"High Court Upholds ITAT's Decision to Include Bogus Credits in Appellant's Income Tax, Rejecting Claim of Double Taxation".

This civil appeal challenges the judgment and order passed by the High Court, wherein the appellant's appeal was dismissed and the order of the Income Tax Appellate Tribunal was upheld. The case revolves around the assessment year 1998-1999, and the appellant/assessee received a notice under Section 143(2) (of Income Tax Act, 1961). The assessing officer made certain additions under the "Trading Account" and "Credits" categories in the assessment order, including treating a certain amount as cash credits under Section 68 (of Income Tax Act, 1961). The appellant/assessee appealed to the Commissioner of Income Tax (Appeals) and then to the ITAT, but the order regarding the second addition was upheld. The appellant/assessee then appealed to the High Court, arguing that the assessing officer couldn't rely on the same books of accounts to impose subsequent additions after rejecting them for the initial assessment. The High Court dismissed the appeal, stating that the credits were bogus entries and properly added to the appellant/assessee's income. The appellant/assessee now argues before the Supreme Court that the assessment order rejected the books of accounts under Section 145(3) (of Income Tax Act, 1961) and, therefore, subsequent additions based on those rejected books should not have been made. The respondent contends that the assessment was made under Section 143(3) (of Income Tax Act, 1961), justifying the reliance on the books of accounts. The parties present their arguments, and subsequent events, such as the appellate authority setting aside the penalty proceedings and the appellant/assessee being acquitted in criminal proceedings, are also brought to the court's attention.

During the appellate proceedings, the appellant filed an application under Rule 46A (of Income Tax Rules, 1962), submitting additional evidence and affidavits from 13 creditors, a sales tax order showing purchases from unregistered dealers, cash vouchers, and identity documents. The assessing officer recorded statements of 12 unregistered dealers who confirmed the sale of marble slabs to the appellant on credit. However, the assessing officer observed that the dealers did not produce any evidence due to their small-scale businesses. Despite this, the assessing officer did not doubt their identity or the claim of purchases from unregistered dealers. The appellate authority considered the evidence and concluded that there was no concealment of income or furnishing of inaccurate particulars. The penalty order passed by the assessing officer was cancelled, and the appellant was refunded the penalty amount along with interest. The relevant provisions of the Income Tax Act for assessment year 1998-1999 were cited. The Supreme Court heard arguments from both parties and examined the provisions in question.

The case involves an appellant/assessee who failed to prove the correctness and genuineness of their claim regarding purchases of marble from unregistered dealers. The assessing officer treated the transactions as bogus entries and made an addition of Rs.2,26,000 to the appellant's income. However, during the penalty proceedings, the appellant produced affidavits and statements of the unregistered dealers, which established their credentials and supported the claim of purchases on credit. The appellate authority accepted this evidence and concluded that there was no concealment of income or furnishing of inaccurate particulars for the assessment year in question. The Supreme Court noted that the factual basis for the assessing officer's addition had been dispelled by the evidence presented in the penalty proceedings. Therefore, the addition of Rs.2,26,000 was unjustified and was set aside. The rest of the assessment order remained unchanged. The appeal was allowed, and there was no order as to costs.

1. This appeal takes exception to the final judgment and order

dated 21.8.2008 passed by the High Court of Judicature for

Rajasthan at Jodhpur (for short, “the High Court”) in Income Tax

Appeal No. 69 of 2006, whereby the appellant’s appeal was

dismissed and the order of Income Tax Appellate Tribunal,

Jodhpur Bench (for short, ‘the ITAT’) came to be upheld.

2. In short, the appellant/assessee was served with a notice

under Section 143(2) (of Income Tax Act, 1961) (for short,

‘1961 Act’) by the Assessing Officer (for short, ‘Officer’) for the

assessment year 1998­1999, pursuant to which an assessment

order was passed on 30.11.2000. This appeal involves limited

challenge to certain addition made under the heads ­ “Trading

Account” and “Credits” in the assessment order. The Officer,

inter alia, while relying on the Balance Sheet and the books of

account, took note of the credits amounting to Rs.2,26,000/­

(Rupees two lakhs twenty­six thousand only). The Officer treated

that amount as “Cash credits” under Section 68 of the Income Tax Act, 1961

and added the same in declared income of the assessee (for short,

‘second addition’). The Officer then proceeded to compute the

income of the assessee for the concerned assessment year. The

relevant part of the computation is mentioned below: ­

“Credits:

On examining the balance­sheet and accounts books

of assessee, it is apparent that the assessee has shown

credit amount of Rs.2,26,000/­ in the names of the following

15 persons:

Accordingly, sufficient time and opportunity was

granted to prove the veracity of credits of Rs. 2,26,000/­ as

shown by assessee. However false/wrong particulars or

explanation were submitted with respect to credits shown by

assessee. In this manner, the credits of Rs.2,26,000/­ shown

in the name of 15 persons, is not correct and any correct

proof/evidence has not been produced by assessee with

respect to income of creditors and source of income. Besides

this, the credits of Rs.2,26,000/­ as shown in the name of 15

persons is held as unexplained under Section 68 (of Income Tax Act, 1961) and added

in declared income of assessee.

Accordingly, the computation of income of assessee for

assessment year 1998­99 is as follows:

Income shown in the Returns 87500/­

1. Disallowed deduction U/s.24(1) (of Income Tax Act, 1961)

as per discussion 7200/­

2. Additions in gross profit 10000/­

3. Additions on the basis of less

Household expenses withdrawals 18000/­

4. Unexplained credits as per discussions 226000/­ 261200/­

Total taxable Income Tax 348700/­

Assessment was made. Necessary forms were issued. Notice

be issued separately for imposition of penalty under Section

272(1)(c).”

3. Aggrieved, the appellant/assessee preferred an appeal before

the Commissioner of Income Tax (Appeals), Jodhpur (for short,

‘CIT(A)’). The appeal was partly allowed vide order dated

9.1.2003. However, as regards the Trading Account and Credits

in question, the CIT(A) upheld the assessment order.

4. The appellant/assessee then preferred further appeal to the

ITAT. Having noted the issues and objections raised by the

Department and the appellant/assessee, the ITAT partly allowed

the appeal vide order dated 4.11.2004. However, the order

relating to the second addition (under consideration in the

present civil appeal) regarding credits of Rs.2,26,000/­ (Rupees

two lakhs twenty­six thousand only) came to be upheld.

5. The appellant/assessee then filed an appeal before the High

Court under Section 260A of the Income Tax Act, 1961. The appeal was

admitted on 27.4.2006 on the following substantial question of

law: ­

Whether claim to purchase of goods by the assessee could

be dealt with under Section 68 (of Income Tax Act, 1961) of the Income Tax as a cash

credit, by placing burden upon the assessee to explain that

the purchase price does not represent his income from the

disclosed sources?’’

The principal argument of the appellant/assessee was that once

the books of account have been rejected and an assessment order

has been passed, the same books of account cannot be then

relied upon by the Officer to impose consequent addition(s).

6. The High Court dismissed the appeal vide impugned

judgment and order dated 21.8.2008, as being devoid of merits.

The High Court opined that the amount shown as credits was

nothing but bogus entries and was justly added to the income of

the appellant/assessee. The Court also noted other reasons to

dismiss the appeal. Relevant part of the judgment is reproduced

hereunder: ­

“In our view, none of the submissions advanced by the

learned counsel for the appellant has force. Learned counsel

has proceeded on the basic assumption, about the factum of

purchase of goods, having accepted by the authorities below,

while the categoric finding of the Assessing Officer, which

has not been disturbed in appeal is, that regarding this

purchase from unregistered dealer assessee was called upon

during the course of assessment proceedings to prove the

correctness and genuineness of his claim, but he completely

failed, and therefore, the purchase cannot be accepted. In

our view, this finding, rather is clear and categoric, that

no purchase was affected by the assessee, and amount

was shown in a bogus manner, shown to be standing to

credit of alleged purchasers, who could not be shown, to

be either existent, or to be the creditors of the assessee,

much less for the consideration alleged by the assessee.

It is clear from the assessment orders and the finding

affirmed in the appeals, that opportunity was given to

the assessee to substantiate the genuineness of the

alleged transactions, but the assessee failed, and efforts

made by the Revenue, to investigate the correctness of

the alleged transaction also could not yield any results,

in favour of the assessee.

Thus it is clear, that the amounts shown to be

standing to the credit of the persons, which had been added

to the income of the assessee, was clearly a bogus entry, in

the sense that it was only purportedly shown to be the

amount standing to the credit of the fifteen persons,

purportedly on account of assessee having purchased goods

no credit from them, while since no goods were purchased,

the amount did represent income of the assessee from

undisclosed sources, which the assessee had only brought

on record (books of accounts), by showing to be the amount

belonging to the purported sellers, and as the liability of the

assessee.

That being the position, the contention about

impermissibility of making addition under this head, in view

of addition of Rs.10,000/­ having been made in trading

account, cannot be accepted, as books of accounts has

been rejected for the purpose of assessing the gross

profit, as the gross profit shown in the books has not

been accepted, on the ground, that the assessee had not

maintained day to day stock registers, nor has produced

or maintained other necessary vouchers, but then, if

those books of accounts did disclose certain other

assets, which are wrongly shown to be liabilities, and for

acquisition of which the assessee did not show the

source, it cannot be said that the Assessing Officer was

not entitled to use the books of accounts for this

purpose.”

(emphasis supplied)

7. The appellant/assessee in the present civil appeal has

reiterated the argument that the Officer, having made the

addition under Section 144 of the Income Tax Act, 1961 being “best judgment

assessment”, had invoked powers under sub­Section (3) of

Section 145 (of Income Tax Act, 1961). For, assessment under Section 144 (of Income Tax Act, 1961) is done only if

the books are rejected. In that case, the same books cannot be

relied upon to impose subsequent additions, as has been done in

this case under Section 68 of the Income Tax Act, 1961. The

appellant/assessee adopted a three­pronged plea in support of

the above contention; First, that assessment order refers to

Section 145(2) of the Income Tax Act, 1961. It should have mentioned Section

145(3) of the 1961 Act. For that, the appellant/assessee relies on

the amendment of the 1961 Act which came into effect from

1.4.1997. It is urged that Section 145(2) (of Income Tax Act, 1961) prior to 1.4.1997 (pre-

amendment) is akin to Section 145(3) (of Income Tax Act, 1961) post 1.4.1997 (post-

amendment). It is thus urged that the

Department committed error in mentioning Section 145(2) (of Income Tax Act, 1961) and

not Section 145(3) (of Income Tax Act, 1961); Second, that the assessment order in

reference to the first addition has incorrectly mentioned the term

“not”. According to the appellant/assessee, the prefix of the

paragraph and the language used, makes it abundantly clear that

the Department had relied upon Section 145(3) of the Income Tax Act, 1961 to

impose the addition. The appellant/assessee has also placed

reliance on the Hindi version of the assessment order to buttress

this submission; Third, that the assessment was made under

Section 144 (of Income Tax Act, 1961) as the same refers to Section 145(3) (of Income Tax Act, 1961). Under Section

144, the Officer has to make “best judgment assessment”. The

appellant/assessee urges that the purport of the stated provision

is that the Officer re­assesses the entire accounts and makes the

assessment of total income and thereafter computes the income

tax liability. Resultantly, the Officer (after rejecting the books of

account) cannot then rely on the same books of account to make

any subsequent addition(s). The appellant/assessee also argues

that the approach adopted by the Officer would have the effect of

taxing the same transaction twice.

8. To buttress the aforesaid contentions, reliance is placed on

Maddi Sudarsanam Oil Mills Co. v. Commissioner of Income-

Tax, Hyderabad and Andhra; Commissioner of Income Tax

v. Aggarwal Engg. Co. (Jal.)2 and Commissioner of Income

Tax vs. G.K. Contractors.

9. Per contra, the respondent urged that the assumption of the

appellant/assessee that the assessment order had rejected the

books of accounts under Section 145(3) of the Income Tax Act, 1961 is

preposterous. In that, the assessment in question came to be

made under Section 143(3) of the Income Tax Act, 1961. Thus, the Officer

was justified in relying upon the said books for making

addition(s). The respondent would also urge that while imposing

the first addition, the assessment order does not reject the books

of accounts, but only that part which pertained to assessing the

gross profit, as the assessee had not maintained day to day stock

registers, nor had produced or maintained other necessary

vouchers while determining the gross profits. Additionally, the

respondent would also urge that the amount mentioned under

“Credits” in the Balance Sheet is incorrect and qualifies as “Cash

Credits” under Section 68 of the Income Tax Act, 1961, as stated in the

assessment order. Indisputably, the Officer gave several

opportunities to the appellant/assessee to prove the authenticity

of the entries in question. As a matter of fact, summon notices

were issued to the named fifteen creditors, but no

evidence/explanation was forthcoming. The finding of fact so

recorded by the Officer is unexceptionable. The respondent thus

contends that the finding relating to the cash credits, does not

give rise to any substantial question of law.

10. Before we proceed to analyze the rival submissions, we need

to advert to I.A. No. 57442/2011 for permission to bring on

record subsequent events. By this application, the

appellant/assessee has placed on record an order passed by the

CIT(A) dated 13.1.2011, which considered the challenge to the

order passed by the Income­Tax Officer under Section 271(1)(c) (of Income Tax Act, 1961)

dated 17.11.2006 qua the appellant/assessee for the self­same

assessment year 1998­1999. The Income­Tax Officer had passed

the said order as a consequence of the conclusion reached in the

assessment order which had by then become final upto the stage

of ITAT vide order dated 27.4.2006 ­ to the effect that the stated

purchases by the appellant/assessee from unregistered dealers

were bogus entries effected by the appellant/assessee.

Resultantly, the penalty proceedings under Section 271 (of Income Tax Act, 1961) were

initiated by the Officer. That order, however, has now been set

aside by the appellate authority [CIT(A)] in the appeal preferred by

the appellant/assessee, vide order dated 13.1.2011 with a finding

that the appellant/assessee had not made any concealment of

income or furnished inaccurate particulars of income for the

concerned assessment year. As a consequence of the decision of

the appellate authority, even criminal proceedings initiated

against the appellant/assessee have been dropped/terminated

and the appellant/assessee stands acquitted of the charges

under Section 276(C)(D)(1)(2) of the Income Tax Act, 1961 vide judgment and

order dated 6.6.2011 passed by the Court of Additional Chief City

Magistrate (Economic Offence), Jodhpur City in proceedings No.

262/2005. Reverting back to the decision of the appellate

authority [CIT(A)], vide order dated 13.1.2011, it considered the

explanation offered by the appellant/assessee in the penalty

proceedings concerning assessment year 1998­1999 and went on

to observe thus: ­

“17. During the course of appellate proceedings, the

appellant filed an application under Rule 46A (of Income Tax Rules, 1962) vide letter

dated 16.10.2008 and the same was sent to the ITO, Ward­,

Makrana vide this office letter dated 28.1.2009 and

1.12.2010 to submit remand report after examination of

additional evidences. Along with the application under Rules

46A, the appellant filed affidavits from 13 creditors, sales

Tax Order for the Financial Year 97­98 showing purchases

from unregistered dealer to the tune of Rs.2,28,900/­, cash

vouchers duly signed on the revenue stamp for receipt of

payment by the unregistered dealers and copy of Rasan

Card/Voter Identity Card to show identity of the

unregistered dealer. The Assessing Officer recorded

statements of 12 unregistered dealers out of 13. In the report

dated 22.12.2010, he mentioned that statements of above 12

persons were recorded on 15/16.12.2010 and in respect of

identify, the unregistered filed photo copies of their Voter

Identity Cards and all of them have admitted that they

have sold marble on credit basis to Sh. Bashir Ahmed

Sisodia, the appellant, during the Financial Year 97­98

and received payments after two or three years. However,

he observed that none of them have produced any evidence

in support of their statement since all are petty unregistered

dealers of marble and doing small business and therefore, no

books of account were maintained. Some of them have stated

that they were maintaining small dairies in the relevant

period of time but they could not preserve old dairies. Some

of them have stated that they have put their signature on the

vouchers on the date of transactions. It is therefore,

observed that the Assessing Officer has neither doubted

their identity nor any adverse comments in respect of

purchase of marble slabs in the Financial Year relevant

at AY98­-99 has given in the remand report.

19. In respect of addition of Rs.2,26,000/­, it would be

pertinent to note here that there is no denial of

purchase of marble slabs worth Rs.4,78,900/­ and sale of

goods worth Rs.3,57,463/­ and disclose of closing stock

of Rs.2,92,490/­ as disclosed in the trading account for

the year ended on 31.3.98.

Without purchases of marbles, there could not have been

sale and disclosure of closing stock in the trading account

and it suggests that the appellant must have purchased

marble slabs from unregistered dealers.

The explanation given by the appellant in respect of

purchases from the unregistered dealer and their

genuineness are substantiated by filing of affidavits,

producing before the Assessing Officer in the course of

remand report and the Assessing Officer did not find any

objectionable in respect identity of the unregistered

dealers and claim made for sale of marble slabs to the

appellant in the Financial Year relevant to AY98-­99.

Thus, there was no justification not to accept the purchase

made from unregistered dealers. If such an addition is made,

it would give unreasonable rate of profit. The vouchers in

respect of purchases made from unregistered dealers were

produced by the appellant.”

(emphasis supplied)

Finally, in paragraph 20, the appellate authority observed thus: ­

‘‘20. Under the above facts and circumstances, I am of the

view that there was no either concealment of income or

furnishing any inaccurate particulars of income and

accordingly, the penalty order dated 17.11.2006 passed by

the Assessing Officer is cancelled. The grounds of appeal

allowed.’’

Notably, the appellant/assessee has asserted in paragraph 2 of

the application (I.A. No. 57442/2011) that consequent to the

order passed by the appellate authority dated 13.1.2011, the

Department has refunded penalty amount of Rs.98,153/­

(Rupees ninety­ eight thousand one hundred fifty­ three only)

along with interest to the appellant/assessee. That means the

Department has allowed the said order dated 13.1.2011 to

become final.

11. We have heard learned senior counsel, Dr. Manish Singhvi

and Mr. K. Radha krishnan appearing for the appellant and

respondent, respectively.

12. Before dissecting the rival submissions, we deem it apposite

to reproduce the relevant provisions as applicable at the relevant

time for assessment year 1998-­1999 as below;

“Assessment

143. (1) (a) Where a return has been made under section

139, or in response to a notice under sub­section (1) of

section 142 (of Income Tax Act, 1961),­

(i) if any tax or interest is found due on the basis of

such return, after adjustment of any tax

deducted at source, any advance tax paid and

any amount paid otherwise by way of tax or

interest, then, without prejudice to the

provisions of sub-­section (2), an intimation shall

be sent to the assessee specifying the sum so

payable, and such intimation shall be deemed to

be a notice of demand issued under section 156 (of Income Tax Act, 1961)

and all the provisions of this Act shall apply

accordingly; and

(ii) if any refund is due on the basis of such return,

it shall be granted to the assessee:

Provided that in computing the tax or interest payable by, or

refundable to, the assessee, the following adjustments shall

be made in the income or loss declared in the return,

namely:­

(i) any arithmetical errors in the return, accounts

or documents accompanying it shall be rectified;

(ii) any loss carried forward, deduction, allowance

or relief, which, on the basis of the information

available in such return, accounts or

documents, is prima facie admissible but which

is not claimed in the return, shall be allowed;

(iii) any loss carried forward, deduction, allowance

or relief claimed in the return, which, on the

basis of the information available in such return,

accounts or documents, is prima facie

inadmissible, shall be disallowed:

Provided further that where adjustments are made under

the first proviso, an intimation shall be sent to the assessee,

notwithstanding that no tax or interest is found due from

him after making the said adjustments:

Provided also that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of two

years from the end of the assessment year in which the

income was first assessable.

(b) Where as a result of an order made under sub­section

(3) of this section or section 144 (of Income Tax Act, 1961) or section 147 (of Income Tax Act, 1961) or section

154 or section 155 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or section

260 or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), or any

order of settlement made under sub­section (4) of section

245D relating to any earlier assessment year and passed

subsequent to the filing of the return referred to in clause

(a), there is any variation in the carry forward loss,

deduction, allowance or relief claimed in the return, and as a

result of which,­

(i) if any tax or interest is found due, an intimation

shall be sent to the assessee specifying the sum

so payable, and such intimation shall be deemed

to be a notice of demand issued under section

156 and all the provisions of this Act shall apply

accordingly, and

(ii) if any refund is due, it shall be granted to the

assessee:

Provided that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of four

years from the end of the financial year in which any such

order was passed.

(c) Where the assessee is a member of an association of

persons or body of individuals and as a result of the

adjustments made under the first proviso to clause (a) of

sub­section (1) in the income or loss declared in the return

made by the association or body, as the case may be, or as a

result of an order made under sub­section (3) of this section

or section 144 (of Income Tax Act, 1961) or section 147 (of Income Tax Act, 1961) or section 154 (of Income Tax Act, 1961) or section 155 (of Income Tax Act, 1961)

or sub­section (1) or sub­section (2) or sub­section (3) or

sub­section (5) of section 185 (of Income Tax Act, 1961) or sub­section (1) or sub-

section (2) of section 186 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or

section 260 (of Income Tax Act, 1961) or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), or

any order of settlement made under sub­section (4) of

section 245D (of Income Tax Act, 1961), passed subsequent to the filing of the return

referred to in clause (a), there is any variation in his share in

the income or loss of the association or body, as the case

may be, or in the manner of inclusion of his share in the

returned income, then,­

(i) if any tax or interest is found due, an intimation

shall be sent to the assessee specifying the sum

so payable, and such intimation shall be deemed

to be a notice of demand issued under section

156 and all the provisions of this Act shall apply

accordingly, and

(ii) if any refund is due, it shall be granted to the

assessee:

Provided that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of four

years from the end of the financial year in which any such

adjustments were made or any such order was passed.

(1A) (a) Where as a result of the adjustments made

under the first proviso to clause (a) of sub­section (1),­

(i) the income declared by any person in the return

is increased; or

(ii) the loss declared by such person in the return is

reduced or is converted into income, the Assessing Officer shall,­

(A) in a case where the increase in income under

sub­clause (i) of this clause has increased the

total income of such person, further increase the

amount of tax payable under sub­section (1) by

an additional income­tax calculated at the rate

of twenty per cent on the difference between the

tax on the total income so increased and the tax

that would have been chargeable had such total

income been reduced by the amount of

adjustments and specify the additional income-

tax in the intimation to be sent under sub-

clause (i) of clause (a) of sub­section (1);

(B) in a case where the loss so declared is reduced

under sub­clause (ii) of this clause or the

aforesaid adjustments have the effect of

converting that loss into income, calculate a

sum (hereinafter referred to as additional

income­tax) equal to twenty per cent of the tax

that would have been chargeable on the amount

of the adjustments as if it had been the total

income of such person and specify the additional

income­tax so calculated in the intimation to be

sent under sub­clause (i) of clause (a) of sub-

section (1);

(C) where any refund is due under sub­section (1),

reduce the amount of such refund by an amount

equivalent to the additional income­tax

calculated under sub­clause (A) or sub­clause

(B), as the case may be.

(b) Where as a result of an order under sub­section (3) of

this section or section 154 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or

section 260 (of Income Tax Act, 1961) or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), the

amount on which additional income­tax is payable under

clause (a) has been increased or reduced, as the case may

be, the additional income­tax shall be increased or reduced

accordingly, and,­

(i) in a case where the additional income­ tax is

increased, the Assessing Officer shall serve on

the assessee a notice of demand under section 156 (of Income Tax Act, 1961);

(ii) in a case where the additional income­ tax is

reduced, the excess amount paid, if any, shall be

refunded.

(1B) Where an assessee furnishes a revised return under

sub­-section (5) of section 139 (of Income Tax Act, 1961) after the issue of an

intimation, or the grant of refund, if any, under sub­section

(1) of this section, the provisions of sub­sections (1) and (1A)

of this section shall apply in relation to such revised return

and­

(i) the intimation already sent for any income­ tax,

additional income ­tax or interest shall be

amended on the basis of the said revised return

and where any amount payable by way of

income ­tax, additional income­ tax or interest

specified in the said intimation has already been

paid by the assessee then, if any such

amendment has the effect of­

(a) enhancing the amount already paid, the

intimation amended under this clause

shall be sent to the assessee specifying the

excess amount payable by him and such

intimation shall be deemed to be a notice

of demand issued under section 156 (of Income Tax Act, 1961) and

all the provisions of this Act shall apply

accordingly;

(b) reducing the amount already paid, the

excess amount paid shall be refunded to

the assessee;

(ii) the amount of the refund already granted shall

be enhanced or reduced on the basis of the said

revised return and where the amount of refund

already granted is­

(a) enhanced, only the excess amount of

refund due to the assessee shall be paid to him;

(b) reduced, the excess amount so refunded

shall be deemed to be the tax payable by

the assessee and an intimation shall be

sent to the assessee specifying the amount

so payable, and such intimation shall be

deemed to be a notice of demand issued

under section 156 (of Income Tax Act, 1961) and all the provisions of

this Act shall apply accordingly:

appellant filed an application under Rule 46A (of Income Tax Rules, 1962) vide letter

dated 16.10.2008 and the same was sent to the ITO, Ward­,

Makrana vide this office letter dated 28.1.2009 and

1.12.2010 to submit remand report after examination of

additional evidences. Along with the application under Rules

46A, the appellant filed affidavits from 13 creditors, sales

Tax Order for the Financial Year 97­98 showing purchases

from unregistered dealer to the tune of Rs.2,28,900/­, cash

vouchers duly signed on the revenue stamp for receipt of

payment by the unregistered dealers and copy of Rasan

Card/Voter Identity Card to show identity of the

unregistered dealer. The Assessing Officer recorded

statements of 12 unregistered dealers out of 13. In the report

dated 22.12.2010, he mentioned that statements of above 12

persons were recorded on 15/16.12.2010 and in respect of

identify, the unregistered filed photo copies of their Voter

Identity Cards and all of them have admitted that they

have sold marble on credit basis to Sh. Bashir Ahmed

Sisodia, the appellant, during the Financial Year 97­98

and received payments after two or three years. However,

he observed that none of them have produced any evidence

in support of their statement since all are petty unregistered

dealers of marble and doing small business and therefore, no

books of account were maintained. Some of them have stated

that they were maintaining small dairies in the relevant

period of time but they could not preserve old dairies. Some

of them have stated that they have put their signature on the

vouchers on the date of transactions. It is therefore,

observed that the Assessing Officer has neither doubted

their identity nor any adverse comments in respect of

purchase of marble slabs in the Financial Year relevant

at AY98­-99 has given in the remand report.

19. In respect of addition of Rs.2,26,000/­, it would be

pertinent to note here that there is no denial of

purchase of marble slabs worth Rs.4,78,900/­ and sale of

goods worth Rs.3,57,463/­ and disclose of closing stock

of Rs.2,92,490/­ as disclosed in the trading account for

the year ended on 31.3.98.

Without purchases of marbles, there could not have been

sale and disclosure of closing stock in the trading account

and it suggests that the appellant must have purchased

marble slabs from unregistered dealers.

The explanation given by the appellant in respect of

purchases from the unregistered dealer and their

genuineness are substantiated by filing of affidavits,

producing before the Assessing Officer in the course of

remand report and the Assessing Officer did not find any

objectionable in respect identity of the unregistered

dealers and claim made for sale of marble slabs to the

appellant in the Financial Year relevant to AY98-­99.

Thus, there was no justification not to accept the purchase

made from unregistered dealers. If such an addition is made,

it would give unreasonable rate of profit. The vouchers in

respect of purchases made from unregistered dealers were

produced by the appellant.”

(emphasis supplied)

Finally, in paragraph 20, the appellate authority observed thus: ­

‘‘20. Under the above facts and circumstances, I am of the

view that there was no either concealment of income or

furnishing any inaccurate particulars of income and

accordingly, the penalty order dated 17.11.2006 passed by

the Assessing Officer is cancelled. The grounds of appeal

allowed.’’

Notably, the appellant/assessee has asserted in paragraph 2 of

the application (I.A. No. 57442/2011) that consequent to the

order passed by the appellate authority dated 13.1.2011, the

Department has refunded penalty amount of Rs.98,153/­

(Rupees ninety­ eight thousand one hundred fifty­ three only)

along with interest to the appellant/assessee. That means the

Department has allowed the said order dated 13.1.2011 to

become final.

11. We have heard learned senior counsel, Dr. Manish Singhvi

and Mr. K. Radha krishnan appearing for the appellant and

respondent, respectively.

12. Before dissecting the rival submissions, we deem it apposite

to reproduce the relevant provisions as applicable at the relevant

time for assessment year 1998-­1999 as below;

“Assessment

143. (1) (a) Where a return has been made under section

139, or in response to a notice under sub­section (1) of

section 142 (of Income Tax Act, 1961),­

(i) if any tax or interest is found due on the basis of

such return, after adjustment of any tax

deducted at source, any advance tax paid and

any amount paid otherwise by way of tax or

interest, then, without prejudice to the

provisions of sub-­section (2), an intimation shall

be sent to the assessee specifying the sum so

payable, and such intimation shall be deemed to

be a notice of demand issued under section 156 (of Income Tax Act, 1961)

and all the provisions of this Act shall apply

accordingly; and

(ii) if any refund is due on the basis of such return,

it shall be granted to the assessee:

Provided that in computing the tax or interest payable by, or

refundable to, the assessee, the following adjustments shall

be made in the income or loss declared in the return,

namely:­

(i) any arithmetical errors in the return, accounts

or documents accompanying it shall be rectified;

(ii) any loss carried forward, deduction, allowance

or relief, which, on the basis of the information

available in such return, accounts or

documents, is prima facie admissible but which

is not claimed in the return, shall be allowed;

(iii) any loss carried forward, deduction, allowance

or relief claimed in the return, which, on the

basis of the information available in such return,

accounts or documents, is prima facie

inadmissible, shall be disallowed:

Provided further that where adjustments are made under

the first proviso, an intimation shall be sent to the assessee,

notwithstanding that no tax or interest is found due from

him after making the said adjustments:

Provided also that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of two

years from the end of the assessment year in which the

income was first assessable.

(b) Where as a result of an order made under sub­section

(3) of this section or section 144 (of Income Tax Act, 1961) or section 147 (of Income Tax Act, 1961) or section

154 or section 155 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or section

260 or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), or any

order of settlement made under sub­section (4) of section

245D relating to any earlier assessment year and passed

subsequent to the filing of the return referred to in clause

(a), there is any variation in the carry forward loss,

deduction, allowance or relief claimed in the return, and as a

result of which,­

(i) if any tax or interest is found due, an intimation

shall be sent to the assessee specifying the sum

so payable, and such intimation shall be deemed

to be a notice of demand issued under section

156 and all the provisions of this Act shall apply

accordingly, and

(ii) if any refund is due, it shall be granted to the

assessee:

Provided that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of four

years from the end of the financial year in which any such

order was passed.

(c) Where the assessee is a member of an association of

persons or body of individuals and as a result of the

adjustments made under the first proviso to clause (a) of

sub­section (1) in the income or loss declared in the return

made by the association or body, as the case may be, or as a

result of an order made under sub­section (3) of this section

or section 144 (of Income Tax Act, 1961) or section 147 (of Income Tax Act, 1961) or section 154 (of Income Tax Act, 1961) or section 155 (of Income Tax Act, 1961)

or sub­section (1) or sub­section (2) or sub­section (3) or

sub­section (5) of section 185 (of Income Tax Act, 1961) or sub­section (1) or sub-

section (2) of section 186 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or

section 260 (of Income Tax Act, 1961) or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), or

any order of settlement made under sub­section (4) of

section 245D (of Income Tax Act, 1961), passed subsequent to the filing of the return

referred to in clause (a), there is any variation in his share in

the income or loss of the association or body, as the case

may be, or in the manner of inclusion of his share in the

returned income, then,­

(i) if any tax or interest is found due, an intimation

shall be sent to the assessee specifying the sum

so payable, and such intimation shall be deemed

to be a notice of demand issued under section

156 and all the provisions of this Act shall apply

accordingly, and

(ii) if any refund is due, it shall be granted to the

assessee:

Provided that an intimation for any tax or interest due

under this clause shall not be sent after the expiry of four

years from the end of the financial year in which any such

adjustments were made or any such order was passed.

(1A) (a) Where as a result of the adjustments made

under the first proviso to clause (a) of sub­section (1),­

(i) the income declared by any person in the return

is increased; or

(ii) the loss declared by such person in the return is

reduced or is converted into income, the Assessing Officer shall,­

(A) in a case where the increase in income under

sub­clause (i) of this clause has increased the

total income of such person, further increase the

amount of tax payable under sub­section (1) by

an additional income­tax calculated at the rate

of twenty per cent on the difference between the

tax on the total income so increased and the tax

that would have been chargeable had such total

income been reduced by the amount of

adjustments and specify the additional income-

tax in the intimation to be sent under sub-

clause (i) of clause (a) of sub­section (1);

(B) in a case where the loss so declared is reduced

under sub­clause (ii) of this clause or the

aforesaid adjustments have the effect of

converting that loss into income, calculate a

sum (hereinafter referred to as additional

income­tax) equal to twenty per cent of the tax

that would have been chargeable on the amount

of the adjustments as if it had been the total

income of such person and specify the additional

income­tax so calculated in the intimation to be

sent under sub­clause (i) of clause (a) of sub-

section (1);

(C) where any refund is due under sub­section (1),

reduce the amount of such refund by an amount

equivalent to the additional income­tax

calculated under sub­clause (A) or sub­clause

(B), as the case may be.

(b) Where as a result of an order under sub­section (3) of

this section or section 154 (of Income Tax Act, 1961) or section 250 (of Income Tax Act, 1961) or section 254 (of Income Tax Act, 1961) or

section 260 (of Income Tax Act, 1961) or section 262 (of Income Tax Act, 1961) or section 263 (of Income Tax Act, 1961) or section 264 (of Income Tax Act, 1961), the

amount on which additional income­tax is payable under

clause (a) has been increased or reduced, as the case may

be, the additional income­tax shall be increased or reduced

accordingly, and,­

(i) in a case where the additional income­ tax is

increased, the Assessing Officer shall serve on

the assessee a notice of demand under section 156 (of Income Tax Act, 1961);

(ii) in a case where the additional income­ tax is

reduced, the excess amount paid, if any, shall be

refunded.

(1B) Where an assessee furnishes a revised return under

sub­-section (5) of section 139 (of Income Tax Act, 1961) after the issue of an

intimation, or the grant of refund, if any, under sub­section

(1) of this section, the provisions of sub­sections (1) and (1A)

of this section shall apply in relation to such revised return

and­

(i) the intimation already sent for any income­ tax,

additional income ­tax or interest shall be

amended on the basis of the said revised return

and where any amount payable by way of

income ­tax, additional income­ tax or interest

specified in the said intimation has already been

paid by the assessee then, if any such

amendment has the effect of­

(a) enhancing the amount already paid, the

intimation amended under this clause

shall be sent to the assessee specifying the

excess amount payable by him and such

intimation shall be deemed to be a notice

of demand issued under section 156 (of Income Tax Act, 1961) and

all the provisions of this Act shall apply

accordingly;

(b) reducing the amount already paid, the

excess amount paid shall be refunded to

the assessee;

(ii) the amount of the refund already granted shall

be enhanced or reduced on the basis of the said

revised return and where the amount of refund

already granted is­

(a) enhanced, only the excess amount of

refund due to the assessee shall be paid to him;

(b) reduced, the excess amount so refunded

shall be deemed to be the tax payable by

the assessee and an intimation shall be

sent to the assessee specifying the amount

so payable, and such intimation shall be

deemed to be a notice of demand issued

under section 156 (of Income Tax Act, 1961) and all the provisions of

this Act shall apply accordingly:

Provided that an assessee, who has furnished a revised

return under sub­section (5) of section 139 (of Income Tax Act, 1961) after the service

upon him of the intimation under sub­section (1) of this

section, shall be liable to pay additional income­tax in

relation to the adjustments made under the first proviso to

clause (a) of sub­section (1) and specified in the said

intimation, whether or not he has made the said

adjustments in the revised return.

(2) Where a return has been made under section 139 (of Income Tax Act, 1961), or

in response to a notice under sub­ section (1) of section 142 (of Income Tax Act, 1961),

the Assessing Officer shall, if he considers it necessary or

expedient to ensure that the assessee has not understated

the income or has not computed excessive loss or has not

under­ paid the tax in any manner, serve on the assessee a

notice requiring him, on a date to be specified therein, either

to attend his office or to produce, or cause to be produced

there, any evidence on which the assessee may rely in

support of the return:

Provided that no notice under this sub­section shall be

served on the assessee after the expiry of twelve months

from the end of the month in which the return is furnished.

(3) On the day specified in the notice issued under sub-

section (2), or as soon afterwards as may be, after hearing

such evidence as the assessee may produce and such other

evidence as the Assessing Officer may require on specified

points, and after taking into account all relevant material

which he has gathered, the Assessing Officer shall, by an

order in writing, make an assessment of the total income or

loss of the assessee, and determine the sum payable by him

on the basis of such assessment.

(4) Where a regular assessment under sub­ section (3) of

this section or section 144 (of Income Tax Act, 1961) is made,­

(a) any tax or interest paid by the assessee under

sub­ section (1) shall be deemed to have been

paid towards such regular assessment;

(b) if no refund is due on regular assessment or the

amount refunded under sub­ section (1) exceeds

the amount refundable on regular assessment,

the whole or the excess amount so refunded

shall be deemed to be tax payable by the

assessee and the provisions of this Act shall

apply accordingly.

(5) The provisions of this section as they stood

immediately before their amendment by the Direct Tax Laws

(Amendment) Act, 1987 (4 of 1988), shall apply to and in

relation to any assessment for the assessment year

commencing on the 1st day of April, 1988, or any earlier

assessment year and references in this section to the other

provisions of this Act shall be construed as references to

those provisions as for the time being in force and applicable

to the relevant assessment year.

Explanation.­ An intimation sent to the assessee under sub-

section (1) or sub­ section (1B) shall be deemed to be an

order for the purposes of sections 246 and 264.

Best judgment assessment.

144. (1) If any person—

(a) fails to make the return required under sub-

section (1) of section 139 (of Income Tax Act, 1961) and has not made a

return or a revised return under sub­section (4)

or sub­section (5) of that section, or

(b) fails to comply with all the terms of a notice

issued under sub­section (1) of section 142 (of Income Tax Act, 1961) or

fails to comply with a direction issued under

sub­section (2A) of that section, or

(c) having made a return, fails to comply with all

the terms of a notice issued under sub-section (2) of section 143 (of Income Tax Act, 1961), the Assessing Officer, after taking into account all

relevant material which the Assessing Officer has

gathered, shall, after giving the assessee an opportunity

of being heard, make the assessment of the total income

or loss to the best of his judgment and determine the

sum payable by the assessee on the basis of such

assessment:

Provided that such opportunity shall be given by the

Assessing Officer by serving a notice calling upon the

assessee to show cause, on a date and time to be specified in

the notice, why the assessment should not be completed to

the best of his judgment:

Provided further that it shall not be necessary to give such

opportunity in a case where a notice under sub­section (1) of

section 142 (of Income Tax Act, 1961) has been issued prior to the making of an

assessment under this section.

(2) The provisions of this section as they stood immediately

before their amendment by the Direct Tax Laws

(Amendment) Act, 1987 (4 of 1988), shall apply to and in

relation to any assessment for the assessment year

commencing on the 1st day of April, 1988, or any earlier

assessment year and references in this section to the other

provisions of this Act shall be construed as references to

those provisions as for the time being in force and applicable

to the relevant assessment year.

Method of accounting.

145. (1) Income chargeable under the head "Profits and

gains of business or profession" or "Income from other

sources" shall, subject to the provisions of sub­section (2), be

computed in accordance with either cash or mercantile

system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the Official Gazette

from time to time accounting standards to be followed by any

class of assesses or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the

correctness or completeness of the accounts of the

assessee, or where the method of accounting provided in

sub­section (1) or accounting standards as notified under

sub­section (2), have not been regularly followed by the

assessee, the Assessing Officer may make an assessment

in the manner provided in section 144 (of Income Tax Act, 1961).”

(emphasis supplied)

13. Reverting to the findings and conclusions recorded by the

Officer and which commended to the appellate authority, as well

as, the High Court, it must follow that the appellant/assessee

despite being given sufficient opportunity, failed to prove the

correctness and genuineness of his claim in respect of purchases

of marbles from unregistered dealers to the extent of

Rs.2,26,000/­ (Rupees two lakhs twenty­six thousand only).

Resultantly, the said transactions were assumed as bogus entries

(standing to the credit of named dealers who were non­existent

creditors of the assessee).

14. However, it has now come on record that the

appellant/assessee in penalty proceedings offered explanation

and caused to produce affidavits and record statements of the

concerned unregistered dealers and establish their credentials.

That explanation has been accepted by the CIT(A) vide order

dated 13.1.2011. In paragraph 17 of the said decision

reproduced hitherto, it has been noted that the Officer recorded

statements of 12 unregistered dealers out of 13 and their identity

was also duly established. After analysing the evidence so

produced by the appellant/assessee, the appellate authority

[(CIT(A)] noted that the Officer had neither doubted the identity of

those dealers nor any adverse comments were offered in reference

to their version regarding sale of marble slabs by them to the

appellant/assessee in the financial year relevant to assessment

year 1998­1999 and receipt of payments after two to three years.

Further, there was no denial of purchase of marbles worth

Rs.4,78,900/­ (Rupees four lakhs seventy­eight thousand nine

hundred only) by the assessee and sale thereof worth

Rs.3,57,463/­ (Rupees three lakhs fifty­seven thousand four

hundred sixty three only) with closing stock of Rs.2,92,490/­

(Rupees two lakhs ninety two thousand four hundred ninety

only), as disclosed in the trading account for the year ended on

31.3.1998. The appellate authority thus found that without

purchases of marbles, there could be no sale and disclosure of

closing stock in the trading account. In other words, the

materials on record would clearly suggest that the concerned

unregistered dealers had sold marble slabs on credit to the

appellant/assessee, as claimed. As a consequence of this finding,

the appellate authority concluded that there was neither any

concealment of income nor furnishing of inaccurate particulars of

income by the assessee. We are conscious of the fact that these

observations are made by the competent forum (appellate

authority) in penalty proceedings under Section 271 (of Income Tax Act, 1961)

Act in favour of the assessee. However, what needs to be noted is

that the stated penalty proceedings were the outcome of the

assessment order in question concerning assessment year 1998­

1999. Indeed, at the time of assessment, the appellant/assessee

had failed to produce any explanation or evidence in support of

the entries regarding purchases made from unregistered dealers.

In the penalty proceedings, however, the appellant/assessee

produced affidavits of 13 unregistered dealers out of whom 12

were examined by the Officer. The Officer recorded their

statements and did not find any infirmity therein including about

their credentials. The dealers stood by the assertion made by the

appellant/assessee about the purchases on credit from them; and

which explanation has been accepted by the appellate authority

in paragraphs 17 and 19 of the order dated 13.1.2011.

15. To put it differently, the factual basis on which the Officer

formed his opinion in the assessment order dated 30.11.2000 (for

assessment year 1998­1999), in regard to addition of

Rs.2,26,000/­ (Rupees two lakhs twenty six thousand only),

stands dispelled by the affidavits and statements of the

concerned unregistered dealers in penalty proceedings. That

evidence fully supports the claim of the appellant/assessee. The

appellate authority vide order dated 13.1.2011, had not only

accepted the explanation offered by the appellant/assessee but

also recorded a clear finding of fact that there was no

concealment of income or furnishing of any inaccurate

particulars of income by the appellant/assessee for the

assessment year 1998­1999. That now being the indisputable

position, it must necessarily follow that the addition of amount of

Rs.2,26,000/­ (Rupees two lakhs twenty­six thousand only)

cannot be justified, much less, maintained.

16. Accordingly, this appeal ought to succeed on this count

alone and it would be unnecessary for us to dilate on other

questions/contentions urged by the parties as referred to in the

earlier part of this judgment.

17. Accordingly, this appeal is allowed. The addition of

Rs.2,26,000/­ (Rupees two lakhs twenty­six thousand only) by

the Officer under Section 68 of the Income Tax Act, 1961, towards cash credit

amount shown against the names of concerned unregistered

dealers for the assessment year 1998­1999, is hereby set aside.

The rest of the assessment order dated 30.11.2000 as modified by

the CIT(A) vide order dated 9.1.2003, shall remain undisturbed.

There shall be no order as to costs. All pending interlocutory

applications are also disposed of.

(A.M. Khanwilkar)

(Dinesh Maheshwari)

New Delhi;

April 24, 2020.