ITA No.577 of 2006 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.572 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ...Respondent ITA No.575 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ...Respondent ITA No.576 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ...Respondent ITA No.577 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ITA No.577 of 2006 2 ...Respondent ITA No.578 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ...Respondent ITA No.579 of 2006 Date of decision :17.10.2011 Sudesh Kukreja Prop. M/s HI-Tech Instruments & Diagonistics, S/o Sh.Wadhu Ram, H.No.142, NAC, Mani Majra, Chandigarh ...Appellant Versus Commissioner of Income Tax – I, Chandigarh ...Respondent CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE G.S.SANDHAWALIA Present:Mr.S.K.Mukhi, Mr.Rajiv Sharma, Ms.Jyoti, Advocates, for appellant, Ms.Urvashi Dhugga, Advocate, for the respondent. ***** G.S.SANDHAWALIA J. By a common order, ITA Nos.572, 575, 576, 577, 578 & 579 of 2006 for assessment years 1997-98, 1996-97, 1998-99, 1995-96, 1999-2000 & 2000-01 respectively will be disposed of. While admitting the appeals, the questions of law framed were as under: ITA No.577 of 2006 3 “ A) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified on facts & in law in confirming the action of the authorities below by erroneously invoking the provisions of Section 148 of the Income Tax Act, 1961 which is against the established principles of law? B) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified on facts & in law in confirming the action of the authorities below by erroneously allowing only partial relief and thereby estimating the income at a net rate of 5% without pointing out any defect qua the sales, purchases, expenditure or any undisclosed income or investment which fact in itself would have led to the dropping of proceeding u/s 147/148 of Income Tax Act, 1961 and acceptance of the book version of the appellant?” The facts are being taken from ITA No.577 of 2006 for the assessment year 1995-1996 as the issue is common in all these cases and pertain to the same assessee. The assessee was dealing in medical equipment relating to heart surgery and his business premises was raided by the Central Bureau of Investigation, Chandigarh on 10.08.2001. The said agency forwarded the copies of these documents to the Additional Commissioner of Income Tax, Range- II, Chandigarh and on the basis of information collected from the Excise and Sales Tax Department, Chandigarh, a notice under Section 148 of the Income Tax Act, 1961 (for brevity, 'The Act') was issued on 22.11.2001. In response to this notice, the assessee filed the return declaring income at Rs.20,920/-. The case was processed under Section 143 (1) of the Act and selected for scrutiny. ITA No.577 of 2006 4 Thereafter, notices were issued under Section 142 (1) and 143 (2) of the Act. The assessing authority, after examining the return of income for the year under consideration, noticed that gross sale of Rs.12,90,078/- had been shown and after examining various expenditures, the net profit of Rs.20,920/- was shown. Accordingly, the assessee was asked to show books of accounts and vouchers on the basis of which he has worked- out his income and in the written submission, the assessee- appellant failed to produce the same on the ground that there was a dispute between his landlord and the records of the tenants were destroyed. The assessing authority accordingly, while examining the purchase/sale documents supplied by the Central Bureau of Investigation, Chandigarh, worked-out the gross profit at the rate of 42.62% and issued show cause notice dated 08.03.2003 requiring the assessee to explain as to why the trading results shown by him may not be rejected under Section 143 (3) of the Act and a net profit of 20% of the gross sales may be applied in his case. Accordingly, by applying a rate of 20%, the income from the business was worked-out at Rs.2,58,015/- and penalty proceedings under Section 271 (1)(C) of the Act were initiated separately. Apart from this, the assessing authority also noticed that appellant had raised loans from the relatives and friends to the tune of Rs.1,39,778/- and accordingly was asked for the details of the persons who had given the said loan and on failing to establish the identity of the creditors, the said amount was added ITA No.577 of 2006 5 to the income of the assessee. Thirdly, the assessing authority also noticed that only a sum of Rs.15,612/- was withdrawn for household expenses whereas the assessee's family consists of his wife and two daughters and the assessee, in his written submission, stated that household expenses of Rs.4000/- per month were being spent by him, and therefore, a further amount of Rs.32,338/- was added to his income and resultantly, the total taxable income of the above-said three figures of Rs.2,58,015/-, Rs.1,39,778/- and Rs.32,338/- was assessed under the three heads and total taxable income was rounded-off as Rs.4,30,130. In the appeal filed by the assessee before the Commissioner of Income Tax (Appeal), Chandigarh, the assessee claimed that notice under Section 148 of the Act was not on account of independent application of mind by the assessing authority and that net income at the rate of 20% of the total sale turn-over was not justified on the ground that he was appointed as agent of M/s Johnson & Johnson for the heart surgery equipment from February, 2000 for the first time in the assessment year 2000-2001; and before that, he was only dealing in trading of branded medicines. Regarding taking of loan of Rs.1,39,778/- from eight persons, affidavit of Wadhu Ram, father of the appellant and his three brothers was filed. The addition of Rs.32,338/- on account of household expenses was contested on the ground that the appellant's wife was Post-Graduate with qualification of M.A. B.Ed and was conducting tuition, and therefore, no addition towards household expenses was called ITA No.577 of 2006 6 for. The CIT accepted the submission that the net profit of 10% was reasonable against the gross sale of Rs.2,58,015/- on the ground that the appellant was trading in branded medicines during the assessment year under consideration and had been appointed as agent of M/s Johnson & Johnson for the heart surgery related equipment viz. Tropease IVC filter, V Stent, World Pass Baloon and Mini Cord Stent for the assessment year 2000- 01 for the first time and since there was nothing to show that the appellant was dealing in surgery equipment for the assessment year 2000-01 and accordingly directed the assessing authority to calculate the net profit at the rate of 10%. On the issue of loans taken to the tune of Rs.1,39,778/-, the addition was up-held whereas the addition of Rs.32,338/- towards household expenses was deleted. In the appeal filed before the Income Tax Appellate Tribunal by the assessee, the rate of gross profit was reduced to 5% of the turn-over under Section 44 AF and on the issue of the loans taken, the case was sent back to the assessing authority for fresh adjudication to produce evidence/creditors to substantiate the claim of loans. The assessee has challenged the above-said order of the Tribunal by way of the present appeal and had contended that the questions of law framed were liable to be decided in his favour. The counsel for the appellant has stressed that the action of the authorities invoking the provisions of Section 148 of the Act is against the established principles on the ground that ITA No.577 of 2006 7 the assessing authority had no reason to believe that any income chargeable to tax had escaped assessment for any assessment year, and therefore, the proceedings were liable to be dropped and the book-version of the appellant was liable to be accepted. In the facts and circumstances of the present case, it would be clear that the assessee had not filed his return with the Department and it was only on account of the search and seizure operation which was carried out by the Central Bureau of Investigation, certain documents came to the notice of the agency which had forwarded the copies of the same to Income Tax Commissioner, Range- II, Chandigarh. It was only on the receipt of the above-said information from the Additional CIT, Range- II, Chandigarh and on the basis of the information collected from the Excise and Sales Tax Department, Chandigarh, a notice under Section 148 of the Act was issued on 22.11.2001 to the assessee and it was thereafter only, the assessee filed his return of income declaring income at Rs.20,920/-. The assessing authority, while issuing notice under Section 148 of the Act, gave the following reasons as to why the assessee-firm should have filed return of the said assessment years, i.e., from 1995-96 to 2000-01:- “During the course of surprise checking by the CBI Anti Corruption Branch & I.Tax Department as also further verification made from Sales Tax Authorities as well as from the banks, it has been noticed that the assessee has shown figures of sales/deposits to the sales tax department/bank as under: Asstt. Year Amount 1995-96 1290078-05 ITA No.577 of 2006 8 1996-97 1412253-47 1997-98 1627809-09 1998-99 1694952-39 1999-2000 938472-60 2000-2001 6,166,00-00 Accordingly the assessee was asked to explain as to why notice u/s 148 of the I.T. Tax Act should not be issued. In compliance the assessee has stated that it has carried out the business from rented commercial place, arranged on sub-let basis till 1998-99 and has effected the above mentioned sales by selling medical products since 1994-95. The assessee firm could not earn enough profit so as to enable to file their Income Tax Returns for the above years and finally he has to close down the said business. As is evident from the above statistics the assessee has must have invested substantial money to carry out the above said business and earned profit thereon also, therefore it was required to furnish the returns of the above assessment years by declaring sources of investment as well as element of profit earned, which the assessee fails to do so in view of explanation 2(a) to section 147 of the Act, accordingly the income of the assessee is worked out by applying net profit rate of 10% on total sales as under:- Asstt. Year Amount 1995-96 129007/- 1996-97 141225/- 1997-98 162780/- 1999-99 169495/- 1999-2000 93847/- 2000-2001 6,1600/- In view of the above facts, I have reason to believe that the income chargeable to tax have escaped assessment for the A.Y. 1996-97 amounting to `Rs. 1441225/-.” A perusal of the said reasons would go to show that the ITA No.577 of 2006 9 assessing authority had verified from Sales Tax authorities as well as from the banks that the assessee had shown figures of the sales to the Excise and Sales Tax Department and on the basis of the sales/deposits figures, came to the conclusion that the assessee-firm could earn substantial amount by carrying on business and had earned profit also, and therefore, the assessee was under obligation to furnish details of the income tax by declaring the source of income for the assessment years under consideration. A perusal of Section 148 of the Act would go to show that the assessing authority would serve on the assessee a notice requiring him to furnish his return within such period as may be specified in which he has disclosed his assessable income under the Act and under Sub-section 148 (2), reasons have to be recorded before issuance of such notice. From the facts noted above, it would be clear that the assessee was carrying on business but had failed to file his return and it is only due to the search operation conducted by the CBI that the documents were forwarded to the Department, who further verified it from the Sales Tax authorities regarding the business being conducted by the assessee and accordingly, notice under Section 148 of the Act was served upon the assessee and the reasons for the issuance of the said notice have already been reproduced above which would go to show that the assessee had invested substantial money and he was required to furnish the return by declaring the source of investment and there was reasonable material before the assessing authority which applied its mind independently by ITA No.577 of 2006 10 issuing the notice under Section 148 of the Act and recorded his reasons while issuing notice. Thus, in the facts and circumstances, the Income Tax Appellate Tribunal was justified in confirming the action of the authorities regarding the invoking of the provisions of Section 148 of the Act, and accordingly, the first question is answered in favour of the Revenue and against the assessee. Regarding the second question of law on the point of the fact that there was no defect qua sales/purchase and any un-disclosed income and the fact would have led to dropping of the proceedings of Section 148 of the Act and the acceptance of the book-version of the appellant, the same also merits no acceptance in view of the background of the facts given above, the assessing authority had initially worked-out the gross income at the rate of 42.62% on the basis of the purchase/sales for the assessment year 2001-02 and applied 20% net profit rate and had enhanced the income to the tune of Rs.2,58,015/-. This was set aside in appeal by the Commissioner of IT who came to the conclusion that the assessee was not dealing with heart surgery equipment for the relevant period and started doing it only in the year 2000-01, and therefore, assessed the net profit at 10% as per the notice under Section 148 of the Act. The assessee further got relief before the Tribunal who further reduced the rate of profit to 5% of the turn-over and also gave the assessee opportunity to produce the persons who had given loan to him. Once the assessee himself had not filed returns and it was only ITA No.577 of 2006 11 on account of search operations conducted by the CBI, it came to light that the assessee was running a business and not filing his returns. It, therefore, cannot be contended by the assessee that there was no defect in his sales/purchase expenditure or any un- disclosed income and his book-version should be accepted. Accordingly, the second question of law is also answered against the assessee in view of the peculiar facts and circumstances of the case. Accordingly, the appeals are dismissed. (G.S.SANDHAWALIA) JUDGE (HEMANT GUPTA) JUDGE 17.10.2011 sailesh