Madras H.C : They have fabricated false evidence to show that they incurred expenditure of Rs. 1,87,500 by way of purchase of accessories and parts fitted to the printing units sold by them with a view to use the same for the asst. yr. 1979-80 and thus he made false statement

High Court Of Madras

Thanjai Murasu & Ors. vs. ITO

Sections 276C(1), 277, 278B, Indian Penal Code 1860, ss. 120B, 193, 196 & 420

Asst. Year 1979-80

A. Raman, J.

Crl. R.C. No. 626 of 1997 & Crl. M.P. No. 5605 of 1997

20th October, 1998

Counsel Appeared

Harikrishnan for Karthik Seshadri, for the Petitioners : T. Sivanantham, for the Respondent

JUDGMENT

A. RAMAN, J. :

This revision is directed against the order passed by the Additional Chief Metropolitan Magistrate (E.O. II), Egmore, Chennai, in M.P. No. 303 of 1996 in E.O.C.C. No. 180 of 1985, on 22nd Aug., 1997.

2. The allegations made in M.P. No. 303 of 1996 are as follows : The complaint against the accused is that they have fabricated false evidence to show that they incurred expenditure of Rs. 1,87,500 by way of purchase of accessories and parts fitted to the printing units sold by them with a view to use the same for the asst. yr. 1979-80 and thus he made false statement. This was done with a view to evade payment of tax under the IT Act and hence the accused fraudulently and dishonestly induced the ITO to make an assessment order based on the alleged false return of income and statements with a view to have the tax payable by the accused at a lower rate than the legitimate rate of tax, which would be due. The accused, against by the order of assessment passed by the ITO for the asst. yr. 1979-80, preferred an appeal in IT Appeal No. 96/82-83, before the CIT(A)-II, Madras. The authority, by its order dt. 22nd Sept., 1992, held that the matter requires reconsideration in the light of the evidence sought to be let in before him as some witnesses examined by the AO seem to have retracted from the earlier stand and that it would be just and proper for the AO to allow the first accused to have an opportunity to examine the witnesses and cross-examine them. In view of the order of the appellate authority, remitting back the assessment and directing the AO to reframe the assessment, the prosecution launched in respect of the assessment is unjustified and unwarranted since the continuance of prosecution will be an abuse of process of law. As the prosecution has been launched solely on the basis of the assessment order for the asst. yr.1979-80, since then the assessment order has been set aside by the CIT(A-II), the very complaint is without any basis and it becomes unsustainable. Therefore, the proceedings against the accused should be terminated and the complaint should be dismissed.

The Department filed an objection, contending that serious allegations are made in the compliant accusing that offences under ss. 120B, 1993, 196 and 420 of the IPC, and under ss. 276C(1), 277 r/w s. 278B of the IT Act, 1961, have been committed. Bogus bills were prepared to show as though the first accused had incurred an expenditure of Rs. 1,87,500 by producing false vouchers. There are serious allegations of fabrication of the cash book, ledger, false vouchers, etc. The complaint has an independent existence, which is laid on the face of the evidence gathered and statements recorded. The appellate authority has only remitted back the matter to the assessing authority to enable the accused to have a fresh opportunity but that will not in any manner after the complaint which has been already taken cognizance of Hence, the petition is not maintainable.

The learned Additional Chief Metropolitan Magistrate (E.O. II), dismissed the petition. Hence, the petitioners have come up with the revision before this Court. On 16th March, 1995, an order was passed by this Court in Crl. O.P. No. 15230 of 1992 which runs Thanjai Murasu vs. ITO (1995) 216 ITR 716 (Mad) : TC 48R.905 as follows: “The assessment order has been set aside by the CIT directing the respondent to reframe having regard to the fresh evidence sought to be let in in respect of the sale of the machinery. In such a situation, whether the basis for the prosecution survives or not is a matter to be considered by the learned Magistrate, as a preliminary issue independently. With this observation, the petition is dismissed.” Now, the lower Court, in its order, indicated that it cannot be tried as a preliminary issued, and in that manner, the order passed by the lower Court runs against the direction issued by this Court. But, anyhow, in effect, the lower Court has held that the objections based upon the setting aside of the assessment order to the effect that the complaint with not survive, cannot be maintained at all.

The lower Court has come to this conclusion mainly because, according to the lower Court, the prosecution has not been launched on the basis of the assessment order for the asst. yr. 1979-80 and that the appeal preferred is not with reference to the asst. yr. 1979-80. Against and again, the lower Court has observed that the accused have not preferred an appeal against the assessment order for the asst. yr. 1979-80. Again, it has stated that the compliant has not been launched for the assessment order for the year 1979-80. It is also observed that the appellate authority has not decided the assessment for the year 1979-80. Thus, the lower Court has simply chosen to decide the matter obviously on an erroneous basis that the appellate authority has not decided about the assessment order for the year 1979-80 and that the appeal was not preferred against the order for the asst. yr. 1979-80.

6. From the case of the parties here, it is clear that it is with reference to the asst. yr. 1979-80, the complaint has been given. The CIT has very clearly stated in his order that the order of assessment is for the year 1979-80, which was the matter in appeal before him. Both the accused and the Department are agreed that aggrieved by the order of assessment for the year 1979-80, the accused preferred the appeal to the CIT. It is also their case that the complaint has been filed against the accused with reference to the asst. yr. 1979=80. Thus, it is very clear that the lower Court did not go through the records in a proper manner. Otherwise, such a fundamental mistake could not have been made. If the mistake a committed in one place of the order, we can attribute it to a clerical mistake or a mistake by oversight. But again and again and repeatedly, the very same mistake has been committed. Therefore, it follows that the very job done by the lower Court is on an erroneous basis because the Additional Chief Metropolitan Magistrate was under the impression that the order of the CIT, on appeal, did not pertain to the asst. yr. 1979-80. The magistrate has committed a grave mistake by considering that no appeal was preferred against the assessment for the year 1979-80. Thus, the grave error committed by the lower Court fogged its perspective and thus the Additional Chief Metropolitan Magistrate has blundered his way. This obvious mistake had led him to decide the matter as he did.

7. The case, in short, as against the petitioners, is as follows : The first accused imported nine units of second hand stero-rotary printing machines for the purpose of its business during the asst. yr. 1972-73. During the asst. yr. 1979-80, the petitioners dismantled the machinery and sold the same to a third party, for a sum of Rs. 3,45,171. The petitioners had also alleged that they further fitted some parts and accessories to the machines so purchased and for the same they had incurred an expenditure of Rs. 1,87,500. The total cost of machinery was shown as Rs. 4,82,330.96. Deducting a sum of Rs. 1,37,705.96 towards depreciation withdrawn the written down value as on 31st Jan., 1978, was shown as Rs. 3,44,625, and the sale proceeds of the machinery was shown as Rs. 3,45,171.29. Thus, a profit of Rs. 546.29 was shown on the sale of the machinery. The accused company, viz., the petitioners, produced 39 vouchers in support of the purchase of accessories and parts to show that they had incurred expenditure of Rs. 1,87,500. On an investigation, the ITO can to a conclusion that all the vouchers were bogus and fabricated. When confronted by the Department, the assessee claimed that the supply of spare parts and accessories was entrusted to certain persons and they paid against the bills and vouchers produced by those persons. Therefore, he passed an assessment order for the year 1979-89, on 17th Sept., 1982, determining the total income at Rs. 2,20,430 as against a loss of Rs. 1,26,120 returned by the first accused. He determined under s. 41(2) the profit on the sale of three units of printing machinery at Rs. 1,50,267 and long-term capital gains on the sale of the printing machinery at Rs. 44,645. The ITO issued a penalty notice for concealment of income unders. 271(1)(c) of the IT Act, 1961. In the penalty proceedings, the petitioners approached the Settlement Commission, which rejected the petitioners’ request for the asst. yr. 1979-80. Hence, the Department filed the complaint, alleging that with a view to evade income-tax and to defraud the exchequer of its legitimate revenue and to mislead and deceive the ITO, at the accused have conspired together and committed the offence of fabrication of false evidence in the form of false cash book, ledger and bogus vouchers with the intention to use them as genuine evidence to deliver a false return of tax and thus the accused are guilty under ss. 120B, 193, 196 and 420 of the IPC, 1860, r/w ss. 276C(1) and 277 of the IT Act.

8. In the meanwhile, the petitioners herein preferred an appeal against the assessment order for the year 1979-80 in IT Appeal No. 96/82-83. The appeal was directed against the assessment order for the year 1979-80. The appellate order was passed by the CIT(A)-II, on 22nd Sept., 1992. The order runs as follows : “The appeal is directed against the assessment order for the asst. yr. 1979-80. 2. The appellant is a private limited company, carrying on the business of publishing a Tamil daily (Malai Murasu) from Tiruchirapalli. A return of income-tax this year was filed on 27th Oct., 1979, declaring a loss of Rs. 1,26,120. The impugned assessment was made under s. 143(3) r/w s. 144B on a total income of Rs. 1,83,785 and long term capital gains of Rs. 44,646. The total assessed income as aforesaid, inter alia, included an amount of Rs. 1,50,267 by way of profit under s. 41(2) which resulted from enquiries made by the AO. The enquiries revealed that the appellant has failed to disclose the correct amount of the actual cost of the machinery sold. The AO also enhanced the income by an amount of Rs. 17,000 towards unaccounted sale of waste newsprint.

3. The appellant has, inter alia, objected to the addition of Rs. 17,000 as sale proceeds of waste newsprint, on the basis of a comparable case. Without giving proper opportunity to present its case. It has been contended that the AO did not bring any evidence on record to show that the appellant had suppressed the sale of waste.

3.2 In the course of learning, learned counsel, however, admitted that the appellant had disclosed certain income from the sale of waste for earlier and subsequently years. I have seen the order dt. 26th Sept., 1990, of the Settlement Commission for the asst. yr. 1969-70 to 1971-72, 1973-74, 1974-75, 1977-78, 1978=79, 1980-81 and 1981-82 and I find that the additions in respect of excessive wastage have been accepted and made as under :

3.3 In other words, therefore, the estimate made by the AO for the year under appeal was much less than the average determined by the Settlement Commission on the basis of the appellant’s petitioners. It is thus clear that an enhancement is called for having regard to the order of the Commission.

4. The appellant has also objected to the aforesaid additions under s. 41(2) and towards long term capital gains on the sale of the assets. It has been contended that the AO was not justified in holding that the appellant did not acquire additional machinery for Rs. 1,87,500 and also in rejecting the appellant’s explanation in regard thereto. Learned counsel submitted before me fresh evidence and contended that the enquiries were made by the AO behind the back of the appellant and the latter was not given a proper opportunity to cross-examine the witnesses on whose statement the AO placed reliance. Learned counsel sought to submit the affidavits of certain persons, who retracted from the stand they had taken before the AO. According to learned counsel, in the light of the confirmation obtained by the appellant from the sellers/job workers in respect of the machinery, the additions towards profit under s. 41(2) and long-term capital gains should be deleted.

5. I have carefully considered the appellant’s objections and the submissions of learned counsel. In my opinion, the matter requires a reconsideration in the light of the evidence sought to be led before me as the witnesses examined by the AO are seen to have retracted from their earlier stand. It would, therefore, be proper for the AO to allow the appellant the opportunity to examine the witnesses and then cross-examine them to ascertain the veracity of their different averments at different stages.

6. As the assessment is being remitted back to the AO, the other objections are not taken up for consideration. The AO is directed to reframe the assessment having due regard to the order of the Settlement Commission and the fresh evidence sought to be let in respect of the sale of the machinery.

7. In the result, the assessment is set aside.”

9. Learned counsel for the petitioner would therefore contended that inasmuch as the assessment has been set aside, the entire basis for the prosecution is thus knocked down and, therefore, the complaint is not maintainable. On the other hand, learned counsel for the Department would contend that merely because the assessment has been set aside, the criminality involved in the action of the petitioner in submitting false returns is not wiped away and that action survives despite the order of the CIT. It is also contended by learned counsel for the petitioners that any fresh assessment is barred by virtue of the provisions of the IT Act and, therefore, as no assessment can be made at all, the question of filing false returns will not arise and, therefore, in that view of the matter as well, the prosecution cannot be sustained.

10. Certain dates are relevant for the purpose of consideration of this matter. The return was filed by the petitioner in October, 1979. It was for the assessment for the year 1979-80. The assessment order passed by the concerned ITO is dt. 17th Sept., 1982. The appeal against the said order was preferred immediately and was taken on file in IT Appeal No. 96/1982-83. The order on appeal was passed on 22nd Sept., 1992. The complaint has been given in the year 1985. It was taken on file as C.C. No. 180 of 1985. We are now in October, 1998. Thus, the matter has been pending for the last 20 years. The complaint discloses that the ITO made certain enquiries and came to the conclusion that the vouchers produced, 39 in number, were bogus vouchers and that no such expenditure was incurred at all by the assessee. The appellate authority’s order is to the effect that the examination of the witnesses by the concerned ITO was behind the back of the assessee and the assessee must be given an opportunity to cross- examine the witnesses more so when some of the witnesses have retracted the statements given by them. The complaint thus, arises out of an assessment made for the year 1979-80. The basis for the assessment order is the investigation said to have been made by the ITO concerned. That assessment order has been set aside.Necessarily, it would mean that this investigation which is said to have been made by the ITO, on the basis of which the assessment was made, is not accepted by the concerned authority, viz., the appellate forum. The appellate forum does not agree with the result of the investigation. It felt necessary that an opportunity should be given to the assessee to cross-examine the persons said to have been examined by the ITO. The appellate forum has also referred to the fact that same of the witnesses alleged to have been examined by the concerned ITO have retracted from their earlier stand. Therefore, the finding of the Investigating Officer, viz., the ITO, that bogus vouchers were prepared and submitted is not longer accepted or confirmed by the appellate forum. The criminal acts said to have been committed by the accused is not visible in view of the order passed by the appellate forum. The allegation is that the petitioners with a view to defraud the exchequer of legitimate revenue, misled and deceived the ITO. They fabricated false evidence in the form of false cash book and ledgers. They did it with a view to file a false return which was in turn down with a view to induce the ITO to make an assessment order based on the alleged false return of income and statement to determine the tax payable at a lower amount than what was legitimately due. Therefore, it is alleged that all the accused with the common intention had conspired to defraud the exchequer of legitimate revenue. That aspect of the matter, which was practically a decision taken by the ITO on investigation and which culminated in an order passed by him has been set aside by the appellate authority. Not only that, the appellate authority has also directed that the witnesses examined by the ITO with reference to the vouchers should be examined so that the accused will have an opportunity to cross-examine. It is also seen from the order of the appellate authority that some of the witnesses have also gone back on the statements given by them before the ITO. Therefore, the very premise upon which the ITO has built up a case against the petitioners under ss. 120B, 193, 196 and 420 of the IPC, and r/w ss. 276C(1), 277 and 278B of the IT Act is knocked off its pedestal. When the very assessment is thus set aside, and the assessment having been made on the basis of certain investigations or enquiry made by the ITO, and when that investigation or enquiry has not been accepted by the appellate authority, it follows that the basis of the allegations against the petitioners has disappeared. Therefore, the criminality in the action is neither visible nor persists.

11. In this connection, it is necessary to refer to the rulings cited by learned counsel for the petitioner in the decision reported in Didwania (G.L.) vs. ITO (1997) 140 CTR (SC) 273 : (1997) 224 ITR 687 (SC) : TC S48.3888 in which, the Supreme Court has observed as follows : “In the instant case, the crux of the matter is attracted and whether the prosecution can be sustained in view of the order passed by the Tribunal. As noted above, the assessing authority held that the appellant-assessee made a false statement in respect of income of Young India and Transport Company and that finding has been set aside by the Tribunal. If that is the position then we are unable to see as to how criminal proceedings can be sustained….. The whole question is whether the appellant-assessee made a false statement regarding the income which according to the assessing authority has escaped assessment. So far as this issue is concerned, the finding of the Tribunal is conclusive. Therefore, as held in Uttam Chand’s vs. ITO case (1982) 133 ITR 909 (SC) : TC 48R.304, the prosecution cannot be sustained. Accordingly, the proceedings are quashed and the appeal is allowed.” Here, in this case, the finding of the ITO is that the assessee filed a false return and that the vouchers produced and bogus and no such expenditure was incurred at all by the assessee. The appellate authority has not only set aside the order of the ITO but also directed the assessing authority, viz., the ITO, to reframe the assessment. He has also specifically stated that an opportunity should be given to the assessee to cross-examine the witnesses alleged to have been examined by the ITO. Therefore, the appellate authority has set aside the order of the ITO totally, and there the ITO’s assessment based upon his conclusion that it is a false statement and false return is therefore, set aside. The complaint is said to be sustained against the petitioners on the ground that the petitioner made a false statement and prepared false vouchers. When that assumption or when that view of the assessing authority has been set aside by the appellate authority, it would follow that the basis for the complaint vanishes.

The decision in Uttam Chand vs. ITO (1982) 133 ITR 909 (SC) : TC 48R.304 is more or less an identical one. There, the allegation was that a false return was made on the ground that the firm was not a genuine one. The apex Court has held that in view of the finding recorded by the Tribunal that the firm was genuine, the assessee could not be prosecuted for filing false returns. Here, the case is that false vouchers were produced. The vouchers are said to be false on the basis of the statements recorded from the witnesses. But, some of those witnesses have retracted the statement. Hence, the Tribunal has held that those witnesses, who have been examined by the ITO should be re-examined so that the assessee will have an opportunity to cross-examine those witnesses. Thus, in effect, the Tribunal has set aside the decision of the assessing authority that the vouchers are false, which was solely based upon the statements recorded by him from those persons. It is to be pointed out that as against the order of the Tribunal, no appeal or any proceeding has been taken up by the Department, challenging the same. As held by the Supreme Court in Dy. CCT vs. H.R. Sri Ramulu (1977) 39 STC 177 (SC) a reassessment under the taxing acts completely obliterates without a trace the original assessment proceeding. I have to distinguish the cases relied upon by counsel for the Department on the following grounds : Those are cases where some part of the assessment had become final. Here, the entire assessment has been set aside. The return has not been accepted and the assessment has been made on the ground that the vouchers produced to show the incurring of expenditure and purchase of spare parts are bogus. It is on the basis of these conclusions arrived at by the ITO, the assessment order has been passed by him. The Tribunal has set aside the same. The ITO has been asked to conduct a fresh enquiry, giving an opportunity to the assessee to cross-examine the witness on the ground that many of the witnesses have retracted from their statements. Therefore, the basis for the ITO to conclude that there has been suppression of material particulars and filing of false return is no longer there. It is only after a fresh assessment or after holding a fresh enquiry, that any such finding can be arrived at. Therefore, the matter has been remitted by the Appellate CIT and it was not challenged further by the Department. Hence, that order has become final. It is not necessary that the Tribunal ought to have given a finding that the vouchers submitted are true or the complaint is false. There need not be such a positive finding in favour of the assessee or negative finding against the assessee. The absence of the same is not a material thing. The very basis for the Department to conclude that there has been suppression of income and filing of false return is taken away by the appellate order. It is on the ground of such statements alleged to have been recorded by the ITO, that the came to the conclusion that the vouchers are false. But that conclusion has not been accepted by the appellate authority and, therefore, he has directed the assessing authority to hold a fresh enquiry and decide the matter after giving opportunity to the assessee to cross- examine those witnesses. Therefore, the case on hand is thus distinguishable on the facts and thus stands distinguishable on the facts. Therefore, the ruling relied upon by learned counsel for the Department will not apply to the peculiar facts of this case.

15. There is yet another circumstances to be pointed out in this regard. The complaint relates to the assessment for the year 1979-80. With reference to the same, the accused are said to have committed offences punishable under ss. 120B, 193, 196 and 420 of the IPC, 1860, and ss. 276C (1) and 277 of the IT Act. Sec. 276C of the IT Act relates to wilful attempt to evade in any manner tax, penalty or interest chargeable or imposable under the Act. Sec. 277 of the IT Act refers to the person making a statement in any verification under this Act or under any rule made thereunder, or delivering an account or statement which is false, which he either known or believes to be false or does not believe to be true, shall be punishable under the Act.

The specific case of the Department is that the offence under s. 276C(1) was committed with reference to the asst. yr. 1979-80. The offence under s. 277 of the IT Act is also attributed to the return submitted for the year 1979-80. Sec. 153 of the IT Act reads as follows : “No order of assessment shall be made under s. 143 or s. 144 at any time after the expiry of : (a) two years from the end of the assessment year in which the income was first assessable; or (b) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st April, 1988, or any earlier assessment year, is filed under sub-s. (4) or sub-s. (5) of s. 139. whichever is later. Sub-s. (2) : No order of assessment, reassessment or recomputation shall be made under s. 147 after the expiry of two years from the end of the financial year in which the notice under s. 148 was served.” Sec. 142 of the IT Act sets out the time limit for issuing notice. Here in this case, as on the date of filing of the complaint or as on the date of filing of the criminal O.P., no assessment has been done nor any notice has been given. Though the Tribunal directed the AO to make a fresh assessment and the order of the appellant authority has been passed as early as on 22nd Sept., 1992, the assessment has not been made nor any notice of fresh assessment as required by the appellate order has been issued. Till the date, when the arguments of learned counsel for the petitioner were head, no notice was served upon the petitioner. The petitioners’ counsel then filed an application to plead additional ground, viz., to contend that even otherwise the assessment is barred by limitation. The Department took time to file its objections to the same. They took some adjournments for the same. After the conclusion of arguments of the petitioner’s counsel and at the request of learned counsel for the Department, the case was adjourned for his arguments and at that stage; it appears that the notice has been served. Even then, as on the date when a notice has been issued, the assessment for the year being 1979-80, and the direction of the Tribunal having been issued passed in the year, 1992, and as no step has been taken all along, it is contended by learned counsel for the petitioners that on the face of it, no assessment can be made and, therefore, when the very assessment for the particular period is barred, the question of committing an offence with reference to the asst. yr. 1979-80 does not arise and, therefore, on this ground as well, the proceedings should be quashed.

On the other hand, learned counsel for the Department would submit that the question of limitation cannot be gone into by this Court and it is a matter that can be considered only by a Division Bench, and as notice has been issued now, there is no question of limitation and, therefore, the proceedings cannot be quashed on this ground. Of course, it may not be open for this Court to decide as to whether such an assessment is actually barred by limitation and whether the issuance of notice after the petitioners have chosen to question the criminal proceedings would fill up the lacuna as they are matters for decision before a different forum. If and when a fresh assessment is made pursuant to the notice issued by the Department subsequent to the filing of this petition, it may be open to the assessee to agitate the question of limitation in which case whether the fresh assessment on that basis is barred by limitation or not will definitely be decided by the competent Court. In this case on hand, this Court does not propose to go into the question of the right of the Department to issue a notice or do reassessment. Because, this is not an appeal against an order of assessment nor can it be considered as an appeal against a possible assessment. Now, one has to see whether there is any basis to proceed against the petitioners. Suppose the Department, after reassessment, in pursuance of the direction by the Tribunal once again comes to the conclusion that the vouchers and receipts produced by the assessee are fabricated, then definitely it will be a proper ground for the Department to initiate proceedings under the IPC and IT Act, viz., under ss. 276C(1) or 277 of the Act. Until that stage is reached, in the facts and circumstances of the case, it is not possible to say that there is some basis to proceed against the petitioner before the criminal Court of law. As it is, there are no material, for the simple reason that the materials upon which the assessing authority founded its order of assessment are not there. Further, the conclusion of the assessing authority with regard to the same has not been accepted by the appellate authority which has directed the authority concerned to conduct a fresh assessment. Therefore, only after holding an enquiry, it will be open to the assessing authority and possible for the assessing authority to decide whether, in fact, these vouchers and receipts are true or not. Only thereafter the necessary cause of action would arise for the assessing authority to proceed against the assessee. it is now at the best in the form of a suspicion in the mind of the assessing authority. For the suspicion to get crystalised into a definite accusation, he has to hold an enquiry and then determine in which case alone the suspicion will lake the form of accusation which would then become the necessary platform for launching the criminal prosecution. Therefore, in my opinion, the criminal action has no independent existence. For it would flow only from the result of assessment.

Further, s. 153 of the IT Act provides a period of limitation. The question whether the assessment in this case is barred by limitation or not cannot of course be decided by this Court. But, the fact remains that in spite of the order of assessment by the appellant authority, which was passed in September, 1992, no attempt has been made to do a fresh assessment as enjoined upon by the order of the appellate authority.

Learned counsel for the Department referred to the decision reported in Rajinder Nath vs. CIT (1979) 12 CTR (SC) 201 : (1979) 120 ITR 14 (SC) : TC 51R.2044, 68R.211. It was a case where two buildings belonging to a firm comprising a father and his two major sons as partners were treated so by the ITO concerned and for the asst. yrs. 1955-56 and 1956-57, he estimated the cost of construction of those buildings at a higher figure than that disclosed and brought to tax the excess as income in the hands of the firm. On appeal, the AAC found that the moneys advanced for the construction of the buildings had been debited in equal shares to the father, his two major sons and a minor son and held that the firm was not the owner of the properties and deleted the addition. The AAC has also observed that the ITO was free to take action to assess the excess in the hands of the co- owners. The ITO thereupon issued notices under s. 147(a) of the IT Act and reopened the assessments of the individual assessees and estimated excess of the cost of construction. On appeal, the AAC held that s. 147(a) could not apply but upheld the assessments under s. 153(3)(ii) on further appeal, the Tribunal held that s.

153(3)(ii) and could not apply because there was neither a finding nor a direction in the earlier order of the AAC and further that the AAC could not convert the assessments made under s. 147(a) into those under s. 153(3)(ii).

The matter was referred to the High Court to decide whether the AAC was justified in holding that the provisions of s. 147(a) were not applicable and whether the provisions of s. 153(3)(ii) were not applicable and the High Court held that the provisions of s. 153(3) were applicable and observed that the AAC’s finding that the properties did not belong to the firm. and, therefore, the excess amount of the cost of construction could not be regarded as the income of the firm, was a finding which was necessary for the disposal of the firm, was a finding which was necessary for the disposal of the firm’s appeals and as a corollary it was held that the buildings belonged to the co- owners and this necessiated the direction to the ITO that he was free to assess the excess in the hands of the co- owners. On appeal, the Supreme Court has held that the observation that the ITO was “free to take action” to assess the excess in the hands of the co-owners could not be described as a “direction”. A direction by a statutory authority was in the nature of an order requiring positive compliance. When it was left to the option and discretion of the ITO whether or not to take action, it cold not be described as a direction, and therefore, the earlier order of the AAC contained neither a finding nor a direction in consequence of which or to give effect to which the reassessment proceedings could be said to have been taken and the provisions of s. 153(3)(ii) were not attracted, and the Supreme Court defined the expressions “finding” and “direction” in s. 153(3) are limited in meaning and a finding given must be a finding necessary for the disposal of a particulars case and must be directly involved in the disposal of the case. It must be an expressed direction before the authority or the Court.

22. Here, the order of the CIT has to be reproduced. It is sufficient to extract the order in para 4.2, which runs as follows : “4.2 Learned counsel submitted before me fresh evidence and contended that the enquiries were made by the AO behind the back of the appellant and the latter was not given a proper opportunity to cross-examine the witnesses on whose statements the AO placed reliance. Learned counsel sought to submit the affidavits of certain persons, who retracted from the stand they had taken before the AO. According to learned counsel, in the light of the confirmation obtained by the appellant from the sellers/job workers in respect of the machinery, the additions towards profit under s. 41(2) and long-term capital gains should be deleted. I have carefully considered the appellant’s objections and the submissions of learned counsel. In my opinion, the matter requires a reconsideration in the light of the evidence sought to be let in before the appellate authority as the witnesses examined by the AO were seen to have retracted from their earlier stand. It would, therefore, be proper for the AO to allow the appellant the opportunity to examine the witness and then cross-examine them to ascertain the veracity of their different averments at different stages.

As the assessment is being remitted back to the AO, the other objections are not taken up for consideration. The AO is directed to reframe the assessment having due regard to the order of the Settlement Commission and the fresh evidence sought to be let in the respect of the sale of the machinery.

In the result, the assessment is set aside.” Thus, the above order clearly shows that the Tribunal has set aside the entire assessment which was based upon the opinion of the AO. In view of the submission made before the CIT(A)-II, the CIT held that it is, therefore, proper for the AO to allow the appellants the opportunity to examine the witnesses and then cross-examine them to ascertain the veracity of their different averments at different stages and, therefore, he has remitted back the assessment to the officer setting aside the assessment and directing the officer to reframe the assessment having due regard to the order of the Settlement Commission and the fresh evidence sought to be let in respect of the sale of the machinery. This, it is in the nature of a definite direction.

23. It is contended by learned counsel for the Department that as the matter has been remitted, the matter is still at large and, therefore, the question of bar of limitation will not come into play. Of course, the CIT has not specified in his order any time limit for reframing the assessment. But, is it proper for the Department to take its own time ? It is pointed out that pursuant to the order of the CIT, the notice has been issued. But the same is done only after the matter was argued in part, especially after the petitioner’s counsel raised the question of limitation by filing additional grounds. Therefore, the plea of limitation raised by the petitioners’ counsel is definitely a plea that has a bearing on the maintainability of the complaint. For it is argued that as the Department cannot, now make any assessment for the year 1979-80 in view of the bar of limitation provided in s. 153 of the IT Act, the filing of false returns does not arise and hence the proceedings has to be quashed. Therefore, as the records now stand and as the things now stand, any fresh assessment or reassessment appear to be plagued by the question of bar and susceptible to the question of limitation. Therefore, while considering the request of the petitioner under s. 482 of the Crpc. this aspect of the matter has also to be taken into account.

24. The materials and evidence which were the basis for the complaint were not disturbed in this case. Whereas, it was so in the case reported in Dharma Pratishthan vs. Miss. B. Mandal, IAC of IT (1988) 71 CTR (Del) 52 : (1988) 173 ITR 487 (Del) : TC 48R.828. The case reported in G. Viswanathan vs. ITO (1987) 65 CTR (Ker) 184 : (1987) 167 ITR 103 (Ker) : TC 48R.414 relates to the execution of a gift deed after issuance of notice on the defaulter. Hence, it does not apply to the facts of this case. The ruling report in Balakrishnan, Terelac Furnaces (P) Ltd. vs. ITO 1976 CTR (Ker) 352 : (1982) 134 ITR 573 (Ker) : TC 48R.883 (Appex) is on the point whether the ITO is a Court. The quantum proceedings came to a rest and the assessment order had become final and only the penalty proceeding was pending. In that context, the Punjab and Haryana High Court held in Telu Ram Raunqui Ram vs. ITO (1984) 39 CTR (P&H) 93 : (1984) 145 ITR 111 (P&H) : TC 48R.509 that expectancy of success in the proceedings challenging penalty, cannot stand in the way. But, hence the assessment is not made at all. Hence, the above ruling cannot apply. The case reported in Rinkoo Steels vs. K.P. Ganguli, ITO (1989) 77 CTR (Del) 95 : (1989) 179 ITR 482 (Del) : TC 48R.834 related to a complaint which was not based on the return or original assessment but on materials discovered in a search, containing false statements and entries. However, it cannot apply to the case on hand. The ruling reported in Geethanjali Mills Ltd. vs. V. Thiruvengadathan (1988) 74 CTR (Mad) 115 : (1989) 179 ITR 558 (Mad) : TC 5R.672 was of course a similar case. But, after the remand, the IAC confirmed the earlier assessment, for despite the opportunities given, the assessee did not produce evidence to show that the shares said to have been purchased from persons. But, here the matter is still at large. That the vouchers are bogus is yet to be decided. The facts of the case in G.S.R. Krishnamurthi vs. M. Govindaswamy, ITO (1992) 104 CTR (Mad) 143 : (1992) 195 ITR 137 (Mad) : TC 3PS.9, 48R.417, S3.163 are quite different, There the Karta of an HUF purchased a property for Rs. 14,11,000 but declared the sale consideration at Rs.

5,86,000. The accused filed a final return for the relevant asst. yr. 1982-83, on 15th Nov., 1983, declaring the sale consideration at Rs. 5,86,000. Later he filed a revised return declaring Rs. 14,11,000 as sale consideration. Thus, it was a case where the prosecution was launched in 1984. A search conducted led to the seizure of an agreement declaring the sale consideration as Rs. 14,11,000. There the facts are quite distinguishable. There were records available in that case to show prima facie the commission of offences. But here, it is based on an enquiry after submission of returns, which was not accepted by the appellate authority. Learned counsel for the Department relied upon the decision of this Court report in K.P. Kandasami Mudaliar & Sons. vs. CIT (1984) 39 CTR (Mad) 303 : (1985) 156 ITR 638 (Mad) : TC 50R.648 to contend that the remand cannot rub off from the records, the conduct of the assessee in concealing income. But, it was a case where there was concealment. The assessee filed revised returns disclosing income from a foreign bank. Here that a false case is filed is yet to be determined. Only after a reassessment is done in the light of the order of remand, it can be decisively determined. Unless the persons concerned are examined, whether payments were really made and whether the vouchers are bogus, cannot be decided. Further, the above decision related to penalty proceedings. A search of the premises of the petitioner resulted in several documents and account books, which revealed sufficient income and criminal complaints were lodged. In that case, the Supreme Court, in the decision reported in P. Jayappan vs. S.K. Perumal, First ITO (1984) 149 ITR 696 (SC) : TC 48R.501, held that there is no law that prosecution proceedings can be launched only after reassessment and mere expectation in an appeal or reference cannot come in the way of complaint. Here, the facts are difference. There is no assessment at all. The complaint was not on discover of certain facts unearthed during a raid. It was an opinion drawn on examination of witnesses, regarding the vouchers, which opinion was not accepted by the appellate forum. Hence, the above ruling will not apply. The ruling report in S.R. Arulprakasam vs. Smt. Prema Malini Vasan, ITO (1987) 61 CTR (Mad) 54 : (1987) 163 ITR

487 (Mad) : TC 48R.927 concerns a case where the original return was false. But, here it is not determined that the original return was acquired by the ITO, after the examination of certain witnesses. Some of these witnesses retracted their statements. The assessee were not given an opportunity to cross-examine them. The statements were recorded in the absence of or behind the back of the assessee. Hence, the assessment was set aside. Therefore, the basis for complaint was the subsequent knowledge or opinion gathered after the submission of the return. It was so gathered without the knowledge of the assessee and without giving an opportunity. Therefore, the charge or accusation that a false return was filed was not on the strength of any inherent and intrinsic materials that were available on the face of the return nor was it so apparent. Thus, there is no independent evidence.

As regards the ruling report in Associated Industries vs. First ITO (1983) 139 ITR 269 (Mad) : TC 48R.838. It was a prosecution laid as an outcome of the assessment order, it cannot be stated in the circumstances of the case that the criminal proceedings are independent of the assessment order. The cause of action flowed only from the enquiry made by the AO for the purpose of assessment. Hence, the above ruling cannot apply. Thus, there is no finding as on date that the allegations upon which the complaint is laid are true. The effect of the remand is that the very basis of the complaint is taken away.

In most of the cases relied upon by learned counsel for the Department, the returns contained prima facie materials to hold that false statements have been made. But, in this case on hand, on the face of the records submitted by the assessee no such conclusion was made. It was only on the basis of examination of certain persons, it was found that there has been attempt to evade payment of tax. The assessing authority had recorded the statements of certain persons, who were alleged to have stated before him that they did not either carry out the repairs or did not supply machinery, as held out by the assessee. This information was not available to the assessing authority on looking at the return filed. It is only on investigation made by the assessing authority, he could collect some statements from persons to indicate that no such expenditure was incurred by the assessee. Therefore, on the basis of such statements, the authority concluded that there has been at attempt to evade tax. That basis was not accepted by the CIT, in appeal, in view of certain statements produced by the assessee from those persons, who retracted the statements given before the assessing authority. The CIT also held that it was necessary to give an opportunity to the assessee to cross-examine those witnesses, whose statements have been recorded by the assessing authority behind the back of the assessee. Thus, this is a case where the materials alleged to have been collected by the assessing authority were not accepted by the CIT prima facie and he directed the assessing authority to make a fresh assessment in the light of fresh evidence sought to be let in respect of sale of machinery. Therefore, to that extent, the facts of the case are quite different. It is not a case, where the falsity was apparent on the face of the records or there was any intrinsic material available in the return or by the discovery of certain documents to show that false vouchers, statements and verification have been made with a view to evade payment of tax. Therefore, the cases relied upon by the counsel in my opinion, are thus distinguishable on the facts.

It has been held in the decision reported in Laxmi Insurance Co. Ltd. vs. CIT (1932) 2 Comp Cas. 221 (Lahore) : AIR 1931 Lah. 441 that there is a clear distinction between chargeability and assessability. The former expression connotes liability to pay income-tax; while the latter expression has reference primarily to the machinery, which ought to be utilised and the procedure that must be followed in determining the amount which should be levied as income-tax. Here, by reason of the order of the CIT, the machinery sought to be utilised to determine the amount which should be levied as income-tax, does not exist. In other words, as it is, there is no machinery that would make it possible for the IT authorities to assess the income, profits or gains of the company during the asst. yr. 1979-80. The question of assessability would arise only if the machinery exists there. Since there is no machinery existing there in that, no step has been made pursuant to the order of the CIT to assess the fresh enquiry.

29. The decision reported in Madras Vanaspati Ltd. vs. S. Subramanian, ITO (1988) 72 CTR (Mad) 69 : (1989) 175 ITR 172 (Mad) : TC 48R.881 is in respect of a case where it was held that when certain offences are committed, which on the very face constitute offences with reference to the documents, the mere fact that the assessment has been set aside, need not deter the prosecution of the offender. Thus, it was a case where the offence was obviously discernible. Here, only after examination of witnesses, he came to such a conclusion. As I have already pointed out in this case on hand, as it is, it cannot be stated that on the face of the very return filed by the assessee, or on the basis of any documents recovered from the assessee, it was held that certain offences have been committed under s. 277 of the IT Act.

30. The Kerala High Court has held in the decision reported in Dr. B. Seerapani vs. ITO (1993) 203 ITR 288 (Ker) : TC 48R.915 as follows, following the earlier ruling reported in Madras Spinners Ltd. vs. Dy. CIT (1993) 203 ITR 282 (Ker) : TC 48R.863: “In view of the setting aside of the assessment which formed the basis for the prosecution by the Tribunal, the prosecution of the assessee was liable to be quashed without prejudice to the right of the ITO to file a fresh complaint, if so advised, in the light of the result of reassessment proceedings.”

31. I am of the view that the above decisions will squarely apply to the facts of this case. Here, a complaint has been made pursuant to the order of the assessing authority. That order has been set aside. The CIT had already asked to reframe it in view of the statements given by certain persons as those statements were taken as the basis by the assessing authority originally to hold that a false return has been filed. Therefore, in the context of this case, I am of the view that the very basis for assessment having been knocked out, the prosecution which is the child of such assessment must, therefore, be allowed to die a natural death. However, on reassessment, if the Department comes to the conclusion that prima facie offences under s. 276C of the IT Act and s. 277 of the IT Act has been committed, then it will always be open to the Department to initiate criminal action. Therefore, in my opinion, the proceedings against the petitioners are liable to be quashed.

In the result, the petition is allowed, quashing the proceedings, however, without detriment to the right of the Department to file a fresh complaint, on the basis of the result of the reassessment proceedings. Consequently, Crl. M.P. Nos. 5605 and 5606 of 1997 shall stand closed.

[Citation : 247 ITR 465]

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