TMI Blog2004 (11) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... ent depreciation allowance on leased assets. A notice under section 158BC was issued on 22-10-1996. In response, the assessee company filed on 21-1-1997 the return of income under section 158BC for the block period declaring nil undisclosed income. The Assessing Officer, thereafter issued notices under section 143(2) on various dates calling for detailed information on a number of points. During the course of proceedings under section 158BC(b), the Assessing Officer also referred to the material gathered by the department as a result of searches and investigation otherwise from a large number of parties situated at various places. Thereafter, the Assessing Officer passed on 31-7-1997 an order under section 158BC(c) of the Act. In this order, the Assessing Officer did not compute any undisclosed income for assessment years 1987-88 to 1993-94. For the remaining part of the block period undisclosed income was determined on the ground that 14 lease transactions as detailed in para 4 of the impugned order alleged by the assessee were only on paper as a result of which the assessee had falsely claimed 100 per cent depreciation allowance and accordingly the amount of depreciation allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not intended to be genuine, the mechanism was to be brought in place to ensure that a substantial portion of purchase consideration was received back either by the assessee himself or an associate company belonging to the assessee s group. The payment of purchase consideration and recouping a substantial portion of the said consideration (around 85%) was simultaneous. For this purpose after documentation formalities were over, the accounts were opened at the Bank of the assessee in the name of both the supplier of the assets as well as the lessee. After lease agreements, the assessee issued cheques favouring the supplier. The entire amount was transferred from the suppliers accounts to the lessees accounts on the same day. This was effected by issue of a cheque favouring the lessee by the supplier. The lessee in turn returned back the substantial portion of the purchase consideration which was about 85 per cent in most of the cases to the assessee and in some of the cases to a finance company belonging to the assessee group. The amount refunded by the lessee to the assessee or the finance company was given the colour or security deposit. In this manner, in a circular transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g its account. (iv) In a real transaction it also does not transpire that the supplier refunds the entire purchase consideration to the lessor via lessee. Furthermore, a lessee who pays in advance the entire lease rentals of the lease period does not have any necessity to enter into any lease transaction at all. (v) It is significant to note that bank accounts were opened by the supplier and the lessees at the place of business of lessor and they have been introduced by the lessor or the group companies belonging to the lessor with the sole purpose of closing the financial transaction on the very day on which the transactions have been entered into. Subsequent to the closure of these transactions, the bank accounts of the supplier/lessees have been closed or have become inoperative. (vi) It is noteworthy that subsequent to such bank operations, the lessees have no necessity whatsoever to pay any lease rentals to the lessor during the entire period of lease and it is so reflected in their books. This can seldom happen in a genuine lease transaction. (vii) Lease is a mode of finance. In a genuine lease transaction, the lessee pays a token deposit of 10-15 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hyalakshmi Vegetable Products Ltd. : The assessee claimed to have entered into two lease agreements with this party, hereinafter referred to as BVPL. The assessee claimed that it purchased Veesons Make Steam Boiler from M/s. Thomson Heat Systems, Poonam Apartments, Chira Galli Lane, Hyderabad for a sum of ₹ 90 lakhs. The assessee further claimed that it purchased 2100 High Pressure Seamless Gas Cylinders from M/s. Applied Cryogenics Technological Services, A13/16, T.N.H.B., Baglur Road, Hosur for a sum of ₹ 1,00,80,000. Thus, the total cost of assets leased to BVPL was claimed at ₹ 1,90,80,000. In support of these transactions the assessee relied upon a number of documents such as copies of lease agreements; copies of supplier s invoices; copy of memorandum of understanding in the case of lease of Steam Boilers; installation certificates from lessees; copies of Board resolution authorizing the lessees to enter into lease transactions; copies of Chartered Engineer s certificates/affidavits; particulars of relevant bank transactions etc. According to the learned Assessing Officer, the letters were sent by Speed Post to both the suppliers at the given address but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad admitted that M/s. Thomson Heat Systems was not in existence and that BVPL had not taken any asset from the assessee company. In his further statement recorded by ADI(Inv.) Hyderabad on 20-8-1996, Shri Suryanarayan maintained that this transaction had been done as BVPL was in deep financial crisis with a view to secure some benefit to the company. He also admitted that there was no Board meeting on the dates mentioned in the documents and the Board resolution was fabrication. Further in his statement, Shri Suryanarayan also stated that the company had purchased one Veeson make Steam Boiler from M/s. Batliboi Co., way back in 1991. The Boiler formed part of Block of assets of BVPL and BVPL had been claiming depreciation and continued to do so as a part of the Block of assets. As to the reliance placed by the assessee on the affidavit of one Shri Chandrasekhar, Chartered Engineer, Shri Suryanarayan clarified that the photographs taken by him were of the Boilers which continued to be owned and possessed by BVPL from 1991-92 and there was no question of purchase of any Boiler from M/s. Thomson Heat Systems which did not exist. The learned Assessing Officer also examined the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Piramal group. This circular transaction was enough to prove the fictitious nature of the lease transaction. The learned Assessing Officer took note of the fact that the entire amount paid to the supplier was transferred to the lessee s account and it was done with a view to refund the amount paid back to the assessee-company or the finance company of the group to the extent of 85 per cent and the balance 15 per cent was used by the lessee company. The learned Assessing Officer also took note of the fact that it was not the case of the assessee that the assessee had himself carried out physical verification of the assets and instead reliance was merely placed on a certificate from a Chartered Engineer. As a matter of fact, the assessee never conducted the physical verification which is understandable because when the assets were not there, the need of physical verification did not arise. M/s. Sri Ramakrishna Steels Industries Ltd.: 7. The assessee claimed that it purchased 2100 High Pressure Seamless Gas Cylinders from M/s. Sri Penta Engineering Corporation (hereinafter referred to as SPEC), having office at 1171, Thottipalayam, Pirivu, R.K. Pudur, Coimbatore, vide invoice No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rifying the existence of the assets. In his statement, Shri Srinivas admitted that he had merely issued the certificate at the request of one Shri Gurudutt of M/s. Chetan Financial Services. Shri S. Kanakaraj, Proprietor of SPEC was a man of very ordinary means and worked as a part time Accountant in some company and had a monthly income of ₹ 3000. In his statement recorded by ADI on 7-8-1996 he stated that he was approached by SRSIL, MOAL and SROL to issue sale bills. In connection with the same he visited Bombay accompanied by the executives of the aforesaid companies. He signed bogus bills and also signed blank cheques. 90 per cent of the amount credited to his account was transferred to the lessee companies i.e., SRSIL, MOAL and SROL. In his statement he admitted to have done similar work for 17 other companies and confirmed that there could be some more transactions of similar nature. Shri S. Kanakaraj submitted that the lessee companies through their executives had informed them that they were having the assets in question and they would issue sale bills as if the assets were sold to him. But they never issued any sale bills as promised. 7.1 According to the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t inspection simultaneously with cross examination. According to the learned Assessing Officer the assessee avoided joint inspection for obvious reasons. M/s. Niraj Petro Chemicals Limited: 8. The assessee claimed to have purchased Waste Heat Recovery Systems and Water Pollution Control Equipments from M/s. Andhra Organics Corporation, 5-8-352, Chirag Ali Lane, Hyderabad for a sum of ₹ 2,39,09,000 and to have leased the same to M/s. Niraj Petro Chemicals Ltd., hereinafter called NPL, as per lease agreement dated 21-3-1995. According to the learned Assessing Officer on full enquiries carried out by his office jointly with Investigation Directorate, Hyderabad, it was ascertained that the supplier M/s. Andhra Organics Corporation never existed at the given address. Shri G. Siva Prasad Reddy, M.D. of NPL in his statement recorded by ADI (Inv.), Hyderabad on 12-3-1997 submitted that NPL did not enter into lease transaction with the assessee company. During the course of proceedings under section 158BC the assessee was confronted with these findings. The assessee relied upon the elaborate documentation which included inspection certificates, invoices, Board resolution of less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this connection a questionnaire was issued to the assessee-company by the learned Assessing Officer as well as to M/s. NPL. In reply, M/s. NPL stated that it had not entered into lease transaction with the assessee company and as there was no lease transaction NPL was not in a position to given any information. On examination of Shri G. Siva Prasad Reddy, M.D. of NPL, he was shown the photographs of the machinery taken by Shri Chandrasekaran. He submitted that the photographs were from the plant but he did not known who had taken them. During the course of proceedings under section 158BC, the assessee-company requested for an opportunity to cross examine the lessee company. This cross examination took place on 21-7-1997. In the cross examination the lessee reiterated its stand. Further on 19-3-1997, M/s. NPL addressed a letter to the assessee with copy to the Assessing Officer in which NPL confirmed that it had not entered into any lease transaction with the assessee-company. The learned Assessing Officer noted that the Memorandum of Understanding dated 18-9-1993 was being relied upon by the assessee-company. He further noted that as per MoU it was lessee who was required to pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by MGPL. According to the learned Assessing Officer since the cylinders were industrial cylinders any concern dealing with such cylinders was required to be registered under the Indian Explosives Act, but the assessee-company did not meet the requirement of Indian Explosives Act. Shri Mahesh Gupta, in fact, expressed his ignorance about the provisions of Explosives Act. The statement of Shri Ajay Piramal, the Chairman of the assessee-company was also recorded on 20-7-1996. He was informed that the entire transaction was mere paper transaction to which Shri Piramal replied that he heard that for the first time. He further stated that he was informed by Shri Mahesh Gupta that every leasing transaction was legal and was done with due diligence. He, therefore, continued to believe the same to be true. However, Shri Piramal agreed to have the transaction examined once again with expert opinion. Again on 2-8-1996 further facts were brought to the notice of Shri Mahesh Gupta. The statement of Krishna Mohan was shown to him. In his reply, Shri Mahesh Gupta pointed out that as per the statement of Shri Krishna Mohan, the gas cylinders bought by MGPL were sold to DDK Industries who in turn s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the invoice was given for the sake of accommodation. MGPL also confirmed that the lease transaction was of accommodation in nature as the gas cylinders had not actually been sold to the assessee-company. As suggested by the assessee-company a third party invoice was arranged for the purpose of lease transaction. The assessee-company had also received back 85 per cent of the lease amount. MGPL further submitted that they were not told as to for what purpose the assessee-company had entered into these transactions. At any rate the entire lease transaction was not genuine and no cylinders were involved in it. The cylinder were still in the books of MGPL and they were claiming deprecation on those cylinders and did not form part of the lease transaction. On the strength of this material the learned Assessing Officer concluded that the transactions were merely on paper with the sole purpose of reducing tax liability of the assessee-company by claiming 100 per cent depreciation. The learned Assessing Officer also found that the Board resolution of the lessee company dated 23-3-1994 was also not a genuine document because investigation revealed that there was no Board meeting of MGP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996 was correct. The assessee had been requested to carry out a joint inspection for physical verification of leased assets but the assessee did not reply to that proposal. Cross examination of Shri Krishna Mohan was fixed for 28-7-1997 but the assessee did not turn up. Thereafter, the same was refixed on 11-8-1997. Based on this material, the learned Assessing Officer concluded that the assessee s transaction with MGPL were not genuine. M/s. Raghunath Cotton Oil Products Ltd.: 10. The assessee claimed to have purchased Waste Heat Recovery Equipment and Pollution Control Equipment in Oil Extraction Systems and some other equipments from One M/s. Agri Commercial Products, 1/1 Ashok Nagar, Guntur 7 vide invoice No. 250, dated 4-9-1994 for a sum of ₹ 1,55,34,000 and leased them to M/s. Raghunath Cotton Mills Oil Products Ltd., hereinafter called RCOP as per lease agreement dated 23-9-1994. In support of this claim the assessee relied upon various documents. The learned Assessing Officer found that after the search in the case of the assessee-company the department conducted further enquiries and the statement of Shri G. Venkateswaralu, Managing Director of RCOP was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the invoice was not genuine. Thus, the sale invoice was also fabricated one. The payment by Account Payee cheque made by the assessee-company on 28-9-1994 was drawn on assessee s account with Allahabad Bank, Parel, Mumbai. The accounts were opened in the name of the supplier and RCOP in the same branch on 28-9-1994 and this account was introduced by Shri Mahesh Gupta and Shri Sunil Adukiya, an employee of Piramal Group. The payment made by the assessee company to the supplier was transferred to the account of RCOP on the same date and RCOP, in turn transferred on the same date a sum of ₹ 1,32,03,900 to M/s. Piramal Texturising Pvt. Ltd. a finance company belonging to the same group, under the guise of security deposit. Thus, 84 per cent of the payment made by the assessee-company came back to a company belonging to the same group on the same date. There were no other transactions in the Bank account of the supplier and RCOP. It was also significant to note that these transactions were not reflected in the books of account of RCOP. Moreover, there was no valid commercial ground to justify the transfer of funds from the supplier s account to RCOP since there was no transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been sold by RCOP to M/s. Agri Commercial Products. The assets purchased by RCOP had been hypothecated in favour of financial institutions like IDBI and ICICI and, therefore, could not be sold without obtaining specific permission from these financial institutions. Furthermore, the assessee was requested to conduct a joint inspection of assets stated to have been purchased from M/s. Agri Commercial Products. The assessee was requested to intimate a suitable date. However, the assessee failed to intimate a suitable date for joint inspection. Even the assessee s request for cross examination was acceded to and the cross examination took place in the office of ADI, Guntur on 22-7-1997. In this cross examination RCOP reiterated its stand consistently. Finally on 29-7-1997 the learned Assessing Officer received once again a letter from RCOP in which it was clarified that no material was purchased by them from M/s Agri Commercial Products and there were no separate equipments other than the Solvent Extraction Plant which had been installed much earlier than 1987. M/s. Appollo Tubes Limited: 11. The assessee claimed to have purchased Cold Farming Roll Sets made of high Carbon high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained. The accounts of M/s. Amity Industries were operated by one Shri H.R. Hashni and that of M/s. ATL was operated by K. Sriram, Vice President of company. The accounts were introduced by Shri Mahesh Gupta, CFO of the assessee company and Shri Adhukia, an employee of the Piramal Group. The assessee made payment of the entire amount to M/s. Amity Industries on 28-9-1994 and, thereafter the entire amount was transferred from the supplier s account to the ATL s account on the same day. The ATL in turn returned back an amount of ₹ 1,98,44,527 to M/s. Vulcan Investments Pvt. Ltd., a finance company belonging to the Piramal Group under the guise of Security Deposit. Thus, 80 per cent of the purchase consideration was received back on the same day. The learned Assessing Officer, however, noticed that in this case the supplier was located at Bangalore whereas the factory of ATL was located at Ranipet in Tamilnadu. The assessee was asked to furnish copies of transportation documents in support of the movement of the assets but the assessee chose to submit an explanation that the supplier was identified and located by the lessee i.e. M/s. ATL. There was also no material to suggest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Radhakrishna Babu was further confronted with the fact that certain evidences/documents were found during the course of a search in the business premises of M/s. Prime Trust Financial Services Pvt. Ltd., Hyderabad indicating that SKSCL had taken certain assets on lease. Shri Radhakrishna Babu stated that there was no Board resolution authorizing any such transaction and as the assessee was a Public Limited Company such transaction could be made only with the approval of Members in the General Body Meeting. On 13-8-1996 the statement of Shri S.R. Kailas, Chairman Managing Director of SKSCL was recorded and after going through the statement of Shri Radhakrishna, Shri S.R. Kailas confirmed the same. In the second statement of Shri S.R. Kailas recorded on 26-8-1996 he confirmed that the machinery allegedly supplied by M/s. Maheshwari Engineering Works were never with the group companies. He submitted that with a view to make some money as suggested by Shri Vishwanathan Ganeshan of M/s. Prime Trust Financial Services (P.) Ltd., they had signed some bundle of papers. The enquiries made at the address 7-1-61/7, Ameerpet, Hyderabad revealed that at the nearby Door No. 7-1-61/1 a works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investigation Wing at Hyderabad. In this statement, he categorically denied that he had carried out any physical verification of the assets. He stated that the certificate was issued at the behest of concerned parties on the basis of papers shown to him but no physical verification was made. The Assessing Officer also noted that the description of the assets mentioned on the bills were not complete and they were vague and insufficient for the purpose of proper identification. Specifications were required to include the size of the Rolls, make of the Rolls, manufacturing details and so on. The assessee was required to furnish the details but the same were not furnished. The assessee was also requested to conduct a joint inspection of the assets but the assessee avoided it by saying they would like to find a Chartered Engineer for the purpose and the time given was too short. If the claim of the assessee was genuine then it was in assessee s interest to participate in joint inspection without any loss of time. The assessee requested for an opportunity to cross examine SKSCL and on 21-7-1997 one of the Directors of SKSCL viz., J.S.R. Prasad appeared. However, the counsel of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ater Pollution Control Equipments of the value of ₹ 4,49,12,850. These assets were supposed to have been sold by DSL to MGM and after such sale; the assets were taken back on lease by DSL. This was the case of a direct sale and lease back. In support of its claim the assessee company relied upon a large number of documents. The learned Assessing Officer made reference to Investigation Wing at Bangalore and Madras for causing necessary enquiries. ADI, Chennai informed in its report dated 25-3-1997 that from the return of income it was seen that the transaction with MGM was not reflected in the account. Several letters sent to DSL for obtaining various information were not responded. 13.1 The learned Assessing Officer noted that in the Schedule to the lease agreement the location of the assets was mentioned at Chinchkoda Village, Madhya Pradesh. However, in the audited accounts and annual report of DSL for the financial year 1994-95 there was no mention of any factory at any place other than the factory located in District Shimoga, Karnataka. Further enquiries revealed that by virtue of an agreement dated 15-1-1994 with M/s. Thungabadhra Sugar Works Ltd., hereinafter referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso reported by the A.C. at Chennai that DSL had been in the habit of entering into similar sale and lease back transaction of non-existing assets with other financial companies. For example, transaction entered into by DSL with ITC, Badrachalam Finance Investment Ltd. The assessee company relied on the certified copy of Board s resolution of DSL dated 5-1-1995. Enquiries were conducted to validate the authenticity of Board resolution. There was no record available in the Registered Office of DSL. It proved that there was no Board Meeting. Another certificate from DSL dated 7-2-1995 mentioned that Deve Annapurna Foods Beverages Industries Ltd., had not created any charge or lien on the assets sold to the assessee company. In that certificate it was certified that the assets had been installed and put to use on 6-2-1995. This certificate though issued on the letter head of DSL appeared to be concerned with Deve Annapurna Foods Beverages Industries Ltd. The certificate of Chartered Engineer, Shri P.G. Srinivas on 31-3-1995 that the assets qualified for 100 per cent depreciation can also not be relied upon because the credibility and reliability of the certificates issued by Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from the lessor had been returned back as advance lease rentals. The circumstances in which various documents had been signed, it was stated that RFL was having financial problem and was badly seeking working capital facilities. It was found that the group of companies belonging to Piramal Group were prepared to consider advancing working capital only if the Company obliged them by entering into certain accommodation transactions. However, RFL was never informed that these transactions would be used for tax purposes. The learned Assessing Officer further found from the balance sheet of M/s. RFL that IDBI was on the Board of Directors of the company. A letter was, therefore, issued to IDBI on 16-6-1997 to confirm whether the assets of RFL were hypothecated or subject to any charge. In its reply dated 3-7-1997 IDBI stated that all movable assets present and future were hypothecated and RFL had not obtained permission from IDBI for selling the assets and the transactions in question had not been reflected in RFL s annual audited accounts and other statements for the year 1994-95. A letter was issued to the Registrar of Companies. Copies of Deeds of Hypothecation registered with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from encumbrance; all assets of RFL were hypothecated showed that the assessee s transactions were not genuine, irrespective of the confirmation letter dated 27-3-1997 or the Chartered Engineer s certificate dated 5-4-1997 which could only prove that the assets were in existence but mere existence of the assets could not answer the question as to whether there was a genuine sale-cum-lease back transaction. The learned Assessing Officer also took note of the fact that RFL had similarly raised bills in an indiscriminate manner on various companies which also included other companies belonging to Piramal Group. M/s. Bangalore Gases Private Limited: 15. The assessee claimed to have purchased 2105 High Pressure Seamless Gas Cylinders for ₹ 99,98,750 from M/s. Bestow Agencies, Bangalore vide invoice No. 915, dated 2-3-1995 and have entered into a lease agreement on 4-3-1995 in respect of the same with M/s. Bangalore Gases Pvt. Ltd., Bangalore, hereinafter referred to as BGL. According to the learned Assessing Officer, during the course of statement of Shri Ajay Piramal recorded on 29-7-96, it was brought to his notice that M/s. Bestow Agencies as well as BGL had admitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kant, Chartered Accountant who audited the balance sheet it was found that there was no such Chartered Accountant at the address as given in the Auditor s report. As to the certificate of Chartered Engineer, Shri P.G. Srinivas, in his statement recorded on 23-7-1996 submitted that he had not visited the premises of M/s. BGL and had not physically verified the assets. Mr. Srinivas also accepted that the certificate issued by him was not true. Since physically the assets were not there, the question of physical verification did not arise. As to the Board resolution of BGL dated 27-2-1995, a survey conducted at the premises of BGL revealed that the company was on paper only. No books of account had been maintained nor had any meeting ever been held. This fact was confirmed by the Managing Director of BGL himself. As to the invoice issued by M/s. Bestow Agencies, the invoice contained KST and CST Registration Numbers. It had been signed by one Mairaz Ahmed. The distinctive Nos. of Cylinders were D 18362 to D 20464. A letter was sent by Speed Post at the address of M/s. Bestow Agencies as on the invoice but the same was received back with the postal remarks No party exists . The enquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction in question. 15.2 As to the reliance placed by the assessee on the payment by Account Payee Cheque made to M/s. Bestow Agencies, the learned Assessing Officer noted that the cheque was deposited in the account opened in the name of M/s. Bestow Agencies and BGL in Allahabad Bank. These two accounts were introduced by M/s. Anand Piramal Investments Ltd., a company belonging to Piramal Group through one of its Directors, Mr. V.C. Vadodaria. Both the accounts were opened on the same date. The cheque issued by the assessee favouring M/s. Bestow Agencies was deposited in its account in Allahabad Bank for ₹ 99,98,750. On the same date the entire amount was transferred to the account of BGL and BGL in turn transferred on the same date a sum of ₹ 83,98,950 to M/s. Swastic Safe Deposits and Investments Ltd. a company belonging to Piramal Group. This amount was in turn transferred on the same date to the account of the assessee company. The balance 15 per cent was appropriated by BGL and other various persons. According to the learned Assessing Officer the manner in which the bank transactions were carried out was significant. 15.3 According to the learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the movable assets of GSAL. The learned Assessing Officer, therefore, concluded that Board resolution was false and fabricated. Secondly, from the published accounts of GSAL it was clear that all the movable assets present and future had been hypothecated to IDBI. Therefore, in the case of a genuine sale of assets it was incumbent to obtain specific prior approval of IDBI but no such approval was ever obtained. The assessee was confronted with these facts. The assessee submitted that the charge created was in the nature of floating one and hence there was no prohibition for sale of individual assets. According to the learned Assessing Officer irrespective of the nature of charge, no sale of assets could be made without the permission of financial institutions in whose favour the charges had been created. The assessee also argued that if the seller had express warranty over the title of goods then such a sale was a valid sale. The learned Assessing Officer held that in the case under consideration GSAL did not have an express warranty. The assessee company was aware of the charges because a copy of the audited balance sheet of GSAL was in its possession. The learned Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction demonstrated that it was a doctored transaction. Why should GSAL part with its assets for a consideration equivalent to 15 per cent only of the cost of assets? Enquiries from bank revealed that GSAL had filed a copy of resolution of Board meeting dated 10-3-1995 wherein Shri N. Krishna Mohan, MD of the company was authorised to open and operate the bank account in Allahabad Bank, Parel, Mumbai. During the course of a survey at GSAL, Hyderabad it was found that as per the Minutes Book there was a Board meeting of GSAL on 10-3-1995 but there was no resolution authorizing Shri N. Krishna Mohan to open and operate the bank account in Allahabad Bank, Parel, Mumbai. As to the affidavit of Shri S. Chandrasekaran, Chartered Engineer, it only stated that he visited the plant and verified the physical existence. However, the question was not as to whether the assets were in existence but whether the said assets had at all been sold or were they capable of being sold. There was a clear prohibition of the financial institutions because the assets of GSAL had been hypothecated to them. Secondly, there was no question of genuine sale for only 15 per cent of the cost of assets. M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s return of income for assessment year 1995-96 also did not disclose any sale of assets. The assessee relied on payments made by account payee cheques. An account in the name of DAFBIL was opened at Allahabad Bank, Parel, Mumbai where the assessee company was also having its accounts. This account was opened and operated by Shri U. Kasim Rizvi, Director of DAFBIL. After this account was opened on 2-3-1995 the assessee paid by Account Payee cheque on 3-3-1995 an aggregate sum of ₹ 7,41,07,190. On the same date, 84 per cent of the consideration was received back from DAFBIL amounting to ₹ 6,22,50,000 by M/s. Swastik Safe Deposits and Investments Ltd., a finance company belonging to Piramal Group in the guise of security deposit and on the same date this amount was transferred back to the assessee. Thus, in a circular transaction the assessee company received back 84 per cent of the purchase consideration. The refunded amount of ₹ 6,22,50,000 by DAFBIL in the name of security deposit was nothing but summation of all lease rentals to be paid as per schedule to the lease agreement over a period of 8 years. If at one go DAFBIL could pay the entire lease rentals, what wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Hospet. Approval of State Bank of Mysore was obtained for sale of this Boiler but in that approval it was specifically stipulated that the entire sale proceeds had to be credited to the cash credit account of M/s. Salarjang Sugar Mills Ltd. This approval was given on 12-8-1987. Further it was claimed that Salarjang Sugar Mills Ltd. had sold this Boiler to one M/s. Hemakuta Industrial Investments Company Ltd., from whom M/s. Candy Filters (I) Ltd. purchased the Boiler. According to the learned Assessing Officer if the approval was given on 12-8-1987, it implied that the Boiler could not have been sold to Hemakuta Industrial Investments Co. Ltd., in 1985-86. Furthermore, the entire sale proceeds were required to be deposited in the cash credit account of Salarjang Sugar Mills Ltd., for which there was no evidence. M/s. Candy Filters (I) Ltd. were asked to produce particulars pertaining to purchase of machinery from Hemakuta Industrial Investments Co. Ltd., but no such details were furnished. It was also noticed that the accounts of M/s. Candy Filters (I) Ltd. had not been drawn up or finalized. It was, however, significant that the original cost of the Boiler was only ₹ 1.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceive payment of lease rentals. The same were adjusted against the so called security deposits. Normally the lease rentals for the entire period could not be given upfront as an advance. The assessee also could not confirm the insurance cover being taken in respect of any of the leased assets either by himself or by the lessees which was an abnormal phenomenon. In the column in the sales tax returns for capital assets purchased during the period the particulars of the leased assets were not mentioned. These purchases were booked through journal entries representing abnormal departure from the standard accounting policy and recording of regular transactions in the books of account. No internal procedure was followed for these purchases otherwise essential for corporate governance. According to the learned Assessing Officer the certificates of physical verification of assets at the time of entering into the transaction relied upon by the assessee were not authentic and would be of no avail if the assets were not in existence. The assessee was duly confronted with the findings in this respect. The assessee was also asked to confirm if any physical verification of the assets was at an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was recorded. In his statement, Shri H.N. Shah mentioned that leased assets had been given on lease to group companies which was factually incorrect. He could also not explain as to whether during the course of audit any query had been raised regarding the physical verification of leased assets. The learned Assessing Officer stated, regular programme of physical verification stipulated that leased assets should be physically verified at least once in a year . The statutory auditor could not through any light on this aspect. According to the learned Assessing Officer, having regard to the fact that leased assets constituted about ₹ 34 crores in the case of the assessee company, the statutory auditor was required to give his opinion on this issue. During the course of statement, Shri H.N. Shah was also asked to go through the working papers during the audit and comment if there was any reference to the issue of physical verification of leased assets. The statutory auditor replied that no such papers were in his possession. The learned Assessing Officer, therefore, concluded that the management did not carry out any physical verfication and the statutory auditor also did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f manufacture, make, capacity, dimension and various other technical parameters. In most of the bills technical specifications were not included and the descriptions were vague. These bills prima facie lacked credibility and aroused suspicion. The suppliers and lessees were all located in places far away from the assessee company. They were almost alien to the assessee company and introduced by the financial intermediary M/s. Gold Crest Finance (I) Ltd. By choosing these parties at far away places the assessee company seemed to have taken precaution to avoid investigation by the Jurisdictional Assessing Officer. 24. The learned Assessing Officer noted that all the transactions were effected through Bank accounts opened at the assessee s bank, Allahabad Bank, Parel, Mumbai. For this purpose, both the suppliers and lessees opened account in that very branch and they were introduced to the bank by the persons and the entities in the Piramal Group. The transactions were effected in a circular manner whereby the assessee on the same date got back 85 per cent of the purchase consideration. It was an abnormal feature that all the suppliers and lessees came all the way to Mumbai for ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevance. At any rate, in deference to the assessee s insistence of cross examination, the same were arranged and in many cases, the cross examinations were carried out. In all such cases, the lessees reiterated their stand that assessee s purchases were bogus and assets did not exist. However, emphasis of the assessee was all along on the documents that too false and fabricated ones. 27. The learned Assessing Officer held that there was a collusive and collaborative arrangement between the assessee company, financial intermediaries and lessees. There was a common intention, design and motive to secure benefit for each of the parties concerned. The assessee s edifice of claim was based on a set of doctored documents with the purpose of obtaining tax shelter without any intention or action of effecting genuine transaction. The assessee, therefore, could not be permitted to plead his case as legitimate tax planning. The learned Assessing Officer referred to the remarks of the House of Lords in the case of W.T. Ramsay Ltd. v. IRC [1982] AC 300 and of Hon ble Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 1481. The learned Assessing Officer found that the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch borrowed funds were disallowable under section 36(1)(iii) of the Act as having been incurred for the purpose other than the business purpose of the assessee company. With regard to the case where the security deposit came back directly to the assessee company, the learned Assessing Officer held that there would be no disallowance called for. In the second category of the case where security deposit had been received by other finance companies and the amounts had not yet been received by the assessee company in any other form, the interest was to be disallowed on working capital limits utilized to the extent of security deposits received by such companies. The learned Assessing Officer calculated disallowance of interest to the extent of ₹ 1,57,48,361 for the block period. In the third category of cases, security deposit had been received by M/s. Swastik Safe Deposits Investments Ltd. That company advanced the amounts to the assessee company as inter-corporate deposits or loans and charged interest at the rate of 15 per cent per annum. The assessee claimed such interest payments as deduction. The learned Assessing Officer calculated interest disallowable on this account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving been recorded in the books of account. As on the date of search, returns of income for and up to assessment year 1995-96 had fallen due and the same had been duly furnished to the Department prior to the date of search. The assessments up to assessment year 1993-94 had already been completed. In respect of the assessee s return of income for assessment years 1994-95 and 1995-96 that had been filed, no orders of assessment under section 143(3) had been made by the learned Assessing Officer. The return of income for assessment year 1996-97 had not fallen due and was, therefore, filed subsequent to search under section 132. The learned Assessing Officer issued a Notice under section 158BC of the Act dated 22-10-1996 and in compliance thereto the assessee furnished the return of undisclosed income, disclosing its undisclosed income at NIL. 31. The learned Counsel for the assessee argued that in the impugned order under section 158BC, the learned Assessing Officer has not assessed any income from undisclosed source for and up to assessment year 1993-94. For assessment years 1994-95 and 1995-96, the assessee had filed the returns of income but assessment orders had not been passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the impugned order under section 158BC was extraneous to the search carried out in the case of the assessee and, therefore, the entire investigation made and material gathered that has been relied upon by the learned Assessing Officer was beyond the scope of Chapter XIV-B. For the purpose of applying the provisions of Chapter XIV-B, there should have been positive material found during the course of search in the assessee s own case. 32. The learned Counsel for the assessee further argued that where the assessment was pending or a return of income had not been subjected to assessment proceedings, it could not be concluded that any expense claimed therein was false. For this reason, no undisclosed income could be assessed on the ground of false claim of depreciation allowance or deduction of interest in respect of assessment years 1994-95 and 1995-96. In support of this contention reliance was placed on the Judgment of Hon ble Supreme Court in the case of S.L. Kapoor v. Jagmohan AIR 1981 SC 136. 33. The learned Counsel for the assessee argued that for assessment year 1996-97, the return of income had not even fallen due as on the date of search. In the case of CIT v. Mahe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g these two items of deduction. Moreover, the approach of the learned Assessing Officer in this behalf was self-contradictory. On the basis of lease agreements and other documents the assessee disclosed lease income from the transactions and as a corollary to the same, the assessee claimed depreciation in the returns of income filed for assessment years 1994-95 and 1995-96. The income disclosed by the assessee representing lease income from the transactions in question has been duly accepted in the assessments of the assessee for various assessment years as would be seen from the following table:- Sr. No. Assessment year Income disclosed from 14 Transactions as lease income Income assessed as lease income (1) (2) (3) (4) Rs. Rs. 1. 1995-96 41,07,000 41,07,000 2. 1996-97 4,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the I.T.A.T. in the case of Sunder Agencies v. Dy. CIT [1997] 63 ITD 245(Mum.) that an addition under section 158BC cannot be made unless some direct evidence came to the knowledge of the department as a result of search establishing clearly the factum of the undisclosed income. A search conducted under section 132 did not provide license to Revenue to make rowing enquiries or to throw any presumption in regard to other matters and the Assessing Officer could proceed only on the basis of material detected at the time of search. 36. Referring to the provisions of section 158B(b), the learned Counsel for the assessee argued that the definition of undisclosed income clearly indicated that the income or property which had been disclosed or which would have been disclosed for the purpose of Income-tax Act shall not form part of undisclosed income. In other words, it was necessary to establish that any income or property had been found or detected as a result of search or based on any entry in the books of account or other documents or transactions found in the course of the search which had not been disclosed or would not have been disclosed. Reliance was placed on the Judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any interest. The same applied to assessment year 1997-98 also. 39. The learned Counsel objected to the method of computation of undisclosed income in the impugned order also on the ground that the same was not in accordance with the method of computation laid down under section 158BB of the Act. He argued that direct assessment of undisclosed income was not permissible and the Assessing Officer was required to go through the entire process. In the case of the assessee, lease income of ₹ 18,99,25,356 had been assessed. After having done so, how could the learned Assessing Officer disallow the claim of depreciation allowance on the ground that these lease transactions were false, more so, in the absence of any order under section 263, cancelling the assessment of lease rentals. 40. The learned Counsel for the assessee argued that out of 14 transactions the transaction with Deve Sugars Ltd., Ready Foods Ltd., Goldstar Steel Alloys Ltd., and Deve Annapoorna Foods Beverages Industries Ltd., were sale-cum-lease back transactions. The parties performed as the seller as well as the lease. All plant and machinery purchased by the assessee remained in the control and cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of lease was being regularly held as income derived by the assessee from transactions of lease. There was a contradiction in terms inasmuch as if the transactions were bogus or sham as had been assumed, there was no income earned by the assessee by way of lease and the amount received was a mere return of capital. The learned Assessing Officer having taxed the income from lease rentals in each of the assessment years of an amount aggregating to ₹ 18,99,25,356, could not hold on to his presumption that the transaction was sham. Without prejudice and in the alternative, the learned Counsel for the assessee argued that the lease income ought to have been excluded. 41. The learned Counsel for the assessee emphasized that in any case the entire exercise was outside the scope of Block assessment. Section 158BB(1) provides for computation of undisclosed income in accordance with Chapter XIV on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the learned Assessing Officer. Such other materials has to bear a direct nexus with the facts discovered during the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation was, therefore, wholly unjustified being not in accordance with Law. In any case, the said sum being notional amount could not be held to be undisclosed income. 43. In respect of disallowance of ₹ 5,01,78,902 by way of disallowance of interest, the learned Counsel for the assessee argued that the returns of income for the assessment years 1996-97 and 1997-98 had not become due and, therefore, there was no earthly justification to treat the said sums as disallowable for the simple reason that the same had not even been claimed as on the date of search. However, the interest had been paid by the assessee company on its cash credit account which was continuing for more than 10 years. The transaction pertaining to the payment and receipt had all been entered in the books of account and carried out in the ordinary course of assessee s business. There was no nexus with any particular sum of borrowing as the borrowings of the assessee had been made for the purpose of business in a composite manner. Moreover, the income earned by way of lease from plant and machinery had been assessed to tax and, therefore, the interest paid on the amounts invested for the purpose of purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, the learned Assessing Officer held that the supplier, Applied Cryogenics Technological Services was a fictitious concern on the basis of alleged investigation report of ADIT, Bangalore dated 10-3-1997. The assessee was not furnished with a copy of the aforesaid investigation report and thus, the assessee was not confronted for rebuttal with this material or evidence. The learned Counsel argued that the proprietor of the supplier firm had come to Bombay to open the bank account. The existence of the supplier could also be established by the reference made to the Investigation Department which concluded that one Mr. Ramakrishna dealing in Nitrogen gas cans was staying at the residential address indicated in the receipt issued by the supplier and was doing business at Hosur. The name of the proprietor of the supplier was also Mr. A. Ramakrishna. Further, the learned Assessing Officer himself states that the supplier had sold even to other parties. In this view of the matter, the lessee s denial of existence of supplier was irrelevant as the supplier was in fact located by the lessee only. Furthermore, the inability to locate the supplier did not itself lead to the inference that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997, 30-6-1997, 7-7-1997 and 23-7-1997. 47.1 In respect of second transaction with BVPL, the learned Counsel for the assessee argued that the allegation that the supplier of the asset was not in existence was not correct. The existence of the supplier could be established from sales-tax Registration No. and bank account. The existence of the supplier could also be established by the reference made to the Investigation Wing by the Tax Department which concluded that the supplier had sold even to other parties. The lessee s denial of existence of supplier was irrelevant as the supplier was located by the lessee himself. At any rate, the inability to contact the supplier could not lead to the inference that the supplier did not exist or he did not sell assets to the assessee. The learned Counsel also argued that the transport/insurance was not necessary as the asset was already available with the lessee. The denial by the lessee was contrary to records; contrary to various statements given by the lessee himself and this denial was self serving as the lessee did not want to accept the sale of equipment. There was a broker who was paid brokerage by the lessee himself. The lessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he bills issued by the supplier. The assessee could also rely on the fact that the same supplier had sold even to other parties. The lessee s denial of existence of supplier was irrelevant as the supplier himself was located by the lessee as borne out by the statements given by the supplier. The learned Counsel also objected to only some extracts of the statements of the lessee and supplier, having been furnished to the assessee and not the whole statements. He also pointed out that the assessee was not confronted with report or enquiries conducted at Coimbatore and the subsequent statement of Chartered Engineer, Shri P.G. Srinivas dated 23-7-1996. As to the circular nature of the transaction, the learned Counsel argued that the Board resolution was signed by the Managing Director of the lessee and, therefore, the assessee could rely on the same based on the Doctrine of Indoor Management. In respect of the contention of the learned Assessing Officer in Para 9.9 at Page 36 of the Order that the certificate had been issued by the Chartered Engineer without physical verification, the learned Counsel argued that the learned Assessing Officer had made a wrong and misleading statement. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was given to the assessee company by the M.D. of NPL and, therefore, the assessee was entitled to rely on the Doctrine of Indoor Management. The genuineness of the signatures on the Board resolution had been attested by the bank Manager. The failure on the part of NPL to intimate IDBI about the Board meeting did not in itself lead to the conclusion that the Board meeting was not held at all. As to the No Lien certificate furnished by NPL being untrue, the learned Counsel argued that this showed the conduct of NPL and not of the assessee. As to there being no evidence of delivery of goods it was pointed out that the supplier had issued delivery challans dated 10-2-1994 and 12-2-1994, confirming the delivery of the equipment. About 85% of the total consideration being returned on the same date it was argued that it was a commercial transaction that had been agreed upon amongst the parties. As to the allegation that the affidavit of the Chartered Engineer had been given without physical verification of the assets, the learned Counsel pointed out that the lessee had admitted that the photographs in the affidavit were from his own factory but the lessee was unaware of the reasons for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genuineness of the transaction. As to the allegation that the supplier DDK Industries was a concern floated by M.D. of MGPL purely for bill trading, the learned Counsel argued that the existence of the supplier was not doubted and the supplier was registered with sales tax authorities also. It was also found by Investigation Department that the supplier had carried out sales to other parties as well. Hence, existence of the supplier was fully established. Moreover, in the case of Microland Ltd. v. Asstt. CIT [1998] 67 ITD 446(Bang.), the Tribunal had accepted the genuineness of sale and lease transaction by MGPL through DDK. The nature of the transaction in the case of the assessee company was very similar to that of Microland upheld in the aforesaid decision of the Tribunal. As to the contention of the learned Assessing Officer that the Chartered Engineer D.V. Nagabhushan had accepted that he had not conducted any physical verification of the assets and that he had given a certificate of installation without knowing the purpose of the certificate, it was argued that in the statement of Chartered Engineer, the certificate referred by him did not pertain to the transaction of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Assessing Officer, the supplier M/s. Agri Commercial Products could not be located at the given address. In this connection the learned Counsel for the assessee argued that this fact in itself could not lead to the conclusion that the supplier did not exist or that he did not sell the machinery to the assessee company. It was the case of the Department that this supplier had made similar sales to other parties as well. RCOP had also accepted that they had been dealing with the supplier even earlier and that they had purchased raw materials from the supplier. This supplier had, in fact, been located by the lessee himself. The address of the supplier was the same as that of the RCOP s office at Guntur and the person who had signed the document on behalf of the supplier was an ex-employee of RCOP itself. As to the statement of the MD of RCOP denying that they had purchased or sold any machinery to the supplier, the learned Counsel argued that the assessee had neither been given the copy of local enquiries and investigation report by Investigation Wing at Hyderabad nor the statement of RCOP recorded on 16-9-1996 and 11-7-1997. At any rate, the denial of RCOP was contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the existence of the supplier was doubtful. According to the learned Assessing Officer the material on the basis of which this conclusion was reached was not furnished to the assessee for rebuttal. At any rate, non-filing of the sales tax return or the letters not being replied to could not lead to the inference that the supplier did not exist or had not sold the assets to the assessee company. Investigation made by the Department also showed that the supplier had sold to other parties also. The denial by ATL of the existence of supplier was irrelevant because the supplier in question had been located by ATL only. The Assessing Officer also did not make any efforts to locate the supplier from the other address mentioned on the receipt, challan etc. i.e., Title Factory Compound, Bangalore. As to there being no proof regarding transportation and insurance of the assets, it was argued that there was no necessity because the assets were already available with the lessee. As to the Bank account being opened by the supplier and ATL on the same date and 85% of the consideration being transferred on the same date to an investment company of Piramal Group, the learned Counsel argued tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. At any rate, the denial was contrary to the records. It was self-serving as SKSCL did not want to accept the sale of equipment. This stand had also been taken by the Assessing Officer in the case of Goldcrest Finance Ltd. There was a broker who had been paid brokerage for the transaction. Money had actually passed from the assessee-company to the supplier. The statement of SKSCL could not be relied upon as it suffered from contradictions and was inconsistent. Although they denied that the persons who had signed the documents were their employees, no further investigation was made in that respect. The denial was made by the new management of SKSCL and, therefore, it was quite possible that the new management was not fully informed. As to the allegation that the Chartered Engineer, S. Chandrasekaran had confirmed that he had issued the certificate without carrying out physical verification of the assets it was argued that the assessee was not confronted with the statement of Mr. S. Chandrasekaran. It was also relevant to note that in another case (BVPL) this Engineer had specifically confirmed to the Assessing Officer that he had physically verified the assets while giving the ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the transactions were executed suggested that the same were stage managed and not genuine. During the course of hearing before us, the learned Counsel for the assessee argued that the assessee was not confronted with the material on the basis of which the learned Assessing Officer gave his findings in respect of this transaction. The assessee was not furnished with a copy of the agreement between Tungbhadra Sugar Works Ltd. and DSL. The assessee also had not been given an opportunity to inspect the assessment records of DSL and annual report of DSL for the Financial Year 1994-95 referred to in the assessment order. The assessee was also not confronted with the report of Inspection by the Department at DSL s Registered Office and copy of statement of Shri PG Srinivas dated 23-7-1996 was also not furnished to the assessee. However, the learned Counsel argued that the assessee-company could not be held responsible for omissions or inaccuracies if any, in the records maintained by DSL. The assessee was entitled to rely on the documents executed between the assessee-company and DSL and the certificates given by DSL. Furthermore in this case, the learned Assessing Officer had not exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the learned Counsel for the assessee argued that most of the material referred to by the learned Assessing Officer had not been furnished to the assessee-company for rebuttal. Such material included various letters addressed by the learned Assessing Officer to RFL; report of Investigation Wing of the Department at Bangalore; correspondence with IDBI. As to BIFR, the learned Assessing Officer did not mention as to on what material he arrived at his finding. The learned Assessing Officer also did not clarify as to on what material he came to the conclusion that RFL had been raising bills in an indiscriminate manner in respect of the same assets. The learned Counsel further argued that the learned Assessing Officer had mentioned that the promoter of RFL was absconding. The assessee could not be penalized for the same or for the lack of response by RFL. As to the letter of RFL dated 19-6-1997, the learned Counsel for the assessee pointed out that the same did not refer specifically to the lease transactions with the assessee-company. At any rate, the denial was contrary to the records and was self-serving because RFL did not want to accept the sale of equipment. The assessee had mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of alleged purchase by the assessee. The assessee-company had also not taken any steps to verify the assets at any point of time. During the course of hearing before us, the learned Counsel for the assessee stated that the assessee was not confronted with the material referred to by the learned Assessing Officer, such as Certificate of Incorporation of BGL; Investigation Report of Investigation Wing at Bangalore or the details of Investigation made at Bangalore; enquiries made with sales tax authorities etc. The learned Counsel argued that if certificate of incorporation was fraudulent, the same would call for action in the case of BGL and not the assessee-company. Mr. Anwar Pasa, Managing Director of BGL has represented to the assessee-company about the existence of the company and its registered address. There was no reason for the assessee to doubt the genuineness of these representations and the balance sheet produced before it. The assessee was also not expected to verify about the Auditor mentioned in the balance sheet. The assessee was also entitled to rely on the Board resolution, the genuineness of the signatures on the same had not been refuted by the learned Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer and the GSAL and the statement of Shri S.S. Bhat. The learned Counsel argued that Board resolution was duly signed by the Managing Director. The genuineness of the signatures has not been denied. By a letter dated 12-7-1997 addressed to the Assessing Officer, GSAL had again confirmed the Board resolution and the fact that the same had been ratified by the General Body on 20-12-1995. In Para 7(c) of the lease agreement it was clearly mentioned by GSAL that the lease agreement did not violate any covenant with any bank financial institutions and Government authorities. In his letter dated 26-7-1997, Mr. S.S. Bhat had confirmed the genuineness of the transaction. Balance sheet of GSAL also did not reveal that the assets in question had been hypothecated to IDBI. Vide letter dated 12-7-1997 addressed to the Assessing Officer, GSAL had clarified that sales tax was not applicable since it was a second sale. The learned Assessing Officer had not specified as to how GSAL was held to have indulged in indiscriminate issue of sale bills. As to the manner in which the transaction was recorded in the books of GSAL, the fact of the matter was that the transaction was recorded an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer of DAFBIL, Police complaint filed by DAFBIL on 7-4-1997 and the statement of Mr. Rizvi on 25-7-1997. The learned Counsel further argued that the contention that no one was available at the company s address and the promoters were absconding showed that the office of DAFBIL was existing at the given address even at the time of investigations made by the Department. As to the Board resolution, the genuineness of the signatures on the Board resolution was not denied. Mr. Rizvi admitted to have signed the Minutes. The failure of DAFBIL to intimate IDBI did not lead to the conclusion that the Board meeting was not held. Moreover, so far as the assessee was concerned, it had no reason to doubt the genuineness of Board resolution. As to the allegation that the promoters of DAFBIL had committed various violations of Law only proved that DAFBIL had acted fraudulently but it did not prove that the assessee-company had not acted in good faith. If the sale was recorded at a lower price in the balance sheet, it did not indicate that the entire transaction was fictitious. Entries made in the books of DAFBIL should not affect the claim of depreciation allowance in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; correspondence with Candy Filters; letter from State Bank of Mysore; letters to TBPL and Bank statements. The learned Counsel argued that in any case purchase of Boiler by Candy Filters from Hemakuta was not denied or disproved by the learned Assessing Officer. The learned Assessing Officer had only relied on the date of approval by State Bank of Mysore, but he disregarded the fact that Candy Filters had duly confirmed the fact that they had purchased the Boiler from Hemakuta. The fact that the approval was obtained from State Bank of Mysore in itself showed that the Boiler was in existence. The failure of supplier to furnish the details of acquisition of Boiler could not affect the physical existence of the asset and its purchase by the assessee company. Similarly, the non-finalisation of account books of the supplier could not affect the claim of the assessee company. The assessee company had relied upon the agreements; certificate of Chartered Engineer and Board resolution. If the other parties did not reply to the queries of the Assessing Officer, the genuineness of these documents was not disproved. It was represented before the assessee company that the Board resolution w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no force in the contention of the learned Counsel for the assessee that undisclosed income assessed in the impugned order was not relatable to the search carried out in the case of the assessee. 61. The learned Departmental Representative strongly relied upon the various findings elaborately discussed in the impugned order under section 158BC. He pointed out that in most cases, the suppliers were found to be not existing. There was no evidence of any machinery being transported from the alleged supplier to the assessee or to the alleged lessees. There was no force in the argument of the assessee company that taking delivery of the assets was the responsibility of the lessees. As the assessee had claimed depreciation it was the assessee s burden of proof to establish these primary facts. Apart from the suppliers not being found in most cases, the alleged assets were also not found to be physically existing. It was an admitted fact that the assessee company themselves never conducted any physical verification of the assets. No evidence was ever filed that the assets were inspected by the assessee company. In such a scenario if the lessees made a statement that the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive argued that various documents relied upon by the assessee company had not stood the test of enquiry by the Assessing Officer. There was elaborate discussion in the impugned order in respect of each transaction and the learned Assessing Officer had found far too many holes in the story of the assessee. The assessee produced Board resolutions but it was found that Board meetings never took place. The register of Minutes of Board meetings was either never produced or did not contain particulars of any such Board resolutions. No Lien certificates were filed while the assets were already hypothecated with IDBI or other financial institutions. The parties were either found to be not existing or they denied having entered into the transaction and admitted that the documents in question were mere paper work. All these enquiries were conducted during the course of search and, therefore, had a direct nexus with the search. Thus, the learned Assessing Officer was entitled to include disallowance of depreciation in computation of undisclosed income of the block period. 64. The learned Departmental Representative argued that there was no force in the contention of the assessee that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Counsel for the assessee vehemently opposed the contention of the learned Departmental Representative that in view of the lease agreements and other supporting documents to the lease agreements having been found during the course of search at the premises of the assessee, there was a direct nexus between the search under section 132 and undisclosed income represented by the disallowance of assessee s claim of depreciation on the leased assets. He argued that if that were so, there would be no distinction left between the subject-matter of normal assessment proceedings and proceedings under section 158BC because the books of account and supporting documents and material were only expected to be found if the search of any business premises were conducted under section 132. He argued that if the lease agreement had not been found at the assessee s premises during the course of search, the Revenue could have had some case against the assessee. The fact that lease agreements and supporting documents were found at the assessee s premises only supported the assessee s claim and not otherwise. Moreover, the lease agreements did not by themselves suggest that the same were not g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Pvt. Ltd. (MGPL) and Bhagyalakshmi Vegetable Products Ltd.-II (BVPL-II), the security deposits were received by the assessee company. In the remaining cases, the money was paid to the Finance Companies such as Swastik Safe Deposit Investments Pvt. Ltd., Vulcan Investments Pvt. Ltd., Legend Pharma Ltd., etc. The learned Assessing Officer was not justified in treating that the deposits to the extent of 85% in all the cases were received back by the assessee company for the reasons that the other finance companies were group concerns. The learned Assessing Officer had not brought on record that the assessee company received back the purchase consideration in other cases as well. As a matter of fact, the learned Assessing Officer did not further look into the matter and held that it was sufficient that these finance companies were group concerns. The learned Counsel further pointed out that it was not true that all the lessees had denied genuineness of lease transactions. In five cases, viz., Apollo Tubes Ltd. (ATL), Deve Sugars Ltd. (DSL), Gold Star Steel Alloys Ltd. (GSAL), Deve Annapoorna Food Beverages Industries Ltd. (DAFBIL) and Tungbhadra Pulp Boards Ltd. (TPBL), the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the remaining five cases that the learned Assessing Officer had alleged that the lessees had not reflected lease transactions in question in their respective books of account. The learned Counsel argued that the assessee company had no right to dictate as to in what manner the books of account should have been maintained by the lessees and the assessee company could not be penalized for any lapse and omissions on the part of the lessees. 71. The learned Counsel for the assessee vehemently argued that the learned Assessing Officer had not even in a single case established that the leased assets were not physically existing. In a large number of cases, the assessee had made during the course of proceedings under section 158BC further evidence available to the learned Assessing Officer to prove the existence of the leased assets. In the case of Bhagyalakshmi Vegetable Products Ltd.-I (BVPL-I), the assessee carried out physical verification after the date of search on 14-9-1996. In the case Bhagyalakshmi Vege-table Products Ltd.-II (BVPL-II), Chartered Engineer s affidavit dated 14-9-1996 (after the date of search) along with the photographs of the asset confirmed the existence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch statements. 73. The learned Counsel argued that there were corresponding receipts of lease rentals offered for assessment by the assessee company from year-to-year. These lease rental receipts were substantial. If it were the case of Revenue that there were no genuine lease agreements, how could the Department proceed to assess the lease income in the case of the assessee? 74. The learned Counsel further argued that the search was just an intermediate event in the case of the assessee. The assessee had filed returns of income for assessment years 1994-95 and 1995-96 much before the search action under section 132. The assessee had claimed depreciation on leased assets in these returns of income. The Department had already conducted investigation in several cases before the search commenced in the case of the assessee. The learned Assessing Officer mainly relied on enquiry which was by and large made after the search had been carried out in the premises of the assessee. While completing the impugned order under section 158BC, the learned Assessing Officer had obliterated the distinction between the regular assessment proceedings and the proceedings under section 158BC. He r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Counsel or the assessee the disallowance of the assessee s claim of depreciation in relation to 14 lease transactions as well as disallowance from out of interest paid by the assessee on is borrowings is well beyond the ambit of the provisions of Chapter XIVB on account of absence of any evidence or material found as a result of the search under section 132(1) in the case of the assessee. On merits the learned Counsel for the assessee has argued that the Revenue had not established that the suppliers are bogus and in any case, the supplier had been identified by the lessees and not the assessee-company. As far as the lessees were concerned, there was no dispute about their identity or existence. The leased assets physically existed in all the cases and the self serving statements of the lessees in respect thereof could not rebut the weight of documentary evidence relied upon by the assessee. We propose to examine first the assessee company s challenge to the jurisdiction of the learned Assessing Officer to make disallowance in question in the impugned order under section 158BC. 76. The Finance Act of 1995 has inserted a new Chapter XIV-B in the Income-tax Act. It provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute of regular assessment order or the block assessment was in addition to regular assessments. This controversy or doubt has been set at rest by clarification in the Memorandum explaining the provisions of Finance (No. 2) Bill, 1998 in the following words:- To set at rest the controversy as to whether block assessment subsumes the regular assessments or independent of the latter, the Bill proposes to clarify that block assessment shall be made in addition to the regular assessment of previous years included in the block period. Further, it proposes to provide that income assessed in regular assessment shall not be included in the block period and income assessed in the block period shall not be included in the regular assessment. The clarificatory amendment is proposed to be inserted retrospectively from the 1st day of July, 1995. [231 ITR (St.) 228, 256]. 78. After insertion of Explanation to section 158BA(2) by the Finance (No. 2) Act, 1998 with retrospective effect from July 1, 1995, there is no dispute now that the block assessment under section 158BC is in addition to the regular assessment and not in substitution of the regular assessment. There is also not much diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome as representing the assessee s income from undisclosed source. In the case of A. Sadasivam v. Asstt. CIT [2002] 255 ITR 1(Cal.), the Calcutta Bench of the Tribunal held that the computation of income of block period must be based on evidence found as a result of search and where there was no clear evidence regarding certain amounts such amounts are not to be included in block assessment. In the case of Ms. Pooja Bhatt v. Asstt. CIT [2000] 113 Taxman 44(Mum.) (Mag.), the Tribunal held that the process of regular assessment is totally different from assessment under section 158BC in search cases and additions, if any, are to be made only on the basis of material found in search. 79. The Hon ble Gujarat High Court arrived at the same conclusion even before insertion of Explanation by the Finance (No. 2) Bill, 1998 in the case of N.R. Paper Board Ltd. v. Dy. CIT [1998] 234 ITR 7333. The Hon ble Gujarat High Court held that the process laid down under Chapter XIV-B did not disturb the assessments already made and was only intended to sniff out what had remained hidden and what would not have been disclosed by the assessee. There would, therefore, be no over-lapping in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess clearly shows that the Department had not understood the scope of Chapter XIV-B of the Act. By no stretch of imagination the impugned addition fell within Chapter XIV-B. 82. In the case of CIT v. Rajendra Prasad Gupta [2001] 248 ITR 3502(Raj.), the Assessing Officer rejected the return of undisclosed income filed by the assessee and made his own estimate of undisclosed income. The Tribunal did not accept resort to estimation on the ground that the assessing authority had done so without examining the material that had come in its possession during the course of search. On appeal, filed by the Revenue, the Hon ble Rajasthan High Court upheld the order of the Tribunal as having been made on application of the principle of Law Correctly. The Hon ble High Court inter alia observed: We are of the opinion that so far as the contention of learned counsel for the appellant that the Assessing Officer has necessary jurisdiction to resort to best judgment assessment in proceedings under section 158BB, the correctness of it cannot be doubted. However, under the scheme of the provisions for block assessment, it is apparent that it relates to assessment of Undisclosed income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the block assessment and the regular assessment. As has been held by the Division Bench in Shaw Wallace and Co. Ltd. s case [2001] 248 ITR 81(Cal.) that there are three types of income within the meaning of the said Act of 1961, i.e., incomes which are offered for taxation, incomes which are shown in the return but deductions have been claimed wrongly and undisclosed income. The Assessing Officer while dealing with regular assessment is free to examine the veracity of the return as well as the claims made by the assessee with regard to exemption and/or deduction. Those can be considered under section 143(3) of the said Act of 1961, whereas the third income being the undisclosed income is taxed and by way of block assessment resulting in search and seizure. Such block assessment is made under section 158BA. The logic behind the two different modes of assessment, according to us, is that concealment of income and claiming deduction or exemption of taxes in respect of a disclosed income cannot be treated at par. The former is an offence which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the Assessing Officer is free to acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. Dr. M.K.E. Memon [2001] 248 ITR 3103, the assessee admitted undisclosed income of ₹ 75.60 lakhs in the return of income under section 158BC for the block period. The Assessing Officer, however, made an estimate for the entire block period at ₹ 2.33 crores. The Tribunal deleted the addition made by the Assessing Officer to the undisclosed income admitted by the assessee. On Revenue s appeal, the Hon ble High Court held that Chapter XIV-B laid down a special procedure for assessment of search cases and provided for assessment of undisclosed income as a result of search. While passing an order under section 158BC, the Assessing Officer could not enlarge the scope of assessment under Chapter XIV-B to that of regular assessment. In the case of CIT v. Shamlal Balram Gurbani [2001] 249 ITR 5011(Bom.), a search was conducted at the residential premises of the assessee on March 25, 1996. A notice under section 158BC was issued for the block period 1-4-1985 to 25-3-1996. It was found that the assessee had not filed returns of income for assessment years 1993-94, 1994-95 and 1995-96. Hence, the Assessing Officer treated the income of these three years as the income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of the proceedings under section 158BC. He can make assessment of only that undisclosed income which has a direct nexus with the search proceedings in the case of the assessee. 87. During the course of hearing before us, the learned Counsel for the assessee categorically declared that during the course of search proceedings under section 132, in the case of the assessee No incriminating material was found or detected other than the documents that were duly entered and recorded in the books of account or forming part of the official records of the assessee company . The learned Counsel for the assessee further declared that none of the materials relied upon by the learned Assessing Officer in the impugned order could be considered to have been found as a result of the search in the case of the assessee. He stated that the materials relied upon by the learned Assessing Officer was either not found or available at the premises of the assessee or it was the material or information which the assessee had already disclosed or would have disclosed for the purposes of the Act. The learned Counsel for the assessee further contended that the learned Assessing Officer has hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Had these agreements and other documents not been found at the premises of the assessee, the Revenue could have had some case. On the contrary the fact that these have been found at the premises of the assessee only strengthens the case of the assessee that there was no undisclosed income. As to the enquiry being conducted by the Department during the period from 17-7-1996 to 22/30-9-1996, as argued by the learned Departmental Representative, the learned Counsel for the assessee argued that there ought to have been some specific information found during the search at the premises of the assessee. Even the amended provision speaks of evidence found as a result of search and other materials or information relatable to such evidence. This showed that the evidence has to be found during the course of the search of the assessee and then only reliance can be placed another materials relatable to such evidence. If there is no material pointing towards undisclosed income found during the course of search in the case of an assessee, no extraneous material or information would provide the Assessing Officer, jurisdiction under section 158BC. The learned Counsel for the assessee fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the contention of the learned Departmental Representative that the lease agreements in question and other connected documents having been found at the premises of the assessee during the course of search under section 132(1), the jurisdiction was conferred upon the learned Assessing Officer to assess undisclosed income in respect thereof. For one thing, none of these documents in themselves reveal that the transactions of the assessee were not genuine. Secondly, these are the materials on which the assessee company strongly places reliance in support of its claim. It would be travesty of Law if it were to be held that these very documents would invoke the jurisdiction which was otherwise not there to make an assessment under section 158BC. Further, if it is so held it would obliterate the distinction between the assessment under normal provisions of the Act and an assessment under section 158BC. It is for this reason that in the case of Vikram A. Doshi (supra), the Hon ble Bombay High Court held that the transactions disclosed in returns by no stretch of imagination can be said to be undisclosed transactions falling under section 158B and ought to have been assessed in the reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese annual accounts and reports, the assessee should not have been wisened in some cases that the alleged assets had already been hypothecated by the lessees with some financial institutions and, therefore, No Lien Certificate signed by such lessees should not have been accepted or relied upon by the assessee and, as such, the transaction in question should not have been gone through. There is no material as to whether these annual reports were available with the assessee before execution of the lease agreements in such cases. Secondly, there is no basis to hold that the assessee ought to have noticed and acted in the manner supposed by the learned Assessing Officer. We find that the arguments of the learned Assessing Officer to be remote and based on long drawn reasoning. At any rate, it is nobody s case that this indeed provoked the enquiries and investigation carried out by the Department at various places. The correct facts in this respect as we would shortly see are quite different. Other than the mention of these annual reports being found at the premises of the assessee, we do not find any specific material found at the premises of the assessee being held out against the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd he has accepted that cylinders have been sold on bills only for non-existence cylinders. There has been no physical sale of cylinders. Ans. : Thank you. This is news to me which I heard for the first time. Q.10 : Since the above contention of Mr. Krishna Mohan also relates to your company since it is a party to the transaction which is stated as fictitious ab initio, do you know what are its repercussions? Ans. : Before I came to know about these developments with Bangalore party, I was informed by Mr. Mahesh Gupta that every leasing transactions that we have entered are legal and we have done with due diligence. I continue to believe in true. Since I know you have categorically informed me about this fictitious transactions I will once again examine it with expert opinion and if there is any irregularity, I will get back to you. Q.13 : We will provide you the confession statement of all those parties which has done sham transaction with your company i.e. Morarjee Mills in respect of leasing. So, when you will like to take those copies? Ans. : I will collect latest by 23rd July, 1996. It is, thus, seen that the Department had already initiated enquiry and inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d order by the learned Assessing Officer does not fall in the domain of an order under section 158BC for want of nexus with any evidence or material found during course of the search in the case of the assessee and, therefore, it falls in the domain of the assessments that may be made under the general provisions of the Act. During the course of hearing before us, the learned Counsel for the assessee made considerable submissions to support his contention that the findings of the learned Assessing Officer in the impugned order were, on merits unsustainable. The learned Departmental Representative, on the other hand, placed considerable reliance upon the findings of the learned Assessing Officer elaborately made in the impugned order of considerable length.We have devoted a large part of this order in recording the gist of the findings given and materials and information relied upon in support of such findings in the impugned order under section 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. We have given considerable thought to both the contentions of the learned Assessing Officer as well as the learned Counsel for the assessee, with a vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uineness of the lease transactions, was available with the assessee, these statements recorded in the course of search, can hardly be said to be adverse to the assessee. 4. With effect from 1-6-2002, as per section 158BB(1), the undisclosed income is to be computed in accordance with the provisions of the 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. Evidently, therefore, the amendment in the section further clarifies the previous position that the computation of undisclosed income is to be done with reference to the evidence relatable to the evidence found as a result of search. This is the case of other documents available with the Assessing Officer. 5. In the assessee s case, all the Lease Agreements in question were discovered during the course of the search. They stand duly shown in the Panchanama dated 20-7-1996. The search commenced on 19-7-1996. The statement of Shri Mahesh Gupta was recorded on 30-9-1996. The evidence found as a result of search by the Authorities leads to the conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration to the supplier and correspondingly, the supplier also did not receive any sale consideration. In fact, there was no transaction comprising sale and purchase at all. No asset can be parted with for a consideration of 15 per cent of the cost thereof. Such transactions are only paper transactions, having no real existence at all. This is fortified by the normal commercial conduct that lessees and suppliers do not open start normal business place. Noticeably, in the present case, this was done and after these transactions were completed, the bank accounts of the suppliers as well as those of the lessees were either closed or were rendered in operative. Strikingly, such conduct runs through the transactions under consideration here. Similarly, refunding of the entire purchase consideration to the lessor by the supplier through the lessee is unheard of in any normal business transactions. Where the entire lease rental is paid in advance, no lease transactions are entered into, as none are required. Evidently, no valid commercial transaction came about between the suppliers and the lessees. Upon having discovered the Lease Agreements and other connected documents during the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely paper transactions amounting to nothing but eye wash. It is not palatable that the assessee, if it had acted bona fide in the alleged purchases, would have satisfied without actual physical inspection of the assets. Likewise, after lease of the assets, if genuine, the assessee would have kept track thereof and would not have casually replied that they were not its responsibility. The documents relied on by the assessee were not at all beyond the pale of doubt, as correctly held by the Assessing Officer. The Board Resolution depicted Board Meetings, which never took place. No proper Register of Minutes of Board Meetings was produced. The ones produced were bereft of particulars of any such Board Resolutions. Although, the assets stood already hypothecated with IDBI or other Financial Institutions, surprisingly, no lien certificates were produced. Even the parties, where they were found to be existing, denied the transactions and categorically admitted that the documents were sham documents. 8. In view of the above appalling circumstances, it cannot be gainsaid that the eleborate enquiry procedure was carried out during the course of search, and was bearing a most direct c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to 1 above is in the negative, whether on the facts and in the circumstance of the case the Assessing Officer has the jurisdiction to include the amount of depreciation allowance claimed by the assessee in the computation of undisclosed income for the purpose of Chapter XIV-B of the Act. 2A. The facts in brief are that there was a search under section 132 conducted at the premises of the assessee company on 19-7-1996. It is stated to be finally concluded on 22-9-1996, as block period mentioned in the order of assessment is 1986-87 to 1996-97 and 1-4-1996 to 18-7-1996. The search was stated to be sequel to all India investigation in respect of lease transactions entered into by a large number of assessee resulting into claim of 100 per cent depreciation on leased assets. Consequent to return filed under section 158BC an assessment was made by the Assessing Officer on 31-7-1997 under section 158BC(c) of the Act, computing undisclosed income in respect of 14 lease transactions for the period from assessment years 1987-88 to 1993-94, disallowing the depreciation of ₹ 34,11,36,758 and interest of ₹ 5,01,81,901 aggregating to ₹ 39,13,18,659. The details are as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce or material found during the course of the search in the case of the assessee and, therefore, it falls in the domain of the assessments that may be made under the general provisions of the Act. He has devoted a large part of his order to record the gist of the findings given and materials and information relied upon in support of such findings in the impugned order under section 158BC as well as elaborated arguments of the learned Counsel for the assessee in rebuttal. He, however, did not propose to go into the merits of the case made out against the assessee for the reason that the same do not pertain to the domain of proceedings under section 158BC and found it sufficient to say, for the purpose of this appeal the undisclosed income assessed in the impugned order is required to be deleted for the reason of having fallen outside the scope and ambit of the provisions of section 158BC. 4. The Ld. Judicial Member on the other hand held that all the lease agreements in question were discovered during the course of search and they stand in the Panchnama dated 20-7-1996. The search commenced on 19-7-1986 and the statement of Shri Mahesh Gupta was recorded on 30-9-1996. The evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no transaction comprising sale and purchase at all and that such transactions are only paper transaction, having no real existence at all and evidently, no valid commercial transaction came about between the suppliers and the lessees. According to him, upon having discovered the Lease Agreements and other connected documents during the course of search, the Department carried out extensive enquiries relating to the search on the basis of the aforesaid evidence discovered during the course of search, that it was on these inquiries having been conducted that the real intention of the assessee came to the fore; that as such, the undisclosed income assessed was directly relatable to the search carried out in the case of the assessee; that in view of the above appalling circumstances, it cannot be gainsaid that the elaborate inquiry procedure was carried out during the course of search, and was bearing a most direct connection therewith. The Department was, therefore, rightly of the view that the assessee would not have disclosed the impugned income. In these facts, it cannot be said that the addition has been made on the basis of material not relatable to the material found and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it remains undisputed that the assessee company has earned income from leasing of assets, on which depreciation has been claimed. Secondly, the depreciation has been claimed for assessment year 1994-95 and 1995-96 and the transaction of lease was duly disclosed in the books of account maintained by it. No claim of depreciation for assessment years 1996-97 and 1997-98 till the date of search nor depreciation was debited in the books of account. Therefore, the assessee on the date of search may or may not have the claimed the depreciation. Again in none of the cases, the lessees have even allegedly denied having entered into such lease transaction. Whereas it has only been alleged by the Assessing Officer that the lessees have denied signing of the lease agreements or have signed without knowing the purpose of it and later on concluded that it is a paper transactions. It was further submitted that many of such purported statements had not been confronted to the assessee for its rebuttal nor the copies thereof furnished. Relying on the decision of the Tribunal in the case of Sunder Agencies v. Dy. CIT [1997] 63 ITD 245(Mum.) it is submitted that section 158BA does not authorize to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of account in respect of assets leased. It is, therefore, submitted that the Assessing Officer has failed to appreciate there can be no warrant in law to hold that such a transaction, which has been disclosed and is thus beyond the pale of Chapter XIV-B of the Income-tax Act. He further submitted that the distinction should be made between a fact and inquiry in light of decision of the Supreme Court in the case of Kishinchand Chellaram v. CIT [1980] 125 ITR 7131. The fact that the assessee had entered into lease transaction was already disclosed in the books of account by declaring the income from leased assets and also claimed the depreciation thereon. This is not a new fact which was found in the course of search. No other material could be considered for the purpose of Chapter XIV-B unless it be relatable to such evidence. The statements shown to the assessee during the assessment proceedings which may have a bearing, came on record only after the search. The learned counsel for the assessee therefore submitted that the Assessing Officer was not justified in disallowing the depreciation and interest relatable to the lease transaction, when he himself has assessed the lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years preceding a previous year in which the search was conducted under section 132 or any requisition was made under section 132A, and also includes in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date such requisition. Therefore, the assessment for the block period under chapter XIV-B can be made of the undisclosed income only up to the date of commencement of search or the date of the requisition and not of the period thereafter. Section 158BA provides for assessment of undisclosed income as result of search for the block period and computation of income and the computation of undisclosed income for the block period to be made as per the provisions of section 158BB and assessment has also to be made under section 158BC of the block period. The undisclosed income for which the assessment is to be made, is defined in section 158B(b) which include money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable articles, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, as income of the assessee and the depreciation and interest with regard to the very lease transactions have been claimed as a deduction. Lease agreements may be an evidence by itself but there is nothing in those agreements which could establish that assessee had undisclosed income. On the contrary, disclosure of income has been made by the assessee in the books and return of income pursuant to these very lease agreements. The department has no doubt collected the material subsequent to raid, but that may not be very material and relevant for framing the assessment under Chapter XIV-B of the case because of the mandate given under section 158BB it has to be the income computed on the basis of evidence found as a result of search and not otherwise. If any material is collected by the Revenue after the search, that may not give authority to department to make the computation of undisclosed income under section 158BB or assessment under section 158BC of the Act. Reference in this connection may be had to the decision of Jodhpur Bench of Tribunal in the case of Chitra Devi v. Asstt. CIT [2002] 77 TTJ 640 wherein it is held that Further the addition was made on the basis of the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port Services (P.) Ltd. v. Asstt. CIT [2000] 72 ITD 228taken similar view on the interpretation of such material by observing that- Chapter XIV-B lays down special procedure for assessment in search cases. The special procedure set out in Chapter XIV-B is a separate set of rules, by itself. For the purposes of this Chapter, the terms undisclosed income is defined. The definition of the term undisclosed income is given in an inclusive manner, but it is again made clear under section 158B(b) that disclosed income includes money, bullion, jewellery etc., only if they represent income or property which has not been or would not have been disclosed for the purposes of this Act. Therefore, we find that even though disclosed income is defined in an inclusive manner, the scope and extent of the term undisclosed income for the purposes of this Chapter is contingent upon the fact that the undisclosed income should be borne out of material representing income or property which has not been or would not have been disclosed by the assessee for the purposes of this Act. When certain information and details are already furnished in the returns of income or statements accompanyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al has been brought on record to this effect that something was required to be done after 20th July, 1996 or that the search extended was to be extended 30th September, 1996 as claimed by the learned DR. 14. In the case of Elegant Homes (P.) Ltd. (supra) before the Jaipur Bench of Rajasthan High Court, cash credit addition was made by the Assessing Officer in assessment under Chapter XIV-B of the Act, which was deleted by the Tribunal on the ground that entry shown in the regular books of account and therefore, it cannot be stated that income was undisclosed income of the assessee. This finding of the Tribunal was vacated by the High Court by upholding that the Tribunal has committed an error in holding that the entries were found in the regular books, and therefore, it cannot be treated as undisclosed income of the assessee, because, the same was contrary to the provisions of Chapter XIV-B and the undisclosed income was found on the basis of material seized, and therefore, should be treated as undisclosed income of the assessee, as per the scheme of special assessment. In the body of the judgment of the High Court, it is noted that the admitted fact was the search was carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 13, in this regard are quoted by the Accountant Member in his order in paragraph 91 to conclude that the material has been collected before the search was conducted with regard to these lease transactions. The material, if any, was thus collected either before the search or it has been collected after the search proceedings were over. There is no material on record to suggest that any evidence has been collected in this case by the Revenue during the course of search or as the result of the search, on the basis of which the computation of undisclosed income under section 158BB or under section 158BC could be made. The assessment made under section 158BC is thus not within the ambit of Chapter XIV-B of the Act and it is required to be vacated. In these circumstances, as observed by the learned Accountant Member, it is not necessary on this respect, at this stage, to go into the merits of the case made out by the assessee in the impugned order, which would be for the department to make the best use of material so gathered before the search as well as after search proceedings. Insofar as this assessment is concerned, it would be sufficient to say that undisclosed income, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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