ITR/43/1999 1/23 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 43 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- HONOURABLE MR.JUSTICE R.H.SHUKLA 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 ==================================== M/S.KRISHNA TEXTILES - Applicant Versus THE COMMISSIONER OF INCOME TAX - Respondent ==================================== Appearance : MR MANISH J SHAH for Applicant. MRS. MAUNA M. BHATT, Standing Counsel for Respondent. ==================================== ITR/43/1999 2/23 JUDGMENT CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE R.H.SHUKLA Date : 18/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. At the instance of the assessee, Income-Tax Appellate Tribunal, Ahmedabad Bench 'C' Ahmedabad, has referred the following questions of law for the opinion of this Court, for the assessment year 1987 – 88 :- 1) “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the drafts of Rs.1,67,261/- being cash credits in the books of Gujarat Mineral Development Corporation in the account of the assessee was the income of the assessee when there are no corresponding entries in the books of the assessee ? 2) If the reply to the above question is in the affirmative, whether the Tribunal was right in law in not allowing the deduction of the said amount as the cost of purchase or as allowable expenditure ?” 2. The brief facts giving rise to the present reference are that during the course of assessment proceedings for assessment year 1987 – 88, the Assessing Officer called for the copy of account of the assessee as ITR/43/1999 3/23 JUDGMENT appearing in the books of Gujarat Mineral Development Corporation (GMDC) and compared with the copy of account of assessee. The Assessing Officer observed that certain drafts allegedly sent to GMDC by the assessee totaling to Rs.1,92,161/- had not been accounted for in the books of the assessee but the entries in respect thereof appeared in the account of the assessee in the books of GMDC. The assessee replied that the accounts of GMDC could not be reliable and the assessee had not sent the above drafts. The Assessing Officer was not satisfied with the explanation furnished by the assessee and he made the impugned addition of Rs.1,92,161/-. 3. Being aggrieved by the said addition, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Ahmedabad who vide his order dated 20.01.1994 confirmed the addition of Rs.1,92,161/-. 4. Being further aggrieved by the order of the learned Commissioner of Income Tax (Appeals), the assessee preferred second appeal before the Income-Tax ITR/43/1999 4/23 JUDGMENT Appellate Tribunal, Ahmedabad. While confirming the said addition vide its order dated 27.10.1995, the Tribunal has held that the assessee made certain payments to GMDC by drafts which drafts have been duly credited by GMDC in their books of accounts, but there are no corresponding debit entries in the books of assessee. The onus thus squarely lay on the assessee to explain the source of funds remitted by drafts to GMDC. The assessee's explanation was that the books of accounts of GMDC were not reliable. According to the Tribunal, this is too general an explanation to be accepted especially when the payee is a State Government undertaking of repute. The Tribunal, therefore, took the view that the assessee failed to prove the sources of drafts remitted to GMDC and as such, the additions made by the Assessing Officer and confirmed by the CIT (Appeals) are fully justified. 5. The Tribunal has also rejected the alternative contention raised by the assessee that corresponding deduction should be given in as much as the payments ITR/43/1999 5/23 JUDGMENT were made for purchases of raw materials like coal etc. The Tribunal held that in absence of any evidence, it cannot be presumed that the payments were made for business purposes. 6. In the above background of the matter, the above referred two questions of law are referred to this Court for its opinion. 7. Mr. Manish J. Shah, learned advocate appearing for the assessee has submitted that the assessee has taken all throughout a consistent stand that the drafts appeared in the books of accounts of GMDC were never given by the assessee and simply because there are entries of these drafts in the books of accounts of GMDC, the addition cannot be made in the hands of the assessee. He has further submitted that the payment of Rs.24,899.64 made by the assessee to GMDC vide Draft has not been accounted by GMDC. He has further submitted that for the year under consideration, the assessee had, in fact, purchased goods worth Rs.32,403/- from Gautam and Co. and ITR/43/1999 6/23 JUDGMENT Rs.42,166/- from Share Balaji Minerals directly who might have sent the drafts to GMDC on assessee's behalf. The assessee paid the sum by cheques to these parties. Thus, simply because GMDC is a State Government undertaking, it does not mean that the proper entries had been made in its books of accounts. He relied on the decision of the Apex Court in the case of Central Bureau of Investigation V/s. V. C. Shukla and others (1998) 3 S.C.C. 410 wherein it is held that entries in books of accounts shall not alone be sufficient evidence to charge any person with liability. Entries even if relevant are only corroborative evidence. Independent evidence as to trustworthiness of those entries are necessary to fasten liability. He has further submitted that burden is on the revenue to prove that the assessee has made unexplained expenditure and simply on the basis of the entries found in the books of accounts of GMDC, it cannot be said that the said burden has been discharged by the revenue. In support of his submissions, he relied on the decision of the Hon'ble Supreme Court in the case of Kishinchand ITR/43/1999 7/23 JUDGMENT Chellaram V/s. Commissioner of Income-Tax, Bombay City – II, (1980) 125 ITR 713 and the decision of the Calcutta High Court in the case of Bimal Kumar Damani V/s. Commissioner of Income-Tax, (2003) 261 ITR 635. 8. As far as alternative contention which gives rise to question No.2 is concerned, Mr. Shah has submitted that as per the provisions contained in Section 69-C of the Income Tax Act 1961, even if it is assumed that the assessee has incurred expenditure to the extent of Rs.1,92,161/- and even if it is assumed that the assessee has not offered any satisfactory explanation and it is deemed to be the income of the assessee for the year under consideration, such unexplained expenditure is allowable as business expenditure under Section 37 of the Income Tax Act, 1961. He has further submitted that the proviso to Section 69-C inserted by Finance (No.2) Act, 1998 with effect from 01.04.1999 has no application to the facts of the present case as the assessment year involved is assessment year 1987–88, much prior to the ITR/43/1999 8/23 JUDGMENT introduction of the proviso to Section 69-C of the Act. Mr. Shah has, therefore, submitted that even on this alternative ground, the assessee deserves to be succeeded and the questions paused before this Court are required to be answered in favour of the assessee and against the revenue. 9. Mrs. Mauna M. Bhatt, learned Standing Counsel appearing for the revenue, on the other hand, has strongly submitted that all the three authorities have given concurrent finding of facts which cannot be interfered with by this Court. She has further submitted that demand drafts were given by the assessee and credit was rightly given by GMDC in its books of accounts. The assessee was given an opportunity to explain the source of these demand drafts. The assessee, however, could not give any satisfactory explanation except the fact that the assessee has denied to have given such demand drafts. She has further submitted that the assessee's case falls under the provisions of Section 69 of the Act and not under Section 69-C as contended by the assessee. ITR/43/1999 9/23 JUDGMENT Section 69 talks about the unexplained investments. The assessee has made unexplained investment to the tune of Rs.1,92,161/- with GMDC and under Section 69 of the Act, the burden is on the assessee to prove the nature and source of the investments. The investment found in the books of GMDC was not recorded in the books of accounts maintained by the assessee. She has, therefore, submitted that the addition was rightly made by the Assessing Officer and confirmed by the CIT (Appeals) as well as Tribunal. In support of her submissions, she relied on the decisions in the case of (1) Selvakumar, Legal heir of late Chellappan Chettiar V/s. Commissioner of Income-Tax, (1992) 193 ITR 470 (Kerala High Court), (2) Kanhiayalal V/s. Commissioner of Income-Tax, (1998) 234 ITR 566 (Rajasthan High Court), (3) Mrs. Rama Sinha V/s. Commissioner of Income-Tax and another, (2002) 256 ITR 481 (Punjab & Haryana High Court), (4) Commissioner of Income-Tax V/s. Chunnilal Premraj and Company, (2005) 272 ITR 578 (Madhya Pradesh High Court). Based on the aforesaid decisions, she has urged that the addition ITR/43/1999 10/23 JUDGMENT made by the Assessing Officer and confirmed by the CIT (Appeals) as well as Tribunal is required to be upheld. 10.As far as alternative contention is concerned, Mrs. Bhatt has submitted that the revenue authorities have rightly held that the assessee has failed to prove that the alleged expenditure was incurred by the assessee for business purposes and hence, the provisions of Section 69-C for taking benefit of deduction as business expenditure under Section 37 of the Act cannot be invoked. 11.She has further submitted that the source of income not being known, such deemed income will not fall even under the head “Income from other sources” and hence, the corresponding deductions which are applicable to the income under any of heads, will not be attracted in the case of deemed incomes which are covered under the provisions of Section 69, 69-A, 69-B & 69-C of the Act in view of the scheme of those provisions. In support of her submission, she relied on ITR/43/1999 11/23 JUDGMENT the decision of this Court in the case of Fakir Mohmed Haji Hasan V/s. Commissioner of Income-Tax, (2001) 247 ITR 290. 12.She has further submitted that what was implicit prior to 1999 was made explicit by inserting the proviso to Section 69-C of the Act by the Finance (No.2) Act, 1998 with effect from 01.04.1999 which clearly states that notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. 13.While summing up her arguments, she has strongly urged that the reference made at the instance of the assessee is required to be rejected and the questions referred to are required to be answered in favour of the revenue and against the assessee. 14.We have carefully considered the submissions made by the learned advocate appearing for the assessee ITR/43/1999 12/23 JUDGMENT and the learned Standing Counsel appearing for the revenue. We have also minutely gone through the orders passed by the authorities below and considered the relevant statutory provisions and the authorities cited before the Court. There is no dispute about the fact that the assessee has made purchases of lignite coal from GMDC. There is also no dispute about the fact that as per the account books of GMDC, Ahmedabad, Demand Drafts worth Rs.1,92,261/- deposited in the account of the assessee have not been accounted for by the assessee in its books of accounts. There is also no dispute about the fact that when the assessee was asked to explain the reasons for the said discrepancy and to prove the source of such demand drafts deposited in the said account, the assessee has replied that the said amount was not sent by the assessee. On these facts, the Assessing Officer has come to the conclusion that explanation of the assessee is not satisfactory and since GMDC being Government Undertaking, the credit entry is found in the books of accounts of GMDC were accepted to be true without making any further inquiry in the matter. ITR/43/1999 13/23 JUDGMENT The assessee's stand is that instead of asking the assessee to prove the source of alleged income of Rs.1,92,261/-, the Assessing Officer could have inquired from the Bank and could have collected further details to justify the addition made by him. The Assessing Officer was, however, of the view that the onus to prove the source of income is on the assessee and hence, he has not made any further inquiry in the matter. It was sought to be justified on the ground that Section 8 read with Section 106 of the Indian Evidence Act, 1872 states that any fact is relevant and when a fact is substantially within the knowledge of any person, burden of proving that fact is upon him. The learned CIT (Appeals) as well as the Tribunal are also of the view that the burden is on the assessee to prove the source of the said demand drafts. This stand of the revenue is, however, contrary to the decision of the Hon'ble Supreme Court in the case of Kishinchand Chellaram V/s. Commissioner of Income-Tax, Bombay City – II (supra). In that case, the assessee had an office in Bombay and one in Madras. On receiving information that a sum of ITR/43/1999 14/23 JUDGMENT Rs.1,07,350/- was remitted by the assessee by two telegraphic transfers from Madras to Bombay through a bank, the ITO wrote two letters to the manger of the bank dated January 14 and February 10, 1955, making inquiries about the remittance. These two letters were neither disclosed to the assessee nor brought on record. The manager replied, by a letter dated February 18, 1955, to the effect that a telegraphic transfer of Rs.1,07,350/- sent by the assessee from Madras was received by the Bank at Bombay on October 16, 1946, and the amount was paid to N, an employee of the respondent, on the same day. This letter also was not disclosed to the assessee. The application for the telegraphic transfer was signed by one T describing himself as : “T c/o. M/s. K. Chellaram”. There were at the relevant time two employees of that name, both of whom had left service long back. There was another letter dated March 9, 1957, addressed by the Bank to the assessee wherein it was stated by the manager that the bank had received a telegraphic transfer from the Madras office on October 16, 1946, favouring N and this amount was ITR/43/1999 15/23 JUDGMENT remitted by the assessee through their Madras office. In a copy of this letter forwarded to the ITO, there was an endorsement referring to a summons dated March 3, 1957, issued by the ITO, which was also not disclosed to the assessee. Relying upon the two letters dated February 18, 1955, and March 9, 1957, the Tribunal held that the sum of Rs.1,07,350/- was the undisclosed income of the assessee for the reason that the assessee could not show that the amount did not belong to it, which it could have done by examining the respective employees and the bank officers. On a reference, the High Court held that there was material before the Tribunal to justify the finding that the amount remitted by T to N was the undisclosed income of the assessee. On appeal to the Hon'ble Supreme Court, it was held that the two letters dated February 18, 1955, and March 9 1957, did not constitute any material evidence which the Tribunal could take into account for the purpose of arriving at the finding that the sum of Rs.1,07,350/- was remitted by the assessee from Madras, and if these two letters were eliminated, there was no material evidence at all which could ITR/43/1999 16/23 JUDGMENT support its finding. The department ought to have called upon the manager to produce the documents and papers on the basis of which he made the statements and confronted the assessee with those documents and papers. The Court further held that even assuming that the two letters were to be taken into account, those letters would at the highest establish that T, an employee, remitted the amount from Madras and N, another employee, received it at Bombay. From this, it did not follow that the remittance was made at Madras and received at Bombay on behalf of the assessee. The burden was on the department to show that the money belonged to the assessee by bringing proper evidence on record and the assessee could not be expected to call T and N in evidence to help the department to discharge the burden that lay upon it. The Apex Court, therefore, held that there was no evidence on the basis of which the Tribunal could come to the finding that the sum of Rs.1,07,350/- was remitted by the assessee and that it represented the undisclosed income of the assessee. ITR/43/1999 17/23 JUDGMENT 15.The above decision of the Apex Court would certainly help the assessee. The burden is on the department to show that the amount of demand drafts found to be credited in the assessee's account from the books of accounts of GMDC, belonged to the assessee, by bringing proper evidence on record and the assessee could not be expected to explain the source of income or to call responsible officers of GMDC or bank to discharge the burden that lay upon the department. We could have remitted this matter to the Income-Tax Officer to make further inquiry in the matter. However, looking to the matter being very old which is pertaining to assessment year 1987 – 88 and also having found force in the alternative contention raised by the assessee, we do not think it just and proper to make any further inquiry in the matter and we are of the view that the Assessing Officer has failed to discharge his burden to prove that the amount in question is the income of the assessee. 16.Relying on the decision of the Hon'ble Supreme Court in the case of Kishinchand Chellaram V/s. ITR/43/1999 18/23 JUDGMENT Commissioner of Income-Tax, Bombay City – II (supra), the Calcutta High Court in the case of Bimal Kumar Damani V/s. CIT (Supra) held that the question of presumption of possession is confined to the amount recovered from a particular person. Possession of another cannot be presumed to be possession of the assessee. If the ownership is disputed, the burden of proving that the possession was not possession as owner and that ownership was of someone else, is on the assessee. If the Department wants to assert that the assessee is the owner of the amount recovered from someone else, then the burden lies on the Department to prove the ownership of the assessee. 17.So far as the authorities relied upon by Mrs. Manua M. Bhatt are concerned, they are dealing altogether different issues. In the case of Selvakumar, Legal heir of late Chellappan Chettiar V/s. Commissioner of Income-Tax, during the course of search of the assessee's premises, certain fixed deposit receipts were found standing in the names of the wife ITR/43/1999 19/23 JUDGMENT and children of Chellappan Chettiar and the question whether the unexplained investments were assessable in the hands of the assessee. The whole case was proceeded under Section 69 of the Act treating the said fixed deposit receipts as unexplained investments. 18.Similarly, in the case of Kanhiayalal V/s. Commissioner of Income-Tax (Supra), a search took place at the residential house of the assessee and cash and gold ornaments, fixed deposits, silver coins, etc. were discovered. The assessing authority assessed the total income at Rs.5,38,717/- making addition for unexplained investment and undisclosed income discovered during the search. The High Court on these facts held that the Tribunal was justified in upholding the assessment qua the additions retained by the first appellate authority. 19.The other authorities cited and relied upon by the revenue are not on the point involved in the present reference and hence, they would not render much assistance to the revenue. ITR/43/1999 20/23 JUDGMENT 20.So far as alternative contention is concerned, we are at pains to observe that the Tribunal has very cursorily dealt with the alternative contention of the assessee. If it is presumed that the payments by demand drafts were made by the assessee to GMDC, then as a natural corollary, further presumption could have been drawn that the said payments were made for purchases of raw materials like coal, lignite etc. It is an admitted position that the assessee was purchasing raw materials from GMDC and various payments were made by the assessee which were duly reflected in the books of accounts of GMDC. The Tribunal has rejected this contention only on the ground that in absence of any evidence, it cannot be presumed that the payments were made for business purposes. There is no relationship other than the business relationship between the assessee and GMDC. The Assessing Officer could have asked GMDC as to on what count, the said payments were made by the assessee. As a matter of fact, it has come on record that in lieu of the said payments, certain materials were dispatched by ITR/43/1999 21/23 JUDGMENT GMDC through their agents. Thus, there is no doubt about the fact that if the payments are made, such payments are only for business purposes. 21.Since there is an admitted position that the assessee was carrying on the business of coal and lignite and purchases were made from time to time from GMDC, in that case, even if any addition is required to be made under Section 69-C, the entire expenditure towards it has to be allowed as a deduction under Section 37 (1) of the Act. The arguments canvassed by the learned Standing Counsel appearing for the revenue that if an addition on account of unexplained expenditure is made under Section 69-C, then the fact that deduction could not be allowed under Section 37 (1) was obvious and automatic then there was no need of amending Section 69-C by adding the proviso which has come into force w.e.f. 01.04.1999, and is relevant to assessment year 1999 – 2000 onwards and has not been made retrospective in operation. The assessment year under consideration is admittedly 1987 – 88 to which the effect of this amendment will not be ITR/43/1999 22/23 JUDGMENT applicable. Thus, taking into consideration the totality of the facts and circumstances of the case, the revenue authorities are not justified in making and/or confirming the disputed addition in as much as even if the assessee did incur expenditure of Rs.1,92,261/- in purchasing coal, lignite etc. from GMDC, the equivalent debit in the profit and loss account would neutralize each other and no addition could be made. 22.The decision of this Court in the case of Fakir Mohmed Haji Hasan V/s. Commissioner of Income-Tax (Supra) would not render much assistance to the revenue as in that case, the Court was really concerned with the unexplained investment under Section 69 of the Act and other provisions, namely, Sections 69-A, 69-B and 69-C are not under consideration. The onus to prove is different under each of these provisions, more particularly, under Section 69-C, the onus is on the revenue to prove that the income really belongs to the assessee. Moreover, proviso to Section 69-C which has come into force with effect from 01.04.1999 was not considered while ITR/43/1999 23/23 JUDGMENT laying down the general propositions with regard to Sections 69-A, 69-B & 69-C of