TMI Blog1999 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... The counsel for the assessee first of all submitted that the notice required to be served upon the assessee as per the provisions of s. 158BC is analogous/within the parameter of the requirements for a notice under s. 148 of the IT Act and, therefore, the law relating to the requirements for the validity of the notice under s. 148 and the case laws thereof, are fully applicable, so far as the requirements for a valid notice under s. 158BC of the Act are concerned. 3.3. Referring to the copy of the notice dt. 12th Dec, 1996 (placed at p. 1 of assessee's paper book-a copy, certified by both the parties, was filed during the course of hearing also), The assessee's counsel submitted that the notice is vague and invalid because of the following illegalities in the notice: (i) According to the provisions of s. 282(2)(b), every notice issued, under the Act, in case of a company has to be addressed to the principal officer of the company and since the impugned notice has not been addressed in accordance with the requirement of this provision, the notice in question is vague and invalid; (ii) The notice is also silent as to the 'status' in which the return was required to be furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year which are requirement for a valid notice asking for the return of undisclosed income. (iv) From the period mentioned by the AO in the notice the counsel for the assessee further submitted that as per the provisions of s. 158B of the Act the block period is to include the period upto the date of commencement of search" and not upto the "last date of search warrant executed in one's case" and therefore on this account also the AO cannot be said to have mentioned the block period/assessment year correctly. 3.4. In view of the above alleged illegalities claimed to have been committed in the notice under s. 158BC of the Act, the assessee's counsel submitted that the assessee-company was not able to understand as to whose, for which period and in which status, the return was required to be furnished. Explaining the illegalities further, the counsel submitted that since the AO has mentioned various status such as individual/HUF/firm/company/AOP/BOI/local authority in the notice, it is clear that the AO was not satisfied as to from whom he was going to ask for a return and in whose case was going to make assessment for block period. The assessee's counsel further su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been issued to the assessee is required and, therefore, the assessee has no choice to claim a particular status. 3.9. The assessee's counsel further submitted that the illegalities pointed out in the notice under s. 158BC of the Act were not curable and consequently such notice cannot be cured/saved by the provisions of s. 292B of the Act and for this purpose relied on the Tribunal's decision in case of M/s Prakash Spun Pipe, in asst. yr. 1990-91 ITA No. 1014/All/1994, dt. 1st Feb., 1998, and the relevant part is contained in paras 10 and 11 of the order which is reproduced as under: "10. Referring to the view taken by the learned CIT, that the AO had condoned the defect, with reference to s. 292B of the Act, we have no hesitation in saying that this provision of law is not a panacea, pulling the AO out of any and all sort of statutory non-compliances by him. Sec. 292B only says that a return, assessment notice, summons or other proceedings shall not become invalid merely by reasons of any mistake, defect or omission in such return assessment notice, summons or other proceedings if these are in substance and effect in conformity with or according to the intent and purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the provisions of s. 292B of the Act. 4.2. In support of above submissions the Addl. standing counsel has relied on the decisions in the case of Bed Chand vs. ITO (1969) 72 ITR 197 (SC) and Parameswara Ballakuraya vs. Comm. Of Agrl. IT (1987) 164 ITR 536 (Ker). 5. We have considered the rival submissions, provisions of the Act necessary and relevant for deciding the issue in hand and various decisions relied upon by the parties and after careful consideration, are of the opinion that for the decision of the dispute raised by the appellant the following 3 questions have to be decided: (i) The first question, in our opinion, for our decision is with respect to the nature/status of the notice required to be served under s. 158BC of the Act i.e. is such a notice akin/analogous and within the parameter of a notice under s. 148 of the Act? (ii) If so can the points raised by the assessee's counsel amounts to illegalities in the notice and consequently have they rendered the notice illegal, bad in law and vague? (iii) If the notice is found to be vague, can the assessment for block period be quashed as a nullity? 6.1. To decide the first question we consider it necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and trully all material facts necessary for the assessment for that assessment year." (c) Sec. 148 of the Act: "148. Issue of notice where income has escaped assessment- (1) Before making the assessment, reassessment or computation under s. 147 the AO shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner; and setting forth such other particulars as may be prescribed and the provisions of this Act shall so far as may be, apply accordingly as if such return were a return required to be furnished under s. 139. (2) The AO shall, before issuing any notice under this section, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e block period computed, in accordance with the provisions of Chapter IV, 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 AO as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years determined ...... (2) In computing the undisclosed income of the block period, the provisions of ss. 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition." 158BC. Procedure for block assessment- Where any search has been conducted under s. 132 or books of account, other documents or assets are requisitioned under s. 132A, in the case of any person, then.- (a) the AO shall: (i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995, but before the 1st day of January, 1997, serve a notice to such person re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -compliance of this requirement has resulted in setting aside of the assessment for proceeding from the stage of irregularity and it is so because after furnishing of a valid return the AO assumes a valid jurisdiction to proceed for making a regular assessment but as far as the other two schemes i.e. the scheme provided for 'assessment of escaped income contained in provisions of ss. 147,148 and 149 and the scheme of special procedure for assessment in search cases" as provided under Chapter XIV-B i.e. under the provisions of ss. 158B, 158BA, 158BB and 158BC etc. are concerned these go to show that: (i) object of both the schemes is same i.e. object is to tax the income which has not already been taxed. Under the former scheme the requirement is that in the opinion of the AO the income should have escaped the assessment and search is not necessary and the prerequisite conditions to assume jurisdiction to tax the escaped income limits are: (i) with respect to the quantum of escaped income as provided under s. 147(ii) and service of a valid notice under s. 148 has to be served upon the person and (iii) within the limitation prescribed under s. 149, whereas in the later scheme the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an assessment for the block period which is inclusive of 10 previous assessment years. The dispensation with the requirement of issuing of a notice under s. 148 of the Act and the fact that assessment of block period includes the assessment of 10 previous years leaves one in no doubt about the purpose, nature, status and effect of a notice under s. 158BC, which according to us is, (i) to get already completed assessment falling within the block period reopened and the AO is clothed with the power to make assessment of undisclosed income for those assessment years; (ii) If assessments have not been completed then the AO gets clothed with the powers to make assessment resembling with the assessment framed under s. 147 of the Act; (iii) If return has been furnished, then the AO is clothed with the power to make assessment of undisclosed income. 6.4. The above provisions envisaged in the 2 schemes confirm beyond any doubt that: (1) Purpose of both the notices is same viz; (i) A notice under s. 148 and under s. 158BC can be issued only after fulfilment of required conditions such as a escapement of income or action under s. 132 of the Act, as the case may be. (ii) In both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been right in holding that the assessment in question was not valid in law." (iv) Madan Lal Agarwal vs. CIT "It is now well settled, and we do not consider it necessary, to advert to numerous authorities in this regard cited at the Bar, that issuing of a valid notice to the assessee under s. 148 of the IT Act within the period specified under s. 149 of the Act is a condition precedent to the validity of any assessment to be made against such assessee under s. 147 of the Act. Accordingly, where no such notice has been issued or if the notice issued is not valid or the same has not been served on the assessee in accordance with law, it will not be possible to sustain the eventual assessment made under s. 147 on the basis of such notice. We may also take it that where the notice issued to an assessee is vague, it would not be possible to rely upon it to sustain an assessment made." (v) CIT vs. Thayaballi Mulla Jeevaji Kapasi In this case the Hon'ble Supreme Court referred to its earlier decision in the case of Narayan Chetty vs. ITO and held as under: "Service of notice prescribed by s. 34 of the IT Act, for the purpose of commencing proceedings for reassessment, is not a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck period or before the assessment proceedings for the block period are set into motion and consequently the service of a notice under s. 158BC gives rise to the jurisdiction of the AO to proceed with the proceedings for assessment of block period. 8.2. Having held so, the next question for our decision in with respect to the validity of the notice but since there is no codified law on the point or circumstances under which a notice could be held to be invalid, we are of the opinion that for deciding the issue relating to the validity of the notice it is necessary to consider the circumstances under which a notice can be termed as invalid or bad in law as per the law laid down in various cases relied upon by the parties and then decide the validity of the impugned notice in the light of preposition of law laid down therein. 9. We have heard the parties in relation to the submissions made for pointing out as to how the notice was illegal/invalid one and as to how it was not illegal/invalid one. 10.1. After considering the facts and circumstances of the case and the rival submission we are of the opinion that as in the case of initiation of reassessment, the proceedings commenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 158BC to be a valid notice, the assessment year covered by the block period, in a given case, must also be specified clearly. 11.2(a) For deciding the issue relating to the existence of illegalities in notice under attack, first of all we prefer to reproduce the notice, which runs as under: "NOTICE UNDER S. 158BC OF THE IT ACT, 1961. PAN/GIR No............. Block Period: The previous years relevant to ten assessment years preceding the previous year 1996-97 and includes the period upto the last date of search warrant executed in your case (as defined under s. 158B(a) upto 3rd Sept., 1996. Income-tax Office Central Circle-II Kanpur Date: 12th Dec, 1996 To, M/s Monga Metals (P) Ltd. 76/43,Gopal Market, Halsey Road, Kanpur. In pursuance of the provisions of s. 158 of the IT Act, 1961, you are requested to prepare a true and correct return of your total income including the disclosed income in respect of which as individual/HUF/Firm/Company/AOP/BOI local authority are assessable for the block period mentioned a s. 158B(a) of the IT Act, 1961. The return should be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice under s. 142(1)(i) can be meant for furnishing of the return for the current assessment year alone and not the previous assessment years-as in the case of notice under s. 148 or under s. 158BC. (ii) Further, so far as the requirement of addressing the notice as per the terms of s. 282, specifying the status and the "assessment year" and, prerequisite mandatory requirements for a valid notice under s. 142(1)(i) are concerned the same are as are for a notice under ss. 148 and 158BC, and consequently the Revenue's plea, instead of advancing its interest, goes against it meaning thereby that if the illegalities referred to the purpose of notice under s. 148 are found in the notice under s. 142(1)(i) also then the notice under s. 142(1)(i) shall also be rendered bad in law. (iii) In view of the above discussions we are of the opinion that a notice under s. 158BC, as far as purpose and scope is concerned is not akin to a notice under s. 142(1)(i) but as far as the prerequisite mandatory requirements for a notice to be valid, are concerned they are same for both the notices and consequently even if Revenue's plea that a notice under s. 158BC is akin to a notice under s. 142(1)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of Rs. 19,99,858 (reduced from 33,99,568 after order under s. 154) and of Rs. 14,39,448 (reduced from Rs. 55,38,565 as per order under s. 154) for asst. yrs. 1995-96 and 1996-97 respectively on account of alleged introduction of assessee's undisclosed cash in books, and undisclosed income of Rs. 21,99,000 on account of alleged undisclosed investment is stock of scrap found at the time of search, have been computed solely on the basis of statement of Mr. Madan Handa, Mr. Muktar Abbas, Mr. Aquil Ahmed, Mr. Deepak Handa and Mr. Surendar Singh without allowing the assessee an opportunity for cross-examining any of those persons, and the assessment order, so far as the aforesaid undisclosed income on various accounts is concerned, has been made in complete violation of the principle of natural justice and consequently is liable to be quashed being bad-in-law. In support of this submission the assessee's counsel has relied on the decisions in following cases: (i) Malwa Vanaspati vs. CST 1995 UPTC 98 (ii) Colonisers vs. Asstt. CIT (1993) 45 TTJ (Hyd) 114 (SB) : (1992) 41 ITD 57 (Hyd)(SB); (iii) S.K. Gupta vs. Dy. CIT (1999) 63 TTJ (Del) 532. (iv) State of Kerala vs. Shaduli G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1996. (vii) Ram Bahadur- Statement recorded during search on 3rd Sep., 1996. (viii) Vijay Singh- Statement recorded during search on 3rd Sept., 1996. 16.2. The statement of Mr. Mukhtar Abbas, Aquil Ahmed, Surendra Singh, Ram Bahadur and Vijay Singh have been used against the assessee as is evident from intentions of the AO expressed in para 11 of his letter No. ACIT/CC/IT/block assessment/1997-98 dt. 23rd July, 1997 for the purpose of holding that the sales and purchases done by the assessee were not genuine and the assessee had introduced in the books, its undisclosed cash. Assessee had made a request for cross-examination of aforesaid persons as per reply furnished on 18th Sept., 1997. As per order sheet entry dt. 18th Sept., 1997, the AO fixed the date of cross-examination of these persons by the assessee as 23rd Sept., 1997, but after this entry the AO made another entry, on 18th Sept., 1997 itself, in which he has recorded that there is no time for cross-examination of Mr. Madan Hada. The entry is silent about the cross-examination of other persons, but as per discussion at p. 21 of the assessment order, these persons were also not allowed to be cross-examined. The det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a together, it amply shows the intention of the assessee that it, in fact never wanted to cross-examination and only wanted excuses. In the case of cross-examination of Ram Singh an employee whose statement was recorded on oath, it is true that he was not available in the morning hours on 17th Sept., 1997, in the office even though he came to office. He again visited the office in the evening but then the assessee was not available for cross-examining him. Since Shri Ram Singh is now not residing at Kanpur, he showed his inlability to be available for next 10-12 days and as such he could not be offered again for cross-examination." 16.3. To concluded the fact remains that the assessee was not allowed to cross-examine any of the aforesaid persons. 17. In the light of the above facts and circumstances the question for our decision are: (i) Can the assessment framed by relying on the statements of 3rd parties who were not allowed to be cross-examined by the assessee be said to be and assessment in violation of principle of natural justice; (ii) If so, can the assessment be considered as having been vitiated and be quashed. 18. As far as first question is concerned, now the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not constant; that are not absolute and rigid rules having universal application, AIR 1969 SC 198. One of the rules which constitutes a part of the principles of natural justice is the rule of audi alteram partem which requires that no man should be condemned unheard. It is indeed a requirement of the duty to act fairly which lies on all quasi-judicial authorities and this duty has been extended also to the authorities holding administrative enquiries involving civil consequences of affecting rights of parties. The quasi-judicial decision rendered and order made in violation of audi alteram partem Rule is null and void and the order impugned in such case can be struck down as invalid on that score only and this view is fortified by the decisions in the following cases: (i) Swadeshi Cotton Mills Company Ltd. vs. Union of India 51 ITC 210, 255 (SC); (ii) Menka Gandhi vs. Union of India AIR 1978 SC 597; (iii) Smt. Kanti Khare vs. Kali Prasad Asthan AIR 1983 All 45; (iv) State of Kerala vs. K.C. Shaduli Grocery Dealers, Etc. AIR 1977 SC 1627; (v) Colonisers vs. Asstt. CIT; (vi) Malwa Vanaspati Chemicals Ltd. vs. CIT. (vii) Dhakeshwari Cotton Mills Ltd. vs. CIT (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efusing to summon the wholesale dealer for cross-examination by the assessee clearly constituted infraction of the right conferred on the assessee by the second part of the proviso and that vitiated the orders of the assessment made against the assessee. The following part of the decision of the Hon'ble Supreme Court is worthy of notice and we, prefer to make the relevant part as part of this order which is in the following terms: "Now, the law is well settled that tax authorities entrusted with the power to make assessment of tax discharge quasi-judicial functions and they are bound to observe principles of natural justice in reaching their conclusions. It is true, as pointed out by this Court in Dhakeswari Cotton Mills Ltd. vs. CIT (1955) 1 SCR 94 : AIR 1995 SC 95 that a taxing officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law" but that does not absolve him from the obligation to comply with the fundamental rules of justice which have come to be known in the jurisprudence of administrative law as principles of natural justice. It is, however, necessary to remem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from the decision. It is, therefore, not possible to say that in every case the rule of audi alteram partem requires that a particular specified procedure is to be followed. It was be that in a given case the rule of audi alteram partem may import a requirement that witness whose statements are sought to be relied upon by the authority holding the inquiry should be permitted to be cross-examined by the party affected while in some other case it may not. The procedure required to be adopted for giving an opportunity to a person to be heard must necessarily depend on facts and circumstances of each case." 20.2(b). In case of Coloniser vs. Asstt. CIT, Tribunal, Special Bench, as per head notes, has also held that an order rendered in violation of rule audi alteram partem is null and void and the order made in such a case can be struck down as invalid on that score only. The relevant part of head notes, which is quite important and worth of noting reads as under: "In regard to the second point of difference, two segments of it existed. The first segment was as to whether the additions made in violation of the principles of natural justice should be set aside as void ah initio. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re separable from the other additions in the order that were not challenged." 20.2(c). In case of Swadeshi Cotton Mills (P) Ltd; in case of Menaka Gandhi, in case of Smt. Kanti Khare and in other decisions relied upon by the assessee the Courts have followed the same principle and have quashed the order as being a nullity and void. 21.1. In view of aforesaid settled principle of law and various decisions which we are bound to follow there remains no doubt about the answer to the question before us i.e. our answer to the question is that once the assessment is found to be in violation of principle of natural justice it has to be quashed as being bad in law and void or a nullity. 21.2. As far as the assessment before us is concerned since we have already held in para 19 the assessment to be in violation of principle of natural justice, we respectfully following the decision of various Courts including Hon'ble Supreme Court and also the decision of Tribunal, have no hesitation in holding that the AO's action refusing the permission to the assessee for cross-examination of Mr. Madan Hada and others not only constituted infraction of right conferred to the assessee in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the case of such person or in the context or in relation to the case of the person in whose case search has been conducted, immediately after the close of the search' and (b) If the authorised officer for the search has no jurisdiction over the person in whose case the search has been conducted then he has no powers to retain the assessee's documents or assets seized during the search after a period of 15 days, and (c) if the authorised officer retains the books of account after the prescribed period or records the statement or examines any person then his action is wholly illegal, bad in law and assessment based on such action has to be declared as bad-in-law. From the aforesaid proposition the assessee's counsel further derived a legal proposition that if the result of examination of assessee's documents by the authorised officer carried out after the expiry of 15 days or the statement recorded by him after the conclusion of the search are used for framing the assessment detrimental to the assessee's interest, such an assessment having been passed as a result of influence/advice/instruction of outsider, has to be held to be bad in law. 22.3. So far as the assessee's case is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from him. No evidence whatsoever, in support of the claim that the statement referred to by the assessee's counsel in his arguments were recorded by the ADI, Kanpur as a result of commission used by the AO was furnished. 24. We have considered the rival submissions, facts and circumstances of the case, the statement recorded by the ADI copies of which have been placed in the assessee's compilation, assessment order wherein the aforesaid statements have been relied upon by the AO, provisions of s. 132 with respect to power of authorised officer and also the provisions with respect to jurisdiction of the ADI and case law relied upon by the assessee, very carefully. 25. As far as the factum of recording of the statements by the ADI and reliance by the AO on the contents of those statements is concerned, it is now admitted fact that the statements were recorded after the conclusion of the search by the ADI (Inv), HQ, Kanpur and have been relied upon by the AO for computing the undisclosed income referred to by the assessee's counsel in his arguments. 26. To adjudicate upon the issue raised by the assessee's counsel we are of the opinion that first question for our decision is wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian IT Act, 1922 (11 of 1922), or under this Act. Explanation: For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian IT Act, 1922 (11 of 1922), or under this Act. (5)....... (6)....... (7)...... (8) The books of account or other documents seized under sub-s. (1) or sub-s. (1A) shall not be retained by the authorised officer for a period exceeding one hundred and eighty days from the date of the seizure unless the reasons for retaining the same are recorded by him in writing and the approval of the Chief CIT, CIT, Director General or Director for such retention is obtained: Provided that the Chief C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the seized material, is to the ITO meaning thereby that since the provisions states that the seized material has to be handed over to the ITO, having jurisdiction over the person searched and thereafter the powers to exercised in view of provisions of ss. 8 and 9 shall be exercised by such ITO, it is very much clear that the jurisdiction is with respect to the "Jurisdiction with relation to the making of assessment" and not anything else. 27.3 Another requirement of sub-s. (9)(A) is that the seized material and assets are to be handed over to the "ITO" and nobody else. 28. In view of our aforesaid analysis of the various provisions we are of the opinion that an authorised officer who has no jurisdiction over the person in whose case search has been conducted, has no powers either to retain the seized materials for a period more than 15 days or to examine any person or to record statement of any person connected with the case of the person searched and on the contrary, has to hand over the seized material to the "ITO" having jurisdiction over the persons searched. 28.1. This analysis leads to one more conclusion that after expiry of period of 15 days from the conclusion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on every one of them by virtue of the provisions of s. 120 of the Act and therefore, it is incumbent upon the concerned authorities to exercise the powers and perform and functions conferred on it and not to engross upon or encroach upon the powers and functions conferred on some one else. (ii) Similarly each one of the authorities specified in s. 116 of the Act has to exercise his powers to carryout the functions assigned to do with respect to the area or the persons or the class of persons as the case may be and authorized by the CBDT or any other authority so authorised by the CBDT in exercise of the powers vested by the provisions of s. 120/124. (iii) In the present case since the Revenue had not lead any evidence with respect to the jurisdiction of the concerned ADI, it seems that ADI had no jurisdiction over the assessee's case. 31. Coming to the plea that the AO has been influenced by the statements recorded, proceedings conducted, over letters, advice etc. given by the ADI who had since ceased to be an authorized officer after the conclusion of the search, it is revealed from the assessment order that following letters/statement (originating from the said ADI (Inv) mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld the orders passed by a quasi-judicial authority on the basis of advice/instruction/directions or guidance of other authorities as bad in law and void ab initio. 33.2. The aforesaid preposition of law is fortified by the following decisions on which the assessee's counsel has placed reliance: (i) Decision of Hon'ble Tribunal, Madras Bench in case of Kirtilal Kalidas Co. vs. CIT (a) The fact of this case were that in terms of s. 132 separate search warrants were issued by the concerned authorities on 26th Aug., 1995/30th Aug., 1995, in respect of different premises in which the business was carried on by the assessee. After the searches were conducted on 30th Aug., 1995, separate Panchnamas were prepared for separate premises recording seized materials, and an appraisal report was prepared by them which was forwarded to the relevant AO who on the basis of appraisal report issued notices to the appellants in terms of s. 158BC r/w s. 158BD. In this statement on oath in terms of s. 132(4) "T" admitted that he would disclose a sum of Rs. 40 lakhs for the block period to cover up any shortage of deficiencies in the group of search cases. The AO framed the assessments under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch an other authority who directed or issued orders/instructions to the lower authority to act and thereafter pass an order/decision in a particular manner and frame the block period assessments. The refusal by the Department to furnish a copy of the questioned appraisal report for perusal and study compelled one to accept that the impugned assessments were vitiated and illegal. The Department was in custody and possession of the appraisal report of the DDI which according to the appellants were adverse to their interest in as much as the AO had been influenced, dictated and directed to act not on his own independently but as directed and dictated by the superior officer in a particular document, namely, in the instant case, the appraisal report of the DDI. It was on account of this conduct and attitude of the Departmental authorities in withholding the appraisal report which compelled one to draw an inference that what the assessees submitted was true and correct and, therefore, the same was true correct and acceptable. It was on the account of these reasons that the impugned assessments, were vitiated and were not sustainable in law requiring vacation." (ii) Sirpur Paper Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e block period and the details of undisclosed income determined by the Revenue and disputed by the assessee in the aforesaid grounds are as under: (i) Asst. yr. 1993-94 AO has determined undisclosed income on the basis of alleged undisclosed investment in the construction of assessee's factory building at Rs. 3,42,337 and the same is disputed by the assessee; (ii) Asst. yr. 1995-96 AO has computed the assessee's undisclosed income for asst. yr. 1995-96 as under: (a) Undisclosed income as a result of manufacturing of ingots and sale of the same but not recorded in the books of account Rs. 1,53,28,028 and after allowing depreciation net undisclosed income from business outside the books at Rs. 1,41,51,178; (b) Undisclosed income on account of alleged undisclosed capital required for carrying on the alleged undisclosed manufacturing and trading activity of ingots at Rs. 18,00,000; (c) Undisclosed income on the basis of findings that assessee's trading activity such as purchases and sales were not genuine and assessee had introduced its undisclosed cash in its books of account at Rs. 19,99,858 (after order under s. 154). (iii) Asst. yr. 1996-97 Undisclosed income on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding in asst. yrs. 1994-95 and 1995-96 also has been allowed on the basis of brought forward WDVs which confirms that the cost of construction of the building as declared by the assessee was accepted by the Revenue. 35.3. The first assessment for asst. yr. 1993-94 has been completed after due investigations and scrutiny of assessee's books of account as is evident from the observations of the AO which are in the following terms: "The assessee-company vide its return of income for the first time declaring loss of Rs. 22,19,460. The income-tax return also accompanied with audited copy of balance sheet, P L a/c and TAR, etc. which are placed on record. The details of purchases, sales and other details as filed by the assessee with reference to audited copy of balance sheet, P L a/c and the TAR filed along with the income-tax return. The books of account produced were also put to test check. After discussion the points in dispute/disallowances are being discussed as under:" 35.4. While making assessment for the block period the learned AO in spite of the facts that there was nothing in any of the books of account or documents found or seized during the course of search at as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and appliances to carry out the civil and mechanical construction as in the case of regular contractors. In view of these facts, the margins of profit as available in the case of these facts, the Valuation Officer has rightly allowed the credit for self-supervision charges at the rate of 7.5 per cent. Besides, the assessee has also objected to the adoption of Schedules of CPWD rates as against PWD rates. The Hon'ble High Court in the cases relied by the assessee has not directly dealt with the issue of applicability of PWD and CPWD rates. In addition to this it has also been argued that since the difference in valuation and disclosed value is arrived 105, the same could be ignored. Looking to the facts and circumstances of the case, the objections of assessee are not acceptable. Therefore, the difference be taken of Rs. 33,99,643 disclosed by the assessee and Rs. 37,42,000 estimated by the Departmental Valuer comes to Rs. 3,42,357 and is treated as unexplained investment in the construction of factory building which is added to the assessee's income." 36.1. In the light of the aforesaid facts the assessee's counsel first of all submitted that the issue relating to the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - The difference between the cost of investment in the factory building of the appellant and that estimated by the District Valuation Officer, IT Department has been treated as unexplained investment in the factory building during the relevant asst. yr. 1993-94. The appellant disputes this addition on the strength of two decisions of the Hon'ble Tribunal, Allahabad, stating that since it maintained records of construction in books of account the same should be accepted. It has been further stated that the book value of investment is being accepted by the Department even during the course of regular assessment proceedings including that for asst. yr. 1996-97 The fact that the value of factory as appearing in the balance sheet of the appellant has not been altered, does not help the case of the appellant. As regards adjustments in the books of account, that is to be carried out by the appellant itself by taking into account the unexplained investment and making suitable adjustment in the reserves appearing in the liability side. However, the appellant is entitled to extra claim of depreciation on the enhanced value of investment also. As regards maintenance of records of constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect because the Valuation Officer while determining the cost of construction has considered as amount of Rs. 37,049 (on account of builders efforts) which cannot be investment by the assessee. The amount determined by the Valuation Officer on account of builders effort is a notional saving made by every builder as a result of his personal efforts during purchases of material or engagement of labour, etc. This amount may be considered for the purpose of market value of the building because the saving made as a result of builders efforts are definitely to be reflected in the market value but cannot be considered as investment by the builders. This is simply a saving in the case and nothing has flowed from the builders pocket. 38.1. Under the provisions of s. 69 or 69B of the Act, as the case may be it is the amount which has flown from the pocket of some one including the assessee which can be considered as undisclosed investment, meaning, there by that if nothing has flown from the assessee's pocket then nothing can be said to have been invested and consequently nothing can be considered undisclosed investment. Since the savings made by the person as a result of his personal eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block period, are that the learned AO assumed the loose papers in documents marked as LP1 to LP 31 found and seized during the course of search under s. 132 of the Act at the residence of Mr. Madan Hada- erstwhile director of the assessee-company, after relying on the possibility of both these papers are belonging to the assessee expressed by Madan Hada in his statement recorded under s. 131 of the Act on 8th Nov., 1996, by the ADI copy of statement available at pp. 189 to 192 typed copy at pp. 276 to 279 of the assessee's paper book. The relevant part of the statement, as contained in answers to question Nos. 5 to 11 of this statement reads as under: 40.2. Another important fact, worth of mention here, is that at the time of search at the residence of Shri Madan Hada on 3rd Sept., 1996, Shri Madan Hada had not, during his examination under s. 132(4) of the Act, expressed any apprehension or doubt with regard to the ownership of the documents marked as LP1 to LP 31 as belonging to the assessee. He had not alleged or expressed any possibility of these documents as belonging to the assessee, on the contrary, he on the basis of these very documents had disclosed an income of Rs. 78, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is not acceptable for want of any evidence. Therefore, the sale of R.R. are estimated at an average rate of Rs. 8,800 and those of scrap has been valued at an average rate of Rs. 7,220 per metric ton. (Annexure LP-5) Accordingly, the total undisclosed sales as per annexure-for the accounting period relevant for the asst. yr. 1995-96 which is part of block period have been worked out to Rs. 10,50,64,349." 40.5. The details of loose papers found at the residence of Mr. Madan Hada, their reference in the assessment order for block period and purpose for what these have been relied upon and also the details of loose papers found at the residence of Mr. Agarwal, their reference in the1 assessment order and purpose for which they have been led by the AO, as per chart filed by the learned Departmental Representative are as under: --------------------------------------------------------------- s. Document Page No. Purpose for which used in the Page nos. No. marked of assessment order of asst. as document order u/s. 158BC ------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of despatches from Monga Metal on 31st Sept., 1996 12. Agarwal Residence LP-3 Page 26, Records of despatch of M/s 14,15,16, 15 Ingots and receipt of the same 22, by VVS Alloy's from Monga 23,39,24 Metal corresponds to p. No. 147 of A-3. 13. MMB-2 Page 1- Capacity of production. 15 32 14. MMB-3 Page 10- Capacity of production. 15 11 15. BKFF-2 Page 100 Undisclosed sales for the 26,27 123 month of June and July 1994. --------------------------------------------------------------- 41. Submissions by the counsel for the appellant: (a) The assessee's counsel advanced the following arguments: (i) That the loose papers marked as LP1 to LP31 found at the time of search at the residence of assessee's erstwhile director Mr. Madan Hada did not relate to assessee's business and since Mr. Madan Hada was himself carrying on the business of sale and purchase of ingots and scrap and might had got ingots manufactured from some other manufacturer, transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 and January, 1995 respectively by attributing these entries as relating to assessee's business. The assessee's counsel case was that in case the word "M" is taken as representing "M/s Monga Steel Ltd." then the word 'A' should have been taken as representing "Arpit Steels"; a concern owned by the son of Mr. Madan Hada and explained as claimed by the director of assessee-company in various replies and consequently the entries against which 'A' is mentioned should not have been taken as relating to the business of assessee-company. In support of his submission the assessee's submitted that it is an admitted fact that the Revenue has accepted the existence of a concern styled as M/s Arpit Steel, as a genuine concern and belonging to son of Mr. Madan Hada. According to him the assessment of this concern has also been completed. He therefore, submitted that ownership of loose documents have been attributed as that of the appellant without any supporting evidence and therefore, this action is not sustainable in law. (b) In support of above submissions the assessee's counsel had relied on the observations of the Hon'ble Supreme Court in case of Dr. N.G. Dastan vs. S. Dastan 1975 AIR S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from such alleged turnover out-side the books. (d) The assessee's counsel further submissions, which was without prejudice to the aforesaid submissions were as under: "Without Prejudice (i) The figures of sales worked out in Annexure 'A' appears to be incorrect and excessive mainly on account of adoption of higher rate of sales on estimate basis. The quantity of sales have also not been found correct. We are enclosing herewith a chart from which it will be seen. (ii) Regarding G.P. rate it may be submitted that working of GP of 30 per cent as mentioned at p. 4 of the your notice is also not correct because figures of closing stock has been taken at Rs. 16,00,000 which includes stock of traded goods. Besides this figures, of sales have been adopted including excise duty whereas the purchases have been taken net of excise. If we reconcile the figures the G.P. rate as per books comes to 14.88 per cent. (iii) That if the Department wants to consider the-seized papers then the expenses like freight, brokerage and the expenses mentioned in Annexure LP-5 (Trading P L a/c of September, 1994), have to be considered then the working of profit on the basis of these papers b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel the undisclosed income to the extent of Rs. 1,72,67,650 as computed by the Assessment Officer for alleged introduction of cash has to be out of alleged undisclosed income and therefore, there is no reason for estimating an additional undisclosed income of Rs. 1,53,28,028. (g) With regard to the ownership of M/s Arpit Steel, the assessee's counsel submitted that if at all the Revenue's version is accepted then as far as assessee is concerned, the transaction related to it had to be excluded and could be assessed in the hands of Mr. Vinod Agarwal, after making necessary enquiries. 42. The learned Departmental Representative on the other hand, first of all relied on the discussion and finding of the learned AO contained in page Nos. 3 to 34 of the assessment order and while enlarging the field of the arguments it submitted: (i) That Mr. Madan Hada, Deepak Hada and Sri Ram Singh were not allowed to be cross-examined because the assessee's insistence for cross-examination of Shri Deepak Hada and Madan Hada simultaneously was unfair and assessee's this demand goes to show that the assessee did not want to cross-examine but was only to finding excuses. He further submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce related to the appellant company. During the course of search operations, various papers, assets, investments are recovered and at the heat of moment, the owner of the premises will naturally not disown them. It is also a fact that during the course of search operations, it is not possible to identify each paper and documents being recovered from a premises. It is only after the search operations, when papers were analysed, Shri Madan Hada was again confronted to explain them. After looking into the specific papers and their nature, Shri Madan Hada could say that these papers related to the appellant company and were relevant for the period when he was director in the company. The recovery of any paper from an active director is not any unnatural phenomenon. The loose papers recovered from the residence of Shri Madan Hada were held to belong to the appellant company not only on the basis of statement of the Ex-Director, Shri Madan Hada but also due to the fact that they were clearly relatable to the appellant company part of the papers were prepared by the regular employees of the appellant company and even part of the entries appearing in the loose papers seized from the reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises of the appellant is available in the seized material from the residence of Shri Madan Hada. Thus, looking to the entirety of circumstances, relatable contents of the seized material undoubtedly related to the appellant company and could not be wished away simply on account of the facts that in the first instance at the time of search about operations Shri Madan Hada did not specifically stated about these papers. More so, when these papers were not specifically confronted during the course of search operations. The appellant was given opportunity to rebut this finding and instead of availing this opportunity, it chose to put up unreasonable demands such as examining together on the same day one by one more than one witnesses. It also chose to send an affidavit of Shri R.D. Verma by registered post on 29th Sept., 1997 knowing fully well that the limitation was expiring on 30th Sept., 1997 and as such there was no time to examine Shri R.D. Verma. While working out the undisclosed manufacturing activity, suppressed production and sales, care has been taken to restrict it to the material available in the seized loose papers vis-a-vis regular books of account of the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,26,867 54 Smt. Sarada Hada 12,25,000 51 Bihar Sponge 2,79,596 52 Desraj Collection 0000000 50 Frontiex Alloy 7,220 a/c 01 B.R. residence 19,29,440 08 Bank 25,92,648 30 B.R. residence 25,000 54 G.E.C. 20,530 sus. 30 Bank of Baroda 10,67,178 02 Durga Steel 4,26,611 14 Picup Reserve 18,00,238 02 Madan Hada 44,182 14 Electricity 12,94,879 27 Sudhirjee 19,26,250 44 Picup interest 12,13,164 50 Kishan Broker 1,328 44 Bank interest 52,205 50 Shyamlal Broker 859 55 Rokar interest 1,79,170 30 Sanjay Factory 20,000 52 Dadiji 50,426 22 Nemani 58,272 60 Channu Sardar 2,60,000 01 Cash with Ram 5,171 Singh 61 Int. on own. 23,60,000 01 Cash at office 34,414 64 6ZB Quality a/c 75,000 55 Suspense a/c 1,60,472 45 GZB a/c 1,34,321 Supplementary 3,12,562 45 Unit No. 2 2,91,204 Closing Stock 54,00,549 47 Store July 7,10,279 Difference A/c 7,336 47 Store Augus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a view detrimental to the assessee. In our opinion the AO should have made proper enquiries from various parties including Mr. Madan Hada as to with whom the said transactions had been effected and after bringing cogent material on record should have come to his conclusion as to the ownership of the documents. (b) Further, the AO, while attributing this document' as that of the appellants, has relied on the entry in this document against date 2nd Jan., 1995, which reads as "(37) 2nd Jan., 1995 PJ 119/0086-146.05 x 3213" and, according to him tallies with the entry at pp. 3 and 4 of LP 32 which in turn are alleged also has to be details of purchase of scrap by M/s Monga Steel Ltd. from M/s Venkateshwar Scrap, Aligarh and also have relied on another entry dt. 1st Jan., 1995, claimed to be purchased through Truck No. USZ 2882 as tallying with entry at p. 3 of LP 22. (c)(i) We have gone through the copies of the pp. 11 and 12 of LP 9, pp. 2, 3 and 4 of p. 22 and have noticed that name of appellant company i.e. M/s Monga Steel Ltd. is not mentioned in any of these documents as alleged by the AO. (ii) The entry dated 1st Jan., 1995 as per p. 11 of LP 9 reads as "(36) 1195 USZ 2882 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctober as per p. 93 is 182 MTs whereas opening stock of scrap at the beginning of month of November as per p. 92, is 582.090 MTs. These different details show that closing stock of scrap for the month of September (as per LP 5) was 579.245 MTs whereas opening of stock in the beginning of October is only 129 MTs. How these two can be said to belonging to the appellant's business without any corroborating evidence, is beyond anybody's imagination and we are unable to subscribe to the conclusion arrived at by the AO. (v) LP 15 (a) As observed at p. 7 of the assessment order the AO has considered the contents of LP 15 as sales and purchases made by the appellant during the month of August, 1994 on the basis of his finding that these statements have the name of parties whose names are recorded appearing in the assessee's books of account also. The observation of the AO are as under: "Annexure LP 15 The page Nos. 1 to 7 are the details of purchases of MS scrap for the month of August, 1994. In fact these are the purchase which might have been used for produced of ingots which have been sold out in the month of August, 1994, as per Annexure LP-9. These receipt statements have also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(a) Mr. Madan Hada, in his statement recorded during search on 3rd Sept., 1996, had not confirmed the ownership of these documents as that of assessee: (b) On the contrary, he seems to have admitted the documents as belonging to him and that seems to be the reason that he had disclosed/offered an income of Rs. 78 lakhs. Had the documents related to the assessee's business, Mr. Madan Hada, who at that time was not in good terms with the assessee's director would not have even tried to save the assessee by concealing the fact of ownership. I was psychologically impossible. The human nature would have compelled him to disclose the fact of ownership because by doing it he was not going to loose anything rather would have succeeded in harming his enemy, the assessee. Another factor which support our views, is that no prudent person will accept the tax liabilities on an income of Rs. 78 lacs on the basis of document which belongs to his enemy. Every person would, not only tried but will disclosed the facts relating to ownership of such documents as that of the enemy at the earliest possible opportunity. In this case Mr. Madan Hada had not mentioned anything about the assessee's owners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d because the Revenue has not denied that the word 'A' do not represent "Arpit Steels" or at the most such entries may be considered in the hands of Vinod Agarwal who had been alleged to be carrying on the affairs of M/s Artie Steels, if so proved, but since the AO, who was present during the hearing of this appeal, admitted that M/s Arpit Steel has been accepted to be genuine concern owned by Deepak Hada, we are of the opinion that there remains no question of considering the entries relating to Arpit Steel either as belonging to appellant or to Mr. Vinod Agarwal and consequently the same have to be excluded. We direct accordingly. (ii) As far as quantum of undisclosed income is concerned, since the AO has himself, while considering the genuineness of assessee's trading activities as per books has held the G.P. rate of 15 per cent for asst. yr. 1995-96, G.P. rate of 12 per cent for asst. yr. 1996-97 and G.P. rate of 10 per cent for 1997-98 to be high on the plea that such rates are unheard of and has observed that in fact in Steel Trading rates are very low which are in the range of 2 to 3 per cent as well as in view of assessee's computation of G.P rate on various basis, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt liabilities and assets is taken as requirement of initial investment. Alternatively, there is no material available in the seized records to suggest that to carry out the undisclosed production, the assessee purchased raw material on credit. The attendent expenses, like salary, wages, stores, etc. must have been incurred in cash only. Therefore, not only on the basis of net of current liabilities and assets, but also for the reason of cash expenses in purchase of raw material and manufacturing expenses, the requirement of 'working capital' can't be ruled out. The undisclosed manufacturing activity started in June, 1994 with turnover in the month at Rs. 22,78,254 only and, therefore, the estimate of working capital, required for effecting turnover of Rs. 22,78,384-in the month of June, 1994 at Rs. 18 lakhs cannot be said to be unjustified or unreasonable." 47. We have considered the rival submissions, facts and circumstances of the case as well as the decision in case of Ashok Kumar Rastogi carefully. 47.1 So far as the facts relating to the issue are concerned, there is no material either in the assessment order or in the seized record which may indicate the involvement of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of accounts cannot be exactly applied in the case of undisclosed business. M/s Monga Metal (P) Ltd. Order under s. 158BC of IT Act It is seen that the assessee has started the undisclosed business activity in the month of June 1994, and the total turnover is Rs. 22,78,254. Since it is a manufacturing concern, the investment starts right from purchase of raw material and ends at the door of customers and obviously, in the given circumstances and for the reasons discussed above the investment in effecting turnover of 22,00,000 and odd in the month of June 1994 is, therefore, considered as requirement of working capital for the undisclosed business. In succeeding months, the money will be available for circulation and it will buildup further with the passage of time. Considering the profit rate of 15 per cent as per Annexure LP-5 the requirement of working capital is rounded off at Rs. 18,00,000. Since there is no explanation available for the source of this additional requirement of working capital in respect of undisclosed business, the sum of Rs. 18 lacs will be treated as undisclosed investment in the working capital against the disclosed business." 47.2. As far as qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s equally clear that in making the assessment sub-s. (3) of s. 23 of the Act, the ITO is not entitled to make a pure guess and make assessment without reference to any evidence or any material at all. There must be something more than the suspicion to support the addition under s. 23", held that from the estimate sales it cannot necessarily be inferred that the assessee has invested Rs. 50,000 in some unexplained business and that it being not a necessary inference is pure guess and finding seems to be based on surmises and conjecture without there being any evidence or material in support thereof. 47.5. The facts in the case before the Hon'ble High Court were that a raid was conducted on the residential premises of the assessee who is an individual, on 13th Aug., 1976, as a result of which 244 documents were seized-some of which related to the transaction regarding the asst. yr. 1976-77 i.e. assessment year under consideration, the ITO after giving an opportunity of being heard to the assessee, completed the assessment whereby transaction as per documents found during search were totalled at Rs. 4,24,396 and profit of Rs. 42,440 was estimated after applying a rate of 10 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is equally clear that in making the assessment under sub-s. (3) of s. 23 of the Act, the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under s. 23(3)." As mentioned hereinbefore, no evidence or material has been referred to or relied upon for treating the aforesaid sum of Rs. 50,000 as unexplained investment and the only circumstance, which has been referred in this connection is the estimated sale of Rs. 4,24,396. From the estimated sale it cannot necessarily be inferred that the assessee has invested Rs. 50,000 in some unexplained business. It being not a necessary inference is a pure guess and the findings seem to be based on surmises and conjectures without there being any evidence or material in support thereof." 48. As far as present case is concerned, we are of the opinion that same is covered by the decision of Hon'ble High Court and respectfully following the same we hold that the AO's action while determining the undisclosed income on account of so-called working capital, was a result of pure guess work and findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own paper LP-5. According to this paper as stated earlier in this order, the profit rate worksout at 14.59 per cent. In absence of any other detail, it would be reasonable to presume that the assessee earned profit on this undisclosed turnover also at the rate of 14.59 per cent. Accordingly, the undisclosed income for August and 1st Sept., 1996 works out at Rs. 33,85,810 (2,32,02,266 X 14.59%)." The discussion with respect to p. No. 15 of LP 3 and p. 1 of Annexure A8 finds placed at pp. 12,13 and 14 where the statement of directors Sanjay Agarwal and Vinod Agarwal have been discussed. 49.3. Both the parties advanced their arguments based on the aforesaid facts and the documents referred above. 50.1. The assessee's counsel, after referring to the copies of p. 15 of LP 3 and p. 5 of Annexure A8 to "Panchnama" submitted that none of these documents contains any details with respect to the nature of the entries listed therein and simple arithmetical figural details cannot, by stretch of any imagination or any provision of law, we consider as the details relating to the sale and purchase of goods and that too by the assessee. According to him, since the documents have no such deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two documents relied upon by the learned AO, we are of the opinion that the outcome of such analysis depends on the question relating to the onus to explain the details in such loose papers found during the search-was it assessee's onus or Revenue's onus. After going through the provisions contained in the provisions of ss. 132, 139(1), 142(1) and 143 on the one hand and provisions of Chapter XIV-B on the other hand we are of the opinion that under the scheme relating to the regular assessment under s. 143 and where the assessee had furnished the return of income, first it is the assessee's onus to substantiate the return and if the Revenue is not going to accept the return then onus shifts on the Revenue to substantiate its stand, but, under the later scheme for assessment of undisclosed income under Chapter XIV-B of the Act, which comes into play after the action under s. 132 of the Act as a result of which the citizen's every kind of privacy is evaded, we are of the opinion that it is the Revenue's onus first to prove as to which entry and in which books of account or document or which transaction or money bullion, jewellery, or valuable articles seized are considered to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue has also failed to bring any evidence to support its conclusion and content of documents do not support the assessment order. (ii) So far as the document No. LP A/8 page No. 5 is concerned the AO before arriving at any conclusion, should have made proper enquiries as to the nature of the transactions- atleast from the owners of truck whose numbers appear in the document. The transaction should also have been verified from the assessee's books of account. This issue is set aside for reconsideration. 53.4. It is further evident that the AO has not invoked the deeming provisions of ss. 69 and 69A, meaning thereby that the contents of these documents have been considered as representing the assessee's undisclosed income under the substantive provisions of the Act. According to which. Every receipt is not necessary and cannot be income in the hands of the recipient. The question whether any particular receipt is income or not depends on the nature of the receipt and true scope as well as the fact of relevant taxing provisions-as has been held by the Hon'ble Bombay High Court in case of Mehboob Production (P) Ltd. vs. CIT (1977) 106 ITR 758 (Bom). In view of this settled p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered as assessee's sales of ingots outside the books resulting in undisclosed income and therefore we hold that there is no evidence on record which may support the findings of the AO. 56. In the ultimate analysis of cumulative facts and circumstances relating to the issue, one thing has become clear is that except suspicion, there is no evidence in favour of the conclusion arrived at by the AO, and since it is settled law, that if decision of quasi-judicial authority is based on suspicion, conjecture and surmises or on material or partly on evidence and partly on suspicion; the same is likely to be set aside by the higher Court. Keeping in view these propositions of law we are of the opinion that findings of the AO being based only on suspicion, and since suspicion however strong it may be cannot take the place of proof; we are unable to sustain the findings, our view is further supported by the decisions of Hon'ble Supreme Court in case of Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151 (SC), Dhakeshwari Cotton Mills Ltd. vs. CIT and Umacharan Showe Bros vs. CIT which are as under: (i) In the case of Omar Salay Mohamed Sait vs. CIT where the Hon'ble apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into consideration the entire circumstances of the case, we are satisfied that there was no material on which the ITO could come to the conclusion that the firm was not genuine. There are many surmises and conjectures and the conclusion is the result of suspicion which cannot take the place of proof in these matters." 57. In view of the above facts and circumstances of the case and the discussion, various case laws as well as the settled principle of law, we hold that conclusion arrived at by the AO was based purely on suspicion and, therefore, cannot be sustained. The addition of Rs. 33,85,410 as undisclosed income from asst. yr. 1997-98 is, therefore, directed to be deleted. 58. Ground No. 4.1 [Asst. yr. 1997-98 (b) and 4.7] Undisclosed income of Rs. 21,99,000 on account of alleged excess stock of scrap available on the date of search i.e. 3rd September: 58.1 The fact relating to the issue are that at the time of search on 3rd Sept., 1996 at the factory premises of assessee where the assessee's stock of scrap was also available, the authorised officer prepared a inventory of assessee's stock of various items, including scrap, in the presence of assessee's supervisor Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is that stock inventory of scrap was based purely on guess work and consideration of one heap of one truck load of 12 MTs is absolutely unreasonable and impracticable computation. According to him when the scrap is unloaded from the truck it has to be unloaded in shape of 2 or 3 heaps and similarly weight of each truck can never be 12 MTs. According to him total stock of scrap should not have been more than 20 to 30 trucks load and if the authorities were so sure of stock as per inventory then they should not have remained silent on the assessee's request made since 4th Sept., 1996, for actual weighment. As regards to the statement of Shri Ram Singh, the assessee's counsel submitted that he had nowhere stated or confirmed that one heap was one truck load of scrap weighing 12 MTs. The assessee's counsel further submitted that the Revenue's refusal to allow the assessee cross-examination of authorised officer has vitiated the order and the same should be quashed. 59.1 The learned Departmental Representative, in addition to relying on the findings of the AO contained at pp. 34 and 35 of the assessment order, submitted that the stock on the date of search was actually physically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant, it is of no use to the Revenue, because, it is admitted fact that the stock was not actually weighed rather was mere on physical look of the authorised officer that the stock of 60 heaps was estimated to be 60 trucks load. The Law required the authorised officer to weigh the stock which was not done. The subsequent confrontation into the assessee is also of no help to the Revenue. So far as the presence of the assessee's employee is concerned, we after having gone through the statement, are of the opinion that he had nowhere confirmed or accepted each heap as one truck load of stock of scrap. The Revenue's stand that it was not possible or practicable to verify these stock in a running concern at a later stage is also of no use, because, in the present case search was concluded on 4th Sept., 1996, and the premises where stock was lying were sealed as is evident from the assessee's letter to the SHO and since the assessee was crying from 4th Sept., 1996, itself and was requesting time and again for actual weighment of the stock of scrap (which was still lying in the sealed premises) it is unjustified on the part of the Revenue now to take the stand that it was not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order and the records available before us, as under: 61.2. The appellant's books of account for asst. yrs. 1995-96, 1996-97 and 1997-98, which were in respect of manufacturing as well as trading activities, depicted the G.P. rate of 15 per cent, 12 per cent and 10 per cent respectively. The AO rejected the G.P. rates depicted by the appellant books of account by holding that the appellant has squared up the amounts of various parties from whom the purchases were shown to have been made by sales and if such purchases (which according the AO were not genuine) excluded, then the G.P. rate for each year comes to 32 per cent, 24 per cent and 87 per cent respectively which are abnormally high and unheard of the trading business of steel. The AO further observed that the profit in such trading activities is in the range of 2 to 3 per cent. 61.3 The AO, conducted the verification with regard to various purchases and sales shown by the assessee and according to him out of 20 parties, from whom the appellant had shown purchases and had squared up their accounts by way of sale, the parties namely: (1) M/s Saral Enterprises, (2) M/s Sharda Enterprises, (3) M/s Shukla Steel, ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 3rd category of sale i.e. sales to M/s K.C.P. Fueller Ltd., the AO, after making enquiries from the transporter concluded that number of vehicles claimed for sending the goods were not the number of trucks and the so-called sales to this party were not genuine i.e. according to the AO there was no actual delivery of goods. (iv) The other important fact to be noticed is that the AO asked the appellant to explain the details of M/s K.C.P. Fueller Ltd. only which were explained by way of return reply to the effect that these transactions are appearing in the regular books of account and may be considered in the course of regular assessment and not for the purpose of assessment for block period. Here it is important to mention that the learned AO did not confront the appellant with the evidence collected or enquiry made with regard to appellant's trading activities with other parties on the ground that the appellant has refused to give any further detail or replies with respect to the dealings with M/s K.C.P. Fueller Ltd. and this fact is borne out from the second para at p. 49 of the assessment order reproduced below: "The issue of K.C.P. Fueller Ltd. was confronted to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that by making trading activities, unaccounted profit of the assessee's company has been introduced in the books of accounts" Without Prejudice We may submit if the Department has reached to this conclusion then it will be seen that the trading profits as shown below in these three years have been introduced by the assessee-company in its books of accounts: Asst yr. Income from Trading Transactions Rs. 1995-96 64,72,528.00 1996-97 76,30,167.16 1997-98 (upto 3rd Sept., 1996) 31,60,954.50 Your allegation about no purchases and sales made from and to the parties are also not justified because the purchases were made from the recognised parties and profits earned as shown above were disclosed and assessed. We have also furnished the details required for sales made to M/s Fuller K.C.P. Ltd. just after search the Department had made various enquiries from the parties at Kanpur, Agra, etc. and nothing adverse was intimated. Moreover the various parties had confirmed their purchases and sales and they had given their statements and copies of accounts, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that even if it is assumed that the transaction with some of the parties were not genuine then also there is no case for introduction of undisclosed cash for holding that all the trading activities were ungenuine. The appellant's counsel has made another alternate plea to the effect that if undisclosed cash is taken as having been introduced in the books then the whole of the alleged undisclosed income got introduced in the books and therefore of course, there is no case for any assessment of undisclosed income or at least to assessee the undisclosed income to the extent as alleged in the assessment order. 63. The learned Departmental Representative on the other hand in addition to relying on the assessment order, relied on para 8 at p. 11 of the "Synopsis furnished during the hearing of the appeal, which runs as under: "Trading Activities: Though the appellant is primarly a manufacturing company, interestingly, the co. also engaged itself in trading activity in iron and steel material on a massive scales where the sales were in crores. Since the main activity of the appellant was manufacturing, it looked strange that it should indulge in such heavy trading acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, M/s Bharat Traders, M/s Anjani Traders, M/s Bhagwati Sales Corporation and M/s Balkrishan Gopi Krishan for having entered into any transaction with the assessee, is concerned, we are of the opinion that the conclusion arrived at by the AO without allowing the assessee an opportunity to cross-examine the parties and without investigating the business interest of any of these parties is nothing but arbitrary conclusion arrived at with a pre-determined mind. Had the AO investigated the business interest of the parties, we are sure, the AO could have dig out the truth because it is very common for the parties who carry on the so-called undisclosed business activity to deny having done any business. These parties may not be telling the truth and one example is M/s Anjani Traders. In this case the AO has observed that M/s Anjani Traders accepted to have sold the goods worth Rs. 30 lakhs as against Rs. 1.68 crores shown by the assessee. Under these circumstances how the AO came to the conclusion that the whole of the purchases from these parties were bogus. Similarly in case of M/s Bhagwati Sales Corporation and M/s P.B. Traders, the AO should have called for their books of account or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, if any. (av) There is no valid basis of computing cash at Rs. 91,52,894 for asst. yr. 1995-96 and Rs. 1,31,68,732 for asst. yr. 1996-97 and Rs. 31,60,957 for asst. yr. 1997-98 and consequently undisclosed income determined on this account cannot be sustained. (avi) Simply, if we examine the possibility of introduction of cash in books by way of an example it will be noticed that there no on possibility of introduction of undisclosed cash in books. Example (a) If the transaction of purchases and sales are found entered in the books of account, then irrespective of the fact as to whether there was actual involvement of goods or not or as to whether transaction was genuine or ungenuine, the possibility of introduction of cash can be only to the extent of and in the circumstances detailed below: (i) Since all the transactions are recorded in the books, the person is under obligation to explain the source of payment made (recorded in books) for purchases be it in cash or by way of draft or by way of squaring up of the account with sales and it is only when the person is unable to explain the source of such payment that the payment can be said to have been out of undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit as in the example but still the question remains will anybody or any prudent person will choose this part? In our opinion it is not only impossible, impracticable but unprofitable also, and cannot be done without convenience of 3rd person. Here again a question arises as to why the 3rd party shall associate itself. If any party chooses to associate itself it will do so with the intention of procuring some benefit or earning some income and ultimately to get lost ab initio, so that it is out of reach of the taxman. (c) Even if it is taken that some one will take risk to associate itself then the question arises as to why the assessee will extend any benefit or allow any 3rd party to earn some income, when the assessee can disclose its cash by taking recourse to the provisions of s. 273A of the Act and by paying the regular tax. (d) Further by introducing cash to the extent of gross profit as in the above example one is left with, in the shape of working capital; is sum to the extent of net profit only which no prudent person will prefer. 65.1. In view of above discussion, we are of the opinion that such type of activity do not result introduction of undisclosed cash, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income there is one more reason for which there cannot be any undisclosed income for this assessment year even if Revenue's theory of introduction of cash is accepted and that reason is the provisions of s. 158BB(1)(b) according to which the undisclosed income on the basis of entries in the regular books of account, for the period for which the return of income is not due by the date the search has been conducted, can be determined only if it is proved by the Revenue that had there been no search the person would not have disclosed such entries or transaction or income, otherwise as per the provisions of s. 158BB(1)(b) income for the periods for which the time for furnishing the return under s. 139(1) has not expired and computed on the basis of entries relating to such income found recorded before the date of search in the books of account and other documents maintained in the normal course of business has to be deducted for arriving at the undisclosed income for that year. (b) As far as the present case is concerned, since the AO has admitted in the assessment order that the purchases and sales, which as per him are not genuine, have been recorded in the regular books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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