COMMISSIONER OF INCOME TAX vs. M/S.MANGALAM PUBLICATIONS

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN MONDAY, THE 12TH OCTOBER 2009 / 20TH ASWINA 1931 ITA.No. 400 of 2009() --------------------- ITA.243/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- M/S.MANGALAM PUBLICATIONS, KOTTAYAM. ADV. SRI.P.BALAKRISHNAN (E) FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ALONG WITH ITA NOS.557 & 558/2009 ON 12/10/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

C.R. C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal Nos.400,557 & 558 of 2009 .................................................................... Dated this the 12th day of October, 2009. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals filed by the department for the assessment years 1990-91, 1991-92 and 1992-93 is whether the Tribunal was justified in cancelling the assessments completed under Section 147 of the Income Tax Act as time barred for the reason that the re-assessments were not completed within four years from the end of the relevant assessment year in terms of the proviso to Section 147 of the Act. We have heard Senior Standing Counsel Sri.P.K.R. Menon appearing for the appellants and Sri.P.Balakrishnan appearing for the respondent. 2. The assessee is engaged in publication of newspaper, periodicals, etc. Assessee did not maintain any books of accounts and the returns for all the assessment years were filed without being accompanied by balance sheet and statement of accounts. From the

2 extracts pertaining to the income returned by the assessee it is seen that even advertisement receipts are returned by the assessee on estimation basis obviously showing that the assessee did not maintain proper books of accounts. The original assessments were, however, completed under Section 144 estimating the income. It is found by the Tribunal that though the assessments were completed by estimation of income which is at substantial variance with the income returned, assessee substantially accepted the addition of Rs.1,55,15,550/- for the assessment years 1989-90 to 1993-94. After completion of the assessments, the Assessing Officer got copies of balance sheet furnished by the firm to South Indian Bank which showed substantial increase in the capital and current accounts of the partners. The Assessing Officer inferred that the increase in the capital accounts and current accounts of the partners of the respondent-firm is obviously share income from the respondent-firm which escaped assessment in the original assessments of the firm completed under Section 147 of the Act. After issuing notice to the respondent-assessee, the original assessments were completed under Section 147.

3 3. The assessee challenged the assessment on ground of limitation as well as on merits before the C.I.T.(Appeal). On facts, the C.I.T.(Appeal) found that the assessee had not maintained any books of accounts and disclosed fully and truly all material facts necessary for completion of assessments and so much so, the limitation of four years provided under proviso to Section 147 does not apply. He, therefore, rejected the plea of limitation raised by the assessee. On the merits of the case, he noticed that the Assessing Officer had granted excess relief in the estimation of income and therefore, after issuing notice to the assessee, he enhanced the income by some amounts. Then the assessee filed second appeals before the Tribunal. The Tribunal has accepted the assessee's appeals on ground of limitation and set aside the order of the C.I.T.(Appeal), against which these appeals are filed before us. 4. On going through the orders of the Tribunal, we find that going by their own reasoning, their finding that the assessee has disclosed fully and truly all material facts necessary for the completion of original assessment is not tenable. Tribunal itself admits that the assessee was not maintaining any books of accounts. It is the further

4 finding of the Tribunal that even in the absence of full books of accounts, the assessee had not furnished the documents as required in terms of Section 139(f) of the Income Tax Act, which is as follows: "Where regular books of account are not maintained by the assessee, the return is accompanied by a statement indicating the amounts of turnover or, as the case may be, gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed and also disclosing the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year." In fact, the C.I.T.(Appeal) upheld the assessment as within time for the reason that even in the absence of regular books of accounts, the assessee is bound to give the information required under the above clause and the assessee who has not disclosed the above information cannot be said to have made full disclosure of all material facts necessary for completion of assessment. Even before the Tribunal, assessee has no case that the assessee had maintained books of accounts or furnished particulars required for the assessment in terms of Section 139(f) of the Act. Even though counsel appearing for the respondent contended that books of accounts were with the department after seizure, we do not think this is a ground for the Tribunal to allow

5 the assessee's appeals. Further, if books of accounts were retained by the department, we see no reason why assessee could not collect copies, prepare proper statement of accounts including Profit and Loss Account and Balance Sheet before the department for the purpose of assessment. In any case the reopening is admittedly not based on any information collected by the department from the seized records which were available at the time of assessment. On the other hand, the partners of the respondent-assessee submitted balance sheets of the respondent-assessee before the Bank which disclosed increase in current accounts and capital accounts of the partners which do not tally with the profits returned by the firm. There is no need for us to consider the explanation of the partners pertaining to the increase in current accounts and capital accounts as not relatable to the unaccounted income of the firm because that is on the merits of the case not considered and decided by the Tribunal. The only question to be considered is whether the assessee had for the purpose of completing the original assessment made full disclosure of all material facts necessary for their assessment and if it is proved so, then the re-

6 assessment under Section 147 beyond four years from the end of the year will get time barred. 5. As already found by us, the Tribunal does not anywhere state in their order that the assessee had made full disclosure of all materials before completion of original assessment. On the other hand, even though original assessments were completed at substantial variance with the income returned on estimation basis, it is stated in the Tribunal's order that from 1989-90 to 1993-94 the assessee has without contest accepted the addition of Rs.1,55,15,550/-. In fact, in paragraph 20 of the Tribunal's order in the argument for the assessee, assessee concedes that they were not maintaining formal set of books of accounts for preparing balance sheet. Even though assessee claimed that all materials necessary for completion of assessments were furnished by them, they have not stated what are the materials furnished by them for completion of original assessments. As already pointed out by us, they don't have even accounts pertaining to advertisement receipts which is the major source of income of a publication company and the assessee had in fact chosen to return

7 income from advertisement on estimation basis. We notice that the Tribunal has mixed up the limitation issue with the merits of assessment and without finding that the assessee has made full disclosure of materials for completion of assessments, the Tribunal declared the assessments as invalid which in our view, is not sustainable. In fact, in order to challenge a re-assessment on ground of limitation, it is for the assessee to prove that they have furnished all material facts necessary for completion of the original assessment. Section 145(1) among other things states that income from profits of business shall be computed in accordance with the cash, mercantile or any other system of accounting regularly employed by the assessee. Sub-section (2) of the said Section authorises the Government to prescribe accounting standards to be followed by assessees. A best judgment assessment under Section 144 is authorised under Section 145(3) only when the Assessing Officer is satisfied that accounts maintained by the assessee are not correct or complete. Since business income is to be computed based on method of accounting followed by the assessee and based on the books of accounts

8 maintained by the assessee, the assessee is required to produce the books of accounts and when books of accounts are not available, in our view, atleast minimum statements as shown in Section 139(f) should be made available by the assessee to the officer. An assessee who is required to maintain books of accounts returns income on estimation basis cannot claim that it has fully and truly disclosed all material facts required for the assessment. We do not find any material for the Tribunal to hold that the assessee had disclosed fully and truly all material facts required for completion of the original assessment. We, therefore, allow the departmental appeals by vacating the order of the Tribunal and remand the matter to the Tribunal to consider the case on merits after issuing notice to the parties. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms