ORDER
M. A. BAKHSHI, J.M. :
This appeal by the assessee for asst. yr. 1987-88 is directed against the order dt. 29th August, 1991, of CIT (A), Jodhpur.
2. Rival contentions have been heard and records perused. Relevant facts in this case are that a firm was constituted of four partners, namely, Shri Pyarelal, Shri Nathmal, Smt. Ranidevi and Shri Tersemlal w.e.f. 27th March, 1969, on the terms and conditions of the partnership deed executed on 15th June, 1969 (pb. 213-214). Shri Pyarelal, one of the partners of the firm, expired on 22nd of August, 1986. On 25th of August, 1986, Smt. Rajrani, the widow of the deceased Shri Pyarelal, joined hands with the other three surviving partners on the terms and conditions of partnership deed executed on 5th September, 1986 (pb-221-223). Assessee had filed two returns of income. One for the period from 18th April, 1986 to 21st August, 1986, which was constituted of four partners, including Shri Pyarelal, the deceased. Another return was filed for the period beginning from 25th August, 1986 to end of March, 1987. There was a note in the computation sheet attached to the return of income filed for the first period, which the AO has quoted in the assessment order at page 2 as under :
“The assessee filed two returns due to death of one partner Shri Pyarelal on 21st August, 1986, the firm stood dissolved. Hence, assessee filed two returns separately from 18th April, 1986 to 21st August, 1986 (1st return) and from 25th August, 1986 to 31st March, 1987.”
3. As stated before us by the learned counsel, the assessee had filed Form No. 12 for the first period and for the second period fresh application for grant of registration was filed in Form No. 11. The returns were accepted under s. 143(1). Subsequently, it transpired as per the version of Revenue that the assessee had overvalued the closing stock in the first return so as to take benefit of the same in the second return. In the first return, the assessee had declared an income of Rs. 8,350 after inflating the value of stocks by a sum of Rs. 9,05,184. But for this overvaluation of closing stock there would have been a loss of Rs. 8.96,834. It is the case of the Revenue that by overvaluation of the closing stock for the first period assessee suppressed the profits of the firm in the second period so as to get a dual benefit. Firstly, assessee would not pay firms tax in respect of the amount of Rs. 9 lacs and odd in the 2nd period and, secondly, the benefit of carry forward of loss that would have been lost in the case of the deceased partner by reason of his death was obtained in the hands of his wife by reducing her profit share in the second period. Proceedings were, accordingly, reopened and the AO had demonstrated in the assessment order as to how the stocks have been overvalued by the assessee for the first period and, accordingly, a corresponding credit has been taken in the second period resulting in underassessment of income in the case of the appellant in the second period. Notice under s. 148 had been issued to the assessee for the period 25th August, 1986 to 31st March, 1987, on 8th June, 1988 and the said notice was served on the assessee on 10th June, 1988. In response to the said notice, the appellant filed two returns on 1st August, 1988 – one for the period ending 21st August, 1986 and another from 25th August, 1986 to 31st March, 1987. On 16th August, 1988, the AO issued a letter to the assessee to explain the basis for adopting the value of closing stock for the first period. It is the case of the Revenue that after receipt of this letter the assessee realised that the attempt to reduce the profits for the second period has been detected by the Revenue and, accordingly, a consolidated return was filed by the assessee which was termed as a revised return. It is at this stage the assessee claimed that only one assessment should be made in respect of the entire period as there has been no dissolution of the partnership firm on the death of one of the partners but only a change the constitution of the firm. The assessee vide letter dt. 28th of June, 1990, made claim that after the execution of the first partnership deed, a supplementary partnership deed had been executed by the firm on 24th July, 1969, which contained cl. 10 to the effect that the firm would not be dissolved on the death of any partner. The assessee filed certificate from Punjab National Bank certifying the availability of the supplementary partnership deed with the bankers. The AO had summoned the branch manager of the bank and recorded his statement. Certain discrepancies have been pointed out by the AO in the assessment order in order so establish that the claim made by the assessee was afterthought and without any substance. The AO referred to the following facts :
That a typed copy of the partnership deed dt. 15th June, 1969, provided by the bankers had following clause No. 9 :
“That all the parties shall diligently, honestly and faithfully carry on the partnership business, but the firm shall not stand dissolved on the death of any partner.”
In the supplementary partnership deed dt. 24th of June, 1969, cl. 10 has been shown to exist as under :
“The firm shall not stand dissolved on the death of any partner.”
4. When the AO required the branch manager of the bank to produce original deeds, it was informed that no such deed existed with the bank. The AO has further pointed out that vide letter dt. 29th September, 1988, the branch manager, Punjab National Bank had been requested to furnish the photocopies of the partnership deed prior to 21st of August, 1986. The same was provided to the AO and in the partnership deed dt. 15th June, 1969, cl. 9 stood as under :
“That all the parties shall diligently, honestly and faithfully carry on the partnership business.”
There has been no mention of the words “that the firm shall not stand dissolved on the death of any partner”. Thus, it is clear that there was an attempt to present the facts in a distorted form.
5. The AO has also pointed out another discrepancy in regard to the claim of the assessee that there was no dissolution of the firm on the death of one of the partners. It has been pointed out that assessee had maintained separate account books for two different period. The assessee-firm had also intimated the fact of dissolution of the firm to the manager, Punjab National Bank, Raisinghnagar, who in turn, had written a letter dt. 11th September, 1986 to the regional manager, Punjab National Bank, Sriganganagar as under :
“The above firm dissolved on 16th August, 1986, due to death of one partner named Shri Pyarelal who was the owner of our bank building at Raisinghnagar, credit limit sanctioned by you have been got adjusted and fresh current account has been opened of new constituted firm on 25th August, 1986.”
For all these reasons the AO came to the conclusion that assessees attempt to claim that there was no dissolution of the firm on the death of the partner was afterthought and an attempt of creation of evidence.
6. Referring to the modus operandi of the assessee in the overvaluation of closing stock in first period and opening stock of the second period, the AO has observed as under :
“Now, I would like to discuss a little as to how is a well thought way, he is putting his claim for framing a single assessment. For the first period the assessee firm had filed return showing a total income of Rs. 8,350 and since all partners had equal profit share ratio, the share income in the hands of the deceased partner remained very nominal. Had the firm not overvaluation the closing stock in the first period then it would have resulted into substantial loss in the first period and the loss falling to the share of the deceased would have remained unset-off because after his death he was no more assessable, for the income accruing after his death. However, by doing so the firm was in a position to reduce its huge profits assessable in the hands of the firm and its partners in the second period. So the claim at this stage for one assessment after issuing of notice under s. 148 is to avoid the extra tax liability which the assessee is to suffer on account of correct legal position.”
7. Thereafter the AO has, in detail, demonstrated as to how there is difference in the valuation of the closing stock of first period and corresponding overvaluation of opening stock in the second period. This has resulted in underassessment of income to the tune of Rs. 9,05,184 and the same has been brought to tax. Certain other additions have been made which we shall discuss while dealing with the grounds relating to such addition. We would, however, like to make a mention of the addition of Rs. 56,84,158 on account of excess stock on the basis of statements of closing stock filed with the banks. This addition was set aside by the CIT (A) and is not an issue before us, as the addition is stated to have finally been deleted.
8. The assessee appealed to the CIT (A) against the order of the AO. Whereas the addition of Rs. 56.84,158 was set aside, the CIT (A) confirmed the addition of Rs. 9,05,184. The objection raised by the assessee relating to the validity of the initiation of proceedings under s. 147 was also rejected by the CIT (A).
9. The assessee is in appeal before us. Grounds No. 6.1 to 6.5 relating to addition of Rs. 56,84,158 are dismissed as not pressed. Ground Nos. 7.1 to 7.2, which reads as under, are also dismissed as not pressed :
“7.1 That the learned CIT (A) erred in drawing out a chart in para 2 of the impugned order and in making observations in para 2 of the impugned order without confronting the appellant firm in the assessment/appellate proceedings.
7.2 That the observations and directions contained in para 2 of the impugned appellate order are without jurisdiction and said para deserves to be expunged from the appellate order.”
10. We shall first deal with Ground No. 6 which challenges the validity of the notice under s. 148 dt. 8th June, 1988. The reason for reopening of assessment is the overvaluation of opening stock of second period by reason of overvaluation of closing stock in the first period. We have stated the facts in detail relating to the assessee having filed the two separate returns for two periods and having claimed that there was a dissolution of the first firm by the AO under s. 143(1) and, therefore, the issue as to whether there was a change in the constitution or dissolution of the firm was concluded by the acceptance of the return which the claim had been made by the assessee. It is well settled that when an assessment is reopened it is not open to the assessee to agitate matters that stood settled in the original proceedings. This principle is supported by the decision of the Supreme Court in the case of CIT vs. Sun Engg. Works Pvt. Ltd. (1992) 198 ITR 297 (SC) . Their Lordships of the Supreme Court have held that in regard to the matters attaining finality in original assessment the assessee has no right to reagitate in reassessment proceedings. It is in the light of this principle that we have to consider the validity of the reopening of assessment in this case. There is no dispute about the fact of overvaluation of the closing stock in the first period and consequently the overvaluation of the opening stock in the second period. But for the overvaluation of the stock as above the income of the assessee for the second period would have been assessed in excess by a sum of Rs. 9,05,184. In view of these facts, the AO was justified in our view in reopening the assessment under s. 147. The Ground No. 6 raised by the assessee is, accordingly, dismissed.
11. We now deal with the other grounds of appeal. The addition of Rs. 9,05,184 is challenged mainly on the ground that the firm was not dissolved on the death of Shri Pyarelal on 21st of August, 1986, and that on the execution of fresh partnership deed the widow of the deceased having taken the place of the deceased, there was a change in the constitution of the firm and that only a single assessment was to be made in respect of the entire year. As has already been pointed out, the issue as to whether there was a dissolution of the firm on the death of a partner or was there a change in the constitution of the firm was no longer open when the claim of the assessee that there was a dissolution was accepted by the AO under s. 143(1). On the authority of the Supreme Court decision in the case of Sun Engg. (supra), it was not open to the assessee to agitate in reassessment proceedings about the issue that had reached finality in the original assessment. The assessment had been reopened on the ground that there was escapement of income. The assessee has made an attempt to change the stand in the reassessment proceedings which, in our view, is not permissible.
12. Even otherwise the claim of the assessee is not acceptable as we are also convinced that the same is clearly afterthought. The AO has dealt with this issue in detail in the assessment order as to how the assessee had made the claim of supplementary partnership deed only after having been informed about the detection of overvaluation of the stock. The claim of the assessee is not established by sufficient evidence. On the contrary, facts and circumstances of the case suggest to the contrary. At this stage we consider it relevant to refer to some of the facts found by the AO even at the cost of repetition.
13. A firm was constituted w.e.f. 27th March, 1969, on the terms and conditions of partnership deed dt. 15th June, 1969. There was death of one of the partners Shri Pyarelal on 22nd August, 1986. The said partnership deed did not provide as to what would happen in the event of death of any partner (s). However, cl. 10 of the partnership deed reads as under :
“Clause 10 : that all other terms and conditions shall be borne by the Indian Partnership Act.”
This brings us to s. 42 of the Partnership Act, 1932, which reads as under :
“Sec. 42 – Subject to contract between the partners a firm is dissolved –
(a) if constituted for a fixed term, by the expiry of that term;
(b) if constituted to carry out one or more adventures or undertaking, by the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
It is in this context, the conduct of the assessee assumes importance.
14. The assessee had filed two returns of income and curiously a note in the statement of income attached to the first return clearly indicated that there was a dissolution of the firm on the death of one of the partners. The finding of the AO about the existence of this note has not been disputed before us. There is no explanation forthcoming from the assessee as to why this note was given in the statement of income attached to the first return when it is claimed that there was a supplementary partnership deed which clearly provided that the firm would not be dissolved on the death of the partner. The AO has also pointed out the information given to the bankers by the assessee about the firm having been dissolved on the death of the partner. The AO has reproduced the contents of the letter written by the manager, Punjab National Bank, Raisinghnagar to the regional manager which clearly indicated that the firm had been dissolved on the death of one of the partners of the firm.
15. The assessee has heavily relied on the certificate of branch manager, Punjab National Bank, to the effect that the partnership deed as well as the supplementary partnership deed were available with them in their records. Firstly, it has not been stated by the concerned manager as to when these partnership deeds were filed by the assessee. Secondly the AO has pointed out the discrepancy in cl. 9 of the partnership deed of the typed copy, which contains a clause relating to the firm not getting dissolved on the death of any partner. Ultimately it has been found that cl. No. 9 was presented in a distorted manner and the words relating to the dissolution of the firm not being effected by the death of the partner were found as non-existent. A comparison of cl. 9 as per typed copy with cl. 9 as per the original deed given below clearly indicates that assessee was anxious to present a distorted picture of facts before the AO :
Cl. 9 as per typed copy
Cl. 9 as per original deed
That all the parties shall deligently, honestly and faithfully carry on the partnership business but the firm shall not stand dissolved on the death of any partner.
That all the parties shall deligently, honestly and faithfully carry on the partnership business.
16. It is also interesting to note that assessee filed Form No. 12 for the first period and Form No. 11 for the second period. In case of change in constitution of the firm assessee would have filed Form No. 11A for the whole period.
17. If assessee would have firm belief that there was no dissolution and if the supplementary deed had existed as claimed it would not have been necessary for the assessee to inflate the closing stock of the first period and consequently the opening stock of the second period as desired results would have been achieved by filing only one return.
18. It is also important to note that assessee claimed the existence of supplementary partnership deed only when it was confronted with the discrepancy in the valuation of stock. It is also noteworthy that the original deed of so-called supplementary deed is not available with the assessee. It is claimed that the same was filed with the Department along with application for registration. The learned Departmental Representative has confirmed that no such deed is available with the Department on record. Assessee has also no evidence to establish that any supplementary deed had been filed with the Department.
19. Considering the facts and circumstances of this case in totality, we are satisfied that the claim of the assessee that the firm was not dissolved due to existence of the supplementary partnership deed is not established. The evidence against the claim is heavy as against in favour. In any case, the assessment on the first return as well as on the second return had been made on the basis of the claim made by the assessee that there was a dissolution. This issue as already pointed out was not open to be agitated in reassessment. We, accordingly, reject the claim of the assessee for the aforementioned reasons.
20. We now deal with the alternative contention raised on behalf of the assessee that the opening stock of the second period had been adopted on the basis of the closing stock of the first period and, therefore, no addition in the second period was warranted. The contention raised on behalf of the assessee looks very attractive but on the facts and in the circumstances of this case the contention is not acceptable. It is a case where the closing stock of the first period seems to have been adopted at a higher rate with a definite purpose of reducing the profits of the second period. There is otherwise no explanation given by the assessee for overvaluation of the closing stock of the first period. The only benefit the assessee has derived is to reduce the profit of the second period as a measure of tax planning. The assessee had perceived that there was a dissolution of the partnership on the death of one of the partners. In order to lower the tax brunt it seems that a tax planning device had been adopted by the assessee. In such circumstances, the Revenue was justified in rejecting the claim of the assessee for adopting the same value in the opening stock as had been adopted in valuing the closing stock in the first period. The assessee at best can claim that for the first period the closing stock should be revalued. The CIT (A) has issued certain directions for adjusting the closing stock in the first period. It has been stated before us by the learned counsel for the assessee that this direction of the CIT (A) is not being implemented by the Revenue. He further stated that this direction of the CIT (A) has not been challenged before us by any party. We, therefore, refrain ourselves from giving any direction in this regard. The contention of the assessee relating to the addition of Rs. 9,05,184 is accordingly dismissed. We now deal with the other grounds of appeal.
21. The next ground of appeal is relating to the addition of Rs. 58,700 on account of interest. This addition has been made on the ground that borrowed funds had been diverted to the sister-concerns and family members at concessional rate of interest. The assessee has charged interest in respect of such funds at 6 per cent. Assessees claim is that the capital of the partners and the interest-free advances available to the assessee were much more than the advance of Rs. 4,90,000 to the sister-concern and family members. The interest had been charged from those concerns and members at the same rate in the past and no addition has been made. Considering the facts and circumstances of the case specially the capital of the partners and the past history of the case, we are of the view that the addition of Rs. 58,700 is uncalled for and accordingly is hereby deleted.
22. The next ground of appeal is relating to addition of Rs. 1,500 on account of telephone expenses. In our view, the addition being nominal and within the reasonable limits, we, therefore, decline to interfere.
23. The next ground of appeal is relating to the disallowance of loss on the sale of car. Assessee claimed to have sold the car resulting in a loss. This loss had been allowed to the assessee, when assessment under s. 143(1) was made. The learned counsel for the assessee contended that there was no justification for disallowance of the loss while making the assessment under s. 147. The AO has treated the loss as a loss on capital account and held that the same was adjustable against any capital gain. In the absence of any capital gain there was no possibility of setting off of the loss claimed by the assessee.
24. The learned counsel for the assessee contended that the car was an asset of business and since the same had been sold during the year under appeal, the loss was allowable as such.
25. Finding of facts recorded by the AO that there was a capital loss on the sale of car has not been rebutted by any evidence. We, therefore, find no justification to interfere.
26. The only ground that remains for our consideration is relating to interest under ss. 139(8) and 217 in reassessment proceedings. This issue is covered in favour of the assessee by the Jurisdictional High Court decision in the case of CIT vs. Manna Lal Nirmal Kumar (1992) 198 ITR 556 (Raj). Respectfully following the aforementioned decision of the Rajasthan High Court, the levy of interest is deleted.
27. In the result, the appeal of the assessee is partly allowed.