Reelvant Extract of the Judgment
Analysis and Findings
22. On the question of law presently before the court, the primary consideration is whether the AO had the jurisdiction to make the additions to the assessment under section 158BC of the Act. To analyze this, it is necessary to address the grounds of each such addition made, and assess if the AO had jurisdiction in conducting the block assessment within the meaning of section 158BC, or if this was indeed not within the purview of the AO’s jurisdiction. Section 158BC reads as follows:
“Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then,
(a) the Assessing Officer shall
(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995 but before the 1st day of January, 1997 serve a notice to such person requiring him to furnish within such time not being less than fifteen days;
(ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after the 1st day of January, 1997 serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days,
as may be specified in the notice a return in the prescribed forml and verified in the same manner as a return under clause (i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period:
Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter:
Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;
(b) the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143 2[, section 144 and section 145] shall, so far as may be, apply;
(c)accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment;
(d) the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B.’
23. The Gujarat High Court had, in an earlier decision, in R. Paper & Board Ltd. v. DCIT (1998) 234 ITR 733 (Guj) ruled that block assessments and regular assessments deal with different purposes. The aim and objective of block assessments is the assessment of undisclosed income of the block period as a result of search. The objective of a regular or normal assessment is to determine the true total income or loss of the previous year on the basis of the return under section 139 and other documents and decide the Assessee’s tax liability. The structure and pattern of Chapter XIV-B as originally enacted e.f. 1st July, 1995 and as modified/changed through amendments, from time to time (in the relevant provisions), continues to retain its purpose, in that, a block assessment pertaining to a number of years remains distinct from an assessment under Section 143(3) pertaining to a single assessment year. Further, the amendment to section 158B(b) has enlarged the meaning of the term “undisclosed income” by including therein “any expenses, deduction or allowance claimed under this Act, which is found to be false”. However, this cannot be construed to mean that whatever has been left out in a regular assessment can be reassessed or re-examined with reference to those provisions which are relatable to an assessment u/s 143(3). This is evident from A.R. Enterprises (supra),where the court held as follows:
3 … Sections 158BD and 158BC, along with the rest of Chapter XIV-B, find application only in the event of discovery of “undisclosed income” of an Assessee. Undisclosed income is defined by Section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. We are of the view that the only way of disclosing income, on the part of an Assessee, is through filing of a return, as stipulated in the Act, and therefore an “undisclosed income” signifies income not stated in the return filed. Keeping that in mind, it seems that the legislature has clearly carved out two scenarios for income to be deemed as undisclosed: (i) where the income has clearly not been disclosed and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and hence subject to the machinery provisions of Chapter XIVB. The second category, viz where income would not have been disclosed, contemplates the likelihood of disclosure; it is a presumption of the intention of the Assessee since i n concluding that an Assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the Assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.’
25. A block assessment is to be carried out on the basis of the material found during the course of search and not as a result of other documents or material, which come to the possession of the AO subsequent to the conclusion of the search operation unless and until such material has a relationship or connection with certain material or evidence found during the course of search. It was highlighted in CIT v. Ravi Kant Jain (250 ITR 141- Delhi) how the procedure of Chapter ±XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. The scope and ambit of a block assessment is limited to materials unearthed during search and the assessment for the block period can only be done 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 AO. The Bombay High Court in the case of CI T v. Vinod Danchand Ghodawat (247 ITR 448 (Bom.) also held, similarly that where the assessee had made disclosure in their wealth tax return, which was accepted by the Department, additions made by the Department on the ground of undisclosed income was erroneous._ 4
26. A larger, five member bench of the Supreme Court reiterated the distinctness of the procedure between normal assessments and block assessments, with specific reference to the ‘charging section (of the Income tax), the reference to “previous year”as the income for which tax is levied and the special procedure for assessment of undisclosed income relatable to materials seized during a search, in Commissioner of Income Tax v Vati ka Township  367 ITR 466 (SC) in the following terms:
“Undisclosed income referred to in Chapter XIVB is not relateable to the previous year. On the contrary, it is for the block period which may be 6 years or 10 years, as the case may be. Consequently, as already mentioned, while analyzing the scheme of Chapter XIVB, such Chapter is a complete code in respect of assessments of ‘undisclosed income’. Not only it defines what is undisclosed income, it also lays down the block period for which undisclosed income can be taxed. Further, it also lays down the procedure for taxing that income. It is very pertinent to note at this stage that for this purpose, specific provision in the form of Section 158BA (2) is inserted making it a charging section. Thus, a diagnostic of Chapter XIVB of the Act leads to irresistible conclusion that it contains all the provisions starting from charging section till the completion of assessment, by prescribing special procedure in relation thereto, making it a complete Code by itself. Looking it from this angle, the character and nature of ‘undisclosed income’ referred to in Chapter XIVB becomes quite distinct from ‘total income’ referred to in Section 5. It is of some significance to observe that when a separate charging section is introduced specifically, to assess the undisclosed income, notwithstanding a provision in the nature of Section 4 already on the statute book, this move of the legislature has to be assigned some reason, otherwise, there was no necessity to make a provision in the form of 158BA (2). It could only be that for assessing undisclosed income, charging provision is 158BA (2) alone.”
27. This court is also of the opinion that the proper approach, commended through the decision in Shailendra Mahto (supra) by the Revenue, is inapt. Where the law is clear that unles material extraneous to the returns and document are seized or discerned as relatable to statements made, etc. additions could not have been made, having regard to the state of law applicable to the facts of the case. Furthermore, Durga Prasad More (supra) undoubtedly propounds an important principle of law relating to evidence. Its application however is wherever there is material that can validly be used to complete an assessment (in this case a block assessment). Again, as in the case of Shailendra Mahto, that authority has no applicability for this case.
28. As far as the question regarding the jurisdiction of the third member to doubt the reassessment on the basis that income to be added was not an issue is concerned, this court is of the opinion that such an objection should not be articulated this day and age. It is axiomatic a cliched proposition of law that a statutory authority conferred with quasi judicial powers has undoubted jurisdiction to (a) decide issues concerning its jurisdiction in a particular matter and (b) to apply the correct legal principles. Indeed, to say that a tribunal cannot decide a foundational issue, because of a perceived procedural issue would expose the legal system to insurmountable barriers-the foremost of them being that the litigant would be driven to superior courts each time the issue crops up in the competent tribunal. Hardly any authority is required for this, but dicta abound on the subject (Ref. Smt Ujjambai v. State of UP AIR 1962 SC 1621; Hari Vishnu Kamath v. Ahmad Ishaque and Ors. AIR 1955 SC 233; T.C. Basappa v. T. Nagappa and Another AIR 1954 SC 215). Furthermore, there is statutory authority in the form of Section 254 (1) and (2) of the Income Tax Act read with Section 255 (4), which provides thus:
(4) if the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shalI be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it.”
In the present case, when the third member noticed what he considered to be a lack of clarity about the block proceeding and the Revenue’s ability to add income in the absence of any seized material, he was duty bound to refer that point for decision, which he did. The subsequent clarification by the Bench, and later final decision, therefore, cannot be faulted.
29. This court now proposes to discuss the specific issues, which were referred or restored to the AO, having regard to the final order made by the It is apparent that in Mr. Pinaki Misra’s case, out of the18 heads of addition, 11 were restored for further inquiry and orders, of AO, on remand. The ITAT itself had deleted substantial income relating to three heads in the case of Mr. Misra. In the circumstances, the court proposes to discuss only the heads of income that were specifically addressed during arguments of counsel for the parties.
30. This court, therefore, would deal with the specific amounts brought to tax by the AO, but deleted by the ITAT. The first of these are addition of the amounts of 21,72,000/- and of 22,50,000/- in respect of Shri S.K. Chakraborty, (in Pinaki Misra’s case) and the addition of ` 5,00,000/- made to the income of Sangeeta Misra, for the alleged income earned from Triad The AO made an addition of Rs. 1,72,000/- being the amount standing to the credit of Shri S.K. Chakraborty but the same was reflected in Mr. Misra’s balance sheet, his bank account, duly supported by the confirmation of Shri S.K. Chakrabortyi and an original amount was accepted in the original proceedings u/s 143(3) according to the assessment order for Assessment Year (hereinafter also referred to as “AY”) 1989-90 dated 11.09.1990. In parallel, the AO made an addition of 25,00,000/- for the AY 1992-93 on account of alleged estimated income incurred from M/s Triad Associates by the Assessee’s wife. Further, Shri Chakraborty had confirmed on behalf of the ESPI Industrial Corporation on 23.11.1989 certifying that a sum of 22,50,000/- was receivable from the Assessee. As such, the AO had made a further addition of Z 2,50,000/- on the ground that the said amount given by Shri Chakraborty was not recorded by the Assessee in his books of account. On the point of jurisdiction regarding the addition of 22,50,000/-, the AO did not come across any material during the course of search and as is clear from the assessment order, the addition of Rs. 2,50,000/- was made on the basis of the statement made subsequent to the search and which even otherwise, was not presented to the assessee for rebuttal. The assessee did not make it during the search; it was disclosed and gone into during the regular assessment.Thus, this addition is based on a confirmation that was sought after the search, and hence, could not form part of the undisclosed income for the block period.
31. The amounts were already disclosed the regular assessment of the assessee in 1989-90, and similarly even in the case Sangeeta Misra, and are thus, outside the purview of the definition of “undisclosed income”. Thus, the AO has no jurisdiction to make the :aforementioned additions under section 158BC of the Act. Thus, the addition of 21,72,000/- by the AO has been made devoid of jurisdiction, since the same was already disclosed, and had not been unearthed during the search undertaken for the block assessment.
32. The next item of the addition of 250,00,000/- made by the AO on account of foreign travelling expenses. The court notices at the outset, that this was on the basis of the AO’s ad-hoc estimate of daily expenditure incurred by Shri Pinaki Misra vis-à-vis the foreign visits @ 22,500/- per day, and addition of 225,00,000/- on account of foreign travel expenses of Ms. Sangeeta Misra. The material on the record- filed during the regular assessment was that by his letter dated 16.12.1997 Shri Misra submitted that he was an advisor of Shri Chandraswamy since 1984, and had undertaken 22 foreign trips along with him to advise on legal matters, though he had not recorded any professional receipts from Shri Chandraswamy. A statement of Shri Chandraswamy had been recorded, where he disclosed that the assessee had accompanied him. The addition was made primarily on the basis of the assessee’s old passport, which was requisitioned from the passport office and which showed the numerous foreign trips undertaken by the assessee during the block period. This was done when the assessee was required to furnish copies of his passport, and he stated that he had surrendered his old passport to the issuing authority for issue of a fresh diplomatic passport. The foreign travels evidenced by the expired passport were by virtue of the requisition from the passport office, and not from the search. At the same time, the assessee’s computation of expenditure on tickets (`3,66,000/-) is on the lower side as against the figure of 250,00,000/- as worked out for by the Revenue. What is apparent is that the AO omitted the statement of Chandraswamy that the assessee’s expenses were borne by his devotee. Yet,whether the requisition of the passport from the passport office falls squarely within section 158BC, requires examination. The additions made on the foreign trips incurred by Ms. Sangeeta Misra are also to be examined in the same light.
33. In Mahesh Bhatt v. Asstt. Commissioner of Income Tax (2004)87 TTJ (Mumbai) 734 the court highlighted how the Income Tax Act provides additions or disallowances in a block assessment have to be based on evidences found at the time of search and not merely on the basis of presumptions and assumptions by taking inference from the set of material available on record. It was similarly held in Sunder Agencies v DCIT (1997) 63 ITD 245 (Mum) that the scheme of Chapter XIV-B does not empower to the Revenue to presume or draw assumptions in regard to the undisclosed income. The AO can only proceed on the basis of material detected at the time of search and the evidence gathered under section 132(4) only, and not otherwise. If seen in this light, the estimates of costs on the foreign travels of the assessee and his wife were not made during the course of the search pertaining to the block assessment, but through surmises based on the details found in the passports of the two assessees after requisitioning them from the passport office. Thus, the inference of escaped income is based upon materials gathered from extraneous sources and not from search. Section 158BB (subsequent to amendment by the Finance Act, 2002 w.e.f. 01.07.1995) states how the undisclosed income of the block period needs to be computed on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence on the basis of evidence. In Assistant Commissioner of Income Tax and Anr. v. Hotel Blue Moon (2010) 229 CTR (SC) 219 held that block assessments are not intended to substitute regular assessment and its scope and ambit is limited in that sense to materials unearthed during search. Similarly, it was highlighted in Commissioner of Income Tax v. R.M.L. Mehrotra (2010) 230 CTR (All) 288, an assessment based on search alone that does not attribute material evidence found therein or other information available with the AO relating to such materials cannot constitute block assessment. In the light of the above analysis, it is held that the additions made on account of the foreign trips made by the assessees fell outside the jurisdiction of the AO under section 158BC. They were correctly deleted by the ITAT.
34. The additions of 29,50,000/- (in the case of Mr. Pinaki Misra and 26,00,000/- made (in the case of Ms. Sangeeta Misra) by the AO on account of professional receipts are to be now examined. The two grounds on which these additions were made and that too on estimate basis, were the non-production of books of account and the 23 foreign trips made by Mr. Misra allegedly for the professional services rendered to Shri Chadraswamy. In respect of assessment years 1994-95 to 1996-97, 22,50,000/- each was added whereas the figures for AY. 1997-1998 was Rs. 2,00,000/- i.e. totaling 29,50,000/-, and an aggregate of 26,00,000/- in case of Sangeeta Misra, allegedly on account of difference in professional receipts and cash in hand. However, there does not seem to be any observation on the assessee’s arguments that no incriminating material had been found at the time of search pertaining to the suppression of professional receipts. The counsel for the Revenue, however, in the course of the present proceedings was unable to pinpoint any material, which had been found during the course of the search vis-a-vis the point at issue, thereby, the aforesaid figures arrived at cannot be brought to tax as “undisclosed income”in the block assessment, within the meaning of section 158BB(1). Therefore, in the absence of any any material found during the course of search, the post search enquiries made by the AO would become futile since this would only be relevant for a regular assessment u/s 143(3) and not in respect of a block assessment.
35. The next item is addition of 228,70,000/- made by the AO towards suppressed rent. The search took place on 01.11.1996. Further, the property in question i.e. 145, Jor Bagh, New Delhi is owned by a company named M/s. Jupiter Estates Pvt. Ltd. and the assessee along with his family were residing in this property since June, 1989. The tenancy was formally recognized by means of a lease deed between the parties dated 01.06.1989 entered into by the assessee and the said company. Additionally, the Assessee (Mr. Misra) had also made a security deposit and extended an interest free loan to the company of an aggregate amount of 258,00,000. What can be observed from the assessment order, is that the addition was made on a presumption that the rent charged (at the rate of 22500/- per month) was less than the fixed rent. However, this exercise of the AO ought to have been carried out within the meaning of regular assessment under section 143(3). When all material relating to the so called “suppressed rent” was available with the AO, in the first instance when the assessment for the relevant year was completed and no addition was made, the exercise by the AO, in deducing that the assessee must have earned some income (based on the expenditure estimated for his foreign travel and the estimate of his professional income) which was the suppressed rent, and determined, is twice removed from reality. The error in this kind of assessment was compounded, given that no material relating to such “suppressed rent” was discerned during the search or from the seized materials. Thus, this assessment falls outside the jurisdiction of the AO, since the block assessment conducted is not based on relatable evidence as required under section 158BB(1), but on presumptions made by the AO, as was highlighted in R.M.L. Mehrotra (supra), how an assessment based on search alone that does not attribute material evidence found therein or other information available with the AO relating to such materials cannot constitute block assessment.
36. This brings the discussion to two gifts aggregating Z90,00,000/-received by the assessee (Mr. Misra) from Shri Jhanwar Lal Kothari, and the gift to the Assessee’s wife of an amount of `38,71,507/- by Shri R.K. Jatia.. In the AY 1993-93, Mr. Misra received two NRI gifts aggregating 290,00,000/-from Shri J. L. Kothari to purchase a company by the name of White Lilly Estates Pvt. Ltd. which owns a property at 202- Golf Links, New Delhi. By his reply-dated 02.08.1997 (to a show cause notice) Mr. Misra contended that the said gifts were received out of NRE account of Shri Jhanwar Lal Kothari and accordingly they did not attract the provisions of the Gift Tax Act, 1958. He also furnished copies of the affidavit of Shri Kothari dated 30.04.1994 and the gift deed where it was stated that the gifts have been made out of natural love and affection. He also furnished copy of NRE account No. 5010009008 maintained with Sanwa Bank Ltd. in the name of Shri J.L. Kothari from where these gifts have been made. These gifts were duly reflected in this bank account. The assessee (Mr. Misra) also furnished a copy of the letter from Nakomthon Bank dated 26.05.1994 which stated that Shri Kothari was their valued customer and the bank provided credit facilities in the form of over draft, short term loan upto a moderate 7 figures in Baht. The assessment order shows that the addition was made entirely on the basis of the post search enquiries, and as a matter of record, the Assessee had disclosed the gifts in his return for AY 1994-95. Similarly, the gift to Ms. Sangeeta Misra was scrutinized previously in an assessment under section 143(3) of the Act, the receipt of the gift was duly disclosed in the return for AY 1992-93 and the gift had been accepted on scrutiny of the documents and evidence. As such, since the gifts have already been disclosed to the Revenue prior to the search, they cannot form part of the block assessment within the meaning of section 158BB(1), and cannot be thus, brought to tax as “undisclosed income”, as was reiterated in Hotel Blue Moon (supra) which held that the scope of block assessment is limited to material found during the search, and thereby, cannot include material already revealed. This was similarly highlighted in CI T v. Jupiter Builders P. Ltd. ((2006) 287 ITR 287 (Del)) and Commissioner of Income Tax v. Shri Vishal Aggarwal (2006 (283) ITR326(Del)) that where an income and assets are disclosed in the books of account and no incriminating material is found during search and seizure, addition in the block assessment is not valid. Therefore, the gifts received by the assessees from Jhanwar Lal Kothari, as well as the gift from Shri R. K. Jatia fell outside the purview of block assessment, and the AO has no jurisdiction to bring to tax the said sums.
37. In the light of the foregoing discussion and conclusions, the question of law framed in these appeals has to be and is answered in favour of the assessees and against the Revenue. The Aappeals fail and are, therefore, dismissed.