THE issues before the Bench are -
Whether depreciation in case of a rented building can be claimed as business
expenditure u/s 32; Whether voluntary disclosure of an assessee made u/s 132(4)
can be rejected in case, revenue has not filed any corroborative evidence
against it; Whether the income assessed under Chapter 14B can be included in the
regular assessment of any previous year included in the block period; Whether
penalty can be imposed under Section 271 (c) where undisclosed income is
determined under Chapter 14B and Whether the possibility of penalty can be a
reason to require that it can be treated as undisclosed income only when the
claim is found to be made deliberately. And the verdict goes against the
assessee.
Facts of the
case
The assessee is a
firm doing business in wholesale pharmaceutical distribution. One Shri.
Sebastian Thomas was the holder of POA given by the Partners for operation of
the bank account of the firm. There was a search at the business premises as
well as at the residence of the Partners. Shri. Sebastian Thomas gave a sworn
statement wherein he had declared an amount of Rs. 4 lakhs u/s 132(4) towards
the unaccounted investment in the building owned by the firm. The assessee filed
a return pursuant to notice u/s 158BC. Assessee had constructed a building known
as "Thomas Puthur Memorial Bldg". The accounts revealed the cost of construction
as Rs. 6,95,7000/- only. Shri. Sebastian Thomas had confirmed that there was a
deficiency of Rs. 4,00,000/- in accounting the cost of construction. The matter
was referred by AO to the Valuation Officer of the Department(DVO). The
Executive Engineer (Valuation), Calicut fixed the value at Rs. 11,47,600/-. When
this was pointed out to the assessee, it contended that the valuation was based
on CPWD rates at Delhi and increased cost was taken. AO had not found any
documentary evidence for the lower valuation and took Rs. 4,51,900/- being the
difference as liable to be taxed as the undisclosed income for AY 1995-96. Still
further, AO noted that the assessee was regularly claiming depreciation on the
building owned by the assessee which had been rented out to third parties,
noting that depreciation u/s 32 was allowable only when it was used for the
purpose of the business and as it was evident that the building was not used for
the purpose of the business, no depreciation could be claimed. Depreciation
claimed from 1995-96 to 1998-99 was ordered to be treated as the undisclosed
income. On appeal, CIT(A) deleted the addition of Rs. 4,51,900/-. Likewise, AO
was directed to delete the amount of depreciation from the total undisclosed
income and the same was directed to be considered in the regular assessment.
On
further appeal by Revenue, Tribunal partly allowed it and found that assessee
had singularly failed to discharge the burden of proof qua what was claimed by
it. This was in regard to the addition made towards the cost of construction of
the building. It was found that the Revenue's case was not only supported by the
voluntary statement u/s 132(4) which stood not retracted, but also corroborated
by the DVO's report to which no valid rebuttal had been made by the assessee.
But, the Tribunal found it justifiable to restrict the addition towards
unexplained investment to building at Rs. 4,00,000/- as declared by the
assessee. As far as the second issue, namely the claim of depreciation
allowance, the Tribunal took note of the words "or any expense, deduction or
allowance claimed under this Act which is found to be false" added to the
definition of the undisclosed income vide Section 158B(b) by the Finance Act,
2002 with effect from 01/7/1995 which clinched the issue against the assessee.
The Tribunal found that Chapter 14B provides separate procedure for assessment
of any income revealed by search or requisition.
Before the HC, the assessee's
counsel had contended that there was no basis for making the addition of Rs.
4,00,000/- towards cost of construction in proceedings under Chapter 14B. AO and
the Tribunal had relied on estimation made by the Valuation Officer. The
valuation was unacceptable. As far as the question of depreciation was
concerned, it was submitted that there was no basis for overturning the order of
the Appellate Authority. More importantly, it was submitted that under the
provisions relied on by the Tribunal, it had to be found that the claim made by
the assessee was false. In this case, it was submitted that there was no finding
that the claim made by assessee was false. It was submitted that the use of the
word "false" would necessarily bring in the requirement of the element of mens
rea and as long as as the assessee was not attributed with any criminal intent,
the disallowance of the depreciation in block assessment and what was more
exposing the assessee to possible penal provisions, was clearly impermissible.
On the other hand, the Revenue's counsel sought to support the order and pointed
out that as far as the addition of a sum of Rs. 4,00,000/= as sustained by the
Tribunal was concerned, the Partner had made the statement that there was a
short fall of Rs. 4,00,000/=. No doubt, there was also the report of the
Valuation Officer. As far as the undisclosed income in the form of depreciation
was concerned, it was pointed out that it was found that it was claimed falsely
and that was sufficient.
Held
that,
++ as
far as the question relating to reckoning of Rs.4,00,000/= as undisclosed income
is concerned, we find there is no merit. As correctly held by the Tribunal, it
is supported by the voluntary statement given u/s 132(4). The statement was not
retracted. No doubt, corroboration was sought to be drawn from the report of the
DVO. The Tribunal has in fact limited the addition strictly on the basis of the
statement made by the assessee and not accepted Rs.4,52,000/- which would
involve some variations. We would think that in such circumstances, there can be
no room for complaint and none of the decisions cited by the appellant can come
to its rescue. The second question which arises is whether on finding that the
assessee had used the building by way of renting it out and, therefore, the
claim for depreciation could not be allowed and, therefore, relying on the
definition of the words "undisclosed income", the said amount claimed as
depreciation could be considered as undisclosed income. There is no case for the
appellant that the finding that the building was let out, is not correct.
Therefore, the building was not used for the purpose of the business of the
assessee. Depreciation was, however, claimed by the assessee, even though the
building could not be said to have been used for the business of the assessee.
Thus, in law, the depreciation could not have been claimed or granted. The case
of the appellant is that as held by the Appellate Authority, this is a matter
for consideration in the regular assessment and it is not a matter to be
considered in the block assessment;
++ in
order to appreciate this argument, we must consider the scheme of Chapter 14B.
As the very heading suggests, the provisions in the Chapter provides for a
special procedure for assessment of such cases. No doubt, the body of the
provisions show that they are intended to cover cases not only of a case of
search under Section 132, but they are intended to also deal with a case where
books of account, other document or assets are requisitioned under Section 132A.
Section 158BA sub-section (2) vide its Explanation declares that the assessment
under Chapter 14B is to be in addition to the regular assessment in respect of
each previous year including the block period. Further, it is declared that the
total undisclosed income relating to the block period shall not include the
income assessed in any regular assessment. Likewise, the income assessed under
Chapter 14B is not to be included in the regular assessment of any previous year
included in the block period. Section 158BB provides for the computation of
undisclosed income for the block period. The undisclosed income of the block
period is the aggregate of the total income for the relevant previous years
computed in accordance with the Act on the basis of the evidence found as a
result of the search or requisition of the book of account, documents and other
materials as are available relatable to such evidence. The said total income is
to be reduced, inter alia, on the basis of the income where assessments have
been concluded under Sections 143, 144 or 147 on the basis of the assessments.
In a case where returns are filed, but the assessment has not been made till the
date of the search or requisition, the undisclosed total income for the block
period is to be reduced by the amount shown in the return. In a case where
return is not filed, clause (C) applies. Likewise, Clauses C(a) to (f) provide
for other situations;
++ it
is no doubt true that imposition of penalty u/s 271(a) stands on a different
footing from penalty u/s 271(c). The use of the word "concealment" has played a
large part in persuading the Courts to hold that there must be a deliberate act
of omission on the part of the assessee. It has also been held that the order
imposing penalty is quasi criminal in nature and thus the burden lies on the
Department to establish that the assessee has concealed its income (See T.Ashok
Pai v. CIT (2007-TIOL-98-SC-IT). It is also
no doubt true that in Govind Impex (P) Ltd. v. Income-tax Deptt. (2010-TIOL-107-SC-IT) the Court
took the view that a penal statute which makes an act a penal offence or imposes
a penalty is to be strictly construed and if two views are possible, one
favourable to citizens is to be ordinarily preferred. Apparently, no penalty can
be imposed under Section 271 (c) where undisclosed income is determined under
Chapter 14B. In fact, the provisions of Section 158BFA is a special provision
relating to the power to impose penalty as provided therein. No penalty can be
imposed if the return is filed as provided in the Explanation followed by
payment of tax and the other conditions are satisfied. Secondly, the levy of
penalty is not mandatory. There is the discretion. Penalty may be levied. We are
called upon to adopt the narrow meaning of the word "false" and to confine the
inclusion of any amount claimed by way of deduction or allowance as undisclosed
income, only if the same are claimed with an evil intention or with knowing that
it is false. There can be no doubt that widely interpreted the word "false" is
capable of taking in intentional and innocent falsehoods. In other words, if
widely interpreted, it is capable of bearing the meaning that the claim is
untrue on the basis of mistake or accident or it was untue even though care had
been taken and the appellant had honestly thought that the claim was
sustainable;
++ it
is no doubt true that the Legislature has made use of the word "false". We
cannot also be unmindful of the fact that when the claim is found to be false in
the wider sense and hence rejected, there is the possibility that the Officer
may invoke Section 158BFA and impose penalty. We are of the view that in the
facts of this case, the claim for depreciation was made quite without any basis.
In view of the amended definition of "undisclosed income" such claim would
render it undisclosed income. Merely because it is not in so many words
mentioned that the claim is made falsely in the facts of this case it does not
mean it is not made falsely. The word "false" in this context need be given only
the wide meaning as the direct impact is that amount included will be assessed
as undisclosed income. In the facts of this case, where there can be no
explanation from the assessee for illegally claiming depreciation, on the
admitted facts, there is no need for relegating the matter for regular
assessment. The possibility of penalty cannot be a reason to require that it can
be treated as undisclosed income only when the claim is found to be made
deliberately. In fact, the claim is made as it is clear from the facts without
any foundation as the claim was made when the building was let out in which
circumstances, there is absolutely no scope for claiming depreciation. In such
circumstances , the questions of law are answered against the appellant and the
appeal is dismissed as meritless.
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