1

Background Material

on

Taxation of Cash Credit , Loans &

Gifts in view of recent

amendments in finance act -2012

By CA. Kapil Goel Adv.

Advocatekapilgoel@gmail.com

9910272806
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It is held in no. of case laws that realization of trade debt cannot be subject
matter of section 68 (refer Delhi ITAT in Decent Foods ITA 2471/Del/2010 DT.
07.12.2010 & Delhi bench of ITAT in 55 ITD 159 para 24-26)

Mere suspicion however strong cannot take the place of evidence :refer
Umacharan Shaw and Bros. vs. CIT (1959) 37 ITR 271 (SC). Relied in 299 ITR
180

No Endless litigation on account of inaction of revenue : P&h High Court FCS

case 203 CTR____

Failure to make requisite enquiry by Ld AO from critical witness: vitiates addition

49 ITR 561 (All High Court)

A man indulging in double speaking cannot be said by any means a truthful man
at any stage and no court can decide on what occasion he was truthful…Cal HC
in 210 ITR 103 (APPLIED in 133 TTJ 394)

In the case of CIT v. Nathulal Agarwalla & Sons 153 ITR 292 Full Bench of
Hon’ble Patna High Court has observed as follows :

"As to the nature of explanation offered by the assessee, it seems plain on

principle that it is not the law that the moment any fantastic or
unacceptable explanation is given, the burden placed on him will be
discharged and presumption rebutted. It is not the law, and perhaps
hardly can be, that any and every explanation of the assessee must be
accepted. In my view, the explanation of the assessee for avoidance of
penalty must be an acceptable explanation. He may not prove what he
 3

asserts to the hilt positively, but at least material brought on record must
show that what he says is reasonably valid."

CIT vs Kamdhenu Steel and Alloys Ltd., Vijay Foils (P) Ltd., JH
Finvest (P) Ltd., North Delhi Construction and Investment (P) Ltd.,
Laxman Industrial Resources Ltd. and Ors.

Gupta Citi Shelters Ltd., Infomediary India (P) Ltd. and Ors. vs
CIT
Citation 206 Taxman 254

39. We may repeat what is often said, that a delicate balance

has to be maintained while walking on the tight rope of
Sections 68 and 69 of the Act. On the on hand, no doubt, such
kind of dubious practices are rampant, on the other hand,
merely because there is an acknowledgement of such
practices would not mean that in any of such cases coming
before the Court, the Court has to presume that the assessee in
questions as indulged in that practice. To make the assessee
responsible, there has to be proper evidence. It is equally
important that an innocent person cannot be fastened with
liability without cogent evidence. One has to see the matter
from the point of view of such companies (like the assessees
herein) who invite the share application money from different
sources or even public at large. It would be asking for a moon if
such companies are asked to find out from each and every
share applicant/subscribers to first satisfy the assessee
companies about the source of their funds before investing. It is
for this reason the balance is struck by catena of judgments in
laying down that the Department is not remediless and is free
to proceed to reopen the individual assessment of such
alleged bogus shareholders in accordance with the law. That
was precisely the observation of the Supreme Court in Lovely
Export (supra) which holds the fields and is binding.
 4

Bank deposit in cash by all time Agriculturist

Allahabad High Court Case :- INCOME TAX APPEAL No. - 341 of

2008 Petitioner :- Commissioner Income Tax Respondent :- Bhawana
Makhijani Thru.Natural Guardian Smt.Indumakhijani

The A.O. found that Rs.33,90,038/- was deposited in cash in the

account in the name of the assessee in Citizen's Cooperative Bank,
Sector 39, Noida, in which large number of transactions took place of
deposits in cash between 25.9.2001 to 2.3.2003 and that almost the
entire amount was withdrawn. Keeping in view the circumstances it
was found that the onus of proving source of deposit in the bank
account lies with the assessee and same has not been discharged by
the assessee. The entire unexplained amount in the bank account
was treated in the hands of the assessee under Section 68 of the Act
on protective measures and on substantive basis in the hands of
Deepak Gupta for the assessment year 2002- 03.

The CIT (A) dismissed the appeal against which the department went
in appeal before the Income Tax Appellate Tribunal. The Tribunal has
held as follows:-
"4.1 From the findings of the AO, it is clear that the assessee or his family members did not have any
source of income from which the impugned amounts could be credited in her bank account. Further, the
utilization of various amounts from the bank account was made by Shri Deepak Gupta by transferring
money to various concerns. In the case of CIT v. P.K. Noorjahan (1999) 237 ITR 571, Hon'ble Supreme
Court referred to the findings of the Tribunal that discretion u/s 69 was not properly exercised by the ITO
and the AAC by taking into account the circumstances in which the assessee was placed, namely, that the
assessee had no source of income from which investment could be made. Thus, the Tribunal came to the
conclusion that the investment cold not be taken as income of the assessee and the High Court agreed with
this finding. The Hon'ble Court held that there was no error in the order of the Tribunal that the provisions
contained in section 69 could not be invoked in respect of the investment. We find that the facts of that case
and this case are similar. The assessee does not have any source of income. The money was not utilized by
her. Therefore, if the circumstances in which the assessee is placed are appreciated properly, it cannot be
said that the impugned amount of Rs.33,90,040/- was the income of the assessee. Respectfully, following
the ratio of the decision in the case of P.K. Noorjahan (supra), the addition is deleted and the appeal is
allowed. This order was pronounced in the open Court on 26.10.2007."
 5

We do not find any error of fact or law in the order of the Tribunal.
The authorities have recorded findings that the assessee did not have
any source of income, and that money was not utilised by her. In the
circumstances, the protective assessment made against her and the
substantive assessment against Shri Deepak Gupta does not call for
any interference by the High Court. We do not find that any question
of law arise for consideration by the High Court under Section 260A
of the Act

Gift related case laws

Sunita Makhija, IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL
NO.1026 OF 2010 DATE : 24th July, 2012 8) Mr. Vimal Gupta, Advocate for
the revenue submits that the gifts of Rs.22.75 lacs were not genuine as
according to him it was respondent-assessee's money which were routed
through her counsin as gift and therefore, must be added to the income of
the respondent assessee as undisclosed income. Mr. Subhash Shetty
counsel for the respondent assessee points out that during the
assessment proceedings the respondent had pointed out the capacity and
the source of the gifts by furnishing the copies of the pass books, income
tax details and PAN of the donors. Further the source of the monies gifted
being the refund from M/s. Innovative Investment by account payee
cheque was also filed. Consequently according to him the order of the
Tribunal does not call for any interference. ITAT order affirming CIT-A
order as approved by High Court of Bombay The Commissioner of
Income Tax (Appeals) found that during the course of the appellate
proceeding the respondent assessee had pointed out that the gifts were
given by her cousins as her father had helped her cousin's family during
their bad days. These gifts were given by her cousins, during her difficult
financial period. Further, the amount gifted to her were by account payee
cheques and came from refund of an advance which donors had made in
one M/s. Innovative Investment. Necessary details were provided. So far
as balance-sheet and capital gain accounts are concerned, it was pointed
out the same were taken by the department during the search of the
respondent's premises. The Commissioner of Income Tax (Appeals) was
of the view that the appellant had reasonably discharged the onus to
prove the genuineness of the gift transaction and the same cannot be
doubted without bringing on record material evidence to prove that gift
transactions were paper transactions. Therefore, the appeal of the
respondent-assessee was allowed by Commissioner of Income Tax
(Appeals) Further refer:
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Case Law Gist

Delhi High Court in 4. In our opinion, as gifts were made by way of registered gift deeds as well
as payments were made by way of account payee cheques and both the
Mrs Kusum Gupta donors are income tax assesses, it cannot be said that the gifts are not
ITA 831/2010 genuine. Resultantly, the appeal stands dismissed in limine but with no
order as to costs.

Delhi High Court The Commissioner of Income-tax (Appeals) examined the matter and
agreed with the findings of the Assessing Officer with regard to the
Suresh Kakar 324 ITR 231 genuineness of the gifts. According to the Commissioner of Income-tax
(Appeals), the gifts were not genuine. One of the reasons, and strangely
so, was that gifts are normally given on the eve of some occasion and
since these gifts were not given in relation to any occasion, the same were
doubtful. We fail to understand the logic adopted by the Commissioner of
Income-tax (Appeals). We must keep in mind that this is a case of gifts
made by a mother to a son. Such gifts do not require any occasion and the
mother can make a gift to her son at any time.

3. Insofar as the identity is concerned, that is an admitted position that the

gifts were made by the mother to the son. With regard to the
creditworthiness, the assessee has been able to discharge the onus cast
upon him by furnishing the bank statement of his mother (donor) as also
the confirmation certificate from the mother confirming the said gifts. Once
the assessee has discharged the primary onus, which was cast upon the
assessee, it was incumbent upon the Assessing Officer to prove on the
basis of a cogent evidence that the transaction was not genuine. There is
no such evidence forthcoming. We find that the conclusions of the
Assessing Officer and the Commissioner of Income-tax (Appeals) with
regard to the genuineness of the transactions are merely conjectural and
are based on surmises and assumptions. Such conjectures and
assumptions cannot take the place of proof, once the assessee has
discharged the primary burden which had been cast upon him

Bang bench ITAT in Gift recd from devotees treated as genuine when all possible
Harsha Shastry evidence (in shape of donor’s declaration, bank particulars etc)
were submitted by assessee and AO did not displaced the
same by cogent material : Held GIFT genuine (SC P
Mohankala distinguished)
P&H high court in The assessee claimed to have received a gift of Rs.5
A.K.Sachdeva (ITA
lac from his maternal uncle Ramesh Arora but the
 7

251/2009: 06.11.2009) said amount was added to his income by the

SAME by BHC in Dr Assessing Officer, as undisclosed income. On appeal,
the CIT(A) accepted the genuineness of the gift which
Prabhu Kamlesh has been affirmed by the Tribunal… We have not
found any evidence nor the department has adduced
any evidence that the impugned amount belongs to
the assessee in any manner. The donor is the
maternal uncle of the assessee and is also in a
position to make a gift, therefore, from any angle the
gift cannot be suspected.
Delhi ITAT in Mukul After hearing both sides, we hold that the gift was made by the
Tayal ITA 120/2011 brother of the assessee. Hence the identity of the donor is not

(16.3.2011) in doubt. The donor has confirmed the gift made. The gift is
out of natural love and affection as donee is brother of donor.
The creditworthiness of the donor is also established as he
was drawing salary of more than `91 lakhs in a year. Further,
the cash deposited in the donor’s account prior to making the
gift has been looked into by the I.T. Authorities and no
adverse inference was drawn on this count in the assessment
of the donor. The genuineness of the transaction is also
established. Considering all the facts, the CIT(A) has rightly
deleted the addition. We, therefore, sustain the order of the
CIT(A) and dismiss the Revenue’s appeal.
Delhi ITAT in We have considered the facts of the case and
Subhranshu Gupta submissions made before us. We find that the amount
has been received from the brother, who is a non-
(16.3.2011) resident person, drawing the salary of about US$
1.00 lakh per annum. This is evidenced by the
certificate of the employer, placed on page no. 24 of
the paper book. There was a special relationship

between the brothers as the assessee had donated

one kidney to the donor brother. The amount has
been gifted from NRE account maintained with
HDFC bank. The genuineness of the donor is not in
doubt. His capacity is proved because of his salary
 8

income, being more than US$ 1.00 lakh per annum.

The gifts are evidenced by three declarations duly
signed by the donor and accepted by the assessee,
which have been placed in the paper book on page
nos. 15 to 17. In such circumstances, we are of

the view that the ld. CIT(Appeals) approached the

matter in the right way
Gau ITAT Third It was the claim of the assessee that she received genuine gift of Rs. 1 lakh
each from two donors, whereas it was the case of the Department that the
impugned gifts were bogus and such transactions were for formation of
member 53 DTR 214 capital in the guise of gift….The AO has simply rejected the explanation of
the assessee and evidences produced by her in support of the gifts
(Trib) Amita Devi/137 received on the plea that the assessee failed to produce both the donors
TTJ 521 for examination without exhausting the scope available to him in such
cases as per law. It was on the basis of such lack of efforts that the AO
stated that the source of income shown in the returns of income of the
donors established that these were the case of capital formation by way of
bogus gifts and the assessee's own undisclosed money came back to her
en route bogus donors. The Hon'ble apex Court in the case of CIT vs.
Daulatram Rawatmull 1972 CTR (SC) 411 : (1973) 87 ITR 349 (SC) has
observed that the onus of proving that the apparent is not real was on the
party who claimed it to be so. As stated above, the Revenue could not
bring any conclusive evidence, except alleging that alleged donors could
not be produced, to show that donors from whom the gifts were received
were bogus. Further, no evidence could be brought on record by the
Revenue authorities to show that the amounts which were received by the
assessee from the donors had actually been received by the donors from
the assessee out of her undisclosed income (Hence gift treated as
Genuine)
Kar HC in Archna Gift from parents treated as genuine
Satwalekar ITA
253/2009 (8.2.2010)
Agra ITAT Third 9. Parties are heard and their rival submissions
considered. The following facts are not in dispute:
Member in Avnish
Kumar 124 TTJ 750 (a) the identity of the donor is not in doubt; (b) gift is
by a declaration deed; (c) donor has given an affidavit
affirming the making of the gift; (d) there is a
confirmation through post of gift per demand draft; (e)
affirmation of the assessee in examination on oath
recorded by AO; (f) affirmation of the donor in
examination on oath recorded; (g) direct reply of the
donor to the AO confirming the gift; (h) donor is
stated to be a friend of assessee's father; (i) donor was
doing some finance business; and (j) source of the gift
is the receipt through a cheque of Rs. 2,46,000 received
by the donor from the Balaji Trading Corporation,
 9

Delhi, and a cash amount of Rs. 3,500.

10. All these facts establish the fact that a gift was
received by the assessee and the sources thereof are
satisfactorily explainable and proved putting its
genuineness beyond doubt.

11. The adverse facts as pointed out by the learned AM

(i) that the assessee or his family had never made any gift of
any amount to anybody; (ii) that the gift was not on any
occasion or function; (iii) that the donor visited his house one
or two times though never beyond the drawing room; (iv) that
the donor is a person of low financial status having monthly
income of less than Rs. 5,000 and has shown withdrawals
from his capital account less than Rs. 3,000 per month; (v)
that the donor has no house, no telephone number, no fixed
deposit and not any other immovable assets; or that the
original deposit by the donor of Rs. 1,25.000 with Balaji
Trading Corporation was not proved are not so material to
hold the gift not a genuine one or sources thereof
unsatisfactory so long as the immediate source of the gift is
admittedly established to be from a third party, the donor had
appeared in person before the AO and confirmed the making
of the gift and the reasons which persuaded him to make the
gift, he being the friend of the assessee's father who helped him
in past.

Luck bench ITAT Whatever inferences the Assessing Officer has drawn cannot
be sustained unless the authorities give a finding that the
Sonu Aggarwal 29
donors could not have cash at their own and could not have
SOT 478 deposited the same out of their own sources and further that
the theory of love and affection is only a smoke screen for
arranging the gifts. Once the donors are related to the assessee
and there is a day-to-day acquaintance with the assessee, as in
the present case, unless it is shown that it is only a pretence
and not a natural phenomenon, the existence of ingredients of
love and affection cannot be ruled…Once the assessee has
shown that the donors are related to him and they are
closed family friends, then the onus shifted on the
Assessing Officer to show that what is pretended to be
a case of natural love and affection is not borne out
from facts. Such facts are required to be extracted by the
Assessing Officer either by enquiries or by recording
 10

statements of donors/donee/other witness or by

whatever means lawful, he considers necessary.
Rejecting the claim of natural love and affection which
is otherwise apparent as in the present case without
there being any material on record would not be
justified

Capital Gains vs Cash credit u/s 68

The Commissioner of Income Tax, Jamshedpur ... Appellant -- Versus --Arun

Kumar Agarwal (HUF) ................. ..............Respondent IN THE HIGH COURT
OF JHARKHAND AT RANCHI Tax Appeal No.4 of 2011 Dated : 13 th July,
2012

10. We have considered the submissions of the learned counsel for the parties and
we are of the considered opinion that the learned Assessing Officer was much
influenced by the enqiury report which may has been brought on record by the
efforts of the Assessing Officer and that enquiry report was prepared by the SEBI
and from the observations made by the Assessing Officer himself, it is clear that
after getting that enquiry report, the SEBI prima facie found involvement of some
of the share brokers in unfair trade practices. Even in a case where the share
broker was found involved in unfair trade practice and was involved in lowering
and rising of the share price, and any person, who himself is not involved in that
type of transaction, if purchased the share from that broker innocently and
bonafidely and if he show his bonafide in transaction by showing relevant
material, facts and circumstances and documents, then merely on the basis of
the reason that share broker was involved in dealing in the share of a particular
company in collusion with others or in the manner of unfair trade practices
against the norms of S.E.B.I and Stock Exchange, then merely because of that
fact a person who bonafidely entered into share transaction of that company
through such broker then only by mere assumption such transactions cannot be
held to be a shame transaction. Fact of tinted broker may be relevant for
suspicion but it alone necessarily does lead to conclusion of all transaction of that
broker as tinted. In such circumstances, further enquiry is needed and that is for
individual case. Such further enquiry was not conducted in that case.

At this juncture, it would be relevant to mention here that it is not disputed by the
Revenue before us that the shares of these assessees were already shown in the
earlier Balance Sheet submitted by the assessees, and therefore, in that situation,
how the revenue condemned the transaction even on the ground of steep rise in the
shares. If within a period of one year, the share price has risen from Rs.5 to 55 and
 11

from 9 to 160 and one person was holding the shares much prior to that start of
rise of the share, then how it can be inferred that such person entered into sham
transaction few years ago and prepared for getting the benefit after few years when
the share will start rising steeply. In present case even there was no reason for
such suspicion when the shares were purchased years before the unusual
fluctuation in the share price.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A”

NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI K.G. BANSAL
ITA No. 789/Del/10 A.Y. 2000-01

M/s Akshay Portfolio (P) Ltd., Vs. Income-tax

Officer
We have heard rival contentions and gone through the relevant material
available on record. The fact that Shri Satish Kumar proprietor of M/s Batra
Investment expired on 8-1-2001 and death certificate in this behalf, has not
been disputed, therefore, the production of Satish Kumar was beyond
possibility. The assessee purchased the shares in earlier years from My
Money Securities Pvt. Ltd. through banking channels; this fact has not been
disputed. Thus the purchase of the shares in earlier years remains
undisputed. Assessing Officer has doubted the sales made by assessee to
M/s Batra Investment. There are no comments about the banking
transactions between assessee and M/s Batra Investment being not genuine.
The onus cast by sec. 68 on the assessee is to establish the identity,
creditworthiness of the creditor and genuineness of the transaction. This
onus has been discharged by assessee and same can be rebutted by
Assessing Officer on the basis of cogent reasons. The assessee produced
sales note of shares to M/s Batra Investments, sale proceeds were received
through banking channels, which, according to assessee establishes the
genuineness of transaction. In our view, the burden to prove cash credit u/s
 12

68 stands discharged by the assessee and has been rebutted only by vague
findings that Shri Satish Kumar had involvement with Mahesh Batra and
there is no independent agency to prove the transaction. In our view the
rebuttal does not carry effective meaning to dislodge assessee’s explanation.
Assessee having discharged his burden,, there is no justification in retaining
the addition u/s 68 on vague assertions of lower authorities. Our view is also
supported by the Hon’ble Delhi High Court judgment in the case of
Medshave Health Care Ltd.(supra). In view of the above, we delete the
addition.

SEARCH CASE LOOSE DOCUMENT VS CASH CREDIT ETC

IN THE HIGH COURT OF DELHI AT NEW DELHI

RESERVED ON: 21.08.2012 PRONOUNCED ON: 31.08.2012
INDEO AIRWAYS PVT. LTD. If the revenue was of the opinion that
the expenses claimed towards “green boxes” was inadmissible or
was excessive, or not genuine, in order to reject the entries in the
books of account and other documents of the assessee, seized
during the search, it ought to have relied on other materials. Having
once drawn the presumption that the contents of the documents (of
the assessee) taken into possession during the search were true, the
revenue could not have, consistently with that presumption,
proceeded to require the assessee to produce materials in support of
the expenditure entries. Such an inconsistent approach in respect of
the contents of the same book appears to have been founded only on
suspicion that they were not genuine (refer Delhi bench ITAT Vatika
case 121 TTJ 208, loan received on loose document found in search
cannot be treated to be income u/s 68 for want of further proof of
loan, where document is treated as correct by revenue)

M/s. Divya Fuels, Mahaboobnagar IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘A’, HYDERABAD It is an undisputed fact that the assessee-firm

came into existence only 7.6.2005 and commenced its business in the month of August, 2005,
and that being so assessment year 2006-07 is the first year of business of the assessee. While
 13

the total unsecured loans claimed to have been raised by the assessee are of the order of
Rs.42,27,977, the CIT(A), as noted above, segregated the same into two categories, viz.
pertaining to the periods prior to commencement of business and after commencement of
business. Prior to commencement of business, the assessee having not made any sale or
business, could not have income to cover the aggregate amount of unsecured loans of the
relevant period. As such, the CIT(A) in

our opinion , was justified in directing the assessing officer to delete the additions in respect
of unsecured loans pertaining to the period prior to commencement of business. The decision
of the Hon’ble Allahabad High Court in the case of Kapur Bros. (supra) clearly applies to the
facts of the present case. We accordingly uphold the order of the CIT(A) on that aspect and
dismiss the grounds of the Revenue.

M/S. DATAWARE PRIVATE LIMITED: Calcutta High Court order

In our opinion, in such circumstances, the Assessing officer of the assessee

cannot take the burden of assessing the profit and loss account of the creditor
when admittedly the creditor himself is an income tax assessee. After getting
the PAN number and getting the information that the creditor is assessed
under the Act, the Assessing officer should enquire from the Assessing
Officer of the creditor as to the genuineness of the transaction and whether
such transaction has been accepted by the Assessing officer of the creditor
but instead of adopting such course, the Assessing officer himself could not
enter into the return of the creditor and brand the same as unworthy of
credence. So long it is not established that the return submitted by the
creditor has been rejected by its Assessing Officer, the Assessing officer of
the assessee is bound to accept the same as genuine when the identity of the
creditor and the genuineness of transaction through account payee cheque
has been established...

Refer: All. High Court order in case of Raj Kr Aggarwal: Unsecured Loans:
Section 68 Assessee’s Onus etc HELD:
 14

“Mr. D.D. Chopra, appearing on behalf of the revenue, submits that the
assessee had not discharged the onus, which lay on him under Section 68 of
the Act. He also points out that it is the assessee, who has failed to produce
the Managing Director/Director of the lending Company and, therefore, the
Assessing Officer was justified in making the addition. He further points out
that huge cash had been deposited in the bank account of the lending
Company. In support of the submission, reliance has been placed on the
following decisions:- (1) K.L. Agarwal Vs. CIT, 190 ITR 303 (Delhi). (2)
Sumati Dayal Vs. CIT, 214 ITR 801 (SC).

After hearing learned counsel for the revenue and on appraisal of material
available on record, it appears that addition of Rs. 25,05,000/- was made
only for the ground that the Director of M/s. Rich Capital & Financial
Services Ltd. was not produced before the revenue. But facts remains that so
far as the identity of the lender is concerned, it cannot be questioned because
it is a public limited Company and is regularly assessed to income tax
having PAN. Therefore, in our considered view, onus is discharged by the
assessee by producing necessary evidence. The source of source cannot be
examined in view of law laid down in the case of Commissioner of Income
Tax (Central), Calcutta Vs. Daulat RaRawatmull, 87 ITR 349 (SC). Hence,
we find no merit in the grounds raised by the revenue in regard to addition of
Rs.25,05,000/-“

Jurisdictional Delhi High Court in ITA No. 1735/2010/12.11.2010: Section 68

Alleged Unexplained cash credits or Loans (refer 330 ITR 298 Also)

The CIT(A) reversed this order of the assessee holding that the cash deposited in
the bank of the assessee of ` 11 lacs was confirmed by M/s. Indo Monext Pvt.
Ltd. and since the source was established by said confirmation, the addition
 15

could not be sustained. This order of the CIT(A) is upheld by the Tribunal as
well. It is clear from the aforesaid facts that the assessee had borrowed ` 33 lacs
from M/s. Indo Monex Pvt. Ltd which were given on different dates, ` 22 lacs
was given by means of cheques and ` 11 lacs was given by cash on different
dates. When the creditor, namely, M/s. Indo Monex Pvt. Ltd. itself has
confirmed that it had paid the amount to the assessee, such an amount could not
be treated as undisclosed income. We find that no substantial question of law
arises.

Concord Air Logistics Ltd., IN THE INCOME TAX APPELLATE TRIBUNAL "C" Bench,
Mumbai ITA No. 5860/Mum/2010 (Assessment Year: 2005-06) 4. It was contended before
the CIT (A) that the assessee’s business practice was that a customer approaches the assessee
for shipment of cargo through the customer’s preferred international airline, as the customer
cannot directly approach the airline but has to go to an Agent. The assessee is registered as
Agent with the IATA and as per the Cargo Agency Agreement, the assessee arranges for the
shipment of customers’ cargo and receives full amount as per the agreed tariff of the airlines.
As per the terms of the agreement assessee after retaining its commission “generally up to
maximum 5%” makes balance payment to the airline. The commission income was
accounted under the head “service charges” in the Profit & Loss account and the amount
payable to international airlines is shown as sundry creditors. In case there is an outstanding
recovery from the customers, they are shown as sundry debtors in the balance sheet. The
illustrated accounting entry was explained as under:

Sundry debtors. Dr Rs. 100/-

To service charges 5/-

To sundry creditors Rs.95

It was submitted that the amount payable to the airline (sundry creditors) as on 31.3.2005
was Rs. 56,50,907/- and these sundry creditors are 11 major international and domestic
airlines, the details are as under… 8. We have considered the issue and examined the record.
We are unable to sustain the addition so made by the Assessing Officer and confirmed by the
CIT (A). As assessee explained these are amounts payable by the assessee to various foreign
airlines which arose in the course of its day-to-day business activity. The assessee has not
received any amounts from them but is payable to them in the course of its business activity.
The amounts were received from various customers to be payable to airlines. Not only the
accounting entries explained by the assessee but also the ledger copies placed on record
indicate that these are the amounts payable by the assess e in the course of its day to day
business activity and outstanding balance on the last day of 31.3.2005 happened to be the
amounts not paid by then and shown in the balance sheet. 9. The provisions of section 68 are
 16

not attracted to the transactions of business nature in which debit and credits arise. This issue
was decided by the Hon'ble Allahabad High Court in the case of CIT vs. Panchamdas Jain
156 Taxman 507 (All.). Further it is held by Raj HC in 208 CTR 208: When ITAT found
that assessee was receiving money from the customers in hands against payment on
delivery of vehicles , the said amount could not attract section 68
because cash deposits become self explanatory…Also See Chd ITAT in 132 Taxation 148
; Chennai ITAT in 83 TTJ 352 (to the same effect is Allahabad high court order in case
of Padam kr Aggarwal case law paper book pg 49)

ITA Nos. 5269, 5270 & 5271/Del/2010 Asstt. Yrs: 2003-04, 05-06 & 06-
07 Continental Carbon India Ltd. Vs. Income-tax Officer, F-40, NDSE,
Part-I, Ward 3(3), New Delhi. New Delhi.
PAN/GIR No. AABCC8129N

10.3. What is being added by the AO is the credit balances of suppliers as

on the end of each year, which, in our view, cannot be done u/s 68, as long
as the purchase is admitted by the department In view thereof, we h old that
the additions made in the case of the assessee u/s 68 of the Act ought to be
deleted in all these years. In our view the I.T. Act does not cast absolute
burden on the assessee, sec. 68 cast a preliminary burden, which, in our
view, has been duly discharged by the assessee by filing the confirmations,
bank statements, invoices and transport details of supplies and goods. The
identity of the purchaser is accepted by the department in one year or the
other subsequent year. The genuineness of the purchases emerge from the
fact that all the goods purchased by the assessee on credit. Purchases have
not been disputed by the department in P&L a/c by allowing same as
expenditure to the assessee. Therefore, assessee has discharged its onus to
file evidence for genuineness of suppliers. The issue of creditworthiness will
not be applicable in this case as the credit balances are due to purchases
made by the assessee from these suppliers. Therefore, the discharge of
burden of creditworthiness is implicit from these facts. Looking from any
angle, the assessee cannot be held to be liable for any non-discharge of
onus. In these circumstances, the additions cannot be made only because the
departmental authorities failed to exercise their power and duties for
serving and enforcing the summons.
 17

Jurisdictional Delhi bench of ITAT in Divine International ITA 1995 &

1493(Del)2011 30.09.2011

16. In these circumstances, whether the creditors of whom the

assessee has failed to give the address should be added by invoking the
provisions of Section 68 of the Act?

Further, as per the provisions of Section 68 of the Act, it is not mandatory

that in case the assessee fails to satisfy the assessing officer about the
outstanding credits, the same are mandatorily required to be added as
income of the assessee. Section 68 gives a discretion to the assessing officer,
as can be seen from its provisions, which read as under:-19. This view has
also been upheld by the Hon’ble Supreme Court in the case of ‘CIT vs. Smt.
P.K. Noorjahan’ (1999) 237 ITR 570 (SC). The assessing officer has to take
into account the overall facts. Accordingly, in the case of the assessee the
overall facts need to be considered. The amount outstanding being credit on
account of purchases which have been exported by the assessee, it is not
mandatory that in the absence of verification of the creditors, the same need
to be added statutorily.

Further, even if impugned bank account is treated as unaccounted then since

there are both cash withdrawals and deposits (refer bank statement being
enclosed), in light of below mentioned case laws, only peak/maximum
amount in assessee’s account as on ONE particular date can be considered
for making addition (if any) u/s 69A/69 of the Act (which is app. Rs
.170,000 on 13/12/2006), which again gets self explained from accumulated
 18

cash probably generated & available from surplus (income declared in past
ROI minus reasonable household withdrawals) emerging from income
declared in Past ITR’s as enclosed herewith. The subject bank account is
operated from 17/5/2006 onwards further strengthen assessee’s case for
probable availability of suggested cash from past savings so as to make
deposit in present year.

Cash Withdrawal and deposits

Gist of the selected orders enclosed:

Delhi Bench of ITAT in Sanjeev Kapoor case: ITA 2091/Del/2010 dated

29.10.2010:
Held “It is bit unusual that a person withdraws cash from bank in
installments and redeposit the same into bank without using the cash but still
in the absence of any evidence regarding any other use of cash by the
assessee, it cannot be alleged that such cash was used by the assessee for
some other purposes and it was not available with the assessee on the date
when the assessee deposited the cash into bank. There is no evidence
brought on record by Ld AO in this regard….The facts in the case of Shri
Sanjeev Chadha (supra) were also similar. …”

ITAT in 205 Taxation 58 Rasida Bano, Basiran and Mohd. Aslam vs

ACIT
AY 2001-02 and AY 2002-03. The assessee explained that deposits in bank
account were made from rent received in past and kept at home before
deposit. The assessee had no other source of income. She was receiving rent
in cash which were recovered on six-monthly basis or later since property
was situated in another town. There was no legal bar in keeping the cash at
home and keeping cash at home before depositing in bank was not unusual.
The deposits stood explained. No addition to income could be made. S.69 of
the Income Tax Act 1961
 19

Baldev Charla 121 TTJ 366 ITAT in

27…... We find that this explanation of the assessee was found correct that
against these five deposits on dt. 14th June, 1996, Rs.31,000; 21st July,
1997, Rs.1,27,000; 18th Sept., 1997, Rs.22,000; 4th Oct., 1997, Rs.26,000
and on 7th Nov., 1997, Rs.52,000 there were sufficient cash withdrawals
from AWI and from SBI, Mayapuri, but this addition has been confirmed by
learned CIT(A) on the basis that there is time gap between the assessee's
withdrawals from his own partnership M/s AWI or from his own bank.
There is no /sic finding recorded by the learned AO or by learned CIT(A)
that apart from depositing these cash into bank as explained by the assessee,
there was any other user by the assessee of these amounts and in the absence
of that, simply because there was a time gap, the explanation of the assessee
cannot be rejected and hence the addition confirmed by the learned CIT(A)
is not correct. We, therefore, delete the same. This ground of the assessee is
allowed.

Refer: Chennai bench of ITAT in ACIT vs N. Sasikala92 TTJ 1196

“…The AO could have examined the availability of cash balance as on 1st April, 1990, along with the
return for 1990-91. Instead of adding the opening balance of cash as unexplained, the AO could have
dealt with this issue in the asst. yr. 1990-91. Therefore, the CIT(A) is justified in holding that the
action of the AO is not correct….”

(Punjab and Haryana) Kaushalya Wati vs CIT 201 Taxation 572

It is evident from record in the present case that the money found in cash at the time of search was
explained by the assessee in the form of carry forward savings from the previous years in the returns filed by
him which were duly accepted by the revenue. Once a carry forward cash is accepted, there was no reason
for not giving the benefits to the assessee for the same in a subsequent year as opening balance. The
Tribunal ignoring this admitted factual position on record has merely referred to the fact that if sufficient cash
is found during the year in question, there was no occasion for him to withdraw Rs. 5,300/- in cash from M/s.
Kesar-Da-Dhaba, where the assessee was a partner, during the year 1976-77, and Rs. 5,200/- in 1977-78. It
has further mentioned that the assessee could very well deposit the same with the bank to earn the interest.
Withdrawal of amount from the firm Kesar-Da-Dhaba has been explained by the assessee with the plea that
in the firm he was a partner and he also withdrew his share as other partners did. Accordingly, nothing
hinges on the same. Such probability would not take precedence over the concrete documentary evidence
on record which was available in the form of returns. There is no reason to deny the assessee the benefits
of the cash available with him at the close of the previous assessment year while framing the assessment
for the year in question.
 20

Parneeta Goyal Date of decision: 7.2.2011 Cash withdrawal and subsequent

deposits : Telescoping and Peak theory P&H high court

“Whether on the facts and in the circumstances of the case and in law the
order of the Hon’ble ITAT is correct in deleting the addition made by the
Assessing Officer, holding that the cash credits were out of sale of property
where the assessee failed to prove the nexus between the cash deposits and
withdrawals from bank/sale proceeds of the house.”

The assessing officer having come to know of cash deposits

of Rs.10,97,300/- and Rs.32,84,000/- made by the assessee asked
from her the source of such deposits. The assessee explained to the
assessing officer vide written reply dated 15.11.2007 that the said
amounts were those which she withdrew from the bank on different
dates. It was further claimed by her that she had sold a house for a
sum of Rs. 24,70,000/- in which she had 50% share whereas
remaining 50% share belonged to her husband. The reply so
furnished by the assessee did not find favour with the assessing
officer who accordingly, vide order dated 26.12.2007, made an
addition of Rs. 13,50,000/- under Sections 68 and 69 of the Act.

The Tribunal, however, allowed the appeal of the assessee, vide the order
under appeal by relying upon the decision of the apex Court in Lal Chand
Bhagat Ambika Ram Vs. Commissioner of Income Tax, 37 ITR 288 (SC).
The Tribunal observed that burden to prove the source of cash deposits was
on the assessee and such onus had been discharged by her by producing of
relevant record. The issue that arises for consideration by this Court is,
whether the amounts of Rs. 13,50,000/- and Rs.6,15,300/- deposited by the
assessee in her bank account on various dates was her undisclosed income or
the cash deposits had been duly explained by the assessee.

The deposits made by the assessee were held to be genuine by the Tribunal
after appraisal of bank statements of Indus Ind Bank and Vijaya Bank in
which she had the account and also after perusal of copy of entries of
withdrawals and deposits in the accounts being operated by her. Learned
counsel for the Revenue could not
show that the findings recorded by the Tribunal holding the cash
deposits to be genuine were liable to be interfered with. In view of
this, no substantial question of law arises for consideration by this
 21

Court. Case laws referred: CIT Vs. Daya Chand Jain Vaidhya 98 ITR 280
(All.); Narndra G. Goradia (HUF) Vs. CIT (234 ITR 571) (Bom); decision in
the case of Sumiti Dayal

Shri Palwinder Pal Singh Cash withdrawal and deposit undisclosed income

That dissatisfied with the appeal being dismissed by the CIT (A), the appeal was
filed before the Income Tax Appellate Tribunal, Chandigah Bench 'A', Chandigarh
(for short “the Tribunal') which came to the conclusion that the entire deposits in
the bank accounts were explained as out of the money withdrawn from the joint
saving account of assessee's father and mother of the Centurion Bank of Punjab
and that transfer of funds by Sh. Ajit Singh Mangat from one joint account to
another joint account cannot be treated as unexplained and the source of deposits
have been duly explained. The revenue had failed to bring on record any evidence
to show that the explanation of the assessee was incorrect. The explanation of the
father that the amount was withdrawn for the purchase of some agricultural land
and when the purchase did not materialise, the amount was deposited in the
aforesaid bank accounts of his son was accepted for showing certain amount in the
bank account of the assessee who had plans to go abroad and had actually left the
country in November, 2008.. Accordingly, no question of law arises for
determination in the background of the case due to transfer of funds interse
between the family members.

Delhi ITAT in Joginder Singh case approving CIT-A order I. T. Appeal No. 2942
(Del) of 2011 A N D C. O. No. 211 (Del) of 2011. 26th August,
2011

“ 6. Now next issue to be decided is in respect of the merit of the case. I have verified the
content of the AIR information and found that the appellant’s submission in respect of
bank deposits are the base of the assessment. I have carefully considered the facts of the
case and the submission of the assessee. The records reveal that the appellant, a
businessman has withdrawn cash from his concerns. The deposits in bank account in
aggregate of Rs.14,52,000/- during the relevant period has been found duly reflected in
the books of accounts of the appellant. The appellant has explained and demonstrated the
source of the deposit of Rs.14,52,000/- which has been treated unexplained by the
assessing officer and accordingly assessed as income. The cash deposits have been duly
explained from bank withdrawals and business receipts / withdrawals as mentioned
above, which are held genuine in view of facts that no prudent man will withdraw
accounted cash from his bank account/business concerns and convert it into unaccounted
/ unexplained / black money and simultaneously deposit his unaccounted /unexplained /
black money in the bank account. The AO has not brought any material on record to
establish the fact that the cash withdrawals have been utilized other than the purpose
specified by the appellant. Keeping in view the facts and circumstances in totality and
 22

also judicial pronouncements in this regard, I hereby hold that the AO was not justified
in treating deposits of Rs.14,52,000/- unexplained. Hence the addition of Rs.14,52,000/-
is deleted. Accordingly, the appellant gets relief.” The ld. CIT (Appeals) had himself
examined the contents of AIR information and had recorded finding of fact that amount
of Rs.14,52,000/- deposited in the bank account was duly reflected in the books of
accounts of the assessee. He
had also recorded a finding of fact that the source of deposit of Rs.14,52,000/- was
explained. Cash deposits were made from the bank withdrawals. Therefore, it is not a
case where the ld. CIT (Appeals) has simply accepted the contention of the assessee
without verification of additional evidence filed before him. Therefore, in our considered
opinion, the order passed by the ld. CIT (Appeals) is a speaking order and cannot be
treated as a cryptic order as contended by
the ld. Sr. DR.

ITA No.1159/Del/2011 Bharat Bhushan Gupta 26.08.2011. Delhi bench ITAT

The grounds of appeal read as under:- “1. On the facts and circumstances of the
case Ld. CIT (A) erred in restricting the addition to Rs.3,85,172/- against the
addition of Rs.14,72,770/- made by the A.O. ignoring that the source of cash
deposits and purpose of withdrawals have not been explained by the assessee,
neither before the Assessing Officer nor before ld. CIT (A) and also do not
commensurate with
the declared business of the assessee. 2. On the facts and circumstances of the
case Ld. CIT (A) erred in directing to adopt peak of credit for addition ignoring
that
relevant material to establish that the amount withdrawn from the bank has not
been utilized anywhere and the same has been recycled in the account, are not
furnished by the assessee. 3. The appellant craves leave for reserving the right
to amend,
modify, alter, add or forego any ground (s) of appeal at any time before or during
the hearing of this appeal.” We have carefully considered the rival submissions in
the light of the material placed before us. The copy of the bank account has been
furnished by the assessee at pages 55-59 of the paper book. We have gone
through the said details and we find that the maximum deposit in the bank
account comes at ` 3,85,172/- on 26th July, 2004. Thereafter, the balance
 23

outstanding in the bank account never exceeded that amount. Therefore, we are
of the opinion that learned CIT (A) has rightly come to the conclusion that the
amount of ` 3,85,172/- could only be added to the income of the assessee being
unexplained cash
deposits in the aforementioned bank account as the source of the remaining
deposits will be rotation of the said amount only. We find no reason to interfere in
the findings recorded by the learned CIT (A) and we decline to interfere.

ITA No.1434/Kol/2009 IN THE INCOME TAX APPELLATE TRIBUNAL “A”

BENCH : KOLKATA

We are of the considered view that the assessee has made cash deposit and also
cash withdrawal from time to time from the said bank account. The assessee has
also not been able to explain the source of deposit
in the said bank account. Further, the Department has also not brought any
evidence on record that the said cash withdrawal has been spent by the assessee.
Therefore, we find substance in the submission of the assessee that the assessee
made withdrawal from the said bank account and again deposited the same as the
assessee could not utilize the
withdrawal amount for the purpose for which it was withdrawn. No doubt the
assessee has not stated any where the purpose for which the amount was
withdrawn from time to time. The assessee has also placed the bank statement at
page 7 of the paper book. Considering the said bank statement, the extract of
which has been given by the Ld. CIT(A) at page 3 of the impugned order, which
has already been reproduced hereinabove, we are of the considered view that the
peak of the balance in the said bank
account should be considered as unexplained investment u/s. 69 of the I. T. Act On
perusal of the said bank statement, we observe that the peak balance as on 14th
June, 2005 of Rs.16,15,261/- and in the facts and circumstances of the case, the
 24

said amount could be considered as unexplained investment by way of deposit in

the said undisclosed bank account. Therefore, we modify the orders of the
authorities below
and restrict the addition to Rs.16,15,261/- u/s. 69 of the I. T. Act as against
Rs.49.09 lacs u/s. 69A as sustained by the Ld. CIT(A).

PART-3A

Role of Assessee’s Affidavit: All High Court in case of L Sohan Lal Gupta 33
ITR 786

…The assessee in his affidavit, had definitely stated that the purchaser wanted to purchase both the going
concerns, the Jaswant Sugar Mills and the Straw Board Mills Ltd. together and one of his conditions of
purchase was that all the shares of Lala Jaswant Rai, his sons and other relatives had to be transferred to
the purchaser. The Income-tax Appellate Tribunal rejected this affidavit of the assessee on the mere ground
that there was no documentary evidence in corroboration in the form of any correspondence or otherwise on
this point. Shri G. S. Pathak contended rightly before us that the Tribunal was not entitled to reject the
affidavit on this point on such a ground. After the assessee had filed the affidavit, he was neither cross-
examined on that point, nor was he called upon to produce any documentary evidence. Consequently, the
assessee was entitled to assume that the Income-tax authorities were satisfied with the affidavit as sufficient
proof on this point. If it was not to be accepted as a sufficient proof either by the Income-tax Officer or by the
Appellate Assistant Commissioner of Income-tax or by the Income-tax Appellate Tribunal, the assessee
should have been called upon to produce documentary evidence, or at least he should have been cross-
examined to find out how far his assertions in the affidavit were correct…

39. In Union of India & Anr. v. Delhi High Court Bar Association & Ors.
(2002) 4 SCC 275 (SC) their Lordships of the Supreme Court in paragraph
23 of their judgement inter alia held and observed as under: " ..... when the
High Courts and the Supreme Court in exercise of their jurisdiction under
 25

Article 226 and Article 32 can decide questions of fact as well as law merely
on the basis of documents and affidavits filed before them ordinarily, there
should be no reason why a Tribunal likewise should not be able to decide the
case merely on the basis of documents and affidavits before it. ...."
It may also be noted that in the aforesaid judgement, their Lordships of
the Hon’ble Supreme Court, in paragraphs 17 & 25 of the said judgement,
dealt with the powers of the Appellate Tribunal under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 as also similar
powers exercised by Tribunal pertaining to Income-tax, Sales Tax, Excise,
Customs or Administration, throughout the country.

40. Again, in Salem Advocate Bar Association v. Union of India (2003) 1 SCC
49 (SC) their Lordships of the Supreme Court in paragraphs 17 & 18 of the
judgement also referred to Order 18, Rule 4 of the Civil Procedure Code,
1908, which inter alia reads as under: "R.4. Recording of evidence by
Commissioner – (1) in every case, the evidence of a witness of his
examination-in-chief shall be given by affidavit and copies thereof shall be
supplied to the opposite party by the party who calls him for evidence."

Further Rule 1 of Order 19 of the Civil Procedure Code, 1908 also permits
affidavits to be filed "R.1. Power to order any point to be provided by
affidavit .... Any Court may at any time for sufficient reason order that any
particular fact or facts may be proved by affidavit, or that the affidavit of
any witness may be read at the hearing on such conditions as the Courts
thinks reasonable."
 26

ITA No.1214/Hyd/04 and nine others M/s. Transport Corporation of India Ltd., Sec’bad

In our considered opinion, therefore, the tax authorities were not justified
in law in arbitrarily rejecting the affidavits sworn by its senior officers of
the assessee, merely on the ground that these were self serving
declarations/documents, particularly when neither the assessing officer
nor the CIT(A) called any of the deponents for cross examination, in
course of the impugned assessment/appellate proceedings, for any of the
years now under appeal. As correctly canvassed by the ld counsel for the
assessee, every affidavit is a self serving declaration on oath made by the
deponent thereof, and on that ground alone the affidavit cannot be
rejected and/or ignored.

In the High Court at Calcutta Dr. Syamal Baran Mondal …Appellant

- Versus – The Commissioner of Income Tax-XX, Kol …Respondents Judgment
18.2.2011 Income Tax Appeal No.698 of 2007

It is settled position in law in view of number of decisions of the Hon’ble Supreme Court as
well as by the various High Courts that the affidavit of the Accountant cannot be thrown
away or rejected without subjecting the deponent to cross-examination. In case of Mehta
Parekh and Co. v. Commissioner of Income Tax (Bombay) reported in 30 ITR 181 the
Supreme Court at page 187 of the report has observed as follows:-

“The appellants took up the affidavits of the parties were enough and neither the appellant
Assistant Commissioner, nor the Income Tax Officer was present at the hearing of the appeal
before the appellant Assistant Commissioner, considered it necessary to call for them in
order to cross-examine them with reference to statement made by them in their affidavits.
Under these circumstances it was not open to the revenue to challenge the correctness of the
cash book entries or the statements made by this deponent in their affidavits.

The fact of the cases before the Supreme Court showed that a few persons had filed affidavit
in support of the assessee stating that currency notes of denomination of Rupees one
thousand each were supplied by them.”
 27

Bombay High Court in the case of Dilip Kumar Raj v. Commissioner of Income Tax reported
in 94 ITR 1 following the said decision of the Supreme Court took the same view. It has been
observed at page 8 of the said report that the affidavit which was filed before the Income Tax
Officer and its truthfulness was not challenged by the cross-examination of Richard Millar.
In that context, it was held that the Income tax officials should not have rejected the said
affidavit without cross-examining the deponent.

When an affidavit is affirmed the deponent makes statement on oath with complete
understanding and responsibility if not risk that if such statement is found to be false or
incorrect he will be charged with the offence of purgery. As such, the affidavit cannot be
thrown away without declaring the statements made therein are false or incorrect. Hence
unless contrary is proved, statement in the affidavit is to be accepted as correct.

Under those circumstances, we think that rejection of this affidavit on the ground the SAME
being an afterthought as rightly urged by Mr. Khaitan, is based on conjecture and further in
violation of principle of natural justice.

GUJARAT HIGH COURT Case Title: MAHESH G POMNANI TAX APPEAL

No.900 of 2009
Date: 07/09/2010
Subject: Stated Tuition Income Bank Deposits – Onus on
assessee to give student names etc.
Assessee Favoring Case Law
From the facts noted hereinabove, it is apparent that the assessee had income
from tuition fees which was duly reflected in his books of accounts. Out of the
funds received by way of tuition fees, the assessee had placed Rs.20 lakhs in fixed
deposits for a short period since the said amount was necessary for the
expenditure which he was required to incur in respect of the coaching classes in
the next few months. The revenue has not produced any material on record to
indicate that the assessee had any undisclosed income. In the circumstances,
when the tuition fee receipts had already been offered to tax which was duly
recorded in the regular books of accounts maintained by the assessee, and
thereafter had been invested in short term fixed deposits, in absence of any
material to indicate that the deposits had been made from any undisclosed
income of the assessee, there was no question of calling upon the assessee to
explain the source thereof. Even before this Court, on behalf of the revenue,
nothing contrary has been pointed out to indicate that the amounts which had
been parked in the fixed deposits were out of any undisclosed income of the
assessee. In the light of the aforesaid factual background, it is not possible to state
that the conclusion arrived at by the Tribunal is in any manner unreasonable or
perverse so as to warrant interference
 28

Gujarat High Court in case of MEENABEN LAKHANI TAX APPEAL No. 104 of
2011 Date : 26/03/2012 CASH CREDIT: REQUIRED APPROACH TO
BE FOLLOWED ONCE INITIAL ONUS U/S 68 DISCHARGED BY ASSESSEE

In our opinion, when the loan has been received by the assessee by way

of account payee cheque from an assessee under the Income Tax Act and

the PAN as well as the confirmation by such creditor has been furnished

to the Assessing Officer, before deciding to proceed further it is the first

duty of the Assessing Officer to verify from the coordinate Assessing

Officer of the said lender whether the transaction in question has found

place in the account of the said lender. If it appears that such

transaction has been accepted to be genuine by the Assessing Officer of

the said depositor, the Assessing Officer in question cannot dispute any

further the genuineness or creditworthiness of the selfsame transaction

which has been accepted to be genuine by the coordinate Assessing

Officer having jurisdiction to decide such question.

In the case before us, the Assessing Officer did not place any material

indicating that the transaction in question i.e. the loan, has been either

disbelieved by the Assessing Officer of the lender or is not reflected in the

lender's account. Such being the position, there was no scope of

branding the transaction as “not worthy of credence”.

Gujarat High Court in case of RANCHHOD JIVABHAI NAKHAVA TAX APPEAL

No. 50 of 2011 Date : 20/03/2012 CASH CREDIT: REQUIRED
 29

APPROACH TO BE FOLLOWED ONCE INITIAL ONUS U/S 68 DISCHARGED

BY ASSESSEE

In our view, once the assessee has established that he has taken money

by way of accounts payee cheques from the lenders who are all income

tax assessees whose PAN have been disclosed, the initial burden under

Section 68 of the Act was discharged. It further appears that the

assessee had also produced confirmation letters given by those lenders.

Once the Assessing Officer gets hold of the PAN of the lenders, it was his

duty to ascertain from the Assessing Officer of those lenders, whether in

their respective return they had shown existence of such amount of

money and had further shown that those amount of money had been lent

to the assessee. If before verifying of such fact from the Assessing Officer

of the lenders of the assessee, the Assessing Officer decides to examine

the lenders and asks the assessee to further prove the genuineness and

creditworthiness of the transaction, in our opinion, the Assessing Officer

did not follow the principle laid down under Section 68 of the Income Tax

Act. If on verification, it was found that those lenders did not

disclose in their income tax return the transaction or that they had

not disclosed the aforesaid amount, the Assessing Officer could call

for further explanation from the assessee to prove the genuineness

of the transaction or creditworthiness of the same. However,

without verifying such fact from the income tax return of the

creditors, the action taken by the Assessing Officer in examining

the lenders of the assessee was a wrong approach. Moreover, we find

 30

that those lenders have made inconsistent statement as pointed out

by the Commissioner of Income Tax (Appeals) and in such

circumstances, we find that both the Commissioner of Income Tax

(Appeals) and the Tribunal were justified in setting aside the

deletion as the Assessing Officer, without taking step for

verification of the Income Tax Return of the creditors, took

unnecessary step of further examining those creditors. If the

Assessing Officers of those creditors are satisfied with the

explanation given by the creditors as regards those transactions, the

Assessing Officer in question has no justification to disbelieve the

transactions reflected in the account of the creditors. In other

words, the Assessing Officer had no authority to dispute the

correctness of assessments of the creditors of the assessee when a

co-ordinate Assessing Officer is satisfied with the transaction.

It is held in no. of case laws that realization of trade debt cannot be subject
matter of section 68 (refer Delhi ITAT in Decent Foods ITA 2471/Del/2010 DT.
07.12.2010 & Delhi bench of ITAT in 55 ITD 159 para 24-26)

Mere suspicion however strong cannot take the place of evidence :refer
Umacharan Shaw and Bros. vs. CIT (1959) 37 ITR 271 (SC). Relied in 299 ITR
180

P&H High Court in M/s Amar Chand and sons ncome-tax Appeal No.243 o
f 2011 November 25, 2011 We feel that the submission is absolutely untenable as
the assessee cannot be asked to show credit worthiness of his creditors and the Assessing
 31

Officer of that creditor can add the said amount to the income of that creditor if he is not
satisfied by the explanation given and it is not possible for the assessee to prove the
sources of the creditors. It has also been recorded as a matter of fact that the amounts
have been received by way of banking channel and, therefore, it was for the Assessing
Officers of the said creditors to question the said creditors, who were income tax assesses
and in the absence of any evidence, the Assessing Officer could not have treated the said
amount as belonging to the assessee from his undisclosed sources.

Refer: All. High Court order in case of Raj Kr Aggarwal: Unsecured Loans:
Section 68 Assessee’s Onus etc HELD:

“Mr. D.D. Chopra, appearing on behalf of the revenue, submits that the
assessee had not discharged the onus, which lay on him under Section 68 of
the Act. He also points out that it is the assessee, who has failed to produce
the Managing Director/Director of the lending Company and, therefore, the
Assessing Officer was justified in making the addition. He further points out
that huge cash had been deposited in the bank account of the lending
Company. In support of the submission, reliance has been placed on the
following decisions:- (1) K.L. Agarwal Vs. CIT, 190 ITR 303 (Delhi). (2)
Sumati Dayal Vs. CIT, 214 ITR 801 (SC).

After hearing learned counsel for the revenue and on appraisal of material
available on record, it appears that addition of Rs. 25,05,000/- was made
only for the ground that the Director of M/s. Rich Capital & Financial
Services Ltd. was not produced before the revenue. But facts remains that so
far as the identity of the lender is concerned, it cannot be questioned because
it is a public limited Company and is regularly assessed to income tax
having PAN. Therefore, in our considered view, onus is discharged by the
assessee by producing necessary evidence. The source of source cannot be
 32

examined in view of law laid down in the case of Commissioner of Income

Tax (Central), Calcutta Vs. Daulat RaRawatmull, 87 ITR 349 (SC). Hence,
we find no merit in the grounds raised by the revenue in regard to addition of
Rs.25,05,000/-“

Jurisdictional Delhi High Court in ITA No. 1735/2010/12.11.2010: Section 68

Alleged Unexplained cash credits or Loans (refer 330 ITR 298 Also)

The CIT(A) reversed this order of the assessee holding that the cash deposited in
the bank of the assessee of ` 11 lacs was confirmed by M/s. Indo Monext Pvt.
Ltd. and since the source was established by said confirmation, the addition
could not be sustained. This order of the CIT(A) is upheld by the Tribunal as
well. It is clear from the aforesaid facts that the assessee had borrowed ` 33 lacs
from M/s. Indo Monex Pvt. Ltd which were given on different dates, ` 22 lacs
was given by means of cheques and ` 11 lacs was given by cash on different
dates. When the creditor, namely, M/s. Indo Monex Pvt. Ltd. itself has
confirmed that it had paid the amount to the assessee, such an amount could not
be treated as undisclosed income. We find that no substantial question of law
arises.

M/S. DATAWARE PRIVATE LIMITED: Calcutta High Court order

In our opinion, in such circumstances, the Assessing officer of the assessee

cannot take the burden of assessing the profit and loss account of the creditor
when admittedly the creditor himself is an income tax assessee. After getting
the PAN number and getting the information that the creditor is assessed
under the Act, the Assessing officer should enquire from the Assessing
Officer of the creditor as to the genuineness of the transaction and whether
such transaction has been accepted by the Assessing officer of the creditor
but instead of adopting such course, the Assessing officer himself could not
enter into the return of the creditor and brand the same as unworthy of
credence. So long it is not established that the return submitted by the
 33

creditor has been rejected by its Assessing Officer, the Assessing officer of
the assessee is bound to accept the same as genuine when the identity of the
creditor and the genuineness of transaction through account payee cheque
has been established...
 34

Topic: Recent & Key Propositions on

Reassessment u/s 148 Income Tax
Act (Kapil Goel FCA LLB
(advocatekapilgoel@gmail.com)

1) Bakulbhai Ramanlal Patel v. Income Tax Officer reported in (2011)

56 DTR(Guj.) 212, wherein Division Bench of this Court observed that the
assessment cannot be reopened to verify whether any income chargeable to
tax has escaped assessment and further that reopening of assessment cannot
be permitted on vague and nonexistent reasons for a mere fishing inquiry.

2) Hotel Oasis(Surat) (P) LTD. v. Deputy Commissioner of Income Tax

reported in (2011) 57 DTR (Guj) 378, wherein Division Bench of this
Court observed that assessment cannot be reopened merely to make
inquiries.

3) Chhugamal Rajpal v. S.P. Chaliha and others reported in (1971) 79

ITR 603(SC), wherein assessment was reopened on the ground that loan
transactions required investigation. Such belief was found on the basis of
communication from the Commissioner of Income-tax. The Apex Court
held that the reasons record would not be sufficient to reopen the
assessment. We may however, notice that in the said case the assessment
was sought to be reopened after four years.

4) Dass Friends Builders P.Ltd. v. Deputy Commissioner of Income-tax

reported in (2006) 280 ITR 77(All), to contend that reopening of
 35

assessment would not be permissible on the basis of findings of earlier

assessment years.

5) Income-tax Officer, I ward Distt. VI, Calcutta and others v.

Lakhmani Mewal DAS reported in (1976) 103 ITR 437(SC), wherein it
was observed that for reopening of assessment, there must be a rational
connection or relevant bearing on the formation of belief that income
chargeable to tax has escaped assessment.

6) Prashant S. Joshi v. Income-tax officer and another reported in

(2010) 324 ITR 154(Bom) of the Bombay High Court, wherein it was held
that while examining the validity of reassessment proceedings, reasons
recorded by the Assessing Officer alone would be relevant and such
reasons could not be supplemented by affidavit.

7. Apex Court in case of Assistant Commissioner of Income-tax v. Rajesh

Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500(SC). This was also a
case where the Court was concerned with reopening of assessment where
the previous assessment was accepted without scrutiny. Noticing various
statutory changes made in Sections 143 and 147 of the Act and change in
the entire scheme of the assessment under Section 143 from making prima
facie adjustment to merely communication of the acceptance of return
under sub-section(1) of Section 143 of the Act without scrutiny, the Apex
Court observed as under :

“...In the scheme of things, as noted above, the intimation under section
143(1)(a) cannot be treated to be an order of assessment. The distinction is
also well brought out by the statutory provisions as they stood at different
points of time. Under section 143(l)(a) as it stood prior to April 1, 1989, the
Assessing Officer had to pass an assessment order if he decided to accept
the return, but under the amended provision, the requirement of passing of
an assessment order has been dispensed with and instead an intimation is
required to be sent. Various circulars sent by the Central Board of Direct
 36

Taxes spell out the intent of the Legislature, i.e., to minimize the
departmental work to scrutinize each and every return and to concentrate on
selective scrutiny of returns. These aspects were highlighted by one of us
(D. K. Jain J) in Apogee International Limited v. Union of India [(1996)
220 ITR 248]. It may be noted above that under the first proviso to the
newly substituted section 143(1), with effect from June 1, 1999, except as
provided in the provision itself, the acknowledgment of the return shall be
deemed to be an intimation under section 143(1) where (a) either no sum is
payable by the assessee, or (b) no refund is due to him. It is significant that
the acknowledgment is not done by any Assessing Officer, but mostly by
ministerial staff. Can it be said that any “assessment” is done by them? The
reply is an emphatic “no”. The intimation under section 143(1)(a) was
deemed to be a notice of demand under section 156, for the apparent
purpose of making machinery provisions relating to recovery of tax
applicable. By such application only recovery indicated to be payable in the
intimation became permissible. And nothing more can be inferred from the
deeming provision. Therefore, there being no assessment under section
143(1)(a), the question of change of opinion, as contended, does not arise.”

Having thus held that mere intimation under Section 143(1)(a) of the Act
would not amount to any formation of opinion by the Assessing Officer, the
Apex Court then went on to explain the term “reason to believe” used in
Section 147 of the Act and observed as under :

Section 147 authorises and permits the Assessing Officer to assess or

reassess income chargeable to tax if he has reason to believe that income
for any assessment year has escaped assessment. The word “reason” in the
phrase “reason to believe” would mean cause or justification. If the
Assessing Officer has cause or justification to know or suppose that income
had escaped assessment, it can be said to have reason to believe that an
income had escaped assessment. The expression cannot be read to mean
that the Assessing Officer should have finally ascertained the fact by legal
evidence or conclusion. The function of the Assessing Officer is to
administer the statute with solicitude for the public exchequer with an
inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court
in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662],
for initiation of action under section 147(a) (as the provision stood at the
relevant time) fulfillment of the two requisite conditions in that regard is
essential. At that stage, the final outcome of the proceeding is not relevant.
In other words, at the initiation stage, what is required is “reason to
believe”, but not the established fact of escapement of income. At the stage
 37

of issue of notice, the only question is whether there was relevant material
on which a reasonable person could have formed a requisite belief. Whether
the materials would conclusively prove the escapement is not the concern at
that stage. This is so because the formation of belief by the Assessing
Officer is within the realm of subjective satisfaction (see ITO v. Selected
Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ; Raymond
Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)].”

8. Multiscreen Media Private Limited v. Union of India and another

reported in (2010) 324 ITR 54(Bom.), Bombay High Court was of the
opinion that on the basis of additional material in form of subsequent
assessment year, if the Assessing Officer issued notice on the ground of
reason to believe that income chargeable to tax has escaped assessment,
such notice cannot be stated to be invalid. The Court relied on the decision
of the Apex Court in case of Ess Ess Kay Engineering Co. P. Ltd. v. CIT
reported in (2001) 247 ITR 818 (SC).

9. ICICI Bank Ltd., IN THE HIGH COURT OF JUDICATURE AT

BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.1237 OF 2011 Further, the
Assessing Officer while reassessing the respondent by an order
dated 26/3/2002 has in fact taken a ground different from the
grounds in the reasons recorded for reopening the assessment
under Section 148 of the said Act. The reasons furnished for
reopening the assessment alleged that non fund income had
been shown in fund based income so as to avail of a higher
deduction. However, the basis of the order dated 26/3/2002 was
that 20.1% out of the gross expenses attributed to non fund
income was excessive and ought to be restricted to only 10%.
Thus, the basis of the order is completely different from the
 38

reasons recorded for reopening the assessment. This is clearly

not permissible as held by this Court in Jet Airways (supra).

10. IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY

ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1120
OF 2010 M/s.Unity International It is not disputed that the matters
stand covered against the appellant in view of the judgment of a
Division Bench of this Court in the case of Commissioner of Income
Tax vs. Jet Airways (I) Ltd. (2011) 331 ITR 236. As rightly noted by the
Tribunal, once the Assessing Officer reaches the conclusion that the
income which he believed to have escaped assessment had been
explained and no action was taken in respect thereof, the AO would
not be entitled to exercise jurisdiction to tax any other with income,
even if the same comes to his notice in the course of the
reassessment proceedings.

11. M/S Abhyudaya Builders (P) Ltd Reopening Held to

extraordinary power to used by AO strictly as per law :
Allahabad High Court

It may be mentioned that the basic idea in the Act is that

the entire income of an assessee assessable in respect of a
particular assessment year should be made the subject of
one single assessment made on him for that year. Income
which is assessable in one assessment year cannot be
brought to tax in another assessment year even where its
non-assessment in the year to which it relates was due to a
device employed by the assessee which came to light in the
subsequent year as per the ratio laid down by the High
Court in the case of Ratanchand Lallumal vs. ITR 189 (All.). The
Hon'ble Supreme Court in the case of CIT vs. Sun Engineering
Works (P) Ltd. (1992) 198 ITR 297 observed that on such
 39

reopening, the previous assessment stands set aside,

vacated or cancelled and the whole assessment proceedings
start afresh. The reopening of the assessment is a power of
extraordinary nature and so section 147 must be strictly
construed, as per ratio laid down by the Hon'ble Supreme
Court in the case of Associated Stone Industries (Kotah) Ltd. vs. CIT
(1997) 224 ITR 560 (SC).

Before starting the proceedings under section 147 of the

Income Tax Act, A.O. must have the “reason to believe”
and these words have the following four elements:

(i) some material or materials and not mere fancy, imagination,

speculation, suspicion; (ii) a nexus between such material and the belief of
escapement of income from assessment in the circumstances outlined in
clause (a) or (b); (iii) an application of mind by the Assessing Officer to
such material; and (iv) an inference based on reason drawn tentatively by
the officer that income has escaped assessment.

The A.O. would be acting without jurisdiction if the “reason

for his believe” that the conditions are satisfied does not
exist, or is not material or relevant to the belief required by
the section. The Court can always examine this aspect
though the declaration or the sufficiency of the reasons for
the belief cannot be investigated by the Court, as per the
ratio laid down in the case of ITO vs. Purushottam Das Bangur
(1997) 224 ITR 362 (SC).

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL

CIVIL APPLICATION No. 858 of 2006 INDUCTOTHERM (INDIA)
PVT.LTD. (FORMERLY INDUCTOTHERM INDIA 16. It would, thus,
emerge that even in case of reopening of an assessment which was
previously accepted under section 143(1) of the Act without scrutiny, the
Assessing Officer would have power to reopen the assessment, provided he
had some tangible material on the basis of which he could form a reason to
believe that income chargeable to tax had escaped assessment. However, as
held by the Apex Court in the case of Assistant Commissioner of Income
 40

Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., (supra) and several other
decisions, such reason to believe need not necessarily be a firm final
decision of the Assessing Officer. 17. If we accept such proposition, the
petitioner's apprehension that the Assessing Officer would arbitrarily
exercise powers under section 147 of the Act to circumvent the scrutiny
proceedings which could not be framed in view of notice under section
143(2) having become time barred, would be taken care of. To reiterate,
even for reopening of an assessment which was accepted previously under
section 143(1) of the Act without scrutiny, the Assessing Officer should
have reason to believe that income chargeable to tax has escaped
assessment.

18. Reverting to the facts of the present case, we notice that in two out of
four reasons recorded by the Assessing Officer for reopening the
assessment, he stated that he need to verify the claims. In the second
ground, he had recorded that admissibility of the bad debts written off
required to be verified. In the fourth ground also, he had recorded that
admissibility of royalty claim was required to be verified. We are in
agreement with the contention of the counsel for the petitioner that for mere
verification of the claim, power for reopening of assessment could not be
exercised. The Assessing Officer in guise of power to reopen an
assessment, cannot seek to undertake a fishing or roving inquiry and seek to
verify the claims as if it were a scrutiny assessment. 19. With respect to
other two grounds, however, we find that the Assessing Officer had some
material at his command to form a belief that income chargeable to tax had
escaped assessment.

Also refer:

1. SPECIAL CIVIL APPLICATION No. 3188 of 2005 PRITI MARINE

PVT.LTD

After referring Apex Court in case of Assistant Commissioner of Income-tax v.

Rajesh Jhaveri Stock Brokers P. Ltd. reported in (2007) 291 ITR 500 (SC);
Raymond Woollen Mills Ltd. v. Income-tax Officer and others reported in (1999)
236 ITR 34(SC); Shri Krishna Pvt. Ltd., Etc. v. Income-tax Officer and others
reported in (1996) 221 ITR 538(SC), Andhra Pradesh High Court in case of GVK
Gautami Power Ltd. (formerly known as Gautami Power Ltd.) v. Assistant
Commissioner of Income-tax(OSD) and another reported in (2011) 336 ITR
451(AP), referring to large number of decisions of the Apex Court on the question
of reopening of the assessment culled out several principles on the issue including
 41

following :

“(xxvii). At the stage of examining the validity of the notice under Section
148/147, the enquiry is only to see whether there are reasonable grounds for
the ITO to believe, and not whether the omission/failure and the
escapement of income is established. (Sri Krishna Pvt. Ltd.19) [1996] 221
ITR 538(SC)

(xxviii). Whether the material would conclusively prove the escapement is

not of concern at the initiation stage. (Selected Dalurband Coal Co. (P)
Ltd18; Raymond Woollen Mills Ltd.21; Central Provinces Manganese Ore
Co. Ltd.16; Rajesh Jhaveri [2007] 291 ITR 500.”

It is held in above case that:

In the present case, admittedly no assessment was framed in case of the

petitioner under section 143(3) of the Act. During the assessment
proceeding in case of another assessee, books of account of the present
petitioner were called for and it was found that the petitioner had shown
sales to one M/s. Shital Marketing. M/s. Shital Marketing was found to be a
bogus concern who was used by several ship breakers for the purpose of
introducing unaccounted sales in their books of account. On that basis the
Assessing Officer formed an opinion that the books of the petitioner are not
reliable and liable to be rejected.

If on the basis of such material available with the Assessing Officer, he

formed a belief that income chargeable to tax in case of assessee has
escaped assessment, we do not think the Assessing Officer lacked sufficient
material to hold such a belief. At this stage, particularly, in a case where no
previous scrutiny assessment was framed in case of the petitioner, our
inquiry would not permit any further scrutiny beyond ascertaining whether
there was some material available with the Assessing Officer to enable him
to form such a belief. When it is specifically pointed out that the petitioner
had introduced sales in favour of fictitious parties and on such basis, the
Assessing Officer found that books were not reliable and liable to be
rejected, further proceeding in terms of section 147 of the Act cannot be
scuttled.

2. IN THE HIGH COURT OF DELHI AT NEW DELHI SHONKH

TECHNOLOGY LTD. ITA 1325/2009 + ITA 525/2010 + ITA 1697/2010 Dated
of decision: 10th July, 2012 5. In view of the above reasoning the Tribunal set-aside the
assessment and penalty order. We have heard counsel for the parties. In our opinion the
Tribunal has adopted a hyper-technical approach in holding that the material which
 42

existed and which was relied upon by the Assessing Officer on 28.10.2004, as revealed
in the notice dated 29.10.2004, were insufficient to be described as “reasons to believe”
under Section 147 of the Act. As is evident, the assessee had filed return for the year
2000-01. However, it did not file any return for the succeeding year but had received a
sum in excess of `100 crores as consideration for transfer of business to one M/s.
Sreejee Yatayat Ltd. The reasoning of the Tribunal was not justified because
Explanation 2(a) to Section 47 provides that non-filing of return under certain
circumstances could itself led to inference of escaped income. The Tribunal was
conscious of that provision; yet it proceeded to take an extremely narrow view of the
facts of this case and set an impossibly high threshold upon the Assessing Officer.
Once the Assessing Officer was satisfied – as indeed evidenced from the reasons
recorded on 28.10.2004 – that no return had been filed for the relevant year and further
a substantial amount had been received by the assessee, there could have been no
further investigation as to what was the ground for the assessee to have not filed the
return. In other words the explanation for the non-filing of the return would really be
going into the merits of the case. Therefore, we are of the opinion that the Tribunal
ought not to have set-aside the assessment and penalty order in this case on such
narrow reasoning.

3. Kaveri Associates Karnataka high court 10.07.2012 Held AO was right in

forming reasons to belief that a firm having capacity to lend Rs 71 lacs (app.) to one
of its partners or other, is reasonably presumed to have taxable income and if
assessee has never returned any expenditure or otherwise disclosed its activities,
then in such circumstances AO will be right on belief that income has escaped
assessee coupled with fact that there is no filing of return of income for subject
period.

4. Bombay High Court in: ICICI Home Finance Co. Ltd. WRIT

PETITION NO. 430 OF 2012 20th July, 2012 6 The power to reopen
a completed assessment under Section 147 of the Act has been
bestowed on the Assessing Officer, if he has reason to believe that any
income chargeable to tax has escaped assessment for any assessment
year. However, this belief that income has escaped assessment has to be
the reasonable belief of the Assessing Officer himself and cannot be an
opinion and/or belief of some other authority.
 43

5. IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION WRIT
PETITION NO.315 OF 2012 Indivest Pte Ltd., Singapore 13 March
2012.

Reading the reasons of the Assessing Officer, it is evident that there is absolutely no
tangible material on the basis of which the assessment for Assessment Year 200607
could have been reopened. Upon the return of income being filed by the assessee
both in the electronic form and subsequently in the conventional mode, the assessee
received an intimation under Section 143(1). The Assessing Officer would have
been legitimately entitled to issue a notice under Section 143(2) within the statutory
period. That period has expired. We must clarify that the non issuance of a notice
under Section 143(2) does not preclude the Assessing Officer from reopening the
assessment under Section 147.

The nature of the jurisdiction of the Assessing Officer which was dealt with by the
judgment of the two learned Judges of the Supreme Court in Rajesh Jhaveri’s case
was revisited in a decision of three learned Judges in Commissioner of Income
Tax v. Kelvinator of India Ltd.2. The Supreme Court has held that though after 1
April 1989, a wider power has been conferred upon the Assessing Officer to reopen
an assessment, the power cannot be exercised on the basis of a mere change of
opinion nor is it in the nature of a review. The Supreme Court has laid down the test
of whether there is tangible material on the basis of which the Assessing Officer has
come to the conclusion that there is an escapement of income

If the test of whether there exists any tangible material were to be applied in the
present case, it would be evident that the Assessing Officer has not acted within his
jurisdiction in purporting to reopen the assessment in exercising the powers
conferred by Section 148. There was a disclosure clearly by the assessee that it is a
body corporate incorporated in Singapore, the principal business of which is to
invest in Indian securities; that the assessee is a tax resident of Singapore and that
 44

the profits which the assessee realised from its transactions in securities constituted
its profits from business. The assessee stated that it had no permanent establishment
in India as defined in Article 5 of the DTAA and that based on the provisions of
Article 7 the profits of Rs.131.70 Crores from transactions in Indian securities were
not liable to tax in India

In the order disposing of the objections which were raised by the assessee, the
succeeding Assessing Officer has clearly attempted to improve upon the reasons
which were originally communicated to the assessee. The validity of the notice
reopening the assessment under Section 148 has to be determined on the basis of
the reasons which are disclosed to the assessee. Those reasons constitute the
foundation of the action initiated by the Assessing Officer of reopening the
assessment. Those reasons cannot be supplemented or improved upon subsequently.
While disposing of the objections of the assessee, the Assessing Officer has
purported to state that the assessee had filed only sketchy details in its return filed in
the electronic form. As we have noted earlier, the relevant provisions expressly
make it clear that no document or report can be filed with the return of income in
the electronic form. The assessee has an opportunity to do so during the course of
the assessment proceedings if a notice is issued under Section 143(2). The
Assessing Officer was, in our view, not entitled, when he disposed of the objections
to travel beyond the ambit of the reasons which were disclosed to the assessee. For
all these reasons, we are of the view that the exercise of the jurisdiction under
Section 147 and Section 148 in the present case is without any tangible material.
The notice of reopening does not meet the requirements as elucidated in the
judgment of the Supreme Court in Kelvinator of India Ltd.

6. SPECIAL CIVIL APPLICATION No. 12768 of 2009 HI-CHOICE

PROCESSORS PVT LTD The reasons recorded by the Assessing Officer for
reopening the assessment readas under:

“1. The assessee derives its income from job work. During the year, the
turnover was shown at Rs. 13,63,10,809/- as against Rs. 9,10,89,299 of the
 45

previous year. The increase is at 49.64%. 2. The raw material consumed is at

Rs. 6,10,05,422 as against Rs. 3,66,37,892. The increase is at 66.50%. The
increase in full consumption is also at about 66.50% whereas; the production
was shown at 1,32,98,157 meters as against 90,06,923 meters of the previous
year. The increase in production is at 49.64% only. 3. Though, the raw
material and full consumption which are the main cost factors were
consumed at 66.50% percentage but, the production was increased only at
49.64%. Considering the ratio or raw material consumed in the previous
year, the production/turnover for the current year would be Rs. 15,16,71,966
as against Rs. 13,63,10,809/- shown by the assessee. 4. So, the assessee has
under stated the turnover to the extent of Rs. 1,53,61,157/- which needs to be
investigated in depth. In view of the discussion in aforesaid paras, I am of the
considered view that substantial income has escaped assessment in view of
section 147 of the IT Act 1961, for which assessment need to be reopened.”

HELD: The Assessing Officer, on an arithmetical calculation of the

turnover of the previous years and raw material consumed as against raw
material consumed in the year under consideration, has come to the
conclusion that considering the ratio of raw material consumed in the
previous year and in the current year, the turnover should be higher than
that stated by the petitioner. Thus, the Assessing Officer has not formed
any belief that any income chargeable to tax has escaped assessment but is
of the view that the turnover to the extent the Assessing Officer believes
that the assessee had understated the same, needs to be investigated in
depth. It is, therefore, apparent that neither of the two contingencies
necessary for invoking jurisdiction under section 147 of the Act after the
expiry of a period of four years from the end of the relevant assessment
year exists in the present case. As noted earlier, the reasons recorded do not
in any manner, either explicitly or by implication, indicate that income
 46

chargeable to tax has escaped assessment. Under the circumstances, the

first condition precedent itself is not satisfied in the facts of the present case
in as much as the only belief formed by the Assessing Officer is that the
understatement of turnover needs to be investigated. It is settled legal
position that section 147 of the Act cannot be exercised for making a roving
inquiry and that the Assessing Officer, before reopening the assessment
has to form a belief that income chargeable to tax has escaped assessment.

7. M/s.Sahil Knit Fab, ITA No.45 of 2007. Himachal Pradesh High Court
Date of decision: 14.03.2012

What we are concerned with in this case is the scope and ambit of the jurisdiction of
the Assessing Officer under Sections 147 and 148 of the Act. This issue is no longer
res-integra and has engaged the attention of Courts in a number of cases.

23. We need not consider any other precedent as the law settled by the Supreme
Court is clear on the point. It is not the mere whim or opinion of the Assessing
Officer which
would entitle him to invoke the powers for re-opening assessment. Comparison of
profit with another firm for a different assessment year subsequent to the
assessment year, in which the case of the respondent was sought to be reassessed,
cannot form the ground for ordering reassessment. The second ground urged that
the eligibility of the
assessee for deduction under Section 80-1A could be claimed only after fulfilling
mandatory conditions required, the learned Tribunal holds that reopening of
assessment is permissible to bring to tax escaped income and not to make
investigation or verification. The Tribunal upholds the decision of the
Commissioner Income Tax(Appeals) that if the return filed by the assessee is
required to be verified by the Assessing Officer which what is required is notice
 47

under Section 143(2) and to proceed with assessment under Section

143(3) on the basis of material gathered by him

The learned Tribunal then proceeded to hold that the reason to believe would not
mean suspicion as laid down by the Supreme Court in ITO vs. Lakhmani Mewa Das
103 ITR 437 (SC) and Indian Oil Corpn. vs. ITO, 159 ITR 956(SC). In this view of
the settled position we cannot accept that the Assessing Officer was right in
reopening assessment. We hold that as held in Kelvinator’s and Eicher’s case,
reason to believe cannot be interpreted to mean mere just opinion. We, therefore,
concur with the reasoning of the learned Tribunal.

TDS credit vs. reopening/reasons for income escapement vide expl. 2 to section
147: Held No (ass fav. Reopening quashed) ASIA SATELLITE
TELECOMMUNICATIONS CO. LTD IN THE HIGH COURT OF DELHI AT
NEW DELHI Reserved on:25th July, 2012 % Date of Decision: 23rd August, 2012
+ W.P. (C) No.8852/2011 Two aspects fall for consideration on this issue: firstly,
whether it is legally permissible for the AO to improve upon the reasons recorded
for reopening the assessment in his order rejecting the petitioner‟s objections and
secondly, whether the allegation is factually correct. As far as the legal aspect is
concerned, there are several authorities to the effect that the reasons recorded prior
to the issue of notice under Section 148 cannot be improved upon and the gaps
cannot be supplied later. The validity of the reasons has to be judged only on the
basis of what was originally recorded under Section 148(2): In Signature Hotels (P)
Ltd. v. Income Tax Officer and Anr., (2011) 338 ITR 51. It has been held in the
following cases that the reasons cannot be added or improved upon subsequently
and the validity of the reopening of the assessment must be judged only with
reference to or on the basis of the reasons recorded by the Assessing Officer under
Section 148(2) prior to the issue of the notice: -

(a) Commissioner of Income Tax v. Agarwalla Brothers (1991) 189 ITR 786 (Pat.)
(b) East Coast Commercial Company Ltd. v. Income Tax Officer and Ors., (1981) 128
ITR 326 (Cal.)

(c) Equitable Investment Co. (P) Ltd. v. Income Tax Officer, G. Ward & Others, (1988)
174 ITR 714 (Cal)

(d) Jamna Lal Kabra v. Income Tax Officer, (1967) 69 ITR 461 (All.)

(e) Manji (H.A.) and Co. v. Income Tax Officer, (1979) 120 ITR 593 (Cal.)

(f) Rajigharia v. Income Tax Officer, (1975) 98 ITR 486 (Pat.)

 48

(g) Saradbhai M. Lakhani v. Income Tax Officer, (1997) 231 ITR 779 (Guj.)

Turning now to the validity of the reasons recorded, that credit for TDS of 
`2,11,16,426/‐ was wrongly allowed to the petitioner, counsel for the petitioner is 
right in his submission that Section 147 of the Act can be invoked only “if the Assessing 
Officer has reason to believe that any income chargeable to tax has escaped 
assessment for any assessment year” and that there is no authority given by the 
section enabling the Assessing Officer to reopen the assessment on the ground that 
credit for TDS was wrongly allowed in the original assessment. In the reasons recorded, 
reference has been made to Explanation 2 to Section 147. What perhaps the 
respondent in the present case had in mind – we are only surmising – is that the 
assessee has not disclosed the income corresponding to the TDS of `2,11,16,426/‐; and 
when credit was given for the same by the order passed on 26.06.2006 under Section 
154 of the Act, the petitioner was allowed “excessive relief” within the meaning of 
clause (b) of Explanation 2 to Section 147 of the Act. We are just assuming that this 
was in the mind of the Assessing Officer though in the reasons recorded it has not been 
so articulated. Even assuming this was the basis for issuing the notice, it cannot be 
validated for several reasons 

CIVIL APPEAL NO.2329 OF 2006SIMPLEX CONCRETE PILES (INDIA) LTD

The subsequent reversal of the legal position by the judgment of the Supreme
Court does not authorise the Department to re-open the assessment, which
stood closed on the basis of the law, as it stood at the relevant time.

. Sita World Travels (India) Ltd CIVIL APPEAL NO.1401 OF 2005 Heard
learned counsel on both sides.
This civil appeal filed by the Department concerns Assessment Year 1996-1997.
The controversy in this case revolves around the question of re-
opening of assessment under Section 148 of the Income Tax Act, 1961. We
are satisfied that there was no concealment and this is a case of change
of opinion. In the circumstances, this civil appeal filed by the Department is
dismissed with no order as to costs.

refer:

iCICI Securities Primary Dealership Ltd Petition(s) for Special Leave to Appeal
(Civil) No(s).16054/2007 22/08/2012 "Leave granted. We have heard learned
counsel on both sides. The assessee had disclosed full details in the Return of
Income in the matter of its dealing in stocks and shares. According to the assessee,
the loss incurred was a business loss, whereas, according to the Revenue, the loss
incurred was a speculative loss. Rejection of the objections of the assessee to the re-
opening of the assessment by the Assessing Officer vide his Order dated 23rd June,
2006, is clearly a change of opinion. In the circumstances, we are of the view that
the
 49

order re-opening the assessment was not maintainable. The civil appeal is,
accordingly, dismissed. No order as to costs.

iN THE HIGH COURT OF DELHI AT NEW DELHI

ITA 847/2011 SAHARA INVESTMENT INDIA LTD The Court
further notices that the finality in respect of the very same transaction
which was attained by virtue of the order dated 11.07.2005 could not have
been disturbed in the manner that is sought to have been done in the
present case it is precisely such an exercise which was frowned by the
Supreme Court in the decision CIT v. Rao Thakur Narayan Singh 1965
(56)
ITR 234 (SC). For the above reasons, no substantial question of law
arises. The appeal is accordingly dismissed.

Karnataka High Court/Kar HC: in Dr N Thippa Shetty : In context of

reopening of assessment under section 148 after intimation u/s 143(1), Kar HC
taking cognizance of SC ruling in Rajesh Jhaveri 291 ITR 500, has interalia
concluded that:

a) In case confession given during search u/s 132(4), stands retracted before
issuance of reopening notice, same will have no evidentiary value and said
confession will not be legally admissible evidence/material as far as reopening of
assessment u/s 148 is concerned even post 143(1).

b) If the very basis of reopening did not exist, there will be no case for reopening
of the case that is if reopening is based on mere confession (as in present case)
which hitherto stands repudiated, whole reassessment proceedings will be liable
to be quashed/annulled.

c) Recorded Reasons, if are in the nature of suspicion/ mere speculation, same can
not be treated as "reasons to believe" or "cause/justification" as held by SC in
Rajesh Jhaveri.

d) Recorded reasons must be "good and sufficient" to make out a prima facie case
for reopening that is, reasons must be based on relevant material having nexus
with belief entertained by AO for reopening.

Similar conclusion has been since arrived by Delhi High Court in Batra Bhatta
& Gupta Abhushan, in context of reopening after 143(1), after considering (in
former case) SC ruling in Rajesh Jhaveri.
 50

REOPENING & PRIVATETRUST TAXATION :Karnataka High Court in

case of CIT vs Indramma Held a) discretion u/s 166 to assess either
trustee or beneficiary can be exercised before any assessment in
either hands and cannot be re-exercised after having once
accepted/assessed the trustee u/s 161 b) when a note was appended
as a matter of disclosure and no action is taken for same u/s 143(2),
reopening in said situation would be OPPOSED to law c) when in one
case scrutiny asst. is made u/s 143(3) and same facts/situation prevail
in other cases where only 143(1) is done, then in said other cases
processed u/s 143(1), doctrine and theory of change of opinion will
come into picture d) It would be erroneous to hold that AO can take
different conclusion on same set of facts for identical assessees, who
are beneficiaries of same trust and have filed same returns e) when
once notice of demand in pursuance to intimation u/s 143(1) is
generated and tax demanded therein is paid, no contrary view on same
facts is persmissible subsequently f) Notice u/s 143(2) having been
issued post 12 months of return filing, whole proceedings are bad in
law g) Escapement of income result when some income is not disclosed
or suppressed income is identified and where subject income is
offered in hands of trust u/s 161 and duly explained by beneficiaries
in subject note appended to ROI/ITR, no recourse to sec. 148 is
permissible (Note: To the same effect is Orissa HC latest order
reported in case of Visa Comtrade Ltd.)

HIGH COURT OF ORISSA: CUTTACK W.P.(C) No. 27531 of 2011

Management Committee (CFH Scheme On the rival, legal and factual contentions
advanced by the parties, the following questions fall for consideration by this
Court i) Whether order dated 13.08.2010 (Annexure-1) passed by opposite party
no.1-ITO (TDS) rejecting the application of the petitioner made in Form 13 of the
I.T. Rules on 22.06.2009 for issuance of certificate under Section 197 of the Act
for the financial year 2009-10 is sustainable in law ? (ii) Whether validity of the
impugned order can be justified by assigning fresh reasons by way of counter
affidavit other than that is mentioned in the impugned order ?

12. We also find that there is inordinate delay and serious laches on the part of
opposite party-authorities in dealing with the petitioner’s application for grant of
 51

no deduction certificate under Section 197 of the Act. There is also no explanation
from the Department as to why the petitioner’s application submitted on
22.06.2009 for issuance of nodeduction certificate under Section 197 of the Act
was taken up for the first time for consideration towards fag end of the financial
year 2009-10 and that too on a wrong ground of non-payment of outstanding
dues, nodeduction certificate was not issued to the petitioner-assessee during
financial year 2009-10.

13. At this juncture, it is relevant to mention the circular of the CBDT bearing
Circular No.F.No.20/23/67 IT(A-I) to expeditiously dealt with the application
filed by the Charitable trust for issuance of certificate for deduction of tax at
lower rate or without deduction of tax. 16. Law is also well settled that validity of
an order is to be judged by the reasons mentioned therein and it cannot be
developed either by oral submission or by filing affidavit.

The Hon’ble Supreme Court, in Mohinder Singh Gill & Anr. Vs. The Chief
Election Commissioner, New Delhi & Ors., AIR 1978 SC 851 .. Orders are not
like old wine becoming better as they grow older.”

17. Admittedly, the impugned order of rejection of the petitioner’s application

does not state that because of outstanding dues, short deduction/no-deduction
certificate under Section 197 of the Act was not issued. This is a fresh reason
stated in the counter affidavit that too an incorrect reason which contention on
behalf of the Revenue is wholly untenable in law.

19. The Hon’ble Supreme Court in M/s. Dabur India Ltd. And another v. State of
Uttar Pradesh and others. AIR 1990 SC 1814, observed that Government,
Central or State, cannot be permitted to play dirty games with the citizens of this
country to coerce them in making payments which the citizens were not legally
obliged to make. If any money is due to the Government, the Government should
take appropriate steps, but it should not take extra legal steps or adopt the course
of manoeuvring. Because of the above discontentment expressed at the Bar, it has
become necessary to provide guidelines for just exercise of the power of Revenue
authorities. To prevent the abuse of power and to see that it does not become a
new despotism, courts are gradually evolving the principles to be observed by
the authorities while exercising such power. New problems call for new
solutions
 52

Topic: Recent & Key Propositions on

Assessment under Income Tax Act
(Kapil Goel FCA LLB
(advocatekapilgoel@gmail.com)
Raza Textiles Ltd. vs Income Tax Officer, Rampur on 22 September, 1972
Equivalent citations: AIR 1973 SC 1362, 1973 87 ITR 539 SC, (1973) 1 SCC 633

No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by

deciding a jurisdictional fact wrongly It is incomprehensible to think that a quasi-judicial
authority like the Income-tax Officer can erroneously decide a jurisdictional fact and
thereafter proceed to impose a levy on a citizen

(can apply to section 148 : requirement of valid reasons to believe; valid sanction; section
153A: valid search, initiated & conducted upon assessee; Section 263: erroneous and
prejudicial condition; section 40(a)(i)/40(a)(ia): tax deductible: income chargeable;
jurisdictional assessing officer shall issue scrutiny/reopening notice ETC.

Following words of SC in L. Hirday Narain vs ITO A Ward Barelly 78 ITR 26 are

apposite: “If a statute invests a public officer with authority to do an act in a specified set
of circumstances, it is imperative upon him to exercise his authority in a manner
appropriate to the case when a party interested and having a right to apply moves in that
behalf and circumstances for exercise of authority are shown to exist. Even if the words
used in the statute are prima facie enabling the courts will readily infer a duty to exercise
power which is invested in aid of enforcement of a right-public or private-of a citizen.”

(applicable to rectification section 154 assessee’s petition; section 220(6):

assessee not in default stay petition; refund u/s 237 etc)

 53

The burden of showing that the assessee had undisclosed

income is on the revenue. The burden cannot be
discharged by merely referring to general probabilities
and possibilities as also the burden is on the revenue
to prove that the income sought to be taxed is within
the taxing provisions and there was in fact income
Supreme Court in the case of Parimisetti Seetharamamma
vs CIT 1965 57 ITR 532 (apply to deeming provisions of
section 68; 69; 69B etc)

The Division Bench of Madras High Court in the case of Sri Ramalinga
Choodambikai Mills Ltd. v Commissioner of Income Tax [(1055) 28 ITR 952
held as under:

“in absence of evidence to show either that the sales were sham transactions or
that the market prices were in fact paid by the purchasers; the mere fact that the
goods were sold at a concessional rate to benefit the purchasers at the expense
of the company would not entitle the Income Tax department to assess the
difference between the market price and the price paid by the purchasers, as
profits of the company.”

Bombay High Court order in case of M/s.Rosy Blue (India) Private Limited
INCOME TAX APPEAL NO.61 OF 2011 Whether the Income Tax Appellate
Tribunal was justified in deleting the addition of Rs.5.08 crores made by the
assessing officer under Section 69B of the Income Tax Act, 1961 is the
question raised in this appeal. 2. The assessment year involved herein is AY
2006-07. Section 69B of the Income Tax Act, 1961, the required conditions are (a)
that the assessee must be found to be the owner of any bullion, jewellery or other
valuable article; ((b) the assessing officer finds that the amount expended on
making or acquiring such bullion, jewellery or other valuable article exceeds the
amount recorded in the books of account maintained by the assessee; and (c) the
 54

explanation offered by the assessee is not in the opinion of the assessing officer
satisfactory. Therefore, in the absence of any material to doubt the genuineness of
the transaction value and in the absence of any material to show that the
assessee has paid more amount than that is recorded in the books, merely on the
basis of the possible valuation permitted in law, it could be presumed that the
assessee has paid more amount than what is recorded in the books maintained by
the assessee

In the case of CIT v. Nathulal Agarwalla & Sons 153 ITR 292 Full Bench of Hon’ble
Patna High Court has observed as follows :

"As to the nature of explanation offered by the assessee, it seems plain on principle that it
is not the law that the moment any fantastic or unacceptable explanation is given, the
burden placed on him will be discharged and presumption rebutted. It is not the law, and
perhaps hardly can be, that any and every explanation of the assessee must be accepted.
In my view, the explanation of the assessee for avoidance of penalty must be an
acceptable explanation. He may not prove what he asserts to the hilt positively, but at
least material brought on record must show that what he says is reasonably valid."

DISCLOSURE MEANING (applicable to reopening and penalty law)

Siemens Information Systems Limited WRIT PETITION

(LODG.) NO.2606 OF 2011 9 February 2012 (bombay
high court) relevant to reopening after earlier 143(3)
after 4 years from end of asst. year

A full disclosure and a true disclosure are what the statute

mandates. A full disclosure is a disclosure which provides a
complete statement of all material facts A true disclosure is a
 55

disclosure which does not suppress material facts from the

Assessing Officer and does not contain any taint of falsehood.

(can be applied to section 271(1)(c) penalty law explanation 1

thereto)

Sunil Kumar Chhabra M/s Khanna Malleable, Jalandhar IN THE HIGH

COURT OF PUNJAB AND HARYANA AT CHANDIGARH.

Date of Decision: February 1, 2012

In so far as ITA No. 85 of 2011 is concerned, it has come on record that the notice
dated 26.10.2007 under Section 143(2) of the Act was sent on a wrong address.
Furthermore, the revenue-appellant has not brought on record any evidence
showing delivery of the said notice on the assessee-respondent or his authorised
representative. Therefore, under no circumstances it could be presumed that
notice has been served on the assesseerespondent within the prescribed period of
limitation as per Section 143(2)(ii) of the Act, which requires that the notice has
to be served on the assessee after the expiry of twelve months from the end of the
financial year in which the return is furnished. Section 27 of the General
Clauses Act, 1897, explains the meaning of ‘service’ by Post From the bare
perusal of Section 27 of the General Clauses Act it is clear that service would be
deemed to be sufficiently effected if a letter containing the document is properly
addressed, prepared and posted by registered post. In the present case the notice
in question has not been properly addressed, which is amongst a condition
precedent for inferring ‘service’. 11. Similarly, in the other case, the revenue-
appellant has not been able to substantiate from the record of the assessment
proceedings that any notice under Section 143(2) of the Act was issued on
24.10.2006. It has been categorically observed by the

CIT(A) in his order dated 22.3.2010 that the return was processed under Section
143(1) on 23.3.2006 and in the noting of first order sheet no date has been
mentioned by the Assessing Officer. The first notice under Section 143(2) of the
Act, which is available on the assessment record, is dated 9.11.2006. Therefore,
we see no legal infirmity in the view taken by the Tribunal as well as the CIT(A),
Jalandhar in both the cases. There is no merit in these appeals warranting
 56

admission. The learned counsel for the revenue-appellant has placed reliance on
the Division Bench judgment of this Court rendered in the case of V.R.A. Cotton
Mills (P) Ltd. v. Union of India and others (CWP No. 18193 of 2011, decided on
27.9.2011). However, we are of the considered view that the Division Bench
judgment in the case of V.R.A. Cotton Mills (P) Ltd. (supra) is totally
distinguishable on the facts of the present cases because it has been established
that in one case the revenue-appellant has sent the notice under Section 143(2) of
the Act on a wrong address and in the other case the revenue-appellant has not
been able to substantiate by adducing any evidence that any notice under Section
143(2) was issued within the prescribed period of limitation.

In Venad Properties Private Ltd. Vs. Commissioner of Income Tax, ITA

No. 1525 of 2010 decided on 11th November 2011 In the said case, Delhi
high court has held that procedural rules of service are required to be
interpreted in a practical and pragmatic manner and not in a formalistic and
technical manner. Prejudice caused is relevant and apposite, but contrivance
and stratagem, once established, should not be accepted. Procedural rules
and requirements are a means to deliver justice and not technical contrives to
stall/obstruct proceedings, even when no prejudice is caused due to non
observance of the technical formalities : Technicalities cannot wreck justice)

IN THE HIGH COURT OF DELHI AT NEW DELHI V R EDUCATIONAL

TRUST ITA 510/2011 2. The stand taken by the appellant is that the notice
issued under Section 142(1) dated 14th August, 2008 should be treated as
omnibus or a general notice. It is accordingly submitted that this notice
under Section 142(1) dated 14th August, 2008, should be regarded as a
notice issued under Section 143(2) of the Act. 3. The above contention has
no merit. The notice under Section 142 (1) dated 14th August, 2008 was
issued and served beyond the period of one year from the date of filing of
return i.e. 15th June, 2007. It was barred by limitation. The issue of notice
under Section 142(1) dated 14th August, 2008, therefore, does not help the
 57

Revenue. Even otherwise, it is difficult to accept the contention of the

appellant that notice under Section 142 (1) can be regarded as a notice
issued under Section 143(2) of the Act. This Court in the case of
Commissioner of Income Tax versus Lunar Diamonds Ltd. [2008] 281 ITR 1
(Del.) has held that service of notice under Section 143(2) of the Act is
mandatory. It is not disputed that in respect of the proceedings under
Section 147 of the Act, notice under Section 143(2) is required and is
mandated except in cases covered by the first and second proviso to Section
148 of the Act. The present case is not covered by the exceptions carved out
in the two provisos as the return in the present case filed on or after 1st
October, 2005. In the case of Assistant Commissioner of Income Tax and
Another Vs. Hotel Blue Moon (2010) 321 ITR 362 (SC), the Supreme Court
had examined the question of mandate and necessity to issue notice under
Section 143(2) of the Act, in the case of block assessment proceedings. 4. The
aforesaid reasoning will equally apply to proceedings initiated under Section
147 of the Act.. 5. In the present case, Section 292BB does not help the
Revenue, as the respondent-assessee had objected to the reassessment
proceedings on the ground of non-issue and service of notice under Section
143(2) before the Assessing Officer. This factum is recorded in the
assessment order itself.

Also refer: Delhi High Court in a) MASCOMPTEL INDIA LTD ITA 1/2012
Assessment year 2006-07 b) ITA 608/2011 CIT ..... Appellant Through Mr.
Kamal Sawhney, Adv. with Mr. Amit Srivastava, Adv. versus HARINDER
SACHDEV .c) Delhi high court in Rev. fav sec. 143(2) service notice case delhi high
court ITAT reversed Samir Kumar Aditya NOVEMBER 21, 2011 ITA

NO.849/2008 d) CIT Vs. Lunar Diamonds Ltd. (2006) 281 ITR 1 (Del.).; CIT
Vs. Vardhman Estates P. Ltd., [2006] 287 ITR 368 (Del.) and CIT Vs. Bhan
 58

Textiles P. Ltd., [2006] 287 ITR 370 (Del.). e) Latest Jagat Novel order of Delhi
high court (rev fav)

Karnataka High Court in case of MICRO LABS Limited on impact of

JURISDICTIONAL defect vis a vis waiver and participation in
proceedings and sec. 292B (curable defect) HELD:

a) Consent or waiver does not confer jurisdiction. Jurisdiction is

conferred by statute. An authority cannot assume jurisdiction only
because the same has been consented to or the lack of jurisdiction is
waived by the assessee. What is mandated cannot be diluted. An
inherent lack of jurisdiction as a result of invalid notice can’t
transcribe into a jurisdiction which is sought to be validated on
grounds of waiver or consent.

b) When sum and substance of notice is not in conformity with the

provisions of the Act, section 292B has no application.

c) Accordingly, notice u/s 158BC not giving clear 15 days time, will
result into nullification of proceedings irrespective of the fact some
extension is granted on subsequent occasions.

d) Time to be granted in terms of sec. 158BC is mandatory and having

failed to do so, cannot entitle revenue to seek remand of proceedings
as “if that were to be so then each and every violation of law by
revenue would stand rectified by orders of remand which is
neither the intent nor the purpose of the Act”

Allahabad high court in Smt. Raj Rani Gulati INCOME TAX APPEAL No. -
54 of 2007 .19.10.2011

1. Whether on true and correct interpretation of the provisions to

section 250 of the Act the Tribunal was legally correct in holding
that the assessee's claim for being assessed as per second
 59

proviso to section 112 (1) could not have been considered and
allowed from the stage of the first Appellate Authority?

2. Whether there existed any basis for the Tribunal to hold that
there arose no cause of action from the order passed by the
Assessing Officer and the first Appellate Authority was not legally
correct in allowing the relief to which the assessee was

undisputedly entitled in law?

Though ignorance of law has no excuse, but it can be excused in

tax matter as per the ratio laid down in the case of P.V.Devassy Vs.
CIT, 84 ITR 502 Kerla. It is not expected that the Department shall
take the advantage of assessee's ignorance as per C.B.D.T.
Circular No.14 (XL- 35)1955 dated 11 April 1955. Even under the
bonafide belief, the assessee has shown the long term capital
gain at the rate of 20%, but it was expected from the A.O. to
know the latest amendment. The mistake might have been
corrected by passing an order under section 154 of the Act. In
the case of CIT Vs. Mahalaxmi Sugar Mills Co. Ltd. (1986) 160 ITR

920 SC, it was observed that:

“There is a duty cast on the Income-tax Officer to apply the relevant provisions of
the Indian Income-tax Act for the purpose of determining

the true figure of the assessee's taxable income and the consequential tax liability.
That the assessee fails to claim the benefit of a set-off

cannot relieve the Income-tax Officer of his duty to apply section 24 in an

appropriate case.”

From the SC GOETZE order/above, it is clear that Hon'ble apex

court has discussed the power of A.O. only but made that no
comment regarding the power of ITAT. So, the said ratio is not
 60

applicable in the instant case. In the light of above discussion, we

are of the view that the assessee is entitled to raise the legal
issue before the first Appellate Authority, which possessed co-
terminus powers similar to the A.O. as per ratio laid down by
Hon'ble Supreme Court in the case of Jute Corporation of India Ltd.
(supra). Hence, CIT (A) has rightly adjudicated the statutory
right of the assessee and directed to allow the long term capital
gain at the of 10%. The justice must not only be done but seem
to have been done as observed by Lord Hewart C.J. in R. Vs.
Susses Justices (1924) 1KB 256/9. Therefore, we set aside the
impugned order passed by the Tribunal and restore the order of
the CIT (A). The answer to the substantial question of law is

affirmative in favour of the assessee and against the revenue

Once books rejected u/s 145, book ¾ Delhi High Court in AERO
result can be disturbed only when CLUB 197 Taxman 58 (Para
comparable case is brought on 21)
record

In Admitted thorough rejection of ¾ Ahd bench ITAT in G.Patel

books u/s 145, revenue cannot rely
on same to disallow some
development expenses & invoke
section 40(a) (ia).
(also refer: Hyd bench ITAT in
Teja Constructions 129 TTJ 57; All
Construction (ITA
3201/Ahd/2008)
¾ H.P.High Court in Amrit
Sugar Co. (In view of the
above discussion, we are of the
considered view that though the

HC in 229 ITR 229; Delhi bench in books of accounts of the

Renu Mukherjee) assessee have been rejected, the

Assessing Officer was not
 61

justified in adding back the

amounts which were found to
be paid in violation of Section
40A(3). The second question is
answered in favour of the
assesee. The appeal is allowed
to this extent. No costs.)

HELD 6. We have heard the Mum bench ITAT in Mukesh

learned representatives of the
parties, Kheradi (ITA 2187/Mum/2010) date
perused the records and gone 31.3.2011
through the orders of the
authorities below as well as gone
through decisions cited. We find
that the books of account of the
assessee are subject to audit. It is
an admitted fact that the assessee
has failed to furnish confirmation
from the parties from whom he
made purchases. Therefore, the
revenue authorities treated the
purchases made by the assessee
as bogus purchases and made the
disallowance of purchases. It is
also a fact that the assessee has
given quantitative details and the
assessee has made sales
corresponding to the shirt
purchases. Therefore, it cannot be
said that the purchases are bogus
purchases. It can only be said that
the purchases are not supported
by proper bills, etc. In such a case,
at the most, trading account can
be rejected and profits can be
estimated but the entire purchases
cannot be disallowed. In view of
the above, we set aside the order
of the CIT(A) and remit the matter
back to the file of the Assessing
 62

Officer with a direction examine

the details, estimate profits and
decide the issue afresh in
accordance with the law after
providing reasonable opportunity
of being heard to the assessee.

To the case of Mahabir Prasad Jagdish Prasad v/s CST 27 STC 337 (All)
wherein Hon'ble High Court has held thus : "The account books of an
assesses cannot be rejected on mere suspicion or conjecture unless the
accounts are kept in such a way that reliance cannot be placed upon
them. If the method of accounting followed by the assessee is so
defective that there is a possibility of suppression and leakage, the
accounts can be rejected without any further material. But, if the accounts
are properly maintained with all the relevant details, it is
necessary for the assessee authority to place on record some material to
show that the accounts are not tenable. The fact that the consumption of
electricity shown by the assesses was unduly high can give rise to
a strong suspicion that the assesses might have suppressed its production
and thereby might have understated its sales. But, suspicion, howsoever
strong it may be cannot take the place of positive material.
Even if the Sales Tax Officer is able to detect one instance where the
assessee might have understand its sales he would be justified in rejecting
the accounts and making an estimate of the escaped turnover. But, the
high consumption of electricity alone cannot be held to be a material
justifying the rejection of the accounts particularly when the assessee's
accounts had once been accepted during the regular assessment
proceedings. "

Rutvi Steel & Alloys P. Ltd. ITA No.3870/AHD/2007

Assessment Year : 2005-2006 IN THE INCOME TAX APPELLATE TRIBUNAL
 63

AHMEDABAD BENCH “A” Approved by Gujarat High Court

Therefore, in our considered opinion merely on the basis of units of

electricity consumption, it cannot be concluded that the assessee’s
books of account were not reliable or the assessee is engaged in
producing finished goods outside the goods of account.

Nadkarni Hospital & Test Tube Baby Centre, Vapi ITA No. 1619/Ahd./2009
Date of Pronouncement : 10/02/2012 IN THE INCOME TAX APPELLATE
TRIBUNAL : ‘B’ BENCH : AHMEDABAD

6.1 At the outset, we observe that the rejection of book results has been
resorted to u/s 145 of the Act on a clumsy ground as the AO had neither
identified any specific defect nor any purchases or income transaction
being outside the books of the assessee. Another glaring example of futile
exercise on the part of the Revenue was to resort to work out the average
consumption on the alleged inflation of expenses under the head
hospital consumables and medicine’ based on the AO’s working on
average consumption per patient when the assessee itself had claimed
the expenditure on cash basis after maintaining the bills for the purchases
made. Another salient feature noticed in the impugned assessment order
was that the AO had not specifically identified which particular purchase
was inflated to drive him to come to such a conclusion. As rightly
emphasized by the CIT (A), the AO made the addition on the basis of
comparative consumption of medicines and hospital consumables which,
in our considered view, was not on a sound footing since the AO had
taken into account the OPD patients for whom neither any medicines nor
hospital consumables were used (consumed).
 64

6.2 Taking into account all these relevant factors and also the AO had
failed to trace out any specific defect in the maintaining of the books, the
rejection of books of a/c of the assessee merely on the basis of assumed
excess consumption of hospital consumables, in our considered view, will
not withstand the testimony of law.

6.3 At this juncture, we would like to recall the recent findings of the
earlier Bench in the case ITO v. Mansi Prints Pvt. Ltd in ITA Nos.498 and
872/Ahd/2009 dated 20.5.2011 in a similar issue wherein it has been
observed:

“….The AO accepted part of the contention of the assessee but noted

that even after considering Cenvat there was a fall in GP by 3.03% in
comparison to last year. The learned CIT (A) considering the totality of the
facts and circumstances rightly noted that the AO has not brought any
other material on record for rejecting the books results. The Hon’ble Delhi
High Court in the case of Smt. Poonam Rani 326 ITR 223 held that ‘absence
of stock register alone not a ground to infer that accounts are inaccurate
or incomplete. It may put the AO on guard against the falsity in the return
and persuade to carefully scrutinize the books of accounts.’ The Hon’ble
Delhi High Court in the case of Bindles Apparels 332 ITR 410 held that ‘no
day to day stock register, books cannot be rejected.’ Considering the
details noted in the tax audit report, it is clear that the assessee
maintained proper stock register and maintained quantitative details of
all the items except the consumables and that the AO has not brought
any other material on record to justify rejection of book results, we do not
find any merit in the departmental appeal. The learned CIT (A) on proper
appreciation of the facts and material on record rightly deleted the
addition………”
 65

6.4 Yet another finding, the earlier Bench in the case of Pushpanjali
Dyeing & Printing Mills (P) Ltd v. JCIT - 72 TTJ 886, had observed that:

“After careful consideration on all above facts, contentions, observations

and submissions, we hold that mere low yield and excess expenditures on
electricity do not warrant an addition in the trading account. When
reasons for low G.P. and excess expenditure on electricity have been
satisfactorily explained by the assessee, the electricity consumption alone
is not an aspect by which a person can earn taxable income or profit. We
do not find any material on record to justify the conclusion reached upon
by the AO for rejection of books of accounts when the assessee
maintained complete books of accounts in accordance with the
provisions of IT Act, further same were audited by auditor and no adverse
observations were pointed out by the auditor. In these circumstances, the
lower authorities of Revenue were not justified in making/confirming the
addition…”.

6.5 In view of the above deliberations and also in conformity with the
findings of the earlier Benches (supra), we do not find any infirmity on the
finding of the CIT (A) which requires our intervention at this stage. It is
ordered accordingly.

Gujarat high Court in M/S AMAR JEWELLERS PVT LTD TAX APPEAL No. 1327
of 2010 5th December 2011

As far as Question [A] is concerned, this pertains to deletion of addition of

Rs. 1,53,04,648/= on account of low gross profit
 66

[A] “Whether, on the facts and in the circumstances of the case, the
Income Tax Appellate Tribunal is justified in deleting addition of Rs.
1,53,04,648/= made by the Assessing Officer and confirmed by the
Appellate Commissioner on account of low gross profit ?”

As could be noted from the order of the Tribunal, it noted that the books

of account have been rejected by the lower authorities mainly influenced

by the fact that the selling price was lower than the purchase price and

that the sales were made in cash and addresses of those parties were not

available. It also noted that the quantity wise stock registers were not

maintained and there was variance in the rate of labour charges from

month to month. The Tribunal was of the opinion that there was a

sufficient explanation that was forthcoming from the assessee. Though the

assessee had not maintained the stock register in terms of quality, but the

quality and quantity of items purchased and sold can be deduced from

the purchase and sale invoices and the Department was unable to point

out any single case where there was defect in the purchase and sale

invoices. The Tribunal further noted that the nature of work of the assessee

was both manual and machine labour, and therefore, there was variance

in the labour charges. There was nothing on the record that suggested

that the method of account was not regular method incurred by it, nor

was there any material to suggest that the income, or profit, or gains of

the assessee was not properly deduced from the accounts maintained.

Considering all these aspects, the Tribunal was of the view that there was
 67

no defect pointed out in the books of account maintained by the

assessee, and therefore, the findings of both the adjudicating authorities

below of rejecting the books of account of the assessee was not

sustained by the Tribunal. On accepting the version of the assessee and

accepting the books of account, the Tribunal in detail dissected the facts

and on the basis thereof, the addition made of Rs. 1,53,00,000/= [rounded

off] was not held sustainable.

As can be noted from the order of the Tribunal, it has given cogent

reasons for not accepting the findings of both the lower authorities and for

accepting the books of account of the assessee. No infirmity could be

pointed out from the flaw of the reasonings given by the Tribunal

GOVINDA MILLS LTD ITAT No. 139 of 2011 G.A.1576 of 2011 10th June, 2011
IN THE HIGH COURT AT CALCUTTA Special Jurisdiction (Income-tax)
Original Side

The first question raised in this appeal is whether the Commissioner of

Income-tax (Appeals) and the Tribunal below were justified in deleting the
addition made by the Assessing Officer on the basis of difference between
percentage of yield of the current year and the previous
 68

year without bringing any material on record to show that the yield had
actually been suppressed. We find that the learned Commissioner of
Income-tax (Appeals) specifically recorded that the Assessing Officer
could not produce any material to show that the opening stock,
purchases and closing stock of the items were not correct and there was
no material to show that the amount of sale was more than what was
shown in the account and, therefore, decided to delete the addition
which was made on the basis of the rate adopted by other businessman
dealing with similar type of goods.

We find that in the absence of any material showing that what was
reflected in the books of account was not the actual one, the learned
Commissioner of Income-tax (Appeals) and the Tribunal below rightly
deleted the addition which was based on no evidence but merely on
surmise and conjecture.

Orissa High Court in CIT vs Utkal Allloys Ltd 226 CTR 676: Principle spelt:

a) The basic principle is the same in law relating to income-tax as well as

in civil law, namely, that if there is no challenge to the transaction
represented by the entries or to the genuineness of the entries, then it is
not open to the other side to contend that what is shown by the entries is
not the same state of affairs in CIT vs. Amitbhai Gunvantbhai (1980) 19 CTR
(Guj) 105 : (1981) 129 ITR 573 (Guj) (at p. 580),
b) When a return is furnished and the accounts are put in support of that
return, the accounts should be taken as the basis for the assessment. They
should not be rejected because they are complicated. The procedure of
the AO is of judicial nature and in making the assessment; the AO should
proceed on judicial principles. If the evidence is produced by the
assessee in support of his return it should be accepted unless it is rebutted
 69

by other admissible evidence and not by mere hearsay or arbitrarily

[George Commen vs. Commr. of Agrl. IT (1964) 52 ITR 977 (Ker)]. From the
assessment order, it is clear that the AO has not mentioned any reason
why the stock books or other books were not acceptable to him.
Therefore, the action of the officers in straightway proceeding to
inventories the stock on estimate basis, that too which is not accurate and
correct, is not in order. The above discussion and the case laws clearly go
to show that the stocks shown by the assessee which has been mentioned
in p. 2 of the assessment order should be accepted in the absence of any
defects in the accounts or omission or commission by the assessee.

c) In Vijaya Traders case Mys HC 74 ITR 279 , the question before the
Mysore High Court was whether the Tribunal was right in law in holding
that the ITO could act on the proviso to s. 13 of the IT Act, 1922, for
completing the assessment for the asst. yr. 1961-62 and on the proviso to
sub-s. (1) of s. 145 of the IT Act, 1961, for completing the assessment for the
asst. yr. 1962-63. The High Court held that the Tribunal was not right in law
in holding that the ITO could act on the proviso to s. 13 of the Act of 1922
or the proviso to s. 145(1) of the Act of 1961, for completing the
assessments, as the accuracy of the accounts had not been doubted
and the Tribunal did not also find that the manner in which the assessee
maintained his accounts did not enable a proper determination of his
income. So long as it is not impossible to deduce the true income from the
accounts, its computation could not be made in any other way.
d) The procedure of assessment is quasi judicial in nature and in making
the assessment the AO must observe the judicial principles. Accounts
regularly maintained in course of business have to be relied upon unless
there are strong and sufficient reasons to disbelieve them. Needless to say
that discrepancy worked out on the basis of estimation of quantity and
 70

value of stock is not accurate, correct and scientific. Therefore, in

absence of any defect found out in the books of account, maintained in
regular course of business, no addition can be made to the income
disclosed by the assessee in its return of income on the basis of
discrepancy worked out on estimation of stock.

Hon’ble apex court in the case of CIT v. Calcutta Discount Co. Ltd. (1973)
91 ITR 8 (SC) clearly establishes that, unless the ITO on the basis of material
before him is able to come to conclusion that the assessee had really
made profits in the transactions, it is not permissible for him to add back to
the assessee’s returned income any fraction of income.

The Hon’ble Madras High Court in the case of Sivakami Co. Pvt. Ltd. v. CIT
(1973) 88 ITR 311 (Mad) has held that the burden of proving that certain
sales were effected with the object of avoidance or reduction of tax on
capital gains is on Revenue and it is not enough in the explanation
offered by the assessee was not acceptable and there are strong
suspicion as to the real motive, which prompted the assessee to sell the
assets. There must be something positive to suggest that the sales were
effected with the object of avoidance or reduction of tax liability for
capital gains and this was affirmed by Hon’ble apex court in (1986) 159 ITR
71 (SC). That is, unless there is evidence that more than what is stated in
the documents or was received, no higher price can be taken to be the
basis for computation of tax either in business transaction or capital gain
transactions. The entire onus is on Revenue and the inferences might be
drawn in certain cases but come to a conclusion that a particular higher
amount was, in fact received must be based on such material from which
such an irresistible conclusion follows
 71

Marghabhai Kishanbhai Patel and Co vs CIT 108 ITR 54…in any event he
had no right to depart from the prices shown in the books of account
unless he found the transaction not to be a bona fide one or to be a
sham one or unless he found that the prices paid were not what was
shown in the books of account and since none of these three conclusions
had been reached by him, he had no right to depart from the books of
account of the assessee-firm.

Allahabad High Court in Case :- INCOME TAX APPEAL No. - 213 of 2000
Petitioner :- The Commissioner Of Income Tax,And Another
Respondent :- M/S, Ratan Prakashan Mandir Sahitya Kunj, Agra

The Tribunal while upholding the order of the assessing officer that the
account-books of the assessee cannot relied upon has applied the G.P.
rate as was disclosed by the assessee and was accepted by the
Department for the immediate preceding year as well as of the
subsequent year. The Tribunal has held that even after rejection of the
account-books, it is not open to the Revenue Authority to fix the turn-over,
arbitrarily. The Tribunal has found that no evidence was brought on record
to suggest that the assessee has made extra sales, in addition to the sales
turn-over disclosed by it. We do not find any illegality in the said approach
of the Tribunal. The order of the Tribunal is well considered order and it is
concluded by finding of fact. No substantial question of law is involved.

The Division Bench of Madras High Court in the case of Sri Ramalinga
Choodambikai Mills Ltd. v Commissioner of Income Tax [(1055) 28 ITR 952
held as under:
 72

“in absence of evidence to show either that the sales were sham
transactions or that the market prices were in fact paid by the purchasers;
the mere fact that the goods were sold at a concessional rate to benefit
the purchasers at the expense of the company would not entitle the
Income Tax department to assess the difference between the market
price and the price paid by the purchasers, as profits of the company.”

Contractor/ book rejection net profits to be assessed various latest ITAT orders
(unreported) 4% to 9% rate applied (same scenario in bogus purchases case 12.5%
of total purchase disallowance)

Gist of profit rate orders

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH ‘B', HYDERABAD M/s. Rishi Projects, Hyderabad ITA

No.982/Hyd/2011 : Assessment year 2006-07 On careful consideration of
the matter, we find that as far as rate to be adopted for estimation of
income is concerned, this Tribunal has been consistently holding, as in its
recent decision in ITA No.1191/Hyd.2011 in ACIT V/s. Teja Constructions
Secunderabad for the assessment year 2006-07 vide order dated 17th
February, 2012, to which both of us are parties, that estimation

of income at 9% in respect of the contracts taken by the assessee itself

and executed by it; at 8% in respect of receipts from sub-contract works
taken from others and executed by the assessee; and 4% of the gross
receipts in respect of contracts given by the assessee to third parties on
sub-contract basis, as reasonable.
 73

T.K. Infrastructure Private Limited … ITA No. 01/PN/2011 (Asstt. Year : 2007-
08 ) IN THE INCOME TAX APPELLATE TRIBUNAL Pune Bench “A” , Pune We
have considered the rival arguments made by both the sides, perused

the orders of the A.O and the CIT(A) and the paper book filed on behalf
of the assessee. After considering the various adverse remarks pointed out
by the A.O. and considering the fact that most of the payments have
been made in cash for amounts less than Rs. 20,000/-, we are of the
considered opinion that there is possibility of some leakage of revenue.
We therefore accept the alternate contention of the assessee that Net
Profit at the rate of 5% of the contract receipt may be adopted. We
accordingly set aside the order of the CIT(A) and direct the A.O. to adopt
Net Profit at the rate of 5% of the contract receipt. The appeal filed

by the Revenue is accordingly partly allowed.

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH,

VISAKHAPATNAM ITA No.374/Viz/2011 Sri Talluri Satyanarayana Having
given a thoughtful consideration to the rival submissions and

from a perusal of record, we find that there is no dispute with regard to

the documents found during the course of search. It is also an admitted
fact that this document relate to the business of canteen of the assessees
and in canteen business the margin of profit may not be more. But the
profit as offered by the assessees cannot be adopted as in eatable items
the percentage of profit is on higher side. Keeping in view the totality of
the facts and circumstances of the case, we are of the considered
opinion that the net profit should be estimated at 10% to meet the ends of
justice. We accordingly set aside the order of the CIT(A) and direct the
 74

A.O. to estimate the net profit at 10% of the total amount mentioned in
the seized document.

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH “D”

AHMEDABAD Shri Upendra Rai Plot No.3 & 7, Nr. Mohid Tower , Daman
Road, Chhala, Vapi, ITA No.62/Ahd/2009 PAN No.AEPR9319Q We have
heard the rival submissions and perused the materials on

record. From the facts before us it is apparent that the assessee is in the

activity of civil construction and the same is not disputed by Revenue. The

assessee has been making payments regularly for the purchase of

materials used in civil construction from the bank accounts. Therefore it is
apparent that the amount credited in his bank account could be the
receipt from the civil construction activities carried on by the assessee in
the nature of turnover and not profits from such activity. In such
circumstances, it will be fair enough to tax the income arrived out of such
turnover and not the turnover as the income. Since the assessee has not
maintained proper books of account to establish the income of his
construction activities we find it appropriate to arrive at an income of 8%
of the turnover of the assesse,e considering the turnover of the assessee
from civil construction activities to be Rs.13,50,995/-.

ITA No.3238 & 3293/Ahd/2009 A.Y. 2006-07 ITA No.3238 and

3293/Ahd/2009 Sh. Simit P Sheth v. ITO Wd-2(2), BRD 24 -02-2012
 75

7. Having heard the submissions of both sides, we have been informed

that the malpractice of bogus purchase is mainly to save 10% sales tax
etc. It

has also been informed that in this industry about 2.5% is the profit margin.

Therefore, respectfully following the decisions of the co-ordinate bench

pronounced on identical circumstances, we hereby direct that the 7.

Having heard the submissions of both sides, we have been informed

that the malpractice of bogus purchase is mainly to save 10% sales tax
etc. It has also been informed that in this industry about 2.5% is the profit
margin. Therefore, respectfully following the decisions of the co-ordinate
bench pronounced on identical circumstances, we hereby direct that the
disallowance is required to be sustained at 12.5% of the purchases from
those parties. With these directions, we hereby decide. The grounds of the
rival parties which are partly allowed

Laddha Lime Pvt. Ltd., Mumbai I T A No: 398/Mum/2005

(Assessment Year: 2001-02) IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES, ‘J’, MUMBAI The assessee is in further appeal before the
Tribunal. There seems to be no appeal by the department against the
relief granted
 76

by the CIT(A). After carefully considering the facts and the rival
submissions, we are of the view that there is no case for any further relief
made out. The estimate of 10% as profit on the gross sales has been
reduced by the CIT(A) to 2.5%, which seems eminently reasonable
considering the nature of the assessee’s business,

namely, wholesale textile trade and commission agency. Accordingly we

confirm the order of the CIT(A) and dismiss the appeal filed by the
assessee

Poonam Rani: 326 ITR 223: High Court of Delhi

8. The fall in gross profit ratio, in the absence of any cogent reasons could
not, by itself, have been a ground to hold that proper income of the
assessee cannot be deduced from the accounts maintained by her and
consequently, could not have been a ground to reject the accounts
invoking Section 145(3) of the Act.

9. The fall in gross profit ratio could be for various reasons such as increase
in the cost of raw material, decrease in the market price of finished
product, increase in the cost of processing by the assessee etc. There is
no finding that the actual cost of the raw material purchased by the
assessee was less than what was declared in the account books. There is
no finding that the actual cost of processing carried out by the assessee
was less than what had been declared in her account books. No
particular expenditure shown in the account books has been disallowed
by the Assessing Officer. There is no finding by the Assessing Officer that
the actual quantity of finished product produced by the assessee was
more than what it was shown in the accounts books. There is no finding
that the assessee had made any such sale of the finished product which
was not reflected in the accounts books. There is no finding by the
 77

Assessing Officer that the finished product was sold by the assessee at a
price higher than what was declared in the accounts books. In these
circumstances, the Commissioner of Income Tax (Appeals) and the
Income Tax Appellate Tribunal, in our view, were justified in holding that
the Assessing Officer could not have increased the gross profit ratio
merely because it was low as compared to the gross profit ratio of the
preceding year.

If stock register is not maintained by the assessee that may put the
Assessing Officer on guard against the falsity of the return made by the
assessee and persuade him to carefully scrutinize the account books of
the assessee. But the absence of one register alone does not amount to
such a material as would lead to the conclusion that the account books
were incomplete or inaccurate. Similarly, if the rate of gross profit
declared by the assessee in a particular period is lower as compared to
the gross profit declared by him in the preceding year, that may alert the
Assessing Officer and serve as a warning to him, to look into the accounts
more carefully and to look for some material which could lead to the
conclusion that the accounts maintained by the assessee were not

correct. But, a low rate of gross profit, in the absence of any

material pointing towards falsehood of the accounts books,

cannot by itself be a ground to reject the account books under
Section 145(3) of the Act.

Jacksons House/ ITA 651/2010: 26 April 2010

The Tribunal relying upon the decision of Supreme Court in

S.N.Namashivayam Chettiar vs. CIT, Madras: 38 ITR 579 held that if the
method adopted by the assessee was a regularly employed method and
was such that the income, profit and gain can be properly deduced
 78

therefrom, then such method of accounting, as followed by the assessee,

cannot be discarded. The Tribunal also noted that the accounts of the
assessee were audited and no discrepancy of accounting had been
pointed out. It was also noticed that the Act had not prescribed any
specific method of maintaining the stock register and the assessee was
maintaining its stock register through which in and out stock movement
was clearly verifiable. The Tribunal appreciated that when the assessee is
in the business of manufacturing and export of clothes, his raw material
would have to be in metres, whereas the finished goods would obviously
be in number of pieces and cannot be measured in metres. It was further
noted that the Assessing Officer, had not pointed out that consumption of
raw material and finished goods did not tally with the past record of the
assessee. The Tribunal was of the view that maintenance of a stock
register on a daily basis in regard to the issue of cloth and quantification of
finished goods cannot be said to be defective. The Tribunal found that the
income of the assessee was discernible from the method of accounting
followed by it and, therefore, the order passed by the Commissioner of
Income Tax(Appeals) did not call for any inference.

….As regards the assessee not maintaining Stock Register in the form
expected by the Assessing Officer, the assessee has given an explanation
which has been accepted not only by the Commissioner of Income
Tax(Appeals) but also by the Tribunal and both of them have given a
concurrent finding of fact that maintaining Stock Register of that nature
was not feasible, considering the nature of the business being run by the
assessee which was engaged in the business of manufacturing
readymade garments by purchasing fabric which was then subjected to
embroidery, dyeing and finishing and was then converted into
readymade garments by stitching. Our attention has not been drawn to
any provision of the Act or to Rules framed thereunder, requiring the
 79

assessee engaged in the business of manufacturing and export of

garments or all assesses in general having business income, to maintain
Stock Register, in a particular form. As found by the Tribunal, the income
of the assessee was clearly discernible from the accounting method
followed by it. Hence, the accounts of the assessee cannot be said to be
defective or incomplete, merely because the Stock Register was not
maintained in a particular form. Section 145(3) of Income Tax, therefore,
could not have been invoked by the Assessing Officer to the present
case.

Income Tax Appeal No. 28 of 2010 (Assessment Year 2004-05)

Commissioner of Income Tax …......................................................................
Appellant Versus M/s Ballabh Das & Sons
…......................................................................... Respondent It may be
mentioned that the A.O. has rejected the books of accounts solely for the
reason that the assessees have shown the lower N.P. Rate. During the
assessment year under consideration, no other defect was mentioned. It
may also be mentioned that the lower profit shown by the assessee by
itself cannot be a ground for rejection of the books of accounts results, as
per the ratio laid down in the following cases:-

1. Namasi Vayam Chattior v. CIT, (1960) 39 ITR 579 SC;

2. Pandit Bros v CIT, (1954) 26 ITR 159 (Punj.); 3. Veeriah Reddiar (S) v. CIT,
(1960) 38 ITR 152 (Ker.); 4. International Forest Co. v. CIT, (1975) 101 ITR 721
(J & K)

It may also be mentioned that the low profit is merely a warning to the
Assessing Officer to look into the accounts more carefully to see whether
there is material to lead him to the conclusion that there is something false
 80

in the account books. The low profit may be due to the incompetence of
the assessee, or the business having become uneconomic

WINNER CONSTRUCTIONS PVT LTD “Whether the Tribunal erred in

deleting the trading addition of Rs.42,88,000/- made by the AO after
rejecting the books of accounts?” The aforesaid question of law is answered
in affirmative i.e. against the appellant revenue and in favour of the
assessee. The appellant-Revenue will be pay cost of `10,000/- to the
assessee HELD:

The first two reason ( viz.The net profit of 1.28% declared by the assessee
was low in comparison to prescribed profitability of 8% in Section 44AD of
the Act.and The real net profit was Rs. 2,76,592/- against the total turnover
of Rs. 10,71,93,334/-. Thus percentage of net profit was 0.25%, which is
low. Ms/ Unibuild Engineering and Construction Co. (P) Ltd. assessed in
Circle-18(1) had declared GP rate of 6.44% and net profit of 5.97% on a
turnover of Rs.42.27 crores)recorded by the Assessing Officer by themselves
do not justify rejection of the books of accounts. Low gross or net profit may
be a ground or reason to conduct a detailed and thorough investigation and
verification, but on stand alone basis cannot be a ground for rejecting the
books. Gross profit or net profit rate can vary from year to year depending
on favourable or unfavourable factors and market conditions. There can be a
fall or reduction in gross profit but this by itself is not a good reason to reject
the books. Books results or additions to gross profits cannot be made on the
sole or mere fact that the profits are low. This cannot be the circumstance or
material alliunde to make estimation of profits. [See Pundit Brothers versus
Commissioner of Income Tax, (1954) 26 ITR 56 (Pun.)] System of
 81

accounting adopted by an assesse cannot be rejected on the ground that the

gross profit disclosed in the books was low, in comparison with others in the
same line of business. Low profit with other defect can justify rejection of
books, Therefore, we have to examine the three reasons given by the
Assessing Officer recorded above to determine whether or not the books of
accounts were rightly rejected, but without ignoring the low profit rate

As held by Jurisdictional Delhi High Court in case of Ad CIT DELHI - II vs

JAY ENGINEERING WORKS LTD 113 ITR 389:

The question arises, therefore, whether the reports of the auditors

could be said to be " material " on which reliance could be placed by
the income-tax authorities. Unlike the proof required of such reports
as also of the account books under the Indian Evidence Act, it is quite
competent for the income-tax authorities not only to accept the
auditors' report, but also to draw the proper inference from the
same. The income-tax authorities could, therefore, come to the
conclusion that since the auditors were required by the statute to
find out if the deductions claimed by the assessees in their balance-
sheets and profit and loss accounts were supported by the relevant
entries in their account books, the auditors must have done so and
must have found that the account books supported the claims for
 82

deductions, when the deductions were disallowed, by the Income-tax

Officer on the ground that detailed information regarding them was
not available, justice was not done to the assessees. It was not
possible for the assessees to produce the original account books,
which were destroyed in fire. There was, however, other material
mainly consisting of the auditors' reports from which it could be
inferred that the deductions were properly supported by the relevant
entries in the account books. In a sense it may be a question of law as
to what the meaning of " material " is and whether the auditor’s'
reports were material. But the question of law is well settled and is
not capable of being disputed and does not, therefore, call for
reference.

As held by Supreme Court of India in case of LALCHAND BHAGAT

AMBICA RAM vs CIT BIHAR AND ORISSA: 37 ITR 288: It is,

therefore, clear that the Tribunal in arriving at the conclusion it did

in the present case indulged in suspicions, and surmises and acted

without any evidence or upon a view of the facts which could not

reasonably be entertained or the facts found were such that no

person acting judicially and properly instructed as to the relevant law

could have found, or the finding was, in other words, perverse and this

court is entitled to interfere;

Delhi bench of ITAT in case of Shiv Cable and Wire Industries (India) vs
Addl. CIT 99 TTJ 106
 83

15. We have carefully considered the rival submissions. It is seen that

bulk of the assessee's sales were made in cash and the buyers were
not identifiable. On these facts, the authorities below could estimate
the selling price provided there was material to show that the
prevalent market rate was higher. In the alternative, the authorities
below could estimate the declared GP as the assessee's sales were
more or less unverifiable. For that purpose also, it was necessary to
point out that the declared rate of GP by the assessee was lower than
the expected rate of GP in the assessee's line of trade. The AO has
attempted to compare purchase rate with selling rate. The assessee
has easy and cogent Explanation that there was wide variation in the
quality of goods the assessee dealt in. Hence, unless the learned AO
compared purchase price and sale price of the same quality, the
inferences of the learned AO cannot be accepted…. The AO was not
entitled to make disallowance of the assessee's claim of loss without
arriving at a finding that the goods were sold below the prevalent
market rate. The learned AO has compared the average purchase
price, with average sale price, whereas comparison was retired to be
made between the purchase price of a specific material with the sale
price of that very kind of material. In these circumstances, having
regard to the fact that this was an exceptional year on account of
turmoil in the market, we are inclined to delete the disallowance of
loss as made by the learned AO
 84

Jodhpur bench of ITAT in case of 100 TTJ 647 ITO vs Madanlal Singhal and
Sons

. I am of the considered opinion that no addition can be made by disallowing a claim on the basis of
presumptions and assumptions only. When the assessee did produce the requisite evidence
demanded by the learned AO, it was his duty, thereafter, to disprove the same by way of concrete
evidence. Any rejection on the basis of surmises and conjectures that the dealing was with the
sister-concern, the offices were located in the same premises, etc. cannot lead to any logical
conclusion. When all the purchases and sales are admittedly vouched and verifiable and both the
seller and buyer are income-tax assessees and nothing has been hidden by any one of them, then
the transactions cannot be stated to be bogus. When you are accepting the similar transaction with
the same sister-concern where the assessee has shown profit, it ill behoves to reject certain similar
transaction where the assessee suffered loss. So, in my opinion, the whole claim of the assessee
has to be accepted. If the reason for restricting this addition to Rs. 1,60,088 given by the learned
CIT(A) has to be accepted, the earlier finding by him shall be set at naught. One cannot be allowed
to blow hot and cold at the same time. When the transactions are accepted as genuine, these have
to be accepted in their entirety. There is no evidence on record that the sale price was not lesser
than the purchase price, how and why the claim of the assessee can be rejected. The transactions
in which profit has been shown were also made with the same party and on the same day. But the
assessee is not in appeal, so the findings of the learned CIT(A) are confirmed in this regard. This
ground taken by the Department is dismissed

The Patna High Court has delivered a very important ruling in Md. Umer v.

CIT[1975] 101 ITR 525. In that case, the assessee was individual, who derived
income from sale of country liquor. The Tribunal gave five reasons for the
purpose of rejection of book profits as follows :

(1) The sale were not verifiable.

(2) From the point of drawing of the liquor from the barrels, no
account was maintained and even the normal leakage in the process of
drawing and filing in the bottles was not shown.

(3) Year to year, the book results shown have been rejected and
profit invariably estimated by the Department.

(4) The percentage of profit shown was low.

 85

(5) Drawings for expenses were inadequate.

However, assessee had produced all his books of account before the
Income-tax Officer and only two defects were found by him: (1)
absence of cash memos which means sales are not verifiable, and (2)
certain transactions were noted in lump sums. But no finding has been
recorded by either of the authorities below as to the unacceptability
of the method and irregularity of the accounts kept by the assessee.
It is well-settled that in the absence of such a finding recorded by
the authorities, the book results cannot be ignored or brushed aside.
Very important principle of law was laid down by Patna High Court in
the following words :

"There is no finding in the present case that any of the entries in the
books of account was not correct; there is no finding that the
assessee is not employing a method of accounting; and there is no
finding that such a method of accounting has been irregularly
employed by the assessee. In the absence of any such finding, there
being no reason germane to the unacceptability of the book results, it
must be held that the Tribunal as well as the revenue authorities
below had no materials before them, on the basis of which it could be
said that the trading results were not verifiable and that, therefore,
they should not be accepted, nor is it their case that the trading
results could not be deducible from the entries of the books of
account regularly employed".

The Patna High Court, therefore, held that—

"...the finding of the Tribunal upholding the rejection of the book

profit shown by the assessee was vitiated by reason of its reliance
upon suspicion, surmises as also irrelevant material. The finding that
sales were unverifiable is not based on the materials on record and is
an arbitrary finding."

Guj HC in case of CIT Gujarat II vs Amitbhai Gunvantbhai 129 ITR 573 The
basic principle is the same in the law relating to income-tax as well as
in civil law, namely, that if there is no challenge to the transaction
represented by the entries or to the genuineness of the entries, then
it is not open to the other side-in this case the revenue-to contend
 86

that that which is shown by the entries is not the real state of
affairs

Kar HC in case of CIT and Anr. vs S.C. Naregal 329 ITR 615

These substantial questions of law relate to the finding given by the

Income-tax Appellate Tribunal holding that the penalty could not be imposed
under section 271B of the Act and if at all proceedings could not initiated
under section 271A of the Act as the assessee has not maintained any
accounts and the question of limitation holding that the order imposing
penalty was barred by time.

The learned counsel for the appellant submitted that the assessee has
admitted in its statement and the reply given to the show-cause notice that
he is maintaining the party-wise register for credit sales pucca book of cash
sales and purchase register and wherefore, it cannot be disputed that the
assessee had maintained accounts though not all the accounts required to be
maintained under the Act. The decisions relied upon by the learned counsel
for the respondent would clearly show that only where no books of account
are maintained, no proceedings can be initiated for non-auditing of the books
of account which are not maintained under section 271B of the Act and
penalty can be imposed only under section 271A of the Act.

The following decisions are relied upon by the learned counsel for the
respondent:-

Sheraton Apparels v. Asst. CIT [2002] 256 ITR 20 (Bom);

Surajmal Parsuram Todi v. CIT [1996] 222 ITR 691 (Gauhati);

ITO v. Nanak Singh Guliani [2002] 257 ITR 677 (MP); and

CIT v. Heros Publicity Services [2001] 248 ITR 256 (Bom).

It is clear from the principle laid down in the decisions relied upon by the
learned counsel for the respondent that only where no accounts are
maintained the question of auditing the accounts does not arise and
wherefore, no proceedings can be initiated for imposing penalty under
section 271B of the Act. However, where accounts are maintained though
not all the accounts as prescribed under the Act, it is clear that the auditing
of the accounts is necessary under section 44AB of the Act.
 87

It is clear from the provisions of section 44AB of the Act that where the
turnover exceeds rupees forty lakhs, accounts are required to be audited.
There is no merit in the contention of the learned counsel for the
respondent that the books referred to in the order of the assessment
and stated by the assessee in the statement and in the reply to the
show-cause notice comprising of party-wise register for credit sales,
pucca book of cash sales and purchase register are not books of account
as defined under section 2(12A) of the Act as it cannot be disputed
that pucca book and purchase register are the accounts maintained by
the assessee.

It is clear from the definition that "books or books of account" includes

ledgers, day books, cash books, account books and other books,
whether, kept in the written form or as print-outs of data stored in a
floppy, disc, tape or any other form of electro-magentic data storage
device and wherefore, it cannot be denied that the assessee has
maintained account books as defined, under section 2(12A) of the Act
though not all the books prescribed under the Act as it cannot be
disputed that the pacca book of cash sales and purchase register are
the account books as defined under section 2(12A) of the Act. The
Assessing Officer and the Commissioner of Income-tax (Appeals) had
confirmed the order of the Assessing Officer to the effect that the notice
initiating proceedings for imposing of penalty under section 271B of the Act
was justified as the assessee has maintained account books. The finding of
the Tribunal that the assessee has not maintained any books of account is
perverse and arbitrary as it is clear from the reply given by the assessee as
also the answer to question 7, the statement given before the authority that
the assessee has maintained pucca books of cash sales and purchase
registers which are books of account as defined under section 2(12A) of the
Act and wherefore the finding of the Appellate Tribunal that the initiation
of proceedings for imposing of penalty under section 271B of the Act is not
justified cannot be sustained.

Since the statute does not specify the nature of books to be maintained in
the business carried on by the assessee and, in fact, as the tax auditor
certified the veracity thereof, there cannot be any adverse inference drawn there
from. (refer Blue Heaven Construction vs ITO 2010 39 SOT 39 Kol ITAT
 88

Mumbai ITAT order in case of Chandabhoy & Jassobhoy ITA No.

20/Mum/2010 8th July 2011 Section 40(a)(ia)

It is also not the case that assessee has not deducted any amount. Assessee
has indeed deducted tax under section 192 and so we are of the opinion that
provisions of section 40(a)(ia) also do not apply as the said provision can be
invoked only in the event of non deduction of tax but not for lesser
deduction of tax. In view of this, we are of the opinion that there is no
merit in Revenue’s contention that the amount paid to the employees should
be disallowed as provisions of section 194J would attract. On the facts of
the case, there is no merit in Revenue’s appeal. Accordingly the order of the
CIT(A) is confirmed.

Guj High Court in Nirma Chemicals Tax Appeal 1614/2009 dt

15/03/2011

Shortly stated facts are that assessee firm had filed returns of income on
20.11.2000 for assessment year 2000-2001. During the year under consideration,
assessee had purchased 54,368 special premium notes (SPN for short) of M/s.
Nirma Ltd at the rate of Rs. 355 per note having face value of Rs. 200. Such SPN
were redeemed during the same year at the rate of Rs.361. Assessee thus earned
net income of Rs.2,68,908/- and offered such income as its business income.
Since M/s. Nirma Ltd had deducted tax at source on entire difference between
face value of Rs.200 and redemption price of 361 and thus collected
Rs.19,25,715/-, assessee claimed refund of such TDS. Assessing Officer declined
the claim. Issue was carried in appeal before CIT(Appeals). CIT(Appeals)
declined the claim. Tribunal in appeal accepted the case of assessee. We are
broadly in agreement with the view of the tribunal. From the facts on record, it
can be seen that with respect to the claim of assessee that it earned income of
Rs.11,000 per note and thus earned Rs.2,68,908/- in such transaction is not in
dispute. That being the position, when M/s. Nirma ltd had deducted tax at source
on such transaction and when it was found that such tax was in excess of tax
liability of the assessee, tribunal in our opinion rightly directed the Assessing
 89

Officer to refund the same. No question of law arises. Appeal is therefore,

dismissed.

Pfizer Ltd., Pfizer Centre IN THE INCOME TAX APPELLATE TRIBUNAL "C"
Bench, Mumbai ITA No.1667/Mum/2010 (Assessment year: 2007-08) Mumbai,
dated 31st October, 2012

12. As already explained and evidenced from the computation of income as well as
the orders of AO in the assessment proceedings, the entire provision has been
disallowed under section 40(a)(ia) and section 40(a)(i). Once the amount has been
disallowed under the provisions of section 40(a)(i) on the reason that tax has not
been deducted, it is surprising that AO holds that the said amounts are subject to
TDS provisions again so as to demand the tax under the provisions of section 201
and also levy interest under section 201(1A). We are unable to understand the logic
of AO in considering the same as covered by the provisions of section 194C to 194J.
Assessee as stated has already disallowed the entire amount in the computation of
income as no TDS has been made. Once an amount was disallowed under section
40(a)(i)/(ia) on the basis of the audit report of the Chartered Accountant, the same
amount cannot be subject to the provisions of TDS under section 201(1) on the
reason that assessee should have deducted the tax. If the order of AO were to be
accepted then disallowance under section 40(a)(i) and 40(a)(ia) cannot be made and
provisions to that extent may become otiose. In view of the actual disallowance under
section 40(a)(i) by assessee having been accepted by AO, we are of the opinion that
the same amount cannot be considered as amount covered by the provisions of
section 194C to 194J so as to raise TDS demand again under section 201 and levy of
interest under section 201(1A). Therefore assessee’s ground on this issue are to be
allowed as the entire amount has been disallowed under the provisions of section
40(a)(i)/(ia) in the computation of income on the reason that TDS was not made. For
this reason alone assessee’s grounds can to be allowed. Considering the facts and
reasons stated above assessee’s grounds are allowed.