Friday, June 27, 2014

Income tax - Whether when assessee fails to declare salary income on which TDS was deducted, same is to be treated as 'undisclosed income' - YES: HC

AHMEDABAD, JUNE 27, 2014: THE issue before the Bench is - Whether non-disclosure of income by not filing return of income on which the TDS is deducted, can be treated as “undisclosed income” within the meaning thereof in Section 158B(b) under Chapter XIV-B. And the answer goes against the assessee.
Facts of the case
The assessee, an individual, is a salaried employee working as Works Manager with M/s. Khemani Distillery Private Limited, Daman from June, 1995 onwards. However, from 01.04.1987 to 31.03.1995 included in the block period the assessee was employed with Zandu Pharmaceutical Works Limited, Mumbai as Chief Engineer. The assessee had never filed his returns of income although he had income liable to tax during the block period. There was a search and seizure operation in the case of entire Khemani Group on 20.08.1997 and consequently the search was also conducted at the assessee’s residence on 20.08.1997. In the course of search, cash of Rs.84,500/and jewelery of Rs.2,29,804/- were found, out of which, cash of Rs.50,000/- was seized. In the course of search, the assessee was also found to have investment in fixed deposit and other securities regarding to Rs.12,25,400/-. After search, the assessee consulted CA and he was advised that as the assessee had made the investment in FDRs etc. from his salary income and interest income, which can be considered as known sources, the salary and income from other sources can not be treated as undisclosed income. Accordingly, the assessee filed regular return of income of AY 1996-97 and 1997-98 u/s.139(4) showing salary and income from other sources considering it as normal income. Then the AO, issued a notice u/s 158BC which was served on the assessee on 09.10.1997. In response to the said notice, the assessee filed the return showing undisclosed income at Rs.13,64,954/- for the block period and paid full tax at the rate of 60% on this income. The assessment was however, framed by AO at a total income of Rs.18,33,771/- making certain other additions to the income of salary and interest/dividend disclosed by the assessee in the return of undisclosed income. AO also treated the returns of income filed u/s.139(4) of AYs 1996-97 and 1997-98 as invalid as he assessed the whole income of these assessment years in the assessment of undisclosed income. The AO however allowed deduction under Chapter VIA rebate u/S. 88 and TDS from salary and self assessment tax paid u/s.140A for AYs 1996-97 and 1997-98 against the assessment of undisclosed income.
On appeal before CIT(A), assessee did not raise the ground relating to the assessment of salary income earned by the assessee which was declared in the return of undisclosed income by way of abundant caution the assessee was of the opinion that the salary income cannot be treated as undisclosed income because TDS was deducted by the employer from the salary and form No.24 was filed by the employer with the Department as required u/s 206. The assessee raised certain other grounds with regard to the addition made to the undisclosed income on account of seized cash as well as addition on account of alleged unexplained investment in FDRs as well as alleged low household expenses which were dismissed by the CIT(A).
On further appeal, Tribunal had allowed the said appeal by holding and directing that the income earned by way of salary by the assessee cannot be treated as “undisclosed income” within the meaning thereof in section 158B(b) under Chapter XIV-B of the Act and also reducing the addition on account of unexplained investment of Rs.1,88,884/- to Rs.35,000/-.
Before HC, the Revenue's counsel had submitted that the Tribunal had materially erred in not treating the non-disclosure of the income earned by way of salary by the assessee as “undisclosed income” within the meaning thereof in section 158B(b) under Chapter XIV-B of the Act on the ground that on the aforesaid amount of salary TDS was deducted. It was submitted that as such the aforesaid issue was not res integra in view of the decision of SC in the case of ACIT v. A.R. Enterprises 2013-TIOL-04-SC-IT-LB. In that case SC held that since the tax to be deducted at source was computed on the estimated income of an assessee for the relevant FY, such deduction cannot result into disclosure of the total income for the relevant AY and therefore, mere deduction of TDS, does not amount to disclosure of income, nor does it indicate the intention to disclose income most definitely when the same was not disclosed in the returns filed for the concerned assessment years. It was submitted that therefore non-disclosure of the income received by the assessee by way of salary was required to be treated as “undisclosed income” within the meaning thereof in Section 158B(b) under Chapter XIV-B liable to tax at 60%. It was further submitted that in the present case even after the search and seizure the assessee did not file the return and subsequently filed the return only after initiation of block assessment proceedings and declaring the said income as “undisclosed income”. It was submitted that therefore even considering the decision of SC in the case of A.R. Enterprises, non-disclosure of income earned by the assessee by way of salary was required to be treated as undisclosed income. with regard to reduction in the addition on account of unexplained investment of Rs.1,88,884/- to Rs.35,000/-, it was submitted that as such the aforesaid was without any evidence and no reasons had been signed by the Tribunal to reduce the addition on account of unexplained investment of Rs.1,88,884/- to Rs.35,000/-. Therefore, it was requested to allow the present appeal and answer the questions in favour of the revenue.
On the other hand, though served, nobody appeared on behalf of the assessee.
Held that,
++ present tax appeal is of the year 2000 and therefore, this Court is proceeding with hearing of the present tax appeal ex parte. At the outset it is required to be noted that after search and seizure it was found that the asssessee did not disclose the income received by him by way of salary and thereafter the block assessment proceeding was initiated treating the non-disclosure of the said income received by the assessee by way of salary as “undisclosed income”. Both, the AO as well as the CIT(A) held against the assessee. However, on an appeal, the Tribunal has held that as on the aforesaid income the TDS was deducted and therefore, it cannot be said that there was a non-disclosure of the income by way of salary;
++ the issue is not res integra in view of the decision of SC in the case of A.R. Enterprises. In this case SC considered the payment of advance tax and tax deducted at source. While dealing with the advance tax, it had observed and held that since the Advance Tax payable by an assessee is an estimate of his “current income” for the relevant financial year, it is not the actual total income, to be disclosed in the return of income. To repeat, the vital distinction being that the “current income” is an estimation or approximation, which may not be accurate or final; whereas the “total income” is the exact income disclosed in a valid return, assessable by the Revenue. The fact that the “current income” is an estimation implies that it is not final and is subject to further adjustments in the form of additions or reductions, as the case may be, and would have to be succeeded by the disclosure of final and total income in a valid return. It will be a misconstruction of the law to construe the undisclosed income for purposes of Chapter XIVB as an “estimate” of the total income, which is assessable and chargeable to tax. Therefore, we are unable to accept that payment of Advance Tax based on “current income” involves the disclosure of “total income”, as defined in Section 2(45) of the Act, which has to be stated in the return of income. The same is evidenced in the scheme of Chapter XIVB, in particular. In view of the above, Tribunal has committed a grave error in directing that the income earned by way of salary by the assessee cannot be treated as undisclosed income for levying tax at 60% on the salary income as undisclosed income;
++ in the aforesaid decision in the case of A.R. Enterprises, SC has also considered one another aspect with respect to the intention of the assessee to disclose the income. In the aforesaid decision the SC has observed and held that return was filed only when the block assessment proceedings are initiated by the Assessing Officer declaring the income in the said return. It indicates that there was no intention to disclose the income. In the present case the assessee filed return of income declaring the income received by him by way of salary only after the block assessment proceedings were initiated by the Assessing Officer. Under the circumstances also, the Tribunal has materially erred in not treating the income earned by way of salary by the assessee as “undisclosed income”. Under the circumstances, question (a) & (b) are answered in favour of the revenue and against the assessee;
++ so far as the question No.(c) is concerned, by impugned order the Tribunal has reduced the addition made by the AO on account of unexplained investment of Rs.1,88,884/-to Rs.35,000/-. It is required to be noted that at the time of search unexplained investment of Rs.1,88,884/-was found and even after the search the assessee did not file the return of income and declared the same at the time of filing the return after the block assessment proceedings were initiated. Considering the decision of SC in the case of A.R. Enterprises, when the return was filed by the assessee after the block assessment proceedings were initiated by AO as observed by SC in the aforesaid decision, the intention of the assessee is to be presumed that he was not to disclose the income and therefore, the same is required to be treated as undisclosed income within the meaning thereof in section 158B(b) under Chapter XIV-B of the Act. Even as such no specific reasons and/or evidence on record to reduce the addition on account of unexplained investment of Rs.1,88,884/-to Rs.35,000/-. Under the circumstances, the Tribunal has materially erred in reducing the addition on account of unexplained investment of Rs.1,88,884/- to Rs.35,000/-. Under the circumstances, the question No. (c) is also answered in favour of the revenue and against the assessee. In view of the above and for the reasons stated above, present tax appeal succeeds. Question Nos.(a), (b) & (c) are held in favour of the revenue and against the assessee. Consequently, the impugned judgment and award dated 04.07.2000 passed by the Tribunal is hereby quashed and set aside and the order passed by the Assessing Officer confirmed by the CIT(A) is hereby restored. No costs.

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