ORDER
Mukul Shrawat, J.M.
1. The above referred appeals have been filed by both the assesse’s against the orders passed under Section 158BC(c) both dt. 25th Sept., 1996. In the case of Mr. Devang S. Desai the assessment of undisclosed income for the block period was worked out at Rs. 4,42,544 and in the case of Suryakant H. Desai, the total undisclosed income for the total block period assessed at Rs. 6,26,296. In both the appeals out of the four grounds raised during the course of hearing only ground No. 1 was pressed, therefore, rest of the grounds are dismissed and ground No. 1 being identical in both the appeals is hereby reproduced as follows :
“1.1 The learned Dy. CIT erred in rejecting the claim of your appellant under Section 54F of the IT Act, 1961, amounting to Rs. 63,760, in total disregard to the facts of the case and the relevant provisions of the IT Act concerning the assessment provisions under Chapter X1VB of the IT Act,
1.2 The learned Dy. CIT ought to have strictly followed the procedure for assessment prescribed in Chapter XIV-B of the IT Act and computation of total income ought to have been as per provisions of Chapter IV of the IT Act. The learned Dy. CIT failed to appreciate that the said Chapter IV of IT Act consists of Sections 28 to 59 of the IT Act, and hence deduction/exemption under Section 54F being part of head of income ‘capital gains’ ought to have been allowed by the learned Dy. CIT.
1.3 Learned Dy. CIT also failed to appreciate that the phrase ‘total income’ is defined in Section 2(45) of the IT Act, r/w Section 5 of the IT Act, the said phrase implies that the income is to be computed subject to all the provisions of the Act, including exemptions/allowances and deductions available under each of the head of the income. The deduction under Section 54F being part of the head ‘capital gains’ ought to have been allowed while computing total income of the appellant.”
2. A search under Section 132(1) of IT Act was conducted in the case of M/s Desai Investment & Financial Consultants on 14th Sept., 1995. Mr. Devang S. Desai is a partner in this firm to the extent of 25 per cent and the wife of Shri Suryakant H. Desai namely Smt. Joyti S. Desai is partner to the extent of 15 per cent share in this firm. In the assessment order, the AO has mentioned that undisclosed shares were found and seized from the premises. The contention before us is in respect of long-term capital gain of Rs. 63,760 in the hands of Mr. Devant S. Desai for the asst. yr. 1995-96. In the case of Mr. Suryakant H. Desai the long-term capital gain in question amounted to Rs. 94,413 and Rs. 1,02,005, respectively, for the asst. yrs. 1994-95 and 1995-96. The appellants have claimed deduction under Section 54F in respect of income shown under the head long-term capital gain on the ground that the investment was made towards purchase of flat. Mr. Devang S. Desai has informed that long-term capital gain was invested in a flat situated at Supreme Towers Housing Society, Maniklal Road, Navsari. The other appellant Mr. Suryakant H. Desai has informed that the long-term capital gain was utilised towards agreement of purchase of a plot bearing No. 21 situated at Swastik Housing Society, JVPD Scheme, Ville Parle (N), Mumbai.
3. The AO has pointed to the assessee that the alleged claim of deduction under Section 54F could not be allowed because the capital gain arose on transfer of shares which were not disclosed in the income of return originally filed. The subsequent claim of deduction was only an application as well as utilisation of undisclosed income. The AO mentioned that the said undisclosed income was unearthed at the time of search action under Section 132(1). The contention of the assessee before the AO was that for the purpose of computation of undisclosed income under Section 158BB, it has to be computed as per the provisions of Chapter-IV, i.e., after allowing deduction under Section 54F. The AO has rejected this contention on the ground that a special procedure for assessment in the case of search has been laid down in Chapter XIV-B of IT Act to compute the undisclosed income for a block of 10 years. For this purpose the legislature has also prescribed a uniform tax @ 60 per cent on such undisclosed income irrespective of the nature and source of such income. The AO has concluded that there was no intention on the part of the appellants to disclose this income in the normal course. The returns of income for the relevant years had already been filed before the search action and the income arising from the capital gains were not disclosed in the said income-tax returns. Under the provisions, therefore, the subsequent application of such undisclosed income to get the tax benefit by applying Section 54F should not be allowed and undisclosed income to be taxed at the flat rate of 60 per cent. The AO has therefore disallowed the claim of deduction under Section 54F and included the same in the computation of undisclosed income.
4. On behalf of the appellants Shri Bharat Desai appeared and vehemently argued that the AO wrongly interpreted the provisions of Section 158BB. He has argued that “total income” as defined in Section 2(45) means “the total amount of income referred to in Section 5, computed in the manner laid down in this IT Act.” Therefore, the income has to be computed in the. manner and the procedure laid down in the Act. The computation of capital gain is subject to deduction under Section 54F of IT Act. He has further mentioned that Section 158BB used the expression “computed in accordance with provisions of Chapter-IV”. This Chapter contains Section 14 to Section 59. Sec. 54F is within this Chapter. The said chapter is mentioned only for the purpose of providing the rules for the computation of income under specified sections for the purpose of block assessment. Further, he has mentioned that Section 158BH provides : “Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”
He has further advanced his arguments by referring to amendment in Section 158B(b) which seeks to cover any expense, deduction or allowance claimed by the assessee not to be allowed if the claim is found to be false. In support of his arguments he has cited certain decisions, i.e., CIT v. Milling Trading Co. (P) Ltd. (1995) 211 ITR 690 (Guj), CIT v. J.H. Gotla (1985) 156 ITR 323 (SC), Shaw Wallace & Co. Ltd. v. Asstt. CIT (1999) 238 ITR 13 (Cal), Govinddas and Ors. v. ITO and Anr., (1976) 103 ITR 123 (SC). In the compilation he has also submitted the correspondence in respect of claim under Section 54F, confirmation of transaction of sale of shares, proof of investment in flat and plot, copies of statement of undisclosed income along with bank summaries, etc. On the basis of position of law and the factual position he has thus concluded that the assessee is entitled for claim of deduction under Section 54F.
5. On behalf of Revenue, learned Departmental Representative, Mr. B.K. Mishra has supported the action of the AO and argued that the particular income was not disclosed by the assessee and the same was unearthed at the time of raid. Therefore, claim of deduction against an undisclosed income is not permissible. He has also pleaded that the AO has not gone into detail to verify whether the investment under Section 54F was legitimately made as per the terms and conditions laid down because he has only considered that the undisclosed income to be assessed under Section 158BB as such without any deduction. Hence, alternatively this fact has to be verified in case the deduction is going to be held as admissible under Chapter-XIVB.
6. We have carefully considered the submissions of both the sides and also thoroughly perused the order of the AO passed under Section 158BC(c) in the light of the material placed before us, as well as, case laws cited. The facts of the case have already been discussed in above paras in detail and apparently there is no dispute over the same. During the search action under Section 132(1) conducted on 14th Sept., 1995, at the premises of M/s Desai Investment and Financial Consultants certain assets were found and seized. The assessee was required to explain the working of the undisclosed income and in compliance he has explained that the undisclosed shares seized have been considered as undisclosed income for the block period. The assessee has thus worked out the block period income under the head “other sources” and also under the head “capital gains”. The objection of the AO was that on one hand the assessee has shown ‘long-term capital gain’ for the block period and simultaneously on the other hand the entire gain was claimed to have been invested towards the purchase of an asset qualified for deduction under Section 54F of IT Act. The assertion of the appellant was that the total income should first be calculated as per the provisions of Chapter-IV, which includes Section 54F, and then the disclosed income (either returned or assessed) should be reduced from it so as to arrive at the “undisclosed income”.
The issue thus before us is that under the present circumstances long-term capital gain, which was disclosed only after the search operation, whether the assessee is- eligible for deduction under Section 54F while computing undisclosed income of the block period under Section 158BB? Before we proceed further it is pertinent to examine the language of Section 158BB(1), reads as follows :
“Computation of undisclosed income of the block period–“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 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 AO……”
7. Therefore, under Chapter-XIVB, special procedure for assessment in the case of search cases has been laid down. The undisclosed income is to be assessed, as per this section, in accordance with the provisions of Chapter-IV. Chapter-IV of IT Act starts from Section 14 up till Section 59 of IT Act. This chapter covers ‘heads of income’, ‘computation of salary’, ‘house property’, ‘business income’, ‘capital gains’ and finally income from ‘other sources’. Therefore, this Chapter includes, ‘capital gains’ and relevant deduction against this head of income. Under this head of ‘capital gains’ there is a provision of deduction under Section 54F in case capital gain arises on transfer of certain capital assets not to be charged if the investment is made towards residential house. The assessee is required to invest the sale consideration in a residential house to claim the deduction under Section 54F. Section 158BB has also used the term “total income” which is defined under Section 2(45), means “the total amount of income referred to in Section 5, computed in the manner laid down in this Act”. Section 5 has defined scope of total income, according to which, the total income of any previous year of a person who is a resident includes all income from whatever source. Therefore, the ‘total income’ as mentioned in Section 158BB is the income earned or received from whatever source and that income is to be computed in the manner laid down in this Act.
Chapter XIV-B also defines “undisclosed income” as per Section 158B(b) under the head ‘definitions’: At this juncture it is pertinent to mention that under the definition of “undisclosed income” certain words have now been inserted by Finance Act, 2002 which are w. r. e. f. 1st July, 1995 which read, “or any expense, deduction or allowance claimed under this Act which is found to be false”. Side by side a consequential amendment is also made in Section 158BB in the Finance Act, 2002 which is also w. r. e. f. 1st July, 1995 and in place of the old language the new language substituted reads as follows : “in accordance with 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 AO and relatable to such evidence”. In consequence thereto the Explanation to Section 158BB has also been amended wherein also wherever the word “Chapter-IV” was used the same has now been replaced by the word “this Act”.
8. Before we proceed to consider the relevance of the amendments made, referred in above para, we would like to mention that the undisclosed income is to be determined on the basis of evidence found as a result of search or requisition of books of accounts or documents and such other material or information as is available with the AO. Section 158BC(b) provides that the AO shall proceed to determine the undisclosed income in the manner laid down in Section 158BB and the provisions of Section 142, Sub-sections (2) and (3) of Section 143 and Section 144, so far as may be, apply. It means that it is open to the AO to call for further evidence which is not found during search. The determination of income is to be made just like a fresh assessment of all the previous years in the block period after making necessary enquiries and considering the evidence found during search and called for during the assessment proceedings under this Chapter. The evidence already considered earlier may also be reviewed in such proceedings. Further, if we consider Sub-section (4) of Section 158BB the unabsorbed losses and depreciation are not to be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessment. It means that the assessment under Chapter XIVB shall not effect the amount of carried forward and set off of unabsorbed losses and unabsorbed depreciation and the assessee shall be allowed to carry forward and set off the same only in the regular assessment as per Chapter VI as it would have been (if) no search or requisition was made. The Explanation to Section 158BB(1) also indicates the same intention of the legislature that :
“Explanation–For the purposes of determination of undisclosed income–
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32.”
Therefore, the combined reading of the entire Section 158BB definitely gives an impression that the intention of the legislature is to compute the total income in accordance with the provisions of Chapter IV, now substituted with the words, “in accordance with the provisions of this Act.” The only exception is of set-off of brought forward losses or unabsorbed depreciation. Thus, it indicates that the provisions of Chapter VI (aggregation of income and set-off or carry forward of loss) are to be excluded while computing the income under Section 158BB otherwise the other Chapters of IT Act have to be applied if not expressly mentioned otherwise.
9. Now we have to consider the effect of the amendment in the definition of “undisclosed income” provided in Section 158B(b). The Finance Act, 2002 has inserted w.r.e.f. 1st July, 1995 that any expense, deduction or allowance claimed under this Act if found to be false then should be treated as “undisclosed income”. Therefore any deduction if found to be false after the search operation then only the same shall be taxed under the special provisions and Chapter XIV-B. Otherwise if the AO has not found any deduction or allowance to be incorrect or false then he has to allow the same while computing the total income for the purpose of Section 158BB. In the instant case after perusing the order of the AO we have observed that nowhere AO has doubted that the claim of deduction under Section 54F was not genuine or the same was false, His only objection was that the utilisation of undisclosed income to gain the benefit of tax under a particular section of IT Act should not be allowed while computing the undisclosed income for the purpose of the flat rate of 60 per cent. Thus he has not doubted the claim of assessee under Section 54F which was made at the time of filing of return for the block period.
10. As far as the main objection of the AO is concerned we hereby give a finding based on the reasoning, as per above paras, that the cumulative effect of the language of, Section 158BB, Explanation thereto and the definition of undisclosed income as per Section 158B vis-a-vis with the inserted language as per Finance Act, 2002, the total undisclosed income has to be computed in accordance with the provisions of Chapter-IV, i.e. after allowing the deductions provided therein if such deductions or allowances are not found to be false. One more section, i.e., Section 158BH also affirms the intention of the legislature which reads as follows :
“158BH–Application of other provisions of this Act.–Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”
Thus, a conclusion can be drawn that all the provisions of this Act shall apply to make an assessment under this Chapter and safely a view can be taken that the total income of the block period has to be computed after taking into account the method and the manner laid down in Chapter-IV of IT Act.
11. On behalf of the assessee, an argument was also advanced that under bona fide belief the long-term capital gain was not disclosed originally at the time of filing the income-tax return treating the same being exempt under Section 54F. According to the assessee he was under the impression that once the entire gain was invested in the specified assets as provided in Section 54F then, according to him, it was not necessary to include the same in the income-tax return filed in the normal course. The gain of sale of shares was mentioned as per the “Notes” forming parts of return filed for the block period. However, the issue is not in respect of the conduct of the assessee while filing the original return in the normal course but the issue is restricted only to the extent that whether the claim under Section 54F is eligible or not as provided in Chapter IV while computing the total undisclosed income for the block period. We have already answered this question in favour of the assessee as per the reasons recorded above. The only question left as raised by learned Departmental Representative is yet to be answered that whether the claim under Section 54F was as per the terms and conditions laid down under Section 54F was made or not. It is evident from the assessment order that the AO has not considered this aspect and related facts. He has also not examined the nature of investment. For that purpose it is justifiable to restore it back to the file of AO with the direction to examine the correctness of the claim of deduction under Section 54F as the same was not done at the time of passing the impugned order. For this limited purpose we refer this matter back to AO obviously with the direction to provide adequate opportunity to the appellant so that he can furnish necessary details in this regard.
12. In the result, appeals of the appellants are hereby allowed with the aforesaid directions.