AJIT KUMAR SENGUPTA, J. - (1.) AT the instance of the CIT, the following two questions have been referred to this Court under s. 256(2) of the IT Act, 1961 ("the Act"), for the asst. yr. 1957-58 : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal ignored relevant evidence and relied on irrelevant materials in holding that the jewellery found in the premises occupied by the assessee as its business premises did not belong to the assessee, and in that view upholding the order of the AAC deleting the addition of the value of the jewellery included in the assessment of the assessee ? (2) Whether, on the facts and in the circumstances of the case, and having regard to the fact that the AAC had upheld the validity of the proceedings initiated under S. 147(a) of the IT Act, 1961, and the assessee did not challenge before the Tribunal such finding of the AAC, the Tribunal misdirected itself in law in holding that the expenditure incurred in purchase of loom- hours could not be disallowed in the assessment made in pursuance of such proceedings even though such expenditure was in the nature of capital expenditure ?" In our view, the questions have not been properly framed by the Revenue. They should be reframed as follows : "(1) Whether the Tribunal ignored relevant evidence and relied on irrelevant materials in holding that the jewellery found in the course of search and seizure did not belong to the assessee and in that view upholding the order of the AAC deleting the addition of the value of the jewellery included in the assessment of the assessee ? (2) Whether the expenditure incurred in purchase of loom- hours is revenue expenditure allowable as deduction and whether such expenditure can be disallowed in the assessment reopened under s. 147(a) of the IT Act, 1961 ?"
(2.) THE facts relating to the first question are that the original assessment for the asst. yr. 1957-58 was completed on 22nd June, 1962. Premises Nos. 61, 57, Harrison Road, and 212, Cornwallis Street, were searched by the Customs department and the officers of the IT Department from 4th July, 1956 to 7th July, 1956. The business of the assessee was carried on from the premises No. 61, Harrison Road (Mahatma Gandhi Road). During the search of the premises, No. 61, M. G. Road, a large quantity of jewellery was found therein. The assessment was reopened under S. 147(a) of the Act on the ground that income had escaped. The ITO wrote a letter to the assessee to show cause why the value of the jewellery should not be treated as the income of the assessee. The assessee denied that the jewellery was found in the business premises of the assessee. It pleaded that the jewellery was found in the residential portions of some of the partners of the assessee-firm. Shri D. K. Jalan, one of the partners of the assessee, informed the ITO that all the Jalan partners resided in the premises and that the guddy of the assessee used to be in the premises No. 61, M. G. Road. He admitted that he resided in a portion of the premises and that the entire office of the firm was situated therein. He further stated that substantial portion of the said jewellery belonged to the firm. All other partners denied that any jewellery was found in the portion occupied by them. The ITO rejected the explanation of the assessee that the jewellery was not found in the premises of the assessee for the reasons given by him in his order. He held that the jewellery in question was purchased out of the undisclosed income of the assessee. He estimated the value of the jewellery at Rs. 6 lakhs and made an addition thereof to the income of the assessee.
(3.) IN appeal before the AAC, the assessee objected to the reopening of the assessment under s. 147 but that objection was overruled by the AAC. The assessee next objected to the addition of Rs. 6 lakhs to its income. It was urged that only a part of the premises of 61, M. G. Road, was used as business premises and that no jewellery was found in the premises of the assessee-firm. It was urged that the value of the jewellery found in the portion occupied by the partners was included in their assessments and reference was made to the assessment order of the partner, Shri D.N. Jalan. The AAC accepted the assessee's contention and deleted the addition of Rs. 6 lakhs.;