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TMI Blog2014 (11) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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:- T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal is right in holding that in a block assessment under Section 158BC of the Income Tax Act irrecoverable advances made in the course of money lending business cannot be allowed as a deduction in computing the assessable income? 4.1. The facts in a nutshell are as under: A search was conducted under Section 132 of the Income Tax Act (for brevity, the Act ) on 24.9.1998 and certain incriminating documents were seized and heavy investments were noticed. Based on the materials, a notice under Section 158BC of the Act was issued and in response to the same, the assessee filed a return of income. 4.2. The rival claims of the assessee and the department and the findings rendered by the Original Authority, First Appellate Authority and the Tribunal on each of the issues raised is as under: OPENING CASH BALANCE - (C.M.A.No.1244 of 2007) 4.3.1. The assessee claimed ₹ 5,00,000/- as opening balance for the assessment year 1989-1990 in the cash flow statement filed along with the return of income and stated that he received cash as gift from friends and relatives as under: (i) On the occasion of his daughter's ear-boring ceremony, which was held on 14.4.1979, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e went on appeal to the Commissioner of Income Tax (Appeals), who held that the amount received by the assessee as honorarium from friends and family on resolution of disputes could be termed as casual and non-recurring type. Thus, he deducted a sum of ₹ 5,000/- under Section 10(3) of the Act and the balance amount of ₹ 85,000/- was brought to tax. 4.4.4. The assessee appealed to the Tribunal, which confirmed the order passed by the Commissioner of Income Tax (Appeals). BAD DEBTS - (C.M.A.No.1245 of 2007) 4.5.1. In the course of the search, it was found that there were certain entries showing that the assessee had given a sum of ₹ 3,50,000/- to one Pothiraj and it was stated by the assessee that he could not recover the said amount despite lodging of a complaint with the police. Thereafter, the said Pothiraj passed away and as a complete settlement towards the loan taken by Pothiraj, he took over 58 Cents of land at Kannanendal Village. 4.5.2. The Assessing Officer held that even though the assessee claims to have lent money to Pothiraj, the source of the same is not explained and, therefore, treated it as undisclosed income of the assessee. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le with the Assessing Officer and relatable to such evidence], as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined. ... ** Substituted for 'in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer' by the Finance Act, 2002, w.r.e.f. 1.7.1995.' 7.2. According to the learned counsel for the assessee, the Assessing Officer made certain deductions for the years prior to 1988 as probable expenditure and, thus, came to the conclusion that the opening balance of ₹ 5,00,000/- as on 1.4.1988 is incorrect. Expatiating the said plea, he contended that as the department has accepted the sum of ₹ 5,00,000/- as opening balance, they cannot rely upon the so-called expenditure of the period prior to 1.4.1988 for disallowing the claim of opening balance of ₹ 5,00,000/-, and the same would be hit by the provisions of Section 158BB of the Act, which envisages that evidence found as a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of computation of undisclosed income for the block period. To buttress this argument, he relied upon the annexure to the assessment order and the summary, which are relevant to the present issue and read as under: I. Y.E. 31.3.1989 (Asst. Year 1989-90) a. Investments made as per Records/Materials 1. Drawings Rs.45,000.00 2. Investments Rs. NIL Total Rs.45,000.00 b. Sources available as per Records/Materials 1. Opening balnace of ₹ 5,00,000 in the TB - Taken at ₹ 2,50,000 as directed by the JCIT Range II, Madurai Rs.2,50,000.00 2. Salary ₹ 22,000.00 Rs.2,72,000.00 c. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sst. Year 1997-98) a. Investments made as per Records/Materials 1. Drawings Rs.75,000.00 X. Y.E. 31.3.1998 (Asst. Year 1998-99) a. Investments made as per Records/Materials 1. Drawings Rs.75,000.00 XI. Y.E. 24.9.1998 (broken period Asst. Year 1999-2000) a. Investments made as per Records/Materials 1. Drawings Rs.42,000.00 SUMMARY Asst. Year Undisclosed income/ excess fund Add Income admitted in the statement treated as undisclosed income Grand Total Less I/R or add less returned if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the beginning of the block assessment. In support of this plea, he placed emphasis on the reasoning given in the assessment order, based on the cash flow statement furnished by the assessee, which is in the following terms: On the opening balance of ₹ 5,00,000 (2 issue) I am of the opinion that the assessee is not entitled to get this benefit. First function was celebrated somewhere in 1979 and second function was celebrated in 1985. The assessee presumed that the moi receipts were kept intact till 1.4.88. The assessee was also not able to produce evidence in what form the moi receipts were kept. When he is receiving moi from various parties/relatives it is also mandatory on the part of the assessee to pay back to the parties/relatives on occasion like ear boring/house warming/marriage etc., if not more, an equal amount as moi. For the function the assessee would have spent heavy amount for booking halls, food, drinks, beverages etc. Further the time gap is also very big. It is therefore hard to believe that he has not spent any amount in moi payments, celebration of functions etc. till the date of search. In this connection, I draw the attention to the finding given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s drawing is around ₹ 50,000/- to ₹ 75,000/- during every block year. In view of the admission of the assessee that there is a drawing of certain amount during every block year, which we have already set out in the previous paragraphs, the assessee cannot claim that there was no drawing at all prior to the block assessment period 1989-1990. 9.4. The contention of the learned counsel for the assessee that 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 Assessing Officer in the course of search to determine the opening cash balance and for computation of the undisclosed income for the block period. What is relevant for computation of undisclosed income under Section 158BB of the Act is not merely evidence found as a result of the search, but material information available with the Assessing Officer relatable to such evidence. The cash flow statement is a piece of evidence before the Assessing Officer given at the behest of the assessee and that material has been considered to compute the undisclosed income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.6. On the contrary, Mr.Swaminathan, learned Standing Counsel was at pains to point out a decision of the Kerala High Court in Vengat Bava v. Commissioner of Income Tax, [2009] 318 ITR 276 (Ker.). In the said decision, based on cash flow statement furnished by the assessee, certain additions towards unexplained investments and expenditure were made and additions to cash credit was also made. Under such circumstances, a Division Bench of the Kerala High Court held that 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 under Sections 68 and 69 of the Act is permitted in an assessment under Section 158BB read with Section 158BC of the Act. This is in line with the key word in Section 158BB of the Act that it should be in accordance with the provisions of the Act and fortifies our view on this issue. 9.7. In such view of the matter, we answer the first substantial question of law against the assessee and in favour of the revenue. REMODELING OF HOUSE AT No.15-B, GOKALAY ROAD - (C.M.A.No.1244 of 2007) 10.1. The assessee claimed that the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of ₹ 85,000/- as undisclosed income, giving exemption to the extent of ₹ 5,000/- as per Section 10(3) of the Act. 10.6. In such view of the matter, the second question of law is answered against the assessee and in favour of the Revenue. BAD DEBTS - (C.M.A.No.1245 of 2007) 11.1. This issue relates to the advances made by the assessee to one Pothiraj to the tune of ₹ 3,50,000/- and his claim that it has become bad debt. It is on record that after the demise of Pothiraj, as a complete settlement towards the loan taken by Pothiraj, the assessee took over 58 Cents of land at Kannanendal Village worth about ₹ 64,600/-. 11.2. Even though the Assessing Officer brought to tax ₹ 3,50,000/- given as loan and ₹ 64,600/- being the value of land, the Commissioner of Income Tax (Appeals), directed deletion of ₹ 3,50,000/-. However, the Tribunal reversed the said finding relying upon Section 36 of the Act. The main reason for the Tribunal to disallow such a claim is that there were no books of account in this case and there was no seized material to show that the debt has become bad. It is was observed that in block assessment, undisclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt has become bad and when the assessee has written it off as bad debt etc. In fact, there is no books of accounts at all in this case and there is no seized material to show that the debt has become bad. In the block assessment, undisclosed income has to be computed in accordance with the provisions of the Income-tax Act on the basis of evidence found as a result of search or requisition of books of accounts or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence. Where there is no evidence to suggest that the debt has become bad and the seized material also does not suggest that the debt has become bad, it cannot be allowed as bad debt. Further, this debt has not been taken into account in computing the income of the assessee in any earlier year and the condition laid down in sec.36(2) is not fulfilled. The ratio laid down in the decision of the Tribunal in the case of K.Easwarappa v. DCIT (89 ITD 229) relied on by the assessee is not applicable to the facts of the present case. In view of this, we are of the opinion that the CIT (Appeals) is not justified in allowing the ground of the assessee on this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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