Judgment:
1. The appeal by the assessee is directed against the order dt. 29th Nov., 1996 of the Asstt. CIT, Circle 1(1), Indore, under s. 158BC r/w s. 143(3) of the IT Act, 1961 for the block period 1987-88 to 20th November, 1995.
2. The assessee has taken 17 grounds of appeal. In first three ground Nos. 1 to 3, the assessee has raised preliminary objections. Ground Nos. 4 to 14 challenged the assessment on merits. In ground No. 15, levy of surcharge @ 15 per cent on the demand raised has been challenged. Ground Nos. 16 and 17 are of general nature. The preliminary ground Nos. 1 to 3 read as under : "1. That the learned AO has erred in recording a finding that a search was conducted in the business premises of the assessee-company which is contrary to the facts on records and such aversions of AO are erroneous in law and to guard the assessment framed under s. 158BC, which is not sustainable in law.
2. The learned AO has erred in making an assessment under s. 158BC and his reference to the Valuation Officer and District Valuation Officer is erroneous in law and contrary to the provisions of Chapter XIV-B of the IT Act, 1961.
3. The learned AO has erred in determining the alleged undisclosed income contrary to the provisions of s. 158B(b) arbitrarily." 3. It is submitted by Shri H. C. Sarda, the learned counsel of the assessee that the assessee is a private limited company engaged in the business of construction and sale of residential and commercial buildings. The business premises of the assessee-company is situated at 380, Jawahar Marg, Indore. He submitted that no search had been conducted at the business premises of the assessee-company and as such the AO is wrong in stating in para 1 of the order that search was conducted in the business premises of the company on 21st November, 1995. Our attention was drawn to the Panchanama appearing at p. 1 of the assessee's compilation which clearly shows that warrant was issued in case of Shri Rameshwar R. Maheshwari and Smt. Lalitadevi and the place to be searched was G. F. Surya Apartments 2/5, South Tukoganj, Indore (MP). It was pointed out that Shri Rameshwar R. Maheshwari, is director in Indore Constn. (P) Ltd., the assessee. He, therefore, vehemently asserted that there was no search in the case of the assessee-company. He argued that the word 'person' is defined in sub-s.
31 of s. 2 of the Act. It would be seen therefrom that a company is a distinct and separate entity from that of an individual. Our attention was drawn to the statement of Shri Rameshwar R. Maheshwari recorded on 21st November, 1995 i.e. on the date of search, copy of which appears at pp. 3-5 of the assessee's paper book. In the question No. 2 thereof, the said Shri Maheshwari was asked about the source of his income. In reply thereto, he deposed that his profession is that of tax consultant 'R. R. Maheshwari & Co., 380, Jawahar Marg'. In continuation, he deposed that he is director in Indore Constn. (P) Ltd., Jawahar Marg, whose business is construction work. Shri Sarda submitted that the search had taken place at ground floor Surya Apartments 2/5, South Tukoganj, Indore and not at 380, Jawahar Marg, Indore, which is the address of the assessee-company. Further, our attention was invited to question No. 5. It was asked as to where the books of account relating to business are kept. In reply thereto, it was deposed by Shri Maheshwari that books relating to business are kept in office at 380, Jawahar Marg. Our attention was also invited to question No. 11, wherein Shri Maheshwari was asked whether he could produce the books of account relating to business for enquiry. In reply thereto, Shri Meheshwari stated in the affirmative that "'yes', it can be. Record is in office which I can produce before you here." Shri Sarda submitted that the records of the assessee-company were lying in the office at 380, Jawahar Marg, Indore, which the deponent undertook to produce before search party which was conducting search at the residential premises of the deponent, Shri Rameshwar R. Maheshwari. Shri Sarda submitted that the books of the assessee-company were perforce brought by the search party from its business premises at 380, Jawahar Marg, Indore, to the ground floor, Surya Apartments 2/5, South Tukoganj, Indore, and were seized therefrom i.e. from ground floor Surya Apartments 2/5, South Tukoganj, Indore. It was vehemently argued that since no search warrant was issued in the case of the assessee-company, the AO had no jurisdiction to issue notice to the assessee-company under s. 158BC. Relying on the Tribunal, Madras 'B' Bench decision in Urmila Chandak & Ors. vs. Asstt. CIT (1998) 60 TTJ (Mad) 758, Shri Sarda argued that the block assessment made by the AO in the case of the assessee-company is void for want of jurisdiction on account of irregularity in issuing notice under s. 158BC. Shri Sarda also referred to the Supreme Court decision in CIT vs. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC), wherein in the context of notice under the old s. 34, which is analogous to 147 of the Act, their Lordships held that if the notice issued by the AO is invalid for any reason, the entire proceedings taken by him would become void for want of jurisdiction. Shri Sarda, therefore, submitted that the impugned block assessment is not sustainable in law.
4. Shri Sarda argued that reference to the DVO is erroneous in law and contrary to the provisions of Chapter XIV-B of the Act. Further, the additions have been made on the basis of report of the DVO. There was no positive evidence on records for the additions. The addition made merely on estimate is not permissible under Chapter XIV-B. Assessment under Chapter XIV-B can be made only in respect of the undisclosed income and such undisclosed income must come as a result of search.
Sec. 158BA does not provide a licence to the Revenue for making roving enquiries connected with completed assessment and it is beyond power of the AO to review the assessments completed unless some direct evidence comes to the knowledge of the Department as a result of search which indicates clearly the factum of undisclosed income. The scheme of Chapter XIV-B does not give power to the Revenue to draw the presumption in regard to the undisclosed income. He submitted that in the case of the assessee-company, assessments had already been completed upto the asst. yr. 1995-96. Unless there is clinching evidence and such evidence is co-related with undisclosed income, the AO cannot make addition by drawing the presumption in regard to the undisclosed income. Roving enquiry by making reference to the DVO is not permissible under Chapter XIV-B. In support of the above, reference was made to the following decisions : (1) Agrawal Motors vs. Asstt. CIT (2000) 66 TTJ (Jab) 130 : (1998) 26 ITC 362; 5. Inviting our attention to the charts appearing at pp. 257-258 of the assessee's compilation, Shri Sarda submitted that the additions made by the AO on account of investment towards construction of three apartments, namely, Varshadeep Apartments, Nayate Apartments and Vineet Apartments aggregating Rs. 33,68,888 and on account of undisclosed profit earned on sale of flats, aggregating Rs. 13,44,259 are based on estimate only, whereas the AO ought to have confined himself to the addition on account of undisclosed income revealed from the documents found in search. He, therefore, submitted that the additions are not sustainable.
6. Shri Sarda drew our attention to the affidavit sworn by Shri Rameshwar R. Maheshwari on 18th June, 1998, wherein he deposed that he is director of the company, M/s. Indore Constn. (P) Ltd. He had received the valuation report of the DVO on 18th November, 1996 and a letter dt. 22nd November, 1996 seeking time of 15 days to produce the detailed technical objections to the valuation of the Varshadeep Apartments against report of DVO filed before the AO. However, further time was not allowed and the case was closed for orders on 22nd November, 1996. It is further deposed that detailed technical comments which could not be filed during assessment proceedings appear at pp.
207-249 of the compilation. A request has been made to admit the same as additional evidence for the reason that it goes to the root of the case. In support of the contentions raised in the affidavit, reliance was placed on the following decisions :Union of India & Anr. vs. Paras Laminates (P) Ltd. (1990) 186 ITR 722 (SC).
7. Shri H. C. Sarda completed his arguments on the preliminary grounds on 18th September, 1998. The case was adjourned for further hearing on 25th September, 1998. However, due to paucity of time, the hearing could not take place on 25th September, 1998. The hearing was adjourned to 9th October, 1998. Meanwhile, Shri Brijesh Gupta, senior authorised representative, filed petition on 6th October, 1998, stating therein that during the course of hearing an affidavit has been filed on behalf of Shri Rameshwar R. Maheshwari, director of the assessee-company stating, inter alia, that the books of account of the assessee were called for from 380, Jawahar Marg, Indore to the residence of Shri Rameshwar R. Maheshwari at 2/5, South Tukoganj, Indore and the ADI seized the same from this residence. It is stated in the petition that in order to clarify the position, the senior authorised representative wrote a letter dt. 18th August, 1998 to the AO with a copy to ADI. The letter appears as Annexure 'B' to this petition. In reply thereto, Shri Jayant Kumar, ADI, vide his letter dt. 28th August, 1998, has informed that the claim of the assessee is not substantiated by the Panchnama prepared during the course of search. The letter of the ADI appears as Annexure 'C'. Along with the said petition, an affidavit of Shri Patanjali, the then AO, has also been filed, which appears as Annexure 'A' to the petition. It is requested that this affidavit as also the letters which appear at Annexures 'B' and 'C' be admitted as additional evidence.
8. When the case came up for hearing on 9th October, 1998, the Bench invited the comments of Shri H. C. Sarda on the admittance or otherwise of the additional evidence sought to be introduced by the Revenue.
Referring to para 2 of the affidavit sworn by Shri Patanjali on 29th September, 1998, Shri Sarda submitted that Mr. Patanjali was not a member of the search party, which was deputed to carry out search at the residence of Shri Rameshwar R. Maheshwari at G. F. Surya Apartments 2/5, South Tukoganj, Indore on 21st November, 1995. He further submitted that part 3 of the affidavit contains false statement. Loose papers at page Nos. 6, 97 and 138 of Annexure BS-29 to the Panchanama contained details of petty payments and the AO has not made any addition on the basis of such payments. Shri Sarda further submitted that in the opening paragraph of the assessment order, the AO has stated that a search was conducted in the business premises of the assessee-company on 21st November, 1995, meaning thereby that search was conducted at 380, Jawahar Marg, Indore, whereas in the affidavit sworn on 29th September, 1998 he changed his stand and has deposed that on the basis of loose papers at page Nos. 6, 97 and 138 of Annexure BS-29 he had issued notice under s. 158BC on 6th February, 1998, as these papers relating to M/s. Indore Constn. (P) Ltd., the assessee-company, were found in search at the residence of Shri Rameshwar R. Maheshwari. Referring to the letter of ADI dt. 28th August, 1998, Annexure 'C', Shri Sarda submitted that the ADI has rightly stated that the warrant of authorisation had not been issued in the case of Indore Constn. Co. (P) Ltd. However, in the said letter, the ADI has stated that the claim made on behalf of the assessee that the seized books of account were called for from 380, Jawahar Marg to the residence at 2/5, South Tukoganj is not substantiated. According to Shri Sarda, this statement of ADI is based purely on his memory and cannot be relied upon. He again reiterated that no block assessment can be made in a case in which the search warrant is not issued and in such a case notice under s. 158BC cannot be served upon such an assessee.
He, therefore, again repeated that the impugned block assessment is illegal and deserves to be knocked off.
9. Thereafter, Shri Sarda proceeded to argue grounds No. 4 to 14 relating to the merits of the additions of Rs. 33,68,888 on account of unexplained investment under s. 69 and Rs. 13,44,259 being income as undisclosed profit earned on sale of flats. Inviting our attention to the AO's observations on p. 7 of the assessment order, Shri Sarda submitted that the AO rejected the books of account under s. 145(2) for the reasons, namely, that various receipts and expenses mentioned on pp. 6, 97 and 138 of seized papers contained in Annexure BS-29 of the Panchnama are not fully recorded in the books; on day-to-day quantitative details of consumption of building material has been maintained; the built up area of Varshadeep Apartments disclosed by the assessee is 38,000 sq. ft. whereas as per measurement by the DVO the built up area thereof is 4,837.83 sq. mtrs. (more than 48000 sq. ft) and lastly there is vast difference between the cost of construction debited in the books in respect of the three apartments and that estimated by the DVO. Shri Sarda argued that the provisions of s.
145(2) are inapplicable to the assessment as envisaged in Chapter XIV-B wherein it has been stipulated that addition for undisclosed income can be made on the basis of clinching evidence only found in search.
9.1. Shri Sarda submitted that in the case of the assessee-company, the assessment for the asst. yr. 1989-90 had been completed on 11th April, 1990 on total income of Rs. 70,753 under s. 143(3) of the Act, copy thereof appears at pp. 386-388 of the paper book. He further submitted that the assessee-company had filed the returns of income for the subsequent assessment years as under : ------------------------------------------------------------------- Asst. yr.
Income/Loss returned Date of filing the return ------------------------------------------------------------------- 1990-91 5,570 20-12-90 1991-92 12,585 23-12-91 1992-93 11,190 25-9-92 1993-94 11,480 1-12-93 1994-95 Loss 5,120 18-11-94 1995-96 19,930 30-10-95 ------------------------------------------------------------------- 9.2. He submitted that on p. 5 of the assessment order, the AO has himself admitted that the returns for the asst. yrs. 1990-91 to 1994-95 have been processed under s. 143(1)(a). He pointed out that since the return for the asst. yr. 1995-96 was filed on 30th October, 1995, the AO could have issued notice under s. 143(2) only upto 29th October, 1996. Since no notice under s. 143(2) was issued for the asst. yr.
1995-96, the assessee presumed that the income returned for the asst.
yr. 1995-96 has been accepted under s. 143(1)(a).
9.3. Shri Sarda submitted that while making reference to the DVO, the AO incorporated the desire of the CIT, Bhopal, that the DVO should specifically point out the discrepancy on account of any items of expenses like, cement, wages, bricks, iron, etc., if any. This, according to Shri Sarda, indicated that the AO did not make reference to the DVO after applying his own mind. Rather the reference was made at the instance of the CIT, which is not legally tenable. He pointed out that as a consequence to the said reference dt. 14th October, 1996, in respect of the three apartments, vide letter dt. 24th October, 1996, to the CIT, Bhopal, the assessee objected to the reference being made to the DVO stating therein that the said reference is not in agreement with provisions of Chapter XIV-B. Without prejudice, it was also stated therein that the provisions of Chapter XIV-B are at par with the provisions of s. 147. It was brought to the notice of the CIT that regular assessment of the assessee-company has already been completed and as such the reference is erroneous in law and requires reconsideration. In support, reliance was placed on certain decisions.
A copy of the assessee's letter dt. 24th October, 1996, to the CIT appears at pp. 88-90 of the paper book. There was, however, no response thereto. As a sequel to the reference made by the AO a report of the DVO, Indore in respect of Nayate Apartments was submitted on 21st November, 1996, copy thereof appears at pp. 91-115. The valuation report of the DVO, Indore of same date in respect of Vineet Apartments appears at pp. 116-142 of the paper book. The valuation report of DVO, Bhopal dt. 18th November, 1996, in respect of Varshadeep Apartments appears at pp. 143-164 of the assessee's paper book. Shri Sarda submitted that on receipt of the valuation reports, the assessee addressed a letter dt. 22nd November, 1996, to the AO stating therein that the report of the DVO has been supplied to the assessee on 18th November, 1996, in respect of Varshadeep Apartments and assessee's comments have been asked on 22nd November, 1996. In such a short time, it was not possible to offer detailed comments and, therefore, further time of 15 days was asked. This was not allowed. It was, however, pointed out in the said letter that the DVO appears to have overlooked the facts that the project of the assessee was a commercial-one. The assessee had observed all possible economy. The purchase of raw material had been made from wholesellers. The DVO did not compute the quantity of different types of material used in the construction. He simply applied some formula arbitrarily without disclosing as to how such formula was applicable. It was also stated therein that the provisions of s. 69 were inapplicable. The entire complex has been sold away by the assessee which was stock-in-trade. It was stated that at worst, it may be a case of suppression of purchases and if the purchases are increased on the basis of DVO's report, there will be loss which shall have to be adjusted towards the alleged unexplained investment made in the purchases. By this process, the amount to be added as income of the assessee will be zero. It was also stated therein that there is vast difference of about 30 per cent in the labour payment, etc. as per actual and that considered by the DVO. The actual payment to the labour contractor is by cheques and is verifiable. This has been ignored by the DVO, who has made high-pitched report. In respect of Nayate Apartments, it was submitted that the report of the DVO was supplied to the assessee on 20th November, 1996, and comments were opportunity somehow or the other, the assessee obtained broad comments of the Regd. Valuer, Shri K. K. Doshi. It was pointed out that if reasonable time had been given, detailed valuation with quantity, analysis and the basis of Regd. Valuer's valuation would have been submitted. A request was made to obtain further comments from the DVO. It was also requested that the DVO should be made available for cross-examination. Similar submission was made in respect of Vineet Apartments. The comments of the Regd. Valuer in respect of Nayate Apartments and Vineet Apartments were enclosed with the letter. Copies of such comments are available at pp. 169 to 206 of the paper book.
Shri Sarda submitted that the comments and technical objections of the Regd. Valuer on DVO's report in respect of Varshadeep Apartments were submitted to the AO after assessment, which needs to be taken into consideration. A copy thereof is available at pp. 207-249. In this connection, he referred to the decision in M. N. Sulaiman's case (supra).
9.4. Shri Sarda argued that the assessee has maintained books of account, which are audited. Copies of yearly audit reports for the period from 1st April, 1989, to 31st March, 1996 appear at pp. 6-77 of the assessee's paper book.
Inviting our attention to such audit reports, Shri Sarda submitted that in respect of debits for construction material consumed in P&L a/c of each of the aforesaid years, details had been furnished in note on accounts giving therein the items like iron and steel, cement, bricks, sand, gitti, other material, etc., their quantity and value thereof.
According to Shri Sarda, no defects whatsoever were found in the books of account and, therefore, additions to income could not be made on the basis of DVO's report. However, in the assessee's case, the additions have not been made even on the basis of DVO's report(s) but on AO's own whims. He argued that the AO did not detect any instance of under-sales and, therefore, he was not justified to estimate the gross profit and allow set off against cost of construction. There was lack of judicious application of mind on the part of the AO. He clarified that the difference in built up area in respect of Varshadeep Apartments has been explained by the Regd. Valuer in para 15 on p. 213 of the paper book. The DVO had added full area of balconies into the calculation of plinth area. He had also added parking area as plinth area. Placing reliance on the following decisions, Shri Sarda argued that the impugned additions are not warranted at all : 9.5. In respect of ground No. 15, Shri Sarda submitted that there is no provision to levy surcharge. Referring to s. 113, he submitted that the tax on undisclosed income of the block period is chargeable at the flat rate of 60 per cent.
9.6. With regard to ground No. 16, Shri Sarda highlighted that no adequate opportunity was allowed to the assessee to give counter comments in respect of Varshadeep Apartments against the comments of the DVO. Further, no addition on the basis of the so-called clinching evidence annexed with the assessment order has been made.
10. Shri Brijesh Gupta, the learned Departmental Representative, submitted that as per Panchnama, prepared at the time of search certain books belonging to the assessee were found and seized from the residence of the director, Shri Rameshwar R. Maheshwari, in whose case the search warrant was issued. He submitted that as the books of the account of the company were kept at the residence of the director, the AO has mentioned that such books were seized from the business premises. In support of the above proposition, he referred to the provisions of s. 133A of the Act.
10.1. 1As to the deposition of Shri Rameshwar Maheshwari in his affidavit sworn on 17th August, 1998 (copy at p. 259A of the assessee's paper book) wherein he stated that the books of account were called for by him from 380, Jawahar Marg, Indore and were not found in search at his residence, Shri Gupta submitted that it is a new plea as no such plea was taken before the AO. Shri Gupta further submitted that Shri Maheshwari is carrying on his profession as Tax Consultant from 380, Jawahar Marg. He is also a director in the assessee-company whose business premises is also situated at 380, Jawahar Marg. He pointed out that the word "Vyasaya" in question Nos. 5 and 11 refers to the Vyasaya of Shri Maheshwari as a Tax Consultant. It did not have any reference to the Vyasaya of the company. He pointed out that it is an admitted position that no books of account relating to the profession of Shri Maheshwari as Tax Consultants was found and seized from his residence.
Shri Gupta submitted that had the authorised officer called for the books of the assessee-company, nothing prevented him to have called for the books of the profession of Shri Maheshwari as Tax Consultant as well. This was not done.
10.2. Shri Gupta pointed out that the Revenue had relied on item 29 of Annexure BS to the Panchnama, which happened to be bundle of loose papers. Moreover, certain other loose papers have been treated as incriminating documents by the Revenue, as the transactions reflected therein have not been found recorded in the regular books of account of the company. Shri Gupta argued that if the statement of Shri Maheshwari is correct that he was asked to bring the books of account from 380, Jawahar Marg to his residence, he would have called for regular books of account and certainly not the incriminating documents, which are generally kept at the residence only. He, therefore, submitted that the statement of Shri Maheshwari that the books of the company were called for by him from 380, Jawahar Marg is not correct.
10.3. Shri Gupta submitted that as the affidavit dt. 17th August, 1998, of Shri Rameshwar Maheshwari was not before the AO, clarification from the AO was sought. The reply of the then AO and the ADI is based on the Panchnama and Annexure BS thereto. Nothing has been stated by the ADI out of his personal knowledge. As per Panchnama, the books of account of the company were found/seized from the residence of Shri Rameshwar Maheshwari. Hence, additional evidence filed by the Revenue deserves to be admitted.
10.4. Shri Gupta further submitted that in case it is held that in the absence of issue of search warrant in the case of the assessee-company block assessment cannot be made in its case, then by way of alternate argument it is submitted that s. 158BD provides for handing over of the seized material belonging to a person other than the person with respect to whom search was made to the AO having jurisdiction over such other person and the same procedure shall follow as if that other person had been searched. He submitted that there is no requirement of recording reasons for satisfaction as per the provisions of s. 158BD.Shri Gupta submitted that notice under s. 158BC was issued to the assessee-company as also to the director Shri Rameshwar Maheshwari on the same date i.e. 6th February, 1996. The block assessments were also made in the case of the company as also in the case of Shri Maheshwari on the same date 29th November, 1996. Shri Gupta argued that the seizure of the books of account of the company, issue of notice under s. 158BC and finalisation of assessment in the case of the company go to suggest that the AO was satisfied right from the date of search that the assessee-company had undisclosed income. For the reasons aforesaid, Shri Gupta submitted that the affidavit dt. 17th August, 1998 of Shri R. Maheshwari is nothing but a self-serving instrument. Shri Gupta emphasised that even if search warrant was not issued in the case of the assessee-company, since books of account of the company were found/seized from the residence of the director, Shri Maheshwari in whose case search warrant had been issued, by virtue of the provisions of s. 158BD block assessment can be made in the case of the assessee-company.
11. At this juncture, Shri H. C. Sarda filed two paper books-one containing pages from 413 to 475 and another containing pp. 476 and 477. Vide petition dt. 23rd October, 1998, it is urged that the documents contained in the said paper books may be admitted for consideration, as these had to be filed to meet the arguments of the learned Departmental Representative. It is stated therein that copy of warrant of authorisation (p. 413) does not include the name of the company. Copies of notices (pp. 414 to 429) issued to 16 parties would go to reveal that in issuing them there was lack of judicious application of mind by the AO as in every notice it is recorded that search was (pp. 430 to 432), Shri Ashok Kumar Daga had also stated that books of Indore Constn. (P) Ltd. i.e. the assessee-company are at its office at 380, Jawahar Marg, Indore on the same date i.e. 21st November, 1995. Seized register BS-27 (pp. 433 to 451) was maintained for details of professional fees, inventory of cash found of M/s.
Indore Constn. (P) Ltd. from 380, Jawahar Marg, Indore (p. 452) proves that search party had gone to 380, Jawahar Marg, Indore without search warrant or authorisation. Inventory of books of account found in the office premises of Rameshwar R. Maheshwari & Co., 380, Jawahar Marg, Indore in survey on 21st November, 1995 (copy at pp. 453-455) also includes paper of M/s. Indore Constn. (P) Ltd. Copy of assessment order in the case of Harbans Kaur Bhatia at pp. 459 to 475 along with notice to her under s. 158BD (copy at p. 456), income-tax computation form (p.
458) go to prove that the assessment in the case of the person other than the person in whose case search warrant is issued is made under s.
143(3) r/w s. 158BD and Expln. 2 thereunder as in such a case neither notice can be issued under s. 158BC nor assessment can be made under s.
158BC, as time-limit for passing under ss. 158BC and 158BD are provided separately. It is, therefore, necessary that in a case of a person other than the person in whose case the search warrant has been issued, separate notice under s. 158BD and separate order under that section has to be made. Notice under s. 158BD in the case of other persons (pp.
476 and 477) proves that in the case of other persons notice under s.
158BC cannot be issued.
12. On consideration of the above submissions, these documents were admitted and opportunity was allowed to the learned Departmental Representative to state his objections, if any, and to offer his comments thereon.
13. Shri Gupta, the learned Departmental Representative, submitted that the papers appearing at pp. 433-451 were found and seized from the residence of Shri Maheshwari as no search had taken place at 380, Jawahar Marg, Indore. Regarding the documents at pp. 453 to 455, Shri Gupta submitted that survey was conducted on 21st November, 1995 in the premises of R. R. Maheshwari & Co. at 380, Jawahar Marg. Certain books of R. R. Maheshwari & Co. were found and identified by the survey party. These books of account are not those which were found and seized vide Annexure BS-29 prepared at the residence of Shri Maheshwari.
Regarding notices appearing at pp. 456 and 457, Shri Gupta submitted that s. 158BD does not provide for issue of notice. If the AO had issued notice under s. 158BD in these cases, it was only a procedural irregularity, as notice can be issued only under s. 158BC. Regarding the assessment order appearing at pp. 459-475 of the assessee's paper book, Shri Gupta submitted that the AO has committed mistake. He has mentioned wrong section in the order. He submitted that the provision of s. 158BD is analogous to provisions contained in sub-s. (7) of s.
132. He submitted that wherever the legislature required recording of reasons, it has specifically provided so, as in sub-s. (8A) of s. 132 inserted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989.
13.1. Shri Gupta then proceeded to state the background in which the AO referred the properties for estimating the cost of construction to the Valuation Cell. He invited our attention to the Annexures to the assessment. He submitted that p. 6 of Annexure BS-29 marked as A-1 is admittedly connected with the business of the assessee-company. He submitted that the expenditure of Rs. 4,500 on account of tape connection has not been accounted for even in the voucher appearing at Annexure 2 which was prepared by the assessee after one month of the search on 21st December, 1995. He pointed out that nnexure B-97 is a seized paper relating to the financial year 1995-96. Admittedly, this paper also belonged to the assessee-company. Onus lay on the assessee to explain the entries appearing therein. The AO has recorded the finding that the receipts and payments recorded on this loose sheet has not been accounted for in the regular books of the assessee-company.
Annexure C-138 is the seized paper showing payments through cash as also cheque. Certain payments reflected here have not been recorded in the regular books. Shri Gupta laid emphasis on the point that the AO has first recorded reasons on the basis of defects in books of account and then referred these properties to Valuation Cell. Inviting our attention to the AO's observations on p. 4 of the assessment order, he submitted that the AO had completed the assessments for the asst. yrs.
1990-91 to 1994-95 under s. 143(1) when the apartments were still under construction. If that be so, the AO during the course of proceedings for block assessment could enquire into the investment and for that purpose he could make reference to the Valuation Cell. Relying on Daulatram & Anr. vs. ITO (1990) 181 ITR 119 (AP), he submitted that the property can be referred to the Valuation Cell for the purpose of estimating the cost of construction even under s. 55A, though while making the references in the instant case the AO had done so under s.
131(1)(d). According to the learned Departmental Representative, the AO rejected the books for the reasons given by him on p. 7 of the assessment order.
13.2. Shri Gupta heavily relied on the observations of the AO in the assessment order on pp. 8 & 9 thereof. Referring to s. 158BH, Shri Gupta submitted that there is no bar to the application of the provisions of s. 145(2) for the purpose of making block assessment.
13.3. Shri Gupta argued that s. 158BG provides for approval of block assessment by the CIT. If that be so, there was nothing wrong if the block assessment was finalised after approval by the CIT, who could certainly give necessary directions in the matter. According to Shri Gupta, the assessments in the case of the assessee for the asst. yrs.
1990-91 onwards had not been completed under s. 143(3). These had been completed under s. 143(1); that means no regular assessment as defined in s. 2(40) of the Act was made for the asst. yrs. 1990-91 to 1994-95.
He argued that reference to the Valuation Cell is valid on two counts, namely, that incriminating documents were found in search showing undisclosed receipts and expenses in respect of construction activities and the assessments during which construction continued were made under s. 143(1), which cannot be said to be a regular assessment as defined in s. 2(40) of the Act.
13.4. Shri Gupta argued that it is not correct to say that the AO has not followed the report of the DVO. He explained that the method of working given in Annexure G to the assessment is correct.
13.5. About the reports of the DVO, Shri Gupta submitted that the DVO has applied actual cost realisation method in respect of Vineet Apartments as also Nayate Apartments but he applied average rate per unit area method in respect of Varshadeep Apartments for the reasons given by the DVO in the reports themselves. He pointed out that in the absence of structural drawings and details about foundations, the DVO could not apply actual cost realisation method in respect of Varshadeep Apartments. He concluded his arguments by stating that since the reports of the DVO formed part of the assessment order, the AO was fully justified in rejecting the books and making the impugned additions.
13.6. Regarding ground No. 15, Shri Gupta submitted that Finance (No.2) Act, 1996 in First Schedule to s. 2 Part I provided that the amount of income-tax computed in accordance with the provisions of s. 113 shall in case of every domestic company having total income exceeding Rs. 75,000 be increased by a surcharge at the rate of 15 per cent of such income.
14. In his counter-arguments, Shri Sarda, the learned counsel for the assessee, submitted that the inventory of cash appearing at p. 452, goes to reveal that this inventory was not prepared in survey but it was prepared in search of Indore Constn. Co. (P) Ltd., the assessee at 380, Jawahar Marg, Indore when even search warrant had not been issued in the case of the company. This is also proved from the notice under s. 158BC dt. 6th February, 1996 (copy at page 416 of the paper book) wherein it is mentioned that search was conducted in the month of November, 1995. In the assessment order in the opening paragraph also, the AO says that the search was conducted in the business premises of the assessee company on 21st November, 1995. Wrong averment has, thus, been made in the affidavit filed by the then AO sworn on 29th September, 1998.
14.1. Relying on T. S. Sujatha vs. Union of India, Shri Sarda argued that for invoking the provisions under s. 158BD, the satisfaction of the AO is essential and the notice has to be issued under this section which has not been done in the case of the assessee-company, even if alternate argument of the learned Departmental Representative is accepted. Relying on the decision of Gujarat High Court in CIT vs.
Deepak Family Trust No. 1 & Anr. (1995) 211 ITR 575 (Guj) and CIT vs.
Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom), Shri Sarda submitted that the decision (supra) of the Kerala High Court being the solitary decision on the point, the law declared by the Kerala High Court is binding on the Tribunal in Madhya Pradesh. He submitted that, in fact, in the cases of other assessees, the Department has been issuing notices under s. 158BD whenever the provisions of s. 158BD were sought to be applied but in the case of the assessee-company notice under s.
158BC was issued as if the search had taken place in its case, though admittedly no warrant of authorisation was issued in the case of the assessee-company. Shri Sarda refuted the argument of the learned Departmental Representative that the provision of s. 132(7) is analogous to s. 158BD and is applicable to block assessment. He again reiterated the same arguments which were originally advanced by him.
However, in view of the learned Departmental Representative's submissions, ground No. 15 was not pressed.
15. We have carefully gone through the block assessment order and have given our thoughtful consideration to the submissions of the parties.
In para 71 of the Budget Speech of Minister of Finance for 1995-96 reported in 212 ITR (St) 87, the Minister stated, thus : "Hon'ble Members are aware that the searches conducted by the IT Department are an important means of unearthing black money.
However, undisclosed incomes have to be related to the different years in which the income was earned and as such assessments are unduly delayed. In order to make the procedure more effective, I am proposing a new scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent. An appeal against the order can be filed directly before the Tribunal." 16. In the explanatory note (Para 39.2) on Finance Act, 1995, the CBDT in Circular No. 717 dt. 14th August, 1995 [(1995) 215 ITR (St) 70, 95], it is stated, thus : "In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced for the assessment of undisclosed income determined as a result of search under s. 132 or requisition under s. 132A." It is, thus, obvious that the search conducted under s. 132 or requisition made under s. 132A is the sine qua non of assessment under the new scheme envisaged under Chapter XIV-B. This is also clear from sub-s. (1) of s. 158BA, which provides that the AO can proceed to assess the undisclosed income only if a search is initiated in the case of any person under s. 132 or books, etc. are requisitioned under s.
132A.17. The assessee before us is Indore Constn. Co. (P) Ltd. situated at 380, Jawahar Marg, Indore, which is engaged in construction and sale of apartments. The AO has made assessment in this case under Chapter XIV-B. This assessment has been challenged on the preliminary ground that search was not conducted in the business premises of the company as mentioned by the AO in the opening paragraph of the order. Such observation of the AO is only with a view to safeguard the assessment made under s. 158BC. The facts which emerged from the documents brought on record are that no warrant of authorisation was issued in the case of the company. Warrant of authorisation was issued in the case of Shri Rameshwar R. Maheshwari and Smt. Lalitadevi to search the ground floor of Surya Apartments at 2/5, South Tukoganj, Indore. The search warrant was executed on 21st November, 1995. On the same date i.e. 21st November, 1995, an authorisation under s. 133A of the Act was issued by the ADI to enter the premises at 380, Jawahar Marg, Indore occupied by Indore Constn. Co. (P) Ltd. In pursuance thereto, survey at the above business premises was conducted on 21st November, 1995. It appears that no inventory of books of account, etc. found in the office premises of Indore Constn. Co. (P) Ltd. was prepared as a result of survey under s.
133A, as no such material has been brought on record by the parties.
What has been placed before us is inventory of cash found but not seized from the business premises of Indore Constn. Co. (P) Ltd. and inventory of books of account found in the office premises of R. R.Maheshwari & Co., 380, Jawahar Marg, Indore, during survey on 21st November, 1995. At this stage, it may be stated that R. R. Maheshwari & Co. is the name and title under which Shri R. R. Maheshwari carries on his profession as Tax Consultant at 380, Jawahar Marg, Indore (which houses number of offices, etc. premises of different entities). The inventory of cash found at business premises of Indore Constn. Co. (P) Ltd. is found to contain signature of two Panchas, who had witnessed the search conducted at the residence of Shri R. R. Maheshwari. It also had the signature of an officer below which seal of authorised officer under s. 132(1) has been affixed. On being asked by the Bench about the above abnormalities, it has been explained by the Revenue that no search was conducted at the office premises of Indore Constn. Co. (P) Ltd. and the seal of authorised officer under s. 132(1) has been used inadvertently. What has been explained to us, namely, that no search was carried out at the business premises of Indore Constn. Co. (P) Ltd. is contrary to what has been stated by the AO in the opening paragraph of the assessment order, namely, that a search was conducted in the business premises of the assessee-company on 21st November, 1995 as a result of which various incriminating account books and documents were seized. As stated earlier, account books and documents pertaining to Indore Constn. Co. (P) Ltd. were not even inventorised as a result of survey at its business premises on 21st November, 1995, as no such inventory has been brought on record. If as stated earlier and as admitted by the Revenue before us that no search was conducted at the business premises of the assessee-company on 21st November, 1995, the question of seizure of incriminating account books and documents from the business premises of the assessee-company on 21st November, 1995 does not arise at all.
18. Let us pause for a moment and analyse the reason why the AO mentioned wrong facts in the opening paragraph of the assessment order.
Before that, we have to bear in mind that the AO was not in the picture in the entire episode of search under s. 132(1) in the case of the company's director, R. B. Maheshwari and his wife and survey under s.
133A at the business premises of the company at 380, Jawahar Marg, Indore. Nonetheless the AO exercised jurisdiction over Shri R. B.Maheshwari, director in the company as also over Indore Constn. (P) Ltd. On perusal of the form used for preparing inventory of cash found/seized, it is noticed that similar form is used in search under s. 132(1) as also in survey under s. 133A. This form was used for preparing the inventory of cash of Rs. 5,000 found but not seized during survey under s. 133A at the business premises of the company at 380, Jawahar Marg, Indore. What appears to have created confusion in the mind of the AO is that this inventory bears the signatures of the same two Panchas, who had witnessed the search conducted at the residence of the director, Shri R. B. Maheshwari on 21st November, 1995, as also the signature of the authorised officer along with his seal, who had carried out the search operations at the residence of the director, Shri R. B. Maheshwari. How this happened is still shrouded in mystery. One thing is clear that because of the signatures of the same Panchas on the inventory of cash found at the business premises of the company at 380, Jawahar Marg, Indore that the AO had entertained erroneous impression that a search was conducted in the business premises of the assessee-company and accordingly proceeded to frame the assessment in the case of the company under s. 158BC of the Act. This he could not do in the absence of warrant of authorisation in the case of the company to search its business premises and the categorical admittance now by the Revenue that no search had, in fact, been conducted at the business premises of the company on 21st November, 1995. Framing of assessment by issuing notice under s. 158BC without search warrant and without conduct of search in the case of the company is void for want of jurisdiction. In taking this view, we are supported by the decision of Madras Bench of the Tribunal in Urmila Chandak & Ors. case (supra).
19. The alternate argument advanced by Shri Gupta, the learned Departmental Representative, loses its significance, as the AO never intended to invoke the provisions of s. 158BD, which is obvious from the fact that right from the beginning, he proceeded against the assessee-company as if search had been conducted in its case and it was in this background that he issued notice to the company under s. 158BC clearly mentioning in the notice itself that the search had been conducted in the month of November, 1995. Material has been brought on record that where the AO proceeds against a person other than the person in whose case search warrant had not been issued, the assessment is framed in the case of such other person under s. 143(3) r/w s.
158BD. If the AO intended to proceed against the assessee-company in whose case search warrant was not issued nor search had taken place at its business premises, then he should have framed the assessment under s. 143(3) r/w s. 158BD. This has not been done. As stated earlier, the notice was issued to the company under s. 158BC and the assessment has also been framed under s. 143(3) r/w 158BC. The averment made in affidavit sworn on 29th September, 1998 by the AO is clearly an after thought.
20. The assessment had also been assailed on the second preliminary ground that reference to Valuation Cell is not in accordance with the provisions of Chapter XIV-B of the Act. Let us notice the relevant facts. The assessee had constructed three apartments, namely, Varshadeep Apartments from asst. yrs. 1990-91 to 1994-95, Nayate Apartments from asst. yrs. 1992-93 to 1995-96 and Vineet Apartments from asst. yr. 1994-95 which was still under construction on the date of search. It is, therefore, obvious that the construction of the Varshadeep Apartments and Nayate Apartments had already been completed in asst. yr. 1994-95 and asst. yr. 1995-96, respectively. Maximum construction works of Vineet Apartments is reported to have been completed upto the date of search i.e . 20th November, 1995. On the basis of books of account maintained by the assessee and duly audited, the assessee had filed its returns of income for the asst. yrs. 1990-91 to 1995-96. As per the books of account, the yearwise position of construction of flats, cost thereof and receipts are as under : Varshadeep Apartments --------------------------------------------------------------------- Asst. yr.
Cost of constn : Receipts --------------------------------------------------------------------- 1990-91 5,77,120 6,34,800 1991-92 16,66,040 17,50,647 1992-93 20,06,806 22,70,000 1993-94 12,60,271 14,80,0001994-95 1,50,128 1,14,252 1995-96 Nil 1,85,000 ------------ ------------- 56,60,365 64,34,699--------------------------------------------------------------------- Nayate Apartments --------------------------------------------------------------------- Asst. yr.
Cost of constn : Receipts --------------------------------------------------------------------- 1992-93 4,95,076 2,43,920 1993-94 9,51,052 13,92,500 1994-95 7,91,003 8,94,437 1995-96 4,88,266 8,02,453 ----------- ------------ 27,25,397 33,33,310 ----------- --------------------------------------------------------------------------------- Vineet Apartments --------------------------------------------------------------------- Asst. yr.
Cost of constn : Receipts --------------------------------------------------------------------- 1994-95 2,34,392 81,000 1995-96 9,15,769 3,61,000 1996-97 12,71,042 15,03,300 ------------- ------------ 24,21,203 19,45,300 ------------- ------------ --------------------------------------------------------------------- 21. The AO processed the returns for the asst. yrs. 1990-91 to 1994-95 under s. 143(1)(a). The AO is silent as to what happened to the return filed on 30th October, 1995 for the asst. yr. 1995-96. It has been brought to our notice by the learned representative of the assessee that notice under s. 143(2) which could have been issued upto 29th October, 1996 had not been issued till then and, therefore, presumably the income returned for the asst. yr. 1995-96 had also been accepted under s. 143(1)(a). On the basis of alleged incriminating documents found at the residence of the company, the AO concluded that the assessee has not recorded all the receipts and expenses in its regular books of account. Such receipts and expenses mentioned in the top portion of BS-29, page No. 6 to the Panchnama (Annexure A-1) related to receipts and payments of Rs. 6,080 and Rs. 5,820, respectively. Another incriminating material is BS-29 p. 97 to the Panchnama, on which certain notings are recorded. This, according to the AO, represented receipts in lakhs which had not been accounted for. On the same paper, certain payments to persons in M.P.E.B. have also not been recorded in the regular books. Lastly, as per BS-29 (p. 138) to the Panchnama cash payments of Rs. 1,837, Rs. 370 and Rs. 405 have not been recorded in the regular books. For the reason aforesaid, he referred the three apartments to the Valuation Cell for ascertaining the cost of construction. The question for our consideration is whether on these facts, the AO was correct in law in referring these properties to the Valuation Cell for ascertaining the cost of construction in the context of assessment under Chapter XIV-B.22. On consideration of the rival submissions of the parties, we are of the view that in the facts and circumstances of the assessee's case, reference to the Valuation Cell is not tenable. The assessee has maintained books of account in the course of carrying on its business of construction and sale of residential and commercial buildings. Such books of account were audited and the returns filed by the assessee for the asst. yrs. 1990-91 to 1995-96 accompanied audit report and audited P&L a/c, balance sheet, etc. Perusal of the audit report revealed that in notes on accounts, quantitative details of consumption of different items of building material have been given along with value thereof in respect of the years in which construction took place. The returns filed by the assessee for the asst. yrs. 1990-91 to 1995-96 have been accepted under s. 143(1)(a) and in none of the years any notice under s. 143(2) had been issued for making regular assessment under s.
143(3).
23. The assessee has given explanation about the entries appearing in the seized loose papers. If the explanation tendered was found to be not satisfactory, the AO could make matching addition based on the entries reflected in the seized material. Sec. 158BB(1) contemplates that undisclosed income of the block period shall be the aggregate of total income of the previous years falling within the block period. It is to be computed in accordance with the provisions of Chapter IV. Such computation should be 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. It is important to note that the words used are 'such other materials'. The legislature has not used the words 'any other materials'. The word 'such' has been defined in Black's Law Dictionary, Sixth Edn. as under : "Such. of that kind, having particular quality or character specified. Identical with, being the same as what has been mentioned. Alike, similar, of the like kind. 'Such' represents the object as already particularised in terms which are not mentioned, and is a descriptive and relative word, referring to the last antecedent." Again the words used in the section are; 'as are available'. The expression 'available' has been defined to mean in Black's Law Dictionary, Sixth Edn. as 'present or ready for immediate use'. What materials or information were available, which were present or ready for immediate use by the AO These were loose papers described above found in search at the residence of the director of the company, Shri R. B. Maheshwari. Did the AO compute the undisclosed income of the block period on the basis or the said loose papers The reply is in the negative.
24. The assessee-company is a builder. The assessee had shown the cost of construction of the three apartments for the period from asst. yrs.
1990-91 to 1996-97 aggregating Rs. 1,08,06,973, receipts from the sale of flats aggregating Rs. 1,17,13,309 and gross profit at Rs. 15,64,336 as per books. When the AO examines the accounts of an assessee, he has to consider whether the assessee has regularly employed the method of accounting; whether the accounts are correctly maintained; and whether the accounts maintained are complete in the sense that there is no significant omission therein. If the finding of the AO on any of the aforesaid is in the negative, s. 145(2) applies and the AO may make a best judgment assessment in the manner provided in s. 144. It is significant to note that even in such a situation, the books need not be discarded altogether. The assessment may be adjusted to cure the extent of the infirmity found, so as to make it a 'best judgment' assessment. In making the impugned assessment and that too under Chapter XIV-B, the AO did not limit himself to cure the infirmity found as a result of search. He went far beyond which is not at all envisaged in Chapter XIV-B.25. For the reasons aforesaid, we hold that the AO was not justified in referring the impugned properties to the Valuation Cell.
26. The third preliminary ground on which the assessment is challenged is that the undisclosed income has been determined contrary to the provisions of s. 158B(b). Undisclosed income has been defined in s.
158B(b), thus : "'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, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act." 27. From a bare reading of the above definition of undisclosed income, it is obvious that what the assessee had already disclosed or would have disclosed is not to be treated as undisclosed income. In L.R.Gupta vs. Union of India (1992) 194 ITR 32 (Del), their Lordships of Delhi High Court have held that the income which is hidden from the Department is undisclosed income. From the provisions of s. 158BA, it would be abundantly clear that under Chapter XIV-B, assessment could be made only in respect of the undisclosed income. Such undisclosed income must come as a result of search. In Sunder Agencies' case (supra), Bombay Bench of the Tribunal has observed as under : "Sec. 158BA does not provide a licence to the Revenue for making roving enquiries connected with the completed assessment. It is beyond the power of the AO to review the assessments completed unless some direct evidence comes to the knowledge of the Department as a result of search which indicates clearly the factum of undisclosed income. Without such evidence or material, the AO is not empowered to draw any presumption as to the existence of undisclosed income . . . We find that the scheme of Chapter XIV-B does not give power to the Revenue to draw the presumption in regard to the undisclosed income. The AO could proceed on the basis of material detected at the time of search and the evidence gathered." 28. Perusal of the assessment order would go to reveal that the AO did not do so. Instead of determining undisclosed income on the basis of the material seized from the residence of the Company's Director, he embarked upon a roving enquiry in respect of completed assessments by referring the three apartments to the Valuation Cell 'to ascertain the correct investment made by the assessee' and on receipt of reports of the Valuation Cell proceeded to compute income under s. 69 as unexplained investment, adding thereto further undisclosed profit earned on sale of flats. To our mind, what the AO did is beyond the scope of s. 158BB. No addition can be made in any of the assessment year of the block period regarding which no material or information is available with the AO. In a case where any material or information is found during search, the AO has to co-relate such material/information with regard to the regular assessment which have already been completed. At the cost of repetition we may state that Chapter XIV-B does not authorise the AO to review the assessment completed unless and until there is any direct or clinching evidence to indicate that the assessee has withheld or had not disclosed any income. No additions can be made merely on the basis of presumption or hypothesis. This is what the AO has actually done.
29. The assessee, thus, succeeds in its preliminary grounds. We, therefore, do not propose to deal with the ground Nos. 4 to 14 assailing the impugned additions made on the basis of the reports of the Valuation Cell and certain presumptions made by the AO which are beyond the scope of Chapter XIV-B.