Brief of the Case
Delhi High Court held In the case of CIT vs. Harjeev Aggarwal that the statements recorded would certainly constitute information and if such information is relatable to the evidence or material found during search, the same could certainly be used in evidence in any proceedings under the Act as expressly mandated by virtue of the explanation to Section 132(4). However, such statements on a standalone basis without reference to any other material discovered during search and seizure operations would not empower the AO to make a block assessment merely because any admission was made by the Assessee during search operation. If the provisions of Section 132(4) are read in the context of Section 158BB (1) read with Section 158B (b), it is at once clear that a statement recorded under Section 132(4) can be used in evidence for making a block assessment only if the said statement is made in the context of other evidence or material discovered during the search. A statement of a person, which is not relatable to any incriminating document or material found during search and seizure operation cannot, by itself, trigger a block assessment.
Facts of the Case
A search was conducted on 01.02.1999 on the premises of one Mr Arvind Seth, a Non-resident Indian, pursuant to a specific information received from the investigation wing that the one property owned by Mr Arvind Seth, was being sold for Rs.86 lacs out of which only Rs.12 lacs were paid by cheque and the balance was payable in cash. He also stated in his statement that although he has signed the receipt for the full amount, Rs.20 lacs was still to be received by him from assessee. Later a search was conducted on assessee. During the search, the Income Tax Authorities seized certain books of accounts of the Assessee including a diary, which contained a record of certain unaccounted sales and purchases made by the Assessee. In his statement during the search, the Assessee admitted that he entered into a deal for purchase with Mr Arvind Seth for a sum of Rs.86 lacs. Out of the aforesaid sum, Rs. 14 lacs was paid in cash and 2 cheques each of Rs.50,000/- were given to Mr J K Gulati, the attorney holder of Mr Arvind Seth, on 08.07.1998; Rs.20 lacs in cash was given to Mr Arvind Seth on 28.01.1999; and Rs.39 lacs in cash was paid to Mr Arvind Seth on 28.01.1999. Mr Harjeev Aggarwal also handed over 6 cheques amounting to Rs.12 lacs to Mr Arvind Seth on 28.01.1999 and then received a signed receipt for the entire sum of Rs.86 lacs which was signed by Mr Arvind Seth. Mr JK Gulati and Mr Kamal Seth (brother of Mr Arvind Seth) signed the receipt as witnesses.
During the block assessment proceedings, the Assessee was again required to explain the source of investment of Rs.74 lacs. The Assessee replied by explaining that an amount of Rs.45 lacs was received in cash from M/s Penguin Chits Pvt ltd, M/s Parmeshwar Chits Pvt Ltd and M/s Jai & Associates as earnest money. The AO examined the returns filed by the Assessee for the block period and noticed that the income declared by the Assessee for the relevant AYs was barely above the threshold taxable limit. He, therefore, concluded that it was not possible for the Assessee to have purchased the property on the basis of his declared sources. The AO disbelieved the Assessee’s claim that bulk of the cash payments were made from advances received from M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar Chits Pvt. Ltd. and M/s Jai & Associates. The AO reasoned that the property in question was not yet registered in the name of the Assessee, his wife and the HUF and consequently it was not plausible that other entities would pay large amounts in cash as earnest money for purchase of the said property from the Assessee. Accordingly, the AO taxed the entire amount paid for purchase of the property in question – Rs.86 lacs as undisclosed income of the Assessee.
Contention of Appellant
The ld counsel of the appellant submitted that the Income Tax Authorities had not found any incriminating material during the search conducted at the premises of the Assessee, which would be relevant for making the addition of Rs.74 lacs under a block assessment. He, emphatically, submitted that statements recorded under Section 132(4) of the Act could not be construed as evidence for the purposes of Section 158BB(1) of the Act. He further submitted that ITAT had examined the factual matrix and had accepted that the payments made by M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar Chits Pvt. Ltd. and M/s Jai & Associates Pvt. Ltd. were genuine. The Revenue had not contested the said finding as being perverse and thus, the said finding could not be disturbed.
He further submitted that Rs.74 lacs could not be added as undisclosed income of the Assessee because the said transactions were admitted in the first instance and were subsequently also disclosed in the balance sheet filed by the Assessee, Mrs Anita Aggarwal – wife of the Assessee, and the HUF. He referred to the decision of this Court in CIT v. Ravi Kant Jain: (2001) 250 ITR 141 (Del) in support of his contention that a block assessment could not be made in respect of income/transactions that were duly disclosed in the books. He further submitted that the returns filed by Assessee, his wife and the HUF were duly accepted by the AO under Section 143(1) of the Act and, therefore, the transactions could not be made a subject matter of block assessment.
Contention of the Revenue
The ld counsel of the revenue submitted that the ITAT had grossly erred in holding that the cash payment of Rs. 74 lacs could not be taxed as undisclosed income of the Assessee under a block assessment made under Section 158BC of the Act. He submitted that after the search, Mr Harjeev Aggarwal had voluntarily made a statement that an amount of Rs.60 lacs was paid out of sale proceeds of unaccounted stock sold in cash in the market. He further pointed out that admittedly, the Assessee had not maintained any books of accounts and, thus, the question of cash paid by the Assessee being accounted for or representing disclosed income did not arise.
He further submitted that undisclosed income would not only include income that was not disclosed but also the income which would not have been disclosed for the purposes of the Act. He submitted that in the present case, the fact that large payments were made in cash clearly evidenced the Assessee’s intention to not disclose the same. Further, on being confronted during the search, the Assessee had within three days thereafter, clearly, admitted that the Rs.60 lacs of cash was unaccounted money and there would have been no occasion for the Assessee to have done so if the search was not conducted in his premises.
He further submitted that in terms of that provision, undisclosed income of a block period is required to be computed on the basis of the evidence found as a result of search as well as other information as is available with the AO. He argued that in the present case, the conditions under Section 158BB (1) for taxing the payments in question were duly fulfilled; first of all, for the reason that the Assessee was examined under Section 132(4) of the Act and by virtue of the said provision, his statement could be used in evidence in any proceedings under the Act; and secondly, the search conducted on the premises of Mr Arvind Seth had unearthed various incriminating documents that evidenced cash payments from the Assessee. Thus, a block assessment could be made in the case of the Assessee based on such incriminating material.
Held by CIT (A)
CIT (A) sought a remand report from the AO. After considering the contentions advanced by the Assessee as well as the remand report, the CIT (A) upheld the addition of Rs.74 lacs but deleted the addition of Rs.12 lacs which were paid by the Assessee by way of cheques since these cheques were not en-cashed.
Held by ITAT
ITAT dismissed the Revenue’s appeal while allowing the Assessee’s appeal. The ITAT deleted the addition of Rs.74 lacs holding that the Assessing Officer did not make out any valid case for treating the investment as the undisclosed income of the Assessee for the block assessment. The ITAT further held that even if there is any doubt about the genuineness of the investments, the same would have to be decided in the regular assessment proceedings of the persons concerned – that is, Mr Harjeev Aggarwal, Mrs Anita Aggarwal and the HUF – who had made the investment. Also The ITAT upheld the deletion of Rs.12 lacs holding that the cheques were not encashed in the instant case and therefore, CIT (A) had rightly deleted the addition.
Held by High Court
High Court held that it is well established that the special procedure as provided under Chapter XIV B is triggered only in cases where undisclosed income is unearthed during a search initiated under Section 132 or where any books of accounts, other documents or assets are requisitioned under Section 132A. The explanation to Section 158BA (2) clarifies that the assessments made under Chapter XIV B are in addition to the regular assessment in respect of each previous year included in the block period and are only in respect of undisclosed income which are not included in the regular assessments. Thus, plainly, a block assessment is for bringing to tax undisclosed income which is computed on the basis of evidence found as a result of search and/or other information as is available with the AO which is relatable to such evidence.
Whether a statement recorded under Section 132 (4) would by itself be sufficient to assess the income, as disclosed by the Assessee in its statement, under Block Assessment
A plain reading of Section 158BB (1) does not contemplate computing of undisclosed income solely on the basis of a statement recorded during the search. The words “evidence found as a result of search” would not take within its sweep statements recorded during search and seizure operations. However, the statements recorded would certainly constitute information and if such information is relatable to the evidence or material found during search, the same could certainly be used in evidence in any proceedings under the Act as expressly mandated by virtue of the explanation to Section 132(4) of the Act. However, such statements on a standalone basis without reference to any other material discovered during search and seizure operations would not empower the AO to make a block assessment merely because any admission was made by the Assessee during search operation. If the provisions of Section 132(4) of the Act are read in the context of Section 158BB (1) read with Section 158B (b), it is at once clear that a statement recorded under Section 132(4) of the Act can be used in evidence for making a block assessment only if the said statement is made in the context of other evidence or material discovered during the search. A statement of a person, which is not relatable to any incriminating document or material found during search and seizure operation cannot, by itself, trigger a block assessment.
In CIT v. Sri Ramdas Motor Transport Ltd.: (1999) 238 ITR 177 (AP), a Division Bench of Andhra Pradesh High Court, reading the provision of Section 132(4) of the Act in the context of discovering undisclosed income, explained that in cases where no unaccounted documents or incriminating material is found, the powers under Section 132(4) of the Act cannot be invoked. If the Revenue’s contention that the block assessment can be framed only on the basis of a statement recorded under Section 132(4) is accepted, it would result in ignoring an important check on the power of the AO and would expose assessees to arbitrary assessments based only on the statements, which we are conscious are sometimes extracted by exerting undue influence or by coercion. Sometimes statements are recorded by officers in circumstances which can most charitably be described as oppressive and in most such cases, are subsequently retracted. Therefore, it is necessary to ensure that such statements, which are retracted subsequently, do not form the sole basis for computing undisclosed income of an assessee. In Commissioner of Income Tax v. Naresh Kumar Aggarwal: (2014) 3699 ITR 171 (T & AP), a Division Bench of Telangana and Andhra Pradesh High Court held that a statement recorded under Section 132(4) of the Act which is retracted cannot constitute a basis for an order under Section 158BC.
However in given case, a perusal of the assessment order indicates that on 2nd February 1999, a diary containing certain notings of purchases and sales that were not recorded in the books of accounts was also unearthed during search conducted on the Assessee. The Assessee had himself declared that Rs.89,400/- was the profit in respect of unaccounted sales and purchases that were recorded in that diary. It is further relevant to note that the Assessee carried on business as a sole proprietor of a concern named M/s Machine Tools and Hardware Store. During the search, certain books of account were also seized. The Assessee had on 5th February, 1999, immediately after the search stated that Rs.60 lacs paid for purchase of the property in question was paid out of unaccounted stocks sold in cash. Subsequently, in his statement recorded on 24th February, 1999, the Assessee once again reiterated his stand that Rs.60 lacs represented unaccounted money belonging to him. Although, the Assessee has retracted his statement that the same was unaccounted money, he nonetheless maintains that Rs.37.35 lacs was paid by him which included Rs.32.9 lacs in cash which included Rs.12.9 lacs withdrawn from his proprietorship concern. Since it is undisputed that (a) cash was paid by the Assessee; and (b) that the same was not recorded in the books of account seized at the material time, it cannot be accepted that the
Revenue did not have incriminating material regarding generation of unaccounted money. The diary found which recorded undisclosed sales and purchases as well as the books of accounts which did not record payment of cash (which was admittedly paid) at the time of search does indicate that the Revenue had found incriminating evidence. The statement made by the Assessee was also relatable to the records found during the search.
Concededly, in the present case, the Assessee has been unable to show that the transactions in question were recorded in the books of accounts and records maintained in the normal course prior to the date of the search. On the contrary, Mr Aggarwal had argued that the Assessee is not obliged to maintain any books and, therefore, the question of keeping a record of the transactions for purchase of the property did not arise. In our view, the aforesaid contention is wholly without merit and it is not open to the Assessee to now claim that the payments made were not undisclosed income as the time for filing the return for the previous year had not expired and the transactions in question would be reflected in the returns to be filed subsequently.
In our view, the ITAT has erred in not examining or not interpreting the scope of ‘undisclosed income’ as defined under Section 158B (b) of the Act. By virtue of Section 158B of the Act, „undisclosed income‟ not only includes income or property which has not been disclosed but also income which would not have been disclosed for the purposes of the Act. The Supreme Court in the case of Assistant Commissioner of Income Tax v. AR Enterprises: (2013) 350 ITR 489 (SC) has explained that the undisclosed income also includes the category of income that would not have been disclosed and thus, contemplates a question as to the likelihood of disclosure which must be gauged from the surrounding facts and circumstances of the case. In our view, the ITAT failed to address itself to that question. In the present case, the surrounding facts and circumstances of the case are telling. First of all, the payments have been made in cash and there is no explanation as to why such large payments were required to be made in cash. Secondly, such cash payments were not recorded by the Assessee in its books or any record maintained by it at the time of search. Thirdly, the Assessee had admitted – by a letter sent immediately after the search as well as in a statement recorded under section 131 of the Act – that the source of Rs.60 lacs cash payments was sale of unaccounted stock. Fourthly, the fact that the Assessee carried on transactions outside his books of accounts is also not disputed. The additions made by the AO with regard to unaccounted transactions recorded in the diary have been sustained and the Assessee has not appealed against the decision of the ITAT in that respect. Fifthly, although the Assessee now claimed that there were back to back agreements with three unrelated entities for sale of the property in question, no such documents were produced at the material time. There is also no explanation as to why such documents could not have been produced at the relevant time.
As noticed earlier, there was a clear admission on the part of the Assessee that the payment of Rs.60 lacs was from the sale of undisclosed stock. The statement was reiterated again after the search on 24th February, 1999 and it is difficult to contemplate that the letter dated 5th February, 1999 and the statement recorded on 24th February, 1999, which were much after the search, were not made voluntarily and of free will. In our view, the only inescapable conclusion that can be drawn from the surrounding facts is that the Assessee would not have disclosed the cash payments admittedly made by the Assessee and such payments were his undisclosed income. In view of the above, the questions of law are answered in the negative, that is, in favour of the Revenue and against the Assessee.
Accordingly, appeal disposed of.