9911796707
TMI Blog2004 (11) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed income. The break up of the undisclosed income determined by the learned Assessing Officer for the block period is as under : Sl. No. Asst. year Depreciation disallowed Interest disallowed Total 1. 1994-95 Rs. 2,14,61,000 - Rs. 2,14,61,000 2. 1995-96 Rs. 25,87,93,435 Rs. 1,47,79,935 Rs. 27,35,73,370 3. 1996-97 Rs. 6,08,82,323 Rs. 2,48,46,679 Rs. 8,57,29,002 4. 1997-98 - Rs. 1,05,55,287 Rs. 1,05,55,287 Total.... Rs. 39,13,18,659 3. As enumerated in para 4 of the impugned order the assessee entered into 14 lease transactions during the block period or during the period relevant to assessment years1994-95 to 1997-98. According to the learned Assessing Officer the sole and primary motive behind these lease transactions was to avail the benefit of depreciation allowance at the rate of 100 per cent cost of assets. In order to avail such benefit the assessee entered into fictitious transactions of purchase of assets which qualify for depreciation allowance at 100%. Thereafter the assessee entered into elaborate documentation which included suppliers bills, lease agreement, Board resolution, delivery documentation, installation certificates, no lien certificates etc. After documentation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any purchase consideration to the supplier nor the supplier has received any sale consideration. There has been no sale and purchase at all. (ii) In these cases where there is a direct sale and lease back transaction the supplier-cum-lessee after receiving the sale consideration pays about 85 per cent of it to the lessor. In this structure the supplier-cum-lessee in effect gets only say about 15 per cent of the purchase consideration which is in the nature of commission or compensation for entering into accommodation transaction. It is ridiculous to believe that an asset can be parted with or ownership transferred for consideration or a price which is equivalent to 15 per cent of the cost of the assets. It never happens in normal commercial world. (iii) It is significant to note that sale consideration has not been received through the regular bank accounts of the suppliers. Instead separate bank accounts have been opened by both suppliers and lessees in the same bank as that of the lessor to facilitate the process of refund of purchase consideration to the lessor/finance company in the garb of security deposit. In normal lease transaction it does not transpire that lessee and sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In the case under reference, there is total absence of any valid commercial transaction between the suppliers and the lessees. (ix) It is noticed that almost all the lessee companies are in deep financial crisis. These companies are short of finance even to meet their day-to-day requirement, leave alone further funding of leased assets. Most of these companies are in fact financially and operationally sick. All the assets either exist only on paper or existed even before the commencement of the lease. In many cases, the assets have already been financed through bank/financial institutions. Therefore the lessee has entered into lease agreement not for the purpose of financing any capital asset but to facilitate the bogus depreciation claim of the lessor for an agreed price ranging between 15 to 20 per cent of the supposed cost of the assets. (x) The differential between the apparent cost of assets and the security deposit was appropriated not for the purpose of financing any asset. It was shared or utilized by different people for various purposes not connected with the financing the cost of any asset. 5. After recording the general observations in para 6, the learned Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. BVPL. The statement of Shri Suryanarayan, Executive Director of M/s. BVPL was recorded on 24-7-1996 and he admitted that M/s. Thomson Heat Systems was not in existence at all and that M/s. BVPL had not taken any asset on lease from the assessee. He further submitted that the entire transaction was a mere paper transaction. On being confronted with these information the assessee supported its claim by various documents. The assessee further submitted that as per clause 9(b) of the lease agreement, the sole function of the lessor was to purchase the equipment selected by the lessee from the supplier who had been designated by the lessee. As to the statement of Shri Suryanarayan, the assessee submitted that it was Mr. Suryanarayan who had confirmed the lease transaction as per his letter dated 14-8-1996 and, therefore, it was extremely difficult to understand the circumstances in which Shri Suryanarayan had denied the lease transaction in his statement recorded by the Investigation Directorate on 24-4-1996. The learned Assessing Officer held that there was no trace of M/s. Thomson Heat Systems. There was also no materials to support that the Steam Boiler was transported from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereft of substance. 6.1 In respect of second transaction of 2100 High Pressure Seamless Gas Cylinders, the learned Assessing Officer held that there again, the existence of the supplier at the given address was disapproved and the addresses were found to be fictitious. It was further found that the fictitious bills in the name of Applied Cryogenics Technological Services (supplier) had not been used by the assessee company alone and there were large number of cases wherein the letter-head of the firm had been used for raising bills. For example, in the case of Piramal Group itself, its another company viz., Roche Products Ltd. also claimed to have purchased the same number of cylinders for the value of ₹ 1,00,80,000 from this party by sale bill dated 16-3-1995. As to the reliance placed by the assessee on payment of Account Payee cheque the learned Assessing Officer found that the accounts of the supplier as well as the lessee had been opened on the same date i.e., on 24-3-1995 in Allahabad Bank, Parel where the assessee was having its regular accounts. These accounts were introduced to the Bank by Shri V.C. Vadodaria, the Secretary of the assessee-company. The cheque favouri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure the chief executive of these companies viz., Mr. R. Guruswamy of SRSIL, Mr. S. Ramesh of SROL and Mr. P. Sriramulu of MOAL were authorised to do the needful. These executives entered into some agreements with various parties through which they derived income which were utilized by them for urgent financial problems. It was further stated that these executives gave their signatures on agreements, blank papers, and blank cheques only to accommodate the request made by the other parties who promised payment to them. During the course of proceedings under section 158BC, the learned Assessing Officer confronted the assessee-company with the findings of the Investigation Wing at Coimbatore. In his detailed reply, the assessee strongly relied upon the documents including Board resolution, Inspection Certificate and no lien certificate of SRSIL and the certificate of Chartered Engineer, Shri P.G. Srinivas and so on. According to the learned Assessing Officer, on further enquiries it was noticed that there was a Board meeting of the company as alleged but there was no resolution for taking any asset on lease from the assessee-company. All the assets of SRSIL had been hypothecated with I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the Assessing Officer in which the broad facts of the earlier statement were reiterated. According to the learned Assessing Officer the assessee was merely trying to base his case on documents and cheque payments. The documents had been declared to be bogus by the signatories and as to the cheque payments, the bulk of the money travelled back to the assessee in the form of security deposit. What was material and relevant was the fact that the assessee had not actually paid the entire consideration and had in a circular transaction received back 85 per cent of it. The payment made to the supplier and receipt of security deposit were not two separate and independent transactions because the same were carried out on a single day and the same money was utilized for the purpose of both the transactions. The cross examination of Shri V. Gopalkrishnan, Director, SRSIL was taken by Shri V.P. Vashi, Advocate, on behalf of the assessee on 25-7-1997 at Coimbatore. In this cross examination, Shri Gopalkrishnan contended that Mr. Guruswamy had misused the authorization given to him. Thus Shri V. Gopalkrishnan reiterated his earlier statement. On the basis of this material, the learned Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods. There were also no papers relating to transit insurance for safety and security of the assets during such transportation. As to the payments made by Account Payee cheques, the accounts in the name of M/s. Andhra Organics Corporation and M/s. NPL were opened in Allahabad Bank, Industrial Finance Branch, Mumbai where the assessee was having its accounts. These accounts had been introduced by Shri V.C. Vadodaria, the secretary of the assessee-company. The entire payment made by the assessee by cheque to M/s. Andhra Organics Corporation was transferred on the same date to the account of M/s. NPL from which 85 per cent of the amount was paid back to the assessee-company. Thus, in a circular manner, the assessee got back its money allegedly employed for the purchase of assets. The learned Assessing Officer also took note of the fact that various companies belonging to Piramal Group had made huge purchases from the same M/s. Andhra Organics Corporation. A large number of other parties also utilized the bills in the name of that party. However, there was no trace of Andhra Organics Corporation or its proprietors at the given address. As to the affidavit of Mr. S. Chandrasekaran, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Miga Gas Pvt. Ltd., herein after referred to as MGPL by lease agreement dated 23-3-1994. According to the learned Assessing Officer, a search under section 132 of the Income-tax Act was conducted in the case of MGPL at Bangalore on 6-3-1996. During the course of this search it was revealed that Shri Krishna Mohan, M.D. of MGPL was also the proprietor of DDK Industries and that Shri Krishna Mohan had issued mere paper bills in the name of DDK Industries in favour of the assessee-company and several other parties. During the course of that search a large number of letter heads and invoices were seized which included the letter head of DDK Industries also. In his statement recorded on 6-3-1996 Shri Krishna Mohan admitted that M/s. DDK Industries did not carry out any genuine sale. The cylinders were bought by MGPL, the same were shown as the cylinders sold to leasing companies. Shri Krishna Mohan was found to have raised bogus bills to the extent of ₹ 46 crores and that amount could be more because more information was forthcoming. During the course of search proceedings in the case of the assessee-company, this fact was brought to the notice of Mr. Mahesh Gupta, Chief Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on because Invoice No. and date was different and even the date of certificate was different. Another statement of Shri Gupta was recorded on 18-9-1996 but he again relied upon the documents on record. On 20-9-1996, Shri Gupta filed a copy of Shri Krishna Mohan s affidavit dated 23-3-1996. 9.1 The learned Assessing Officer made his own investigation in addition to the investigation carried out by the Investigation Wing at Mumbai and Bangalore. He addressed letters to MGPL and DDK Industries. Although the letters were acknowledged no replies were received. Several reminders sent were of no avail. The learned Assessing Officer, therefore, concluded that the transactions were not genuine. Based on the investigation made by Investigation Wing and enquiries, a show-cause notice was issued to the assessee on 5-7-1997. In reply, the assessee relied upon the stand taken by Shri Mahesh Gupta in his earlier statement. Thereupon the learned Assessing Officer made reference to ADI. Bangalore to obtain explanation from Shri Krishna Mohan. Letters were received on 28-7-1997 from MGPL as well as DDK Industries Ltd. They confirmed that invoice was issued for the purpose of accommodation and actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Shri Krishna Mohan. The address of Shri B.K. Ramesh was given as 61, GM, Pallya, behind BEML, Bangalore. Further, on the same date another account was opened by Shri B.K. Ramesh with Bank of India where the address was given as Flat No. 4, Anjali Apartments, South Avenue, Khar (W), Mumbai 52. The second account was opened in respect of another lease transaction by another company belonging to Piramal Group. Enquiries were conducted at the Khar address and it was found that one Shri V.N. Shenoy resided at that address since 1972 and he was not aware of any person in the name of B.K. Ramesh or any concern in the name of DDK Industries. It was, therefore, clear that these accounts had been opened by the same person giving wrong, incorrect or bogus address. These accounts were introduced by different employees of the companies in Piramal Group. As to the Bank account in the name of MGPL, the address was given to be Flat No. 4, Anjali Apartment, South Avenue, Khar (West), Mumbai 52. Another account of MGPL was opened in the Bank of India. The photographs of Shri Krishna Mohan given to both the banks were different and they did not look similar or alike in any manner. These aspects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the learned Assessing Officer even during the course of search proceedings in the case of the assessee-company, the contents of the statement of Shri G. Venkateswaralu had been brought to the notice of the Chairman of the assessee-company as well as Shri Mahesh Gupta, Chief Finance Officer of the company. The assessee was, therefore, required to ascertain from the lessee company the reasons for denial but no such steps were taken for obvious reasons. Further, the learned Assessing Officer found that even the documents being relied upon by the assessee-company were by and large fabricated ones. The assessee relied on the minutes of the Board meeting of RCOP held on 30-6-1994. The enquiry made by the DDI, Guntur revealed that there was no such Board meeting held on 30-6-1994. As to the payments made by Account Payee cheque, enquiries were conducted to locate the supplier but the supplier was not found at the given address. It was found that one Shri G. Sai Bhaskar was a tenant at the given address who was an ex-small time employee of RCOP. Shri G. Bhaskar had signed as proprietor of M/s. Agri Commercial Products Ltd. It was highly inconceivable that a small time employee like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer noted that the assessee s claim under clause 9(b) of the lease agreement was not justified. It was the statutory obligation of the assessee company to establish the genuineness of purchase and existence of the asset. The assessee could not shift such obligation to the lessee. The assessee was asked to produce the supplier to prove the genuineness of purchase for establishing the ownership of leased assets on or before 4-7-1997 but the assessee failed to do so. Instead on 22-7-1997 the assessee company wrote that M/s. Agri Commercial Products was a party in existence who had been dealing with the assessee company as per the statement of Shri G. Venkateswaralu recorded by A.D.I.T. on 16-9-1996. The assessee also claimed that in substance, it was the transaction in the nature of sale and lease back on the part of RCOP. The learned Assessing Officer held that as far as the assessee was concerned the purchase was said to be from M/s. Agri Commercial Products and merely because an asset of similar description was with RCOP which formed a part of Block of assets, did not establish the assessee company s claim of ownership of such an asset. The documents on which the assessee placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his address and the house belonged to him since 1972. In a written reply to the learned Assessing Officer, Dr. Shoeeb stated that he had no idea about the so called M/s. Amity Industries nor he had heard about it. Enquiries with sales-tax authorities at Bangalore showed that M/s Amity Industries had not filed any sales-tax return. A letter was sent to the assessee company on 25-6-1997 confronting the assessee with the findings of enquiries regarding the non-existence of the supplier. In his reply the assessee stated that as per clause 9(b) of the Lease Agreement it was the lessee who directly ordered and received the leased assets from the supplier. The assesssee stated that it was ATL who was responsible for indentifying and selecting the supplier i.e. M/s. Amity Industries. 11.1 According to the learned Assessing Officer, M/s. Amity Industries had been used not only in the case of the assessee company but in many other cases, some of which were the companies belonging to the Piramal Group. A supplier of this magnitude could not disappear without any trace and, therefore, the transactions could not be regarded as genuine. Regarding the payments made by the assessee the learned Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company records had been taken over by Central Excise authorities and, therefore, they were not able to provide the required information. This reply was not correct. According to the learned Assessing Officer, the Central Excise authorities informed that no such documents were in possession of the Central Excise authorities. M/s. Shri Kailas Sugars Chemicals Limited: 12. The assessee claimed to have purchased Sugar Works Rollers of the value of ₹ 2,51,00,000 from M/s. Maheshwari Engineering Works, 7-1-61/7, Ameerpet, Hyderabad-16 vide invoice No.1203, dated 3-8-1994 and to have leased them to M/s. Sri Kailas Sugars Chemicals Ltd. hereinafter referred to as SKSCL, by agreement made on 19-9-1994. During the course of proceedings under section 158BC the assessee relied on a number of documents in support of this claim. According to the learned Assessing Officer summons issued to M/s. Maheshwari Engineering Works were received back with the postal remarks no such firm exist in the said address . Enquiries made by Investigation Wing of Hyderabad also revealed that no such firm ever existed at the given address. In the case of SKSCL a survey under section 133A was carried out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he supplier, M/s. Maheshwari Engineering Works was, as per normal practice, identified and selected by SKSCL. The duly authorized representative of SKSCL viz., Shri M. Sunil came to Mumbai with necessary documents to enter into the transaction. The assessee also relied on clause 9(b) of the lease agreement. According to the learned Assessing Officer irrespective of this clause it was a statutory obligation of the assessee company to prove the genuineness of purchase and, therefore, the assessee was requested to produce the supplier which was not done by the assessee and, therefore, the assessee failed to discharge its fundamental legal obligation for the purpose of claiming ownership of the assets. As to the documents relied upon by the assessee, a Board resolution of SKSCL dated 1-8-1994 was certified by one Shri Muralikrishna as Secretary of the company. This resolution authorized Mr. M. Sunil, Manager (Operations) of the company to complete all formalities in connection with the transaction. However, SKSCL vide its letter dated 27-6-1997 confirmed that though there was a meeting of Board of Directors on 1-8-1994 no such resolution was passed in the said meeting. The company, fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer also looked into the payment aspect and found that accounts in the name of M/s. Maheshwari Engineering Works and SKSCL had been opened on 24-3-1995 at Allahabad Bank, Parel, Mumbai where the assessee was having its accounts. Both these accounts had been introduced to the bank by Shri V.V. Vadodaria, Director of a Finance company belonging to the Piramal Group. A cheque was issued favouring Maheswari Engineering Works for ₹ 2,51,00,000 on 28-3-1995 and on the same date a sum of ₹ 2,13,35,000 was transferred to the account of SKSCL who in turn transferred the whole of the amount to M/s. Swastik Safe Deposit and Investment Ltd., a finance company belonging to the same Group. Thus, by way of circular transaction 85 per cent of the payment made by the assessee was refunded to the group company. It was incredible to believe that an asset could be sold or parted with just by receiving 15 per cent of the cost. Therefore, the plea of payment by Account Payee cheque did not hold good. M/s. Deve Sugars Limited: 13. The assessee entered into a lease agreement on 1-3-1995 with M/s. Deve Sugars Ltd., hereinafter referred to as DSL having its registered office at Bangalo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not reflected in those invoices. Even in respect of the 7 invoices the enquiries revealed that there was no genuine purchase and in the assessment order, the machinery purchased to the extent of ₹ 3,15,31,329 was disallowed as bogus purchase and the same was also confirmed by the learned CIT (Appeals). During the course of assessment proceedings for assessment year 1995-96, the purchase register of DSL for the financial year 1994-95 was produced and the same was impounded under section 131(3) because it was reported on verification of the said register that the machinery alleged to have been sold to MGM did not find a place. The certified copy of accounts filed for assessment purpose along with the return of income for the assessment year 1995-96 also did not refer to the transactions with MGM. The payment of Security Deposit of ₹ 3,77,26,754 to M/s. Swastik Safe Deposit Investments Ltd. was also not reflected. The operation of bank account with the Allahabad Bank, Parel, Mumbai where the transaction pertaining to lease were routed was also not reflected. Furthermore, no lease rental had been debited to the profit and loss accounts for the financial year 1994-95. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad also been done by him. In a Public Limited Company all the transactions could not be confined to one individual only. M/s. Ready Foods Limited : 14. The assessee claimed to have purchased Micro Processor Multi-Head Electronic Packaging System on 4-4-1994 from Ready Foods Ltd., Bangalore, hereinafter referred to as RFL for ₹ 2,23,67,396. Thereafter, the assessee entered into lease agreement with RFL on 15-9-1994. The assessee relied upon a number documents in support of this transaction. According to the learned Assessing Officer several letters were addressed to RFL. Though such letters were duly acknowledged by RFL not a single letter had been replied. A reference was made to ADI(Inv.) at Bangalore to make necessary enquiries but the repeated efforts of ADI(Inv.) also failed to obtain the requisite information. He informed that various agencies were after the Chairman, Mr. T.V. Raja Reddy who was absconding. The said company had also not been filing any return of income from the assessment year 1994-95. Finally, in response to summons issued on 9-6-1997, Shri T.V. Raja Reddy, vide his letter addressed to the learned Assessing Officer submitted that the sale of assets had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RFL for the years ending 31-3-1993 and 31-3-1994. These balance sheets clearly mentioned that all immovable properties of RFL including machinery etc. had prior charge in favour of the financial institutions. 14.1 According to the learned Assessing Officer the fact that there was no genuine purchase was also proved by the fact that a substantial portion of the sale consideration had been refunded back to the assessee. The assessee made payment of ₹ 2,23,67,396 by way of cheque on 28-9-1994. However, out of that amount a sum of ₹ 1,90,12,287 had been refunded by RFL to an associate company of Piramal Group viz., Legend Pharma Pvt. Ltd. on the same date. 14.2 According to the learned Assessing Officer, a letter was issued to the assessee company on 4-7-1997 informing the contents of the letter received from RFL. In reply, the assessee company placed reliance on various documents. The assessee also placed reliance on the letter dated 27-3-1997 of Shri T.V. Raja Reddy confirming the transaction and stating that the assets were in good condition and in possession of RFL. The Chartered Engineer s affidavit was also furnished to support that the equipments were in existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company stated that Shri Mahesh Gupta had agreed to withdraw the depreciation claim if it was proved that the Gas Cylinders did not exist but the assessee company had not been able to physically verify the assets from the concerned party who had however verbally confirmed the transaction. In response to this letter, the learned Assessing Officer wrote to the assessee company for a joint inspection of the assets. The assessee, in spite of having been given an opportunity to prove the genuineness or the existence of the assets, wrote a letter on 15-7-1997 in which the assessee reiterated its stand that the leased assets had been verified through an independent Chartered Engineer at the time of entering into the transaction. 15.1 Regarding the various documents relied upon by the assessee, according to the learned Assessing Officer, the enquiries revealed that the Certificate of Incorporation of BGL found at the premises of the assessee, bearing Incorporation No. 06/13091 of 1991 issued on 28-5-1991 was fabricated and the correct Incorporation certificate was 08/15915 of 1994 issued by Registrar of Companies, Karnataka on 11-7-1994. Regarding audited balance sheet of BGL as on 31-3-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ique Ahmed. He admitted that he was only a name lender and he had signed whatever he was asked to sign by Mr. Prakash Shah. He confessed to have received ₹ 34,00,000 in the transaction which he claimed he had shared with various people. He offered ₹ 30 lakhs in his hand for taxation. The statement of Shri Prakash Shah alias Deepak Mehta was recorded by ADI, Bangalore on 13-4-1996. Shri Prakash Shah in his statement confirmed whatever was stated by Mr. Anwar Pasa. He admitted that he was the main person behind the activities of M/s. BGL and M/s. Bestow Agencies among other firms; that he was the person who got the bank accounts opened in their names. He admitted that M/s. BGL had a Bank account in Bangalore which had been operated by Mr. Guru Dutt of M/s. Chetan Financial Services and his agency M/s. Gold Crest Finance (I) Ltd. Similarly, the account of M/s. Bestow Agencies in Bangalore was also operated by Mr. Gurudutt. Blank cheque books were signed by Mr. Anwar Pasa and Mr. Mairaz Ahmad. Mr. Prakash Shah stated that Mr. Gurudutt was the main contact person in Bangalore and he had signed various documents blindly and handed them over to Gurudutt. Bills were issued for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gold Star Steel Alloy Ltd., hereinafter referred to as GSAL two Dust Collectors vide invoice No. 163, dated 2-8-1994 for ₹ 2,30,00,000 and two Wet Air Oxidation Equipment for recovery of chemicals vide invoice No. 165, dated 4-8-1994 for ₹ 2,70,00,000. Thereafter, the assessee entered into a lease transaction on 23-9-1994 with GSAL and leased back these assets. In support of this claim the assessee relied upon a large number of documents. Based on the documents, the learned Assessing Officer conducted enquiries to ascertain the genuineness of the transaction. The first letter was issued to GSAL on 5-3-1997. Though the letter was acknowledged no response was received from GSAL. Another letter was written to GSAL on 3-6-1997. Again there was no response from GSAL. Thereafter, a reference was made to ADI, Hyderabad for causing necessary enquiries. The assessee had placed reliance on Board resolution of GSAL dated 7-7-1994. In order to validate the authenticity of this resolution the learned Assessing Officer addressed a letter to IDBI on 17-6-1997 as IDBI was on the Board of Directors of GSAL. The IDBI in its letter dated 25-6-1997 stated that no Board meeting was held on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales. 16.2 The learned Assessing Officer referred to the audited balance sheet of GSAL for the period from 1-4-1994 to 30-6-1995 and observed that an addition of ₹ 537 lakhs had been shown to plant and machinery. This addition had been worked out by reducing from the security deposit against leased assets, the estimated original value of the disposed assets. Thus, the accounting treatment given in the books of account of GSAL was very elusive and mis-guiding. Furthermore, GSAL had stated during the survey that it had sold assets worth ₹ 17.81 crores whereas the information available with the Department suggested that the sale bills raised were of much higher figure. As to the reliance placed by the assessee company on payments made by Account Payee cheque, the learned Assessing Officer found that the account in the name of GSAL was opened in Allahabad Bank, Parel Branch, Mumbai on 20-3-1995. On 28-9-1995 the assessee paid by way of Account Payee cheque a sum of ₹ 5,00,00,000. However, on the same date a sum of ₹ 4,25,00,000 was transferred to the account of M/s. Swastik Safe Deposits and Investments Ltd., a finance company belonging to the Piramal Group in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference was made to IDBI to confirm if there was such a Board meeting on 5-1-1995. IDBI replied that DAFBIL had not forwarded to the IDBI nominee Director any Notice convening the Board meeting on the said date. Hence, the learned Assessing Officer concluded that the Board resolution was false. The assessee company also placed reliance on another certificate issued by DAFBIL to the effect that no charge or lien had been created against the assets sold. This certificate again was not correct because all the movable assets of DAFBIL had been hypothecated to financial institutions. IDBI had clarified that the company had not obtained permission for selling the assets. Thus, the certificate of no charge and lien was also false. The assessment records of DAFBIL at Chennai were examined. The depreciation statement for the assessment year 1995-96 did not show any removal of assets by way of sales. In the audited accounts of the lessee company the total sale for the period ending on 31-3-1995 was shown at ₹ 3,48,10,162 whereas the sale of assets made to the assessee company itself was claimed at ₹ 7,41,07,190. The sale of assets as contended by the assessee company was not refl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inspector of Police, Poonamallee Police Station. However, the list of assets destroyed enclosed with this complaint did not show any assets taken on lease by DAFBIL. Shri Rizvi admitted to have signed the sale invoices but he could not explain as to why no lease rent was debited in the profit and loss account for the financial year 1994-95. He also expressed ignorance about the security deposit made to M/s. Swastik Safe Deposits and Investments Ltd. He produced fixed assets register as well as ledger of DAFBIL and it was seen that the list of assets did not figure therein. All these showed that the transactions were not genuine. M/s. Thungabadhra Pulp Board Limited : 18. The assessee claimed to have purchased from M/s. Candy Filters (I) Ltd., a Murre make Boiler for a consideration of ₹ 60 lakhs vide invoice dated 16-8-1994 and to have leased the same to M/s. Thugabadhra Pulp Board Ltd., hereinafter referred to as TPBL, vide lease agreement dated 1-3-1995. In support of this claim the assessee placed reliance on a number of documents. According to the learned Assessing Officer the enquiries made revealed that these Boilers originally belonged to Salarjang Sugar Mills Ltd., Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onging to Piramal Group. The payment was made to the suppliers but on the same date the entire consideration was transferred to the account of TPBL and TPBL in turn returned ₹ 50,40,000 to M/s. Swastik Safe Deposits Investments Ltd., a finance company belonging to the Piramal Group by way of security deposit. Thus, 84 per cent of the consideration was received back in a circular transaction. How could the assets be parted with the remaining 16 per cent and at any rate as far as the supplier was concerned he did not receive any part of the consideration? This proved that the payment theory advanced by the assessee company was merely an eyewash. The learned Assessing Officer, therefore, concluded that the transactions were only on paper and not genuine transactions. 19. After discussing each of the transactions serially, as briefly summarized by us in the foregoing paragraphs, the learned Assessing Officer re-emphasised some aspects. He pointed out that situs of sale and lease and present location of the assets in most cases was in the State of Andhra Pradesh. There the sales tax laws covered the transactions of lease also. The non-payment of lease tax was a pointer to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was brought to the notice of the assessee during the course of recording the statement of Shri Mahesh Gupta, CFO of the company on 24-7-1997. Shri Mahesh Gupta relied on the principle under the Company Law that if a document not open to public inspection was furnished by a company such document is binding on that company as far as an outsider is concerned. According to the learned Assessing Officer it could not be appreciated that Board minutes was not a public document. Secondly, such a principle of doctrine of in-door management could not control the assessment proceedings. The Assessing Authorities were entitled to examine the genuineness or authenticity of a document being relied upon by the assessee. Such legal principles could not be applied out of context. 21. As the assessee s accounts were duly audited a letter was issued to Shri H.N. Shah, Statutory Auditor on 9-7-1997. In his reply, Shri H.N. Shah submitted that they had obtained a certificate from the Managing Director regarding the verification of fixed assets. On request from the Assessing Officer, the certificate filed by the management was also enclosed. The learned Assessing Officer found that the certificate was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finance company except saying that oral offers had been received from some reputed companies. From the statement of Shri Gupta in this respect, the learned Assessing Officer concluded that the assessee company had not followed any objective practice for selecting the financial intermediary who was chosen because of his personal relationship with the CFO. The assessee company by and large ignored the necessary requirements in respect of selection, compensation paid, terms and conditions etc., of the financial intermediary. 23. The learned Assessing Officer noted that in all cases leasing had been effected either in the month of September or March. This indicated that the transactions were done with the sole and exclusive purpose of availing depreciation shelter to reduce tax liability. Even Shri Gupta in his statement admitted that the tax implications were considered while calculating the over-all return on lease transactions. The fact that all these transactions were done either in September or March was not an accident but a calculated and structured design. Further, the assets had been chosen with deliberate intention of obtaining depreciation shield. The description of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it generally had the capacity to pay the balance 15 per cent. Thus, the lease transactions and security deposit were just an eye-wash. It was pertinent to mention that differential 15 per cent was in some cases distributed amongst various beneficiaries to the transaction and the amount had neither gone to the supplier nor to the lessee company. Therefore, essential ingredients of a finance lease were completely absent. 26. According to the learned Assessing Officer, findings of the enquiries were brought to the notice of the assessee by ADI (Inv.) during the course of post-search investigation proceedings and also by Assessing Officer during the course of Block Assessment Proceedings under section 158BC. Copies of statements were furnished to the assessee. In his reply the assessee insisted on cross examination of the lessees. It was not understood as to how the cross examination could meet the requirement of establishing physical existence of the assets. When the Department proposed for joint physical inspection of assets, the assessee preferred and raised the bogie of cross examination, thus, side-stepping the issue of joint inspection of assets. When the enquiry had established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security deposit representing the refund of purchase consideration did not come back to the assessee company, the working capital limits of the company were not set off and the limits continued to be utilized to that extent and the assessee continued to pay interest and claimed the same in its accounts. For argument sake, even granting that internal accruals were contained in the bank account, the commercial practice and prudence was that the existing debits were paid off rather than diverting to group companies via circular transactions. Having established that the assets did not exist and the intention behind payment made to the supplier was not genuinely for the purpose of purchasing the assets and the lease transactions were fictitious, the borrowed funds utilized for parking the same with the investments companies of the group routed through suppliers and lessees accounts, the interest incurred on such borrowed funds were disallowable under section 36(1)(iii) of the Act as having been incurred for the purpose other than the business purpose of the assessee company. With regard to the case where the security deposit came back directly to the assessee company, the learned Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and never confronted with that statement. The learned Counsel for the assessee categorically stated, During the course of search no incriminating material was found or detected other than the documents as were duly entered and recorded in the books of account or forming part of the official records of the assessee. The learned Counsel for the assessee further categorically stated that in the statement of Shri Ajay G. Piramal and Shri Mahesh S. Gupta, there was no admission or acceptance at all of any undisclosed income earned or any false transaction having been recorded in the books of account. As on the date of search, returns of income for and up to assessment year 1995-96 had fallen due and the same had been duly furnished to the Department prior to the date of search. The assessments up to assessment year 1993-94 had already been completed. In respect of the assessee s return of income for assessment years 1994-95 and 1995-96 that had been filed, no orders of assessment under section 143(3) had been made by the learned Assessing Officer. The return of income for assessment year 1996-97 had not fallen due and was, therefore, filed subsequent to search under section 132. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be only in respect of transactions entered into on or after 1-7-1995 and in any case such expenditure, deduction or allowance was required to be found to be false during the course of search. So far as the search under section 132 in the case of the assessee company was concerned, not a single document or any material otherwise was discovered which could establish that the entries as made in the books of account of the assessee were false. As a matter of fact, investigation made by the Department and relied upon by the learned Assessing Officer in the impugned order under section 158BC was extraneous to the search carried out in the case of the assessee and, therefore, the entire investigation made and material gathered that has been relied upon by the learned Assessing Officer was beyond the scope of Chapter XIV-B. For the purpose of applying the provisions of Chapter XIV-B, there should have been positive material found during the course of search in the assessee s own case. 32. The learned Counsel for the assessee further argued that where the assessment was pending or a return of income had not been subjected to assessment proceedings, it could not be concluded that any expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment of undisclosed income on the impugned order under section 158BC was that as a result of the search made, it was found that the claim of depreciation was not allowable and that the amount of interest was not deductible. It was a matter of record that this purported basis of assessment under section 158BC did not at all exist. There was no incriminating material found in the course of search on the assessee on the basis of which the learned Assessing Officer could validly conclude that there was an undisclosed income representing these two items of deduction. Moreover, the approach of the learned Assessing Officer in this behalf was self-contradictory. On the basis of lease agreements and other documents the assessee disclosed lease income from the transactions and as a corollary to the same, the assessee claimed depreciation in the returns of income filed for assessment years 1994-95 and 1995-96. The income disclosed by the assessee representing lease income from the transactions in question has been duly accepted in the assessments of the assessee for various assessment years as would be seen from the following table:- Sr. No. Assessment year Income disclosed from 14 Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of search. 36. Referring to the provisions of section 158B(b), the learned Counsel for the assessee argued that the definition of undisclosed income clearly indicated that the income or property which had been disclosed or which would have been disclosed for the purpose of Income-tax Act shall not form part of undisclosed income. In other words, it was necessary to establish that any income or property had been found or detected as a result of search or based on any entry in the books of account or other documents or transactions found in the course of the search which had not been disclosed or would not have been disclosed. Reliance was placed on the Judgment of Hon ble Calcutta High Court in the case of Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 5621and it was stated that in that Judgment, the Hon ble Calcutta High Court held that where details of loans credited had been furnished in the regular assessment itself, the Assessing Officer was not entitled to question them in the Block Assessment. It was held that the Block Assessment was not a substitute for regular assessment. 37. The learned Counsel for the assessee submitted that no evidence had been found during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After having done so, how could the learned Assessing Officer disallow the claim of depreciation allowance on the ground that these lease transactions were false, more so, in the absence of any order under section 263, cancelling the assessment of lease rentals. 40. The learned Counsel for the assessee argued that out of 14 transactions the transaction with Deve Sugars Ltd., Ready Foods Ltd., Goldstar Steel Alloys Ltd., and Deve Annapoorna Foods Beverages Industries Ltd., were sale-cum-lease back transactions. The parties performed as the seller as well as the lease. All plant and machinery purchased by the assessee remained in the control and custody of the sellers who had then become the lessees by virtue of their transactions with the assessee company. There was another case of Tungabhadra Pulp Board Ltd., wherein the party sold its plant to Candy Filters Ltd., from whom the assessee purchased the plant in question. Then the same was leased back by the assessee company to TPBL. Thus, for all practical purposes it was also a case of sale-cum-lease back transaction. The plant and machinery continued to remain with TPBL itself. These transactions could not be held to be sham merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udice and in the alternative, the learned Counsel for the assessee argued that the lease income ought to have been excluded. 41. The learned Counsel for the assessee emphasized that in any case the entire exercise was outside the scope of Block assessment. Section 158BB(1) provides for computation of undisclosed income in accordance with Chapter XIV 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 learned Assessing Officer. Such other materials has to bear a direct nexus with the facts discovered during the course of search. In the case of Sunder Agencies (supra), the Hon ble Mumbai Bench held that the Legislature has used the words, such other materials and not any other materials . The word such is defined in Concise Oxford Dictionary, V Edn. At Page 1289 as of the kind or degree already described or implied or intelligible from the context or circumstances . In this view of the matter, the expression such material means, material found or detected as a result of search and not any other material. As in the case of the assessee company, no such material had been f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the interest had been paid by the assessee company on its cash credit account which was continuing for more than 10 years. The transaction pertaining to the payment and receipt had all been entered in the books of account and carried out in the ordinary course of assessee s business. There was no nexus with any particular sum of borrowing as the borrowings of the assessee had been made for the purpose of business in a composite manner. Moreover, the income earned by way of lease from plant and machinery had been assessed to tax and, therefore, the interest paid on the amounts invested for the purpose of purchase of plant and machinery had necessarily to be allowed as deduction. 44. The learned Counsel pointed out that according to the learned Assessing Officer interest was disallowable since part of the amounts received by the suppliers had been paid by such suppliers/lessees to the group companies of the assessee without charging interest. There was a diversion of funds to the group companies of the assessee and as such, the interest under section 36(1)(iii) could not be allowed as deduction. Here too, the learned Assessing Officer failed to appreciate that there was no dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich concluded that one Mr. Ramakrishna dealing in Nitrogen gas cans was staying at the residential address indicated in the receipt issued by the supplier and was doing business at Hosur. The name of the proprietor of the supplier was also Mr. A. Ramakrishna. Further, the learned Assessing Officer himself states that the supplier had sold even to other parties. In this view of the matter, the lessee s denial of existence of supplier was irrelevant as the supplier was in fact located by the lessee only. Furthermore, the inability to locate the supplier did not itself lead to the inference that the supplier did not exist or it had not sold Boilers to the assessee. The learned Assessing Officer could not draw any adverse inference on the ground that no proof of supplier and movements of the assets from the supplier to the lessee were furnished. Transport/Insurance was not necessary as the asset was already available with the lessee. In any event, it was the lessee s obligation to arrange the transport of goods and the assessee was not concerned with the same. As to the bank accounts opened and movements of funds, the learned Counsel argued that it was done for the convenience of all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the lessee himself. At any rate, the inability to contact the supplier could not lead to the inference that the supplier did not exist or he did not sell assets to the assessee. The learned Counsel also argued that the transport/insurance was not necessary as the asset was already available with the lessee. The denial by the lessee was contrary to records; contrary to various statements given by the lessee himself and this denial was self serving as the lessee did not want to accept the sale of equipment. There was a broker who was paid brokerage by the lessee himself. The lessee had signed the agreement and the signature of the lessee s representative had also been verified by his own bankers. The lessee accepted the signatures during the course of cross examination. There was a certificate issued by a Chartered Accountant, Mr. Ramdas which supported that the transaction was genuine. The Stamp Paper on which the lease agreement was executed had been purchased at Adoni, where BVPL was located. As to the Board resolution, the learned Counsel argued that the same was signed by the M.D. of the lessee company. This Board resolution was furnished to the assessee company by the les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Engineer, Shri P.G. Srinivas dated 23-7-1996. As to the circular nature of the transaction, the learned Counsel argued that the Board resolution was signed by the Managing Director of the lessee and, therefore, the assessee could rely on the same based on the Doctrine of Indoor Management. In respect of the contention of the learned Assessing Officer in Para 9.9 at Page 36 of the Order that the certificate had been issued by the Chartered Engineer without physical verification, the learned Counsel argued that the learned Assessing Officer had made a wrong and misleading statement. The Engineer had, in fact, in his statement dated 23-7-1996 categorically accepted that he had visited the lessee s premises and physically verified the cylinders although he was not sure whether the same belonged to the lessee or to others. As to the request of joint inspection not being accepted by the assessee company, the learned Counsel submitted that the assessee had requested the learned Assessing Officer to fix a date of joint inspection after giving at least 15 to 20 days but this request was not acceded to. In support of the contentions, the learned Counsel also placed reliance on its written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the supplier had issued delivery challans dated 10-2-1994 and 12-2-1994, confirming the delivery of the equipment. About 85% of the total consideration being returned on the same date it was argued that it was a commercial transaction that had been agreed upon amongst the parties. As to the allegation that the affidavit of the Chartered Engineer had been given without physical verification of the assets, the learned Counsel pointed out that the lessee had admitted that the photographs in the affidavit were from his own factory but the lessee was unaware of the reasons for taking the photographs and that he was not aware of the visit of the Chartered Engineer in reply to questions put to him during the course of cross examination held on 21-7-1997. As to the entire transactions not having been recorded in the books of lessee, the learned Counsel argued that the learned Assessing Officer had not mentioned as to on which basis he had come to that conclusion and in any event, the assessee could not be blamed for the lapse on the part of the lessee. During the course of hearing before us, the learned Counsel also placed reliance on its letters dated 14-5-1997, 26-6-1997, 7-7-1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GPL through DDK. The nature of the transaction in the case of the assessee company was very similar to that of Microland upheld in the aforesaid decision of the Tribunal. As to the contention of the learned Assessing Officer that the Chartered Engineer D.V. Nagabhushan had accepted that he had not conducted any physical verification of the assets and that he had given a certificate of installation without knowing the purpose of the certificate, it was argued that in the statement of Chartered Engineer, the certificate referred by him did not pertain to the transaction of the assessee company. Further, the Chartered Engineer had mentioned in his statement that it was the Managing Director of MGPL who had approached him for issue of installation certificate. Hence, manipulation or mala fide conduct, if any, was attributable to the lessee and the assessee could not be penalized for the same. As to the report of ADIT, Bangalore that no Board meeting of MGPL was held on the specified date, the assessee pointed out that this report had not been furnished to the assessee for rebuttal and in any case the Board resolution relied upon by the assessee company was duly signed by the M.D., of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e himself. The address of the supplier was the same as that of the RCOP s office at Guntur and the person who had signed the document on behalf of the supplier was an ex-employee of RCOP itself. As to the statement of the MD of RCOP denying that they had purchased or sold any machinery to the supplier, the learned Counsel argued that the assessee had neither been given the copy of local enquiries and investigation report by Investigation Wing at Hyderabad nor the statement of RCOP recorded on 16-9-1996 and 11-7-1997. At any rate, the denial of RCOP was contrary to records. It was self serving as RCOP did not want to accept the sale of equipment. Money had actually passed from the assessee to the supplier. RCOP had signed the lease agreement. Although RCOP had stated in their statement dated 11-7-1997 that the signature on the lease agreement had been forged, the same was not true. The learned Counsel for the assessee argued that the statement of RCOP could not be relied upon as they were inconsistent and suffered from contradictions. As to the report of ADIT at Guntur that no Board meeting of RCOP was held on the specified date, it was stated that such report by ADIT, Guntur had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer also did not make any efforts to locate the supplier from the other address mentioned on the receipt, challan etc. i.e., Title Factory Compound, Bangalore. As to there being no proof regarding transportation and insurance of the assets, it was argued that there was no necessity because the assets were already available with the lessee. As to the Bank account being opened by the supplier and ATL on the same date and 85% of the consideration being transferred on the same date to an investment company of Piramal Group, the learned Counsel argued that this was done for the convenience of all parties and it was a commercial transaction agreed upon amongst the parties. As to the allegation that no Board resolution had been passed by ATL on the date specified, it was argued that the representative signing the resolution was the Vice President of ATL and, therefore, the assessee was entitled to rely on the Doctrine of Indoor Management. It was also argued that the statement of Mr. N. Subramaniam to the effect that no Board Meeting was held on the specified date was never furnished to the assessee and the same had also not been enclosed in the Annexures enclosed to the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement of SKSCL and, therefore, it was quite possible that the new management was not fully informed. As to the allegation that the Chartered Engineer, S. Chandrasekaran had confirmed that he had issued the certificate without carrying out physical verification of the assets it was argued that the assessee was not confronted with the statement of Mr. S. Chandrasekaran. It was also relevant to note that in another case (BVPL) this Engineer had specifically confirmed to the Assessing Officer that he had physically verified the assets while giving the certificate. As to the allegation that the contents of the Board Resolutions were false it was argued that the Board Resolution had been certified by the Company Secretary of SKSCL. The assessee could not have verified whether the person authorised by the Board resolution was actual employee of SKSCL. 53. As to the contention that the assessee-company did not attend to the cross examination fixed on 28-7-1997, it was submitted that the notice for this purpose was received by the assessee-company on only 26-7-1997 which was a Saturday. On the same date, the learned Assessing Officer had also scheduled a cross examination in the case of Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfronted with the report of Inspection by the Department at DSL s Registered Office and copy of statement of Shri PG Srinivas dated 23-7-1996 was also not furnished to the assessee. However, the learned Counsel argued that the assessee-company could not be held responsible for omissions or inaccuracies if any, in the records maintained by DSL. The assessee was entitled to rely on the documents executed between the assessee-company and DSL and the certificates given by DSL. Furthermore in this case, the learned Assessing Officer had not examined DSL and, therefore, inference drawn by the learned Assessing Officer was without seeking the explanation of the lessee. As to the existence of the assets, DSL had furnished a certificate regarding existence of assets from an independent Chartered Engineer. DSL also furnished copy of Board resolution. The assessee was entitled to reply on these documents and it had no reason to suspect the veracity of the same. In this case, there was also no specific denial of transactions by the DSL who was seller-cum-lessee. As to the transactions and agreements being made in Mumbai on the same date and 85 per cent of the purchase consideration being rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Counsel further argued that the learned Assessing Officer had mentioned that the promoter of RFL was absconding. The assessee could not be penalized for the same or for the lack of response by RFL. As to the letter of RFL dated 19-6-1997, the learned Counsel for the assessee pointed out that the same did not refer specifically to the lease transactions with the assessee-company. At any rate, the denial was contrary to the records and was self-serving because RFL did not want to accept the sale of equipment. The assessee had made payment towards purchase price which fact was borne out by the bank accounts of RFL. When the learned Assessing Officer himself found that the RFL had indulged in a large scale of unethical practice, he could not have relied upon the denial of the transaction from RFL. The transaction of the assessee-company by RFL was supported by agreements; certificate issued by an independent Chartered Accountant, P.P. Bhat Co., Board resolution furnished by RFL and No Lien certificate issued by RFL. These documents had been furnished to the assessee by RFL themselves and as far as the assessee was concerned, it had no reason to suspect the genuineness of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company. Mr. Anwar Pasa, Managing Director of BGL has represented to the assessee-company about the existence of the company and its registered address. There was no reason for the assessee to doubt the genuineness of these representations and the balance sheet produced before it. The assessee was also not expected to verify about the Auditor mentioned in the balance sheet. The assessee was also entitled to rely on the Board resolution, the genuineness of the signatures on the same had not been refuted by the learned Assessing Officer also. As to supplier, the assessee was not aware as to on what basis the learned Assessing Officer came to the finding that the supplier never existed. No opportunity was accorded to the assessee to establish the genuineness of the supplier and in any case the assessee-company was entitled to rely on the signed documents available with it. Just because the assets had not been insured it could no be said that the assets were not in existence at all. During the course of hearing before us, the learned Counsel referred to the letters addressed by the assessee company to the learned Assessing Officer dated 14-5-1997, 2-7-1997, 7-7-1997, 15-7-1997 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction. Balance sheet of GSAL also did not reveal that the assets in question had been hypothecated to IDBI. Vide letter dated 12-7-1997 addressed to the Assessing Officer, GSAL had clarified that sales tax was not applicable since it was a second sale. The learned Assessing Officer had not specified as to how GSAL was held to have indulged in indiscriminate issue of sale bills. As to the manner in which the transaction was recorded in the books of GSAL, the fact of the matter was that the transaction was recorded and if the same was totally inconsistent with the accounting practice, the same could not affect insofar as the claim of the assessee-company was concerned. In this case, even the learned Assessing Officer had not doubted the physical existence of the assets in question. As to the manner in which the transaction was carried out, the same was in accordance with the convenience between the parties and as argued upon between the parties. The learned Counsel for the assessee referred to the letters of the assessee-company dated 14-5-1997, 7-7-1997, 23-7-1997 and 30-7-1997 addressed to the Assessing Officer. M/s. Deve Annapoorna Food Beverages Industries Limited (DAFBIL): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, it had no reason to doubt the genuineness of Board resolution. As to the allegation that the promoters of DAFBIL had committed various violations of Law only proved that DAFBIL had acted fraudulently but it did not prove that the assessee-company had not acted in good faith. If the sale was recorded at a lower price in the balance sheet, it did not indicate that the entire transaction was fictitious. Entries made in the books of DAFBIL should not affect the claim of depreciation allowance in the case of the assessee-company. As to the manner in which transaction was carried out and the Security Deposit was made the same were commercial transactions as agreed upon among the parties concerned. The learned Counsel for the assessee argued that the learned Assessing Officer had not established that the description in the Police complaint did not match with the description of assets sold to the assessee-company. The learned Assessing Officer had at the same time stated that these assets were hypothecated to IDBI. The learned Counsel argued that according to the learned Assessing Officer, the assessee was required to know the existence of assets at all times after the same were l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... physical existence of the asset and its purchase by the assessee company. Similarly, the non-finalisation of account books of the supplier could not affect the claim of the assessee company. The assessee company had relied upon the agreements; certificate of Chartered Engineer and Board resolution. If the other parties did not reply to the queries of the Assessing Officer, the genuineness of these documents was not disproved. It was represented before the assessee company that the Board resolution was genuine and the assessee had no reasons to doubt the same. As to the consideration paid by the assessee company, the same was supported by the valuation report of Chartered Engineer, Mr. PG Srinivas dated 30-9-1994. The payment made by Candy Filters to TBPL could be towards settlement of their internal outstanding. The assessee company could not dictate as to how the supplier should utilize the purchase consideration paid by the assessee company. The learned Counsel for the assessee also referred to the letters addressed by the assessee dated 14-5-1997 and 23-7-1997. 60. Shri Boota Singh, CIT(DR) appearing on behalf of the Revenue pointed out that under the provisions of section 158B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had claimed depreciation it was the assessee s burden of proof to establish these primary facts. Apart from the suppliers not being found in most cases, the alleged assets were also not found to be physically existing. It was an admitted fact that the assessee company themselves never conducted any physical verification of the assets. No evidence was ever filed that the assets were inspected by the assessee company. In such a scenario if the lessees made a statement that the assets in question did not exist, what else remains! The assessee had relied upon the lease agreements and supporting documents. However, these lease agreements and related documents were collusive. The documents were duly fabricated with ulterior motive to claim depreciation. The fact that the payments were allegedly made by the assessee company by Account Payee Cheques was of no consequence because major part of the payments came back to the assessee. The assessee only parted with about 15 per cent which was by way of cost of making these arrangement in order to enable the assessee to claim 100 per cent depreciation. The bank accounts in which the assessee made payment had been opened at the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied having entered into the transaction and admitted that the documents in question were mere paper work. All these enquiries were conducted during the course of search and, therefore, had a direct nexus with the search. Thus, the learned Assessing Officer was entitled to include disallowance of depreciation in computation of undisclosed income of the block period. 64. The learned Departmental Representative argued that there was no force in the contention of the assessee that the assessee was not confronted with various statements recorded and investigation carried out. During the course of proceedings under section 158BC, these statements were shown to the assessee from time-to-time. This fact was borne out from the impugned order. At any rate, the assessee was well aware of the case against him. 65. The learned Departmental Representative also argued that the reliance placed by the learned Counsel for the assessee on the Judgment of Hon ble Supreme Court in the case of Mahendra Mills (supra) was totally misplaced. The provisions of section 158B(b) also included income based on any entry in the books of account or on the document or transaction which would not have been disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he search of any business premises were conducted under section 132. He argued that if the lease agreement had not been found at the assessee s premises during the course of search, the Revenue could have had some case against the assessee. The fact that lease agreements and supporting documents were found at the assessee s premises only supported the assessee s claim and not otherwise. Moreover, the lease agreements did not by themselves suggest that the same were not genuine. 69. The learned Counsel for the assessee also vehemently opposed the contention of the learned Departmental Representative that whatever enquiries were conducted by the Department during the period 19-7-1996 to 30-9-1996, could be said to be relating to the search under section 132 in the case of the assessee. He argued that unless, during the course of search at the assessee s premises only, some evidence was found which could enable the Revenue to draw an adverse inference against assessee s claim, it could not be said that the searches and survey and other enquiries carried out by the Department elsewhere were relatable to the search carried out in the case of the assessee. Without prejudice to this main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer did not further look into the matter and held that it was sufficient that these finance companies were group concerns. The learned Counsel further pointed out that it was not true that all the lessees had denied genuineness of lease transactions. In five cases, viz., Apollo Tubes Ltd. (ATL), Deve Sugars Ltd. (DSL), Gold Star Steel Alloys Ltd. (GSAL), Deve Annapoorna Food Beverages Industries Ltd. (DAFBIL) and Tungbhadra Pulp Boards Ltd. (TPBL), the lessees had not denied the genuineness of lease transactions. Out of the remaining nine parties, only two parties, viz., Raghunath Cotton Oil Products Ltd. (RCOP) and Shree Kailas Sugar Chemicals Ltd. (SKSCL) denied having knowledge of the lease transaction with the assessee company. In the case of RCOP the statement of the lessee denying his signature was not proved. In the case of SKSCL there was a change in the management of lessee company whereas the transactions with the assessee company had been carried out by the earlier management. In the remaining seven cases, the lessees did not dispute that they had signed the lease agreements. They merely made self-serving statements that the transactions were accommodation paper trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to the learned Assessing Officer to prove the existence of the leased assets. In the case of Bhagyalakshmi Vegetable Products Ltd.-I (BVPL-I), the assessee carried out physical verification after the date of search on 14-9-1996. In the case Bhagyalakshmi Vege-table Products Ltd.-II (BVPL-II), Chartered Engineer s affidavit dated 14-9-1996 (after the date of search) along with the photographs of the asset confirmed the existence of the assets. The same was done in the case of Niraj Petro Chemicals Ltd. (NPCL) on 14-9-1996; in the case of Ready Foods Ltd. (RFL) on 5-4-1997; in the case of Gold Star Steel and Alloys Ltd. (GSAL) on 14-9-1996; in the case of Sree Ramakrishna Steel Industries Ltd. (SRSIL) on 23-7-1996. The Chartered Engineers in his statement dated 23-7-1996 categorically accepted that he had visited the premises of SRSIL and had physically verified the cylinders. In the case of Miga Gases Pvt. Ltd. (MGPL), the Managing Director of lessee company accepted in his various statements that cylinders actually existed. In the case of Raghunath Cotton Oil Products Ltd. (RECOP), Apollo Tubes Ltd. (ATL) and Sri Kailas Sugars Chemicals Ltd. (SKSCL), there was no denial of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral cases before the search commenced in the case of the assessee. The learned Assessing Officer mainly relied on enquiry which was by and large made after the search had been carried out in the premises of the assessee. While completing the impugned order under section 158BC, the learned Assessing Officer had obliterated the distinction between the regular assessment proceedings and the proceedings under section 158BC. He referred to the decision of the ITAT, Chennai Bench dated 27-9-2001 in the case of P.K. Ganeshwar v. Dy. CIT [2002] 80 ITD 429. In that decision, the Tribunal held that where undisclosed income is found not on the basis of evidence found as a result of search but on investigations and enquiries made following the search, such income could not be included as undisclosed income of block period. The provisions of Chapter XIV-B laid down a special provision for assessment of undisclosed income found as a result of search only and there was no scope for considering all the items that could be considered under regular assessment. Without prejudice, the learned Counsel for the assessee also pointed out that while the learned Assessing Officer disregarded the distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf serving statements of the lessees in respect thereof could not rebut the weight of documentary evidence relied upon by the assessee. We propose to examine first the assessee company s challenge to the jurisdiction of the learned Assessing Officer to make disallowance in question in the impugned order under section 158BC. 76. The Finance Act of 1995 has inserted a new Chapter XIV-B in the Income-tax Act. It provides a new concept for assessment in relation to searches conducted under section 132 of the Act or requisition made under section 132A after June 30, 1995. The purpose of enactment of the Chapter as given in clause 32 of the Notes on Clauses of the Finance Bill, 1995 reads as under: In order to make the procedure of assessment of search or requisition cases effective it is proposed to introduce new provisions for assessment of undisclosed income detected as a result of search or requisition. Under the new provisions, the undisclosed income detected as a result of search initiated or requisition made after June 30, 1995, shall be assessed separately as income of a block of ten previous years. Where the previous year has not ended or the due date for filing a return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted retrospectively from the 1st day of July, 1995. [231 ITR (St.) 228, 256]. 78. After insertion of Explanation to section 158BA(2) by the Finance (No. 2) Act, 1998 with retrospective effect from July 1, 1995, there is no dispute now that the block assessment under section 158BC is in addition to the regular assessment and not in substitution of the regular assessment. There is also not much difficulty in arriving at the view that in the block assessment under section 158BC only the undisclosed income of the assessee has to be charged to tax at special rate of tax provided in section 113. The moot question is as to whether in a block assessment computation of undisclosed income has to be confined only to the undisclosed income found during the course of the search or it is open to the Assessing Officer to carry out such scrutiny, examination and enquiry as he may deem fit to find out the undisclosed income of the assessee for the block period. This aspect of the matter is regulated by the provisions of section 158BB(1) that the undisclosed income of the block period shall be computed on the basis of evidence found as a result of search or requisition of books of account or docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (No. 2) Bill, 1998 in the case of N.R. Paper Board Ltd. v. Dy. CIT [1998] 234 ITR 7333. The Hon ble Gujarat High Court held that the process laid down under Chapter XIV-B did not disturb the assessments already made and was only intended to sniff out what had remained hidden and what would not have been disclosed by the assessee. There would, therefore, be no over-lapping in the nature of the assessment made under Chapter XIV-B of undisclosed income and the regular assessment made under section 143(3) of the Act. 80. In the case of CIT v. Shambhulal C. Bachkaniwala [2000] 245 ITR 4884(Guj.), the Tribunal deleted the additions of ₹ 19,03,677, ₹ 17,27,447 and ₹ 1,62,349 in the block period made by the Assessing Officer by rejecting the trading accounts and estimating higher turnover and higher gross profit and by making disallowance on account of interest and other expenses which were debited in the regular books of account. It was submitted that there was absolutely no justification in considering these aspects while passing an order under section 158BC where only undisclosed income was required to be computed. The Tribunal, following the decision of Hon ble Gujara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the contention of learned counsel for the appellant that the Assessing Officer has necessary jurisdiction to resort to best judgment assessment in proceedings under section 158BB, the correctness of it cannot be doubted. However, under the scheme of the provisions for block assessment, it is apparent that it relates to assessment of Undisclosed income of the assessee excluding the income subjected to regular assessment in pursuance of the returns filed by the assessee for such period. It is also apparent from the perusal of section 158BB that the returns are also required to be filed in pursuance of the notice under section 158BC(a) and the assessment is to be framed on that basis in the light of material that has come into possession of the assessing authority during the course of search which is the foundation of the proceedings. That being so, the correctness or otherwise of the returns filed in pursuance of the notice under section 158BC(a) has to be examined with reference to the material in the possession of the assessing authority having nexus to assessment of undisclosed income which is with the assessing authority, and premise of such proceedings. If the returns filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent modes of assessment, according to us, is that concealment of income and claiming deduction or exemption of taxes in respect of a disclosed income cannot be treated at par. The former is an offence which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the Assessing Officer is free to accept the justification shown or reject the same. The said two types of cases cannot be treated at par. 84. In the case of CIT v. Smt. Usha Tripathi [2001] 249 ITR 41(All.), the Tribunal held that if the books of account or documents found during the search are rejected under the provisions of section 145, there is no question of any income or undisclosed income on the basis of such books of account or documents. The Tribunal also held that under the provisions of section 158BB(1), the Assessing Officer was not justified in estimating the undisclosed income of a period for which there was no detail in any of the seized documents. On appeal filed by the Revenue, the Hon ble High Court held that no substantial question of Law arises out of the order of the Tribunal. In the case of CIT v. Ravi Kant Jain [2001] 250 ITR 1412(Delhi) the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial premises of the assessee on March 25, 1996. A notice under section 158BC was issued for the block period 1-4-1985 to 25-3-1996. It was found that the assessee had not filed returns of income for assessment years 1993-94, 1994-95 and 1995-96. Hence, the Assessing Officer treated the income of these three years as the income of the assessee for the block period. The Tribunal came to the conclusion that the findings of the Assessing Officer regarding undisclosed income were not based on any material found in the search operations and, therefore, there was no reason for treating the said total income as undisclosed income for the purpose of Chapter XIV-B. On Revenue s appeal, the Hon ble High Court observed that they do not find any reason to interfere with the finding of facts recorded by the Tribunal. In the case of CIT v. Vikram A. Doshi [2002] 256 ITR 1292(Bom.), the Assessing Officer assessed in the order under section 158BC certain income that had already been disclosed in the returns of income regularly filed by the assessee. The Hon ble High Court held : The other questions sought to be raised by the Revenue need no consideration as the issues raised therein are based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned Assessing Officer was either not found or available at the premises of the assessee or it was the material or information which the assessee had already disclosed or would have disclosed for the purposes of the Act. The learned Counsel for the assessee further contended that the learned Assessing Officer has himself appended to the impugned order under section 158BC 86 annexures. None of these 86 documents could be said to be materials or information obtained by the Assessing Officer as a result of the search at the premises of the assessee. He, therefore, argued that undisclosed income computed in the impugned order was liable to be deleted for the reason alone that the same could not be subject to an order under section 158BC. The learned Departmental Representative opposed these contentions of the assessee. He argued that during the course of the search, lease agreements were found. Apart from lease agreements, several connected documents were also found. Further enquiries were conducted in connection with these documents and, therefore, the materials gathered and information obtained that has been relied upon in the impugned order was as a result of the search i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced another materials relatable to such evidence. If there is no material pointing towards undisclosed income found during the course of search in the case of an assessee, no extraneous material or information would provide the Assessing Officer, jurisdiction under section 158BC. The learned Counsel for the assessee further argued that the contention of the learned Departmental Representative in this respect were vague and too general. In the impugned order under section 158BC, there was considerable materials and information relied upon by the learned Assessing Officer some of which were already available with the Assessing Officer even before the commencement of the search. Furthermore, in the impugned order, the learned Assessing Officer relied upon large number of extraneous enquiry reports initiated and carried on long after 30-9-1996. The learned Departmental Representative had not even specified as to which special material was found during the period 17-7-1996 to 30-9-1996. 89. On a careful consideration we find considerable force in the contention of the assessee that the regular books of account and supporting material maintained by the assessee in the ordinary course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment under section 158BC. It is for this reason that in the case of Vikram A. Doshi (supra), the Hon ble Bombay High Court held that the transactions disclosed in returns by no stretch of imagination can be said to be undisclosed transactions falling under section 158B and ought to have been assessed in the regular assessment and not in the block assessment. 90. We now address to the second limb of the argument of the learned Departmental Representative that the materials and information available with the Assessing Officer as a result of the investigations conducted by the Department from 17-7-1996 to 30-9-1996 should at least be said to be relating to the search conducted in the case of the assessee. At the outset, we find that this issue cannot be separated from the question as to what evidence was found as a result of search in the case of the assessee. From the various decisions of the Tribunal and Judgments of Hon ble High Courts, discussed by us at length in the foregoing paragraphs, we find that the prime mover must first exist in the materials or information available during the course of search in the case of the assessee. We wish to make it clear that we do not say that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department at various places. The correct facts in this respect as we would shortly see are quite different. Other than the mention of these annual reports being found at the premises of the assessee, we do not find any specific material found at the premises of the assessee being held out against the assessee in the impugned order. 91. On the contrary, we find that the enquiry and investigations, had started well before the commencement of search in the case of the assessee. The Assessing Officer has himself mentioned in the prelude to the impugned order in the second paragraph that the search was a part of All India investigation to unearth fraudulent lease transactions. Further, from the statement of Shri Ajay G. Piramal recorded under section 132(4) on 20-7-1996, it is clear that the search was conducted in the case of the assessee as the Department was of the view that the assessee company had entered into lease transactions in relation to non-existent assets. The following questions and answers in the aforesaid statement dated 20-7-1996 bring home this point:- Q.7 : Are you concerned about the irregularities in payment part as you have stated earlier or other serious irregula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which has done sham transaction with your company i.e. Morarjee Mills in respect of leasing. So, when you will like to take those copies? Ans. : I will collect latest by 23rd July, 1996. It is, thus, seen that the Department had already initiated enquiry and investigation in respect of the lease transactions. It appears that the search in the case of the assessee was carried out with a view to unearth further evidence/material. Had during the course of the search some further evidence been found to confirm the enquiry already made, there could, perhaps, be a case of assessment of undisclosed income under the provisions of section 158BC of the Act. If, on the other hand, no evidence was found during the course of the search in the assessee s own case, but on the basis of enquiry and investigation otherwise carried out by the Department and the Assessing Officer, the Assessing Officer holds the view that the assessee s claim of depreciation allowance should be rejected, the assessment of undisclosed income on that basis cannot be made insofar as the provisions of section 158BC are concerned. We have already pointed out that an order under section 158BC is not a substitute of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. We have given considerable thought to both the contentions of the learned Assessing Officer as well as the learned Counsel for the assessee, with a view to find out whether there is any nexus between the findings of the learned Assessing Officer and the search in the case of the assessee. We do not propose to go, at this stage, into the merits of the case made out against the assessee in the impugned order for the reason that we have already held that the same do not pertain to the domain of proceedings under section 158BC before us. We find it sufficient to say, for the purpose of this appeal before us, that 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. We direct accordingly and allow this appeal. Per Shri A.D. Jain, Judicial Member. The facts pertaining to the case and the circumstances of both the parties have been considered by the learned Accountant Member from Pages 1 to 139 of his order. So, for brevity, they are not being reproduced here. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey stand duly shown in the Panchanama dated 20-7-1996. The search commenced on 19-7-1996. The statement of Shri Mahesh Gupta was recorded on 30-9-1996. The evidence found as a result of search by the Authorities leads to the conclusion that the depreciation allowance claimed by the assessee was a fictitious claim. The assessee entered into 14 Lease Transactions during the block period or during the period relevant to the assessment years 1994-95 to 1997-98. The Assessing Officer concluded that only motive behind this transaction was to avail the benefit of depreciation allowance at the rate of 100 per cent cost of the assets. Pithy documentation was made, including, suppliers bills, Lease Agreements, Board Resolution, Delivery Document, Installation Certificates and No Lien certificates, etc. Thereafter, the final structure of the transaction was arrived at, in a circuitous way. Ostensible payment of consideration for purchase of the asset was shown, in order to claim the ownership thereof. An ingenious mechanism was evolved so as to ensure that the bulk of the purchase consideration reverted to the assessee itself or to Associate Company belonging to Group of Companies of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions are entered into, as none are required. Evidently, no valid commercial transaction came about between the suppliers and the lessees. 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. It was on these enquiries having been conducted that the real intention of the assessee came to the fore. As such, the undisclosed income assessed was directly relatable to the search carried out in the case of the assessee. 6. It was found by the Department that in most of the cases, the suppliers were simply not there. Even any machinery was not proved to have been transported from the supplier either to the assessee or to the lessees. The response of the assessee to the query in this regard was that it was the responsibility of the lessees to take the delivery of the assets. This stand is wholly unsustainable. It is a clear pointer to the actual state of affairs. The depreciation having been claimed by the assessee, it was the assessee who was to prove such facts. Moreover, even the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the documents were sham documents. 8. In view of the above appalling circumstances, it cannot be gainsaid that the eleborate enquiry procedure was carried out during the course of search, and was bearing a most direct connection therewith. The statements recorded in the investigation were shown to the assessee during the course of the proceedings under section 158BC, as recorded in the assessment order. Otherwise also, the assessee was not unaware of the proceedings against it. 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. 9. In view of the above discussion, the appeal stands dismissed. Reference under section 255(4) of the Income-tax Act, 1961 Since there is a difference of opinion via-a-vis conclusions arrived at in IT(SS) A. No. 143/MUM/1997 in the case of The Morarjee Goculkas Spg. Wvg. Co. Ltd. v. Dy. CIT Spl. Rg. 34, Mumbai, involving Block Period 1-4-1985 to 18-7-199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m assessment years 1987-88 to 1993-94, disallowing the depreciation of ₹ 34,11,36,758 and interest of ₹ 5,01,81,901 aggregating to ₹ 39,13,18,659. The details are as under: Sl. No. Asst. Year Depreciation Disallowed Interest Disallowed Total 1. 1994-95 ₹ 2,14,61,000 - Rs. 2,14,61,000 2. 1995-96 ₹ 25,87,93,435 ₹ 1,47,79,935 Rs. 27,35,73,370 3. 1996-97 ₹ 6,08,82,323 ₹ 2,48,46,679 Rs. 8,57,29,002 4. 1997-98 - ₹ 1,05,55,287 Rs. 1,05,55,287 ₹ 34,11,36,758 ₹ 5,01,81,901 Rs. 39,13,18,659 3. The said disallowance of depreciation and interest are disputed by the assessee, inter alia, on the ground that no material was found in the search, which could lead to an inference that the assessee s claim for depreciation was disallowable. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the transaction was arrived at, in a circuitous way, that ostensible payment of consideration for purchase of the asset was shown, in order to claim the ownership thereof, that an ingenious mechanism was evolved so as to ensure that the bulk of the purchase consideration reverted to the assessee itself or to Associate Company belonging to Group of Companies of the assessee, that noticeably, the payment and reclamation of the bulk of the purchase consideration was simultaneous, for which purposes, bank accounts were opened at the bank of the assessee in the names of the supplier of the assets, as well as the assessee itself, that lease Agreements having been executed, cheques in favour of the supplier were issued by the assessee; that pertinently, the transfer of the entire amount from the suppliers accounts to those of the lessees came about on the very same date, by way of issuance of cheques by the lessees to the suppliers; that on their turn, the lessees channelled about 80 per cent of the purchase consideration to the assessee in most of the cases, that in some of the cases, such channelisation was to a company belonging to the assessee s Group of Companies, that this re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orming part of the official record of the assessee company. He further submitted that the return of total income for and up to the assessment year 1995-96 were due and were duly filed prior to the date of search (for assessment year 1994-95 on 30-11-1994 and for assessment year 1995-96 on 30-11-1994) and assessments had also been completed for the assessment year 1993-94 on 27-12-1995. Return for assessment year 1996-97 had not filed as the return was no even due on the date of search and in view of the decision of Supreme Court in the case of CIT v. Mahendra Mills [2000] 243 ITR 561, the assessee might or might not have claimed depreciation as it was not obligatory claim to be made. An item expended was to be allowed when it was claimed and therefore disallowance of sum of ₹ 6,08,82,323 pertaining to the purported claim of depreciation for assessment year 1996-97 is also misconceived and contrary to law. It is submitted that for the assessment year 1997-98 also the return had not become due on the date of search and therefore the claim of depreciation and interest of ₹ 1,05,55,287 thereon was not undisclosed income of the assessee. It is further submitted that no indis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the definition of undisclosed income in section 158B(b), it is submitted that the income or property, which has been disclosed or which would have been disclosed for the purpose of this Act shall not form part of the undisclosed income and before an attempt is made to hold that the amount has not been disclosed, it is necessary to establish that any property which would include money, valuable articles or a thing has been found or detected as a result of search or any other income based on any entry in the books of account or other documents or transactions, which has not been disclosed or which would not have disclosed for the purpose of this Act, has been found and has not been disclosed. Reliance was made on the decision of Calcutta High Court in case of Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 5621wherein the details of loan creditors were furnished in the regular assessment itself and it was held that the department was not entitled to question them in the block assessment. It was observed that the block assessment is not a substitute for regular assessment and they should be considered in the regular assessment and not in the block assessment. The Revenue s case be submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nating evidence, as the word used in section is other material as relatable to such evidence . The assessee has not filed lease agreement in the assessment proceedings which came to knowledge of the department only during the search and seizure proceedings. The learned DR further submitted that the search was concluded on 22-9-1996, the day on which the last action of the search was executed. On the basis of that inquiry, it is proved beyond doubt that the claim of depreciation made by the assessee was bogus one and therefore, the assessment under Chapter XIV-B cannot be challenged on that ground. He referred to certain decisions based on which it was submitted that circumstantial evidence is sufficient to make the assessment. In one of the case, a document (gift-deed) was found during the course of search. On further inquiry as bogus and it was held to be sufficient to make the addition under this Act. Reliance is also placed on the cases of CIT v. Ajay Kumar Sharma [2003] 259 ITR 2401(Raj.) and the assessee in the case of CIT v. Elegant Homes (P.) Ltd. [2003] 259 ITR 2322(Raj.), which are the cases of cash credit which was found to be bogus on the basis of material seized in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e found as a result of search or requisition of books of account or other documents and such other materials or information as are available 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 and provided in clauses (a) to (f) of section 158BB(1). What is crucial to be determined is that the undisclosed income which can be assessed under Chapter XIV-B should be that amount which is computed on the basis of evidences found as a result of search and such other material or information as are available with the Assessing Officer and relatable to such evidence. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded during the search, could be made in the block assessment. 10. Similar view is taken by the Indore Bench of the Tribunal in the case of Indore construction (P.) Ltd. v. Asstt. CIT [1999] 71 ITD 128wherein it was held that- Such computation should be on the basis of evidence found as a result of search or requisition of books of account or documents and such other material or information as are available with Assessing Officer. It is important to note that the words used are such other materials . The Legislature has not used words any other materials . The word such has been defined in Black s Law Dictionary, Sixth Edition as under : Such of that kind, having particular quality or character specified. Identical with, being the same as what has been mentioned. Alike similar, of the like kind. Such represents the object as already particularized in terms which are not mentioned, and is descriptive and relative word, referring to the last antecedent . Again the word used in the section are as are available the expression available has been defined to mean in Black s Law Dictionary, Sixth Edition as present or ready for immediate use . 11. Observation given by the Mumbai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found out by the Department as a result of search or requisition of books and details as provided under section 132 of the Income-tax Act. Thus, there are two elements to be satisfied so as to be treated as undisclosed income for purposes of this Chapter, i.e., the factum of non-disclosure should be existing, and the said non-disclosure on the part of the assessee should have been blown out as a result of search or requisition of books, etc., under section 132 of the Act. It naturally follows therefore that wherever the assessee has disclosed necessary information and details regarding income or expenses or credit or property in the returns of income or in the statements accompanying the returns or even if the books of account based on which returns would be filed contain those details, assessee gets away from the clutches of non-disclosure in respect of that income or property etc. because those materials are already available even in the absence of any recourse to search operations under section 132. 13. The statement of Shri Mahesh C. Gupta was recorded on 30th September, 1996 can be taken into consideration only when it was recorded during the course of search. No evidence has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be construed as reference to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. 15. In view of the specific insertion of section 68 for making the assessment under Chapter XIV-B, this decision would not be any help to the Revenue for supporting the addition for disallowance of depreciation for which there is no material found during the course of search. 16. In the case of Ajay Kumar Sharma (supra) another case before the Jaipur Bench of the Rajasthan High Court, the cash credit addition was upheld which were found to be bogus on examination of creditors. There also the High Court observed that merely because some entries in the books of account if shown, that does not prohibit the Assessing Officer to tax that amount in the block period, if that amount has not been taxed in the regular assessment. When the cash credits are not taxed in the relevant assessment years, that can be treated as undisclosed income and can be taxed after search in the block period. This case is also on the similar line as was in the case of Elegant Homes (P.) Ltd. (supra). These two decisions, therefore, in my opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Revenue to disallow the depreciation claim of the assessee to retain the assessment of the rental income from these very transactions, unless a finding is recorded that assessment of rental income is also not in accordance with law and facts of the case. 19. 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 20. This appeal is accordingly to be allowed. Per K.S.S. Prasad Rao, Judicial Member The above appeal is filed by the assessee having been aggrieved by the assessment order dated 31-7-1997 passed by the Assessing Officer. Since there is a difference of opinion between the Members constituting the Bench, the following questions were referred to the Hon ble IIIrd Member: - 1. Whether on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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