Karnataka H.C : The income detected pursuant to search cannot be brought to tax in the Block assessment despite the same having not been disclosed within the stipulated time prescribed under section 139 of the Act and consequently should be treated as NIL income as per section 158BB(1)(ca)

High Court Of Karnataka

CIT, Central Circle vs. H.E. Mynuddin Pasha

Assessment Years : 1990-2000 And 2000-01

Section : 158BC

N. Kumar And Ravi Malimath, JJ.

IT Appeal Nos. 931,935 & 957 Of 2006

July 27, 2011

JUDGMENT

1. The Revenue has preferred this appeal challenging the order passed by the Tribunal which held that the block assessment order passed by the Assessing Authority which is confirmed by the Appellate Commissioner is erroneous as the income which is assessed in the block period is not an undisclosed income.

2. As the said issue involved in all these appeals is same and the Tribunal has disposed of all the three appeals by common order, we are also disposing of the appeals by a common order.

3. A search was conducted under section 132 of Income-tax Act, 1961 on 18-1-2001 in the premises of the assessees. Consequently, notice under section 158BC was issued. On the date of the search, due date of filing the assessment years 1999-2000 and 2000-01 stood expired. The assessees have not filed their returns. Assessees enjoyed taxable incomes during these periods. The source of the said taxable income was income and remuneration from the partnership firms in which they were partners, in reply to the notice under section 158BC the assessees confirmed that the source of income in the above years are known to the department and the returns for the assessment of M/s. Mallikarjuna Enterprises for the assessment year 2000-01, was filed on 30-10-2000, returns of M/s. HED Brothers for the assessment years 1999-2000, 2000-01 were filed on 27-9-1999 and 27-1-2000 and the returns of income of M/s. Sugandha Flavours for assessment years 1999-2000 and 2000-01 were filed on 31-12-1999 and 30-10-2000 respectively. As all these returns were filed before the search in the premises of the assessees and remuneration paid by those firms were clearly disclosed in their returns, they contended that they were not undisclosed income which calls for a block assessment order. It was also contended that those firms had deducted TDS in respect to the interest paid to these assessees.

4. The Assessing Officer on consideration of the aforesaid material held that these incomes are sufficient to explain the assets found during the search. The assessees filed returns of their income after the date of search. However, the Assessing Officer held that as the assessees have not filed their returns before search and disclosed the said incomes in the returns and that income was disclosed only in the returns filed after the search. In his view it amounted to undisclosed income and liable for assessment for the block period. Accordingly, he passed an assessment order. Aggrieved by the same, the assessees preferred an appeal before the Appellate Commissioner without any success and where the said appeal came to be dismissed. Aggrieved by the said order, the assessees preferred appeals before the Tribunal. The Tribunal on a careful consideration of the material on record, the definition of the undisclosed income as defined under section 158B of the Act and taking note of various decisions rendered by the High Courts of the Country and also the judgment of the Supreme Court held that the moment TDS is paid, advance tax is paid, the income with reference to which the said payments were made becomes a disclosed income and they cannot be the subject-matter of a block assessment proceedings, on the pretext of they not being disclosed by filing a return. Therefore, it set aside the block assessment order passed by the Assessing Officer as confirmed by the Appellate Commissioner. Aggrieved by the said order the Revenue has filed these appeals.

5. Learned Counsel for the Revenue assailing the impugned orders contend that, admittedly, the assessees filed their returns of income only after the search. As the returns were not filed on the due dates, but only after the search, and as a consequence of the notice issued to them, the assessees filed returns, and therefore, income shown in the return filed in pursuance of the notice issued in block assessment proceedings is to be construed as income undisclosed, it becomes the subject-matter of the block assessment order. Even if the TDS is deducted and advance tax is paid. Law does not make any difference and therefore, he submits that the order of the Tribunal requires interference.

6. Per contra, Sri A. Shankar, learned Counsel for the respondent supported the impugned order.

7. The appeals were admitted to consider the following substantial questions of law on 5-4-2007:-

“1.Whether the Tribunal was correct in holding that the income detected pursuant to search cannot be brought to tax in the Block assessment despite the same having not been disclosed within the stipulated time prescribed under section 139 of the Act and consequently should be treated as NIL income as per section 158BB(1)(ca) of the Act?

2.Whether the Tribunal was correct in holding that the Advance Tax payment disclosed in the books of other firms about remuneration and interest paid to the assessee would be sufficient to treat the said amount of income as disclosed and take it out of the purview of the Block assessment proceedings?”

8. From the aforesaid materials on record, the facts are not in dispute. The assessees are partners in various firms. They have advanced loans to the said firms. The said firms have paid remuneration to them. The said firms have paid interest on the loan borrowed by the firms. Insofar as the interest payment is concerned, they have deducted the Tax Payable at Source for the amounts paid by these firms. All these payments are reflected in the books of account. Admittedly all the firms have filed returns before the due date and before the search. Therefore, the entire remuneration received by these assessees is reflected in the accounts of books of the firms and TDS is deducted. Assessees on their part have also paid advance tax, assessees have not filed the returns before the due dates. It is not in dispute that the assets found during the search is explained by the assessees as having been acquired from the aforesaid source of income and the said explanation is accepted by the Assessing Authority. Therefore it is clear, when the assessee files returns, an income disclosing the aforesaid remuneration as well as the interest received from those firms, the said income cannot be construed as undisclosed income. The undisclosed income for the purpose of block assessment has been defined under the Act. The said definition has been the subject-matter of interpretation by various High Courts and the Supreme Court. It has been clearly held that the proceedings under the regular assessment and the assessment for the block period stands to operate on different fields. Income in respect of which advance taxes has been paid, as well as TDS deducted cannot be construed as undisclosed income at all. The moment advance tax is paid the taxable income at that point of time stands disclosed to the Revenue by the assessee. When the creditors pay interest and deduct TDS and show the said payment in their books of account, as well as the returns filed, the said income due to the assessee stands disclosed to the department. Similarly, when the partnership firm pay remuneration in terms of the agreement to its partner and reflects in the books of account as well as in the returns filed to the department well in time, the said income stands disclosed to the department. Therefore, merely because the recipient of the income did not file the returns and he filed only after the search makes no difference. Though he filed returns disclosing the said income, it has already been disclosed to the department and cannot be construed to be undisclosed income, so as to fall within the block assessment proceedings. Therefore, the Tribunal in the facts of these cases was justified in holding that the remuneration received from the partnership firm, interest income derived from the partnership cannot be construed as undisclosed income and does not fall within the block assessment proceedings as contended by the authorities. The said income has to be excluded from the block assessment proceedings. The order of the Tribunal is legal and valid and does not call for interference. Accordingly, the substantial questions of law framed in these appeals are answered in favour of the assessees and against the Revenue. Accordingly, appeals are dismissed. No costs.

[Citation : 338 ITR 533]

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