1987 (12) TMI 63 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the Commissioner's assumption of jurisdiction under section 263 of the Income Tax Act.
2. Whether the ITO's original assessment was erroneous and prejudicial to the interests of the Revenue.
3. The correct price of National Defence Gold Bonds for the assessment.
4. Treatment of the alleged capital gains as income from undisclosed sources.
5. Appropriate assessment year for the undisclosed income.

Detailed Analysis:

1. Validity of the Commissioner's Assumption of Jurisdiction:
The Commissioner issued a notice under section 263 of the Income Tax Act, claiming that the ITO's assessment was erroneous and prejudicial to the interests of the Revenue. The Commissioner relied on the Bombay Stock Exchange quotation and statements made by third parties, which were not part of the original assessment record. The assessee argued that the Commissioner did not properly assume jurisdiction as the evidences relied upon were not part of the record at the time the ITO passed his order. The Tribunal noted that the ITO failed to make proper inquiries regarding the exemption claim, and this failure itself was sufficient ground for the Commissioner to assume jurisdiction. The Tribunal cited various court decisions supporting the view that the Commissioner was justified in taking up the case under section 263.

2. Whether the ITO's Original Assessment was Erroneous and Prejudicial to the Interests of the Revenue:
The ITO accepted the short-term and long-term capital gains declared by the assessee without making necessary inquiries into the nature of the transactions. The Commissioner found that the ITO did not verify the purchase price of the National Defence Gold Bonds and the circumstances under which the assessee could purchase them at a significantly lower rate and sell them at double the price within a week. The Tribunal agreed with the Commissioner that the ITO's failure to make necessary inquiries rendered the assessment erroneous and prejudicial to the interests of the Revenue.

3. The Correct Price of National Defence Gold Bonds for the Assessment:
The assessee claimed to have purchased the bonds at Rs. 750 per ten grams based on an agreement made in 1979. The Commissioner found that the market price on 4-1-1980 was Rs. 1,450 per ten grams, as certified by the Bombay Stock Exchange. The Tribunal upheld the Commissioner's finding, noting that the assessee failed to produce evidence of the 1979 agreement. The Tribunal concluded that the Commissioner was justified in taking the market rate as the cost price and treating the difference as unexplained investment.

4. Treatment of the Alleged Capital Gains as Income from Undisclosed Sources:
The Commissioner concluded that the capital gains claimed by the assessee were actually an introduction of unaccounted funds into the books of account in the guise of tax-free capital gains. The Tribunal agreed with the Commissioner's conclusion, noting that the purchase price declared by the assessee was significantly lower than the market price and was not supported by verifiable evidence. The Tribunal upheld the Commissioner's direction to treat the difference as income from undisclosed sources.

5. Appropriate Assessment Year for the Undisclosed Income:
The assessee argued that if the capital gains were to be treated as undisclosed income, they should be assessed in the assessment year 1980-81, as the transactions were completed before the end of the financial year ending 31st March 1980. The Tribunal noted that the ITO's order was silent regarding the accounting period adopted by the assessee. The Tribunal set aside this issue and restored the matter to the file of the ITO for careful consideration and decision in accordance with law, after giving full opportunity of hearing to the assessee.

Conclusion:
The Tribunal concluded that the Commissioner was justified in assuming jurisdiction under section 263 and in directing the ITO to treat the difference between the declared purchase price and the market price as income from undisclosed sources. The Tribunal also directed the ITO to reconsider the appropriate assessment year for the undisclosed income. The appeal was partly allowed for statistical purposes.