1. This appeal has been filed by the assessee on 28th Aug., 1997 against the order of the learned Dy. CIT, Special Range-34, Mumbai, in the case of the assessee under Section 158BC of the IT Act, 1961, for the block period from asst. yrs. 1987-88 to 1996-97 and for the incomplete asst. yr. 1997-98 from 1st April, 1996 to 18th July, 1996.
2. The facts of the case leading to this appeal, briefly, are that there was a search under Section 132 conducted at the premises of the assessee-company on 19th July, 1996. In the impugned order it is stated that this search was finally concluded on 22nd Sept., 1996. This search was a part of an all India investigation in respect of lease transactions entered into by a large number of assessees resulting into claim of 100 per cent depreciation allowance on leased assets. A notice under Section 158BC was issued on 22nd Oct., 1996. In response, the assessee-company filed on 21st Jan., 1997, the return of income under Section 158BC for the block period declaring 'nil' undisclosed income.
The AO, thereafter issued notices under Section 143(2) on various dates calling for detailed information on a number of points. During the course of proceedings under Section 158BC(b), the AO also referred to the material gathered by the Department as a result of searches and investigation otherwise from a large number of parties situated at various places. Thereafter, the AO passed on 31st July, 1997, an order under Section 158BC(c) of the Act. In this order, the AO did not compute any undisclosed income for asst. yrs. 1987-88 to 1993-94. For the remaining part of the block period, undisclosed income was determined on the ground that 14 lease transactions as detailed in para 4 of the impugned order alleged by the assessee were only on paper as a result of which the assessee had falsely claimed 100 per cent depreciation allowance and, accordingly, the amount of depreciation allowance claimed by the assessee in this manner represented the assessee's undisclosed income. The break-up of the undisclosed income determined by the learned AO for the block period is as under : Asst. yr.
Depreciation Interest Total (Rs.)No. disallowed (Rs.) disallowed (Rs.)4.
1997-98 -- 1,05,55,287 1,05,55,287 Total 39,13,18,659 3. As enumerated in para 4 of the impugned order, the assessee entered into 14 lease transactions during the block period or during the period relevant to asst. yrs. 1994-95 to 1997-98. According to the learned AO, the sole and primary motive behind these lease transactions was to avail the benefit of depreciation allowance at the rate of 100 per cent cost of assets. In order to avail such benefit, the assessee entered into fictitious transactions of purchase of assets which qualify for depreciation allowance at 100 per cent. Thereafter, the assessee entered into elaborate documentation which included suppliers' bills, lease agreement, board resolution, delivery documentation, installation certificates, no lien certificates, etc. After documentation formalities were over and executed, the final structure of the transaction was made in a circular manner. For claiming ownership the asset had to be purchased for which consideration had to be paid.
Therefore, first aspect of the final structure was payment of consideration. Since the transactions were. not intended to be genuine, the mechanism was to be brought in place to ensure that a substantial portion of purchase consideration was received back either by the assessee himself or an associate company belonging to the assessee's group. The payment of purchase consideration and recouping a substantial portion of the said consideration (around 85 per cent) was simultaneous. For this purpose after documentation formalities were over, the accounts were opened at the bank of the assessee in the name of both, the supplier of the assets as well as the lessee. After lease agreements, the assessee issued cheques favouring the supplier. The entire amount was transferred from the suppliers' accounts to the lessees' accounts on the same day. This was effected by issue of a cheque favouring the lessee by the supplier. The lessee in turn returned back the substantial portion of the purchase consideration which was about 85 per cent in most of the cases to the assessee and in some of the cases to a finance company belonging to the assessee group.
The amount refunded by the lessee to the assessee or the finance company was given the colour of security deposit, fn this manner, in a circular transaction the assessee got back substantial portion of the purchase consideration on the same date. The differential amount was in the nature of compensation which had to be paid for concluding the paper transaction to enable the assessee to avail the benefit of depreciation at the rate of 100 per cent of supposed cost of the assets.
4. In para 6 of the impugned order, the learned AO has enumerated, which according to him, are the salient features and important implications of the 14 lease transactions entered into by the assessee during the block period. We reproduce para 6 of the impugned order which reads as follows : (i) The purchase consideration paid to the supplier have all been transferred to the lessee company and the lessee in turn has paid back substantial part of it say about 85 per cent of it to the lessor in the form of security deposit. In effect lessor has not paid any purchase consideration to the supplier nor the supplier has received any sale consideration. There has been no sale and purchase at all.
(ii) In these cases where there is a direct sale and lease back transaction, the supplier-cum-lessee after receiving the sale consideration pays about 85 per cent of it to the lessor. In this structure the supplier-cum-lessee in effect gets only say about 15 per cent of the purchase consideration which is in the nature of commission or compensation for entering into accommodation transaction. It is ridiculous to believe that an asset can be parted with or ownership transferred for consideration or a price which is equivalent to 15 per cent of the cost of the assets. It never happens in normal commercial world. (iii) It is significant to note that sale consideration has not been received through the regular bank accounts of the suppliers. Instead separate bank accounts have been opened by both, suppliers and lessees in the same bank as that of the lessor to facilitate the process of refund of purchase consideration to the lessor/finance company in the garb of security deposit. In normal lease transaction it does not transpire that lessee and supplier open separate bank accounts for a sole and singular transaction in a place other than their normal place of business. In this case all the lessees and suppliers have opened their account at Allahabad Bank, Parel Branch or Allahabad Bank, IFB Branch, Mumbai, where the lessor is having its account.
(iv) In a real transaction it also does not transpire that the supplier refunds the entire purchase consideration to the lessor via lessee. Furthermore, a lessee who pays in advance the entire lease rentals of the lease period does not have any necessity to enter into any lease transaction at all.
(v) It is significant to note that bank accounts were opened by the supplier and the lessees at the place of business of lessor and they have been introduced by the lessor or the group companies belonging to the lessor with the sole purpose of closing the financial transaction on the very day on which the transactions have been entered into. Subsequent to the closure of these transactions, the bank accounts of the supplier/lessees have been closed or have become inoperative.
(vi) It is noteworthy that subsequent to such bank operations, the lessees have no necessity whatsoever to pay any lease rentals to the lessor during the entire period of lease and it is so reflected in their books. This can seldom happen in a genuine lease transaction.
(vii) Lease is a mode of finance. In a genuine lease transaction, the lessee pays a token deposit of 10-15 per cent of the cost of the assets to the lessor and during the period of lease pays periodic lease rentals. In the transactions entered into by the assessee-company and the lessees the difference of 15 per cent is only the cost of accommodation and it can by no stretch of imagination be called as a genuine lease transaction.
(viii) In the structure enumerated above, there is a transfer of fund from supplier's account to the lessee's account. In the normal lease transaction, it seldom occurs that supplier transfers the purchase consideration to the lessee. Can we say that the transaction is supported by genuine commercial transaction between supplier and lessee It is understandable when such transfer is validated by commercial transaction between these two parties and such transaction should have been genuine, effected and supported by evidences and documents in the regular course of business between the parties concerned. In the case under reference, there is total absence of any valid commercial transaction between the suppliers and the lessees.
(ix) It is noticed that almost all the lessee companies are in deep financial crisis. These companies are short of finance even to meet their day-to-day requirement, leave alone further funding of leased assets. Most of these companies are in fact financially and operationally sick. All the assets either exist only on paper or existed even before the commencement of the lease. In many cases, the assets have already been financed through bank/financial institutions. Therefore, the lessee has entered into lease agreement not for the purpose of financing any capital asset but to facilitate the bogus depreciation claim of the lessor for an agreed price ranging between 15 to 20 per cent of the supposed cost of the assets.
(x) The differential between the apparent cost of assets and the security deposit was appropriated not for the purpose of financing any asset. It was shared or utilized by different people for various purposes not connected with the financing the cost of any asset.
5. After recording the general observations in para 6, the learned AO has discussed at considerable length each of the 14 transactions and his findings thereupon. We are referring to such discussion in the impugned order in a condensed form in respect of each of the 14 transactions in the following paragraphs.
6. The asses see claimed to have entered into two lease agreements with this party, hereinafter referred to as BVPL. The assessee claimed that it purchased Veesons make steam boiler from M/s Thomson Heat Systems, Poonam Apartments, Chira Galli Lane, Hyderabad, for a sum of Rs. 90 lakhs. The assessee further claimed that it purchased 2100 high pressure seamless gas cylinders from M/s Applied Cryogenics Technological Services, A13/16, T.N.H.B., Baglur Road, Hosur, for a sum of Rs. 1,00,80,000. Thus, the total cost of assets leased to BVPL was claimed at Rs. 1,90,80,000. In support of these transactions, the assessee relied upon a number of documents such as copies of lease agreements; copies of supplier's invoices; copy of memorandum of understanding in the case of lease of steam boilers; installation certificates from lessees; copies of board resolution authorizing the lessees to enter into lease transactions; copies of chartered engineer's certificates/affidavits; particulars of relevant bank transactions, etc. According to the learned AO, the letters were sent by speed post to both the suppliers at the given address but they were returned unserved by the postal authorities. On a reference made to the Investigation Directorate at Hyderabad, it was ascertained that no firm in the name of M/s Thomson Heat Systems ever existed at the given address. It was also ascertained that no sales-tax return had been filed by the party. Similarly on a reference made to Investigation Wing at Bangalore, of the three addresses given in the documents it was found that Applied Cryogenics Technological Services (the supplier) never existed at the address of registered office. Another address referred to was situated at a housing colony called Thali Hudco where one Mr. Anand was residing and he told that there was one Mr.
Ramakrishna staying in the said premises till April, 1990. The said Mr.
Ramakrishna was involved in a lot of litigations and left Hosur in 1990. A search under Section 132 was carried out by the Investigation Directorate at Hyderabad in the case of M/s BVPL. The statement of Shri Suryanarayan, executive director of M/s BVPL, was recorded on 24th July, 1996 and he admitted that M/s Thomson Heat Systems was not in existence at all and that M/s BVPL had not taken any asset on lease from the assessee. He further submitted that the entire transaction was a mere paper transaction. On being confronted with these informations, the assessee supported its claim by various documents. The assessee further submitted that as per Clause 9(b) of the lease agreement, the sole function of the lessor was to purchase the equipment selected by the lessee from the supplier who had been designated by the lessee. As to the statement of Shri Suryanarayan, the assessee submitted that it was Mr. Suryanarayan who had confirmed the lease transaction as per his letter dt. 14th Aug., 1996 and, therefore, it was extremely difficult to understand the circumstances in which Shri Suryanarayan had denied the lease transaction in his statement recorded by the Investigation Directorate on 24th April, 1996. The learned AO held that there was no trace of M/s Thomson Heat Systems. There was also no material to support that the steam boiler was transported from the address of the supplier in Hyderabad to the site of the lessee at Adoni, Andhra Pradesh. There was no transit insurance of asset against the risk of damage or loss during transportation. Shri T.G. Suryanarayan in his statement before Investigation Directorate had admitted that M/s Thomson Heat Systems was not in existence and that BVPL had not taken any asset from the assessee-company. In his further statement recorded by ADI (Inv.) Hyderabad, on 20th Aug., 1996, Shri Suryanarayan maintained that this transaction had been done as BVPL was in deep financial crisis with a view to secure some benefit to the company. He also admitted that there was no board meeting on the dates mentioned in the documents and the board resolution was fabricated. Further in his statement, Shri Suryanarayan also stated that the company had purchased one Veeson make steam boiler from M/s Batliboi and Co., way back in 1991. The boiler formed part of block of assets of BVPL and BVPL had been claiming depreciation and continued to do so as a part of the block of assets. As to the reliance placed by the assessee on the affidavit of one Shri Chandrasekhar, chartered engineer, Shri Suryanarayan clarified that the photographs taken by him were of the boilers which continued to be owned and possessed by BVPL from 1991-92 and there was no question of purchase of any boiler from M/s Thomson Heat Systems which did not exist. The learned AO also examined the payment aspect and found that the amounts paid by the assessee by account payee cheques were not presented to the bank and on the reverse of the cheque the sum had been endorsed in favour of the assessee-company by way of security deposit. At the request of the assessee, an opportunity was given to the assessee to cross-examine Shri T.G. Suryanarayan, director of BVPL. In this cross-examination also, Shri Suryanarayan reiterated his stand that the assets stated to have been purchased from M/s Thomson Heat Systems never existed and they were not in possession of BVPL. The learned AO further held that there was nothing to support the hypothesis that the BVPL sold its steam boilers to M/s Thomson Heat Systems who in turn sold to the assessee-company and that the same was leased back to BVPL. On the basis of this reasoning, the learned AO held that there was mere transaction on paper and the documents were bereft of substance.
6.1 In respect of second transaction of 2100 high pressure seamless gas cylinders, the learned AO held that there again, the existence of the supplier at the given address was disapproved and the addresses were found to be fictitious. It was further found that the fictitious bills in. the name of Applied Cryogenics Technological Services (supplier) had not been used by the assessee-company alone and there were large number of cases wherein the letter-head of the firm had been used for raising bills. For example, in the case of Piramal group itself, its another company, viz., Roche Products Ltd. also claimed to have purchased the same number of cylinders for the value of Rs. 1,00,80,000 from this party by sale bill dt. 16th March, 1995. As to the reliance placed by the assessee on payment of account payee cheque, the learned AO found that the accounts of the supplier as well as the lessee had been opened on the same date, i.e., on 24th March, 1995 in Allahabad Bank, Parel, where the assessee was having its regular accounts. These accounts were introduced to the bank by Shri V.C. Vadodaria, the secretary of the assessee-company. The cheque favouring the assessee for Rs. 1,00,80,000 was deposited to the suppliers' account on 31st March, 1995, but on the same date the amount was transferred to lessee's account who in turn parted with 85 per cent of the consideration to a finance company belonging to the Piramal group. This circular transaction was enough to prove the fictitious nature of the lease transaction. The learned AO took note of the fact that the entire amount paid to the supplier was transferred to the lessee's account and it was done with a view to refund the amount paid back to the assessee-company or the finance company of the group to the extent of 85 per cent and the balance 15 per cent was used by the lessee company.
The learned AO also took note of the fact that it was not the case of the assessee that the assessee had himself carried out physical verification of the assets and instead reliance was merely placed on a certificate from a chartered engineer. As a matter of fact, the assessee never conducted the physical verification which is understandable because when the assets were not there, the need of physical verification did not arise.
7. The assessee claimed that it purchased 2100 high pressure seamless gas cylinders from M/s Sri Penta Engineering Corporation (hereinafter referred to as SPEC), having office at 1171, Thottipalayam, Pirivu, R.K. Pudur, Coimbatore, vide invoice No. 7115, dt. 25th Feb., 1995 and to have leased these cylinders to M/s Sri Ramakrishna Steels Industries Ltd. (hereinafter referred to as SRSIL) on 1st March, 1995. According to the learned AO, on a reference made to the DDIT (Inv.), Coimbatore, the said DDIT (Inv.) sent report vide his letter dt. 12th March, 1997.
As per this report, Shri S. Kanakaraj, proprietor of SPEC in his statement recorded under Section 131 on 7th Aug., 1996 admitted that SPEC was a fictitious concern and all the bill books, delivery challans, letter heads, etc. were printed and used for bill trading without there being any actual sale of assets. Similarly there was a search under Section 132 in the case of SRSIL and Shri V.Gopalkrishnan, director of SRSIL, in his statement categorically denied to have entered into any lease transaction with the assessee-company.
As SRSIL and its associate companies were having financial problems, in order to bring down the mounting pressure, the chief executive of these companies, viz., Mr. R. Guruswamy of SRSIL, Mr. S. Ramesh of SROL and Mr. P. Sriramulu of MOAL were authorised to do the needful. These executives entered into some agreements with various parties through which they derived income which were utilized by them for urgent financial problems. It was further stated that these executives gave their signatures on agreements, blank papers, and blank cheques only to accommodate the request made by the other parties who promised payment to them. During the course of proceedings under Section 158BC, the learned AO confronted the assessee-company with the findings of the Investigation Wing at Coimbatore. In his detailed reply, the assessee strongly relied upon the documents including board resolution, inspection certificate and no lien certificate of SRSIL and the certificate of chartered engineer, Shri P.G. Srinivas and so on.
According to the learned AO, on further enquiries it was noticed that there was a board meeting of the company as alleged but there was no resolution for taking any asset on lease from the assessee-company. All the assets of SRSIL had been hypothecated with IDBI and other financial institutions and, therefore, no lien certificate issued by SRSIL was not truthful. Shri R.G. Srinivas, the chartered engineer, had given the certificate of inspection without even visiting the factory premises or physically verifying the existence of the assets. In his statement, Shri Srinivas admitted that he had merely issued the certificate at the request of one Shri Gurudutt of M/s Chetan Financial Services. Shri S.Kanakaraj, proprietor of SPEC was a man of very ordinary means and worked as a part-time accountant in some company and had a monthly income of Rs. 3,000. In his statement recorded by ADI on 7th Aug., 1996 he stated that he was approached by SRSIL, MOAL and SROL to issue sale bills. In connection with the same he visited Bombay accompanied by the executives of the aforesaid companies. He signed bogus bills and also signed blank cheques. 90 per cent of the amount credited to his account was transferred to the lessee companies, i.e., SRSIL, MOAL and SROL. In his statement, he admitted to have done similar work for 17 other companies and confirmed that there could be some more transactions of similar nature. Shri S. Kanakaraj submitted that the lessee companies through their executives had informed them that they were having the assets in question and they would issue sale bills as if the assets were sold to him. But they never issued any sale bills as promised.
7.1 According to the learned AO, based on the information received from IT authorities in Coimbatore, Shri S. Kanakaraj had issued the bills worth Rs. 42 crores which was obviously beyond the means of a very ordinary person of monthly income of Rs. 3,000. Shri V. Gopalkrishnan, director of SRSIL reiterated his statement in his letter dt. 8th July, 1997, addressed to ADIT, Coimbatore. During the course of proceedings under Section 158BC, the assessee was confronted with this material.
The assessee was requested to depute a representative to be present for the purpose of joint inspection of leased assets on 14th July, 1997.
The assessee, however, sought some time to find a chartered engineer for the purpose. As the assessee had also requested for the cross-examination, the cross-examination of Shri V. Gopalkrishnan of SRSIL was posted on 24th July, 1997. In the meantime Shri V.Gopalkrishnan addressed a letter dt. 15th July, 1997 to the assessee-company and a copy to the AO in which the broad facts of the earlier statement were reiterated. According to the learned AO, the assessee was merely trying to base his case on documents and cheque payments. The documents had been declared to be bogus by the signatories and as to the cheque payments, the bulk of the money travelled back to the assessee in the form of security deposit. What was material and relevant was the fact that the assessee had not actually paid the entire consideration and had in a circular transaction received back 85 per cent of it. The payment made to the supplier and receipt of security deposit were not two separate and independent transactions because the same were carried out on a single day and the same money was utilized for the purpose of both the transactions. The cross-examination of Shri V. Gopalkrishnan, director, SRSIL, was taken by Shri V.P. Vashi, advocate, on behalf of the assessee on 25th July, 1997, at Coimbatore. In this cross-examination, Shri Gopalkrishnan contended that Mr. Guruswamy had misused the authorization given to him. Thus, Shri V. Gopalkrishnan reiterated his earlier statement. On the basis of this material, the learned AO held that these transactions were proved to be bogus. In spite of opportunity given, the assessee did not take part in the joint inspection of the assets on the pretext that no meaningful purpose would be served in carrying out joint inspection simultaneously with cross-examination. According to the learned AO, the assessee avoided joint inspection for obvious reasons.
8. The assessee claimed to have purchased waste heat recovery systems and water pollution control equipments from M/s Andhra Organics Corporation, 5-8-352, Chirag Ali Lane, Hyderabad, for a sum of Rs. 2,39,09,000 and to have leased the same to M/s Niraj Petro Chemicals Ltd., hereinafter called NPL, as per lease agreement dt. 21st March, 1995. According to the learned AO, on full enquiries carried out by his office jointly with Investigation Directorate, Hyderabad, it was ascertained that the supplier M/s Andhra Organics Corporation never existed at the given address. Shri G. Siva Prasad Reddy, managing director of NPL in his statement recorded by ADI (Inv.), Hyderabad, on 12th March, 1997 submitted that NPL did not enter into lease transaction with the assessee-company. During the course of proceedings under Section 158BC, the assessee was confronted with these findings.
The assessee relied upon the elaborate documentation which included inspection certificates, invoices, board resolution of lessees, no lien certificate and also on the payments having been made by account payee cheques. The assessee also relied upon the affidavit of one Mr. S.Chandrasekaran, chartered engineer. The learned AO found that NPL was an IDBI assisted company and IDBI was on the board of directors of the said company. IDBI as per its letter dt. 4th July, 1997 confirmed that there was no meeting of board of directors on 3rd Dec., 1993 which proved that the purported board resolution was fictitious. Similarly, NPL could not have given a no lien certificate without prior permission from IDBI. Therefore, no lien certificate was also incorrect. As to the invoices of M/s Andhra Organics Corporation, there were no further documents to prove the genuineness of the transactions. The supplier of the machinery was located at Hyderabad whereas the factory of the lessee was located at Visakhapatnam. The assessee could not furnish any document supporting the movement of goods. There were also no papers relating to transit insurance for safety and security of the assets during such transportation. As to the payments made by account payee cheques, the accounts in the name of M/s Andhra Organics Corporation and M/s NPL were opened in Allahabad Bank, Industrial Finance Branch, Mumbai, where the assessee was having its accounts. These accounts had been introduced by Shri V.C. Vadodaria, the secretary of the assessee-company. The entire payment made by the assessee by cheque to M/s Andhra Organics Corporation was transferred on the same date to the account of M/s NPL from which 85 per cent of the amount was paid back to the assessee-company. Thus, in a circular manner, the assessee got back its money allegedly employed for the purchase of assets. The learned AO also took note of the fact that various companies belonging to Piramal group had made huge purchases from the same M/s Andhra Organics Corporation. A large number of other parties also utilized the bills in the name of that party. However, there was no trace of Andhra Organics Corporation or its proprietors at the given address. As to the affidavit of Mr. S. Chandrasekaran, it was mentioned that he understood from one Shri Koteshwar Rao, works-in-charge of NPL that the said assets were owned by the assessee-company and leased out to NPL. The photocopies of photographs were attached along with the affidavit. In this connection, a questionnaire was issued to the assessee-company by the learned AO as well as to M/s NPL. In reply, M/s NPL stated that it had not entered into lease transaction with the assessee-company and as there was no lease transaction NPL was not in a position to given any information. On examination of Shri G. Siva Prasad Reddy, managing director of NPL, he was shown the photographs of the machinery taken by Shri Chandrasekaran. He submitted that the photographs were from the plant but he did not know who had taken them. During the course of proceedings under Section 158BC, the assessee-company requested for an opportunity to cross-examine the lessee company. This cross-examination took place on 21st July, 1997. In the cross-examination, the lessee reiterated its stand. Further on 19th March, 1997, M/s NPL addressed a letter to the assessee with copy to the AO in which NPL confirmed that it had not entered into any lease transaction with the assessee-company. The learned AO noted that the memorandum of understanding dt. 18th Sept., 1993 was being relied upon by the assessee-company. He further noted that as per MoU it was lessee who was required to place an order on the supplier company and the assessee-company was supposed to reimburse all such payments. This MoU was not relevant because in the present case the assessee had submitted that it had made payment directly to the supplier of the assets. The learned AO took note of the fact that in the books of NPL there was no transaction recorded to reflect the lease agreement. The lease rental had not been debited in the books and there was also no mention of the so-called security deposit to the assessee-company. With these findings, the learned AO held that the transaction claimed by the assessee was not genuine.
9. The assessee claimed to have purchased 161545 kg. of carbon di-oxide cylinders for Rs. 1,00,13,000 from DDK Industries having works at 61, GM Pallya, Behind BEML, Bangalore, and office at 49, II Cross, CGI Building, New Thipasandra, Bangalore, and to have leased the same to M/s Miga Gas (P) Ltd., hereinafter referred to as MGPL by lease agreement dt. 23rd March, 1994. According to the learned AO, a search under Section 132 of the IT Act was conducted in the case of MGPL at Bangalore on 6th March, 1996. During the course of this search, it was revealed that Shri Krishna Mohan, managing director of MGPL was also the proprietor of DDK Industries and that Shri Krishna Mohan had issued mere paper bills in the name of DDK Industries in favour of the assessee-company and several other parties. During the course of that search, a large number of letter heads and invoices were seized which included the letter head of DDK Industries also. In his statement recorded on 6th March, 1996, Shri Krishna Mohan admitted that M/s DDK Industries did not carry out any genuine sale. The cylinders were bought by MGPL, the same were shown as the cylinders sold to leasing companies. Shri Krishna Mohan was found to have raised bogus bills to the extent of Rs. 46 crores and that amount could be more because more information was forthcoming. During the course of search proceedings in the case of the assessee-company, this fact was brought to the notice of Mr. Mahesh Gupta, Chief Financial Officer on 20th July, 1996. Shri Gupta, however, stated that he would like to rely on the documents on record including certificates from the consulting engineer and Registered Valuer certifying the installation and use of cylinders by MGPL. According to the learned AO, since the cylinders were industrial cylinders any concern dealing with such cylinders was required to be registered under the Indian Explosives Act, but the assessee-company did not meet the requirement of Indian Explosives Act. Shri Mahesh Gupta, in fact, expressed his ignorance about the provisions of Explosives Act. The statement of Shri Ajay Piramal, the chairman of the assessee-company was also recorded on 20th July, 1996. He was informed that the entire transaction was mere paper transaction to which Shri Piramal replied that he heard that for the first time. He further stated that he was informed by Shri Mahesh Gupta that every leasing transaction was legal and was done with due diligence. He, therefore, continued to believe the same to be true. However, Shri Piramal agreed to have the transaction examined once again with expert opinion. Again, on 2nd Aug., 1996 further facts were brought to the notice of Shri Mahesh Gupta. The statement of Krishna Mohan was shown to him. In his reply, Shri Mahesh Gupta pointed out that as per the statement of Shri Krishna Mohan, the gas cylinders bought by MGPL were sold to DDK Industries who in turn sold the same to the assessee-company and the same were given on lease to MGPL. Thus, according to the statement, the cylinders were in existence with MGPL. The learned AO, however, noted that in the statement Shri Krishna Mohan had nowhere stated that cylinders had been sold first by MGPL to DDK Industries. On being asked to state as to whether the assessee-company had made any physical verification of the assets leased out to MGPL, Shri Gupta replied that the cylinders had been physically verified by the chartered engineers or the company's employees. The statement of Shri Nagabhushan, chartered engineer was recorded on 24th July, 1996 by ADI, Bangalore.
Shri Nagabhushan stated that he had not conducted any physical verification of the gas cylinders and signed on typed format given to him. Shri Mahesh Gupta was confronted with this statement also and Shri Gupta pointed out that the statement of Shri Nagabhushan related to some other transaction because invoice number and date was different and even the date of certificate was different. Another statement of Shri Gupta was recorded on 18th Sept., 1996, but, he again relied upon the documents on record. On 20th Sept., 1996, Shri Gupta filed a copy of Shri Krishna Mohan's affidavit dt. 23rd March, 1996.
9.1 The learned AO made his own investigation in addition to the investigation carried out by the Investigation Wing at Mumbai and Bangalore. He addressed letters to MGPL and DDK Industries. Although the letters were acknowledged, no replies were received. Several reminders sent were of no avail. The learned AO, therefore, concluded that the transactions were not genuine. Based on the investigation made by Investigation Wing and enquiries, a show-cause notice was issued to the assessee on 5th July, 1997. In reply, the assessee relied upon the stand taken by Shri Mahesh Gupta in his earlier statement. Thereupon the learned AO made reference to ADI, Bangalore, to obtain explanation from Shri Krishna Mohan. Letters were received on 28th July, 1997 from MGPL as well as DDK Industries Ltd. They confirmed that invoice was issued for the purpose of accommodation and actual sale was 'not effected. The payments made against the sale invoices were given by DDK Industries to MGPL who in turn transferred back the money to the assessee-company. According to this letter, the assessee-company was fully aware that the invoice was given for the sake of accommodation.
MGPL also confirmed that the lease transaction was of accommodation in nature as the gas cylinders had not actually been sold to the assessee-company. As suggested by the assessee-company, a third party invoice was arranged for the purpose of lease transaction. The assessee-company had also received back 85 per cent of the lease amount. MGPL further submitted that they were not told as to for what purpose the assessee-company had entered into these transactions. At any rate the entire lease transaction was not genuine and no cylinders were involved in it. The cylinder were still in the books of MGPL and they were claiming deprecation on those cylinders and did not form part of the lease transaction. On the strength of this material, the learned AO concluded that the transactions were merely on paper with the sole purpose of reducing tax liability of the assessee-company by claiming 100 per cent depreciation. The learned AO also found that the board resolution of the lessee company dt. 23rd March, 1994 was also not a genuine document because investigation revealed that there was no board meeting of MGPL on 23rd March, 1994. The learned AO also took note of the payment aspect. He found that accounts in the name of DDK Industries and MGPL were opened in Allahabad Bank, IFB, Mumbai, on 29th March, 1994. That was the bank where the assessee was also having its accounts. Both the accounts were introduced to the bank by Shri Deepak Tipnis, an employee of M/s Nicolos Piramal India Ltd., a company belonging to Piramal group. On 29th March, 1994, the assessee-company issued a chegue favouring the supplier for Rs. 1,00,13,000. On the same date, the amount was transferred to the account of MGPL who in turn on the same date transferred Rs. 76,09,880 to the assessee-company in the guise of security deposit. Thus, the assessee-company got 76 per cent of the amount paid in a circular transaction. The learned AO further found that the account in Allahabad Bank in the name of DDK Industries was opened stating one Shri B.K. Ramesh as its proprietor instead of Shri Krishna Mohan. The address of Shri B.K. Ramesh was given as 61, GM, Pallya, behind BEML, Bangalore. Further, on the same date another account was opened by Shri B.K. Ramesh with Bank of India where the address was given as Flat No. 4, Anjali Apartments, South Avenue, Khar (W), Mumbai - 52. The second account was opened in respect of another lease transaction by another company belonging to Piramal group.
Enquiries were conducted at the Khar address and it was found that one Shri V.N. Shenoy resided at that address since 1972 and he was not aware of any person in the name of B.K. Ramesh or any concern in the name of DDK Industries. It was, therefore, clear that these accounts had been opened by the same person giving wrong, incorrect or bogus address. These accounts were introduced by different employees of the companies in Piramal group. As to the bank account in the name of MGPL, the address was given to be Flat No. 4, Anjali Apartment, South Avenue, Khar (West), Mumbai - 52'. Another account of MGPL was opened in the Bank of India. The photographs of Shri Krishna Mohan given to both the banks were different and they did not look similar or alike in any manner. These aspects highlighted that there was no credibility about the transaction routed through these bank accounts. On these facts, the learned AO held that the statement given by Shri Krishna Mohan to the Investigation Wing on 6th March, 1996 was correct. The assessee had been requested to carry out a joint inspection for physical verification of leased assets but the assessee did not reply to that proposal. Cross examination of Shri Krishna Mohan was fixed for 28th July, 1997 but the assessee did not turn up. Thereafter, the same was refixed on 11th Aug., 1997. Based on this material, the learned AO concluded that the assessee's transaction with MGPL were not genuine.
10. The assessee claimed to have purchased waste heat recovery equipment and pollution control equipment in oil extraction systems and some other equipments from one M/s Agri Commercial Products, 1/1 Ashok Nagar, Guntur -7, vide invoice No. 250, dt. 4th Sept., 1994 for a sum of Rs. 1,55,34,000 and leased them to M/s Raghunath Cotton Mills and Oil Products Ltd., hereinafter called RCOP as per lease agreement dt.
23rd Sept., 1994. In support of this claim, the assessee relied upon various documents. The learned AO found that after the search in the case of the assessee-company, the Department conducted further enquiries and the statement of Shri G. Venkateswaralu, managing director of RCOP was recorded on 16th Sept., 1996. In this statement, RCOP denied having purchased or sold any machinery to M/s Agri Commercial Products Ltd., Guntur, and instead stated that RCOP was buying only cotton seeds and other oil seeds from this party. Shri Venkateswaralu also denied having taken any machinery on lease from the assessee-company. He further stated that RCOP did not have any waste heat recovery system separately and it was part of the regular solvent extraction plant of RCOP which had been purchased about 5 years ago on IDBI financing. Shri Venkateswaralu, however, stated that RCOP had paid some rentals to Haritha Finance, Madras, and Anamalai Finance, Coimbatore, and to no other company. The learned AO confronted the assessee with the statement of Shri Venkateswaralu. The assessee relied upon the documents of lease and also pointed out that as per Clause 9(b) of the lease agreement, the lessee had directly obtained the leased assets from the supplier. According to the learned AO, even during the course of search proceedings in the case of the assessee-company, the contents of the statement of Shri G.Venkateswaralu had been brought to the notice of the chairman of the assessee-company as well as Shri Mahesh Gupta, chief finance officer of the company. The assessee was, therefore, required to ascertain from the lessee company the reasons for denial but no such steps were taken for obvious reasons. Further, the learned AO found that even the documents being relied upon by the assessee-company were by and large fabricated ones. The assessee relied on the minutes of the board meeting of RCOP held on 30th June, 1994. The enquiry made by the DDI, Guntur, revealed that there was no such board meeting held on 30th June, l'994. As to the payments made by account payee cheque, enquiries were conducted to locate the supplier but the supplier was not found at the given address. It was found that one Shri G. Sai Bhaskar was a tenant at the given address who was an ex-small time employee of RCOP.Shri G. Bhaskar had signed as proprietor of M/s Agri Commercial Products Ltd. It was highly inconceivable that a small-time employee like him could raise a bill to the extent of Rs. 1.5 crores in a single instance. It was also found that M/s Agri Commercial Products was not registered with Sales-tax Department and the sales-tax registration number given on the invoice was not genuine. Thus, the sale invoice was also fabricated one. The payment by account payee cheque made by the assessee-company on 28th Sept., 1994 was drawn on assessee's account with Allahabad Bank, Parel, Mumbai. The accounts were opened in the name of the supplier and RCOP in the same branch on 28th Sept., 1994 and this account was introduced by Shri Mahesh Gupta and Shri Sunil Adukiya, an employee of Piramal group. The payment made by the assessee-company to the supplier was transferred to the account of RCOP on the same date and RCOP, in turn transferred on the same date a sum of Rs. 1,32,03,900 to M/s Piramal Texturising (P) Ltd. a finance company belonging to the same group, under the guise of security deposit. Thus, 84 per cent of the payment made by the assessee-company came back to a company belonging to the same group on the same date.
There were no other transactions in the bank account of the supplier and RCOP. It was also significant to note that these transactions were not reflected in the books of account of RCOP. Moreover, there was no valid commercial ground to justify the transfer of funds from the supplier's account to RCOP since there was no transaction between the supplier and the RCOP carried out except the lease under reference. In any case there was no transaction pertaining to sale or purchase of machinery between these parties.
10.1 According to the learned AO, the statement of Shri G.Venkateswaralu was recorded once again on 11th July, 1997. In this statement it was stated that RCOP did not own any equipment of the nomenclature waste heat recovery equipment and pollution control and oil extraction system. RCOP never sold any machinery to M/s Agri Commercial Products, Guntur. Board resolution dt. 30th June, 1994 was fabricated. Even on lease agreement the signature of the director, Mrs.
G. Jayalakshmi who was the wife of Shri G. Venkateswaralu was forged.
The bank account in Allahabad Bank, Parel, Mumbai, had been opened by Shri N.V.S.S.S. Rao without any authority and the board resolution authorizing him to open and operate that bank account was also a fabricated document.
10.2 The learned AO noted that the assessee's claim under Clause 9(b) of the lease agreement was not justified. It was the statutory obligation of the assessee-company to establish the genuineness of purchase and existence of the asset. The assessee could not shift such obligation to the lessee. The assessee was asked to produce the supplier to prove the genuineness of purchase for establishing the ownership of leased assets on or before 4th July, 1997 but the assessee failed to do so. Instead on 22nd July, 1997 the assessee-company wrote that M/s Agri Commercial Products was a party in existence who had been dealing with the assessee-company as per the statement of Shri G.Venkateswaralu recorded by ADIT on 16th Sept., 1996. The assessee also claimed that in substance, it was the transaction in the nature of sale and lease back on the part of RCOP. The learned AO held that as far as the assessee was concerned the purchase was said to be from M/s Agri Commercial Products and merely because an asset of similar description was with RCOP which formed a part of block of assets, did not establish the assessee-company's claim of ownership of such an asset. The documents on which the assessee placed reliance were found to be bogus.
The payment made by the assessee had come back to the extent of 85 per cent. The asset in question was not found to be in existence. There was nothing to suggest that any asset had been sold by RCOP to M/s Agri Commercial Products. The assets purchased by RCOP had been hypothecated in favour of financial institutions like IDBI and ICICI and, therefore, could not be sold without obtaining specific permission from these financial institutions. Furthermore, the assessee was requested to conduct a joint inspection of assets stated to have been purchased from M/s Agri Commercial Products. The assessee was requested to intimate a suitable date. However, the assessee failed to intimate a suitable date for joint inspection. Even the assessee's request for cross-examination was acceded to and the cross-examination took place in the office of ADI, Guntur, on 22nd July, 1997. In this cross-examination, RCOP reiterated its stand consistently. Finally on 29th July, 1997, the learned AO received once again a letter from RCOP in which it was clarified that no material was purchased by them from M/s Agri Commercial Products and there were no separate equipments other than the solvent extraction plant which had been installed much earlier than 1987.
11. The assessee claimed to have purchased cold farming roll sets made of high carbon high chromium steel from M/s Amity Industries, 7th Cross, Magadi Road, Bangalore for Rs. 2,36,24,437 vide invoice No. 008, dt. 17th Sept., 1994 and to have leased the same to M/s Apollo Tubes Ltd., hereinafter referred to as ATL, having registered office at 1, Malcha Marg, Chanakyapuri, New Delhi, vide agreement made on 17th Sept., 1994. The assessee placed reliance on various documents in support of these transactions. With a view to verify the genuineness of transaction, the learned AO addressed a letter by speed post to the supplier M/s Amity Industries calling for various particulars. This letter came back unserved with postal remarks "not known". However, on one of the receipts allegedly issued by M/s Amity Industries, the address was mentioned as 37/2, Sriram Mandir Road, Basavanagudy, Bangalore-560 004. On enquiries, this address turned out to be of one Dr. Tasveem Ahmed Shoeeb, Officer on Special Duty, Coffee Board, Government of India and he was found to be residing at this address and the house belonged to him since 1972. In a written reply to the learned AO, Dr. Shoeeb stated that he had no idea about the so-called M/s Amity Industries nor he had heard about it. Enquiries with sales-tax authorities at Bangalore showed that M/s Amity Industries had not filed any sales-tax return. A letter was sent to the assessee-company on 2bth June, 1997 confronting the assessee with the findings of enquiries regarding the non-existence of the supplier. In his reply, the assessee stated that as per Clause 9(b) of the lease agreement it was the lessee who directly ordered and received the leased assets from the supplier.
The assessee stated that it was ATL who was responsible for identifying and selecting the supplier, i.e., M/s Amity Industries. 11.1 According to the learned AO, M/s Amity Industries had been used not only in the case of the assessee-company but in many other cases, some of which were the companies belonging to the Piramal group. A supplier of this magnitude could not disappear without any -trace and, therefore, the transactions could not be regarded as genuine. Regarding the payments made by the assessee, the learned AO found that the accounts in the name of ATL and M/s Amity Industries had been opened on the same date in Allahabad Bank, Parel, Mumbai, where the accounts of the assessee-company were maintained. The accounts of M/s Amity Industries were operated by one Shri H.R. Hashni and that of M/s ATL was operated by K. Sriram, vice president of company. The accounts were introduced by Shri Mahesh Gupta, Chief Financial Officer of the assessee-company and Shri Adhukia, an employee of the Pira'mal group. The assessee made payment of the entire amount to M/s Amity Industries on 28th Sept., 1994 and, thereafter the entire amount was transferred from the supplier's account to the ATL's account on the same day. The ATL in turn returned back an amount of Rs. 1,98,44,527 to M/s Vulcan Investments (P) Ltd., a finance company belonging to the Piramal group under the guise of security deposit. Thus, 80 per cent of the purchase consideration was received back on the same day. The learned AO, however, noticed that in this case the supplier was located at Bangalore whereas the factory of ATL was located at Ranipet in Tamilnadu. The assessee was asked to furnish copies of transportation documents in support of the movement of the assets but the assessee chose to submit an explanation that the supplier was identified and located by the lessee, i.e., M/s ATL. There was also no material to suggest transit insurance of the assets during the course of transportation. As to the board resolution of ATL, dt. 5th Sept., 1994, it was found that there was no board meeting of M/s ATL on that date: There was also no board meeting on that date authorizing Shri K. Sriram to open and operate bank account in Allahabad Bank, Parel, Mumbai. The inspection certificate was issued by Shri K. Sriram only. This certificate was totally unreliable. Purchase of goods by the assessee-company itself had been proved to be bogus. Moreover, the transactions with the assessee-company were not reflected in the regular books of account of ATL. During the course of assessment proceedings, a statement was made that the transaction was in fact sale and lease back transaction by ATL. The learned AO did not find force in this contention because the records of ATL did not reveal any sale to M/s Amity Industries. Various enquiries were made with ATL. ATL in its reply dt. 5th July, 1997 submitted that most of the company records had been taken over by Central excise authorities and, therefore, they were not able to provide the required information. This reply was not correct. According to the learned AO, the Central excise authorities informed that no such documents were in possession of the Central excise authorities.
12. The assessee claimed to have purchased sugar works rollers of the value of Rs. 2,51,00,000 from M/s Maheshwari Engineering Works, 7-1-61/7, Ameerpet, Hyderabad-16, vide invoice No. 1203, dt. 3rd Aug., 1994 and to have leased them to M/s Sri Kailas Sugars and Chemicals Ltd. hereinafter referred to as SKSCL, by agreement made on 19th Sept., 1994. During the course of proceedings under Section 158BC, the assessee relied on a number of documents in support of this claim.
According to the learned AO, summons issued to M/s Maheshwari Engineering Works were received back with the postal remarks "no such firm exist in the said address". Enquiries made by Investigation Wing of Hyderabad also revealed that no such firm ever existed at the given address. In the case of SKSCL, a survey under Section 133A was carried out and the statement of Shri G. Radhakrishna Babu, deputy general manager (finance) was recorded on 7th Aug., 1996. In this statement, he submitted that SKSCL had not taken any asset on lease during the relevant period. Shri Radhakrishna Babu was further confronted with the fact that certain evidences/documents were found during the course of a search in the business premises of M/s Prime Trust Financial Services (P) Ltd., Hyderabad, indicating that SKSCL had taken certain assets on lease. Shri Radhakrishna Babu stated that there was no board resolution authorizing any such transaction and . as the assessee was a private limited company, such transaction could be made only with the approval of members in the general body meeting. On 13th Aug., 1996 the statement of Shri S.R. Kailas, chairman and managing director of SKSCL was recorded and after going through the statement of Shri Radhakrishna, Shri S.R. Kailas confirmed the same. In the second statement of Shri S.R. Kailas recorded on 26th Aug., 1996, he confirmed that the machinery allegedly supplied by M/s Maheshwari Engineering Works were never with the group companies. He submitted that with a view to make some money as suggested by Shri Vishwanathan Ganeshan of M/s Prime Trust Financial Services (P) Ltd., they had signed some bundle of papers. The enquiries made at the address 7-1-61/7, Ameerpet, Hyderabad, revealed that at the nearby door No. 7-1-61/1 a workshop in the name of M/s Maheshwari Engineering Works existed which was a proprietary concern by one Mr. Gopikrishnan Baheti. The statement of Shri Baheti was recorded under Section 131 on 7th Aug., 1996 and Shri Baheti categorically stated that his firm had not supplied or manufactured boilers or rollers for sugar works and that he had no interaction or dealing with the assessee-company. A further letter was received from SKSCL on 13th March, 1997 wherein SKSGL on verification of books of account denied to have entered into lease transaction with the assessee-company. The assessee-company was confronted with this material. In its, letter dt. 17th June, 1997, the assessee-company submitted that SKSCL had approached them through M/s Gold Crest Finance (I) Ltd. for lease finance. The assessee had arranged for inspection and physical verification of the assets through M/s Gold Crest Finance (I) Ltd. and the assessment of fair market value was done through an independent chartered engineer, Shri S. Chandrasekharan. The supplier, M/s Maheshwari Engineering Works was, as per normal practice, identified and selected by SKSCL. The duly authorized representative of SKSCL, viz., Shri M. Sunil came to Mumbai with necessary documents to enter into the transaction. The assessee also relied on Clause 9(b) of the lease agreement. According to the learned AO, irrespective of this clause, it was a statutory obligation of the assessee-company to prove the genuineness of purchase and, therefore, the assessee was requested to produce the supplier which was not done by the assessee and, therefore, the assessee failed to discharge its fundamental legal obligation for the purpose of claiming ownership of the assets. As to the documents relied upon by the assessee, a board resolution of SKSCL dt. 1st Aug., 1994, was certified by one Shri Muralikrishna as secretary of the company. This resolution authorized Mr. M. Sunil, manager (operations) of the company to complete all formalities in connection with the transaction. However, SKSCL vide its letter, dt.
27th June, 1997, confirmed that though there was a meeting of board of directors on 1st Aug., 1994 no such resolution was passed in the said meeting. The company, further confirmed that no person by the name of Mr. M. Sunil was ever employed by SKSCL. As to the certificate from Shri S. Chandrasekaran, chartered engineer, his statement was recorded by the Investigation Wing at Hyderabad. In this statement, he categorically denied that he had carried out any physical verification of the assets. He stated that the certificate was issued at the behest of concerned parties on the basis of papers shown to him but no physical verification was made. The AO also noted that the description of the assets mentioned on the bills were not complete and they were vague and insufficient for the purpose of proper identification.
Specifications were required to include the size of the rolls, make of the rolls, manufacturing details and so on. The assessee was required to furnish the details but the same were not furnished. The assessee was also requested to conduct a joint inspection of the assets but the assessee avoided it by saying they would like to find a chartered engineer for the purpose and the time given was too short. If the claim of the assessee was genuine then it was in assessee's interest to participate in joint inspection without any loss of time. The assessee requested for an opportunity to cross-examine SKSCL, and on 21st July, 1997 one of the directors of SKSCL, viz., J.S.R. Prasad appeared.
However, the counsel of the assessee-company refused to cross-examine him as the original statement had been given by S.R. Kailas. As the assessee's counsel insisted on cross-examination of Shri S.R. Kailas, the date of cross-examination was postponed to 28th July, 1997. On that date, Shri S.R. Kailas appeared for cross-examination but the assessee wrote a letter seeking notice of at least three working days. The learned AO did not consider this request to be reasonable and rejected the same. The AO had also written a letter to SKSGL to confirm whether the assets referred to in the purchase invoice and lease agreement were in existence. In response SKSCL in its letter, dt. 9th July, 1997, submitted that the sugar factory of the company had been erected by M/s Buckau Wolf (I) Ltd., and they did not acquire rolls from any party other than M/s Backau Wolf (I) Ltd., either on ownership basis or on lease basis. The company had been claiming depreciation on rolls supplied by M/s Backau Wolf (I) Ltd. The learned AO also looked into the payment aspect and found that accounts in the name of M/s Maheshwari Engineering Works and SKSCL had been opened on 24th March, 1995 at Allahabad Bank, Parel, Mumbai, where the assessee was having its accounts. Both these accounts had been introduced to the bank by Shri V.V. Vadodaria, director of a finance company belonging to the Piramal group. A cheque was issued favouring Maheswari Engineering Works for Rs. 2,51,00,000 on 28th March, 1995, and on the same date a sum of Rs. 2,13,35,000 was transferred to the account of SKSCL who in turn transferred the whole of the amount to M/s Swastik Safe Deposit and Investment Ltd., a finance company belonging to the same group.
Thus, by way of circular transaction 85 per cent of the payment made by the assessee was refunded to the group company. It was incredible to believe that an asset could be sold or parted with just by receiving 15 per cent of the cost. Therefore, the plea of payment by account payee cheque did not hold good.
13. The assessee entered into a lease agreement on 1st March, 1995, with M/s Deve Sugars Ltd., hereinafter referred to as DSL having its registered office at Bangalore. As per this agreement, the assessee leased out certain energy saving specialized boilers, air pollution control equipment, energy saving waste heat recovery equipment systems and water pollution control equipments of the value of Rs. 4,49,12,850.
These assets were supposed to have been sold by DSL to MGM and after such sale, the assets were taken back on lease by DSL. This was the case of a direct sale and lease back. In support of its claim, the assessee-company relied upon a large number of documents. The learned AO made reference to Investigation Wing at Bangalore and Madras for causing necessary enquiries. ADI, Chennai, informed in its report dt.
25th March, 1997, that from the return of income it was seen that the transaction with MGM was not reflected in the account. Several letters sent to DSL for obtaining various information were not responded.
13.1 The learned AO noted that in the schedule to the lease agreement the location of the assets was mentioned at Chinchkoda Village, Madhya Pradesh. However, in the audited accounts and annual report of DSL for the financial year 1994-95 there was no mention of any factory at any place other than the factory located in District Shimoga, Karnataka.
Further enquiries revealed that by virtue of an agreement dt. 15th Jan., 1994 with M/s Thungabadhra Sugar Works Ltd., hereinafter referred to as TSWL, DSL came into functional existence. According to this agreement, dt. 15th Jan., 1994, the value of the machinery transferred to DSL was Rs. 78,51,240. This valuation was done by one Shri P.C.Pandian who submitted a report about the valuation of the factory land, civil works, plant and machinery available at DSL on 4th Oct., 1993.
According to this report, a list of machinery available at the factory was valued at Rs. 9,2,8,00,000. In this list, the assets alleged to have been sold by DSL to MGM were not reflected. The learned AO referred to the balance sheet of DSL for the year ending 31st March, 1994 as available in the assessment records. According to this balance sheet, the additions made to the plant and machinery during the period 15th Jan., 1994 to 31st March, 1994 were to the extent of Rs. 3,15,31,329. During the course of assessment proceedings, DSL filed 7 purchase invorces dt. 25th Feb., 1994 for a value of Rs. 3,15,31,329.
But the machineries allegedly sold to MGM in January, 1995, were not reflected in those invoices. Even in respect of the 7 invoices, the enquiries revealed that there was no genuine purchase and in the assessment order, the machinery purchased to the extent of Rs. 3,15,31,329 was disallowed as bogus purchase and the same was also confirmed by the learned CIT(A). During the course of assessment proceedings for asst. yr. 1995-96, the purchase register of DSL for the financial year 1994-95 was produced and the same was impounded under Section 131(3) because it was reported on verification of the said register that the machinery alleged to have been sold to MGM did not find a place. The certified copy of accounts filed for assessment purpose along with the return of income for the asst. yr. 1995-96 also did not refer to the transactions with MGM. The payment of security deposit of Rs. 3,77,26,754 to M/s Swastik Safe Deposit Investments Ltd. was also not reflected. The operation of bank account with the Allahabad Bank, Parel, Mumbai, where the transaction pertaining to lease were routed was also not reflected. Furthermore, no lease rental had been debited to the P&L a/cs for the financial year 1994-95.
According to the learned AO, these facts evidently demonstrated that DSL had entered into a sale-cum-lease transaction with MGM of the non-existing assets of DSL. It was also reported by the AC at Chennai that DSL had been in the habit of entering into similar sale and lease back transaction of non-existing assets with other financial companies.
For example, transaction entered into by DSL with ITC, Badrachalam Finance and Investment Ltd. The assessee-company relied on the certified copy of board's resolution of DSL, dt. 5th Jan., 1995.
Enquiries were conducted to validate the authenticity of board resolution. There was no record available in the registered office of DSL. It proved that there was no board meeting. Another certificate from DSL, dt. 7th Feb., 1995 mentioned that Deve Annapurna Foods and Beverages Industries Ltd., had not created any charge or lien on the assets sold to the assessee-company. In that certificate, it was certified that the assets had been installed and put to use on 6th Feb., 1995. This certificate though issued on the letterhead of DSL appeared to be concerned with Deve Annapurna Foods and Beverages Industries Ltd. The certificate of chartered engineer, Shri P.G.Srinivas on 31st March, 1995 that the assets qualified for 100 per cent depreciation can also not be relied upon because the credibility and reliability of the certificates issued by Shri P.G. Srinivas had already been observed in other case.
13.2 As to the account payee cheque issued by the assessee-company favouring DSL, the account in the name of DSL was opened in Allahabad Bank, Parel, Mumbai, on 3rd March, 1995. This account was introduced by India Polo Promotion Foundation, a trust belonging to Piramal group.
Out of the payment of Rs. 4,49,12,850 made on 3rd March, 1995, a Sum of Rs. 3,77,26,794 was transferred to Swastik Safe Deposit and Investments Ltd., a company belonging to Piramal group as security deposit which constituted 84 per cent of purchase consideration. On the same day, this amount was transferred from the Swastik account to the account of the assessee-company by way of loan completing the cycle of transaction. The learned AO also noted that sale invoice in this case had been raised by the director of DSL, Shri M.V. Ramachandran. The board resolution and certificates had also been signed by him. The accounts had been opened and operated by him. Other documentation had also been done by him. In a private limited company, all the transactions could not be confined to one individual only.
14. The assessee claimed to have purchased micro processor multi-head electronic packaging system on 4th April, 1994 from Ready Foods Ltd., Bangalore, hereinafter referred to as RFL for Rs. 2,23,67,396.
Thereafter, the assessee entered into lease agreement with RFL on 15th Sept. 1994. The assessee relied upon a number of documents in support of this transaction. According to the learned AO, several letters were addressed to RFL. Though such letters were duly acknowledged by RFL not a single letter had been replied. A reference was made to ADI (Inv.) at Bangalore to make necessary enquiries but the repeated efforts of ADI (Inv.) also failed to obtain the requisite information. He informed that various agencies were after the chairman, Mr. T.V. Raja Reddy who was absconding. The said company had also not been filing any return of income from the asst. yr. 1994-95. Finally, in response to summons issued on 9th June, 1997, Shri T.V. Raja Reddy, vide his letter addressed to the learned AO submitted that the sale of assets had never taken place and the entire sale and lease transaction was in the nature of accommodation transaction. He, further, submitted that 85 per cent of the amounts received from the lessor had been returned back as advance lease rentals. The circumstances in which various documents had been signed, it was stated that RFL was having financial problem and was badly seeking working capital facilities. It was found that the group of companies belonging to Piramal group were prepared to consider advancing working capital only if the company obliged them by entering into certain accommodation transactions. However, RFL was never informed that these transactions would be used for tax purposes. The learned AO further found from the balance sheet of M/s RFL that IDB1 was on the board of directors of the company. A letter was, therefore, issued to IDBI on 16th June, 1997, to confirm whether the assets of RFL were hypothecated or subject to any charge. In its reply, dt. 3rd July, 1997, IDBI stated that all movable assets, present and future, were hypothecated and RFL had not obtained permission from IDBI for selling the assets and the transactions in question had not been reflected in RFL's annual audited accounts and other statements for the year.
1994-95. A letter was issued to the Registrar of Companies. Copies of deeds of hypothecation registered with the Registrar of Companies, Karnataka, established that the assets were never sold by RFL to the assessee-company. Further, on a reference to IDBI it was found that there was no meeting of the board of directors held on 4th April, 1994 which indicated that the board resolution relied upon by the assessee-company was false. From the guarantee agreements and hypothecation deeds made by RFL with various financial institutions, it was abundantly clear that RFL could not create any charge, sale, dispose of or create any encumbrance in any manner in respect of the hypothecated assets with the financial institutions as no such permission had been obtained by RFL. Mere raising of the sale bills did not imply that the sales had been actually effected and the sale was valid. RFL had been declared a sick company by BIFR. There was no specific order of the BIFR either, allowing the company to sell assets in question. Even the assessee-company could not claim innocence on this issue. The assessee was in possession of copy of the balance sheet of RFL for the years ending 31st March, 1993 and 31st March, 1994.
These balance sheets clearly mentioned that all immovable properties of RFL including machinery, etc. had prior charge in favour of the financial institutions.
14.1 According to the learned AO, the fact that there was no genuine purchase was also proved by the fact that a substantial portion of the sale consideration had been refunded back to the assessee. The assessee made payment of Rs. 2,23,67,396 by way of cheque on 28th Sept., 1994.
However, out of that amount a sum of Rs. 1,90,12,287 had been refunded by RFL to an associate company of Piramal group, viz., Legend Pharma (P) Ltd. on the same date.
14.2 According to the learned AO, a letter was issued to the assessee-company on 4th July, 1997 informing the contents of the letter received from RFL. In reply, the assessee-company placed reliance on various documents. The assessee also placed reliance on the letter dt.
27th March, 1997, of Shri T.V. Raja Reddy confirming the transaction and stating that the assets were in good condition and in possession of RFL. The chartered engineer's affidavit was also furnished to support that the equipments were in existence. But, according to the learned AO, on account of the fact that there was no board meeting on 4th April, 1994, the assets of the company were not free from encumbrance; all assets of RFL hypothecated showed that the assessee's transactions were not genuine, irrespective of the confirmation letter dt. 27th March, 1997 or the chartered engineer's certificate dt. 5th April, 1997, which could only prove that the assets were in existence but mere existence of the assets could not answer the question as to whether there was a genuine sale-cum-lease back transaction. The learned AO also took note of the fact that RFL had similarly raised bills in an indiscriminate manner on various companies which also included other companies belonging to Piramal group.
15. The assessee claimed to have purchased 2,105 high pressure seamless gas cylinders for Rs. 99,98,750 from M/s Bestow Agencies, Bangalore, vide invoice No. 915, dt, 2nd March, 1995 and have entered into a lease agreement on 4th March, 1995, in respect of the same with M/s Bangalore Gases (P) Ltd., Bangalore, hereinafter referred to as BGL. According to the learned AO, during the course of statement of Shri Ajay Piramal recorded on 29th July, 1996, it was brought to his notice that M/s Bestow Agencies as well as BGL had admitted that the entire transaction was sham and there was no cylinder existing in respect of which bills were issued. In his reply, Shri Piramal requested for copies of the statements and also submitted that he would get back to the Department as soon as possible. However, the assessee-company did not approach the Investigation Wing to collect the statements. In the course of statement of Shri Mahesh Gupta, Chief Financial Officer of Piramal group recorded on 2nd Aug., 1996, it was brought to the notice of Shri Gupta that M/s, Bestow Agencies was a fictitious proprietary concern of Mr. Prakash Shah alias Deepak Mehta and that Shri Prakash Shah and Mr.
Anwar Pasa of BGL had stated that the transaction was bogus. In his reply, Shri Gupta submitted that he was ready to withdraw the claim of depreciation if it was found that the cylinders were not in existence.
However, while filing the return of income under Section 158BC of the Act, the . assessee did not offer this amount for taxation. Hence, a show-cause notice was issued on 12th June, 1997. In reply on 2nd July, 1997, the assessee-company stated that Shri Mahesh Gupta had agreed to withdraw the depreciation claim if it was proved that the gas cylinders did not exist but the assessee-company had not been able to physically verify the assets from the concerned party who had however verbally confirmed the transaction. In response to this letter, the learned AO wrote to the assessee-company for a joint inspection of the assets. The assessee, in spite of having been given an opportunity to prove the genuineness or the existence of the assets, wrote a letter on 15th July, 1997, in which the assessee reiterated its stand that the leased assets had been verified through an independent chartered engineer at the time of entering into the transaction.
15.1 Regarding the various documents relied upon by the assessee, according to the learned AO, the enquiries revealed that the certificate of incorporation of BGL found at the premises of the assessee, bearing incorporation No. 06/13091 of 1991, issued on 28th May, 1991, was fabricated and the correct incorporation certificate was 08/15915 of 1994, issued by Registrar of Companies, Karnataka, on 11th July, 1994. Regarding audited balance sheet of BGL as on 31st March, 1994, the learned AO held it to be a fraud because BGL was not in existence as on 31st March, 1994. When an enquiry was made about Shri K.P. Srikant, chartered accountant who audited the balance sheet, it was found that there was no such chartered accountant at the address as given in the auditor's report. As to the certificate of chartered engineer, Shri P.G. Srinivas, in his statement recorded on 23rd July, 1996, submitted that he had not visited the premises of M/s BGL and had not physically verified the assets. Mr. Srinivas also accepted that the certificate issued by him was not true. Since physically the assets were not there, the question of physical verification did not arise. As to the board resolution of BGL dt. 27th Feb., 1995, a survey conducted at the premises of BGL revealed that the company was on paper only. No books of account had been maintained nor had any meeting ever been held. This fact was confirmed by the managing director of BGL himself.
As to the invoice issued by M/s Bestow Agencies, the invoice contained KST and CST registration numbers. It had been signed by one Mairaz Ahmed. The distinctive numbers of cylinders were D-18362 to D-20464. A letter was sent by speed post at the address of M/s Bestow Agencies as on the invoice but the same was received back with the postal remarks "No party exists". The enquiries conducted by Inspection Wing at Bangalore also revealed the same fact. Enquiries conducted with sales-tax authorities revealed that the party had never filed any sales-tax return and as a matter of fact the registration numbers never pertained to M/s Bestow Agencies. The statement of Mr. Mairaj Ahmed was recorded by the ADI at Bangalore on 13th April, 1996, wherein he admitted to have signed as proprietor of M/s Bestow Agencies and stated that he was merely the name lender. He further admitted to have printed bill books in the name of M/s Bestow Agencies and signed the bill books for a commission. Regarding the address given on the bills, he admitted that the address was fictitious. The statement of Mr. Anwar Pasa, managing director of BGL recorded on 13th April, 1996 revealed that the business of M/s BGL had not started. He pleaded ignorance about the lease transaction. Regarding bank transactions, he stated that he had signed blank cheques and account opening forms, etc., at the behest of Mr. Prakash Shah who was a friend of his friend Mr. Rafique Ahmed. He admitted that he was only a name lender and he had signed whatever he was asked to sign by Mr. Prakash Shah. He confessed to have received Rs. 34,00,000 in the transaction which he claimed he had shared with various people. He offered Rs. 30 lakhs in his hand for taxation. The statement of Shri Prakash Shah alias Deepak Mehta was recorded by ADI, Bangalore, on 13th April, 1996. Shri Prakash Shah in his statement confirmed whatever was stated by Mr. Anwar Pasa. He admitted that he was the main person behind the activities of M/s BGL and M/s Bestow Agencies among other firms; that he was the person who got the bank accounts opened in their names. He admitted that M/s BGL had a Bank account in Bangalore which had been operated by Mr. Gurudutt of M/s Chetan Financial Services and his agency M/s Gold Crest Finance (I) Ltd. Similarly, the account of M/s Bestow Agencies in Bangalore was also operated by Mr. Gurudutt. Blank cheque books were signed by Mr.
Anwar Pasa and Mr. Mairaz Ahmad. Mr. Prakash Shah stated that Mr.
Gurudutt was the main contact person in Bangalore and he had signed various documents blindly and handed them over to Gurudutt. Bills were issued for sale of cylinders but they had no cylinder to sell in the first place. Shri Prakash Shah also admitted to have received Rs. 24 lakhs commission in the transaction in question.
15.2 As to the reliance placed by the assessee on the payment by account payee cheque made to M/s Bestow Agencies, the learned AO noted that the cheque was deposited in the account opened in the name of M/s Bestow Agencies and BGL in Allahabad Bank. These two accounts were introduced by M/s Anand Piramal Investments Ltd., a company belonging to Piramal group through one of its directors, Mr, V.C. Vadodaria. Both the accounts were opened on the same date. The cheque issued by the assessee favouring M/s Bestow Agencies was deposited in its account in Allahabad Bank for Rs. 99,98,750. On the same date, the entire amount was transferred to the account of BGL and BGL in turn transferred on the same date a sum of Rs. 83,98,950 to M/s Swastic Safe Deposits and Investments Ltd. a company belonging to Piramal group. This amount was in turn transferred on the same date to the account of the assessee-company. The balance 15 per cent was appropriated by BGL and other various persons. According to the learned AO, the manner in which the bank transactions were carried out was significant.
15.3 According to the learned AO, the Chief Financial Officer of the assessee-company in his statement recorded on 2nd Aug., 1996, and vide his letter dt. 1st Aug., 1996, agreed to withdraw the claim of depreciation if it was found that the assets were not existing at the time of executing lease agreement. In order to avail of depreciation, it was the assessee who had to establish the fundamental requirements of the ownership of assets and its user. The statement made by the Chief Financial Officer of the company was ridiculous. On the one hand, the assessee claimed that it was the owner of the assets but at the same time it was not sure as to whether the assets were in existence at the time of lease transaction. It was the assessee who claimed the ownership but desired that the Department should find out whether the assets were existing or not at the time of lease. The learned AO also took exception to the assessee for not cooperating in joint inspection of assets and the cross-examination of the parties.
16. The assessee claimed to have purchased from M/s Gold Star Steel and Alloy Ltd., hereinafter referred to as GSAL two dust collectors vide invoice No. 163, dt. 2nd Aug., 1994 for Rs. 2,30,00,000 and two wet air oxidation equipment for recovery of chemicals vide invoice No. 165, dt.
4th Aug., 1994 for Rs. 2,70,00,000. Thereafter, the assessee entered into a lease transaction on 23rd Sept., 1994 with GSAL and leased back these assets. In support of this claim the assessee relied upon a large number of documents. Based on the documents, the learned AO conducted enquiries to ascertain the genuineness of the transaction. The first letter was issued to GSAL on 5th March, 1997. Though the letter was acknowledged, no response was received from GSAL. Another letter was written to GSAL on 3rd June, 1997. Again there was no response from GSAL. Thereafter, a reference was made to ADI, Hyderabad, for causing necessary enquiries. The assessee had placed reliance on board resolution of GSAL, dt. 7th July, 1994. In order to validate the authenticity of this resolution, the learned AO addressed a letter to IDBI on 17th June, 1997 as IDBI was on the board of directors of GSAL.
The IDBI in its letter dt. 25th June, 1997, stated that no board meeting was held on 7th July, 1994. IDBI further confirmed that in view of the term loans granted to GSAL, IDBI had first charge by way of hypothecation of all the movable assets of GSAL. The learned AO, therefore, concluded that board resolution was false and fabricated.
Secondly, from the published accounts of GSAL, it was clear that all the movable assets present and future had been hypothecated to IDBI.Therefore, in the case of a genuine sale of assets it was incumbent to obtain specific prior approval of IDBI but no such approval was ever obtained. The assessee was confronted with these facts. The assessee submitted that the charge created was in the nature of floating one and hence there was no prohibition for sale of individual assets. According to the learned AO, irrespective of the nature of charge, no sale of assets could be made without the permission of financial institutions in whose favour the charges had been created. The assessee also argued that if the seller had express warranty over the title of goods then such a sale was a valid sale. The learned AO held that in the case under consideration GSAL did not have an express warranty. The assessee-company was aware of the charges because a copy of the audited balance sheet of GSAL was in its possession. The learned AO found that GSAL had awarded a turnkey project to M/s Buckau Wolf (I) Ltd. 16.1 As GSAL was not responding to the various letters issued by the learned AO, the learned AO approached IDBI and explained to them that GSAL had been engaging in indiscriminate issue of sale bills to various parties, a list of which was subsequently forwarded to IDBI. A senior officer of IDBI, therefore, sent several letters and fax messages to GSAL but no reply was received. IDBI further mentioned that Shri Krishna Mohan, managing director of GSAL was expected in their office on 28th July, 1997 to file an explanation in the matter. He failed to turn up on that date. A survey was conducted in the premises of GSAL on 8th July, 1997. A statement of Shri S. Bhatt, president (finance) of 'GSAL was recorded and the minutes book of GSAL was examined. It was ascertained that there was no board meeting on 7th July, 1994. Shri S.Bhatt also, confirmed that no permission of the financial institutions had been obtained before selling the assets and that no sales-tax had been paid on such sales. 16.2 The learned AO referred to the audited balance sheet of GSAL for the period from 1st April, 1994 to 30th June, 1995 and observed that an addition of Rs. 537 lakhs had been shown to plant and machinery. This addition had been worked out by reducing from the security deposit against leased assets, the estimated original value of the disposed assets. Thus, the accounting treatment given in the books of account of GSAL was very elusive and misguiding.
Furthermore, GSAL had stated during the survey that it had sold assets worth Rs. 17.81 crores whereas the information available with the Department, suggested that the sale bills raised were of much higher figure. As to the reliance placed by the assessee-comapany on payments made by account payee cheque, the learned AO found that the account in the name of GSAL was opened in Allahabad Bank, Parel Branch, Mumbai, on 20th March, 1995. On 28th Sept. 1995, the assessee paid by way of account payee cheque a sum of Rs. 5,00,00,000. However, on the same date a sum of Rs. 4,25.,00,,000 was transferred to the account of M/s Swastik Safe Deposits. and Investments Ltd., a finance company belonging to the Piramal group in the guise of security deposit. Thus, 85 per cent of the consideration came back in a circular transaction to the group. This transaction demonstrated that it was a doctored transaction. Why should GSAL part with its assets for a consideration equivalent to 15 per cent only of the cost of assets Enquiries from bank revealed that GSAL had filed a copy of resolution of board meeting dt. 10th March, 1995, wherein Shri N, Krishna Mohan, managing director of the company was authorised to, open and operate, the bank account in Allahabad Bank, Pare], Mumbai. During the course of a survey at GSAL, Hyderabad, it was found that as per the minutes book there was a board meeting of GSAL on 10th March, 1995, but there was no resolution authorizing Shri N. Krishna Mohan to open and operate the bank account in Allahabad Bank, Parel, Mumbai. As to the affidavit of Shri S.Chandrasekaran, chartered, engineer, it only stated that he visited the plant and verified the physical existence. However, the question was not as to whether the assets were in existence but whether the said assets had at all been sold or were they capable of being sold. There was a clear prohibition of the financial institutions because the assets of GSAL had been hypothecated to them. Secondly, there was no question of genuine sale for only 15 per cent of the cost of assets.
M/s Deve Annapoorna Foods and Beverages Industries Ltd. : 17. The assessee claimed to have purchased from M/s Deve Annapoorna Foods and Beverages Industries Ltd., hereinafter referred to as DAFBIL, on 10th Jan., 1995, vapour absorption refrigeration system for Rs. 94,10,390 and energy saving micro processor base control system for Rs. 6,46,96,800 and to have leased them back to DAFBIL on 1st March, 1995 as per lease agreement. The assessee relied upon a number of documents in support of these transactions. To verify the genuineness of the transactions the learned AO sent letters to DAFBIL at various addresses as available on record but all the letters came back unserved from postal authorities. A reference was made to the Investigation Wing at Madras who reported that no one was available in the company at the given address. Further, DAFBIL belonged to one Shri Rajarathinam, promoter of the company who was known to have indulged into unethical practices at a very large scale. The assessee-company relied upon the board resolution of DAFBIL dt. 5th Jan., 1995. A reference was made to IDBI to confirm if there was such a board meeting on 5th Jan., 1995.
IDBI replied that DAFBIL had not forwarded to the IDBI nominee director any notice convening the board meeting on the said date. Hence, the learned AO concluded that the board resolution was false. The assessee-company also placed reliance on another certificate issued by DAFBIL to the effect that no charge or lien had been created against the assets sold. This certificate again was not correct because all the movable assets of DAFBIL had been hypothecated to financial institutions. IDBI had clarified that the company had not obtained permission for selling the assets. Thus, the certificate of no charge and lien was also false. The assessment records of DAFBIL at Chennai were examined. The depreciation statement for the asst. yr. 1995-96 did not show any removal of assets by way of sales. In the audited accounts of the lessee company, the total sale for the period ending on 31st March, 1995, was shown at Rs. 3,48,10,162 whereas the sale of assets made to the assessee-company itself was claimed at Rs. 7,41,07,190. The sale of assets as contended by the assessee-company was not reflected in the audited P&L a/c of DAFBIL The statement of computation of income filed by DAFBIL with its return of income for asst. yr. 1995-96 also did not disclose any sale of assets. The assessee relied on payments made by account payee cheques. An account in the name of DAFBIL was opened at Allahabad Bank, Parel, Mumbai, where the assessee-company was also having its accounts. This account was opened and operated by Shri U. Kasim Rizvi, director of DAFBIL. After this account was opened on 2nd March, 1995, the assessee paid by account payee chegue on 3rd March, 1995, an aggregate sum of Rs. 7,41,07,190. On the same date, 84 per cent of the consideration was received back from DAFBIL amounting to Rs. 6,22,50,000 by M/s Swastik Safe Deposits and Investments Ltd., a finance company belonging to Piramal group in the guise of security deposit and on the same date this amount was transferred back to the assessee. Thus, in a circular transaction, the assessee-company received back 84 per cent of the purchase consideration. The refunded amount of Rs. 6,22,50,000 by DAFBIL in the name of security deposit was nothing but summation of all lease rentals to be paid as per schedule to the lease agreement over a period j&f 8 years. If at one go DAFBIL could pay the entire lease rentals, what was the necessity to execute sale of assets in the first instance.
17.1 The learned AO also noted that by a reference made to the AO of DAFBIL it was ascertained that as per depreciation chart the value of plant and machinery as on 1st April, 1994 was to the extent of Rs. 58,56,410 only and additions made during the period 1st April, 1995 to 31st March, 1996, was to the extent of Rs. 12,73,08,431. DAFBIL came into being by a memorandum of understanding/agreement, dt. 11th Aug., 1994 between Annapooma group of Coimbatore, and Shri Rajarathinani. A list of machineries available was enclosed with the memorandum of understanding. But the assets allegedly sold to the assessee-company did not figure therein. In any case, in the depreciation chart, for asst. yr. 1995-96, there was no removal of any asset from the block of assets. Shri V. Kasim Rizvi was located in Madras and his statement was recorded on 25th July, 1997. He deposed that the factory was closed and the entire machinery in the factory had been destroyed and a complaint in this connection was filed with inspector of Police, Poonamallee Police Station. However, the list of assets destroyed enclosed with this complaint did not show any assets taken on lease by DAFBIL. Shri Rizvi admitted to have signed the sale invoices but he could not explain as to why no lease rent was debited in the P&L a/c for the financial year 1994-95. He also expressed ignorance about the security deposit made to M/s Swastik Safe Deposits and Investments Ltd. He produced fixed assets register as well as ledger of DAFBIL and it was seen that the list of assets did not figure therein. All these showed that the transactions were not genuine.
18. The assessee claimed to have purchased from M/s Candy Filters (I) Ltd., a Murre make boiler for a consideration of Rs. 60 lakhs vide invoice dt. 16th Aug., 1994 and to have leased the same to M/s Thugabadhra Pulp and Board Ltd., hereinafter referred to as TPBL, vide lease agreement dt. 1st March, 1995. In support of this claim, the assessee placed reliance on a number of documents. According to the learned AO, the enquiries made revealed that these boilers originally belonged to Salarjang Sugar Mills Ltd., Munirabad, Karnataka, which was under liquidation. The said boiler was hypothecated with State Bank of Mysore, Hospet. Approval of State Bank of Mysore was obtained for sale of this boiler but in that approval it was specifically stipulated that the entire sale proceeds had to be credited to the cash credit account of M/s Salarjang Sugar Mills Ltd. This approval was given on 12th Aug., 1987. Further it was claimed that Salarjang Sugar Mills Ltd. had sold this boiler to one M/s Hemakuta Industrial Investments Company Ltd., from whom M/s Candy Filters (I) Ltd. purchased the boiler. According to the learned AO, if the approval was given on 12th Aug., 1987, it implied that the boiler could not have been sold to Hemakuta Industrial Investments Co. Ltd. in 1985-86. Furthermore, the entire sale proceeds were required to be deposited in the cash credit account of Salarjang Sugar Mills Ltd., for which there was no evidence. M/s Candy Filters (I) Ltd. were asked to produce particulars pertaining to purchase of machinery from Hemakuta Industrial Investments Co. Ltd., but no such details were furnished. It was also noticed that the accounts of M/s Candy Filters (I) Ltd. had not been drawn up or finalized. It was, however, significant that the original cost of the boiler was only Rs. 1.25 lakhs and its book value as on 12th Aug., 1987 was only Rs. 77,000. Even the present market value of all the machineries on that date was stated to be Rs. 9 lakhs only in a letter to State Bank of Mysore. Thus, if the machinery was having a book value of Rs. 77,000 only in 1987, could it be fairly sold for Rs. 60 lakhs in 1994. For this the assessee-company had no explanation except the valuation report of Shri P.G. Srinivas, chartered engineer. It was experienced in various other cases of lease transactions that the certificates issued by Mr. Srinivas were not reliable.
18.1 According to the learned AO, the assesses relied upon the copy of board resolution of TPBL dt. 13th Feb., 1995. Letters were issued to TPBL to confirm the genuineness of the resolution but no reply was received. The assessee-company placed reliance upon payment having been made by account payee cheque. The accounts in the name of M/s Candy Filters (I) Ltd. and TPBL were opened at Allahabad Bank, Parel, Mumbai.
The accounts were introduced by India Polo Promotion Foundation, a trust belonging to Piramal group. The payment was made to the suppliers but on the same date, the entire consideration was transferred to the account of TPBL and TPBL in turn returned Rs. 50,40,000 to M/s Swastik Safe Deposits and Investments Ltd., a finance company belonging to the Piramal group by way of security deposit. Thus, 84 per cent of the consideration was received back in a circular transaction. How could the assets be parted with the remaining 16 per cent and at any rate as far as the supplier was concerned he did not receive any part of the consideration This proved that the payment theory advanced by the assessee-company was merely an eyewash. The learned AO, therefore, concluded that the transactions were only on paper and not genuine transactions.
19. After discussing each of the transactions serially, as briefly summarized by us in the foregoing paragraphs, the learned AO, re-emphasised some aspects. He pointed out that situs of sale and lease and present location of the assets in most cases was in the State of Andhra Pradesh. There the sales-tax laws covered the transactions of lease also. The non-payment of lease tax was a pointer to the fact that the transactions were not genuine. It was further seen that the assessee did not actually receive payment of lease rentals. The same were adjusted against the so-called security deposits. Normally, the lease rentals for the entire period could not be given up-front as an advance. The assessee also could not confirm the insurance cover being taken in respect of any of the leased assets either by himself or by the lessees which was an abnormal phenomenon. In the column in the sales-tax returns for capital assets purchased during the period the particulars of the leased assets were not mentioned. These purchases were booked through journal entries representing abnormal departure from the standard accounting policy and recording of regular transactions in the books of account. No internal procedure was followed for these purchases otherwise essential for corporate governance. According to the learned AO, the certificates of physical verification of assets at the time of entering into the transaction relied upon by the assessee were not authentic and would be of no avail if the assets were not in existence. The assessee was duly confronted with the findings in this respect. The assessee was also asked to confirm if any physical verification of the assets was at any point of time made by the assessee himself through his employees. The assessee, however, relied upon only on the certificates of chartered engineers.
In some cases, even the photographs of assets were enclosed. However, the fact of ownership of the assessee of such assets was not established. The assessee was harping only at the existence of assets at the time of entering into these transactions. However, the assessee's claim should have been verifiable at any point of time after the date of entering into lease transactions. The assessee could not get away by merely stating that at the time of lease transaction the assets had been physically verified. The assessee entered into lease transactions of huge amounts and, therefore, the assessee could not be indifferent on this aspect of the matter. The exclusive dependence on certificates only was another circumstance to indicate that the assets were only on paper and the documents were prepared to give an apparent colour of genuineness.
20. The assessee also relied on certified copies of board resolutions.
The falsity of board resolution was brought to the notice of the assessee during the course of recording the statement of Shri Mahesh Gupta, Chief Financial Officer: of the company on 24th July, 1997. Shri Mahesh Gupta relied on the principle under the company law that if a document not open to public inspection was furnished by a company such document is binding on that company as far as an outsider is concerned.
According to the learned AO, it could not be appreciated that board minutes was not a public document. Secondly, such a principle of doctrine of in-door management could not control the assessment proceedings. The assessing authorities were entitled to examine the genuineness or authenticity of a document being relied upon by the assessee. Such legal principles could not be applied out of context.
21. As the assessee's accounts were duly audited a letter was issued to Shri H.N. Shah, statutory auditor on 9th July, 1997. In his reply, Shri H.N. Shah submitted that they had obtained a certificate from the managing director regarding the verification of fixed assets. On request from the AO, the certificate filed by the management was also enclosed. The learned AO found that the certificate was silent about the leased assets. A summon was issued to the statutory auditor and his statement was recorded. In his statement, Shri H.N. Shah mentioned that leased assets had been given on lease to group companies which was factually incorrect. He could also not explain as to whether during the course of audit any query had been raised regarding the physical verification of leased assets. The learned AO stated, "regular programme of physical verification stipulated that leased assets should be physically verified at least once in a year". The statutory auditor could not through any light on this aspect. According to the learned AO, having regard to the fact that leased assets constituted about Rs. 34 crores in the case of the assessee-company the statutory auditor was required to give his opinion on this issue. During the course of statement, Shri H.N. Shah was also asked to go through the working papers during the audit and, comment if there was any reference to the issue of physical verification of leased assets. The statutory auditor replied that no such papers were in his possession. The learned AO, therefore, concluded that the management did not carry out any physical verification and the statutory auditor also did not raise any query regarding this aspect. Thus, the statutory auditor failed in his duty to comment or pronounce any opinion on this issue, He gave a certificate in a very routine manner which was not in conformity with fair auditing practice and required norms.
22. The learned AO found that the assessee entered into all the lease transactions through the sole financial intermediary, M/s Gold Crest Finance (I) Ltd., Mumbai. Shri Mahesh Gupta was asked in the statement recorded to explain how and on what parameters the intermediary was chosen. Shri Gupta replied that M/s Gold Crest Finance (I) Ltd. was chosen because they were offering best terms and scope of service. Shri K.N. Iyer, managing director of M/s Gold Crest Finance (I) Ltd. enjoyed confidence and trust of Shri Gupta. The answers given by Shri Gupta in respect of M/s Gold Crest Finance (I) Ltd. were very general in nature.
It was admitted that there was no written agreement with the financial intermediary. Shri Gupta could not also furnish evidence that offers in this respect had been solicited from any other reputed finance company except saying that oral offers had been received from some reputed companies. From the statement of Shri Gupta in this respect, the learned AO concluded that the assessee-company had not followed any objective practice for selecting the financial intermediary who was chosen because of his personal relationship with the Chief Financial Officer. The assessee-company by and large ignored the necessary requirements in respect of selection, compensation paid, terms and conditions, etc. of the financial intermediary.
23. The learned AO noted that in all cases leasing had been effected either in the month of September or March. This indicated that the transactions were done with the sole and exclusive purpose of availing depreciation shelter to reduce tax liability. Even Shri Gupta in his statement admitted that the tax implications were considered while calculating the overall return on lease transactions. The fact that all these transactions were done either in September or March was not an accident but a calculated and structured design. Further, the assets had been chosen with deliberate intention of obtaining depreciation shield. The description of assets in the lease transactions did not contain identifiable features such as size, year of manufacture make capacity, dimension and various other technical parameters. In most of the bills technical specifications were not included and the descriptions were vague. These bills prima facie lacked credibility and aroused suspicion. The suppliers and lessees were all located in places far away from the assessee-company. They were almost alien to the assessee-company and introduced by the financial intermediary M/s Gold Crest Finance (I) Ltd. By choosing these parties at far away places, the assessee-company seemed to have taken precaution to avoid investigation by the jurisdictional AO.24. The learned AO noted that all the transactions were effected through bank accounts opened at the assessee's bank, Allahabad Bank, Parel, Mumbai. For this purpose, both the suppliers and lessees opened account in that very branch and they were introduced to the bank by the persons and the entities in the Piramal group. The transactions were effected in a circular manner whereby the assessee on the same date got back 85 per cent of the purchase consideration. It was an abnormal feature that all the suppliers and lessees came all the way to Mumbai for opening accounts on a particular date and within that day completed the transactions. On this issue, the assessee explained that this was done for their own convenience. It was incredible to believe that such banking transactions could not have taken place in the regular bank accounts of the parties located in various parts of India, if the transactions were genuine. It was not that in their respective places the suppliers and lessees could not find banks or branches of nationalised banks. This practice was followed to ensure cycle of flow of funds from various accounts on the same date.
25. The learned AO found that the transactions of the assessee did not fit in the normal financing leases. In the ordinary circumstances, the party which required fund approached the financier to fund the cost of assets fully or substantially. In the assessee's case, the lessees returned 85 per cent of the cost of asset to the assessee-company on the same date. This was conveniently called security deposit. Looking into objectively, if the lessee had the capacity to pay 85 per cent of the cost of assets then it generally had the capacity to pay the balance 15 per cent. Thus, the lease transactions and security deposit were just an eyewash. It was pertinent to mention that differential 15 per cent was in some cases distributed amongst various beneficiaries to the . transaction and the amount had neither gone to the supplier nor to the lessee company. Therefore, essential ingredients of a finance lease were completely absent.
26. According to the learned AO, findings of the enquiries were brought to the notice of the assessee by ADI (Inv.) during the course of post search investigation proceedings and also by AO during the course of block assessment proceedings under Section 158BC. Copies of statements were furnished to the assessee. In his reply, the assessee insisted on cross-examination of the lessees. It was not understood as to how the cross-examination could meet the requirement of establishing physical existence of the assets. When the Department proposed for joint physical inspection of assets, the assessee preferred and raised the bogie of cross-examination, thus, side-stepping the issue of joint inspection of assets. When the enquiry had established that the leased assets did not exist, cross-examination did not have any relevance. At any rate in deference to the assessee's insistence of cross-examination, the same were arranged and in many cases, the cross-examinations were carried out. In all such cases, the lessees reiterated their stand that assessee's purchases were bogus and assets did not exist. However, emphasis of the assessee was all along on the documents that too false and fabricated ones.
27. The learned AO held that there was a collusive and collaborative arrangement between the assessee-company, financial intermediaries and lessees. There was a common intention, design and motive to secure benefit for each of the parties concerned. The assessee's edifice of claim was based on a set of doctored documents with the purpose of obtaining tax shelter without any intention or action of effecting genuine transaction. The assessee, therefore, could not be permitted to plead his case as legitimate tax planning. The learned AO referred to the remarks of the House of Lords in the case of W.T. Ramsay Ltd v. IRC (1982) AC 300 (HL) and of Hon'ble Supreme Court in the case of McDowell and Co. Ltd v. CTO . The learned AO found that the principles laid down by Hon'ble Supreme Court in the case of McDowell and Co. Ltd. v. CTO (supra) were squarely applicable to the case of the assessee-company. The documents and the associated transactions were intended to have the effect of depriving the Revenue of its rightful dues.
28. In short, the learned AO held that the depreciation claimed by the assessee of leased assets could not be allowed as legitimate deduction.
He therefore, made the following disallowance from out of the assessee's claim of depreciation, allowance and assessed the same as representing undisclosed income of the assessee within the meaning of Section 158B(b) of the Act : 29. The learned AO also held the view that a further disallowance of the assessee's claim of interest payment on its borrowed capital was called for insofar as it represented utilization of borrowed capital for the lease transactions in question. The learned AO held that to the extent the security deposit representing the refund of purchase consideration did not come back to the assessee-company, the working capital limits of the company were not set off and the limits continued to be utilized to that extent and the assessee continued to pay interest and claimed the same in its accounts. For argument sake, even granting that internal accruals were contained in the bank account, the commercial practice and prudence was that the existing debits were paid off rather than diverting to group companies via circular transactions.
Having established that the assets did not exist and the intention behind payment made to the supplier was not genuinely for the purpose of purchasing the assets and the lease transactions were fictitious, the borrowed funds utilized for parking the same with the investments companies of the group routed through suppliers and lessee's accounts, the interest incurred on such borrowed funds were disallowable under Section 36(1)(iii) of the Act as having been incurred for the purpose other than the business purpose of the assessee-company. With regard to the case where the security deposit came back directly to the assessee-company, the learned AO held that there would be no disallowance called for. In the second category of the case where security deposit had been received by other finance companies and the amounts had not yet been received by the assessee-company in any other form, the interest was to be disallowed on working capital limits utilized to the extent of security deposits received by such companies.
The learned AO calculated disallowance of interest to the extent of Rs. 1,57,48,361 for the block period. In the third category of cases, security deposit had been received by M/s Swastik Safe Deposits and Investments Ltd. That company advanced the amounts to the assessee-company as inter-corporate deposits or loans and charged interest at the rate of 15 per cent per annum. The assessee claimed such interest payments as deduction. The learned AO calculated interest disallowable on this account for the block period at Rs. 4,38,38,143.
At the same time, the learned AO held that from the amounts disallowed, the total amount of interest paid by the assessee to M/s Swastik Safe Deposits and Investments Ltd., for the block period amounting to Rs. 94,07,602 was to be reduced. The learned AO, therefore, made the net disallowance of Rs. 5,01,78,902 in the following manner : Aggrieved by this computation of undisclosed income, the assessee is in appeal before us.
30. Shri C.S. Agarwal, the learned Counsel for the assessee pointed out that the assessee-company was a very old reputed company incorporated on 10th Aug., 1871. It was carrying on the business of manufacture and sale of textiles and was also engaged in the leasing business. All the transactions of the assessee-company were duly entered in the books of account maintained in the regular course of its business activities and there was no case of any transaction having been incurred by the assessee-company outside its books of account. There was a search under Section 132(1) of the Act conducted at the business premises of the assessee on 19/20th July, 1996. During the course of the search, statements of Shri Ajay G. Piramal, Shri Mahesh S. Gupta and Shri V.C.Vadodaria were recorded. The assessee, however, was not given copy of the statement of Shri V.C. Vadodaria and never confronted with that statement. The learned Counsel for the assessee categorically stated, "During the course of search no incriminating material was found or detected other than the documents as were duly entered and recorded in the books of account or forming part of the official records of the assessee." The learned Counsel for the assessee further categorically stated that in the statement of Shri Ajay G. Piramal and Shri Mahesh S.Gupta, there was no admission or acceptance at all of any undisclosed income earned or any false transaction having been recorded in the books of account. As on the date of search, returns of income for and up to asst. yr. 1995-96 had fallen due and the same had been duly furnished to the Department prior to the date of search. The assessments up to asst. yr. 1993-94 had already been completed. In respect of the assessee's return of income for asst. yrs. 1994-95 and 1995-96 that had been filed, no orders of assessment under Section 143(3) had been made by the learned AO. The return of income for asst.
yr. 1996-97 had not fallen due and was, therefore, filed subsequent to search under Section 132. The learned AO issued a notice under Section 158BC of the Act dt. 22nd Oct., 1996, and in compliance thereto the assessee furnished the return of undisclosed income, disclosing its undisclosed income at nil.
31. The learned Counsel for the assessee argued that in the impugned order under Section 158BC, the learned AO has not assessed any income from undisclosed source for and up to asst. yr. 1993-94. For asst. yrs.
1994-95 and 1995-96, the assessee had filed the returns of income but assessment orders had not been passed. He argued that when all the transactions had been recorded in the books of account could it be said that there was any "undisclosed" income. He took us closely through the definition of "undisclosed income" as given in Section 158B(b) and pointed out that during the course of search, no money, bullion, jewellery or other valuable article or thing representing wholly or partly income or property which had not been or would not have been disclosed for the purposes of IT Act, was found. As to any entry in the books of account or other documents or transactions, the learned Counsel for the assessee argued .that there was no question of any such entry, document or transaction not being disclosed by the assessee insofar as the lease transactions were concerned. Without disclosing these, the assessee could not have claimed any depreciation allowance and, in that case there would not have been any allegation of undisclosed income. Thus, on the facts of the case it was patent that entries in the books of account or other documents or transactions were bound to be disclosed for the purpose of IT Act or else the proceedings in question would not have arisen. In relation to the insertion by the Finance Act, 2002, in the provisions of Section 158B(b) with retrospective effect from 1st July, 1995, the learned Counsel for the assessee argued that so far as the Finance Bill was concerned, the amendment was introduced to have prospective effect. Thus, the amendment as passed by the legislature was only prospective and, therefore, the amendment could not be given retrospective effect from 1st July, 1995. Hence, any expenditure, deduction or allowance found to be false cannot be treated as "undisclosed" prior to 1st June, 2002.
The learned Counsel for the assessee argued that even if this insertion is given retrospective effect it could be only in respect of transactions entered into on or after 1st July, 1995, and in any case such expenditure, deduction or allowance was required to be 'found to be false, during the course of search. So far as the search under Section 132 in the case of the assessee-company was concerned, not a single document or any material otherwise was discovered which could establish that the entries as made in the books of account of the assessee were false. As a matter of fact, investigation made by the Department and relied upon by the learned AO in the impugned order under Section 158BC was extraneous to the search carried out in the case of the assessee and, therefore, the entire investigation made and material gathered that has been relied upon by the learned AO was beyond the scope of Chapter XIV-B. For the purpose of applying the provisions of Chapter XIV-B, there should have been positive material found during the course of search in the assessee's own case.
32. The learned Counsel for the assessee further argued that where the assessment was pending or a return of income had not been subjected to assessment proceedings, it could not be concluded that any expense claimed therein was false. For this reason, no undisclosed income could be assessed on the ground of false claim of depreciation allowance or deduction of interest in respect of asst. yrs. 1994-95 and 1995-96. In support of this contention, reliance was placed on the judgment of Hon'ble Supreme Court in the case of S.L Kapoor v. Jagmohan .
33. The learned Counsel for the assessee argued that for asst. yr.
1996-97, the return of income had not even fallen due as on the date of search. In the case of CIT v. Mahendia Mills (2000) 243 ITR 56 (SC), the Hon'ble apex Court held that an assessee may or may not claim depreciation and it is not obligatory to make claim for depreciation allowance. The Hon'ble Supreme Court further held that an allowance is given when it is claimed. In this view of the matter, the assessment of undisclosed income on account of alleged depreciation allowance for asst. yr. 1996-97 was wholly misconceived and contrary to law laid down by the Hon'ble Supreme Court. The learned Counsel for the assessee argued that for the same reason the disallowance of interest for asst.
yrs. 1996-97 and 1997-98 of Rs. 2,48,46,679 and Rs. 1,05,52,287 was totally uncalled for because unless a claim of deduction was made it could not be held that the disallowance thereof represented undisclosed income of the assessee. In fact, no interest had even been debited till the date of search relating to asst. yr. 1997-98 in the books of account maintained by the assessee. No P&L a/cs or balance sheet had even been prepared, much less adopted by the shareholders in its annual general body meeting as on the date search, was conducted. In short, the learned Counsel for the assessee argued that for asst. yrs. 1996-97 and 1997-98, in the absence of return of income it could not be said that the assessee made a claim of deduction which was not justified and represented undisclosed income.
34. During the course of hearing before us, the learned Counsel for the assessee strongly argued that the impugned order under Section 158BC was required to be quashed for the short reason that there was no nexus between the search under Section 132 in the case of the assessee and undisclosed income assessed in the impugned order. It was further argued that the sole basis on which the learned AO had made assessment of undisclosed income on the impugned order under Section 158BC was that as a result of the search made, it was found that the claim of depreciation was not allowable and that the amount of interest was not deductible. It was a matter of record that this purported basis of assessment under Section 158BC did not at all exist. There was no incriminating material found in the course of search on the assessee on the basis of which the learned AO could validly conclude that there was an undisclosed income representing these two items of deduction.
Moreover, the approach of the learned AO in this behalf was self-contradictory. On the basis of lease agreements and other documents, the assessee disclosed lease income, from the transaction's and as a corollary to the same, the assessee claimed depreciation in the returns of income filed for asst, yrs. 1994-95 and 1995-96. The income disclosed by the assessee representing lease income from the transactions in question has been duly accepted in the assessments of the assessee for various assessment years as would be seen from the following table :8.
2002-03 85,68,000 Return filed on 31-10-2002 Total 18,99,25,356 From the statement of income disclosed and assessed it was apparent that the Revenue could not be justified in disallowing the claim of depreciation on the ground that it was a false claim of depreciation.
It was not open to the Revenue to treat the transaction to be genuine for the purpose of assessing income from leasing of assets and to treat it false when the question of corresponding depreciation arose. In support of this contention, the learned Counsel for the assessee placed reliance on the judgment of Hon'ble Supreme Court in the case of Smt.
Tara Devi Aggarwal v. CIT . The learned Counsel for the assessee further argued that if there was any loss in an assessment year the same was required to be set off for arriving at the undisclosed income. In support of this contention, the learned Counsel for the assessee placed reliance on the decision of the Tribunal in B.D.A. Ltd. v. Asstt. CIT (1998) 61 TTJ (Mumbai) 197 : (1998) 65 ITD 501 (Mumbai).
35. The learned Counsel maintained that under the provisions of s.
158BC, only the income not disclosed by the assessee but found and determined as a result of search under Section 132 or requisition under Section 132A could be assessed and, therefore, the search was sine qua non for the block assessment. In support of this contention, reliance was placed on a plethora of Tribunal decisions and Court pronouncements compiled in the voluminous paper book filed by the assessee. Reference was made to the decision of the Tribunal in the case of Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai) that an addition under Section 158BC cannot be made unless some direct evidence came to the knowledge of the Department as a result of search establishing clearly the factum of the undisclosed income. A search conducted under Section 132 did not provide license to Revenue to make rowing enquiries or to throw any presumption in regard to "other matters" and the AO could proceed only on the basis of material detected at the time of search.
36. Referring to the provisions of Section 158B(b), the learned Counsel for the assessee argued that the definition of "undisclosed income" clearly indicated that the income or property which had been disclosed or which would have been disclosed for the purpose of IT Act shall not form part of undisclosed income. In other words, it was necessary to establish that any income or property had been found or detected as a result of search or based on any entry in the books of account or other documents or transactions found in the course of the search which had not been disclosed or would not have been disclosed. Reliance was placed on the judgment of Hon'ble Calcutta High Court in the case of Bhagwati Prasad Kedia v. CIT and it was stated that in that judgment, the Hon'ble Calcutta High Court held that where details of loans credited had been furnished in the regular assessment itself, the AO was not entitled to question them in the block assessment. It was held that the block assessment was not a substitute for regular assessment.
37. The learned Counsel for the assessee submitted that no evidence had been found during the course of search to establish that the assessee had failed to disclose any transaction which was in the nature of an income and which had not been entered by the assessee in the books of account. On the contrary, the entire case of the Revenue was that the assessee had entered into certain transactions of lease which had been found duly recorded in the books of account. In respect of the amount of depreciation which had been claimed for the asst. yrs. 1994-95 and 1995-96, there was no question that the assessee had not wholly disclosed the transaction. To make any disallowance on that basis as undisclosed income was clearly in violation of the principles of law laid down by the Hon'ble Calcutta High Court in the case of Bhagwati Prasad Kedia (supra).
38. The learned Counsel for the assessee pointed out that in the impugned order under Section 158BC, the learned AO specifically placed reliance on 86 items annexed to the impugned order. None of these 86 items could be said to be incriminating material found as a result of the search. These documents were either not found during the course of the search in the case of the assessee because they were procured from other sources or they were part of regular and official record of the assessee. The learned Counsel for the assessee referred to the judgment of Hon'ble Delhi High Court in the case of CIT v. Ravi Kant Jain (2001) 250 ITR 141 (Del) to the effect that an order under Section 158BC was not a substitute to regular assessment and only an income "unearthed" as a result of search could form the basis of assessment under Section 158BC. If the assessee had already filed return of income for asst, yrs. 1994-95 and 1995-96, disclosing transactions in question, then what was undisclosed. For asst. yr. 1996-97, the assessee had not even claimed any depreciation or deduction of any interest. The same applied to asst. yr. 1997-98 also.
39. The learned Counsel objected to the method of computation of undisclosed income in the impugned order also on the ground that the same was not in accordance with the method of computation laid down under Section 158BB of the Act. He argued that direct assessment of undisclosed income was not permissible and the AO was required to go through the entire process. In the case of the assessee, lease income of Rs. 18,99,25,356 had been assessed. After having done so, how could the learned AO disallow the claim of depreciation allowance on the ground that these lease transactions were false, moreso, in the absence of any order under Section 263, cancelling the assessment of lease rentals.
40. The learned Counsel for the assessee argued that out of 14 transactions the transaction with Deve Sugars Ltd., Ready Foods Ltd., Goldstar Steel and Alloys Ltd., and Deve Annapoorna Foods and Beverages Industries Ltd., were sale-cum-lease back transactions. The parties performed as the seller as well as the lessee. All plant and machinery purchased by the assessee remained in the control and custody of the sellers who had then become the lessees by virtue of their transactions with the assessee-company. There was another case of Tungabhadra Pulp and Board Ltd., wherein the party sold its plant to Candy Filters Ltd., from whom the assessee purchased the plant in question. Then the same was leased back by the assessee-company to TPBL. Thus, for all practical purposes it was also a case of sale-cum-lease back transaction. The plant and machinery continued to remain with TPBL itself. These transactions could not be held to be sham merely because of alleged statements of lessees subsequently recorded by the IT authorities. In any case and without prejudice, it could not be held that the transactions were found to be sham as a result of search. The learned Counsel for the assessee referred to the decision of the Third Member of the Tribunal in the case of Ellenbarrie Industrial Gases Ltd. v. Jt. CIT (2002) 76 TTJ (Cal)(TM) 841 : (2002) 83 ITD 111 (Cal)(TM) and specially referred to the observations at p. 149 that after having assessed lease rentals as the income of the assessee, the AO could not allege that the entire sale-cumlease back transaction was bogus, moreso in an order under Section 158BC. The learned Counsel for the assessee also pointed out that in the impugned order the learned AO has invoked the rule laid down by the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. (supra). A transaction without substance can be regarded as 'sham'. But a transaction brought in existence for ulterior purpose does not necessarily become a sham transaction as held by Hon'ble Bombay High Court in the case of CIT v. Seksana Sons (P) Ltd. . The learned Counsel for the assessee pointed outBombay Burmah Trading Corpn. Ltd. v. Asstt. CIT (2002) 76 TTJ (Mumbai) 983 : (2002) 82 ITD 531 (Mumbai), it has been held that the claim of allowance of depreciation cannot be dubbed as a transaction which was made for avoidance of tax to fall within the category of case decided by the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. (supra). In the case of the assessee-company, all that the learned AO had done was to make assumptions and proceed to hold that lease of plant and machinery by the assessee-company as "sham" without even appreciating that such income as declared and earned by way of lease, was being regularly held as income derived by the assessee from transactions of lease. There was a contradiction in terms inasmuch as if the transactions were bogus or sham as had been assumed, there was no income earned by the assessee by way of lease and the amount received was a mere return of capital. The learned AO having taxed the income from lease rentals in each of the assessment years of an amount aggregating to Rs. 18,99,25,356, could not hold on to his presumption that the transaction was sham. Without prejudice and in the alternative, the learned Counsel for the assessee argued that the lease income ought to have been excluded.
41. The learned Counsel for the assessee emphasized that in any case the entire exercise was outside the scope of block assessment. Section 158BB(1) provides for computation of undisclosed income in accordance with Chapter XIV 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 learned AO. "Such other materials" has to bear a direct nexus with the facts discovered during the course of search. In the case of Sunder Agencies (supra), the Hon'ble Mumbai Bench held that "the legislature has used the words, 'such other materials' and not 'any other materials'. The word 'such' is defined in Concise Oxford Dictionary, V Edn., at p. 1289 as 'of the kind or degree already described or implied or intelligible from the context or circumstances'. In this view of the matter, the expression "such material" means, material found or detected as a result of search and not any other material. As in the case of the assessee-company, no such material had been found as a result of search from which it could be established that the transaction was not bona fide. The entire approach of the learned AO in making the assessment under Chapter XIV-B of the Act was without jurisdiction and wholly misdirected in law.
42. The learned Counsel for the assessee referred to the decision of Indore Bench of the Tribunal in the case of Indore Construction (P) Ltd. v. Asstt. CIT (2000) 66 TTJ (Ind) 420 : (1999) 71 ITD 128 (Ind), wherein also it was held that the words used are "such other materials" and not "any other materials". Again the Bombay Bench of Tribunal in the case of Harakchand N. Jain v. Asstt. CIT (1998) 61 TTJ (Mumbai) 223 also similarly observed that the words "such other materials" used in s. 158BB(1) does not mean that the AO has got unfettered powers for making rowing enquiries. The same legal position had been stated by Hyderabad Bench in the case of Essem Intra-port Services (P) Ltd. v.Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd), and the Hon'ble Bench held that for the purpose of assessments under Chapter XIV-B, there are two requirements to be satisfied so as to be treated as undisclosed income, i.e., the factum of non-disclosure should be existing and the said non-disclosure on the part of the assessee should have been blown out as a result of search or requisition of books, etc.
under Section 132 of the Act. In the case of the assessee-company, it was not that the assessee had not recorded the transactions in the books, of account or had not disclosed the transactions. It was only upon sustained interrogation and deep scrutiny after allowing an opportunity to the assessee-company that a finding could be recorded either way. In such a situation, the instant assessment was beyond the pale of Chapter XIV-B of the Act. The disallowance of the purported claim of depreciation was, therefore, wholly unjustified being not in accordance with law. In any case, the said sum being notional amount could not be held to be undisclosed income.
43. In respect of disallowance of Rs. 5,01,78,902 by way of disallowance of interest, the learned Counsel for the assessee argued that the returns of income for the asst. yrs. 1996-97 and 1997-98 had not become due and, therefore, there was no earthly justification to treat the said sums as disallowable for the simple reason that the same had not even been claimed as on the date of search. However, the interest had been paid by the assessee-company on its cash credit account which was continuing for more than 10 years. The transaction pertaining to the payment and receipt had all been entered in the books of account and carried out in the ordinary course of assessee's business. There was no nexus with any particular sum of borrowing as the borrowings of the assessee had been made for the purpose of business in a composite manner. Moreover, the income earned by way of lease from plant and machinery had been assessed to tax and, therefore, the interest paid on the amounts invested for the purpose of purchase of plant and machinery had necessarily to be allowed as deduction.
44. The learned Counsel pointed out that according to the learned AO, interest was disallowable since part of the amounts received by the suppliers had been paid by such suppliers/lessees to the "group companies" of the assessee without charging interest. There was a diversion of funds to the group companies of the assessee and as such, the interest under Section 36(l)(iii) could not be allowed as deduction. Here too, the learned AO failed to appreciate that there was no direct co-relation with the funds or nexus with the funds invested in the purchases. In any case, there was no material found as a result of such search which can be made the basis for making disallowance out of the interest debited in the books of account in respect of the cash credit account. 45. The learned Counsel argued that while invoking the provisions of Chapter XIV-B, the learned AO had committed a basic jurisdictional error. The assessee had already disclosed the lease income in its return of income of asst. yr. 1995-96 and had also claimed depreciation in respect of the some of the assets in its return of income for asst. yr. 1994-95. For these reasons, the learned AO could not hold the claim of depreciation as falling under "undisclosed income" within the meaning of Section 158B(b) of the Act. For the purpose of assessing income disclosed by the assessee from some lease transactions, the learned AO treated the transactions as properly disclosed by the assessee. He could not treat the very same transactions as "undisclosed" for the purpose of making disallowance/depreciation under Chapter XIV-B. The learned Counsel submitted that either the transaction is disclosed or is undisclosed.
It cannot be both. 46. During the course of hearing before us, the learned Counsel made lengthy submissions in respect of each of the 14 lease transactions and in that process referred to voluminous paper books filed by the assessee in connection with this appeal. We shall now briefly enumerate the gist of the submissions of the learned Counsel for the assessee in respect of each of the transactions.
47. The learned Counsel for the assessee pointed out that in the impugned order, the learned AO held that the supplier, Applied Cryogenics Technological Services was a fictitious concern on the basis of alleged investigation report of ADIT, Bangalore, dt. 10th March, 1997. The assessee was not furnished with a copy of the aforesaid investigation report and thus, the assessee was not confronted for rebuttal with this material or evidence. The learned Counsel argued that the proprietor of the supplier firm had come to Bombay to open the bank account. The existence of the supplier could also be established by the reference made to the Investigation Department which concluded that one Mr. Ramakrishna dealing in nitrogen gas cans was staying at the residential address indicated in the receipt issued by the supplier and was doing business at Hosur. The name of the proprietor of the supplier was also Mr. A. Ramakrishna. Further, the learned AO himself states that the supplier had sold even to other parties. In this view of the matter, the lessee's denial of existence of supplier was irrelevant as the supplier was in fact located by the lessee only.
Furthermore, the inability to locate the supplier did not itself lead to the inference that the supplier did not exist or it had not sold boilers to the assessee. The learned AO could not draw any adverse inference on the ground that no proof of supplier and movements of the assets from the supplier to the lessee were furnished.
Transport/insurance was not necessary as the asset was already available with the lessee. In any event, it was the lessee's obligation to arrange the transport of goods and the assessee was not concerned with the same. As to the bank accounts opened and movements of funds, the learned Counsel argued that it was done for the convenience of all the parties. Under this transaction there was a commercial advantage for the lessee in having continuous use of the equipment for its balance useful life and at the same time being left with a monetary difference between the amount received less the security deposit. The assessee also accepted a reasonable return as a lessor from this transaction. As to the statements of the lessee, the learned Counsel for the assessee argued that the denial of the lessee was contrary to records. The denial was also self-serving as the lessee did not want to accept the sale of equipment. The subsequent stand of the lessee was also contrary to the various statements given by him. Since the statements of the lessee suffered from various contradictions, the same could not be relied upon by the AO. The lessee had signed the agreement. Signature of the lessee's representative had also been verified by his own bankers. The lessee could not be permitted to say that he was not aware of what he was signing. During the course of cross-examination by the assessee, the lessee had also accepted that the signature on the lease agreement was his own. The allegation of the learned AO that the assessee had not conducted any physical verification at any time was not justified because physical verification had been carried out through a chartered engineer at the time of entering into the transaction. Moreover, the assessee had also subsequently carried out the physical verification through the chartered engineer and this fact was brought to the notice of the learned AO in the communication dt. 7th July, 1997, but the same was ignored by the learned AO. The learned Counsel also relied upon the various letters submitted to the AO on 14th May, 1997, 30th June, 1997, 7th July,.1997 and 23rd July, 1997.
47.1 In respect of second transaction with BVPL, the learned Counsel for the assessee argued that the allegation that the supplier of the asset was not in existence was not correct. The existence of the supplier could be established from sales-tax registration number and bank account. The existence of the supplier could also be established by the reference made to the Investigation Wing by the Tax Department which concluded that the supplier had sold even to other parties. The lessee's denial of existence of supplier was irrelevant as the supplier was located by the lessee himself. At any rate, the inability to contact the supplier could not lead to the inference that the supplier did not exist or he did not sell assets to the assessee. The learned Counsel also argued that the transport/insurance was not necessary as the asset was already available with the lessee. The denial by the lessee was contrary to records; contrary to various statements given by the lessee himself and this denial was self serving as the lessee did not want to accept the sale of equipment. There was a broker who was paid brokerage by the lessee himself. The lessee had signed the agreement and the signature of the lessee's representative had also been verified by his own bankers. The lessee accepted the signatures during the course of cross-examination. There was a certificate issued by a chartered accountant, Mr. Ramdas which supported that the transaction was genuine. The stamp paper on which the lease agreement was executed had been purchased at Adoni, where BVPL was located. As to the board resolution, the learned Counsel argued that the same was signed by the managing director of the lessee company. This board resolution was furnished to the assessee-company by the lessee and the assessee-company was entitled to rely on this board resolution in view of doctrine of indoor management. During the course of cross-examination, the genuineness of the signature on the board resolution was not denied. The learned AO could not disbelieve the contents of the affidavit dt. 14th Sept., 1996, of Mr. Chandrasekaran, chartered engineer merely on accepting the self-serving statement of the lessee company. As to the circular nature of the transaction, the observation of the learned AO was not factually correct because, actually the cheque for Rs. 71.10 lakhs was handed over to BVPL (as part reimbursement of the amount paid to the supplier) and was received back after endorsement, which was a genuine banking transaction.
48. The learned Counsel for the assessee submitted that the denial by the lessee of the lease transaction and the statement of the lessee that its executives had signed the blank papers only was contrary to records and self-serving because the lessee did not want to accept the sale of equipment. The lessee also received money in its bank accounts from the supplier. In the course of examination, the lessee accepted the signatures on the lease agreement and the managing director also accepted his signatures on board resolution. He also . accepted that the chief executives of the company were authorised to do the needful.
The transaction was also supported by the certificate issued by a chartered accountant, Mr. H. Narayan. As to the statement of Shri S.Kanagaraj, the proprietor of the supplier firm that his firm was not existing and dealing in bill trading only, the learned Counsel for the assessee argued that the assessee had no reason to doubt the genuineness of the bills issued by the supplier. The assessee could also rely on the fact that the same supplier had sold even to other parties. The lessee's denial of existence of supplier was irrelevant as the supplier himself was located by the lessee as borne out by the statements given by the supplier. The learned Counsel also objected to only some extracts of the statements of the lessee and supplier, having been furnished to the assessee and not the whole statements. He also pointed out that the assessee was not confronted with report or enquiries conducted at Coimbatore and the subsequent statement of chartered engineer, Shri P.G. Srinivas dt. 23rd July, 1996. As to the circular nature of the transaction, the learned Counsel argued that the board resolution was signed by the managing director of the lessee and, therefore, the assessee could rely on the same based on the doctrine of indoor management. In respect of the contention of the learned AO in para 9.9 at p. 36 of the order that the certificate had been issued by the chartered engineer without physical verification, the learned Counsel argued that the learned AO had made a wrong and misleading statement. The engineer had, in fact, in his statement dt. 23rd July, 1996, categorically accepted that he had visited the lessee's premises and physically verified the cylinders although he was not sure whether the same belonged to the lessee or to others. As to the request of joint inspection not being accepted by the assessee-company, the learned Counsel submitted that the assessee had requested the learned AO to fix a date of joint inspection after giving at least 15 to 20 days but this request was not acceded to. In support of the contentions, the learned Counsel also placed reliance on its written communications dt. 14th May, 1997, 17th June, 1997, 11th July, 1997, 14th July, 1997, 23rd July, 1997 and 28th July, 1997.
48A. The learned Counsel for the assessee pointed out that according to the learned AO the supplier M/s Andhra Organics Corporation did not exist at the given address. He arrived at this conclusion on the basis of local enquiry conducted and investigation made by the Investigation Wing at Hyderabad. However, neither the report of local enquiry nor the report of Investigation Wing was furnished to the assessee for rebuttal. The certificate of registration granted to the supplier by the Asstt. CTO, Nempally Circle, was the conclusive evidence of the supplier's existence. Further, the learned. AO himself mentioned in the . impugned order that this party had raised bills to other parties also all over India and that Mr. Reddy of NPL had also confirmed that NPL had dealings with this party in past also. As to the denial of transaction by NPL and the letter written by NPL to the assessee-company on 19th March, 1997 stating that it had not entered into any lease transaction with the assessee, the learned Counsel argued that the denial of NPL was contrary to records and it was a self-serving denial made by NPL which stand had also been taken by the learned AO in the case of Goldcrest Finance Ltd. The lease agreement had been signed by managing director of NPL and his signature had been attested by his own bankers. Money had actually passed from the assessee-company to the supplier. These facts establish that the statements of NPL could not be relied upon as they were inconsistent.
As to the board resolution, the learned Counsel for the assessee relied upon the arguments that the said resolution was given to the assessee-company by the managing director of NPL and, therefore, the assessee was entitled to rely on the doctrine of indoor management. The genuineness of the signatures on the board resolution had been attested by the bank manager. The failure on the part of NPL to intimate IDBI about the board meeting did not in itself lead to the conclusion that the board meeting was not held at all. As to the No Lien certificate furnished by NPL being untrue, the learned Counsel argued that this showed the conduct of NPL and not of the assessee. As to there being no evidence of delivery of goods it was pointed out that the supplier had issued delivery challans dt. 10th Feb., 1994 and 12th Feb., 1994, confirming the delivery of the equipment. About 85 per cent of the total consideration being returned on the same date it was argued that it was a commercial transaction that had been agreed upon amongst the parties. As to the allegation that the affidavit of the chartered engineer had been given without physical verification of the assets, the learned Counsel pointed out that the lessee had admitted that the photographs in the affidavit were from his own factory but the lessee was unaware of the reasons for taking the photographs and that he was not aware of the visit of the chartered engineer in reply to questions put to him during the course of cross-examination held on 21st July, 1997. As to the entire transactions not having been recorded in the books of lessee, the learned Counsel argued that the learned AO had not mentioned as to on which basis he had come to that conclusion and in any event, the assessee could not be blamed for the lapse on the part of the lessee. During the course of hearing before us, the learned Counsel also placed reliance on its letters dt. 14th May, 1997, 26th June, 1997, 7th July, 1997 and 23rd July, 1997 addressed to the AO, 49. According to the learned AO, when a search under Section 132 was conducted in the case of MGPL on 6th March, 1996, the managing director of MGPL had admitted that all the transactions were on paper and there was no asset taken on lease from the assessee-company. The learned Counsel for the assessee pointed out that this statement of MGPL and the report of Investigation Wing at Bangalore relied upon by the learned AO had not been furnished to the. assessee for rebuttal. As to the statement of managing director of MGPL that the transaction had been entered with the assessee-company only for accommodation purposes, that statement too had not been furnished to the assessee for rebuttal.
At any rate, the denial of MGPL was contrary to records. It was self-serving as MGPL did not want to accept the sale of equipment. This stand was also contrary to the various statements given by MGPL. The learned Counsel pointed out that MGPL had confirmed vide their affidavit dt. 23rd March, 1996 and confirmation letter dt. 12th Sept., 1996 that the assets in question had been leased. Money had actually passed from the assessee to the supplier. MGPL had signed the lease agreement which fact has not been disputed. MGPL could not get away by merely saying that they were not aware of what they were signing. The chartered engineer had mentioned in his statement that the managing director of MGPL had approached him for issue of installation certificate. That being so, MGPL could not be ignorant of the transaction. The answers to question Nos. 6 and 7 in the statement of Mr. Krishna Mohan dt. 6th March, 1996 showed that MGPL was regularly dealing with cylinders and, therefore, there was no reason for the assessee to doubt the genuineness of the transaction. As to the allegation that the supplier DDK Industries was a concern floated by managing director of MGPL purely for bill trading, the learned Counsel argued that the existence of the supplier was not doubted and the supplier was registered with sales-tax authorities also. It was also found by Investigation Department that the supplier had carried out sales to other parties as well. Hence, existence of the supplier was fully established. Moreover, in the case of Micioland Ltd. v. Asstt.
CIT (1999) 63 TTJ (Bang) 701 : (1998) 67 ITD 446 (Bang), the Tribunal had accepted the genuineness of sale and lease transaction by MGPL through DDK. The nature of the transaction in the case of the assessee-company was very similar to that of Microland upheld in the aforesaid decision of the Tribunal. As to the contention of the learned AO that the chartered engineer D.V. Nagabhushan had accepted that he had not conducted any physical verification of the assets and that he had given a certificate of installation without knowing the purpose of the certificate, it was argued that in the statement of chartered engineer, the certificate referred by him did not pertain to the transaction of the assessee-company. Further, the chartered engineer had mentioned in his statement that it was the managing director of MGPL who had approached him for issue of installation certificate.
Hence, manipulation or mala fide conduct, if any, was attributable to the lessee and the assessee could not be penalized for the same. As to the report of ADIT, Bangalore, that no board meeting of MGPL was held on the specified date, the assessee pointed out that this report had not been furnished to the assessee for rebuttal and in any case the board resolution relied upon by the assessee-company was duly signed by the managing director, of MGPL and, therefore, the assessee-company was entitled to rely on the doctrine of indoor management. It was also not clear as to on what basis the ADIT had stated that there was no board meeting on the specified date. As to the 76 per cent of total sale consideration being returned on the same date, the learned Counsel for the assessee argued that this was a commercial transaction agreed upon amongst all the parties. The payment of security deposit could not negate the fact that particular purchase consideration had been paid by the assessee-company. As to the address given by the supplier in the bank account at the time of opening of the bank account, it was argued that the assessee-company could not have known that the lessee had given the fraudulent address. However, it was the bank's responsibility to take proper documents supporting the address of the account holder.
As to the argument that the assessee-company had not accepted the offer of joint inspection, the learned Counsel pointed that no such letter for joint inspection of assets in respect of this transaction had been sent to the assessee-company. As to the assessee not availing of opportunities of cross examining MGPL, the learned Counsel pointed out that the cross-examination was fixed on 28th July, 1997 (Thursday) evening. Further, the statement of MGPL was not furnished to enable the assessee to conduct the cross-examination. For these reasons, a request was made to the learned AO to give another date for cross-examination.
During the course of hearing before us, the learned Counsel also placed reliance in this respect on the letters addressed to the AO dt. 16th July, 1997, 23rd July, 1997 and 25th July, 1997.
50. According to the learned AO, the supplier M/s Agri Commercial.
Products could not be located at the given address. In this connection, the learned Counsel for the assessee argued that this fact in itself could not lead to the conclusion that the supplier did not exist or that he did not sell the machinery to the assessee-company. It was the case of the Department that this supplier had made similar sales to other parties as well. RCOP had also accepted that they had been dealing with the supplier even earlier and that they had purchased raw materials from the supplier. This supplier had, in fact, been located by the lessee himself. The address of the supplier was the same as that of the RCOP's office at Guntur and the person who had signed the document on behalf of the supplier was an ex-employee of RCOP itself.
As to the statement of the managing director of RCOP denying that they had purchased or sold any machinery to the supplier, the learned Counsel argued that the assessee had neither been given the copy of local enquiries and investigation report by Investigation Wing at Hyderabad nor the statement of RCOP recorded on 16th Sept., 1996 and 11th July, 1997. At any rate, the denial of RCOP was contrary to records. It was self serving as RCOP did not want to accept the sale of equipment. Money had actually passed from the assessee to the supplier.
RCOP had signed the lease agreement. Although RCOP had stated in their statement dt. 11th July, 1997 that the signature on the lease agreement had been forged, the same was not true. The learned Counsel for the assessee argued that the statement of RCOP could not be relied upon as they were inconsistent and suffered from contradictions. As to the report of ADIT at Guntur that no board meeting of RCOP was held on the specified date, it was stated that such report by ADIT, Guntur had not been furnished to the assessee-company for rebuttal. At any rate, this board resolution had been signed by a director of RCOP and the person signing the other documents was the company secretary of RCOP. RCOP had stated that the board resolution was genuine and, therefore, the assessee-company was entitled to rely on the doctrine of indoor management. As to the statement of sales-tax authorities at Guntur that M/s Agri Commercial Products was not registered with them and the registration number did not belong to the State of Andhra Pradesh, it was argued that the report of enquiry made with sales-tax authorities was not furnished to the assessee-company for rebuttal. As to the substantial part of purchase consideration being returned on the same date, it was argued that it was a commercial transaction agreed amongst the parties concerned. As to the transaction appearing in the bank accounts of RCOP at Mumbai, not appearing in the books of account of RCOP, the learned Counsel argued that it was a failure or lapse on the part of RCOP and it could not be held out against the assessee. As to the contention that the assessee-company had not accepted the offer for joint inspection, it was argued that the assessee-company had not refused joint inspection. During the course of hearing before us, the learned Counsel for the assessee also placed reliance on the letters of the assessee-company addressed to the AO on 26th June, 1997, 22nd July, 1997, 23rd July, 1997 and 24th July, 1997.
51. In respect of this transaction, the learned AO held on the basis of the statement of sales-tax authorities that the supplier had never filed sales-tax returns and the letter addressed to the supplier dt.
16th May, 1997 that the existence of the supplier was doubtful.
According to the learned AO, the material on the basis of which this conclusion was reached was not furnished to the assessee for rebuttal.
At any rate, non-filing of the sales-tax return or the letters not being replied to could not lead to the inference that the supplier did not exist or had not sold the assets to the assessee-company.
Investigation made by the Department also showed that the supplier had sold to other parties also. The denial by ATL of the existence of supplier was irrelevant because the supplier in question had been located by ATL only. The AO also did not make any efforts to locate the supplier from the other address mentioned on the receipt, challan, etc., i.e., Title Factory Compound, Bangalore. As to there being no proof regarding transportation and insurance of the assets, it was argued that there was no necessity because the assets were already available with the lessee. As to the bank account being opened by the supplier and ATL on the same date and 85 per cent of the consideration being transferred on the same date to an investment company of Piramal group, the learned Counsel argued that this was done for the convenience of all parties and it was a commercial transaction agreed upon amongst the parties. As to the allegation that no board resolution had been passed by ATL on the date specified, it was argued that the representative signing the resolution was the vice president of ATL and, therefore, the assessee was entitled to rely on the doctrine of indoor management. It was also argued that the statement of Mr. N.Subramaniam to the effect that no board meeting was held on the specified date was never furnished to the assessee and the same had -also not been enclosed in the Annexures enclosed to the impugned order. As to the argument that records and books of ATL did not reflect any sale of assets to the supplier, it was argued that on what basis this conclusion was reached had not been specified. At any rate the transaction could not be considered as not genuine just because ATL had not recorded the transaction in their books. During the course of hearing before us, the learned Counsel for the assessee also relied upon the letters addressed to the AO, dt. 14th May, 1997, 16th July, 1997 and 23rd July, 1997.
52. According to the learned AO, the supplier M/s Maheshwari Engineering Works did not exist at the given address. There was also no sales-tax registration of the supplier nor had any return been filed with sales-tax authorities. It was argued that the particulars of summons issued to the supplier and investigation conducted by Investigation Wing at Hyderabad and enquiries with local sales-tax authorities had not been furnished to the assessee-company for rebuttal. The learned Counsel argued that these facts relied upon by the learned AO did not lead to the inference that the supplier did not exist or had not sold the equipment to the assessee-company.
Furthermore, the enquiries were made at the address 7-1-61/1 whereas the address of the supplier was 7-1-61/7. The efforts made by the assessee-company in June, 2002, had revealed that the supplier, M/s Maheshwari Engineering Works was actually registered with sales-tax authorities. SKSCL had also not denied the existence of the supplier.
As to the denial of SKSCL of the lease transactions, it was argued that the statement of SKSCL dt. 26th Aug., 1996 had not been furnished to the assessee-company for rebuttal. At any rate, the denial was contrary to the records. It was self-serving as SKSCL did not want to accept the sale of equipment. This stand had also been taken by the AO in the case of Goldcrest Finance Ltd. There was a broker who had been paid brokerage for the transaction. Money had actually passed from the assessee-company to the supplier. The statement of SKSCL could not be relied upon as it suffered from contradictions and was inconsistent.
Although, they denied that the persons who had signed the documents were their employees, no further investigation was made in that respect. The denial was made by the new management of SKSCL and, therefore, it was quite possible that the new management was not fully informed. As to the allegation that the chartered engineer, S.Chandrasekaran had confirmed that he had issued the certificate without carrying out physical verification of the assets, it was argued that the assessee was not confronted with the statement of Mr. S.Chandrasekaran. It was also relevant to note that in another case (BVPL) this engineer had specifically confirmed to the AO that he had physically verified the assets while giving the certificate. As to the allegation that the contents of the board resolutions were false it was argued that the board resolution had been certified by the company secretary of SKSCL. The assessee could not have verified whether the person authorised by the board resolution was actual employee of SKSCL.
53. As to the contention that the assessee-company did not attend to the cross-examination fixed on 28th July, 1997, it was submitted that the notice for this purpose was received by the assessee-company on only 26th July, 1997 which was a Saturday. On the same date, the learned AO had also scheduled a cross-examination in the case of Miga Gas (P) Ltd. to be held at Bangalore. As to the bank account of supplier SKSCL being opened in Mumbai on the same date, it was contended that it was done for the convenience of all parties. During the course of hearing before us, reliance was also placed on the letters of the assessee-company to the AO dt. 14th May, 1997, 17th June, 1997, 15th July, 1997, 22nd July, 1997, 23rd July, 1997 and 28th July, 1997.
54. In this case, the assessee claimed that the assets had been sold to them by DSL and thereafter, the assessee leased back the assets to DSL.
The learned AO did not accept this contention of the assessee on various grounds. The location of the assets was mentioned in the lease agreement as Madhya Pradesh whereas there was no factory of DSL in Madhya Pradesh. DSL had acquired all its assets from Tungbhadra Sugar Works Ltd., but in the agreement between Tungbhadra Sugar Works Ltd. and DSL, the assets in question did not form part of the agreement and there was also no evidence that the same had been subsequently acquired by DSL. The transaction had not been recorded in the books of DSL.
Since no records were available at DSL's office and DSL had also not responded to enquiry letter, the learned AO concluded that the board resolution was fabricated. No lien certificate issued by DSL was also considered to be a wrong certificate as it referred to Deve Annapoorna Food and Beverages Industries Ltd. The certificate of the chartered engineer, Mr. P.O. Srinivas was also not found acceptable on the ground that the same engineer had issued certificates in many other cases without physical verification of the assets. The learned AO also found that the manner in which the transactions were executed suggested that the same were stage managed and not genuine. During the course of hearing before us, the learned Counsel for the assessee argued that the assessee was not confronted with the material on the basis of which the learned AO gave his findings in respect of this transaction. The assessee was not furnished with a copy of the agreement between Tungbhadra Sugar Works Ltd. and DSL. The assessee also had not been given an opportunity to inspect the assessment records of DSL and annual report of DSL for the financial year 1994-95 referred to in the assessment order. The assessee was also not confronted with the report of inspection by the Department at DSL's Registered Office and copy of statement of Shri P.G. Srinivas dt. 23rd July, 1996, was also not furnished to the assessee. However, the learned Counsel argued that the assessee-company could not be held responsible for omissions or inaccuracies if any, in the records maintained by DSL. The assessee was entitled to rely on the documents executed between the assessee-company and DSL and the certificates given by DSL. Furthermore in this case, the learned AO had not examined DSL and, therefore, inference drawn by the learned AO was without seeking the explanation of the lessee. As to the existence of the assets, DSL had furnished a certificate regarding existence of assets from an independent chartered engineer. DSL also furnished copy of board resolution. The assessee was entitled to reply on these documents and it had no reason to suspect the veracity of the same. In this case, there was also no specific denial of transactions by the DSL who was seller-cum-lessee. As to the transactions and agreements being made in Mumbai on the same date and 85 per cent of the purchase consideration being received back by an investment company of Piramal group, the learned Counsel for the assessee argued that from this itself it could not be inferred that the transactions were not genuine. The modalities were adopted as the same were found to be convenient and acceptable to both the parties. Reliance was also placed on letters dt. 14th May, 1997 and 23rd July, 1997.
55. In this case also, the assessee claimed to have purchased and leased back the assets from/to RFL only. The learned AO held that the transaction was not genuine on several grounds. Although RFL had acknowledged receipt of letters from the AO, it did not reply. RFL was known to be a fraudulent party and its promoter was absconding. It had also not filed returns of income after the asst. yr. 1993-94. The promoter of RFL confirmed by its letter received on 19th June, 1997, that no sale of assets had taken place. The assets in question were hypothecated with IDBI and no permission was taken from IDBI for sale of assets. IDBI had also confirmed that there was no board meeting on the date of board resolution relied upon by the assessee-company. Apart from IDBI, RFL being sick company and the permission of BIFR was also required which had not been taken. The certificate of chartered engineer was irrelevant because existence of assets as not an issue but whether there was a genuine transaction. RFL had been found to have raised bills in an indiscriminate manner to a number of parties. The learned AO also found that the manner in which transactions were carried out and the movement of money paid by the assessee also suggested that transaction was not genuine. During the course, of hearing before us, the learned Counsel for the assessee argued that most of the material referred to by the learned AO had not been furnished to the assessee-company for rebuttal. Such material included various letters addressed by the learned AO to RFL; report of Investigation Wing of the Department at Bangalore; correspondence with IDBI. As to BIFR, the learned AO did not mention as to on what material he arrived at his finding. The learned AO also did not clarify as to on what material he came to the conclusion that RFL had been raising bills in an indiscriminate manner in respect of the same assets. The learned Counsel further argued that the learned AO had mentioned that the promoter of RFL was absconding. The assessee could not be penalized for the same or for the lack of response by RFL. As to the letter of. RFL dt. 19th June, 1997, the learned Counsel for the assessee pointed out that the same did not refer specifically to the lease transactions with the assessee-company. At any rate, the denial was contrary to the records and was self-serving because RFL did not want to accept the sale of equipment. The assessee had made payment towards purchase price which fact was borne out by the bank accounts of RFL. When the learned AO himself found that the RFL had indulged in a large scale of unethical practice, he could not have relied upon the denial of the transaction from RFL. The transaction of the assessee-company by RFL was supported by agreements; certificate issued by an independent chartered accountant, P.P. Bhat and Co., board resolution furnished by RFL and No Lien certificate issued by RFL. These documents had been furnished to the assessee by RFL themselves and as far as the assessee was concerned, it had no reason to suspect the genuineness of the same.
The payment by the assessee to RFL and payment by RFL to another group company of the assessee were two independent transactions. At any rate, there was still a commercial advantage for RFL as it enjoyed continuous use of equipment and was also left with a monetary difference between the amount received and the security deposit paid. The learned Counsel for the assessee pointed out that in this case, the learned AO also did not doubt the physical verification of the assets or existence of the assets. That being so, the genuineness of the transaction could not be questioned merely because of the subsequent statements of RFL. The learned Counsel for the assessee placed reliance on its letters dt.
14th May, 1997, 6th July, 1997 and 23rd July, 1997 ' addressed to the learned AO.56. In this case, the learned AO held that the certificate of incorporation of BGL was fabricated. The balance sheet of BGL as on 31st March, 1994, was fraudulent since BGL did not exist at that time and there was no auditor existing as mentioned in the balance sheet.
The chartered engineer, P.O. Srinivas had stated that he had not visited the factory of BGL and he had not physically verified the assets. The managing director of BGL had also confirmed that BGL was merely a paper company. Hence the board resolution was false. The supplier Bestow did not exist at the given address and the sales-tax registration numbers did not belong to Bestow. The alleged proprietor of Bestow had also confirmed that he was only a name lender who had signed the bills only for earning commission. There was no insurance of assets in question and as a matter of fact, the assets never existed at the time of alleged purchase by the assessee. The assessee-company had also not taken any steps to verify the assets at any point of time.
During the course of hearing before us, the learned Counsel for the assessee stated that the assessee was not confronted with the material referred to by the learned AO, such as certificate of incorporation of BGL; investigation report of Investigation Wing at Bangalore or the details of investigation made at Bangalore; enquiries made with sales-tax authorities, etc. The learned Counsel argued that if certificate of incorporation was fraudulent, the same would call for action in the case of BGL and not the assessee-company. Mr. Anwar Pasa, managing director of BGL has represented to the assessee-company about the existence of the company and its registered address. There was no reason for the assessee to doubt the genuineness of these representations and the balance sheet produced before it. The assessee was also not expected to verify about the auditor mentioned in the balance sheet. The assessee was also entitled to rely on the board resolution, the genuineness of the signatures on the same had not been refuted by the learned AO also. As to supplier, the assessee was not aware as to on what basis the learned AO came to the finding that the supplier never existed. No opportunity was accorded to the assessee to establish the genuineness of the supplier and in any case the assessee-company was entitled to rely on the signed documents available with it. Just because the assets had not been insured it could not be said that the assets were not in existence at all. During the course of hearing before us, the learned Counsel referred to the letters addressed by the assessee-company to the learned AO dt. 14th May, 1997, 2nd July, 1997, 7th July, 1997, 15th July, 1997 and 23rd July, 1997.
57. In this case also, the assessee claimed to have purchased and leased back the assets in question from/to GSAL. The learned AO, however, held that the board meeting dt. 7th July, 1994, approving the lease was never held. The assets were hypothecated with IDBI and the same could not be sold to the assessee-company without the permission from IDBI. This fact should have been known to the assessee-company since it had the annual accounts and reports of , GSAL in its possession. GSAL had been found to have signed bills to various parties in an indiscriminate manner. In the statement recorded on 8th July, 1997, Mr. S.S. Bhat had confirmed that no sales-tax had been paid on the sale and the transaction was not reflected in the monthly sales-tax return filed before the State Government. The learned AO also found that GSAL had recorded the transaction in its books of account in a manner not consistent with the regular accounting practice. The transaction was stage managed and 85 per cent of the purchase consideration was received back on the same date by a financial company of the assessee group. As to the certificate issued by the chartered engineer, the learned AO held that GSAL had not confirmed the visit by the chartered engineer. During the course of hearing before us, the learned Counsel for the assessee stated that the assessee-company was not confronted with the correspondence with IDBI. The learned AO had not specified as to on what basis he came to the conclusion that GSAL had issued bills in an indiscriminate manner. The assessee was also not confronted with the correspondence between the AO and the GSAL and the statement of Shri S.S. Bhat. The learned Counsel argued that board resolution was duly signed by the managing director. The genuineness of the signatures has not been denied. By a letter dt. 12th July, 1997 addressed to the AO, GSAL had again confirmed the board resolution and the fact that the same had been ratified by the general body on 20th Dec., 1995. In para 7(c) of the lease agreement, it was clearly mentioned by GSAL that the lease agreement did not violate any covenant with any bank financial institutions and 'Government authorities. In his letter dt. 26th July, 1997, Mr. S.S. Bhat had confirmed the genuineness of the transaction. Balance sheet of GSAL also did not reveal that the assets in question had been hypothecated to IDBI. Vide letter dt. 12th July, 1997 addressed to the AO, GSAL had clarified that sales-tax was not applicable since it was a second sale. The learned AO had not specified as to how GSAL was held to have indulged in indiscriminate issue of sale bills. As to the manner in which the transaction was recorded in the books of GSAL, the fact of the matter was that the transaction was recorded and if the same was totally inconsistent with the accounting practice, the same could not affect insofar as the claim of the assessee-company was concerned. In this case, even the learned AO had not doubted the physical existence of the assets in question. As to the manner in which the transaction was carried out, the same was in accordance with the convenience between the parties and as argued upon between the parties. The learned Counsel for the assessee referred to the letters of the assessee-company dt.
14th May, 1997, 7th July, 1997, 23rd July, 1997 and 30th July, 1997, addressed to the AO.58. In this case also the assessee claimed to have purchased and leased back the assets from/to DAFBIL. The learned AO, however, did not accept the genuineness of the transactions. The letters written to DAFBIL had come back with the remarks of postal authorities "left", "not traceable", etc. The assets in question had been hypothecated with IDBI and, therefore, No Lien certificate issued by DAFBIL was false. The IDBI had also not received any notice for the board meeting and, therefore, no reliance could be placed on board resolution. The assessment records of DAFBIL along with its return of income for the asst. yr. 1995-96 did not reveal any sale from the block of assets. The balance sheet of DAFBIL for 31st March, 1995, showed the sale of asset which was lower than the amount of purchase consideration disclosed by the assessee-company. Documents of DAFBIL relating to acquisition and lien of assets also did not reveal any sale to the assessee-company.
The assets owned by DAFBIL were allegedly destroyed in a fire for which a Police complaint was made on 7th April, 1997, along with the list of assets destroyed. The assets allegedly sold to the assessee-company did not appear in such list of assets destroyed. Mr. Rizvi, director, DAFBIL could not explain as to why the lease rent was not debited to the P&L a/cs. He could also not explain as to why security deposit was made with a group company of the assessee. During the course of hearing before us, the learned Counsel for the assessee argued that the assessee was not confronted with the letters written by the learned AO to DAFBIL; correspondence with IDBI and other financial institutions; enquiry report of the AO of DAFBIL, Police complaint filed by DAFBIL on 7th April, 1997, and the statement of Mr. Rizvi on 25th July, 1997. The learned Counsel further argued that the contention that no one was available at the company's address and the promoters were absconding showed that the office of DAFBIL was existing at the given address even at the time of investigations made by the Department. As to the board resolution, the genuineness of the signatures on the board resolution was not denied. Mr. Rizvi admitted to have signed the minutes. The failure of DAFBIL to intimate IDBI did not lead to the conclusion that the board meeting was not held. Moreover, so far as the assessee was concerned, it had no reason to doubt the genuineness of board resolution. As to the allegation that the promoters of DAFBIL had committed various violations of law only proved that DAFBIL had acted fraudulently but it did not prove that the assessee-company had not acted in good faith. If the sale was recorded at a lower price in the balance sheet, it did not indicate that the entire transaction was fictitious. Entries made in the books of DAFBIL should not affect the claim of depreciation allowance in the case of the assessee-company. As to the manner in which transaction was carried out and the security deposit was made the same were commercial transactions as agreed upon among the parties concerned. The learned Counsel for the assessee argued that the learned AO had not established that the description in the Police complaint did not match with the description of assets sold to the assessee-company. The learned AO had at the same time stated that these assets were hypothecated to IDBI. The learned Counsel argued that according to the learned AO, the assessee was required to know the existence of assets at all times after the same were leased back to the seller. The conduct of the assessee-company should be compared with that of IDBI with whom assets in question had been hypothecated. As to DAFBIL not debiting the lease rent to P&L a/c, the learned Counsel for the assessee argued that the fact of the matter was that payment of lease rent was denied by Mr. Rizvi. The learned Counsel for the assessee also referred to the letters addressed to the learned AO dt.
14th May, 1997 and 23rd July, 1997.
59. According to the learned AO, the enquiry revealed that the boiler in question was purchased by one Hemakuta from the original owner Salarjung in 1985-86 after obtaining approval of State Bank of Mysore to which it was hypothecated. However, the approval of State Bank of Mysore was subsequent which showed that the asset could not have been sold to Hemakuta. As to the supplier Candy Filters, they did not furnish particulars relating to purchase of assets from Hemakuta. It showed that it was a paper transaction. The total market value mentioned in the letter of State Bank of Mysore while granting approval was Rs. 9 lakhs. The book value was Rs. 77,000 only. The same could not be purchased at an exorbitant value of Rs. 60 lakhs. The letters written to TBPL to confirm board resolution remained unanswered. In this case, Candy Filters who allegedly sold the machineries did not receive any consideration as the entire amount was transferred by it to TBPL which was inconceivable. During the course of hearing before us, the learned Counsel for the assessee contended that the assessee was not confronted with the enquiry report of the Department; correspondence with Candy Filters; letter from State Bank of Mysore; letters to TBPL and bank statements. The learned Counsel argued that in any case purchase of boiler by Candy Filters from Hemakuta was not denied or disproved by the learned AO. The learned AO had only relied on the date of approval by State Bank of Mysore, but he disregarded the fact that Candy Filters had duly confirmed the fact that they had purchased the boiler from Hemakuta. The fact that the approval was obtained from State Bank of Mysore in itself showed that the boiler was in existence. The failure of supplier to furnish the details of acquisition of boiler could not affect the physical existence of the asset and its purchase by the assessee-company. Similarly, the non-finalisation of account books of the supplier could not affect the claim of the assessee-company. The assessee-company had relied upon the agreements; certificate of chartered engineer and board resolution. If the other parties did not reply to the queries of the AO, the genuineness of these documents was not disproved. It was represented before the assessee-company that/the board resolution was genuine and the assessee had no reasons to doubt the same. As to the consideration paid by the assessee-company, the same was supported by the valuation report of chartered engineer, Mr. P.G. Srinivas dt. 30th Sept., 1994.
The payment made by Candy Filters to TBPL could be towards settlement of their internal outstanding. The assessee-company could not dictate as to how the supplier should utilize the purchase consideration paid by the assessee-company. The learned Counsel for the assessee also referred to the letters addressed by the assessee dt. 14th May, 1997 and 23rd July, 1997.
60. Shri Boota Singh, CIT (Departmental Representative), appearing on behalf of the Revenue pointed out that under the provisions of s.
158B(b), "undisclosed income" also includes "any expense, deduction or allowance claimed under this Act which is found to be false". These words though inserted by the Finance Act, 2002, have been given retrospective effect from 1st July, 1995. Further, as per the provisions of Section 158BB(i), the undisclosed income of the block period is to be computed in accordance with the provisions of the Act on the basis of evidence found as a result of search. In the case of the assessee, all the lease agreements in question were found during the course of the search and had been duly shown in the Panchanama dt.
20th July, 1996. The AO had mentioned in the impugned order under Section 158BC that the search commenced on 19th July, 1996, but the same was continued until 22nd Sept., 1996. There was, however, a statement of Shri Mahesh Gupta recorded on 30th Sept., 1996 signifying that the search continued up to 30th Sept., 1996. The evidence found during the enquiries conducted atleast during the period 19th July, 1996 to 30th Sept., 1996 was, therefore, found as a result of search.
Such evidence led to the conclusion that depreciation allowance claimed by the assessee. was false. There was, therefore, a direct nexus between the findings of the learned AO in the impugned order under Section 158BC and the search under Section 132 carried out in the case of the assessee. The learned Departmental Representative emphasized that in the first instance, lease agreement and some other connected documents were found during the course of the search. Secondly, during the period of search, extensive enquiries were conducted by the Department and all such enquiries could be said to be relating to the search. Therefore, there was no force in the contention of the learned Counsel for the assessee _that undisclosed income assessed in the impugned order was not relatable to the search carried out in the case of the assessee.
61. The learned Departmental Representative strongly relied upon the various findings elaborately discussed in the impugned order under Section 158BC. He pointed out that in most cases, the suppliers were found to be not existing. There was no evidence of any machinery being transported from the alleged supplier to the assessee or to the alleged lessees. There was no force in the argument of the assessee-company that taking delivery of the assets was the responsibility of the lessees. As the assessee had claimed depreciation it was the assessee's burden of proof to establish these primary facts. Apart from the suppliers not being found in most cases, the alleged assets were also not found to be physically existing. It was an admitted fact that the assessee-company themselves never conducted any physical verification of the assets. No evidence was ever filed that the assets were inspected by the assessee-company. In such a scenario if the lessees made a statement that the assets in question did not exist, what else remains ! The assessee had relied upon the lease agreements and supporting documents. However, these lease agreements and related documents were collusive. The. documents were duly fabricated with ulterior motive to claim depreciation. The fact that the payments were allegedly made by the assessee-company by account payee cheques was of no consequence because major part of the payments came back to the assessee. The assessee only parted with about 15 per cent which was by way of cost of making these arrangement, in order to enable the assessee to claim 100 per cent depreciation. The bank accounts in which the assessee made payment had been opened at the assessee's own bank and the parties were introduced to the bank by the assessee himself. In none of the cases, the bank made any independent enquiry about the genuineness of the parties. The manner in which the transactions were routed was with a view to ensure that the amounts paid by the assessee came back to him on the same date. If the assessee could be refunded 85 per cent of the purchase consideration, what was the justification of the parties having entered into these transactions at all In most cases, the suppliers of the assets did not receive anything and they transferred the entire money to the account of the lessees. This showed that the suppliers were not in existence at all. In none of the cases, the assessee produced the suppliers. This also established that there was no genuine sale of any asset to the assessee. If that were so, the claim of the assessee of depreciation allowance was false.
62. The learned Departmental Representative argued that there was no force in the contention of the learned Counsel for the assessee that the denial by the lessees was contrary to records. The fact of the matter wag that the so-called records were collusive documents relating to the transaction which were never intended to be physically carried out. Reliance placed on the certificate of chartered engineers was also an eye-wash. If the assessee had genuinely made purchase of such colossal amounts, he would have himself satisfied that the assets of such value really existed. Not only that, after having leased the assets, the assessee would have seen to it that the assets continued to be in good shape with the lessees from time-to-time.
63. The learned Departmental Representative argued that various documents relied upon by the assessee-company had not stood the test of enquiry by the AO. There was elaborate discussion in the impugned order in respect of each transaction and the learned AO had found far too many holes in the story of the assessee. The assessee produced board resolutions but it was found that board meetings never took place. The register of minutes of board meetings was either never produced or did not contain particulars of any such board resolutions. No lien certificates were filed while the assets were already hypothecated with IDBI or other financial institutions. The parties were either found to be not existing or they denied having entered into the transaction and admitted that the documents in question were mere paper work. All these enquiries were conducted during the course of search and, therefore, had a direct nexus with the search. Thus, the learned AO was entitled to include disallowance of depreciation in computation of undisclosed income of the block period.
64. The learned Departmental Representative argued that there was no force in the contention of the assessee that the assessee was not confronted with various statements recorded and investigation carried out. During the course of proceedings under Section 158BC, these statements were shown to the assessee from time-to-time. This fact was borne out from the impugned order. At any rate, the assessee was well aware of the case against him.
65. The learned Departmental Representative" also argued that the reliance placed by the learned Counsel for the assessee on the judgment of Hon'ble Supreme Court in the case of Mahendra Mills (supra) was totally misplaced. The provisions of Section 158B(b) also included income based on any entry in the books of account or on the document or transaction which would not have been disclosed for the purpose of the Act. From the manner in which the documents were made by the assessee, it was quite clear that the assessee was all set to claim depreciation if there were no search. The learned AO was, therefore, entitled to include the amount of such depreciation allowance though not claimed as undisclosed income in the block assessment.
66. During the course of hearing before us, the learned Departmental Representative also filed a brief chart enumerating the grounds on which the learned AO treated the assessee's claim for depreciation to be false. Various particulars relied upon by the learned Departmental Representative in this chart have all been enumerated by us while referring to the impugned order under Section 158BC in respect of each of the 14 transactions.
67. Shri C.S, Agarwal, the learned Counsel for the assessee in his rejoinder stated that for all practical purposes, the search was completed by the 20th July, 1996. Thereafter, only the statements of Shri Ajay Piramal and other senior employees of the assessee-company were recorded on different dates. Merely because these statements were labelled to be under Section 132(4), it could not be said that the search under Section 132 indeed continued up to 22nd Sept., 1996 or 30th Sept., 1996 and at any rate, so far as these statements were concerned, the same did not point to any falsity about the assessee's claim of depreciation allowance, and in none of these statements there was any acceptance or admission that the transactions were not genuine.
On the contrary, all the deponents stood by the entries as made in the books of account of the assessee-company.
68. The learned Counsel for the assessee vehemently opposed the contention of the learned Departmental Representative that in view of the lease agreements and other supporting documents to the lease agreements having been found during the course of search at the premises of the assessee, there was a direct nexus between the search under Section 132 and undisclosed income represented by the disallowance of assessee's claim of depreciation on the leased assets.
He argued that if that were so, there would be no distinction left between the subject-matter of normal assessment proceedings and proceedings under Section 158BC because the books of account and supporting documents and material were only expected to be found if the search of any business premises were conducted under Section 132. He argued that if the lease agreement had not been found at the assessee's premises during the course of search, the Revenue could have had some case against the assessee. The fact that lease agreements and supporting documents were found at the assessee's premises only supported the assessee's claim and not otherwise. Moreover, the lease agreements did not by themselves suggest that the same were not genuine.
69. The learned Counsel for the assessee also vehemently opposed the contention of the learned Departmental Representative that whatever enquiries were conducted by the Department during the period 19th July, 1996 to 30th Sept., 1996, could be said to be relating to the search under Section 132 in the case of the assessee. He argued that unless, during the course of search at the assessee's premises only, some evidence was found which could enable the Revenue to draw an adverse inference against assessee's claim, it could not be said that the searches and survey and other enquiries carried out by the Department elsewhere were relatable to the search carried out in the case of the .
assessee. Without prejudice to this main contention, the learned Counsel for the assessee argued that in the impugned order under Section 158BC, the learned AO had not confined himself to any particular period. He had relied upon the material which was available with the Department even before the search and also on further enquiries made or caused to be made by the learned AO long after September, 1996. In the impugned order, the learned AO had nowhere specified as to what statements were recorded or what facts were found specifically during the alleged period of search i.e., 19th July, 1996 to 22nd Sept., 1996. He argued that the fact of the matter was that so far as the search in the case of the assessee was concerned, the Department drew blank and no material adverse to the assessee was found at the premises of the assessee-company. Therefore, all other material relied upon by the learned AO in the impugned order was extraneous material which could not be utilized or relied upon in the impugned order under Section 158BC.70. The learned Counsel for the assessee argued that in the impugned order under Section 158BC, the learned AO had mainly relied upon suspicion, surmises and conjectures and in none of the 14 cases the learned AO had brought on record sufficient material to establish it as a fact that the assessee's transactions were not genuine. He argued that the learned AO had held that in all the cases 85 per cent purchase consideration was received back by the assessee. The true facts in this regard were that only in respect of three transactions, viz., Niraj Petro Chemicals (NPL), Miga Gases (P) Ltd. (MGPL) and Bhagyalakshmi Vegetable Products Ltd.-II (BVPL-II), the security deposits were received by the assessee-company. In the remaining cases, the money was paid to the finance companies such as Swastik Safe Deposit and Investments (P) Ltd., Vulcan Investments (P) Ltd., Legend Pharma Ltd., etc. The learned AO was not justified in treating that the deposits to the extent of 85 per cent in all the cases were received back by the assessee-cornpany for the reasons that the other finance companies were group concerns. The learned AO had not brought on record that the assessee-cornpany received back the purchase consideration in other cases as well. As a matter of fact, the learned AO did not further look into the matter and held that it was sufficient that these finance companies were group concerns. The learned Counsel further pointed out that it was not true that all the lessees had denied genuineness of lease transactions. In five cases, viz., Apollo Tubes Ltd. (ATL), Deve Sugars Ltd. (DSL), Gold Star Steel and Alloys Ltd. (GSAL), Deve Annapoorna Food and Beverages Industries Ltd. (DAFBIL) and Tungbhadra Pulp and Boards Ltd. (TPBL), the lessees had not denied the genuineness of lease transactions. Out' of the remaining nine parties, only two parties, viz., Raghunath Cotton and Oil Products Ltd. (RCOP) and Shree Kailas Sugar and Chemicals Ltd. (SKSCL) denied having knowledge of the lease transaction with the assessee-company. In the case of RCOP, the statement of the lessee denying his signature was not proved. In the case of SKSCL there was a change in the management of lessee company whereas the transactions with the assessee-company had been carried out by the earlier management. In the remaining seven cases, the lessees did not dispute that they had signed the lease agreements. They merely made self-serving statements that the transactions were accommodation paper transactions or that they had signed blank lease agreements. The learned AO had accepted such contentions of the lessees without demur.
The learned Counsel argued that out of 14 lease transactions, 4 transactions in the case of Deve Sugars Ltd. (DSL), Ready Foods Ltd. (RFL), Gold Star Alloy and Steels Ltd. (GSAL) and Deve Annapoorna Food and Beverages Industries Ltd. (DAFBIL), the transactions were purchase-cum-lease back transactions. Obviously, in such cases it was the seller who remained in possession of the plant and machinery all the time. In such circumstances, in order to establish that such asset existed of which the assessee-company became the owner, the lease agreements and other supporting documents were the most important evidence. In respect of other 10 transactions also, the assessee had relied upon a large number of documents which could not be brushed aside by merely calling such documents as an eye-wash or documents of accommodation. As to the entries in the books of account of the lessees, the learned Counsel pointed out that in 5 cases, viz., Bhagyalakshmi Vegetable Products Ltd.-I (BVPL-I), Bhagyalakshmi Vegetable Products Ltd.-II (BVPL-II), Miga Gases (P) Ltd. (MGPL), Ready Foods Ltd. (RFL) and Gold Star Alloy and Steels Ltd. (GSAL), the lease transactions were found to be duly recorded in the books of account of the lessees. Besides, in four cases, viz., Apollo Tubes Ltd. (ATL), Bangalore Gases (P) Ltd. (BGPL), Deve Annapoorna Food and Beverages Industries Ltd. (DAFBIL), and Tungbhadra Pulp and Boards Ltd. (TPBL) recording of transactions in the lessees' books of account had not been denied. It was only in the remaining five cases that the learned AO had alleged that the lessees had not reflected lease transactions in question in their respective books of account. The learned Counsel argued that the assessee-company had no right to dictate as to in what manner the books of account should have been maintained by the lessees and the assessee-company could not be penalized for any lapse and omissions on the part of the lessees.
71. The learned Counsel for the assessee vehemently argued that the learned AO had not even in a single case established that the leased assets were not physically existing. In a large number of cases, the assessee had made during the course of proceedings under Section 158BC further evidence available to the learned AO to prove the existence of the leased assets. In the case of Bhagyalakshmi Vegetable Products Ltd.-I (BVPL-I), the assessee carried out physical verification after the date of search on 14th Sept., 1996. In the case of Bhagyalakshmi Vegetable Products Ltd.-II (BVPL-II), chartered engineer's affidavit dt. 14th Sept., 1996 (after the date of search) along with the photographs of the asset confirmed the existence of the assets. The same was done in the case of Niraj Petro Chemicals Ltd. (NPCL) on 14th Sept., 1996; in the case of Ready Foods Ltd. (RFL) on 5th April, 1997; in the case of Gold Star Steel and Alloys Ltd. (GSAL) on 14th Sept., 1996, in the case of Sree Ramakrishna Steel Industries Ltd. (SRSIL) on 23rd July, 1996. The chartered engineers in his statement dt. 23rd July, 1996, categorically accepted that he had visited the premises of SRSIL and had physically verified the cylinders. In the case of Miga Gases (P) Ltd. (MGPL), the managing director of lessee company accepted in his various statements that cylinders actually existed. In the case of Raghunath Cotton and Oil Products Ltd. (RECOP), Apollo Tubes Ltd. (ATL) and Sri Kailas Sugars and Chemicals Ltd. (SKSCL), there was no denial of existence of assets. In the case of Tungbhadra Pulp and Boards Ltd. (TPBL), one employee of the assessee-company, Mr. Sunil K.Adukiya visited the lessee's premises on 4th April, 1997, and gave the inspection report along with photographs of the assets. TPBL also vide their letter dt. 23rd April, 1997 confirmed the existence of leased assets. In the remaining three cases also, the findings of the learned AO was based on mere suspicion, surmises and conjectures. From the fact that the assets in question were not enlisted in the list of assets as per the takeover agreement or in the list of assets destroyed by fire, it could not be concluded that these assets had not physically existed at all. The learned Counsel reiterated that so far as the physical existence of assets was concerned, the assessee had brought in on record ample material to establish the same.
72. The learned Counsel argued that the assessee was not confronted with most of the material relied upon and referred to in the impugned order under Section 158BC. The assessee was not supplied with copies of statements recorded behind the back of the assessee nor was the assessee supplied with a copy of the enquiry reports of various investigating agencies of the Department. The contention of the learned Departmental Representative that the statements had been shown to the assessee during the course of proceedings under Section 158BC was not entirely true. In many cases, the statements were not shown and in any case merely referring to the statements during the course of discussion was not sufficient. The assessee had specifically asked for copies of such statements.
73. The learned Counsel argued that there were corresponding receipts of lease rentals offered for assessment by the assessee-company from year-to-year. These lease rental receipts were substantial. If it were the case of Revenue that there were no genuine lease agreements, how could the Department proceed to assess the lease income in the case of the assessee 74. The learned Counsel further argued that the search was just an intermediate event in the case of the assessee. The assessee had filed returns of income for asst. yrs. 1994-95 and 1995-96 much before the search action under Section 132. The assessee had claimed depreciation on leased assets in these returns of income. The Department had already conducted investigation in several cases before the search commenced in the case of the assessee. The learned AO mainly relied on enquiry which was by and large made after the search had been carried out in the premises of the assessee. While completing the impugned order under Section 158BC, the learned AO had obliterated the distinction between the regular assessment proceedings and the proceedings under Section 158BC. He referred to the decision of the Tribunal, Chennai Bench dt.
27th Sept., 2001 in the case of P.K. Ganeshwar v. Dy. CIT (2004) 91 TTJ (Chennai) 970 : (2002) 80 ITD 429 (Chennai). In that decision, the Tribunal held that where undisclosed income is found not on the basis of evidence found as a result of search but on investigations and enquiries made following the search, such income could not be included as undisclosed income of block period. The provisions of Chapter XIV-B laid down a special provision for assessment of undisclosed income found as a result of search only and there was no scope for considering all the items that could be considered under regular assessment.
Without prejudice, the learned Counsel for the assessee also pointed out that while the learned AO disregarded the distinction between the nature of these proceedings, he did not set off huge losses incurred by the assessee-company against undisclosed income computed under Section 158BC. He pointed out that in the case of the assessee-company, business loss far exceeded the amounts of depreciation claimed and it was not a case where the assessee would have otherwise filed returns of income declaring substantial income chargeable to tax but for the depreciation in question claimed by the assessee-company.
75. We have carefully considered the rival submissions. In this case, the learned AO has held that the 14 lease transactions of the assessee existed on paper only and did not represent any genuine transactions.
He has arrived at these findings on the basis of extensive enquiries contended by himself as well as the Investigation Wing of the Department at various places holding that the suppliers of the leased assets were not traceable in many cases and the lessees in many cases admitted that the transactions were in the nature of accommodation only. The learned AO has also found it hard to accept that the purchase considerations paid by the assessee to the suppliers by any of account payee cheques should come back to the extent of 85 per cent either to the assessee himself or the sister concerns on the same day. In the lengthy impugned order, the learned AO has relied upon several facts and circumstances. The learned Counsel for the assessee has challenged the impugned order both on the jurisdiction of the AO as well as on the merits of the case. According to the learned Counsel for the assessee, the disallowance of the assessee's claim of depreciation in relation to 14 lease transactions as well as disallowance from out of interest paid by the assessee on is borrowings is well beyond the ambit of the provisions of Chapter XIV-B on account of absence of any evidence or material found as a result of the search under Section 132(1) in the case of the assessee. On merits the learned Counsel for the assessee has argued that the Revenue had not established that the suppliers are bogus and in any case, the supplier had been identified by the lessees and not the assessee-company. As far as the lessees were concerned, there was no dispute about their identity or existence. The leased assets physically existed in all the cases and the self serving statements of the lessees in respect thereof could not rebut the weight of documentary evidence relied upon by the assessee. We propose to examine first the assessee-company's challenge to the jurisdiction of the learned AO to make disallowance in question in the impugned order under Section 158BC.76. The Finance Act of 1995 has inserted a new Chapter XIV-B in the IT Act. It provides a new concept for assessment in relation to searches conducted under Section 132 of the Act or requisition made under Section 132A after 30th June, 1995. The purpose of enactment of the Chapter as given in Clause 32 of the Notes on Clauses of the Finance Bill, 1995, reads as under : "In order to make the procedure of assessment of search or requisition cases effective it is proposed to introduce new provisions for assessment of undisclosed income detected as a result of search or requisition. Under the new provisions, the undisclosed income detected as a result of search initiated or requisition made after 30th June, 1995, shall be assessed separately as income of a block of ten previous years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income recorded on or before the date of search or requisition in the books of account or other documents maintained in the normal course relating to such previous years will not be included in that block." [(1995) 212 ITR (St) 306].
The salient feature of Chapter XIV-B is that "undisclosed income" of a person shall be assessed as the income of a block period consisting of previous years relevant to 10 assessment years preceding the previous year in which the search was conducted or requisition was made and also period of current previous year up to the date of the search or the requisition. The undisclosed income of the block period has to be taxed at a flat rate of 60 per cent as given in Section 113. The order of assessment for the block period is to be passed within one year from the end of the month in which the last authorization of the search under Section 132 or the requisition under Section 132A was executed in case where the search is initiated or requisition made before 1st of June, 1997. In cases where a search was initiated or requisition under Section 132 was executed on or after 1st July, 1997, a time-limit of two years has to be reckoned with instead of one year. Prior to insertion of Chapter XIV-B, the estimate of the undisclosed income was being made in a summary manner under Sections 132(5) and 132(7). Chapter XIV-B has substituted the earlier provisions of Section 132(5) and with an extension of scope.
77. Soon after the enactment of the provisions of Section XIV-B, a controversy arose as to whether the block assessment was a substitute of regular assessment order or the block assessment was in addition to regular assessments. This controversy or doubt has been set at rest by clarification in the memorandum explaining the provisions of Finance (No. 2) Bill, 1998, in the following words : "To set at rest the controversy as to whether block assessment subsumes the regular assessments or independent of the latter, the Bill proposes to clarify that block assessment shall be made in addition to the regular assessment of previous years included in the block period. Further, it -proposes to provide that income assessed in regular assessment shall not be included in the block period and income assessed in the block period, shall not be included in the regular assessment. The clarificatory amendment is proposed to be inserted retrospectively from the 1st day of July, 1995." [(1998) 231 ITR (St) 228, 256].
78. After insertion of Explanation to Section 158BA(2) by the Finance (No. 2) Act, 1998, with retrospective effect from 1st July, 1995, there is no dispute now that the block assessment under Section 158BC is in addition to the regular assessment and not in substitution of the regular assessment. There is also not much difficulty in arriving at the view that in the block assessment under Section 158BC only the undisclosed income of the assessee has to be charged to tax at special rate of tax provided in Section 113. The moot question is as to whether in a block assessment, computation of undisclosed income has to be confined only to the undisclosed income found during the course of the search or it is open to the AO to carry out such scrutiny, examination and enquiry as he may deem fit to find out the undisclosed income of the assessee for the block period. This aspect of the matter is regulated by the provisions of Section 158BB(1) that the undisclosed income of the block period shall be computed "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 AO...." The meaning of "such other materials" has been considered at length in the decision of Tribunal, Mumbai Bench in the case of Sunder Agencies v. Dy. CIT (supra) and the Hon'ble Bench held that legislature has used the words "such other materials" and not "any other materials". Hence, "such other materials" means the materials found as a result of search or requisition. This view has been followed in a plethora of decisions made by various Benches of the Tribunal.
Tribunal, Indore Bench, in the case of Indore Construction (P) Ltd. v.Asstt. CITHarkchand N. Jain v.Asstt. CITEssem Intra-port Services (P) Ltd. v. Asstt. CIT (supra) have arrived at the same interpretation as in the case of Sunder Agencies (supra). In the case of Monga Metals (P) Ltd. v. Asstt. CIT (2000) 67 TTJ (All) 247, the Allahabad Bench held that in the absence of evidence in the seized record, it could not be held that the assessee had made cash purchase outside the books of account. In the case of Tarun Goel v. Asstt. CIT (2000) 112 Taxman 77 (Chd)(Mag), it was held that since during the course of search no material, no document, no books of account, etc.
were found which could show that the assessee had introduced his unaccounted income in the form of agriculture income, the AO had no authority to assume jurisdiction for including in the block assessment, agricultural income as representing the assessee's income from undisclosed source. In the case of A. Sadasivam v. Asstt. CIT , the Calcutta Bench of the Tribunal held that the computation of income of block period must be based on evidence found as a result of search and where there was no clear evidence regarding certain amounts such amounts are not to be included in block assessment. In the case of Ms. Pooja Bhatt v. Asstt. CIT (2000) 66 TTJ (Mumbai) 817 : (2000) 113 Taxman 44 (Mumbai)(Mag), the Tribunal held that the process of regular assessment is totally different from assessment under Section 158BC in search cases and additions, if any, are to be made only on the basis of material found in search.
79. The Hon'ble Gujarat High Court arrived at the same conclusion even before insertion of Explanation by the Finance (No. 2) Bill, 1998, in the case of N.R. Paper and Board Ltd. and Ors. v. Dy. CIT . The Hon'ble Gujarat High Court held that the process laid down under Chapter XIV-B did not disturb the assessments already made and "was only intended to sniff out what had remained hidden and what would not have been disclosed by the assessee." There would, therefore, be no over-lapping in the nature of the assessment made under Chapter XIV-B of undisclosed income and the regular assessment made under, Section 143(3) of the Act.
80. In the case of CIT v. Shambhulal C. Bachkaniwala , the Tribunal deleted the additions of Rs. 19,03,677, Rs. 17,27,447 and Rs. 1,62,349 in t-he block period made by the AO by rejecting the trading accounts and estimating higher turnover and higher gross profit and by making disallowance on account of interest and other expenses which were debited in the regular books of account. It was submitted that there was absolutely no justification in considering these aspects while passing an order under Section 158BC where only undisclosed income was required to be computed. The Tribunal, following the decision of Hon'ble Gujarat High Court in the case of N.R. Paper and Board Ltd. (supra), held that only undisclosed income as defined in Section 158B has to be assessed under Chapter XIV-B. On reference by the CIT, the Hon'ble Gujarat High Court held that the Tribunal had committed no error in rejecting the reference application of the CIT.the AO completed the block assessment at a total undisclosed income of Rs. 24,66,850 as against the return declaring undisclosed income of the block period at Rs. 10,54,383 only. The addition made by the AO on account of gold ornaments, investment in bungalow and household expenses were deleted by the Tribunal. On appeal by the Revenue, the Hon'ble Bombay High Court held that the Tribunal was justified in deleting the additions on account of gold ornaments and silver articles and utensils which had already been declared by the assessee in the return of wealth which had been duly accepted. The Hon'ble Bombay High Court held, "in the circumstances, Chapter XIV-B has no application to the facts of the case." Further, during the course of search it was found that the assessee had constructed a bungalow. It was found that the assessee had incurred expenses of Rs. 4.16 lakhs. The AO, thereafter referred the matter to the Departmental Valuer, who valued the property at Rs. 6.66 lakhs. The AO added the difference as undisclosed income. On these facts, the Hon'ble Bombay High Court held, "the above process clearly shows that the Department had not understood the scope of Chapter XIV-B of the Act. By no stretch of imagination the impugned addition fell within Chapter XIV-B." 82. In the case of CIT v. Rajendra Prasad Gupta , the AO rejected the return of undisclosed income filed by the assessee and made his own estimate of undisclosed income. The Tribunal did not accept resort to estimation on the ground that the assessing authority had done so without examining the material that had come in its possession during the course of search. On appeal, filed by the Revenue, the Hon'ble Rajasthan High Court upheld the order of the Tribunal as having been made on application of the principle of law correctly. The Hon'ble High Court inter alia observed : "We are of the opinion that so far as the contention of learned Counsel for the appellant that the AO has necessary jurisdiction to resort to best judgment assessment in proceedings under Section 158BB, the correctness of it cannot be doubted. However, under the scheme of the provisions for block assessment, it is apparent that it relates to assessment of 'undisclosed income' of the assessee excluding the income subjected to regular assessment in pursuance of the returns filed by the assessee for such period. It is also apparent from the perusal of Section 158BB that the returns are also required to be filed in pursuance of the notice under Section 158BC(a) and the assessment is to be framed on that basis in the light of material that has come into possession of the assessing authority during the course of search which is the foundation of the proceedings. That being so, the correctness or otherwise of the returns filed in pursuance of the notice under Section 158BC(a) has to be examined with reference to the material in the possession of the assessing authority having nexus to assessment of "undisclosed income" which is with the assessing authority, and premise of such proceedings. If the returns filed by the assessee do not accord with the material which are already in the possession of the authority, it can be estimated to the best judgment by the assessing authority on the basis of the material in his possession. However, the assessing authority is not conferred with power to make estimation of income de hors the material in his possession, while making regular assessment order under Section 158BB." 83. In the case of Bhagwati Prasad Kedia v. CIT (supra), during the block assessment, the assessee was called upon to explain the advance taken from a company. The assessee had filed the confirmation letter of loan from the company. The AO held that the said loan was a fictitious loan liable to be included as undisclosed income of the assessee during the block period. On assessee's appeal, the Tribunal held that it made no difference whether the material was found during the course of search or was brought on record . subsequently or whether it had connection with the material available or found in the course of search. As long as the loan can be treated as undisclosed income it could be assessed under Chapter XIV-B. On assessee's appeal, the Hon'ble High Court held that the AO was not entitled to question in block assessment the loan which was a subject-matter of regular assessment. The Hon'ble High Court inter alia observed as under : "On a composite reading of the said three parts of the Explanation it is crystal clear that the legislature thought it fit to make a distinction between the block assessment and the regular assessment.
As has been held by the Division Bench in Dy. CIT v. Shaw Wallace and Co. Ltd. that there are three types of income within the meaning of the said Act of 1961, i.e., incomes which are offered for taxation, incomes which are shown in the return but deductions have been claimed wrongly and undisclosed income. The AO while dealing with regular assessment is free to examine the veracity of the return as well as the claims made by the assessee with regard to exemption and/or deduction. Those can be considered under Section 143(3) of the said Act of 1961, whereas the third income being 'the undisclosed income' is taxed and by way of block assessment resulting in search and seizure. Such block assessment is made under Section 158BA. The logic behind the two different modes of assessment, according to us, is that concealment of income and claiming deduction or exemption of taxes in respect of a disclosed income cannot be treated at par. The former is an offence which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the AO is free to accept the justification shown or reject the same. The said two types of cases cannot be treated at par." Tribunal held that if the books of account or documents found during the search are rejected under the provisions of Section 145, there is no question of any income or undisclosed income on the basis of such books of account or documents. The Tribunal also held that under the provisions of s. 158BB(1), the AO was not justified in estimating the undisclosed income of a period for which there was no detail in any of the seized documents. On appeal filed by the Revenue, the Hon'ble High Court held that no substantial question of law arises out of the order of the Tribunal. In the case of CIT v. Ravi Kant Jain (supra) the AO appointed special auditors after the return of undisclosed income at nil for the block period had been filed by the assessee. The AO completed the block assessment on the basis of the report of the special auditors. The Tribunal came to the conclusion that the case was in the nature of a mere change of opinion, particularly, on the basis of the report of special auditors who had given a different colour to the existing facts and was not relatable to any seized material. On Revenue's appeal, the Hon'ble Delhi High Court held that the AO was not proceeding within the scope of exercising jurisdiction of Chapter XIV-B. The Hon'ble High Court inter alia observed : "The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. As the statutory provisions go to show, it is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done 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 AO. Evidence found as a result of search is clearly relatable to Sections 132 and 132A:" 85. The Hon'ble Bombay High Court have in a series of judgments held the same view. In the case of CIT v. Dr. M.K.E. Memon , the assessee admitted undisclosed income of Rs. 75.60 lakhs in the return of income under Section 158BC for the block period. The AO, however, made an estimate for the entire block period at Rs. 2.33 crores. The Tribunal deleted the addition made by the AO to the undisclosed income admitted by the assessee. On Revenue's appeal, the Hon'ble High Court held that Chapter XIV-B laid down a special procedure for assessment of search cases and provided for assessment of undisclosed income as a result of search. While passing an order under Section 158BC, the AO could not enlarge the scope of assessment under Chapter XIV-B to that of regular assessment. In the case of CIT v.Shamlal Balram Guibani , a search was conducted at the residential premises of the assessee on 25th March, 1996. A notice under Section 158BC was issued for the block period 1st April, 1985 to 25th March, 1996. It was found that the assessee had not filed returns of income for asst. yrs. 1993-94, 1994-95 and 1995-96. Hence, the AO treated the income of these three years as the income of the assessee for the block period. The Tribunal came to the conclusion that the findings of the AO regarding undisclosed income were not based on any material found in the search operations and, therefore, there was no reason for treating the said total income as undisclosed income for the purpose of Chapter XIV-B-. On Revenue's appeal, the Hon'ble High Court observed that they do not find any reason to interfere with the finding of facts recorded by the Tribunal. In the case of CIT v. Vikram A.Doshi , the AO assessed in the order under Section 158BC certain income that had already been disclosed in the returns of income regularly filed by the assessee. The Hon'ble High Court held : "The other questions sought to be raised by the Revenue need no consideration as the issues raised therein are based on transactions which, by no stretch of imagination can be said to be undisclosed transactions falling under Section 158B of the IT Act, since the transactions in question were disclosed in returns which were the subject-matter of regular assessment. The same ought to have been assessed in the regular assessment and not in the block assessment.
We, therefore, affirm the conclusions or findings recorded by the Tribunal with respect to those transactions referred to in other questions sought to be canvassed, may be for additional different reason recorded herein." 86. From the discussion in the foregoing paragraphs, it is quite clear that while making an order under Section 158BC, the learned AO does not have the same jurisdiction that he has while assessing the income of an assessee under the general provisions of the Act. We find that an order under Section 158BC can be made only in respect of undisclosed income while in an assessment order under general provisions, the AO can assess all income chargeable to tax under the provisions of the Act. We further find that the preponderance of judicial opinion is that in an order under Section 158BC, the AO can subject to special rates of tax under Section 113, only the undisclosed income that he determines as a result of search. It is not correct position in law that while completing an order under Section 158BC, the AO can make assessment of the entire undisclosed income that comes to his notice during the course of the proceedings under Section 158BC. He can make assessment of only that undisclosed income which has a direct nexus with the search proceedings in the case of the assessee.
87. During the course of hearing before us, the learned Counsel for the assessee categorically declared that during the course of search proceedings under Section 132, in the case of the assessee "No incriminating material was found or detected other than the documents that were duly entered and recorded in the books of account or forming part of the official records of the assessee-company". The learned Counsel for the assessee, further declared that none of the materials relied upon by the learned AO in the impugned order could be considered to have been found as a result of the search in the case of the assessee. He stated that the materials relied upon by the learned AO was either not found or available at the premises of the assessee or it was the material or information which the assessee had already disclosed or would have disclosed for the purposes of the Act. The learned Counsel for the assessee further contended that the learned AO has himself appended to the impugned order under Section 158BC, 86 Annexures. None of these 86 documents could be said to be materials or information obtained by the AO as .a result of the search at the premises of the assessee. He, therefore, argued that undisclosed income computed in the impugned order was liable to be deleted for the reason alone that the same could not be subject to an order under Section 158BC. The learned Departmental Representative opposed these contentions of the assessee. He argued that during the course of the search, lease agreements were found. Apart from lease agreements, several connected documents were also found. Further enquiries were conducted in connection with these documents and, therefore, the materials gathered and information obtained that has been relied upon in the impugned order was as a result of the search in the case of the assessee. The learned Departmental Representative emphasized the amendment to s. 158BB(1) by the Finance Act, 2002 with retrospective effect from 1st July, 1995 to the effect that the undisclosed income shall be computed "in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence." The learned Departmental Representative argued that further materials or information relatable to the evidence found during the course of search constituted valid basis for the computation of undisclosed income under Section 158BC in the case of the assessee.
Secondly, the learned Departmental Representative argued that in this case, the search under Section 132(1) commenced on 17th July, 1996 and the same was continued up to 22nd Sept., 1996 or 30th Sept., 1996, if the statement of Shri Mahesh Gupta on that day was taken into consideration. According to the learned Departmental Representative, any enquiry made during this period could at least be said to be relating to the search in the case of the assessee.
88. The learned Counsel for the assessee in his rejoinder, argued that in a search under Section 132, the entire official record of a businessman is bound, or most likely, to be found at the premises.
There was nothing special about the lease agreement and connected documents having been found at the premises of the assessee. Had these agreements and other documents not been found at the premises of the assessee, the Revenue could have had some case. On the contrary the fact that these have been found at the premises of the assessee only strengthens the case of the assessee that there was no undisclosed income. As to the enquiry being conducted by the Department during the period from 17th July, 1996 to 22/30th Sept., 1996, as argued by the learned Departmental Representative, the learned Counsel for the assessee argued that there ought to have been some specific information found during the search at the premises of the assessee. Even the amended provision speaks of evidence found as a result of search and other materials or information relatable to such evidence. This showed that the evidence has to be found during the course of the search of the assessee and then only reliance can be placed on another materials relatable to such evidence. If there is no material pointing towards undisclosed income found during the course of search in the case of an assessee, no extraneous material or information would provide the AO, jurisdiction under Section 158BC. The learned Counsel for the assessee further argued that the contentions of the learned Departmental Representative in this respect were vague and too general. In the impugned order under Section 158BC, there were considerable materials and information relied upon by the learned AO some of which were already available with the AO even before the commencement of the search. Furthermore, in the impugned order, the learned AO relied upon large number of extraneous enquiry reports initiated and carried on long after 30th Sept., 1996. The learned Departmental Representative had not even specified as to which special material was found during the period 17th July, 1996 to 30th Sept., 1996.
89. On a careful consideration we find considerable force in the contention of the assessee that the regular books of account and supporting material maintained by the assessee in the ordinary course of conduct of business which would have been disclosed by the assessee as and when called upon or required to do so cannot be designated as materials or information found as a result of search. This aspect is duly supported by the various decisions of the Tribunal and the judgments of High Courts including the jurisdictional High Court enumerated by us in the foregoing paragraphs. In the case of N.R. Paper and Board Ltd. (supra), the Hon'ble Gujarat High Court have at p. 742, pointed out that the process under Chapter XIV-B did not disturb the assessments already made, of the previous years, and was only intended to "sniff out what had remained hidden and would not have been disclosed by the assessee". In the case of Shamlal Balram Gurhani (supra), the Hon'ble Bombay High Court held that income disclosed by firm in its audited balance sheet could not be treated as undisclosed income for purpose of block assessment. In the case of Ravi Kant Jain (supra), the Hon'ble Delhi High Court have held that the scope and ambit of Chapter XIV-B is limited to "materials unearthed during search". In the case of Essem Intra-port Services (P) Ltd. (supra), Hyderabad Bench of the Tribunal held that when certain information and details are already recorded in the books of account maintained in the regular course of business, based on which return of income would be filed in normal course, that very same information and details cannot be re-examined in the course of block assessment. We, therefore, do not agree with the contention of the learned Departmental Representative that the lease agreements in question and other connected documents having been found at the premises of the assessee during the course of search under Section 132(1), the jurisdiction was conferred upon the learned AO to assess undisclosed income in respect. thereof. For one thing, none of these documents in themselves reveal that the transactions of the assessee were not genuine. Secondly, these are the materials on which the assessee-company strongly places reliance in support of its claim. It would be travesty of law if it were to be held that these very documents would invoke the jurisdiction which was otherwise not there to make an assessment under Section 158BC. Further, if it is so held it would obliterate the distinction between the assessment under normal provisions of the Act and an assessment under Section 158BC. It is for this reason that in the case of Vikram A.Doshi (supra), the Hon'ble Bombay High Court held that the transactions disclosed in returns "by no stretch of imagination can be said to be: undisclosed transactions falling under Section 158B" and" ought to have been assessed in the regular assessment and not in the block assessment".
90. We now address to the second limb of the argument of the learned Departmental Representative that the materials and information available with the AO as a result of the investigations conducted by the Department from 17th July, 1996 to 30th Sept., 1996 should at least be said to be relating to the search conducted in the case of the assessee. At the outset, we find that this issue cannot be separated from the question as to what evidence was found as a result of search in the case of the assessee. From the various decisions of the Tribunal and judgments of Hon'ble High Courts, discussed by us at length in the foregoing paragraphs, we find that the prime mover must first exist in the materials or information available during the course of search in the case of the assessee. We wish to make it clear that we do not say that such an evidence has to be conclusive. It should be of such nature and quality as to be reasonably considered to be an evidence against the assessee. In the absence of such evidence, other materials or information referred to in Section 158BB do not come into play. This is the interpretation to the words "such other materials or information" given in the various decisions cited by us. In the impugned order, the AO has not brought on record any materials or information found during the course of the search in the case of the assessee himself that might bring the assessee's case in an adverse light. As to the materials found during the course of the search, the learned Counsel for the assessee has categorically declared, "No incriminating material was found or detected" and this contention has not been refuted during the course of proceedings before us. During the course of the search, statements of managing director, Shri Ajay G. Piramal, Shri Mahesh Gupta and Shri V.C. Vadodaria were recorded. There appears to be no direct or indirect admission of the falsity of the assessee's claims in these statements. The Department has also not brought on record any particular document found during the course of search that might cast a reasonable doubt against the assessee. In the impugned order, the learned AO has referred to the annual accounts of the lessee companies 'found at the premises of the assessee. According to the AO, on a careful study of these annual accounts and reports, the assessee should not have been wisened in some cases that the alleged assets had already been hypothecated by the lessees with some financial institutions and, therefore, No Lien certificate signed by such lessees should not have been accepted or relied upon by the assessee and, as such, the transaction in question should not have been gone through. There is no material as to whether these annual reports were available with the assessee before execution of the lease agreements in such cases.
Secondly, there is no basis to hold that the assessee ought to have noticed and acted in the manner supposed by the learned AO. We find the arguments of the learned AO to be remote and based on long drawn reasoning. At any rate, it is nobody's case that this indeed provoked the enquiries and investigation carried out by the Department at various places. The correct facts in this respect as we would shortly see are quite different. Other than the mention of these annual reports being found at the premises of the assessee, we do not find any specific material found at the premises of the assessee being held out against the assessee in the impugned order.
91. On the contrary, we find that the enquiry and investigations, had started well before the commencement of search in the case of the assessee. The AO has himself mentioned in the prelude to the impugned order in the second paragraph that "the search was a part of All India investigation to unearth fraudulent lease transactions." Further, from the statement of Shri Ajay G. Piramal recorded under Section 132(4) on 20th July, 1996, it is clear that the search was conducted in the case of the assessee as the Department was of the view that the assessee-company had entered into lease transactions in relation to non-existent assets. The following questions and answers in the aforesaid statement dt. 20th July, 1996 bring home this point : "Q.7 : Are you concerned about the irregularities in payment part as you have stated earlier or other serious irregularity also Q.8 : Whether, so far, any irregularities in leasing have been noticed or reported to you Ans. : The first time I came to know of the likelihood of any irregularity that may have taken place was from the income-tax search party.
Q.9 : Let me inform you that your company, i.e., Morarjee Mills has purchased industrial gas cylinders during financial years ended 31st March, 1995 and 31st March, 1996 from M/s D.D.K. Industries and M/s M.M. Industries, Bangalore, and these cylinders have been leased to one of the Bangalore based company M/s Miga Gas (P) Ltd. (MGPL) which is managed by one Mr. Krishna Mohan from Bangalore, M/s D.D.K. Industries and M.M. Industries are proprietary concerns of same Mr.
Krishna Mohan who happens to be managing director of M/s MGPL.
During a search and survey action under Sections 132 and 133(a) carried out in March, 1996, on residential and commercial premises of Mr. Krishna Mohan and his concerns. Mr. Krishna Mohan has confirmed on oath at Bangalore under Section 132/131 that the whole transaction of the sale of cylinders on his part and leasing of those cylinders to MGPL has been a total sham. "The complete modus operandi of this plain financial deal and payment of kick back and commission to him has been also conferred by him in his statement.
Mr. Krishna Mohan has surrendered Rs. 50 lakhs earned by way of commission from such transaction with you and other parties also and he has accepted that cylinders have been sold on bills only for non-existence cylinders. There has been no physical sale of cylinders.
Ans. : Thank you. This is news to me which I heard for the first time.
Q.10 : Since the above contention of Mr. Krishna Mohan also relates to your company since it is a party to the transaction which is stated as fictitious ab initio, do you know what are its repercussions Ans. : Before I came to know about these developments with Bangalore party, I was informed by Mr. Mahesh Gupta that every leasing transactions that we have entered are legal and we have done with due diligence. I continue to believe in true. Since I know you have categorically informed me about this fictitious transactions I will once again examine it with expert opinion and if there is any irregularity, I will get back to you.
Q.13 : We will provide you the confession statement of all those parties which has done sham transaction with your company, i.e., Morarjee Mills in respect of leasing. So, when you will like to take those copies It is, thus, seen that the Department had already initiated enquiry and investigation in respect of the lease transactions. It appears that the search in the case of the assessee Was carried out with a view to unearth further evidence/material. Had during the course of the search some further evidence been found to confirm the enquiry already made, there could, perhaps, be a case of assessment of undisclosed income under the provisions of Section 158BC of the Act. If, on the other hand, no evidence was found during the course of the search in the assessee's own case, but on the basis of enquiry and investigation otherwise carried out by the Department and the AO, the AO holds the view that the assessee's claim of depreciation allowance should be rejected, the assessment of undisclosed income on that basis cannot be made insofar as the provisions of Section 158EC are concerned. We have already pointed out that an order under Section 158BC is not a substitute of assessment under the general provisions of the Act and only an undisclosed income found as a result of the search under Section 132(1) can be the subject-matter of an order under Section 158BC.92. In the impugned order, the learned AO has also referred to and placed reliance upon the judgment of Hon'ble Supreme Court in the case of McDowell and Co. Ltd. (supra). In our considered opinion the ruling given in the case of McDowell and Co. Ltd. (supra) cannot be invoked and relied upon in an order under Section 158BC. As we have seen the assessment of undisclosed income as defined in Chapter XIV-B has to be based on specific discovery during the course of the search either of 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 which has not been or would not have been disclosed for the purposes of the Act, or any expense, deduction or allowance claimed which is found to be false. The operation of the ruling given by the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. (supra) is in altogether different sphere. We, therefore, hold that the reliance on the judgment of Hon'ble Supreme Court in the case of McDowell and Co. Ltd. (supra) can be placed only in the orders of assessment under the general provisions of the Act and not in an order under Section 158BC.93. In short, we hold that the undisclosed income assessed in the impugned order by the learned AO does not fall in the domain of an order under Section 158BC for want of nexus with any evidence or material found during course of the search in the case of the assessee and, therefore, it falls in the domain of the assessments that may be made under the general provisions of the Act. During the course of hearing before us, the learned Counsel for the assessee made considerable submissions to support his contention that the findings of the learned AO in the impugned order were, on merits unsustainable. The learned Departmental. Representative, on the other hand, placed considerable reliance upon the findings of the learned AO elaborately made in the impugned order of considerable length. We have devoted a large part of this order in recording the gist of the findings given and materials and information relied upon in support of such findings in the impugned order under Section 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. We have given considerable thought to both the contentions of the learned AO as well as the learned Counsel for the assessee, with a view to find out whether there is any nexus between the findings of the learned AO and the search in the case of the assessee. We do not propose to go, at this stage, into the merits of the case made out against the assessee in the impugned order for the reason that we have already held that the same do not pertain to the domain of proceedings under Section 158BC before us. We find it sufficient to say, for the purpose of this appeal before us, that the undisclosed income assessed in the impugned order is required to be deleted for the reason of having fallen outside the scope and ambit of the provisions of s. 158BC. We direct accordingly, and allow this appeal.
1. The facts pertaining to the case and the circumstances of both the parties have been considered by the learned AM from pp. 1 to 139 of his order. So, for brevity, they are not being reproduced here. However, I 'do not agree with the conclusion arrived at, which constitutes pp. 139 to 167, for the following reasons.
2. What is to be seen in the case is as to whether the facts which came to light pursuant to the search conducted under Section 132 of the IT Act, could come to light in the proceedings relating to regular assessment and whether such facts were brought to light as a result of the enquiries made in the course of the said search. Evidently, such facts could not possibly be brought to light in the course of proceedings relating to the regular assessment. They were discovered only consequent to the search under Section 132. The so-called lease agreements were unearthed only as a result of the search operations carried out by the Department against the assessee. It was only due to enquiries made regarding the genuineness of the lease agreements, that the Department could establish that in fact the lease agreements were mere paper work and were not genuine.
3. On the one hand, the assessee contends that nothing incriminating was found and the entire facts were available in the assessee's regular books of account, whereas on the other hand, the assessment order is said to have been passed in violation of the principles of natural justice, as certain statements were not made available to it, which adversely affected its case. Once the entire evidence, with the help of which the assessee could establish the genuineness of the lease transactions, was available with the assessee, these statements recorded in the course of search, can hardly be said to be adverse to the assessee.
4. With effect from 1st June, 2002, as per Section 158BB(1), the undisclosed income is to be computed in accordance with the provisions of the Act on the basis of evidence found as a result of search or requisition of books of account or "other" documents and such other materials or information as are available with the AO and relatable to such evidence. Evidently, therefore, the amendment in the section further clarifies the previous position that the computation of undisclosed income is to be done with reference to the evidence relatable to the evidence found as a result of search. This is the case of "other documents" available with the AO.5. In the assessee's case, all the lease agreements in question were discovered during the course of the search. They stand duly shown in the Panchanama dt. 20th July, 1996. The search commenced on 19th July, 1996. The statement of Shri Mahesh Gupta was recorded on 30th Sept., 1996. The evidence found as a result of search by the authorities leads to the conclusion that the depreciation allowance claimed by the assessee was a fictitious claim. The assessee entered into 14 lease transactions during the block period or during the period relevant to the asst. yrs. 1994-95 to 1997-98. The AO concluded that only motive behind this transaction was to avail the benefit of depreciation allowance at the rate of 100 per cent cost of the assets. Pithy documentation was made, including suppliers' bills, lease agreements, board resolution, delivery document, installation certificates and No Lien certificates, etc. Thereafter, the final structure of the transaction was arrived at, in a circuitous way. Ostensible payment of consideration for purchase of the asset was shown, in order to claim the ownership thereof. An ingenious mechanism was evolved so as to ensure that the bulk of the purchase consideration reverted to the assessee itself or to associate company belonging to 'group of companies of the assessee. Noticeably, the payment and reclamation of the bulk of the purchase consideration was simultaneous, for which purposes, bank accounts were opened at the bank of the assessee in the names of the supplier of the assets, as well as the assessee itself.
Lease agreements having been executed, cheques in favour of the supplier were issued by the assessee. Pertinently, the transfer of the entire amount from the suppliers' accounts to those of the lessees came about on the very same date, by way of issuance of cheques by the lessees to the suppliers. On their turn, the lessees channelled about 80 per cent of the purchase consideration to the assessee in most of the cases. In some of the cases, such channelisation was to a company belonging to the assessee's group of companies. This refund was given the garb of security deposit. Evidently, therefore, 85 per cent of the purchase consideration was funnelled back to the assessee on the same date, in this tortuous manner. It was in the nature of compensation that the differential amount had to be paid for concluding the paper transaction in order to enable the assessee to avail the depreciation at the rate of 100 per cent of the supposed cost of assets. The evidence found as a result of search indicated in no uncertain terms that the depreciation allowance claimed by the assessee was not there at all to be claimed. Factually, the lessor did not pay any purchase consideration to the supplier and correspondingly, the supplier also did not receive any sale consideration. In fact, there was no transaction comprising sale and purchase at all. No asset can be parted with for a consideration of 15 per cent of the cost thereof. Such transactions are only paper transactions, having no real existence at all. This is fortified by the normal commercial conduct that lessees and suppliers do not open start normal business place. Noticeably, in the present case, this was done and after these transactions were completed, the bank accounts of the suppliers as well as those of the lessees were either closed or were rendered inoperative. Strikingly, such conduct runs through the transactions under consideration here.
Similarly, refunding of the entire purchase consideration to the lessor by the supplier through the lessee is unheard of in any normal business transactions. Where the entire lease rental is paid in advance, no lease transactions are entered into, as none are required. Evidently, no valid commercial transaction came about between the suppliers and the lessees. Upon having discovered the lease agreements and other connected documents during the course of search, the Department carried out extensive enquiries relating to the search, on the basis of the aforesaid evidence discovered during the course of search. It was on these enquiries having been conducted that the real intention of the assessee came to the fore. As such, the undisclosed income assessed was directly relatable to the search carried out in the case of the assessee.
6. It was found by the Department that in most of the cases, the suppliers were simply not there. Even any machinery was not proved to have been transported from the supplier either to the assessee or to the lessees. The response of the assessee to the query in this regard was that it was the responsibility of the lessees to take the delivery of the assets. This stand is wholly unsustainable. It is a clear pointer to the actual state of affairs. The depreciation having been claimed by the assessee, it was the assessee who was to prove such facts. Moreover, even the assets were found non-existent. Admittedly, no physical verification thereof was conducted by the assessee, which casts much doubt on . behalf of the assessee. Still further, the lessees themselves stated that there were no such assets in existence.
The agreements and supporting documents relied on by the assessee were clearly collusive, having been fabricated and engineered so as to achieve the illegal and ulterior motives of claiming 100 per cent depreciation on non-existent assets. So, it is evident that the alleged transactions were nothing but sham one. This surreptitious and clandestine nature thereof was discovered by the Department only as result of the search conducted by it, in which the so-called lease agreements were found and seized.
7. So far as regards the alleged cheque payments, they do not aid the assessee, since a major portion thereof reverted to the assessee and the assessee parted with a meagre 15 per cent as compensation/cost for making these spurious and ersatz arrangements, which were merely a facade to cover the malintents and to thereby illegally claim 100 per cent depreciation. No independent enquiries were made with regard to the genuineness of the parties. No suppliers were produced, clearly pointing to the fact that actually there was no sale transaction. The denial by the lessee was also as per the record and not contrary to it.
In fact, the documents were collusive ones and were merely paper transactions amounting to nothing but eye wash. It is not palatable that the assessee, if it had acted bona fide in the alleged purchases, would have satisfied without actual physical inspection of the assets.
Likewise, after lease of the assets, if genuine, the assessee would have kept track thereof and would not have casually replied that they were not its responsibility. The documents relied on by the assessee were not at all beyond the pale of doubt, as correctly held by the AO.The board resolution depicted board meetings, which never took place.
No proper register of minutes of board meetings was produced. The ones produced were bereft of particulars of any such board resolutions.
Although, the assets stood already hypothecated with IDBI or other financial institutions, surprisingly, No Lien certificates were produced. Even the parties, where they were found to be existing, denied the transactions and categorically admitted that the documents were sham documents.
8. In view of the above appalling circumstances, it cannot be gainsaid that the elaborate enquiry procedure was carried out during the course of search, and was bearing a most direct connection therewith. The statements recorded in the investigation were shown to the assessee during the course of the proceedings under Section 158BC, as recorded in the assessment order. Otherwise also, the assessee was not unaware of the proceedings against it. The Department was, therefore, rightly of the view that the assessee would not have disclosed the impugned income. In these facts, it cannot be said that the addition has been made on the basis of material not-relatable to the material found and seized during the course of search, or that the addition is based on no material found as a result of search.
Since there is a difference of opinion vis-a-vis conclusions arrived at in IT(SS)A No. 143/Mum/1997 in the case of The Morarjee Goculkas Spg.
and Wvg. Co. Ltd. v. Dy. CIT Spl. Range--34, Mumbai, involving block period 1st April, 1985 to 18th July, 1996, we are of the opinion that the following points of difference are required to be referred to the Third Member and for the purpose, we direct that the file be put up to the Hon'ble President.
"1. Whether, on the facts and in the circumstances of the case and in law, the learned AO had jurisdiction and justification in including the depreciation allowance in the computation of undisclosed income in the order under Section 158BC of the IT Act 2. If the answer to question No. 1 is in the affirmative, whether grounds of appeal Nos. II to IV raised by the assessee are required to be remitted to the Division Bench, for adjudication thereupon." 1. On difference of opinion between the Members of Mumbai Bench, the President, Tribunal, has referred the following points of difference for my opinion as Third Member : "Whether the lease agreements and other documents connected thereto seized from the business premises of the assessee constitute evidence of undisclosed income of the assessee and can be considered to have been found as a result of search so as to entitle the AO to assume jurisdiction to treat the depreciation allowance claimed by the assessee as representing undisclosed income of the assessee-company in the impugned order under Section 158BC In case the answer to 1 above is in the negative, whether on the facts and in the circumstance of the case, the AO has the jurisdiction to include the amount of depreciation allowance claimed by the assessee in the computation of undisclosed income for the purpose of Chapter XIV-B of the Act ?" 2. The facts in brief are that there was a search under Section 132 conducted at the premises of the assessee-company on 19th July, 1996.
It is stated to be finally concluded on 22nd Sept., 1996, as block period mentioned in the order of assessment is 1986-87 to 1996-97 and 1st April, 1996 'to 18th July, 1996. The search was stated to be sequel to all India investigation in respect of lease transactions entered into by a large number of assessee resulting into claim of 100 per cent depreciation on leased assets. Consequent to return filed under Section 158BC an assessment was made by the AO on 31st July, 1997 under Section 158BC(c) of the Act, computing undisclosed income in respect of 14 lease transactions for the period from asst. yrs. 1987-88 to 1993-94, disallowing the depreciation of Rs. 34,11,36,758 and interest of Rs. 5,01,81,901 aggregating to Rs. 39,13,18,659. The details are as under :Sl Asst. yr.
Depreciation Interest TotalNo. Disallowed (Rs.) Disallowed (Rs.) (Rs.)4.
1997-98 - 1,05,55,287 1,05,55,287 34,11,36,758 5,01,81,901 39,13,18,659 3. The said disallowance of depreciation and interest are disputed by the assessee, inter alia, on the ground that no material was found in the search, which could lead to an inference that the assessee's claim for depreciation was disallowable. The learned AM had held that the Department had already initiated inquiry in respect of the lease transactions and it., appears that the search in the case of assessee was carried out with a view to unearth further evidence/material and on the basis of inquiry and investigation was, otherwise, carried out by the Department and the AO could not come to the conclusion that the assessee's claim for depreciation should be rejected and the assessment of undisclosed income on that basis cannot be made under Section 158BC of the Act, as according to him, an order under Section 158BC is not a substitute of assessment under the general provisions of the Act and only an undisclosed income found under Section 132, can be subject-matter of an order under Section 158BC. He concluded in para 93 of his order by observing that the undisclosed income assessed in the impugned order by the learned AO does not fall in the domain of an order under Section 158BC for want of nexus with any evidence or material found during the course of the search in the case of the assessee and, therefore, it falls in the domain of the assessments that may be made under the general provisions of the Act. He has devoted a large part of his order to record the gist of the findings given and materials and information relied upon in support of such findings in the impugned order under Section 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. He, however, did not propose to go into the merits of the case made out against the assessee for the reason that the same do not pertain to the domain of proceedings under Section 158BC and found it sufficient to say, for the purpose of this appeal, the undisclosed income assessed in the impugned order is required to be deleted for the reason of having fallen outside the scope and ambit of the provisions of Section 158BC.4. The learned JM, on the other hand, held that all the lease agreements in question were discovered during the course of search and they stand in the Panchnama dt. 20th July, 1996. The search commenced on 19th July, 1986 and the statement of Shri Mahesh Gupta was recorded on 30th Sept., 1996. The evidence was found as a result of search by the authorities, according to him, and that lead to the conclusion that depreciation allowance claimed by the assessee was a fictitious claim.
He also went on merits of the case and observed that the assessee entered into 14 lease transactions during the block period of the period commencing from the asst. yrs. 1994-95 to 1997-98. Pithy documentation was made, including, suppliers' bills, lease agreements, board resolution, delivery document, installation certificates and No Lien certificates, etc., that thereafter, the final structure of the transaction was arrived at, in a circuitous way, that ostensible payment of consideration for purchase of the asset was shown, in order to claim the ownership thereof, that an ingenious mechanism was evolved so as to ensure that the bulk of the purchase consideration was reverted to the assessee itself or to associate company belonging to group of companies of the assessee, that noticeably, the payment and reclamation of the bulk of the purchase consideration was simultaneous, for which purposes, bank accounts were opened at the bank of the assessee in the names of the supplier of the assets, as well as the assessee itself, that lease agreements having been executed, cheques in favour of the supplier were issued by the assessee; that pertinently, the transfer of the entire amount from the suppliers' accounts to those of the lessees came about on the very same date, by way of issuance of cheques by the lessees to the suppliers; that on their turn, the lessees channelled about 80 per cent of the purchase consideration to the assessee in most of the cases, that in some of the cases, such channelisation was to a company belonging to the assessee's group of companies, that this refund was given the garb of security deposit, that evidently, therefore, 85 per cent of the purchase consideration was funnelled back to the assessee on the same date, in this tortuous manner, that it was in the nature of compensation that the differential amount had to be paid for concluding the paper transaction in order to enable the assessee to avail the depreciation at the rate of 100 per cent of the supposed cost of assets, and that the evidence found as a result of search indicated in no uncertain terms that the depreciation allowance claimed by the assessee was not there at all to be claimed.
In fact, there was no transaction comprising sale and purchase at all and that such transactions are only paper transaction, having no real existence at all and evidently, no valid commercial transaction came about between the suppliers and the lessees. According to him, upon having discovered the lease agreements and other connected documents during the course of search, the Department carried out extensive enquiries relating to the search on the basis of the aforesaid evidence discovered during the course of search, that it was on these inquiries having been conducted that the real intention of the assessee came to the fore; that as such, the undisclosed income assessed was directly relatable to the search carried out in the case of the assessee; that in view of the above appalling circumstances, it cannot be gainsaid that the elaborate inquiry procedure was carried out during the course of search, and was bearing a most direct connection therewith. The Department was therefore, rightly of the view that the assessee would not have disclosed the impugned income. In these facts, it cannot be said that the addition has been made on the basis of material not relatable to the material found and seized during the course of search, or that the addition is based on no material found as a result of search.
5. Mr. C.S. Agarwal, appearing on behalf of the assessee, contended that the action under Section 132(1) of the IT Act was conducted on 19th and 20th July, 1996, when the statements of Shri Ajay G. Parimal, managing director, Shri Mahesh S. Gupta, Chief Financial Manager and Shri V.C. Vadodaria were recorded. According to him, no incriminating material was found or detected other than the documents, as were duly entered and recorded in the books of account or forming part of the official record of the assessee-company. He further submitted that the return of total income for and up to the asst. yr. 1995-96 were due and were duly filed prior to the date of search (for asst. yr. 1994-95 on 30th Nov., 1994 and for asst. yr. 1995-96 on 30th Nov., 1994) and assessments had also been completed for the asst. yr. 1993-94 on 27th Dec., 1995. Return for asst. yr. 1996-97 had not filed as the return was no even due on the date of search and in view of the decision of Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 (SC), the assessee might or might not have claimed depreciation as it was not obligatory claim to be made. An item expended was to be allowed when it was claimed and, therefore, disallowance of sum of Rs. 6,08,82,323 pertaining to the purported claim of depreciation for asst.
yr. 1996-97 is also misconceived and contrary to law. It is submitted that for the asst. yr. 1997-98 also the return had not become due on the date of search and, therefore, the claim of depreciation and interest of Rs. 1,05,55,287 thereon was not undisclosed income of the assessee. It is further submitted that no undiscriminating material was found at the time of search on the basis of which it cannot be validly concluded that there was an undisclosed income or that the transaction relating to assets leased were not duly entered in the books of account. Nowhere, there is a finding recorded that the depreciation was a case of a false claim. The fact, however, is that the income disclosed by the assessee, representing lease income from the said transaction, for each of the assessment years, represented income not from any source other than lease income. Therefore, it cannot be said that the depreciation claim was false because it remains undisputed that the assessee-company has earned income from leasing of assets, on which depreciation has been claimed. Secondly, the depreciation has been claimed for asst. yr. 1994-95 and 1995-96 and the transaction of lease was duly disclosed in the books of account maintained by it. No claim of depreciation for asst. yrs. 1996-97 and 1997-98 till the date of search nor depreciation was debited in the books of account.
Therefore, the assessee on the date of search may or may not have the claimed the depreciation. Again in none of the cases, the lessees have even allegedly denied having entered into such lease transaction.
Whereas it has only been alleged by the AO that the lessees have denied signing of the lease agreements or have signed without knowing the purpose of it and later on concluded that it is a paper transaction. It was further submitted that many of such purported statements had not been confronted to the assessee for its rebuttal nor the copies thereof furnished. Relying on the decision of the Tribunal in the case of Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai), it is submitted that Section 158BA does not authorize to make an addition for undisclosed income on the basis of presumptions and assumptions and that the AO cannot review completed assessments unless some direct evidence comes to the knowledge of the Department, as a result of search, establishing clearly the factum of an undisclosed income; that the search does not provide a license to Revenue to make roving enquiries or to draw any presumption with regard to "other matters" and that the AO could proceed only on the basis of material detected at the end of search and the evidence gathered therein. Referring to the definition of undisclosed income in Section 158B(b), it is submitted that the income or property, which has been disclosed or which would have been disclosed for the purpose of this Act shall not form part of the undisclosed income and before an attempt is made to hold that the amount has not been disclosed, it is necessary to establish that any property which would include money, valuable articles or a thing has been found or detected as a result of search or any other income based on any entry in the books of account or other documents or transactions, which has not been disclosed or which would not have been disclosed for the purpose of this Act, has been found and has not been disclosed. Reliance was made on the decision of Calcutta High Court in case of Bhagwati Prasad Kedia v. CIT , wherein the details of loan creditors were furnished in the regular assessment itself and it was held that the Department was not entitled to question them in the block assessment. It was observed that the block assessment is not a substitute for regular assessment and they should be considered in the regular assessment and not in the block assessment. The Revenue's case to be submitted is that the assessee had entered into certain transactions of lease which though have been found duly recorded in the books of account including the income by way of lease money was received and yet it proceeded to hold that the depreciation, which has been claimed or which may be claimed, cannot be allowed as deduction and as such the depreciation claim, is the undisclosed income of the assessee. The depreciation has been claimed for asst. yrs. 1994-95 and 1995-96 which is an evidence that the assessee had recorded the transactions, which is otherwise admitted to have duly been entered in the books of account in respect of assets leased. It is, therefore, submitted that the AO has failed, to appreciate there can be no warrant in law to hold that such a transaction, which has been disclosed and is thus beyond the pale of Chapter XIV-B of the IT Act. He further submitted that the distinction should be made between a 'fact' and 'inquiry' in light of decision of the Supreme Court in the case of Kishinchand Chellaram v. CIT . The fact that the assessee had entered into lease transaction was already disclosed in the books of account by declaring the income from leased assets and also claimed the depreciation thereon. This is not a new fact which was found in the course of search. No other material could be considered for. the purpose of Chapter XIV-B unless it be relatable to such evidence. The statements shown to the assessee during the assessment proceedings which may have a bearing, came on record only after the search. The learned Counsel, for the assessee, therefore, submitted that the ' AO was not justified in disallowing the depreciation and interest relatable to the lease transaction, when he himself has assessed the lease rental from these very leased transaction, as income of the assessee. He, therefore, submitted that the entire exercise of making the assessment under Chapter XIV-B is unauthorized and unwarranted in law and should be struck down as invalid. In view of this, he submitted that it would not be necessary to go into the merits of the case.
6. The learned Counsel for the Department, Shri Boota Singh, on the other hand submitted that what can be used in making the assessment under Chapter XIV-B is an evidence which is relatable to the transaction and that is not necessarily to be an undiscriminating evidence, as the words used in section are "other material as relatable to such evidence". The assessee has not filed lease agreement in the assessment proceedings which came to knowledge of the Department only during the search and seizure proceedings. The learned Departmental Representative further submitted that the search was concluded on 22nd Sept., 1996, the day on which the last action of the search was executed. On the basis of that inquiry, it is proved beyond doubt that the claim of depreciation made by the assessee was bogus one and, therefore, the assessment under Chapter XIV-B. cannot be challenged on that ground. He referred to certain decisions based on which it was submitted that circumstantial evidence is sufficient to make the assessment. In one of the case, a document (gift-deed) was found during the course of search. On further inquiry (it was found) as bogus and it was held to be sufficient to make the addition under this Act. Reliance is also placed on the case of CIT v. Ajay Kumar Sharma and in the case of CIT v. Elegant Homes (P) Ltd. , which are the cases of cash credit which was found to be bogus on the basis of material seized in the search. He further submitted that the AO had made available the statements to the assessee as is evident from various documents referred in assessee's paper book Vol-1 by giving reference to various pages of questions and answers thereto.
7. Rival contentions raised by the learned Counsel of assessee, Shri C.S. Agarwal and the learned advocate, Shri Boota Singh were considered and the case records and the various precedents relied upon gone through.
8. Block period for which the assessment is to be made under Chapter XIV-B means the period comprising previous years relevant to ten assessment years preceding a previous year in which the search was conducted under Section 132 or any requisition was made under Section 132A, and also includes in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition. Therefore, the assessment for the block period under Chapter XIV-B can be made of the undisclosed income only up to the date of commencement of search or the date of the requisition and not of the period thereafter. Section 158BA provides for assessment of undisclosed income as result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of Section 158BB and assessment has also to be made under Section 158BC of the block period. The "undisclosed income" for which the assessment is to be made, is defined in Section 158B(b) which includes 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 articles, 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 purpose of this Act and after the amendment by Finance Act, 2002 w.e.f. 1st July, 1995 it includes also the any expenses, deduction or allowance claimed under this Act which is to be found to be false.
9. Section 158BB provides for computation of undisclosed income to be the aggregate of the total income of the previous falling within the block period computed in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence 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 and provided in Clauses. (a) to (f) of Section 158BB(1).
What is crucial to be determined is that the undisclosed income which can be assessed under Chapter XIV-B should be that amount which is computed on the basis of evidences found as a result of search and such other material or information as are available with the AO and relatable to such evidence. Core thing to be seen is the evidence found which will be the basis for making the assessment. If there is no evidence or the evidence has already come on record or has been disclosed by the assessee in the assessment proceedings, then that evidence cannot be said to be have been found as a result of search and in that case, the material or information available with the AO and relatable to such evidence could also not help in computing undisclosed income. The search in this case was undertaken on 19th and 20th July.
The statement of three officials of the assessee-company was recorded and in these statements no incriminating material was there which could be termed as evidence on the basis of which the undisclosed income could be computed. Certain documents in the form of lease agreement, etc. were seized at the time of search, but entries based on those documents were already found recorded in the books of account of the assessee, in the sense that the lease rent income on the basis of such lease agreements have been recorded in the books of account, as income of the assessee and the depreciation and interest with regard to the very lease transactions have been claimed as a deduction. Lease agreements may be an evidence by itself but there is nothing in those agreements which could establish that assessee had undisclosed income.
On the contrary, disclosure of income has been made by the assessee in the books and return of income pursuant to these very lease agreements.
The Department has no doubt collected the material subsequent to raid, but that may not be very material and relevant for framing the assessment under Chapter XIV B of the case because of the mandate given under Section 158BB it has to be the income computed on the basis of evidence found as a result of search and not otherwise. If any material is collected by the Revenue after the search, that may not give authority to Department to make the computation of undisclosed income under Section 158BB or assessment under Section 158BC of the Act.
Reference in this connection may be had to the decision of Jodhpur Bench of Tribunal in the case of China Devi v. Asstt. CIT (2002) 77 TTJ (Jd) 640 wherein it is held that "Further the addition was made on the basis of the statements of the assessee and here two sons recorded during the search. These statements though may constitute information available with the AO, the same can by no stretch of imagination be treated to be relatable to 'such evidence', i.e., to the evidence 'found' as a result of search, inasmuch as, the statement recorded during search would not be said to be an evidence 'found as a result of search' though the same may be an evidence 'obtained' during search.
Accordingly, in view of the provision of Section 158BB(1) as it stands amended w.e.f. 1st July, 1995, no addition on the basis of statement recorded during the search, could be made in the block assessment." 10. Similar view is taken by the Indore Bench of the Tribunal in the case of Indore Construction (P) Ltd. v. Asstt. CIT (2000) 66 TTJ (Ind) 420 : (1999) 71 ITD 128 (Ind) wherein it was held that : "Such computation should be on the basis of evidence found as a result of search or requisition of books of account or documents and such other material or information as are available with AO. It is important to note that the words used are 'such other materials'.
The legislature has not used words 'any other materials'. The word 'such' has been defined in Black's Law Dictionary, Sixth Edition as under : 'Such of that kind, having particular quality or character specified. Identical with, being the same as what has been mentioned. Alike similar, of the like kind. 'Such' represents the object as already particularized in terms which are not mentioned, and is descriptive and relative word, referring to the last antecedent'.
Again the word used in the section are 'as are available' the expression 'available' has been defined to mean in Black's Law Dictionary, Sixth Edition as 'present or ready for immediate use'."Harakhchand N. Jain v. Asstt. CIT (1998) 61 TTJ (Mumbai) 223 are also to this effect : "The words 'such other material' used in s. 158BB(1) do not mean that the AO has got unfettered powers to override the rules of evidence so as to make hypothetical and ad hoc additions." It was held that the AO cannot make roving enquires in respect of assessments completed without any information or material in possession during the block period.Essem Infra-port Services (P) Ltd. v. Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd) has taken similar view on the interpretation of such material by observing that : "Chapter XIV-B lays down special procedure for assessment in search cases. The special procedure set out in Chapter XIV-B is a separate set of rules, by itself. For the purposes of this Chapter, the term 'undisclosed income' is defined. The definition of the term 'undisclosed income' is given in an 'inclusive' manner, but it is again made clear under Section 158B(b) that 'disclosed income' includes money, bullion, jewellery, etc. only if they represent income or property which has not been or would not have been disclosed for the purposes of this Act. Therefore, we find that even though 'disclosed income' is defined in an 'inclusive' manner, the scope and extent of the term 'undisclosed income' for the purposes of this Chapter is contingent upon the fact that the undisclosed income should be borne out of material representing income or property which has not been or would not have been disclosed by the assessee for the purposes of this Act. When certain information and details are already furnished in the returns of income or statements accompanying thereto, filed before the Department, or when certain information and details are already recorded in the books of account maintained in the regular course of business, based on which return of income would be filed in normal course, that very same information and details cannot be re-examined in the course of block assessment proceedings to arrive at any fresh conclusions, so as to result in determination of undisclosed income based on those materials. The true nature of undisclosed income, as it is construed in Chapter XIV-B is that the assessee has not or would not have disclosed that income to the Department in the normal course, and such income should be found out by the Department as a result of search or requisition of books and details as provided under Section 132 of the IT Act. Thus, there are two elements to be satisfied so as to be treated as undisclosed income for purposes of this Chapter, i.e., the factum of non-disclosure should be existing, and the said non-disclosure on the part of the assessee should have been blown out as a result of search or requisition of books, etc., under Section 132 of the Act. It naturally follows, therefore, that wherever the assessee has disclosed necessary information and details regarding income or expenses or credit or property in the returns of income or in the statements accompanying the returns or even if the books of account based on which returns would be filed contain those details, assessee gets away from the clutches of non-disclosure in respect of that income or property, etc. because those materials are already available even in the absence of any recourse to search operations under Section 132." 13. The statement of Shri Mahesh C. Gupta recorded on 30th Sept., 1996 can be taken into consideration only when it was recorded during the course of search. No evidence has been brought on record that the search was continued till 30th Sept., 1996. On the contrary, the last Panchnama drawn is dt. 20th July, 1996 and after that date there was no prohibitory order made by the search authority, and therefore, in view of Bombay High Court's decision in the case of CIT v. Mrs. Sandhya P.Naik , it is not possible to extend the search in that case even by passing restrain order under Section 132(3) for namesake when the same is not required to be done. No evidence or material has been brought on record to this effect that something was required to be done after 20th July, 1996 or that the search extended was to be extended 30th Sept., 1996 as claimed by the learned Departmental Representative.
14. In the case of Elegant Homes (P) Ltd. (supra) before the Jaipur Bench of Rajasthan High Court, cash credit addition was made by the AO in assessment under Chapter XIV-B of the Act, which was deleted by the Tribunal on the ground that entry shown in the regular books of account and, therefore, it cannot be stated that income was undisclosed income of the assessee. This finding of the Tribunal was vacated by the High Court by upholding that the Tribunal has committed an error in holding that the entries were found in the regular books, and therefore, it cannot be treated as undisclosed income of the assessee, because, the same was contrary to the provisions of Chapter XIV-B and the undisclosed income was found on the basis of material seized, and therefore, should be treated as undisclosed income of the assessee, as per the scheme of special assessment. In the body of the judgment of the High Court, it is noted that the admitted fact was the search was carried on at the residential and business premises of the director of the assessee and some incriminating papers were found during the search and the same were seized and the genuineness of the. cash credit was not proved by the assessee. Even otherwise, the provisions of s. 68 for assessing the cash credit are specifically incorporated in s. 158BB(2) for making the assessment under Chapter XIV-B of the Act. This section for the sake of convenience is being reproduced hereinunder : "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 reference to 'financial year' in those section shall be construed as reference to the relevant previous year falling in, the block period including the previous year ending with the date of search or of the requisition." 15. In view of the specific insertion of Section 68 for making the assessment under Chapter XIV-B, this decision would not be any help to the 'Revenue for supporting the addition for disallowance of depreciation for which there is no material found during the course of search.
16. In the case of Ajay Kumar Sharma (supra), another case before the Jaipur Bench of the Rajasthan High Court, the cash credit addition was upheld which were found to be bogus on examination of creditors. There also the High Court observed that merely because some entries in the books of account if shown, that does not prohibit the AO to tax that amount in the block period, if that amount has not been taxed in the regular assessment. When the cash credits are not taxed in the relevant assessment years, that can be treated as undisclosed income and can be taxed after search in the block period. This case is also on the similar line as was in the case of Elegant Homes (P) Ltd. (supra).
These two decisions, therefore, in my opinion, are of no help to the Revenue in advancing its case for disallowing the depreciation for which, as aforesaid, there is no material found as a result of the search.
17. It would also be interesting to note that inquiries/investigations have been started even before the commencement of search .and the statement of Shri Ajay G. Parimal which was recorded on 20th July, 1996 revealed that these inquiries were made and evidences were collected before the search. The relevant question Nos. 7, 8, 9 and 10 to 13, in this regard are quoted by the AM in his order in para 91 to conclude that the material has been collected before the search was conducted with regard to these lease transactions. The material, if any, was thus collected either before the search or it has been collected after the search proceedings were over. There is no material on record to suggest that any evidence has been collected in this case by the Revenue during the course of search or as the result of the search, on the basis of which the computation of undisclosed income under Section 158BB or under Section 158BC could be made. The assessment made under Section 158BC is thus not within the ambit of Chapter XIV-B of the Act and it is required to be vacated. In these circumstances, as observed by the learned AM, it is not necessary on this respect, at this stage, to go into the merits of the case made out by the assessee in the impugned order, which would be for the Department to make the best use of material so gathered before the search as well as after search proceedings. Insofar as this assessment is concerned, it would be sufficient to say that undisclosed income, as assessed in the impugned order, is required to be deleted for the reasons that there is no such income, which could be said to be based on any evidence found as a result of search and any such other material or information as relatable to such evidence found.
18. Before parting with the case, it would be relevant to point out a fact that the lease rent received by the assessee on that account on these fourteen lease transactions is duly offered by the assessee in the returns filed and assessed in asst. yrs. 1995-96 to 2002-03 which amounting to Rs. 18.99 crores. Therefore, this is one more reason that the assessee having offered the same for assessment, it could not be perhaps open to the Revenue to disallow the depreciation claim of the assessee to retain the assessment of the rental income from these very transactions, unless a finding is recorded that assessment of rental income is also not in accordance with law and facts of the case.
19. In my opinion, therefore, the assessment made under Section 158BC is required to be vacated as the same is not authorised by the provisions of Chapter XIV-B of the Act, it being based on the material already collected and appearing on record or on the material collected after the search proceedings was over and it is not made on the basis of the material and evidence found as a result of the search nor on other search material or evidence available with the AO and relatable to such evidence found as a result of the search.
The above appeal is filed by the assessee having been aggrieved by the assessment order dt. 31st July, 1997 passed by the AO. Since there is a difference of opinion between the Members constituting the Bench, the following questions were referred to the Hon'ble Third Member : "1. Whether, on the facts and in the circumstances of the case and in law, the learned AO had jurisdiction and justification in including the depreciation allowance in the computation of undisclosed income in the order under Section 158BC of the IT Act 2. If the answer to question No. 1 is in the affirmative, whether grounds of appeal Nos. II to IV raised by the assessee are required to be remitted to the Division Bench, for adjudication thereupon ?" The Hon'ble Third Member, after hearing the same, has passed the order dt. 30th Sept., 2004, agreeing with the Hon'ble AM. Hence, as per the majority opinion, the appeal of the assessee is hereby allowed.