ORDER
K.P.T. Thangal, J. M.
1. This appeal by the assessee pertains to the asst. yr. 1992-93. The only effective ground is directed against the confirmation of the order of assessment made under s. 144 of the IT Act, 1961 by the learned CIT(A) and also confirming certain additions made by the Assessing Officer (AO).
2. The assessee is a private limited company carrying on business of cutting marbles blocks and sale of marbles and tiles, etc. The assessee filed the return of income on 31st March, 1994 showing a loss of Rs. 13,88,540. A notice under s. 143(2) was issued to assessee on 17th Aug., 1994 fixing the hearing on 6th Sept., 1994. The said notice was served, according to Department, on 26th Aug., 1994. Since there was no response to the above notice, another notice was sent to the assessee on 6th Oct., 1994, fixing the date of hearing on 18th Oct., 1994. The said notice, according to the Department, was served on the assessee on 10th Oct., 1994. Again, since there was no response to the above notice it was proposed to frame the assessment under s. 144 of the IT Act, 1961. Another notice was issued calling upon the assessee to explain as to why the assessment under s. 144 should not be resorted to. According to the Department, this notice was served on the assessee on 12th Nov., 1994. Since nobody attended on behalf of the assessee, the learned AO completed the assessment computing the income at Rs. 51,81,460. The AO noticed that the unsecured loans have increased from Rs. 16.81 lakhs as on 31st March, 1991 to Rs. 77.27 lakhs as on 31st March, 1992. Cash and bank balance at the year end have increased from Rs. 7,110 (last year) to Rs. 28,59 lakhs. Sundry debtors have increased from Rs. 8.98 lakhs (last year) to Rs. 15,10,230. Inventories have increased from Rs. 4,08,885 to 11.2 lakhs. The sales have increased from Rs. 2.53 lakhs to Rs. 13.56 lakhs. Manufacturing expenses have increased from Rs. 20 lakhs to Rs. 29.05 lakhs. Administrative expenses have increased from Rs. 5.18 lakhs (last year) to Rs. 7.79 lakhs. Cash-in-hand was shown at Rs. 27.25 lakhs whereas total sales of the year and job charges amounted to only Rs. 15.3 lakhs. The loans of Rs. 50 lakhs were treated as unsubstantiated and the assessee’s unexplained income which have been introduced as loans. This, according to the AO, finds support from the fact that the assessee has shown substantial cash-in-hand. Thus, he made the addition of Rs. 13.7 lakhs as trading addition and made disallowance of Rs. 2 lakhs out of administrative and manufacturing expenses which totalled to Rs. 15,70,000. Thus, the result was an income of Rs. 51,81,460 i.e. minus the assessee’s claim of loss as per return at Rs. 13,88,540. To this, a further addition of Rs. 50 lakhs was made as income from undisclosed sources under s. 68 of the Act.
3. Aggrieved by the above additions, the assessee appealed before the CIT(A). The first contention of the assessee was that no proper and adequate opportunity was extended to the assessee and that the assessment made under s. 144 was bad in law. The assessee, before the CIT(A) has taken the second ground, contesting the trading addition of Rs. 13.7 lakhs, in 3rd ground contesting the disallowance out of administrative and manufacturing expenses at Rs. 2,00,000 and in last ground (4th ground), the assessee contested the ad hoc addition of Rs. 50,00,000 on account of unexplained loans considered as income from undisclosed sources. The assessee’s first objection that no proper opportunity was extended to the assessee was rejected by the learned CIT(A) for the reasons stated in para 1.2 of his orders. The main contention of the assessee with regard to this before the learned CIT(A) was that “it seems that the notices were served to the lower staff or may be to some of the peons who were not conversant with the complexity of the matter and it seems that notices so served fixing the hearing of the cases remained to be put before the concerning director of the company, accounts department and the counsel of the company who is conversant with the taxation affairs of the company”. Thus, according to the assessee, there was a reasonable cause for not complying with the notices issued under s. 143(2) of the Act. The learned authorised representative for the assessee further submitted before the learned CIT(A) that this fact was clear from the order of the learned AO who himself has mentioned that it speaks only of issue of notices but no service of notice. It was further contended that a loss making company, like the assessee, after service of notice will never be negligent or careless in attending the matter before the Revenue authority. Thus, circumstantial evidence supports the assessee’s claim that the notices were not properly served on the person responsible, contended the authorised representative for the assessee. It was further contended that is was the duty of the Revenue authorities to establish that the service was made on the assessee himself or somebody else duly authorised by the assessee to receive such notice and in this regard, a reference was made to the decision of the Orissa High Court in the case of Fatechand Agarwal vs. CWT (1975) 97 ITR 701 (Ori).
4. An opportunity was extended to the AO to present his view on this point and vide his letter dt. 6th Feb., 1995 bearing No. 1156, the AO commented that the assessee’s argument that Department should serve notice of hearing on authorised person or the directors of the company is not relevant because the assessee has never intimated the names of authorised persons who alone will receive the notice nor it has been indicated that who was the principal officer of the company. Just because, the notice does not mention the “Principal Officer”, the notice does not become bad. In any case, such omission is curable under s. 292B of the Act. The AO further commented that the notice was served by an independent Governmental agency whose bona fides cannot be doubted and the postman, in any case, was the person who used to deliver the letters, in all probabilities these letters also, to such a responsible person or authorised person who was receiving such communication. He further submitted that atleast one notice was served on the manager of the company though the name of the manager was not mentioned. This fact, according to him, was ascertainable from the postal records. He further refuted the assessee’s contention that there was a change in the management of the company as the case was not borne out of the record of the assessee. The names of the directors were not mentioned anywhere. Regarding the motive of not complying with the notice, it was commented that they are within the assessee’s personal knowledge. Just by saying that no prudent man would ignore such notices, it would not help the assessee. Perhaps, the assessee was to delay the proceedings and that can be also a reason for not attending the proceedings.
5. Considering the rival submissions, the learned CIT(A) upheld the assessment order passed under s. 144 vide para 1.2 of his order on the following lines :
“I have gone through the assessment orders, the arguments of the learned Departmental Representative and the comments of the AO. The appellant, while filing the return, has not filled up the relevant columns in the IT return regarding the authorised persons or the directors. In the absence of the information available in the return, the only course left to the AO was to address the notice to the appellant-company only. Therefore, the AO was justified in sending the notice to the company. I also agree with the AO when he says that even if any other name was to be mentioned on the notice alongwith the name of the company, such minor mistakes are cured by s. 292B and will not invalidate the notice of hearing. In this connection, reliance can be placed on the judgments of the Hon’ble Patna High Court CIT vs. Mithila Motors (P) Ltd. (1984) 149 ITR 751 (Pat), CIT vs. Dewan Kunj Lal Kanhaiyalal (1987) 154 ITR 284 (Pat), Hon’ble Andhra Pradesh High Court Srinivasa Pitti & Sons vs. CIT (1988) 173 ITR 306 (AP) and Hon’ble Madras High Court I. Devarajan & Ors. vs. Tamil Nadu Farmers Service Co-operative Federation & Ors. (1981) 131 ITR 506 (Mad). The last notice dt. 8th Nov., 1994 was served on the manger of the company who had been receiving notices earlier also. The company has not intimated the AO that the manager, who was receiving the notice earlier, had been deprived of the authority to receive the notice. This indicates that he had the full authority of the company to receive the notice which is clear from his action. This is further confirmed form the fact that the assessment order was served on the manager himself though, it was addressed to the company only. The appellant has admitted the service of assessment order on this person as correct and has filed the appeal in this office. The service of the assessment order has not been disputed. Moreover, the notices were sent by registered post. The Hon’ble Delhi High Court in the case of M. L. Narang vs. CIT (1982) 136 ITR 108 (Del), has held that service is presumed if the notice is sent by registered post. The relevant extract is as under :
‘The IT Act is a Central Act and s. 282 provides for service by post. As such the provisions of s. 27 of the General Clauses Act, 1897, are applicable. A perusal of s. 27 of the General Clauses Act shows that in order to presume service having been effected, the document or letter should be sent by registered post….’
Therefore, in view of what has been discussed above, it is held that the notices were properly served on the company and, therefore, sufficient opportunities were provided to the appellant before framing the order under s. 144. The AO was justified in framing the order under s. 144 because the appellant did not respond to the notices. Hence, the assessment order is in accordance with the provisions of IT Act, and, therefore, not invalid.”
6. The first objection by the assessee is pointed against this confirmation of the assessment order made under s. 144. The learned authorised representative for the assessee reiterated the submissions made before the learned CIT(A). He further submitted that all the relevant papers now adduced before us (paper book pages 1 to 80) were sent to the AO for his comments and the AO has not commented on all the points. The assessee was not extended an opportunity to make the submissions on these comments by the AO. Thus, there is a violation of natural justice, contended the authorised representative. He further contended that in the past the assessee was always prompt in attending before the Revenue authorities. The failure to attend before the Revenue authorities was due to change in management.
7. The learned authorised representative for the assessee relied upon the decision of the Tribunal Delhi Bench in the case of Kabul Trading Co. vs. ITO (1995) 54 ITD 557 (Del) and submitted that where an ex parte assessment under s. 144 is made and CIT(A) also confirmed the addition in ex parte assessment, the Tribunal, as a final fact finding body, can look into the books of account and also contended that the Tribunal will be justified in setting aside the matter and remanding back to the AO for fresh assessment, as the Tribunal being not in a position to scrutinise the books of account as it should be done by the AO. The authorised representative for the assessee further contended that in any case, the learned CIT(A) was not justified in not admitting the fresh evidence in the first appellate stage merely on the ground that the AO has extended the assessee adequate opportunities to represent the case before him and the same was not availed of by the assessee by producing evidence.
8. Opposing the arguments of the learned authorised representative for the assessee, the learned Departmental Representative supported the order of the Revenue authorities. The learned Departmental Representative submitted that the notices were sent as per the address furnished by the assessee. The assessee has not subsequently furnished any change in the constitution of the directors or has not furnished any new address. The assessee had also never given the name and the address of the principal officer of the company on which the letter should be addressed. In any case, all the three letters sent were accepted by the authorised person and the communication might have gone to the concerned person. Though the AO has admitted that name of the person who has received the letters cannot be specifically mentioned, one of the letters was received by the manager which is clear from the stamp affixed on the acknowledgement card. Thus, there was a valid service of notice. If the assessee had defaulted in giving the proper address and due to this fact, the letters did not reach to the assessee, the assessee could not, later on, take a plea that the assessee did not receive the notices. Thus, he supported the orders of the Revenue authorities on the basis of the following decisions which were also relied upon by the learned CIT(A) :
1. CIT vs. Mithila Motors (P) Ltd. (1984) 149 ITR 751 (Pat)
2. CIT vs. Dewan Kunj Lal Kanhaiya Lal (1987) 164 ITR 284 (Pat)
3. Srinivasa Pitti & Sons vs. CIT (1988) 173 ITR 306 (AP)
4. I. Devarajan & Ors. vs. Tamil Nadu Formers Service Co-operative Federation & Ors. (1981) 131 ITR 506 (Mad)
5. M. L. Narang vs. CIT (1982) 136 ITR 108 (Del)
9. Coming to the second point, the learned Departmental Representative supported the orders of the Revenue authorities on the ground that it was due to the assessee’s laxity that the assessment was required to be completed under s. 144. The learned Revenue authorities were perfectly justified in treating the difference between the unsecured loans of the current year and the preceding year as undisclosed income of the assessee.
10. We have heard the rival submissions and gone through the decisions relied upon by the contending parties. Coming to the first point, we are of the view that the assessee has no case. First of all, regarding the change in the constitution of the directors, the assessee has not intimated the same to the AO concerned. It is important to note the observation of the learned AO in reply before the learned CIT(A) that out of the three letters issued one was acknowledged by a person, though the name of (sic – person) was not mentioned, who was a manager. Even otherwise, though the issuance of notice is not a mere formality, the facts should be considered independently with reference to each case. The Postal Department normally does not throw away the letters especially the registered letters. The registered letters are received by authorised person on behalf of the principal officer. In this case, there is no case that the letters were received by the unauthorised person on behalf of the assessee and if such is the case, the assessee should have made complaints to the Postal Department for improper delivery of the letters. There is no such complaint by the assessee. This goes to show that the plea of the assessee that the notices were not served is without any evidence and the same cannot be accepted. Hence, the learned AO was perfectly justified in completing the assessment under s. 144.
11. However, it is seen that while so doing, the learned AO has made huge additions. It is borne out of the record that before making these additions, no notice was issued to the assessee on this specific point calling upon the reasons of the assessee why addition of Rs. 50 lakhs should not be made under s. 68 of the Act. It is true that the ground of appeal No. 2 of the assessee before us mentioned the issue of a notice under ss. 143(2) and 142(1) of the IT Act but neither in the order of the AO nor in the order of the learned CIT(A), there is any mention that a notice under s. 142(1) was issued.
12. In the judgment of Privy Council in CIT vs. Laxminarain Badridas (1937) 5 ITR 170 (PC) in a classic passage, Lord Russell of Killowen observed as under :
“The Officer is to make an assessment to the best of his judgment against a person who is in default as regard supplying information. He must not act dishonestly or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by and assessment of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess work in the matter, it must be honest guess work. In that sense too, the assessment must be to some extent arbitrary.”
This decision of their Lordships of the Privy Council was approved by the Hon’ble Supreme Court in the case of State of Kerala vs. C. Velukutty (1966) 60 ITR 239 (SC) and in the case of Brij Bhushan Lal Parduman Kumar Etc. vs. CIT (1978) 115 ITR 524 (SC). Their Lordships in this case further held that it is not an essential ingredient of a valid best judgment assessment that the AO should have conducted a local inquiry and recorded the details and results of that inquiry. In the light of the above observation, coming to the facts of the instant case of the assessee, we are of the view that the order of the learned AO as confirmed by the CIT(A) cannot be upheld. First of all, it is not disputed that the assessee is a loss making company. Before the AO, the assessment records of the preceding two years were available. Had he gone through, there was a point to give the benefit of carry forward of losses and set off against the loss of the preceding year. This has not been done. In addition to this, unabsorbed depreciation has also not been set off while computing the income. It only indicates that the AO has not applied his mind judicially to the facts of the case. Coming to the order of the learned CIT(A), it will also not stand to the critical analysis of judicial mind. It is true that for some reason or other the assessee failed to make the appearance before the AO. At the first appellate stage, the assessee produced all the materials before the learned CIT(A). The learned CIT(A) before rejecting the claim of the assessee with regard to admission of the evidence adduced before him also should have considered the facts which we have mentioned in the preceding line; such as, the assessee is a loss making firm, benefit of carry forward of losses is not allowed, unabsorbed depreciation has not been set off. Though the AO’s comment was called upon and received and taken note of for refusing to admit the fresh evidence adduced before the CIT(A) for the first time, particularly in a proceeding where order was under s. 144, without giving the assessee an opportunity to make comments upon the objections of the AO against the admission of the evidence are very fatal and goes against the cardinal principles of natural justice. The CIT(A) has rejected the admission of evidence on technicalities and confirmed the addition of an amount of Rs. 50 lakhs on an assessee which was, in the preceding years, a loss making concern. In the light of the above facts also, the addition cannot be justified.
13. In the light of the above discussion, on the facts and also on the basis of the decisions cited supra, we are of the view that the order of the Revenue authorities are liable to be set aside. We set aside the assessment order as confirmed by the learned CIT(A) and remand the matter back to the file of the AO to redo the assessment de novo after affording the assessee an opportunity to present his case in accordance with law.
14. The appeal by the assessee is allowed for statistical purposes.