2014 (11) TMI 565 - HC - Income Tax

Opening cash balance - Whether the AO relied upon any material other than what was found in the course of search or proceedings thereafter to come to the conclusion that the sum of ₹ 2,50,000/- alone should be shown as opening cash balance and other amount should be treated as undisclosed income Held that - the provision of Section 158BB of the Act is in relation to computation of undisclosed income for the block period and that is to be done in accordance with the provisions of the 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 of information as are available with the AO and relatable to such evidence - for drawing this inference the AO has stated that some expenditure should be allowable for the previous years - the assessee admitted that there is a drawing of certain amount during every block year as the assessee cannot claim that there was no drawing at all prior to the block assessment period 1989-1990. The amount fixed as opening cash balance is based on no material itself cannot be countenanced, because the cash flow statement of the assessee is a record which speaks for itself - Nothing more is required for the AO in the course of search to determine the opening cash balance and for computation of the undisclosed income for the block period - The cash flow statement is a piece of evidence before the AO given at the behest of the assessee and that material has been considered to compute the undisclosed income - The emphasis of Section 158BB of the Act is on computation of undisclosed income and for that necessary materials can be taken into consideration and one such material is the cash flow statement and the inference by the AO appears to be justified as decided in VENGAT BAVA Versus COMMISSIONER OF INCOME-TAX 2008 (6) TMI 208 - KERALA HIGH COURT when assessment is based on the materials gathered on inspection which showed proof of investment in landed properties and expenditure in the course of time under various heads, addition u/s 68 and 69 of the Act is permitted in an assessment u/s 158BB read with Section 158BC of the Act Decided against assessee. Remodeling of house at No.15-b, Gokalay Road Held that - The AO was of the view that ₹ 7,00,000/- has been expended towards renovation of the house and ₹ 3,50,000/- was claimed towards cost of material - That was accepted to some extent, except for ₹ 90,000 - Therefore, the onus would rest on the assessee to show as to how the sum of ₹ 90,000/- was received by him either in kind or in value - There being no material to substantiate that, the mere statement of the assessee is of no avail and the department was justified in treating the balance amount of ₹ 85,000/- as undisclosed income, giving exemption to the extent of ₹ 5,000/- as per Section 10(3) of the Act Decided against assessee. Bad debts written of Held that - The AO rejected the plea of the assessee to treat ₹ 3,50,000/- as bad debt by holding that the same can only be treated as investment in money lending in the year of giving and it is not a bad debt - The reasoning given by the AO and the finding of the Tribunal based on Section 36(2) of the Act are on two independent interpretations of the same issue - there appears to be an issue in relation to the applicability of Section 36(2) of the Act, which should be considered by the AO - Decided against assessee.

Summary

Issues Involved:
1. Opening Cash Balance
2. Remodeling of House
3. Bad Debts

Detailed Analysis:

1. Opening Cash Balance:
The assessee claimed an opening cash balance of Rs. 5,00,000 for the assessment year 1989-1990, citing gifts received during family ceremonies and savings from his wife. The Assessing Officer (AO) disbelieved this claim, reducing the opening balance to Rs. 2,50,000 and treating the remaining Rs. 2,50,000 as undisclosed income. The Commissioner of Income Tax (Appeals) increased the opening balance to Rs. 3,00,000, which the Tribunal upheld. The court analyzed Section 158BB(1) of the Income Tax Act, emphasizing that block assessment of undisclosed income must be based on evidence found during the search or information related to such evidence. The court found that the AO's reliance on the cash flow statement and the assessee's own admissions about drawings during each block year justified the reduction of the opening balance. The court concluded that the AO's inference was not based on hypothetical assumptions but on the cash flow statement provided by the assessee. Thus, the court answered the first substantial question of law against the assessee and in favor of the revenue.

2. Remodeling of House:
The assessee claimed that the receipt of building construction materials worth Rs. 90,000 was a capital receipt and not taxable. The AO treated this amount as undisclosed income, which was partially modified by the Commissioner of Income Tax (Appeals), exempting Rs. 5,000 under Section 10(3) of the Act and treating the remaining Rs. 85,000 as undisclosed income. The Tribunal confirmed this decision. The court found that the assessee failed to provide sufficient evidence to substantiate the claim that the amount was received as a goodwill gesture from friends and relatives. Therefore, the court upheld the decision to treat Rs. 85,000 as undisclosed income, answering the second question of law against the assessee and in favor of the revenue.

3. Bad Debts:
The assessee claimed that a loan of Rs. 3,50,000 given to an individual named Pothiraj, which was not recovered, should be treated as bad debt. The AO brought this amount, along with Rs. 64,600 being the value of land taken as settlement, to tax. The Commissioner of Income Tax (Appeals) directed the deletion of Rs. 3,50,000, but the Tribunal reversed this decision, citing non-compliance with Section 36 of the Act. The Tribunal noted that there were no books of account or evidence to show that the debt had become bad. The court found that the AO and the Tribunal had provided independent interpretations of the issue. Therefore, the court remanded the matter to the AO for reconsideration, answering this issue partially in favor of the assessee.

Conclusion:
The court dismissed T.C.(A).No.1244 of 2007 and remanded T.C.(A) No.1245 of 2007 to the AO for further consideration on the issue of bad debts. No costs were awarded.