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TMI Blog1977 (6) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... axable income which escaped assessment. The ITO therefore initiated proceedings under s. 147(a) by the issue of a notice under s. 148 on21st July, 1966. In response to this notice the assessee filed return of income on5th Sep., 1966disclosing income of Rs. 3,000 only from cloth business, adopting financial year as the previous year. No income was returned from khandsari sugar business, on the ground that the production of sugar was started after the end of the accounting year i.e. 3rd Nov., 1959, which was chosen as the previous year. Even though the assessee submitted a return of income in response to the notice issued under s. 148 it was not without protest. The assessee contended that it had no taxable income and was therefore not liable to file any return of income. Though this contention was not stated in so many words in the order of the ITO that appears to be the contention taken by the assessee before the ITO. We have already mentioned earlier that for khandsari business the assessee adopted the Diwali year as the previous year, the first of which ended on previous year, the first of which ended on3rd Nov., 1959. The khandsari business was started on15th July, 1959. From15t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us imperative to go into the reasons. After some debate we found merit in this contention and heard the parties on merits also. Before we set out the fact that led to the additions and the explanations of the assessee, we have to refer to what has happened in the next asst. yr. 1961-62 because that has a direct bearing on the reopening of the assessment for the year under appeal, which proceeding of reopening has been the subject matter of contest before us. 5. For the asst. yr. 1961-62, the assessee filed a return on6th Sep., 1963voluntarily declaring a loss of Rs. 2,488 made up of: Rs. (a) Money lending business Income 989.00 (b) Cloth business (c) Khadsari business for the period from15-7-59to20-10-60. Loss 3,477.00 Net loss 2,488.00 income from money lending and cloth business was returned adopting the financial year as the previous year. For Khandsari business, the accounts that started on15th July, 1959were closed for the first time to Deepawali year ending20th Oct., 1960. 6. The ITO computed the assessment for 1961-62 assessment year on a total income of Rs. 79,578. Rs. (a) Money lending business (year ending31-3-1961) 989.00 (b) Cloth business (year ending3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and escaped assessment. It was in response to this notice the assessee filed return on5th Sep., 1966disclosing an income of Rs. 3,000 from cloth business and nil income from khandsari business. We have already stated that according to the assessee no income resulted from khandsari business because (a) there was no previous year for the asst. yr. 1960-61 and (b) during this period the factory was under erection and the manufacture of khandsari sugar was not started. These contentions were negatived by the ITO. He held that the cash credits, the loans appearing in the accounts of khandsari business and the unaccounted for investment in the construction were all liable to be taxed in this assessment year for want of proper explanation. He also changed the previous year. The assessment was completed on a total income of Rs. 74,578 in the following manner: (a) Cloth business Rs. 5,000 (b) Khandsari business Rs. 5,578 (c) Unexplained investment in the construction Rs. 20,000 (d) Unexplained cash deposits Rs. 44,000 Rs. 74,578 8. On appeal the AAC did not agree with the assessee's contentions that the previous year far khandsari business should be taken as Diwali year and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the previous year should be taken as the year ending with31st March, 1960. There is no warrant for this conclusion nor any reasons were furnished in the order. He seemed to think that because for cloth business there were no accounts maintained and for that reason financial year was adopted as the previous year, the same should be adopted for the khandsari business also. But for khandsari business the accounts were maintained, they were made up to Diwali date and what is more the partnership deed provided the Diwali year the previous year. The ITO is there not justified in changing the previous year from Diwali year as chosen by the assessee to the financial year. The previous year for the asst. yr. 1960-61 for the khandsari business should therefore be taken as the year ending with3rd Nov., 1959. The Departmental Representative has fairly conceded this legal position and could not support the determination of the previous year by the ITO as the year ending with31st March, 1960. 11. Having decided the basic question that for khandsari business the previous year should be the year ending with 3rd Nov., 1959, the next question that arises is whether there is any income from khand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ITO was over a period of four years and the authorities below seemed to think that the entire unexplained investment has come in the first year of construction. If at all there is any unexplained investment, it should be ascertained in what year it was spent and in any case the addition to be made on this account must await the completion of the construction unless there is positive evidence to show that in the meantime certain amount was spent but not accounted for in the books maintained for it. Thirdly, except the Inspector's report, who is not an expert in this line, there is no other evidence brought on record to prove that there was in fact suppression in the cost of construction. At best the Inspector's report may serve as a reason to excite the suspicion of the ITO but it cannot, in our opinion, form the basis for the conclusion that there was suppression of the cost of construction and then for the addition all in the assessment year under appeal. There is absolutely no evidence that such a sum of Rs. 20,000 or Rs. 15,000 as the case may be had been spent by the assessee between15th July, 1959when the total cost of the installation of the factory is about Rs. 9,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by independent authority. The assessee might have been unable to produce the account books of the Sarraf due to the long lapse of time. That cannot be held against the assessee when there is other evidence on which a reasonable conclusion can be drawn. There is not an iota of evidence to show that their other evidence produced by the assessee was all faked up. The partners have supported the sale of jewellery by giving individual affidavits. Nothing was brought on record to show that the contents of the affidavits are to be disbelieved. The most significant point to be noted in all these affidavits is that these affidavits were sworn to as early as 26th July, 1967 and were filed before the ITO, B-Ward, Aligarh long before the assessment for the asst. yr. 1960-61 was completed but after the assessment for the asst. yr. 1961-62 was completed. Except repeating the reasons given in the assessment order for the year 1961-62 no further attempts appear to have been made by the ITO to disprove the statements made in the affidavits. The concentration of the ITO was not so as much upon to find out whether the sale was really genuine or fictitious as much as it was to find out whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for introduction cannot be said to be have been automatically proved to be fictitious. It therefore appeared to us that the addition of the cash credits appearing on the opening day cannot be said to be the unexplained income of the assessee particularly when the partners owned up the moneys and when they were also in business for the last so many years. This addition has therefore to be excluded. In our opinion the same explanation and reasons should apply for the balance of Rs. 14,000 also. So looked at from any angle, it appeared to us that there was no justification to treat the credits appearing in the accounts of the unexplained income of the assessee. Judged in the context that the assessee firm had not started business and it was still in the process of construction and during the period of construction, the amounts introduced by the partners could only belong to the partners and not to the firm because the firm is only a name given to group of persons, who joined to carry on business in partnership. The addition made by the ITO on this account could not therefore also form the basis for the conclusion that there was an omission or failure on the part of the assessee to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint, then the sale proceeds must be deemed to have been proved and therefore the cash deposit. In any case this cash deposit appeared on18th July, 1959three days after the start of the construction work and there being no business at that point of time, this money must have really belonged either to Smt. Lilawati Devi or to the partner, who are her sons. In any case it cannot be said that the money belonged to the assessee firm. It cannot therefore be said that the explanation offered by the assessee in so far as this credit is concerned is unsatisfactory. Regarding the credit in the case of other four creditors the assessee has produced the credits and the proof to show that each one of them owned agricultural lands by producing the revenue records. Each one of them admitted before the ITO that they advanced the moneys to the assessee and it was also on record that they were returned to the parties. The copies of the accounts of the creditors have been filed before the ITO even during the assessment proceedings for the asst. yr. 1961-62. Even by the time that assessment was taken up the amounts were returned and the production of satisfactory proof about their worth, namely, poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the additions are going to be made on account of cash credits in the partners account, loans and the unexplained investments. We have already indicated in the preceding paragraphs how even those additions were not justified. It therefore follows that the belief held by the assessee that it had no taxable income and therefore there was no obligation to file a return of income under s. 139 is a bona fide belief and cannot be said to be a mala fide belief. When the assessee entertained a bona fide belief that it has no taxable income, then as held by the Allahabad High Court in the case of CIT vs. M. Khan & Brothers(1) it has no obligation under the Income-tax law to file a return of income under s. 139. 17. Shri Kasturi for the Department contended that for the purpose of s. 147(a), it is for the ITO to believe that income has escaped assessment and that belief should be based on reasonable grounds but if he is not concerned with what the assessee believes it to be his income. This is indeed a very subtle point and at flush we both at once accepted it and rejected it. Accepted it because of the sound logic involved in it. Rejected it because, the Allahabad High Court had an occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that year, or" It will be seen that the belief of the ITO should be that an assessee omitted or failed to make a return of income under s. 139, having taxable income. If there is no taxable income even under this section, there is no obligation to file a return unless a notice under s. 139(2) is served, when compliance has to be made. The question would then arise whether the taxable income here means what the assessee believes to be his income or what the department has assessed. The High Court said it must be what the assessee honestly believes to be his income. The caution administered was that the belief must be bona fide. Therefore is the assessee entertained an honest belief that his income was blow taxable limit then there is no obligation to file a return of income. It follows that there can be no omission or failure to make a return under s. 139; and it means that in such a case, the ITO cannot justifiably have a reason to believe that by reason of the omission or failure of an assessee, the return under s. 139 was not made. This decision in our opinion applies, in the context of s. 147(a) also. We are therefore unable to accept the argument. 18. S. 139 imposes a dut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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