Karnataka H.C : the Block period, for the assessment years 1994-95, 1996-97, 1998-99, 1999-2000 and 2000-2001, though the return of income had been filed by the assessee beyond the date prescribed under Section 139 (1) of the Act, the income disclosed therein cannot be brought to tax in the Block assessments as per section 158 BB

High Court Of Karnataka

CIT, Central Circle, Bangalore Vs. M.J. Siwani

Section : 158BB,32, 54F

Dilip B. Bhosale And B. Manohar, JJ.

It Appeal Nos. 216 To 219 Of 2007

April  11, 2014

JUDGMENT

Dilip B. Bhosale, J. – These four appeals, under Section 260-A of the Income Tax Act, 1961 (for short “the Act”), arise from the common order dated 31st August 2006 rendered by the Income Tax Appellate Tribunal, Bangalore (A-Bench) (for short “the Tribunal’), disposing of four Income Tax Appeal Nos.1/B/2005, 2/B/2005, 6/B/2005, 7/B/2005. The first two appeals, before the Tribunal, were preferred by the assessees, while the remaining two by the revenue.

1.1 The appeals before the Tribunal were directed against the order dated 15th January 2004 passed by the Commissioner of Income Tax (Appeals-VI), Bangalore (for short “CIT(A)”) in ITA No.235/ACIT-cc-2(3)/CIT(a)-VI/03-04. The appeal before the CIT(A) was preferred against the assessment order dated 29th May 2003 passed by the Asst:. Commissioner of Income Tax, Central Range-2(3), Bangalore (for short the “Assessing Officer”) pertaining to block period from 1st April 1991 to 29th May 2001.

1.2. Since these appeals entail common substantial questions of law, as is evident from the orders passed by the Tribunal and the authorities below and that the fact situation and the parties are common, they are disposed of by common judgment.

2. The assessees namely, M.J.Siwani and H.J.Siwani are the partners of M/s. H.M.Constructions, which, at the relevant time, was engaged in the business of development, and were also real estate agents. Their source of income was from interest on capital, salary from firm, rental income and income from other sources.

3. On 29th May, 2001, a search operation under Section 132 of the Act was carried out at the residential premises of both the assessees and their business premises viz., M/s. H.M.Constructions. In the course of search, certain books/documents pertaining to the assessees were seized. On scrutiny thereof, it was revealed that the assessees had taxable income during the assessment years 1994-95, 1996-97 and 1997-98, and that they had filed return of income for these assessment years on 17-5-1996, 18-12-1998 and 18-12-1998, respectively. Though the return were filed, before the search, they were admittedly filed beyond the dates prescribed under Section 139(4) of the Act. Similarly, it was also revealed that for the assessment years 1998-1999, 1999-2000, 2000-2001, the return of income were filed by the assessees after the search was conducted on 29-5-2001. In other words, for these assessment years the return of income were not filed either before the search or within the time stipulated under Sections 139(1) and (4) of the Act. Based on the materials seized during the search, the Assessing Officer was satisfied that the assessees had undisclosed income pertaining to the aforementioned assessment years.

4. It would be relevant to notice few more facts. After the search, a notice under Section 158-BC was issued on 28-4-2002. The assessees did not respond to the notice and therefore, another letter was issued to the assessee on 13-1-2003 requesting him to show-cause as to why he should not be prosecuted for not filing return of income. The assessees did not respond to this letter also. Hence a notice under Section 142(1) along with a letter was issued on 4-2-2003. This notice and the letter were also not responded to by the assessee. Hence another notice under Section 142(1) was issued on 13-2-2003. In response, the assessee filed a return for the block period declaring their income “nil”. With the return, a letter had been filed by the assessees substantiating the reasons for filing the return of income declaring “nil” income. The assessee also objected to the proceedings initiated under Section 158BC. Then the assessee, through their Chartered Accountant, before the Assessing Officer furnished bills and after examining the seized material and the other material produced before him, assessment for the block period was concluded declaring undisclosed income of the assessee and issued demand notice and challan accordingly. Penalty proceeding under Section 158BBFA (2) were also initiated separately. The undisclosed income as computed by the Assessing Officer, read thus:

1994-1995 Income returned 2,50,940 2,50,940
1996-1997 Regular Income 4,21,970
Agricultural Income 3,50,000 7,71,970
1997-1998 LTCG 90,13,204
Agricultural Income 3,50,000 93,63,204
1998-1999 Income returned 48,548
Crystal . Springs Project 46,31,987
Agricultural Income 6,00,000
Credits in the name of Shri G.Anand 10,00,000 62,80,445
1999-2000 Loss 6,24,092
Agricultural Income 6,50,000
Forfeiture amount 16,50,000 16,75,908
2000-2001 Loss 4,43,106
Unexplained credits 21,50,000
Agricultural Income 6,50,000 23,56,894
Undisclosed Income 2,06,99,361
Tax @ 60% 1,24,19,616
Surcharge @ 2% 2,48,392
TOTAL 1,26,68,008
ADD:
Interest U/s 158BBFA 12,66,800
TOTAL PAYABLE 1,39,34,808

The Assessing Officer computed undisclosed income of the block period (upto to date of search), as indicated in the above table, under Section 158 BB(c) of the Act. Against the order of the Assessing Officer, the assessee preferred an appeal before the CIT (A). Against the order of the CIT (A) dated 15th January 2004, the assessee as well as the revenue filed two appeals each before the Tribunal. The Tribunal allowed the appeals filed by the assessees and dismissed the appeals filed by the revenue. Hence the revenue is before this Court under Section 260-A of the Act against the order of CIT (A).

5-6. The revenue in these appeals has formulated the following substantial questions of law for our consideration:

“I. Whether on the facts and in the circumstances of the case and in law the Appellate Authorities were justified in holding that in the Block period, for the assessment years 1994-95, 1996-97, 1998-99, 1999-2000 and 2000-2001, though the return of income had been filed by the assessee beyond the date prescribed under Section 139 (1) of the Act, the income disclosed therein cannot be brought to tax in the Block assessments as per section 158 BB of the Act?

II. Whether on the facts and in the circumstances of the case and in law the Appellate Authorities were justified in holding that the agricultural income declared by the assessee is liable to be accepted despite the assessee failing to prove that he had carried on agricultural activity and consequently recorded a perverse finding?

III. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the deduction under sections 54 and 54F of the Act is available to the assessee in respect of the capital gains income derived by the assessee?

IV. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the valuation of closing stock of immovable properties should be treated as nil, as claimed by the assessee in view of the fact that the said properties were involved in litigation?

V. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the amount standing to the credit of G.Anand having not been claimed as expense cannot be treated as undisclosed income of the assessee during the block period?

VI. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the sum of Rs.50,000/- NSE discovered during the course of search cannot be treated as the undisclosed income of the assessee in the block period as the same is not claimed as deduction?”

7. The first two substantial questions of law arise in ITA Nos.218 and 219 of 2007 while the remaining four are raised in ITA Nos.216 and 217 of 2007. Since the facts and circumstances against which the impugned orders have been passed are similar, while dealing with the substantial questions of law which are common in all these appeals, we have recorded reasons covering both the assessees. In other words, facts of the case and heads of the income in respect of both the assessees are common, the reasons recorded are also common, covering the case of both the assessees.

8. We would now like to proceed to consider the first substantial question of law as raised by the revenue.

8.1. Mr. Aravind, learned counsel for the revenue at the outset submitted that the income disclosed in a return filed after the due date as prescribed under Section 139(1) of the Act will have to be treated as undisclosed income since such return, as observed by the Supreme Court in Asstt. CIT v. A.R. Enterprises [2013] 350 ITR 489/212 Taxman 531/29 taxmann.com 50 (SC) is invalid income. In other words, he submitted that unless the income is disclosed in “valid return”, the same will have to be computed as undisclosed income of the block period.

8.2 On the other hand, Mr.Parthasarthy, learned counsel for the respondent-assessee submitted that the income which is disclosed by filing return, irrespective of the fact whether it was filed within the time stipulated under Section 139(1) or within the time extended under Section 139(4) of the Act and which is disclosed before the search, under any circumstances, cannot be treated as undisclosed income. He submitted that, if on the date of search, the time to file return has not expired, for such assessment year also, the income cannot be treated as undisclosed income as contemplated by clause (d) of sub-section (1) of Section 158BB. He submitted that, in the present case, for 1994-95 and 1996-97, the returns were filed by the assessee much before the search, though after the time prescribed under Section 139 of the Act and for the remaining three assessment years, viz., 1998-1999, 1999-2000 and 2000-2001, the assessee disclosed income after the search. Insofar as the assessment year 2000-2001 is concerned, he submitted that the search was conducted even before the expiry of the extended time as contemplated by sub-section (4) of Section 139 of the Act and therefore, it cannot be stated that the income disclosed in the return for this assessment year is undisclosed income within the meaning of clause (b) of sub-section (1) of Section 158B of the Act.

9. To consider the first substantial question of law raised by the Revenue and to appreciate the submissions of learned counsel for the parties, we would like to look into the relevant provisions of the Act, in particular, Chapter XIV-B thereof. Section 132 of the Act provides for search and seizure. For evaluation of the material seized under Section 132 of the Act, the provisions contained in Chapter XIV-B stand attracted. Chapter XIV-B in the Act, consisting of Section 158B to Section 158BH, was inserted by the Finance Act, 1995 with effect from 01-07-1995. This chapter deals with special procedure for assessment of search cases. It was inserted for the assessment of undisclosed income determined as a result of search carried out under Section 132 of the Act.

10. From bare perusal of Chapter XIV-B, it is clear that the condition precedent for invoking a block assessment is a search conducted under Section 132 of the Act. The Supreme Court in Asstt. CIT v. Hotel Blue Moon, [2010] 321 ITR 362/188 Taxman 113, while explaining the purport of Chapter XIV-B of the Act, has observed that a search is the sine quo non for the block assessment. It would be relevant to reproduce the observations made by the supreme court in paragraph 12 thereof. The relevant observations in the paragraph read thus:

“12. Chapter XIV-B provides for an assessment of the undisclosed income unearthed as a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are. ‘clearly in addition to the regular assessments’ covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It is not intended to be substitute for regular assessment. Its scope and ambit is limited in that sense to material unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of accounts or documents and such other materials or information as are available with the AO. Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of search under section 132 or requisition under section 132A of the Act.” (Emphasis supplied)

11. Section 158B, in the Chapter, defines “block period” and “undisclosed income”. Section 158BA provides for assessment of undisclosed income as a result of search. Section 158BB provides for computation of undisclosed income of the block period. Section 158BC provides for the procedure for block assessment. Section 158BD speaks about undisclosed income of any other person. Section 158BE provides for time limit for completion of block assessment. Other sections in this Chapter are not relevant for our purpose. Chapter XIV-B provides for assessment of undisclosed income unearthed as a result of a search without affecting the regular assessment made or to be made.

12. For our purpose the definition of “undisclosed income” is relevant which reads thus:

‘158B(b)- “undisclosed income” includes any money, bullion, jewellery or other valuable . article or thing or any income based on any ./entry in the books of account or other documents or transactions, where such money, bullion, jewellery or other valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false.’

12.1 A glance at the definition of Undisclosed income’, as occur in Section 158B(b), it is clear that the legislature has clearly carved out two situations for income to be deemed as Undisclosed’: (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed.

13. Section 158BA empowers the Assessing Officer to assess the undisclosed income in accordance with the provisions of this Chapter, after the search under Section 132 of the Act. It further provides that the total undisclosed income relating to the block period shall be charged to tax, at the rate specified in Section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.

14. Explanation appended to Section 158BA is also relevant for our purpose, which reads thus:

“Explanation.—For the removal of doubts, it is hereby declared that—

(a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period;

(b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period;

(c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period.”

14.1 From plain reading of the explanation, it is clear that block assessment is not intended to be substitute for regular assessment. Its scope and ambit is limited in that sense of the materials unearthed during search. This is in addition to the regular assessment already done or to be done.

15. Under Section 158BB the undisclosed income of the block period shall be aggregate of the total income of previous years falling within the block period computed, in accordance with the provisions of the Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence, as reduced by the aggregate of total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined in the manner provided in clause (a) to (f) of sub-section (1) of Section 158BB. Section 158BB of the Act provides for computation of undisclosed income of the block period. For our purpose Sub-section (3) of Section 158BB is relevant, which states that the burden of proving to the satisfaction of the assessing officer that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee.

16. Section 158BC provides for the procedure for block assessment. The relevant portion, with which we are concerned, in the present appeals, of Section 158BC reads thus:

“158BC. Procedure for block assessment.— Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then,—

(a) the Assessing Officer shall—

(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995, but before the 1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days;

(ii)** ** **

(b) the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be apply;”

17. Section 158BD deals with undisclosed income of any other person, other than the person with respect to whom a search was made under Section 132 of the Act.

18. Sections 158BD and 158BC, along with the other provisions in Chapter XIV-B, would apply only in the event of discovery of ‘Undisclosed income’ of an assessee of and that Undisclosed income’ signifies income not stated in the return filed. Recently, the Supreme -.Court in A.R.Enterprises (supra), had an occasion to deal with v Chapter XIV-B in the Act, in particular, the provisions contained in Section 158B, 158BA, 158BB, 158BC, 158BD along with other provisions in, this Chapter and the Act. The following observations made by the Supreme Court in paragraphs 18 and 26 are relevant, which read thus:

’18.’The genesis of the issue before us lies within the folds of this section. Sections 158BD and 158BC, along with the rest of Chapter XIV-B, find application only in the event of discovery of “undisclosed income” of an assessee. Undisclosed income is defined by Section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. We are of the view that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act, and therefore an “undisclosed income” signifies income not stated in the return filed. Keeping that in mind, it seems that the legislature has clearly carved out two scenarios for income to be deemed as undisclosed:

(i) where the income has clearly not been disclosed and

(ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and hence subject to the machinery provisions of Chapter XIVB. The second category, viz. where income would not have been disclosed, contemplates the likelihood of disclosure; it is a presumption of the intention of the assessee since in concluding that an assessee would or would not have been disclosed, income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.

26.Hence, the computation of “undisclosed income” for the purposes of Chapter XIVB has to be construed in terms of the “total income” received, accrued, arisen; or which is deemed to have been received, accrued or arisen in the previous year, and is computed according to the provisions of the Act. According to Section 139(1) of the Act, every person who is assessable under the Act, must file a return declaring his or her total income during the previous year on or before the due date, for assessment under Section 143 of the Act. Hence, the ‘disclosure of income’ is the disclosure of the total income in a valid return under Section 139, subject to assessment and chargeable to tax under the provisions of the Act. It is important to bear in mind that total income is distinct from the estimated income, upon the basis of which, Advance Tax is paid by an assessee. Advance Tax is based on estimated income, and hence, it cannot result in the disclosure of the total income assessable and chargeable to tax.’ (Emphasis supplied)

19. Under Sub-section (1) of Section 139, return of income should be filed on or before 31st of July and if it is so filed, the income disclosed therein, in any case cannot be treated as undisclosed income. Sub-section(4) of Section 139 provides for further period to file return, if not filed before 31st of July. From plain reading of these provisions, in our opinion, the last date for filing return under Section 139 of the Act, would be the period prescribed under sub-sections (1) and (4) thereof and if the return is filed within the time prescribed under this provision, it would be valid return.

20. Thus, the harmonious reading of the expression “undisclosed income” under Section 158B(b), the explanation appended to Section 158BA, Section 158BB and other relevant provisions, referred to above, of the Act show that the income unearthed on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information, as are available with the Assessing Officer and relatable to such evidence can alone be assessed under Chapter XIV-B of the Act. In other words, it is necessary that the income unearthed during the search for the assessment years in the block period alone will have to be assessed as undisclosed income. The scheme of the block assessment has been explained by CBDT in paragraph 39.3 of Circular No.717 dated 14th August 1995 Hotel Blue Moon (supra). The Supreme Court in Hotel Blue Moon (supra) noticed clause (e) of the Circular which provides for the procedure for making block assessment. Clause (e) of the Circular reads thus :

“(e) Procedure for making block assessment: (i) The AO shall serve a notice on such person requiring him to furnish within such time, not being less that 15 days, as may be specified in the notice,, a return in the prescribed form and verified in the same manner as a return under cl.(i) of sub-s. (1) of s.142 setting forth his total income including undisclosed income for the block period. The officer shall proceed to determine the undisclosed income of the block period and the provisions of s.142, sub-ss. (2) and (3) of s.143 and s.144 shall apply accordingly.”

20.1 From bare perusal of clause (e) and the observations made by the Supreme Court in paragraph 12 of Hotel Blue Moon (supra), it is clear that block assessment is not intended to be substitute for regular assessment. Its scope and ambit is limited in that sense to the materials unearthed during search. This is in addition to the regular assessment already done or to be done. In short, the assessment in the block period can only be done on the basis of evidence found as a result of search or requisition of books of accounts or documents or such other materials or information as are available with the. Assessing Officer. Thus, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as a result of search under Section 132 or requisition under Section 132A of the Act.

21. The Assessing Officer is obliged to serve a notice on the person whose premises has been searched requiring him to furnish within such time, not being less than 15 days, as may be specified in the notice. A return in the prescribed form need to be filed and then verified in the same manner as a return under clause (1) of sub-section (1) of Section 142 setting forth his total income including undisclosed income for the block period. The assessment for the block period can be done on the basis of evidence found as a result of search or requisition of books of accounts or documents and such other materials or information as are available with the Assessing Officer. The assessment made under this Chapter is in addition to the regular assessment in respect of each previous year included in the block period. Similarly, the total of undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period. The income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period. We make it clear, that we are not dealing with a situation, since it did not fall for our consideration, where the assessee discloses certain income in the return after search, which has not been unearthed ‘during the search, whether such income could be treated as undisclosed income of the block period.

22. In the present case, search under Section 132 of the Act was conducted on 29-5-2001. The block period is 1-4-1991 to 29-05-2001. During the block period undisclosed income was computed for the years 1994-95, 1996-1997, 1997-1998, 1998-1999, 1999-2000 and 2000-2001. Admittedly, for the first three assessment years the return of income were filed by the assessee much before the search, though after the due date and for the remaining assessment years, i.e. 1998-1999, 1999-2000, 2000-2001, returns of income were filed after the search. The last date for filing return under Section 139(4) for the assessment years 1998-99 was 31-3-2000, for 1999-2000 was 31-3-2001 and for 2000-2001 it was 31-3-2002. Returns for all the three years were, however, filed on 7-5-2003 in pursuance of the notice issued by the Assessing Officer after the search. Insofar as the last assessment year is concerned, it was urged on behalf of the assessee that they could not file return of income, though the extended period as contemplated by sub-section (4) of Section 139 of the Act had not expired, on the date of search, since during the search entire record was seized and hence there was a delay on the part of the assessee to file return of income for this assessment year.

23. Having regard to the facts and circumstances of the present case and the settled position of law, it is clear that the income unearthed on the basis of evidence found as a result of search or requisition of books of account or documents or such other materials or information available with the Assessing Officer and relatable to such evidence alone could be assessed so as to declare undisclosed income for all the six assessment years in the block period. The Tribunal has not examined the case in proper perspective and in the light of the settled position of law. The income that has been disclosed by the assessee in the returns of income, other than the income unearthed as a result of search, cannot be treated as undisclosed income while assessing the income during the block period. In this view of the matter we remand these appeals to the Tribunal to consider the appeals afresh in the light of the observations made in this judgment insofar as the first substantial question of law is concerned.

24. The second substantial question of law pertains to agricultural income declared by the assessee. The Assessing Officer brought the income of Rs.3,50,000/- for the assessment year 1996-97 to tax as non-agricultural income. The assessee had credited Rs.3,50,000/- as agricultural income and since he could not and did not maintain any books of account in respect thereof and that he was mainly involved in the business of real estate, and sale and purchase of lands, the Assessing Officer expressed doubt about genuineness of this income from agriculture and having so observed did not accept the said claim and brought it to tax. As against this, the Appellate Authority deleted the said addition as undisclosed income for the block period. It appears from the record and so also the orders passed by the Appellate Authority and the Tribunal that the agricultural income for 1995-96 was accepted by the Assessing Officer. Further, the income of Rs.3,50,000/- for the Assessment Year 1996-97, was deleted being undisclosed income for the block period. We do not find any reason to interfere with the orders passed by the Appellate Authority and the Tribunal, more particularly, in view of the fact that the agricultural income from the very same agriculture lands for the assessment year 1995-96 was accepted by the Assessing Officer. Hence we confirm the findings of fact recorded by the appellate authority and the Tribunal. The question, in our opinion, does not arise in the appeals.

25. The third substantial question of law is whether the Tribunal was justified in holding that the deduction under Sections 54 and 54F of the Act is available to the assessees in respect of the capital gains income derived by the assessees. This substantial question of law pertains to the assessment year 1997-98. The assessees had filed return of income for this assessment year on 18-12-1998 declaring their income ‘nil’. As a matter of fact, in the return of income the assessees had shown loss from house property and so also, loss from business along with the capital gains. In the return of income filed on 18-12-1998 for the assessment year 1997-98, long term capital gain in the case of assessee-M.J. Siwani as was shown in the assessment order, is as under:

“No.1/1 North road, Bangalore 4,220

Property at No.27 Davis Road Bangalore 16,86,955

50% share of property at No. 15/1, Binny Crescent road, Benson Town, Bangalore 22,143

17,12,518

Less Exemption u/s. 54 Balance 17,12,518

NIL”

To this computation the following note was furnished as explanatory:

“The assessee has entered into an agreement to purchase 50% of undivided right and interest of property at No.15/3 Binny Crescent Road, Benson Town, Bangalore from his brother Shri H. J. Siwani for a consideration of Rs.15,00,000/- and spent towards construction on the above property an amount of Rs.83,50,000/-. The total amount reinvested being Rs.98,50,000/- claimed as exemption”.

25.1 Similarly, in case of H.J. Siwani, in the return of income filed by him, the long term capital gain, as was shown in the assessment order is as under:

“LTCG of H.J. Shivani

Shops at Alankar North Road, Bangalore 86,773

Property at No.27 Davis Road Bangalore 19,79,324

50% share of property at No.15/1 Binny Crescent Road, Benson Town, Bangalore 3,51,121

Total 24,17,218

Less Exemption u’/s 54 Balance 24,17,218

NIL
The assessee has entered into an agreement to purchase 50% of undivided right and interest of property at No.15/1 Binny Crescent Road, Benson Town, Bangalore from his brother Shri H J Siwani for a consideration of Rs.8,50,000/- and spent towards construction on the above property an amount of Rs.70,50,000/-. The total amount reinvested being Rs.79,00,0000/- claimed as exemption”.

25.2 In this backdrop, the observations made by the Assessing Officer in the order are relevant for our purpose which read thus:

“The assessee has out of the total investments, considered as investment of Rs.17,12,518/- towards long-term capital gains eligible for relief u/s. 54 and the balance of Rs.69,89,886/- as eligible for relief u/s.54F. Beyond this, no documentary evidences are filed along with the Return of Income to support the claims for relief u/ss 54 & 54F. For the applicability of section 54, the asset sold should be a residential house and for the applicability of section 54F, the assessee should no be in possession of a residential house on the date on which the transaction resulting in long-term capital gains took place. During the course of search, in seized material A 3/HMC/14 an agreement to sale of undivided right and interest hi respect of land at No.28, Davis Road, Bangalore was found. On enquiry, it is found that the long term capital gains shown against property at No.27, Davis Road, Bangalore, is a typhographical error and actually it relates to property at No.28, Davis Road, Bangalore. Since the agreement to sale speaks of undivided right and interest in the land sold, the claim of relief u/s. 54 needed an examination. Further, the seized material in A 02/HMC/27 indicates purchase and possession of right in a residential house located at ‘Varoda Road’, Bombay. The existence of this residential house right from 1992 make the allowability of claim of relief u/s 54F doubtful. In view of these evidences seized during the course of search, the claim has been examined by the DDI in the post search investigation. Coupled with the findings of the DDI, the claim has been examined in detail during the course of assessment proceedings. The findings and conclusions thereon are as under:

01 1/1, North Road, Bangalore

The assessee has produced copy of the purchase deed and the premises is a residential one and therefore, the assessee is eligible for exemption u/s.54.

02 No. 27, Davis Road, Bangalore

The address of the property is not 27, Davis road, Bangalore but 28, Davis Road, Bangalore. This property was purchased by Shri M.J.Siwani and Shri H.J.Siwani jointly by way of four purchase-deeds dt. 28th of January 1991, 2nd of January 1999, 6th of May 1991 and 16th of September 1991. While purchasing, the properties were numbered as Nos. 28, 28/1, 28/2 and 28/3. This premises as per the narration in the deeds had an old building and in each of the deeds, a portion of constructed area has been shown. Post purchase, on an application to the corporation authorities, the premises is renumbered and identified as No.28, Davis Road, Bangalore. This information is as per the copies of the purchase deeds filed by the assessee.

The seized material A 3/HMC/14 consisting of pages 01 to 34 has original agreement to sell between Shri H.J.Siwani, Shri M.J.Siwani with Joseph Gerard Jude Rigo with reference to undivided interest in land at No.28, Davis road, Bangalore, a construction agreement between Shri Joseph Gerard Jude Rigo with H.M. Constructions to construct a Flat bearing apartment no.01 in the ground floor. These documents furnish the following information.

(a) M/s. H.M. Constructions being the developer, formulated a scheme for development of the property and persons interested in owning apartment could purchase undivided share in the property.

(b) The developer shall construct a multistoried building and the persons buying the undivided right and interest in the property shall get a flat constructed from the developer.

(c) The undivided interest in the land as confirmed in schedule B, page 27 of the seized material shall be purchased from Shri H.J.Siwani & Shri MJ.Siwani.

In view of the above facts, it is clear that what was being sold was undivided right and interest in the land at 28, Davis Road, and the assessee was not eligible for claiming relief u/s.54 in respect of the property. When this was brought to the notice of the assessee, the assessee filed a copy of the sale deed in respect of one customer by name Smt. Sarala Bai and argued that what was sold was the property which includes land and building and therefore, section 54 is applicable”.

25.3 There cannot be any dispute that for seeking exemption under Section 54 of the Act, the asset sold should be a residential house and for attracting the provisions contained in Section 54F, the assessee should not be in possession of a residential house on the date on which the transaction resulting in long term capital gains took place. It is clear from the facts on record and which were not disputed before us that both the assessees had sold their undivided interest in the land situate at Davis Road, Bangalore, bearing No.28 to several purchasers.

The purchasers of the land, in turn, had entered into a development agreement with M/s.H.M. Constructions to construct a building consisting of apartment. From the admitted facts, it is clear that what the assessees had transferred was their undivided share in the land and not the land plus residential house/apartments. The building was constructed by M/s H.M. Constructions, which is an independent entity in law, though both the assessees were partners thereof.

25.4 It is in this backdrop, the Assessing Officer as well as the Appellate Authority rightly refused to extend any benefit of Section 54 of the Act. Section 54F provides capital gain arising from transfer of any long term capital asset not being residential house. In view thereof, the provisions contained in Section 54F, as has been rightly held by the Assessing Officer and the Appellate Authority, were attracted. Under this provision, the assessee should not be in possession of a residential house on the date on which the transaction resulting in long term capital gains takes place. On the date of transaction, that is, the sale of undivided shares in the landed property the assessees were having two residential houses having one-half share each therein. It is in this backdrop, the Assessing Officer as well as the Appellate Authority refused to grant any benefit either under Section 54 or under Section 54F of the Act in respect of capital gains income derived by the assessees.

25.5 The Tribunal, however, reversed the findings of fact recorded by the authorities below holding that ‘a residential house’ means complete residential house and would not include shared interest in a residential house.

In other words, where the properties are owned by more than one person it cannot be said that any one of them is the owner of the property. Such property, as observed by the Tribunal, continued to be of co-owners and that such joint ownership is different from absolute ownership. Such interpretation is made by the Tribunal in the light of the language employed in Section 54F of the Act, wherein, the expression ‘a residential house’ is used. The Tribunal also placed reliance upon the judgment of the Supreme Court to take such view in Seth Banarsi Dass Gupta v. CIT [1987] 166 ITR 783/32 Taxman 112A. In mis case, the Supreme Court observed that a fractional ownership was not sufficient for claiming even fractional depreciation under Section 32 of the Act with effect from 1-4-1997 by using the expression ‘owned wholly or partly’.

26. Section 54F provides that if the assessee has a residential house he cannot seek the benefit of long-term capital gain. Under this provision, merely because, the words residential house are preceded by article ‘a’ would not, in our opinion, exclude a house shared with any other person. Even if the residential house is shared by an assessee, his right and ownership in the house, to whatever extent, is exclusive and nobody can take away his right in the house without due process of law. In other words, co-owner is the owner of a house in which he has share and that his right, title and interest is exclusive to the extent of his share and that he is the owner of the entire undivided house till it is partitioned. The analogy applied by the Tribunal based on the judgment of the Supreme Court in Banarsi Dass Gupta, wherein, the Supreme Court considered the provisions contained in Section 32 of the Act, in our opinion, would not apply to the facts of the present case. The right of a person, may be one half, in the residential house cannot be taken away without due process of law or it continues till there is a partition of such residential house. Thus, we are unable to agree with the view expressed by the Tribunal on this issue and we set-aside the findings recorded on this question of law. We accordingly, answer the third substantial question of law in favour of the revenue and against the assessee.

27. Next, we would like to consider the fourth substantial question of law raised by the revenue. The assessee, as regards valuation of closing stock, in trading account adopted closing stock of land in litigation as ‘Nil’, explaining that the 20 sites measuring 1,09,813.98 sq.ft. were involved in the litigation. The assessees produced documents in support thereof. The Assessing Officer after examining the documents and the claim of the assessee held that there was no basis for the assessee to value the land as Nil. There is no dispute that as on the date of assessment the assessee was in possession of a registered document in respect of the said land. It is equally true that the assessee had a choice to value the stock at cost or at market price, whichever is lower. There is nothing on record to show what was the market price of the land in question, being the land in litigation. In view thereof, the Assessing Officer as well as the appellate authority held that in any case, the value of the land would not be ‘Nil’ at the end of accounting year i.e. 31-3-1998. Thus, the Assessing Officer as well as the appellate authority made computation of income from the said land (Crystal Springs Project) at Rs. 92,63,795/- by taking the difference between the sale price of the sites sold and cost of such sites and’ since the assessee was having only 50% share therein, apportionment of the income was made at 50% each i.e. Rs.46,31,897/- in the hands of assessee. This view of the authorities below was not accepted by the Tribunal, which remanded the matter observing that the amount received may include both capital as well as profit, if any. It was further observed that treating the entire amount as income would also not be correct and therefore, the matter was remanded to the Assessing Officer for fresh examination. Though the reasons recorded by the Tribunal, in our opinion, are not happily worded, we are also of the view the question as regards valuation of closing stock in respect of the land in litigation deserves to be considered afresh in the light of the settled position of law that the assessee, in such a situation, has a choice to value the stock at cost or market price whichever is lower. None of the authorities have considered this question in proper perspective. It was necessary to find out the value of the land at which it was purchased and the market price, at the relevant time, in the light of the fact that the property was in litigation, and then fix the liability. In the circumstances, the matter insofar as this question is concerned, is remanded to the Tribunal for fresh consideration in the light of the above observations.

28. The fifth substantial question of law is whether the Tribunal was justified in holding that the amounts standing to the credit of G.Anand having not been claimed as expenditure cannot be treated as undisclosed income of the assessee during the block period. This question relates to the assessment year 1998-99. During this period, in the statement of affairs, an amount of Rs. 10,00,000/- was shown as credit in the name of G.Anand. The assessee vide letter dated 7-5-2003 was asked to furnish documentary evidence in respect of this amount, purportedly received from G.Anand and so also requested to produce G.Anand for clarification. Incidentally, G.Anand was also required in the case of M/s.H.M.Constructions of which ‘ both the assessees were partners. M/s. H.M.Constructions has claimed that it had entered into some agreement with G.Anand. The assessee despite seeking time and giving undertaking to furnish confirmation letter from G.Anand, who, according to the assessee at the relevant time was not available, did not submit confirmation nor did he produce him before the Assessing Officer. It appears that G.Anand was running a video parlour in the premises of the assessees at Mumbai and that the assessees and G.Anand had decided to run the business of video parlour. However, due to some misunderstanding between the assessees and G.Anand, their proposal to run the business together was fizzled out. At one stage, it appears, the Assessing Officer got in touch with G.Anand, who sought an adjournment, but thereafter failed to appear before the authority. It is in this backdrop, we have considered all the three orders passed by the Assessing Officer, Appellate Authority and the Tribunal and we find ourselves in agreement with the findings recorded by the Assessing Officer and the Appellate Authority, which observed that the amount of Rs.10,00,000/- remained unexplained and treating the same as undisclosed income. It is also pertinent to note that the assessee has not only not disclosed the said amount but failed to file return of income for the assessment year 1998-99 before the search. In other words, he did not file return of income for this assessment year within the time stipulated under Section 139(1) and (4) of the Act. He also failed to maintain books of account for the said assessment year and in this backdrop, the said amount of Rs.10,00,000/- has rightly been brought to tax. The Tribunal did not consider the materials on record in proper perspective and has simply by single sentence in the order set-aside the concurrent findings of fact recorded by the authorities below. The Tribunal observed that the amount standing to the credit of G.Anand was not claimed as expenses or deduction and, therefore, would fall outside undisclosed income. In our opinion, this observation/finding in view of the facts and circumstances of the case, recorded by the Tribunal, is perverse and deserve to be set-aside. Order accordingly. The fifth question, accordingly, is answered in favour of the revenue and against the assessee.

29. Insofar as the last substantial question of law is concerned, it appears that the assessee had not disclosed an investment of Rs.50,000/- towards purchase of NSC in his regular return which was explained by him stating that it was made out of funds of various firms wherein he was a partner. It was contended that though sources were disclosed to the Assessing Officer in the re-open proceedings relating to assessment year 1996-97, the Assessing Officer chose to make the said addition in the regular assessment proceedings and having done so, has suggested enhancement of undisclosed income on this count, which according to the assessee, was not justified, as the investment is from out of the funds belonging to various firms in which the appellant was a partner. The explanation offered by the assessee was, however, not accepted and it was treated as undisclosed income for the block period by the Assessing Officer and Appellate authority. The Tribunal, however, reversed the findings of fact recorded by the authorities below holding that the assessee did not claim deduction in respect of the investment in NSC it would be out of the purview of the undisclosed income. Having regard to the quantum of amount and the findings recorded by the Tribunal, this substantial question of law was not seriously pressed. We are also not inclined to interfere with the order of the Tribunal in respect of the sum of Rs.50,000/- invested in NSC by the assessee. This question accordingly stands of answered in favour of the assessee and against the revenue.

30. In the result, we dispose of these appeals in terms of this judgment. There shall be no order as to costs.

[Citation : 366 ITR 356]