1984 (9) TMI 153 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction and validity of the assessment.
2. Cancellation of assessment by the Commissioner (Appeals).
3. Onus of disproving purchases and payments made by the assessee.
4. Violation of Section 40A(3) and Rule 6DD of the Income-tax Rules, 1962.
5. Opportunity to cross-examine the witness.
6. Compliance with Section 142(2) of the Income-tax Act, 1961.
7. Power of the IAC to direct the ITO regarding the head of income.
8. Addition of unproved cash credits.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of the Assessment:
The revenue argued that the Commissioner (Appeals) erred in cancelling the assessment, disregarding the fact that the ITO had jurisdiction ab initio over the case. The ITO proposed variations in the assessment exceeding Rs. 1 lakh, necessitating a draft assessment order and objections from the assessee, which were forwarded to the IAC. The IAC issued directions under Section 144B, and the ITO passed the assessment order accordingly. The Commissioner (Appeals) held that the directions of the IAC were tainted with illegality due to the utilization of additional evidence and exceeding the scope of Section 144B, rendering the ITO's order illegal.

2. Cancellation of Assessment by the Commissioner (Appeals):
The Commissioner (Appeals) quashed the entire assessment, citing the IAC's overreach and the ITO's failure to comply with Section 142(2). The revenue contended that procedural remedies could be cured at any stage and that the IAC had granted the assessee an opportunity to cross-examine witnesses, thus complying with natural justice principles. The Tribunal held that the Commissioner (Appeals) was not justified in cancelling the entire assessment but recognized that the additions of Rs. 1,66,624 and Rs. 16,000 violated Section 142(3) and were null and void.

3. Onus of Disproving Purchases and Payments Made by the Assessee:
The revenue argued that the Commissioner (Appeals) erred in holding that Shri Sunderdas Jairamdas was never a witness of the assessee and in placing the onus of disproving the purchases on the department. The Tribunal noted that the ITO examined the vendor and other parties, and the vendor initially accepted the transactions but later claimed they were bogus. The IAC's directions were based on additional evidence, which the Commissioner (Appeals) deemed to exceed the IAC's powers under Section 144B.

4. Violation of Section 40A(3) and Rule 6DD of the Income-tax Rules, 1962:
The revenue contended that the assessee's payments to Shri Sunderdas Jairamdas violated Section 40A(3) read with Rule 6DD, and the onus of disproving such payments was wrongly placed on the department. The Tribunal observed that the ITO added Rs. 1,66,624 as income from undisclosed sources based on the vendor's later statement that the transactions were bogus.

5. Opportunity to Cross-examine the Witness:
The assessee argued that they were not given a proper opportunity to cross-examine Shri Sunderdas Jairamdas regarding the evidence recorded by the ITO. The IAC issued summons for cross-examination, and the vendor reiterated his claim that the transactions were bogus. The Commissioner (Appeals) held that the IAC's actions constituted additional evidence, exceeding his jurisdiction under Section 144B.

6. Compliance with Section 142(2) of the Income-tax Act, 1961:
The Commissioner (Appeals) held that the assessment was bad in law due to non-compliance with Section 142(2), as the ITO utilized evidence from local enquiries and the 'Sai book' without giving the assessee an opportunity to respond. The Tribunal upheld this view, confirming that the additions of Rs. 1,66,624 and Rs. 16,000 were null and void due to the violation of natural justice principles.

7. Power of the IAC to Direct the ITO Regarding the Head of Income:
The ITO proposed assessing Rs. 16,000 as income from undisclosed sources, but the IAC directed it to be assessed as business income. The Commissioner (Appeals) found this to be an irregularity, and the Tribunal agreed, holding that the IAC could not change the head of income as directed.

8. Addition of Unproved Cash Credits:
The ITO added Rs. 35,000 as unproved cash credits based on confirmation letters and examinations of parties involved. The Commissioner (Appeals) quashed the entire assessment, but the Tribunal restored this part of the order for reconsideration on merits, as it was not in contravention of Section 142(3).

Conclusion:
The Tribunal allowed the revenue's appeal in part, confirming the nullity of the additions of Rs. 1,66,624 and Rs. 16,000 due to violations of Section 142(3) and directing the Commissioner (Appeals) to reconsider the addition of Rs. 35,000 on merits. The cross-objection filed by the assessee was dismissed as infructuous.