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TMI Blog1990 (6) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... he two remaining partners by a deed dated 1-1-1975. Thus in the three previous years relevant to the assessment years 1972-73 to 1975-76 ,the business in stainless steel was conducted only by Thanaseelan who was in charge of the accounts etc. The assessments of the firm for these years had been completed on 31-1-1974, 30-3-1974, 16-9-1974 and 29-12-1975 respectively. 3. Subsequently on 9-12-1976 there was a search in the premises of Seelan Metal Corporation where Thanaseelan and his brother Bharathiseelan were partners as well as in their residences. Certain sheets of paper were found in the residence of Bharathiseelan with the superscription "1964 T.A.I." with the statement of account indicating accounted profit of Rs. 29,867.35 and unaccounted profit of Rs. 1,04,654.56. These profits were also shown to be divided between S.P.T. and N.K.T. for 1961-62 to 1963-64. Thanaseelan was examined on 9-12-1976 and he stated that this document had been maintained in a code such that 1964 represented 1974 and the years 1961-62 etc. represented 1971-72 etc. respectively. He also stated that the document showed unaccounted income derived when he was a partner of Thangam Aluminium Industries. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its. In his cross-examination he stated that he was only a part-time employee and did not know about the transactions of Thanaseelan when he was not present. The husband of Smt. Thangam was also examined on 30-3-1981. He denied having taken part in any unaccounted transactions on behalf of his wife and said that he had no connection at all with the firm. 4. The other relevant fact is that in the sales tax proceedings Thanaseelan failed to turn up for cross-examination and it was suggested by the assessee that the letters 'TAI' might have represented Thanaseelan Aluminium Industries, another concern owned by Thanaseelan. The AAC of Commercial Taxes by his order dated 10-2-1982 accepted this contention and deleted the unaccounted turnover mentioned in the seized document which was added to the turnover of the assessee. 5. On these facts, the IAC gave his directions on 30-3-1981 u/s. 144B holding that the document related to the business of the assessee and that unaccounted profit shown therein must be added to the total income of the assessee-firm, and the reassessments were completed accordingly. 6. On appeal, the CIT (Appeals) for the assessment year 1974-75 held that since ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true mm of affairs. The document is in code as stated by Thanaseelan, 1964 representing 1974 and TAI representing Thangam Aluminium Industries. If we were to go only by this statement, a doubt is cast by stating that the 'TAI' may represent Thanaseelan Aluminium Industries. The benefit of this doubt has been given by the sales-tax authorities. However, the revenue has not cared to remove this doubt by producing the assessment of Thanaseelan Aluminium Industries to cross-check the transactions in the seized document with those of Thanaseelan Aluminium Industries. We are, therefore, left only with the internal evidence in the document itself along with the statement of Thanaseelan as to the question whether he had entered into unaccounted transactions. One significant fact is that this document contains in a different ink certain transactions on the top which admittedly tallied with the transactions of the assessee-firm recorded in its books. It is, therefore, not possible to reject the evidence of Thanaseelan that he had entered into clandestine transactions and made a secret profit of Rs. 1,04,654. Whether this profit belonged to himself or to the firm is a different question. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an independent entity in law though it is treated as a taxable entity. The question of the secret profit being treated as that of the firm can arise only if the other partners assent to the unaccounted transactions carried on by the delinquent partner. This assent has to be established with reference to the conduct of other partners since such conduct may also amount to a contract to the contrary as envisaged in section 16 of the Partnership Act. Moreover the concept of mutual agency and implied authority of the partner cannot be extended to illicit transactions unless ratified by the other partners. The revenue pointed to cases where firms have been accepted additions of income from undisclosed sources. But those are the cases which demonstrate the ratification of such transactions by all the partners and generally relate to existing firms where partners act in concert. In this case the firm was dissolved and the erstwhile partners resist the imputation that they had a share of the secret profits stated to be made by a retired partner who was in sole charge of the business. 12. Looking into the facts in this angle, we find that except for a division of profits in the seized doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, agree with the orders of the authorities below that the unaccounted profits revealed by the seized documents cannot be added to the total income of the assessee. Their orders are confirmed. 13. The appeals are dismissed. Per Accountant Member --- I have given anxious consideration to the findings recorded by the Hon'ble Judicial Member in this case. I find it difficult to accept the final conclusion given by him in this order. 2. The area of disagreement is very narrow and not large. The Hon'ble Judicial Member has concurred with the view that the profit shown in the secret accounts will have to be brought to tax. This is the view of the Department and I am in respectful agreement with this view. The further question is whether the secret profit should be assessed in the hands of the firm or only in the hands of the partner, N.K. Thanaseelan. It is here that I am inclined to disagree with the Hon'ble J.M. He had taken the view that the secret profits must be assessed in the hands of Thanaseelan. I consider that the same should be assessed in the hands of firm only. 3. The facts of the case have been detailed in paras 2, 3 and 4 of the Hon'ble J.M's order. The search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent deposition by Thanaseelan before the Income-tax Authorities that he was coerced into giving such a retraction before the Sales-tax Authorities. 4. The argument on behalf of the assessee-firm was that no evidence was let in to show that the other partners actually received a secret of the secret profits and that the division as found in the seized document related to two partners whereas there are three partners during the part of the period. It was also argued that in the dissolution deed on his retirement Thanaseelan was paid a sum of Rs. 12,768.54 for which he has claimed that he was paid a sum of Rs. 57,768 as evidenced by the seized document. The clarification in this regard is to be found in para 27 of the proceedings of the IAC under section 144-B. This is reproduced below :--- "27. The learned representative also pointed out that as per seized sheet the amount received by Mr. Thanaseelan was Rs. 11,552 whereas, according to the dissolution deed the amount shown is Rs. 12,768.54. As per the entries on the reverse side of sheet No. 32 Sri Thanaseelan has received Rs. 57,768.00 and the break up of which is as under :--- Unaccounted profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; ------------- This is as per the disclosed transactions. The dissolution deed will naturally mention only about disclosed dons and not about unaccounted profit. Sri S. Ramachandran in his deposition on 30-3-1981 has said that Sri Thanaseelan received cash of Rs. 12,768.54 at the time of his retirement as evidenced. by the endorsement on the dissolution deed. Sri Ramachandran is one of the witnesses to this document. According to Mr. Thanaseelan, he did not receive cash of Rs. 12,768.54 at the time of his retirement and actually he received the total amount of Rs. 57,768 and out of this, he received only cash of Rs. 9,943 and the was received by him in the form of dies and stock. The amount of Rs. 57,768 also includes the share of unaccounted profit of Mr. Thanaseelan for the past 3 years. The veracity of the statement of Mr. S. Ramachandran is to be tested by cross-examination which I am not able to Am due to paucity of time. The material available shows that Sri Thanaseelan received more than what is received in the dissolution deed." 5. In his detailed order under section 144-B, the IAC has taken great pains to demolish each one of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -will with Smt. Thangam And-has wrote up these documents by putting her into dire peril in relation to her income-tax affairs, then it is not understandable how the other firm Seelan Metal Corporation owned up transactions secretly documented in the sheets seized by the Department. It is also noteworthy that the assessment of Seelan Metal. Corporation proceeded on the basis that the secret documents revealed unaccounted profits and the retraction by Thanaseelan before. the Sales-tax Authorities, did not result in Seelan Metal Corporation trying to go back on their admission. These facts are mentioned and discussed elaborately in the order of the IAC under section 144-B. Several other apparent contradictions are also explained in this order. It will not be logical to presume that Thanaseelan would have anticipated a search under the Income-tax Act in the residence of his brother and would have planted an evidence in the form of seized document No. 31 to implicate the partners of the firm in which hi himself was a partner during the relevant period. 6. Partnership is defined as a relation between persons who have agreed to share the profits of business carried on by all or any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continue even after dissolution of the firm and the law provides for a proper mode of account for such obligations among themselves. This is explicitly made clear by several sections ,in the Partnership Act. Under section 23 an admission or representation made by a partner concerning the affairs of the firm is evidence against the firm if it is made in the ordinary course of business. Under section 25 every partner is liable jointly with all the other partners and-also severally for all acts of the firm done while he is a partner. Section 26 lays down the principle that where by the wrongful act or omission of a partner acting in the ordinary course of business of a firm any penalty is incurred, the firm is liable therefor to the same extent as the partners. Section 19 lays down that act of a partner done to carry on in the usual way the business of the kind carried on by the firm binds the firm and the authority of a partner to bind the firm is implied authority. 7. In this case the Department has come across secret accounts indicating division of profits and the same were tallied with regular books of accounts in respect of fits admitted in the return We consider that by virtue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Certain sheets of paper were found in the residence of Bharathiseelan with the superscription '1964 TAI' with the statement of account indicating accounted profit of Rs. 29,867.35 and unaccounted profit of Rs. 1,04,654.56. These profits were also shown to be divided between SPT and NKT for 1961-62 to 1963-64. Thanaseelan was examined on 9-12-1976 and he stated that this document had been maintained in a code such that 1964 represented 1974 and the years 1961-62 etc., represented 1971-72 etc., respectively. He also stated that the document showed unaccounted income derived when he was a partner of Thangam Aluminium Industries. On 27-12-1980 he was examined by the D.C.T.O. for the purpose of sales-tax assessment He stated that his earlier statement that the document related to Thangam Aluminium Industries was not correct. Subsequently, he was again examined on 25-3-1981 by the IAC of Income-tax. He then stated that he had written the document, that the letters 'TAI' represented Thangam Aluminium Industries and 1964 referred to 1974. He further stated that the sheets contained the entire business results of Thangam Aluminium Industries for the years ended 31-3-1972 to 31-3-1974, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Industries, another concern owned by Ian. The AAC of Commercial Taxes by his order dated 10-2-1982 accepted this contention and deleted the unaccounted turnover mentioned in the seized document which was added to the turnover of the assessee." 3. On the aforesaid facts and circumstances the ITO/IAC held that the unaccounted profits belonged to the assessee. They, therefore, included Rs. 6,666, Rs. 20,907, Rs. 1,22,090 and Rs. 19,100 respectively in the total income of the assessee for the years under consideration. The CIT(Appeals)/AAC, on the other hand, held that the addition made by the ITO/IAC cannot be sustained. In doing so, they considered that (a) the seized material was found at the residence of Bharathiseelan who was not a partner of the assessee-firm, (b) at the relevant time there was another concern namely Thanaseelan Aluminium Industries owned by Shri Thanaseelan to which the seized material may relate, (c) there was no other material to corroborate the information in the seized material, and (a) other partners have not been found to hold any undisclosed assets. 4. Being aggrieved by the orders of the CIT(Appeals)/AAC, the revenue came up in appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other hand, for equally detailed stated in his separate order, was of the opinion that the unaccounted profits shown in the seized material were in fact assessable in die hands of the assessee-firm. He, therefore, reversed the orders of the CIT(Appeals)/AAC. 7. Before me the learned representative for the Department reiterated the submissions which were made on an earlier occasion before the Division Bench and strongly supported the action of the ITO/IAC as well as the order of the learned Accountant Member. In this connection, he invited my attention to pages 38 and 42 of his Paper Book containing the statements of Smt. P. Thangammal and Shri S. Parangiri respectively recorded by the IAC, more particularly the answers given to question Nos. 2, 4, 5, 6 and 7 put to Smt. Thangammal and the answer given to question No. 2 put to Shri Parangiri to urge that Smt. Thangammal was fully aware that the initial 'TAI' stood for the assessee-firm and not for Thanaseelan Aluminium Industries. In this connection, he further submitted that Shri Thanaseelan was the managing partner while the lady were dormant partners and had contributed the capital. As the act of the managing would be binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submitted that no addition could be made on mere surmises, conjectures and suspicions. He, therefore, strongly urged that I should follow the view taken by the learned Judicial Member. 9. I have carefully considered the rival submissions of the parties and gone through the orders of the learned colleagues as well as the material to which my attention was drawn by the parties. During the course of hearing it was felt that the question referred u/s. 255(4) of the Act is very wide and omnibus in nature. However, on the close scrutiny of the facts and circumstances obtaining in the case, it is quite clear that the teal issue is whether the unaccounted profits could be assessed in the hands of the assessee. If the answer is in the affirmative, then the view taken by the learned Accountant Member has to be followed. If, on the other hand, the answer is in the negative, then the view taken by the learned Judicial Member has to prevail. 10. It would appear from the above that the issue involved in those appeals is a pure question of fact. On the material available on record I am inclined to agree with the view taken by the learned Judicial Member. It is not in dispute that (i) the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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