2008 (7) TMI 544 - HC - Income Tax

Income from undisclosed sources - Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the addition of Rs. 8,78,358 in the hands of the assessee ? Held that- except the statement of K and R there was no other evidence available with the department. A copy of the statement of R was not given nor was an opportunity of cross examination R given to the assessee. K had subsequently retracted his statement. Even after retraction, he along with two other partners had filed disclosure petition disclosing this very amount in the disclosure petition. The Assessee s statement was recorded by the Assessing Officer and some discrepancies were pointed out but merely on the basis of such discrepancies, adverse presumption could not be drawn against him. The department had failed to establish any nexus between the promissory note and the amount said to have been given by the assessee to K. The Tribunal was not right in law in upholding the addition of Rs. 8,78,358 in the hand of assessee.

Issues Involved:
1. Validity of the addition of Rs. 8,78,358 in the hands of the assessee.
2. Violation of principles of natural justice.
3. Double taxation.

Detailed Analysis:

1. Validity of the Addition of Rs. 8,78,358 in the Hands of the Assessee:

The case arose from a search and seizure operation under section 132 of the Income-tax Act, 1961, at the assessee's residence. A key and promissory notes were found at another individual's residence, linking the assessee. The promissory note for Rs. 8,78,358 was executed by Shri Kantilal Motilal, who later retracted his statement claiming coercion. Despite the retraction, the Assessing Officer added the amount to the assessee's income, treating it as income from undisclosed sources.

The assessee contended that he had no concern with the promissory note and had not lent any money to Shri Kantilal M. Patel. This was rejected by the Assessing Officer, who maintained the addition. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this decision, citing the spontaneous nature of the initial statement and dismissing the retraction as an afterthought.

2. Violation of Principles of Natural Justice:

The assessee argued that he was not given a chance to cross-examine Shri Ramesh M. Patel, whose statement was crucial to the case. The statement was not referred to in the assessment order, nor was a copy provided to the assessee. The Tribunal and Commissioner of Income-tax (Appeals) dismissed the need for cross-examination, stating the facts were admitted by the assessee.

The court found this to be a violation of natural justice. The assessee should have been allowed to cross-examine Shri Ramesh M. Patel to clarify the number of envelopes and their contents. The reliance on the statement without giving the assessee an opportunity to challenge it was deemed unjust.

3. Double Taxation:

The assessee also contended that the amount had already been disclosed and taxed in the hands of the partners of M/s. Durga Cotton Industries under a voluntary disclosure scheme. The authorities rejected this, stating that the disclosure did not preclude the department from taxing the right person, which they determined to be the assessee.

The court, however, found that since the amount had been disclosed and taxed in the hands of the partners, it should not be taxed again in the hands of the assessee. The principle of double taxation was considered, and it was determined that the same income should not be taxed twice.

Conclusion:

The court concluded that the authorities below had erred in upholding the addition of Rs. 8,78,358 in the hands of the assessee. The failure to provide an opportunity for cross-examination and the principle of double taxation were significant factors. The court quashed the orders of the authorities and answered the question in favor of the assessee, stating that the addition was not justified.

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