- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. S.M Omer.
Summary of Opinion — Bhagabati Prasad Banerjee, J.
Factual and Procedural Background
The Tribunal referred a question of law to the High Court under section 256(1) of the Income-tax Act, 1961. The reference asked whether the Tribunal was justified in upholding the deletion of an addition of Rs. 1,01,649 made by the Income-tax Officer (ITO) treating an amount received from the Controller of Defence Accounts (Navy) as "income from other sources."
The relevant assessment year was 1973–74 (accounting year ended 31 March 1973). During assessment proceedings the ITO found that the assessee received a cheque dated 11 January 1973 for Rs. 1,13,603 from the Controller of Defence Accounts (Navy), credited on 12 February 1973 to Omer and Co., and treated the sum as income from other sources (adding Rs. 1,01,649 as unexplained investment/concealed income).
The assessee appealed to the Commissioner (Appeals), who deleted the addition of Rs. 1,01,649. The Department appealed to the Tribunal, which affirmed the Commissioner (Appeals)'s order. The Tribunal then forwarded the question to the High Court for its opinion under section 256(1).
At the outset of the reference proceedings, it was pointed out that the assessee had died long ago, the legal representative had notified the income-tax authorities of the death, and no substitution had been made; the High Court refused to adjourn the reference for substitution.
Legal Issues Presented
- “Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the deletion of the other source, addition of Rs. 1,01,649, constituting the unexplained cost of material and manufacturing cost of goods supplied by the assessee to the Defence Department?” (Question referred under section 256(1)).
- Whether section 69 of the Income-tax Act, 1961 applies so as to permit treating the unexplained investment (amount received) as income of the assessee (this issue was pressed by the Revenue in argument).
Arguments of the Parties
Revenue / Income-tax Officer
- The Income-tax Officer treated the sum received from the Controller of Defence Accounts (Navy) as "income from other sources" and made an addition of Rs. 1,01,649 as unexplained investment/concealed income.
- On appeal to the High Court, the learned advocate for the Revenue relied on section 69 of the Income-tax Act, submitting that the unexplained investment should be added as income of the assessee.
Assessee / Commissioner (Appeals) (as represented in the record)
- The assessee (as recorded by the Commissioner (Appeals)) admitted lack of knowledge about the source of delivery and stated that goods were to be delivered by A.G. Muller and Co.; there was no knowledge that payments were made in foreign exchange.
- The Commissioner (Appeals) found that the assessee had incurred expenditure in manufacturing and supplying the goods; after rejecting the trading results and applying the proviso to section 145(1), the ITO had no jurisdiction to make a further addition as concealed income for monies invested in raw materials. Accordingly, the Commissioner (Appeals) deleted the addition of Rs. 1,01,649.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court reviewed the factual findings of the assessment and appeals: a cheque for Rs. 1,13,603 was received from the Controller of Defence Accounts (Navy) for supplies; the ITO treated the amount as income from other sources and added Rs. 1,01,649 as unexplained investment.
The Commissioner (Appeals) had examined the record and noted the assessee's admission of ignorance about the source of raw materials and that goods were to be delivered by A.G. Muller and Co., together with documentary references to invoices and letters. The Commissioner concluded that, having rejected the trading results and applied the proviso to section 145(1) to estimate net profit, the ITO did not have jurisdiction to make an additional addition as concealed income for monies invested in raw materials; therefore the Rs. 1,01,649 addition was not warranted.
The Tribunal affirmed the Commissioner (Appeals)'s conclusion that the entire amount invested in raw materials could not be added as income because the assessee had incurred expenditure in manufacturing and supplying the goods — the sum received represented gross receipts (including expenditure and profit), not net income.
The Revenue's submission before the High Court relied on section 69. The court rejected that submission, holding that section 69 applies to unexplained investments not recorded in the books of account; it did not apply on the facts of this case where the assessee had supplied goods after incurring manufacturing costs and the amount received could not be equated to net income. The court noted that the Tribunal's findings on these facts were not challenged for perversity and thus could not be interfered with in a reference.
The court also considered, and declined, a request to adjourn the reference for substitution of the deceased assessee's legal representative, concluding that adjournment was unnecessary for substitution in this matter.
Holding and Implications
Holding: The question referred under section 256(1) is answered in the affirmative and in favour of the assessee — the Tribunal was justified in upholding the deletion of the addition of Rs. 1,01,649; the addition was not warranted. There will be no order as to costs.
Implications:
- The addition of Rs. 1,01,649 as unexplained investment/concealed income cannot be sustained on the facts of this case.
- The court held that section 69 is not applicable where the sum received represents gross receipts after expenditure and manufacturing costs, and where the investment is not an unexplained investment outside the books of account.
- The Tribunal's factual findings, not being shown to be perverse, were left undisturbed; no broader precedent beyond the factual conclusions in this reference was established by the opinion.
Suhas Chandra Sen, J. agreed with the judgment.
Bhagabati Prasad Banerjee, J.:— The Tribunal has forwarded the following question of law to this court under section 256(1) of the Income-tax Act, 1961 (“the Act”):
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the deletion of the other source, addition of Rs. 1,01,649, constituting the unexplained cost of material and manu facturing cost of goods supplied by the assessee to the Defence Depart ment?”
2. The assessment year involved is 1973–74 for which the relevant accounting year ended on March 31, 1973. At the very outset, the learned advocate appearing on behalf of the assessee pointed out that the assessee had died long ago and the legal representative of the assessee informed the income-tax authorities about his death and no substitution has been made.
3. For the reasons given below, we do not think that this case should be adjourned for the purpose of making substitution.
4. During the assessment proceedings, the Income-tax Officer noticed that the assessee received a cheque on January 11, 1973, for Rs. 1,13,603 from the Controller of Defence Accounts (Navy) which was credited in the account of Omer and Co. with the Bank of India on February 12, 1973. This amount was received by the assessee against supplies made to Naval Armament Department. The Income-tax Officer treated the entire sum received from the Controller of Defence Accounts (Navy) being the amount of investment in the goods as “income from other sources”. The assessee went up in appeal before the Commissioner (Appeals) and the Commissioner (Appeals) held as follows:
“I have considered the arguments of both the Income-tax Officer and the appellant and also the contents of the assessment order. It was admitted by the appellant that he had no knowledge about the source of the delivery of the raw materials and of the goods except that the goods were to be delivered by A.G Muller and Co. It was submitted that the goods might have been manufactured in India, under the aegis of A.G Muller and Co. The appellant had no other knowledge about the issue. It was, however, submitted that no payments were made in foreign exchange. It was further submitted that the terms of payment were, vide invoice dated August 2, 1977, letters dated September 7, 1976 and April 15, 1977. Considering all these circumstances, I am of the opinion that, having chosen to reject the trading results of the appellant, apply the proviso to section 145(1) and estimate the difference of net profit which was sought to be added and which was actually added, the Income-tax Officer did not have any further jurisdiction to add an additional sum by way of concealed income in the shape of monies invested in raw materials. In the circumstances, I am of the opinion that the addition of Rs. 1,01,649 was not warranted. This addition is, therefore, directed to be deleted.”
5. Against the said order of the Commissioner (Appeals), the Department filed an appeal before the Tribunal. The Tribunal did not interfere with the order of the appellate authority. Both the Commissioner (Appeals) and the Tribunal held that the entire amount invested for the raw materials could not be added as income inasmuch as, for the purpose of earning this income, the assessee had made certain expenditure. The learned advocate appearing on behalf of the Revenue relied on the provisions of section 69 of the Act and submitted that this unexplained investment should be added as income of the assessee. We are not inclined to accept this submission inasmuch as section 69 has no manner of application on the facts and circumstances of the case but section 69 has application in the case of unexplained investment made by the assessee which are not recorded in the books of account. The assessee supplied the goods after incurring certain cost and after manufacturing the goods and the amount that was received from the Defence Department could not represent the net income but it was the sum received including the profit and expenditure. In this reference, the finding made by the Tribunal has not been challenged and no question of perversity has been raised and, as such, the findings made by the Tribunal in this behalf could not be interfered with by the High Court in a reference and we do not find anything wrong in the order of the Tribunal in this regard. Accordingly, the question of law in this reference is answered in the affirmative and in favour of the assessee. There will be no order as to costs.
Suhas Chandra Sen, J.:— I agree.
Alert