1977 (6) TMI 43 - AT - Income Tax

Summary

Issues Involved:
- Whether the ITO was justified in taking action under s. 147(a);
- Whether the previous year for Khandsari sugar business should be taken as the financial year or the Diwali year;
- Whether the cash credits and loans were unexplained and sustainable;
- Whether the cost of construction was understated.

Detailed Analysis:

1. Justification of Action Under Section 147(a):
The primary contention was whether an assessee who honestly believed they had no taxable income had a legal obligation to file a return under s. 139. The Department argued that the merits of the additions must be considered to judge the bona fides of the assessee's belief. The Tribunal agreed, stating that it is imperative to go into the reasons for the additions to judge the belief of the assessee. After examining the merits, it was found that the additions made by the ITO were not justified, thus invalidating the action under s. 147(a).

2. Previous Year for Khandsari Sugar Business:
The Tribunal held that the assessee had the option to choose any previous year for a newly set-up business, as per s. 3 of the IT Act, 1961. The assessee chose the Diwali year, which the ITO cannot alter. The previous year for the Khandsari business should therefore be the year ending with 3rd Nov., 1959, not the financial year ending with 31st March, 1960. The Departmental Representative conceded this legal position.

3. Unexplained Cash Credits and Loans:
The assessee explained that the cash credits were from the sale of personal jewelry by the partners. The Tribunal found the ITO's conclusion that the sales were fictitious to be unsupported by evidence. The sale bills and Dharam Kanta chits were provided, and the partners' affidavits were not disproven. Even if the sales were fictitious, the partners' admission of contributing the money remained unchallenged. Thus, the credits could not be considered the firm's income. Similarly, the loans were supported by evidence of agricultural income and statements from the creditors, which the ITO failed to disprove. Therefore, the additions on account of cash credits and loans were unjustified.

4. Understatement of Cost of Construction:
The Tribunal found that the ITO's estimation of the cost of construction was based on the Inspector's report, which was not sufficient evidence. The construction took place over several years, and the portion completed in the relevant year was minimal. There was no positive evidence of suppression in the cost of construction. Thus, the addition on this account was not well-founded and could not form the basis for the belief that there was an omission or failure to file a return.

Conclusion:
The Tribunal concluded that the ITO was not justified in taking action under s. 147(a) as the additions made were not sustainable. The previous year for the Khandsari business should be the Diwali year, and the cash credits and loans were satisfactorily explained. The cost of construction was not understated. Therefore, the assessee's belief that there was no taxable income was bona fide, and there was no obligation to file a return under s. 139. Consequently, the appeals were allowed, and the penalty for concealment of income was deleted.