Full Judgment
2. The facts of this case have been elaborately stated both in the reassessment order as well as in the appellate order. According to the ITO the income assessable to tax has escaped assessment in original order passed on 26-3-1987 determining the total loss at Rs. 49,380. The basis for coming to this conclusion is confessional statement given by Shri C.V. Jain, proprietor of M/s Mahavir Trading Co. made before the Second ITO C-III Ward, Bombay on 1-10-1985 which has been communicated through letter dated 11-11-1985 by IAC C-III Range, Bombay. It is said that Shri C.V. Jain had confessed that the loans advanced by him were not genuine but are hawalas only to accommodate the borrower concerns to enable them to introduce. their unaccounted income in their account books. The assessee had also obtained a loan of Rs. 70,000 from the said person which was claimed as a loan in original assessment and was accepted. As a direct consequence of the information received, the ITO recorded reasons in the order sheet dated 26-11-1985 which led him to believe that the income had escaped assessment on account of assessee's failure to disclose fully and truly all the material facts necessary for assessment.
The original assessment in this case was completed on 27-5-1985 under Section 143(3). At the time of original assessment, the assessee firm claimed an alleged borrowings of Rs. 70,000 in cash from one Shri Mahendra T. Shah alleged proprietor of M/s Mahavir & Co. on 2-6-1981. It is now learnt that during the course of proceedings under Section 132, Shri C.V. Shah has stated on oath in his statement under Section 132(4) that various loans and advances given by him in the name as M/s Mahavir & Co., are not genuine and merely hawala transactions, meaning thereby he did not lend any money but lent his name only. Obviously, therefore, for Assessment Year 1982-83 as referred to earlier represents his unexplained and antaxed income introduced in the books of accounts in the guise of loan from Shri M.T. Shah proprietor of M/s Mahavir & Co. I have, therefore, reason to believe that on account of the assessee's failure to disclose truly and correctly all the relevant facts in this behalf, his income chargeable to tax to the extent of Rs. 70,000 has escaped assessment, issue notice under Section 148 accordingly.
The validity of 148 notice issued by the ITO has been challenged by the assessee before the ITO through various correspondences and also before the Bombay High Court by way of writ petition which was not entertained. Prior to issue of 148 notice, the ITO has also conducted survey under Section 133-A on 30-10-1985 and recorded the statement of the assessee regarding loans for which, according to the ITO, the assessee did not give satisfactory explanation. Therefore, the ITO concluded that the loans taken by the assessee were not genuine except in the case of Shri Mathuradas Govardhandas of Rs. 30,000 and Mrs. Gita V. Mchta of Rs. 2,500 and consequently assessed as unproved cash credits under Section 68 of the IT Act, 1961. He has also disallowed proportionate interest thereon at Rs. 2,35,500 and added to the income as pertaining to non genuine loans. Though, he wanted to add back Rs. 18,39,000 as unproved cash credit by mistake he had added Rs. 18,71,500 and this mistake has been pointed out by the CIT (Appeals) in his appellate order. Thus, eyen though the ITO recorded reasons with reference to a specific loan of Rs. 70,000 taken from Shri C.V. Jain, nonetheless he has roped in all the loans taken by the assessee except two items mentioned above by relying on the statement given by the assessee at the time of survey and confessional statement given by Shri C.V. Shah.
4. On appeal, the CIT (Appeals) referred to the preliminary objections raised by the assessee for the issue of notice under Section 148 in para 1 of his order. In para 2 of his order, he has narrated in chronological order the proceedings and the events up to the date of reassessment on 26-3-1987. In para 3 the gist of the counsel's arguments and objections raised before the Assessing Officer have been stated. In para4, the CIT (Appeals) dealt with merits of the case. He gave a finding that in respect of the sole loan transaction with Shri C.V. Jain of Rs. 70,000 no adverse report was received from the counterpart at Bombay nor further details of hawala transactions were furnished by Shri C.V. Jain. On the other hand, the affidavit dated 13-3-1987 furnished by Shri C.V. Jain which was filed before the ITO on 26-3-1987 confirming that this loan was genuine, showed that the very basis or material for issuing 148 notice did not exist or survive. As regards other loans he found that they were fully investigated by the predecessor ITO and no fresh material has come to the successor ITO to entertain the belief of escapement of income. On the other hand, the nine affidavits filed by creditors accompanied by the assessee's letter dated 26-3-1987 proved the genuineness of loans of these parties.
5. On the basis of these material facts and findings given, he concluded in para 5 that the reopening of assessment is not legal and invalid as none of the conditions precedent before the issue of notice under Section 148 was fulfilled. The confessional statement of Shri C.V. Jain is found to be very vague, general and therefore there was no direct nexus or live link between the loans given by him and the loans taken by the assessee from him. Therefore, the reasons for formation of belief of escapement of income did not survive. Consequently, he held that the notice issued by the ITO under Section 148 is illegal notice as it has no foundation or basis and the reassessment made on the strength of such illegal notice is void ab initio. Accordingly, he cancelled the reassessment made by the ITO.6. At the time of hearing, the learned departmental representative reiterated the grounds and supported the order of the ITO based on the confessional statement given by Shri C.V. Jain on 1-10-1985. Referring to the observations of the CIT (Appeals) at page 16 of his order that "at that time he only specified one loan of Rs. 70,000 having been advanced to the appellant during the Samvat year 2037 on which interest was also received at Rs. 3,406", he contended that it would support the case of the department, because this observation was made by the CIT (Appeals) immediately after his earlier observation namely that "in this answer to question No. 30, where he was called upon by the ITO C-III Ward, Bombay, to specify the names of such borrowers to whom actually no money was advanced but only the name was lent, he promised to furnish such information on 3-10-1985 after looking into his books of accounts". He further stressed the fact that the writ filed by the assessee before the Bombay High Court was rejected on 4-11-1986 which, according to him, would justify the reassessment proceedings taken by the ITO. Therefore, he contended that it was no longer open to the CIT (Appeals) to go into the validity of the reassessment proceedings. He further submitted that though the assessee has taken several grounds before the CIT (Appeals) the first set of grounds related to validity of reassessment proceedings while another set of grounds related to merits of the case, the CIT (Appeals) actually decided only the first set of grounds relating to validity of reassessment and not the grounds relating to the merits of the case.
7. He referred us to the order of the Supreme Court in CIT v. VIP Industhes Ltd. [S.L.P. Civil Nos. 3164-65 of 1991 dated 16-7-1991] published in [1991] 191 ITR (St.) 6 on the Special Leave Petition filed by the department against the judgment of the Bombay High Court in the case of VIP Industhes Ltd. v. I AC [1991 ] 187 ITR 639 wherein their Lordships have made observations to the effect that subsequent facts had come to the notice of the ITO which showed that the facts set out in the return might not be true, and therefore, the order of the Bombay High Court was set aside and the matter was remanded to the ITO for fresh adjudication. In other words, he stressed the fact that the confessional statement of Shri C.V. Jain showed that the assessee had not disclosed all material facts truly and fully. Referring to the observations of the CIT (Appeals) that Shri C.V. Jain had filed fresh affidavit accompanied by the assessee's letter dated 26-3-1987 he submitted that though the letter bears the date stamp of 26-3-1987 nonetheless it was seen by the ITO only on 27-3-1987 but the reassessment order was already passed by him. In other words, he sought to urge that the fresh affidavit filed by Shri C.V. Jain forwarded by the assessee vide letter dated 26-3-1987 was not available to the ITO for the consideration when he passed a fresh assessment order.
Referring to the observation of the CIT (Appeals) that it was not open to the ITO for making fishing or roving enquiries regarding other activities, the learned departmental representative cited the judgment of the Andhra Pradesh High Court in the case of Anne Nagendram & Bomma Reddi Venkayya & Co. v. CIT [1967] 66 ITR 46 at page 52. It has been held in that case that if after considering the cash credits and accepting them and allowing interest thereon if it is subsequently discovered that those cash credits were false and not genuine, the provisions of Section 34(1)(a) of the Indian Income-tax Act, 1922 could be invoked, because that would amount to non-disclosure fully and truly of all the material facts necessary for assessment. He also relied on several judgments of Courts, namely in the case of CIT v. Ramsevak Paul [1977] 110 ITR 527 (Cal.) regarding the scope of reassessment, the Gujarat High Court in the case of CIT v. Maneklal Harilal Spg. & Mfg.
Co. Ltd. [1977] 106 ITR 24 and the Bombay High Court in the case of CIT v. Indian Rare Earth Ltd. [1990] 181 ITR 22 (FB). The learned departmental representative stated that the judgment of the S uprcme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 was distinguished by several High Courts with reference to fresh material coming to the possession of the ITO to show that the assessee had not disclosed all material facts fully and truly. He relied on other cases wherein reassessment were held to be justified where on the basis of subsequent information, it is found that the assessee had not disclosed the material facts truly and therefore it would not be a case of mere change of opinion as a result of drawing a different inference from the same facts. He also cited a decision of the Calcutta High Court in the case of Daulalram Rawatmal v. ITO [1960] 38 ITR 301 for the proposition that the reasons recorded by the ITO for reassessment need not be disclosed to the assessee. He finally reiterated the fact that the CIT (Appeals) has not cancelled reassessment on merits of the case and even if he had discussed the merits of the case he is not justified in cancelling the reassessment made by the ITO.8. The learned counsel for the assessee, on the other hand, strongly supported the order of the CIT (Appeals). He made a positive statement on the bar that Shri C.V. Jain did not mention in his confessional statement that Rs. 70,000 advanced by him to the assessee was only a name-lending transaction. In this connection, he referred to the statement made by Shri C.V. Jain contained in page D-l and 2. In particular, he referred to question No. 30 and answer thereto.
Referring to para 4 of the CIT (Appeals) 's order, he pointed out that it was only this confessional statement that has been forwarded by the IAC Bombay in his confidential letter dated 11-11-1985. The fresh affidavit filed by Shri C.V. Jain and which was filed before the ITO on 26-3-1987 is contained in paper book at J-15. In para 9 of the said affidavit Shri C.V. Jain has stated that no confession had been made by him anywhere saying that the said loan of Rs. 70,000 advanced by the assessee was not genuine. As regards other creditors, the learned counsel for the assessee stated that out of 70 creditors only 9 did not respond and even in respect thereof, the assessee filed fresh affidavits before the ITO on 26-3-1987 confirming the transactions. He also pointed out that before the original assessment was passed the predecessor ITO deputed his Inspector to Bombay and he had conducted an enquiry and made verification and found the loans as genuine.
9. Referring to the reasons recorded by the ITO and which have been reproduced in para 2 of the appellate order of the CIT (Appeals) the learned counsel for the assessee stressed that there was no suppression of facts by the assessee and all the material facts were disclosed fully and truly at the time of original assessment. Even during the reassessment, the assessee did make fresh attempts to trace the creditors and furnished the latest addresses of some of the creditors.
In this connection, he relied upon the judgment of the Calcutta High Court in the case of Mather & Plait (India) Ltd. v. CIT [1987] 168 ITR 493 wherein it has been observed that it should not be held that merely because a person was not found in the address after four years, the person was non-existent. He further contended that though ITO proceeded on the basis of information relating to Shri C.V. Jain he has roped in all other credits also which is not warranted. Inasmuch as the loan transactions in that assessee's case were found to be false the order of the Supreme Court in the Special Leave Petition went against the judgment of the Bombay High Court in the case of VIP Industhes Ltd. {supra) cited by the learned departmental representative but it would not apply to the assessee's case.
10. In reply the learned departmental representative submitted that the record of the CIT (Appeals) did not show that the ITO had been co-opted with the appellate proceedings before him. In view of order of the Supreme Court on SLP in the case of VIP Industhes Ltd. (supra) the judgment of the Bombay High Court is the case of VIP Industhes Ltd. (supra) is no longer a good law. Referring to the decision of the Supreme Court decision in the case of Indo-Aden Salt Mfg. & Trading Co.
(P.) Ltd. v. CIT [1986] 159 ITR 624 it was contended that if some material for assessment lay embedded in the evidence which the revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of assessing authority and if there is omission to disclose the material facts then subject to other conditions the jurisdiction to reopen is attracted.
11. We have duly considered the submissions of the parties, paper compilation filed and the records. The grounds of appeal taken by the revenue impinge on the sole issue whether the reassessment made by the ITO on 26-3-1987 under Section 143(3) read with Section 147 is justified or not. For this purpose, it must be seen whether the condition precedent for initiating proceedings under Section 147(a) are satisfied or not. The Supreme Court in the case of Lakhmani Mewal Das (supra) and in the case of Central Provinces Manganese Ore Co. Ltd. v.ITO f 1991] 191 ITR 662 and also other High Courts have held that the ITO must have reason to believe that the income of the assessee had escaped assessment and he must have reason to believe that such escapement is by reason of omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment. Both these conditions must co-exist to confer the jurisdiction on the ITO to reopen the assessment. The statutory provisions contained in Section 147 are also clear. If it is found that either of these conditions is not fulfilled the notice under Section 148 issued by the ITO is without jurisdiction. The duty cast upon the assessee is to disclose primary facts necessary for assessment and not inferential facts. Therefore, the assessee is not under obligation to instruct the ITO about the inference which the ITO may draw from these facts. Unless required by the ITO the assessee is also under no obligation to produce further material.
12. The reasons recorded by the ITO were extracted in para 3 above. It is seen from the reasons recorded by the ITO that Shri C.V. Jain is said to have stated on oath in his statement under Section 132(4) that various loans and advances given by him in the name of M/s Mahavir & Co. are not genuine and merely hawala transactions meaning thereby he did not lend money but lent only name. Based on this statement, the ITO recorded his conclusion, viz., the said sum of Rs. 70,000 claimed by the assessee as loan during the course of assessment proceedings for the assessment year 1982-83 represented unexplained and untaxed income introduced in the books of accounts in the guise of loan from the said person. Thus it is seen that on the basis of the confessional statement given by Shri C.V. Jain, the ITO entertained belief that on account of assessee's failure to disclose fully and truly all the relevant facts the income chargeable to tax has escaped to the extent of Rs. 70,000.
Therefore, he has proceeded to issue a notice under Section 148 of the IT Act, 1961.
13. We shall straightaway consider the confessional statement given by Shri C.V. Jain which is contained in paper book D-l and 2. In reply to a specific question No. 11, he answered that he is a proprietor of two firms, viz. Mahavir & Co. and M/s Paras Textiles. These two firms are carrying on financing business as seen from reply to question No. 12.
In response to question No. 16 regarding capital in business, he stated that he introduced Rs. 5.00 to Rs. 5.50 lakhs in his business. In response to question No. 15, he stilted that he introduced approximately Rs. 8 to 10 lakhs in his business in the Samvat year 2039. In reply to a question No. 24, he stated that he advanced money by cheque and in reply to question No. 28 he stated that he took interest by cheque. Question Nos. 29 and 30 and answers thereto are most relevant for consideration and therefore, they are reproduced as under: Q. No. 29 : Whether the monies advanced by you are genuine transactions? Ans : Some money transactions are not genuine. I have actually not advanced any money to some people, only I have given accommodation enthes.
Q. No. 30: How many transactions are such that you have written only names actually no money is advanced to them? Ans: I can tell about this after looking into my note book. I shall come on 3-10-1985 in your office and tell you about it.
14. From the abovesaid statement the fact of this person carrying on finance business and his capacity to advance and the modus operandi of advances and receipts of loans and interest could be ascertained. From the reply given to question No. 29 it could be clearly seen that only "some money transactions are not genuine" and he has not advanced any money to "some people" but given accommodation. Therefore, there is exception to the rule of having advanced the finance to people in his financial business. It is only with reference to the specific question on how many transactions or hawalas or name lending, Shri C.V. Jain had asked for time for looking into the note book and furnish particulars on 3-10-1985 in the office of the ITO. In other words, the deponent had agreed to furnish the particulars of hawala transactions in respect of some people. This does not mean, that he has made confession stating that all the transactions or the advances made in the name of M/s Mahavir & Co. are not genuine or hawala transactions only as reasoned by the ITO. During the course of hearing, the learned departmental representative has been required to furnish such hawala transactions furnished by said Shri C.V. Jain before the ITO Bombay for the purpose of perusal and appreciation. The learned departmental representative has frankly replied that no such particulars are available on record for production. Therefore, it is rather surprising how the ITO entertained the reasons to believe all the transactions or various loans and advances given by Shri C.V. Jain in the name of M/s Mahavir & Co. are not genuine and are hawala transactions only. Therefore, the finding and conclusion contained in the reasons recorded to come to the conclusion that the said sum of Rs. 70,000 claimed by the assessee as a loan during the assessment proceedings for assessment year 1982-83 represented unexplained and untaxed income introduced in the books of accounts in the guise of loan from Mr. Shah, proprietor of M/s Mahavir & Co. are without any basis or material to support. The statement given by Shri C.V. Jain on 1-10-1985 is not incriminating nor specific and has no rational connection or relevant bearing or live link with the particular transaction with the assessee, vide Lakhmani Mewal Das's case (supra) and Sir Bansilal & Co. v. Prabhu Dayal, ITO [1990] 185 ITR 287 (Bom.). Therefore, there is no evidence or material on record for entertainment of belief that income chargeable to tax, has escaped assessment on account of failure of assessee to disclose material facts fully and truly.
15. Though the ITO proceeded with the confessional statement given by Shri C.V. Jain as the reason or basis to believe that the loan version is not genuine and it represented the concealed income of the assessee, nonetheless he has taxed all the cash credits. For this purpose, he went on survey under Section 133-A on 30-10-1985 and recorded the statement of the assessee partner Shri E.M. De'souza pertaining to the various other loans. It appears that the ITO had gathered during the survey operation sufficient material regarding non-genuineness of the cash credits by relying on the statement of partner Shri De'souza especially in the answers given by him to question Nos. 5, 6 and 7 of the statement. In fact, this information has been revealed by the ITO in para 4(a) of his order in rebuttal of the various preliminary objections raised by the counsel for the assessee regarding validity of re-assessment under Section 147(1). In other words, the ITO is said to have gathered sufficient material to entertain the belief that even the rest of the cash credits, excepting two were non-genuine and represented actually the concealed income of the assessee. Therefore, it is also necessary to consider the statement given by partner Shri De'souza on 30-10-1985. For the sake of appreciation the relevant portion of the statement is extracted hereunder: Q. 5: One of the parties mentioned above is one Shri Mahendra T. Shah of Bombay from whom you allegedly took a cash loan of Rs. 70,000 (Rupees seventy thousands) on 2-6-1981. Please state in detail as to how you know this party, the nature and style of his business and the place from where carrying Ans: I know said Shri C.V. Jain of Mahavir & Co. through one Shri Muktibhai Shah of Sterling Chemical Pharmacy, 329 Madhani Street, Senapati Bapat Marg, Dadar, Bombay-28, who is common friend. The name and style of business of M/s Mahavir & Co. and the address is 'T.M. Road, Joglekar Building, Thane'.
Q. 6: A close examination of alleged confirmation letter dated 30-9-1981 signed by you as a partner of Nasik Eggs Enterprises and one Mr. C.V. Jain as proprietor of Mahavir & Co. reveals a different story, inasmuch as the alleged cash borrowings of Rs. 70,000 is shown to have been effected on 8-5-1981 as against 2-6-1981 recorded in your firm's books of a/c. Moreover, the name of the proprietor shown in the said confirmation letter dated 30-9-1981 is one Mr.
C.V. Jain, while in your books of account at page 127 of cash book for assessment year 1981-82 the name of one Mr. Mahendra T. Shah is shown from whom alleged cash of Rs. 70,000 is borrowed on 2-6-1981.
How you reconcile the discrepancies in name as well as date of alleged borrowings? Ans: The correct name of the party is Mahavir & Co. and the correct date of borrowing of said cash loan of Rs. 70,000 is 8-5-1981. I would, however, like to say that the proprietor of Mahavir & Co. is one Shri C.V. Jain as recorded in the confirmation letter and not Shri Mahendra T. Shah as recorded in our firm's cash book on page 127 through oversight.
Q. 7: Do you remember as to by whom such a large cash of Rs. 4,55,000 including the cash of Rs. 70,000 from Shri Mahendra T. Shah was brought from Bombay to Nasik? Incidentally, it may be mentioned here that the name/names of the person/ persons from whom or through whom the said seven cash loans aggregating to Rs. 4,55,000 allegedly borrowed by your firm on 2-6-1981 are not mentioned.
Ans. : I confirm that I had personally brought the said cash of Rs. 4,55,000 from Bombay to Nasik by train. I further confirm that each of the seven cash loans aggregating to Rs. 4,55,000 including the cash loan of Rs. 70,000 from Mahavir & Co. were personally received by me from the respective parties on the same date at the place of Shri Muktibhai Shah. Incidentally, I may mention here that a sum of Rs. 140.60 is debited as travelling expenses in our cash book on the same date at page 128 of the cash book.
16. A perusal of the aforesaid statement shows that the identity of Shri C.V. Jain, proprietor of M/s Mahavir & Co. is established and the assessee knows that person through a common friend Shri Muktibhai Shah.
The assessee also clarified the discrepancy in the date of borrowing of Rs. 70,000 from the said Shri C.V. Jain by saying that it was actually borrowed on 8-5-1981, but entered in the cash book on 2-6-1981, vide clarification given in Clause (e) of reply to question No. 11. In regard to other loans, reply to question No. 7 shows that the loans were personally received by the partner at the place of Shri Muktibhai Shah and personally brought by him from Bombay to Nasik. In this connection, it is very much relevant to refer back to the record relating to original assessment. In his report dated 2-11 -1984, the Income-tax Inspector has stated that the said Shri Muktibhai M. Shah through whom the loans were arranged had confirmed that he had arranged loans for the assessee from 10 parties including M/s Mahavir & Co. The said Shri Muktibhai Shah has given a statement on 30-10-1984 confirming the statement of the Income-tax Inspector. He has also stated that he himself had advanced Rs. 80,000 on 8-5-1981 and Rs. 45,000 on 2-6-1981 at interest rate of 12 per cent per annum and the transactions are effected in his books of accounts. In the same report, the Income-tax Inspector has stated that Shri Kirit A. Dani had confirmed in writing that he had arranged loans from 17 parties. The said Shri Kirit A. Dani also had given a statement on 29-10-1984 confirming arrangement of loans from 17 parties. There is a statement taken from Shri Krishnakant Anantrai Parekh on 25-3-1985. He has also stated that he has arranged loans to the assessee from 61 parties during the period 20-10-1980 to 4-5-1981. This evidence on record corroborates the statement of the assessee partner that the loans were arranged through Shri Muktibhai Shah and others.
17. It is also necessary to refer to the other questions and answers contained in the statement obtained at the time of survey which are relevant for our consideration. In question No. 8, the ITO asked the assessee why huge borrowal of Rs. 4,55,000 was made on 2-6-1981 when opening cash balance was very high and the closing balance was also very high to which the assessee partner replied that three partners have invested huge amounts in M/s C & M Farming Pvt. Ltd. To question No. 9 as to what was the dire necessity to borrow money on 2-6-1981 when actually investment in the concern was made during 3 -6-1981 to 31 -8-1981, the assessee partner replied that the said concern required large investment towards construction of poultry shed. To Question No.12, as to whether the partner knew all the 7 parties, he replied that he perfectly knew all the 7 parties and also clarified that the name of the proprietor of M/s. Mahavir & Co. is not Shri Mahendra T. Shah as wrongly entered in the cash book. It is also relevant to extract question No. 11 and answer thereto which has a direct bearing on the issue : Q. 11: I put it to you that in view of the circumstances mentioned below, the aforesaid cash borrowings of Rs. 4,55,000 including Rs. 70,000 from Shri Mahendra T. Shah of Mahavir & Co. allegedly effected on 2-6-1981 is not genuine :-- (a) No security whatsoever has been given to any of the seven parties mentioned in question 2 above: (b) No pronote or other documents have been passed on by you in favour of any of the parties mentioned in question 2 above.
(c) It is highly improbable that such a large cash could have single handedly collected and brought to you from Bombay to Nasik.
(d) No brokerage has been paid on any of the allegedly seven parties including Rs. 70,000 of Shri Mahendra T. Shah of Mahavir & Co.
(e) There are serious discrepancies in the name and date recorded in respect of alleged borrowing of Rs. 70,000 from Shri Mahendra T. Shah of Mahavir & Co. on 2-6-1981 as stated in detail in question No. 6 above.
Ans: I strongly deny that any of the loan from seven parties is not genuine. In fact the genuineness of each of the loan from the seven parties stated in question No. 2 is proved as genuine from the following facts : (a) Confirmation letter from each of the seven parties are available with us and specially confirmation letter of Mahavir & Co. is tendered to you herewith.
(b) The interest payment on each of the seven borrowings is paid by account-payee draft and tax has been deducted from each of the interest payments.
(c) Inspector of department verified by test check last year by visiting Bombay and having recorded statement of Shri Muktibhai Shah, who confirmed that he has arranged for cash loan.
(d) All these loans have been repaid by a/c payee cheques drawn on Central Bank, Crawford Market Branch, Bombay. The repayment of loan of Mahavir & Co. of Rs. 70,000 including interest was effected by cheque No. 167805 dated 12-8-1985 for Rs. 72,727.
(e) In regard to the discrepancy about the actual date of receipt of loan, I further clarify that I had gone to Bombay on 8-5-1981 and collected cash of Rs. 70,000 from Mahavir & Co. The money was lying with me as I was very busy with my new company which was during the period of construction. I had to run various places for materials, technicians, power, arranging water supplies, bank loan etc. with a request that the amount of Rs. 70,000 was credited in the book of a/c on 2-6-1981 along with the amount was received by me earlier, I have paid the interest from 8-5-1981, since the loan was received at that time.
18. From the extract of question No. 11 and answer thereto, it is absolutely clear that the assessee has emphatically stated that the transactions with the 7 parties from whom a sum of Rs. 4,55,000 was borrowed by the assessee were genuine by evidence brought on record as contained in reply to question No. 11. The aforesaid statement recorded at the time of survey clearly establishes the version of loans taken by the assessee by way of affirmative confirmations and replies from the assessee partner. There is no other evidence brought on record by the ITO at the time of reassessment proceedings to disprove the proof given by the assessee both at the time of original assessment proceedings as well as reassessment proceedings which formed part of record. There is nothing adverse or incriminating evidence in the statement given by partner Shri De'souza against the assessee to draw conclusion that all the other advances are also non-genuine as concluded by the ITO. After considering the records, therefore, we are not satisfied that the ITO had brought any material or evidence on record to disprove the plea of genuineness of the loans for which the assessee has produced all the material facts fully and truly which are necessary for assessment at the time of original assessment. We would like to rely on reply given to question No. 11 in the statement recorded at the time of survey which shows that the assessee had filed confirmation letters from 7 parties, interest has been paid to them by way of account payee drafts and tax has been deducted at source from out of the interest payments and paid to the Government. In the original proceedings, the Income-tax Inspector has recorded statement from Shri Muktibhai Shah who confirmed the arrangement of loans and parties were repaid loans by way of account payee cheques. It is pertinent to point out that the statement recorded at the time of survey pertained to 7 parties, namely, Shri Nakoda Enterprises, Shri Mahendra T. Shah alias S.V. Jain alias Chelraj Vanaji Jain, Shri Vasant C. Shah, Shri Kantiial S. Shah, K. Jayendra & Co., J.V. Corporation and Bhurmal Chanaji Jain, amounting to Rs. 4,55,000 on 2-6-1981. At this juncture, it is necessary to point out that the ITO has also assessed as non-genuine cash credits other loans taken on 4-5-1981 and 8-5-1981. In respect of loans taken on these two dates, there is no material evidence brought on record to show that these were not genuine loans but represented escaped income of the assessee.
19. On the other hand, a perusal of the record shows that even at the time of original assessment, the ITO deputed his Inspector to conduct the enquiry and verification of these loaa transactions. It is seen from the Inspector's report dated 2-11 -1984 that he visited Bombay on 29-10-1984 and contacted Shri Muktibhai N. Shah and Shri Kirit A. Dani through whfim the assessee had obtained various loans at Bombay. In his report he has stated that Shri M.N. Shah confirmed that he has arranged loans for the assessee from 10 parties including M/s Mahavir & Co.
which appears as item No. 10. The rep art also shows that Shri K. A.Dani confirmed that he had arranged loans from 17 parties out of which 2 parties came forward and confirmed the loan transactions. The statement of Shri K.A. Dani dated 29-10-1984 is at page C-7 to 9 of the paper compilation. The confirmation statement given by Shri Navinchandra K. Shah, and Shri B.V. Padiya dated 30-10-1984 are at page C-8 and 9 of the paper book. The statement of Shri Jayantkumar S. Shah confirming the loan with account copies is at page C-14 and 15. The statement of Shri Popatlal Shah, proprietor of Pritesh Trading Co.
dated 12-2-1985 is at page 16. The statement of Shri Krishnakant Anantrao Parekh dated 25-3-1985 confirming that he has arranged finances from 48 parties for the ass :ssment year 1982-83 and from 13 parties for the next are at page C-17 to 20 and C-21 to 22 respectively.
20. The record shows that the assessee had deducted tax at source and TDS certificates were issued in Form No. 19A and copies of challans for the tax paid. It shows that the predecessor ITO had issued cyclostyled letters dated 27-10-1984 to his counterpart at Bombay reporting the transaction of various parties for the purpose of cross verification and reporting of discrepancy in the transaction. Confirmation letters were filed by the creditors showing particulars of addresses, the concerned ITOs and the permanent account numbers etc. There is another report of the Inspector dated 13-2-1985 which shows that he visited Bombay on 12-2-1985 and verified the transactions of five parties who are assessed to tax and who have confirmed the transactions. He has also verified the transactions of five parties.
21. The assessee also filed a letter dated 26-3-1987 which was received in the Income-tax Office on 26-3-1987 as per the dated initial by the clerk bearing office stamp enclosing nine fresh affidavits from creditors including Shri C.V. Jain. The assessee also written another letter on 27-3-1987 wherein it has been stated that the assessee appeared before the ITO on 26-3-1987 and produced xerox copies of nine affidavits along with the originals for confirmation and the assessee was directed to file the same in the office and, accordingly, they were filed in the office. It rs stated that these affidavits were filed in accordance with the directions given by the ITO but in spite of that it is mentioned that the ITO informed the assessee that he would not consider the same. These affidavits are contained in page J-1 to 32 of the paper book compilation.
22. A perusal of the affidavits show that Shri Hemant S. Shah advanced loan of Rs. 70,000 on 8-5-1981 and Rs. 90,000 on 2-6-1981 from out of cash balance reflected in the cash book pages 182 to 207, respectively, and he has been assessed to tax and he received the repayment on 2-8-1985 by way of account payee cheque. In similar manner, Shri Kantilal Shah advanced loan of Rs. 70,000 on 2-6-1981, Shri Jyendrakumar Sonmal Shah advanced Rs. 80,000 on 8-5-1981 and Rs. 65,000 on 2-6-1981 and Shri Chelraj Vanaji Jain in respect of whom all the loan transactions were treated as non-genuine by the ITO, confirmed that he has advanced Rs. 70,000 on 8-5-1981 and received repayment of Rs. 72,727 by way of account payee cheque on 12-8-1985 and in para 9 of the affidavit he has clearly stated that he made no confession anywhere saying that the said loan was non-genuine. He further admitted that the said loan was genuinely advanced to the assessee. Shri Vasantkumar C.Shah advanced Rs. 80,000, Shri Popatlal Kewalchand Shah advanced Rs. 80,000 on 8-5-1981, Shri Mafatlal Kewalchand Shah advanced Rs. 65,000 on 8-5-1981, Shri Muktikumar B. Shah advanced Rs. 80,000 on 8-5-1981 and Rs. 45,000 on 2-6 1981 and Shri Ashokkumar Surajmal Shah advanced Rs. 80,000 on 8-5-1981. All these persons have enclosed account copies, assessment orders, bank accounts etc. in support of their loans advanced to the assessee. Thus, the assessee had again established that the loan transactions were genuine by adducing evidence both at the time of completion of re-assessment proceedings and also at the time of original assessment when full verification was made by the predecessor ITO. In this connection it is relevant to mention that even in the reassessment the ITO was actually satisfied about the genuineness of the loans in respect of two parlies, i.e., Shri Mathuradas Govardhandas of Rs. 30,000 and Smt. Gita V. Mehta of Rs. 2,500, simply because these parties have furnished information to the satisfaction of the ITO. The format designed by the ITO as per the annexure 'B' to the assessment order is not the only one way of getting satisfied about the genuineness of loans. In contradistinction it could be pointed out that the predecessor ITO has caused both the direct enquiry through Inspector and also sent particulars for cross verification from his counterpart at Bombay, subject to reopening the assessment when discrepancy was communicated. In response to the ITO's letter dated 17-10-1986 enclosing summons at the fresh addresses, 12 parties confirmed by letters but they were not held to be satisfactory to the ITO because they were not in the format prescribed by him.
23. It is also relevant to point out that the direct information received by the ITO after the assessment was completed related to the single transaction of loan with Shri C.V. Jain but the ITO has adopted the modus operandi of survey under Section 133-A with an intention of reconsidering the other loan transactions also without there being any adverse material affecting the genuineness of those transactions. This shows that the ITO was bent upon reconsidering or reviewing the decision already taken by his predecessor regarding the other loan transactions. In spite of the efforts taken by the assessee to trace out the correct addresses of the parties on whom summons by the ITO could not be served and furnishing the correct addresses and securing fresh affidavits from 9 parties and producing them before him on 26-3-1987 the ITO refused to look into them or consider the evidence before passing the order on 26-3-1987. Nothing could have prevented the ITO from looking into those fresh affidavits and passing an order rejecting them for some reason or the other. Simply by ignoring the affidavits produced in person before him on 26-3-1987 the ITO has shirked his responsibility to consider the evidence produced by the ITO though all along he has been harping on the fact that the assessee has not produced evidence regarding the genuineness of the loans.
24. It is needless to point out that the very case viz. Shankar Industhes v. CIT [1978] 114 ITR 689 (Cal.) on the basis of which the ITO has devised the format contained in annexure 'B' to the assessment order to establish the identity, the capacity and the genuineness of the transactions lays down the principle that the assessee must prove the case prima facie and only after the assessee adduced prima facie evidence, the onus shifts to the department. In the original assessment proceedings the assessee, as seen from the records, established prima facie evidence and therefore, it is for the department to disprove what is proved by the assessee prima facie. It is relevant to point out in this connection that the Supreme Court in the case of CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 mentioned that when the assessee had given names and addresses of the alleged creditors and they were income-tax assessees and their Index numbers were also furnished by the assessee and the revenue is not examining the source of income of the alleged creditors to find out whether they are creditworthy, there was no effort made to pursue the so-called alleged creditors. In the circumstances, the Tribunal came to the conclusion that the assessee had discharged the burden and this conclusion of the Tribunal was approved by the Supreme Court in that case. Even the ITO in para 7 of his order, admits that the assessee has proved evidence prima facie by filing confirmatory letters and the onus shifted to the department. In the facts and circumstances of the case, therefore, it cannot be said that the department has discharged its onus to disprove the prima facie evidence adduced by the assessee. There is no material or basis for coming to the conclusion that all the transactions were non-genuine so as to warrant an addition as unexplained income of the assessee under Section 68 of the Income-tax Act, 1961 and also disallow the proportionate interest relating to these loans.
25. Coming to the merits of the case, it cannot be said that the CIT (Appeals) has not dealt with merits of the case, because the material or evidence on the basis of which re-assessment is sought to be made is very much interlinked with merits of the case also, inasmuch as one is consequential to the other. If there is no material to reopen the assessment or the material already brought on record is such that no adverse inference could be taken by entertaining reason to believe escapement of income on account of failure of the assessee to disclose material facts fully and truly, it would be a case of change of opinion only. Therefore, on appreciation of evidence or material if there is no basis for entertaining reason to believe escapement of income, re-assessment becomes invalid in law as it cuts at the root of the reassessment. Therefore, there is no merit in the contention of the learned departmental representative that the CIT (Appeals) has not appreciated the evidence or not dealt with the grounds relating to merits of the case. Therefore, it could be inferred that in the order the CIT (Appeals) has dealt with both grounds relating to jurisdiction under Section 147 as well as merits of the case vide paras 4 and 5 of the appellate order. It is not as though the department has got a case on merits of the case which was declined to be considered by the CIT (Appeals). On the other hand, the order of the CIT (Appeals) shows that he has considered all the material evidence on record while passing the order. The order of the Supreme Court on the Special Leave Petition filed against the judgment of the Bombay High Court in the case of VIP Industhes Ltd. (supra) would be applicable only when true facts crop up subsequent to original assessment which was made by accepting the material facts disclosed by the assessee. In other words, truth is a complete defence not only against the defamation but also against challenge to reassessment proceedings. This is not the case before us.
Therefore, there is no merit in relying on that decision. Similarly, there could be no dispute about the ratio of the Andhra Pradesh High Court in the case of Anne Nagendram & Bomma Reddi Venkayya & Co.
(supra) which again stands on true facts coming to light after the original assessment has been made accepting the return version of the assessee.
26. From the facts and circumstances stated above, and on appreciation of evidence on the record of the case, the only conclusion that could be reasonably drawn is that there is no evidence or material on record to warrant reasons to believe that income has escaped assessment on account of failure of the assessee to disclose all material facts fully and truly which are necessary for assessment. Therefore, the reasons recorded by the ITO are mere pretence only and amounted to change of opinion on reappraisal of the same facts. Therefore, the belief entertained by him that income chargeable to tax has escaped assessment is without any foundation, basis or material evidence and support.
Since there could be no valid and justifiable belief of escapement of income, therefore, the initiation of proceedings under Section 147 is not justified and it is vitiated. Accordingly, the issue of notice under Section 148 is ab initio void and, therefore, reassessment made thereon is not valid and unjustified in law in view of judgment of the Supreme Court in the case of Lakhmani Mewal Das (supra), Calcutta High Court in the case of Soorajmal Srigopal v. ITO [1979] 117 ITR 326, S.P.Agarwalla v. ITO [1983] 140 ITR 1010 (Cal.), Bombay High Court in the case of Sir Bansilal & Co. (supra), Technocraft Industhes v. G.S. Tung, 2nd ITO [1990] 185 ITR 465 (Bom.), Raja Bahadur Motilal (P.) Ltd. v.K.R. Vishwanathan ITO [1990] 183 ITR 80 (Bom.). In view of the fact there is no fresh evidence to show that these loans are not genuine or true ratio of Supreme Court in the case of CIT v. Burlop Dealers Ltd. [1971] 79 ITR 609 and Bombay High Court in the case of VIP Industhes Ltd. (supra) would be applicable to the case. Consequently, we agree with the findings, reasons and conclusion given by the CIT (Appeals) and uphold his order cancelling the reassessment made by the ITO as it is not justified in law.