TaxTMI 
TaxTMI 
1998 (3) TMI 170
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....s the provisions of section 158BE(1) of the Act inasmuch as there was only one warrant of authorisation and not many and the warrant of authorisation was executed on 30-3-1996 and therefore the assessment ought to have been completed on or before 31-3-1997. 3. Without prejudice to the above, the learned ACIT erred in holding that the transactions entered into by the appellant of acquiring assets and leasing them to the customers as part of lease finance business are not genuine and such transactions were entered into solely with a view to claim depreciation at 100% and not out of commercial expediency and such claiming of depreciation resulted in undisclosed income liable to tax under Chapter XIV-B of the Income-tax Act, 1961 consequent to their detection during search on 30-3-1996. The finding is purely on suspicion and surmise, assumptions and presumptions, without any factual foundation and contrary to the evidence available even at the time of search and on improper appreciation of the evidence and thus the finding is vitiated and liable to be vacated especially, in view of the fact the appellant has filed sufficient evidence even after the search about the existence of the ....
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....65,177 while computing the undisclosed income. 2. The Assessing Officer had observed that the search within the meaning of section 132 of the Act of the business premises of the appellant-company was started on 30-3-1996 and concluded on 23-5-1996. Assessing Officer had indicated that the assessee was allowed hearing in the case on 9-12-1996, 17-4-1997 and 20-5-1997. Assessing Officer had indicated the block period for assessment as 1986-87 to 1996-97 with the period ending on 30-3-1996. Assessing Officer had also observed that the assessee was incorporated during the assessment year 1989-90. The observations of the Assessing Officer starting with the paragraph titled as 'Introduction' as contained in his order are briefly narrated hereunder. 3. Assessing Officer had stated that the assessee was served with the notice under section 158BC of the Act on 9-7-1996 and was allowed sixteen days to file the return for the block period 1986-87 to 1996-97. The assessee complied with the said notice and filed the return on 25-7-1996 showing loss of Rs. 21 lakhs. Assessing Officer had stated that the assessee had shown purchases from eleven parties assets like industrial gas cylinders, ....
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....00 Pit Type Services P. Ltd. Furnace 6. The Eng. & Indl. Omega Steel 21-4-1995 7343200 Flameless Services Inds. P. Ltd. Furnace 7. Pentagon Liquid July 1994 8169700 Furnaces Innovative Engineers System 8. Pentagon Liquid 24-7-1995 13940500 Furnaces Innovative&nbs....
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....transactions without verifying the actual existence of the assets and accordingly had offered to surrender the claim of depreciation. These four lease transactions were with (1) New Era Urban Amenities Ltd. for Rs. 102.18 lakhs; (2) Elcot Electro Ferrites for Rs. 158.00 lakhs; (3) Skyline Construction for Rs. 40.28 lakhs and (4) Gas & Gas Enterprises for Rs. 41.18 lakhs and these aggregate to Rs. 341.98 lakhs. Assessing Officer had observed that this was retracted to subsequently and it was submitted by the assessee that the lease transactions with Blades India Pvt. Ltd. and Gas & Gas Pvt. Ltd. were the only transactions where the existence of the assets were not verified before entering into the transactions. 5. The Assessing Officer gave a narration of the modus operandi of the bogus lease transactions in his order. He stated that it involved different steps and these were (1) Identifying a supplier who is fictitious or non-operative or a benami concern; (2) Identification of a small scale businessman as a lessee who would accommodate the lease transaction; (3) Supplier issues a sale invoice in favour of the assessee mentioning the account of the lessee covering goods that are....
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....ed/fabricated to suit their needs and (d) the lease rental deposit received by the lessor is nothing but his own money routed through lessor-supplier-lessee-lessor in the above collusive lease transactions. 7. The basis on which the Assessing Officer came to hold the above view as summarised by him in para 2 of his order are, (a) that the assessee has not produced the fresh confirmation letters or the suppliers/lessees for verification; (b) that the assessee at no given point of time has been contracted or dealt with the supplier directly and the assessee simply claims to have believed the documents furnished by the lessee (if claims to be innocent, which is not true); (c) the physical inspection and verification of the lessee's premises, where the assets are supposed to have been installed, by the department proved that no such assets ever existed; (d) further, the lessees clearly admitted that the entire lease transactions were sham and are nothing but the paper transactions only without the actual involvement of any such assets; (e) that in most of these lease transactions the suppliers have clearly admitted that they have not supplied any assets either to M/s. Kirloskar Inve....
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....nuineness of the lease transactions for which he wanted the assessee to produce (a) production of fresh confirmation letters from the so-called suppliers; (b) production of fresh confirmation letters from the so-called lessees and (c) the full particulars of the suppliers like their income-tax assessment, sales-tax numbers. He went on to observe that the assessee had not taken any steps in regard to the above. Assessing Officer therefore, had sent inquiry letters to the suppliers as well as the lessees calling upon them to furnish details of (a) whether they entered into any lease transaction with M/s. Kirloskar Investments and Finance Ltd., and whether any assets were received by them and put to use on account of their lease transactions with M/s. Kirloskar Investments & Finance Ltd.;(b) the place of installation of the said assets; (c) the parties from whom the said assets were received and the mode of transport; (d) the sources for the payment of lease rental advance/deposit to M/s. Kirloskar Investments & Finance Limited. The inquiry letter that was issued to the so-called suppliers was (a) whether they have sold and supplied any assets to M/s. Kirloskar Investments & Finance L....
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..... 1,02,18,000 vide Invoice Nos. 384 to 386, dated 26-5-1993. Survey under section 133A of the Act was conducted on the lessee on 29-3-1996 and I showed that no asset existed in the business premises. The Managing Director, Mr. Taneja, denied receiving any assets either from the assessee or from the supplier Vijaya Commercial House. Mr. Chettiar, the Chairman of the lessee was also examined and he admitted that he is the proprietor of Vijaya Commercial House but denied of any sale of Centering Sheets by his proprietary concern to the assessee. He did admit that his proprietary concern had provided proforma invoices to the assessee and admitted of receiving loan from the assessee. The assessee was confronted with the above statements. The assessee submitted that the assessee is unable to obtain a fresh confirmation of the lease transaction from the lessee and the lessee is unable to produce the said lessee. It was further noted that the assessee vide letter dated 23-5-1997 had indicated that it had claimed deduction of the loss for the asset. Assessing Officer accordingly concluded that because both the supplier and the lessee had denied the transaction there was no acquisition of....
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....d confronted the assessee with the statements so recorded and noted that the assessee vide its letter 23-5-1997 had stated that it had claimed loss from the said assets. Assessing Officer found the nature of the transaction, invoice, etc., was identical to New Era Urban Amenities P. Ltd. He noted that the assessee had shown lease rentals at Rs. 15,30,074 and had claimed depreciation at 100% of the cost. As the movements of funds from the assessee to the supplier through the lessee to the assessee back to the extent of 85% to 90%, and as concluded by him in New Era Urban Amenities P. Ltd., he held the undisclosed income at Rs. 64,70,326 by adjusting the depreciation claimed against the lease rental. (iii) Gas & Gas Enterprises (P.) Ltd. (Lessee): - The item in issue is the industrial gas cylinder covered by invoice number dated 27-6-1994 of a value of Rs. 41,48,000 that is shown as supplied by Venus Container Ltd. Assessing Officer observed that both the supplier and the lessee were not available at the addresses furnished by the assessee and were untraceable. Assessing Officer confronted the assessee with this fact and the assessee stated that it is unable to obtain fresh con....
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....hysical inspection of the said machinery at the business premises of the lessee. Assessing Officer concluded that because both the supplier and the lessee had denied the transaction, assessee must establish the transaction as genuine. Assessee could not obtain fresh confirmation from the supplier and the lessee. He accordingly concluded that this was not established by the assessee. The lease rental shown in the transaction was Rs. 14,23,314, and adjusting this amount with the depreciation claimed the net amount of Rs. 77,67,685 was treated as undisclosed income. (v) Aero Piston P. Ltd.: & (vi) Omega Steel Industries (P.) Ltd. (Lessees): - The item that is covered by transaction No. v is Pit Type Furnace and in transaction No. vi is Flameless Furnace whose purchase values as claimed were Rs. 1,23,84,800 and Rs. 73,43,200 respectively from the supplier M/s. Engineering and Industrial Services of Madras. Assessing Officer noted that the assessee had failed to produce fresh confirmation letters from both the supplier and the lessees. The Assessing Officer accordingly issued notices both to the supplier and the lessees. The supplier vide its letter dated 7-5-1997 had submitted....
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....eciation as claimed by it. Assessing Officer however was not impressed with these submissions because of the movements of the funds from the assessee to the supplier through the lessee to the assessee back to the extent of 85% to 90%. The lease rental shown in regard to the above for the period ending 31-3-1996 was Rs. 30,19,032 (Rs. 22,57,175 + Rs. 7,61,837). The net amount of Rs. 1,67,08,968 after adjustment of depreciation and the lease rental was stated to be the undisclosed income with regard to the above two transactions. (vii) & (viii) Liquid Engineers (Lessee):- M/s. Pentagon Innovative Systems is stated to have supplied various types of Furnaces under cover of their invoice Nos.' 809 to 817 of July 1974 and 1001 to 1008 of 23-7-1995 for a value of Rs. 81,69,700 and Rs. 1,39,40,500, respectively. In this case, the Assessing Officer notes that no confirmation letters were produced either from the supplier or the lessees. The supplier vide his letter dated 6-5-1997 had stated as under: (a) the plant and machinery which was shown as sale to M/s. Kirloskar Investments and Finance Ltd. was in turn purchased from M/s. Liquid Engineers and the said sales were not shown in....
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....s was only to avoid their tax liabilities. Assessing Officer was not impressed with the reply and held that ownership continued to remain with the lessee and accordingly, the lease rental of Rs. 30,83,651 was adjusted with the depreciation and the net amount of Rs. 1,90,26,549 was stated to be the undisclosed income. (ix) Wave Current Thermal Processes P. Ltd. (Lessee): - The supplier in this case is M/s. Civic Engineering & Contractors who is stated as supplied Furnace under cover of invoice Nos.' 95 and 96 for a value of Rs. 1,02,00,000. In this case too assessee it is noted did not file any confirmation from both the supplier and the lessee. Assessing Officer noted that the movement of money from the assessee to the supplier and through the lessee to the extent of 85% to 90% was the same as in other transactions. All efforts to trace the supplier failed but Assessing Officer succeeded in contacting the lessee. Lessee vide their letter dated 17-5-1997, it was noted had given very evasive reply and it did not contain any information concerning the lease transaction with the assessee. It was further noted that the lessee had confirmed that they had not maintained any le....
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....h confirmation from the supplier. Assessing Officer also had noted that the notice sent to the supplier at the address furnished by the assessee came back unserved containing the remark 'not found'. Assessing Officer had noted that Lessee in its letter had stated that the assets under the lease were in their possession and is used by them. Assessee who was confronted with the non-service of the notice on the supplier and the letter from the lessee insisted that the transaction of lease having been confirmed by the lessee together with the asset being in their possession and duly supported by various documents, the transaction should be treated as genuine. Assessing Officer had noted that the reliance of the assessee is on the proforma invoice as given by the so-called supplier which when viewed from the similar movements of funds as in other cases, he concluded that there was no sale of any plant by M/s. Brilliant Engg. Works followed by taking it on lease and that the documentation is only a make belief story. Assessing Officer as held by him in other transactions as brought out earlier concluded that the present transaction was also one for claiming bogus depreciation. He acco....
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....sues involved in the additional ground of appeal as raised by the standing counsel for the department would be dealt with at the appropriate place. 17. The facts as brought out earlier clearly shows that consequent to the search carried at the business premises of the assessee there were no seizure of any money, bullion, jewellary but seizure of certain files and documents that related to the entries made in the books concerning depreciation on assets and income from lease transactions. The department had made block assessment for the block period ending with 31-3-1996 and had treated the depreciation claimed as resulting in suppression of true income which is treated as equivalent to 'undisclosed income'. It is, accordingly, become necessary to bring in the definition of the term 'undisclosed income' as defined in section 158B of the Act. In this Chapter, unless the context otherwise requires,- (b) 'undisclosed income' includes any money, bullion, jewellary 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, jewellary, valuable article, thing, entry in the books of accou....
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.... books and therefore, it is not the case of property acquired but not disclosed. He also contended that the income from the lease of the assets is also reflected. He contended that the claim of depreciation is peculiar to the income-tax proceedings only and is governed by the normal procedure of determination of income from business and ranks at par with other expenditure that may or may not be allowed in computing the income from business within the meaning of sections 28 to 43A of the Act. He contended that as on 30-3-1996 the day on which the search was conducted, no entry for depreciation was made in the books because it is usually an entry that is placed in the books towards the end of finalisation of the accounts for it does not involve any cash outgo. He contended that therefore the very basis of initiation of the block assessment is wrong. He submitted that in view of the decision of Sunder Agencies 'case it should be held that the treating the depreciation that is yet to be charged to the books of account as resulting in undisclosed income as not permissible for making block assessment. 20. Dr. Krishna, the counsel for the department contended that the assets that ar....
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...., Bangalore had given instructions to me to introduce Mr. C. Radhakrishnan to open the account United Western Bank, Gandhinagar, Bangalore on 18-7-1994. Accordingly I have introduced. Q 3. What was the conversation between you and Mr. C. Radhakrishnan and Mr. Venkatesan when they met you at your office on 18-7-1994? A 3. On 18-7-1994 agreement of lease for cylinders for around Rs. 41 lakhs was entered and signed by both of them before me, the copies of which are available with you, i.e., in the seized material. Q 4. Can you produce Mr. C. Radhakrishnan at our office? A 4. Since, I know him through Mr. Venkatesan I will contact Mr. Venkatesan and trace out Mr. C. Radhakrishnan and produce him before you on 22-4-1996. Q 5. In how many cases you have introduced the people to the bank to open accounts for entering into lease agreements? A 5. So far I have introduced five more persons, viz-, Udayamala Fabs, Tirumala to United Western Bank, Gandhinagar, Bangalore to avail of Rs. 70 lakhs loan in 1994 and M/s. Pentagon Innovative Systems, Madras to Lakshmi Vilas Bank, City Market Branch, Bangalore to avail Rs. 81 lakhs loans in 1994 in addition to Mr. C. Radhakrishnan. ....
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....United 41 Enterprises, Container Western Madras Links Bank, Gandhinagar, Bangalore -------------------------------------------------------- I have introduced the above 6 concerns to open a/c in the bank mentioned above. In fact the lessee only has approached me to introduce him to the bank to open the a/c for himself. In all the cases I have introduced the suppliers also on the request of the lessees. In all the cases the lessees a/c and the suppliers a/c was opened on the same day in the same bank. This was done to facilitate the clearance of the cheque....
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....d with the determination of the correct income that is not disclosed, he had prayed in his additional ground that the undisclosed income should be taken as equal to the depreciation claimed. 22. The definition of undisclosed income as was redrafted limiting to the entries in the books of account or documents or transactions earlier read "any income based on any entry in the books of account or other documents or transactions, where such 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 purposes of this Act". The bare reading of the above gives the literal meaning of undisclosed income as income which is represented wholly or partly by the entry in the books or documents or transactions that has not been so disclosed or would not have been disclosed. To put it other words, the undisclosed income is that income which is entered in the books of account and as supported by the documents and the transactions as other than as income while in reality the entries in books, documents and the transactions represent income. The other intent is with reference to some prope....
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....n 158BB of the Act that describes the manner of computation of undisclosed income specifically to sub-section (2) of that section which states that "in computing the undisclosed income for the block period, the provisions of sections 68,69,69A, 69B and 69C shall, so far as be, apply and references to 'financial year' in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition", it gives an impression that the undisclosed income includes those that are treated as deemed incomes like cash credits under section 68; unexplained investments under section 69; unexplained money, etc., not recorded in books under section 69A; investment not fully disclosed in the books under section 69B and unexplained expenditure under section 69C of the Act. The earlier procedure required relating the undisclosed income to the financial year in which the detection was made combined with the delay caused by the time consumed in the framing of the assessment along with the other disclosed income of that financial year which time for framing of the assessment was available und....
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....ctions 158BE(1), 132(1) and 132(3) of the Act. 158BE-Time limit for completion of Block Assessment The order under section 158BC shall be passed- (a) within one year from the end of the month in which the last of the authorisations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned after the 30th day of June, 1995 but before the 1st day of January, 1997. Section 132 - Search and Seizure (1) Where the Director General or Director or the Chief Commissioner or Commissioner or any such Deputy Director or Deputy Commissioner, as may be empowered in this behalf by the Board, in consequence of information in his possession, has reason to believe that- (a) any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922) or under subsection (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any book....
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....be made extracts or copies therefrom; (v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing: Provided that where any building, place, vessel, vehicle or aircraft referred to in clause (i) is within the area of jurisdiction of any Chief Commissioner or Commissioner, but such Chief Commissioner or Commissioner has no jurisdiction over the person referred to in clause (a) or clause (b) or clause (c), then, notwithstanding anything contained in section 120, it shall be competent for him to exercise the powers under this sub-section in all cases where he has reason to believe that any delay in getting the authorisation from the Chief Commissioner or Commissioner having jurisdiction over such person may be prejudicial to the interests of the revenue: Provided further that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to it being of a dangerous nature, the authorised officer may serve an order on the owner or the person who is in immediate possession or control thereof that he sha....
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....d been brought out for the proper appreciation of the term 'assessment should be made within one year from last of the authorisations' as contained in section 158BE of the Act. He submitted that authorisation for search issued on a date is to be considered with reference to the commencement of the search and its conclusion. Because, search is for specific purpose of seizing of incriminating documents, it must be concluded that the search has come to a close when the officials leave the premises searched taking with them the seized items. The seizure of documents were made by the officials on 30-3-1996 and all other items including computer that were in the premises were left behind and a general prohibitory order for their removal from the premises without the permission of the officials on them was only issued. 26. Mr. Venkatesan submitted that only one warrant was issued on 30-3-1996 on which date search was made and seizure were also made. The search party after the completion of the search on that date had left the premises. The assessee continued with its business activities from 31-3-1996 onwards in the normal manner from the said premises. He pleaded that the warrant base....
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.... inspected on 30-3-1996 made the inspection on 14-5-1996. During this visit, Mr. Rajshekar Reddy was not present. Mr. Ganapathi R. Bhat, on the strength of the warrant issued on 30-3-1996 revisited the premises of the assessee on 21-5-1996 and seized certain books. Mr. Krishna Murthy, ADI, reappears in the scene on 29-5-1996 and finally lifts the prohibitory orders. Mr. Venkatesan had pointed out that his sole purpose of bringing out the above facts to the attention of the court was that the search was concluded on 30-3-1996. 28a. He contended that the Assessing Officer had proceeded on the premise that the last of the authorisations namely the warrant was executed on 29-5-1996 because, it is on that date that he decided that no further visits are necessary. Assessing Officer on that basis he was of the view that he would get one year from 1-6-1996 for completion of the block period assessment. It was with this understanding that the Assessing Officer completed the assessment on 30-5-1997, which is the date of passing of the assessment order. 29. His prime objection was to the above conclusion of the Assessing Officer. He made reference to the section 132(3) of the Act that p....
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....oper warrant. 32. He pleaded by referring to the copies of the search warrants issued, that the department had in fact acted in a high-handed manner by allowing the persons other than those mentioned in the search warrants to be present during the course of search. He pleaded though the warrant of search is valid with reference to the officials named therein to conduct the search and it is only those officials named in the warrant as authorised to conduct the search could conduct the search and the search so conducted such authorised officials alone could be valid search. He pleaded that where search is conducted by officials all of whom are not so authorised to conduct the search under the warrant and the action of these unauthorised officials such as lifting and imposing of prohibitory order vitiates the search and consequently such search must be held as invalid. He contended that the warrant also indicates the names of the officials who may accompany the officials authorised to conduct the search and these officials had never interfered in the search but were only assisting the officials authorised to search and never issued or lifted the prohibitory order. He pleaded that j....
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....b initio and bad in the eyes of law and such an order only deserves nothing than being quashed. 35. Mr. Venkatesan, the learned counsel insisted that the provision of seizure under section 132(3) of the Act is resorted to on the formation of the opinion by the concerned official authorised to carry out the search and seizure that the seized material represents undisclosed income. He insisted that prohibitory orders issued under section 132(3) of the Act, does not amount to seizure. He referred to decision of Allahabad High Court in Sriram Jaiswal v. Union of India [1989] 176 ITR 261/42 Taxman 83 where they had considered the provisions of sections 132(3) and 132(5) of the Act. 36. Mr. Venkatesan carried us through to the decision of the Delhi High Court in B.K. Nowlakha v. Union of India [1991] 192 ITR 436. He insisted that in the instant case, the authorities have held that lifting of the prohibitory order and reimposing it on successive occasions was invalid and on this basis as well, it must be concluded that the search concluded on 30-3-1996. 37. Mr. Venkatesan then referred to the Madras High Court decision in I. Devarajan v. Tamil Nadu Farmers Service Co-operative Fe....
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....earch was temporarily discontinued on 30-3-1996 and recommenced on 8-4-1996, the same warrant was utilised and on that basis, panchanama was issued. On that date, Mr. Krishnamurthy was the authorised officer. This was continued on 12-4-1996, on which date, Mr. Krishnamurthy was the authorised officer. It continued on the same basis on 14-5-1996 on which date Mr. Ganapathi R. Bhat was the authorised officer. On 21-5-1996 too, Mr. Ganapathi R. Bhat was the authorised officer and Mr. Krishnamurthy was the authorised officer on 29-5-1996 on which date the search was concluded. The panchanama was issued by Mr. Rajashekara Reddy on 30-3-1996, Mr. Krishnamurthy issued panchanama on 8-4-1996 and 12-4-1996 and Mr. Ganapathi R. Bhat issued the panchanama on 14-5-1996 and 21-5-1996 and Mr. Krishnamurthy finally issued the panchanama on 29-5-1996. 40. He submitted that the search commenced on 30-3-1996 at 11.15 AM and continued till 6.45 PM. He submitted that they had seized 7 files and one lease register. Before temporarily discontinuing the search, they had passed restraint orders on books of account and other documents and computers kept in steel file rack and wooden cupboards. The searc....
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.... that point of time and to ensure that those documents are not hampered with by the assessee. He submitted that the first restraint order issued on 30-3-1996 covers books of account, all documents, files and computers. The search party found it inconvenient to seize all those files, books of account, etc., and carry them and, therefore, it passed restraint orders. This is clear from the fact that again and again restraint orders had to be passed and when the search was made on 21-5-1996, as many as 22 more files from the various files that were covered under the restraint order were seized. On the final day of the search, namely, 29-5-1996, no further documents or materials were required to be seized and accordingly the search got concluded on that date. He submitted that the warrant of search that was initiated on 30-3-1996 permitted the department to carry out the search till 29-5-1996 when they came to the decision that no further material is available or need to be seized. He submitted that the warrant that authorised them to carry out the search within the meaning of section 132 of the Act, was executed repeatedly and the last of such authorisation was made on 29-5-1996. 43....
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....e instant case the search having been started on 30-3-1996, the restraint order remained effective till 29-5-1996. The restraint order having been lifted on that date, it is on that date, the search had come to a close. He strongly objected to the submission of the learned counsel Mr. Venkatesan that was made with reference to the provisions of section 132(5) of the Act that the restraint order should not be permitted to extend the time required for framing of the assessment under section 132(5) of the Act. He further objected to the contentions raised by Mr. Venkatesan that the period of limitation of one year should be counted from 30-3-1996 because according to him, the search remained a search from 30-3-1996 and it was lifted only on 29-5-1996. He submitted that the explanation that has been inserted to section 132(3) of the Act had made it clear that the restraint order does not tantamount to any seizure. He submitted that this further fortifies his submission that the search continued till 29-5-1996 or atlas till 21-5-1996 when the last of the seizure was made out of the restrained items. He submitted the various case laws relied by the assessee with reference to the provisio....
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....r other valuable article or thing that represents either wholly or partly income or property which has/would not be disclosed for the purposes of the Act. 48. On satisfaction of the existence of any of the aforementioned three situations, the authorities who could direct the search to be carried are the Director General, Director, Chief Commissioner of Income-tax. They can direct Deputy Director, Deputy Commissioner, Assistant Director, Assistant Commissioner or the Income-tax Officer and the Deputy Director, Deputy Commissioner may direct Assistant Director, Assistant Commissioner or the Income-tax Officer to carry the search. The persons who are so directed to carry out the search are provided with the power, (1) to enter and search any building, place, vessel, vehicle or aircraft if he suspects that the books of account, documents, money, bullion, jewellery or other valuable article or thing are kept there; (2) break open the lock of any door, box, locker, safe, almirah or other receptacle for carrying out the actions in (1) above when keys are not available; (3) search any person who is in the building, place, vessel, vehicle or aircraft or is about to go out or is about ....
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.... he may authorise the search. This also shows that authorisation for search may cover areas that may or may not be within the jurisdiction of the authorising official and on the basis of information in the possession of Chief Commissioner of Income-tax, further authorisation may be called for and issued. Thus, the word 'authorisations' used in section 15 8BE of the Act clarifies the use of the word in plural, covering more than one authorisation. 52. Having examined the plurality of the authorisation and the circumstances that required the introduction of the word authorisations, we proceed to examine the term 'last of authorisations was executed'. We have to necessarily appreciate the intention of the law makers as to what they meant by execution of the last of the authorisations. This is necessary because, the time limit of one year for framing of the block period assessment starts from the end of the month in which execution of the last of the authorisation was effected. 53. Execution of authorisation of search means actual implementation of such authorisation, i.e., the officials authorised under the said authorisation act on it by entering the building where books of acc....
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....ert their feeling of existence of more items that cover more undisclosed income, the officials necessarily have to comply with the procedure listed in sections 132(1) and 132(1A) of the Act. Because, every search operation has to be preceded by a reason to believe that the books, documents would not be produced, the person is in possession of money, bullion, etc., that represents partly or wholly income or property which has not been or would not have been disclosed, to re-commence any search on already searched premises, except of course when the search is continued after the premises is locked and sealed, it is necessary for fresh authorisation. 56. The counsel for the revenue that once the search had started and the officials authorised for search seize some items and after a gap of few days re-enter the premises and carry on the search, and repeat this after gaps and finally decide that no more search is called for, it is at that point that the search is completed. This to our view is a wrong appreciation of the provisions contained in section 132(1) of the Act because, if the officials found some items on search and had seized them and had left the premises, they had exhaus....
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....96 and had seized certain items and before leaving the premises had served the restraining order on files and computer. The restraining order so issued does not amount seizure is clear because of the explanation to section 132(3) of the Act. Therefore, on 30-3-1996 when the search party left the premises of the assessee, it has to be concluded that they had seized only those items that they had considered as related to the undisclosed income of the assessee and the other items it had seen including files and computer, that it had left behind are not related to any undisclosed income of the assessee. Having come to this conclusion on 30-3-1996, in order to search the premises on 8-4-1996, in accordance with the provisions of section 132(1) of the Act, the authority to initiate the search must have formed a belief that some income remains undisclosed that is represented by books of account, money, bullion, etc., and issue an authorisation for search. This was not done. Further, the officials who visited the premises on various dates after gaps and after their repeated action of lifting and re-imposing of the restraining order did not feel any necessity for seizing of any files except....
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....ch was not justified because the stocks were found at the premises along with the explanation of the source and the value. The High Court held that passing of the restraint order was invalid because it could not be said to practicable to effect the seizure of the stocks. They further held that restraint order could not be cancelled and renewed from time to time as was done in this case beyond 60 days. They further held that for the extension of restraint order beyond 60 days, the approval of the CIT should have been obtained. They further held that considering that they were large items which the petitioner could not identify or correlate with the purchase vouchers may be a good reason for seizure but not a valid ground for exercising jurisdiction under section 132(3) of the Act. They concluded that action under section 132(3) of the Act could be resorted to only if there was any practical difficulty in seizing the item which was liable to be seized. Where there is no such practical difficulty, the officer is left with no other alternative but to seize the item if he was of the view that it represented undisclosed income. It was accordingly held that the officer who carried out the....
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....t the provisions of section 132(3) of the Act could not be utilised so as to circumvent the time limit specified in section 132(5) of the Act. Their Lordships further held that the apprehension of section 132(3) being misused could not justify imposing of the time limit as specified under section 132(5) into section 132(3) of the Act. 61. The above orders of the High Court lay down the proposition that the time limit for the framing of the order runs from the date of search done and the examination made by the officials with reference to the materials covered by the restraint order does not in any way lead to the conclusion that the search continued. It is also clear from these orders that the restraint order is passed when there is some practical difficulty to seize the items and not on items that are capable of being seized. After the insertion of the explanation effective from 1-4-1989, restraint order does not amount to seizure, and therefore, by passing the restraint order, the time available for framing of the order cannot be extended. Therefore, these decisions fortifies our conclusion reached earlier that the search comes to a close on 30-3-1996 when certain items were s....
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....bmissions in bringing out the nuances of the provisions of section 158BG of the Act is with reference to what is the rule of the term "no such order shall be passed without the previous approval of the Commissioner or Director". He submitted that is not an empty formality or a procedure to be adopted by the CIT needs to be examined. He pleaded that it is a procedure to be followed by the CIT and such procedure is a mandatory requirement of Chapter XIVB. To put it in other words, any order passed within the meaning of Chapter XIVB without the previous approval of the CIT is bad in law within the meaning of Chapter XIVB. He submitted that in such a light, it could not be said that the approval to be obtained from the CIT is a mere formality. He insisted that all mandatory procedures to be followed are attached with it certain powers, namely, granting of approval of the assessment to be framed. He submitted that such an event, prior to the grant of approval by going through the order framed by the AO, has a pre-condition attached to it. According to him, this pre-condition is to give the assessee an opportunity of being heard. He submitted that the provision contained in section 15....
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....e intention of using any material against the assessee. It further states that wherever the assessee seeks opportunity of hearing by the CIT he may grant the same. He accordingly contended that the plea of the assessee that the grant of approval by the CIT is a procedure which is mandatory in nature, has an in-built provision of hearing to be granted by the CIT to the assessee. 68. Dr. R.B. Krishna, the counsel for the revenue admitted in the open court that the CIT did not hear the assessee before granting approval to the order proposed by the AO. Dr. Krishna then touched upon the power of the CIT as referred to in section 158BG of the Act. He submitted that all that the CIT is required to do is to grant approval to the assessment order framed by the AO. Section 158BC of the Act describes the procedure for making the block assessment. It clearly provides that the AO shall serve a notice on the assessee requiring it to furnish such information as called for. It is at this point of time that the Act has clearly spelt out about the opportunity to be allowed to the assessee. He submitted that the AO discusses the case with the assessee, confronts him with various information that i....
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....versy as raised by the parties with reference to the provisions contained in section 158BG of the Act, we feel the necessity of reproducing the said section. This is reproduced below for facility. Section 158BG Authority Competent to Make Block Assessment "The order of assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner or an Assistant Director, as the case may be: Provided that no such order shall be passed without the previous approval of- (a) the Commissioner or Director, as the case may be, in respect of search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, after the 30th day of June, 1995 but before the 1st day of January, 1997." 70. The section clearly states that the order of assessment for the block period shall be passed by an AO and it further states that the said order shall be passed with the previous approval of Commissioner or Director. The case laws relied upon by the learned counsel for the Department which were with reference to the provisions of the Indian Income-tax Act, 1922, where similar provisions existed. The Co....
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....off's case and that of Lahore High Court in Lachhman Das Mehr Chand's case were not cited and hence could not be considered. In the case of Lachhman Das Mehr Chand the penalty order was issued after obtaining the approval of the Inspecting Assistant Commissioner. The assessee challenged the approval on the ground that no hearing was allowed to him in a writ petition. The court ruled that the approval that was required of the Inspecting Assistant Commissioner was because of the quantum involved and therefore, it being mere administrative approval, hearing is unnecessary. During the hearing the parties were asked to address the bench with regard to the provisions that existed for imposition of penalty that stated that no order imposing penalty shall be made by the AO if the amount of penalty exceeds Rs. 10,000 except with the previous approval of the Inspecting Assistant Commissioner because, there the identical term 'with the previous approval' was used. However, neither party came forward with any suitable reply. Section 274(2) of the Act required that no order imposing penalty in excess of Rs. 10,000 shall be passed by AO without obtaining the previous approval of the Deputy Commi....
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....ing Officer is to place the order proposed by him for the approval of CIT because the section directs him to do so and is a procedure that he has to follow before the issue of the said order. On such procedure, in the light of the Madhya Pradesh High Court ruling in Jamnalal Randal Kimtee 's case had clearly held that there could be no vested right of the assessee. 76. In the light of the above additional material, and the legal authorities that were not considered by the Chennai Bench of the Tribunal, we are taking the view that the role of CIT under section 158BG of the Act is merely to grant approval to the order proposed by the Assessing Officer as a higher authority and he has no power under the statute to modify the said order in any form. In our opinion even the circular of the Board that stated that CIT may allow hearing if he proposes to use any material against the assessee is not in line with the provisions of section 158BG of the Act because, all that the section permits the CIT to do is to grant the approval to the order of Assessing Officer as it was placed before him and when the section nowhere grants him with any such power, the implementers of the Act cannot as....
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....tention to the submission as was made before Assessing Officer dated 23-5-1997 which has been made part of the paper book that was filed along with the appeal itself. He contended that in this submission the facts concerning three parties, namely Blades India P. Ltd., Gas & Gas Enterprises and New Era Urban Amenities P. Ltd., have been stated to be treated differently from the remaining eight transactions. It was submitted that it was consequent to the search that was made on New Era Urban Amenities P. Ltd. and Blades India P. Ltd., on whom the department had carried out searches were unwilling to give confirmation in writing in regard to the transactions with the company and this was so made out of fear that it might expose them to huge tax liability. It was clearly stated that the assessee could not trace M/s. Gas & Gas Enterprises. It was with reference to the above facts that the assessee stated that it was prepared to forego the depreciation and pleaded that the assessee be allowed the loss incurred in the matter of acquiring the assets, which loss was suffered by the assessee on account of the fraud played by the three lessees. This offer was conditional, which condition was ....
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....aming the assessee which was made by those parties. He pleaded that the assessee had at no point of time was provided with the information that was sought by the department from the various parties and likewise the replies. Though extracts of replies were provided, the parties not having been allowed to examine by the assessee, the assessee could do no better than to insist that the transactions are genuine because they are supported by confirmations and other evidences that go to show that the transactions are not make-believe story. 82. Mr. Venkatesan drew our attention to the proceedings before the Assessing Officer and submitted that it started sometime in April 1997 and it was concluded in the month of May 1997. Mr. Venkatesan submitted an Affidavit to the effect that the assessee had made oral requests on several occasions for giving it the opportunity of being heard by providing the various parties, and the various questionnaires sent to the parties, based on which the parties had given their replies. He submitted that the replies submitted by various parties and such other material collected by the department were all behind the back of the assessee. He submitted that in....
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....t needed finance came forward to sell their machinery to the assessee and in turn entered into a lease agreement with the assessee for some period. By this arrangement, the lessee was in a position to retain the asset, use it for its business and also find finance. The lessor, namely, the lessee company got an asset on which depreciation was entitled to it and in the shape of security of the asset, it was receiving the lease rentals which covered not only the depreciation but also the hire charge plus some income for letting out the asset on a long-term basis. He submitted that these are pure business transactions in the line of business and merely because the asset remains at one place and does not move about from the premises of its owner, it could not be given a colour of sham transaction. 85. He submitted that the lease finance could involve actual movement which would be mostly when the asset is a new asset that is being supplied by the supplier or could even happen in the case of an old machinery. He submitted that it would be wrong to come to the conclusion that in all cases of lease finance, there ought to be physical movement of items or assets. He submitted that in the....
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.... genuineness of the transaction by the fact that the supplier was said to have paid the consideration directly and the said consideration was cleared through normal banking channels. He pleaded that much noise had been made by Dr. Krishna with regard to the assessee helping the lessee and the suppliers upon the bank accounts. He submitted that where the lessees have sold goods to the supplier and the supplier in turn sells it to the assessee, it would always involve payment by the supplier to the lessee and payment by the assessee to the supplier. In the cases mentioned above, there were transactions of sale by the lessee to the supplier and the assessee buying the same and giving it on lease to the lessee and in few cases, lessee was the owner of the property which it wanted the assessee to buy and lease it back to the lessees. He submitted that it is an admitted position by the department that there were brokers involved in the transaction. He submitted that, if as advocated by the department the assets did not exit and consequently the lease transactions were sham, then it is a case of fraud played by the lessees on the assessee. The assessee, therefore, cannot be held to have w....
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....ts available, which just cannot be rejected as a fabrication. He pleaded that out of 9 suppliers, only 3 suppliers responded to the questionnaire of the department and out of 10 lessees, only 5 had responded. In both cases, the assessee though was provided with a reply and asked for its comment, the assessee was not permitted to cross-examine any of these parties. The statements recorded on various persons including Mr. Tyagaraja Chettiar were never produced to the assessee during the course of assessment. The assessee was not even given an opportunity of cross-examining those parties. 89. He further submitted that the statement of the Managing Director of Brilliant Engineering Works was taken on 28-7-1997 is very much after the block assessment was made and, therefore, to his mind, he submitted that it has no relevance to the issue before us. He insisted vehemently that the assessee could only support its claim with reference to the document that it has entered into which are supported by the fact that the assessee had duly paid for the value of the assets and the same consideration was paid through proper banking channels. He submitted that it is not the case of the revenue th....
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....standing that the assessee had to make no other payment to the assessee concerning the lease. He pleaded that no doubt that the transactions of the assessee are large enough and incidentally it is claim depreciation at 100 per cent on the items because they are so permissible under the Rules. The department had chosen the easy path by placing reliance on the statements of those persons and allowed them to escape the tax net because they have an easy prey in the assessee. He submitted that all that the department had done is merely on suspicion and surmise and on a hurried conclusion by placing reliance on the statements of only a few of them. He submitted that it is not the case of the department that the assessee-company is engaged only in the business of providing lease finance. He pleaded that all that the department is trying to establish is that in all cases where depreciation at 100 per cent is allowable and so claimed by the assessee transactions are sham. He submitted that the department had not appreciated the nature of business of the assessee, namely, lease finance, which requires a lessee and the supplier and on the strength of the lessee and the assurance given by the ....
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....ja Chettiar. He had been absconding and has not been traced as yet. He has cheated several people according to the newspaper report. At the point of time when the assessee had entered into transaction with him, he was a very high-flying businessman who would give few minutes of time for discussion either on the way to the airport or at the airport or from the airport when he was going elsewhere. The assessee invariably is blinded if the assessee has been taken for a ride by the charisma of Mr. Tyagaraja Chettiar with the hope that his association would bring about or widen the field of lease finance of the assessee. He submitted that it is very easy to say that the entire documentation of the assessee is false, but when such written documents are there, to prove that they are fabricated documents, the burden would clearly lie on t he department. He submitted that the department is entitled 10 place its reliance on any evidence. But before condemning the assessee based on the evidence collected., the assessee ought to have been given an opportunity. In the instant cases, in none of the cases, the department even though it was necessary to confront the assessee with the evidence acce....
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....s clearly fallacious and deserves to be quashed. 94. He submitted that the department is harping only on depreciation. He pleaded that whether the depreciation claimed is proper or otherwise is basically a subject-matter of section 32 of the Act. Section 32 of the Act lays down basically two criteria's. He submitted that the first criteria is the asset in question should be owned by the assessee followed by the criteria that it is used for the purposes of business. In case where the department feels that the assessee had not acquired any asset, it is a case of non-satisfaction of the primary criteria and thereby the assessee loosing the claim of depreciation. He submitted that non-allowability of depreciation consequent to the conditions laid down in section 32 of the Act. Not being satisfied, is not a criteria and the law makers had excluded such items from being treated as undisclosed income. He submitted that no doubt the claim of depreciation reduces the income that is taxable, but merely because consequent to the non-allowing of the depreciation, the income returned is enhanced or assessment is concluded at a higher value, the difference between the depreciation claimed and....
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....ement of the Managing Director of Blades India P. Ltd. recorded on 11-4-1996 and 29-5-1996, the statement of the director of Omega Steel Industries was recorded on 23-4-1997 and 24-4-1997 and the statement of one of the employees of the assessee, Mr. V.K. Srinivas, as recorded on 19-4-1996 were available to Assessing Officer when he made the assessment and he placed on our record all the above statements including that of the Managing Director of Brilliant Engineering Works recorded on 28-7-1997. 98. Dr. Krishna, then touched upon the meaning of undisclosed income as indicated in section 158B(b) of the Act and submitted that this includes income which is not disclosed and what the assessee had done is it had claimed false depreciation with the sole intention that the income in its books of account is not disclosed fully. He accordingly supported the order of the Assessing Officer for making the assessment. He further submitted that what the assessee had done in its books of account is to bring down its real income by making false entries in its books and claiming depreciation at 100 per cent on non-existent assets and nonexistent transactions of lease. He submitted that the i....
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....lish those facts, the assessee looses all rights of entitlement of deduction. He submitted that it is here that the power of enhancement comes into operation. 100. He further drew our attention to another Supreme Court decision in Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 for the proposition that where the assessec is not in a position to show the existence of the asset which is the primary condition for establishing the ownership of the asset followed by the assessee having owned by acquisition or otherwise, the entire claim of depreciation on such a non-existing asset is a sham claim and considering that the Tribunal has the power of enhancing the income. He pleaded that one another Supreme Court decision in Nund & Samont Co. (P.) Ltd. v. CIT [1970] 78 ITR 268, for the proposition that where the assessee fails to produce evidence to establish existence of the asset and its ownership by the assessee, it is not the duty of the Assessing Officer to collect the evidence to support the claim of the assessee for depreciation and this is another instance by which the sham claim of depreciation should be considered for the purpose of enhancement of income. He pleaded....
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....ching the banks for information whether Mr. V.K. Srinivas had helped in the opening of the accounts. He submitted that a sample of the same is placed at pages 18 to 20 of the paper book. He submitted that the copy of the bank account which is placed at page 20 shows the account to have a credit of Rs. 41.18 lakhs and debit on the same day of Rs. 34.25 lakhs which show that the credits on account of the cheques issued by the assessee and the debits on account of cheques issued to the assessee. 103. Dr. Krishna, at this point of time drew our attention to the 3 volumes of the paper book filed by the assessee containing various documents in respect of which all the above as were with the assessee. He submitted that in this case, the lease rental is of Rs. 32 lakhs and the moment such lease rental is paid in full in one lump sum, the lessee has no further liability at all. The agreement clearly shows that the item in question results in 100 per cent depreciation. He submitted that this is one example which he wants to bring to the attention of the Bench which clearly shows that the transactions of lease are nothing but sham only with a view to claim depreciation at 100 per cent so a....
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....997 in its letter of 15-5-1997 had stated that the transaction with the assessee was for commission purposes only. Aero Pistons in its letter of 17-5-1997 had stated "1 - the assets covered under the lease agreement details are available at our works in working condition; 2 - we are involved in the special processing for nitriding and solution and precipitation treatments of alloy steel components; 3 - the deposit made to them were generated out of the sale proceeds of then available assets with us; 4 - during 1995-96 we have not charged off any lease rentals. Hence no ledger account was maintained by us for M/s. Kirloskar Investments & Finance Ltd.". It is clear from the letter of Aero Pistons that they are in possession of Pit Type Furnace that is covered under the lease agreement and it is in working condition and they did make the deposit with the assessee. What they deny is about charging off the lease in their books and the non-maintenance of the ledger account of the assessee. The next category is of supplier Pentagon Innovative Systems for supply of different kinds of furnaces to the lessees Liquid Engineers. In this case the supplier stated that it purchased the item....
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.... only confirmed the transaction though it had pleaded that it should be treated as direct lease. Therefore, to treat this transaction as sham is unwarranted. The next transaction of supply of furnace involves the supplier M/s. Civic Engg. & Contractors and the lessee Wave Current Thermal Proc. (P.) Ltd. There was no response from the supplier but the lessee replied vide its letter of 17-5-1997. In its reply it stated that "1 - the assets covered under the lease agreement details are available at our works in working condition; 2 - we are the manufacturers of Piston Pins, Gudeon Pins and also are specialists in Heat Treatment services for all automobile vehicles; 3 - the deposit made to them were generated out of the sale proceeds of then available assets with us; 4 - during 1995-96 we have not charged off any lease rentals. Hence no ledger account was maintained by us for M/s. Kirloskar Investments & Finance Ltd.". The next transaction involves centering sheets stated as supplied by Brilliant Traders and the lessee is Skyline Construction (P.) Ltd. and in this case, the premises of the supplier was surveyed on 2-4-1996 and the manager of the concern accepted the sale as recor....
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....Electro Ferrites for furnace lessee confirmed the lease and the existence of the assets in its premises. From the above it is the transaction No. 1 involving New Era. Urban Amenities Ltd. and Vijaya Commercial House the transaction stands totally denied on which the assessee must show the genuineness of the transaction. In regard to the second transaction involving Blades India and Sonic Marketing, supplier was stated to be fictitious concern and the transaction was accepted as for commission only. This is contrary to the claim by the assessee and the assessee must show its genuineness. The third transaction the department was not able to get any adverse evidence and therefore, the department must prove it to be sham. The fourth, though the supplier Udayamala Fabs denies the sale, the lessee states that there was a proposal only and therefore, the assessee must show the transaction to be genuine. The fifth, one of the stated that consequent to the search it had disclosed commission at 12 per cent on the invoice value of Rs. 73.43 lakhs and this confirms that it did have the transaction with the assessee and Assessing Officer therefore must not choose one for the other but, confr....
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.... lakhs as is income is an indication of acceptance of the transaction but for the purpose of commission which income it might not have disclosed but for the search made on it. Merely because the said party had stated the transaction was one for commission, the Assessing Officer should not have proceeded to hold the assessee as intending to reduce its tax liabilities but called that party for examination by the assessee because the very same party had signed the lease agreement and such signing is not out of any coercion. The department was not able to trace the supplier Venus Container Links and the lessee Gas & Gas Enterprises and its drawing of adverse inference is not proper and therefore, it must establish it to be sham by making further inquiries and by asking the assessee to assist it to trace the parties. If the assessee states that it has no further trace of the lessee, the department could use it to draw adverse inference. In view of the above observations we are of the opinion that the department had hastily concluded that the assessee had claimed depreciation on non-existing assets with a view to reduce its taxable income and that in order to come to this conclusio....