R. Mani vs Income Tax Officer

R. Sudhakar, J.�The assessee is the appellant. It is a case of block assessment. These appeals are filed challenging the order of the Income-tax Appellate Tribunal "C" Bench, Chennai, dated August 25, 2006, made in I.T. (S.S.) A. Nos. 154/Mds/2004 and 4/Mds/2005 for the block assessment year 1989-90 to 1999-2000. T.C. (A.) No. 1244 of 2007 was admitted on the following substantial questions of law:

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal is right in rejecting the claim for availability of the opening cash balance merely based on surmise sans any material?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in assessing the gifts received from friends as casual and non-recurring income?

T.C. (A) No. 1245 of 2007 was admitted on the following substantial question of law:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that in a block assessment under section 158BC of the Income-tax Act irrecoverable advances made in the course of money-lending business cannot be allowed as a deduction in computing the assessable income?"

3.1. The facts in a nut-shell are as under: A search was conducted under section 132 of the Income-tax Act (for brevity, "the Act") on September 24, 1998, and certain incriminating documents were seized and heavy investments were noticed. Based on the materials, a notice under section 158BC of the Act was issued and in response to the same, the assessee filed a return of income.

3.2. The rival claims of the assessee and the Department and the findings rendered by the original authority, the first appellate authority and the Tribunal on each of the issues raised is as under:

Opening cash balance - (C.M.A. No. 1244 of 2007)

3.3.1. The assessee claimed Rs. 5,00,000 as opening balance for the assessment year 1989-90 in the cash flow statement filed along with the return of income and stated that he received cash as gift from friends and relatives as under:

(i) on the occasion of his daughter''s ear-boring ceremony, which was held on April 14, 1979, he received Rs. 2,60,000; and

(ii) on the occasion of his son''s ear-boring ceremony, which was held on May 13, 1985, he received Rs. 1,90,000;

The said amount was received by the assessee in common parlance as moi. That apart, the assessee claimed that a sum of Rs. 50,000 given by his wife out of her savings.

3.3.2. The Assessing Officer disbelieved the same and held that the functions were held in the years 1979 and 1985 and the assessee could not hold the money received as moi for such a long period, namely, till April 1, 1988, in its entirety. Thereafter, based on the direction given by the Joint Commissioner of Income-tax, Madurai, a sum of Rs. 2,50,000 was taken as opening balance and the balance amount of Rs. 2,50,000 was treated as undisclosed income.

3.3.3. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income-tax (Appeals), who gave a further relief of Rs. 50,000 and treated the opening balance as Rs. 3,00,000, thereby restricting the undisclosed income to Rs. 2,00,000.

3.3.4. Not being satisfied with the said order, the assessee preferred an appeal to the Tribunal. The Tribunal confirmed the order passed by the Commissioner of Income-tax (Appeals) holding that he has taken a liberal view and the same warrants no interference.

Remodelling of house at No. 15-B, Gokalay Road - (C.M.A. No. 1244 of 2007)

3.4.1. In the course of search proceedings, it was found that the assessee claimed that the house was remodelled at a cost of Rs. 3,50,000. But, as per the seized material, the Department estimated the value at Rs. 7,00,000. The assessee explained that the value of timber, asbestos and other construction materials is not Rs. 3,50,000, but only Rs. 90,000, and the same was received by the assessee on account of certain arbitration task undertaken by him in a dispute between the family friends and, hence, it is a capital receipt and not undisclosed income.

3.4.2. The Assessing Officer held that the assessee could not give proof for the same and as per the direction of the Joint Commissioner of Income-tax, Madurai, the cost of remodelling was taken as Rs. 4,40,000 and the sum of Rs. 90,000 was treated as undisclosed income, stating that it cannot be treated as capital receipt.

3.4.3. Aggrieved by the same, the assessee went on appeal to the Commissioner of Income-tax (Appeals), who held that the amount received by the assessee as honorarium from friends and family on resolution of disputes could be termed as casual and non-recurring type. Thus, he deducted a sum of Rs. 5,000 under section 10(3) of the Act and the balance amount of Rs. 85,000 was brought to tax.

3.4.4. The assessee appealed to the Tribunal, which confirmed the order passed by the Commissioner of Income-tax (Appeals).

Bad debts - (C.M.A. No. 1245 of 2007)

3.5.1. In the course of the search, it was found that there were certain entries showing that the assessee had given a sum of Rs. 3,50,000 to one Pothiraj and it was stated by the assessee that he could not recover the said amount despite lodging of a complaint with the police. Thereafter, the said Pothiraj passed away and as a complete settlement towards the loan taken by Pothiraj, he took over 58 cents of land at Kannanendal village.

3.5.2. The Assessing Officer held that even though the assessee claims to have lent money to Pothiraj, the source of the same is not explained and, therefore, treated it as undisclosed income of the assessee. Thus, the Assessing Officer brought to tax Rs. 3,50,000 being the loan given to said Pothiraj and Rs. 64,000 being the value of the land.

3.5.3. The Commissioner of Income-tax (Appeals) held that even if Rs. 3,50,000 is brought to tax, the same should be allowed as deduction towards bad debts in the year of recovery because the Assessing officer has already brought to tax Rs. 64,600 separately towards the value of the land purchased and, accordingly, allowed the appeal of the assessee by directing the Assessing Officer to delete the addition of Rs. 3,50,000.

3.5.4. The Department preferred an appeal before the Tribunal and the Tribunal finding that there were no books of account maintained by the assessee and there was no material to show that the debt has become bad, held that in block assessment, undisclosed income has to be computed in accordance with the provisions of the Act on the basis of evidence found as a result of search. It was further observed that the assessee had not complied with the requirement of section 36(2) of the Act, which mandates that for writing off a debt, it should be shown as income in the previous year. Since there was no such disclosure and claim for the previous year, it was held that the claim of bad debt cannot be countenanced. Thus, the Tribunal reversed the order passed by the Commissioner of Income-tax (Appeals).

3.6. Impugning the order passed by the Tribunal, the present appeals are filed on the substantial questions of law, referred to supra.

We have heard the erudite arguments of Mr. R. Srinivasan, learned counsel for the appellant and Mr. M. Swaminathan, learned standing counsel appearing for the respondent.

The issues raised in these appeals are dealt with on the trot.

Opening cash balance - (C.M.A. No. 1244 of 2007)

6.1. Before adverting to the merits of this plea, it is apposite to refer to section 158BB(1) of the Act, which reads as under:

"158BB. Computation of undisclosed income of the block period.--(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of this Act, 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, as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined..."

6.2. According to the learned counsel for the assessee, the Assessing Officer made certain deductions for the years prior to 1988 as probable expenditure and, thus, came to the conclusion that the opening balance of Rs. 5,00,000 as on April 1, 1988, is incorrect. Expatiating the said plea, he contended that as the Department has accepted the sum of Rs. 5,00,000 as opening balance, they cannot rely upon the so-called expenditure of the period prior to April 1, 1988, for disallowing the claim of the opening balance of Rs. 5,00,000, and the same would be hit by the provisions of section 158BB of the Act, which envisages that 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 relatable to such evidence alone should be taken into consideration and not issues prior to the block period. To bolster this plea, the learned counsel relied on the following decisions:

(i) Commissioner of Income Tax Vs. Khushlal Chand Nirmal Kumar, ;

(ii) Commissioner of Income Tax Vs. G.K. Senniappan, ;

(iii) The Commissioner of Income Tax Vs. K. Bhuvanendran, P.S.K. Jagannathan and B. Saroja (LH) Legal Heir of P.S.K. Balasubramaniam, ;

(iv) The Commissioner of Income Tax, Central I Vs. R.M. Patel (Huf), ;

(v) The Commissioner of Income Tax Vs. Shri. Ashok Khetrapal, ;

(vi) Commissioner of Income Tax Vs. P.K. Ganeshwar, ; and

(vii) Commissioner of Income Tax Vs. T. Sivaprabhaskar, .

6.3. To put it differently, the main plea of the learned counsel for the assessee is that block assessment of undisclosed income is to be based on evidence found in the search and material or information gathered in post-search inquiries made on the basis of evidence found in the search. In the present case, the Assessing Officer is relying on probable material or evidence in the nature of expenses incurred prior to the block period to compute the undisclosed income, which is contrary to the provisions of section 158BB of the Act.

6.4. The learned counsel for the assessee relied on the provisions of section 158BB(1) of the Act, post-amendment brought in by the Finance Act, 2002, to contend that the evidence found as a result of search or requisition of books of account or other documents or materials or information available with the Assessing Officer relatable to such evidence alone should be taken into consideration and, in the present case, the probable expenses are not based on evidence and, therefore, it could not have been disallowed.

7.1. Per contra, Mr. M. Swaminathan, learned counsel for the Revenue impressed upon the court that the provisions of section 158BB of the Act, as amended and even prior to the amendment brought in by the Finance Act, 2002, would make no difference in so far as the present case is concerned, as the Assessing Officer has taken into consideration the cash flow statement as admitted by the assessee for the purpose of computation of undisclosed income for the block period. To buttress this argument, he relied upon the annexure to the assessment order and the summary, which are relevant to the present issue and read as under:

7.2. On the basis of this computation of undisclosed income, it was contended that the undisclosed income was determined after giving due weightage to the drawings for each of the block years. He pleaded that if there were drawings out of the funds for each block assessment year, the assessee cannot claim that the entire amount of Rs. 5,00,000 remained as such till April 1, 1988, namely, the beginning of the block assessment. In support of this plea, he placed emphasis on the reasoning given in the assessment order, based on the cash flow statement furnished by the assessee, which is in the following terms:

"On the opening balance of Rs. 5,00,000 (2 issue), I am of the opinion that the assessee is not entitled to get this benefit. First function was celebrated somewhere in 1979 and the second function was celebrated in 1985. The assessee presumed that the moi receipts were kept intact till April 1, 1988. The assessee was also not able to produce evidence in what form the moi receipts were kept. When he is receiving moi from various parties/relatives it is also mandatory on the part of the assessee to pay back to the parties/relatives on occasion like ear boring/house warming/marriage, etc., if not more, an equal amount as moi. For the function the assessee would have spent heavy amount for booking halls, food, drinks, beverages, etc. Further, the time gap is also very big. It is, therefore, hard to believe that he has not spent any amount in moi payments, celebration of functions, etc., till the date of search. In this connection, I draw the attention to the finding given by me under the head moi receipts. Therefore, the assessee''s plea that he has the entire moi receipts intact on April 1, 1988, is not correct/true and, hence, it is rejected. Similarly, the amount of Rs. 50,000 stated to have been given by her wife out of her savings. There is no evidence for this. The assessee was an employee. His wife was also not doing any business. He is also very poorly paid. In this circumstances, no savings would be possible.

The assessee''s representative vehemently argued against the stand taken by me once again before the Joint Commissioner of Income-tax, Madurai. The matter was again discussed. Based on the evidence produced and the directions given by the Joint Commissioner of Income-tax, Madurai, an amount of Rs. 2,50,000 is taken as opening balance and also as source."

7.3. He further stated that the amount of Rs. 2,50,000 taken as opening balance by the Assessing Officer was increased by the Commissioner of Income-tax (Appeals) to Rs. 3,00,000 and the same was approved by the Tribunal and in relation to the increase in the opening cash balance, there is no dispute raised by the Department.

8.1. The core question that arises is as to whether the Assessing Officer relied upon any material other than what was found in the course of search or proceedings thereafter to come to the conclusion that the sum of Rs. 2,50,000 alone should be shown as opening cash balance and other amount should be treated as undisclosed income.

8.2. We find that the provision of section 158BB of the Act is in relation to computation of undisclosed income for the block period and that is to be done in accordance with the provisions of the Act on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials of information as are available with the Assessing Officer and relatable to such evidence.

8.3. In this case, the Assessing Officer based on the cash flow statement and the statement of the assessee recorded consequent to the search held that the opening cash balance should be Rs. 2,50,000 only. No doubt, we find that for drawing this inference the Assessing Officer has stated that some expenditure should be allowable for the previous years. We do not find any error in such a reasoning, given the statement of the assessee in the cash flow statement that for ten long years his drawing is around Rs. 50,000 to Rs. 75,000 during every block year. In view of the admission of the assessee that there is a drawing of certain amount during every block year, which we have already set out in the previous paragraphs, the assessee cannot claim that there was no drawing at all prior to the block assessment period 1989-90.

8.4. The contention of the learned counsel for the assessee that the amount fixed as opening cash balance is based on no material itself cannot be countenanced because the cash flow statement of the assessee is a record which speaks for itself. Nothing more is required for the Assessing Officer in the course of search to determine the opening cash balance and for computation of the undisclosed income for the block period. What is relevant for computation of undisclosed income under section 158BB of the Act is not merely evidence found as a result of the search but material information available with the Assessing Officer relatable to such evidence. The cash flow statement is a piece of evidence before the Assessing Officer given at the behest of the assessee and that material has been considered to compute the undisclosed income. The emphasis of section 158BB of the Act is on computation of undisclosed income and for that necessary materials can be taken into consideration and one such material is the cash flow statement and the inference by the Assessing Officer appears to be justified. It is not hypothetical or fanciful imagination of the Assessing Officer, but a stark reality, based on the cash flow statement made by the assessee and the contents therein.

8.5. We find that the decisions relied upon by the assessee may not apply to the facts of the present case for the following reasons:

(i) In the case of Commissioner of Income Tax Vs. Khushlal Chand Nirmal Kumar, , the issue was whether a report obtained subsequently from a Departmental Valuation Officer could be used and it was held that such document was not part of the documents found in the course of search or seizure and, therefore, no reliance can be placed on the same.

(ii) The decision of this court in Commissioner of Income Tax Vs. G.K. Senniappan, , is also a case of search conducted under section 132(1) of the Act in respect of one A.P. Shanmugaraj and documents seized in the course of such search were used as materials in the case of the assessee and in that view of the matter, the court found it not in consonance with section 158BB of the Act.

(iii) The decision in The Commissioner of Income Tax Vs. K. Bhuvanendran, P.S.K. Jagannathan and B. Saroja (LH) Legal Heir of P.S.K. Balasubramaniam, , was a case of no material found during the search.

(iv) In the case of The Commissioner of Income Tax, Central I Vs. R.M. Patel (Huf), , the seized material did not relate to the assessee and, therefore, the provisions of section 158BB of the Act were held not be applicable.

(v) The decision in The Commissioner of Income Tax Vs. Shri. Ashok Khetrapal, is in relation to a case of no incriminating material found during the course of search.

(vi) In the case of Commissioner of Income Tax Vs. P.K. Ganeshwar, , a Division Bench of this court following the decision in Commissioner of Income Tax Vs. S. Ajit Kumar, held that there was no material found during the course of search operation and, therefore, it cannot be the basis for making addition in the block assessment.

Hence, all these decisions do not throw any light on the plea made by the assessee.

8.6. On the contrary, Mr. Swaminathan, learned standing counsel was at pains to point out a decision of the Kerala High Court in Vengat Bava Vs. Commissioner of Income Tax, . In the said decision, based on the cash flow statement furnished by the assessee, certain additions towards unexplained investments and expenditure were made and additions to cash credit was also made. Under such circumstances, a Division Bench of the Kerala High Court held that when assessment is based on the materials gathered on inspection which showed proof of investment in landed properties and expenditure in the course of time under various heads, addition under sections 68 and 69 of the Act is permitted in an assessment under section 158BB read with section 158BC of the Act. This is in line with the key word in section 158BB of the Act that it should be in accordance with the provisions of the Act and fortifies our view on this issue.

8.7. In such view of the matter, we answer the first substantial question of law against the assessee and in favour of the Revenue.

Remodeling of house at No. 15B, Gokalay Road (C.M.A. No. 1244 of 2007)

9.1. The assessee claimed that the receipt of building construction materials valued at Rs. 90,000 was a capital receipt and not taxable. The Assessing Officer has held that it is not capital receipt and treated it as undisclosed income. The explanation offered by the assessee that friends had given him certain amount in consideration of his services rendered in resolution of disputes, in the absence of details and materials, did not find favour with the Assessing Officer, who treated it as undisclosed income.

9.2. The Commissioner of Income-tax (Appeals), however, modified the assessment order and held that Rs. 5,000 should be exempted as per section 10(3) of the Act and the balance Rs. 85,000 was treated as undisclosed income, being a casual and non-recurring type. The Tribunal approved the same.

9.3. The assessee relied upon a decision in COMMISSIONER OF Income Tax, MADRAS Vs. M. AHMAD BADSHA SAHEB., , where arbitration payments were treated as capital receipts. We find that the admission of the assessee itself is that it is not a case of arbitration per se. It is the claim of the assessee that it was paid as a gratis by some of his friends and relatives as a matter of goodwill and that too in kind, namely, timber and asbestos. Therefore, the said decision is of no help to the assessee.

9.4. The reliance placed by the assessee on the decision of this court in Commissioner of Income Tax Vs. Gopala Naicker Bangaru, is of no assistance to the assessee herein, as the facts of the said case are different in entirety. In the said case, devotees out of natural love and affection and veneration voluntarily donated to the assessee and it was held that the amount received by the assessee were gifts and they were not considerations for his profession/vocation.

9.5. In the case on hand, the Assessing Officer was of the view that Rs. 7,00,000 has been expended towards renovation of the house and Rs. 3,50,000 was claimed towards cost of material. That was accepted to some extent, except for Rs. 90,000. Therefore, the onus would rest on the assessee to show as to how the sum of Rs. 90,000 was received by him either in kind or in value. There being no material to substantiate that, the mere statement of the assessee is of no avail and the Department was, in our considered opinion, justified in treating the balance amount of Rs. 85,000 as undisclosed income, giving exemption to the extent of Rs. 5,000 as per section 10(3) of the Act.

9.6. In such view of the matter, the second question of law is answered against the assessee and in favour of the Revenue.

Bad debts - (C.M.A. No. 1245 of 2007)

10.1. This issue relates to the advances made by the assessee to one Pothiraj to the tune of Rs. 3,50,000 and his claim that it has become bad debt. It is on record that after the demise of Pothiraj, as a complete settlement towards the loan taken by Pothiraj, the assessee took over 58 cents of land at Kannanendal village worth about Rs. 64,600.

10.2. Even though the Assessing Officer brought to tax Rs. 3,50,000 given as loan and Rs. 64,600 being the value of land, the Commissioner of Income-tax (Appeals), directed deletion of Rs. 3,50,000. However, the Tribunal reversed the said finding relying upon section 36 of the Act. The main reason for the Tribunal to disallow such a claim is that there were no books of account in this case and there was no seized material to show that the debt has become bad. It is was observed that in block assessment, undisclosed income has to be computed in accordance with the provisions of the Act and, therefore, if the assessee had not offered this amount as income in the previous year, he cannot claim benefit of bad debt. The finding of the Tribunal on this issue is as under:

"13. We have heard both the parties and also perused the documents placed on record. Section 36(1)(vii) reads as below with effect from April 1, 1989:

''Clause (vii) of sub-section (1) of section 36 of the Income-tax Act provides for deduction of the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of an assessee in the previous year. Thus, not it is a mandatory condition that deduction can be allowed as bad debt only, when it is actually written off as irrecoverable not on mere provision. To allow the bad debt as per section 36(2), the following conditions are to be fulfilled:

(i) It must be a proper debt, or a part thereof.

(ii) Of a revenue nature contradistinguished from capital nature.

(iii) Which has been written off as irrecoverable in the accounts of the assessee for the previous year.

(iv)(a) Which has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or

(b) which represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.''

From the above, it is clear that only bad debt written off by the assessee can be claimed as deduction. For claiming the deduction under this provision the assessee must establish that the debt in question has become bad debt. The very writing off of the bad debt in the books of account as bad is not sufficient to claim the deduction under this provision. The debt becomes bad not because the creditor assessee has decided to treat it so at a particular time, but because at a particular point of time it was no longer possible to recover such debt. The debtor had no means to recover the same and thereby recovery would not be possible and these facts are to be established by the assessee.

In the present case, the Assessee has not written off the bad debt in the books of account. The assessee has not furnished details like the date on which the debt has become bad and when the assessee has written it off as bad debt, etc. In fact, there is no books of account at all in this case and there is no seized material to show that the debt has become bad. In the block assessment, undisclosed income has to be computed in accordance with the provisions of the Income-tax Act 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. Where there is no evidence to suggest that the debt has become bad and the seized material also does not suggest that the debt has become bad, it cannot be allowed as bad debt. Further, this debt has not been taken into account in computing the income of the assessee in any earlier year and the condition laid down in section 36(2) is not fulfilled. The ratio laid down in the decision of the Tribunal in the case of K. Eswarappa v. Deputy CIT (2004) 89 ITD 229 (Chennai) relied on by the assessee is not applicable to the facts of the present case. In view of this, we are of the opinion that the Commissioner of Income-tax (Appeals) is not justified in allowing the ground of the assessee on this issue. Accordingly, we reverse order of the Commissioner of Income-tax (Appeals) and allow the ground taken by the Revenue."

10.3. On the contrary, as pointed out by the learned counsel for the assessee, the Assessing Officer rejected the plea of the assessee to treat Rs. 3,50,000 as bad debt by holding that the same can only be treated as investment in money-lending in the year of giving and it is not a bad debt. The reasoning given by the Assessing Officer and the finding of the Tribunal based on section 36(2) of the Act are on two independent interpretations of the same issue. In such view of the matter, on facts, there appears to be an issue in relation to the applicability of section 36(2) of the Act, which should be considered by the Assessing Officer.

10.4. In such view of the matter, to the extent indicated above, we remand the matter to the Assessing Officer.

In the result, T.C. (A.) No. 1244 of 2007 is dismissed and T.C. (A.) No. 1245 of 2007 is disposed of, by remanding the matter to the Assessing Officer, to the extent indicated above. No costs.