Commissioner of Income Tax, Cochin vs Arya Bangy

C.N. Ramachandran Nair, J.—This is an appeal filed by the revenue u/s 260A of the income tax Act raising various questions of law as arising from orders of the Tribunal. We have heard the counsel for the revenue and counsel appearing for the respondent assessee. The assessment is a block assessment completed for the block period commencing from 1-4-1987 to 28-8-1997. The assessee is a partnership firm that was engaged in the manufacture and sale of wooden decorative doors, frames etc. In the course of search conducted on 28-8-1997, the department noticed that assessee was steadily engaged in the practise of unaccounted sales by accounting in seven cases only 10 per cent of the sale price. The documents recovered show that at the time of entering into contract with the purchasers for supply of materials, assessee shows the actual sale price and sales tax thereon. However, when sale is made, the bill raised is for much lower amount. Besides the above, the assessee was found to be engaged in suppression of 99 per cent of the price by recording in the books of account is only 1 per cent of the actual sale value. On verifying the bank accounts, Assessing Officer noticed that the surplus unaccounted income received were deposited in various bank accounts of partners. In the assessment order, details of as many as 47 bank accounts maintained by the partners and two relatives are given. What is clear from the bank account details is that partners started the account in a bank, closed it within two or three years and then started another account again, closed it after a duration of time and started another account and so as along with the recovery of purchase orders, sale bills, bank accounts and other records, the search team recorded statements from managing partner who confirmed the unaccounted business that was carried on. After search, the assessee was called upon to furnish return of undisclosed income. The assessee filed the return disclosing an additional unaccounted income of Rs. 32,88,333 for the block period. Besides this, assessee had filed returns for the assessment years 1997-98 declaring an income of Rs. 30,03,638 and for the year ending 1998-99 upto the date of search, assessee declared Rs. 15,34,342. The Assessing Officer assessed the undisclosed income at Rs. 2,13,09,241 as against Rs. 32,88,333 disclosed by the assessee.

The assessee filed appeal before CIT (Appeals), who refixed the undisclosed income by just making an addition of Rs. 5,00,000 to the undisclosed income returned by the assessee. Even though both the assessee and the department filed appeals before the Tribunal and Tribunal confirmed the order in the appeal, only department had filed this appeal before us and the assessee has accepted the order of the CIT (Appeals) making a further addition of Rs. 5 lakhs.

During hearing, the standing counsel for the department contended that neither the first appellate authority nor the Tribunal considered the correctness of the block assessment with, reference to seized materials or statements recorded which constitute evidence u/s 132(4) of the income tax Act, The counsel for assessee on the other hand, contended that the questions raised pertain to only modification to the undisclosed income determined by first appellate authority and so much so, the same does not constitute any substantial question of law for interference by this Court. In the normal course, we do not think this Court can interfere with a modification in the estimation of income made in the assessment, that is modified by appellate authorities. However, what we notice in this case is that the block assessment runs into 50 pages and Assessing Officer has considered each and every material seized in the course of search and survey. The pattern of income returned by the assessee for the assessment years 1991-92 to 1996-97 show that the income for every year is a steady average of around 1.25 lakhs. However, after the search, the assessee filed income tax return for 1997-98 declaring an income of Rs. 30,30,368, in addition to declaring undisclosed income of Rs. 32,88,333 for the block period. Therefore, the average undisclosed income returned by the assessee for each year is above Rs. 5,00,000, which is four times the income originally returned by the assessee. In the return filed, the assessee has given a note stating that the partners of the assessee have no other source of income and that the deposits made in the bank accounts represented business income of the firm. In the block assessment the Assessing Officer gives details of all the seized records and the bank accounts. However, on going through the appellate orders issued both by first appellate authority and the Tribunal, we notice that both these appellate authorities have not cared to look into the seized records or the statement recorded by the search team u/s 132(4) of the Act which should constitute the basis for a block assessment.

After going through all orders and after hearing both sides, we notice that the substantial question of law that arises for our decision is whether the Tribunal was justified in confirming the order of the CIT(A) who issued order by making a guess work without referring to any material constituting evidence as referred to in section 158BB(1) of the income tax Act.

First appellate authority took the view that the undisclosed income estimated by the Assessing Officer works out to 60 to 85 per cent of the turnover. Surprisingly, he does not state what is the basis of his adopting the turnover of the assessee for each year of the block period which are not stated in the order. Even the assessee does not have a case that the accounts are reliable and so much so, the Assessing Officer has not determined any turnover or estimated any income therefrom. Assessment is made based on the details collected from bank accounts maintained by the partners, which was treated as unaccounted income. Going by the statement given by the managing partner and the employee and the details of the bank accounts maintained by the partners, there could be no doubt that only surplus unaccounted income was deposited in the banks. Partnership firm has maintained separate bank accounts and therefore there was no justification for the appellate authority to assume that the expenditure is also incurred by the partners, for the purpose of the firm which was maintaining separate bank accounts. The most important aspect that did not engage the attention of the CIT (Appeals) is that the firm was engaged in cash transactions inasmuch as sales and expenditure were in cash and what is seen deposited in the bank as found by the Assessing Officer is only surplus. Therefore if that surplus is taken as undisclosed income by the assessee, there is no justification for the CIT (Appeals) to estimate income therefrom, treating the deposits as part of the turnover. What we notice is that the first appellate authority decided the case just based on arguments whereas the Assessing Officer has substantiated his findings whether tenable or not with reference to facts and figures based on seized records and statements. In our view, neither the CIT (Appeals) nor the Tribunal has considered the appeal in the way they ought to have done, that is by analysing the evidentiary value of the seized documents and the statements recorded and check whether the conclusions drawn by the Assessing Officer based on the evidence is tenable or not. When there is no proper exercise of jurisdiction by the first appellate authority, particularly in a case of block assessment, where undisclosed income has to be assessed based on evidence gathered on inspection, in terms of section 158BB(1) of the Act, the recourse open to us is only to set aside the orders issued in appeal by the Tribunal and that of the first appellate authority and remand the matter to the CIT (Appeals), for fresh decision after giving an opportunity of being heard to the assessee as well as to the Assessing Officer. We make it clear that appellate authority has to decide the case based on the evidence collected during search and survey because the block assessment is based on the same. Accordingly the appeal filed by the revenue is allowed, vacating the order of the Tribunal and that of the CIT(A) and we remand the matter to the first appellate authority for decision afresh.