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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 ..... 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. From15th July, 1959to the Diwali year ending3rd Nov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice under s. 148. In other words the same additions made in the course of assessment for the year 1961-62 were treated as the income liable to be assessed in the asst. yr. 1960-61 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts for the next Diwali year i.e. 20th Oct., 1960 but for the asst. yr. 1960-61 if an assessment has to be made the previous year that is to be taken should be the year from 15th July, 1959 ending with 3rd Nov., 1959. We do not know how the ITO could say that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sources. That entire amount was therefore added as the income of the assessee in the asst. yr. 1960-61. On appeal the AAC reduced this addition to Rs. 15,000. But curiously neither the ITO nor the AAC appeared to have applied their minds to the fact that in the accounting year under appeal the portion of the construction that had taken place was so small that it could not be said that the sum of Rs. 15,000 could have been spent. Secondly the cost of construction estimated 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 Inspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andi Chowk,Delhi. 27 Rs. 116 10,092 14-7-1959 Do 26 Rs. 116 8,016 12-9-1959 Do 33 24-7-1959 Do 26 Rs. 122 4,026 9-10-1959 Do 25-7 Rs. 166 3,121 14-7-1959 Do 17-6 Rs. 116 2,030 9-10-1959 Do 16-8 Rs. 122 2,033 According to the ITO this sale of jewellery was fictitious and no sale had ever taken place and therefore it could not be accepted that the credits had come out of the sale proceeds of the jewellery. First we are not convinced with the reasons given by the ITO in support of his conclusion that the sales of jewellery were fictitious. The assessee produced before the ITO, the sale bills issued by the Sarraf, and the quantity of the gold sold was supported by Dharam Kanta chit issued 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is that the credits have come out of the sale proceeds of the jewellery of the partners, i.e. they have been contributed by the partners and therefore they are traceable to the partners. If the sale is found to be fictitious still the admission of the partners that they contributed the money still remains and that was not proved to be false. It therefore follows that the credits appearing in the accounts of the partners particularly on the opening day cannot be held to be the income of the firm merely because the sale of jewellery was suspected to be fictitious. It is still possible that the partners might have their own money and wanted to introduce that money in this business of khandsari and may have thought of a rise of sale of jewellery as an explanation. If the latter part of the scheme is proved to be false, it did not mean that the earlier part of the scheme, namely, that the partners having their own money 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 part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idavit filed before ITO. 4. Shri Sovern Singh S/o Thakur Damodar Singh, R/o Mauchirail, Distt.Aligarh Rs. 2,000/- 27-8-59 Out of agricultural income. Holding about 40 bighas of irrigated land. Copy of khatauni shown to ITO Statement on oath recorded on16-9-63, in which fact of advancing money and receipt of interest thereon admitted. Certificate affidavit of the party. 5. Shri Bhuj Bir Singh, S/o sh. Phool Singh Rs. 4,000/- 27-8-69 Out of agricultural income. Holding about 50 bighas of well irrigated land. Copy of khatauni shown to ITO Statement on oath recorded by ITO on16-9-63and certificate of the party also his affidavit filed. The explanation offered by the assessee was rejected and a conclusion was drawn that these loans were unexplained. We are unable to appreciate how the conclusion drawn by the Department could be sustained. In the case of Smt. Lilawati, who is the mother of the partners, there is nothing to indicate that the sale proceeds of jewellery was fictitious. If we follow our earlier observations on this point, then the sale proceeds must be deemed to have been proved and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The consequence is that this addition is not available to form the belief that there was a failure or omission on the part of the assessee to file a return of income in accordance with the provisions of s. 139 so as to attract the provisions of s. 147(a). 15. If these additions are deleted what is left is only the income from cloth business. As against the income of Rs. 3,000 shown by the assessee, the estimate made by the ITO was Rs. 5,000 and by the AAC Rs. 4,000, the difference being only Rs. 1,000. It cannot be said that this difference in the estimate of income of Rs. 1,000 would form the basis for the belief that there is omission or failure on the part of the assessee to file return under s. 139 within the meaning of s. 147(a) of the IT Act, 1961. 16. There could be honest difference of opinion in regard to the estimate of income from cloth business, the difference being only Rs. 1,000. If the difference is eliminated then the only income that the assessee could have was only Rs. 3,000 which was admittedly below taxable limit. The assessee at that stage could not anticipate or foresee that the additions are going to be made on account of cash credits in the partners ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was concerned with a situation to find out whether the entertainment of honest belief that if there is no taxable income, there is no obligation to file a return of income voluntarily, can be said to be a reasonable cause for not filing a return of income within time. The High Court held in the affirmative. That ruling cannot be applied for the purpose of s. 147(a), since the context is so different. But for the Allahabad High Court s decisions, we may perhaps agree with him. But after the enunciation of law by the Allahabad High Court, the matter became difficult. Even though the Allahabad High Court s decision was in the context of s. 271(1)(a), still the principle of law laid down there will apply even for the purposes of s. 147(1)(a). S. 147(a) reads as under: "Income escaping assessment If the ITO has reason to believe that by reason of the omission or failure on the part of an assessee to make a return under s. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or" It will be seen that the belief of the ITO should be that a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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