1995 (1) TMI 103 - AT - Income Tax

Summary

Issues Involved:

1. Legality of the CIT's order under Section 263 of the IT Act, 1961.
2. Validity of the assessee's retraction from initial statements.
3. Assessment of Rs. 6,05,000 as income from undisclosed sources.
4. Justification for protective vs. substantive assessment.
5. Jurisdiction and correctness of the CIT's decision.

Issue-wise Detailed Analysis:

1. Legality of the CIT's order under Section 263 of the IT Act, 1961:

The appeal by the assessee is directed against the order of the learned CIT, Baroda, under Section 263 of the IT Act, 1961. The CIT noticed that the assessment made under Section 143(3) for the assessment year 1985-86 was erroneous and prejudicial to the interests of Revenue as it was finalized as a "substantive" order instead of on "protective measures." The CIT issued a show-cause notice under Section 263 and, after giving an opportunity of being heard to the assessee, passed the impugned order converting the assessment for the assessment year 1985-86 into a "protective" assessment. The CIT remarked, "The materials on records, prima facie, show that the assessee's only source of income is 'salary' from the firm. His duty was to deliver the parcels received by the branch office. It is, therefore, clear that the assessee could not or did not earn the impugned amount of Rs. 6,05,000 which he volunteered himself for assessment."

2. Validity of the assessee's retraction from initial statements:

The assessee was intercepted at Baroda railway station carrying cash of Rs. 7,15,000. In his statement to the Railway Police and the ADI, Baroda, he claimed the cash was given to him by the manager of the Angadia firm to deliver to the head office in Surat. Later, the assessee retracted his statements, claiming they were made under pressure and terror of the police. He submitted that Rs. 1,10,000 belonged to Shri Narendra Narayandas Patel, and the remaining Rs. 6,05,000 represented his income from business over five years. The Tribunal found that the retraction was a concocted story to help the Angadia firm, noting, "It cannot be believed that a person who was working as an employee at a meagre salary of Rs. 500 per month and carrying packets/parcels from one place to another, would carry on business and that too of diamonds which requires not only great expertise but lot of investments."

3. Assessment of Rs. 6,05,000 as income from undisclosed sources:

The assessee claimed the amount of Rs. 6,05,000 was from his business in rough and polished diamonds, which he started with Rs. 8,000 received at his marriage. The Assessing Officer found several discrepancies: the assessee did not maintain any books of account, did not have a bank account, and could not produce any evidence supporting his claim of business income. The Tribunal noted, "The only evidence in support of his claim of business of purchase and sale of diamonds were letters from three different parties which did not prove that he could earn the income returned by him by a nominal investment of Rs. 8,000 claimed by him as his initial capital investment."

4. Justification for protective vs. substantive assessment:

The Assessing Officer completed assessments for earlier years on a protective basis but made the assessment for the assessment year 1985-86 on a substantive basis. The CIT modified this, stating, "The IAC(Asst.) should have assessed the assessee for asst. yr. 1985-86 treating Rs. 6,05,000 on account of seized cash as his income from undisclosed sources on protective basis." The Tribunal agreed, noting that the assessee's statements were spontaneous and without coercion, and the retraction was an attempt to help the Angadia firm.

5. Jurisdiction and correctness of the CIT's decision:

The Tribunal held that the CIT was justified in invoking jurisdiction under Section 263, as the order passed by the IAC(Asst.) was erroneous and prejudicial to the interests of Revenue. The Tribunal stated, "The words 'prejudicial to the interests Revenue' have not been defined but they just mean that the orders of assessment challenged are such as are not in accordance with law and facts in consequence whereof the lawful revenue due to the State has not been realised and/or cannot be realised."

Conclusion:

The Tribunal dismissed the appeal, upholding the CIT's order to convert the assessment into a protective one, thereby allowing for appropriate action against the Angadia firm. The Tribunal concluded, "We, therefore, hold that the CIT is justified in invoking his jurisdiction under s. 263 and in modifying the assessment order of the IAC(Asst.) by making it protective assessment."