Kirloskar Investments and Finance Vs. Assistant Commissioner of - Court Judgment

Excerpt:
1. the assessee, a limited company carrying on the business of real estate, financing, hire purchase and leasing activities has filed this appeal against the block period assessment order of assistant commissioner of income-tax, central circle-v, bangalore (hereinafter referred to as ao) dated 30-5-1997 passed under section 158bc of the income-tax act, 1961 (hereinafter referred to as the act). these appeals have been instituted by the assessee under section 253(1)(b) of the act. the assessee had raised seven grounds in this appeal is and these are as under : 1. the order of the learned acit u/s 158bc of the income-tax act, insofar as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. the order of assessment.....

Judgment:
1. The assessee, a limited company carrying on the business of real estate, financing, hire purchase and leasing activities has filed this appeal against the Block Period Assessment order of Assistant Commissioner of Income-tax, Central Circle-V, Bangalore (hereinafter referred to as AO) dated 30-5-1997 passed under section 158BC of the Income-tax Act, 1961 (hereinafter referred to as the Act). These appeals have been instituted by the assessee under section 253(1)(b) of the Act. The assessee had raised seven grounds in this appeal is and these are as under : 1. The order of the learned ACIT u/s 158BC of the Income-tax Act, insofar as it is against the appellant is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.

2. The order of assessment is bad in law as the order transgresses the provisions of section 158BE(1) of the Act inasmuch as there was only one warrant of authorisation and not many and the warrant of authorisation was executed on 30-3-1996 and therefore the assessment ought to have been completed on or before 31-3-1997.

3. Without prejudice to the above, the learned ACIT erred in holding that the transactions entered into by the appellant of acquiring assets and leasing them to the customers as part of lease finance business are not genuine and such transactions were entered into solely with a view to claim depreciation at 100% and not out of commercial expediency and such claiming of depreciation resulted in undisclosed income liable to tax under Chapter XIV-B of the Income-tax Act, 1961 consequent to their detection during search on 30-3-1996. The finding is purely on suspicion and surmise, assumptions and presumptions, without any factual foundation and contrary to the evidence available even at the time of search and on improper appreciation of the evidence and thus the finding is vitiated and liable to be vacated especially, in view of the fact the appellant has filed sufficient evidence even after the search about the existence of the assets and genuineness of the transactions and the evidence about the genuineness of the transaction was also found with the appellant at the time of search and the statements of the parties which were relied upon by the Assessing Officer for such finding, such parties have not been allowed to be cross-examined by the appellant and the finding is vitiated and deserves to be vacated.

4. Without prejudice to the above, if disallowance of depreciation is warranted on the ground that there were no assets in existence of which the appellant was the owner or the appellant has not become the owner of such assets in existence on the basis of such finding then the authorities ought to have allowed the loss in the matter of acquiring the assets which loss is incidental to the trade of lease finance in lieu of depreciation as a deduction.

5. Without prejudice to the above, while computing the undisclosed income on account of claim/allowance of depreciation to be considered as undisclosed income, the authorities ought to have in addition to the lease rentals admitted for the assessment year 31-3-1994, 31-3-1995 and 31-3-1996 ought to have allowed the lease deposits received by the appellant which the appellant is entitled to appropriate against the lease rentals payable in future as and when they fall due and computed the extent undisclosed income and ought to have further allowed the difference between the amounts expended for acquiring the assets minus the lease advance received from the lessees also as a deduction while computing the extent of undisclosed income and the resulting loss ought to have been assessed instead of income.

6. Without prejudice to the above, the authorities below are not justified in considering the depreciation for the year ended 31-3-1996 in respect of which entry has not been passed as on the date of the search in the books and therefore, to that extent the disallowance of depreciation even if it is otherwise warranted would not constitute "undisclosed income" within the meaning of section 158BB(b) of the Income-tax Act, 1961, and the same ought to have been deleted.

7. Without prejudice to the above, the authorities below ought to have given deduction to the disallowance of depreciation for the assessment year 1995-96 in the assessment completed before the date of the impugned order and consequently, deducted a sum of Rs. 3,36,65,177 while computing the undisclosed income.

2. The Assessing Officer had observed that the search within the meaning of section 132 of the Act of the business premises of the appellant company was started on 30-3-1996 and concluded on 23-5-1996.

Assessing Officer had indicated that the assessee was allowed hearing in the case on 9-12-1996, 17-4-1997 and 20-5-1997. Assessing Officer had indicated the block period for assessment as 1986-87 to 1996-97 with the period ending on 30-3-1996. Assessing Officer had also observed that the assessee was incorporated during the assessment year 1989-90. The observations of the Assessing Officer starting with the paragraph titled as 'Introduction' as contained in his order are briefly narrated hereunder.

3. Assessing Officer had stated that the assessee was served with the notice under section 158BC of the Act on 9-7-1996 and was allowed sixteen days to file the return for the block period 1986-87 to 1996-97. The assessee complied with the said notice and filed the return on 25-7-1996 showing loss of Rs. 21 lakhs. Assessing Officer had stated that the assessee had shown purchases from eleven parties assets like industrial gas cylinders, furnaces, centering sheets that were stated as purchased from eleven parties for a total consideration of Rs. 10,12,70,403 on which rate of depreciation permissible under the Act was 100%. The transactions of lease with eleven parties as listed by Assessing Officer in his order is brought out below for the sake of facility.----------------------------------------------------------------------Sl. Name of the Name of the Invoice Invoice Nature ofNo. Supplier lessee date value the asset----------------------------------------------------------------------1 Vijay Commercial New Era Urban 26-5-1993 10218000 Centering House Amenities Ltd. sheets----------------------------------------------------------------------2.

Sonic Marketing Blades India 26-5-1994 8000400 Flameless Pvt. Ltd. Furnace3.

Venus Container Gas & Gas 27-6-1994 4118000 Cylinders Links Enterprises4.

Udaymala Fabs Lords Finance 19-4-1994 7067403 Furnace & Inds. Pvt.5.

The Eng. & Indl. Aero Pistons 21-4-1995 12384800 Pit Type Services P. Ltd. Furnace----------------------------------------------------------------------6.

The Eng. & Indl. Omega Steel 21-4-1995 7343200 Flameless Services Inds. P. Ltd. Furnace----------------------------------------------------------------------7.

Pentagon Liquid July 1994 8169700 Furnaces Innovative Engineers8.

Pentagon Liquid 24-7-1995 13940500 Furnaces Innovative Engineers9.

Brilliant Skyline 1-6-1993 4028000 Centering Traders Construction Sheets P. Ltd.10. Civic Engg. & Wave Current 10200000 Contractors Thermal Proc.11. Brilliant Eng.

Elcot Electro 12-4-1993 15800000 Flameless Works Ferries Ltd. Furnace---------------------------------------------------------------------- Total Rs. 101270403 4. Assessing Officer had stated that the assessee had shown as having entered into certain lease transaction during the accounting years 1993-94 to 1995-96 on the above stated assets. The assessee had shown lease rentals from parties and had claimed depreciation at the rate of 100% on the assets industrial gas cylinders, furnaces, centering sheets. Assessing Officer goes on to observe that Mr. Mundewade, the Managing Director of the company in his statement that was recorded during the course of the search on 30-3-1996 had admitted that the company had entered into four lease transactions without verifying the actual existence of the assets and accordingly had offered to surrender the claim of depreciation. These four lease transactions were with (1) New Era Urban Amenities Ltd. for Rs. 102.18 lakhs; (2) Elcot Electro Ferrites for Rs. 158.00 lakhs; (3) Skyline Construction for Rs. 40.28 lakhs and (4) Gas & Gas Enterprises for Rs. 41.18 lakhs and these aggregate to Rs. 341.98 lakhs. Assessing Officer had observed that this was retracted to subsequently and it was submitted by the assessee that the lease transactions with Blades India Pvt. Ltd. and Gas & Gas Pvt.

Ltd. were the only transactions where the existence of the assets were not verified before entering into the transactions.

5. The Assessing Officer gave a narration of the modus operandi of the bogus lease transactions in his order. He stated that it involved different steps and these were (1) Identifying a supplier who is fictitious or nonoperative or a benami concern; (2) Identification of a small scale businessman as a lessee who would accommodate the lease transaction; (3) Supplier issues a sale invoice in favour of the assessee mentioning the account of the lessee covering goods that are eligible for 100% depreciation under the Income-tax Rules; (4) A delivery challan that is cancelled by the lessee to indicate actual delivery by the supplier to the lessee in the latter's premises; (5) Installation and valuation certificates are procured from Chartered Engineers; (6) Based on the invoice delivery challan, installation certificates, etc., a lease agreement would be drawn up between the assessee as the lessor and the lessee and (7) After the lease agreements are drafted and signed, the assessee paid the full invoice value to the supplier by cheque or DD. Out of this, about 85-90% of the amount is then transferred by the lessee to the assessee as lease rental in advance/deposit and that brokers are shown as having mediated the lease transactions. Assessing Officer had observed that the lease agreement would invariably contain similar terms and conditions. Some of these are, (a) the lease period will be approximately 5-8 years; (b) the total lease rentals payable over the entire period of 5-8 years will be calculated at about 85% of the invoice value and taken in advance as deposit by the lessor; (c) the deposit will be non-refundable and to be adjusted against the future lease rentals (monthly or so) as and when they are due.

6. Assessing Officer observed that as soon as the lease is finalised and about 85% of the money paid by the lessor is received back by the assessee as the lessor, there will be no further liability of any kind on any of the parties concerned. He also observed that the difference of 10-15% left with the supplier will be withdrawn in cash as self-withdrawal and shared by all the parties concerned at various ratios depending upon their bargaining capacity. He further observed that the fact of sharing of 10 to 15% between parties is so stated by the lessee's and the others involved in the bogus lease transactions.

He accordingly concluded that the modus operandi clearly proved, (a) entire lease transaction is a collusive, fraudulent one entered in order to evade income-tax or reduce the incidence of tax; (b) there are no assets involved in the lease transactions and all that the supplier and lessee have done is to accommodate the lease transactions that are paper transactions; (c) all the documents like sale invoice, delivery note, lease agreement, installation certificates, etc., are nothing but make-believe things created/fabricated to suit their needs and (d) the lease rental deposit received by the lessor is nothing but his own money routed through lessor-supplier-lessee-lessor in the above collusive lease transactions.

7. The basis on which the Assessing Officer came to hold the above view as summarised by him in para 2 of his order are, (a) that the assessee has not produced the fresh confirmation letters or the suppliers/lessees for verification; (b) that the assessee at no given point of time has been contracted or dealt with the supplier directly and the assessee simply claims to have believed the documents furnished by the lessee (if claims to be innocent, which is not true); (c) the physical inspection and verification of the lessee's premises, where the assets are supposed to have been installed, by the department proved that no such assets ever existed; (d) further, the lessees clearly admitted that the entire lease transactions were sham and are nothing but the paper transactions only without the actual involvement of any such assets; (e) that in most of these lease transactions the suppliers have clearly admitted that they have not supplied any assets either to M/s. Kirloskar Investments and Finance Ltd. or to the concerned lessees at any stage; and the assessee's inability to explain the above and furnish such other evidences as required in this office letters clearly proved that the above lease transactions are entered by way of collusion with the suppliers and lessees with the sole motive of claiming depreciation on non-existing assets (i.e., without acquiring them) in order to evade the incidence of income-tax.

8. In para 3 of his order the Assessing Officer explained the manner in which the bogus lease transactions are reflected in the books of account.

"Once the lease transaction is entered in the books the following entries will follow the suit - (a) firstly, the fixed assets account is debited; (b) secondly, the depreciation account is debited; (c) the lease rental advance/deposit account is credited; (d) the interest on lease rental advance account is debited; (e) the lease rental discounting charges account is debited and (f) the lease rental account is credited. Therefore, the above in turn affect the Profit & Loss A/c. in the form of - Debits in the P&L A/c - (i) Depreciation on the asset; (ii) interest on the lease rental deposit and (iii) lease rental discounting charges - Credits in the P&L A/c - (i) lease rental receipts and (ii) lease management/finance fee, if any shown as received.

9. The Assessing Officer after considering the entries in the books observed that the lease transactions being bogus both the credits on account of lease rental income and the debits on expenditure, depreciation, etc., to the profit and loss account do not represent the real incomes. He accordingly concluded that because the lease transactions were bogus the above entries, i.e., both credits and debits to the profit and loss account should be disregarded so as to arrive at the true and correct income. He expressed that these bogus debits and credits on being disregarded the extent of income that is not disclosed surfaces out. In other words, the net effect of all the above entries in the profit and loss account, i.e., total debits minus total credits in the profit and loss account represents the correct undisclosed income on account of these bogus lease transactions.

10. Assessing Officer in para 4 of his order had explained the basis for his above conclusion. He had stated that he had called upon the assessee to prove the genuineness of the lease transactions for which he wanted the assessee to produce (a) production of fresh confirmation letters from the so-called suppliers; (b) production of fresh confirmation letters from the so-called lessees and (c) the full particulars of the suppliers like their income-tax assessment, sales-tax numbers. He went on to observe that the assessee had not taken any steps in regard to the above. Assessing Officer therefore, had sent inquiry letters to the suppliers as well as the lessees calling upon them to furnish details of (a) whether they entered into any lease transaction with M/s. Kirloskar Investments and Finance Ltd., and whether any assets were received by them and put to use on account of their lease transactions with M/s. Kirloskar Investments & Finance Ltd.; (b) the place of installation of the said assets; (c) the parties from whom the said assets were received and the mode of transport; (d) the sources for the payment of lease rental advance/deposit to M/s.

Kirloskar Investments & Finance Limited. The inquiry letter that was issued to the so-called suppliers was (a) whether they have sold and supplied any assets to M/s. Kirloskar Investments & Finance Ltd., genuinely. If so, how were they acquired by them and details; (b) why about 85% of the invoice value was transferred to the so-called lessee and the purpose for the same and (c) what was the source for the purchase of the said assets by them.

11. Assessing Officer observed in his order observed that, "In response almost all the lessees have either confirmed that their lease transactions with M/s. Kirloskar Investments and Finance Ltd., are not genuine or gave evasive replies while almost all the so-called suppliers explained that they have neither sold nor supplied any assets to M/s. Kirloskar Investments and Finance Ltd." Assessing Officer thereafter observed that the explanation of the assessee in pursuance to the above vide its letter dated 23-5-1997 was that all the lease transactions were genuine except in the cases of Blaze India (P.) Ltd., Gas & Gas (P.) Ltd., and New Era Urban Facilities (P.) Ltd. 12. Assessing Officer from para 5 onwards in his order gave individual account of each of the eleven lease transactions that have been reproduced earlier. He noticed the following uniform pattern on the above eleven transactions. (a) No assets were acquired or purchased from the supplier from any other party; (b) No assets were leased to the assessee on account of lease transactions and (c) All the documents like invoices, lease agreements, etc., are make-believe things only.

The fourth of the pattern was not the same in all cases but applied to certain transactions and these were "Further, the so-called supplier said that he had issued the bill only without supplying the assets"; "Further, the so-called lease and the supplier are not traceable and no such persons ever existed in the addresses given"; "Further, the so-called lessee-cum-original supplier, clearly admitted that the transaction was only a loan transaction"; "the supplier had not sold any plant and machinery and the invoices produced are also make-believe things" and "Further, the so-called invoices are nothing but proforma invoices only".

13. Each of the eleven lease transactions have been extensively dealt with by Assessing Officer and these are brought out briefly hereunder : The subject of lease is centering sheets that are entitled to 100% depreciation is stated as supplied by Vijaya Commercial House at a cost of Rs. 1,02,18,000 vide Invoice Nos. 384 to 386, dated 26-5-1993. Survey under section 133A of the Act was conducted on the lessee on 29-3-1996 and I showed that no asset existed in the business premises. The Managing Director, Mr. Taneja, denied receiving any assets either from the assessee or from the supplier Vijaya Commercial House. Mr. Chettiar, the Chairman of the lessee was also examined and he admitted that he is the proprietor of Vijaya Commercial House but denied of any sale of Centering Sheets by his proprietary concern to the assessee. He did admit that his proprietary concern had provided proforna invoices to the assessee and admitted of receiving loan from the assessee. The assessee was confronted with the above statements. The assessee submitted that the assessee is unable to obtain a fresh confirmation of the lease transaction from the lessee and the lessee is unable to produce the said lessee. It was further noted that the assessee vide letter dated 23-5-1997 had indicated that it had claimed deduction of the loss for the asset.

Assessing Officer accordingly concluded that because both the supplier and the lessee had denied the transaction there was no acquisition of any asset and consequently the assessee could not have owned the asset and used it for its business of leasing. He also observed that because both the supplier and the lessee had denied having supplied and receiving on lease any asset, the various documents such as invoices, lease agreements, etc., are all make believe things that are prepared in collusion with the suppliers and lessees in a fraudulent manner with the sole objective of claiming bogus depreciation on non-existing assets with a view evade the income-tax. Assessing Officer to come to the said conclusion had examined the movement of funds from the assessee to the supplier and from the supplier to the lessee and from the lessee to the assessee.

He observed that cheque is issued in favour of the suppliers and he had passed on 85 to 90% of the cheque amount to the lessee and the lessee would hand over the said amount to the assessee towards lease rental advance or deposit. On this basis Assessing Officer had observed that the purchase consideration paid by the assessee had flown back to it in the shape of lease rental advance and deposit.

Assessing Officer also observed that the lease rentals are not the real income of the assessee as there were no assets acquired or leased. He had held that the assessee had failed to prove the genuineness of claim of depreciation. Assessing Officer therefore, adjusted the depreciation debited against the lease rental receipts of Rs. 24,50,315 credited to the profit & loss account and held the difference of Rs. 77,67,685 as the undisclosed income of the assessee.

Flameless Furnace is stated as purchased from Sonic Marketing for Rs. 80,00,400 under invoice No. 025, dated 25-9-1994 and given on lease to the lessee. The said furnace is entitled to 100% depreciation. The business premises of the lessee was searched on 11-4-1996 and no furnace was found. Mr. Jeevan Kumar, the Managing Director of the lessee admitted Sonic Marketing was a fictitious concern created by him and denied having received any asset either from the assessee or from Sonic Marketing. He admitted that 85% of the amount paid by the assessee to Sonic Marketing returned back to the assessee through his company as lease rental advance or deposit and that balance of 15% was the benefit enjoyed by him and others involved in the process. Assessing Officer had confronted the assessee with the statements so recorded and noted that the assessee vide its letter 23-5-1997 had stated that it had claimed loss from the said assets. Assessing Officer found the nature of the transaction, invoice, etc., was identical to New Era Urban Amenities P. Ltd. He noted that the assessee had shown lease rentals at Rs. 15,30,074 and had claimed depreciation at 100% of the cost. As the movements of funds from the assessee to the supplier through the lessee to the assessee back to the extent of 85% to 90%, and as concluded by him in New Era Urban Amenities P. Ltd., he held the undisclosed income at Rs. 64,70,326 by adjusting the depreciation claimed against the lease rental.

The item in issue is the industrial gas cylinder covered by invoice number dated 27-6-1994 of a value of Rs. 41,48,000 that is shown as supplied by Venus Container Ltd. Assessing Officer observed that both the supplier and the lessee were not available at the addresses furnished by the assessee and were untraceable. Assessing Officer confronted the assessee with this fact and the assessee stated that it is unable to obtain fresh confirmation from the lessee or produce it and vide letter dated 23-5-1997, it had indicated that it is claiming loss from the said asset. The lease rental showed by the assessee from the above transaction was Rs. 8,54,568 and after adjustment of the depreciation claimed by the assessee, the net amount of Rs. 32,63,832 was concluded as the amount of undisclosed income with regard to the said transactions.

The item in issue is Roller Hearth Furnace that is stated to be supplied by Udayamala Fabs under cover of invoice No. 17 dated 19-4-1994 for a total consideration of Rs. 70,67,403. The supplier was found at No. 5, Sitco Industrial Estate, (TEICO), Tiruchirapalli and vide letter dated 15-5-1997 had submitted as follows : "With reference to the above cited letter of yours we submit the following for your consideration : (a) that we have not sold or supplied plant and machinery to M/s.

Kirloskar Investments & Finance Ltd. (b) we do fabrication business for BHEL purely on labour contract and our turnover for 94-95 was 9.70 lakhs.

(c) the information for point Nos. 3, 4, 5 & 6 are not applicable as we have not supplied any machineries or plants".

The letter from lessee dated 15-5-1997 had the following information : "In connection with the letter referred above, we hereby inform that though we have entered into lease agreement with M/s. Kirloskar Investments & Finance Ltd. for leasing machinery for Rs. 70.67 lakhs, the transaction was not completed and hence not fructified.

The following facts are furnished below as reply to your letter : (1) Any plant and machinery as mentioned in your letter have not been received by us from M/s. Kirloskar Investments & Finance Ltd. (2) As we have not been leased any machinery we have not effected any turnover with the said plant and machinery.

(3) The details of sources for payment of lease rental advance/deposit does not arise as payments were not paid by us to M/s. Kirloskar Investments & Finance Ltd., (4) We have no account of M/s. Kirloskar Investments and Finance Ltd. in our books".

The submissions of both the supplier and the lessee was furnished to the assessee for its reply. In its reply the assessee insisted that the transaction was effected and in support had furnished the certificate dated 27-5-1996 of M/s. G. V. Sunder & Co. who had carried out physical inspection of the said machinery at the business premises of the lessee. Assessing Officer concluded that because both the supplier and the lessee had denied the transaction, assessee must establish the transaction as genuine. Assessee could not obtain fresh confirmation from the supplier and the lessee. He accordingly concluded that this was not established by the assessee.

The lease rental shown in the transaction was Rs. 14,23,314, and adjusting this amount with the depreciation claimed the net amount of Rs. 77,67,685 was treated as undisclosed income.

The item that is covered by transaction No. v is Pit Type Furnace and in transaction No. vi is Flameless Furnace whose purchase values as claimed were Rs. 1,23,84,800 and Rs. 73,43,200 respectively from the supplier M/s. Engineering and Industrial Services of Madras.

Assessing Officer noted that the assessee had failed to produce fresh confirmation letters from both the supplier and the lessees.

The Assessing Officer accordingly issued notices both to the supplier and the lessees. The supplier vide its letter dated 7-5-1997 had submitted as under : "(i) that we are in no way connected, related or otherwise with the fraudulent firm bearing our name and address of which Mr.

Balasubramanian is the proprietor, (ii) that we have absolutely had no business dealings or otherwise with the said M/s. Kirloskar Investments and Finance Ltd., (iii) that we have not sold any plant and machinery to M/s.

Kirloskar Investments and Finance Ltd. at any point of time that too under our invoice Nos.' 63 & 64 dated 21-4-1995 for Rs. 123.84 lakhs and Rs. 73.43 lakhs as alleged, (iv) that we have never in all our business transactions ever transacted any business of that huge volume, (v) that we have never had as our client/customer M/s. Kirloskar Investments and Finance Ltd. and we have no ledger folio of M/s.

Kirloskar Investments and Finance Ltd. and we have not received any money from M/s. Kirloskar Investments and Finance Ltd." Assessing Officer observed with regard to the lessee M/s. Aero Pistons (P.) Ltd. that it gave an evasive reply without stating the genuineness or otherwise of the lease transactions with the assessee and about the acquisition of any asset from the supplier. He further noted that it had admitted having charged off the lease rental and therefore, did not maintain the account of M/s. Kirloskar Investments and Finance Ltd. in its books. On this reply the Assessing Officer opined that it clearly showed that the party is colluding on the bogus lease transaction.

Assessing Officer with reference to the lessee M/s. Omega Steel Industries P. Ltd. observed that its premises was searched on 24-4-1947 and in its statement dated 15-5-1997 had admitted that the transaction with the assessee for commission purposes only and that no assets were acquired in the so-called lease transactions.

The assessee when confronted with the above claimed that independent physical inspection carried out by M/s. G. V. Sunder & Co. and supported this plea with the certificate from the said concern. It was further pleaded that the evasive reply of M/s. Aero Pistons (P.) Ltd. should not be the basis for denial of the depreciation claim.

On the transaction with M/s. Omega Steel Industries P. Ltd. it was submitted that it had not disputed the existence of the asset and that the transaction could be one of sale by the lessee and lease back to it and therefore, the assessee could not be denied the depreciation as claimed by it. Assessing Officer however was not impressed with these submission because of the movements of the funds from the assessee to the supplier through the lessee to the assessee back to the extent of 85% to 90%. The lease rental shown in regard to the above for the period ending 31-3-1996 was Rs. 30,19,032 (Rs. 22,57,175 + Rs. 7,61,837). The net amount of Rs. 1,67,08,968 after adjustment of depreciation and the lease rental was stated to be the undisclosed income with regard to the above two transactions.

M/s. Pentagon Innovative Systems is stated to have supplied various types of Furnaces under cover of their invoice Nos.' 809 to 817 of July 1974 and 1001 to 1008 of 23-7-1995 for a value of Rs. 81,69,700 and Rs. 1,39,40,500, respectively. In this case, the Assessing Officer notes that no confirmation letters were produced either from the supplier or the lessees. The supplier vide his letter dated 6-5-1997 had stated as under : (a) the plant and machinery which was shown as sale to M/s.

Kirloskar Investments and Finance Ltd. was in turn purchased from M/s. Liquid Engineers and the said sales were not shown in the total turnover of M/s. Pentagon Innovative Systems.

(b) the money received front M/s. Kirloskar Investments and Finance Ltd. was in turn paid to M/s. Liquid Engineers towards their sale of plant and machinery to M/s. Pentagon Innovative Systems.

(c) there was no movement of assets in these transactions. It was only transfer of title.

(d) though the transactions was a tripartite agreement, it should be treated as direct lease.

Assessing Officer had called for information from the lessee who vide its letter of 9-5-1997 had stated that they had raised the invoice with the sole view of accommodation of the lease transaction and it should not be treated as sale made by them. It was also stated that the lease transaction should be treated as loan transaction only as the assets were never parted with.

Assessing Officer had observed that the supplier had paid for his purchase only when it had received the sale consideration from M/s.

Kirloskar Investments and Finance Ltd. and there was no physical movement of the asset. Assessing Officer further noted that the original owners M/s. Liquid Engineers are claiming depreciation on the same assets and in the books of the lessee the asset had a nominal value but through the series of sale, the price of the asset had been reflected at a very high price. He further noted that income of the supplier for the financial years 1993-94 to 1995-96 showing income of Rs. Nil, Rs. 17,13,357 and Rs. Nil and accordingly concluded that the supplier was incapable of such huge value transaction and the transaction as sham. Because of the claim made by M/s. Pentagon Innovative Systems that the transaction should be treated as direct lease and the fact that the plant never moved from the premises of M/s. Liquid Engineers and that of M/s. Liquid Engineers that the invoices were raised by it for accommodating the lease transactions while the transaction was really a loan transaction, his view of the transaction being sham was fortified.

The submissions of both the supplier and the lessee were furnished to the assessee and his reply was solicited. The reply by the assessee was that both parties having accepted about the transaction and that the transactions are fully supported by invoices, agreements, etc., but have different submissions that suited them.

It was further contended that the submission of M/s. Liquid Engineers was only to avoid their tax liabilities.

Assessing Officer was not impressed with the reply and held that ownership continued to remain with the lessee and accordingly, the lease rental of Rs. 30,83,651 was adjusted with the depreciation and the net amount of Rs. 1,90,26,549 was stated to be the undisclosed income.

The supplier in this case is M/s. Civic Engineering & Contractors who is stated as supplied Furnace under cover of invoice Nos. '95 and 96 for a value of Rs. 1,02,00,000. In this case too assessee it is noted did not file any confirmation from both the supplier and the lessee. Assessing Officer noted that the movement of money from the assessee to the supplier and through the lessee to the extent of 85% to 90% was the same as in other transactions.

All efforts to trace the supplier failed but Assessing Officer succeeded in contacting the lessee. Lessee vide their letter dated 17-5-1997, it was noted had given very evasive reply and it did not contain any information concerning the lease transaction with the assessee. It was further noted that the lessee had confirmed that they had not maintained any ledger account of the assessee and that they had not claimed any lease rental payment concerning the lease transaction. On confrontation of the above, the submission of the assessee was that the evasive replies of the lessee should not be the basis for disbelieving the claim of the assessee.

Assessing Officer considering the non-filing of the confirmation of the supplier and the untraceable nature of the supplier and the reply by the lessee concluded that the transaction was so sown to have been effected solely with a view to claim 100% depreciation. He accordingly adjusted the lease rental of Rs. 8,51,320 as declared against the depreciation claimed and the net amount of Rs. 93,40,680 was treated as the undisclosed income.

The supplier in the instant transaction is M/s. Brilliant Traders who are stated to have supplied Centering Sheets under cover of invoice dated 1-6-1993 for a value of Rs. 40,28,000. The business premises of the supplier was surveyed under section 133A of the Act on 2-4-1996 and the statement of the Manager Mr. P. J. Ramesh was recorded. Mr. Ramesh it was noted had admitted that there was no physical movement of Centering Sheets and that in the books it was treated as a sale. Mr. Ramesh had admitted that entries in the books of account were made at the instance of Mr. Selva Kumar, the Finance Manager of the lessee. Assessing Officer had noted that Assessing Officer noted that the movement of money from the assessee to the supplier and through the lessee to the extent of 85% to 90% was the same as in other transactions. Assessing Officer noted that the assessee was called to file fresh confirmation of both the supplier and the lessee together with extract of the ledger accounts of the assessee as appearing in the books of the supplier and the lessee and that assessee did not provide any of them. Assessing Officer concluded that the transaction was sham and accordingly after adjusting Rs. 9,02,122, the lease rent with the depreciation, the net amount of Rs. 31,25,878 was treated as the undisclosed income.

Supplier in the instant transaction is M/s. Brilliant Engg. Works who it is claimed had supplied Furnace under cover of invoice dated 12-4-1993 of a value Rs. 1,58,00,000. Assessing Officer had noted that the assessee did not file fresh confirmation from the supplier.

Assessing Officer also had noted that the notice sent to the supplier at the address furnished by the assessee came back unserved containing the remark 'not found'. Assessing Officer had noted that Lessee in its letter had stated that the assets under the lease were in their possession and is used by them. Assessee who was confronted with the non-service of the notice on the supplier and the letter from the lessee insisted that the transaction of lease having been confirmed by the lessee together with the asset being in their possession and duly supported by various documents, the transaction should be treated as genuine.

Assessing Officer had noted that the reliance of the assessee is on the proforma invoice as given by the so-called supplier which when viewed from the similar movements of funds as in other cases, he concluded that there was no sale of any plant by M/s. Brilliant Engg. Works followed by taking it on lease and that the documentation is only a make belief story. Assessing Officer as held by him in other transactions as brought out earlier concluded that the present transaction was also one for claiming bogus depreciation. He accordingly adjusted the lease rent of Rs. 34,56,250 adjusted against the depreciation claimed and the net amount of Rs. 1,23,43,750 was treated as the undisclosed income.

14. The assessee-company was represented by Mr. Venkatesan and the Department had engaged Dr. R. B. Krishna as their standing counsel to represent them. Both the counsels deliberated upon the various issues that were raised in the appeal and rendered active assistance to this Court in appreciating the nuances involved in the appeal. Their rendition was of great assistance in our venture for rendering justice to the issue in appeal before us.

15. Both the counsels prayed for admission of additional grounds of appeal that they had filed during the hearing. The additional grounds as raised by Mr. Venkatesan and Dr. Krishna are reproduced hereunder.

"The learned ACIT is not justified in holding that the impugned lease transactions entered into by the appellant in the normal course of business are not genuine and were mere sham transactions to claim 100 per cent depreciation under the facts and in the circumstances of the appellants' case. He failed to appreciate that all the transactions with the lessee are genuine and evidenced by documents and were entered into in the normal course of business and all the lessees are identifiable and the finding arrived at is on the improper appreciation of the evidence on record and accordingly is vitiated." "The stand of the Department is that the lease transactions with respect to which depreciation has been disallowed are a sham. In case the Hon'ble Tribunal upholds this stand, no adjustment to the income assessed would be necessary.

Otherwise, the Respondent prays that this Hon'ble Court (being the First Appellate Authority) may be pleased to re-compute the income assessed by adding the finance/lease rentals deducted by the Assessing Officer from the disallowance made. Reliance is placed upon the Supreme Court decision in the case of CIT v. Rai Bahadur Harditroy Motilal Chamaria [1967] 66 ITR 443." 16. Dr. Krishna had indicated in writing that he had no-objection for admission of the additional ground moved by the assessee. Mr.

Venkatesan, however, strongly objected to the additional ground raised by the department. The issues involved in the additional ground of appeal as raised by the standing counsel for the department would be dealt with at the appropriate place.

17. The facts as brought out earlier clearly shows that consequent to the search carried at the business premises of the assessee there were no seizure of any money, bullion, jewellery but seizure of certain files and documents that related to the entries made in the books concerning depreciation on assets and income from lease transactions.

The department had made block assessment for the block period ending with 31-3-1996 and had treated the depreciation claimed as resulting in suppression of true income which is treated as equivalent to 'undisclosed income'. It is, accordingly, become necessary to bring in the definition of the term 'undisclosed income' as defined in section 158B of the Act.

(b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act.

18. Because the block assessment is based on the entries in the books, documents and transactions, for proper appreciation of the issue we would extract only that portion of the definition that deals with entries in the books, documents and transaction. Accordingly the definition would read undisclosed income includes "any income based on any entry in the books of account or other documents or transactions, where such entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act".

19. Mr. Venkatesan, the learned counsel for the appellant-company submitted that the above definition clearly shows that it concerns itself with entry made in the books or other document or a transaction that is connected with the income or property that may or may not have been disclosed. He contended that the block assessment could not be resorted to for treating something as undisclosed income which are otherwise governed by the provisions of the Act such as non-allowability of expenditure claimed as a deduction from the total income. In support he placed reliance on the decision of the Tribunal in Sunder Agencies v. Dy. CIT [1997] 63 ITD 245 (Mum.). This was a case of search and consequent to the search felt that the claim of sales promotion expenses as deduction from the income from business was excessive because the rate of commission, etc., were found to be higher than the normal rates and completed the block assessment. The Tribunal had held that for such disallowances the special provision of block assessment could not be resorted to and quashed it.

He further contended that the files and documents that were seized did not reflect any transaction that goes to show that any income that should have been reflected was not so reflected in the books. He contended that all the lessees and the suppliers are parties with which there was business transactions only and none of them are in any way related to the assessee either by holdings of shares by shareholders or directors or other interests. He pleaded that the assets that were leased out were acquired and were so reflected in the books and therefore, it is not the case of property acquired but not disclosed.

He also contended that the income from the lease of the assets is also reflected.

He contended that the claim of depreciation is peculiar to the income-tax proceedings only and is governed by the normal procedure of determination of income from business and ranks at par with other expenditure that may or may not be allowed in computing the income from business within the meaning of sections 28 to 43A of the Act. He contended that as on 30-3-1996 the day on which the search was conducted, no entry for depreciation was made in the books because it is usually an entry that is placed in the books towards the end of finalisation of the accounts for it does not involve any cash outgo. He contended that therefore the very basis of initiation of the block assessment is wrong. He submitted that in view of the decision of Sunder Agencies' case (supra) it should be held that the treating the depreciation that is yet to be charged to the books of account as resulting in undisclosed income as not permissible for making block assessment.

20. Dr. Krishna, the counsel for the department contended that the assets that are shown as acquired in the books are those that have a rate 100 per cent depreciation under the Schedule of depreciation rates. He contended that the appellant-company colluding with certain parties like the supplier and the lessee had reflected purchase of certain assets in its books without actually acquiring them and the sole purpose of these transactions reflected in the books is to claim 100 per cent depreciation on them and thereby the true income is substantially reduced and this fraudulent reduction in the true income has the effect of not disclosing the income. He strongly contended that any entry in the books or documents or transactions that has the effect of bringing down the true income with the sole view of disclosing lower income has to be viewed as income to the extent of reduction in the income as income not disclosed by the assessee. He contended that had it been a case of claim of normal depreciation he would have no-objection of applying the decision of the Tribunal in Sunder Agencies' case (supra). But, he pleaded that the manner of entering of the transactions must be appreciated which clearly shows that the claim of depreciation at 100 per cent is not the normal claim but with the definite motive of bringing down the true income. He further insisted that he would not have objected to the claim of depreciation at 100 per cent if the facts showed that assets were acquired and used for the purpose of business.

He drew our attention to the statement of Mr. Srinivas recorded on 19-4-1996 (placed at pages 20 to 26 of the Statement Folder) who is the Chief Accountant and the Chief Officer Business Development of the appellant-company for his proposition that the transaction were collusive in nature and was to cover up the true income with the intention to evade tax on the true income. He referred to the said statement especially to the questions 2 to 6 and its answers and these are as under : A 2. Yes. I know him. Mr. Venkatesan proprietor of M/s. Gas & Gas Enterprises, Madras (Lessee) has introduced Mr. C. Radhakrishnan in July '94 at our office. I met him only once on 18-7-1994. I took Mr.

C. Radhakrishnan to United Western Bank, Gandhinagar, Bangalore to give introducing him to open an account at the bank at Mr. Mundewadi Managing Director of M/s. Kirloskar Investments and Finance Ltd., Bangalore had given instructions to me to introduce Mr. C. Radhakrishnan to open the account United Western Bank, Gandhinagar, Bangalore on 18-7-1994. Accordingly I have introduced.

Q 3. What was the conversation between you and Mr. C. Radhakrishnan and Mr. Venkatesan when they met you at your office on 18-7-1994 A 3. On 18-7-1994 agreement of lease for cylinders for around Rs. 41 lakhs was entered and signed by both of them before me, the copies of which are available with you, i.e., in the seized material.

A 4. Since, I know him through Mr. Venkatesan I will contact Mr.

Venkatesan and trace out Mr. C. Radhakrishnan and produce him before you on 22-4-1996.

Q 5. In how many cases you have introduced the people to the bank to open accounts for entering into lease agreements A 5. So far I have introduced five more persons, viz., Udayamala Fabs, Tirumala to United Western Bank, Gandhinagar, Bangalore to avail of Rs. 70 lakhs loan in 1994 and M/s. Pentagon Innovative Systems, Madras to Lakshmi Vilas Bank, City Market Branch, Bangalore to avail Rs. 81 lakhs loans in 1994 in addition to Mr. C. Radhakrishnan.

I introduced the lessees also in the above three cases on the same day. The details are as follows :----------------------------------------------------------------------Lessee Supplier Bank Amount Rs.----------------------------------------------------------------------Lords Udayamala United 70Furnaces Fabs, WesternLiquid Pentagon Lakshmi 81Engineers Innovative Vilas Bank,Gas & Gas Venus United 41Enterprises, Container Western I have introduced the above 6 concerns to open a/c in the bank mentioned above. In fact the lessee only has approached me to introduce him to the bank to open the a/c for himself. In all the cases I have introduced the suppliers also on the request of the lessees. In all the cases the lessees a/c and the suppliers a/c was opened on the same day in the same bank. This was done to facilitate the clearance of the cheques within the same day.

A 6. Yes. I do not know the supplier at all. In all the above cases I introduced the suppliers a/c at the request of lessees only.

21. Dr. Krishna then made reference to the account opening form and the copy of the account in the books of the bank and submitted that immediately the credit to the account there is debit of substantial part of the credit which is due to the same amount flowing back to the appellant's bank account. He contended that the lessees had received the funds from the appellant-company and had returned the same which the assessee had accounted as lease rental deposit or advance. He further made reference to the terms of the lease agreement and submitted that though it prescribed schedule of payment of lease over a period the entitle amount of the case was collected in one instalment because, it was so routed back to the appellant-company and the lessee is totally made free of any further obligation insofar as the lease agreement is concerned.

He insisted that this kind of lump sum receipt though he insisted it is not a receipt at all is never seen in any lease transactions because, if the lessee was in a position to pay to the extent of 85 per cent to 90 per cent of the value of the machine, he may as well end-up making 100 per cent payment. In the eleven cases noted by Assessing Officer invariably the 100 per cent of the value of the so-called asset was shown as moved from the bank account of the assessee to the supplier who after retaining 10 per cent to 15 per cent of it passed the balance of 90 per cent or 85 per cent as the case may be back to the assessee which the assessee had reflected in its books as advance lease rental or deposit towards lease.

He pleaded that the entries in the books, documents or transactions that show that these have been so effected with the only intention of reducing the taxable income so as to avoid payment of tax on the correct income is nothing but income which has not been or would not have been disclosed for the purposes of this Act. He contended that but for these fraudulent transactions the income that would have and should be disclosed would be higher and because the Assessing Officer had wrongly adjusted the lease rental shown as income against the depreciation and because the Tribunal is concerned with the determination of the correct income that is not disclosed, he had prayed in his additional ground that the undisclosed income should be taken as equal to the depreciation claimed.

22. The definition of undisclosed income as was redrafted limiting to the entries in the books of account or documents or transactions earlier read "any income based on any entry in the books of account or other documents or transactions, where such entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act". The bare reading of the above gives the literal meaning of undisclosed income as income which is represented wholly or partly by the entry in the books or documents or transactions that has not been so disclosed or would not have been disclosed. To put it other words, the undisclosed income is that income which is entered in the books of account and as supported by the documents and the transactions as other than as income while in reality the entries in books, documents and the transactions represent income. The other intent is with reference to some property shown in the books, documents and transactions but the source of its acquisition is not explained or established, the said property is said to represent source of undisclosed income.

Dr. Manmohan Singh the then Finance Minister in his budget speech for 1995-96 said, - "the searches conducted by the Income-tax Department are an important means of unearthing black money. However, undisclosed incomes have to be related to the different years in which income was earned and as such assessments are unduly delayed. In order to make the procedure more effective, I am proposing a new Scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent".

"Searches conducted by the Income-tax Department are important means of unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed income to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and seized assets remain with the department for a long time.

In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, it is proposed to introduce a new scheme of assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30-6-1995, shall be assessed separately as income of a block of years." The undisclosed income as defined in this section it appears on the basis of the above explanation offered by the Finance Minister introducing the scheme and as explained in the memorandum explaining the provisions of the Finance Bill, covers any entry in the books of account or other documents or transactions which wholly or partly income or property which has not been or would not have been disclosed for the purposes of the Act. Further, from the reading of the provision contained in section 158BB of the Act that describes the manner of computation of undisclosed income specifically to sub-section (2) of that section which states that "in computing the undisclosed income for the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as be, apply and references 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", it gives an impression that the undisclosed income includes those that are treated as deemed incomes like cash credits under section 68; unexplained investments under section 69; unexplained money, etc., not recorded in books under section 69A; investment not fully disclosed in the books under section 69B and unexplained expenditure under section 69C of the Act.

The earlier procedure required relating the undisclosed income to the financial year in which the detection was made combined with the delay caused by the time consumed in the framing of the assessment along with the other disclosed income of that financial year which time for framing of the assessment was available under section 153 of the Act.

This was found to be cumbersome and was taking a long time, and the intention being that the undisclosed should be taxed at the flat rate of 60 per cent. the new scheme was evolved of bringing into tax such undisclosed income by making the block assessment. Further, the definition of undisclosed income talks of income based on any entry in the books, documents or transactions that has not been or would not have been disclosed for the purposes of the Act but, it nowhere states that the entry in the books is so made that has the effect of reducing the income that is recorded in the books or documents or transactions would be part of the undisclosed income.

We are accordingly of the opinion that the block assessment procedure must be strictly adhered to as intended by the law makers to cover those search cases in which items that represent income based on the entries on the books of account, document, transactions that should have been disclosed as income but not disclosed as income and those items that represent some property the source of which is muffled by means of entries in the books of account, document and transactions and its source that represents some income that is not disclosed. The bare reading of the section as above in our opinion is not intended to cover search cases where the income is shown in the books of account, documents and transactions but certain deductions are claimed either wilfully or otherwise so that the income on which the tax is payable gets reduced. This in our opinion is the reasonable interpretation because, the claim of deduction is not represented by black-money, detection of which, searches are conducted for framing of the block assessment.

22a. The parties before us had placed extensive arguments touching the provision contained in section 158BE(1) concerning the interpretation of the term 'within one year from the end of the month in which the last of the authorisations for search under section 132 .... was executed'. They also made extensive references to the section 132(3) regarding the prohibitory order issued, section 132(8A) regarding the prohibitory order not enforceable beyond sixty days from the date of said order. The parties addressed in detail on the issue of the block assessment that is framed on 30-5-1997 could be held as on time or not.

Considering the above, we reproduce sections 158BE(1), 132(1) and 132(3) of the Act.

(a) within one year from the end of the month in which the last of the authorisations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned after the 30th day of June, 1995 but before the 1st day of January, 1997.

(1) Where the Director General or Director or the Chief Commissioner or Commissioner or any such Deputy Director or Deputy Commissioner, as may be empowered in this behalf by the Board, in consequence of information in his possession, has reason to believe that - (a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922) or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account, or other documents as required by such summons or notice, or (b) any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act, or (c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property), then, (A) the Director General or Director or the Chief Commissioner or Commissioner, as the case may be, may authorise any Deputy Director, Deputy Commissioner, Assistant Director, Assistant Commissioner or Income-tax Officer, or (B) such Deputy Director or Deputy Commissioner, as the case may be, may authorise any Assistant Director, Assistant Commissioner or Income-tax Officer, (the officer so authorised in all cases being hereinafter referred to as the authorised officer) to - (i) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such books of account, other document, money, bullion, jewellery or other valuable article or thing are kept; (ii) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by clause (i) where the keys thereof are not available; (iia) search any person who has got out of, or is about to get into, or is in the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing; (iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search; (iv) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom; (v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing : Provided that where any building, place, vessel, vehicle or aircraft referred to in clause (i) is within the area of jurisdiction of any Chief Commissioner or Commissioner, but such Chief Commissioner or Commissioner has no jurisdiction over the person referred to in clause (a) or clause (b) or clause (c), then, notwithstanding anything contained in section 120, it shall be competent for him to exercise the powers under this sub-section in all cases where he has reason to believe that any delay in getting the authorisation from the Chief Commissioner or Commissioner having jurisdiction over such person may be prejudicial to the interests of the revenue : Provided further that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to it being of a dangerous nature, the authorised officer may serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it, except with the previous permission of such authorised officer and such action of the authorised officer shall be deemed to be seizure of such valuable article or thing under clause (iii).

(3) The authorised officer may, where it is not practicable to seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing, for reasons other than those mentioned in the second proviso to sub-section (1), serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it except with the previous permission of such officer and such officer may take such steps as may be necessary for ensuring compliance with this sub-section.

Explanation - For removal of doubts, it is hereby declared that serving of on order as aforesaid under this sub-section shall not deemed to be seizure of such books of account, other documents, money, bullion, jewellery or other valuable article or thing under clause (iii) of sub-section (1).

23. Dr. Krishna provided copy of search warrant issued on 30-3-1996 to the appellant and filed it on our records. He produced the original of the warrant which was examined. Mr. Venkatesan filed written submissions with reference to the search warrants.

24. The learned counsel Mr. Venkatesan, submitted that the business premises was searched on 30-3-1996 based on the warrant of search that was issued on 30-3-1996. He submitted that there were seizure of documents on that date combined with issue of prohibitory order under section 132(3) of the Act on the computer and on files that were in the premises. He submitted that the departmental official on the strength of the warrant issued on 30-3-1996 had been visiting on various dates 8-4-1996, 12-4-1996, 14-5-1996, 21-5-1996 and 29-5-1996, to which visits the assessee did not raise any objection. He submitted that the departmental officials would lift the prohibitory order on each of their visits and would re-impose the prohibitory orders on files and computer when they left. On each visit the officials examined the various records, files, etc., and on 21-5-1996 that they had seized some more files which files were covered by the prohibitory order issued on 30-3-1996.

25. Mr. Venkatesan submitted that the above facts had been brought out for the proper appreciation of the term 'assessment should be made within one year from last of the authorisations' as contained in section 158BE of the Act. He submitted that authorisation for search issued on a date is to be considered with reference to the commencement of the search and its conclusion. Because, search is for specific purpose of seizing of incriminating documents, it must be concluded that the search has come to a close when the officials leave the premises searched taking with them the seized items. The seizure of documents were made by the officials on 30-3-1996 and all other items including computer that were in the premises were left behind and a general prohibitory order for their removal from the premises without the permission of the officials on them was only issued.

26. Mr. Venkatesan submitted that only one warrant was issued on 30-3-1996 on which date search was made and seizure were also made. The search party after the completion of the search on that date had left the premises. The assessee continued with its business activities from 31-3-1996 onwards in the normal manner from the said premises. He pleaded that the warrant based on which search is conducted its effective nature must be taken as exhausted the moment the search party leaves the premises after making seizure of some of the items. He contended that the purpose of search is to seize undisclosed incomes and assets and on their seizure from the premises the effectiveness of the search is completed.

27. Mr. Venkatesan submitted that the Officials who entered the premises on the strength of the warrant dated 30-3-1996, the search as made by them between 8-4-1996 and 29-5-1996 must be held as not search within the meaning of section 132 of the Act. He pleaded that the continuation of search could be so treated if the search is carried to the following day to the date of start of the search proceeding. He pleaded that the date 8-4-1996 on which the Officials revisited the premises was after a gap of about 9 days from 30-3-1996, and again after a gap of 4 days, 33 days, 7 days and 8 days, they visited on 12-4-1996, 14-5-1996, 21-5-1996 and 29-5-1996 respectively. He contended that considering the gap between the dates, it should be held that the dates 8-4-1996 to 29-5-1996 do not represent dates of search conducted.

28. He pleaded that the warrant that authorised the search clearly gave the names of the officers who would carry out the search, other persons accompanying them, the names of panchas and the address where search was to be conducted. In the warrant dated 30-3-1996 that authorised the search indicated the names of the officers and it did not contain the name of Mr. Krishna Murthy, ADI. Mr. Krishna Murthy who was not so authorised by the warrant dated 30-3-1996 entered the premises of the assessee on 8-4-1996 and removed the prohibitory orders placed on the files and the computer by the search party on 30-3-1996 and when he left he had re-imposed the prohibitory order on the same items. He repeated his act of lifting off of the prohibitory order and re-imposing it when he visited again on 12-4-1996. He submitted that this is abundantly clear from the fact that Mr. Krishna Murthy had issued fresh prohibitory orders on 8-4-1996 on some files and the computer. Mr. Krishna Murthy again visited on 12-4-1996 and repeated his act of lifting the prohibitory order and re-clamping the prohibitory order. On 14-5-1996, one Mr. Ganapathi R. Bhat, whose name figured in the warrants issued on 30-4-1996 and had not visited or inspected on 30-3-1996 made the inspection on 14-5-1996. During this visit, Mr. Rajshekar Reddy was not present. Mr. Ganapathi R. Bhat, on the strength of the warrant issued on 30-3-1996 revisited the premises of the assessee on 21-5-1996 and seized certain books. Mr. Krishna Murthy, ADI, reappears in the scene on 29-5-1996 and finally lifts the prohibitory orders. Mr. Venkatesan had pointed out that his sole purpose of bringing out the above facts to the attention of the court was that the search was concluded on 30-3-1996.

28a. He contended that the Assessing Officer had proceeded on the premise that the last of the authorisations namely the warrant was executed on 29-5-1996 because, it is on that date that he decided that no further visits are necessary. Assessing Officer on that basis he was of the view that he would get one year from 1-6-1996 for completion of the block period assessment. It was with this understanding that the Assessing Officer completed the assessment on 30-5-1997, which is the date of passing of the assessment order.

29. His prime objection was to the above conclusion of the Assessing Officer. He made reference to the section 132(3) of the Act that permitted issuing of prohibitory order and contended that the section stated that prohibitory orders could be issued where the Assessing Officer considers it not practicable to seize any such books of account, other documents, money, bullion, jewellery or other valuable articles. He submitted that the emphasis on prohibitory order is with reference to the term 'practicable to seize'. He contended that section 132(1) also sanctions the Assessing Officer to issue prohibitory order but is with reference to 'it is not possible or practicable to take physical possession .... due to weight or other physical characteristics, or due to it being of a dangerous nature'. Further, he also pleaded that the explanation added to section 132(3) by the Taxation Laws (Amendment) Act, 1987, had left clarified that issuing of prohibitory order does not amount to seizure. He, accordingly, contended that the search must be held to have concluded on 30-3-1996.

30. He insisted that because of the Explanation of section 132(3) of the Act, the prohibitory order not amounting to seizure and the officials having left the premises on 30-3-1996, without ceiling it, there is no doubt that the search had concluded on 30-3-1996. He pleaded that every time a search is to be made on any premises it must be backed by an authorisation or warrant. Because, only one warrant was issued on 30-3-1996 and on that date after carrying out seizure of documents, etc., the officials having left the premises, he contended that, it must be held that the on 8-4-1996 and subsequent dates were all visits that does not have the sanction of the Act to seize any documents or issue of any prohibitory order. He insisted that the files stated as seized on 21-5-1996 must be held as files handed over by the appellant-company.

31. He submitted the term "practicable to seize" had to be appreciated with reference to the items on which prohibitory orders were issued, namely, files and the computer. He pleaded that the files are not so huge in volume making it difficult to carry and likewise the computer is not an immovable property which is impracticable to seize. He pleaded because they had only issued prohibitory orders on these 2 items and had not seized, insofar as these 2 items are concerned the search had come to a close on 30-3-1996. He pleaded that only the search that was made on 30-3-1996 is based upon a proper warrant.

32. He pleaded by referring to the copies of the search warrants issued, that the department had in fact acted in a high-handed manner by allowing the persons other than those mentioned in the search warrants to be present during the course of search. He pleaded though the warrant of search is valid with reference to the officials named therein to conduct the search and it is only those officials named in the warrant as authorised to conduct the search could conduct the search and the search so conducted such authorised officials alone could be valid search. He pleaded that where search is conducted by officials all of whom are not so authorised to conduct the search under the warrant and the action of these unauthorised officials such as lifting and imposing of prohibitory order vitiates the search and consequently such search must be held as invalid. He contended that the warrant also indicates the names of the officials who may accompany the officials authorised to conduct the search and these officials had never interfered in the search but were only assisting the officials authorised to search and never issued or lifted the prohibitory order.

He pleaded that just as the accompanying officials named in the warrant to assist the officials authorised to conduct the search are prevented from acting for the authorised officials, in the same way the other officials not named as either authorised to conduct the search or to accompany those officials, could not have acted in the manner in which the officials authorised to search can and consequently all actions of such unauthorised officials are not actions within the meaning of section 132(3) of the Act. He submitted that the authorisation for search or warrant that is issued in favour of an officer is not a transferable document. He submitted that the provisions of section 76 of the Criminal Procedure Code is very categorical on this point. He submitted that this also aptly clamps the issue in favour of the assessee to the effect that the search concluded on 30-3-1996.

33. He pleaded that the records that are not seized but covered by the prohibitory order must be held as examination of the records on their visits from 8-4-1996 to the business premises to which the assessee did not object which examination could have been conducted at their office as well by resorting to seizure on 30-3-1996. He submitted that visits made with a view to examine the records can never be equated with search and seizure. He submitted that examination of the various seized records for arriving at the undisclosed income is always a procedure that is followed from the time the search is carried out. He accordingly contended that what follows the search cannot be equated with the search. He pleaded strongly that the search had come to a close on 30-3-1996.

34. He further pleaded that because there was only one warrant that was issued dated 30-3-1996 and because it must be held to be the only one authorisation and further because it was executed on 30-3-1996, the Assessing Officer would get one year for completion of the assessment in the block period assessment from the end of the month of March '96 in which month the search was carried out as is the time-limit indicated in section 158BE of the Act. He pleaded that on the basis of the above, the time available to the Assessing Officer for framing the assessment starts from 1-4-1996 and ends with 31st March, 1997. He pleaded that on this basis, the assessment framed on 30-5-1997 is clearly barred by time and is therefore, illegal, void ab initio and bad in the eyes of law and such an order only deserves nothing than being quashed.

35. Mr. Venkatesan, the learned counsel insisted that the provision of seizure under section 132(3) of the Act is resorted to on the formation of the opinion by the concerned official authorised to carry out the search and seizure that the seized material represents undisclosed income. He insisted that prohibitory orders issued under section 132(3) of the Act, does not amount to seizure. He referred to decision of Allahabad High Court in Sriram Jaiswal v. Union of India [1989] 176 ITR 261/42 Taxman 83 where they had considered the provisions of sections 132(3) and 132(5) of the Act.

36. Mr. Venkatesan carried us through to the decision of the Delhi High Court in B. K. Nowlakha v. Union of India [1991] 192 ITR 436. He insisted that in the instant case, the authorities have held that lifting of the prohibitory order and reimposing it on successive occasions was invalid and on this basis as well, it must be concluded that the search concluded on 30-3-1996.

37. Mr. Venkatesan then referred to the Madras High Court decision in I. Devarajan v. Tamil Nadu Farmers Service Co-operative Federation [1981] 131 ITR 506. Mr. Venkatesan insisted that though the seizure of any item does not necessarily need to be preceded by a search, but once search is conducted and the authorities come to a conclusion that certain of the items only need to be seized and certain others need not be seized by passing restraint order on them, clearly goes to indicate that the items that are covered by the restraint order are not seized material. The order under section 132(5) is to be passed within 120 days of seizure. This indicates that from the day the seizure is concluded, 120 days time limit is available for framing of on order.

He contended that items like files and the computer on which prohibitory order was issued, time and again, not being items that could be said to be not 'practicable to seize', the prohibitory order was bad. Further, the lifting of the restraint order and re-imposing it also shows that the authorities were not sure whether such items represented or had any relation to undisclosed income. He further pleaded because the Assessing Officer had proceeded on the basis that the search came to an end on 29-5-1996 by treating the search as in continuation from 30-3-1996, the Assessing Officer by this process had framed the assessment on 30-5-1997 and thus had extended the time limit for framing of the assessment which is one year as allowed by section 158BE of the Act. He, accordingly, insisted that the order passed on 30-5-1997 is bad in law because it was passed beyond the time allowed by the Act.

38. Dr. R. B. Krishna, the standing counsel for the department filed a paper book containing panchanama, statements recorded on various persons and copies of letters from the suppliers, lessees, banks and the assessee. Dr. Krishna for the convenience of the Bench had prepared a statement of chronology of the search operations. He drew our attention to page 20 of the file containing panchanama, wherein the chronology of search operations have been placed.

39. He also made available the appraisal report of the Asst. Director of Income-tax (Inv.), Unit-I(3), Bangalore, Mr. K. Krishnamurthy. He also produced the original warrant dated 30-3-1996 that authorised the search on the premises of the assessee that mentioned the authorised officers for conducting the search as Mr. Rajashekara Reddy, Mr. U.Anjaneyulu and Mr. K. Krishnamurthy. Because the search was temporarily discontinued on 30-3-1996 and recommenced on 8-4-1996, the same warrant was utilised and on that basis, panchanama was issued. On that date, Mr. Krishnamurthy was the authorised officer. This was continued on 12-4-1996, on which date, Mr. Krishnamurthy was the authorised officer.

It continued on the same basis on 14-5-1996 on which date Mr. Ganapathi R. Bhat was the authorised officer. On 21-5-1996 too, Mr. Ganapathi R.Bhat was the authorised officer and Mr. Krishnamurthy was the authorised officer on 29-5-1996 on which date the search was concluded.

The panchanama was issued by Mr. Rajashekara Reddy on 30-3-1996, Mr.

Krishnamurthy issued panchanama on 8-4-1996 and 12-4-1996 and Mr.

Ganapathi R. Bhat issued the panchanama on 14-5-1996 and 21-5-1996 and Mr. Krishnamurthy finally issued the panchanama on 29-5-1996.

40. He submitted that the search commenced on 30-3-1996 at 11.15 AM and continued till 6.45 PM. He submitted that they had seized 7 files and one lease register. Before temporarily discontinuing the search, they had passed restraint orders on books of account and other documents and computers kept in steel file rack and wooden cupboards. The search continued on 8-4-1996 at 12.30 PM and it was temporarily discontinued at 8.15 PM. On this date there was no seizure of any records but, restraint order was passed on books of account, documents kept in file racks, and wooden cupboards where computers were kept. The search proceedings again continued on 12-4-1996 at 5.45 PM and temporarily discontinued at 7.30 PM. On this day, there were no seizure of any records and restraint order was placed on client files/documents kept in the file racks at the Secretarial Department. The search again continued on 14-5-1996 from 2.15 PM to 4.45 PM and on this date only restraint order was passed on client files and documents kept in the file rack kept in the Secretarial Department. The search continued on 21-5-1996 from 9.40 AM and it was temporarily discontinued at 1.15 PM.On this day 22 more files were seized and there was no restraint order.

The search continued on 29-5-1996 and it was finally concluded on that date.

41. Dr. Krishna submitted the warrant that was issued authorising the persons mentioned therein to enter into the premises of the assessee which also carried with it the power to seized material which the search party feels are relevant leading to the undisclosed income and to pass restraint orders on certain other items. The warrant provides the power to the search party to break open the door of any box, locker, safe, almirah and search such other person who is about to enter the business premises which are under search, place various marks of identification and is also required to prepare an inventory of all items that were seized such as money, bullion, jewellery or any other valuable article. He submitted that Mr. Krishnamurthy was one of the authorised officers to carry out the search based on the warrant of search issued on 30-3-1996 and on that basis, he had conducted the search on 30-3-1996, 8-4-1996, 12-4-1996 and 29-5-1996. He pleaded that because the warrant of search was discontinued, based on the same warrant, an addition of the authorised officer was made, namely, Mr.

Ganapathi R. Bhat. On that power, Mr. Ganapathi R. Bhat carried out the search on 14-5-1996 and 21-5-1996.

42. He submitted that the restraint order in regard to certain other items are passed when the search party is of the opinion that the items could lead to undisclosed income, but need not be necessarily seized at that point of time and to ensure that those documents are not hampered with by the assessee. He submitted that the first restraint order issued on 30-3-1996 covers books of account, all documents, files and computers. The search party found it inconvenient to seize all those files, books of account, etc., and carry them and, therefore, it passed restraint orders. This is clear from the fact that again and again restraint orders had to be passed and when the search was made on 21-5-1996, as many as 22 more files from the various files that were covered under the restraint order were seized. On the final day of the search, namely, 29-5-1996, no further documents or materials were required to be seized and accordingly the search got concluded on that date. He submitted that the warrant of search that was initiated on 30-3-1996 permitted the department to carry out the search till 29-5-1996 when they came to the decision that no further material is available or need to be seized. He submitted that the warrant that authorised them to carry out the search within the meaning of section 132 of the Act, was executed repeatedly and the last of such authorisation was made on 29-5-1996.

43. He contended that issuing of the prohibitory order or the restraint order is a part of the seizure proceedings, but does not amount a seizure. Merely because restraint order has been issued it does not mean that the search has come to a close. He referred to the provisions of the second proviso to section 132(1) of the Act, and submitted that the restraint order under that section is to be issued, when it is not possible or practicable to take physical possession. Under section 132(3) of the Act, restraint order is to be issued when it is not practicable to seize the items. He pleaded that considering the volume of the files and other records, the restraint order was issued, which prevented the assessee from tampering with it. It was out of the records that were covered by the restraint order on 21-5-1996, 22 files were seized. He submitted that the search proceedings that commenced on 30-3-1996 and continued till 29-5-1996, when the intervening periods of searches carried out with gaps, during which time restraint orders were passed, the search should be taken to have concluded on 29-5-1996. He submitted that the competent authority who had authorised the warrant by placing the authorised officers therein, and the authorised officers having executed it properly on 30-3-1996 and on other dates, though the warrant date remained to be 30-3-1996, it has to be treated as a warrant that was in continuation and effectively executed on various dates and finally on 29-5-1996.

44. Dr. Krishna submitted that the last of the authorisation for the search having been executed on 29-5-1996, the Assessing Officer who had to carry out the block period assessment would be allowed one year from the end of the month, namely, May 1996. According to section 158BE of the Act, this one year period would end on 31-5-1997. He accordingly pleaded that the order in the instant case having been passed on 30-5-1997 is, therefore, well within the time indicated in section 158BE of the Act.

45. Dr. Krishna further contended that according to section 132(8A) of the Act, the restraint order has a life of normally 60 days and it could be extended with the approval of the Director or the CIT as the case may be. He pleaded that from a reading of section 132(3), along with section 132(8A) of the Act, it is clear that the restraint order being effective for a period of 60 days and in the instant case the search having been started on 30-3-1996, the restraint order remained effective till 29-5-1996. The restraint order having been lifted on that date, it is on that date, the search had come to a close. He strongly objected to the submission of the learned counsel Mr.

Venkatesan that was made with reference to the provisions of section 132(5) of the Act that the restraint order should not be permitted to extend the time required for framing of the assessment under section 132(5) of the Act. He further objected to the contentions raised by Mr.

Venkatesan that the period of limitation of one year should be counted from 30-3-1996 because according to him, the search remained a search from 30-3-1996 and it was lifted only on 29-5-1996. He submitted that the explanation that has been inserted to section 132(3) of the Act had made it clear that the restraint order does not tantamount to any seizure. He submitted that this further fortifies his submission that the search continued till 29-5-1996 or atlas till 21-5-1996 when the last of the seizure was made out of the restrained items. He submitted the various case laws relied by the assessee with reference to the provisions of section 132(1) of the Act which contained a proviso that stated that restraint orders amounted to deemed seizure. It was with reference to this provision that even though the seized materials could be retained for a further period in excess of the normal 60 days, for which the order of the CIT was required, the time limit within which the provisions of section 132(5) of the Act need to be passed cannot be affected. He submitted that the last of the authorisation as indicated in section 158BE of the Act must be appreciated in its true perspective as submitted by him. He accordingly submitted that the order passed by the Assessing Officer on 30-5-1997 was well within the time and is, therefore, a valid order.

46. The word 'authorisation' means sanction or approval. This word in section 158BE of the Act used in plural 'authorisations' indicating that there could be more than one sanction or approval. This word is so used for determining the commencement of the period of limitation of framing of the assessment. The term used is the order under section 158BC shall be passed within one year from the end of the month in which the last of the authorisations for search under section 132 was executed. Considering that the word 'authorisations' is used in conjunction with the words 'last of the', this amplifies the word indicating that authorisation for search would include single or more than one or multiple sanction or approval.

47. The law makers had intentionally used the words 'last of the authorisations' and this intention in our view can be gathered from the provisions of section 132 of the Act that governs the search actions of the revenue department. Section 132(1) of the Act describes the circumstances that may require carrying out search of the premises.

Search may be called for because it is felt that, (a) the person who is served with summons under section 131 of the Act or who is served with a notice under section 142(1) of the Act to produce books of account or documents, has failed to produce the books of account as directed on him by the summons or the notice; (b) the person on whom the summons or the notice as in (a) above has been served or might be issued, will/would not produce the books of account or documents that are useful or relevant to any proceeding under the Act, and (c) the person in possession of any money, bullion, jewellery or other valuable article or thing that represents either wholly or partly income or property which has/would not be disclosed for the purposes of the Act.

48. On satisfaction of the existence of any of the aforementioned three situations, the authorities who could direct the search to be carried are the Director General, Director, Chief Commissioner of Income-tax.

They can direct Deputy Director, Deputy Commissioner, Assistant Director, Assistant Commissioner or the Income-tax Officer and the Deputy Director, Deputy Commissioner may direct Assistant Director, Assistant Commissioner or the Income-tax Officer to carry the search.

The persons who are so directed to carry out the search are provided with the power, (1) to enter and search any building, place, vessel, vehicle or aircraft if he suspects that the books of account, documents, money, bullion, jewellery or other valuable article or thing are kept there; (2) break open the lock of any door, box, locker, safe, almirah or other receptacle for carrying out the actions in (1) above when keys are not available; (3) search any person who is in the building, place, vessel, vehicle or aircraft or is about to go out or is about to get in if it is suspected that he has secreted about his person any books or documents, money, bullion, jewellery or other valuable article or thing; (4) seize any books, documents, money, bullion, jewellery or other valuable article or thing found during search; (5) place marks of identification on books of account, documents or make copies therefrom; and (6) make a note of inventory of such money, bullion, jewellery or other valuable article or thing. If it so happens that building, place, vessel, vehicle or aircraft is within the territorial jurisdiction of another Chief Commissioner of Income-tax who has no jurisdiction over the person searched, the authorised official if believes that any delay in getting the authorisation may adversely affect the interest of the revenue, he can proceed to carry out the search action on such building, place, vessel, vehicle or aircraft.

49. The official authorised as above finds that it is not possible or practicable to take physical possession of any valuable article or thing and remove it a safe place because of its volume, weight or other physical characteristics or because it may be of dangerous nature, he may serve on the owner who is having possession or control thereof that he shall not remove it without the prior approval of such officer and such order shall have the effect of seizure of any books, documents, money, bullion, jewellery or other valuable article or thing.

50. A Chief Commissioner of Income-tax because of the information in his possession has reason to suspect that any books, documents, money, bullion, jewellery or other valuable article or thing for which the official has been authorised are kept in any building, place, vessel, vehicle or aircraft not mentioned in the authorisation, he can authorise such official to carry out all that he could do as brought out in (1) to (6) above in respect of such building, place, vessel, vehicle or aircraft.

51. The perusal of the above shows that search may be made in building, place, vessel, vehicle or aircraft that is within the jurisdiction of the official who has been provided with the power of search, search could be made in building, etc., that is not located within the jurisdiction of the official who has authorised the search and based on the information with the Chief Commissioner of Income-tax that books, etc., are kept in building, etc., he may authorise the search. This also shows that authorisation for search may cover areas that may or may not be within the jurisdiction of the authorising official and on the basis of information in the possession of Chief Commissioner of Income-tax, further authorisation may be called for and issued. Thus, the word 'authorisations' used in section 158BE of the Act clarifies the use of the word in plural, covering more than one authorisation.

52. Having examined the plurality of the authorisation and the circumstances that required the introduction of the word authorisations, we proceed to examine the term 'last of authorisations was executed'. We have to necessarily appreciate the intention of the law makers as to what they meant by execution of the last of the authorisations. This is necessary because, the time limit of one year for framing of the block period assessment starts from the end of the month in which execution of the last of the authorisation was effected.

53. Execution of authorisation of search means actual implementation of such authorisation, i.e., the officials authorised under the said authorisation act on it by entering the building where books of account, documents are kept and search, break open the lock of safe, etc., search it and seize such books, documents, money, bullion, and so on. Primarily, a search is conducted on a person because, a person is suspected to have stacked money, bullion, jewellery, valuable article or thing and his books of account or documents from which the true income could be determined because, the income as shown by him is not correct. This being the intention, the party authorised to carry out the search has to ensure that their search reveals all of the above or any of the above. To achieve this objective of search, it is necessary that the search is carried out at one stretch and completed. Because the volume of the items searched is so large compared to the number of officials deputed, it may not be practicable to complete the search in one day and therefore, the officials temporarily stop the search by sealing the premises searched with their lock and seal. The search is started immediately in the following day and completed with the seizure of items that is carried by the party carrying out the search. When the party conducting the search leave the premises searched carrying seized items, it means that other items noted during the search but left behind in the premises are not seized material.

54. The question 'what is the life of the authorisation ?', is of importance. Authorisation may be prepared but it was decided not to act on it, in which case, it had died a natural death. Authorisation issued for a specific person and the officials act on it and perform what all they could do under section 132 of the Act including seizure of books, etc., the purpose of the authorisation is served. Therefore, it could be concluded that the life of the authorisation starts with its issue and ends with its implementation or action by the officials resulting in seizure of books, documents, money and so on. As had been observed earlier, the purpose of search is to locate the undisclosed income with power to seize books, documents, money, bullion, etc., that represent wholly or partly the undisclosed income, it has to be concluded that the search is complete with the seizure of the items for which the officials are on the look out.

55. If the officials are not satisfied with the search and feel that some more items exist that was not found at the time of search, in order to convert their feeling of existence of more items that cover more undisclosed income, the officials necessarily have to comply with the procedure listed in sections 132(1) and 132(1A) of the Act.

Because, every search operation has to be preceded by a reason to believe that the books, documents would not be produced, the person is in possession of money, bullion, etc., that represents partly or wholly income or property which has not been or would not have been disclosed, to re-commence any search on already searched premises, except of course when the search is continued after the premises is locked and sealed, it is necessary for fresh authorisation.

56. The counsel for the revenue that once the search had started and the officials authorised for search seize some items and after a gap of few days re-enter the premises and carry on the search, and repeat this after gaps and finally decide that no more search is called for, it is at that point that the search is completed. This to our view is a wrong appreciation of the provisions contained in section 132(1) of the Act because, if the officials found some items on search and had seized them and had left the premises, they had exhausted the power under the authorisation to carry out the search. This is obvious because, the search was based on an information on which a belief was formed that a person is in possession of books, etc., that show income or property that is not disclosed or that would not be disclosed and acting on this belief, the authorisation is issued that is followed by action taken by searching the premises and seizing items. It is quite possible that at the time of formation of belief, the officials may not have a clear picture about the form in which the undisclosed income may be found but merely because, the seized items is not found matching expected or anticipated quantum of undisclosed income that was believed to be existing, it cannot be taken to mean that the search is still continuing and it will end only when the person matches the expectations of the officials who initiated the search. This would lead to a situation that once a person is searched, his premises is continuously open for the officers to search despite the fact that the search party is unable to find item that represents undisclosed income.

In order to make sure that the authorised officials who are empowered to initiate a search and the officials authorised to search strictly conform to the purpose for which search is permitted under the Act, the preamble provisions, namely, information on which a belief was formed that a person is in possession of books, etc., that show income or property that is not disclosed or that would not be disclosed, has been enacted. The explanation that is added to sub-section (3) of section 132 of the Act is clear to the effect that order restraining the person on whom such an order is served in removing, parting, or otherwise deal with it does not amount to seizure. This further goes to show that as soon as the search party seizes some items and serves with the restraining order and leaves the premises, the search operation has ended. We are therefore of the opinion that the search comes to an end when the search party leaves the premises after carrying with them the seized material. We are further of the opinion that as soon as the search party leaves the premises carrying with them the seized material, the authorisation for search is fully implemented upon and execution is complete.

57. In the instant case, the search party had carried out the search on 30-3-1996 and had seized certain items and before leaving the premises had served the restraining order on files and computer. The restraining order so issued does not amount seizure is clear because of the explanation to section 132(3) of the Act. Therefore, on 30-3-1996 when the search party left the premises of the assessee, it has to be concluded that they had seized only those items that they had considered as related to the undisclosed income of the assessee and the other items it had seen including files and computer, that it had left behind are not related to any undisclosed income of the assessee.

Having come to this conclusion on 30-3-1996, in order to search the premises on 8-4-1996, in accordance with the provisions of section 132(1) of the Act, the authority to initiate the search must have formed a belief that some income remains undisclosed that is represented by books of account, money, bullion, etc., and issue an authorisation for search. This was not done. Further, the officials who visited the premises on various dates after gaps and after their repeated action of lifting and re-imposing of the restraining order did not feel any necessity for seizing of any files except on 21-5-1996. It is therefore clear that the officials when they visited on 8-4-1996, 12-4-1996, till 21-5-1996 were carrying out examination of the records that remained at the premises all the time. There was no apprehension in the mind of the official who was to initiate the search that such documents would not be produced because, it was already covered by the restraining order issued on 30-3-1996 and therefore, he could not have authorised the search at all. When the official authorised to initiate could do so under the provisions of section 132(1) of the Act, he could not have granted the power to search because, he did not acquire that power. When the official who is to initiate the search does not get that power from the Act after 30-3-1996 because of the foregoing reasons, and consequently he could not have authorised the search after 30-3-1996, and therefore, from 8-4-1996 onwards the actions of the officials based on the authorisation dated 30-3-1996 that was executed on 30-3-1996, could not be equated as search under the Act. We are therefore of the opinion that in the instant case the last of the authorisations was executed on 30-3-1996 and the one year time limit for the framing of the block period assessment starts from the end of the month, i.e., 31-3-1996 and ends with 31-3-1997. Accordingly we are of the opinion that the block period assessment framed on 30-5-1997 is barred by limitation and is therefore, bad in the eye of law and we quash it.

58. Before parting on this issue we may deal with some of the decisions that were relied upon. In Allahabad High Court in Sriram Jaiswal's case (supra) had considered the provisions of sections 132(3) and 132(5) of the Act. In this case consequent to the search, the officer concerned passed a restraint order on stocks of articles available in the premises. After about 2 months, the concerned officer lifted the restraint order by visiting the premises and passed a fresh restraint order on the same day. The said lifting of restraint order and imposing the same was repeated once again in the months of April and June 1991, when the officer visited the premises. Towards the end of June 1991, the CIT passed an order granting extension of the restraint order till 30-9-1991. The said order of the CIT was challenged along with the very search that was conducted. The plea raised by the petitioners was that the search was not justified because the stocks were found at the premises along with the explanation of the source and the value. The High Court held that passing of the restraint order was invalid because it could not be said to practicable to effect the seizure of the stocks. They further held that restraint order could not be cancelled and renewed from time to time as was done in this case beyond 60 days.

They further held that for the extension of restraint order beyond 60 days, the approval of the CIT should have been obtained. They further held that considering that they were large items which the petitioner could not identify or correlate with the purchase vouchers may be a good reason for seizure but not a valid ground for exercising jurisdiction under section 132(3) of the Act. They concluded that action under section 132(3) of the Act could be resorted to only if there was any practical difficulty in seizing the item which was liable to be seized. Where there is no such practical difficulty, the officer is left with no other alternative but to seize the item if he was of the view that it represented undisclosed income. It was accordingly held that the officer who carried out the search at the first instance, finding that the assessee's were not in a position to give a valid explanation should have exercised the power of seizure. They further held that the power under section 132(3) of the Act could not be so exercised so as to circumvent the provisions of section 132(3) read with section 132(5) of the Act.

59. In the case of Delhi High Court in B. K. Nowlakha's case (supra), the officials had seized various materials like gold ornaments, cash, etc., and passed restraint orders for want of verification of stock of woollen yarn, carpets, etc. The Assessing Officer passed an order under section 132(5) of the Act and on finding that the total liability was far in excess of the seized material, he passed an order retaining the entire assets including the assets that were covered by the restraint order, namely stock of woollen yarn and carpets. The assessee had challenged the order of the AO so made under section 132(5) of the Act with reference to the retention order passed in respect of stock of woollen yarn, carpets, etc. On the above facts, the Hon'ble High Court considering the provisions of section 132(3) of the Act read with the Explanation that was inserted by Direct Tax Laws (Amendment) Act, 1987, which was effective from 1-4-1989, held that the restraint order passed under section 132(3) of the Act does not amount to seizure or attachment. They further held that attaching such assets covered by the restraint order after the passing of the order under section 132(5) of the Act does not arise. They further held that the condition that is preceding to make a seizure or to pass a restraint order is a discovery of undisclosed assets during the search. They further held that no restraint order could be passed when the officer is in doubt of the asset having been disclosed or undisclosed.

60. In the case of Madras High Court in I. Devarajan's case (supra), Their Lordships were concerned with the provisions of sections 132(3) and 132(5) of the Act. Their Lordships clearly observed that there was a specific time limit for framing of an order under section 132(5) of the Act. However, in section 132(3) of the Act, there is no such time limit indicated. Their Lordships observed that because there was no time limit indicated in section 132(3) of the Act, the department cannot utilise the said provision for indefinite attachment. They further held that the provisions of section 132(3) of the Act could not be utilised so as to circumvent the time limit specified in section 132(5) of the Act. Their Lordships further held that the apprehension of section 132(3) being misused could not justify imposing of the time limit as specified under section 132(5) into section 132(3) of the Act.

61. The above orders of the High Court lay down the proposition that the time limit for the framing of the order runs from the date of search done and the examination made by the officials with reference to the materials covered by the restraint order does not in any way lead to the conclusion that the search continued. It is also clear from these orders that the restraint order is passed when there is some practical difficulty to seize the items and not on items that are capable of being seized. After the insertion of the explanation effective from 1-4-1989, restraint order does not amount to seizure, and therefore, by passing the restraint order, the time available for framing of the order cannot be extended. Therefore, these decisions fortifies our conclusion reached earlier that the search comes to a close on 30-3-1996 when certain items were sized and with the passing of the restraint order on 30-3-1996. It also fortifies our conclusion that all actions of the officials from 8-4-1996 are not part of search proceedings and that the time limit of one year had started from 31-3-1996 and expired on 31-3-1997.

62. Mr. Venkatesan came heavily on the assessment framed with reference to the provisions of section 158BG of the Act. He submitted that this section provides that no order shall be passed by an AO without the previous approval of the Commissioner of Income-tax (CIT for short). He pleaded that the very manner in which the provision has been so inserted in the said section, need to be appreciated by considering the fact that from the order so framed only one appeal is provided that is directly to the Income-tax Appellate Tribunal (ITAT for short). He submitted that the provisions contained in Chapter XIVB of the Act are special provisions concerned with the search and seizure issues and this was why a separate assessment was provided for in regard to undisclosed income consequent to the search.

63. Mr. Venkatesan insisted that the assessment that is framed on undisclosed income is separate from the assessment of disclosed income as is made with reference to the other provisions of the Act. In regard to assessment of income not involving the search, appeal is provided to the first appellate authority, namely, the CIT(A) or the DCIT(A) as the case may be and there is a power of revising the order framed by the AO on satisfaction of the condition of the order being erroneous and prejudicial to the interests of revenue and the assessee also being allowed in filing a petition to the CIT for revising the order of assessment framed by the AO.64. The assessment of undisclosed income being a special provision, the above manner of appeals, revision, etc., are accordingly not applicable. He submitted that this has been specifically so made by the law-makers because the assessment has to be framed with the approval of the CIT. He submitted that the assessment having been so framed with the approval of the CIT and, therefore, not being an order which could be revised or the assessee moving a petition for revision against which only an appeal to the ITAT is provided is an indication that the assessment is being framed by the active participation of the CIT.65. Mr. Venkatesan submitted that the submissions in bringing out the nuances of the provisions of section 158BG of the Act is with reference to what is the rule of the term "no such order shall be passed without the previous approval of the Commissioner or Director". He submitted that is not an empty formality or a procedure to be adopted by the CIT needs to be examined. He pleaded that it is a procedure to be followed by the CIT and such procedure is a mandatory requirement of Chapter XIVB. To put it in other words, any order passed within the meaning of Chapter XIVB without the previous approval of the CIT is bad in law within the meaning of Chapter XIVB. He submitted that in such a light, it could not be said that the approval to be obtained from the CIT is a mere formality. He insisted that all mandatory procedures to be followed are attached with it certain powers, namely, granting of approval of the assessment to be framed. He submitted that such an event, prior to the grant of approval by going through the order framed by the AO, has a pre-condition attached to it. According to him, this pre-condition is to give the assessee an opportunity of being heard. He submitted that the provision contained in section 158BG of the Act does not contain similar words as were existing in section 144B of the Act, where it required the AO to pass a draft assessment order, forward the same to the assessee and the assessee is required to file his objections on the same and finally the Inspecting Assistant Commissioner had to grant a hearing to the assessee, after which he shall issue the necessary instructions to the AO based on which the assessment needs to be framed.

66. He submitted that though the above is not finding any place in section 158BG of the Act, to treat the approval to be granted by the CIT as an administrative Act, not calling for or including granting of any opportunity of hearing to the assessee would be going against the intentment of the law-makers. He submitted that the approval to be granted by the CIT could not be treated as an administrative approval because the assessee is about to be thrust with tax liability on certain items that are being treated as undisclosed income. He submitted that an approval granted by the CIT without granting hearing to the assessee is similar to a person being condemned without hearing him. Therefore, the principles of natural justice come into play in such circumstances and the CIT ought to grant a hearing to the assessee before he grants an approval. He submitted that in this case no such opportunity of hearing was allowed by the CIT. He also furnished a copy of the decision of the Chennai Bench of ITAT in Kirtilal Kalidas & Co.

v. Dy. CIT [IT Appeal Nos.'93 to 96 (Mad.) of 1997 dated 17-10-1997] where the identical issue of the power of CIT to grant approval of the block period assessment was considered and it was held that the CIT must give opportunity of hearing before granting his approval for the assessment. He submitted that his plea is strengthened by the above decision of the Tribunal.

67. Dr. Krishna was directed to file the background paper based on which the said Chapter XIVB of the Act came to be introduced in the statute book. He made necessary enquiries with the CBDT and submitted that these background materials having been placed before the Parliament are not permitted for production before any Court. He however, placed a clarification issued by the CBDT, dated 2-1-1996 in which it has been clearly stated that the CIT while granting the approval no formal hearing is necessary, except where the CIT has the intention of using any material against the assessee. It further states that wherever the assessee seeks opportunity of hearing by the CIT he may grant the same. He accordingly contended that the plea of the assessee that the grant of approval by the CIT is a procedure which is mandatory in nature, has an in-built provision of hearing to be granted by the CIT to the assessee.

68. Dr. R. B. Krishna, the counsel for the revenue admitted in the open court that the CIT did not hear the assessee before granting approval to the order proposed by the AO. Dr. Krishna then touched upon the power of the CIT as referred to in section 158BG of the Act. He submitted that all that the CIT is required to do is to grant approval to the assessment order framed by the AO. Section 158BC of the Act describes the procedure for making the block assessment. It clearly provides that the AO shall serve a notice on the assessee requiring it to furnish such information as called for. It is at this point of time that the Act has clearly spelt out about the opportunity to be allowed to the assessee. He submitted that the AO discusses the case with the assessee, confronts him with various information that is in his possession, confronts him with the books of account and other records seized and calls upon the assessee to furnish such information as is necessary. The AO, thereafter evaluates the same and if he feel that further clarification is necessary, he should give such further opportunity to the assessee. Once the AO had carried out the above, it is he, who has to pass the assessment order and the assessment proceedings comes to a close. All that section 158BG of the Act states is that no order of block assessment shall be passed without the previous approval of the CIT. He pleaded that after the AO concluded all the discussion that is necessary, it is only at the stage of issuing the order that the approval of the CIT is required which is merely an administrative sanction. He submitted that this is aptly clear from the decision of the Bombay High Court in Dinshaw Darabshaw Shroff v. CIT [1943] 11 ITR 172 and the Lahore High Court decision in Lachhman Das Mehr Chand v. ITAT [1944] 12 ITR 432. He filed copies of the orders of the Supreme Court in State Bank of Patiala v. S. K.SharmaState Bank of India v. S. S. Koshal [1994] 2 SCC 468 and Sultansingh v. State of Haryana [1996] 2 SCC 66 for the proposition that the Act does not contemplate any hearing to be granted by the CIT before granting of the approval to the assessment order framed by the AO.He drew our attention to the decision in Grindlays Bank Ltd. v. ITO [1980] 122 ITR 55/3 Taxman 38 (SC) and submitted that the said decision supports his point of view that all that the CIT could grant is approval, but the person to carry out the assessment remains the AO and it is he who has to grant the assessee an opportunity of hearing. For the same proposition, he placed reliance on the Supreme Court decision in Guduthur Bros. v. ITO [1960] 40 ITR 298, Karnataka High Court decision in G. R. Steel & Alloys (P.) Ltd. v. CIT [1985] 152 ITR 220/[1984] 17 Taxman 29 and Madhya Pradesh High Court decision in Prabhudayal Amichand v. CIT [1989] 180 ITR 84/44 Taxman 213. He also cited several other decisions, which according to him support the same view. He accordingly contended that at no stretch of imagination, it could be held that the CIT when he grants an approval without granting a hearing to the assessee, had infringed the principles of natural justice.

69. In order to appreciate the controversy as raised by the parties with reference to the provisions contained in section 158BG of the Act, we feel the necessity of reproducing the said section. This is reproduced below for facility.

"The order of assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner or an Assistant Director, as the case may be : Provided that no such order shall be passed without the previous approval of - (a) the Commissioner or Director, as the case may be, in respect of search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, after the 30th day of June, 1995 but before the 1st day of January, 1997." 70. The section clearly states that the order of assessment for the block period shall be passed by an AO and it further states that the said order shall be passed with the previous approval of Commissioner or Director. The case laws relied upon by the learned counsel for the Department which were with reference to the provisions of the Indian Income-tax Act, 1922, where similar provisions existed. The Courts clearly had held that the approval of a superior officer is mere administrative sanction and this was because, the officer who is provided with the power to administer the Act has to perform judicially as well and this he can do only when there is no interference even from his superiors. There are a few decisions that have clearly held that the advise of the superior in the manner of framing of an assessment is not binding and if the AO follows such an order, the order so passed would be vitiated because, he had not applied his mind to the facts of the case.

71. In the section 158BG of the Act, the authority to pass the order of block assessment is the AO and he had been directed by the provisions contained in section 158BC of the Act to allow opportunity to the assessee. Once this is availed of and the section 158BG of the Act only permits the CIT to grant approval to such an order passed by the AO so that the said order could be issued. In other words, CIT is merely introduced as an administrative head to monitor the progress of the assessment and has no role at all to play in the framing of it. The circular to which the learned counsel for the revenue relied upon in our opinion could not be held to have been after proper appreciation of the provisions of the said section. We are not in a position to appreciate the basis on which the Board chose to issue the circular especially when the section gives the authority to frame the assessment to AO and all that CIT could do is to grant approval so that the order could be issued. If as stated in the said circular the CIT could grant a hearing to the appellant because, he wants to use certain material against the assessee, in that event, the assessment that comes to be passed by AO and CIT which is in clear violation of the provision of section 158BG of the Act that allows the power of framing of the assessment only to AO and therefore, such an order is bad in law. We are of the opinion because CIT has not been authorised to make the block period assessment under the Act, he cannot give any direction to the AO of any sort our not provided with any power to modify or enhance or reduce the assessment.

72. We are conscious of the decision of Chennai Bench of the Tribunal and have given our very careful consideration. In the said decision the decisions of the Bombay High Court in Dinshaw Darabshaw Shroff's case (supra) and that of Lahore High Court in Lachhman Das Mehr Chand's case (supra) were not cited and hence could not be considered. In the case of Lachhman Das Mehr Chand (supra) the penalty order was issued after obtaining the approval of the Inspecting Assistant Commissioner. The assessee challenged the approval on the ground that no hearing was allowed to him in a writ petition. The court ruled that the approval that was required of the Inspecting Assistant Commissioner was because of the quantum involved and therefore, it being mere administrative approval, hearing is unnecessary. During the hearing the parties were asked to address the bench with regard to the provisions that existed for imposition of penalty that stated that no order imposing penalty shall be made by the AO if the amount of penalty exceeds Rs. 10,000 except with the previous approval of the Inspecting Assistant Commissioner because, there the identical term 'with the previous approval' was used. However, neither party came forward with any suitable reply. Section 274(2) of the Act required that no order imposing penalty in excess of Rs. 10,000 shall be passed by AO without obtaining the previous approval of the Deputy Commissioner. The said provision is similar that existed under the Indian Income-tax Act, 1922 with reference to which the Lahore High Court (supra) had held that it was administrative in nature.

73. The learned counsel for the department had referred to the decision of Madhya Pradesh High Court in Prabhudayal Ami Chand's case (supra).

In this case Their Lordships of Madhya Pradesh High Court considered the provisions of section 274(2) of the Act where similar provision of requirement of approval by a higher authority existed. In this case the AO had passed the order imposing the penalty without obtaining the approval of his superior authority and the assessee challenged the jurisdiction of the AO in imposing the penalty. The court ruled that passing of the penalty order without obtaining the approval of the higher authority concerned was a procedural irregularity not involving the question of jurisdiction and the same can be cured.

74. The question of vested right of the assessee on the procedural matter of granting of approval was examined in Addl. CWT v. Jamnalal Ramlal Kimtee [1983] 139 ITR 625/14 Taxman 359 by the Madhya Pradesh High Court and it was held that there could be no vested with reference to the procedural matter. The special leave petition against this decision has been refused which is reported in [1983] 140 ITR (St.) 1.

75. We may also observe that the law makers wherever there might the need of enforcing the principles of natural justice, they had specifically stated so in the body of the section like they did in section 107 of the Act that read, "except in cases where a decision is given by the Board under sub-section (4) of section 107A, order shall be made by the Income-tax Officer under section 104 unless the previous approval of the Inspecting Assistant Commissioner has been obtained, and the Inspecting Assistant Commissioner shall not give his approval to any order proposed to be made by the Income-tax Officer until he has given the company concerned an opportunity of being heard. Therefore, the law makers having intended that the CIT should grant only his approval without adding the words "Commissioner shall not give his approval to any order proposed to be made by the Assessing Officer until he has given the assessee concerned an opportunity of being heard", it is no open to any court to add non-existent words or even assume that by implication it existed. The Assessing Officer is to place the order proposed by him for the approval of CIT because the section directs him to do so and is a procedure that he has to follow before the issue of the said order. On such procedure, in the light of the Madhya Pradesh High Court ruling in Jamnalal Ramlal Kimtee's case (supra) had clearly held that there could be no vested right of the assessee.

76. In the light of the above additional material, and the legal authorities that were not considered by the Chennai Bench of the Tribunal, we are taking the view that the role of CIT under section 158BG of the Act is merely to grant approval to the order proposed by the Assessing Officer as a higher authority and he has no power under the statute to modify the said order in any form. In our opinion even the circular of the Board that stated that CIT may allow hearing if he proposes to use any material against the assessee is not in line with the provisions of section 158BG of the Act because, all that the section permits the CIT to do is to grant the approval to the order of Assessing Officer as it was placed before him and when the section nowhere grants him with any such power, the implementers of the Act cannot assume such power by any means including by issuing a circular.

77. On the merits of the case the rival submissions touched upon the various observations of Assessing Officer that indicated the transactions as sham, the violation of the principles of natural justice in as much as the Assessing Officer never allowed the cross-examination of the parties that gave adverse replies to the Assessing Officer, the aspect of oral evidence could take the place of written evidence when such evidence is on record and on the aspect that the claim of the assessee was depreciation allowance against its income and because, it is not income that is undisclosed, the invocation of the block period assessment for the only reason that the premises was searched was wrong. Mr. Venkatesan filed an affidavit stating that several oral requests were made to the Assessing Officer for calling the party so that the assessee could cross-examine them but, the Assessing Officer refused the same. Assessing Officer had filed a counter affidavit stating that he does not recollect any oral request from the assessee for calling the persons who had adversely stated and went on to rely on a Supreme Court decision that the burden entirely lies on the assessee when it is stalking a claim of deduction of depreciation to prove it by evidences.

78. Mr. Venkatesan referred to the order he took a strong objection to the observations made by the Assessing Officer in para 1 under the caption 'introduction' with reference to the statement of the Managing Director that the lease transactions having been entered without verifying the actual existence of the assets concerned he has come forward to disclaim the depreciation. He pleaded that Assessing Officer should have reproduced the statement and it would have shown that all that Managing Director stated was that on their own accord they did not physically verify the existence of the assets and in the event of the department being of the view that the assets do not exist and thereby the depreciation claim is not justified, then the assessee should have been treated as having been duped and the assessee should be allowed the loss of the asset in computing the income. He submitted that the claim of loss of asset was alternatively made if the department is taking the view that depreciation is not allowable because asset do not exist.

79. He drew our attention to the submission as was made before Assessing Officer dated 23-5-1997 which has been made part of the paper book that was filed along with the appeal itself. He contended that in this submission the facts concerning three parties, namely Blades India P. Ltd., Gas & Gas Enterprises and New Era Urban Amenities P. Ltd., have been stated to be treated differently from the remaining eight transactions. It was submitted that it was consequent to the search that was made on New Era Urban Amenities P. Ltd. and Blades India P.Ltd., on whom the department had carried out searches were unwilling to give confirmation in writing in regard to the transactions with the company and this was so made out of fear that it might expose them to huge tax liability. It was clearly stated that the assessee could not trace M/s. Gas & Gas Enterprises. It was with reference to the above facts that the assessee stated that it was prepared to forego the depreciation and pleaded that the assessee be allowed the loss incurred in the matter of acquiring the assets, which loss was suffered by the assessee on account of the fraud played by the three lessees. This offer was conditional, which condition was that in the event that the department comes to a conclusion that there is some undisclosed income on these transactions with these three parties. Mr. Venkatesan accordingly submitted that the Assessing Officer by quoting wrong submissions had given his assessment order a colour which on the face of it may be attractive but once the facts are evaluated the said assessment order would crumble.

80. Mr. Venkatesan then touched upon the principles of natural justice.

He submitted that the block assessment is a different course of action to be carried out in the case of search proceedings, but the principles of natural justice cannot be brushed aside. He pleaded that the Assessing Officer wherever he had noted that the submissions or statements recorded on parties were confronted to the assessee, it was mere confrontation of those statements or what was contained in those statements. At no point of time, the Assessing Officer allowed the assessee any opportunity of examining those parties. He submitted that in the assessment, whether it is the block assessment or the regular assessment that is framed by placing reliance on statements of certain persons, cannot be acted upon, unless the assessee is allowed an opportunity of examining the source of such information.

81. He pleaded that explaining the information confronted to the assessee at no point of time could bring in any satisfactory appreciation by the Assessing Officer. This is because the assessee is being pushed to prove the negative while the easier way is available, which is allowing the assessee to cross-examine the parties. He submitted that these parties had specifically stated that they had no dealings or they had dealings of a different understanding. Unless the assessee is in a position to put to them the various documents that had been executed by them and in a few cases it was a tripartite agreement, in such a direct allegation on the assessee, denying the transaction etc., the department has a heavy responsibility of confronting the assessee not only with the statements but by allowing the assessee to examine those persons. He pleaded that if it were a general statement by some of these parties without naming the assessee, then the situation would take a different colour because the onus would lie heavily on the department to bring in materials in support of the general statement without naming the assessee which was made by those parties. He pleaded that the assessee had at no point of time was provided with the information that was sought by the department from the various parties and likewise the replies. Though extracts of replies were provided, the parties not having been allowed to examine by the assessee, the assessee could do no better than to insist that the transactions are genuine because they are supported by confirmations and other evidences that go to show that the transactions are not make-believe story.

82. Mr. Venkatesan drew our attention to the proceedings before the Assessing Officer and submitted that it started sometime in April 1997 and it was concluded in the month of May 1997. Mr. Venkatesan submitted an Affidavit to the effect that the assessee had made oral requests on several occasions for giving it the opportunity of being heard by providing the various parties, and the various questionnaires sent to the parties, based on which the parties had given their replies. He submitted that the replies submitted by various parties and such other material collected by the department were all behind the back of the assessee. He submitted that in spite of such a request, the Assessing Officer never provided the same to the assessee.

He pleaded that the Special Bench of the Tribunal in Colonisers v.Asstt. CIT [1992] 41 ITD 57 (Hyd.), had categorically laid a proposition that where additions have been made by the Assessing Officer in violation of the principles of natural justice, the orders deserves to be set aside as void ab initio and cannot be restored to the Assessing Officer for being redone. He submitted on this basis in the instant case, the department using certain materials, namely, the statements no doubt were confronted on the assessee, but the parties but the parties who made those statements knowing fully well that their subsequent statement is in direct contradiction to their earlier statement, the assessee not being allowed an opportunity to examine them, is now thrust with a liability which in certain cases is clearly as case of those parties avoiding tax liabilities on themselves. In such a situation and facts, the present order in the light of the Special Bench decision, deserves to be set aside or quashed as void ab initio.

83. Dr. Krishna took a strong objection to the said affidavit and filed a reply from the Assessing Officer who had clearly stated that he does not recollect any oral request having been made by the assessee or the authorised representative for examination of any of the parties like Arrow Piston, Omega Steel Industries and Engineering Industrial Services. The Assessing Officer, further had stated in his reply that he derives support from the decisions of the Supreme Court to the effect that when an assessee claims an expenditure, the burden of proving the expenditure clearly lies on the assessee. He further states that he had made available to the assessee all the materials that were used by him when he framed the assessment order.

84. Mr. Venkatesan submitted that it is necessary to appreciate the background of the lease finance business. He contended that at one point of time, there was no finance facility available in the case of second-hand machinery. Industries were finding it difficult to survive with old machinery when they needed much more finance so as to give a gallop to their business. It is in this background that the lease finance came into being in the western countries and a new life was injected into the business. The companies which owned the assets, but needed finance came forward to sell their machinery to the assessee and in turn entered into a lease agreement with the assessee for some period. By this arrangement, the lessee was in a position to retain the asset, use it for its business and also find finance. The lessor, namely, the lessee company got an asset on which depreciation was entitled to it and in the shape of security of the asset, it was receiving the lease rentals which covered not only the depreciation but also the hire charge plus some income for letting out the asset on a long-term basis. He submitted that these are pure business transactions in the line of business and merely because the asset remains at one place and does not move about from the premises of its owner, it could not be given a colour of sham transaction.

85. He submitted that the lease finance could involve actual movement which would be mostly when the asset is a new asset that is being supplied by the supplier or could even happen in the case of an old machinery. He submitted that it would be wrong to come to the conclusion that in all cases of lease finance, there ought to be physical movement of items or assets. He submitted that in the case of movable property title gets transferred on the basis of constructive delivery, namely, delivery taken by the lessee on behalf of the lessor.

He submitted that in the case of immovable property delivery is by exchange of documents and by registration of documents. He accordingly insisted that the present case is not at all a case of false claim of depreciation since the claim is based on genuine transaction, where the parties for their own benefit are trying to give it a colour of sham, so as to escape the tax net of the department. He submitted that the assessee has its own method of ensuring the existence of the asset and it had carried out such exercise, in support of which the physical verification reports have also been made available.

86. Mr. Venkatesan submitted that it is necessary to appreciate between operating lease and a financial lease. He referred to the book on lease financing and hire purchase by IV Edition of 1996. He submitted that the present transactions are all financial lease. He submitted that the assessee enters into a financial agreement so as to fund the lessee so that he can acquire an asset which the assessee could earn lease income. The lessee identifies the supplier and produces the proforma invoice. The assessee on receipt of the above proceeds to approve the financing and in fact pays the supplier. He submitted that during the search that was conducted on the premises of the assessee, it is an accepted position by the appraisal reported himself that no valuable cash or jewellery was seized. The search party found the various files containing the lease agreements and other documents. The assessee has its own appraisers and based on such appraisal, the assessee had proceeded to provide the necessary fund. The assessee had made payment directly to the supplier and all such payments had been cleared through banking channels. However, as had been advocated by the standing counsel Dr. Krishna that there never existed any supplier, then, the person to be questioned would be the lessee. He pleaded that this could be appreciated from the fact that the assessee's business is to finance various lease arrangements and it is not the duty of the assessee to keep a track of every supplier, his capacity and the like. On identification of a supplier by the lessee all that the assessee is required to do is to satisfy itself about the genuineness of the transaction by the fact that the supplier was said to have paid the consideration directly and the said consideration was cleared through normal banking channels. He pleaded that much noise had been made by Dr. Krishna with regard to the assessee helping the lessee and the suppliers upon the bank accounts. He submitted that where the lessees have sold goods to the supplier and the supplier in turn sells it to the assessee, it would always involve payment by the supplier to the lessee and payment by the assessee to the supplier. In the cases mentioned above, there were transactions of sale by the lessee to the supplier and the assessee buying the same and giving it on lease to the lessee and in few cases, lessee was the owner of the property which it wanted the assessee to buy and lease it back to the lessees. He submitted that it is an admitted position by the department that there were brokers involved in the transaction. He submitted that, if as advocated by the department the assets did not exit and consequently the lease transactions were sham, then it is a case of fraud played by the lessees on the assessee. The assessee, therefore, cannot be held to have wrongly claimed the depreciation. He submitted that in this connection the assessee came forward to make a claim that if depreciation is not allowable, the assessee was no longer in a position to recover the finance from advance made by it for purchase of the asset. There being no security, based on which the recovery could be made, the assessee puts forth its claim of loss of finance as its business loss. He submitted that this claim has been misinterpreted by the Assessing Officer as an acceptance of a wrong claim of depreciation or a sham claim of depreciation.

87. He pleaded that the department is insisting on relying on oral statements of parties as against written agreements. He submitted that according to the basics of law of evidence, the written evidences would have mere evidentiary value then oral evidence unless the oral evidence is supported by evidence in some manner which could prove the written agreements as sham.

88. He submitted that it is not the case of the department that any of the lessees or the suppliers are related to the assessee. Rather, it is a finding of the department that in few cases, lessees themselves have created the suppliers in paper. In such a situation, Mr. Venkatesan pleaded that the assessee should not be blamed. He referred to the newspaper reporting about Mr. Tyagaraja Chettiar, who had been declared as an offender and the fraud committed by him. He submitted that Mr.

Tyagaraja Chettiar had not only played a fraud on the assessee, but on other financial institutions as well. He pleaded that the department is prepared to believe the submissions of those parties at the cost of the assessee literally arising that the assessee has got nothing to gain by claiming depreciation, because the assessee is providing the finance.

He submitted that the assessee had agreed to provide finance in most of these cases only with a view to enhance its business. He submitted with reference to the paper report about the lease rental claim being bogus and submitted that wherever they are really bogus, the department has a right to go into it. But when the other party to the lease transaction, with a view to avoid their own income-tax on sale of property or other asset to the assessee, puts forth the claim that the entire transaction is false, it is for the department to believe only their oral statements when there are written documents available, which just cannot be rejected as a fabrication. He pleaded that out of 9 suppliers, only 3 suppliers responded to the questionnaire of the department and out of 10 lessees, only 5 had responded. In both cases, the assessee though was provided with a reply and asked for its comment, the assessee was not permitted to cross-examine any of these parties. The statements recorded on various persons including Mr.

Tyagaraja Chettiar were never produced to the assessee during the course of assessment. The assessee was not even given an opportunity of cross-examining those parties.

89. He further submitted that the statement of the Managing Director of Brilliant Engineering Works was taken on 28-7-1997 is very much after the block assessment was made and, therefore, to his mind, he submitted that it has no relevance to the issue before us. He insisted vehemently that the assessee could only support its claim with reference to the document that it has entered into which are supported by the fact that the assessee had duly paid for the value of the assets and the same consideration was paid through proper banking channels. He submitted that it is not the case of the revenue that the cheque that was issued by the assessee had been transferred by the supplier to the lessee and to the assessee back. He submitted that the above manner in which the assessment was framed by the department is highly arbitrary. He again drew our attention to the decision of the Tribunal in Sunder Agencies case (supra) and submitted that items of disallowable nature or items of expenditure claimed, which are not allowable, could not be the subject-matter of block assessment and could not be treated as forming or falling within the term undisclosed income.

90. Mr. Venkatesan submitted that he had prepared a statement/chart for the convenience of the Bench, which gives the basis that was in the mind of the Assessing Officer with regard to each of the transaction.

He submitted that the confirmation was at the time when the lease was entered into or obtained from the various parties, namely the suppliers and the lessees. However, after the search was made on the assessee followed by searches on some of the parties, who were the parties with the assessee, some of them had turned half time only to escape the tax net of the department. Some of these parties had refused to furnish confirmation letters. Some of these parties have denied lease transactions. Some of these parties have stated that they intended to enter in to lease transaction, but it did not finally happen. In one case, namely Pentagon Innovative Systems, it stated that the plant and machinery that was purchased from the assessee, was in fact purchases made by the assessee from Liquid Engineers and that the sales were not shown in the turnover of the supplier. He submitted that there is constructive transfer and deliver of the asset, when the lessee acknowledges the receipt of the asset.

91. Mr. Venkatesan referred to the various statements recorded on certain persons and submitted that at most of the time, the department were making enquiries concerning the transactions of Karnataka State Financial Corporation and incidentally, the assessee's transaction with the assessee was queried. The reply of the various parties to these questions need to be appreciated in this light. He submitted that no doubt in few of the cases, the parties have directly stated that they had retained part of the commission and had given about 88 per cent of the invoice value to the assessee as lease rental with the clear understanding that the assessee had to make no other payment to the assessee concerning the lease. He pleaded that no doubt that the transactions of the assessee are large enough and incidentally it is claim depreciation at 100 per cent on the items because they are so permissible under the Rules. The department had chosen the easy path by placing reliance on the statements of those persons and allowed them to escape the tax net because they have an easy prey in the assessee. He submitted that all that the department had done is merely on suspicion and surmise and on a hurried conclusion by placing reliance on the statements of only a few of them. He submitted that it is not the case of the department that the assessee-company is engaged only in the business of providing lease finance. He pleaded that all that the department is trying to establish is that in all cases where depreciation at 100 per cent is allowable and so claimed by the assessee transactions are sham. He submitted that the department had not appreciated the nature of business of the assessee, namely, lease finance, which requires a lessee and the supplier and on the strength of the lessee and the assurance given by the lessee, and in fact on the identification of the lessee all that the lease finance company needs to do is to make the payment to the supplier and get the necessary documents establishing the existence, the installation, management and running of the asset by the lessee. In cases of lease and buy back, it is something which the lessee to get over certain financial concerns, as well as the items to the assessee and takes it back on lease, in which case there will be no case for any movement at all. The lessee could not have sold to the assessee if the asset did not exist and at this point of time that the department has enquired from the lessees that the assessee seemed to have claimed purchases from them, why is it that it had not disclosed the sale and the profit on the sale of asset.

The department did not do so but immediately jumped to the conclusion that the transactions of lease as shown by the assessee are sham transactions. He submitted that with a view to help the lessees and assist them in the finance dealings, the officer of the assessee may have to assist them in the opening of the account. When all the dealings of the bank are done at arms length and it is not the case of the department that all the accounts are operated by the assessee and it is in fact accepted by them that none of the accounts of the suppliers or the lessees are operated by the assessee. In such a situation, the conclusion of the department that the assessee had deliberately entered into sham transaction is clearly baseless.

92. Mr. Venkatesan then carried us through each of the transaction and submitted that all the evidences that are produced clearly show that the transactions are all genuine. He submitted that in the case of New Era Urban Amenities, the lessee and the supplier is one and the same, namely, Vijay Commercial House. Similarly, he drew our attention to each of the transactions with various parties and submitted that when the lessees are satisfied about the machines, the lessor is normally not bothered about the machines. The lessor comes into picture for financing and on the basis of the description provided by the lessee and the proforma invoice obtained from the supplier, all that the lessor needs to do is to make the payment, which it did. He submitted that New Era Urban Amenities, Gas & Gas Enterprises and Blades India P.Ltd., are all concerns of Tyagaraja Chettiar. He had been absconding and has not been traced as yet. He has cheated several people according to the newspaper report. At the point of time when the assessee had entered into transaction with him, he was a very high-flying businessman who would give few minutes of time for discussion either on the way to the airport or at the airport or from the airport when he was going elsewhere. The assessee invariably is blinded if the assessee has been taken for a ride by the charisma of Mr. Tyagaraja Chettiar with the hope that his association would bring about or widen the field of lease finance of the assessee. He submitted that it is very easy to say that the entire documentation of the assessee is false, but when such written documents are there, to prove that they are fabricated documents, the burden would clearly lie on the department. He submitted that the department is entitled to place its reliance on any evidence.

But before condemning the assessee based on the evidence collected, the assessee ought to have been given an opportunity. In the instant cases, in none of the cases, the department even though it was necessary to confront the assessee with the evidence accepting that it had indicated that some of the suppliers had not responded or some of them had denied the transaction and so on, had not done so. Those parties, who had denied the transaction at no point of time before the conclusion of the assessment were produced to the assessee at the office of the Assessing Officer so that the assessee could make its cross-examination with those parties. He pleaded that the assessee having been denied this opportunity and the assessee having been asked only to reply, in such a situation all that the assessee could do was to place reliance on its own documentation because it had no way to bring out anything more, unless the parties denying the transactions were allowed to be confronted with the assessee. He submitted that these transactions could be based on one lump sum payment or payments made on quarterly, half-yearly or yearly basis. Merely because the lessees had paid the assessee in lump sum and are not required to make any further payment, it does not lead to the conclusion that the transactions are sham. He submitted that finance is a very hot commodity and it has various burdens attached to it in the shape on interest, other charges etc., and at times, it demands high rates of interest and other expenses.

Considering the times of needs of such finance, if the parties to the agreement agreed to pay the amount in one lump sum, the assessee could not be stated to have entered into a sham transaction.

93. Mr. Venkatesan submitted that one of the items of undisclosed income is any income based on any entry in the books of account. He submitted that on 30-3-1996, the assessee had not passed any entry of depreciation. The entry for depreciation is passed much later than that date and perhaps as and when the accounts are finally prepared for being audited. He submitted that on this basis, the depreciation claimed by the assessee being the sole contention of the department as having been claimed without the existence of the assets and has been so claimed with a view to reduce its total income is baseless, because there was no entry on that date, but an entry that is made subsequent to that date. He pleaded that even on this basis, to bring the non-allowing of the depreciation within the ambit of the block assessment, by treating it as giving rise to undisclosed income on the basis of any entry in the books of account is clearly fallacious and deserves to be quashed.

94. He submitted that the department is harping only on depreciation.

He pleaded that whether the depreciation claimed is proper or otherwise is basically a subject-matter of section 32 of the Act. Section 32 of the Act lays down basically two criteria's. He submitted that the first criteria is the asset in question should be owned by the assessee followed by the criteria that it is used for the purposes of business.

In case where the department feels that the assessee had not acquired any asset, it is a case of non-satisfaction of the primary criteria and thereby the assessee loosing the claim of depreciation. He submitted that non-allowability of depreciation consequent to the conditions laid down in section 32 of the Act. Not being satisfied, is not a criteria and the law makers had excluded such items from being treated as undisclosed income. He submitted that no doubt the claim of depreciation reduces the income that is taxable, but merely because consequent to the non-allowing of the depreciation, the income returned is enhanced or assessment is concluded at a higher value, the difference between the depreciation claimed and allowed could at no stage or circumstance be treated as undisclosed income.

95. In support of this proposition, he relied on the decision of the Tribunal in Sunder Agencies case (supra). He submitted that in that case, block period assessment was resorted to for disallowing various expenses. The Tribunal accordingly considered the definition of undisclosed income and concluded that the non-allowability of certain expenses claimed by the assessee could be treated as undisclosed income for framing block period assessment.

96. He referred to the observations made by the Assessing Officer in the assessment order, with reference to each of the transactions and submitted that the Assessing Officer had concluded that the lease rental shown by the assessee is not its income because it is the money that was belonging to the assessee and advanced to the parties, which had come back to it in the shape of lease rental advance or deposit. He had accordingly concluded that transactions of lease and advances are sham because the returning of the money that was advanced by the assessee could not constitute income of the assessee. If that is to be treated so, then there is no undisclosed income at all because they themselves have set-off the lease rental shown by the assessee and depreciation claimed and are treating the difference of the amount of depreciation over and above the lease rental shown as undisclosed income. Therefore, it was a clear case of wrong application of the provisions of the block assessment and on this basis too, the assessment deserves to be quashed.

97. Dr. Krishna also placed on our records a letter from the Assessing Officer to the suppliers and to the lessees which war dated 30-4-1997 and had prepared a questionnaire which was uniform in all the cases. He conceded that the appellant was not provided with the questionnaire that was sent to the suppliers and lessees. He submitted that only three suppliers replied out of nine and five lessees replied out of ten. He submitted that statement of the Managing Director of one of the supplier, namely, Brilliant Engineering Works was recorded on 28-7-1997 was not available to the Assessing Officer when he framed the assessment. He however submitted that the statements of the Managing Director and Director of New Era Urban Amenities Ltd., one of the lessees recorded on 29-3-1996 and 17-4-1996, the statement of the Managing Director of Blades India P. Ltd. recorded on 11-4-1996 and 29-5-1996, the statement of the director of Omega Steel Industries was recorded on 23-4-1997 and 24-4-1997 and the statement of one of the employees of the assessee, Mr. V. K. Srinivas, as recorded on 19-4-1996 were available to Assessing Officer when he made the assessment and he placed on our record all the above statements including that of the Managing Director of Brilliant Engineering Works recorded on 28-7-1997.

98. Dr. Krishna, then touched upon the meaning of undisclosed income as indicated in section 158B(b) of the Act and submitted that this includes income which is not disclosed and what the assessee had done is it had claimed false depreciation with the sole intention that the income in its books of account is not disclosed fully. He accordingly supported the order of the Assessing Officer for making the assessment.

He further submitted that what the assessee had done in its books of account is to bring down its real income by making false entries in its books and claiming depreciation at 100 per cent on non-existent assets and non-existent transactions of lease. He submitted that the income that should have been disclosed in its return properly, was reduced by means of entries in the books of account stating them to be lease transactions and because all these entries of depreciation etc., the income had not been disclosed a its proper figure. He accordingly concluded that the assessment framed concerning the depreciation is clearly an undisclosed income and the assessment framed therein is proper.

99. Dr. Krishna submitted with reference to the petition for enhancement of the income assessable that the order of assessment does not bring out the various facts in the proper fashion. He submitted that the assessee had prepared or fabricated various documents to make it appear as a lease transaction. He pleaded that he is not in a position to show with evidence that are available on the records of the department which is sufficient evidence, both direct and circumstantial from which an adverse inference can be drawn against the assessee, because the assessee had in its exclusive possession certain materials which were all for cover up of the claim of false depreciation. He insisted that the assessee knew fully well that the depreciation which it was claiming was sham, which was exclusive to his knowledge and keeping and thus the department was able to establish by support of evidence that are both direct and circumstantial. He submitted that it was in this light that the Supreme Court in CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 had held that adverse inference could be drawn where the assessee had suppressed the information. On the power of enhancement and its scope, he placed reliance on the Supreme Court decision in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 and drew our attention to the observations as noted at page 449. He insisted that the Tribunal by having made the first appellate authority has an inbuilt power of revising the order of the Assessing Officer and such power of revision is not limited to the computation of income alone, but to every process that led to the ultimate computation or assessment. He contended that the Supreme Court in CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 is a direct authority for his proposition that it is for the assessee to establish that the facts as are available entitled the assessee to claim deduction of depreciation and when the assessee was not in a position to establish those facts, the assessee looses all rights of entitlement of deduction. He submitted that it is here that the power of enhancement comes into operation.

100. He further drew our attention to another Supreme Court decision in Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 for the proposition that where the assessee is not in a position to show the existence of the asset which is the primary condition for establishing the ownership of the asset followed by the assessee having owned by acquisition or otherwise, the entire claim of depreciation on such a non-existing asset is a sham claim and considering that the Tribunal has the power of enhancing the income. He pleaded that one another Supreme Court decision in Nund & Samont Co. (P.) Ltd v. CIT [1970] 78 ITR 268, for the proposition that where the assessee fails to produce evidence to establish existence of the asset and its ownership by the assessee, it is not the duty of the Assessing Officer to collect the evidence to support the claim of the assessee for depreciation and this is another instance by which the sham claim of depreciation should be considered for the purpose of enhancement of income. He pleaded that the enhancement which he is seeking is with reference to the undisclosed income considered by the Assessing Officer. He submitted that the Assessing Officer had adjusted the depreciation to the lease income taken by the assessee for the earlier year when he had made the remark clearly that it is the money of the assessee that had taken round and has come back to it in the shape of lease income. He submitted that because the assets were not owned and acquired and they in fact never existed, the assessee could not have acquired them and given it on lease. As a consequence, the lease income shown by the assessee is wrong and it is not an income at all. Because the asset did not exist the assessee is not entitled to depreciation at all.

101. He pleaded that one Mr. V. K. Srinivas, who was the Accountant and the Chief of the business development of the assessee was queried during the course of the search whose statement is placed on the file of statements at pages 20 to 26 and in this statement, the employee had categorically admitted that the various bank accounts were opened by his help by the various suppliers as well as the lessees, only for accommodating the movement of the cheques from the assessee to the supplier, from the supplier to the lessee and from the lessee to the assessee. In this movement what the assessee had received is about 88 per cent of the amount advanced. The various statements recorded of persons, namely the Managing Director of Brilliant Engineering Works, New Era Urban Amenities, Blades India Ltd. and Omega Steel Industries, all clearly go to show that these were all accommodation made to the assessee for which those persons had received some commission. In fact, the parties had categorically denied having had any kind of lease arrangement with the assessee and in a few of the cases, they have categorically stated that what was provided by them was only a proforma invoice, which was not at all acted upon. In the light of these facts, though the strict rules of Indian Evidence Act may not apply, the principles concerning evaluation of the evidence as stated in Sections 101 to 103 and 114 of the Indian Evidence Act squarely apply to the IT proceedings as well.

102. He submitted that the Assessing Officer did not limit himself to the various questions or statements of the various parties, but had done a good home work by approaching the banks for information whether Mr. V. K. Srinivas had helped in the opening of the accounts. He submitted that a sample of the same is placed at pages 18 to 20 of the paper book. He submitted that the copy of the bank account which is placed at page 20 shows the account to have a credit of Rs. 41.18 lakhs and debit on the same day of Rs. 34.25 lakhs which show that the credits on account of the cheques issued by the assessee and the debits on account of cheques issued to the assessee.

103. Dr. Krishna, at this point of time drew our attention to the 3 volumes of the paper book filed by the assessee containing various documents in respect of which all the above as were with the assessee.

He submitted that in this case, the lease rental is of Rs. 32 lakhs and the moment such lease rental is paid in full in one lump sum, the lessee has no further liability at all. The agreement clearly shows that the item in question results in 100 per cent depreciation. He submitted that this is one example which he wants to bring to the attention of the Bench which clearly shows that the transactions of lease are nothing but sham only with a view to claim depreciation at 100 per cent so as to bring down the real taxable income. He pleaded that it is not a case of there being difference in the rate of depreciation or depreciation not being admissible on account of some technicality, but a situation where the assessee had claimed sham depreciation only with a view to bring its true income on which it would have otherwise paid the tax. He submitted that the entire transaction is rather funny in the sense that the assessee had brought in a supplier and a lessee only as a front end and it is not the fund of the assessee that is shown to have moved from the supplier and the lessee and back. He submitted that is rather strange that the assessee would enter into such a transaction without even verifying the existence of the asset or the capacity of the supplier to meet the ends of the lessee. He submitted that a lessee may come forward for lease arrangement by identifying the supplier and invariably the assessee as a financier would verify the asset in question is in existence, because the assessee is a security against the amount to be paid to the supplier for and on behalf of the lessee. He submitted that the statements of the persons who had been examined during the course of the proceedings have all been uniform in their reply that there was no real movement of the goods and there was an offer in regard to the existence of the asset and all that the parties had done was prepared the bills and other documents for receipt of a commission. He submitted that such accommodations have been clearly been found to have been a make believe story because there existed no asset for being leased out.

104. He also pointed out that in some cases value of the asset is stated to be about Rs. 11 lakhs, but the lease transactions showed the same asset to be of the value of nearly 10 times. He submitted that in one case, one of the persons who is stated to be a supplier, stated that his activity had never been large enough to enter into a contract of Crore of rupees at any point of time. He submitted that all these factors go to show the falsity of the claim with a view to ensure that the true income is not disclosed. In other words, the undisclosed income is the income that is disclosed by the assessee because to that extent the assessee had claimed depreciation.

105. Dr. Krishna submitted that it is necessary for the court to appreciate that in all these cases, documents are perfectly prepared.

He pleaded that court must look into the nature of transaction and the manner in which the transaction had been effected. The lessee is only identified and in majority of the cases, the supplier is also another concern of the lessee. It is undisputed by the assessee that the money that was paid by the assessee to the supplier or to the supplier named by the lessee, had found its way through proper banking channels from the lessee. He submitted that the one time lump sum lease amount is received only in those cases where the assessee is claiming depreciation at 100 per cent. In cases where depreciation is admissible at rates lower than 100 per cent, invariably, the lease income is received on time basis.

106. He submitted that there are statements by the parties, to the effect that they had made only the accommodation, for which they received some commission. Therefore, the assessee had deliberately made these transactions to look like lease agreements so that it could claim 100 per cent depreciation. The assessee, to give it a little genuine look or appearance, had also included the income from lease by dividing the lease amount by the number of years. He submitted that the assessee at the cost of suffering commission payment of 12 per cent is in fact gaining about 88 per cent in the shape of depreciation and thus helps the assessee in bringing down its taxable income. He submitted that the undisclosed income is the income that would have otherwise been disclosed by the assessee.

107. He submitted that the reliance placed by the assessee about the newspaper report about Mr. Tyagaraja Chettiar having duped several persons and that he had not mentioned the name of the assessee is because he never took any finance from the assessee. Therefore, by calling another person to have duped does not in any way establish that the assessee's transactions are genuine.

108. It is an accepted position that in every case the assessee did not verify the existence of the asset. It is rather quite difficult to accept the proposition advanced by the counsel for the assessee that the assessee in the interest of advancing its business and with its eye on further business that might flow in that a leasing finance company agrees to advance or fund a business based on the personal charisma of its proprietor without carrying out any verification of any sort. It is equally difficult to accept the argument that the assessee was never aware of the fact that few of the lessees and the suppliers were one and the same and that the suppliers were incapable of business to the magnitude entered with them. It goes against all possible probabilities of the action of any prudent business man. This especially so when some of the parties are stated as located at different places like Madras, Mumbai and so on.

109. The facts of the case indicates that the transactions can be comfortably placed in compartments of like nature. First of them is where the supplier and the lessee are of the same group and both deny of having sold and taken on lease any asset to and from the assessee but accept the receipt of money and repayment out of such receipt to the extent of 85 per cent. In the case concerning Vijaya Commercial House as the supplier and New Era Urban Amenities as lessee, the transaction is on centering sheets. On a survey under section 133A of the Act on 29-3-1996 the Managing Director of New Era Urban Amenities Ltd. had accepted that he is the proprietor of Vijaya Commercial House and all he did was to provide proforma invoice to assessee and that the amount received from the assessee was a loan. The second case under this category falls Blades India Ltd. and Sonic Marketing involving flameless furnace. On a search at the premises of Blades India Ltd. on 11-4-1996 the Managing Director had accepted that the concern Sonic Marketing was his fictitious creation and that no furnace existed and that money was received by Sonic Marketing from which 85 per cent was returned to the assessee.

The second category is of the supplier and the lessee are not traceable and thus the transaction is not verifiable and in this category falls the supplier Venus Container Links and the lessee Gas & Gas Enterprises involving industrial gas cylinders. The assessee was also not able to trace them.

The third category is of the supplier Udayamala Fabs stating in its letter dated 15-5-1997 that it had not sold any Roller Hearth Furnace and that their business comprised of labour contract with BHEL with turnover of less than Rs. 10 lakhs. The lessee Lords Finance & Ind.

Ltd. in its letter dated 16-5-1997 had stated that there was a proposal for a contract of Rs. 70.67 lakhs but was not completed. It further stated that they had not been leased any machinery and that they had not effected any turnover with the said plant and machinery. It also stated that because there was no advance lease rental or deposit and the explaining the source thereof does not arise and that they have no account in their books of the assessee. It is with reference to this machinery that the assessee had placed reliance on the certificate of inspection by a firm of Chartered Accountants who had certified to the existence of the machinery at the premises of the lessee.

The next in the line is a category where the supplier Engineering & Industrial Services denied the transaction that involved two different lessees but one of them Omega Steel Ind. (P.) Ltd. stated to have entered into the transaction for the purpose of commission and the other lessee M/s. Aero Pistons (P.) Ltd. did accept the existence of the asset and explained that the deposit made with the assessee was generated out of sale proceeds of available assets. The supplier in its letter of 7-5-1997 had stated that some person by name Mr.

Balasubramanian is the proprietor of the said firm with which they have no connection. Omega Steel which was searched on 24-4-1997 in its letter of 15-5-1997 had stated that the transaction with the assessee was for commission purposes only. Aero Pistons in its letter of 17-5-1997 had stated "1 - the assets covered under the lease agreement details are available at our works in working condition; 2 - we are involved in the special processing for nitriding and solution and precipitation treatments of alloy steel components; 3 - the deposit made to them were generated out of the sale proceeds of then available assets with us; 4 - during 1995-96 we have not charged off any lease rentals. Hence no ledger account was maintained by us for M/s.

Kirloskar Investments & Finance Ltd.".

It is clear from the letter of Aero Pistons that they are in possession of Pit Type Furnace that is covered under the lease agreement and it is in working condition and they did make the deposit with the assessee.

What they deny is about charging off the lease in their books and the non-maintenance of the ledger account of the assessee.

The next category is of supplier Pentagon Innovative Systems for supply of different kinds of furnaces to the lessees Liquid Engineers. In this case the supplier stated that it purchased the items from the lessee and sold it to the assessee but this transaction was not shown in its books. It further stated that the money received from assessee was paid off to lessee and there was no movement of assets but it was transfer of title only. It further stated that though it was a tripartite contract, it should be treated as direct lease. Lessee in its letter dated 9-5-1997 agreed with the supplier about the sale made to the supplier and the supplier making the sale to the assessee and there was no movement of assets. It further stated its business as designing, commissioning and fabrication of petro-chemical equipment and mineral oil processing. It further stated that sale of assets of Rs. 81,69,700 and Rs. 1,39,40,500 was not included in its sale turnover in 1994-95 and 1995-96 because their auditor had opined that "as on date there is no real intention on the part of M/s. Kirloskar Investments & Finance Ltd. to deal in goods and the valuable consideration in full has not been made to flow against such transfer, the transfer is still in the status of gratuitous transfer for right to use. These lease transactions are in reality should be treated as loan transactions only". It accepted payment of Rs. 81,69,700 to Pentagon Innovative Systems from the assessee and the receipt of like amount from Pentagon Innovative Systems by it for the sale it had made earlier to the Pentagon Innovative Systems. It accepted that it had paid the assessee security deposit of Rs. 67 lakhs as agreed to in the lease agreement.

It also stated that it had charged off lease payment to its profit and loss account of Rs. 8,27,375 each for 1994-95 and 1996-97 respectively and other than this, there will not be any other ledger account of M/s.

Kirloskar Investments & Finance Ltd. in its books. In regard to the other transaction involving Rs. 1.39 crores it made similar submissions and stated that it had charged off to its profit and loss account for the two years 1994-95 and 1995-96 Rs. 14,28,901 and that other than the ledger accounts concerning payment of deposit there are no other ledger accounts of the assessee in its books.

From the above it is clear that the lessee had confirmed the lease transaction and the payment of advance deposit to the assessee and the charging of the annual lease in its profit and loss account in very clear terms. Pentagon Innovative Systems also had only confirmed the transaction though it had pleaded that it should be treated as direct lease. Therefore, to treat this transaction as sham is unwarranted.

The next transaction of supply of furnace involves the supplier M/s.

Civic Engg. & Contractors and the lessee Wave Current Thermal Proc.

(P.) Ltd. There was no response from the supplier but the lessee replied vide its letter of 17-5-1997. In its reply it stated that "1 - the assets covered under the lease agreement details are available at our works in working condition; 2 - we are the manufacturers of Piston Pins, Gudeon Pins and also are specialists in Heat Treatment services for all automobile vehicles; 3 - the deposit made to them were generated out of the sale proceeds of then available assets with us; 4 - during 1995-96 we have not charged off any lease rentals. Hence no ledger account was maintained by us for M/s. Kirloskar Investments & Finance Ltd.".

The next transaction involves centering sheets stated as supplied by Brilliant Traders and the lessee is Skyline Construction (P.) Ltd. and in this case, the premises of the supplier was surveyed on 2-4-1996 and the manager of the concern accepted the sale as recorded in its books and stated that there was no movement of the items and that entries in the books were made as directed by the lessee.

The last of the transaction involves furnace stated as supplied by Brilliant Engg. Works and the lessee as Elcto Electro Ferrites Ltd. and the letter sent to the supplier was returned unserved but the lessee had confirmed the transaction and that the assets covered by the lease agreement were in their possession and were under use.

From the above transactions it is the transactions involving the New Era Urban Amenities with Vijaya Commercial House and Blades India (P.) Ltd. with Sonic Marketing are the two transactions which are almost similar and that the supplier and the lessee belong to one group. In the case of the former the supplier denied the transaction, the latter however accepted the transaction as concerning commission only. The third Venus Container Links and Gas & Gas Enterprises were not traceable and hence the transaction is not confirmed or proved otherwise. In the fourth involving Udyamala Fabs and Lords Finance Ind.

Ltd., Udyamala Fabs denied the transaction stating that it does work for BHEL only and the lessee also denied the transaction but accepted that there was a proposal. In the fifth, the supplier Engg. & Ind.

Services was not traceable as claimed by the said concern that Balasubramanian had been using the name of his concern but he is not connected with it. Omega Steel said that search was made at its premises and it had disclosed 12 per cent commission of the invoice value of Rs. 73.43 lakhs as its profit. Aero Pistons confirmed the lease transactions. In the sixth transaction involving Pentagon Innovative Systems and Liquid Engineers for supply of furnaces both parties confirmed the transaction of sale and purchase and the lease deposit and the amount of lease charged off to the profit and loss account. The seventh transaction involving Civic Engg. & Contractors and Wave Current Thermal Proc. (P.) Ltd., the supplier was not traced but the lessee replied in the same manner as Aero Pistons did. The eighth transaction involving Brilliant Traders and Skyline Construction (P.) Ltd., the supplier Brilliant Traders confirmed that the transactions are reflected in its books and that such entries were made at the instance of the lessee. The ninth transaction involving Brilliant Engg. Works and Elcto Electro Ferrites for furnace lessee confirmed the lease and the existence of the assets in its premises.

From the above it is the transaction No. 1 involving New Era. Urban Amenities Ltd. and Vijaya Commercial House the transaction stands totally denied on which the assessee must show the genuineness of the transaction. In regard to the second transaction involving Blades India and Sonic Marketing, supplier was stated to be fictitious concern and the transaction was accepted as for commission only. This is contrary to the claim by the assessee and the assessee must show its genuineness. The third transaction the department was not able to get any adverse evidence and therefore, the department must prove it to be sham. The fourth, though the supplier Udayamala Fabs denies the sale, the lessee states that there was a proposal only and therefore, the assessee must show the transaction to be genuine. The fifth, one of the stated that consequent to the search it had disclosed commission at 12 per cent on the invoice value of Rs. 73.43 lakhs and this confirms that it did have the transaction with the assessee and Assessing Officer therefore must not choose one for the other but, confront both the parties to get to the true fact. The other lessee Aero Pistons had given full particulars of the transactions confirming the claim made by the assessee and therefore, the said transaction could not be termed as sham. The sixth, involving Pentagon Innovative and Liquid Engineers confirm the transactions with the assessee and therefore, it could not be held as sham. The seventh stands on the same footing as in fifth of Aero Pistons and hence the assessee had shown it to be genuine. The eighth the supplier confirms the transaction as existing in its books but states that it was so made at the instance of the lessee. In this case, the parties must be confronted with the assessee and the true picture must be carved out by the Assessing Officer. In the ninth and the last transaction the lessee has confirmed the transaction and to the existence of the asset and therefore, it could not be held as sham.

The provision of the copy of the statement or letters in our opinion is not sufficient opportunity when it is seen in the light of the assessment proceedings as shown in the order sheets. The dates on which hearing was allowed to the assessee are 9-12-1996, 17-4-1997, 20-5-1997, 26-5-1997 and on 30-3-1997, it is stated that assessment completed. On 17-4-1997 it is stated that the case is adjourned to 23-4-1997 but it appears there was no hearing on that place because, there is no such indication on the order sheet. Five of the statements are recorded between March and April '96 but these it appears were not provided to the assessee almost till the stage when the Assessing Officer was about to start framing of the assessment order. All letters to suppliers and the lessees are dated 30-4-1997 and the three suppliers and five lessees replied by about the middle of May '97 and this hardly gave the assessee less than fifteen days to file its reply.

The questionnaire that was forwarded to the suppliers and the lessees was not furnished to the assessee so that the assessee could appreciate the replies by the parties for furnishing its reply. Further the Assessing Officer wherever the reply of the lessee was not the one that was expected by him he had noted that the party had given evasive reply. The reply from Omega Steel (P.) Ltd. dated 15-5-1997 where it had stated that there was a search in its premises and it had disclosed 12 per cent commission on Rs. 73.43 lakhs as is income is an indication of acceptance of the transaction but for the purpose of commission which income it might not have disclosed but for the search made on it.

Merely because the said party had stated the transaction was one for commission, the Assessing Officer should not have proceeded to hold the assessee as intending to reduce its tax liabilities but called that party for examination by the assessee because the very same party had signed the lease agreement and such signing is not out of any coercion.

The department was not able to trace the supplier Venus Container Links and the lessee Gas & Gas Enterprises and its drawing of adverse inference is not proper and therefore, it must establish it to be sham by making further inquiries and by asking the assessee to assist it to trace the parties. If the assessee states that it has no further trace of the lessee, the department could use it to draw adverse inference.

In view of the above observations we are of the opinion that the department had hastily concluded that the assessee had claimed depreciation on non-existing assets with a view to reduce its taxable income and that in order to come to this conclusion department must carry out some more inquiry and permit further opportunity to prove it otherwise. Oral evidence of persons concerned with the transaction are important piece of evidence and before it could replace the written evidence, the party against whom such oral evidence is being used must be allowed the opportunity of examining the person because, both the types of evidences need to weighed properly before rejecting one for the other. As stated by the assessee if the person gives a statement so as to escape from the tax net, department should not fall into the trap because it strongly feels the assessee has committed a fraud. We are, accordingly, setting aside the assessment.

On the question of additional ground of the revenue that the Tribunal should enhance the assessment we may observe that the assessing authority is the Assessing Officer and even the CIT has no power of enhancement or any type of modification and the Tribunal though is acting as the first appellate authority but under section 254 of the Act where there are no words similar to the ones available under section 251 of the Act. Therefore, this ground is rejected. The additional ground of the assessee is also rejected because the assessment is set aside.