1998-VIL-122-ITAT-BLR
Equivalent Citation: ITD 067, 446, TTJ 063, 701,
Income Tax Appellate Tribunal BANGALORE
Date: 17.03.1998
MICRO LAND LTD.
Vs
ASSISTANT COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : P. K. AMMINI., S. BANDYOPADHYAY.
JUDGMENT
Per S. Bandyopadhyay, A.M. - The instant appeal has been filed by the assessee M/s. Microland Ltd., a limited company which was incorporated during 1989-90, against the assessment order passed by the Assessing Officer under Chapter XIV-B of the Income-tax Act, in respect of block assessment years stated to be from 1986-87 to 1996-97. The facts of the case as discussed by the Assessing Officer in detail in the impugned assessment order, may be summarised as below. However, with regard to certain aspects of the facts, the assessee has different versions, to which we shall advert at relevant places, later on.
2. The assessee-company is stated to be engaged in buying and selling computer hardwares and also in networking. From the records however, it appears that this was the main business of the assessee. As per the Assessing Officer, the business premises of the assessee-company were searched under section 132 of the Income-tax Act, 1961,on 29-3-1996 and that the search was finally concluded on 23-5-1996. The assessee has tried to draw our attention to several points with regard to different aspects of the search, to which we shall refer at appropriate places.
In the assessment order passed by the Assessing Officer on 30-5-1997, the Assessing Officer states that during the search proceedings it was noticed that the assessee had claimed 100% depreciation on certain assets like Industrial Gas Cylinders, Solar Testing Plant, etc., claimed to have been purchased by the assessee from different parties for a total consideration of 445.30 lakhs. All these assets, were shown by the assessee as having been leased to M/s. Miga Gases (P.) Ltd., and certain other parties, as detailed below: -
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Sl. Name of the Name of Invoice Invoice Nature of
No. supplier the Lessee Date Value the Asset
-----------------------------------------------------------------------
1. DDK Industries. Miga Gases (P.) 10-3-1994 4805000 Industrial
B'lore Ltd., B'lore Gas
Cylinders
2. -do- -do- 23-9-1994 4030000 -do-
3. MM Industries, -do- 15-9-1995 5266280 -do-
Hosur
4. -do- -do- 15-9-1995 15628960 -do-
5. Tamil Nadu Tamil Nadu 17-9-1994 7800000 46.7 kg.
Oxygen, Madras Air Products water
(P.) Ltd., cylinders
Madras
6. Vishakha Savik Vijai 12-3-1994 4200000 Shunt
Electricals Engg. (P.) capacitors
(P.) Ltd., Ltd. B'lore
B'lore
7. Akshay Tejus Solar 9-9-1994 2800000 Solar
Engineering, (P.) Ltd.,Total Testing
B'lore B'lore Plant
-----------
Rs. 4,45,30,240
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3. The Assessing Officer states thereafter that on an examination under oath, during the course of a search proceeding carried on in the case of M/s. Miga Gases (P.) Ltd., during the period from March to May'96, Mr. Krishna Mohan, the Managing Director of the said company had admitted that the entire lease transactions of the assessee with them were merely paper transactions and that actually no cylinders had been received by M/s. Miga Gases from the assessee. The Assessing Officer also mentions that similarly Sri Prasanna Kumar, the Managing Director of M/s. Tejus Solar (P.) Ltd., also stated that the lease transaction of the assessee with that company was also not genuine. The assessee, however, contended before the Assessing Officer that the lease transactions were genuine and also properly supported by various documents.
The Assessing Officer states thereafter that based on the search proceeding and the seized materials, a notice under section 15 8BC of the Income-tax Act, 1961 was issued to the assessee on 9-7-1996 requiring it to file the return of income for the block period ended on 29-3-1996 in the prescribed form within 16 days from receipt of the said notice. The assessee not only asked for time to file the return, but also by a letter dated 8-8-1996, demanded from the Assessing Officer the reasons for issue of the notice under section 158BC. The Assessing Officer states that thereafter a letter dated 20-8-1996 was issued to the assessee explaining the reasons for issue of the notice under section 158BC. The assessee was also asked to show cause why penalty should be levied on it under section 271(1)(b) of the Income-tax Act, 1961.
An examination of this letter of Assessing Officer dated 20-8-1996, however shows that no mention was made in this particular letter about the lease transaction with M/s. Miga Gases or other concerns and that it was simply stated therein in a general manner that the burden of proving to the satisfaction of Assessing Officer that any undisclosed income had already been disclosed in the returns of income filed by the assessee before the commencement of the search, lay with the assessee. It was, however, not at all mentioned as to what exactly constituted undisclosed income of the assessee.
4. In response to the said letter, the assessee filed a letter dated 31-8-1996 submitting that since no valid search and seizure proceeding had been effected in the case of the assessee under section 132, the assessee was not liable for filing the return under section 158BC. In the said letter, it is found to have been mentioned by the assessee that all entries/transactions found in the seized materials were transactions which had been carried on by the assessee during the course of its regular business through the banking channels and that the same had also duly been recorded in the regular books of account of the assessee which had again duly been audited by the statutory auditors. The letter also mentioned that no undisclosed article or thing was found out by the Deptt. during the course of search and seizure proceedings in the premises of the assessee.
The Assessing Officer issued another letter on 9-9-1996 asking the assessee to file the return of income under consideration on or before 18-9-1996. In response to the same, the assessee-company filed the return of income for the block period in Form No. 2B, on 30-9-1996 admitting NIL undisclosed income for the block period.
5. On receipt of the aforesaid return of income for the block period, a show cause letter dated 8-10-1996 is stated to have been issued by the Assessing Officer along with notice under section 143(2) posting the case for hearing on 23-10-1996 at 10.30 AM. In this letter, the assessee was asked to show cause as to why the claim towards 100% depreciation in respect of lease transactions (four in number) with M/s. Miga Gases (P.) Ltd., should not be disallowed. The assessee was also asked to furnish the present full postal addresses of the suppliers of gas cylinders and also of the lessees thereof. The full details of sales tax, excise duty, etc., paid on these cylinders by the suppliers were also asked to be furnished. The Assessing Officer also wanted the assessee to furnish confirmation letters from the suppliers for having genuinely supplied the cylinders, if at all, as per the invoices. Along with the same, the assessee was also asked to furnish details of any other lease transactions entered into by the assessee along with similar details in respect of each such transactions. The Assessing Officer also mentioned in the said letter that during the course of investigations conducted by the IT. Deptt, it had been found that under section DDK Industries and M/s. M.M Industries were 'non-existing' and 'non-operating' concerns of one Mr. Krishna Mohan who was also the Managing Director of M/s. Miga Gases (P.) Ltd. It was furthermore mentioned that Sri Krishna Mohan, in his statements recorded on oath on various dates had confirmed that neither M/s. DDK Industries/MM Industries had supplied any cylinders shown (as in their invoices issued to the assessee-company) nor M/s. Miga Gases (P.) Ltd., had received any cylinders on account of the aforesaid lease transactions. A reference was also made about some statements of Sri Krishna Mohan about the entire transactions having been nothing but paper transactions entered for the purpose of accommodation and also that the entire money paid by the assessee to M/s. DDK Industries/MM Industries having been remitted back to the assessee-company through M/s. Miga Gases (P.) Ltd., as lease rental advances, after retention of the commission of Sri Krishna Mohan for having accommodated the transactions. It was stated therein that copies of the statements recorded from the above persons would be shown to the assessee at the time of hearing. It is worth mentioning in this connection that no papers containing the aforesaid statements of Sri Krishna Mohan prior to 8-10-1996 were brought on record by the Assessing Officer or relied upon by him in the assessment order or even supplied to the assessee also. It is also worth mentioning in this connection that apart from the four lease transactions with M/s. Miga Gases (P.) Ltd., mention of no other lease transaction of the assessee, was made in the aforesaid letter dated 8-10-1996.
In response to the aforesaid show cause letter, the assessee filed a letter asking for time. On 11-11-1996 again, the assessee filed a further letter in which the genuineness of the lease transactions was asserted on the ground that the purchase of the cylinders and also the lease transactions stood evidenced by legally enforceable documents like invoices, delivery notes, agreements, inspection certificates, etc., that certain all India financial institutions and banks had financed those transactions and also that the so-called statements of Sri Krishna Mohan of M/s. Miga Gases (P.) Ltd., insofar as they were contrary to the facts borne by the books of account and records maintained by the assessee were self-serving and not binding on the assessee and, therefore, no reliance should be placed on such statements. Along with the aforesaid letter, the assessee also furnished copies of invoices, agreements, certificates from the lessees for receipts of the assets and installation of the same at their premises.
The Assessing Officer states that the assessee however did not appear before the Assessing Officer. The Assessing Officer also mentions that summonses under section 131 were issued successively to Sri Pradeep Kar, the Managing Director of the assessee-company but that he did not turn up on the pretext of visiting USA and that till the end of February 1997, there was no response from the assessee at all.
6. Thereafter, the Assessing Officer wrote another letter dated 19-2-1997 to the assessee asking the assessee to produce the full postal addresses of the suppliers and of the lessees, the details of sales tax, etc., paid by the suppliers and also confirmation letters from the suppliers, etc. In the said letter, the Assessing Officer said that the statements recorded from the lessees by the Deptt, showed that the assets wherever they were in existence in the premises of the lessees were not the assets received from the so-called suppliers or from the assessee and furthermore that the lessees had admitted that such assets were owned by the lessees in their business and that the lessees were still claiming depreciation on such assets in their books. However, a thorough scrutiny of the materials on record shows that no copy of the above statement alleged to have been made by the lessees was supplied to the assessee at any stage.
7. A further letter dated 6-3-1997 with attention to Sri Pradeep Kar, Managing Director was issued to the assessee by the Assessing Officer, proposing the disallowance of claim of depreciation on the bogus transactions, as the assessee-company:
(a) had failed to obtain any fresh confirmation letters from the suppliers/lessees;
(b) failed to explain/furnish the whereabouts of the suppliers;
(c) failed to show the existence of assets, etc.
In the said letter again, it was stated by the Assessing Officer that during the investigations conducted by the Deptt., it had been found that both M/s. DDK Industries and M/s. M.M Industries were non-existing and non-operational during the relevant period, i.e., 1992-93 to 1995-96, and also that the concerns/their proprietors/partners were not traceable. It was furthermore mentioned that Sri Krishna Mohan, the Managing Director of M/s. Miga Gases (P.) Ltd., had categorically denied the receipts of any cylinders either from M/s. DDK Industries/MM Industries or from the assessee on account of the lease transactions with M/s. Miga Gases. Reference was also made to a letter of Sri Krishna Mohan dated 14-2-1997 in which it is said to have categorically been stated by Sri Krishna Mohan that all the lease transactions entered into between M/s. Miga Gases (P.) Ltd., and the various lessors based on invoices of M/s. DDK Industries/ MM Industries, were also bogus and non-genuine and that accommodation in that regard had been given at the specific request of the assessee. Sri Krishna Mohan was also stated in the said letter to have admitted that all the cylinders which had been claimed by the assessee to have been inspected, actually belonged to M/s. Miga Gases and still continued to be in its books as its owned assets and did not form part of the lease transactions with M/s. Miga Gases. It was also stated in the said letter of the Assessing Officer that M/s. Tejus Solar Ltd., had already admitted that the sale/lease of solar test equipment was not genuine and was nothing but paper transaction. An extract from the aforesaid letter of Sri Krishna Mohan dated 14-2-1997 addressed to the Assessing Officer was annexed along with this letter of Assessing Officer dated 6-3-1997. The said extract is being reproduced below:
"I once again confirm that all the supplies of industrial gas cylinders by M/s. DDK Industries, 61 G.M. Palya, Behind BEML, Bangalore -75/MM Industries, Thali Road, Hosur, Tamilnadu are not genuine and are nothing but paper invoices only. I also state that both these concerns were non-existing and non-operating during the period, i.e., 93-96. I further confirm that all the lease transactions entered into between Miga Gases (P.) Ltd., and all the lessors based on the invoices obtained for D.D.K. Industries and MM Industries are also non-genuine and are nothing but accommodative transaction given at the specific request of the concerned lessors and their representatives.
I once again reiterate to your honourable self and plea mercy for my act of entering into non-genuine lease transactions which were entered into out of ignorance, and accord mercy to me on humanitarian grounds in not initiating any penalties and prosecution proceedings against me."
This entire letter of the Assessing Officer dated 6-3-1997 along with the copy of the enclosure has also been annexed by the Assessing Officer to the assessment order as Annexure-1.
8. Along with the issue of the aforesaid letter dated 6-3-1997, the hearing of the case was posted on 14-3-1997 at 11.30 AM. Necessary summons under section 131 and also notice under section 143(2) were issued.
On 14-3-1997, the assessee filed a reply letter enclosing the copies of lease agreements, invoices, delivery challans, etc. (which had been filed earlier also), but failed to obtain any fresh confirmation, etc., from the lessees/ suppliers. In the said letter, the assessee also emphasised on the points like that the lease rentals on the lease transactions were being continued to be paid till date thus removing any iota of doubt about the genuineness of the transactions and that the letter of Sri Krishna Mohan could not be relied upon and in any case was not binding on the assessee. The assessee also wanted the Assessing Officer to summon under section 131, a large number of parties like the proprietors of M/s. DDK Industries/MM Industries, Commercial Tax Officers in respect of M/s. Miga Gases, M/s. DDK Industries and M/s. MM Industries, etc., financial institutions certifying genuineness of the financing arrangements, and the private consulting party M/s. Ramba Hydrogen (P.) Ltd., which had conducted a survey and issued inspection certificate, the Chartered Engineers, M/s. Bhusan Associates which had also issued inspection certificates, the Chartered Accountants M/s. Prabhat P. Bhat & Co., which had also issued an inspection certificate regarding the cylinders and also the bank officials of the banks in which the cheques had been encashed by M/s. DDK Industries, M/s. MM Industries, M/s. Tejus Solar (P.) Ltd., etc. The assessee also stated therein that once the verification of the above persons would be completed, the assessee would request the Assessing Officer to summon Sri Krishna Mohan for cross-examination purpose. A copy of this letter of the assessee dated 14-3-1997 stands annexed to the impugned assessment order as Annexure-2.
9. The Assessing Officer issued a letter dated 14-3-1997 to the assessee along with notice under section 143(2) and summons under section 131. This letter has also been annexed by the Assessing Officer to the assessment order as Annexure-3. The Assessing Officer mainly discussed in the said letter that although the assessee had been asked to furnish fresh confirmation letters from both the suppliers as well as the lessees for the purpose of proving the genuineness of the lease transactions, the assessee, however, failed to do the same. The Assessing Officer also stated in the said letter that although the assessee had enclosed along with its letter of the same date, certain copies of confirmation letters having been issued by different parties, the said confirmation letters however stood withdrawn by the concerned lessees. (In this connection, we want to mention that no papers are on our record to show that the confirmation letters issued by the lessees earlier were actually withdrawn by them at any stage). The Assessing Officer furthermore referred to the promise of the assessee that a fresh confirmation from Sri Krishna Mohan would be made available shortly. The Assessing Officer again stated that as per the departmental records and information, the assets were not found at the time of search of the premises of the lessee. The Assessing Officer asked the assessee to produce any evidence in support of existence of the assets in the premises of the lessee. The Assessing Officer reiterated that to prove the genuineness of the assets stated by the assessee to have been received from M/s. DDK Industries /M/s. MM Industries confirmation letters from such parties would be necessary. The Assessing Officer also stated that summonses to Sri Krishna Mohan and some of the local lessees were being issued by him requiring them to appear before him on 21-3-1997. The Assessing Officer wanted the assessee also to be present on 21-3-1997 in case it wanted to cross-examine such parties.
10. In response to the abovementioned letter of the Assessing Officer dated 14-3-1997, the assessee filed another letter dated 15-3-1997 (annexed to the impugned assessment order as Annexure-4). This letter was, however, actually filed in the office of the Assessing Officer on 21-3-1997. In this letter also, the assessee reiterated its earlier stand about genuiness of the lease transactions. It was furthermore stated therein that the assessee was neither the supplier nor the dealer of the equipments leased out and that the essential function of the assessee in the capacity of the lessor of the lease transactions was to purchase the equipments selected by the lessee, from the supplier who had been designated by the lessee. The entire transaction was, therefore, at the instance of the lessee and the function of the lessor was merely to provide the necessary finance and obtain ownership of the assets leased. The assessee also once more asserted that it had information on reliable authority that the assets had been found at the time of search in the premises of the lessee and that the same had duly been recorded by the search party visiting the lessee's place. The assessee wanted the Assessing Officer to enable it to read the documentary evidences like copies of panchanama, etc., in the case of the search of the lessee. The assessee also objected to placing any reliance on a truncated statement of Sri Krishna Mohan, which actually ran into six pages but only the copy of the page No.6 having been supplied to the assessee. The assessee enclosed along with this letter, four copies of affidavits sworn by Sri Krishna Mohan on 31-5-1996 before the notary public accepting the genuiness of the lease transactions, confirmation letters given by the lessees like M/s. Miga Gases (P.) Ltd., dated 3-6-1996 (three numbers), M/s. Tamil Nadu Air Products (P.) Ltd., dated 30-5-1996 and M/s. Tejus Solar (P.) Ltd., dated 26-6-1996. A statement giving details of the rental income and losses incurred by the assessee was also supplied along with the same. In the said letter, the assessee made an alternative claim without any prejudice to its original claim about the genuineness of the lease transactions, to allow, in case the claim of the assessee for depreciation on the assets were disallowed, the lease rentals offered as income earlier amounting to Rs. 78.91 lacs, loss arising on account of the transactions being the difference between the amount paid and security deposit received amounting to Rs. 82.85 lacs, and the loss of the assets.
11. Meanwhile on 21-2-1997, the Assessing Officer had passed an order under section 281B of the Act, provisionally attaching the security deposits and other deposits and also any other sums with four different parties including the present assessee.
12. Finally a show-cause notice was issued by the Assessing Officer on 16-5-1997. In this communication, the claim of 10096 depreciation in respect of the lease transactions of the assessee (seven in number) with four different parties viz., M/s. Miga Gases (P.) Ltd., Savik Vijai Engg. (P.) Ltd., Tamil Nadu Air Products Ltd. and M/s. Tejus Solar (P.) Ltd. was proposed to be disallowed. So far as M/s. Miga Gases (P.) Ltd., was concerned, the Assessing Officer reiterated his earlier stand about the statements of Sri Krishna Mohan. Regarding M/s. Tejus Solar (P.) Ltd., the Assessing Officer stated that the Managing Director of that concern, viz., Mr. Prasanna Kumar had admitted that the lease transaction of the assessee with that concern was also a paper creation and furthermore that the proprietrix of the supplier concern viz., M/s. Akshay Engineering had also said that they had not supplied any material to the assessee or to M/s. Tejus Solar (P.) Ltd., and that the invoice was a paper accommodation only. A copy of the aforesaid letter of the proprietrix of M/s. Akshay Engg. was only supplied to the assessee.
The Assessing Officer stated that with regard to the lease transaction with M/s. Savik Vijai Engg. (P.) Ltd., the efforts to trace the existence and the genuiness of the so-called supplier, viz., Vishaka Electricals (P.) Ltd., had been in vain, indicating the non-genuineness of the transaction. It was furthermore stated that similarly in case of the lease agreement with M/s. Tamil Nadu Air Products Ltd., based on the purchase invoice from M/s. Tamil Nadu Oxygen, there had been no response from these two concerns to the enquiry letters sent by the Assessing Officer to them.
The Assessing Officer also mentioned that in all the above lease transactions, the amounts paid by the assessee to the so-called suppliers had come back to the assessee through the concerned so-called lessees in the form of lease rental advance deposit which was about 85% of the payment made by the assessee. The Assessing Officer stated that this clearly indicated that there was a collusion between the assessee, the so-called suppliers and the so-called lessees.
The Assessing Officer further mentioned that in the cases of M/s. Miga Gases (P.) Ltd. and M/s. Blades India (P.) Ltd., their MD's has clearly admitted that the transactions were sham and confirmation letters had been issued by them during the period from April to June 1996 under pressure and hence should not be considered. The Assessing Officer, thus, asked the assessee to obtain fresh confirmations from all the suppliers/lessees including the above two. It may however, be mentioned in this connection that as per the papers on record, the assessee did not have any connection with M/s. Blades India (P.) Ltd., not to speak of having any lease agreement with that concern.
The Assessing Officer stated in this connection that although an opportunity of cross-examining Sri Krishna Mohan had been provided by his letter dated 14-3-1997, the assessee, however, had failed to turn up on the said date.
As regard the alternative claims of the assessee also, the Assessing Officer replied that it is for the assessee to prove the genuineness of any claim of deduction/allowance/exemption to the satisfaction of the assessing authority. The Assessing Officer furthermore stated in the said correspondence that the statements by the lessees were not the primary evidence in the case of the assessee and that they mere merely confirmative in nature. He also stated that the main aspect in the matter was the failure of the assessee to obtain the fresh confirmation letters from the suppliers/lessees, failure to produce them before the Assessing Officer and also failure to show even the very existence of the concerned assets. The Assessing Officer furthermore stated therein: -
"In case you want to prove the existence of the assets, please take me to the place of their installation for physical inspection arid arrange for the confirmation from the concerned people on 21-5-1997 between 2 PM to 6 PM."
The Assessing Officer thereafter asked the assessee once more to get fresh confirmation letters from the concerned parties like so-called suppliers/ lessees (obtained after 1-10-1996) and also, the ledger accounts extracts of the assessee in their books, to produce the concerned lessees/suppliers on 21 -5-1997 during office hours and to arrange for physical inspection of the assets at the place of installation, if any, on 21-5-1997 between 12 noon to 6 PM. The Assessing Officer added thereafter that for this purpose the case of assessee was being posted for hearing on 21-5-1997 at 10.30 AM and furthermore that in case of failure of the assessee on that date, the case should be treated as being reposted on 26-5-1997 at 10.30 AM as another opportunity. Separate summons to Sri Pradeep Kar, MD of the assessee-company was also enclosed for compliance.
13. On 26-5-1997, the Managing Director and also the representative of the assessee appeared before the Assessing Officer. Although the Assessing Officer states that after detailed examination and verification, the assessment was completed, actually however, the assessee is found to have filed a written correspondence dated 26-5-1997 with the Assessing Officer. In the said correspondence, the assessee reiterated its stand as discussed above. The assessee mentioned therein that the significance of confirmation certificates after 1-10-1996 was not being understood by it. The assessee placed reliance on the sworn affidavits, copies of which had already been supplied by it to the Assessing Officer. Regarding physical verification of the assets, the assessee said, as below, in the said correspondence:
"Regarding physical verification of the leased assets, you may kindly note that the investigation team which visited the lessee's premises have found the leased assets intact and have also noted these. Further we are making arrangements with the lessee's for verification of the assets. We may start with the assets held by M/s. Tamil Nadu Air Products Pvt. Ltd., which is located in Tamilnadu. As the visit may take the entire day, we request you to indicate the date convenient to you. If you wish to start today, we are ready to accompany you. You may also note that the assets held by M/s. Miga Gases Pvt. Ltd., and others are spread in various places and will involve considerable time for verification. Hence, we request you to indicate your convenience in this regard. You may kindly note you have sought the verification of assets for the first time that too at a time when the case is getting time barred."
14. After detailing out the correspondences between himself and the assessee, the Assessing Officer discusses the modus operandi of bogus lease transactions in a general manner, firstly and thereafter pins down his point to the particular case of this assessee. The Assessing Officer states that in all cases of bogus lease transactions, a fictitious or non-operating or benami concern is identified as supplier of materials/equipments on which 100% depreciation is allowable under Income-tax Rules. A small-scale businessman is also identified to act as lessee for the purpose of accommodating the lease transactions. According to the Assessing Officer, all evidences on paper like preparation of invoices, delivery challan, lease-deed in favour of the lessee, installation/valuation certificates from Chartered Engineers, etc., are also prepared. He, furthermore, discusses that in all such cases, the general characteristics are that the lease period will be approximately for 5-10 years, that the total lease rentals stated to be payable by the lessee over the entire period will be calculated and about 85% of the invoice value in respect of the materials/ equipments will be taken by the lessor as advance deposits which will be non-refundable in nature and required to be adjusted against the future lease rentals as and when they fall due. He discusses that thereafter, the full invoice value is paid by the lessor, i.e., the assessee in the instant case, to the supplier by cheque or DD and 85-90% of the same amount will in turn be transferred to the account of lessee which again ultimately comes back to the lessor, i.e., the assessee by way of lease rental advance. There would be brokers mediating the process. The Assessing Officer goes on discussing further that there would be a tacit understanding amongst all the parties that once the lease is finalised and 85% of the purchase amount is received by the assessee towards advance lease rentals/deposits, there would be no further liability of any kind amongst the parties. The difference of 10-15% left with the supplier would be withdrawn in cash and would be shared by all the parties concerned at various ratios depending upon their respective bargaining capacities.
The Assessing Officer discusses, thereafter, that the above modus operandi clearly proves that the entire lease transaction is collusive and fraudulent entered into with the purpose of evasion of tax or reduce the incidence of tax, that no actual assets involved in the lease transaction, that all the documents like invoices, delivery notes, lease agreements, installation certificates, etc., are merely on paper and do not relate to any actual transactions and also that the lease rental deposit received by the lessor is nothing but his own money routed through the lessor-supplier-lessee-lessor channel.
The Assessing Officer also discusses in detail the nature of entries which the assessee has made in connection with these so-called bogus lease transactions. He states that on the debit side of the P&L a/c, depreciation of the assets leased, interest payable on lease rental deposit and also lease rental discounting charges are accounted for, whereas credits are given in the P&L a/c in respect of lease rental receipts and also lease management/finance fees, if any. According to the Assessing Officer, these entries do not relate to any real transactions and the amounts covered by all these entries are required to be neglected or disallowed. For arriving at the correct income of the assessee, therefore, the Assessing Officer is of the view that the total debits under the above heads minus to total credits should be added back.
15. Thereafter the Assessing Officer once more discusses about the various contentions of the assessee against disallowance of its claims. Some of those contentions have already been discussed by us above and some others, which have also been taken up before us, would be deliberated upon in much greater detail in the paragraphs to follow. In this connection, it is worth mentioning that the Assessing Officer clearly says that the statements of Sri Krishna Mohan are not regarded by him as primary evidence and that they are only of the nature of corroborative evidences in support of the fact that the assessee has failed on all fronts to produce any evidence as directed by the Assessing Officer in the show-cause notices to prove the genuineness of the transactions.
Finally, the Assessing Officer comes to the conclusion that the following aspects clearly prove that the so-called lease transactions were not genuine ones.
(a) The assessee did not produce fresh confirmation letters or the suppliers/lessees for verification and examination;
(b) The assessee had not seen/conducted or dealt with the supplier directly at any point of time and that the assessee simply believed the documents furnished by the lessee;
(c) The physical inspection and verification of the lessee's premises where the assets are supposed to have been installed by the Deptt., proved that no such assets ever existed;
(d) The lessees clearly admitted that the entire lease transactions were sham and nothing but paper transactions only without the actual involvement of any such assets;
(e) The assessee failed to explain the above position and furnish other evidence as required by the Assessing Officer from time to time to prove the genuineness of the lease transactions.
16. Thereafter the Assessing Officer has tried to analyse each of the lease transactions claimed to have been entered into by the assessee with different parties.
Firstly, he takes up the cases of four lease transactions of the assessee with M/s. Miga Gases Pvt. Ltd. He states that during the course of search proceedings in the premises of M/s. Miga Gases Pvt. Ltd., during March - April' 96, its Managing Director Sri Krishna Mohan had categorically said that the lease transactions of M/s. Miga Gases with M/s. Microland were not at all genuine and were merely of the nature of paper transactions entered into for the purpose of accommodation at the specific request of the assessee. This point is exactly the same as what was taken up by the Assessing Officer with the assessee in his correspondence dated 8-10-1996 and as discussed by us above. The Assessing Officer also referred to the statement of Sri Krishna Mohan that no assets were received by M/s. Miga Gases either from M/s. DDK Industries or M/s. MM Industries, or from M/s. Microland Ltd., or from any other person on account of their lease transactions with M/s. Microland Ltd. The truncated statement of Sri Krishna Mohan, a copy of which was supplied by the Assessing Officer to the assessee, was also extracted in this connection. Finally, the Assessing Officer relied on the total failure on the part of the assessee to prove the genuineness of its claim of depreciation coupled with examination of the lessee. The Assessing Officer discusses thereafter that the amounts paid by the assessee by cheque or DD to the so-called suppliers had in turn been passed on to the lessee, i.e., M/s. Miga Gases Pvt. Ltd., which in its turn passed the same back to the assessee as lease rental advance/deposits. The Assessing Officer also noted that the monthly lease rentals, etc., as shown by the assessee up to March' 96 were nothing but adjustments out of the above lease rentals/advance lying with the assessee. He clearly stated that the lease rentals were not the real income of the assessee.
The Assessing Officer also discusses that as no assets were involved and there were no actual transactions of any nature, the claim of the assessee towards depreciation of the fictitious lease assets was clearly disallowable. He also noted that the assessee had actually received 80% of the invoice value as lease rental advance from the lessee which constitutes the final payment in respect of the lease transaction and nothing further would be due to the assessee from the lessee. He also discusses that whereas the total lease rentals to be received as per the lease agreements over the entire lease period of eight years was around 120% of the invoice value, the difference between this amount and the advance lease rental (around 85% of the invoice value) was shown by the assessee as discounting charges, i.e., future lease rentals received in advance at the discounted price and debited also as such.
According to the Assessing Officer, the claim of discounting charges of Rs. 130,13,301 in respect of lease rentals from M/s. Miga Gases Pvt. Ltd., was being disallowed and the amount being brought to tax as undisclosed income for the block period under consideration.
The Assessing Officer discusses thereafter that the assessee had shown Rs. 41.23 lacs as lease rental receipts as on 31-3-1996 in its books (for which again no details were furnished) and had offered for taxation the same amount in its regular returns filed. However, the Assessing Officer goes on discussing further that as seen from the lease agreements, the total lease rental deposits and finance charges due and accounted as on 29-3-1996 were only Rs. 23,99,493 and not Rs. 41.23 lacs. Hence, the Assessing Officer restricted the claim of the assessee towards deduction of lease rentals to the abovementioned amount of Rs. 23,99,493.
Finally, the Assessing Officer disallowed the claim of the assessee towards depreciation, lease rent discounting charges and lease rental receipts. He furthermore discussed that net amount of Rs. 4,02,44,048, i.e., depreciation + interest claims as reduced by the amount shown as lease rentals was being brought to tax as undisclosed income for the three assessment years 1994-95, 1995-96 and 1996-97, in the respective amounts of Rs. 54,82,475, Rs. 50,94,705 and Rs. 2,96,66,868.
17. Thereafter the Assessing Officer took up the case of the lease transaction of the assessee with M/s. Tejus Solar Pvt. Ltd. The assessee showed as having purchased Solar Testing Plant from M/s..Akshay Engineering for Rs. 28 lacs and leased out the same to M/s. Tejus Solar Pvt. Ltd. The Assessing Officer discusses that on cross verification during the survey conducted in the premises of the so-called lessees, it was found that no such assets ever existed in the said premises. The assessee also refers to the statement of the Managing Director of M/s. Tejus Solar Pvt. Ltd., Sri Prasanna Kumar on examination under oath to the effect that his company had not acquired any Solar Test Plant on account of the lease transaction with the assessee and also that the lease transaction was merely a paper transaction entered into for accommodation purpose. Reference is also made by the Assessing Officer to the explanation offered by Sri Prasanna Kumar that for the purpose of photographs etc. certain junk items had been assembled as a plant, but that the same was not at all used in running the business as they were not usable. The Assessing Officer goes on discussing that Sri Prasanna Kumar had admitted that M/s. Akshay Engineering was proprietary concern of his wife and that the said concern had not carried on any business till date. The Assessing Officer also referred to a letter from the proprietrix of M/s. Akshay Engg., to which we have already made a reference as above. The Assessing Officer discusses thereafter that the money paid by the assessee to M/s. Akshay Engg. came back to the assessee through M/s. Tejus Solar Pvt. Ltd. in the form of lease rental deposits.
In this case also, the Assessing Officer, not only disallowed the claim of depreciation to the extent of Rs. 28 lacs but also added back the discounting charges stated to be debited to the P&L a/c. The discounting charges, in this case also, have been described by the Assessing Officer to constitute difference between the total lease rentals receivable by the assessee at 120% of the invoice value of the equipments and the lease rental advance constituting 85% of the said invoice value. The amount of discounting charges has been calculated by the Assessing Officer to be at Rs. 12,03,400. The Assessing Officer however gave credit in respect of an amount of Rs. 6.58 lacs stated to have already been shown as lease rental receipts and offered for taxation by the assessee as on 31-3-1996. In this process, the total amount of Rs. 35,39,725 was added back as undisclosed income of the assessee for assessment year 1995-96.
18. The Assessing Officer thereafter discusses the details of lease transaction of the assessee with M/s. Savik Vijai Engg. Pvt. Ltd. He states that the modus operandi in his case was also the same as in the case of M/s. Miga Gases Pvt. Ltd. The Assessing Officer however does not refer to any admission made by the lessee in this case. On the other hand, he relies on the failure on the part of the assessee to produce the supplier and also the lessee and to furnish fresh confirmation letters as well as to arrange for the physical inspection of the assets by the Deptt. Ultimately, besides disallowing claim of depreciation of Rs. 42 lacs, discounting charges calculated by the Assessing Officer at Rs. 19,23,600 has also been disallowed by him. Ultimately a total amount of Rs. 47,92,200 has been considered by the Assessing Officer as constituting undisclosed income of the assessee for assessment year 1994-95 in respect of this particular lease.
19. The Assessing Officer has dealt with the lease transaction of the assessee with M/s. Tamilnadu Air Products Ltd., exactly in the same manner as in the case of the lease transaction with M/s. Savik Vijai Engg. Pvt. Ltd. For the same reasons as in that case, the Assessing Officer disallowed the claim of depreciation of Rs. 78 lacs and also discounting charges of Rs. 33,52,360, allowing credit in respect of lease rentals already offered by the assessee up to 31-3-1996. The Assessing Officer finally treated the amount of Rs. 98,69,690 as undisclosed income of the assessee for the assessment year 1995-96 in respect of this particular lease arrangement.
20. In the aggregate, total amount of Rs. 5,84,45,663 has been considered by the Assessing Officer to constitute the undisclosed income of the assessee for the entire block period. Tax has been levied thereon at Rs. 3,50,67,398 at 6096. Further, surcharge at the rate of 1596 on the tax has also been imposed at the figure of Rs. 52,60,110. The total tax levy as per the impugned assessment has thus come to Rs. 4,03,27,508.
21. Before we proceed on to tackle the different grounds of appeal taken up by the assessee, it would be necessary for us to dispose off an application filed by the learned DR under the Appellate Tribunal Rules, 1963. In the said application, Dr. R.B. Krishna, the learned counsel for the Deptt. contends that the assessee, in the appeal memorandum filed by it, has stated certain facts which are prima facie contrary to the assessment order, which admittedly forms a part of the records. Without prejudice to the generality of such an assertion, Dr. Krishna has tried to give certain examples as below: -
(a) That there were no such warrants in the name of the assessee;
(b) That the Assessing Officer completely failed to follow the principles of natural justice;
(c) That the appellant arranged for physical inspection of the leased assets on 26-5-1997 and the Assessing Officer failed to proceed to inspect the leased assets;
(d) That the Commissioner did not afford an opportunity to appellant for being heard."
It is submitted by the Departmental counsel that as per Rule 10 of the Income-tax (Appellate Tribunal) Rules, 1963, the assessee has to furnish an affidavit in support of such facts and since the assessee has not furnished any such affidavit, the appeal filed by the assessee deserves to be rejected in limine. Dr. Krishna has also verbally contended before us that in absence of any affidavit from the side of the assessee in support of the allegations as mentioned above, the appeal should be dismissed by the Tribunal.
Rule 10 of the Income-tax (Appellate Tribunal) Rules, 1963 reads as below:
"Filing of Affidavits - Where a fact which cannot be borne out by, or is contrary to, the record is alleged, it shall be stated clearly and concisely and supported by a duly sworn affidavit."
In support of his contention that in absence of such an affidavit, the appeal itself is liable to be dismissed in limine. Dr. Krishna has relied on a judgment of Rajasthan High Court in the case of CIT v. Swastik Motors [1992] 195 ITR 368/64 Taxman 555. The said case related to requirements of filing of an appeal before the Income-tax Appellate Tribunal in accordance with Rule 9(1) of the aforesaid Income-tax (Appellate Tribunal) Rules, 1963. According to the said rule, every memo of appeal shall be in triplicate and shall also be accompanied by two copies (at least one of which shall be a certified copy) of the order appealed against, two copies of the order of the ITO, two copies of the grounds of appeal before the first appellate authority and also two copies of the statement of facts filed before the said first appellate authority. In that particular case, the Deptt. had not filed a certified copy of the order of the Appellate Assistant Commissioner. The Tribunal on that ground, had dismissed the departmental appeal in limine for non-complying with the requirements of Rule 9(1). The High Court upheld the order of the Tribunal in that case on the ground that there was no challenge to the finding of fact.
Dr. Krishna points out in this connection that in accordance with the provisions of sub-rule (3) of Rule 9 of the Income-tax (Appellate Tribunal) Rules, as mentioned above, the Tribunal may in its discretion accept a memorandum of appeal which is not accompanied by all or any of the documents as referred to in sub-rule (1). He argues that in spite of the existence of such a provision condoning some of the requirements of Rule 9, the Tribunal had dismissed that appeal before it and the High Court also upheld the action of the ITAT. In the instant case, Dr. Krishna strongly urges that in absence of a provision allowing the Tribunal to condone the requirements of Rule 10, the Tribunal must dismiss the appeal filed before it. He has brought to our notice the provisions of Rule 4A(2)(ii) regarding the power of the Registrar to endorse all appeals and applications, the date of receipt for the purpose of calculating limitation and, also the provisions of sub-rule (3) of Rule 35A which clearly states that an application (stay-petition) which does not conform with the requirements of sub-rule (2) of the said Rule is liable to be summarily rejected.
It is difficult to accept the contentions of Dr. Krishna. All the rules of the Income-tax (Appellate Tribunal) Rules, do not stand on the same footing and the importance and also the degree of requirement of compliance of different rules should be judged in accordance with the importance and gravity of the rules concerned. Rule 9 is a basic rule prescribing which papers are required to accompany the memorandum of appeal. This particular requirement of Rule 9 goes into the root of the appeal. The Tribunal may, therefore, reject the appeal in limine unless the requirements of Rule 9 are strictly fulfilled. On the other hand, Rule 10 is a rule relating to evidentiary value of certain assertion of fact made by the appellant. That is why Rule 10 prescribes that a fact which is not borne out and is also contrary to the record, must be supported by an affidavit. If the appellant fails to furnish the required affidavit, the assertion of fact on that particular issue, will naturally have to be ignored by the Tribunal in deciding the relevant issue. Only if the assertion of facts goes at the very root of the appeal, the question of dismissing the appeal in limine, may arise. In the instant case, if we examine the four different points as enumerated by Dr. Krishna in his instant application, we find that all the issues are highly disputed in nature. It is the assertion of the assessee that there was no warrant in the name of the assessee. On the face of the records available with the assessee, such an assertion seems to be warranted. We will come to this issue later on, at the appropriate place and discuss that the assertion of the assessee certainly deserves some merit. The question of completely failing to follow the principles of natural justice, is again a highly debatable issue and both sides have showered heaps of arguments on this particular issue. Furthermore, this is simply an argument taken up by the assessee and not an assertion of fact itself. Regarding the arrangement for physical inspection of the leased assets on 26-5-1997 again, the matter requires detailed examination, as we will find out later. As regards non-affording an opportunity to the assessee by the Commissioner again, there is nothing on record to show that the Commissioner had actually afforded such an opportunity. Hence, the assertion of the assessee on this issue also cannot exactly be said to be contrary to the records. Hence, we are of the opinion that the assertions as made by the assessee in the statement of facts filed by it are not simple distortions of fact or lies which can be found out easily from a study of the record. On the other hand, ascertainment of whether these assertions are correct or not depends on a detailed examination of the records and also the arguments of both the sides. Therefore, it may be very difficult to say that the assessee has plainly contravened the provisions of Rule 10. In any case, even if the assessee be found to have not supported any of its assertions, which are not borne by records or are contradictory to the same, with sworn affidavits, such assertions will be totally neglected by us in deciding the relevant issues. It would be thoroughly unjustified on our part to dismiss the appeal in its entirety on this flimsy ground.
22. Now we taken up the different grounds as contended by the assessee. First of all we will be taking up the preliminary and technical grounds against the validity of the assessment order as such.
It is the contention of the assessee that the impugned assessment under Chapter XIV-B of the Income-tax Act is invalid in as much as there was no valid search in the assessee's case. The representative of the assessee, Sri K.R. Pradeep appearing before us has shown it to us that in all the correspondences, notice issued asking for the return and also in the assessment order, the Assessing Officer has all along considered the assessments as having been done under section 158BC and that nowhere any mention of the provisions of section 158BC relating to an assessment under Chapter XIV-B arising out of search in the case of another assessee has been mentioned. Sri Pradeep strongly contends that the search warrant was not in the name of the assessee viz. M/s. Microland Ltd. He has also shown that the panchanama issued by the Deptt., on different occasions were all in the name of Sri Pradeep Kar, CMD, M/s. Microland Ltd., although the place to be searched was mentioned as M/s. Microland Ltd. In the lists/inventory of account books, etc., found/seized also, the name of the person is found to be shown as Sri Pradeep Kar, CMD, M/s. Microland Ltd. On an examination of the relevant papers (copies of the panchanamas, etc.), we find the contention of the assessee to be correct. Therefore we wanted Dr. Krishna, the Departmental counsel, to produce before us the relevant search warrant. After initial hesitations, Dr. Krishna produced before us a photocopy of the said search warrant (original search warrant was never produced before us). The photocopy of the search warrant (which is very hazy) is found to read as below:
Whereas information has been laid before me and on the consideration thereof I have reason to believe that:
If a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 or under sub-section (1) of section 131 of the Income-tax Act, 1961 or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922 or sub-section (1) of section 142 of the Income-tax Act, 1961 is issued to Mr. Pradeep Kar (name of the person) to produce or cause to be produced, books of account or other documents which will be useful for or relevant to proceedings under the Indian Income-tax Act, 1922, or under the Income-tax Act, 1961, he would not produce or cause to be produced, such books of account or other documents as required by such summons or notice.
Shri Pradeep Kar, Chairman & Managing Director of Microland Ltd., and Microland Ltd. or/is in possession of any money, bullion, jewellery or other valuable article or thing or such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purpose of the Indian Income-tax Act, 1922 or the Income-tax Act, 1961......"
The search warrant is found to be signed by the Additional Director of Income-tax (Inv.) Unit. It thus appears that at one place of the search warrant, the names of both Sri Pradeep Kar, Chairman & Managing Director of M/s. Microland and also Microland Ltd., were mentioned. The learned counsel for the assessee has verbally stated that the name of the assessee-company was interplated at a later point of time. From a thorough examination of the photocopy of the search warrant, we also feel that there is some scope for suspecting the existence of the name of Microland Ltd., in the search warrant originally. In order to resolve the issue about this suspicion, we wanted to inspect the original search records which led to conducting this search in the premises of the assessee. We felt that an examination of the reasons required to be recorded by the officer authorising the search would be able to throw light as to whether that authority originally had proper reasons for conducting the search in the case of Mr. Pradeep Kar alone or even in the case of the assessee, i.e., Microland Ltd. We therefore verbally directed Dr. Krishna to produce all the papers connected with the search including the reasons recorded before authorising the search and also the appraisal report prepared by the Departmental officers consequent on the search. The departmental representatives including Dr. Krishna, however, did not produce any papers in that regard including the reasons recorded for authorising the search on the ground of privilege and also divulgence of secret matter of the Department. We are unable to accept the departmental contention in this regard. In this connection, we would like to rely on a judgment of the Allahabad High Court in the case of Union of India v. Sheo Shanker Sitaram [1974] 95 ITR 523 as pointed out by the learned counsel for the assessee. It was held by the High Court in that case that the claim of privilege by Department in the matter of production of assessment records containing the correspondences between the ITO and his higher official under section 124 of the Evidence Act on the ground of official secrecy is not tenable.
A reference may also be made in this connection on a judgment of the Punjab & Haryana High Court in the case of H.L. Sibal v. ITO [1976] 103 ITR 606. It was held in the said case that when claim for privilege is made under section 138 of the Income-tax Act, the matter has to be decided with respect of the public affairs of the state, and that the competent authority which claims privilege must apply its mind to each individual document and also indicate reasons for which the claim for privilege is made. It was furthermore decided in the said case that when an official records is tampered with by its custodian for the purpose of putting forth a false defence, no claim for privilege in respect of such a record can be allowed.
In the instant case, we feel that the insertion of the name of the assessee in the relevant search warrant might have been made at a later date. For the purpose of removal of our suspicion in that regard only, we wanted to inspect and verify the official records supposed to be maintained in this connection. The claim of privilege on the part of the Department is certainly unwarranted in view of the above decisions.
In this connection, we may make mention of certain remarks made by the Karnataka High Court in the case of Southern Herbals Ltd. v. Director of Income-tax [1994] 207 ITR 55, which has actually been sought to be relied upon by the learned departmental counsel with regard to certain other issue. The Karnataka High Court clearly stated in the said case that the warrant of authorisation for search has to be in the prescribed form and that it cannot be issued in general terms without specifying the person in respect of whom it is issued. The learned counsel for the assessee has also relied in this connection on another judgment of the Karnataka High Court in the case of Nenmal Shankarlal Partner v. Asstt. CIT [1992] 195 ITR 582 at page 586. In that case, the search warrant was in the name of the firm but the residential premises of the partners were searched without any warrant in their names. The Karnataka High Court held that the mere mention of the residential premises did not enable the department to effect seizure of assets etc. belonging to the partners from such premises.
Dr. Krishna initially tried to argue that Microland was actually the party to be searched although the warrant was in the name of its Managing Director Mr. Pradeep Kar. He argues that a company does not have any direct method of operation and that it is to be operated through its employees and authorised persons only. He referred to the provisions of section 282(2)(b) of the Income-tax Act, 1961 in accordance with which a notice in the case of a company may be served on the principal officer thereof. As regards the question of disclosure of information to the assessee at the stage of conducting the search is concerned, Dr. Krishna has tried to rely on the discussions made by the Karnataka High Court in the case of Southern Herbals Ltd. at page 62 of the reported judgment to the effect that disclosure of the materials or the information to the persons against whom action under section 132(1a) is taken is not mandatory, because the very disclosure would affect or hamper the investigations.
In this connection, Sri Pradeep appearing on behalf of the assessee-company, has brought our notice to the further discussions made by the Karnataka High Court in that very case at page 63 of the reported judgment, as below: -
"The stage for disclosure of the materials is reached only when the Revenue resolves to proceed to make an appropriate order imposing tax liability or penalty, etc., and at that stage, all relevant materials from which the liability of the taxpayer is sought to be inferred shall have to be disclosed."
Sri Pradeep strongly argues that even at the stage of framing the assessments also, the departmental authorities did not disclose the actual reasons for conducting the search.
Whatever may be the case relating to disclosure of the information about search to the assessee even at the assessment stage, at this stage of appeal before us, at least, the departmental authorities should have placed all the relevant records. The Tribunal would have surely taken care to see that such confidential matters are not divulged to the assessee or any body else. However, non-production of the relevant records would certainly go against the departmental case. We are constrained to take an adverse view of the matter on account of non-compliance of our requirements, by the departmental authorities. We therefore come to the opinion that the name of M/s. Microland Ltd., was not there in the original search warrant and was inserted at a later stage and a photocopy thereof only was produced before us when we wanted for the same. There are indeed a large number of decisions in support of the proposition that the Court cannot put its own judgment as to the reasonability of the reasons required to be recorded by the authority for issuing the search warrant. However, the Court can certainly look into and get itself satisfied as to whether such reasons were at all recorded or not. The onus will lie on the department to prove the existence of such recording. In the instant case, on account of failure of the Department to discharge such onus, we once more reiterate our opinion about the lack of a proper and valid search in the case of the assessee. So far as the provision of section 282(2)(b) is concerned, that particular section merely prescribes on whom the notice may be served. However, it is a cardinal principle of law that the notice itself should show the name of the company. In the instant case, all the papers on record are merely in the names of Sri Pradeep Kar. Although he has been stated to be the Chairman & Managing Director of M/s. Microland Ltd., that is only an epithet used to describe him and it cannot be said that the departmental authorities have meant Microland itself in place of Sri Pradeep Kar, in all the papers and documents used by it like panchanamas, etc.
Ultimately therefore, we feel that as there was no valid search in the case of the assessee, the assessment made under section 158BC is invalid and void in law. There is again no indication anywhere that the assessment has been made under section 158BD.
23. The assessee also challenges the validity of the impugned order by arguing that when the order was passed, it was already barred by limitation. In order to appreciate the significance of the arguments of the assessee in this regard, it would first of all be necessary to trace the sequence of the search proceedings and also the connected activities. The panchanama executed by the departmental authorities on 29-3-1996 (the first date of search) clearly shows that the search was commenced at 10.20 PM and was closed temporarily at 11 PM on the same date. A bunch of loose sheets (9 in No.) was seized on this date. A prohibitory order under section 132(3) was issued on that day directing restraint on removable of books of account, documents kept in the wooden almirah of the purchase Department of M/s. Microland at the third floor of M/s. Microland House, Koramangala, Bangalore. The panchanama, the inventory of seized materials and also the prohibitory order under section 132(3) were all in the name of Sri Pradeep Kar, CMD, Microland Ltd.
Sri Pradeep,the learned counsel for the assessee tried to raise a point that the search conducted at such untimely hours, was beyond any reasonable norms and hence illegal. Dr. Krishna, the learned DR has, on the other hand, placed on our record a correspondence from the ADIT (Inv.) concerned stating the circumstances leading to the delay in commencement of the search. It has been stated therein that originally a survey was conducted in the premises of the assessee and that during the course of the survey, explanation of the Managing Director of the company with regard to certain important papers found during the survey was required. Since the Managing Director was not present, the departmental authorities had to wait for a very long time and ultimately a search operation was required to be undertaken. Dr. Krishna has furthermore argued that in any case, there is no legal bar on commencing a search at 10.20 PM. On the basis of the explanation of the departmental authorities as stated above and taking into consideration the legal position as explained by Dr. Krishna, we do not take any serious note of the point raised by the assessee's side on this issue.
Sri Pradeep has also tried to raise another issue in this connection. He argues that when the search operation was closed on the first day, i.e., 29-3-1996, it has got to be considered that the said operation undertaken on that day actually came to an end. It is the argument of Sri Pradeep that for continuation of the search operation on subsequent dates, issues of fresh warrants, of search were necessary and those searches conducted on the later days should be considered as fresh searches. In as much as, no fresh warrant of search was issued on the subsequent days, it is contended by Sri Pradeep that the subsequent searches should be considered as invalid and illegal. We are however unable to agree with the contention on behalf of the assessee on this issue. Once a search is commenced on a particular day, it is possible and also legally permissible for the departmental authorities to hold up the search on a temporary basis on that day by issue of preventive orders under section 132(3) and by making a specific mention in the panchanama that the search operation is being temporarily closed only. In such a case, it would be perfectly valid on the part of the departmental authorities to resume the search proceedings on a subsequent day from the point where they had been left on the last day and to continue on in this manner.
Although fresh panchanamas are required to be executed on each day of search operation (that has actually been done in this particular case), however, no fresh warrant of search would be necessary for the subsequent days. This point has been discussed by us in detail and the legal position in this regard stands explained in our earlier order in the case of Poornima Finance Corpn. & H.V. Srinivas dated 5-8-1997 in IT(SS) Appeal No. 87 (Bang.) of 1997.
In this particular case, the search operations were resumed on 30-3-1996 at 5 PM and were again temporarily concluded at 7 PM on that day. A fresh panchanama was executed in the name of Sri Pradeep Kar and one bunch of loose sheets with written pages from 1 to 21 was seized on this particular day. In the inventory of the seized materials, the name of M/s. Microland was shown on this day, whereas in similar paper prepared by the departmental authorities on 29-3-1996, only the name of Sri Pradeep Kar, CMD, M/s. Microland Ltd., had been shown. A fresh prohibitory order under section 132(3) was issued on this day also restraining removal of books of account, documents kept in the wooden almirah of Purchase Department of M/s. Microland at the 3rd Floor of Microland House, Koramangala, Bangalore.
Finally, the departmental authorities once more searched the premises on 23-5-1996 at 3.15 PM and the operations were finally concluded at 4.45 PM. On this day also, the panchanama was executed in the name of Sri Pradeep Kar. Two bundles of loose sheets containing 26 & 27 written pages were seized on this particular day also. The inventory of materials seized prepared on this day showed the name of Sri Pradeep Kar, MD, M/s. Microland Ltd.
It is the contention of Sri Pradeep, the learned counsel for the assessee that the prohibitory orders issued on both the earlier days, i.e., 29-3-1996 and 30-3-1996 were illegal in as much as it was not at all required to keep the matter hanging, as the departmental authorities could have very easily seized the loose sheets which were ultimately seized on the final day of the search, i.e., 23-5-1996 on those very days. Sri Pradeep strongly argues that the proceedings of the search were extended for a period of about two months merely for the collateral purpose of gaining more time for completing the search assessments and that the entire search and seizure proceeding could have been completed on the first or at least on the second day itself. In support of his contention that issue of any prohibitory order under section 132(3) in an indiscriminate manner without fulfilling the conditions thereof, is illegal, Sri Pradeep has relied on a number of decisions, which will be discussed at some length, as below. Before that however, we consider it necessary to reproduce here, the provisions of sub-section (3) of section 132 of the Income-tax Act:
"The authorised officer may, where it is not practicable to seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing, (for reasons other than those mentioned in the second proviso to sub-section (1)), serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it except with the previous permission of such officer and such officer may take such steps as may be necessary for ensuring compliance with this sub-section."
In the background of such provisions of statute, we may now proceed to examine the ratios of various judgments as cited by Sri Pradeep as below: -
(i) In the case of K. Choyi, ITO v. Syed Abdulla Bafakki Thangal [1973] 91 ITR 144 (Ker.) at pages 155 & 159
The Kerala High Court held that the power conferred under subsection (3) of section 132 can be exercised only when there is a practical difficulty experienced in the seizure of documents, etc., which have been found as the result of the search conducted by the authorised officer of the building or place where the documents, etc., were lying.
This particular judgment of the Kerala High Court was affirmed by the Supreme Court, however, on a different ground reported at 123 ITR 435.
(ii) The Madras High Court held in the case of I. Devarajan v. Tamil Nadu Farmers Service Co-operative Federation [1981] 131 ITR 506 as below: -
"In the case of seized assets, there is a specific provision made for seeing that the assets are not retained beyond the period of 90 days after seizure. However, in case of sub-section (3), there is no such time-limit. But the non-specification of time-limit cannot be construed as showing that the authorised officer can subject the assets to attachment for an indefinite period of time. It is not possible to read the time limit in sub-section (5) into sub-section (3) as Parliament has not imposed any such time-limit with respect to sub-section (3) for good and valid reasons. But the provisions of sub-section (3) cannot be utilised so as to continue the attachment indefinitely.
(iii) In the case of B.K. Nowlakha v. UOI [1991] 192 ITR 436, the Delhi High Court held that section 132(3) could be resorted to only if there was any practical difficulty in seizing the item which was liable to be seized. The Delhi High Court furthermore stated in that connection that if there were no practical difficulties then the authorised officer has the jurisdiction and duty to seize the books of account, other documents, money, bullion, valuable articles, etc., found as a result of the search if no explanation was coming forward in respect thereof. The Delhi High Court furthermore commented in that case that the power under section 132(3) cannot be so exercised as to circumvent the provision of section 132(1) read with section 132(5).
(iv) The Punjab & Haryana High Court held in the case of Omparkash Jindal v. Union of India [1976] 104 ITR 389 as below: -
"Though the word 'practicable' has a number of significances, yet its meaning depends largely on the context. Ordinarily, it means that which may be practised or performed; capable of being put into practice, done or accomplished. The word 'practicable' when read in that context, would relate to those ornaments, etc., found on a search, which can be reasonably believed to be undisclosed property. So, it is only when the nature or the location of the particular ornaments, etc., found on a search, which are reasonably believed to be undisclosed property, does not allow, or the circumstances of a given case do not permit the immediate seizure of the same, that the provisions of sub-section (3) may be resorted to. But when the authorised officer is not satisfied or he has doubts as to whether the particular ornaments found on search are undisclosed property, he cannot have recourse to provisions of section 132(3)."
(v) The Allahabad High Court also held in the case of Sriram Jaiswal v. Union of India [1989] 176 ITR 261/42 Taxman 83 that no order under section 132(3) can be passed when the authorised officer is in doubt whether the asset is disclosed or not.
On the other hand, the learned DR has strongly contended that the issues of prohibitory orders under section 132(3) were perfectly valid in this case in as much as the circumstances prevailing at such points of time did not exactly justify the completion of seizures of the documents on those dates. He has relied on a judgment of the Madras High Court in the case of Punamchand R. Shah v. ITO [1975] 101 ITR 373 in support of his proposition that whether a situation is practicable or not is left to the discretion of the authorised officer. On a study of this particular judgment, however, we are not able to find that the proposition as put forward by the learned DR is supported by this particular judgment. On the other hand there is just an obiter at the reported page 382 of the said judgment, as below: -
"As it (the question of completion of seizure) is largely a matter of intention and as the intention in this case is clear that the authorised officer did not want to seize the goods on 23rd June, 1971, there is no question of the goods being taken as seized on that date."
The High Court certainly did not go into the legal controversies as to whether issue of a prohibitory order under section 132(3) could be considered to be valid and legal. The contention in that regard was also not raised before the High Court.
The facts of the present case clearly show that ultimately what seized were a bunch of loose sheets on different dates. It is also a fact that these loose sheets were ultimately not at all utilised for the purpose of making the impugned assessment. No reference has been made anywhere in the impugned assessment order to the contents of any of those loose sheets. In the context of such position therefore, it would not be quite out of place to come to a conclusion that the seizures of those loose sheets could have been effected on the very first day or at least the second day of the search and it was not at all necessary for the authorised officer to keep the entire search proceeding in suspension for a long period of two months approximately. It would not be possible for us to comment as to what was in the mind of the authorised officer at the time of keeping the materials under preventive order and whether the sole purpose was simply to prolong the search proceeding so as to enable the Assessing Officer ultimately, to have a longer period for completing the assessment. It is the contention of the assessee that the search proceeding should be considered as having been completed on 29-3-1996 and in that case the assessment order passed on 30-5-1997, beyond the period of one year since the last day of the month during which the search had been completed, becomes illegal as barred by limitation. We are also of the opinion that the circumstances of the case clearly show that the search and seizure proceeding was unnecessarily and without any valid purpose kept in suspension for a period of about two months. Again, even if it be assumed that on the first day of the search, there was a valid warrant against the assessee-company, since the departmental authorities executed panchanamas and also prohibitory orders successively in the name of Sri Pradeep Kar alone, the search operations carried on the following days, even if be considered to be validly done so in the case of Sri Pradeep Kar, must be considered to have been concluded on the first day itself so far as the present assessee is concerned. Hence, passing an assessment order on 30-5-1997 in the case of the present assessee on the basis of a search concluded in its case on 29-3-1996 has got to be considered to be affected by the provisions of limitation of time. In other words, the assessment has got to be considered as time-barred and in that way also invalid.
24. The assessee has also taken up another rather curious point against the validity of the assessment. It has been contended that since the assessee-company was incorporated only in the year 1989, there would not be ten clear previous years in the case of the assessee, so as to form a valid "block-year" relevant for completing a search and seizure assessment under Chapter XIV-B of the Income-tax Act, 1961. It is thus argued by the learned counsel for the assessee that the formation of the block year itself being invalid, the assessment order based on such block year is also liable to be quashed as invalid.
In this connection, we would like to refer to the definition of "block-period" as provided in section 158B, as below: -
" 158B. In this Chapter unless the context otherwise requires,-
(a) "block period" means the previous years relevant to ten assessment years preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A, and includes, in the previous year in which such search was conducted or requisition made, the period upto the date of the commencement of such search or as the case may be the date of such requisition;"
The learned counsel for the assessee has relied on the following two judgments in support of his contention in this regard that in the absence of a valid block-period, the assessment itself would be invalid. He argues in this connection, that whenever, there is a variation from the normal time-period comprised in the 'previous year', the Act itself mentions the same as in the cases of new business covering less than a year, in section 3.
(i) Liquidator of Mahamudabad Properties (P.) Ltd. v. CIT [1980] 124 ITR 31/3 Taxman 47 (SC) at page 39 (3rd para).
This particular case related to deduction of vacancy allowance in case of let-out properties. The Supreme Court held as below:
"The provisions of Income-tax Act relating to charge on income apply in relation to a specific assessment year, and the provisions of the Act, providing for the computation of the chargeable income, in the absence of anything to the contrary, is in relation to the relevant previous year."
(ii) CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC)
The issue involved in this particular case was consideration of cost of capital assets for the purpose of arriving at the capital gains arising from transfer of such capital assets. The Supreme Court held as below:
"The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section."
We are however afraid that these two decisions do not exactly support the assessee's contention in the instant case. The issue before us simply relates to interpretation of the expression "previous years relevant to ten assessment years" used in defining "block-period" in section 158B. This is not exactly a charging section. If there was no existence of ten assessment years in case of a particular assessee, in such a case, reasoned judgment would lead to the conclusion that as many previous years as can be found out in the case of the assessee but not exceeding ten assessment years should be taken into consideration. It is a cardinal principle of law that while interpreting the provisions of a particular word of statute, a sensible meaning is required to be given to the same so as to make it effective. This principle is contained in the legal maxim.
UT RES MAGIS VALEAT QUAM PERFAT
The Supreme Court has also acknowledged this particular principle in its judgment in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13. The Supreme Court held in that case as below:
"A statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction."
In this particular case, there cannot be any doubt about the fact that the intention of the Legislature was to define block-period as a period which should in general contain ten previous years in respect of the assessee where such ten previous years were existing and available. Where however ten such previous years were neither existing nor available, the intention of the Legislature is clear enough that only as many previous years as were existing, should be considered to form the block-period. There is a grave danger lying in the interpretation tried to be forwarded on behalf of the assessee in as much as if the assessee's contention be accepted, then no search-assessment under Chapter XIV-B of the Act, can be made in case of an individual below the age of ten years or a firm or a company which has not yet completed ten years of its existence. Such an interpretation would not only be violative of the intention of the Legislature but also would militate against the provisions of Article 14 of the Constitution of India. We are therefore of the opinion that the definition of "Block Period" in this particular case and also in similar other cases should be construed to contain as many previous years as possible, but not exceeding ten. In that way, we reject the appellate ground taken up by the assessee on this issue.
25. Another ground against the validity of the impugned assessment has been taken up by the assessee on the issue that before approving the impugned search-assessment, the CIT should have given an opportunity of being heard to the assessee. At the outset, the learned DR, Dr. Krishna has submitted that according to his instructions, the CIT had actually afforded an opportunity of being heard to the representative of the assessee. As however there is nothing on record to substantiate this assertion, we would proceed on the basis as if no chance of hearing was allowed by the CIT before according the approval. It is however required to be noticed that while approving the assessment order as prepared by the Assessing Officer, the CIT did not give any further direction for anymore increase or enhancement in the assessed income of the assessee. It appears that he merely dittoed the estimation of undisclosed income as computed by the Assessing Officer.
Sri Pradeep and later on Sri Venkatesan appearing on behalf of the assessee has strongly contended before us that non-affording a chance of hearing to the assessee at the stage of according the statutory approval constitutes a serious violation of the principles of natural justice and hence the impugned assessment is liable to be quashed. It has beau argued that the power of the CIT, while according statutory approval to an assessee, is an amalgam of the appellate power under section 251 and the revisionary power under section 264. It is thus contended that although the statute does not specifically provide for allowing a chance of hearing at the stage of according approval, such provisions must be considered to be read in the relevant section.
In this connection, reliance is placed firstly by the learned counsel for the assessee on a judgment of the Supreme Court in the case of Mahadayal Premchandra v. CTO AIR 1958 SC 667. In this particular case relating to sales tax, the appellant was taxed by the assessing authority on instructions from superior authorities. The Supreme Court held that when the Assistant Commissioner being the higher authority, had already delegated the work of assessment to the lower authority, i.e., commercial tax officer, then it was the duty of the latter to make the assessment order giving his own reasons for doing so. However, the superior authority had directed the lower authority to make the assessment on certain basis without affording any opportunity to the assessee of meeting his point of view. Accordingly, the assessment was considered by the Supreme Court to be invalid. It is required to be said in this connection that in the present case with us, the assessment order was passed fully in accordance with the judgment of the Assessing Officer and the CIT(A), while approving the assessment order, did not interfere with the same, not to speak of asking for making any enhancement in the amount of undisclosed income. Hence, the facts of the present case are not compatible with those of this particular case and therefore the Supreme Court decision under consideration will not be applicable to the present case.
Next, the learned counsel for the assessee has relied on another judgment of the Supreme Court in the case of C.B. Gautam v. Union of India [1993] 199 ITR 530. That case related to acquisition of immovable property by the Deptt. under Chapter XX-C of the Income-tax Act. The Supreme Court held that in as much as the action of the competent authority hurts, the interests of both the purchaser as well as the intending seller, the requirement of a reasonable opportunity being given to the concerned parties, must be read into the provisions of Chapter XX-C.
A judgment of Karnataka High Court in the case of H.S. Anantharamaiah v. CBDT [1993] 201 ITR 526/69 Taxman 291 has also been relied upon by the assessee's counsel in this connection. The Karnataka High Court held in that case that in the matter of exercising its power under clause (b) of section 119(2) of I.T. Act, 1961, the CBDT discharges a quasi-judicial function and hence before rejecting the application of the assessee, it must afford an opportunity of being heard to the party.
Sri Venkatesan, also appearing on behalf of the assessee, relied on two further judgments of Karnataka High Court and Supreme Court. In the first case of P.V. Pal v. R.L. Rinawma, Dy. CIT [1993] 200 ITR 717, the Karnataka High Court held that even an administrative order which involves civil consequences must be made consistently with the rules of natural justice. Accordingly, the High Court gave the verdict that while sanctioning prosecution, the authorities concerned must observe the principles of natural justice and afford proper opportunity of being heard to the accused.
In the other case viz., Institute of Chartered Accountants of India v. L.K. Ratna [1987] 164 ITR 1/28 Taxman 654 at page 11, also, the Supreme Court held that the principles of natural justice must be read into the unoccupied interstices of the statute unless there is clear mandate to the contrary.
Sri Venkatesan has also relied on another judgment of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. Union of India [1969] 51 Comp. Cas. 210. In that particular case, the Supreme Court made a detailed discussion about the rules of natural justice and the requirements of following such rules in judicial matters. The Supreme Court discussed that rules of natural justice are not embodied rules and that they are means to an end and not an end in themselves and hence it is not possible to make an exhaustive catalogue of such rules. The Supreme Court however made a special mention about two fundamental maxims of natural justice which are required to be followed in all judicial proceedings. These two maxims in latin tags are the twin principles of AUDI ALTERAM PARTEM and NEMO JUDEX IN RE SUA. The Supreme Court further emphasised that AUDI ALTERAM PARTEM is a highly effective rule devised by the courts to ensure that a statutory authority arrives at a just decision and it is calculated to act as a healthy check on the abuse or misuse of power. A further discussion was made therein about two facets of this maxim viz., (a) notice of the case to be met, and (b) opportunity to explain. The Supreme Court furthermore discussed that the rules of natural justice can operate only in areas not covered by any law validly made and that they can supplement the law but cannot supplant it. The Supreme Court furthermore discussed that if a statutory provision either specifically or by inevitable implications excludes the application of the rules of natural justice, then the Court cannot ignore the mandate of the Legislature. However, difficulties arise when the statute conferring the power does not expressly exclude this rule but its exclusion is sought by implication due to the presence of certain factors such as, urgency, where the obligations to give notice and the opportunity to be heard would obstruct the taking of prompt action of a preventive or remedial nature. The Supreme Court furthermore discussed that the general principle, as distinguished from an absolute rule of uniform application, is that where the statute does not, in terms, exclude the rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding AUDI ALTERAM PARTEM rule at the pre-decisional stage. Conversely, if the statute conferring the power is silent with regard to the giving of a pre-decisional hearing to the present affected and the administrative decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against the decision is provided, courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing sworn of all its formal trappings and dilatory features at the pre-decisional stage, unless, viewed pragmatically, it would paralyse the administrative process or frustrate the need for utmost prompitude. Sri Venkatesan has strongly argued in this connection that a pre-decisional hearing was required to be allowed by the CIT before according approval to the assessment order under consideration.
On the other hand, Dr. Krishna, the learned DR has strongly contended that introduction of the provision of granting statutory approval to the search assessment by the CIT was meant simply to enable the CIT to monitor the search and seizure assessment proceedings. It is more for the benefit of the departmental authorities to see that all the materials discovered or detected during the search are properly taken care of in finalising the assessment, than to allow the assessee a chance of giving a sort of appellate or revisionary proceeding against the proposed assessment, before the CIT. Dr. Krishna has argued in this connection that every Assessing Officer is required to act independently in discharging his duties as an Assessing Officer. He cannot normally be guided or instructed even by his superior authorities in the matter of framing an assessment. In support of this proposition, Dr. Krishna has relied on a host of decision as detailed below:
(i) Dinshaw Darabshaw Shroff v. CIT [1943] 11 ITR 172 (Bom.) at page 176.
(ii) Raja V.V.V., R.K. Yachendra Kumar Rajah of Venkatagiri v. ITO [1968] 70 ITR 772 (AP).
It was held in this particular case that assessment proceedings are quasi-judicial in nature and while making assessments, the ITO is solely to be guided by the provisions of law. No administrative instructions or directions can be given to him by the higher authorities in the matter of framing of the assessment.
(iii) Elphinstone Picture Palace v. Union of India [1969] 74 ITR 115 (Cal.)
(iv) Sheo Shankar Sitaram's case
(v) J.K. Synthetics Ltd. v. CIT [1972] 83 ITR 335 (SC).
Thereafter, Dr. Krishna has referred to certain other decisions, as discussed below to prove his point that while according an administrative approval with regard to certain matters, under the Income-tax Act, an opportunity of hearing to the assessee is not necessary. Firstly, he relied on a judgment of the Lahore High Court in the case of Lachhman Das Mehr Chand v. ITAT [1944] 12 ITR 432. In that particular case, it was held as below: -
"Sec. 28(6) of the Income-tax Act, 1922 does not contemplate a hearing being given to the assessee by the IAC before approving the penalty to be imposed by the ITO under that section. Under sub-section (6), the previous approval of the IAC is only required."
Thereafter Dr. Krishna referred to a judgment of the Calcutta High Court in the case of Mahabir Prosad Poddar v. CIT [1970] 77 ITR 343. This particular judgment does not seem to contain any clear ratio on the issue involved. The matter relates to approval to be given by the CIT to a proposal of the ITO for retaining seized documents for over 180 days, as per the provisions of section 132(8). The Single Judge of the Calcutta High Court deciding the writ petition brought by the assessee, merely stated as below: -
"Even if I accept the contention of Mr. Sen (Departmental counsel) that the approval of the Commissioner is a prior approval, without expressing any final opinion on this question, I do not see how it is of any assistance to the Revenue in the present case."
However, when the same case of Mahavir Prasad Poddar came up before the Division Bench of Calcutta High Court, it was held in that connection as below: -
CIT v. Mahabir Prosad Poddar [1974] 93 ITR 215 (Cal.).
"There is nothing in section 132(8) to indicate that the Commissioner should have a quasi-judicial approach in giving his order of approval to the retention of books of account and documents seized under section 132(1) beyond the prescribed period. The order of the Commissioner in giving the approval is nothing but an administrative order and the assessee is not entitled to a show-cause notice or to an opportunity of being heard before the Commissioner makes such an order. The statute has clearly provided for an opportunity of being heard to be given to a party in some of the other sub-sections of section 132 but no such provision has been made in sub-section (8)."
This particular decision of the Division Bench of Calcutta High Court was impliedly affirmed by the Supreme Court, not however on this particular issue, in the case of CIT v. Oriental Rubber Works [1984] 145 ITR 477/15 Taxman 51.
Dr. Krishna also brought our notice to several judgments of the Supreme Court in the matters of allied laws where it has been held that granting administrative approval for certain purposes, does not require to allow an opportunity of being heard to the person concerned. A gist of such judgments are being given below: -
(i) SP (CBI) v. Deepak Chowdhary [1995] 6 SC 225.
The matter related to granting of sanction for prosecution under the Prevention of Corruption Act, 1947. The Supreme Court held that the grant of sanction is an administrative function and that what is required is that the investigating officer should place all the necessary materials before the sanctioning authority which should apply its mind to the materials and accord sanction. The Supreme Court thus ultimately held that the question of giving opportunity of hearing to the accused before granting sanction does not therefore arise.
(ii) Sultan Singh v. State of Haryana [1996] 2 SCC 66.
It was held by the Supreme Court in this case that a Government order making reference of industrial disputes under section 10 of the Industrial Disputes Act is an administrative and not a quasi-judicial order, based on subjective satisfaction of Government. Therefore, no lis is involved. Recording of reasons was held by the Supreme Court to be required by the statute only in case of order refusing to make the reference and not in case of order making the reference.
(iii) State Bank of India v. S.S. Koshal [1994] Suppl. (2) SCC 468.
This matter related to departmental inquiry under the Service Law. The question was whether the appellate order should be a speaking one. The Supreme Court held that assuming that the rules required it to be so, on facts, the appellate order should be held as a speaking one as it showed application of mind to the facts of the case and the grounds of appeal. It was furthermore held that the order being one of affirmance, appellate authority was not bound to say more.
(iv) State Bank of Patiala v. S.K. Sharma [1996] 3 SCC 364.
The Supreme Court held in this case that where, there are no rules/regulations/statutory provisions incorporating the principles of natural justice, but those principles are implicit in the very nature of the action/order, if there is total violation of the principles i.e., no opportunity of hearing was given, then the action/order would be invalid, but if there is violation only of a facet of the principles i.e., no adequate opportunity/no fair hearing was given, test of prejudice should be applied and if no prejudice is caused, no interference will be called for. This particular case also related to a departmental inquiry under the service law. The Supreme Court also held in this particular case with regard to the maxim of AUDI ALTERAM PARTEM forming a part of principle of natural justice that where stay or public interest requires curtailing of the rule, court should balance that interest with the requirements of natural justice.
Thereafter Dr. Krishna furthermore argued that even if the Tribunal feels that the Commissioner should have allowed opportunity of being heard to the assessee before according approval to the assessment order, it would not be proper for the Tribunal to quash the entire assessment order on that ground. On the other hand, in such a case, the Tribunal should send the matter back to the lower authorities for complying with the principles of natural justice, i.e., Tribunal should restore the matter to the stage of according approval by the Commissioner with a direction to him to allow opportunity of being heard to the assessee. In support of this particular proposition, reliance has been placed on a number of decisions as listed below: -
(i) CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC) at page 449.
(ii) Mishri Lal Gordhan Lal v. CIT [1995] 80 Taxman 249 (Raj.).
The issue involved was procedural irregularity in an order required to be passed under section 144B of the Income-tax Act read with section 144A. It was held by the High Court that the Tribunal was right in restoring the matter back to the IAC to proceed afresh.
(iii) G.R. Steel & Alloys (P.) Ltd. v. CIT [1985] 152 ITR 220/17 Taxman 29 (Kar.)
In this case, an assessment as a result of which there was a variation in the income or loss returned exceeding Rs. 1 lakh, had been completed without following the prescribed procedure. It was held by the High Court that non-compliance is only a procedural irregularity and will not render the assessment as ab initio void. Direction to the ITO to redo the assessment after following the prescribed procedure was considered by the High Court to be valid.
(iv) Guduthur Bros. v. ITO [1960] 40 ITR 298 (SC)
On account of no opportunity of being heard having been afforded to the assessee in penalty proceedings validly initiated, it was held that setting aside the order imposing penalty with a direction for continuation of the proceeding from the stage of notice, was valid.
(v) Prabhudayal Amichand v. CIT [1989] 180 ITR 84/44 Taxman 213 (MP)
This was a similar decision as the preceding one in which an order passed for levy of penalty for concealment of income without approval of the IAC was sent back for curing the procedural irregularity.
(vi) Grindlays Bank Ltd. v. ITO [1980] 122 ITR 55/3 Taxman 38 (SC)
It was held that the defect in notice under section 142(1) was a procedural one and could be readily corrected by sending a proper notice.
(vii) Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC)
It was found in this case that the claim of partition of HUF had been made within time, though however, the assessment was made without holding inquiry. It was decided that the assessment was liable to be set aside and that it was the duty of the ITAT to direct the ITO to make fresh assessment after conducting the required inquiry.
In this connection, it is also required to mention the reliance placed by the assessee on a recent judgment of ITAT, Madras Bench 'A' in the case of Shanthakumar IT Appeal No. 1883(Mad.) of 1996 dated 17-10-1997. This was also an appeal against the assessment made under Chapter XIV-B of the Income-tax Act. The ITAT, Madras Bench", held the assessment to be illegal and void on two grounds viz., (a) that the Assessing Officer did not act independently in conduct of inquiry and in framing the impugned assessment; (b) that the Commissioner gave his approval without allowing the assessee an opportunity of being heard. The assessment was accordingly quashed. We find that the assessment was quashed in this particular case on the combined strength of the two grounds as mentioned above. It is not a fact that simply because of the Commission failing to allow an opportunity of being heard to the assessee, the assessment was held to be illegal and void. In any case, for the grounds to be discussed by us below, we respectfully differ from this particular judgment of the Madras Bench of ITAT, if it be considered to be an authority on the question of quashing a search and seizure assessment simply on the ground of Commissioner failing to afford chance of hearing before according approval to the assessment order.
The different judgments as discussed by us above clearly show that even the Supreme Court has held in a number of cases even in recent past that administrative actions on the part of the administrative authorities do not warrant compliance with the principles of natural justice of the nature of AUDI ALTERAM PARTEM. We are inclined to agree with the arguments of Dr. Krishna that the provisions for according approval to assessment orders to be passed in case of search and seizure assessments, were introduced mostly for the purpose of allowing the Commissioners to monitor the search and seizure cases in a legal manner. But for this provision, any interference on the part of the Commissioners, even to oversee how the search and seizure assessments are progressing, might have been considered as illegal and invalid. It does not appear that the Legislature intended that the Commissioner should play an appellate or revisionary role while according such approval excepting where the proposed assessment is based clearly on unrealistic, unfounded and capricious views and findings of the Assessing Officer. What the Commissioner is required to see while approving the proposed assessment orders in search and seizure cases is that whether all the materials collected during the search have properly been taken care of and also utilised in framing the assessment and whether the assessment, on the basis of materials on record, can be considered to have satisfactorily been framed. The Commissioner can discharge his function in this regard simply on the basis of the facts and materials on record. Since the Assessing Officer himself is supposed to have allowed sufficient opportunity of being heard to the assessee, before framing the proposed assessment order, it will not be necessary for the Commissioner to allow a specific opportunity of hearing to the assessee, unless a specific request in that regard is made by the assessee or the proposed assessment order is based on patent miscarriage of justice. Thus, in our view, if the Commissioner does not try to improve upon the proposed assessment order in a very big manner by ordering for further enhancements over and above what has been proposed in the assessment order framed by the Assessing Officer, it would not be necessary for him to allow a fresh chance of hearing of the assessee. Again, it is not the case of the assessee here that it had asked specifically for an opportunity of being heard before the Commissioner at the stage of according the approval to the proposed assessment order. It is also a fact that the Assessing Officer himself framed the assessment order on the basis of all the materials which had already been brought by him to the notice of the assessee and the issues already dealt with by him with the assessee were only put forth in the proposed assessment order. There is nothing on record to show that the Commissioner ordered to make any further enhancement of the undisclosed income over and above what had been proposed by the Assessing Officer. The assessee had already enough chances before the Assessing Officer himself and all further appellate avenues remained open to the assessee even after the act of according approval by the Commissioner to the proposed assessment order. The approval accorded by the Commissioner itself therefore did not create any civil liability of grave consequences against the assessee and hence the discussions of the Supreme Court about pre-decisional or post-decisional opportunities of hearing in the case of Swadeshi Cotton Mills Co. Ltd. would not seem to apply to the present case.
Taking into consideration all these aspects, we are of the opinion that since according of approval in this particular case was merely administrative in nature and no effective harm was caused to the assessee on account of such approval, not granting an opportunity of being heard to the assessee at the stage of according the approval, did not constitute denial of the principles of natural justice. Hence, we reject this particular ground taken by the assessee.
26. The last preliminary objection of the assessee against the validity of the impugned assessment order impinges on the consideration of undisclosed income for the purpose of the search and seizure assessment under appeal. It is the contention of the assessee that what has ultimately been assessed as undisclosed income is nothing but disallowance of the claims of the assessee towards depreciation and interest payments. In addition to that some amount has also been added as discounting charges, which was however neither debited by the assessee to its accounts nor even claimed as expenses anywhere. Firstly, it has been argued that disallowance of claims of expenses, or deductions by way of depreciation, etc., cannot be considered to constitute income of the assessee at all, not to speak of undisclosed income. It is not exactly possible for us to accept this particular contention on behalf of the assessee. In this connection, we would like to rely on the discussions made by ITAT, Delhi Bench 'C' in the case of Express Movers (P.) Ltd v. Dy. CIT [1997] 61 ITD 528 as cited by the learned representative of the assessee himself. It was held therein that if the entry or transaction representing income has been shown as a liability or a loan, and not as income, it will still come within the ambit of the definition of "undisclosed income". Hence, in our view even if the claim of allowance of certain expenses liability or deduction be found to be bogus on the basis of materials discovered during the search and seizure operation, the addition in that regard will have to be considered to be of the nature of undisclosed income as envisaged in the relevant section.
The learned counsel for the assessee goes on arguing further that in any case, depreciation and interest payments were duly recorded in the books of the assessee and also debited to its accounts in the proper manner and hence it will not be possible to treat such items as undisclosed income. It is thus finally claimed that what has actually been assessed as undisclosed income can at best be considered as income escaping the assessment. The inclusion of these items as undisclosed income in the impugned assessment has thus vehemently been challenged by the assessee.
Before we go into the question of this issue in detail, it would be necessary for us first of all, to have a look at the definition of "undisclosed income" for the purpose of application of the provisions of Chapter XIV-B. The said definition is as below: -
"158B........
(b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, buillion, 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."
The learned counsel for the assessee has brought our notice to a judgment of the ITAT, 'Mumbai Bench 'B' in the case of Sunder Agencies v. Dy. CIT [1997] 63 ITR 245. In that particular case, it has been held that although the definition of "undisclosed income" as given in section 158B(6) is stated to be merely inclusive, actually however it has got to be construed to be the exclusive definition of undisclosed income for the purpose of Chapter XIV-B. Detailed discussions have been made in the said judgment on this particular issue. In addition to the same, it has also been held therein that within the pale of Chapter XIV-B, assessment can be made only in respect of the undisclosed income and such undisclosed income must come as a result of search. It has also been held therein that it is beyond the power of the Assessing Officer to review the assessments completed unless some direct evidences come to the knowledge of the Department as a result of search which indicates clearly the factum of undisclosed income. It would be necessary for us to examine the contentions of the assessee on this issue in the light of this particular judgment.
There cannot be any doubt about the fact that during the course of the search, even if it can be assumed that there was such a valid search in the case of the assessee, no money, bullion, jewellery or other valuable articles or thing were found out. It cannot also be said that any entry in the books of account or other documents or transactions were discovered during the search which would evidence that such transactions represent wholly or partly income or property which had not been or would not have been disclosed for income-tax purposes. It has already been discussed by us earlier that the seized materials, i.e., a bunch of loose sheets were not at all utilised in framing the impugned assessment under section XIV-B. The entire additions have been made on the basis of the appreciation of the Assessing Officer about bogus transactions being conducted in the line of leasing of certain equipments entitled to 100% depreciation and also on certain statements of Sri Krishna Mohan and a letter of the proprietrix of M/s. Akshay Enterprises. It will not therefore be possible to say that the income that has been considered in the impugned assessment has got any connection with the search and seizure proceeding. Furthermore, the acquisition of the assets by the assessee are clearly recorded in the books of the assessee, the claim of depreciation is also debited to its regular accounts although at lower rate as per the provisions of Companies Act and not at the higher rates as per the Income-tax Rules, and the interest payments also stand debited to the regular accounts of the assessee. We agree with the assessee that the so-called discounting charges were neither debited to the books nor claimed in the assessments and hence the question of adding back the same does not arise at all. We will revert back to this particular issue once more when we look at the merits of the claim of the assessee in paragraphs to come below. The search did not reveal any materials by virtue of which alone or even in conjunction with certain other materials, the Assessing Officer was in a position to come to the conclusion that the claims of the assessee towards depreciation, etc., were fictitious and disallowable. Hence, we are of the opinion that strictly going by the definition of "undisclosed income" as finding place in Chapter XIV-B, it is neither possible to say that what has been added back in the impugned assessment represents the undisclosed income of the assessee nor even can the same be considered to be connected with the search & seizure proceedings. On both these counts therefore, the departmental effort to treat the disallowance of depreciation, etc., not only as undisclosed income but that too in a search and seizure assessment made under section 158BC, must be considered to be without any basis. Ultimately therefore, we agree with the contention of the assessee that the addition not actually representing undisclosed income of the assessee discovered as a result of the search, the assessment made under Chapter XIV-B containing such addition must be considered to be illegal, invalid and unwarranted. On this count also, we strike down the impugned assessment.
27. It will now be required of us to look into the claim of the assessee from the merit angle. Lots of discussions have been made by both the sides and many arguments have also been put forward. Both the representatives of the assessee viz., S/Shri Pradeep and Venkatesan have tried to argue very strongly that the ends of natural justice were not met in as much as the departmental authorities used certain materials for disallowing the claims of the assessee without allowing the assessee adequate opportunity to examine and rebut the same. It has been contended that the entire assessment should be quashed on the ground of denial of natural justice as stated above, alone. In support of this contention, reliance has been placed on a number of judgments as mentioned below: -
(i) Surajamull Mohta & Co. v. A.V. Visvanatha Sastri [1954] 26 ITR 1 (SC) at page 13.
The issue in this particular case related to the assessment of undisclosed income of the assessee in accordance with the provisions of section 5 of the Taxation on Income (Investigation Commission) Act, 1947. It was held by the Supreme Court as below:
"Sub-section (4) of section 5 of the Taxation on Income (Investigation Commission) Act, 1947 and the procedure prescribed by the Act in so far as it affects the persons proceeded against under that sub-section being a piece of discriminatory legislation offends against the provisions of Article 14 of the Constitution of India and is therefore void and unenforceable.... The assessee is not even entitled to see his own books and take copies."
In this particular case however, it is difficult to argue that Chapter XIV-B contains similar provisions which are discriminatory in nature and which offends Article 14 of the Constitution. It may be the argument of the assessee that some of the materials used against it were not supplied to it and on that ground, the question of denial of natural justice arises. However, this particular judgment cannot be considered to be applicable to the circumstances of the present case.
(ii) Colonisers v. Asstt. CIT [1992] 41 1TD 57 (Hyd.)(SB).
It was held in this case that the additions made by the Assessing Officer in violation of principles of natural justice should be set aside as void ab initio and there is no need to restore; the case to the Assessing Officer with directions for redoing.
From a detailed examination of the facts of the case, which have also been discussed by us above, it would be evident to everybody that the Assessing Officer took enough pains to put forward his points to the assessee from time to time. There were successive correspondences between the two sides. The departmental representative has also pointed that summonses issued to the Managing Director of the assessee on successive occasions were not complied with. Hence, on the basis of all these facts, it will not be possible for us to come to a conclusion that principles of natural justice were violated in a very gross manner. So far as however, the question as to whether any particular conclusion was arrived at by the Assessing Officer without bringing in proper evidences at the back of the assessee is concerned, we feel that such questions are required to be examined in the matter of appreciation of the issues in particular. The general contention of the assessee that on account of denial of natural justice, the assessment is liable to be quashed as a whole, seems to be just the opposite of the contention raised by Dr. Krishna that on account of violation of Rule 10 of the Income-tax (Appellate Tribunal) Rules, the appeal should be dismissed in limine. We cannot allow such unreasonable and unrestrained claims on either side. We would therefore take recourse to the procedure of examining each of the additions separately in the light of the evidences available with the Assessing Officer and in the background of whether the assessee had been afforded proper opportunity to rebut such evidences on that particular issue.
28. Dr. Krishna, the learned DR has assailed the claim of assessee towards depreciation even on merits on various grounds. His contentions in the nutshell are that firstly there is nothing on record to show that the assessee was in the business of leasing. He contends on this issue that the business of the assessee is in computer line and the assessee showed some purported leasing transactions. No evidences have been adduced to show that all the requirements like the formalities under the Company Law have been complied with by the assessee to carry on even leasing business. Secondly, Dr. Krishna argues that the cylinders and other equipments cannot be considered as 'plants' in the hands of the assessee. Thirdly, it has also been claimed that the assessee never became the owner of such assets in as much as all the so-called transactions for acquiring them were sham ones. Lastly, it is argued finally that in any case, the assessee did not use the assets in its business. Dr. Krishna thus contends that depreciation, in any case, is not admissible to the assessee on the assets even if the lease transactions be not found to be sham. He contends that in such a case, depreciation will have to remain disallowed, whereas the deductions allowed by the Assessing Officer in the assessment order in respect of the lease rentals would also have to be added back. Dr. Krishna thus strongly contends that the case calls for enhancement of the income by way of adding back the lease rentals amounts. He has argued in this connection that since this is a case of a first appeal before the Tribunal, the Tribunal has all the plenary powers of the first appellate authority including that of enhancement. In support of this proposition, he has relied on the following observations made by the Supreme Court in the case of Rai Bahadur Hardutroi Motilal Chamaria.
"It is only the assessee who has a right.... to prefer an appeal against the order of assessment made by the ITO..... Therefore, it would be only erroneous to compare the powers of the AAC with the powers possessed by a court of appeal, under the code of civil procedure. The AAC is not an ordinary court of appeal. It is impossible to talk of a court of appeal when only one party to the original decision is entitled to appeal and not the other party, and in view of the peculiar position, the statute has conferred very wide powers upon the AAC once an appeal is preferred to him by the assessee."
In opposition to this contention of Dr. Krishna, the learned counsel on behalf of the assessee has strongly contended that although Income-tax Appellate Tribunal may be the first appellate authority in respect of search and seizure assessments completed under Chapter XIV-B of the Income-tax Act, yet, its powers are limited only to what have been provided to it under section 254(1) of the Act. We agree with such contention. In the case of Rai Bahadur Hardutroi Motilal Chamaria, the Supreme Court was discussing the rationale behind the power of enhancement specifically conferred upon the first appellate authority like the AAC by the statute. In fact, the power of enhancement has specifically been given to an AAC or a CIT(A) under section 251 of the Act. Such a specific power however is not provided under section 254, to the Tribunal. Hence, it would not be possible to extend the arguments as provided by the Supreme Court in the abovementioned case, to the sphere of plenary powers of Income-tax Appellate Tribunal. Again, although it may not be possible for the Assessing Officer to file an appeal against the assessment order in search & seizure cases, once the assessee has preferred an appeal against the same, under the procedures relating to appeals before the ITAT, the Assessing Officer is at liberty to file a crose-appeal even asking for enhancement. The question of enhancement can be considered only with reference to such cross-appeals, if any. In this particular case, the Deptt., has not filed any cross-appeal and therefore the Tribunal cannot enhance the income in an appeal filed by the assessee, putting it in a position worse than at what it was at the stage of filing the appeal. In any case, Sri Venkatesan has brought to our notice an important j udgment of the Supreme Court which seems to be directly on this issue. In the case of State of Kerala v. Vijaya Stores [1979] 116 ITR 15, the Supreme Court clearly held as below: -
"The Tribunal does not have any jurisdiction or power to enhance the assessments in the absence of an appeal or cross-objections by the Department."
Although the above judgment was in the context of Sales Tax Law in the State of Kerala, the ratio of the judgment of the Supreme Court would however be applicable to similar issue with Income-tax Appellate Tribunal also. Following the said judgment keeping in view the various aspects of the matter as discussed by us above, we reject the plea take up by the learned departmental counsel regarding causing the enhancement of income.
29. So far as the question of whether the assessee was in leasing business or not, the learned counsel for the assessee has filed on our record a copy of the order of Company Law Board, South Regional Bench at Madras dated 29-12-1993 in Company Petition No. 376/17/SRB/93. In the said order, the Company Law Board approved of the alteration in the Memorandum of Association of the assessee company as proposed in a special resolution passed by the company inserting a further object clause.
"III(C)(iv). To carry on the business of leasing and/or hire purchase operations of all kinds of equipments, plant & machinery, vehicles, goods and other assets and to carry on the business of general finance, investment and other financial service and treating operations of all kinds."
In view of the above amendment in the object-clause of the assessee, the assessee must be considered to have entered the business of leasing and hire purchase operations from the end of December 1993 onward.
Sri Venkatesan has brought to our notice a judgment of Delhi High Court in the case of CIT v. National Air Products Ltd. [1980] 126 ITR 196/4 Taxman 309 in which case it has been held that a cylinder for storing gas is a "plant". Dr. Krishna has also admitted during the course of arguments before us that the cylinders and other equipments may be considered as "plants" in the hands of the actual users thereof i.e., the lessees. He however argues that since the assessee itself did not use the same in its business, they cannot be treated as plants in the hands of the assessee. Sri Venkatesan has in this connection relied on a judgment of the Karnataka High Court in the case of CIT v. Shaan Finance (P.) Ltd. [1993] 199 ITR 409, in which it has been held that the machinery owned by that assessee but given on hire and used by lessee for manufacture of article or thing is entitled to investment allowance. Taking cue from this particular judgment we hold that both the points as raised by Dr. Krishna are met hereby viz., that the cylinders and other equipments were used by the assessee in its leasing business and that they also constitute "plants" in its hands and hence depreciation would be allowable on such assets.
30. We thus come to the basic question as to whether the transactions of the assessee relating to purchase of assets and leasing them out to different parties can be considered to be sham transactions and in that way, the assessee cannot be considered to have become owner of the assets. Sequence of events leading to production of evidences by both sides have been discussed by us in great detail as above. We find that in support of the genuineness of the purchase as well as the lease transactions, the assessee has relied on various facts and also evidences. Firstly, the acquisitions of the assets have been rellected in the audited accounts of the assessee and the payments in that regard have been made by the Account Payee Cheques. Certain banks and financial institutions of all India repute are also stated to have financed the said acquisitions. Copies of invoices of the suppliers concerned were also duly filed before the Assessing Officer. As example of such, Invoice Nos. 25 & 26 dated 15-9-1995 of M/s. M.M. Industries and Invoice Nos. 12 & 13 dated 27-9-1994 and 10-3-1994 respectively of M/s. DDK Industries have been filed on our record. These are again supported by confirmation letters of the suppliers as well as of the lessees. Copies of the relevant lease agreements duly executed, were also provided to the Assessing Officer and have also been filed on our records. In case of some of the purchaser, copies of Credit Advises dated 22-9-1995 of State Bank of Mysore have also been put in the paper book filed before us. Auditors' Certificate in various cases certifying installation of the relevant equipments in the lessees' places have also been filed on record. Delivery challans of the suppliers have also been exhibited as evidences. Furthermore, Examination Reports of consultant like Ramba Hydrogen Pvt. Ltd. and of M/s. Bhushan Associates in support of installation of the equipments in the respective places of the lessees were also provided to the Assessing Officer and the copies of the same have been furnished to us for our examination.
Dr. Krishna has strongly contended in this connection that when an assessee claims some particular expenses, liability or deduction, the onus lies strongly on it to evidence the same with the help of proper materials. In this connection, he has placed reliance on the following judgments.
(i) CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11 (SC) at page 18
This judgment discusses about shifting of onus or burden of proof between the Department and the assessee depending on the circumstances of the case.
(ii) CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC)
It was held in this case that the burden of proving the necessary facts for claim of exemption under section 13(2)(xv) of the Income-tax Act, 1922 was on the assessee.
(iii) Lakshmiratan Cotton Mills Co. Ltd. [1969] 73 ITR 634 (SC) at page 649
(iv) Nund & Samount Co. (P.) Ltd. v. CIT [1970] 78 ITR 268 (SC) at page 272.
It was held in the said case that in an inquiry under section 10(4A) of the Income-tax Act, 1922, into the excessiveness or unreasonableness of an allowance resulting in the provision of any remuneration or benefit or amenity to a Director, it is for the taxpayer, to establish by evidence that the particular allowance is justifiable. Thereafter Dr. Krishna has brought our notice to the provisions of various sections of the Indian Evidence Act like sections 101,102,103, 106 and 114 in support of the same proposition that the onus of proving a particular proposition lies on the party who asserts the same.
Dr. Krishna has tried to point out certain irregularities or anomalies in some of the evidences furnished by the assessee like some of the certificate being undated, the name of the assessee not appearing in some of them, etc. In support of the claim that both the purchases as well as the leasing transactions were bogus, Dr. Krishna has strongly relied on the discussions made by the Assessing Officer in detail in the assessment order to which we have already made a reference as above. Dr. Krishna has emphasised in this connection on the arguments that on paper, the assessee shows having paid for the acquisition of the assets, but, gets back immediately 85% of the amount by way of lease rental advance from the lessee. He thus argues that this is not a legitimate financing activity and on this account also therefore, the assessee cannot be considered to have been carrying on a proper leasing business. Dr. Krishna goes on arguing that the actual intention of the assessee in exhibiting these transactions of false nature was to claim 100% depreciation on the cylinders purchased on different dates. He has also emphasised that the assessee was allowed sufficient opportunity not only to produce the suppliers and the lessees, but also to furnish fresh confirmation certificates from them and also to prove the existence of the assets by carrying on physical inspection of the same. Dr. Krishna once more reiterates that the assessee did not avail itself of the opportunity of cross-examining Sri Krishna Mohan and Sri Prasanna Kumar and furthermore of proving the existence of the assets by accompanying the Assessing Officer to the spots concerned for carrying on proper inspection.
The learned counsel for the assessee however contends in this connection that although an opportunity for cross-examining Sri Krishna Mohan and Sri Prasanna Kumar had been offered by the Assessing Officer on 21-3-1997 by his letter dated 15-3-1997, however on that date, it was not possible for the representative of the assessee who presented himself before the Assessing Officer to carry on the cross-examination proceeding in absence of both Sri Krishna Mohan and Sri Prasanna Kumar. We are unable to hold a proper view on this assertion of fact by the learned counsel for the assessee. However the examination of records clearly shows that on 21-3-1997, no proceeding took place at the end of the Assessing Officer.
31. We find that for disallowing the claim of depreciation of assessee, the learned Assessing Officer has mostly proceeded on a general presumption about fictitious nature of leasing transactions being carried on all over the country at the relevant time simply for the purpose of claiming 100% depreciation on certain equipments. Whatever might have been the general atmosphere and the practice resorted to by different parties on this particular matter, for the purpose of disallowing the claim of depreciation to the assessee in this particular case, it was necessary on the part of the Assessing Officer to clearly disprove the said claim by adducing proper evidences to show that both the purchasers as well as the leasing transactions were non-genuine. We find on a thorough examination of the assessment order and also the other materials including the correspondences between both the sides (described in detail) that the only two concrete materials which the Assessing Officer has utilised for disallowing the claim are the letter of Sri Krishna Mohan dated 14-2-1997 addressed to the Assessing Officer and a sworn statement before the Assessing Officer on 26-2-1997 by Sri Krishna Mohan. As discussed by us above, the full text of the letter dated 14-2-1997 was not supplied by the Assessing Officer to the assessee. Only copy of the sixth page of the said letter was provided by the Assessing Officer to the assessee in spite of repeated requests for the entire text. Dr. Krishna has relied in this connection, on the provisions of section 39 of the Indian Evidence Act, under which a relevant portion of a full material can serve the purpose of evidence with regard to the whole material. The page 6 of the letter of Sri Krishna Mohan to the Assessing Officer seems to be in continuation of his assertions made in the earlier pages and in absence of those earlier pages, it would be difficult to grasp the significance of the assertions of Sri Krishna Mohan as made in the page 6 i.e., the last page of his communication addressed to the Assessing Officer.
32. The Assessing Officer has stated in the assessment order and also stated so in his earlier correspondences that the statement of Sri Krishna Mohan is just a corroborating piece of evidence and that the main grounds on which the disallowance of depreciation was being resorted to by the Assessing Officer were the failure on the part of the assessee to produce fresh confirmation letters from the suppliers and the lessees and also to produce such parties before the Assessing Officer, coupled with the details of the sales tax and other allied matters relating to the supply of the equipments by the suppliers and finally, the inability of the assessee to identify the existence of the assets i.e., the cylinders in the premises of the lessee.
In the light of the different case-laws as referred to by Dr. Krishna and cited by us as above and also the various sections of Indian Evidence Act, it would be now be necessary for us to examine critically all the evidences on both the sides and also the question of shifting of onus or burden of proof between the Department and the assessee. As has been discussed above, the assessee discharged its primary onus for claiming depreciation on the cylinders by producing a number of documents like copies of invoices, delivery challans, lease deeds, inspection reports of various agencies along with the proof regarding the payments having been made through Account Payee Cheques. At this stage, the onus shifted on to the Deptt. to prove with stronger evidences that these papers were all bogus and did not reflect the correct factual position. Without discharging such onus, the Department cannot ask the assessee to produce any further evidence in support of its claim towards depreciation. As stated by us earlier, so far as the case of M/s. Miga Gases is concerned, the only two evidences on which the Assessing Officer has finally relied in support of his claim about the bogus nature of the transactions are Sri Krishna Mohan's letter dated 14-2-1997 to the Assessing Officer and also his sworn statement before the Assessing Officer on 26-2-1997. So far as the last named evidence is concerned, the Assessing Officer did not supply a copy of the same to the assessee at any stage. Hence, it is not possible for the Assessing Officer to rely on this particular piece of evidence. So far as the other evidence viz., Krishna Mohan's letter dated 14-2-1997 is concerned, there is no doubt about the fact that more than a copy of the page 6 of the said letter, nothing was ever furnished to the assessee. In the said page 6, Sri Krishna Mohan once again confirmed that all the supplies of industrial gas cylinders by M/s. DDK Industries/MM Industries were not genuine and were nothing but paper invoices only. He also stated that both these concerns were non-existing and non-operating during the period. He once more confirmed that all the lease transactions entered into between M/s. Miga Gases Pvt. Ltd. and all the lessors based on the invoices obtained from M/s. DDK Industries and M/s. MM Industries were also non-genuine and were nothing but accommodative transactions given at the specific request of the concerned lessors and their representatives. Towards the end of the said letter again, Sri Krishna Mohan requested the Assessing Officer to accord mercy on him on humanitarian ground is not initiating any penalty and prosecution proceeding against him.
Several factors are required to be noted with regard to this particular piece of evidence. As has been pointed out by the learned counsels for the assessee, this was merely a letter from Sri Krishna Mohan to the Assessing Officer asking for mercy in his own case so that he could come out of the precarious position to which he was put due to search & seizure in his own premises. The statement was not made by him on oath and it is not of the nature of a sworn statement or affidavit before any authority. In the face of such facts, it would be difficult to hold that this particular assertion made by him and that too in a letter addressed to the Assessing Officer, would disprove all his earlier confirmations given with regard to genuineness of the transactions between the assessee and his concern. Furthermore, although the Assessing Officer stated in the assessment order that the original affidavits (declared by Sri Krishna Mohan on 31 -5-1996) were withdrawn by him later on, there is however no evidence or material on record in support of such withdrawal. Hence those original affidavits must be considered to hold good. It is a fact that those affidavits were furnished by the assessee to the Assessing Officer at a very late stage of the proceeding i.e., on 21-3-1997. That however does not reduce the evidentiary value of the affidavits. The Assessing Officer got more than two months' time after receiving such affidavits. He did not utilise this time to get clear-cut retraction or withdrawal of such affidavits through further affidavits filed by Sri Krishna Mohan before proper authorities. The other contention on behalf of the assessee that in this mercy petition filed by Sri Krishna Mohan, he would like to tilt all the facts in favour of himself and against other parties including the assessee, also seems to have sufficient force.
In Assessing Officer's letter dated 8-10-1996 addressed to the assessee he informed the assessee about Krishna Mohan's statement recorded on oath about the non-genuineness of the transactions. The copies of such so-called statements before October 1996, of Sri Krishna Mohan were never furnished to the assessee, nor they have been utilised in any way in making the impugned assessment. Such statements, if any at all, do not form a part of the records before us. It is indeed intriguing to note that while since October 1996, the Assessing Officer had been shouting about non-genuineness of the transactions relating to supply and leasing of the equipments, the materials on our record only show that for the first time Sri Krishna Mohan came with a submission in that regard in February'97. All these things suggest that the Assessing Officer was being guided by presupposition about the transactions being sham transactions simply on the basis of a general notion of the Deptt, about all lease transactions in respect of equipments entitled to 100% depreciation being bogus, based on certain material found in respect of similar transactions in the cases of certain other assessees at various places of the country. So far as this particular assessee is however concerned, it is not possible for us to conclude on the basis of the materials on record that the Assessing Officer was in possession of any positive material about non-genuineness of the transactions, even in October 1996. He however started playing on the same card right from that time and ultimately disallowed the claim of the assessee towards depreciation.
It is correct that the assessee was provided with an opportunity to cross-examine Sri Krishna Mohan on 21-3-1997. Sri Pradeep, the learned counsel for the assessee stated before us that he was present on that day though however Sri Krishna Mohan was not available. Without going into the verification of genuineness of this statement, it would suffice to say that the assessment record showed that on 21-3-1997 no proceeding took place before the Assessing Officer.
There is no doubt about the fact that M/s. Miga Gases Pvt. Ltd. owned a number of cylinders. The learned counsel for the assessee says that 19000 cylinders were found out at its premises during the course of search/survey operations therein. In absence of any corroborative evidences, we are unable to believe this figure. At the same time again, gas cylinders were certainly found in the premises of M/s. Miga Gases Pvt. Ltd. by the departmental authorities. Whether those cylinders belonged fully to M/s. Miga Gases or a part of them belonged to the assessee does not seem to have been examined and verified in detail. The Assessing Officer has merely stated that M/s. Miga Gases had confirmed that such cylinders all belonged to that concern and not to the assessee. However there is no positive material or evidence on record in support of such statement. It is a fact that on the last date of the proceeding i.e., on 26-3-1997, the representative of the assessee and also the Assessing Officer confronted each other on the issue of inspection of the cylinders. The order-sheet entry shows that the assessee did not avail itself of the opportunity to carry on the inspection on that date. A letter filed by the assessee on the same date, shows that the assessee proposed to start the inspection on although in a limited manner. In any case, it is difficult for us to agree with the contentions of either party. It appears that the assessee was not in proper mood to take the Assessing Officer for inspection on that date. At the same time again, it also appears that the Assessing Officer also perhaps was not very much willing to carry out a very laborious and time-consuming inspection process of the cylinders towards the fag end of the assessment proceedings, which even according to the Deptt. was going to get time barred within a few days.
33. It may be true that the departmental authorities were able to detect a number of cases of bogus leasing operations in equipments entitled to 100% depreciation. The Assessing Officer has made detailed discussions in his chapter relating to "modus operandi" on this matter. He has also annexed a chart showing the inflow of money from one party to another. He has taken great pains to show that in the entire process, the assessee gets back about 85% of the amount spent by it in making the purchase of the equipments from the supplier. There is however a big missing-link in his theory and also the chart. He has not at all clarified how legally it will be possible for the entire money received by the supplier from the lessor to come to the lessee which in its turn would supply about 85% of the money to the lessor. The relationship between the supplier and the lessee has not at all clearly been discussed. In the instant case also, this general theory fails to have any effect in absence of the link between the supplier and the lessee being established by the departmental authorities. At one place, the Assessing Officer has described the suppliers like M/s. DDK Industries and M/s. MM Industries being non-existent and non-operating concerns, although there are apparent evidences in support of existence of such concerns by way of bank accounts, sales tax assessment numbers, etc. At another place again, the Assessing Officer states that these two concerns were also being owned by Sri Krishna Mohan, which fact has not at all been established with any evidence.
Ultimately, so far as the transactions of the assessee with M/s. Miga Gases Pvt. Ltd., are concerned, we feel that the Assessing Officer has not been able to rebut the various documentary evidences furnished by the assessee in support of the genuineness of both the supplies as well as the leasing transactions. The learned DR, in the written submissions furnished by him, contends in this connection that it is for the assessee to prove the genuineness of the transactions and the departmental authorities were not obliged to enquire into that matter by summoning the various parties as requested by the Assessing Officer. We have however discussed that on the assessee discharging its primary onus by furnishing the documentary evidences as referred to above, the onus clearly lay on the Deptt., to rebut the contention of the assessee. There was an opportunity for the Assessing Officer to do so by summoning the various persons and authorities as asked for by the assessee in its letter dated 14-3-1997 and disproving the case of the assessee thereby. The Assessing Officer however, without taking recourse to such proper procedure, merely remained content to rely on unsatisfactory evidences like the letter of Sri Krishna Mohan addressed to him, that too without affording the assessee proper opportunity to examine such evidences. The assessee has relied on two judgments in this connection. In the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775, the Supreme Court held that the ITO is not entitled to make a pure guess and make an assessment without reference to any evidences or any material at all. The Supreme Court furthermore held that there must be something more that bare suspicion to support the assessment.
In another case of Kalra Glue Factory v. Sales Tax Tribunal [1987] 167 ITR 498 (SC) also, the Supreme Court found out that in arriving at the conclusion that the transaction entered into by the appellant-firm was in the course of inter-state trade, the Sales Tax Tribunal had relied, inter alia, on the statement of a partner of another firm which had not been tested by cross-examination. The Supreme Court, therefore set aside the order of the Tribunal.
In the instant case, the claim towards depreciation as put forward by the assessee in the case of the leasing transactions with M/s. Miga Gases Pvt. Ltd., has been denied merely on a presupposition of the Assessing Officer about non-genuineness of leasing transactions in general and on an insufficient piece of evidence like page 6 of Sri Krishna Mohan's letter addressed to the Assessing Officer dated 14-2-1997.
34. So far as the case of claim of depreciation on Solar Testing Plant on lease operations with M/s. Tejus Solar Pvt. Ltd., is concerned, the Assessing Officer merely relied on a letter dated 18-4-1996 of the Proprietrix of the supplier concerned viz., M/s. Akshay Engineering. In the said letter, the Proprietrix merely stated that she had wanted to set up a selective coating plant with the help of her husband and that she had not done any business in this company since its inception. There was no specific mention about supply of materials to the assessee. Although the Assessing Officer mentioned about some statement of Sri Prasanna Kumar, the Managing Director of M/s. Tejus Solar Pvt. Ltd., regarding the non-genuineness of the lease agreement, no material evidence in that regard seem to have been placed on records.
35. The other two claims relating to lease operations with M/s. Tamil Nadu Air Products Ltd., Madras and M/s. Savik Vijay Engg. Pvt. Ltd., have also been denied merely on the ground of the inability of the assessee to produce fresh confirmation letters of the parties concerned. Like the case of M/s. Miga Gases Pvt. Ltd., in these cases also, the assessee furnished all the relevant papers like confirmation certificates, invoices, delivery challans, lease agreements and also certificates from consultants regarding installation of the equipments in the lessees' premise, with the Assessing Officer. Without first rebutting these documentary evidences on record, the Assessing Officer cannot ask the assessee to produce further evidences. In fact, the Assessing Officer does not have any evidence in support of his supposition about non-genuineness of the transactions.
Taking into consideration all these aspects of the case, we are therefore of the opinion that as per the materials on record, the assessee must be considered to have discharged its primary onus in proving its case for allowance of depreciation on all the equipments, whereas the Assessing Officer has based his action in denying the claim of the assessee either on a general supposition or on very scanty evidences as discussed above.
36. Apart from the claim of depreciation, the Assessing Officer has also disallowed interest payments on the lease rental advances/deposits. We have already discussed above that there are not sufficient evidences with the Assessing Officer to show that the lease agreements were not genuine. There is also no evidence to impinge the genuineness of the lease rental advances received by the assessee from the lessees. Hence, the question of disallowance of interest on such advances does not arise.
37. So far as the question of addition of discounting charges is concerned, we fully agree with the contention of the assessee that such so-called discounting charges were neither debited to accounts nor even claimed by the assessee in its assessments. The concept of claim of discounting charges is just a figment of imagination on the part of the Assessing Officer. If at all there be discounting charges, such charges represent expenses in the case of the assessee and they should be deducted instead of being added back. Dr. Krishna also, did not put forward any argument on this issue. The learned counsels for the assessee have relied, in this connection on the following case-laws in support of their contention that in case the lease transactions are held to be non-genuine, all the losses incurred by the assessee as per the records should be allowed.
(i) CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC)
(ii) Badridas Daga v. CIT [195S] 34 ITR 10 (SC)
(iii) CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC).
However, since we do not find any proper grounds to suspect the genuineness of the supply and lease transactions, we feel that the claim of the assessee in this regard is merely academic in nature and need not be attended to separately.
38. The learned counsel for the assessee also objects to levy of surcharge separately in addition to tax at the rate of 60% on the undisclosed income. We agree with him that as per the provisions of section 113, separate surcharge cannot be levied in respect of search & seizure assessments made under Chapter XIV-B. However, in view of the fact that we have held the entire assessment to be liable to cancellation, this particular ground becomes academic in nature.
39. In the result, the impugned assessment is cancelled as invalid, illegal and also barred by limitation. Furthermore, we also hold that there is no undisclosed income with reference to the search & seizure proceedings, which can be subjected to assessment in an assessment under Chapter XIV-B of the Income-tax Act. Furthermore, on merits also, we do not find sufficient materials for the Department to disallow the claim of the assessee towards depreciation and to add back interest amounts as well as discounting charges.
40. In the result, the appeal filed by the assessee is allowed.
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