IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS TUESDAY, THE 30TH MARCH 2010 / 9TH CHAITHRA 1932 ITA.No. 1417 of 2009 ---------------------------- IT(S&S) A.85/COCH/2005 DT.22.8.2008 of I.T.A.TRIBUNAL, COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, KANNUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ SMT.ZUHARA.U.V,PROPRIETRIX,PALAKKI MEDICALS,MANSOOR HOSPITAL COMPLEX,KANHANGAD, KASARAGOD. BY ADV. SRI.S.ARUN RAJ THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 02/03/2010, THE COURT ON 30.3.2010 DELIVERED THE FOLLOWING: C. R. K. M. JOSEPH & M.L. JOSEPH FRANCIS, JJ. -------------------------------------------------- I.T.A.NO. 1417 OF 2009 --------------------------------------------------- Dated this the 30th March, 2010 JUDGMENT K.M. Joseph, J. The respondent/assessee is engaged in a retail business of medicines known as Palakki Medicals. A search was conducted under Section 132 of the Income Tax Act (hereinafter referred to as the Act) at the business premises of the respondent/assessee on 29.8.2002, 30.8.2002 and 3.9.2002. A search was also conducted at the residential premises where the assessee is staying with her husband, daughter and son-in-law, on 29.8.2002. The respondent's business premises is located in the premises of one Manzoor Hospital, Kanhangad. The hospital is owned by the assessee's daughter. Several incriminating documents evidencing large scale suppression of income came to light. Accordingly, proceedings were initiated under Chapter XIVB of the Act against the assessee. Pursuant to the notice, I.T.A.NO.1417 OF 2009 2 the assessee filed a Return showing undisclosed income of Rs.13,96,680/= for the assessment years from 1997 - 1998 to 2002 - 2003 relating to the block period 1.4.1996 to 31.3.2002. The assessing officer found, however, that the total undisclosed income as rounded off was Rs.54,66,280/=. The Appeal filed by the respondent was dismissed. In the Appeal filed by the respondent before the Appellate Tribunal, the Tribunal partly allowed her Appeal and directed deletion of the addition made of Rs.7,35,562/= for the broken period 1.4.2002 to 29.8.2002. The substantial questions of law raised for decision before us are as follows: “1. Whether on the facts and in the circumstances of the case and in the light of the finding in paragraph 2 of the assessment order under Section 143(3) for the Asst. Year 2003 -04 (previous year being 01.04.2002 to 31.03.2003 (Annexure A), the Tribunal is right in law and fact and with jurisdiction in deleting the addition made for the broken period 01.04.2002 to 29.08.2002 in a sum of Rs.7,35,562/- ? I.T.A.NO.1417 OF 2009 3 2. Whether on the facts and in the circumstances of the case and also in the light of the facts narrated/noted in the statement of the case and the grounds raised, the Tribunal is right in law and fact in deleting the addition made for the broken period (01.04.2002 to 29.8.2002) in a sum of Rs.7,35,562/= ?” 2. We heard Shri Jose Joseph, learned counsel for the appellant and Shri T.N. Seetharaman, learned counsel appearing on behalf of the respondent. 3. The assessing officer unearthed evidence of cash purchases aggregating to a sum of Rs.35,71,007/= by the assessee for the period 1.4.2002 to 29.8.2002. The assessee contended that the income relating to the unaccounted purchases for the period should not be considered as undisclosed income because of the provisions of Section 158BB(1)(d) of the Act, as the due date for filing of the return of income was not over as on the date of the search and the purchases made during the period 1.4.2002 to 29.8.2002 were fully reflected in the seized records. I.T.A.NO.1417 OF 2009 4 The assessing officer rejected the said contention, finding that there were no regular Books of Account for the period, found and seized. It is stated that the respondent and her employee who managed the medical shop has categorically stated that no Books of Account were maintained by the assessee. It is also stated that the purchase bills for the amount aforesaid were in respect of cash purchases and corroborative evidence in support of such cash sales were obtained from the dealers. The assessing officer further found that no evidence was forthcoming from the respondent even after she was asked to produce evidence to prove that the cash purchases were actually reflected in her regular Books of Account. She was further asked to produce the copies of the monthly sales tax returns to the Sales Tax Department for the months April, 2002 to August, 2002. To the same, the respondent/assessee responded by pointing out that there were no monthly returns as medical shops attached to hospitals are exempted from sales tax. The profit relating to the unaccounted purchases was computed by adopting the gross I.T.A.NO.1417 OF 2009 5 profit margin of 17.02 per cent as had been adopted by the assessee herself in her return for the immediately preceding assessment year (2002 - 2003) and thus, the undisclosed income was determined as Rs.7,35,562/= for the year 2003 - 2004. 4. As already noted, the first appellate authority dismissed the Appeal filed by the respondent. In Second Appeal, the Tribunal confirmed the application of the gross profit rate per centage. Thereafter, in relation to the includability of the undisclosed income for the broken period 1.4.2002 to 29.8.2002, the Tribunal referred to the letter dated 13.8.2004 of the assessee to the assessing officer and it finds that the assessing officer has not denied the assessee's statement that the relevant records, ie. the rough cash book, cash and credit purchase bills including the alleged unaccounted purchases were available in the shop premises at the time of the search and that these documents were not taken by the Department during the course of search. It is further stated that the statement in the letter that the purchases of Rs.33,02,466/= were not accounted, and that the assessee had I.T.A.NO.1417 OF 2009 6 filed a return on the basis of the assessment year 2003 - 2004 are not refuted by the assessing officer who, in his letter dated 13.8.2004 required the assessee only to produce the monthly return of the sales submitted to the sales tax authorities for which the reply was given, as already been referred to by us. Thereafter, after referring, inter alia, to the contention that all the purchases were duly accounted in the Books of Account, and that the contention that there was no unaccounted purchases, the Tribunal held as follows: “14. We have heard rival submissions and considered the facts and materials on record. There is no dispute about the fact that for the broken period, viz. 1-4-2002 to 29-8-2002, the due date for filing the return under Section 139(1) was 30.11.2003 and the assessee had filed her return on 28.11.2003 along with tax audit report considering all purchases/sales during the previous year ended on 31.3.2003 and the assessment was completed under Section 143(3) after scrutiny, accepting the book results with slight disallowances out only for the reason that certain expenses. We find much I.T.A.NO.1417 OF 2009 7 force in the contention of the learned counsel for the assessee that `undislosed income' contemplates only income or property, which has not been or would not have been disclosed for the purposes of this Act. Since in this case, there was time for the assessee to file the return under Section 139(1) and subsequently assessee has filed return and Assessing Officer has accepted the same under Section 143(3) with slight disallowances, we cannot say that the assessee would not have disclosed the income for the period from 1.4.2002 to 29.8.2002. Since there was ample time for the assessee to file the return under Section 139(1) and the assessee also has filed the return within the due date including the income in question, which has been accepted u/s.143(3) of the Act, we find force in the contention of the learned counsel for the assessee and direct the Assessing Officer to delete the addition made for the broken period in a sum of Rs.7,35,562/=.” 5. Shri Jose Joseph, learned counsel for the appellant would contend that the Tribunal has clearly proceeded on a I.T.A.NO.1417 OF 2009 8 misconception about the scope of Section 158 BB(1)(d). He would point out that it was found by the assessing Officer that the respondent was not maintaining regular Books of Account. This finding is not interfered with by the appellate authority. The undisclosed income was computed by aggregating the suppressed purchases made by the respondent and by adding the gross profit at a rate which was returned by the respondent herself in the previous year and the undisclosed income was arrived at. The Tribunal itself upheld the application of the gross profit rate in respect of the other periods. The interpretation placed on Section 158 BB(1)(d) is unsustainable, it is contended. 6. Per contra, Shri T.N. Seetharaman, learned counsel appearing on behalf of the respondent would, on the other hand, submit that actually Accounts were being maintained and they were available, but they were not seized. He reiterated the contents of the letters written and the stand of the assessing officer as already referred to by us. He would further contend I.T.A.NO.1417 OF 2009 9 that the income cannot be treated as undisclosed income, as the respondent had time to file return till 30.11.2002 and she did file a return and what is more, it is contended, in the regular assessment with slight modifications, the assessing Officer accepted the respondent's return and assessed the respondent to tax. He contended that the assessee has paid tax on the alleged income from the suppressed purchases in the regular assessment. In response, learned counsel for the appellant Shri Jose Joseph would contend that the fact that the respondent/assessee filed a return subsequently, and that an assessment order was passed in the regular assessment as contended by the respondent is wholly irrelevant and what is crucial, in view of the circumstances admittedly obtaining, was whether the respondent was maintaining regular Books of Accounts to justify deletion of Rs.7,35,562/=. 7. Section 158B defines “undisclosed income” as follows: “158B. Definitions: In this Chapter, unless the context otherwise requires,- I.T.A.NO.1417 OF 2009 10 xx xx xx xx (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 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.” Section 158BA, inter alia, provides that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income for such period. Sub-section (3) of Section 158BA reads as follows: “158BA. Assessment of undisclosed income as a result of search: (3): Where the assessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-section (1) relates to I.T.A.NO.1417 OF 2009 11 an assessment year for which the previous year has not ended or the date of filing the return of income under sub-section (1) of Section 139 for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period.” Section 158BB provides for the method of computing undisclosed income. Sub-section (1), inter alia, provides as follows: “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 I.T.A.NO.1417 OF 2009 12 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.- (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.” Thus, under Section 158BB, the assessing officer in the case of a search, is to compute the undisclosed income for the block period on the basis of the evidence found as a result of the search as also such other materials or information as are available with him and relatable to such evidence. The aggregate income so arrived at is to be reduced by the total income in a case where the assessments under Section 143 or Section 144 or Section 147 have been concluded prior to the I.T.A.NO.1417 OF 2009 13 commencement of the search on the basis of the assessment. If the assessment has not been made, though returns have been filed, the income disclosed in the return is to be reduced from the computed undisclosed income. In a case, however, where the previous year is not ended or the date of filing the return of income under Sub-section (1) of Section 139 has not expired, then the income as recorded in the entries relating to the income or transactions, as recorded in the Books of Account and other documents maintained in the normal course on or before the date of search or requisition relating to other previous years, is to be deducted from the aggregate undisclosed income computed under Sub-section (1) of Section 158BB. 7. In the facts of this case, there is no dispute that as on the day when the searches were conducted, the respondent had time (till 30.11.2002) to file the return within the meaning of Section 158BB(1)(d). The question which falls for our decision is whether having regard to the position available, the respondent could claim the benefit of Section 158BB(1)(d)? I.T.A.NO.1417 OF 2009 14 We have already noticed that undisclosed income was unearthed by discovery of the suppressed purchase bills from the premises of the respondent amounting to more than Rs.35 Lakhs, for the period 1.4.2002 to 29.8.2002. It has been found by the assessing Officer that the respondent was not maintaining regular Books of Account. As already noticed by us, the assessing Officer found that the assessee and her employee categorically stated that no Books of Account were maintained by her. In the letter dated 13.8.2004, what is stated by the respondent is that all the relevant records, such as, rough cash books, cash and credit purchase bills, including the above mentioned purchases (referring to the purchase of Rs.33,02,466/=) were available in her shop premises at the time of search. It is further stated that the documents were not taken by the Department, since the Accountant informed him that the same were kept for preparation of the Day Book and the Ledger. We find it difficult to treat the rough cash books as the Books of Account normally kept in the course of business within the I.T.A.NO.1417 OF 2009 15 meaning of Section 158BB(1)(d). We notice further that even going by the letter of the assessee, it is stated that the aforesaid documents as also the cash and credit purchase bills were kept for preparation of the Day Book and Ledger. The Tribunal has not entered a finding overturning the finding the assessing Officer that the respondent was not maintaining regular Books of Account. What the Tribunal has found is that for the broken period in question, the due date was 30.11.2003 and the assessee had filed her return on 28.11.2003 along with the tax audit report. Thereafter, it is stated that considering all purchases/sales during the previous year ended on 31.3.2003, the assessment was completed after scrutiny under Section 143 (3), accepting the Book results with slight disallowances. The Tribunal found favour with the contention of the respondent that the assessee would have disclosed the income for the period from 1.4.2002 to 29.8.2002 as there was ample time for the assessee to file the return and the assessee has also filed the return within the due date, it was accepted and the deletion was I.T.A.NO.1417 OF 2009 16 ordered. We find the reasoning of the Tribunal totally unsustainable. As already noticed, there was suppressed purchases. Undisclosed income was computed by applying the gross profit rate. This has been upheld for all the periods comprised in the block period, except the broken period aforesaid. The reasoning that the assessee had time to file return and would, therefore, have disclosed the income and did disclose the income and, therefore, there is no undisclosed income is patently opposed to the terms of Section 158BB(1)(d). Proceeding on the basis of the finding entered by the assessing Officer which is not interfered with by the first appellate authority, which was not overturned by the Tribunal, the conclusion would be as follows: On the basis of the suppressed purchase bills and applying a rational criterion (namely gross profit rate), undisclosed income was computed. The time for filing return in respect of the broken period was to expire only on 30.11.2003. The question, as we have already mooted, is whether there is any I.T.A.NO.1417 OF 2009 17 scope for reducing the undisclosed income ascertained under sub-section (1) with reference to the income as revealed in the Books of Account maintained in the normal course. If we proceed on the finding that there was no Books of Account as such maintained in the normal course by the respondent for the period, then there was no scope for any reduction of any amount from the ascertained undisclosed income of Rs.7,35,562/=. If that be so, there was no basis at all to order deletion of the amount of Rs.7,35,562/= from the aggregate of undisclosed income for the broken period. The Tribunal has acted without any legal basis and was indulging in an irrelevancy when it reasoned that the income would have been disclosed, as there was time for filing return and the income was, in fact, disclosed by the assessee in her regular return and it was accepted with slight modifications. Such a reasoning flies in the face of the unambiguous provisions of Section 158BB(1)(d). The Tribunal quite clearly did not ask itself the correct question. If the reasoning were to be accepted, it would clearly not only not I.T.A.NO.1417 OF 2009 18 square with Section 158BB(1)(d), but it would allow the assessee to defeat the object of the Act by filing a return and producing the Accounts by the time the regular assessment was taken up and escape from the consequences of the suppression of income which stood discovered as a consequence of the search under Section 132 of the Act. 8. The upshot of the above discussion is that we must answer the questions raised in favour of the appellant which we do and we allow the Appeal and restore the order of the Assessing Officer. Sd/= K.M. JOSEPH, JUDGE Sd/= M.L. JOSEPH FRANCIS, JUDGE kbk. // True Copy // PS to Judge