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Addition Made Under Section 144 Is Invalid When The Penalty Proceedings Stand Quashed Under Sub Section 3 Of Section 145 Of Income Tax Act 1961 Sc

The Supreme Court in Civil Appeal No. 6110 of 2009 titled Basir Ahmed Sisodiya Vs Income Tax Officer, held that that the addition under Section 68 of the Income Tax Act, 1961 is needed to be quashed since the appellant or assessee, in subsequent and separate penalty proceedings offered an explanation and caused to produce affidavits and record statements of the concerned unregistered dealers and established their credentials following which penalty proceedings qua same assessment year he was exonerated from findings of concealment of Income.

Reverting to the factual matrix of Civil Appeal No. 6110 of 2009, the assessee, Basir Ahmed Sisodiya was served with a notice under Section 143 (2) of the Income Tax Act, 1961 by the Assessing Officer, for the assessment year 1998­1999, pursuant to which an assessment order was passed on 30.11.2000.

This appeal involves a limited challenge to certain additions made under the heads- Trading Account and Credits in the assessment order. The Officer, inter alia, while relying on the Balance Sheet and the books of account, took note of the credits amounting to Rs. 2, 26, 000/- (Rupees Two Lakhs Twenty ­ Six Thousand Only). The Officer treated that amount as Cash credits under Section 68 of the Income Tax Act and added the same in the declared income of the assessee. The Officer then proceeded to compute the income of the assessee for the concerned assessment year.

Aggrieved, the appellant/assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Jodhpur. The appeal was partly allowed Vide Order dated 09.01.2003. However, as regards the Trading Account & Credits in question, the CIT (A) upheld the Assessment Order.

The appellant/assessee then preferred further appeal to the ITAT. Having noted the issues and objections raised by the Department and the appellant/assessee, the ITAT partly allowed the appeal Vide Order dated 4.11.2004. However, the Order relating to the second addition (under consideration in civil appeal) regarding credits of Rs. 2, 26, 000/­ (Rupees Two Lakhs Twenty ­ Six Thousand Only) came to be upheld.

The appellant/assessee then filed an appeal before the High Court under Section 260-A of the Income Tax Act, 1961. The appeal was admitted on 27.04.2006 on the following substantial question of law:
Whether claim to purchase of goods by the assessee could be dealt with under Section 68 of the Income Tax as a Cash Credit, by placing burden upon the assessee to explain that the purchase price does not represent his income from the disclosed sources?

Arguments raised on behalf of appellant/assessee before Hon'ble High Court
The principal argument of the appellant/assessee was that once the books of account have been rejected and an assessment order has been passed, the same books of account cannot be then relied upon by the Officer to impose consequent addition(s).

The High Court dismissed the appeal Vide impugned Judgment & Order dated 21.8.2008, as being devoid of merits. The High Court opined that the amount shown as credits was nothing but bogus entries and was justly added to the income of the appellant/assessee. The Court also noted other reasons to dismiss the appeal.

Arguments raised by the appellant/assessee before Hon'ble Supreme Court
The appellant/assessee in the Civil Appeal No. 6110 of 2009 reiterated the argument that the Officer, having made the addition under Section 144 of the 1961 Act being best judgment assessment, had invoked powers under sub­section (3) of Section 145 of Income Tax Act, 1961.

For, assessment under Section 144 is done only if the books are rejected. In that case, the same books cannot be relied upon to impose subsequent additions, as has been done in this case under Section 68 of the 1961 Act. The appellant/assessee adopted a three pronged plea in support of the above contention; First, that assessment order refers to Section 145 (2) of the 1961 Act. It should have mentioned Section 145 (3) of the 1961 Act.

For that, the appellant/assessee relies on the amendment of the 1961 Act which came into effect from 01.04.1997. It is urged that Section 145 (2) prior to 01.04.1997 (pre- amendment) is akin to Section 145 (3) post 01.04.1997 (post-amendment). It is thus urged that the Department committed error in mentioning Section 145 (2) and not Section 145 (3); Second, that the assessment order in reference to the first addition has incorrectly mentioned the term not.

According to the appellant/assessee, the prefix of the paragraph and the language used, makes it abundantly clear that the Department had relied upon Section 145 (3) of the 1961 Act to impose the addition. Third, that the assessment was made under Section 144 as the same refers to Section 145 (3). Under Section 144, the Officer has to make best judgment assessment.

The appellant/assessee urges that the purport of the stated provision is that the Officer re­assesses the entire accounts and makes the assessment of total income and thereafter computes the income tax liability. Resultantly, the Officer (after rejecting the books of account) cannot then rely on the same books of account to make any subsequent addition(s). The appellant/assessee also argues that the approach adopted by the Officer would have the effect of taxing the same transaction twice.

Arguments raised by revenue/income tax department before Hon'ble Supreme Court.

Per contra, the respondent urged that the assumption of the appellant/assessee that the assessment order had rejected the books of accounts under Section 145 (3) of the 1961 Act is preposterous. In that, the assessment in question came to be made under Section 143 (3) of the 1961 Act.

Thus, the Officer was justified in relying upon the said books for making addition(s). The respondent would also urge that while imposing the first addition, the assessment order does not reject the books of accounts, but only that part which pertained to assessing the gross profit, as the assessee had not maintained day to day stock registers, nor had produced or maintained other necessary vouchers while determining the gross profits. Additionally, the respondent would also urge that the amount mentioned under Credits in the Balance Sheet is incorrect and qualifies as Cash Credits under Section 68 of the 1961 Act, as stated in the assessment order.

Indisputably, the Officer gave several opportunities to the appellant/assessee to prove the authenticity of the entries in question. As a matter of fact, summon notices were issued to the named fifteen creditors, but no evidence/explanation was forthcoming. The finding of fact so recorded by the Officer is unexceptionable. The respondent thus contends that the finding relating to the cash credits, does not give rise to any substantial question of law.

Ratio of law laid down by Hon'ble Supreme Court
Supreme Court Bench consisting of Justice A. M. Khanwilkar & Justice Dinesh Maheshwari set aside the addition made by the Assessing Officer by holding that:
14. However, it has now come on record that the appellant/assessee in penalty proceedings offered explanation and caused to produce affidavits and record statements of the concerned unregistered dealers and establish their credentials. That explanation has been accepted by the CIT (A) Vide Order dated 13.01.2011. In Paragraph 17 of the said decision reproduced hitherto, it has been noted that the Officer recorded statements of 12 unregistered dealers out of 13 and their identity was also duly established.

After analysing the evidence so produced by the appellant/assessee, the appellate authority [(CIT (A)] noted that the Officer had neither doubted the identity of those dealers nor any adverse comments were offered in reference to their version regarding sale of marble slabs by them to the appellant/assessee in the financial year relevant to assessment year 1998­1999 and receipt of payments after two to three years.

Further, there was no denial of purchase of marbles worth Rs. 4, 78, 900/­ (Rupees Four Lakhs Seventy ­ Eight Thousand Nine Hundred Only) by the assessee and sale thereof worth Rs. 3, 57, 463/­ (Rupees Three Lakhs Fifty ­ Seven Thousand Four Hundred Sixty Three Only) with closing stock of Rs. 2, 92, 490/­ (Rupees Two Lakhs Ninety Two Thousand Four Hundred Ninety Only), as disclosed in the trading account for the year ended on 31.03.1998.

The appellate authority thus found that without purchases of marbles, there could be no sale and disclosure of closing stock in the trading account. In other words, the materials on record would clearly suggest that the concerned unregistered dealers had sold marble slabs on credit to the appellant/assessee, as claimed.

As a consequence of this finding, the appellate authority concluded that there was neither any concealment of income nor furnishing of inaccurate particulars of income by the assessee. We are conscious of the fact that these observations are made by the competent forum (appellate authority) in penalty proceedings under Section 271 of the 1961 Act in favour of the assessee.

However, what needs to be noted is that the stated penalty proceedings were the outcome of the assessment order in question concerning assessment year 1998­ 1999. Indeed, at the time of assessment, the appellant/assessee had failed to produce any explanation or evidence in support of the entries regarding purchases made from unregistered dealers. In the penalty proceedings, however, the appellant/assessee produced affidavits of 13 unregistered dealers out of whom 12 were examined by the Officer.

The Officer recorded their statements and did not find any infirmity therein including about their credentials. The dealers stood by the assertion made by the appellant/assessee about the purchases on credit from them; and which explanation has been accepted by the appellate authority in paragraphs 17 and 19 of the order dated 13.01.2011.

Bench further observed that:
15. To put it differently, the factual basis on which the Officer formed his opinion in the assessment order dated 30.11.2000 (for assessment year 1998­1999), in regard to addition of Rs. 2, 26, 000/­ (Rupees Two Lakhs Twenty - Six Thousand Only), stands dispelled by the affidavits and statements of the concerned unregistered dealers in penalty proceedings. That evidence fully supports the claim of the appellant/assessee.

The appellate authority Vide Order dated 13.01.2011, had not only accepted the explanation offered by the appellant/assessee but also recorded a clear finding of fact that there was no concealment of income or furnishing of any inaccurate particulars of income by the appellant/assessee for the assessment year 1998­1999. That now being the indisputable position, it must necessarily follow that the addition of amount of Rs. 2, 26, 000/­ (Rupees Two Lakhs Twenty ­ Six Thousand Only) cannot be justified, much less, maintained.

The rest of the assessment order dated 30.11.2000 as modified by the CIT(A) vide order dated 9.1.2003, shall remain undisturbed. There shall be no order as to costs. All pending interlocutory applications are also disposed of.

Written By: Dinesh Singh Chauhan, Advocate - High Court of Judicature, Jammu.
Email: [email protected], [email protected]

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