TMI Blog2014 (1) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... worn statement admitted to not disclosing the proper and correct income - The AO has rightly invoked the jurisdiction u/s 158BC of the Income-tax Act – Decided against assessee. Whether the cash deposits recorded by the assessee in its books of accounts could be treated as undisclosed income u/s. 158B(b) – Held that:- Following CIT Vs. J.M.D International [2008 (9) TMI 880 - DELHI HIGH COURT] - The assessee has claimed to have maintained regular books of accounts and filed returns regularly reflecting the income but the AO has not examined this claim of the assessee - If the receipts were reflected in the regular returns of the relevant assessment years falling in the block period, then they cannot be considered as undisclosed income of the assessee for the block period - The assessee has failed to file any documents in support of its claim of filing returns regularly for the relevant assessment years - The entire receipts cannot be considered as the income of the assessee. If the assessee has not been able to prove the claim of expenditure, the AO ought to have allowed reasonable expenditure – The issue was set aside for fresh adjudication. Disallowance of expenses – Held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase are that M/s Vinsree Infotech is a partnership firm set up by one Shri Suresh and his family members as partners with the object of carrying on business in software development, training and consultancy and it is the contention of the assessee that it has been filing its return of income regularly. The Department had conducted a search and seizure operation u/s 132 of the Income-tax Act on the assessee's business premises and also the residential premises of its partners on 31/1/2003. Various incriminating material was found and seized. The Assessing Officer completed the assessment for the block period u/s 158BC(c) r.w.s 144 on 24.6.2008 raising heavy demand of taxes and penal interest thereon. The assessee filed an application u/s 264 before the CIT stating that he was arrested by the police immediately after search and was granted bail only in August 2007 and, therefore, could not participate in the asst. proceedings. The CIT after going through the account of the events from time to time and the explanation of the assessee as to why the assessee could not appear before the AO to participate in the assessment proceedings, set aside the assessment order and directed the AO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be set aside. The CIT, passed the order u/s 264 setting aside the original assessment with a direction to the AO to redo the assessment after affording an opportunity of hearing to the assessee. During the assessment proceeding u/s 158BC(c) r.w.s 264 of the Income-tax Act, the AO had reconsidered the issue and found that in case of the assessee it was necessary to get its accounts audited in terms of the provisions contained u/s 142(2A) of the Income-tax Act. The assessee was asked to show cause as to why the accounts should not be audited u/s 142(2A) and the assessee filed its objections. The AO rejected the objections of the assessee and after getting approval from the CIT, (Central) on 24/12/2007, the accounts were got audited by M/s Karvy and Co., Chartered Accountants, Hyderabad. M/s Karvy Co. submitted its audit report stating that no proper books of accounts have been maintained by the assessee and that the cash receipts shown in the receipt book do not tally with those shown in the cash book and could not be reconciled with the bank statements and, therefore, they were unable to verify the profit and loss account and balance sheet of the assessee in the absence of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained by the assessee and also that the receipts taken into account by the AO as income for the block period was in fact the receipts which were disclosed in the books of accounts as well as in the bank account of the assessee, as all the transactions were through banking channels. He further held that the expenditure incurred for the purchase of books was revenue expenditure, as the assessee had to purchase books from which soft copies were to be made and for the speedy execution of the work, different papers in the books were distributed to different sub contractors for conversion, thereby resulting in the books getting dismembered and are of no more use to the assessee thereafter. He, therefore, held that the entire expenditure had to be allowed in full. He, therefore, set aside the addition made by the AO. 7. Aggrieved by the relief given by the CIT(A), the Revenue is in appeal before us, while the assessee is in appeal before us raising the legal grounds that the order passed by the AO u/s 143(3) r.w.s 158BC and r.w.s 264 is unsustainable in law as the AO did not take prior approval of the Additional CIT, as required u/s 158BG of the Income-tax Act before passing the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equisitioned u/s 132A. In such circumstances, AO shall serve a notice u/s 158BC of the Act, on such person requiring him to furnish within the specified time, return setting forth his total income including the undisclosed income for the block period. The term 'undisclosed income' has been defined u/s 158B(b) of the IT Act to include any income 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. Thus, the AO should be satisfied that the assessee has not or would not disclose its correct income but for the search. In the case before us, the assessee has not only not maintained proper books of accounts but has also during the course of search in the sworn statement admitted to not disclosing the proper and correct income. Therefore, in such a scenario, we are of the opinion that the AO has rightly invoked the jurisdiction u/s 158BC of the Income-tax Act. Therefore, this ground of appeal of the assessee is rejected. 12. In the result, assessee's appeal is dismissed. 13. As far as the Revenue appeal is concerned, we find that the additions made by the AO are on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the returns prepared on the basis of said books of account for the assessment years 1999-2000 to 2001-02 and were filed much prior to the search and in such circumstances, it was held that the cash deposits could not be treated as undisclosed income. In the case before us, the assessee has claimed to have maintained regular books of accounts and filed returns regularly reflecting the income but the AO has not examined this claim of the assessee. If the receipts were reflected in the regular returns of the relevant assessment years falling in the block period, then they cannot be considered as undisclosed income of the assessee for the block period. But even before us, the assessee has failed to file any documents in support of its claim of filing returns regularly for the relevant assessment years. Therefore, AO had no other alternative but to proceed to compute the undisclosed income on the basis of material available with him. But as held by us above, the entire receipts cannot be considered as the income of the assessee. If the assessee has not been able to prove the claim of expenditure, the AO ought to have allowed reasonable expenditure. But his estimation of profit at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk, the assessee had to compensate the intermediaries in the form of consultancy fee. It was submitted that the assessee had entered into agreements with the intermediaries which were also found and seized by the department during the course of search and, therefore, payments made towards consultancy fee through account payee cheques/DD's are reflected in the assessee's current account maintained with Allahabad Bank and that it represents its expenditure and should be allowed as such. The CIT(A) had considered the contentions of the assessee which are reproduced in CIT(A)'s order at paragraph 4.2.1 and held that the books of accounts of the assessee were under the custody of the AO when he determined the income of the assessee for the assessment year 2003-04, but the AO never bothered to compute the income as per the books of accounts but computed it by treating the receipts as income on the ground that the assessee has not filed the details. He held that there is a fundamental mistake in the sense that the first bank account is in respect of the corporate body of the group, whereas the latter is the bank account of the assessee firm in which the credits were to the extent of Rs.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of search. The stand of the assessee has been that these documents were the evidence in proof of necessity to make the payments made by the assessee and were in the custody of the Assessing Officer. Therefore, the assessee's contention that it was rightly prevented from furnishing necessary evidence before the AO in proof of the expenditure claimed by it is correct. In such circumstances what is the procedure to be adopted by the AO. If there is no material in his custody and the assessee does not produce any evidence, then the AO may proceed to complete the assessment according to his best judgment u/s 144 of the Income-tax Act. It is also settled position of law that the AO has to compute the income of the assessee in accordance with law. If the assessee fails to prove its claim, the AO has to make the assessment on the basis of the material available with him. However, we do not agree with the view taken by the CIT(A) that the entire addition has to be deleted because the AO has not looked into the material available with him. The income of the assessee not only constitutes the receipts but also the expenditure incurred by the assessee for earning those receipts. Therefore, in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the reasons furnished by the assessee, the CIT directed the AO to redo the assessment after giving the assessee another opportunity. During the proceedings u/s 158BC r.w.s 264 and 144 of the Income-tax Act, the AO observed that the assessee has shown receipts to the tune of Rs.10,15,025/-, during the relevant period. Since the assessee did not maintain any books of account, special audit u/s 142(2A) of the Income-tax Act was directed after considering the assessee's objections and the audit was done by the M/s Karvy and Co., Chartered Accountants Hyderabad. The Assessing Officer after considering the findings in the audit report, observed that the assessee maintained current account bearing No.CA/3311 with Allahabad Bank, S.D Road Branch and as per the information obtained from the assessee, the assessee had received a sum of Rs.12,48,81,281/- and as against this has claimed a loss of Rs.12,74,025/- for the assessment year 2003-04 falling in the block period. He observed that for working out this loss, the assessee had debited various amounts under different heads as expenditure incurred for the purpose of business which totaled to Rs.12,61,55,306/-. He observed that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case CIT Vs. Maha Singh Rana reported in (2008) 172 Taxman 144 (Del) is in support of this contention. The Hon'ble High Court has held in the said case that an income would be treated as undisclosed income if but for the search, it would not have been disclosed in the books of account or other documents and that in the case therein, even before the search took place, the cash receipt/income was disclosed in the other document, i.e in the bank account of the assessee and, therefore, the provision of sec. 158BA(3) are applicable and the Revenue should have assessed the income of the assessee u/s 143(3) and not under Chapter XIV B of the Income- tax Act. We find that the facts of the present case are similar to the facts of the case before the Hon'ble Delhi High Court. Though the assessee has raised these grounds before the CIT(A,) the CIT(A) has not adjudicated on this issue but has granted relief to the assessee by holding that AO ought to have considered both receipts and the payments reflected in the bank account for arriving at the undisclosed income and since it has not carried out such exercise, the total undisclosed income computed by the AO at Rs.4,75,70,510/- cannot be susta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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