Income Tax Search and Seizure Assessments- No universal application of the “extrapolation technique” in Search Assessments

Income Tax Search and Seizure Assessments- No universal application of the “extrapolation technique” in Search Assessments

Introduction:

During the course of a Search and Seizure action, it is seen in practice that incriminating material in the form of documents, diaries and other evidences are found which sometime reflects undisclosed income of an assessee only for a particular limited period of time and not for all the assessment years to be covered u/s 153A of the Income Tax Act’1961. However, it is seen that the during the course of search assessments, the finding of such undisclosed for a particular period is extrapolated to the entire block period of assessments as envisaged u/s 153A of the Income Tax Act’1961.

To illustrate, let us assume that during the search and seizure action on an assessee into manufacturing activity, certain seized document suggest that there were undisclosed scrap sales for 2 months only. The vital question here is as to whether the Assessing Officer while framing assessments u/s 153A r.w.s. 143(3) for 7 years, can extrapolate the findings of undisclosed income which relate to only 2 months, to entire 7 years.

On a similar note, in the case of search or survey on real estate developers, there may be cases when evidences are found regarding receipt of unaccounted cash or ‘on money’ from the customers. Such evidences may be found relating to certain units out of total project or from some of the customers. Whether in such cases, can the Assessing Officer extrapolate receipt of ‘on money’ to the entire project with respect to all the customers on the pretext that in case ‘on money’ is being received in certain cases, it reflects that the actual market price is higher and therefore the presumption is that ‘on money’ has been received from all the customers.

First of all let us understand what an “extrapolation” is.

The Extrapolation technique is the method of backward and forward projection of income while assessing the income of whole of the assessment years covered u/s 153A of the Income Tax Act’1961 on the basis of the income found to have been earned by the assessee for a short period. Under this technique, if the assessee is found to have earned the income found as a result of search based on certain evidence for a period of, say, 10 days, the assessee can be said to have earned the same income for the whole of the year or may be for all the years covered under assessment.

Having said so, it is pertinent to mention at the outset that it is a matter of settled legal principle that the doctrine of res judicata does not apply to tax laws so far as under the Income Tax Act each year is an independent year and the assessment is to be made for each year independently based upon the evidences available for that particular year.

However it is seen in practice that the department invariably relies on the extrapolation technique during the course of the search assessments and thereby makes arbitrary additions in the years relating to which no incrimination material has been unearthed on the pretext of some incriminating material pertaining only to a limited period/year.

Judicial Precedents:

To support its stand, the department heavily relies on the decision of the Supreme Court in the case of CST v. H.M. Esufali H.M. Abdulali [1973] 90 ITR 271 to justify the income estimated by it. In the above case, which pertains to sales tax law, the dealer had disputed the determination of turnover arrived at by the STO. On the basis of incriminating documents found at the premises of the dealer during the course of survey, while arriving at the best judgment assessment and estimating the assessee’s turnover, the STO observed that there were dealings outside the assessee’s books of account amounting to Rs. 31,171.28 during the period of 19 days. The fact of suppressed sale was established and the STO estimated the assessee’s turnover for the whole of the year on that basis. The assessee conceded that those bills belonged to him and the entries therein related to his dealings. The Supreme Court observed that it was proved and admitted that the assessee was dealing outside the accounts during the period of 19 days and that his dealings outside the books during that period stood at the value of Rs. 31,171.28 and that from this, it was open to the STO to infer that the appellant was dealing outside his books of account. The Supreme Court upheld the estimate of turnover made by the STO for the whole year. However, while upholding the estimate, the Supreme Court had made a qualification to the effect that the estimate should not be arbitrary and should have a nexus with the facts which had been discovered. It was stated that the basis adopted should be relevant to the estimate made. It was also stated by the Court that the assessing authority, while making a best judgment assessment, no doubt, should arrive at its conclusion on a rational basis without any bias and should not be vindictive or capricious. The prime issue before the Supreme Court while deciding the matter was whether estimate made in the best judgment assessment based on proper facts and material could be challenged just because of the fact that a precise estimate has not been made. Where it is purely a question of making estimate, it has been held by Supreme Court, that the estimate of the Assessing Officer should not be disturbed, provided it is fair and bona fide.

The Hon’ble Punjab and Haryana High Court in case of Tara Singh V ITO [2017] 81 taxman 293 (Punjab & Haryana) held that the assessing officer in a best judgment assessment can resort to a bona fide estimate based on a rational basis.

The Hon’ble Mumbai ITAT in case of ACIT V Giriraj Developers[2017] 82 taxman 54 (Mumbai – Trib.)

Facts:-

During the course of survey upon the assessee-firm one document was found with regard to sale of a shop involving cash component. The assessee had sold 5 shops during the year and on the basis of document impounded during the course of survey it was held by the Assessing Officer that during the year under consideration the assessee had also received cash on sale of said shops and brought to tax the same as undisclosed income of the assessee.

Held:-

The law clearly stipulated and put the burden upon the shoulders of the assessee to show that other shops did not have a cash component at all or the sales consideration of the remaining shops having identical location and other contribution was equivalent to their agreement value only. Nothing had been brought during the course of assessment proceedings in this regard by the assessee. The Assessing Officer also failed in bringing any further information or evidence on record in this regard. In the circumstances, the issue was restored back to the file of the Assessing Officer to give the assessee an opportunity to bring requisite evidences to show that market value of those shops were equivalent to the amount on which transactions had been done. 

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