The assessee and the department have filed their appeals aggrieved by the order dated 29-2-2000, of the Commissioner (Appeals), Coimbatore (Commissioner (Appeals) [hereinafter referred to as Commissioner (Appeals). The appellant is agitated over the confirmation of the order of assessment to the extent of treating Rs. 2.56 crores as undisclosed income and in not allowing of the claim of bad debts to the tune of Rs. 29,10,778 in the computation to undisclosed income within the meaning of section 158BC of the Income Tax Act, 1961 (hereinafter referred to as the Act). The grievance of the department is on the deletion of Rs. 21.70 lakhs from the undisclosed income. Considering the fact both the appeals are instituted from the same order of Commissioner (Appeals), for the same block period and there is a common issue relating to the undisclosed income, the appeals have been grouped and are disposed of by means of this common order.
The appellant at the start of the hearing placed a prayer for adjournment of the appeals on the ground that some more information is being gathered, details of stock particulars and sales effected in Erode Shandy could not be produced earlier and given the time the assessee would be able to furnish particulars of stock, actual sales.
This request was rejected because the appeal had come up for hearing consequent to the order on stay petition for stay of tax demanded and the appellant had been allowed a time of over three months to prepare its case.
The Senior Departmental Representative, Mr. Ravi, at the commencement of the proceeding of the appeals filed a letter from the Dy. CIT, Central Circle II, Coimbatore (hereinafter referred to as (Dy. CIT) that is dated 15-2-2001 which contained 4 prayer for withdrawal of the appeal filed by the department on the issue, of deletion of undisclosed income of Rs. 21.70 lakhs.. The prayer was granted and accordingly the said appeal filed by the department is treated as dismissed.
The appellant had filed a paper book of 114 pages and the few initial pages giving chronological events with brief description thereof. Mr.
Ravi for the department objected to the filing of pp. 57, 66 to 68 and 110 which are a certificate of the District Chamber of Commerce and Industry at Erode dated 17-11-1999 and a letter from the Central Warehousing Corporation dated 18-12-2000, addressed to Lakshmi Textiles. He objected to the placement of these papers in the paper book as documents filed before the authorities when it is not so.
The undisputed facts of the instant case stated briefly is that a search was carried out within the meaning of section 132 of the Act on 10-9-1997. On that day, certain items were seized and were so noted by the assessing officer in the block period order of assessment. The items seized as noted by assessing officer in his assessment order are listed below.
(i) Cash : Rs. 1,87,15,316 representing current account balances held with M/s Karur Vysya Bank Ltd., Tirupur, and Coimbatore, and deposits in City Union Bank Ltd., Chennai, in Mount Road and T. Nagar branches.
(ii) Share certificates in Ambika Cotton Mills, Mari Spinners Ltd., and the Dhar Textiles Mills Ltd. of the face value of Rs. 1, 13,53, 000.
assessing officer in the immediately following line to the above had observed, 'As a result of search, it has been found that the assessee had invested in the name of fictitious persons deposits to the tune of Rs. 2.83 crores'. Commissioner (Appeals) had noted in' his order in para 3. 'It further transpires that in the course of follow up investigation, it came to the notice of the department that the appellant had deposited Rs. 2,83,00,000 in fictitious names. In the return for block assessment, the assessee has, however, only Rs. , 36.
10 lakhs as his undisclosed income'.
The Asstt. Director of Investigation (hereinafter referred to as ADI) came across a fact of the opening of a letter of credit for import of machinery and called for the details from the manager of State Bank of India (hereinafter referred to as SBI). The manager of SBI gave information to the fact that the appellant had placed as security fixed deposits standing in the names of several persons for the opening of the letter of credit in 1996. The appellant was questioned about this feature on 23-10-1997 and the assessee accepted that the fixed deposits that were standing in the names of several persons were taken by him out of his funds and those were intended to be repaid to the persons from whom he had taken goods loan. The appellant also stated that he did not open the fixed deposits in the names of his loan creditors because they had taken bank finances. He stated that he had taken goods on loan from Mr. 'R. Ramamurthy, Mr. Thangavelu and others and these goods were sold by him Erode Shandy for cash and the cash was utilized in buying fixed deposits with banks in the names of several persons.
The submission of the assessee in this regard is as under : Assessing officer called upon the appellant to provide copies of sale bills showing dates of sale, the particulars of the parties to whom goods were sold and amount paid by each. Assessing officer had noted that ADI too had called for similar information and the appellant had made his submissions in his letter dated 27-11-1997. The submission was that the appellant and Mr. Ramamurthy wanted to modernize the textile industry and had carried out survey of the world market on textile machineries The machinery that suited was identified and it was decided to import it, The bank was approached for the finance and the bank wanted security for opening of letter of credit. Mr. Ramamurthy came forward to help the appellant by giving on loan, cloth which the appellant could sell, realise cash and, place the same as security with the bank.
Mr. Ramamurthy and the appellant were questioned on 23-10-1997, about the cloth loan and Mr. Ramamurthy had stated that he had loaned the appellant with cloth which the appellant took delivery from his premises between April and June, 1996. Appellant had stated that he had transported the cloth in his own transportation and on hired transportation. The goods so loaded into the trucks were directed towards Erode where there was a shandy at which trading of various items were carried out. The goods are stated to be. sold for cash by employing brokers but the brokers and the purchaser remained unidentified. The cash realisation was then placed in fixed deposits in the names of several persons by the appellant. The appellant had admitted that the deposits, 'though standing in the names of several persons, really belonged to him and he was to encash them to repay Mr.
Rarnamurthy and Mr. Thangavelu.
The appellant had filed an affidavit stating that Mr. Ramamurthy had advanced cloth loan to the assessee on the understanding that identical quantity of cloth would be given back in three months. The transaction with brother, Mr. Thangavelu, was also similar to that entered with Mr.
Ramamurthy. Both parties had confirmed that they did not insist for any security and had not made any record of the same in their books because they had finance arrangement with their respective bankers and that they had removed the goods from godowns without informing their bankers because the arrangement was one of hypothecation and bank placed reliance on the stock statement supplied by the parties.
ADI had in his quest carried out inquiries from the bank of Mr.
Ramamurthy and Mr. Thangavelu and all that he obtained was that the parties were enjoying certain limits and that he did not carry out any inspection or verification of the stocks lying in the godown of the parties. ADI had apparently noted from the statement of stocks sent by the parties to their bankers from April 1996 to June 1996, that the parties did not have sufficient stocks for giving to the appellant.
Assessing Officer too in the assessment order had brought out the table showing the information of the name of mills, type of cloth as under process or grey cloth, quantity on hand as at the end of March, April and May 1996 and the quantity given over to the assessee. Assessing officer observed that the available quantity was insufficient when compared to the quantity supplied to the assessee in the months of April to June 1996. Assessing officer further observed that though Mr.
Ramamurthy claimed that the cloth loan arrangement was for a short period of three months only, it had been over three years and the cloth loan still remained. assessing officer, considering the insufficiency of stock in the godown to be given to the appellant combined with the cloth loan remaining unsettled, and the appellant not providing information about brokers employed for cash sales at Erode Shandy and not identifying the buyers when all his regular sales are through identified brokers and customers, accordingly concluded that the appellant had not explained transaction satisfactorily.
The Commissioner (Appeals) in his appellate order in paras 7.8, 7.13 and 7.15 observed as under : "7.8 I have considered the submission. The only evidence in support of the alleged cloth loan is two uncorroborated statements from appellant and Shri Ramamurthy. It is said that the burden placed on the assessee was, therefore, fulfilled. Nothing could be more ludicrous. The assessing officer has pointed out the improbability of the so called loan. The appellant has ready explanation for everything done in violation of law, rules, and regulations except evidence. In the context of cash credits, unexplained investments, etc., it is well-known that any fantastic explanation given by the assessee need not be accepted by the assessing officer. The appellant's own submission will go to show that not an iota of evidence has been produced in support of the so-called loan.
7.13 The learned Authorised Representative has cited some case laws. It was stated that section 68 has no application since the amounts were found credited in the bank accounts. Reliance was placed on Smt.
Bhagwati Devi v. ITO (1993) 47 ITD 58 (Cal). These sections 68, 69, etc., represent the common rule of evidence. It is not in doubt that the assessee had made FD's in fictitious names. If the assessee is not able to explain the source, the addition made, if not under section 68, then as unexplained investment under section 69. In this case apart from the interested statements, no evidence has been produced in support of the explanation. It is totally unnatural that no evidence involving transaction of crores of rupees will not be kept. If such evidence is not produced, adverse inference can reasonably be drawn, 7.15 The bare facts are that the assessee had made fixed deposits in 86 Benami names aggregating to Rs. 2.83 crores. There is no dispute about that. As for the source, the appellant came up with the explanation that the same was out of sale proceeds of goods which were surreptitiously taken out from the godown of others and then sold immediately in Erode Shandy and then deposited in bank. No evidence has been produced. On the other hand, the assessing officer has brought out improvability of the explanation. In such circumstances, no fault can be found with the action of the assessing officer. The appeal on this ground is dismissed.
In para 8.2, Commissioner (Appeals) had dealt with the loan from Mr.
Thangavelu from which the deposit in the bank was stated to have been made of Rs. 2,56,30,000 and was of the view that his observations in paras 7 to 7. 15 applied with equal force and confirmed the addition.
The appellant troubled by the addition sustained by Commissioner (Appeals), has filed this appeal before the Tribunal. The. submission of the assessee regarding the taking of cloth loan, selling it for cash at Erode shandy and using the cash for taking fixed deposits in the names of several persons remained the same, i.e., the assessee in order to arrange for the security insisted by bank for opening of letter of credit for import of machinery. One of the documents that was objected to by the Senior Departmental Representative, Mr. Ravi, a letter from Central Warehousing Corporation, it was submitted has been placed only to highlight the fact of the intention to import machinery, which machinery after import could not be taken possession of because of finance and other factors.
It was submitted that the arrangement was to last for a short period of three months but it took longer and in the meanwhile the search proceedings also were made which upset the plan of the appellant. It was submitted that because the transaction was to last for three months and the parties did not want to involve their bankers expecting some more intervention it was not recorded in the books of any party. It was also submitted that, had the plan of assessee succeeded in three months, the parties would have been satisfied of their loan and the assessee also managing finance for the security for opening of letter of credit. It was further contended that the certificate from the Erode Chamber has been filed along with the paper cutting indicating of the huge market for cloth in Erode shandy only to emphasize the 'point that the transaction of cash sale as submitted was a genuine one. It was also contended that the fact that Mr. Ramamurthy had given in clear terms the quantity of cloth loaned to him but the department never felt it necessary to call for the books of Mr. Ramamurthy to check up about the stocks in his godown. It was also stated that the hypothecation limit with the bank is for a certain amount and the statement of stocks supplied to the bank was only to cover the loan but it was not a complete statement of stocks as was available to it in its godown. It was contended that the department had continued with its thinking that the stock statement as supplied to bank reflected complete stocks without inquiring from Mr. Ramamurthy and if only it had done so, it would have not made the assessment as had been made.
The decision of the Apex Court in CIT v. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC) was referred to and it was contended that merely because the assessing officer found the explanation offered by an appellant was not to his satisfaction, it does not lead to the conclusion that the assessee had not established about the transaction. It was also contended that the appellant had sold goods belonging to another for cash and the cash was then used for taking fixed deposits with the bank and that sale proceeds could never be considered for addition under section 68 of the Act. The appellant drew our attention to the various documents placed in the paper book to substantiate his case that the amount treated as undisclosed income was not justified.
Mr. Ravi took strong objections to the various arguments advanced by the appellant and contended that any evidence that the assessee was asked for, it was the submission that it is impossible to obtain and that his oral averments are supported by the. trade practice and hence, the addition should be deleted. He contended that the authorities had provided the assessee sufficient opportunity of hearing and for the production of the evidence and all that the assessee submits is an affidavit that is not verifiable. He echoed the views of the assessing officer and Commissioner (Appeals) that the assessee conveniently omits to file any evidence but insists that the addition could not be made by rejecting his pleas. He contended that the authorities have not merely rejected his explanations but found holes in it and held that the explanation offered was not a reliable one and therefore, had taken the adverse view. He pleaded that even before the Tribunal, the submissions and facts continue as it is and therefore; the assessee could not be said to have made any improvement to his case or raise doubt about the correctness of the approach made in the circumstances by the authorities and that the case deserves to be dismissed.
The hearing got concluded and the order that was reserved was being considered for finalization. At that point of time, it was felt that the plea of the appellant that, if he is allowed time, he may be able to place particulars of stock, evidence concerning the sale at shandy and accordingly, the party was directed to file such information with the Departmental Representative a week before the date indicated for continuing the hearing, making it clear that this direction should not, be taken to mean that the Tribunal had called for the details and the appellant may have to move an application for admission of additional evidence which application would be examined on its merits. The appellant complied with the direction of the Tribunal and filed a paper book.
At the commencement of the hearing as above, Mr. Ravi strongly objected to the proceedings. His objection was that the procedure followed by the Tribunal was not justified when at the start of the hearing the adjournment request was rejected and the case was argued at length and the Tribunal calling upon the assessee to file details as it feels, and considering the case on that basis' virtually is to allow a fresh hearing all over again. He further pointed out that in the paper book now filed by, the assessee, there is no new information and the assessee has once again placed the certificate of the Erode Chamber, the paper cuttings which were not filed before the authorities. He submitted that the appellant had sought, for admission, of additional evidence such as demurrage charges levied on Lakshmi Textile Mills, Ponni Mills filing its return of income on 29-11-1996, along with its computation of income, final accounts, statement showing turnover and value of closing stocks on hand at the close of the year for a few years. Because the appellant insisted that the department had not furnished the statement of Mr. Ramamurthy recorded on 23-10-1997, by ADI claiming that it is very important material that supports the case of the assessee, Mr. Ravi provided a copy of the same.
The counsel for the appellant drew our attention to the statement of Mr. Ramamurthy and submitted that Mr. Ramamurthy had confirmed having supplied to the appellant cloth measuring 12,78,900 meters between April and June, 1996, and the dates on which delivery was taken with description of goods and quantity was supplied under cover of letter dated 22-10-1997, addressed to ADI and that this was a solitary transaction. It also showed that Mr. Ramamurthy had confirmed that no invoice was raised, no delivery challan was raised except that the delivery is noted in a notebook acknowledged by the assessee personally. The statement also showed that Mr. Ramamurthy is, following up for the return of the cloth loan, security was not insisted upon for the cloth loan given by him and that his bankers had no knowledge about the cloth loan. The acknowledgements of taking delivery of cloth are placed at pp, 56 to 59 of the paper book.
The counsel made reference to the certificate issued by the auditor of Mr. Ramamurthy's mills, giving turnover figures and stock-on-hand figures and submitted that it showed clearly that Mr. Ramamurthy was a man of means with sufficient stocks to give to the assessee. He contended that if only the authorities had called upon Mr. Ramamurthy to submit his stock statements as per his books, the doubt that was lingering on the mind of the authorities would have got cleared and it would have been found that the cloth loan was given out of stocks on hand and that the statement of stocks given to bank was not a complete or a total list. He submitted that the practice followed by the mill owners in and around Erode and using the market for sale of goods for cash is substantiated. He contended that the facts as are -submitted in the case of Mr. Ramamurthy, similar and identical facts in the case of Mr. Thangavelu too.
He contended that the transactions of goods taken on loan, sale by cash at shandy were all intended and used for providing security demanded by the bank for opening of letter of credit and the imported machinery is lying to be cleared for which demurrage charges are paid. He once again brought our attention to the search carried out on 10-9-1997, and submitted that the cash of Rs. 1,20,000 was found along with some jewellery, some foreign currencies and no other incriminating document was found and seized. Because the assessee did some money-lending business which it had not disclosed earlier, it came forward with its offer of Rs. 1.24 crores comprising of money lending unaccounted income of Rs. 75 lakhs, construction of godowns and a hotel and investment in shares of Ambica Mills. The opening of the letter of credit was learnt by the ADI in October 1997 and from the submissions of the assessee about its source that it represents cash sale at shandy of cloth taken on loan from Mr. Ramamurthy and Mr. Thangavelu, the ADI examined Mr.
Ramamurthy on 23-10-1997 who corroborated the statement of the assessee.
The counsel further contended that it was only on 7-11-1997, that the ADI found some security deposits of Rs. 1.08 crores and Rs. 56.23 lakhs: and these were seized by him. It was on the follow up action of inquiry conducted that ADI landed on the information of fixed deposits taken of Rs. 2.83 crores with State Bank of India which deposits stood in the names of different persons. The inquiry was also conducted with reference to the call deposit for Brindavan Mills of Rs. 67 lakhs, fixed deposit of Brindavan Mills of Rs. 1 crore, fixed deposit of more than Rs. 1 crore with City Union Bank Ltd. Madras and another fixed deposit of Rs. 22.30 lakhs with City Union Bank Ltd. Tirupur. He contended that the fixed deposits of Rs. 2.83 crores admitted as made by the assessee out of cash sale of cloth received on loan was not part of the seized material and was not part of the search proceedings but arising out, of inquiries conducted following the search. He submitted that the addition sustained of Rs. 2.56 crores should be deleted.
Mr. Ravi, the Senior Departmental Representative, took serious objection to the submissions about non-informing to the bank about the removal of goods, the contradiction in the statements of Mr. Ramamurthy and non-recording of the cloth loan. He further contended that for an earlier year the assessee had made a voluntary disclosure of stocks of about Rs. 40 lakhs. He submitted that it is quite likely that the assessee still had suppressed stocks that he had sold for cash and had made the effort of roping in Mr. Ramamurthy to cover up the fact. He also pointed out that all regular transactions of the assessee are through the broker and even for the cash sales at shandy, broker was claimed as used but information in this regard was never placed. He insisted that the addition must be retained.
Rival contentions and the documents and case laws relied upon have been given our very careful consideration. In a commercial transaction, it is always presumed that the usual course of business is followed by the parties to the transaction. In the instant case the assessee who manufactures textiles employs brokers for its normal business of sale of textiles and these brokers are identified and payments of commission are also accepted. Even in the case of sale for cash at Erode shandy, the assessee did say that it employed the services of brokers but failed to put forth any evidence in that connection. The business is normally carried with the aid of banking channels but this is not so followed in the case of cash sale of Rs. 2.83 crores at Erode shandy.
Every other transaction is traceable but the transaction resulting in sale at Erode shandy is not verifiable. The only feature that the appellant is hanging on to is his claim of taking the goods on loan from Mr. Ramamurthy and Mr. Thangavelu together with the affirmation from those persons of giving the goods on loan. The entire events that followed the statements and affirmation by the two persons are not verifiable by any evidence. All that the assessee is relying on the certificate of the Chamber of Erode and the paper cutting mentioning about the big market at Erode shandy where transactions of crores of rupees take place. The assessee wants us to accept its oral submission of taking goods by himself in his own truck or hired truck for which evidence is not adduced at any point of time and moving it directly to shandy at Erode and selling it for cash and that cash is used for making of fixed deposit in the names of several persons. The assessee, further claims that the deposits so taken having been provided as security for opening of letter of credit, for import of machinery for which the assessee underwent all these troubles, which machinery is still to be cleared as iron-clad evidence of the events.
The inquiry started on the discovery of the letter of credit which led to the fixed deposits standing in the names of several persons but all of them were opened by the assessee is conceded by him. The sources of these deposits are stated to be cash realization of goods sold at Erode shandy and that the goods were taken on loan from the two parties mentioned earlier. As observed earlier other than the statement of the two parties affirming of having given the goods on loan for a short period of three months, the events that transpired from that point till it took the shape of fixed deposits is a mystery and this mystery is stated as goods moved by assessee to shandy and sold for cash and the existence of the market for textiles at the shandy. The certificate of the Chamber reads "To Whomsoever it may concern : This is to certify that Erode Town, head quarters for Erode District, is very famous for handloom and powerloom cloth and the cloth shandy at Erode is very big in India involving instant ready cash sales transactions in several crores, which are convened twice a week." The appellant has placed heavy reliance on this certificate and is insisting that this is sufficient evidence for its claim of sale of cloth taken on loan for cash. This certificate is a general statement of convening of cloth shandy at Erode and it does not travel beyond and it can never be treated as any piece of direct or even indirect evidence of sales claimed as made. In case the parties purchasing the cloth could be identified along with payment made by them in cash, the above certificate could perhaps be relied upon as a circumstantial piece of information. But in this case, the basic fact that remains to be established is the assessee possessing the goods, moving it to shandy and for this the only information is the affirmation of giving the goods on loan by the two parties, i.e., both parties saying that the assessee was given the cloth and he moved it from their godown.
Incidentally both parties also accept that they have not made any record of giving goods on loan to the appellant and appellant too accept that no record was made because he expected to return the goods in about three months, From the above events it appears that the appellant did not possess goods worth Rs. 2.83 crores. The appellant further claimed that the amount was kept in fixed deposit for opening of letter of credit. The assessee also claims that he intended to repay the exact quantity of cloth taken on loan in about three months. It is often stated in the financial circles about a term called teeming and lading. The teeming and lading is a process of taking a loan from one person and used for some purpose and loan taken from another is used to repay the first person and some of the frauds of this nature are found in banks. The adjustments are for a short duration so that it does not attract the attention of any one. The ploy of the assessee appears somewhat similar to the teeming and lading. He claimed he wanted money for opening of letter of credit and so invents the story of goods loan and unfortunately for the assessee, he was unable to find another person who would come to his rescue for repaying the two persons but got stuck with the fixed deposits used for letter of credit. The contention of the Senior Departmental Representative that in an earlier year the assessee had come forward with a disclosure of stocks of Rs. 40 lakhs and it is likely that the sources of the deposits may be the stocks that were not disclosed in the circumstances of the case appear to the logical conclusion.
The additional evidence of turnover and stock values to our mind in these circumstances do not make any dent to the already empty and weak claim. On the factual aspect of the addition, we are of the opinion that the assessee could not substantiate by any evidence at all and hence rejected.
There is one other dimension to the issue in the instant appeal and that is with reference to the sustainability of the addition as undisclosed income that did not arise directly as a result of the search. The sequence of events listed out by the appellant is that the search was made on 10-9-1997, and certain cash and jewellery were found and the items seized were bank accounts, namely, current account balances with banks, share certificates and some books. These seized items did not contain any reference to the letter of credit and the fixed deposits of Rs. 2.83 crores and the ADI who conducted the search had no idea about the existence of the fixed deposits when he concluded the search on 10-9-1997. The investigations were carried out following the search which led the ADI to the letter of credit opened and he inquired from the Bank Manager who informed him about the fixed deposits kept as security and that the fixed deposits though stood in the names of several persons were opened by the assessee. It was based on this realization that the ADI inquired the assessee on 23-10-1997, about the letter of credit, the sources of the fixed deposits to which the assessee had replied that the deposits were taken by utilizing the cash realization of sale of cloth at Erode shandy and the cloth was received as a loan from the two persons named earlier. On that very day ADI recorded the statements of Mr. Ramamurthy and Mr. Thangavelu and both affirmed having given the cloth on loan only. These facts remain undisputed by the department and this is evident from the observation of assessing officer and Commissioner (Appeals) in their respective orders and for the sake of facility these are brought out below.
(i) Cash: Rs. 1,87,15,316 representing current account balances held with M/s Karur Vysya Bank Ltd., Tirupur and Coimbatore and deposits in City Union Bank Ltd., Chennai in Mount Road and T' Nagar branches.
(ii) Share certificates in Ambika Cotton Mills, Mari Spinners Ltd. and The Dhar Textile Mills Ltd. of face value Rs. 1, 13,53,030.
As a result of search, it has been found out that the assessee had invested in the name of fictitious persons deposits to the tune of Rs. 2.83 crores.
"It further transpires that in the course of follow up investigation, it came to the notice of the department that the appellant had deposited Rs. 2,83,00,000 in fictitious names. In the return for block assessment, the assessee has, however, showed only Rs. 36. 10 lakhs as his undisclosed income." Chapter XIV-B of the Act has been enacted to speed up assessments on undisclosed income consequent to the search conducted and with reference to assets seized during search conducted within the meaning of section 132 of the Act. The background of the enactment indicated that the provisions that existed earlier of framing of summary assessments that required to be followed by regular assessments resulted in inordinate delay in the recovery of taxes that are due. In order to overcome this delay, the enactment was made whereby within a year from the end of the month in which the search was made, the assessments are now required to be made of the undisclosed income found as a result of search represented by seized assets. This is evident from the reading of section 158BC of the Act.
Section 158BA of the Act makes it clear that after 30-6-1995, when a search is initiated under section 132 of the Act, assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of this chapter. Section 158BB of the Act touches upon the computation of undisclosed income for the block period and for the sake of convenience the relevant sections are reproduced hereunder : "158BA. Assessment of undisclosed income as a result of search(1) Notwithstanding anything contained in any other provisions of this Act, where after the 30-6-1995, a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.
(2) The total undisclosed income relating to ihe block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.
(a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; (b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period; (c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period.
(3) Where the assessee proves -to the satisfaction of the assessing officer that any part of income referred to in sub-section (1) relates to an assessment year for which the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 for any previous year has not expired, and such income or the transactions relating -to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period." 158BB. Computation of undisclosed income of the block period (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block: period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the assessing officer, as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined,- (a) where assessments under section 143, or section 144 or section 147 have been concluded, on the basis of such assessments; (b) where returns of income have been filed under section 139 or section 147 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns; (c) where the due date for filing a return of income has expired but no return of income has been filed, as nil, (d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years; (e) where any order of settlement has been made under sub-section (4) of section 245D, on the basis of such order; (f) where an assessment of undisclosed income had been made earlier under clause (c) of section 158BC, on the basis of such assessment.
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32; (b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called to any partner not being a working partner: Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement; (c) assessment under section 143 includes determination of income under sub-section (1) or sub-section (1B) of section 143.
(2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and 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.
(3) The burden of proving to the satisfaction of the assessing officer that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee.
(4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under subsection (2) of section 32 shall not, be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessment".
"158BC. Procedure for block assessmentWhere any search has been conducted under section 132 or books of account, other documents. or assets are requisitioned under section 132A, in the case of any person, then,- (i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30-6-1995, but before the 1-1-1997, serve notice to such person requiring him to furnish within such time not being less than fifteen days;- 158BE. Time-limit for completion of block assessment (1) The order under section 158BC shall be passed, (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 30-6-1995, but before the 1-1-1997; (b) within two years 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 on or after the 1-1-1997.
(2) The period of limitation for completion of block assessment in the case of the other person referred to in section 158BD shall be- (a) one year from the end of the month in which the notice under this Chapter was served on such other person in respect of search initiated or books of account or other documents or, any assets requisitioned after the 30-6-1996, but before the 1-1-1997; and (b) two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search initiated or books of account or other documents or any assets are requisitioned on or after the 1-1-1997.
: In computing the period of limitation for the purposes of this section, the period- (i) during which the assessment proceeding is stayed by an order or injunction of any court, or (ii) commencing from the day on which the assessing officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub-section, shall be excluded.
For the removal of doubts, it is hereby declared that the authorisation referred to in sub-section (1) shall be deemed to have been executed,- (a) in the case of search, on the conclusion of search as recorded in the last panchnama. drawn in relation to any person in whose case the warrant of authorisation has been issued; (b) in the case of requisition under section 132A, on the actual receipt of the books of account or other documents or assets by the Authorised Officer." The reading of the above sections indicates the intention of the law-maker like, it starts with 'search is initiated under section 132 based on which assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of the said Chapter. It then describes the quantification of the undisclosed income of the block period as the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of Chapter IV and on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with assessing officer. It then describes the procedure to be followed by assessing officer before the framing of the assessment and it starts with where any search has been initiated under section 132, he shall serve a notice on such person requiring him to furnish within such time not less than fifteen days. It then dictates to assessing officer that he shall pass the order within one year from the end of the month in which the last of the authorizations for search was executed. The execution of the last of the authorizations is explained in Explanation 2 as to mean "in the case of search, on the conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued".
The undisclosed income of the block period has been defined as the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of Chapter IV and on the basis of evidence found as a result of search. It is, therefore apparent that any income that is found not disclosed and such finding is not based on evidence found as a result of search but by virtue of investigations and inquiries made following the search, could not be included as undisclosed income of the block period computed under Chapter IV.In the instant case from the extracts from the order of assessment and of the first appellate authority, it is clear that the revelation to the department about the letter of credit being opened on the strength of fixed deposits standing in the names of several persons was in the course of investigations that followed the search conducted earlier and the explanation offered by the assessee was found unsatisfactory. The search was made on 10-9-1997, and it was on 23-10-1997, that it confronted the assessee about the letter of credit and the fixed deposits and it is undisputed that these fixed deposits are not seized as is evident from the list of seizures provided by assessing officer in the initial paragraph of his order. But because it was so noticed not because of a search but because of investigations carried out after the search, though it is found as undisclosed income, it could not be included in the computation of undisclosed income under Chapter IV. The Delhi High Court in CIT v. Ravi Kant Jain (2001) 250 ITR 141 (Del) has clearly ruled that the computation of income for the block period should be based on the material seized and found during the course of search. Bombay High Court in CIT v. Vinod Danchand Ghodawat (2001) 247 ITR 448 (Bom), Rajasthan High Court in CIT v Rajendra Prasad Gupta (2001) 248 ITR 350 (Raj) and the Allahabad High Court in CIT v. Smt.
Usha Thpathi (2001) 249 ITR 4 (All) have all held similar views as the Delhi High Court (supra).
Tribunal is a creature of law and is required to apply the law as it stands at the relevant point of time with no power to add or delete any of the words in the provisions of the Act, and when it finds a certain action of the authorities not falling within the four corners of the provisions of the said chapter, it has the duty to state so. This is precisely the view of the Madras High Court in CIT v. Smt. S.Vijayalakshmi (2000) 242 ITR 46 (Mad) and the observations are "the Tribunal was not required to embark on an enquiry, which was outside the scope of the assessee's claim and the claim made by the assessee before the Income Tax Officer was that the capital gain was a long-term capital gain. The facts required for examining the claim were before the Tribunal. The absence of an appeal by the assessee against the order of the CIT, who had remanded the matter to the Income Tax Officer, did not in any way preclude the Tribunal from holding that the capital gain in the instant case was a long-term capital gain. The ends of justice justify the Tribunal to grant the relief to the assessee even in the absence of a specific appeal or cross-appeal, if the facts available on record permit the grant of such relief and such relief had in fact been sought by the assessee before the assessing authority".
In the light of the foregoing legal propositions and authorities of the various courts (supra) and the ruling of the jurisdictional High Court in Smt. S. Vijayalakshmi's case (supra), the Tribunal which is empowered to give a finding based on the facts of the case and in the face of the undisputed facts being the fixed deposits are not detected by search but by investigations following the search, in view of the clear demarcation of what could form part of undisclosed income under Chapter XIV-B of the Act, we have to hold that the amount of Rs. 2.56 crores could not be included in the undisclosed income of the block period and we hold accordingly.
The other issue raised is with reference to claim of bad debts of Rs. 29,10,778, which debts represents, normal dealings of the assessee, the income from which was included in the regular assessments. The Chapter XIVB is a special provision for assessments of undisclosed income found as a result of search only and as there is no scope for considering the terms that could be considered under regular assessments, the claim was rightly rejected by the authorities below and we uphold the same.
In the result the appeal by the assessee is allowed in part and that of the department is dismissed.