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2004 (3) TMI 706 - AT - Income TaxLegality of the reference to special audit u/s 142(2A) - Inquiry before assessment - Block assessment in search cases - Time-barred assessment order - trading additions sustained by the learned CIT(A) - Addition in respect of cash credits. HELD THAT - It is very much clear from the provisions of section in question that a reference by the Assessing Officer can be made only for making audit of accounts of the assessee. The Act nowhere authorises the Assessing Officer to make reference to the auditor to prepare the books of account on the basis of seized records or to make reference to the auditors to compute the undisclosed income of the different years. Special auditor appointed u/s 142(2A) of the Act can only take the audit of books of account but preparation of such accounts can be outside the jurisdiction of the special auditor. Again, we are convinced by the arguments of the learned AR that when the auditor prepares accounts, he cannot himself or itself conduct the audit of such accounts because nobody can be judge in his or her own case. Definitely this is against the ethics as well as against the established standards that no one can audit accounts prepared by himself. It is also true that any income which is determined on the basis of books of account or which is duly recorded in the regular books of account or other records, the same cannot be a part of block assessment because u/s 158BC computation of undisclosed income is to be done on the basis of assets and other documents found during the course of search which are not recorded in the regular books of account . Thus, we are of the considered opinion that reference made by the Assessing Officer for special audit is without proper jurisdiction and is bad in law and in case the assessment so made is barred by limitation of time prescribed under the Act, cannot be added to be within time by resorting to the special audit procedures. As we have mentioned above, the assessment should have been completed by 30th Nov., 1999 but the same was completed on 24th May, 2000. When the extended period of time is not available to the Assessing Officer in view of our above observations and findings, the assessment order in question is clearly time barred. So we have accepted the plea of the learned AR that the assessment order in question is time barred and also that reference to the special audit is only to gain further time for completion of the assessment and no complexity of accounts is established. It is also held that the special auditor cannot compute the income of the assessee in the manner it has been done by it. So special audit report in itself cannot be sustained. To that extent, we accept the ground taken in ground Nos. 1( a ) to 1( h ). The other portions of the ground are rejected. Block assessment - Trading additions sustained by the learned CIT(A) - On merits again, we are of the opinion that the Assessing Officer has wrongly estimated the income of the assessee on the basis of gross profit rate in respect of unaccounted sales as against the amount of net profit, which should have been earned. Tax is to be levied only on the net income and not on the gross income. The regular returns filed by the assessee are also subject-matter of regular assessment, and the income earned therein is duly assessed. It cannot be presumed that the expenses for making such undisclosed sales would have been claimed in the regular returns filed by the assessee. If income is to be assessed as undisclosed income, only the net income has to be taxed as undisclosed income. We are of the opinion that the Assessing Officer should compute the net income as per the net profit disclosed by the assessee in different years and only in those assessment years where during the course of search, the material has been found to indicate the undisclosed sales being made by the assessee. The scope for making block assessment is very clear and it shall include only undisclosed income which is found as a consequence of search. Where no evidence is found, no addition can be made because that cannot be the subject-matter of block assessment. If the material is found for some years only, the block assessment has to be made only for those years where such evidence is found. With the above direction, we order to delete the addition in toto and only that much addition shall be sustained, as we have directed above. This finding of the Bench will dispose of the ground taken by the assessee as well as the ground taken by the Department. In the result we partly allow the issue raised by the assessee and dismiss the ground raised by the Department in this regard. Addition in respect of cash credits - It appears that issues relating to Shri Trilokchand, Balcand and Shri Shankarlal where only set aside. The addition in respect of Lalit Kumar had been sustained. In set aside proceedings, this deposit of Rs. 55,000 from Balchand had also been accepted and the assessee does not have any grievance in this regard any more before us. Regarding deposit from Shri Lalit Kumar, the Assessing Officer had himself accepted it to the extent of Rs. 1,25,000. Thus, there was no justification in not accepting the other loan of Rs. 1 lakh from the said party. So in view of our above finding, this addition in respect of cash credits which are stated to be a loan from 3rd party, recorded in the diaries cannot be added in the hands of the assessee under the provisions of section 68 and on merits also, as we have explained above, these additions cannot be sustained. The result is that this ground of the assessee is allowed. In the result, the appeal of the assessee is partly allowed and the appeal of the Department is dismissed.
Issues Involved:
1. Legality of the reference to special audit u/s 142(2A). 2. Time-barred assessment order. 3. Trading additions sustained by CIT(A). 4. Addition of Rs. 4,450 for sale of motor cycle and Rs. 200 for sale of cycle. 5. Addition of Rs. 7,000 on account of short-term capital gains. 6. Deduction of interest of Rs. 21,200. 7. Addition in respect of cash credits. 8. Addition of Rs. 3,176 on account of income from Maruti Van. 9. Addition of Rs. 5,740 as business profit. 10. Addition of notional interest. 11. Legality of additions u/s 158BC. 12. Penalty u/s 158BFA. Summary: 1. Legality of the Reference to Special Audit u/s 142(2A): The reference to the special audit report u/s 142(2A) was challenged on the grounds that it was outside the scope of jurisdiction and aimed at gaining time for assessment completion. The Tribunal found that the Assessing Officer (AO) improperly delegated the task of framing an assessment to the auditor, which is beyond the scope of section 142(2A). The Tribunal concluded that the reference to the special audit was without proper jurisdiction and was bad in law. 2. Time-Barred Assessment Order: The assessment order should have been completed by 30th Nov., 1999, but was completed on 24th May, 2000. The Tribunal held that the assessment order was time-barred as the extended period of time was not available to the AO due to the improper reference to the special audit. 3. Trading Additions Sustained by CIT(A): The Tribunal found that the AO wrongly estimated the income of the assessee on the basis of gross profit rate instead of net profit rate. The Tribunal directed that only the net income should be taxed as undisclosed income and deleted the addition in toto, sustaining only the addition for years where evidence of undisclosed sales was found. 4. Addition of Rs. 4,450 for Sale of Motor Cycle and Rs. 200 for Sale of Cycle: The Tribunal dismissed the assessee's ground, holding that the addition was correctly made based on the surplus received on the sale of the motor cycle recorded in the diaries. 5. Addition of Rs. 7,000 on Account of Short-Term Capital Gains: The Tribunal dismissed the assessee's ground, holding that the addition was based on details noted in the seized material and was sustainable. 6. Deduction of Interest of Rs. 21,200: The Tribunal dismissed the assessee's ground, finding the submissions unconvincing and upholding the AO's decision to disallow the interest deduction. 7. Addition in Respect of Cash Credits: The Tribunal held that the AO's act of rejecting part of the diaries and accepting part of them was unsustainable. The provisions of section 68 were not applicable to the loans mentioned in the seized diaries. The Tribunal allowed the assessee's ground, deleting the addition. 8. Addition of Rs. 3,176 on Account of Income from Maruti Van: The Tribunal accepted the assessee's ground, holding that the loss arising from depreciation should be allowed to be set off against other income determined in the block period. 9. Addition of Rs. 5,740 as Business Profit: The Tribunal deleted the addition, agreeing with the assessee that the sales had already been included in the income and further addition would result in double counting. 10. Addition of Notional Interest: The Tribunal deleted the addition, holding that no addition can be made on the basis of notional interest which the appellant had not earned. 11. Legality of Additions u/s 158BC: This ground was general in nature and did not require adjudication. 12. Penalty u/s 158BFA: The Tribunal did not adjudicate on this ground on merits. Departmental Appeal: The Tribunal dismissed the Department's appeal, upholding the findings of the CIT(A) and rejecting further additions based on the audit report. Conclusion: The appeal of the assessee was partly allowed, and the appeal of the Department was dismissed.
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