MADATHIL ZAINUDDIN vs. COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE THURSDAY, THE 28TH DAY OF NOVEMBER 2013/7TH AGRAHAYANA, 1935 ITA.No. 255 of 2012 () ----------------------- IT(SS)A. 33/2006/Coch/06 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT(S)/APPELLANT: ------------------------------ MADATHIL ZAINUDDIN MADATHIL HOUSE, KAVANNUR, AREACODE MALAPPURAM. BY ADV. SRI.S.ARUN RAJ RESPONDENT(S)/RESPONDENT: ------------------------------------ COMMISSIONER OF INCOME TAX I.S. PRESS ROAD, KOCHI - 682 018. BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 28- 11-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA 255/12 ------------- APPENDIX APPELLANT'S EXHIBITS ------------------------------ ANNEXURE -A TRUE COPY OF THE ASSESSMENT ORDER-BLOCK ASSESSMENT YEARS: 1997-98 TO 2003-04 (UPTO 23.12.02) ANNEXURE -B TRUE COPY OF THE CIT(a) ORDER DT.25.1.06 IN APPEAL NO.C- 053/05-06 ANNEXURE -C TRUE COPY OF THE TRIBUNAL ORDER DT.22.6.12 IN IT(SS) A.33/C0CH/2006 ANNEXURE -D TRUE COPY OF THE CASH FLOW STATEMENT FOR THE PERIOD 1.4.96 TO 23.12.112 ANNEXURE -E TRUE COPY OF APPELLANT;S LETTER DT.2.1.03 TO THE DEPUTY DIRECTOR OF INCOME TAX, (INVESTIGATION), CALICUT ANNEXURE -F TRUE COPY OF THE APPELLANT'S LETTER DT.29.10.04 TO THE ADDL.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, CALICUT ANNEXURE -G TRUE COPY OF THE APPELLANT'S LETTER DT.19.1.05 TO THE ADDL.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, CALICUT. //True copy// PS to Judge. uj.

MANJULA CHELLUR, C.J & A.M.SHAFFIQUE, J. --------------------------------------------- I.T.A.No.255 of 2012 --------------------------------------------- Dated 28th November, 2013 JUDGMENT Manjula Chellur,C.J By consent of both parties the matter is heard and disposed of on merits. The following substantial questions of law arises for consideration. 1) Whether on the facts and in the circumstances of the case and also considering the reasons set out in the Grounds above, the Tribunal is right in law in sustaining addition of Rs.58 Lakhs as “undisclosed income” of the appellant under section 158B(b) of the Act for the AY 2003-04 ? 2) Whether on the facts and in the circumstances of the case and also considering the reasons set out in the Grounds above, the Tribunal was right in law and had material to hold that the accumulated cash as per the cash flow statement offered and assessed as undisclosed income of the assessment years 1997-98 to 2002-03 cannot be source for the amount of

WA No. 1689 of 2013 -:2:- Rs.65 Lakhs found by the police and requisitioned by the department under section 132 A of the Act ? 3) Whether on the facts and in the circumstances of the case and also considering the reasons set out in the Grounds above, the Tribunal was right in law and fact in not appreciating the evidentiary value of the spontaneous statement of Mr.K.K.Azeez, the carrier of the cash of Rs.65 Lakhs and the modus operandi of the gold business explained by the appellant and holding that the appellant's claim of trading in gold is not true ? 4) Whether on the facts and in the circumstances of the case, the Tribunal having upheld the assessment of the cash of Rs.65 Lakhs seized as the appellant's undisclosed income for the assessment year 2003-04, ought to have allowed the amount seized as loss incidental to the appellant's business of trading in gold ?” 2. The issue pertains to block period 1997-98 and 2003-04. The facts that lead to filing of the present appeal are as under. Chennai police recovered a sum of . ₹ 65 lakhs on 21/12/2002 from a car occupied by four persons, i.e. Mr.K.K.Azeez and three others. Mr.K.K.Azeez made a

WA No. 1689 of 2013 -:3:- statement under Section 131 of Income Tax Act disclosing that the cash of .65 lakhs found with him in fact belongs to ₹ assessee. It was further disclosed that it was given to him for the purpose of purchasing gold biscuits. 3. Subsequently, the assessee sent a letter dated 2/1/2003 to Deputy Director of Income Tax (Investigation Wing), Calicut wherein he clearly admits that .65 Lakhs ₹ found with Mr.Azeez belongs to him. He also admits that the amount was given to him for the purchase of gold for the purpose of busniss to be started by his brother and other persons. Said letter also reveals, he was acting as an agent to transfer funds from Mumbai to Kerala through his bank accounts maintained with Manjeri Co-operative Urban Bank, during a short period between 12/12/2001 to 6/4/2002. So far as peak credit of deposits found in the bank account amounting to .50 Lakhs, he voluntarily offered the ₹ said cash as his income. 4. Proceedings were initiated with issuance of notice

WA No. 1689 of 2013 -:4:- under Section 158 B C read with Section 158 B D of the Act. In response to the said notice the assessee filed block return declaring undisclosed income of .65 Lakhs for the above ₹ said block assessment period. During the assessment proceedings, the Assessing officer came across important material that there was a deposit of an amount of . ₹ 2,62,15,000/- in his bank account on various dates, during short spell between 12/12/2001 to 6/4/2002. All the deposits which came to Manjeri Co-operative Urban Bank Branch were credited showing “Head Office Advice”. Those amounts were withdrawn immediately on the very same day in cash. When details of the deposits were called for by the Assessing Officer, the assessee could not give the names and addresses of the persons from whom deposits were received and on the other hand, he gave explanation that those amounts relate to transaction of business of purchase and sale of gold carried on by him. But he was not able to furnish names of either the buyers or the sellers. Declining

WA No. 1689 of 2013 -:5:- to accept the explanation of the assessee, the Assessing officer proceeded to treat the entire deposits of . ₹ 2,62,15,000/- as undisclosed income of the assessee. As there was voluntary offer of .50 lakhs on the part of the ₹ assessee in his block return, the Assessing Officer added . ₹ 2,12,15,000/- to the income disclosed by the assessee. 5. This came to be challenged before CIT (Appeals), who confirmed the addition of bank deposits. But however, CIT(Appeals) issued notice of enhancement to the assessee as he was of the opinion that cash of .65 Lakhs ₹ seized by the police, should be assessed separately for the reason that the aggregate income declared in the block return could not be considered as a source for the cash seized by the police. This opinion of CIT(Appeals) was formed by referring to contradictory stand by the assessee with regard to the deposits found in the bank account before the Deputy Director of Income Tax(Investigation Wing) and the Assessing Officer. The assessee was also not able to

WA No. 1689 of 2013 -:6:- explain the time gap between last withdrawal made from the Bank and the cash seized. Therefore, according to CIT (Appeals) .65 Lakhs also be assessed as undisclosed ₹ income in the hands of the assessee, in addition to what was already assessed by the Assessing Officer. 6. Aggrieved by the same, the assessee approached the Tribunal contending that the transaction found in the bank accounts clearly indicate, there was rotation of funds, i.e, the amount received by way of Head Office Advice was immediately withdrawn and after the withdrawal there was another set of deposit and withdrawal which was carried on so. Therefore, according to assessee it would be justifiable only to assess the peak credits in repetitive transactions, instead of assessing the entire deposits. The Tribunal after addressing the contentions of the appellant assessee noticing the stand of the department that the assessee has taken contrary stand with regard to the deposits made in the bank accounts, i.e initially he

WA No. 1689 of 2013 -:7:- stated that he acted as an agent to transfer funds from Mumbai to Kerala through his bank accounts, later on during the assessment proceedings he changed the said stand saying he was carrying cash for the purchase of gold biscuits. Therefore, having failed to substantiate both stands by the assessee, only opinion that could be arrived at was that apart from the amount disclosed in the bank account, .65 Lakhs found in cash with Mr.Azeez also ₹ escaped income of the assessee. Ultimately, the Tribunal opined that the deposits found on various dates in the bank account have been credited in the bank account with a note “Head office Advice”. It clearly indicates that the amounts were transferred from some other branch of the bank. The source was not explained, as noticed by the Assessing Officer. The deposits whenever made were immediately drawn also. 7. The Tribunal proceeded to analyse the facts on record and opined that the stand of the assessee was

WA No. 1689 of 2013 -:8:- different from time to time, so also opined assessee was not even able to establish that the source of income was from gold business. If the first stand of the assessee that funds were transferred from Mumbai to Kerala through bank accounts were to be believed, said amount cannot be his amount. But it is also surprising to see that he admitted income of .50 Lakhs in his bulk return as peak credit. This ₹ would only go to show, though he tried to establish the transfer of funds from Mumbai to Kerala it was not properly explained. Then coming to the stand of the assessee, the assessee failed to bring on record any material to substantiate his stand and the same cannot be believed according to the Tribunal for the following reasons which are extracted below. The claim of the assessee does not appear to be true. (a) If the assessee had really carried on trading in gold biscuits, he could have at least tried to reconcile the quantity details of gold vis-a-vis the deposits found in the bank accounts.

WA No. 1689 of 2013 -:9:- (b) Presuming for a moment that the deposits represent sale value of gold, we notice that the deposits are always in lakhs that too in round figures, which would not be so in practical situations. There is also wide variation between two deposits, which would not be normally so if the assessee is carrying on trading activity. (c) From the copy of the three bank accounts placed in the paper book, we notice that the assessee has received an aggregate deposit of Rs.1.23 crores in the month of December, 2001. Even if the initial deposit of Rs.12 lakhs each (Total Rs.24.00 lakhs) received in Account Nos.34 and 11804 is considered as the capital of the assessee, it does not commensurate with the amount declared by the assessee in his block return, i.e, up to 31/3/2001. The assessee has declared only a sum of Rs.8.00 lakhs only as undisclosed income. (d) In the month of December, 2001, we notice deposits of Rs.25.00 lakhs and Rs.50.00 lakhs, but there after the deposit amount was in the range of below ten lakhs only up to 20-03-2002. There after there is a deposit of big amount, i.e, Rs.24.00 lakhs on 23.3.2002. The last deposit was Rs.20.00 lakhs made on 06.4.2002. The assessee has not explained the reasons for stopping the alleged gold trade thereafter.

WA No. 1689 of 2013 -:10:- Paragraph 14 is the actual opinion of the Tribunal which deals with the details furnished by the assessee in the cash flow statement. The Tribunal made this exercise in order to understand the claim of the assessee whether the income declared by the assessee in various years including peak credit amount can be taken as source for the cash of .65 ₹ Lakhs seized by the police at Chennai. The cash flow statement with reference to the financial year 2000-01 shows .3 Lakhs followed by .2 lakhs in the financial year ₹ ₹ 2002-03 indicating that .2 Lakhs was from brother Hussain ₹ in the business. There was no details with regard to the nature of business. On the other hand, in the first letter addressed to the Deputy Director of Income Tax this .65 ₹ Lakhs was given to Mr.Azeez to purchase gold biscuits for the purpose of starting business by his brother and others. In other words, it was not the amount pertaining to his gold business but an amount for the purchase of gold for his brother's business. This is a relevant fact that has to be

WA No. 1689 of 2013 -:11:- taken note of. Having regard to this stand of the assessee and also unexplained income reflected in the cash flow statement, the Tribunal was justified in not placing much reliance on the cash flow statement furnished by the assessee, as it was a self serving one without supported by any regular bank account and documents. 8. Then coming to the statement of assessee, the income of .One Lakh each declared in the years ₹ relevant to the assessment years 1997-98 and 1998-99, there is doubt expressed by the Tribunal whether that Two Lakhs was still remaining with the assessee after a gap of four or five years and according to us it is a genuine doubt. With regard to the declaration of peak credit of .50 Lakhs, ₹ the Tribunal was justified in saying, by operation of law as legal fiction provided under Section 68 and 69 in the absence of proper explanation of the assessee relating to bank transactions .50 Lakhs becomes taxable. Then the ₹ question is whether the amount of .65 Lakhs in the hands ₹

WA No. 1689 of 2013 -:12:- of the assessee in December, 2012 would represent cash credit amount in the banks when the assessee fails to explain the source of income so far as the bank account in the light of the fact that what exactly the business of the assessee was not proved. In the absence of documents supporting such contention, the Tribunal was justified in confirming the opinion of the appellate authority that all the amounts shown in the bank accounts are entirely different from the amount of cash .65 Lakhs found in the hands of ₹ the assessee in December, 2012, because if he was really dealing with gold business, it is hard to believe that he was keeping .65 Lakhs idle with him for a period of more than ₹ nine months, that too, to start business for his brother in gold as explained in the letter. First letter immediately addressed after seizure of the gold becomes very relevant. If he was dealing in the gold business he would have declared so in the said letter. But his explanation regarding the bank account was that he acted only as an agent for transferring

WA No. 1689 of 2013 -:13:- funds from Mumbai to Kerala through his bank accounts. 9. In the light of the above stand of the assessee at the earliest point of time there is clear indication that the amount reflected in the bank accounts pertain to the transactions shown in the bank accounts having no connectivity with the cash shown in the hands of the assessee. In these circumstances, we decline to interfere with the orders of the Tribunal. All the questions are answered against the appellant assessee. Accordingly this appeal is dismissed. (MANJULA CHELLUR) CHIEF JUSTICE. (A.M.SHAFFIQUE) JUDGE. uj.