No addition as undisclosed income if Revenue failed to bring on record that the amount in fact belonged to Assessee
Income Tax survey & search action often results in the third party information in the possession of the income tax department. Often the party on whom raid is conduced admits and pay the tax. However, the statement given by such party becomes the basis for opening of case in the hands of the other parties. Question emerges in all such cases as to whether the addition made by AO merely based on the statement recorded under section 132(4) of the I.T. Act of other parties is justified in law?
This is the most common questions which I have faced in all the raids cases handled by me in the last couple of years. Even such instances are happening after income tax survey and other assessment proceedings. Tax professionals may also notice such instances in the case of inspections carried out by the I & CI wing of the income tax department.
In all such instances, tax professionals may note the judgement of Supreme Court in the case of one case by Supreme court Kishanchand Chellaram 125 ITR 713 wherein it is held that amount cannot be assessed as undisclosed income of assessee in the absence of positive material brought by Revenue to prove that the amount in fact belonged to assessee as the burden is on the Revenue. The judgement is of high importance as it has been discussed in various court ruling of Supreme Court, High court & tribunals. More particularly, it has been discussed in (1983) 143 ITR 814 (MP), (1991) 187 ITR 543 (All), (1992) 108 CTR (Del) 18, (1994) 208 ITR 849 (Bom) : (1994) 119 CTR (Bom) 394, 1994) 210 ITR 103 (Cal) : (1995) 123 CTR (Cal) 217, (1999) 239 ITR 77 (Cal) : (2000) 162 CTR (Cal) 448, (2002) 175 CTR (Guj) 604, (2003) 181 CTR (Ker) 487, (2003) 261 ITR 635 (Cal) : (2003) 181 CTR (Cal) 494, (2007) 293 ITR 565 (All), (2007) 293 ITR 565 (All) : (2007) 212 CTR (All) 477, (2009) 221 CTR (Del) 97, (2008) 220 CTR (Guj) 568, (2009) 224 CTR (Cal) 62, (2009) 224 CTR (Bom) 409, (2014) 363 ITR 195 (Delhi) : (2013) 86 CCH 171 DelHC, (2016) 382 ITR 639 (Delhi) : (2016) 95 CCH 029 DelHC, (2016) 387 ITR 561 (Bom) : (2016) 96 CCH 049 MumHC, (2016) 388 ITR 514 (Mad) : (2016) 97 CCH 005 ChenHC, (2018) 402 ITR 281 (Delhi) : (2018) 101 CCH 148 DelHC, (2018) 409 ITR 102 (P&H) : (2018) 103 CCH 144 PHHC.
Here is the copy of the said judgment:
FULL ORDER
KISHINCHAND CHELLARAM vs. COMMISSIONER OF INCOME TAX
SUPREME COURT OF INDIA
P.N. Bhagwati & E.S. Venkataramiah, JJ.
Civil Appeal No. 2728 of 1972
16th September, 1980
(1980) 48 CCH 0716 ISCC
(1980) 19 CTR 0360 : (1980) 125 ITR 0713 : (1980) 4 TAXMAN 0029
Legislation Referred to
Section 2(24), 68
Case pertains to
Asst. Year 1947-48
Decision in favour of:
Assessee
BHAGWATI, J.
The short question which arises for determination in this appeal by special leave is whether there was any material evidence to justify the finding that a sum of Rs. 1,07,350 was remitted by the assessee from Madras to Bombay and that it represented the undisclosed income of the assessee? The assessee before us is the firm of M/s Kishinchand Chellaram and the assessment year with which we are concerned is 1947-48, the relevant accounting year being the year ending 6th April, 1947. The original assessment of the assessee for this assessment year was completed long back, but it seems that some information was received by the ITO that a sum of Rs. 1,07,350 was remitted by the assessee from Madras by two telegraphic transfers through the Punjab National Bank Ltd. and the ITO, therefore, addressed two letters dt. 14th Jan., 1955 and 10th Feb., 1955, to the manager of the Punjab National Bank Ltd. making inquiries about this remittance. Neither these two letters nor their copies appear to have been brought on record and it was common ground between the parties that they were at no time disclosed to the assessee and even now the copies of these two letters which ought to be in the record of the IT Dept. have not been produced before us. The manager of the Punjab National Bank Ltd. replied to the inquires made by the ITO by his letter dt. 1st Feb., 1955, in which he stated:
“One telegraphic transfer of Rs. 1,07,350 sent by M/s Kishinchand Chellaram from Madras was received by us on 16th Oct., 1946. T.T. receipt was issued by us on the same day in favour of one, Mr. Nathirmal, and paid in cash on the same day.” Though this letter of the manager of the Punjab National Bank Ltd. was on the record of the ITO, he did not disclose it to the assessee nor did he make any reference to it in the letters dt. 24th Feb., 1955 and 4th March, 1955, which he addressed to the assessee making inquiries about the remittance of Rs. 1,07,350 said to have been made by the assessee from Madras to Nathirmal in Bombay. These two letters address by the ITO also make inquiries in regard to various other matters besides the remittance of Rs. 1,07,350 and the assessee replied to these inquiries by its letter dt. 24th March, 1955, in which amongst other things it pointed out that it was not able to trace any entry in its Madras books in regard to this remittance of Rs. 1,07,350 indicating clearly that no such remittance was sent by it from Madras to Nathirmal in Bombay. There was no further communication from the ITO to the assessee until 2nd Feb., 1956, when the ITO once again addressed a letter to the assessee reiterating that one telegraphic transfer of Rs. 1,07,350 was sent by the assessee from Madras on 16th Oct., 1946, in favour of Punjab National Bank Ltd., Kalba Devi Road, Bombay, and this amount was paid to one, Nathirmal, in cash on the same day and requesting the assessee to explain the nature of this transaction and to produce the relevant proofs of having accounted for this amount in its books of account. The assessee reiterated by its reply dt. 9th Feb., 1956, that it had once again looked into its books of account but did not find any entry in regard to the remittance of Rs. 1,07,350 and, in the absence of such entry, it was not in a position to say anything further in the matter. Then again there was a lull in the correspondence for a period of about one year and on 4th March, 1957, the ITO once again addressed a letter to the assessee repeating its request to explain the nature of the remittance of Rs. 1,07,350 and to produce relevant books of account and complaining that the assessee did not seem to have given any reply to his earlier letter dt. 2nd Feb., 1956. This complaint was, of course, unjustified because the assessee had replied to the earlier letter of the ITO by its letter dt. 9th Feb., 1956. But even so the assessee once again reiterated in its reply dt. 13th March, 1957, that no amount of Rs. 1,07,350 was remitted by the assessee from Madras and pointed out that Nathirmal was a common name in the Sindhi community and requested the ITO to kindly give his father’s name to enable the assessee to look into the matter further and also to inform the assessee as to who on behalf of the assessee purported to have sent the telegraphic transfer from Madras. The ITO did not give any further information to the assessee and proceeded to make an order of reassessment under s. 34 of the Indian IT Act, 1922, bringing to tax the amount of Rs. 1,07,350 on the ground that it represented the concealed income of the assessee. The ITO observed in the order that the Punjab National Bank Ltd. had stated that one telegraphic transfer of Rs. 1,07,350 was sent by M/s Kishinchand Chellaram from Madras and received by them on 16th Oct., 1946, and “there was no reason to doubt the banker’s statement that the amount was remitted by M/s Kishinchand Chellaram from Madras”. It was also stated in the order that the telegraphic transfer was encashed by one Nathirmal who was identified by an officer of the bank and whose address was the same as that of the Bombay office of the assessee, and it was found from the assessee’s records that this Nathirmal was an employee of the assessee in the relevant accounting year and, therefore, the conclusion was irresistible that the telegraphic transfer was sent by the assessee from its Madras office and encased by the assessee’s employee on its behalf in Bombay and, since it was not accounted for in the books of account, it must be held to be the undisclosed income of the assessee.
- The assessee being aggrieved by the order of the ITO preferred an appeal to the AAC. It was pointed out on behalf of the assessee at the hearing of the appeal that Nathirmal who was supposed to have received the amount of Rs. 1,07,350 sent by telegraphic transfer from Madras and to have signed the voucher in regard to the receipt of this amount as “N. B. Bani” had left the service of the assessee long back and a grievance was made that it was not known as to who was the person who was supposed to have made the remittance on behalf of the assessee, because in the absence of this information, it was not possible for the assessee to meet the case of the Revenue. The AAC thereupon obtained from the Madras office of the Punjab National Bank Ltd. a copy of the telegraphic transfer application by which the amount of Rs. 1,07,350 was remitted and this copy which was disclosed to the assessee showed that the application was signed by one Tilok Chand as follows: “Tilok Chand, c/o M/s K. Chellaram, 181, Mount Road, Madras.” The assessee pointed out to the AAC that there were two Tilok Chand working in the assessee’s office at Madras at the material time, one was Tilok Chand Thadani and the other was Tilok Chand Chellaram and both these Tilok Chand had left the service of the assessee long back. The assessee informed the AAC that the whereabouts of Tilok Chand Thadani were not known and so far as Tilok Chand Chellaram was concerned, he was then at Hong Kong. It was also pointed out to the AAC that the business in Madras was carried on by the assessee in the name of M/s Kishinchand Chellaram and not M/s/ K. Chellaram and that the remittance of Rs. 1,07,350 said to have been made by Tilok Chand was not on behalf of the assessee nor was it sent to the assessee and that its inclusion as undisclosed income of the assessee was not at all justified. The AAC, however, negative these contentions of the assessee and held that the remittance of the amount of Rs. 1,07,350 was by an employee of the assessee from Madras to another employee in Bombay and the bank had also reported that the remittance related to the assessee and hence the burden was on the assessee to explain and prove the nature and source of the remittance and since this burden was not discharged, the inclusion of the amount in the assessment of the assessee was liable to be sustained. The AAC, accordingly, rejected the appeal and confirmed the assessment of the assessee.
- The assessee thereupon preferred a further appeal to the Tribunal but this appeal was also unsuccessful. The Tribunal relied on the letter of the bank dt. 18th Feb., 1955, to which we have already referred earlier, and surprisingly enough, though this letter was strongly relied upon both by the AAC and the Tribunal, and an extract of it was given in the order of the AAC, it was not produced before the assessee nor was a copy of it given to the assessee. The Tribunal also placed reliance on another letter dt. 9th March, 1957, addressed by the bank of the assessee where it was stated by the manager of the bank that they had received one telegraphic transfer from Madras office on 16th Oct. 1946, favouring Nathirmal and this amount was remitted by the assessee through their Madras office. This letter was admittedly written by the manager of the bank to the assessee in reply to the assessee’s letter dt. 7th March, 1957, but obviously it did not carry the matter any further since it was in the same terms as the letter dt. 18th Feb., 1955, addressed by the manager of the bank to the ITO. The Tribunal then proceeded to observe that:
“The assessee was not in a position to show that the respective employees in Madras and Bombay were carrying on any business and were in a position to send from one place to another such a large sum of Rs. 1,07,350. The assessee merely informed the ITO that it had nothing to do with this amount. It would have been easy for the assessee to have the said persons examined so as to show that the sum of Rs. 1,07,350 cannot represent any amount belonging to the assessee. But for the reasons best known to itself it did not choose to do so. By remitting the amount as cash and by not bringing it into its books the assessee cannot escape the consequences of having to explain the source for this and especially when the bank through which the amount was remitted has in categorical terms stated that the remitter from Madras was the assessee. It would have been open to the assessee to establish the contrary by showing that the bank’s statement that the assessee did remit the amount is not correct and thus displace the evidence on record, but it did not choose to examine the bank officers with reference to this aspect either. Therefore, this is a case where a sum of Rs. 1,07,350 has been remitted by the assessee as shown by the bank’s letter from Madras to its employee in Bombay which has not been brought to the books. In the said circumstances, it is for the assessee to explain the source for the fund and it cannot escape the consequence by merely adopting an attitude of non-co- operation.”
The Tribunal accordingly held that the assessee had not satisfactorily explained the source of the amount of Rs. 1,07,350 and the ITO was, therefore, justified in adding this amount as the undisclosed income of the assessee.
- This order of the Tribunal led to the filing of an application for a reference by the assessee and on the application being rejected by the Tribunal, the assessee preferred an application to the High Court for directing the Tribunal to make a reference and, on this application, the High Court directed the Tribunal to refer the following question for the opinion of the High Court:
“Whether there was any material evidence to justify the findings of the Tribunal that the amount remitted by an employee of the Madras branch to an employee of the Bombay branch was the income of the firm of M/s Kishinchand Chellaram from undisclosed source ?”
The Tribunal thereupon drew up a statement of the case and referred the above question to the High Court. The entire evidence in the case was considered by the High Court and taking the view that there was material evidence to justify the finding that the amount of Rs. 1,07,350 remitted by Tilok Chand to Nathirmal was the undisclosed income of the assessee, the High Court answered the question in favour of the Revenue and against the assessee. The assessee thereupon preferred the present appeal with special leave obtained from this Court.
- The sole question which arises for determination in this appeal is whether there was any material evidence to justify the findings of the Tribunal that the amount of Rs. 1,07,350 said to have been remitted by Tilok Chand from Madras represented the undisclosed income of the assessee. The only evidence on which the Tribunal could rely for the purpose of arriving at this finding was the letter dt. 18th Feb., 1955, said to have been addressed by the manager of the Punjab National Bank Ltd. to the ITO. Now, it is difficult to see how this letter could at all be relied upon by the Tribunal as a material piece of evidence supportive of its finding. In the first place, this letter was not disclosed to the assessee by the ITO and even though the AAC reproduced an extract from it in his order, he did not care to produce it before the assessee or give a copy of it to the assessee. The same position obtained also before the Tribunal and the High Court and it was only when a supplemental statement of the case was called for by this Court by its order dt. 16th Aug., 1979, that, according to the ITO, this letter was traced by him and even then it was not shown by him to the assessee but it was forwarded to the Tribunal and it was for the first time at the hearing before the Tribunal in regard to the preparation of the supplemental statement of the case that this letter was shown to the assessee. It will, therefore, be seen that, even if we assume that this letter was in fact addressed by the manager of the Punjab National Bank Ltd. to the ITO, no reliance could be placed upon it, since it was not shown to the assessee until at the stage of preparation of the supplemental statement of the case and no opportunity to cross-examine the manager of the bank could in the circumstances be sought or availed of by the assessee. It is true that the proceedings under the income-tax law are not governed by the strict rules of evidence and, therefore, it might be said that even without calling the manager of the bank in evidence to prove this letter, it could be taken into account as evidence. But before the IT authorities could rely upon it, they were found to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross-examine the manager of the bank with reference to the statements made by him. Moreover, this letter was said to have been addressed by the manager of the bank to the ITO on 18th Feb., 1955, in relation to a remittance alleged to have been sent on 16th Oct., 1946, and it is impossible to believe, in the absence of any evidence to that effect, that the manager who write this letter on 18th Feb., 1955, must have been in-charge of the Madras office on 16th Oct., 1946, so as to have personal knowledge as to who remitted the amount of Rs. 1,07,350. What the manager of the bank wrote in this letter could not possibly be based on his personal knowledge and it does not appear from the letter as to what were the original documents and papers from which he gathered the information conveyed by him to the ITO. The statements contained in this letter addressed by the manager of the bank to the ITO were in the nature of hearsay evidence and could not be relied upon by the Revenue authorities. The Revenue authorities could have very well called upon the manager of the bank to produce the documents and papers on the basis of which he made the statements contained in his letter and confronted the assessee with those documents and papers but instead of doing so, the Revenue authorities chose to rely merely on the statements contained in the letter and that too, without showing the letter to the assessee. There is also one other important circumstance which deserves to be noted. It appears that when the letter dt. 9th March, 1957, was addressed by the manager of the bank to the assessee, a copy of it was forwarded by the manager to the ITO and this copy contained the following endorsement:
“Copy to Mr. T.K. Surendran, 2nd ITO, Income-tax Office, C-IV Ward, Bombay, for information with reference to his summons dt. 5th March, 1957. One only T.T. for Rs. 1,07,350 was received with particulars as above. Mr. Nathirmal was identified by Mr. B.N. Mallaya, the then officer in our office.”
- This copy of the letter dt. 9th March, 1957, was obviously in the record of the ITO but it was not disclosed to the assessee at any stage and, according to the ITO, it was not traceable until the case came back to him for evidence in connection with the preparation of the supplemental statement of the case. He then seemed to trace it and forwarded it along with his report to the Tribunal and it was at the hearing before the Tribunal in connection with the supplemental statement of the case that it was shown to the assessee for the first time. It is difficult to understand how his copy of the letter dt. 9th March, 1957, as also the letter dt. 18th Feb., 1955, said to have been addressed by the manager of the bank to the ITO were not traceable in the records of the ITO all this time and they came to be traced only when the supplemental statement of the case was called for by this Court. There is no explanation given by the Revenue as to why these two important documents were not traceable and they were not disclosed to the assessee. The reason perhaps was, and this was the suggestion made by the learned counsel appearing on behalf of the assessee, that the Revenue authorities did not wish to give an opportunity to the assessee to call the manager of the bank for cross-examination, lest the edifice which they wanted to construct for taxing the assessee on the amount of Rs. 1,07,350 might be jeopardised. It is interesting to note that the endorsement made at the foot of the copy of the letter dt. 9th March, 1957, sent to the ITO clearly shows that the manager of the bank was served by the ITO with a summons dt. 5th March, 1957, and one can reasonably presume that the manager of the bank must have appeared in answer to the summons before the ITO and given his statement. But no such statement has been produced by the Revenue authorities nor are we told as to what happened when the manager of the bank appeared in obedience to the summons. It is impossible to believe that the manager of the bank should have failed to appear before the ITO in answer to the summons and there is no doubt that his statement must have been recorded. The question then is, why has this statement been kept back by the Revenue authorities ? Even if we assume that the ITO did not record the statement of the manager of the bank, it is difficult to appreciate why he should not have done so and probed into the matter further with a view to finding out what was the basis on which the manager had made the statement that the remittance was sent by the assessee. We are clearly of the view that the letters dt. 18th Feb., 1955 and 9th March, 1957, did not constitute any material evidence which the Tribunal could legitimately take into account for the purpose of arriving at the finding that the amount of Rs. 1,07,350 was remitted by the assessee from Madras, and if these two letters are eliminated from consideration, it is obvious that there was no material evidence at all before the Tribunal which could support this finding.
- But even if these two letters dt. 18th Feb., 1955, and 9th March, 1957, were to be taken into account, we do not think they supply any reasonable basis for reaching the finding that it was the assessee which sent the remittance of Rs. 1,07,350. It is undoubtedly true that the manager of the bank stated in these two letters that the amount of Rs. 1,07,350 was remitted by the assessee through the Madras office of the bank, but this statement which was obviously not based on the personal knowledge of the manager, which was not supported by any documents or papers produced by the manager and in regard to which it was not known as to what was the material on which it was based, was clearly belied by the original application for remittance which was signed by Tilokchand in his own name and not on behalf of the assessee. The primary evidence before the Tribunal in regard to the remittance of the amount of Rs. 1,07,350 was the application signed by Tilokchand and this application clearly showed that it was Tilokchand and not the assessee which remitted the amount of Rs. 1,07,350 from Madras. There can be no doubt that if the amount had been remitted by Tilokchand on behalf of the assessee, he would have signed the application on behalf of the assessee and not in his own name. We fail to appreciate how, in the fact of this primary evidence showing Tilokchand as the person who remitted the amount of Rs. 1,07,350, the Tribunal could possibly accept the unsupported statement of the manager of the bank, based on hearsay, that the amount was remitted by the assessee. Unfortunately, the Revenue authorities did not produce copies of the letters dt. 14th Jan., 1955 and 10th Feb., 1955, addressed by the ITO to the manager of the bank. Copies of these letters, if produced, would perhaps have shown that the suggestion that the amount of Rs. 1,07,350 was remitted by the assessee was made by the ITO and taking the clue from this suggestion, the manager of the bank might have stated that the telegraphic transfer of Rs. 1,07,350 was sent by the assessee. It is to our mind impossible to hold, in the face of the application for remittance signed in the name of Tilokchand, that this amount was sent by the assessee and the finding to that effect reached by the Tribunal must be held to be unreasonable and perverse. What at the highest could be said to be established by the material evidence on record is that Tilokchand remitted the amount of Rs. 1,07,350 from Madras and this amount was received by Nathirmal in Bombay. Even if we accept that Tilokchand and Nathirmal were employees of the assessee as held by the Tribunal, the utmost that could be said is that an employee of the assessee in Madras remitted the amount of Rs. 1,07,350 to another employee in Bombay. But, from this premise it does not at all follow that the remittance was made by the employee in Madras on behalf of the assessee or that it was received by the employee in Bombay on behalf of the assessee. The burden was on the Revenue to show that the amount of Rs. 1,07,350 said to have been remitted from Madras to Bombay belonged to the assessee and it was not enough for the Revenue to show that the amount was remitted by Tilokchand, an employee of the assessee, to Nathirmal, another employee of the assessee. It is quite possible that Tilokchand had resources of his own from which he could remit the amount of Rs. 1,07,350 to Nathirmal. It was for the Revenue to rule out this possibility by bringing proper evidence on record, for the burden of showing that the amount was remitted by the assessee was on the Revenue. Unfortunately, for the Revenue, neither Tilokchand nor Nathirmal was in the service of the assessee at the time when the assessment was reopened and the assessee could not, therefore, be expected to call them in evidence for the purpose of helping the Revenue to discharge the burden which lay upon it. We must, therefore, hold that there was no material evidence at all before the Tribunal on the basis of which the Tribunal could come to the finding that the amount of Rs. 1,07,350 was remitted by the assessee from Madras and that it represented the concealed income of the assessee.
- We accordingly allow the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in favour of the assessee and against the Revenue. The revenue will pay the costs of the assessee throughout.
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