* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 19.01.2017
Pronounced on: 03.03.2017
+ ITA 119/2004
COMMR.OF INCOME TAX, DELHI (CENTRAL-I)..... Appellant
versus
PINAKI MISRA ..... Respondent
+ ITA 423/2004
COMMISSIONER OF INCOME TAX ..... Appellant
versus
SANGEETA MISRA ..... Respondent
Through : Sh. Dileep Shivpuri, Sr. Standing Counsel with
Sh. Sanjay Kumar, Jr. Standing Counsel and Sh. Vikrant.
A. Maheshwari, Advocate, for appellants.
Sh. Akhil Sibal with Ms. Rashmi Chopra, Advocates, for
respondents.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
MR. JUSTICE S. RAVINDRA BHAT
%
1. These appeals concern common questions of law. The question of law
framed for decision by this court is:
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").
FACTS IN BRIEF:
2. A search and seizure operation under Section 132 of the Act was
ITA 119/2004 & 423/2004 Page 1 of 28
conducted at the residence of Shri Pinaki Misra, the Assessee (in ITA
119/2004) in November 1996. 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.
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. 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.
3. 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,
ITA 119/2004 & 423/2004 Page 2 of 28
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
4. Aggrieved by the assessment order passed for the block period, both
assessees, preferred appeals before the ITAT, New Delhi. 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;
ITA 119/2004 & 423/2004 Page 3 of 28
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.
5. 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.
6. 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
ITA 119/2004 & 423/2004 Page 4 of 28
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. 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. 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-
ITA 119/2004 & 423/2004 Page 5 of 28
XIV-B of the Act.
7. 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.
8. 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
ITA 119/2004 & 423/2004 Page 6 of 28
merit in the arguments advanced on behalf of the Assessee, and allowed the
Assessee a relief of ` 7,50,000/-.
9. 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. The
points of reference were:
"1 Whether, on the facts and circumstances of the case and
in law an addition of Rs. 2,50,000/- in respect of Shri S. K.
Chakraborty was to be deleted as has been done by the Vice
President or the matter was required to be restored back to the
AO for a decision de novo as is the view expressed by the
Judicial Member.
2. (a) Whether on the facts and circumstances of the case
and in law the view expressed by the V.P. to hold that an
estimate of Rs. 10 lacs towards the cost of tickets for foreign
travel was fair and reasonable as against Rs. 50 lacs estimated
by the AO and the view of the J.M. being to the effect that the
matter was required to be reconsidered by the AO after
ascertaining the position of the assessment made in the hands
of Shri Chandra Swami and related cases.
(b) Whether the view taken by the V.P. to hold that the daily
expenses on the various foreign trips be taken at Rs. 2,500 as
against Rs. 10,000 estimated by the AO and the matter being
subsequently restored back to the file of the AO for necessary
verification regarding the number of days was the correct view
or the decision of the J.M. to hold that necessary verification be
undertaken subject to the decision being taken in the case of
Shri Chandra Swamy & other was the correct view.
3. Whether on the facts and circumstances of the case and
in law the view of the V.P. to hold that addition to the extent of
Rs. 2 lacs out of the addition of Rs. 9.50 lacs made by the AO
on account of professional receipts was to be sustained or the
ITA 119/2004 & 423/2004 Page 7 of 28
decision of the J.M. to hold that the matter required verification
and re-adjudication on the part of the AO was the correct one.
4. Whether on the facts and circumstances of the case and
in law the view of the V.P. to hold that the addition of Rs.
28,76,000 made by the AO towards 'suppressed rent' was
required to be deleted on the decision of the J.M. to restore the
matter back to the file of the AO with the direction to re-decide
the same after ascertaining the fate of the block assessment in
the case of M/s. Jupiter Estates was the correct one.
5. Whether on the facts and circumstances of the case and
in law the view of the V.P. to hold that no addition could be
made on account of the two gifts aggregating Rs. 90 lacs
received from one Shri Jhanwar Lal Kothari was right or the
view taken by the J.M. to uphold the addition was the correct
one."
10. 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
ITA 119/2004 & 423/2004 Page 8 of 28
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."
11. 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
ITA 119/2004 & 423/2004 Page 9 of 28
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."
12. 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
13. 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
ITA 119/2004 & 423/2004 Page 10 of 28
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.
14. 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.
15. 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
ITA 119/2004 & 423/2004 Page 11 of 28
allowing the Assessee's appeals partly was erroneous.
16. 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.
17. 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
ITA 119/2004 & 423/2004 Page 12 of 28
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."
18. 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.
19. 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.
20. Counsel further highlighted that there cannot be any controversy about
ITA 119/2004 & 423/2004 Page 13 of 28
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.
21. 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.
Analysis and Findings
22. 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
ITA 119/2004 & 423/2004 Page 14 of 28
the AO's jurisdiction. Section 158BC reads as follows:
"Where any search has been conducted under section 132 or
books of account, other documents or assets are requisitioned
under section 132A, in the case of any person, then,
(a) the Assessing Officer shall
(i) in respect of search initiated or books of account or
other documents or any assets requisitioned after the
30th day of June, 1995 but before the 1st day of January,
1997 serve a notice to such person requiring him to
furnish within such time not being less than fifteen days;
(ii) in respect of search initiated or books of account or
other documents or any assets requisitioned on or after
the 1st day of January, 1997 serve a notice to such
person requiring him to furnish within such time not
being less than fifteen days but not more than forty-five
days,
as may be specified in the notice a return in the
prescribed form1 and verified in the same manner as a
return under clause (i) of sub-section (1) of section 142,
setting forth his total income including the undisclosed
income for the block period:
Provided that no notice under section 148 is required to
be issued for the purpose of proceeding under this
Chapter:
Provided further that a person who has furnished a
return under this clause shall not be entitled to file a
revised return;
(b) the Assessing Officer shall proceed to determine the
undisclosed income of the block period in the manner
laid down in section 158BB and the provisions of section
142, sub-sections (2) and (3) of section 143 2[, section
144 and section 145] shall, so far as may be, apply;
ITA 119/2004 & 423/2004 Page 15 of 28
(c) the Assessing Officer, on determination of the
undisclosed income of the block period in accordance
with this Chapter, shall pass an order of assessment and
determine the tax payable by him on the basis of such
assessment;
(d) the assets seized under section 132 or requisitioned
under section 132A shall be dealt with in accordance
with the provisions of section 132B."
23. 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.
24. 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). This is
evident from A.R. Enterprises (supra),where the court held as follows:
ITA 119/2004 & 423/2004 Page 16 of 28
"... 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 XIVB. 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."
25. 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-
ITA 119/2004 & 423/2004 Page 17 of 28
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.
26. 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 [2014] 367 ITR 466 (SC) in the following terms:
"Undisclosed income referred to in Chapter XIVB is not
relateable to the previous year. On the contrary, it is for the
block period which may be 6 years or 10 years, as the case may
be. Consequently, as already mentioned, while analyzing the
scheme of Chapter XIVB, such Chapter is a complete code in
respect of assessments of 'undisclosed income'. Not only it
defines what is undisclosed income, it also lays down the block
period for which undisclosed income can be taxed. Further, it
also lays down the procedure for taxing that income. It is very
pertinent to note at this stage that for this purpose, specific
provision in the form of Section 158BA (2) is inserted making it
ITA 119/2004 & 423/2004 Page 18 of 28
a charging section. Thus, a diagnostic of Chapter XIVB of the
Act leads to irresistible conclusion that it contains all the
provisions starting from charging section till the completion of
assessment, by prescribing special procedure in relation
thereto, making it a complete Code by itself. Looking it from
this angle, the character and nature of 'undisclosed income'
referred to in Chapter XIVB becomes quite distinct from 'total
income' referred to in Section 5. It is of some significance to
observe that when a separate charging section is introduced
specifically, to assess the undisclosed income, notwithstanding
a provision in the nature of Section 4 already on the statute
book, this move of the legislature has to be assigned some
reason, otherwise, there was no necessity to make a provision
in the form of 158BA (2). It could only be that for assessing
undisclosed income, charging provision is 158BA (2) alone."
27. 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.
28. As far as the question regarding the jurisdiction of the third member to
doubt the reassessment on the basis that income to be added was not an issue
is concerned, this court is of the opinion that such an objection should not be
articulated this day and age. It is axiomatic a clichéd proposition of law that
a statutory authority conferred with quasi judicial powers has undoubted
ITA 119/2004 & 423/2004 Page 19 of 28
jurisdiction to (a) decide issues concerning its jurisdiction in a particular
matter and (b) to apply the correct legal principles. Indeed, to say that a
tribunal cannot decide a foundational issue, because of a perceived
procedural issue would expose the legal system to insurmountable barriers-
the foremost of them being that the litigant would be driven to superior
courts each time the issue crops up in the competent tribunal. Hardly any
authority is required for this, but dicta abound on the subject (Ref. Smt
Ujjambai v. State of UP AIR 1962 SC 1621; Hari Vishnu Kamath v. Ahmad
Ishaque and Ors. AIR 1955 SC 233; T.C. Basappa v. T. Nagappa and
Another AIR 1954 SC 215). Furthermore, there is statutory authority in the
form of Section 254 (1) and (2) of the Income Tax Act read with Section 255
(4), which provides thus:
"Section 255(1)*************
******
(4) if the members of a Bench differ in opinion on any point, the
point shall be decided according to the opinion of the majority,
if there is a majority, but if the members are equally divided,
they shall state the point or points on which they differ, and the
case shall be referred by the President of the Appellate
Tribunal for hearing on such point or points by one or more of
the other members of the Appellate Tribunal, and such point or
points shall be decided according to the opinion of the majority
of the members of the Appellate Tribunal who have heard the
case, including those who first heard it."
In the present case, when the third member noticed what he considered to be
a lack of clarity about the block proceeding and the Revenue 's ability to add
income in the absence of any seized material, he was duty bound to refer that
point for decision, which he did. The subsequent clarification by the Bench,
and later final decision, therefore, cannot be faulted.
ITA 119/2004 & 423/2004 Page 20 of 28
29. This court now proposes to discuss the specific issues, which were
referred or restored to the AO, having regard to the final order made by the
ITAT. It is apparent that in Mr. Pinaki Misra's case, out of the18 heads of
addition, 11 were restored for further inquiry and orders, of AO, on remand.
The ITAT itself had deleted substantial income relating to three heads in the
case of Mr. Misra. In the circumstances, the court proposes to discuss only
the heads of income that were specifically addressed during arguments of
counsel for the parties.
30. This court, therefore, would deal with the specific amounts brought to
tax by the AO, but deleted by the ITAT. The first of these are addition of the
amounts of `1,72,000/- and of `2,50,000/- in respect of Shri S.K.
Chakraborty, (in Pinaki Misra's case) and the addition of ` 5,00,000/- made
to the income of Sangeeta Misra, for the alleged income earned from Triad
Associates. The AO made an addition of `1,72,000/- being the amount
standing to the credit of Shri S.K. Chakraborty but the same was reflected in
Mr. Misra's balance sheet, his bank account, duly supported by the
confirmation of Shri S.K. Chakraborty; and an original amount was accepted
in the original proceedings u/s 143(3) according to the assessment order for
Assessment Year (hereinafter also referred to as "AY") 1989 -90 dated
11.09.1990. In parallel, the AO made an addition of `5,00,000/- for the AY
1992-93 on account of alleged estimated income incurred from M/s Triad
Associates by the Assessee's wife. Further, Shri Chakraborty had confirmed
on behalf of the ESPI Industrial Corporation on 23.11.1989 certifying that a
sum of `2,50,000/- was receivable from the Assessee. As such, the AO had
made a further addition of ` 2,50,000/- on the ground that the said amount
ITA 119/2004 & 423/2004 Page 21 of 28
given by Shri Chakraborty was not recorded by the Assessee in his books of
account. On the point of jurisdiction regarding the addition of `2,50,000/-,
the AO did not come across any material during the course of search and as
is clear from the assessment order, the addition of ` 2,50,000/- was made on
the basis of the statement made subsequent to the search and which even
otherwise, was not presented to the assessee for rebuttal. The assessee did
not make it during the search; it was disclosed and gone into during the
regular assessment.Thus, this addition is based on a confirmation that was
sought after the search, and hence, could not form part of the undisclosed
income for the block period.
31. The amounts were already disclosed in the regular assessment of the
assessee in 1989-90, and similarly even in the case Sangeeta Misra, and are
thus, outside the purview of the definition of "undisclosed income". Thus,
the AO has no jurisdiction to make the aforementioned additions under
section 158BC of the Act. Thus, the addition of `1,72,000/- by the AO has
been made devoid of jurisdiction, since the same was already disclosed, and
had not been unearthed during the search undertaken for the block
assessment.
32. The next item of the addition of `50,00,000/- made by the AO on
account of foreign travelling expenses. The court notices at the outset, that
this was on the basis of the AO's ad-hoc estimate of daily expenditure
incurred by Shri Pinaki Misra vis-à-vis the foreign visits @ `2,500/- per
day, and addition of `25,00,000/- on account of foreign travel expenses of
Ms. Sangeeta Misra. The material on the record- filed during the regular
assessment was that by his letter dated 16.12.1997 Shri Misra submitted that
he was an advisor of Shri Chandraswamy since 1984, and had undertaken 22
ITA 119/2004 & 423/2004 Page 22 of 28
foreign trips along with him to advise on legal matters, though he had not
recorded any professional receipts from Shri Chandraswamy. A statement of
Shri Chandraswamy had been recorded, where he disclosed that the assessee
had accompanied him. The addition was made primarily on the basis of the
assessee's old passport, which was requisitioned from the passport office and
which showed the numerous foreign trips undertaken by the assessee during
the block period. This was done when the assessee was required to furnish
copies of his passport, and he stated that he had surrendered his old passport
to the issuing authority for issue of a fresh diplomatic passport. The foreign
travels evidenced by the expired passport were by virtue of the requisition
from the passport office, and not from the search. At the same time, the
assessee's computation of expenditure on tickets (`3,66,000/-) is on the
lower side as against the figure of `50,00,000/- as worked out for by the
Revenue. What is apparent is that the AO omitted the statement of
Chandraswamy that the assessee's expenses were borne by his devotee. Yet,
whether the requisition of the passport from the passport office falls squarely
within section 158BC, requires examination. The additions made on the
foreign trips incurred by Ms. Sangeeta Misra are also to be examined in the
same light.
33. In Mahesh Bhatt v. Asstt. Commissioner of Income Tax (2004)87 TTJ
(Mumbai) 734 the court highlighted how the Income Tax Act provides
additions or disallowances in a block assessment have to be based on
evidences found at the time of search and not merely on the basis of
presumptions and assumptions by taking inference from the set of material
available on record. It was similarly held in Sunder Agencies v DCIT (1997)
63 ITD 245 (Mum) that the scheme of Chapter XIV-B does not empower to
ITA 119/2004 & 423/2004 Page 23 of 28
the Revenue to presume or draw assumptions in regard to the undisclosed
income. The AO can only proceed on the basis of material detected at the
time of search and the evidence gathered under section 132(4) only, and not
otherwise. If seen in this light, the estimates of costs on the foreign travels of
the assessee and his wife were not made during the course of the search
pertaining to the block assessment, but through surmises based on the details
found in the passports of the two assessees after requisitioning them from the
passport office. Thus, the inference of escaped income is based upon
materials gathered from extraneous sources and not from search. Section
158BB (subsequent to amendment by the Finance Act, 2002 w.e.f.
01.07.1995) states how the undisclosed income of the block period needs to
be computed 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 AO and relatable to such evidence on
the basis of evidence. In Assistant Commissioner of Income Tax and Anr. v.
Hotel Blue Moon (2010) 229 CTR (SC) 219 held that block assessments are
not intended to substitute regular assessment and its scope and ambit is
limited in that sense to materials unearthed during search. Similarly, it was
highlighted in Commissioner of Income Tax v. R.M.L. Mehrotra (2010) 230
CTR (All) 288, an assessment based on search alone that does not attribute
material evidence found therein or other information available with the AO
relating to such materials cannot constitute block assessment. In the light of
the above analysis, it is held that the additions made on account of the
foreign trips made by the assessees fell outside the jurisdiction of the AO
under section 158BC. They were correctly deleted by the ITAT.
34. The additions of `9,50,000/- (in the case of Mr. Pinaki Misra and
ITA 119/2004 & 423/2004 Page 24 of 28
`6,00,000/- made (in the case of Ms. Sangeeta Misra) by the AO on account
of professional receipts are to be now examined. The two grounds on which
these additions were made and that too on estimate basis, were the non-
production of books of account and the 23 foreign trips made by Mr. Misra
allegedly for the professional services rendered to Shri Chadraswamy. In
respect of assessment years 1994-95 to 1996-97, `2,50,000/- each was added
whereas the figures for AY. 1997-1998 was `2,00,000/- i.e. totaling
`9,50,000/-, and an aggregate of `6,00,000/- in case of Sangeeta Misra,
allegedly on account of difference in professional receipts and cash in hand.
However, there does not seem to be any observation on the assessee's
arguments that no incriminating material had been found at the time of
search pertaining to the suppression of professional receipts. The counsel for
the Revenue, however, in the course of the present proceedings was unable
to pinpoint any material, which had been found during the course of the
search vis-a-vis the point at issue, thereby, the aforesaid figures arrived at
cannot be brought to tax as "undisclosed income" in the block assessment,
within the meaning of section 158BB(1). Therefore, in the absence of any
material found during the course of search, the post search enquiries made by
the AO would become futile since this would only be relevant for a regular
assessment u/s 143(3) and not in respect of a block assessment.
35. The next item is addition of `28,70,000/- made by the AO towards
suppressed rent. The search took place on 01.11.1996. Further, the property
in question i.e. 145, Jor Bagh, New Delhi is owned by a company named
M/s. Jupiter Estates Pvt. Ltd. and the assessee along with his family were
residing in this property since June, 1989. The tenancy was formally
recognized by means of a lease deed between the parties dated 01.06.1989
ITA 119/2004 & 423/2004 Page 25 of 28
entered into by the assessee and the said company. Additionally, the
Assessee (Mr. Misra) had also made a security deposit and extended an
interest free loan to the company of an aggregate amount of `58,00,000.
What can be observed from the assessment order, is that the addition was
made on a presumption that the rent charged (at the rate of `2500/- per
month) was less than the fixed rent. However, this exercise of the AO ought
to have been carried out within the meaning of regular assessment under
section 143(3). When all material relating to the so called "suppressed rent"
was available with the AO, in the first instance when the assessment for the
relevant year was completed and no addition was made, the exercise by the
AO, in deducing that the assessee must have earned some income (based on
the expenditure estimated for his foreign travel and the estimate of his
professional income) which was the suppressed rent, and determined, is
twice removed from reality. The error in this kind of assessment was
compounded, given that no material relating to such "suppressed rent" was
discerned during the search or from the seized materials. Thus, this
assessment falls outside the jurisdiction of the AO, since the block
assessment conducted is not based on relatable evidence as required under
section 158BB(1), but on presumptions made by the AO, as was highlighted
in R.M.L. Mehrotra (supra), how an assessment based on search alone that
does not attribute material evidence found therein or other information
available with the AO relating to such materials cannot constitute block
assessment.
36. This brings the discussion to two gifts aggregating `90,00,000/-
received by the assessee (Mr. Misra) from Shri Jhanwar Lal Kothari, and the
gift to the Assessee's wife of an amount of `38,71,507/- by Shri R.K. Jatia.
ITA 119/2004 & 423/2004 Page 26 of 28
In the AY 1993-93, Mr. Misra received two NRI gifts aggregating
`90,00,000/-from Shri J. L. Kothari to purchase a company by the name of
White Lilly Estates Pvt. Ltd. which owns a property at 202- Golf Links, New
Delhi. By his reply-dated 02.08.1997 (to a show cause notice) Mr. Misra
contended that the said gifts were received out of NRE account of Shri
Jhanwar Lal Kothari and accordingly they did not attract the provisions of
the Gift Tax Act, 1958. He also furnished copies of the affidavit of Shri
Kothari dated 30.04.1994 and the gift deed where it was stated that the gifts
have been made out of natural love and affection. He also furnished copy of
NRE account No. 5010009008 maintained with Sanwa Bank Ltd. in the
name of Shri J.L. Kothari from where these gifts have been made. These
gifts were duly reflected in this bank account. The assessee (Mr. Misra) also
furnished a copy of the letter from Nakomthon Bank dated 26.05.1994 which
stated that Shri Kothari was their valued customer and the bank provided
credit facilities in the form of over draft, short term loan upto a moderate 7
figures in Baht. The assessment order shows that the addition was made
entirely on the basis of the post search enquiries, and as a matter of record,
the Assessee had disclosed the gifts in his return for AY 1994-95. Similarly,
the gift to Ms. Sangeeta Misra was scrutinized previously in an assessment
under section 143(3) of the Act, the receipt of the gift was duly disclosed in
the return for AY 1992-93 and the gift had been accepted on scrutiny of the
documents and evidence. As such, since the gifts have already been
disclosed to the Revenue prior to the search, they cannot form part of the
block assessment within the meaning of section 158BB(1), and cannot be
thus, brought to tax as "undisclosed income", as was reiterated in Hotel Blue
Moon (supra) which held that the scope of block assessment is limited to
ITA 119/2004 & 423/2004 Page 27 of 28
material found during the search, and thereby, cannot include material
already revealed. This was similarly highlighted in CIT v. Jupiter Builders P.
Ltd. ((2006) 287 ITR 287 (Del)) and Commissioner of Income Tax v. Shri
Vishal Aggarwal (2006 (283) ITR326(Del)) that where an income and assets
are disclosed in the books of account and no incriminating material is found
during search and seizure, addition in the block assessment is not valid.
Therefore, the gifts received by the assessees from Jhanwar Lal Kothari, as
well as the gift from Shri R. K. Jatia fell outside the purview of block
assessment, and the AO has no jurisdiction to bring to tax the said sums.
37. 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.
S. RAVINDRA BHAT
(JUDGE)
NAJMI WAZIRI
(JUDGE)
MARCH 03, 2017
ITA 119/2004 & 423/2004 Page 28 of 28
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