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Commissioner Of Income-Tax v. Khushlal Chand Nirmal Kumar
Structured Summary of the Opinion
Factual and Procedural Background
A search and seizure operation was conducted under Section 132 of the Income-tax Act, 1961 at the business premises of the respondent-firm, during which cash and jewellery were found. A notice under Section 158BC was issued on July 7, 1997, requiring returns for the block period April 1, 1986 to March 31, 1996 and for April 1, 1996 to December 24, 1996. The assessee filed returns and the Assessing Officer proceeded with block assessment under Chapter XIV-B.
While assessing investment in a construction (a residential house), the Assessing Officer relied on a report of the Departmental Valuation Officer and held that the investment for the relevant years was Rs. 10,18,000. The Assessing Officer found that the assessee could not explain the valuation report and therefore accepted it.
The assessee appealed to the Income-tax Appellate Tribunal (Tribunal), which, inter alia, deleted an addition of Rs. 1,88,042 made by the Assessing Officer in the block assessment under Section 158BC on account of alleged unexplained investment in construction, observing that nothing was found during the search to establish that more had been spent than recorded in the books and that an earlier Tribunal order (Agarwal Motors v. ACIT) was squarely applicable.
The Revenue preferred the present appeal under Section 260A of the Act challenging the Tribunal's deletion of the addition.
Legal Issues Presented
- Whether a report of the Departmental Valuation Officer (or other expert report obtained post-search) can be treated as "such other materials or information as are available with the Assessing Officer" under Section 158BB(1) of the Income-tax Act and used to compute undisclosed income in a block assessment when the valuation or related material was not found in the course of search.
- Whether the Assessing Officer can invoke powers under Section 131 (including issuing commissions under Section 131(1)(d)) to gather information or obtain reports post-search and treat such reports as admissible information for the purposes of Chapter XIV-B block assessments.
Arguments of the Parties
Appellant (Revenue)
- The Tribunal misconstrued Section 158BB; the phrase "such other materials or information as are available with the Assessing Officer" includes reports obtained by the Departmental Valuation Officer and similar material.
- The Assessing Officer may lawfully take into consideration information obtained at the time of assessment, including a departmental valuer's report, and such reports are legally obtainable under Section 131(1)(d) (power to issue commission) and Section 131(1)(b) (discovery/production of evidence).
- Relied on precedents (C. T. Laxmandas and William De Noronha) for the proposition that the Department has power to determine market value or rely upon valuation material.
Respondent (Assessee)
- Section 158BB's scope cannot be widened to permit reliance on expert reports obtained post-search where that information was not in continuance of material seized in the search; such independent reports do not constitute evidence under the statutory scheme for block assessment.
- Relied on the Division Bench decision in CIT v. Vinod Danchand Ghodawat and on a Central Board of Direct Taxes circular (dated August 27, 2002) to support the contention that only evidence found during search (and post-search inquiries based on that evidence) can be the basis for block assessment additions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Agarwal Motors v. ACIT (order of the Tribunal referenced) | Applied by the Tribunal to support deletion of addition in respect of unexplained renovation/construction expenditure. | The Tribunal relied on this Tribunal order as squarely applicable and used it as a basis for deleting the addition of Rs. 1,88,042. The present Court noted the Tribunal's reliance in its analysis. |
| C. T. Laxmandas v. CIT (Assistant) [1994] 208 ITR 859 (Mad) | Authority stating that the Income-tax Officer has power to determine market value of a capital asset under Section 55A (as cited by Revenue's counsel). | The Court examined the citation but stated that on perusal the judgment had no applicability to the present case. |
| William De Noronha v. CIT (Assistant) [1997] 227 ITR 27 (All) | Decision dealing with certain aspects of the Wealth-tax Act (cited by Revenue). | The Court observed that this decision, on perusal, did not have applicability to the present matter. |
| CIT v. Vinod Danchand Ghodawat [2001] 247 ITR 448 (Bom) | Held that additions in block assessment cannot be based on Departmental Valuer's report obtained subsequent to the regular assessment where Chapter XIV-B (block assessment provisions) has no application to such post-assessment valuations; Tribunal correctly deleted the addition. | The Court respectfully agreed with the Bombay High Court's view in this case and treated it as directly in point, concluding that the Departmental valuer's report obtained after search could not form the basis for block additions under Section 158BB. |
Court's Reasoning and Analysis
The Court began by examining the language of Section 158BB(1) (Chapter XIV-B), which defines "undisclosed income of the block period" to be computed on the basis of "evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer." The Revenue emphasized the phrase "such other materials or information" and argued that it permits the Assessing Officer to obtain and rely on reports such as that of the Departmental Valuation Officer, with supporting reliance on Sections 131(1)(b) and 131(1)(d) (powers of discovery/production and issuing of commissions).
The Court considered the rival interpretation advanced by the assessee: that Section 158BB must be read so that only evidence found during the search (and post-search inquiries that arise from that evidence) can be the basis for computation of undisclosed income; independent expert reports obtained after the search, which are not in continuance of material seized, cannot be treated as statutory evidence for block assessment additions.
The Court then reviewed the authorities cited. It found that the Madras decision in C. T. Laxmandas and the Allahabad decision in William De Noronha were not applicable to the question at hand. The Court gave substantial weight to the Bombay High Court decision in CIT v. Vinod Danchand Ghodawat, which directly addressed whether an addition based on a Departmental Valuer's report could be sustained in a block assessment context and concluded it could not when the report was not grounded in evidence found during the search.
The Court also referred to the Central Board of Direct Taxes circular (2002) which clarified that the Finance Act, 2002 amended Section 158BB to specify that block assessment of undisclosed income is to be based on evidence found in the search and material or information gathered in post-search inquiries made on the basis of evidence found in the search. The Court interpreted the unamended and amended provisions and the circular to support the proposition that evidence must have been found during the search and that only thereafter could material or information gathered in post-search inquiries (rooted in that evidence) be considered.
Applying these principles to the facts, the Court noted it was not disputed that during the search nothing was found in the assessee's premises regarding the investment in the house. The Assessing Officer nevertheless obtained a Departmental Valuer's report and confronted the assessee with it; the assessee could not explain the report. The Court held that such a post-search valuation report, not tied to evidence found during the search, could not constitutionally and legally form the basis for the block assessment addition under Section 158BB. In doing so the Court respectfully agreed with the Bombay High Court in Vinod Danchand Ghodawat and concluded that the Tribunal's deletion of the addition was justified.
On this reasoning the Court concluded there was no substantial question of law arising from the appeal.
Holding and Implications
DISPOSED OF — The appeal by the Revenue is dismissed.
Consequences and implications:
- The Tribunal's deletion of the addition of Rs. 1,88,042 made by the Assessing Officer in the block assessment under Section 158BC (on account of alleged unexplained investment in construction) is upheld.
- The Court held that a Departmental Valuer's report obtained post-search, where nothing relevant was found during the search regarding the investment, cannot by itself form the statutory basis for block assessment additions under Section 158BB; material or information considered for block assessment must be evidence found during search or information gathered in post-search inquiries rooted in such evidence.
- The Court indicated that no new legal principle was laid down beyond agreeing with the Bombay High Court's view; it stated that there was no substantial question of law for consideration, implying that the decision's direct effect is limited to the parties and the facts before the Court rather than establishing a wider novel precedent beyond the relied-upon authorities.
This summary reflects only the material and reasoning explicitly contained in the provided opinion. No additional facts, inferences, or external information have been introduced.
1. In this appeal preferred under Section 260A of the Income-tax Act, 1961 (for brevity "the Act"), the Revenue has called in question the legal propriety of the order passed by the Income-tax Appellate Tribunal, Jabalpur Bench, Jabalpur (for brevity "the Tribunal").
2. The facts which are essential to be stated are that in respect of the business premises of the respondent-firm a search and seizure operation was carried out under Section 132 of the Act whereby certain amount in cash and jewelleries were found. A notice under Section 158BC was issued on July 7, 1997, and the respondent was asked to furnish return in respect of the block period April 1, 1986, to March 31, 1996, and also for April 1, 1996, to December 24, 1996. In pursuance of the notice the assessee filed the return and the Assessing Officer proceeded with assessment. While dealing with investment in a construction, the Assessing Officer came to hold that the investment for the respective years was Rs. ,10,18,000. To arrive at the conclusion the Assessing Officer placed reliance on the report obtained from the Departmental Valuation Officer. He expressed the view that the assessee could not explain the valuation report obtained from the Departmental Valuation Officer and in the absence of any oppugnation the same deserved acceptance. We may hereby clarify that in this appeal we are only concerned with the aforesaid facet and nothing else.
3. Being dissatisfied the assessee preferred an appeal before the Tribunal. The Tribunal dealt with various aspects, but we are not concerned with the same. However, in paragraph 11 while dealing with this particular spectrum the Tribunal expressed the view as under :
"11. We have carefully gone through the orders of the authorities below. Rival submissions were also considered. Admittedly, not an iota of evidence was found during the course of search to establish that the assessee has spent more on renovation on residential house than what was recorded in the books of account. The order of this Tribunal in the case of Agarwal Motors v. ACIT (supra) is squarely applicable to the facts of the case. We are, therefore, of the opinion that the Assessing Officer is not at all justified in making impugned addition in block assessment framed under Section 158BC of the Income-tax Act. We, therefore, hereby delete the addition of Rs. 1,88,042 made by the Assessing Officer in the assessment framed under Section 158BC on account of alleged unexplained investment in the construction."
4. Assailing the aforesaid order it is submitted by Mr. Rohit Arya, learned counsel for the Revenue, that the Tribunal has misconstrued the provision engrafted under Section 158BB of the Act inasmuch as the said provision unequivocally lays postulate that the Assessing Officer can take into consideration the information at the time of assessment and the report of the Departmental Valuation Officer is an information and material one and legally obtainable under the provision. He has also drawn our attention to Section 131(1)(d) of the Act. To bolster his submission he has placed reliance on the decisions rendered in the case of C. T. Laxmandas v. CIT (Assistant) [1994] 208 ITR 859 (Mad) and William De Noronha v. CIT (Assistant) [1997] 227 ITR 27 (All).
5. Mr. Sumit Nema, learned counsel for the assessee, per contra, contended that the scope of Section 158BB cannot be enlarged to collect information by way of expert report once it is not collectable with the material brought forth in the course of search as that would not be the evidence as per law. He has drawn inspiration from the Division Bench decision rendered in the case of CIT v. Vinod Danchand Ghodawat [2001] 247 ITR 448 (Bom). Learned counsel has also commended us to the circular of the Central Board of Direct Taxes issued on August 27, 2002.
6. To appreciate the rival submissions, it is appropriate to refer to Section 158BB(1) of the Act which occurs in Chapter XIV-B of the Act. It reads as under :
158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer, as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined,--
(a) where assessments under Section 143 or Section 144 or Section 147 have been concluded, on the basis of such assessments ;
(b) where returns of income have been filed under Section 139 or Section 147 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns ;
(c) where the due date for filing a return of income has expired but no return of income has been filed, as nil;
(d) where the previous year has not ended or the date of filing the return of income under Sub-section (1) of Section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years ;
(e) where any order of settlement has been made under sub-section (4) of section 245d, on the basis of such order ;
(f) Where an assessment of undisclosed income had been made earlier under Clause (c) of Section 158BC, on the basis of such assessment.
Explanation.--For the purposes of determination of undisclosed income,--
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32 ;
(b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called to any partner not being a working partner :
Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement;
(c) assessment under Section 143 includes determination of income under Sub-section (1) or Sub-section (1B) of Section 143."
7. Mr. Arya, learned counsel for the Revenue, has placed emphasis on the. words "such other materials or information as are available with the Assessing Officer". It is contended by him that the said provision has to be read conjointly with Section 131(1)(b) of the Act which confers power on the Assessing Officer regarding discovery or production of evidence, etc. Section 131(1)(d) of the Act deals with issuing of commission. The submission of Mr. Arya is that information can be gathered by issuing necessary direction for collection of report as that would be in tune and harmony with the language employed under Sections 158BB and 131(1)(d) of the Act. Mr. Nema would like us to interpret the aforesaid provision in the backdrop that unless the information is in continuance of the document or material seized in the course of search an independent report cannot form the foundation for computation of undisclosed income of the block period.
8. Before we refer to the circular of the Central Board of Direct Taxes, we would like to refer to the citations made at the Bar. In the case of C. T. Laxmandas [1994] 208 ITR 859 the learned single judge of the Madras High Court expressed the view that the Income-tax Officer has power to determine the market value of a capital asset under Section 55A of the Act. In the case of William De Noronha [1997] 227 ITR 27 a Division Bench of the Allahabad High Court dealt with certain aspects in relation to the Wealth-tax Act. On a perusal of the aforesaid judgments we are of the considered view, the same have no applicability to the present case. At this juncture, we may refer with profit to the decision rendered in the case of Vinod Danchand Ghodawat [2001] 247 ITR 448 (Bom). In the said case the Bombay High Court was directly in seisin of the issue in question. Question No. 3 which was framed in that case read as under (page 450) :
"Question No. 3 : Whether in law, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 2,49,350 made on account of unexplained expenses in the construction of the residential bungalow at Jaysingpur, when the same was properly made by the Assessing Officer ?"
9. While dealing with said question the view was expressed as under (page 450) :
"The said question refers to an addition of Rs. 2,49,350 made on account of unexplained expenses in the construction of a residential bungalow by the assessee. Here also, Chapter XIV-B has no application. The Tribunal, rightly, found that the addition is made on the basis of the report of the Departmental Valuer. According to the Assessing Officer, during the search, it was found that the assessee had constructed a bungalow. It was found that the assessee had incurred expenses of Rs. 4.16 lakhs. The Assessing Officer, thereafter, referred the matter to the Departmental Valuer, who valued the property at Rs. 6.66 lakhs and, accordingly, the difference has been added to the income of the assessee as undisclosed income. The above basis clearly shows that the Department has not understood the scope of Chapter XIV-B of the Income-tax Act. By no stretch of imagination, the impugned addition fell within the Chapter XIV-B. There would be no finality, if the Department is permitted to add back to the income of the assessee on the basis qf the Departmental valuer's report obtained subsequent to the order of the regular assessment. Hence, the Tribunal was right in deleting the said addition. Accordingly, question No. 3 is answered in the affirmative, i.e., in favour of the assessee and against the Department."
10. If the provision of Section 158BB is read in proper perspective, we are inclined to respectfully agree with the view expressed by the Bombay High Court. Quite apart from the above, the Central Board of Direct Taxes Circular (see [2002] 258 ITR (St.) 13) which has been referred to above in paragraph 61.3.2 has laid down as under (page 58) :
"61.3.2. The Finance Act, 2002, has amended Section 158BB to clarify that the block assessment of undisclosed income is to be based on the evidence found in the search and material or information gathered in post-search inquiries made on the basis of evidence found in the search."
11. We have referred to the aforesaid clarification for the simple reason, Mr. Arya submitted that the amendment was effected to Section 158BB in the year 2002 with effect from July 1, 1995, and the amendment would be applicable to the present case as block period covers ten years commencing 1986 to 1996. On a perusal of the unamended and amended provisions and the Central Board of Direct Taxes circular, we are of the considered view that there has been no specific effect as far as this facet is concerned. Emphasis has been given on the fact that evidence must have been found during the search and only thereafter the question of gathering any material information would arise based on the search inquiry. It is not disputed at the Bar, that during the search in the premises of the assessee nothing was found with regard to the investment in the house. However, it is contended by Mr. Arya that the valuation report of the Departmental Valuation Officer was obtained and was confronted to the assessee but he was not able to give any explanation and, therefore, it should be accepted as evidence. We are afraid, the aforesaid submission does not commend acceptance in view of the statutory provisions and the law laid down in the case of Vinod Danchand Ghodawat [2001] 247 ITR 448 (Bom) with which we have respectfully agreed. In view of the aforesaid, we do not find any substantial question of law involved in this appeal.
12. Resultantly, the appeal, being sans merit, stands dismissed.
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