ITA 29/2006 BEFORE THE HON’BLE MR. JUSTICE RANJAN GOGOI THE HON’BLE MR. JUSTICE B.P. KATAKEY IN THE GAUHATI HIGH COURT (The High Court of Assam, Nagaland, Meghalaya, Manipur, Tripura, Mizoram and Aru nachal Pradesh) INCOME TAX APPEAL NO.29 OF 2006 Commissioner of Income Tax, Guwahati-II, Saikia Commercial Complex, Sree Nagar, G.S. Road, Guwahati - 5 &..APPELLANT -VERSUS- M/s Bimal Auto Agency, Chand Market, A.T. Road, Guwahati - 1. &.RESPONDENT P R E S E N T THE HON’BLE MR. JUSTICE RANJAN GOGOI THE HON’BLE MR. JUSTICE B.P. KATAKEY For the appellant : Mr. U. Bhuyan, Mr. A. Hazarika, Standing Counsel, I.T. D eptt. For the Respondents : Dr.A.K.Saraf, Senior Advocate Mr. A. Goyal, Advocate. Dates of Hearing : 11.6.2009 & 12.6.2009 Date of Judgment & Order : 23.6.2009 JUDGMENT AND ORDER (CAV) (Ranjan Gogoi, J.) Out of the several substantial questions of law framed at the time of admission of this appeal, two questions have been urged by the appellant at the hearing. The first relates to the addition of Rs.40,04,369/- made by the Assessing Officer in a Block Assessment order dated 21.11.2000 under Section 15 8BC and Section 143(3) of the Income Tax Act. The block period covered the Asses sment Years 1989-1990 to 1999-2000. The said addition having been deleted by the learned Commissioner of Income tax (Appeals) and the said order having been aff irmed by the learned Tribunal by the impugned order dated 18th July, 2006, the i nstant appeal has been filed under Section 260A of the Income Tax Act, 1961, her einafter referred to as \the Act\. 2. The second issue pressed at the hearing relates to another addi tion made by the Assessing Officer in respect of a sum of Rs.14,98,282/- on acco unt of disallowable travelling expenses incurred through Credit Cards recovered in the course of search. The said addition having met a similar fate at the hand s of the appellate authority and the learned Tribunal below, the findings of the said authorities have been challenged in the instant appeal. 3. A search was conducted on 27.4.1998 and on subsequent dates in the business and residential premises of the Sarawagi Group to which the Assess ee belongs. Admittedly, nothing was found in the course of the search. However, the search party noticed the business establishment of the Assessee located at A dabari and taking into account the investments in the said building, as shown in the returns filed by the assessee, referred the matter to the Departmental Valu ation Officer (DVO) for submission of a report on the valuation of the said buil ding. The Departmental Valuation Officer submitted his report. The Assessing Off icer, on his own, also made a reference to the District Valuation Officer, IT De partment at Kolkata for his expert comments in the matter. No communication was, however, received by the Assessing Officer in response to the said reference. A ccordingly, the Assessing Officer proceeded to assess a sum of Rs.40,04,369/- (t he difference between the amount mentioned in the report of the Departmental Val uation Officer and the investments shown in the return filed by the assessee) as undisclosed income of the assessee. 4. In so far as the addition of disallowable allowance is concern ed, the amount of expenditure involved was admittedly shown by the assessee in i ts Books of Accounts. However, on the ground that the explanations furnished by the assessee with regard to the aforesaid expenditure was not satisfactory, the said amount of Rs.14,98,282/- was also assessed as undisclosed income of the ass essee for the block period in question. Both the aforesaid additions, as already noticed, had been deleted by the two appellate authorities below. 5. We have heard Mr. U. Bhuyan, learned counsel appearing for the appellant and Dr. A.K. Saraf, learned senior counsel appearing for the responde nt. 6. Shri U. Bhuyan, learned counsel for the appellant has not been v ery successful in showing any specific provision of the Act authorizing the Asse ssing Officer to act on the report of the Departmental Valuation Officer in resp onse to a reference made by the search party acting under Section 132 of the Act . The judgment of this Court in Commissioner of Income Tax -Vs.- Amiya Bala Paul , reported in (1999) 240 ITR 378 holding a power to be available to the Assessin g Officer under Section 55A of the Act to make such a reference, though initiall y relied upon, was subsequently found to be over-ruled in Commissioner of Income -Tax -Vs.- Amiya Bala Paul, reported in (2003) 6 SCC 342. Consequently, Shri Bhu yan has altered the argument by relying on the views expressed by the Apex Court in para-11 of the said judgment that the Assessing Officer is not bound by the strict rules of evidence and a report of a Valuation Officer under Section 55-A may be considered by the Assessing Officer as a piece of evidence if it is relev ant. Shri Bhuyan has further argued that regardless of the validity of the manne r in which materials have come to the knowledge of the Assessing Officer, as lon g as such materials are relevant, the same can form a legitimate basis of an ord er of the Assessing Officer. In this regard, the judgment of the Apex Court repo rted in (1974) 93 ITR 505 (Paoran Mal -Vs.- Director of Inspection (Investigatio n), Income Tax, New Delhi and others, has been relied upon by Shri Bhuyan. 7. Shri Bhuyan has further submitted that the provisions of Secti on 158BB of the Act, as prevailing on the date of the Assessment Order i.e. 21.1 1.2000, would govern the instant matter and the amendment of Section 158BB broug ht about by the Finance Act of 2002, though with retrospective effect from 1.7.1 995, will not apply to the present case. Relying on the provisions of Section 15 8BB, prior to its amendment by the Finance Act of 2002, Shri Bhuyan has submitte d that the materials relied upon by the Assessing Officer in making the assessme nt of undisclosed income need not be connected with the materials found in the c ourse of the search and such materials may be independent of the search. 8. In so far as the issue with regard to disallowable travelling expenses is concerned, Shri Bhuyan has submitted that in the course of the searc h certain items of expenditure claimed to be business expenditure and incurred a gainst the Credit Cards of the partners and officers of the assessee were found to be relatable to personal expenditures of such persons. Therefore, according t o Shri Bhuyan, the learned Tribunal ought to have remitted the matter to the Ass essing Officer for an effective segregation of such personal expenditure from th e business expenditure of the assessee. 9. Dr.A.K.Saraf, learned senior counsel for the Respondent Assess ee has drawn the attention of the Court to a CBDT Circular bearing No.8 of 2002 dated 27th August, 2002 containing an explanatory note on the provisions of the Finance Act, 2002 relating to Direct Taxes. Referring to paragraph 61.3 of the a foresaid Circular, Dr. Saraf has submitted that the amendment of Section 158BB m ade by the Finance Act of 2002 is merely clarificatory. Learned counsel has poin ted out that in the aforesaid Circular issued by the CBDT it has been mentioned that the amendment to Section 158BB had been necessitated by the views of certai n appellate authorities under the Act to the effect that income which can be inc luded in block assessment is only such income which is directly evidenced by mat erials found during the search and does not include income which has been discov ered on the basis of post search inquiries. In the aforesaid circular, it has be en clearly stated that such views of the appellate authorities are contrary to t he intention that undisclosed income discovered as a result of search is to be i ncluded in the block assessment as long as such income has been detected as a re sult of evidence gathered during the search. Dr. Saraf has further pointed out a lternatively that even under Section 158BB prior to its amendment, it is such ot her materials or information as are available with the Assessing Officer which c ould form the basis of an assessment of undisclosed income. The word \such\ is r elatable to materials or information found in the course of the search and not t o any materials or information independent of the search. In this regard, Dr.Sar af has further relied on the definition of undisclosed income appearing in Secti on 158B(b) of the Act to indicate that undisclosed income is income which had no t been or would not have been disclosed for the purpose of the Act. Learned coun sel has also pointed out that prior to insertion of Section 153A of the Act with effect from the year 2003, the assessment under Section 158BB was in respect of undisclosed income only and the regular assessments for the years covered by th e block period continued to remain. It is only after the aforesaid amendment mad e in the year 2003 that the earlier assessment stands abated and the Assessing O fficer has been empowered to make fresh assessment of income inclusive of undisc losed income. Dr. Saraf has further pointed out that the precedents cited on beh alf of the appellant are cases involving regular assessments and not assessment of undisclosed income. Dr. Saraf has also relied upon two decisions of the Delhi High Court in the case of Commissioner of Income Tax -Vs.- Manoj Jain, reported in (2006) 287 ITR 285 and Commissioner of Income Tax -Vs.- Askok Khetrapal, rep orted in (2007) 294 ITR 143 to contend that undisclosed income cannot be assesse d on the basis of any evidence or materials not discovered/known in the course o f the search and otherwise unconnected with the search. In this regard, reliance has been placed on the decision of the Madhya Pradesh High Court in the case of Commissioner of Income Tax -Vs.- Khushlal Chand Nirmal Kumar, reported in (2003 )263 ITR 77. 10. In so far as the issue with regard to the addition of disallow able travelling allowances is concerned, Dr. Saraf has pointed out that the enti re of the said expenditure was reflected in the books of accounts of the assesse e which was produced in the course of regular assessment for the Assessment Year s covered by the block period. The expenditure claimed was accepted and allowed in the regular assessment proceedings. Therefore, according to Dr. Saraf, the d isallowance made and the action of treating the said expenditure to be undisclos ed income cannot be sustained as the said decision is based on a mere change of opinion. 11. We have considered the rival submissions made by the learned c ounsels on behalf of the parties. In the present case there is no manner of doub t that in the course of search operation carried under Section 132 of the Act, n o evidence or material was found. In so far as the investment in the building at Adabari made by the assessee is concerned, there is also no dispute on the basi c proposition that the undisclosed income assessed is solely on the basis of the report of the Departmental Valuation Officer to whom a reference was made by th e search party itself upon a physical inspection of the building. 12. Chapter XIV-B of the Act provides a special procedure to deal with undisclosed income. Undisclosed income has been defined by Section 158B(b) to mean income which had not been or would not have been disclosed for the purpo se of the Act. Under the provisions of the Act, as it stood at the relevant poin t of time, assessment of undisclosed income for the block period of 10 years did not have the affect of abrogating the regular assessments that may have been ma de in any of the Assessment Year covered by the block period. The scheme of the Chapter-XIV-B of the Act was to provide a mechanism for assessment of undisclose d income on the basis of a search carried out in accordance with the provisions of Section 132 of the Act. In the present case, the assessment of undisclosed in come in so far as the building is concerned cannot also be justified on the basi s of Section 158BB of the Act as it stood prior to its amendment by the Finance Act of 2002. To make the discussion complete, the provisions of Section 158BB as it existed before and after the amendment are reproduced below :- Before Amendment 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 Chapter IV, on the basis of evidence foun d 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. As reduced by the aggregate of the total income, or as the case may be, as increas ed by the aggregate of the losses of such previous years, determined, - & & & . After Amendment 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 increased by the aggregate of the losses of s uch previous years, determined, - & & & . 13. A reading of the provisions of Section 158BB as it existed bef ore and after amendment amply discloses that even prior to the amendment, Sectio n 158BB authorized the Assessing Officer to make an assessment of undisclosed in come on the basis of evidence found as a result of search ..................... .. and such other materials or information as may be available with the Assessin g Officer . The use of the word - \such\ clearly points out that such materials or information must have some connection with the search and do not constitute i ndependent materials i.e. independent of the search. The aforesaid is the view i ndicated in CBDT Circular No.8 of 2002, details of which have already been notic ed. In the said clarification, the Central Board had made it clear that the amen dment was necessitated by contrary views expressed by the authorities in certain quarters. From the CBDT Circular in question, it is, therefore, clear that the amendment of Section 158BB brought about by the Finance Act of 2002 is merely cl arificatory. In the present case, admittedly, no evidence or materials was disco vered in the course of the search of the premises of the Group to which the asse ssee belongs. The undisclosed income in so far as the building is concerned was solely made on the basis of the report of the Departmental Valuation Officer as obtained by the search party. The report of the Departmental Valuation Officer d oes not constitute materials or information relatable to the search. Such a view have been recorded in the judgments of the Madhya Pradesh High Court in Commiss ioner of Income Tax -Vs.- Kushlal Chand Nirmal Kumar, reported in (2003) 263 I.T .R. 77 and Delhi High Court in Commissioner of Income Tax -Vs.- Manoj Jain, repo rted in (2006) 287 ITR 285 (Delhi) and Commissioner of Income Tax -Vs.- Ashok Kh etrapal, reported in (2007) 294 ITR 143 (Delhi). While expressing our respectful agreement with the said views, it has to be held that the determination of undi sclosed income of Rs.40,04,369/- in respect of the building in question being so lely on the basis of the report of the Departmental Valuation Officer was rightl y interfered with by the learned Tribunal. The said conclusion of the learned Tr ibunal, therefore, will not be open to interference. 14. Coming to the issue of disallowable travelling expenses, what th e Court finds is that though the assessee had shown the said expenditure in the Books of Accounts which was scrutinized in the course of regular assessment, in the course of search operations conducted under Section 132 of the Act, it was f ound that some portion of such expenditure did not relate to the partners or emp loyees of the assessee but were in respect of other persons and further that som e items of expenditure though claimed by the assessee to be business expenditure were found to be personal expenditure of the concerned persons. If such materia ls have been found in the course of the search, naturally there was room for fur ther scrutiny into the matter in the course of the block assessment proceedings. Such an enquiry had, in-fact, been undertaken by the Assessing Officer by issua nce of an appropriate notice. However, the Assessing Officer did not make any en deavour to find out or segregate the items of personal expenditure or expenditur e unconnected with the business of the assessee from those items which are so re latable. Instead, the Assessing Officer, not being satisfied with the reply subm itted by the assessee, proceeded to add the entire of the expenditure as undiscl osed income of the assessee. 15. On due consideration, we are of the view that the addition of th e entire expenditure as undisclosed income could not have been made by the Asses sing Officer as it is admitted that only some items of expenditure were found in the course of search to be unrelated to the business of the assessee or was fou nd to be in respect of persons not connected with such business. In such a situa tion, the Assessing Officer should have made an endeavour to segregate the items of expenditure under separate heads and only those items which were found to be unconnected with the business of the assessee or were in respect of persons not connected with the assessee which could have legitimately formed the basis of a n addition to the undisclosed income. As the Assessing Officer had failed to so act, we are of the view that the learned Tribunal should have remitted the matte r to the Assessing Officer for a de-novo consideration. Accordingly, we interfer e with that part of the order of the learned Tribunal and remit the same for a f resh consideration by the Assessing Officer after giving the assessee all opport unities as may be required under law. 16. Consequently and in the light of the forgoing discussions, the app eal is partly allowed to the extent indicated above.