1982 (8) TMI 116 - AT - Income Tax

Issues Involved:
1. Jurisdiction of the ITO for passing the assessment order.
2. Validity of the assessment order framed by the ITO.
3. Applicability of section 144B of the Income-tax Act, 1961.
4. Additions made by the ITO and confirmed by the AAC.
5. Disallowance of entertainment expenditure under section 37(2B).
6. Deletion of certain additions by the AAC.

Issue-wise Detailed Analysis:

1. Jurisdiction of the ITO for Passing the Assessment Order:
The main contention in this appeal relates to the jurisdiction of the ITO for passing the assessment order on 15-3-1976. The assessee, a limited company engaged in manufacturing railway wagons, aircraft refuelers, and LPG cylinders, filed its return of income on 31-7-1972, declaring an income of Rs. 4,76,654, and subsequently revised it on 17-2-1975 to Rs. 4,73,125. The ITO wrote to the assessee on 23-1-1976 requiring details of unsecured loans, which the assessee furnished on 30-1-1976. On 9-2-1976, the assessee voluntarily surrendered Rs. 2,66,700 for inclusion in its total income, citing difficulty in producing evidence to prove the genuineness of the credits. The ITO accepted this offer and included the amount in the total income of Rs. 8,13,542 under 'Income from other sources'. Additional proposed additions amounted to Rs. 68,931.

2. Validity of the Assessment Order Framed by the ITO:
The assessee challenged the validity of the assessment order before the AAC, arguing that the ITO had to complete the assessment within one year from the date of filing the revised return, i.e., by 16-2-1976, and could not take advantage of the extended time permitted by clause (iv) of Explanation 1 to section 153. The AAC rejected this contention, stating that the surrender offer did not amount to filing a revised return and that the provisions of section 144B were clearly attracted. The ITO was within his jurisdiction to refer the case to the IAC, and the assessment made on 15-3-1976 was within the extended period of time.

3. Applicability of Section 144B of the Income-tax Act, 1961:
The assessee argued that the provisions of section 144B did not apply as the variation between the income proposed and that returned did not exceed Rs. 1 lakh. The counsel for the assessee contended that the surrender of Rs. 2,66,700 was not a variation proposed by the ITO and therefore did not attract section 144B. However, the department argued that the variation amounted to Rs. 2,66,700 plus Rs. 68,931, exceeding Rs. 1 lakh. The Tribunal held that the conditions laid down in section 144B were satisfied, and the assessment was made within the extended period of time.

4. Additions Made by the ITO and Confirmed by the AAC:
- Credit of Rs. 9,000 in the name of Hira Nand: The ITO treated the amount as the assessee's income from other sources due to lack of evidence supporting the genuineness of the credit. The AAC upheld the addition, and the Tribunal confirmed it, stating that the assessee had not offered any satisfactory explanation.
- Credit of Rs. 5,000 in the name of Ram Parshad: The ITO found alterations in the day book, and the assessee failed to produce the creditor. The AAC confirmed the addition, and the Tribunal upheld it, stating that the explanation offered by the assessee was not satisfactory.
- Credit of Rs. 5,000 in the name of Nand Lal Bhalla: Similar to the Ram Parshad case, the ITO found alterations in the day book, and the assessee failed to provide satisfactory evidence. The AAC confirmed the addition, and the Tribunal upheld it.

5. Disallowance of Entertainment Expenditure Under Section 37(2B):
The ITO disallowed Rs. 3,410 spent on tea, coffee, and other drinks, treating it as entertainment expenditure. The AAC confirmed the disallowance, following decisions of the Allahabad and Kerala High Courts. However, the Tribunal deleted the addition, following the Gujarat High Court's decision in CIT v. Patel Bros. & Co. Ltd., and the Supreme Court's principle that if two interpretations are possible, the one favorable to the assessee should be followed.

6. Deletion of Certain Additions by the AAC:
- Credit of Rs. 10,000 in the name of Mohinder Pratap: The ITO treated the amount as the assessee's income from undisclosed sources due to suspicious entries. However, the AAC deleted the addition, finding that the creditor had been examined and explained the source of the amount. The Tribunal confirmed the deletion.
- Payment of Rs. 26,998 to S.P. Bhalla: The ITO disallowed the claim due to lack of written agreement and evidence of work done. The AAC found sufficient evidence supporting the payment and deleted the addition. The Tribunal confirmed the deletion.

Separate Judgment by Judicial Member:
The Judicial Member disagreed with the majority view regarding the applicability of section 144B, stating that the ITO did not propose the variation, the variation did not exist at the time of invoking section 144B, and the variation was not prejudicial to the assessee. He annulled the assessment, stating that the limitation was governed by section 153(1)(c) and the assessment was made beyond the period of limitation.

Third Member Decision:
The Third Member agreed with the Accountant Member, holding that the amount of Rs. 2,66,700 added to the assessee's income formed part of the total variation in the income or loss returned, and the provisions of section 144B were applicable. The Tribunal concluded that the assessment was made within the extended period of time and rejected the assessee's contention.

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