TMI Blog1992 (12) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... esh, 3. T.M. Palanetraiah 4. G.P. Sadashivaiah 5. K.N. Veeranna Setty 6. C.N. Parvatha Raj It may here be mentioned that the aforesaid change in the constitution of the firm was occasioned by the death some time in July, 1983 of T.M. Shivanna. 4. The details of the income returned and income assessed may be abstracted as follows : --------------------------------------------------------------------- Asst. year Income returned Income determined ---------------------------- Original re-assessment assessment --------------------------------------------------------------------- Rs. Rs. Rs. 1982-83 1,35,130 1,35,130 5,05,770 1983-84 1,18,600 1,19,100 3,70,950 1984-85 1,74,005 6,52,600 -- 1985-86 1,62,774 6,43,300 -- 1986-87 2,36,960 7,20,450 -- ---------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he had no knowledge of such papers. 8. None of the aforesaid arguments found favour with the Assessing Officer who held that the assessee-firm had made secret profits as detailed above. In this regard, the Assessing Officer was impelled by the following considerations : (i) the seized papers referred to above contained details of the secret profits made by the assessee-firm. (ii) The profits thus earned were also allocated amongst the partners of the firm whose names are referred to therein in the form of initials such as K.H.V ; C.N.P ; T.M.S ; G.P.S and T.M.P. (iii) The seized papers also contain details of certain interest income earned by the assessee-firm, which are referred to as " S.P. interest " and " A.C. interest ". (iv) Both the secreted profits and the interest income have been allocated amongst the partners in their profits sharing ratio. (v) The contention of the partners that they had no knowledge of the papers cannot be accepted, when regard is had to the fact that the papers were seized from the residence of T.N. Palanetraiah, one of the partners of the firm. Their denial is clearly self-serving. (vi) Similarly, the denial by the Accountan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uttable presumption, is available for the limited purpose of passing an order under section 132(5). The said presumption is not available for the purpose of making an assessment under section 143(3) of the Act. Further, under section 34 of the Evidence Act, mere entries in a document without substantial proof cannot be considered to be complete evidence. In this case, only certain papers containing what according to the Assessing Officer are the details of the secret profits earned by the assessee-firm and the allocation thereof amongst the partners, were found. No supporting books of account were found. Therefore, there is all the more reason why section 34 of the Evidence Act will avail the assessee. 12. Reliance was also placed on behalf of the assessee on (i) certain observations of the Supreme Court in the case of Jaydayal Poddar v. Bibi Hazara AIR 1974 SC 171 ; (ii) The Orissa case of Devamani Atha v. CIT [1978] 112 ITR 837 and the Delhi case of Yadu Hari Dalmia. 13. The contention that the papers in question had been " planted " in partner Palanetraiah's residence did not impress the CIT (Appeals). According to him, " once the document is shown in the Panchnama, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) considered that assessee's counsel had rightly relied on the Punjab Haryana case of Mohan Lal Vig's case. 17. Fourthly, the Assessing Officer had not made any attempt to identify the hand-writing contained in the seized papers and to make further enquiries relating to the genuineness of the entries made in those papers. 18. In view of the foregoing, therefore, concluded the CIT (Appeals), the Assessing Officer was not justified in making impugned addition for the assessment year 1984-85 and, accordingly, deleted the addition. 19. The first appellate authority took the same line as respects the assessment for the assessment years 1982-83, 1983-84, 1985-86 and 1986-87. It may here be highlighted that in the assessment for the assessment year 1985-86 the CIT (Appeals) was impelled by the further consideration that, even on the basis of the seized papers the addition of Rs. 4,78,525 made by the Assessing Officer could not be sustained, because the said figure represented the balance brought forward from the earlier year. 20. It is in these circumstances that the Department is now before us. Shri P.S. Puniha, the learned Departmental Representative, vehemently conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Department was justified in bringing to charge the secret profits in the hands of the firm. 23. The third limb of Shri Puniha's arguments was centered on legal issues. 24. Repelling the assessee's argument that the secret profit could not be assessed in the hands of the firm, Shri Puniha contended that it is well settled that a firm and its partners are not different entities and that the firm is but a convenient, compendious name for the partners. The said legal position taken in conjunction with the fact that the seized papers disclosed not only secret profits but also the allocation thereof amongst the five partners, would go to show that the Department was not wrong in bringing to charge the secret profits in the hands of the firm. 25. Turning next to the question whether the presumption contained in section 132(4A) of the Act was limited to an order under section 132(5) of the Act, or whether it could be invoked for the purposes of making an assessment under section 143(3) of the Act, Shri Puniha contended that, under the Scheme of the Act, the said presumption would avail the Assessing Officer in the context of making an assessment under section 143(3) also. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons concerned ; only thereafter they could question the partners concerned. This is what exactly happened in this case. It should therefore follow that that nothing turned on the fact that the partners were not questioned on the contents of the seized papers even on the date of the search. 29. One of the contentions that was urged before the CIT (Appeals) on behalf of the assessee was that, if the assessee had really earned secret profits aggregating Rs. 20 lakhs spread over a period of five years, then at least some part of the profits would have been invested in assets such as land, building, jewellery etc. But no such investment was found during the search. Shri Puniha pointed out that this contention was contrary to the facts of the case. During the course of the search cash, jewellery and other investments were discovered and seized. 30. Shri Puniha summed up his arguments thus : (i) Incriminating papers were found and seized. (ii) These papers contained the initials of Palanetraiah, one of the partners. (iii) The seized papers disclosed that the assessee-firm had made secret profits which it had failed to disclose. (iv) The secret profits were also distribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Lakshminarasimhan, it would be seen that the papers in question were planted and hence there was no question of the Department making use of them. 34. Turning next to the merits of the case, Shri Lakshminarasimhan first contended that no nexus has been established between the contents of the seized papers and the assessee-firm. For a fact, the Department had not introduced any evidence in this regard. The assessee is a dealer in foodgrains. It also acts as a commission agent. The records of the assessee would show that the assessee's turnover which was about Rs. 39 lakhs in the previous year relevant to the assessment year 1981-82 swelled to Rs. 1.76 crores in the previous year relevant to the assessment year 1992-93, with the corresponding net profit registering a rise from Rs. 99,000 to Rs. 2,44,000. Going on the basis of the said figures, contended Shri Lakshnminarasimhan, it would be seen that to earn an aggregate secret profits of Rs. 20 lakhs, the assessee-firm should have had an aggregate turnover of about Rs. 15 crores. It is indeed strange that given this picture, the Department was not able either to seize or to bring on record any evidence pointing to such huge turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and investment seized. This was due to the simple reason that all the seized items had been properly accounted for by the assessee or, as the case may be, the partners concerned. This circumstance would also indicate that the Department's contention that the assessee-firm had made huge secret profits is untenable. 38. Shri Lakshminarasimhan then contended that the Department itself was not sure as to whether the huge secret profits came out of the assessee's business or from other undisclosed sources. Thus, while in the assessment for the assessment years 1984-85 and 1985-86, the alleged secret profits were brought to tax in the hands of the firm as business income, in the other three years they were brought to charge under the head 'other sources'. This would indicate that the Department has no independence evidence to go by. 39. Thereafter Shri Lakshminarasimhan advanced certain legal contentions. First, the seized papers in question were not found in the business premises of the assessee-firm and that, consequently, there was no question of applying the presumption incorporated in section 132(4A) vis-a-vis the firm. Secondly, at the time of the seizure the papers in ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Karnataka case of Canara Sales Corpn. Ltd. v. CIT [1989] 176 ITR 340 Shri Lakshminarasimhan contended that the partners' having denied knowledge of the contents of the seized papers, it could not be said that there was failure to disclose the alleged secret profits. 44. Finally Shri Lakshminarasimhan relied on the decision of the Madras Bench of the ITAT in the case of ITO v. Thangam Aluminium Industries [1990] 88 CTR (Mad.)(Trib.)21 (TM) and contended that no addition could be made in the hands of the assessee-firm on the basis of the material seized from the residence of the partner. 45. Shri Lakshminarasimhan then highlighted the fact that when the partners have denied the authenticity of the seized papers, the initial onus that lay upon them gets automatically shifted on to the Department and that it is for the Department to lead further evidence to show first, that secret profits were at all earned and, secondly, that the said secret profits belonged to the firm. The Department has brought on record no evidence in that regard. 46. Shri Lakshminarasimhan then drew our attention to the fact that two different Commissioners of Income-tax (Appeals) have, on examination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of pages 7 and 22 of the seized papers were admitted by Palanetraiah. Since the said pages contained details of the figures brought forward from the earlier pages, namely 4, 5 and 6, it should be held that Palanetraiah was aware of the contents of those earlier pages. It should, therefore, follow that Palanetraiah, or for that matter, any other partner could not be heard to say that they had no knowledge of the contents of the papers. (v) The cases referred to and relied upon by the assessee's counsel cannot avail the assessee because they deal with different facts and different questions. (vi) With the result, the first appellate, authority was not justified in deleting the additions made by the Assessing Officer. 49. Intervening in the course of the departmental representative's reply, the assessee's counsel drew our attention to the fact that the first appellate authority has highlighted the fact that the seized papers were in different hand-writings, in some instances as many as three. The Department has not identified the persons who made the notings on the seized papers. Therefore, the seized papers cannot avail the Department. 50. We have looked into the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at all. Partners also denied having any knowledge of the entries contained on the seized papers. For a fact, the basic contention is that the papers in question were flaunted in the house of Palanetraiah. Touching on the merits of the case, it is further contended on behalf of the assessee-firm that the seized papers do not contain anything even remotely indicating the nature and extent of the so-called secret business ; that they do not contain anything to connect the entries with the assessee-firm ; that the Department has not brought on record any evidence to establish a nexus between the said entries and the assessee-firm; and that consequently there was no question of making any addition to the income returned by the assessee-firm on the basis of the said seized papers. It should, therefore, follow that the CIT(A) was jusufied in deleting the baseless additions made by the Assessing Officer. 53. Now, as has been pointed out by the Punjab and Haryana High Court in Mohan Lal Vigs' case, in the cases of the type under consideration, two distinct and separate proofs are necessary ; namely, proof of recovery and proof of the truth of the contents of the seized books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti Bahi ex. P.Y., from those premises. In the absence of any independent corroboration of the statement of Mr. Jain, it will be difficult to hold that in fact the Dasti Bahi, ex. P.Y., was recovered from those premises. Any way, if it be presumed for the sake of argument that the recovery of the Dasti Bahi, ex. P.Y., from the business premises of the firm of the respondents stands proved from the statement of Shri Jain, P.W., it cannot be said that proof of the recovery of that Dasti Bahi, also amounts to the proof of the truth of the contents of the Dasti Bahi. In order to show that that Bahi contained true accounts relating to the business conducted by the firm of the respondents, some evidence should have been led by the prosecution for showing that those accounts were entered in that Bahi, by the respondents or by somebody at their instance, but it may be pointed out that no evidence whatsoever has been produced to prove the contents of that Bahi. No person who might have made those entries in ex. P.Y., was examined on behalf of the prosecution. No person who was acquainted with the handwriting of the person by whom entries in that Dasti Bahi, were made and signed has been exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusively that the seized documents contained details of secreted profits which are chargeable to tax. It remains to be seen whether preponderance of probabilities supports the department's case. 57. True, the seized papers contain statement in figures of what appears to be the financial results of certain unnamed transactions. There is nothing either in law or in logic to warrant the conclusion that the figures denote secreted profits which are chargeable to tax. For all we know, the figures may represent what may broadly be called gross receipts. To illustrate, let us assume that the five persons concerned had put through a joint adventure in the nature of trade, say, in real estate. To start with, they would have naturally contributed their share of the money--cash if you like--to purchase a particular piece of land and to develop it into plots. If they had sold plots over a period of time, then, as soon as each plot or each group of plots is sold, they could well have distributed the sale proceeds net of the expenses incurred in connection with the sale. This time they would be receiving cash. If they had chosen to note down on a sheet of paper the manner in which the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es against the Department. If profits have been divided, such a division could also have taken place in different contexts. The five persons, for example, could have formed a separate AOP, in which event also profits could have been distributed. Again, they might have undertaken a joint venture, which would also have resulted in the profits being distributed among them. The point that we are making here is that the mere factum of distribution of profits cannot be used as a peg on which to hang the Department's case that the secreted profits belonged to the assessee-firm. Going further, let us assume, again with the Department, that the five persons did constitute a firm in relation to secreted profits. Even then, as we see it, the Department's case does not improve. It is well settled that whatever may be the position under the Partnership Act, under the Income-tax Act a firm is a juristic entity for purposes of assessment. In that context, courts have been called upon to answer the question whether, where there is a plurality of firms with identical partners, the firms, constitute distinct and separate taxable entities, or a single taxable entity. In the Bombay High Court's cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceed upon so very general a principle without a careful enquiry into the concrete case and into the matters above mentioned. It may turn out that the case depends on the question of fact whether the two firms were entirely separate--a question of fact including the question of intention. It is necessary that we should know whether in substance and in truth the partners as part of the business of Martin and Company brought up certain assets (in which cage the fact that these assets went by a different name would have no importance whatever) or whether, on the other hand, it was an entirely separate venture not intended to be any part of the business of Martin and Company or to have any connection with Martin and Company. " The Calcutta ruling was followed by the Punjab and Haryana High Court in R. N. Oswal Hosiery Mahabir Woollen Mills v. CIT [1968] 70 ITR 843, and by a Full Bench of the Andhra Pradesh High Court in CIT v. G. Parthasarathy Naidu Sons [1980] 121 ITR 97. In the latter case, after noticing the earlier rulings on this issue, the Andhra Pradesh High Court enunciated the following principles : " (1) The concept of partnership law is that a firm is not an entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... businesses and the factum or otherwise of the inter-lacing and inter-locking of the funds between the two partnerships is a question of fact and such finding would be binding on the High Court in a reference unless there is no material in support of it. " 62. The above principles will atonce bring into bold relief how untenable the Department's contention is, particularly in the absence of any external evidence. In other words, even if we sail with the Department and hold that the seized papers do, in fact, contain details of taxable profits distributed amongst the five persons, we will not be able to connect the secreted profits with the assessee-firm, relying only on the fact that the secreted profits had been divided amongst the five persons in the same ratio as the one in which they shared the disclosed profits of the assessee-firm. The Department's difficulty, as we see it, is that it has brought on record no evidence to establish a nexus, however, tenuous, between the so-called secreted profits and the assessee-firm. 63. In view of the foregoing, therefore, we decline to interfere in the matter. 64. In the view that we have taken of the matter, we do not consider it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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