% 31.07.2014I.t.t.a v. < Gist

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A Nos.10, 12 & 19 OF 1999 % 31.07.2014I.T.T.A.No.10 of 1999# The Commissioner of Income Tax, Andhra Pradesh – II, Hyderabad .. AppellantAnd$ Sri E. Sudhir Reddy, M-22/3RT, Vijayanagar Colony, Hyderabad .. Respondent!Counsel for the Appellants : Sri J. V. PrasadCounsel for Respondents : Sri S. Dwarakanath < Gist : > Head Note :? Citations: 229 ITR 268 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.10, 12 AND 19 of 1999 COMMON JUDGMENT:(Per Hon’ble Sri Justice L.Narasimha Reddy) These three appeals are filed by the Revenue, feelingaggrieved by three separate orders passed by Hyderabad Bench‘B’ of the Income Tax Appellate Tribunal (for short, ‘the Tribunal’) inthe appeals presented by three different assessees. The commonfeature of the appeals is that all of them are the result of a searchconducted by the officials of the Income Tax Department vis-à-visM/s.IVR Constructions Limited, the respondent in I.T.T.A.No.19 of1999. The respondent in I.T.T.A.No.19 of 1999 is a Company. It commenced its activities, initially as a private company and lateron, it has gone for public issues after following the procedure underthe Companies Act, 1956. As a part of its activity, it acquired sharecapital by issuing shares. It has been submitting the returns yearafter year under the Income Tax Act, 1961 (for short, ‘the Act’). Therespondents in I.T.T.A.Nos.10 and 12 of 1999 are its ManagingDirector and Executive Director, respectively, of the Company. They too are the assesses under the Act. A search was conducted in the premises of the Company on23.01.1996 under Section 132 of the Act. On the basis of therecoveries said to have been made in the search, the respondentswere required to file returns for the block period 1986-87 to 1996-97. In the process, the respondents themselves came forward witha plea that there was an undisclosed income to a tune of Rs.35.00 lakhs. The assessing officer, however, took the view that the sharecertificates pertaining to the Company are in the premises or in thecustody of the Directors, though issued in the name of some thirdparties. The value of these shares was treated as undisclosedincome. The assessing officer has also disallowed certainperquisites, which were claimed by the Managing Director andExecutive Director, and treated that amount as undisclosedincome. A block assessment order was passed, levying thecorresponding tax. Aggrieved by that, the respondents filedI.T.A.Nos.42, 43 and 90/Hyd/97before Hyderabad Bench ‘B’ of theIncome Tax Appellate Tribunal. Through a common order, dated27.01.1999, the Tribunal allowed the appeals setting aside thefindings recorded by the assessing officer on certain importantaspects. Hence, these appeals. Sri J. V. Prasad, learned counsel for the appellants, submitsthat the definition of undisclosed income under Section 158B(b) ofthe Act is wide enough, to cover every unexplained item of incomeand the share certificates that were found to be in possession of therespondents fall into that definition. He contends that the assessingofficer scrupulously followed the procedure prescribed underChapter XIVB of the Act and the Tribunal has interfered with theorder of assessment on certain assumptions. He contends that theexercise of passing a block assessment order is wide enough andthere was no justification for the Tribunal in restricting such powers. Sri S. Dwarakanath, learned counsel for the respondents, onthe other hand, submits that whatever may have been thejustification in including certain items in the category of undisclosedincome, there was no basis for the assessing officer to add the value of theshares to the income, that too of the Company itself, as undisclosed Sri S. Dwarakanath, learned counsel for the respondents, onthe other hand, submits that whatever may have been thejustification in including certain items in the category of undisclosedincome, there was no basis for the assessing officer to add the value of theshares to the income, that too of the Company itself, as undisclosed wealth. He contends that the assessing officer has virtuallyproceeded on imagination that the Company has purchased its ownshares and thereby avoided income tax. Learned counsel furthersubmits that in the name of making a block assessment, anassessing officer cannot decide the legality or otherwise of theassessments, which were already made in the earlier years,whether within the block period, or outside thereof. Successful legislations have acknowledged the fact thatmany a time, the disclosures made in a return submitted by anassessee are not totally reliable, but also accurate. Variousprocedures are evolved to handle situations of that nature. If aninaccurate statement is noticed in the returns of an assessee, theassessing officer is conferred with power to lay penalty underSection 271 (1) (c) of the Act. Another method of dealing with thesituation of this nature is to pass order of rectification under Section148 of the Act, by reopening the assessment, which was alreadymade. Third method of rectification is the one, under Section 154 ofthe Act. The superior authority, namely, the Commissioner isconferred with the power to cause suo motu revision under Section263 of the Act. The methods, referred to above, are mostly on thebasis of the facts and figures furnished in the returns and the resultis almost in the form of re-verification. Section 132 of the Act empowers the authorities of theCompany to conduct a search in the premises of not only anassessee, but also of the persons associated with him. If, duringthe course of the search, any incriminating material or undisclosedincome is noticed, a block assessment order covering a period often years (which, at present is six years), is to be passed. Theprocedure, to be followed in this regard, is broadly prescribed underSection 158BB and 158BC of the Act. Once the authority, whoconducted the search, arrives at a particular figure, as to undisclosed income, the block assessment order is to be passed inaccordance with law. Broadly stated, the aggregate of the total income pertainingto the block period, which is arrived at on the basis of the search, istaken as standard. In case the assessee has any income to hiscredit for the aggregate of block period, as disclosed in the returns,it is to be deducted from that amount. If, on the other hand, loss wasposted, it is to be added. To illustrate, let it be assumed that the searchyielded undisclosed income of 15.00 lakhs and the income of theassessee shown in the returns over the block period is Rs.7.00lakhs. Then the taxable amount, as a result of block assessment,would be Rs.8.00 lakhs (15 - 7). If, on the other hand, the assesseehas posted losses of Rs.4.00 lakhs over the block period, thetaxable amount for the block period would be Rs.19.00 lakhs (15 +4). The entire controversy revolves around the meaning to beascribed to the expression ‘undisclosed income’. The same isdefined under Section 158 B (b) of the Act. It reads: “undisclosed income” includes any money, bullion,jewellery or other valuable article or thing or any incomebased on any entry in the books of account or otherdocuments or transactions, where such money, bullion,jewellery, valuable article, thing, entry in the books ofaccount or other document or transaction representswholly or partly income or property which has not been orwould not have been disclosed for the purposes of this Act(or any expense, deduction or allowance claimed underthis Act which is found to be false).” The manner, in which the undisclosed income must becomputed, is provided for under Section 158BB of the Act. It reads: “158BB. Computation of undisclosed income of the “undisclosed income” includes any money, bullion,jewellery or other valuable article or thing or any incomebased on any entry in the books of account or otherdocuments or transactions, where such money, bullion,jewellery, valuable article, thing, entry in the books ofaccount or other document or transaction representswholly or partly income or property which has not been orwould not have been disclosed for the purposes of this Act(or any expense, deduction or allowance claimed underthis Act which is found to be false).” The manner, in which the undisclosed income must becomputed, is provided for under Section 158BB of the Act. It reads: “158BB. Computation of undisclosed income of the block period.- (1) The undisclosed income of the blockperiod shall be the aggregate of the total income of theprevious years falling within the block period computed, inaccordance with the provisions of this Act on the basis ofevidence found as a result of search or requisition ofbooks of account or other documents and such othermaterials or information as are available with theAssessing Officer and relatable to such evidence, asreduced by the aggregate of the total income, or, as thecase may be, as increased by the aggregate of the lossesof such previous years determined,- (a) where assessments under section143 or section 144 or section 147 havebeen concluded prior to the date ofcommencement of the search or the date ofrequisition, on the basis of suchassessments; (b) where returns of income have beenfiled under section 139 or in response to anotice issued under sub-section (1) ofsection 142 or section 148 butassessments have not been made till thedate of search or requisition, on the basis ofthe income disclosed in such returns;where the due date for filing a returnof income has expired, but no return ofincome has been filed,-on the basis of entries asrecorded in the books of accountand other documents maintained inthe normal course on or before thedate of the search or requisitionwhere such entries result incomputation of loss for any previousyear falling in the block period; oron the basis of entries asrecorded in the books of accountand other documents maintained inthe normal course on or before thedate of the search or requisitionwhere such income does notexceed the maximum amount notchargeable to tax for any previousyear falling in the block period;where the due date for filing a return of (c)where the due date for filing a return (A) (B) (ca) income has expired, but no return ofincome has been filed, as nil, in cases notfalling under clause (c); (d) where the previous year has notended or the date of filing the return ofincome under sub-section (1) of section139 has not expired, on the basis of entriesrelating to such income or transactions asrecorded in the books of account and otherdocuments maintained in the normal courseon or before the date of the search orrequisition relating to such previous years, (e) where any order of settlement hasbeen made under sub-section (4) of section245D, on the basis of such order; (f)where an assessment of undisclosed income had been made earlier under clause(c) of section 158 BC, on the basis of suchassessment. (2)In computing the undisclosed income of the blockperiod, the provisions of section 68, 69A, 69B and69C shall, so far as may be, apply and referencesto “financial year” in those sections shall beconstrued as references to the relevant previousyear falling in the block period including theprevious year ending with the date of search or ofthe requisition. (3) The burden of proving to the satisfaction of theassessing Officer that any undisclosed income hadalready been disclosed in any return of income filedby the assessee before the commencement ofsearch or of the requisition, as the case may be,shall be on the assessee. (4) (f)where an assessment of undisclosed income had been made earlier under clause(c) of section 158 BC, on the basis of suchassessment. (2)In computing the undisclosed income of the blockperiod, the provisions of section 68, 69A, 69B and69C shall, so far as may be, apply and referencesto “financial year” in those sections shall beconstrued as references to the relevant previousyear falling in the block period including theprevious year ending with the date of search or ofthe requisition. (3) The burden of proving to the satisfaction of theassessing Officer that any undisclosed income hadalready been disclosed in any return of income filedby the assessee before the commencement ofsearch or of the requisition, as the case may be,shall be on the assessee. (4) For the purpose of assessment under thisChapter, losses brought forward from the previousyear under Chapter VI or unabsorbed depreciationunder sub-section (2) of section 32 shall not be setoff against the undisclosed income determined inthe block assessment under this Chapter, but maybe carried forward for being set off in the regularassessments.” From a perusal of this, it becomes clear that the items, suchas, money, bullion, jewellery and other residuary items, which constitute the wealth or income, would be treated as anundisclosed income, provided that such items were not disclosedfor the purpose of the Act. It means such items were not the subjectmatter of any returns filed under the Act. Once the items mentionedin the definition were the subject matter of the returns filed under theAct, they cannot be treated as undisclosed income. Another aspectis that the returns need not be those filed by the concernedassessee alone. The provision does not indicate or that the returnsinsist covering those items must be that of the concerned assesseealone. It is too well established that the provisions of a taxation law,that too of the punitive nature, need to be interpreted in a strictmanner. The intention of the Legislature is to ensure that no unduehardship is caused to the assessee nor an assessee is subjected toany detriment contrary to law. A significant part of the block assessment was the sharecertificates said to have been found in the premises of theCompany. It is not in dispute that the share certificates were issuedin the name of third parties. In the course of enquiry conductedduring the block assessment, the authorities verified from thepersons whose names were shown in the share certificates. Therecord discloses that such persons stated that the share certificatesbelong to them and they have also filed returns disclosing thesame. The basis for the assessing officer to disbelieve thosestatements was that the filing of returns, though before the searchwas conducted, was done as an afterthought, in some cases, or thatfiling of returns was not warranted at all, having regard to thefinancial status of the concerned assessee. The Tribunal took the view that the scope of powers of anofficer conducting search cannot be expanded to cover theadjudication or verification of the assessments already made. The Tribunal took the view that the scope of powers of anofficer conducting search cannot be expanded to cover theadjudication or verification of the assessments already made. It has already been mentioned that Section 158BB of the Acttakes away any item of wealth discovered in the course of search, from the purview of ‘undisclosed income’, if it had been the subjectmatter of proceedings under the Act, which may include a merefiling of return or a detailed order of assessment. If the authority,who conducted a search, is permitted to determine the correctnessor otherwise of the returns or the orders of assessment passedearlier in respect of concerned assessee or a third party, virtuallythe exercise tends to partake the character of the one under Section263 of the Act. In case the earlier proceedings were the subjectmatter of appeal before the Tribunal or this Court, the power getswidened even to cover such orders also. That was not, and cannever be, the intention of the Parliament. It is only when the cash,bullion, negotiable instruments or other similar items of wealthwhich did not constitute the subject matter of returns under the Act,that the authorities can make an attempt to treat them asundisclosed income. This is exactly what, the Tribunal hadobserved in its order. Certain defects were also pointed out by the Tribunal in thecontext of making the block assessment. We have alreadyobserved that the block assessment is to be made strictly inaccordance with Section 158BB of the Act. Many a time, theassessing officers, propose to treat the undisclosed income as anindependent entity and subject to making tax without following theprovision under Section 158BB of the Act. Such a course wouldpush the assessee to a further hardship and result in denial of thevery safeguard that was prescribed by the Legislature. The discussion undertaken by us in the precedingparagraphs, cover questions 1 to 4 that were framed in the grounds of appeal. The 5[th] question pertains to Managing Director andExecutive Director. The assessing officer took the view thatsubstantial number of share certificates were found with theManaging Director, Executive Director and thereby they areenjoying the benefits in respect of the shares allotted to thepromoters. It has already been mentioned that the persons, inwhose names they were issued, have stated that they belong tothem and it was also found in the search itself, that shareholdershave submitted their returns. That being the case, there was nobasis for treating the share certificates as belonging to anybodyelse. The assessing officer added the benefit under Section 224 (4) r/w Section 17 of the Act, as a perquisite. This aspect iscovered by the judgment of the Supreme Court in Commissioner of Income Tax v. Lovely Exports Private Limited[[1]],in favour ofthe respondents. Hence, the appeals are dismissed. There shall be no orderas to costs. The miscellaneous petitions filed in these appeals shallstand disposed of. _______________________ L. NARASIMHA REDDY, J _____________________ CHALLA KODANDA RAM, J31.07.2014Note:- L.R. Copy to be marked. (B/o) KH