MISC. APPEAL No.338 OF 2002 ****** Against the order dated 28.9.2001, passed by the Income-Tax Appellate Tribunal, Patna Bench, Patna in ITA(SS)No.21/Pat./1997 for the assessment period 1.4.1994 to 31.3.1995 and 1.4.1995 to 7.2.1996. ****** Ganesh Foundry & Casting Limited, through its Director, Shri Om Prakash Bajoria, Son of Late Dwarika Prasad Bajoria, resident of Laxmi Narain Road, Sarrayaganj, Muzaffarpur. ........ Appellant. Versus 1. Income Tax Appellate Tribunal, Patna Bench, Patna. 2. Asstt.Commissioner of Income Tax, Investigation Circle, Muzaffarpur. ...... Respondents. ***** For the Appellant: Mr. D.V. Pathy, Advocate. For the Respondents: Mr. Harshwardhan Prasad, Sr. Standing Counsel. Mrs. Archana Sinha, Standing Counsel. P R E S E N T THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE KISHORE KUMAR MANDAL ****** S K Katriar, J. The assessee has preferred this appeal under the provisions of section 260A of the Income Tax Act 1961 (hereinafter referred to as the „Act‟), and is aggrieved by the order dated 28.9.2001, passed by the Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA(SS) No.21/Pat/1997, for the block assessment period 1.4.1994 to 31.3.1995, and 1.4.1995 to 7.2.1996. 2 2. A brief statement of facts essential for the disposal of this appeal may be indicated. The appellant is a company with its foundry and casting unit at Muzaffarpur in the State of Bihar. It had submitted its returns for the period 1994-95 on 30.11.1995. While the returns awaited application of the mind and order of assessment by the learned assessing authority, there was a search and seizure in the appellant‟s premises at Surat (Gujarat) on 15.12.1995 and 7.2.1996. Consequently, the respondent authorities issued notice under section 142(1) read with section 158BC of the Act to the appellant. In response to the show-cause notice, the appellant filed returns for the block period 1995-96 and 1996-97 on 5.8.1996. On a consideration of the materials on record and the submissions of learned counsel for the parties, the learned Assistant Commissioner of Income Tax, Muzaffarpur, passed a composite order of assessment on 20.2.1997 (Annexure-1), whereby certain investments in shares found during the course of search were treated to be undisclosed income of the assessee. Secondly, it disallowed certain unexplained expenditure on the basis of materials which have come on record during the course of search and seizure, and treated them to be undisclosed income. 3 3. Aggrieved by the order of the learned Assessing Officer, the appellant preferred appeal before the Tribunal, which has been allowed in part by the impugned order. In so far as the first issue is concerned, the learned Tribunal has held that the learned assessing officer was not justified in treating the ownership of the shares as undisclosed income of assessment year 1995-96. The assessment order to that extent has been set aside and the matter has been remitted back to the learned Assessing Officer for a fresh consideration in accordance with law. Learned counsel for the appellant does not contest this proposition and submits that he shall contest the matter before the learned assessing officer. 4. In so far as the second issue is concerned, learned Tribunal has agreed with the finding of the learned assessing officer and has in substance held that the business expenditure for which deduction is being claimed were fictitious transactions, inter alia, for two reasons. A show was made of issuance of account-payee cheque. The same were later on with the help of interpolations converted into bearer cheque(s) which is in violation of section 40A (3) of the Act. It has also been found that the amounts were credited to different accounts other than the names of the 4 payee written on the cheques, cash were withdrawn from the accounts, and returned to the assessee. 5. By order dated 19.10.2006 this Court formulated the following substantial questions of law: (i) Whether the Tribunal was correct in law in holding that an expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub clause (b) of Section 158 B of the Act? (ii) Whether the Tribunal was correct in law in holding that an expenditure incurred in contravention to the provisions of sub clause 3 of Section 40A of the Act would be an undisclosed income within the meaning of sub- clause (b) of Section 158B of the Act even though, the transactions in respect thereof were found entered in the books of accounts prior to the date of search and no material in respect of such expenditure were found in course of search? (iii) Whether the Tribunal was correct in law in confirming the addition in relation to undisclosed expenditure treated as undisclosed income even though, the condition precedent to the exercise of jurisdiction under the provisions of Chapter XIV B of the Act were conspicuously absent? 6. While assailing the validity of the impugned order, learned counsel for the appellant submits that, in order to invoke the provisions of section 158BB of the Act, it must be shown to the satisfaction of the learned assessing authority that such undisclosed income is relatable to the 5 materials which have been found during the course of search and seizure, failing which the same cannot be the subject-matter of block assessment under Chapter XIVB of the Act. The same can be part of regular assessment proceedings. He relies on the following reported judgments: (i) (2001) Vol. 248 ITR 81 (Deputy Commissioner of Income-Tax and others vs. Shaw Wallace and Co. Ltd.); (ii) (2001) Vol. 248 ITR 562 (Bhagwati Prasad Kedia vs. Commissioner of Income-Tax); (iii) (2001) Vol. 250 ITR 141 (Commissioner of Income-Tax vs. Ravi Kant Jain); (iv) (2002) Vol. 256 ITR 129 (Commissioner of Income-Tax Vs. Vikram A. Doshi); 6.1) In his submission, “such evidence” occurring in Section 158BB of the Act is relatable to the materials found during the course of search and seizure alone. He relies on the following reported judgments: (i) (2006) 284 ITR 220 (Mad) (Commissioner of Income-Tax Vs. G.K. Senniappan). (ii) (2008) 298 ITR 98 (Raj) (Commissioner of Income-Tax Vs. Chandra Chemoux P. Ltd.). 7. The learned Standing Counsel for the Department has supported the impugned order. He submits that Section 158BB was amended with effect 6 from 1.7.1995. He has taken me through various materials on record in an effort to establish that the learned Tribunal has taken into account materials which have come during the course of search and seizure. He next submits that, in view of the findings of facts recorded by the learned assessing officer and the learned Tribunal that account-payee cheques exceeding rupees twenty thousand were by manipulation converted into the bearer cheques, such transactions are violative of Section 40A (3) of the Act. He relies on the judgment reported in (2007) 162 Taxman 195 (Mad) (Commissioner of Income-tax Vs. A.D.Jayaveerapandia Nadar & Sons). 8. We have perused the materials on record and considered the submissions of learned counsel for the parties. We would at the very inception like to notice the kind of transaction the appellant has engaged itself and the finding of fact recorded by the two learned authorities below. It is evident that the appellant had issued two cheques amounting to Rs.4,00,000/- and Rs.4,30,000/- which were initially issued as account-payee cheque but were manipulated to be converted into bearer cheques, the amounts were credited to the accounts other than those of the two payees, and were later on returned to the 7 appellant. The net result is that it was a case of issuance of bearer cheques beyond rupees twenty thousand and were also acts of fraud. It is patently violative of section 40A (3) of the Act which reads as follows: “40A(3).50Where the assessee incurs any expenditure51 in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette52, in a sum exceeding 53[54[twenty] thousand] rupees otherwise than by 55[an account payee cheque drawn on a bank or account payee bank draft], 56[twenty per cent of such expenditure shall not be allowed as deduction]: Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding 57[58[twenty] thousand] rupees otherwise than by 59[an account payee cheque drawn on a bank or account payee bank draft], the allowance originally made shall be deemed to have been wrongly made and the 60[Assessing] Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub- section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made; 8 Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding 61[62[twenty] thousand] rupees is made otherwise than by 59[an account payee cheque drawn on a bank or account payee bank draft], in such cases and under such circumstances as may be prescribed63, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.]” It is evident on a plain reading of the provisions that any claim for deduction exceeding rupees twenty thousand in a manner otherwise than by a crossed cheque or a crossed bank draft shall deprive the assessee of the benefit of deduction of the whole amount. We are satisfied that the transaction in question is hit by the bar of Section 40A (3) of the Act which disentitles the appellant to the claim of deduction. 9. There is yet another aspect of the matter. Law is well settled that fraud unravels everything. We are satisfied that the materials on record disclose that the appellant engaged itself in acts of fraud indicated hereinabove and the same by itself will defeat the appellant‟s claim for deduction. Reference may be made to the judgment of Court of appeal in England reported in (1956)1 All E.R. 341 (Lezarus Estates Vs. Beasley). Speaking for the Court Lord Denning observed as follows: 9 “... If this argument is correct, the landlords would profit greatly from their fraud. The increase in rent would pay the fine many times over. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The Court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever...”. 10. Elaborate submissions have been advanced on behalf of the appellants that computation of undisclosed income has to be exclusively relatable to the materials which have been noticed on the basis of the materials found during the curse of search and seizure. The assessment order, and the order of the Tribunal on the appellant‟s review application, are replete with references to the materials found during the course of search and seizure. The appellant has indeed advanced a chimerical submission without any basis whatsoever. Furthermore, it is relevant to notice the order dated 19.3.2002, passed by the learned Tribunal on the appellant‟s review application which notes as follows: “This transaction relating to the issuance of the aforesaid cheques, though recorded in the books of accounts by the assessee, yet was not shown in its return filed on 30.11.95. 10 It is not the case of the assessee that this income was shown in the regular returns. The AO had noted at great length that transaction relating to the issuance of cheques was not a genuine explanation and a hide and seek game was played. Therefore, it emerges that the assessee had not disclosed this income in its regular returns...”. (Emphasis added) 11. We are thus convinced that the transactions in question are violative of section 40A (3) of the Act, were acts of fraud, and are directly and clearly relatable to the materials which have been found during the course of search and seizure. The assessee had not disclosed this income in its original returns. 12. In view of the foregoing discussion, we answer the three substantial questions of law against the appellant and in favour of the Department. 13. In the result, this appeal is dismissed with costs quantified at Rs.10,000/- which shall form part of the demand notice. (S K Katriar, J.) Kishore K. Mandal, J. I agree. (Kishore K. Mandal, J.) Patna High Court, Patna. Dated the 4th day of December, 2009. S.K.Pathak/ (AFR)