This appeal of the assessee is directed against the order of the CIT(A) dated 6-3-2002 for the above block period on the ground that the CIT(A) erred in sustain ing the addition of Rs. 50 lakhs towards repayment of dues with Catholic Syrian Bank, Pondicherry.
The brief facts of the case are that there was a search action in the case of Smt. A.V. Shanthi, who was one of the Directors of the assessee company on 11-9-1997. Consequent upon the search, notice under section 158BD of the Income Tax Act was issued on 22-6-1999 to the assessee-company to file a return of income for the above block period.
In response to the notice, the assessee filed return of income on 2-9-1999. After hearing the parties, viz., Smt. A.V. Shanthi, the Director of the assessee-company and the authorized representative of the assessee, the assessing officer passed the block assessment order on 28-6-2001, determining the income at Rs. 59,40,762 as against the declared income of Rs. 3,56,363 and made impugned addition on Rs. 50 lakhs on the reason that the balance sheet filed by the assessee along with the return of income reflects an amount of Rs. 50 lakhs outstanding with Bank of India. But, actually as per information with him no liability was existing as on 31-3-1995. Instead, the loan was with Catholic Syrian Bank and the assessee has repaid the loan with Catholic Syrian Bank and the source of the third party deposit through which the loan was repaid was not explained to the assessing officer.
The assessee being aggrieved against the addition of Rs. 50 lakhs carried the matter in appeal before the CIT(A), who has confirmed the addition. Further aggrieved, the assessee is in appeal before us on this issue.
At the outset, the learned counsel for the assessee challenged the legality of the action of the assessing officer in passing the assessment order without invoking the provisions of section 2(35) of the Act, as the assessing officer has not brought on record the principal officer for the purpose of assessment and submitted that Notice under section 158BD was issued in the name of M/s. Nikki Enterprises (P) Ltd., where there was only one Director at the time of issue of notice. Actually, there were two Directors, out of which one Director, Shri S.M. Pandian expired on 4-4-1996. Subsequent to his death, no new Director was appointed in his place. The learned counsel for the assessee vehemently argued that as per Companies Act, being a Private Limited Company, the company must have two Directors for its existence. Since the strength of the Directors on the date of issue of notice or on the date of passing of the assessment order was below two, the company ceased to exist and any order passed in the name of such company will be deemed to be null and void. He further submitted that this is the block assessment for which block assessment income has to be determined in accordance with the provisions of section 158BB(1) of the Act purely on the basis of evidence found as a result of search and such other materials or information as are available with the assessing officer. In the present case, the assessment has not been framed on the basis of any evidence gathered during the course of search and any other evidence relatable to evidence collected during search.
Therefore, the assessment concluded by the assessing officer is bad in law. For this purpose, he relied on the judgment of Hon'ble Delhi High Court in the case of CIT v. Ravi Kant Jain (2001) 250 ITR 141. He also argued that in the block assessment, undisclosed income cannot be presumed. For this purpose, he relied on the following judgments :D.N. Kamani (HUF) v. Dy. CIT The learned counsel for the assessee further submitted that there is no jurisdiction to pass the block assessment order by the assessing officer because the assessee has filed the return of income for the assessment years 1994-95 and 1995-96 with the Company Circle IV(3), Chennai and the case was transferred from Company Circle IV (3) Chennai to Central Circle I(5), Chennai, without giving intimation to the assessee which is required under section 127 of the Act. For this purpose, he relied on the decision of the Tribunal in the case of All India Children Care & Educational Development Society v. Jt. CIT (2003) 87 ITD 209 (All-Trib). Further, he submitted that the order does not conform to the requirement of section 158BD which requires that satisfaction of any undisclosed income belonging to any person other than the person with respect to whom the search was made was to be recorded. For this purpose he relied on the judgment of Bangalore Bench of the Tribunal in the case of Y. Subbaraju & Co. v. Asstt. CIT (2004) 270 ITR 174 (AT). The learned counsel for the assessee vehemently argued that the assessing officer has not recorded the satisfaction as warranted under section 158BD.The learned counsel for the assessee also submitted that the order passed by the CIT(A) is in violation of principles of natural justice as adequate opportunity of hearing was not given to the assessee. The CIT(A) gave only one opportunity on 4-3-2003 to appear before him for which the assessee filed an adjournment letter on 4-3-2002 which was not considered by the CIT(A) and he passed the order on 6-3-2002 without hearing the assessee. The learned counsel for the assessee submitted that the alleged evidence of loan account was available with the assessing officer even before the search action as the assessee filed the return for the assessment year 1995-96 on 25-3-1996 with the Company Circle I(5) and the assessee has disclosed the details of bank loan in its regular return and hence, it cannot be the subject-matter of block assessment. For this purpose, he relied on the decision of the Tribunal in Smt. Sivabala Devi's case (supra). The learned counsel for the assessee further submitted that though the assessee has not raised the ground regarding legality of passing block assessment order, the assessee is at liberty to raise any issue at any stage of proceedings.
For this purpose, he relied on the Full Bench decision of the Kerala High Court in the case of Syed Alavi v. State of Kerala 48 STC 150. He further submitted that the block assessment order should be passed with the approval of the CIT and the order passed without the approval of the CIT becomes null and void as held in (sic) 65 ITR 108. The plea of the assessee that the entire loan was settled through one SM Pandian who was the former Director of the assessee-company and the company does not have any deposit with the bank. The company's turnover for the assessment years 1993-94 to 1996-97 is very low and there is no possibility of earning such huge amount by way of profit by the assessee.
The learned Departmental Representative, on the other hand, submitted that the balance sheet filed by the assessee along with the return of income reflects an amount of Rs. 50. lakhs outstanding with Bank of India.
But, actually no liability was existing as on 31-3-1995. Instead, the loan with Catholic Syrian Bank and the assessee has repaid the loan with Catholic Syrian Bank and the source of the third party deposit through which the loan was repaid was not explained to the authorities below.
Hence, the lower authorities are justified in making the addition and the assessing officer has got the information regarding loan through the entries in the bank account which was found during the course of search action.
We have heard the rival submissions and perused the records.
Admittedly, there was a search action on 11-9-1997 at the premises of Smt. A.V. Shanti. Subsequent to the search, the Investigation Officers found that the assessee is having Current Account Bearing No. 747 with Bank of India, Usman Road Branch, Chennai, and the same was recorded in Inventory statement of bank accounts found at 184, Rangarajapuram, Main Road, Kodambakkam, Chennai which was named as document No. MAK/Bank a/cs/NS. In this bank account the assessee has deposited a sum of Rs. 46 lakhs on 28-1-1995 and sum of Rs. 4 lakhs on 11-3-1995 and these funds have came from outward clearing, i.e., from Pondicherry. Further enquiry it was observed that the assessee had a loan account with Catholic Syrian Bank, Pondicherry. After going through the file, the assessee observed that there was prima facie case and on that reason the file was transferred from Company Circle IV(3) to Central Circle I(5) under section 127(3) of the Act.
The revenue after recording the reason for issuing the notice under section 158BD, the notice under section 158BD was issued on 22-6-1999.
Section 27(3) does not provide for giving any opportunity to the assessee while effecting such transfer, especially when both the assessing officers are located in the same city. Accordingly, we do not find any merit in the argument of the assessee on this account.
Consequently, we reject this ground.
Regarding the requirement of section 158BD, we are of the opinion that the requirement of section 158BD was duly complied with and only after going through the indiscriminate documents found during the course of search, the files were handed over to the concerned assessing officer and reasons were duly recorded for initiating proceedings under section 158BD. Hence, we do not find any infirmity in invoking the provisions of section 158BD in this case.
Regarding non-invoking the provisions of section 2(35) of the Income Tax Act, we are of the opinion that the company was having perpetual existence. It is the duty of the assessee to inform the change in the management of the company and when it received the notice for assessment, etc. The principle of doctrine of Indoor Management is applicable and in the present case, the assessee prudently acted in response to the notice issued by the assessing officer and filed the return of income against notice under section 158BD and appeared before the assessing officer for assessment proceedings and received the assessment order and filed appeal against the assessment order and sought adjournment before the CIT(A). Now, the assessee- company held (sic) that the Directors in the assessee-company were below two and the return filed by the assessee was non est in law and demand arising out of the assessment order was not enforceable. This plea cannot be admitted at this stage. The conduct of the assessee proves beyond doubt that it was accepted all the proceedings of the department. In view of this position, we reject this plea taken by the assessee.
Regarding determination of undisclosed income in the block assessment, we have perused the material available on record. Admittedly, the assessee has shown in the balance sheet as on 31-3-1995 in Schedule I that an amount of loan of Rs. 50 lakhs was outstanding with Bank of India, Pondicherry, but when the assessing officer enquired, the loan was not actually existing. Actually it was found that the assessee is having Current Account Bearing No. 747 with Bank of India, Usman Road Branch, Chennai, wherein the assessee has deposited a sum of Rs. 46 lakhs on 28-1-1995 and sum of Rs. 4 lakhs on 11-3-1995 and these funds have come from outward clearing, i.e., from Pondicherry. Further enquiry it was revealed that the assessee had a loan account with Catholic Syrian Bank, Pondicherry which was closed by assessee and the source from which it was repaid has not explained to the satisfaction of assessing officer. The plea of the assessee that the entire loan was settled through one SM Pandian who was the former Director of the assessee-company and the company does not have any deposit with the bank. The company's turnover for the assessment years 1993-94 to 1996-97 is as follows : As such, the assessee counsel argued that the company could not have earned an amount of Rs. 50 lakhs from the business in view of meagre turnover in the above years. This plea of the assessee cannot be accepted on the reason that the assessee-company has been carrying the business and sources from which the bank loan has been repaid is not disclosed even before us. On the other hand, only raised the arguments on technicalities. Further, the assessee has not denied that loan amount of Rs. 50 lakhs has been repaid and there was no existence of loan as on 31-3-1995. In spite of this, the assessee has shown in its balance sheet that the amount was outstanding with the Bank of India.
It is to be noted that where any sum is found credited in the books of an assessee maintained in any previous year and the assessee offers no explanation about the nature and source thereof, or the explanation offered by the assessee is not in the opinion of the assessing officer satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year/s. Whenever, the explanation offered by the assessee is false or unbelievable or that the assessee gives evasive replies to the queries regarding the nature, source of credit entry, the assessing officer could be presumed the whole receipt to be revenue receipt and tax accordingly. Thus, it is the duty of the assessee to explain the nature and source of credit found in the books of account and when there is suspicion about entries regarding the alleged borrowings of substantial amounts, it is for the assessee to show that the entries are genuine and represented borrowings from a genuine persons or concerns. On production of prima facie evidence in discharging the burden, the onus shifts to the revenue to make out a case that the entries were genuine. The assessee is required to establish the following : The assessee is required to prove that the party in whose name the amount is credited is not a fictitious party but a real party and entry in the books of account is genuine. And mere furnishing of the particulars of party is not enough and similarly payment by account-payee cheque is also not sacrosanct nor can it make a non-genuine transaction genuine, as held in the case of CIT v.Precision Finance (P) Ltd. (1994) 208 ITR 465 (Cal). Where the assessee has established only the identity of the creditor and nothing more, the cash credits could be treated as the income of the assessee as held in the case of Shankar Industries v. CIT (1978) 114 ITR 689 (Cal) and mere production of confirmation letter is not sufficient to discharge onus which lies on assessee, as held in the case of Ravindra Traders v. ITO 16 DTC 621. Where there is an unexplained credit, the assessee could hold that it would be income of the assessee and it is for the assessee to prove that even if the cash credit represents income, it is the income from a source which has already been taxed or exempted from taxation as held in the case of Asstt. CIT v. Mohan Engg. Co. (1985) 151 ITR 571, (Pat), V. Datachinamurthy v. Asstt. DIT (I984) 149 ITR 341(Mad), A. Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC) and Samati Dayal v. CIT (1995) 214 ITR 801 (SC). The assessing officer is free to add those credits to the income of the assessee where the explanation furnished by the assessee regarding genuineness of the credits is not satisfactory as held by Hon'ble Supreme Court in the case of Jamnaprasad Kanhaiyalal v. CIT (1981) 130 ITR 244, ITO v.Rattan Lal (1984) 145 ITR 183 (SC), CIT v. S. Kamaraja Pandian (1984) 150 ITR 703 (Mad), CIT v. United Trading & Construction Co. (2001) 247 ITR 819 (SC) and CIT v. K. Palaniappan (2000) 242 ITR 719 (Mad).
Regarding the plea of the assessee that the block assessment for which block assessment income has to be determined in accordance with the provisions of section 158BB(1) of the Act, the section 158BB(1) reads as follows : "The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the assessing officer and relatable to such evidence as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined." A careful reading of the above section reveals that the undisclosed income for the block period could be determined not only on the basis of evidence found as a result of search or requisition of books of account but also on the basis of such other material or information as are available with the assessing officer relatable to such evidence. It is an admitted fact that the assessee has closed the loan account with the Catholic Syrian Bank. The source from which it was closed was not explained to the department. The bank account was unearthed during the course of search. The bank account has given birth to the information regarding existence of loan account and closure of loan account. The assessee is duty bound to explain source from which the existing loan account was closed or repaid. As per section 158BH, while computing the undisclosed income of block period, all other provisions of Income Tax Act shall apply to the assessment made under Chapter XIV-B. In view of this, the assessing officer is justified in making the addition on this account. The assessee should have produced the details of the source of deposit from which loan was repaid. The assessee has failed to do so.
Even before us the assessee has not explained the source from which the said loan was repaid. When the appeal was filed before the CIT(A), the CIT(A) has issued notice for hearing on 4-3-2002. The assessee filed an adjournment petition on 4-2-2002 and failed to appear on that date and the CIT(A) passed the appellate order on 6-3-2002 on the basis of facts available on record and decided the issue on merit, in accordance with law. However, we heard the matter at length and consider all the aspects of the case in the interest of justice. We are of the opinion that the assessee is not interested in explaining the real source of repayment of loan and it wants to hide the same. Hence, we have no hesitation in confirming the order of lower authorities and same is confirmed.