2005 (1) TMI 69 - HC - Income Tax

Unexplained investment - In reassessment order AO held (i) that the book result of the appellant can never be relied upon as true and correct and as such the total income of the appellant ought to be determined on estimate by invoking section 145 and (ii) that an investment of Rs. 2, 70, 421 made by the appellant remained unexplained and is treated as deemed income of the appellant as per the provision of section 69 Held that unless the requirements of section 69 are strictly satisfied by a finding by the AO on relevant materials that the appellant has actually made some unexplained investments in stock-in-trade during the financial year 1988-89 to the tune of Rs. 2, 70, 421 section 69 cannot be applied to treat the said sum of Rs. 2, 70, 421 as income of the appellant for the AY 1989-90. In the facts and circumstances of the case therefore the addition of Rs. 2, 70, 421 by applying section 69 is not legal and justified

Summary

Issues Involved:
1. Justification and legality of reopening the assessment under section 147 of the Income-tax Act.
2. Legality and justification of the addition of Rs. 2,70,421 as inflated liabilities under section 69 read with section 68 of the Income-tax Act.

Detailed Analysis:

1. Justification and legality of reopening the assessment under section 147 of the Income-tax Act:

The first issue revolves around whether the reopening of the assessment under section 147 of the Income-tax Act was justified and legal. The appellant argued that the reasons for reopening the assessment, as recorded by the Assessing Officer, were not sufficient to form a belief that income had escaped assessment. The appellant relied on Supreme Court decisions in Chhugamal Rajpal v. S.P. Chaliha and ITO v. Lakhmani Mewal Das, arguing that action under section 147 cannot be based on mere suspicion or for making a fishing or roving enquiry.

The court examined the reasons provided by the Assessing Officer, which included a search and seizure operation revealing discrepancies in the sundry creditors' account. The balance-sheet filed by the appellant showed Rs. 5,47,684.71 in sundry creditors, while the seized books revealed only Rs. 2,66,612.60, suggesting an inflation of Rs. 2,81,072.02. The court agreed with the Commissioner of Income-tax (Appeals) and the Tribunal that this discrepancy provided a prima facie case for the Assessing Officer to believe that income had escaped assessment, thereby justifying the initiation of action under section 147.

The court further referenced the Supreme Court's interpretation of "reason to believe" in Chhugamal Rajpal and Lakhmani Mewal Das, emphasizing that there must be a direct link between the materials and the belief of income escapement. The court concluded that the materials in this case had a direct nexus with the formation of the belief that income had escaped assessment due to the appellant's failure to disclose fully and truly all material facts. Therefore, the reopening of the assessment under section 147 was held to be justified and legal.

2. Legality and justification of the addition of Rs. 2,70,421 as inflated liabilities under section 69 read with section 68 of the Income-tax Act:

The second issue was whether the addition of Rs. 2,70,421 as inflated liabilities under section 69, read with section 68, was legal and justified. The appellant contended that section 68 was not applicable as no credit was found in the books, and section 69 was not applicable as there was no material evidence of an unexplained investment.

The court analyzed sections 68 and 69 of the Act. Section 68 pertains to unexplained cash credits in the books, while section 69 deals with unexplained investments not recorded in the books. The court noted that the Assessing Officer had not applied section 68 but had relied on section 69, concluding that the appellant had made an unexplained investment of Rs. 2,70,421 based on discrepancies between the balance-sheet and the party ledgers.

The court found that the Assessing Officer's conclusion was based solely on an analysis of figures rather than any concrete evidence of actual investments made by the appellant. The Tribunal's view that the addition could be justified under section 69, or even section 68, was rejected by the court. The court emphasized that section 69 requires a finding that the assessee made actual investments not recorded in the books, which was not established in this case.

Therefore, the court held that the addition of Rs. 2,70,421 under section 69 was not legal and justified. The second question of law was answered in favor of the appellant, and the appeal was allowed to the extent indicated, with each party bearing its own costs.

Conclusion:

The court upheld the reopening of the assessment under section 147 as justified and legal but found the addition of Rs. 2,70,421 under section 69 to be unjustified. The appeal was allowed in part, with costs borne by both parties.