TMI Blog2011 (9) TMI 1000X X X X Extracts X X X X X X X X Extracts X X X X ..... the following three grounds: - I. VALIDITY OF SEARCH ACTION UNDER SECTION 132 OF THE ACT II. DISALLOWANCE TREATED AS UNDISCLOSED INCOME III. DISALLOWANCE OUT OF CLEARING FORWARDING EXPENSES In ITA No. 242/Mum/2005 Revenue has raised the following grounds: - 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in restricting disallowance from ₹ 1,53,53,036/- to ₹ 93,82,411/- on account of clearing and forwarding expense. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in accepting the contention of the assessee with regard to bifurcation of clearing and forwarding expenses without giving opportunity to the Assessing Officer under Rule 46A(3). 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not correct in deleting addition of ₹ 60,00,000 on account of sales promotion expenses. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not correct in not appreciating that the undisclosed income on account of sales promotion expenses was estimated on the basis of the statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 132(3) of the I.T. Act, 1961, I am not quite sure of any discrepancies in books/commission or omissions, etc. that may be found in the course of further search and in order to cover up for the same, I hereby declare that a sum of ₹ 2.50 crores on account of above is being offered in various hands of the group companies. However, in the return for the block period filed on 19th September 2002 undisclosed income of only ₹ 2 crores was declared. In a note appended to the said return it was stated that the return for the block period was being filed under protest since the provisions of section 132 did not apply as the jurisdictional conditions to be fulfilled for a valid action under section 132 were not present. The assessee also requested for furnishing to them the reasons on the basis of which action under section 132 was initiated. In the notes to the computation of income of block period it was further submitted though undisclosed income was declared in the preliminary statement recorded under section 132(4), on verification of the books of account, it was noticed that the entries are correctly reflected in the books of account and the aforesaid disclosu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statement indicates that Shri Adiyil Menon was unable to give any documentary evidence of payment and names of the recipients of the same. On a question about the approximate amount of such expenses it was stated that the expenses were to the tune of ₹ 22 lakh per annum and in about six years it would come to about ₹ 6.5 crore( sic). On the basis of this statement the Director was confronted and the Director, even though stated that there were no supporting evidences toward clearing charges it may be noted that the expenses have been incurred and is in the course of the business of the company. Due to lack of documentary evidences a sum of ₹ 1.5 crore was offered as income of the block period. The A.O., on the basis of the seized papers, Page 32 of Annexure A-3 at Khar office of interim audit report, questioned assessee with reference to the audit observations. Assessee was asked to furnish the year-wise brake up of expenses under the head Clearing and Forwarding Expenses and out of the total expenses of ₹ 1771 crore an amount of ₹ 1.70 crore was identified as expenses incurred in cash. As there is no supporting third party evidence with referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into other expenses like expenses at Dock and expenses at Customs etc.. The CIT(A) also gives a finding that the A.O. estimation the unallowable and inadmissible expenses at 90% is unreasonable and high. This indicates that the disallowance was made purely on the basis of unverifiable nature of the expenditure but not due to availability of any incriminating material in the course of search. There is no evidence found during the course of search to show that Clearing and Forwarding expenses were false or bogus. Just because the vouchers found during the search showed incurring of cash expenses for customs clearance there cannot be any addition treating the same as undisclosed income in the assessment under section 158BC in the block period. The entire expenditure claim was arising out of the books of account, which was duly maintained by the company and even the IOUs, which were advances taken by the Manager towards various cash expenses itself was fully vouched and was accounted for. Therefore, we are of the view the disallowance of expenses towards customs clearance due to reason of unverifiable nature cannot be made in the block assessment. The company has proper internal contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of cash expenses incurred at customs it cannot be stated that this entire expenses was towards unlawful payment. In the absence of any evidence, we are of the view that the action of the CIT(A) in disallowing 40% of the cash expenses towards customs clearance alone cannot be upheld. Therefore assessee s ground No. 3 with reference to treatment of this amount as undisclosed income is to be upheld as there is no reason to treat it as such. With reference to ground No. 2 it is true that the expenditure was disallowed as unvouched. Consequently, on the principles of law as well as on facts treatment of disallowance of certain portion of the expenses incurred cannot be considered as undisclosed income as the same would not be falling within the definition of clause (b) of section 158B. For these reasons ground No. 2 is also upheld. Accordingly ground No. 2 3 raised by assessee are allowed and ground No. 1 2 raised by Revenue are dismissed. 9. Addition of ₹ 60,00,000/- on account of sales promotion expenses and commission payable on exports at ₹ 5,12,99,210/- : Ground No. 3 to 6 in revenue appeal pertains to deletion of addition of ₹ 60,00,000/- on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of search and it was unlikely that overseas agents would wait for the receipt of commission for such duration. For these reasons the export commission payable to top 10 parties amounting to ₹ 4,12,99,210/- was treated as undisclosed income in A.Y. 2002-03 upto 14.02.2003. 10. The CIT(A) after examining the facts, vide para 9.9 came to the conclusion that the A.O. travelled beyond bounds of Chapter XIV-B to convert the block assessment proceedings into regular assessment proceedings and the complete information regarding commission provided was available at the time of search. The A.O. has not made out any enquiries with RBI, Banks, Customs or Agents to show that the commission provided was false. As there was no material to show that the commission provided was false. He also noted that the commission disallowed was only with reference to the top 10 parties, even though the commission payable to other parties were also equally outstanding but not disallowed. He was of the opinion that there appears to be substance in the contention of the assessee that the disallowance as made merely to pin down the assessee to the declaration of undisclosed income made under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not be for business purposes. In the block assessment impugned in the instant appeal, another reason given for the disallowance is that the said expenses were not fully verifiable. However, there is no finding of the AO that the expenses were false. I quite agree with the appellant that making disallowances on the basis of verifiability of expenses is the province of regular assessment u/s 143(3) and not of block assessment u/s 158BC. Unverifiability of an expense does not by itself make it false. For an expense to be false it has to be shown with positive evidence that the expense was never incurred or that it was definitely not incurred for purposes of the business or was patently inadmissible. Failure on the part of the assessee to prove the expenses does not make the expense false. The said expense merely remains unproved. On facts of the case it is clear that no evidence was found as a result of the search to show that sales promotion expenses were false. 8.8. The law has come to be well settled that additions not founded on evidence uncovered by search cannot be the subject of block assessment under the provisions of Chapter XIV-B. There is virtual unanimity of judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw Wallace Co. Ltd. (2001) 248 ITR 81 (Cal) held that Explanation to section 158BA of the Act makes it clear that the Legislature thought it fit to make a distinction between the block assessment and the regular assessment. In the case of regular assessment, the AO is free to examine the veracity of the return as well as the claims made by the assessee, whereas the undisclosed income is taxed by way of block assessment as a result of search and seizure. iv) In the case of CIT vs Ravi Kant Jain (2001) 250 ITR 141 (Del) the Delhi High Court has taken the view that block assessment .. is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of the evidence found as a result or requisition of books of account or documents and such other materials or information as are available with the AO. Evidence found as a result of search is clearly relatable to section 132 and 132A. The Court held that income based on report of special auditors appointed u/s 142(2A) canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such proceedings cannot admit of assessment of undisclosed income based on opinion. Assessment based on opinion is the province of regular assessment u/s 143(3) but is beyond the purview of block assessment under chapter XIV-B of the Act. It has been held by the M P High Court in CIT v Khushlal Chand Nirmal Kumar, 263 ITR 77, that the amendment made in the provisions of S 158BB(I) by Finance Act 2002 w.r.e.f 1.7.1995 as explained in CBDT circular dated 27.8.2002 does not alter this proposition. Undisclosed income cannot still be assessed on the basis of any evidence other than that found as a result of search or any material or information relatable to such evidence uncovered during search. 12. After considering the legal principles, the CIT(A) was of the opinion that application of the above principles to the facts of the instant case will lead to irresistible conclusion that the A.O. had travelled beyond the scope of Chapter XIV-B in making disallowance out of sales promotion expenses and export commission expenses in the block assessment. By doing so the A.O., so to say, converted the block assessment proceedings into regular assessment proceedings. We agree with the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the matter, the Assessing Officer was not justified in making block assessment at a flat rate of 20 per cent of the total turnover, because disclosure of the sales outturn at an average rate of 20 per cent was only in respect of liquors. So, it would be just and appropriate to have a block assessment only in respect of the liquor sales outturn. The share of the liquor sales could be determined at 70 per cent of the total turnover and taking into account that 20 per cent liquor turnover was suppressed, 14 per cent of the total turnover could be determined as the income concealed. 14. As can be seen from the above, there should be admission of concealment in a statement which can be taken as basis for considering the same in the block assessment. In this case there is not admission at all. Even the Directors statement do indicate that the expenditure was incurred as far as ground No. 1 on the issue of clearing and forwarding expenses and as far as the export commission and sales promotion are concerned these disallowances are made on adhoc basis without any incriminating material. The sales promotion expenses, as seen earlier, was based on earlier disallowances invoking sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visory charges claimed by the assessee was false. The Assessing Officer only disallowed the expenditure under section 40A92) on the ground that the expenditure was unreasonable. The disallowance made under section 40A92) would not be considered for the purpose of making block assessment under Chapter XIV-B unless and until the Revenue gave a categorical finding that the whole expenditure of deduction was totally false. In the absence of a finding that the supervisory charges were bogus or false, the Revenue could not treated it as undisclosed income. Therefore, the Tribunal was not justified in confirming the disallowance of supervisory charges, which were duly recorded in the accounts regularly maintained by the assessee and which were not seized or requisitioned either under section 132 or section 132A. 16. There is neither incriminating material nor there is any admission of modus operandi of concealment or a finding by AO that the expenditure claimed was bogus or false in this case. Therefore, we are of the opinion that there is no basis for making the addition in the block assessment of these amounts, which in fact are not even based on the statement of the Director or emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, amounts received by assessee from various parties at Delhi depot amounting to ₹ 10,95,276 (12,27,167 1,31,891) at Kundli depot amounting to ₹ 12,10,127/- and at Zirakpur depot amounting to ₹ 3,48,109/- were treated as unexplained income of the assessee not recorded in the books. 18. The CIT(A), after considering the explanation of the assessee, deleted the same by holding as under: - 10.15 I have carefully considered the matter and find myself in agreement with the appellant. There is no dispute that the papers, comprising internal audit reports, found during the search on the basis of which the impugned addition of ₹ 84,25 lakh has been made, all record trade debtors of the assessee company. In the mercantile system of accounting, income accrues and is accounted at the point of time the sale is made irrespective of realisation of the sale proceeds. Sales made on credit, though accounted for as income contemporaneously with the sale taking place, give rise to trade debtors which is an asset of the business. Since income is already accounted at the time of sale, subsequent collection of the sale proceeds is merely realization of the trade d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts which were already offered as income in the earlier years. There was thus a fundamental mistake committed by the A.O. in treating the unmoved trade debtors as unaccounted income. Moreover, on facts, the CIT(A) also examined and found that the amounts have been duly accounted for. In view of the facts as well as the reason that trade debtors were added, we cannot uphold the Revenue s contentions raised in the grounds. In fact Revenue should have refrained from contesting this deletion by the CIT(A) on factual basis itself. For these reasons, we uphold the order of the CIT(A) and reject the grounds raised by Revenue. 20. Both the learned D.R. and the learned A.R. in the aforesaid arguments raised various legal principles which, we are of the view, need not be considered in detail. Suffice to say that all the arguments were considered and the matter was decided accordingly. We place on record our appreciation of the efforts made by the counsels in explaining the issue in detail including referring to various documents in the paper book filed in this regard. 21. With these observations, assessee s appeal is allowed and Revenue s appeal is dismissed. ITA No. 265/Mum/2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot at ₹ 93,82,415/- being the undisclosed income confirmed as per the order of the CIT(A). 24. The CIT(A), however, did not interfere with the order passed by the A.O. on the reason that undisclosed income was voluntarily offered by the assessee and the same has been disclosed in the return by the assessee itself and verified in the manner prescribed and the A.O. has accepted the same. His order is thus: I have heard the A.R. and I have gone through the order giving appeal effect passed by the A.O. After giving the appeal effect, the A.O. has written only one sentence that the undisclosed income is taken at ₹ 2,00,00,000/- as retuned by the assessee. The A.O. has accepted the undisclosed income which was voluntarily offered by the appellant and the same has been disclosed in the return by the appellant itself, and verified in the manner prescribed and the A.O. has accepted the same. Thereafter for further addition as stipulated in section 143(2) he has issued notices. The appellant after the search and seizure action u/s. 132 had got adequate time to consult his C.A s/Advocates and offer a true and full disclosure of concealed income, which in turn saves him from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have not been drawn up as on 14th February, 2002, the income for the period 1st April, 2001 to 14th February, 2002 of ₹ 25,85,74,039/- declared in the block return has been computed on the pro-rata basis of the aforesaid figure of ₹ 29,49,36,010/-. 3. The undisclosed income of ₹ 2,00,00,000/- has been offered for the block period as a whole and the year-wise break-up has accordingly not being given. Out of the aforesaid amount of ₹ 2,00,00,000/-, an amount of ₹ 1,04,91,934/- is in respect of export commission no longer payable and the balance amount is in respect of clearing and forwarding expenses and others. 4. In the preliminary statement recorded under section 132(4), the undisclosed income was broken-up under the following heads: (a) On account of clearing charges ₹ 1.50 crores (b) On account of sales promotion ₹ 0.50 crores (c) On account of export commission payable ₹ 5.00 crores (d) On account of unmoved balances ₹ 0.50 crores (e) On account of group companies ₹ 2,50 crores Rs.10.00 crores On verification of the books of account it is noticed that the entries are correctly reflected in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench decision in the case of Bloom Packaging Pvt. Ltd. vs. DCIT ITA No. 7129/Mum/2008 dated 17th May 2010 wherein it was considered and the A.O. was directed to determine the total income less than the returned income. 29. The learned D.R., however, submitted that assessee had admitted an amount of ₹ 2,00,00,000/- and the A.O., consequent to the appeal proceedings has accepted that returned income as such, hence there is no mistake in the order of the A.O. 30. We have considered the issue. As far as the rights of the assessee to contest that an amount was not taxable under the Act has been determined by the Hon'ble Bombay High Court in the case of Nirmala L. Mehta vs. CIT 269 ITR 1. In that case the assessee admitted the lottery income received from Government of Sikkim. The A.O., however, did not give credit for the amount deducted by the Sikkim Government stating that the same was not paid into Indian treasury and tax was not deducted under section 199 of the I.T. Act. In the revision petition filed by the assessee before the Commissioner challenging the assessment order her case was that she should have been given credit for tax deducted at source of ₹ 62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals) erred in upholding the action of Deputy Commissioner of Income-tax in determining the assessed income at ₹ 3,73,32,930/- as per the return of income since the assessed income as computed by him was lower than the returned income. The issue in this ground is peculiar, in the sense that the Assessing Officer has selected the case for scrutiny and determined the total income at ₹ 2,39,83,053/- by making various disallowances in the order. The ultimate determination of the total income is less than the returned income at ₹ 3,72,32,930/-. Consequently, instead of accepting the total income as determined by him in the assessment order, the Assessing Officer stated that the total income being assessed at lower than the Returned income, total income filed by the assessee at ₹ 3,72,32,930/- was accepted. Before the CIT (A), it was contended that the variation in the total income was not because of any claim by the assessee but because of thrusting the depreciation in the earlier years by the revenue, the action of which resulted in carry forward of higher brought forward losses including the depreciation at ₹ 12,13,63,431/-, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the returned income is more and no scrutiny after introduction of new assessment procedure can result in the refund, as issuance of notice u/s 143(2) is only with reference to under assessment. Consequently, the Assessing Officer s action is supported by the Departmental Representative. 11. We have examined the issue. In the case of CIT vs Shelly Products 129 Taxman 271 of Hon ble Supreme Court has held that tax deposited by the assessee by way of advance tax or selfassessment tax, on returned income cannot be refunded just because variation framed to regular assessment after earlier assessment is set aside or nullified. It was held in that case that, failure or inability of the Revenue to frame a fresh assessment should not place the assessee in a more dis-advantageous position than he would have been in if a fresh assessment were made. In a case where the assessee chooses to deposit, by way of abundant caution, advance tax or tax on self-assessment which is in excess of his liability on the basis of the return furnished or, if there is an arithmetical error or inaccuracy, it is open to the assessee to claim refund of the excess tax paid in the course of the assessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund had been refused by adjusting this amount against the refund due to the petitioners. The income-tax authorities could not retain the said sum of ₹ 49,65,878 twice over. 12. The issue was examined by the Hon ble Bombay High Court in the context of not giving credit of tax deducted at source either in assessment year 1989-90 or in assessment year 1990-91 and on this facts, the court has directed the revenue to grant refund at the stage of 143(1)(a) and writ petition was allowed subject to the directions. However, there is no principle laid down that no refund can be granted after completion of assessment u/s 143(3). This judgment of the Hon ble Bombay High Court has been considered by the A P High Court in the case of CIT vs Bakelite Hylam Ltd 237 ITR 392 wherein it was held:- (i) that under clause (b) of sub-section (3) of section 143 of the Income-tax Act, 1961, before its amendment with effect from April 1, 1989, the Assessing Officer had power to determine the tax liability and also to refund the excess amount to the assessee. However, after amendment, with effect from April 1, 1989, the language employed by the Legislature under section 143(3) of the Act do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases of particular nature in a particular manner. The Assessing Officer being bound by it had abdicated his function and did not act independently and, therefore, there was no question of alternative remedy which was a futile remedy. In fact, the jurisdiction had been exercised by the Central Board of Direct Taxes by issuing the circular and, therefore, the order of the Assessing Officer was without jurisdiction. The court had to exercise its jurisdiction under article 226. the order of the Assessing Officer to the extent it stated that the total income would be the returned income, was to be set aside, with a direction to the Assessing Officer to make assessment without keeping in mind the Central Board of Direct Taxes circular dated October 31, 1989. 14. As can be seen from the series of judgments on the issue, we are of the opinion that the Assessing Officer has powers under IT Act to re-determine the total income according to the provisions of law, which may some times result in being less than the returned income, due to various claims and allowances. In this case, as already stated, it is the revenue which has thrusted the depreciation on the assessee in earlier years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losed income of the block period. The provision is as under: - Computation of undisclosed income of the block period. 158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, 1[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) where assessments under section 143 or section 144 or section 147 have been concluded [prior to the date of commencement of the search or the date of requisition], on the basis of such assessments; (b) where returns of income have been filed under section 139 [or in response to a notice issued under sub-section (1) of section 142 or section 148] but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a working partner] : Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement;] (c) assessment under section 143 includes determination of income under sub-section (1) or sub-section (1B) of section 143. (2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to financial year in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. (3) The burden of proving to the satisfaction of the Assessing Officer that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee. (4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against the undisclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As can be seen from proviso (iv), it mandates that assessee should not have filed an appeal against assessment of that part of income which is shown in the income. This indicates that assessee has a right to contest even that part of the income which was admitted in the return. Therefore determination of undisclosed income in the block assessment is to be independently done without reference to any admitted income in the return of income filed in response to notice under section 158BC or 158BD. Reliance on returned income is only with reference to considering levy of penalty but not with reference to determination of undisclosed income. The determination of undisclosed income in a block assessment is governed by the provisions of section 158BB and has to be determined separately keeping in mind the other provisions with reference to Undisclosed Income on the basis of seized material. 35. As seen from the assessment order, the A.O. arrived at the undisclosed income as per provisions of section 158BB, which was subject matter of appeal. Once the amounts are examined and the CIT(A) gives relief to that part of undisclosed income determined by the A.O., the A.O. is bound to re-d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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