TaxTMI 
TaxTMI 
1977 (6) TMI 43
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..... But according to the ITO, there was taxable 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....
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....ee whether it is bona fide or mala fide. It is thus 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 ....
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....nder 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 Rs. 20,000 (d) Unexplained cash....
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....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 year by the ITO as the year ending with31st March, 19....
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....r 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 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 cons....
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....2 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 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 I....
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....larly 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 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 asse....
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....s 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 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 p....
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....e 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 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 o....
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....atter 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 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 b....