Foreign gift may be treated as undisclosed income on the basis of Confession before FERA Authorities

HIGH COURT OF BOMBAY

Smt. Rajrani Gupta

Versus

Deputy Commissioner of Income-tax

IT APPEAL NO. 38 OF 1999

SEPTEMBER 18, 2012

JUDGMENT

M.S. Sanklecha, J.

This appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’) by the appellant-assessee challenging an order dated 25.02.1999 of the Income Tax Appellate Tribunal (‘the Tribunal’) relating to the assessment for the block period 01.04.1985 to 26.03.1996 was admitted on 06.12.1999. Along with this appeal, we also heard appeals by the other members of the appellants group i.e. Appeal No. 86 of 1999 by her husband Dr. Sohanlal Gupta, Appeal No. 91 of 1999 by her son Dr. Arunkumar Gupta, Appeal No. 36 of 1999 by her daughter-in-law Dr. Renu Gupta and Appeal by Sohanlal Gupta (HUF) bearing Appeal No. 37 of 1999.

2. This appeal was admitted on the following substantial questions of law for the consideration of this Court:

(i)  Whether the Appellate Tribunal was right in law in coming to the conclusion that the gifts received by the appellant from non Resident Indians (NRI) from their Non-Resident External accounts (NRE accounts) during the Assessment years 1993-94, 1994-95 and 1995-96 are the ‘undisclosed income’ of the appellant within the meaning of clause (b) of Section 158B of the Act even though the said gifts were recorded in the regular books of account of the appellant and disclosed in the returns of income of the appellant filed prior to the date of the search and no incriminating material was found in the course of search?

(ii)  Whether on the facts and in the circumstances of the case a person well informed in law could have come to the conclusion that the gifts received by the appellant were actually purchased by the appellant when there is no evidence to that effect on record and the appellant has been able to prove the identify of the donors by producing passports, the genuineness of the transactions by producing bank pass books of the donors and capacity of the donors as the gifts were received from Non-Resident External Accounts of the donors?

(iii)  Whether the Appellate Tribunal was right in law in not considering that the appellant had discharged the burden of proof that lies on her by producing copies of passports of the donors, bank pass books of the donors, confirmatory letters of the donors and the fact that the gifts were given by the donors from their respective Non-Resident External accounts and thereafter the burden of proof had shifted to the Assessing Officer who has failed to discharge the same as the Assessing Officer neither summoned the donors nor issued any commission nor adduced any evidence to establish that the appellant had not received the gifts from the donors?

(iv)   Whether the Appellate Tribunal was right in law in coming to the conclusion that the gifts received by the appellant are non genuine even though there is no evidence brought on record to derive a legal inference to the effect that the gifts were actually purchased by the appellant and therefore, they are non-genuine?

(v)   Whether the Appellate Tribunal was right in law in coming to the conclusion that the case of the appellant is of a money-laundering device because the copies of passports, personal letters, gift deeds, copies of pass book etc. were all obtained simultaneously with the cheques for gifts?

(vi)  Whether the Appellate Tribunal was right in law in coming to the conclusion that the gifts received by the appellant are non genuine because the confirmatory letters obtained by the appellant from different donors are identically worded and typed on the same typewriter even though it was explained by the appellant that the confirmatory letters were drafted and prepared by the appellant herself and sent to the donors for their signatures for the limited purpose of tax records?

(vii)  Whether the Appellate Tribunal was right in law in not considering the alternate argument of the appellant to the effect that the alleged commission receipts of Rs. 2,42,870/- cannot be separately added in view of the addition on account of cash seized amounting to Rs. 40,98,735/- which was sufficient enough to cover the undisclosed income from clinics estimated at Rs. 32,88.105/- and also commission receipts of Rs. 2,42,870/- otherwise it would amount to taxing the same income twice?

3. Brief facts relevant to this appeal are as under:

(a)  The appellant is running health clinics in the name of M/s. Kayakalp International along with her family. The appellant’s family consists of her husband one Dr. Sohanlal Gupta (Dental Surgeon), her son one Dr. Arunkumar Gupta (a Medical Doctor) and her daughter-in-law one Dr. Renu Gupta (also a Medical Doctor).

(b)  The entire family of the appellant was residing in Bhattinda, Punjab up to July 1991. However, due to terrorist activities in Punjab, the appellant and her family moved to Mumbai and commenced their health clinic viz. Kayakalp International at Borivali, Mumbai. This business expanded and soon it had established two more clinics in Mumbai as under:

 (i)  Charni Road, Mumbai- May 1995 and

 (ii)  Dadar, Mumbai- November 1995

(c)  On 26.03.1996, a search was conducted under Section 132 of the Act at the three clinics and residential premises of the appellant and her family. Consequent thereto, assessment for block period i.e. from 01.04.1985 to 26.03.1996 were commenced under Chapter XIV-B of the Act against the appellant and her said family members.

(d)  During the course of the search, it was noticed that the appellant and the said others received substantial gifts from certain Non-Resident Indians out of their Non-Resident External Accounts during the assessment years 1994-95, 1995-96 and 1996-97. Besides, during the course of search, the appellant had offered an amount of Rs. 40.98 lacs for taxation during the block period. In the return of Income, the appellant had disclosed an amount of Rs. 39.74lacs as unexplained cash & offered the same for taxation. The Assessing Officer completed the assessment for the block period 01.04.1985 to 26.03.1996 by an order dated 27.03.1997 under Section 158BA of the Act, determining her total undisclosed income at Rs. 2.11crores. This was computed on the basis of unexplained cash credits, commission received on advertising, unexplained loans, undisclosed investments in properties, gifts from Resident Indians and Non-Resident Indians etc.

(e)  Being aggrieved, the appellant preferred an appeal against the order dated 27.03.1997 to the Tribunal. The Tribunal by its order dated 25.02.1999 deleted all additions made to the income by the Assessing Officer save and except the following two additions:

(a)  Gifts received from Non-Resident Indians from their NRE accounts and cash premium paid thereon aggregating to Rs. 4.06 lacs for the assessment year 1994-1995 and 1995-1996; and

(b)  Commission received from M/s. Chintamani Advertiser aggregating to Rs. 2.42 lacs for the assessment year 1993-94 up to 1996-1997.

4. The appellant is in appeal, on the aforesaid two additions, which has been sustained by the order dated 25.02.1999 of the Tribunal.

5. Mr. B. V. Jhaveri, learned Counsel appearing for the appellant submitted that seven questions of law, as framed by the appellant, at the time of admission of the appeal could be suitably classified into two questions of law namely question no. (i) and question no.(vii). According to him, questions nos. (ii) to (vi) are mere facets of the issue arising in question no. (i). Therefore, he is not pressing question nos. (ii) to (vi) and seeks to raise and press only question nos. (i) & (vii) at the time of final hearing.

6. With regard to the first question namely gifts received from Non-Resident Indians through their NRE accounts being brought to tax as undisclosed income under Chapter XIV-B of the said Act is concerned, Mr. Jhaveri made the following submissions:

(a)  Gifts received by the appellant cannot be subjected to tax in a block assessment under Chapter XIV-B of the Act, as the same would not fall within the meaning of undisclosed income as given under Section 158B(b) of the Act. This was for the reason that the gifts which were received by the appellant had been declared to the Income Tax Authorities in the form of capital gain account filed along with her return of income. In support, he invited our attention to the return of income filed by the appellant during the assessment years 1994-95 and 1995-96. So far as, assessment year 1993-94 is concerned, he invited our attention to an order dated 28.09.1995 of the Assessing Officer under Section 143(3) of the Act, wherein the gifts received from NRI’s was subject matter of inquiry and duly considered while passing the assessment order.

(b)  A block assessment can only be carried out on the basis of documents found during the search and not on the basis of other documents/evidence obtained otherwise than during the course of a search. According to him, the entire basis of the block assessment was with regard to the gifts, were statements made by the appellant’s husband and son to the FERA (Foreign Exchange Regulation Act) Authorities on 06.11.1996 and 07.11.1996 respectively; and

(c)  On merits, the documents found during the search were in the form of copies of the passport of the donors, copies of their NRE accounts and also confirmatory letters from the donors regarding the fact that the gifts have been made to the appellant. According to him none of the aforesaid documents either singly or together could lead to the conclusion that the gifts are fake. This conclusion by the authorities is based merely on suspicion. Suspicion howsoever strong, cannot take a place of proof. In view of the above, Mr. Jhaveri submits that the additions of amounts received as gifts to the appellant’s income as unexplained credits and/or fake gifts is not sustainable.

7. As against the above, Mr. Suresh Kumar, the learned Counsel for the Revenue-respondent submits as under:

(a)  The disclosure made by the appellant while filing its return of income was not a subject matter of inquiry in the assessment year 1994-95 and 1995-96 as the same was not declared as her income. So far as, assessment year 1993-1994 is concerned, the Non-Resident Indians gifts received from NRE account had not been brought to tax as undisclosed income in view of the fact that the same was the subject of inquiry in an order passed under Section 143(3) of the Act on 28.09.1995. Therefore, the reliance upon the aforesaid order by the appellant to establish that the gifts have been disclosed as income is not relevant for the present proceedings;

(b)  It was only on search that the documents found established that what had been disclosed as gifts were in fact not gifts but merely purchase of entries at a premium, so as to convert her undisclosed income into regular income. Therefore the amounts shown as gifts were in fact undisclosed income and therefore within the scope of Chapter XIV-B of the Act;

(c)  The amount taxed as undisclosed income under Chapter XIV-B of the Act were on the basis of material found during the search. The material found during the search indicated that the gifts were not genuine; and

(d)  In matter such as these, one can never have conclusive evidence and one would have to take into account the surrounding circumstances particularly the fact that gifts aggregating to Rs. 35.47 lacs were received by the appellant and her family. This fact and the surrounding circumstances would be tested on the probability of human behaviour to arrive at conclusion whether the gifts are genuine or not. In considering such probabilities, it cannot be said that the conclusion was reached on the basis of conjectures, surmise, inferences and/or suspicions.

8. The second issue is that the commission of Rs. 2.42 lacs received from M/s. Chintamani Advertiser should not be separately subjected to tax in view of the fact that out of Rs. 40.98 lacs cash seized the respondents had estimated an amount of Rs. 32.88 lacs as undisclosed income leaving a sufficient balance to cover the commission receipts of Rs. 2.42 lacs was not raised before the Assessing Officer or the Tribunal. In the circumstances, the question no.(vii) would not arise for consideration by us. Our court in the matter of CIT v. Tata Chemicals Ltd. [2002] 256 ITR page 395 has held that an appeal to the High Court under Section 260A of the Act can only be on a question raised before the Tribunal. In this case, admittedly, the question as formulated for our consideration was not raised before the Tribunal. Therefore there is no occasion for us to consider and answer the same.

9. Therefore in this appeal we are concerned only with the alleged gifts received by the appellant from Non-Resident Indians out of their NRE accounts. Before, dealing with the respective submission for the purposes of considering the issue raised in this appeal, we may usefully reproduce the relevant provisions of Chapter XIV-B of the said Act as under:

158B. In this Chapter, unless the context otherwise requires.

 (a)  …..

(b)  “undisclosed income” includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable articles, 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].

Assessment of undisclosed income as a result of search

158BA(1)….

Computation of undisclosed income of the block period

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 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],

Explanation-……

(2) In computing the undisclosed income of the block period, the provisions of sections 68,69,69A, 69B and 69C shall, so far as may be, apply and references to “financial year” in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition.

(3) The burden of providing to the satisfaction of the Assessing Officer that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee.

10. Mr. Jhaveri submits that the sine-qua-non for application of Chapter XIV-B of the Act is that the income should be undisclosed income. Undisclosed Income has been defined under Section 158B(b) of the said Act as any income or property which has not been or would not have been disclosed for the purposes of this Act. Mr. Jhaveri in support of his submission that all the alleged gifts had been disclosed to the respondent, relies upon the return of income filed by the appellant for the assessment years 1993-94, 1994-95 and 1995-96 where along with the return of income, the appellant had filed her Capital Account which disclosed the receipt of gifts. However, we are not really concerned with the disclosure made in the assessment year 1993-94 for the reason that the gift received during that year have not been made part of undisclosed gifts before the Tribunal. This is evident from paragraph 6 internal page 8 of the impugned order dated 25.02.1999.

11. So far as, the assessment years 1994-95 and 1995-96 are concerned, it is an admitted position that no assessment under Section 143(3) of the Act had been done for the above two years till the initiation of block assessment proceedings under Chapter XIV-B of the Act. Mr. Jhaveri submits that there is difference between a block assessment and regular assessment. According to him, in a block assessment only that income can be subjected to tax which has not been disclosed but found as a result of search under the Act. The assessment as block assessment under Chapter XIV-B of the Act is an assessment of undisclosed income unearthed, as a result of a search. However, the same would not affect the regular assessment covering the previous year falling in the block period. It is therefore, his submission that in case the Assessing Officer was of the view that the gifts were not genuine, then the same having been disclosed in the regular assessment could be a subject matter of proceedings for reopening of assessment etc. but to subject such disclosed income as a part block assessment is not available to the department/respondent. In support of aforesaid submission, he relies upon the decision of the Supreme Court in the matter of Asstt. CIT v. Hotel Blue Moon [2010] 321 ITR 362.

12. There can be no quarrel with the above proposition. However, where the income has not been disclosed and the same has been reveled during the search proceedings then block assessment as provided under Chapter XIV-B of the Act would certainly apply. The meaning of undisclosed income as spelt out under Section 158B(b) is that undisclosed income is that income which has not been or would not have been disclosed for the purpose of this Act. In the present case, the appellant had not disclosed its income but had incorrectly disclosed the same as gifts received. This is for the reason that gifts are not income, they are received on capital account and can never be subjected to tax. However, during the course of search, it was found that the appellant had incorrectly declared large amounts as gifts, when in fact no such gifts were received from Non-Resident Indians. Therefore, where the gifts are found to be not genuine, then the amounts represented by those gifts certainly become undisclosed income. Further, the burden of proof is on the assessee in terms of Section 158BB(3) of the Act to satisfy the Assessing Officer that the so called undisclosed income has already been disclosed in the return of income filed by the assessee. To our mind, mere mentioning of an amount as capital receipt in the Capital Account would not amount to a disclosure of income. This is so, as a capital receipt is not income and consequently not subject to tax.

13. Mr. Jhaveri in support of his contention that the slleged gifts were disclosed income to which Chapter XIVB of the Act would not apply firstly relied upon the decision of Delhi High Court in the matter of L.R. Gupta v. Union of India [1992] 194 ITR 32 where the court held that in terms of Section 132(1)(c) of the Act “income which has not been disclosed” would mean income which the assessee has not returned in his income tax return. Mr. Jhaveri states that in the present facts the gift has been shown along with her return of income filed for the assessment years 1994-95 and 1995-96. However, as held in L. R. Gupta (supra) at page 48 “The words ‘undisclosed income’ must mean income which is liable to be taxed under the provisions of the Income Tax Act but which has not been disclosed by an assessee in an effort to escape assessment. ‘Not disclosed’ must mean the intention of the assessee to hide the existence of the income or the assets from the Income Tax Department, while being aware that the same is rightly taxable.” Therefore in the present facts, the appellant-assessee had disclosed a receipt as gifts only with an intention to hide the existence of its income which was otherwise taxable. In view of the above, this would be non disclosed income for the purpose of Chapter XIV-B of the Act;

14. He then relied upon the decision of the Delhi High Court in the matter of CIT v. Ashok Dua [2009] 177 Taxman 494. In the above case, the assessee had disclosed receipts of gifts in his return of income. However, during the course of search, gift deeds and affidavits relating to the same were discovered. The Assessing Officer added the amount disclosed as gifts to the income on the ground that the gifts were bogus. The Commissioner of Income Tax (Appeals) and the Tribunal on consideration of the facts involved therein, came to the conclusion that no incriminating material was found during the course of search to indicate that the gifts were not genuine. This concurrent finding of fact led the Delhi High Court to refuse to interfere with the orders of authorities under the Act.

In the present facts, the confirmatory letters addressed by the donors to the assessee were identically worded, typed on the same typewriter, the donors seemed were not related to the assessee, the aggregate gifts received by the family of the appellant was over Rs. 35 lacs and all gifts were made allegedly out of love and affection for the appellant and/or her family members. Further, no circumstances have been indicated by the appellant before the authorities or during the hearing before us as to what was the occasion for apparent strangers to advance an amount aggregating Rs. 35 lacs to the Gupta family as gifts. Therefore the decision of Delhi High Court in the matter of Ashok Dua (Supra) is completely distinguishable from the facts arising in the present case.

15. Mr. Jhaveri then relied upon the unreported decision of the Punjab & Haryana High Court in the matter of CIT v. V. P. Singh [IT Appeal No. 194 of 2002, dated 16.04.2012]. In the above case also, there was a finding of fact by the Tribunal that the gifts received by the assessee were genuine and mere non filing of a return of income would not result in making the gifts an undisclosed income, so as to attract Chapter XIV-B of the Act. In the case at hand, there is a finding of fact by the Assessing Officer as well as the Tribunal that the gifts are not genuine and the appellant has not been able to show that the aforesaid conclusion of the Tribunal is arbitrary or perverse.

16. The unreported decision of this court in the matter of CIT v. Bombay Trading and Marketing Co. [IT Appeal No.2234 of 2009, dated 04.01.2010], wherein this court dismissed an appeal by the revenue on the ground that the Commissioner of Income Tax (Appeals) and the Tribunal held that where sundry creditors had been disclosed in the regular return of income and accepted by the Department, it would not be open to the Department to allege that the amounts which were reflected as sundry creditor could not be added as a part of income in a block assessment under Chapter XIV-B of the Act. In the above case also the Commissioner of Income Tax (Appeals) and the Tribunal had come to a finding of fact that the income had been disclosed in the regular return of income filed by the assessee and that the credit balances shown were not genuine. In the present facts it was as a result of search that the revenue came across documents which led it to the conclusion that whatever was shown as gifts were in fact not gifts, but undisclosed income which was shown as gifts. Therefore, the aforesaid decision also is inapplicable to the present fact.

17. In Bhagvati Prasad Kedia v. CIT [2001] 248 ITR 562, the department sought to consider the genuineness of loan under a block assessment even though the same had been duly accounted for in the regular books of account as found during the search. In the above case the court held that Assessing Officer and the Tribunal were incorrect in holding that the loan could be taxed as undisclosed income inter alia on the ground that the loan was genuine as the loan creditor was an assessee in whose assessment the loan advanced had been accepted by the Revenue. As against the above, in the present case no evidence has been led by the appellant to establish the genuineness of the gifts such as producing the donors before the authorities etc. Therefore in our view the present case is a clear case of the gifts being undisclosed income which is subject to Chapter XIV-B of the said Act.

18. In CIT v. Vikram A. Doshi [2002] 256 ITR 129 the Tribunal had as a matter of fact come to the conclusion that if the income concerned had been disclosed and was the subject matter of regular assessment then the same cannot be a part of block assessment. The aforesaid finding of the Tribunal being a finding of fact was not interfered with by this court. The facts in the present case are completely distinguishable as there are concurrent findings of fact by the Assessing Officer and the Tribunal that the so called gifts were in fact not gifts, but undisclosed income to which Section 68 of the Act would clearly apply.

19. We therefore find that none of the decisions which were relied upon by the appellant during the course of the hearing would have any application to the facts of the present case. In this case, there is a concurrent finding of fact by the Assessing Officer and the Tribunal that the amounts shown as gifts were not genuine gifts, but were mere credits taken so as to evade payment of income tax. Further, as gifts are not income being a capital receipt and not subject to income tax its disclosure or non disclosure is of no consequence for the purpose of the Act. The Assessing Officer would normally accept an assessee’s return of income along with the accounts showing an amount received as gifts in its capital account. However, it is only on account of search that documents were unearthed/found which showed that the gifts were not genuine, but only a method to convert the appellant’s unaccounted money into regular income. Therefore, we hold that the non genuine gifts to the appellant was undisclosed income and covered by the definition provided in Section 158B(b) of the Act.

20. The second contention of the appellant is that a block assessment can only be carried out in respect of documents found during the search and it is not open to the Assessing Officer to rely upon the documents and/or evidence other than those found during the course of the search for the purposes of assessment under Chapter XIVB of the Act. The submission is that the evidence found during the search can alone be a basis for block assessment. According to Mr. Jhaveri the authorities under the Act have been influenced by the confessional statement made by the Appellant’s son and husband to the FERA authorities on 06.11.1996 & 07.11.1996 respectively to the effect that the gifts were not genuine and they paid a premium of 8% to receive the gifts from Non-Resident Indians. However, the statement made before the FERA authorities were withdrawn/retracted on the next day have not been relied upon. In any event, it is his contention that the statements made under FERA were made after over 6 months from the date of the search and therefore, was not evidence which was found during the course of search and therefore could not be relied upon for block assessment under Chapter XIVB of the Act.

21. This submission ignores the fact that under Section 158BB(1) of the Act, an Assessing Officer has to compute the undisclosed income for the block period in accordance with the provision of the Act on the basis of evidence found, as a result of a search or other documents or materials available with the Assessing Officer and relatable to such evidence. In the present case, the evidence in the form of confirmatory letters, deed of gifts etc. were found during the course of search. The authorities on examination of the confirmatory letters and surrounding circumstances reached a prima facie view that the gifts were not genuine. A notice dated 27.06.1996 under Section 158BC of the Act was accordingly issued. Thereafter, before the assessment for the block period could be completed, the Assessing Officer came across the confessional statement made by the appellant’s husband and son under FERA stating that the gifts were not genuine. Therefore, the statements made under the FERA and its retractions are relatable to the confirmatory letters given by the donors of the gifts found during the search of the appellant’s premises. The confessional statement is certainly relatable to the evidence found during the course of the search.

22. Mr. Jhaveri in support of his submission that the block assessment has to be done only on the basis of the documents found during the course of the search, relied upon the decision of the Madras High Court in CIT v. S. Ajit Kumar [2008] 300 ITR 152.

The High court upheld the finding of the Tribunal that in case of block assessment only documents found during the course of search could be a basis for block amount. In the above case information was gathered during the course of survey operation at the premises of a third party and that information/material was not relatable to any material found during the course search operation. On the aforesaid finding of fact, the High Court refused to interfere. In the present case, the Tribunal has essentially relied upon the documents found during the course of the search such as identical confirmatory letters typed on the same typewriter not from relatives but from strangers (most were seamen) and the confessional statement as well as retraction made to FERA authorities which were relatable to the material found during the course of the search. Besides it seems that the amendment made to Section 158BB(1) of the Act in 2002 with retrospective effect from 1995 was not brought to the notice of the court. The section as amended permits assessment on the basis of any material with the Assessing officer relatable to the evidence found during the search. Therefore the above decision is distinguishable from the present facts.

23. In CIT v. K. Bhuvanendran [2008] 303 ITR 235 (Mad.) a statement made during the course of the search that certain undisclosed income had been paid was retracted. The Commissioner of Income Tax (Appeals) as well as the Tribunal held that the retracted statement could not be relied upon as there was no evidence or material found during the course of search operation to which such statement could be related. The aforesaid findings of fact were not interfered with by Madras High Court. This above case is completely distinguishable as in the present facts, there was material found during the course of search which gave rise to a finding that the gifts shown by the appellant were not genuine and the statement and the retraction thereof to the FERA authorities were certainly relatable to the evidence found during the course of the search.

24. In CIT v. P. K. Ganeshwar [2009] 308 ITR 124 (Mad.), the decision in S. Ajit Kumar’s case (Supra) were relied upon to conclude that only material found during the search could be relied upon for the purpose of block assessment. In the aforesaid case, the fixed deposits in fictitious names were found not during the course of search, but during the course of investigation which followed the search. On the aforesaid facts, the Madras High Court held that since the information relating to fixed deposits in fictitious names was not found during the course of search, it could not be used to arrive at the undisclosed income for the block period. As pointed out above, in the present case, the gifts were found not to be genuine on the basis of the evidence found in the form of confirmatory letters during the course of the search.

25. In CIT v. Ravi Kant Jain [2001] 250 ITR 141 the Delhi High Court held that undisclosed income for the block period can only be determined on the basis of evidence found as a result of search. The court held that in case any evidence is found de hors the search, the same could be brought to tax in regular assessment and not as a part of the block assessment. In the aforesaid case, the Tribunal had come to a finding that the undisclosed income was not on the basis of any material found during the course of the search, but on the basis of a change of opinion i.e. the auditors report on the existing facts which had already been disclosed in the regular course of assessment. Besides, it must be borne-in-mind that the aforesaid decision was rendered prior to 2002 when the words “relatable to such evidence” was introduced in Section 158BB(1) of the Act with retrospective effect from 1995.

26. The Gauhati High Court in CIT v. Bimal Auto Agency [2009] 314 ITR 191 refused to interfere with a finding of the Tribunal that no material was found during the course of the search for purpose of block assessment. The court also held that the valuation of the property by the Department Valuation officer post the search was not material found during the course of search. The Tribunal on facts in the above case had come to the conclusion that no material or evidence was found during the course of the search and therefore any material obtained thereafter cannot be related to the search even post the 2002 amendment of Section 158BB of the Act. In the above facts the court refused to interfere. The facts of the present case are completely different as in this case material/evidence of the gifts not being genuine were found during the course of search which led to the issuing of notice for block assessment.

27. We therefore find that none of the decisions which were relied upon by the appellant during the course of the hearing would have any application to the facts of the present case. It is very clear that consequent to the amendment in 2002 to Section 158BB of the Act documents and/or information available with the assessing officer and relatable to evidence found during the search is certainly evidence which can be used to compute the undisclosed income for the block period.

28. Infact while introducing the amendment by Finance Act, 2002 the CBDT issued a circular dated 27.08.2002 explaining the need for the amendment as under :

“61.3 The existing provisions of section 158BB specify the manner of computation of undisclosed income of the block period. According to sub-section (1) of the said section, the first step is to compute the aggregate of the total income, including undisclosed income, of the previous year falling within the block period on the basis of evidence found as a result of search or requisition and such other materials or information as are available with the Assessing Officer. Such aggregate income is, thereafter, to be adjusted for the income or loss which has already been assessed or declared, to arrive at the undisclosed income of the block period.

61.3.1 Some appellate authorities have held that income which can be included in the block assessment is only such income which is directly evidenced by material found during the search and does not include income which has been discovered on the basis of post-search inquiries made during the block assessment proceedings. This is contrary to the intention that nay undisclosed income discovered as a result of search is to be included in the block assessment as long as such income has been detected as a result of evidence gathered during the search.

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.” (emphasis supplied)

29. In this case the statement and the retraction thereof to the FERA authorities is certainly relatable to evidence found during the search and could be considered to compute the undisclosed income.

30. Lastly, it was submitted on merits that the evidence found during the course of the search viz. copies of confirmatory letters from the donors of the gifts, copies of passport of the Non-Resident Indian’s donors of the gifts and their NRE account singly or together do not indicate reason enough to record the conclusion that the gifts were not genuine. Mr. Jhaveri submits that the entire case against the appellant is as on the basis of suspicion, conjectures and unwarranted inferences.

31. At this stage it may be relevant to reproduce two confirmatory letters from the donors to members of Gupta family as an illustration of identical language from donors situated in different countries, which are as follows:

To,

Mr. Sohanlal Gupta,

201-A, Lancelot,

S.V. Road, Borivali (W),

Mumbai – 400 092.

My Dear Sohanlalji,

By the grace of God, I trust this letter will find you and your family in the best of health and spirits. Likewise I am also keeping fine.

I am enclosing herewith a cheque no. 001437 dt. 21.9.95, for Rs. 4,00,000/- (Rs. Four Lakhs only), drawn on Bank of Baroda, N.R.E. Branch, Veena Nagar, Mulund (W), Bombay – 400 080, India, issued out of my N.R.E. Account No. 75016, the same has been accepted by you as per our oral talk.

I have made this gift to the amount of Rs. 4,00,000/- to you out of natural love and affection and the high esteem and regards the I have for you. Henceforward you are the sole owner of the proceeds of this gift and can enjoy the same as you may deem fit and proper. I have made this gift without any past, present or future consideration of any kind whatsoever and declare that I have not got any type of right, title, control or interest on the amount gifted to you as mentioned hereinabove.

Please convey my regards to BHABHIJI, ARUN & Renu, Love to Baby Aakansha.

With best wishes,

Yours lovingly,

(DARSHAN SINGH RAINA)

Letter 2)

A.T. DIANOLD,

U.S.M. (Pvt.) Ltd,

3 F Abdoolally House,

20, Stanely Street,

HONG KONG.

Dated: 2/2/1996

To,

Shri. Sohan Lal Gupta,

201/A, Lancelot,

S.V. Road, Borivali (W),

Mumbai – 400 092.

My Dear Uncle,

By the Grace of God, I trust this letter will find you and your family in the best of health and spirits. Likewise I am also keeping fine.

I have given cheque no.031029 dtd.13-12-95, for Rs. 1,00,000/- and cheque no. 031031 dtd. 02.02.96 for Rs. 75,000/- Both cheques drawn on Hong Kong & Shanghai Banking Corporation Limited, Payable at Madras, issued out of my N.R.E. Account No.141 120023-006. The same has been accepted by you as per our oral talk.

I have made this gift of the amount of Rs. 1,75,000/- to your out of natural love and affection and the high esteem and regards that I have for you. Henceforward you are the sole owner of the proceeds of this gift and can enjoy the same as you may deem fit and proper. I have made this gift without any past, present or future consideration of any kind whatsoever and declare that I have not got any type of right, title, control or interest on the amount gifted to you as mentioned hereinabove.

Please convey my regards to Bhabhiji. How is Arun, Renu & Aakansha.

With best wishes,

Yours lovingly,

(A.T. DIANOLD)”

32. Mr. Jhaveri submits that these letters were prepared by the appellant and her family for production before the Income Tax Authorities when called upon to substantiate the genuineness of gifts. Therefore, they were all typed on the same typewriter and are identically worded.

33. However, as pointed out by the Tribunal, this was a position taken by the appellant for the first time only in rejoinder before it to meet the objections of the department. One more fact which must be borne-in-mind is that most of the donors are seamen and none of them was produced before the Assessing Authority at the time of assessment to establish the genuineness of the gifts. In matters such as these all facts are within the knowledge of the appellant and therefore the department is not expected to prove its case with mathematical precision but a degree of probability of a prudent man taking into account the probable behaviour of a reasonable man along with surrounding circumstances. In fact Parliament realizing the difficulty for the Revenue to prove its case to the hilt provided under Section 158BB(3) of the Act that the burden of proving to the satisfaction of the Assessing Officer that any income had already been disclosed is on the assessee. Further, sub section (2) of section 158BB in terms provided that section 68 of the Act relating to cash credits would apply to block assessment and in such cases also it is for the assessee to satisfactorily explain to the Assessing Officer, the source of the credit found in the books of an assessee. In matter such as these where all the facts are within the knowledge of the assessee alone it is impossible for the revenue to prove the breach of law on the part of the assessee beyond reasonable doubts. The Apex Court in the matter of Sumati Dayal v. CIT [1995] 214 ITR 801 had observed with regard to an assessee claiming to have received a large sum of money by winning in horse racing as under :

“There is no dispute that the amounts were received by the appellant from various race clubs on the basis of winning tickets presented by her. What is disputed is that were they really the winnings of the appellant from the races. This raises the question whether the apparent can be considered as the real. As laid down by this court the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find that the reality and the matter has to be considered by applying the test of human probabilities.”

The court further observed in conclusion as under :

“In our opinion, the majority opinion after considering the surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant’s claim about the amount being her winnings from races is not genuine.”

34. In the present case the alleged gifts which appeared to be real are infact not real, particularly, if one takes into account the surrounding circumstances and applies the test of human probabilities. It is most unlikely in the normal course of human conduct for a family to receive gifts in excess of over Rs. 35 lacs from persons who are not related in any manner to the assessee or her family. Similarly, while considering the order of the Tribunal, one is not required to examine the same through a microscope so as to discover a minor lapse here or there so as to use it as a peg on which one can raise a question of law. The Apex Court in the matter of Homi Jehangir Gheesta v. CIT [1961] 41 ITR 135 observed that where the circumstances are such that the only proper inference one can draw is that receipt has to be treated as a income in the hands of the assessee such inferences are one of fact and not of law. In the present case, if all the circumstances are taken together it certainly establishes that the alleged gifts received by the appellant-assessee were nothing but a modes operandi to convert her cash income into regular income. In such circumstances, no fault can be found with the order of the Tribunal while considering the material found during the course of the search and particularly the identical letters written by the donors.

35. In view of the above question (i) which also covers questions (ii) to (iv) are answered in the affirmative i.e. in favour of the revenue-respondent and against the appellant-assessee. So far as, question no. (vii) is concerned as pointed out above the same does not arise from the order of the Tribunal and is therefore dismissed as not maintainable.

36. The appeal is dismissed. No order as to costs.