Facts of the Case

A search and seizure operation under Section 132 of the Income-tax Act was conducted on 13 January 2000 in the Shyam Telecom Group of Companies, to which the respondent companies belonged.

Although no specific search warrant was issued in the names of the respondent companies, documents relating to them were seized during the search. Consequently, notices under Sections 158BC and 158BD were issued for block assessment proceedings covering the period from 1 April 1989 to 13 January 2000.

The assessees filed returns declaring nil undisclosed income. However, the Assessing Officer treated the long-term capital gains arising from the sale of shares as undisclosed income and made additions under Chapter XIV-B.

The Assessing Officer observed that the due date for filing the return under Section 139(1) had already expired before the search, and the returns disclosing the capital gains were filed only after the search under Section 139(4). Therefore, such income was liable to be treated as undisclosed income under Section 158BB(1)(c).

The Commissioner of Income Tax (Appeals) upheld the assessment order. The Income Tax Appellate Tribunal (ITAT), however, deleted the additions holding that the investments in shares had already been reflected in earlier balance sheets and that the subsequent capital gains should not be treated as undisclosed income.

The Revenue challenged the Tribunal’s order before the Delhi High Court.

 

Issues Involved

  1. Whether long-term capital gains disclosed in a return filed under Section 139(4) after the date of search can escape treatment as undisclosed income under Chapter XIV-B of the Income-tax Act?
  2. Whether filing a belated return after the search operation relates back to the original due date for filing the return under Section 139(1)?
  3. Whether the existence of share investments in earlier balance sheets is sufficient to establish prior disclosure of capital gains arising from their sale?
  4. Under what circumstances can income be said to have been disclosed to the Department before the date of search despite non-filing of the return?

 

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The due date for filing the return under Section 139(1) had expired before the search.
  • No return had been filed as on the date of search.
  • The disclosure of capital gains was made only after the search through returns filed under Section 139(4).
  • Chapter XIV-B contains a special procedure for assessment of undisclosed income and overrides other provisions of the Act.
  • Under Section 158BB(1)(c), where the due date for filing the return has expired and no return has been filed, the income is liable to be treated as undisclosed income.
  • The assessee disclosed the capital gains only after incriminating documents relating to the sale of shares were seized during the search.
  • Therefore, the additions made by the Assessing Officer were valid.

 

Respondent’s Arguments (Assessees)

The assessees argued that:

  • The shares sold were already disclosed in the balance sheets filed with the Department for earlier assessment years.
  • Since the investments were already reflected in the records submitted to the Department, it could not be presumed that the capital gains arising from their sale would remain undisclosed.
  • Returns filed under Section 139(4) were legally permissible returns under the Income-tax Act.
  • The capital gains disclosed in such returns could not be treated as undisclosed income merely because the returns were filed after the due date under Section 139(1).
  • Reliance was placed upon the Delhi High Court judgment in CIT v. Mrs. Kum Kum Kohli (276 ITR 589).

 

Court Findings

The Delhi High Court held that:

  • The due date for filing the return under Section 139(1) had expired before the search.
  • No return was filed by the assessees before the search operation.
  • The capital gains were disclosed only after the search and seizure action.
  • Filing a return under Section 139(4) after the search does not relate back to the original due date prescribed under Section 139(1).
  • Once the due date has expired and a search takes place before filing of the return, the subsequent filing of a belated return cannot prevent application of Chapter XIV-B.
  • Mere existence of a provisional balance sheet or internal records with the assessee does not amount to disclosure to the Department.
  • Disclosure must be made to the Department through some overt act before the date of search.
  • The Tribunal erred in deleting the additions.

The Court relied upon:

  • Dr. Brijesh Lahoti v. CIT (282 ITR 349) (MP)
  • A.R. Enterprises v. Assistant Commissioner of Income Tax (Madras High Court)

while distinguishing:

  • CIT v. Mrs. Kum Kum Kohli (276 ITR 589) (Delhi)

on the ground that in Kum Kum Kohli, advance tax had been paid and the income had already been disclosed through contemporaneous records prior to the search.

 

Important Clarification by the High Court

The Court summarized the legal position as follows:

(a)

Where the due date for filing the return under Section 139(1) has expired and no return has been filed, it will normally be presumed that the income has not been disclosed for the purposes of the Act.

(b)

If a search under Section 132 takes place after the expiry of the due date and before filing of the return, the subsequent filing of a return under Section 139(4) will not affect the applicability of Chapter XIV-B.

(c)

Even if a return has not been filed, income will not be treated as undisclosed where the assessee is able to establish that such income had already been disclosed to the Department before the date of search through some other recognized mode.

(d)

Payment of advance tax is one such circumstance from which an inference of prior disclosure may be drawn.

(e)

A provisional balance sheet or documents merely found in the possession of the assessee during the search do not amount to disclosure to the Department.

 

Sections Involved

  • Section 132 – Search and Seizure
  • Section 139(1) – Due Date for Filing Return of Income
  • Section 139(4) – Belated Return
  • Section 142(1) – Notice for Furnishing Return
  • Section 143(1) – Processing of Return
  • Section 158B – Definition of Undisclosed Income
  • Section 158BA – Assessment of Undisclosed Income as a Result of Search
  • Section 158BB(1)(c) – Computation of Undisclosed Income
  • Section 158BC – Procedure for Block Assessment
  • Section 158BD – Assessment of Undisclosed Income of Other Persons

 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:5750-DB/AKS29112010ITA8112007.pdf

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