Income or transactions not disclosed on or before date of search – would not have been disclosed but for the search – to be treated as undisclosed income

IT all started with search and seizure operation conducted at the premises of Friends Portfolio. In the course of the search, statements of Shri Manoj Agarwal and other persons were recorded and thereafter assessment was completed in their cases. It was found that all the transactions undertaken by Shri Manoj Agarwal through Friends Portfolio and his other concerns were bogus transactions, in the nature of merely providing entries without any real physical transactions relatable to those entries. Such entries were taken by a number of persons, namely, S/Shri C.P. Khanna, Puneet Khanna, Rajiv Aggarwal, Dhanraj Singh, Harjoot Singh, M/s Ramco Steel (P) Ltd. etc. The last named company filed petition to the Settlement Commission for settlement of its case in respect of entries taken from Shri Manoj Agarwal. In the statement Shri Manoj Agarwal admitted that all the entries given by him through Friends Portfolio and his other companies were in the nature of accommodation entries, which could be grouped into six categories as under:-

i) Long-term capital gain, short-term capital gain, speculation profit, loss on sale and purchase of shares;

ii) Bogus share profits through Friends Portfolio and M/s NITS Softech Ltd.

iii) Gifts and loans;

iv) Bogus sales through M/s Classic Textiles;

v) Bogus sales and trading in shares through NITS Softech Ltd.

vi) Bogus sale and purchase of jewellery through M/s Bemco Jewellers (P) Ltd.

It was further deposed by him that in so far as he is concerned, no distinction was made between various kinds of entries and, therefore, he was not aware about the corresponding entries made by the beneficiaries in their accounts. It was also deposited that such entries were provided by charging commission and with a view to help the beneficiaries reduce their income for the purpose of payment of tax. It was also found that entries were also provided to the assessee through an intermediary, Shri Bhushan, as evidenced by the fact that this name appeared on all cheques issued to the parties where he was the intermediary. The cheques issued to the assessee also contained this name.

In view of the information, requisite note was recorded in the case of the assessee u/s 158BD and notice u/s 158BC was issued on 7.10.2003. The assessee filed the return on 12.11.2003, declaring the UDI of Rs.27,90,274/-, as against aggregate amount of Rs.1,78,20,431/- received from Friends Portfolio. In the course of hearing, the assessee explained to the Assessing Officer that a sum of Rs.1,50,30,137/- was offered by him for taxation in the return of income for assessment year 2000-01 as evidence regarding this income could not be obtained by the assessee. A sum of Rs.27,90,274/- was offered for taxation in the assessment of the block period due to lack of evidence. He was required to explain the basis of the aforesaid bifurcation and state why the whole of the amount should not be brought to tax in the assessment of the block period. It was explained that the assessee has dealt in shares through Friends Portfolio, for which he received aggregate amount of Rs.1,78,20,431/-. The facts regarding the amount disclosed in the return for assessment year 2000-01 and in the return for the block period were reiterated. It was also explained that the amount of about Rs. 28 lakh was offered for taxation in the assessment of block period as the assessee could not collect the details subsequently. It was also explained that income of Rs. 1,50,30,137/-was declared in the return for A.Y. 2000-01 as ‘Income from other sources’, the details of which were recorded in the books of account. Therefore, it was agitated that the income declared in the return for assessment year 2000-01 could not be brought to tax as the UDI of the block period. It was also explained that the assessee had no connection with either Shri Manoj Aggarwal or Shri Bhushan. The transactions with Friends Portfolio were conducted through the employees of the assessee. No commission was paid either to Shri Manoj Aggarwal, Shri bhushan or Friends Portfolio. On the basis of the facts and after considering the arguments of the assessee, the Assessing Officer came to the conclusion that the impugned receipts were not backed by any share transactions. In any case no evidence was produced by the assessee in respect of actual transactions. Shri Manoj Aggarwal had clearly deposed that he had given accommodation entries for a consideration and there was no physical transaction behind any entry given by him or his concerns. The assessee was given an opportunity to cross-examine Shri Manoj Aggarwal or any other person connected with the transaction, which was not availed of by the assessee. Therefore, he came to the conclusion that the entries received from Friends Portfolio through intermediary Shri Bhushan were nothing but accommodation entries, the import of which was not known, in the sense that these could be profit entries, loan entries, gift entries or entry of any other nature, falling into one of the six categories enumerated above. The assessee also did not provide any rational basis for offering a part of the income in the return for assessment year 2000-01 and the balance in the return for the block period. Therefore, his conclusion was that after conduct of search and seizure operation in case of Friends Portfolio on 3.8.2000, the assessee tried to show a substantial part of the income in the return for A.Y. 2000-01, with a view to reduce the tax liability from rate of 60% to maximum marginal rate of 30%. In absence of any rational explanation or any distinction between the entries, he came to the conclusion that the whole of the income of Rs.1,78,50,431/- was taxable in the proceedings of block assessment, liable to be taxed @ 60%.

Aggrieved by the above order, the assessee moved an appeal before the CIT(A). The CIT(Appeals) considered the facts of the case and submissions made before him and confirmed the AO’s order.

The appeal is before the ITAT which observed,

i) the facts do not lead to the conclusion that on the date of search the income had been disclosed to the revenue or it was intended to be disclosed in the sense that either taxes relatable to the income were paid in advance on the prescribed dates or the transactions were entered in the books of account maintained in the normal course before the date of search.

ii) It is not a case where some minor amounts were received or expended by the assessee in the course of business through the employees, where a presumption could be that he was not in the knowledge of such receipts or expenditure.

iii) First of all, the transactions were not in the normal course of business as clearly pointed out by Shri Manoj Aggarwal. The transactions were obviously undertaken either for laundering of money by making false entries in the books of account or for suppression of income.

iv) Such transactions could have been done only on the express directions of the assessee and after discussing the matter with Shri Manoj Agarwal. Therefore, there was a clear design in undertaking these transactions, the purpose of which could only be concealment of income or laundering of income.

v) It is clear that the income or transactions had not been disclosed to the revenue on or before the date of search. It is also clear that the income or transactions would not have been disclosed but for the search.

vi) Thus, the case of the assessee is clearly covered in the definition of undisclosed income. It may be added that the whole situation has to be viewed as on the date of search and subsequent discussion, dealing with other provision will highlight the importance of the date of search.