Vildirect: IncomeTax-caselaws-1977-VIL-04-ITAT-

1977-VIL-04-ITAT-

Equivalent Citation: ITD 065, 108,

Income Tax Appellate Tribunal MADRAS

Date: 12.06.1977

R. RAMANATHAN.

ASSISTANT COMMISSIONER.

BENCH

Member(s) : C. L. BOKOLIA., G. CHOWDHURY.

JUDGMENT

Per Shri G. Chowdhury, Judicial Member --- This is a first appeal by the assessee against the order of assessment dated 30th July, 1996 passed under section 143(3) read with section 158BC of the Income-tax Act, 1961 for the block assessment years 1986-87 to 1996-97. The assessee has been carrying on business in jewellery at Chidambaram. There was a search in the residential house and business premises of the assessee on 12-7-1995 and 13-7-1995. The Assessing Officer found some jewellery and other materials during the course of search. A notice under section 158BC was issued to the assessee and in response to the said notice, the assessee filed a return of undisclosed income in Form No. 2B admitting income of Rs. 13,98,690, the details of which are as under :----

(a) Investment in VRS Engineering College

during the assessment year 1994-95 Rs. 10,00,000

(b) Unexplained investment in gold during

the assessment year 1996-97 Rs. 21,93,450

(d) Advances on Pronotes Rs. 2,70,000

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Rs. 36,69,926

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Out of the above, the assessee claimed deduction on account of shortage of stock in the shop amounting to Rs. 22,71,232. The balance of Rs. 13,98,694 was offered as undisclosed income of the assessee. Before finalisation of the assessment under section 158BC, the proposed assessment order was sent to the Commissioner for his approval. The Commissioner's approval dated 25-7-1996 is available at pages 20 to 23 of the paper-book submitted on behalf of the assessee. The assessment was framed on 30th July, 1996 by the Assistant Commissioner, Circle I(1), Pondicherry. Additions were made on various heads by the Assessing Officer. Some of the income offered was accepted by the Assessing Officer.

2. Before us the assessee is aggrieved mainly on two grounds. The first ground is with regard to the addition on account of interest on fixed deposits. The discussion by the Assessing Officer on account of this addition is as follows :-----

" The assessee is accepting deposits from public. The total deposits received by the assessee as on 23-2-1995 has been worked out at Rs. 94,15,230 by the ADI. The assessee is admitting the deposits as creditors in his books of account and also in the statement filed along with the return of income for the past 10 years. On enquiry it is found that the deposits are genuine. But on verification it is found the entire deposits received by the assessee is not wholly utilised for the purpose of the business. A part of the deposits have been diverted to close relatives in the form of loans wherefrom he has collected lesser rate of interest. When this was pointed out to the assessee's representative, the representative has stated that the assessee has agreed to offer 10 per cent of interest payment as not relating to business. The assessee has agreed for disallowance of 10 per cent of such excess interest claim from 1986-87 to 1995-96 and offer for the block assessment. This is separately given in annexures to the assessment order for each assessment year."

For the different years the Assessing Officer has annexed different annexures alongwith the order. From the assessment years 1986-87 to 1990-91 in the Annexures I to V, it has been mentioned by the Assessing Officer that as agreed by the assessee, interest payment to the extent of 10 per cent is disallowed. In the annexure for the assessment year 1991-92 it has been mentioned that the total income for this year was adopted as per revision order, but 10 per cent of the interest payment claimed by the assessee was disallowed as per the orders of the Commissioner (Appeals)-III, Madras. The departmental appeal before the Tribunal is pending. For the assessment year 1992-93 in Annexure VII, it has been mentioned that interest disallowance at the rate of 10 per cent has already been made in the regular assessment order. Therefore, the disallowance of interest is not considered for block assessment. The learned counsel for the assessee has further brought to our notice the comment of the Commissioner while giving approval for assessment, which is as follows :---

"It has been found that the assessee has advance money for non-business purpose, on which he charged lesser interest or no interest. For the assessment year 1991-92, the matter was considered by the Commissioner of Income-tax (Appeals) and it was held that 10 per cent of the interest payment made by the assessee is not relatable to the business of the assessee. The decision was accepted by the Department, though the assessee has preferred an appeal against the decision before the Income-tax Appellate Tribunal which is pending. In order to take consistent stand 10 per cent of the interest payment made by the assessee for the previous year relevant to the assessment years 1986-87 to 1995-96 will be disallowed as not relating to business of the assessee. For the assessment year 1996-97, the Assessing Officer shall disallow 10 per cent of the interest debited in the books up to the date of search. This will duly be considered in the proposed block assessment."

The learned counsel for the assessee heavily relied on the approval order of the Commissioner and submitted that it was found by the Commissioner that 10 per cent of the interest payment made by the assessee was disallowed during the earlier years. Further it was found that this decision was accepted by the department, although the assessee has preferred appeal against the disallowance of 10 per cent for the assessment year 1991-92. It was further submitted that the order of disallowance on this issue passed by the Assessing Officer on the ground that the assessee agreed to the disallowance is also not correct and not borne out of records. It was submitted that the Commissioner has approved the addition only on the ground to maintain a consistent stand for all the years. At no point of time the assessee had agreed for such disallowance, which is an error of record. It was submitted that pursuant to the Commissioner's approval the disallowance was made during the block assessment years except 1991-92 and 1992-93, because those two years are subject-matter of appeals pending before the Tribunal. It was further submitted on behalf of the assessee that while 90 per cent of the interest payment has already been admitted by the department during the assessment years 1991-92 and 1992-93, for the remaining 10 per cent disallowance, the addition cannot be said to have been made out of undisclosed income and it is a matter of record that the income has already been disclosed by the assessee during some of the years under consideration, which was subject-matter of regular assessment and pending before the Tribunal. It has been submitted that for the purpose of making addition by way of assessment under section 158BC this kind of addition cannot be termed as undisclosed income.

3. On the other hand, the learned departmental representative has supported the order of assessment and brought to our notice the definition of the words 'undisclosed income' as prescribed in section 158B of the Act. It was submitted that the definition is inclusive in nature and includes any money, bullion, jewellery or other valuable articles or thing or any income based on any entry in the books of account which has not been or would not have been disclosed for the purpose of the Act. Therefore, it was submitted that the Assessing Officer was correct in making disallowance of the interest payment and adding the same as undisclosed income. It was further submitted that since the disallowance was already available during the earlier years, the material for making addition as undisclosed income was available to the Assessing Officer, which covers the definition of undisclosed income.

4. We have heard both the sides and perused the materials available on record. Before we enter into the facts of the present case, the background of the block assessment should be considered first. Chapter XIV-B is a special procedure for assessment of search cases, which has been incorporated by the Finance Act, 1995 with effect from 1-7-1995. The object of the special provision is reflected in the Budget Speech of the Finance Minister as follows :----

"Hon'ble Members are aware that the searches conducted by the Income-tax Department are an important means of unearthing black money. However, undisclosed incomes have to be related to the different years in which the income was earned and as such assessments are unduly delayed. In order to make the procedure more effective, I am proposing a new scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent. An appeal against the order can be filed directly before the Income-tax Appellate Tribunal."

From the aforesaid Budget Speech it appears that the scheme was evolved with a view to unearth black money by which undisclosed income may be detected at the time of search. What is undisclosed income has been defined in section 158B(b) of the Income-tax Act as follows :---

" 'Undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act."

From the aforesaid definition it is clear that the source of undisclosed income may be valuable article or thing. The income may be based on any entry, in the books of account or other documents which represent wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act. Therefore, the vital point which emerges from the special provision of assessment in search cases is that the assessment should be made with regard to the undisclosed income. Section 158BA deals with assessment of undisclosed income as a result of search. Section 158BB prescribes the computation of undisclosed income of the block period. Section 158BC provides the procedure for block assessment. Section 158BD is the provision for undisclosed income of any other person. In that view of the matter, one thing is clear that the assessment under the special provision has to be made on the basis of undisclosed income only. It is a settled principle of law that a reasonable construction of the taxing statute should be followed as held by the Supreme Court in the case of Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402. In the present case we do not find any ambiguity in the different provisions of the Act to understand that the special procedure was laid down for the purpose of assessment of undisclosed income.

5. Now, in the aforesaid context let us examine the facts of the present case. For the assessment years 1986-87 to 1990-91, the Assessing Officer has made the addition as follows :----

"As agreed by the assessee interest payment to the extent of 10 per cent is disallowed on the total interest of Rs. 7,04,388 ... Rs. 70,439."

From the annexures pertaining to the assessment years 1991-92 to 1992-93 it appears that the Assessing Officer was conversant with the fact that similar disallowance had already been made in the regular assessment and the issue is pending before the Tribunal out of those regular assessments. Therefore for those two years no additions were made in fact on this ground, although a minor addition of Rs. 281 has been made for the assessment year 1991-92 as a difference between the proposed block assessment and the revisional order on the basis of Commissioner (Appeals)'s order. For the other years, as we have already found the addition was made on the ground that the assessee agreed to such addition. This has been denied by the Assessing Officer that there was no such agreement on behalf of the assessee. The Commissioner's approval on this issue has already been quoted above, from where we find that the Commissioner noticed the fact that the same issue is pending before the Tribunal out of the regular assessment for the assessment year 1991-92. Therefore in order to take a consistent stand 10 per cent disallowance was directed to be made out of the interest payment made by the assessee for the previous years. We do not find anything there to gather the impression that the assessee had agreed to such an addition. We do not find any whisper in the approval that even in the draft proposal the Assessing Officer proposed to make the addition on the basis of agreement with the assessee. It appears that the contention raised on behalf of the assessee is correct that there was no such agreement for making addition. Pursuant to the order of approval passed by the Commissioner the Assessing-Officer made disallowances on the ground that the assessee agreed to such disallowance, which in our opinion is not correct. It is an error of record. The learned departmental representative could not controvert the stand taken by the assessee. Further we find that the disallowance of 10 per cent out of the interest payments claimed by the assessee had already been made in the regular assessments for the assessment years 1991-92 and 1992-93, on the basis of which the present disallowance has been made for the other years of the block period. It is correct that 90 per cent interest payment has already been accepted by the department and only 10 per cent has been disallowed during the assessment years 1991-92 and 1992-93. Therefore, following the orders of assessment for those two assessment years the Commissioner with a view to take consistent stand directed the Assessing Officer to disallow 10 per cent of interest payment up to the date of search. We do not find any material to hold that it is an undisclosed income for the purpose of assessment under section 158BC, because according to the definition of undisclosed income, as we have already noticed it should be such an income which has not been or would not have been disclosed for the purpose of this Act, whereas the present disallowance has already been made during the assessment years 1991-92 and 1992-93. This kind of income, in our opinion, cannot be said to be an undisclosed income and further the Assessing Officer has wrongly assessed the income as agreed by the assessee. In that view of the matter we are of the opinion that this addition cannot be sustained.

6. The next ground of appeal is with regard to the addition arising out of the income from unaccounted sales. During the course of search of the business premises deficit stock in gold and silver jewellery was found. It was found by the Assessing Officer that unaccounted sales were noticed in the bunch of loose slips which was accounted by the assessee. There were no dates in the slips. According to the Assessing Officer, the total turnover came to Rs. 12,07,720 and unaccounted sale was worked out to Rs. 7,36,633 as per the annexures attached to the assessment orders. The Assessing Officer relied on the statement of the assessee wherein he has stated that 50 per cent of sales has been entered in the account books and the other 50 per cent being kept outside the books. On the basis of the said statement addition of Rs. 2,68,235 was made as profit on unaccounted sale of jewellery.

7. The learned counsel for the assessee has submitted before us that the Assessing Officer has made the following additions on account of unaccounted sales of jewellery :-----

1993-94 . . . Rs. 9,53,539

1994-95 . . . Rs. 4,68,422

1995-96 . . . Rs. 4,31,842

1996-97 . . . Rs. 2,68,235.

Out of these additions, the Commissioner has given approval for the addition of Rs. 2,68,235 only for the assessment year 1996-97. It has been clearly stated by the Commissioner that no separate addition is required to be made in respect of the unaccounted sales as per the slips found, during the course of search, as discussed in the preceding paragraphs. The relevant portion of the order of the Commissioner is quoted below :---

"On the facts of the case, the proposal of the Assessing Officer as regards the adoption of the gross profit of Rs. 2,68,235 on unaccounted sale represented by deficit in the stock of gold and silver is approved. No separate addition is required to be made in respect of the unaccounted sale as per the slips found during the course of search and as discussed in the preceding paragraph."

The learned counsel for the assessee has submitted that since there was no approval from the Commissioner for the addition, the addition cannot be sustained. Our attention was drawn to the provisions of section 158BG by which it is provided that the assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner provided that no such order shall be passed without the previous approval of the Commissioner. It has been contended that the previous approval of the Commissioner was the condition precedent to make an assessment under the special provision. The learned departmental representative, on the other hand, supported the assessment order and submitted that the assessee has admitted 50 per cent suppression of sales. Therefore, the addition is correct. Further it was submitted that no approval is required for a particular addition under section 158BG of the Act.

8. On going through the materials available on record we find that the contention of the assessee is correct. As we have already noticed above, the Commissioner has approved for the addition of Rs. 2,68,235 only and it has been mentioned there that no separate addition is required to be made in respect of the unaccounted sales as per the slips found in the course of search as discussed above. The provision of section 158BG by which it has been provided that no such order shall be passed without the previous approval of the Commissioner is mandatory and which in our opinion goes to the root of the order. If an addition in the block assessment is not supported by the approval of the Commissioner, the same cannot be sustained in law because an assessment order includes various additions. In that view of the matter in our opinion this issue should be reconsidered by the Assessing Officer again. Therefore, we remit this issue back to the Assessing Officer for fresh consideration in the light of the discussion made above. While doing so the Assessing Officer shall give opportunity of hearing to the assessee.

9. The last issue which is relevant for the assessment year 1996-97 only is with regard to the correct amount of deduction on account of deficit in gold and silver. In Annexure XI of the assessment order the amount for deduction on account of this has been mentioned as Rs. 20,64,848, which according to the assessee should have been Rs. 21,42,425. After hearing both the sides, we direct the Assessing Officer to verify the figure from the records of the case and rectify the mistake accordingly.

10. In the result, the appeal is partly allowed

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