1990 (6) TMI 118 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the unaccounted income attributed to the assessee-firm.
2. Reliability of the seized documents and statements made by the partner, Thanaseelan.
3. Applicability of legal provisions regarding secret profits and their attribution to the firm or individual partners.
4. Evaluation of evidence and corroboration of unaccounted transactions.

Issue-wise Detailed Analysis:

1. Legitimacy of the Unaccounted Income Attributed to the Assessee-Firm:
The primary issue was whether the unaccounted profits revealed by the seized documents should be added to the total income of the assessee-firm. The revenue argued that the document represented the true state of the firm's business, including unaccounted transactions and profits. Conversely, the assessee contended that the document could not relate to the firm as it was not recovered from its partners but from the residence of Bharathiseelan, who was not a partner of the firm. Additionally, the initial 'TAI' could represent another entity, Thanaseelan Aluminium Industries, and the other partners had not been shown to have any unaccounted wealth.

2. Reliability of the Seized Documents and Statements Made by Thanaseelan:
The seized document contained both accounted and unaccounted profits, with the latter being divided between S.P.T. and N.K.T. for 1961-62 to 1963-64. Thanaseelan initially stated that the document showed unaccounted income derived when he was a partner of Thangam Aluminium Industries. However, he later retracted this statement before the sales-tax authorities, only to revert to his original statement before the Income-tax authorities. The appellate authorities found inconsistencies in Thanaseelan's statements and noted that the document was in code, casting doubt on its reliability. The document's internal evidence, such as different ink used for certain transactions that tallied with the firm's books, was not sufficient to establish the firm's involvement in unaccounted transactions.

3. Applicability of Legal Provisions Regarding Secret Profits:
The revenue invoked sections 16 of the Partnership Act and 88 of the Indian Trusts Act, arguing that secret profits made by a partner must be accounted for by the firm. However, the appellate authorities noted that these sections are not rules of evidence or presumptions. They only illustrate the legal position where a partner makes secret profits and holds them for the benefit of the firm. The Income-tax Act contains its own presumptions and deeming provisions, which cannot be attracted unless the other partners are proved to have joined hands with the delinquent partner in cheating the revenue. The appellate authorities concluded that the secret profits could not be assumed to be the firm's income without further evidence of the other partners' assent to the unaccounted transactions.

4. Evaluation of Evidence and Corroboration of Unaccounted Transactions:
The appellate authorities found that there was no corroborative evidence to support the revenue's claim that the unaccounted profits belonged to the firm. The other partners, Smt. Thangam and Smt. Vasumathi, denied any involvement in unaccounted transactions and stated that they had left the business in the sole charge of Thanaseelan. The part-time accountant and the husband of Smt. Thangam also denied any knowledge of unaccounted transactions. The AAC of Commercial Taxes had accepted the contention that the seized document might relate to Thanaseelan Aluminium Industries, further weakening the revenue's case. The appellate authorities concluded that the unaccounted profits revealed by the seized documents must be accounted for only by Thanaseelan and could not be assumed to be the firm's income.

Separate Judgments:
The Judicial Member and the Accountant Member delivered separate judgments. The Judicial Member upheld the orders of the CIT(Appeals) and AAC, concluding that the unaccounted profits could not be added to the firm's income. The Accountant Member disagreed, arguing that the secret profits should be assessed in the hands of the firm. The Third Member resolved the difference, agreeing with the Judicial Member and concluding that the unaccounted profits could not be added to the firm's income. The majority view was that the appeals by the revenue should be dismissed.