ITR/41/1997 1/35 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 41 of 1997 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Sd/- ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 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 ? NO 5. Whether it is to be circulated to the civil judge ? NO ==================================== HEIRS AND LEGAL REPRESENTATIVES OF LATE LAXMANBHAI S. PATEL - Applicants Versus COMMISSIONER OF INCOME TAX - Respondent ==================================== Appearance : MR MANISH J SHAH for Applicants. MR MANISH R BHATT for Respondent. ITR/41/1997 2/35 JUDGMENT ==================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 22/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. During the pendency of this reference before this Court, the applicant – assessee, namely, Shri Laxmanbhai S. Patel expired and hence, his heirs and legal representatives are brought on record vide order dated 09.07.2008 passed in Civil Application No. 142 of 2008 and they are pursuing this reference before this Court. 2. The Income-tax Appellate Tribunal, Ahmedabad Bench A, Ahmedabad vide statement of case drawn in March 1997, referred to the following question of law for the assessment year 1985 - 86, at the instance of the assessee, for the opinion of this Court :- “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the addition of Rs.8,78,358/- in the hands of the assessee ?” 3. The brief facts giving rise to the present reference are ITR/41/1997 3/35 JUDGMENT that there was a search and seizure operation under Section 132 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') carried out at the residential premises of the assessee on 26.03.1986 in which no substantial thing was found. Again, similar search operation was carried out by the department at the residence of one Mr. Rameshbhai M. Patel on 25.07.1986 and a key of the bank locker along with two packets containing six promissory notes were found. The statement of the said Mr. Rameshbhai M. Patel was recorded at the time of search in which he has stated that the said key of the Bank locker as well as both the envelopes containing the promissory notes were handed over to him by Laxmanbhai S. Patel, the assessee. Out of the six promissory notes, one promissory note is for Rs.8,78,358/- dated 25.10.1984 executed by Shri Kantilal Motilal on behalf of M/s. Durga Cotton Industries in the capacity of a partner. The statement of Shri Kantilal Motilal was also recorded on that very day of search i.e. 25.07.1986 and in his statement, the said Shri Kantilal Motilal admitted that he had written the promissory note and ITR/41/1997 4/35 JUDGMENT signed the same on behalf of M/s. Durga Cotton Industries after obtaining a sum of Rs.8,78,358.75/- on behalf of his firm. It has also come on record that the said Shri Kantilal M. Patel filed an affidavit on 07.08.1986 to the effect that his statement was recorded at late hours on the night of 25/26.07.1986 and under pressure by the Income Tax authorities. From this subsequent affidavit dated 07.08.1986 of Shri Kantilal M. Patel, it appeared to the authorities that the said Shri Kantilal M. Patel tried to retract from the earlier statement recorded by the authorities on 25/26.07.1986. Thereafter on 22.09.1986, a disclosure petition was moved on behalf of all the three partners, namely, Kantilal M. Patel, Baldev M. Patel and Babubhai Manilal Shah of M/s. Durga Cotton Industries in which they disclosed a sum of Rs.11 Lacs including the sum of Rs.8,78,358.75ps. of that promissory note. The proceedings under Section 132 (5) were initiated against the assessee in regard to the addition of Rs.8,78,358.75/- in the hands of the assessee on the basis of that promissory note executed by Kantilal M. Patel in favour of the assessee. The ITR/41/1997 5/35 JUDGMENT case of the assessee is that he has no concern with the said promissory note nor he handed over the same to Laxmanbhai S. Patel nor he ever lent any money to Shri Kantilal M. Patel. This contention of the assessee was rejected by the Assessing Officer. Later on, during the assessment proceedings, the Assessing Officer again gave an opportunity to the assessee to explain as to why the sum of Rs.8,78,358.75/- should not be added in his hands. The assessee filed reply dated 25.01.1988 in which he reiterated the same facts that he has never advanced any amount to Shri Kantilal M. Patel in respect of the said promissory note. He further stated that statement of Shri Kantilal M. Patel was recorded somewhere in the mid night after putting lot of pressure and that statement had been retracted by said Kantilal M. Patel. He further corroborated the same story of partners of M/s. Durga Cotton Industries that they had disclosed a sum of Rs.11 Lacs including this sum of Rs.8,78,358.75/-. Again the case of the assessee was that each of the partners of M/s. Durga Cotton Industries had been assessed by the concerned Income Tax Officer for the ITR/41/1997 6/35 JUDGMENT sum disclosed by them in the disclosure petition dated 29.09.1986 and once the amount including the amount of Rs.8,78,358.75/- had been taxed in the hands of Kantilal M. Patel, Baldevbhai M. Patel and Babubhai S. Shah, then said amount cannot be taxed twice in the hands of the assessee. The Assessing Officer did not find any substance in all these assertions of the assessee and he treated the amount of Rs.8,78,358.75/- as income of the assessee from undisclosed sources and added the same in the total income. 4. Being aggrieved by the said order of the Assessing Officer, the assessee went in appeal and legal as well as factual pleas were raised before the Commissioner of Income Tax (Appeals). The first legal plea raised on behalf of the assessee was that the assessee was not having any concern with the promissory note nor has he advanced any amount to Kantilal M. Patel or M/s. Durga Cotton Industries. The plea of the assessee was that partners of M/s. Durga Cotton Industries made a voluntary disclosure of Rs.11 Lacs as belonging to all ITR/41/1997 7/35 JUDGMENT the partners which included the sum of Rs.8,78,358.75/- also and that amount stood assessed in their hands and after that, there was no logic to assess the same amount in the hands of the assessee. The other legal plea was that the department has placed reliance on the statement of Shri Ramesh M. Patel but no opportunity was given to the assessee to cross-examine him nor copy of his statement was furnished to him. The learned CIT (Appeals) took up each and every point and concluded that the statement of Kantibhai M. Patel recorded by the Assistant Director of Investigation on 25.07.1986 was not to be given all credence as the same has not been properly retracted. The other plea of the assessee that already Rs.11 Lacs disclosed by partners of M/s. Durga Cotton Industries including the sum of Rs.8,78,358/- stands assessed in the hands of those partners and need not be taxed twice in the hands of the assessee was also repelled by the learned CIT (Appeals) on the basis that assessment of Shri Kantilal M. Patel and other two partners was under Amnesty scheme and the department was not precluded from making ITR/41/1997 8/35 JUDGMENT assessment in the hands of the appellant. Lastly, the learned CIT (Appeals) also observed that it was not a case in which Rameshbhai M. Patel should have been cross-examined by the assessee as facts stated by him were almost admitted facts. The learned CIT (Appeals) also decided the point on merits against the assessee and concluded that amount was rightly assessed in the hands of the assessee. 5. Being further aggrieved by the order of learned CIT (Appeals), the assessee went in appeal before the Income Tax Appellate Tribunal, Ahmedabad and before the Tribunal, the same contentions were reiterated by the assessee. The first contention was that addition of the impugned amount was made by the revenue after placing reliance on the original statement of Kantibhai M. Patel and promissory notes but statement of Kantibhai M. Patel could have not been relied upon as the same stood retracted by him through affidavit mentioning that his earlier statement was taken at the late hours of the night and under pressure. The other plea was that the amount of Rs.8,78,358/- was included ITR/41/1997 9/35 JUDGMENT in the sum of Rs.11 Lacs which has since been disclosed under voluntary disclosure scheme by Shri Kantilal M. Patel and other two partners vide disclosure petition and even partners of M/s. Durga Cotton Industries were assessed for the disclosed amount. The other plea was that once the amount of Rs.11 Lacs including the disputed figure of RS.8,78,358/- stood assessed in the hands of three partners of M/s. Durga Cotton Industries, then the same amount cannot be assessed in the hands of assessee on the principle of double taxation. The last plea was that promissory note was not recovered from the possession of assessee but from the possession of Rameshbhai M. Patel and his statement was recorded at the back of assessee and opportunity of cross- examination was not given to the assessee. On the basis of these facts, the contention of the assessee was that appeal should be allowed. 6. On the other hand, the learned departmental representative appearing for the revenue relied upon the orders of the authorities below and pointed out ITR/41/1997 10/35 JUDGMENT that cross-examination of Rameshbhai M. Patel was not relevant factor as whatever was stated by him was admitted by the assessee and thus no purpose would have served by his cross-examination. About retraction of Kantibhai M. Patel, the learned D.R. pointed out that his original statement was spontaneous which should have been given precedence over the subsequent events and retraction was manipulated move. Disclosure petition of partners of M/s. Durga Cotton Industries was also an after-thought and that move was at the instance of the assessee. According to the learned departmental representative, it is not a case of double taxation but the amount in question is to be assessed in the hands of right person and assessee is the right person. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Income Tax Officers V/s. Chartered Accountant. Atchaiah, (1996) 218 ITR 239. 7. The Tribunal, after considering all the facts and circumstances of the case did not find any merit in the plea of the assessee and accepting the argument of the ITR/41/1997 11/35 JUDGMENT learned departmental representative came to the conclusion that addition was rightly made in the hands of assessee who was the right person in view of the decision of the Hon'ble Supreme Court. 8. On the above premises, the question of law as reproduced earlier was referred to by the Tribunal for the opinion of this Court. 9. Mr. Manish J. Shah, learned advocate appearing for the assessee has reiterated all the three contentions which were raised before the authorities below. He has taken us through the orders passed by the authorities below as well as the documents produced along with the paper book. He has strongly urged before us that all the three authorities have not correctly applied the principle of law to the facts of the case and arrived at an erroneous conclusion in law which cannot be sustained in view of the settled position in law. He has submitted that the statement of Rameshbhai M. Patel on which heavy reliance was placed by the revenue was not at all referred to in the assessment order and ITR/41/1997 12/35 JUDGMENT the Assessing Officer has made the addition of Rs.8,78,358.75/- in the hands of of the assessee. Neither the copy of the statement was given to the assessee nor any opportunity of cross-examining the said Rameshbhai M. Patel was given to the assessee. Before the learned CIT (Appeals), the statement of Rameshbhai M. Patel is produced by the revenue and though the assessee has raised an objection against production of additional evidence, the said statement was allowed to be produced and the request made by the assessee to allow him to cross-examine the said Rameshbhai M. Patel was not accepted by the learned CIT (Appeals). He has, therefore, submitted that the entire addition made by the Assessing Officer and confirmed by the learned CIT (Appeals) as well as the Tribunal is required to be deleted on the ground that it is in violation of the principles of natural justice. 10.In support of his submission, he relied on the decision of the Hon'ble Supreme Court in the case of Kishinchand Chellaram V/s. Commissioner of Income-Tax, Bombay City – II, (1980) 125 ITR 713 ITR/41/1997 13/35 JUDGMENT wherein it is held that before the Income-tax authorities could rely upon the letters dated 18.02.1955 and 09.03.1957, they were bound to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross-examine the Manager of the Bank with reference to the statement made by him. 11.He further relied on the decision of the Hon'ble Supreme Court in the case of C. B. Gautam V/s. Union of India and others, (1993) 199 ITR 530 wherein it is held that the Courts have generally read into the provisions of the relevant sections a requirement of giving a reasonable opportunity of being heard before an order is made which would have adverse civil consequences for the parties affected. This would be particularly so in a case where the validity of the section would be open to a serious challenge for want of such an opportunity. 12.He further relied on the decision of Delhi High Court ITR/41/1997 14/35 JUDGMENT in the case of Commissioner of Income-Tax V/s. Dharam Pal Prem Chand Limited, 295 ITR 105 wherein it is held that the Assessing Officer had based his assessment order on the report obtained from the research institute. The correctness of that report itself having been under challenge by the assessee who had not only filed petitions thereto but also sought permission on several occasions to cross-examine the analyst even agreeing to pay the necessary expenses, the report could not automatically have been accepted. Since the Assessing Officer did not permit the correctness or otherwise of the report to be tested, there was a clear violation of the principles of natural justice by him in relying upon it to the detriment of the assessee. Even if the strict rules of evidence may not apply to assessment proceedings, the basic principles of natural justice would apply to the facts of the case. Accordingly, the appeal filed by the revenue before the Delhi High Court was dismissed. 13.Mr. Shah further relied on the decision of the Madhya Pradesh High Court in the case of Prakash Chand ITR/41/1997 15/35 JUDGMENT Nahta V/s. Commissioner of Income-tax, (2008) 301 ITR 134 wherein it is held that as the Assessing Officer had not summoned R inspite of his request made under Section 131 of the Act, the evidence of R could not have been used against the assessee and in the absence of affording a reasonable opportunity of being heard by summoning the said witness the assessment order was vitiated. 14.Mr. Shah further relied on the decision of the Hon'ble Supreme Court in the case of Rajesh Kumar and others V/s. Deputy Commissioner of Income-tax and others, (2006) 287 ITR 91 (SC) wherein it is held that principles of natural justice are based on two principles : (i) nobody shall be condemned unheard and (ii) nobody shall be judge of his own cause Duty to assign reasons is, however, judge-made law. When civil consequences ensue, there is hardly any distinction between an administrative order and a quasi judicial order. It is now well settled that the thin demarcating line between an administrative order and a quasi-judicial order stands obliterated. It is further ITR/41/1997 16/35 JUDGMENT held that when an authority, be it administrative or quasi-judicial, adjudicates on a dispute and if its order is appealable or subject to judicial review, it would be necessary to spell out the reasons therefor. While, however, applying the principles of natural justice the Court must also bear in mind the theory of useless formality and the prejudicial doctrine. The Court accordingly held that assuming that two sets of accounts were maintained by the assessee, it did not mean that the nature of the accounts was difficult to understand, and an order under Section 142 (2A) could not be made on that sole basis. 15.Mr. Shah has further submitted that the authorities have committed an error in rejecting the contention of the assessee regarding double taxation after having simply followed the decision of the Hon'ble Supreme Court in the case of Income Tax Officers V/s. Chartered Accountant. Atchaiah, (1996) 218 ITR 239. He has submitted that the said case has no application at all. In that case, there is an admitted position that income is to be assessed either in the hands of the ITR/41/1997 17/35 JUDGMENT individuals or in the hands of association of persons. In that context, the Hon'ble Supreme Court has observed that under the present Act, i.e. Act of 1961, the Income Tax Officer has no option like the one he had under the 1922 Act. He can and he must tax the right person and the right person alone. By right person is meant a person who is liable to be taxed according to law with respect to a particular income. The expression wrong person is obviously used as the opposite of the expression right person. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. Here in the present case, it cannot be said that the assessee is a right person in whose hand the amount of Rs.8,78,358.75/- is to be taxed as an income from undisclosed sources. Since Kantibhai M. Patel and other two partners have admitted that the amount belongs to them and they have offered the said amount as their income in the petition filed under voluntary disclosure scheme and the same has been assessed in their hands, it cannot be said that the right ITR/41/1997 18/35 JUDGMENT persons have not been assessed and that the said amount belongs to the assessee and again it is required to be assessed in the hands of the assessee. He has, therefore, submitted that the addition made by the Assessing Officer and confirmed by the Appellate Authority deserves to be deleted and the question referred to this Court is required to be answered in favour of the assessee and against the revenue. 16.Mr. Manish R. Bhatt, learned Senior Standing Counsel appearing for the revenue, on the other hand, has supported the orders passed by the authorities below and submitted that the authorities below have appreciated the facts in correct perspective and arrived at the correct conclusion which requires no interference by this Court as addition was rightly made in the hands of the assessee. He has further submitted that the main argument of the assessee is that the assessee was not given an opportunity of cross- examining Shri Rameshbhai S. Patel, on whose statement heavy reliance was placed by the Assessing Officer. It was argued on behalf of the assessee that ITR/41/1997 19/35 JUDGMENT by denying the opportunity of cross-examining the said Shri Rameshbhai, the Assessing Offficer has violated the principles of natural justice. In this connection, he has submitted that whatever was stated by the said Shri Rameshbhai was not rebutted by the assessee and the same stood proved by all the facts and circumstances of the case available on record. The assessee himself has admitted that he handed over the key of the locker and one envelope containing promissory notes to the said Shri Rameshbhai for safe custody. The assessee has falsely denied the fact that he handed over two envelopes. The authorities have considered the statement of the assessee in which initially, he stated that he was having one locker in the joint name of his wife and his own and did not state about the existence of locker, the key of which was handed over by him to the said Shri Rameshbhai. It was only after the ADI read over the statement of the said Shri Rameshbhai to him that the assessee had to admit the existence of another locker. The assessee was habitual lier and tried to conceal the bear facts. On these premises, the authorities have come to the ITR/41/1997 20/35 JUDGMENT conclusion that the assessee must have handed over two envelopes to the said Shri Rameshbhai and not one, including the promissory note in question and hence, there was no necessity of cross-examining the said Shri Rameshbhai. 17.Mr. Bhatt has further submitted that the retraction of Shri Kantilal M. Patel is nothing but an after-thought. The first statement of the said Shri Kantilal M. Patel was spontaneous and that should be given precedence over the subsequent events. The retraction was made apparently at the instance of the assessee who has lent huge amount to the said Shri Kantilal and his partners and he could have easily prevailed upon the will of these three partners. The retraction was not a real retraction but it was made to help the cause of the assessee. Even the disclosure petition filed by the three partners was also an after-thought and the same was moved at the instance of the assessee. He has further submitted that in case any pressure or coercion was put to the said Shri Kantilal or that his statement was recorded at the mid night, he could ITR/41/1997 21/35 JUDGMENT have come before the authorities just after the said coercion or pressure was put up by the authorities and should not have waited for a week or so for retraction. He has, therefore, submitted that no weightage should be given to the alleged retraction of the said Kantilal M. Patel. 18.So far as the plea of double taxation is concerned, Mr. Bhatt has submitted that there is no case of double taxation. Simply because Kantilal M. Patel and other two partners have filed disclosure petition and have disclosed their income therein from undisclosed sources, that does not preclude the department to make an inquiry into the undisclosed income of the assessee and if it were found on sufficient evidence that the amount in question belonged to the assessee, the department could not be prevented from taxing the said income in the hands of the assessee. In support of this submission, Mr. Bhatt relied on the decision of the Hon'ble Supreme Court in the case of Jamnaprasad Kanhaiyalal V/s. Commissioner of Income-tax, (1981) 130 ITR 244 (SC) wherein it is held that (i) ITR/41/1997 22/35 JUDGMENT the declaration under Section 24 (2) of the Finance (No.2) Act, 1965, had to relate to income actually earned by the declarant and the Act granted immunity to the declarant alone and not to other persons to whom the income really belonged; (ii) the finality under Section 24 (8) of the Finance (No.2) Act, 1965, was to the order of the Central Board under Section 24 (6) and not to the assessment of tax made on the declarations furnished under the scheme; (iii) under Section 24 (1), the declaration was required to be made in respect of the amount which represented the income of the declarant. The declaration could not be made in respect of an amount which was