Shreeji Education Trust,, Baroda vs Department Of Income Tax on 9 April, 2010

Income Tax Appellate Tribunal - Ahmedabad

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IN THE INCOME TAX APPELLATE TRIBUNAL

AHMEDABAD BENCH "B" AHMEDABAD

Before S/Sheri T.K. Sharma, JM and D.C.Agrawal, AM

IT(SS)A No.218/Ahd/2004

Block period 1.4.95 to

20.09.2001:

Shreeji Education V/s. Asstt.CIT, Cen.Cir.2, Trust, c/o M.S.Hostel, 6 t h floor, Aayakar Sama Savli Road, Bhavan, Race Course, Baroda. Baroda.

AND

IT(SS)A No.223/Ahd/2004

Block period 1.4.95 to

20.09.2001:

Asstt.CIT, Cen.Cir.2, V/s. Shreeji Education 6 t h floor, Aayakar Trust, c/o M.S.Hostel, Bhavan, Race Course, Sama Savli Road,

Baroda. Baroda.

(Appellant) .. (Respondent)

Assessee by :- Sheri U. S. Bhati, AR

Revenue by:- Sheri Anil Kumar, CIT, DR

ORDER

Per D.C.Agrawal, Accountant Member.

These are two appeals one filed by the assessee and the other filed by the Revenue against the order of ld. CIT(A) dated 20.05.2004. As the facts and issues involved in these two appeals are common, we take up them together for the sake of convenience.

2. The assessee has raised the following grounds in its appeal :

All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other,

1. The Id. CIT(A) erred in law & on facts in rejecting the contention of the appellant that the Id, A,O. had framed the assessment and made additions without giving proper opportunity of being heard to the appellant. The Id. A.O, had made the additions without giving reasonable opportunity of being heard to the appellant and denying the basic principles of natural justice to the appellant.

2. The Id. CIT(A) erred in law and on facts in not appreciating the fact that the ld. A.O. had made the additions to the undisclosed income of the appellant without verifying whether the income sought to be added is included and is part of the books of accounts maintained in normal course of business and no evidence was detected during the course of search to point out any discrepancy in the same.

3. The ldr C1T(A) erred in law and on facts in confirming the addition to the extent of Rs,10,81,030/- out of Rs.47,17,272/- made by the ld. A.O. by denying exemption u/s 10(23C) of the Income Tax Act, 1961 for the A.Ys. 1999-00 and 2000-01.

4. The Id. C1T(A) erred in law and on facts in confirming the addition of Rs.67,90,100/- made by the ld, A,O, on account of purchase of milk from M/s Shreeji Caterers. The Id CLT.(A) further erred in not appreciating the fact that no material was found during the course of search and the Id. A.O, had made the addition only on the basis of entries in the books of account regularly maintained,

5. The Id. C1T(A) erred in law and on facts in confirming the action of the Id A.O. in levying interest u/s 158BFA(1) of the Income Tax Act, 1961.

6. Your appellant craves leave to add, alter or amend the grounds of appeal.

3. Whereas the Revenue has raised the following grounds in its appeal:-

1. The ld. CIT(A) has, on the facts of the case and in law erred in holding that provision of sec.40A(3) does not apply in the case of block assessment even in case of non-filer of return of income.

2. The ld. CIT(A) has, on the facts of the case and in law erred in deleting the surcharge in spite of explicit provision contained in Part-I of the First Schedule of the Finance Act.

3. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer on the above points.

4. It is, therefore, prayed that the order of the ld. CIT(A) may be set aside and that of the Assessing Officer be restored to the above extent.

IT(SS)A No.218/Ahd/2004, Assessee's appeal.

4. Ground No.1 is not pressed and hence it is rejected.

5. The facts relating to other grounds in assessee's appeal are that a search and seizure operation under section 132 of the Act was carried out at the business and residential premises of the assessee on 20.09.2001. The assessee is a trust registered under the provisions of Bombay Public Trusts Act 1950. It is maintaining books of accounts and same is audited which fact is not challenged by the revenue. The audit reports in prescribed proforma as per Schedule IX-C of Bombay Public Trusts Act were regularly filed with the Office of the Charity Commissioner of

Baroda and relevant certificates obtained from that office are also filed with the A.O. and the CIT(A).

6. In response to notice under section 158BC the assessee filed undisclosed income at NIL. It was submitted that the trust is running several schools as under :-

a. Ambe Vidhyalay (K.G.Section)

b. Ambe Vidhyalay (Primary Section)

c. Ambe Vidhyalay (Primary English)

d. Ambe Vidhyalay (Secondary English)

e. Ambe Vidhyalaya (Secondary Gujarati)

f. Ambe Vidhyalaya (Higher Secondary Commerce Gujarati) g. Ambe Vidhyalaya (Higher Secondary Commerce English) h. Ambe Vidhyalaya (Higher Secondary Science Gujarati) i. Ambe Vidhyalaya (Higher Secondary Science English)

All the above schools were managed under the same trust i.e. the assessee. However, no registration under section 10(23(c) of the I T Act or under section 12A/12AA of the IT Act were obtained. Since there were no registration under section 12AA, the AO held that provisions of section 11 granting exemption to the assessee could not be invoked. When asked to explain as to why the income of the trust be not taxed, it was explained that assessee is running schools and its income is exempt under section 10(22) for which no separate registration or certification is required. There is no requirement of any approval of any authority. Even after amendment by Finance (No.2) Act, 1998 with effect from 1.4.99 income of the trust would not be taxable because income of each school is below Rs. 1 crore. Registration/Aproval of the institution would be required only where income of the institution or school would be above Rs.1 crore. It was explained that each school is separately registered with

Gujarat Primary Education Board or Gujarat Secondary Education Board and none of the schools had income above Rs.1 crore. Therefore, its income is exempt as per section 10(23 C)(iiiad) and therefore no separate approval of Chief Commissioner of Income-tax is required as per section 10(23C)(vi). The AO did not agree with the above explanation and held that it is a trust which is running schools under its management and none of the individual school are registered with Commissioner of Charity, Gujarat. Thus these schools have no separate identity as far as applicability of section 10(23C) is concerned. The AO accordingly held that the receipts of the trust as a whole has to be considered for deciding whether receipt is above Rs.1 crore or less for finding out whether approval as per section 10(23C)(vi) is required or not. He worked out the total receipt for three A.Ys. as under :-

Section Asst. Year 99-00 Asst. Year 00-01 Asst. Year 01-02 K.G. 1,917,375 1,69,500 2,633,800 Primary Gujarati 3,717,040 3,906,450 4,354,300 Primary English 2,862,640 3,194,750 3,726,250 Secondary Guj. 989,859 1,192,025 1,349,400 Secndary Eng. 731,879 719,600 731,950 H.S.Commerce N.A. N.A. 112,825 H.S.Science N.A. N.A. 156,680 Total 10,118,793 10,182,325 13,065,205

The AO held that since gross receipts in all the three years was exceeded Rs.1 crore and there is no approval under section 10(23C)(vi), the exemption under section 10(23C) would not be available to the assessee trust and entire receipts will be taxed as AOP. After considering the expenses as claimed in the books of accounts the AO worked out taxable income for AYs 1995-96 to 1999-2000 at Rs.47, 17,272. It is apparent

that he has allowed exemption under section 10(22) upto Financial Year 1997-98.

7. In addition to above, the AO found that assessee has made purchases of milk from one M/s Shreeji Caterers. During the course of enquiries, statement of one Sheri Kishorebhai Goswami, proprietor of Shreeji Caterers was recorded on 13.11.2001 and 14.12.2001 wherein he admitted to have not supplied any milk to the schools but only accommodated the managing trustee of the assessee. For the sake of convenience the statement of Sheri Kishorebhai Goswami recorded on 14.12.2001 is reproduced below :-

"I have already accepted in my statement recorded on 14.12.01 that in order to accommodate Sheri Mahendrabhai R. Shah, I had shown the income from Shreeji Caterers in Asst. Year 1998-99 and Asst. Year 99-00. I again confirm that I had not supplied any milk to any of the schools of Ambe Vidhyalaya, Sama Savli Road, Baroda and I had only shown the receipt from Ambe Vidhyalaya in the name of Shreeji Caterers and offered 5% net profit. Actually there was no receipt in my hand from Ambe Vidhyalaya, Sama Savli Road, Baroda in Asst. Year 98-99 and 99-00. Similarly, I had filed my original return of income for Asst. Year 2000-01 and Asst. Year 2001-02 on 26.7.01. But when your inquiry came in the case of Shreeji Caterers from Sheri Mahendrabhai R. Shah, he approached me to request me to file a revised return showing income from Shreeji Caterers for Asst. Year 2000-01 and Asst. Year 2001-02. I tried to accommodate him by giving this entry of Shreeji Caterers again in my IT return and I filed revised return of income for Asst. Year 2000-01 and Asst. Year 2001-02. Actually this was again bogus income shown by me in the name of Shreeji Caterers in Asst. Year 2000-01 and Asst. Year 2001-02 to help Sheri Mahendrabhai R. Shah. I confirm that my only source of income is from Roopa Travels and I do not get any other income from any source including Shreeji Caterers in FY 97-98, 98-99, 99-00 and 2000-01.

The above statement is given by me in sound mental health and without any threat or coercion. I agree with everything written above. I have signed this statement after reading it."

On the basis of above statement following inferences were drawn by the AO :-

(i) That the alleged properties of Shreeji Caterers Sheri Kishore Goswami in his signed statement on two occasion has admitted before Sheri M.R. Shat that no milk was supplied and entire transaction of Shreeji Caterer was bogus entries.

(ii) That the cheques issues to M/s Shreeji Caterers were all bearer cheques and cash was withdrawn for these cheques.

(iii) That the said cash withdrawn so from Shreeji Caterers account were taken by the trusted employer of Sheri Mahendra R. Shah, Chief Trustee viz. Sheri Pradeep Patel and Jagdishbhai or Santosh Hasotkar.

(iv) That there was no history of milk purchases by Ambey Vidyalaya and there is no separate kitchen for that. As per statement of Shri Jagdish Parmar, Kitchen-in-charge of M/s M.S. Hostel recorded us 132(4)on 20.9.01; entire food supply to Ambe Vidyalaya is done from the Kitchen of M.S. Hostel for which M.S. Hostel is recurring income from Ambe Vidyalaya. M/s M.S. Hostel is a separate canteen. Therefore, there is no question of any separate milk purchase for Ambe Vidyalaya.

(v) That M/s M.S. Hostel has regular milk suppliers which are reflected from ledger accounts in Annx. A-12 seized from the hostel premises.

Baroda Dairy

Shreeji Dairy

Bumiya Dairy

Shreenathji Dairy

Uma Dairy"

8. By holding that the purchases are bogus, undisclosed income on this account was worked out as under :-

Asst. Year Amounts (Rs.)

2001-02 19,08,200/-

2000-01 18,68,350/-

1999-00 15,88,950/-

1998-99 13,44,600/-

Total 67,90,100/-

The AO also found certain cash purchases to the extent of Rs.64,80,826/- whose details are given by him in his order. He accordingly disallowed a sum of Rs.12,96,165/- u/s 40A(3) which was added in the total income.

9. The ld. CIT(A) held that in view of the provisions of section 10(22) income of the assessee trust for AYs 95-96, 96-97 and 97-98 are exempt and he accordingly deleted addition of Rs.38,36,242/- but upheld the addition of Rs.10,81,030/- as according to him assessee would not be entitled to exemption under section 10(23C). He in this regard upheld the arguments of the AO that receipts of the trust as a whole is to be seen for finding out whether provisions of section 10(23C)(vi) for taking approval of the prescribed authority (CCIT) could be needed or not. Since in the present case gross receipt of the trust from all the schools in AYs 1999- 2000 and 2000-01 are more than Rs.1 crore and there is no approval from the prescribed authority then income of the trust would be taxable.

10. Regarding addition of Rs.67,90,100/- being alleged bogus purchases from M/s Shreeji Caterer, ld. CIT(A) sustained the addition on the ground that purchases are bogus and as such addition can be made in block assessment.

11. Regarding addition under section 40A(3), ld. CIT(A) deleted the addition by holding that AO has reached a hasty conclusion without analyzing the nature of the bearer cheques which were recorded in the regular books of account. According to him such type of addition cannot be made in the block assessment.

12. The ld. AR, in respect of addition of Rs.10.81,030/- sustained by ld. CIT(A) submitted that no document has been seized during the course

of search and, therefore, such addition could not be sustained in block assessment. The addition has been squarely made on the basis of regular books of account and, therefore, this addition could not be sustained. He has relied on the following judgments:-

1. Morarji Goculdas Spg. & Wvg. Co. Ltd. vs. DCIT 95 ITD 1(Mum)(TM).

2. CIT vs. R.M.L. Mehrotra (2010) 320 ITR 403 (All)

3. CIT vs. P. K. Ganeshwar (2009) 308 ITR 124 (Mad)

4. CIT vs. Ravi Kant Jain 250 ITR 141 (Del)

5. Nagindas M. Goradia vs. DCIT 83 TTJ (Mum) 151

6. DCIT vs. Mrs. Meena Nayan Chandan (2006) 5 SOT 1 (Mum)

7. Mange Ram Mittal vs. ACIT 103 ITD 389 (Del)(S.B.)

8. CIT vs. Jupiter Builders 287 ITR 287 (Del)

9. CIT vs. Asandas Khatri 283 ITR 346; and

10. CIT vs. Purushottam Khatri 290 ITR 260 (M.P.)

13. The ld. AR submitted that ld. CIT(A) has admitted that assessee trust fulfills all the requirements of educational trust as he has himself allowed exemption under section 10(22) of the Act which has not been challenged by the department in its cross appeal. The invididual receipts of the schools run by the trust do not exceed Rs.1 crore and, therefore, the individual school are not required to seek approval from the prescribed authority under section 10(23C)(vi). Even ld. CIT(A) has admitted that assessee trust is running different schools. Even the AO has treated these schools separately as he has invoked provisions of section 40A(3) in respect of cash transactions taken place in each school.

14. The ld. AR further submitted that it is not the income of the trust as such but it is the income of the school which is received by the trust. The trust can have other sources of income in addition to income received on behalf of a school. Therefore, it will not be proper to club the income of

all the schools or all the receipts of the trust to find out the limit for invoking the provisions of section 10(23C)(vi).

15. The ld. AR finally submitted that merely because assessee trust did not seek exemption under section 10(23C)(vi) from the prescribed authority it cannot turn its income assessable under block assessment. It is no body's case that income of the schools is not recorded in the regular books of accounts of different schools and it is also not disputed by the department that any incriminating document was found showing that schools are receiving income over and above what is declared in the books of account. Therefore, merely because assessee trust was required to seek approval from the prescribed authority as per section 10(23C)(vi) and it has not been so obtained then its income cannot be brought to tax under block assessment. It will continue to be considered only in regular assessment and in case it is considered that such approval from the prescribed authority under section 10(23C)(vi) was required then this income could be assessed only in regular assessment.

16. Regarding addition of Rs.67,90,100/- on account of purchase of milk, ld. AR submitted that no evidence has been found during the course of search showing that assessee has made bogus purchases. The statement recorded in post-search enquiries cannot bring the bogus alleged purchases into block assessment. Even otherwise statement of Shri Kishore Goswami cannot be relied upon because in the original statement he has clearly stated that he has actually supplied milk to the school which statement is supported by the affidavit of Mr. Mahendra R. Shah that milk is being regularly provided to the children residing in the hostel. Shri Jagdish Parmar , kitchen-in-charge had also explained that milk was supplied into the kitchen and was distributed to the children. Shri Kishore

Goswami had declared receipt from the milk in his return of income which has been accepted by the department. On this basis ld. AR submitted that there is no case for taxing this sum in the block assessment.

17. Regarding charging of interest under section 158BFA-1 ld. AR submitted that assessee has made request several times for giving extension for filing of return of income but the same was not allowed and, therefore, interest could not be charged under section 158BFA-1. He relied on the following judgements :-

-N.K. Malhan vs. DCIT 91 TTJ 938 (Del)

-Malhan Brothers vs. DCIT 91 TTJ 920 (Del)

-CIT vs. Kishanlal HUF 258 ITR 359 (Del) &

-CIT vs. Ranchi Club Ltd. 247 ITR 209 (SC)

18. Regarding addition under section 40A(3) ld. AR submitted that these transactions have been picked up from regular books, therefore, they could not be subjected to addition in block assessment. In support of this contention he relied on the following judgments:-

-Khopde Kisanrao Manikrao vs. ACIT 74 ITD 25 (Pune) -DCIT vs. Sahu Ram Wadhwani 81 TTJ (Nag) 839 and

-ACIT vs. Dr. Mohan Lal Swarnkar 95 TTJ (Jp) 969

-CIT vs. Anand Swarup Khandelwal 177 Taxman 450 (Del) -ACIT vs. Dr. Mohanlal Swarnkar 95 TTJ (Jp) 969

-Dhanvarsha Builders & Developers P. Ltd. vs. DCIT 102 ITD 375 (Pune)

19. Against above, ld. DR for the department submitted that for the purpose of section 10(23C)(iiiad) the receipt of the trust as a whole should be considered. In the audited balance sheet of the trust, the receipts from all the schools are included. The combined return is filed for all the receipts from all the schools. Even there is one recognition from Charity Commissioner. It is only the permission to run separate

school is granted, but that does not mean that they are separate educational institutions. In fact they are the receipts of the trust and, therefore, it should be considered as a whole. He, therefore, submitted that once approval under section 10(23C)(vi) is not obtained assessee will not get any exemption and, therefore, it has been rightly assessed by the AO in the block assessment.

20. Regarding addition of Rs.67,90,100/- ld. DR submitted that statement of Shri Kishore Goswami recorded clearly indicated that there was no supply of milk and it was only adjustment entries.

21. In respect of addition under section 40A(3) ld. DR submitted that such addition could be made in block assessment also.

22. We have considered the rival submissions and perused the material on record. Even though search and search operation was carried out in the premises of assessee trust but in fact no incriminating material was found during the course of search. A perusal of Panchnama indicated that search at M.S. Hostel of Ambe Vidhyalaya and Shreeji Education Trust certain printed pass books were found and certain books of account, cash books etc. were seized. But the block assessment order as such did not indicate that they were any way connected with any undisclosed income. The total receipts worked out by the AO as mentioned above were on the basis of audited books of accounts. Further purchases held to be bogus were also identified from regular books of accounts. Addition under section 40A(3) are also made on the basis of entries recorded in the regular books. We have gone through entire assessment order passed under section 158 BC read with section 158BG on 30.9.2003. It did not indicate that there was any receipt of the schools/education institution/trust which was found not

recorded in the regular books of accounts. It is therefore, inferred that whatever material has been seized by the department during the course of search did not indicate any transaction outside the books. The AO has basically focused himself on the legal aspects of the additions. We, therefore, are of the considered view that unless an evidence is found during the course of search which indicates that assessee has undisclosed income or the income which has not been declared by him in the return of income or in the books of account it cannot be brought to tax in the block assessment. We are fortified in our view from the observations of Special Bench of the Tribunal in Mange Ram Mittal vs. ACIT (2007) 289 ITR (A.T.)112)( ITAT)(Del) wherein it held as under :-

"The provisions of Chapter XIV-B of the Income-tax Act, 1961, relate to assessment of undisclosed income. For that purpose the provisions of section 158BC lay down the procedure. The provisions of section 158B(b) define what is undisclosed income and the provisions of section 158BB lay down how undisclosed income has to be computed. The provisions of computation have two limbs, viz., (1) evidence found as a result of search, and (2) such other materials or information as are available with the Assessing Officer and relatable to evidence found as a result of search.

After the insertion of the Explanation to section 158BA(2) by the Finance (No. 2) Act, 1998 with retrospective effect from July 1, 1995, there is no dispute that the block assessment under section 158BC is in addition to the regular assessment and not in substitution of the regular assessment and in the block assessment under section 158BC only the undisclosed income of the assessee has to be charged to tax at the special rate of tax provided in section 113.

The computation of undisclosed income of the block period in a block assessment must be related to evidence found as a result of search proceedings. The Finance Act, 2002, by the amendment to section 158BB with retrospective effect from July 1, 1995, added the words "and relatable to such evidence" : the undisclosed income has to be computed on the basis of evidence found as a result of search and/or other materials or information relatable to such evidence. At the same time it cannot be concluded that "undisclosed income" to be computed under the provisions of section 158BC should be confined to the evidence found during the course of the search. Even after the amendment by the Finance Act, 2002, with retrospective effect from July 1, 1995, there is scope to let in other materials or information gathered by the Assessing Officers during the course of post-search enquiry, but such other materials or information as now clearly mandated by the Legislature must be relatable to evidence found as a result of search.

The insertion of the words "relatable to such evidence" by the Finance Act, 2002, with retrospective effect from July 1, 1995, is intended to restrict the scope of material or information that may be relied upon by the Assessing Officer because it has to be relatable to evidence found as a result of search in the first instance. As long as there is an evidence of undisclosed income of the assessee, that would be sufficient to clothe the Assessing Officer with the powers to add to such evidence any further material or information that may be pertinent or necessary to reach a logical conclusion but there has to be a certain and specific nexus between the evidence found as a result of search and undisclosed income proposed to be assessed in the block assessment under section 158BC. At the same time it cannot be held that conclusive evidence of undisclosed income should be found during the course of search action itself and nothing further can be added or supplemented by way of subsequent enquiry.

Thus, an assessment under section 158BC is required to be made both on the basis of result of search as well as such post-search enquiry and other proceedings that are in the nature of a logical consequence of the evidence found as a result of the search.

Whether a search is carried out at business or residential premises, the entire mass of what is physically found at the searched premises cannot be said to be evidence found as a result of search. Under section 158BB it is computation of undisclosed income of the block period and not the entire income of the block period. The provisions of section 158B(b) clearly define "undisclosed income" as including any "money, bullion, jewellery or other valuable articles or thing or any income which has not been or would not have been disclosed for the purposes of the Act". Therefore, not every article or thing or every piece of information found during the course of search can be called "evidence found as a result of search". If any money, bullion, jewellery or other valuable article or thing or any income is required to be disclosed for the purposes of the Income-tax Act in any return of income but has not been disclosed, this would constitute basis for "undisclosed income". Where the returns of income have not been filed but the due date for filing the return of income has not expired or where the return of income itself has not fallen due, the question of what would not have been disclosed for the purposes of the Act would depend on the facts and circumstances of each case.

It is not every material or information available with the Assessing Officer that can form the basis of computation of undisclosed income of the block period but only the materials or information relatable to evidence found as a result of search. It is "evidence" that has to be found as a result of search in the first instance. Thereafter it is only "materials" or "information" available with the Assessing Officer. The expression "materials" is of much wider import than the expression "evidence". The phraseology employed in section 143(3) indicates that what an assessee is required to produce on his own or on requisition by the Assessing Officer is "evidence" ; whereas what the Assessing Officer has to gather is "materials". The same distinction has been maintained in the provisions of section 158BB(1). What constitutes admissible evidence, material or information for the purpose of section 143(3) equally constitutes admissible evidence, material or information for the purposes of computation of undisclosed income in block assessment proceedings under section 158BC.

There should be, in the first instance, "evidence" found as a result of search or requisition of books of account or other documents that may constitute the basis of computation of undisclosed income. That "evidence" may not be conclusive to arrive at the finding of undisclosed income and the Assessing Officer may supplement it with "materials" or "information" that he may gather or that may be otherwise available with him at the time of computation of undisclosed income of the block period. The expression "relatable" appearing in section 158BB(1) permits the Assessing Officer to bring material on record as may be required for computation of undisclosed income in relation to "evidence" found as a result of search. All materials or information gathered by the Assessing Officer or received by the Assessing Officer in the process of computation of undisclosed income on the basis of "evidence" would constitute materials or information "relatable to such evidence". For example, if during the course of the search an evidence is found to the effect that the assessee had income from a source not disclosed by the assessee, all further materials or information gathered by the Assessing Officer in regard to that source of income and for quantification of the assessee's income from that source would constitute materials or information relatable to such evidence. Similarly, if for example, during the course of search an evidence is found as to inflation of a particular item of expenditure, the materials or information subsequently gathered by the Assessing Officer in order to find out the other instances of inflation of expenditure would be materials or information relatable to such evidence. In other words, if during the course of search only a part or portion of the picture is seen, the material or information gathered by the Assessing Officer to reasonably reconstruct the whole picture would be materials or information relatable to such evidence. It, therefore, follows that while it is not open to the Assessing Officer to investigate new items of undisclosed income, he is entitled to collect further materials or information so as to bring to the logical conclusion evidence found as a result of search. The burden of proof, however, on the Assessing Officer may be greater in block assessment proceedings than in regular assessment proceedings, in view of the fact that while regular assessment is made of income, block assessment is made of undisclosed income.

While relying upon any materials or information as a supplement to the evidence found as a result of the search the Assessing Officer is not bound by technical rules of evidence and, therefore, he may take into account facts and circumstances that may not be admissible under the Indian Evidence Act and he may arrive at his finding not on the basis of any direct evidence of undisclosed income but on the basis of the cumulative effect of all the facts and circumstances relating to the proceedings before him.

Any undisclosed income discovered by the Assessing Officer entirely on the basis of material or information gathered by him on his own without there being any relationship whatsoever with an evidence found as a result of search, cannot form part of undisclosed income to be brought to block assessment under the provisions of section 158BC."

Similar view has been expressed by various courts as under :-

1. CIT v Ashok Dua (2009) 177 Taxman 494 (Delhi). The assessment in the block period can only be done on the basis of the evidence found as a result of Search.

2. Bhagbati Prasad Kedia -Vs- CIT 248 ITR 562 (Cal).

During the block assessment, assessee was called upon to explain the advances taken from the company. The assessee filed confirmation of loans and letter from the company including Income tax File No. of the creditor. The Income tax authority held that the said loan was a fictitious one and was to be considered as undisclosed income of the assessee during the block period under consideration. It was held that the assessing officer was not entitled to question, in block assessment, the loan, which was a subject matter of the regular assessment. The assessing officer was wrong in holding that the said sum would be taxed in the block assessment, when it has already featured in the regular books of accounts. Thus, item of transaction which is declared in regular books of accounts or return., even though found fictitious, and may give rise to income under Income Tax Act, but the same can not be taxed under Chapter XIVB. For taxing such items of regular return found fictitious later during the search, provisions of Chapter XIVB cannot be invoked.

3. Control Touch Electronic (P) Ltd. -Vs- ACIT 77 ITD 522 (Pune.)

During the course of the search, certain purchase vouchers indicating bogus purchases were found. No purchases thereon were made. Enquiries however revealed that none of the purchase vouchers were entered in the regular books of accounts. Thus Tribunal found that there was no inflation of expenditure and hence, no addition can be made in the Block assessment. Whether such bogus purchase vouchers can be considered in the regular assessment was not decided by the Tribunal.

4. Agrawal Motors -Vs.-ACIT 68 ITD 407 (Jabalpur).

Certain expenditure was debited in the regular books of accounts on account of Foreign Travel of Managing Director. The search revealed that such travel was possibly not for the business purposes. The assessing officer considered the expenditure as undisclosed income u/s. 158BC. The Tribunal held that any item of addition or disallowance considered in the regular assessment could not be said to be discovered by search liable to be added under Chapter XIVB. Such expenditure were not undisclosed. Whether such expenditure was for business purpose or for non- business purpose, was a matter to be considered in regular assessment only.

5. Microland -Vs- ACIT 67 ITD 446 ( Bangalore.)

Where acquisition of assets are recorded in the regular books of accounts, claim of depreciation was also made and considered, interest payment on investment in

purchase of these assets is also considered in the regular assessment, if search revealed that depreciation is not correctly claimed, the addition thereon cannot be made under Chapter XIVB.

6. Shri Kirti Chandulal Oswal v. DCIT[2009] 317 ITR (A.T.) 0285- [ITAT-Pune]

It is the mandate of the amended provisions of section 158BB(1) of the Income-tax Act, 1961, that the materials or information available with the Assessing Officer must "relate" to "such evidence". The words "such evidence" refer only to the evidence found in the course of search at the assessee's premises. Therefore, such other materials must be relatable to evidence found in the course of search at the premises of the assessee itself. There must be a direct nexus between the materials found in the course of search at the assessee's premises as well as the other materials gathered by the Assessing Officer from an extraneous source. If there is no such nexus then the addition would not be justified.

7. CIT v. Kishan Kumar [2009] 315 ITR 0204 [Raj]

Section 158BC of the Income-tax Act, 1961, provides that the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, sections 144 and 145 shall, so far as possible, be applied, and section 158BB shows that thereunder undisclosed income of the block period is to be the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of the Act on the basis of the 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 Assessing Officer and relatable to such evidence, as reduced by the aggregate of the total income or, as the case may be, as increased by the aggregate of the losses for such previous years determined in accordance with the further sub-clauses. Thus, the computation of income is to be made on the basis of the evidence found as a result of search, or requisition of books of account or other documents and such other material or information as is available with the Assessing Officer and relatable to such evidence. This provision does not include any fictional or presumptive income to be liable to or capable of being, included in the aggregate of the undisclosed income.

8. CIT v. Bimal Auto Agency [2009] 314 ITR 0191- [Gau] Undisclosed income has been defined by section 158B(b) of the Income-tax Act, 1961, to mean income which had not been or would not have been disclosed for the purpose of the Act. Prior to the amendment by the Finance Act, 2002, section 158BB authorised the Assessing Officer to make an assessment of undisclosed income on the basis of evidence found as a result of "search . .. and such other materials or information as may be available with the Asses-sing Officer". The use of the word "such" points out that such materials or information must have some connection with the search and not constitute independent materials, i.e., independent of the search.

9. CIT v. Ansal Buildwell Ltd. [2008] 304 ITR 0378- [Del]

Held, - dismissing the appeal, that the Tribunal had found that the amount of commission paid by the assessee to T was shown in the books of account maintained by the assessee in the regular course of its business prior to the search. This amount had also been shown in the regular returns. Under section 158BB, undisclosed income should be that which is discovered as a result, inter alia, of a document or transaction which has not been or would not have been disclosed for the purpose of the Act. The document recovered during the search represented a disclosed transaction of sale of property that had taken place for which T had been paid a commission. The falsity of the expense or deduction or allowance must necessarily be relatable to the document or transaction. As far as the assessee's case was concerned, the very first requirement of non-disclosure of the material was not satisfied because in fact the assessee had disclosed the transaction in its books of account and this was not disputed by the Revenue. The Tribunal had also held that the Assessing Officer had come to the conclusion on inadequate reasons. This was a finding of fact arrived at by the Tribunal based on the material on record. The facts considered by the Assessing Officer might raise a doubt with regard to the genuineness of the transaction, but that by itself was not enough. The facts must be relatable to the evidence available and not inferential. No perversity had been shown in the conclusions arrived at by the Tribunal.

10. CIT v. R. M. Patel (HUF) [2008] 298 ITR 0274- [Mad] What is contemplated under section 158BB of the Income-tax Act, 1961, is that the undisclosed income shall be computed only in accordance with the provisions of the Act on the basis of evidence found as a result of search and such other material or information relating to such material.

The assessee was a Hindu undivided family. A search under section 132 was carried out at the residential and business premises of the karta of the Hindu undivided family and his brother between November 5, 1998, and November 30, 1998. During the search, it was found that the assessee-Hindu undivided family had a timber trading business during the assessment years 1996-97, 1997-98 and 1998-99. The materials seized indicated that the assessee had also undisclosed income from the business and therefore, notice under section 158BD of the Act was issued to the assessee. The assessee filed a return declaring undisclosed income as nil. An explanation was offered that the material seized during the search was in no way connected to the assessee. But the Assessing Officer passed an assessment order under section 158BD read with sections 158BC and 143(3). The Commissioner (Appeals) held that there was no indication in the seized materials about the suppression of sales by the business concern of the assessee and that the Assessing Officer was not correct in invoking section 158BD. The Tribunal held that the addition of gross profit could be made only in respect of one of the assessment years in the block period. On appeal to the High Court :

Held,_ dismissing the appeal, that the Revenue could not proceed on the basis of the material which was not related to the assessee invoking section 158BD read with sections 158BC and 143(3) of the Act for assessing the undisclosed income during the block period of 1988-89 to 1997-98 and April 1, 1998, to November 5, 1998. If the Revenue could substantiate that the return filed by the assessee for the assessment years 1996-97, 1997-98 and 1998-99 did not disclose the correct income, they were at liberty to take appropriate action only with respect to the relevant assessment years, as rightly held by the Tribunal.

23. Since it is undisputed fact that no evidence was found in the search relating to any of the additions proposed by the AO in the assessment order, these additions cannot be upheld in block assessment. Since there is no reference or description or reliance for making addition on the books of account found in the search, it cannot be inferred that those books/documents or evidence found in the search were relevant for making block assessment and, therefore, post search enquiry carried out by the AO could not relate back to those evidence and therefore, addition so proposed by the AO could not be accordingly justified. In fact any addition in the block assessment proposed by the AO must relate to evidence found as a result of search and then it can be further supported or strengthened by material collected during post search enquiry. Whatever material found in the search is not considered relevant then post search material collected by the AO cannot be said to be related to that evidence found as a result of search. The post search enquiry and material collected as a result thereof has to be co-related with the material found as a result of search on the basis of which addition is proposed and only then such addition can be sustained in block assessment. Merely because search is carried out at the premises of an assessee and certain irrelevant material or declared material or material containing transaction recorded in the books of accounts are seized that it does not give jurisdiction to AO to frame block assessment and thereafter make addition on the basis of post search enquiry. In this regard each addition

proposed by the AO has to be separately and independently examined and it has to be seen as to what material/evidence AO has found during the course of search relevant to the addition proposed. The adequacy or sufficiency of material for assuming jurisdiction in block assessment is not relevant. A small nucleus of concealed income found during the course of search would be sufficient to confer jurisdiction for making addition in block assessment, as such nucleus can be snow balled by the AO by collecting relevant post search material by carrying out necessary enquiries according to law. In the present case we notice that none of the additions refers to any seized material found during the course of search. AO has picked up transactions from regular books of account and considered them for additions in the block assessment. This is not permissible. The AO acquired jurisdiction to frame block assessment or for making addition in the block assessment without there being any reference to seized material found in the search. If we examine all the three additions made by the AO, we notice that one addition is by denying exemption under section 10(23C) at Rs.47,70,272 out of which only Rs.10,81,030 is in dispute before us, the other part being Rs.38,36,242 is deleted by ld. CIT(A) and accepted by the Revenue; other is of Rs.67,90,100/- being addition on account of bogus milk purchases and last is of Rs.12,96,165/- being addition under section 40A(3). All of them are as a result of either examination of regular books of accounts or on the basis of material collected in the course of post search enquiries. None of them refers to any material found as a result of search, therefore, none of the three additions could be sustained in block assessment.

24. Notwithstanding we are of the considered view that AO has to first decide whether any part of income would fall in the regular assessment or in block assessment and thereafter such income would be considered for

granting exemption under section 10. It is now settled law that Chapter XIVB is a complete code in itself and if an income falls for consideration in the domain of block assessment then provisions contained in Chapter XIVB would be invoked and thereafter by virtue of section 115BH all other provisions of the Act would be applied to the assessment made under Chapter XIVB. Thus by virtue of section 115BH section 10 can be invoked by the AO. It is not other way round that first section 10 is invoked and thereafter it is decided as to whether income no exempted would be taxed under block assessment. What the AO has done in the present case is that he has considered that benefit of the provisions of section 10(23C)(iiiad) cannot be availed of by the assessee as it has not obtained the approval under section 10(23C)(vi) and, therefore, such income would be taxable under block assessment. This is incorrect proposition of law. If an income does not fall for consideration in the block assessment as in the present case then whether it gets exemption under section 10(22) or does not get exemption under section 10(23C)(iiiad) is not material. Even if income of the assessee is taxable on account of non-applicability of provisions of section 10(23C)(iiiad) on account of assessee not having an approval under section 10(23C)(vi) such income cannot be brought to tax in block assessment as no material is found during the course of search for conferring jurisdiction to the AO to tax this part of income in block assessment.

25. Even otherwise we notice that AO has not made out a good case in law to bring the receipts of various schools to tax by invoking section 10(23C)(iiiad) on account of non-approval under section 10(23C)(vi). It is because section 10(23C) starts with "any income received by any person on behalf of". For the sake of convenience we reproduce section 10(23C) as under :-

10. Incomes not included in total income.--In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included -

(23C) any income received by any person on behalf of--

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed ; or

(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority ; or

Provided that the fund or trust or institution or any university or other educational institution ++or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) ++or sub-clause (vi) or sub-clause (via) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause (v):

From a reading of this provision it is noticed that income falling in these clauses of section 10 shall not be included in computing the total income of a previous year of any person. Here any person is the trust whose assessment has been made by the AO in the status of AOP. The Trust is receiving income from the schools or educational institutions. The trust may be receiving income from other sources as well- such as interest income or property income or even income from carrying out business not specifically exempted under any clause of section 10. Therefore, it is not proper to hold that all the receipts of the trust would be clubbed together to find out the limit of Rs. 1 crore as prescribed in the relevant rules. If all the receipts from different heads or from different sources cannot be clubbed together then there is no reason to hold that all the receipts from different schools or institutions should be clubbed together for determining the receipts of the trust. It is not the receipt of the activities which is to be considered for determining the limit but it is the

receipt of the institution alone has to be considered for determining the limit. If assessee is carrying out activities of imparting education by running different institutions then receipts of the activities as such should not be clubbed to determine the limit but it is a receipt of the individual institution or school, received by the trust which alone should be considered for determining the limit. If the receipt of individual school or institution is less than the prescribed limit then the case would be covered under section 10(23C)(iiiad). Even if the gross receipt from one activity carried out in different institution exceeds the prescribed limit but receipt of individual institution does not exceed the prescribed limit then still the case would be covered under section 10(23C)(iiiad) and assessee would be entitled to exemption. However, we have already held above that as no material was found in the search, no income of the trust could be taxed in the block assessment. On the above principle we hold that the income computed by holding that supply of milk was bogus or the purchases thereof are bogus and addition under section 40A(3) also, cannot be taxed in block assessment as no material in respect of these additions were found in the search.

26. However, the issue regarding charging of interest is covered against the assessee in view of the decision of Hon'ble Bombay High Court in Sk. Muneer Sk. Mannu Choudhary Vs. DCIT (2008) 300 ITR 216 (Bomb) wherein it is held that under section 158BFA(1), there is no provision empowering the Assessing Officer either to reduce the interest or to waive it or to come to a conclusion that it need not be levied. The provision is couched in the words 'The assessee shall be liable to pay simple interest'. Thus, there is no option or escape from interest leviable under section 158BFA(1) to an assessee, who is being assessed only after raid and search under section 132

27. The issue regarding levy of surcharge is also decided against the assessee in view of decision of Hon'ble S.C. in CIT vs. Surajchand Gupta 297 ITR-322 (SC).

28. As a result we decide the appeals of the two parties as under. Assessee's appeal.

Ground No.1 is rejected as not pressed.

Ground No.2,3 and 4 are allowed.

Ground No.5 is decided against the assessee.

Ground No.6 is general and does not require any specific adjudication.

Revenue's appeal.

Ground No.1 is rejected.

Ground No.2 is allowed.

Ground No.3 & 4 are general in nature and as such rejected.

29. As a result both the appeals are partly allowed.

Order pronounced in Open Court on 09-04- 2010

Sd/- Sd/-

(T.K. Sharma) (D.C.Agrawal) Judicial Member Accountant Member

Ahmedabad,

Dated : 09/04/2010

Mahata/-

Copy of the Order forwarded to:-

1. The Appellant.

2. The Respondent.

3. The CIT(Appeals)-

4. The CIT concerns.

5. The DR, ITAT, Ahmedabad

6. Guard File.

BY ORDER,

Deputy/Asstt.Registrar

ITAT, Ahmedabad