Commissioner of Income Tax vs DPA Finvest Services Ltd.

This appeal under section 260A of the Income-tax Act, 1961 ("the Act") is directed against the order dated September 20, 2013, passed by the Income-tax Appellate Tribunal ("the ITAT") in IT(SS)22. No. Del/2010 for the block period from April 1, 1990, to August 20, 2000. The brief facts of the case are that a search and seizure operation under section 132 of the Act was conducted on August 3, 2000, by the Investigation Wing of the Department in the case of Manoj Agarwal, M/s. Friends Portfolio Pvt. Ltd. ("FPPL") which admittedly had given bogus accommodation book entries to various persons. FPPL had given away its right to trade on the stock exchange to another company and, therefore, no genuine trading for any client was done by FPPL. In the course of the assessment proceedings of FPPL and Manoj Agarwal, it transpired that they were using the name and accounts of FPPL for the purposes of providing accommodation book entries. One of such persons who benefited from such accommodation entry was found to be the respondent-assessee, i.e., M/s. DPA Finvest Services Ltd. ("DFSL"). It was shown to have received a sum of Rs. 61,933 from FPPL as an accommodation entry. On the basis of the above material, a notice was issued to the respondent DFSL who was asked to explain each of the credit entries in its bank account with Syndicate Bank, Green Park Extn. New Delhi.

In the order dated March 30, 2005, the Assessing Officer ("the AO") concluded that entries in the aforementioned account totaling Rs. 33,75,949 "could not be explained by the assessee-company". Accordingly, they were treated as unexplained credit under section 68 of the Act. Penalty proceedings under section 158BFA(2) were also initiated.

The aforementioned order was overturned by the Commissioner of Income-tax (Appeals) by the order dated February 22, 2010, by holding that the additions made were based on transactions "which are not related to any evidence collected during the course of search proceedings of the main person". In other words, it was held that all the additions made were "basically the credit entry found in the appellant''s declared bank account".

By the impugned order dated September 20, 2013, the Income-tax Appellate Tribunal dismissed the Revenue''s appeal on the ground that "addition can be made only for an amount of Rs. 61,933 which can be said to be income from undisclosed sources". It was farther recorded that as regards the additions made by the Assessing Officer "nothing was brought on record to show that some evidence relating to these transactions was seized during search on Shri Manoj Agarwal".

It is contended by learned counsel for the appellant that the interpretation placed by the Income-tax Appellate Tribunal on section 158BB(1) of the Act is too narrow and it overlooks the words "and relatable to such evidence" which follows the words "evidence found as a result of search or requisition of books of account or other documents..." In other words, his contention is that if there is anything that emerges during the enquiry which can be said to be "relatable" to the material unearthed during the search, then clearly the opinion to be formed by the Assessing Officer cannot be restricted to merely what is found during the search. However, on facts, the learned counsel for the appellant was unable to dispute that in the present case the Assessing Officer simply added the credit entries for which the assessee was unable, to give explanations.

It is pointed out by the learned counsel for the respondent that in this case the accounts were fully disclosed by the assessee at the time of filing the regular returns. According to him, the entries for which explanation was sought had no connection either with Mr. Manoj Agarwal or FPPL and, therefore, could not be said to be relatable to a single accommodation entry that was unearthed during the search. Relying on the decision in Commissioner of Income Tax Vs. Bluechip Construction Co. (P) Ltd., (2007) 213 CTR 530 , it is submitted that the unexplained entries in the books of account of the assessee could be dealt with only in the regular assessment proceedings under section 143 of the Act and not in the block assessment proceedings. He sought to draw a distinction between "unexplained" income and "undisclosed" income which was a sine qua non for section 158BB of the Act to apply. Reliance is also placed on the decisions in Commissioner of Income Tax Vs. J.M.D. International, (2009) 179 TAXMAN 253 , Commissioner of Income Tax Vs. Ansal Buildwell Ltd., (2008) 219 CTR 238 : (2008) 304 ITR 378 : (2008) 171 TAXMAN 189 , Commissioner of Income Tax Vs. Harkaran Das Ved Pal, (2009) 222 CTR 438 : (2011) 336 ITR 8 : (2009) 177 TAXMAN 398 .

At the outset, it must be noticed that the Income-tax Appellate Tribunal has referred to the decision of the Supreme Court in Assistant Commissioner of Income Tax and Another Vs. Hotel Blue Moon, (2010) 229 CTR 219 : (2010) 321 ITR 362 : (2010) 2 JT 136 : (2010) 2 SCALE 55 : (2010) 3 SCC 259 : (2010) 2 SCR 282 : (2010) 2 UJ 834 . The two questions that the Supreme Court considered in the said case were. : (i) whether issuance of notice under section 143(2) of the Act within the prescribed time limit was mandatory for the purposes of the assessment under section 143(3) of the Act?; and (ii) whether certain additions made in that case under section 68 of the Act ought to have been deleted? An incidental issue that was examined was whether block assessment could have been made under section 158BC without issuing notice under section 143(3) of the Act? In that context, the Supreme Court discussed Chapter XIV-B under which sections 158BB and 158BC fall. In paragraph 12, the Supreme Court observed as under (page 368 of 321 ITR):

"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 substitute for regular assessment.

Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as a result of search under section 132 or requisition under section 132A of the Act."

Although in the above background the Supreme Court observed that the scope and ambit of Chapter XIV-B was limited to "materials unearthed during search," clearly the court was not saying that the assessment for the block period could not be on the basis of materials and information available with Assessing Officer and "relatable to such evidence" unearthed during the search. That question, in the facts of that case, did not arise before the Supreme Court.

In order to undertake a proper exercise in terms of section 158BB(1), the Assessing Officer will have to come to a definite conclusion that what emerges during the enquiry following the search in the form of information or material is "relatable to such evidence" as has been unearthed during the search. That exercise will of course vary from case to case. There has to be an application of mind by the Assessing Officer to the information gathered, and an effort has to be made to relate such information or material to the evidence unearthed during the search. This court in Harkaran Das Ved Pal (supra) explained as under (page 23 of 336 ITR):

"The procedure under Chapter XIV-B is not intended as a substitute to regular assessment and its scope and ambit is limited in that sense to materials unearthed during the search. As pointed out in Earn Kant Jain (supra), 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 other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence. It is, therefore, clear that the undisclosed income, which is to be determined under Chapter XIV-B, has to be determined on the basis of evidence discovered during the search. It is obvious that where the computation of undisclosed income is based on material other than what was found in the course of the search, the same could not be treated as undisclosed income determined under clause (c) of section 158BC."

In coming to the above conclusion, this court followed its earlier decision in Commissioner of Income Tax, Delhi-II Vs. Ravi Kant Jain, (2001) 4 AD 710 : (2001) 91 DLT 764 : (2001) 59 DRJ 741 : (2001) 250 ITR 141 : (2001) 117 TAXMAN 28 .

In the instant case, nothing has been brought on record by the Assessing Officer to show that any information or material that he came across during the enquiry was in fact "relatable" to the solitary accommodation entry which was unearthed during the search. In the circumstances, the conclusion of the Commissioner of Income-tax (Appeals) that there was no justification in the Assessing Officer simply adding the credit entries which, according to him, were not explained by the assessee cannot be faulted.

In the facts of the present case, the court does not find any substantial question of law that arises which required examination by this court. The appeal is dismissed.