PATNA KIRANA STORES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 256(2) of the IT Act, 1961 (hereinafter to be referred to as the Act"). By an order dt. 2nd Dec., 1971 this Courts had directed the Tribunal Patna Bench to state a case and refer it to this Court in pursuance of such a direction, the Tribunal has referred the following question of law for the opinion of this Court.

(2.) THE assessee is a registered firm consisting of five partners. It derives income from business in kirana goods and as hotelier. It purchased a plot of land for Rs. 82,900 during the year ending on the 31st of March, 1966. Accordingly the matter has arisen in connection with the firm's assessment in respect of the asst. yr. 1966-67. The aforesaid purchase of land was made by the assessee from one Hira Lal Jalan, a judgment debtor of the Life Insurance Corporation of India. According to the sale deed, a copy of which has been marked Annexure '2' to item No. 8 and which forms part of the statement of the case, one of the partners of the assessee paid an advance of Rs. 15,000 on the 14th June, 1965. There was no debit entry for Rs. 15,000 which was paid as an advance on 14th June, 1965. On the 5th July, 1965 the assessee passed an entry for Rs. 82,000. On the same date adjustment entries were made in the cash book according to which the accounts of all the five partners were credited with Rs. 3,000 each as payments made to the vendor on the 14th June, 1965. The ITO questioned the source of the deposits in the names of the partners. It was stated that the five partners withdraw a sum of Rs. 5,0-00 each on the 7th Oct., 1964 from their partnership account. Out of the same a sum of Rs. 3,000 each was paid as an advance to the vendor and the balance of Rs. 2,000 was deposited in the books by each partner. The ITO did not accept the withdrawal and added Rs. 25,000 under S. 68 of the Act. A copy of the order passed by the ITO has been made Annexure 'A' to the statement of the case. The assessee having preferred an appeal before the AAC it was contended before the first appellate Court that the sale could not take place unless the building of the judgment debtor was released by the Court. That was possible if the instalment due to the Life Insurance Corporation was paid. As the negotiations were going on, the partners withdrew Rs. 5,000 each out of which they made the advance of Rs. 15,000 on the 14th June, 1965. The balance of Rs. 2,000 each available with the partners was reintroduced in the firm's books of account. The AAC accepted the contention of the assessee and accordingly deleted the addition made by the assessing authority. The order of the AAC has been made Annexure 'B" to the statement of the case. The Revenue having preferred a second appeal to the Tribunal the Tribunal rejected the contention of the assessee that Rs. 3,000 was paid out of the withdrawals of Rs. 5,000 made by each partner on 7th Oct., 1964. It was also found by the Tribunal from the materials placed before it that the withdrawal of Rs. 5000 made by each of the partners on the 7th Oct., 1964 could not be the source for the adjustment entry made on the 5th July, 1965 and there was no nexus or link between the withdrawal made on the 7th Oct., 1964 and the adjustment entry made on the 5th July, 1965. The Tribunal accordingly by its appellate order (Annexure C to the statement of the case ) set aside the AAC, order and restored the order passed by the assessing authority. These are the broad facts.

(3.) THE primary facts, which emerge from the materials on record and admit of no controversy and which are borne out by the deed of sale dt. 3rd July, 1965 (Annexure 2), Item No. 7 forming part of the statement of the case are these : The parties to the sale deed are Sri Hira Lall Jalan (the vendor) of the one part and the registered firm Patna Kirana Stores consisting of the five partners (the firm being the assessee) which is the vendee of the second part. The premises demised need not be mentioned in any detail since not much depends upon its particulars. Suffice it to say that the land and the constructions thereon were Khasmahal properties which had been leased out by the Collector of Patna to the aforesaid Shri Hiralal Jalan or his predecessor in-interest. The period of the lease being specified, the same was extended from time to time. One of the term of the deed of settlement being that without the permission from the Collector of Patna the lessee, namely, the vendor could not enter into any transaction of transfer of those properties with any one else. A partition suit had been filed by Sri Hira Lall Jalan as the plaintiff against his four sons and his wife for division of the entire joint family assets which had been registered as Title Partition Suit No. 45/13 of 1958/59, which was at the relevant time, pending in the Court of the 1st Additional Subordinate Judge, Patna. In the said suit Sri Hira Lall Jalan was appointed receiver of the entire joint family estate under Court's order dt. 23rd Sept., 1958. The property involved in the sale known as Patna Law Press was mortgaged since before the Life Insurance Corporation (hereinafter to be referred to as the LIC). The LIC had brought a title mortgage suit against the Jalan family which suit was at the relevant time pending in the Court of the 2nd Additional Subordinate Judge, Patna, as title mortgage suit NO. 82/11 of 1957.58. That mortgage suit was ultimately decreed in favour of the LIC against the Jalan Family. The decree as finally approved by this Court in First Appeal No. 428 of 1959 was for a sum of Rs. 1,90,000 principal and Rs. 6,428 as interest besides Rs. 9,902.11 as costs. The Jalan family, however, was allowed to pay the decretal amount in six monthly instalments of Rs. 15,000 one by 15th June, and the other by the 15th December, each years. On the date when negotiation for sale started, a balance of Rs. 1,25,000 had remained die to be paid by the Jalan family to the ITO. Finding no other alternative and in order save interest accruing form day to day the vendor applied to the District Magistrate and Collector of Patna for permission to transfer and sell the premises in question. Permission was accorded by the Collector by order dt. 20th Feb., 1964. Thereafter, since as already stated above Sri Hiralal Jalan was acting as the receiver of his joint family estate, by order of the Court in the partition suit which was pending, he filed an application before the trial Court qua receiver for permission to sell the property in question and the learned Additional Subordinate Judge by his order dt. The 7th of Dec., 1964 authorised and permitted the vendor to sell the property in question. The sale deed further expressly recites that prior to the sale deed itself there had already been an agreement between the vendor and Sri Pran Nath Arora, a partner of the assessee firm with terms inter alia that the land would be sold at the rate of Rs. 8,000 per katha and the transfer deed would be executed finally in the name of Sri Pran Nath Arora or his nominee and the firm Patna Kirana Store had been named by Shri Pran Nath Arora to the vendee and accordingly the deed was executed in favour of the assessee. It is further stipulated that at the time when the agreement for sale was entered into between Sri Pran Nath Arora, aforesaid the vendee, a sum of Rs. 15,000 had been advanced as against money to the vendee on the 14th June, 1965 and the same had been deposited in the Court where the mortgage suit had been instituted by the LIC. The balance of Rs. 67,900 had been left with the vendee to deposit the same before the 5th July, 1965 in satisfaction of the instalment fixed by the Court for the period ending Dec., 1965. June and Dec., 1966 and June, 1967; each instalment being, as already stated, of Rs. 15,000 and the remaining sum of Rs. 7,900 towards the instalment of Dec., 1967. These are the salient primary facts on record. As already stated above, in the first appeal filed by the assessee before the AAC the explanation of the assessee with regard to the withdrawal of the amount of Rs. 5,000 by each of the partners from the account of the firm, the payment of Rs. 3,000 each by the partners from such amount withdrawn to the vendee and the redeposit of the balance amount of Rs. 2,000 by each of the partners in the books of account of the partnership had been accepted by AAC.