1981 (8) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Justification of the CIT (Appeals) in confirming the reopening of assessment under Section 147(a) of the IT Act, 1961.
2. Assessment of income from undisclosed sources amounting to Rs. 75,000.
3. Disallowance of interest amounting to Rs. 2,026.

Detailed Analysis:

1. Justification of the CIT (Appeals) in confirming the reopening of assessment under Section 147(a) of the IT Act, 1961:

The original assessment was completed on 25th February 1965, with the total income determined at Rs. 63,207. The assessee had provided the ITO with copies of its profit & loss account and balance sheet as of 31st March 1964, which included interest claims and balances due to various parties. Despite this, the ITO did not question the genuineness of the loans at that time.

However, based on a subsequent examination of Manohar Lal Gopal Dass, the ITO concluded that the loan appearing in his name was not genuine. The ITO initiated proceedings under Section 147(a), citing the failure of the assessee to disclose fully and truly all material facts necessary for the assessment. The CIT (Appeals) agreed with the ITO's decision to reopen the assessment, relying heavily on the statement of Manohar Lal Gopal Dass.

The Tribunal found that the ITO had no new material evidence to justify the change of opinion regarding the other three parties (Afghan Fruit Co., Kanhya Lal Moti Ram, and Fateh Chand Manohar Lal). The Tribunal emphasized that the reasons for the formation of belief under Section 147(a) must have a rational connection with the material coming to the ITO's notice. The Tribunal held that there was no direct nexus between the statement of Manohar Lal Gopal Dass and the formation of the belief that there had been an escapement of income due to the assessee's failure to disclose fully and truly all material facts.

2. Assessment of income from undisclosed sources amounting to Rs. 75,000:

The ITO's conclusion that the credits in the names of the four parties were not genuine loans and represented the assessee's income from undisclosed sources was based on the confessional statement of Manohar Lal Gopal Dass. The ITO found that the receipts and payments to these parties were often made by cheques, with deposits and withdrawals occurring immediately before and after the transactions.

The Tribunal noted that Manohar Lal Gopal Dass admitted to earning brokerage by arranging finances for different parties and did not advance his own money. However, there was no indication that the transactions with the assessee were bogus or havala entries. The Tribunal found that the ITO's inference that the credits represented the assessee's income was unsupported by evidence.

3. Disallowance of interest amounting to Rs. 2,026:

The ITO disallowed the interest claimed to have been paid to M/s. Gopal Dass Udhay Das, based on the conclusion that the credits were not genuine loans. The CIT (Appeals) upheld this disallowance, agreeing with the ITO's assessment that the loans were not genuine borrowings.

The Tribunal, however, found that the ITO's and CIT (Appeals)' conclusions were based on insufficient evidence. The Tribunal emphasized that the assessee had provided all necessary documents and confirmations during the original assessment, and the ITO had accepted these as full and true disclosures without doubting their genuineness.

Conclusion:

The Tribunal held that the reopening of the assessment under Section 147(a) was invalid and illegal, as the ITO could not have a reason to believe that the income chargeable to tax had escaped assessment due to the assessee's failure to disclose fully and truly all material facts. Consequently, the reassessment was canceled, and the appeal was allowed. The Tribunal did not find it necessary to address the merits of the case regarding the genuineness of the credits and the disallowance of interest.