2004 (11) TMI 578 - AT - Income Tax

Undisclosed income u/s 158BC - Validity of the assessment under Chapter XIV-B based on evidence found during the search - difference of opinion between the Members - Third member Order - Whether the learned Assessing Officer had jurisdiction and justification in including the depreciation allowance in the computation of undisclosed income in the order u/s 158BC of the Income-tax Act? - Assessee contended that no incriminating material was found during the search conducted on 19th and 20th July 1996, and the documents discovered were already recorded in the books of account - Assessee argued that the depreciation claims for assessment years 1996-97 and 1997-98 were not due at the time of the search, and thus, the disallowance was misconceived HELD THAT - Ld. Accountant Member had held that the department had already initiated inquiry in respect of the lease transactions and it appears that the search in the case of assessee was carried out with a view to unearth further evidence/material and on the basis of inquiry and investigation was, otherwise, carried out by the department and the Assessing Officer could not come to the conclusion that the assessee s claim for depreciation should be rejected and the assessment of undisclosed income on that basis cannot be made u/s 158BC of the Act, as according to him, an order u/s 158BC is not a substitute of assessment under the general provisions of the Act and only an undisclosed income found u/s 132, can be subject-matter of an order u/s 158BC. He concluded in para 93 of his order by observing that the undisclosed income assessed in the impugned order by the learned Assessing Officer does not fall in the domain of an order u/s 158BC for want of nexus with any evidence or material found during the course of the search in the case of the assessee and, therefore, it falls in the domain of the assessments that may be made under the general provisions of the Act. He has devoted a large part of his order to record the gist of the findings given and materials and information relied upon in support of such findings in the impugned order u/s 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. He, however, did not propose to go into the merits of the case made out against the assessee for the reason that the same do not pertain to the domain of proceedings u/s 158BC and found it sufficient to say, for the purpose of this appeal the undisclosed income assessed in the impugned order is required to be deleted for the reason of having fallen outside the scope and ambit of the provisions of section 158BC. The Ld. Judicial Member - According to him, upon having discovered the Lease Agreements and other connected documents during the course of search, the Department carried out extensive enquiries relating to the search on the basis of the aforesaid evidence discovered during the course of search, that it was on these inquiries having been conducted that the real intention of the assessee came to the fore; that as such, the undisclosed income assessed was directly relatable to the search carried out in the case of the assessee; that in view of the above appalling circumstances, it cannot be gainsaid that the elaborate inquiry procedure was carried out during the course of search, and was bearing a most direct connection therewith. The Department was, therefore, rightly of the view that the assessee would not have disclosed the impugned income. In these facts, it cannot be said that the addition has been made on the basis of material not relatable to the material found and seized during the course of search, or that the addition is based on no material found as a result of search. Third Member Order - There is no material on record to suggest that any evidence has been collected in this case by the Revenue during the course of search or as the result of the search, on the basis of which the computation of undisclosed income u/s 158BB or u/s 158BC could be made. The assessment made under section 158BC is thus not within the ambit of Chapter XIV-B of the Act and it is required to be vacated. In these circumstances, as observed by the learned Accountant Member, it is not necessary on this respect, at this stage, to go into the merits of the case made out by the assessee in the impugned order, which would be for the department to make the best use of material so gathered before the search as well as after search proceedings. Insofar as this assessment is concerned, it would be sufficient to say that undisclosed income, the assessed in the impugned order, is required to be deleted for the reasons that there is no such income, which could be said to be based on any evidence found as a result of search and any such other material or information as relatable to such evidence found. Block period for which the assessment is to be made under Chapter XIV-B means the period comprising previous years relevant to ten assessment years preceding a previous year in which the search was conducted u/s 132 or any requisition was made u/s 132A, and also includes in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date such requisition. Therefore, the assessment for the block period under chapter XIV-B can be made of the undisclosed income only up to the date of commencement of search or the date of the requisition and not of the period thereafter. Section 158BA provides for assessment of undisclosed income as result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of section 158BB and assessment has also to be made u/s 158BC of the block period. The undisclosed income for which the assessment is to be made, is defined in section 158B(b) which include 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 articles, 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 purpose of this Act and after the amendment by Finance Act, 2002 w.e.f. 1-7-1995 it includes also the any expenses, deduction or allowance claimed under this Act which is to be found to be false. Core thing to be seen is the evidence found which will be the basis for making the assessment. If there is no evidence or the evidence has already come on record or has been disclosed by the assessee in the assessment proceedings, then that evidence cannot the said to be have been found as a result of search and in that case, the material or information available with the Assessing Officer and relatable to such evidence could also not help in computing undisclosed income. The search in this case was undertaken on 19th and 20th July. The statement of three officials of the assessee company was recorded and in these statements no incriminating material was there which could be termed as evidence on the basis of which the undisclosed income could be computed. Certain documents in the form of lease agreement etc. were seized at the time search, but entries based on those documents were already found recorded in the books of account of the assessee, in the sense that the lease rent income on the basis of such lease agreements have been recorded in the books of account, as income of the assessee and the depreciation and interest with regard to the very lease transactions have been claimed as a deduction. Lease agreements may be an evidence by itself but there is nothing in those agreements which could establish that assessee had undisclosed income. On the contrary, disclosure of income has been made by the assessee in the books and return of income pursuant to these very lease agreements. The department has no doubt collected the material subsequent to raid, but that may not be very material and relevant for framing the assessment under Chapter XIV-B of the case because of the mandate given u/s 158BB it has to be the income computed on the basis of evidence found as a result of search and not otherwise. If any material is collected by the Revenue after the search, that may not give authority to department to make the computation of undisclosed income u/s 158BB or assessment u/s 158BC of the Act. In my opinion, therefore, the assessment made under section 158BC is required to vacated as the same is not authorised by the provisions of Chapter XIV-B of the Act, it being based on the material already collected and appearing on record or on the material collected after the search proceedings was over and it is not made on the basis of the material and evidence found as a result of the search nor on search other material or evidence available with the Assessing Officer and relatable to such evidence found as a result of the search The Tribunal ruled in favor of the assessee, stating that the assessment u/s 158BC was not justified as it was not based on evidence found during the search. The appeal was allowed, and the assessment order was vacated. The Hon ble IIIrd Member, after hearing the same, has passed the order dated 30-9-2004 agreeing with the Hon ble Accountant Member. Hence, as per the majority opinion, the appeal of the assessee is hereby allowed.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer under section 158BC.
2. Validity of including depreciation allowance in undisclosed income.
3. Merits of the disallowance of depreciation and interest.

Summary:

Jurisdiction of the Assessing Officer under section 158BC:
The learned Accountant Member held that the Assessing Officer did not have the jurisdiction to include the depreciation allowance in the computation of undisclosed income under section 158BC. The search under section 132 did not yield any incriminating material that could be considered as evidence of undisclosed income. The materials and information relied upon by the Assessing Officer were either already disclosed by the assessee or were obtained through inquiries conducted before or after the search. The learned Judicial Member, however, disagreed, stating that the lease agreements and other documents discovered during the search constituted evidence of undisclosed income, thus justifying the jurisdiction of the Assessing Officer.

Validity of including depreciation allowance in undisclosed income:
The learned Accountant Member emphasized that the undisclosed income should be computed based on evidence found as a result of the search. Since the lease agreements and other documents were already part of the assessee's records and disclosed in the regular books of account, they could not be considered as evidence of undisclosed income. The learned Judicial Member, on the other hand, argued that the elaborate inquiry and the evidence discovered during the search indicated that the depreciation allowance claimed by the assessee was fictitious, thereby justifying its inclusion in the undisclosed income.

Merits of the disallowance of depreciation and interest:
The learned Accountant Member did not delve into the merits of the case, focusing instead on the jurisdictional aspect. The learned Judicial Member, however, discussed the merits, concluding that the lease transactions were sham and the depreciation claims were not genuine. The Third Member agreed with the learned Accountant Member, stating that the assessment made under section 158BC was not authorized by the provisions of Chapter XIV-B, as it was based on material already on record or collected after the search, rather than evidence found as a result of the search.

Conclusion:
The appeal was allowed in favor of the assessee, with the majority opinion holding that the assessment under section 158BC was not justified, and the inclusion of depreciation allowance in the undisclosed income was not warranted.