8.1 Searches conducted by the Income Department are important means for unearthing black money. However, under the scheme before insertion of special procedure for assessment of search cases, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced in Chapter XIV-B for the assessment of undisclosed income determined as a result of search under s. 132 or requisition under s. 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30th June. 1995, shall be assessed separately as income of a block of years in addition to regular assessment. This aspect of the separate scheme of Block Assessment and Regular Assessment has been recognized by the Hon’ble Bombay High Court in the case of COMMISSIONER OF INCOME TAX vs. VLKRAM A. POSHI & ANR.(2002) 256 ITR 129 (Bomb), wherein held as under:
“6. The other questions sought to be raised by the revenue need no consideration as the issues raised therein are based on transactions which, by no stretch of imagination can be said to be undisclosed transactions falling under section 158B of the Income-tax Act, 1961 since the transactions in question were disclosed in returns which were the subject-matter of regular assessment- The same ought to have been assessed in the regular assessment and not in the block assessment. We, therefore, affirm the conclusions or findings recorded by the Tribunal with respect to those transactions referred to in other questions sought to be canvassed, may be for additional different reason recorded herein.”
8.2 The Gujarat High Court in the case N.R. Paper & Board Ltd .v. Deputy Commissioner of Income-tax 234 ITR 733 (Guj) after elaborate discussion held that there is no overlapping in nature of assessment made under Chapter XIV-B of undisclosed income and regular assessment made under section 143(3) and these provisions operate entirely for different purposes, one for assessing undisclosed income of block period while other for assessing total income or loss of previous year in regular assessment. Thus regular assessment and Block assessment both are independent and separate scheme of the Act.
8.3 The issue under consideration is related to Block Assessment where in only undisclosed income is to be assessed. Now question arises how the undisclosed income is to find out. For this purpose there must a search under section 132 or requisition under section 132A.of the Act. Section 132 is a Code in itself. It provides for the conditions upon which and the circumstances in which the warrants of authorization can be issued. Sections 132 to 132B of the Act embody an integrated scheme laying down the procedure comprehensively for search and seizure and the power of the authorities making the search and seizure to order the confiscation of the assets seized. Section 132A gives power to the authorities to requisition books of account in consequence of the information in its possession. The section considered as a whole, shows that it has its own procedure for the search, seizure, determination of the point in dispute, quantum to be retained and also the quantum of the tax and interest on the undisclosed income. The object of the search is just to ascertain facts and collect evidence of undisclosed income. Such search and seizure can be authorised under that provision if in consequence of information in possession of the concerned authority, he has reason to believe that the books or documents are not, or would not be produced or any money, bullion, jewellery or other valuable article or thing which represents either wholly or partly income or property, has not been, or would not be disclosed for the purposes of the said Act. The Act has provided certain powers which can exercise by Revenue authorities during the search and assessment proceedings. One of the important powers given is in section 132(4) .The said section reads as under:-
a132 . (l)xxxx
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(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1 922), or under this Act.[Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.}
8.8 What is “undisclosed income”? The undisclosed income has been defined in clause, (b) of s. 158B (b) of the Act. “undisclosed income’ includes any money, bullion, jewellery or other article or thing or any income based en any entry in the hooks of account or other documents or transactions, where such motley, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false.
8.10 According to the section 158BB the undisclosed income of the block period shall he the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of this Act, 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 Assessing Officer and relatable to such evidence, as reduced by the aggregate of the total income, or as the case may he, as increased by the aggregate of the losses of such previous years. There are two items of income are to determine for the block period.
8.13 The debate as to whether the computation of undisclosed income should be restricted to the undisclosed income discovered as a result of search only stands already concluded by the amendment to s. 158BB by the Finance Act., 2002 with retrospective effect from 1st July, 1995. The Finance Act, 2002 has with retrospective effect from 1st July, 1995 added the words “and relatable to such evidence” .Any doubt in this regard now stands dispelled by the e action itself that the undisclosed income has to be computed on the basis of evidence found as a result of search and/or other materials or information relatable to such evidence. At the same time it cannot be concluded that “undisclosed income” to be computed under the provisions of s 158BC should be confined to evidence found during the course of search. Even after the amendment by the Finance Act. 2002 with retrospective effect from 1st July, 1995 the doors have been kept ajar to let in other materials or information gathered by the AO daring the course of post search enquiry, but such other materials or information as now clearly mandated by the legislature must be relatable to evidence found as a result, of search. There is no force in the argument that not only the evidence but material and information available with the AO should have been found during the course of the search. The argument is contrary to the plain language of the provisions of s. 158BB (ij that clearly lays down that undisclosed income of the block period is to he computed not only on the basis of evidence found as a result of search but on the basis of such other materials or information also as are available with the AO and relalable to such evidence. The insertion of words ‘relatabie to such evidence’ by the Finance Act, 2002 with retrospective effect from 1st July, 1995 is intended to restrict the scone of material or information that may he relied upon by the AO because the same has to be relatable to evidence found as a result of search in the first instance it, therefore, follows that as long as there is an evidence to the undisclosed income of the assessee, that would be sufficient to clothe the AO with the powers to add to such evidence any further material or information that may be pertinent or necessary to reach a logical conclusion but there has to be a certain and specific nexus between the evidence found as a result of search and income proposed to be assessed in the block assessment..
8.14 in the light of the above discussion, if we consider the facts of the case under consideration we noticed that no incriminating document was found during the course of search. The assessee filed regular return of income for AY 1997-98 which has been accepted by the department. There is no material on record except statements recorded u/s 132(4) during the course of search, basis on which it cannot be said that there is cessation of liability of Rs. 1.40,31,190/-or the assessee claimed bogus expenses in AY 1997-98 What is available during the search was books of account where in the said liability was shown. Section i32(4A) clearly provides that where any books of account is found in the possession or control of assessee in the course of search it may be presumed that the contents of such books of account are true. This clear presumption is in favour of the assessee- The AO should have accepted the liability shown in the books of account as true liability. No doubt this presumption u/s 132(4A) is rebuttable presumption. In the normal circumstance onus of proving is on the assessee but the onus of proving in this case is on the department thai the statutory presumption is wrong because the department is challenging the statutory presumption provided in the Act. We do not find any material which shows that the department has rebutted that statutory presumption. Further section 158BB (1) (c) provides that where the due date for filing a return of income has expired, but no return of income has been filed the profit or less computed on the basis of entries 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 where such entries result in computation of loss for any previous year falling in the block period is to deduct from the undisclosed income calculated as per the provisions of the Act. In the case under consideration facts are better and are in favour of the assessee as the assessee filed the return of income and same has been accepted by the department, therefore these entries are not subject matter of block assessment. The AO made out the case under section 41(1), cessation of liability whereas the C1T(A) said it is a case of bogus expenses. The department was not clear even after making search and taking statements on oath, that what should be the case. The AO heavily relied upon the statements recorded u/s 132(4|. But we noticed that search officer has put the leading question where desired reply of question itself was in the question The search officer merely on assumption asked the question whether the liability was payable or not. The enquiry/investigation was started on presumption and not on the material found at the time of search. Contrary to that the statutory presumption on the basis of which search officer relied is in favour of the assessee. The way in which statements were taken has been pointed out during the assessment proceedings by Shri Kuljinder Singh Alhuwalia, director of the company in the statement recorded in compliance to summons u/s 13 i that he was called to the income tax office and instructed to sign a declaration. The relevant question & answer of the statement reproduced by the AO at pages 2 fit 3 of his order as under:-
“Q.28 As per you sworn statement dated 15-05-2002, in answer to Q. No. 3 you confirmed the disclosure to Rs. 3.0 crores previously by Shri Rajinder Singh Ahluwalia. You also gave the issue wise break up of the disclosure in answer to Q.No. 3 therein as under:-
Outstanding liability to Prem Ispat Rs. 40,00,000/
Purchases made from Technoweld for which supporting evidence are not available & could not be produced in the course of search Rs. 1,68,00,000/’-
Money withdrawn from IOUs Rs. 1,68,24.000/-
You further stated therein although that the total amount in the said 3 issues is much higher than the disclosed amount of Rs. 3.0 crores the disclosure has been restricted the said amount because the process of reconciliation and obtaining supporting evidence from third party was still on. However, as could be seen from the block return of income filed for M/s Surindra Engg. Co. Ltd. nothing has been disclosed as undisclosed income, inspite of your confirmation as mentioned in earlier. Why ?
Ans.: “I was called in the Income-tax office and instructed to sign a declaration.”
Thus the statements recorded under the circumstances of the case under consideration are not having good evidentiary value.