IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 10.03.2016
+ ITA 8/2004
COMMISSIONER OF INCOME TAX .....Appellant
versus
HARJEEV AGGARWAL ....Respondent
Advocates who appeared in this case:
For the Appellant : Mr Raghvendra Singh, Junior Standing
Counsel.
For the Respondent : Mr Salil Aggarwal with Mr Prakash Kumar.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. The Revenue has filed this appeal under Section 260A of the
Income Tax Act, 1961 (hereafter the ,,Act) impugning an order dated 23rd
June, 2003 (hereafter ,,the impugned order) passed by Income Tax
Appellate Tribunal (hereafter ,,the ITAT) in IT(SS) No.68/Del/2002 filed
by the Assessee. This appeal was directed against an order dated 13th
February, 2002 passed by the Commissioner of Income Tax (Appeals)
[hereafter ,,the CIT(A)] in an appeal preferred by the Assessee against
the assessment order dated 27th February, 2001 passed by the Assessing
ITA 8/2004 Page 1 of 33
Officer (hereafter ,,the AO) for the Block Period 1st April, 1988 to 25th
February, 1999.
2. The controversy involved in the present appeal relates to an
addition of Rs.74 lacs made by the AO as undisclosed income of the
Assessee. Admittedly, the said payment of Rs.74 lacs was made in cash
for purchasing a property. The ITAT, in its order, has held that the AO
had not made out any valid case for treating the investment as the
undisclosed income of the Assessee for the block period. The ITAT
further held that the addition on account of unexplained income, if any,
had to be considered in the regular assessment on the basis of books of
accounts and the return filed by the Assessee and there was no
justification for considering the investment in the block assessment under
Chapter XIV-B of the Act. This is contested by the Revenue.
3. By an order dated 19th February, 2007 the following substantial
questions of law were framed for consideration:-
"1. Whether the Income Tax Appellate Tribunal was
correct in law in deleting the addition of Rs.74 lacs paid
by the Assessee in cash for the purchase of property
bearing No.C-104, Naraina Vihar, Delhi?
2. Whether the Income Tax Appellate Tribunal was
correct in law in holding that the provisions of Section
ITA 8/2004 Page 2 of 33
158 BB of the Income Tax Act, 1961 were not applicable
to the facts of the case?
3. Whether the Income Tax Appellate Tribunal was
correct in law in holding that the genuineness of the
investment made for the purchase of property bearing
No.C-104, Naraina Vihar, Delhi was to be considered in
the hands of the Assessee, Smt. Anita Aggarwal and
Harjeev Aggarwal and Sons, HUF?"
4. Briefly stated, the facts relating to the present case are as under:-
4.1 A search was conducted on 01.02.1999 on the premises of one Mr
Arvind Seth, a Non-resident Indian, pursuant to a specific information
received from the investigation wing that the property bearing No. C 104,
Naraina Vihar, Delhi owned by Mr Arvind Seth, was being sold for Rs.86
lacs out of which only Rs.12 lacs were paid by cheque and the balance
was payable in cash. The said search resulted in recovery of Rs.42.50 lacs
and US $30000 from Mr Arvind Seth of N-29, Green Park, New Delhi. A
copy of the agreement to sell and a receipt confirming part payment of
the sale consideration were also found and seized. Mr Arvind Seth
admitted, in his statement recorded during the search, that he had
received total consideration of Rs.86 lacs out of which Rs.12 lacs was by
way of cheque and the balance Rs.74 lacs was in cash. He also stated in
his statement that although he has signed the receipt for the full amount,
ITA 8/2004 Page 3 of 33
Rs.20 lacs was still to be received by him from Mr Harjeev Aggarwal, the
Assessee herein.
4.2 Since it was claimed that the amount of Rs.20 lacs was yet to be
received and that the registration of the property was yet to be completed,
a search was carried out on 02.02.1999 at the premises C-108, Naraina
Vihar, Delhi - the residence of Mr Harjeev Aggarwal.
4.3 During the search, the Income Tax Authorities seized certain books
of accounts of the Assessee including a diary (referred to as ,,Annexure
8), which contained a record of certain unaccounted sales and purchases
made by the Assessee. Although Rs.1,00,600/- cash was also found, the
same was stated to belong to the mother of the Assessee and was not
seized.
4.4 In his statement during the search, the Assessee admitted that he
entered into a deal for purchase with Mr Arvind Seth for a sum of Rs.86
lacs. Out of the aforesaid sum, Rs. 14 lacs was paid in cash and 2 cheques
each of Rs.50,000/- were given to Mr J K Gulati, the attorney holder of
Mr Arvind Seth, on 08.07.1998; Rs.20 lacs in cash was given to Mr
Arvind Seth on 28.01.1999; and Rs.39 lacs in cash was paid to Mr Arvind
Seth on 28.01.1999. Mr Harjeev Aggarwal also handed over 6 cheques
ITA 8/2004 Page 4 of 33
amounting to Rs.12 lacs to Mr Arvind Seth on 28.01.1999 and then
received a signed receipt for the entire sum of Rs.86 lacs which was
signed by Mr Arvind Seth. Mr JK Gulati and Mr Kamal Seth (brother of
Mr Arvind Seth) signed the receipt as witnesses. The examination of the
Assessee, during the course of the search, was interrupted and remained
incomplete as the Assessee felt unwell.
4.5 A few days later, on 05.02.1999, the Assessee filed his submission,
inter alia, providing the explanation as to the sources of the cash
payments made for purchase of the property in question. He submitted
that the property was agreed to be purchased jointly in the names of Mr
Harjeev Aggarwal, Mrs Anita Aggarwal (his wife) and Harjeev Aggarwal
& Sons HUF (hereafter ,,the HUF) for a sum of Rs.86 lacs from Mr
Arvind Seth out of which Rs.74 lacs was paid in cash and Rs.12 lacs was
yet to be paid. He further stated that out of Rs.74 lacs, Rs.14 lacs was
paid out of cash in hand accumulated over a period of time in their
personal as well as the firms account and the balance amount of Rs.60
lacs was paid out of sale proceeds of unaccounted stock sold in cash in
the market.
ITA 8/2004 Page 5 of 33
4.6 The Assessee was again examined under Section 131 of the Act on
24.02.1999, and he affirmed the submission furnished by him on
05.02.1999 in the following words:
"As I have submitted in my submission dated 5.2.99 the
amount of Rs.60 lacs as I have already submitted. It
represents unaccounted money belonging to me And I
shall pay tax on it at the appropriate time."
4.7 Thereafter, the Assessee sent a letter dated 16.04.1999, now stating
that the amount paid by him was from tax reflected sources, borrowing
and advances against future commitments. The authorised representative
of the Assessee also furnished a letter dated 28.06.1999, explaining the
sources of the funds as subsequently claimed by the Assessee.
4.8 During the block assessment proceedings, the Assessee was again
required to explain the source of investment of Rs.74 lacs. The Assessee
replied by explaining that an amount of Rs.45 lacs was received in cash
from M/s Penguin Chits Pvt ltd, M/s Parmeshwar Chits Pvt Ltd and M/s
Jai & Associates as earnest money; the sources of funds were now
explained as under:
(a) It was claimed that the Assessee paid a sum of Rs.37.35 lacs out
of which Rs.32.9 lacs were paid in cash which comprised of
ITA 8/2004 Page 6 of 33
Rs.20 lacs received from M/s Penguin Chits Pvt Ltd and
Rs.12.9 lacs were withdrawn from the business conducted by
the Assessee in the name of M/s Machine Tools & Hardware
Stores;
(b) Rs. 29 Lacs was stated to have been paid by Mrs Anita
Aggarwal, wife of the Assessee, out of which Rs. 25.15 lacs
was paid in cash. The cash payments included Rs. 15 lacs
received as earnest money from M/s Parmeshwar Chits Pvt.
Ltd; and
(c) Rs.19.65 lacs was stated to be paid by the HUF which included
15.95 lacs in cash. The cash payment included Rs. 10 lacs stated
to have been received from Jai & Associates and the balance
cash was stated to be from "tax reflected sources".
5. The AO examined the returns filed by the Assessee for the block
period and noticed that the income declared by the Assessee for the
relevant AYs was barely above the threshold taxable limit. He, therefore,
concluded that it was not possible for the Assessee to have purchased the
property on the basis of his declared sources. The AO disbelieved the
Assessee's claim that bulk of the cash payments were made from
ITA 8/2004 Page 7 of 33
advances received from M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar
Chits Pvt. Ltd. and M/s Jai & Associates. The AO reasoned that the
property in question was not yet registered in the name of the Assessee,
his wife and the HUF and consequently it was not plausible that other
entities would pay large amounts in cash as earnest money for purchase
of the said property from the Assessee. Accordingly, the AO taxed the
entire amount paid for purchase of the property in question - Rs.86 lacs as
undisclosed income of the Assessee. The AO also assessed Rs.89,400/-
being the amount of profit calculated on the transactions recorded in the
diary seized during the search, as the Assessee's undisclosed income. In
addition, the cash of Rs.1,00,600/- found at the residence of the Assessee
- which was claimed by the Assessee as belonging to his mother and was
not seized during the search - was also included as the Assessee's
undisclosed income.
6. The Assessee appealed against the block assessment order before
the CIT(A), who before deciding the appeal, sought a remand report from
the AO. After considering the contentions advanced by the Assessee as
well as the remand report, the CIT(A) upheld the addition of Rs.74 lacs
but deleted the addition of Rs.12 lacs which were paid by the Assessee by
way of cheques since these cheques were not en-cashed.
ITA 8/2004 Page 8 of 33
7. Aggrieved by this appellate order, both the Assessee as well as the
revenue filed appeals before the ITAT. The Assessee challenged the
addition of Rs.74 lacs while the revenue challenged the deletion of Rs.12
lacs. The ITAT deleted the addition of Rs.74 lacs holding that the
Assessing Officer did not make out any valid case for treating the
investment as the undisclosed income of the Assessee for the block
assessment. The ITAT further held that even if there is any doubt about
the genuineness of the investments, the same would have to be decided in
the regular assessment proceedings of the persons concerned - that is, Mr
Harjeev Aggarwal, Mrs Anita Aggarwal and the HUF - who had made
the investment.
8. The ITAT upheld the deletion of Rs.12 lacs holding that the
cheques were not encashed in the instant case and therefore, CIT(A) had
rightly deleted the addition.
9. Accordingly, the ITAT by a common order dated 23rd June 2003
dismissed the Revenues appeal while allowing the Assessees appeal. It
is only against the order of the ITAT allowing the Assessees appeal that
the Revenue is in appeal before us.
Submissions
ITA 8/2004 Page 9 of 33
10. Mr Raghvendra Singh, Junior Standing Counsel appearing for the
Revenue contended that the ITAT had grossly erred in holding that the
cash payment of Rs. 74 lacs could not be taxed as undisclosed income of
the Assessee under a block assessment made under Section 158BC of the
Act. He submitted that after the search, Mr Harjeev Aggarwal had
voluntarily made a statement that an amount of Rs.60 lacs was paid out of
sale proceeds of unaccounted stock sold in cash in the market. He further
pointed out that admittedly, the Assessee had not maintained any books
of accounts and, thus, the question of cash paid by the Assessee being
accounted for or representing disclosed income did not arise.
10.1 Mr Raghvendra next referred to the definition in Section 158B(b)
of the Act for the meaning of the expression 'undisclosed income'. He
contended that undisclosed income would not only include income that
was not disclosed but also the income which would not have been
disclosed for the purposes of the Act. He submitted that in the present
case, the fact that large payments were made in cash clearly evidenced
the Assessee's intention to not disclose the same. Further, on being
confronted during the search, the Assessee had within three days
thereafter, clearly, admitted that the Rs.60 lacs of cash was unaccounted
ITA 8/2004 Page 10 of 33
money and there would have been no occasion for the Assessee to have
done so if the search was not conducted in his premises.
10.2 Mr Raghvendra next referred to the provisions of Section
158BB(1) of the Act and contended that in terms of that provision,
undisclosed income of a block period is required to be computed on the
basis of the evidence found as a result of search as well as other
information as is available with the AO. He argued that in the present
case, the conditions under Section 158BB(1) for taxing the payments in
question were duly fulfilled; first of all, for the reason that the Assessee
was examined under Section 132(4) of the Act and by virtue of the said
provision, his statement could be used in evidence in any proceedings
under the Act; and secondly, the search conducted on the premises of Mr
Arvind Seth had unearthed various incriminating documents that
evidenced cash payments from the Assessee. Thus, a block assessment
could be made in the case of the Assessee based on such incriminating
material.
10.3 Mr Singh further submitted that the Assessee, in his statement
recorded on 24th February, 1999, had reiterated his admission that Rs.60
lacs represented unaccounted money on which the Assessee would pay
the requisite tax. He submitted that in this view the Assessee's subsequent
ITA 8/2004 Page 11 of 33
assertion that he and his wife had borrowed funds from three independent
entities against back to back sale arrangements was clearly an
afterthought and the ITAT had erred in not rejecting the same.
11. Mr Salil Aggarwal, learned counsel for the Assessee submitted that
the Income Tax Authorities had not found any incriminating material
during the search conducted at the premises of the Assessee, which would
be relevant for making the addition of Rs.74 lacs under a block
assessment. He, emphatically, submitted that statements recorded under
Section 132(4) of the Act could not be construed as evidence for the
purposes of Section 158BB(1) of the Act. He further submitted that ITAT
had examined the factual matrix and had accepted that the payments
made by M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar Chits Pvt. Ltd.
and M/s Jai & Associates Pvt. Ltd. were genuine. The Revenue had not
contested the said finding as being perverse and thus, the said finding
could not be disturbed.
11.1 Mr Aggarwal further contended that Rs.74 lacs could not be added
as undisclosed income of the Assessee because the said transactions were
admitted in the first instance and were subsequently also disclosed in the
balance sheet filed by the Assessee, Mrs Anita Aggarwal - wife of the
Assessee, and the HUF. He referred to the decision of this Court in CIT
ITA 8/2004 Page 12 of 33
v. Ravi Kant Jain: (2001) 250 ITR 141 (Del) in support of his contention
that a block assessment could not be made in respect of
income/transactions that were duly disclosed in the books. He further
submitted that the returns filed by Assessee, his wife and the HUF were
duly accepted by the AO under Section 143(1) of the Act and, therefore,
the transactions could not be made a subject matter of block assessment.
Reasoning and Conclusion
12. The first and foremost issue to be addressed is whether there was
any incriminating material on the basis of which the cash payments made
for purchase of property could be taxed as undisclosed income.
13. Chapter XIV B of the Act - as the title of the said chapter also
indicates - contains a special procedure for assessment of search cases. It
is well established that the special procedure as provided under the said
chapter is triggered only in cases where undisclosed income is unearthed
during a search initiated under Section 132 of the Act or where any books
of accounts, other documents or assets are requisitioned under Section
132A of the Act. The explanation to Section 158BA(2) of the Act
clarifies that the assessments made under Chapter XIV B of the Act are in
addition to the regular assessment in respect of each previous year
ITA 8/2004 Page 13 of 33
included in the block period and are only in respect of undisclosed
income which are not included in the regular assessments.
14. At the outset, it is necessary to refer to Section 158B(b) of the Act,
which defines " undisclosed income"; the said clause reads as under:
"(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 any
expense, deduction or allowance claimed under this Act
which is found to be false"
15. As is apparent from the plain language of the above definition,
"undisclosed income" includes not only the income that is not disclosed
but also which would not be disclosed. Section 158BB of the Act
provides for computation of undisclosed income. The opening words of
the said section are relevant and read as under:
"158BB. (1) The undisclosed income of the block period shall
be the aggregate of the total income of the previous years
falling within the block period computed, in accordance with
the provisions of this Act, on the basis of evidence found as a
result of search or requisition of books of account or other
documents and such other materials or information as are
available with the Assessing Officer and relatable to such
evidence, as reduced by the aggregate of the total income, or
ITA 8/2004 Page 14 of 33
as the case may be, as increased by the aggregate of the losses
of such previous years, determined,-"
16. At this stage, it is relevant to refer to the decision of the Supreme
Court in CIT v. Hotel Blue Moon: (2010) 321 ITR 362 (SC), wherein
the Supreme Court had observed as under:-
"12. Chapter XIV-B provides for an assessment of the
undisclosed income unearthed as a result of search without
affecting the regular assessment made or to be made. Search is
the sine qua non for the Block assessment. The special
provisions are devised to operate in the distinct field of
undisclosed income and are clearly in addition to the regular
assessments covering the previous years falling in the block
period. The special 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. It is not intended to be
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 accounts or documents and such other materials or
information as are available with the assessing officer.
Therefore, the income assessable in Block assessment under
Chapter XIV-B is the income not disclosed but found and
determined as the result of search under Section 132 or
requisitioned under Section 132A of the Act."
17. Thus, plainly, a block assessment under Chapter XIV-B of the Act
is for bringing to tax undisclosed income which is computed on the basis
of evidence found as a result of search and/or other information as is
available with the AO which is relatable to such evidence.
ITA 8/2004 Page 15 of 33
18. In CIT v. Harkaran Dass Ved Pal: (2011) 336 ITR 8 (Del), this
Court expressed the aforesaid view in the following words:-
"This provision clearly stipulates that the undisclosed income
of the block period has to be determined or computed "on the
basis of evidence found as a result of search or requisition of
books of accounts or other documents and such other materials
or information as are available with the Assessing Officer and
relatable to such evidence". This Court in Ravi Kant Jain
(supra), as indicated above, has already observed that the
procedure of assessment under Chapter XIV-B is a special
procedure intended to provide a mode of assessment of
undisclosed income which has been detected as a result of
search. The procedure under Chapter XIV-B is not intended as
a substitute to regular assessment and its scope and ambit is
limited in that sense to materials unearthed during the search.
As pointed out in Ravi Kant Jain (supra), 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 accounts
or other documents and such other materials or information as
are available with the Assessing Officer and relatable to such
evidence. It is, therefore, clear that the undisclosed income,
which is to be determined under Chapter XIV-B, has to be
determined on the basis of evidence discovered during the
search. It is obvious that where the computation of undisclosed
income is based on material other than what was found in the
course of the search, the same could not be treated as
undisclosed income determined under Clause (c) of
Section 158BC."
19. In view of the settled legal position, the first and foremost issue to
be addressed is whether a statement recorded under Section 132 (4) of the
Act would by itself be sufficient to assess the income, as disclosed by the
ITA 8/2004 Page 16 of 33
Assessee in its statement, under the Provisions of Chapter XIV-B of the
Act.
20. In our view, a plain reading of Section 158BB(1) of the Act does
not contemplate computing of undisclosed income solely on the basis of a
statement recorded during the search. The words "evidence found as a
result of search" would not take within its sweep statements recorded
during search and seizure operations. However, the statements recorded
would certainly constitute information and if such information is relatable
to the evidence or material found during search, the same could certainly
be used in evidence in any proceedings under the Act as expressly
mandated by virtue of the explanation to Section 132(4) of the Act.
However, such statements on a standalone basis without reference to any
other material discovered during search and seizure operations would not
empower the AO to make a block assessment merely because any
admission was made by the Assessee during search operation.
21. A plain reading of Section 132 (4) of the Act indicates that the
authorized officer is empowered to examine on oath any person who is
found in possession or control of any books of accounts, documents,
money, bullion, jewellery or any other valuable article or thing. The
explanation to Section 132 (4), which was inserted by the Direct Tax
ITA 8/2004 Page 17 of 33
Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989, further clarifies that
a person may be examined not only in respect of the books of accounts or
other documents found as a result of search but also in respect of all
matters relevant for the purposes of any investigation connected with any
proceeding under the Act. However, as stated earlier, a statement on oath
can only be recorded of a person who is found in possession of books of
accounts, documents, assets, etc. Plainly, the intention of the Parliament
is to permit such examination only where the books of accounts,
documents and assets possessed by a person are relevant for the purposes
of the investigation being undertaken. Now, if the provisions of Section
132(4) of the Act are read in the context of Section 158BB(1) read with
Section 158B(b) of the Act, it is at once clear that a statement recorded
under Section 132(4) of the Act can be used in evidence for making a
block assessment only if the said statement is made in the context of other
evidence or material discovered during the search. A statement of a
person, which is not relatable to any incriminating document or material
found during search and seizure operation cannot, by itself, trigger a
block assessment. The undisclosed income of an Assessee has to be
computed on the basis of evidence and material found during search. The
statement recorded under Section 132(4) of the Act may also be used for
making the assessment, but only to the extent it is relatable to the
ITA 8/2004 Page 18 of 33
incriminating evidence/material unearthed or found during search. In
other words, there must be a nexus between the statement recorded and
the evidence/material found during search in order to for an assessment to
be based on the statement recorded.
22. In CIT v. Sri Ramdas Motor Transport Ltd.: (1999) 238 ITR 177
(AP), a Division Bench of Andhra Pradesh High Court, reading the
provision of Section 132(4) of the Act in the context of discovering
undisclosed income, explained that in cases where no unaccounted
documents or incriminating material is found, the powers under Section
132(4) of the Act cannot be invoked. The relevant passage from the
aforesaid judgment is quoted below:
"A plain reading of sub-section (4) shows that the authorised
officer during the course of raid is empowered to examine
any person if he is found to be in possession or control of
any undisclosed books of account, documents, money or
other valuable articles or things, elicit information from such
person with regard to such account books or money which
are in his possession and can record a statement to that
effect. Under this provision, such statements can be used in
evidence in any subsequent proceeding initiated against such
per son under the Act. Thus, the question of examining any
person by the authorised officer arises only when he found
such person to be in possession of any undisclosed money or
books of account. But, in this case, it is admitted by the
Revenue that on the dates of search, the Department was not
able to find any unaccounted money, unaccounted bullion
nor any other valuable articles or things, nor any
unaccounted documents nor any such incriminating material
ITA 8/2004 Page 19 of 33
either from the premises of the company or from the
residential houses of the managing director and other
directors. In such a case, when the managing director or any
other persons were found to be not in possession of any
incriminating material, the question of examining them by
the authorised officer during the course of search and
recording any statement from them by invoking the powers
under section 132(4) of the Act, does not arise. Therefore,
the statement of the managing director of the assessee,
recorded patently under section 132(4) of the Act, does not
have any evidentiary value. This provision embedded in sub-
section (4) is obviously based on the well established rule of
evidence that mere confessional statement without there
being any documentary proof shall not be used in evidence
against the person who made such statement. The finding of
the Tribunal was based on the above well settled principle."
23. It is also necessary to mention that the aforesaid interpretation of
Section 132(4) of the Act must be read with the explanation to Section
132(4) of the Act which expressly provides that the scope of examination
under Section 132(4) of the Act is not limited only to the books of
accounts or other assets or material found during the search. However, in
the context of Section 158BB(1) of the Act which expressly restricts the
computation of undisclosed income to the evidence found during search,
the statement recorded under Section 132(4) of the Act can form a basis
for a block assessment only if such statement relates to any incriminating
evidence of undisclosed income unearthed during search and cannot be
the sole basis for making a block assessment.
ITA 8/2004 Page 20 of 33
24. If the Revenue's contention that the block assessment can be
framed only on the basis of a statement recorded under Section 132(4) is
accepted, it would result in ignoring an important check on the power of
the AO and would expose assessees to arbitrary assessments based only
on the statements, which we are conscious are sometimes extracted by
exerting undue influence or by coercion. Sometimes statements are
recorded by officers in circumstances which can most charitably be
described as oppressive and in most such cases, are subsequently
retracted. Therefore, it is necessary to ensure that such statements, which
are retracted subsequently, do not form the sole basis for computing
undisclosed income of an assessee.
25. In Commissioner of Income Tax v. Naresh Kumar Aggarwal:
(2014) 3699 ITR 171 (T & AP), a Division Bench of Telangana and
Andhra Pradesh High Court held that a statement recorded under Section
132(4) of the Act which is retracted cannot constitute a basis for an order
under Section 158BC of the Act. The relevant extract from the said
judgement is quoted below:
"17. The circumstances under which a statement is recorded
from an assessee, in the course of search and seizure, are not
difficult to imagine. He is virtually put under pressure and is
denied of access to external advice or opportunity to think
independently. A battalion of officers, who hardly feel any
ITA 8/2004 Page 21 of 33
limits on their power, pounce upon the assessee, as though
he is a hardcore criminal. The nature of steps, taken during
the course of search are sometimes frightening. Locks are
broken, seats of sofas are mercilessly cut and opened. Every
possible item is forcibly dissected. Even the pillows are not
spared and their acts are backed by the powers of an
investigating officer under section 94 of the Code of
Criminal Procedure by operation of sub-section (13) of
section 132 of the Act. The objective may be genuine, and
the exercise may be legal. However, the freedom of a citizen
that transcends, even the Constitution cannot be treated as
non- existent."
"18. It is not without reason that Parliament insisted that the
recording of statement must be in relation to the seized and
recovered material, which is in the form of documents, cash,
gold, etc. It is, obviously to know the source thereof, on the
spot. Beyond that, it is not a limited licence, to an authority,
to script the financial obituary of an assessee."
"19. At the cost of repetition, we observe that if the
statement made during the course of search remains the
same, it can constitute the basis for proceeding further under
the Act even if there is no other material. If, on the other
hand, the statement is retracted, the Assessing Officer has to
establish his own case. The statement that too, which is
retracted from the assessee cannot constitute the basis for an
order under section 158BC of the Act."
26. It is next to be examined whether the Assessees communication
dated 5th February, 1999 and his statement recorded under Section 131 of
the Act is the sole basis for making the block assessment or whether the
AO had other incriminating material which would justify assessing Rs.74
lacs as undisclosed income under Section 158BC of the Act.
ITA 8/2004 Page 22 of 33
27. A perusal of the assessment order indicates that on 2nd February
1999, a diary containing certain notings of purchases and sales that were
not recorded in the books of accounts was also unearthed during search
conducted on the Assessee. The Assessee had himself declared that
Rs.89,400/- was the profit in respect of unaccounted sales and purchases
that were recorded in that diary. It is further relevant to note that the
Assessee carried on business as a sole proprietor of a concern named M/s
Machine Tools and Hardware Store. During the search, certain books of
account were also seized. The Assessee had on 5th February, 1999,
immediately after the search stated that Rs.60 lacs paid for purchase of
the property in question was paid out of unaccounted stocks sold in cash.
Subsequently, in his statement recorded on 24th February, 1999, the
Assessee once again reiterated his stand that Rs.60 lacs represented
unaccounted money belonging to him.
28. Concededly, the payments made in cash were not reflected in the
books of accounts maintained by the Assessee including those seized
during the search. Mr Aggarwal during his course of arguments
contended that books of accounts were confined only to the Assessee's
business and the Assessee did not maintain any other accounts. He sought
to contend that the present transactions were not related to the business of
ITA 8/2004 Page 23 of 33
the Assessee and, therefore, were not required to be recorded in the books
maintained by him. He, however, could not dispute that by virtue of
Section 44AA(2) of the Act, the Assessee was required to maintain such
books of accounts so as to enable the AO to compute his income in
accordance with the Act. Thus, clearly, the Assessee was required to
record the amount paid in cash in his records. Although, the Assessee has
retracted his statement that the same was unaccounted money, he
nonetheless maintains that Rs.37.35 lacs was paid by him which included
Rs.32.9 lacs in cash which included Rs.12.9 lacs withdrawn from his
proprietorship concern. Since it is undisputed that (a) cash was paid by
the Assessee; and (b) that the same was not recorded in the books of
account seized at the material time, it cannot be accepted that the
Revenue did not have incriminating material regarding generation of
unaccounted money. The diary found which recorded undisclosed sales
and purchases as well as the books of accounts which did not record
payment of cash (which was admittedly paid) at the time of search does
indicate that the Revenue had found incriminating evidence. The
statement made by the Assessee was also relatable to the records found
during the search.
ITA 8/2004 Page 24 of 33
29. At this stage, it is also necessary to refer to sub-sections (1) and (3)
of Section 158BA of the Act which read as under:-
"(1) Notwithstanding anything contained in any other
provisions of this Act, where after the 30th day of June,
1995 a search is initiated under section 132 or books of
account, other documents or any assets are requisitioned
under section 132A in the case of any person, then, the
Assessing Officer shall proceed to assess the undisclosed
income in accordance with the provisions of this Chapter."
XXXX XXXX XXXX XXXX
"(3) Where the assessee proves to the satisfaction of the
Assessing Officer that any part of income referred to in
sub-section (1) relates to an assessment year for which the
previous year has not ended or the date of filing the return
of income under sub-section (1) of section 139 for any
previous year has not expired, and such income or the
transactions relating to such income are recorded on or
before the date of the search or requisition in the books of
account or other documents maintained in the normal
course relating to such previous years, the said income
shall not be included in the block period."
30. A plain reading of sub-section (3) of Section 158BA of the Act
indicates that the Assessee can prove to the satisfaction of the AO that the
income under sub-section (1) of Section 158BA (undisclosed income)
relates to the previous year that has not expired that is, the year in
which search is conducted - and such income or transactions are recorded
ITA 8/2004 Page 25 of 33
in the books of accounts and other documents maintained in the normal
course before the date of the search.
31. Concededly, in the present case, the Assessee has been unable to
show that the transactions in question were recorded in the books of
accounts and records maintained in the normal course prior to the date of
the search. On the contrary, Mr Aggarwal had argued that the Assessee is
not obliged to maintain any books and, therefore, the question of keeping
a record of the transactions for purchase of the property did not arise. In
our view, the aforesaid contention is wholly without merit and it is not
open to the Assessee to now claim that the payments made were not
undisclosed income as the time for filing the return for the previous year
had not expired and the transactions in question would be reflected in the
returns to be filed subsequently.
32. In the present case, the ITAT notes that the transaction in question
has been duly disclosed in the returns filed by the Assessee, his wife and
the HUF. However, admittedly, the said returns have not been subjected
to any scrutiny. The intimation under Section 143(1) of the Act, thus,
cannot be construed as assessments made by the AO.
ITA 8/2004 Page 26 of 33
33. The explanation with regard to the sources of the cash paid by the
Assessee is a clear afterthought. The Assessee claims that the said cash
was provided by three entities against back to back arrangement for sale
of the property. However, it is not disputed that at the material time, the
Assessee did not produce any document which would support this stand
that the cash paid for purchase of the property in question was obtained
from three independent entities. The records produced by the three
companies also indicate that amounts paid to the Assessee was stated to
be paid in cash and not through banking channels. Further the cash paid
by the M/s Penguin Chits Limited, M/s Parmeshwar Chits Private
Limited were also not drawn from banks but are stated to be from the
cash deposited with them. There is no explanation whatsoever as to why
such large payments were made in cash. In case of M/s Jai and
Associates, the cash is stated to be paid from withdrawals from a bank.
However, it is relevant to note that various amounts of cash were
withdrawn by M/s Jai and Associates on various dates and there is no
explanation why such cash was withdrawn in various tranches. The AO
had also examined the returns furnished by the Assessee for various years
which were barely above the threshold of the taxable limit. And, after
taking into account the relevant material, the AO had concluded that the
cash paid by the Assessee was undisclosed income. The ITAT has
ITA 8/2004 Page 27 of 33
accepted that since the cash has been duly accounted for and disclosed in
the returns filed by the Assessee subsequently, the same cannot be
considered as undisclosed income. The ITAT has further proceeded on
the basis that since there was no allegation of any nexus between the
Assessee and the three entities, M/s Penguin Chits Pvt. Ltd., M/s
Parmeshwar Chits Pvt. Ltd. and M/s Jai & Associates, who were stated to
have provided the cash, the AO could not treat the cash provided by the
said entities as undisclosed income of the Assessee. The ITAT was of the
view that if the genuineness of deposits made as disclosed by the said
entities could not be verified, the same would have to be taxed in those
entities.
34. In our view, the ITAT has erred in not examining or not
interpreting the scope of 'undisclosed income' as defined under Section
158B(b) of the Act. By virtue of Section 158B of the Act, ,,undisclosed
income not only includes income or property which has not been
disclosed but also income which would not have been disclosed for the
purposes of the Act. The Supreme Court in the case of Assistant
Commissioner of Income Tax v. AR Enterprises: (2013) 350 ITR 489
(SC) has explained that the undisclosed income also includes the category
of income that would not have been disclosed and thus, contemplates a
ITA 8/2004 Page 28 of 33
question as to the likelihood of disclosure which must be gauged from the
surrounding facts and circumstances of the case. The relevant
observations of the Supreme Court are reproduced as under:-
"18. The genesis of the issue before us lies within the folds
of this section. Sections 158BD and 158BC, along with the
rest of Chapter XIV-B, find application only in the event of
discovery of "undisclosed income" of an assessee.
"Undisclosed income" is defined by section 158B as that
income "which has not been or would not have been
disclosed for the purposes of this Act". The Legislature has
chosen to define "undisclosed income" in terms of income
not disclosed, without providing any definition of
"disclosure" of income in the first place. We are of the
view that the only way of disclosing income, on the part of
an assessee, is through filing of a return, as stipulated in the
Act, and, therefore, an "undisclosed income" signifies
income not stated in the return filed. Keeping that in mind,
it seems that the Legislature has clearly carved out two
scenarios for income to be deemed as undisclosed : (i)
where the income has clearly not been disclosed, and (ii)
where the income would not have been disclosed. If a
situation is covered by any one of the two, income would
be undisclosed in the eyes of the Act and, hence, subject to
the machinery provisions of Chapter XIV-B. The second
category, viz., where income would not have been
disclosed, contemplates the likelihood of disclosure ; it is a
presumption of the intention of the assessee since in
concluding that an assessee would or would not have
disclosed income, one is ipso facto making a statement
with respect to whether or not the assessee possessed the
intention to do the same. To gauge this, however, reliance
must be placed on the surrounding facts and circumstances
of the case."
ITA 8/2004 Page 29 of 33
35. In the aforesaid view, the ITAT was required to address a question
whether there was any likelihood that the cash payments would be
disclosed. In our view, the ITAT failed to address itself to that question.
In the present case, the surrounding facts and circumstances of the case
are telling. First of all, the payments have been made in cash and there is
no explanation as to why such large payments were required to be made
in cash. Secondly, such cash payments were not recorded by the Assessee
in its books or any record maintained by it at the time of search. Thirdly,
the Assessee had admitted by a letter sent immediately after the search
as well as in a statement recorded under section 131 of the Act that the
source of Rs.60 lacs cash payments was sale of unaccounted stock.
Fourthly, the fact that the Assessee carried on transactions outside his
books of accounts is also not disputed. The additions made by the AO
with regard to unaccounted transactions recorded in the diary have been
sustained and the Assessee has not appealed against the decision of the
ITAT in that respect. Fifthly, although the Assessee now claimed that
there were back to back agreements with three unrelated entities for sale
of the property in question, no such documents were produced at the
material time. There is also no explanation as to why such documents
could not have been produced at the relevant time.
ITA 8/2004 Page 30 of 33
36. As noticed earlier, there was a clear admission on the part of the
Assessee that the payment of Rs.60 lacs were from the sale of
undisclosed stock. The statement was reiterated again after the search on
24th February, 1999 and it is difficult to contemplate that the letter dated
5th February, 1999 and the statement recorded on 24th February, 1999,
which were much after the search, were not made voluntarily and of free
will. In our view, the only inescapable conclusion that can be drawn from
the surrounding facts is that the Assessee would not have disclosed the
cash payments admittedly made by the Assessee and such payments were
his undisclosed income.
37. The Assessee had subsequently claimed that he had paid a sum of
Rs.12.9 lacs in cash which was withdrawn from his proprietorship
concern. He further explained that a sum of Rs.4 lacs had been
withdrawn from the bank accounts on 26th November, 1998 and 7th
December, 1998. The balance amount was paid out of the sales made in
cash. The AO had disbelieved the aforesaid explanation as the
withdrawals from the bank was much prior to the date of payment to Sh.
Arvind Seth and there was no explanation for withdrawing cash in
tranches and keeping the funds idle. In respect of the sales made in cash,
the enquiries made by the AO revealed that cash sales of Rs.6,16,586/-
ITA 8/2004 Page 31 of 33
were booked in January 1999 in addition to receipts of Rs.2,10,854/-
described as 'sales realisation'. On enquiries, the AO found that the
Assessee had failed to prove the said sales as there was no evidence of
availability of stocks for sale and no purchases had been shown for
making such sales. Further considering that the returns filed by the
Assessee for the block period returned income only in the range of
Rs.18,210/- in the year 1989 to Rs.77,440/- in the year 1999-2000, the
withdrawals claimed by the Assessee were rightly disbelieved by the AO.
Similarly, the claim that the Assessee's wife had contributed Rs. 10.15
lacs in cash was also not accepted as no source for such cash could be
identified. The AO noted that the Assessee's wife had shown a capital of
Rs.5,57,420/-. For AY 1998-99, she had claimed to have received
Rs.60,000/- as salary and Rs.32,550/- as petty gifts. During the AY 1999-
2000, the Assessee's wife claimed to have income from other sources
amounting to Rs.9,05,000/-. The source of such income was not disclosed
and it was the Assessee's case that source of such money was not required
to be disclosed. In absence of any satisfactory explanation as to the
source of Rs.14 lacs which was admittedly paid by the Assessee, the same
would also be liable to be taxed in his hands.
ITA 8/2004 Page 32 of 33
38. In view of the above, the questions of law are answered in the
negative, that is, in favour of the Revenue and against the Assessee.
39. The appeal is allowed and the impugned order dated 23rd June,
2003 passed by the ITAT in IT(SS) No.68/Del/2002 is set aside. In the
circumstances, the parties are left to bear their own costs.
VIBHU BAKHRU, J
S. MURALIDHAR, J
MARCH 10, 2016
RK
ITA 8/2004 Page 33 of 33
|
