Delhi High Court
International Trading & Investment Co. … vs Dy. Cit on 9 November, 2003
Equivalent citations: (2004)86TTJ(DEL)50
ORDER
Ram Bahadem, J.M. This appeal, by the assessed, arises out of the order of Dy. CIT Circle-11 (1), New Delhi dated 28-3-2002, passed under section 254/158BD read with section 158BC(c) of the Income Tax Act, 1961, for the block period 1-4-1986 to 2-11-1996.
2. Below reproduced are the grounds of appeal “1. That the initiation of proceeding under section 158BD of the Income Tax Act is wholly arbitrary and is without jurisdiction. The precondition for invoking the provisions of section 158BD of the Income Tax Act were since not satisfied the assumption of jurisdiction was wholly erroneous and as such assessment made is also not tenable.
2. That the learned Dy. CIT has failed to appreciate that, before proceeding to frame the instant assessment, he had to firstly establish, in view of the order of the Tribunal setting aside the assessment which having been modified by the High Court, that there was a material found as a result of search on the basis of which the assessing officer having jurisdiction on the assessed who had been searched that there was an undisclosed income, which has been found or detected as a result of search and that in support thereof he recorded a note of satisfaction. In the absence of any such valid material and or note of such satisfaction the assumption of jurisdiction and framing of assessment is wholly arbitrary and is thus unsustainable in law.
3. That the learned Dy. CIT Circle 11(1), New Delhi, has erred in framing the assessment under section 254/158BC(c) of the Act without giving any independent reason for holding there was an undisclosed income and further computing the undisclosed income of the assessed at Rs. 3,31,20,258. The instant assessment made is wholly arbitrary and is without jurisdiction.
4. That in making the instant assessment, he has failed to appreciate that the Hon’ble Tribunal was pleased to set aside the assessment with a direction to reassess the issues involved in the assessment made and as such, before making the assessment, he was obliged in law, to have recorded his independent reasons after examining the evidence furnished and bring material to establish that there was any income which had not been disclosed by the assessed, as such, in absence of any adverse finding recorded or adverse material having brought on record and confronted for the assessed’s rebuttal, there was no justification for the learned Dy. CIT to have computed any undisclosed income.
5. That the learned Dy. CIT has failed to appreciate that under Chapter XIV-B of the Act, an assessment has to be made of an undisclosed income and such impugned assessment made by merely re-assessing the income, lacks jurisdiction to frame the instant assessment.
6. That the learned Dy. CIT has failed to appreciate that no adverse evidence, material or any other account was found at the time when search was conducted and as such, in absence of such a precondition, having been established there was no justification to reassess the income of the assesrsee by invoking the provisions of section 158BD of the Act by readjusting the heads of income and/or by increasing the income from property by adopting notional basis and that too, in disregard of the provisions of law.
7. That in making the aforesaid assessment, the learned Dy. CIT has completely ignored detailed submissions made by assessed and has erred in drawing arbitrary conclusion unsupported by any material on record and holding the following amount as undisclosed income of the assessed :
Previous year ending Assessment year Purported undisclosed income 31-3-87 1987-88 1,93,378 31-3-88 1988-89 2,91,255 31-3-89 1989-90 2,81,850 31-3-90 1990-91 2,90,222 31-3-91 1991-92 3,02,244 31-3-92 1992-93 12,06,912 31-3-93 1993-94 21,44,767 31-3-94 1994-95 21,62,983 31-3-95 1995-96 25,37,957 31-3-96 1996-97 35,38,222 31-3-97 1997-98 21,70,768
8. That even otherwise, the learned Dy. CIT has erred in disallowing the loss of Rs. 1,76,52,47,7 on sale of shares of Hindustan Development Corporation Ltd. relating to assessment year 1995-96, treated the same as undisclosed income which was otherwise duly recorded in the books of accounts and could not in any manner be regarded as an undisclosed income. The addition of the aforesaid sum is also on misinterpretation of the statutory provision besides being based on misconception of facts.
8.1 That there was no justification to hold the aforesaid loss as undisclosed income of the assessed particularly when the Hon’ble Tribunal in the case of Paramount Enterprises Ltd. & Ors. cases had deleted a similar addition and as such the action of the learned Dy. CIT is without jurisdiction and totally untenable and unsustainable.
8.2 That the finding of the learned Dy. CIT that the department had filed a reference against the order of the Hon’ble Tribunal and as such, the decision of the Tribunal cannot be applied to the fact of the case of the assessed is against the cannone of principles of judicial propriety as set out by the Hon’ble Supreme Court in the case reported in Union of India v. Kamalksi Finance Corpn. Ltd. 5 ELT 433.
8.3. That further he has erred in concluding that the facts of the assessed’s case were not brought before the Hon’ble Tribunal in the case of Paramount Enterprises Ltd., and in other cases. The observations made are based on misconception and is without any basis. In fact the learned senior Departmental Representative had in the case of Paramount Enterprises Ltd. had brought out the fact of the case of the assessed before the Hon’ble Tribunal by way of a written note and it is only after considering the note that the similar addition made had been deleted, and in view therefore, the addition made deserves to be deleted.
9. That in any case and without prejudice, the impugned assessment has been framed without providing to the assessed a fair and proper opportunity of being heard and as such the order passed is contrary to the principle of natural justice.
10. That, further, before making the impugned order, the learned Dy. CIT has failed to obtain the prior approval from the CIT as is statutorily provided and as such, the assessment made is void ab initio and is thus liable to be quashed altogether.
10.1 That the learned Dy. CIT has failed to appreciate, that in order to enable him to make a proper and valid order, he was obliged in law to prepare a draft of the order which too was required to be forwarded by him to the CIT and in absence thereof, no valid order could have been made and therefore, the present assessment made is completely without jurisdiction.
11. That the learned Dy. CIT has further erred both in law and on facts in levying interest under section 158BFA of the Act of Rs. 31,29,356, when as such no interest was leviable since the search in the case of the assessed was conducted prior to 1-1-1997.
3. Fact, in brief, are that the appellant is a public limited company and is engaged in the business of investment and trading in shares, letting out of properties etc. It is being assessed to income-tax regularly since the assessment year 1980-81. No search and seizure operation under section 132(1) of the Act was, conducted at the premises of the assessed nor any warrant of authorization was issued against it. The assessed’s premises is situated at 7th floor, Hansalaya, 15 Barkhamba Road, New Delhi and that a search and seizure operation had been conducted on 21-11-1996, under section 132(1) of the Income Tax Act, on M/s Hindustran Development Corporation Ltd. (stated to be a flagship company of M/s R.P. Mody Group), where a search had been conducted at Calcutta and also at their office at 7th Floor, Hansalaya which is also the office premises of the aforesaid company.
3.1 During the course of search, only regular books of account, maintained by the assessed-company i.e. ledger, cash books for three financial years i.e., 1994-95, 1995-96 and 1996-97 (up to 21-11-1996) were found and seized. It may further be noted that these books of account had duly incorporated all the transactions on the basis of which, the return of income had been furnished by the assessed.
3.2 In the instant case the assessment was completed by an order dated 29-1-1999, at an undisclosed income of Rs. 3,31,20258 which order of assessment had been set aside by the Tribunal vide order dated 21-2-2000, and on further appeal by the assessed under section 260A of the Income Tax Act, the Hon’ble High Court was though pleased not to admit the appeal but held that any finding/observation made by the Tribunal would not be taken into consideration while making the fresh assessment.
3.3 The present assessment which had been impugned before us has again repeated the additions made originally in the order dated 29-1-1999 and the Dy. CIT has completed the assessment adopting the same sum as an undisclosed income, as had been held as an undisclosed income by an order dated 29-1-1999.
3.4 While computing the undisclosed income at Rs. 3,31,20,258, the learned Dy. CIT has held the following sums as an undisclosed income
(a) The loss suffered of Rs, 17,65,247 by the assessed on the sale of certain shares in the assessment year 1995-96. The entire transaction pertaining to purchase and sale of such shares, in respect of which the loss had occurred, had duly been found recorded in the books of accounts maintained by the assessed for the financial year 1994-95. No incriminating material was found on the basis whereof it could be held that the transaction could be regarded as undisclosed.
(b) The Notional enhancement of ALV of Rs. 97,15,364 under the head “Income from house property” for all the assessment years comprised in the Block period.
(c) The disallowance of business expenses/losses aggregating to Rs. 47,97,974 for all the assessment years comprised in the Block period.
(d) The disallowances of short-term capital loss of Rs. 45,380 in the assessment year 1993-94.
(e) The addition of Rs. 34,311 and Rs. 31,298 for assessment year 1996-97 and 1997-98 respectively, aggregating to Rs. 65,609 on account of unexplained investment in property.
(f) The increase in income from various sources under the head “Income from other sources” due to reassessment made from one head of income to another head of income.
3.5 The return of income, on the date of search (in the case of HDC had become due till the assessment year 1995-96 and the assessed had also duly furnished its return of income for the assessment year 1995-96 on 23-11-1995. That similarly, the return of income for the assessment year 1996-97 had not yet become due till the date of search; however, the return of income for the assessment year 1996-97 was filed on 27-11-1996, six days after the date of search, which return of income was filed within the time provided under section 139(1) of the Income Tax Act.
3.6 A perusal of the order of assessment shows that the learned Dy. CIT, framing the assessment, has also computed an undisclosed income for the assessment years 1995-96 of Rs. 2,05,37,957 for the assessment year 1996-97 of Rs. 35,38,222 and for the assessment year 1997-98 of Rs. 21,70,468.
3.7 A complete break up of undisclosed income has been tabulated at p. 53 of paper book, which for the sake of convenience is being reproduced below “Details showing break up of alleged undisclosed income under various heads:
Particulars Assessment years 1987-88 1988-89 1989-90 1990-91 Total income adopted by the assessing officer in block assessment 2,23,127 2,92,735 4,09,737 3,23,921 Less : Total income originally assessed.
29,749 1,480 1,27,887 33,699 Difference being undisclosed income as alleged 1,93,378 2,91,255 2,81,850 2,90,222 Break up of undisclosed income
(a) Notional enhancement of the annual letting value under the head “Income from house property”
1,34,137 1,82,789 1,77,622 2,14,582
(b) Disallowance of expenses upon concluding that the activity is not business activity and therefore, expenses incurred cannot be allowed under the head “Income from business”
55,178 99,321 1,04,228 75,640
(c)(i) Disallowance of short-term capital loss under the head “Capital gain”
–
–
–
–
(ii) Treatment of short-term capital gain as income from undisclosed sources under the “head Income from other sources”
–
–
–
–
(d) Increase (+)/decrease (-) in income from various sources under the head “Income from other sources” due to reassessment from one head to another.
(-)2,341 16,521
–
–
Gross Total Income 1,86,974 2,98,631 2,81,850 2,90,222
(e) Deduction under section 80-M reduced (+)/enhanced (-) 6,404 (-)5,896
–
–
(f) Deduction under section 80F reduction(+)’ enhanced (-)
–
–
–
–
(g) Income due to applicability of section
–
–
–
–
115J originally adopted but now excluded from the undisclosed income computed from block assessment.
–
–
–
–
Total 1,93,378 2,91,255 2,81,850 2,90,222 Particulars Assessment years 1991-92 1992-93 1993-94 1994-95 Total income adopted by the AO in block assessment 3,75,387 13,25,449 22,29,979 22,69,322 Less : Total income originally assessed.
73,143 1,18,537 1,15,212 1,06,339 Difference being undisclosed income as alleged 3,02,244 12,06,912 21,44,767 21,62,983 Break up of undisclosed income.
(a) National enhancement of the annual letting value under the head “Income from house property”
2,37,616 8,42,061 17,15,073 16,61,747
(b) Disallowance of expenses upon concluding that the activity is not business activity and therefore, expenses incurred cannot be allowed under the head “Income from business”
64,523 3,60,159 5,45,854 5,40,869
(c) (i) Disallowance of short-term capital loss under the head “Capital gain”
–
–
–
45,380
(ii) Treatment of short-term capital gain as income from disclosed sources under the head “Income from other sources”
–
–
–
(-)47,200
(d) Increase (+)/decrease (-) in income from various sources under the head “Income from other sources” due to reassessment from one head to another.
4,692 (-)1,05,404 (-)39,633 Gross Total Income 3,02,244 12,06,912 21,53,703 21,62,983
(e) Deduction under section 80-M reduced (+)/enhanced (-)
–
–
–
–
(f) Deduction under section 80F reduced (+) enhanced (-)
–
–
(-) 8936
–
(g) Income due to applicability of section 115J originally adopted but now excluded from the undisclosed income computed for block assessment.
–
–
–
–
Total 3,02,244 12,06,912 21,44,767 21,62,983 Particulars 1995-96 1996-97 1997-98 (Previous year 1-4-1996 to 21-11-1996) Total Total income adopted by the assessing officer in block assessment 8,11,03,498 46,02,206 27,25,677 9,59,11,038 Less : Total income originally assessed.
6,05,65,541 10,63,984 5,55,209 6,27,90,780 Difference being undisclosed income as alleged 2,05,37,957 35,38,222 21,70,468 3,31,20,258 Break up of undisclosed income.
(a) Notional enhancement of the annual letting value under the head “Income from house property”
17,17,263 17,48,286 10,84,188 97,15,364
(b) Disallowance of expenses upon concluding that the activity is not business activity and therefore, expenses incurred cannot be allowed under the head “Income from business”
12,51,217 6,46,003 10,54,982 47,97,974
(c) (i) Disallowance of short-term capital loss under the head “Capital gain”
1,76,52,477
–
–
1,76,97,857
(ii) Treatment of short-term capital gains as income from undisclosed sources under the head “Income from other sources”
–
–
–
(-)47,200
(d) Increase (+)/decrease (-) in income from various sources under the head “Income from other sources” due to reassessment from one head to another.
(-) 83,000 11,43,933 3,21,298 9,66,171 Gross Total Income 2,05,37,957 35,38,222 21,70,468 3,31,30,166
(e) Deduction under section 80-M reduced (+)/enhanced (-)
–
–
–
(f) Deduction under section 80F reduced (+)’ enhanced (-)
–
–
–
(-)8,936
(g) Income due to applicability of section 115J originally adopted but now excluded from the undisclosed income computed for block assessment.
–
–
–
(-)1,480 Total 2,05,37,957 35,38,222 21,70,468 3,31,20,258
4. On the basis of the aforesaid facts the learned counsel of the assessed submitted at the outset that the learned Dy. CIT exceeded in his jurisdiction while computing the undisclosed income, the purported undisclosed income for the assessment years 1995-96 to 1997-98. It was contended by him that sub-section (3) of section 158BA of the Income Tax Act specifically provides that where the assessed proves to the satisfaction of the assessing officer that any part of income referred to in sub-section (1) relates to an assessment year, for which the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 for any previous year has not expired and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period. It was submitted by him that the search on “Mody Group of cases” was conducted on 21-11-1996 and the return of income for the assessment year 1996-97 had not become due, whereas return of income for the assessment year 1995-96 had already been filed on 23-11-1995, and all entries relating to all the transactions had duly been entered by the assessed in its books of account (which has been held to be the undisclosed income of the assessed) and were duly found recorded in the books of account, there was no justification for holding that there was any undisclosed income of the assessment years 1995-96, 1996-97 & 1997-98. The appellants counsel specifically submitted that for either of three assessment years namely 1995-96, 1996-97 & 1997-98 no addition has been made of any undisclosed income, on the basis of any document found as a result of search or on the basis of any entry not found recorded in the books of account of the assessed. It was thus submitted by him, that the order of assessment made shows complete non application of mind and the additions have been made merely for the sake of making addition and in doing so, the learned Dy. CIT exceeded in his jurisdiction in repeating the additions which had been made in the original order of assessment dated 29-1-1999, which were totally unwarranted both on facts and in law.
4.1 The appellant’s counsel further contended that the main addition made pertaining to the assessment year 1995-96 of Rs. 1,76,52,477 is entirely erroneous both on fact and in law. Explaining the nature of the aforesaid addition it was submitted by him that the aforesaid sum, which has been held to be undisclosed income, represents loss suffered by the assessed genuinely on the sale of shares owned and held by it of Hindustan Development Corporation Ltd. It was contended by him that no material whatsoever was found as a result of search on the basis of which it could be held that the entries resulting into loss is bogus or manipulated but on the contrary represents the loss suffered in the course-of its business. It was specifically contended by him that all the transactions of purchase and sale are duly entered in the books of account which are also supported by relevant material i.e., contract of purchase and sale and the payments for purchase and sale have duly been reflected in the books of account which have duly been cleared through account payee cheques. It was submitted that all the transactions are verifiable and it is not that as a result of search it has been found or has been established by any material that such transactions had not been entered into and were either non-genuine or bogus. It was thus contended that there was no income, which could be regarded as an undisclosed income.
4.2 It was further submitted by the learned counsel that similarly any addition made, as an undisclosed income for the assessment years 1987-88, 1988-89, 1989-90, 1990-91, 1991-92, 1992-93 and 1994-95 are entirely without jurisdiction, firstly because it is an admitted position of fact that no material whatsoever was found or seized much less even an alleged incriminating material, since admittedly only books of accounts of three financial years as noted by us in 3 above were found and seized and second because no other material was found in the course of assessment on the basis of which it could be held that the appellant had not entered in the books of accounts any transactions which has been so entered by it.
4.3 It was further contended by the learned counsel for the assessed that the aforesaid sums, which have been held to be undisclosed income thus is merely as a result of re-approval of completed assessment and is in the nature of reassessment of income already assessed to tax. It was submitted by him that, while so doing, it was not as if the learned Dy. CIT found any material on the basis of which he gathered any material which showed that the assessed-company had either suppressed its rental income or any receipt connected with rental income but on the contrary all what the learned Dy. CIT held was that the income from properties declared deserves to be enhanced by adopting higher annual letting value including the notional amount of interest on the advance against rent or security deposit received by it. It was thus contended that in doing so, the learned Dy. CIT since had not found that the assessed had either not disclosed the income of the properties held and owned by it or any material has been found showing that the assessed had received any rent over and above the declared rent, there was no justification in law to disturb the declared income and treat the notional sums as an undisclosed income. It was further submitted by the assessed that all the facts that it had received the advance against the rent and all the details of letting out of properties had duly been disclosed in the return of income and is part of the balance sheet, no addition could be warranted in law. It was contended that there had been no evidence or material found as a result of search on the basis of which it could be concluded that there was any undisclosed income found or detected as a result of search, the addition made and held as an undisclosed income is wholly erroneous both on facts and in law.
4.4 It was further contended that even the notional interest on the advance against rent could not go to increase the annual letting value as has judicially been held in the following decisions :
a. CIT v. Satya Co. Ltd. (1994) 75 Taxman 193 (Cal) b. MCD v. S.D.S Bali 45 DLT 215 (Del) c. B&A Plantations & Industries Ltd. v. CIT (2000) 242 ITR 22 (Guj) d. CWT v. State Bank of India (1995) 213 ITR 1 (Bom) e. Bharat Hotel Ltd. v. Dy. CIT (1964) 53 ITD 450 (Del) (relevant at p. 490) 4.5 The appellant’s counsel further relied on the following judicial pronouncements in support that what has not accrued, could not be held and assessed as an income :
a. CIT v. A. Raman & Co. (1968) 67 ITR 11 (SC);
b. India Finance & Construction Co. (P) Ltd. v. B.N. Panday, Dy. CIT (1993) 200 ITR 710 (Bom) relevant at 713;
c. State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC);
d. Uco Bank v. CIT (1999) 237 ITR 889 (SC);
e. Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC);
f. CIT v. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 222 ITR 583 (SC);
g. Udayan Chinubhai & Ors. v. CIT (1978) 111 ITR 584 (Guj);
h. Anup Engineering Ltd. v. CIT (2001) 247 ITR 457 (Guj);
i. Saraswati Insurance Co. Ltd. v. CIT (2001) 22 ITR 430 (Del).
4.6 It was also submitted that the issue relating to notional addition on account of enhancement of ALV and disallowance of expenditure had also been the subject-matter of appeal before the Commissioner (Appeals) in regular assessments for the assessment years 1997-98, 1998-99 & 1999-2000 on the additions made on account of enhancement of ALV by assuming notional interest on advance in identical circumstances have been deleted as per the copies of the orders placed at p. 939 to 987 of the paper book.
4.7 Similarly, it was further contended that the learned Dy. CIT has held in the impugned order that the assessed has disclosed income under the head “business” which in his opinion, is the income from property and as such, the expenses incurred and adopted in the profit & loss a/c could not be allowed to be set off against the income from property, is entirely unjustified and it could not be held for the said reason the assessed could be said not to have disclosed the transactions, only because in the opinion of the learned Dy. CIT making the assessment the income should have been assessed under a head other than disclosed and so assessed. The counsel further contended that the learned Dy. CIT has not disputed that the expenses incurred and found to have been debited had not been incurred and were thus bogus. It was thus submitted that this is a case of mere reassessment of income, which is unwarranted in law. The learned counsel for the assessed, in support relied upon the following judgments wherein it has been held that the provisions of Chapter XIV-B of the Income Tax Act cannot be invoked to assess any income duly disclosed but these are the provisions to bring to tax an undisclosed income where the transaction has not been recorded in the books of account :
1. Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mum) 610: (1997) 63 ITD 245 (Mum)
2. JK. Narayanan (HUF) v. Assistant Commissioner (2000) 245 ITR 45 (Mad) (sic)
3. JK Narayayan (HUF) v. Assistant Commissioner (1999) 64 TTJ (Mad)(TM) 823: (1999) 69 TTD 104 (Mad)(TM)
4. CIT v. N.R. Papers & Boards Ltd. (2001) 248 ITR 526 (Guj)
5. CIT v. Vinod Dhanchand Ghodawat (2001) 247 ITR 448 (Bom)
6. Pradip C. Patel v. Dy. CIT (1997) 58 TTJ (Ahd) 409
7. Parakh Foods Ltd. v. Dy. CIT (1998) 64 1TD 396 (Pune)
8. Bhagwati Prasad Kedia v. CIT (2001) 248 ITR 562 (Cal)
9. Haraklichand N. Jain v. Assistant Commissioner (1998) 61 TTJ (Mum) 223
10. Essem Intraport Services (P) Ltd. v. Assistant Commissioner (2000) 68 TTJ (Hyd) 103: (2000) 72 1TD 228 (Hyd)
11. Nagindas M Goradia v. Dy. CIT in ITA No. IT(S&S)A 99/Mum/1996
12. P.K. Ganeshwar v. Dy. CIT (2002) 80 ITD 429 (Chennai) 4.8 The learned counsel further submitted that in all the said decisions it has been held that the provisions of Chapter XIV-B of the Income Tax Act are not meant to reassess the income as envisaged under section 148 of the Income Tax Act.
4.9 He further elaborated that all other additions, which have been tabulated above, have similarly been made which goes to establish that it is a case of mere reassessment of income, which is outside the scope of Chapter XIV-B of the Income Tax Act.
4.10 The learned counsel, as noted in para 4, above, contended that the learned Dy. CIT has also grossly erred in holding that the loss suffered of Rs. 1,76,52,477 in respect of sale of shares of HDC Ltd. for the assessment year 1995-96 represent an undisclosed income. It was submitted that the loss suffered cannot be regarded as the undisclosed income as it is not a case where, the transaction pertaining to either purchaser sale has not been found recorded in the books of accounts. It was also submitted by him that there is no dispute about the genuineness of the transaction. The learned counsel for the assessed specifically referred to the order of the learned Dy. CIT wherein, the learned Dy. CIT while making the impugned addition has merely observed as under :
“In the submissions, the company has also stated that in the case of Paramount Enterprises Ltd., short-term capital loss amounting to Rs. 1,66,59,280 on sale of HDCL was disallowed by the assessing officer but the addition has been deleted by Hon’ble Tribunal, Delhi Bench.
In the assessed’s case, there is loss of Rs. 1,76,52,477 on sale of shares of HDCL in assessment year 1995-96.
It is however, to be noted that against a similar order of Tribunal, Department has gone into reference before High Court. Moreover, the facts as established in the assessed’s case as stated in the original order and also as restated in the Tribunal’s order, were not brought to the notice of Hon’ble Tribunal in the case of Paramount Enterprises Ltd.
It is also worthwhile to mention that had the search not taken place, the facts leading to addition and detection of aforesaid undisclosed income would have never come to the notice of the revenue.”
4.11 The learned counsel for the assessed, assailing the aforesaid observations, contended that the learned Dy. CIT has incorrectly stated that any reference has been filed before the Hon’ble High Court against the order of the Hon’ble Tribunal in the case of Paramount Enterprises Ltd. A copy of the aforesaid order has been placed in the paper book at p. 829. It was submitted that the facts as noted in the said order are identical to the fact of the instant case. In fact, it was submitted by the assessed’s learned counsel that there is no question of filing any reference as the provisions of filing reference under section 256(1) of the Income Tax Act had been omitted with effect from 1-10-1998 and he has stated that no appeal against the order of the Hon’ble Tribunal under section 260A had been filed and it has received no notice on the basis of which it could be contended that the appeal has been filed. Be that as it may, the learned Dy. CIT has not disputed that the fact of the instant case in any manner are not identical to the facts of the case of Paramount Enterprises Ltd.
4.12 It was vehemently argued by the assessed’s counsel that in the instant case the shares of HDCL Ltd. (on which loss occurred) had been purchased by the assessed-company before the sale of shares of ABB Ltd. and Ingersoll Rand on which the assessed had made handsome gains. Therefore, the revenue’s plea that (sic) had entered into the transactions of purchase/sale of shares of HDC Ltd. with a view to set off the loss from the gain, is based on mere conjecture and surmises and without any material. He further submitted that no income had been earned or accrued till the date the share of HDC Ltd. were purchased by the assessed-company in the open market and as such there could be no question of making any attempt to set off the loss which could only have arisen when, before entering into the transaction of the purchase, the assessed had earned any income. It was submitted that when no such income had been earned and the shares had been purchased earlier to the sale on which income arose, the question of concluding that the transaction was entered with a motive to set off the loss, it was submitted, simply did not arise. In support, the assessed’s counsel relied on the judgment of the Hon’ble Gujarat High Court in the case of Banyan & Berry v. CIT (1996) 222 ITR 831 (Guj).
We have perused the order of the Tribunal in the case of Paramount Enterprises Ltd. and we find that the facts are identical. However, for the sake of convenience, we consider it appropriate to record the facts of the case of the assessed, which are as under
(a) The assessed had purchased 9,43,500 shares of M/s HDC Ltd. for Rs. 9,30,71,142. It has not been disputed that such shares, which have been purchased were purchased at the market rate. Out of these 9,43,500 shares, 2,80,000 shares were however, sold by the assessed on 8-3-1995 for Rs. 99,68,000. The assessed’s counsel has placed a chart along with his brief synopsis, showing complete details of purchase and sale. It was stated by the learned counsel for the assessed that in order to make payment for the purchases made, it sold the shares of M/s Ingersoll Rand India Ltd. and M/s ABB Ltd., on which it had made handsome gain. The revenue, it was submitted, has not disputed that these shares were purchased at the market rate and before the sales were made, it had made handsome gain. It has also not been disputed that the sales were made through the broker M/s Rajendra Kumar Agarwal and was made at the market rate. In fact, the assessed’s learned counsel for the assessed has vehemently contended that the market value of the shares never went higher than the rates on which the shares were sold by it on 8-3-1995.
(b) The assessed has also submitted that the shares purchased by it yielded dividend before the sale was made by it on 8-3-1995 to M/s Rajendra Kumar Agarwal, which has duly been assessed in its hands. The income by way of dividend thereafter has duly been assessed in the hands of M/s Lakshmangarh Estate & Trading Co. Ltd. who had purchased the shares from the assessed- company of course, through the broker and at the market rate. It is also not a case of the revenue that the dividend income earned by the assessed from the shares held by it before its sale to M/s Lakshmangarh Estate & Trading Co. Ltd., was not its income or it continues to remain its income after the sale of the shares was made.
(c) The learned counsel for the assessed had also relied upon the orders passed by the Tribunal in the case of M/s Jai Commercial Co. Ltd., who had borrowed the funds for the purchase of shares and in which case, such interest had duly been allowed by the Tribunal of which orders have also become final as no reference or appeal has been filed against such orders.
5. The learned Departmental Representative vehemently opposed each of the submissions made and heavily relied on the findings of the learned Dy. CIT and further submitted that the assessed has manipulated the transaction of purchase and sale of shares and as such the loss claimed to have been suffered on the sale of shares has correctly been disallowed by the learned Dy. CIT. It was his submission upon doing so the loss suffered obviously has to be regarded as an undisclosed income, since the assessed had suppressed income. He however, fairly submitted that all the transactions both of purchase and sale had duly been entered by the assessed in the books. It was his submission that merely because it had been so entered would not mean that such loss did not represent its undisclosed income. It was however not denied by him that any incriminating material was found, as a result of search, which showed the transactions of purchase and sale were either bogus or were not entered into between the parties or that even the sale of shares were not registered in the name of purchaser on the sale having been made.
5.1 The learned Departmental Representative however, fairly admitted that there appears to be no justification for holding any income as undisclosed income for the assessment years 1996-97 & 1997-98 as on the date of search the return of income for assessment year 1996-97 was not due and the accounting year for the assessment year 1997-98 had not ended. He admitted that it is not where any transaction was found not recorded. However, he supported the addition made of undisclosed income for assessment year 1995-96 in respect of loss on sale of shares, which in his submission was a manipulated loss. In respect of other additions he merely relied on the order of the learned Dy. CIT and contended that the addition made as an undisclosed income should be upheld.
6. At the outset, before we proceed to deal with each of the contentions raised by the parties, we are constrained to observe with sense of concern that the approach adopted by the learned Dy. CIT in making the impugned order of assessment is highly casual. In the instant case, an assessment of undisclosed income had been framed by an order dt. 29-1-1999, computing the total undisclosed income at Rs. 3,31,20,258, which assessment was set aside by an order of the Tribunal dated 21-2-2000. It is seen that thereafter no proceedings were initiated to frame a fresh assessment as a result of the set aside of the order which assessment was to get barred by limitation on 31-3-2002, till a notice under section 143(2) of the Income Tax Act was issued to the assessed to appear before the learned Dy. CIT on 5-3-2002. On the aforesaid date, the assessed had appeared but the case was adjourned to 11-3-2002, which was again adjourned to 13-3-2002, and further adjourned to 15-3-2002. On 15-3-2002, the assessed has filed a detailed reply along with the necessary annexure as have been placed in the paper book from pp. 775 to 848 in support of its submissions that there is no undisclosed income. The hearing was thereafter adjourned to 20-3-2002, which again was adjourned to 22-3- 2002, and again adjourned to 26-3-2002, and further adjourned to 28-3-2002, without making any enquiry from the assessed and on 28-3-2002, the instant assessment has been framed. It will be seen from the aforesaid sequence of events that after the assessed had filed a detailed reply dated 15-3-2002, and the learned Dy. CIT without either calling upon the assessed to further place on record any further material and to substantiate the submissions as contained in its reply or confronting any adverse material proceeded to frame the assessment by adopting the same income, which had originally been assessed by an order dated 29-1-1999, which order was set aside on appeal by the Hon’ble Tribunal. It is thus apparent that the learned Dy. CIT could not have factually found any material to rebut the submissions of the assessed, which is also otherwise too, evident from the order of assessment. In fact, the learned Dy. CIT has not given any single reason or basis for making an addition of a sum other than of Rs. 1,76,52,477 being the loss suffered which too, in our considered opinion, is based on incorrect foundation and is otherwise too, no basis for making the said addition has been given. In our opinion, the assessed having made its detailed submissions dated 15-3-2002, the learned Dy. CIT could not be held to be justified either on facts or in law to have proceeded to frame the assessment, without confronting any adverse, material or rebutting the submissions and calling upon it to substantiate the same by repeating the same income, as had been originally assessed. To our mind, the approach adopted is highly unjustified. In spite of the aforesaid, we proceeded to examine the additions made, stated to be the undisclosed income for each of the assessment year, on the basis of the evidence on record, brought by the assessed and in the ultimate analysis found the additions made and held to be the undisclosed income, is entirely unjustified for the reasons stated in the following paragraphs of this order.
6.1 We have also found, as it has not been disputed, that all the transactions entered by the assessed, in the course of business, had been found duly recorded in its books of account maintained in the regular course establishing that any transaction entered into by the assessed had either been not recorded by it in the books of account or was meant not to be recorded. In our opinion, as such, the initiation of proceedings on the assessed, on the basis of the books of accounts maintained by it, by itself could not be held to be legal, valid and on proper basis. All what we find, from the communication of the learned assessing officer, having jurisdiction over the Mody Group of cases, to the assessing officer having jurisdiction over the assessment of the assessed, that the books of account of the assessed found and seized have merely been forwarded to him. In our considered opinion, mere forwarding of such books of accounts by itself is insufficient to conclude that the learned assessing officer, having jurisdiction over the Mody Group of cases was “satisfied” that any undisclosed income was found or detected as a result of search, on the basis of which, proceedings under section 158BD of the Income Tax Act could have been initiated against the assessed.
6.2 Apart from the aforesaid, in our opinion, further we find that in the instant case, the learned Dy. CIT, while framing the assessment was entirely incorrect in holding that there was any undisclosed income particularly because no books of account or any other document was found or seized other than relating to the financial years 1994-95 to 1996-97, relevant to the assessment years 1995-96 to 1997-98. So far as the assessment year 1994-95 is concerned the assessed had duly furnished the return of income on 29-11-1994, even before proceedings had been initiated and further no books of accounts or any other material was found or seized. So far as the assessment year 1996-97 is concerned the return of income had not become due and all the transactions had admittedly been entered in the books of accounts maintained by the assessed-company. Similar remains the position for the assessment year 1997-98 and as such there can be no justification to compute the income alleged to be undisclosed income since the same is against the mandate of section 158BA(3) of the Income Tax Act. In fact the learned Departmental Representative has fairly admitted that no undisclosed income could have been computed, while making the instant assessment for the assessment years 1996-97 and 1997-98.
6.3 So far as the assessment year 1994-95 is concerned it has again not been disputed that return of income had been filed before search and no incriminating material had been found as a result of search as such here too there could have been no computation of undisclosed income for the assessment year 1994-95. So far as the assessment year 1995-96 is concerned return of income had duly been filed by the assessed-company on 23-11-1995, i.e., before the due date and before the search and as such in our opinion there could be no computation of undisclosed income, unless any material is found establishing detecting of an undisclosed income. In the instant case no such material has been brought on record nor our attention was drawn to any such material. In view thereof in our opinion even for the assessment year 1995-96 there could have been no computation of any such alleged income. So far as the assessment years 1987-88 to 1993-94 are concerned here too it is an admitted position that even the regular books of accounts were not found or seized and otherwise too there was no material found or detected as a result of search. It is thus a case wherein the learned assessing officer has proceeded to frame the instant assessment as a result of making merely reassessment of income, which, in our considered opinion, is not permissible and is beyond the pale of Chapter XIV-B of the Income Tax Act.
6.4 We further find that the learned Dy. CIT has merely changed his opinion by treating the income earned by the assessed in the course of business as “income from property” which income had been earned and declared as the income earned by way of “service charges”. In our opinion the learned Dy. CIT has completely misconstrued the provisions of Chapter XIV-B of the Income Tax Act and has failed to appreciate that while framing the assessment under Chapter XIV-B of the Income Tax Act any undisclosed income found as a result of search, alone could be brought to tax. In view thereof, in our opinion, the learned Dy. CIT has erred in making any addition by way of undisclosed income for the assessment years 1987-88 to 1994-95 and also for the assessment years 1995-96 to 1997-98 as it is admitted position that no books of account or other documents were found as a result of search, showing any undisclosed income of the assessed. Further, in our opinion, on the basis of judgment cited by the assessed’s learned counsel we find no justification that the ALV of the properties as adopted could be enhanced.
6.5 So far as assessment year 1996-97 is concerned we find that the return of income was filed by the assessed on 23-11-1995 under section 139(1) of the Income Tax Act and all the transactions, relating to the said year were duly recorded in the books of account. In such a situation, in our opinion, the learned Dy. CIT was not justified in enhancing notional ALV of the property under the head “income from house property” and treating the same as an undisclosed income. It is not, where the learned assessing officer found that the assessed has either not disclosed the income received by it or has not entered in its books of account any transaction, relating to the “income from house property”. We further find that there is no justification to enhance the income from the house property notionally by estimating the element of interest on the advances received against rent. In view thereof, the addition made of Rs. 17,17,263 is totally untenable and is unjustified which cannot be held to be undisclosed income. Similarly, in our opinion, the learned Dy. CIT was not correct either on facts or in law in disallowing the expenses on the basis of mere change of opinion that the activity of the assessed for earning service income was not a business activity. In our opinion, whether such was a business activity or not is a question which has to be examined while making an assessment under Chapter XIV of the Income Tax Act and cannot be a subject-matter of an assessment under Chapter XIV-B of the Income Tax Act for the purpose of determining an “undisclosed income”. In view thereof, in our opinion, the learned Dy. CIT has not acted in accordance with law in making the disallowance of the expenses incurred. We note here that it has not been the finding of the learned Dy. CIT that the expenses debited in the books of account have not been incurred or that the expenses debited are bogus expenses.
6.6 Now coming to the main dispute pertaining to the loss suffered by the assessed of Rs. 1,76,52,477 and set off from the long-term capital gain on the sale of the shares, in our opinion, the same is also unjustified for more than one reasons. Firstly, in our opinion, this addition does not fall within the pale of Chapter XIV-B of the Income Tax Act. In any case, we have examined the transaction at length and we find that the assessed had genuinely entered into the purchase of shares, which have been sold by it. It is a matter of record that the dividend earned from the sale of shares, has duly been assessed in the hands of the purchaser company and the assessed has also been assessed in respect of the income earned from the sale proceeds received which amount had been invested by it in its business. We find that the issue has been dealt with by the various Benches of the Tribunal and while relying upon the said findings of the Tribunal in such cases, we are of the considered opinion that the loss suffered and set off against the capital gains has to be allowed as had rightly been claimed by it.
6.7 We also find that as the facts of the instant case are identical to the facts in the case of Paramount Enterprises Ltd. and that of Orient Bonds & Stocks Ltd., which have been decided by the Tribunal vide its orders dated 17-1-2001 and 19-1-2001, respectively, in our opinion, the loss suffered cannot be said to be not a genuine loss and in fact, there is no finding recorded by the learned Dy. CIT in the impugned order that the said loss is not a genuine loss. Thus, relying upon the findings recorded by the Tribunal in ITA Nos. IT(SS) 324/Del/1997 and ITA No. 5326/Del/1998, we hold that the Dy. CIT was not justified either on facts or in law to hold that the said sum is the undisclosed income of the assessed-company, liable for assessment under Chapter XIV-B of the Income Tax Act. We also hold that the assessed has been able to establish that it has suffered the loss in the course of business and had to be set off against the capital gains, which had duly been offered by it in the return of income.
6.8 In view of the voluminous evidence as has been brought on record, we do not find any justification whatsoever to hold that the learned Dy. CIT was justified and correct in law in disallowing the loss of Rs. 1,76,52,477 on the sale of shares of HDC Ltd., for the assessment year 1995-96 and holding the same to be the undisclosed income of the assessed. In fact, as there had been no rebuttal from the side of the revenue on the submissions made by the assessed, we hold that the undisclosed income computed by the learned Dy. CIT of Rs. 3,31,20,258 is totally untenable and is wholly unjustified.
7. The only other addition of Rs. 34,311 for assessment year 1996-97 and Rs. 31,298 for assessment years 1997-98 aggregating to Rs. 65,609 made by Dy. CIT as included in the total undisclosed income of Rs. 3,31,20,258 which is in dispute is on account of unexplained investment in property No. 6, Amrita Shergil Marg, New Delhi which belongs to 8 joint owners (including the assessed- company) each having 1/8th share.
7.1 The learned counsel of the assessed had invited our attention to a decision of the Tribunal Delhi Bench “E” in IT(SS)A No. 324/Del/1997 in the case of co owner Paramount Enterprises Ltd. (pp. 829-848 of paper book), wherein the aforesaid addition has been deleted by the Tribunal by holding that the Tribunal did not find any justification in sustaining the addition made of Rs. 65,609 by the Dy. CIT. The relevant observation of the Tribunal is reproduced below:
“We have carefully perused the order of the Tribunal and have taken note thereof. Respectfully following the aforesaid decision of the Tribunal Delhi Bench, in the case of Paramount Enterprises Ltd. (supra), we hold that the Dy. CIT was not justified in making the addition of Rs. 65,609 on account of undisclosed investment in the said property as the facts and circumstances of the case are identical. We, therefore, delete the addition made of Rs. 65,609 by the Dy. CIT.”
7.2 Further, we find that as a result of search conducted on Mody Group of cases, as no incriminating material had been found and the proceedings had been initiated by invoking the provisions of section 158BD of the Income Tax Act, the present assessment made is entirely unsustainable. In fact no adverse material whatsoever has been brought to our notice on the basis of which it could be held that as a result of search conducted on Mody Group of cases, any undisclosed income of the assessed was detected or found. It is seen from the record that all what had been seized as a result of search conducted on Mody Group of cases, is the regular books of account of the assessed- company for the financial years 1994-95, 1995-96 and 1996-97 (up to 21-11-1996) and no more such material was either found or gathered before either initiating the proceedings or framing the assessments on the basis of which it could be held there was an undisclosed income.
7.3 We also find that the learned Dy. CIT has further erred in treating the shortterm capital gain of Rs. 47,200 for assessment year 1993-94 as income from undisclosed sources under the head “income from other sources” while making reassessment from one head to another. However, since in our opinion, there is no undisclosed income, falling within the block period, the same will have no effect.
8. In respect of the contention of the appellant about the levy of interest under section 158BFA of the Act of Rs. 31,79,536 we find that such interest is not called for when the search was conducted prior to 1-1-1997, as laid down in the section. In any case since the addition stands deleted as a whole otherwise too there remains no justification to levy any interest.
9. Before we conclude, we do record one of the contentions raised by the learned counsel for the assessed that the proceedings initiated were without any basis or material and was against the provisions of section 158BD of the Income Tax Act. However, we do not think necessary to record any finding in respect of such a contention as on merits of the additions made itself, as we have held that the present assessment has no legs to stand. There being no undisclosed income, the present assessment is totally untenable and the additions made deserves to be deleted altogether.
10. In the result, appeal is allowed and it is held that there is no undisclosed income, which is liable to be held as an undisclosed income.