2014 (11) TMI 511 - HC - Income Tax

Reference u/s 132(4) - Block assessment - Whether the statement said to have been recorded from the managing partner of the respondent would fit into the one referable to Section 132(4) Held that - The statement must be recorded during the course of search and seizure - it can be recorded only as a sequel to the discovery of books of account, cash, bullion or similar items - the search has taken place on 25-03-1999, but the statement was recorded on 11-05-1999 - It was not even alleged that the search was carried out for the entire period, in between - A statement recorded one and half months after the search, can by no means be brought under the purview of Section 132(4) - the block assessment is not on the basis of any discovery of wealth, bullion or books of account. Additions on the basis of discrepancy between the two registers (RG-1) - Held that - While excise duty becomes payable when the manufactured material is removed from the factory, the income tax becomes payable when the product is sold and sale proceeds accrue to the assessee. When it was not even alleged that the steel, representing the differential quantity, was sold, there was no basis to infer or imagine the accrual of income or the corresponding obligation to pay the income tax. It does not need any emphasis that the proceedings under Chapter XIV-B are penal in nature and they can be sustained if only they are founded and grounded on undisputed or established facts. An assessee cannot be subjected to the proceedings under that chapter, just on the basis of imaginations or surmises. the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Discrepancy in steel production records leading to income tax assessment.
2. Validity of the statement recorded from the managing partner.
3. Interpretation of Section 132(4) of the Income Tax Act.
4. Merits of the block assessment based on the discovered discrepancy.
5. Requirement of suppressed sale proceeds for income tax liability determination.

Issue 1: Discrepancy in steel production records leading to income tax assessment
The respondent, a steel manufacturer, was assessed under the Income Tax Act after a search revealed a discrepancy of about 250 metric tonnes of steel between the RG-1 register and Daily Rough Production Register (DRPR). The assessing officer treated a sum representing the cost of 134 metric tonnes of steel as taxable income. The respondent contested this, stating that entries in the DRPR are tentative and only recorded in the RG-1 register after cooling, quality verification, and weighing. The Tribunal later allowed the respondent's appeal, emphasizing the lack of evidence of suppressed steel sales, crucial for income tax liability.

Issue 2: Validity of the statement recorded from the managing partner
The statement recorded from the managing partner post-search was contested for its validity under Section 132(4) of the Act. The Court noted that the statement was recorded after a significant time lapse from the search, failing to meet the statutory requirements. Furthermore, the statement was retracted by the respondent due to confusion during search proceedings, aligning with a precedent regarding the evidentiary value of such statements.

Issue 3: Interpretation of Section 132(4) of the Income Tax Act
The Court analyzed Section 132(4) requirements, emphasizing that statements must be recorded during the search and seizure, directly linked to discovered items. In this case, the delayed statement and lack of direct correlation with discovered items rendered it invalid under Section 132(4).

Issue 4: Merits of the block assessment based on the discovered discrepancy
The block assessment solely relied on the discrepancy in production records without evidence of suppressed sale proceeds. The Court highlighted that the discrepancy between registers, without proof of sold steel, does not justify income tax liability. The assessing officer's failure to consider the nature of steel production and sales process led to an erroneous assessment.

Issue 5: Requirement of suppressed sale proceeds for income tax liability determination
The Court stressed that income tax liability arises upon the sale of products and accrual of sale proceeds. Without evidence of sold steel corresponding to the discrepancy, there was no basis for income tax imposition. The Tribunal's finding that no suppressed steel sales were proven supported the dismissal of the appeal.

In conclusion, the Court dismissed the appeal, emphasizing the need for concrete evidence of suppressed sales to justify income tax assessments and highlighting the importance of accurate assessments based on established facts rather than assumptions or discrepancies in production records.