COMMISSIONER OF INCOME TAX vs. S.MADHAVA, M/S BELLARY STEEL ROLING MILLS,

- 1 - IN THE HIGH COURT OF KARNATAKA CIRCUIT BENCH AT DHARWAD DATED THIS THE 13TH DAY OF AUGUST, 2012 PRESENT THE HON’BLE MR. JUSTICE N. KUMAR AND THE HON’BLE MR. JUSTICE H. S. KEMPANNA I.T.A. No.5034/2009 A/w. I.T.A. Nos.5035/09, 5036/09, 5037/09, 5038/09, 5039/2009 BETWEEN: 1. COMMISSIONER OF INCOME TAX BANGALORE. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2, BANGALORE …APPELLANTS [COMMON] (By Sri. JEEVAN.J.NEERALGI & SRI Y.V.RAVIRAJ Advs.) AND: IN ITA.5034 & 5035 of 2009: S.MADHAVA, MANAGING DIRECTOR, M/S BELLARY STEEL & ALLOYS LTD., SY.NO.890, ANANTHAPURA ROAD, BELLARY-583 101 (By Sri. M V V RAMANA ADV.)

- 2 - IN ITA.5036/09: S.MADHAVA (HUF) PARTNER IN M/S BELLARY STEEL & ALLOYS LTD., SY.NO.890, ANANTHAPURA ROAD, BELLARY-583 101 (By Sri. M V V RAMANA ADV.) IN ITA.5037/09: S.PARVATHI MADHAVA DOOR NO.4/189, WARD NO.XVII, 2ND CROSS, PARVATHI NAGAR, BELLARY-583 101. (By Sri. M V V RAMANA ADV.) IN ITA.5038/09: S.MADHAVA (HUF) MANAGING DIRECTOR M/S BELLARY STEEL & ALLOYS LTD., SY.NO.890, ANANTHAPURA ROAD, BELLARY-583 101 (By Sri. M V V RAMANA ADV.) IN ITA.5039/09: S.PARVATHI MADHAVA MANAGING DIRECTOR M/S BELLARY STEEL & ALLOYS LTD., SY.NO.890, ANANTHAPURA ROAD, BELLARY-583 101 ... RESPONDENTS (By Sri. M V V RAMANA ADV.)

- 3 - ITA: 5034/09 IS FILED U/S 260 A OF THE INCOME- TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.746/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', ALLOWING THE APPEAL FILED BY THE ASSESSEES. ITA: 5035/09 FILED U/S 260 A OF THE INCOME-TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.743/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', DISMISSING THE APPEAL OF REVENUE. ITA: 5036/09 FILED U/S 260 A OF THE INCOME-TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.748/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', ALLOWING THE APPEAL FILED BY THE ASSESSEES.. ITA: 5037/09 FILED U/S 260 A OF THE INCOME-TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.744/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', DISMISSING THE APPEAL OF REVENUE. ITA: 5038/09 FILED U/S 260 A OF THE INCOME-TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.745/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', DISMISSING THE APPEAL OF REVENUE. ITA: 5039/09 FILED U/S 260 A OF THE INCOME-TAX ACT, 1961, AGAINST ORDER DTD:26-06-2009 PASSED IN ITA NO.747/BNG/2008 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH 'B', ALLOWING THE APPEAL FILED BY THE ASSESSEES. These appeals coming on for final disposal this day, N.Kumar J., delivered the following:

- 4 - J U D G M E N T As identical issues are involved in all these appeals, they are taken up together for consideration and disposed of by this common order though there are three assessee’s involved and the appellate order as well as the revisional order is involved and two orders are passed by the Tribunal. 2. For proper appreciation of the issues involved in these matters, we have set out the facts in the case of the assessee, S.Madhav, the respondent in ITA No.5035/2009. 3. The assessee is a Managing Director of M/s. Bellary Steel Alloys Limited, Bellary. The other two appeals pertain to the wife of the assessee—the share-holder of the Company and the other assessee is a HUF consisting of the

- 5 - assessee in this appeal, his wife and their children. For the assessment year 1998-99, the assessee did not furnish the return of income within the time prescribed under Section 139(1) or 139(4) of the Income Tax Act [for short ‘the Act’]. However, the assessee filed the return of income on 18.04.2000 in the office of the ITO, Raichur, disclosing the total income of `20,22,380/-. The tax payable was worked out by the assessee at `4,07,604/-. In this return, the assessee disclosed the income from salary and other sources. This return was treated as an invalid return. But to bring to tax the income disclosed in this return, a notice under Section 148 of the Act was issued on the assessee on 30.03.2004. The notice was served on the assessee by a registered post on 02.04.2004 at the assessee’s Bellary office. In

- 6 - response to the said notice, the assessee filed a return of income on 30.04.2004 disclosing the total income of `20,22,380/-. The return was accompanied by a letter dated 24.04.2004. In the said letter, he contended that he has filed his return of income for the assessment year 1998-99 on 19.04.2000 before the Assistant Commissioner of Income Tax, Circle (1), Raichur. There is no income escaping assessment for the assessment year to warrant the issue of notice under Section 148 of the Act. Therefore, he sought for dropping of all further proceedings. 4. Before the issue of the said notice, a notice under Section 153(A) of the Act dated 02.04.2004 for the afore-said assessment year 1998-99 has been issued.

Therefore, he contended that the proceedings initiated under Section 148 of the Act stands abated in the light

- 7 - of the proviso to Section 153(A) of the Act. However, under protest, he filed a return admitting the very same income as has been declared by him in the return filed by him earlier. 5. There was action under Section 132 of the Act in the assessee’s case on 21.10.2003, when the assessee was intercepted at Bangalore Airport, carrying some unaccounted cash. The search resulted in seizure of cash of `40,00,000/-. Consequently, a notice under Section 153(A) of the Act was issued to the assessee on 02.04.2004 asking him to file a return. The said notice under Section 153(A) of the Act was issued to the assessee for each of the six assessment years i.e., 1998-99 to 2003- 04. In view of the proviso to Section 153(A) of the Act, the afore-said assessment proceedings

- 8 - commenced under Section 148 of the Act merged with the proceedings under Section 153(A) of the Act. 6. In the objections filed to the notice issued under Section 153(A) of the Act, it was contended that the said search did not reveal the existence of any undisclosed income or assets representing any undisclosed income. The said search is illegal and without jurisdiction. Therefore, he wanted the entire proceedings be dropped. 7. Anyhow, he filed the very same return under protest. As he did not pay the taxes due on the income return filed earlier, he made payment of tax due and enclosed a challan showing the payment. As per the request of the assessee, the return of income filed on

- 9 - 19.04.2000, was taken up for consideration after issuing of notice to the assessee. The assessee was called upon to furnish the following details: (i) It is seen that you had declared under VDIS-1997 Jewellery (diamonds) of 41078.5 carat of loose diamonds worth `20,70,68,765/- (shares of `One Crore) (40,00,000 Equity shares of `10/- each of face value of M/s.Kamal Overseas Ltd., acquired at `2.5 per share, cash `40,00,000/-. (ii) For the assessment year 1998-99, you have shown the sale of diamond Jewellery for `75,35,23,139/- and after indexed cost of acquisition you have claimed loss of `1,24,03,271/-. In respect you are required to produce the evidences of the sale proceeds of jewellery.

- 10 - (iii) Please furnish the name and addresses of the purchaser of the loose diamonds. (iv) How did you receive the sale proceeds by cash/by cheques/by DD. Please furnish the details. (v) Please produce the sale bills. (vi) Have you filed wealth tax returns for the assessment year 1997-98 and 1998-99. (vii) Have you ever received dividend from M/s. Kamal Overseas Ltd. (viii) Please furnish the details of dividends received by you from various companies in which you hold shares for the assessment year 1998-99 to 2003-04. (ix) You have shown sundry debtors / creditors of `4,20,00,000/- from M/s.Panchaloha Hotels for the year ending 31.03.1998. Please

- 11 - explain the nature of debtor (the transactions for which the debtor is shown), whether it is for trade, business or otherwise. Please explain. (x) Please furnish the complete address of all the sundry debtors as on 31.03.1998. (xi) Please furnish the bank statement of all accounts as per schedule of cash at bank as on 31.03.1998. (xii) Please produce evidence in respect of sale of loose diamonds. (xiii) Please produce copy of challans of making the payment of tax on VDIS for record purpose. (xiv) It is seen that the following VDIS was declared and taxes is paid other than in the name of individual i.e.,Smt.S.M.Parvathi and Sri.S.Madhava (HUF) of

- 12 - `3,77,86,410/- and `1,38,67,296/- respectively.

Please produce challans for the payment of tax under VDIS for record purpose. (xv) From the VDIS it is seen that you had only `40/- lakhs cash. But you have paid `6,63,20,630/-. Please explain the source for making the payment. 8. In reply to the same, the assessee did not respond. But, on 13.01.2006, his Chartered Accountant appeared on his behalf. Again the assessee was issued a further show-cause notice on 17.01.2006 and he was asked to explain the following points: (i) You had made VDIS declaration on 26.09.1997 and had paid tax of `6,63,20,630/-.

You are requested to explain the sources of the VDIS tax paid. If it is paid by way of cheque payments, the

- 13 - abstract of relevant bank account may be filed. If the payment was made by way of cash, then the relevant cash-book may be produced for verification. (ii) You have claimed sale of jewellery to the extent of `75,35,23,139/-. I find that in the VDIS declaration the value of jewellery declared was only `20,70,68,765/-. Whereas while working out capital gains, the value of jewellery has been taken at `23,13,97,707/-. You are requested to explain the relevant provisions of the law of the board’s notification etc., which entitled you to take different value of jewellery while working out the capital gains. (iii) While going through your balance sheet, I find that so called sale of diamonds were not realised by

- 14 - you during the relevant previous year.

You are requested to furnish copies of your bank accounts in which the sale proceeds of the diamonds were actually received by you. I will also request you to furnish Permanent Account Number and other details of the persons to whom you claimed to have sold the diamond jewellery. From the details furnished so far, I find that the diamond jewellery allegedly sold to following concerns of Surat: 1. M/s. Microne Diamond. 2. Mohit Enterprises 3. Mount Diam 4. Meena Gems 5. Palak Gems 6. Pushpak Gems 7. A.K. Enterprise The Permanent Account Numbers or the assessment

- 15 - details of these concerns or their present whereabouts could not be verified inspite of field enquiries, you are requested to furnish the same. 9. The assessee did not bother to reply to any of the afore-said mentioned notices. No details were furnished.

The Department conducted enquiries, in particularly the D.D.I.T. (Inv.), Hubli. The findings of the enquiries were also communicated to the assessee. The said enquiry reveals the following facts: “Sri S.Madhava, Smt.S.Parvathi and S.Madhava(HUF) have declared Diamonds under the Voluntary Disclosure of Income Scheme 1997 and the said diamonds were allegedly sold and the consideration received was brought in as the share capital in the Company. The details of the VDIS Declaration and the sale consideration received are as under:-

- 16 - Name Value of diamond declared Total sale consideration received Sri.S.Madhava `20,70,68,765/- `75,35,23,140/- Smt. S.M.Parvathi `11,79,54,693/- `41,07,23,368/- Sri.S.Madhava (HUF) `4,37,24,300/- `12,05,96,382/- The enquiries with the purchasers and perusal of their bank accounts reveal that the assessee has followed a circuitous method of transferring money from one account to other on the same day without any actual money involved and the bankers have also helped in doing so. Thus, credit balance in the bank account of the purchasers have been created to enable him to buy the said diamonds declared in the VDIS. The concerns that have purchased the major share of the diamonds have not replied and their existence is non-verifiable. One example of the circuitous route of transfer and counter transfer is given under:- “A.K. Enterprises is a purchaser having account No.CA 15123 in Bank of Madhura,

- 17 - Matunga Branch (Now ICICI Bank has taken over the Bank of Madhura), from this account `2.5 Crores was transferred to account No.15140 standing in the name of Sri.S.Madhava for one of the installments of sale consideration. On verification, it was found that he had received transfer of an equivalent amount on the same day from Account No.15131 standing in the name of Tirupathi Enterprises, Mumbai. On verification of this account also it was found that he had received transfer of an equivalent amount from account 15140 standing in the name of Sri.S.Madhava. Surprisingly, none of the accounts had any initial balance facility. The net result of all the three transactions is zero. The Bank Manager confirmed the same. He stated that all the three cheques were presented together and entries were passed simultaneously. The Tirupathi Enterprises will start appearing as debtor in the books of Sri.S.Madhava. Such cycles are repeated for a number of times to convert

- 18 - all the diamonds so sold into debtors in the hands of Sri.S.Madhava and family. In the financial year 1998-99, in another series of similar fraudulent/fictitious entries, these debtors are converted into as suppliers/creditors of the Company BSAL, which are then in turn converted into share capital of Sri.S.Madhava and family.” 10. The assessing authority called for and examined in the course of the assessment proceedings, the reply furnished by the assessee during the course of the assessment proceedings in his letter dated 27.12.2004 which reads as under:- i) I enclose herein a copy of my letter dated 09.01.2004 submitted to Deputy Director (Inv) Unit II (2), Bangalore, explaining the source and nature of cash of `40 lakhs seized along with letter dated 09.01.2004 submitted by

- 19 - Smt.S.Parvathi to Deputy Director (Inv) Unit II(2), Bangalore. I also enclose a copy of letter dated 01.01.2004 from M/s.Pan Transports and carriers Ltd. (ii) I enclose herein a copy of the agreement of sale dated 01.10.2003 executed by me on behalf of Smt.S.Parvathi, with M/s. Pan Transports and Carriers Ltd., along with copy of cash receipt dated 20.10.2003 for `40 lakhs. (iii) The sale proceeds of diamond jewellery were received by cheques which were deposited in the Bank accounts. Please find Annexure-I detailing the name and address of the purchasers and cheques received along with copy of the purchase bills issued by them. I also enclose the copies of bank statements showing the

- 20 - deposits of cheques received towards sale proceeds. (iv) Since the provisions of Wealth Tax Act are not attracted in my case, I have not filed Wealth Tax returns for the assessment years 1997-98 and 1998-99. (v) The amount of `4.2 crores shown against Pachaloha hotels is made out of sale proceeds of the diamonds jewellery and were paid through my bank account. Copy of the Bank statement showing this entry is enclosed. (vi) The addresses of the Sundry Debtors as on 31.03.1998 is furnished in the enclosed Annexure-II. (vii) Statement of Bank Accounts as per schedule of cash at Banks on 31.03.1998 is enclosed as Annexure-III.

- 21 - (viii) As regards evidence in respect of sale of loose diamonds, please refer to the reply in Sl.No.3 above. (ix) The copy of challan dated 26.09.1997 for payment of taxes under VDIS scheme is enclosed for your verification (Annexure IV). (x) The amount of `6,63,20,630/- under VDIS scheme has been paid out of the sale proceeds through my bank account with IDBI bank. (xi) The copies of declaration and challan for payment of tax and VDIS scheme made by Smt.S.Parvathi and Sri.S.Madhav (HUF) will be submitted in due course.

- 22 - 11. On careful analysis of the above material, he recorded a finding that there has been no physical transfer of diamonds. All the amounts received on this alleged sale of diamonds declared in the VDIS 1997 were merely fictitious, bogus transactions, planned and executed with the sole purpose of explaining the source for the investment in the share capital of the Company. By declaring the diamonds in the VDIS 1997, the assessee has been able to bring him huge amount of `1,28,48,42,890/- by making a declaration of diamonds valued at `36,87,47,758/- and paying the tax on a flat rate of 30% on the VDIS declaration. After taking note of the declaration of cash in the VDIS 1997 by the assessee group, he held that the assessee has merely followed a circuitous method of transferring money from

- 23 - one account to other on the same day without any actual money involved. There is no physical receipt of any sale consideration of the assessee group for the alleged sale of the diamonds. In the circumstances, the source for the taxes paid out of the sale consideration of the diamonds is untrue and bogus. The amount [taxes paid LESS cash declared] is actually unaccounted funds of the assessee group and the same has to be brought to tax as the income for the assessment year 1998-99 which has escaped the assessment. 12. Dealing with the letters produced by the assessee, he observed that the letter is very cryptic and is not supported by any documents such as confirmations of the persons to whom the diamonds were allegedly sold or their PAN numbers or any explanation regarding the

- 24 - cyclical transactions in all the bank transactions. He further observed that the assessee has also not been able to explain as to how he did carry such a huge amount of diamonds to Surat and such far-of places. He is also not able to explain the sudden disappearance of the purchasers of the diamonds. Therefore, he treated the sale as unexplained credits in the assessee’s books and the sale proceeds of the diamonds are brought to tax as unexplained credits in the assessees books of accounts. The assessee’s claim for long term capital loss was disallowed, because the whole transactions of sale of diamonds is treated as fictitious and manipulated transactions. The Tribunal relied on the judgments of the Tribunals to the effect of treating the proceeds of fictitious diamond sales as unexplained

- 25 - credits in the hands of the assessee. Accordingly, the assessing authority treated the amounts received on sale of diamonds as unexplained credits and brought to tax. The assessee was allowed set-off of the income declared under VDIS. As the return of income was not filed in time, as per Section 139 of the Act and as the assessee has not paid taxes to the extent of 90% of the assessed tax, interest under Sections 234(A) and 234(B) of the Act was charged. The total unexplained cash credit which was brought to tax was `54,64,54,375/- and the balance tax payable was `24,86,19,304/-. 13. Aggrieved by the said order of the assessing officer, the assessee preferred the appeal before the Commissioner of Income Tax (Appeals).

- 26 - 14. Before the Appellate Authority, the assessee raised four grounds – (i) he challenged the validity of reopening; (ii) he challenged the order on the ground of violation of principles of natural justice; (iii) he challenged the validity of addition of Rs.54,36,54,375; and (iv) levy of interest under Section 234A, 234B & 234C of the Income Tax Act. 15. The Appellate authority held, since there was search on 21.10.2003, a notice under Section 153A had to be issued and, earlier when returns filed by him was beyond the period prescribed, a notice under Section 148 and/or 153A was ordered and, therefore, the contention that reopening of the assessment is not valid has no basis. 16. Insofar as the second ground of violation of principles of natural justice is concerned, though the Tribunal was of the view that there is some substance in

- 27 - the said contention, as opportunity was given by the Appellate Authority to produce all the documents on which the assessee wants to rely on, it held on that count the assessment order cannot be set aside. Then it considered the case on merits. It noticed that the diamonds were acquired during the period of 1976-77 to 1981-82 valued at Rs.20,70,68,765/-, they were sold by the assessee during the Previous Year relevant to the Assessment Year for a total consideration of Rs.75,35,23,139/-. After adjusting the indexed cost of acquisition of Rs.76,59,26,410/-, the assessee had declared long-term capital loss of Rs.1,24,03,271/-. The assessee is said to have sold the diamonds to seven persons as set out in the tabular form in the order. The Assessing Authority brought to tax the difference between the amount credited in the books of accounts and the income declared under VDIS as unexplained credit disallowing the assessee’s claim as long term

- 28 - capital loss and the assessment order sets out seven / six reasons for arriving at such a conclusion. When the assessee produced several documents and also filed affidavits before the Appellate Authority, he directed the Assessing Authority to furnish a complete report, who, in turn, wrote to Joint DIT (Inv) Surat. The same was furnished to the assesee and comments were sought for. Accordingly, assessee had furnished the comments. The Appellate Commissioner after going through the said reports, the material on record, held that in the light of the overwhelming evidence in respect of the transactions, mere fact that the buyers could not be traced where they carried on their business 10 years back cannot be a reason to castigate the entire transaction as not genuine and, unless positive material is brought on record to prove otherwise, the evidence produced by the assessee deserves to be accepted. Therefore, he was of the opinion that the action of the

- 29 - Assessing Officer in holding that the sum of Rs.54,64,54,375 as unexplained credit cannot be sustained. He held the sale of diamonds is genuine and accordingly deleted the addition of Rs.54,64,54,375/-. As the returns was filed beyond time limit prescribed under Section 139(1) of the Act, he declined to permit the assessee to carry forward the long-term capital loss of Rs.1,24,03,271/-. Consequently, he also set aside the order passed by the Assessing Authority insofar as the interest is concerned. Aggrieved by this order, the Revenue preferred an appeal before the Tribunal. The Tribunal held that the Commissioner of Income Tax (Appeals) has dealt with the respective issues as contended by the Assessing Officer in a elaborate manner; when the CIT (A) has accepted the transaction and laid to rest after issuing the certificate of having accepted the VDIS in form of diamonds, was not to be questioned which very acquisition is now being queried

- 30 - after a gap of eight years. They did not find any link between sale of diamonds and the finding of the Assessing Officer that the addresses were bogus. They were of the view that once the certificate under VDIS is issued, the benefits flowing from the certificate could not be denied as has been held by various Courts. The sales tax registration numbers, entry memos, valuation report of the registered valuer, bank statements, cashbook extracts of the buyers were furnished. The assessee also filed details of cheques and his bank statement as assessed in the paper book. The remand report furnished by the Assessing Officer is Joint Director, Surat, and only states that the assessee could not be found and the notices have come back. On that ground the Assessing Officer had brought to tax the difference in the amount of income declared and the unexplained cash credits being the consideration for disallowing the assessee’s claim on its loss merely on

- 31 - the ground that either the diamonds were not there or the assesee had ploughed back its unaccounted money under the garb of having sold diamonds declared under VDIS, 1997. Therefore, they were of the considered view that the Revenue had failed to establish its claim that the diamonds never existed. The assessee has been repeatedly claiming that the diamonds existed and the assessee sold the diamonds directly to the purchasers; the assessee had discharged its onus and the sale proceeds were disclosed in the books of accounts, therefore, the assessee had proved the identity, creditworthiness and the genuineness of the transaction in terms of Section 68 of the Act and the addition made by the Assessing Officer was not sustainable in law. Therefore, they upheld the finding of the CIT (A) simply because they established beyond doubt that the diamonds existed and were sold to the parties who paid the cheques and deposited into the assessee’s Bank

- 32 - accounts to ultimately acquire shares of a public limited company, and therefore, they did not find any infirmity in the order of the Appellate Authority and the appeal came to be dismissed. 17. The Commissioner of Income Tax by virtue of the power conferred on him under Section 263 of the Act initiated proceedings in respect of allowing deduction of an amount of Rs.20,70,68,765/- being the income declared under VDIS. Similarly, the assessee has made payment of Rs.6,63,20,630/- on the income declared under VDIS. The Assessee’s contention was it has been paid out of sale proceeds through his bank account with IDBI. However, there is no material to show the said payment. Therefore, he was of the view that the assessment order passed by the Assessing Authority was erroneous sofar as it was prejudicial to the interest of Revenue. After appearance of the Assessee, after hearing both the parties, he held that

- 33 - the Assessing Authority had allowed deduction of Rs.20,70,68,765/- being the income declared under VDIS from the total amount credited in the books as alleged sale consideration of diamonds treated as bogus. He has not taken any action for making addition to the income in spite of the fact that the assessee had not satisfactorily explained the sources from which the taxes were paid under VDIS and therefore he set aside the assessment order passed by the Assessing Authority and restored the same to the file of the Assessing Authority for making fresh assessment in accordance with law in the light of the discussion made in the order. He further issued a direction to the effect that the Assessing Authority should give an opportunity of being heard to the assessee and also ensure that no income is taxed twice. If the entire amount credited as alleged sale proceeds of diamonds is brought to tax by the Assessing Authority and the assessee is able to satisfy the

- 34 - Assessing Authority that the amount of taxes paid under VDIS were out of these unexplained cash credits, then, no separate addition on account of the unexplained source of taxes paid will be required to be made. However before coming to any conclusion, the Assessing Authority should examine the facts of the case and also give an opportunity to the assessee in accordance with the principles of natural justice. Aggrieved by the said order passed in revision, the assessee preferred an appeal before the Tribunal. The Tribunal after hearing both the parties held that once the disclosure made by the VDIS stood certified by the very CIT under the said scheme and in the absence of any material to show that such certificate has been cancelled or withdrawn under VDIS, the Assessing Officer could not make roving enquiries under the pretext of assuming jurisdiction under Section 263 on the same. There is no merit in the finding of recorded in

- 35 - the order passed by the revisional authority. The show- cause notice itself indicates that after having paid taxes, the income declared was to be brought in books on the existence of diamonds. The Assessing Officer had held the sales are bogus which had been otherwise considered appropriate by the learned CIT (A). The assessee had declared the very income to gain immunity thereafter once the certificate had been issued by the learned CIT a decade ago. They did not find any merit in the learned CIT assuming jurisdiction under Section 263. Therefore, the order passed by the revisional authority is set aside. The Revenue has preferred these appeals against the orders passed by the Tribunal upholding the order passed by the Commissioner of Income Tax (Appeals) and setting aside the order of the revisional Authority. 18. We have heard the learned counsel for the parties.

- 36 - 19. Learned counsel appearing for the Revenue assailing the impugned orders contended in spite of several notices issued and the assessee being represented by a Chartered Accountant, the assessee did not furnish the requisite particulars sought for; he did not produce the documents to substantiate his contention that he was owning these diamonds, he sold the diamonds at the relevant assessment year and the amount realised from such sale was contributed as his share in the Company in which he was the Managing Director. Though under VDIS scheme, he declared the diamonds and value of the same being Rs.20,70,68,765/-, the total amount credited to his account is Rs.75,35,23,410/-. Therefore, the escape income is Rs.54,64,54,375 which was brought to tax. The assessee in appeal has produced certain documents. On receipt of the said documents, report of the Assessing Officer was called for, who, in turn,

- 37 - referred the matter to Joint DIT (Inv), Surat, who submitted his report pointing out how the case of the assessee is hallow. A copy of the report was enclosed to the assesee calling for remarks which he has filed. Then on consideration of all these materials, the Appellate Authority ought to have shown how the documents produced for the first time before the Appellate Authority supported the case of the assessee. All that one can make out from the appellate order is they are satisfied from the material on record, the letter, cheques, challans, accounts book, affidavit, PAN numbers etc., that this transaction of sale of diamonds is a genuine transaction. The Appellate Authority ought to have set out in its order, the relevant contents of these documents to show that the order passed by the Assessing Authority and the Report submitted by the investigation unit is inaccurate. In the absence of particulars of the said documents, it is not possible to

- 38 - make out whether the said documents have any relevance at all to the question involved in this case and the Appellate Authority was justified in acting on these documents. The Assessing Authority and even the Appellate Tribunal have simply acted on these documents without referring to any of these documents and how the contents of the said documents establishes the case of the assessee. Therefore, he submits that the approach of both the appellate authorities is not in accordance with law, especially, when the 1st Appellate Authority had directed the evidence to be brought on record and was appreciating the same for the first time, it was incumbent on the 1st appellate Authority to set out the contents of the documents, how it supported the case of the asseesee and pass appropriate order which it has not done. Therefore, the said order requires to be set aside. Insofar as the order passed by the Tribunal setting aside the order passed by the revisional is

- 39 - concerned, it was one without jurisdiction as the material on record was not clear as to whether this amount of Rs.20,70,68,765/- which was declared under VDIS is part of the total consideration of Rs.75,25,23,129/- or is it in addition to the consideration of Rs.75,25,23,129/-. All that the revisional authority has done is, it has set aside that portion of the assessment order and directed the Assessing Authority to redo the same and thereafter depending upon the factual finding to be recorded to give benefit of VDIS if the aforesaid amount was inclusive of the total consideration. 20. It is the specific case of the assessee that he has paid a sum of Rs.6,63,30,630/- tax on VDIS by way of cheque of IDBI Bank that was a statement made by before the Assessing Authority. He seems to have produced before the Assessing Authority in proof of the same. Except saying that there is cheque of IDBI Bank,

- 40 - no further particulars are forthcoming from the orders. Therefore, that question has to be gone into independently by the Assessing Officer. Therefore, the Appellate Tribunal certainly exceeded its jurisdiction in setting aside the said order under Section 263 which was in the interest of the revenue. 21. Per contra, learned counsel appearing for the assessee submits that once a disclosure is made under VDIS and accordingly tax is paid, unless that VDIS certificate is recalled or cancelled, it is not open to the authorities to ignore the same and refuse to grant the benefit flowing therefrom which is an error committed by the Assessing Authority which has been rightly interfered with by the Appellate Authority. Secondly, he contended that the Assessing Authority has proceeded on the assumption that particulars of the purchasers of the diamonds is not forthcoming. The report shows there are no such addressees and therefore he has

- 41 - drawn an adverse inference and treated the said income as undisclosed income. Before the 1st Appellate authority all the particulars are furnished. The 1st Appellate Authority has taken into consideration all the documentary evidence. As the proceedings were initiated nearly eight years after the sale, if, at the addresses given, these purchasers were not available, it cannot be inferred that these persons are fictitious persons. Similarly, the bank statement, challans, letters, affidavits filed clearly establishes that the transaction in question is the genuine transaction and is not fictitious one. Therefore, the Tribunal rightly set aside the order passed by the Assessing Authority which is in accordance with law and therefore, the tribunal was justified in not interfering with the said order. Insofar as the order passed by the revisional authority is concerned when once under the VDIS the assessee declared and paid tax and acting on the same when the

- 42 - Assessing Officer has granted the benefit of deduction, the revisional authority was not justified in setting aside the said order and remanding the matter even in respect of tax paid under VDIS is concerned, as it is evidenced by a cheque and therefore, the revisional authority could not have entertained any doubt or suspicion in this regard and therefore he submits that the appellate authority was justified in setting aside the order. 22. The appeal was admitted to consider the following substantial question of law: Whether the Appellate Authority and the tribunal were justified in holding that the deduction has to be given to the value of the diamonds declared when the entire transaction is held to be bogus? 23. From the aforesaid material, it is clear that for the Assessment Year 1998-99, the assessee has shown the sale of diamonds jewellery for Rs.75,35,23,139/- and

- 43 - after adjusting the indexed cost of acquisition, he has claimed loss of Rs.1,24,03,271/-. The said amount is shown as his investment in the Bellary Steels and Alloys Limited. He also declared under VDIS scheme 1997 jewellery (diamonds) of 41078.5 carat of loose diamonds worth Rs.20,70,68,765/- (shares of Rs. One Crore) (40,00,000) equity share of Rs.10 each of face value of M/s. Kamal Overseas Ltd., acquired at Rs.2.5 per share, cash Rs.40,00,000/- and paid a sum of Rs.6,63,20,630/- as tax at 30%. He was called upon to show the source of income; the persons to whom he sold the diamonds; the amount which he has realised by sale of such diamonds. As is clear from the fact set out above, except producing the documents, he avoided the proceedings in spite of engaging a Chartered Accountant. Therefore an assessment order came to be passed. Then he filed an appeal. He complained of violation of principles of natural justice. He was directed to produce what all the

- 44 - documents he wanted to produce. The assessee produced the documents. The Appellate Authority directed the Assessing Officer to furnish a complete report, who, in turn, wrote to Joint DIT (Inv) Surat. The same was furnished to the assesee and comments were sought for. Accordingly, assessee had furnished the comments. It is on consideration of these materials, the Assessing Authority should have decided the aforesaid case. The Assessing Authority on consideration of the materials produced before him categorically held that there is no physical transfer of diamonds and all the amounts received on this alleged sale of diamonds declared in the VDIS 1997 are merely fictitious book transactions, planed and executed with the sole purpose of explaining the sources for the investment in the share capital of the company; by declaring diamonds in the VDIS 1997, the assesee has been able to bring in huge amount of Rs.128,48,42,890/- by making a declaration of diamonds

- 45 - valued at Rs.36,87,47,758/- and paying tax at a flat rate of 30% on the VDIS declaration; the amount (taxes paid less cash declared) is actually the unaccounted funds of the assessee group and the same to be brought to tax as the income for the assessment year 1998-99 which has escaped assessment. The Assessing Officer treated the same as unexplained credits in the assessee’s books and the sale proceeds of the diamonds are brought to tax as unexplained credits in the assessee’s books of accounts. The assessee’s claim of long term capital loss is disallowed because the whole transaction of sale of diamonds is treated as fictitious and manipulated transactions. However, he allowed set off the income declared under VDIS. This factual finding could have been considered by the Appellate Authority on the basis of the material, which was placed before him. Though strictly speaking, he is called the Appellate Authority, in tax jurisprudence, it is well settled that the 1st Appellate

- 46 - authority would be a final assessing authority. Therefore, rightly, he negatived the contention of the assessee that the order passed by the Assessing Officer is in violation of the principles of natural justice as the Assessee has a right to produce the documents before the 1st Appellate Authority. As a matter of fact, the right to produce the evidence in support of his contention by virtue of Section 251 of the Act which he as failed to produce before the Assessing Authority. Once the assessee has produced the evidence before the Appellate Authority and if the Appellate Authority were to appreciate the said evidence and wants to pass an order, for all practical purpose he would be the original authority passing the orders. Then, it is incumbent on the Appellate Authority to set out in his order, the relevant contents of the documents which has bearing in deciding the issues involved and on that basis if he is to set aside the order passed by the Assessing Officer on a question of fact he has to set out

- 47 - how the facts which are brought before him are contrary to the facts noticed by the Assessing Authority and how it is erroneous. By merely stating that documents are produced, cheques are produced, challans are produced, PAN number is given, affidavits are filed and carefully having gone into those documents, he is convinced that the assessee has made out a case for interference and finding recorded by the Assessing/Revisional Authority cannot be sustained would not satisfy the requirement of law. Against the said order, an appeal is provided. The Appellate Authority should have an opportunity to sit in judgment over the judgment of the appellate/revisional authority and assessment of the evidence on record. Seen from this angle, we are unable to make out what are the contents of the documents which are produced before the Appellate Authority which supported the case of the assessee so as to interfere with the order of the Assessing Authority. The second Appellate Authority, on the

- 48 - contrary, declined to interfere with the order of the Appellate Authority. Therefore the order of the Appellate Tribunal is also not in accordance with law and calls for interference. As even the Appellate Tribunal has not referred to the contents of any of these documents, how the finding of the fact recorded by the Assessing Officer is contrary to the legal evidence available on record is not clear. It is in the absence of these documents being brought on record is not clear in manner known to law, we are also handicapped in deciding the case on merits. It is in these circumstances, we have no option but to set aside the order passed by the Tribunal as well as the Appellate Authority and remand the matter back to the Assessing Authority. The Commissioner of Income Tax by virtue of the revisional power conferred on him has remanded the matter to the Assessing Authority for fresh consideration. Similarly insofar as revisional order is concerned all that the revisional authority has done was,

- 49 - in the absence of clear indication of the stand of the assessee and the Assessing Authority without proper verification has granted the benefit of the income which is the subject matter of VDIS, the order of Assessing Authority was set aside with a direction to redo the whole thing. The revisional authority expressly stated in the order of remand that if the VDIS benefit granted to the assessee formed part of total amount invested, then the assessee would have the benefit of escaping the double taxation on the same. The Tribunal committed serious error in interfering with such order of remand and, therefore, even that order of the appellate authority cannot be sustained. Under these circumstances we are of the view that the proper course would be to set aside these orders and remand the matter back to the Assessing Authority to redo the whole assessment on the basis of material now brought on record. Hence, we pass the following order:-

- 50 - O R D E R (a) All the appeals are allowed. (b) The order passed by the Appellate Authority is hereby set aside. (c) The order passed in revision is restored. (d) The order passed by the Appellate authority i.e., Commissioner of Income Tax (appeals) and the order passed by the Assessing Authority are hereby set aside and the matter stands remitted to the Assessing Authority to reconsider all the issues in accordance with law in the light of the observation made above after hearing the assessee and pass a fresh order of assessment on the basis of the

- 51 - material which is on record, in all the cases. (e) Parties to bear their own costs. SD/- JUDGE SD/- JUDGE RKK/KMS/-