There being a difference of opinion between the two members who heard this appeal, the Hon'ble President was pleased to nominate me as the Third Member under section 255(4) of the Income Tax Act, 1961 (hereinafter referred to as the Act) vide his order dated 31-8-2005 to resolve the difference. Accordingly, the matter was posted for hearing both the sides on 8-5-2006. The matter has been heard and I proceed to deal with the issues before me. The points of difference referred to me are as follows: " 1. Whether on the facts and findings and in scheme of block assessment under Chapter XIV-B of the Income Tax Act, 1961 the learned AM is right in holding that the documents seized comprised of loose papers and entries therein do not give rise to the undisclosed income of the appellant for the block period and thereby deleting addition of Rs. 25,91,105 and Rs. 10,00,000.
2. Whether on the facts and admitted findings that the loose documents on the basis of which the assessing officer made the addition pertained to the erstwhile partnership firm wherein the period had also not been indicated and having regard to the subsistence of partnership from 15-4-1982 to 1-4-1992 can it be said that the learned JM is correct in holding that: (i) these documents gave rise to income of the block period from assessment years 1986-87 to 1996-97.
(ii) The appellant was liable to be taxed for the transaction of the erstwhile partnership as undisclosed income of the assessee." The issue which the above questions try to raise can be simplified as follows : "(a) Do the seized loose papers on the basis of which additions were made belong to the erstwhile partnership firm? (b) Do the above loose papers give rise to any income for the block period? (c) Can it be said that income, if any, arising from the above loose papers belong to the assessee?" There is no dispute over the facts between the two members as is evident from the opening sentence in para 5 of the learned JM's order.
The most important and relevant fact to be ascertained is whether the transactions recorded in the loose papers pertain to the firm or to any of its partners individually or to anybody else. On this point also, in my view, there is almost unanimity between the two members. In para 15 of his order, the learned AM has observed as follows: "There is a great possibility that Shri AK Arora kept the record of partnership period when his wife was a partner in that firm. In that event action could be against the partnership firm and not against the appellant before us." Coincidently, it is para 15 again where the learned JM has observed as follows: "The revenue is not required to link the sales with the books of account since as far as they are concerned, these are unrecorded transactions of the assessee's erstwhile partnership firm which has now exclusively devolved upon the assessee who happens to be the sole proprietor of M/s. Bharat Ispat." (a) that the papers were seized not from the assessee, but from Shri A.K. Arora, assessee's brother whose wife was a partner in the erstwhile firm; (c) that the transactions recorded in the loose papers pertain to the erstwhile partnership.
In view of the above facts, the learned AM deleted the additions in the hands of the assessee, who was also a partner in the erstwhile firm but the learned JM sustained the additions on the following main grounds: (a) that the abbreviation "MLA" on the seized papers stood for "Mohan Lal Arora", the assessee; (b) that though the papers were not seized from the assessee's premises, the person from whom they were seized cannot be considered as "third party" because A.K. Arora was the brother of the assessee and that A.K. Arora's wife was also a partner in the erstwhile firm; and (c) since the assessee had continued with the business as a sole proprietor of the erstwhile firm Bharat Ispat after its dissolution, the assessee remained liable for the firm's liabilities, both, in terms of the dissolution deed as well as in law.
The learned counsel assailed the order of the learned JM on all the counts. It was submitted that no incriminating papers against the assessee were found in the course of search at his premises. There was quite an ambiguity as to whom the papers belong which were found from the premises of A.K. Arora. It was contended that when the assessee denies that the papers do not belong to him, it is for the revenue to find out as to whom it belongs. If this is impossible for the revenue, then it is equally impossible for the assessee as well. Referring to the discussion relating to "third party" in the learned JM's order, the learned counsel contended that a third party is one who is not a party to an agreement or to a transaction. Therefore, A.K. Arora from whose premises the papers were seized, was a third party vis-a-vis the assessee, though he was a related person. He also strongly assailed the legal proposition put forth by the learned JM that since the assessee had taken over the business of the erstwhile firm with all its assets and liabilities, this tax liability also devolved on him. Further, it was contended that since no person was mentioned in the seized papers, it could not be said with certainty that the transactions fell within the block period and accordingly, the charge itself failed. Thus, the learned counsel summed up his arguments by stating that despite the fact that the papers were found from the premises of a third party, instead of complying with the provisions of section 158BD, the addition was wrongly made in the assessee's hands, without any corroborating material, particularly when "MLA" did not mean Mohan Lal Arora, The learned Departmental Representative contended that in India, a lady partner would normally be a dormant partner. Generally, the husband would be looking after the affairs of the business and hence, in that sense, in the present case, virtually A.K. Arora was the partner and therefore, cannot be regarded as a third party. He stressed on the abbreviations BI/MLA appearing on the seized papers stating that the assessee was supposed to explain the meaning thereof, but instead, his reply was evasive and vague. In this connection, he also relied on the learned JM's observation that revenue was asked to do the impossible to find out what MLA stood for. It was also contended that it was the assessee who should lead the evidence to show the dates of transactions. Finally, supporting the order of the learned JM, the learned Departmental Representative contended that considering the human probabilities, circumstantial evidence and totality of circumstances, the seized papers did point to the fact that the transactions recorded in the seized papers pertained to the assessee and hence the additions were rightly made in his hands.
1 have duly considered the rival contentions. I have perused the material on record. I have read the orders of the learned members more than once. Having read the two proposed orders several times, I find it difficult to agree with the view of the learned JM. My reasons for the same follow: In the later part of para 2 above, I have summarized the grounds on which the learned JM has sustained the additions. The first reason is that according to her, the abbreviation "MLA" stands for Mohan Lal Arora, the assessee. At some places, the abbreviation "BI/MLA" has been used. It is admitted by A.K. Arora that "BI" stands for Bharat Ispat.
However, he denies that "MLA" stands for Mohan Lal Arora. According to him, they represent the initials of some broker through whom he used to deal. But the name of the broker is not mentioned. The fact that Mohan Lal Arora was a partner in the erstwhile partnership of Bharat Ispat, and that now he is the proprietor of the same Bharat Ispat, gives a fairly strong indication that "MLA" stands for Mohan Lal Arora.
However, it is not discernible, either from the abbreviation itself or from the entries, whether the transactions pertain to the erstwhile partnership or to the present proprietorship. In fact, the ascertainment of this fact is not necessary because, as observed in para 2 above, both the learned members have almost agreed that the entries relate to the erstwhile partnership. Whatever it may be, the revenue has taxed the amount in the hands of the assessce merely on probability by relying on the judgment in the case of CIT v. Durga Prasad More (1971) 82 ITR 545 (SC). There cannot be any quarrel over the proposition of human probabilities laid down by the Supreme Court.
However, what the revenue authorities have forgotten is that the Supreme Court is talking about human probabilities which has to be distinguished from mere probabilities. By 'human probabilities' is meant that in a natural course, one cannot think of certain situations - like a person consistently winning races (Sumati Dayal v. CIT ( 1995) 214 ITR 801 (SC)) or a person living princely life with a meagre income and so on. Where does such human probability comes into the present case - that "MLA" may stand for Mohan Lal Arora is a probability, but certainly not a human probability. In the present case it is more so when the papers are not seized from the assessee's premises, when the papers are not in the hand of the assessee, when A.K. Arora categorically denies it to be pertaining to the assessee. It was under these circumstances, the learned AM said in his order that the revenue should have enquired further rather than fastening the liability on the assessee merely on probability. This does not tantamount to saying that the revenue is asked to prove the impossible as has been observed by the learned JM in her order. The probability could have been a reality had there been some corroborating evidence. But there is none.
Therefore, it cannot be said with certainty that "MLA" s Lands for Mohan Lal Arora and hence the first reason for which the learned JM sustained the addition cannot stand.
The second reason given by the learned JM is that A.K. Arora is not a third party. In para 9 of her order, the learned JM has discussed as to why A.K. Arora is not a third party. After a brief discussion, she concludes that 'Shri Ashok Kumar Arora cannot be considered to be a third party Coming in the required distance of relationship or an unrelated uninterested party from the firm of M/s. Bharat Ispat'. Thus, whereas the learned AM considers A.K. Arora to be a third party as he was not a partner in the firm, the learned JM considers him not to be a third party vis-a-vis the firm because his brother and his wife were partners of the firm. Before I proceed with the discussion on 'third party', let me reiterate that here again it is established that there is no disagreement between the learned members that the transactions in the seized papers pertain to the firm. Coming back to the discussion on 'third party', as explained in The Law Lexicon by P. Ramanatha Aiyar (1997 edition), the said term denotes a person who is not a party to a contract of agreement or any matter in which the actual parties are concerned. it cannot be disputed that a partnership is a specie of a contract between the parties. Therefore, one who is not a partner is strictly a third person vis-a-vis such partnership though his relatives may be partners. However, the learned JM, as rightly argued by the learned counsel, has tried to apply the principles of equity. Now, it is well-seffled that equity and tax are strangers. Equity, again as explained by the same Law Lexicon referred to above, is the correction of that wherein the law, by reason of its universality, is deficient.
The question is, who can make this correction. In my considered view, it is only the court of law which can make such correction as was done by the Hon'ble Andhra Pradesh High Court in the case of A. Sanyasi Rao v. Government of AP (1989) 178 ITR 31 (AP) and upheld by the Supreme Court in Union of India v. A. Sanyasi Rao (1996) 219 ITR 330 (SC).
Neither the tax authorities nor the Tribunal which is the creature of the statute can do so. They have to apply the law as it is. Hence, perhaps, it does not appear to be appropriate for the learned JM to observe that "it would be stretching the settled principles of law too far in coming to the conclusion that the entries are recorded by third parties, as such, addition is not warranted here." To which 'settled principles of law' she is referring to is not known. Thus, the conclusion is that the papers were seized from the premises of a third party, they were in the hand of a third party, they contained entries pertaining to the firm for which the assessee cannot be taxed in his individual capacity.
We now come to the last reason stated by the learned JM for sustaining the addition. It is stated that since the assessee had continued with the business as a sole proprietor of the erstwhile firm Bharat Ispat after its dissolution, the assessee remained liable for the firm's liabilities, both, in terms of the dissolution deed as well as in law.
Let us first ascertain the legal position. But before that a brief recapitulation of the facts will not be out of place.
Earlier, the assessee was a partner in the firm of Bharat Ispat along with Shri H.L. Arora, Shri B.B. Arora, both brothers of the assessee and Smt. Amita Arora, wife of Shri A.K. Arora, brother of the assessee.
The partnership appears to have come into existence on 15-4-1982. The firm was dissolved on 1-4-1994 as a result of which, the three partners other than the assessee retired and the assessee continued the business as its sole proprietor. There was a search under section 132 of the Act at the residential and business premises of the assessee on 13-8-1995.
Nothing incriminating was found from this search. On the same day the premises of A.K. Arora were also searched. In the course of this search, loose papers on the basis of which additions are made in the present case were found. Some of the papers had the abbreviations 'BI/MLA' or simply 'MLA'. Admittedly,'BI'stood for Bharat Ispat, but that'MLA'stood for Mohan Lal Arora was denied. Additions were made on the ground that 'MLA'stood for Mohan Lal Arora and hence the entries therein pertained to the assessee. However, in para 6-1 have already held, concurring with the learned AM, that it cannot be said with certainty that 'MLA' stood for Mohan Lal Arora. It is also mentioned in para 2 and reiterated in para 7 above that there is no disagreement between the learned members that the entries pertained to the erstwhile partnership.
Since there was a search at the premises of the assessee, assessment has been completed under section 158BC(c) of the Act. However, he has also been assessed on the income pertaining to the erstwhile firm.
Section 158BH provides that all other provisions of the Act shall apply to assessment made under Chapter XIV-B. Section 189(1) provides that where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the assessing officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution and taken place. Further, section 189(3) provides that every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other such payable, and all the provisions of the Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum. Contrary to these legal provisions of the Act, in para 21 of her order, the learned JM has stated that ". . . everyone in a partnership firm merely by dissolving it cannot just walk away from it blithely."Again in para 22 of her orderit has been stated that "the liabilities incurred by the said concern has to be honoured by someone and unless something contrary is stated in the Dissolution Deed the one onwhom the assets devolve the liabilities have to be honoured by him." What has been stated by the learned JM is contrary not only to the provisions of the Income Tax Act, but also contrary to the general law.
In the present case, as mentioned earlier, the entries in the seized papers pertain to the firm. As discussed in para 10 above, there are adequate provisions in the Act itself to see that no income escapes assessment and hence the income could have been assessed in the hands of the firm. In fact, it ought to have been assessed in the hands of the firm only despite dissolution having taken place by following the procedure laid down in section 158BD read with section 189(i). The same cannot be assessed in the hands of the assessee. It is not proper to say, as has been stated in para 12 of her order by the learned JM, that the said person (i.e., the assessee in this case) cannot wash away his hands from the liabilities which have been fastened upon him. The entire section 189 is sufficient to take care of the situation. Thus, simply because the assessee continued the business of the erstwhile firm as its sole proprietor, the income of the erstwhile partnership cannot be assessed in his individual hands.
Finally, it is admitted that the seized papers do not make a mention about the dates of the transactions. It is on record that the partnership subsisted from April, 1982 to March, 1994. In that event, it is difficult to ascertain the exact period to which the income belongs and whether it falls within the block period 1986-87 to 1995-96 or not.
In the final analysis, I agree with the view taken by the learned Accountant Member deleting the additions of Rs. 25,91,105 and Rs. 10,00,000.
The matter will now go to the regular Bench for the final disposal of the appeal in accordance with the majority opinion.