Income Based On Unexplained Investments

Updated: Oct 28 2002, 05:30am hrs
The Finance Minister is at his wits end to collect tax on undisclosed income. While it is difficult to detect such income and its sources, it is relatively easier to detect investments in assets because assets have a degree of visibility which cannot escape attention for all times. During the festive season, substantial funds representing concealed income are invested in the purchase of gold, jewellery, ornaments and other valuable assets. The Tax Department has sufficient powers to tax income represented by unexplained investments and assets. These powers have been on the statute book for several decades in the form of sections 69, 69-A, 69-B, 69-C and 69-D. Under these provisions, where the assessee offers no explanation about the nature and source of investments or acquisition of money, bullion, jewellery, etc. or where such explanation is not satisfactory, the value of such assets and investments is deemed to be the unexplained income which is liable to tax.

The action of the Assessing Officer in taxing such income represented by unexplained investments and assets has been upheld by Courts in several cases. A couple of these decisions are discussed, which throw light on the circumstances in which the aforesaid provisions can be applied. In V. Visweswaran v CIT ((2002) 124 Taxman 610), in a raid on the house of the father-in-law of the assessee, some shares were found which were claimed as the assessees individual property. In the explanation given as reply to the notice sent by the department, it was claimed that the shares were purchased firstly out of the amounts raised by way of loan from one R and also out of the amount from the personal savings of the assessee. The two amounts from which shares were so purchased were disbelieved by the authorities and were treated as unexplained income. The Tribunal also treated the loan received from R and the assessees personal savings as undisclosed income. On appeal, the Madras High Court held that the Tribunal was not bound to give a finding as to which particular amount was utilised to purchase which particular share. Once the assessee claimed the ownership of the shares and offered an explanation that the shares were purchased from the loan amount from one R and her personal savings, it was up to her to specifically prove that. Such explanation was not accepted by the Tribunal as well as by the other authorities. The Tribunal had given good reasons for rejecting the explanation regarding the sum allegedly raised from R. So also, the Tribunal had given good reasons to disbelieve the explanation of personal savings on account of contrary statements of the father-in-law of the assessee. There was therefore no error of law, much less a substantial error of law, in the matter. Hence, the Court upheld the decision of the Tribunal which brought to tax the unexplained income of the assessee under section 69-A. In Silk Museum v CIT (257 ITR 22), the assessee was a firm doing business from November 1, 1979. For the assessment year 1981-82, the assessee had filed its return. During the assessment proceedings, the Department came into possession of information to the effect that for acquiring the business premises on rent, the assessee-firm had paid certain amount by way of pagri.

The premises occupied by the assessee were previously in the possession of a firm, M. Mr. B and his wife, V, were the partners of M. The statements of the landlord and B in reply to summons under section 131 showed that the assessee had paid Rs.1 lakh to V and Rs.40,000 to the landlord. The Assessing Officer added this sum as unexplained investment of the assessee. The Tribunal placed reliance on the statement of B. The assessee was given an opportunity to cross-examine the witness and it transpired from the statement of the witness that the assessee had paid Rs.1 lakh to his wife V for handing over the possession of the shop premises. The Tribunal took note of the fact that the shop in question was situated in one of the busiest localities in the city and the assessee had obtained possession of the shop on payment of the amounts admitted by B. The Tribunal also observed that the landlord in his statement had admitted that the earlier tenant was in possession of the shop for 25 to 30 years on a monthly rent of only Rs.25 and, therefore, there was nothing unusual in the said payment having been made to the outgoing tenant.

The Tribunal held that the material on record was sufficient for reaching the conclusion that the amount in question was paid by way of pagri. The Tribunal upheld the order of the Assessing Officer. On a reference, the assessee raised the contention that the provisions of section 69 of the Act were not applicable to the assessee-firm because the firm was constituted under the partnership deed dated November 23, 1979, and had commenced its business from November 1, 1979. Therefore, the amount in question could not be considered an investment from the income in the first year of the business of the assessee.

The Gujarat High Court held that there was a categorical admission by B both in his earlier statement and in the cross-examination about the amount of Rs.1 lakh having been paid to his wife by the assessee in lieu of handing over possession of the premises in question. This was in the realm of appreciation of evidence and there was no perversity in the conclusions reached by the Tribunal. The Tribunal was therefore right in confirming the addition of Rs.1,40,000 to the income of the assessee. The aforesaid two cases are amongst several others where the action of the Tax Department has been upheld by Courts.

Therefore, it is clear that there are sufficient and substantial powers given to Assessing Officers. All unexplained investment and unexplained expenditure, as in the case of marriages and other occasions, can be brought to tax if the expenditure is more than the tax-payers known and declared sources of income. Hence, if the Government is to collect more revenue, there is no need for any amendment to the tax law. The real issue is of implementing the existing provisions in a manner which is fair and objective.