TaxTMI 
TaxTMI 
2005 (1) TMI 69
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.... details of the sundry creditors and sundry debtors. The return was processed under section 143(1)(a) of the Act and intimation was sent to the assessee on January 16, 1990, raising a demand of only Rs. 48. Thereafter, on June 16, 1993, a search and seizure operation was conducted in the case of Sri R.N. Bhol, the partner of the appellant firm. A survey operation under section 133A of the Act was also conducted in the business premises of the appellant and certain books of account of the appellant were also seized from the custody of Sri R.N. Bhol. The action for reassessment was initiated under section 147 of the Act for assessing the income which has escaped assessment for the assessment year 1989-90 and a notice was issued to the appellant under section 148 of the Act on November 9, 1993, to furnish a return of its income for the assessment year 1989-96. The appellant intimated the Assessing Officer by a letter dated September 20, 1994, to treat the original return filed on July 31, 1989, as the return in response to the notice under section 148 of the Act. The appellant was heard through its partner, Sri R.N. Bhol, and an order of reassessment was passed under section 143(3)/14....
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....initiating proceeding under section 147 of the Act and that the addition of Rs. 2,70,421 in the income of the appellant was justified under section 69, read with section 68 of the Act. When this appeal against the impugned order dated March 12, 2002, of the Tribunal was admitted on December 11, 2003, the court formulated the following two substantial questions of law which arise for decision in this case. "(i) Whether, on the facts and in the circumstances of the case, the reopening of the assessment under section 147 of the Income-tax Act was justified and legal? And (ii) Whether, on the facts and in the circumstances of the case, the addition of Rs. 2,70,421 as inflated liabilities under section 69 read with section 68 is legal and justified?" The first question of law which has to be decided in this appeal is whether, on the facts and circumstances of the case, the reopening of the assessment under section 147 of the Act was justified and legal. Mr. S.N. Rotho, learned counsel for the appellant, submitted that section 147 of the Act provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, h....
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.... 148 served on November 9,1993 . . ." It will be clear from the aforesaid reasons given in the assessment order that after the return filed by the appellant was processed under section 143(1)(a) on January 16, 1990 resulting in demand of Rs. 48 only, a search and seizure operation was conducted in the case of Sri R.N. Bhol, a partner of the appellant firm on June 16, 1993, and a survey operation was also conducted in the business premises of the appellant firm during which certain party ledgers were seized and marked as CSS-78 and CSS-13 and it was ascertained therefrom that only Rs. 2,66,612.60 was in the account of the sundry creditors whereas in the balance-sheet filed by the appellant pursuant to the letter dated September 14, 1989, a sum of Rs. 5,47,684.71 was shown in the account of the sundry creditors and a presumption was drawn by the Assessing Officer that the appellant had inflated the sundry creditors' account by Rs. 2,81,072.02 and thereby evaded tax liability on the aforesaid amount. The Commissioner of Income-tax (Appeals) has held that in view of the inflated liability of the sundry creditors as per the balance-sheet found on comparison of liabilities towards sundry....
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....able to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under section 148. From the report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the requirements of either clause (a) or clause (b) of section 147. Ther....
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....ction with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law. (See observations of this court in the cases of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and S. Naryanappa v. CIT [1967] 63 ITR 219 (SC), while dealing with the corresponding provisions of the Indian Income-tax Act, 1922)." The Supreme Court has further observed in the aforesaid case of Lakhmani Mewal Das [1976] 103 ITR 437 that action under section 147 of the Act cannot be taken for reopening of the assessment if the information or the materials have no direct nexus or live link with the formation of the belief of the Income-tax Officer that there has been an escapement of the income of the assessee from the assessment of a particular year because of his failure to disclose fully and truly all the material facts or when the information in the possession of the Income-tax Officer is wholly vague, indefinite, far-fetched and remote. The Supreme Court clarified that the expressi....
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....unt and the assessee offers no explanation about the nature and source of such credit and this is not a case where any credit has been found in the books of the appellant in favour of any party and the assessee had no explanation with regard to the nature and source thereof and therefore, section 68 does not apply. He further submitted that section 69 applies only when investment is not recorded in the books of the assessee and in this case, the appellant has not maintained any ledger account of the investments made nor any stock register and in any case there was no material whatsoever before the Assessing Officer that a particular investment was made during the financial year 1988-89 preceding the assessment year 1989-90, the nature and source of which could not be explained by the appellant. He further submitted that the balance-sheet that was filed by the appellant at the time of the original assessment pursuant to the letter dated September 14,1989, was prepared by an incompetent accountant in an unprofessional manner and the wrong figures in the said balance-sheet with regard to the liabilities of the appellant towards sundry creditors have been taken into consideration by th....
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....of the appellant firm for the previous year relevant to the assessment year 1989-90 a slim of Rs. 2,66,612.60 has been shown on account of sundry creditors, in the balance-sheet that has been filed by the appellant in response to the letter dated March 14, 2003, of the Assessing Officer at the time of the original assessment a sum of Rs. 5,47,684.71 has been shown on the account of sundry creditors. Hence, section 68 of the Act is not at all attracted and cannot be applied. The Assessing Officer has in fact not applied section 68 and has applied only section 69 of the Act. Section 69 provides that where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is, in the opinion of the Assessing Officer, not satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. Thus, for applying section 69 of the Act, the Assessing Officer must first come to a finding that the asses....
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....sp; Cash-in-hand 4,826-50 Sundry creditors 5,47,684-71 ------------- --------------- 10,18,084-31 10,18,084-31 ----------------------------------------------------------------- Presently, after necessary verification, it has been established that the sundry creditors account is not correct. Rs. 5,47,684.71-31, shown in this account includes bogus and unsubstantiated liabilities of Rs. 2,70,421. If this amount is ignored the real balance-sheet will be as under: ------------------------------------------------------------------------ Liabilities  ....
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.... than the liability by Rs. 2,70,421. The items appearing in the asset side i.e., stock, sundry debtors, bank and cash balance are all fixed, duly valued and reflected. But, there is deficiency in the liabilities side since the liability does not match with the asset. As per the accounting principle, both sides must match with each other. If the asset is more, the question is emerge where from the assessee got funds to make the investments appearing as assets in the balance-sheet. There is no answer to it and obviously, source of investment in total asset valued at Rs. 10,18,084-31 remains unexplained to the tune of Rs. 2,70,421. The investment remaining unexplained is liable to be deemed as income of the assessee as per the provisions of section 69 of the Income-tax Act, 1961." The aforesaid portion of the assessment order would show that the Assessing Officer has come to the conclusion that the appellant had made an investment of Rs. 2,70,421 during the financial year 1988-89 previous to the assessment year 1989-90 only on an analysis of different figures of assets and liabilities taken from the balance-sheet and the party ledgers and not on the basis of any material or informati....