TaxTMI 
TaxTMI 
2025 (1) TMI 379
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....irections of Hon'ble ITAT Orders dt. 8-6- 05 & 7-9-05, in respect of establishing complete facts of case/ supply of materials used against assessee / providing reasonable opportunity of being heard. (4) That learned ACIT erred in not issuing a single show cause notice before making additions of Rs. 2,47,940/- in A.Y. 92-93 & Rs. 19,36,095/- in A.Y. 93-94 w.r.t. alleged income tax refund money receipts belonging to Govt. of India and thereby further erred in raising demands of Rs. 2,37,368/- in A.Y. 92-93 & Rs. 13,21,127/- in Α.Y. 93-94. (5) That learned ACIT erred in not supplying evidence to prove alleged charges of claims / receipts / utilization / repayment of such alleged income tax refund money receipts, though directed to supply by Hon'ble ITAT. (6) That learned ACIT erred in not supplying copies of statement dt. 21-4-93 recorded by ITO Ward 8 (1), A'bad & statement dt. 22-4-93 recorded by ITO ward 8 (8) A'bad though directed to supply by Hon'ble ITAT. (7) That learned ACIT erred in not supplying legible Xerox copies or neat & clean typed copies of statements dt. 23, 24-4-93 u/s. 132 (4) of I.T. Act. (8) That learned ....
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....ted by then CIT by not preferring second appeal before Hon'ble ITAT in view of Hon'ble CBDT instruction no. 1903 considering cumulative tax effect and not due to small tax effect as stated in A.O. dt. 8-12-06. V (16) That learned ACIT erred in ignoring contentions raised in letters dt. 12-6-06, 12- 9-06 (253 pages), 28-11-2006, and thus overruled the directions of Hon'ble ITAT. VI (17) That learned ACIT ought to have appreciated that alleged income tax refund money receipts, which belongs to Govt. of India, and hence recovered fully with interest, does not constitute income chargeable to tax u/s. 2 (24)/U/s. 4 r.w. other sections of I.T. Act. (18) That learned ACIT erred in not appreciating that there is no provision under I.T. Act to recover Rs. 37.93 lakhs (Rs. 21.84 lakhs recovery of alleged income tax refund money receipts being Govt. property + Rs. 15.59 lakhs as income tax plus interest demand thereon treating same Govt. property as assessee's income) against Rs. 21.84 lakhs receipts. Appellants' income cannot be recovered. BUT such income can be taxed. Tax can be recovered out of income earned and balance of income is at the dispos....
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.... during life time, & hence recovery of such receipts so made is invalid & assessee is entitled to a refund of such receipts treated as income, after adjustments of demands as raised. Hence learned ACIT may please be directed to issue refund of balance amount with interest. The question of charge of interest u/s. 234 A/234 B of I.T. Act and question recovery proceedings of such demands does not arise under I.T. Act. (24) That, presuming even if alleged charges are proved before Hon'ble Supreme Court of India in a criminal case and even under any other laws in force, fact remains that such alleged income tax refund money receipts, belongs to Govt. of India. AND hence does not constitute taxable income under Income Tax Act AND/ or OTHERWISE assessee is entitled to a huge refunds along with interest u/s. 132 B (4)/244 A of I.T. Act as cited in above grounds of appeal." 3. This is second round of litigation before this Tribunal. The brief facts of the case as per the records are as under :- 3.1 The assessee is a Chartered Accountant by Profession. A search and seizure operation carried out at the residential and office premises of the assessee and several incriminating do....
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....not supplied to the assessee. The said material was used against the assessee while framing the assessment. It has also been noticed that various details and affidavits filed by the assessee have also not been properly appreciated and considered. In view of principle of natural justice, the revenue is required to give the copies of statements and materials used against the assessee while framing the assessment so that the assessee can put his stand and defend his case. We find that the facts of the case have not been completely recorded by lower authorities as the assessee did not get reasonable opportunity to put his case before the lower authorities. After considering the totality of the facts of the case, we find appropriate to send back the matter of these appeals to the file of CIT(A) to decide the same afresh, with a direction to supply the copies of statement recorded and other materials which were used against the assessee while framing the assessment. The CIT(A) will provide a reasonable opportunity of hearing to both sides and will record the complete facts before deciding the matter, since, we have sent back the matter to the file of CIT(A) for fresh consideration as dis....
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....ugh directed to be supplied by Hon'ble ITAT vide order dt. 8-6-05. 'Not only that but also, Appellant has not been supplied evidence as to claim / receipts/utilization/repayment of such alleged income tax refund money receipts as demanded on page 63-77 of appellant's letter dt. 12-9-06 AND as further demanded by your office letter dt. 20-4-09 from the office of Learned ACIT Cir-9. Ahmedabad. Thus learned ACIT has failed to establish complete facts of case (1) by not supplying copies of statements so recorded on which heavy reliance has been place in A.O. dt. 23-3-95 u/s. 143 (3) and A.O. dt. 8-12-06 u/s. 143 (3) r.w.s. 254 (1) of 1.T. Act (2) by not providing evidence & material used w.r.t. alleged changes (page 6377) (3) by not providing opportunity of being heard (Page 58-62), violating principles of justice as per directions of Hon'ble ITAT's order dt. 8-6-05 & 7-9-05. No such evidence has been filed before Hon'ble Criminal Court/High Court/ICAI even till today." 7. Referring to the submission dated 27.08.2009, the assessee pleaded reiterating the facts there on : * that alleged misappropriation of income tax refund /money receipts of Rs. 21.98 lakhs, has....
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....6) 287 ITR 547 (SC) where in it was held "even though the assessee was committing a highly immoral act in illegally manufacturing and selling heroin, the case had to be decided on legal principles and not on one's own moral views." * that even not a single evidence of claims, receipts, utilization / repayments of such alleged income tax, refund receipts has been filed before any competent Court including Criminal Court even after twenty years. * that Income tax refund received by him was recovered subsequently fully, further, the said refund amount belongs to Govt. of India and therefore does not constitute income u/s 2(24) of the I.T. Act 1961. 8. On the other hand, Ld. CIT(DR) Shri Karun Kanth Ojha argued and filed Revenue's arguments in writing that: (i) The assessee has confirmed that the amount of Rs. 2,47,943/- and Rs. 19,36,095/- for Assessment Years 1992-93 and 1993-94 respectively were indeed received by him by en-cashing of Refunds fraudulently. (ii) If the assessee was aware that the Refunds received fraudulently belonged to Govt. of India, then why was he waiting for Income tax Department to recover the amount? Further, had the....
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....ry, assessee is not entitled to such deductions in A.Y. 92-93 / 93-94. Ld. CIT (DR) Shri Karun Kant Ojha vehemently argued that, the receipts in the relevant assessment years had arisen out of encashment of the refund obtained in the names of several persons from the Income-tax Department. Income was earned in assessment year 1991- 92, 1992-93 and 1993-94 and was invested by the assessee in shares in the name of HUF. In assessment year 1994-95 and 1995-96, the recoveries have been made out of investments made by the assessee in the name of the HUF and its members. Therefore, the deduction of an expenditure, if any, has to be considered from the income of assessment years 1994-95 and 1995-96 only. The assessee is a professional and has shown income from profession on mercantile basis. There is no reason to consider and allow expenditure to the assessee in A.Yrs. 1992-93 & 1993-94 on that basis. Arguing so, the Ld.DR submitted that the addition has been made rightly in the hands of the assessee. Further, the ld. DR relied on the order of the ld. CIT(A), the operative part of which is as under:- "... After going through the directions issued by the Hon'ble ITAT, the asses....
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....sessment year 1992-93 & 1993-94 to the extent of Rs 2,47,943/- and Rs. 19,36,095/- respectively. The above amount was determined as Income of the appellant from other sources and added in the returned Income. The complete facts of the case have been discussed in the assessment, order for assessment year 1991-92 which are briefly narrated here. The Income-tax Officer, Ward 8(1), Ahmedabad while verifying the claims of refunds in the cases of Amratlal S. Vyas, Kishore B. Jagtiani, Kishore B. Jagatiani (HUF) and Kokilaben H. Shah, became suspicious about the genuineness of the challans attached with the returns of income, because the refunds claimed were disproportionately high compared to the income shown by them. On further verification, it was found that the challans have been fabricated and a fraud has been perpetrated by the appellant who happens to be the Authorized Representative of the above named assessee. Thereafter, the Deputy Commissioner of Income-tax, Range 8. Ahmedabad, brought these facts to the knowledge of the Commissioner of Income-tax, Gujarat- III, Ahmedabad to the effect that the appellant had defrauded the Revenue as well as the government by f....
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.... himself in the shape of statement recorded on 24/4/1993 by the ITO, Ward -8(8), Ahmedabad which has been reproduced In the assessment order for assessment year 1991-92 at paragraph 2.2 from pages 4 to 16 of the assessment order. v) Subsequent to the above findings and the admission the appellant, -fact were recorded by the records made by the available with the IT. Department and the incriminating documents seized during the course of search at the residential and professional premises of the appellant u/s 132(1) of the I.T. Act. The department identified 106 cases where such bogus refunds were claimed and obtained by the appellant. By the above act, the appellant had made, himself liable to the prosecution under various provisions of the Indian Penal Code for which the ITO, Ward 8(1) had launched First Information Report with the Ellisbridge Police Station, Ahmedabad on 24/4/1993 vi) From the scrutiny of the seized documents, case records available with the I. T. Department and the statement recorded, it was found that the appellant had earned a total income Rs. 21,75,500/- which pertained to assessment year 1991- 92.. 1992-93 and 1993-94. The break-up of the ab....
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....hat the appellant had not been proved guilty of charges leveled against him by the Court and till that date, the appellant was Innocent and as such the question of assessing the income did not arise. The Assessing Officer, however rejected the above explanation and the arguments of the appellant for the following reason:- (a) "The word 'income' in the Act connotes a periodical monetary return 'coming in' with some sort of regularity or expected regularly from definite sources. The sources need not be continuously productive but must be one whose; object is the production of; a definite return excluding anything in the nature of a windfall (CIT vs. Shaw Wallace & Co, AIR PC. 133)." (b) For the purpose of taxation of any income at the hands of an assessee, two things are necessary (i) firstly, the income must have accrued or arisen to or must have been received by the assessee, and (ii) secondly, the income, profits and gains to form the basis of tax must represent the true Income, apart from the deemed or fictional Income under the statutory provisions. Once it is held that a particular income had accrued or arisen during a particular accou....
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....sessment of income-tax He has under the Act to decide whether a particular receipt as income. As between the state and the as sea see, it is his function alone to determine whether the receipt is income and is taxable. [Chhatrasinhji Kesarlsinhji Thakore vs CIT(1966) 59 ITR 562, 568(SC)] (h) It is well settled In England that the Income Tax Act is not restricted to its application to lawful business only. Once it is found that the transaction in question is trade, manufacture, adventure or concern in the nature of trade within the meaning of the Income Tax Act, the words of the Section are not to be cut down by the consideration that the trade is tainted with illegally. The taint of illegality or wrong-doing associates with income, profits and gains is immaterial for the purpose of taxation. Even if a trade is illegal, it is still a trade within the meaning of income Tax Act, and its income, profits and gains are chargeable to Income-tax (see, Wheatoroft's Law of Income-tax part 1- 411, page 1196, Simon's Income-tax, Second edition, Vol.2, para 480). The cases where these principles were laid down are - (1) Mann. V. Nash (1932)16 TAX Cas. 523,527-....
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....ssion there of (CIT vs. Kothari (SC) (1968) 09 ITR I (GUJ) The offence in certain cases may, besides vitiating the main contract, affect subsidiary contracts too, as for example, contracts of insurance against fire or damage of goods or articles involved in the main contract. (Insurance on spirits and casks containing spirits would be void and illegal in areas where anti-liquor laws are in force - Porter on Insurance, 8th edition, page 31) In all such cases, so long as the methods adopted to earn the income are commercial and otherwise amount to a business, the income would not be exempt from taxation (Chandrika Prasad Ram Swarup vs CIT (1939) 7 ITR 269 (ALL). Once the character of the activity has been ascertained as being in the nature of trade, the person who carries it on cannot found himself upon the element of illegality in it, to avoid the tax (Lindsay vs. IRC 18 TC 43). He cannot invoke his (owrn turpitude and claim immunity (Canadian Minister of Finance vs. Smith (1927) AC 193). By taxing such income, the State is not taking part in the crime or condoning it, nor would it become a principal or a sharer in the illegality. The revenue merely looks at an acc....
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....awful and constituting a normal Incident of it [CIT vs. Piara Singh(1930) 124 ITR 40(SC)) Thus, if expenditure has been incurred for the purpose of carrying on the business, that is, to enable a person to carry on and earn profit in that business, it would be treated a permissible deduction. It has to be a commercial loss in trade and also contemplable by the parties. A penalty imposed for a breach of any law during the course of a trade cannot be regarded as an allowable expenditure, as an infraction of the law is not a normal incident of a lawful business and a penalty paid for an infraction of the law cannot be said to be a business loss in the commercial sense. However, where for certain infractions of the law, in addition to a penalty or fine, the goods are confiscated and sold at a lower price which is paid to the assessee, the resultant loss on sale of stock in trade would be an allowable loss. (j) Infraction of the law in the course of carrying on unlawful business - Profits in the carrying on of unlawful business shall have to be computed according to commercial principles. The commercial conception of profits does not vary according as the business in question is....
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....ed as ineligible to the status of a 'business or profession the income from, such business or profession", the income from such business would have to be charged only under the head 'Other sources Under this later head, for the purpose of computing the chargeable income, all expenditure incurred for the purpose of making or earning such income' has statutorily to be deducted. If, however, the income should be taxed under the head 'Business or profession, then, what is taxable thereunder is the 'profit or gain' of the business. Such profits shall have to be computed according to commercial principles, that it is, after making an allowance for necessary outgoings (1) Embezzled or misappropriated funds: The chargeability of sums of money embezzled or stolen would depend upon the application of several principles touching the subject, some of which are well established. It is well settled that the element of unlawfulness or illegality or immorality in the acquisition of income does not exempt the income from charge. It is equally well settled that the fact that theft or embezzled may give rise to deductible loss to the owner of the money, has n....
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....or which in normal parlance amounts to embezzlement. Hence, it can be stated that receipts from such activities do not amount to professional receipts. The nature of his profession is far different from his acts of commission. The requirements of his profession are to prepare Returns of income, represent cases before the Revenue, tender advice to his client etc. Hence, it is Income from such activity which can be termed as his professional receipts. The defrauded amount has not arisen to him on account of his profession, but on account of illegal activity which he carried out during the exercise of his lawful profession. The illegal activity must be dissected from his professional activity and thereby it follows that receipts from two separated activities must also be dissected. The receipts arising from profession will necessarily be taxed under the head "profession", whereas the TAINTED income must be brought to tax under the residuary head "Other sources" The assessee's contention that unless and until he is proved guilty in a Court of law, the question of income does not arise, cannot be entertained as determination of income is independent of the view a Court of law may ta....
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....ements had not been supplied to the appellant, the same could not be rebutted before the Assessing Officer. The procedure adopted by the Assessing Officer in framing the assessment and determining the appellant's income from other sources denied any opportunity to the appellant to explain or rebut the presumptions raised against him. Firstly, the evidence and material relied on by the Assessing Officer was not made available to the appellant and secondly no opportunity was given to offer explanation or comment in this regard. It was further contended that apart from the above denial of principles of natural justice, the Assessing Officer ignored the objections and contentions raised by the appellant on various dates of hearing vide letters dated 27/10/94, 22/1/95, 18/2/95, 2/3/95 and 6/3/1995. 11.3 The Assessing Officer failed to appreciate the fact that the appellant had not earned income at all from the Income-tax refunds obtained from the Government India. No such income had either accrued to the appellant or arosed to him in any of the previous year relevant to assessment year 1992-33 and 1993-94 in view of CBDT order u/s 119(2A) dated 2/5/1994 The Assessi....
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....d amount received by the appellant is not an income as he is duty bound to repay the amount to the Government on being caught with forgery and ownership of the Government never ceased whatever has been paid by him or recovered from him is not tax but recovery of amount which was lying with him and which was owned by the Government throughout this period. The conduct of the appellant howsoever reprehensible may be, will not turn the receipts obtained from bogus claim refund as income of the appellant. The proceedings before the Department have to be decided within the four corners of the Income-tax Act, 1961 and this forum is not a criminal court of justice for passing judgement on immorality of the appellant's act." Since the addition made in appellant's total income in assessment year 1991-92 had been deleted by the learned DCIT(A)2, Ahmedabad vide order dated 23/11/1995 and the department had not filed appeal against the said order, the addition made in assessment year 1992-93 was able to be deleted. It was contended that the addition wade in appellant's total income may be deleted 12. The contention of the appellant has been carefully considered. From the fa....
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....sessing Officer show that the Income-tax Law is concerned with the legality or illegality of business or it is found that there is an economic activity, the provisions of the I.T. Act are applicable to determine the chargeability of the receipts under the I.T. Act under the appropriate heads of income. Under the I.T. Act, I.T. authority is not concerned with the legality of the activities of the appellant. The appellant may be earning income by indulging in the illegal activities. Income- tax Act empowers the Assessing Officer to levy income-tax on such income. 12.1 The deductions from the above income are to be allowed in view of the Supreme Court decision in the case of CIT vs. S.C, Kothari (82 ITR) 794. In that case the Supreme Court had held that loss incurred in carrying on illegal business must be deducted from the true figure of profits brought to tax could be computed. However, it is seen that the recoveries have been made from the appellant not during the accounting period relevant to assessment year 1992-93 & 1993-94. As stated earlier, the amount has been recovered from the appellant only. In A.Y. 1994- 95 and 1995-96. Therefore, the deduction in respect of the ....
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....onsidered after setting off the expenditure incurred by the appellant in earning such Income. Reference is made of the discussion in paragraph 7 of the appellate order, he had considered the recoveries effected from the appellant in assessment year 1994-95 and 1995-96 as expedite allowable for the receipts for assessment year 1991-92 With all due regards, I am unable to agree with the findings in of the brother-colleague. The receipts in assessment year 1991-92 had arisen out of encashment of the refund obtained in the names of several persons from the IT. Department. Income was earned in assessment year 1991-92, 1992-93 and 1993-94 and was invested by the appellant in shares in the name of HUF In assessment year 1994-95 and 1995-96, the recoveries have been made out of investments made by the appellant in the name of the HUF and its members. Therefore, the deduction of an expenditure, if any, has to be considered of the earning or income for assessment year 1994-95 and 1995- 06. Appellant is a professional and has shown income from profession on mercantile basis. There is no reason consider and allow expenditure to the appellant in A.Y 1992-93 & 1993-94 on that basis. Therefore, i....
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....hich is pending for evidence. It was further disclosed that Crime Branch, Abad has collected certain documents from income tax department and from Sahyog cooperative bank Madalpura branch, Abd. That income tax refunds have been credited in savings bank accounts of Sahyog cooperative bank, which has been closed prior to 15 years, and at present there is no information about this bank's management, branch managers, officers, employees, engaged in opening and operating of savings accounts & hence at present, it is not possible to secure copies of this bank's records. It is further disclosed that complainant has tried his level best in collecting evidence since April 1993 but it was just a wastage of considerable time and further due to transfer of case records, income tax department is not in possession of important and cogent evidence. It is further disclosed that crime branch has collected some of the documents but same have been found to have been termit-feded and hence such documents have been returned to crime branch. It is further disclosed that crime branch has again collected certain documents but same being incomplete, it is not possible to establish a chain of eviden....
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....have committed the offence, it can frame the charge. Though for conviction, conclusion is required to be that accused has committed the ofence.at this stage, probative value of materials on record cannot be gone into, but the materials brought on records by prosecution has to be accepted as true at this stage. In the background of the ratios laid down by Hon'ble apex court in Somnath Thapar case (supra) and in the light of the entire above discussion, prima-facie it cannot be said that the ld. Trial judge erred in rejecting the request of the petitioner- original accused no. 4 for discharge. As stated above and as observed by Hon'ble apex court in Dilavar Balus case (supra), even laying evidence for the limited purpose of finding as to whether prima-facie case has been made out, it prima-facie transpires in the light of above entire discussion that the evidence prima-facie reveals that charge is required to be framed" 4. Accused has pleaded that it has been held in the case of P Jayapan 149 ITR 696 (SC), that once the assessment order has been cancelled by the tribunal, prosecution cannot be proceeded with. It is being further argued that it has been held in the case of Ut....
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....ce at this stage, considering the changes in circumstances as stated above, this discharge petition deserves to be accepted again by passing an order. Considering above facts in this case, an order has been passed from justice as state below. :: ORDER :: Petitioner/accused's discharge petition is hereby accepted in this case and accused is hereby discharged in this case in accordance with the norms of sec.245 of Cr. Pr. Code and further declared as innocent and ordered as absolved / acquitted in this case. If there is a change in this order by higher forum, then income tax department will not be prevented from restoring/filing this case again because of such order. No order as to costs Pronounced and read this order today in the court Date: 12/12/2023 (Sanat Jayantilal Panchal) Place: Ahmedabad Addl. Chief Metropolitan Magistrate. Abad (G.J. 00864) 10. From the above sequence of events from the year 1993, the following facts emerge :- * A searc....
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....m @ 35% ? vi) Whether the Income-tax Department working as a Department of Government of India should take initiative and launch proceedings to recover the entire amounts or not ? vii) Whether the Income-tax Department acted as a Department executing the income-tax statute and also as an arm of Government of India like any other Department wherein a fraud has been perpetuated and any action has to be taken on the assessee for the fraud perpetuated rather than restricting itself to the assessment of the amount of the fraud perpetuated and collection of the taxes thereof ? viii) What was the action taken by the Income-tax Department to file any other criminal charges against the assessee who has already perpetuated an act of crime on Government of India ? 12. The case presents a peculiar situation where the income, accrued fraudulently by the assessee, was parked in the accounts of his family's HUF and further leveraged for economic benefits, such as investments and financial gains. The assessee has accepted engaging in the fraudulent activity, which resulted in tangible control and dominion over the funds. This conduct, coupled with the economic benefit....
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....e was recovered or repaid in subsequent years does not negate the taxability of the income in the year of accrual. 15. The doctrine of real income requires taxation at the time of accrual, irrespective of later events. In CIT v. Shoorji Vallabhdas & Co. [(1962) 46 ITR 144 (SC)], the Hon'ble Supreme Court emphasized that income is taxable when it is received or accrued, and subsequent adjustments do not affect its original taxability. Thus, the assessee's claim for deductions in respect of recovery or repayment fails, as it does not satisfy the conditions enumerated in Section 57 of the Act. This provision permits deductions only for expenses incurred wholly and exclusively for the purpose of earning income. Recovery of fraudulent income is not an expense incurred for earning taxable income; rather, it represents restitution of wrongful gains. In CIT v. S.C. Kothari [(1971) 82 ITR 794 (SC)], the Hon'ble Supreme Court held that losses from illegal activities can be deducted only if incurred for earning taxable income. In the present case, recovery or repayment of fraudulent income does not qualify as an allowable expense. Allowing deductions for recovery of fraudulent income would....
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....his case the Income-tax Department itself, by way of claim of fraudulent refunds are still subject to recovery by Govt. of India. Taxability arises at the point of accrual or receipt. Even if the income is later restituted or recovered, its taxability remains unaffected for the year of accrual. Subsequent adjustments do not negate the taxability for the original period for the matter generation, recovery and restitution are separate transactions. Thus, the act of restitution or recovery is treated independently for taxation purpose. Taxability remains intact for the year of accrual and recovery does not create a retroactive exemption. Under Section 57 of the Act, only expenses incurred wholly and exclusively for the purpose of earning income or deductible. Restitution does not meet the criterion. Allowing deductions for restitution of fraudulently earned income would undermine public policy by creating an incentive to commit fraud. Courts have consistently disallowed claims for deductions or refunds in such cases to maintain the integrity of the tax administration. 18. We also find that the Income-tax Department has initiated prosecution u/s 277 of the Act. This prosecution is p....