In Re: Dodsal Ltd.

The petitioner, a limited company, submitted an application u/s 245C of the income tax Act 1961 (''the Act'') on 6-8-1992 for settlement of its income tax case for the assessment years 1989-90 and 1990-91. The Commissioner''s report was received on 7-10-1992 wherein he conceded that proceedings for assessment of income of the petitioner were pending for the assessment year 1989-90 as an appeal was pending before the Commissioner (Appeals). As regards assessment year 1990-91, however, the Commissioner observed that no proceedings were pending as on 6-8-1992 as the petitioner had not filed a return of income for the assessment year 1990-91 up to 31-3-1992 which was the last date for filing the return. The report clarified that a return was filed for the assessment year 1990-91 on 30-7-1992 but the same was treated as non est as it was filed after the permissible last date. The case was heard u/s 245C(1)/245D(1) of the Act on 30-11 -1992. On the preliminary question of pendency of proceedings for the assessment year 1990-91, Shri Harish, the counsel for the petitioner, pointed out that a notice u/s 148 of the Act was issued for the assessment year 1990-91 on 25-9-1992 and vide its letter dated 27-11-1992 the petitioner stated that the return filed by it on 30-7-1992 may be taken as the return in response to notice u/s 148. Thus, he urged that if this same application had been filed on 27-11 -1992, it would have been found to be satisfying all preliminary requirements of section 245C. (The proceedings for the assessment year 1989-90 were pending with the Commissioner (Appeals) even on 27-11 -1992). It was, therefore, decided to proceed with the consideration of the petition u/s 245D(1) treating it as filed on 27-11-1992.

( a ) Shri Harish invited attention to the general background of the petitioner-company as given in the papers filed with the petition. The nature of the work done is clear from the first para of Annexure A to the statement of facts which is as under:

The applicant company, Dodsal Ltd., was established in 1948 and has over the years grown into a large organisation with specialisation in various fields of general contracting such as pipeline construction, plant construction (in the fields of refineries, petro-chemicals plants, steel plants; power plants, etc.) infrastructure activities such as canal building. Railway Electrification, etc.

( b ) He explained that the company had executed or was in the process of executing contracts like the following:

Hazira-Bijapur-Jagdishpur Gas Pipeline for Gas Authority of India Ltd. (Contract value Rs. 95 crores)

Durgapur Steel Plant Modernisation for Steel Authority of India Ltd. (Contract value Rs. 207 crores)

Construction of two branch canals projects for Sardar Sarovar Narmada Ltd. (Contract value Rs. 90 crores)

Railway Electrification for Indian Railways (Contract value Rs. 5 crores)

( c ) He further explained that up to 1986 the company was engaged in work involving annual turnover of about Rs. 25 crores but the company took a giant leap forward in 1986 by securing the H.B.J. pipeline contract of Rs. 95 crores and other important contracts of about Rs. 50 crores which had all to be completed in a short span of time. The management machinery was not geared for this sudden increase of burden and there were, therefore, serious lapses in record keeping. Moreover, Shri Harish stated that the company terminated the services of a senior employee in 1990 and got involved in a litigation with him over getting vacant possession of the residential flat that the company had allotted to him. That employee, Shri Harish explained, started harassing and threatening the company. An extract from the SOF is as under:

Thus, Mr. R. Madhusudan has been acting maliciously with an intention to harass the company to gain personal advantage and the company strongly suspects that in order to achieve his goal, he has also tampered with the important records of company in the absence of which the applicant is finding difficulties in establishing the genuineness of the purchases as well as claiming other tax benefits which otherwise can be available to the applicant.

( d ) Shri Harish pleaded that these adverse factors had their effect when the assessment proceedings for the assessment year 1989-90 were taken up in 1991, when for want of elaborate records and proper supporting evidence the company was not able to prove some purchases to the satisfaction of the Assessing Officer. Shri Harish stated that the company even agreed to the disallowance of deduction for purchases to the extent of Rs. 1.5 crores, but the officer, instead of honouring the agreement, went back on it and made an addition of over Rs. 8 crores which was absolutely baseless and quite out of proportion to the defects noted by him in the accounts. Shri Harish invited attention to the following extract from the assessment order for the assessment year 1989-90:

BOGUS PURCHASES

During the course of assessment proceedings, details of purchases were called for. The details of purchases include the purchases from following parties:

Name of suppliers

Total amount

Rs.

Aroh Trading Co.

3,28,64,603.58

..................................

..............................

Steel Supplies Syndicate

3,56,265.00

8,31,43,983,52

Vide letter dated 10-3-1992 the assessee was requested to produce the purchase vouchers in respect of purchases made from Meena Sales Corpn. and Shri Ram Agencies. The proprietor Shri Kailash Khandelwal of Meena Sales Corpn. admitted that he has issued the sale bill for consideration of 1/2 per cent commission on value of bill. Shri Ram Agency was owned by his wife. On behalf of the wife he also stated that there was no purchase of raw material except on the commission of 1/2 per cent on the sale bills issued. In the said letter it was also mentioned to give the purchase vouchers as well as the complete postal addresses of the following 14 parties:

Name of the party

Amount

Rs.

Preshit Trading Co.

26,83,715

..................................

..............................

Rajasthan Sales Corpn.

3,14,760

86,43,198

The assessee filed petition (without prejudice) dated 20-3-1992 on 24-3-1992 stating therein that due to certain difficulty he cannot produce the party as well as the relevant records. In the said petition following reasons were given for non-production of documents and also parties:

( i )They have shifted their headquarters from Bangalore to Bombay and in the process are not able to trace all the documents that are necessary to prove the purchases.

( ii )Some of the records have been either lost, damaged, mutilated and/or misplaced at the site due to heavy rains at Nagothane site.

( iii )Due to paucity of time even tracing of the parties are also difficult.

In view of the reasons given above the assessee offered to buy peace and avoid litigation: they agreed for lump sum addition of Rs. 1.5 crores inclusive of the amount of peak credit, with a clear understanding that there will be no penalty proceedings or prosecution or any other action, under the income tax Act and the company be not saddled with the liability by invoking the provisions of section 234B/234C of the said Act. In the petition it is stated that materials have been purchased by them and invariably deliveries have been taken by them and materials consumed. In support of that certificate from the engineer regarding the reasonableness of consumption of materials for the relevant accounting year in respect of the said projects at the said site is also enclosed.

Though the assessee filed the petition without prejudice but indirectly they have admitted that they cannot produce the parties mentioned above. Therefore, they cannot explain the debits to that extent in their profit and loss account. As regards the consumption of the material, on this point no comments can be made at this stage as during the year the assessee had about 37 projects and out of it 24 were incomplete and 13 were complete projects. So verification of consumption vis-�-vis record is not at all possible within two or three days time. Since the assessee itself has admitted that it cannot produce the parties mentioned above, therefore, the purchases from the above referred parties cannot be said to be genuine. I therefore, disallow the full purchases of 8.31 crores and for that 271(1)( c ) penalty proceedings are also initiated.

Shri Harish pointed out that the purchases referred to by the officer were in respect of 33 parties totalling Rs. 8.31 crores but-

( i )the purchases from Meena Sales and Ram Agency totalled to about Rs. 41 lakhs only,

( ii )the statements from the above two parties were recorded by the officer behind the back of the assessee,

( iii )the assessee was not given copies of their statements,

( iv ) the assessee was not given an opportunity to cross-examine these two parties,

( v ) apart from that the officer''s letter dated 10-3-1992 referred to in the assessment order ( see extract above) only called for ''purchase vouchers and postal addresses'' of only 14 parties as stated therein,

( vi )the purchases from these 14 parties amounted to only Rs. 86.43 lakhs and even if the officer were to add this amount to the above figure of Rs. 41 lakhs, the total would work out to Rs. 1.27 crores only,

( vii )the company asserted then and maintains even now that the purchases were all genuine but because of the peculiar facts explained and because it was aware of its shortcomings in the matter of proving the purchases the company had agreed to an addition of Rs. 1.5 crores by way of a settlement of the issue,

( viii )and yet to the surprise of the petitioner, the ITO made an addition of Rs. 8.31 crores which was not Justified either by the incomplete enquiries as at ( i ) to ( ii ) above or by the agreement referred to at ( vii ) above.

Shri Harish stated that the assessment order for the assessment year 1990-91 had not been passed but the facts were similar and, hence, if assessment year 1989-90 was admitted, the petitioner would like the assessment year 1990-91 also to be admitted.

Shri Harish stressed that even in settlement the company does not seek to capitalise the amount of purchases disallowed. This is consistent with its stand that the purchases are not bogus but the company has to compromise and agree to some disallowance on account of its failure to prove some purchases, which again is due to the peculiar circumstances explained by him. He pleaded that in these circumstances the petition ought to be admitted by the Settlement Commission.

The Commissioner PR) urged the following points:

( a )The petitioner was not cooperating with the department. It was not filing returns in time. The return for the assessment year 1990-91 was filed after the time limit expired (discussed above). The return for the assessment year 1991-92 has not yet been filed.

( b )It is clear that the assessee has been debiting bogus purchases into its books.

( c )When the Assessing Officer found out that some purchases were bogus, he asked for bills and addresses and as the assessee did not co-operate, the officer was constrained to add the entire amount.

( d )Since only the question of quantum of disallowance out of purchases was involved, that did not constitute a complexity and the correct quantum of addition could easily be determined in appeal,

Shri Harish in his reply made out the following points:

( i )As regards delay in filing of returns pointed out by the Commissioner (DR), Shri Harish stated that the TDS collected by the department on behalf of the assessee was more than the Income as per return and the department, therefore, did not suffer on account of the delay. He urged that on the contrary the delay in claiming a refund only went to support his contention about the difficulties faced by the petitioner explained earlier.

( ii )About the allegation that the assessee was obviously debiting false purchases in its books, Shri Harish argued that the officer had recorded a couple of statements behind the back of the assessee, not even given copies of the same to the assessee, called for particulars of purchases of about Rs. 1.25 crores and then suddenly made an, addition of over Rs. 8 crores 1 Such an action would not justify the charge that the purchases were obviously bogus.

( iii )Dealing with the departmental representative''s argument that the quantum of addition could be determined in appeal proceedings, Shri Harish argued that the manner in which an addition of over Rs. 8 crores had been made after calling for particulars of Rs. 1.25 crores did not give rise to a reasonable expectation that the appellate authority could easily quantify the addition to be made. Considerable enquiries would be necessary from outside parties, opportunity would have to be given to the assessee to cross-examine parties who made adverse statements, the nature of the works carried out would have to be studied, the fact that the petitioner could not complete the projects without consuming various items and the need to purchase those items and the reasonable quantum of purchases that would have to be allowed having regard to the work done would have to be considered, and reasonable additions would have to be worked out for each of the two years. No appellate authority could be expected to take up this task and, therefore, Shri Harish urged that what the DR meant was that the assessment order could be set aside by the Commissioner (Appeals) and then the order reframed by the Assessing Officer. He stressed that it was not a case of addition of a few thousand or even a few lakhs. The matter involved several crores. Shri Harish urged that it was not fair for any officer to just add over eight crores in a slipshod manner without the least regard for elementary principles of natural Justice like giving an opportunity to the assessee, and then argue that there was no complexity involved as he could always reframe the order after it was set aside in appeal. Shri Harish pleaded that the petitioner would in that case be dragged into wasteful litigation for years and it was precisely to avoid such long drawn litigation that the company was seeking recourse to Chapter XIXA. Shri Harish argued that on facts the petitioner was entitled to seek recourse to the provisions of Chapter XIXA and the Settlement Commission, therefore, ought to admit the petition.

We have heard the counsel for the petitioner and the Commissioner (DR) as above. We find that although the petitioner does not admit that the debit for purchases has been inflated, it has offered to accept a substantial addition to its incomes for the assessment years 1989-90 and 1990-91. The amount offered before us in the SOF is much more than the figure of Rs. 1.5 crores that was offered - allegedly on agreed basis - before the Assessing Officer. We do not appreciate the manner in which a large addition of over Rs. 8 crores has been made for the assessment year 1989-90 and we are inclined to agree with the petitioner that it will be involved in litigation for years if the petition is not admitted by us. We feel that in these circumstances the petitioner is justified in seeking recourse to Chapter XTXA. We, therefore, admit the petition for the assessment years 1989-90 and 1990-91. In accordance with the provisions of sub-section (2A) of section 245D. the petitioner shall, within 35 days of the receipt of the order, pay the additional amount of income tax payable on the income disclosed in the petition and shall furnish proof of such payment to the Settlement Commission and the Assessing Officer assessing it, within 15 days of making the aforesaid payment. If the petitioner does not pay the additional amount of income tax payable as above within the time specified in sub section (2A) of section 245D, the amount of income tax remaining unpaid together with the interest payable thereon under sub-section (2C) of section 245D shall be recovered by the Assessing Officer in accordance with the provisions of section 245D(2D).