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Arun Kumar Bhansali v. Deputy Commissioner of Income-tax

Income Tax Appellate Tribunal
Nov 30, 2005
Smart Summary (Beta)

Structured Summary of the Opinion by Deepak R. Shah, Accountant Member

Factual and Procedural Background

This appeal by the assessee is directed against the order of the learned CIT(A)-VI, Bangalore, dated 30th January 2004, in an appeal against assessment under section 158BC for the block period comprising assessment years 1990-91 to 26th April 2000.

A search was conducted at the assessee's premises and at the premises of one Mr. Lalchand Balar on 26th April 2000. During the search it was found that the assessee had conducted 22 chits. Based on material found during the search and the assessee's statement, the Assessing Officer (AO) treated Rs. 4,00,000 (computed as Rs. 50,000 for eight assessment years) as income by way of commission from chit business, and treated Rs. 6,00,000 as undisclosed income from the assessee's proprietary concern M/s Kusboo Enterprises. The CIT(A) upheld the addition relating to the chit income. The assessee appealed to the tribunal.

Legal Issues Presented

  1. Whether the sum of Rs. 4,00,000 admitted by the assessee as income from chit business is taxable, or whether it is exempt by application of the principle of mutuality (i.e., income being profit made from oneself/contributors and thereby not chargeable to tax).
  2. Whether the sum of Rs. 6,00,000 admitted by the assessee as undisclosed income from his proprietary concern M/s Kusboo Enterprises should be accepted as admitted, or whether the undisclosed income should be determined on the basis of books of account and seized material (the assessee contending that the correct figure is Rs. 5,03,412).

Arguments of the Parties

Appellant (Assessee) — Principal contentions

  • With respect to the Rs. 4,00,000 from chit business: Even though the assessee had admitted the amount during the search, the income should be treated as exempt on the principle of mutuality. The business income from chits represents income from oneself because the assessee was both contributory and a beneficiary; hence, it cannot be treated as chargeable undisclosed income. The assessee relied on the Andhra Pradesh High Court decision in Commissioner of Income-Tax v. Nataraj Finance Corporation and the Supreme Court decision in Commissioner of Income Tax, Bihar v. Bankipur Club Ltd.
  • With respect to the Rs. 6,00,000 from M/s Kusboo Enterprises: The assessee submitted that the admission of Rs. 6,00,000 was an immediate reaction at the time of search; on correct appreciation of the books and seized material the net income was Rs. 5,03,412. Therefore the undisclosed income should be restricted to Rs. 5,03,412 rather than Rs. 6,00,000.

Departmental Representative / Revenue — Principal contentions

  • Regarding the Rs. 4,00,000: The revenue relied on the appellate order and submitted that after enquiries and confrontation with the seized material the assessee admitted the income; therefore it cannot be said the assessee was unaware of such income. The revenue characterised the receipt as business income (and not a mere dividend) arising from conducting the chits and argued that the principle of mutuality does not apply.
  • Regarding the Rs. 6,00,000: The revenue submitted that the assessee's own admission of Rs. 6,00,000 and the fact that profits of M/s Kusboo Enterprises were not disclosed justified treating the admitted sum as undisclosed income.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income-Tax v. Nataraj Finance Corporation, [1988] 169 ITR 732 (Andhra Pradesh High Court) Articulation of the test of mutuality: an entity is a mutual benefit association if the contributors to the common fund and the participators in the surplus are the same (the identity of the class of contributors and participators satisfies mutuality). The tribunal applied this test to the chit transactions, finding that contributors and beneficiaries were the same persons and therefore the surplus (profit) was made from oneself and should be exempt under the mutuality principle.
Commissioner Of Income Tax, Bihar v. Bankipur Club Ltd., [1997] 226 ITR 97 (Supreme Court) Approved and quoted the principle (from Kanga & Palkhivala) that contributors and participators must be an identical body for mutuality; the test does not require identical individual returns but identity of the class and rights over surplus. The tribunal relied on the Supreme Court's exposition to reinforce that the chit surplus represented profit from oneself (mutuality) and thus was not chargeable to tax.
Pullangode Rubber Produce Co. Ltd. v. State of Kerala, [1973] 91 ITR 18 (Supreme Court) Entries or admissions made by an assessee in accounts are important evidence but are not conclusive; an assessee who made an admission may show it to be incorrect and should be given an opportunity to demonstrate the true facts. The tribunal applied this principle to hold that the assessee's admission of Rs. 4,00,000 did not preclude him from showing, on the basis of law and material, that the admitted amount was not chargeable to tax; consequently the admission could not be the sole basis for taxability.

Court's Reasoning and Analysis

The tribunal examined the facts and legal authorities before it and proceeded in two parts corresponding to the two impugned additions.

1. Rs. 4,00,000 (chit business)

  • Fact-finding: The assessee conducted 22 chits over several years and was himself one of the participants and contributories; surplus arising from conducting the chits was distributed amongst the members-beneficiaries.
  • Legal analysis: The tribunal applied the test of mutuality as explained by the Andhra Pradesh High Court in Nataraj Finance Corporation and as affirmed by the Supreme Court in Bankipur Club Ltd. The essential requirement is that the contributors to the common fund and the participators in the surplus are the same class of persons; individual exactness of contribution versus benefit is not necessary.
  • Conclusion on characterisation: The surplus arising from the chits is a distribution among contributors (a profit "from oneself") and not income derived from others by way of commission; therefore the mutuality principle renders such surplus non-taxable.
  • On the evidentiary effect of admission: Relying on Pullangode, the tribunal held that the assessee's admission at the time of search is an important piece of evidence but not conclusive; where the admitted amount is shown, on the basis of legal principle and seized/books material, to be non-chargeable, it cannot be taxed merely on admission.
  • Result: The addition of Rs. 4,00,000 was deleted because the income was held to be exempt by application of mutuality and because admission alone could not sustain taxation where law and material demonstrated non-chargeability.

2. Rs. 6,00,000 (M/s Kusboo Enterprises)

  • Fact-finding: The appellant is proprietor of M/s Kusboo Enterprises; books and accounts for the block period were seized. The assessee admitted at the time of search that Rs. 6,00,000 represented undisclosed profit from that concern.
  • Legal and practical analysis: The tribunal noted that it is not realistic to compute undisclosed income for a nearly ten-year period instantly at the time of search. The assessee filed a computation based on books of account and seized documents showing total net income of Rs. 5,03,412 (composed of Rs. 3,94,302 as income recorded in the books for 1990-91 to 1999-2000 and Rs. 1,09,110 as profit from additional sales shown in seized documents).
  • Application of principle: It is settled that undisclosed income must be computed on the basis of material found as a result of the search. The AO should have accepted and considered the assessee's computation, particularly where the AO did not find the computation incorrect.
  • Result: The tribunal directed the AO to restrict the assessed profit as proprietor of M/s Kusboo Enterprises to Rs. 5,03,412 instead of adopting the Rs. 6,00,000 figure admitted during the search.

Holding and Implications

APPEAL PARTLY ALLOWED

Direct consequences for the parties:

  • The addition of Rs. 4,00,000 treated as income from chit business was deleted on the basis that the surplus represented profit from oneself and was therefore exempt under the principle of mutuality; the assessee's admission could not sustain taxation where legal principle and material showed non-chargeability.
  • The addition of Rs. 6,00,000 as undisclosed profit from M/s Kusboo Enterprises was reduced and the AO was directed to restrict the profit to Rs. 5,03,412, based on the assessee's book-computation and seized material, which the AO had not discredited.

Broader precedential implications: The tribunal applied existing case law (Nataraj Finance Corporation; Bankipur Club Ltd.; Pullangode Rubber Produce Co. Ltd.) to the facts. The opinion does not purport to set a new legal precedent beyond applying these authorities to the facts before it.

Show all summary ...

Deepak R. Shah, Accountant Member. - This appeal by assessee is directed against the order of learned CIT(A)-VI, Bangalore, dated 30th Jan., 2004 in an appeal against assessment under section 158BC for the block period comprising assessment years 1990-91 to 26th April, 2000.

1.1 The assessee mainly challenges the two additions by way of income from chit business amounting to Rs. 4 lakhs and income from proprietary concern M/s Khusboo Enterprises of Rs. 6 lakhs.

2. A search was conducted at the premises of assessee and one Mr. Lalchand Balar on 26th April, 2000. During the course of search, it was found that the assessee has conducted 22 numbers of chits. On the basis of material found during search and the statement of assessee, an amount of Rs. 4 lakhs, being Rs. 50,000 for 8 assessment years, were considered as income by way of commission from chit business. The assessee during the course of search admitted as under :

"I admit that I had conducted 22 number of chits of various value between 1992 to 1998. The every second chit used to be taken by me without any discount. However, there have been expenditure incurred like gifts given to chit participants as well as chit drawn and collection charges. I have also incurred liability in indirect fashion on account of delayed remittances of participants as well as liability on account of non-collectible chit amounts. The capital receipt on account of second chit has been employed by me into real estate and other business conducted by me. However, to buy peace from the Department, I hereby declare an amount of Rs. 4 lakhs as undisclosed income on account of chit businesses conducted by me. I shall be paying taxes on this Rs. 4 lakhs as undisclosed income arrived by me after taking out all expenditure including non-collectible amount."

Before the Assessing Officer as well as CIT(A), the assessee submitted that there is no material found during search which suggests that every year the assessee has earned a sum of Rs. 50,000 for 8 years. Thus, the income of Rs. 4 lakhs is not correctly treated as undisclosed income for the block period. Secondly, he relied upon the decision of Hon’ble Andhra Pradesh High Court in the case of Commissioner Of Income-Tax v. Nataraj Finance Corporation.. [1988] 169 ITR 732 for the proposition that the income from chit is by way of income from oneself and hence applying the principle of mutuality, such income cannot be treated as undisclosed income even though declared by the assessee. Learned CIT(A) dismissed this ground holding that the assessee himself has admitted having conducted chit business. Material was found during search. The assessee was confronted by Assessing Officer. Since he himself has admitted having earned income of Rs. 4 lakhs, the addition was upheld.

2.1 Learned counsel for assessee, Shri Laxminarasimhan submitted that even though the assessee had admitted, still the income is to be treated as exempt on the principle of mutuality. There cannot be concession against the provision of law. If the income is exempt, even though it is admitted, the same has to be excluded, as the income is to be computed according to the provision of IT Act and not merely on the admission of assessee. He once again relied upon the decision of Hon’ble Andhra Pradesh High Court in the case of Nataraj Finance Corpn. (supra). He further relied upon the decision of Hon’ble Supreme Court in the case of Commissioner Of Income Tax, Bihar v. Bankipur Club Ltd. [1997] 226 ITR 97. He submitted that the business income from chit is income from oneself and since the assessee is contributory as well as beneficiary, the income cannot be treated as undisclosed income, as the same is not chargeable to tax.

2.2 Learned Departmental Representative, on the other hand, relied upon the appellate order. He submitted that only after conducting various enquiries and confronting with assessee’s seized material, the assessee has admitted the income of Rs. 4 lakhs. Thus, it cannot be said that the assessee was unaware about such income. What the assessee has received is business income and not merely dividend from such chits. Thus, principle of mutuality will not apply.

3. We have carefully considered the relevant facts and the arguments advanced. The only question to be considered is that even though admitted, whether the assessee can claim income of Rs. 4 lakhs as exempt on the principle of mutuality relying upon the decision of Hon’ble Supreme Court and that of Hon’ble Andhra Pradesh High Court (supra ). In the present case, it is seen that the assessee conducted various chits numbering 22 over several years. The assessee was one of the participants of the chits. The assessee is contributory as well. Whatever surplus arises in conducting the chits is distributed equally amongst the members-beneficiaries. What is the real nature of income is the assessee receiving dividend by conducting such chits. The dividend is nothing but the surplus arising by contributing into the chits and not by way of commission for conducting such chits. Hon’ble Andhra Pradesh High Court in the case of Nataraj Finance Corpn. (supra) held thus :

"An entity would be a mutual benefit association if all the participators to the common fund are also contributors and their identity is established. It is this basic principle that satisfies the test of mutuality. The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus."

Hon’ble Supreme Court in the case of Bankipur Club Ltd. (supra) quoted with approval the following passage from the book on the Law and Practice of Income-tax by Kanga and Palkhivala thus :

". . . The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects. . . ."

In the present case, it is seen that various persons contributing (to) the chits are availing the combined contributed sum for a lesser sum called chit and the surplus arising is distributed amongst the chit contributors. Thus, the contributors to the common fund and the participators in the surplus are same persons. Hence, the principles of mutuality are squarely applicable. Applying the ratio laid down by Hon’ble Supreme Court as well as the Andhra Pradesh High Court, the income is not to be taxed but is to be exempted as the profit is made from oneself and not from others.

3.1 The Assessing Officer as well as learned CIT(A) has taxed the sum of Rs. 4 lakhs merely because the assessee agreed for the same. It is settled law that there cannot be any concession against the provision of law. Even though the assessee admitted but is able to demonstrate that the income admitted is either not his income or that such amount is not chargeable to tax, the same cannot be brought to tax merely on admission. Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 held thus :

"Entries made by the assessee in the accounts books treating a portion of the general expenditure as expenses towards immature plants and capitalizing such portion amount to an admission that the amount in question was laid out or expended for the cultivation, upkeep or maintenance of immature plants from which no agricultural income was derived during the previous year for the purpose of Explanations 2 to 5 of the Kerala Agrl. IT Act, 1950. Such admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee who made the admission to show that it is incorrect and the assessee should be given a proper opportunity to show that the books of account do not disclose the correct state of facts."

Applying the above principle, we hold that though the assessee admitted the income of Rs. 4 lakhs, yet it clear that the income is not chargeable in view of the principle of mutuality and hence to be taken out of the purview of chargeable income under the Act. We accordingly delete the addition of Rs. 4 lakhs.

4. The next ground of appeal is against addition of a sum of Rs. 6 lakhs for the profit from proprietary concern of M/s. Kusboo Enterprises.

4.1 The appellant is proprietor of M/s Kusboo Enterprises. During the course of search, the account books for the block period pertaining to said concern were found and seized. During the course of search, the assessee admitted that the job work done in the name of M/s Kusboo Enterprises was not accounted for. The appellant during the course of search admitted a sum of Rs. 6 lakhs to be his undisclosed income from the said business. The same was accordingly brought to tax.

4.2 Learned counsel for assessee, Shri Laxminarasimhan submitted that admitting a sum of Rs. 6 lakhs was the immediate reaction of assessee. However, on correct appreciation of evidence and even considering the seized material, the net income from M/s Kusboo Enterprises is the sum of Rs. 5,03,412. Thus, the amount to be adopted as undisclosed income should be such sum of Rs. 5,03,412 and not the sum of Rs. 6 lakhs as admitted during the course of search.

4.3 Learned Departmental Representative, on the other hand, relied upon the appellate order. He submitted that since the assessee himself has admitted a sum of Rs. 6 lakhs and since the profit in the name of M/s Kusboo Enterprises was never disclosed, the same is to be treated as undisclosed income.

5. We have carefully considered the relevant facts and the arguments advanced. It is seen that on the date of search itself, the assessee admitted a sum of Rs. 6 lakhs being the profit in M/s Kusboo Enterprises as his income. However, it is impossible to compute the undisclosed income for the entire period of 1991-2000 in a momentous admission. On correct appreciation of books of account and even considering the undisclosed as well as seized document, the income of such concern is a sum of Rs. 5,03,412 only. The computation in this regard has been filed by the assessee, which is also filed before the lower authorities. The Assessing Officer should have taken cognizance of such correct income depicted in the books of account as well as in the seized material and should not have adopted the figure merely as per admission of assessee. The income for the period 1990-91 to 1999-2000 as recorded in the books of account is Rs. 3,94,302. Similarly, the additional sales as per seized document and the profit from such additional sales is Rs. 1,09,110. The total of these two gives the figure of Rs. 5,03,412. The Assessing Officer has not found such computation incorrect. It is settled law that undisclosed income can be computed only on the basis of material found as a result of search. We accordingly direct the Assessing Officer to restrict the profit as proprietor of M/s Kusboo Enterprises to a sum of Rs. 5,03,412 instead of the sum of Rs. 6 lakhs adopted.

In the result, the appeal is partly allowed.