COMMISSIONER OF INCOME TAX vs. T AHOBALA RAO

1 8 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 4TH DAY OF OCTOBER 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR ITA No.972/2006 BETWEEN: 1. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE, NO.55/1, SHILPASHREE, VIDHYARANYA COMPLEX, VISHVESHWARANAGAR, MYSORE.

2 ITA FILED U/S.260-A OF I.T.ACT,1961 ARISING OUT OF ORDER DATED 13-01-2006 PASSED IN IT(SS)A 103/BANG/2004 FOR THE BLOCK ASSESSMENT PERIOD 01-04-1995 TO 07-06-2001, PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO

I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN IT(SS)A 193/BANG/2004 DATED 13-01-2006 & CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, MYSORE, IN THE INTEREST OF JUSTICE AND EQUITY. THIS ITA HAVING BEEN HEARD AND RESERVED AND COMING ON FOR PRONOUNCEMENT OF JUDGEMENT THIS DAY, B.MANOHAR J., MADE THE FOLLOWING: JUDGMENT The Revenue filed this appeal under Section 260A of the Income Tax Act, 1961 (in short ‘the Act’) being aggrieved by the order dated 13.01.2006 passed by the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore made in IT(SS)A No.103/Bang/2004 wherein the Appellate Tribunal set aside the order passed by the CIT (Appeals) for the block assessment year 01.04.1995 to 07.06.2001.

3 2. A search was conducted in the residential premises of the respondent-assessee on 07.06.2001 under Section 132 of the Act. During the course of search, many incriminating documents evidencing the assessee doing business in the money lending were found and the documents are seized. By the said business, the assessee has earned substantial income, which was never disclosed since the assessee was never assessed to the tax and no declaration has been filed by the assessee. The seized documents revealed that the said money lending activity was carried by the assessee in his HUF capacity and as such the source of the said money lending activity flowed from the funds belonging to the HUF. A notice under Section 158BD of the Act was issued on 10.01.2002 calling upon the assessee to file the returns in the status of HUF. Accordingly, the assessee filed returns declaring NIL undisclosed income on 30-1-2002. Further, the assessee in his letter has contended that the books of accounts and documents such as share certificates do not represent the undisclosed income. As per the family partition of the year 1984 in the joint family of the assessee, he has received a sum of Rs.28,63,944/- and he is doing the money- lending business out of the said amount and he has suffered huge loss. Further, in his objections, he has stated that there was no

4 income in his individual capacity. The money-lending business is done under the HUF. Accordingly, notice was issued to the HUF. In response to the said notice, returns was filed stating that no assessment was possible since the joint family is disrupted as on 01.06.2001. Hence, in accordance with the law laid down by this court in COMMISSIONER OF WEALTH TAX v/s G.E.NARAYANA AND OTHERS reported in 193 ITR 41 no assessment can be made in respect of HUF. As per the memorandum of family arrangement entered into between the members of family, the partition has been effected. The HUF is not in existence, hence, the question of assessing the HUF does not arise. The Assessing Authority by its assessment order dated 30.06.2003 concluded the block assessment from 01.04.1995 to 07.06.2001 disallowing the bad debts claimed and also disruption of the joint family and issued demand notice. Being aggrieved by the assessment order dated 30.06.2003, the assessee preferred an appeal before the CIT (Appeals)-4, Bangalore (hereinafter referred to as First Appellate Authority). The First Appellate Authority after considering the matter in detail confirmed the order passed by the Assessing Authority, however set aside the assessment order insofar as levy of surcharge. Accordingly allowed the appeal in part by its order dated

5 31.03.2004. Being aggrieved by the order dated 31.03.2004 passed by the First Appellate Authority, the assessee preferred an appeal before the Income Tax Appellate Tribunal in IT(SS)A- 103/BANG/2004. The Income Tax Appellate Tribunal after considering the matter in detail allowed the appeal by setting aside the order passed by the First Appellate Authority as well as the Assessing Authority by its order dated 13.01.2006. Being aggrieved by the said order, the Revenue has preferred this appeal. 3. This appeal is admitted to consider the following Substantial questions of law: (i) Whether the Tribunal is right in holding that family arrangement dated 1-6-2001 between the assessee, his wife and two minor children to live together and there is no evidence of division or partition of property by metes and bounds? (ii) Whether the Tribunal was right in holding that provision of bad debts should be allowed as deduction under Sec.30(1)(vii) despite the assessee not maintaining books of accounts and writing off such debts as required under the abovesaid provision of law?

6 4. Sri.Indrakumar, learned Senior Counsel appearing for Sri.E.I.Sanmathi contended that the order passed by the Income Tax Appellate Tribunal is contrary to law. Though the assessee was doing money-lending business, he has not filed his returns. The assessee does not have money-lending license though he has been in the business of advancing monies and earning huge interest. The seized documents clearly disclose the day-to-day transactions. However, there is no entry with regard to irrevocable debts. Further no document has been produced before the Authorities to show that there is disruption in HUF and partition of the joint family properties. The partition deed is not registered documents. In the absence of the same, HUF is responsible to pay the tax and undisclosed income has to be brought to tax since the HUF continued to be in existence. The Appellate Tribunal without taking into consideration all these documents set aside the order, which is contrary to law. 5. On the other hand, Sri.A.Shankar, learned counsel appearing for the respondent argued in support of the order passed by the Income Tax Appellate Tribunal and contended that there is no

7 infirmity or irregularity in the order passed by the Appellate Tribunal. Since the HUF has been disrupted much prior to the survey, the question of paying income tax of the disrupted HUF does not arise. The memorandum of family arrangement drawn on 01st June 2001 at Chikkamagalur was made available before the Assessing Authority on 27-06-2001. A copy of the memorandum of Family Arrangement was also furnished to the Assessing Authority. Further, on the basis of the memorandum of family arrangement, an application filed before the Competent Authorities to change the mutation on 12-06-2001 was also made available. Further, before issuing notice under Section 158BD of the Act, the authorities must record its reasons. In the instant case, no satisfaction is recorded under Section 158BD. Inspite of the same, the Assessing Authority concluded the block assessment from 01.04.1995 to 07.06.2001, which is contrary to law. Though the assessee was doing money- lending business, he has suffered huge loss. The Assessing Authority has not given bad debt deduction. Further, the savings were made in SHREE FINANCE, however, that Finance Company has been closed, due to which the assessee has suffered lost huge amount and also he could not recover some amounts. When the HUF is in existence, it was not assessed for the tax. After the

8 dissolution of HUF, tax can be levied on the basis of the search conducted. Hence sought for dismissal of the appeal by upholding the order passed by the Appellate Tribunal. 6. We have carefully considered the arguments addressed by the learned counsel for the parties. 7. The records clearly disclose that the search was conducted in the residential premises of the assessee on 07.06.2001 and seized incriminating documents regarding the assessee doing the money- lending business. A notice was issued calling upon the assessee to file his returns. The assessee filed NIL income stating that he does not have the taxable income. He also contended that the HUF was doing the business in money-lending and not in his individual capaicty. Accordingly, a notice was issued to the HUF. Objections have been filed stating that the HUF is dissolved as per the family arrangement entered into on 01.06.2001. No income tax can be levied on disrupted HUF. The assessee has stated that he has suffered huge loss in the business of money lending and he could not recover any amount advanced. The Finance Corporation where the

9 assessee has deposited the amount was also closed. He does not have taxable income. On the other hand, the revenue contended that in the seizure they had found large number of documents with regard to undisclosed income for the assessment years 1996-97 to 2001-02. The HUF continues to be in existence. The partition deed ought to have been registered only for the purpose of the case the document has been cooked up. The undisclosed income was brought to tax. No document has been produced to show the disruption of the family and incurring huge loss in the business, further, there is no entry in the books with regard to bad debts. However, the assessee made available the memorandum of family arrangement entered into between the joint family of the assessee and his wife and two minor children. As per the memorandum of family arrangement, ‘A’ schedule property was allotted to the assessee, ‘B’ schedule property was allotted to the wife and ‘C’ and ‘D’ schedule property were allotted to the minor children of the assessee. Further, doucment with regard to the application made to the Town Municipality, Chikkamagalur for mutation of entry on the basis of the memorandum of Family Arrangement was also made available to the Assessing Authority. The Assessing Authority without considering the said document concluded the assessment holding that the joint

10 family is continued to be in existence and undisclosed income was brought to be taxed. The order passed by the Assessing Authority is contrary to law. No tax can be levied on a disrupted joint family. The said order was confirmed by the First Appellate Authority mechanically. Much prior to the search of the premises, the memorandum of family arrangement was entered into between the parties. The said memorandum of Family Arrangement need not be registered. The judgment reported in (1966)2 SCJ 209 in the case of THILAK BAHADDUR BHUJIL v/s DEBI SINGH BHUJIL AND OTHERS, the Hon'ble Supreme Court held that the family arrangement can be arrived orally. Its terms may be recorded in writing as a memorandum of what had been agreed upon between the parties. The memorandum need not be prepared for the purpose of being used as a document on which, future title of the properties be founded. The judgment relied upon by Shankar is applicable to the facts of the present case. The family arrangement need not be registered. He also relied upon the judgment reported in 253 ITR 430 (Kerala) with regard to writing off of the bad debts. The oral partition effected between the members of HUF has been recorded and necessary application has been made to the Competent Authorities to mutate their names. The records clearly disclose that

11 HUF was not in existence as on 07.06.2001. The memorandum of Family Arrangement and also the endorsement issued by the City Municipality, Chikkamagalur, refusing to mutate the names on the basis of the family arrangement is part of the records of the Revenue. It was made available during the course of arguments. Hence, we hold issue No.1 against the revenue. 8. With regard to issue No.2 is concerned, the reasoning of the Assessing Officer is that no effort has been made by the assessee to recover the loan advanced. Hence, the amount advanced cannot be treated as bad debts. The Assessing Officer held that it is difficult to conclude that the debts have become irrevocable. Approach of the Assessing Officer is contrary to law. The assessee cannot be called upon to prove the negative. In view of the amendment to Section 36(i)(iv) w.e.f. 01.04.1989 takes away the condition of proving debt to be bad. The written off of amount as a bad debt is sufficient compliance. In view of amendment to Section 36(i)(iv) the Assessing Officer was not correct in insisting the assessee to prove the debt as bad. The assessee apart from doing money-lending business, he was also running the Chit Business. He has suffered

12 huge loss in that business also and could not recover the amount. Hence, the assessee in individual capacity cannot be taxed. Since the HUF is disrupted prior to the survey, the disrupted HUF cannot be taxed. 9. We find that there is no infirmity or irregularity in the order passed by the Appellate Authority. The Revenue has not made out a case to interfere with the order passed by the Income Tax Appellate Tribunal. Both the substantial questions framed in this appeal are held against the revenue. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE mpk/-*