I. ON MONEY
Q.1 Whether book result can be disturbed in case of Assessment relating to search & seizure?
Ans. Book result cannot be disturbed except to the extent that some document are found showing that entries in books are wrong or ‘ON MONEY’ found to be received by the assessee on the basis of seized material.
Reliance can be placed on the following cases:
a) Udhiram v/s. ITO-88 Taxman 191 (Asr.)
b) Jaya Shetty v/s. ACIT-69 ITD 336(Bom)
c) ITO v/s Jayant Saree House, 82 Taxmann 191 (Ass.)
Q. 2 Whether the entire On Money received would be taxed as Income or not? If not, what is the basis for taxing the On Money?
Ans. No, the entire On money received / found would not be subject to tax. The only method to work out the correct element of profit from the ‘On Money’ receipts would be to take a percentage thereof at the rate of gross profit / net profit annually disclosed by the assessee or by other similarly placed businessman. In the case of assessee’s engaged in construction business, only 6% to 15% (Depending upon case to case) of the ‘On Money’ receipts would be brought to tax as income from on money receipts.
Reliance can be placed in the following case decided by the Mumbai ITAT:
| i) | Mrs. Mehroo N. Irani v/s. ACIT.
ITA No. 1180 (Bom) of 1989, 26.2.91 (75 Taxman). |
| ii) | Wall Street Construction ltd. v/s. ACIT.
ITA No. 1759/Bom/1995 dt. 7.8.95 |
| iii) | M/s. Kanakia Builders & Ors. v/s. ACIT.
ITA (SS) No. 14 to 31/Mum/96 dt. 21.11.97 |
Q. 3 Whether the judgement passed in the case of Commr. of Sales Tax v/s. H. M. Esufalli’s, H. M. Abdulali reported in 90 ITR 271 (SC.) relating to Estimation of profit in case of search cases is a good law and whether the decision in the said case is binding on all assessees?
Ans. No, in the said case the Apex Court had upheld the estimation of sale out side books of Accounts. This decision cannot be applied universally as the facts of the said case were that no material was furnished before officer and it was an Exparte assessment and further this was the case of sales tax. Reliance can be placed on the following judgements:
(i) 60 ITR 239 (SC) State of Kerala v/s Vellukutty.
(ii) 49 ITR 95 (Pat) Chetandas Gulabchand v/s CIT
(iii) 207 ITR 979 (Cal) CIT v/s Ranicherra Tea Co. Ltd.
(iv) 37 ITR 1(SC) Calcuta Co. Ltd. v/s CIT.
BUSINESS EXPENDITURE:
Q.4 What would be the tax treatment in the case of On money received by a Builder, following Project completion method of accounting?
Ans. In the case of Builder following Project completion method of accounting, the On money component would be taxed as his business income in the year when the Project is completed. If the Assessee is liable to tax in the year of handing over possession then the on money component would also be taxed as his business in the year when the possession is handed over.
Q.5 Whether the expenditure incurred On payments made to Government Officials is an allowable expenditure?
Ans. Upto 31.3.2000 any expenditure incurred towards payments to Government Officials were treated as allowable expenditure. However the law is amended from 1.4.2000 and now the same are treated as not an allowable expenditure. However routine expenses at Govt. offices to get the legal work done can be treated as speed money and may be allowed as exp. of routine nature.
Q.6 Whether amount paid for security charges are allowed , as deduction?
Ans. Yes, Amount paid as security charges are distinguishable from amount paid as protection money to extortionists. Therefore legal and genuine business expenditures are allowed whereas illegal, unlawful and expenditures incurred against public policy are not allowed in view of the amended provisions of section 37(1) of Income-tax Act from 1.4.2000.
Q.7 Expenditure incurred in business outisde books of accounts can be added as undisclosed income.
Ans. Yes, expenditure incurred outside books of Accounts can be added as undisclosed income but again deduction of expenditure will be allowed hence finally taxable income will be NIL.
Reliance can be placed on the following judgements:
(i) 19 ITD 306 (Ahd.) S.F. Wadia v/s. ITO
(ii) 31 ITD 114 (Mad) M.K. Mathivathanam v/s ITO
(iii) 52 ITD 103 (Pat) Nishat Housing Dev. (P) Ltd. v/s. ACVT
(iv) 127 ITR 90 (SC) CIT v/s. Piard Singh
(v) 50 ITR 233 (Bom) CIT v/s R. B. Rungta & Co.
(vi) 49 ITR 31 (Bom) CIT v/s Pranlal Kesurdas.
Q.8 Assessee owning vast Agricultural Lands and same reflected in accounts and regular assessment completed. Whether roving enquiries be made questioning the details of Agricultural land and income thereof?
Ans. Under search assessment roving enquiries can be made in respect of completed assessments, which is likely to be disturbed on account of search , if some false documents are found during the course of search.
IV. Addition on surmises & presumptions:
Q.9 Whether additions under search assessment can be made on the basis of presumptions, Assumptions, Surmises and conjectures etc.?
Ans. No. Additions under search assessment can be made only with regard to as such as cash, jewellery unexplained investments valuable and no additions can be made on the basis of presumptions, assumptions, surmises and conjectures etc.
“Reliance can be placed on the following decided case laws:
a) 71 ITD 128
131 ITR 597 (SC) – K. P. Varghese.
held when there is no material found addition on surmises is unjustified in a search assessment.
b) 66 ITD 510 (Pune) Kasat Textiles Pvt. Ltd. v/s ACIT – Information in a persons books of accounts unless proved wrong should be accepted.
c) 63 ITD 153 (Bom) ACIT v/s Shailesh Shah
Held addition based on suspicion cannot be sustained.
d) IT (SS) A No. 1 18/Mum/96 – Shri R. M. Bhagwandas Raheja v/s. ACIT.
held vague information found in search cannot be used against the Assessee.
Q.10 During the course of search valuable documents / Agreements standing in the names of children, who are major and assessee to tax are found whether, addtions can be made in the hands of Assessee?
Ans. No
Q. 11 If during the course of search some papers are found describing household expenditure for 2 months. Based on the said loose paper whether the A.O. can make addition for the entire year?
Ans. No. Assessing Officer cannot read something extra and on presumptions make addiiton. If the papers are found for two months, then additions at the most can be made for 2 months and not for the entire year.
Q. 12 If an assessee has many group concerns and bank account and the cash credits are rotated by the assessee through his different bank accounts. Whether the addition can be made of the all the credits appearing in different bank accounts?
Ans. No. In such a case the Peak Theory should be followed by the department, by calculating the Peak credit available to assessee on a particular date and only addition of the Peak credit can be made.
Q. 13 In case of search conducted at the site office of the Builder and the supervisor gives a statement that the rate of flat per sq. ft. is Rs. 4,500/- and the Builder gives the statement that the rate of flat per sq. ft. is Rs. 1,500/-. Then whether the statement given by the Supervisor supercedes the statement of the Builder and whether the same can be relied upon?
Ans. No. In case of search no third party statement can be relied upon unless there is corroborative evidence.
V. MISCELLANEOUS:
Q 14. On whom search notice can be served?
Ans. If during the course of search the search authorities find valuables such as jewellery, investments, cash of a third person, then search warrant can be taken out at the said third party too.
Q. 15 An assessee had offered for tax undisclosed income of say Rs. 50 lacs and unexplained valuable to the extent of say Rs. 25 lacs are found from his premises. The Assessing Officer made addition of both undisclosed income and unexplained investment to the income of Assessee. Whether he is correct in doing so?
Ans. No. Assessing Officer cannot make addition of both source of earning income as well as the investment thereof. In the given case since the investments are less than income, only addition on account of income and not investment would be sustained.
Q. 16 If the premises of an assessee is searched and till date of search he has not filed any return of income. Whether such an assessee can file his return of income thereafter?
Ans. Yes. Once an assessee is searched and it is found that no return of income is filed by him before search. His income for the past 06 years would be treated as part of search assessment and tax on the same would be charged at the rates as applied in the relevant assessment.
Q. 17 At the time of search if the books of account of the assessee are not complete. Whether the same can be completed?
Ans. Yes. During the course of search an assessee can complete his incomplete books of account and explain to the search authorities in respect of any discrepancies found.
Q. 18 During the course of search if an assessee makes a voluntary declaration in order to put an end to seamless litigation and to buy peace and if the Assessing Officer does not accept the same in its totality. Whether the declaration is binding on the assessee?
Ans. No. The declaration made by assessee amounts to an offer and if the same is not accepted in its true spirit and in its totality the same is not binding on the Assessee. Reliance in this regard can be placed in the following case laws:
i) Kishore Meswani Vs. 3rd Additional ITO, BSD(S) Wd ITA No. 7162/Bom/90.
ii) Puspa Vihar, Bombay Vs. ACIT, Circle 36(2) Mumbai ITA No. 1822/Bom/90.
Q. 19 If the case of Assessee is complicated and the Assessing Officer lacks understanding. In such situations what is the remedy available to an assessee?
Ans. If the case of assessee is complicated and Assessing Officer lacks understanding, assessee can request Assessing Officer to appoint a neutral Chartered Account, u/s 142(2A) for special audit who will audit the books of the assessee and the income of the assessee can be justly and easily quantified.
Q. 20 During the course of search assessment whether an assessee can make a waiver petition to the Commissioner of Income-tax u/s 273 A or 273 A (4) of the Income Tax Act, 1961?
Ans. Yes.
Q. 21 During the course of pendency of search assessment whether an assessee can approach settlement commission for settlement of his case which involves complexities?
Ans. Yes. But one has to wait for 120 days to complete from the date of search or receipt of Assessment order, but after 31-5-2007 it will not be possible to go to settlement Commission in case of Search cases.
Q. 22 Jewellery belonging to woman found at the time of search for which there is no documentary proofs of purchase. Whether the same would be treated for the purpose of search Assessment?
Ans. Income Tax Department has come out with number of circulars that a married woman should not be questioned on jewellery acquisence upto 500 grams and an unmarried Lady upto 250 gms. male members upto 100 gms. Therefore if jewellery found to this extent then Authorised officers can not seize that Jewellery and no addition can be made in Search Assessment. This view is confirmed by ITAT in number of cases.
Q. 23 if an assessee has jewellery or other valuables which was purchased 06 years prior to the date of search and has proof of purchase of the same, or holding the same then, whether the Income-tax Department can make addition in respect of the said jewellery or other valuables to the total income of the appellant?
Ans. No. Income-tax Department cannot question the Assessee in respect of transactions prior to 06 Assessment years.
Q. 24 Pass book maintained by an assessee, whether constitutes books of Account?
Ans. Yes.
Q. 25 What are the precautions to be taken by an Assessee to avoid complications during search?
Ans. The following are few suggestions / tips:
a) Regularise the books.
b) Regularise the jewellery held i.e. physical quantity of jewellery should tally with the jewellery declared. Particularly of diamond jewellery and weight of gold & silver ornaments or articles.
c) Since the tax rates are very low, it is advisable to pay tax and keep white money instead of holding black money in tension.
Such precautions would help an assessee in a great way. Presently an assessee is required to pay maximum Income tax @ 33%, Wealth tax @ 1% only on few items, Gift tax, Estate duty are abolished and expenditure tax is not applicable to individuals. Therefore with such great reliefs it is advisable that an assessee complies with the provisions of law and pays proper tax regularly to lead carefree life and particularly when cases are selected under scrutiny by computer only @ 2% of returns filed.
It is worthwhile to mention that in earlier years Income tax was @ 97.75%, wealth tax as @ 13%, Estate duty was @ 85%, Gift tax was @ 85%, Expenditure tax was @ 30% and many many other taxes at very high rates and over and above that there was 100% scrutiny of returns filed.
Q. 26 Assessee is Builder! Developer ! Contractor and following project completion basis of accounting whether after search department can change his system of accounting, particularly in view of AS7 and power of AO u!s 145(2).
Ans. No. If assessee is following particular system of accounting which is recognised by law and accepted by department then assessing officer cannot change that system.
Reliance can be placed on the following judgements:
(i) 37 ITR 37 (SC) Calcutta Co. Ltd. v!s CIT.
(ii) 193 ITR 694 (Bom) Shree Nirmal Commercial v!s CIT.
(iii) 171 CTR 203 (Bom) CIT v!s Dempo Ltd.
(iv) 107 ITR 119 (Bom) CIT v!s Kay Arts.
(v) 49 ITD 479 (Bom) Shapoorji Pallonji & Co. v!s CTO.
(vi) 17 TTJ 125 (Bom) Malad Shopping Centre v!s ITO.
(vii) AIR 2000 SC 94 (SC) United Com. Bank v!s CIT
(viii) (1956) A. C 85 (P.C.)
Q. 27 Assessee have filed return showing profit and accepted by Department, after search action Assessee filed returns in response to notice by AO declaring losses while completing Assessment AO compute losses but refused to allowed to be c!f in view of the fact that search & seizure provisions are for the benefit of Revenue and not for Assessee.
Ans. In view of the provisions of Chapter VI of IT Act, if returns are filed in accordance with law and Assessee by AO then loss has to be allowed to be c!f. Reliance can be placed on the following judgement:
(i) 36 ITD 625 (Del) Vinod Tayal v/s ITO
(ii) 37 ITR 1 (SC) Calcutta Co. Ltd. v/s CIT
(iii) 226 ITR 62 (SC) CIt v/s Poddar Cement (P) Ltd.
(iv) 191 ITR 570 (Cal) Burdwan Wholesale consumers Co-op. Soc. Ltd. v/s CIT
(v) 181 ITR 22 (Bom) CIt v/s Indian Rare Earth.
(vi) 200 ITR 749 (Cal) Himmatsingka Motor Works Ltd. v/s CIT
(vii) 22 TTJ 82 Smt. Margaret Rose Rendem v/s ITO
(viii) 142 ITR 877 (Mad) CIT v/s Standard Motor Products of India Ltd.
(ix) 171 ITR 232 (AP) State Bank of Hyderabad v/s CIT
(x) 149 ITR 487 (Raj) CIt v/s Rangnath Bangur.
Q. 28 During the course of search it was found that Assessee has received certain amounts due to Arbitration Award for earlier years but Assessee have shown as income in the year when received and accepted by Department. if Assessee follow mercantile system of accounting whether while completing the search assessment AO can take that amount in earlier years for which it pertains.
Ans. No. A.O. cannot take that amount in earlier years because amount is due to Assessee only due to Arbitration Award and that is the subsequent event ie after date of search.
Reliance can be placed on the following judgements:
(i) 193 ITR 496. G. Gopinathan v/s CIT
(ii) 192 ITR 534 (Ori.) BPR Construction v/s CIT
(iii) 53 ITR 114 (SC) CIT v/s Gajapathy Naidu.
(iv) 144 ITR 270 K. Sadashiva Krishnarao v/s CIT
(v) 232 ITR 2 (SC) P. Mariappa Coundet v/s CIT.
Q. 29 Can the matter be referred to the valuation officer for valuation of property etc by assessing officer in search cases?
Ans. By, virtue of Amendment by Finance Act No.2, 2004 a new section is inserted which is sec. 142A, wherein the assessing officer is given powers to refer the matter in Search cases to the Valuation Officer hence after 8-7-2004 AO can refer matter to valuation officer to value property etc.
