Ita/1417/2009 Of The Commissioner Of Income Tax v. U.v.zuhara

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS TUESDAY, THE 30TH MARCH 2010 / 9TH CHAITHRA 1932 ITA.No. 1417 of 2009 ---------------------------- IT(S&S) A.85/COCH/2005 DT.22.8.2008 of I.T.A.TRIBUNAL, COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, KANNUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ SMT.ZUHARA.U.V,PROPRIETRIX,PALAKKI MEDICALS,MANSOOR HOSPITAL COMPLEX,KANHANGAD, KASARAGOD. BY ADV. SRI.S.ARUN RAJ THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 02/03/2010, THE COURT ON 30.3.2010 DELIVERED THE FOLLOWING: C. R. K. M. JOSEPH & M.L. JOSEPH FRANCIS, JJ. -------------------------------------------------- I.T.A.NO. 1417 OF 2009 --------------------------------------------------- Dated this the 30th March, 2010 JUDGMENT K.M. Joseph, J. The respondent/assessee is engaged in a retail business ofmedicines known as Palakki Medicals. A search was conductedunder Section 132 of the Income Tax Act (hereinafter referred toas the Act) at the business premises of the respondent/assesseeon 29.8.2002, 30.8.2002 and 3.9.2002. A search was alsoconducted at the residential premises where the assessee isstaying with her husband, daughter and son-in-law, on29.8.2002. The respondent's business premises is located in thepremises of one Manzoor Hospital, Kanhangad. The hospital isowned by the assessee's daughter. Several incriminatingdocuments evidencing large scale suppression of income cameto light. Accordingly, proceedings were initiated under ChapterXIVB of the Act against the assessee. Pursuant to the notice, I.T.A.NO.1417 OF 2009 the assessee filed a Return showing undisclosed income ofRs.13,96,680/= for the assessment years from 1997 - 1998 to2002 - 2003 relating to the block period 1.4.1996 to 31.3.2002.The assessing officer found, however, that the total undisclosedincome as rounded off was Rs.54,66,280/=. The Appeal filed bythe respondent was dismissed. In the Appeal filed by therespondent before the Appellate Tribunal, the Tribunal partlyallowed her Appeal and directed deletion of the addition madeof Rs.7,35,562/= for the broken period 1.4.2002 to 29.8.2002.The substantial questions of law raised for decision before us areas follows: “1. Whether on the facts and in thecircumstances of the case and in the light of thefinding in paragraph 2 of the assessment orderunder Section 143(3) for the Asst. Year 2003 -04(previous year being 01.04.2002 to 31.03.2003(Annexure A), the Tribunal is right in law and factand with jurisdiction in deleting the addition madefor the broken period 01.04.2002 to 29.08.2002 in asum of Rs.7,35,562/- ? 2. Whether on the facts and in thecircumstances of the case and also in the light of thefacts narrated/noted in the statement of the case andthe grounds raised, the Tribunal is right in law andfact in deleting the addition made for the brokenperiod (01.04.2002 to 29.8.2002) in a sum ofRs.7,35,562/= ?” 2. We heard Shri Jose Joseph, learned counsel for theappellant and Shri T.N. Seetharaman, learned counsel appearingon behalf of the respondent. 3. The assessing officer unearthed evidence of cashpurchases aggregating to a sum of Rs.35,71,007/= by theassessee for the period 1.4.2002 to 29.8.2002. The assesseecontended that the income relating to the unaccounted purchasesfor the period should not be considered as undisclosed incomebecause of the provisions of Section 158BB(1)(d) of the Act, asthe due date for filing of the return of income was not over as onthe date of the search and the purchases made during the period1.4.2002 to 29.8.2002 were fully reflected in the seized records. I.T.A.NO.1417 OF 2009 2. We heard Shri Jose Joseph, learned counsel for theappellant and Shri T.N. Seetharaman, learned counsel appearingon behalf of the respondent. 3. The assessing officer unearthed evidence of cashpurchases aggregating to a sum of Rs.35,71,007/= by theassessee for the period 1.4.2002 to 29.8.2002. The assesseecontended that the income relating to the unaccounted purchasesfor the period should not be considered as undisclosed incomebecause of the provisions of Section 158BB(1)(d) of the Act, asthe due date for filing of the return of income was not over as onthe date of the search and the purchases made during the period1.4.2002 to 29.8.2002 were fully reflected in the seized records. I.T.A.NO.1417 OF 2009 The assessing officer rejected the said contention, finding thatthere were no regular Books of Account for the period, foundand seized. It is stated that the respondent and her employeewho managed the medical shop has categorically stated that noBooks of Account were maintained by the assessee. It is alsostated that the purchase bills for the amount aforesaid were inrespect of cash purchases and corroborative evidence in supportof such cash sales were obtained from the dealers. The assessingofficer further found that no evidence was forthcoming from therespondent even after she was asked to produce evidence toprove that the cash purchases were actually reflected in herregular Books of Account. She was further asked to produce thecopies of the monthly sales tax returns to the Sales TaxDepartment for the months April, 2002 to August, 2002. To thesame, the respondent/assessee responded by pointing out thatthere were no monthly returns as medical shops attached tohospitals are exempted from sales tax. The profit relating to theunaccounted purchases was computed by adopting the gross I.T.A.NO.1417 OF 2009 profit margin of 17.02 per cent as had been adopted by theassessee herself in her return for the immediately precedingassessment year (2002 - 2003) and thus, the undisclosed incomewas determined as Rs.7,35,562/= for the year 2003 - 2004. 4. As already noted, the first appellate authority dismissedthe Appeal filed by the respondent. In Second Appeal, theTribunal confirmed the application of the gross profit rate percentage. Thereafter, in relation to the includability of theundisclosed income for the broken period 1.4.2002 to 29.8.2002,the Tribunal referred to the letter dated 13.8.2004 of the assesseeto the assessing officer and it finds that the assessing officer hasnot denied the assessee's statement that the relevant records, ie.the rough cash book, cash and credit purchase bills including thealleged unaccounted purchases were available in the shoppremises at the time of the search and that these documents werenot taken by the Department during the course of search. It isfurther stated that the statement in the letter that the purchases ofRs.33,02,466/= were not accounted, and that the assessee had I.T.A.NO.1417 OF 2009 filed a return on the basis of the assessment year 2003 - 2004 arenot refuted by the assessing officer who, in his letter dated13.8.2004 required the assessee only to produce the monthlyreturn of the sales submitted to the sales tax authorities forwhich the reply was given, as already been referred to by us.Thereafter, after referring, inter alia, to the contention that all thepurchases were duly accounted in the Books of Account, andthat the contention that there was no unaccounted purchases, theTribunal held as follows: I.T.A.NO.1417 OF 2009 filed a return on the basis of the assessment year 2003 - 2004 arenot refuted by the assessing officer who, in his letter dated13.8.2004 required the assessee only to produce the monthlyreturn of the sales submitted to the sales tax authorities forwhich the reply was given, as already been referred to by us.Thereafter, after referring, inter alia, to the contention that all thepurchases were duly accounted in the Books of Account, andthat the contention that there was no unaccounted purchases, theTribunal held as follows: “14. We have heard rival submissions andconsidered the facts and materials on record.There is no dispute about the fact that for thebroken period, viz. 1-4-2002 to 29-8-2002, the duedate for filing the return under Section 139(1) was30.11.2003 and the assessee had filed her return on28.11.2003 along with tax audit report consideringall purchases/sales during the previous year endedon 31.3.2003 and the assessment was completedunder Section 143(3) after scrutiny, accepting thebook results with slight disallowances out only forthe reason that certain expenses. We find much force in the contention of the learned counsel forthe assessee that `undislosed income' contemplatesonly income or property, which has not been orwould not have been disclosedfor the purposes ofthis Act. Since in this case, there was time for theassessee to file the return under Section 139(1) andsubsequently assessee has filed return andAssessing Officer has accepted the same underSection 143(3) with slight disallowances, wecannot say that the assessee would not havedisclosed the income for the period from 1.4.2002to 29.8.2002. Since there was ample time for theassessee to file the return under Section 139(1) andthe assessee also has filed the return within the duedate including the income in question, which hasbeen accepted u/s.143(3) of the Act, we find forcein the contention of the learned counsel for theassessee and direct the Assessing Officer to deletethe addition made for the broken period in a sum ofRs.7,35,562/=.” 5. Shri Jose Joseph, learned counsel for the appellant would contend that the Tribunal has clearly proceeded on a I.T.A.NO.1417 OF 2009 misconception about the scope of Section 158 BB(1)(d). Hewould point out that it was found by the assessing Officer thatthe respondent was not maintaining regular Books of Account.This finding is not interfered with by the appellate authority.The undisclosed income was computed by aggregating thesuppressed purchases made by the respondent and by adding thegross profit at a rate which was returned by the respondentherself in the previous year and the undisclosed income wasarrived at. The Tribunal itself upheld the application of thegross profit rate in respect of the other periods. Theinterpretation placed on Section 158 BB(1)(d) is unsustainable,it is contended. 6. Per contra, Shri T.N. Seetharaman, learned counselappearing on behalf of the respondent would, on the other hand,submit that actually Accounts were being maintained and theywere available, but they were not seized. He reiterated thecontents of the letters written and the stand of the assessingofficer as already referred to by us. He would further contend I.T.A.NO.1417 OF 2009 6. Per contra, Shri T.N. Seetharaman, learned counselappearing on behalf of the respondent would, on the other hand,submit that actually Accounts were being maintained and theywere available, but they were not seized. He reiterated thecontents of the letters written and the stand of the assessingofficer as already referred to by us. He would further contend I.T.A.NO.1417 OF 2009 that the income cannot be treated as undisclosed income, as therespondent had time to file return till 30.11.2002 and she did filea return and what is more, it is contended, in the regularassessment with slight modifications, the assessing Officeraccepted the respondent's return and assessed the respondent totax. He contended that the assessee has paid tax on the allegedincome from the suppressed purchases in the regular assessment.In response, learned counsel for the appellant Shri Jose Josephwould contend that the fact that the respondent/assessee filed areturn subsequently, and that an assessment order was passed inthe regular assessment as contended by the respondent is whollyirrelevant and what is crucial, in view of the circumstancesadmittedly obtaining, was whether the respondent wasmaintaining regular Books of Accounts to justify deletion ofRs.7,35,562/=. 7. Section 158B defines “undisclosed income” as follows:“158B. Definitions: In this Chapter, unless the contextotherwise requires,- (b) “Undisclosed income” includes anymoney, bullion, jewellery or other valuable articleor thing or any income based on any entry in thebooks of account or other documents ortransactions, where such money, bullion, jewellery,valuable article, thing, entry in the books ofaccount or other document or transactionrepresents wholly or partly income or propertywhich has not been or would not have beendisclosed for the purposes of this Act or anyexpense, deduction or allowance claimed underthis Act which is found to be false.” Section 158BA, inter alia, provides that the total undisclosedincome relating to the block period shall not include the incomeassessed in any regular assessment as income for such period.Sub-section (3) of Section 158BA reads as follows: “158BA. Assessment of undisclosed incomeas a result of search: (3): Where the assessee proves to thesatisfaction of the Assessing Officer that any partof income referred to in sub-section (1) relates to an assessment year for which the previous year hasnot ended or the date of filing the return of incomeunder sub-section (1) of Section 139 for anyprevious year has not expired, and such income orthe transactions relating to such income arerecorded on or before the date of the search orrequisition in the books of account or otherdocuments maintained in the normal courserelating to such previous years, the said incomeshall not be included in the block period.” Section 158BB provides for the method of computingundisclosed income. Sub-section (1), inter alia, provides asfollows: “158BB. Computation of undisclosed incomeof the block period: (1): The undisclosed income of the blockperiod shall be the aggregate of the total income ofthe previous years falling within the block periodcomputed, in accordance with the provisions of thisAct, on the basis of evidence found as a result ofsearch or requisition of books of account or otherdocuments and such other materials or information as are available with the Assessing Officer andrelatable to such evidence as reduced by theaggregate of the total income, or as the case maybe, as increased by the aggregate of the losses ofsuch previous years, determined.- Section 158BB provides for the method of computingundisclosed income. Sub-section (1), inter alia, provides asfollows: “158BB. Computation of undisclosed incomeof the block period: (1): The undisclosed income of the blockperiod shall be the aggregate of the total income ofthe previous years falling within the block periodcomputed, in accordance with the provisions of thisAct, on the basis of evidence found as a result ofsearch or requisition of books of account or otherdocuments and such other materials or information as are available with the Assessing Officer andrelatable to such evidence as reduced by theaggregate of the total income, or as the case maybe, as increased by the aggregate of the losses ofsuch previous years, determined.- (d) where the previous year has not ended orthe date of filing the return of income under sub-section (1) of Section 139 has not expired, on thebasis of entries relating to such income ortransactions as recorded in the books of accountand other documents maintained in the normalcourse on or before the date of the search orrequisition relating to such previous years.” Thus, under Section 158BB, the assessing officer in the case ofa search, is to compute the undisclosed income for the block period on the basis of the evidence found as a result of thesearch as also such other materials or information as areavailable with him and relatable to such evidence. Theaggregate income so arrived at is to be reduced by the totalincome in a case where the assessments under Section 143 orSection 144 or Section 147 have been concluded prior to the I.T.A.NO.1417 OF 2009 commencement of the search on the basis of the assessment. Ifthe assessment has not been made, though returns have beenfiled, the income disclosed in the return is to be reduced fromthe computed undisclosed income. In a case, however, wherethe previous year is not ended or the date of filing the return ofincome under Sub-section (1) of Section 139 has not expired,then the income as recorded in the entries relating to the incomeor transactions, as recorded in the Books of Account and otherdocuments maintained in the normal course on or before the dateof search or requisition relating to other previous years, is to bededucted from the aggregate undisclosed income computedunder Sub-section (1) of Section 158BB. 7. In the facts of this case, there is no dispute that as onthe day when the searches were conducted, the respondent hadtime (till 30.11.2002) to file the return within the meaning ofSection 158BB(1)(d). The question which falls for our decisionis whether having regard to the position available, therespondent could claim the benefit of Section 158BB(1)(d)? We have already noticed that undisclosed income was unearthedby discovery of the suppressed purchase bills from the premisesof the respondent amounting to more than Rs.35 Lakhs, for theperiod 1.4.2002 to 29.8.2002. It has been found by theassessing Officer that the respondent was not maintainingregular Books of Account. As already noticed by us, theassessing Officer found that the assessee and her employeecategorically stated that no Books of Account were maintainedby her. In the letter dated 13.8.2004, what is stated by therespondent is that all the relevant records, such as, rough cashbooks, cash and credit purchase bills, including the abovementioned purchases (referring to the purchase ofRs.33,02,466/=) were available in her shop premises at the timeof search. It is further stated that the documents were not takenby the Department, since the Accountant informed him that thesame were kept for preparation of the Day Book and the Ledger.We find it difficult to treat the rough cash books as the Books ofAccount normally kept in the course of business within the meaning of Section 158BB(1)(d). We notice further that evengoing by the letter of the assessee, it is stated that the aforesaiddocuments as also the cash and credit purchase bills were keptfor preparation of the Day Book and Ledger. The Tribunal hasnot entered a finding overturning the finding the assessingOfficer that the respondent was not maintaining regular Booksof Account. What the Tribunal has found is that for the brokenperiod in question, the due date was 30.11.2003 and the assesseehad filed her return on 28.11.2003 along with the tax auditreport. Thereafter, it is stated that considering allpurchases/sales during the previous year ended on 31.3.2003,the assessment was completed after scrutiny under Section 143(3), accepting the Book results with slight disallowances. TheTribunal found favour with the contention of the respondentthat the assessee would have disclosed the income for the periodfrom 1.4.2002 to 29.8.2002 as there was ample time for theassessee to file the return and the assessee has also filed thereturn within the due date, it was accepted and the deletion was I.T.A.NO.1417 OF 2009 ordered. We find the reasoning of the Tribunal totallyunsustainable. As already noticed, there was suppressedpurchases. Undisclosed income was computed by applying thegross profit rate. This has been upheld for all the periodscomprised in the block period, except the broken periodaforesaid. The reasoning that the assessee had time to file returnand would, therefore, have disclosed the income and diddisclose the income and, therefore, there is no undisclosedincome is patently opposed to the terms of Section 158BB(1)(d).Proceeding on the basis of the finding entered by the assessingOfficer which is not interfered with by the first appellateauthority, which was not overturned by the Tribunal, theconclusion would be as follows: On the basis of the suppressed purchase bills and applyinga rational criterion (namely gross profit rate), undisclosedincome was computed. The time for filing return in respect ofthe broken period was to expire only on 30.11.2003. Thequestion, as we have already mooted, is whether there is any I.T.A.NO.1417 OF 2009 scope for reducing the undisclosed income ascertained undersub-section (1) with reference to the income as revealed in theBooks of Account maintained in the normal course. If weproceed on the finding that there was no Books of Account assuch maintained in the normal course by the respondent for theperiod, then there was no scope for any reduction of any amountfrom the ascertained undisclosed income of Rs.7,35,562/=. Ifthat be so, there was no basis at all to order deletion of theamount of Rs.7,35,562/= from the aggregate of undisclosedincome for the broken period. The Tribunal has acted withoutany legal basis and was indulging in an irrelevancy when itreasoned that the income would have been disclosed, as therewas time for filing return and the income was, in fact, disclosedby the assessee in her regular return and it was accepted withslight modifications. Such a reasoning flies in the face of theunambiguous provisions of Section 158BB(1)(d). The Tribunalquite clearly did not ask itself the correct question. If thereasoning were to be accepted, it would clearly not only not I.T.A.NO.1417 OF 2009 18 square with Section 158BB(1)(d), but it would allow theassessee to defeat the object of the Act by filing a return andproducing the Accounts by the time the regular assessment was taken up and escape from the consequences of the suppressionof income which stood discovered as a consequence of thesearch under Section 132 of the Act. 8. The upshot of the above discussion is that we mustanswer the questions raised in favour of the appellant which wedo and we allow the Appeal and restore the order of theAssessing Officer. Sd/= K.M. JOSEPH, JUDGE Sd/= M.L. JOSEPH FRANCIS, JUDGE kbk. // True Copy // PS to Judge