D.K.B. and Co. Vs. Assistant Commissioner of Income - Court Judgment

Excerpt:
this is an appeal by the assessee against the confirmation of addition of rs. 2,50,000 and rs. 11,11,716 made under the head "other sources".the facts relating to these additions are as under : 2. during the year ending on 31st march, 1986 relevant to the asst. yr.1986-87, the assessing officer noticed that the following tax remittances by the firm were not recorded in the books of the accounts of the firm : the assessees explanation was that this amount was part of the disclosure made by the assessee-firm, m/s d.k.b & co., by shri r.bharathan, who was looking after the affairs of the firm. as the assessing officer was not satisfied with the explanation, he treated the entire remittances as unexplained investments of the firm.3. in the books of the accounts of the assessee there was an opening balance of rs. 2,50,000. it was explained that the amount had come out of the following : lease rent received from d.k.b. & co., abkari contractors, quilon for the years ended 31st march, 1984 and 31st march, 1985 after expenses such as repairs ...the assessees explanation was rejected by the assessing officer for the reason that the lease rent of rs. 1,71,114 was not paid by the other firm, viz, d.k.b. co. and that there was no evidence for the sale of closing stock. further, there was no evidence that assessee. these additions were made originally in the assessment order dt. 29th march, 1989 and the same were confirmed in appeal. on further appeal the tribunal in ita no. 802/coch/89 dt. 30th march, 1990 (r/w corrigendum dt. 15th june, 1990) restored the issue to the file of the assessing officer with the following observations : "thus, though the unaccounted income assessed was rs. 41 lakhs for 1983-84 the evidence collected by the department revealed that only rs. 10.5 lakhs had been distributed amongst the partners leaving a balance of rs. 30.5 lakhs. it is, however, evident that in the appeals coming before this tribunal in the cases of sri bharathan, smt. ponnamma and smt. indira rani, claims are put forward that various deposits in a large number of bank accounts and also purchases of drafts in their cases are coming out of the above referred figure of rs 41 lakhs. as this tribunal is a fact finding body, it is difficult to take a decision on facts in the absence of various details considered by the department for arriving at the figure of rs. 41 lakhs and also without knowing whether the department had accepted the availability of rs. 41 lakhs are reduced by rs. 10.5 lakhs already distributed amongst the partners, as on the date on which the agreed figure of rs. 41 lakhs was arrived at. it is quite possible that after the close of the accounting year for 1983-84 or during the said accounting year the assessee or its managing partner shri bharathan might have spent away large sums, which were not allowable as deductions in computing the total income for the asst. yr. 1983-84. according to the decided case laws, it is for the assessee to prove that an addition made in one assessment year was actually available with him by adducing corroborative evidence against the deposits or investments made in later years. at the same time with a view to avoid unnecessary litigations, the department also can give some benefit of doubt at the time of arriving at a settlement. since the exact position in this respect is not known, in the interest of justice, it is only proper to set aside and send the matter back to the assessing officer to decided the issue afresh. we way caution the assessee or its partners should co-operate with the assessing officer by placing all the relevant details before him within a reasonable time, falling which the assessing officer will be at liberty to decide the matter in accordance with the provisions of law." 4. as for the addition of rs. 2,50,000 it was held that the assessing officer was justified in rejecting the explanation of the assessee and looking upon the said sum as taxable income under s. 68 of the it act, 1961, but it was not clear from the records whether the previous year relevant for the asst. yr. 1986-87 was for the period from march, 1985 to 31st march, 1986 or from 1st april, 1985 to 31st march 1986. if it is the former, no interference is called for and if it is the latter, the assessment of rs. 2.5 lakhs for the asst. yr. 1986-87 will not be proper. in this view of the matter, the issue was restored to the ito.5. upon the restoration, the learned assessing officer passed fresh orders upholding the additions. in the impugned order dt. 20th march, 1992, he adverted to the circumstances in which the assessee-firm came forward for settlement of its case with an additional income of rs. 41 lakhs for the asst. yr. 1983-84 and also how a sum of rs. 31,70,434 was found distributed among the partners of the firm. these are to be found in paras 4 and 5 of his order. at para 6, he gives the summary of the amounts distributed out of rs. 41 lakhs, which is as follows : "the instance of division of suppressed profit among the partners cited above is only one of the instances. the balance amount between the income offered and the investments mentioned in para 5(a) to (h) above, should have also been divided among the partners, and should have been spent away by the partners for invisible investments/expenses." thereupon the assessing officer furnished the details of distribution to the extent of rs. 31,70,434 to all the partners in his letter dt.11th feb., 1992 calling for their explanation. it was explained that the entire affairs of the business of the firm was managed by one shri bharathan and therefore, he should have explained the source towards the payment of tax totaling to rs. 11,11,716. there is no mention in the order whether mr. bharathan was examined on this aspect of the matter even though the partners of the assessee-firm have specifically stated that it was for him to explain. the replies were furnished by shri n. krishnan, shri anandarajan and shri n. bharatharajan. it was claimed by this partners that the tax remittances had been made from the funds of the old firm deposited in the name of shri bharathan, his wife smt. ponnamma and his daughter smt. indira rani. the learned assessing officer was of the view that the above three partners did not produce any evidence to show that the funds had come from the account of shri bharathan, ponnamma and smt. indira rani. therefore, he held that the payment of taxes should have come from out of the unaccounted funds of the firm. in this view of the matter, the sum of rs. 11,11,716 was added to the income of the firm as before.6. on appeal, the first appellate authority held that no money would have been left by april 1985 after explaining away the various investments that has been described in the assessment order. the assessees representative was asked to show whether there was any cash on hand in the wealth-tax assessment of the partners as on 31st march, 1985. but the assessees representative could not furnish such information. he was also asked to prove whether the payments were made from the running business of the assessee for which the assessments has been made for the asst. yr. 1986-87 and there was no such evidence forthcoming on this scope. in these circumstances, he held that the tax payments had come out of the unaccounted income of the firm in the asst. yr. 1986-87. the assessee is aggrieved and in second appeal.7. we have heard rival submissions. out of rs. 41 lakhs assessed to tax for the asst. yr. 1983-84 upon "settlement". rs. 31,70,434 is taken to have been distributed among the partners. though the partners are objecting that smt. indira rani could not have taken the sum of rs. 9,35,276 as she was not a partner in the firm, that issue cannot be reopened in view of the appellate orders. it has to be concluded that the assessing officers computation of distribution of the additional income at rs. 31,70,434 is the final figure. now there is still a sum of rs. 9,29,566. whether this amount was available or not for payment of taxes is the question. the assessing officers contention is that the balance amount of rs. 9,29,566 should have been distributed among the partners and, therefore, not available; the cit(a)s view is that after such distribution, the partners should have at least shown their share of the balance amount in their respective wealth-tax assessment records for the asst. yr. 1985-86 and as this was not done, the funds cannot be said to be available. in our considered opinion, the whole approach is erroneous. the assessing officer had collected the evidence of distribution of the additional income only to the extent of rs. 31,70,434 out of rs. 41 lakhs and for the balance amount there is no evidence of distribution. there is only a conjecture about its distribution among the partners. the cit(a)s approach is equally wrong because based on this conjecture he had asked for the proof of the same in the wealth-tax assessments of the respective partners. hence, we reject their approach. the sum of rs. 41 lakhs offered for assessment and assessed as such represented profits kept outside the books. the distribution of rs. 31.7 lakhs is also found to have been made outside the books. therefore, it is reasonable to hold in the preponderance of probabilities of the case that the balance of rs. 9,29,566 must have been kept outside the books and utilised for tax payments. it is relevant to recall in this context that it was only after 1st feb., 1985 that the assessee had come forward with an additional income of rs. 41 lakhs and that the assessment was completed on 11th april, 1985 on that basis. thus, the intervening period between the surrender of additional income and payment of tax is only a short period. further, this is a case of tax payment and the risk of exposure in the utilisation of untaxed income for such payments at such a short interval would be greater than in the case of any other expenditure or investment and no prudent assessee would of court such exposure.therefore, in the absence of evidence for distribution of any sum other than rs. 31,70,434, it has to be held in the probabilities of the case that the balance amount was available for payment of taxes and was utilised for that purpose.8. it is seen that shri bharathan was managing the affairs of the firm and has been helping himself largely with the funds of the firm in his accounts and the accounts of his daughter and such amounts has been included in the distribution of rs. 31,70,434. when shri bharathan was such a key figure, even in the set aside assessment, he does not appear to have been examined or at any rate to material has been placed before us by the revenue, that he was examined on the issue of tax payments.yet an adverse inference has been drawn against the firm. as we are in seisin of restored appeal, we do not find it necessary to restore the issue again as it will result in unnecessary hardship and protracted litigation and therefore, we decide the issue on the basis of the materials available before us. in our considered opinion, since out of the sum of rs. 41 lakhs only rs. 31,70,434 is found to have been distributed as per the records of the revenue, it is reasonable to hold that the balance amount of rs. 9,29,566 had been utilised for the impugned tax payments. to this extent, the addition is deleted.9. as regards the addition of rs. 2,50,000, it is seen that the reconstituted partnership firm came into existence on 4th day of march, 1985 and as per cl. 11 of the partnership deed, "the books of accounts of the firm shall be closed for the first time on 31st march, 1986 and thereafter on 31st march of every year". since the amount of rs. 2,50,000 was credited in the books of the firm on 17th march, 1985 it fell in the previous year beginning from 4th march, 1985 and ending on 31st march, 1986; the same was rightly assessed in the previous year relevant to the asst. yr. 1986-87.

Judgment:
This is an appeal by the assessee against the confirmation of addition of Rs. 2,50,000 and Rs. 11,11,716 made under the head "other sources".

The facts relating to these additions are as under : 2. During the year ending on 31st March, 1986 relevant to the asst. yr.

1986-87, the Assessing Officer noticed that the following tax remittances by the firm were not recorded in the books of the accounts of the firm : The assessees explanation was that this amount was part of the disclosure made by the assessee-firm, M/s D.K.B & Co., by Shri R.Bharathan, who was looking after the affairs of the firm. As the assessing Officer was not satisfied with the explanation, he treated the entire remittances as unexplained investments of the firm.

3. In the books of the accounts of the assessee there was an opening balance of Rs. 2,50,000. It was explained that the amount had come out of the following : Lease rent received from D.K.B. & Co., Abkari Contractors, Quilon for the years ended 31st March, 1984 and 31st March, 1985 after expenses such as repairs ...

The assessees explanation was rejected by the Assessing Officer for the reason that the lease rent of Rs. 1,71,114 was not paid by the other firm, viz, D.K.B. Co. and that there was no evidence for the sale of closing stock. Further, there was no evidence that assessee. These additions were made originally in the assessment order dt. 29th March, 1989 and the same were confirmed in appeal. On further appeal the Tribunal in ITA No. 802/Coch/89 dt. 30th March, 1990 (r/w Corrigendum dt. 15th June, 1990) restored the issue to the file of the Assessing Officer with the following observations : "Thus, though the unaccounted income assessed was Rs. 41 lakhs for 1983-84 the evidence collected by the Department revealed that only Rs. 10.5 lakhs had been distributed amongst the partners leaving a balance of Rs. 30.5 lakhs. It is, however, evident that in the appeals coming before this Tribunal in the cases of Sri Bharathan, Smt. Ponnamma and Smt. Indira Rani, claims are put forward that various deposits in a large number of bank accounts and also purchases of drafts in their cases are coming out of the above referred figure of Rs 41 lakhs. As this Tribunal is a fact finding body, it is difficult to take a decision on facts in the absence of various details considered by the Department for arriving at the figure of Rs. 41 lakhs and also without knowing whether the Department had accepted the availability of Rs. 41 lakhs are reduced by Rs. 10.5 lakhs already distributed amongst the partners, as on the date on which the agreed figure of Rs. 41 lakhs was arrived at. It is quite possible that after the close of the accounting year for 1983-84 or during the said accounting year the assessee or its managing partner Shri Bharathan might have spent away large sums, which were not allowable as deductions in computing the total income for the asst. yr. 1983-84. According to the decided case laws, it is for the assessee to prove that an addition made in one assessment year was actually available with him by adducing corroborative evidence against the deposits or investments made in later years. At the same time with a view to avoid unnecessary litigations, the Department also can give some benefit of doubt at the time of arriving at a settlement. Since the exact position in this respect is not known, in the interest of justice, it is only proper to set aside and send the matter back to the Assessing Officer to decided the issue afresh. We way caution the assessee or its partners should co-operate with the Assessing Officer by placing all the relevant details before him within a reasonable time, falling which the Assessing Officer will be at liberty to decide the matter in accordance with the provisions of law." 4. As for the addition of Rs. 2,50,000 it was held that the Assessing Officer was justified in rejecting the explanation of the assessee and looking upon the said sum as taxable income under s. 68 of the IT Act, 1961, but it was not clear from the records whether the previous year relevant for the asst. yr. 1986-87 was for the period from March, 1985 to 31st March, 1986 or from 1st April, 1985 to 31st March 1986. If it is the former, no interference is called for and if it is the latter, the assessment of Rs. 2.5 lakhs for the asst. yr. 1986-87 will not be proper. In this view of the matter, the issue was restored to the ITO.5. Upon the restoration, the learned Assessing Officer passed fresh orders upholding the additions. In the impugned order dt. 20th March, 1992, he adverted to the circumstances in which the assessee-firm came forward for settlement of its case with an additional income of Rs. 41 lakhs for the asst. yr. 1983-84 and also how a sum of Rs. 31,70,434 was found distributed among the partners of the firm. These are to be found in paras 4 and 5 of his order. At para 6, he gives the summary of the amounts distributed out of Rs. 41 lakhs, which is as follows : "The instance of division of suppressed profit among the partners cited above is only one of the instances. The balance amount between the income offered and the investments mentioned in para 5(a) to (h) above, should have also been divided among the partners, and should have been spent away by the partners for invisible investments/expenses." Thereupon the Assessing Officer furnished the details of distribution to the extent of Rs. 31,70,434 to all the partners in his letter dt.

11th Feb., 1992 calling for their explanation. It was explained that the entire affairs of the business of the firm was managed by one Shri Bharathan and therefore, he should have explained the source towards the payment of tax totaling to Rs. 11,11,716. There is no mention in the order whether Mr. Bharathan was examined on this aspect of the matter even though the partners of the assessee-firm have specifically stated that it was for him to explain. The replies were furnished by Shri N. Krishnan, Shri Anandarajan and Shri N. Bharatharajan. It was claimed by this partners that the tax remittances had been made from the funds of the old firm deposited in the name of Shri Bharathan, his wife Smt. Ponnamma and his daughter Smt. Indira Rani. The learned Assessing Officer was of the view that the above three partners did not produce any evidence to show that the funds had come from the account of Shri Bharathan, Ponnamma and Smt. Indira Rani. Therefore, he held that the payment of taxes should have come from out of the unaccounted funds of the firm. In this view of the matter, the sum of Rs. 11,11,716 was added to the income of the firm as before.

6. On appeal, the first appellate authority held that no money would have been left by April 1985 after explaining away the various investments that has been described in the assessment order. The assessees representative was asked to show whether there was any cash on hand in the wealth-tax assessment of the partners as on 31st March, 1985. But the assessees representative could not furnish such information. He was also asked to prove whether the payments were made from the running business of the assessee for which the assessments has been made for the asst. yr. 1986-87 and there was no such evidence forthcoming on this scope. In these circumstances, he held that the tax payments had come out of the unaccounted income of the firm in the asst. yr. 1986-87. The assessee is aggrieved and in second appeal.

7. We have heard rival submissions. Out of Rs. 41 lakhs assessed to tax for the asst. yr. 1983-84 upon "settlement". Rs. 31,70,434 is taken to have been distributed among the partners. Though the partners are objecting that Smt. Indira Rani could not have taken the sum of Rs. 9,35,276 as she was not a partner in the firm, that issue cannot be reopened in view of the appellate orders. It has to be concluded that the Assessing Officers computation of distribution of the additional income at Rs. 31,70,434 is the final figure. Now there is still a sum of Rs. 9,29,566. Whether this amount was available or not for payment of taxes is the question. The Assessing Officers contention is that the balance amount of Rs. 9,29,566 should have been distributed among the partners and, therefore, not available; the CIT(A)s view is that after such distribution, the partners should have at least shown their share of the balance amount in their respective wealth-tax assessment records for the asst. yr. 1985-86 and as this was not done, the funds cannot be said to be available. In our considered opinion, the whole approach is erroneous. The Assessing Officer had collected the evidence of distribution of the additional income only to the extent of Rs. 31,70,434 out of Rs. 41 lakhs and for the balance amount there is no evidence of distribution. There is only a conjecture about its distribution among the partners. The CIT(A)s approach is equally wrong because based on this conjecture he had asked for the proof of the same in the wealth-tax assessments of the respective partners. Hence, we reject their approach. The sum of Rs. 41 lakhs offered for assessment and assessed as such represented profits kept outside the books. The distribution of Rs. 31.7 lakhs is also found to have been made outside the books. Therefore, it is reasonable to hold in the preponderance of probabilities of the case that the balance of Rs. 9,29,566 must have been kept outside the books and utilised for tax payments. It is relevant to recall in this context that it was only after 1st Feb., 1985 that the assessee had come forward with an additional income of Rs. 41 lakhs and that the assessment was completed on 11th April, 1985 on that basis. Thus, the intervening period between the surrender of additional income and payment of tax is only a short period. Further, this is a case of tax payment and the risk of exposure in the utilisation of untaxed income for such payments at such a short interval would be greater than in the case of any other expenditure or investment and no prudent assessee would of court such exposure.

Therefore, in the absence of evidence for distribution of any sum other than Rs. 31,70,434, it has to be held in the probabilities of the case that the balance amount was available for payment of taxes and was utilised for that purpose.

8. It is seen that Shri Bharathan was managing the affairs of the firm and has been helping himself largely with the funds of the firm in his accounts and the accounts of his daughter and such amounts has been included in the distribution of Rs. 31,70,434. When Shri Bharathan was such a key figure, even in the set aside assessment, he does not appear to have been examined or at any rate to material has been placed before us by the Revenue, that he was examined on the issue of tax payments.

Yet an adverse inference has been drawn against the firm. As we are in seisin of restored appeal, we do not find it necessary to restore the issue again as it will result in unnecessary hardship and protracted litigation and therefore, we decide the issue on the basis of the materials available before us. In our considered opinion, since out of the sum of Rs. 41 lakhs only Rs. 31,70,434 is found to have been distributed as per the records of the Revenue, it is reasonable to hold that the balance amount of Rs. 9,29,566 had been utilised for the impugned tax payments. To this extent, the addition is deleted.

9. As regards the addition of Rs. 2,50,000, it is seen that the reconstituted partnership firm came into existence on 4th day of March, 1985 and as per cl. 11 of the partnership deed, "the books of accounts of the firm shall be closed for the first time on 31st March, 1986 and thereafter on 31st March of every year". Since the amount of Rs. 2,50,000 was credited in the books of the firm on 17th March, 1985 it fell in the previous year beginning from 4th March, 1985 and ending on 31st March, 1986; the same was rightly assessed in the previous year relevant to the asst. yr. 1986-87.