Legal issues arising from the order of Manoj Aggarwal (SB)

 
Rano Jain, FCA, DISA (ICA)

A five member special bench of the Delhi ITAT has delivered the judgement in a very widely published case of Shri Manoj Aggarwal and others reported in 113 ITD 377 related cases as on 25.07.08.  Initially the Special bench was constituted by the Honble President of the ITAT only in the case of Tejinder Singh (HUF), however being related to the same one way or the other, three other assesses namely Sh. Manoj Aggarwal, M/s Bemco Jewellers Pvt. Ltd. and M/s Bishan Chand Mukesh Kumar were also consolidated with the same and put before the bench.  A number of prominent counsels from Delhi, Amritsar and other places argued for various assesses as well as for the department.  Besides analyzing the facts of the cases and giving finding on merits, the Honble Bench has resolved a number of legal issues arising out of the said appeals in this landmark judgement of almost one hundred and fifty pages.  The present article is intended to bring about the legal issues coming out of the judgement in a nutshell.

After much deliberation, the finally reframed question before the bench which was authorized to modify change, delete or add  any question for purpose of  reference by an order of the honble president of the ITAT, was  :

            Whether on the facts and  circumstances of the case, consideration claimed  to have been received on account of sale of jewellery etc. relating to the disclosures made under VDI Scheme, 1997, can be considered to be the income of the assessee from undisclosed sources under any of the provisions of Income Tax Act, 1961.

The question so referred to the honble special bench was answered in negative and while analyzing the issue for giving  such an answer.  Honble Bench has arrived at following further conclusions.

(i)         Section 68 of Chapter IV of the Finance Act, 1997, which provided for the Voluntary Disclosure of Income Sections, 1997, says that the amount of the voluntary disclosed income will not be included  in the total income  of the declarant of any assessment year if certain conditions are satisfied.  One such condition is that the declarant should have credited the amount in the books of account, if any, maintained by him for any source of income or in any other record and should have intimated the credit so made to the Assessing Officer.  This is an enabling provision.  It enables the hitherto undisclosed income to be brought into the accounts of the assesee as disclosed income since tax thereon has been paid under the VDIS.  Once the tax is paid on the undisclosed income, it becomes disclosed income and thereafter there is no justification for denying  the assessee the facility of bringing  the declared income into account.  The immunity given by  Section 68 of the Finance Act, 1997, is limited to this, that the declared income will not be assessed again as the income of the declarant for any assessment year under the Income Tax Act.  Obviously the only provision, which the Assessing Officer can invoke for assessing the amount credited in the books of account, is section 68 of the Income Tax Act, but by virtue of Section 68 of the Finance Act, 1997, the applicability of section 68 of the Income Tax Act to the amount declared under the VDIS is ruled out.  But the immunity stops there.

(ii)        Section 68 of the Income Tax Act only give statutory recognition to the well settled position that any monies found credited in the accounts of the assessee have to be proved by the assessee in relation to their nature and source.  It does not enact any new principle.  Even long prior to the introduction of this Section, courts had held   that any amounts found credited in the books of the assessee and the assessee offered no explanation about the nature and source thereof or the explanation offered was not satisfactory,  the amounts so credited could be charged to income tax as income of the assessee.  Reference in this connection may be made to three judgements  of the Supreme Court : (1)  Govindrajulu Mudaliar Vs. CIT (1958) 34 ITR 807, (2) Lakshmi Chand Baijnath Vs. CIT (1959) 35  ITR 416 and (3) CIT Vs Devi Prasad Viswanath Prasad (1969) 72 ITR 194.  Reference may also be made to the judgement of the Delhi High Court in Yadu Hari Dalmia vs. CIT (1980) 126 ITR 48.

(iii).      It is well settled that under Section 68 the burden keeps shifting from one side to the other depending upon the evidence adduced.  But all that the department authorities are called upon to do is to prove that the explanation of the assessee with regard to the nature and source of the sale proceeds or  the evidence adduced by the assessee in support of the explanation is not acceptable.  They are under no duty to lead evidence to show that the monies shown as sale proceeds represent the undisclosed income of the assessee brought into the books in the guise of sale proceeds.  To hold  to the contrary will not only amount to not giving effect to the ruling of the Supreme Court in Govindrajulu Mudaliars case and the well settled legal position recognized by several courts as one of the fundamentals of the income tax law but also  to turning the law upside  down.  Therefore, as  a proposition of law it can not certainly be accepted that section 68 is not applicable to such cases.

(iv)       Even if the assessee does not maintain books of account, under general principal he is bound to explain the nature and source of a receipt.  The argument to the contrary is answered by the judgement of the Delhi High Court in Yadu Hari Dalmia (supra) where it was held that section 68  merely gives statutory recognition to the principle that it is the duty of the assesse to explain, even in the absence of Section  68, the receipt of monies. 

It will not be  out of place here to mention that though the honble bench has given the answer to the question referred to it in negative, still the decision in the case of Tejinder Singh (HUF) has been rendered in favour of the assessee.  This is so that though the bench does not wish to restrict the A.O for making any investigation under  Section 68  in cases of  subsequent sale of jewellery initially declared under VDIS, since in the present case as a finding has been given by the Honble bench that the jewellery business done by M/s Bishan Chand Mukesh Kumar to whom the jewellery was sold by the appellant, on the facts and circumstances of the case, such sale is proved to be genuine and hence appellant  got the relief.

An extensive discussion on the provision of Section 158BD and the various judicial pronouncements both from the Apex Court  as well as various high courts relating to Section 158BD has been done in the judgements and following legal issues are settled.

(i)         The honble bench has held that the Section  158BD has certain built in requirements which have to be scrupulously followed as held in the Apex Court decision in the case of  Manish Maheshwari Vs. ACIT & Another 289 ITR 341 (SC), if an attack against an order under this Section has to be repelled.  

(ii)        If the assessing Officer assessing the person searched does not find any undisclosed income at all, or does not arrive at any finding in respect of the same or having arrived at such finding does not hand over the material to the second Assessing  Officer, the provision of Section 158 BD do not come into existence at all.

(iii).      If there is a time limit for passing an order under Section 158BC, there is an implied time  limit for giving a finding as to the person to whom the undisclosed income belongs which under no circumstance   can  be beyond  the time limit set in section 158BE.  If there is no such finding given in the order U/s 158BC, the provisions of section 158BD stand ousted at the expiry of the said time limit for the reason that such a finding is the very basis for invoking section 158BD. 

(iv).      Strict interpretation of fiscal statute is the order of the day and as the provisions for search are draconian in nature such provisions  have necessarily to be strictly construed.  It will have to be remembered that section 158BD provides for invoking jurisdiction under the said section enabling the Assessing Officer  assessing the other person in respect of whom the Assessing Officer assessing the person searched gives a  finding that the  undisclosed income unearthed as a result of search belongs to the said person and once such a finding is given the provisions  of section 158BD come into operation.  This, therefore,  involves assumption of jurisdiction and can not be construed as a procedural matter.  In the absence  of   finding  in this behalf, there is no jurisdiction  to the other Assessing Officer at all to proceed further in the matter.  As the time limit set in section 158BE applies to such finding, it is only logical that the said time limit automatically applies for invoking  the provisions of  section 158BD and it is for this reason that the Parliament did not find it necessary to specify a separate time limit for the same, as the enactment itself shows that both sections 158BC and BD are inter linked , inter laced and inter twined and both form part and parcel of the chapter.

(v).       The satisfaction can be found in the order passed under Section 158BC and if no such order is passed then it will have to be found in the note handing over the material seized to the Assessing Officer assessing the other person.  In any event, it has to be in writing and in view of Section 158BE, the said recording has to be made before the time set in section 158BE expires.  After the said date, it is not possible to invoke section 158 BD at all.

vi)        Holding the provision  Section 158BC(a)(i) to be parimateria in so far as the words used therein are identical and relying on the the logic behind the  decision in the case of Winter Care (P) Ltd.)  by Karnataka High Court, it has been held by the honble Special bench that  as the notice in the case is similarly worded and gives a time of less than 15 days as against stipulated time of not less than 15 days, the said notice suffers from an incurable defect rendering all proceedings  emanating therefrom invalid and void ab-initio.

            A reference to the decision of the Special Bench of ITAT in the case of Smt. Krishna Verma 107 ITD 1 (SB) (Del was  also made in this context.  In the case of Smt. Krishna Verma (supra),  the notice under Section 158BC was issued in case of person in whose case a search under Section 132 has been conducted.  It was thus held that such a notice  was a procedural notice issued after requisition of jurisdiction, which in such cases vests with Assessing Officer in terms of Section 158BA of the Act.  The case on hand is on a different footing as the impugned assessment  is in the case of a person other than a   person who is subjected to search and the proceedings are initiated under Section 158BD of the Act and hence the issue of notice under Section 158BC of the Act on the assessee firm is a jurisdictional notice.  Therefore, the controversy covered by the bench with regard to Section 158BC(a)(i) in the present case is factually different than that was before the Special Bench of ITAT in the case of Smt. Krishna Verma (supra).

            That is how, with the arrival of this judgement, a number of legal issues has come to rest.  Issues related to Section 158BD have been settled, especially regarding the time limit for recording satisfaction.  Similarly, the legal position related to the sale of jewellery declared under VDIS has also been settled.

(The writer is a practicing chartered accountant with M/s. Ved Jain and Associates)