THE HON'BLE SRI JUSTICE GODA RAGHURAM AND THE HON'BLE SRI JUSTICE M.S.RAMACHANDRA RAO I.T.T.A.NO.22 OF 200.16.08.2012 M/s.Hastalloy India Limited, Visakhapatnam. The Deputy Commissioner of Income Tax,Special Range-I, Visakhapatnam. I.T.T.A.NO.24 OF 200.16.08.2012 The Deputy Commissioner of Income Tax,Special Range-I, Visakhapatnam. M/s.Hastalloy India Limited, Visakhapatnam HEAD NOTE: Senior Counsel for the assessee (appellant in ITTA No.22 of 2000 and respondent in ITTA No.24 of 2000):Sri C.Kodandaram Senior Standing Counsel for the Revenue(respondent in ITTA No.22 of 2000 and appellant in ITTA No.24 of 2000): Sri S.R.Ashok. Cases referred 1.2000 (6) S.C.C”
2. (1986 Supp. S.C.C. 110 = Volume 159 ITR page 78) 3 AIR 200.SC 142.4 2011 (1) S.C.C”
5. 1972 (83) I.T.R. page 187 = (1972) 4 S.C.C”
6. (2001) 3 S.C.C.179 7 (2011) 4 SCC 24.8 AIR 197.S.C. 87=(1973) 2 S.C.C”
9. AIR 199.S.C. 1984 = (1990) 4 S.C.C 59.10. (2011) 1 SCC 15.para 9 I.T.T.A.Nos.22 and 24 of 2000 COMMON JUDGMENT
(per Hon'ble Sri Justice M.S.Ramachandra Rao): ITTA No.22 of 2000 filed by the assessee M/s.Hastalloy India Limited and ITTA No.24 of 2000 filed by the Revenue are appeals under Section 260-A of the Income Tax Act, 1961 challenging the order dated 21-09-1999 of the Income Tax Appellate Tribunal, Hyderabad Bench-B in I.T.(SS)A.No.48/Vizag/97 for the block period 01-04-1986 to 28-11-1996.
2. The assessee is a Company engaged in the manufacture of ferrous and non- ferrous castings and forgings having its registered office at Visakhapatnam. One Sri G.V.K. Rao is the Managing Director of the assessee company. He and other directors of the assessee company promoted another company by name M/s.Hastalloy Holdings Limited (hereinafter referred to as "HHL") with the objective of carrying on business of finance.
3. The Income Tax Department carried out search operations under Section 132 of the Income Tax Act, 1961 on 28-11-1996 in the business premises of the assessee company as well as the residential premises of the Managing Director, Sri G.V.K.Rao. The office of the assessee company and the residence of the Managing Director were in the same building. The office of the associate company HHL was also situated at the same office premises of the assessee company. In the course of the search operations, the Income Tax Department obtained books of account of the assessee company as well as a number of other documents and materials evidencing transactions and activities of the assessee company, its associate company HHL, its Managing Director and other firms in which the Managing Director or the Directors of the appellant company were substantially interested. Apart from the books of account, documents, materials etc., the officers also found fixed deposit receipts issued by the associate company HHL in favour of various persons numbering about hundred (100) in all. These fixed deposit receipts were found discharged in advance by the respective depositors whose names appeared in the fixed deposit receipts (F.D.Rs.). Sri G.V.K.Rao, when confronted with all the material seized by the department, conceded before the officers of the Revenue in his sworn statement that the deposits found in the names of over hundred persons represented by the certificates found at the time of search actually belonged to the assessee company and offered Rs.30.00 lakhs as undisclosed income apart from offering it to tax for the block period. In the background of the above facts and circumstances, the assessing officer initiated block assessment proceedings u/s.158 BC of the Income Tax Act, 1961 against the assessee, its associate company HHL and Managing Director Sri G.V.K. Rao for the period 01-04-1986 to 28-11-1996. The Managing Director, while filing the block return on behalf of the assessee, retracted the earlier admission and statements made before the officers and returned an undisclosed income of Rs.2.00 lakhs only, that too pertaining to the cash seized at the time of search operations. After examining the entire search material, the assessing officer issued summons to the various persons stated to have made fixed deposits with HHL and took the statements on oath of those persons who responded . After considering the same, he came to the conclusion in the assessment order dated 27-11-1997 that the F.D.Rs. in the names of the employees of the assessee company and the friends and relatives of the Managing Director and other Directors of the assessee are bogus, that all those fixed deposits represent the investments made by the assessee in the name of those persons, that all those persons are only name lenders and the F.D.Rs. found in the possession of the assessee actually relate to the assessee and therefore constituted an undisclosed income of Rs.29,10,000/- in the hands of the assessee. He passed separate assessment orders in respect of the assessee, its associate company HHL and G.V.K. Rao, the Managing Director.
4. Challenging the assessment made in respect of the assessee, the assessee filed I.T.(S.S.).A.No.48/Vizag/97 before the Income Tax Appellate Tribunal, Hyderabad Bench-B.
5. The Tribunal partly allowed the appeal filed by the assessee holding that only Rs.7,50,000/- can be construed as undisclosed income of the assessee and deleted Rs.21,60,000/- from out of Rs.29,10,000/- held to be the undisclosed income by the assessment officer in regard to the F.D.Rs found in the search of the premises of the assessee, the associate company and the Managing Director on 28-11-1996.
6. Challenging the same, the assessee filed I.T.T.A.No.22 of 2000 insofar as the I.T.A.T. had held that Rs.7,50,000/-constituted the undisclosed income of the assessee. The Revenue filed I.T.T.A.No.24 of 2000 insofar as the I.T.A.T. had deleted Rs.21,60,000/- from the undisclosed income of Rs.29,10,000/- assessed by the assessing officer in regard to the F.D.Rs.
7. The ITTA no.22/2000 filed by the assessee was admitted on 14.8.2000 to consider the following substantial questions of law: a) Whether, in the face of the categorical statements made by the employees of the assessee-company, the Tribunal is correct in applying Section 69 of the Income Tax Act and treat the F.D.Rs. as undisclosed income of the assessee? b) Whether the appellate Tribunal is justified in sustaining the addition without considering the entire evidence on record?" 8. The ITTA 24 2000 was also admitted on 14.8.2000 to consider the following question of law: "Whether the Tribunal's finding that the deposits made by those who appeared before the assessing authority cannot be considered to be the undisclosed income of the assessee and the deposits should be treated as genuine, is perverse and untenable in law?" 9. Heard Sri C.Kodandaram, learned Senior Counsel on behalf of the assessee and Sri S.R.Ashok, learned Senior Standing Counsel for the Revenue in both the appeals.
10. Sri C.Kodandaram, Senior Counsel for the assessee, contended that the order of the I.T.A.T. insofar as it had held that there was an undisclosed income of Rs.7,50,000/- with the assessee is erroneous, that the Managing Director Sri G.V.K. Rao was forced to give a statement at the time of the search that the deposits found in the names of the persons found at the time of the search belonged to the assessee on account of fear and tension, that the Tribunal should have accepted the statements of the employees about their capacity to invest the amounts covered by the F.D.Rs., and that the Tribunal erred in holding that majority of investors in HHL are bogus investors, that they have no source of income and their external appearance would show that they did not have the capacity to invest in the above associate company.
11. Per contra, Sri S.R.Ashok, Senior Counsel for the Revenue, contended that the assessing officer had painstakingly recorded the evidence of 43 workers of HHL and 40 persons who were relatives or friends of the Managing Director and other Directors of the assessee company, elaborately discussed this evidence apart from other evidence and rightly held that Rs.29,10,000/- (the aggregate amount of deposits standing both in the name of workers as well as in the names of the assessee's relatives and friends) is undisclosed income in the hands of the assessee, that the Tribunal, being the final Court of fact, did not at all analyse the evidence as was done by the assessing officer and erroneously held that Rs.21,60,000/- standing in the names of 35 persons, who were relatives and friends of the Managing Director is to be deleted from the undisclosed income of Rs.29,10,000/- assessed by the assessing officer. He further contended that the Tribunal's order does not disclose reasons for its above conclusion except some general statements that the depositors are agriculturists, that they would not have ventured to appear before the assessing officer, much less own up deposits of substantial value inviting risks of being proceeded against, just to accommodate the convenience of the Managing Director of the assessee. He also contended that there was no basis for the Tribunal to hold that the credit worthiness of the depositors was established and its findings that such deposits cannot be treated as undisclosed income is erroneous and perverse.
12. Sri C.Kodanda Ram, however contended that when the order of the assessing authority merged with that of the Tribunal, this Court cannot look into the order of the assessing authority in determining the correctness of the order passed by the Tribunal. He relied on the decision reported in KUNHAYAMMED AND OTHERS v. STATE OF KERALA AND ANOTHER1. He also contended that the finding of the Tribunal is based on consideration of the material before it insofar as deletion of Rs.21,60,000/- is concerned and cannot be said to be a finding on the basis of no evidence or improper rejection of material and relevant evidence and in any event, the inference drawn was only of fact and did not warrant interference under Section 260-A of the Act . He relied on decision reported in COMMISSIONER OF INCOME TAX, ORISSA v. ORISSA CORPORATION P.LTD 2.wherein the Supreme Court held as follows: "..............This Court held that when a court of fact arrives at its decision by considering material which is irrelevant to the enquiry, or acts on material, partly relevant and partly irrelevant, and it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its decision, a question of law arises, whether the finding of the court is not vitiated by reason of its having relied upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon evidence and partly upon inadmissible material. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises, nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures and surmises.... If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises." He also contended that scrutiny of evidence by this Court u/s.260-A of the Act can be done only in very exceptional cases and only if there is extreme perversity as held by the Supreme Court in a decision reported in JAI SINGH V. SHAKUNTALA3 wherein the Supreme Court held in para 6 as follows: "6. Mr Jain, the learned Senior Advocate appearing in support of the appeal contended that in the event of due compliance with the four requirements as envisaged under Section 16 of the Act of 1956 question of there being any further requirement depicting acceptance thereof does not and cannot arise. The submissions undoubtedly at the first blush seem to be rather attractive and it is on this particular issue which prompted this Court to have the matter argued in detail irrespective of the technicality as raised before this Court pertaining to the maintainability issue vis--vis the appeal. While scrutiny of evidence does not stand out to be totally prohibited in the matter of exercise of jurisdiction in the second appeal and that would in our view be too broad a proposition and too rigid an interpretation of law not worthy of acceptance but that does not also clothe the superior courts within jurisdiction to intervene and interfere in any and every matter - it is only in very exceptional cases and on extreme perversity that the authority to examine the same in extenso stands permissible - it is a rarity rather than a regularity and thus in fine it can be safely concluded that while there is no prohibition as such, but the power to scrutiny can only be had in very exceptional circumstances and upon proper circumspection. This is, however, without expression of any opinion pertaining to Section 100 of the Code of Civil Procedure." He also relied on a decision reported in VIJAY KUMAR TALWAR v. COMMISIONER OF INCOME TAX, DELHI4 wherein the Supreme Court observed at paras 23 as follows: "23. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. (See Madan Lal v. Gopi4, Narendra Gopal Vidyarthi v. Rajat Vidyarthi5, Commr. of Customs v. Vijay Dasharath Patel6, Metroark Ltd. v. CCE7 and W.B. Electricity Regulatory Commission v. CESC Ltd.8)." He also relied on decision reported in COMMISSIONER OF INCOME TAX, U.P. v. BHARAT ENGINEERING AND CONSTRUCTION CO.5, wherein the Supreme Court held as follows: "Hence it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the Income Tax Officer may assume that cash credit entries in its book represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final." He contended that this Court should not interfere as regards the deletion of Rs.21,60,000/- as ordered by the Tribunal from the undisclosed income of the assessee.
13. We have considered the above submissions of the counsel for the assessee and the Revenue.
14. While we are in respectful agreement with the principles laid down in the decisions cited by Sri C.Kodandram, learned Senior Counsel for the assessee, we however feel that , in the facts and circumstances of the present case, the order of the ITAT suffers from a serious defect as explained below.
15. A reading of the assessment order passed by the Deputy Commissioner of Income Tax, Special Range-I, Visakhapatnam, in the case of the assessee reveals that he had elaborately considered each of the statements of the 43 employees and 35 friends and relatives of the Managing Director of the assessee before him in respect of the F.D.Rs. standing in their names issued by the associate company HHL and which were seized at the time of search operations and gave cogent reasons why in his opinion their statements about availability of such amounts with them, their standard of living, means of livelihood, their interest in making deposit, their saving pattern, nature of income, banking and saving habits etc. cannot be believed and also gave reasons for his conclusion that the assessee is the owner of these F.D.Rs. He held that the said depositors had lent their names to the assessee only to help the Managing Director. He therefore concluded that the aggregate amount of Rs.29,10,000/- covered by the F.D.Rs. standing both in the name of the workers/employees of the assessee as well as in the names of the assessee's relatives and friends has to be treated as undisclosed income in the hands of the assessee.
16. In the impugned order passed by the I.T.A.T., it is noticed that the appellate Tribunal agreed with the assessing officer in disbelieving the creditworthiness of the employees to make the deposits attributed to them and the genuineness of those deposits amounting to Rs.6,10,000/- and five friends and relatives of the Managing Director in respect of a sum of Rs.1,40,000/- deposited by them in HHL and held that Rs.6,10,000/- + Rs.1,40,000/- = Rs.7,50,000/- was the undisclosed income of the assessee.
17. But in respect of the deposits made by the relatives and friends of the Managing Director in HHL amounting to Rs.21,60,000/, which was spoken to by 35 persons before the assessing officer, it is noticed that the ITAT had not considered their statements in the manner an appellate Court, which is a final Court of fact, is expected to consider and appreciate , before reversing the findings of the assessing officer and coming to a contrary conclusion. It had reversed the findings of the assessing officer in respect of the sum of Rs.21,60,000/- standing in the names of the friends and relatives of the Managing Director without specifically stating why the statements of the 35 persons in this category should be accepted as true and why the reasoning of the assessing officer in that regard should be considered as erroneous. It made sweeping statements such as "all these persons are by and large agriculturists..... the identity of these persons has been established.........as they are all outsiders and not employees of the appellant company, we cannot take the view that all these persons were under the influence of the appellant company to render the statements before the assessing officer to suit the convenience of the appellant company in explaining away the fixed deposits made in their names.......unless the deposits made by them are genuine, they would not have appeared and admitted having made those deposits of huge sums, that too before the assessing officer in the income tax proceedings..... Merely because some are not income tax assesses, deposits made by them cannot be disbelieved doubting their creditworthiness, because as admitted by the assessing officer, all these depositors are agriculturists, whose income from agriculture is exempt from tax.....When the depositors have appeared before the assessing officer and admitted having made deposits of substantial amounts, the genuineness of the deposits cannot be doubted." We are unable to approve the manner in which the I.T.A.T. has considered the evidence of these 35 persons and its appreciation thereof while coming to a conclusion that the deposits made by them to the tune of Rs.21,60,000/- are genuine.
18. In Santosh Hazari Vs. Purushottam Tiwari6, the Supreme Court at para 15 in page 188 observed as follows: "The appellate court has jurisdiction to reverse or affirm the findings of the trial court. First appeal is a valuable right of the parties and unless restricted by law, the whole case is therein open for rehearing both on questions of fact and law. The judgment of the appellate court must, therefore, reflect its conscious application of mind and record findings supported by reasons, on all the issues arising along with the contentions put forth, and pressed by the parties for decision of the appellate court. The task of an appellate court affirming the findings of the trial court is an easier one. The appellate court agreeing with the view of the trial court need not restate the effect of the evidence or reiterate the reasons given by the trial court; expression of general agreement with reasons given by the court, decision of which is under appeal, would ordinarily suffice (See Girijanandini Devi v. Bijendra Narain Choudhary9). ....... While reversing a finding of fact the appellate court must come into close quarters with the reasoning assigned by the trial court and then assign its own reasons for arriving at a different finding. This would satisfy the court hearing a further appeal that the first appellate court had discharged the duty expected of it...." 19. In H.Siddiqui V. A.Ramalingam7, the Supreme Court held: ".....it must be evident from the judgment of the appellate Court that the court has properly appreciated the facts/evidence, applied its mind and decided the case considering the material on record." "...........It is mandatory for the appellate court to independently assess the evidence of the parties and consider the relevant points which arise for adjudication and the bearing of the evidence on those points. Being the final court of fact, the first appellate court must not record mere general expression of concurrence with the trial court judgment rather it must give reasons for its decision on each point independently to that of the trial court. Thus, the entire evidence must be considered and discussed in detail." 20. The I.T.A.T. in its order having observed that one is not justified in making a general presumption on the basis of a general legal ground and every item has to be considered individually on its own merit and generalization ought not to be done, proceeded to do exactly the same while reversing the findings of the assessing officer in regard to the FDRs amounting to Rs.21,60,000. The ITAT ought to have taken up the statement of each of the 35 persons who had spoken about the deposits made by them in the associate company HHL , should have considered the same and then give a finding why the conclusion of the assessment officer in regard to them cannot be accepted. In our opinion no valid reasons have been given by the I.T.A.T. in coming to the conclusion that the creditworthiness of the depositors is established and the genuineness of the deposits cannot be doubted. In our view the I.T.A.T. has not acted in the manner laid down in the above judgments of the Supreme Court.
21. In Union of India Vs. M.L.Capoor8, at para 28, the Supreme Court also observed as follows: "Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi- judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable." 22. In S.N.Mukherjee Vs. Union of India9, a Constitution Bench of the Supreme Court of India held at para 34 as follows: "34. The decisions of this Court referred to above indicate that with regard to the requirement to record reasons the approach of this Court is more in line with that of the American courts. An important consideration which has weighed with the court for holding that an administrative authority exercising quasi- judicial functions must record the reasons for its decision, is that such a decision is subject to the appellate jurisdiction of this Court under Article 136 of the Constitution as well as the supervisory jurisdiction of the High Courts under Article 227 of the Constitution and that the reasons, if recorded, would enable this Court or the High Courts to effectively exercise the appellate or supervisory power. But this is not the sole consideration. The other considerations which have also weighed with the Court in taking this view are that the requirement of recording reasons would (i) guarantee consideration by the authority; (ii) introduce clarity in the decisions; and (iii) minimise chances of arbitrariness in decision-making. In this regard a distinction has been drawn between ordinary courts of law and tribunals and authorities exercising judicial functions on the ground that a Judge is trained to look at things objectively uninfluenced by considerations of policy or expediency whereas an executive officer generally looks at things from the standpoint of policy and expediency." 23. After looking at the order passed by the I.T.A.T. impugned in these appeals, we are constrained to observe that its order does not disclose the facts considered on the basis of which it arrived at the conclusion in respect of the fixed deposits made by the friends and relatives of the Managing Director to the tune of Rs.21,60,000/-. Admittedly reasons are the links between the materials on which certain conclusions are based and the actual conclusions. In the absence of reasons based on consideration of facts by the I.T.A.T. in the impugned order to support its conclusion as regards the F.D.Rs. of Rs.21,60,000/- mentioned above, its order to that extent cannot be sustained. The conclusion of the ITTA is not based on evidence and it has to be held to be perverse. (D.R.Rathna Murthy v. Ramappa10) Therefore the substantial question of law in ITTA 24 2000 filed by the Revenue has to be answered in favour of the Revenue.
24. However as regards the F.D.Rs. to the tune of Rs.7,50,000/- comprising Rs.6,10,000/- in the names of the employees of the assessee and Rs.1,40,000/- in the names of five relatives and friends of the Managing Director are concerned, we are of the opinion that the I.T.A.T. had given reasons for concurring with the more elaborate reasons given by the assessing officer. It is settled law that an appellate authority, if it affirms an order of an original authority which contains reasons, need not give separate reasons if it agrees with the reasons contained in the order of the original authority (see S.N.Mukherjee (9) supra at para 35 page 1995 of AIR). Therefore it's decision in regard to the FDRs of Rs.7,50,000/- does not warrant any interference and the substantial questions of law raised in ITTA 22 2000 filed by the assessee have to be answered against the assessee.
25. In the facts and circumstances of this case, in the interests of justice, and for the reasons set out above, we deem it appropriate to set aside the order of the I.T.A.T. to the extent of it's finding regarding the F.D.Rs. of Rs.21,60,000/- in the name of friends and relatives of the Managing Director and remand the matter to the I.T.A.T. with a direction to consider afresh the evidence on record and come to a conclusion as to the computation of the above item vis-a-vis the income of the assessee. The I.T.A.T. shall consider the matter afresh in regard to the above item only uninfluenced by any observations in this order or in the order of the I.T.T.A under appeal.
26. Therefore I.T.T.A.No.22 of 2000 field by the assessee is dismissed and I.T.T.A.No.24 of 2000 is allowed and remanded to the extent indicated above. No costs. __________________________ JUSTICE GODA RAGHURAM _________________________________ JUSTICE M.S. RAMACHANDRA RAO Date :16-08-2012