Income Tax Appellate Tribunal - Mumbai
Nagin Das M. Goradia vs Deputy Commissioner Of Income Tax ... on 27 January, 2003
Equivalent citations: (2004)83TTJ(MUM)151
ORDER
A.D. Jain, J.M.
1. The assessee in IT(S&S)A 100/Mum/1996, Neeta V. Goradia is the wife of one Vijay N. Goradia. Vijay N. Goradia is a Civil Engineer who renders architectural services to various clients, including M/s Prakash Corporation, Dahisar, Mumbai. There was a search and seizure operation in the case of Vijay Goradia on 14th Nov., 1995, along with the case of M/s Prakash Corporation. Block assessment was done in the case of Vijay Goradia. The block assessment in the case of the present assessee, for the block period 1st April, 1985 to 14th Nov., 1995, was done separately, vide the impugned assessment order.
2. A notice under Section 158BC of the IT Act was issued to the assessee. Later, a notice under Section 143(2) was issued. In response to the notice under Section 158BC, the assessee filed her returns of income for the block period in Form No. 2B on 15th Nov., 1996, admitting undisclosed income for the block period at nil. She contended having not filed her returns of income for some of the years, as no return was needed to be filed, since the income for these years was below the taxable limit. The assessee filed her regular return of income for asst. yr. 1989-90- She did not file her subsequent returns of income till the date of search, id est, 14th Nov., 1995. After the search, the assessee filed her returns of income for asst. yrs. 1994-95 and 1995-96. She did not file her returns of income for asst. yrs. 1986-87 to 1988-89 and 1990-91 to 1993-94. The learned AO observed that in view of the provisions of Chapter XIV of the Act, if the assessee has not filed the return of income till the date of search, the income should be treated as nil; that this is clear from the provisions of Section 158BB(c); and that in the assessee's case, whether she has failed to file the return of income either due to the fact of the income being below the taxable limit, or due to some omission, the income is to be considered as nil. The AO, therefore, computed the income of the assessee for the block period, as detailed in the assessment order. It is this assessment which has constrained the assessee to file the appeal at hand.
3. The assessee pleads that the learned AO has erred in treating the regular income shown in the belated returns filed after the date of search, as undisclosed income; and that the income returned is regular income not covered under the definition of "undisclosed income" given in Section 158B(b) and hence, the addition is bad in law. It is prayed that the undisclosed income should be reduced to nil.
4. Similar is the position, mutatis mutandis, in the other two appeals too.
5. The learned authorised representative of the assessee submits that during the course of search, no incriminating material was found against the assessee. He pleads that being so, instead of resorting to block assessment, the AO ought to have taken recourse to the regular assessment provisions. On a remark from the Bench that after the search has taken place, the AO is left with no option, but to conduct block assessment, the learned authorised representative responded by saying that where no incriminating material is found during search, the AO does have an option, which is not foreclosed by the mere factum of search having been conducted. Failure to file return does not by itself give rise to a presumption of existence of undisclosed income. In this case, no TDS or advance tax is involved. Every undisclosed income does not form part of block assessment. In order to proceed to make block assessment, there must be an established nexus of such undisclosed income with the search. The following judicial decisions have been relied on behalf of the assessee:
(i) Vidya Madanlal Malani v. Asstt CIT (2000) 69 TTJ (Pune) 456 : (2000) 74 ITD 341 (Pune)
(ii) Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mumbai) 610 ; (1997) 63 ITD 245 (Mumbai)
(iii) CIT v. Dr. M.K.E. Memon (2001) 248 ITR 310 (Bom)
(iv) CIT v. Ravi Kant Jain (2001) 250 ITR 141 (Del)
(v) C.J. Shah & Co. v. Asstt. CIT (2001) 118 Taxman 183 (Mumbai)(Mag)
(vi) Smt. Sitadevi Daga v. Asstt. CIT (1999) 63 TTJ (Ind) 72 : (1998) 67 ITD 151 (Ind)
(vii) N.K. Paper & Board Ltd v. Dy. CIT (1998) 234 ITR 733 (Guj).
6. Per contra, the learned Departmental Representative, refuting the claim of the assessee, refers to p. 2 of the assessment order, to say that there has been a seizure in this case. Once a warrant is issued, Section 143(2) ceases to operate and the AO can proceed to make the assessment as a block assessment. The procedure is mandatory. As on the date of search, if any income is not disclosed till the search proper is carried out, that income is nothing but undisclosed income. Proceeding under Section 158BC is the only course left available to the AO for the entire block period.
7. In his rejoinder, besides referring to his earlier assertions, the learned authorised representative avers that what cannot be done directly, must not be allowed to be done indirectly.
8. The claim of the assessee is that since no incriminating material was found against her during the course of the search, the AO should have stayed his hand short of embarking upon making block assessment. Rather, he ought to have conducted regular assessment. Is this plea tenable and in accordance with law? Let us see!
9. Let us first of all consider the applicable provisions of block assessment.
10. Chapter XIV-B of the IT Act provides for a special procedure for the assessment of search cases. As the name suggests, in search cases, the provisions contained in this chapter control the assessment, to the exclusion of all others laid down in the Act,
11. As per Section 158B(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 income represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of the Act, or any expense, deduction or allowance claimed under this Act, which is found to be false.
12. Section 158BA(1), which is a non obstante clause, lays down that the other provisions of the Act notwithstanding, where, inter alia, a search is initiated under Section 132 in the case of any person, the AO shall proceed to assess the undisclosed income in accordance with the provisions of this chapter. Sub-section (2) provides that undisclosed income of the block period shall be charged to tax at the rate specified in Section 113, as income of the block period irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.
13. The Explanation below Section 158BA(1) declares that the assessment made under this chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; and that the income assessed in this chapter shall not be included in the regular assessment of any previous year included in the block period.
14. "Block period", pertinently, has been defined in Section 158B(a) to mean, for the purposes of this case, the period comprising previous years relevant to assessment years preceding the previous year in which the search was conducted under Section 132 and to include the period upto the date of the commencement of such search in the previous year in which the said search was conducted.
15. As per Section 158BA(3), where the assessee proves to the satisfaction of the AO that any part of the income referred to in Sub-section (1) of the said section relates to an assessment year for which the previous year has not ended or the date of filing return of income under Section 139(1) for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search in the books of account or other documents maintained in the normal course relating to such previous years, such income shall not be included in the block period.
16. The manner of computation of undisclosed income of the block period has been prescribed under Section 158BB of the Act. According to Sub-section (1) of this section, the undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of this Act, on the basis of evidence found as a result of search and such other materials or information as are available with the AO and relatable to such evidence, as reduced by the aggregate of the losses of such previous years, determined :
--where returns of income have been filed under Section 139 or in response to a notice issued under Section 142(1) or Section 148, but assessments have not been made till the date of search, on the basis of the income disclosed in such returns [Section 158BB(1)(b)];
--where the due date for filing a return of income has expired, but no return of income has been filed :
(A) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of search where such entries result in computation of loss for any previous year falling in the block period [Section 158BB(1)(c)(A)]; or (B) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of search where such income does not exceed the maximum amount not chargeable to tax for any previous year failing in the block period [Section 158BB(1)(c)(B)];
--where the due date for filing a return of income has expired, but no return of income has been filed, as nil, in cases not falling under the above two clauses [Section 158BB(1)(ca)]; and
--where the previous year has not ended or the date of filing the return of income under Section 139(1) has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search relating to such previous years [Section 158BB(1)(d)].
17. Section 158BG lays down the procedure for block assessment. It enjoins, inter alia, that where any search has been conducted under Section 132 in the case of any person, then, the AO shall serve a notice to such person requiring him to furnish within such time, not being less than fifteen days, as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under Section 142(2)(i), setting forth his total income including the undisclosed income for the block period. The AO shall then proceed to determine the undisclosed income of the block period in the manner laid down in Section 158BB and the provisions of Sections 142, 143(2) and (3), 144 and 145 shall, so far as may be, apply. On determination of the undisclosed income of the block period in accordance with Chapter XIV-B, the AO shall pass an order of assessment and determine the tax payable by such person on the basis of such assessment.
18. As noted above, the legislature has provided, by way of enactment of Chapter XIV-B of the Act, a special procedure for the assessment of search cases. In search cases, the assessment has to be done only and only in accordance with the provisions contained in this chapter, as is crystal clear from the non obstante clause comprising Section 158BA(1).
19. Block assessment must be based on seized/found assets or evidence. That is why in Form 2B, as applicable before its substitution by the IT (Fifteenth Amendment) Rules, 2001, unlike in other returns, the assessee is called upon to give details in Part I, Col. 12, of the value of cash, jewellery and other valuables found/seized as on the date of search. Therefore, the stress is on and the importance is of assets or income found as a result of search. In the case of block assessment, though the search is the basis for assessment of the undisclosed income, the proceedings do not commence automatically after the search is completed. They would start only on issuance of notice under Section 158BC, for which, the AO must be satisfied that undisclosed income within the meaning of Section 158B(b) was found in assets/documents/books of account found during the search and such undisclosed income is that of the person searched or the person mentioned in Section 158BD. Once there is jurisdiction for the AO on discovery of escaped income consequent upon search, he computes the income for the block period, for which he has to issue notice. Normal escaped income or escaped income as a result of a search conducted before 1st July, 1995, are to be assessed only in the regular assessment, which includes reassessment under Section 147 of the Act. It thus follows that jurisdiction for a block assessment, notwithstanding a search, cannot lie, where there is no discovery in the strictest meaning of the expression by treating the definition in Section 158B(b) as confined to what is found during search. Some assessable income noticed during enquiry consequent on search but unrelated to materials found during search cannot become the subject-matter of block assessment. (And this view is a fortiori, evident from the addition of the words "and, relatable to such evidence" in Section 158BB(1) by virtue of the latest amendment). Such assessment, if assessable, can only be the subject-matter of regular assessment or reassessment, if within permissible jurisdiction and time-limit.
20. If, au contraire, there is material found during search, the jurisdiction is there. The present controversy involves inclusion of income not found during search, but as per the AO, assessable all the same. It might have been difficult for the AO to resist inclusion of such income in the block assessment. However, in the absence of an inference possible because of the expression "and such other materials or information available with the AO and relatable to such evidence", regular assessment/reassessment can be the only recourse available. If undisclosed income simply means an income not returned or assessed prior to search, any addition which could have been justifiably made in regular assessment could be assessed in the block assessment so as to avoid the contingency of two proceedings for the same period. But the subject-matter of regular assessment cannot be block assessment merely because of the existence of jurisdiction for block assessment. What cannot be done directly must not be allowed to be done indirectly.
21. Even the amendment of Section 158B(b), defining "undisclosed income" to exclude from its ambit expenses or deductions or allowance found to be false, is limited in its scope, in that, such exclusion can only be affected only if there are materials found in search to show that such claims are false.
22. The computation of undisclosed income of the block period is to be done on the basis of evidence found as a result of search and other materials or information available with the AO and relatable to such evidence. This is as provided under the amended provisions of Section 158BB(1), such amendment having been made applicable retrospectively w.e.f. 1st July, 1995, by the Finance Act, 2002. Before the said amendment, Section 158BB(1) read:
"158BB(1)--The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the AO."
(emphasis, italicized in print, supplied)
23. By virtue of the said amendment, inter alia, the words "and relatable to such evidence" have been added in the section after and in conjunction with the words "and such other materials or information available with the AO". Before the amendment, the computation could be done on the basis of evidence found as a result of search and other materials available with the AO. It means that besides basing the computation on the evidence found as a result of search, it was open for the AO to call for further evidence, though obviously related to such evidence. The determination of income was to be done after considering the evidence found during the search and called for during the assessment proceedings under the chapter. Even under those unamended provisions, it cannot be gainsaid that the computation was to be done on the basis of the material gathered comprising evidence found during search and called for, on the lead provided by such evidence, in the assessment proceedings under the chapter. In the pre-amendment scenario, the material on which the present computation has been based could well be said to be material called for. Though again, such material would have been insufficient to base the computation on, since the unamended section envisaged the computation to be based on evidence found as a result of search and materials and information available with the AO. Computation under that section pre-supposed the contemporaneous co-existence of both these factors. Computation based solely on materials and information available with the AO, in the absence of evidence found as a result of search could, in no event, be termed as computation under the section.
24. Now however, in order to obviate any ambiguity in this regard, the abovesaid words have been added in the section so as to specify that the material called for in the assessment proceedings must relate to the evidence found as a result of, and originally gathered in, the search. So, in order to enable computation to be made, first of all, there must be some evidence found as a result of search. Then, on such discovery of evidence, further materials or information, if any relatable to such evidence, together with such evidence, should form the basis of the computation to be made. It cannot be any other evidence unconnected with material or information found during search. The phrase "such materials" does not mean any other materials. In the amended section, this phrase has been retained and the phrase "relatable to such evidence" has been added, so that "other materials or information" be related to evidence found as a result of search. The amended law, therefore, recognises that post search enquiries unrelated to evidence obtained as a result of search cannot be the basis for block assessment. The methodology to compute the undisclosed income, as prescribed in Section 158BB, makes the position of law clear that what is not relatable to evidence found as a result of search will not be includible in computation. In P.K. Ganeshwar v. Dy. CIT (2002) 80 ITD 429 (Chennai), the Tribunal has held that the additions came to be made not as a result of search, but because of investigations carried out after the search and that though it was undisclosed income, it could not be included in computation of undisclosed income for block assessment.
25. Reverting to the dispute before us, it is the self-avowed case of the Department that the jewellery, cash and silver articles seized during the search were considered in the hands of the husband of the assessee while completing his block assessment. It also finds mention in the assessment order in IT(S&S)A 99/Mum/1996, that the entire investment and unaccounted for expenditure detected during the course of search and also based on enquiries during the course of assessment proceedings were owned by Vijay Goradia and they were discussed in his block assessment. So, admittedly, no incriminating material against the assessees was found in the course of the search. Now, though it is not the case of the Department that the material and information forming the foundation of the computation in question comprise 'evidence found as a result of search' as discussed hereinabove, such an assumption can be the only inference in support of the computation being in accord with the statutory mandate of Section 158BB(1). Is this assumption correct?
26. Such data became available to the AO but as a result of issuance of notice under Section 158BC. There also, the assessee admitted undisclosed income for the block period at nil. It was only in pursuance of the computation having been made that the AO arrived at the conclusion that there was undisclosed income. Such data cannot, by any chance, be called 'evidence found as a result of search'. Hence, by itself, it could not and should not have been taken as the basis of the computation under scrutiny. The assumption is wrong.
27. Coming to the case law on the point, in CIT v. Dr. M.K.E. Menon (supra) (relied on by the assessee), the Hon'ble Mumbai High Court has held that "undisclosed income cannot be estimated arbitrarily. While estimating the undisclosed income under Chapter XIV-B, the AO cannot apply a rule of thumb. The scope of regular assessment is quite different from the scope of assessment under Chapter XIV-B. Regular assessment is to ensure that the assessee has not understated income or has not computed excessive loss or has not underpaid the tax in any manner, whereas what is assessed under Chapter XIV-B is only the undisclosed income for the block period and not the income or loss of the previous year, which is only done in the normal regular assessment under Section 143(3)." The Hon'ble High Court further observed that "in a large number of cases, the above distinction is not kept in mind by the AO. It is for this reason that the difference between the regular assessment and the block assessment under Chapter XIV-B has been spelt out."
28. The Hon'ble Delhi High Court, in the case of CIT v. Ravi Kant Jain (supra) (cited by the assessee), has held:
"Block assessment under Chapter XIV-B of the IT Act, 1961, is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials found during search. It is in addition to regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials and information as are available with the AO. Evidence found as a result of search is clearly relatable to Sections 132 and 132A."
29. The Mumbai Bench of the Tribunal has held, in the case of Sunder Agencies v. Dy. CIT (supra) (quoted on behalf of the assessee), that "it is abundantly clear from a perusal of the prescription in Section 158B(b) that even under the pale of Chapter XIV-B, assessment could be made only in respect of undisclosed income. Such undisclosed income must come as a result of search."
30. In Vidya Madanlal Malani v. Asstt. CIT (supra) (referred to on behalf of the assessee), it was held that in block assessment in search cases, where the income does not fall within the provisions of Section 158B, the same cannot be brought to tax under Section 158BA even though such income may be computed as undisclosed income under Section 158BB(1)(c).
31. In C.J. Shah & Co. v. Asstt. CIT (supra) (quoted by the assessee), it was held, inter alia, that if the assessee discloses all the particulars in its return filed before the date of search and if the AO takes a different view, then such income cannot be termed as 'undisclosed income' and that income can be considered for inclusion in the total income during the course of assessment or reassessment, in accordance with law.
32. In Smt. Sitadevi Daga v. Asstt. CIT (supra) (cited on behalf of the assessee), after search and seizure of books, the assessee filed return beyond the period prescribed under Section 139(1) but within the period prescribed under Section 139(4), declaring interest income as per regularly maintained books of account seized. The Department accepted the returned income but included the same while computing undisclosed income in framing block assessment. It was held that the Department having made no efforts to prove that the books of account were maintained for purposes other than those of the Act and that the income returned was income which would not have been disclosed for the purposes of the Act, the assessee could be held to have maintained the books of account only for the purposes of the Act and thus, the returned income did not form part of undisclosed income.
33. The Hon'ble Gujarat High Court in N.R. Paper & Board Ltd. and Ors. v. Dy. CIT (supra) (relied on by the assessee), held that block assessment is for assessment of undisclosed income of the block period, whereas regular assessment is for assessment of the total income of the year; that there can be no double assessment; that both assessments are for different purposes; that the exercise of the AO under Section 158BB r/w Section 158BC(b) is undertaken where he has to assess only the undisclosed income of the block period on the basis of the evidence found and material available as a result of the search conducted under Section 132 of the Act; and that the powers of regular assessment are kept intact and so are all the appellate, revisional and other powers affecting such regular assessment and all the statutory consequences flowing from the exercise of such powers would follow alongside of this special assessment procedure devised for dealing with the undisclosed income as a result of search.
34. The Hon'ble Rajasthan High Court, in the case of CIT v. Rajendra Prasad Gupta (2001) 248 ITR 350 (Raj), has held as under:
"The return is to be adjudicated with reference to material obtained during search proceedings. The AO is not conferred with power to make estimate of income de hors material in his possession."
35. In the case of Pooja Bhatt v. Asstt. CIT (2000) 66 TTJ (Mumbai) 817 : (2000) 73 ITD 205 (Mumbai), again, the Mumbai Bench of the Tribunal observed that:
"The assessment procedure provided under Section 158BA authorises assessment of undisclosed income as a result of search."
36. The Ahmedabad Bench of the Tribunal, in the case of Pradip C. Patel v. Dy. CIT (1997) 58 TTJ (Ahd) 409, also endorses the view of the Mumbai Bench of the Tribunal in Sunder Agencies v. Dy. CIT (supra).
37. The Hon'ble jurisdictional High Court in CIT v. Vinod Danchand Ghodawat (2001) 247 ITR 448 (Bom), has expressed a view similar to the one held by the Hon'ble Delhi High Court in CIT v. Ravi Kant Jain (supra), that the computation of income for the block period should be based on material seized and found during the course of search.
38. In CIT v. Smt. Usha Tripathi (2001) 249 ITR 4 (All), the Hon'ble Allahabad High Court too, has held similarly.
39. In CIT v. Vikram A. Doshi (2002) 256 ITR 129 (Bom), the Hon'ble Bombay High Court has held that transactions disclosed in returns which are the subject-matter of regular assessments, but which are not disclosed in the block assessment, are not to be considered in the block assessment.
40. In K. Moidu alias Kunhippa v. Asstt. CIT (2002) 75 TTJ (Coch) 864 : (2002) 256 ITR 76 (Coch)(AT), additions made on pure estimate have been held to be not justified in block assessment.
41. The Chennai Bench of the Tribunal, in Nilesh R. Shah v. Asstt. CIT (2002) 253 ITR 34 (Chennai)(AT), held that in the absence of evidence, material or information in the possession of the AO, the addition under block assessment was bad.
42. The Calcutta Bench of the Tribunal also has held, in the case of A. Sadasivam v. Asstt. CIT (2002) 255 ITR 1 (Cal)(AT), that computation of undisclosed income of block period must be based on evidence found as a result of search.
43. So, looked at from any angle, the material which is the very raison d'etre of the computation under consideration, does not fall under either Section 158BB, or Section 158B. Therefore, there is no question of imposition of tax under Section 158BA. Section 158BA must prevail, it being a charging section and a non obstante clause. Since no income falls within the purview of Section 158B, nor can be computed under Section 158BB, none can be brought to tax under Section 158BA. The AO has erred in treating the regular income shown in the belated returns filed after the date of search, as undisclosed income. The income below the taxable limit, for which no return has been filed, has also wrongly been similarly treated as undisclosed income.
44. The claims of the assessee succeed. The appeals are allowed.