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2007 (6) TMI 317 - AT - Income TaxNotice issued u/s 158BC r/w section 158BD - Validity of the Block assessment in search cases - Undisclosed income of any other person - satisfaction recorded by the Assessing Officer - HELD THAT - We have no hesitation in coming to the conclusion that the noting made does not meet the requirements of recording the satisfaction by the Assessing Officer of the person searched as the noting made merely states that the assessee is a firm and that no returns of income have been filed up to the date of search. The said noting does not even state that any undisclosed income belonging to the assessee has been discovered in course of search in the case of Madhuvana House Building Co-op. Society. Mere non-filing of a return does not mean that there is undisclosed income. As rightly argued by the learned counsel for the assessee, in case the assessee had suffered losses and omitted to file returns of income, it cannot be said that proceedings u/s 158BD have to be taken to assess the losses in the absence of any material discovered in course of search to show that the assessee has undisclosed income. This is the crucial aspect of the matter i.e., the discovery of undisclosed income in course of search based on material found or seized. The existence of the material showing undisclosed income must be shown and the same cannot be assumed or based on suppositions or hypothesis. In the instant case, there is absolutely no material that has been found and brought to our knowledge from which it could be said that there was undisclosed income belonging to the assessee found in course of the search. Therefore, the proceedings initiated in the instant case cannot stand, as there is no basis for the satisfaction reached and recorded by the Assessing Officer. We are also fortified in this view by the conclusions reached by the Tribunal in the case of M/s. Ramachandran Co. the sister-concern of the assessee, which was also carrying on business from the same premises at Mysore. We have held in that case that in course of the survey conducted in the business premises on 6-2-1996, the Department derived knowledge that the assessee firm was carrying on business of developing layouts and that no returns of income have been filed for certain years. We have also held that there was no statement recorded in course of search from any person to support the conclusion that the Department discovered the omission to file the return in course of search proceedings taken in the case of Madhuvana House Building Co-op. Society or in the course of search/proceedings conducted in the case of the residence of the partners. Rather, there was a statement recorded from one Sri R. Sridhar, partner of the firm, in course of the survey action from which these facts have come to light. Thus, we are of the considered view that the initiation of the proceedings u/s 158BD of the Act, purportedly based on the search conducted in the case of Madhuvana House Building Co-op Society is unjustified and accordingly, the proceedings initiated are bad in law. The order of block assessment so passed is hereby annulled. Assessment made on the assessee in the status of individual - It is seen from the assessment order that the Assessing Officer has mentioned the status of the assessee as individual in the column against status. We do not see any merit in the contentions of the assessee, as the wrong mention of status in the assessment order is only a curable error u/s 292B of the Act. Hence this ground is rejected. Assessment of any income after the period of dissolution - It is true that in course of the assessment proceedings the assessee had not advanced the contention that the firm stood dissolved on 18-9-1993 itself, but the fact remains that this is purely a legal ground and can be raised at any time as held by the Hon ble Supreme Court in the case of National Thermal Power Corpn. Ltd. v. CIT 1996 (12) TMI 7 - SUPREME COURT . However, since the assessee had not raised this plea before the Assessing Officer it would be in the fitness of things that the matter be remanded to the Assessing Officer to consider the issue in accordance with law having regard to the decisions relied upon by the assessee. If the Assessing Officer finds that the assessee firm stood dissolved on 18-9-1993 itself by virtue of section 42 of the Indian Partnership Act, 1932 then, the income after the date of dissolution cannot be assessed in the hands of the assessee firm and the same shall be excluded. Determination of undisclosed income - Applying the findings and conclusions reached by us in the case of M/s. S. Ramachandran Co. we hold that the Assessing Officer was not justified in splitting up the contract entered into by the assessee with various societies into civil works and liaison works and thereafter proceed to compute the income separately in respect of the two activities. Therefore, the method of determination of income by the Assessing Officer by splitting the contract into two phases is set aside and it is directed that the income from the business has to be computed by taking the contract as a whole. In the result, the appeal by the assessee is partly allowed to the extent indicated and discussed.
Issues Involved:
1. Validity of the block assessment under section 158BD of the Income-tax Act, 1961. 2. Assessment of the firm in the status of an individual. 3. Opportunity of hearing before the approval of block assessment. 4. Assessment of income post-dissolution of the firm. 5. Determination of undisclosed income and the method of accounting. Issue-wise Detailed Analysis: 1. Validity of the Block Assessment under Section 158BD: The primary contention was the validity of the block assessment under section 158BD. The assessee argued that the satisfaction required for invoking section 158BD was not properly recorded by the Assessing Officer (AO) as per the Supreme Court's judgment in Manish Maheshwari v. Asstt. CIT [2007] 289 ITR 341 (SC). The AO must reach a satisfaction that undisclosed income belonging to the assessee was found during the search and record this satisfaction. The Tribunal found that the satisfaction note recorded by the AO did not meet the statutory requirements as it merely stated that the assessee had not filed returns, without indicating any undisclosed income found during the search. Consequently, the Tribunal held that the initiation of proceedings under section 158BD was unjustified and annulled the block assessment order. 2. Assessment of the Firm in the Status of an Individual: The assessee contended that the assessment was made in the status of an individual, whereas the notice was issued in the status of a firm. The Tribunal found that the AO had mentioned the status of the assessee as an individual in the assessment order but proceeded on the basis that the assessee was a firm. The Tribunal held that this was a curable error under section 292B of the Act and rejected the ground. 3. Opportunity of Hearing Before the Approval of Block Assessment: The assessee argued that the Commissioner of Income-tax (CIT) had not given an opportunity of hearing before granting approval to the block assessment order. The Tribunal noted that consistent decisions of the Bangalore Benches of the Tribunal had held that there was no requirement to give an opportunity of hearing before granting approval. Hence, this ground was also rejected. 4. Assessment of Income Post-Dissolution of the Firm: The assessee claimed that the firm was dissolved upon the death of a partner on 18-9-1993, and therefore, income post-dissolution could not be assessed in the hands of the firm. The Tribunal acknowledged that this legal ground could be raised at any time and remanded the matter to the AO to consider the issue in accordance with law. If the AO finds that the firm stood dissolved on 18-9-1993, the income after the date of dissolution should be excluded from the assessment of the firm. 5. Determination of Undisclosed Income and the Method of Accounting: The assessee contended that the AO had wrongly split the single contract into civil and liaison works and computed income separately for each. The Tribunal, relying on its decision in the case of S. Ramachandran & Co., held that the contract was indivisible and should not be split. The Tribunal also held that receipts covered by Tax Deducted at Source (TDS) could not be considered as undisclosed income. The Tribunal remanded the issue of the difference in receipts to the AO for verification and held that protective additions made in the hands of the assessee were not justified. The Tribunal upheld the assessee's claim of following the completed contract method of accounting, noting that the method adopted by the AO was arbitrary and unrealistic. Conclusion: The Tribunal partly allowed the appeal, annulling the block assessment order, rejecting certain grounds, and remanding specific issues to the AO for reconsideration. The Tribunal emphasized the necessity of proper satisfaction recording under section 158BD and upheld the assessee's method of accounting, ensuring a realistic determination of income.
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