Commissioner of Income Tax and Another vs B. Nagendra Baliga

B. Manohar, J.—The Revenue has filed this appeal u/s 260A of the income tax Act, 1961 (for short "the Act"), challenging the order dated September 22, 2006, made in I.T.(SS)A No. 11/PANJ/2002 passed by the income tax Appellate Tribunal, Bangalore "B" Bench (for short "the Tribunal"), confirming the order dated April 30, 2002, passed by the Commissioner of income tax (Appeals)-VI, Bangalore (for short "the first appellate authority") for the block assessment period April 1, 1989, to January 28, 2000. The instant appeal was admitted to consider the following substantial questions of law:

Whether the appellate authorities were correct in holding that the Assessing Officer is not entitled to extrapolate the undisclosed income detected in the course of search for a particular period to the entire block period on estimate basis despite adopting a rational basis for working out such an estimate and the same having reasonable nexus to the material discovered and the statement of the assessee recorded pursuant to search?

Whether the appellate authorities were correct in not taking into account the statement recorded by the assessee who admitted making sales and purchases outside the books to the tune of Rs. 64,90,000 which was admittedly invested to developing building/property that is New Residential Bungalow Rs. 15,90,000, Vasudev Towers Rs. 10,00,000 residential property at bypass Road, Vasudev Residency Rs. 24,00,000 Vasudev Plaza and Girijamma Property Rs. 15,00,000?

Whether the appellate authorities were correct in holding that since the valuation of Vasudev Building was held to be a mere opinion which cannot be brought to tax as the undisclosed income of the block period in the case of the firm, M/s. Vasudev Constructions, the same cannot be considered as the income of the assessee in these proceedings also?

Whether the appellate authorities were correct in holding that the Assessing Officer in respect of the block period cannot levy surcharge despite the Finance Act contemplating such a levy?

Whether the appellate authorities were correct in holding that the interest levied u/s 158BFA(1) of the Act by the Assessing Officer is liable to be set aside despite the mandatory payment of such interest by the assessee as contemplated in the said section?

During the course of the arguments, Sri K.V. Aravind, learned counsel appearing for the Revenue, submitted that no issue has been raised before the Tribunal with regard to the second and the third substantial questions of law 2 and 3. Hence, the said questions need not be answered.

In view of the above submission, the substantial questions of law 2 and 3 do not arise for consideration.

With regard to first substantial question of law is concerned, learned counsel appearing for both the parties submitted that the said question is covered by the judgment of the hon''ble Supreme Court reported in Assistant Commissioner of Income Tax and Another Vs. Hotel Blue Moon, .

We have carefully gone through the judgment of the hon''ble Supreme Court. The Supreme Court clearly held that the assessment for the block period can only be done on the basis of the evidence found as a result of search or requisition of the books of account or documents and such other materials or information as available with the Assessing Officer. Paragraph 12 of the judgment reads as under (page 368):

Chapter XIV-B provides for an assessment of the undisclosed income unearthed as a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. It is not intended to be substituted 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 Assessing Officer. Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of search u/s 132 or requisition u/s 132A of the Act.

In view of the judgment of the hon''ble Supreme Court, the first substantial question of law is answered in favour of the assessee and against the Revenue.

With regard to the fourth substantial question of law is concerned, it is admitted by the parties that this issue is also covered by the judgment of this court reported in Commissioner of Income Tax, Mysore Vs. K.C. Puttaswamy Gowda, . The judgment reads as under:

The Revenue has preferred this appeal challenging the order passed by the income tax Appellate Tribunal which held that proviso to section 113 which was inserted by Finance Act, 2002 with effect from June 1, 2002 does not have retrospective application, therefore, the surcharge levied on the assessee is not leviable and therefore, it preferred to delete surcharge. Aggrieved by the said order, Revenue has preferred this appeal.

The apex court in the case of Commissioner of Income Central II Vs. Suresh N. Gupta, has held as under (page 340 of 297 ITR):

According to the assessee, prior to June 1, 2002, the position was ambiguous as it was not clear even to the Department as to which year''s Finance Act would be applicable. To clear this doubt precisely, the proviso has been inserted in section 113 by which it is indicated that the Finance Act of the year in which the search was initiated would apply. Therefore, in our view, the said proviso was clarificatory in nature. In taxation, the legislation of the type indicated by the proviso has to be read strictly. There is no question of retrospective effect. The proviso only clarifies that out of the four dates, Parliament, has opted for the date, namely, the year in which the search is initiated, which date would be relevant for applicability of a particular Finance Act. Therefore, we have to read the proviso as it stands.

There is one more reason for rejecting the above submission. Prior to June 1, 2002, in several cases, tax was prescribed sometimes in the 1961 Act and sometimes in the Finance Act and often in both. This made liability uncertain. In the present case, however, the rate of tax in case of block assessment at 60 per cent was prescribed by section 113 but the year of the Finance Act imposing surcharge was not stipulated. This resulted in the above four ambiguities. Therefore, clarification was needed. The proviso was curative in nature. Hence, the proviso inserted in section 113 merely clarifies that out of the above four dates, the relevant date for applicability of the Finance Act would be the year in which the search stood initiated u/s 158BC.

Therefore, the apex court, has said that such proviso is curative in nature and it merely clarifies that for a relevant date for applicability of the financial year would be the year in which the search is initiated u/s 158BC Therefore, the order of the Tribunal is contrary to the order passed by the Assessing Officer and it is hereby set aside.

However, in the case of Commr. of Income Tax-I, New Delhi Vs. Vatika Township P. Ltd., after referring to the aforesaid; Supreme Court judgment, the larger Bench of the apex court was at the view that the aforesaid judgment requires to be considered by a larger Bench and accordingly, a direction was issued by the Registry, to place the matter before the larger Bench. It was submitted that, now the matter is before the larger Bench.

Under these circumstances, as the law stands today surcharge is payable by the assessee. In the event of the larger Bench of the Supreme Court reversing the aforesaid judgment of the apex court and holding surcharge is not leviable, the assessee is absolved of the liability to pay surcharge. Therefore, in our view, the proper order to be passed is to set aside the order of the Tribunal and remit the matter to the assessing authority with the direction to await the judgment of the apex court and consequent to the order passed by the larger Bench to give effect to our order. Hence, the following order:

Appeal is allowed

The impugned order passed by the Tribunal is hereby set aside.

The orders passed by the assessing authority and the Appellate Commissioner is restored.

However, the Assessing Officer shall await the decision of the larger Bench of the apex court and depending on the decision to be rendered by the apex court to give effect to the order. Matter remanded.

In the circumstances, the fourth substantial question of law is answered in favour of the Revenue. However, the Assessing Officer shall await the decision of the larger Bench of the hon''ble Supreme Court and may proceed subject to outcome of the decision that will be rendered by the hon''ble Supreme Court.

The fifth substantial question of law is with regard to levy of interest u/s 158BFA(1) of the Act for the delay in filing the return is concerned. Sri K.V. Aravind, learned counsel appearing for the Revenue, contended that in view of the mandatory provision, the Assessing Officer is liable to levy interest for filing the return of income belatedly for the block assessment period. He relied upon the judgment of this court in Commissioner of Income Tax and Another Vs. Khoday India Ltd., .

On the other hand, Smt. Vani H. learned counsel appearing for the assessee, contended that the delay, in filing the returns cannot be attributable to the assessee. She contended that search was conducted on January 28, 2000, and a few documents including two diaries containing noting for the period September, 1997, to December, 1997, were seized. On February 3, 2000, the assessee requested for issue of xerox copies of seized materials in order to file returns. On April 20, 2000, the Department called upon the assessee to pay the requisite fee for issue of xerox copies of the seized materials. Accordingly, the assessee paid the said fee. On May 30, 2000, furnished the voluminous material. On verifying the voluminous documents, it was noticed that the xerox copies of two diaries which were also seized were not furnished. Subsequently, the said copies were furnished, however, the Department had taken more than four months time to issue photo copies of the seized materials. On June 20, 2000, the Deputy Commissioner of income tax issued notice u/s 158BC of the Act calling upon the assessee to file the returns of income for the block assessment period. The said notice was served on the assessee on June 22, 2000. On July 10, 2000, the assessee filed 10 returns of income for the block period and later by March 22, 2001, he filed 29 regular returns. On October 30, 2000, the assessee filed returns for the relevant block period relating to the period in question. In view of the delay on the part of the Department in furnishing necessary documents, the delay had occasioned. The said delay cannot be attributable on the part of the assessee.

On verification of the records, we found that there is considerable force in the submission made by the assessee. Without furnishing the necessary documents sought for by the assessee, which were seized during the course of search, the assessee cannot be called upon to file the returns. The delay in filing the returns cannot be attributable on the assessee. Accordingly, the fifth substantial question of law is answered against the Revenue and in favour of the assessee. Accordingly, the appeal is allowed in part. The substantial questions of law 1 and 5 held in favour of the assessee and the fourth substantial question of law is held in favour of the Revenue.