2019 (7) TMI 792 - AT - Income Tax

High Court validates Income Tax Act proceedings, Tribunal deletes additions, emphasizes block assessments on search materials.

The High Court validated the proceedings under sections 158BC and 158BD of the Income Tax Act, leading to a remand for merits consideration. The Tribunal ... Validity of Proceedings u/s 158BD/158BC - unexplained deposits in bank accounts - no search u/s 132(1) but a requisition was made u/s 132A - cheque books seized by the Enforcement directorate in a search and seizure operation u/s 37 of the Foreign Exchange Regulation Act - HELD THAT:- It was highlighted in CIT v. Ravi Kant Jain [2001 (3) TMI 52 - DELHI HIGH COURT] how the procedure of Chapter - XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. The scope and ambit of a block assessment is limited to materials unearthed during search and the assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the AO. After looking to the facts and circumstances of the case, documents and material placed before us, we are of the opinion that there is no material which suggest that the cheque books belong to the M/s Mittal Consul & Co, as appellant has established that such cheque books belong to the clients of M/s Mittal Consul & Co. In such circumstances, action of the revenue to bring to tax the deposits made in such accounts in the hands of the appellant is devoid of any merit. Hence, addition made in respect of the deposits in such bank accounts and sustained by the CIT(A) are deleted. In fact, the revenue had not filed any appeal against the order of CIT(A) deleting the additions. The details of such additions have already been tabulated in foregoing para 13 above. In the result, we hold that the additions sustained by CIT(A) of ₹ 1,06,23,044/- in the case of M/s Mittal Consul & Co. on substantive basis is deleted. - We further hold that the additions sustained on protective basis in the assessments made in the cases of M/s Tushar Stock & Share Brokers Pvt. Ltd. and that of Shri R. K. Mittal are also unsustainable, hence are deleted. Addition in respect of the receipt of the share capital - HELD THAT:- Once the assessee has furnished the adequate evidence/material, the burden of the assessee is discharged in proving identity of shareholders, genuineness of transaction and creditworthiness of shareholder, and hence addition made by the AO and sustained by the CIT(A) without rebutting such material or without bringing any adverse material is unsustainable in law. It is not a case, wherein the shareholders have denied the investment made in the assessee company nor any enquiry has been made from such shareholders to prove that share capital received by the assessee is not genuine. Therefore, addition made in respect of the receipt of the share capital is deleted. In our opinion further as stated above, such an addition was otherwise unsustainable as it did not represent any undisclosed income within the meaning of section 158B(b). Disallowance of 1/10th of the expenses - on account of the purported personal user of Telephone & Cars - personal use in case of the corporate entity - HELD THAT:- The issue is covered by the judgment of the High Court of the Gujarat in the case of Sayali Iron & Engineering Co. Vs. CIT. [2001 (7) TMI 70 - GUJARAT HIGH COURT] wherein it has been held that in the case of a company, which is a corporate entity there cannot be any personal element involved no disallowance of any expenditure can be made for possible personal use. Further as has been observed by us as aforesaid, otherwise too the aforesaid disallowance made was outside the pale of Chapter XIVB of the Act. In such circumstances, aforesaid disallowance made is deleted. - Decided in favour of assessee. Issues Involved:1. Validity of proceedings under sections 158BC and 158BD of the Income Tax Act.2. Legitimacy of additions made based on unexplained deposits in bank accounts.3. Validity of additions based on personal use of telephone and car expenses.4. Legitimacy of additions based on entries in a seized diary.5. Validity of additions based on share application money.Issue-wise Detailed Analysis:1. Validity of Proceedings under Sections 158BC and 158BD:The Tribunal initially held that there was no valid requisition under section 132A of the Act by the Income Tax Department from FERA authorities, rendering the proceedings under section 158BC invalid. The High Court, however, validated the proceedings under sections 158BC and 158BD, leading to a remand for merits consideration. The Tribunal emphasized that block assessments under Chapter XIV-B should be based on materials found during the search, as highlighted in CIT v. Ravi Kant Jain [2001] 250 ITR 141 (Delhi).2. Legitimacy of Additions Based on Unexplained Deposits in Bank Accounts:The Tribunal found that the AO made additions based on assumptions without substantial evidence. The assessee provided evidence that the cheque books belonged to clients of M/s Mittal Consul & Co., a firm of Chartered Accountants. The Tribunal ruled that the AO failed to investigate these claims adequately and that the burden of proof was not met by the Department. Consequently, the additions of Rs. 1,06,23,044/- in the case of M/s Mittal Consul & Co. and the protective additions in the cases of M/s Tushar Stock & Share Brokers Pvt. Ltd. and Shri R.K. Mittal were deleted.3. Validity of Additions Based on Personal Use of Telephone and Car Expenses:The Tribunal deleted the disallowance of Rs. 78,335/- for personal use of telephone and car expenses, noting that such disallowances are not applicable to corporate entities and are outside the scope of Chapter XIV-B. The Tribunal referenced the Gujarat High Court judgment in Sayali Iron & Engineering Co. Vs. CIT, which held that no personal element is involved in corporate entities.4. Legitimacy of Additions Based on Entries in a Seized Diary:The Tribunal deleted the addition of Rs. 13,10,000/- based on a diary found at the residence of Shri A.S. Aneja, as it was not found at the assessee's premises. The Tribunal cited the Supreme Court judgment in CBI vs. V.C. Shukla and Others, which held that evidence not found in possession of a person cannot be used against them unless supported by concrete evidence. The Tribunal also referenced the Common Cause vs. UOI case, which deemed entries in loose papers irrelevant and inadmissible as evidence.5. Validity of Additions Based on Share Application Money:The Tribunal deleted the addition of Rs. 10,80,000/- for share application money, noting that the assessee provided adequate evidence to prove the identity, genuineness, and creditworthiness of the shareholders. The Tribunal ruled that the AO and CIT(A) failed to rebut the evidence provided by the assessee or bring any adverse material. The Tribunal emphasized that such additions are outside the scope of Chapter XIV-B as they do not represent undisclosed income.Conclusion:The Tribunal allowed all three appeals filed by the assessee, deleting the contested additions and disallowances. The order was pronounced in the Open Court on 17th May 2019.