1. The Revenue is the appellant in the appeals, whereas the assessee filed the cross objections. Both the appeals and the cross-objections relate to the assessment years 1986-87 and 1987-88 and they arise out of the common order of the CIT (Appeals), Madurai dated 27-3-1990. For the sake of convenience the appeals as well as the cross-objections are heard together and disposed of by this common order. The following grounds are raised in the Revenue's appeals : "The CIT (Appeals) erred in holding that the levy of additional tax under section 104 in both the assessment years was not justified and in cancelling the same.
The CIT (Appeals) should have seen that the assessee itself has filed revised returns of income showing enhanced income, conceding the inflation in certain items of expenditure, and that the enhanced income shown should be taken to the real commercial profits of the assessee.
The CIT (Appeals) should have followed the ratio of the decision of the Supreme Court in the case of Gobald Motor Services (P.) Ltd. v. CIT [1966] 60 ITR 417.
The decisions relied on by the CIT (Appeals) are not applicable to the facts of the case." The assessee filed the cross-objections mainly supporting the order of the CIT (Appeals) and no separate relief is prayed for.
2. The assessee is a private limited company in which public are not substantially interested. It is engaged in the business of chit fund.
The assessee filed its returns of income for the assessment years 1986-87 and 1987-88 on 3-7-1986 and 31-7-1987 respectively and the assessments under section 143(1)(a) were completed on 16-7-1986 for the assessment year 1986-87 and on 14-9-1987 for the assessment year 1987-88. Subsequently the business premises of the assessee were surveyed under section 133A, during the course of which it was found that the assessee had inflated expenditure under two heads viz., canvassing commission and collection data. As stated by the Assessing Officer, the managing director of the assessee-company agreed about the inflation and in consequence filed revised returns of income thereby disallowing the commission by 45 per cent. and collection data by 20 per cent. The reassessments were accordingly completed on total income of Rs. 89,250 for the assessment year 1986-87 and Rs. 1,20,640 for the assessment year 1987-88. As the assessee-company did not declare any dividend, a notice was sent to the assessee calling for its objections, if any, for levy of additional tax. According to the assessee the revised returns were filed as a result of survey and the question of declaring any dividend did not arise as there was no required profit.
The Assessing Officer did not accept the assessee's contention and stated that as there was inflation in expenditure, the assessee had chosen to file the revised returns adopting higher figures. The Assessing Officer further stated that when the assessee had deliberately reduced the profits in the statements, the profit shown in the statements cannot be taken as commercial profits. Relying on the decision of the Hon'ble Supreme Court in Gobald Motor Service (P.) Ltd. v. CIT [1966] 60 ITR 417, the Assessing Officer did not accept the assessee's explanation for non-declaration of dividend and accordingly imposed additional tax under section 104 of the Income-tax Act, 1961 in both the assessment years under consideration.
3. The assessee took up the matter in appeal before the CIT (Appeals), reiterating the arguments that it had earlier advanced, unsuccessfully, before the Assessing Officer. On an examination of the facts and circumstances of the case, the CIT (Appeals) found that the assessee filed its revised returns after survey operations were conducted, showing increased income only to avoid prolonged proceedings and litigation in the matter and to purchase peace. Referring to the decisions of the Calcutta High Court in the cases of CIT v. Chemical Agents (P.) Ltd. [1987] 167 ITR 387/33 Taxman 241 and CIT v. Industry Side (P.) Ltd. [1985] 154 ITR 686/22 Taxman 28 the CIT (Appeals) held that merely because the assessee has filed its revised returns in both the years showing enhanced income, it could not be proved that the assessee had enough commercial profits to declare dividend. The CIT (Appeals) observed that the enhanced incomes were shown only with a view to purchasing peace and avoid long-drawn litigation. The CIT (Appeals) accordingly held that the levy of additional tax under section 104 in both the assessment years under consideration was not justified and cancelled the orders under section 104. It is under these circumstances that the Revenue is now before us.
4. Before considering the arguments of the parties, we may state some more facts which are relevant. The present appeals were filed by the Revenue on 4-6-1990. The assessee filed applications for settlement of its case for assessment years 1986-87 to 1992-93 (including the assessment years under consideration) under section 245C(1) before the Settlement Commission (IT & WT) on 29-3-1993. The Settlement Commission passed order under section 245D(4) on 29-7-1994 determining the assessee's total income for the assessment years 1986-87 and 1987-88 at Rs. 1,72,350 and Rs. 2,25,660 respectively. The learned Departmental Representative argued that the assessee itself had filed revised returns of income showing enhanced income conceding the inflation in certain items of expenditure and therefore, the enhanced income shown should be taken to be the real commercial profits of the assessee. The learned D.R. further argued that the decision in the case of Gobald Motor Service (P.) Ltd.'s case (supra) relied on by the Assessing Officers is applicable to the facts of the present case. The learned D.R. therefore, supported the orders passed by the Assessing Officer under section 104 of the Income-tax Act, 1961. The learned D.R. stated that the order passed by the Settlement Commission is not relevant insofar as appeal under section 104 is concerned because the issue of additional tax under section 104 was not before the Settlement Commission. The learned D.R. therefore, strongly supported the orders of the Assessing Officer passed under section 104 of the Income-tax Act.
5. The learned counsel for the assessee, on the other hand, supported the order of the CIT (Appeals) and urged that the departmental appeals are not maintainable and that the provisions of section 104 ought not to be invoked in the present case. It is further urged that the assessee filed applications for settlement of its case for various years including the assessment years under consideration and the Department was represented before the Settlement Commission by the CIT(DR) and the Assessing Officer. It is submitted that Chapter XIXA of the Act providing for "Settlement of cases" is a comprehensive code in regard to the matters to be dealt with by the Settlement Commission, jurisdiction and powers and procedure of the Settlement Commission, etc. The learned counsel referred to provisions of sections 245D(4) and 245D(6) and argued that a plain reading of these provisions will bring out beyond any doubt that under the scheme of the Act governing "Settlement of cases" the Settlement Commission is empowered to pass an order in relation to the case complete in all respects. In other words, the exercise of powers by the Settlement Commission is not piece-meal but is meant to be complete and comprehensive. The learned counsel filed written submissions and stated that a combined reading of sections 245D(6) and 104 will show that in a case in which the Settlement Commission passes an order under section 245D(4), the authority to levy income-tax under section 104 can be derived only from the order of the Settlement Commission and not otherwise. The learned counsel submitted that on the date of filing of the Settlement applications by the assessee, the orders passed by the Assessing Officer under section 104 for both the years under appeal had been cancelled by the CIT (Appeals). Being aggrieved, the Department filed appeals before the Tribunal on 4-6-1990. The records of the case were before the Settlement Commission and the Department was represented by the CIT(DR) and the Assessing Officer at the time of hearing before the Settlement Commission but neither the Commissioner or his representatives raised a plea regarding levy of income-tax under section 104. It is therefore, pleaded that it is not now open to the Department to argue for the levy of income-tax under section 104 in the appeals before the Tribunal. Such a plea could have been raised by the Department before the Settlement Commission as the matter pertains to demand by way of tax which was one of the matters before the Settlement Commission. Not having done so the Department cannot invoke the jurisdiction of the Tribunal for the purpose. It is urged that the Department's attempt to pursue the present appeals amounts to resorting to duality of jurisdiction in a matter which was before the Settlement Commission and is contrary to the provisions of the Act. It is therefore, contended that the present departmental appeals are not maintainable and deserve to be dismissed as such.
6. In reply, the learned Departmental Representative, contended that the order of the Settlement Commission under section 245D(4) is conclusive only with regard to the matters dealt with therein. So long as a matter is not decided by the Settlement Commission, the same is not covered by its order. If the matter regarding additional tax under section 104 is not agitated before the Settlement Commission and no finding has been given by the Commission on such a matter, then the appeal is maintainable before the Tribunal. The learned Departmental Representative pointed out that if the arguments of the assessee's counsel are accepted, then there is no need for the provisions of section 245-I of the Income-tax Act, 1961.
7. We have looked into the facts of the case and considered the rival submissions and material on record. Under section 245C(1) the assessee has right to file an application for settlement before the Settlement Commission at any stage of a case relating to him. Case has been defined in section 245A. Clause (b) of section 245A(b) defines 'case' meaning any proceeding under the Act for the assessment or reassessment of any person in respect of any year or years, or by way of appeal or revision in connection with such assessment or reassessment, which may be pending before an income-tax authority on the date on which an application under sub-section (1) of section 245C is made. Income-tax authorities are defined in section 116 and Appellate Tribunal has not been included in the said list of authorities. Therefore, the assessee can file settlement petition only when any proceeding is pending before the IT authorities only. The provisions of section 245M are omitted w.e.f. 1-6-1987 by Finance Act, 1987. Those provisions however, provided the filing of settlement application in cases where any assessee has filed an appeal to the Appellate Tribunal under the Income-tax Act and such appeal is pending before the Tribunal. The assessee, in a case where the appeal is pending before the Tribunal, is entitled to make an application to the Settlement Commission after withdrawing the appeal from the Appellate Tribunal before the 1st day of October, 1984. The provisions of section 245M, omitted by Finance Act, 1987 w.e.f. 1-6-1987 only entitles the assessee to file applications before the Settlement Commission when an appeal is pending before the Appellate Tribunal. But at no point of time the assessee is permitted to file any application before the Settlement Commission when the appeals filed before the Tribunal are pending. The arguments of the learned counsel for the assessee have no merit in view of the provisions of Income-tax Act in Chapter XIX-A. We would like to refer to the provisions of section 245C (1) r.w. section 245(A)(b) and sections 245D(4) and 245F(4). Under section 245C(1) the assessee could file an application for settlement only in cases when the proceedings are pending before the Income-tax authorities, as mentioned in section 116 of the Act. Therefore, even the assessee cannot file application for settlement when an appeal is pending before the Tribunal. The relevant provisions of section 245D(4) and section 245F(4) and also section 245-I of the Act are as follows : "... the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks it on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in report of the Commissioner under sub-section (1) or sub-section (3)." "For all removal of doubt, it is hereby declared that, in the absence of any express direction by the Settlement Commission to the contrary, nothing in this Chapter shall affect the operation of the provisions of this Act insofar as they relate to any matters other than those before the Settlement Commission." "Every order of settlement passed under sub-section (4) of section 245D shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in this Chapter, be reopened in any proceeding under this Act or under any other law for the time being in force." A combined reading of the above sections bring into sharp focus the following legal position : (i) Under section 245D(4) the Settlement Commission could pass orders in accordance with the provisions of the Income-tax Act on the matters covered by the application and any other matter relating to cases not covered by applications, but referred to in the report of the Commissioner under sub-section (1) or sub-section (3). In the present case the issue regarding levy of additional tax was neither raised by the assessee nor by the Revenue and therefore, there was no question of passing any order under section 104 by the Settlement Commission.
(ii) Under sub-section (4) of section 245F it is clear that in the absence of any express direction by the Settlement Commission to the contrary, nothing in Chapter XIX-A : (Settlement of cases,) shall affect the operation of the provisions of the Act insofar as they relate to any matters other than those before the Settlement Commission. Therefore, when the Settlement Commission has not dealt with levy of additional tax under section 104, the operation of the provisions of section 104 is not at all affected by the order passed by the Settlement Commission.
(iii) Under section 245-I every order of settlement passed under section 245D(4) shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in Chapter XIX-A, be reopened in any proceeding under the Act or under any other law for the time being in force. Since the levy of additional tax under section 104 was not considered by the Settlement Commission, the operation of the provisions of section 104 not at all affected by the order of the Settlement Commission, in view of the provisions of section 245F(4).
8. According to the learned counsel for the assessee, the Department has not taken this issue before the Settlement Commission and it cannot invoke the jurisdiction of the Appellate Tribunal for this purpose. The Department is not invoking the jurisdiction of the Appellate Tribunal now, because the appeals were filed by the Department on 4-6-1990 much before the date of filing of settlement applications by the assessee under section 245C(1) i.e., 29-3-1993, i.e., more than two years and 9 months prior to the date of filing settlement applications. The assessee does not acquire any right to challenge the jurisdiction of the Appellate Tribunal or the invoking of jurisdiction of the Appellate Tribunal by the Department when the appeals were already filed by the Department on 4-6-1990 before the Tribunal. The Department is not invoking now the jurisdiction of the Tribunal after the decision of the Settlement Commission or after the filing of the settlement applications under section 245C(1), but the Department has already challenged the order of the CIT (Appeals) by filing appeals before the Tribunal on 4-6-1990. Once the appeals are filed by the assessee or by the Department before the Tribunal, then the Tribunal acquires jurisdiction over those matters and no authority could deprive the Tribunal's jurisdiction in the matters, unless and until the Tribunal permits the parties to withdraw the appeals filed before it.
9. There is no provision in the Income-tax Act to enable the Department to file any settlement application. It is the privilege of the assessee to file settlement application under the provisions of section 245C(1).
When the Department has already filed appeals before the Tribunal on 4-6-1990 against the orders of the CIT (Appeals) dated 27-3-1990, there is no provision in the Act which enables the Department to contest those issues before the Settlement Commission. The Department might not have agitated the matters pertaining to section 104 before the Settlement Commission because only question of law is involved and therefore, there was no fact which requires investigation. Hence the arguments of the assessee's counsel that it is not now open to the Department to plead for levy of income-tax under section 104 in the appeals before the Tribunal and the Department's attempt to pursue the present appeals amounts to resorting to duality of jurisdiction in a matter which was before the Settlement Commission, are not at all correct. Likewise, the plea of the assessee's counsel that in a case in which the Settlement Commission passes an order under section 245D(4), the authority to levy income-tax under section 104 can be derived only from the order of the Settlement Commission and not otherwise, is also not tenable. We may also mention that the Assessing Officer could consider application of the provisions of section 104 only after distributable income of a company is determined. Distributable income of a company is determined after an order under section 143(3) or 144 is passed. Therefore, after passing an order of assessment under section 143(3) the Assessing Officer has correctly determined the application of the provisions of section 104. We, therefore, dismiss the arguments of the assessee's counsel regarding invoking the jurisdiction of the Tribunal and hold that the Revenue is justified in invoking the provisions of section 104 of the Income-tax Act before the Tribunal against the order of the CIT (Appeals) dated 27-3-1990 even after the order of the Settlement Commission, which does not cover the matter relating to provisions of section 104 of the Income-tax Act, 1961. Under the circumstances, we are of the considered opinion that the Appellate Tribunal cannot deprive itself of its statutory duty to decide an appeal pending before it. The issue whether the CIT could or could not have raised the matters relating to additional tax under section 104 are totally irrelevant in these appeals.
10. On merits, it is submitted by the learned counsel for the assessee that the assessee-company is engaged in chit business. In this business substantial funds are required for disbursement to the bidders as and when auctions take place. Recovery of chit subscriptions also possess a grave problem. It is further submitted that the assessee is thus under a perennial obligation to meet the requirements of the chit business and maintain liquidity. The business is founded on trust of the chit subscribers and any default resulting from want of funds can lead to serious detriment to the assessee-company. It is submitted by the assessee's counsel that the following figures will reveal the extent of the assessee-company's financial commitments :Share capital 1,00,000 1,00,000Subscriber's Collection A/c 92,88,377 1,37,87,100 On the basis of these figures it is argued that the assessee-company has to conserve its resources to meet its obligations to its customers and that non-declaration of dividend cannot be held against the company to invoke the provisions of section 104 of the Income-tax Act, 1961.
11. The learned Departmental Representative, on the other hand, argued that the assessee was not honest in declaring its income. After the survey it was found that the assessee had suppressed its income and therefore, general principle of prudence or trade regarding requirement of funds does not apply to the case of the assessee. Reliance was placed on the Supreme Court's decision in Gobald Motor Service (P.) Ltd.'s case (supra). It is argued by the learned D.R. that the assessee had suppressed its income by inflating the expenses which itself shows that it was not in need of funds; otherwise it would have shown the correct income.
12. On a consideration of the rival submissions, we are of the opinion that the submissions urged on behalf of the revenue are correct and they have to be accepted. The circumstances and facts of the case have already been summarised by us in earlier part of this order. However, we repeat the facts briefly for deciding the issue on merit. The assessee-company filed its returns of income for the assessment years 1986-87 and 1987-88 on 3-7-1986 and 31-7-1987 admitting income of Rs. 3260 and Rs. 5770 respectively, and both the returns were accepted under section 143(1)(a). Subsequently during the course of search, the managing director of the assessee-company Sri B. Navamani admitted that expenditure under various heads as shown in the books of account from year to year have been grossly inflated. As a result of survey the assessee declared total income of Rs. 89,250 and Rs. 1,20,640 for the assessment years 1986-87 and 1987-88 and reassessments were accordingly completed. The matters did not come to an end and it is seen that the Department was pursuing investigation in the assessee's case and its managing director. The assessee therefore filed application for settlement under section 245C(1) on 29-3-1993 before the Settlement Commission for the assessment years 1986-87 to 1992-93 after the search was conducted by the Department. The Settlement Commission vide order dated 29-7-1994 determined the income of the assessee-company for the assessment years 1986-87 and 1987-88 as under : (as returned) 89,254 1,20,640Add statement filed) 60,000 60,000 ------------ ----------- As already stated, during the course of search in the case of the assessee and its managing director, Sri B. Navamani on 29-3-1990 Sri Navamani admitted that the expenditure under various heads as shown in the books of account from year to year have been grossly inflated. The learned counsel for the assessee also squarely conceded before the Settlement Commission that there has been substantial inflation of expenditure as recorded in the accounts. The Settlement Commission also held that there has been substantial inflation of expenses under various heads and that the assessee had received interest income by lending the surplus cash available as a result of inflating the expenses. It is argued by the learned counsel that even assuming that the assessee-company had not declared dividends due to the alleged inflation of expenditure, the Assessing Officer cannot constitute himself as a super director and it was for the directors of the company to decide the matters on dividend. The assessee was under perennial obligations to have high cash flow to meet the requirements of chit business which is founded on trust of the customers and liquidity of the company and hence section 104 cannot be invoked in the present case. The assessee thus claimed that the enhanced incomes were shown only with a view to purchasing peace and to avoid long-drawn litigation and looking at the case from the point of view of the company the non-declaration of dividend cannot be held against the company to invoke the provisions of section 104 of the Act.
13. In the case of Gobald Motor Service (P.) Ltd. (supra) their Lordships of the Supreme Court held as under (Head Notes) : "The commercial or accounting profits which have to be taken into consideration to see whether a larger amount than that declared by the company could be distributed in view of the smallness of the profits made, are the real commercial or accounting profits. If an item of receipt is deliberately omitted from the accounts it cannot be said that commercial principles prevent that amount being added to the profits in order to arrive at the real commercial or accounting profits.
In considering whether a larger amount than that declared by the appellant-company, transport operator, to which he had applied section 23A of the Income-tax Act, could be distributed by way of dividends, the ITO added to the profits disclosed by the books of the company, amounts of luggage collections suppressed as well as expenditure on spare parts disallowed as inflated, for the purpose of ascertaining its commercial profits available for distribution.
Held, that the two items were rightly added to the book profits in order to arrive at the true commercial or accounting profits of the appellant company." The ratio laid down by the Hon'ble Supreme Court in the aforesaid case is squarely applicable to the facts of the assessee's case. The assessee-company suppressed its real commercial profits by inflating the expenditure and the real inflation of expenditure was even not detected by the Assessing Officer even after the survey operations. The real inflation was detected by the Department after the search was conducted in the case of the assessee-company and its managing director Sri B. Navamani on 29-3-1990 after which the assessee filed applications for settlement of cases before the Settlement Commission revealing huge unaccounted income by way of inflation of various expenses. Therefore, the concealed income forms part of the commercial profits of the assessee and has to be considered as distributable income of the company in view of the aforesaid judgments of the Supreme Court in Gobald Motor Service (P.) Ltd.'s case (supra). The Assessing Officer, however, has considered only a part of the income i.e., Rs. 89,250 in the assessment year 1986-87 and Rs. 1,20,640 in the assessment year 1987-88 despite of the fact that the assessee offered income of Rs. 1,72,350 and Rs. 2,25,660 respectively in the asst. years 1986-87 and 1987-88 before the Settlement Commission, as detailed in para-12 of this order, and which figures have been accepted by the Settlement Commission vide its order dated 29-7-1994 passed under section 245D(4). Therefore, there is no merit in the argument of the assessee's counsel.
14. The CIT (Appeals) allowed relief to the assessee by relying on the Calcutta High Court decisions in the cases of Chemical Agents (P.) Ltd. (supra) and Industry Side (P.) Ltd. (supra) These two decisions are highlighted by the assessee in its cross-objections to argue that merely because the assessee-company has filed its revised returns of income showing enhanced income would not prove that the assessee had enough commercial profits to declare dividend. We have considered the relevant facts in these two decisions of the Calcutta High Court, and found to be totally different from the facts of the present assessee's case. In these cases the assessees failed to establish the genuineness of the loans which were considered as undisclosed investment and added to their income. In the present assessee's case the issue of genuineness of the loans is not at all involved. The assessee has intentionally inflated the expenditure with a view to suppress the commercial profits and taxable income. Therefore, the CIT (Appeals) himself mis-directed in applying the ratio laid down by the Calcutta High Court in the aforesaid two cases because the ratio in those cases are not at all applicable to the assessee's case. The ratio laid down by the Hon'ble Supreme Court in Gobald Motor Service (P.) Ltd.'s case (supra) is fully applicable to the assessee's case, for the reasons stated earlier. We, therefore, reverse the order of the CIT (Appeals) and confirm the assessment orders passed by the Assessing Officer.
15. In the result, both the appeals filed by the Revenue are allowed while the cross-objections of the assessee are dismissed.