By TIOL News Service

NEW DELHI, MAR 13, 2015: THE issue before the Bench is - Whether an estimation of income tax logically based upon inference drawn in the case of block assessment procedure is per se excludable from the ambit of the penal provision. NO is the answer.

Facts of the case

The assessee concern is a stock broker. A search operation was carried in the office of assessee and residence of its Directors. The books of accounts, documents and other materials were seized. The assessee on being called, filed a NIL return for the relevant block period. AO completed assessment u/s 158BC at Rs.8,90,36,597/- which comprised of undisclosed provisional income of Rs.1,57,15,409/- arrived at by adopting a flat rate of 1.5% on the aggregate of all credit entries in the bank account statements of the assessee. Other than this amount, the AO also added sums of money on the basis of unexplained cash deposits and negative balances. On appeal, CIT(A) directed the cancellation of the sums added on account of negative balances. CIT(A) rejected the assessee's contentions with respect to addition of Rs.1,57,15,409/-. Assessee had, in the original returns, declared the amounts to be derived on account of share trading transactions. The assessee's contentions were rejected because the AO and the CIT(A) found that in the statement recorded u/s 132(4), assessee had admitted that the said sum of Rs.1,04,76,94,004/- was actually not entirely based on share transactions but was also based on accommodation entries. The assessee had stated in the returns that the commission received on the share transactions ranged between 0.25% and 0.5%. The CIT(A), however, found that there was material suggestive of receipt of commission of upto 1% even on the share transactions. Thus, the estimated income added back by the AO on the basis of his assessment of the true income on the business activity of providing accommodation entries which the assessee was engaged in, was to the extent of 1.5% of the total turnover indicated. On further appeal, Tribunal upheld the substantive decisions of the AO and the CIT(A) and directed rejection of the 1.5% turnover of commission attributed by the AO and upheld by the CIT(A). AO had, in the meanwhile initiated penalty proceedings u/s 158BFA(2). The AO directed payment of Rs.15,34,375/-. The assessee's appeal to the CIT(A) was not successful. The assessee had not appealed against the ITAT's order finally determining the income @ 0.6% of Rs.1,04,76,94,004/-. Therefore, the matter became final.

Held that,

++ the plain terms of the provision - which Harkaran emphasised occur in a separate part of the Income Tax Act. Chapter XIV-B entitled "Special procedure for assessment of search cases" nowhere indicates that an estimation of income tax logically based upon inference drawn in the case of block assessment procedure is per se excludable from the ambit of the penal provision. The plain text of the enactment says that the AO has the discretion to levy penalty, "which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the AO under clause (c) of section 158BC";

++ in the present instance, there is no doubt at all that the AO did determine the undisclosed income; that it was based upon estimation or an inference is a matter of detail. The plain text of the enactment admits no room for doubt that all manners of determination of income, per se might call for action at the discretion of the AO. As to whether the AO has properly exercised discretion in a particular matter or otherwise can certainly be subject to further scrutiny. The plain text of enactment, however, does not admit of the interpretation which was favoured by the two Rajasthan High Court judgments cited by the assessee. The assessee's argument that there was no fresh material since the entire amount was disclosed earlier and that amount has not been varied, in our opinion, is not accurate. The sum of Rs.1,04,76,94,004/- was claimed in entirety (originally) to have been derived from share business. However, it did not exclusively stem from the share business and in fact the assessee admitted, in the course of search proceedings u/s 132(4), that the said amount also included sums forming part of the turnover on account of providing accommodation entries. Now, that radically changed the complexion of the nature of declaration made and certainly formed the basis for materials discovered during the course of proceedings. Furthermore, having regard to this admission, the AO, most importantly, was entitled to determine: having regard to the nature of commission originally declared, whether that was in line with the new activity disclosed. It is a matter of record - noted by the CIT(A) in the quantum proceedings that the commission ranged upto 1%. Having regard to the conspectus of circumstances, therefore, the AO determined the commission to be 1.5% on the said total turnover; the ITAT decreased it. Nonetheless, the important fact is that the determination in the course of block assessment order was based upon a material discovered, i.e. in the form of statement made by the assessee u/s 132(4); that radically changed the character of the income originally declared. Consequently, the estimation directed by the ITAT was accepted by the assessee. In view of the above circumstances, this Court is of the opinion that the question of law urged has to be answered against the assessee and in favour of the Revenue. The appeal is consequently dismissed along with the pending application.

(See 2015-TIOL-596-HC-DEL-IT)