THE COMMISSIONER OF INCOME TAX vs. SRI N LEELA KUMAR

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IN THE HIGH COURT OF KARNATAKA AT BANGALORE ®

DATED THIS THE 25th DAY OF NOVEMBER 2013

PRESENT

THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MRS. JUSTICE RATHNAKALA

I.T.A. NO.384/2007 c/w. I.T.A.NO.386/2007

In I.T.A. No.384/2007

BETWEEN :

Income-tax,

55/1, Shilpashree, Vidhyaranya Complex, Vishveshwaranagar, Mysore – 570 008.

55/1, Shilpashree, Vidhyaranya Complex, Vishveshwaranagar, Mysore – 570 008. ...APPELLANTS

(By Sri.K.V.Aravind & Sri.B.Pramod, Advs.)

AND :

Sri.N.Leela Kumar, Partner,

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M/s. Raghavendra Traders, Santhepet, Hassan. …RESPONDENT

(By Sri.S.Parthasarathi, Adv.)

. . . .

This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore in IT(SS)A112/Bang/2004 dated 19.10.2006 and confirm the order passed by the Appellate Commissioner confirming the order passed by the Assistant Commissioner of Income Tax, Central Circle, Mysore, in the interest of justice and equity.

In I.T.A. No.386/2007

BETWEEN :

Income-tax,

No.55/1, Shilpashree, Vidhyaranya Complex, Vishveshwaranagar, Mysore.

No.55/1, Shilpashree, Vidhyaranya Complex, Vishveshwaranagar, Mysore – 570 008. ...APPELLANTS

(By Sri.K.V.Aravind & Sri.B.Pramod, Advs.)

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AND :

M/s. Raghavendra Traders, Santhepet, Hassan. …RESPONDENT

(By Sri.S.Parthasarathi, Adv.)

. . . .

This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore in IT(SS)A111/Bang/2004 dated 19.10.2006 and confirm the order passed by the Appellate Commissioner confirming the order passed by the Assistant Commissioner of Income Tax, Central Circle, Mysore, in the interest of justice and equity.

These I.T.As. coming on for admission, this day, N.Kumar J., delivered the following:

JUDGMENT

These two appeals are preferred by two assesses against the common order passed by the Tribunal. As common question of law arises for consideration in both these appeals, they are taken up together and disposed of by this common order.

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trade in liquor. The first search was conducted on 13.03.2000. A Block Assessment order for Block period from 01.04.1990 to 31.03.2000 was passed on 27.03.2002. The Assessing Officer had computed a sum of Rs.28,83,258/- as undisclosed income in the case of M/s. Raghavendra Traders and Rs.27,25,596/- in the case of Sri.N.Leela Kumar under the head “returned income” and did not include the said income for the purpose of Block Assessment as the due date described for filing a return under Section 139(1) of the Act had not yet expired on the date of search. Subsequently, the second search was conducted in the premises of the assessees on 27.04.2001. As the assessees did not file the return under Section 139(1) of the Act disclosing the aforesaid amounts, he treated it as an undisclosed income and assessed as such for the assessment year 2000-2001 relating to the previous year 1999-2000.

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had not expired and that he had filed a return under Section 139(4) disclosing the said amounts, it would not constitute undisclosed income. The said contention was negatived by the Assessing Authority on the ground that though due date for filing of the return under Section 139(4) had not expired as on the date when the second search was conducted after the due date for filing Section 139(1) return is over, it constitutes an undisclosed income. Even if he had filed return under Section 139(4) before the second search, he cannot be granted the benefit. But as the return under Section 139(4) is filed after the second search, it partakes the character of an undisclosed income as contained in Section 158-BB of the Income Tax Act, 1961 (for short, hereinafter referred to as `the Act’). Aggrieved by the said order, the Assessees preferred an appeal to the Commissioner of Income Tax (Appeals) who dismissed the appeal affirming the order passed by the Assessing Authority. Aggrieved by the said order, the Assessee preferred an appeal before the Tribunal. The Tribunal held that during the course of first search itself, the

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Department has found these entries in the Books of Accounts and in the First Block Assessment order dated 27.03.2002, at page 16 the Assessing Officer has concluded that the return of income in question does not form undisclosed income. The second block Assessment Order is contrary to the first order. The only ground cited by the Assessing Officer is the Assessee had not filed his return of his income within the period specified under Section 139(1). There is no finding that the income in question is relatable to any evidence disclosed or found during the course of search. There is no finding, but for the search, his income would never have been disclosed by the Department. Therefore, they were of the view that the said amount would not constitute an undisclosed income and therefore, the order passed by the Lower Appellate Authority is set-aside and it was held that the aforesaid amount do not constitute undisclosed amount. Aggrieved by the said order, these appeals are filed by the Revenue.

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Whether the Income entered in the books of accounts, which was detected in search, which were disclosed in the return filed under Section 139(4) after search, would constitute undisclosed income?

Section 132A deals with Power to Requisitioning the Books of Accounts. Chapter 14B is a

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special procedure for assessment of such case. Section 158B defines what a “Block period” is, as well as “undisclosed income”. Section 158BB dealing with undisclosed income reads as under: Computation of undisclosed income of the block period. 158BB. (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,— (a) where assessments under section 143 or section 144 or section 147 have been concluded prior to the date of commencement of the search or the date of requisition, on the basis of such assessments;

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(b) where returns of income have been filed under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns; (c) where the due date for filing a return of income has expired, but no return of income has been filed,— (A) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition where such entries result in computation of loss for any previous year falling in the block period; or (B) on the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition where such income does not exceed the maximum amount not chargeable to tax for any previous year falling in the block period; (ca) where the due date for filing a return of income has expired, but no return of income

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has been filed, as nil, in cases not falling under clause (c); (d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years; (e) where any order of settlement has been made under sub-section (4) of section 245D on the basis of such order; (f) where an assessment of undisclosed income had been made earlier under clause (c) of section 158BC on the basis of such assessment. Explanation.—For the purposes of determination of undisclosed income,— (a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of this Act without giving effect to set off of brought forward losses under Chapter VI or

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unabsorbed depreciation under sub-section (2) of section 32; Provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32; (b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called to any partner not being a working partner : Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement;] (c) assessment under section 143 includes determination of income under sub-section (1) or sub-section (1B) of section 143.. (2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be,

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apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. (3) The burden of proving to the satisfaction of the Assessing Officer that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee. (4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments.

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requisitioning of documents of the assessee under Section 132A of the Act. This chapter is a self- contained one and gets attracted as a result of such proceedings initiated by the Income- tax authorities. Section 158BA deals with assessment of undisclosed income as a result of search and Section 158BB deals with computation of undisclosed income of the Block period.

“Undisclosed income is defined by Section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. We are of the view that the only way of disclosing income, on the part of an assessee, is through filing of a

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return, as stipulated in the Act and therefore, an “undisclosed income” signifies income not stated in the return filed. Keeping that in mind, it seems that the legislature has clearly carved out two scenarios for income to be deemed as undisclosed: (i) where the income has clearly not been disclosed and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and hence subject to the machinery provisions of Chapter XIVB. The second category, viz. where income would not have been disclosed, contemplates the likelihood of disclosure; it is a presumption of the intention of the assessee since in concluding that an assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To guage this, however, reliance must be placed on the surrounding facts and circumstances of the case.

Therefore, it is clear that an undisclosed income is not an income which has not been or would not have been disclosed for the purpose of the Act.

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(a) being a company [or a firm]; or

(b) being a person other than a company [or a firm], if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax,

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shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed :

Therefore, a valid return under Section 139(1) of the Act has to be filed before the due date. Explanation (2) to Section 139(1) defines what the ‘due date’ for the purpose of sub-section (1) of Section 139 of the Act, which reads as under:

Explanation 2.—

In this sub-section, “due date” means,—

(a) where the assessee is (other than an assessee referred to in clause (aa)) -

(i) a company; or

(ii) a person (other than a company) whose accounts are required to be audited under this Act or under any other law for the time being in force; or

(iii) a working partner of a firm whose accounts are required to be audited

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under this Act or under any other law for the time being in force,

the [30th day of September] of the assessment year;

(aa) in the case of an assessee (who) is required to furnish a report referred to in section 92E, the 30th day of November of the assessment year.

(b) in the case of a person other than a company, referred to in the first proviso to this sub-section, the 31st day of October of the assessment year;

(c) in the case of any other assessee, the 31st day of July of the assessment year.

Therefore, the ‘due date’ for the purpose of Section 139(1) of the Act is what is stipulated in explanation (2). If the return is not filed as stipulated in Section 139(1) of the Act, Section 139 (4) provides for filing the return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. Section 139 (4) of the Act reads as under:-

Section 139 (4 ): Any person who has not furnished a return within the time allowed to him under sub-section (1), or within the time allowed under a notice

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issued under sub-section (1) of section 142, may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier

Provided:

that where the return relates to a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.

Sub-section (5) of Section 139 of the Act also provides for filing of a revised return, if the return filed under Section 139(1) of the Act has any omission or wrong statement. The said provision reads as under:- Section 139 (5): If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers

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any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier :

Provided:

that where the return relates to the previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.

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recorded on or before the date of search or requisition in the books of accounts or in other books of accounts has as been kept for the purpose relating to the previous years, the said income shall not be included in the block period. Therefore, this provision makes it clear that if the income sought to be assessed relating to the block period is recorded on or before the date of search or requisition in the books of accounts, maintained by the assessee, prior to the ending of the previous year or prior to the date of filing of the return under Section 139 (1) of the Act, it is open to the assessee to request the assessing officer not to include the said income in the block period as an undisclosed income. While computing the undisclosed income under Section 158BB of the Act, which provides for undisclosed income of the block period as aforementioned, shall be the aggregate of the total income of the previous years filing within the block period computed in accordance with the provisions of the Act, on the basis of the evidence found as a result of search or requisition of books of account or other documents as are available

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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 year. It provides various contingencies. In Clause (a) of Section 158BB of the Act, provides to a case where the assessment is concluded under Section 143 or 144 or 147 of the Act. Clause (b) deals with a case where the return of income is filed under Section 139 (1) or under Section 142 or 148 of the Act, but the assessments are not made till the date of search or requisition. Clause (c) of the Act deals with, where the due date for filing the return has expired but no return of income has been filed. Firstly, on the basis of the entries as recorded in the books of accounts before the due date of search for any previous year falling under the block period. Secondly, on the basis of the entries as recorded in the books of accounts when such income does not exceed the maximum account which is not chargeable to tax under the block period. Thirdly, where no return of income has been filed as ‘nil’ before the due date of

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filing of the return has been expired. Fourthly, where the previous year has not ended or the date of return of filing under Section 139 (1) of the Act has not expired. They have brought in Clause (3) as (d) nothing beyond that. In the books of accounts, those entries are recorded on or before the due date of search or requisition relating to the previous years.

b. The income not recorded in the books of account before the search, even though the due date for filing the return under Section 139 (1) and (4) has not expired.

c. The income which is not disclosed in the books of accounts but found as a result of search at the premises, even if the due date prescribed under Sections 139(1) and (4) has not expired.

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(1) as is clear from the words given in explanation (2) of Section 139 (1) of the Act, the due date is only for the purpose of Section 139 (1). The due date referred to in Section 158BB of the Act, includes the due date prescribed under Section 139(1) as well as Section 139

(4) of the Act. While construing Section 158BB of the Act, we cannot impart the due date prescribed under Section 139 (1) of the Act and compute undisclosed income, if such an undisclosed income is not shown in the return filed as prescribed under the Act. Therefore, the stand of the assessing authority that though the income was disclosed in books of accounts prior to the

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date of first search, as the said income is not disclosed under Section 139(1) of the Act or in a return filed under Section 139 (4) before the date of second search which constitutes undisclosed income which is contrary to the aforesaid statutory provisions. Rightly, the Tribunal has set aside the said finding.

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return filed under Section 139 (4) on 31.01.2002, within the due date, the said amount was disclosed. Therefore, the contention that it constitutes an undisclosed income, as it was not disclosed in the return filed under Section 139(1) of the Act is unacceptable and that is precisely what the Tribunal has held.

Sd/- JUDGE

Sd/- JUDGE

SPS/nvj