The Hindu Business Line : A war of words

A LENGTHY debate on Section 254(2) of the Income-Tax Act, 1961 came up before the Delhi Bench of the Income-Tax Appellate Tribunal (ITAT) in Finquick Finance (P) Ltd vs Dy CIT (Delhi) TM (2003 87 ITD 323).

The case was extensively argued and the uniqueness of the case was that the veracity of the statements made by the warring factions had to be cross-verified by the ITAT.

Facts

The company filed a return of income for the assessment year (AY) 1997-98 and it was processed under Section 143(1)(a). With an intent to conclude the assessment under Section 143(3), the assessing officer (AO) issued various notices under Section 142(1). He was keen to obtain evidence from the assessee about the genuineness of the share application money and the unsecured loans received by the assessee.

Finquick turned a deaf ear to all these notices. Frustrated, the AO framed the assessment under Section 144 and added the share application money and unsecured loans as income. This woke up the assessee who knocked on the doors of the Commissioner (Appeals) by pleading additional evidence. The Commissioner (Appeals) rejected this plea which forced the assessee to approach the ITAT.

The ITAT also concurred with the Commissioner (Appeals) and rejected the claim. Left with the option of approaching the courts, Finquick appeared before the Tribunal again under Section 254(2) seeking a recall of its order stating that some grounds had not been considered by it.

Veracity of documents

During the initial hearings, there were contrasting arguments given by the representatives of Finquick and the Department. Finquick argued that all the documents in the paper book before the ITAT were certified copies procured by the assessee from the AO and the Commissioner (Appeals).

The directors of the company ostensibly appeared before the AO and placed these documents on record. As a result, he was of the opinion that there was no non-compliance of the terms and conditions of the notices issued under Section 142(1) or 143(2). He was also of the opinion that the AO should have issued a notice prior to framing the order under Section 144.

The representative of the Department took an exactly opposite view. He countered that none of the directors of the company had filed any documents before the AO. All that the directors had done was to seek an adjournment which was documented in the order entry sheet. The CIT (Appeals) had also not admitted to having been privy to any documentation from Finquick.

Since there were two diametrically opposite views, the Tribunal decided to ask the warring factions to come back with additional evidence to prove their claims. The parties reappeared with Finquick producing an affidavit and the Department copies of the income-tax records. Since the documents given by Finquick were not up to the expectations of the Tribunal, they asked Finquick if they could improve upon the situation to which they expressed their inability.

After going through the evidence produced, the ITAT concluded that it could not be said that the documents claimed to have been produced before the AO were actually produced. In coming to this conclusion, the ITAT also considered the concept of preponderance of possibilities.

Finquick's defence

To justify their stand that share application money cannot be considered as income, Finquick relied on the Supreme Court decision in CIT vs Stellar Investment Ltd (2001 115 Taxman 99). It felt that the Delhi High Court decision in CIT vs Sophia Finance Ltd (1994 205 ITR 98) has been rendered academic and does not survive.

It was also stated that the share application money was received from the same persons as was done in the previous assessment year. On the issue of treating unsecured loans as income, Finquick claimed that there is no provision in I-T law for considering loans as income. Also, Finquick had filed the complete details of the loans and had deposited them into its own bank account.

Department's stand

The Department, on the other hand, argued that the ratio of the decision in CIT vs Stellar Investment Ltd would not hold water here since the Full Bench of the Delhi High Court, in CIT vs Sophia Finance Ltd, had dismantled the observations made in the Stellar case.

Reacting to the statement that the share application money was received from the same persons as last year, the Department stated that there was no evidence to prove this. Due to this lack of evidence, the AO was right in his stand.

Tribunal's decision

After going through the decisions quoted in detail, the ITAT concluded that Finquick had failed to produce three sine qua nons for proving unexplained credits: i) identity of the creditors; ii) capacity of the creditors; and iii) genuineness of the transaction.

As a result, the Commissioner (Appeals) was correct in framing his assessment and concurred with the additions made on account of share application money and unsecured loans.

Difference of opinion

There was a difference of opinion amongst the members on the submission of Finquick that the order of the Tribunal is to be recalled since all the grounds of appeal were not heard by the ITAT.

The Accountant Member decided to vacate the order and restore the appeal for de novo disposal and hearing in accordance with law. Reliance was placed on the ratio in the Grindlays Bank Ltd vs Central Government Industrial Tribunal (AIR 1981 SC 606) and Tin Box Co vs CIT (2001 249 ITR 216) decisions.

The Judicial Member opined that the order could not be recalled since it would be contrary to the findings in the Karan & Co vs ITAT (2002 253 ITR 131) case. He was of the opinion that a partial recall of the order was in the interests of justice.

Third member's decision

The third member concluded that the Tribunal's orderpassed under Section 254(1) did not merit a total recall since the mistakes apparent from the record were capable of being rectified and both the members were substantially in agreement on this point.

He agreed with the opinion of the judicial member that a partial recall of the order was the right thing to do in the circumstances.

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