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Ganesh Foundry & Casting Limited v. Income Tax Appellate Tribunal
Structured Summary of the Opinion
Factual and Procedural Background
The appellant is a company operating a foundry and casting unit in Muzaffarpur, Bihar. The company filed returns for assessment year 1994-95 on 30.11.1995. While those returns were pending assessment, search and seizure operations were conducted at the appellant's premises in Surat on 15.12.1995 and 7.2.1996. Notices under section 142(1) read with section 158BC of the Income Tax Act, 1961 were issued. The appellant subsequently filed returns for the block periods 1995-96 and 1996-97 on 5.8.1996.
The Assistant Commissioner of Income Tax, Muzaffarpur, passed a composite assessment order dated 20.2.1997 in which (i) certain investments in shares found in the course of search were treated as undisclosed income, and (ii) certain business expenditures claimed as deductions were disallowed on the basis of materials that surfaced during the search and were treated as undisclosed income.
The appellant appealed to the Income Tax Appellate Tribunal (ITAT), which in part allowed the appeal. The Tribunal set aside the assessing officer's finding that share ownership amounted to undisclosed income for AY 1995-96 and remitted that issue for fresh consideration. However, the Tribunal agreed with the assessing officer in upholding the additions treating certain expenditures as fictitious and disallowing the claimed deductions on specified factual findings.
The appellant then preferred an appeal under section 260A of the Income Tax Act to this Court, challenging the Tribunal's order dated 28.9.2001. This Court framed three substantial questions of law on 19.10.2006 for consideration.
Legal Issues Presented
- Whether the Tribunal was correct in law in holding that an expenditure incurred in contravention of section 40A(3) of the Act would be an "undisclosed income" within the meaning of sub-clause (b) of section 158B of the Act?
- Whether the Tribunal was correct in law in holding that such an expenditure would be undisclosed income under section 158B(b) even though the transactions were recorded in the books prior to the date of search and no material in respect of such expenditure was found during the course of search?
- Whether the Tribunal was correct in law in confirming the addition treated as undisclosed income even though the conditions precedent to exercise jurisdiction under Chapter XIV-B of the Act were alleged to be absent?
Arguments of the Parties
Appellant's Arguments
- The appellant contended that invocation of Chapter XIV-B (block assessment) and section 158BB requires that the undisclosed income be relatable to materials found during the course of the search and seizure; absent such connection, the matter should be the subject of regular assessment and not block assessment proceedings. This submission relied on several reported judgments cited in the opinion.
- The appellant argued further that "such evidence" in section 158BB should be read as limited to materials discovered during the search and seizure (this point was supported by additional authorities cited in the opinion).
- The appellant appears to have contested the Tribunal's factual conclusion that the questioned expenditures were fictitious and that the cheques were manipulated; however, the opinion records that the appellant did not contest the Tribunal's conclusion on the share-ownership issue and would contest that point afresh before the assessing officer.
Respondent's (Department's) Arguments
- The Standing Counsel for the Department defended the Tribunal's order. He submitted that section 158BB (referred to as amended effective 1.7.1995) was properly applied and that the Tribunal had considered materials that came to light in the course of the search and seizure.
- The Department relied on the factual findings that account-payee cheques in excess of Rs. 20,000 were manipulated into bearer cheques, amounts were credited to accounts other than the named payees, cash was withdrawn, and funds were ultimately returned to the assessee — establishing violations of section 40A(3) and fraudulent conduct.
- The Department relied on judicial authority (Commissioner of Income-tax v. A.D Jayaveerapandia Nadar) for propositions relating to consequences of contraventions of section 40A(3).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Deputy Commissioner of Income-Tax v. Shaw Wallace and Co. Ltd., (2001) 248 ITR 81 | Relied on by the appellant to support the proposition that undisclosed income for block assessment must be relatable to materials found during search and seizure. | The Court recorded the appellant's reliance on this authority but ultimately answered the substantial questions against the appellant, concluding the transactions in question were relatable to search materials and involved fraud. |
| Bhagwati Prasad Kedia v. Commissioner of Income-Tax, (2001) 248 ITR 562 | Relied on by the appellant in support of the contention that block assessment additions must be tied to materials discovered in search. | The Court noted reliance but concluded on the facts that the transactions were connected to materials found during search and rejected the appellant's contention. |
| Commissioner of Income-Tax, Delhi-II v. Ravi Kant Jain, (2001) 250 ITR 141 | Relied on by the appellant on the limits of block assessment and the requirement of a nexus with search materials. | The Court observed the citation and proceeded to find the requisite nexus on the facts; the appellant's reliance did not alter the outcome. |
| Commissioner of Income-Tax v. Vikram A. Doshi, (2002) 256 ITR 129 | Another authority cited by the appellant for the proposition that undisclosed income under Chapter XIV-B must be linked to materials found in search. | The Court recorded the precedent but concluded that here the materials and the fraudulent manipulation were directly relatable to the search, leading to an adverse answer to the appellant. |
| Commissioner of Income-Tax v. G.K. Senniappan, (2006) 284 ITR 220 (Mad) | Relied on by the appellant to support the narrower interpretation of "such evidence" in section 158BB as limited to materials found during search. | The Court noted the authority among those relied upon but found on the facts that the transactions were connected to search materials and constituted fraud; thus the appellant's argument did not prevail. |
| Commissioner of Income-Tax v. Chandra Chemoux P. Ltd., (2008) 298 ITR 98 (Raj) | Relied on by the appellant for the proposition that evidence for invoking Chapter XIV-B must arise from materials found during the search. | The Court recorded the precedent but, applying the factual findings about the cheque manipulations and nondisclosure, ruled against the appellant. |
| Commissioner of Income-tax v. A.D. Jayaveerapandia Nadar, (2007) 162 Taxman 195 (Mad) | Relied on by the Department in support of consequences flowing from contravention of section 40A(3) (i.e., disallowance where payment in excess of prescribed sum is not by account-payee cheque). | The Court accepted the Department's reliance on this authority as consistent with its conclusion that the impugned transactions contravened section 40A(3) and were fraudulent. |
| Lezarus Estates v. Beasley, (1956) 1 All E.R. 341 (Court of Appeal, England) | Principle quoted: "Fraud unravels everything" — used to support the proposition that advantage obtained by fraud cannot be retained and fraud vitiates transactions and claims. | The Court invoked this authority and applied the principle to hold that the fraudulent manipulation of cheques defeated the appellant's claim for deduction. |
Court's Reasoning and Analysis
The Court's analysis proceeds from the factual findings made by the assessing officer and confirmed by the Tribunal regarding the manner of the transactions and their connection to the search:
- The Court described the key transactions: two cheques for Rs. 4,00,000 and Rs. 4,30,000 were issued initially as account-payee cheques but were manipulated into bearer cheques. The amounts were credited to bank accounts other than those of the named payees, cash was withdrawn, and the funds were returned to the appellant.
- On a plain reading of section 40A(3) (as quoted in the opinion), payments in excess of Rs. 20,000 made otherwise than by an account-payee cheque (or account-payee bank draft) disentitle the assessee to claim deduction for such expenditure. The Court held that the transactions were clearly hit by section 40A(3) and therefore the appellant was not entitled to the claimed deductions.
- The Court further held that the factual matrix disclosed fraudulent conduct — issuance of bearer cheques beyond Rs. 20,000 and other manipulations — and invoked the equitable and well-established principle that "fraud unravels everything." The Court cited Lezarus Estates v. Beasley for this principle and applied it to conclude that the appellant could not retain any advantage obtained through fraud.
- The appellant's central contention was that additions under Chapter XIV-B and section 158BB must be exclusively relatable to materials found during the search and seizure. The Court examined the record and the Tribunal's review order (dated 19.3.2002) which noted that the cheque transactions, although recorded in the books, were not disclosed in the returns filed on 30.11.1995 and that the assessing officer had found the explanations to be not genuine.
- Having considered the materials on record, the Court concluded that the impugned transactions were directly and clearly relatable to materials found during the course of search and seizure, were acts of fraud, and were not disclosed in the original returns. On that basis the Court rejected the appellant's argument that the additions could only be based on materials physically recovered during the search.
- The Court therefore answered the three substantial questions of law against the appellant and in favour of the Department, endorsing the conclusion that the Tribunal's treatment of the questioned expenditures as undisclosed income under the relevant block assessment provisions was legally supportable on the facts found.
Holding and Implications
FINAL HOLDING: The appeal is DISMISSED.
The Court answered all three substantial questions of law against the appellant and in favour of the Revenue, concluding that:
- The transactions were in contravention of section 40A(3) and therefore disentitled the appellant to the claimed deductions;
- The transactions and the resultant undisclosed income were directly and clearly relatable to materials found in the course of search and seizure; and
- The presence of fraud independently precluded the appellant from retaining claimed advantages, applying the maxim that "fraud unravels everything."
Direct consequence for the parties: the appellant's appeal is dismissed and costs of Rs. 10,000 are imposed on the appellant, to be included in the demand notice. The opinion does not purport to lay down a new principle of law beyond applying established provisions and authorities to the facts of this case; it resolves the specific questions raised on the facts and law before the Court.
Note: This summary is limited to and based exclusively upon the content of the provided opinion and does not introduce material beyond that opinion.
SK Katriar, J.
The assessee has preferred this appeal under the provisions of section 260A of the Income Tax Act 1961 (hereinafter referred to as the ‘Act’), and is aggrieved by the order dated 28.9.2001, passed by the Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA(SS) No. 21.Pat/1997, for the block assessment period 1.4.1994 to 31.3.1995, and 1.4.1995 to 7.2.1996
2. A brief statement of facts essential for the disposal of this appeal may be indicated. The appellant is a company with its foundry and casting unit at Muzaffarpur in the State of Bihar. It had submitted its returns for the period 1994-95 on 30.11.1995 While the returns awaited application of the mind and order of assessment by the learned assessing authority, there was a search and seizure in the appellant's premises at Surat (Gujarat) on 15.12.1995 and 7.2.1996 Consequently, the respondent authorities issued notice under section 142(1) read with section 158BC of the Act to the appellant. In response to the show-cause notice, the appellant filed returns for the block period 1995-96 and 1996-97 on 5.8.1996 On a consideration of the materials on record and the submissions of learned counsel for the parties, the learned Assistant Commissioner of Income Tax, Muzaffarpur, passed a composite order of assessment on 20.2.1997 (Annexure-1), whereby certain investments in shares found during the course of search were treated to be undisclosed income of the assessee. Secondly, it disallowed certain unexplained expenditure on the basis of materials which have come on record during the course of search and seizure, and treated them to be undisclosed income.
3. Aggrieved by the order of the learned Assessing Officer, the appellant preferred appeal before the Tribunal, which has been allowed in part by the impugned order. In so far as the first issue is concerned, the learned Tribunal has held that the learned assessing officer was not justified in treating the ownership of the shares as undisclosed income of assessment year 1995-96. The assessment order to that extent has been set aside and the matter has been remitted back to the learned Assessing Officer for a fresh consideration in accordance with law. Learned counsel for the appellant does not contest this proposition and submits that he shall contest the matter before the learned assessing officer.
4. In so far as the second issue is concerned, learned Tribunal has agreed with the finding of the learned assessing officer and has in substance held that the business expenditure for which deduction is being claimed were fictitious transactions, inter alia, for two reasons. A show was made of issuance of account-payee cheque. The same were later on with the help of interpolations converted into bearer cheque(s) which is in violation of section 40A(3) of the Act. It has also been found that the amounts were credited to different accounts other than the names of the payee written on the cheques, cash were withdrawn from the accounts, and returned to the assessee.
5. By order dated 19.10.2006 this Court formulated the following substantial questions of law:
(i) Whether the Tribunal was correct in law in holding that an expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub clause (b) of Section 158 B of the Act?
(ii) Whether the Tribunal was correct in law in holding that an expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub-clause (b) of Section 158B of the Act even though, the transactions in respect thereof were found entered in the books of accounts prior to the date of search and no material in respect of such expenditure were found in course of search?
(iii) Whether the Tribunal was correct in law in confirming the addition in relation to undisclosed expenditure treated as undisclosed income even though, the condition precedent to the exercise of jurisdiction under the provisions of Chapter XIV B of the Act were conspicuously absent?
6. While assailing the validity of the impugned order, learned counsel for the appellant submits that, in order to invoke the provisions of section 158BB of the Act, it must be shown to the satisfaction of the learned assessing authority that such undisclosed income is relatable to the materials which have been found during the course of search and seizure, failing which the same cannot be the subject-matter of block assessment under Chapter XIVB of the Act. The same can be part of regular assessment proceedings. He relies on the following reported judgments:
(i) (2001) Vol. 248 ITR 81 (Deputy Commissioner of Income-Tax v. Shaw Wallace and Co. Ltd.);
(ii) (2001) Vol. 248 ITR 562 (Bhagwati Prasad Kedia v. Commissioner of Income-Tax);
(iii) (2001) Vol. 250 ITR 141 (Commissioner Of Income-Tax, Delhi-Ii v. Ravi Kant Jain.);
(iv) (2002) Vol. 256 ITR 129 (Commissioner Of Income-Tax v. (1) Vikram A. Doshi);
6.1) In his submission, “such evidence” occurring in Section 158BB of the Act is relatable to the materials found during the course of search and seizure alone. He relies on the following reported judgments:
(i) (2006) 284 ITR 220 (Mad) (Commissioner of Income-Tax v. G.K Senniappan).
(ii) (2008) 298 ITR 98 (Raj) (Commissioner of Income-Tax v. Chandra Chemoux P. Ltd.).
7. The learned Standing Counsel for the Department has supported the impugned order. He submits that Section 158BB was amended with effect from 1.7.1995 He has taken me through various materials on record in an effort to establish that the learned Tribunal has taken into account materials which have come during the course of search and seizure. He next submits that, in view of the findings of facts recorded by the learned assessing officer and the learned Tribunal that account-payee cheques exceeding rupees twenty thousand were by manipulation converted into the bearer cheques, such transactions are violative of Section 40A(3) of the Act. He relies on the judgment reported in (2007) 162 Taxman 195 (Mad) (Commissioner of Income-tax v. A.D Jayaveerapandia Nadar).
8. We have perused the materials on record and considered the submissions of learned counsel for the parties. We would at the very inception like to notice the kind of transaction the appellant has engaged itself and the finding of fact recorded by the two learned authorities below.
It is evident that the appellant had issued two cheques amounting to Rs. 4,00,000/- and Rs. 4,30,000/- which were initially issued as account-payee cheque but were manipulated to be converted into bearer cheques, the amounts were credited to the accounts other than those of the two payees, and were later on returned to the appellant. The net result is that it was a case of issuance of bearer cheques beyond rupees twenty thousand and were also acts of fraud. It is patently violative of section 40A(3) of the Act which reads as follows:
“40A(3).50 Where the assessee incurs any expenditure51 in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette52, in a sum exceeding 53[54[twenty] thousand] rupees otherwise than by 55[an account payee cheque drawn on a bank or account payee bank draft], 56[twenty per cent of such expenditure shall not be allowed as deduction]:
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding 57[58[twenty] thousand] rupees otherwise than by 59[an account payee cheque drawn on a bank or account payee bank draft], the allowance originally made shall be deemed to have been wrongly made and the 60[Assessing] Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in subsection (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made; Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding 61[62[twenty] thousand] rupees is made otherwise than by [an account payee cheque drawn on a bank or account payee bank draft], in such cases and under such circumstances as may be prescribed63, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.]”
It is evident on a plain reading of the provisions that any claim for deduction exceeding rupees twenty thousand in a manner otherwise than by a crossed cheque or a crossed bank draft shall deprive the assessee of the benefit of deduction of the whole amount. We are satisfied that the transaction in question is hit by the bar of Section 40A(3) of the Act which disentitles the appellant to the claim of deduction.
9. There is yet another aspect of the matter. Law is well settled that fraud unravels everything. We are satisfied that the materials on record disclose that the appellant engaged itself in acts of fraud indicated hereinabove and the same by itself will defeat the appellant's claim for deduction. Reference may be made to the judgment of Court of appeal in England reported in (1956) 1 All E.R 341 (Lezarus Estates v. Beasley). Speaking for the Court Lord Denning observed as follows:
“… If this argument is correct, the landlords would profit greatly from their fraud. The increase in rent would pay the fine many times over. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The Court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever…”.
10. Elaborate submissions have been advanced on behalf of the appellants that computation of undisclosed income has to be exclusively relatable to the materials which have been noticed on the basis of the materials found during the curse of search and seizure. The assessment order, and the order of the Tribunal on the appellant's review application, are replete with references to the materials found during the course of search and seizure. The appellant has indeed advanced a chimerical submission without any basis whatsoever. Furthermore, it is relevant to notice the order dated 19.3.2002, passed by the learned Tribunal on the appellant's review application which notes as follows:
“This transaction relating to the issuance of the aforesaid cheques, though recorded in the books of accounts by the assessee, yet was not shown in its return filed on 30.11.95 It is not the case of the assessee that this income was shown in the regular returns. The AO had noted at great length that transaction relating to the issuance of cheques was not a genuine explanation and a hide and seek game was played. Therefore, it emerges that the assessee had not disclosed this income in its regular returns…”.
(Emphasis added)
11. We are thus convinced that the transactions in question are violative of section 40A(3) of the Act, were acts of fraud, and are directly and clearly relatable to the materials which have been found during the course of search and seizure. The assessee had not disclosed this income in its original returns.
12. In view of the foregoing discussion, we answer the three substantial questions of law against the appellant and in favour of the Department.
13. In the result, this appeal is dismissed with costs quantified at Rs. 10,000/- which shall form part of the demand notice.
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