HIGH COURT OF KARNATAKA
Assistant Commissioner of Income-tax, Circle 5(1)
IT APPEAL NO. 27 OF 2011
JULY 10, 2012
1. This is an appeal by the assessee under section 260-A of the Income Tax Act, 1961 [for short ‘the Act’] against the order of the Tribunal dated 23.09.2010 and on the premise that the Tribunal has committed errors and illegalities in dismissing the appeal of the assessee.
2. The assessee – appellant is a partnership firm said to have been constituted on 16.3.1996 in the name and style of M/s. Kaveri Associates and has been continued thereafter, with change of composition of partners, but under the same name and style and the questions raised for examination in this appeal arose for the period relating to assessment year 1999-2000.
3. The appellant – assessee has filed the appeal raising the following questions as substantial questions of law arising for determination in this appeal.
“1. Whether the Tribunal was justified in law in holding that reopening of assessment under section 148 of the Act is valid and complies with all the mandatory conditions for reopening on the facts and circumstance of the case?
2. Whether the Tribunal was justified in law in confirming the addition of Rs.75,50,000/-made by the Assessing officer under section 68 of the Act on the facts and circumstance of the case?
3. Whether the Tribunal was justified in law in confirming the addition of Rs.75,50,000/-when the Assessing Officer summoned and recorded the statement from all the persons and all of them have confirmed the advance paid for purchase of shops and explained their sources on the facts and circumstance of the case consequently gave a perverse finding?
4. Whether the authorities below are justified in law in charging- interest under section 234A sum of Rs. 18,84,432/- and 234B sum of Rs. 24,52,570/- contrary to the provisions of section 234A(3) and 234B(3) of the Act on the facts and circumstance of the case?”
4. Notice had been issued to the respondent – revenue regarding admission of the appeal on 18.4.2011 and thereafter on the appearance of learned standing counsel for the revenue, appearing for the respondent, had been directed to produce original records including the statement recorded pertaining to Mr. Rathanlal K Jain – a person who is said to have given certain amount by way of credit to the assessee – firm.
5. Counsel for the other side having taken time, it was submitted by learned counsel for the appellant as well as respondent that they had been given to understand that the matter though is in the admission list, can be heard and disposed of finally.
6. It is in this background, we have heard Sri A. Shankar, learned counsel for the appellant – assessee and Sri K V Aravind, learned counsel for the respondent – revenue.
7. Elaborate submissions have been heard on behalf of the appellant by Sri Shankar, learned counsel and brief reply on behalf of the respondent by Sri K V Aravind, learned standing counsel appearing for the revenue.
8. The genesis of these proceedings lies in a search that was conducted at the premises of one Rishabchand Bhansali who is also a partner of the firm and it is claimed that he is partner in his capacity as Kartha of Hindu Undivided Family comprising of himself and his brothers. However, a perusal of the copy of the partnership deed dated 16.8.1997 available in the assessment records indicates that the firm had come to be reconstituted as per this deed and Rishabchand Bhansali had a share of 20% in the firm on reconstitute and in fact three other brothers also had shares of 20%, 20% and 12.5% respectively in the very firm and they had held shares in their individual capacity etc.
9. Be that as it may, insofar as this appeal is concerned, to complete the narration of facts, search of the premises of Rishabchand Bhansali – partner of the firm had indicated that said Rishabchand Bhansali had drawn a sum of Rs.75,50,000/ from the firm and said amount had been drawn for the purpose of loaning this amount to Sri Balakrishna and his educational institution Vishwabharathi Vidhya Mandir and as a sequel, the Assessing Officer had after follow up action etc., had issued notice to the firm under section 148 of the Act, reopening the assessment under section 147 of the Act for bringing to tax the said amount in the hands of the firm. In response to notice issued under section 148 of the Act, the assessee firm filed a ‘Nil‘ return of income claiming that the amount did not represent any part of the income of the firm; that it had been received from as many as 14 persons by way of advance for sale of shops in a shopping complex that was being constructed by the assessee – firm etc.
10. The Assessing Officer did not find the explanation offered by the partner of the firm to claim elicit source of the sum of Rs.75,50,000/-, rejected the stand of the assessee that it was not income, but concluded that the amount having been shown as cash credit in the books of account of the assessee and as received from fourteen persons, applied the provisions of section 68 of the Act, assessed the cash credit amount as undisclosed income of the assessee during the assessment year relevant to the period when the amount had been so credited in the books of account of the firm and brought it to tax as per the assessment order dated 21.3.2005.
11. The aggrieved assessee appealed to the Commissioner of Income Tax – (Appeals)-II, Bangalore.-. Assessee had raised various contentions before the Appellate Commissioner and the appeal came to be dismissed as per the order dated 29.9.2009 (copy at Annexure-D).
12. A further appeal to the Appellate Tribunal also having been dismissed. by the Appellate Tribunal, finding no occasion to differ from the views taken by the Assessing Authority and the First Appellate Authority and in this background the present appeal.
13. Sri Shankar, learned counsel for the appellant has made very elaborate submissions to support the case of the assessee in the context of substantial questions of law as indicated above and as raised in the memorandum of appeal.
14. Sri Shankar, learned counsel has made submissions on two aspects.
15. It is firstly contended that assumption of jurisdiction for re-opening the assessment for the year 1999-2000 by issue of a notice under Section 148 was erroneous without any basis and therefore, the very initiation of the proceedings is clearly illegal and further proceedings cannot be sustained. In this regard, it is urged that first of all there is total non-application of mind on the part of the Assessing Officer and that the very reasons are recorded before the issue of notice under Section 148 which reads as under :-
“It is noticed that the firm M/s. Kaveri Associates has not filed any return of income for the Asst. Year 1999-2000 till today. As per the information in the HUF file of Shri Rishabchand Misrimal Bhansali, who is a partner of M/s. Cauvery Associates he has withdrawn Rs. 71,75,000/- from the above firm as on 31.3.1999. For lending Rs. 71,50,000/-, the assessee-firm must be having taxable income. As the assessee has not filed the return of income, the income has escaped assessment as per clause (a) to Explanation 2 to section 147. Hence the assessment proceedings initiated under Section 147 of the Act.
Issue notice under Section 148.”
reveals that the assessing officer had mentioned the name of the assessee wrongly at least in one place for this reason in the sense it had been mentioned as M/s. Cauvery Associates whereas the name of the firm was M/s. Kaveri Associates and this in itself indicated there was some confusion in the minds of the assessing officer with regard to the very name of the firm. However, it is more importantly contended that the so called reasons recorded does not really indicate any formation of belief on the part of the assessing officer to arrive at the inference. He had reasons to believe that income of the assessee, which was required to be subjected to tax during the assessing year had escaped assessment; that the recording never revealed that the assessing officer had reason to believe that at the best it amounted to suspicion and it is well settled on authority of law that a mere suspicion or a mere satisfaction, that there may be some income, which had not been taxed is not at all a ground for re-opening the assessment, at any rate determination on this question has been quite settled that a mere suspicion or information by itself cannot constitute a reason for re-opening a concluded assessment and therefore, there was no occasion for the assessing officer to pass an assessment order on the basis of re-opening of the assessment.
16. In support of this contention, Mr. Shankar has placed reliance on the following authorities, which touches upon the vivid situation and hues and shades involving occasions when, the revenue had sought to re-open the concluded assessment but, which were found fault by the court opining that there is no real reason to believe for the re-opening as indicated by the assessing authorities etc.
1. Ganga Saran & Sons (P.) Ltd. v. ITO  130 ITR 1
2. ITO v. Lakhmani Mewal Das  103 ITR 437 (SC)
3. Calcutta Discount Co. Ltd. v. ITO  41 ITR 191 (SC)
4. Indian Oil Corpn. v. ITO  159 ITR 956
5. A. Nagappa v. Asstt. CIT (Unreported Judgment of Hon’ble High Court of Karnataka dated 11-1-1991)
6. Rallis India Ltd. v. Asstt. CIT  323 ITR 54.
17. It is also contended by Sri Shankar, learned counsel that apart from the impugned order of the assessing authority the first appellate authority as also the Tribunal being vitiated by a clear incorrect understanding of the legal position for the purpose of re-opening an assessment within the scope of Section 147 of the Act, the assessing authority has committed an error in law in assuming and presuming that, the fact situation of the goods warranted application of the provisions of Section 68 of the Act; that the assessing officer had called in aid the provisions of section 68 to bring to tax the amount of Rs. 75,50,000/-, even when the assessee had very satisfactorily explained the sources of such credits that the assessing officer opining such source had not been properly explained or was found to be convincing is a extraneous consideration for bringing to tax cash credit amounts as income of an assessee under Section 68 of the Act; that a recording or finding to the effect such amounts which were cash credits and which were properly explained by the assessee, nevertheless is income of the assessee during the previous year when the entries were made, is nothing short of recording a perverse finding and the Tribunal has committed an error in law in affirming such findings of the lower authorities and that the order of the Tribunal is not sustainable for such reasons. In support of such submissions Mr. Shankar, learned counsel, has placed reliance on the following decisions both of the Supreme Court as well as other High Courts viz.,
a. CIT v. Daulat Ram Rawatmull  87 ITR 349 (SC)
b. Aravali Trading Co. v. ITO  187 Taxman 338 (Raj.)
c. Nemi Chand Kothari v. CIT  264 ITR 254
d. Kanhaialal Jangid v. Asstt. CIT [IT Appeal No. 85 of 2001, dated 2-1-2007]
e. CIT v. Lovely Exports (P.) Ltd. [Application No. 11993 of 2007, dated 11-1-2008].
18. On the contrary, Sri K.V. Aravind, learned Standing counsel appearing for the revenue has submitted that having regard to the concurrent findings recorded by all the three authorities, there is absolutely no scope for interference under Section 260A of the Act; that all the three authorities have in great detail discussed the fact situation and have concluded that the amount not only was undisclosed income of the assessee firm during the period when the cash credit entries had been made, but also is a situation, which clearly attracted the provisions of Section 68 of that Act that the reopening was based on material as found in the premise that it was the partner of the firm, who had claimed that he had drawn the amount from the account of the firm; that all transactions though were huge in terms of the amount having, not been depicted in the books of account of the assessee, but for the first time being revealed after the search and the fact that all transactions were settled through cash payments though were transactions of money in lakhs and one such transaction being 20 lakhs of rupees, all did indicate that the assessee did not at all properly elicit source of income; that mere indicating of the creditors in itself is not the end and therefore, contends that there is no need for interference. It is also submitted that the reasons had in fact been recorded before the issue of notice; that it had been so recorded prior to issue of notice on 28.1.2004; that the very reason indicated the basis for re-opening. This was thoroughly examined by all the three authorities, who had satisfied such recording and therefore, submits that there is no cause for examining the same again in a appeal under Section 260-A of the Act.
19. Mr. K.V. Aravind, learned standing counsel has also brought to our notice the provisions of Clause (a) of Explanation 2 to Section 147 reading as under:-
“Explanation 2 – For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;”
20. Mr. Aravind, learned standing counsel submits that the assessee had never filed any return of income that it had never disclosed existence of a firm that though the assessee had transactions involving immovable property and huge amounts, had never, at any point of time, revealed such transactions to the revenue; that the explanation putforth subsequent to the notice claiming that the firm had not started its business and therefore, that no income was earned was rejected by the authorities; that the firm had been receiving amounts and even as per its own version for commercial purposes and therefore, the explanation having been rejected, bringing to tax this amount was inevitable as it disclosed income which had escaped assessment. It is therefore, urged that the appeal has no merit and has to be dismissed.
21. Mr. Aravind, learned Standing counsel for the revenue has also drawn our attention to the judgment of the Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd.  291 ITR 500 which has been referred to and applied by the Tribunal to reject the contention on behalf of the assessee to the effect that the reopening of the assessment was bad, on noticing the following paragraph:-
“The expression “reason to believe” in section 147 would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. What is “required is “reason to believe” but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer.”
22. Mr. Aravind, learned counsel has also submitted that the authorities have gone into the question of accepting or otherwise, the explanation offered by the assessee on the touchstone of the genuineness and creditworthiness of the creditors and that the Tribunal and lower appellate authority found no occasion warranting a different finding from the view of the assessing authority on this aspect, but to reject the explanation; that there is no occasion to interfere on such findings by the High Court in an appeal under Section 260A of the Act. In support of this contention reliance is sought to be placed on the following decision :-
1. Asstt. CIT v. Vishwanath & Co.  292 ITR 225
2. Mukesh Shaw v. ITO  204 Taxman 615
3. Tirath Ram Gupta v. CIT  304 ITR 145
23. Reliance is also placed on the decision of the Supreme Court in Raymond Woollen Mills Ltd. v. ITO  236 ITR 34 to contend that sufficiency of reasons cannot be gone into in a case of re-opening of assessment under Section 147 of the Act, in terms of this decision.
24. Even having regard to the contention of the learned counsel for the assessee to the effect that initially notice not having mentioned the status of the assessee all further proceedings are vitiated, submission is that at the best it may amount to an irregularity and not an illegality as contended by the learned counsel for the assessee and in support of this proposition reliance is placed on the judgment of this court in the case of Vishwanath & Co. (supra).
25. We have bestowed our attention to the submissions made at the Bar and the contentions urged with the supporting decisions.
26. What is contended basically on behalf of the assessee is that the very re-opening of the assessment is bad and bringing to tax cash credits as income of the assessee, is also bad on settled legal principles. The basic undisputed facts were that the assessee had claimed the status of a firm and whether or not the notice mentioned it, the stand of the assessee is that it is a partnership firm and in income tax parlance a partnership firm is a person and an assessable entity at the relevant period and that is not in dispute. Insofar as the argument of application of mind or lack of it, regarding the discrepancy in the name of the assessee and therefore, the assessment proceedings is vitiated, is concerned, we find that the description is only in the name of the assessee firm and not as to, who is the firm. At any rate the wrong spelling assuming that to be so, in describing the name of the assessee has not caused any prejudice per se to the assessee as the assessee was quite aware of the proceedings that it was in respect of the very firm. In our considered view, it is difficult to assume, that either the wrong description of the name of the assessee and not indicating the status of the assessee as a firm has really worked to the prejudice of the assessee and at the best it being an irregularity, does not affect the further proceedings. Insofar as the re-opening aspect is concerned we cannot avoid noticing and even as recorded by the authorities below the re-opening of the assessment proceedings of the firm was because of the submission or explanation offered by one of its partner Rishabchand Bhansali, who claimed that an amount found in his books of account which was in turn advanced to some other person, was drawn by this partner from the account of the firm, is by none other than the partner of the very firm. A firm always acts through its partners, and therefore, there cannot be a dichotomy of the stand in the case of the individual partner being different from that of the firm. What the partners states whether he is a partner in the capacity of HUF or in his individual capacity, nevertheless it is on behalf of the firm, because only through this finding this aspect has been noticed by the authorities below also. It is in the wake of such a stand taken by the partner, there was an occasion for investigating the transactions of the firm, who had claimed the amount as its amount and which was the very version of the assessee and its partner.
27. Insofar as the recording of the reasons is concerned this has been thoroughly examined by the three authorities below and in the facts and circumstances of the case, it is accepted that a bona fide reason is recorded for re-opening. Though Sri Shankar, learned counsel submits that the records had been called for only to examine this aspect as to whether reasons recorded is right or it is otherwise. We cannot accept this submission for the reason that issue of notice has been proceeded by a follow up action taken by the assessing officer subsequent to the search of the premises of one of the partners and after recording the statements of some persons, who were available and claimed to be creditors. Ultimately the assessing officer was of the opinion that a firm, which had the capacity to lend an amount of Rs. 71,50,000/- that too, to one of its partners or others is reasonably presumed to have the taxable income and if the assessee had never disclosed its expenditure or otherwise earlier and in such circumstances, if the officer records that he has reason to believe that assessee had taxable income and a non-filing of the return is not merely suspicion and therefore in bringing to tax such amount by re-opening. We do not find, it can amount to a mere suspicion or a surmise as submitted by Sri Shankar, learned counsel.
28. As to whether the recording of reasons to believe constitutes a real reason or otherwise has to be culled out from the facts and circumstances of each case and in this regard, we cannot lose sight of the fact that information is provided in respect of the assessee by its own partner and while the assessee had never filed its returns not disclosing its expenditure and therefore, there was no record available with the revenue with respect to the assessee.
29. A return was being filed for the first time only after issue of notice under Section 148 of the Act, no doubt showing nil income in the return, but that is a matter to be examined for acceptance by the assessing authority who had proposed reopening and that the authorities below have concurrently opined that the recording of the reasons by the revenue was sufficient for the purpose of issue of notice under Section 145 of the Act. The judgment of the Supreme Court not only in the decision of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) but in other cases also wherein it is held that sufficiency cannot be gone into applies.
30. In the circumstances and on the basis of the findings recorded by the authorities follow, we are unable to accept the submission of the learned counsel for the appellant-assessee that there was no reason and it was only a suspicion based on which the re-opening has been made. In our considered opinion, until and unless the statutory provisions are mis-used or abused or invoked arbitrarily to victimize an assessee or the action is in a biased manner, interference is not warranted particularly, to render ineffective the statutory provisions. The very purpose of issuing notice under Section 148 of the Act is to bring to tax the income, which is otherwise suspicious assessment. Therefore, in the wake of the findings recorded by the authorities below, we are not very impressed that we can exercise appellate jurisdiction under Section 260-A of the Act to hold that the very reopening cannot be sustained.
31. Insofar as merits of the matter relating to bringing the amount to tax is concerned, this amount is an income brought to tax in the hands of the firm on the authorities finding the explanation offered being not acceptable.
32. The case of the assessee firm was not that credit entries were in dispute and though it is urged very strongly by Sri Shankar, learned counsel, that at least one or two of the creditors had independent income in their own capacity and that they were quite capable of lending such amounts etc., and the Department has not made good that the amount is actually not lent by such assessees, who had borrowed the amount. We are afraid this argument cannot be accepted for more than one reason. It is to be noticed that in the first instance, it is one of the partners, who had sought to explain that the amount in question was drawn by him from the account of the firm justifying that kind of lending by the partner of the firm in favour of some third parties and the source was attributed to the firm. The action taken against the firm was a follow-up action, as a result of search of the premises of the partner. If the version of the assessee partner is to be accepted then there is no choice for the revenue to proceed further as against the person, who has lent the money to the firm. The firm though had transactions had not indicated the income from its transactions but claiming that it had no income liable to tax was not further accepted by the authorities below.
33. We sitting in appeal under Section 260-A of the Act do not find it proper to examine the appeal for the purpose of finding as to whether explanation offered by the assessee firm should have been accepted by the authorities below. The explanation was rejected and in the circumstances, we find that if the authorities had opined on the facts and circumstances that the re-opening was not bad in law and justified in the facts and circumstances, and to bringing to tax the cash credits of the assessee was also justified and finding recorded, which was examined by the authorities, we do not find occasion to interfere in respect of an order of this nature.
34. We also find that the arguments to the effect that the Department has not established through the factual position as against the stand taken by the assessee is arguments, which is principally based on the premises that the Department is expected to prove or produce material to counter the circumstances of the assessee. Assessment proceedings are not adversary proceedings in nature and it is not as though there is a lis between the assessee and the assessing authority. The assessing authority is the statutory functionary and is required to perform statutory duty. An order passed by an assessing authority if is erroneous on facts, there is scope for interference by the Tribunal and if it is erroneous on law, there is scope for interference even up to the High Court in an appeal. But it does not mean that the revenue having not proved certain position or not made good such position, the order renders itself to be bad in law.
35. There is no question of the revenue proving anything against the assessee, but it is the duty of the assessee for proving taxable income. Therefore, to pay corresponding tax is the statutory duty of the assessee and not because the assessing authority determines or quantifies the liability of the tax, the liability is fastened on the assessee and in this background. We find that if the authorities had occasion to examine the amount of Rs. 75,50,000/- which according to the authorities had not been properly accounted for, particularly, being in the nature of cash credits as claimed by the assessee and therefore, thought it fit to bring it to tax as the income earned during the relevant period, we do not find occasion to interfere in a matter of this nature and therefore dismiss the appeal.