ITR/117/1997 1/13 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 117 of 1997 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MR.JUSTICE Z.K.SAIYED ====================================================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ===================================================== COMMISSIONER OF INCOME-TAX - Applicant(s) Versus M/S.AMBICA CORPORATION - Respondent(s) ==================================================== Appearance : MR BB NAIK for Applicant(s) : 1, Ms SWATI S. SOPARKAR with MR TUSHAR P. HEMANI for Respondent(s) : 1, ===================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 15/04/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. Though only one Reference is registered, in fact, there are two Cross-References, one by the Revenue for Assessment Years 1980-81 to 1982-83, and ITR/117/1997 2/13 JUDGMENT the other by the assessee for Assessment Years 1983- 84 and 1984-85. 2. The Income Tax Appellate Tribunal, Ahmedabad Bench-C has referred the following question for the opinion of this Court at the instance of the Commissioner of Income Tax under sec. 256(1) of the Act (the Act). “Whether, the Appellate Tribunal is right in law and on facts in holding that since the assessment was completed beyond a period of 4 years, the same could not be sustained and thereby the reassessment proceedings were bad ?” 3. The three years in question, are 1980-81, 1981- 82 and 1982-83. It is an accepted fact that the facts for all the three years are similar and hence for the sake of convenience facts relatable to Assessment Year 1980-81 are taken. Original Assessment was framed under sec. 143(3) of the Act on 25.2.1983. Thereafter, the assessment was reopened under sec. 147(a) of the Act by issuance of notice under sec. 148 of the Act on 25.7.1985. The reassessment was framed by assessment order passed on 15.3.1990. In fact, the reassessment orders for all the three years have been passed on 15.3.1990. 4. The assessee is a registered partnership firm. Originally, the assessment was made by taxing only ITR/117/1997 3/13 JUDGMENT property income. The assessments were reopened on the basis of valuation made by the departmental valuer as regards the cost estimated by the departmental valuer and the difference in the cost declared by the assessee in its books of accounts. The difference for various years has been recorded by the Tribunal in the following tabular form: A.Y. Cost declared Cost assessed Difference by the by the Dept. in Cost Assessee valuer Rs. Rs. Rs. 1979-80 34,953 60,417 25,646 1980-81 2,17,016 3,75,093 1,58,077 1981-82 2,49,629 4,31,583 1,81,954 1982-83 94,250 1,62,884 68,634 1983-84 69,269 1,19,794 50,525 1984-85 3,153 5,429 2,276 6,68,270 11,55,200 4,86,930 5. Against the action of the Assessing Officer of initiating reassessment proceedings and also making additions of the amounts as undisclosed income under sec. 69B of the Act towards unexplained investment in construction, the assessee carried the matter in appeal. The Commissioner (Appeals) for the reasons recorded in consolidated order for five years made on 13.8.1981 held that : (1) reopening was justified and (2) on merits,no addition was required to be made. ITR/117/1997 4/13 JUDGMENT 6. The Revenue carried the matter in appeal against the finding recorded by the Commissioner (Appeals) on merits. The assessee had not challenged the order of the first Appellate Authority but pleaded before the Tribunal that it was open to the assessee to support the order of Commissioner (Appeals) on the ground which had been decided against the assessee, namely, reopening of assessment. 7. The Tribunal accepted the contention of the assessee and permitted the parties to agitate the validity of the reassessment proceedings. After hearing both the sides, the Tribunal held that: “In the impugned assessments, we find that the assessment for the A.Ys. 1980-81, 1981- 82 and 1982-83 were completed only on 15.3.1990 beyond four years and, therefore, they cannot be sustained. We, therefore, dismiss the appeals of the department on these facts and law.” 8. Assailing the aforesaid finding of the Tribunal, Mr B.B. Naik learned Standing counsel for Revenue has submitted that the Tribunal has committed an error in law in holding that the assessments were completed beyond four years for Assessment Years 1980-81, 1981- 82 and 1982-83. That the notices for reassessment having been issued on 25.7.1985, the last day for completion of assessment proceedings would be 31.3.1990 and the assessments had been completed on ITR/117/1997 5/13 JUDGMENT 15.3.1990. 9. Mr. Tushar P. Hemani submitted that in so far as initiation of reassessment proceedings was concerned, at least for Assessment Year 1980-81 the said action was bad in law and to that extent the Tribunal's order did not call for any interference. That the assessee had disclosed all the relevant facts fully and truly and there being nothing further to disclose the notice issued by the Assessing Officer beyond four years was not justified. He, therefore, urged that reassessment proceedings had rightly been struck down by the Tribunal and the order was required to be upheld on a different ground, if the court is not inclined to accept the finding of the Tribunal that the said assessment was completed beyond four years, the reassessments were bad. 10. Having heard the learned advocates, it is apparent that the Reference made at the instance of Revenue is required to be decided in favour of Revenue. The question posed for consideration of this Court is clear and unambiguous and the only finding of the Tribunal which has been challenged is regarding the assessment being completed beyond the period of four years and, thereby, the reassessment proceedings being bad. Under sec. 153(2)(a) of the Act, the time limit for completion of reassessment has been provided. The provision stipulates that no order of reassessment shall be made under sec. 147(a) ITR/117/1997 6/13 JUDGMENT of the Act after the expiry of four years from the end of the assessment year in which the notice under sec. 148 of the Act was served. The facts of the present case show that notices under sec. 148 of the Act are dated 25.7.1985 and, therefore, Assessment Year 1985-86 would be the relevant Assessment Year during which the said notice should be served upon the assessee. It is nobody's case that the notices for three years under consideration issued under sec. 148 of the Act were not served before 31.3.1986. The period of four years would therefore elapse on 31.3.1990. Admittedly, the assessments have been framed for the three years under consideration on 15.3.1990. Hence, on a plain reading of the relevant provisions, it is apparent that the Tribunal has committed an error in law in holding that the assessments were completed beyond the period of four years and, therefore, the reassessment proceedings were bad. The facts noted hereinbefore show that the assessments were completed within the period of four years from the end of the Assessment Year in which the notices under sec. 148 of the Act, were issued and served. 11. The Tribunal was, therefore, not right in law and on facts in holding that the assessments were completed beyond a period of four years, and as a consequence, the reassessment proceedings were bad. The question referred at the instance of the Revenue is, therefore, answered in the negative, that is, in favour of the Revenue and against the Assessee. ITR/117/1997 7/13 JUDGMENT 12. In so far as the Cross Reference at the instance of the assessee is concerned, the same relates to two Assessment Years 1983-84 and 1984-85. The following two questions have been referred by the Tribunal at the instance of the Assessee: 1.Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law confirming addition in the hands of the firm which was already disclosed by the partners in their individual capacities? 2.Whether, on the facts and circumstances of the case, the Income-Tax Appellate Tribunal was right tin law in holding that amount disclosed by the partners on profit ratio basis can still be regarded as unexplained investment in the hands of the firm? 13. As noted hereinbefore, the investment made by the firm by way of cost of construction was found to be on the lesser side and the Reference was made to the Departmental Valuer who estimated the cost of construction for various periods, including the two years under consideration. While framing the assessment orders under the provisions of Sec. 143(3) of the Act, the Assessing Officer added a sum of Rs. 52,500/- under sec. 69-B of the Act for ITR/117/1997 8/13 JUDGMENT Assessment Year 1983-84 and Rs. 2277/- for the Assessment Year 1984-85. 14. The assessee carried the matter before the the Commissioner (Appeals) who allowed the appeal by observing as under: “The additions have been made from the period when the property was under constructions and the firm was not having any sources of income. It is a fact that the partners had their sources of income and apart from rent they have other sources and all the possibilities of earning black money to invest in the construction of this property. The partners have admitted that they had undisclosed income which were invested in the construction of this property and this undisclosed income has been offered for taxation under Amnesty Scheme different years in their profit sharing ratio. In view of this cost the explanation that the undisclosed investment relates to partners appears reasonable and satisfactory. The provisions of section 69B is, therefore, not applicable on this unexplained investment of the property of the firm. The additions made in all these under sec. 69B are, therefore, deleted.” 15. In Revenue's appeal, the Tribunal did not accept ITR/117/1997 9/13 JUDGMENT the finding recorded by the Commissioner (Appeals) and reversed the order made by the Commissioner (Appeals) upholding the addition made by the Assessing Officer. In relation to the contention raised on behalf of the assessee that the disclosure by the partners of the amount of difference in the cost of construction under Amnesty Scheme took care of the additions made in the hands of the firm, it was held by the Tribunal that the said explanation by the partners was an after-thought and could not help the assessee firm. 16. Mr. Tushar P. Hemani learned advocate assailing the finding of the Tribunal submitted that; (i) the assessee was required to explain the source of investment and not source of source; that the assessee had already explained the immediate source of investment being the disclosure made by the partners, (ii) the finding of after-thought by the Assessing Officer and the Tribunal was an incorrect finding recorded because under the Amnesty Scheme disclosure of the amounts in the hands of the partners in the profit sharing ratio had been accepted by the department, (iii) that even if such a disclosure could be termed to be an after-thought in absence of any legal prohibition the Tribunal was also required to consider the legal consequences of such disclosure and the same income could not brought to tax twice. It was further submitted that as laid down by the Apex Court in the case of Commissioner of Income Tax vs. Smt. P.K. Noorjahan, reported in ITR/117/1997 10/13 JUDGMENT (1999) 237 ITR 570, a discretion was vested in the Assessing Authority and there was no material with the Assessing Authority to come to the conclusion that any addition was required to be made in the hands of the assessee firm when the partners had owned up the investment stated to have been made by the firm. That the Tribunal has failed to appreciate this legal position and the Tribunal ought to have held that the authority had failed to exercise the discretion correctly. 17. On behalf of the respondent – Revenue, Mr. Naik submitted that the firm and the partners were distinct entities as laid down by the Apex Court from time to time and for this purpose placed reliance on the Apex Court's decision in the case of Bist & Sons vs. Commissioner of Income-Tax, New Delhi, reported in (1979) 116 ITR 131 with special reference to the observations appearing at page nos. 133 and 134 of the reported judgment. 18. There is no dispute to the fact that the assessments upto Assessment Year 1982-83 were re- opened on the basis of valuation report tendered by the Departmental Valuer and for the two years under consideration the assessments were pending when the Departmental Valuer's report was received by the Assessing Officer. The partnership firm comprised of 11 partners had come into existence under a deed executed on 12.11.1977 and was already carrying on business of purchasing lands, plotting the same, ITR/117/1997 11/13 JUDGMENT constructing buildings and shops and also giving the same on rent, if not sold. Admittedly, a property had been constructed at Palanpur and rented out. The assessee was called upon to tender its explanation in relation to the difference in cost of construction as recorded in the books of accounts and determined by the Departmental Valuer. The explanation tendered by the assessee vide letter dated 17.6.1985 has not been accepted by the Assessing Officer. In relation to the disclosure made by the 11 partners under Amnesty Scheme, the Assessing Officer has held that the said explanation is an after-thought because the disclosure made by the partners is equivalent to the difference in the total cost of construction shown by the assessee firm and worked out by the Departmental Valuer. In other words, the disclosure has been made after receipt of the valuation report of the Departmental Valuer. 19. In the aforesaid set of facts and circumstances, if the Tribunal has upheld the finding of the Assessing Officer and come to the conclusion that the discretion vested in the Assessing Officer under sec. 69B of the Act has rightly been exercised there is no material in the present proceedings to take a contrary view of the matter. There is no dispute that the Assessing Authority has exercised the discretion vested in it. Whether on the same set of the facts and circumstances of the case such discretion has been rightly exercised or not can be determined only keeping in view the facts and circumstances of a ITR/117/1997 12/13 JUDGMENT particular case. In other words, question whether source of investment should be treated as income or not under sec. 69B of the Act, has to be considered in the light of the facts of each case. This is what has been laid down by the Supreme Court in the case of Commissioner of Income-Tax vs. Smt. P.K. Noorjahan (supra). In the facts of the present case, it is not possible to accept the contention raised on behalf of the assessee that such discretion has not been validly exercised. 20. Merely because the partners have disclosed the total amount of difference in cost of construction in profit sharing ratio would not absolve the assessee firm from discharging the onus which the assessee is required to discharge under the provisions of Sec. 69B of the Act considering the fact that it is the investment made by the firm which has been found to be unexplained investment. Whether the explanation tendered by the assessee is found to be satisfactory or not would again be dependent on the facts and circumstances of the case. The Tribunal has come to the conclusion that the explanation of the assessee firm on the basis of disclosure made by the partners is not satisfactory considering the fact that the disclosure was made after the difference in cost of construction had been estimated by the Departmental Valuation Officer. The Court is not in a position to take a different view of the matter in light of the facts and evidence available on record. ITR/117/1997 13/13 JUDGMENT 21. In the circumstances, both the questions referred at the instance of the assessee are answered in the affirmative, that is in favour of the Revenue and against the Assessee. 22. The Reference stands disposed of accordingly. There shall be no order as to costs. (D.A. MEHTA, J.) (Z.K. SAIYED, J.) mandora/