Whether when assessee fails to explain huge increase in sundry creditors and unsecured loans, additions made by AO in this regard are legally sustainable - YES: HC

THE issues before the Bench is - Whether when assessee fails to explain huge increase in sundry creditors and unsecured loans, additions made by AO in this regard are legally sustainable. And the answer goes against the assessee.

Facts of the case

The assessee filed its return for the Assessment Year 2000-01 declaring loss. The case of the

assessee was picked up for scrutiny and a notice under Section 143(2) was dispatched by the Income Tax Authorities on 30.10.2001. The Assessing Officer, thereafter, sent further notices for the purposes of the scrutiny assessment. In response to the said notices, N, one of the then partners of the assessee firm, appeared before the Assessing Officer but showed his inability to produce any accounts or other details as sought by the Assessing Officer. He stated that there were certain disputes between the partners of the assessee firm and a suit had been instituted in this court wherein a Local Commissioner had been appointed to inspect and sign the books of accounts relating to the businesses of the partners including the assessee firm. The books and other accounts were stated to be in the custody of the Local Commissioner appointed by the Court. The Assessing Officer passed an assessment order under Section 144 on best judgment basis. The Assessing Officer observed that while the opening stock of Walnut Kernels was valued at Rs.173.81 per kg., the closing stock had been valued at Rs.44.53 per kg. The Assessing Officer also noticed that there was a shortage of 23,817.516 kgs of Kernels. During the previous year relevant to the Assessment Year 2000-2001, there was an increase in sundry creditors and unsecured loans. There was addition in the partners’ capital accounts. The Assessing Officer disallowed the losses claimed and made additions under Section 68 with regard to the addition in the capital accounts of partners as well as on account of increase in unsecured loans and sundry creditors. In addition, the Assessing Officer also initiated penalty proceedings under Section 271(1)(c), 272A(1)(c), 271D and 271E of the Act.

The disputes between the partners of the assessee were, apparently, settled and a Memorandum of Understanding and accordingly, a compromise decree was passed by the Court.

Thereafter, the assessee preferred a revision petition under Section 264 impugning the assessment order which was rejected by the CIT as being belated. Aggrieved by the same, the assessee preferred a writ petition which was allowed by this court and the matter was remanded to CIT to decide the same on merits in accordance with law and after affording the assessee an opportunity of being heard.

On remand, the CIT passed an order again rejecting the revision petition preferred by the assessee. Aggrieved by the same, the assessee preferred another writ petition alleging that the CIT had failed to consider the assessee's contention that no notice under Section 143(2) had been served on the assessee within the period prescribed and, consequently, the assessment proceedings were liable to be set aside. The court was of the view that the CIT had not examined the assessee’s contention with regard to non-service of notice and remanded the matter to CIT to examine the contentions of the assessee and decide the revision petition afresh.

CIT held that as per the statement of assessee, notice dispatched on 30.10.2001 had been received by the assessee and same had not been objected to by the assessee before the Assessing Officer. CIT also noted that there were several other notices on record which had been issued to the assessee through speed post at the same address subsequent to 31.10.2001. While some of them had been served, the others had been returned on the ground that the assessee had refused to accept the same. It was noted that there was no evidence that the notice dispatched on 30.10.2001 had been returned. Thus, CIT returned finding that the notice had been duly served on the assessee.

Assessee contended that assessee had filed its return on 31.10.2000 the last date for serving the notice would be 31.10.2001. It was asserted that the assessee had not received any notice within the specified period and, therefore, the assessment proceedings were without jurisdiction. Assessee argued that Section 292BB had been introduced by Finance Act, 2008 w.e.f. 01.04.2008 by virtue of which any notice under any provision of this Act would be deemed to have been served on an assessee who has appeared in the proceedings without raising any objection before the completion of the assessment. It was submitted that the period in question in the present matter was prior to 01.04.2008 and in the absence of that provision it could not be deemed that the assessee was precluded from raising the objection that it had not received the notice as prescribed. It was contended that the address printed on the acknowledgement slip indicated that the notice was sent to an address in New Delhi whereas the office of the assessee firm was in Delhi. It was also contended that since the Assessing Officer had rejected the books of accounts and thereby disallowed the losses, the Assessing Officer could not make any additions on account of increase in the sundry creditors and unsecured loans as reflected in those books of accounts as the name had already been rejected.

Having heard the parties, the Court held that,

++ a notice under Section 143(2) of the Act was dispatched by the Income Tax Authorities on 30.10.2001; The proof of dispatch by speed post has been produced. Undisputedly, subsequent notices dispatched at the same address had been received by the assessee was represented at hearings before the Assessing Officer, information of which were communicated through those notices. It must, therefore, be presumed that the notice dispatched on 30.10.2001 was also correctly addressed. The fact that the speed post receipts mentioned New Delhi, in our view, would not be determinative of question whether the notice in question was correctly addressed. In this view, it must be presumed that the assessee had duly received the notice in question;

++ the assessee had not disputed the service of notice at the relevant stage. The Assessing Officer, on 27.02.2002, issued another notice including a questionnaire. Apparently, the said notice also referred to the issuance of notice on 30.10.2001 and noted that the same had been duly received by the assessee on 31.10.2001. Thereafter, further notices were served by the Assessing Officer which were duly received or returned on account of the assessee refusing to accept the same. On 27.12.2002, the Assessing Officer issued yet another notice/questionnaire which also referred to the earlier notices under Section 143(2) of the Act. Concededly, this notice/questionnaire was received by the assessee who sought an adjournment of the date of hearing scheduled under the said notice. It is stated that the assessee sought adjournments on one ground or the other. During the proceedings before the Assessing Officer, the assessee did not dispute the contents of any of the letters/questionnaire, although, the representative of the assessee did enter appearance. The fact that the notice dispatched on 30.10.2001 had been duly received by the assessee on 31.10.2001 was not disputed or controverted by the assessee during the assessment proceedings;

++ the dispute with respect to non-receipt of notice was raised for first time in the revision petition filed on 16.01.2007; more than three years after the assessment order, dated 28.02.2003, had passed. At that stage, obtaining any evidence from the postal authorities was not possible. The delay on the part of the assessee in raising the dispute cannot be permitted to prejudice to the revenue;

++ we find no infirmity in the finding of the CIT as it is not disputed that the subsequent questionnaire/notice sent by the Assessing Officer to the assessee which mentioned that the notice under Section 143(2) had been duly received by the assessee on 31.10.2001 was not controverted during the assessment proceedings. In our opinion, the assessee cannot be permitted to raise this plea at a subsequent stage;

++ there is distinction between precluding a person who has not raised the plea of non-receipt of notice during the assessment proceedings, from subsequently raising such plea, and a case where the assessee has not controverted a statement during the assessment proceedings that it had duly received the notice under Section 143(2) of the Act. In the latter case, where an assessee does not controvert an affirmative statement that it had duly received the notice on a particular date, the assessee would be precluded from controverting the same at a later stage and it would not be erroneous to hold that, as a matter of fact, the assessee had duly received the notice of the proceedings. Thus, in the present case, the conclusion of the CIT that the assessee had duly received the notice in question on 31.10.2001 cannot be faulted. Although, it is the Revenue’s view - as articulated in Circular No. 1 of 2009 dated 27.03.2009 - that Section 292BB of the Act would be applicable to all pending proceedings as on 01.04.2008. In view of our aforesaid opinion, it is not necessary to examine the correctness of this view;

++ a plain reading of the opening words of sub-section 2 of Section 282 indicates that the same only enables a notice to be addressed in the manner as specified in various clauses of Section 282(2); In terms of clause (a), a notice may be addressed in case of a firm to any member of the firm. This provision cannot be read to mean that a notice which is addressed in the name of the firm is invalid. On the contrary, the import of the Section 282(2)(a) is that a notice to a firm could also be addressed to any of its members;

++ insofar as the assessee’ contention that the best judgment assessment made by the Assessing Officer is arbitrary and unreasonable is concerned, it is relevant to note that the assessee had not produced the books of accounts or any other material as required by the Assessing Officer. It is not disputed that pursuant to the notice dated 27.12.2002, one N, who was admittedly a constituent partner in the assessee firm at the material time, had appeared before the Assessing Officer. He had explained that the books of accounts and other records of the company were under the control of a Court appointed Local Commissioner and had sought time to obtain the records. However, thereafter he neither produced the books of accounts nor appeared before the Assessing Officer. The only explanation given by the assessees for the non-production of books of accounts is that the same were not under their control but in control of a Local Commissioner appointed by this Court in a civil suit instituted on its original side. It was submitted that the possession of the premises in which the Books of Accounts and other material had been kept was taken over by Standard Chartered Bank and subsequently, handed over to the purchaser of the said property. The assessees have, thus, submitted that they were not in control of the Books of Accounts and records of the assessee firm. In our view, this contention cannot be accepted, because it was always open for the assessee and/or its partners to approach this Court and seek an inspection of the records even if the same were in possession of the Local Commissioner. There is nothing on record to indicate that any efforts were made to obtain either copies of Books of Accounts or other relevant records of the assessee. In absence of the material sought by the Assessing Officer, he had no alternative but to make a best judgment assessment;

++ one of the well accepted methods of making a best judgement assessment is to refer to the past years and estimate the income based on the operational results and trends of the preceding years. The assessees had produced a statement of comparison between the trading result and profit and loss during the period relevant to the Assessment Year 1999-2000 and 2000-01. The said statement indicates that there was no major variance in sales and purchases made during the years 1999-2000 & 2000-01.Whereas, the assessee made sales aggregating Rs.7,70,38,592/-in the previous year ending 31.03.1999, the sales made during the previous year ended 31.03.2000 (AY 2000-01) were to the tune of Rs.8,06,92,897/-. Similarly, the purchases made during the year ended 31.03.1999 aggregated Rs.6,18,74,488/- and the purchases made during the previous year ended 31.03.2000 added up to Rs.6,92,07,695/-. Whilst the assessee had made a gross profit of Rs.1,42,13,364/- (i.e. disclosed a gross profit margin of about 18.22%) for the Assessment year 1999-2000 (i.e. previous year 1998-1999), the gross loss for the period in question (Assessment Year 2000-2001) was Rs.2,42,62,900/-. This variance in profit was not in conformity with the profile of the final accounts of the preceding year;

++ it is apparent from the statement of comparison submitted by the assessee, that the Assessing Officer could not accept the losses in the year in question on the basis the financial results in the earlier years. The final accounts of the preceding year did not indicate that the assessee had written off any stock as having perished and thus it could not be assumed that such loss was normal for the business. However, the assessee had claimed a shortage of 28,817 kgs in the year in question and in addition, the assessee had also claimed that almost the entire opening stock of Walnut Kernels on 01.04.1999 had deteriorated. Such losses were clearly an aberration and in absence of sufficient material could not be accepted by the Assessing Officer in a best judgment assessment, especially where there was no material to substantiate the loss as declared in the returns and the statement of accounts furnished along with it. The Assessing Officer, therefore, rejected the loss as returned by the assessee and in our view, rightly so;

++ the Assessing Officer also made additions on account of increase in sundry creditors and unsecured loans. The assessee could easily obtain confirmation of outstanding balances from third parties, however, no confirmation was supplied to the Assessing Officer. The scale of operations of the assessee during the year was not materially different from that in the preceding year, and in the circumstances a significant increase in the sundry creditors and unsecured loans was clearly unexplained and in the circumstances the Assessing Officer added the same under Section 68 of the Act. The Assessing Officer also added the increase in the account of the partners. The assessee attempted to explain the same by stating that the additions were from the funds withdrawn by the partners. However, the individual accounts of the partners which could have substantiated such claim were, apparently, not produced before the Assessing Officer. Thus, the said explanation was also not accepted. We are unable to find any flaw in the approach of the Assessing Officer.