TMI Blog2005 (1) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... peal under section 260A of the Income-tax Act, 1961 (in short, "the Act"), filed by the appellant against the order dated March 12, 2002 of the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack, in I.T.A. No. 301/CTK/1997. The facts briefly are that the appellant is a partnership firm consisting of three partners, namely, Sri Harish Chandra Bhol, Sri Rabindranath Bhol and Sri Jitendranath Bhol. The appellant carries on the business of sanitary stores and for the assessment year 1989-90 the appellant filed a return on July 31, 1989, disclosing a total income of Rs. 78,000. The return was accompanied by a trading and profit and loss account but no balance-sheet. A letter dated September 14, 1989, was issued by the Assessing Officer to the appellant to file a balance-sheet and in response to the said letter, a balance-sheet was filed by the appellant enclosing the details of the sundry creditors and sundry debtors. The return was processed under section 143(1)(a) of the Act and intimation was sent to the assessee on January 16, 1990, raising a demand of only Rs. 48. Thereafter, on June 16, 1993, a search and seizure operation was conducted in the case of Sri R.N. Bhol, the partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings, the Commissioner of Income-tax (Appeals), Orissa, Cuttack, deleted the said addition of Rs. 2,70,421 and determined the income of the appellant on the basis of the estimate at Rs. 1,14,777. Aggrieved by the deletion of Rs. 2,70,421 from the income of the appellant, the Department filed I.T.A. No. 301/CTK/1997 before the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (for short, "the Tribunal"). Aggrieved by the finding of the Commissioner of Income-tax (Appeals) that the initiation of proceedings for the reassessment under section 147 of the Act was justified, the appellant filed a cross-objection in the said appeal numbered as C.O. No. 97/CTK/1997. By the impugned order dated March 12, 2002, the Tribunal dismissed the cross-objection filed by the appellant and allowed the appeal of the Department with the findings that there was adequate ground for initiating proceeding under section 147 of the Act and that the addition of Rs. 2,70,421 in the income of the appellant was justified under section 69, read with section 68 of the Act. When this appeal against the impugned order dated March 12, 2002, of the Tribunal was admitted on December 11, 2003, the court formul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatus was accepted as P.F. Subsequently, on June 16, 1993, a search and seizure operation was conducted in the case of Sri R.N. Bhol, partner of the firm. Simultaneously a survey operation under section 133A too was conducted in the business premises of the firm. Certain books of account relating to the firm were seized from the custody of Sri R.N. Bhol as per annexure to Panchanama. From the party ledgers seized and marked as CSS-78 and CSS-13, it was ascertained that the assessee had shown Rs. 5,47,687.71 in the balance-sheet filed with the return on account of sundry creditors whereas the books revealed only Rs. 2,66,612.60 on this account. Hence, the presumption was that the assessee had inflated this account by Rs. 2,81,072.02 and thereby evaded the tax liability on the aforesaid amount. For this reason, action under section 147 was initiated and notice under section 148 served on November 9,1993 . . ." It will be clear from the aforesaid reasons given in the assessment order that after the return filed by the appellant was processed under section 143(1)(a) on January 16, 1990 resulting in demand of Rs. 48 only, a search and seizure operation was conducted in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name-lenders and the transactions were bogus and hence proper investigation regarding the loans was necessary. On these facts, the Supreme Court held that the Income-tax Officer must have some prima facie grounds before him for action under section 148 and on the materials placed by the Income-tax Officer before the Commissioner, he could not have had reason to believe that income chargeable to tax had escaped assessment for that year. On sections 147 and 148 of the Act as they stood then, the Supreme Court observed: "Before issuing a notice under section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not sufficiency of the reasons for the belief. The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law. (See obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re wholly vague, indefinite, far-fetched or remote to the formation of the belief that some income of the appellant had escaped assessment for the assessment year 1989-90 because of the failure of the appellant to disclose fully and truly all material facts necessary for the assessment of the appellant for that assessment year. We, therefore, hold on the first question that in the facts and circumstances of the case, the reopening of the assessment under section 147 of the Act was justified and legal. The second question of law which has to be decided in this appeal is whether, on the facts and circumstances of the case, the addition of Rs. 2,70,421 as inflated liabilities under section 69, read with section 68 of the Act is legal and justified. Mr. Rotho, learned counsel for the appellant, submitted that section 68 applies only when credit is given to a party in the books of account and the assessee offers no explanation about the nature and source of such credit and this is not a case where any credit has been found in the books of the appellant in favour of any party and the assessee had no explanation with regard to the nature and source thereof and therefore, section 68 does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 of the Act quoted above shows that where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is, in the opinion of the Assessing Officer, not satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of the previous year. In the present case, as will be clear from the order of assessment passed by the Assessing Officer for the assessment year 1989-90, it is not the case of the Department that any sum was found credited in the books of the appellant maintained for the previous year relevant to the assessment year 1989-90 and the appellant has not offered any explanation for such false or bogus credit in the books of account. The case of the Department, on the other hand, is that whereas in the party ledgers of the appellant firm for the previous year relevant to the assessment year 1989-90 a slim of Rs. 2,66,612.60 has been shown on account of sundry creditors, in the balance-sheet that has been filed by the appellant in response to the letter dated March 14, 2003, of the Assessing Officer at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts ----------------------------------------------------------------- Partner's capital Stock 8,69,419-00 R.N. Bhol 1,62,772-86 Sundry debtors 1,14,309-19 J.N. Bhol 2,23,850-42 P.N.B. 29,529-62 H.C. Bhol 83,776-32 Cash-in-hand 4,826-50 Sundry creditors 5,47,684-71 ------------- --------------- 10,18,084-31 10,18,084-31 ----------------------------------------------------------------- Presently, after necessary verification, it has been established that the sundry creditors account is not correct. Rs. 5,47,684.71-31, shown in this account includes bogus and unsubstantiated liabilities of Rs. 2,70,421. If this amount is ignored the real balance-sheet will be as under: ------------------------------------------------------------------------ Liabilities Assets ------------------------------------------------------------------------ Partner's capital 4,70,399-60 Stock 8,69,419-00 Sundry creditors shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 421 there was no ground for considering to what asset the same had been added. The Assessing Officer had sufficient material with him in the absence of proper books of account to point out that it was the stock-in-trade which have been inflated by the like amount. The learned Assessing Officer on the basis of difference in the balance-sheet and the party's ledger together with the purchase account considered it to be added under section 69 without stopping that it would come under the mischief of section 68 of the Act as well ..." We do not agree with the aforesaid conclusion of the Tribunal because section 69 of the Act by a deeming provision provides for treating an unexplained investment made by an assessee during a financial year to be income of the assessee of the financial year for the purpose of assessment and unless the requirements of section 69 are strictly satisfied by a finding by the Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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