Madhya Pradesh H.C : The transaction of purchase and sale of land at village Shyampur in the name of assessee’s wife, Smt. Jyoti Khatri, was not an adventure in the nature of trade without assigning reasons for the same and whether such holding was not contrary to the established legal position

High Court Of Madhya Pradesh

CIT vs. Purshottam Khatri

Sections 10(4)(ii), 5(1)(c), proviso, 158BB

Asst. Year Block period 1st April, 1986 to 18th Oct., 1996

A.K. Patnaik, C.J. & R.K. Gupta, J.

MA (IT) No. 114 of 2000

25th January, 2006

Counsel Appeared

Rohit Arya with Sanjay Lal, for the Appellant : A.P. Shrivastava, for the Respondent

JUDGMENT

A.K. Patnaik, C.J. :

This is an appeal under s. 260A of the IT Act, 1961 (for short ‘the Act’) filed by the CIT against the order dt. 7th June, 2000 of the Tribunal.

2. The facts briefly are that the respondent left India in 1968 and was employed in Muscat and Dubai till the previous year relevant to the asst. yr. 1992-93 and thereafter returned to India. A search was carried out under s. 132 of the Act in the premises of the respondent at Bhopal for a period of 13 days from 18th Oct., 1996 to 30th Oct., 1996. Thereafter, an assessment was made under s. 158BC r/w s. 143(3) of the Act by the AO on 29th Oct., 1997 determining the total undisclosed income for the block period 1st April, 1986 to 18th Oct., 1996 at Rs. 2,10,48,043. Aggrieved, the respondent filed an appeal before the Income-tax Appellate Tribunal, Indore Bench, Indore (for short, the Tribunal) and by order dt. 7th June, 2000, the Tribunal deleted some of the additions made by the AO to the undisclosed income of the respondent and allowed the appeal in part.

3. The first ground urged by the appellant in the appeal is that the Tribunal’s decision to delete addition of Rs. 1,03,50,020 as unexplained deposits in the NRE accounts of the respondent was erroneous in law. Accordingly, on 13th Aug., 2001, the Court while admitting the appeal, formulated the first substantial question of law for decision in this appeal as follows : “Whether, on the facts and circumstances of the case, the learned Tribunal was justified in deleting the addition of Rs. 1,03,50,020 made on account of unexplained deposits in the NRE bank accounts of the assessee even when the assessee had failed to discharge his onus of establishing the genuineness of the source of credits in his NRE bank accounts ?”

4. Mr. Rohit Arya, learned senior counsel appearing for the appellant, submitted that the proviso to s. 5(1)(c) of the Act provides that in the case of a person not ordinarily resident in India, the income which accrues or arises to him outside India is not to be included but the said proviso to s. 5(1)(c) of the Act will apply only to income which accrues or arises outside India and in the present case, the respondent had failed to establish that the amount of Rs. 1,03,50,020 accrued or arose as income of the respondent outside India. He submitted that the Tribunal has failed to appreciate that under the Foreign Exchange Regulation Act, 1973 (for short, ‘the FERA’) and the notifications issued thereunder, any person visiting India, can bring foreign currency notes including travellers cheques upto US $ 10,000 without any declaration and w.e.f. June, 1995 a person visiting India can bring foreign currency note including travellers cheques upto US $ 3,500 without a declaration and, therefore, any amount beyond the aforesaid limits during the block period could not have been brought by the respondent to India in violation of the provisions of the FERA and the notifications issued thereunder and such foreign currency in excess of the limits must have accrued or arisen as income of the respondent in India and not outside India. He further submitted that the Tribunal has erred in accepting the explanation of the respondent that the foreign currency brought by him prior to the block period were retained by him till the rate of foreign exchange increased and was thereafter deposited by him in his NRE accounts during the block period. He submitted that under the notifications issued under the FERA from time to time, a person owning or holding any foreign exchange has to sell the foreign exchange to the RBI or any authorised dealer within three months of such acquisition and, therefore, the respondent could not have retained such foreign exchange brought by him from abroad before the block period. He submitted that onus was on the respondent to produce material to establish that the foreign currency deposits made by him in his NRE accounts in India during the block period were earned by him outside India and that onus was not on the Department to show that the assessee earned such foreign currency deposits inside India, but the Tribunal has proceeded as if the onus was on the Department to show that the deposits of foreign currency made by the respondent in his NRE accounts were income accruing to him inside India.

5. Mr. A.P. Shrivastava, learned counsel appearing for the respondent, on the other hand, submitted that the AO has recorded a clear finding that the respondent was a person not ordinarily resident in India and the proviso to s. 5(1)(c) of the Act made it sufficiently clear that income which accrues or arises to such a person outside India, shall not be included in his total income for the purpose of assessment under the Act. He submitted that the AO gave credit to all such income of the respondent earned by him outside India and brought into India in respect of which declarations were produced, but did not give credit in respect of all such income earned by him outside India and brought into India in respect of which no declarations were produced but other documents such as exchange vouchers issued by exchange centres in foreign countries were produced. He further submitted that besides exchange vouchers, bank certificates were produced, in which it was certified that the amounts were credited as per rules governing NRE accounts of non-resident Indian or that the amounts were received from abroad through normal or proper channel. He referred to copies of some exchange vouchers and bank certificates in the paper books filed by the respondent in this Court. He submitted that on these materials, the Tribunal came to the conclusion that the deposits made in the NRE accounts of the respondent were income which accrued or arose to him outside India and were not taxable under the Act and this finding of fact of the Tribunal cannot be disturbed by the High Court in an appeal under s. 260A of the Act which is confined only to a substantial question of law. He cited the decision of the Supreme Court in M. Janardhana Rao vs. Jt. CIT (2005) 193 CTR (SC) 585 : (2005) 273 ITR 50 (SC), in which it has been held that an appeal under s. 260A of the Act can only be on a substantial question of law. He also relied upon the decision in CIT vs. Ashok Kumar Jain (2004) 190 CTR (MP) 143 : (2005) 272 ITR 385 (MP) in which a Division Bench of this Court has held that findings of the Tribunal on facts cannot be interfered with in exercise of powers conferred on the High Court under s. 260A of the Act unless it is shown that the finding is so perverse that no judicial man can ever reach such a conclusion or it is against the settled principle of law. He placed reliance on the decision of a Division Bench of this Court in CIT vs. Kantilal (2004) 190 CTR (MP) 210 : (2005) 273 ITR 90 (MP), in which the Tribunal accepted the explanation coupled with the evidence tendered by the assessee in relation to the additions made by the AO and held that since the same had been properly explained, they could not be included while computing the total income of the assessee and the High Court refused to interfere in such a finding of the Tribunal saying that no substantial question of law arose from the order of the Tribunal. He also cited the decision of this Court in CIT vs. V. Raghavan (2005) 274 ITR 64 (MP), in which the Division Bench while dismissing the appeal under s. 260A of the Act, held that once the Tribunal accepted the explanation of the assessee and deleted certain additions made by the AO, it does not involve any substantial question of law.

6. Sec. 5(1) of the Act is quoted hereinbelow : “5(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub- s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.” Sec. 5(1)(c) quoted above provides that subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which accrues or arises to him outside India during such year. In the case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6 of the Act, however, an exception has been made in the proviso to s. 5(1)(c) of the Act. The exception is that the income of such a person not ordinarily resident in India accruing or arising to him outside India shall not be so included in his total income, unless it is derived from a business controlled in or a profession set up in India. The aforesaid proviso to s. 5(1)(c) of the Act thus grants a person not ordinarily resident in India an exemption from tax under the Act in respect of his income, which accrues or arises to him outside India. Thus, once the Department establishes that a certain income has accrued or arisen to a person not ordinarily resident in India, to get the benefit of the exemption, such a person must establish that such income has accrued or arisen to him outside India. As has been held by the Supreme Court in the case of CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC), the burden of proving the necessary facts in order to entitle the assessee to claim an exemption was upon the assessee. Moreover, once it is shown that a certain receipt represents the income of the assessee, as to whether such income has arisen or accrued to him outside India is a fact within the special knowledge of the assessee and it is for the assessee to establish this fact by adducing proof thereof. But once an assessee, who is not ordinarily resident in India, establishes that a particular income has accrued or arisen to him outside India, onus would shift to the Department to show that such income, which has accrued or arisen to the assessee outside India is derived from a business controlled in or a profession set up in India, and has to be included in total income for assessment under the Act.

In the present case, the AO has found that the respondent during the previous years relevant to the asst. yrs. 1992-93 to 1997-98 was not an ordinarily resident in India and the AO has further found that the respondent had made number of deposits in foreign currency in his NRE accounts in different banks in India and has excluded therefrom remittances of foreign currency directly received from abroad, obviously because the said deposits made by remittances from abroad represented income accruing or arising to the respondent outside India. Similarly, the AO has excluded the deposits of foreign currency which had been brought by the respondent from outside India after making declarations under the notifications issued under the FERA and had deposited the same in his NRE accounts during the block period, because in such cases, the foreign currency represented income which had accrued or arisen to the respondent outside India but which had been brought by him into India as evidenced by the declaration forms and thereafter deposited in his NRE accounts. Similarly, the AO had excluded from such deposits foreign currency within the limits beyond which declarations had to be made presuming that the respondent during his different visits may have brought foreign currency without declarations to India and deposited the same in his NRE accounts during the block period because such income brought inside India within such limits could be treated as income having accrued or arisen to the respondent outside India. After having excluded the aforesaid items of foreign currency deposits in the NRE accounts of the respondent, the AO found that foreign currencies representing Rs. 1,03,50,020 were unexplained deposits and treated the same to be undisclosed income of the respondent.

Before the Tribunal, the respondent made a grievance that prior to the block period, he visited India a number of times and on each such occasion, had brought foreign currency with him in the form of pounds and dollars either in cash or traveller cheques and had produced declarations with regard to such foreign currency brought by him into India before the AO to prove that the foreign currency was retained by him in India and was not taken back by the respondent outside India and that such foreign currency was retained by him at home with the hope that the exchange rate would increase and was ultimately deposited by him in the NRE accounts during the block period, but the AO has included such foreign currency in the unexplained deposits of Rs. 1,03,50,020. The Tribunal held in para 12 of the impugned order that while determining the unexplained deposits, the AO did not give any credit of such foreign currency brought into India by the respondent against the declarations without any enquiry or finding that this foreign currency was either utilized by the respondent or taken back by him while leaving India and in these circumstances, the explanation of the respondent that the foreign currency was retained by him in his home with the hope that the same would be exchanged as and when the exchange rate of foreign currency would increase, appears to be plausible. Under s. 14 of the FERA, the Central Government may, by notification in the Official Gazette order every person in or resident in India who owns or holds such foreign exchange as may be specified in the notification, to offer it or cause it to be offered for sale to the RBI or to such person as the RBI may authorize for the purpose at such price as the Central Government may fix. Under the first proviso to s. 14 of the FERA, the Central Government may also exempt any person or class of persons from the operation of the order made in such notification. We find that the Tribunal has found in para 11 of the impugned order on the basis of facts placed before it that the respondent had visited India on 25th Oct., 1982, 21st Feb., 1985, 5th Sept., 1985,10th Dec., 1985, 12th Aug., 1986, 31st Jan., 1987 and 2nd Dec., 1987 and had brought along with him foreign currency in pound and dollars, both in cash and traveller cheques as declared in the declarations. The appellant has not produced before the Tribunal or before this Court any notification under the said s. 14 of the FERA issued during the aforesaid period from 25th Oct., 1982 to 2nd Dec., 1987 whereunder a person who was not ordinarily resident and who has brought foreign currency into India after furnishing declarations under the notifications issued under the FERA, had to sell the foreign currency to the RBI or any authorized dealer. In any case, the respondent has been able to show by production of declarations made as per notifications issued under the FERA that he had brought in foreign currency out of income which had accrued or arisen to him outside India prior to the block period and in the absence of any finding by the AO that such foreign currency, which had accrued or arisen to the respondent as income outside India and brought into India, had been either sold or exchanged for Indian currency as per such notifications issued under the FERA or had been utilized in any other manner, or had accrued or arisen to him from a business controlled or a profession set up in India, the explanation of the respondent that such income had been deposited in the NRE account during the block period subsequently had to be accepted and the finding of the Tribunal in this regard on a question of fact cannot be disturbed by this Court in the present appeal under s. 260A of the Act, which is confined to only substantial question of law.Before the Tribunal, the respondent also made a grievance that for the remaining foreign currency deposited by him in the NRE accounts in India, although he could not produce declarations to show that such foreign currency was brought by him to India, he produced other materials such as exchange vouchers issued by the exchange centres abroad and certificates issued by the banks in India in support of his claim that such foreign currency deposited by him accrued or arose to him as income outside India. The Tribunal found in para 13 of the impugned order that the foreign currency exchange vouchers produced by the respondent were issued a few days prior to the date of visit of the respondent in India and hence the claim of the respondent that the foreign currency shown in the foreign currency exchange vouchers was in fact brought into India by him in his visits to India also appears to be plausible, but the AO while working out the unexplained deposits of foreign currency in the NRE accounts has totally ignored these foreign currency exchange vouchers. The Tribunal has further held that a visitor to India is required to surrender the declaration form at the time of his departure from India, if he wishes to carry any foreign currency with himself and in these circumstances, it is possible that the respondent might have brought some foreign currency with himself while leaving India and the possibility of his surrendering the declaration forms to the Customs authorities at the time of leaving India is not ruled out. The Tribunal has further held that a common man may not anticipate that in the years to come, he would be searched by the IT authorities and would be required to produce all the evidence through which he has brought the foreign currency which is not chargeable to tax in India and since the respondent had earned foreign currency outside India, which is not chargeable to tax in India the same should not have been viewed with an evil eye when it is brought to India through lawful means.

In our considered opinion, the foreign currency exchange vouchers are only evidence of the fact that the respondent had converted some foreign currency into dollars or pounds outside India but cannot be considered as evidence of the fact that such dollars or pounds were thereafter brought to India by the respondent and finally deposited in his NRE accounts in India. The certificates issued by the banks vaguely state that the amounts were credited as per rules governing NRE accounts and therefore do not constitute evidence of the fact that dollars and pounds which were obtained from exchange centres abroad, as evidenced by foreign currency exchange vouchers, were brought into India and deposited in the NRE accounts of the respondent. The respondent was required to explain the deposit of foreign currency in his NRE accounts and the respondent’s case was that the said deposits were out of his income which had arisen or accrued to him outside India. Since s. 13 of the FERA imposed restrictions on the import of foreign currency into India, he could establish this fact by producing declarations made by him at the time of his visits to India from abroad in which he had declared the value of dollars or other foreign currency brought into India by him in accordance with the notifications issued thereunder.

12. The currency declaration forms prescribed by notifications issued under the FERA in which declarations were made stipulated as follows :”(b) Visitors to India may please note that in case they do not wish to encash all the foreign exchange/special rupee notes declared above, they should retain this form with them for production to customs at the time of departure to enable them to take with them the unutilized balance.”The aforesaid stipulation does not require that at the time of departure from India, the visitor must surrender the declaration form before the Customs authorities to enable him to take with him the unutilized balance of foreign currency and the finding of the Tribunal that the possibility of the respondent having surrendered the declaration forms to the Customs authorities at the time of his departure from India so that he could take some of the unutilized balance of foreign currency brought into India cannot be ruled out, is also not correct.The currency declaration forms are also signed by the visitor to India and the Customs authorities and constitute the evidence to show that the respondent had brought into India foreign currency which had accrued or arose to him as income outside India. Since the respondent had not been able to produce such evidence nor any other material before the Tribunal to clearly establish that the deposits made by him in his NRE accounts represent his income which had accrued or arose to him outside India, the finding of the Tribunal that the deposits made by the respondent in the NRE accounts in India is his income which he had earned as foreign currency outside India is without any evidence or is one which could not be reasonably entertained on the evidence before the Tribunal and such a finding of fact can be interfered with by a Court deciding only question of law [See Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181 (SC)]. In CIT vs. Ashok Kumar Jain, CIT vs. Kantilal and CIT vs. Raghavan (supra) cited by Mr. Shrivastava, the Court did not find that the findings of fact by the Tribunal were based on no evidence or were such as could not be reasonably entertained on the evidence before the Tribunal. We are thus of the view that while the Tribunal was justified in deleting addition of the amounts equivalent to the foreign currency brought into India with declarations prior to the block period from the addition of Rs. 1,03,50,020 made in the NRE accounts of the respondent, the Tribunal was not justified in deleting the amount equivalent to the foreign currency covered by the foreign currency exchange vouchers from the said addition of Rs. 1,03,50,020 made on account of unexplained deposits of NRE accounts of the respondent. The first substantial question of law is answered accordingly.

The second substantial question of law formulated by the Court for decision in this appeal is as follows :”Whether, on the facts and circumstances of the case, the learned Tribunal was justified in law in deleting the addition of Rs. 1,45,000 made on account of interest earned on unexplained deposits in the NRE bank account of the assessee even when such interest was not exempt in view of the provisions of s. 10(4)(ii) of the IT Act ?” In para 32 of the impugned order, the Tribunal, after perusing the provisions of s. 10(4)(ii) of the Act, has held that since the deposits of dollars in the NRE accounts was duly explained by the respondent and his explanation has been accepted by the Tribunal, the interest accrued thereon is not chargeable to tax in view of the provisions of s. 10(4)(ii) of the Act.

15. Sec. 10(4)(ii) of the Act is quoted hereinbelow :

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included : (1) …….… (2) …….… (3) …….… (4) (i) …… (ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a non-resident (external) account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made thereunder : Provided that such individual is a person resident outside India as defined in cl. (q) of s. 2 of the said Act or is a person who has been permitted by the RBI to maintain the aforesaid account : Provided further, that nothing contained in this sub-clause shall apply to any income by way of interest paid or credited on or after the 1st day of April, 2005 to the non-resident (external) account of such individual.”

It will be very clear from the aforesaid provision that income by way of interest on moneys standing to the credit of an individual in his NRE account in any bank in India in accordance with the FERA and the rules made thereunder shall not be included in the total income of the assessee for purposes of the Act. We have already held that s. 13 of the FERA put restrictions on the import of foreign currency into India and that foreign currency beyond the prescribed limits could only be brought into India by visitors only by furnishing foreign currency declarations at the time of arrival in India. No material has been placed before the Tribunal or before us to show that such declarations were required to be surrendered to the bank in which the foreign currency was to be deposited. Rather, several foreign currency declarations have been produced before the AO to explain the foreign currency deposits made by the respondent in his NRE accounts in the bank which shows that the declarations were not surrendered to the bank at the time of depositing the foreign currency. We have also held that foreign currency declaration forms were not required to be surrendered to the Customs authorities by a visitor at the time of leaving India if he was to take back any unutilized balance of the foreign currency shown in the declaration made at the time of arrival in India. Hence, the foreign currency for which no declarations have been produced by the respondent but only exchange vouchers issued by the exchange centres outside the country were produced, even if deposited in the NRE accounts cannot be said to be moneys standing to the credit of the respondent in the NRE accounts in accordance with the FERA and the rules made thereunder and the income by way of interest on such moneys is not exempt from inclusion in total income of the respondent under s. 10(4)(ii) of the Act. The Tribunal was thus not justified in deleting addition of the interest earned on foreign currency deposits in NRE bank account of the assessee beyond the limits prescribed by notifications issued under the FERA for which no declaration was produced by the assessee before the AO or the Tribunal.

16. The third substantial question of law which arises for decision in this appeal as formulated by the Court on 13th Aug., 2001 is as follows :

“Whether, on the facts and circumstances of the case, the learned Tribunal was justified in law in deleting the addition of Rs. 22,39,000 on account of unexplained investment in shares and whether such finding is not inconsistent with and contrary to the material available on record ?” While Mr. Rohit Arya, learned counsel for the Department submitted that the AO has rightly added Rs. 22,39,000 on account of unexplained investment in the shares and relied on the findings of the AO in this regard, Mr. Shrivastava, learned counsel for the respondent, submitted that the AO has made the addition on the erroneous assumption that the shares were purchased by the respondent from the secondary market at a premium, but actually the respondent purchased the shares at face value and had explanation for the investment so made on shares.

We find that the AO has found that the face value of the shares purchased in the name of the respondent and his family members is Rs. 23,04,589, whereas the respondent had shown a withdrawal of Rs. 21,91,000 for purchase of such shares and a deficit of Rs. 1,43,689 remained unexplained. The AO has further found that the shares had been purchased from the secondary market and in his statement under s. 132(4)/131 of the Act, the respondent had surrendered an amount of Rs. 22,00,000 towards unexplained investment in shares but has subsequently retracted the said statement without furnishing any evidence to justify the same and considering all these facts, the AO took the investment in shares at Rs. 44,00,000 and as the respondent had furnished explanation towards the investment of Rs. 21,61,000 withdrawn from his bank account, the AO added the differential amount of Rs. 21,31,000 as unexplained investment in shares by the respondent. But in the appeal, the Tribunal has found on facts that as per the balance sheet of the respondent with regard to the Indian funds, the investment in shares was shown at Rs. 21,91,000 and as per the balance sheet with regard to the NRE funds, the investment in shares with the Indian currency was shown at Rs. 2,25,000 and if both the investments were added, the resultant figure was more than Rs. 23,04,689 which is the face value of shares seized during the course of search. The Tribunal has further found that the respondent had not purchased the shares from the secondary market, as held by the AO, but was the original allottee of the shares and this finding has been recorded by the Tribunal on the basis of details of shares placed on record. The Tribunal, therefore, held that the respondent has been able to explain the source of investment in the shares of the face value of Rs. 23,04,689 and there is no reason for the AO to have taken the investment in shares at Rs. 44,00,000 when the respondent had furnished complete details of the investment in shares along with share certificates. The finding of the Tribunal, in our view, was consistent with the material placed on record and the Tribunal was justified in deleting the addition of Rs. 22,39,000 on account of unexplained investment in shares. We answer the third substantial question of law accordingly.

The fourth substantial question of law formulated in order dt. 13th Aug., 2001 of the Court for decision in this appeal is as follows : “Whether, on the facts and circumstances of the case, the learned Tribunal was justified in law in holding that the transaction of purchase and sale of land at village Shyampur in the name of assessee’s wife, Smt. Jyoti Khatri, was not an adventure in the nature of trade without assigning reasons for the same and whether such holding was not contrary to the established legal position ?”

We find that the Tribunal has held in para 76 of the impugned order that Smt. Jyoti Khatri, wife of the respondent, had purchased 8 acres of land at village Shyampur at Rs. 56,076 from Ghasiram as per sale deed dt. 24th May, 1990 and made the entire payment in cash, but the respondent had not filed any explanation and instead included the entire payment in cash chart filed as on 31st March, 1990 and no payment had been shown in the cash chart for the period ending 31st March, 1991 and the AO, thus, treated this investment as out of undisclosed source. But before the Tribunal, the counsel for the respondent made a submission that the payment was made by Smt. Jyoti Khatri out of cash available as on 31st March, 1990 and in support of this contention he filed cash flow statement as on 31st March, 1991 along with the explanation. The Tribunal held that since these documents were not before the AO when he adjudicated the issue and now the respondent has come up with a plea that cash of Rs. 63,731 was available with Smt. Jyoti Khatri on 31st March, 1990 out of which she made payment of Rs. 56,075 for purchase of land, the issue requires re-adjudication in the light of explanation of the respondent. The Tribunal, therefore, set aside the finding on the issue and has restored the matter to the file of AO with a direction to him to examine it afresh in the light of explanation furnished by the respondent. In para 79 of the impugned order, the Tribunal has further held that the issue with regard to capital gains earned on the sale of the land should be decided by the AO in the light of its decision on earlier issues and has set aside the addition of Rs. 43,930 as an addition in the hands of the respondent treating the same as profit arising out of adventure in the nature of trade. Since the matter has been remitted back to the AO for fresh adjudication and while making such fresh adjudication, the AO will have to determine the issue on fresh facts, we refrain from expressing any opinion at this stage as to whether the income arising out of sale of land should be treated as capital gains in the hands of Smt. Jyoti Khatri or should be treated as income arising out of an adventure in the nature of trade in the hands of the respondent. The AO will determine the facts afresh and adjudicate the issue in accordance with law.

19. The last and the fifth substantial question of law framed by the Court in the order dt. 13th Aug., 2001 for decision in this appeal is as follows : “Whether, on the facts and circumstances of the case, and in view of the provisions of ss. 158BB(1) and 158BB(1)(c) of the IT Act, the learned Tribunal was justified in law in holding that if the total income in those assessment years in which the return was not filed before the search was conducted, is below the taxable limit after claiming deduction under s. 80L of the Act, the income of that year shall not be considered as part of the undisclosed income and whether decision of the learned Tribunal is not contrary to the scheme of the IT Act ?”

On this question, the direction of the Tribunal in para 35 of the impugned order is to the following effect : “In the light of the above observations we direct the AO to work out the income of the assessee in the light of our decision on aforesaid issue and if the income of the assessee for those assessment years in which the return was not filed before the search was conducted, is determined below the taxable limit after claiming the deduction under s. 80L of the Act, the income of that year shall not be considered as part of the undisclosed income. In other cases in which the income of the assessee after claiming deduction under s. 80L, crosses the taxable limit, the total income of the assessee without allowing deduction under s. 80L shall be considered as part of the undisclosed income for that period. We further direct the AO to allow the deduction under s. 80L from the income of the assessee for those assessment years in which the return was filed by him in time before the search was conducted. Accordingly, the order of the AO is set aside and the matter is restored to his file with the direction to frame the assessment on this issue, afresh in the light of the above observations.”

Mr. Rohit Arya, learned counsel very fairly submitted that s. 158BB of the Act has been amended by Finance Act of 2002 w.e.f. 1st July, 1995 and the effect of such amendment is that the undisclosed income for the block period will be the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of the Act including the provisions of s. 80L of the Act 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 in the manner mentioned therein. The Tribunal was thus justified in law in holding that the total income in those assessment years for which the return was not filed when the search was conducted which is below the taxable limit after claiming deduction under s. 80L of the Act, the income of that year shall not be considered as part of the undisclosed income. The fifth substantial question of law is answered accordingly.

20. In the result, the appeal is allowed in part and to the extent indicated in this judgment. The AO will give effect to the issues determined by us in this judgment.

[Citation : 290 ITR 260]

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