Income Tax Appellate Tribunal - Vizag
Madhavi Finvest (P) Ltd. And Ors. vs Assistant Commissioner Of Income Tax on 10 February, 2005
Equivalent citations: (2006)99TTJ(VISAKHA)933
ORDER
P.K. Bansal, A.M.
1. These four appeals since arising out of the search and seizure action taken by the Revenue on 22nd March, 1996 by issuing the,search warrant in the case of Smt. B. Surya Prabha, therefore, all these cases are being disposed of by this common order.
2. The brief facts, which are common, to all the cases, are that Smt. B. Surya Prabha, is the managing director of M/s Golden Agro Tech Industries Ltd., V.K. Rao Puram, Samalkot, East Godavari District. Search and seizure operation took place under Section 132(1) by issuing search warrant in her name. During the course of search and seizure operations as per the Panchnama drawn on 23rd March, 1996 at 3.30 a.m. at the conclusion of the search by passing a restraint order under Section 132(3) in respect of bedroom of Smt. Madhavi, daughter of Sri B.V.B.S. Prasad and on the steel almirah in the bedroom of Smt. B. Surya Prabha. As per the Panchnama neither any cash nor jewellery assets were found or seized. Only following books of account were found and seized:
(i) One note book (Vidya Super Delux) cattle computers consisting of 13 pages,
(ii) One account book (Kesava) consisting of pp. 1 to 19 and 71 to 173, and
(iii) One bundle of loose sheets serially numbered from 1 to 53.
3. The AO issued notice under Section 158BC in the case of Smt. B. Surya Prabha, dt. 11th Nov., 1996 and while in other cases notices were issued as under:
ITA No. 177, Authorised Representative, Late B.V.B.S. Prasad, dt. 11th Nov., 1996 ITA No. 180, Smt. B. Madhavi, dt. 11th Nov., 1996 ITA No. 175, Madhavi Finvest (P) Ltd., dt. 17th Jan., 1997
4. As mentioned in the assessment order, notice in the case of Madhavi Finvest (P) Ltd. was issued under Section 158BD while in other appeals it was issued under Section 158BC. After completion of the assessment, the AO vide letter dt. 26th May, 1998 clarified in respect of the group as under:
To be more specific block assessment orders in whose case warrant was issued during search are to be assessed under Section 158BC and block assessment in whose cases warrant not issued under Section 158BD.
In the following cases assessment orders passed under Section 158BA(1) may be construed as order passed under Section 158BD:
Smt. B. Madhavi, B.V.B.S. Prasad, Individual, B.V.B.S. Prasad, HUF and Madhavi Finvest (P) Ltd.
In the case of Smt. B. Surya Prabha, assessment order passed under Section 158BA(1) must be construed as order passed under Section 158BC.
5. Return in response to the notice for the block period was filed on 10th March, 1997, in the case of Smt. B. Surya Prabha, vide acknowledgement No. 415, in the case of HUF on 10th March, 1997 vide acknowledgement No. 0416, in the case of D. Madhavi vide acknowledgement No. 0421, but no return was filed in the case of Madhavi Finvest (P) Ltd. The AO has wrongly observed in the case of Smt. B. Surya Prabha, individual and HUF that no return was filed. There is no material or satisfaction note available on the block assessment files as produced by the learned Departmental Representative.
6. Madhavi Finvest was incorporated on 19th Dec., 1994 and there was no business in the company except the receipt of the money from the promoters. Madhavi Finvest did not file any return of income-tax for the asst. yr. 1995-96 as there was no business and the return for the asst. yr. 1996-97 was not due as the search has taken place prior to the close of the financial year. All the other assessees have filed the returns for the asst. yrs. 1991-92 to 1994-95 prior to the search detailed as under:
_________________________________________________________ Assessee Asst. yr. Ack. No. Filing Ward IT/WT date _________________________________________________________ B. Ravi Prasad 1991-92 WT 448 17-6-92 1/Kakinada
-do- 1992-93 WT 449 17-6-92 1/Kakinada
-do- 1992-93 IT 443 17-6-92 1/Kakinada
-do- 1993-94 IT 5114 31-3-94 1/Kakinada
-do- 1994-95 IT 87 30-12-94 3/Kakinada B. Madhavi Devi 1991-92 WT 452 17-6-92 1/Kakinada
-do- 1992-93 WT 453 17-6-92 1/Kakinada
-do- 1992-93 IT 445 17-6-92 1/Kakinada
-do- 1993-94 IT 5105 31-3-94 1/Kakinada
-do- 1994-95 IT 85 30-12-94 3/Kakinada B. Surya Prabha 1991-92 WT 451 17-6-92 1/Kakinada
-do- 1992-93 WT 450 17-6-92 1/Kakinada
-do- 1992-93 IT 444 17-6-92 1/Kakinada
-do- 1993-94 IT 5113 31-3-94 1/Kakinada
-do- 1994-95 IT 88 30-12-94 3/Kakinada B.V.B.S. Prasad 1991-92 WT 457 17-6-92 1/Kakinada
-do- 1992-93 WT 456 17-6-92 1/Kakinada
-do- 1992-93 IT 447 17-6-92 1/Kakinada
-do- 1993-94 IT 5106 31-3-94 1/Kakinada
-do- 1994-95 IT 85 30-12-94 3/Kakinada _________________________________________________________
7. Mr. B.V.B.S. Prasad, husband of Smt. Surya Prabha, expired on 14th Oct., 1995 and she became the managing director of Madhavi Finvest (P) Ltd. Due to the death of the principal person, Mr. B.V.B.S. Prasad, the regular return for asst. yr. 1995-96 could not be filed in time and in the meantime, the search took place in the case of B. Surya Prabha before the close of the financial year 1995-96. The return for the asst. yrs. 1995-96 and 1996-97 were filed in the case of all the abovesaid four assessees except Madhavi Finvest (P) Ltd. on 10th March, 1997. The note book seized consists of the entries relating to the money-lending activities and agricultural income earned by each of the assessees, the income for which except for asst. yrs. 1995-96 and 1996-97 were already shown in the return filed for the respective assessment years. The block assessments have been completed in each of the cases relying on the basis of the income disclosed in the note book so seized except the addition of entire promoters equity shares being added in the hands of Shri B.V.B.S. Prasad-HUF on the basis of the share certificates found from the suitcases in the premises of Smt. K. Hymavatha in whose premises also the search has taken place at Hyderabad, registered in the name of various persons. The AO framed the assessment in the case of each and every assessee except in the case of B. Ravi Prasad in whose case proceedings were dropped under Section 158BA(1) r/w Section 158BC. Being aggrieved, the respective assessees have come before us in appeal.
8. In all these four appeals bearing Nos. IT(SS) A Nos. 175 to 177 and 180, the learned Authorised Representative vide his letter dt. 19th Nov., 2004 received on 22nd Nov., 2004 by the Registry, took the following common additional ground by filing separate applications in each of the cases:
In the absence of any material throwing light on the undisclosed income of the appellant found in the course of search and seizure operations, the initiation of the block assessment proceedings under Section 158BC/158BD is without jurisdiction and the assessment so framed is liable to be annulled.
9. The learned Authorised Representative contended that the said additional ground should be admitted to do substantial justice to the assessee. The additional ground is a legal ground and does not require any determination and investigation of the facts already on record of the assessee with the Revenue. The reliance was placed on the decision of the Hon'ble apex Court in the case of National Thermal Power Co. Ltd. v. CIT and thus it was vehemently contended that the assessee be permitted to argue the same prior to the other grounds of appeals already taken. If this ground was not admitted, the assessee would be put to irreparable loss and hardship. The learned Departmental Representative, on the other hand, was fair enough to concede the position that the additional ground is a legal ground and he did not put any objection to the admission of the additional ground.
10. We have carefully considered rival submissions for the admission of the additional grounds taken in all the cases before us. We find that the additional ground taken by the assessee in all these appeals is a legal ground which does not require the investigation of the facts on record. Since it is a legal ground, we, therefore, respectfully following the decision of Hon'ble apex Court in the case of National Thermal Power Co. Ltd. (supra) admit the additional ground of the assessee in each of the case.
11. Now, we will take up each of the appeals.
IT(SS) A No. 175/Hyd/ 1997 :
12. The learned Authorised Representative contended for the additional ground that the block assessment framed by the AO is void ab initio. There is no material with the AO to initiate proceedings under Section 158BC/158BD. For initiating action under Section 158BC, there must be search in the case of the assessee while for initiating action under Section 158BD, the AO must be satisfied before initiating proceedings on the basis of the material seized that the assessee had undisclosed income. There was no search in the case of the assessee. The search was carried out in the case of Smt. B. Surya Prabha and during the course of the search, no material relating to Madhavi Finvest (P) Ltd. was found. No books of account of the assessee were found. The AO issued letter for the first time dt. 27th Jan., 1997 by making the roving enquiries about the company, the copy of which is available at p. 31, the reply thereof was filed vide letter dt. 11th Feb., 1997, the copy available at p. 33. The letter is reproduced hereunder:
The following information is required in order to complete the block assessment of your company:
(1) The name and address of the directors. When it started and the name and address of the directors at present.
2. Regarding the financing pattern of the company, the following details are required:
(a) Promoters' quota :
(i) Name and address of the promoters;
(ii) Date of investment;
(iii) Mode of investment (cash/cheque)
(iv) Sources for the investment (enclose copy of the bank accounts of family members)
(b) Investment by the financial institutions:
(i) Whether the loans were sanctioned or not ? If so, the details of disbursement. Enclose the bank account copies where the loan disbursements are credited.
(ii) Did the company carry out any business in purchase and sales of shares or not ? If so, the details of the same, the income generated out of this activity and so as to why IT return were not filed.
The above information should reach this office on or before 10th Feb., 1997 on which date the case is posted for hearing at 3 p.m.
13. From the aforesaid letter, on the basis of which the proceedings were initiated, proves that there was no material for arriving at the satisfaction for initiating proceedings under Section 158BD and, therefore, in the absence of initiation of the valid proceedings, the assessment so framed must be annulled. For this proposition reliance was placed on the decision of the Hon'ble Delhi High Court in the case of Amity Hotel (P) Ltd. and Ors. v. CIT and Ors. in which it was held :
That, in the present case, there was nothing to indicate that the AO could have formed an opinion and arrived at a satisfaction that the petitioner had not truly disclosed its income. The appreciation report clearly revealed that the AO was called upon to look into it with regard to several entries and the AO in his noting had clearly indicated that it required further investigation, in-depth scrutiny and there was nothing to indicate that he had recorded in writing that he was satisfied about the action required to be initiated. Even in the affidavit-in-reply it was not stated that the AO was satisfied and hence issued notice. On the contrary, it revealed that to arrive at a satisfaction, notice was issued and that was clear from the affidavit of the AO. The property, which was referred to, for initiating proceedings had already been disclosed in the return of income. The notices issued under Section 158BD were not valid and were liable to be quashed.
14. The reliance was also placed on the following decisions:
(a) Ved Prakash Sanjay Kumar v. Asstt. CIT (2000) 66 TTJ (Chd) 442 : (2001) 76 ITD 107 (Chd).
(b) Smt Farzana Farooq Desai v. Dy. CIT (2002) 74 TTJ (Ahd) 507.
(c) Suman Dhanji Zalte v. Asstt. CIT (2000) 68 TTJ (Pune) 273 : (2000) 72ITD 132 (Pune).
(d) Dr. Ajay Kumar Aggarwal v. Asstt. CIT (2001) 71 TTJ (All) 445.
15. It was further submitted that the assessee did not file any return as there was no business for the asst. yr. 1995-96 while for the asst. yr. 1996-97, due date has not expired. The AO procured the bank statement from the assessee when he filed the reply to the roving enquiries of the AO vide his letter dt. 27th Jan., 1997. Thus, there was no material for the satisfaction of the AO found during the course of the search which may make AO to form prima facie view that the assessee has undisclosed income. Even the assessment record of the assessee also does not contain any material or the satisfaction recorded by the AQ. The bank statement which was submitted by the assessee vide his letter dt. llth Feb., 1997 was the basis for making the addition in the case of the assessee. The bank statement cannot be regarded to be the material seized during the course of the search. Thus the assessment framed must be annulled.
16. On merit, it was submitted that in the bank statement, there was credit entry in respect of promoters' contribution. The assessee although submitted the explanation in respect of all the credit entries but the AO made the addition by treating credit in the bank statement to be the undisclosed income of the assessee. The bank statement cannot be regarded to be the book of accounts of the assessee and if there is any credit in the bank statement, the provision of Section 68 will not apply and for this, reliance was placed on the decision of the, Tribunal, Pune Bench, in the case of Kantilal & Bros. v. Asstt. CIT (1995) 51 TTJ (Pune) 513 : (1995) 52 ITD 412 (Pune). Our attention was invited to p. 37 of paper book which consists of the letter of the AO, dt. llth Feb., 1997, showing the details of Rs. 35.5 lakhs from the bank account of the assessee. The reply for the same was filed vide letter dt. 10th March, 1997. For the sum of Rs. 13 lakhs and Rs. 8 lakhs, the confirmations were duly filed which are available from pp. 43 to 65 of the paper book. These confirmations were before the AO and the AO has not gone to the merit of the confirmations. For a sum of Rs. 4 lakhs, our attention was drawn to p. 67 of the paper book, which is the statement of account with Vsya Bank Ltd. and it was submitted that this amount was credited on 16th Feb., 1996 and not on 6th Feb., 1996 and was transferred through cheque No. 229467 on Andhra Bank from the account of Smt. B. Surya Prabha managing director of the assessee-company. The copy of bank account No. 27410 with Andhra Bank belonging to Smt. Surya Prabha is available at p. 89, which shows same amount withdrawn through cheque in favour of Madhavi Finvest on 15th Feb., 1996, thus the source of this amount along with identity is also proved. For a sum of Rs. 5 lakhs, it was submitted that it was a clearing entry through cheque and for which affidavit, duly attested by the notary public, dt. 8th March, 1997 signed by Chandra Sekharan was filed. The copy of the same is available at p. 41 of paper book. For the balance sum of Rs. 4 lakhs and Rs. 1.5 lakhs, it was submitted these funds have come by way of deposit from Maniam Ravi Babu Rs. 1 lakh, Gunnam Sarojini Rs. 1 lakh, Maniyam Shrimullu Rs. 1.5 lakhs, Rs. 50,000 from Endra Venkata Suba Rao and Rs. 1.5 lakhs from Marini Veeraveni.
17. The confirmations in respect of these parties could not be filed because the AO did not give sufficient opportunity and completed the assessment within 10 days of the reply of the assessee. A request by way of a petition under r. 29 for the admission of the additional evidence was filed requesting this Bench to admit the additional evidence for rendering the substantial justice to the assessee. The learned Departmental Representative did not object to the admission of the additional evidence and was fair enough to concede on the basis of the order-sheet in the assessment file that the assessee was not given proper opportunity to adduce evidence. We, therefore, keeping in view that the AO has not given the proper opportunity to the assessee to adduce these evidence and the assessment was completed merely after given one notice and these evidence are essential to render substantial justice. We admit the additional evidence relating to the confirmation of Rs. 4 lakhs and Rs. 1.5 lakh in view of the following decisions:
Jagbir Singh v. ITO (1987) 29 TTJ (Del) 439 : (1987) 23 ITD 15 (Del), Eectra (Jaipur) (P) Ltd. v. IAC (1988) 26 ITD 236 (Del), Smt. Prabhavati S. Shah v. CIT , Abhay Kumar Shroff v. ITO (1997) 63 ITD 144 (Pat)(TM), Jagannath Prasad Kanhaiya Lal v. CIT , CIT v. Gani Bhai Wanab Bhai , Deep Chand Kothari v. CIT .
18. It was also submitted that no addition ought to be made in view of the decision of Supreme Court in the case of CIT v. Steller Investment Ltd. which is squarely applicable to the impugned case as the. money received by the company represents share application money, not the deposit or loan from any party. If any addition is to be made, it can be made only in the hands of the shareholders, not in the hand of the assessee-company.
19. For the next ground relating to the addition of presumptive interest on funds diverted by the directors amounting to Rs. 1,62,575, it was contended that no income has either accrued or received by the assessee. The AO from the bank statement, the copy of which was filed by the assessee, noted that the assessee has used a sum of Rs. 10,06,591 for the following purposes :
(a) Flat No. 103, Amerpet Hyd. held in the name of Late Shri B.V.B.S. Prasad amounting to Rs. 3,70,000.
(b) Tata Estate car in the name of Smt. B. Surya Prakash amounting to Rs. 4,71,591.
(c) GPR Chit Nos. GL 2 and 46 in the name of Smt. B. Surya Prabha amounting to Rs. 85,000.
(d) Margdarshi Chit LT 013 TA 3839 in the name of Smt. B. Surya Prabha amounting to Rs. 80,000.
20. The AO took the view that these funds of the company were diverted and, therefore, he computed interest on these funds @ 24 per cent and added it as the undisclosed income of the assessee. The learned Authorised Representative in this regard, vehemently submitted that there is no diversion of funds for non-business purposes. No income has accrued to the assessee and, therefore, no interest can be added in the income of the assessee. The reliance was placed on the decision of the Hon'ble Gauhati High Court in the case of Highways Construction Co. (P) Ltd. v. CIT .
21. The learned Departmental Representative produced the assessment record of the assessee-company and was fair enough to state on the basis of the file of the assessee that no notice under Section 158BD was issued to the assessee. The notice under Section 158BC was for the first time issued on 17th Jan., 1997 as per the order-sheet in the file. The photocopy of the order-sheet was filed before us. The learned Departmental Representative even then relied on the following decisions :
(a) Digvijay Cements Ltd. v. Asstt. CIT
(b) Rushil Industries Ltd. v. Harsh Prakash
(c) Y. Subbaraju & Co. and Ors. v. Asstt. CIT (2004) 85 TTJ (Bang)(SB) 670 : (2004) 91ITD118(Bang)(SB).
22. It was further submitted on the basis of this decision that neither any material nor recording of the satisfaction is required for the purpose of making block assessment. Although in the assessment order, the AO has mentioned that the assessment was completed under Section 158BA(1) but it has subsequently been clarified vide letter dt. 25th June, 1998 that the order passed may be construed as passed under Section 158BD. He was also fair enough to concede that although the record on the file shows issuance of notice under Section 158BC but in the assessment order it was wrongly mentioned as issued under Section 158BD. On a query from the Bench whether there is any material seized on the basis of which notice was issued, he was fair enough to state that there is no material available on record. Regarding the merits of the case, the learned Departmental Representative relied on the order of the AO.
23. We have considered the rival submissions, perused the material on record and also the order-sheet as well as the block assessment file of the assessee put up before us, by the learned Departmental Representative. We have also looked into the case laws relied upon by both the sides. First we. would like to deal with the additional ground relating to the validity of the assessment made by the AO. This is an undisputed fact that there was no search initiated under Section 132 in the case of the assessee and neither any books of account or the documents or any assets were requisitioned under Section 132A in the case of the assessee-company. The assessment was completed under Section 158BA(1) of the IT Act as is apparent from the assessment order. The notice in this case was issued for the first time under s., 158BD vide office noting on the order-sheet of the file dt. 17th Jan., 1997. The order-sheet of the assessment file does not state that any notice under Section 158BD was issued or the block assessment proceedings were initiated in the case of the assessee under Section 158BD. The order-sheet upto the date of the assessment order, i.e., 20th March, 1997 is reproduced as under:
17-1-1997. This case is notified to this circle vide CIT's Notification No. CC Tech/5 (544) 96-97, dt. 18-9-1996. The A has not filed ROI. Notice under Section 158BC put up.
Sd/- Illegible 17-1-1997 24-1-1997 Assessees' Authorised Representative, Sri Sundaram chartered accountant appeared. Case discussed.
Sd/- Illegible. Sd/- Illegible.
11-2-1997 A's Authorised Representative, Sri Sundaram chartered accountant appeared and filed part of information.
Sd/- Illegible. Sd/- Illegible.
3-3-1997 Sri Sundaram chartered accountant appeared. Information filed is placed on record.
Sd/- Illegible. Sd/- Illegible.
AO is typed on computer as dictated and put up. DN challan put up.
Sd/- Illegible. 20-3-1997.
Despatched Sd/-Illegible despatcher.
24. From the order-sheet, it is explicitly clear that no action under Section 158BD was taken against the assessee. Even the order-sheet neither states that search has taken place in the case of the assessee nor the action under Section 158BD was taken on the basis of the material seized in the case of Smt. B. Surya Prabha. The learned Departmental Representative was also fair enough to concede on the query from the Bench that there is no material whatsoever gathered during the course of the search on the basis of which the block assessment proceedings were initiated against the assessee. From the record produced before us, it is apparent that the AO himself was satisfied that he has wrongly and illegally issued the notices and completed assessment under the impression that the search has taken place in the case of the assessee and therefore, he subsequently vide his letter dt. 26th May, 1998, i.e., much after the completion of the assessment clarified that the order passed in the case of the assessee be read as if it was passed under Section 158BD. The question before us is whether by such action taken by the AO, can he legalize the action, which is void ab initio and thus can an assessment order, which is void ab initio, can be validated when it is a settled law that an illegality cannot be cured. Therefore, we are of the view that an illegal assessment order cannot be validated by the subsequent letter of the AO and the assessment framed is bound to be quashed only on this basis.
25. Chapter XIV-B which consists of Section 158B to Section 158BH was introduced by the Finance Act, 1995 w.e.f. 1st July, 1995 to make procedure of assessment of cases in which search is initiated under Section 132 or where books of account, other documents or any assets are requisitioned under Section 132A. The chapter is titled 'Special procedure for assessment of search cases'. The scheme of block assessment enacted under this chapter laying down procedure for the block assessment proceedings is intended by the legislature to operate simultaneously with the normal and regular scheme of assessment indicated under Chapter XIV of the IT Act. Both the tax schemes are independent of each other and they are mutually exclusive. Block assessment under Chapter XIV-B is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to material unearthed during search. Therefore if the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of that chapter. Different provisions are made for making assessments on the person who had been searched and on the persons who had not been searched but in respect of which undisclosed income is unearthed from the person who has been searched under Section 158BA r/w Section 158BC while in the case of the person who had not been searched the assessment has to be framed under Section 158BA r/w Section 158BD. From the evidence on record, we do not have any hitch in holding that the assessment framed in the case of the assessee is invalid and void ab initio because there was no search in the case of the assessee and, therefore, assessment cannot be framed without invoking the provisions of Section 158BD. The AO himself realized the legal position and, therefore, subsequently he invoked the provisions of Section 158BD when the assessment has already been completed.
26. The provisions of Section 158BD extend the operation of such provisions to the person who is not searched. Section 158BD lays down as under:
Where the AO is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 or whose books of account or other documents or any assets were requisitioned under Section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the AO having jurisdiction over such other person and that AO shall record (under Section 158BC) against such other person and the provisions of this chapter shall apply accordingly.
27. From the reading of the aforesaid section it is clear that for its applicability following essential ingredients are to be complied with:
(a) The AO of the person who was searched should be satisfied.
(b) That there is undisclosed income unearthed during search belonging to the person other than the one who was searched.
(c) The books of account or the documents or assets seized or requisitioned shall be handed over to the AO having jurisdiction over such other person.
(d) The AO shall proceed against such other person under this chapter.
28. Thus, it is essential that there must be material showing the undisclosed income of the person who has not been searched in the possession of the AO of the person searched. The AO should be of the view that the income belongs to the person not searched. The material unearthing the undisclosed income of the person not searched is necessary for initiating proceedings under Section 158BD. This Bench, therefore, asked the learned Departmental Representative in the open Court about the material that led to the satisfaction of the AO that there is undisclosed income of the assessee detected as a result of search. The Departmental Representative was fair enough to concede that there was no material of search but the proceedings were initiated as if there was search in the case of the assessee. Since there was no material whatsoever detected during the course of the search, in our opinion, the proceedings without any material for demonstrating the satisfaction of the AO is void ab initio because valid initiation of assessment proceedings is the foundation for a valid assessment. It appears in this case that the AO although issued notice without any material, but went on making roving inquiries so that the material could be collected from the assessee, which is not permitted under the law. Material should precede the investigation not that the investigation should precede the material. The AO tried to put cart before the horses to validate his action. We, therefore, are of the firm view that entire proceedings framed with the issue of the notice by the AO should go and, therefore, we cancel the assessment framed by the AO against the assessee for whom the AO had no jurisdiction.
29. Now, we may deal with the case laws relied on by the learned Departmental Representative. The case of Digvijay Cements Ltd. v. Asstt. CIT (supra) will not assist the Revenue. In this case, during the course of search in the premises of BIG and RDB, certain documents relating to assessee were also seized. This material was sent to the AO having jurisdiction over assessee. On the basis of this, notice under Section 158BD was issued to the assessee. When the matter travelled to Hon'ble High Court, Hon'ble High Court has held that there was no requirement in Section 158BD of affording opportunity of hearing to a party before recording satisfaction and that it was evident from the order of the Tribunal that Dy. CIT, Amritsar, was satisfied that the undisclosed income mentioned in the seized documents pertained to the assessee. This case will not apply to appeal before us, as in the case before us, there is no material seized during the course of search pertaining to assessee. Therefore, there cannot be any satisfaction that the assessee derived undisclosed income. Even AO issued notice under Section 158BC not under Section 158BD.
30. Coming to the case of Rushil Industries Ltd. v. Harsh Prakash (supra), we find that this case will also not assist the Revenue. In this case, when by way of petition under Article 226 of the Constitution,, notice dt. 29th Aug., 2000, issued by the Jt. CIT under Section 158BC r/w Section 158BD was challenged, the Hon'ble High Court has held that the bare reading of the provisions of Section 158BD showed that for taking action under the said section, the AO was merely required to be satisfied that the books of account or other documents or assets found in the search showed undisclosed income of the person other than one against whom the search was conducted. Merely because no books of account or documents belonging to the petitioner were found in the search, it could not be said that the action initiated under Section 158BD r/w Section 158BC was illegal or without jurisdiction. The disclosure in the search operations against the two persons was a relevant material for forming an opinion and satisfaction that the petitioner had not truly disclosed its income and hence the action under Section 158BD was justified. In the impugned case before us, there is no disclosure even made by the person against whom the search has taken place. The Revenue could not bring any material found during the course of search, before us, which may be regarded to be relevant for forming an opinion and satisfaction that the assessee has not disclosed its income correctly. Even the action in the case before us, as held by us earlier was not under Section 158BD; therefore, this case in our opinion is not applicable to the facts of the case before us.
31. Now coming to the last case relied by the learned Departmental Representative which relates to the case of Subbaiaju & Co. and Ors. v. Asstt. CIT (supra) decided by the Special Bench of Tribunal, Bangalore, this case in our opinion supports the case of the assessee rather than assisting the Revenue. From the headnote of this case, we found that in this case it has been held:
Chapter XIV-B provides for a special procedure for assessment of cases in which search is initiated under Section 132 where books of account, other documents or any assets are requisitioned under Section 132A. If the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of the chapter. Similarly, it is basically the person searched who is subject to assessment under that chapter. The provisions of Section 158BD, however, extend the operation of those provisions to the person who is not searched.
The essential ingredients of Section 158BD are :
(i) The AO of a person searched should be satisfied,
(ii) That undisclosed income belongs to person other than person in respect of whom search was conducted,
(iii) The books of account or other documents or assets seized shall be handed over to the AO having jurisdiction over that other person,
(iv) The AO shall proceed against such other person under the provisions of this chapter.
On the basis of the search material in the possession of the AO of a person who is searched, he must come to a prima facie view that undisclosed income belongs to other person. If the satisfaction of the AO that undisclosed income belongs to other person is justifiable the authorities when called in question, cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under Section 158BD would have to be dropped because, the very foundation, for the assumption of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In the instant case, there was no iota of material to show that there was undisclosed income. When such was the case, the satisfaction that the undisclosed income belonged to such other person was wanting. When that was the case, the entire proceedings framed with the issuance of notice under Section 158BD would have to go. In other words, if the basis of notice is not there, the notice itself is wrongly issued and making further assessment on such other person would be wholly outside the purview of the scheme. Thus, issuance of notice by itself is not the display or record of satisfaction which the basic requirement under Section 158BD (paras 7.1, 7.2 and 9).
In the light of the foregoing discussion, the issuance of notice under Section 158BD was not justified in the instant case. It was not justified merely on the ground that there was no material at all indicating any undisclosed income. The Revenue had fairly agreed that there was no material found as a result of search, which could pinpoint the existence of undisclosed income of a person who was not subject to search. The basic ingredient of Section 158BD is the existence of some material. If there is no material, the question of AO's satisfaction does not simply arise. If there is material, then of course, it would be better if the AO demonstrates that he is satisfied about there being some undisclosed income belonging to a person who was not searched. In all the instant cases, the assessment were not based on a search action or supported by any material found during the course of search but were the result of reappraisal of facts that were already within the knowledge of the Department (para 10). However, in a given case, where there is sufficient material to take action under Section 158BD and the AO has not specifically recorded satisfaction, it is not a lapse which would vitiate the proceedings. The main thing to be kept in mind is that proceedings under Section 158BD cannot be a fancy or ipse dixit of the AO but it should be based upon some material evidence found in the course of search. By invoking the provisions of Section 158BD, a stranger to the search proceedings is being implicated for a liability higher than normal rates of tax. Therefore, it would be in the fitness of things that the AO demonstrates in some way his satisfaction about there being undisclosed income hidden in the search material, which as per the provision, has to be handed over to the AO having jurisdiction over that other person. Thus, existence of material is a sine qua non for taking action under Section 158BD. If the above requirement is fulfilled in a given case, then omission to record satisfaction may not vitiate the proceedings, (para 11).
Thus, in the instant cases, the examination of the records did not show the existence of any material for the satisfaction and, consequently, issuance of notice under Section 158BD was not justified. The assessment orders passed in pursuance thereof were vacated (para 12).
In the result, all the appeals were to be allowed, (para 13).
32. This case we find is squarely applicable to the case of the assessee. In case the AO treats that the assessment has been completed in pursuance of notice under Section 158BD, as in impugned case there was no material in existence for initiating action under Section 158BD. Similarly there is no material in existence for taking action under Section 158BD rather the Revenue has fairly agreed that there is no material found as a result of search in the case of the assessee which may point out the undisclosed income of the assessee. The decision of the Special Bench is binding before us. The decisions relied on by, the learned Authorised Representative of the various Benches of Tribunal have also taken the view that if there is no material found as a result of the search which may pinpoint the existence of undisclosed income of the person who was not searched, the notice issued under Section 158BD was illegal. The learned Departmental Representative could not point out any other decision, which may have taken a different view.
33. The decision of co-ordinate Bench is also binding on us on the similar facts in view of the decision of the Special Bench in the case of Mrs. Arathi Shenoy and Ors. v. Jt. CIT . The Hon'ble Supreme Court in the case of Union of India v. Kamakshi Finance Corporation Ltd. has clearly observed that the principles of judicial discipline require that orders of higher appellate authorities to be followed unreservedly by subordinate authorities. The same view has been taken by Chandigarh Tribunal in the case of Asstt. 'CIT v. Avon Cycles Ltd. (2004) 82 TTJ (Chd) 127 : (2003) 86ITD 156 (Chd) following the judgment of Bombay High Court in the case of CIT v. Thana Electricity Supply Ltd.. The decision of the Special Bench is squarely applicable to the facts of the case before us, and, therefore, in our opinion the assessment framed by the AO is not justified.
34. We therefore, on the basis of the aforesaid discussion quash the block assessment order passed in the case of the assessee.
35. Since it was vehemently contended that this Bench should give finding on merits also in view of the fact that in case the order of this Tribunal is set aside on the legality issue, the assessee may have not to come to this Court again to decide the issue on merit. We, therefore, give our finding on the issue relating to the additions made on merits for the complete disposal of the grounds of appeal.
36. The first issue relates to the addition of Rs. 35,50,000. From the record we find that the AO made the said addition on the basis that the assessee through the letter dt. 10th March, 1997 simply stated cash credit received Rs. 35,50,000 represents the repayment of the loans given earlier. However, no details were submitted as to the names and addresses of the persons to whom loans were given earlier, how these repayments were made. It was, however, mentioned that from the information on record it is not understood that M/s Madhavi Finvest (P) Ltd. has sought a loan of Rs. 30,00,000 sanctioned by the Vysya Bank Ltd. which was used to check-up share price of M/s Golden Agro Tech. Industries Ltd., so that the Benami shareholdings of the promoters can be sold at higher rate. However, as the share prices fell down below the par the assessee loaded with the shares purchased at heavy premium for which there was no market. Under these circumstances, Rs. 45,00,000 was taken as loan from M/s Golden Agro Tech. Industries Ltd. The assessee did not repay the loan taken from the Vysya Bank. However, while repaying the loan the said cash credit was taken by the assessee. Since no satisfactory information was offered except stating that this cash credit represents repayment of the loan given, it was decided to bring the amount of cash credit of Rs. 35,50,000 to tax for the block asst. yr. 1996-97. Page. 39 of the paper book consisting of letter dt. 10th March, 1997 showing the details for the sum of Rs. 13,00,000, Rs. 8,00,000, Rs. 5,00,000 and Rs. 4,00,000 proves the confirmations were duly filed. The same are available from pp. 39 to 67 of the paper book and were duly verified by the AO. For a sum of Rs. 4,00,000 and Rs. 1,50,000 which were received on 1st March, 1996 and 2nd March, 1996, the evidence has been first time filed before us. The AO has come to know about these credits only through the bank statement filed by the assessee not on the basis of the material found during the course of the search. Section 158BB, which provides for computation of undisclosed income of block period expressly and unequivocally provides that the undisclosed income has to be computed "on the basis of evidence found as a result of search... and such other materials or information as are available with the AO and relatable to such evidence". The expression "relatable to such evidence" has been inserted by the Finance Act, 2002 retrospectively w.e.f. 1st July, 1995. A bare reading of this provision would indicate that undisclosed income has to be computed on the basis of evidence and material found during search. Any material or evidence, available to the AO, which is not related to the search would not form the basis for computation of undisclosed income. The bank statement filed by the assessee cannot be regarded to be the material found as a result of search and cannot be evidence relatable to such material. Therefore, no income can be computed under this chapter on the basis of the bank statement filed in the course of block assessment as it cannot be considered either as evidence found as a result of the search or as a material or information relatable to any evidence found as a result of the search and, therefore, addition of Rs. 35,50,000 cannot be sustained in the block assessment. The bank statement can also not be regarded to be the books of account of the assessee. The addition so made stands deleted.
37. Coming to the next issue, which relates to the addition of Rs. 1,62,575 being interest on funds diverted by the directors. We find force in the submission made by the learned Authorised Representative that no income can be charged to tax until and unless it is not accrued or received by the assessee. The interest income has been added by the AO, merely on presumption that the assessee has diverted the funds for non-business purposes. In our opinion, the onus is on the Revenue to prove that the assessee has earned the income. No cogent material or evidence has been brought on record or filed by the Revenue, which may prove that the assessee has actually earned the income and are relatable to the evidence found as a result of the search or as material or information relatable to any evidence found as a result of the search. Only on this ground it is liable to be deleted as it cannot be considered during block assessment.
38. We have gone through the decision of Hon'ble Gauhati High Court, we find that the case of the assessee is duly covered by the decision of said High Court, in which the Hon'ble High Court, when the interest-free loan were given to the directors from the amount borrowed on interest has held that notional interest can be assessed to tax although the disallowance of the interest may be justified. No contrary decision, has been brought to our notice by the learned Departmental Representative. We therefore, respectfully following the said decision delete the addition of Rs. 1,62,575 made by the AO towards presumptive income.
39. In the result, the appeal of the assessee is allowed.
ITA 176/Hyd/1997
40. The learned Authorised Representative contended that there was no material found during the search and seizure, which may pinpoint the undisclosed-income of the assessee. The additions are made merely on the basis of presumptions, conjectures and surmises. No doubt there was search in the case of the assessee, which took place on 22nd March, 1996 but no undisclosed income was found. Attention was invited to the Panchnama appearing at pp. 5 to 11 of the paper book which shows under para 5(b) that no cash, jewellery or valuable being undisclosed were found. Only the books of account under Annex. B/A were found and seized. These books were the cash book and ledgers of all the family members from 1st April, 1984 to 31st March, 1994. The income/assets as shown in these books were duly disclosed in the IT return and wealth-tax return filed as per the details given hereinabove. No additions were made on the basis of the books of account found and seized except the income, which were already disclosed and which cannot be regarded to be the undisclosed income under Section 158B(b) of the IT Act. No books of account for the asst. yrs. 1995-96 and 1996-97 were found, as they were not maintained. No addition was made in the asst. yrs. 1995-96 and 1996-97 on the basis of the books of account seized or material found during search. Additions in the asst. yr. 1986-87 to asst. yr. 1994-95 were made ignoring the provisions of Sections 158B(b) and 158BB(1), therefore, the block assessment framed is invalid and illegal. Reliance was heavily placed on the judgment of Hon'ble Delhi High Court in the case of CIT v. Ravi Kant Jain (2001) 250 ITR 141 (Del). In respect of additional ground filed on 22nd Nov., 2004, for the proposition that in the absence of any material found during the course of search and seizure operations throwing light on undisclosed income, additions on presumptions, conjectures and surmises are not permissible, reliance was placed on the following decisions:
1. Patel Rajeshkumar Kantilal & Co. v. Asstt. CIT (1998) 62 TTJ (Ahd) 189
2. General Exporters v. Asstt. CIT (2000) 67 TTJ (Del) 119
3. Smt. Rajrani Gupta v. Dy. CIT (2000) 66 TTJ (Mumbai) 582 : (2000) 72ITD 155 (Mumbai)
4. Smt. Sheela Aggarwal v. Dy. CIT (1999) 106 Taxman 227 (Del)(Mag)
5. CIT v. C.J. Shah & Co.
6. CIT v. Rajendra Prasad Gupta
7. CIT v. Smt. Usha Tripathi
8. CIT v. Ravikant Jain (supra).
41. For the proposition that mere submission of the assessee to the jurisdiction of the AO cannot validate the jurisdiction, which is otherwise invalid and illegal, reliance was placed on the following decisions:
1. Continental Commercial Corporation v. ITO and Anr.
2. P.V. Doshi v. CIT (1978) 113 ITR 22 (Guj)
3. CIT v. Kurban Hussain Ibrahimji Mithiborwala
42. For the proposition that the transactions do not fall under the purview of the provisions of Chapter XIV-B where these are recorded in the regular books of account, in the absence of any material to show that these transactions are bogus, the reliance was placed in the case of CIT v. Gom Ind. Ltd. .
43. For the proposition that the transactions disclosed in the return, which were the subject-matter for regular assessment, cannot be considered in block assessment, the reliance was placed on the following cases:
1. Monga Metals (P) Ltd. v. Asstt. CIT (2000) 67 TTJ (All) 247
2. CIT v. Vikram A. Doshi
44. Relying on the decision of Ravi Prakash Agarwal (HUF) v. Asstt. CIT (2000) 67 TTJ (Del) 234, it was submitted that unless some material is found which is not recorded in the books, no addition can be made in block assessment. Further submitted that the AO cannot enlarge the scope of the provisions so as to re-examine what would have been subject-matter of regular assessment. In this regard, reliance was placed on the decisions of Essem Intia-port Services (P) Ltd. v. Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd) and CIT v. C.J. Shah & Co. (supra). Income below taxable limit cannot be considered as undisclosed income for purposes of block assessment in view of the decision of Kerala High Court in the case of CIT v. MM. Thomas .
45. Coming the merits of the cases, it was submitted that the additions are not sustainable. Attention was invited to the AO's letter dt. 2nd Jan., 1997, first para, to stress that the additions are not based on seized material but are made with reference to IT returns filed by the assessee. For the additions made in asst. yr. 1986-87 to asst. yr. 1990-91, it was stated, the additions relate to interest income from money-lending activity and income from agriculture. The income in these years was below the maximum income chargeable to tax and the agricultural income was not taxable, therefore, no return for these years was filed. Provision of Section 158BB(1)(ca) was clearly applicable and this income cannot be regarded to be undisclosed income. For the asst. yrs. 1991-92 to 1994-95, it was contended, the interest income and agricultural income were duly disclosed in the IT returns filed as per the details given at p. 227 of paper book. Section 158B(b) is a charging provision and the AO does not have any jurisdiction to review such income. There was no material found in search, which empowers the AO to treat such income to be undisclosed income. Chapter XIV-B oannot be applied in substitution of Chapter XIV. For the additions made in asst. yrs. 1995-96 and 1996-97, it was stated that the additions for agricultural income in both the years were not made on the basis of the material found during search but on the basis of the returns filed by the assessee. The interest and agricultural income being derived by the assessee regularly is on record in the earlier years. The return/information filed by the assessee in the course of block assessment proceedings do not satisfy the condition prescribed in Section 158BB(1). These can be looked into during regular assessment proceedings. For the addition of Rs. 4,50,000 as undisclosed investment in acquisition of site at Kakinada, firstly it was contended that this does not satisfy the condition laid down in Section 158BB(1). This addition was made on the basis of the receipts and payment account as well as statement of affairs as on 31st March, 1996 filed by the assessee after the search and does not relate to the materia1/evidence found during the course of search. Our attention was drawn to the receipt and payment account in which investment in house at Kakinada is shown at Rs. 6,50,000. These payments were made through cheques drawn on Andhra bank, the copy of bank account given at p. 149 of the paper book. No doubt following entries appear at the credit in August, 1995 (not in April, 1995) :
19-8-1995 Cash 1,50,000
By Transfer 2,50,000
By Transfer 2,00,000
46. The cash was deposited out of amount realized from debtors amounting to Rs. 1,26,500 and Rs. 25,000 interest received from debtors. The assessee was engaged in the money-lending business is not disputed and the money advanced was received back and deposited. This fact is self-explained from the receipt and payment account. No query or question for the same was asked and addition was made for this amount separately as undisclosed income for the cash deposit in Andhra Bank account No. 27410. The receipt and payment account was not considered at all while the balance sheet filed along with receipt and payment account was considered for making addition. Even the date of deposit has been wrongly mentioned as 14th April, 1995 instead of correct dt. 19th Aug., 1995. No addition without giving opportunity to the assessee can be made. The confirmation from the debtors were filed vide letter dt. 3rd March, 1991 as per pp. 153 to 226 of the paper book. Rs. 4,50,000 were received through two cheques of Rs. 2,50,000 and Rs. 2,00,000 from Palacherle Venkataramna and Palacherle Brahmaji, respectively. This fact was also duly shown in the receipt and payment account but no query was asked for. Attention was invited to the copies of letters issued by AO. No material for the same was found during search; therefore no addition under this chapter can be made. The reliance was placed strongly on the judgment of Dr. (Mrs.) Surjit Tosaria v. Jt. CIT (2005) 92 TTJ (Del) 338. The copy of the bank account and receipt and payment account were filed in the course of block assessment and, therefore, these cannot be considered either as evidence found as a result of the search and, therefore, addition in respect thereof should not be sustained. Further it was submitted that no addition under Section 68 on the basis of bank statement could be made, as bank statement cannot be construed as books of account. Reliance was placed in the case of S.P. Goel v. Dy. CIT (2002) 77 TTJ (Bom)(TM) 1 : (2002) 82 ITD 85 (Bom)(TM). Thus it was prayed to delete the addition of Rs. 4,50,000 and Rs. 1,50,000 made in the asst. yr. 1996-97.
47. For the last addition of Rs. 36,655 as unexplained cash it was contended by referring to p. 253 that the cash of Rs. 36,655 was duly explained. As on 31st March, 1996 our family members were having cash in hand detailed as- assessee Rs. 7,028, late Sh. BVBS Prasad HUF Rs. 14,729, Smt. B. Madhavi Rs. 905 and Sh. B. Ravi Prasad Rs. 19,950. Thus, there was cash balance amounting to Rs. 42,612. The AO rejected the explanation of the assessee, as there was no withdrawal during March, 1996 from bank account. The AO thus presumed that the family members were not having any cash balance till February, 1996. The block assessment proceedings in the case of B. Ravi Prasad were dropped. No evidence or material to counter the assessee's version was brought on record. The cash less than Rs. 50,000 is not considered as asset for wealth-tax purpose. Thus, keeping in view the family status and fact some cash has to be kept at house, the addition should have been deleted.
48. The learned Departmental Representative did not advance any argument except relying on the assessment order..On a query from the Bench, the learned Departmental Representative clarified that the additions for the asst. yrs. 1995-96 and 1996-97 were made on the basis of bank statement collected subsequent to the search during block assessment proceedings.
49. We have considered the rival submissions and perused the material on record and also the order-sheet as well as the block assessment file as was put up by the learned Departmental Representative. We have gone through the case laws relied on from both the sides. First, we would like to deal with the additional ground of the assessee, which relates to the validity of the assessment made by the AO. From the copy of the assessment order, it is clear that the assessment in this case was completed under Section 158BC. There is no dispute that the search warrant was in the name of the assessee and the proceedings were initiated by issuing notice dt. 11th Nov., 1996 under Section 158BC. We find from the record that the assessee has filed block return on 10th March, 1997 vide receipt No. 000415 as appearing at p. 3 of the paper book, showing nil undisclosed income. However, the AO has wrongly mentioned that no block return was filed. During the course of the search as per copy of Panchnama appearing at pp. 5 and 6, no (sic) cash in hand, jewellery, books and documents, valuable assets were found but not seized. The books of account, which were found and seized, consist of note book wherein entries relating to money-lending activity and income from agriculture were noted upto the asst. yr. 1994-95. The assessee has shown the interest income and agricultural income in the regular returns filed for the asst. yrs. 1991-92 to 1994-95. The copy of the returns with the computation statement and balance sheet were filed before us from pp. 228 to 252. The particulars of the date of filing and the receipt number of the return are available at p. 227 of the paper book. The note book also shows the income of the assessee from interest and agriculture w.e.f. 1st April, 1984 to 31st March, 1994. The income upto the asst. yr. 1990-91 as shown is less than the maximum income chargeable to tax. No addition on the basis of the seized material documents/papers were made by the AO in the block assessment year. Upto asst. yr. 1994-95 the same income as was shown in the regular returns as well as in the regular books, i.e., note book were treated as the undisclosed income of the assessee and the assessment was completed without any evidence or material being seized which may prove that the entries in the note book were bogus. The additions made in the asst. yr. 1995-96 on the basis of the regular return filed by the assessee, relate to the agricultural income, the source of which was already shown in the earlier regular assessment years and the source cannot be regarded to be the undisclosed source. This income cannot be regarded to be the undisclosed income, unearthed or earned from the source, which was not disclosed to the Revenue. This income has not been added on the basis of the material found as a result of search or as a material or information relatable to any evidence found as a result of search. During the asst. yr. 1996-97 additions made are also not related to the material found during the course of the search. The additions are based on the basis of the bank statements and the receipt and payment account filed by the assessee in the course of block assessment proceedings. Chapter XIV-B which consists of Section 158B to Section 158BH was introduced by the Finance Act, 1995 w.e.f. 1st July, 1995 to make procedure of assessment of cases in which search is initiated under Section 132 or where books of account, other documents or any assets are requisitioned under Section 132A. The chapter is titled 'special procedure for assessment of search cases'. The scheme of block assessment enacted under this chapter laying down procedure for the block assessment proceedings is intended by the legislature to operate simultaneously with the normal and regular scheme of assessment indicated under Chapter XIV of the IT Act. Both the tax schemes are independent of each other and they are mutually exclusive. Block assessment under Chapter XIV-B is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to material unearthed during search. Therefore, if the search action does not disclose undisclosed' income, the question of any assessment being framed under that- chapter is simply improper and outside the purview of that chapter. Clause (b) of Section 158B contains inclusive definition of undisclosed income and reads as under:
(b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable 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 purposes of this Act (or any expense, deduction or allowance claimed under this Act which is found to be false).
50. If we analyze the aforesaid definition, it provides that undisclosed income includes:
(i) any money, bullion, jewellery or other valuable article or thing, or,
(ii) any income based on any entry in the books of account or other documents or transactions;
(iii) such money, bullion, jewellery, valuable article, thing, entry in the books of account or other documents or transactions represent wholly or partly income or property;
(iv) which has not been or would not have been disclosed for the purposes of this Act.
51. From the aforesaid analysis of the definition, it clearly emerges that if any asset or any income as recorded in the books or documents has been disclosed or intended to be disclosed to the IT authorities, this would be outside the pale of undisclosed income as defined under Clause (b) as above.
52. We may next refer to Section 158BB, which provides. for computation of undisclosed income of block period. The section expressly and unequivocally provides that the undisclosed income has to be computed "on the basis of evidence found as a result of search ... and such other materials or information as are available with the AO and relatable to such evidence." The expression "relatable to such evidence" has been inserted by the Finance Act, 2002, retrospectively w.e.f. 1st July, 1995. A bare reading of this provision would indicate that undisclosed income has to be computed on the basis of evidence and material found during search. Any material or evidence, available to the AO, which is not related to the search would not form the basis for computation of undisclosed income.
53. On the basis of the aforesaid legal provision, we are of the firm view that the income which the assessee had duly disclosed in the regular assessment and the books relating thereto not showing any unearthed income and the returns and documents filed by the assessee subsequently will not entrust the jurisdiction on the AO to make' assessment under Chapter XIV-B. The learned Departmental Representative has not brought out before us from the file of the assessee that the AO on the basis of the evidence found as a result of search unearthed any undisclosed income. The income detected by the AO on the basis of the returns, evidence and material filed by the assessee during block proceedings are not relatable to the evidence found as a result of search and may be a subject-matter of regular assessment but cannot be considered as part of the block assessment. In the case of CIT v. Ravi Kant Jain (supra), the Hon'ble Delhi High Court has held that a block assessment under Chapter XIV-B of the Act is not intended to be a substitute for a regular assessment, that its scope and ambit is limited in that sense to materials unearthed during the search, that it is in addition to the regular assessment already done or to be done. A perusal of the assessment order in the impugned case clearly shows that what has been assessed in the block assessment are the incorne relatable or to be considered in the regular assessment. Due to the aforesaid discussion, we hold that the block assessment framed on the assessee is invalid and without jurisdiction and, therefore, the block assessment is annulled.
54. Although our aforesaid decision is sufficient to dispose of this appeal, however since the extensive arguments were made on merit of the various additions, for the sake of completeness and disposal of all the grounds, we give our finding on the various additions made on merit also.
55. In respect of the issue relating to the interest income from money-lending activity and agriculture income being added in each of the assessment year as under :
Asst. yr. Interest income Agriculture income (Amount Rs.) (Amount Rs.) 1986-87 12,180 16,700 1987-88 16,790 19,125 1988-89 17,020 23,850 1989-90 17,640 22,000 1990-91 16,560 56,315 1991-92 21,280 62,400 1992-93 23,500 14,64,350 1993-94 33,820 46,550 1994-95 5,780 54,300 1995-96 -- 2,14,735 1996-97 25,000 1,06,250
56. We found substance in the submission- of learned Authorised Representative in view of the definition of the 'undisclosed income' given under Section 158B(b) r/w Section 158BB(1). The aforesaid income cannot be regarded to be the undisclosed income of the assessee. The assessee has maintained the regular books by way of cash book and ledger from 1st April, 1984 to 31st March, 1994 in the shape of note book, which were seized and on the basis of which the income-tax and wealth-tax returns for the asst. yrs. 1991-92 to 1994-95 were filed prior to the search. The income disclosed in these returns cannot be treated to be the undisclosed (income) of the assessee and are, therefore, outside the scope of Chapter XIV-B in view of Section 158BB(1)(b). The income for the asst. yr. 1986-87 to asst. yr. 1990-91 were below the income maximum chargeable to tax, therefore, cannot be regarded to be the undisclosed income in view of Clause (ca) of Sub-section (1) of Section 158BB. Therefore, the addition made for the interest income and agricultural income for the asst. yrs. 1986-87 to 1994-95 stand deleted. For the asst. yr. 1996-97, since the income was earned from the same source, i.e., the interest from money-lending business and also from the agricultural land, the return for the assessment year was not due till 22nd March, 1996 when the search took place, the source of such income was already disclosed in the earlier assessment years. This income on the basis of the return filed by the assessee after the search cannot be regarded to be the undisclosed income of the assessee. This was the income, which was disclosed in the regular return and was subject-matter of the regular assessment [refer to Section 158BB(1)(d)]. No material was pointed out by the learned Departmental Representative, which may point out that this income was based on the bogus transactions. This income may be a part of regular assessment but cannot form part of the undisclosed income. The income was duly disclosed in the return filed although subsequent to the search as the due date of filing the return had not expired. There is no whisper or evidence, which may suggest that the assessee would not have disclosed this income for income-tax purposes. Rather by filing the return, the intention of assessee of disclosing this income is proved. The provision of Section 158B(b) which defines the 'undisclosed income1 in our opinion is also a charging provision as any income which can be assessed under Chapter XIV-B have to be first 'undisclosed income'. Section 158BB deals with the computation of undisclosed income of the block period but it cannot override the Section 158B(b). First, any income to be computed under Chapter XIV-B under Section 158BB has to be an undisclosed income as defined under Section 158B(b). If there is any conflict between the charging and computation provision, the charging provision of Section 158B(b) will prevail. The assessee has shown the income from the source from which he was regularly getting the income. This income on the basis of the return even if filed late cannot be regarded to be the undisclosed income and such income in our view has to be considered in the regular assessment. Bombay High Court in the case of CIT v. Vikram A. Doshi (supra) has taken the same view.
57. Now coming to the addition of agriculture income for the asst. yr. 1995-96, we find this income was also added on the basis of the return filed by the assessee subsequent to the due date on the basis of computation of undisclosed income. Since we have already held in the preceding para that Section 158BB cannot override the provision of Section 158B(b) and this income was duly disclosed in the return for the asst. yr. 1995-96, therefore, the. addition of the interest income and agriculture income for the asst. yrs. 1995-96 and 1996-97 stands deleted.
58. Coming to the issue of additions of Rs. 4,50,000 and Rs. 1,50,000, we find that these additions were made not on the basis of material found as a result of the search or as a material or information relatable to any evidence found as a result of the search. These additions have been made on the basis of the copy of the bank statements which was filed by the assessee vide his letter dt. 4th Feb., 1997 in reply to the letter of the A3 dt. 27th Jan., 1997. A perusal of the assessment order shows that there was no evidence collected by the AO during the search in respect of amount invested in the Kakinada property as well as cash deposit in the Andhra Bank. The reasons given in the assessment order are stated that the sources for the amount was said to be loans from Smt. P. Vankayamma and Shri P. Brahmaji but no confirmation letters from these parties were filed and no address was given for further verification. The sum of Rs. 1,50,000 was added as the assessee did not submit proper explanation and in his reply dt. 16th Jan., 1997, the assessee stated it is out of the compensations received on account of death claims. We have gone through the letter dt. 16th Jan., 1997, we find that this letter was submitted by the assessee in reply to the letter of the AO dt. 2nd Jan., 1997 in which under para VI, the AO asked the assessee to explain the sources for the cash credited in his account with Andhra Bank and the assessee in reply thereto submitted that most of the credits in the said account is received on account of realization and compensations received on account of death claims of my late husband and also amount received from M/s GATIL by way of salary, car hire, etc. She further stated that she had applied to the bank to supply her account copy and soon after the transactions with the said bank. The AO came to know about the loan from Smt. P. Vankayamma and Shri P. Brahmaji only through the receipt and payment account filed by the assessee showing the purchase of the property as well as the source of the investment. There is realization from the debtors to the extent of Rs. 1,26,500 and the interest amounting to Rs. 25,000. This receipt and payment account was filed with the AO on 10th March, 1997 along with the return for the asst. yr. 1995-96 and which was not at all seems to have been considered by the AO. The addition of Rs. 4,50,000 and Rs. 1,50,000 in our opinion does not satisfy the conditions laid down in Section 158BB(1) that the undisclosed income should be assessed on the basis of evidence found as a result of search and such other material or information which are available with the AO and are relatable to the evidence so found and, therefore, on this basis both these additions cannot be sustained and are liable to be deleted. The copy of the bank statement as well as the receipt and payment account filed by the assessee in the course of block assessment proceedings could have been treated as material or information available with the AO and relatable to the evidence found in search only if some evidence with regard to that and connected therewith had been found and seized in the course of search in assessee's case. The bank statement was filed in reply to the copy demanded by the AO while the receipt and payment account was filed along with the returns for the asst. yr. 1996-97.
59. Even the bank statement and the receipt and payment account cannot be termed as books of account being maintained for the previous year so that the provision of Section 68 could be applied. Our aforesaid view is supported by the decision of Pune Bench in the case of Kantilal & Brothers v. Asstt. CIT (supra) and that of Mumbai Tribunal in the case of S.P. Goya] v. Dy. CIT (supra). Even on this basis also the additions of Rs. 4,50,000 and Rs. 1,50,000 are to be deleted. We are further of the view that the amount arises out of the bank account of the assessee which was duly disclosed to the Revenue in the. regular assessment proceedings and there is no evidence on record that the bank account maintained by the assessee was not disclosed or would have not been disclosed to the Revenue rather the copy of the returns for the asst. yrs. 1995-96 and 1996-97 clearly shows the balance with the bank in the statement of affairs of the assessee. Therefore, the AO in our opinion was not correct in law in adding as undisclosed income of the assessee in accordance with law. The AO is free to consider these entries in the bank account in the regular assessment of the assessee. Thus the ground of appeal relating to the addition of Rs. 4,50,000 and 1,50,000 are allowed and both the additions made are deleted.
60. The last issue relates to the addition of Rs. 36,655 for the asst. yr. 1996-97. The AO made the said addition on the basis that there was no withdrawal from the bank account in the month of March by the assessee. The AO in our opinion ignored the fact that there were three assessees putting up together, where the search has taken place and out of the cash in hand shown by the assessee on 31st March, 1996 only Rs. 7,028 belong to the assessee, Rs. 14,729 relate to the HUF and Rs. 19,950 relate to Shri B. Ravi Prasad son of the assessee, in whose case proceedings for block assessment were dropped by the Department keeping in view of the quantum of cash, status of the assessee and the fact that no wealth-tax is payable on the cash upto Rs. 50,000. In our opinion the AO was not correct in law in making this addition merely on presumption without bringing any evidence contrary to the explanation given by the assessee. We have gone through the balance sheet of the assessee filed along with the return for asst. yr. 1996-97 and that of HUF. In the case of the assessee there was a cash balance of Rs. 7,028 while at the end of the asst. yr. 1995-96 the cash balance was Rs. 72,654 and as per the last day of the period for which the books of account maintained by the assessee were found, i.e., 31st March, 1994 the cash balance was Rs. 16,919. Under these facts, the plea of the AO that there was no cash in hand with the assessee and also that the total cash found relates to the assessee cannot be accepted. We, therefore, delete the addition of Rs. 36,655.
61. In the result, the appeal of the assessee is allowed.
IT(SS)A No. 180/Hyd/1997
62. The Authorised Representative for the additional ground, which relates to the legality of the block assessment order, contended that the block assessment framed by the AO was illegal and advanced the similar arguments as has been advanced in ITA No. 175/Hyd/1997. For the sake of repetition, we are not reproducing the same.
63. In brief for the clarity, our attention was drawn to the notice appearing at p. 7 of the paper book, which was issued under Section 158BC stating that search and seizure operation was carried, but in fact no search and seizure operation was carried in the case of the assessee. The search was carried only in the case of Smt. B. Surya Prabha. During the course of the search no material relating to the assessee was found. It is only a note book which consists of the accounts regularly maintained by the father of the assessee was found and this book does not have any undisclosed income, it consist of the details of the assets and property for the period 1st April, 1984 to 31st March, 1994. On the basis of these books, the returns for the asst. yrs. 1991-92 to 1994-95 were filed, but the return for the asst. yr. 1995-96 could not be filed as her father suddenly expired on 14th Oct., 1995 at the age of 46 years, just after 10 days of her marriage, the return for the asst. yr. 1996-97 was not due.
64. The assessment has been completed by the AO on the basis of material gathered after the search and not on the basis of the material collected during search or as material or information relatable to any evidence found as a result of the search. Even no material pointing out the undisclosed income of the assessee was either found during the course of the search, which may justify issuance of the notice even under Section 158BD. Attention was drawn to p. 11 of the paper book which consists of a letter addressed by the AO to the assessee dt. 2nd Jan., 1997 in which the AO asked for the information regarding the Madhavi Finvest (P) Ltd. and also cash deposits made and credited to the Madhavi Finvest (P) Ltd. account. The letter was addressed to the assessee as director of Madhavi Finvest (P) Ltd. It is only the following query which relates to the personal income of the assessee which is reproduced as under:
The following amount are credited to the account of Madhavi Finvest (P) Ltd. with SBI account No. 091/5238 Date Amount 4-11-1995 Rs. 1,20,000 4-11-1995 Rs. 80,000 20-12-1995 Rs. 50,000 Please explain the source for the credit reflected in the account of Madhavi Finvest (P) Ltd. and also in your personal account. You may please note that in the absence of satisfactory explanation these cash deposits are liable to taxed as per the provisions of Section 68 of the IT Act.
65. The learned Authorised Representative carried us to the paper book of the assessee and submitted that there was no material which were seized during the course of the search carried out at (the premises of) Smt. B. Surya Prabha, which would have been found and formed the basis for taking action under Section 158BD. From the copy of the assessment it is apparent that the AO has completed the assessment under Section 158BC not under Section 158BD. It is only by way of his letter, dt. 26th May, 1998 (reproduced hereinabove) which was issued after completion of the assessment, the AO clarified that the order passed under Section 158BC be treated as passed under Section 158BD. Thus, it was submitted in the absence of any valid proceeding, the assessment must be annulled. In this regard on the cases laws as relied in the case of Madhavi Finvest (P) Ltd. were cited by the learned Authorised Representative. In brief on legality, it was submitted that the assessment completed under Section 158BC is void ab initio as there was no search, even there cannot a valid assessment under Section 158BD as there was no material found from the possession of the person who was searched that the assessee derived undisclosed income, for the satisfaction of the AO to take a prima facie view that the assessee has undisclosed income.
66. On merits, it was submitted that the assessee was a regular assessee, the investment of Rs. 2,00,000 with the Golden Agro Tech Investment Ltd., for the asst. yr. 1993-94 was duly disclosed in her balance sheet filed along with the return. Similarly the investment of Rs. l;00,000 for the asst. yr. 1994-95 was duly disclosed in the balance sheet for the asst. yr. 1994-95 filed along with the return for the asst. yr. 1994-95 and for this pp. 183 and 189 of the paper book were referred. The return for the asst. yr. 1995-96 was filed on 10th March, 1997, while for the asst. yr. 1996-97 was also filed on 10th March, 1997. In the return for the asst. yr. 1995-96 receipt and payment account was enclosed in which the investment in the shares of GATIL amounting to Rs. 1,50,000 and also shares investment in Madhavi Finvest (P) Ltd. amounting to Rs. 2,10,000 were duly disclosed, the source thereof is also apparent in the receipt and payment account. The assessee has sold 25,000 shares of GATIL for a sum of Rs. 2,50,000 and a loan of Rs. 1,00,000 was received from her mother Smt. B. Surya Prabha. For the asst. yr. 1996-97, it was stated that the receipt and payment account filed along with the return duly disclosed the sources for the investment in the house at Kakinada amounting to Rs. 8,50,000. The sources thereof were a loan of Rs. 1,50,000 from the mother of the assessee and Rs. 1,00,000 from the brother of the assessee, the assessee has also received gifts amounting to Rs. 5,26,122 at the time of marriage. The confirmation and the details of gifts received were duly filed before the AO, the copy of which was filed before us in the paper book from pp. 69 to 164. For a sum of Rs. 2,50,000 it was submitted that the AO made the double addition on the one side, the AO added investment of Rs. 8,50,000 for which the source was explained to be of Rs. 2,50,000 - Rs. 1,50,000 as loan from the mother and Rs. 1,00,000 as loan from her brother. The AO made the addition of Rs. 8,50,000 as well as for Rs. 2,50,000 i.e., both investment and source of the investment. The AO has wrongly observed that the assessee has not filed any IT return, the assessee even filed block return also, the copy of which was filed at p. 13 of the paper book in which the undisclosed income was shown at nil. The AO completed the assessment without considering the block return as well as the regular return of the assessee. The assessment was completed in haste so that the huge demand may be created against the assessee by making addition in respect of the income and investment shown in the regular assessment, not on the basis of the evidence found as a result of the search or as material or information relatable to any evidence found as a result of the search. This income cannot be added in the block assessment as it is not a substitute of, regular assessment. Thus, the conditions laid down under Section 158BB(1) were also not complied with. The assessee was married and putting up at her in-laws. The house in which her parents were putting up cannot be regarded to be house belonging to the assessee. Thus, it was vehemently submitted that the addition of Rs. 17,60,000 as undisclosed income of the assessee must be deleted.
67. The learned Departmental Representative produced the assessment record of the assessee and was fair enough to state on the basis of the order-sheet on the file that no notice under Section 158BD was issued to the assessee. The notice was issued under Section 158BC on 11th Nov., 1996, he also confirmed that there was no search conducted in the case of the assessee. Photocopy of the order-sheet was filed before us which was put up on record. Although the learned Departmental Representative agreed that there was no material on record seized during the course of the search which warrant action under Section 158BD even then he relied on the decisions as were cited in ITA No. 175/Hyd/1997 and on the basis of these decisions it was submitted that neither material nor recording of satisfaction is required for the purpose of making the block assessment under Section 158BD. Although in the assessment order the AO has mentioned that the assessment was completed under Section 158BC but vide letter, dt. 25th June, 1998 it was clarified that the order passed must be construed as passed under Section 158BD. Therefore, if there is any illegality committed by the AO in issuing notice under Section 158BC and passing the order, it got cured by the subsequent letter of the AO after completion of the assessment. Regarding the merits of the case, the learned Departmental Representative relied on the order of the AO.
68. We have considered the rival submissions, perused the material on record as well as the block assessment file of the assessee put up before us by the learned Departmental Representative on our direction. We have also gone through the legal luminaries cited before us. We find that the facts on record in this case are similar to the facts in the case of Madhavi Finvest (P) Ltd. ITA 175/H/1997. In the order-sheet also we find that the notice under Section 158BC was issued in the case of the assessee not under Section 158BD. Even we do not find any mention on the order-sheet about the material, which would have been found during the course of the search on the basis of which the AO would have formed the prima facie satisfaction for initiating action under Section 158BD. The order-sheet upto the date of the assessment order is reproduced as under:
11-11-1996 The case is notified under Section 127 of the IT Act.
Search was conducted on Golden Agro Tech Ind. Ltd., on 22nd March, Notice under Section 158BC put up 1996. Sd/-Illegible Sd/- Illegible 2-1-1997 Letter to the A put up, Sd/- Illegible Sd/- Illegible 16-1-1997 As Authorised Representative Sri V.V. Sundaram, chartered accountant, along with Sri Ramprasad appeared and the case is heard. Sd/- Illegible Sd/- Illegible 17-1-1997 Reminder to the A put up Sd/- Illegible Sd/- Illegible 24-1-1997 Sri V.V. Sundaram appeared. Details called for is submitted. Sd/- Illegible Sd/- Illegible 27-1-1997 Questionnaires are typed as dictated and put up Sd/- Illegible Sd/- Illegible 11-2-1997 Sri V.V. Sundaram, chartered accountant, Authorised Representative appeared. Details filed are placed below. Sd/- Illegible Sd/- Illegible 3-3-1997 Sri V.V. Sundaram, chartered accountant, Authorised Representative appeared. Information filed is placed in record Sd/- Illegible Sd/- Illegible Assessment order is typed as dictated and put up. Sd/- Illegible On challan put up Sd/- Illegible Despatched Sd/- Illegible Despatcher
69. In this case also on the basis of the order-sheet it is explicitly clear that no action under Section 158BD was taken against the assessee. Even the order-sheet neither states that search has taken place in the case of the assessee nor the action under Section 158BD is taken on the basis of the material seized in the case of Smt. B. Surya Prabha. The learned Departmental Representative was also fair enough to concede on the query from the Bench that there is no material whatsoever gathered during the course of the search on the basis of which the block assessment proceedings were initiated against the assessee. From the record produced before us, it is apparent that the AO himself was satisfied that he has wrongly and illegally issued the notices and completed assessment under the impression that the search has taken place in the case of the assessee and, therefore, he subsequently vide his letter dt. 26th May, 1998 i.e., much after the completion of the assessment clarified that the order passed in the case of the assessee be read as if it was passed under Section 158BD. The question before us is whether by such action taken by the AO, can he legalize the action, which is void ab initio and thus can an assessment order, which is void ab initio, can be validated when it is a settled law that an illegality cannot be cured. Therefore, we are of the view that an illegal assessment order cannot be validated by the subsequent letter of the AO and the assessment framed is bound to be quashed only on this basis.
70. In view of our finding given in ITA No. 175/H/1997 as the facts and the arguments advanced by both the parties are the same on legal issue, endorsing our finding given under in that case hereinabove, we quash the block assessment order passed in the case of this assessee also.
71. Now coming to the merits of the case, since the learned Authorised Representative vehemently contended that this Bench should give finding in view of the fact that in case the order of the Tribunal is set aside on the legal issue, the assessee may have not to come again to decide the issue on merit. We, therefore, give our finding on the issue relating to the grounds taken on merits also for the disposal of all the grounds of appeal.
72. The assessee was a regular assessee and investment of shares in GATIL were duly disclosed during the asst. yr. 1993-94 amounting to Rs. 2,00,000 in the regular return of the assessee, a copy of which was filed before us. In our opinion, this income, which has already been disclosed in the regular assessment, cannot be regarded to be the undisclosed income under Chapter XIV-B in view of the definition under Section 158B(b). We therefore, delete the addition of Rs. 2,00,000 made in the asst. yr. 1993-94 by adopting the reasoning given in paras 55, 56 and 57 hereinabove. Similarly, the addition of Rs. 1,00,000 made in the asst. yr. 1994-95 in respect of investment made in the shares of GATIL is also deleted as it is also out of scope of Chapter XIV-B of the IT Act as this investment was duly disclosed by the assessee in the regular assessment.
73. Coming to the addition of Rs. 1,50,000 and Rs. 2,10,000 made in the asst. yr. 1995-96, we find that the assessee has filed the return for the aforesaid assessment year on 10th March, 1997 before the same AO and before the completion of the block assessment. The assessee has also filed the copy of receipt and payment account..It is apparently clear that the shares investment made in GATIL amounting to Rs. 1,50,000 and shares in Madhavi Fin vest (P) Ltd., amounting to Rs. 2,10,000 were out of the sale proceeds of 25,000 shares in Golden Agro Tech Ltd., amounting to Rs. 2,50,000 and Rs. 1,00,000 out of the loan from the mother. The assessee was already holding shares for Rs. 3,00,000 in Golden Agro Tech Ltd., as on 31st March, 1994. Therefore, in our opinion, so far the source of Rs. 4,50,000 is concerned, it is duly proved as the shareholding of Rs. 3,00,000 was duly disclosed in the return for the asst. yr. 1994-95, which was filed prior to the date of search. For the loan of Rs. 1,50,000 from the mother Smt. B. Surya Prabha, we find that the assessee has taken the loan from her mother and in the case of the mother of the assessee the loan advanced to the assessee has duly been shown. Therefore, in our opinion, the source of the investment in the shares of GATIL and Madhavi Finvest (P) Ltd., as explained in the receipt and payment account is duly proved. The AO instead of understanding the receipt and payment account and reconciling with the other assessees of the same group, ignored the return filed by the assessee on 10th March, 1997, i.e., much prior to the date of the completion of the block assessment and made the additions in the hands of the assessee. Since in our opinion, the source of the investment is duly explained and the identity of the parties are proved, we, therefore, delete the additions of Rs. 1,50,000 and Rs. 2,10,000 made during the asst. yr. 1995-96 out of the block assessment.
74. Coming to the addition of Rs. 8,50,000 for the asst. yr. 1996-97, we find that in this year also the assessee has filed the return for the asst. yr. 1996-97 on 10th March, 1997, before the same AO i.e., much prior to the date of completion of the assessment and filing of the return was not due as on the date of the search in the case of the mother of the assessee. The assessee has also filed the receipt and payment account and from the receipt and payment account it is apparently clear that the assessee has received the money as under:
(a) Realization debts Rs. 50,000
(b) Interest received Rs. 9,000
from debtors
(c) Loan from mother Rs. 1,50,000
(d) Loan from brother Rs. 1,00,000
(e) Marriage gifts received Rs. 5,26,112
75. The AO made separate addition for a sum of Rs. 2,50,000 in respect of the loan from the mother and the brother, which have been made under Section 68 of the IT Act. So far the gifts are concerned, we find that the assessee has filed the details of list showing the names of the donors and the details of the gifts received by the assessee. The copy of such details of the gifts, are given from p. 149 onwards. Some of the gifts consisting of Rs. 20,000, Rs. 20,000, Rs. 25,000, Rs. 25,000, Rs. 30,000, Rs. 30,000, Rs. 30,000 and Rs. 20,000 were received by the assessee through demand drafts from her close relatives. The relation has also been mentioned at p. 149 of the paper book. The AO mentioned in the assessment order that the assessee has not given addresses of the donors, but from the paper book, we find that the addresses of the donors are duly given in the details. The details excluding relatives are of 79 persons. It is customary to receive gifts by a girl at the time of her marriage; the quantum of gifts will depend on the status of the family. Rs. 2,00,000 are the gifts received through demand drafts and the balance gifts are amounting to Rs. 3,26,112. The AO in our opinion, if was not satisfied about the genuineness of the gifts should have issued summons to these parties so that the genuineness of the gifts could have been verified. The AO even has not gone to the aspect of the expenses incurred at the time of marriage of the assessee. The inaction on the part of the AO cannot be culminated addition of income in the hands of the assessee. We do not find that any query has been raised by the AO on the receipts and payments of the assessee, which in our opinion is a vital piece of evidence explaining the source of the investment made by the assessee. The learned Departmental Representative could not produce any evidence before us, which may lead to non-genuineness of the gifts received by the assessee. Under these circumstances, we accept the gifts received for Rs. 5,26,112 out of Rs. 8,50,000. The receipt of Rs. 1,50,000 from the mother is also to be accepted as the source for the purchase of house at Kakinada as Smt. B. Surya Prabha has showed the same amount as being advanced to the assessee. Therefore, the addition of Rs. 1,50,000 out of Rs. 8,50,000 also stands deleted. Although no evidence for Rs. 1,00,000 received by the assessee from her brother is submitted to discharge the onus by the assessee but in view of the fact that this addition has been made not on the basis of the material found during the course of the search but was made on the basis of the material filed in the course of the block assessment and in view of our finding given hereinabove since this cannot be considered either as evidence found as a result of the search or as material or information relatable to any evidence found as-.a result of the search and, therefore, the addition in respect of this cannot be sustained in the block assessment as it did not satisfy the condition prescribed in Section 158BB(1). Thus the addition for the same also stands deleted.
76. Coming to the addition of Rs. 2,50,000, we find that this amount consists of two loans i.e., Rs. 1,50,000 from her mother and other Rs. 1,00,000 from her brother. The loans were used as source investment in the purchase of house property amounting to Rs. 8,50,000. Since we have already deleted the addition of Rs. 1,50,000 being loan given by the mother of the assessee and Rs. 1,00,000 in respect of the loan from her brother, in our opinion, the AO has made this addition twice, once while considering addition of Rs. 8,50,000 as undisclosed investment and the other when the assessee received loan as source of Rs. 8,50,000, thus the addition has to be considered only once, we, therefore, delete the addition of Rs. 2,50,000.
77. Thus, the appeal of the assessee is allowed.
IT(SS)ANo. 177/Hyd/1997
78. In this case also in respect of the additional ground, the learned Authorised Representative relied on the submissions already made in ITA No. 175/H/1997 and ITA No. 180/H/1997, as the facts in this case, relating to the issue of the notice under Section 158BC without issue of search warrant and without invoking provisions of Section 158BD, are similar as were in those cases. The learned Authorised Representative in addition to the reliance of the arguments advanced in those cases, further submitted that the notice has been issued in this case to the Authorised Representative of Smt. B. Surya Prabha in the status of HUF as is apparent from first page of the paper book consisting of the copy of the notice issued by the AO by which the block assessment proceedings against the assessee were initiated. The proceedings cannot be initiated by serving notice on the Authorised Representative. The provisions of service of notice are laid down under Section 282 and the same were not complied with. The notice has to be served on the member of the HUF or the Karta of the HUF. As is clear from 1st page of the assessment order, the assessment order has been passed in the name of Sri (late) B.V.B.S. Prasad through legal representative of Smt. B. Surya Prabha in the status of HUF. The assessment has to be through Karta or if the Karta is not there, through member and not through the legal representative. The provisions of Section 159 are not applicable to the HUF as HUF does not die, it is only the member of the HUF who dies and thus on this ground also the assessment framed is illegal. The learned Authorised Representative also relied on the case laws as were quoted in other appeals and specifically relied on the case of Allahabad Tribunal in the case of Monga Metal (P) Ltd. v. Asstt. CIT (supra) for the proposition that wrongly addressed notice is illegal and in the absence of service of legally valid notice, the consequential block assessment made is void ab initio.
79. The learned Departmental Representative, on the other hand, was fair enough to state from the file that the notice under Section 158BC was issued on llth Nov., 1996 although the search was in the case of B. Surya Prabha, one of the members of the assessee-HUF and not in the case of the assessee. There is nothing on record about the action taken under Section 158BD in the case of the assessee except the letter dt. 26th May, 1998, which was issued after the completion of the assessment. He even then relied on the case laws as were relied in ITA No. 175/H/1997 and ITA No. 176/H/1997.
80. We have considered the rival submissions on this ground, perused the assessment order, assessment order-sheet and the relevant case law, relied on by both the parties. The assessment was completed under Section 158BC without invoking Section 158BD. There was no search in the case of B.V.B.S. Prasad, HUF. In view of our finding in ITA No. 175/H/1997 under paras 23 to 36 hereinabove, we allow the additional ground of appeal and quash the block assessment proceedings.
81. We may also like to mention in this case that although the block assessment proceedings are against the HUF i.e., B.V.B.S. Prasad, HUF, which consists of two members, Smt. B. Surya Prabha and Shri B. Ravi Prasad. The assessment has been framed by the AO in the name of Sri (late) B.V.B.S. Prasad through legal representative, Smt. B. Surya Prabha, mentioning the status as HUF by issuing the notice under s."158BC addressed to "Authorised Representative" of late Shri B.V.B.S. Prasad. The notice issued itself is illegal as in the case of the HUF, the notice has to be issued as per Section 282(2) on the Karta or the adult member of the family. The proceedings cannot be initiated by issuing the notice on the Authorized Representative. Thus, the block assessment proceedings in our view are illegal and void ab initio in the absence of valid notice and valid service thereof. After the death of Sh. B.V.B.S. Prasad, his eldest son, Sh. B. Ravi Prasad became the Karta of the HUF and therefore, framing an assessment in the name of Sri (late) B.V.B.S. Prasad through legal representative Smt. B. Surya Prabha, in the status of HUF is void ab initio. The assessment can be framed through the legal representative as per the provision of Section 159 which is applicable in the case of individual assessee. The HUF did not die only a member thereof can die. The provisions of Section 159 are not applicable in the case of the HUF and, therefore, on this ground also the block assessment is liable to be quashed and accordingly, we cancel the block assessment.
82. The learned Authorised Representative for the addition of investment in the share capital of GATIL under the promoter quota firstly, submitted that there was no search in the case of the assessee. Secondly, the shares were not found from the possession of the assessee-HUF or its members. The share certificates were found in the name of different persons from the possession of Smt. K. Hymavtha. Thirdly, Smt. K. Hymavtha never said that the share certificates belong to the HUF. Referring to her statement at p. 63, it was submitted that Smt. K. Hymavtha stated that these were kept by Mr. B. Ravi Prasad in her flat on the plea that he was going to Kakinada. Statement of Mr. B. Ravi Prasad was also recorded under Section 131, which is appearing at p. 65 of the paper book. Our attention was invited to p. 67 which contains the reply of Sh. B. Ravi Prasad and in which he stated that after the demise of his father, the investors (got) worried and they asked Mr. Ramana Ghowdary to dispose of their shares and these were brought to Hyderabad after the death of his father and since he was shuttling between Kakinada and Hyderabad, these were kept at Mr. Ramakrishna's place through Mr. Ramana Chowdary. The statement of Sh. Ramana Chowdary was also recorded which is available at pp. 72 to 93 of the paper book. Our attention was invited towards question Nos. 5, 6, 7 and 8 and respective answers thereof and accordingly, it was vehemently submitted that neither Mr. B. Ravi Prasad nor Mr. Ramana Chowdary has stated that share certificates belong to the assessee. Fourthly, the additions are made merely on presumptions and assumptions and not on the basis of materials seized during the course of search at the place of the assessee. Fifthly, all the said promoters categorically confirmed by filing letter, that it was they who had invested their own funds in the promoter quota of M/s Golden Agro-Tech Industries Ltd. All the promoters had required and sufficient resources such as agricultural income, dairy income, etc. to invest in the promoters' quota of the said company. It was an admitted fact that the assessee Shri B.V.B.S. Prasad had expired on 14th Oct., 1995, i.e., much earlier to search operation. The relevant share certificates had been found in the suitcase in a flat belonging to Shri Ramakrishna at Hyderabad on 22nd March, 1996. Mr. Ramakrishna was not a family member of the assessee. The assessee used to live in Kakinada and not at Hyderabad where the said share certificates had been found in a flat belonging to a very distant relative of the assessee. In a deposition taken by the search officials at the time of search operations from Smt. Hymavathi, wife of Sri Ramakrishna at Hyderabad, there was no allegation that the said suitcases had been given to her by the assessee. She also stated that Mr. B. Ravi Prasad had given the suitcases for safe custody. Neither Shri Ramakrishna nor his wife Smt. Hymavathi had deposed that it was the assessee who had given the said suitcase for safe custody. The allegation of the learned Asstt. CIT, that most of the promoter-shareholders of the said company had explained their sources for their investment in the said company was agricultural and such assertion was not verifiable, was not correct for the reasons that all the promoter-shareholders did not have only fertile agricultural lands in their own names but other family members also had fertile agricultural lands. Pooling the agricultural income of all the family members, the promoters of the said company had invested in their names or in the name of family members depending upon the circumstances. The promoter had produced details of the agricultural land holdings of the promoter-shareholders of the said company in their letter of confirmation filed during the assessment proceedings. They were all paying land revenue in respect of their agricultural, lands. Therefore, the allegation of the learned Asstt. CIT that the explanations for the investment made in M/s Golden Agro-Tech Industries Ltd. by the promoter shareholders from out of agricultural income was not verifiable was not at all correct. The following promoter-shareholders of the said company had attended in person before the ADI in response to summons issued to them and they all had confirmed before the learned ADI that it was they who had actually invested their own monies in the promoter quota of the said company from out of the agricultural income, etc.
1. Sri V.V.V. Chowdary
2. Sri Y. Venkata Rao
3. Sri Y. Narayana Murthy
4. Sri Y. Padda Raju
83. Also, it was contended that the following promoters of the said company had attended before the learned ADI at Hyderabad travelling all the way from their remote villages of East Godavari to Hyderabad, but depositions had not been taken from them, for reasons best known to the said ADI.
1. Sri Y. Subrahmanyam
2. Sri Y. Ramakrishna
84. When the same ADI visited the premises of the following promoter shareholders in the villages of East Godavari District, the following persons had deposed before him that it was their own money that they had invested in the share capital of the M/s Golden Agro-Tech Industries Ltd.:
1. Sri Kakra Krishnamurthy, Nayakampalli
2. Sri Abburi Dorabhai, Yerrampalem
3. Sri Boddu Ramarao, J. Thimmapuram
4. Kum. Boddu Venkata Lakshmi, J. Thimmapuram
5. Smt. Immani Kusuma, J. Thimmapuram
85. The following promoter-shareholders of the said company had given written statements before the learned IT Inspector, office of the Asstt. CIT, when he examined the following persons at their places of residences in East Godavari District in February, 1997, that they had invested their, own funds in the promoters quota of the said company:
1. P. Veerraju
2. Sri P.V.V. Satyanarayana
3. Sri E. Veerraju Chowdary
4. Sri P.S. Prabhakara Rao
5. Sri M. Bramhaji
6. Sri P.S. Prabhakara Rao
7. Smt. A. Surya Prabhavati
8. Smt. M. Papa
9. Smt. M. Nagamani
10. Sri Y. Macharrarao
11. Sri Y. Ramarao
12. Sri Y. China Krishnammurthy
13. Sri B. Veera Venkata Rao
14. Sri I. Subbarao
15. Smt. Y.V.V. Lakshmi
16. Sri M. Butchiraju
17. Smt. R. Satyavathi
18. Smt. P. Papayamma
19. Smt. V. Veerayamma
20. Kum. V. Usha Anantha Padamavathi
21. Sri B. Venkateshwara Rao
22. Sri B. Veera Raghavulu
23. Sri P. Venkata Rao
86. The learned Authorised Representative also stated that the rest of the promoters could not personally attend to Hyderabad due to travelling from their own villages in East Godavari District in response to the summons issued by the learned Asstt. CIT/ADI as in most of the cases the summons had been served one or two days prior to the date of hearing and in some cases summons had been received after the date of hearing. Also that most of the promoters were agriculturists and due to rains/cyclones that had affected their agriculture for more than two times in April, 1996 to February, 1997, they had remained busy in salvaging the damaged crop or in harvesting the crops. Further,, it was contended that in almost all cases, all of them had admitted by filing letters and in fact some of them filed affidavits, wherein they had confirmed that out of their agricultural and dairy income, they had invested in the promoters quota of M/s Golden Agro Tech Industries Ltd. Even some of the very few shareholders in promoters' quota who due to fear of harassment at the first instance had denied of making investment by sending telegrams in the said company and subsequently all of them had filed affidavits during the course of assessment proceedings stating that out of fear and harassment and to avoid litigation from the Department, though earlier they had sent the above-mentioned telegrams to ADI, it was they who had actually invested their own funds in the said company.
87. For the observations of the learned Asstt. CIT that most of the investments were made in cash, the learned Authorised Representative of the assessee stated that though the promoters had given cash to the officials of the said company for the purchase of shares from promoters' quota but they had actually deposited the said amounts in the bank account of the said company by signing themselves on the concerned forms of the bank. For the allegation raised by the learned Asstt. CIT regarding source of income for making investments in the shares by the promoters, the learned Authorised Representative argued that all the promoters had very fertile agricultural lands and which were capable of substantial income. Most of them were double crop-wet land cultivated with the help of perennial source of supply of water by Godavari canals. Apart from the two crops per year from the said lands, pulses were also grown in between these two crops in these lands. The other family members of the promoters also had extensive agricultural land-holding in coastal Districts of Andhra Pradesh especially in East Godavari District, which were fed continuously by Godavari canal waters. All the promoters had other sources of income also such as diary incomes. Therefore, the promoters could satisfactorily explain the sources of their investments in the said company.
88. The learned Authorised Representative alleged (sic-oppugned) the observation of the learned Asstt. CIT that the promoters had not ever claimed their rights to the share certificates and the promoters were not aware of the fact that the share certificates had been pledged. The learned Authorised Representative submitted that it was not correct, as all the promoters had claimed their right to their share certificates in the said company. The promoters had given the share certificates to the officials of the company for the sake of pledging their certificates for obtaining loans for the business of the company and also to sell their shares if there has been an increase in the market rate of shares of the company as per the statements given by them to the IT Inspector of the office of the Asstt. CIT when he had examined them in the premises of the shareholders.
89. Regarding the. allegation of the learned Asstt. CIT that there were variations in the signatures of the promoter-shareholders, it was contended that none of the promoters had denied that the signatures in various forms were not theirs. Since they were not accustomed to sign regularly on forms, documents, naturally their signatures had changed from time-to-time. Further, two persons named, Sri V.V.G. Chowdary and Sri Y. Venkata Rao also attended the office of the ADI in response to the summons issued to them and affirmed that it was they who had signed the relevant forms in different styles. The Asstt. CIT also had no evidence that the signature of the promoters were forged. It was a mere suspicion and conjecture of the learned Asstt. CIT.
90. In regard to the observation recorded by the Asstt. CIT that the photocopies of the signed transfer deeds relating to some of the shareholders had been maintained by Sri Late B.V.B.S. Prasad with a view to forge the signatures at the time of offloading these Benami holdings, the learned Authorised Representative argued that Sri B.V.B.S. Prasad had never taken possession of the said photocopies of the share application forms. The photocopies of share applications of the promoters had been kept for the purpose of verifying signature and other particulars in case the share certificates were lost or misplaced. Thus it was vehemently submitted that the additions so made in the asst. yrs. 1991-92 to 1995-96 must be deleted. Further, it was stated that no question or query was asked for from the assessee by issuing any letter. None of the letters was issued in favour of the HUF but in the name of late Shri B.V.B.S. Prasad, Smt. Surya Prabha or in the name of the companies addressing Smt. Surya Prabha as director or managing director. Learned Departmental Representative merely relies on the order of the AO.
91. We have carefully considered the rival submissions, perused material on record and we find that these share certificates were found not from the possession of the assessee but from the possession of Smt. K. Hymavathi when search took place at her place at Hyderabad but she never stated in her statement recorded under Section 132(4) that these share certificates belong to the HUF. The relevant portion of the statement recorded from Smt. Hymavathi is given hereinunder :
Statement of K. Hymavathi recorded on 22nd March, 1996 under Section 132(4) of the IT Act, 1961 Question 2. During the search proceedings we found 2 suitcases which are full of share certificates. Please tell how is it that they are in your residence ?
Ans. The shares certificates do not belong to me. Mr. B. Ravi son of Mr. B. Prasad has kept the share certificates in our flat. At the time of keeping the share certificates Mr. Ravi told us that since they are going to Kakinada they want to keep the share certificates in our flat. At the time of keeping two suitcases they only told us that the two cases contain some papers relating to the factory Golden Agro-Tech. We do not know about the share certificates. Since he is our relative, we allowed him in keeping the share certificates in our flat. Mr. B.V.B.S. Prasad has expired since two months back because of some medical problem. After that nobody came to take the share certificates from us. The share certificates are lying here since last two months.
92. On this, the statement of Shri B. Ravi Prasad was recorded under Section 131. The relevant portion of his statement is reproduced as under:
Statement of B.B. Ravi Prasad recorded on 25th March, 1996 under Section 131 of the IT Act, 1961 Q. No. 5 Under what circumstances shares of Golden Agro-Tech Ind. Ltd. was kept by you at the residence of Mr. K. Ramakrishna and whether they were aware of the contents of the suitcase ?
Ans. My father involved Mr. R.Y. Ramana Chowdary for mobilizing shares and people invested on the faith of my father. After his sudden demise investors were worried about the future of the company so they asked Mr. Y. Ramana Chowdary to dispose their shares in the open market. So he brought these shares to Hyderabad by car in about a month after the death of my father. As we felt that my place was not secure enough because I was shuttling between Kakinada and Hyderabad most of the time, we thought of keeping the shares of friends and relative along with my father's and Madhavi Finvest shares, purchased in the open market in Mr. K. Ramakrishna's place who is my mother's brother's son during November or December, 1995 by Mr. Y. Ramana Chowdary. I only planned but not participated in the shifting of the share certificates. Mr. K. Ramakrishna's family was not aware of the contents of these suitcases, which were locked. We could not sell these shares as the share price is quoting below par.
Q. No. 6. Who are the people whose shares which were kept in the residence of Mr. K. Ramakrishna ?
Ans. The packing operation was done by Mr. Y. Ramana Chowdary and apart from my father's and Madhvi Finvest shares I do not know whose shares are in the suitcases. Only Mr. Y. Ramana Chowdary can give details of the shares in the suit since he totally dealt with this matter.
Que. No. 7 I am showing you the statement of Smt. K. Hymavathi wife of K. Ramakrishna in which she has stated that it was you who,kept these suitcases in their residence. Please clarify.
Ans. I did not keep them in their residence.
Que. No. 8 Do the company possesses evidence of dispatch of the share certificates of promoters quota to the respective shareholders ?
Ans. As I am not involved in the affairs of the company at that time, I do not know.
Que. No. 9 What is the total face value of the shares, which are in the suitcase ?
Ans. Only Mr. Y. Ramana Chowdary can clarify this point.
93. Statement of Mr. Y. Ramana Chowdary was also recorded and the relevant portion of the same is reproduced hereunder:
Statement of Mr. Y. Ramana Chowdary recorded on 28th March, 1996 under Section 131 of the IT Act, 1961 Q. No. 5 What are the contents of two suitcases found at the residence of Mr. K. Ramakrishna, Flat No. 512, Maheshwari Complex, Masab Tank, Hyderabad and under what circumstances these were found, at his residence ?
Ans. The suitcases contained the following:
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1. Boddu Venkatalakshmi 13,600 Shares
2. Balusu Veeramma 5,000 Shares
3. Y. Ramana Chowdary 12,000 Shares
4. VWN Mohan Rao 6,500 Shares
5. Y. Surya Kumari 10,000 Shares
6. V. Trimuruthulu 4,500 Shares
7. P. Abbulu 2,650 Shares
8. S. Subba Rao 4,050 Shares
9. K. Rarnakrishna 50 Shares
10. K. Krishnamurthy 50 Shares
11. K. Venket Rao 50 Shares
12. MYN Murthy 50 Shares
13. S. Ajay Kumar 5,000 Shares
14. D. Sudarsanamma 4,000 Shares
15. A. Laxmi Mangatayaru 2,500 Shares
16. M. Veera Veni 1,000 Shares
17. M.S. Markandeyulu 2,500 Shares
18. S. Sunita 5,000 Shares
19. Y. Subba Rao 2,500 Shares
20. Y. Nageshwara Rao 2,500 Shares
21. A. Surya Kumari 2,700 Shares
22. G. Padmavathi 3,000 Shares
23. P. Rarnakrishna 10,000 Shares
24. M. Satyaveni 10,000 Shares
25. C. Adinarayana 2,600 Shares
26. M. Dhanraju 10,000 Shares
27. A. Srinivasa Rao 2,500 Shares
28. P. Veerabadhra Rao 10,000 Shares
29. P. Veeraraju 5,000 Shares
30. M. Sathiraju 15,000 Shares
31. PW Satyanarayana 5,000 Shares
32. G. Bullaiah 5,000 Shares
33. V. Venkata Raju 10,000 Shares
34. B. Veeravenkata Satyavathi 10,000 Shares
35. B. Vijaya Kumari 5,000 Shares
36. Y. Kanaka Srinivasrao 10,000 Shares
37. P. Madhavi Pramila 10,000 Shares
38. B. Rama Tulasi 5,000 Shares
39. Y. Varahalamma 10,000 Shares
40. Y. Usha 15,000 Shares
41. E. Veeraraju 10,000 Shares
42. V. Pattabi Rama Rao 1,000 Shares
43. E. Ananthalaxmi 10,000 Shares
44. E. Janakiratnam 5,000 Shares
45. V. Subrahmanyam 10,000 Shares
46. Y. Satyavathi 5,100 Shares
47. M. Rambabu 10,000 Shares
48. Y. Baby 10,000 Shares
49. M. Janakamma 10,000 Shares
50. P. Papayamma 10,000 Shares
51. I. Kusuma 5,000 Shares
52. P. Veera Raju 5,000 Shares
53. G. Veerajaama 5,000 Shares
54. P. Surya prakasa Rao 5,000 Shares
55. M. Brahmaji 10,000 Shares
56. B V. VSatyanarayana 10,000 Shares
57. S. Subba Rao 10,000 Shares
58. Y. Ramakrishna 10,000 Shares
59. K. Venkat Rao 5,000 Shares
60. V. Satyanarayana 10,000 Shares
61. Y. Subrahmanyam 10,000 Shares
62. Y. Suryavathi 10,000 Shares
63. C. Sathyawati 10,000 Shares
64. C. Satyanarayana 10,000 Shares
65. Y. Veeraraj Chowdary 10,000 Shares
66. J. Nageshwara Rao 10,000 Shares
67. N. Venkatratnam 10,000 Shares
68. M. Narayan Rao 10,000 Shares
69. P. Suryanarayana 10,000 Shares
70. M. Venkatlakashmi 5,000 Shares
71. M. Lakshmi 10,000 Shares
72. K. Ammaji 10,000 Shares
73. Y. Narayana Murthy 10,000 Shares
74. Y. Papa Rao 5,000 Shares
75. K. Ghakra Rao 5,000 Shares
76. E. Rama Rao 5,000 Shares
77. B. Ramakrishna 5,000 Shares
78. P. Ramakrishna 40,000 Shares
79. P. Mahalaxmi 10,000 Shares
80. B. Madhavi Devi 7,000 Shares
81. B.V.B.S. Prasad 8,010 Shares
82. Madhvi Finvest 1,30,000 Shares
83. B.B. Ravi Prasad 6,200 Shares
84. B. Surya Prabha 19,090 Shares
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7,60,700 The other items which were kept in the suitcases are as under:
(a) Four or five books relating to sale of promoters' quota shares allotted initially and then transferred to third parties and the payment received details.
(b) One file relating to sale of shares of promoters.
(c) One mini cassette.
I am sure that no other material was kept in the suitcases. I have personally collected the shares after one week from the date of demise of B.V.B.S. Prasad, managing director. These shares have been collected by me at my native place, factory VK Rayapuram, Samalkot, Kakinada, at the residence of my aunt P. Venkayamm, 63-6-27, Dwarkanagar, Kakinada. I brought these shares together with other items specified above by car Tata Estate, AP 9 8888 belonging to the company on 15th Nov., 1995, starting at early hours from Kakinada and reached Hyderabad same day afternoon. It was kept in the flat of Mr. B.B. Ravi Prasad on 17th Nov., 1995 at around 4.00 p.m. I took these suitcases in the same car and handed over to Mr. K. Ramakrishna personally. He asked me the contents of these suitcases and I replied that it contains share certificates were collected from the respective shareholders for the disposal at their request since after the death of the managing director they wanted to sell. These shares were shifted from flat of Mr. B. Ravi Prasad to the flat of Mr. K. Ramakrishna for security reasons since Mr. B. Ravi Prasad was shuttling between Kakinada and Hyderabad.
Q. No. 6 Do you know car driving and how did you take the share certificates in the suitcases to the residence of Mr. K. Ramakrishna ?
Ans. I do not know car driving. The company car driver Mr. V. Sriniwas drove the car and I engaged two auto drivers to assist in lifting the suitcases and to carry it to the residence of Mr. K. Ramakrishna. The driver did not accompany or assist us in shifting these suitcases since at a time only one suitcase was shifted and the driver kept a vigil over the other suitcase in the car.
Q. No. 7 Who was available at the residence of Mr. K. Ramakrishna and whether he was aware of your intention of shifting the suitcases to his residence ?
Ans. Mr. K. Ramakrishna was not available at the residence when reached his flat with one suitcase along with the auto drivers. Further, he was not aware of the fact that I am bringing the share certificates. I waited for about one hour before he came alone. The second suitcase was brought by the driver and we waited outside the flat for one hour.
Q. No. 8 Are you sure that these suitcases did not contain any other material other than those specified by you in response to Q. No. 5 ?
Ans. Yes. I am sure that these suitcases did not contain anything else. I had locked these suitcases and retained the keys with me when I handed over these suitcases to Mr. K. Ramakrishna.
94. We find again the statement of Ramana Chowdary was recorded, the relevant portion of the same is reproduced herewith :
Statement of Mr. Y. Ramanna Chowdary recorded on 29th March, 1996 under Section 131 of the IT Act, 1961 Q. No. 8 Under what circumstances the share certificates, books and documents and the mini cassette came to your possession ?
Ans. One week after the demise of Mr. B.V.B.S. Prasad, managing director, these shareholders approached me at different times upto 12th Nov., 1995 and asked me to sell these shares and handed over the share certificates. Some shareholders approached me at the site, at my residence even during my absence. At the residence of Mr. P. Brahmaji at Kakinada, I collected 5000 shares of Gunnam Bukllaiah through his son who is aged about 30 years and 5000 shares of P. Surya Prakash who handed over personally, 40000 shares of P. Ramakrishna, 10000 shares of P. Mahalakshmi, which were handed over to me by Mr. P. Brahmaji. All these people specifically told me to get the shares sold. Mr. P. Brahmaji did not give transfer deeds relating to his shares and shares of P. Mahalakshmi and Mr. P. Ramakrishna. Mr. P. Ramakrishna is absconding since 1 year 10 months and P. Mahalakshmi passed away around 1 year 9 months back. I do not remember whether the other two people gave signed transfer deeds along with the share certificates.
95. From the reading of these statements recorded by the Department, it is clear that none of the parties who were examined at oath mentioned that the shares belong to the assessee-HUF. We have gone through the block assessment order and we find that the AO presumed on the basis of the statement recorded and the statement of Smt. K. Hymavathi in whose case search has taken place that the assessee has invested in the shares. No doubt the statement recorded under Section 132(4) of Smt. K. Hymavathi may be used thereafter in evidence in any proceeding but Smt. K. Hymavathi did not mention the shares belong to the assessee-HUF. Even ''this evidence is also rebuttable and for that great responsibility lies on the AO to give proper opportunity to the assessee but from the file, it appears no opportunity was given to the assessee-HUF. The share certificates are not in the name of the assessee. Some of the shareholders were examined but they also did not state that the assessee has invested the money. For the applicability of Section 69, the first onus lies on the Revenue to prove that the assessee has made the investments during the financial year immediately preceding the assessment year and the same has not been disclosed by the assessee in his books of account. Even from the records produced before us, we found no explanation was asked for by the assessee from the assessee-HUF. The letters were issued by raising the queries either to Smt. Surya Prabha, Authorised Representative of Shri (late) B.V.B.S. Prasad, Golden Agro-Tech Industries Ltd. and managing director thereof. The learned Departmental Representative was also not able to produce any letter calling (for) explanation from the assessee during the course of lengthy hearing. Sworn statements of 12 persons were filed before the AO but he did not bother to counter those persons by cross-examining, in their sworn statements they have stated that they have invested the money. In our view, if the AO wanted to reject the sworn statement/affidavit, he must have cross-examine these parties. Our said view is supported by the decision of Hon'ble apex Court in the case of Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC). We are also of the view that no addition can be made in the hands of the assessee without giving him the opportunity. From para 3.8 of the assessment order also it is explicitly clear that the AO computed the income in the hands of the legal representative of the assessee ignoring that the assessee-HUF cannot have legal representative and on this ground itself the additions made are liable to be deleted. These certificates were not found from the possession of the assessee-HUF, therefore, it cannot be deemed that they belong to the HUF, The provisions of Section 158BD were also not invoked by the AO. Under these facts and circumstances, we are of the firm view that no addition can be made in the case of the assessee in his block assessment proceedings. We, therefore, delete the addition so made in respect of undisclosed investment in shares of Golden Agro Tech Ltd. in the asst. yr. 1991-92 to asst. yr. 1995-96.
96. For the additions made in asst. yr. 1986-87 to asst. yr. 1990-91, it was stated by learned Authorised Representative that the additions relate to interest income from money-lending activity and income from agriculture. The income in these years was below the maximum income chargeable to tax and the agricultural income was not taxable, therefore, no return for these years was filed. Provision of Section 158BB(1)(ca) was clearly applicable and this income cannot be regarded to be undisclosed income. The additions were made treating that income to be bogus without bringing any evidence on record. These incomes were duly disclosed in the note book consisting of the account books found during the course of the search in the case of Smt. B. Surya Prabha. For the asst. yrs. 1991-92 to 1994-95, it was contended, the interest income and agricultural income were duly disclosed in the IT returns filed as per the details given at p. 227 of paper book in the case of Smt. B. Surya Prabha. Section 158B(b) is a charging provision and the AO does not have any jurisdiction to review such income. There was no material found in search which empowers the AO to treat such income to be undisclosed income. Chapter XIV-B cannot be applied in substitution of Chapter XIV. For the additions made in asst. yrs. 1995-96 and 1996-97, it was stated that the additions for interest on money-lending business for both the years and investments in Madhavi Finvest (P) Ltd. in asst. yr. 1995-96 was not made on the basis of the material found during search but on the basis of the returns/information filed by the assessee. The interest income being derived by the assessee regularly is on record in the earlier years. The return/information filed by the assessee in the course of block assessment proceedings do not satisfy the condition prescribed in Section 158BB(1). These can be looked into during regular assessment proceedings but not in the block assessment proceedings. The addition of Rs. 6,00,000 for Madhavi Finvest was made on the basis of the information gathered after the search from the said company and no opportunity was given to the assessee to explain these additions. The reliance was vehemently placed in the case of V.L. Dutt v. CIT . The reliance was also placed on the cases as relied in the case of Smt. Surya Prabha. The reliance was also placed strongly on the judgment of Dr. (Mrs.) Surjit Tosaria v. Jt. CIT (supra). The copy of the bank account and the IT returns were filed in the course of block assessment and, therefore, cannot be considered either as evidence found as a result of the search and, therefore, addition in respect thereof should not be sustained. The learned Departmental Representative relied on the order of the AO.
97. We have considered rival submissions in respect of the issue relating to the interest income from money-lending activity and agriculture income being added in each of the assessment year as under:
Asst. yr. Interest income Agriculture income
(Amount Rs.) (Amount Rs.)
1986-87 11,400 1,300
1987-88 11,500 1,500
1988-89 11,000 1,000
1989-90 11,500 1,500
1990-91 11,600 1,900
1991-92 11,750 2,000
1992-93 13,200 6,03,250
1993-94 19,500 0
1994-95 20,430 0
1995-96 18,500 0
1996-97 11,880 0
98. We found substance in the submission of learned Authorised Representative in view of the definition of the 'undisclosed income' given under Section 158B(b) r/w Section 158BB(1). The aforesaid income cannot be regarded to be the undisclosed income of the assessee. The assessee has maintained the regular books by way of cash book and ledger from 1st April, 1984 to 31st March, 1994 in the shape of note book, which were seized and on the basis of which the income-tax and wealth-tax returns for the asst. yrs. 1991-92 to 1994-95 were filed prior to the search. The income disclosed in these returns cannot be treated to be the undisclosed income of the assessee and are, therefore, outside the scope of Chapter XIV-B in view of Section 158BB(1)(b). The income for the asst. yr. 1986-87 to asst. yr. 1990-91 were below the income maximum chargeable to tax, therefore, cannot be regarded to be the undisclosed income in view of Clause (ca) of Sub-section (1) of Section 158BB. Therefore, the addition made for the interest income and agricultural income for the asst. yrs. 1986-87 to 1994-95 stand deleted. For the asst. yrs. 1995-96 and 1996-97, since the income was earned from the same source, i.e., the interest from money-lending business, the return for the asst. yr. 1996-97 was not due till 22nd March, 1996 when the search took place, the source of such income was already disclosed in the earlier assessment years. This income on the basis of the return filed by the assessee after the search cannot be regarded to be the undisclosed income of the assessee. This was the income, which was disclosed in the regular return and was subject-matter of the regular assessment [refer to Section 158BB(1)(d)]. No material was pointed out by the learned Departmental Representative, which may point out that this income was based on the bogus transactions. This income may be a part of regular assessment but cannot form part of the undisclosed income. The income was duly disclosed in the return filed although subsequent to the search as the due date of filing the return had not expired. There is no evidence which may suggest that the assessee would not have disclosed this income for income-tax purposes. Rather by filing the return, the intention of assessee of disclosing this income is proved. The provision of Section 158B(b) which defines the 'undisclosed income' in our opinion is also a charging provision as any income which can be assessed under Chapter XIV-B have to be first 'undisclosed income'. Section 158BB deals with the computation of undisclosed income of the block period but it cannot override the Section 158B(b). If there is any conflict between the charging and computation provision, the charging provision of Section 158B(b) will prevail. The assessee has shown the income from the source from which he was regularly getting the income. This income on the basis of the return even if filed late cannot be regarded to be the undisclosed income and such income in our view has to be considered in the regular assessment. Bombay High Court in the case of CITv. Vikram A. Doshi (supra) has taken the same view.
99. Thus, the additions so made for the interest income and agriculture income for each of the assessment years are deleted.
100. Coming to the addition of Rs. 6,00,000 being investment in the shares of Madhavi Finvest (P) Ltd., during asst. yr. 1995-96 we find this addition has not been made on the basis of the material found as a result of the search or as a material or information relatable to any evidence found as a result of the search but have been made on the basis of the copy of the bank statement filed in the case of Madhavi Fihvest (P) Ltd. and on the basis of the enquiry conducted from the said company and without giving or issuing letter to the assessee asking for the reasons why this addition should not be made. A perusal of the assessment order shows that there is no evidence collected by the AO during the search in the case of Smt. B. Surya Prabha that the assessee has invested the said amount. This addition in our opinion does not satisfy the conditions laid down in Section 158BB(1) that the undisclosed income should be assessed on the basis of the evidence found as a result of the search and such other material or information which are available with the AO and are relatable to the evidence so found and, therefore, on this basis this addition also cannot be sustained in block assessment and is liable to be deleted. We, accordingly delete the addition so made from the asst. yr. 1995-96.
101. In the result, the appeal of assessee is allowed.