Prehladbhai Naranbhai Patel vs N.K.C. Nair, Income Tax Officer

D.A. Mehta, J.—This petition challenges notice dated March 17, 1999, issued by the respondent u/s 148 of the Income Tax Act, 1961 ("the Act") for the assessment year 1992-93. The challenge is primarily on the ground that as the impugned notice has been issued beyond a period of 4 years from the end of the relevant assessment year, the burden is on the Revenue to establish that any one of the conditions stipulated by the proviso to Section 147 of the Act stands fulfilled so as to vest the respondent-authority with jurisdiction, but the respondent-authority has failed to establish the jurisdictional facts.

The facts which are not in dispute are that on October 23, 1992, a return of income declaring loss of Rs. 9,17,411 was filed by the petitioner in relation to the proprietary business carried on in the name of Shyam Traders. The assessment came to be framed u/s 143(3) of the Act on January 31, 1995, assessing the loss at Rs. 8,41,205. The impugned notice dated March 17, 1999, has been issued after recording reasons which read as under:

Regarding : Shri Prahladbhai Naranbhai Patel

Status : Individual

Assessment year : 1992-93

Reason for reopening assessment u/s 148

In this case the assessee has filed the return of income showing total loss of Rs. 9,17,410. The total loss was assessed at Rs. 8,41,205 u/s 143(3). In the return of income, the assessee has reduced the stock of cotton by 325 quintals by claiming that it has been burnt due to fire. On verification of the records, it appears that the assessee did not show the income of Rs. 3,22,160 being the insurance claim accepted by the insurance company. Since the assessee has maintained the books of account on mercantile basis during the year, the fire claim of Rs. 3,22,160 accepted by the insurance company should be shown as income by the assessee. However, the assessee failed to do so. I have, therefore, reason to believe that the income of Rs. 3,22,160 has escaped assessment.

Ahmedabad, Dated 23-2-1999 (N.K.C. Nair) income tax Officer, Ward-3(6) Ahmedabad.

The learned advocate for the petitioner has assailed the impugned notice by stating that there was no failure on the part of the petitioner to disclose truly and fully all material facts necessary for the assessment of the relevant assessment year. That the remaining two conditions regarding non-filing of return and not responding to statutory notice are not applicable in the facts of the case. It was submitted that along with the return of income, the petitioner had placed a note which reads as under:

Notes : There was a fire in the business premises of Ambica Vijay Cotton Ginning and Pressing Factory on April 25, 1991. At that time, 200 bales of cotton belonging to me were burnt away. I had insurance policies to the extent of Rs. 8 lakhs with New India Insurance Company. I had put up a claim along with other dealers. As the claim was not settled with the company, a complaint was made under the Consumer Protection Act. Thereafter, a regular complaint has been filed at No. 66/92. The company has replied on July 17,1992. The company has not made any settlement so far. As nothing is received so far, the value of burnt bales of cotton has been claimed as loss. When the compensation is settled, and received from the insurance company, the same shall be offered as income of the year of receipt.

The return of income was accompanied by tax audit report in Form No. 3CB as required by the provisions of Section 44AB of the Act. Note No. 10 of the tax audit report dated October 10, 1992, gave complete details as to the destruction of 200 bales by virtue of fire which took place on April 25, 1991. The said note reads as under:

No. 10 As per the explanation given by the assessee, 200 cotton bales, i.e., 325 quintal were burnt due to fire took place on April 25, 1991, in the premises of Ambica Vijay Cotton Ginning and Pressing Factory, Dholka, where the goods of the assessee were lying. The insurance claim has been made with insurance company. The said claim is not settled even after lapsed of more than fifteen months. It is further explained by the assessee that when the compensation, i.e., fire claim will be received from the insurance company. The same will be credited in the books of account and will be offered to tax in that year.

It was, therefore, submitted that in the absence of any omission on the part of the petitioner, the impugned notice was bad in law and be declared to be so.

On behalf of the respondent-authority, it was emphatically pointed out that as recorded in the reasons for reopening, the respondent-authority had come into possession of information pointed out by the internal audit that a sum of Rs. 3,22,160 was the amount of insurance claim accepted by the insurance company. The petitioner-assessee had failed to show the said amount as income despite the fact that the petitioner maintained the books of account on the mercantile system of accounting. Therefore, the impugned notice was rightly issued by the respondent-authority. In support of the submissions, reliance was placed on the order dated October 20, 1993, made by the Consumer Disputes Redressal Commission in Complaint No. 66 of 1992, with special reference to the report of the surveyor, one Shri U.R. Shah of the insurance company wherein the surveyor has assessed the value of the damaged bales after deducing the salvage and adding the fire-fighting costs and resorting to exclusion clause, and held the entitlement of the complainant, i.e., the petitioner at Rs. 3,22,160. It was, therefore, contended that at least to this extent, the petitioner was required to disclose the said amount as income liable to tax for the year under consideration.

The facts noted hereinbefore go to show that the petitioner had unequivocally pointed out the factum of fire, the fact of the petitioner having made claim before the insurance company, and the fact that the claim was not settled till the point of time of filing of return. In fact, the petitioner had categorically stated in the note placed along with the return of income and the auditors had recorded in the tax audit report that when the claim is settled and received from the insurance company, the same shall be offered as income in the year of receipt. When one reads the reasons recorded, it is apparent that the assessment made by the surveyor of the insurance company has been treated by the respondent-authority as the income accruing to the petitioner.

However, the order of the Consumer Disputes Redressal Commission on which reliance has been placed for recording of reasons cannot carry the case of the Revenue any further. Firstly, the said order is dated October 20, 1993, while the relevant previous year in the case of the petitioner had ended on March 31, 1992. Therefore, even without going further, the said order cannot be treated as a basis for forming an opinion that some income had escaped assessment. Such an opinion could not have been formed for the relevant assessment year, namely, assessment year 1992-93 considering the fact that the order of the Commission was not in existence during the relevant accounting period, i.e., April 1, 1991, to March 31, 1992. Secondly, even if the said order is read, it is apparent that the Commission itself has recorded, after recording the assessment made by the surveyor of the insurance company, the complainant did not accept the assessment. This is a statement of fact recorded by the Commission. The respondent-authority could not have, therefore, even prima facie formed an opinion that such an amount had accrued as income in the hands of the petitioner-assessee merely because the surveyor of the insurance company had worked out some figure. In fact, the order itself records that the insurance company has been directed to make payment of sum of Rs. 7,84,862 along with 12 per cent. interest as against the claim of sum of Rs. 8,00,000.

In fact, the petitioner has placed on record communication dated October 15, 1999, annexure F, issued by the New India Assurance Company Limited and addressed to the petitioner wherein it is specifically stated:

Sub : Claim Status Certificate for Fire Claim No : 91/11/014 and 015, Date of Fire-25-04-91 for the stock of cotton covered under Policy Nos. 11 21002 04965 & 11 212002 05027.

Dear Sir,

This has reference to your letter of even date, regarding the above subject. We have to inform you that the above claims are still pending as per our branch office record. Further to this you have claimed for Rs. 4,00,000 + Rs. 4,00,000 = Rs. 8,00,000. Your claims files which are under dispute, are lying with our higher authority for the further negotiation with National Forum. For the latest status of information you may contact our Regional Office, at Ahmedabad.

Branch Manager.

Thus, it is clear that despite the order made by the Commission in 1993, as late as October 15, 1999, the insurance company had not accepted the claim of the petitioner and the matter was pending before the higher authorities. There was, therefore, no question of treating any part of the claim as income which could be stated to have accrued during the relevant previous year relevant to the assessment year 1992-93.

In the aforesaid set of facts and circumstances of the case, it is not possible to state that there was any omission to fully and truly disclose all material facts relevant for the assessment of the assessment year in question.

On the absence of any failure on the part of the petitioner, the impugned notice dated March 17, 1999, issued u/s 148 of the Act for the assessment year 1992-93 could not have been issued beyond a period of 4 years from the end of the relevant assessment year. Accordingly, the impugned notice is quashed and set aside. The petition is allowed accordingly. Rule made absolute. There shall be no order as to costs.