1. This appeal filed by the revenue and the cross-objection filed by the assessee relates to the assessment year 1976-77 and arise out of the order of the Commissioner (Appeals), Nagpur, dated 2-11-1981. The aforesaid appeal and the cross-objection involve a common issue and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience.
The revenue contests the appeal on the following grounds, namely, that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in : (i) cancelling the assessment disregarding the fact that the ITO enjoyed ab initio jurisdiction and had seisin over the case ; (ii) in exercising his discretion wrongly in cancelling/annulling the assessment altogether and, thus, deprived the revenue of an opportunity to reassess the assessee ; (iii) holding that Shri Sunderdas Jairamdas was never a witness of the assessee and in placing the onus of disapproving the purchases in question made by the assessee on the department; (iv) ignoring the fact that the payments of assessee to Shri Sunderdas Jairamdas are violative of the provisions of Section 40A(3) read with Rule 6DD of the Income-tax Rules, 1962 and in placing the onus on disapproving such payments on the department; (v) holding that the action of the IAC in giving the opportunity to the assessee to cross-examine Shri Sunderdas Jairamdas though done in the interest of the natural justice, is illegal of provisions of Section 144B of the Income-tax Act, 1961 ('the Act') ; (vi) holding that the assessment is bad in law because the provisions of Sub-section (2) of Section 142 of the Act have not been complied with in disregard of the fact that the principle of natural justice has been complied with ; (vii) holding that the IAC has no powers of giving a direction to the ITO to assess a sum of Rs. 16,000 under the head 'Profits and gains of business or profession' instead of the head 'Income from other sources' ; and (viii) cancelling the assessment in disregard of the fact that an addition of Rs. 35,000 by way of unproved cash credits in the names of the three parties has nothing to do with the question of giving opportunity to the assessee either by the ITO or the IAC.2. The assessee carries on business in purchase and sale of oil seeds, oil and oilcake. It also owns one oil mill for crushing. It filed a return of income on 25-6-1975 declaring the total income of Rs. 21,820.
The ITO proposed to make variation in the assessment as it exceeded Rs. 1 lakh and, therefore, passed a draft assessment order and forwarded the same to the assessee for objections. The said draft assessment order along with the objections of the assessee was forwarded by him to the IAC, who after hearing the assessee, issued directions under Section 144B and in pursuance of the directions issued by the IAC, the ITO passed the assessment order. The facts in regard to each of the disputed additions made are as under : (a) Regarding addition of Rs. 35,000. The above amount represented peak of the credits of the three parties, viz., Tarachand Bakhru, Jaigopal Bakhru and Shri Jairamdas. The assessee produced confirmation letters in respect of the aforesaid parties and the ITO examined two of them, namely, Shri Tarachand Bakhru and Jaigopal Bakhru. Both these persons admitted having advanced the amounts to the assessee and confirmed the copy of accounts in the books of the assessee. The amounts were received by the assessee-firm through Shri Pohumal Tolani, who was also examined by the same ITO. The aforesaid addition of Rs. 35,000 proposed by the ITO was added by him to the income of the assessee in pursuance of the directions of the IAC.The second addition proposed by the ITO is in respect of Rs. 1,82,669.
The amount consists of two items of Rs. 1,66,624 and Rs. 16,000, respectively. The former item represents the value of dhep which, according to the ITO, is a bogus purchase made by the assessee and the latter item represented gross profit on undisclosed sale of oil. The ITO, therefore, proposed both these additions to be made to the assessee's income as income from undisclosed sources. The facts leading to these additions are that the assessee purchased oilcake of Rs. 1,66,624 from one Jairamdas. In response to the query made by the ITO as to the payment made to the said party in cash, the assessee claimed that the case of the assessee fell under exceptions in Rule 6DD. In support of its claim, the assessee filed a letter dated 17-8-1978 wherein the vendor accepted the position that he had declined to accept the payment by cheque/draft and the payment was made in cash as agreed at the time of purchase. The vendor clarified that the transactions in question are recorded in his books of account and he is assessed by the ITO. Along with the said letter statement showing the purchases from him duly signed by him was also annexed. The ITO examined the vendor under Section 131 of the Act on 24-3-1979. The vendor admitted having sold the goods in question and confirmed having signed the letter and the statement dated 17-8-1978. He explained that he is a sales tax payer but he has not filed income-tax return for the last 5/6 years. He produced cash book, purchase register and sales register. The purchases made by the assessee are found recorded in the books produced by him which are lying impounded with the ITO. He further admitted that he insisted for cash payment. After recording the statement, the learned ITO made some enquiries from some of the parties from whom the vendor claimed to have purchased the oilcake. After these enquiries were instituted against Jairamdas, he appeared before the ITO on 30-3-1979 and stated that he had merely issued bogus bills for which he received Rs. 2 per tonne of 16 bags. He stated that all the bills issued by the assessee were untrue. On the basis of this statement recorded, the ITO held that the purchases of the assessee from this vendor are not genuine. He, therefore, added this amount as income of the assessee from undisclosed sources. He further proposed variation at Rs. 16,000, on account of crushing operations which may yield 63.3 tonnes of oil and adopted a gross profit of 5 per cent on estimate of such sales at Rs. 3,70,000. The assessee objected to the consideration of the evidence collected at the back of the assessee and contended that the proposed assessment and the variation are in disregard of Sub-section (3) of Section 142 and a nullity. In the course of proceedings under Section 144B, the learned Counsel for the assessee raised a plea that the assessee was not given a proper opportunity to cross-examine Jairamdas in respect of the evidence recorded from him by the ITO on 30-3-1979 and that, therefore, this evidence should not be taken into consideration. The IAC issued summons under Section 131 to Jairamdas.
He also summoned three other persons, namely, Yeshwant Namdeo Wairagade, Shri Shyamrao Yenurkar and Shri Pralhad Sukhdeo Mahadule.
The evidence collected from the aforesaid persons, who are said to be the suppliers of Jairamdas by the inspector of the department, was not put to the assessee. In response to the summons, only two persons, namely, Jairamdas and Shri Yeshwant Namdeo Wairagade were present and the aforesaid persons have been cross-examined by the learned Counsel for the assessee. Even during the course of cross-examination, Jairamdas struck to the version given to the ITO on 30-3-1979. He has confirmed that the bills issued to him by the assessee-firm in respect of sale of oil cake are all bogus. Yeshwant Namdeo Wairagade, who is supposed supplier of Jairamdas also deposed during the course of examination that he had never dealt in oil cake and that he had never supplied oil cake to Jairamdas. Some of the books of account which were impounded by the ITO earlier were available at the time of cross-examination. They were the following : 2. Purchase registers where by purchase bills, both cash and credit are noted.
There was also another book called 'Sai book' (receipt register) in which the receipt received from parties to whom payments are made are noted. Payments are made from 10 to 12 days after the date of purchase bills. This book, however, was not available at the time of cross-examination and was produced before the IAC by Jairamdas after the cross-examination, to explain his system of accounting. After considering the entire material before him, the IAC directed the ITO to make an addition of Rs. 1,66,624 and Rs. 16,000, which is proposed by the ITO. In pursuance of the directions issued by the IAC, the ITO passed the assessment order making the aforesaid additions to the income of the assessee against which order, the assessee went up in appeal before the Commissioner (Appeals).
The first ground taken by the assessee before the Commissioner (Appeals) is against the legality of the assessment. He also contested some specific additions, namely, the addition of Rs. 35,000 representing the peak credits in the accounts of Tarachand Bakhru, Jaigopal Bakhru and Jairamdas and also with respect to the additions of Rs. 1,66,644 and Rs. 16,000 added by the ITO in the income of the assessee. The learned Counsel for the assessee submitted before the Commissioner (Appeals) that the assessment is tainted with illegality and deserves to be quashed. According to him, the assessment is framed by the ITO implementing the directions issued by the IAC on 25-9-1979.
The IAC in giving the directions has clearly exceeded the powers vested in him under Section 144B. It is pointed out that under Section 144B, the IAC can only consider the draft order, the objections of the assessee and the records relevant to the draft order. It is, therefore, not possible for him to go beyond this material nor is bound to give directions in respect of matters not touched by the draft order. The powers of the IAC functioning under Section 144B are far more restricted compared to the powers conferred on appellate and revisionary authorities. Again, it is not open for the IAC to seek production of witnesses to ascertain the factual position when confirmation letters are filed by the assessee. In the case of the assessee, initially Jairamdas accepted the purchases made by him as genuine, though subsequently on 30-3-1979, he took a somersault and started alleging that the bills issued by him were bogus. The IAC during proceedings under Section 144B examined Jairamdas on 18-9-1979.
The IAC also took the statement of Yeshwant Namdeo Wairagade from whom Jairamdas claimed to have made purchases and who could not be examined by the ITO before submission of the draft order. The statements of these two people, according to the learned Counsel are clearly in the nature of additional evidence. He further submitted that the IAC also utilised receipt register known as 'Sai book' which was produced by Jairamdas after his cross-examination by the assessee's counsel was over. All such additional evidences collected by the IAC had been utilised in issuing directions under Section 144B and, therefore, it is a clear case where the IAC has exceeded his powers. He, therefore, contended that an assessment made on such illegal directions is bad in law. It is further submitted that the ITO in the draft order has proposed assessment of an amount of Rs. 16,000 as income from undisclosed sources, which was changed by the IAC as business income in his order under Section 144B. This according to him was yet another irregularity. It was further contended by the learned Counsel for the assessee that the ITO did not give a reasonable opportunity to the assessee as contemplated under Sub-section (3) of Section 142.
Elaborating the point, he submitted that the 'Sai book' has been utilised in building up the addition. The ITO has also utilised the results of certain local enquiries without giving him an opportunity to meet the case. He relied upon the decision of the Kerala High Court in the case of Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366 in support of his contention that the assessment framed by the ITO without giving a reasonable opportunity to the assessee as contemplated under Sub-section (3) of Section 142 is bad in law. After hearing the learned Counsel for the assessee and the learned IAC, the Commissioner (Appeals) for the reasons stated by him in his order held that the directions of the IAC are tainted with illegality inasmuch as there has been utilisation of additional evidence collected at his own instance and inasmuch as the IAC travelled beyond the scope of Section 144B.Therefore, the order of the ITO passed on such directions of the IAC is illegal. He further held relying on the decision of the Kerala High Court in Ponkunnam Traders' case (supra), that the assessment framed by the ITO without complying with the requirements of Sub-section (2) of Section 143 being tainted with illegality is liable to be quashed. As against this order of the Commissioner (Appeals), the revenue is in appeal before us.
3. The revenue has raised as many as eight grounds of the appeal but all are intended to attack the order passed by the Commissioner (Appeals) in cancelling the assessment. The learned departmental representative proceeded to argue the matter ground-wise. The first ground taken by the revenue is a general ground relating to the cancellation of the assessment by the Commissioner (Appeals). The learned departmental representative pointed out that the procedural remedy can be cured at any stage and there was no lack of jurisdiction.
He relied upon the Supreme Court's decisions on this issue 40 ITR 288 (sic) and 132 ITR 45 (sic).
In support of the second ground taken by the revenue, the learned departmental representative submitted that it was wrong on the part of the Commissioner (Appeals) to annul the whole of the assessment order.
According to him, the contention of the assessee was that no opportunity was granted to him for the purpose of contradicting the evidence of Jairamdas and the IAC has granted the opportunity to the assessee by summoning the aforesaid persons. Since opportunity has been given by the IAC at the instance of the assessee for the purpose of cross-examination, it cannot be said that the IAC has exceeded his jurisdiction under Section 144B.In support of ground No. 3, taken by the revenue, he contended that the Commissioner (Appeals) erred in holding that Jairamdas was never a witness of the assessee and in placing onus of disproving the purchases in question on the department.
Coming to the other ground, he stated that the purchases were made in violation of Section 40A(3) read with Rule 6DD. He further submitted that the IAC gave the opportunity to the assessee and the Commissioner (Appeals) found the same to be necessary in the interest of natural justice and yet held the order to be illegal and in contravention of the provisions of Section 144B. The assessment in question, according to him, cannot be bad in law since the principles of natural justice have been complied with. He further submitted that the IAC has power to change the head of income from one head to another. Lastly, he submitted that the addition of Rs. 35,000 in any way has nothing to do with the opportunity having not been given to the assessee as the aforesaid addition is based purely on independent evidence and the provisions of Sub-section (3) of Section 142 are not contravened.
The learned Counsel appearing for the assessee contended before us that the prayer made to the IAC in the proceedings under Section 144B was to exclude the evidence of Jairamdas recorded at the back of the assessee on 30-3-1979 and also to exclude the evidence in the form of local enquiries and the statements recorded at the back of the assessee. It was not his case before the IAC that the parties should be examined.
According to him, the IAC has taken the proceedings under Section 144B to consider only the draft assessment order, objections of the assessee and the record relating to the draft assessment order. The learned IAC exceeded his jurisdiction by recording the evidence at that stage, which was never the prayer of the assessee. The department cannot sleep over the matter for two years and then say that for want of limitation, the opportunity could not be given. He submitted that certain evidence in the form of local enquiries were conducted earlier. The ITO also withheld the evidence recorded at the back of the assessee and did not give a copy of the same to the assessee. The counsel, therefore, contended that the assessment was clearly in violation of the provisions of Sub-section (2) of Section 142 and, hence, the Commissioner (Appeals) was justified in cancelling the same. He, however, stated that the two decisions, namely, Ponkunnam Traders v.Addl. ITO [1972] 83 ITR 508 (Ker.) and Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366 (Ker.) relied upon by him before the Commissioner (Appeals) lay down that the assessment is null and void to the extent of additions which are made on the basis of or in contravention of provisions of Sub-section (3) of Section 142. He fairly conceded that the case of the assessee is covered by the two decisions of the Kerala High Court only to the extent of two additions of Rs. 1,66,624 and Rs. 16,000. In respect of these additions, even the IAC could not change the head 'Income from other sources' to 'Profits and gains of business or profession'. He fairly conceded that the entire order does not become null and void as held by the Commissioner (Appeals). He, however, submitted that the ground relating to the addition of Rs. 35,000 will have to be adjudicated by the Commissioner (Appeals) and for this purpose, the matter will have to be restored to the Commissioner (Appeals). According to him, since the additions relating to the dheb account amounting to Rs. 1,66,624 and Rs. 16,000 are in contravention of the provisions of Section 142(3), the order passed by the Commissioner (Appeals) to that extent is valid.
4. We have carefully considered the facts and circumstances of the case and the arguments advanced by both the sides. We are clearly of the opinion that the Commissioner (Appeals) was not justified in cancelling the whole assessment but the two additions amounting to Rs. 1,66,624 and Rs. 16,000 are clearly in violation of the statutory principles of natural justice laid down in Section 142(3). The decision of the single Judge of the Kerala High Court in Ponkunnam Traders' case (supra) was, subsequently, confirmed by the Division Bench of the same High Court in Ponkunnam Traders' case (supra). In the aforesaid case, it was held : ...When an Income-tax Officer gathers materials from a source other than the records relevant to the year of assessment, he has gathered materials on the basis of enquiry within the meaning of Section 142(3) and, therefore, he will be bound to give an opportunity to the assessee in respect of the materials so gathered. The failure to conform to the principle of natural justice of audi alterant partem would make a judicial or quasi-judicial order void : If we apply the ratio laid down in the aforesaid case to the facts of the case under consideration before us, it is seen that the 'Sai book' (receipt register) in which the receipts received from parties to whom payments are made are noted was not available at the time of cross-examination and was produced before the IAC after the cross-examination. It is further seen that certain local enquiries made by the ITO from some of the parties from whom the vendor purchased the oilcakes were not put to the assessee and the results of such local enquiries have been utilised in making the addition by the ITO. We are, therefore, of the opinion that the ratio laid down in the aforesaid case squarely applies to the facts of the present case. Since this is the only decision on the point and there being no contrary decision of any other High Court, we are bound to follow the same. We, therefore, respectfully following the aforesaid decision hold that the assessment made by the ITO is null and void only to the extent of two additions amounting to Rs. 1,66,624 and Rs. 16,000. We further hold that the IAC could not direct to assess the same as business income against the proposed by the ITO as 'income from other sources'. The order of the Commissioner (Appeals) pertaining to the deletion of the additions made by the ITO amounting to Rs. 1,66,624 and Rs. 16,000 is confirmed as the assessment order to that extent is null and void. That part of the order relating to the deletion of Rs. 35,000 is set aside and the matter is restored to the file of the Commissioner (Appeals) to consider the same on merits as it is not in contravention of the provisions of Sub-section (3) of Section 143. In the result, the appeal filed by the revenue is allowed in part.
5. The cross-objection filed by the assessee merely supports the order of the Commissioner (Appeals) and the same is, therefore, dismissed as infructuous.