1. The assessee has filed this appeal against the order of AO dt. 24th April, 1997.
2. The first ground of appeal is general and will stand disposed of in view of the findings to be recorded against other grounds of appeal.
3. The second ground of appeal is that the order passed by AO is barred by limitation. The warrant of authorization was executed on 6th Feb., 1996 and hence assessment was to be completed on or before 28th Feb., 1997 as per Section 158BE of the IT Act.
4. The learned Authorised Representative drew our attention to Panchnama dt. 6th Feb., 1996 (available at pp. 1 to 13 of the paper book). As per this Panchnama, search was commenced on 6th Feb., 1996 and prohibitory order under Section 132(3) was placed. Thereafter our attention was drawn to the Panchnama dt. 19th Feb., 1996 (available at pp. 14 to 18 of the paper book). As per this Panchnama, search was concluded on 19th Feb., 1996. No prohibitory order was placed. Our attention was drawn to third Panchnama dt. 25th April, 1996 (available at pp. 19 to 23 of the paper book).
5. The learned Authorised Representative submitted that as per Panchnama dt. 25th April, 1996, nothing was found or seized. No prohibitory order was placed. Search commenced at 4 PM and concluded at 5 PM. The learned Authorised Representative submitted that it was a mere formality. The Panchnama dt. 25th April, 1996 is not a valid Panchnama. The learned Authorised Representative stated that col. 9 of Panchnama dt. 19th Feb., 1996 is blank and it means that search was concluded on 19th Feb., 1996. Accordingly the assessment should have been completed on or before 28th Feb., 1997.
6. The learned Authorised Representative relied on the order of this Bench in the case of Madhuvana House Building Co-operative Society v.Asstt. CIT. This Bench vide order dt. 31st Dec, 2001 in IT(SS)A No.175/Bang/1997 [reported at (2002) 76 TTJ (Bang) 948--Ed.] held that search cannot be said to have been completed on the day of last Panchnama, if there has been no search and seizure on the day of last Panchnama. In that case, on the day when the last Panchnama was drawn, there was no search and there was no seizure of material kept under P.O. Under these circumstances, it was held that the search cannot be said to be completed on the last day when last Panchnama was drawn but it was held that search stood completed before that.
7. The learned Authorised Representative relied on the decision of Allahabad High Court in the case of Sriiam Jaiswal v. Union of India and Ors. in which it has been held that order under Section 132(3) does not amount to seizure. It was further held by the learned Allahabad High Court that the condition precedent to make an attachment order under Section 132(3) is that undisclosed assets are discovered during search. In the instant case, Panchnama dt. 25th April, 1996 shows that no asset was seized. Hence it is clear that search stood concluded by the Panchnama dt. 19th Feb., 1996.
8. The learned Authorised Representative also relied on the decision of Special Bench in the case of Promain Ltd. v. Dy. CIT (2005) 95 TTJ (Del)(SB) 825 : (2005) 95 ITD 489 (Del)(SB). In that case at para 75, it has been mentioned that the AO must satisfy himself for the purpose of calculating the period of limitation that the document in question is in reality a Panchnama. In case, restraint order is placed under 2nd proviso to Section 132(1), then it amounts to seizure and lifting of restraint order will not be relevant. The learned Authorised Representative drew our attention to para 76 of the order of Special Bench. In case there is a prohibitory order then search could be concluded when prohibitory order is lifted and the books of account/valuable articles are actually seized and Panchnama is prepared. From this the learned Authorised Representative conferred that in order to be a Panchnama, there must be some search and seizure.
In the instant case, the learned Authorised Representative stated that vide Panchnama dt. 19th Feb., 1996, no prohibitory order under Section 132(3) was placed. Hence that should be treated last Panchnama.
9. The learned Authorised Representative also relied on the decision of Bombay High Court in the case of CIT v. Mrs. Sandhya P. Naik . In this case, search warrant was executed between 16th Oct., 1996 and 20th Oct., 1996. On 20th Oct., 1996, an order under Section 132(3) was passed covering one cupboard in which all the silver articles found were placed and sealed. On 26th Oct., 1996, 6 kg. of silver vessels were released and the cupboard was sealed again. On the same day, a Panchnama was drawn concluding the search and indicating in the said Panchnama that the cupboard containing silver articles had been sealed. On 13th Oct., 1997, the Asstt. CIT Shri Ashish Abrol who was not one of the authorized officers removed the seal and made a further order under Section 132(3) of the IT Act, releasing the said silver articles. Assessment was completed on 13th Dec, 1997. The learned High Court upheld the finding of the Tribunal that there was no practical impediment to seizure of 45 kg. of silver. It was further held that Tribunal was right in holding that proceedings on 26th Oct., 1996 could not be considered as part of the execution of search proceedings. Explanation to Section 132(3) says that a restraint order does not amount to seizure. Mr. Abrol was not an authorised officer.
Validity of Panchnama is to be looked as per the provisions of Criminal Procedure Code. In the circumstances the learned High Court held that impugned assessment dt. 31st Dec, 1997 is barred by limitation.
10. The learned senior counsel appearing for Revenue stated that Section 132 can be split into two compartments. Sub-sections (1) to (5) of this section relate to conducting of search. Search operations are administrative matter and these cannot be looked into by the Tribunal.
The AO is handed over search material and appraisal report. The warrant of authorisation and satisfaction note is not handed over. There may be procedural errors in the Panchnama. The learned senior counsel stated that when these Panchnamas were drawn, Explanation to Section 158BE was not in statute book.
11. The learned senior counsel drew our attention to Panchnama dt. 6th Feb., 1996. As per col. 9 of this Panchnama it is clear that two prohibitory orders under Section 132(3) were placed. In col. 8, it was mentioned that search is temporarily concluded. Thereafter he drew our attention to p. 18 of the paper book filed by the Department. The learned senior counsel stated that on the top of this page it is written as under: Statement of Shri D.T.S. Rao, director, M.H.B.C.S., Mysore under Section 132(4) continued on 23rd April, 1996.
12. From this, the learned Departmental Representative stated that search continued upto 23rd April, 1996. Hence, it cannot be said that search was concluded on 19th Feb., 1996.
13. The learned senior counsel referred to p. 15A of the paper book filed by the learned Authorised Representative. According to it, prohibitory order in case of cupboard was lifted on 19th Feb., 1996, the second prohibitory order was not lifted. The learned senior counsel stated that date mentioned in col. 2 of Panchnama dt. 25th April, 1996 (p. 19 of the paper book of learned Authorised Representative) is correct. If there is an error then the same is covered under Section 292B of the IT Act. Hence, it was argued that last Panchnama is dt.
25th April, 1996 and accordingly assessment has been completed within the time allowable under the Act.
14. The learned senior counsel drew our attention to Section 132(8A) as existing at that relevant time. According to it prohibitory order under Section 132(3) shall not be in force for a period exceeding sixty days from the date of search except where such period is extended beyond 60 days on the basis of reasons recorded and taking the approval of the Director or CIT. Hence, the prohibitory order which was passed on 6th Feb., 1996 was valid till 6th April, 1996 and hence such date should be reckoned as the date for the conclusion of search. The learned senior counsel, then stated that assessment order passed is within limitation period on account of consideration of any of the following dates: (b) Statement of Shri Rao recorded under Section 132(4) on 23rd April, 1996.
15. The learned senior counsel then submitted that limitation is provided under Section 158BE. The period is to be reckoned from the last day of the month in which authorization under Section 132 is executed. Such execution may be through either Section 132(3) or 132(4). Explanation 2 to Section 158BE is for removal of doubts.
Section 158BE(1) does not refer to the Panchnama. Hence the date on which statement under Section 132(4) has been recorded is relevant.
16. The learned Authorised Representative in his counter-reply admitted that there were two prohibitory orders as per Panchnama dt. 6th Feb., 1996.
17. We have heard both the parties. Special Bench in the case of Promain Ltd. (supra) has clarified the issues on which Tribunal has jurisdiction to call for records in order to decide the issue before it. It will be relevant to reproduce the relevant extract from p. 498 of 95 ITD: As already discussed, the search action under Section 132 has three limbs i.e., initiation of search, conduct of search and conclusion of search. Insofar as the validity of search is concerned, the first limb, i.e., initiation of search, which includes all the action culminating into issue of warrant of authorization, assumes significance and relevance and the same are not justiciable in an appeal before the Tribunal. The only remedy in the matter lies in the form of seeking issue of a writ from the High Court.
As regards the remaining two limbs, i.e. conduct of search and conclusion of search anomalies and infirmities therein, if any, do not get to vitiate the search action and the Tribunal can look into these aspects to the extent relevant for disposing of the appeal against the block assessment. The Tribunal also has the power to call for the production of warrant of authorization and other documentary evidence with a view to find out the date of last Panchnama and to ascertain the search in fact was initiated and conducted in a given case to verify the jurisdictional fact, if so challenged by the assessee and if so thought fit by the Tribunal in the facts and circumstances of the case.
18. In the instant case, the assessee has challenged that the assessment order has been passed beyond the time-limit as provided under the Act.
19. Time-limit for completion of block assessment is provided under Section 158BE(1) of the IT Act. The assessment is to be completed within one year from the end of the month in which the last of the authorizations under Section 132 is executed. It is true that Section 158BE does not refer to any sub-section of Section 132. The perusal of provisions of Section 132 shows that authorization is issued under Sub-section (1) or (1 A) of Section 132. Sub-sections (2) to (4) of 132 deal with powers of authorized officer. Hence, the authorization as referred in Section 158BE means the authorization as issued under Section 132(1) or 132(1A).
20. Word 'executed' was not originally defined. However, Expln. 2 to Section 158BE was introduced by Finance (No. 2) Act, 1998 with retrospective effect from 1st July, 1995. The Expln. 2 is as under: For the removal of doubts, it is hereby declared that the authorization as referred in Sub-section (1) shall be deemed to have been executed, in the case of search, on the conclusion of search as recorded in the last Panchnama drawn in relation to any person in whose case, the warrant of authorization has been issued.
21. The CBDT vide Circular No. 772, dt. 23rd Dec, 1998 clarified the position as to why Explanation was introduced. In para 53.2 of that circular it was mentioned: To settle the controversy regarding meaning of the word 'execution' while calculating the period of limitation in Section 158BE of the IT Act, the Act has inserted a new clarificatory Explanation. An authorization is deemed to have been executed in the case of search on the conclusion of search as recorded in the last Panchnama drawn in relation to any person in whose case the warrant of authorization has been issued.
22. Thus, it is clear that Explanation is clarificatory and has been introduced to settle the controversy. If the Explanation is clarificatory in nature and has retrospective effect then Explanation so brought in the statute simply explains the law as it has always been in the main provision.
23. An Explanation was introduced to Section 194A. The learned Madras High Court in the case of ITO v. D. Manoharlal Kothari observed at p. 374: From what is expressed by the apex Court, the Explanation cannot be treated as an amendment because the purpose of the Explanation is to explain or, in the words of the apex Court, to clear any mental cobwebs surrounding the meaning of a statutory provision and to prevent the controversial interpretations without giving the true meaning of the provision. That is why the apex Court further emphasized by saying that such Explanations were intended more as a legislative exposition or clarification of the existing law than as a change in it. When the Explanation serves the purpose of the clarification of the existing law, there is no question of any prospective or retrospective operation of the Explanation. Hence, in this case, in the year 1987, the legislature has expressed the intention or scope of Section 194A of the Act by making it clear that even the suspense account or interest payable account has to be deemed only as the account with credit entries.
24. The learned Rajasthan High Court in the case of Laxmi Industries Ltd. Co. and Ors. v. ITO observed at p. 517: An Explanation brought on the statute book is ordinarily clarificatory in nature and has retrospective effect, as the Explanation so brought to a provision in the statute simply explains the law as it has always been in the main provision. However the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly. That apart, if two views of the interpretation or construction of a provision in the statute are reasonably possible, the view which is favourable to the subject should be adopted.
25. In this case, the learned High Court held that the assessee was liable to deduct tax at source credited in suspense account though Explanation was introduced subsequently for deduction of tax at source in case the interest is credited in suspense account. Hence, the provision was strictly construed in accordance with Explanation. The learned Calcutta High Court in the case of CIT v. Sri Jagannath Steel Corporation 26. Explanation 8 to Section 43(1) was introduced by Finance Act, 1986 with retrospective effect from 1st April, 1974. It declared that it is for removal of doubts. The learned Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. observed at p. 936 as under: It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with effect from a particular date should be construed prospectively and not retrospectively. But this principle will not be applicable in a case where the provision construed is merely explanatory, clarificatory or declaratory. It cannot be disputed that the object of the Explanation is to explain the meaning and intendment of the Act itself.
27. Thus, it is clear that execution of warrant of authorization under Section 132(1) is to be seen in accordance with Expln. 2.
28. In view of Expln. 2 to Section 158BE, execution of search warrant is to be inferred from the date recorded in respect of conclusion of search in the last Panchnama. Panchnama is not defined in the IT Act.
However, Section 100 of CrPC governs the conducting of search. As per 100(4) of CrPC, the authorized officer to make search is required to call upon two or more independent and respectable inhabitants of the locality in which the place to be searched is situated. Search is to be made in the presence of these two respectable inhabitants; list of things to be seized and placed where these have been found is to be prepared and such list is to be signed by the authorized officer and the two witnesses. Copy of the list prepared is to be delivered to the occupant of the premises. Recording of the names of the officer authorized to search, the building or premises to be searched, the designation of the officer who authorized the search, name and addresses of two respectable persons called to witness the search, time of commencement of search and conclusion or suspension of search, list of valuables, documents etc. found as well as seized, recording of statement of any person during search and mention of any restraint order or prohibitory order, are recorded in the prescribed format and such document is known as Panchnama. Panchnama is prepared even if search is temporarily suspended. Panchnama is definitely prepared at the conclusion of search. In case an order under Section 132(3) is passed, then the same is mentioned in the Panchnama. Normally order under Section 132(3) is passed in respect of a room, shop, office or an almirah or lockers etc. Such room, locker or almirah etc. is sealed.
Prohibitory order under Section 132(3) is in respect of a specific portion of an area or space which can be sealed and to which legal access of entry cannot be made except with the knowledge of authorized officer. When such sealed room, almirah etc. is opened again then the same is also done in the presence of two witnesses. Such proceedings are also recorded in the Panchnama at the conclusion and if prohibitory order is again to be passed then the same is mentioned in the Panchnama. When the prohibitory order under Section 132(3) is finally lifted then Panchnama is drawn.
29. In the instant case, as per Panchnama dt. 6th Feb., 1996 shows that search was temporarily concluded at 5 AM on 7th Feb., 1996. List of documents, valuables found and seized were also prepared. Statement of Shri D.S. Manjunath recorded during search. Prohibitory order under Section 132(3) passed in respect of the following: (b) One cupboard in the wardrobe of first floor of house No. 23, Palace Model House, Mysore.
30. Copy of order under Section 132(3) available at p. 15A of the paper book filed by the assessee shows that personal jewellery, pawned jewellery, diary and loose papers were kept in the cupboard in the bedroom of Shri D.S. Manjunath S/o D.T.S. Rao, 23, Palace Mode House, Mysore. This prohibitory order was lifted on 19th Feb., 1996 and Panchnama was drawn on 19th Feb., 1996. Vide this Panchnama no further prohibitory order was passed.
31. Then, the last Panchnama is dt. 24th April, 1996. As per this Panchnama, nothing has been found or seized. Col. 5 of Panchnama has been struck off. Col. 5 of the Panchnama requires the following details to be given: 32. However, annexures have been attached to Panchnama dt. 25th April, 1996. In annexures, it has been mentioned: 33. These details suggest that this Panchnama is in respect of prohibitory order placed on 6th Feb., 1996 in respect of an almirah.
Though the Department has filed copy of order under Section 132(3) in respect of cupboard on first floor but no copy of order under Section 132(3) filed in respect of almirah.
An order under Section 132(3) shall not be in force for a period exceeding sixty days from the date of the order, except where the authorized officer, for reasons to be recorded by him in writing extends the period of operation of the order beyond sixty days after obtaining approval of the Director or, as the case may be CIT for such extension.
35. Prohibitory order under Section 132(3) was passed on 6th Feb., 1996 and in case it continued upto 25th April, 1996 then such order was required to be extended as per Section 132(8A) after recording reasons and getting such extension approved from competent authority. The learned Authorised Representative has stated that assessee was neither given copy of prohibitory order dt. 6th Feb., 1996, if any, in respect of almirah nor any intimation given for its extension.
36. It is necessary for Revenue authorities to communicate such extension to the assessee as Section 275A states that any person who contravenes order under Section 132(3) is punishable with rigorous imprisonment. In view of the facts as placed before us, it is held that prohibitory order was not valid as on 25th April, 1996.
37. Panchnama is not defined under IT Act. However, Board has issued taxpayer's charter. In respect of charter of rights and duties of persons searched, the Board has mentioned that such person has a right to have a copy of Panchnama together with all the annexure. Duty of the person searched is to affix his signature on the recorded statement, inventories and the Panchnama. Rule 112 of the IT Rules provides the procedure to be followed in search. Combined reading of Rule 112 and the taxpayer's charter makes it clear that Panchnama referred in Expln.
2 to Section 158BE is that Panchnama copy of which is given to the party searched. In the instant case, there are three Panchnamas dt. 6th Feb., 1996, 19th Feb., 1996 and 25th April, 1996. As stated earlier, order under Section 132(3) was not valid on 25th April, 1996. When order under Section 132(3) was not extended beyond sixty days then lifting of such prohibitory order vide Panchnama dt. 24th April, 1996 has no legal sanction, when violation of order under Section 132(3) can result into punishment with rigorous imprisonment then, communication of extension of order under Section 132(3) is a must. Hence, Panchnama dt. 25th April, 1996 is not a valid Panchnama.
38. Search comes to an end when the last Panchnama is drawn. It is date of such Panchnama which is relevant for determining the period of limitation for passing the order under Section 158BC by the AO.Accordingly, the AO is required only to find out the date when the last Panchnama with reference to last authorisation is drawn and nothing beyond that. Hence, the Tribunal can examine the date when last Panchnama was drawn. It will be relevant to quote from p. 51 in the case of Promain Ltd. v. Dy. CIT (supra): It is, however, pertinent to mention about the significance of the Panchnama. The Panchnama is a document which is prepared in the presence of Panchas (respectable local witnesses) containing the items found and seized in the course of search. So the AO must satisfy himself for the purpose of calculating the period of limitation that document in question is in reality a Panchnama.
There may be a case where inventory is prepared in respect of books of account or valuable articles found in the course of search but taking of or removal of such books of account or valuable article is not practicable. The authorized officer may issue a restraint order under the proviso to Section 132(1). Such restraint is deemed to be a seizure as per the said proviso. Hence, in such a case, the preparation of inventory and Panchnama would be relevant and any action of the authorized officer lifting the restraint order would, in our opinion, be irrelevant. The reason is that whatever the search partly was required in law to do had been done and nothing more was required. The restraint order is passed not because anything was to be done but because it was not practicable to take physical possession and remove the material to a safe place at the relevant time. As held by the Hon'ble Bombay High Court in the case of CIT v. Mrs. Sandhya P. Naik officer cannot keep the search proceedings in operation by passing a restraint order under Section 132(3) so as to circumvent the provisions of Section 132(3) r/w Section 132(5).
However, the situation would be different where a prohibitory order under Section 132(3) is issued because such order, unlike a restraint order, does not amount to seizure as per Sub-section (3) of Section 132. Such orders are issued where it is not practicable to seize. So an act of seizure remain to be performed and, therefore, search cannot be said to be concluded. Hence, in such case, search would be concluded when the prohibitory order is lifted and the books of account/valuable articles are actually seized and the Panchnama is prepared. In such case, it is this Panchnama (if it is the last one) which is relevant for calculating the period of limitation. Accordingly, we hold that the Tribunal can examine the record of search with a view to find out the factum of last Panchnama as discussed above.
39. Perusal of Panchnama dt. 25th April, 1996 shows that prohibitory order was lifted. Items which were earlier found have been inventorised. Panchnama dt. 25th April, 1996 means that Shri D.Padmanabha, ITO is an authorized officer. However his name is not appearing as an authorized officer in the Panchnama dt. 7th Feb., 1996.
An officer is authorized to participate for the search as per the warrant of authorization. Hence, the name of Shri Padmanabha as authorized officer also viatiates Panchnama dt. 25th April, 1996.
40. During the course of proceedings before us, the learned Departmental Representative has filed the copy of appraisal report along with annexure. At p. 3 of such report, it is mentioned that limitation for assessment in the case of Shri D.T.S. Rao is 28th Feb., 1997. It means, the Department was of the opinion that assessment is to be passed on or before 28th Feb., 1997.
41. In view of the fact that Panchnama dt. 25th April, 1996 is not valid, then last Panchnama is dt. 19th Feb., 1996 vide which certain books of account and documents were seized. Therefore, it is the last Panchnama and according to it, the assessment order should have been passed on or before 28th Feb., 1997.Madhuvana House Building Co-operative Society v. Asstt. CIT (supra), held vide para 12 that Panchnama dt.
25th April, 1996, was not the date of last Panchnama, as there was no search or seizure. In that the assessment order was held as barred by limitation.
43. During the course of proceedings, the learned senior counsel argued that statement of late Shri D.T.S. Rao was recorded under Section 132(4) on 23rd April, 1996 and, therefore, it will be considered that search continued upto 23rd April, 1996. Section 132(4) authorizes the AO to examine, on oath in person during the course of search or seizure. Mere mention of section on the top of the statement will not make the statement as recorded during the course of search. At top of the statement, it is written as under: Statement of Shri D.T.S. Rao, director, M.H.B.C.S., Mysore under Section 132(4) continued on 23rd April, 1996.
44. Before this stage, statement was recorded on 6th March, 1996 and at the end of the statement it was mentioned that it is temporarily concluded. Hence, this statement on 23rd April, 1996 was in continuation of statement recorded on 5th March, 1996. Statement recorded on 5th April, 1996 is in continuation of statement dt. 24th Feb., 1996. In the statement recorded on 7th Feb., 1996, it is clearly mentioned that the same has been recorded during the course of proceedings under Section 132 of the Act. It will be relevant to mention that statement dt. 23rd April, 1996, 5th March, 1996 and 24th Feb., 1996 do not contain the signature of the witnesses. Statement on 24th Feb., 1996 was continuation of statement dt. 7th Feb., 1996.
Statement on 24th Feb., 1996 has been recorded by Shri Padmanabha and his name has not appeared as an authorized officer in the Panchnama dt.
6th Feb., 1996. Therefore statement dt. 24th Feb., 1996 is not a statement recorded by the authorized officer. Similarly, statement of 23rd April, 1996 is also by Shri Padmanabha, his name is not appearing as authorized officer in the Panchnama dt. 6th Feb., 1996. It means that he was not an authorized officer. Hence, statement dt. 23rd April, 1996 cannot be termed as the statement recorded during the course of search proceedings by an authorized officer. Moreover, the limitation is to be reckoned from the date of last Panchnama and not from the date on which statement has been recorded. If the statement is recorded during the course of search, then mention of such recording of statement is to be given in para 6 of the Panchnama. Unless that mention is available in the Panchnama, the statement cannot be a statement during the course of search. Hence, we do not agree to the contention of the learned senior counsel that assessment order is within time as there is statement of late Shri Rao on 23rd April, 1996.
45. The learned senior counsel also argued that prohibitory order was placed on 7th Feb., 1996. Such prohibitory order should have been continued for the period of 60 days without approval of the Director or CIT. It was therefore argued that such prohibitory order continued upto 6th April, 1996. The limitation period reckoned from the end of the month in which prohibitory order expired i.e. April, 1996. It was therefore submitted that order passed is within the limitation.
46. It is assumed that prohibitory order stood lifted on 7th April, 1996. However no Panchnama has been drawn. As per Expln. 2 to Section 158BE, it is only the last Panchnama which is to be seen for the purpose of determining limitation of passing the assessment order. As per the facts on record last Panchnama is dt. 19th Feb., 1996, as there is no seizure vide Panchnama dt. 25th April, 1996 besides the fact that Panchnama dt. 25th April, 1996 is not a valid Panchnama. Hence, it is held that order passed by the AO is barred by limitation.
47. Ground of appeal Nos. 3 and 4 are against the addition of Rs. 1,37,00,502 as alleged gross receipts received by the assessee or his family members. Alternately it has been mentioned that AO should have taxed only the income attributable to the gross receipts.
48. Late Shri T.D.S. Rao was one of the promoters of M/s Madhuvana House Building Co-op. Society (hereinafter referred to as M.H.B.C.S.) and occupied various positions in the managing committee of the society. M/s M.H.B.C.S. was formed in 1974 and from 1985, it became active. Late Shri Rao is also president of Saradavilas Educational Society from 1991 onwards. During the course of search at the premises of brother of Smt. Gayathri, manager, M.H.B.C.S. certain documents were seized and these documents showed that amounts drawn were utilized by late Shri Rao and his family members for their personal purposes and also for advancing their position in society. Smt. Gayathri was the trusted employee of M.H.B.C.S. and used to collect money and maintained books of account. Smt. Gayathri recognized the documents written in her handwriting and stated the period to which such document belongs. She stated that sometimes the contractors handed over certain funds to be disbursed or to be spent in a particular way. For such expenses, the contractors subsequently gave the vouchers under their signature specifying the nature of expenditure to be debited. The society records do not indicate the actual nature of disbursement or expenditure as recorded in the loose sheets maintained by Smt. Gayathri. Such sums appeared as advance to contractors such system of recording the entries in the regular books was adopted as per directions of management, which included 15 directors out of which Shri D.T.S. Rao was executive director and Shri Ramesh Rao was authorized director. There were following three projects: (i) Srirampura Layout-51.35 acres Contractor--M/s S.G.R. Enterprises allotment of site complete.
(ii) Sathagalli Layout-74.12 acres Contractor--M. Ramachandrachar.
Land acquired by Government and possession given by the Government.
Provisional allotment made, civil works is still to commence.
(iii) Dattagalli-132 acres Contractors--M/s Raghavender Constructions. 4(1) notification subsequently cancelled and in lieu of that NOC issued for Srirampura in Stage.
(a) Securing from Government permission and approval for acquisition of lands in favour of the first party.
(b) Processing matters with relevant authorities and securing possession of lands in favour of the society.
(d) To carry out civil portion of the layout work after getting permission.
(e) Laying of lines for water supply, underground drainage system, street lights, asphalting after completion of civil work.
49. Above referred entire work was to be done by the contractors and the payments were to be made by society. The AO stated that most of the work has been executed by the directors and their family members. This is evident from the fact that funds have either been drawn by bearer cheque in the name of contractor or in the names of the directors and the employees of the society. The AO collected information from encashed cheques and vouchers on sample basis and found that 97 cheques of dates from 28th Dec, 1986 to 4th Jan., 1995 have been encashed by (i) Ramesh, (ii) Manjunath, (iii) Varija Kumari, (iv) D.T. Prakash, (v) D.T.S. Rao, (vi) Srinivas Rao, (vii) Gayathri.
50. From this the AO concluded that there is diversion of funds of the society by directors and their family members at the instance of the assessee. The contractors stated that they gave blank vouchers and some blank vouchers were found at the residence occupied by brother of Smt.
Gayathri. Shri M. Ramachandran and Shri N. Shankar, partner of M/s Raghavendra constructions and M/s S.G.R. Enterprises stated that Shri D.T.S. Rao obtained blank vouchers from them and they are not aware as to how such vouchers have been utilized by Shri Rao. Shri Ramachandra stated that he has received Rs. 15 lakh from the society. There were two parts of contract. Part A pertained to obtaining land from Government and getting layout plan sanctioned. Part B revealed to civil and other residual work relating to layout. Total contract receipts in respect of part A of work amounted to Rs. 3,53,07,443. The firm in which Mr. Ramachandrachar is a partner has accounted receipts of Rs. 3,16,21,698. He has given blank vouchers and has also signed reverse side of the cheques for facilitating payments to be made by society. As per the oral agreement he was to receive 10 per cent of the cost of the work and thus was entitled for Rs. 31 lakhs. Balance Rs. 16 lakhs is still to be received. Such oral agreement was made with Shri D.T.S.Rao. The AO has reproduced the statement in his order and from it can be inferred that Shri Ramachandrachar stated that he has not constructively received the payments as shown by society. In IT return, receipts were shown as the society entered into a turnkey contract with me and has also deducted TDS on Rs. 3.5 crores. The society itself was incurring the expenses and quantum and such expenses were to be reflected in the books of the contractor. He agreed that he has not accepted to bear the expenses of the marriage of daughter of Shri D.T.S. Rao i.e., Kum. Satya Prema. He stated that he never authorized the use of funds of society for personal gain of Shri Rao or his family members. Similar details were given by partner of M/s Raghavendra constructions. It was stated that receipt vouchers were obtained without paying any consideration. Amount of Rs. 13 lakhs was paid while no consideration was paid for the vouchers given for Rs. 36 lakhs.
51. From the evidences collected, the learned AO concluded that late Shri Rao utilized the medium of society and the contractor for earning huge sum of money. Such amounts stand utilized for his personal purposes as per details available in the loose papers. As per books of society, payments made are as under:Financial year M/s S.G.R. Enterprises M/s Raghavendra Constructions 52. Amounts disclosed by the abovereferred two concerns as received from society in their block return are Rs. 1,33,75,186 and Rs. 12,22,000.
53. The AO further illustrated from the statement that Shri Rao had made payments to persons for getting the work done. Such persons cannot be named. However late Shri Rao stated that these amounts were paid on the instruction of the contractor. These payments were regularized by getting vouchers from the contractors. Late Shri Rao admitted that details as mentioned in the rough sheets have not been recorded as such in the day book and hence he admitted that day book does not reflect the true nature of expenditure. The following expenses have been particularly questioned from Shri Rao as these were personal expenses but debited to contractor account:(a) Marriage expenses of daughters Rs. 3,80,000(b) Flight ticket for Singapore for Mr. Manjunath Rs. 30,000(c) Ashwini Anand stitching charges Rs. 10,000(d) Swamy jewellers Rs. 50,000(e) Purchase of corner site in the name of Shri Rao and Shri Rs. 2,25,000 Prakash(f) Rao's Delhi trip Rs. 80,000(g) Rao's Madras and Bombay trips of Rs. 1,00,000 and Rs. 50,000, respectively 54. All such expenses are admitted but it was stated that contractors agreed to bear such expenses. The learned AO also brought on record that late Shri Rao's case before Settlement Commission, Madras was being handled by an advocate of Madras and visits to Madras are made for this purpose. It has been agreed by late Shri Rao that he has done liaison work on behalf of contractors as they were not acquainted with the politicians and Government officials.
55. The learned Authorised Representative relied on the decision of Supreme Court in the case of McDowell & Co. Ltd. v. CTO and held that profit earned by late Shri Rao through the medium of society and contractor is assessable in his hands. The assessee is the main force in dealing with purchase of land, developing it and selling it to members and such work is done in the name of contractors and hence the receipts shown to the contractors are the profit earned by the assessee.
56. The assessee contended before the AO that all the drawings written in their name or name of their family members are not personal expenses. Even if some personal expenses are mentioned then these are from the sums given by him to Mrs. Gayathri. This Explanation was rejected by the AO. The AO therefore held the sum of Rs. 1,29,38,822 drawn and exploited by the assessee as his income.
57. Besides the above amount, a sum of Rs. 7,61,680 was mentioned in the sheets but no year is mentioned. All the details of such sums have been mentioned at pp. 5 and 6 of the assessment order. These have also been treated as income. Thus an addition of Rs. 1,29,38,822 plus Rs. 7,61,680 i.e. Rs. 1,37,00,502 has been made by the AO.58. The learned Authorised Representative drew our attention to the statement of facts attached with the Form No. 36. M/s M.H.B.C.S. was to acquire land, make layouts and allot sites to various members of the society. The acquisition of the land and the allotment of sites are governed, determined and controlled by the Mysore Urban Development Authority. Turnkey : contractors were appointed for doing the liaison and development work of the layouts. The AO has concluded on the basis of the statements given on behalf of the following three contractors that they have not done any work for the society: 59. As per learned Authorised Representative, Shri Ramachandrachar was forced to make such statement. Subsequently he has retracted from his earlier statement. M/s S.G.R. Enterprises admitted receipts upto a certain date and denied the receipts after that date to minimize their tax liability. In case of M/s Raghavendra constructions, the father of managing partner was examined. He was director of the society and is a disgruntled person and hence his statement cannot be relied. Copies of statements were not given but AO offered them for cross-examination only on the points on which they have given statements to AO. Such opportunity has not been availed as the assessee wanted to cross-examine on all the points as it was considered necessary for assessment of assessee and M/s M.H.B.C.S.60. Amounts to such contractors paid by account-payee cheque or bearer cheque in their names or in the name of the person authorized by them or payments made to persons at their instance. All such payments are supported by vouchers. Some of the contractors have reported such receipts in their returns filed before search.
61. It has been submitted that documents seized from the residence of brother of Smt. Gayathri did not contain the year in respect of disbursement. Smt. Gayathri was forced to write the year in such documents. These disbursements were out of the funds entrusted to Smt.
Gayathri by the assessee and his family members. Similarly contractors entrusted funds to Smt. Gayathri and disbursements were as per the instruction of the contractor. Smt. Gayathri mentioned the name of the assessee and his family members as disbursement were made through them.
The notings in the name of Shri D.T. Prakash were specifically directed to be excluded by CIT though these were included in draft order by AO.The payments treated as personal can be clarified in the following seven categories: (a) Payments made through each one of the directors or family members of the assessee. Such payments were neither received by the assessee nor any benefit accrued to the assessee--Rs. 32,44,650.
(b) Amounts against which initials or the name of the assessee not mentioned--Rs. 46,38,647 (c) Amounts in respect of which the word personal has not been mentioned against the initials or the name of the assessee--Rs. 11,82,735 (e) Disbursements to the extent of Rs. 3,90,815 have already been disclosed by the respective persons in the returns filed before the date of search.
(g) Amounts disbursed to others at the instruction of the contractor--Rs. 29,08,965.
62. Alternatively, it has been argued that receipts cannot be taxed as these receipts have been applied for making payments on account of contractor or on account of assessee. The assessee is a director in the society and such receipts, if not applied for the purpose of society are to be reimbursed to the society. Hence, these receipts are not taxable. In respect of amounts disbursed through Shri D.T. Prakash, the AO proposed addition but the learned CIT(A) observed that in extreme case such disbursement may be termed as embezzlement and not as income.
The amount was not added. If the contractors are dummies then amount received from the contractors will not represent consideration for any work to be done by them.
63. The learned senior counsel appearing for the Revenue drew our attention to the fact noted by AO in his order that the society, though formed in 1974, became active in 1985. The period from 1st April, 1985 is included in the block period. Hence non-availability of year in respect of certain payments is not at all relevant. The learned senior counsel drew our attention to statement of Smt. Gayathri. In Ans. to Q.No. 3, she has stated that she is working in the society since 1985.
Shri Rao in his statement recorded in 1996 stated that first project was taken just 5 to 6 years back. Hence it was argued that transactions as appearing in loose papers are all within the period covered under block period.
64. The learned senior counsel also filed a paper book dt. 31st Dec, 2004 containing 105 pages. Vide paper book, the learned senior counsel has given the extract of personal drawings noted against late Shri D.T.S. Rao.
Total of personal drawing noted against Late Shri Rao as per seized material /KG/Sr. No. 4 = Rs. 50,45,552 (pages 1 to 9 of paper book dt. 31st Dec, 2004)Sr. No. 17 (page Nos. 10 and 11 of paper book dt. 31st Rs. 13,89,734Dec., 2004) --------------- Total Rs. 64,35,282 65. After hearing both the parties and perusing the statements of Smt.
Gayathri and Shri Rao, it is clear that entries mentioned in the documents referred in paper book dt. 31st Dec, 2004 are after 1st April, 1985 and hence to be considered for the block assessment.
Non-mentioning of year against some entries will have no impact in respect of accessibility of income represented by such entries. Society became active in 1985, Smt. Gayathri joined the society in 1985 and first project was also taken up after 1985. The second conclusion which we drew, is that no addition of income in the hands of assessee can be made in respect of entries in which name of the assessee or his family members are not appearing. As the learned senior counsel pointed out that details of entries related to personal drawings have been filed at the instance of a Member of the Bench, it is held that we will be considering the income, if any, required to be sustained in the hands of assessee in respect of entries totalling to Rs. 64,35,282 as per paper book dt. 31st Dec, 2004.
66. The learned Authorised Representative filed the details as to why the entries of Rs. 64,35,282 cannot be considered as income in the hands of assessee. The details are as under:Alleged drawings as per paper book filed by 64,35,282DepartmentWhere the name of D.T.S. Rao not appearing Annex. 1 5,18,000Where entries are repeated or not entry--Annex. 2 3,33,000Payments of income-tax reflected in the books of 68,000Annex. 3Detailed amounts spent out of the funds given by Late 2,40,500Shri Rao Annex. 4Expenses incurred as per instructions of the contractorfor society work--Annex. 5 33,36,415 44,95,915 ---------------------Balance 19,39,367Expenditure incurred where personal is not mentioned 13,56,130in loose sheets--Annex. 6Expenditure incurred where the year is not available inloose sheets 5,83,237 --------------- 67. Hence, it was argued that all the entries stand explained and no addition is required to be made. The learned Authorised Representative drew our attention to p. 79 of his paper book in which worthy CIT made a noting as draft order in the case of Shri D.T. Prakash: Not approved, funds taken out of the society at worst amount to misappropriation or embezzlement. Such amounts cannot be taxed.
68. The learned senior counsel for Revenue stated that the onus was on the assessee to establish that details as filed now are not required to be considered. The learned senior counsel further stated that no evidence (was) produced to show that expenses were incurred at the instance of the contractor. Subsequent statement of same contractors cannot be relied upon. The retraction of statement by such contractors is not to be relied upon. The learned senior counsel relied on the following case laws: Amounts embezzled by assessee from employer and utilization in construction of immovable property. Subsequent agreement to return money. Amount cannot be considered as loan. It is assessable as income.
Expenses incurred in transactions carried out in violation of provisions of FERA are not deductible.
Assessee staying with family in the building where social work was being conducted and assessee and his family taking food in common mess. Assessee not drawing any salary or remuneration. Assessee liable to income-tax in respect of estimated amounts expended on maintenance of himself and family.
69. The learned Authorised Representative drew our attention to the order of this Bench in the case of M.H.B.C.S. (supra). In that appeal, Department relied on the report of Asstt. Director, Registrar of Co-operative Societies, Mysore to establish that funds of society were indirectly used for the benefit of the family members of Shri Rao. He drew our attention to p. 964 of the 76 TTJ at which this Bench has taken note of the fact that Government of Kamataka ordered enquiry and held that the so-called audit report is malicious and false. Action against the Asstt. Director was directed to be taken.
70. The learned senior counsel appearing for Revenue drew our attention to audit report under Section 142(2A) in the case of society available at pp. 152 to 270 of paper book containing 270 pages. At p. 192, the auditor has mentioned as under: The vouchers obtained from the contractors in respect of which we have dealt with in detail in this report are mostly pre-stamped, blank signed vouchers in which management at its discretion and to its inconvenience has filled up figures and the details furnished on the reverse of those vouchers cover payments made in two accounting years.
71. We have heard both the parties. It was admitted by Shri Rao himself that vouchers were subsequently prepared in respect of expenses incurred and noted in the documents. It will be relevant to reproduce the following extract from the statement of Shri Rao dt. 5th March, 1996: Q. 2 Are these amounts namely marriage expenses of Rs. 3,80,000, wife's ticket charges of Rs. 1,00,000. Flight tickets of Rs. 30,000 for Singapore of Shri Manjunath, repayable to the contractors.
Ans. No, they are not repayable but they have not asked me to repay.
It is just as it is left in the contractors account.
Q. 3 You have answered that the amount spent for Madras trip, Bombay trip and Delhi trip of Rs. 1,00,000, Rs. 80,000 and Rs. 50,000, respectively have been done by you under the oral instructions of the contractors for the society's work. Can you tell me what work exactly you did for the society during those trips.
Ans. This question has already been answered about the spending of money is not effected by me but it has been handed over to the persons as per the oral instructions of the contractor with whom he had agreed to orally and the names of those persons from Kamataka cannot be disclosed.
Q. 4 Can you state the name of the persons, the amount of money handed over to those persons and the date on which said amounts were given.
Ans. The names cannot be disclosed since they are politicians. And the amount, how much has been handed after keeping up of my expenses, has been handed over and I do not exactly remember to the extent handed over.
We would also like to reproduce following extract of statement of Smt. Gayathri dt. 6th Feb., 1996.
Q. 111 am showing a paper noted serial No. 1 which denotes transactions from 5.4 to 21.6. Please tell me to which years it pertains and briefly explain the nature of transaction, therein? Ans. Most of the receipts shown as cash flow in the regular cash book in the name of advance given to contractor. However in actual practice no immediate advance is given instead the money will remain with us and we will spend the money as per the directions of the contractor. Some of the expenditure incurred during that period are:Rs. 10,000 : Amount given to D.T.S. Rao through Manjunath for release of files.Rs. 25,000 : Amount to KEB officials (illegal)Rs. 50,000 : Amount has been paid by D.T.S. Rao to some politicians in Delhi.Rs. 1 lakh : Received from Shri RameshRs. 30,000 : Flight ticket purchased for Singapore by the advice of Shri ManjunathRs. 20,000 : Money given to D.T.S. Rao to MadrasRs. 30,000 : Given to D.T.S. Rao for Bangalore tripRs. 6,000 : Paid to D.T.S. Rao City Bank AccountRs. 5,000 : Paid to D.T.S. Rao City Bank AccountRs. 20,000 : Paid to Secretariat through Ramesh Q. 12. I am showing Annex. 2, please tell me the details of the paper.
Date Amount Explanation 17-3-1995 Rs. 1 lakh Paid to Shri Ramesh in turn paid to SGR Enterprises 28-11-1994 Rs. 50,000 Paid to Shri Ramesh to be paid to Ramachandrachar 4-2-1995 Rs. 20,000 Paid to Asstt. Commr. Office 13-12-1995 Rs. 1,25,000 Amounts paid through D.S. Manjunath towards donations to political parties 14-1 Rs. 75,000 gold loan taken by D.S. Manjunath 9-2 1 lakh 9-3 25,000 Amt. paid to Shri Rajashekhar Murthy, Minister 24-1 1 lakh Badev Dass, Under Secretary 72. Above extracts have been given to show the information collected by Revenue at the time of search. Statements recorded do show that late Shri Rao has played a role in getting the work of society in respect of layouts, done. Shri Rao states all such payments have been made at the instructions of the contractors. The contractors have denied that they have authorized Shri Rao to make such payments. Shri Rao has admittedly drawn funds for his personal matters and the argument is that he was authorised by the contractors. Such expenses have not been repaid to the contractors. If actually these were repayable, then there was no occasion for Shri Rao to have not paid back the sums. In one of the judgments, the apex Court has observed: Human probabilities are to be considered as science has not invented any instrument to test the truthfulness of the statement of a person.
73. They way in which the drawings have been used by Shri Rao suggested that some of such drawings were actually treated by him as belonging to him but in account books, such amounts were adjusted as advance to contractors. Turnkey contractors were appointed for different projects for getting the land acquired and layout plan approved. It was admitted by Shri Rao, that he himself rendered services for such purpose, as the contractors were not acquainted of politicians and bureaucrats. Late Shri Rao admitted that he passed on the money but failed to give the exact amount. Hence, it is held that amounts utilized by assessee for his personal purposes will be income taxable in his hands.
74. Now, we will discuss the details as filed by learned Authorised Representative to explain as to why certain amounts are not to be included.Annex. 1 : Name of D.T.S. Rao not mentioned in the notings by K. Gayathri.
S. No. Page No. Date Amount Description 321 94/95 15/3 40,000 Prabharaj 355 149 31/8 50,000 Swamy Jewellers 358 149 20/8 3,000 Tel 20291 362 150 19/7 40,000 Swamy JeweUers 8 1 17/5 10,000 Gundu Rao's daughter's marriage 18 1 21/6 1,00,000 Shanmukhiah 20 2 21/8 25,000 Madras visit 21 2 14/1 25,000 Gold loan paid 22 2 9/2 1,00,000 D.S. Shamala Madras ticket 23 4 4/2 50,000 Madras 25 2 15/12 50,000 Swamy Jewellers 26 2 15/12 25,000 Swamy Jewellers 75. During the course of proceedings before us, the learned senior counsel has filed the comments of the AO as per letter addressed by AO to the senior counsel. It is submitted that loose sheets as recorded by Smt. Gayathri should be considered as cash book of the assessee.
Moreover the amount of drawings aggregating to Rs. 5,18,000 represent certain personal expenses incurred by Shri Rao. If it is claimed that these are not personal expenses then onus is on the assessee to establish it. In respect of entry of Sr. No. 321, it is contended that the assessee in Annex. 4 has explained that payment to Prabha Raj of Rs. 15,000 at Sr. No. 156 is out of amounts given by late Shri Rao, therefore, payment of Rs. 40,000 to Prabha Raj at S. No. 321 in Annex.
1 be considered as part of personal nature. It is also mentioned that assessee in Annex. 4 has admitted that certain marriage expenses were met by Smt. Gayathri, hence payment to Swamy Jewellers be treated as personal.
76. We have considered the arguments of both the parties. Entry in respect of Prabha Raj is available at p. 55 of Departmental paper book containing 105 pages (hereinafter referred as DPB-105) 77. The learned AO has rightly pointed out that payment to Shri Prabha Raj has been considered as relating to personal as it is argued that such payment to Prabha Raj as per Annex. 4 is out of the funds provided by late Shri Rao.
78. Late Shri Rao vide statement dt. 5th March, 1996 in answer to Q.No. 1 admitted that payment to Swamy Jewellers were in respect of purchase of jewellery in respect of marriage of his daughter. Hence, payments shown in the name of Swamy Jewellers are not to be excluded.
Expenditure of telephone to be excluded. Expenditure of Gundu Rao's daughter marriage is not to be excluded as the sum represents the gift given on marriage and hence related to Shri Rao. Smt. Gayathri in another Q. No. 11 on 6th Feb., 1996 stated that Rs. 1 lakh was paid to auditor. This cannot be a personal expenditure of late Shri Rao hence to be excluded. No other item is to be excluded as the remaining are personal expenses and can only be related to Shri Rao.
81. The learned AO in his report has submitted that amount of Rs. 3,03,000 represent duplicate entries and this amount be considered for deletion. Hence, sum of Rs. 3,03,000 is deleted.
82. The AO has offered comments in respect of two entries which should not be considered for deletion. These are: S. No. Page No. Date Amount Remarks 92 26 7/2 5,000 Same as S.N. 327/71 83. Entry at S. No. 92 relates to amount withdrawn by late Shri Rao and sent through Narsing Rao.
84. S. No. 71 relates to money sent through D.S. Manjunath while entry at S. No. 327, the amount was sent on 8th Feb., through D.S.N. Rao.
85. We have seen photocopy of seized documents. Entry at S. No. 92 on the back side of p. 26 is for 7th Feb., 1992. Entries at p. 94 of the seized document tally with the entries on back p. 26. Hence, entry No.92 at back page of 26 is duplicate entry of S. No. 327 as per comparison of both the pages. Hence Rs. 5,000 is held as duplicate entry. Similarly in respect of entry at S. No. 46 of p. 14 of document No. 17/MHBCS is stated to be duplicate of entry at S. No. 45 of p. 12A.The AO has stated that withdrawal made on 26th September is entirely different from 25th September.
86. We have seen the photocopy of seized documents and list on p. 14, there are two withdrawals of Rs. 25,000 each on 25th September and 26th September. In the list prepared by AO, he has taken only one entry of Rs. 25,000 in 26th September, other entry not taken as it is reflected on p. 12A. Hence, we feel that it is not a duplicate entry. No relief allowed in respect of such entry.
88. Annex. 3 contains the details of payment of Rs. 68,000 as income-tax and is stated to be accounted in the books of S.S.Corporation. This fact will be verified by AO and in case the payments have been accounted by S.S. Corporation and not claimed as expenditure then the amount will be deleted in the hands of assessee.
89. Annex. 4 contains the details of sum of Rs. 2,40,500. The learned Authorised Representative explained that expenses to such extent stand explained by the amounts paid by Shri Rao. The learned senior counsel for Revenue stated that such receipts in the hands of the assessee should be explained for getting the relief. As per the seized documents, there has been payments to late Shri Rao and it is not mentioned against those payments that these have been spent. Reference may be made to pp. 1 to 9 of DPB-105. We are inclined to accept that such receipts entered in the loose sheets be out of such payments. The AO in his report has mentioned that entry at p. 51 of seized document 17 MHBCS is in respect of Rs. 66,000 and it represents the amounts to be paid on the date of making entry. Such expenditure must have been cleared. After considering the comments of AO, it is felt that onus was on the Revenue to establish that such sums were paid. All payments are reflected in loose sheets. In absence of any evidence of payment, such amount of Rs. 66,000 could not be considered as paid and to be included in the undisclosed income. Hence the sum of Rs. 2,40,500 is directed to be excluded.
90. Annexure 5 contains the details of expenses noted in the loose sheets in respect of which it is claimed that expenditure is in connection of society work and incurred on instructions of contractors.
91. The learned senior counsel argued that the assessee has not proved such expenditure has been incurred for society work. No evidence was submitted that such expenditure was really incurred. The notings in loose sheets indicate the purpose for which expenditure was incurred.
We are inclined to accept the correctness of nature of expenditure as mentioned in the documents. Expenditure incurred for notification of land acquisition, advocate fee etc. are for the purpose of society and such expenses are not personal expenses. Hence, the following amounts are directed to be excluded: S. No. Page No. Date Amount Description 4 3 15/12 25,000 DTSR-BNG 6(1)(A) Notification 6 3 18/12 5,500 DTSR-3 Acharcar Advocate fee 7 3 20/12 30,000 DTSR-BNG 6(1)(A) 8 3 29/12 30,000 DTSR-BNG 6(1)(A) Notification Kitty 11 3 1/1/91 5,500 Telephone No. 20291 27 5 26/11 25,000 DTSR-BNG stay 5(1) 38 6 20/10 7,200 Tel 20291 54 23 26/1 15,000 DTSR-BNG Mantralaya 95 27 2/3 20,000 Salary to staff 96 27 4/3 20,000 DTSR 6(1) Bang Notification 269 91 13/8 20,000 DTSR-BNG (Stay) 284 92 17/6 860 Tel 20291 ---------------- 92. The AO in his comments has mentioned that the contractors on oath have stated that they had not authorized late Shri Rao to incur such expenses. Hence claim of Rs. 33,64,415 cannot be allowed.
93. We have noted that against some of the expenses, specific narration has been given. Such expenses are not personal in nature. In absence of specific details, it cannot be said that all expenses in Annex. 5 represented the expenses for the work of society. If one takes into account the nature of some of the expenses, it cannot be ruled that Late Shri Rao incurred expenses for the work of society out of the funds withdrawn. Before us, the learned Departmental Representative stated that onus is on the assessee to prove that amounts withdrawn have been spent for the work of society. Keeping in view the fact that some expenses are for the work of society, the matter is restored back on the file of the AO to give an opportunity to the assessee to establish that part of such expenses have been utilized for the work of society. Such expenses will be reduced from Rs. 33,64,415 to ascertain the undisclosed income.
94. Annex. 6 filed by learned Authorised Representative contains the details of expenses where name of D.T.S. Rao (is) mentioned but personal (is) not mentioned.
95. The AO in his comments has stated that assuming but not admitting that such expenses relate to business, then onus is cast on assessee to establish that such expenses were incurred for business.
96. We have considered the arguments of both the sides. The total of amount is Rs. 13,56,000. It includes the following: S. Page Date Amount Description No. 124 38 12/5 25,000 DTSR-BNG Gowri son marriage 141 43 17/3 10,000 DTSR-marriage-Tirupati 174 63 30/7 10,000 DTSR-cartape 175 63 21/8 5,500 DTSR-car 213 83 22/1 7,700 DTSR-Republic day SVES 214 83 23/1 5,000 DTSR-SVES-cultural programme 218 83 10/11 40,000 DTSR-Haridwar tickets 237 86 18/2 25,000 DTSR IT Balance 238 86 24/2 30,000 DTSR IT Balance 357 149 25/8 10,000 DTSR-sisters foreign tour 4 1 24/4 3,000 DTSR car repair 6 1 4/5 20,000 DTSR-DTP family tour 97. The above items are specific and not to be excluded. It also cannot be said that car is entirely used for personal purposes. The assessee was required to spend the amounts on visits and tours. Keeping in view the direction given in para 93, this issue is also restored back on the file of the AO. The expenses which are established to have been incurred for the work of society will be excluded from Rs. 13,56,000 to ascertain the undisclosed income.
98. Annexure 7 contains the details in which according to Authorised Representative, year is not mentioned. It has already been held in earlier para that all the transactions mentioned in the documents have occurred during the block period. Hence it cannot be excluded. However the nature of entries is the same as the Annex. 6. As per direction given in respect of Annex. 6, this issue is also restored back on the file of the AO.99. While disposing of grounds of appeal No. 3 and 4, it is observed that late Shri D.T.S. Rao has never stated that amounts withdrawn are repayable and hence these cannot be loans. The late Shri Rao was looking after the work of the society and the payments received were shown as advance to contractor. Such receipts, which were used for meeting personal expenses and those receipts which did not represent expenses have been treated as income on the basis of case laws relied on the learned senior counsel of Revenue. Tax audit report supports such conclusions.
100. The fifth ground of appeal is against addition of Rs. 12,63,400 as unexplained investment in shares of M/s Chaitanyya Food Products Ltd. 101. During the course of search, documents relating to investments made by Shri D.T.S. Rao in M/s Chaitanyya Food Products were found.
Enquiries were made from M/s Karnataka State Financial Corporation and it was found an investment of Rs. 12,63,000 was made in the name of family members and associates. Cash receipts issued by M/s Chaitanyya Food Products were found. The assessee submitted the following Explanation: M/s Chaitanyya Food Products Ltd. is a company promoted and managed by Shri Jayadevaraya Urs. The company was in financial crises. The assessee lost all interest to revive the company after the death of Mr. Jayadevaraja Urs. The assessee filed a copy of letter written by Shri Jayadevaraja Urs. in which it has been stated that there has been no allotment of shares. The assessee is not having copy of balance sheet of the company and it should be provided to the assessee to rebut the evidence.
102. The above Explanation has been rejected by the AO. As per AO, the onus was on the assessee that investment has not been made by him.
103. During the course of proceedings before us, it was stated that the assessee was requested by Shri D. Jayadevaraja Urs. managing director of M/s Chaitanya Food Products (hereinafter M/s CFP Ltd.) to assist him in rehabilitating his company as the same was under threat of take-over and sold by the financial institution. The assessee was appointed managing director and the assessee was promised certain remuneration in the form of allotment of shares. With a view to project a bright picture, receipts were signed on behalf of M/s CFP Ltd. by the assessee himself. Mr. Urs. later on resiled from the undertaking and proposal.
He also denied having received any money. Official liquidator and Registrar of Companies rejected the claim of the assessee his relatives and friends have contributed any monies and are the owners of any shares in the company. A request was made by the assessee to the AO to furnish copy of the balance sheet and other documents on which he has relied, the AO stated that receipts are not signed by Shri Urs. and he does not propose to make addition and hence there is no need to provide copies of the documents. But the AO changed his stand and made the addition.
104. The learned senior counsel of Revenue stated that receipts were found during search. Such receipts were cash receipts. The assessee has not led any evidence to suggest that payments were not made.
105. We have heard both the parties. The details of investments have been mentioned at p. 58 of order. Investments in the name of assessee are of Rs. 4,56,900. Balance investments are in the name of 26 persons.
It includes the names as under also: 106. All the 26 persons are not family members of the assessee.
Receipts are from 15th Dec, 1986 to 29th Aug., 1987. In case the investments have been made Benami by the assessee then onus was on the Revenue to establish it. Search documents showed the cash receipts issued by the assessee in the name of various persons. The assessee explained that no money was given and only receipts have been issued.
It was pointed that such receipts do not contain the signature of Shri Urs. Shri Jaya Devaraja Urs sent a letter to the Asstt. Registrar of Companies in the capacity of chairman of M/s CFP Ltd., and a copy was also endorsed to the assessee in the capacity of director. In this letter, Shri Urs informed: (a) There is no allotment of shares to 31 persons as per the letter sent by the assessee.
(c) The alleged allotment violates the provision of the Companies Act as by alleged allotment, the share capital exceeds the authorized capital.
107. A letter dt. 11th Sept., 1991 signed by Shri D. Jayadevaraja Urs and addressed to advocate, who issued notice on behalf of alleged shareholders shows that the managing director of M/s CFP Ltd. stated that none of the clients mentioned in the notice of advocate are shareholders. Copy of this letter has been addressed to official liquidator.
108. The assessee has also filed a copy of letter dt. 27th Sept., 1991 from the office of Registrar of Companies in which it was intimated that the alleged shareholders were not shareholders and hence notice of general meeting has not been given to them.
109. Kamataka State Financial Corpn. vide order dt. 1st Aug., 1987 under Section 29 of SFC Act, 1951, directed the taking over of assets of M/s CFP Ltd. Land, Building and transformer along with sub-station of M/s CFP Ltd. were put on sale as per advt. dt. 4th Jan., 1997 by Kamataka State Financial Corporation(KSFC).
110. The learned AO has also not provided the balance sheet of M/s CFP Ltd. to the assessee. When the possession of assets have been taken over by M/s KSFC and official liquidator also stands appointed then balance sheet with either of them should have indicated the investment.
The appellant has discharged the onus by asserting that receipts were signed by assessee and not by Urs. Financial crisis in the company has been established. Copies of letter from authorities indicate that the persons alleged to be shareholders are not shareholders. The onus was shifted on Revenue and Revenue has not discharged such onus. No evidence mentioned that balance sheet as available with official liquidator or KSFC showed the so-called investment. Hence addition of Rs. 12,63,000 is deleted.
111. The sixth ground of appeal is against addition of Rs. 1,95,000 representing the advance given to Mrs. and Mr. Nagaraj Urs.
112. Seized document showed that assessee advanced a sum of Rs. 1,95,000 to Mr. and Mrs. Nagaraj Urs. against pledge of jewellery. In the statement under Section 132(4), such advance was denied. However vide written submission dt. 6th Jan., 1997, it was contended that advance was made out of the funds of joint Hindu family. Before the AO, the assessee submitted that HUF was not having taxable income and no return was filed. An oral partition was made on 15th Jan., 1992 and copy of memorandum was filed. Theory of oral partition was not advanced during search. During search, the assessee did not admit the fact of advancing money. Pawned jewellery along with pronote was seized from the residence of Smt. Gayathri and she stated that pawned jewellery and pronote was given by the assessee.
113. During the course of proceedings before us, the learned Authorised Representative stated that the assessee owned ancestral agricultural land. In the WT return of 1976, the assessee showed loan from HUF. Copy of memo of oral partition dt. 15th March, 1992 was also filed.
114. The learned senior counsel of Revenue stated that AO has rightly made the addition.
115. We have heard both the parties. The pronote was seized and it is not the case of the assessee that pronote showed that advance was given out of HUF funds. While explaining the position in respect of receipts of funds from contractors for the purpose of performing marriage of his daughter in 1990, assessee tried to explain that he was not having funds and therefore contractors provided the funds. In case funds were not there, then such a position should be true in respect of funds in individual capacity and HUF capacity. But this was not so. There has been no record or evidence to suggest the use of HUF funds for advancing the loans. Hence the AO was justified in making the addition.
117. Seized document from the residence of Smt. Gayathri showed that a sum of Rs. 3 lakhs was advanced to Shri A. Ashok Anand on 18th Dec, 1989. The document showed that amount was handed over by Shri Ramesh.
On enquiry it has been found that the said sum has been handed over to Shri Ashok Anand through Shri B. Ramesh out of the funds of M/s M.H.B.C.S. Hence, the same was added in the hands of assessee.
118. During the course of proceedings before us, the learned Authorised Representative stated that a blank stamp paper was seized on which there was an endorsement that a sum of Rs. 3 lakhs was borrowed from Ramesh and stamp paper was signed by Ashok Anand. Shri Ashok Anand was forced to accept that he has borrowed funds in the statement recorded at the time of search. Ramesh also denied to have given sum. This amount was added on protective basis in the hands of Shri Ramesh. The AO in the order of Shri Ramesh mentioned that on enquiry, it is found that funds of M/s M.H.B.C.S. were used for advancing the same through Ramesh. Such enquiry has not been confronted to us. This amount is not appearing in the documents maintained by Smt. Gayathri. There is no material for making such addition in the hands of assessee.
119. The learned senior counsel appearing on behalf of the Revenue supported the order of AO.120. We have heard both the parties. The AO has clearly mentioned that funds of M/s M.H.B.C.S. were used for advancing the sum. No evidence collected to suggest that such advance is on behalf of assessee and he has to receive back such advance. Such advance is not reflected in the documents maintained by Smt. Gayathri. Hence there is no justification of making addition of Rs. 3 lakhs in the hands of assessee. The same is deleted.