High Court Of Karnataka
CIT, Central Circle VS. Smt. Annapoornamma Chandrashekar
Section 158BD
N. Kumar And Ravi Malimath, JJ.
IT Appeal Nos. 2302, 2304, 2315 & 2316 Of 2005
September 28, 2011
JUDGMENT
N. Kumar J. – As common questions arise for consideration in all these four appeals, preferred by the Revenue against the order of the Tribunal, they are taken up together, disposed of by this common order.
2. The premises of Trishul Enterprises and one Sri T.S. Chandrashekar were searched on 12-2-1995 under Section 132 of the Income-Tax Act, 1961(hereinafter referred to as ‘the Act’ for short). In the course of search documents implicating the assessees herein were seized. On that basis proceedings ,were initiated under Section 158BD of the Act. However, the notice served on the assessees was under Section 158BC. After service of notice the assessees produced the documents which were in their possession and contended that there is no undisclosed income. However, the assessing authority proceeded to frame the assessment order in respect of all the four assessees for the block period from 1985-86, 1994-95 and 1-4-1995 to 12-2-1996 setting out the undisclosed income for the aforesaid years and issued a demand for payment of tax at 60% of the undisclosed income under Section 113 of the Act. Aggrieved by the said order the assessees preferred appeals before the Tribunal. The Tribunal on re-appreciation of the entire evidence on record held that the notice issued under section 158BC is voidab initio and consequently the assessment orders passed in a proceeding which commenced by issue of such notice is also illegal and therefore set aside the order of the assessing authority on the ground that there is no undisclosed income during the block period. Aggrieved by the said order of the Tribunal the Revenue has preferred these appeals.
3. The learned senior counsel appearing for the Revenue assailing the impugned order contended that though the proceedings initiated is under Section 158BD the said provision as such did not contemplate a notice to be issued to the assessee. The said provision expressly provides that the procedure prescribed under Section 158 is to be followed. Therefore, the provisions of Chapter-XIV B apply and therefore this Section 158BC which is applicable, which deals with computation of undisclosed income, the notice issued under Section 158BC is the notice which had to be issued. Therefore the order passed by the Tribunal holding that the notice is void and the order passed in pursuance of such notice is also void, is illegal and requires to be set aside. On merits he contended that a sum of Rs. 61,25,385/- opening balance shown in the statement of accounts furnished by the assessees was not established by acceptable evidence and therefore by virtue of Section 69 it is deemed to be an undisclosed income and the Tribunal committed a serious error in setting aside the said finding. In the case of land sold to the Bank Officers Co-operative Society is concerned, in the case of Smt. Annapoornamma it is admitted that there is an agreement of sale, the rate at which the land is agreed to be sold is mentioned and calculating that 58% of the total land is what is agreed to be sold at the rate of Rs. 37/- per square feet, the assessee has not shown the income from the aforesaid transaction. Therefore the assessing authority has arrived at a sum of Rs. 2,08,96,259/- as the income which was not disclosed and therefore he was justified in levying the tax on the said amount. Insofar as sale of property to Bank Officers Co-operative Housing Society is concerned the said income was not reflected in the returns filed prior to the date of search and no documents were produced to substantiate their claim. Therefore, in the absence of any such material the assessing authority was justified in holding that the said amount also represents undisclosed income. Insofar as income derived from M/s. Sripriya Developers is concerned, the same is also not disclosed and therefore the assessing authority brought it to tax. In respect of the diary seized and on that basis assessment is made, it constitutes a document disclosing the undisclosed income from the seized material and the Tribunal was not justified in interfering with the said finding. Therefore he contends that both on merits as well as on question of law, the Tribunal was not justified in setting aside the order passed by the assessing authority.
4. Per contra, the learned counsel appearing for the assessee supported the impugned order.
5. The substantial questions of law which arise for consideration in these appeals are as under:-
“(1) Whether the finding of the Tribunal that the notice issued under Section 158BC in respect of the proviso under section 158BD is void, ab initio and therefore the order of assessment passed in pursuance of such notice is also void is it correct?
(2) Whether the order passed by the Tribunal holding that there is no undisclosed income as held by the assessing authority calls for interference?”
Point No. 1
6. Chapter XIV-B deals with a special procedure for assessment in search cases. Section 158B is the definition Section and Section 158BA deals with assessment of undisclosed income as a result of search. The computation of undisclosed income for the block period is provided under Section 158BB and procedure for block assessment is provided under Section 158BC. If in the course of search and seizure if any undisclosed income of a person other than the person whose premises is searched is recovered, Section 158BB provides for assessment of such undisclosed income of such persons.
Section 158BB reads as under:-
“158BB,(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, (in accordance with the provisions of this 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 the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined,-
(a) where assessments under section 143 or section 144 or section 147 have been concluded (prior to the date of commencement of the search or the date of requisition), on the basis of such assessments;
(b) where returns of income have been filed under section 139 (or in response to a notice issued under sub-section (1) of section 142 or section 148) hut assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns;
(c) where the due date for filing a return of income has expired, but no return of income has been filed,-
(A) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition where such entries result in computation of loss for any previous year failing in the block period; or
(B) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition where such income does not exceed the maximum amount not chargeable to tax for any previous year falling in the block period;
(ca) where the due date for filing a return of income has expired, but no return of income has been filed, as nil, in cases not falling under clause(c);]
(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years;
(e) where any order of settlement has been made under sub-section (4) of section 245D, on the oasis of such order;
(f) where an assessment of undisclosed income had been made earlier under clause (c) of section 158BC, on the basis of such assessment.
Explanation. – For the purposes of determination of undisclosed income.
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of (this Act) without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32:
Provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32:
[(b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called [to any partner not being a working partner]:
Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement;]
(c) assessment under section 143 includes determination of income under sub-section (1) or sub-section (IB) of section 143.
(2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be apply and reference to “financial year” in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition.
(3) The burden of proving to the satisfaction of the Assessing officer that any undisclosed income has 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.
(4) For the purpose of the assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments.”
Thus by Finance Act, 2002, which came into effect from 1-6-2002 the word ”under Section 158BC” is introduced, Prior to the said amendment if any assessment has to be made of undisclosed income of any other person the provisions of Chapter XIV-B was made applicable. As is clear from the wordings of the said Section that if the assessing officer seizes the books of account or other documents or of any other person other than the person whose premises is searched he shall proceed against such other person under the provisions of Chapter XIV-B. There was no provision in the said Section as such for issue of any notice to such person. Section 158BC provides for procedure for block assessment which reads as under –
“158BC. 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) in respect of search initiated or books of account or other documents or any assets requisitioned on or after 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 but not more than forty-five days, as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period:
Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter :
Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;
(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;
(c) the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment;
(d) the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B”
The said provision mandates the service of notice to such person requiring him to furnish within such time not being less than 15 days a return in the prescribed form and verify in the same manner as the return given under sub-Clause(l) of sub-Section(i) of Section 142 setting out his total income including the undisclosed income for the block period. Therefore where the assessment is to be done under Section 158BC or 158BD issue of a notice is mandatory and the said notice is also prescribed under the Act. In order to clarify the position by Finance Act, 2002, the words “under Section 158BC” is expressly provided. The said amendment is clarificatory in nature. Even though it is stated that the provisions of this Chapter shall apply and in that Chapter, Section 158BC which is the provision which prescribes the procedure for block assessment the assessment under Section 158BD has to be in terms of Section 158BC. When proceedings are initiated in terms of Section 158BC against a person who is covered under Section 158BD and the notice to be issued is prescribed under the Act and in the absence of any prescription of a notice in a prescribed manner under Section 158BD the only notice that requires to be issued both under Sections 158B and 158BD is the notice which is prescribed. It is the notice prescribed under Section 158BC. Therefore, the contention that the assessment is under Section 158BD whereas notice issued under Section 158BC and therefore the entire proceedings in pursuance of such notice is void and is untenable.
7. The assessee relies on the Judgment of the Bombay High Court in the case of CIT v. Tirupathi Oil Corporation [2001] 248 ITR 194. In the aforesaid Judgment all that has been stated is that a search operation was conducted in the premises of a partner. After the said search a notice under Section 158BC of the Income-Tax Act was issued to the firm. It was held that if the assessment on the assessee-firm is to be done, the Assessing Officer is required to invoke Section 158BD which has nor. been done in the case. Therefore, the block assessment made on the firm without following the procedure under Section 158BD was bad in law. In the aforesaid Judgment nowhere it is stated that a notice mentioning Section 158BC being issued in proceedings under Section 158BD, the notice would be void. Therefore the Judgment has no application.
8. Reliance is also placed on the Judgment of the Delhi High Court in the case of CIT v. Pushpa Rani [2004] 136 Taxman 627. In the aforesaid Judgment it was held that unless a search warrant is issued the Assessing Officer cannot invoke the provisions of Section 158BC for initiation of block assessment proceedings under Chapter XIV-B. Search and seizure under Section 132 of the Act is a condition precedent for initiation of proceedings under Chapter XIV-B. They were not dealing with a notice which should be issued under the provisions. Therefore the Judgment has no application in this case.
Therefore in the light of what is stated above, the Tribunal was not justified in holding that a notice mentioning purported to have been issued under Section 158BC in a proceedings initiated under Section 158BD is void ab-initio.
Point No.2.
9. On merits the assessing authority has held that the opening capital shown by the assessee as on 1-4-1985 is the undisclosed income for the block period. It is not in dispute that the block period is for the period from 1-4-1985 to 12-12-1985, the day on which the search was conducted. Any income accrued to the assessee during this period, if it is not disclosed would constitute undisclosed income as defined under Section 158BB of the Act. If the said amount is shown as a opening balance by all the assessees that is the income which has accrued prior to 1-4-1985. Therefore, the income which has accrued to the assessee prior to the date of the commencement of the block period would not constitute undisclosed income under Chapter XIV-B of the Act. The contention of the Revenue is that in respect of the said amount the assessee were not able to produce satisfactorily the material to show the source of the said income. Therefore according to them Section 69 is attracted and therefore it is deemed to be the income of the assessee or such financial year and constitutes unexplained investment. In support of that contention the learned counsel relies on a Judgment of the Apex Court in the case of CIT v. Mukundray K. Shah [2007] 290 ITR 433/160 Taxman 276. That was a case of deemed dividend income accruing to the assessee, admittedly during the block period. Therefore, the said judgment has no application to the facts of this case. Infact, the Tribunal on going through the records has categorically stated that the material on record clearly demonstrates that the assessees did have enough resources to substantiate opening capital as on 1-4-1995, the assessees have not paid the tax due on this opening capital. This is outside the ambit of the block period, it cannot be taxed as undisclosed income for the block period and therefore the addition of undisclosed income under the aforesaid head was ordered to be deleted.
10. In the light of the aforesaid facts we are of the view that as the said opening capital accrue to the assessees at a point of time anterior to the commencement of the block period, it cannot be treated as undisclosed income at all. The Tribunal was justified in directing deletion under that head.
11. Insofar as the agreement with M/s. Bank Officers Co-operative Bank is concerned, the original agreement was between the Bank Officers and one M/s. Shripriya Developers which agreed to mortgage the land to the Bank which includes the lands of the assessees. They were unable to keep up their word as there was shortage of funds. In those circumstances the assessee stepped in and gave the land belonging to them to honour the commitment made by the Bank Officers Co-operative Society Ltd., in the returns filed earlier. They have shown the cost of the land. The transaction has not been completely concluded. What the Assessing Officer did was to calculate 58% of the total of 28 acres 13 guntas at the rate of Rs.37/- per square feet and arrive at the gross sale receipt and reduced the cost of land and the remaining land was assumed as the undisclosed income. It is well-settled law that in a block assessment the undisclosed income is to be computed from the materials seized. There is no scope for estimation in a block assessment.
12. From the aforesaid facts it is clear that the amount computed by the Assessing Officer is only a mere assumption. It is not borne out from the material seized during search. When the Assessing Officer was calculating the gross sale receipts at the rate of Rs. 37/- per square feet, he forgot to take into consideration the cost of formation of layout, roads, drinking water and other expenses and other amenities. As is clear from his order, he has taken the cost of land as undisclosed and then made this calculation and reduced the cost of land and according to him the balance is the income which represents the undisclosed income. Therefore, the Tribunal was justified in setting aside the said finding. . That can not be the basis and it is outside the purview of the assessment proceedings.
Insofar as the transaction with M/s. Ramanashree comforts is concerned all the assessees had filed their return prior to the date of the search in which this transaction was reflected. The reason assigned by the Assessing Officer not to take note of the same and to include it in the block assessment is that in the return it is not specifically mentioned. It was open to the assessing authority to call upon the assessee to substantiate the same and hand over the same by producing the documents. In fact the documents were all produced. There is no other transaction which is entered into by the assessee as found by the assessing authority. Under these circumstances merely on the ground that in the return it is not expressly provided that the said transaction pertains to M/s. Ramanashree Comforts Private Ltd., the assessing authority had no jurisdiction to include that income which is disclosed in the regular returns as undisclosed income and the Tribunal was justified in setting aside the finding recorded by, the assessing authority. Infact the assessees have offered the said capital gains for the assessment years 1996-97, 1997-98. That has been accepted by the Department in the regular assessment.
13. Insofar as the transaction with M/s. Sripriya Promoters is concerned that was a case of land purchased before 31-3-1995 and disclosed in the returns and hence it was effected immediately prior to the search and strangely they had attempted to disclose the same at the time of filing the return for which the last date had not expired. Infact the addition made in the case of Sri T.S. Chandrshekar in respect of the very same transaction was deleted by the Tribunal. It has attained finality. Under these circumstances the Tribunal set aside the said addition also. Insofar as the addition of Rs. 18,38,375/- in the case of M/s Annapoorna Constructions is concerned the said addition was made on the basis of a diary which stood in the name of Vijendra. Incidentally in the diary, the name of Smt. Annapoornamma is not found. It is very strange that the said income is treated as undisclosed income at the hands of the assessee Smt. Annapoornamma and she is taxed. In those circumstances the Tribunal was justified in directing the deletion of the said addition. Insofar as the additions in the case of the assessee Ravishankar is concerned as the figure offered by the assessee had not been accepted and addition has been made, the Tribunal found that the explanation offered by the assessee was reasonable and the said amount had been reflected in the assessment by the assessee and therefore it did not constitute undisclosed income and therefore it directed deletion. Under these circumstances, the order passed by the Tribunal on merits is based on legal evidence which is just and equitable and does not suffer from any legal infirmity which calls for interference.
14. In the light of what we have stated, the first substantial question of law is answered in favour of Revenue and against the assessee and the second question of law is answered in favour of the assessee and against the Revenue. In the result, the appeals are partly allowed.
[Citation : 353 ITR 55]