[2008] 19 SOT 13 (PATNA)(URO)

ITAT Patna Bench

Deputy Commissioner of Income-tax

v.

Dipesh Chandak

K.S.S. Prasad Rao, Judicial Member

And R.P. Rajesh, Accountant Member

IT Appeal Nos. 188, 189 and 191 (Patna) of 2001

[Assessment years 1987-88, 1988-89 and 1990-91]

February 6, 2007

Section 4, read with sections 2(45), 2(24) and 5, of the Income-tax Act, 1961 - Income - Chargeable as - Assessment years 1987-88, 1988-89 and 1990-91 - Whether in order to bring to tax a receipt of income, an assessee should have unflinching right of ownership and disposition, control and user, over such income - Held, yes - Whether in a case where money which has been fraudulently withdrawn by assessee is within knowledge of original owner and original owner is pursuing recovery and persons involved in criminal act of fraud have already surrendered and admitted of their crime, such amount cannot constitute income of assessee within meaning of section 5 to be brought to tax under section 4 - Held, yes - Whether where assessee had fraudulently withdrawn amounts from Animal Husbandry Department of State of Bihar in fodder scam which was later on confessed by assessee and everything belonging to assessee was under attachment of State and ownership of State over defrauded amount was not refuted by assessees, such amount could not be assessed as income of assessee - Held, yes

Facts

The assessee was engaged in the criminal conspiracy of systematic fraudulent withdrawals of funds from the State Exchequer in connivance with the officials of the Animal Husbandry Department (AHD), Government of Bihar, and others. The AHD placed orders on the assessee for supply of feed to it. The assessee in turn raised bogus bills of supply of feed to the AHD without actually making them. In support of these supplies, the assessee raised fictitious purchase vouchers as if purchases had actually been made from the farmers and reflected transportation of the same to the various stores/depots of AHD in Bihar without any actual transportation being done. The fraudulent amount so withdrawn was drawn by the assessee from bank account and thereafter divided among the various conspirators whereas, in the books of account, it was reflected as if the payment had been made to the farmer-suppliers and the transporters. However, the fraudulent withdrawals being made from the State exchequer were detected by the Government of Bihar and FIRs were lodged all over the State against the conspirators. Subsequently, in view of the order of the High Court, all the cases related to the criminal conspiracy of fraudulent withdrawal from the State exchequer were taken over by the CBI from the State Police for proper investigation. The CBI made a detailed investigation in all the cases and, the assessee extended his full co-operation to the investigating authorities during the course of investigation and also made a confessional statement before the First Class Judicial Magistrate in which he revealed the true picture of transaction taken place with the AHD, Government of Bihar. Thereafter, during the course of criminal proceedings, the assessee made an application before the designated Court of CBI, to grant him pardon and make him an approver. The Court of CBI granted pardon to the assessee on condition of his making a full and true disclosure of the whole circumstances within his knowledge relating to the offences and every other person concerned, whether as principal or abettor, in the commission thereof, in terms of section 5(2) of the Prevention of Corruption Act, 1988. Thereafter, the Assessing Officer based upon the statement made by the assessee before the designated Court of CBI, initiated proceeding under section 144/147 against the assessee and passed the orders for the relevant assessment years 1987-88, 1988-89 and 1990-91. He held that since the assessee was the main beneficiary of the payments from AHD in the names of the various concerns controlled by him against which he had not been able to produce any iota of evidence of having incurred any expenses, the whole of the receipts from the AHD, Bihar, against fake bills was to be taxed in the hands of the assessee. The Assessing Officer, therefore, taxed the said payments in the hands of the assessee as income of the assessee on substantive basis.

On appeal, the Commissioner (Appeals) held that the fraudulent withdrawal of sum from the AHD did not constitute income of the assessee within the meaning of section 2(24) and, accordingly, deleted the additions made in hands of the assessee-individual.

On revenue’s appeal :

Held

The main question to be decided in the instant case was as to whether a defrauded amount, the owner of which is aware of such a fraud and the Police has already identified the recipients of money, prosecution launched and defrauded sum recovered from the recipients, and the recipients having already admitted the fraud, can be considered as income within the meaning of sub-section (24) of section 2 chargeable to income-tax under section 4 and can form the basis of computing the total income in terms of sub-section (45) of section 2, read with section 5.

From a reading of the provisions of sections 2(24), 2(45) and 5, it is evident that it is the receipt which bears income character received or deemed to be received, accrues or arises or is deemed to accrue or arise in India during such year or accrues or arises to an assessee outside India during such year and is computed as per the provisions of the Act under the heads of income as defined under section 14 which can be brought to tax. The word ‘Income’ pre-supposes two important conditions - (i) a receipt on which the recipient should have absolute command, control and right of disposition, and (ii) the transferor of such funds in the hands of recipient should have divested all rights in favour of the recipient. If the transfer of such income retains a lien or claim over such receipt, then such a receipt shall either be a loan or accommodation or illegal acquisition which can be recovered by the owner by appropriate legal action.

Section 4 brings to charge income of an assessee earned during the year. In a case where money which has been fraudulently withdrawn by the assessee is within the knowledge of the original owner and the original owner is pursuing recovery and the persons involved in the criminal act of fraud have already surrendered and admitted of their crime, in such a scenario, such amount cannot constitute income of the assessee within the meaning of section 5 to be brought to tax under section 4. In order to bring to tax a receipt, an assessee should have unflinching right of ownership and disposition, control and user. In the instant case, everything belonging to the assessee was under attachment of the State, who was claiming ownership over the money and the ownership of the State over the money was not refuted or denied by the assessee. In such a case, if still another wing of the State wanted to tax that amount which belonged to it, that would amount to taxing an amount, which belonged to the State and not to the assessee.

Further, from the statement of the assessee before the CBI, whose statement had been accepted by several authorities as true and full disclosure, the distribution of fraudulent fund and expenditure on gratification during the span of 10 years was evident. 80 per cent of such fraudulent withdrawal had been straightway given to one ‘S’ and his other associates on his instruction. Out of the remaining 20 per cent with the assessee, 4 per cent had been paid to lower cadre of the AHD officials, 4 to 5 per cent on various statutory taxes, office maintenance, etc. Thus, considerable amount was spent on gratification to AHD officials and for self-entertainment with them and the remaining cash of approx. Rs. 1.34 crores found at his residence/office had been seized by the CBI. Therefore, it appeared that after the division of defrauded sum amongst the conspirators and subsequent expenditure, nothing left with the assessee.

It was to be noted that in his statement under section 306 of Cr.PC, the assessee confessed that he used to keep the cash belonging to ‘S’ with him for utilising the same as per his instruction. It was also confessed that the said money was handed over to him by the assessee after the break of the AHD scam. The truthfulness of this confession had not been doubted by any authority after considering the evidences/documents seized from the possession of the assessee and, more so, when taking this statement of the assessee as true, the trial was concluded.

Further, a person is supposed to suffer tax and pay tax out of the income at his disposal, because he is the absolute owner of the sum which he has acquired by way of income and which is his earning. In the instant case, since the assessee did not have at any stage the actual ownership over the defrauded receipt and was ultimately after distribution and seizure left with any money unto himself to suffer tax, given full account of the money lying with the other persons who were parties with him to such fraudulent act, by bringing the defrauded amount belonging to the State to tax in his hand, would result in raising a hypothetical and unreal demand. Therefore, the money withdrawn fraudulently from the AHD by the assessee having been established to be of the State’s Exchequer could not be treated as income of the assessee in view of section 2(24) chargeable to income-tax under section 4 and could not form the basis of computing the total income in terms of sub-section (45) of section 2, read with section 5.

Hence, the appeal was to be dismissed.