2002 (9) TMI 388 - AT - Income Tax

Summary

Issues Involved:

1. Addition of interest earned on Income-tax refund.
2. Additions made by applying the provisions of section 145 of the Income-tax Act, 1961.
3. Assessment of income for the block period.
4. Additions on account of unexplained liability towards crusher payable.
5. Application of gross profit rate additions in block proceedings.
6. Charging of interest under section 158BFA.

Issue-wise Detailed Analysis:

1. Addition of Interest Earned on Income-tax Refund:

The assessee contested the addition of Rs. 25,227 made by the Assessing Officer (AO) on account of interest earned on an Income-tax refund for the assessment year 1996-97. The AO treated this as undisclosed income, but the assessee argued that this income was already known to the department and should not be part of the block assessment. The Tribunal agreed with the assessee, noting that the department was aware of the interest income and it should not be treated as undisclosed income. The Tribunal cited the Delhi High Court's decision in L.R. Gupta v. Union of India, emphasizing that undisclosed income implies an intention to hide the income from the department. The addition was deleted.

2. Additions Made by Applying the Provisions of Section 145:

For the assessment years 1997-98 and 1998-99, the AO applied section 145 to estimate the assessee's income at 8% of the gross contract receipts, as no books of account were produced during the search or block assessment proceedings. The Tribunal noted that the receipts were deposited in the bank and subject to TDS, and thus could not be considered undisclosed. The Tribunal referenced several case laws, including CIT v. Shamlal Balram Gurbani and CIT v. Shambulal C. Bachkaniwala, which supported the assessee's position that income subject to TDS and recorded in bank accounts should not be treated as undisclosed. The Tribunal directed the AO not to consider the income as undisclosed for the block period.

3. Assessment of Income for the Block Period:

The Tribunal discussed the principles governing block assessments, noting that only undisclosed income detected as a result of search can be taxed under Chapter XIV-B. The Tribunal reiterated that the AO was not justified in treating the income for the period 1-4-1997 to 9-10-1997 as undisclosed, as the contract receipts were already recorded in the bank accounts and subject to TDS. The Tribunal emphasized that the due dates for filing the returns for the assessment years 1997-98 and 1998-99 were after the date of search, further supporting the assessee's position.

4. Additions on Account of Unexplained Liability Towards Crusher Payable:

The AO added Rs. 3,30,967 and Rs. 5,20,445 for the assessment years 1996-97 and 1997-98, respectively, considering the liabilities as undisclosed income. The assessee argued that the liabilities should be considered as a whole and not individually, and that the AO's approach was based on suspicion without substantive evidence. The Tribunal agreed with the assessee, noting that the AO had applied section 145 to reject the books of account, and thus could not rely on the same books to make further additions. The Tribunal cited the Andhra Pradesh High Court's decision in Indwell Constructions v. CIT, which held that once books are rejected, the revenue cannot rely on the same books for specific disallowances. The additions were deleted.

5. Application of Gross Profit Rate Additions in Block Proceedings:

The Tribunal addressed the issue of applying a gross profit rate of 8% in block proceedings, noting that the assessee did not seriously contest this application. However, the Tribunal emphasized that once a net profit rate is applied, all expenses are deemed allowed to that extent, and no further disallowance should be made on account of unpaid liabilities. The Tribunal directed the AO to allow the benefit of depreciation, salary, and interest to partners for the relevant period.

6. Charging of Interest Under Section 158BFA:

The Tribunal referred to its earlier decision in M/s Narula Transport Co., Amritsar v. ACIT, where it was held that interest under section 158BFA should not be charged if the delay in filing the block return was beyond the assessee's control. The Tribunal noted that the assessee was prevented from filing the return in time due to the department's delay in providing photocopies of seized documents. Following the precedent, the Tribunal directed the AO not to charge interest under section 158BFA.

Conclusion:

The appeal was partly allowed, with significant deletions of additions made by the AO and directions to not treat certain incomes as undisclosed for the block period. The Tribunal emphasized the principles of fairness and reliance on substantive evidence in block assessments.