ORDER
P.K. Bansal, A.M.
1. This appeal has been filed by the assessee against the order of the CIT(A-I)/ Visakhapatnam dt. 19th Dec., 2003.
2. The brief facts of the case are that there was a search in the business premises of assessee’s father Sri Indukuri Appala Raju. During the course of search the account books of M/s Durga Finances, a proprietary concern of the assessee, were found. It was noticed that there were some creditors in the books of M/s Durga Finances. The AO made enquiries during the search about two creditors, namely, Sri Y. Rajendra Raju and Sri Y. Srinivasa Raju, and it was found that Sri Y. Srinivasa Raju was working as cleaner of a lorry at a monthly salary of Rs. 1800. Enquiries with the mother of Sri Y. Srinivasa Raju revealed that Sri Y. Srinivasa Raju and his younger brother Y. Rajendra Raju did not have the financial capacity to make deposits or give loan to anybody. On that basis in a sworn in statement recorded from the assessee on the date of search, the assessee affirmed that he received the deposits. A notice under Section 158BD was issued to assessee on 26th Sept., 2000. Block return was filed disclosing ‘nil’ undisclosed income. The AO during the course of block assessment proceedings asked the assessee to furnish confirmation letters and also to produce all the creditors. The AO did not accept any of the credits as genuine and the entire credits outstanding amounting to Rs. 15,27,660 was treated as unproved and added as undisclosed income of the assessee.
3. The assessee went in appeal before the CIT(A) challenging the assessment on legality that the loan creditors were duly disclosed in trial-balance submitted along with the regular return filed by the assessee and therefore the AO did not have any jurisdiction to make the addition under block assessment under Chapter XIV-B of the IT Act.
4. The CIT(A) did not agree with this contention of the assessee. The assessee has also challenged the addition on merit, and on merit the CIT(A) allowed a relief of Rs. 8,01,938 to the assessee and confirmed the balance of the addition.
5. Before us, the learned Authorised Representative submitted that there are three categories of the creditors :
Category 'A' Rs. 6,40,303 Category 'B' Rs. 5,49,405 Category 'C'. Rs. 3,30,947 Category 'A' consists of principal amount Rs. 3,56,500, Category 'B' consists of principal amount of Rs. 2,99,000, while the Category 'C' consists Rs. 1,82,000. The details of each category were filed by way of reconciliation disclosed in the trial balance as on 31st March, 1996.
6. Our attention was drawn towards pp. 11 to 13 of the Volume IV of the paper book, and it was pointed out that the total liabilities as per the trial balance sheet which was enclosed along with the return filed for the asst. yr. 1996-97 on 31st Oct., 1996 was Rs. 16,63,045 and out of which after deducting the capital gain hire purchase charge payable to the creditors were 12,49,149, the interest was credited for the year ended 31st March, 1995 and 31st March, 1996 to the extent of Rs. 59,309 and Rs. 1,62,831, after excluding these figures the principal amount of credit were Rs. 10,27,000. It was pointed out that out of this, Rs. 1,89,500 were accepted as genuine and not considered by the AO for the purpose of the addition and therefore the principal amount remains only Rs. 8,37,500. For this amount along with the interest he has made a chart showing that if the interest up to 28th July, 1999 is added, the figure will come as has been added by the AO. The learned Authorised Representative thus contended that all the creditors were duly disclosed in the regular books of accounts and were in the balance sheet of the assessee called trial balance. Therefore, they were duly disclosed and cannot be regarded as undisclosed income of the assessee.
7. Our attention was drawn towards Section 158B(b) and it was pointed out that any income under Chapter XIV-B must first be the undisclosed income. The creditors were duly disclosed in the trial balance sheet cannot be regarded to be the undisclosed income, and therefore the provision of Chapter XIV-B will not apply. Reliance was placed on the following decisions : The Hon’ble Bombay High Court in the case of CIT v. Vikram A. Doshi and Anr. has held that transaction disclosed in return which were subject to matter of regular assessments, cannot be considered in block assessment.:
The Hon’ble Madhya Pradesh High Court in the case of Bhagwati Prasad Kedia v. CIT has held that the AO was not entitled to question loan transaction, which is subject-matter of regular assessment. The AO was wrong in holding that the said sum could be taxed in the block assessment although the same featured in the regular books of accounts.
The Hon’ble Delhi High Court in the case of CIT v. Ravi Kant Jain (2001) 167 CTR (Del) 566 : (2001) 250 ITR 141 (Del) has held that, block assessment is not a substitute for regular assessment. Assessment of block assessment can only be done on the basis of evidence found as a result of search.
The Hon’ble Madhya Pradesh High Court in the case of CIT v. GOM Industries Ltd. (head note) amount shown in balance sheet and transaction recorded in books–Finding that there was no concealment of income within the meaning of Section 158B(b)–No substantial question of law–Amount not assessable as income from undisclosed sources.
The Hon’ble Mumbai High Court in the case of CIT v. Shamlal Balaram Gurbani (head note) income disclosed in the audited balance sheet–No reason for treating income as undisclosed income for purposes of block assessment–Tribunal justified in deleting additions–No substantial question of law arises.
The Hon’ble Gujarat High Court in the case of N.R. Paper & Board Ltd. and Ors. v. Dy. CIT has held that block assessment is for assessment of undisclosed income of the block period and regular assessment is for assessment of total income–No double assessments–Both are for different purposes.
The Delhi ‘A’ Bench in the case of Sheela Aggarwal v. Dy. CIT (1999) 106 Taxman 227
(Del) (Mag) has held that in computation of undisclosed income–AO does not acquire any power under Section 158BA to make roving enquiries and investigation about assessments already completed and further to compute undisclosed income on estimate basis on presumptions and surmises, there being no seized material to support computation of such undisclosed income–Also held that AO could not reopen issue and assess undisclosed income on account of credit amounts especially when same stood accepted in regular assessment on scrutiny and no evidence was found during search to prove this credits as bogus or non-genuine.
The Delhi Tribunal in the case of Ravikant Jain v. Asstt. CIT (2000) 67 TTJ (Del) 797 has held that assessment under Chapter XIV-B could be made only in respect of undisclosed income and such undisclosed income must come as a result of search.
The Hyderabad ‘A’ Bench of the Tribunal in the case of Srinivasa Resorts Ltd. v. Asstt. CIT (2004) 86 TTJ (Hyd) 797 : (2003) 127 Taxman 86 (Hyd)(Mag) has held that block assessment under Chapter XIV-B cannot be made unless there is material found during the search, which can lead to an inference of undisclosed income.
The Madras Bench of Tribunal in the case of Mesh R. Shah v. Assn. CIT (2002) 253 ITR 34 (Chennai)(AT) held that diary containing investment in shares by assessee found during search–No return filed by the assessee for asst. yr. 1995-96 at the time of search–Treating cash credits and gifts as undisclosed income and including them in total income for block period in absence of evidence/material or information in possession of AO, addition not justified.
The Delhi ‘A’ Bench of the Tribunal in the case of Ravi Prakash Aggarwal (HUF) v. Asstt. CIT (2000) 67 TTJ (Del) 234 has at paras 2 & 2.1 held that cash credits recorded in the books of account and accepted by the Department in respective years, in the absence of any incriminating material found during search, could not be made the subject-matter of block assessment.
The Delhi ‘D’ Bench of Tribunal in the case of General Exporter v. Asstt. CIT (2000) 67 TTJ (Del) 119 (head note). No specific documents produced by Revenue to show that income assessed was a direct result of documents recovered during search–Queries raised in respect of documents replied by the assessee and same not made basis of assessment–Assessee already filed return disclosing income from exports supported by various documents–No further material discovered–There was thus no justification for addition of income from undisclosed sources.
The Chandigarh ‘A’ Bench of the Tribunal in the case of Shanti Rani v. Asstt. CIT (2003) 126 Taxman 62 (Chd)(Mag) to which Hon’ble AM was the author has held that Chapter XIV-B is separate code to bring to tax only undisclosed income and no income or source thereof which had been disclosed in regular return can be brought under this chapter–Undisclosed income will include only that asset or income which is based on any entry in the books of account or document or would not have been disclosed by assessee to Department for purposes of imposing tax under the Act,
The Jodhpur Bench of the Tribunal in the case of Chitra Devi v. Asstt. CIT (2002) 77 TTJ (Jd) 640 has held that addition in block assessments can be made only on the basis of incriminating material found as a result of search and not without the same.
The Lucknow Bench of the Tribunal in the case of Smt Savitri Devi v. Asstt. CIT (2002) 76 TTJ (Lucknow) 628 has held at para 18 to 20 that addition made on the basis of the reply and the balance sheet filed by the assessee herself during the course of assessment proceedings could not be sustained–Assessee made the payment for purchasing the property and reflected the same duly in her accounts–Addition made on account of investment in house property could not be sustained as the same was not covered and included in the “undisclosed income”.
The Nagpur Bench of Tribunal in the case of Savitri Devi v. Asstt, CIT 69 ITJ (Nag) 712 has held that an expenditure recorded in the books of account cannot by any stretch of imagination be called as undisclosed income,
The Delhi ‘A’ Bench of the Tribunal in the case of Dolly Farms & Resort (P) Ltd. v. Dy. CIT (2000) 69 TTJ (Del) 821 has held that once transaction is reflected in the books of account regularly maintained such transaction cannot form subject matter of any addition in block assessment.
The Hyderabad ‘B’ Bench of the Tribunal in the case of Essem Intra-Port Services (P) Ltd. v. Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd) has held that in computing the undisclosed income information and details furnished in the return of income or statements accompanying it or shown in the books of accounts maintained in the regular course of business cannot be made the basis of computation of undisclosed income under Chapter XIV-B. For the purposes of Chapter XIV-B there should have been non-disclosure of income and such non-disclosure should have been unearthed in search or requisition proceedings.
The Mumbai ‘B’ Bench of the Tribunal in the case of Sundar Agencies v. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai) has held that undisclosed income defined in Section 158BA does not provide a licence to Revenue for making roving enquiries connected with completed assessments unless some direct evidence comes to the knowledge of Department as a result of search which indicates clearly of undisclosed income.
8. The learned Authorised Representative further contended relying on the decision of Bangalore Bench of Tribunal in the case of Y. Subba Raju & Co. and Ors. v. Asstt. CIT (SB)(AT) that there was no material with the AO for sending satisfying note for taking action under Section 158BD. No undisclosed income was found during the course of search at the residence of the assessee’s father. Even no document or material, which may prove that the assessee has undisclosed income, was found during the search. Satisfaction should precede the investigation and not that the investigation should be preceded by the satisfaction. Reliance was also placed to the case of Amity Hotels (P) Ltd v. CIT and Ors. . In the absence of the material to form the prima facie belief, the notice issued under Section 158BD was void. The notice under Section 158BD was issued in a routine mechanical manner. Hence, the assessment framed in consequence of a invalid notice must be quashed.
9. Even on merit, it was submitted that the assessee has proved all the creditors by submitting their confirmation; therefore, no addition is to be made.
10. The learned Departmental Representative on the other hand relied on the orders of the authorities below and also submitted that the books of account were found during the course of search and in the statement recorded it was stated that some of the creditors are merely the driver and servant not having the creditworthiness. Thus, there was prima facie material found during the course of search to form the belief that the assessee has undisclosed income. Recording of the satisfaction is not necessary for the issue of the notice under Section 158BD. Reliance was made to the decision of the Special Bench as relied on by the Authorised Representative.
11. We have considered the rival submissions, perused the material on record, we have also gone through the case laws relied on. We find that the assessee was a regular assessee and he has filed income-tax returns for the asst. yrs. 1996-97 and 1995-96 prior to the date of search. The cash credits, which have been added by the AO for the block assessment proceedings treating to be undisclosed income of the assessee were duly disclosed in the trial-balance of the assessee (balance sheet) filed along with the return for the asst, yr. 1996-97. The reconciliation about the principal amount and the balance as on 31st March, 1996 till the date of the search was filed before us, which we have verified. The learned Departmental Representative also could not be able to point out any discrepancy in the reconciliation since all these credits were duly disclosed.
12. Chapter XIV-B which consists, of Section 158B to Section 158BH was introduced by the Finance Act,.1995 w.e.f. 1st July, 1995 to make procedure of assessment of cases in which search is initiated under Section 132 or where books of account, other documents or any assets are requisitioned under Section 132A. The chapter is titled (special procedure for assessment of search cases). The scheme of block assessment enacted under this chapter laying down procedure for the block assessment proceedings is intended by the legislature to operate simultaneously with the normal and regular scheme of assessment indicated under Chapter XIV of the IT Act. Both the tax schemes are independent of each other and they are not mutually exclusive, Block assessment under Chapter XIV-B is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to material unearthed during search. Therefore if the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of that chapter. Clause (b) of s, 158B contains inclusive definition of undisclosed income and reads as under :
(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 articles, 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).
13. If we analyse the aforesaid definition, it provides that undisclosed income includes :
(i) Any money, bullion, jewellery or other valuable article or thing or,
(ii) Any income based on any entry in the books of account or other documents or transactions;
(iii) Such money, bullion, jewellery, valuable article, thing, entry in the books of account or other documents or transactions represents wholly or partly income or property;
(iv) Which has not been or would not have been disclosed for the purposes of this Act.
14. Prom the aforesaid analysis of the definition, it clearly emerges that if any asset or any income as recorded in the books or documents has been disclosed or intended to be disclosed to the IT authorities, this would be outside the pale of undisclosed income as defined under Clause (b) as above.
15. We may next refer to Section 158BB, which provides for computation of undisclosed income of block period. The section expressly and unequivocally provides that the undisclosed income has to be computed “on the basis of evidence found as a result of search…. And such other materials or information as are available with the AO and relatable to such evidence.” The expression “relatable to such evidence” has been inserted by the Finance Act, 2002 retrospectively w.e.f. 1st July, 1995. A bare reading of this provision would indicate that undisclosed income has to be computed on the basis of evidence and material found during search. Any material or evidence, available to the AO, which is not related to the search would not form the basis for computation of undisclosed income.
16. On the basis of the aforesaid legal provision we. are of the firm view that the income which the assessee had duly disclosed in the regular assessment and the books relating thereto not showing any unearthed income and the returns and documents filed by the assessee subsequently will not entrust the jurisdiction on the AO to make assessment under Chapter XIV-B. The learned Departmental Representative has not brought out before us from the file of the assessee that the AO on the basis of the evidence found as a result of search unearthed any undisclosed income. In the case of CIT v. Ravikant Jain (supra), the Hon’ble Delhi High Court has held that “a block assessment under Chapter XIV-B of the Act is not intended to be a substitute for a regular assessment, that its scope and ambit is limited in that sense to materials unearthed, during the search, that it is in addition to the regular assessment already done or to be done.” Similar view has been taken by the various High Courts and the Benches of the Tribunal as is apparent from the decisions relied on by learned Authorised Representative and produced hereinabove. No contrary decisions were brought to our knowledge by the learned Departmental Representative. A perusal of the assessment order in the impugned case clearly shows that what has been assessed in the block assessment are the cash credits, which were already disclosed by the assessee in the trial balance filed along with the income-tax return filed for the asst. yr. 1996-97. Therefore, in our opinion, these credits cannot be regarded to be the undisclosed income of the assessee within the definition of the undisclosed income given under Section 158B(b) of the IT Act Chapter XIV-B. No other income has been brought on record as may be detected or found during the course of the search. We, therefore, hold that the block assessment framed on the assessee is invalid and without jurisdiction and therefore the block assessment is annulled. We do not debar the AO to take the action under the regular assessment proceedings and the AO may take the action against the assessee for this income in the regular assessment proceedings in accordance with law.
17. Coming to the validity of the notice issued under Section 158BD, we find that Chapter XIV-B provides for a special procedure for assessment of cases in which search is initiated under Section 132 where books of account, other documents or any assets are requisitioned under Section 132A. If the search action does not disclose undisclosed income, the question of any assessment being framed under that chapter is simply improper and outside the purview of the chapter. Similarly, it is basically the person searched who is subject to assessment under that chapter. The provisions of Section 158BD, however, extend the operation of those provisions to the person who is not searched.
18. The essential ingredients of Section 158BD are;
a–The AO of a person searched should be satisfied,
b–That undisclosed income belongs to person other than person in respect of whom search was conducted,
c–The books of account or other documents or assets seized shall be handed over to the AO having jurisdiction over that other person.
19. The AO shall proceed against such other person under the provisions of this chapter.
20. The search was carried out under Section 132 on 28th July, 1999 at the business premises of the assessee’s father, and while the search was carried on, certain material in respect of finance business of the assessee was also found and seized. The material relates to the cash credit received by the assessee. What was that material is not mentioned in the assessment order. Now coming to the case relied by the learned Authorised Representative and Departmental Representative which relates to the case of Y. Subba Rao & Co. v. Asstt. CIT (supra) decided by the Special Bench of Tribunal, Bangalore, from the head note of this case, we found that in this case it has been held :
On the basis of the search material in the possession of the AO of a person who is searched, he must come to a prima facie view that undisclosed income belongs to other person.
If the satisfaction of the AO that undisclosed income belongs to other person is justifiable the authorities when called in question, cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under Section 158BD would have to be dropped because the very foundation for the assumption of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In the instant case, there was no iota of material to show that there was undisclosed income. When such was the case, the satisfaction that the undisclosed income belonged to such other person was wanting. When that was the case, the entire proceedings framed with the issuance of notice under Section 158BD would have to go. In other words, if the basis of notice is not there, the notice itself is wrongly issued and making further assessment on such other person would be wholly outside the purview of the scheme. Thus, issuance of notice by itself is not the display or record of satisfaction which is the basic requirement under Section 158BD (Paras 7,1, 7.2 and 9).
In the light of the foregoing discussion, the issuance of notice under Section 158BD was not justified in the instant case. It was not justified merely on the ground that there was no material at all indicating any undisclosed income. The Revenue had fairly agreed that there was no material found as a result of search, which could pinpoint the existence of undisclosed income of a person who was not subject to search. The basic ingredient of Section 158BD is the existence of some material. If there is no material, the question of AO’s satisfaction does not simply arise. If there is material, then of course, it would be better if the AO demonstrates that he is satisfied about there being some undisclosed income belonging to a person who was not searched. In all the instant case, the assessment was not based on a search action or supported by any material found during the course of search but were the result of reappraisal of facts that were already within the knowledge of the Department (Para 10).
However, in a given case, where there is sufficient material to take action under Section 158BD, and the AO has not specifically recorded satisfaction, it is not a lapse which would vitiate the proceedings. The main thing to be kept in mind is that proceedings under Section 158BD cannot be a fancy or ipse dixit of the AO but it should be based upon some material evidence found in the course of search. By invoking the provisions of Section 158BD, a stranger to the search proceedings is being implicated for a liability higher than normal rates of tax. Therefore, it would be in the fitness of things that the AO demonstrates in some way his satisfaction about there being undisclosed income hidden in the search material, which as per the provision, has to be handed over to the AO having jurisdiction over that other person. Thus, existence of material is a sine qua non for taking action under Section 158BD. If the above requirement is fulfilled in a given case, then omission to record satisfaction may not vitiate the proceedings. (Para 11).
Thus, in the instant case, the examination of the records did not show the existence of any material for the satisfaction and, consequently, issuance of notice under s, 158BD was not justified. The assessment orders passed in pursuance thereof were vacated. (Para 12)
In the result, all the appeals were to be allowed. (Para 13).
21. The Revenue although was given an opportunity to show the material on the basis of which the notice under Section 158BD was issued to the assessee and what was the material before the Revenue for taking the action under Section 158BD. The record was not produced before us, and the learned Departmental Representative did point out that there was material on record seized during the course of the search relating to the finance business of the assessee for arriving at the satisfaction of the AO issuing notice under Section 158BD. This fact has not been denied by learned Authorised Representative that the material relating to the finance business of the assessee was seized during the course of the search at the place of the assessee’s father. In view of the this fact, we are of the opinion that there was material to form the prima facie belief for the issue of the notice under Section 158BD and this Court cannot examine the sufficiency of the material. The recording of the satisfaction is not necessary by the AO as has been held by the Special Bench (supra) relied on by both the parties. The case of Hon’ble Delhi High Court in the case of Amity Hotel (P) Ltd. (supra) will also not assist the assessee as in this case seizure of the material relating to the finance business of the assessee was not denied even by the learned Authorised Representative. We are, therefore, of the view that the power under Section 158BD has not been exercised in a mechanical manner but there are material seized during the course of the search, which may prima facie justify the action of the AO of the satisfaction. We therefore dismiss the plea of the assessee that the notice issued under Section 158BD is invalid and void ab initio.
22. Since, we have already quashed the assessment because the income assessed was not the undisclosed income within the definition of Section 158B(b) of the IT Act, therefore, the AO cannot got into the merits by examining the creditors during block assessment proceedings. This action of the AO in our opinion is illegal. The appeal of the assessee on that ground is allowed.
23. In the result, the appeal of the assessee is allowed.