Judgment:
Since common issues are involved in these eight appeals, the same are consolidated and disposed of by a single order for the sake of convenience.
The first common grievance in all the eight appeals relates to an addition of Rs. 1,50,000 in each of the year. M/s Jaguste Tandale & Co.
was a firm dealing in grains which started its activity in Samvat Year 2031 (assessment year 1975-76). It had two partners, namely, Shri Chandrakant Atmaram Jaguste having 50 per cent share and Shri Madhukar Ramchandra Tandale, having 50 per cent share. There was also another firm called M/s Ganesh Trading Co. which also was dealing in grains.
This firm came into existence in Samvat Year 2036 (assessment year 1981-82). The partners in the firm were the wives of Shri Chandrakant A. Jaguste and Shri Madhukar R. Tandale, In addition, there was a third partner one Shri Narayan Vasudev Kamerkar. The firms were regularly assessed to tax upto the assessment year 1985-86. Due to serious disputes amongst the partners, both the firms were dissolved on 12-11-1985, i.e., by the end of Samvat Year 2041 (assessment year 1986-87). A dissolution deed in the case of M/s Jaguste Tandale & Co.
was duly entered into by the partners. (copy placed on page 15 of the paper book-II). Similarly, the firm M/s Ganesh Trading Co. also was dissolved on 12-11-1985. Though the deed of dissolution was also entered into an 25-10-1986, it has been made effective from 12-11-1985.
Notice to the Registrar of Firms was duly given, a copy of which has been placed on page 9 of the paper book. Notice of dissolution was also given to the Income Tax Officer by letter, dated 23-2-1988 (p.14 of the paper book-II). A public notice also was given in the local newspapers, copy of which has been placed on page 6 of the paper book. These facts clearly show that not only these two firms were dissolved by 12-11-1985 (assessment year 1986-87), but their dissolution was also informed to the Registrar of firms, the Income Tax Officer and also to the general public.
There was a search under section 132 of the Income Tax Act on 4-10-1989, on the residential premises of Shri Jaguste and Shri Tandale. A statement of Shri Tandale was recorded at the time of search (pages 1 to 8 of the paper book II). At the time when the search took place, it was within the knowledge of the department that these two firms had already been dissolved. A number of questions were asked to Shri Chandrakant A. Jaguste.
Shri Jaguste did not, however, accept that the firm was dissolved. At the end, in response to question No. 36, Shri Jaguste gave following reply (English translation) : "Using the relief available under section 132(4) and on discussion with all the partners of M/s Jaguste Tandale & Co. and M/s Ganesh Trading Co. I along with other partners jointly declare Rs. 12 lakhs (Rupees Twelve lakhs only) as additional income of the two firms, details of which will be given later on. A separate letter of guarantee (Hamipatra) of all the partners jointly is being enclosed." A copy of his Hamipatra dated 4-10-1989 has been placed on page 9 of paper book No. 1.
On 7-12-1996, both the firms M/s Jaguste Tandale & Co. and M/s Ganesh Trading Co. wrote to the Commissioner, Kolhapur, a letter in regard to their application under section 273B of the Income Tax Act. In this letter, it had been stated that the Income Tax Officer had taken declaration on behalf of the partners that they were disclosing the income for assessment years 1986-87 to 1989-90 of Rs. 12 lakhs as additional income. The above two firms were not carrying on any business activity from 1985 to 1989. From the accounts, it was seen that there were some discrepancies in the accounts which the assessees were not able to explain. There were some disputes amongst the partners and they had tried to settle the same through arbitration. To give their say to the arbitrator, the partners had manipulated the accounts and put some wrong entries in the statement which were not relevant.
When the Income Tax Officer visited the residence of the partners and enquired about the entries, it was not possible to explain the same; assessments of both the firms and partners were finalised upto 1985-86.
In order to avoid enquiries and to get rid of it, all the partners had given in writing that they were disclosing additional income for the assessment years 1985-86 to 1989-90 of Rs. 12 lakhs. Accordingly, a request was made to the Commissioner to settle the matter for consideration of proposal on taxing the additional income of Rs. 1,50,000 for each year from the assessment years 1986-87 to 1989-90 in the case of both the firms.
By his order dated 27-10-1993 (placed at page 13 of the paper book I), the Commissioner passed order under section 273A(3) of the Act. He referred to the petitions of the assessee dated 8-12-1989 and 7-12-1990. In his order, he has referred to the concerned years as assessment years 1981-82 to 1986-87. The Commissioner stated that the petitions of the assessees were vague and were, therefore, rejected.
Since the firms had not filed returns for the assessment year 1986-87 onwards, notices under section 148 were issued on 14-11-1990, to both the firms. It appears that both the firms did not file returns for the assessment year 1986-87, but filed returns for the assessment years 1987-88 to 1989-90 declaring NIL income.
The assessing officer completed the assessments ex parte under section 144 read with section 147 and added a sum of Rs. 1,50,000 in each of the year as per the declaration under section 132(4) of the Act.
On appeal, the Commissioner (Appeals) deleted in all the years addition of Rs. 1,50,000 made on the basis of declaration under section 132(4), vide detailed order in the case of M/s Jaguste Tandale & Co.
In M/s Ganesh Trading Co., these additions were also deleted by the Commissioner (Appeals) by following his reasoning in the case of M/s Jaguste Tandale & Co. The reasons given by the Commissioner (Appeals) are as follows : (i) The search and seizure operation took place on 4-10-1989, i.e., more than four years of the date of dissolution of the firms. The dissolution deed had been seized during the course of search. The newspaper cutting containing the public notice dated 2-1-1987 was on record to indicate that the notice was given to the public about the dissolution of the firm.
(ii) In the statement under section 132(4), one of the partners, viz., Shri C.A. Jaguste, in answer to question No. 5 had clearly stated that the said firm had closed with effect from Samvat Year 2042, i.e., 12-11-1985.
(iii) When the firms had been dissolved, the partner has no locus standi to declare income relatable to the past years.
(iv) The declaration had been made of a total sum of Rs. 12 lakhs by one of the partners on behalf of other partners as well as on behalf of the sister concern, viz., M/s Ganesh Trading Co. whereas none of the partners of M/s Ganesh Trading Co. in their statements under section 132(4) had made any declaration.
(v) No books, no papers or any proof had been found during the course of search to indicate any possibility of such an income, and no seizure of any valuable asset had been made during the course of search and seizure operation. Therefore, the declaration is vague in a lumpsum amount which was subsequently spread over in four years in an equal amount between the two firms.
The Commissioner (Appeals) concluded that in essence the declaration for all the years is not based on any material and it does not indicate that any income was actually earned. As regards the settlement petition filed by the assessee, the Commissioner (Appeals) held that even the proposals made in the settlement petition which were turned down by the department would not make any non-income as the income of the assessee.
He accordingly deleted the addition of Rs. 1,50,000 made in each of the years, in view of the following judgments :Pullangode Rubber Products Co. Ltd. v. State of Kerala (1973) 91 ITR 18 (SC);Kishori Lal v. Mt. Chaltibai AIR Shri P.V. Kulkarni, the learned Departmental Representative submitted that the Commissioner (Appeals) erred in not appreciating the fact that the person who had substantial interest in the firms of M/s Jaguste Tandale & Co. Kolhapur and M/s Ganesh Trading Co. Kolhapur, had voluntarily opted to declare undisclosed income by virtue of section 132(4) for the assessment years 1986-87 to 1989-90 and the department had just brought to tax the income offered for taxation in accordance with the option exercised by the interested person on behalf of the said firms. He further submitted that the Commissioner (Appeals) erred in not appreciating that the declaration made under section 132(4) has evidentiary value as contemplated in the said section and the said evidence was utilised for bringing to tax the undisclosed income voluntarily offered for taxation for the assessment years 1986-87 to 1989-90. He further submitted that the Commissioner (Appeals) erred in not appreciating the fact that the declaration of income made by the interested person (partner) was not under pressure or duress, as such a pressure or duress was not borne out by the records. Accordingly to the learned Departmental Representative the Commissioner (Appeals) erred in not appreciating the fact that by deeming fiction of law as contained in section 176(3A), the dissolved firm had remained continued after its dissolution and the conduct of the interested person (partner) in resorting to section 132(4) and in opting to declare income under section 132(4) itself supports the continuance of the firm. In support of this contention, he relied upon by the following judgments : Shri K.A. Sathe, the learned Counsel for the assessees strongly supported the orders of the Commissioner (Appeals).
We have considered the rival submissions and perused the facts on record. Under section 132(4) of the Act, the authorised officer can examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, etc., and any statement made by such person during such examination may be used in evidence under the Income Tax Act, Explanation added to this section states that examination of any person under this section need not be merely in respect of books of account, other documents or assets found as a result of search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceedings under the Act. The section says that no doubt the authorised officer is entitled to ask any questions relevant to the issue in hand, but there is no provision for making any declaration of any income. A declaration of income presupposes application of mind of the concerned person to the various facts and drawing conclusion therefrom which be both factual as well as legal. In this case, when one of the partners was examined, there was in the course of examination no question relating to the years subsequent to the search. There was no material found during the course of search which could throw light on the income-earning activity of the firms subsequent to the dissolution. In fact, the declaration of Rs. 12 lakhs itself shows an ad hoc figure and the declaration seems to have been made by one partner Shri Jaguste who was not even the partner of M/s Ganesh Trading Co. If one goes by the declaration, the declaration is only by Shri C.A. Jaguste. It is no doubt true that, apart from the statement under section 132(4), the partners of both the firms have given a declaration, dated 4-10-1989, which does not specify the year for which the declaration is made, as also bifurcation between the firms. Since this letter is not under oath, it cannot be regarded as part of the statement under section 132(4).
We have perused the applications made to the Commissioner Kolhapur, where the assessees wanted spread over to be given to the amount of Rs. 12 lakhs not to the assessment year 1986-87 onwards, but earlier years, i.e., from assessment years 1981-82 to 1986-87. But such proposal has been turned down by the Commissioner. If the proposal made by the assessees was turned down, such an offer for being assessed on any income cannot be used by the department for making assessment. In Additional CIT v. Kanhayalal Jessaram (1977) 106 ITR 168 (MP), the Hon'ble Madhya Pradesh High Court has held that, "if the offer for settlement is not accepted and if the department insists on deciding the assessment case on merits, any facts said to be disclosed in such offer have to be altogether excluded. It was incumbent on the department to have furnished the requisite material showing that the assessee's son D was the assessee's benamidar. Any admission made in the offer for settlement under section 271(4A) could not be accepted when the offer was not accepted by the department." Similar observations have also been made by the Hon'ble Calcutta High Court in CIT v. National Alloy & Metal Works (P) Ltd. (1989) 176 ITR 299 (Cal).
As regards the evidentiary value of the statement given during the course of search under section 132(4), we rely upon the decision of the Ahmedabad Bench in Asstt. CIT v. Mrs. SushiIadevi S. Agarwal (1994) 50 lTD 524 (Ahd-Trib) to which one of us (A.M.) was a party. It was observed by the Ahmedabad Bench that a search operation under the Income Tax Act is a lawful invasion on the privacy, life and property of a citizen which may affect him mentally also. There is every likelihood of a statement tendered to or recorded by the search officers on the search day being incoherent or at variance with subsequent statements tendered to or recorded in any further or collateral proceedings, but to make addition in the returned income or to put such person to sufferance or to adverse consequences on such statement is not justified in law. All that is stated by any deponent on the search day should not be taken as the truth, the whole truth and nothing but the truth. Such statements indubitably have evidentiary value and credibility in law, but the same should be viewed with great caution, particularly when the same are denied, varied or retracted or established by the defendant to have been obtained or given under mental stress, coercion, undue influence or due to any other abnormal condition and circumstances, etc. Therefore, a statement made under section 132(4) of any income on behalf of the assessee-firms has to be discounted to a large extent and in any case, in absence of there being any material to support such declaration, it could not have been relied by the department.
As far as assessment years 1987-88 to 1989-90 are concerned, it is an admitted and undisputed position that both the firms did not exist in these years. Once the firms having been legally dissolved, no income could be said to have arisen to these firms even by concession of any of the partners of these firms. It is, therefore, held that there is no case for adding the amount of Rs. 1,50,000 in the assessments of both the firms for the assessment years 1987-88 to 1989-90.
A statement of the partner making any declaration of income would not have any evidentiary value, unless it is supported by any documentary proof. In this behalf, reference may be made to the decision of the Honble Andhra Pradesh High Court in CIT v. Shri Ramdas Motor Transport (1999) 238 ITR 177 (AP). In that case there was a search in the premises of the company and all its managing directors and other directors in February, 1988. No unaccounted money or incriminating documents were discovered during the course of search. During the course of assessment, the assessee had claimed deduction of Rs. 97,67,301 being commission on sale of spare parts. The Income Tax Officer relying on the statements of the managing director of the assessee in the course of search disallowed a sum of Rs. 56.16 lakhs.
In appeal, the Commissioner (Appeals) sustained disallowance to some extent. In the Tribunal, appeals filed by the revenue were dismissed and the appeals filed by the assessee were allowed. On a reference to the High Court, the Hon'ble Andhra Pradesh High Court held that under the provisions of section 132(4) as it existed at the relevant time, question of examining any person by the authorised officer would arise only when he finds such person to be in possession of any undisclosed money or books of account. But in the case before them, it was admitted by the revenue that on the dates of search, the department was not able to find any unaccounted money, unaccounted bullion nor any other valuable articles or things, nor any unaccounted documents nor any such incriminating material either from the premises of the company or from the residential houses of the managing director and other director. In such case, in absence of any such material, question of examining them by the authorised officer during the course of search and recording any statement from them under section 132(4) did not arise. Attention of the Hon'ble High Court was drawn to Explanation to section 132(4) which was introduced subsequently and it was urged that such Explanation was clarificatory in nature and could apply to the concerned period also.
In that context, even on that basis, the Hon'ble High Court observed that the declaration had no evidentiary value since the Tribunal had recorded a finding of fact to the effect that the statement of the managing director or that other directors had no evidentiary value, because it was not supported by any documentary proof. In the case before us, during the course of search no incriminating material was found, no books of account of the two dissolved firms were found; on the other hand, dissolution deeds were found which duly established that the firms had since been dissolved on 12-11-1985.
. Reference may also be, made to the decision of this Bench in the case of Kasat Paper & Pulp Ltd. v. Asstt. CIT (2000) 74 lTD 455 (Pune-Trib).
Reference is invited to the observations in para 8 to the following effect : "Secondly, there cannot be estoppel against the legal principles and, therefore, if the income does not accrue to the assessee, the same cannot be taxed merely on the ground that it was offered for taxation.
The assessee can always retract if the amount offered cannot be taxed under the law." In view of the above, we hold that the declaration made by one of the partners on ad hoc basis and letter of an offer made under section 273A to get assessed at an amount of Rs. 1,50,000 for each of the years 1986-87 to 1989-90 do not have any evidentiary value and cannot be relied upon in making the assessment when the firms had already been dissolved/closed after 1986-87. There were no papers or documents indicating from which source income was earned or which assets did it represent.
As regards the four authorities on which the learned Departmental Representative has placed reliance, they are all relating to the subject of assessing the firm after dissolution, but none of these authorities permit any assessment being made of any income after the firm has been dissolved. In fact, in Nagarlal Baijnath v. CIT (supra) what the Hon'ble Bombay High Court held was that even after discontinuance of the firm on dissolution or otherwise, the firm can be considered as continuing so far assessment of its pre-dissolution income is concerned and the assessment or reassessment of such a firm after dissolution can under section 44 of the Income Tax Act, 1922 be made in the same manner as under the Income Tax Act. (Emphasis here italicised in print, supplied).
In Shivram Poddar v. ITO (supra), it was held that a firm by its discontinuance of its business does not cease to be liable to pay tax on the income earned by it. A firm if it has discontinued its business, whether it is dissolved or not either under section 25(2) in the year of account in which he discontinued business or year of assessment.
There is no dispute about these legal provisions. In fact under section 189 of the Income Tax Act, an assessment of a dissolved firm is permissible. We are not concerned in this case about the validity of the assessment of a firm which is already dissolved. The question here is whether a dissolved firm could be said to have earned any income after its dissolution had become final and none of the authorities cited by the department support its case. The learned Departmental Representative's reliance on section 176(3A) is also misplaced in view of the fact that there is no independent evidence found during the search that any income in fact was earned after dissolution.
In the light of above discussion, we concur with the findings of the Commissioner (Appeals) and decline to interfere. The common grounds raised in all the eight appeals are accordingly dismissed.
In the case of M/s Jaguste Tandale & Co. relating to assessment year 1986-87 (ITA No. 743/Pn/94) two more grounds have been raised which are not common to the other years and to the case of M/s Ganesh Trading Co.
The same are discussed and disposed of as under.
"On the facts and in the circumstances of the case, the Commissioner (Appeals) erred in deleting the sums of Rs. 5,34,992 and Rs. 3,16,000 representing excess liabilities treated by the assessing officer as income." The facts here are that the assessing officer referred to the agreement dated Nil made on stamp paper, dated 3-4-1986, which forms part of the Panchanama, as per which the liabilities taken by Shri C.A. Jaguste and Shri M.R. Tandale, exceeded by Rs. 5,34,992 over the liabilities shown in the balance sheet of the firm relating to assessment year 1986-87.
The details have been given by the assessing officer in para 6 of the assessment order. The assessing officer observed that since the assessee had not written the account books after 12-11-1985, as the business was closed, therefore, he requested the two partners of the assessee-firm to explain the liabilities undertaken by them as per the stamp paper, dated 3-4- 1986. It was explained that the liabilities were taken as per the working by the accountant Shri Nagvekar and the partners were not aware of the liabilities of the firm. The assessing officer did not accept the above contentions by observing that the two partners had signed the said agreement and, therefore, they could not take the plea that they were not aware of these liabilities. The assessing officer observed that the liabilities were in excess as compared to those shown in the balance sheet. There was also a minus difference of Rs. 27,842. The assessing officer, therefore, concluded that the sum of Rs. 27,842 was paid after 12-11-1985, and, therefore, the amount as per balance sheet was more than that shown in the agreement. He, therefore, treated this sum of Rs. 27,842 as unaccounted payment. According to him, since the partners could not furnish the dates of payment, it was treated as unaccounted payment. The assessing officer further observed that for extra liability there must be excess assets otherwise balance sheet would not tally. He observed that the excess liability had corresponding assets in the form of 'on money' or the amounts might have been spent but not shown to the department.
According to the assessing officer, this conclusion was supported by the fact that the amount of Rs. 27,842 out of this excess liability had been paid by the partner which is also not reflected in the books of account. According to the assessing officer, this fact showed that the partners had unaccounted money which was not shown in their regular books of account and the entire scale of the business of the assessee-firm was understated. The assessing officer worked out such income at Rs. 5,62,816 and added the same to the income of the assessee-firm. He also referred to para 3 of serial No. 32 being loose paper found at the residence of Shri C.A. Jaguste, being a copy of the resolution, dated 11-9-1989, showing that both the partners S/Shri C.A.Jaguste and M.R. Tandale had paid the liabilities of Rs. 3,00,137 and Rs. 3,07,612, respectively. As per this document, the remaining liability to be paid by the assessee was shown at Rs. 6,29,914. On the basis of these payments and the balance amount remaining, the assessing officer observed that the firm's liabilities at the close of the business was of Rs. 12,37,763. According to the assessing officer, these liabilities were not mentioned in the document, dated 3-4-1986 as referred to above. He also mentioned that the liability to the extent of Rs. 3,16,000 as mentioned in the document, dated 3-4-1986, was not reflected in the regular books of account. The partners explained before the assessing officer that since there were disputes amongst the partners, number of such documents were prepared from time to time.
However, the assessing officer observed that the documents were prepared in the presence of the Panchas and were signed by both the partners and, therefore, displayed the actual liabilities of the business. Hence he added this sum also to the income of the assessee.
The two additions of Rs. 5,34,992 and Rs. 3,16,000 were challenged before the Commissioner (Appeals). The Commissioner (Appeals) noted that the assessing officer had accepted the balance-sheet and the books of account as filed before him by the assessee. On the basis of this balance-sheet and the books of account, the assessing officer had adopted the net profit as per profit and loss account while computing the income of the assessee. He had not rejected the books of account.
In the two impugned documents, although the liabilities had been found to be in excess since after dissolution of the firm, the partners had claimed inflated figure so as to grab the assets of the firm. However, in the two statements, no corresponding assets had been identified.
These statements did not contain the balance-sheet. Holding that the assessing officer had presumed that when there is excess liabilities, there may be excess assets or the appellant must have spent the on money, he deleted the impugned additions.
Shri P.V. Kulkarni, the learned Departmental Representative relied upon the order of the assessing officer. On the other hand, Shril Sathe, the learned Counsel for the assessee, strongly supported the order of the Commissioner (Appeals).
We have considered the rival submissions. From the facts stated above, it is evident that the assessing officer has just presumed that when there are excess liabilities, there may be excess assets or the assessee must have spent the on money. No proof of the possession of the on money or spending of the secret profits or availability of the assets has been brought on record nor any proof was found during the course of search and seizure operation. Therefore, no addition can be made on account of the excess liability, unless the balance sheet, prepared by the assessee has been rejected and another balance sheet consisting of excess amount of assets is prepared or found which could show that the excess liability represented the suppressed profits or suppressed asset. Addition of a liability can be made under the Income Tax Act, provided it is recorded in the books of account and if it is found as unexplained. In the case of the assessee, it is neither. The creditors has not confirmed the excess liabilities and the excess liabilities have not been provided in the balance sheet. There is no provision to the effect that liability which is not recorded in the books should be added to the income. We accordingly hold that the Commissioner (Appeals) is justified in deleting the two impugned additions. This ground accordingly fails and is dismissed.
"On the facts and in the circumstances of the case, the Commissioner (Appeals) erred in deleting the sum of Rs. 27,924 on the ground that the payment of the sum was made after the end of the year." This ground is against the addition of Rs. 27,824, the facts about which have been discussed in the preceding paras. The addition has been deleted by the Commissioner (Appeals) with the following remarks : "I have considered the contentions of the appellant. The assessing officer himself has observed on facts that the payment of the sum of Rs. 28,824 was made after the end of the year. Therefore, he was not justified in making the above addition to the income of the year under consideration. The same is, therefore, deleted. The appellant gets relief of Rs. 27,824 in respect of this ground." After hearing both the parties, we do not find any infirmity in the above remarks of the Commissioner (Appeals) and accordingly decline to interfere. This ground also fails and is dismissed.