Citation Codes

Equivalent Citations

citation codes

Case Number

I.T Applications Nos. 218, 238 to 241 of 1999

Judges

B.C Patel
P.B Majmudar, JJ.

Acts

FINANCE NO 2 ACT 1998
s. 256(1) of the IT Act, 1961 ('the Act')

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Smart Summary

Structured Summary of the Court's Opinion

Factual and Procedural Background

These applications arise from a common judgment of the Income-tax Appellate Tribunal, Ahmedabad Bench A. The Commissioner of Income Tax (CIT), Surat, moved the Tribunal under section 256(1) of the Income-tax Act, 1961 seeking that eight specific questions be referred to this Court. The Tribunal referred only Question No. 4 to this Court and declined to refer Questions Nos. 1–3 and 5–8, concluding that those questions were not referable as questions of law. In consequence of the Tribunal's order, the CIT made an application under section 256(2) to this Court seeking a direction to the Tribunal to refer the question of law set out in paragraph 4 of the application.

Separately, the assessee had earlier invoked the writ jurisdiction of this Court to challenge notices issued under section 143(2) in relation to the assessment year 1995–96. The facts included a search and seizure operation (1 December 1995 to 6 January 1996) and a block assessment under Chapter XIV-B for the block period 1 April 1985 to 6 January 1996. The assessee's position was that the block assessment had already computed income for AY 1995–96 and therefore regular assessment for that year should not proceed or result in additions overlapping with the block assessment. The Division Bench judgment in N. R. Paper & Board Ltd. vs. Dy. CIT (1998) 234 ITR 733 (Guj) was discussed and relied upon in this factual and legal context.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal having held that such addition is not justified in block assessments was justified in adjudicating the issue on its merit?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified to hold that services were rendered by the liaison agents with reference to the additional evidence of counter-signed order intents de hors the relevant pieces of evidence taken note of by the AO?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified by holding that an expenditure already claimed under the provisions of the Act cannot be termed as undisclosed income arising as a result of fictitious debits with reference to papers found in search and investigations based thereon?
Whether, on the facts and in the circumstances of the case and proper interpretation of provisions of s. 158BB Part-II, Part-III of Form No. 2B for block assessment, the Tribunal was justified in law in holding that the assessee is eligible to deduction under s. 80-I or 80-IA with reference to 'total undisclosed income' of the block period?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law to decide the case on merit after having accepted the preliminary objection that the AO was not competent to decide the issue of depreciation in block assessment?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in accepting the claim of depreciation with reference to the earlier assessment and the first time additional evidence in the form of an agreement and resolution de hors the facts found on the spot inspection?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deciding the addition on merit after having accepted the preliminary objection that the addition cannot be considered in block assessment?
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition on account of interest with reference to the advance given for the residential premises of the directors?

Arguments of the Parties

Revenue's Arguments

The learned counsel for the Revenue contended that nothing in the record shows the witnesses were not offered for cross-examination; therefore, the Tribunal should not have recorded a finding that witnesses were not available for cross-examination.
The Revenue argued that material collected during the search and seizure must feed into the block assessment; if hidden income or non-permissible deductions are discovered from seized material, those items should be considered in the block assessment and not in a regular assessment under section 143 even if a regular assessment was pending.
The Revenue pointed out that additional evidence (an admitted execution of an agreement) was produced at the appellate stage and implied that such evidence supported its position concerning liaison agents; however, the record did not show the Revenue objected to that evidence being placed before the Tribunal.

Assessee / Respondents' Arguments

The assessee had challenged notices under section 143(2) by asserting that the block assessment (Chapter XIV-B) for the period including AY 1995–96 had already computed the income for that year and therefore regular assessment should not proceed to make overlapping additions.
Relying on the Division Bench decision in N. R. Paper & Board Ltd. (supra), the assessee contended that block assessment of undisclosed income is independent of pending regular assessments and does not disturb earlier assessments; where previously disclosed income appears in returns or books prior to the search, it should not be treated as undisclosed income for the purpose of higher tax under Chapter XIV-B.
Mr. Soparkar (for the respondents) drew attention to factual material indicating liaison fees were paid to three companies, recorded in audited books of account, and paid by account-payee cheques cleared through the banking channel; he further noted that the AO had accepted those payments as correct in an assessment order for Suman Paper & Boards Ltd., and relied on Tribunal paragraphs discussing cross-examination to challenge the Revenue's factual assertions.
The respondents also relied on material and past assessments showing depreciation had been allowed in earlier years, supporting their claim for depreciation entitlement.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
N. R. Paper & Board Ltd. vs. Dy. CIT (1998) 234 ITR 733 (Guj) (also reported 1998) 101 Taxman 525 (Guj)	That block assessment of undisclosed income under Chapter XIV-B is independent of pending regular assessments; undisclosed income under the Chapter is classified separately, worked out in prescribed manner, and taxed at a higher rate without disturbing prior assessments; material discovered subsequently in regular assessment may be used by the AO in the regular assessment.	The Court relied on this decision to: (a) reject the Revenue's submission that seized material must necessarily be part of block assessment to the exclusion of regular assessment; (b) support the Tribunal's view that income disclosed in returns/books prior to search cannot be treated as undisclosed income for Chapter XIV-B; and (c) support the Tribunal's conclusion regarding entitlement to depreciation based on earlier assessments.
Dy. CIT vs. Central Hatcheries (P) Ltd. (1997) 59 TTJ (Jab) 587	Authority relied on by the Tribunal in relation to treatment of interest on rent deposit and related additions in block/regular assessment context.	The Tribunal placed reliance on this decision when considering Questions Nos. 7 and 8 (deletion of addition on account of interest with reference to an advance given for residential premises of directors), and the Court found no reason to interfere with the Tribunal's reliance on it.

Court's Reasoning and Analysis

The Court's analysis proceeded by examining each cluster of the questions proposed for reference and by assessing whether the Tribunal's determinations raised questions of law fit for reference under section 256(1).

On the scope of referral: The Tribunal referred only Question No. 4 to this Court and declined to refer Questions Nos. 1–3 and 5–8 because it concluded those were not referable questions of law. The Court noted that no question had been framed asserting the Tribunal's decision was perverse; had such a question been framed, the Tribunal would have expressed its views. The Court observed that the Revenue did not press such a question before it either.
Question No. 1 (additions in block assessment adjudicated on merits): The Court accepted that the Tribunal made factual findings on the evidence (including assessment order observations) and concluded that the Tribunal properly appreciated the evidence and therefore correctly refused to refer Question No. 1.
Question No. 2 (services rendered by liaison agents based on additional evidence): The Court noted that additional evidence was produced at the appellate stage (an executed agreement). There was no record of the Revenue objecting to admission of that evidence. The Court emphasized that the Tribunal has the discretion to accept or reject additional evidence; and, whether payments to liaison agents were genuine involved factual appreciation. Accordingly, Question No. 2 was not a question of law warranting interference.
Question No. 3 (expenditure already claimed cannot be treated as undisclosed income): The Tribunal concluded that where particulars of income or expenditure were disclosed prior to the search in returns, books of account, or in proceedings, such items cannot be treated as undisclosed income for the purpose of Chapter XIV-B. The Court recorded the Tribunal's reliance on N. R. Paper & Board Ltd. (supra) and found no reason to interfere with that view.
Questions Nos. 5 and 6 (competence of AO to decide depreciation in block assessment and acceptance of depreciation with earlier assessment evidence): The Court noted that depreciation had been allowed in earlier assessment years after verification of facts discovered during a prior search (21 August 1986). The Tribunal found the renovation expenditure for the premises (used as a sales office) was for business purposes and the company was entitled to depreciation. The Tribunal relied on N. R. Paper & Board Ltd. (supra) and the Court found the Tribunal's conclusions justified.
Questions Nos. 7 and 8 (additions and deletion relating to interest on advances for residential premises): The Tribunal gave reasons and placed reliance on the decision in Dy. CIT vs. Central Hatcheries (P) Ltd. The Court concluded that, on the facts and record considered by the Tribunal, its decision did not warrant interference.

The Court therefore upheld the Tribunal's approach of treating most of the proposed questions as matters of fact or appreciation of evidence (not referable legal questions) and accepted the Tribunal's referral of Question No. 4 to this Court.

Holding and Implications

Holding: The applications are rejected; the Tribunal's order is upheld in respect of Questions Nos. 1–3 and 5–8 (the Tribunal correctly declined to refer those as questions of law) and the Tribunal properly referred Question No. 4 to this Court. The Rules are discharged in all applications and there is no order as to costs.

Implications:

The Tribunal's factual findings and exercise of discretion (including its treatment of cross-examination, admission of additional evidence at the appellate stage, and conclusions regarding liaison fees, disclosed income, and depreciation) stand undisturbed on judicial review in this proceeding.
The Tribunal's referral of Question No. 4 to this Court remains in effect for further adjudication by this Court.
The opinion does not announce any new legal principle; it applies existing authorities (notably N. R. Paper & Board Ltd. and Dy. CIT vs. Central Hatcheries) and affirms that many of the contested issues were matters of factual appreciation or discretionary admissibility of evidence rather than pure questions of law fit for referral.

Note: This summary is confined strictly to the content and reasoning contained in the provided opinion and does not add or infer information beyond that text.

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Commissioner Of Income-Tax v. N.R Papers And Boards Ltd.

1. All these applications arise out of a common judgment passed by the Tribunal, Ahmedabad Bench A, Ahmedabad, hence, these applications are disposed by this common judgment.

2. The CIT, Surat, moved the Tribunal under s. 256(1) of the IT Act, 1961 ('the Act') for making a reference. The following 8 questions were suggested to be referred to this Court :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal having held that such addition is not justified in block assessments was justified in adjudicating the issue on its merit ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified to hold that services were rendered by the liaison agents with reference to the additional evidence of counter-signed order intents de hors the relevant pieces of evidence taken note of by the AO ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified by holding that an expenditure already claimed under the provisions of the Act cannot be termed as undisclosed income arising as a result of fictitious debits with reference to papers found in search and investigations based thereon ?

(4) Whether, on the facts and in the circumstances of the case and proper interpretation of provisions of s. 158BB Part-II, Part-III of Form No. 2B for block assessment, the Tribunal was justified in law in holding that the assessee is eligible to deduction under s. 80-I or 80-IA with reference to 'total undisclosed income' of the block period ?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law to decide the case on merit after having accepted the preliminary objection that the AO was not competent to decide the issue of depreciation in block assessment ?

(6) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in accepting the claim of depreciation with reference to the earlier assessment and the first time additional evidence in the form of an agreement and resolution de hors the facts found on the spot inspection ?

(7) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deciding the addition on merit after having accepted the preliminary objection that the addition cannot be considered in block assessment ?

(8) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition on account of interest with reference to the advance given for the residential premises of the directors ?"

3. Out of the aforesaid questions, question No. 4 has been referred to this Court by the Tribunal. So far as the question Nos. 1 to 3 and 5 to 8 are concerned, the Tribunal in its lengthy judgment has arrived at the conclusion that these questions are not referable as questions of law and, hence, declined to refer the same to this Court. It is in view of this order passed by the Tribunal that the CIT has made application before this Court under s. 256(2) to direct the Tribunal to refer to this Court, the question of law, set out in para 4 of the application.

4. Earlier the assessee invoked writ jurisdiction of this Court seeking to challenge the notices issued to them under s. 143(2) of the Act by which the assessees were required to attend the office of the Revenue in connection with the return of income submitted by them for the asst. yr. 1995-96. The assessee pointed out that the search and seizure operation carried out on 1st December, 1995 was concluded on 6th January, 1996. Their block assessment under Chapter XIV-B of the Act was made for the block period from 1st April, 1985 to 6th January, 1996. In accordance with the provisions of s. 158BB of the Act, the total income was worked out after giving credit for the amount disclosed. The assessee pointed out that the income for the asst. yr. 1995-96 was already computed in the assessment year for the block period. Hence, there was no question of preceding with the regular assessment for the asst. yr. 1995-96. It was further submitted that in any event no addition could be made to the total income disclosed in the said returns in view of the block assessments made for the period which included the said asst. yr. 1995-96. The Division Bench of this Court in the case of N. R. Paper & Board Ltd. vs. Dy. CIT (1998) 234 ITR 733 (Guj) : (1998) 101 Taxman 525 (Guj) : TC S10.1209 considered the provisions in detail. The Court pointed out that the block assessment of undisclosed income to be charged at a higher rate of tax prescribed was independent of the pending regular assessments and it operated in a different field from the assessment of undisclosed income which was not and would not have been disclosed for the purpose of the Act. Undisclosed income, by Chapter XIV-B, is classified separately for the purpose of assessment and is required to be worked out in the manner prescribed therein and treated to a higher rate of tax. This process did not disturb the assessments already made of the previous years, and was only intended to sniff out what had remained hidden and not disclosed by the assessee. There would, therefore, be no overlapping in the nature of the assessment made under this Chapter of undisclosed income and the regular assessment made under s. 143(3). The powers of regular assessment are kept in tact and so are all the appellate, revisional and other powers affecting such regular assessment and all the statutory consequences flowing from the exercise of such powers would follow alongside of this special assessment procedure devised for dealing with undisclosed income as a result of search. It, therefore, follows that in the inquiry under s. 143(3) for regular assessment which was pending when the block assessment was made, the AO who comes across evidence and material which was not found or made available in the process of block assessment, cannot ignore the same and he will be duty-bound to make the regular assessment taking into account such evidence and material gathered in the enquiry under s. 143(3) to ensure that proper assessment of total income is made and tax is determined on the basis of such assessment. The learned counsel submitted that the Division Bench was not in agreement with the views expressed by two different Courts. He submitted that even Explanation has been added to s. 158BA by the Finance (No. 2) Act, 1998 with retrospective effect from 1st July, 1995. The Explanation reads as under :

"Explanation. - For the removal of doubts, it is hereby declared that -

(a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period;

(b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period;

(c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period."

5. The learned counsel for the Revenue further submitted that whatever material is collected during search and seizure has to be evolved and from there if any hidden income or some non-permissible deduction is found, then the same will be considered and will form part of block assessment and not regular assessment under s. 143 despite the fact that the assessment is pending. We are not in a position to agree with the submission of the learned counsel for the Revenue in view of the decision of this Court.

6. It is in this background as stated hereinabove, the questions are required to be considered. No question is framed to indicate that the decision rendered by the Tribunal is perverse. If at all the Revenue is of the opinion that the Tribunal's decision is perverse, a question in that regard is required to be framed. If such question was framed, the Tribunal would have expressed its views. That apart, even before this Court, no such question is raised.

7. So far as Question No. 1 is concerned, it is required to be noted that on the facts, the Tribunal has arrived at a conclusion.

8. The learned counsel for the Revenue submitted that so far as the cross-examination of the witnesses is concerned, there is nothing to suggest that the witnesses were not offered for cross-examination. In the absence of a demand made by the assessee, the Tribunal ought not to have recorded a finding that the witnesses were not offered for cross-examination. Mr. Soparkar, the learned counsel appearing for the respondents, drew our attention to para 7 (on p. 100) and para 10 (on page 109) regarding cross-examination. The AO relying upon the statement of one Shri Jani arrived at a conclusion that the payment of commission to liaison agent was not genuine. Apart from that fact Mr. Soparkar further submitted that in the instant case, the liaison fees have been paid to three companies and have been debited in the account books maintained by the assessee which have been audited by the chartered accountants. Payments have been made by account payee cheques and the same have been cleared through banking channel. The Tribunal has observed that

". . . . . . in fact the AO has accepted the same as correct as per his observation at p. 16 of the assessment order in the case of Suman Paper & Boards Ltd."

Thus, it is clear that on appreciation of the evidence, the Tribunal has rendered the decision and the Tribunal has rightly rejected the application refusing to refer question No. 1.

9. So far as question No. 2 is concerned, the learned counsel for the Revenue, submitted that at the appellate stage, additional evidence has been produced. That piece of evidence indicates the admission of the execution of an agreement by the parties. In the application no grievance is made that this piece of evidence was placed on record without giving any opportunity to the Revenue. There is nothing to indicate that the Revenue objected to the same. When additional evidence is placed before the Tribunal, it is for the Tribunal to accept the same or not. Even if this piece of evidence would not have been placed on records in view of what we have indicated hereinabove, the decision would be the same. Insofar as the payment with regard to liaison is concerned, question No. 2 cannot be said to be a question of law and in our view, the decision of the Tribunal is not required to be interfered with.

10. With regard to question No. 3, the Tribunal has considered in para 11 the necessary averments. The Tribunal has arrived at a conclusion that

"if prior to the date of search, the assessee has disclosed the particulars of income or expenditure either in the return or in the books of account or in the course of proceedings to the AO or where the return has not become due, same are duly recorded in the regular books of account, then, in our opinion, such income cannot be treated as undisclosed income."

The assessee has disclosed the particulars of income or expenditure in the return/books of account and on the same material, the AO wants to take a different view. Such income cannot be treated as undisclosed income so as to tax a person at the rate of 60 per cent. The Tribunal has placed reliance upon the judgment of this Court in the case of N. R. Paper & Board Ltd. (supra) and in view of the aforesaid decision, it cannot be said that the view taken by the Tribunal requires any interference.

11. So far as question Nos. 5 and 6 are concerned, both are required to be considered together. It is required to be noted that for the earlier assessment years, depreciation was allowed by the AO in the earlier assessment years after verifying the facts which were discovered during the earlier search carried out in the case of the assessee on 21st August, 1986. The Tribunal has observed that in view of the fact that the premises were used by the assessee as its sales office the expenditure on renovation incurred for the office, was for the business purpose and, accordingly, the company is entitled to claim depreciation. The Tribunal has relied upon the decision of this Court in the case of N. R. Paper & Boards (supra). The Tribunal has rightly answered these questions.

12. So far as question Nos. 7 and 8 are concerned, they are required to be considered together. The Tribunal in its detailed order has given reasons. The Tribunal has placed reliance on the decision in the case of Dy. CIT vs. Central Hatcheries (P) Ltd. (1997) 59 TTJ (Jab) 587. The assessee has not charged interest on rent deposit. Considering the record and decision referred to hereinabove, the Tribunal arrived at a conclusion. It cannot be said that the decision rendered by the Tribunal requires any interference. Considering the facts placed before the Tribunal, the Tribunal has rendered its decision and, therefore, in our opinion, the Tribunal has rightly disposed of the applications by referring question No. 4 to this Court. These applications are, therefore, rejected. Rules discharged in all applications. No order as to costs.

Commissioner Of Income-Tax v. N.R Papers And Boards Ltd.

Structured Summary of the Court's Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee / Respondents' Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. N.R Papers And Boards Ltd.

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