Bombay High Court
Income-tax Reference No. 50 of 1962, decided on 14th November 1968.
Presented By: Kotval, C. J. and V. S. Desai, J
1971 P T D 579 [Bombay (India)] Before Kotval, C. J. and V. S. Desai, J LAXMIDAS & Co. Versus COMMISSIONER OF INCOME TAX, BOMBAY Income tax Reference No. 50 of 1962, decided on 14th November 1968. Income tax Undisclosed income Re assessment Limitation --Assessment order made within one year of service of notice but served after one year of service thereof Validity Sale of goods by assessee Receipt entered in third party's name Evidence as to entry rejected Account books not showing funds from which purchase was made Whether receipt can be assessed as undisclosed income --Whether whole or part only to be assessed as profit Whether amount taxable in year of entry Onus of proof Reference High Court calling for supplementary statement of case Whether Tribunal can admit fresh evidence Notice addressed to firm and served on partner Income tax Act (XI of 1922), S. 34(1)(a), (3), proviso. The time limit of one year provided by section 34(3), as it stood before it was amended in 1956, is for the period within which the Income tax Officer has to complete the assessment of the income and the determination of tax payable. That stage can be completed by the Income tax Officer within that period and it is not necessary that the order of assessment should be communi cated within that period. Where notice was served on March 23, 1957, and the reassessment was completed on March 18, 1958, but the order of reassessment was served on the assessee only on the 25th March 1958, which was beyond the date of service of notice by one year and 2 days: Held, that the re assessment proceedings were valid. Where a receipt is shown to be income of the assessee and his explanation with regard to its source and nature is rejected, the legal inference permissible to be drawn would be that the receipt was undisclosed income of the assessee and is liable to be taxed in the year of account unless the inference was rebutted by the assessee by showing that the receipt or any part of it was either not income or that, if it was income, it was not taxable during the year of account. Even after the discontinuance of the business of a firm either by dissolution or otherwise, the firm can be treated as continuing so far as the assessment of its pre dissolution income is concerned and the assessment or reassessment of such a firm after dissolution, under section 44 of the Indian Income tax Act, could be made in the same manner under Chapter IV as if it had not discontinued its business: Held also, that when the High Court calls for a supple mentary statement of the case it is not open to the Tribunal to take additional evidence. Abraham (C. A.) v. Income tax Officer, Kottayam (1961) 41 I T R 425; Badri Prosad Bajoria v. Commissioner of Income tax (1967) 64 I T R 362: Commissioner of Income tax v. Devidayal & Sons (1968) 68 I T R 425 ; Commissioner of Income tax v. Ganapathi Mudaliar (M.) (1964) 53 I T R 623 (S C); Esthuri Aswathiah v. Commissioner of Income tax (1963) 50 I T R 764; Govindarajulu Mudaliar v. Commissioner of Income tax (1958) 34 I T R 807 (S C); Kalekhan Muhammad Hanif v. Commissioner of Income tax (1963) 50 I T R 1 (S C) ; Keshav Mills Co. Ltd. v. Commissioner of Income tax (1965) 56 I T R 365 (S C) ; Kodidasu Appalaswamy and Suryanarayana v. Commissioner of Income tax (962) 46 I T R 735; Muthiah Chettlar v. Commissioner of Income tax (1951) 19 I T R 402; Petlad Bulakhidas Mills Co. Ltd. v. Raj Singh (1959) 37 I T R 264 and Viswanathan Chettiar (Rm. P. R.) v. Commissioner of Income tax (1954) 25 I T R 79 ref. R. J. Kolah with S. E. Dastur for the Assessee. G. N. Joshi with R. J. Joshi for the Commissioner. JUDGMENT V. S. DESAI, J. This reference arises out of the reassess ment made upon the assessee firm for the assessment year 1948 49, the previous year for which was the S. Y. 2003 from 25th October 1946, to the 12th November 1947. At the material time the assessee was a partnership firm consisting of three equal partners. One of the partners died subsequently in S. Y. 2005 and the firm was dissolved on his death. The original assessment was completed by the Income tax Officer on the 24th April 1950, which was after the dissolution of the firm. The total income was determined at Rs.3,600. The application under section 26 A made by the assessee was granted and its registration was renewed for the assessment year in question. Subsequently, the Income tax Officer received information that the assessee firm had received a sum of Rs. 1,75,000 by telegraphic transfer from Nandlal Bhandari Mills Ltd., Indore, on the 3rd June 1947. The preliminary enquiry made by the income tax Officer on receipt of this information showed that the said amount represented a part of the total sale proceeds of Rs. 1,76,444 in respect of 826 bales of cotton sold by the assessee firm to the Nandlal Bhandari Mills Ltd., and Rai Bahadur Kanhaiyalal Bhandari Mills Ltd., Indore. In the assessee's account books, which had been produced before the Income tax Officer at the time of the original assessment, there was an account in the name of one Hastimal Parikh. A credit entry was made in the said account in respect of the said sum of Rs. 1,75,000 received by telegraphic transfer and an equal amount was shown as having been paid to him in cash in Bombay. In view of these facts the Income tax Officer was of the opinion that there was a case for reopening the assessment under clause (a) of section 34(1). He accordingly issued a notice to the assessee firm and served it on one of its partners on the 23rd March 1957. In response to the said notice a return was submitted on behalf of the assessee firm on the 24th April 1957, and the reassessment was completed on the 18th March 1958, The reassessment order was served on the assessee on the 25th March 1958. On the material, which was before him, the Income tax Officer came to the conclusion that the transaction of the sale of 826 bales of cotton was the assessee's transaction and the amount of Rs. 1,75,000, which was received by the assessee by telegraphic transfer, constituted its own receipt, and since the cost of the 826 bales had not come out of the account books of the assessee, the cost as well as the profits on the transaction constituted the secret profits of the assessee. In the view of the Income-tax Officer the element of profit involved in this trans action was the assessee's profit on the transaction received by it in the account year and consequently taxable under section 4(1)(a) and the part, which represented the cost of the 926 bales, was the accumulated profits of the assessee of earlier years outside the taxable territories, which it had received or brought into the taxable territories during the year of account and, therefore, taxable under section 4(1)(b)(iii) of the Act. The Income tax Officer, therefore, brought the entire amount of Rs. 1,75,000 to tax. The assessee appealed to the Appellate Assistant Commis sioner. Several contentions were raised by it before him. It was contended that the notice of reassessment, which was issued in the name of the dissolved firms, was bad and inoperative in law and, consequently, the reassessment made in consequence of the said notice was also bad and invalid; that the reassessment had not been completed within a period of one year from the date of the service of the notice and was, consequently, illegal in view of the proviso to section 34(3) as it stood at the material time. On merits, it was contended that the Income tax Officer had erred in holding that the transaction of the sale of 826 bales of cotton was not a transaction of Hastimal as alleged by the assessee but of the assessee itself. It was urged that the assessee had duly discharged the burden, which lay on it to prove the source of the receipt of Rs. 1,75,000, and the Income tax Officer had erred in treating the item as the secreted profits of the assessee. The Appellate Assistant Commissioner did not accept any of the contention urged by the assessee. He agreed with the view taken by the Income tax Officer that the assessee was the undoubted owner of the 826 bales of cotton, which were sold by it to the two textile mills at Indore. The amount of Rs. 1,75,000 which it had received from the Nandlal Bhandari Mills by telegraphic transfer was, therefore, a receipt of the assessee itself and the entire receipt, according to the Appellate Assistant Com missioner, was chargeable in accordance with the provisions of section 4(1) of the Income tax Act. The Appellate Assistant Commissioner accordingly dismissed the assessee's appeal. The assessee took a second appeal to the Income tax Appellate Tribunal. All the contentions which were urged before the Appellate Assistant Commissioner, were repeated before the Tribunal. In addition, it was urged before the Tribunal that the action under section 34(1)(a) was not validly instituted because all the primary facts were before the Income tax Officer when he made the original assessment and, as such, he was not competent to take recourse to section 34(1)(a) of the Act. It was further complained that the Appellate Assistant Commissioner had relied on certain additional evidence which had been secured behind the back of the assessee while the appeal was pending and the assessee had no opportunity to meet it. The Tribunal did not accept any of the contentions of the assessee except the one, which it had made relating to the consideration of additional material by the Appellate Assistant Commissioner. With regard to the said contention the Tribunal held that the Appellate Assistant Com missioner was not entitled to consider the said part of the evidence and that it had to be left out from consideration. It was, however, of the opinion that, even without taking into consideration the said additional material, there was enough evidence on record to justify the conclusion which the Income tax Officer and the Appellate Assistant Commissioner had come to, with regard to the merits of the matter. According to the Tribunal the view taken by the departmental authorities that the transaction of 826 bales of cotton was made in fact by the assessee itself and that Shri Hastimal had nothing to do with the sale or the sale proceeds was correct. The Tribunal was of the opinion that, since the assessee's books of account did not show the funds from which the said bales of cotton were purchased, it was legitimate to infer that the said funds came from some undis closed source and the entire amount of Rs. 1,75,000, which consisted of the sum invested in the purchase of 826 bales of cotton, and the element of profit involved in the said transaction constituted the undisclosed income of the assessee. Since the assessee had offered no explanation with regard to the said receipt, which could be believed, the entire amount constituted the assessee's undisclosed income liable to be brought to tax. It may be, observed the Tribunal, that the sale transaction might have involved some expenses and, consequently, the amount of Rs. 1,75,000 received by the assessee could be treated as a gross receipt of the sale. Since, however, no satisfactory explanation had been given by the assessee with regard to the part that could be deducted by way of expenses, the whole of it had to be treated as the income of the assessee. The Tribunal accordingly confirmed the decision of the departmental authorities and dismissed the assessee's appeal. The assessee applied to the Tribunal under section 66(1) for a reference to this Court on a number of questions. On the said application the Tribunal held that only two of the several questions, which had been suggested by the assessee, could be regarded as questions of law arising out of its order. It accordingly drew up a statement of the case and referred to this Court the two questions, which were as follows: