Can Additions be made on the basis of other documents which come to the possession of AO subsequent to the conclusion of Search - Held No
Block assessments and regular assessments deal with different purposes. The aim and objective of block assessments is the assessment of undisclosed income of the block period as a result of search. The objective of a regular or normal assessment is to determine the true total income or loss of the previous year on the basis of the return under section 139 and other documents and decide the Assessee’s tax liability.
A block assessment is to be carried out on the basis of the material found during the course of search and not as a result of other documents or material, which come to the possession of the AO subsequent to the conclusion of the search operation unless and until such material has a relationship or connection with certain material or evidence found during the course of search
Whether the ITAT was correct in law in deleting the additions made by the Assessing Officer (hereinafter also referred to as “AO”) on the ground that the AO has no jurisdiction to pass the order under section 158BC of the Income Tax Act, 1961 (hereinafter also referred to as the “Act”)
2. A search and seizure operation under Section 132 of the Act was conducted at the residence of Shri Pinaki Misra, the Assessee (in ITA 119/2004) in November 1996.
3. During the course of the search, various documents etc. were found and seized. Thereafter, notice under section 158BC was issued to the Assessee on 7.03.1997 to file his return of income for the block period. The return was filed on 25.04.1997 declaring an undisclosed income of ` 27,65,528/-. The block assessment proceedings were carried out, after which various documents were taken into account.
4. Based on these, the Assessee was asked to reply to several queries, which the Assessee complied with and furnished the relevant replies to the Assessing Officer (AO). After considering these, the assessment order for the block period was completed and assessment made at `2,68,80,387/-. Additions made in the order included the amounts of `1,72,000/- and `2,50,000/- on account of loan, `75,00,000/- on foreign trips, `9,50,000/- on account of professional receipts, `10,80,000/- on account of household expenses and an addition of `90,00,000/- on account of unexplained gifts received.
5. The AO further made an addition of `5,00,000/- as undisclosed sources for the assessment year 1992-93 on account of alleged estimated income from M/s Triad Associates assuming it to be the proprietorship concern of Sangeeta Misra; and an addition of `6,00,000/- allegedly on account of difference in professional receipts and cash in hand.
6. In ITA 423/2004, an addition of `38,71,507/- was made in respect of a gift to Sangeeta Misra, (the wife of the Assessee in ITA 119/2004, Pinaki Misra), from one Shri R. K. Jatia, a resident of Japan. This gift was in the form of a cheque drawn on Marine Midland Bank, New York for a sum of US$ 1,50,000/- and the same was received by the Assessee’s wife in Hong Kong through her attorney Shri N. B. S. Mani. Another addition was made, of an amount of `25,00,000/-, on account of foreign travel expenses incurred by Ms. Sangeeta Misra. Additionally, on the basis of estimate of income for several years and expenses, the AO added various amounts. The assessees were aggrieved and approached the Income Tax Appellate Tribunal (ITAT). The ITAT’s Order dated 08.06.2001
7. Aggrieved by the assessment order passed for the block period, both assessees, preferred appeals before the ITAT, New Delhi.
8. A two-member bench of the ITAT, New Delhi, heard the appeal relating to Mr. Pinaki Misra and announced an order on 8.06.2001. The Assessee had submitted that there was no recovery of cash and jewellery during the search and the jewellery found (valued at around `2 lakhs) was normal, and that the AO was not entitled to reopen any past assessment which had already been completed in the guise of a block assessment; citing a number of reported judgments which dealt with what “undisclosed income” is and what could not be included within such definition. Reference in this connection was made to section 158B(b) and 158BA(3) of the Act. The further submission was to the effect that both the proceedings (for regular assessment and block assessment) could run parallel, i.e., regular assessment under section 143(3) as also the block assessment which contained a specific number of years that comprised the “block period”. Likewise, the additions towards `1,72,000/- under Section 68 of the Act for the assessment year 1987-88, and of `2,50,000/- for an unrecorded loan taken by the Assessee from one Shri S.K. Chakraborty were assailed on the ground that this was gone into during the relevant assessment year by the AO. The ITAT held that the addition of `1,72,000/- was not called for, as the amount had been duly explained in the course of the original assessment proceedings and on the same set of facts; the ITAT held likewise even in the block assessment. Therefore, it deleted the addition of `2,50,000/-, holding that the same was made on insufficient and invalid grounds and in violation of relevant provisions of law. The ITAT had also deleted the additions to the tune of `9,90,000/-, made on account of household expenses for various assessment years comprising the block period, on its findings that the addition was disproportionately high, and based on estimates, and not facts
9. With regard to the foreign trips alleged to have been incurred out of undisclosed sources, the AO concluded that the 22 foreign trips had been funded outside the books of account and since the Assessee had not furnished any details, the AO accordingly proceeded to estimate the expenditure on tickets at `50,00,000/- and thereon added a sum of `25,00,000/- towards expenditure on local conveyance, boarding and lodging etc. i.e., coming to a total of `75,00,000/-. The ITAT held that the AO did not make any detailed enquiries to ascertain the cost of the tickets for the various assessment years and directed the AO to re-compute the addition on account of foreign travel expenses in the various assessment years falling in the block period with a further verification to be made in respect of the actual number of days spent abroad by the Assessee during the said block period
10. In relation to the aggregate addition of `18,38,209/- on account of expenses alleged to have been incurred outside the books of account on maintenance etc., the AO stated that the Assessee had shown nominal expenditure on the cars maintained in the various assessment years falling within the block period and it was noticed that the Assessee was maintaining more than one car whose numbers varied/increased from year to year. It was also observed that the Assessee owned imported cars, with high costs on maintenance, staffing, insurance etc. The Assessee contended that the addition was made on assumptions and presumptions, and assessments already completed accepting the car expenses cannot be reviewed since the scope of block assessment under Chapter XIV-B of the Act is limited to items of undisclosed income.
11. The ITAT went on to hold that the estimates made by the AO were unrealistic, and the yearly calculation for each year in the block period was ad hoc and arbitrary. Another addition of `28,76,000/- made on account of “suppressed rent” pertaining to property No.145 Jor Bagh, New Delhi, the ITAT held that the Revenue was unable to establish the addition in law or on facts. The other addition, made in the Assessee’s hands, for two gifts of `45,00,000/- each, from one Shri Jhanwar Lal Kothari, who affirmed by an affidavit dated 30.04.1994, that they were made out of natural love and affection and on account of his longstanding friendship with the Assessee’s family, the AO had asked the Assessee to furnish a copy of the account from where the remittance of US$3,05,000 from DSS Singapore, that constituted the aforementioned gifts, had come. The Assessee was also asked to show cause as to why the sum of `90,00,000/- was not to be treated as his income.
12. In response to the show cause notice, the Assessee replied that the gifts were received out of the NRE account of Shri Kothari and the gifts, therefore, did not attract the provisions [section 5(1)(iib)] of the Gift Tax Act, 1958, and they rose out of natural love and affection. The ITAT held that the addition was made purely on surmises and conjectures, and the details of the gifts had been disclosed for the assessment year 1994-95, could not be held as an undisclosed item on the part of the Assessee and thus, not falling for consideration under Chapter XIV-B of the Act
13. The other ground deals with an addition of `10,00,000/- alleged to be an undisclosed professional fee received by the Assessee from M/s. Dhanraj Mills Pvt. Ltd. The main submission on behalf of the Assessee was to the effect that the letter of Shri T.B. Ruia (Director of the said company) dated 15.09.1997 was never confronted to the Assessee and there was nothing on record to suggest that on 20.06.1991 when the sum of `10,00,000/- was received, it was not an interest free loan. The counsel for the Revenue strongly supported the order passed by the AO. The ITAT set aside the order passed by the AO and restored the matter once again to his file asking him to confront the letter of Shri T. B. Ruia dated 15.09.1997 to the Assessee allowing him an opportunity to rebut the same
14. The next set of grounds for disposal pertained to the addition on account of professional receipts in the assessment years 1994-95 to 1997-98. The arguments of the Assessee were twofold, namely, that there was no material found during the course of the search which would show that the professional receipts had been earned and suppressed; and secondly, the additions were based on the past history overlooking the fact that in the assessment year 1994-95 to 1996-97 the Assessee had disclosed professional receipts to the tune of `3,65,000/-, `3,25,000/- and ` 4,10,000 respectively. It was, therefore, urged that the aggregate addition of `9,50,000/-be deleted. As against this, the counsel for the Revenue strongly supported the order passed by the AO relying heavily on the fact that the Assessee had not produced his books of account in spite of numerous opportunities allowed and as such, provisions of section 145(2) of the Act were attracted, and the addition was justified. The ITAT went on to hold that there is substantial merit in the arguments advanced on behalf of the Assessee, and allowed the Assessee a relief of ` 7,50,000/-
15. Due to a difference of opinion between the Accountant Member and the Judicial Member, the case was referred to the President of the ITAT, New Delhi as a Third Member under section 255(4) on 19.06.2001
16. In the view expressed by the third member, the issue of jurisdiction was underlined:
“5. The scope and ambit of block assessment under Chapter - XIV-B of the I. T. Act 1961 is a basic and fundamental issue giving jurisdiction to the AO. The issue has come up before the Hon'ble Delhi High Court in the case of CIT Vs. Ravi kant Jain (2001) 250 ITR 141 and it was held that block assessment under Chapter -XIV-B of the I. T. Act 1961 is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other material or information as are available with the AO. Evidence found as a result of search is clearly relatable to Sec. 132 and 132A of the Act. Similarly the Hon'ble Calcutta High Court in the case of Bhagwati Prasad Kedia Vs. CIT(2001) 248 ITR 562 held that the explanation to Section 158 BA of the I. T. Act, 1961 makes it clear that the Legislature thought it fit to make a distinction between the block assessment and the regular assessment. In the case of regular assessment, the AO is free to examine the veracity of the return as well as the claim made by the assessee, whereas the undisclosed income is taxed by way of block assessment as a result of search and seizure. The logic behind the two different modes of assessment is that concealment of income and claiming deduction or exemption in respect of a disclosed income cannot be treated at par. The former is an offense which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the AO is free to accept the justification shown or reject the same. In doing so, the Hon'ble Calcutta High Court followed its earlier decision in the case of CIT Vs. Shaw Wallace And Co. Ltd. (2001) 248 ITR 81. The Hon'ble Rajasthan High Court also had an occasion to consider this issue in the case of CIT Vs. Rajendra Prasad Gupta (2001) 248 ITR 35.”
17. The third member, therefore, by order dated 05.04.2002 returned back the matter to the Original Bench for deciding the issue of jurisdiction and then the points of reference on the basis of findings to be arrived at by the Bench. On 26.03.2013, the Bench made its determination and held as follows:
“It is possible that in view of the other evidences found indicating unexplained expenses, such affidavit or receipts showing receipts of money by gifts or otherwise may be relatable to such unexplained expenses. Therefore sec. 158BC empowers and the Assessing Officer to make inquiries even about such evidences which are filed with the Income Tax Department and which were not earlier scrutinized, if this is relatable to other evidences found during the search. The word used is 'relatable' and not related'. A thing may be considered prima-facie relatable to other thing, and on further scrutiny it may be found that it is not related. Therefore, the scope of 'relatable' is much wider than that of 'related'. It cannot be said that the word 'found' mentioned in the section means that the evidence must have been found for the first time during search. No such limitation is provided in the section and 'on the basis of evidence found has to included all evidences found or filed earlier with the Department. Section 158BC has been amended w.e.f. 1-7-95 to include the clause "relatable to such evidence". Even before the amendment the Assessing Officer had the power to compute undisclosed income on the basis of materials or information available with him. The use of the word 'are' only means that the materials or information are those which are available with him at the time of passing he block assessment order and not necessarily those found earlier during the search. This is a procedural section and its retrospectively has to be upheld. As regards the first point of reference the division bench has specifically considered the point of jurisdiction and therefore it cannot be reviewed.”
18. The President of the ITAT then passed the final order under section 255(4) of the Act on 22.04.2003, and the matter was referred back to the Bench for decision according to the majority opinion. In these circumstances, the ITAT, by its impugned order dated 05-06-2003, allowed the Assessee’s appeal. In the second appeal, i.e ITA 423/2004, the assessee is the wife of the other assessee (appellant in ITA 119/2004). In this appeal, the ITAT followed its decision in the husband/assessee’s case, as many heads of income were common and allowed the assessee’s appeal
Arguments by Revenue
It was argued that the ITAT erred in law in reviewing its own order and concluding that the order passed by the AO was beyond his jurisdiction. It is argued that the ITAT erred in law in not deciding the additions on merits and it merely allowed the appeal on the question of jurisdiction. The Revenue’s counsel submits that during the assessment proceedings for the block period, the Assessee did not object to the validity of the proceedings on all the issues and on the contrary the Assessee had acquiesced to the proceedings and filed various replies and documents.
Counsel for the Revenue submits that undisclosed income has to be computed in accordance with the provision of the Act and thus, should be completed on the basis of evidence found as a result of search or requisition of books of accounts or other documents; such material or information being available with the AO and being relatable to such evidence. Therefore, he contended that it would be an error to interpret this to mean that the undisclosed income must be computed only on the basis of the evidence found as a result of search and in exclusion of the application of the other sections of the Act and consideration of other material or information.
It is submitted that the finding of the ITAT that the order on the five points referred to, which were remitted to the decision of the AO, in the earlier order, is plainly erroneous. In this regard, it is submitted by counsel for the Revenue that when, in the first instance, two members differed on various issues and referred the matter for decision to a third member, it was not open to him, on such reference, to require a decision on the question of jurisdiction. In other words, the order referring to the five points conferred limited scope of inquiry into those matters and not on the issue of jurisdiction, in regard to which the two differing members did not entertain any doubt. In proceeding then to decide and pronounce upon the question of scope of provisions relating to block assessment, the Bench, in its order dated 05.04.2003, in effect reviewed its previous determination. This was sought to be pointed out to the ITAT, by the Revenue, but without avail. After the remit for decision on merits, in these circumstances, the order allowing the Assessee’s appeals partly was erroneous.
Counsel for the Revenue also urged that the issues relating to foreign travel expenses and those towards stay as well as expenses were decided wrongly. It was submitted that these were added due to the statements made by Chandraswamy, who admitted that the Assessee, Mr. Pinaki Misra, had accompanied him on several occasions. Furthermore, the additions made on account of undisclosed income reflected in household expenditure as well as suppressed rent, were warranted in law. Counsel submitted that the explanation provided in regard to the two gifts received by the Assessee’s minor sons, of `45,00,000/- was unconvincing and the AO acted within jurisdiction to bring them to tax for the relevant years.
In regard to ITA 423/2004, it was contended that the 15 additions made pertained to estimated professional receipts which the AO decided had not been disclosed, for several years; value of unreported investment in purchase of shares and jewelry and also the gift received from Mr. Jatia, as in the Assessee’s husband (Pinaki Misra’s) case. It was argued that these additions were justified because they were scrutinized during block assessments for the relevant years and it could be said that they related to material discerned after the search and seizure proceedings. Learned counsel argued that the ITAT failed to see that the Revenue was bound to consider the vacillating statement of the alleged donor, Shri Kothari and his unreliability because on the one hand, he denied making gifts whereas later he retracted the statement. Reliance was placed on Commissioner of Income Tax v ShailendraMahto372 ITR 257. It was also submitted that broadly, the rule of evidence to be followed is that of preponderance of probabilities, which was overlooked by the ITAT, erroneously. For this, support was derived from the ruling in Commissioner of Income Tax v Durga Prasad More (1971) 82 ITR 540 where it was held that -
“the law does not prescribe any quantitative test to find out whether the onus in a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some cases, the onus may be heavy whereas in others, it may be nominal. There is nothing rigid about it.”
Arguments by Assessee
The main submission of the Assessee’s counsel is that there was a fundamental difference between a block assessment and a regular assessment and the scope of the former was limited to the material found/unearthed during the course of search and further, addition on account of undisclosed income could not be made by drawing any assumptions. Counsel highlights Section 158BB(1) of the Act to emphasize how the computation of the undisclosed income in a block assessment on the basis of post search enquiries mandatorily needs to be relatable to evidence found specifically from such search, and cannot rest solely on presumption and surmises of the AO.
It was submitted that in both cases, additions were made upon a fresh assessment or redetermination of all the issues. Not only did the income added not relate to any materials, documents or other thing recovered or seized during the search, the AO went out of his way to make fresh inquiries from unrelated sources. Even such inquiries were not warranted or did not emanate from any statement recorded during the search. Therefore, the additions- in respect of the gifts received and the sources of income disclosed or expenditure incurred, which had been subjected to previous assessments could not have been validly made.
Counsel further highlighted that there cannot be any controversy about the Tribunal’s power to decide whether the Revenue could re-assess the previous year’s returns as that was a matter of law. It was submitted that though five questions were referred for decision, the member who was asked to decide them noticed that the issue of jurisdiction, which went into the root of the matter, was unaddressed. As a member of the Tribunal it was his duty to point this to the other two who had differed with each other on five specific points. If at that stage, the Revenue felt aggrieved, it should have approached this court. That it chose to abide by the ruling of the two members when that specific point was urged meant that the Revenue is now precluded for arguing on that issue.
Learned counsel relied on the decision of the Supreme Court, reported as The Assistant Commissioner of Income Tax, Chennai v. A.R. Enterprises (2013 (2) AD (S.C.) 21) for the proposition that in the absence of any material seized for any block assessment, or material relatable to something seized, the Revenue could not validly revisit its views in the original assessment. It was submitted that this proposition has been validated and iterated in numerous rulings and the impugned order merely followed that principle. Therefore, the question of law deserves to be answered in favour of the assessees.
On the question of law presently before the court, the primary consideration is whether the AO had the jurisdiction to make the additions to the assessment under section 158BC of the Act. To analyze this, it is necessary to address the grounds of each such addition made, and assess if the AO had jurisdiction in conducting the block assessment within the meaning of section 158BC, or if this was indeed not within the purview of the AO’s jurisdiction....
The Gujarat High Court had, in an earlier decision, in N.R. Paper & Board Ltd. v. DCIT (1998) 234 ITR 733 (Guj) ruled that block assessments and regular assessments deal with different purposes. The aim and objective of block assessments is the assessment of undisclosed income of the block period as a result of search. The objective of a regular or normal assessment is to determine the true total income or loss of the previous year on the basis of the return under section 139 and other documents and decide the Assessee’s tax liability.
The structure and pattern of Chapter XIV-B as originally enacted w.e.f. 1st July, 1995 and as modified/changed through amendments, from time to time (in the relevant provisions), continues to retain its purpose, in that, a block assessment pertaining to a number of years remains distinct from an assessment under Section 143(3) pertaining to a single assessment year. Further, the amendment to section 158B(b) has enlarged the meaning of the term "undisclosed income" by including therein "any expenses, deduction or allowance claimed under this Act, which is found to be false". However, this cannot be construed to mean that whatever has been left out in a regular assessment can be reassessed or re-examined with reference to those provisions which are relatable to an assessment u/s 143(3)....
A block assessment is to be carried out on the basis of the material found during the course of search and not as a result of other documents or material, which come to the possession of the AO subsequent to the conclusion of the search operation unless and until such material has a relationship or connection with certain material or evidence found during the course of search. It was highlighted in CIT v. Ravi Kant Jain (250 ITR 141-Delhi) how the procedure of Chapter –XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. The scope and ambit of a block assessment is limited to materials unearthed during search and the assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the AO. The Bombay High Court in the case of CIT v. Vinod Danchand Ghodawat (247 ITR 448 (Bom.) also held, similarly that where the assessee had made disclosure in their wealth tax return, which was accepted by the Department, additions made by the Department on the ground of undisclosed income was erroneous.
A larger, five member bench of the Supreme Court reiterated the distinctness of the procedure between normal assessments and block assessments, with specific reference to the charging section (of the Income tax), the reference to “previous year” as the income for which tax is levied and the special procedure for assessment of undisclosed income relatable to materials seized during a search, in Commissioner of Income Tax v Vatika Township  367 ITR 466 (SC)....
This court is also of the opinion that the proper approach, commended through the decision in Shailendra Mahto (supra) by the Revenue, is inapt. Where the law is clear that unless material extraneous to the returns and document are seized or discerned as relatable to statements made, etc. additions could not have been made, having regard to the state of law applicable to the facts of the case. Furthermore, Durga Prasad More (supra) undoubtedly propounds an important principle of law relating to evidence. Its application however is wherever there is material that can validly be used to complete an assessment (in this case a block assessment). Again, as in the case of Shailendra Mahto, that authority has no applicability for this case....
In the light of the foregoing discussion and conclusions, the question of law framed in these appeals has to be and is answered in favour of the assessees and against the Revenue. The appeals fail and are, therefore, dismissed.
Cases Referred to
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