The Commissioner of Income Tax - I vs. M/s. Bhooratnam Construction Co. (P) Ltd.

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU TUESDAY, THE 31ST DAY OF OCTOBER 2017/9TH KARTHIKA, 1939 ITA.No.222 of 2012 ----------------------- AGAINST THE ORDER IN IT(SS)A. No.217/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 23-03-2012 ---------- APPELLANT/RESPONDENT/ASSESSEE: ------------------------------------------ M/S. REAL FORTS & RESORTS PVT. LTD. CITY CENTRE, FORT ROAD, KANNUR, REPRESENTED BY ITS MANAGING DIRECTOR, SRI.ABDULLA ZUBAIR.

BY ADV. SRI.S.ARUN RAJ RESPONDENT/APPELLANT/REVENUE: ----------------------------------------- COMMISSIONER OF INCOME TAX CALICUT.

BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX Sri.PKR MENON (SR.), SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 31-10-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ANTONY DOMINIC, & DAMA SESHADRI NAIDU, JJ. ------------------------------------------------ I.T.A. No.222 of 2012 ------------------------------------------------ Dated this the 31st day of October, 2017 JUDGMENT Antony Dominic, J. 1. aThis appeal is filed by the assessee against the order passed by the Income Tax Appellate Tribunal in IT (SS)A. No.217/Coch/2005 concerning the block period from 01.04.1966 to 29.01.2003. 2. The brief facts of the case are that, the assessee company is engaged in real estate development. The Department carried out search and seizure operation of the assessee on 29.01.2003. Consequent to the search, block assessment under Section 158BB of the Income Tax Act was completed by making various additions. The assessee challenged the additions before the Commissioner of Income Tax (Appeals). The appellate authority passed orders

I.T.A. No.222 of 2012 -2- granting partial relief. Aggrieved by the relief granted, the Revenue filed IT(SS)A.217/05 before the Tribunal and the additions which were confirmed by the first appellate authority were impugned by the assessee in Cross Objection No.14/2006. The appeal and Cross Objection were disposed of by the Tribunal by its order dated 23.03.2012. It is this order which is impugned by the assessee with the following questions of law framed for the consideration of this Court: "1. Whether the Tribunal is correct, in law and fact of the case, in remanding the issue, relating to the profit on sale of pent house to the tune of Rs.21,00,000/-, back to the assessing officer for fresh consideration even after the Tribunal taking note of the fact that the CIT (A) have deleted the addition, inter alia, on the ground that there was no material found in the course of search for this addition and also after getting convinced that the assessing officer is also silent about availability of seized material. Is not the finding perverse and illegal? 2. Whether the Tribunal is correct, in law and facts of the case, in remanding the issue, relating to alleged undisclosed profit of Rs.50,81,874/- on sale of land and building, back to the assessing officer for fresh

I.T.A. No.222 of 2012 -3- consideration even after the Tribunal taking note of the fact that the CIT(A) have deleted the addition, inter alia, on the ground that there was no material found in the course of search for this addition and also after getting convinced that the assessing officer is also silent about availability of seized material. Is not the finding perverse and illegal? 3. Whether the Tribunal is correct, in law and facts of the case, in restoring/confirming the addition made by the assessing officer to the tune of Rs.50 lakhs as undisclosed sale proceeds of City Centre space in the case of Sri.Jamaluddin and Sri.Muneer? 4. Whether the Tribunal is right in law and facts of the case, in holding that the statement taken on oath u/s 131 from Sri.Muneer at the time of survey proceeding in firm M/s Malabar Tower and Superior Decor prior to the search has got evidentiary value and addition can be made in the hands of assessee based on the said statement of Sri.Muneer? 5. Whether the Tribunal is right in law and facts of the case in holding that the decision of the Kerala High Court in the case of Paul Mathew & Sons (263 ITR 101) is not applicable to the facts of the case? 6. Whether the Tribunal is right in law and facts of the case, in restoring/confirming the addition of Rs.50,00,000/- made by the

I.T.A. No.222 of 2012 -4- assessing officer on the basis of a statement of Mr. Muneer taken under Section 131 of the Income Tax Act on survey proceedings prior to the search, especially when there was no material found in the course of search, as held by the CIT(A) and there being no adjudication of the same by the Tribunal. Is not the said finding perverse and illegal?” 3. We heard the learned counsel appearing for the assessee and the learned Senior Counsel appearing for the Revenue. 4. Among the three issues that were raised before this Court, the first is with respect to the deletion of `21 lakhs pertaining to the profit on sale of the Pent House. In the assessment order, `21 lakhs was brought to tax as undisclosed income in the hands of the assessee. The first appellate authority ordered that the addition be deleted based on its finding that the Pent House was not complete and relied on a non-completion certificate produced before it. The CIT (Appeals) also found that there was no seized material supporting the addition. By the order impugned,

I.T.A. No.222 of 2012 -5- the Tribunal set aside the order of the appellate authority and directed the Assessing Officer to examine the issue afresh in the light of seized materials and pass orders in accordance with law. 5. According to the learned counsel for the assessee, the first appellate authority having deleted the addition for valid reasons, the Tribunal should not have interfered with such order. However, a reading of the order passed by the Tribunal shows that, it had found that the assessment order was silent as to whether the addition was towards suppressed cost of construction or towards the suppressed sale receipts. The Tribunal also took note of the fact that fresh evidence was considered by the first appellate authority without confronting the assessing authority with the same. These reasons assigned by the Tribunal are perfectly legal and, therefore, the Tribunal cannot be faulted for having remitted the issue for the consideration of the Assessing Officer.

I.T.A. No.222 of 2012 -6- 6. The second finding of the Tribunal which was impugned by the assessee was with respect to the addition of undisclosed profit of `50,81,874/- on sale of land and constructed area. This issue also was remitted by the Tribunal and the reasons thereof are stated in paragraph 8.2 thus: “...... In our view, the AO has tried to quantify the said difference and treated the same as the undisclosed income of the assessee. However, he has failed to highlight/consider the terms of agreement between the assessee company and the land owners in this regard. If according to the agreement, the assessee company is entitled to enjoy the excess price realised on sale of land and further if it has failed to account the same as its income, then the said difference, in our view, can be treated as undisclosed income in the hands of the assessee company. We may mention here that all depends upon the terms of agreement between the assessee company and land owners, which requires examination, as the same was not brought on record by the AO. In view of the foregoing discussions, we are of the view that this issue also requires re-examination in the light of discussions made above. Accordingly, we set aside the order of Ld. CIT(A) on this issue and restore the same to the file of the AO with a direction to examine the issue afresh by making proper reference to the seized materials and

I.T.A. No.222 of 2012 -7- decide the same in accordance with law.” 7. These reasons assigned by the Tribunal are also valid and therefore, we are not persuaded to interfere with this finding also. 8. The third issue canvassed before us relates to the addition of `50 lakhs relating to the unaccounted receipt on sale of commercial space to M/s Malabar Tower and Superior Decor. This addition was set aside by the first appellate authority and was restored by the Tribunal. According to the learned counsel for the assessee, a reading of the Assessment Order and the order passed by the first appellate authority would show that this addition was made based on materials recovered at the time of the survey conducted long before the search and seizure operation. According to the learned counsel, a reading of Section 158BB of the Income Tax Act, by the Circular No.8 of 2002 and the judgments of the Madhya Pradesh High Court in C.I.T. v. K.C.Nirmal Kumar (M.P.) [263 ITR 77] and the

I.T.A. No.222 of 2012 -8- judgment of the Madras High Court in CIT v. S.Ajit Kumar (Mad) [2008] 300 ITR 152 (Mad), would show that materials recovered in the search or thereafter alone could form basis of an order under Section 158BB. Learned Counsel contended that the conclusions to the contrary arrived at by the Tribunal are unsustainable and should be set aside. 9. We have considered the submissions made. The relevant part of Section 158BB of the Income Tax Act reads thus: “(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,―” 10. A reading of this provision would show that the

I.T.A. No.222 of 2012 -9- undisclosed income for the block period shall be 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 and such material or information as are available with the Assessing Officer and relatable to such evidence. The expression “such evidence” should be read as evidence found as a result of search or requisition issued. So read, computation of undisclosed income shall be; 1)on the basis of evidence found as a result of search under Section 132; or 2)on the basis of requisition of books of account or other documents under Section 132A; 3)and such other materials or information as are available with the Assessing Officer and relatable to such evidence, viz. the evidence found as a result of search or requisition of books of account or other documents.

I.T.A. No.222 of 2012 -10- 11. If the Section is so read, the computation of undisclosed income can be made by the Assessing Officer on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials, if such other material or information is relatable to evidence recovered at the time of search or gathered on the basis of requisition of books of accounts or other documents. This Section does not authorise computation of undisclosed income relying on evidence unearthed in a survey under Section 133A. Therefore, as in this case, on the basis of a survey conducted before the search and seizure operation, if the Assessing Officer comes into possession of materials and information, such evidence or materials recovered in the survey cannot be relied on for computing the undisclosed income for the block period. 12. This very question was considered by the Madras High Court in Commissioner of Income Tax v. G.K.Senniappan [2006] 284 ITR 220 (Mad), and it was

I.T.A. No.222 of 2012 -11- held thus: “Section 158BB occurs in Chapter XIV-B, which provides for special procedure for assessment of search cases. The computation of undisclosed income of the block period is contemplated under Section 158BB. As per the section, the undisclosed income of the block period should 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 the 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. A mere reading of the above provision clearly indicates that the sentence "such other materials or information as are available with the Assessing Officer" cannot be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the Assessing Officer, should as per the section relatable to such evidence. The word "such" used as a prefix to the word "evidence" assumes much significance, in this provision, as it indicates only the evidence found, as a result of search or requisition of books of account or other documents, at the time of search. Any other material cannot form basis for computation of

I.T.A. No.222 of 2012 -12- undisclosed income of the block period.” Similar principles have been laid down by the Madhya Pradesh High Court in C.I.T. v. K.C.Nirmal Kumar (M.P.) [263 ITR 77], and again by the Madras High Court in CIT v. S. Ajit Kumar (Mad.) [2008] 300 ITR 152 (Mad) and Commissioner of Income Tax v. P.K.Ganeshwar [2009] 308 ITR 124 (Mad). In the light of statutory provision and the principles laid down in the aforesaid judgments, the order passed by the Tribunal sustaining the addition is legally untenable. 13. Further, insofar as this case is concerned, on facts, there is yet another difficulty for the Revenue. In the assessment order, the addition has been made stating thus: “Undisclosed sale price of City Centre space in the case of Shri Jamaluddin and Shri V. Muneer: The company had sold 2911 Sq. Ft. of City Centre space to Malabar Tower and Superior Decor of Shri Jamaluddin and Shri V. Muneer on 26.03.2002. During the course of search certain loose papers numbered 1 to 27 inventorised as ORF 67 were found and seized from the office premises of the

I.T.A. No.222 of 2012 -13- assessee company. Page 16 of this set of loose papers is page 2 of an agreement entered into by Shri Jamaluddin for purchase of 1711 Sq. ft. of City Centre space @ Rs.5,000/- per Sq. ft. This page of agreement, though not signed by the seller, was signed by the purchaser, Shri Jamaluddin. During the course of an independent survey action conducted by the Department at the business premises of Shri Jamaluddin and Shri V. Muneer, evidences of on-money payment of Rs.51,00,000/- for purchase of 2911 Sq.ft of City Centre space was detected. These evidences were in the nature of certain loose papers, the entries in which were explained by Shri V. Muneer who was examined u/s 131. In the statement on oath recorded during the course of survey, Shri V.Muneer stated that the purchases were initially negotiated @ 4400 per. Sq.ft. for 1711 Sq.ft area and @ Rs.4,000/- per sq. ft. of 922 Sq.ft. area. He also stated that the deals were finally struck for total consideration of Rs.1,01,50,000/- out of which Rs.51,50,000/- only was documented. Attention of Shri P.V.Raghavan, Officer in-charge of the assessee company was drawn to the statement of Shri V. Muneer. He, however, denied to have received any amount in excess of the documented consideration towards the actual sale price of 2911 Sq.ft. to the above parties. The incriminating documents found during the course of survey and the statement of Shri V.Muneer constituted “any other material in possession of the Assessing Officer” for the purpose of computation of undisclosed income u/s 158BB. It is also seen that this information also related to the second page of the agreement, Shri

I.T.A. No.222 of 2012 -14- Jamaluddin had made with the sellers. The amount of Rs.51,00,000/- admitted to have been paid by Shri Jamaluddin and Shri V. Muneer in excess of documented consideration for purchase of 2911 Sq.ft. of City Centre space during F.Y. 2001-02 is brought to tax part of the undisclosed income of the assessee company for A.Y.2002-03.” 14. Although in the initial part, it is stated that during the course of search, certain loose papers numbered as 1 to 27 inventorised as ORF 67 were found and that, page 16 of the set of loose papers is page No.2 of an agreement entered into by Shri Jamaluddin for purchase of 1711 sq. ft. of City Centre space @ `5,000/- per Sq. Ft., in the latter part of the same paragraph, it is stated that the incriminating documents found during the course of survey and the statement of Shri V. Muneer consituted any other material in possession of the Assessing Officer. In order to reconcile the apparent contradictions in what is stated in the assessment order, the learned Senior Counsel for the Revenue wanted us to read the words “survey” as “search”. This plea is raised for the first time and, therefore, cannot

I.T.A. No.222 of 2012 -15- be accepted. 15. Even if it is assumed that it was during the search that ORF 67 was recovered and that the page 2 of an agreement is part thereof, according to us, that case of the Revenue raised for the first time is not substantiated in any manner. Annexure-B is the Panchanama prepared at the time of search on 29.01.2003. Insofar as ORF 67 is concerned, in the Panchanama, it is stated that ORF 67 consists of “loose sheets containing statement of accounts, Serial Nos.1 to 23”. Therefore, the Mahazar prepared at the time of search does not record that ORF 67 included page 2 of an agreement as stated in the Assessment Order or as contended before this Court. 16. Now we shall refer to Annexure-A, which is the letter dated 03.12.2004 sent by the Assessing Officer to the assessee. In this letter, it is stated that among the undisclosed income allegedly earned by the assessee, one of the items is the undisclosed sale price of City Centre space

I.T.A. No.222 of 2012 -16- in the case of Shri Jamaluddin and Shri V. Muneer and that one of the items is “undisclosed sale price of City Centre Space in the case of Shri Jamaluddin and Shri V. Muneer `51 lakhs during the financial year 2002-03”. Thereafter, it is again stated that “the above are evidenced from seized documents ORF-6, 8, 10, 14, 15, 27, 28, 40, 159 and impounded documents from the premises of Shri Abdul Salam and Shri Jamaludeen.” Therefore, if what the Assessing Officer stated in Annexure-A is read, the incriminating documents leading to the undisclosed income in question were recovered at the time of survey and the list of aforesaid seized documents does not include ORF 67 and if Annexure-B is read, the incriminating material was not revealed from ORF 67. Therefore, Annexures-A and B are contradictory to each other. 17. Therefore, this appeal is disposed of answering the questions of law in the above manner. The Assessing Officer will reconsider the matter as

I.T.A. No.222 of 2012 -17- ordered by the Tribunal. Sd/- ANTONY DOMINIC

JUDGE Sd/- DAMA SESHADRI NAIDU JUDGE kns/- //TRUE COPY// P.S. TO JUDGE