India: Case Study: Commissioner Of Income Tax, Chennai Versus vs. Ajit Kumar

In an appeal filed before the Hon'ble Supreme Court i.e Civil Appeal Nos. 10164, 10165 of 2010, 10917 of 2013, 4449, 5255 of 2015, the question raised for consideration was, whether the material found in the course of a survey, in the premises of a builder can be included in Block Assessment of the assessee.

FACTS

The office and residence of a Tamil cine actor were searched on July 17, 2002. This search was concluded on August 21, 2002. Evidence was found during the search that the assessee had indulged in an understatement of his real income relating to the block period from 01.04.1996 to 17.07.2002. On the same day, a survey under section 133A of the Income Tax Act, 1961, was also conducted on the premises of M/s. Elegant Constructions and Interiors Ltd. (hereinafter referred to as "Elegant Constructions"). Elegant Constructions was also the builder and interior decorator who had constructed and decorated the assessee's residential house at Seaward Road, Valmiki Nagar, Thiruvanmiyur. The cost of this investment was disclosed to the Revenue department in the course of regular return filed by the assessee. In the course of survey operation, it was learned that Elegant Constructions had received payment in cash in addition to cheque payment and both cash and cheque payments were recorded in the books of Elegant Constructions. However, the books of accounts of the assessee showed only cheque payment. It was found that the assessee had paid a sum of Rs. 95.16 lakh in cash which was not accounted for. The Assessing Officer, vide order dated August 31, 2004, after having regard to the facts and circumstances of the case, completed the block assessment and, inter alia, held that the said amount is liable to tax as undisclosed income of the block period. Aggrieved by this order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

In the present case, it is admitted position that the cost ofinvestmentwasdisclosedtothe Revenuedepartment in the course of return filed by the assessee.

QUESTION OF LAW

The main contention was whether the material found in the course of the survey in the premises of the builder could be used in Block Assessment of the assessee?

The CIT (Appeals) held that it was due to the simultaneous search action, the Department had found that the assessee had engaged the services of Elegant Constructions and hence, the same is directly related to the information obtained in the survey proceedings. CIT confirmed the order of assessment and dismissed the appeal.

Aggrieved by the order of CIT (Appeals), the assessee filed an appeal to the Income Tax Appellate Tribunal (hereinafter referred to as the "Tribunal"). The Tribunal was of the view that information of materials found in the survey operation of the premises of M/s. Elegant Constructions was not related to any material found during the course of the search operation and hence, the same cannot be a basis for making any addition in the block assessment.

An appeal was moved against the Tribunals order to the High Court, The High Court dismissed the appeal vide order dated November 22, 2006 and upheld the decision of the Tribunal.

An appeal was preferred against the order dated November 22nd 2006 before the Hon'ble Supreme Court; The Hon'ble Supreme court held that it is a cardinal principle of law that in order to add any income in the block assessment, evidence of such must be found in the course of the search under Section 132 of the IT Act or in any proceedings simultaneously conducted in the premises of the assessee, relatives and/or persons who are connected with the assessee and are having transaction/dealings with such assessee.

LEGAL JURISPRUDENCE

In the present case, a survey was conducted, and the moot question was whether the cash payment of Rs 95.16 lakh can be added under the head of the undisclosed income of the assessee in block assessment.

The Hon'ble Supreme Court while deciding the said point for consideration, placed reliance on Section 158 BH, whereby, all other provisions of the IT Act were applicable to assessments made under Chapter XIVB except otherwise provided under this Chapter. Placing reliance on Hotel Blue Moon case1and upon the finding that the provisions under Chapter XIVB were devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous year's falling in the block period.

Furthermore, the Hon'ble Supreme Court held that under the power of Survey under Section 133 A of the IT Act, any material or evidence found/collected in a Survey which has been simultaneously made at the premises of a connected person can be utilized while making the Block Assessment in respect of an assessee.

Under Section 158BB, read with Section 158 BH of the IT Act, the material or evidence found under survey was read within Section 158BB under the words "and such other materials or information as are available with the Assessing Officer and relatable to such evidence". The impugned orders were set aside, and the orders passed by the Assessing Officer making the Block Assessment were restored.

CONCLUSION

Chapter XIV-B of the Act provides a special procedure to deal with undisclosed income. Undisclosed income has been defined by Section 158B(b) to mean income which has not been disclosed for the purpose of the Act. Under the provisions of the Act, as it stood at the relevant point of time, assessment of undisclosed income for the block period of 10 years did not have the effect of abrogating the regular assessments that may have been made in any of the assessment year covered by the block period.

The computation of undisclosed income of the Block period has to be done in accordance with the provisions of Section 158BB. The income assessable in Block

assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of the search under Section 132 or requisition under Section 132A of the Act.

Section 158B defines "undisclosed income", and "block period" which are the two basic factors for framing the block assessments. Search is the sine qua non for the Block assessment. The special procedure in Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of the search. It is not intended to be a substitute for regular assessment.

In the present case, the assessment of undisclosed income is on the basis of Section 158BB of the Act, as it stood post the amendment by the Finance Act of 2002.

'BEFORE AMENDMENT

158BB(1) The undisclosed income of the block period shall be the aggregate of the total income of the previousyearsfallingwithintheblockperiodcomputed, in accordance with the provisions of Chapter IV, 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 Assessing Officer.

AFTER AMENDMENT

158BB(1) The undisclosed income of the block period shall be the aggregate of the total income of the previousyearsfallingwithintheblockperiodcomputed, 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 be as increased by the aggregate of the losses of such previous years, determined,- . . .'

A reading of the provisions of Section 158BB, as it existed before and after amendment, amply discloses that prior to the amendment, Section 158BB authorized the Assessing Officer to make an assessment of undisclosed income on the basis of evidence found as a result of "search ... or other documents and such other materials ... and relatable to such evidence". The use of the word "other such" clearly points out that such materials or information must have some connection/ relatable with the search and do not constitute independent materials, i.e., independent of the search or not relatable to the search.

The Hon'ble Supreme Court placed reliance on Hotel Blue Moon case and interpreted the cannon of tax law strictly. The Apex Court created an arena in order to help ease the conflicting decisions on the point of law over the scope of Section 158BB of the IT Act. The Court held that any material or evidence found/collected in a Survey under Section 133 A that was undertaken simultaneously to the Search under the provisions of the IT Act, will be part of the computation of Block Assessment.

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