1991 (4) TMI 163 - AT - Income Tax

Summary

Issues Involved:
1. Ownership of the cloth in question.
2. Applicability of Section 69 of the Income Tax Act.
3. Validity of the addition of Rs. 3,60,269 to the assessee's income.
4. Weight of denial by third parties regarding ownership of the cloth.
5. Relevance of the Supreme Court's decision in Chuharmal vs. CIT.
6. Consideration of other cited case laws.

Detailed Analysis:

1. Ownership of the Cloth in Question:
The primary issue was whether the cloth found in the assessee's factory belonged to the assessee or third parties. The Tribunal noted that the assessee was engaged solely in the business of dyeing and processing cloth on a job basis, not in the purchase and sale of cloth. This fact was consistent over the years. The Tribunal concluded that the cloth in question was received by the assessee for job work and did not belong to the assessee.

2. Applicability of Section 69 of the Income Tax Act:
The Income Tax Officer (ITO) had invoked Section 69, which pertains to unexplained investments, to add the value of the cloth to the assessee's income. The Tribunal, however, found that the presumption of ownership could be rebutted by circumstances indicating that the goods were merely in the custody of the assessee for job work. Given the nature of the assessee's business and the consistent records, the Tribunal held that Section 69 was not applicable.

3. Validity of the Addition of Rs. 3,60,269 to the Assessee's Income:
The Tribunal examined the seized documents, which included details about the cloth and names of the parties, albeit in abbreviated form. The Tribunal inferred that the cloth belonged to third parties who had entrusted it to the assessee for job work. Therefore, the addition of Rs. 3,60,269 was not justified. Instead, only the job work charges amounting to Rs. 73,689 should be added to the assessee's income.

4. Weight of Denial by Third Parties Regarding Ownership of the Cloth:
The Tribunal considered the denials by third parties about the ownership of the cloth. It found that these denials were not credible because admitting ownership would have financial repercussions for the third parties. The Tribunal concluded that the denials should not be given much weight.

5. Relevance of the Supreme Court's Decision in Chuharmal vs. CIT:
The Department relied on the Supreme Court's decision in Chuharmal vs. CIT, where the possession of contraband goods led to an inference of ownership. The Tribunal distinguished this case, noting that in Chuharmal, the assessee could not provide any explanation for the possession of the goods. In contrast, the assessee in the present case consistently explained that the cloth belonged to third parties and was received for job work. Therefore, the Chuharmal decision was not applicable.

6. Consideration of Other Cited Case Laws:
The Department also cited several other cases where the possession of unexplained assets led to additions under the Income Tax Act. The Tribunal found that these cases were not analogous to the present case because the facts differed significantly. In those cases, the assessees were found to possess gold or cash without satisfactory explanations, whereas, in the present case, the assessee had a consistent business practice of processing cloth for third parties.

Conclusion:
The Tribunal concluded that the cloth in question did not belong to the assessee but to third parties who had entrusted it for job work. Consequently, the addition of Rs. 3,60,269 was reduced to Rs. 73,689, representing the job work charges. The appeal was partly allowed.