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Judgment
P.D. Dinakaran, J.—These tax case appeals are preferred against the order of the Income Tax Appellate Tribunal dated 26.04.1999 made
in I.T(SS)A. No. 75/MDS/97, which was filed against the order of the Assessing Officer dated 27.02.1997. Tax Case Appeal No. 10 of 2000 is
filed by the revenue and Tax Case Appeal No. 47 of 2000 is filed by the assessee.
The assessee is a Private Limited Company engaged in the business of construction and sale of residential and commercial buildings. The
assessee commenced the business in the year 1992. K. Narasa Reddy designated as the Managing Director of the assessee company held 50% of
the shares and the remaining 50% of the shares was shared by Subba Reddy (Individual) designated as the Director of the Company, Subba
Reddy (HUF) and Rajini Reddy, wife of Subba Reddy.
3.1. There was a search in the premises of the assessee u/s 132 of the Income Tax Act, 1961 on 23.02.1996. In the course of the search the
following documents were seized:
i. Statement of accounts prepared by one V.C. Gupta, Executive Director (Finance) of the company, relating to the settlement of accounts to the
outgoing Director Subba Reddy and his group;
ii. Work Sheet prepared by Chartered Accountants Giri and Prabhakar, which was taken into consideration for settling the accounts of the
outgoing Director Subba Reddy and his Group,
iii. Paper showing negotiation with buyers for purchase of flats.
3.2. Concededly, except the three documents referred to above, there was no other seizure of cash, bullion, jewellery or other articles or things of
value during the time of search.
Based on the above materials, the Assessing Officer, gave due notice to the assessee u/s 142(1) of the Income Tax Act; received their
objections; gave an opportunity to the assessee to explain its objections; and thereafter came to the conclusion that during the block period from
1986-87 to 1996-97, there was undisclosed income amounting to Rs. 10,24,64,660/- as per the following details, attracting income tax to the tune
of Rs. 7.07 crores :
Sl. Assessment year Total Undisclosed Tax payable
No. income (Rs. ) thereon (Rs)
i. 1993-94 52,81,110 36,43,970
ii. 1994-95 1,97,10,820 1,36,20,820
iii. 1995-96 2,61,16,191 1,82,27,380
iv. 1996-97 5,10,26,738 3,52,08,450
Total 10,24,64,660 7,07,00,620
Even though, only 85% of the constructed area of Kences Enclave Project was sold, and the balance 15% remained unsold, they did not
receive the entire sale consideration even for the 85% of the areas sold before the date of search, and that the entire sale consideration was
collected by the assessee only during the subsequent period for which the assessee duly submitted their returns and paid tax.
However, the Assessing Officer took note of the documents seized at the time of search referred to above and came to the conclusion that
entire sale consideration for the sale of 85% of the constructed area was already received by the assessee and therefore passed an assessment
order on 27.2.1997 directing the assessee to pay a sum of Rs. 7.07 crores as income tax.
7.1. Against the assessment order dated 27.2.1997 directing the assessee to pay tax amounting to Rs. 7.07 crores, the assessee preferred an
appeal before the Tribunal in I.T.(SS) A. No. 75/MDS/97 contending that the documents relied on by the Assessing Officer for the purpose of
arriving at the undisclosed income, namely, the statement of accounts prepared by V.C. Gupta and the work-sheet of the Chartered Accountants
were prepared only for the purpose of settling their shares payable to the outgoing Director Subba Reddy and his group as the settlement of shares
to an outgoing Director could not be indefinitely postponed and had to be worked out based on the entire value of the project; and therefore, the
said documents would not themselves be considered as a conclusive evidence that the assessee had received the entire sale consideration from the
purchasers.
7.2. According to the assessee, the Assessing Officer ought to have taken all relevant factors into consideration, namely, the actual receipts of sale
consideration from the purchasers by way of cheques or cash before the date of search as well as the amount received as income generated by
such sale subsequent to the date of search, which were in fact shown in the returns duly filed by the assessee as well as the tax paid for the same
for the subsequent period.
7.3. The assessee referring to the fact that except the three documents referred to above, there was no other seizure of cash or bullion, jewellery or
other articles or things of value during the time of search, contends that the conclusion of the assessing officer that there is undisclosed income is
without any basis. Such conclusion as to the undisclosed income is solely based on the documents referred to above, which was intended to settle
their shares payable to the outgoing Director, Subba Reddy and his group is arbitrary, unreasonable and perverse.
That apart, the assessee also claimed 100% depreciation with reference to their investment on the windmill to the tune of Rs. 1,87,13,477/-
which got commissioned on 30.09.1985 based on the certificate issued by the Electricity Board. The Tribunal while accepting the case of the
assessee that 100% depreciation with reference to installation of wind mill, rejected the contentions of the assessee with regard to the undisclosed
income and computed the undisclosed income at Rs. 1,64,59,292/- and gave 40% margin for the unsold portion of the constructed area.
9.1. Aggrieved by the order of the Tribunal dated 26.04.1999, regarding the computation of the undisclosed income the assessee preferred TC
(A) No. 47 of 2000 and the Revenue preferred TC(A) No. 10 of 2000.
9.2. The substantial questions of law raised by the assessee in TC(A) No. 47 of 2000 are as follows:
i. Whether on the facts and in the circumstances of the case, the Tribunal was right in determining the undisclosed income eventhough the
Assessing Officer himself has not specifically rejected the books of accounts of the appellant or the method of accounts adopted by the appellant?
ii. Whether on the facts and in the circumstances of the case, the Tribunal was right in determining the undisclosed income at Rs. 385/- lakhs as a
profit from Enclave Project when the assessee himself returned the profit to the extent of Rs. 580.00 lakhs based on the actual sale?
iii. Whether on the facts and in the circumstances of the case, the Tribunal was right in concluding that the appellant had made a total profit of Rs.
642.00 lakhs in the Enclave Project when no material regarding collection of excess sale price or unaccounted expenditure has been found by the
Department?
iv. Whether on the facts and in the circumstances of the case, the Tribunal ought to have concluded that the seized material was merely an estimate
of the profit that might be earned out of the project and in the absence of any specific material to show that the appellant had earned more income
than accounted no undisclosed income can be seized in the hands of the appellant in respect of the said project?
v. Whether on the facts and in the circumstances of the case, the Tribunal ought to have clarified that the amount of Rs. 385.00 lakhs constitute the
total profit before tax out of the project during the block period and the profits already offered by the appellant should have been excluded ?
vi. Whether on the facts and in the circumstances of the case the Tribunal ought to have taken into account the profit already offered by the
appellant in the said project over various years?
9.3. The substantial questions of law raised by the Revenue in TC(A) No. 10 of 2000 are as follows:
Whether on the facts and in the circumstances of the case and having regard to various seized materials placed, the Appellate Tribunal is right in
law in allowing a margin of 40% on Rs. 642.00 lakhs on the profit earned on Kences Enclave Project?
Was the Tribunal right in granting 100% depreciation even if it held that the production started on 30.09.1985 and not on 25.10.1985 and that
has it ignored the provisions of Section 32(1) 2nd proviso and Section 158(B) (definition of block period) of the Income Tax Act?
10.1. Mrs. Pushya Sitaraman, learned standing counsel appearing for the Revenue contended that the undisclosed income estimated by the
Revenue is based on the material documents collected/seized from the premises of the assessee at the time of search, namely, i) Statement of
accounts prepared by one V.C. Gupta, Executive Director (Finance) of the company, relating to the settlement of accounts to the outgoing
Director Subba Reddy and his group; ii) Work Sheet prepared by Chartered Accountants Giri and Prabhakar, which was taken into consideration
for settling the accounts of the outgoing Director Subba Reddy and his Group; and iii) Paper showing negotiation with buyers for purchase of flats.
Those documents having been acted upon by the assessee and the Directors of the company, are binding on them and, therefore, the assessing
officer is right in arriving at the undisclosed income based on such materials.
10.2. According to the Revenue, the contention of the assessee that they received the entire sale consideration only after the date of search is
nothing but an after thought. Even though the assessee had filed returns stating that they have received the entire sale consideration for the sale of
85% of the constructed area and had paid tax for the subsequent period, that will not eschew them from the liability to pay tax and the explanation
offered by the assessee in this regard is not only untenable but it would only amount to evasion from payment of tax.
Per contra, Mr. P.P.S.Janardhana Raja, learned counsel for the assessee forcefully contends that it is admitted that except the documents
seized at the time of search, there was no seizure of cash, bullion, jewels or other things of value. In other words, the only materials available for
estimating the undisclosed income or the documents seized at the time of search as referred to above, those documents were prepared only for the
purpose of settling the accounts of the outgoing Director, Subba Reddy, and his group. In normal business practice, much less in the real estate
business, the over all value of the project has to be worked out while settling the accounts to the outgoing Director, irrespective of the receipt of
the entire sale consideration from the purchasers on the date of retirement of the outgoing Director. Therefore, these documents cannot themselves
be a basis for estimating the undisclosed income.
We have given careful consideration to the submissions made by either side.
Regarding the second substantial question of law raised by the Revenue in TC(A) No. 10 of 2000, namely, Was the Tribunal right in granting
100% depreciation even if it held that the production started on 30.09.1995 and not on 25.10.1995 and that has it ignored the provisions of
Section 32(1) 2nd proviso and Section 158(B) (definition of block period) of the Income Tax Act?"", since the wind mill installed by the assessee
got commissioned on 30.9.1985, as certified by the Electricity Board, the entitlement of the assessee for 100% depreciation with respect to their
investment in the installation of the wind mill cannot be disputed and, therefore, this issue is decided in favour of the assessee and against the
Revenue.
The centripetal force behind the substantial questions of law raised by the assessee in TC(A) No. 47 of 2000 and the first substantial question
of law raised by the Revenue in TC(A) No. 10 of 2000 revolves around the materials available for estimating the undisclosed income as on the
date of search as relied by the Revenue and disputed by the assessee and therefore, all the questions are dealt with commonly.
Concededly, at the time of search except the documents referred to above, there were no other materials or valuables such as cash, bullion,
jewellery or other articles or things of value, seized from the premises of the assessee.
The assessee company permitted Subba Reddy and his group to retire from the company for settling his dues based on the settlement of
accounts prepared by the Executive Director (Finance) and the report of the Chartered Accountant. There is no other material to hold that
assessee received any cash from any of the purchasers for the sale of the 85% of the built up area. The entire sale consideration was not credited
into account by cheque nor there was any material to show that the company accepted cash payment. On the other hand, the explanation offered
by the assessee that they received cheques towards sale consideration of the 85% of the building sold and that was reflected in the income tax
returns while paying income tax for the subsequent years deserves consideration. Therefore we are not able to appreciate that the documents
seized from the premises of the assessee at the time of search as referred to above is a conclusive proof to arrive at the undisclosed income.
The expression ''undisclosed income'' has been defined in Section 158B(b) of the Income Tax Act to include income based on entries in the
books of account or other materials seized from the premises of the assessee at the time of search. In the instant case, even though the documents
seized at the time of search would at best be considered in our opinion as prima facie material, since except the said documents there was no
seizure of money, bullion, jewellery or other articles or things of value during the time of search, the said documents themselves would not be a sole
criteria for estimating the undisclosed income in view of the explanation offered by the assessee that they were prepared for the purpose of settling
the dues of the outgoing Director, who proposed to retire. Both the orders of the assessing officer as well as the Tribunal, therefore, lack specific
finding as to the reliability and relevancy of those documents for arriving at the undisclosed income of the assessee on the date of search or in the
light of payment credited to the accounts of the assessee by way of cheques from the purchasers for the sale of 85% of the constructed area only
after the date of search and the tax paid thereon as reflected in their return.
Hence, both the orders of the assessing officer and the Tribunal are set aside and the matter is remanded back to the assessing officer to
compute the correct undisclosed income in accordance with law.
The appeals are disposed of in the above terms.