Income Tax Appellate Tribunal - Bangalore
T.S. Chandrashekar vs Assistant Commissioner Of Income-Tax on 26 May, 1999
ORDER
S. Bandyopadhyay, A.M.
1. This appeal has been filed by the assessee against the block assessment made under s. 158BC of the IT Act, 1961, on 28th February, 1997, out of the search and seizure proceedings conducted by the Department under Chapter XIV-B.
2. The assessee, Shri T. S. Chandrashekar, is a partner of the firm M/s Trishul Enterprises. The assessee also carries on some business activities in his individual capacity. Search and seizure operations were conducted by the Department simultaneously in the premises of M/s Trishul Enterprises, No. 33/23, First Floor, 20th Cross, First Block, Rajaji Nagar, Bangalore 10 and also at the residential premises of the assessee at No. 41 9th 'B' Cross, Mahalakshmipuram, West of Chord Road, Bangalore. Separate warrants were issued in the name of the assessee at both the places. So far as the office premises at No. 33/23 Rajaji Nagar is concerned, the search started at 3.30 p.m. on 12th December, 1995 and was closed temporarily at 1.15 a.m. on 13th December, 1995. Certain books of account, documents and other valuables, etc. were seized on this first day of the search as per the inventory made by the searching party. Certain other books of account and documents were also inventorised as found but not seized. A Prohibitory Order (P.O.) was issued under s. 132(3) of the Act in respect of the filing cabinet and Almirah in the inner-office of M/s Trishul Enterprises at the above-mentioned address. On the same date again (12th December, 1995 searches were commenced at 3.45 p.m. in the above-mentioned residential premises of the assessee, which was closed temporarily at 6 p.m. on the same day. Some cash and other valuables were seized whereas certain amount of cash as inventorised separately was found but not seized. A.P.O. under s. 132(3) was put on one wardrobe in the bed-room of the assessee. Search in the residential premises of the assessee was resumed on 13th December, 1995 at 12.30 p.m. and was finally concluded at 4 p.m on the same day without making any further seizure. However, some jewelleries, ornaments, etc. found but not seized were inventorised .
So far as the office premises of M/s Trishul Enterprises (as mentioned above) is concerned, search was once more resumed under the same warrant on 19th January, 1996 at 3 p.m. and was once more temporarily closed at 6.30 p.m. on the same day. Panchanama prepared during the course of the search proceedings on that day shows nothing as having been seized and also nothing as having been found but not seized. It was stated in the Panchanama" P.O. on Almirah dt. 12th December, 1995 continues".
Search proceedings under the old warrant were once more commenced on 7th February, 1996 at 9.30 a.m. and was closed at 11.20 a.m. on the same day without seizing anything or without recording anything as having been found but not seized. This time also, the search proceedings were temporarily concluded on that day and the P.O. continued in respect of the Almirah in the inner-hall of the office of M/s Trishul Enterprises wherein documents and other papers were kept.
Finally, the search proceedings were resumed on 12th February, 1996 at 3 p.m. On this day also nothing was either seized or even found but not seized. The search was finally concluded on this day at 3.45 p.m.
3. The learned counsel for the assessee, Shri S. Venkatesan, challenges the validity of the search and seizure assessment from several counts. Firstly, he argues that before giving approval to the assessment order under consideration, the CIT had not allowed any opportunity of being heard to the assessee and hence the order should be considered to be invalid on the ground of denial of natural justice. This particular issue was considered by this Bench in two successive cases of Microland Ltd. vs. Asstt. CIT (1999) 63 TTJ (Bang) 701 : (1999) 67 ITD 446 (Bang) and Kirloskar Investments & Finance Ltd. vs. Asstt. CIT (1999) 67 ITD 504 (Bang). The Tribunal in both these cases held that the approval required to be given by the CIT to the assessment order being more or less administrative in nature does not require the CIT to give specific opportunity of being heard to the assessee. Shri Venkatesan tried to argue in this connection that the decision of the Supreme Court with regard to allowance of opportunity of being heard in the case of Swadeshi Cotton Mills Ltd. 51 Comp Cases 210 was not noted in Kirloskar's case (supra). He also stated that although the loan creditors waited outside the chamber of the CIT for substantiating the genuineness of the credits, the CIT did not entertain them at all. The learned counsel argues that in the circumstances the approval given by the CIT to the addition of the loan amounts in the impugned assessment must be considered to be against the principles of natural justice and hence bad in law.
4. We are, however, of the view that even the decision taken by this Bench in the case of Microland at least is required to be followed. The question of not entertaining the valuable witnesses by the CIT will be taken up by us at appropriate place, when we would consider the issue relating to the addition of loan amounts.
5. Thereafter, Shri Venkatesan strongly contends that the assessment is barred by limitation. He argues that the search in the office premises of the assessee should be considered as having been concluded on 13th December, 1995 itself and that the further operations carried on by the searching party were merely farces and had no real bearing. He thus strongly argues that the assessment completed on 28th February, 1997 being more than one year after the date of completion of the search should be considered as barred by limitation and hence invalid.
The first argument advanced by Shri Venkatesan, in support of the stand that the search should be considered as having been concluded on 13th December, 1995 is that the same witnesses were not employed by the searching party on the subsequent dates of the search. He tries to argue that if the entire search proceeding undertaken on different dates is to be considered as a continuous process, if was necessary that some witnesses should have witnessed the search proceedings throughout and in the absence of the same, the proceedings undertaken on the subsequent days will have to be treated as separate search and seizure operations for which there was no proper warrant of authorisation. The learned Departmental Representative, on the other hand, strongly argues in this connection that there is no law that the witnesses must remain till the end of the search. He also agrues that the form of Panchanama being non-statutory form, any deviation from the procedure adopted in the said Panchanama for practical considerations, cannot invalidate the search proceedings.
6. We are in agreement with the Departmental Representative contention. It is quite possible that the search operation may continue over a long span of time. It may not, therefore, be possible to employ the same witnesses throughout the search operation. The witnesses may have their personal inconveniences to be present at the spot of search for a very long period. What is required under the law is that the search operation should be witnessed by some respectable persons and the law does not at all require that the same witnesses must continue. We, therefore, do not find much force in the arguments advanced by Shri Venkatesan on this issue.
7. Shri Venkatasan thereafter argues that the facts of the case are to be taken into consideration for arriving at the conclusion that the search was actually completed, if not on 13th December, 1995, by the latest on 19th January, 1996. The learned counsel contends in this connection that on the first day of search itself in the office premises of M/s Trishul Enterprises the search party had examined all the books of account and other documents and had also seized some of them which were required to be seized.
On the other hand, certain other books of account and documents were inventorised as found but not seized. Shri Venkatesan states in this connection that certain books and documents which had already been examined and considered to be not fit for being seized were put in the filing cabinet and the almirah in the office of M/s Trishul Enterprises and the P.O. was issued thereon merely for continuing the search, not from the point of view of practical considerations relating to the search, but for collateral purposes. In support of this contention, Shri Venkatesan draws our attention to the Panchnamas prepared by the searching party on all the following days and points out that neither any books of account/documents and also valuables were at all seized on any of those following days of search operations but even they were not considered as "found but not seized". Shri Venkatesan thus strongly contends that even on the first day of the search itself, the searching party had made up its mind as to what books of account, documents, etc. were to be seized and the P.O. was put simply without any purpose. Shri Venkatesan relies on the judgment of the Tribunal, Bangalore Bench, in the case of Kirloskar Investments & Finance Ltd. (supra) in support of his argument that in such a case the search should be considered as having been concluded on the very first day itself. He has placed on our record similar judgments of the Tribunal, Bangalore Bench, in two more cases as noted below where also it was decided by the Tribunal that the search having been continued without any purpose has got to be treated as concluded on the very first day of the search.
1. Esanda Finanz & Leasing Ltd. IT (SS) A No. 136/Bang/1997
2. Bellaire Apartments Ltd. IT(SS) A No. 141/Bang/1997 On the other hand, the learned Departmental Representative strongly argues in this connection that the search was temporarily postponed on certain dates in view of practical considerations of the searching party not being able to complete the examination of all the documents/books found during the search. In this connection he relies on the judgment of the Tribunal, Bangalore Bench, in the case of Microland Ltd. (supra). He has also relied on judgments of the same Bench in the cases of Shri H. V. Shrinivas & M/s Poornima Finance Corpn. [IT(SS)A No. 86/Bang/1997 & IT (SS) A No. 87(Bang)/1997), dt. 5th August, 1997], and also another judgment in the case of Abdus Salam dt. 16th January, 1998. He also relied on a judgment of the Madras High Court in the case of Punam Chand R. Shah vs. ITO (1975) 101 ITR 373 (Mad). In that particular case the order prohibiting removal of articles was issued after the search. The Madras High Court had held that there was no seizure of goods on the first day of the search when the P.O. under s. 132(3) had been issued. We find that this particular case does not have much bearing on the facts of the present case and the issue involved therein.
The learned Departmental Representative, thereafter argued that the order of the Tribunal in the case of Kirloskar Investments & Finance Ltd. (supra) is in direct conflict with that of the same Bench in the cases of Microland (supra) and M/s Poornima Finance Corpn. (supra). He contends that the principle of 'stare decisis' is required to be taken into consideration while dealing with the present issue. He relies on the two decisions of the Supreme Court in the cases of Sri Venkateswara Rice Ginning Groundnut Oil Mills 28 STC 599 (SC) and Aditya Minerals (P) Ltd. vs. CIT (1999) 236 ITR 39 (SC) to argue that when there is a conflict between the two decisions of the co-ordinate Benches, the matter should be referred to a larger Bench for decision. The learned Departmental Representative thereafter relies on a judgment of the Kerala High Court in the case of T.O. Abraham & Co. vs. ADI & Ors. In this particular case, it was decided that the one year period starts from the end of the month of execution of the authorisation i.e., after completion of search or implementation of search order. The learned Departmental Representative strongly argues that this particular decision being the only decision of a High Court on this issue should be followed in deciding the present issue. In support of this contention that when there is only one decision of a High Court, the same will be binding on the Tribunal. The learned Departmental Representative places reliance on an order of the Tribunal, Ahmedabad Bench (Third Member) in the case of ITO vs. P. M. Suthar (1995) 52 TTJ (Ahd) 260 (TM) : (1995) 53 ITD 1 (Ahd) (TM). Lastly, the learned Departmental Representative also brings our notice to the retrospective amendment brought to s. 158BE relating to time-limit for completion of block assessment by the Finance (No. 2) Act, 1998 with retrospective effect from 1st July, 1995. Actually, a new Explanation was introduced to the aforesaid section in this matter which reads as follows :
"Explanation 2. - For removal of doubts, it is hereby declared that the authorisation referred to in sub-s. (1) shall be deemed to have been executed, -
(a) in the case of search, on the conclusion of search as recorded in the last Panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued;
(b) ............."
The learned Departmental Representative thus strongly argues that in view of this retrospective amendment to the relevant section, the search in the instant case should be considered to have been concluded on the last date as mentioned in the Panchnama i.e. 12th February, 1996.
8. Shri Venkatesan, the learned counsel for the assessee, has tried to rely on the affidavit filed by the assessee on 24th April, 1999. In the said affidavit the assessee narrates the proceedings of the search in accordance with his own version. He states that the witnesses who were engaged on the first day of the search were never called again on subsequent days. He furthermore affirms that on the first day i.e. 12/13th December, 1995, there was a thorough search of the entire office premises and records from the filing cabinet and the Almirah had all been taken out and scrutinised and furthermore that the AO seized all that was required to be seized and carried along with him leaving only the rest those which were not required so. The assessee furthermore states that the AO inventorised certain other books of account and documents of the nature of bank pass-books of various persons; but did not seize then and kept them in the already searched cabinet and Almirah in the office of M/s Trishul Enterprises. The assessee also affirms in this connection that there was no impracticability in seizing those other books and documents, etc. The assessee furthermore asserts that on the subsequent days, during the course of visit of the searching party, there was nothing to search at all. Some assertion has also been made in this affidavit about non-recording of any statement under s. 132(4) on 7th February, 1996.
The assessee also asserts in this connection that although the Panchnama drawn on 19th January, 1996, shows that a statement had been recorded from the assessee under s. 132(4) on that date, to the best of his recollection no such statement had actually been recorded in the premises under search. On the other hand, Shri Ganapati R. Bhat, the authorised officer, at the relevant time has also filed a counter-affidavit stating that on 19th January, 1996 a statement under s. 132(4) was recorded from the assessee. Certain other facts relating to the search, as have been discussed by us above, are also affirmed in the said affidavit.
9. Shri Venkatesan points out that the PO dt. 12th December, 1995 was not renewed. He argues that hence the said P.O. lapsed after 60 days i.e. on 10th February, 1996, and, therefore, on 12th December, 1996, no PO was in operation. He thus argues that there was no scope for the searching party to visit the premises of the assessee on 12th February, 1996. Thereafter, Shri Venkatesan has relied on a judgment of the Karnataka High Court in the case of Patil Vijay Kumar & Ors. vs. Union of India & Anr. (1985) 151 ITR 48 (Kar) in which the Karnataka High Court held that the decision of one High Court is not binding on the Tribunals in other States.
10. In this connection, it may be mentioned that the learned Departmental Representative takes objection to the version of the affidavit filed by the assessee challenging the Departmental version with regard to some matters. He relies on a judgment of the Tribunal Mumbai Bench 'C' (Third Member) in the case of Dy. CIT vs. Vira Construction Co. (1997) 61 ITD 33 (Mumbai)(TM) to argue that under r. 29 of the IT (Appellate Tribunal) Rules, 1963, parties to appeal are not entitled to produce additional evidence before the Tribunal. Shri Venkatesan replies in this connection that the affidavit filed by the assessee is not an additional evidence under r. 29; but, on the other hand, the said affidavit is filed in defence of the assertions made by the assessee in accordance with the requirement of r. 10 of the IT (Appellate Tribunal) Rules, 1963.
In this connection, Shri Venkatesan relies on certain other decisions in support of his contention that the PO was issued merely for collateral purposes. We shall refer to those decisions at the appropriate place.
11. In the case of Poornima Finance Corpn. (supra), the issue was raised on behalf of the assessee that for visit by the searching party on every day, a separate warrant of authorisation is necessary. The Tribunal decided the issue in the negative and held that if it is not possible to conclude the search operation at the first stretch, the searching party may leave the premises after keeping certain portions of the premises (even Almirah, etc.) under PO and the search operation may remain suspended temporarily. The Tribunal held that in such cases, it would be perfectly valid for the search party to visit the premises after a few days and resume the search operation once more in continuity of the earlier operation and in such a case fresh warrant of authorisation will not be necessary. It is, however, required to be mentioned in this connection that no point was raised before the Tribunal in that case about the PO having been without any purpose or for a collateral purpose. The Tribunal, therefore, did not have the occasion to examine whether the search was continued for proper reasons or the same could have been concluded on the very first day itself.
12. We are also of the opinion that there is no controversy between the judgments of the Tribunal Bangalore in the cases of Microland Ltd. (supra) and Kirloskar Investments & Finance Ltd. (supra). In the case of Microland Ltd. also, the Tribunal discussed that where there is no proper reason for deferring the search operation and where the PO is issued not from the point of view of impracticability of seizing some of the articles/documents, etc., the PO will have to be considered as invalid and the search should be considered as having been concluded on the first day itself. However, this point was not much stressed in that particular judgment of the Tribunal inasmuch as the question of invalidity of the search on the subsequent days was decided easily in that case by taking into consideration the fact that the PO for the subsequent occasions was not issued in the name of that particular assessee at all.
In this connection, we may examine the decisions tried to be relied upon by Shri Venkatesan, some of which were already examined in the case of Microland Ltd. (supra).
1. Sriram Jaiswal vs. Union of India & Ors. (1989) 176 ITR 261 (All). In this case it was held that no order under s. 132(3) can be passed when the authorised officer is in doubt as to whether the assets are disclosed or not.
2. B. K. Nowlakha & Ors. vs. Union of India & Ors. (1991) 192 ITR 436 (Del). In this case it was held that the provisions of s. 132(3) could be resorted to only when there was any practical difficulty in seizing the item which was liable to be seized. The High Court furthermore stated that there was no practical difficulty then the authorised officer has the jurisdiction and duty to seize the books of account, other documents, money, bullion, valuable articles, etc. found as a result of the search, if no explanation was coming forward in respect thereof. The Delhi High Court furthermore commented that the power under s. 132(3) cannot be so exercised as to circumvent the provisions of s. 132(1) r/w s. 132(5).
3. C. Balakrishna Nayar vs. CIT & Anr. (1999) 237 ITR 70 (Ker). In this case also, the Kerala High Court held that the power under s. 132(3) can be exercised only if it is not practicable to seize such documents/articles and that the power cannot be used to dump documents and articles in a particular place and seal it. The Court furthermore held that search cannot be prolonged unreasonably without justification. It is required of us to apply the above-mentioned decisions, as cited by both the sides, to the facts of the present case, for the purpose of taking an appropriate decision on the issue. There is no doubt about the fact that except on the first day of search being 12/13th December, 1995, no other books, documents, etc. were seized on any of the following days nor was any such books, documents, etc. were considered as "found but not seized". On 19th January, 1996, against the PO on filing cabinet was lifted. It is very difficult to understand why the PO on the Almirah was also not lifted on the same day. It appears that the search was shown to be continuing by keeping the PO intact on the Almirah for some collateral purposes like getting disclosure from the assessee under s. 132(4), etc. There is no material anywhere to show that it was impracticable on the part of the searching party to decide whether all the books and documents, etc. found on the place of search should be seized or not. We are, therefore, of the opinion that even if such a decision could not have been arrived at in the early hours of 13th December, 1995, the searching party should have made up its mind for making seizure of the required books/documents at least on 19th January, 1996, and that thereafter, there was no need to continue the search operations. It is, of course, a fact that the ADI was conducting enquiries and investigations into certain other matters relating to the search. However, if he were able to find out some new incriminating materials, he could have started separate search operation on the subsequent days under a new warrant of authorisation. So far as the original search operation started on 12th December, 1995 in the premises of M/s Trishul Enterprises and also in the residential premises of the assessee is, therefore, concerned, we are of the opinion that the search must be considered to have been concluded at least on 19th January, 1996. The retrospective amendment by way of insertion of Expln. 2 to s. 158BE does not help the Department at all. If the search has got to be treated as having been continued, the same should be done in a valid manner and without offending the provisions of ss. 132(1) and 132(3), as has been discussed by the Allahabad and Delhi High Courts in the above-mentioned cases of Sriram Jaiswal and B. K. Nowlakha & Ors. (supra). The judgment of the Kerala High Court in (1999) 237 ITR 70 (Ker) (supra) confirms this decision further. We fell that the new Expln. 2, as inserted with retrospective effect, should be considered to be applicable to cases where a number of warrants of authorisation have been issued simultaneously and the reference to recording conclusion of search in the last Panchnama drawn must refer to a search continued in a valid manner, as discussed by us above. Otherwise, if the search is continued under the whims of the searching party without any real purpose or for collateral purpose, and if the searching party goes on visiting the premises off and on and there is a Panchnama on each day without carrying on any search operation, in our considered view, the Expln. 2 to s. 158BE cannot validate such invalid Panchnama. Finally, we are of the view that so far as the instant case is concerned, the search in the premises of the assessee must be considered as having been concluded by the latest on 19th January, 1996. The assessment order having been passed beyond the time-limit of one year from that date is to be treated as barred by limitation and hence invalid.
13. Although we have struck down the search assessment as a whole as invalid and bad in law yet, looking to the possibility of the validity of the assessment being revived in further appeal, we will take up the other grounds preferred by the assessee in respect of specific items of additions.
14. The AO states that the assessee showed the opening balance in his capital account as at 1st April, 1985 at Rs. 2,37,070 and that no supporting evidence was furnished in that regard. Accordingly, he treated this amount of Rs. 2,37,070 as undisclosed income of the assessee for the asst. yr. 1986-87.
Shri Venkatesan, strongly contends in this connection that from the cash-flow statement filed by the assessee during the course of assessment proceedings, it would be clear that the assessee was having this much of opening capital balance. On the other hand, the learned Departmental Representative contends that the cash-flow statement filed by the assessee during the course of assessment proceedings has no sanctity. He points out that no return of income was filed by the assessee for the asst. yrs. 1985-86 to 1987-88 and that for the asst. yr. 1984-85 the return was filed accompanied with only a one-page computation sheet. Furthermore, for the asst. yrs. 1988-89 to 1991-92, no valid return was filed by the assessee. From the asst. yr. 1992-93 onward again, the assessee started filing returns along with one-page computation sheet. The learned Departmental Representative also contends in this connection that the assessee had shown the opening capital balance at Rs. 2,37,180 as on 31st March, 1986, and no figure as on 1st April, 1985, was shown by the assessee. He furthermore points out that the paper-book filed by the wife of the assessee, Smt. Annapoornamma shows the credit balance of the assessee to be Rs. 70,000 only. Shri Venkatesan, the learned counsel for the assessee, tries to reply in this connection that besides the personal account of Smt. Annapoornamma as shown in her paper-book the assessee's balance with a proprietary concern of Smt. Annapoornamma viz. M/s Annapoornamma Construction is also required to be taken into consideration. It is argued that, in any case, the opening capital of the assessee stands explained by the various investments made by the assessee, of which detailed list has been furnished, as on the relevant date.
We find ample force in this last argument of Shri Venkatesan. The capital of a person in his balance sheet must be reflected by way of presence of a number of assets in different forms. The assessee has given details of such assets, which are easily verifiable. We are, therefore, of the opinion that this matter requires thorough examination at the end of the AO and that the AO, without conducting such examination, has wrongly treated the entire opening capital as disclosed by the assessee to be bogus and has thus misdirected himself in adding back the same. We, therefore, order that in the event of the assessment being revived in further appeal this particular assessment shall stand restored to the file of the AO for thorough examination on the lines as discussed above.
15. The AO has added back two items of credits of Rs. 6 lakhs each in the names of Shri Eshwarappa and Shri Hanumanthappa shown as liability in the balance sheet of the assessee as on 31st March, 1991, as undisclosed income for the asst. yr. 1991-92. The contention of the assessee in this regard is that the genuineness of these two loans taken on 25th September, 1990 and repaid on 3rd June, 1992, and 2nd July, 1992, stands established by the seized materials in the form of promotes discharging the loans. The learned Departmental Representative strongly objects to the admission of the said evidences at this later stage of appeal. On the other hand, he contends that no confirmation letters were filed by the assessee in support of the genuineness of the loans and hence the identity and the creditworthiness of the lenders do not stand established. He relied on the following judgments in support of his contention that unless the assessee is able to establish the identity and creditworthiness of the creditors, the loans claimed to have been taken by him are liable to be assessed to tax as undisclosed income of the assessee.
(1) Shankar Industries vs. CIT (1978) 114 ITR 689 (Cal);
(2) Harichand Virendra Paul (1983) 140 ITR 148 (P&H);
(3) C. Kant & Co. vs. CIT (1980) 126 ITR 63 (Cal);
(4) CIT vs. Precision Finance (P) Ltd. (1994) 208 ITR 465 (Cal); and (5) CIT vs. Korlay Trading Co. Ltd. (1998) 232 ITR 820 (Cal).
We are of the opinion that although it may not have been possible for the assessee to file confirmation letters in support of the loans, if the seized materials themselves tend to prove the genuineness of the loans, the AO must take into consideration such evidence and act judiciously on the basis of such evidences already with him. In our view, therefore, this particular matter also requires to be restored back to the file of the AO for fresh examination in the light of the above discussion and for coming at appropriate decision thereon. The matter is, therefore, being set aside with the above direction.
16. An amount of Rs. 1 lakh shown as liability as on 31st March, 1995, from Shri Hariram Alidas has also been added back by the AO as undisclosed income of the assessee for the asst. yr. 1995-96. Again, the AO also added back the following liabilities shown as on 12th December, 1995 as unproved credit items :
Rs.
(i) Madhav Das Aildas (M/s Sripriya Advance a/c) 3,35,500 (ii) N. Ravi (M/s Sripriya Advance a/c) 1,52,500 (iii) H. Vijeyandra (M/s Sripriya advance a/c 1,52,000 ----------- 6,40,500 -----------
With regard to the above items also, the learned Departmental Representative relied on the above-mentioned decisions (para 15) of different High Courts to contend that since no confirmation letters were filed in support of those loans, the loan amounts are required to be added back as income of the assessee.
Shri Venkatesan, on other hand, contends that a letter dt. 15th February, 1997, being confirmation certificate from Shri Hariram Aildas was filed with the AO at the stage of assessment. It has been pointed out that this letter clearly states that the loan was received by the assessee by cheque No. 154155, dt. 16th February, 1995, draw on bank of Maharashtra, City Market, Branch. The learned Departmental Representative, on the other hand, objects to the admission of this particular piece of evidence. We, however, feel that the addition of this amount had wrongly been made without taking into consideration this important piece of evidence. In our view, therefore, this matter is also required to be sent back to the file of the AO for fresh examination after taking into consideration the above-mentioned evidence.
So far as the other three amounts are concerned, it is contended that all these amounts represent advances from those parties being customers of the assessee through M/s Sripriya Developers. Shri Venkatesan stated at Bar before us that all these parties along with Shri Hariram Aildas waited outside the chamber of the CIT to depose about the genuineness of the loans in their names at the stage of according approval to the assessment order by the CIT; but the CIT did not meet them at all.
We feel that the additions in respect of these loan amounts have been made without making proper enquiries. The statement of Shri Venkatesan about the parties waiting outside the chamber of the CIT is borne out by the affidavit filed by the assessee. In any case, we are of the opinion that the matter relating to these credit entries requires further examination at the end of the AO and proper opportunity should be allowed to the assessee to establish his case. For this purpose, therefore, the above two matters are being restored back to the file of the AO.
17. The AO has also added back an amount of Rs. 10,39,950 being undisclosed income arising out of the activities undertaken by the assessee in purchasing and developing certain plots of land at Kammannahalli. The AO refers to a memorandum of agreement, dt. 8th September, 1995, between the assessee and M/s Sripriya Developers (hereinafter referred to as 'SD') in which the assessee was shown as vendor and the other party as purchaser. An agreement for sale was also entered into between the parties on the same day. It is the contention of the AO that the assessee did actually sell the land to SD after getting the agricultural land converted for non-agricultural purposes and developing the same. The AO discusses that SD was to do some more development on the same land and then would sell the land to other private parties. Although the AO mentions that a sale deed was executed, from an examination of the papers filed before us and also from the oral submission of both the sides, it is clear that no proper sale deed was actually executed; but only an agreement for sale was arrived at. The AO makes a mention to similar operations done by the members of the assessee group with M/s Ramanashree Comforts (RC). He also refers to the deposition given by the assessee on 9th October, 1996 admitting, in response to question No. 2, that he had received the entire consideration on or before 12th December, 1995. He also refers to other answers given by the assessee during the course of the said interrogation to the effect that the sale had been outright and that the money received was not refundable. The assessee also admitted that he did not have the right over the land. The AO discusses thereafter that although the assessee has been admitting the amount received by him as advance only, the facts of the case would clearly show that the assessee had actually sold the land to SD. The AO commented in this connection that actually sale deeds were not registered for the purpose of avoiding stamp duty. He also points out that the assessee himself had admitted in his regular returns filed for the asst yrs. 1994-95 and 1995-96 that he had earned brokerage and commission on land dealing.
The AO, thereafter refers to the contention of the assessee that the transaction between the assessee group and S.D. could not take place fully owing to some litigation between the assessee and the original land owners. The AO admitted that the assessee had not transferred those pieces of land over which he did not get clear title. The AO, however, held that the assessee had sold the other pieces of land in respect of which he had got the clear title. In this connection, the AO refers to various recitals in the memorandum of understanding (MoU) arrived at between the assessee group and SD. The AO, thereafter discusses that the business profits of the assessee is taken on the basis of mercantile system of accounting. He commented that however it was not clear as to what system of accounting the assessee himself had adopted. However, he states that the assessee had admitted before him that his method of accounting was mercantile. Finally, the AO took into consideration the amount of sale receipt of Rs. 17,53,750 and deducting therefrom the amount of expenses of Rs. 7,13,770 towards the cost of the land and also the development expenses, he considered the balance amount of Rs. 10,39,950 as net profit and included the same as undisclosed income of the assessee for the asst. yr. 1996-97 (upto the date of search).
18. The assessee strongly objects to the action taken by the AO in this regard. Firstly, it is contended that although proper books of account were not being maintained by the assessee, yet all the transactions were through bank accounts and hence it cannot be inferred that the assessee had any intention of not disclosing the transactions before the Department. Shri Venkatesan strongly contended in this connection that the relevant accounting year having not at all by then ended and the due date for filing of the return for the relevant year having not expired, it would not be proper to say that the income arising out of those transactions were meant to keep out of the knowledge of the Department and hence the same represented the undisclosed income of the assessee.
Without prejudice to the above argument another contention has also been raised by the assessee. Shri Venkatesan contends in this connection that the assessee along with others had taken the entire plots of land as a whole and wanted to dispose of the same also in a lump manner. It is furthermore contended that the assessee follows the method of completed contract with reference to this particular operation. It was stated by Shri Venkatesan that the price fixed was for a large extent of property measuring about 25 acres of land and that out of the same, litigation was continued in respect of some of the plots included therein. Shri Venkatesan strongly argues in this connection that the rate fixed for sale is lump price for the whole property.
He contends that it will not be proper to isolate the profit in respect of earlier part of the operation and to allow the remaining difficult part to be taken into consideration at a later point of time. Shri Venkatesan, finally argued that the contract as a whole has to be validated for proper determination of income.
At the time of hearing of the appeal before us, the learned Departmental Representative tried to argue first by relying on a judgment of the Kerala High Court in the case of V. Kunhambre & Sons vs. CIT (1996) 219 ITR 235 (Ker) and of the Tribunal, Ahmedabad Bench, in the case of Manharlal Kasturchand Chokshi vs. Asstt. CIT (1997) 57 TTJ (Ahd) 639 : (1997) 61 ITD 55 (Ahd) that the admission made by the assessee at the time of search must be considered to be having sufficient sanctity. The learned Departmental Representative strongly contended that for assessing profit out of operations by way of acquisition and development of land, it is not necessary that the assessee must transfer the land legally by way of registered sale documents. In this connection, he relied on the judgment of the Andhra Pradesh High Court in the case of M. Syamala Rao vs. CIT (1998) 234 ITR 140 (AP). It was held in this particular case that when the agreement of sale was executed in 1992 and possession was delivered to the assessee on the same date and the sale consideration was paid by that assessee to the vendor, though the document was registered in June, 1979, the registration of the document would relate back to the date on which the agreement of sale had been executed in favour of that assessee by the vendor. However, so far as the present case before us is concerned, there is nothing on record to show that any registered sale documents were at all executed by the assessee in favour of the purchaser. Hence, we are of the view that this particular decision will not be applicable to the present case.
The learned Departmental Representative has also relied on a judgment of the Supreme Court in the case of P. M. Mohammed Meerakhan vs. CIT (1969) 73 ITR 735 (SC). In that particular case, that assessee had divided the entire area purchased by him into 23 plots out of which 22 plots had been sold to others and the last one was retained by that assessee. The Supreme Court held that the transaction was in the nature of trade and profits from the transactions were to be taken into consideration by holding the last plot to represent stock-in-trade. It may be noted in this connection that in that particular case the operations had substantially been concluded by way of sale of 22 plots out of 23. In the present case, it is not the fact that major portion of the operation, in which the assessee was involved, was over by the date considered by us herein.
The learned Departmental Representative also relies on the order of the Tribunal, Cochin Bench, dt. 23rd December, 1997, in IT(SS)A No. 4/Cochin/1997, in the case of Dr. M. V. Raman to argue that undisclosed income till the date of search is required to be taken into consideration in the block assessment.
Thereafter, the learned Departmental Representative has argued that the assessee has obtained consideration for sale of land acquired and developed by him and that the onus would lie on him to prove that the profit arising out of the transaction shall not be subjected to tax. In support of this contention, the learned Departmental Representative relied on a judgment of the Supreme Court in the case of November pan India Ltd. (1994) 73 ELT 769 (SC). We, however, find that in that particular case, it was held by the Supreme Court that a person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision and that in case of doubt or ambiguity, benefit of it must go to the state. We, however, are of the opinion that this is not the case where the assessee is seeking exemption from the tax liability. On the other hand, the assessee merely contends that profit from the transaction should be considered on the basis of complete contract method being followed by him. Hence, in our opinion, this particular decision of the Supreme Court will not be applicable to the present case.
19. The learned Departmental Representative furthermore argues in this connection that the agreement for sale is a documentary evidence about completion of transaction to that extent. He also refers to the sworn statement of the assessee to the effect that he had "sold" the land. The learned Departmental Representative also refers to the MoU and points out that three different types of land are considered therein. He argues in this connection that it is incumbent upon the AO to take into consideration the profit arising out of the transactions already completed. In support of this contention, the learned Departmental Representative relies on the following decisions :
(1) CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC). This particular decision, however, relates to the question of accounting principles which should be taken into consideration in valuation of stock-in-trade.
(2) CIT vs. U.P. State Industrial Development Corpn. (1997) 225 ITR 703 (SC). In this case, it was held that principles of commercial accounting should ordinarily be applied in ascertaining profits and gains.
(3) Tirathram Ahuja (P) Ltd. vs. CIT (1990) 186 ITR 428 (SC). In this case, it was held that in case of incomplete construction contract, no reference would lie out of the finding that neither profit nor loss for the work can be taken into account.
The learned Departmental Representative also relies on an order of the Tribunal, Mumbai Bench, in the case of Param Anand Builders (P) Ltd. vs. ITO (1996) 56 TTJ (Mumbai) 21 : (1996) 59 ITD 29 (Mumbai). In that particular case also that assessee was engaged in construction work and it took a huge project in 1980 which had to take several years to complete. It adopted "Project completion method" as its method of accounting and contended that it should be treated to have earned no profit till the asst. yr. 1985-86. During a search on 11th May, 1987, the Department found some incriminating materials. The assessee declared unaccounted profit of Rs. 66 lakhs as 'on money' and wanted that Rs. 26 lakhs should be assessed in the asst. yr. 1987-88 and Rs. 40 lakhs in the asst. yr. 1988-89. Thereafter, the issue was whether the rate of profit at 25 per cent was correctly applied on total receipts and not on receipts after deducting profits. The particular assessee, however, after the search, had itself admitted having earned 'on money' during the year under consideration. So far as the present case before us is concerned, there is nothing on record to show that the assessee earned any 'on money'. The assessee also did not admit any income during any part of the block period. Hence, in our view this particular judgment would also not be applicable to the present case.
20. We have examined the copies of documents furnished in the paper-book filed by both the sides. We have also thoroughly gone through the written submission made by the learned Departmental Representative. He has mentioned a number of case laws in support of the proposition that the assessee purchasing land, carrying out some development activities on the same, converting the land to non-agricultural land and selling the same thereafter earns income out of business transactions. So far as the present case is concerned, there is no doubt about the fact that the ultimate result of the operation carried on by the assessee would be business profit/loss. Hence, we need not take into consideration these case laws as cited and relied on by the learned Departmental Representative.
On the other hand, the main issue before us is to decide as to whether, in view of particular method of accounting followed by the assessee, any income from the transactions under consideration, can be held to have accrued to the assessee during the block period. Another matter to be decided is whether the transactions were of the nature of undisclosed transactions or not. It is very difficult to say anything with regard to this particular aspect of the matter. It appears that the assessee would have disclosed the transactions and the results thereof before the Department in due course and in that way income of the assessee from the transactions, if any, cannot be considered as undisclosed income. However, it would be very difficult to arrive at an exact conclusion on this issue.
The other question as to whether any profit did arise to the assessee at all during the block period can be resolved more easily. The AO as also the learned Departmental Representative have mentioned some admissions made by the assessee during the course of search about land having been purchased and sale consideration having been received. From a close study of the deposition of assessee, however, it appears that the said portions of the deposition of the assessee relate to the transaction with RC entered into by Smt. Annapurna, Ravishnakar and Girish. The AO also mentions in the assessment order that with regard to the transaction with RC, the transactions were completed. That may be the case. But so far as the present assessee is concerned, the transactions relating to him are required to be examined separately. There is no doubt about the fact that no sale deed was executed in the present case, not to speak of getting the same registered. The only materials on which the Departmental authorities relied are the MoU and the agreement for sale. It is an undisputed fact that the assessee received some amount of money from the ultimate purchasers and some portions of the land have also been handed over after development. However, the entire MoU and also the agreement related to the whole block of land at a lump price. Part-performance of the contract cannot be said to give rise to profit in partial manner, when the assessee follows the method of 'completed contract'. This particular method of accounting is a recognised method in the field of development of land and building. There is no doubt about the fact that some portion of the land was under litigation and the assessee could not complete the contract to that extent. So far as some other portions of the land are concerned, the assessee was yet to make purchase of those portions of land. Taking into considerations all these facts, we must come to the conclusion that the entire contract as a whole is required to be considered for arriving at the ultimate profit/loss, out of the transaction as a whole. The transaction was certainly not completed till the date of search and hence it would not be proper to slice off a portion of the net profit which would ultimately result as pertaining to the block period. We are, therefore, of the opinion that the profit arising our of transaction will have to be considered as a whole at the end of completion of the contract. Hence, in our view, the assessment of the amount of Rs. 10,39,950 as undisclosed income of the assessee for the asst. yr. 1996-97 is not proper. We, therefore, delete this addition.
21. In the result, the appeal filed by the assessee is allowed to the above-mentioned extent.