Calcutta High Court
M/S Himal Enterprise Pvt. Ltd vs Chief Commissioner Of Income Tax on 19 May, 2011
Author: K. J. Sengupta
Bench: Kalyan Jyoti Sengupta
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IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction (Income-tax)
Original Side
PRESENT:
The Hon'ble JUSTICE KALYAN JYOTI SENGUPTA
AND
The Hon'ble JUSTICE KANCHAN CHAKRABORTY
I.T.A. No.238 of 2007
I.T.A. No.446 of 2007
M/s Himal Enterprise Pvt. Ltd.
Vs.
Chief Commissioner of Income Tax, Jalpaiguri & ors
And
Commissioner of Income Tax, Siliguri
Vs.
Himal Enterprise Pvt. Ltd.
Judgment on: 19.5.2011.
K.J. Sengupta, J.:-
Both the appellants in the aforesaid two appeals have preferred their
respective appeals against the common judgment and order dated 30th
November, 2006 passed by the Income Tax Appellate Tribunal, "B" Bench,
Kolkata in IT. (S.S.) A. No.49/Kol/2006. Hence both the matters were argued
analogously and this Court decided to dispose of the same by the common
judgment.
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The first mentioned appeal (hereinafter referred to assessee's appeal) was
admitted by order dated 7th May, 2007 on the following substantial questions of
law:-
"1. Since the Income Tax Act, 1961 has been purported to be extended but
not yet implemented in the State of Sikkim and the appellant, a company
registered under the Sikkim Companies Act, and resident of Sikkim and having
its registered office in Sikkim and paying Sikkim Income Tax as per Sikkim
Income Laws, is liable to tax under the Income Tax Act, 1961 in respect of
income accruing/arising to it in Sikkim?
2. Whether the Tribunal could proceed on the basis of unamended
provision of S.158BB of Income Tax Act, 1967, when the said section had been
retrospectively amended by Finance Act of 2002 with effect from 01.07.1995?
3. Whether and in any event, on a true and proper interpretation of the
retrospectively amended section 158BB of the Income Tax Act, 1961 requiring
computation of undisclosed income on the basis of evidence found as a result of
search and any other material or information relatable to such evidence, the
Tribunal was justified in law in sustaining an aggregate addition of
Rs.16,75,29,688/- when there was no such evidence, material or information
found as a result of such search and its purported findings in that behalf are
arbitrary, unreasonable and perverse?
4. Whether the Tribunal could have relied upon the judgment of single
Judge of this Hon'ble Court when the same has been expressly reversed in appeal
by Division Bench of this Hon'ble Court?
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5. Whether and in any event, the addition of Rs.16,75,29,688/- was made
in violation of the principles of natural justice without affording a reasonable of
adequate opportunity to the appellant and the purported findings of the -
Tribunal sustaining the addition are arbitrary, unreasonable and perverse?
6. Whether and in any event, even if a block assessment order could be
passed against the appellant, the - Tribunal was justified in law in upholding the
inclusion of the period from 1st April 1986 to 31st March 1989 and the alleged
income relating thereto in such - assessement?
7. Whether and in any event, the conditions precedent for invoking section
158BD of the Income Tax Act, 1961 existed and the block assessment order
under Section 158 BD read with Section 158 BC passed without jurisdiction?
8. Whether and in any event, tax chargeable under Section 113 at the rate
of 60% can be increased by a surcharge where the search was conducted on 8th
October, 1996 prior to insertion of the proviso in the section with effect from 1st
June, 2002?"
The second mentioned appeal (hereinafter referred to as Revenue's Appeal)
admitted by an order dated 24th July, 2007 and the following substantial
question of law:-
"1.Whether in the facts and circumstances of the case, the Learned
Tribunal was justified in ignoring the comparing of two sets of Balance Sheets,
one filed by the assessee before search along with the returns of income and
which were accepted under Section 143(1)(a) and revised Audited Balance
Sheets, which were materially different from the original one and filed after the
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search, without any supporting explanations of the assessee and its auditors
reconciling the differences on a simple view that this is a matter of regular
assessment?
2. Whether in facts and circumstances of the case Learned Tribunal was
justified in law in ignoring the fact that the Original Balance sheet filed along
with the Original Return was Unaudited and the Balance Sheet filed along with
the Block Return was Audited one and the difference was noticed only after filing
the audited Balance Sheet along with Block Return?
3. Whether in the facts and circumstances of the case the order dated
November 30, 2006 passed by the Learned Tribunal having been obtained by the
Assessee Company is perverse?"
The fact leading to preferring both the appeals are as follows:-
The assessee is a private limited company incorporated under the
Companies Act, Sikkim, 1961 on 12th March, 1975. The contention of the
assessee is that ever since its incorporation it has been regularly filing returns
and as such being assessed to income tax under the provisions of Income Tax
Manual, Government of Sikkim which is still in force, though Income Tax 1961
extendes to the State of Sikkim on 1st April, 1989, as the same has not yet been
implemented. Government of India and Government of Sikkim have recently
constituted a high power committee to resolve the differences between the
Government of India and the Government of Sikkim on implementation of the
Direct Tax Laws in the State of Sikkim. The nature of business of the assessee is
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of interest on bonds, FDR etc. and truck operation. The Assessing Officer
concerned in this case on receipt of information resulted in a search on 8th
October, 1996 in the case of M/s. Feena Petro Products Limited having its place
of business at 622, Mount Road, Chennai and notice to the assessee company
under Section 158BD of the Income Tax Act, 1961 hereinafter referred to the said
Act required the assessee-company to submit returns for the block period of 1st
April, 1996 to 8th October 1996. The assessee in response to the said notice had
filed return for the block period on 10th July, 1998. Thereafter, the Assessing
Officer issued another letter dated 12th November, 1998 for supplying various
details within 20th November, 1998. However the said date was extended in view
of the general strike till 24th of November, 1998. The assessee attended and filed
certain details and requested to adjourn the case for filing further details
required in the said notice. However the Assessing Officer declined to adjourn the
case and accordingly completed the assessment at an undisclosed income of
Rs.18,20,18,770/- vide order dated 30th November, 1998. An appeal being
preferred by the assessee the said initial order of assessment was set aside on
the ground of not giving opportunity of hearing. Hence the matter was restored to
the file of the Assessing Officer for fresh hearing. In terms of the said order the
Assessing Officer after hearing the assessee passed the fresh assessment order.
At the time of hearing the assessee raised objection regarding the provision of
said Act in the State of Sikkim with effect from 1st April, 1989 and therefore, the
action of the Assessing Officer was not authorized one so far earlier assessment
year of 1987-88,88-89.89-90 are concerned. Apart from aforesaid preliminary
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point various legal points were taken before the Assessing Officer and he rejected
all the contentions of the assessee and he passed fresh assessment orders.
Aggrieved by the said fresh assessment order the appeal was preferred
before the learned Tribunal against which the aforesaid two appeals have been
preferred.
It appears from the fresh order of Assessing Officer it was decided that the
assessee is alleged to have failed to disclose the following incomes and following
years:-
Assessment Year Undisclosed income
1987-88 Rs. 6,95,55,434/-
1988-89 Rs.1,25,65,408/-
1989-90 Rs.3,44,97,206/-
1990-91 Rs.1,30,12,621/-
1991-92 Rs.82,93,834/-
1992-93 Rs.31,43,638/-
1993-94 Rs.36,13,456/-
1994-95 Rs.1,18,58,987/-
1995-96 Rs.46,24,330/-
1996-97 Rs.3,08,13,822/-
1997-98 Rs.1,00,86,034/-.
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The learned Tribunal after considering the contention and rival contention
both on law and fact passed the impugned judgment and order rejecting all the
contentions raised by the assessee except the contention that addition of sum of
Rs.10,08,265/- being the amount of loss claimed on account of the leased
cylinders and amount of Rs.1,00,23,000/- which was included as being the
amount paid for purchase from one M/s. Dessma Engineering Company Limited
and the same was also related to the lease of cylinders by the assessee to M/s.
Feena Enterprise. The addition by the Assessing Officer of the aforesaid amounts
was not accepted hence on limited purpose the learned Tribunal remanded the
matter for reconsideration.
The Revenue has preferred above appeal against the aforesaid order of
remand after deletion of the addition of the aforesaid two amounts.
Mr. Khaitan, learned Senior Advocate has raised various interesting legal
points in this matter. He firstly submits the learned Tribunal has committed
error in law while holding that the Income Tax Act, 1961 at the relevant point of
time was not applicable to Sikkim relying on the judgment of the learned Single
Judge in case of Anjan Banerjee vs. Union of India reported in 1994 (207) ITR
130 (Cal) and also the order of withdrawal of subsequent writ petition of the
assessee in the Hon'ble Sikkim High Court wherein permission was given to the
assessee to raise all points before Assessing Officer when notice issued by the
Assessing Officer was challenged. The said permission was also granted by the
Hon'ble Supreme Court to raise the point in appeal against the assessment.
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He submits that learned Tribunal should have held that at the relevant
point of time the said Act had no application when his client filed returns and
paid Income Tax in accordance with Sikkim Income Tax Act. Therefore no action
can be taken compelling the assessee to pay tax doubly.
According to him with the support of the decision of the Supreme Court
reported in 289 ITR 341 both on law as well as on fact he submits that the claim
of depreciation to be made is not an undisclosed income under Section 158B(b) of
the said Act. It would appear from the intimation sent by the Assessing Officer of
Feena from Chennai under Section 158BD alleged undisclosed income is claim
on depreciation of the value of the cylinders.
Factually the assessee had never claimed any depreciation in respect of the
cylinders rather the same amounting to Rs.10,18,165/- was written off loss of
Rs.10,08,265/- in respect of leased Cylinders in its accounts for the financial
year 1996-97 relevant to the assessment year 1997-98. The search in the lessee's
premises took place on October 8, 1996 in the middle of financial year 1996-97
when the return for the assessment year 1997-98 was not even due (due date
was 30th November 1997). No claim for the loss was made before search and the
said loss was reflected in the accounts for the year 1996-97 filed with the block
return and disallowed in the block assessment year dated November 30, 1998 by
holding that the purchase and leasing was mere paper transactions. The said
notice for block assessment was issued pursuant to the letter of intimation of the
Assessing Officer at Chennai who in its turn found that there is no existence of
lease in fact and it was a mere paper transaction. Ultimately it was found in the
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arbitration proceeding between the assessee and the said Feena (lessee), that the
assessee purchased the cylinders which were delivered to the lessee under lease.
The arbitration award was put into execution and the Hon'ble Madras High Court
passed various orders in such execution proceedings. Thus by the award followed
by the orders in execution by the Hon'ble Madras High Court it has clearly been
established the fact that there has been a lease and the assessee owns the said
cylinders and thereby the findings of the Assessing Officer who conducted search
and seizure at the place of lessee, of non-existence of lease and paper
transactions is unacceptable under law. Thus factual basis for initiation of block
assessment under the said aforesaid Section 158BD is absolutely non est.
Even the learned Tribunal failed to notice that assumption of jurisdiction
under Section 158BD made without examining the satisfaction recorded as
required in the said section. Hence there was no need to remand the said matter
for fresh hearing.
He urges thereafter that while computing the alleged undisclosed income
Assessing Officer as well as the learned Tribunal have taken into consideration of
the extraneous material as in view of the amended provision of Section 158 BB
which came into force retrospectively from July 1, 1995 though amended by the
Finance Act 2002 does not permit other materials or information other than
which has been found as a result of such search. In other words the Assessing
Officer can rely on such evidence found upon search that may be only basis for
computing undisclosed income and no other thing.
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In this case, only material of the evidence for initiation of block assessment
was the alleged claim of depreciation in relation to the said cylinders. As it has
been already urged legally and factually initiation of the said proceeding has no
foundation at all. Therefore the other materials relied on cannot form legal basis
of continuation of the said block assessment.
The rest of the addition of Rs.18,10,10,505/- was made on the basis of
audited accounts filed with the block returns by picking up various debit/credit
items unrelated to the cylinders transaction from the balance-sheet, profit and
other accounts and bank statement and upon comparison with unaudited
accounts filed by the assessee along with the returns for some of the years
pursuant to the notices received. These are not permissible at all. The learned
Tribunal permitted to retain the aforesaid findings of the Assessing Officer in
relation to the aforesaid amount relying on unamended Section 158BB which is
patently erroneous in law. In support of his submission he has relied on the
following decisions of the various High Courts:
250 ITR 141 (Del), 284 ITR 220 (Mad), 304 ITR 393 (Del) and 308 ITR 124 (Mad).
He also contends that in course of the hearing before the Tribunal the
assessee was not required to make any submission on the merit of the addition
unrelated to the search materials on the basis that the proceedings were required
to be confined to the search materials and that search material did not reveal any
undisclosed income on this ground alone and judgment and order of the learned
Tribunal is liable to be set aside so far as it relates to the addition of
Rs.18,10,505/- is concerned.
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He contends even if the Income Tax Act, 1961 was brought into force in
Sikkim it was so done with effect from the assessment year 1990-91, under
Section 26 of the Finance Act 1989. As such, the assessment years 1986-87,
1989-90 and addition of Rs.11,60,18,048/- made for the said year could not
have been included in the block assessment.
He submits that the levy of surcharge is not applicable if it is held in favour
of the assessee on the aforesaid point. If 1961 Act is applicable and the levy of
surcharge is not imposable as applicability of the decisions of the Supreme Court
reported in 297 ITR 322 and 310 ITR 105 have been referred by decision of the
Supreme Court reported in 314 ITR 338 (SC) to the Larger Bench.
Learned Counsel for the Revenue while contesting the appeal filed by the
assessee Himal and while supporting the appeal of the Revenue contends that in
view of the judgment of the learned Single Judge of this Hon'ble Court in the case
of Ajan Banerjee vs. Union of India (1994) 2007 ITR 130 (Cal) the said fact has
full application, even though the said judgment has been upset by the Division
Bench of this Court but the ratio and reasoning has got full force. Hence it is
incorrect to say that Income Tax has no application in this matter.
He contends that the Assessing Officer of Feena arrived at his satisfaction
with regard to the undisclosed income of the appellant-assessee and as such
satisfaction has been recorded in his letter dated October 7, 1997 addressed to
the Assessing Officer of the assessee. On receipt of the said communication
proceedings for block assessment was initiated by the Assessing Officer of the
appellant-assessee at a time when present provision of Section 158BB was not in
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the statute book. The said section has been amended in the year 2002 with effect
from July 1, 1994. Therefore, he emphasizes, the Assessing Officer who initiated
the proceedings in the year 1997 would not have conceived of the amendment,
which would take place in future. Accordingly, legally and logically he was right
in taking action according to the provision, which was then prevailing prior to the
said amendment.
He further submits that definition of undisclosed income as given in
Section 158B(b) has also undergone a change and at the material time the words
"it is found to be false" but not there in the said satisfaction. Learned Tribunal
has examined the action of the Assessing Officer and validity of the proceeding
taken and initiated at the point of time when amendment of 2002 did not come
into being. Hence the learned Tribunal was right in considering the matter in the
light of the unamended provision of Section 158B(b) of the Income Tax Act, 1961.
While urging the point raised in the Revenue Appeal learned counsel
contends that assessee had filed two sets of balance sheet. One set of balance
sheet had been filed before search at Feena's Office was conducted. Thereafter,
revised audited balance sheet was filed by the assessee and on comparison it
would appear that they are materially different. The learned Tribunal ignored to
compare two sets of balance-sheet and did not appreciate the fact that original
balance-sheets filed with the original Returns were unaudited and the balance-
sheet filed along with the block return were audited ones and two differed from
each other. The learned Tribunal therefore was wrong in deleting the sum of
Rs.1,31,47,355/- and Rs.13,64,727/-.
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We have considered the contention and rival contention of the parties. The
interesting point in this appeal has arisen as it is contended that Income Tax Act,
1961 is not applicable to the State of Sikkim until 1989. Therefore, the matter
has to be looked into from this angle also. We shall discuss this issue at last as
we feel that it is possible for this Court to deal with the matter even applying the
provisions of 1961 Act (assuming it has application in the State of Sikkim). It is
an admitted position that block assessment proceeding has been initiated under
Section 158BD of the said Act by the Assessing Officer on receipt of
communication made by the counter part of lessee, Feena at Chennai.
Indisputably assessment for the block period has been initiated pursuant to the
said notice for the assessment years 1987-88, till 1997-98.
It is contended by the learned counsel for the appellant in assessee's
appeal that the various legal issues were urged before the learned Tribunal, and
though noted the same were not discussed nor any reason has been given. On
reading of the judgment of the learned Tribunal we find what the learned counsel
for the appellant-assessee contends. First point is whether initiation of block
assessment under Section 158BD is lawful exercise of jurisdiction or not. We
therefore set out the text of the provision of Section 158BD.
Undisclosed income of any other person.
"Section 158BD - Where the Assessing Officer is satisfied that any
undisclosed income belongs to any person, other than the person with respect to
whom search was made under section 132 or whose books of account or other
documents or any assets were requisitioned under section 132A, then, the books
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of account, other documents or assets seized or requisitioned shall be handed
over to the Assessing Officer having jurisdiction over such other person and that
Assessing Officer shall proceed (under Section 158 BC) against such other person
and the provisions of this Chapter shall apply accordingly."
It is true that bracketed portion in the said section was not originally in
the statute book when the Assessing Officer at Madras discovered the alleged
undisclosed income, however, in view of the amendment of the said section by
Finance Act 2002 with effect from 1st June, 2002 the said portion of the said
section will have application. In this context it has to be looked into what the
Assessing Officer at Chennai in its communication recorded meaning thereby
whether he has recorded satisfaction of undisclosed income or not or for that
matter the alleged undisclosed income can be said to be an undisclosed income
within the provision of this Chapter XIV-B. It appears that the definition in
Section 158B(b) of undisclosed income has also undergone a change with
insertion of bracketed portion by the same Finance Act with effect from 1st July,
1995. This definition of undisclosed income is as follows:-
"Section 158B(b) - "undisclosed income" includes any money, bullion,
jewellery or other valuable article or thing or any income based on any entry in
the books of account or other documents or transactions, where such money,
bullion, jewellery, valuable article, thing, entry in the books of account or other
document or transaction represents wholly or partly income or property which
has not been or would not have been disclosed for the purposes of this Act or
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(any expense deduction or allowance claimed under this Act which is found to be
false.")
Therefore, in order to invoke provision of Section 158BD pre-condition of
satisfaction of undisclosed income of the Assessing Officer who conducted the
search and seizure of some other assessee has to be fulfilled. The Chennai
Assessing Officer by his communication has mentioned that the appellant-
assessee might have claimed for depreciation in respect of the gas cylinders
which were alleged to have been leased out to Feena and such possible claim of
depreciation was an undisclosed income and it was noted that there is no
existence of the gas cylinders said to have been leased out to Feena. So claim of
depreciation would be unfounded. Actually in the said letter it was never
mentioned that the said undisclosed income is false.
We find some force in the argument of Mr. Khaitan learned Senior Advocate
that claim of depreciation going by definition of undisclosed income in Section
158B(b) of the Act cannot be said to be allowable or deductable expense as it is
really written down value of the assets hence it cannot be said to be an income. It
would appear from the said notice no satisfaction required under Section 158BD
has been recorded nor could be recorded. It is now well-settled as has been
correctly argued by the learned counsel for the respondent that the satisfaction of
the Assessing Officer is pre-condition for assumption of jurisdiction. This proposition has been laid down by the Supreme Court in Its decision reported in 289 ITR 341.
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Therefore, we are of the view initiation of the block assessment based on the said communication of the Chennai Assessing Officer is without jurisdiction. Besides assumption of jurisdiction by the Assessing Officer at Madras on fact is also legally incompetent in view of the award published on the reference of dispute to Arbitration between appellant-assessee and the said Feena/lessee followed by order passed by the Hon'ble High Court at Madras in execution proceedings for enforcement of award. Thus conclusion of undisclosed income was arrived at on the premise that there was no lease actually and it was a paper transaction has now become unfounded. Hence communication made by the Assessing Officer on factual basis is totally wrong.
We, therefore, hold that the assumption of jurisdiction in drawing up Block Assessment under Section 158BB in this case is without jurisdiction.
Moreover, we find that the Assessing Officer has initiated block assessment in respect of such assessment years when other regular return in relation to those years pursuant to notice under Sections 147, 148 of the said Act had already been filed. We accept the contention of Mr. Khaitan that the jurisdiction of initiation block assessment cannot cover in relation to any returns in which income has been disclosed whether it is assessed or not and kept pending, under Section 158BD. The aforesid Chapter XIVB is a special one and it has got restrictive application and it cannot cover the assessment under other Chapter of the said Act. This position of law has been well-settled by large number of decisions of both the High Courts as well as Supreme Court. To quote few of them are as follows:-
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250 ITR 141 (Del), 284 ITR 220 (Mad), 304 ITR 393 (Del), 308 ITR 142 (Mad). It appears that the Assessing Officer has relied on other materials which are unrelated to the materials found at the time of search. It is legally settled no material other than what was found in search can form basis of Block Assessment.
Hence, we are of the view that both factually and legally initiation of the Block Assessment under Section 158BD is legally incompetent. The learned Tribunal however, failed to take note or discuss the aforesaid point or legal issues.
We, therefore, set aside the judgment and order of the Assessing Officer as well as the learned Tribunal holding that the said block assessment done by the Assessing Officer is without jurisdiction. We are informed that the Assessing Officer pursuant to the remand order has already deleted by an order dated 31st May, 2010 the addition/disallowance of Rs.10,08,265/- and Rs.1,00,23,000/-.
As far as the issue of surcharge is concerned this levy of surcharge does not arise at the moment as this issue is sent to the Larger Bench of the Supreme Court by Division Bench decision of Supreme Court reported in 314 ITR 338 (SC). Moreover when we have found that the block assessment proceeding is without jurisdiction question of levy of surcharge in this connection does not and cannot arise.
As far as the applicability of the Income Tax Act, 1961 to the State of Sikkim is concerned we are of the view when the judgment of the learned Single Judge of this Court has been reversed by the Division Bench this issue still open 18 for decision before appropriate forum. It appears that on 23rd November, 1989 by notification No.148(E) the Central Government fixed 1st April, 1989 as date on which the 1961 Act would come into force in the State of Sikkim.. Therefore, in this case we conclude that the said Act has come into operation on and from the aforesaid date and there cannot be any applicability prior thereto in this case. In view of the aforesaid discussion we do not find any merit in the contention of the Revenue Appeal and the same is accordingly dismissed.
We make it clear that this judgment will not prevent and prejudice Revenue Officials proceedings against the assessee under the different chapter if permissible under the law.
(K. J. Sengupta, J.) I agree.
(Kanchan Chakraborty, J.)