TaxTMI 
TaxTMI 
2017 (12) TMI 920
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....ssued and the assessee-company filed return of income declaring NIL undisclosed income. The A.O. issued questionnaire and called for explanation of the assessee-company. The search and subsequent enquiries conducted following the search operation reveal that assessee-company being an Investment Company and closely linked with the Mody Group of companies, has been facilitating the ploughing back of undisclosed income of the flagship company of Mody Group namely M/s. Hindustan Development Corporation ("HDC"), in the garb of a speculation profit through an arranged speculative share transactions routed through a reliable stock broker of the flagship company. Generally, this speculation profit is set-off against the interest outgo, mainly to the flagship company. Subsequently, if there remains a huge profit, it has been noticed that the company, through the share-brokers of the Calcutta arrange some speculation loss and offset a considerable amount of profit against this loss. The perusal of the documents filed by assessee-company at Annexure-XVIII shows that in F.Y. 1992-93 (A.Y. 1993-94), the assessee-company earned profit of Rs. 2,68,92,000 in transaction through ANZ Grindlays Bank,....
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....s from the O/o. HDC etc. The Post search investigations and survey at the O/o. M/s. Rahul and Company, share broker have revealed certain interesting features which are discussed by the A.O. as under : A - "The seized material marked pages 53, 54, 55 and 73 to 76 of "HDC-14" from Hindustan Development Corporation palpably indicate arrangement of profits in various group investment company and Group individual members in collusion with share brokers. The statement of Mr. Shishir Kejriwal of Kejriwal and Company and Sh. Dinesh Kumar Singhania of M/s. Dinesh Kumar Singhania and Company were recorded u/s.131(1A) on 20.1.97 and 26.2.97 respectively. They have admitted having arranged speculation profits as per the requirements communicated by the Group Executives Sh. A. M. Lodha and receiving back of cash against cheques issued by them. Mr. A. M. Lodha, in his statement recorded u/s. 132(4) on 22.11.96 had admitted that, the several investment company of the group, one of which is Promain Ltd., required a lot of book entries from the market for adjustments and the term "delivery profits", "Trading profits" referred to in the seized document marked 53, 54, 55, & 73-76 of "HDC-14....
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.... Company, Canfina, Bangalore, Standard Chartered Bank, Bombay and ANZ Grindlays Bank, Calcutta and Bombay, ABFSL, Bombay and Canara Bank, Calcutta revealed a palpable contradiction in the version put forth before the department by the group concern. The contradictions revealed consequent to investigation made by the Department is as follows : (i) Andhra Bank Financial Service Limited., outrightly denied having transacted in relevant, cantriples. No delivery was received by them and no payment was made against, the delivery. The payment of Rs.? 5 crore received by ANZ Grindlays Bank, Calcutta from their Head Office Bombay was traced to the account, of Sh. Hiten P. Dalai, Share Broker, Bombay, heavily involved in the securities scam during the relevant period. (ii) No evidence could be produced by Rahul and company regarding fiscal delivery of the relevant. cantriples certificate from Standard Chartered Bank, Bombay and eventual sale and delivery to ABFSL. (iii) The regular books of account of Rahul and company do not record the sale transaction of the relevant, cantriples to ABFSL. (iv) The payment of Rs. 15 crore made by Canfina to Standard Chart....
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....rranged depending upon requirement of the investment company. This is done apparently to introduce the undisclosed income of the flagship company in the garb of speculation profits, sufficient to adjust the debit of interest payment. Moreover, if the profit still remains, they are offset against the arranged speculation loss. The post search enquiries have also revealed that while ploughing back of undisclosed funds used to be made available to the group investment company in the garb of a speculation profits, it has also came to the notice that corresponding losses also used to be arranged against the accommodated profits. In A.Y. 1993-94, the assessee-company has shown huge speculation profit allegedly made through ANZ Grindlays Bank duly routed through M/s. Rahul and Company, Calcutta. It has also shown huge loss of Rs. 1.11 crores in the transaction of share and securities made through M/s. Rahul and Company, Calcutta. It may be noted here that in A.Y. 1994- 95, the company has again booked profit of Rs. 2,00,34,850 and loss of Rs. 83,18,750, all deals made through M/s. Rahul and Company, Calcutta. In order to verify the genuineness of the transactions which resulted in specula....
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....isclosed profits. (ii) The undisclosed profits of the flagship company is ploughed back in several investment companies of the group through the sophisticated device of a speculation profit. (iii) The flagship company advances money to the assesses company which is utilised for sales and purchases of shares and on which the assessee company incurs liability to pay interest to the flagship company. (iv) The speculation profit is, set-off against the interest outgo, mostly to the flagship company. (v) When it is realised that there remains huge surplus profit even after setting off the interest outgo which would result in high incidence of taxation, speculative losses are arranged through the reliable, broker who earns 0.5-1% commission for organising such deals. (vi) In this process the undisclosed income of the flagship company is first routed to the assessee company and then passed back to the flagship company in the legal garb of Interest on loans while at the same time ensuring that unnecessary high incidence of taxation is not suffered by the assessee company. 19. Therefore, if viewed and examined the above mentioned facts i....
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....ck assessment order under section 158BC of the I.T. Act dated 28.11.1997. 2.7. The assessee-company challenged the block assessment order before ITAT in IT (SS) A.No.325 of 1997 which was earlier decided by ITAT, Delhi-B Bench, vide order dated 23rd June, 2006. The assessee-company insisted for production of the search warrant by submitting that there was no authorization of search against the assessee-company and challenged the validity of the search. The Tribunal noted that despite directions by the Bench, the department has not been able to produce any authorization for conducting search specially in the name of the assessee-company. Therefore, adverse inference was drawn and it was held that there were no warrant of authorisation in the name of the assessee-company, therefore, block assessment was held to be invalid and quashed. The assessee-company also challenged the block assessment order on the ground that no undisclosed income has been earned by the assessee-company and that computation of undisclosed income has not been made on the basis of material found during the course of search. The Tribunal noted that the copies of the seized documents are filed at pages 215 to 2....
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....osed income, as admittedly no incriminating material of any nature has been found during the course of search so as to make addition under Chapter-XIVB of the I.T. Act, 1961. He has submitted that it is settled Law that the purport of block assessment under Chapter-XIVB of the I.T. Act, is not intended to be the substitute for regular assessment. Its scope and ambit is limited to the incriminating materials found during the course of search. It is, in addition to the regular assessment already done or to be done. The assessment for block period can only be done on the basis of the incriminating evidence found as a result of search or requisition of the books of account or documents and as such material or information as are available with the A.O. The evidence found as a result of search is clearly relatable in Section 132 and 132A of the I.T. Act. He has relied upon the decision of the Delhi High Court in the case of CIT vs. Ravi Kant Jain 250 ITR 141 and also relied upon the following decisions in support of the above legal proposition. (i) CIT vs. Pooja Forge Ltd., 389 ITR 382 (ii) CIT vs. Balaji Wire (P.) Ltd., 304 ITR 393 (Del.) (iii) CIT vs. Jupiter....
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....d in search with regard to the speculation loss suffered by assessee-company and no query was raised by the A.O. The A.O. misunderstood the provisions of block assessment because the addition could be made only on the basis of the evidence found as a result of search or requisition of the books of account or other documents and such material or information as are available to the A.O. relatable to search material. He has submitted that it is well settled Law that material gathered as a result of post- search proceedings could not be gone into so as to make any addition under block assessment and relied upon decision of the Tribunal in the case of Sunder Agencies vs. DCIT 63 ITD 245. He has further submitted that the statements recorded by ADIT which are dated 21st January, 1997, under sections 131 (1A) and 133 of the Act, as well as statements recorded on 26th January, 1997 are as a result of again post-search enquiry. Hence, could not even be looked into as admittedly no incriminating material/ evidence was found from the premises of the assessee-company during search. He has submitted that statements of the two persons namely ....
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....of the A.O. and referred to the assessment order in detail to highlight the modus operandi of the assessee-company and its flagship company as to how the profits have been syphoned in the garb of speculation loss. The Ld. D.R. submitted that the tax provisions have to be strictly construed. There are material found during the course of search to justify the additions made by the A.O. The Ld. D.R. submitted that undisclosed income of HDC have been syphoned through the assessee-company by obtaining bogus speculation loss. Both the losses are routed through M/s. Rahul and Company, Broker, Calcutta. The total profits are set-off against the interest income. The Ld. D.R. referred to copies of the seized documents which are filed at pages 215 to 222 of the Paper Book. The Ld. D.R. submitted that assessee-company is conduit to book losses which are supported by statements of Shri Shishir Kejriwal, Shri Dinesh Kumar Singhania, and Shri V.C. Mehta. Shri R.P. Mody is connected with the HDC group as well as the assessee- company. Therefore, there is a nexus between the flagship company and the assessee-company. The A.O. made independent enquires as to how profits/losses have been arrived at. ....
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....the income for block period. 6.1. Chapter XIV-B starts with Section 158B and provides the definition of "block period" and "undisclosed income". "Undisclosed income" is relevant in this case, which is reproduced below as amended by Finance Act, 2002 w.e.f. 1.7.1995 : "S. 158B(b) "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, or any expense, deduction or allowance claimed under this Act which is found to be false. This section shows that the following conditions must be satisfied to treat the income as undisclosed income i.e. : (i) It must be in the form of money, bullion, jewellery, other valuable article or thing or should constitute income or property based on any entry in the books of accounts or other document or transaction; (ii) It ....
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....ome under sub- section (1) of sec. 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years; (e) where any order of settlement has been made under sub-section(4) of sec. 245D, on the basis of such order; (f) where an assessment of undisclosed income had been made earlier under clause (c) of sec. 158BC, on the basis of such assessment. Explanation - For the purpose of determination of undisclosed income, - (a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of [this Act] without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under subsection (2) of section 32; [provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2)....
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....h evidence recovered during the course of the- search. The amended definition of sec. 158BB as mentioned above clearly suggests that some evidence is to be found as a result of search operation and it is only thereafter that the remaining part of the provisions come into play and that too the remaining evidence must be relatable to the evidence recovered during the course of the search. The other amendment in sec. 158B(b) which is reproduced above has enlarged the meaning of the term "undisclosed income" by including therein "any expense, deduction or allowance claimed under this Act which is found to be false." What has to be seen is that the valuable articles, documents or transactions which represent wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act. Therefore, before coming to analyze what is undisclosed income, it is necessary to be seen that such income has not been or would not have been disclosed for the purpose of this Act. If any such article or thing or income has already been disclosed to the department prior to the search, it cannot be termed that the same has not been or would not have been disclosed fo....
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....sum could be taxed in block assessment although the same featured in the regular books of account. When the loan creditor was an assessee and in whose assessment the loan advanced had been accepted by the Revenue, the AO was wrong in holding that the assessee was liable to pay tax on that loan money taken from the assessee." 6.5. In case of CIT vs. Ravi Kant Jain, 250 ITR 141 (Del.), the Hon'ble Delhi High Court observed: "Block assessment under Chapter XIV-B of the IT Act, 1961, is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. 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. Evidence found as a result of search is relatable to sections 132 and 132A. Held, that, admittedly the undisclosed income was not determined on the basis of any search material and the AO was proceeding within the scope of the assessment and not within the....
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....n for assessment of undisclosed income found as a result of search only and there is no scope for considering items that could be considered under regular assessment - Held, yes." 6.9. Hon'ble Calcutta High Court in the case of CIT vs. Ashim Krishna Mondal, 270 ITR 160 at pages 163 and 164 observed: "The principle that has been laid down for the purpose of making assessment are settled proposition as was referred to by the Id. Tribunal in the case of Sunder Agencies vs. DCIT [1997] 63 ITD 245 (Mumbai); T.S. Kumarasamy vs. ACIT [1998] 65 ITD 188 (Mad), at page 206 and Indore Construction (P) Ltd. vs. ACIT [1999] 71 ITD 128 (Indore) wherein the Mumbai Bench of the ITAT, the Madras Bench of the ITAT and the Indore Bench of the ITAT, respectively, had held that the income for block assessment under search and seizure procedure is to be computed strictly on the basis of the documents seized; and it cannot proceed on conjectures and/or surmises and arrive at an estimation instead of computation. The word "computation" connotes a different meaning than estimation or appraisal. Computation presupposes a calculation on the basis of the materials, which is something different fro....
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....d on the material found during the survey on the premises that in respect of block assessment u/s 133A could not be taken into consideration. This was confirmed by the Tribunal. On appeal contending that the material gathered in the course of survey u/s 133A could also be regarded as a material for the purpose of block assessment u/s 158BB: Held, accordingly, dismissing the appeal, that the Commissioner (Appeals) and the Tribunal having decided the issue in accordance with the statutory provisions, it required no interference." 10. Hon'ble Delhi High Court in the case of CIT vs. Girish Chaudhary, 163 Taxman 608 in the head-note held "Under chapter XIVB, before an addition of an undisclosed income can be made, the AO has to bring on record the material to show that on evidence found as a result of search, there is an undisclosed income represented by credits appearing in the books of account. In the instant case, there was no material on record to show as to what on basis the AO reached the conclusion that the figure "48" was to be read as Rs. 48 lakhs. The document recovered during the course of search in the instant case was a dumb document. Thus, the Tribu....
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....ompany in both the assessment years. The assessments for A.Ys. 1993-94 and 1994-95 were accordingly framed under section 143(3) on 25.01.1995 and 28.11.1995. Copies of all the material filed before A.O. at the original assessment stage and assessment order are filed in the paper book. It therefore, clearly revealed that assessee-company disclosed the incurring of the speculation losses in both the years to the Revenue Department, prior to the date of search and in the scrutiny assessment, the same speculation losses have been accepted by the Revenue Department which is also prior to the date of search. Therefore, there is no question of considering it to be the undisclosed income as per Chapter- XIVB of the I.T. Act and there is nothing on record which proved that assessee-company has not been or would not have been disclosed the speculation losses for the purpose of this Act. Therefore, the primary condition of Chapter-XIVB of the I.T. Act have not been satisfied in this case. The copies of the seized documents are filed at pages 215 to 222 of the paper book which are having the dates of year of 1996 and did not reveal if assessee-company has received any speculation loss from any....
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....ing the course of search against the assessee-company. Since there is no reference to the assessee-company in any of the seized documents, therefore, there is no question of relying upon statements of these persons which are not based on any search material found during the course of search. The statement recorded under section 132(4) of the Act, can be used in evidence of making block assessment order only if the said statement is made in the context of other evidence or material discovered during the search. The statement of a person, which is not relatable to any incriminating document or material found during the course of search and seizure operation cannot, by itself initiate the block assessment. The undisclosed income of the assessee-company has to be computed on the basis of the evidence and material found during search. The statements recorded under section 132(4) of the Act, may also be used for making the assessment, but only to the extent it is relatable to the incriminating evidence/material unearthed or found during the course of search. In otherwords, there must be a nexus between the statement recorded and evidence/material found during the course of search in orde....