Rc/64/2002 Of Commissioner Of Income Tax v. Shri Ramdas Motor Transport Ltd

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE T. SUNIL CHOWDARY REFERRED CASE No. 64 OF 2002 24-10-2014 BETWEEN The Commissioner of Income Tax, Karnataka, Central, Bangalore …Applicant And Shri Ramdas Motor Transport Ltd, Kakinada …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND HON’BLE SRI JUSTICE T. SUNIL CHOWDARY REFERRED CASE No. 64 OF 2002 ORDER:(per the Hon'ble Sri Justice L. Narasimha Reddy) This reference under Section 256(1) of the Income Tax Act, 1961 (forshort, ‘the Act’) is at the instance of the Revenue. The facts, in brief, that gave rise to the making of the present referenceare as under: The respondent is a manufacturer of automobile parts. It also undertakesseveral other business activities including the one in transport. For theassessment year, 1984-85, it submitted returns wherein deduction of a sum ofRs.84,76,463/- was claimed towards commission and brokerage on sale ofautomobile parts, said to have been made in favour of four firms, namely (1)Shri Bhanu Enterprises, Kakinada (2) Shri Bhaskara Auto Service, Kakinada (3) Shri Prabhakar Enterprises, Kakinada and (4) Mehta Trading Company,Bombay. That plea however was not accepted and deduction was denied. Theassessing officer relied upon a statement recorded from the Managing Directorof the assessee company, during the course of search conducted in the year1988 and took the view that the so-called payment of commission andbrokerage to authorised dealer-firms was noting but a device to evade tax. Forthe assessment year 1985-86, claim for deduction under the same heading fora sum of Rs.97,67,302/- was made. Here again, the assessing officer reliedupon the statement recorded under Section 132(4) of the Act and disallowed theclaim to the extent of Rs.56,16,426/-. Against the order of the assessing officerfor the two assessment years, two appeals were filed before the Commissionerof Income Tax (Appeals), Vijayawada. The Commissioner (Appeals) partlyallowed the appeals and allowed deduction, to the extent of Rs.76,76,463/- forthe assessment year 1984-85 and Rs.21,29,278/- over and above what wasallowed by the assessing officer for the assessment year 1985-86. TheRevenue, on the one hand and the assessee, on the other hand filed twoappeals each, before the Hyderabad Bench ‘A’ of the Income Tax AppellateTribunal (for short, ‘the Tribunal’) feeling aggrieved by the orders passed by theCommissioner (Appeals). The principal contention before the Tribunal was as to whether it wasopen for the assessing officer to take into account, the statement recordedunder Section 132(4) of the Act, at a subsequent point of time. The departmentpleaded that in view of the amendment to the provision, it was open to them toplace reliance upon the statement even in respect of the proceedings that arereferable to earlier assessment years. The contention of the respondent-assessee was two fold. The first was that the amendment was prospective innature and the second was that even on merits, the statement recorded underSection 132(4) has no evidentiary value since it has been retracted by theperson from whom it was recorded. The Judicial Member accepted the contention of the Revenue, whereasthe Accountant Member held the other way. Therefore, the matter was referredto a third member. He agreed with the Accountant Member. As a result, theappeals preferred by the assessee were allowed and those preferred by theRevenue were dismissed. The Revenue filed R.A Nos.250, 251, 430 and 431/Hyd/1991 in the appeals, with a request to refer the following questions tothis Court, for answer: “1. Whether the interpretation of Appellate Tribunal as regards thescope and ambit under section 132(4) is correct? 2 . Whether the Appellate Tribunal is justified in holding thatExplanation to sec.132(4) is prospective in nature though the saidexplanation laid down only rule of evidence and in that sense it is onlyprocedural in nature?” The Judicial Member accepted the contention of the Revenue, whereasthe Accountant Member held the other way. Therefore, the matter was referredto a third member. He agreed with the Accountant Member. As a result, theappeals preferred by the assessee were allowed and those preferred by theRevenue were dismissed. The Revenue filed R.A Nos.250, 251, 430 and 431/Hyd/1991 in the appeals, with a request to refer the following questions tothis Court, for answer: “1. Whether the interpretation of Appellate Tribunal as regards thescope and ambit under section 132(4) is correct? 2 . Whether the Appellate Tribunal is justified in holding thatExplanation to sec.132(4) is prospective in nature though the saidexplanation laid down only rule of evidence and in that sense it is onlyprocedural in nature?” Questions were accordingly referred. However, on an earlier occasionthis Court refused to answer the reference. Thereupon, the matter was carriedby the department to the Hon’ble Supreme Court. The appeals were allowed bythe Supreme Court. In addition to directing that the questions framed in theapplication be answered, the Supreme Court directed as under: “Should the High Court come to the conclusion that theExplanation to section 132(4) is retrospective in nature. It shall considerwhether the Tribunal was right in the order that it passed, having regard tothe evidence on record.” In view of this development, the Tribunal passed an order dated 11-12-2001, referring the questions to this Court. Sri S.R. Ashok, learned Senior Counsel for the Revenue submits that thecompanies to which the respondent is said to have paid commission arenothing but name lenders and they are in fact the branches or establishmentsof the same family that owns and controls the respondent. He submits thatthrough a specific amendment, the Parliament empowered the authorities underthe Act, to rely upon the statement recorded during the course of a search ofthe premises of an assessee, not only in the proceedings pertaining to theblock period, but also in relation to any other proceedings and that theamendment being clarificatory in nature would cover all the proceedings thatwere pending, by the time the statement was recorded. He further submits thatSection 132(4) of the Act is purely procedural in nature and any amendment toit would date back to the origin of the provision. He has placed reliance uponthe judgments of the Supreme Court in Commissioner of Wealth Tax v.Sharvan Kumar Swarup and Pooran Mal v. Director of Inspection. Sri Y. Ratnakar, learned counsel for the respondent, on the other hand,submits that the search took place in the year 1988 and the assessment ordersin question are referable to 1984-85 and 1985-86 and that the returns for thosetwo years cannot be processed with reference to the events that have takenplace at a later stage. He contends that mere delay in passing of assessmentorders cannot be a factor to superimpose the subsequent events, particularlywhen each year constitutes a unit by itself, under the Act. Learned counselfurther submits that any provision that entails in disadvantage or penalconsequences cannot be given retrospective effect. It is also urged that even on merits, the so-called statement of theManaging Director cannot constitute basis since it was already retracted andthat the assessing officer did not press into service, any independent materialother than the statement. It is also urged that even on merits, the so-called statement of theManaging Director cannot constitute basis since it was already retracted andthat the assessing officer did not press into service, any independent materialother than the statement. The orders passed, in relation to the returns filed by the respondent forthe assessment years 1984-85 and 1985-86 are in question. In respect of boththe assessment years, the respondent claimed deduction of amounts said tohave been paid towards “commission and brokerage, to authorised dealer-firms”. The amounts are indeed substantial. For one reason or the other, therewas delay in passing assessment orders for those two years. In the meanwhile,a search was conducted in the premises of the respondent in the year 1988.Statement is said to have been recorded under Section 132(4). The concernedperson however retracted from the contents thereof and alleged that thestatement was forcibly extracted from him. Through amendment caused to Section 132(4) of the Act, the Parliamentempowered the authorities under the Act to use the statements recordedthereunder, for the proceedings under other sections, also in relation to thesame assessee. After the amendment, the provision reads: “132(4): The authorised officer may, during the course of the searchor seizure, examine on oath any person who is found to be in possessionor control of any books of account, documents, money, bullion, jewelleryor other valuable article or thing and any statement made by such personduring such examination may thereafter be used in evidence in anyproceeding under the Indian Income-tax Act (XI of 1922), or under this Act.” The assessing officer relied upon this and, took into account, thestatement recorded from the Managing Director in the year 1988. On that basis,he disbelieved the very payment of commission to the dealers. According tohim, the so-called dealers, are none other than the puppet establishments ofthe respondent. For the assessment year 1984-85, he totally disallowed theclaim, and for 1985-86, he allowed the claim in part. In the appeals preferred bythe assessee, the Commissioner granted substantial relief. He expressed theview that the statement recorded in the search conducted in the subsequentyears cannot constitute the basis to disallow the deduction. In the furtherappeals preferred by the department, on the one hand and the asseessee, onthe other hand, initially there was a difference of opinion. Therefore the appealwas listed before a third member. Ultimately, the majority view was in favour ofthe assessee. The gist of the reference as sought by the department is as to whetherthe explanation added to Section 132(4) of the Act can be said to beretrospective or prospective in nature. If it is held that the explanation isretrospective in operation, the second question that arises, in view of theobservation made by the Hon’ble Supreme Court is as to whether on merits, thestatement recorded under Section 132 of the Act could constitute properevidence to support the conclusion arrived at by the assessing officer. Answering the first question is by no means a simple task. Severalconcepts need to be taken into account in this behalf. The discussion muststart from the ordinary basic premise that unless the Legislature expresses theview otherwise, the provision enacted by it is always deemed to be prospectivein operation. There are certain exceptions to this general principle. If theamendment is to a provision which is purely procedural in nature, theamendment is treated as retrospective, meaning thereby that the provisioncarried the meaning ascribed to it through the amendment, from the initial stageitself. Though it is not difficult to express this in theory, several problems arisein practice. The first is in the context of the classification itself. Many a time, a Answering the first question is by no means a simple task. Severalconcepts need to be taken into account in this behalf. The discussion muststart from the ordinary basic premise that unless the Legislature expresses theview otherwise, the provision enacted by it is always deemed to be prospectivein operation. There are certain exceptions to this general principle. If theamendment is to a provision which is purely procedural in nature, theamendment is treated as retrospective, meaning thereby that the provisioncarried the meaning ascribed to it through the amendment, from the initial stageitself. Though it is not difficult to express this in theory, several problems arisein practice. The first is in the context of the classification itself. Many a time, a provision though occurs in an enactment which is procedural in nature,partakes the substantive characters. Further, in a given case, a particularprovision can be purely procedural in nature or though may appear to beprocedural, may contain substantive aspects hidden therein. It is only onreading the relevant provision and by taking into account, the purport of theenactment, that the Court can make an attempt to answer a question of thatnature. It becomes difficult to formulate a general principle, covering all thesituations. The Income Tax Act contains substantive as well as proceduralprovisions. For example, the provisions concerning the method of determinationof income or allowing depreciations or deductions do not have any traces ofprocedure in them. They are substantive provisions, pure and simple. Incontrast, the provisions stipulating the time within which a return must be filedor the advance tax must be paid, the form in which the notices must be issuedor the method in which the appeals must be preferred, are procedural in nature.Section 132(4) can be treated as procedural as long as it enables the authorityunder the Act to record a statement. However, the legal effects flowing from thestatement so recorded as mentioned in explanation, cannot be treated as purelyprocedural. The point of distinction can be demonstrated by taking the example of thefiling of an F.I.R in a criminal case under the Criminal Procedure Code. Thefiling of the F.I.R is procedural from the point of view of the complainant and theprosecution. However with the submission thereof, a set of rights standaccrued to the accused. He may take advantage of any inconsistency in theF.I.R at a later stage or can attack the very authenticity of the F.I.R if it is filedwith unexplained delay. The examples can be multiplied. The effort is only todemonstrate that there hardly exists a universal test, which can yield a resultvis-à-vis the classification of the provisions of the enactment. Similar examplescan be culled out from the Code of Civil Procedure, and other enactments. Even while leaning towards the principle that amendment to a provisionwhich is procedural in nature can be taken as retrospective, the Courts havebeen cautious. For example, in Sharvan Kumar Swarup’s case (1 supra) afterreferring to Indian and English precedents on the subject, the Supreme Courtobserved: “No suitor has any vested interest in the course of procedure,nor any right to complain, if during the litigation the procedure ischanged, provided, of course, that no injustice is done. It is true that if one traces any substantive right back farenough it will be found secreted in the interstices of procedure. (Emphasis is of ours)” The distinction between the charging provision on the one hand andmachinery provisions on the other, in a tax enactment is also explained asunder: “It is important to distinguish between charging provisions, whichimpose the charge to tax, and machinery provisions, which provide themachinery for the quantification of the charge and the levying andcollection of the tax in respect of the charge so imposed. Machineryprovisions do not impose a charge or extend or restrict a chargeelsewhere clearly imposed.” It is true that if one traces any substantive right back farenough it will be found secreted in the interstices of procedure. (Emphasis is of ours)” The distinction between the charging provision on the one hand andmachinery provisions on the other, in a tax enactment is also explained asunder: “It is important to distinguish between charging provisions, whichimpose the charge to tax, and machinery provisions, which provide themachinery for the quantification of the charge and the levying andcollection of the tax in respect of the charge so imposed. Machineryprovisions do not impose a charge or extend or restrict a chargeelsewhere clearly imposed.” The subject matter before the Hon’ble Supreme Court was the right ofappeal, and their Lordships held that no individual has a substantive right ofappeal and much would depend upon the procedure that is in vogue, at therelevant point of time. In Pooran Mal v. Director of Inspection (2 supra), a Constitution Benchof the Supreme Court examined the constitutional validity of certain parts ofSection 132 itself. Even while upholding the provision, their Lordships stressedthe importance of fair play and reasonableness. After referring to the protectiongiven under the constitution against self-incrimination, their Lordshipsobserved: “In other words, search and seizure for the purposes of preventingor detecting crime reasonably enforced was not inconsistent with theconstitutional guarantee against search and seizure. It was held in thatcase that the search of the appellant by a police officer was not justifiedby the warrant nor was it open to the officer to search the person of the appellant without taking him before a Justice of the Peace Nevertheless itwas held that the court had a discretion to admit the evidence obtained asa result of the illegal search and the constitution protection against searchof person or property without consent did not take away the discretion ofthe court. Following Kuruma v. Queen ([1955] A.C. 197 (P.C.) the courtheld that it was open to the court not to admit the evidence against theaccused if the court was of the view that the evidence had been obtainedby conduct of which the prosecution ought not to take advantage. But thatwas not a rule of evidence but a rule of prudence and fair play. It wouldthus be seen that in India, as in England, where the test of admissibility ofevidence lies in relevancy, unless there is an express or necessarilyimplied prohibition in the Constitution of other law of evidence obtainedas a result of illegal search or seizure is not liable to be shut out.” We are therefore of the view that the effect of explanation to Section132(4) of the Act is that the assessing officer can rely upon it in respect ofpending proceedings also, as a piece of evidence, but not as the sole basis forimposing additional financial liability upon an assessee either in the form ofdenial of benefits which an assessee is otherwise entitled to, or subjecting himto prosecution. To be more precise, if there exists any other supportivematerial, the statement recorded under Section 132(4) can certainly be takenaid of. Conversely, in the absence of other supporting material, a statement ofthat nature cannot constitute the basis to burden an assessee. The second question which is referable to the observation of the Hon’bleSupreme Court, namely, whether the statement recorded under Section 132(4)in the instant case would constitute valid evidence is equally important. In away, it stood answered in the preceding paragraph. However, to be more clearwe express the view that even in relation to the very block assessment, astatement referable to Section 132(4), but retracted by the person cannot constitute the sole basis. Itcan be relied upon if (a) it is not retracted from and (b) even if it is retractedfrom, it is supported by other material. The communication dated 11-03-2003 ofthe department to its officials throws light upon this. In ITTA The second question which is referable to the observation of the Hon’bleSupreme Court, namely, whether the statement recorded under Section 132(4)in the instant case would constitute valid evidence is equally important. In away, it stood answered in the preceding paragraph. However, to be more clearwe express the view that even in relation to the very block assessment, astatement referable to Section 132(4), but retracted by the person cannot constitute the sole basis. Itcan be relied upon if (a) it is not retracted from and (b) even if it is retractedfrom, it is supported by other material. The communication dated 11-03-2003 ofthe department to its officials throws light upon this. In ITTA No. 112 of 2003, decided on 09-09-2014, this Court took the saidcommunication and the relevant provisions of the Act, and held: “If the statement made during the course of search remains the same, itcan constitute the basis for proceeding further under the Act, even if thereis no other material. If, on the other hand, the statement is retracted, the Assessing Officer has to establish his own case. The statement that too,which is retracted from the assessee, cannot constitute the basis for anorder under Section 158BC of the Act.” The same factual situation obtains in the present case also. The statementhas been retracted and the department did not press into service, any othermaterial. If such a statement cannot constitute the basis in respect of the veryblock assessment, the question of it being treated as adequate for theassessments preceding the search, does not arise. We, therefore, answer the questions against the Revenue. There shall beno order as to costs. ___________________________ L. NARASIMHA REDDY, J 24-10-2014ksNote:LR Copy to be marked.B/Oks _________________________ T. SUNIL CHOWDARY, J