2018 (11) TMI 1747 - HC - Income Tax

Reopening of assessment u/s 147 - disallowance u/s 40A(3) - payment was related to the transaction of sale of imported car by one Shri.Balan Pillai to one Sri. Arun Choksi and assessee is said to have acted as a middle man - HELD THAT - Entire price of the car and the customs duty would have been borne by the assessee and on subsequent transfer being made, it would have been on payment by Sri. Arun Choksi to the assessee. Even in such a circumstance, there could not be a dis-allowance made under Section 40A(3) of the Act. The assessing officer having not attempted to view it in that perspective, we do not think that there need be a remand. However if as held by the Tribunal there could not be a dis-allowance under Section 40A(3) of the Act since the payment was not from the assessee to the registered owner of the vehicle; then there is no scope for allowing an expenditure, since that was not an amount received by the assessee from Arun Choksi and then passed on to Balan Pillai. The said amount was merely shown as an expenditure, by virtue of the payment made to Balan Pillai, without explaining the same. We, hence, find the ground of dis-allowance under Section 40A(3) to be improper but still find the dis-allowance to be apt for no explanation of the source of such funds. Unexplained cash credit u/s 68 - A.O. has, on facts, found that even though in the first instance, Sri. M.K.A. George accepted the fact that he handed over the Demand Draft for ₹ 22,000/- to the assessee. But later he stated that the affidavit pertaining to such acceptance was actually prepared and brought to him by Sri. Jose, brother of Sri. Alex C.Joseph, and that he had simply signed it and the contents of that affidavit were denied when he was examined by the AD(I). Consequently, the affidavit was rejected and addition of ₹ 22,000/- was made. Sri. M.K.A. George had later filed a letter before the A.O. stating that he did not give any statement to the AD(I) voluntarily and that he had handed over the draft and the same was encashed through the bank account of the assessee. The Tribunal has held that without any cross-examination by the assessee in this regard, the statement before the AD(I) cannot be a basis for making such an addition. We agree with that. We answer the said question of law also in favour of the assessee and against the Revenue. Unaccounted business receipts - No reason to interfere with the Tribunal's order except with respect to ₹ 9,00,000/-, wherein two demand drafts of ₹ 9,00,000/- and ₹ 6,50,000/- were found to be credited to the accounts of Sri. Alex C. Joseph, out of which an amount of ₹ 9,00,000/- was reflected in the accounts of the assessee. The Tribunal's order is interfered with to the limited extent of making an addition of ₹ 9,00,000/- being the amounts reflected in the accounts of the assessee with respect to a transaction between Sri. Bagla and Sri. Alex C. Joseph. All the other business proceeds are seen to have been those found in the accounts of Alex C. Joseph. Only on information received of the same being that of the assessee itself the additions were proposed. There was nothing recovered in search to substantiate such information and confirm its veracity. We hence concur with the Tribunal except on the limited addition sustained herein above. Sale of a jeep belonging to Sri. M.K.A. George - There is an affidavit proffered of that person, in which he admitted the transaction. But, before the Additional Director (Investigation), he denied the same. Later, again a confirmation letter was submitted. What assumes significance is the fact that there was no cross-examination permitted of the person when he appeared before the AD(I). Hence, we cannot interfere with the deletion made by the Tribunal on that account. Unexplained cash found and seize - The assessee cannot merely contend that the cash belonged to Sri. Alex C. Joseph without any confirmation from him; especially when he declined to own up the same in his statement. The cash having been found from the assessee's premises, the assessee has a duty to reveal and substantiate the source, which was not done. In such circumstances, we do not think that the Tribunal was right in deleting the addition of income with respect to the cash recovered from the assessee's premises, which was not accounted by the assessee. We, hence set aside the deletion of the said addition by the Tribunal, restoring that made by the A.O.

Summary

Issues Involved:
1. Validity of the search conducted under Section 132 of the Income Tax Act.
2. Additions made under Section 68 of the Income Tax Act.
3. Disallowance under Section 40A(3) of the Income Tax Act.
4. Unexplained deposits and credits.
5. Unaccounted business receipts.
6. Burden of proof and principles of natural justice.

Detailed Analysis:

1. Validity of the Search Conducted Under Section 132 of the Income Tax Act:
The Tribunal found that it cannot go into the validity of the search proceedings and can only examine whether there was a warrant of authorization for the search. The warrant was issued in the name of Sri. Alex C. Joseph, who was present at the premises during the search and was actively involved in the firm's affairs. The assessee was not registered as a partnership firm and was assessed as an Association of Persons (AoP). The Tribunal rightly relied on the Supreme Court judgment in Pooran Mal v. Director of Inspection [1974] 93 ITR 505, which allows the Department to use material seized even if the search is illegal. Therefore, the Tribunal's findings on the legality of the search were upheld.

2. Additions Made Under Section 68 of the Income Tax Act:
The assessee's claim that the amounts were received as chitty installments was not credible, especially since no chitty business was carried on during the subject years. The identity of the persons who paid the amounts was not revealed. The Tribunal confirmed the addition of ?1,48,450/- under Section 68. The appeal by the assessee for 1992-93 was rejected, and the questions of law were answered in favor of the Revenue.

3. Disallowance Under Section 40A(3) of the Income Tax Act:
The disallowance of ?7,50,000/- was related to a transaction involving the sale of an imported car. The Tribunal found that the payment was not made by the assessee but was related to a transaction between Sri. Balan Pillai and Sri. Arun Choksi. The Tribunal concluded that there was no reason to find the payment of ?7,50,000/- as having been made by the assessee. However, the High Court found the disallowance to be apt due to the lack of explanation for the source of such funds.

4. Unexplained Deposits and Credits:
The unexplained deposit of ?22,000/- in the current account of the assessee with Union Bank of India was deleted by the Tribunal due to the lack of cross-examination of Sri. M.K.A. George, who had provided conflicting statements. The High Court agreed with the Tribunal's decision, emphasizing the violation of principles of natural justice.

5. Unaccounted Business Receipts:
For the year 1993-94, the Tribunal deleted the additions of unaccounted business receipts, reasoning that the transactions were carried out by Sri. Alex C. Joseph. The High Court concurred with the Tribunal except for an addition of ?9,00,000/-, which was reflected in the accounts of the assessee. The Tribunal's order was interfered with to the limited extent of making this addition.

6. Burden of Proof and Principles of Natural Justice:
The Tribunal held that the burden of proof was on the Department, especially when the assessee was not allowed to cross-examine witnesses whose statements were used against them. The High Court agreed, emphasizing the importance of cross-examination for upholding principles of natural justice.

Conclusion:
The High Court partly allowed the appeals of the Department, sustaining the addition of ?9,00,000/- and restoring the addition of ?2,89,500/- as unexplained cash. The other additions deleted by the Tribunal were not interfered with. The appeals by the assessee for both years were rejected.