Sec 158BC - Whether when no incriminating document is found during search,

Sec 158BC - Whether when no incriminating document is found during search, even then addition can be made on ground that some transactions shown in books are found to be fictitious - NO, rules HC

KOLKATA, JULY 08, 2011: THE issues before the Bench were - Whether when no incriminating document is found during the search, no addition can be made in respect of the transactions reflected in the regular books in the block assessment even if they are found to be fictitious and can only be considered under regular assessment and whether surcharge is applicable to the Income tax payable even though the search and seizure took place before insertion of the proviso to Section 113. And the verdict partially goes in favour the assessee.

Facts of the case

During the previous year ended March 31, 1993 relevant to the AY 1993-94, the assessee purchased for the purpose of resale HTS wire from `DKH' Stores - payment for purchases was made by account payee cheques partly during the impugned previous year and partly during the subsequent year - the entire quantity of wire was sold during the previous year ended March 31, 1993 to `SCL' giving rise to a profit of Rs.2.89 lacs – the entire sale proceeds were received by the assessee during the impugned previous year by account payee cheque deposited into the bank on 31st March, 1993. The transactions were duly accounted in the regular books of account – income tax return was filed declaring an income of Rs.3.42 lacs which was processed u/s 143(1). Search took place in Dec, 95 and the copy of audited accounts for impugned previous year was seized and the AO asked the assessee to produce the statement of `DKH' which was reflecting as creditor to whom the amount was due to payment. Assessee furnished the copies of bills, challans and details of payment made. AO made direct enquiry through the inspector who could not find the said person at the address mentioned in the documents – assessee explained the sales by submitting the copies of sales bills, sale price received by cheque and transactions were duly recorded in the books. AO held that the assessee did not require HTS wire for the fabrication work and it had inflated its expenses by claiming bogus purchases and treated it as undisclosed income.

Another issue arose was as regards to two payments of Rs.10 lakh each shown in the regular books of account allegedly made to `FC' and `SCC' in August 95 - the search took place as indicated earlier on December 21, 1995 before the close of the Financial Year 1995-96 and the assessee's return for the Assessment Year 1996-97 relevant to the Financial Year 1995-96 was due to be filed much later.

AO asked the assessee as to why the payments should not be treated as fictitious as the payments were shown as against old dues but the two parties were not shown as Sundry Creditors as on March 31, 1995. Assessee explained that the cheques issued in the names of the said parties were "Account Payee" but the endorsement in this behalf was cancelled and cash was drawn against the cheques by the assessee's cashier which was thereafter sent to Budge Budge site for payment of wages to the contractors and labourers where its receipts and subsequently disbursements were duly recorded which was duly verified by the Assessing Officer. AO, however, held that the payments were fictitious and bogus and included the same as undisclosed income for the Financial Year 1995-96. ITAT confirmed the additions made by the AO.

Assessee contended that the transactions being reflected in the return of the assessee and being also supported by the entries made in the books of account produced by the assessee cannot be added even if considered as fictitious, in block assessment. If those were disbelieved and treated to be fictitious, the AO could pass necessary order in the regular assessment, but there was no scope of passing such order in block assessment as the findings recorded by the AO were not based on any material recovered at the time of search and seizure – no incriminating papers were recovered from the office of the assessee in respect of these transactions.

Revenue contended that pursuant to a notice issued for block assessment, the AO had every right to pass the order impugned in block assessment.

After hearing both the parties, the High Court held that,

++ so far the finding of the AO that the assessee did not require HTS wire for the fabrication work and consequently, the assessee had inflated its expenses by claiming bogus purchases, it is found that such finding of the AO is not based on any material obtained during search and seizure but is founded on the documents reflected in the return of the assessee;

++ as regards the finding of the AO in respect of the two payments of Rs. 10 lakh, each shown in the regular books of account, in course of search and seizure, a certificate of license showing that Shri Umesh Narayan Jha as proprietor of `SCC' who was found to be an employee of the propriety concern of D. K. Goyal was recovered. The Photostat certified copy of the cheque which was encashed after deleting the account payee mark in favour of `SCC' and making it a self drawn one has been placed showing that the same was not seized at the time of search and seizure. The payment by the said cheque was not made to `SCC' and it was a self paid bearer cheque encashed by the drawer himself. Thus, merely because a license in the name of `SCC' was recovered from the office of the Assessee, such fact has nothing to do with the said encashment in favour of the drawer. Thus, the addition of Rs. 20 lakh which is shown in the regular books of account as payment made to `FC' and `SCC' as cash payment of Rs. 10 lakh each as fictitious entry in block assessment was patently illegal as it had no connection with the search and seizure;

++ the finding as regards addition is not based on any materials unearthed on search and seizure and thus, not liable to be assessed on block assessment under Chapter XIV B of the Act but should be subject to regular assessment;

++ the proviso to Section 113 of the Act is curative in nature as is held by the Supreme Court, in the case of CIT vs. Suresh N. Gupta (2008-TIOL-02-SC-IT). Therefore, it is held that surcharge is applicable to the Income tax fixed under Section 113 of the Act even though the search and seizure took place before insertion of the proviso to Section 113 of the Act.