KHANDELWAL CONSTRUCTIONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AS per direction in Civil Rule No. 7(M) of 1992, the following two questions have been referred to this Court under S. 256(2) of the IT Act, 1961 (for short "the Act"), for the opinion of this Court.

(2.) WE may state the following facts: The assessee, a firm registered under the Indian Partnership Act, carried on the business of contract work. The questions relate to the asst. year 1981 -82. An amount of Rs. 1,70,000 had been shown as cash credit received from seven creditors, namely, Bhagchand Jain, Surajmal Royal, Tarachand Sharma, Fulchand Sharma, Ramawater Choudhury, Matadeen Saraf and Niranjan Kr. Sharma. The AO doubted the genuineness of the transactions. Accordingly, notice was issued to the assessee to satisfy the AO about the transactions invoking the power under S. 68 of the Act. Pursuant to that, the confirmation letters had been produced by the assessee. The assessee also gave the GIR numbers of the creditors inasmuch as they were also assessees under the IT Department. Yet, the ITO did not believe and, therefore, issued notice under S. 131 in respect of all the seven creditors. Out of the above, only four creditors, namely, Bhagchand Jain, Surajmal, Tarachand Sharma and Niranjan Kr. Sharma, appeared before the AO and explained the transaction satisfactorily and accordingly the AO accepted these transactions to be genuine. However, notices in respect of the remaining three creditors, namely, Fulchand Sharma, Ramawater Choudhury and Matadeen Saraf, were returned unserved. In the previous assessment year, the address of these creditors has been shown as C/o R.D. Sharma & Co., another partnership -firm. It may be mentioned here that R.D. Sharma & Co. was also an assessee. The notices were issued through process server with remarks that the persons were not known. Situated thus, the AO deputed one Inspector of Income -tax to make enquiry from C/o R.D. Sharma & Co. The Inspector, however, without meeting the persons who are at the helm of affairs, met the accountant of the said firm. The accountant informed the Income -tax Inspector that there were no such persons. The Inspector of Income -tax, however, did not consider it necessary to make any further enquiry and take the statement of the owners of the said firm. On the basis of the information received by the Inspector of Income -tax from the accountant of the firm of R.D. Sharma & Co. that the addressees were fictitious persons, the AO added the said amounts in the hands of the assessee as income from other sources. This was challenged by the assessee before the CIT(A). As the fact of the information given by the accountant of the said R.D. Sharma & Co. was not intimated to the assessee, it had no opportunity to agitate before the AO. However, in the grounds of appeal, it was specifically stated that the amount was paid by one of the creditors, namely, Matadeen Saraf from R.D. Sharma & Co. But while disposing of the said appeal, the CIT(A) did not take into consideration this aspect of the matter. The CIT(A) also did not feel it necessary to give a direction to the AO to make further enquiry regarding the receipt of money from R.D. Sharma & Co. by the assessee. The appeal was, however, allowed following a decision of the apex Court in CIT vs. Orissa Corporation (P) Ltd. (1986) 52 CTR (SC) 138 : (1986) 159 ITR 78 (SC) : TC 42R.1098. The Revenue took up the matter before the Tribunal. The Tribunal reversed the order of the CIT(A) by observing as follows: "But in view of the clear findings of the ITO which have not been dislodged or contradicted by any subsequent findings of the CIT(A) and keeping in view the decisions mentioned earlier in the preceding paragraphs, we cannot support the above conclusion of the CIT(A) in the present circumstances of the case. Accordingly, we support the conclusion arrived at by the ITO that the assessee had failed to discharge the burden which lay on it in view of the circumstances and findings of fact given by both the authorities below in their respective orders. In such a situation, the order of the CIT(A) cannot be maintained. Accordingly, we support the conclusion arrived at by the ITO that the assessee has failed to discharge the burden in view of the circumstances of the finding of facts in the respective orders. In such a situation, the appeal cannot be sustained". Situated thus, the assessee requested the Tribunal to refer the questions to this Court under S. 256 (1) which however was refused and the assessee, therefore, filed the aforesaid Civil Rule No. 7 (M)/92 and this Court directed the Tribunal to refer the said questions. Hence, the present reference.

(3.) WE have heard both sides. Dr. Saraf, learned counsel for the assessee, submits before this Court that the Tribunal committed a manifest error by directing the assessee to discharge its burden of proving beyond what was necessary. Dr. Saraf submits that the assessee in its return shows these amounts were found/received from the creditors of which four persons mentioned above have been accepted by the assessing authority and disbelieved in respect of three on the ground that they were not available when notices under S. 131 were issued and also on the basis of enquiry made by the Inspector of Income -tax that no such persons were known to the accountant of R.D. Sharma & Co. Learned counsel further submits that it is true that the AO under S. 68 of the Act has full authority to make enquiry if any of the entries made is not believable. But the enquiry should be in a manner which is reasonable and in consonance with the principles of natural justice and a hasty conclusion on a perfunctory enquiry cannot be the basis for rejecting the claim of the assessee. In the instant case, learned counsel submits that returns had been filed by these creditors continuously for a long time ranging from five years to six years. Therefore, without considering this matter, the AO had no jurisdiction to give conclusion. Mr. Joshi, on the other hand, supports that the order passed by the Tribunal as not bad in law. According to Mr. Joshi, the assessee must know the present address that (sic) these are the persons genuine in giving the loan, Mr. Joshi also submits that at the time when they received the loan they knew the persons and definitely the assessee must have received all the information about the persons granting loan. Mr. Joshi further submits that S. 68 empowers the AO when he is not satisfied the cash creditors in terms of coming to a conclusion (sic). On the rival contentions of learned counsel, it is to be seen whether the Tribunal's order is just and proper. Sec. 68 of the Act empowers the AO to make enquiry specifically satisfied regarding the cash credit. If he is satisfied that these entries are not genuine he has every right to add these income as income from other sources. The satisfaction of the AO is the basis of invocation of the powers under S. 68 of the Act and the satisfaction must be derived from relevant factors on the basis of proper enquiry. The enquiry envisaged under S. 68 is an enquiry which is reasonable and just. In the present case seven persons took (sic) the loan of which the AO had given notices on four persons mentioned above. But the remaining three persons were suspected, solely on the ground that confirmation letters were not satisfactory to the AO. The AO in the notices had reiterated observing remarks that the whereabouts are not known. The address as mentioned showing R.D. Sharma & Co., is a registered firm and also an assessee. As the notices were unserved, the AO deputed the IT Inspector to enquire into the matter. The IT Inspector simply met the accountant. We do not know what led the IT Inspector about the whereabouts or genuineness of the firm made by the accountant. Records did not show anything that the accountant has any connection with the whereabouts of the aforesaid creditors. The address is given under the care of the firm. The accountant of the firm, in our opinion, has got nothing into it as admittedly those creditors have on the face of it nothing to do with the business of the firm. In our opinion, the IT Inspector was not proper on the part of the enquiry made with the accountant. Besides, at what time enquiry was made is not available. The assessee had specifically, stated that the said Matadeen Saraf received the money from R.D. Sharma & Co. If this is true by stretch of imagination that these persons were fictitious, it is an admitted fact that those three creditors were assessees. Mr. Joshi submits that the assessee having a small income, and returns have been filed by those three persons. If the amount was shown to be received as loan by the assessee that ought not to have been in the return. There is nothing on record to show that the AO made any attempt in this regard to verify the same. The Tribunal observed thus: