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2016 (3) TMI 329 - DELHI HIGH COURT

2016 (3) TMI 329 - DELHI HIGH COURT - TMI - Cash payments made for purchase of property taxed as undisclosed income - Held that:- There was a clear admission on the part of the Assessee that the payment of ₹ 60 lacs were from the sale of undisclosed stock. The statement was reiterated again after the search on 24th February, 1999 and it is difficult to contemplate that the letter dated 5th February, 1999 and the statement recorded on 24th February, 1999, which were much after the search, w .....

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rom the bank accounts on 26th November, 1998 and 7th December, 1998. The balance amount was paid out of the sales made in cash. The AO had disbelieved the aforesaid explanation as the withdrawals from the bank was much prior to the date of payment to Sh. Arvind Seth and there was no explanation for withdrawing cash in tranches and keeping the funds idle. In respect of the sales made in cash, the enquiries made by the AO revealed that cash sales of ₹ 6,16,586/- were booked in January 1999 i .....

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ssessee were rightly disbelieved by the AO. Similarly, the claim that the Assessee's wife had contributed ₹ 10.15 lacs in cash was also not accepted as no source for such cash could be identified. The AO noted that the Assessee's wife had shown a capital of ₹ 5,57,420/-. For AY 1998-99, she had claimed to have received ₹ 60,000/- as salary and ₹ 32,550/- as petty gifts. During the AY 1999-2000, the Assessee's wife claimed to have income from other sources amounting to  .....

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Respondent : Mr Salil Aggarwal with Mr Prakash Kumar JUDGMENT Vibhu Bakhru, J. 1. The Revenue has filed this appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) impugning an order dated 23rd June, 2003 (hereafter the impugned order ) passed by Income Tax Appellate Tribunal (hereafter the ITAT ) in IT(SS) No.68/Del/2002 filed by the Assessee. This appeal was directed against an order dated 13th February, 2002 passed by the Commissioner of Income Tax (Appeals) [hereafter th .....

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had not made out any valid case for treating the investment as the undisclosed income of the Assessee for the block period. The ITAT further held that the addition on account of unexplained income, if any, had to be considered in the regular assessment on the basis of books of accounts and the return filed by the Assessee and there was no justification for considering the investment in the block assessment under Chapter XIV-B of the Act. This is contested by the Revenue. 3. By an order dated 19 .....

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er the Income Tax Appellate Tribunal was correct in law in holding that the genuineness of the investment made for the purchase of property bearing No.C-104, Naraina Vihar, Delhi was to be considered in the hands of the Assessee, Smt. Anita Aggarwal and Harjeev Aggarwal and Sons, HUF?" 4. Briefly stated, the facts relating to the present case are as under:- 4.1 A search was conducted on 01.02.1999 on the premises of one Mr Arvind Seth, a Non-resident Indian, pursuant to a specific informati .....

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Arvind Seth admitted, in his statement recorded during the search, that he had received total consideration of ₹ 86 lacs out of which ₹ 12 lacs was by way of cheque and the balance ₹ 74 lacs was in cash. He also stated in his statement that although he has signed the receipt for the full amount, ₹ 20 lacs was still to be received by him from Mr Harjeev Aggarwal, the Assessee herein. 4.2 Since it was claimed that the amount of ₹ 20 lacs was yet to be received and th .....

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to the mother of the Assessee and was not seized. 4.4 In his statement during the search, the Assessee admitted that he entered into a deal for purchase with Mr Arvind Seth for a sum of ₹ 86 lacs. Out of the aforesaid sum, ₹ 14 lacs was paid in cash and 2 cheques each of ₹ 50,000/- were given to Mr J K Gulati, the attorney holder of Mr Arvind Seth, on 08.07.1998; ₹ 20 lacs in cash was given to Mr Arvind Seth on 28.01.1999; and ₹ 39 lacs in cash was paid to Mr Arvind .....

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, the Assessee filed his submission, inter alia, providing the explanation as to the sources of the cash payments made for purchase of the property in question. He submitted that the property was agreed to be purchased jointly in the names of Mr Harjeev Aggarwal, Mrs Anita Aggarwal (his wife) and Harjeev Aggarwal & Sons HUF (hereafter the HUF ) for a sum of ₹ 86 lacs from Mr Arvind Seth out of which ₹ 74 lacs was paid in cash and ₹ 12 lacs was yet to be paid. He further sta .....

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amount of ₹ 60 lacs as I have already submitted. It represents unaccounted money belonging to me And I shall pay tax on it at the appropriate time. 4.7 Thereafter, the Assessee sent a letter dated 16.04.1999, now stating that the amount paid by him was from tax reflected sources, borrowing and advances against future commitments. The authorised representative of the Assessee also furnished a letter dated 28.06.1999, explaining the sources of the funds as subsequently claimed by the Assess .....

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ash which comprised of ₹ 20 lacs received from M/s Penguin Chits Pvt Ltd and ₹ 12.9 lacs were withdrawn from the business conducted by the Assessee in the name of M/s Machine Tools & Hardware Stores; (b) ₹ 29 Lacs was stated to have been paid by Mrs Anita Aggarwal, wife of the Assessee, out of which ₹ 25.15 lacs was paid in cash. The cash payments included ₹ 15 lacs received as earnest money from M/s Parmeshwar Chits Pvt. Ltd; and (c) ₹ 19.65 lacs was stat .....

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ave purchased the property on the basis of his declared sources. The AO disbelieved the Assessee's claim that bulk of the cash payments were made from advances received from M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar Chits Pvt. Ltd. and M/s Jai & Associates. The AO reasoned that the property in question was not yet registered in the name of the Assessee, his wife and the HUF and consequently it was not plausible that other entities would pay large amounts in cash as earnest money for pu .....

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s belonging to his mother and was not seized during the search - was also included as the Assessee's undisclosed income. 6. The Assessee appealed against the block assessment order before the CIT(A), who before deciding the appeal, sought a remand report from the AO. After considering the contentions advanced by the Assessee as well as the remand report, the CIT(A) upheld the addition of ₹ 74 lacs but deleted the addition of ₹ 12 lacs which were paid by the Assessee by way of che .....

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r held that even if there is any doubt about the genuineness of the investments, the same would have to be decided in the regular assessment proceedings of the persons concerned - that is, Mr Harjeev Aggarwal, Mrs Anita Aggarwal and the HUF - who had made the investment. 8. The ITAT upheld the deletion of ₹ 12 lacs holding that the cheques were not encashed in the instant case and therefore, CIT(A) had rightly deleted the addition. 9. Accordingly, the ITAT by a common order dated 23rd June .....

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that after the search, Mr Harjeev Aggarwal had voluntarily made a statement that an amount of ₹ 60 lacs was paid out of sale proceeds of unaccounted stock sold in cash in the market. He further pointed out that admittedly, the Assessee had not maintained any books of accounts and, thus, the question of cash paid by the Assessee being accounted for or representing disclosed income did not arise. 10.1 Mr Raghvendra next referred to the definition in Section 158B(b) of the Act for the meanin .....

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t the ₹ 60 lacs of cash was unaccounted money and there would have been no occasion for the Assessee to have done so if the search was not conducted in his premises. 10.2 Mr Raghvendra next referred to the provisions of Section 158BB(1) of the Act and contended that in terms of that provision, undisclosed income of a block period is required to be computed on the basis of the evidence found as a result of search as well as other information as is available with the AO. He argued that in th .....

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t could be made in the case of the Assessee based on such incriminating material. 10.3 Mr Singh further submitted that the Assessee, in his statement recorded on 24th February, 1999, had reiterated his admission that ₹ 60 lacs represented unaccounted money on which the Assessee would pay the requisite tax. He submitted that in this view the Assessee's subsequent assertion that he and his wife had borrowed funds from three independent entities against back to back sale arrangements was .....

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ses of Section 158BB(1) of the Act. He further submitted that ITAT had examined the factual matrix and had accepted that the payments made by M/s Penguin Chits Pvt. Ltd., M/s Parmeshwar Chits Pvt. Ltd. and M/s Jai & Associates Pvt. Ltd. were genuine. The Revenue had not contested the said finding as being perverse and thus, the said finding could not be disturbed. 11.1 Mr Aggarwal further contended that ₹ 74 lacs could not be added as undisclosed income of the Assessee because the said .....

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F were duly accepted by the AO under Section 143(1) of the Act and, therefore, the transactions could not be made a subject matter of block assessment. Reasoning and Conclusion 12. The first and foremost issue to be addressed is whether there was any incriminating material on the basis of which the cash payments made for purchase of property could be taxed as undisclosed income. 13. Chapter XIV B of the Act - as the title of the said chapter also indicates - contains a special procedure for asse .....

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ct of each previous year included in the block period and are only in respect of undisclosed income which are not included in the regular assessments. 14. At the outset, it is necessary to refer to Section 158B(b) of the Act, which defines undisclosed income ; the said clause reads as under: (b) undisclosed income includes any 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, .....

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d. Section 158BB of the Act provides for computation of undisclosed income. The opening words of the said section are relevant and read as under: 158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information .....

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s a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the Block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It is not .....

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der Chapter XIV-B is the income not disclosed but found and determined as the result of search under Section 132 or requisitioned under Section 132A of the Act." 17. Thus, plainly, a block assessment under Chapter XIV-B of the Act is for bringing to tax undisclosed income which is computed on the basis of evidence found as a result of search and/or other information as is available with the AO which is relatable to such evidence. 18. In CIT v. Harkaran Dass Ved Pal: (2011) 336 ITR 8 (Del), .....

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that the procedure of assessment under Chapter XIV-B is a special procedure intended to provide a mode of assessment of undisclosed income which has been detected as a result of search. The procedure under Chapter XIV-B is not intended as a substitute to regular assessment and its scope and ambit is limited in that sense to materials unearthed during the search. As pointed out in Ravi Kant Jain (supra), the assessment for the block period can only be done on the basis of evidence found as a res .....

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the same could not be treated as undisclosed income determined under Clause (c) of Section 158BC." 19. In view of the settled legal position, the first and foremost issue to be addressed is whether a statement recorded under Section 132 (4) of the Act would by itself be sufficient to assess the income, as disclosed by the Assessee in its statement, under the Provisions of Chapter XIV-B of the Act. 20. In our view, a plain reading of Section 158BB(1) of the Act does not contemplate computing .....

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planation to Section 132(4) of the Act. However, such statements on a standalone basis without reference to any other material discovered during search and seizure operations would not empower the AO to make a block assessment merely because any admission was made by the Assessee during search operation. 21. A plain reading of Section 132 (4) of the Act indicates that the authorized officer is empowered to examine on oath any person who is found in possession or control of any books of accounts, .....

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tatement on oath can only be recorded of a person who is found in possession of books of accounts, documents, assets, etc. Plainly, the intention of the Parliament is to permit such examination only where the books of accounts, documents and assets possessed by a person are relevant for the purposes of the investigation being undertaken. Now, if the provisions of Section 132(4) of the Act are read in the context of Section 158BB(1) read with Section 158B(b) of the Act, it is at once clear that a .....

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ng search. The statement recorded under Section 132(4) of the Act may also be used for making the assessment, but only to the extent it is relatable to the incriminating evidence/material unearthed or found during search. In other words, there must be a nexus between the statement recorded and the evidence/material found during search in order to for an assessment to be based on the statement recorded. 22. In CIT v. Sri Ramdas Motor Transport Ltd.: (1999) 238 ITR 177 (AP), a Division Bench of An .....

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e in possession or control of any undisclosed books of account, documents, money or other valuable articles or things, elicit information from such person with regard to such account books or money which are in his possession and can record a statement to that effect. Under this provision, such statements can be used in evidence in any subsequent proceeding initiated against such per son under the Act. Thus, the question of examining any person by the authorised officer arises only when he found .....

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ctor or any other persons were found to be not in possession of any incriminating material, the question of examining them by the authorised officer during the course of search and recording any statement from them by invoking the powers under section 132(4) of the Act, does not arise. Therefore, the statement of the managing director of the assessee, recorded patently under section 132(4) of the Act, does not have any evidentiary value. This provision embedded in sub-section (4) is obviously ba .....

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ction 132(4) of the Act is not limited only to the books of accounts or other assets or material found during the search. However, in the context of Section 158BB(1) of the Act which expressly restricts the computation of undisclosed income to the evidence found during search, the statement recorded under Section 132(4) of the Act can form a basis for a block assessment only if such statement relates to any incriminating evidence of undisclosed income unearthed during search and cannot be the so .....

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ich can most charitably be described as oppressive and in most such cases, are subsequently retracted. Therefore, it is necessary to ensure that such statements, which are retracted subsequently, do not form the sole basis for computing undisclosed income of an assessee. 25. In Commissioner of Income Tax v. Naresh Kumar Aggarwal: (2014) 3699 ITR 171 (T & AP), a Division Bench of Telangana and Andhra Pradesh High Court held that a statement recorded under Section 132(4) of the Act which is re .....

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ough he is a hardcore criminal. The nature of steps, taken during the course of search are sometimes frightening. Locks are broken, seats of sofas are mercilessly cut and opened. Every possible item is forcibly dissected. Even the pillows are not spared and their acts are backed by the powers of an investigating officer under section 94 of the Code of Criminal Procedure by operation of sub-section (13) of section 132 of the Act. The objective may be genuine, and the exercise may be legal. Howeve .....

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bserve that if the statement made during the course of search remains the same, it can constitute the basis for proceeding further under the Act even if there is no other material. If, on the other hand, the statement is retracted, the Assessing Officer has to establish his own case. The statement that too, which is retracted from the assessee cannot constitute the basis for an order under section 158BC of the Act. 26. It is next to be examined whether the Assessee s communication dated 5th Febr .....

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ssessee. The Assessee had himself declared that ₹ 89,400/- was the profit in respect of unaccounted sales and purchases that were recorded in that diary. It is further relevant to note that the Assessee carried on business as a sole proprietor of a concern named M/s Machine Tools and Hardware Store. During the search, certain books of account were also seized. The Assessee had on 5th February, 1999, immediately after the search stated that ₹ 60 lacs paid for purchase of the property .....

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ssee's business and the Assessee did not maintain any other accounts. He sought to contend that the present transactions were not related to the business of the Assessee and, therefore, were not required to be recorded in the books maintained by him. He, however, could not dispute that by virtue of Section 44AA(2) of the Act, the Assessee was required to maintain such books of accounts so as to enable the AO to compute his income in accordance with the Act. Thus, clearly, the Assessee was re .....

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ted that the Revenue did not have incriminating material regarding generation of unaccounted money. The diary found which recorded undisclosed sales and purchases as well as the books of accounts which did not record payment of cash (which was admittedly paid) at the time of search does indicate that the Revenue had found incriminating evidence. The statement made by the Assessee was also relatable to the records found during the search. 29. At this stage, it is also necessary to refer to sub-se .....

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ssessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-section (1) relates to an assessment year for which the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal co .....

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aintained in the normal course before the date of the search. 31. Concededly, in the present case, the Assessee has been unable to show that the transactions in question were recorded in the books of accounts and records maintained in the normal course prior to the date of the search. On the contrary, Mr Aggarwal had argued that the Assessee is not obliged to maintain any books and, therefore, the question of keeping a record of the transactions for purchase of the property did not arise. In our .....

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e said returns have not been subjected to any scrutiny. The intimation under Section 143(1) of the Act, thus, cannot be construed as assessments made by the AO. 33. The explanation with regard to the sources of the cash paid by the Assessee is a clear afterthought. The Assessee claims that the said cash was provided by three entities against back to back arrangement for sale of the property. However, it is not disputed that at the material time, the Assessee did not produce any document which wo .....

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as to why such large payments were made in cash. In case of M/s Jai and Associates, the cash is stated to be paid from withdrawals from a bank. However, it is relevant to note that various amounts of cash were withdrawn by M/s Jai and Associates on various dates and there is no explanation why such cash was withdrawn in various tranches. The AO had also examined the returns furnished by the Assessee for various years which were barely above the threshold of the taxable limit. And, after taking i .....

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and M/s Jai & Associates, who were stated to have provided the cash, the AO could not treat the cash provided by the said entities as undisclosed income of the Assessee. The ITAT was of the view that if the genuineness of deposits made as disclosed by the said entities could not be verified, the same would have to be taxed in those entities. 34. In our view, the ITAT has erred in not examining or not interpreting the scope of 'undisclosed income' as defined under Section 158B(b) of t .....

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closure which must be gauged from the surrounding facts and circumstances of the case. The relevant observations of the Supreme Court are reproduced as under:- 18. The genesis of the issue before us lies within the folds of this section. Sections 158BD and 158BC, along with the rest of Chapter XIV-B, find application only in the event of discovery of "undisclosed income" of an assessee. "Undisclosed income" is defined by section 158B as that income "which has not been or .....

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Keeping that in mind, it seems that the Legislature has clearly carved out two scenarios for income to be deemed as undisclosed : (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and, hence, subject to the machinery provisions of Chapter XIV-B. The second category, viz., where income would not have been disclosed, contemplates the likel .....

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ments would be disclosed. In our view, the ITAT failed to address itself to that question. In the present case, the surrounding facts and circumstances of the case are telling. First of all, the payments have been made in cash and there is no explanation as to why such large payments were required to be made in cash. Secondly, such cash payments were not recorded by the Assessee in its books or any record maintained by it at the time of search. Thirdly, the Assessee had admitted - by a letter se .....

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ugh the Assessee now claimed that there were back to back agreements with three unrelated entities for sale of the property in question, no such documents were produced at the material time. There is also no explanation as to why such documents could not have been produced at the relevant time. 36. As noticed earlier, there was a clear admission on the part of the Assessee that the payment of ₹ 60 lacs were from the sale of undisclosed stock. The statement was reiterated again after the se .....

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claimed that he had paid a sum of ₹ 12.9 lacs in cash which was withdrawn from his proprietorship concern. He further explained that a sum of ₹ 4 lacs had been withdrawn from the bank accounts on 26th November, 1998 and 7th December, 1998. The balance amount was paid out of the sales made in cash. The AO had disbelieved the aforesaid explanation as the withdrawals from the bank was much prior to the date of payment to Sh. Arvind Seth and there was no explanation for withdrawing cash .....

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