2005 (10) TMI 276 - AT - Income Tax

Block Assessment in search case - legality of initiation of search and seizure operation - quantification of undisclosed income on the basis of seized material - confessionary statement - whether the amount will be taxable in assessment year 1996-97 or in some other year - deduction for the expenditure incurred - HELD THAT - The document speaks of receipt in cash and also receipt by way of cheques. The receipts by way of cheques tally with the books of account. Therefore it is a natural consequence that the receipt by way of cash have also been made. As we shall see subsequently the date of receipt of cash is not material for deciding the assessment year in which the profits embedded in such receipts are to be taxed. Suffice it to say at the moment the assessee is following project completion method and therefore all amounts i.e. amounts received in cash as well as amounts received by way of cheques are taxable in the year in which project is completed or substantially completed. Therefore the learned counsel s arguments on all three grounds fail. Accordingly it is held that the document is not a dumb document but it is a speaking document and it pertains to the business transactions of the assessee. This conclusion is further fortified by answer to question No. 12 of Shri Akalank to the effect that the cash will be shown for 1996-97 assessment year as additional income over and above the book profits of Dhanvarsha Builders and Developers Pvt. Ltd. After this statement the document becomes in fact an eloquent document regarding the receipt on money of the assessee. It appears that no opportunity of cross examination has been given by the Assessing Officer to the assessee in this behalf. Therefore the evidence gathered by him in respect of receipt of on money is only a tentative evidence on which no firm conclusion can be drawn. If the learned DR s arguments regarding expenditure were to be accepted then the figures of cash receipts mentioned in the seized paper will also have to be ignored. Such course of action will be against the tenor of the evidence seized in the course of search operation more particularly when the evidence gives clear picture of the undisclosed income of the assessee. The other argument of the learned counsel was that provisions of section 40A(3) should be applied in respect of expenditure. It may be pointed out that we are on the issue of computation of income of the assessee de hors the books of account and on the basis of seized material. In such computation provisions of section 40A(3) are not applicable because this is not the case of the assessee or the revenue that the computation of undisclosed income is on an exact basis as per seized documents and the books of account. The result of the aforesaid discussion is that the undisclosed income is to be quantified at Rs. 14.74 lakhs. Whether the amount will be taxable in assessment year 1996-97 or in some other year - The conduct of search and seizure operation in a particular year does not lead to an inference that the undisclosed income detected as a consequence thereof has to be taxed in the assessment year relevant to the previous year in which search was conducted. In other words accounting of profits have yet to be made on the basis of method of accounting followed by the assessee. No elaborate discussion has been made in this regard in the assessment order. Therefore it would be appropriate that this matter is restored to the file of the Assessing Officer to find out the method of accounting namely whether the assessee has been accounting the profits- (i) on year to year basis (ii) on sale basis or (iii) on project completion method. The impugned undisclosed income of Rs. 14.74 lakhs may be brought to tax as per the method of accounting of the assessee. Accordingly it is held that the undisclosed income of the assessee amounted to Rs. 14.74 lakhs which is taxable as per the method of accounting followed by the assessee for recognition of the income. In the result the appeal of the assessee is partly allowed as discussed above.

Issues Involved:
1. Legality of the initiation of search and seizure operation.
2. Assessment of total undisclosed income.
3. Validity of retraction of the statement made under section 132(4).
4. Computation method for undisclosed income.
5. Year of taxability of undisclosed income.

Issue-wise Detailed Analysis:

1. Legality of the initiation of search and seizure operation:
The assessee raised grounds regarding the validity of the search and seizure operation conducted under section 132, arguing that it should be declared null and void, and consequently, the order under section 158BC should also be void. However, the Tribunal referred to the full Bench decision in Promain Ltd. v. Dy. CIT, which held that if a search is conducted based on a warrant of authorization, the Tribunal cannot question the validity of the initiation of the search. Consequently, these grounds were dismissed.

2. Assessment of total undisclosed income:
The primary issue was the assessment of undisclosed income at Rs. 49.25 lakhs by the Assessing Officer, based on a declaration made under section 132(4) and later retracted. The assessee argued that the document relied upon by the Assessing Officer was a "dumb document" and that no other evidence was found regarding the receipt of cash. The Tribunal found that the document was not a dumb document but a speaking document, as it contained meticulous records of monies received, and the names and cheque amounts matched the books of account. Therefore, the document was considered valid evidence for assessing undisclosed income.

3. Validity of retraction of the statement made under section 132(4):
The Tribunal considered the retraction of the statement made by Shri Akalank on 10-4-1996. The learned DR argued that the retraction was too late and not made before the Assessing Officer, thus having no legal standing. The Tribunal held that while the statement under section 132(4) could be used as evidence, it must be seen in the context of the facts found during the search. The Tribunal concluded that the retraction did not displace the fact of the receipt of 'on money' as stated in the original confession.

4. Computation method for undisclosed income:
The Tribunal discussed various case laws and concluded that only the net profit from the undisclosed receipts should be taxed, not the gross receipts. The seized document indicated both receipts and expenditures. The Tribunal held that the document should be read as a whole, and the expenditure mentioned should be considered. Therefore, the undisclosed income was recalculated at Rs. 14.74 lakhs, considering the expenditure of Rs. 40 lakhs against the cash receipts.

5. Year of taxability of undisclosed income:
The Tribunal considered the assessee's method of accounting, which was the project completion method. The Tribunal restored the matter to the Assessing Officer to determine the method of accounting followed by the assessee and to tax the undisclosed income of Rs. 14.74 lakhs accordingly. The Tribunal emphasized that the conduct of search and seizure in a particular year does not automatically determine the year of taxability; it should be based on the method of accounting followed by the assessee.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal held that the undisclosed income amounted to Rs. 14.74 lakhs, which should be taxed according to the method of accounting followed by the assessee.

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