Facts of the Case

A search and seizure operation under the Income-tax Act was conducted on 13 January 2000 in the Shyam Telecom Group of Companies, to which the respondent-assessees belonged. Although there was no specific search warrant in the name of the assessees, documents relating to them were seized during the search proceedings.

Consequently, notices under Section 158BD of the Income-tax Act, 1961 were issued requiring block assessment proceedings. The assessees filed returns declaring nil undisclosed income. However, the Assessing Officer treated long-term capital gains arising from sale of shares as undisclosed income and made additions in the block assessments.

The Commissioner of Income Tax (Appeals) upheld the additions. Subsequently, the Income Tax Appellate Tribunal (ITAT) deleted the additions on the ground that the transactions relating to the shares had already been disclosed before the search and therefore could not be treated as undisclosed income.

The Revenue challenged the ITAT orders before the Delhi High Court.

 

Issues Involved

  1. Whether long-term capital gains arising from sale of shares could be treated as “undisclosed income” under Chapter XIV-B of the Income-tax Act, 1961.
  2. Whether income disclosed in a return filed after the search, but within the permissible period under Section 139(4), can escape block assessment proceedings.
  3. Whether filing of advance tax, maintenance of books of accounts, or disclosure in balance sheets before the date of search amounts to disclosure of income for purposes of Chapter XIV-B.
  4. Whether the ITAT was justified in deleting additions made under Section 158BB(1)(c) of the Income-tax Act.

 

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The due date for filing the return for the relevant assessment year had expired before the search operation.
  • No return had been filed by the assessees up to the date of search.
  • Since the return was not filed within the prescribed due date, the income disclosed subsequently could not be considered for determining undisclosed income under Chapter XIV-B.
  • Section 158BB specifically governs computation of undisclosed income in search assessments and overrides general provisions relating to regular assessment.
  • The ITAT erred in relying upon disclosures made after the search operation.
  • Long-term capital gains had not been validly disclosed before the date of search and therefore constituted undisclosed income liable for block assessment.

 

Respondents’ Arguments (Assessees)

The assessees argued that:

  • The shares giving rise to capital gains had been acquired and recorded in their books much before the search.
  • Relevant transactions were reflected in balance sheets and other financial records already available with the Department.
  • Returns filed under Section 139(4) were legally permissible and therefore disclosures made therein should be considered.
  • The income could not be regarded as undisclosed merely because the return under Section 139(1) had not been filed before the search.
  • Reliance was placed on judicial precedents holding that income already disclosed to the Department in some form cannot be assessed as undisclosed income under Chapter XIV-B.

 

Court Findings and Analysis

The Delhi High Court examined the scheme of Chapter XIV-B and particularly Sections 158B, 158BA and 158BB.

The Court observed that where the due date for filing the return had expired and no return had been filed by the date of search, Section 158BB(1)(c) becomes applicable. In such circumstances, computation of undisclosed income is to be made in accordance with the special provisions governing block assessments.

The Court emphasized that Chapter XIV-B is a self-contained code for assessment of undisclosed income detected as a result of search operations.

The Court further noted that a return filed after the search under Section 139(4) does not automatically cure the failure to disclose income before the search where the due date under Section 139(1) had already expired.

The Court considered decisions of the Madras High Court and Madhya Pradesh High Court and clarified the circumstances in which income can be treated as disclosed even without filing a return.

According to the Court, if an assessee can demonstrate that income had been disclosed to the Department before the search through some overt act, such as payment of advance tax or similar evidence showing disclosure, the income may not be treated as undisclosed.

However, in the present cases:

  • The due date for filing returns had expired.
  • No returns were filed before the search.
  • There was no satisfactory evidence establishing disclosure of the long-term capital gains to the Department before the search.
  • Mere possession of a provisional balance sheet by the assessee was not sufficient disclosure.

Therefore, the Tribunal erred in deleting the additions.

 

Important Clarification by the Court

The Court summarized the legal position as follows:

(a)

Where the due date for filing the return has expired and no return has been filed, the income is normally treated as undisclosed for purposes of Chapter XIV-B.

(b)

If a search takes place after expiry of the due date and no return has been filed by that date, a subsequent return under Section 139(4) does not affect the applicability of Chapter XIV-B.

(c)

Even where no return has been filed, if the assessee proves that income was disclosed to the Department before the search through some recognized mode, such income may not be treated as undisclosed.

(d)

Payment of advance tax can be one circumstance indicating prior disclosure of income.

 

Section involved

Income-tax Act, 1961

  • Section 139(1) – Return of Income
  • Section 139(4) – Belated Return
  • Section 142(1) – Notice for Return/Information
  • Section 158B(b) – Definition of Undisclosed Income
  • Section 158BA – Assessment of Undisclosed Income
  • Section 158BB – Computation of Undisclosed Income
  • Section 158BD – Assessment of Undisclosed Income of Other Persons
  • Chapter XIV-B – Special Procedure for Assessment of Search Cases

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:11578-DB/AKS29112010ITA3782008_171510.pdf

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