Mar 6, 2010
Q.1 Whether book result can be disturbed in case
of Assessment relating to search & seizure?
Ans. Book result cannot be disturbed except to the extent
that some document are found showing that entries in books
are wrong or ‘ON MONEY’ found to be received by the
assessee on the basis of seized material.
Reliance can be placed on the following cases:
a) Udhiram v/s. ITO-88 Taxman 191 (Asr.)
b) Jaya Shetty v/s. ACIT-69 ITD 336(Bom)
c) ITO v/s Jayant Saree House, 82 Taxmann 191 (Ass.)
Q. 2 Whether the entire On Money received
would be taxed as Income or not?
If not, what is the basis for taxing the On Money?
Ans. No, the entire On money received / found would not be
subject to tax. The only method to work out the correct e
lement of profit from the ‘On Money’ receipts would be
to take a percentage thereof at the rate of gross profit / net
profit annually disclosed by the assessee or by other similarly
placed businessman. In the case of assessee’s engaged in
construction business, only 6% to 15% (Depending upon case to case)
of the ‘On Money’ receipts would be brought to tax as income
from on money receipts.
i) Mrs. Mehroo N. Irani v/s. ACIT.
ITA No. 1180 (Bom) of 1989, 26.2.91 (75 Taxman).
ii) Wall Street Construction ltd. v/s. ACIT.
ITA No. 1759/Bom/1995 dt. 7.8.95
iii) M/s. Kanakia Builders & Ors. v/s. ACIT.
ITA (SS) No. 14 to 31/Mum/96 dt. 21.11.97
Q. 3 Whether the judgement passed in the case
of Commr. of Sales Tax v/s. H. M. Esufalli’s,
H. M. Abdulali reported in 90 ITR 271 (SC.) r
elating to Estimation of profit in case of search
cases is a good law and whether the decision in
the said case is binding on all assessees?
Ans. No, in the said case the Apex Court had upheld the
estimation of sale out side books of Accounts.
This decision cannot be applied universally as the
facts of the said case were that no material was
furnished before officer and it was an
Exparteassessment and further this was the
case of sales tax.
Reliance can be placed on the following judgements:
(i) 60 ITR 239 (SC) State of Kerala v/s Vellukutty.
(ii) 49 ITR 95 (Pat) Chetandas Gulabchand v/s CIT
(iii) 207 ITR 979 (Cal) CIT v/s Ranicherra Tea Co. Ltd.
(iv) 37 ITR 1(SC) Calcuta Co. Ltd. v/s CIT.BUSINESS EXPENDITURE:
Q.4 What would be the tax treatment in the case
of On money received by a Builder, following
Project completion method of accounting?Ans. In the case of Builder following Project
completion method of accounting, the
On money component would be taxed as
his business income in the year when the
Project is completed. If the Assessee is liable
to tax in the year of handing over possession
then the on money component would also be
taxed as his business in the year when the
possession is handed over.
Q.5 Whether the expenditure incurred
On payments made to Government Officials
is an allowable expenditure?
Ans. Upto 31.3.2000 any expenditure incurred
towards payments to Government Officials were
treated as allowable expenditure. However the law
is amended from 1.4.2000 and now the same are
treated as not an allowable expenditure.
However routine expenses at Govt. offices to get
the legal work done can be treated as speed money
and may be allowed as exp. of routine nature.
Q.6 Whether amount paid for security
charges are allowed , as deduction?
Ans. Yes, Amount paid as security charges are
distinguishable from amount paid as protection
money to extortionists. Therefore legal and genuine
business expenditures are allowed whereas illegal,
unlawful and expenditures incurred against public
policy are not allowed in view of the amended
provisions of section 37(1) ofIncome-tax Act from 1.4.2000.
III : Expenditure outside Books of Account:
Q.7 Expenditure incurred in business outisde
books of accounts can be added as undisclosed income.
Ans. Yes, expenditure incurred outside books of Accounts
can be added as undisclosed income but again deduction
of expenditure will be allowed hence finally taxable income
will be NIL.
Reliance can be placed on the following judgements:
(i) 19 ITD 306 (Ahd.) S.F. Wadia v/s. ITO
(ii) 31 ITD 114 (Mad) M.K. Mathivathanam v/s ITO
(iii) 52 ITD 103 (Pat) Nishat Housing Dev. (P) Ltd. v/s. ACVT
(iv) 127 ITR 90 (SC) CIT v/s. Piard Singh
(v) 50 ITR 233 (Bom) CIT v/s R. B. Rungta & Co.
(vi) 49 ITR 31 (Bom) CIT v/s Pranlal Kesurdas.
Q.8 Assessee owning vast Agricultural Lands and
same reflected in accounts and regular assessment
completed. Whether roving enquiries be made
questioning the details of Agricultural land and income thereof?
Ans. Under search assessment roving enquiries can be
made in respect of completed assessments, which
is likely to be disturbed on account of search , if some
false documents are found during the course of search.
IV. Addition on surmises & presumptions:
Q.9 Whether additions under search assessment can
be made on the basis of presumptions,
Assumptions, Surmises and conjectures etc.?
Ans. No. Additions under search assessment can be
made only with regard to as such as cash, jewellery
unexplained investments valuable and no additions can
be made on the basis of presumptions, assumptions,
surmises and conjectures etc.
“Reliance can be placed on the following decided case laws:
a) 71 ITD 128
131 ITR 597 (SC) - K. P. Varghese.
held when there is no material found addition on surmises is unjustified in a search assessment.
b) 66 ITD 510 (Pune) Kasat Textiles Pvt. Ltd. v/s ACIT –
Information in a persons books of accounts unless proved wrong should be accepted.
c) 63 ITD 153 (Bom) ACIT v/s Shailesh Shah
Held addition based on suspicion cannot be sustained.
d) IT (SS) A No. 1 18/Mum/96 – Shri R. M. Bhagwandas Raheja v/s. ACIT.
held vague information found in search cannot be used against the Assessee.
documents / Agreements standing in the names
of children, who are major and assessee to tax are
found whether, addtions can be made in the hands of Assessee?
Ans. No
Q. 11 If during the course of search some papers are
found describing household expenditure for 2 months.
Based on the said loose paper whether the A.O. can
make addition for the entire year?
Ans. No. Assessing Officer cannot read something extra and on
presumptions make addiiton. If the papers are found for two months,
then additions at the most can be made for 2 months and not for the entire year.
Q.12 If an assessee has many group concerns and bank
account and the cash credits are rotated by the assessee
through his different bank accounts.
Whether the addition can be made of the all the credits
appearing in different bank accounts?
Ans. No. In such a case the Peak Theory should be followed
by the department, by calculating the Peak credit available to
assessee on a particular date and only addition of the Peak
credit can be made.
Q. 13 In case of search conducted at the site office of
the Builder and the supervisor gives a statement that the
rate of flat per sq. ft. is Rs. 4,500/- and the Builder gives
the statement that the rate of flat per sq. ft. is Rs. 1,500/-.
Then whether the statement given by the Supervisor
supercedes the statement of the Builder and whether
the same can be relied upon?
Ans. No. In case of search no third party statement can be
relied upon unless there is corroborative evidence.
V. MISCELLANEOUS:
Q 14. On whom search notice can be served?
Ans. If during the course of search the search authorities find
valuables such as jewellery, investments, cash of a third person,
then search warrant can be taken out at the said third party too.
Q. 15 An assessee had offered for tax undisclosed income
of say Rs. 50 lacs and unexplained valuable to the extent
of say Rs. 25 lacs are found from his premises.
The Assessing Officer made addition of both undisclosedincome
and unexplained investment to the income of Assessee.
Whether he is correct in doing so?
Ans. No. Assessing Officer cannot make addition of both source
of earning income as well as the investment thereof. In the given
case since the investments are less than income, only addition on
account of income and not investment would be sustained.
Q. 16 If the premises of an assessee is searched and
till date of search he has not filed any return of income.
Whether such an assessee can file his return of income thereafter?
Ans. Yes. Once an assessee is searched and it is found
that no return of income is filed by him before search.
His income for the past 06 years would be treated as
part of search assessment and tax on the same would be
charged at the rates as applied in the relevant assessment.
Q. 17 At the time of search if the books of account
of the assessee are not complete.
Whether the same can be completed?
Ans. Yes. During the course of search an assessee can
complete his incomplete books of account and explain to
the search authorities in respect of any discrepancies found.
Q. 18 During the course of search if an assessee
makes a voluntary declaration in order to put an
end to seamless litigation and to buy peace and if
the Assessing Officer does not accept the same in
its totality. Whether the declaration is binding on the assessee?
Reliance in this regard can be placed in the following case laws:
i) Kishore Meswani Vs. 3rd Additional ITO, BSD(S) Wd ITA No. 7162/Bom/90.
ii) Puspa Vihar, Bombay Vs. ACIT, Circle 36(2) Mumbai ITA No. 1822/Bom/90.
Q. 19 If the case of Assessee is complicated and the
Assessing Officer lacks understanding. In such situations
what is the remedy available to an assessee?
Ans. If the case of assessee is complicated and Assessing
Ans. If the case of assessee is complicated and Assessing
Officer lacks understanding, assessee can request Assessing
Officer to appoint a neutral Chartered Account, u/s 142(2A)
for special audit who will audit the books of the assessee
and the income of the assessee can be justly and easily quantified.
Q. 20 During the course of search assessment whether
Q. 20 During the course of search assessment whether
an assessee can make a waiver petition to the Commissioner
of Income-tax u/s 273 A or 273 A (4) of the Income Tax Act, 1961?
Ans. Yes.
Q. 21 During the course of pendency of search
Ans. Yes.
Q. 21 During the course of pendency of search
assessment whether an assessee can approach
settlement commission for settlement of his case
which involves complexities?
Ans. Yes. But one has to wait for 120 days to complete
Ans. Yes. But one has to wait for 120 days to complete
from the date of search or receipt of Assessment order,
but after 31-5-2007 it will not be possible to go to
settlement Commission in case of Search cases.
Q. 22 Jewellery belonging to woman found at the time
Q. 22 Jewellery belonging to woman found at the time
of search for which there is no documentary proofs of purchase.
Whether the same would be treated for the purpose of search Assessment?
Ans. Income Tax Department has come out with number of
Ans. Income Tax Department has come out with number of
circulars that a married woman should not be questioned on
jewellery acquisence upto 500 grams and an
unmarried Lady upto 250 gms. male members upto 100 gms.
Therefore if jewellery found to this extent then
Authorised officers can not seize that Jewellery and no addition
can be made in Search Assessment. This view is confirmed
by ITAT in number of cases.
Q. 23 if an assessee has jewellery or other valuables
Q. 23 if an assessee has jewellery or other valuables
which was purchased 06 years prior to the date of search
and has proof of purchase of the same, or holding t
he same then, whether the Income-tax Department
can make addition in respect of the said jewellery or
other valuables to the total income of the appellant?
Ans. No. Income-tax Department cannot question the
Ans. No. Income-tax Department cannot question the
Assessee in respect of transactions prior to 06 Assessment years.
Q. 24 Pass book maintained by an assessee,
Q. 24 Pass book maintained by an assessee,
whether constitutes books of Account?
Ans. Yes.
Q. 25 What are the precautions to be taken by an
Ans. Yes.
Q. 25 What are the precautions to be taken by an
Assessee to avoid complications during search?
Ans. The following are few suggestions / tips:
Ans. The following are few suggestions / tips:
a) Regularise the books.
b) Regularise the jewellery held i.e. physical
quantity of jewellery should tally with the jewellery
declared. Particularly of diamond jewellery
and weight of gold & silver ornaments or articles.
c) Since the tax rates are very low, it is advisable
to pay tax and keep white money instead of holding
black money in tension.
Such precautions would help an assessee in a great way.
Presently an assessee is required to pay maximum Income tax
@ 33%, Wealth tax @ 1% only on few items, Gift tax,
Estate duty are abolished and expenditure tax is not applicable
to individuals. Therefore with such great reliefs it is advisable
that an assessee complies with the provisions of law and pays
proper tax regularly to lead carefree life and particularly when
cases are selected under scrutiny by computer only @ 2% of
returns filed.
It is worthwhile to mention that in earlier years
Income tax was @ 97.75%, wealth tax
as @ 13%, Estate duty was @ 85%, Gift tax
was @ 85%, Expenditure tax was @ 30% and
many many other taxes at very high rates and over
and above that there was 100% scrutiny of returns filed.
Q. 26 Assessee is Builder! Developer !
Contractor and following project completion
basis of accounting whether after search d
epartment can change his system of accounting,
particularly in view of AS7 and power of AO u!s 145(2).
Ans. No. If assessee is following particular system of accounting which is recognised by law and accepted by department then assessing officer cannot change that system.
Reliance can be placed on the following judgements:
(i) 37 ITR 37 (SC) Calcutta Co. Ltd. v!s CIT.
(ii) 193 ITR 694 (Bom) Shree Nirmal Commercial v!s CIT.
(iii) 171 CTR 203 (Bom) CIT v!s Dempo Ltd.
(iv) 107 ITR 119 (Bom) CIT v!s Kay Arts.
(v) 49 ITD 479 (Bom) Shapoorji Pallonji & Co. v!s CTO.
(vi) 17 TTJ 125 (Bom) Malad Shopping Centre v!s ITO.
(vii) AIR 2000 SC 94 (SC) United Com. Bank v!s CIT
Ans. In view of the provisions of Chapter VI of IT Act, if returns are filed in accordance with law and Assessee by AO then loss has to be allowed to be c!f.
Reliance can be placed on the following judgement:
(i) 36 ITD 625 (Del) Vinod Tayal v/s ITO
(ii) 37 ITR 1 (SC) Calcutta Co. Ltd. v/s CIT
(iii) 226 ITR 62 (SC) CIt v/s Poddar Cement (P) Ltd.
(iv) 191 ITR 570 (Cal) Burdwan Wholesale consumers Co-op. Soc. Ltd. v/s CIT
(v) 181 ITR 22 (Bom) CIt v/s Indian Rare Earth.
(vi) 200 ITR 749 (Cal) Himmatsingka Motor Works Ltd. v/s CIT
(vii) 22 TTJ 82 Smt. Margaret Rose Rendem v/s ITO
(viii) 142 ITR 877 (Mad) CIT v/s Standard Motor Products of India Ltd.
(ix) 171 ITR 232 (AP) State Bank of Hyderabad v/s CIT
(x) 149 ITR 487 (Raj) CIt v/s Rangnath Bangur.
Q. 28 During the course of search it was found that Assessee
has received certain amounts due to Arbitration Award for
earlier years but Assessee have shown as income in the year
when received and accepted by Department. if Assessee
follow mercantile system of accounting whether while
completing the search assessment AO can take that amount
in earlier years for which it pertains.
Ans. No. A.O. cannot take that amount in earlier years because
amount is due to Assessee only due to Arbitration Award
and that is the subsequent event ie after date of search.
Reliance can be placed on the following judgements:
(i) 193 ITR 496. G. Gopinathan v/s CIT
(ii) 192 ITR 534 (Ori.) BPR Construction v/s CIT
(iii) 53 ITR 114 (SC) CIT v/s Gajapathy Naidu.
(iv) 144 ITR 270 K. Sadashiva Krishnarao v/s CIT
(v) 232 ITR 2 (SC) P. Mariappa Coundet v/s CIT.
Q. 29 Can the matter be referred to the valuation officer
for valuation of property etc by assessing officer in search cases?
Ans. By, virtue of Amendment by Finance Act No.2, 2004
a new section is inserted which is sec. 142A, wherein the
assessing officer is given powers to refer the matter in
Search cases to the Valuation Officer hence after 8-7-2004
AO can refer matter to valuation officer to value property etc.
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