Judgment:
Ranjan Gogoi, J.
1. Out of the several substantial questions of law framed at the time of admission of this appeal, two questions have been urged by the appellant at the hearing. The first relates to the addition of Rs. 40,04,369 made by the Assessing Officer in a block assessment order dated November 21/2000, under Section 158BC and Section 143(3) of the Income-tax Act. The block period covered the assessment years 1989-90 to 1999-2000. The said addition having been deleted by the learned Commissioner of Income-tax (Appeals) and the said order having been affirmed by the learned Tribunal by the impugned order dated July 18, 2006, the instant appeal has been filed under Section 260A of the Income-tax Act, 1961, hereinafter referred to as 'the Act'.
2. The second issue pressed at the hearing relates to another addition made by the Assessing Officer in respect of a sum of Rs. 14,98,282 on account of disallowable travelling expenses incurred through credit cards recovered in the course of search. The said addition having met a similar fate at the hands of the appellate authority and the learned Tribunal below, the findings of the said authorities have been challenged in the instant appeal.
3. A search was conducted on April 27, 1998, and on subsequent dates in the business and residential premises of the Sarawagi group to which the assessee belongs. Admittedly, nothing was found in the course of the search. However, the search party noticed the business establishment of the assessee located at Adabari and taking into account the investments in the said building, as shown in the returns filed by the assessee, referred the matter to the Departmental Valuation Officer (DVO) for submission of a report on the valuation of the said building. The Departmental Valuation Officer submitted his report. The Assessing Officer, on his own, also made a reference to the District Valuation Officer, I. T. Department at Kolkata, for his expert comments in the matter. No communication was, however, received by the Assessing Officer in response to the said reference. Accordingly, the Assessing Officer proceeded to assess a sum of Rs. 40,04,369 (the difference between the amount mentioned in the report of the Departmental Valuation Officer and the investments shown in the return filed by the assessee) as undisclosed income of the assessee.
4. In so far as the addition of disallowable allowance is concerned, the amount of expenditure involved was admittedly shown by the assessee in its books of account. However, on the ground that the explanations furnished by the assessee with regard to the aforesaid expenditure was not satisfactory, the said amount of Rs. 14,98,282 was also assessed as undisclosed income of the assessee for the block period in question. Both the aforesaid additions, as already noticed, had been deleted by the two appellate authorities below.
5. We have heard Mr. U. Bhuyan, learned Counsel appearing for the appellant and Dr. A.K. Saraf, learned Counsel appearing for the respondent.
6. Shri U. Bhuyan, learned Counsel for the appellant, has not been very successful in showing any specific provision of the Act authorising the Assessing Officer to act on the report of the Departmental Valuation Officer in response to a reference made by the search party acting under Section 132 of the Act. The judgment of this Court in CIT v. Smt. Amiya Bala Paul reported in : [1999] 240 ITR 378 holding a power to be available to the Assessing Officer under Section 55A of the Act to make such a reference though initially relied upon, was subsequently found to be overruled in CIT v. Smt. Amiya Bala Paul reported in : [2003] 262 ITR 407 (SC). Consequently, Shri Bhuyan has altered the argument by relying on the views expressed by the apex court in paragraph 11 of the said judgment that the Assessing Officer is not bound by the strict rules of evidence and a report of a Valuation Officer under Section 55A may be considered by the Assessing Officer as a piece of evidence if it is relevant. Shri Bhuyan has further argued that regardless of the validity of the manner in which materials have come to the knowledge of the Assessing Officer, as long as such materials are relevant, the same can form a legitimate basis of an order of the Assessing Officer. In this regard, the judgment of the apex court reported in Pooran Mal v. Director of Inspection (Investigation) : [1974] 93 ITR 505 has been relied upon by Shri Bhuyan.
7. Shri Bhuyan has further submitted that the provisions of Section 158BB of the Act, as prevailing on the date of the assessment order, i.e., November 21, 2000, would govern the instant matter and the amendment of Section 158BB brought about by the Finance Act of 2002, though with retrospective effect from July 1, 1995, will not apply to the present case. Relying on the provisions of Section 158BB, prior to its amendment by the Finance Act of 2002, Shri Bhuyan has submitted that the materials relied upon by the Assessing Officer in making the assessment of undisclosed income need not be connected with the materials found in the course of the search and such materials may be independent of the search.
8. In so far as the issue with regard to disallowable travelling expenses is concerned, Shri Bhuyan has submitted that in the course of the search certain items of expenditure claimed to be business expenditure and incurred against the credit cards of the partners and officers of the assessee were found to be relatable to personal expenditure of such persons. Therefore, according to Shri Bhuyan, the learned Tribunal ought to have remitted the matter to the Assessing Officer for an effective segregation of such personal expenditure from the business expenditure of the assessee.
9. Dr. A.K. Saraf, learned senior counsel for the respondent assessee has drawn the attention of the court to a Central Board of Direct Taxes Circular bearing No. 8 of 2002 dated August 27, 2002 ([2002] 258 ITR (St.) 13), containing an explanatory note on the provisions of the Finance Act, 2002, relating to direct taxes. Referring to paragraph 61.3 of the aforesaid Circular, Dr. Saraf has submitted that the amendment of Section 158BB made by the Finance Act of 2002 is merely clarificatory. Learned Counsel has pointed out that in the aforesaid Circular issued by the Central Board of Direct Taxes it has been mentioned that the amendment to Section 158BB had been necessitated by the views of certain appellate authorities under the Act to the effect that income which can be included in block assessment is only such income which is directly evidenced by materials found during the search and does not include income which has been discovered on the basis of post-search inquiries. In the aforesaid Circular, it has been clearly stated that such views of the appellate authorities are contrary to the intention that undisclosed income discovered as a result of search is to be included in the block assessment as long as such income has been detected as a result of evidence gathered during the search. Dr. Saraf has further pointed out alternatively that even under Section 158BB, prior to its amendment, it is such other materials or information as are available with the Assessing Officer which could form the basis of an assessment of undisclosed income. The word 'such' is relatable to materials or information found in the course of the search and not to any materials or information independent of the search. In this regard, Dr. Saraf has further relied on the definition of undisclosed income appearing in Section 158B(b) of the Act to indicate that undisclosed income is income which had not been or would not have been disclosed for the purpose of the Act. Learned Counsel has also pointed out that prior to the insertion of Section 153A of the Act with effect from the year 2003, the assessment under Section 158BB was in respect of undisclosed income only and the regular assessments for the years covered by the block period continued to remain. It is only after the aforesaid amendment made in the year 2003 that the earlier assessment stands abated and the Assessing Officer has been empowered to make fresh assessment of income inclusive of undisclosed income. Dr. Saraf has further pointed out that the precedents cited on behalf of the appellant are cases involving regular assessments and not assessment of undisclosed income. Dr. Saraf has also relied upon two decisions of the Delhi High Court in the case of CIT v. Manoj Jain reported in : [2006] 287 ITR 285 and CIT v. Ashok Khetrapal reported in : [2007] 294 ITR 143 to contend that undisclosed income cannot be assessed on the basis of any evidence or materials not discovered/known in the course of the search and otherwise unconnected with the search. In this regard, reliance has been placed on the decision of the Madhya Pradesh High Court in the case of CIT v. Khushlal Chand Nirmal Kumar reported in : [2003] 263 ITR 77.
10. In so far as the issue with regard to the addition of disallowable travelling allowances is concerned, Dr. Saraf has pointed out that the entirety of the said expenditure was reflected in the books of account of the asses-see which was produced in the course of regular assessment for the assessment years covered by the block period. The expenditure claimed was accepted and allowed in the regular assessment proceedings. Therefore, according to Dr. Saraf, the disallowance made and the action of treating the said expenditure to be undisclosed income cannot be sustained as the said decision is based on a mere change of opinion.
11. We have considered the rival submissions made by the learned Counsel on behalf of the parties. In the present case, there is no manner of doubt that in the course of search operation carried under Section 132 of the Act no evidence or material was found. In so far as the investment in the building at Adabari made by the assessee is concerned, there is also no dispute on the basic proposition that the undisclosed income assessed is solely on the basis of the report of the Departmental Valuation Officer to whom a reference was made by the search party itself upon a physical inspection of the building.
12. Chapter XIV-B of the Act provides a special procedure to deal with undisclosed income. Undisclosed income has been defined by Section 158B(b) to mean income which had not been or would not have been disclosed for the purpose of the Act. Under the provisions of the Act, as it stood at the relevant point of time, assessment of undisclosed income for the block period of 10 years did not have the effect of abrogating the regular assessments that may have been made in any of the assessment year covered by the block period. The scheme of Chapter XIV-B of the Act was to provide a mechanism for assessment of undisclosed income on the basis of a search carried out in accordance with the provisions of Section 132 of the Act. In the present case, the assessment of undisclosed income in so far as the building is concerned cannot also be justified on the basis of Section 158BB of the Act, as it stood prior to its amendment by the Finance Act of 2002. To make the discussion complete, the provisions of Section 158BB, as it existed before and after the amendment, are reproduced below:
Before amendment
158BB.(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. As reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined,-After amendment158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of 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 Assessing Officer 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,- . . .
13. A reading of the provisions of Section 158BB, as it existed before and after amendment, amply discloses that even prior to the amendment, Section 158BB authorised the Assessing Officer to make an assessment of undisclosed income on the basis of evidence found as a result of 'search ... and such other materials or information as may be available with the Assessing Officer'. The use of the word 'such' clearly points out that such materials or information must have some connection with the search and do not constitute independent materials, i.e., independent of the search. The aforesaid is the view indicated in Central Board of Direct Taxes Circular No. 8 of 2002 ([2002] 258 ITR 13), details of which have already been noticed. In the said clarification, the Central Board had made it clear that the amendment was necessitated by contrary views expressed by the authorities in certain quarters. From the Central Board of Direct Taxes Circular in question, it is, therefore, clear that the amendment of Section 158BB brought about by the Finance Act of 2002 is merely clarificatory. In the present case, admittedly, no evidence or materials was discovered in the course of the search of the premises of the group to which the assessee belongs. The undisclosed income in so far as the building is concerned was solely made on the basis of the report of the Departmental Valuation Officer as obtained by the search party. The report of the Departmental Valuation Officer does not constitute materials or information relatable to the search. Such a view have been recorded in the judgments of the Madhya Pradesh High Court in CIT v. Khushlal Chand Nirmal Kumar reported in : [2003] 263 ITR 77 and Delhi High Court in CIT v. Manoj Jain : [2006] 287 ITR 285 and CIT v. Ashok Khetrapal : [2007] 294 ITR 143. While expressing our respectful agreement with the said views, it has to be held that the determination of undisclosed income of Rs. 40,04,369 in respect of the building in question being solely on the basis of the report of the Departmental Valuation Officer was rightly interfered with by the learned Tribunal. The said conclusion of the learned Tribunal, therefore, will not be open to interference.
14. Coming to the issue of disallowable travelling expenses, what the court finds is that though the assessee had shown the said expenditure in the books of account which was scrutinized in the course of regular assessment, in the course of search operations conducted under Section 132 of the Act, it was found that some portion of such expenditure did not relate to the partners or employees of the assessee but were in respect of other persons and further that some items of expenditure though claimed by the assessee to be business expenditure were found to be personal expenditure of the concerned persons. If such materials have been found in the course of the search, naturally there was room for further scrutiny into the matter in the course of the block assessment proceedings. Such an enquiry had, in fact, been undertaken by the Assessing Officer by issuance of an appropriate notice. However, the Assessing Officer did not make any endeavour to find out or segregate the items of personal expenditure or expenditure unconnected with the business of the assessee from those items which are so relatable. Instead, the Assessing Officer, not being satisfied with the reply submitted by the assessee, proceeded to add the entirety of the expenditure as undisclosed income of the assessee.
15. On due consideration, we are of the view that the addition of the entire expenditure as undisclosed income could not have been made by the Assessing Officer as it is admitted that only some items of expenditure were found in the course of search to be unrelated to the business of the assessee or was found to be in respect of persons not connected with such business. In such a situation, the Assessing Officer should have made an endeavour to segregate the items of expenditure under separate heads and only those items which were found to be unconnected with the business of the assessee or were in respect of persons not connected with the assessee which could have legitimately formed the basis of an addition to the undisclosed income. As the Assessing Officer had failed to so act, we are of the view that the learned Tribunal should have remitted the matter to the Assessing Officer for a de novo consideration. Accordingly, we interfere with that part of the order of the learned Tribunal and remit the same for a fresh consideration by the Assessing Officer after giving the assessee all opportunities as may be required under law.
16. Consequently and in the light of the foregoing discussions, the appeal is partly allowed to the extent indicated above.