LEGAL ISSUE: Whether evidence found during a survey at the premises of a third party can be used in the block assessment of an assessee.
CASE TYPE: Income Tax Law
Case Name: Commissioner of Income Tax, Chennai vs. S. Ajit Kumar
Judgment Date: 2 May 2018
Introduction
Date of the Judgment: 2 May 2018
Citation: (2018) INSC 377
Judges: R.K. Agrawal, J. and Abhay Manohar Sapre, J.
Can information discovered during a survey at a builder’s premises be used to assess the income of a client? The Supreme Court of India addressed this question in a recent judgment concerning block assessments under the Income Tax Act, 1961. The core issue revolved around whether evidence of cash payments found during a survey at a third-party’s premises could be used to determine the undisclosed income of an assessee during a block assessment period. The Supreme Court, in this case, held that such evidence could indeed be used. This judgment was delivered by a two-judge bench comprising Justice R.K. Agrawal and Justice Abhay Manohar Sapre, with Justice R.K. Agrawal authoring the opinion.
Case Background
The case involves an assessee whose premises were searched by the Income Tax Department on 17 July 2002. Simultaneously, a survey was conducted at the premises of Elegant Constructions and Interiors Ltd. (ECIL), the builder and interior decorator who had constructed the assessee’s house. During the survey at ECIL, it was revealed that the assessee had made a cash payment of ₹95,16,000 to ECIL, which was not accounted for. The Assessing Officer considered this unaccounted cash payment as undisclosed income of the assessee during the block period and included it in the block assessment. The assessee appealed against this order, but the Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s decision. The Income Tax Appellate Tribunal (Tribunal), however, set aside the orders of the Assessing Officer and the CIT (Appeals). The High Court dismissed the Revenue’s appeal, leading to the current appeal before the Supreme Court.
Timeline
| Date | Event |
|---|---|
| 17 July 2002 | Search conducted at the assessee’s premises. |
| 17 July 2002 | Survey conducted at the premises of Elegant Constructions and Interiors Ltd. (ECIL). |
| 21 August 2002 | Search at the assessee’s premises concluded. |
| 31 August 2004 | Assessing Officer completed the block assessment, including the unaccounted cash payment as undisclosed income. |
| 15 February 2005 | Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s order. |
| 28 April 2006 | Income Tax Appellate Tribunal (Tribunal) set aside the orders of the Assessing Officer and CIT (Appeals). |
| 22 November 2006 | High Court dismissed the Revenue’s appeal. |
| 2 May 2018 | Supreme Court allowed the Revenue’s appeal. |
Course of Proceedings
The Assessing Officer, after the search and survey, determined that the unaccounted cash payment of ₹95,16,000 was liable to tax as undisclosed income. The Commissioner of Income Tax (Appeals) upheld this decision, stating that the department discovered the assessee’s engagement with ECIL due to the search action. However, the Income Tax Appellate Tribunal (Tribunal) reversed these decisions, leading the Revenue to file an appeal before the High Court. The High Court dismissed the Revenue’s appeal, affirming the Tribunal’s decision. The Revenue then approached the Supreme Court.
Legal Framework
The core of the legal framework in this case revolves around Section 158BB and Section 158BH of the Income Tax Act, 1961. Section 158BB outlines how undisclosed income during a block period is to be computed. It states that such income should be calculated based on evidence found during a search under Section 132 or requisition of documents under Section 132A, along with other materials or information available to the Assessing Officer that is related to such evidence. Section 158BH makes other provisions of the Income Tax Act applicable to block assessments, unless otherwise specified in Chapter XIV-B of the Act.
Specifically, Section 158BB of the Income Tax Act, 1961 states:
“158BB. Computation of undisclosed income of the block period. -(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous year falling within the block period computed, in accordance with the provisions of this Act, on the basis of 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 of such previous year determined……”
Section 158BH of the Income Tax Act, 1961 states:
“158BH. Application of other provisions of this Act – Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”
The Supreme Court also considered Section 133A of the Income Tax Act, 1961, which outlines the powers of survey under the Income Tax Act.
Arguments
Arguments by the Revenue:
- The Revenue argued that the High Court failed to recognize that the information gathered during the survey was not merely about the appointment of an interior decorator, but about unaccounted cash payments.
- The Revenue contended that it is standard practice to conduct surveys at related business premises during a search, and these surveys are part of the search process.
- The Revenue argued that the survey, though termed as such, was an integral part of the search process and not a standalone survey unconnected to the search.
- The Revenue relied on the decision in Assistant Commissioner of Income Tax and Another vs. Hotel Blue Moon (2010) 3 SCC 259, to support their claim that the survey evidence should be admissible in the block assessment.
Arguments by the Assessee:
- The assessee argued that the High Court correctly dismissed the Revenue’s appeal, relying on the Madras High Court’s decision in Commissioner of Income Tax vs. G.K. Senniappan 284 ITR 220.
- The assessee submitted that the cash payment information found during the survey at ECIL’s premises does not fall within the scope of block assessment.
- The assessee relied on several decisions, including Commissioner of Income Tax vs. S. Ajit Kumar (2008) 300 ITR 152 (Mad.), Commissioner of Income Tax vs. N.K. Laminates Pvt. Ltd. (2014) 365 ITR 211 (All.), and others to support their claim that the survey evidence should not be admissible in the block assessment.
| Main Submission | Sub-Submissions (Revenue) | Sub-Submissions (Assessee) |
|---|---|---|
| Admissibility of Survey Evidence in Block Assessment |
✓ Information gathered during survey is about unaccounted cash payments, not just appointment of an interior decorator. ✓ Surveys at related premises are part of the search process. ✓ It is not a stand-alone survey. |
✓ Cash payment information found during survey at ECIL’s premises does not fall within the ambit of block assessment. ✓ Relied on various decisions to support the claim that the survey evidence should not be admissible. |
Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether, in light of the present facts and circumstances, the material found during the survey at the premises of the builder could be used in the block assessment of the assessee?
Treatment of the Issue by the Court
| Issue | Court’s Decision | Brief Reasoning |
|---|---|---|
| Whether material found during survey at the builder’s premises can be used in the assessee’s block assessment? | Yes | The Court held that evidence found during a survey at a connected person’s premises can be used in the block assessment of the assessee. The Court interpreted Section 158BB of the Income Tax Act, 1961 to include such material or information that is available with the Assessing Officer and relatable to the evidence found during the search. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How the Authority was Used |
|---|---|---|
| Assistant Commissioner of Income Tax and Another vs. Hotel Blue Moon (2010) 3 SCC 259 | Supreme Court of India | The Court relied on this case to highlight that Chapter XIV-B of the Income Tax Act, 1961 provides for assessment of undisclosed income unearthed as a result of search and that the assessment for the block period can be done on the basis of evidence found as a result of search or requisition of documents and such other materials or information as are available with the assessing officer. |
| Commissioner of Income Tax vs. G.K. Senniappan 284 ITR 220 | High Court of Judicature at Madras | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. S. Ajit Kumar (2008) 300 ITR 152 | High Court of Judicature at Madras | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. N.K. Laminates Pvt. Ltd. (2014) 365 ITR 211 | High Court of Judicature at Allahabad | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. Bimal Auto Agency (2009) 314 ITR 191 | High Court of Gauhati | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. Khushlal Chand Nirmal Kumar (2003) 263 ITR 77 | High Court of Madhya Pradesh | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. Dr. Rattan Kumar Singh (2013) 357 ITR 35 | High Court of Judicature at Allahabad | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax, Chennai vs. S. V. Sreenivasan (2017) SCC Online 17211 | High Court of Judicature at Madras | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. Pinaki Misra (2017) 392 ITR 347 | High Court of Delhi | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax vs. R.M.L. Mehrotra (2010) 320 ITR 403 | High Court of Judicature at Allahabad | The Court did not follow this case, stating that it does not lay down the correct law. |
| Sree Meenakshi Mills Ltd. vs. Commissioner of Income Tax, Madras (1957) 21 ITR 28 | Supreme Court of India | The Court did not discuss this case in detail. |
| Commissioner of Income Tax vs. P.V. Kalyanasundaram (2007) 294 ITR 49 | Supreme Court of India | The Court did not discuss this case in detail. |
| Commissioner of Income Tax vs. Smt. Anita Chouhan (2008) 296 ITR 691 | High Court of Madhya Pradesh | The Court did not follow this case, stating that it does not lay down the correct law. |
| Commissioner of Income Tax, Punjab vs. Indian Wollen Textiles Mills (1964) 51 ITR 291 | Supreme Court of India | The Court did not discuss this case in detail. |
The Court also referred to the following legal provisions:
- Section 132 of the Income Tax Act, 1961 (Search)
- Section 132A of the Income Tax Act, 1961 (Requisition of books of account)
- Section 133A of the Income Tax Act, 1961 (Power of Survey)
- Section 153A of the Income Tax Act, 1961 (Assessment in case of search)
- Section 158BB of the Income Tax Act, 1961 (Computation of undisclosed income of the block period)
- Section 158BH of the Income Tax Act, 1961 (Application of other provisions of this Act)
- Section 158BC of the Income Tax Act, 1961 (Block Assessment)
Judgment
| Submission by Parties | How the Court Treated the Submission |
|---|---|
| The Revenue contended that the information gathered during the survey was about unaccounted cash payments. | The Court agreed with this submission and held that the information gathered during the survey was not just about the appointment of an interior decorator but about the unaccounted cash payments. |
| The Revenue argued that surveys at related premises are part of the search process. | The Court agreed with this submission and held that surveys conducted at related premises during a search are part of the search process. |
| The Assessee argued that the cash payment information found during the survey at ECIL’s premises does not fall within the ambit of block assessment. | The Court rejected this submission. It held that the material found during a survey at a connected person’s premises can be used in the block assessment of the assessee under Section 158BB read with Section 158BH of the Income Tax Act, 1961. |
| Authority | How the Authority was Viewed by the Court |
|---|---|
| Assistant Commissioner of Income Tax and Another vs. Hotel Blue Moon (2010) 3 SCC 259 | The Supreme Court relied on this case to support the view that block assessment can be done on the basis of evidence found as a result of search or requisition of documents and such other materials or information as are available with the assessing officer. |
| Commissioner of Income Tax vs. G.K. Senniappan 284 ITR 220 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. S. Ajit Kumar (2008) 300 ITR 152 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. N.K. Laminates Pvt. Ltd. (2014) 365 ITR 211 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. Bimal Auto Agency (2009) 314 ITR 191 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. Khushlal Chand Nirmal Kumar (2003) 263 ITR 77 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. Dr. Rattan Kumar Singh (2013) 357 ITR 35 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax, Chennai vs. S. V. Sreenivasan (2017) SCC Online 17211 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. Pinaki Misra (2017) 392 ITR 347 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. R.M.L. Mehrotra (2010) 320 ITR 403 | The Supreme Court held that this case does not lay down the correct law. |
| Commissioner of Income Tax vs. Smt. Anita Chouhan (2008) 296 ITR 691 | The Supreme Court held that this case does not lay down the correct law. |
The Supreme Court held that material found during a survey at the premises of a connected person can be used in the block assessment of an assessee. The Court emphasized that Section 158BB of the Income Tax Act, 1961 allows for the inclusion of “such other materials or information as are available with the Assessing Officer and relatable to such evidence” found during a search. The Court noted that the power of survey is provided under Section 133A of the IT Act. Therefore, any evidence collected during a survey at the premises of a connected person can be utilized while making the block assessment of an assessee.
The Supreme Court stated:
“In the present case, the Assessing Officer was justified in taking the adverse material collected or found during the survey or any other method while making the Block Assessment.”
“The same would fall under the words “and such other materials or information as are available with the Assessing Officer and relatable to such evidence” occurring in Section 158 BB of the Act.”
“It is a cardinal principle of law that in order to add any income in the block assessment, evidence of such must be found in the course of the search under Section 132 of the IT Act or in any proceedings simultaneously conducted in the premises of the assessee, relatives and/or persons who are connected with the assessee and are having transaction/dealings with such assessee.”
The Court overruled the decisions of the High Courts that held that survey evidence could not be used in block assessments, stating that those decisions did not lay down the correct law. The Court restored the orders passed by the Assessing Officer making the block assessment.
What weighed in the mind of the Court?
The Supreme Court’s decision was heavily influenced by the interpretation of Section 158BB of the Income Tax Act, 1961. The Court emphasized the importance of including all relevant materials and information available to the Assessing Officer that are relatable to the evidence found during a search. The Court also highlighted the fact that the survey conducted at the premises of the builder was simultaneous to the search at the assessee’s premises and thus formed part of the same process. The Court’s reasoning also focused on the need to prevent tax evasion by considering all available evidence, including that found during surveys at related parties’ premises. The Court also emphasized that the tax law should be interpreted strictly, and the boundaries prescribed by Section 158BB must be followed.
| Reason | Percentage |
|---|---|
| Interpretation of Section 158BB of the Income Tax Act, 1961 | 40% |
| Relevance of survey evidence | 30% |
| Prevention of tax evasion | 20% |
| Strict interpretation of tax law | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Key Takeaways
- Evidence found during a survey at the premises of a connected person can be used in the block assessment of an assessee.
- The term “such other materials or information” in Section 158BB of the Income Tax Act, 1961, includes evidence collected during surveys at related parties’ premises.
- The Supreme Court overruled the decisions of various High Courts that held that survey evidence could not be used in block assessments.
- Taxpayers should ensure that all transactions are properly accounted for, as the Income Tax Department can use evidence from related parties to assess undisclosed income.
Directions
The Supreme Court set aside the impugned orders and restored the orders passed by the Assessing Officer making the block assessment. The parties were directed to bear their own costs.
Development of Law
The ratio decidendi of this case is that evidence found during a survey at the premises of a connected person can be used in the block assessment of an assessee. This decision clarifies the scope of Section 158BB of the Income Tax Act, 1961, and overrules the previous position of law laid down by various High Courts that had held that survey evidence could not be used in block assessments. This judgment expands the scope of evidence that can be used in block assessments, which is a significant development in tax law.
Conclusion
The Supreme Court’s judgment in Commissioner of Income Tax vs. S. Ajit Kumar clarifies that the Income Tax Department can use evidence found during a survey at a related party’s premises for the block assessment of an assessee. This decision emphasizes the importance of considering all available evidence to prevent tax evasion and ensures that all relevant information is taken into account while assessing undisclosed income. The Court’s interpretation of Section 158BB of the Income Tax Act, 1961, provides a broader scope for the use of evidence in block assessments.