V.S.DESAI,J. - (1.) THIS reference arises out of the reassessment made upon the assessee firm for the asst. year 1948 - 49, the previous year for which was the S.Y. 2003 from 25th Oct., 1946, to the 12th November, 1947.
(2.) AT the material time the assessee was a partnership firm consisting of three equal partners. One of the partners died subsequently in S.Y. 2005 and the firm was dissolved on his death. The original assessment was completed by the ITO on the 24th April, 1950, which was after the dissolution of the firm. The total income was determined at Rs. 3,600. The application under S. 26A made by the assessee was granted and its registration was renewed for the assessment year in question. Subsequently, the ITO received information that the assessee firm had received a sum of Rs. 1,75,000 by telegraphic transfer from Nandlal Bhandari Mills Ltd., Indore, on the 3rd June, 1947. The preliminary enquiry made by the ITO on receipt of this information showed that the said amount represented a part of the total sale proceeds of Rs. 1,76,444 in respect of 826 bales of cotton sold by the assessee firm to the Nandlal Bhandari Mills Ltd., Indore, and Rai Bahadur Kanhaiyalal Bhandari Mills Ltd., Indore. In the assessee's account books, which had been produced before the ITO at the time of the original assessment, there was an account in the name of one Hastimal Parikh. A credit entry was made in the said account in respect of the said sum of Rs. 1,75,000 received by the telegraphic transfer and an equal amount was shown as having been paid to him in cash in Bombay. In view of these facts the ITO was of the opinion that there was a case for reopening the assessment under cl. (a) of S. 34(1). He accordingly issued a notice to the assessee firm and served it on one of its partners on the 23rd March, 1957. In response to the said notice a return was submitted on behalf of the assessee firm on the 24th April, 1957, and the reassessment was completed on the 18th March, 1958. The reassessment order was served on the assessee on the 25th March, 1958. On the material, which was before him, the ITO came to the conclusion that the transaction of the sale of 826 bales of cotton was the assessee's transaction and the amount of Rs. 1,75,000, which was received by the assessee by telegraphic transfer, constituted its own receipt, and since the cost of the 826 bales had not come out of the account books of the assessee, the cost as well as the profits on the transaction constituted the secret profits of the assessee. In the view of the ITO the element of profit involved in this transaction was the assessee's profit on the transaction received by it in the account year and consequently taxable under S. 4(1)(a) and the part, which represented the cost of the 826 bales, was the accumulated profits of the assessee of earlier years outside the taxable territories, which it had received or brought into the taxable territories during the year of account and, therefore, taxable under S. 4(1) (b)(iii) of the Act. The ITO, therefore, brought the entire amount of Rs. 1,75,000 to tax. The assessee appealed to the AAC. Several contentions were raised by it before him. It was contended that the notice of reassessment, which was issued in the name of the dissolved firm, was bad and inoperative in law and, consequently, the reassessment made in consequence of the said notice was also bad and invalid; that the reassessment had not been completed within a period of one year from the date of the service of the notice and was, consequently, illegal in view of the proviso to S. 34(3) as it stood at the material time. On merits, it was contended that the ITO had erred in holding that the transaction of the sale of 826 bales of cotton was not a transaction of Hastimal as alleged by the assessee but of the assessee itself. It was urged that the assessee had duly discharged the burden, which lay on it to prove the source of the receipt of Rs. 1,75,000 and the ITO had erred in treating the item as the secreted profits of the assessee. The AAC, did not accept any of the contentions urged by the assessee. He agreed with the view taken by the ITO that the assessee was the undoubted owner of the 826 bales of cotton, which were sold by it to the two textile mills at Indore. The amount of Rs. 1,75,000 which it had received from the Nandlal Bhandari Mills by telegraphic transfer was, therefore, a receipt of the assessee itself and the entire receipt, according to the AAC, was chargeable in accordance with the provisions of S. 4(1) of the IT Act. The AAC accordingly dismissed the assessee's appeal. The assessee took a second appeal to the Tribunal. All the contentions, which were urged before the AAC, were repeated before the Tribunal. In addition, it was urged before the Tribunal that the action under S. 34(1)(a) was not validly instituted because all the primary facts were before the ITO when he made the original assessment and, as such, he was not competent to take recourse to S. 34(1)(a) of the Act. It was further complained that the AAC had relied on certain additional evidence which had been secured behind the back of the assessee while the appeal was pending and the assessee had no opportunity to meet it. The Tribunal did not accept any of the contentions of the assessee except the one, which it had made relating to the consideration of additional material by the AAC. With regard to the said contention the Tribunal held that the AAC was not entitled to consider the said part of the evidence and that it had to be left out from consideration. It was, however, of the opinion that, even without taking into consideration the said additional material, there was enough evidence on record to justify the conclusion which the ITO and the AAC had come to, with regard to the merits of the matter. According to the Tribunal the view taken by the Departmental Authorities that the transaction of 826 bales of cotton was made in fact by the assessee itself and that Shri Hastimal had nothing to do with the sale or the sale proceeds was correct. The Tribunal was of the opinion that, since the assessee's books of account did not show the funds from which the said bales of cotton were purchased, it was legitimate to infer at that the said funds came from some undisclosed source and the entire amount of Rs. 1,75,000, which consisted of the sum invested in the purchase of 826 bales of cotton, and the element of profit involved in the said transaction constituted the undisclosed income of the assessee. Since the assessee had offered no explanation with regard to the said receipt, which could be believed, the entire amount constituted the assessee's undisclosed income liable to be brought to tax. It may be, observed the Tribunal, that the sale transaction might have involved some expenses, and, consequently, the amount of Rs. 1,75,000 received by the assessee could be treated as a gross receipt of the sale. Since, however, no satisfactory explanation had been given by the assessee with regard to the part that could be deducted by way of expenses, the whole of it had to be treated as the income of the assessee. The Tribunal accordingly confirmed the decision of the Departmental Authorities and dismissed the assessee's appeal.
(3.) THE assessee applied to the Tribunal under S. 66(1) for a reference to this Court on a number of questions. On the said application the Tribunal held that only two of the several questions, which had been suggested by the assessee, could be regarded as questions of law arising out of its order. It accordingly drew up a statement of the case and referred to this Court the two questions, which were as follows : "1. Whether the assessment made upon the assessee -firm, Laxmidas and Co., on the basis of the notice issued under the name of the firm, and served upon Chatrabhuj Vithaldas on 23rd March, 1957, was valid in law, the validity being challenged on the ground that the firm ceased to exist at the material time of service of notice under S. 34 ? 2. Whether the reassessment made upon the assessee on 18th March, 1958, was barred by limitation of one year mentioned in the first proviso to S. 34(3) ?" ;