Income Tax Appellate Tribunal - Mumbai
Repl Engg. Ltd , Mumbai vs Department Of Income Tax on 18 February, 2013
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"H Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
& Shri Amit Shukla, Judicial Member
IT(SS) No.152/Mum/2005
(Block Assessment Period 01.04.1987 to 18.12.1997)
Heatshrink Technologies Ltd, Vs. ACIT 8(2),
Plot No.112, 13th Road, MIDC Room No.209/216 A,
Marol Naka, Andheri (East), Aayakar Bhavan, MK Road,
Mumbai 400093 Mumbai 400020
PAN: AAACR 2591 J
(Appellant) (Respondent)
IT(SS) No.162/Mum/2005
(Block Assessment Period 01.04.1987 to 18.12.1997)
ACIT 8(2), Vs. REPL Engineering Ltd.
Room No.209/216 A, (now Known as Heatshrink
Aayakar Bhavan, MK Road, Technologies Ltd), Plot
Mumbai 400020 No.112, 13th Road, MIDC
Marol Naka, Andheri (East),
Mumbai 400093
PAN: AAACR 2591 J
Assessee by: Shri Pradip N. Kapasi
Department by: Shri K.C.P. Patnaik, CIT DR
Date of Hearing: 18/02/2013
Date of Pronouncement: 10/05/2013
ORDER
Per B. Ramakotaiah, A.M.
These cross appeals are by assessee and Revenue for the Block assessment period 1.4.1987 to 18.12.1997. Assessee filed detailed charts on various grounds in both assessee's as well as Revenue's appeals and also placed paper books running from Page Nos.1 to 863. Revenue also placed written submissions and a paper book containing pages 1 to 161.
Page 1 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
2. Originally, the appeal was dismissed as un-admitted for want of prosecution by assessee vide the orders dated 27.03.2008 and in M.A. No.307/Mum/2011, the orders were recalled for fresh hearing. The case was adjourned for various reasons over a period of time sometimes for consolidation, sometimes for obtaining statements of the Director, sometimes for obtaining copies of the seized documents etc.
3. We have heard the learned Counsel Shri Pradip N. Kapasi and the learned CIT (DR) Shri K.C.P. Patnaik. In assessee's appeal, there are grounds 1 to 16 contesting the jurisdiction for completing the assessment in the Block assessment and making additions in the Block assessment and also on the issue of set off of business losses, set off of depreciation on unabsorbed depreciation, set off of lease rents and various other issues which are considered in the appeal at later point of time. The Revenue has raised fifteen grounds on various deletions made by the CIT (A), that too mostly on the reason that the CIT (A) admitted additional evidence in violation of Rule 46A.
IT(SS) No.152/Mum/2005:
4. Briefly stated, a search and seizure action under section 132 of the IT Act had taken place on 18.12.1997 at the various premises of assessee. The search took place along with similar action carried out in the cases of the Directors of the company as well as in some sister concerns. Documents found were seized and statements of concerned persons were recorded.
5. Consequent to the search and seizure action, on receipt of the intimation AO issued notice under section 158BC of the Act calling for the return for the Block period within the period of 30 days.
6. In compliance to the said notice, the assessee company filed return for the Block period in the extended period granted for Page 2 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai the purpose, offering undisclosed income at a loss of `22,93,24,285. However, when AO initiated the assessment proceedings for the determination of the undisclosed income, there was no compliance in this direction. In the circumstance, AO issued show-cause notice referred to in the assessment order granting assessee final opportunity to have its say in regard to certain transactions reflected in the seized record. Since there was no compliance to the said notice as well, he proceeded to pass an order ex-parte based on his best judgment.
7. In the said order passed under section 158BC of the Act, AO has determined the undisclosed income of assessee at `.226.18 crores. The major areas in respect of which AO has made the additions are:
a) Disallowance of lease rent in respect of certain assets.
b) Disallowance of claim of depreciation in respect of certain assets.
c) Addition on account of investment in the equity capital of the company by Oxcamb Investment Ltd.
d) Addition on account of investment in immovable properties.
e) Addition on the basis of certain seized materials.
f) Disallowance of interest on borrowings from financial institutions.
g) Rejection of contention of claim of losses.
8. Assessee contested before the CIT (A) mainly on the principles of natural justice, being violated by AO and completing the assessment order ex-parte under section 144. Since assessee could not make detailed submissions, assessee furnished voluminous documents with a prayer for admission of additional Page 3 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai evidence in terms of Rule 46A. The CIT (A) called for a remand report and AO submitted its first of the report vide the letter dated 21.12.2000 and 29.11.2001. Further reports were also called from the AO by the successor CIT (A) vide letter dated 16.01.2004 and 29.03.2004 relating to alleged investment in immovable properties and utilization of loans on which interest has been paid that has been disallowed. The reports called for were submitted by the DCIT vide his letters dated 10.03.2004 and 18.06.2004 and the reports so received were forwarded to assessee for further comments. The contents of the remarks and the comments of assessee were considered by the CIT (A) while finalizing the appeal. Even though the learned AO and the Jt. Commissioner objected the admission of additional evidences, the learned CIT (A) vide Para 18 has admitted the fresh evidence in terms of Rule 46A and accordingly the Revenue is aggrieved with reference to the admission of fresh evidence in their grounds.
9. At the outset, the learned Counsel briefly explained the facts of the case to submit that AO has treated many of the transactions of the purchase and sale of wind turbine generators and payments of lease rents as bogus and made various additions in the Block assessment, whereas the information pertains to these were available with AO in the course of survey proceedings which were initiated much earlier and inquiries have been concluded. It was the submission that assessee was volunteering to file VDIS declarations, but was prevented at that point of time. Therefore, part of the seized material was based on the VDIS declarations prepared by assessee. It was the submission that the information obtained in the course of the survey cannot be utilized in the Block assessment. The detailed submissions of assessee are as under:
A survey action U/s.133A has taken place on 20/02/1997 at Gala No.3, Bldg No.2, Diamond Industrial Estate, Nani Daman, Page 4 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai specifically in connection with inquiries relating to the lease of certain assets by REPL Engineering Limited to certain Financial Institutions on the basis of purchases of assets made from Universal Moulders & Fabricators. This fact is confirmed by the learned Assessing Officer vide page nos. 4-7 of his order of Block assessment dated 27.12.1999. The order also confirms that inquiries were made even prior to the said survey and it was in pursuance of such inquiries only that survey took place. The learned Assessing Officer in the order also confirms that during the course of survey a physical verification was carried out and the alleged assets were found to be non-existent. He further confirms that another survey had taken place at Varanasi. It is also confirmed that detailed statements of Shri Sudhir Pethe, Vice President of REPL Engineering Limited (owner of said Universal Moulders & Fabricators) were recorded wherein the said Mr. Pethe had explained the modus operandi of the said lease transactions & had categorically stated that the operations were carried out as directed by Shri Homi R.Patel Chairman & Shri B.S.Doctor director of REPL Engineering Limited. He also explained that lease transactions involved hawala transactions.
Subsequent to the said surveys under section 133A, survey actions were carried out under section 133A in the case of the company & statements also were recorded under section 131 of the directors including that of Kishore Shivdasani & Arvind Nair. The details of transactions in connection with the purchase of WTG & of lease rent were verified during the survey action & thereafter.
In consultation with the Income Tax Authority the company had agreed to file a declaration under VDIS 1997 & the computation of the Income/loss incorporating the alleged transaction was made for Asst Year 1997-1998 & Asst Year 1996-1997(Erroneously mentioned as Asst Year 1996-97 & 1995-96). This is confirmed by Page 5 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai the learned Assessing Officer on page 6 & 7 of the Block Assessment Order. The said declaration was not acceptable to the Income Tax Authorities & was rejected as the authorities did not wish to allow the set off of the unabsorbed depreciation of about Rs.78 crores pertaining to Asst Year 1996-97 & 1997-98 for which returns were already filed. The Income Tax Authorities also did not wish to allow the set-off of the revenue expenses of about Rs.26 crores which were capitalized in the books of accounts & also refused the allowance of interest of Rs.7.50 crores forming part of lease rent. These facts are clear on page nos. 6 & 7 of the Assessment order.
The above stated facts clearly confirmed that inquiries were conducted by the Income Tax Authorities in the matters of the said lease rent & WTG much before the search action. It also confirms that subsequent to such inquiries survey action was carried out U/s.133A on more than one occasion with the specific intention to verify the genuineness of the said transactions. It also confirms that specific statements were recorded of different parties directly concerning the genuineness of the transactions. It also confirms that the Income pertaining to such non- existent transactions was sought to be considered for the purposes of taxation much before the date of search on 18.2.1997. The Survey action also confirmed that the transactions were not genuine.
In the assessee's case material alleging non-existent Wind Turbine Generators (WTG) and alleged bogus claim of lease rentals was collected under section 133A. Therefore, it could not be taken into consideration in the Block Assessment of the assessee.
Secondly, the statements of Shri Dhirubhai Damaniya (owner of adjoining gala)[Para 6 on page 4 of Assessment Order for the Block period] and Shri Sudhir Pethe (Proprietor of M/s. Universal Moulders & Fabricators)[Para 6 on page 4 of Assessment Order for the Block Page 6 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai period] were recorded under section 131 r.w.s. 133A during the course of survey which commenced on 20.02.1997 and in the said statements detailed inquiry was made concerning the transactions of M/s. REPL Engg. Ltd in the matters of WTGs and lease transactions. Further statements of Kishore Shivdasani & Arvind Nair were recorded.
Thirdly, a Statement of Income representing these transactions was made under the guidance of the Income Tax Authorities for the purposes of declaration under the VDIS [Para 6 on page 7 of Assessment Order for the Block period] much before the search, once again confirming that the Income Tax Authorities had clear knowledge of the said transactions and the nature thereof.
Fourthly, the loose papers seized in any case, did not in any place suggest that the said transactions were non-genuine or represented any undisclosed income. Hence it could never be stated that evidence was found during the course of search of any undisclosed income.
Lastly, it is significant to note that no inquiry of any nature was made by the A.O. pursuant to/search with any of the parties to establish that the said loose papers represented undisclosed income. Therefore, the A.O. could not have been in the possession of any material to establish that the said loose papers represented undisclosed income. The above facts are confirmed by the A.O. as is evident from perusing pg. 4 to 6 of the Assessment Order for the Block period under consideration. (Refer CIT vs. T.Sivaprabhakar 238 ITR 4S7 (Mad).
10. To support the contention that material collected u/s.133A could not be taken into consideration for the purposes of computing the undisclosed income of the Block period the assessee places reliance on the following decisions:
Page 7 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
(i) G.K. Senniappan, 284 ITR 220 (Mad.) In the instant case it was held that the word "such" used as a prefix to the word "evidence" assumes much significance, in this provision, as it indicates only the evidence found, as a result of search or requisition of books of account or other documents, at the time of search. Any other material cannot form the basis for computation of undisclosed income for the Block period.
(ii) Dasari Sri Sailendra Kumar, 27 SOT 33 (Vizag) (URO).
In the instant case the Tribunal held that the expression "such other material or information" has to be relatable to the evidence found as a result of search. It does not take into account the material gathered or information collected as a result of survey which is not relatable to the material found as a result of search. Therefore, the material gathered during the course of survey under section 133A, cannot form the basis for computation of undisclosed income of the Block period of assessee.
(iii) Gauthamchand Bhandari, 95 TTJ 288 (Bang.) In the instant case it was held that once the assessee admits any undisclosed income during survey it does not retain the character of undisclosed income in the search u/s. 132. To compute the undisclosed income u/s. 158BC, the same is to be based on material found during search conducted under section 132 only and not survey conducted u/s. 133A.
(iv) Prakash Tulsidas, 68 TTJ 479 (Nagpur) In the instant case it was held that anything found or detected as a result of action u/s. 133A is outside the scope of the assessment under Chapter XIV-B which deals only with assessment of "undisclosed income as a result of search"; anything that is Page 8 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai already assessed under the regular assessment cannot again be assessed under Chapter XIV -B.
(v) Bomanna Swarna Rekha, 94 TT J 885 (Vizag) In the instant case it was held that no addition can be made on the basis of deficit stock found in the business premises during the course of survey action taken under section 133A in the Block assessment as it is outside the scope of Chapter XIV -B. From the reading of section 158BA, it is expressly clear that under this Chapter, the A.O. shall proceed to assess the undisclosed income only if a search is initiated u/s. 132 or the books of account, other documents or any asset are requisitioned under section 132A in the case of any person. Had there been any intention of the legislature to make the addition on the basis of the survey operations conducted u/s 133A, section 133A would have been included in s. 158BA. The preliminary objection of the learned Counsel was that the additions could not have been made in Block Assessment on the findings already concluded in proceedings u/s 133A.
11. The learned CIT (DR) countering the submissions of assessee filed the following note:
" With regard to the assessment of depreciation and lease rent in the Block assessment your honours have asked the Department to file submissions. The submissions regarding the issue of including depreciation disallowance and income from lease rent as undisclosed income in the Block period are as under:
(1) The wrong claim of depreciation on non-existing assets was found out during the course of such proceedings. The contention of assessee that this was found out in survey proceedings conducted on 20.02.1997 is not acceptable. There are several seized documents which prove that assessee made wrong claim of depreciation and lease rent. The details of such seized documents are furnished in the table below:Page 9 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai S.No Seized Description AO Reference material or statement identification No. 1 Page No.13 & Proposed VDIS declaration AO Page No.6 41 Annex-A withdrawing lease rent of 13.80 to 7 cr. And depreciation of 59.51 cr.
2 Page No.1 of Details of wind energy equipments Page 7 AO and
Annex.A 1 with connection date Page No 15 AO
3 Letter of Informing AO that the AO Page 8 to 9
Gujarat commissioning certificates are not
Energy genuine in 20 cases - post search
Development investigation.
Agency dated
29.12.1997
4 Statement of The statement was in course of AO Page 9 to
B.S. Doctor search and director admitted 10
under section bogus depreciation and bogus
132(4) dated lease rentals of 114.08 cr.
18.12.1997
5 Statement of Statement recorded in the course AO Page 10
Homi J. Patel of search and the Managing
under section Director accepted that
132(4) commissioning certificate were not
recorded on genuine
27.12.1997
6 Page No.2 Seized paper containing the AO Page 15
Annexure A1 names of bogus suppliers like M/s
Universal Moulders and
Fabricators, M/s XI Plast, M/s.
Rupali Plastics, M/s. Avon
Mouldings Pvt. Ltd, M/s. Avon
Plastics Pvt. Ltd
7 Page No.12 Indicates calculation of lease rent AO Page 16
and 13 of which is not genuine and was
Annexure A1 proposed to be withdrawn.
8 Page No.41 of Relates to proposed VDIS AO Page 16
Annexure A declaration for AY 95-96
indicating wrong claim
9 Page No.13 Letters from Mardia Leasing and AO Page 18
Annexure A2 Financial Services Ltd regarding
commissioning of Wind Mills
10 Page No.41 Letters relating to bogus lease AO Page 19
Annex.A2 claim
11 Page 8 Fax Message from Homi J. Patel, AO Page 25
Annexure A2 regarding wind mills
Page 10 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai (2) The above list is only indicative and not exhaustive.
There are several references to incriminating material found during course of search relating to depreciation and lease rentals.
(3) The search took place on 18.12.1997. The DDI investigation wrote a letter to Gujarat Energy Development Authority on 26.12.1997, making enquiry regarding the commissioning certificates of wind mills. Gujarat Energy Development Authority replied on 29.12.1997 that the certificates are not genuine. This was during the course of search and post search enquiry.
(4) The statements of various directors have been recorded u/s 132(4). The statement of B.S.Doctor has been recorded u/s.132(4) on 18.12.1997. He has surrendered an amount of Rs.114.08 Crores relating to Bogus Claim of depreciation and lease rent. This is to bring to the kind notice of your honours that the statement was during the course of the search and not during the course of survey. The contents of the statement have been again ratified by the statement of Homi J. Patel recorded on 27.12.1997. The directors have stated that the Bogus commissioning certificates must have been an in house creation.
(5) The CIT(A) In the course of deciding appeals for the regular assessment has also held that the disallowance of depreciation and lease rent has to be taxed in the Block Assessment. The order of CIT(A) in Appeal No : CIT(A) VIII/ IT-318 /2000-2001, Dated :
06.01.2005 [or Assessment Year : 1997-98, indicates that the disallowances are to be made only in Block Assessment. The CIT (A) has discussed this issue in paragraphs 12 to 15 of his order cited supra. The assessee has accepted this contention of CIT by not filing appeal against this order. Therefore, the issue has become final. The assessee cannot contest this issue again in Block assessment appeal proceedings before your honour. We rely on decision of Bombay High Court in the case of Sudhakar T.Pendse 323 ITR 22 (Bom)) for the proposition that once particular stand has been accepted by the tax payer he would not be permitted to take a contradictory stand on the same issue again before a higher authority".Page 11 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai This general submission is on issue of jurisdiction to make additions in the Block assessment, mainly contested in ground No. 2. The submissions on other grounds are also extracted before deciding the issues, which are as follows.
12. Ground Nos. 3 to 5 of assessee's appeal is with reference to set off of unabsorbed business and depreciation loss (accounted and unaccounted).
12.1 In the assessment, AO held that Explanation to 158BB made clear that the undisclosed income is to be worked out without giving effect to set off of b/fwd losses under chapter VI or unabsorbed depreciation under section 32(2). No variation in the position of unabsorbed loss or depreciation is accordingly permitted while acting under section 158BB.
12.2 Before the CIT(A), it was submitted that net undisclosed income for AY 1993-94 till 1997-98 and also for the broken period of the Block is negative and such unaccounted loss be adjusted against the undisclosed income, if any, for the Block period. Provisions of section 158C for set off of losses is in relation to those losses which were incurred in regular course out of duly accounted transactions. Such an embargo does not apply to the losses for the Block period relating to unaccounted transactions. Without such set off the income that would be taxed under Chapter XIV-B would not represent true undisclosed income of the Block period. ITAT Mumbai Bench in the case of BDA Industries Ltd 64 ITD 501 has held that the unaccounted losses have to be set off against the unaccounted income of the Block period.
12.3 The learned CIT (A) did not agree for the following reasons:
(i) Section 158B(1)(a) provides that the total income or loss of each previous year is to be determined without taking into Page 12 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai account the brought forward loss or unabsorbed depreciation under section 32(2) of the Act.
(ii) Section 158B(4) provides that losses brought forward under Chapter VI or unabsorbed depreciation under section 32(2) shall not be set off against the undisclosed income determined in the Block assessment but may be carried forward for being set off in the regular assessment.
(iii) Assessee's claim has been that since the depreciation amount could not be allowed as deduction for want of adequate profits in two assessment years, there was no case for taking these inadmissible amounts as part of the undisclosed income. There is also no case for holding that any part of the said carried forward amount if found inadmissible cannot be taken as part of the total income in the computation of the undisclosed income.
12.4 It was submitted before us that:
(a) Net undisclosed income for AY 1993-94 till 1997-98 and also for the broken period of the Block is negative and such unaccounted loss be adjusted against the undisclosed income, if any, for the Block period.
(b) Provision of section 158C for set off of losses in relation to those losses which were incurred in regular course out of duly accounted transactions. Such an embargo does not apply to the losses of the Block period relating to unaccounted transactions.
(c) Without such set off the income that would be taxed under Chapter XIV-B would not represent true undisclosed income of the Block period.Page 13 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
(d) ITAT Mumbai Bench in the case of BDA Industries Ltd 64 ITD 501 has held that the unaccounted losses have to be set off against the unaccounted income of the Block period.
(e) The learned CIT (A) failed in appreciating that section 158(1) prohibited set off of losses and depreciation that were accounted. The said provisions applied by him does not prohibit set off of unaccounted loss and depreciation.
12.5 The case law relied upon by assessee with regard to set off of losses is as follows:
i) Amritsar Processor P Ltd (2006) 154 Taxman 33 (Asr.)
ii) E.K. Lingamurthy vs. Settlement Commission (2009) 222 CTR I/19
iii) DTR/99/178 Taxman 116/314 ITR 305 (SC)
iv) BDA Industries Ltd, 64 ITD 501 (Mum).
12.6 With regard to set off of depreciation, assessee relied upon the following case law:
i) N.R. Panduranga Setty (2006) 100 TTJ 424 (Bang) (Trib.)
ii) C. Sabira (2010) 40 DTR 153 (Ker.) HC
iii) H.E. Distilleries P Ltd (2010) 229 CTR 457/34 DTR 299 (Kar.)High Court
13. Ground No.6 of assessee's appeal is with reference to addition for lease rent claimed for the AYs 1993-94 to 1997-98 for a total amount of `.20,70,06,500.
13.1 AO held that there is evidence that assessee has claimed lease rentals on non existing assets and Shri Sudhir Pete, Shri Homi Patel and Shri B.S. Doctor have categorically admitted this position. In AY 1993-94 AO assessed the undisclosed income at `35,06,500 on the ground that the said amount represented claim of depreciation on a non existing assets and AO has relied on the claim where the said IDBI had asked the company to bear tax relating to the transaction. In AY 1994-95 AO has assessed the Page 14 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai undisclosed income at `.96 lakhs on the ground that the claim of lease rentals of `.88.00 lakhs paid to IDBI and `.8.00 lakhs paid to LKP Merchants were bogus. In addition he has not allowed the enhanced claim for deduction under Chapter VI-A as there was no authority in law to do so. In AY 1995-96 to 1997-98, AO has not given any reason, nor any comment in support of his action.
13.2 It was submitted before the CIT (A) that the lease rent was paid by a/c payee cheque, duly accounted in the books of account and it was regularly allowed as deduction in the regular assessments. It was the submission that no evidence was found during search to establish that lease rent paid was bogus. AO has not identified the relevant loose papers relying on which he has added the lease rent as undisclosed income. Assessee nowhere stated that the lease rent claimed was a bogus expenditure and the entire lease rent claimed was disallowed in Block assessment without even identifying the payees or inquiring with them about the genuineness. Also there was no reason to believe that the entire lease rent was bogus without any evidence or inquiry leading to such findings.
13.3 Without prejudice it was claimed that the "lease rent"
represented interest paid to financial institution and banks for genuine borrowings utilized for the purposes of the business, a fact which is not in dispute at all and which is confirmed by the learned CIT (A). The deduction for interest (lease rent) did not represent any undisclosed income as the claim thereof was genuine and legal. The payment of lease rent was part of the overall scheme for raising funds for business and the net undisclosed income, if any relating to the entire scheme should only be taxed. The company was in dire needs of finance for meeting its working capital requirements and also for other purposes of business.Page 15 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 13.4 Under the route suggested by Financial Institution, the company sold an asset to the financial institution, the sale consideration paid by the financial institution for acquiring the assets from the company was nothing but the loan provided by the said financial institution. The financial institution would in turn lease back the same asset to the company and the company was required to pay lease rent to the financial institutions which in fact represented the installment for repayment of loan and interest for the period.
13.5 The payment of lease rent was so structured that the aggregate of lease rent over a period of lease matched the amount of loan and the interest thereon at the market rate. Section 158B(b), definition of undisclosed income excludes an income which is represented by an entry in the books of account. The claim of the company was made in determining the regular income or profit for the year and was considered by AO in regular assessments upto AY 1997-98. Section 158BA/BB also exclude the accounted transaction from the purview of Block assessments.
13.6 It was also submitted before the learned CIT (A) that once it is held that the income pertaining to excessive claim was the subject matter of regular assessment as is duly considered in the assessment order of AY 1997-98, the additions in respect of each of the assessment years should be excluded from the purview of Block assessment. Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd 101 Taxman 525 held that the proceedings in Block assessment are totally different from the proceedings in regular assessment and that a subject matter of one assessment could not be the subject matter of Block assessment. The excessive element of claim could have been determined only after reducing the lease rent by the amount of interest and the amount of paper profit. It is only the excess net claim of expenditure if any that could be treated as Page 16 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai undisclosed income under chapter XII-B. Instead of bringing to tax, the net income relating to the transaction disallowed the entire amount that was debited as lease rent and treated the amount so disallowed as undisclosed income for the Block period. The company had in fact inflated its profit by an amount of `.20,45,12,686 on account of the activity of raising finance and claiming lease rent and had accordingly shown higher profit. The said amount was offered for taxation and was considered in determining the total income for the respective AY which should be reduced in ascertaining true undisclosed income for the Block period. Thus, there was no understatement of income in respect of this activity and the company was not in possession of any undisclosed income. AO instead of reducing the profit, added an amount of `.20,71,06,500 to the income that was not as a regular income but as the undisclosed income under Chapter XIV-B. The action of AO has resulted in double taxation of a non existing income wherein AO in assessment for AY 1997-98 had disallowed claim of lease rentals on non existing assets of `.14,73,48,444.
13.7 For example, a wind mill on paper was sold to the finance institution for profit, for such sale the company was paid consideration (loan) by the financial institution by A/c payee cheque deposited in the bank A/c of the company. The considerations received were utilized for purposes of business. The financial institution in turn leased back the said asset to the company for an apparent consideration of lease rent. The period of lease rent were structured to match the repayment period of loan together with interest thereon. The fictitious profit on sale was offered for taxation.
13.8 The learned CIT (A) relying in the case of Elegant Homes Pvt Ltd, 177 ITR 261 (Raj.) that in Chapter XIVB special provision of assessment in search cases have been given and if any amount of Page 17 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai income has not been taxed and during the course of search some undisclosed income is found on the basis of materials seized, that should be treated as undisclosed income. Also in the case of Ajay Kumar Sharma 259 ITR 240 (Raj.) it has been held that merely because some entries are shown in the books of account that does not prohibit AO from taxing that amount in the Block assessment, if the amounts have not been taxed in the regular assessment and material has been found in the course of search to support his action.
13.9 It was also the reasoning by the learned CIT (A) that amendments both in section 158B(b) defining undisclosed income and in section 158BB(1) relating to computation of undisclosed income by Finance Act, 2002 are retrospectively w.e.f. 01.07.1995. The said amendment specifically include therein income based on entries in books of account or other documents which represent false claim of any expense, deduction or allowance. In the light of amendment made by Finance Act, 2002 the possibility of having two opinion on the matter is clearly eliminated and AO is at liberty to examine in a Block assessment proceedings an entry recorded in regular books of account, if on that account some incriminating document is found during the course of proceedings. According to the learned CIT (A) the said transaction entered into by assessee was not a genuine sale and lease back transaction. Assessee had shown payments having been made for the purchase of the assets to these non existent concerns. Authorized Representative has not rebutted this observation of AO in the remand report. The finance obtained in the form of sale consideration under the arrangement has not remained in the business of the assessee company to be utilized for the said purpose but has been taken out from the business by payments to non existent and non genuine suppliers. Therefore, the claim of assessee for the admissibility of deduction of Page 18 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai interest component relating to and forming part of the lease rent cannot be accepted.
13.10 Before us assessee's main submissions are as under:
(1) Lease rent was paid by a/c payee cheque, duly accounted in the books of account and it was regularly allowed as deduction in the regular assessments. It was the submission that no evidence was found during search to establish that lease rent paid was bogus. AO has not identified the relevant loose papers relying on which he has added the lease rent as undisclosed income. Assessee nowhere stated that the lease rent claimed was a bogus expenditure and the entire lease rent claimed was disallowed in Block assessment without even identifying the payees or inquiring with them about the genuineness. Also there was no reason to believe that the entire lease rent was bogus without any evidence or inquiry leading to such findings.
(2) Without prejudice the "lease rent" represented interest paid to financial institution and banks for genuine borrowings utilized for the purposes of the business, a fact which is not in dispute at all and which is confirmed by the learned CIT (A). The deduction for interest (lease rent) did not represent any undisclosed income as the claim thereof was genuine and legal. The payment of lease rent was part of the overall scheme for raising funds for business and the net undisclosed income, if any relating to the entire scheme should only be taxed. The company was in dire needs of finance for meeting its working capital requirements and also for other purposes of business.
(3) Under the route suggested by Financial Institution, the company sold an asset to the financial institution, the sale Page 19 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai consideration paid by the financial institution for acquiring the assets from the company was nothing but the loan provided by the said financial institution. The financial institution would in turn lease back the same asset to the company and the company was required to pay lease rent to the financial institutions which in fact represented the installment for repayment of loan and interest for the period.
(4) The payment of lease rent was so structured that the aggregate of lease rent over a period of lease matched the amount of loan and the interest thereon at the market rate.
Section 158B(b), definition of undisclosed income excludes an income which is represented by an entry in the books of account. The claim of the company was made in determining the regular income or profit for the year and was considered by AO in regular assessments upto AY 1997-98. Section 158BA/BB also exclude the accounted transaction from the purview of Block assessments.
(5) It was also submitted by assessee before us that once it is held that the income pertaining to excessive claim was the subject matter of regular assessment as is duly confirmed by the assessment order of AY 1997-98, the additions in respect of each of the assessment years should be excluded from the purview of Block assessment. Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd 101 Taxman 525 held that the proceedings in Block assessment are totally different from the proceedings in regular assessment and that a subject matter of one assessment could not be the subject matter of Block assessment. Statement on oath nowhere confirms that the amount of lease rent represented suppression of profit in its entirety.
Page 20 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai (6) The decision relied upon by the CIT (A) are on different facts as he himself has highlighted that it is possible to disregard the accounts only on the basis of material seized during the course of search. Neither AO nor the learned CIT (A) has highlighted or specified any seized material to support the action.
(7) The amendment to the Finance Act 2002 did not dispense with the need for the seized material and findings thereon. The amendment does not cure the deficiency arising on account of want of seized material which is a sine qua non for the addition in chapter XIVB, the learned CIT (A) himself confirmed this position in law. The amendment in any case was inapplicable to the case of a search which took place on 18.12.1997 and importantly to a Block assessment order passed on 29.12.1999. No material is relied upon by the learned CIT (A) to conclude that the transaction of sale and lease back were not genuine. The learned CIT (A) has not given any findings as to why the net income on the activity of raising finance should alone not be taxed. He has in fact not adjudicated upon this request.
(8) Without prejudice it was submitted that:
(i) the excessive element of claim could have been determined only after reducing the lease rent by the amount of interest and the amount of paper profit.
(ii) It is only the excess net claim of expenditure, if any, that could be treated as undisclosed income under Chapter XII-B.
(iii) Instead of bringing to tax the net income relating to the transaction disallowed entire amount that was debited as lease rent and treated the amount so disallowed as undisclosed income for the Block period.Page 21 of 84
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(iv) The company had in fact inflated its profit by an amount of `.20,45,12,686 on account of the activity of raising finance and claiming lease rent and had accordingly shown higher profit.
(v) The said amount was offered for taxation and was considered in determining the total income for the respective AYs which should be reduced in ascertaining true undisclosed income for the Block period.
(vi) Thus, there was no understatement of income in respect of this activity and company was not in possession of any undisclosed income.
(vii) AO instead of reducing the profit, added an amount of `.20,71,06,500 to the income that was not as a regular income but as the undisclosed income under Chapter XIV-B. The action of AO has resulted in double taxation of a non existing income wherein AO in assessment for AY 1997-98 had disallowed claim of lease rentals on non existing assets of `.14,73,48,444.
13.11 Without prejudice the undisclosed income if any represented the income of a new Industrial Undertaking that was eligible for deduction under section 80IA and also pertained to export business and was eligible for deduction under section 80HHC and such deductions should have been granted in computing undisclosed income. The amendment in section 158BB covering expense/ deduction or allowance, if at all, applies only when the claims are found to be false as a result of the search and evidence found in search. The definition of undisclosed income prevailing on date of search and also on the date of Block assessment order did not include in its scope and ambit the claims made for expenses/deductions and allowances. There was no seized Page 22 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai material in possession of AO which he could have seen to disallow the lease paid to IDBI & LKP. Moreover he has also not given any reason whatsoever for rejection and how he has determined the quantum of disallowance. No seized materials were found and AO never produced any proofs to show the genuineness of payments for purchase of assets. The accounting entries were passed in the books of account maintained in regular course of business before the date of search. The claims were made in the return of income for the respective years filed before the date of search which were verified and audited by the Auditors and were duly disclosed in the financial statements. AO mainly treated the claims as representing undisclosed income of the Block period because (a) the explanations was not furnished (b) details were not available and (c) claim is supposed to be bogus.
13.12 AO had simply disallowed the claim for AY 1993-94 because the IDBI was denied the claim of depreciation. For subsequent years AO does not have any reason whatsoever to support his action but for above three points:
- That least rent was accounted and no seized material was found.
- To claim for set off for capitalized revenue expenditure `.40,95,50,804
- To claim enhanced chapter VI-A deduction of `.56,29,399 in AY 1994-95.
- To claim set off of b/fd unabsorbed depreciation `.74,74,520 in AY 1994-95.
13.13 As far as the facts for AY 1993-94 are concerned, amount debited to Profit & Loss A/c is `.20,67,973. Amount disallowed by AO is `.35,06,500 which is in excess of the debit in Profit & Loss Page 23 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai A/c. Expenses of revenue nature not claimed in regular return of `.2,21,13,738 not set off against undisclosed income.
13.14 For AY 1994-95 the amount debited to Profit & Loss A/c is `.1,69,66,037, whereas the amount disallowed by AO is `.96,00,000. Expenses of revenue nature not claimed in regular return of `.78,17,197 not set off against undisclosed income.
13.15 In AY 1995-96 the amount debited to Profit & Loss A/c `.1,85,65,280 whereas the amount disallowed by AO is `.1,29,00,000. Expenses of revenue nature not claimed in regular return of `.1,47,66,748 not set of against the undisclosed income.
In AY 1996-97, the amount debited to Profit & Loss A/c was `.6,56,11,546 against which AO disallowed an amount of `.4,10,00,000. Expenses of revenue nature not claimed in regular return of `.9,98,73,498 not set off against the undisclosed income.
13.16 In AY 1997-98 the amount debited to Profit & Loss A/c was `.17,81,46,180 against which AO disallowed an amount of `.14,00,00,000. Expenses of revenue nature not claimed in regular return of `.23,55,97,722 not set off against undisclosed income.
14. Ground No.7 of assessee's appeal is with reference to addition for depreciation claimed for the AYs 1995-96 to 1997-98 for `.2,08,00,000, `.38,52,00,000 and `.59,51,00,000 respectively.
14.1 In the assessment AO held that evidences were found in the course of the search that assessee had claimed depreciation as well as lease rentals on non existing assets.
14.2 It was submitted before the CIT (A) that depreciation was duly accounted in the books of account and it was regularly allowed as deduction in the regular assessments. Undisclosed income excludes an income which is represented by an entry in the books of account. The claim of the company was made in determining the Page 24 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai regular income or profit for the year and was considered by AO in regular assessment upto AY 1997-98. Once it is held that the income pertaining to excessive claim was the subject matter of regular assessment as is duly confirmed by the assessment order of AY 1997-98 the additions in respect of each of the AYs should be excluded from the purview of Block assessment. In this regard the Hon'ble Gujarat High Court in the case of NR Paper & Board Ltd 101 Taxman 525 held that the proceedings in Block assessment are totally different from the proceedings in regular assessment and that a subject matter of one assessment could not be the subject matter of Block assessment. Moreover, no evidence is found in search to establish that depreciation was bogus.
14.3 AO has not identified the relevant loose papers relying on which he has added the claim of depreciation as undisclosed income. Without prejudice the claim of depreciation was part of the overall scheme for raising funds for business and the net undisclosed income, if any, relating to the entire scheme should only be taxed. Without prejudice the learned AO could not have treated the entire amount representing the claim of depreciation as undisclosed income but should have reduced such amount by the amount against paper revenue/income shown on sale of electricity and genuine revenue expenditure which otherwise was allowable in computing total income. The excessive element of claim could have been determined only after reducing the depreciation by amount of paper profit. Depreciation is just one of the links of entire transaction of raising the necessary finance for the purposes of business and the same should not have been isolated by AO for treating it as income. Statement on oath recorded during the course of search which explain the transactions nowhere confirmed that the amount of depreciation Page 25 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai represented suppression of profit/income and represented by any income.
14.4. It was held by the learned CIT (A) that Amendments both in section 158B(b) defining undisclosed income and in section 158BB(1) relating to computation of undisclosed income by Finance Act 2002 but retrospectively w.e.f.01.07.1995. The said amendments specifically include therein income based on entries in books of account or other documents which represent false claim of any expense, deduction or allowance.
14.5 In the light of the amendment made by Finance Act, 2002 the possibility of having two opinion on the matter is clearly eliminated and AO is at liberty to examine in a Block assessment proceedings an entry recorded in regular books of account, if on that account some incriminating document is found during the course of proceedings. There is no merit in the claim of assessee that the expenses which were capitalized in the accounts be allowed as the revenue deduction in the computation of undisclosed income. In the computation of the undisclosed income only an expenditure can be held as admissible for deduction that has been incurred for earning an unaccounted receipt that was noticed in the course of search proceedings only.
14.6 It was submitted before us that depreciation was duly accounted in the books of account and it was regularly allowed as deduction in the regular assessments. No evidence is found in search to establish that Depreciation was bogus. A.O has not identified the relevant loose papers relying on which he has added the Claim of Depreciation as undisclosed income. No Claim for Depreciation to the extent of Rs.24,03,95,048(Asst Year 1996-1997) & Rs.52,21,20,023(AY 1997-98) aggregating to Rs.76,25,15,071 was made in the regular return for Asst Year 1996-97 & 1997-98 as no addition could have been made for allowance that was not Page 26 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai claimed nor allowed. Depreciation for AY 1996-97 and 1997-98 was never claimed and could never be part of undisclosed income. Page 151,152 and Pg 124,125 of PB 2 confirms that claim was not made while filing Return 0f Income. Therefore these claims were never allowed by AO in regular assessment leaving no possibility of withdrawal of such claims in Block period. Only depreciation amount adjusted allowed & absorbed in the regular return could be a subject matt of disallowance and the depreciation not claimed could never be a subject matter of addition provided evidence was found during search and that depreciation duly accounted in the books of account of the respective years and assessed as such by the Income Tax Department could be considered only in the regular assessments and could never have been considered in Block assessment proceedings whilst computing undisclosed income. Also no specific reason was given by A.O. He concluded only on the general observations made by him.
14.7 A.O has also not given any reason whatsoever for his action of addition as undisclosed income & how he has determined the quantum of addition. Undisclosed income defined by sec. 158B( b) excludes any income that is accounted in Books of accounts. Sec. 158BB(i) mandates that an income can be treated as undisclosed income only on the basis of evidence found as a result of search. Sec. 158BB(iii) removes all doubts about the fact that any claim disclosed in the Return of Income filed before date of search cannot be treated as undisclosed income. The amendment in sec. 158BB covering expense/deduction or allowance applies only when the claims are found to be false as a result of the search and evidence found in search. In this case no evidence is found to disprove the claim. Definition of undisclosed income prevailing on date of search and also on the date of Block assessment did not Page 27 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai include in its scope and ambit the claims made for expenses/deductions and allowances. The amendment to the Finance Act, 2002 did not dispense with the need for the seized material and findings thereon. The amendment does not cure the deficiency arising on account of want of seized material which is a sine qua non for the addition in chapter XIV B. The CIT(A) himself confirmed this position in law. The amendment in any case was inapplicable to the case of a search which took place on 18/12/1999 and importantly to a Block assessment order passed on 29-12-1999. Without prejudice the claim of depreciation was part of the overall scheme for raising funds for business & the net undisclosed Income, if any, relating to the entire scheme should only be taxed.
14.8 Without prejudice The Ld. A.O. could not have treated the entire amount representing the claim of depreciation as undisclosed income but should have reduced such amount by the amount against paper revenue/income shown on sale of electricity and genuine revenue expenditure which otherwise was allowable in computing total income. The excessive element of claim could have been determined only after reducing the depreciation, the amount of paper profit. Depreciation is just one of the links of entire transaction of raising the necessary finance for the purposes of business and the same should not have been isolated by the A.O. for treating it as income., Statement on oath recorded during the course of search which explain the transactions nowhere confirmed that the amount of depreciation represented suppression of profit/income and represented any income. Undisclosed income excludes an income which is represented by an entry in the books of account. The claim of the company was made in determining the regular income or profit for the year and was considered by AO in regular assessment upto AY 1997-98. Once it is held that the Page 28 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai income pertaining to excessive claim was the subject matter of regular assessment as is duly confirmed by the assessment order of AY 1997-98, the addition in respect of each of the AYs should be excluded from the purview of Block assessment.
14.9 Hon'ble Gujarat High Court in the case of NR Paper & Board Ltd 101 taxman 525 held that the proceedings in Block assessment are totally different from the proceedings in regular assessment and that a subject matter of one assessment could not be the subject matter of Block assessment. The real undisclosed income could only be brought to tax and the revenue expenditure allowable under normal course wrongly capitalized should be reduced from the depreciation amount sought to be taxed.
14.10 Without prejudice the undisclosed income if any represented the income of a new Industrial Undertaking that was eligible for deduction under section 80IA and also pertained to export business and was eligible for deduction under section 80HHC and such deductions should have been granted in computing undisclosed income. Further assessee was eligible for set off of unabsorbed deprecation against the undisclosed income and set off of unabsorbed business loss against the undisclosed income for the Block period.
14.11 The facts relating to AY 1995-96, the net result of unaccounted transactions/undisclosed income was `(-)10,69,12,434 which when adjusted against the GTI before depreciation of `.9,01,54,495 came to `.(-)1,67,57,939. Accordingly there was no scope for adjusting genuine depreciation of `.4,73,68,372 (`.7,28,92,386 - `.2,55,23,934) which remained unabsorbed and available for set off against income of subsequent year.
Page 29 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 14.12 For AY 1996-97 the net result of unaccounted transactions/undisclosed income was `(-)17,74,26,078 which when adjusted against the GTI before depreciation of `.12,59,93,545 came to `.(-)5,14,32,533. Accordingly there was no scope for adjusting genuine depreciation of `.3,59,75,504 (`.38,01,71,841 - `.34,41,96,337) which remained unabsorbed and available for set off against income of subsequent year. Assessee company has not claimed any depreciation to the extent of `.24,03,95,048. Depreciation of `.3,59,75,054 out of `.38,01,71,841 was for genuine existing assets while AO has added `38,52,00,000.
14.13 With regard to AY 1997-98, the net result of unaccounted transactions/undisclosed income as mentioned above was `.(-)27,29,56,598 which when adjusted against the GTI before depreciation of `.12,26,21,983 came to `.(-)15,03,34,615. Accordingly there was no scope for adjusting genuine depreciation of `.4,55,81,321(`.64,47,42,006 - `.59,91,60,685) which remained unabsorbed and available for set off against income of subsequent year. Company has not claimed any depreciation to the extent of `.52,21,20,023, whereas depreciation of `.4,55,81,321 out of `.64,47,42,006 was for genuine existing assets while AO has added `.59,51,00,000.
15. Ground No.8 is with regard to claim for allowance of revenue expenditure treated as capital expenditure for AYs 1993-94 (`.2,16,97,964, 1995-96 `.84,81,795, 1996-97 `.8,44,89,635, 1997- 98 `.18,52,31,429 and for AY 1998-99 `10,96,49,955.
15.1. Before the CIT (A) it was submitted that claim was made in return for the Block period and genuine expenditure of revenue nature were incurred on finance charges, professional fees and lease management. To ensure higher book profits, genuine revenue expenses were capitalized which had an effect of inflating the profit. It was necessary to show higher book profits since the company Page 30 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai wanted to raise funds by ADR and GDR issue. The amount of undisclosed income on account of wrong claim of lease rent has to be reduced by genuine revenue expenses incurred mainly for raising funds through lease route which expenses ere not claimed in regular course. It is only the excess net claim of lease rent that could be treated as undisclosed income under chapter XII-B. It is established principle of law that the amount that could be taxed as income is the one which is determined after deduction of all that expenditure that was incurred for earning the income.
15.2 It was held by the CIT (A) that the expenses capitalized were relatable to the acquisition of assets and their installations. The assets in respect of which expenses were claimed to have been capitalized were found non existent in the search action, thus it is not known how those expenses can be held as incurred for other purposes.
15.3. Before us it was submitted that:
(i) Claim was made in Return for Block period. Page 77 of PB I
(ii) Genuine expenditure of revenue nature were incurred on Finance charges, Professional fees and Lease Management fees. Page 347 of PB 3A
(iii) Details of expenses were furnished. Page 347 of PB 3A
(iv) CIT(A) erred in saying that the expenses capitalized were relatable to the acquisition of assets and their installations since the asset was not in existence.
(v) The CIT(A) himself confirms that the assets were found to be non-existent thus contradicting his position.
(vi) The company showed higher book profits by not claiming genuine revenue expenditure since it wanted to raise funds by ADR and GDR issue.Page 31 of 84
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(vii) This expenses were never claimed and hence not allowed as deduction in regular assessment
(viii) The expenses were revenue in nature
(ix) Proofs of expenditure were available and details were furnished
(x) This expenditure were incurred for earning undisclosed income
(xi) It had the effect of reducing undisclosed income
(xii) Only real (net) undisclosed income can be taxed. It is only the excess net claim of Lease rent that could be treated as undisclosed income under chapter XII-B.
(xiii) Specific claim was made while filing return for Block period
(xiv) It is established principle of law that the amount that could be taxed as income is the one which is determined after deduction of all that expenditure that was incurred for earning the income.
(xv) Shri Homi R Patel MD of the company in his statement on oath dated 27.12.1997 and in answer to Q.12 has specifically explained the genuineness of these expenses which were in the nature of revenue expenses but were capitalised in the books of accounts & therefore pressed for allowance of the same in computing undisclosed Income.
16. Ground No.9 is with regard to failure to exclude bogus receipts shown as income and offered for tax in regular return of income for AY 195-96 (`.10,49,78,450, 1996-97 (`.1,27,51,970), 1997-98 (`.6,81,95,452), 1998-99 `.38,08,009.
16.1 It was submitted before the CIT (A) that the claim was made in return for Block period. To ensure higher book profits, company generated paper profits on fictitious sale of the power or energy from paper wind mills (non-genuine assets) and showed bogus income on sale of electricity. Company showed higher book profits by showing bogus income on sale of electricity, profit on sale and lease back since it wanted to raise funds by ADR and GDR issue.
Page 32 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai The excessive element of claim for lease rent that could be treated as an undisclosed income could have been determined only after reducing the amount of paper profit shown on sale of electricity from non-genuine assets and the lease rent by the amount of interest, genuine revenue expenditure capitalized. The company had in fact inflated its profit by an aggregate amount of `.20,45,12,686 by showing bogus income on sale of electricity, profit on sale and lease back. It is only the excess net claim of lease rent that could be treated as undisclosed income under Chapter XII-B. 16.2 The learned CIT (A) held that assessee had shown the sale of electricity to one of the concerns of the same management M/s. Avon Electronics Pvt. Ltd. The AR in this respect has not been able to provide any evidence that the claim for deduction of the expenditure incurred by the said expenditure incurred by the said concern has been withdrawn consequent to the search action.
16.3 It was also held by the CIT (A) that there is also no finding in the search proceedings in regard to the sale of electricity being non genuine. Even the accounts of the company does not indicate any sale. Again for the claim of exclusion of income of the interest on hire purchase transaction, it is to be said that there is no finding in the search proceedings that any item has been taken by assessee in terms of the said arrangement.
16.4 Before us assessee submitted the following:
a) Claim that income was non existent was made in Return for Block period. Page 77
b) To ensure higher book profits, Company generated paper profits on fictitious sale of the power or energy from Paper Wind Mills (Non-genuine assets) and showed bogus income on sale of electricity.Page 33 of 84
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c) The Company showed higher book profits by showing bogus income on sale of electricity, profit on sale and lease back since it wanted to raise funds by ADR and GDR issue
d) The excessive element of claim for Lease rent that could be treated as an Undisclosed Income could have been determined only after reducing the amount of paper profit shown on sale of electricity from non-genuine assets & the lease rent by the amount of interest, genuine revenue expenditure capitalized.
e) Details of Non-income receipts as per Pg 510-511 of PB 3B)
f) Non-existent income on sale of electricity were recorded in books of accounts and no expenses corresponding to the said paper income were debited since the sole objective of the company was to ensure higher profits.
g) Power generating assets not in existence at all
h) Block assessment confirmed that assessee had no infrastructure or plant and machinery to produceelectricity
i)The CIT(A) himself has reduced the income for the Block period by excluding the paper profit credited to P/L A/c. representing sale of non - existing assets namely Wind Turbine Generator. Now when the WTG themselves are admitted to be not in existence the question of said WTG generating power & its sales & such sales making profit could never arise & the profit credited to Profit & Loss A/c had to be excluded by reducing the undisclosed income as was done for profit on sale of WTG(Please see pg 45 of CIT(A) order pg 18) Pg 310 of PB 3A)
j) Income representing paper transaction
k) Sale proceeds was never realised
l) The learned CIT(A) was wrong in his reasons because M/s. Avon Electronics P. Ltd had never accounted, never Page 34 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai participated, never issued any bill & never claimed any expenses for purchase of electricity from assessee company nor paid for it.
m) Disallowance of lease rent and depreciation is a part of the same transaction of generating paper income on sale of electricity.
n) The transaction in totality should be disregarded and not selectively.
o) Block Assessment should bring to tax the real (net) undisclosed income.
p) Credits and debits were intricately linked and represented one transaction and one scheme
q) The sole objective was to show higher revenue and offset tile same by claim for deductions based on paperwork.
17. Ground No.10 is on the disallowance of claim for interest on funds borrowed from financial institutions and banks for AY 1996- 97 (`.3,96,00,000) and for AY 1997-98 (`.8,32,00,000).
17.1 AO held that the interest was paid on funds borrowed for acquiring non existing assets can not be allowed.
17.2 Before the CIT (A) it was submitted that AO had not defined or specified the parties from whom these funds were borrowed nor had he specified the quantum or the amount of the loans. He had also not identified when these loans were taken, what was the rate of interest and whether the loans taken were otherwise used for business purposes or not. He had not bothered to furnish any reasoning or methods explaining how the respective amounts were determined by him for the purposes of disallowances.
Page 35 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 17.3 It was submitted that interest was duly accounted in the regular books of account and could not have been treated as undisclosed income under section 158B(b) of the Block period nor under section 158BB. As long as the funds are not proved to have been utilized for the non business purposes, the interest on said funds cannot be disallowed.
17.4 It was also submitted before the CIT (A) that no material whatsoever nature was found during the course of search to support such a disallowance nor was any statement recorded on oath. In the circumstances, the disallowances even if it was true and correct could have taken place only in computing total income in regular assessment and in no circumstances could have been treated as respecting part of the undisclosed income and for that matter of the Block assessment. Interest that has been claimed for the respective years is in respect of funds borrowed for business purposes. Most of the funds were borrowed in earlier years and the interest thereon was consistently allowed. It is really not known why AO had picked up AY 1996-97 and 1997-98 only for disallowance. Interest for AY 1997-98 was disallowed in regular assessment by AO by invoking provisions of section 43B for non payment before due date. This very same interest once again appears to have been treated as undisclosed income in Block assessment thus leading to double taxation.
17.5. The learned CIT (A) held that based on the remand report of AO assessee has primarily utilized the fund for making payments to its associated enterprises. Based on the remand report, the learned CIT (A) was of the opinion that the said borrowed funds are not used for the purposes of business.
Page 36 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 17.6 Before us assessee submitted as under:
(a) Addition based on no loose papers at all even though no admission was ever made.
(b) Interest was a) paid by Account Payee Cheque and it was duly Accounted in the books of accounts.
(c) It was regularly allowed as deduction in the regular assessment
(d) No evidence is found in search to establish that Interest paid was bogus.
(e) A.O has not identified the relevant loose papers relying on which he has added the interest as undisclosed income
(f) Assessee had nowhere stated that the Interest represented bogus claim of expenses
(g) A.O. had not defined or specified the parties from whom these funds were borrowed nor had he specified the quantum or other amount of the loans; He had also not identified when these loans. were taken, for what period they were taken-what was the rate of interest and whether the loans taken Were otherwise used for business purposes or not. He had hot bothered to furnish any reasoning or methods explaining how the respective amounts were determined by him for the purposes of disallowance
(h) There was no reason to believe that the entire Interest was bogus without any evidence or inquiry leading to such findings .
(i) The Funds were not borrowed for acquiring non existing assets and acquired & used only for business purpose.
(j) Interest was duly accounted in the regular books of Page 37 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai account and could not have been treated as undisclosed income under section 158B9b) of the Block period nor under section 158BB.
(k) Even Remand Report of A.O was indicative & tentative - Not Conclusive. Facts of borrowings arc not disputed and are confirmed by the learned CIT (A).
Fact of payment of interest is not disputed and is confirmed by CIT (A).
(l) No Independent Findings of CIT(A) for diversion of funds.
(m) As long as the funds arc not proved to have been utilised for the non-business purposes, the interest on said funds cannot be disallowed
(n) Most of the funds were borrowed in earlier years and the interest thereon was consistently allowed.
(o) No loose papers found to show the diversion of funds to Associates Enterprises
(p) Payment to Associated Enterprise was in any case in the course of business & could have been with or even without interest
(q) Without prejudice Payment to Associated Enterprises even if made could not be disallowed in Block Assessment
(r) No material whatsoever nature was found during the course of search to support such a disallowance nor was any statement recorded on oath. In the circumstances, the disallowances even if it was true and correct could have taken place only in computing total income in regular assessment and in no circumstances could have been treated as respecting part of the undisclosed income and for that matter of the Block assessment.
Page 38 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
(s) It is really not known why the Ld. A.O. had picked up Asst. years 1996-97 and 1997-98 only for disallowance
(t) Interest that has been claimed for the respective years is in respect of funds borrowed for business purposes.
(u) No statement was made nor AO has relied upon an statement by company for disallowance.
(v) Interest for A.Y 1997-98 was disallowed in regular assessment by the A.O by invoking provisions of sec. 439 for non-payment before due date. This very same interest once again appears to have been treated undisclosed income in Block assessment thus leading to double taxation.
17.7. The learned DR submitted his contentions in detail on which all the factual issues and also on legal propositions.
18. We have considered the issues and examined the record and rival contentions. All the above grounds are interlinked in a sense that of jurisdiction to make additions/deductions in the Block assessment. As far as the legal principles are concerned it is already an established law that matters which are recorded in the books of account and on which no incriminating material was found cannot be considered in the Block assessment. It was also an established law that proceedings undertaken under section 133A and information already gathered before the search cannot be a basis for completing the Block assessment unless there is incriminating material. The same cannot be considered in the Block assessment.
18.2 Relevant case law on this issue are as under.
(a) the case of E.K. Lingamurthy v. Settlement Commissioner (IT&WT) (2009) 178 taxman 116 (SC)2009, it was held: Section 158BB, inter alia, states that undisclosed income of the Block period shall be 'the aggregate of the total income of the previous years Page 39 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai falling within the Block period' computed in accordance with the provisions of Chapter IV. 'Total income' is defined in section 2(45 ) to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act. In other words, Chapter XIV does not rule out Chapter IV in the matter of computation of undisclosed income under Chapter XIV-B. It may be mentioned that ordinarily, in the case of regular assessment, the unit of an assessment is one year consisting of twelve months, whereas in the case of Block assessment the unit of assessment consists of ten previous years and the period up to the date of the search. Section 158BB provides for aggregation of income/loss of each previous year comprised in the Block period. The Block period assessment under Chapter XIV-B is in addition to regular assessment.
Analysing section 158BB(4), read with the Explanation (a) thereto, one finds that only brought forward losses of the past years under Chapter VI and unabsorbed depreciation under section 32(2) are to be excluded while aggregating the total income or loss of each previous years in the Block period but set-off of the loss suffered in any of the previous years in the Block period against the income assessed in other previous years in the Block period is not prohibited. The Settlement Commission had erred in disallowing the application of the assessee for set-off of inter se losses and depreciation accruing in any of the previous years in the Block period against the income returned/assessed in any other previous year in the Block period.
For the aforestated reasons, the impugned judgment of the High Court as well as the decision of the Settlement Commission was to be set aside; the matter was to be remitted to the Settlement Commission for fresh computation of the undisclosed income under section 158BB for the Block period-in-question. Accordingly, the appeals filed by the assessee were to be allowed.
Page 40 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
(b) In the case of CIT vs. Smt. C. Sabira, 338 ITR 226 (KER)/[2011] 237 CTR 477 (KER) Search and seizure - Block assessment - claim of depreciation - section 158BH makes all the other provisions applicable to the assessment under Chapter XIV-B unless it is otherwise provided for
- section 158BB provides that the undisclosed income shall be the aggregate of the total income of the previous years within the Block period which is to be compute din accordance with the provisions of the Act. Therefore, subject to the restrictions imposed in the Explanation to section 158BB there is no embargo against assessee claiming the benefit of the depreciation as per the provisions of the Act and the Rules notwithstanding the fact that the amount of depreciation claimed is higher than the amount claimed in the regular return.
Conclusion: Section 158BH makes all the other provisions applicable to the assessment under Chapter XIV-B unless it is otherwise provided for, therefore, even in a Block assessment, AO must allow the claim of assessee for the depreciation which is legally permitted under the provisions of the Act.
(c) In the case of Assistant Commissioner of Income-tax , C.C. II vs. Amritsar Processors (P.) Ltd. 2006] 154 Taxman 33 (ASR)(MAG.) (10-11-2005] it was decided that: In view of the decision of the Tribunal, Mumbai Bench in the case of B.D.A. Ltd. v. Asstt. CIT [1998] 65 ITD 501 , in which it was held that losses computed in Block assessment for later years had to be set off against the undisclosed income computed in respect of other previous year falling within the Block period, the Commissioner (Appeals) was justified in allowing the claim of the assessee.
(d) the case of CIT vs. Krishna Kumar R. Parmar - SLP (Case) No.25394 of 2009 dated 1st October, 2009, the Hon'ble Gujarat High Court dismissed the Department's appeals holding that the material Page 41 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai or evidence which was unrelated to search could not form the basis of the computation of undisclosed income especially when the impugned income had been disclosed by assessee in regular assessment and the same had been assessed (Tax Appeal Nos.1195 and 1196 of 2008 dated 19th January, 2009).
(e) In the case of B.D.A. Ltd. vs. Assistant Commissioner of Income- tax, [1998] 65 ITD 501 (MUM)/[1998] 61 TTJ 197 (MUM)-
There is no prohibition against the losses of some of the previous years comprised in the Block period being set off against the income of the other years comprised in the Block period. Even on first principles, it is not possible to countenance the argument of the revenue that the result of the computation of a particular period comprised in the Block period has to be ignored, if such computation shows a loss. Such an argument, if advanced in respect of an assessment of an assessee whose case is not covered by Chapter XIV-B, cannot be accepted, as it is a well accepted and recognized position that the computation must be made with reference to the whole period of twelve months comprised in the previous year and the tax is payable only if such computation shows a positive income. Losses incurred during the previous year cannot be ignored and this principle is in-built in the concept of an assessment under the Act. The principle is that for the purpose of charging income-tax the various sources of income of an assessee have got to be aggregated and the results of each source for the entire previous year have to be reckoned and merely because the first few months of the previous year show a positive income and the rest of the period shows a negative income, the result of the later period cannot be ignored. The income-tax law does not permit this. What is true of the assessment of an assessee who has not been brought under section 132 and in whose case Chapter XIV-B does not apply is also true in respect of an assessee who has been searched and whose assessment is to be Page 42 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai made under Chapter XIV-B. There is no difference between the two types of cases so far as the application of the principle is concerned. In the former, the previous year is the period with reference to which the income is to be ascertained, as defined in section 3; in the latter, it is the 'Block period' with reference to which the income is to be ascertained, and the Block period consists of previous years relevant to ten assessment years preceding the previous year in which the search took place and includes the further period up to the date of commencement of the search. But the undisclosed income is to be computed with reference to the entire Block period and it is the total undisclosed income relating to the Block period that is charged to income-tax under sub-section (2) of section 158BA. It follows that the results of the different various years comprised in the Block period will have to be aggregated in order to find out the 'total undisclosed income relating to the Block period'. In other words, the Block period is to be treated as the previous year and so it follows that the losses suffered during certain parts or periods of the Block period have to be set off or adjusted against the income earned during the remaining parts or periods thereof.
Reading sub-section (1) of section 158BB in conjunction with clause
(a) of the Explanation, it is clear that while aggregating the results of the different previous years falling within the Block period, the losses have also to be taken into account. The Explanation does not say that if the computation results in a loss it should be ignored. On the contrary it proceeds to say that the loss for that previous year shall be considered for aggregation. Only the brought forward losses under Chapter VI and the unabsorbed depreciation under section 32(2) cannot be adjusted against the income of a previous year while resorting to aggregation. Thus, reading clause (a) of the Explanation to sub-section (1) in harmony with the said sub-section and sub- section (4), the prohibition against setting off the losses against the Page 43 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai undisclosed income of the Block period applies only to losses under Chapter VI (section 72) and unabsorbed depreciation determined and permitted to be carried forward in regular assessments and does not apply to adjustment of the loss computed in respect of a particular previous year falling within the Block period against the income computed in respect of the other years falling within the Block period. Such adjustment or set-off, in fact, cannot be considered to fall under the category of 'brought forward losses under Chapter VI' at all. In this respect, both clause (a) of the Explanation to sub-section (1) of section 158BB and sub-section (4) thereof convey the same idea.
Section 158BB(1)(c ) did not admit of the argument advanced by the Department to the effect that the returns for the assessment years 1989-90, 1993-94,1994-95 and 1995-96, for which losses had been computed in the Block assessment, not having been filed till the date of search, the losses computed for those years could not be set off against the income computed in respect of the other years falling within the Block period.
For the above reasons, the assessee's claim was accepted and the losses for the assessment years 1989-90, 1993-94, 1994-95 and 1995-96 as computed in the Block assessment, were directed to be set off against the undisclosed income computed in respect of the other previous years falling within the Block period.
18.3 Thus as can be seen from the above, there is merit in assessee's contentions that issues which were crystalized by inquiries made under section 133A cannot be considered as undisclosed income in the Block assessment on legal principles. Further, provisions of section 158C for set off of losses is in relation to those losses which were incurred in regular course out of duly accounted transactions. Such an embargo does not apply to the losses for the Block period relating to unaccounted transactions. Without such set off the income that would be taxed Page 44 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai under Chapter XIV-B would not represent true undisclosed income of the Block period. ITAT Mumbai Bench in the case of BDA Industries Ltd 64 ITD 501 has held that the unaccounted losses have to be set off against the unaccounted income of the Block period. The principle is that for the purpose of charging income-tax the various sources of income of an assessee have got to be aggregated and the results of each source for the entire previous year have to be reckoned and merely because the first few months of the previous year show a positive income and the rest of the period shows a negative income, the result of the later period cannot be ignored. The income-tax law does not permit this. What is true of the assessment of an assessee who has not been brought under section 132 and in whose case Chapter XIV-B does not apply is also true in respect of an assessee who has been searched and whose assessment is to be made under Chapter XIV-B. There is no difference between the two types of cases so far as the application of the principle is concerned. In the former, the previous year is the period with reference to which the income is to be ascertained, as defined in section 3; in the latter, it is the 'Block period' with reference to which the income is to be ascertained, and the Block period consists of previous years relevant to ten assessment years preceding the previous year in which the search took place and includes the further period up to the date of commencement of the search. But the undisclosed income is to be computed with reference to the entire Block period and it is the total undisclosed income relating to the Block period that is charged to income-tax under sub-section (2) of section 158BA. It follows that the results of the different various years comprised in the Block period will have to be aggregated in order to find out the 'total undisclosed income relating to the Block period'. In other words, the Block period is to be treated as the previous year and so it follows that the losses suffered during certain parts or periods of Page 45 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai the Block period have to be set off or adjusted against the income earned during the remaining parts or periods thereof. Thus on legal principles the contentions of assessee are valid. 18.4 Apart from the legal principles stated above the facts also indicate the above contentions are genuine. As seen from the order assessee's claim of purchase of assets, sale and lease back transactions were under inquiry in the assessment proceedings and AO conducted survey proceedings and also made further inquiries with various purchasers, banks etc. This gets support from the VDIS declarations prepared and being filed by assessee. As a part of paper book the Revenue has filed copy of the assessment order along with the office note of AO, which makes an interest reading which is as under:
"Office Note Search under section 132 in this group was carried out on 18.12.1997 and the cases were initially centralized with the DCIT Central Circle-33. After the search Shri Homi Patel, Chairman & Managing Director left the country and has not returned since then as there are several non bailable warrants against him in connection with cases under section 138 of the Negotiable Instruments Act. Shri B.S. Doctor, another director is facing 78 such cases filed at several places. All other group companies including REPL Synergy Power Systems Ltd got wounded up vide Mumbai High Court's order and their premises were sealed by the Official Liquidator. On 21.04.1998 the main company i.e REPL Engg. Ltd made application to the B.I.F.R. which awaits admission.
For administrative convenience, the cases were thereafter transferred to this circle vide order under section 127 dated 08.09.98 passed by the CIT (C)-III. As per the appraisal report (Para 3 of the DDs forwarding letter dated 21.03.1998) the search action has resulted into discovery of documents suggesting evasion to the tune of `.200.00 crores on account of claim of depreciation and lease rentals on non existing assets. (This includes estimated depreciation and lease rentals till the date of search which assessee was expected to claim). The only job left for AO is to find out the assets representing the concealed income as desired by the Page 46 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai ADIT in his concluding remarks on page 104 of the appraisal report. Ideally this should have been the other way round. Whether any asset is existing or not can be ascertained simply by making spot inquiries under section 133A. In fact the claim of depreciation on non existing assets sold to IDBI and leased back to assessee was conclusively proved as bogus much earlier. This is evident from the seized papers 86 and 87 of annexure A-
2 dated 20.02.98 which is a photocopy of letter dated 30.03.97 written by IDBI to REPL. It is mentioned therein that vide order under section 143(3) dated 26.03.96 and 27.03.97 respectively for AY 1993-94 and 1994-95 passed in their case, the claim of depreciation on non existing assets purchased from REPL was rejected by AO and asking REPL to pay the demand as a result of the above assessment orders. Accordingly further follow up in the case of REPL was all that was necessary to disallow consequent lease rentals and depreciation on assets of similar nature.
3. Be that as it may, it is claimed in the appraisal report that as a result of search, evidence proving non existent nature of assets have been found. It would appear from the seized papers that assessee was himself about to surrender the claim of lease rentals and depreciation in the wake of order under section 143(3) dated 26.03.96 and 27.03.97 passed in the case of the IDBI by filing declarations under the VDIS. Unfilled VDIS declarations have been seized. Because of the action under section 132 assessee became ineligible for VDIS. He therefore could not pay more than ` two crores which he obviously intended to. However, in view of the findings in the case of the IDBI, other finance companies who had entered into similar transactions later on filed declarations under VDIS as mentioned on page 98 of the appraisal report and paid the tax. This way obliquely the objective of the search can be said to have been achieved.
4. The appraisal report and the seized material were extensively discussed with the Addl. CIT. It occurs that what assessee did was essentially a hawala racket earning some commission and in that process enabling him to show huge turnover in the company's account to secure more finance from financial institutions as it was already heavily indebted. A major part of the sale proceeds of Wind Turbine Generators was immediately returned to the concerned finance companies by way of Page 47 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai advance lease rentals. The finance companies claimed 100% depreciation on non existing assets purchased from REPL and the lease rentals received was shown as income. The REPL on his part, claimed depreciation for other WTGs on own account to book huge profit in company's books. Since the idea was to claim tax benefit and to show huge book profit at the same time, all such paper transactions of sales, purchase and lease rentals were necessarily to be recovered in the regular books of account and this way there is hardly any unrecorded transaction. Most part of the Appraisal Report however repeats over and again the loose papers showing transaction in sale of WTGs which assessee already admitted as bogus though not unrecorded. Some of the remarks indicating huge tax evasion (Page No.68 of AUTHORISED REPRESENTATIVE referring to seized papers No.49 to 58) defies any description concerning knowledge of accountancy.
5. As stated above the ADIT has generously referred to a large number of documents showing transactions of sale and lease of non existing assets (WTGs) on almost each page of the appraisal report. Discussion on page No.116 and 117 of the Appraisal report itself makes it clear that only a fraction of the total amount exceeding `.75 crores involved in the leasing was in fact received by assessee. There are some other seized papers referred to in the appraisal report. Assessee was confronted with all such papers but there is no compliance. Unfortunately the regular books of account have not been seized.
Accordingly no direct verification is possible. However, summons were issued to the banks and copies of bank statements were obtained to verify particularly assessee's claim that the seized letters indicating arrangement of foreign remittances were all fabricated messages to hoodwink creditors and the banks. This appears to be correct as the bank accounts do not corroborate receipt of remittance of huge amount referred to therein. The contents of the seized papers were discussed with the Addl. CIT from time to time. Since the regular books have not been seized and as assessee has not made any attempt to explain any of the seized paper by producing such books of account, there is no alternative but to draw adverse inference wherever necessary and taking an overall view estimated additions to cover the seized papers have been made.
Page 48 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
6. It is seen from the records that assessee was in joint venture with Elf Lubricants, Paris since F.Y 1994-95.The total turnover was `.51 crores. Other joint ventures started from the same year are REPL - VSZM Hungary and REPL (Malaysia) SDN-BHD. Remittances on such accounts for various export earnings are though regular banking channels. So far as the Oxcamb is concerned, in vies of the evidences referred to in the order, the same is held as benami concern of assessee.
7. In the course of discussions held regularly with the Addl. CIT regarding the progress of investigation, it was decided to send proposal for provisional attachment under section 281B. Accordingly all known assets of the company have been provisionally attached on 02.07.98. The permission expires on 31.12.99 and the CIT has already been requested to extend the same for further period upto 31.03.2000".
(emphasis supplied).
18.5 Thus, as can be seen from the above, there is an admission by AO on record that these transactions were already being ascertained and inquired in the 133A proceedings and just because the search and appraisal report, AO has considered them in the Block assessment proceedings. Even before the search, purchase of non existing assets from REPL was rejected in the case of IDBI on the basis of which the assessment in that case was completed for AY 1996-97. Therefore, assessee's contentions that these matters were crystalised much before the search proceedings has to be accepted. Therefore, the same cannot be considered in the Block assessment.
18.6 Even in the Block assessment completed there are other contentions that the losses to be considered in the Block assessment can be claimed and set off. In our opinion the learned CIT (A) wrongly considered the issue while rejecting assessee's contentions. As can be seen from the case law extracted the losses which were determined and eligible for set off in the regular assessment cannot be considered in the Block assessment but Page 49 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai there is no restriction under the law to set off the losses arrived at the Block period itself which has nothing to do with the quantified losses in regular assessments. Therefore, on that issue also assessee's contentions are valid.
18.7 Other issue to be considered is to give effect to the entire transactions of it is to be considered as bogus. It was assessee's contentions that the entire sale and lease back transactions being bogus, what is required to be adjusted is that the sale of electricity shown as income should be excluded while considering the disallowance of depreciation on the non existing assets and also losses incurred in the transactions. Further it was also contention that the lease payments being treated as bogus should be adjusted by way of interest payable for the finance obtained. 18.8 Even though these aspects were agitated by assessee, these were not considered at the right spirit by AO and the CIT (A). Therefore, we are of the opinion that the orders passed by AO and the CIT (A) suffers from various deficiencies both on principles of the law as well as on facts. Assessee has placed large voluminous paper books and documents and it is not possible for us to examine each and every document to verify whether the same can be considered in the Block assessment or in the regular assessment. More over the amounts claimed in Return of Income of Block require reconciliations with the amounts submitted before CIT(A) particularly Annexueres B-1 to B-5 placed in Paper book from Pages 481 to 509, which included amounts admitted to be undisclosed income in Block assessment. It is on record that some of the transactions and depreciation disallowed was already considered by AO in the regular assessment even though some of the additions in the regular assessment was deleted by the CIT (A). We are of the opinion that since inquiries were conducted under section 133A much before the search, the certain extent of depreciation claimed on non existing assessments having been Page 50 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai crystalised, those are to be considered in the regular assessment only. Since this has effect on carry forward of depreciation and losses in the regular assessment, it is all the more necessary to be made in the regular assessment as none of the transactions are outside the books of account. As bogus nature of various entries and claims having been concluded before the search and assessee was contemplating filing VDIS declarations, we are of the opinion that based on the office note of AO as well as the fact that the matters were crystalised before the search has taken place, the claims of bogus depreciation, bogus sale and lease back, paper profits earned in the sale of electricity and the allowance towards interest should be considered in the regular assessment as all the transactions are arising out of the books of account. If there are any other transactions not connected with the 133A proceedings and having been crystalised by the search, these have to be considered in the Block assessment. Since this require detailed examination of not only the survey folders but also various statements recorded and the incriminating material therein, in the interest of justice, we set aside the order of AO and direct AO to establish and examine each issue in the light of legal principles stated above. . 18.9 It is also one of the contention that assessee has not claimed depreciation in some years, but still these were considered as undisclosed depreciation claim in the Block assessment. Since assessee has not claimed depreciation, the question of treating the same as undisclosed does not arise in the Block assessment. Therefore, to that extent since the claim is not made, disallowance per se does not arise. These aspects should be kept in mind by AO while crystalising the disallowance of depreciation claimed in the regular assessment.
18.10 The learned CIT (A) has deleted the disallowance made in regular assessment on the basis of assessee's contentions and the Revenue also did not prefer any appeal. The learned DR made Page 51 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai submissions that following the principles of Hon'ble Bombay High Court in the case of Sudhakar T. Pendse v. Income-tax Officer 323 ITR 22 that a particular stand has been accepted by the tax payer, he would not be permitted to take contrary stand on the same issue before the higher authorities. While agreeing with the principle, we are unable to accept the contentions of the learned DR as these proceedings are entirely different and assessee can contest without prejudice to various arguments on issues of legal nature. As far as the law is concerned the issues which got identified in the regular assessment or recorded in books of account cannot be considered in the Block assessment, unless there is incriminating material. The VDIS declaration cannot be considered as incriminating material as it is an intention of assessee to settle the matters consequent to the inquiries already conducted and crystallized in the regular assessment proceedings. These documents which were yet to be filed before the Department cannot be considered as incriminating material establishing the bogus nature of the transactions, as they do not relate any particular transaction and these does not establish anything except the intention of the company to settle the disputed matters. Having crystallized the issue in the assessment proceedings, not only in the case of assessee but also in the case of IDBI, the basis on which certain disallowances were already made, it is obligatory that these matters are to be examined in the regular assessment only. In case the Revenue did not prefer appeal on the order of CIT(A) on regular assessment, it is the mistake of the Revenue but this forum cannot permit the addition or deletion in Block assessment on the matters which were crystalised in the 133A proceedings, without there being any incriminating material. Therefore, the Revenue can file the appeal belatedly with a condonation so as to reverse the findings of the CIT (A).
18.11 Before concluding we are also conscious of the fact that lot Page 52 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai of time has passed in deciding the matters both at the level of CIT(A) (almost five years) and before this forum (about eight years) due to various factors mainly as the company became sick and is fighting many court cases as well. The quantification of losses and depreciation may become academic in nature as efflux of time may not permit setting of losses in later years. AO also may find difficult to reopen the past assessments which may not be pending. Therefore the only option is to give findings in these proceedings about the necessary working as these matters are to be examined in detail on facts and pass consequential modification orders for carried forward losses and depreciation in regular assessment proceedings u/s 154 or 155 of the Act. Assessee is at liberty to admit the incomes / losses in Block proceedings as it has taken a stand before CIT(A) and admitted undisclosed incomes, to settle matters. However, the above suggestion to assessee is only advisory as legally the issues can be contested on principles of law, which we are aware.
18.12 In the result the block assessment order on the above grounds are set aside with a direction to AO to reconsider the matter as per the guidelines broadly stated above. He should also consider the detailed submissions made before AO and the CIT (A) placed in the paper book before us and quantify the undisclosed amounts on the basis of incriminating material.
19. Ground No.11 pertains to addition made for imaginary receipts of foreign remittances for AY 1997-98 for an amount of `.10,00,00,000.
19.1 AO held that no explanation was furnished by assessee on the above amount. Shri Homi Patel and Shri Sudhir Pethe had stated on oath that most of the papers were fabricated messages to be shown to their creditors including Bank assuring them of huge remittances in the near future. Assessee has joint venture with Page 53 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai ELF Lubricants Ltd Paris as also with other companies in Hungary and Malaysia. Assessee refrained from giving any explanation in respect of the seized papers except contesting that a few of them were fabricated documents and no remittances were actually received.
19.2. Before the CIT (A) it was submitted that during the course of search Shri Homi Patel, MD on oath as also the Executive Director that the said loose papers did not represent any transaction but the papers were fabricated for stalling the recovery by the creditors by assuring them that the company was likely to receive remittances which in turn would be utilized for the payment to the creditors. The statement made during search should be believed in respect of the loose papers under consideration. 19.3 It was held by the learned CIT (A) that decision in the case of P.R. Metrani (HUF) 251 ITR 244 (Kar), the jurisdictional High Court held that the presumption under section 132(4)A of the Act is available at the assessment stage as well. The provisions of section 132(4)A of the Act remained in the statute even after omission of section 132(5) of the Act w.e.f. 01.07.1995. According to the CIT (A), AO is right to finalise the assessment relying upon the documents utilized by him for raising the said presumption, if assessee fails to rebut the said presumption. In the case of CJ Shah & Co., 246 ITR 671 (Bom.), the Bombay High Court held that where the material is decided after the seizure operations are carried out, AO is required to determine the undisclosed income on estimations. In the case of Rajendra Kumar Lohati, 266 ITR 621 (Raj.) it was held that the addition in a Block assessment can be made even where there is no direct evidence found during the course of search. The recording cannot be equated with lease rent payments and depreciation in respect of non existing asset. Onus is on assessee to explain the entries therein in a proper manner in terms of section 132(4A) of the Act. The action of AO of making Page 54 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai estimation is sustained.
19.4. Before the ITAT it was submitted that:
a) Statement on oath clearly confirmed that the loose papers did not represent any income and were fabricated for stalling the recovery by creditors.
b) Adhoc addition based on surmises and guess work without any evidence or proofs.
c) The same cannot be treated as undisclosed income
d) Outside the ambit of s. 158BB
e) AO has not identified any paper nor has he specified any transaction.
f) Most of the papers had no links to assessee.
g) Some papers represented fictional recordings and were fabricated to raise more funds for the company.
h) Estimations without basis or proofs cannot be subject to Block Assessment.
i) The amount of Rs.10.00 crores representing the alleged foreign remittances did not represent any unaccounted income.
j) There are no J.V of the company as alleged by AO. Further no specific loose paper has been considered for making this addition by AO. Assessee has explained most of the papers were fabricated for satisfaction of the bankers.
k) The AO has not provided assessee with any details whatsoever on loose papers, whether the said papers belong to the company, thus making it difficult for assessee to explain the entries therein in a proper manner to the Hon. Page 55 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai CIT(A).
l) Copies of Loose papers presently not available with company though repeatedly applied for.
m) No working of addition has been provided by the A.O 19.5 Case Laws relied by CIT(A) are not applicable to the facts of the case of assessee. This case cited by CIT(A) is in favour of assessee and actually substantiates the stand or assessee company that no adhoc or estimated addition can be made on the basis or loose paper round during search unless they are proved to have generated undisclosed income. Once it is found and established that seized materials represented Undisclosed Income, then only in such circumstances it was possible to make a fair estimation of undisclosed income. Assessee relied on the following case law in support of contentions:
1. Rajendrakumar Lahoti, 266 ITR 621 (Raj.) In this case, undisclosed income was computed since there were certain events which had proved that certain undisclosed expenditure "as incurred by assessee. The Ld. CIT (A) has erred in relating this case in assessee's case because mere existence of certain loose papers didn't confirm that the appellant has earned undisclosed income. AO did in no way specify on what basis an income of Rs. 10 crores was undisclosed on the basis or loose seized papers. Accordingly, in the said Lahoti case the fact that the event had taken place was undisputed and" hat "as estimated was the expenditure incurred on such undisputed income. In assessee's case no such findings arc established warranting an estimation.
2. P.R.Metrani(HUF) 251 ITR 244 (Kar) In this case. onus was discharged by the Deptt. and assessee railed to discharge his burden. While in the Page 56 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai appellant's case onus was on A.O. to have disproved the facts, Such a huge addition could not have been made simply on the basis or loose papers of no consequence and without giving any explanation.
19.6 We have considered the rival contentions. As seen from the office note extracted earlier AO made enquiries with Banks and came to a conclusion that the so called remittances are not genuine. Therefore the contention of assessee that these are forged documents for the purpose of obtaining credit can be accepted. Since no income/receipt was identified the document need not be considered for making any addition that too adhoc additions. The ground raised by assessee is therefore allowed.
20. Ground No.12 (a)(i) is with regard to the outstanding bill of Scholar Finance Management Pvt. Ltd for AY 1998-99 for an amount of `.4,55,000.
20.1 It was held by AO that loose paper was found (No.5 of Annexure A-3 on page of assessment order). Hence assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
20.2 It was submitted before the CIT (A) that the loose paper is a reminder to Mr. Pethe, Director of Avon. It reminds the company Avon about the outstanding bill of `.4.55 lakhs which was due to be paid on 13.05.1997 and the said loose paper has nothing to do with the affairs of the company REPL. The said loose paper in any case does not indicate any receipt of income by REPL or anyone Page 57 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai else and the statement on oath nowhere deals with the said loose paper under consideration.
20.3 It was held by the CIT (A) that the letter does not indicate that the amount is due from Avon Global Pvt. Ltd rather there is no reference of that concern in the correspondence. If the regd. Office of the said concern Avon is located at Dadar (East) Mumbai, there is no reason for the paper being found in the possession of the assessee company. He upheld the addition.
20.4 Assessee before us submitted that:
(i) The said loose paper has nothing to do with the affairs of the company REPL
(ii) the said loose paper in any case doesn't indicate any receipt of income by REPL or anyone else.
(iii) The said paper does not represent any unaccounted income of the company
(iv) the statement on oath nowhere deals with the said loose paper under consideration
(v) that undisclosed income imagined by the Ld. A.O. without there being any proofs to support any addition 20.5 We agree with the contentions. As seen from the document and contentions the transaction was a inter office note about money to be received and made by Director of Avon. This document has no relation to company and so no undisclosed income can be brought to tax on the so called receivable. We are also guided by the finding that most of the transactions are recorded in books and practically no unrecorded transaction. The ground is allowed.
21. Ground No.12(a)(ii) is relating to Interest for the AY 1998-99 for `.45,164.Page 58 of 84
ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 21.1 It was held by AO that loose paper No.9 in Annex.A-3 on page 19 of the assessment order vide Page 5123 of PB 3B was found. Hence assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year. 20.2 It was submitted before the CIT (A) that AO presumed that the said loose paper represented income of the company which had not been accounted. AO should also have added the amount of `.12,370 being TDS on such interest and the said loose paper represents the interest calculation in respect of an ICD received by the company which was duly accounted in the books of company. 20.3 It was held by the CIT (A) that though there is no mention of any concern in the document on the basis of which the addition has been made, the fact remains that the document was found in the possession of assessee company. Therefore, the onus is on assessee company to discharge fully the nature of entries made therein.
21.4 It was submitted before us that:
a) The said paper does not represent any unaccounted income of the company
b) the said loose paper in any case doesn't indicate any receipt of income by REPL or anyone else.
c) that the transaction were related to the company are duly accounted in the books of account
d) the statement on oath nowhere deals with the said loose paper under consideration
e) A.O. presumed that the said loose paper represented income of the company which had not been accounted
f) A.O. should also have added the amount of Rs.
12,370 being TDS on such interest Page 59 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai
g) the said loose paper represents the interest calculation in respect of an ICD received by the company which was duly accounted in the books of company
h) That the undisclosed income imagined by AO without there being any proofs to support any addition.
21.5 This contention of assessee are valid. There is TDS also made on the amount. This indicates that the transaction is one of regular interest receipt. The document seized also does not indicate the company to which it pertains to . The query by AO as extracted in the order (at page 19) was only asking the assessee to explain whether the same was recorded by any group concerns. In view of this, we hold that this document does not establish any unaccounted income. In fact, AO made addition of net amount without considering the TDS made on the gross amount. The ground is allowed.
22. Ground No.12(a)(iii) is with regard to loan amount adjustment for the AY 1998-99 amounting to `.70,00,000 and `.4,34,000.
22.1 AO found loose paper No.12 & 125 in Annex A-3. Assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
22.2 It was submitted before the CIT (A) that assessee is not connected with the said loose papers. The said papers do not bear any name of assessee and do not indicate any income or undisclosed income/receipt of assessee. The said loose paper has nothing to do with the affairs of the company REPL. the said loose paper in any case doesn't indicate any receipt of income by REPL or anyone else. The said paper does not represent any Page 60 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai unaccounted income of the company. The statement on oath nowhere deals with the said loose paper under consideration.
22.3 It was held by the CIT (A) that the said document is addressed to Mr. Pethe of REPL, therefore, it is for assessee to discharge the onus. Considering it has failed to do so, addition is sustained.
22.4 It was submitted before us that the said loose paper has nothing do with the affairs of the company REPL. The said loose paper in any case does not indicate any receipt of income by REPL or anyone else. The said paper does not represent any unaccounted income of the company. The statement on oath nowhere deals with the said loose paper under consideration and that undisclosed income imagined by the Ld. A.O. without there being any proofs to support any addition.
22.5 Considering the submission on the issue, we restore the issue to the file of AO to examine the document and the records to decide whether the same can be considered as unaccounted. The ground is allowed for statistical purpose.
23. Ground No.12(a)(iv) is with regard to N. Cheraj Travels Pvt. Ltd for AY 1998-99 for `.8,371.
23.1 It was held by AO that loose paper No.2 of Annex.A-3 was found and hence assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
23.2. It was submitted before the CIT (A) that the loose paper appears to be a bill raised by some travel agent of Delhi on one P. Chakravorthy and it has no relationship whatsoever with the affair Page 61 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai of the company.
23.3 It was held by the CIT (A) that assessee failed to show that Shri P. Chakravorty was an employee of the company and if so payment indicated in the document has been accounted for in the regular books of account.
23.4 Before us it was submitted that:
(a) The loose paper appears to be a Bill raised by some travel agent of Delhi on one P.Chakravorty which has whatsoever no relation with the company
(b) The said paper does not represent any unaccounted income of the company
(c) the said loose paper in any case doesn't indicate any receipt of income by REPL or anyone else.
(d) the statement on oath nowhere deals with the said loose paper under consideration
(e) that undisclosed income imagined by the Ld. A.O. without there being any proofs to support any addition
(f) Assessee never claimed that Shri P.Chakravorthy was an employee of the company 23.5 Considering the finding by AO that most of the transactions are recorded in books and also the fact that this bill does not pertain to assessee, we are inclined to accept assessee contention that this does not pertain to assessee and more so as unaccounted transaction. There is no enquiry also whether the amount was paid or settled. For these reasons we allow the ground and delete the addition.
24. Ground No.12(a)(v) pertains to Runner Corporation for 1998-99 for `.25,00,000.
24.1 It was held by AO that loose paper No.31 was found in Annexure A-4 and hence assessee was asked to furnish complete Page 62 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
24.2 It was submitted before the CIT (A) that the said loose paper indicates the movements in the Bank balance and the said transactions relate to the regular affairs of the company and do not reflect anything which is un-accounted or is in the nature of undisclosed income. The said funds as expected were not received from M/s Runners Corporation and the statement on oath nowhere deals with the said loose paper under consideration.
24.3. It was held by the CIT (A) that mere fact that in the accounts of M/s. Runners Corporation this amount is not appearing is of no consequence. The claim of assessee has been that list was prepared in connection with working out of the anticipated fund to be raised. If that is so and the amount was not received, ultimately assessee should have produced some corroborative evidences. Having failed to do so the amount is liable for addition.
24.4 Before us it was submitted that the said paper does not represent any unaccounted income of the company and the said loose paper in any case doesn't indicate any receipt of income by REPL or anyone else. The transactions were related to the company are duly accounted in the books of account. The statement on oath nowhere deals with the said loose paper under consideration and that undisclosed income imagined by the Ld. A.O. without there being any proofs to support any addition. Even M/s Runners Corporation was not examined by AO. It was also not known why only M/s Runners Corporation was selected, out of so many parties.
24.5 We have considered the issue. The copy of the document was not placed before us. Moreover the contention that this transaction Page 63 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai is accounted was not examined properly. Therefore in the interest of justice, we restore the matter to AO to examine the document and contentions to decide afresh. Ground allowed for statistical purpose.
25. Ground No.12(a)(vi) pertains to Shri S.N. Dhruv for AY 1998- 99 for `.10,00,000.
25.1 It was seen by AO that loose paper No.38 to 41 was found in Annexure A-3 and hence assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
25.2 It was submitted before the CIT (A) that REPL and other concerns had in year 1993 acquired shares of Saple's Scale Mfg.Co Ltd. The loose papers contain the detail of payments made to Shri S.N. Dhruv who was majority shareholder of the said Saple's Scale. These payments were made by account pay cheque in all cases but for `.10.00 lakhs which was paid in cash by M/s Avon which are self explanatory and the payments are duly accounted in the books of account of various concerns.
25.3 It was held by the CIT (A) that there is no indication that the payment of `.10.00 lakhs has been made by M/s Avon Global Pvt. Ltd as made out by assessee. The addition is sustained as incriminating document was found in the possession of assessee. 24.4 Before us it was submitted that Company REPL & other concerns had in year 1993 acquired shares of Sap Ie's Scale Mfg. Co. Ltd. The loose papers contain the detail of payments made to Shri S.N.Dhruv who was majority shareholder of the said Sap le's Scale. These payments were made by account payee cheques in all cases but for Rs. 10.00 lacs which was paid in cash by M/s. Avon. These papers are self explanatory and the payments are duly Page 64 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai accounted in the books of account of various concerns. The said paper does not represent any unaccounted income of the company Moreover, the statement on oath nowhere deals with the said loose paper under consideration.
25.4 Ground No.12(a)(vii) pertains to Shri receipt from G S Khator for AY 1996-97 for `.7,00,000 25.5 Loose paper No.1 and 2 of Annexure A-8 was found by AO, hence assessee was asked to furnish complete details relating to the transactions mentioned in the above papers. Nothing was heard from assessee and therefore, the same is treated representing the undisclosed income for the relevant year.
25.6 Before the CIT (A) it was submitted that assessee and its group concerns had effected withdrawals from the accounted bank accounts from which a payment of `.7.00 lakhs was made to Mr. G.S. Khator, an employee of assessee and no action was initiated against 3rd parties till date.
25.7 Before us also assessee reiterated the submissions made before the learned CIT (A) and the said paper does not represent any unaccounted income of the company.
25.8 In these two sub grounds (12 (a) (vi) and 12 (a) (vii) also the matter require examination by AO. The copy of the document was not placed before us. Moreover the contention that this transaction is accounted was not examined properly. Therefore in the interest of justice, we restore the matter to AO to examine the document and contentions to decide afresh. Grounds allowed for statistical purpose.
26. Ground No.13 pertains to investment in immovable properties for AY 1998-99 of `.50,00,000 (`.19,50,00,000 deleted by the CIT (A).
26.1 It was held by AO that assessee was asked to furnish complete details in response to show cause notice dated 28.09.99 failing Page 65 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai which it was held that these properties were in fact owned by assessee in different names. Some of the properties are not prima facie appearing in assessee's books of account. All such properties are held to be benami properties of assessee as no explanation regarding the identity of the party concerned and the source of acquisition has been furnished by assessee. Individual cost of acquisition of each property was not made available by assessee. In the absence of any explanation, AO added an amount of `.20.00 crores as undisclosed part of the investment in acquiring the properties on estimated basis.
26.2 Before the CIT (A) it was submitted that the said property belongs to Eltrol Ltd and assessee had agreed to acquire the shares of Eltrol Ltd from its erstwhile promoter and his group. 26.3 It was held by the learned CIT (A) that except for the property being W 163 MIDC, Dombivali, the ownership of remaining properties stands established and no addition on this account can be sustained. No details regarding property being W-163 MIDC Dombivali was furnished by assessee even after copy of remand report sent by AO. Consequently, out of `.20.00 crores added to the undisclosed income, the addition of `.50.00 lakhs was sustained and balance of `.19.50 crores deleted.
26.4 Before us it was submitted that AO has added the said amount on the basis of loose paper No.29 of Annexure A-4. A bare look confirms that the said paper neither indicates any value nor investment nor the year of investment & nowhere states or confirms the existence on any unaccounted or undisclosed income. AO has simply assumed that the said loose paper represented such income. The owner of the property being W-163, MIDC, Dombivali was Eltrol Ltd. Loose paper itself confirms the 3rd party ownership. It does not represent any undisclosed income under section.158B(b) and the same is outside the ambit of section. 158BB. As far as column of 'approximate price' is concerned, that it is an estimate made of Page 66 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai realizable value of property in a rough attempt to ascertain the net worth of the group. The said property belongs to Eltrol Ltd., assessee had agreed to acquire the shares of Eltrol Ltd. from its erstwhile promoter and his group but subsequently the deal didn't materialize and the shares along with the property were given back to its erstwhile promoters.
26.5 Considering the submissions and the fact that all other properties were accepted, there is prima facie evidence that the contention of assessee is correct. Moreover the shares of Eltrol was not acquired by assessee company or Director. Therefore the addition can not be made just because the documents was seized. Considering that all other properties were verified and accepted, we do not see any reason to sustain the addition when there is no evidence that the said property belong to assessee. The addition is deleted. Ground is allowed.
27. Ground No.14 pertains to Shares seized of company and M/s Trans Power Engg. Ltd for AY 1998-99 amounting to `.26,88,300. 27.1 It was held by AO that Annexure 'O' to the Panchnama dated 27.02.1998 confirmed seizure of `.2,68,830 shares of face value of `.10.00 each of M/s Trans Power Engg. Ltd and M/s REPL Engg. Ltd in the names of various persons found at the time of search. Assessee was unable to provide any explanation nor any evidence or confirmations from the parties to the effect that these persons were real and beneficial owners of the seized shares. Thus the value of seized shares is treated as assessee' undisclosed income. 27.2 Before the CIT (A) it was submitted that the seized shares mainly belong to Lyla Homi Patel who is a family member of the promoter. The shares have been acquired by the persons at the time of public/rights issue and since then are owned by them. These shares are acquired by them out of their accounted funds and the payment thereof is made by account payee cheque and the investment is duly reflected in the respective hands. The shares Page 67 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai were kept with the company to meet any contingency of raising funds by using them as collateral security. The Companies Act and in particular Section.77 of Companies Act prohibits a company from purchasing its own shares and therefore, the company could never have bought these shares. Non inquiry was made by AO with these persons to confirm his action.
27.3 It was observed by the CIT (A) that assessee has not been able to produce any evidence of the sources of investment. While the shares of Trans Power Engg. Ltd were acquired by the assessee company and its associates from the open markets. However, no evidence as to source of investment has been produced. Provisions of section 77 of the Companies Act is no relevant in the case considering that is only applicable where there is a legal acquisition having taken place.
27.4 Before us it was submitted that:
(a) These shares were in the name of 3rd Parties & many were the shares of the company REPL itself.
(b) No material or loose paper found or seized to show the investment by the company
(c) The only material found was share certificate issued by the company in the name of shareholders
(d) Some of the share certificates were not even of the company but were of Transpower Engg. Ltd.
(e) No inquiry was made by AO with these persons to
confirm his action
(f) The reasons recorded by AO for addition of
`26,88,300/- are not based on any evidence or facts.
(g) The addition has been made simply because 2,68,330 shares of Rs.10/- each of Transpower Engg Limited & REPL Engineering Limited were seized.
(h) Inability of the joint secretary of the company to explain the source of the shareholders & that too Page 68 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai during the course of search could not be a ground for addition in the hands of the company.
(i) The shares were the property of the shareholder
(j) Shares were issued outside the Block period in the past.
(k) The Addition is made for not explaining the correct facts.
(l) None of the shares were in the name of assessee
(m) CIT(A) erred in stating that the shares were acquired by assessee company
(n) As admitted by the CIT(A) these shares were Purchased from the open market by 3rd parties. Hence can't explain source.
27.5 After considering the rival contentions, we are unable to sustain the action of AO. Instead of making addition in the hands of shareholder, in this case assessee is not shareholder, the addition was made without any enquiry. Just because the share certificates were seized from the company the addition can not be made. Assessee discharged his onus of explaining the ownership to director and reason they are found in assessee possession. These are not disproved. We are of the opinion the addition can not be made in the hands of assessee. The ground is allowed.
28. The AO is directed to give adequate opportunity to the assessee, consider the submissions after due examination of facts and decide the issues which are restored to assessee. Assessee is directed to cooperate in the proceedings and place relevant details/ documents for proper examination. In case of non cooperation AO is free to take any adverse view on the matters. Many other case law were also referred in the submissions. We have considered them but could not extract them for the sake of brevity. Assessee and AO are directed to keep the principles of law and provisions of the Act in deciding the issues restored to the file of AO for fresh consideration.
Page 69 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai With these observations and directions, the appeal is considered allowed for statistical purposes.
ITSS No.162/Mum/200529. The revenue has raised the following grounds:
1) On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding in Para 45 of his order that the profits offered by assessee on sale and lease back of non genuine assets of `.10,29,93,553 for the AY 1996-97 and `.11,65,11,868 for the AY 1997-
98 in the regular assessments should not form a part of the undisclosed income of the Block period, without appreciating the facts of the case.
2) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 55 of his order in deleting the addition of `.27 crores, being the investment made by Oxcamb Investment Ltd by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules, 1962 without appreciating the facts of the case.
3) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Paa 56 of his order in deleting the addition of `.20 lacs, being the investment made by Kamalkant Chhotalal Exporters P Ltd by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules 1962 without appreciating the facts of the case.
4) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 71 of his order in deleting the addition of `.8,94,60,000 by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules, 1962 without appreciating the facts of the case.
5) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 73 of his order in deleting the addition of `.13,46,25,200 on the ground that there was no indication that assessee's income has been diverted for the purchase of shares, without appreciating the facts of the case.
6) On the facts and in the circumstances of the case and in law, the CIT (A) erred in 75 of his order in deleting the addition of `.1,82,01,041 without appreciating the facts of the case.
7) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 77 of his order in deleting the addition of `.6,30,09,101 without Page 70 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai appreciating the facts of the case.
8) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 79 of his order in deleting the addition of `.17,40,900 by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules, 1962 without appreciating the facts of the case.
9) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 81 of his order in deleting the addition of `.30 lacs being advance from Bharat Vijay Mills by admitting additional evidence from assessee in violation of the Rule 46A of the I.T Rules 1962 without appreciating the facts of the case.
10) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 94 of his order in deleting the addition of `.61 lacs, by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules, 1962 without appreciating the facts of the case.
11) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 96 of his order in deleting payment of `.18 lacs, by admitting additional evidence from assessee in violation of Rule 46A of the I.T. Rules, 1962 without appreciating the facts of the case.
12) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 101 of his order in deleting the addition of `.2,36,05,000 by admitting additional evidence from assessee in violation of Rule 46A of the I.T.Rules 1962 without appreciating the facts of the case.
13) On the facts and in the circumstances of the case and in law, the CIT (A) erred in Para 107 of his order in deleting the addition of `.19.50 crores without appreciating the facts of the case".
29.1 As can be seen from the grounds raised the grievance of Revenue is mainly on admission of additional evidence by ld. CIT(A). As the order was passed ex parte on the reason that assessee did not cooperate in the proceedings, AO made various addition on the basis of seized documents in the absence of explanation from assessee. Before the Ld CIT(A) while contesting the issues on principle of natural justice, assessee filed additional Page 71 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai evidence supporting the claims and contentions. These additional evidence was referred to AO and many reports were obtained in the course of proceedings before CIT(A). After considering the objections and reports of AO, Ld CIT(A) vide para 16 and 17 of his order upheld the ex parte order while holding that assessee contentions on not giving reasonable opportunity was not correct. However, vide para 18 of his order by giving detailed reasons and following the principles laid by Hon'ble Bombay High Court in the case of Prabhavati S Shah 231 ITR 1 admitted the additional evidence as it was considered appropriate to determine the undisclosed income in the Block assessment proceedings. There is no violation of Rule 46A as contended by Revenue in each of its ground. For that reason alone Revenue grounds are not maintainable. However for the sake of record, we discuss the grounds on merits also as under.
30. Ground No.1 pertains to profits on sale and lease back for AYs 1996-97 (`.10,29,93,553) and for AY 1997-98 (`.11,65,11,868). This issue is inter linked to the sale and lease transaction undertaken by the assessee. AO did not consider the profits earned on these transactions to be bogus as contented by assessee.
30.1 Before the CIT (A) it was submitted that the company booked the profit on the sale of property (non genuine) asset to the financial institution which resulted in paper profit and was considered for determining the profit for the year. The profit so determined being paper profit was to be removed from the profit. 30.2 It was held by the CIT (A) that the sale and lease back arrangements were found to be non genuine and in respect of non existent assets in the course of search proceedings. The profits on account of the said transaction is entitled for deduction in the computation of the undisclosed income for the respective AYs forming part of the Block period.
Page 72 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 30.3. Considering the rival contentions and the nature of transactions undertaken and consistent with the stand taken on these transactions we see no reason to interfere with the order of CIT(A). Such profits are to be excluded and the quantum of addition on account of bogus lease rent and depreciation has to be reduced by the bogus profits. The ground is rejected.
31. Ground No.2 pertains to investment in shares and fixed assets of Oxcamb Invest (P) Ltd for AY 1996-97 amounting to `.27,00,00,000.
31.1 It was held by AO that Oxcamb Investment Ltd (OIL) was a foreign company and OIL was a benami concern of assessee. Investment in shares of REPL by OIL was treated as undisclosed income. AO however did not make any addition on the reason that large amount of cash was withdrawn from the account of M/s Universal Moulders and Fabricators as well as certain Avon group companies and the funds so withdrawn have been remitted abroad and brought back in the name of Oxcamb International Ltd. Investment in fixed assets and other investments in the final accounts of OIL i.e. `.27.00 crores (USD 67,57,429) was treated as undisclosed income of assessee remitted out of India through illegal channels. Since a part of the said fund has been later on utilized in acquiring the shares of REPL , no separate addition of `.21.00 crores was considered necessary.
31.2 Before the CIT (A) it was submitted that OIL, a company incorporated in Mauritius on 01.03.1995 and had obtained a permission from RBI for investing in shares of REPL which was granted by RBI. The investment was made by the said OIL out of borrowings from Taib Bank, Bahrain. The sources of fund therefore, are beyond doubt. Balance sheet as on 31.03.1996 of OIL confirms the borrowing from Taib bank and the corresponding Investment in REPL. OIL was not in possession of any funds and had not rerouted the funds remitted by REPL. No Page 73 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai funds were transferred by OIL from English Trust and OIL is not a benami concern of REPL.
31.3 It was held by the CIT (A) that the documentary evidence available with the department that was found and seized as part of the incriminating documents itself shows that for the purpose of making investment, the OIL had taken loan from Taib Bank, Bahrain. The company had obtained prior permission from RBI before making investment in the shares of REPL. The said bank for the purpose of making the investment had granted OIL a short term loan. OIL failed to meet the deadline in so far as repayment of loan is concerned. Due to which bank had initiated certain proceedings as is evident from the loose papers found in search proceedings. Thus investment made by OIL with the approval of RBI is required to be held as genuine investment and addition of `.27.00 crores cannot be sustained.
31.4 After considering rival contentions, we affirm the order of CIT(A) as the learned CIT (A) has verified the loose papers and the facts has been verified. OIL acquired shares under RBI approval from persons other than company. Similar addition in Homi R. Patel deleted by ITAT in appeal No.IT(SS)A 645/Mum/2004 vide page 25 to 27. OIL, a company incorporated in Mauritius on 01.03.1995 had obtained a permission from RBI for purchase of shares from some of the shareholders of the company REPL which was granted by RBI. The investment was made by the said OIL out of borrowings from Taib Bank, Bahrain. Therefore question of treating the investment as assessee income that too as undisclosed does not arise. The ground is rejected.
32. Ground No.3 pertains to deposit from Kamalkant Chotalal for AY 1996-97 for `.20,00,000. AO asked assessee to furnish copy of accounts of M/s Kamalkant Chotalal Exporters Pvt. Ltd and as assessee failed to provide necessary evidence, the amount was treated as income.
Page 74 of 84ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai 32.1 It was submitted before the CIT (A) that the said loose papers represent an ICD taken from Kamalkant Chotalal Exporters Ltd. The payment was made by account payee cheque, interest was also duly paid by account payee cheque and tax was deducted at source. Loan was taken against security by pledging the equity shares. A criminal case had filed by the company under section 138 of the Negotiable Instruments Act against REPL for recovery. 32.2 On these facts, It was held by the CIT (A) that the documentary evidence available which has been taken as the basis by AO for making addition show that the said concern had advanced the amount and on account of failure of assessee to repay it had initiated the proceedings under the Negotiable Instruments Act. There was no basis for AO to hold that the amount represented to undisclosed income the assessee company.
32.3 After considering the rival contentions we do not see any reason to disturb the finding of CIT(A) as he examined the facts and deleted the addition rightly. The ground is rejected.
33. Ground No.4 pertains to payment to PEIL and NILA for AY 1997-98 of `.8,94,60,000. AO asked assessee to explain the genuineness of payments and the purpose with evidence to PEIL and NILA and as assessee failed to produce necessary evidence, treated as income.
33.1 Before the CIT (A) it was held that loose paper No.1 which was a letter from PEIL confirming the receipt of payments from Avon Global Pvt Ltd/Avon Plastics under various cheques aggregating 47 in all were found. Loose paper No.2 is a letter dated 25.12.1996 from PEIL addressed to Avon Plastics Pvt Ltd acknowledging the receipt of a cheque of `.40.00 lakhs drawn on Bank of Madura Ltd, whereas Loose Paper Nos. 10 to 24 are photocopies of above mentioned cheques aggregating 58 in Nos. M/s Avon Global Pvt. Ltd/Avon Plastics Ltd had entered into agreements for purchase of Wind Turbine Generators on high seas Page 75 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai from M/s NILA and PEIL. Payments were made in pursuance of the above agreements. Copies of these agreements as also invoices of these companies were in fact seized by the search party which material was always in possession of AO. It was also submitted before the CIT (A) that none of the transactions relate to the company REPL nor do they indicate any involvement of REPL. 32.2 It was held by the learned CIT (A) that the Act itself provides for taxation of any undisclosed income in the hands of any person other than in whose name authorization of search has not been issued. Further as AR produced confirmation letter from the said companies that the payments are duly recorded in the books of the respective companies, he deleted the same.
33.3 Before us respective contentions were reiterated. Since it is also a factual issue which was examined by Ld.CIT(A), we do not see any reason to accept Revenue ground and accordingly rejected.
34. Ground No.5 pertains to alleged remittances from Oxcamb Investment Limited for AY 1997-98 of `.13,46,25,200. It was held by AO that the amount received from M/s Oxcamb Investment Limited was utilized for the benefits of the assessee company, which indicated that M/s Oxcamb is benami concern of assessee and AO treated the remittance as undisclosed income of the company. Before the learned CIT (A) it was submitted that loose paper No.42 is an undated working of details of receipts from M/s Oxcamb Investment Ltd which is registered and incorporated in Mauritius under proper and necessary approvals from RBI and had purchased shares of REPL Engg not directly by subscription, but by purchase from the then existing shareholders of the company. Receipt from Oxcamb is by various shareholders of REPL for transfer of shares to them and have no relationships of whatsoever nature with REPL. The said funds were received by Oxcamb Ltd from borrowings made from Taib bank Ltd Bahrain. It was held by the learned CIT (A) that there is no indication that the remittances received from Oxcamb is Page 76 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai a diversification of assessee's income or its confirmed utilisation is for the benefit of assessee company.
34.1 We do not see any reason to modify the well reasoned order of CIT(A) as the learned CIT (A) has verified the loose papers and deleted on facts. Shares were never issued to Oxcamb nor any money was received by REPL from Oxcamb. Addition of Rs.27 crores also made on the same grounds of alleged of Investment by OIL as per Ground No 2 was also deleted. Further copy of the loose paper in fact seized by the search party which was material for addition was always in possession of the Ld. A.O and this was considered by the CIT(A). ground is rejected.
35. Ground No.6 pertains interest component for AY 1997-98 of `.1,82,01,041. AO held that a loan of `.12.00 crores was taken from IFC under equipment credit scheme for which bogus invoices amounting to `.1164 lakhs were prepared. Since the loan amount does not seem to have been utilized for genuine purchase of assets and the funds have apparently been diverted for some other purposes, the interest accrued at the rate of 21.05% for the period 12.07.1996 to 31.03.1997 amounting to `.1,82,01,041 is disallowed as revenue expenses wrongly claimed. 35.1. Before the CIT (A) it was submitted that the said loose paper No.14 is unsigned and undated and AO was of the opinion that the said loan of `.12.00 crores was not utilized for the purposes of business and therefore, the interest thereon of `.1,82,01,041 was disallowed. The said loan was disbursed on13.07.1996 and was carrying interest at 26%. The interest for the period upto 31.03.1997 was `.1,39,77,806 which was debited to the Profit & Loss A/c. The said loan in any case was used for the purposes of business for repayment to various creditors of the company. The interest was duly considered in regular assessment for AY 1997-98 and was allowed as a deduction by AO. Further, disallowance of a claim of interest recorded in regular books of account cannot be Page 77 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai subject matter of Block assessment.
35.2 It was held by the CIT (A) that there is nothing to indicate that the documents reflect in any manner any element of profit embedded therein inter alia include IFCI loan of' `12.00crores under Equipment Credit Scheme and certain other loan and their utilisation. While the loan in itself cannot be the subject matter of addition, the interest thereof has to be allowed. Therefore, on the basis of this, there cannot be addition to the undisclosed income of assessee company to the extent of `1,82,01,041. 35.3 Before us also assessee reiterated the submissions made before the learned CIT (A). Alternatively, the said amount has already been included in the disallowance of interest ofRs3.96 crores for A.Y. 1996-97 and `8.32 crores for A.Y.1997-98 as per Ground No. 10 of Appeal No. 152/Mum/2005.
35.4 There is no need to disturb the finding of CIT(A). As submitted the interest was other wise also disallowed. Since the issue of allowing interest was restored to AO in assessee appeal, this aspect of double disallowance can also be examined by AO. The ground is however treated as rejected.
36. Ground No.7 pertains to interest liability disallowed amounting to `.6,30,09,101 for AY 1997-98. AO held that assessee was asked to establish the genuineness of the purposes for which the loans were taken and subsequent payment of interest of `.6,30,09,101 and as assessee failed to produce necessary evidence, the same was undisclosed income.
36.1 It was submitted before the CIT (A) that most of the funds have been raised in the year's preceding the calendar year 1996 and the interest on the said loans has been duly allowed as deduction on the finding and satisfaction that the funds were used for the purposes of business. Loose papers 15 & 16 nowhere remotely indicates anything relating to non business use or unrecorded transaction. The said interest was duly considered in regular Page 78 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai assessment for AY 1997-98 and was allowed as a deduction. No material of whatsoever nature was brought on record by AO to support his allegations.
36.2 It was held by the learned CIT (A) that there is no indication from the perusal of the document that was taken by AO that the utilization of these loans in any manner for non business purposes. Therefore, addition was held to be deleted.
36.3 Here also we do not see any reason to consider the revenue ground. There is nothing to indicate that loan was not used for the purpose of business. More over similar interest was allowed in regular assessment. Therefore question of disallowing in Block assessment does not arise. The ground is rejected.
37. Ground No.8 pertains to consultancy charges of `.17,40,900. AO noticed that assessee failed to produce necessary evidence and on that reason added the amount as undisclosed income. Before the CIT (A) it was submitted that the said loose paper was a bill raised by ASIS Overseas Pvt Ltd for rendering professional services for an amount of `.5,69,400 only. The said bill was in respect of processing and procuring the advance license for the company of the value of `.5,80,30,000. ASIS had rendered their professional services for a remuneration of 3% of value of license which came to `17,40,900. The said expenditure had been claimed as deduction in computing the total income for A.Y. 1996-97 and A.Y. 1997-98 which expenditure has been allowed by A.O. The said loose paper carried the identification and address of payee as also the telephone numbers and in case of doubt the A.O. should have examined the payee and verified the correctness. The said payee was assessed to tax and has been taxed in respect of the receipt of professional fees. 37.1. The learned CIT (A) held that it is evident that certain services were rendered by ASIS Overseas Pvt. Ltd for procuring of advance license for which the payment has been made. There is nothing in the incriminating document to show that the services Page 79 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai have not been rendered warranting the disallowance of the payment in the Block assessment proceeding.
37.2 Since issue was examined on facts and findings of CIT(A) are found to based on documents seized and claims in earlier years, we reject the ground raised by Revenue.
38. Ground No.9 pertains to receipt from Bharat Vijay Mills of `.30,00,000. AO observed that assessee failed to produce necessary evidence on this transaction and treated as income in Block. 38.1 Before the CIT (A) it was submitted that the REPL had agreed to supply WTG to the said Sintex Ltd under their order dated 1.10.1997. According to the terms of agreement the said Sintex had paid an advance of `.30.00 lakhs. Copy of the letter and accounts of the said Sintex as also the copy of the bank statement confirming the receipt and deposits were produced.
38.2 It was held by the CIT (A) that from the perusal of the cheque which was forming part of the incriminating document, it is evident that M/s.Bharat Vijay Mills is a division of M/s. Sintex Industries Ltd., therefore where the payment is duly accounted for in the bank statement furnished, there is no basis for retaining addition on this account as the undisclosed income of assessee. 38.3 This addition made by AO was also devoid of any merit. The Ld.CIT(A) examined the seized material and rightly deleted the addition. We uphold the finding and reject the ground.
39. Ground No.10 pertains the amounts received from various persons aggregating to `.61,00,000.
39.1 AO noticed that the loose papers contained the following details:
Prabhu & FD - `.5.00 lakhs
Joshi FD - `.3.00 lakhs + Interest
Avon - `.13.00 lakhs
CAs - `.40.00 lakhs
39.2 Shri Homi Patel in his statement on oath stated that these
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ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai are payment liabilities, but as assessee failed to produce necessary evidence, AO made the addition.
39.3 Before the CIT (A) it was held that the company had raised various ICD's from other companies and individuals. Such deposits have been duly accounted for by the assessee company in its regular books of account. Copies of accounts were filed in the course of assessment proceedings. Since the entries were recorded, there is no case for making addition on this account to the undisclosed income. The learned CIT (A) held that there is a merit in the claim considering the evidences produced. In the circumstances, there remains no basis for sustaining the addition. We uphold the order and reject the ground.
40. Ground No.11 pertains to payment to Runners Corporation of `.18,00,000. AO observed that assessee failed to produce necessary evidence and on that reason made the addition. Before the CIT (A) it was submitted that against the amount received from time to time, an amount of `.18.00 lakhs was paid by cheque to them vide No.111390 dated 31.7.1997 drawn on Bank of Madura. Copy of the account submitted would clearly confirm this payment to the said M/s Runners Corporation. The learned CIT (A) held that apparently the payment made was duly accounted in the regular books of account of the assessee company. Therefore, the addition made to the undisclosed income on this account cannot be sustained and deleted the addition.
40.1 After perusing the record and submissions we uphold the order of CIT(A) as it is based on facts and correct appreciation of the documents. Ground is rejected.
41. Ground No.12 pertains to difference of stock of `.2,36,05,000 based on seized documents. AO held that the typed figures of the stock value has been struck off and different value has been mentioned. Difference in stocks were found between what was declared for cash credit purpose and the actual stock. AS assessee Page 81 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai failed to produce necessary evidence when asked by AO, he treated the difference as undisclosed income. Before the CIT (A) it was stated that a statement duly typed for October, 1997 was furnished to the bank indicating the value of the stock of `.3339.41 lakhs which was duly acknowledged by the Bank which does not contain any hand written corrections unlike the loose papers. Subsequently when it came to furnishing the statement of stock tally for Nov. 1997, the statement for October, 1997 was taken as the basis for preparing November 1997 tally. In doing so, the typewritten figures were struck off by hand and the figures for Nov.1997 were put by hand. A comparison of the two will very clearly explain that there was no difference in the stock tally. These figures represented value of stocks for two different months. AO himself has accepted and acknowledged the position wherein the stock tally for two different months were bound to be different. Hence it was now known why in the final analysis he treated the loose papers as representing undisclosed income.
41.1 The learned CIT (A) considered the submissions of the AR and considered that there was no basis for retaining the additions made by AO. He deleted the same. After perusing the record and submissions, we uphold the order of CIT(A) as it is based on facts and correct appreciation of the documents. Ground is rejected.
42. Ground No.13 pertains to the investment in immovable property. AO held that assessee was asked to furnish complete details in response to show cause notice dated 28.09.1999 failing which it was proposed to hold that these properties were in fact owned by assessee in different names. Some of the properties are not prima facie appearing in assessee's books of account. All such properties were held to be benami properties of assessee as no explanation regarding the identity of the party concerned and the source of acquisition has been furnished by assessee. Individual cost of acquisition of each property was not made available by Page 82 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai assessee. In the absence of any explanation, AO added an amount of `.20.00 crores as undisclosed part of the investment in acquiring the properties on estimated basis.
42.1 Before the CIT (A) it was submitted that the said properties are the properties belonging to the company REPL or its related concerns. The said properties are acquired through the due process of law under validly executed agreements and most of acquisition of such properties in respect of them were made by account payee cheques which payments are duly accounted for in the regular books of account of respective concern. Some of the properties are the tenated properties where tenancy rights are acquired years back before 1987 for which there is no cost of acquisition. These properties are duly reflected in the balance sheet filed with the return of income regularly. As far as column of 'approximate price' is concerned it was submitted that the estimate was made of realizable value of property in a rough attempt to ascertain the net worth of the group. None of the properties are benami properties of the company REPL and properties which belong to the related concerns are the properties which are acquired by them out of their funds. 42.2 It was held by the learned CIT (A) that assessee's submission was forwarded to AO and AO furnished report dated 18.06.2004 and from the perusal of the said report, it can be concluded that in respect of certain properties there is no dispute in ownership and hence no addition on account of the alleged unaccounted investment in the acquisition of said properties can be retained. In regard to the remaining properties, the learned CIT (A) observed that except for the property being W-163 MIDC Dombivali the ownership of remaining properties stands established and no addition on this account can be sustained. Consequently out of `.20.00 crores added to the undisclosed income, the addition of `.50.00 lakhs is retained and balance of `.19.50 crores was deleted.
42.3 After considering the rival contentions, we uphold the order of Page 83 of 84 ITSS Nos.152 & 162 of 2005 Heat Shrink Tech Ltd & REPL Engg. Ltd Mumbai CIT(A). In fact, AO himself verified and accepted the properties as accounted for either in assessee books or its related concerns. Ld CIT(A) gave detailed reasons while deleting all but one which was sustained by him. There is no reason to contest by the Revenue this issue on merits. Ground rejected.
42. For the reasons stated above, Revenue appeal is dismissed.
43. In the result, Assessee appeal is allowed for statistical purposes and Revenue appeal is dismissed.
Order pronounced in the open court on 10th May, 2013 Sd/- Sd/-
(Amit Shukla) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 10th May, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, " H" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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