2014 (9) TMI 1299 - AT - Income Tax

Interest under s.132B denied where realisation occurred post-assessment; s.244A interest allowed on refund; telescoping set-off directed

M/s Paras Rice Mills Versus The A.C.I.T., Circle Kurukshetra AND M/s Paras Rice Mills Versus The D.C.I.T., Circle Kurukshetra

ITAT rejected the claim for interest under s.132B, holding that no interest was payable where realisation from sale of seized assets occurred after the ... Allowability of interest u/s 132B - search and seizure proceedings were conducted at the premises of the assessee - HELD THAT:- Where certain moneys are retained u/s 132 of the Act or money is realised from the sale proceeds of the assets sold by the department to meet the liabilities of the person searched, then where the said amount realized by the department exceeds the tax liabilities of the assessee, then the interest @ 15% per annum is payable from the date of passing of the order u/s 132(5) of the Act to the date of regular assessment or re-assessment. Admittedly, the regular assessment in the case of the assessee was made on 27.9.1996 and till then no money was realised on the sale of the assets seized by the department. In the absence of the same, we find no merit in the claim of the assessee in relation to the interest due u/s 132B of the Act. As consequent to the regular assessment made under section 158BC of the Act, there was huge demand payable by the assessee as on 27.9.1996. The provisions of section 132B of the Act have limited application and the same are not applicable to the facts of the present case where the amount on sale of seized assets was realised after the date of regular assessment. No doubt, the said amount was adjusted against the demands raised against the assessee and pursuant to the order of the Tribunal, refund was determined, in the hands of the assessee. On such refund determined pursuant to appeal effect given by the AO the assessee is due to receive the interest under the provisions of section 244A of the Act, which admittedly had been allowed to the assessee. We find no merit in the claim of the assessee as to interest receivable u/s 132B of the Act and the same is rejected. The grounds of appeal raised by assessee are dismissed. Telescoping of undisclosed income against un-disclosed expenditure - Plea of the assessee before us is limited that once the un-disclosed income is determined in the hands of the assessee that proves that thee is availability of funds with the assessee, which in turn could be utilized for incurring expenditure outside the books of account, we find merit in the plea of the assessee that there is availability of funds with the assessee, which in turn can be said to have been utilized for meeting un-explained expenditure. We hold that the telescoping of undisclosed income against un-disclosed expenditure merits to be allowed to the assessee and addition of the balance net undisclosed expenditure is to be made in the hands of the assessee. The grounds of appeal raised by assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest under section 132B(4) is payable where proceeds from sale of seized assets were realized and adjusted against tax liabilities after the date of the regular assessment (i.e., whether section 132B applies when realization occurs post-regular assessment). 2. Whether 'telescoping' is permissible by setting off undisclosed income determined in the hands of an assessee against undisclosed expenditure determined separately, thereby reducing the net addition (i.e., whether availability of funds established by determination of undisclosed income justifies allowing the claimed unexplained expenditure). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of interest under section 132B where sale proceeds were realized after the regular assessment Legal framework: Section 132B prescribes the application of assets retained or realized pursuant to a search (section 132). Sub-section (4)(a) mandates simple interest at 15% per annum where aggregate money retained/sale proceeds exceeds liabilities referable to regular assessment; sub-section (4)(b) fixes the period for interest from the date immediately following six months from the order under section 132(5) to the date of regular assessment or reassessment referred to in section 132B(1)(i). Precedent treatment: No specific conflicting precedent was applied by the Tribunal on this point in the judgment; the Court confined itself to statutory text and facts. Interpretation and reasoning: The Court emphasized the temporal operation of section 132B(4)(b): interest runs up to the date of the regular assessment or reassessment mentioned in section 132B(1)(i). Where the regular assessment predates realization of sale proceeds, there is no period between the relevant section 132(5) event and the regular assessment during which the State held surplus proceeds for which section 132B interest is due. Here, the regular assessment was completed on 27.9.1996 while realizations/adjustments from sale of seized perishable stock occurred on 11.12.1998 and 28.12.1998. Because the realizations occurred after the date of the regular assessment, the statutory prerequisite for interest under section 132B did not arise. Ratio vs. Obiter: Ratio - where realization of retained/sold seized assets occurs after the date of regular assessment/reassessment, section 132B(4) does not give rise to interest for the assessee because the interest period under section 132B(4)(b) runs only up to the date of regular assessment or reassessment. Obiter - observations on the interplay between section 244A interest (allowed and distinct) and section 132B (distinct statutory head) serve explanatory purposes but are subsidiary to the ratio. Conclusion: Claim for interest under section 132B rejected. The provision has limited application and does not cover proceeds realized after the date of the regular assessment; the assessee remains entitled to interest, if any, under section 244A for refunds determined on appeal effect, which was allowed in the facts. Issue 2 - Telescoping undisclosed income against undisclosed expenditure Legal framework: The concept of telescoping allows setting off one addition against another (e.g., undisclosed income vs undisclosed expenditure) where both relate to the same source or where the existence of undisclosed income demonstrates availability of funds to meet expenditure. Principles of natural justice require opportunity to be given for such factual/forensic determination before denying telescoping. Precedent treatment: The parties relied on the Supreme Court decision in Anantharam Veerasinghaiah & Co.; the Tribunal earlier remitted the telescoping issue for consideration due to lack of opportunity. The present decision follows established principles permitting telescoping where facts warrant it and where the Tribunal has sufficient findings to justify set-off. Interpretation and reasoning: The Tribunal examined earlier orders and records: undisclosed income of Rs. 5,99,633 and undisclosed expenditure of Rs. 6,36,496 were both determined and adjudicated by the Tribunal. The Court found that determination of undisclosed income demonstrates availability of funds, which plausibly financed the undisclosed expenditure. Absent conflicting evidence and given prior adjudication, the Court held telescoping appropriate: undisclosed income should be set off against undisclosed expenditure leaving a net undisclosed expenditure of Rs. 36,863 to be added. Ratio vs. Obiter: Ratio - where undisclosed income and undisclosed expenditure have both been adjudicated and the existence of undisclosed income establishes availability of funds to meet unexplained expenditure, telescoping by setting one against the other is permissible, subject to opportunity to the assessee and factual consistency. Obiter - references to procedural history (remittance for lack of opportunity) and reliance on general principles in Anantharam are supportive but the operative finding is factual application of telescoping to the numbers at hand. Conclusion: Telescoping allowed; undisclosed income set off against undisclosed expenditure, resulting in a net addition of Rs. 36,863. The assessee's appeal on this issue is allowed. Cross-reference Both issues required close attention to timing and to the factual matrix: Issue 1 turned on temporal operation of a specific statutory interest provision (section 132B) tied to the date of regular assessment; Issue 2 turned on the sufficiency of adjudicated findings to permit netting of two distinct additions. The Court treated each on its statutory and factual footing and reached opposite outcomes: rejection of section 132B interest claim (legal/timing bar) and allowance of telescoping (factual/legal entitlement).