In a recent judgment, Delhi High Court has held that no additions can be made on the basis of computer file seized during the search u/s 132 which only contain cash flow projections and not the actual sale.

Case Law Details:
ITA 670/2014
Commissioner of Income Tax (Appellant) vs Vatika Landbase Pvt. Ltd (Respondent)
Date of Order : 26-02-2016
Coram: Justice S Muralidhar and Justice Vibhu Bakhru

Facts of the Case(s):
The Respondent-company was engaged in the business of real estate development. A search and seizure operation u/s 132 of the Income Tax Act, 1961 was carried out at the business premises of the Assessee and residential premises of its Directors on 8th May 2003. For quite some time thereafter no further proceedings took place. During the search and seizure operation, the Revenue seized a file in the computer of an employee of Vatika Group. The said file contained the working of the anticipated sale revenue on account of sale of space in the Vatika Triangle ('VT') and Vatika World ('VW') commercial complexes.

Notice u/s 158BC issued to the Assessee and no return was filed by the Assessee pursuant thereto, notice under Section 142 (1) was issued again. The Assessee filed Nil return of income. A questionnaire was issued to the Assessee to explain the undisclosed receipts of sale of spaces/flats in VT.

As regards the allegations that as per the file found in the computer, the rate of sale of the ground floor space was at Rs. 5,538 per sq.ft. and other floors was at Rs. 4,000 per sq.ft, the Assessee pointed out that the computer was used by the employee working as a Junior Executive under Vice President (Marketing Division) of Vatika Group. The Assessee contended that a plain reading of the paper would disclose that these were mere projections and do not represent any completed materialized transaction and those were not the actual sale rates. In fact the footnote of the file contained various assumptions for arriving at those figures. It was pointed out that although print out was titled as ‘Cash in flow detail for the revenue’ there was in fact no cash in flow statement and this was merely a proposal prepared for a customer in order to attract the investment from such customer. However AO relying on the computer file, made an addition of Rs. 5,60,73,380/- which was in addition to other additions made on the basis of several other records/documents found during the search.

On appeal CIT(A) held that only addition possible was on the basis of seized material was as per file ‘cash flow/Vatika Triangle/ backup” found from the computer of the employee (Mr. Sunil Awasthi) where there was a mention of actual sale of 2nd floor and 3rd floor of Vatika Triangle. Thus addition to the undisclosed income worked out at Rs. 5,60,73,380. CIT(A) held that no addition was possible on the basis of estimate as done by AO or other seized material referred by the AO.

Both, Revenue and the assessee approached ITAT which dismissed the Revenue’s appeal while partly allowing the Assessee’s appeal. With regard to issue of the alleged undisclosed receipt on sale of flats/space in VT, the ITAT deleted the additions made by the AO as sustained by the CIT (A) of Rs. 5,60,73,380. ITAT observed that If the paper was a projection for the other floors then it could not be used for determining the rate of alleged sale.

Question before the Court
The scope of the current appeal was confined to the question:
Did the ITAT fall into error in holding that the addition of Rs. 5,60,73,380 was unsustainable in law in the circumstances of the case?

Excerpts from the Judgment:

Discussion and Reasons
38. At the outset the Court would like to recapitulate the scope of search proceedings under Section 158BC under Chapter XIV B of the Act. In Commissioner of Income Tax v. Ravi Kant Jain (supra) the Court explained:

"The special procedure of Chapter XIV-B is intended to provide a mode of assessment of undisclosed income, which has been detected as a result of search. As the statutory provisions go to show, it is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Evidence found as a result of search is clearly relatable to sections 132 and 132A."

39. Likewise in Commissioner of Income Tax v. Vishal Aggarwal (2006) 283 ITR 326 (Del), Commissioner of Income Tax v. Girish Chaudhary (2008) 296 ITR 619 (Del) and Commissioner of Income Tax v. V.B. Aggarwal 296 ITR 750 (Del) it was emphasized that provisions of Chapter XIV B of the Act are not meant to make an assessment or reassessment of an income but are the provisions which are aimed to make addition of an undisclosed income detected as a result of search. The scope of the block assessment proceedings before the AO was explained by the Rajasthan High Court in CIT v. Rajendra Prasad Gupta (2001) 248 ITR 350 (Raj) in the following words:

"...the correctness or otherwise of the returns filed in pursuance of the notice under section 158BC(a) has to be examined with reference to the material in the possession of the assessing authority having nexus to assessment of “undisclosed income” which is with the assessing authority, and premise of such proceedings. If the returns filed by the assessee do not accord with the materials which are already in the possession of the authority, it can be estimated to the best judgment by the assessing authority on the basis of the material in his possession. However, the assessing authority is not conferred with power to make estimation of income de hors the material in his possession, while making regular assessment order under section 158BB. It has to be borne in mind that proceedings under sections 158BB and 158BC are that of undisclosed income. Therefore, the proceeding carries with it a presumption that returns filed in pursuance of such proceedings are of undisclosed income and not necessarily in accordance with the books of account. Its verification has to be searched outside regular books with reference to material that has been found during search. That makes it imperative to adjudicate the return with reference to material that has come in the possession of the assessing authority during the course of search proceedings and on which basis the belief about the existence of undisclosed income is entertained by the assessing authority inviting invocation of sections 158BB and 158BC."

40. Turning to the case on hand, the document recovered from the file in the computer of Mr. Awasthi, forms the basis of the addition made by the AO, which was further reduced by the CIT (A). This was in the form of a computer print out of three sheets which were unsigned and undated. The first sheet was titled ‘Cash-in-flow detail for the revenue’, the next was titled ‘Revenue details’ and the third was titled ‘Vatika Triangle, Guargaon.’ The notes to the documents are indicative of their being projections. Noting (i) states that “it is presumed that the building will be completed and fully let out in the month of November 2002.” Another note states "Further, the sale of the building will took place over a period of nine months." Admittedly, as on the date of the search the construction was still in progress. Flats up to the fourth floor had been sold. The view taken by the ITAT that mere fact that the print out states that the flats on second and third floor have been sold, does not necessarily mean that they were sold at the rates indicated therein is definitely a plausible view to take.

41. Considering that the document was recovered from the computer of Mr. Sunil Awasthi, he ought to have been summoned to explain the rates of sale shown therein for the flats on different floors. In fact, the Assessee did make a request for his cross-examination. The other possibility was to examine the purchasers of the flats as they would have confirmed the price paid by them and how much of it was in cheque and what extent in cash. However, that too was not done.

42. In Commissioner of Income Tax v. S.M. Aggarwal (supra), in similar circumstances certain slips of paper were recovered during search and their author was not examined. The Court observed:

"It is well-settled that the only person competent to give evidence on the truthfulness of the contents of the document is the writer thereof. So, unless and until the contents of the document are proved against a person, the possession of the document or handwriting of that person on such document by itself cannot prove the contents of the document. These are the findings of fact recorded by both the authorities, i.e., the Commissioner of Income-tax (Appeals) and the Tribunal.

13. In Mahavir Woollen Mills case [2000] 245 ITR 297 (Delhi), during the course of search and seizure proceedings, certain slips were found, which, the Assessing Officer concluded, contained details of payment beyond those which were made by cheques and drafts and were duly reflected in the books of account. The assessee' s stand before the Tribunal was that the documents were " dumb documents" which did not contain full details about the dates of payment and its contents were not corroborated by any material and could not be relied upon and made the basis of addition. The Tribunal considered this aspect and observed that on comparison of the seized documents and ledger accounts of the parties, the seized documents could not be regarded as "dumb documents"

44. The above projection statement mentions rates for seven floors whereas the construction was still in progress and the seven floors had not been completed. There is another anomaly inasmuch as in para 8.28 of the order of the CIT (A), it is observed that the said document cannot form the basis of determining the actual rate of sales for the remaining floors, and yet, as rightly pointed out by the ITAT, those rates have been relied upon by the CIT (A) to determine the amount that should be added in respect of the sales of the flats on the second and third floors of VT.

45. As pointed out in Commissioner of Income Tax v. S.M. Aggarwal (supra) the said document can at best be termed as a 'dumb' document which in the absence of independent corroboration could not possibly have been relied upon as a substantive piece of evidence to determine the actual rates at which the flats were sold. Further as pointed out in Commissioner of Income Tax v. D.K. Gupta (supra) merely because there are notings of offers on slips of paper, it did not mean that those transactions actually took place. Likewise in Commissioner of Income Tax v. Girish Chaudhary (supra), the Court termed a loose sheet containing some notings of figures as a 'dumb document' since there was no material to show as to on what basis the AO had reached a conclusion that the figure '48' occurring in one of them was to be read as Rs. 48 lakhs.

46. In the present case, there was again no material on the basis of which the AO could have applied a standard rate of Rs 4,800 per sq ft for all the floors of VT. It was also not open to the AO to draw an inference on the basis of the projection in the document, particularly when the Assessee offered a plausible explanation for the document. The burden shifted to the Revenue to show, on the basis of some reliable and tangible material, how the rate at which the flats on the second and third floors of VT was higher than that indicated in the sales register or the sale deeds themselves.

47. In the circumstances, the Court is of the view that the ITAT was justified in coming to the conclusion that the addition of Rs. 5,60,73,380 made by the CIT (A) was not sustainable in law.

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