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TMI Blog1992 (12) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain words and figures are central to the controversy before us. These papers contain details relating to the period starting from 1-7-1980. Some of these papers also contain what appears to be the allocation of certain amounts amongst the partners. 6. On an examination of the said papers, the Assessing Officer concluded that the assessee-firm had earned secret profits as detailed below : Previous year Assessment amount ending on year Rs. 30-6-1981 1982-83 3,70,643 30-6-1982 1983-84 2,51,840 30-6-1983 1984-85 4,48,553 30-6-1984 1985-86 4,78,525 30-6-1985 1986-87 4,61,748 The Assessing Officer put the assessee-firm on notice of his intention to bring to charge in its hands the aforesaid concealed income in the relevant assessment years. 7. The assessee-firm responded by making the following points : (i) The firm made no secret profits. (ii) The documents do not relate to the firm or its transactions. (iii) There is not even a mention of the firm's name in any of the papers relied on. Mere mention of partner's initials or entries against their names cannot mean that the documents belong to the firm or firm's business. (iv) There is no indication as to what fine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two-fold contention was urged before the first appellate authority on behalf of the assessee. The first contention was that the papers in question had been " planted " and that, therefore, no credence can be placed on them. The second contention related to the merits of the case. Here all the arguments that were earlier advanced, unsuccessfully, before the Assessing Officer were reinterated. Of course the contentions that had earlier been advanced, unsuccessfully, before the Assessing Officer, were suitably amplified before the CIT (Appeals) ; but the basic fact remains that, on the merits of the case, what was urged before the CIT (Appeals) was essentially the same as that was urged before the Assessing Officer. 10. Certain legal contentions were also urged, which may be summarised as follows : (i) The Assessing Officer has not brought on record any independent corroborative material to show that the assessee-firm had earned secret profits as alleged. (ii) There is no automatic presumption in law that merely because there is a division of profits in the same ratio in which the profits of the firm are divided among the partners, the secret profits belong to the firm. The busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pers, the CIT (Appeals) endeavoured to ascertain the authenticity of the papers by addressing himself to the following transactions recorded therein : (i) Purchase of site for Rs. 32,677 in the name of T. M. Shivanna. (ii) Entries in the name of Marivalle, Ganesh and Santosh. (iii) Sale of car by K.H.V. for a sum of Rs. 9,000 (iv) Transactions relating to Smt. Prabhavathi and Shri Babu, and (v) Purchase of a Maruti car in September, 1983 for Rs. 90,000. The CIT (Appeals) asked the partners whether the transactions were put through. The partners denied all the transactions, whereupon the CIT (Appeals) concluded : " ...From these I cannot but conclude that the document does not depict or reflect a true picture of the business affairs of the firm, and in the light of the various submissions made by the appellant's representative the authenticity of document A-4 is not established. Reliance therefore on this seized material for making huge additions without backing it up with reliable date/evidence/material is misplaced. " 15. Secondly, the CIT (Appeals) accepted the assessee's contention that the presumption embodied in section 132(4A), apposite as it was in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge. 22. The second limb of Shri Puniha's arguments was that none of the 15 points urged before the CIT (Appeals) on behalf of the assessee has any force. Generally speaking, they are either irrelevant, or inconclusive, or speculative, or downright invalid. Amplifying his arguments in this regard, Shri Puniha contended that, the papers in question having been seized from the residence of Palanetraiah, one of the partners of the firm, and the papers having contained details relating to secret profits and the allocation thereof amongst the five partners, the onus to prove that the secret profits did not belong to the firm lay on the assessee. This is especially in view of the fact that the matters relating to the contents of the seized papers are in the personal knowledge of the partners. Therefore, the assessee could not be heard to say that the Department must prove that the secret profits evidenced by the seized papers belonged to the firm. Further, it is not necessary for the Department to find the primary records and other books of account on the basis of which the final statements contained in the seized papers came to be prepared. Again, the fact that the sales-tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also. 26. Turning his attention to the Allahabad case of Pushkar Narain Sarraf v. CIT [1990] 183 ITR 388 relied upon by the assessee, Shri Puniha contended that the said decision is not applicable to this case because it turned on different set of facts. In this regard he highlighted the fact that the question referred to therein was different ; it related to the provisions of section 68 of the Act and not to the provisions of section 143(3) of the Act. 27. The next limb of Shri Puniha's arguments related to certain general issues. 28. Adverting to the assessee's contention before the CIT (Appeals) that during the course of the search, the contents of the seized papers were not put to the partners of the assessee-firm and their response elicited on the various facets of the issue, Shri Puniha vehemently contended that this contention is baseless. He drew our attention to the fact that on 8-4-1986 and 9-4-1986, that is to say, within a week after the search, questions were asked of all the partners on the contents of the seized papers in question. True, said Shri Puniha, no questions were asked on the date of the search. There is, however, nothing strange in this. It is not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir contents with the firm. On the former issue, the CIT (Appeals) did not accept the assessee's contention that the papers in question were planted in the residence of Palanetraiah by some interested parties. According to Shri Lakshminarasimhan, the fact that the papers had been planted could be clear from the following. First Rule 112(7) of the Income Tax Rules stipulates that each and every one of the seized documents should contain the signatures of not only the person whose residence/business premises are searched, but also of the witnesses. In the case before us, it is a matter of record, the seized papers and particularly those relied upon by the Department for making the impugned additions did not contain the signatures of the witnesses. It was Shri Lakshminarasimhan's case that a week after the search the ADI concerned obtained Palanetraiah's initials on the seized papers in the guise of questioning that partner. In this regard Shri Lakshminarasimhan referred to the circumstances according to him significant, that at the relevant point of time the attention of the CIT concerned was drawn to the fact that the Department was trying to make use of planted papers. There was, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impossible for the assessee-firm to have effected undisclosed sales aggregating Rs. 15 crores, without any one of the agencies (such as those connected with the regulated market or those connected with sales-tax and the like) stumbling upon some evidence of clandestine transactions of the assessee-firm. Yet, no such evidence was unearthed by any of the agencies concerned. This would show that the assessee was not indulging in any clandestine transaction. 35. The next point made by Shri Lakshminarasimhan was that, significantly, on the date of the search, no questions were asked of the partners either on the contents of the seized papers or on their nexus with the firm. No direct question was at all asked on the nature of business, the magnitude of the turnover, and the like. Nor was any direct question asked on the issue whether the contents of the seized papers related to the firm. For a fact, even when, a week after the search, sworn depositions were taken, no direct questions were at all asked about the contents of the papers and their relation to the assessee-firm. 36. Shri Lakshminarasimhan then drew our attention to the fact that the CIT (Appeals) had, on his own, picked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper containing allocation of profits amongst the partners has no evidentiary value ; and (ii) the case of Prashant S. Shah 188 ITR (Statutes) 83. In the latter case the Gujarat High Court had rejected a reference application filed by the Department seeking a reference on the question whether an unsigned valuation report seized by the Department could form the basis for making additions to the capital gains returned by the assessee, and the Supreme Court dismissed the Department's Special Leave Petition. 41. Shri Lakshminarasimhan drew our attention to the Madhya Pradesh case of Milan Supari Stores v. ITO [1990] 184 ITR 106 and Milan Supari Stores v. Assistant ITC [1992] 194 ITR 72. In that case, in the course of a search certain stocks were seized. Relying on the factum of the said seizure, the Assessing Officer initiated re-assessment proceedings for the earlier years. The Madhya Pradesh High Court held that the re-assessment proceedings were invalid. In that connection, the Court observed that merely because at the time of the raid in a particular year some unaccounted stock or money was found in possession of one of the partners of the firm, it would not automatically lead to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter did the Department officers put direct questions either on the contents of the seized papers or on their connection with the firm. (v) When the papers were seized from the residence of a partner no addition can be made in the hands of the firm. (vi) It is impossible to hold that the firm had made secret profits aggregating Rs. 20 lakhs particularly in view of the fact that profits to that extent would have entailed an aggregate turnover of Rs. 15 crores. Surprisingly, however, neither the Department nor the other authorities such as the authorities incharge of the regulated markets, sales-tax authorities and the like have come upon any evidence of concealment. (vii) The Department has not found any unaccounted investment either by the firm or by the partners. For a fact, even the cash, jewellery and investment seized at the time of the search were found to have been fully accounted for and consequently no addition was made on that score. (viii) The Department itself is in two minds about the source of the alleged secret profits. (ix) It should, therefore, follow that the Department not having proved its case, the impugned orders of the first appellate authority do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as to the nature, extent etc. of the transactions concerned) ; (b) the details of interest due to, or, as the case may be, due from the five persons who are partners of the assessee-firm, on two counts, namely (i) " SP interest ", and (ii) " AC Interest " ; (c) the details of the allocation of not only interest on the said two accounts but also of the figures of the financial results of certain transactions referred to in (a) above ; (d) the accounts of the five aforesaid persons containing the details of the amounts credited/amounts debited to the said accounts ; and (e) skelton balance sheet. 52. The Department's case is that the aforesaid figures of the financial results of " unnamed " transactions represents the secreted profits of the assessee-firm. It is also the Department's case that in the course of the said transactions, which were not accounted for by the assessee-firm, the five partners of the firm had received, or, as the case may be, paid interest on the two counts referred to earlier. The seized papers also show that the secret profits were divided amongst the five partners of the firm in the same ratio as the one in which they have agreed to share the disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the IPC on the basis of the recovered Dasti Bahi. The Chief Judicial Magistrate acquitted all the three partners of the firm of the charge under section 193 of the IPC, and acquitted two of the three partners of the charge under section 193 of the IPC. The third partner was also acquitted on appeal by the Court of Additional Sessions Judge. Dismissing the criminal appeal filed by the Department, the High Court observed : " ...We are of the considered opinion that the evidence produced in this case is hardly sufficient to prove the charges under section 277 of the IT Act and section 193, IPC, against the respondents or any of them. The main documentary evidence which has been relied upon by the prosecution to prove its charges against the respondents is Dasti Bahi, ex. P.Y., allegedly recovered by the IT authorities (sic) from the business premises of the firm of the respondents when a raid was carried out at the said premises by those authorities, but we doubt if the alleged recovery of Dasti Bahl, ex. P.Y., and also the contents of that Bahi, have been got duly proved by leading any legal evidence. Shri S.K. Jain, Deputy Excise and Taxation Commissioner, P.W. 6, has stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l facts of the case detailed above, it will at once be clear that the proof of the truth of the contents of the seized papers is totally lacking in this case. The Department has failed to prove the proof of the contents of the seized papers on the lines adumbrated by the Punjab and Haryana High Court in the portion of the report of the case excerpted above. It should, therefore, follow, just as in the Punjab and Haryana case prosecution failed, so in the case before us the Department will have to fail in the quantum appeal. 55. Let us examine the matter more closely to see whether there is anything at all to support the Department's case that the contents of the seized papers represent secreted profits of the assessee-firm which it failed to disclose. As we see it, the Department's case can be reduced to two propositions, namely (i) that the statement in figures of what appears to be the financial results of some unnamed transactions, which is contained in the seized papers, represents the secreted profits, that is to say, the income that is chargeable to tax ; and (ii) that the said secreted profits having been divided amongst the five persons in the same ratio as the one in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the seized sheet of paper contains details of profits distributed amongst the joint adventurers. 58. The foregoing illustration will indicate that, going merely on the basis of the seized papers and nothing more, it could not be predicated that what was distributed was profits and not sale proceeds, that is to say cash. Secondly, the above illustration will also highlight the fact that more than one interpretation could be placed on the details contained in the seized papers. The Department contends that what was distributed was profits. The above illustration, on the contrary, indicates that what was distributed can well be sale proceed, that is cash. In other words, the details of distribution contained in the seized papers do not by themselves present a preponderance of probabilities so as to support the Department's case that what was distributed was taxable income. 59. The second limb of the Department's case is that because the alleged secreted profits were divided among the five persons in the same ratio as the one in which they shared the disclosed profits of the assessee-firm, it must logically follow that the secreted profits belonged to the firm. Here again, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay High Court held that " in law, common partners could constitute two separate firms in respect of different businesses for the purpose of income-tax on the ground that a firm is recognised by the IT Act as an assessee as much as an individual or a joint Hindu family. " It is interesting to note that in the said case the Bombay High Court was speaking through Chagla C.J. who, referring to the aforesaid observations of Beaumont C.J. in Vissonji Sons & Co.'s case, pointed out that the said observations were obiter. In that regard, Chagla C.J. observed at page-27 of the report : " With great respect to the learned Chief Justice, the actual question that be had to consider in that reference was whether a certain item which the assessee claimed as a bad debt was a bad debt or not, and the learned Chief Justice disposed of that reference by coming to the conclusion that this question was really a question of fact and the only question of law that arose was whether there was sufficient evidence to justify the finding of fact by the Tribunal. Therefore, this particular observation on which the Tribunal has relied was not called for the determination of the reference and, therefore, it m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing its own entity and personality. It is also a separate entity under the sales tax law. (5) It is well settled that it is open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law [see CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC)] (6) In law there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners. (7) Whether a firm is genuine or bogus or benami is a pure question of fact. But whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, only one partnership or not is a mixed question of fact and law. (8) The prime guideline to determine this latter question is the cumulative effect or the totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise of inter-lacing and inter-locking of funds between the two fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Pushkar Narain Sarraf in which the High Court has clearly held that the presumption regarding correctness of books in section 132(4A) is not available in the context of making a regular assessment. The reason is not far to seek. Appearing as it does in the fasciculus of sections dealing with the powers of the taxing authorities regarding production of evidence etc., and forming as it does a part of section 132 dealing with search and seizure, the presumption contained in section 132(4A) could only be regarded as being relevant in the context of an order to be passed under section 132(5) of the Act. Secondly, it is true that section 278D incorporates a similar presumption. But the significant point to be noted is that a recourse to that presumption will be available only in cases where criminal complaints filed by the Department are admitted by the Court. In other words, if the criminal complaints are themselves rejected in limine on the ground that no prima facie case had been made by the Department, the question of the department's having access to the presumption does not arise. The point that we are making here is that the basic requirement underlying section 277 is that the ..... 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