THE issue before the bench is - Whether if assessee declares income during search, assets seized are liable to be appropriated towards tax liability on such income as per provisions of Sec 132(5). NO is the answer.
Facts of the case
The present appeals involve a common question concerning the treatment of the currency seized during the search and seizure operations conducted u/s 132. The Assessees claimed that the amounts seized during the search ought to be accounted for as payment of advance tax on the date of seizure and interest chargeable u/s 234A, 234B and 234C ought to be computed accordingly. The Revenue disputed this contention. According to the Revenue, the currency seized during the search operations u/s 132, cannot be treated as payment of tax till the filing of the return by the Assessee surrendering the seized amount as payment of tax or a demand being raised pursuant to a regular assessment.
The search and seizure operations were conducted u/s 132 at the premises of the Assessee, during which Indian currency was found and seized by the concerned officers. An order u/s 132(5) was made estimating the income of the Assessee and the AO passed an order retaining the cash seized to be dealt with in accordance with provisions of Section 132B. Against the AO's order, assessee filed an application u/s 154 for rectification of the said demand. The Assessee contended that the cash seized on 14th January, 1991 ought to have been treated as payment of tax on that date and the failure to treat the said amount as advance tax paid on that date had resulted in a mistake apparent from the record. According to the Assessee, the said mistake was liable to be corrected and the interest chargeable u/s 234A, 234B, 234C ought to have been recomputed. AO had rejected assessee's application u/s 154 and held that the cash seized during the search operations had to be dealt with in accordance with Section 132B and had to be applied towards "regular demand raised on the assessment and other proceedings under the I.T Act." Thus, the seized cash could not be treated as advance tax payment on the date of the seizure and, therefore, was adjusted towards the part payment of the demand finally raised pursuant to assessment u/s 143(1)(a). On appeal, CIT(A) held that the amount seized during the search, ought to be adjusted from the date of the order u/s 132(5) and interest be charged accordingly. On further appeal, Tribunal upheld the contention of the Revenue that the seized cash could not be treated as payment of advance tax on the date of the seizure. However, the Tribunal held that the liability to pay advance tax by the Assessee stood discharged on the date of the order u/s 132(5), as the amount seized had to be applied in accordance with Section 132B and in terms of that Section the cash seized was to be applied towards "existing liability" referred to in clause (iii) of Section 132(5).
++ even though the Assessee had declared income u/s 132(4) during search and seizure operations, the same would not constitute a determined liability towards which the assets seized could be readily applied. Thus, the contention advanced by the Assessee that once the Assessee had declared income (undisclosed or otherwise) during the course of search operations, the assets seized were liable to be immediately appropriated towards the tax liability on such income cannot be sustained. A plain reading of Section 132 indicates that once the search and seizure operations have been conducted and assets have been seized from the Assessee, the ITO has to estimate the amount/assets required to meet the Assessee's known and estimated liability and retain the same. By virtue of the provisions of Section 132(5), the ITO is required to make an order within 120 days of the date of seizure with the prior approval of the Joint Commissioner. The ITO has to (a) estimate the undisclosed income to the best of his judgment on the basis of material available with him; (b) calculate the amount of tax on such income; (c) determine the amount of interest payable to penalty imposable; and (d) specify the amount required to satisfy any existing liability under the Act. The ITO can retain in its custody only such assets which in his opinion are sufficient to satisfy the amounts as aforesaid and any assets in excess of the same have to be returned and cannot be withheld from the Assessee. Section 132(5) serves to protect interest of the Revenue as well as the Assessee; whilst sufficient assets to meet the liability of the Assessee are retained in the custody of the Income Tax Authority, the concerned Authority is not permitted to retain assets in excess or what may be required to meet the Assessee's liability. The words "retained in his custody" are key operative words which, clearly, indicate that the ITO retains the assets in his custody and the same are not appropriated towards payment of tax. Section 132(5) does not contemplate appropriation of assets towards any liability, whether existing or in future, but is limited to permitting the ITO to retain the seized assets to be applied as provided under the Act;
++ in view of the aforesaid, the conclusion of the CIT(A) as well as the Tribunal that liability of the Assessee would stand discharged to the extent of cash seized from the date of the order under Section 132(5) of the Act is not sustainable as Section 132(5) does not deal with appropriation of the assets seized. Clause (i) of Section 132B(1) as it existed in the statute book at the material time enables the Income Tax Authorities to apply the assets retained u/s 132(5) towards any "existing liability" as referred to in clause (iii) of Section 132(5). By virtue of that clause, the ITO could specify any existing liability and retain assets sufficient to meet the same. The expression "existing liability" as used in Section 132(5) would mean a liability which has been determined and crystallized and, thus, is capable of being specified in an order u/s 132(5). In absence of any return filed, any assessment made or any determinative process undertaken, the question of the ITO specifying a liability under clause (iii) of Section 132(5) does not arise. Thus, plainly, the reference to an "existing liability" as used in Section 132(5)(iii) would mean such liability that has already been determined and crystallized such demands outstanding in respect of prior years where assessment have been made for or any other liability that stands crystallized by any determinative process under the Act;
++ we are unable to accept the Tribunal's view that payment of advance tax was an existing liability as on the date of the order u/s 132(5) and, thus, seized assets could be applied towards the said liability as on that date. Although it cannot be disputed that the Assessee had the liability to pay the advance tax, nonetheless, this liability could not have been determined by the AO prior to the assessment under the Act. Advance tax is, essentially, to be paid by an assessee on the amount of taxable income estimated by it. The AO can determine whether payment of advance tax paid fell short of the required amount only when an assessee's income is assessed. Thus, at the stage of Section 132(5), such liability in respect of the Assessee's income for the Previous Year 1990-91 could not be specified under clause (iii) of Section 132(5). Admittedly, no order u/s 132B was passed for applying cash seized and retained by the ITO. It is not disputed that the Assessee had also not made any request that the amount seized by the ITO be applied towards the discharge of its liability under the Act. Thus, the assets retained by the ITO could not have been appropriated towards the payment of tax until the Assessee had filed a return indicating the application of seized cash towards its tax liability or till an assessment was framed for the AY 1991-1992. For the reasons stated above, the question of law framed by an order dated 12th February, 2004 is answered in the negative and in favour of the Revenue. The appeals are, accordingly, allowed. No order as to costs.