1998 (6) TMI 120 - AT - Income Tax

Summary

Issues Involved:

1. Legality and jurisdiction of the survey conducted on 25th Feb., 1987.
2. Authority of the Inspector to record statements and prepare stock inventory.
3. Validity of additions made based on the survey report.

Detailed Analysis:

1. Legality and Jurisdiction of the Survey:

The appellants contended that the survey conducted on 25th Feb., 1987, was without jurisdiction and illegal. The Inspector who conducted the survey was not legally authorized as he was posted with the AO at Jodhpur, not at the location of the survey. The appellants argued that only the Assistant Director of Investigation or AO could record statements and prepare inventory, making the Inspector's actions unauthorized and invalid. This contention was supported by references to the case of ITO vs. Jewells Emporium (1975) 48 ITD 164 (Indore) and a Circular No. 179 dated 30th Sept., 1975.

2. Authority of the Inspector to Record Statements and Prepare Stock Inventory:

The Tribunal examined whether an Inspector is empowered to record statements or prepare stock inventory under Section 133A of the Income Tax Act. Sub-section (3) of Section 133A allows an income tax authority to make an inventory of any cash, stock, or other valuable articles or things checked or verified by him and to record the statement of any person which may be useful for or relevant to any proceeding under the Act. However, the explanation below sub-section (5) of Section 133A clarifies that "income tax authority" includes an Inspector of Income-tax only for specific purposes, such as placing marks of identification on books of accounts or other documents inspected by him and making or causing to be made extracts or copies therefrom. The Tribunal concluded that the Inspector is not authorized to record statements or prepare stock inventory, as these actions can only be performed by designated income tax authorities like the CIT, Dy. CIT, Director, Dy. Director, Asstt. Director, or an AO.

3. Validity of Additions Made Based on the Survey Report:

Since the survey and the subsequent actions (recording of statements and preparation of stock inventory) were conducted by an unauthorized Inspector, the Tribunal found these actions to be illegal. Consequently, the additions made based on the survey report were deemed invalid. The Tribunal emphasized that the entire survey operation was conducted by the Inspector, who recorded the statement of a person alleged to be a partner of one of the firms and prepared the stock inventory, both of which were beyond his legal authority. Therefore, the additions made on the basis of this survey had no legal standing.

Judgment:

The Tribunal admitted the additional ground raised by the appellants regarding the legality of the survey and found in their favor. It was held that the survey conducted by the Inspector was unauthorized and illegal, rendering the additions based on the survey report invalid. Consequently, the Tribunal deleted the additions on account of stock valuation in all the appeals of the assessee. Since the primary ground was decided in favor of the assessee, there was no need to adjudicate the other grounds. The appeals of the assessee were allowed, and the cross-appeals by the Department were dismissed.