THE COMMISSIONER OF INCOME TAX vs MRS MANISHA A SADHWANI

- - - 1 - 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

INCOME TAX APPEAL NO.414 OF 2007

BETWEEN:

The Commissioner of Income-Tax, Central Circle, C.R. Building, Queens Road, Bangalore.

The Assistant Commissioner of Income-Tax,

Circle – 1(1),

C.R. Building,

Queens Road,

Bangalore.

.. APPELLANTS

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

AND:

Mrs. Manisha A. Sadhwani, No.67/1, Sadhwani Mansion, Lavelle Road, Bangalore .

.. RESPONDENT

(By Sri A. Shankar & Sri M. Lava, Advs.)

- - - 2 - This Appeal is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 22-12-2006 passed in IT(SS)A 78/Bang/2004 for the Block Assessment Year 1988-89 to 1998-99, praying that this Hon’ble Court may be pleased to;

i. formulate the substantial questions of law stated therein,

ii. allow the appeal and set aside the order passed by the ITAT, Bangalore in IT(SS)A 78/Bang/2004 dated 22-12- 2006 confirming the order of the Appellate Commissioner and confirm the order passed by the Asst., Commissioner of Income Tax, Circle-1(1), Bangalore, in the interest of justice and equity.

This Appeal coming on for hearing this day, KUMAR J., delivered the following:

J U D G M E N T

This appeal is preferred by the Revenue, challenging the order passed by the Tribunal as well as the Lower Appellate Authority in holding that the income shown in the return of the assessee does not constitute undisclosed income.

There was a search operation under Section 132 of the Income Tax Act, 1961 (for short hereinafter referred to as ‘the Act’) on 12.11.1997 in the case of M/s.Sadhwani Group of Companies. Consequent to said search, notice under Section 158BC of the Act, was issued on 19.11.1998 calling upon the assessee to file the return of income for the block

- - - 3 - period. In response to the notice, the assessee filed the return of income in Form No.2B. The assessee in the regular returns filed under Section 139(1) of the Act, had shown the NRI gifts received by her and had claimed exemption from payment of income tax. The Assessing Officer called upon the assessee to substantiate the said gifts. Same was produced. However, the Assessing Officer held that these gifts have been received by the family members of M/s.Sadhwani Group from the donors residing in twenty countries. These donees have introduced capital into various business concerns belonging to them. The Assessing Officer was of the view that these donations are not genuine and therefore, he assessed the said amount for tax. The said amount was brought to tax. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The assessment orders was set aside on the ground that the Assessing Officer without verifying the truth about the gifts and without affording the assessee an opportunity to prove the gift, has added the said sums to the income of the assessee. After remand also, the assessee produced the

- - - 4 - documents. The Assessing Officer also addressed letters to Central Board of Direct Taxes to secure some information on consideration of the aforesaid material on record. Again the Assessing Authority held that the gifts are not genuine and brought the said amount to tax. Aggrieved by the said order, assessee preferred an appeal to the Appellate Authority. The Appellate Authority accepting the case of the assessee and by setting aside the order of the Assessing Authority, granted relief to the assessee. Against the said order, the Revenue preferred an appeal to the Tribunal, which has declined to entertain the appeal, dismissed the appeal confirming the order of the Appellate Authority. It is against the said order, the Revenue is in appeal. It is relevant to note that no search has taken place in the hands of this respondent Assessee.

This appeal came to be admitted to consider the following substantial question of law:

“Whether the Appellate Authorities were correct in holding that the NRI gifts detected in the course of

- - - 5 - search cannot be treated as an undisclosed income of the assessee for the block period despite the identification of the donor, his creditworthiness and the genuineness of the transactions, not having been proved?”

The material on record discloses that, the assessee in the returns filed within the due date has disclosed the amounts, which she has received by gift from nearly 25 donors across 20 countries. Now after enquiry, the Assessing Authority held that these gifts are not genuine. The question is, in a block assessment proceedings, whether the Assessing Authority could have proceeded to assess the assessee in respect of the amount covered under the gifts as undisclosed income?

“Undisclosed income” has been defined under Section 158B(b) of the Act, which reads as under: “158B(b) “undisclosed income” includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where

- - - 6 - such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act or any expense, deduction or allowance claimed under this Act which is found to be false.”

Chapter XIV-B deals with special procedure for assessment of search cases. Dealing with this provision, the Apex Court in the case of ASST.COMMISIONER OF INCOME- TAX AND ANOTHER –vs- HOTEL BLUE MOON reported in

(2010) 321 ITR 362 (SC) at para-12 has held as under:

“12. 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

- - - 7 - has been detected as a result of search. It is not intended to be substituted 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 the result of search under section 132 or requisition under section 132A of the Act.”

Following the aforesaid judgment, the Apex Court in the case of Assistant Commissioner of Income-Tax –vs- A.R.Enterprises reported in (2013) 350 ITR 489 (SC) has held as under:

“11. Sections 132 and 132-A of the Act incorporate provision of search, seizure and requisition which were resorted to for the conduct of search at the premises of M/s.A.R.Mercantile Pvt.Ltd. For the evaluation of the material seized during the

- - - 8 - operation or proceedings under Section 132 or 132A of the Act, as the case may be, the provisions contained in Chapter XIV-B come into play. This Chapter, consisting of Section 158B to 158BH was inserted by the Finance Act, 1995, with effect from July 1, 1995. The heading of Chapter XIV-B reads “Special procedure for assessment of search cases”. It was introduced for the assessment of undisclosed income determined as a result of search carried out under Section 132 of the Act or requisitioning of documents or assets under Section 132A of the Act. The Chapter is a self-contained code and gets attracted as a result of search proceedings initiated by the income-tax authorities, under Section 132 of the Act, notwithstanding any other provisions of the Act except to the extent provided for in the Chapter.”

Thereafter it was held that, a bare reading of Section 158BB of the Act makes it clear that the condition precedent for invoking a block assessment is a search conducted under Section 132 or documents or assets requisitioned under Section 132A. Moreover, Section 158BD permits the application of the provisions of this Chapter only on the satisfaction of the Assessing Officer that the seized documents

- - - 9 - show undisclosed income of a person other than the person with respect to whom search was conducted or a requisition was made. Thereafter, at paragraph-18 dealing with the undisclosed income, they held as under:

“18. The genesis of the issue before us lies within the folds of this section. Sections 158BD and 158BC, along with the rest of Chapter XIV-B, find application only in the event of discovery of “undisclosed income” of an assessee. “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 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

- - - 10 - 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 XIV-B. 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 gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.”

From the aforesaid judgment, it is clear that an undisclosed income signifies income not stated in the returns filed. If income is disclosed in the return filed, either under Section 139(1) or under Section 139(4) of the Act, it cannot be construed as an undisclosed income. Then Chapter XIV-B is not attracted. Therefore, the condition precedent for exercising power under Chapter XIV-B are:

- - - 11 - (i) A search under Section 132 of the Act where incriminating evidence of undisclosed income is seized; (ii) The said income, which was found in such search and is not reflected in the returns filed under Section 139(1) or 139(4) before the date of search.

The existence of both these conditions is sine qua non for initiation of proceedings and passing of block assessment order under Chapter XIV-B.

In the instant case, the so-called undisclosed income finds a place in the returns filed by the assessee under Section 139(1) of the Act. The search is subsequent to filing of the said returns. In the search, no incriminating evidence of undisclosed income was assessed. What was found in the search was the assessee had invested huge amount as capital in the firm, in pursuance thereto, when the premises of the assessee are searched, the assessee had filed returns showing this amounts in the return. Therefore, in the first instance, no incriminating material, such as, undisclosed income was

- - - 12 - seized. Even before search, the amount, which is shown as gift, has been reflected in the returns filed by them. Both the appellate authorities have given a finding that the amounts of gifts treated as an income find a place in the return of income filed before the date of search. Under those circumstances, the Assessing Authority was wrong in concluding that the amounts shown as gift in the return constitute undisclosed income. The Lower Appellate Authority and the Tribunal were justified in setting aside the said order.

In that view of the matter, we do not see any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the Revenue.

The appeal is devoid of merit. Accordingly, it is dismissed.

Sd/-

JUDGE

Sd/-

JUDGE

KNM/-

THE COMMISSIONER OF INCOME TAX vs. MRS MANISHA A SADHWANI