P.D Dinakaran, J.:— These tax case appeals are preferred against the order of the Income-tax Appellate Tribunal dated April 26, 1999, made in I.T(SS)A. No. 75.MDS/97, which was filed against the order of the Assessing Officer dated February 27, 1997. Tax Case Appeal No. 10 of 2000 is filed by the Revenue and Tax Case Appeal No. 47 of 2000 is filed by the assessee.

2. The assessee is a private limited company engaged in the business of construction and sale of residential and commercial buildings. The assessee commenced the business in the year 1992. K. Narasa Reddy designated as the managing director of the assessee-company held 50 per cent, of the shares and the remaining 50 per cent, of the shares was shared by Subba Reddy (Individual) designated as the director of the company, Subba Reddy (HUF) and Rajini Reddy, wife of Subba Reddy. There was a search in the premises of the assessee under section 132 of the Income-tax Act, 1961 on February 23, 1996. In the course of the search the following documents were seized:

(i) Statement of accounts prepared by one V.C Gupta, executive director (finance) of the company, relating to the settlement of accounts to the outgoing director Subba Reddy and his group;

(ii) Work sheet prepared by chartered accountants Giri and Prabhakar, which was taken into consideration for settling the accounts of the outgoing director Subba Reddy and his group,

(iii) Paper showing negotiation with buyers for purchase of flats.

3. Concededly, except the three documents referred to above, there was no other seizure of cash, bullion, jewellery or other articles or things of value during the time of search.

4. Based on the above materials, the Assessing Officer gave due notice to the assessee under section 142(1) of the Income-tax Act; received their objections; gave an opportunity to the assessee to explain its objections; and thereafter came to the conclusion that during the block period from 1986-87 to 1996-97, there was undisclosed income amounting to Rs. 10,24,64,660 as per the following details, attracting income-tax to the tune of Rs. 7.07 crores:

Sl. No. Assessment year Total undisclosed income (Rs.) Tax payable thereon (Rs.) (i) 1993-94 52,81,110 36,43,970 (ii) 1994-95 1,97,10,820 1,36,20,820 (iii) 1995-96 2,61,16,191 1,82,27,380 (iv) 1996-97 5,10,26,738 3,52,08,450 Total 10,24,64,660 7,07,00,620

5. Even though, only 85 per cent, of the constructed area of Kences Enclave Project was sold, and the balance 15 per cent, remained unsold, they did not receive the entire sale consideration even for the 85 per cent, of the areas sold before the date of search, and that the entire sale consideration was collected by the assessee only during the subsequent period for which the assessee duly submitted their returns and paid tax.

6. However, the Assessing Officer took note of the documents seized at the time of search referred to above and came to the conclusion that entire sale consideration for the sale of 85 per cent, of the constructed area was already received by the assessee and therefore passed an assessment order on February 27, 1997, directing the assessee to pay a sum of Rs. 7.07 crores as income-tax.

7. Against the assessment order dated February 27, 1997, directing the assessee to pay tax amounting to Rs. 7.07 crores, the assessee preferred an appeal before the Tribunal in I.T(SS) A. No. 75.MDS/97 contending that the documents relied on by the Assessing Officer for the purpose of arriving at the undisclosed income, namely, the statement of accounts prepared by V.C Gupta and the work-sheet of the chartered accountants were prepared only for the purpose of settling their shares payable to the outgoing director Subba Reddy and his group as the settlement of shares to an outgoing director could not be indefinitely postponed and had to be worked out based on the entire value of the project; and therefore, the said documents would not themselves be considered as a conclusive evidence that the assessee had received the entire sale consideration from the purchasers.

8. According to the assessee, the Assessing Officer ought to have taken all relevant factors into consideration, namely, the actual receipts of sale consideration from the purchasers by way of cheques or cash before the date of search as well as the amount received as income generated by such sale subsequent to the date of search, which were in fact shown in the returns duly filed by the assessee as well as the tax paid for the same for the subsequent period.

9. The assessee referring to the fact that except the three documents referred to above, there was no other seizure of cash or bullion, jewellery or other articles or things of value during the time of search, contends that the conclusion of the Assessing Officer that there is undisclosed income is without any basis. Such conclusion as to the undisclosed income is solely based on the documents referred to above, which was intended to settle their shares payable to the outgoing director, Subba Reddy and his group is arbitrary, unreasonable and perverse.

10. That apart, the assessee also claimed 100 per cent, depreciation with reference to their investment on the windmill to the tune of Rs. 1,87,13,477 which got commissioned on September 30, 1985, based on the certificate issued by the Electricity Board. The Tribunal while accepting the case of the assessee that 100 per cent, depreciation with reference to installation of windmill, rejected the contentions of the assessee with regard to the undisclosed income and computed the undisclosed income at Rs. 1,64,59,292 and gave 40 per cent, margin for the unsold portion of the constructed area.

11. Aggrieved by the order of the Tribunal dated April 26, 1999, regarding the computation of the undisclosed income the assessee preferred T.C (A) No. 47 of 2000 and the Revenue preferred T.C (A) No. 10 of 2000.

12. The substantial questions of law raised by the assessee in T.C (A) No. 47 of 2000 are as follows:

“(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in determining the undisclosed income even though the Assessing Officer himself has not specifically rejected the books of account of the appellant or the method of accounts adopted by the appellant?

(ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in determining the undisclosed income at Rs. 385 lakhs as a profit from Enclave Project when the assessee himself returned the profit to the extent of Rs. 580 lakhs based on the actual sale?

(iii) Whether on the facts and in the circumstances of the case, the Tribunal was right in concluding that the appellant had made a total profit of Rs. 642 lakhs in the Enclave Project when no material regarding collection of excess sale price or unaccounted expenditure has been found by the Department?

(iv) Whether on the facts and in the circumstances of the case, the Tribunal ought to have concluded that the seized material was merely an estimate of the profit that might be earned out of the project and in the absence of any specific material to show that the appellant had earned more income than accounted no undisclosed income can be seized in the hands of the appellant in respect of the said project?

(v) Whether on the facts and in the circumstances of the case, the Tribunal ought to have clarified that the amount of Rs. 385 lakhs constitute the total profit before tax out of the project during the block period and the profits already offered by the appellant should have been excluded?

(vi) Whether on the facts and in the circumstances of the case the Tribunal ought to have taken into account the profit already offered by the appellant in the said project over various years ?”

13. The substantial questions of law raised by the Revenue in T.C (A) No. 10 of 2000 are as follows:

“1. Whether on the facts and in the circumstances of the case and having regard to various seized materials placed, the Appellate Tribunal is right in law in allowing a margin of 40 per cent, on Rs. 642 lakhs on the profit earned on Kences Enclave Project?

2. Was the Tribunal right in granting 100 per cent, depreciation even if it held that the production started on September 30, 1985, and not on October 25, 1985, and that has it ignored the provisions of section 32(1) second proviso and section 158B(a) (definition of block period) of the Income-tax Act ?”

14. Mrs. Pushya Sitaraman, learned standing counsel appearing for the Revenue contended that the undisclosed income estimated by the Revenue is based on the material documents collected/seized from the premises of the assessee at the time of search, namely, (i) statement of accounts prepared by one V.C Gupta, Executive Director (Finance) of the company, relating to the settlement of accounts to the outgoing director Subba Reddy and his group; (ii) work sheet prepared by chartered accountants Giri and Prabhakar, which was taken into consideration for settling the accounts of the outgoing director Subba Reddy and his group; and (iii) paper showing negotiation with buyers for purchase of flats. Those documents having been acted upon by the assessee and the directors of the company, are binding on them and, therefore, the Assessing Officer is right in arriving at the undisclosed income based on such materials.

15. According to the Revenue, the contention of the assessee that they received the entire sale consideration only after the date of search is nothing but an afterthought. Even though the assessee had filed returns stating that they have received the entire sale consideration for the sale of 85 per cent, of the constructed area and had paid tax for the subsequent period, that will not eschew them from the liability to pay tax and the explanation offered by the assessee in this regard is not only untenable but it would only amount to evasion from payment of tax.

16. Per contra, Mr. P.P.S Janardhana Raja, learned counsel for the assessee forcefully contends that it is admitted that except the documents seized at the time of search, there was no seizure of cash, bullion, jewels or other things of value. In other words, the only materials available for estimating the undisclosed income or the documents seized at the time of search as referred to above, those documents were prepared only for the purpose of settling the accounts of the outgoing director, Subba Reddy, and his group. In normal business practice, much less in the real estate business, the over all value of the project has to be worked out while settling the accounts to the outgoing director, irrespective of the receipt of the entire sale consideration from the purchasers on the date of retirement of the outgoing director. Therefore, these documents cannot themselves be a basis for estimating the undisclosed income.

17. We have given careful consideration to the submissions made by either side.

18. Regarding the second substantial question of law raised by the Revenue in T.C (A) No. 10 of 2000, namely, “Was the Tribunal right in granting 100 per cent, depreciation even if it held that the production started on September 30, 1995, and not on October 25, 1995, and that has it ignored the provisions of section 32(1) second proviso and section 158B(a) (definition of block period) of the Income-tax Act ?”. Since the windmill installed by the assessee got commissioned on September 30, 1985, as certified by the Electricity Board, the entitlement of the assessee for 100 per cent, depreciation with respect to their investment in the installation of the windmill cannot be disputed and, therefore, this issue is decided in favour of the assessee and against the Revenue.

19. The centripetal force behind the substantial questions of law raised by the assessee in T.C (A) No. 47 of 2000 and the first substantial question of law raised by the Revenue in T.C (A) No. 10 of 2000 revolves around the materials available for estimating the undisclosed income as on the date of search as relied on by the Revenue and disputed by the assessee and therefore, all the questions are dealt with commonly.

20. Concededly, at the time of search except the documents referred to above, there were no other materials or valuables such as cash, bullion, jewellery or other articles or things of value, seized from the premises of the assessee.

21. The assessee-company permitted Subba Reddy and his group to retire from the company for settling his dues based on the settlement of accounts prepared by the executive director (finance) and the report of the chartered accountant. There is no other material to hold that the assessee received any cash from any of the purchasers for the sale of the 85 per cent, of the built up area. The entire sale consideration was not credited into account by cheque nor there was any material to show that the company accepted cash payment. On the other hand, the explanation offered by the assessee that they received cheques towards sale consideration of the 85 per cent, of the building sold and that was reflected in the income-tax returns while paying income-tax for the subsequent years deserves consideration. Therefore we are not able to appreciate that the documents seized from the premises of the assessee at the time of search as referred to above is a conclusive proof to arrive at the undisclosed income.

22. The expression “undisclosed income” has been defined in section 158B(b) of the Income-tax Act to include income based on entries in the books of account or other materials seized from the premises of the assessee at the time of search. In the instant case, even though the documents seized at the time of search would at best be considered in our opinion as prima facie material, since except the said documents there was no seizure of money, bullion, jewellery or other articles or things of value during the time of search, the said documents themselves would not be a sole criterian for estimating the undisclosed income in view of the explanation offered by the assessee that they were prepared for the purpose of settling the dues of the outgoing director, who proposed to retire. Both the orders of the Assessing Officer as well as the Tribunal, therefore, lack specific finding as to the reliability and relevancy of those documents for arriving at the undisclosed income of the assessee on the date of search or in the light of payment credited to the accounts of the assessee by way of cheques from the purchasers for the sale of 85 per cent, of the constructed area only after the date of search and the tax paid thereon as reflected in their return. Hence, both the orders of the Assessing Officer and the Tribunal are set aside and the matter is remanded back to the Assessing Officer to compute the correct undisclosed income in accordance with law.

23. The appeals are disposed of in the above terms.