2011 (7) TMI 76 - HC - Income Tax

Search and seizure - Block assessment - transactions relating to purchase and sale of HTS wire were duly accounted in the regular books of account for the previous year ended March 31, 1993, relevant to the Assessment Year 1993-94 and those were reflected in the assessee s audited profit and loss account for the previous year ended March 31, 1993 - in course of search and seizure, a certificate of license showing that Shri Umesh Narayan Jha as proprietor of Sakti Construction who was found to be an employee of the propriety concern of D. K. Goyal was recovered - Held that so far as the addition of Rs.39, 78,315/- and a further sum of Rs. 20 lac are concerned the same should not have been assessed in block assessment under Chapter XIV B of the Act as the said findings resulting in those additions are not based on any material recovered as a result of search and seizure - merely because a license in the name of Sakti Construction was recovered from the office of the Assessee, such fact has nothing to do with the said encashment in favour of the drawer - Appeal is partly allowed

Summary

Issues Involved:
1. Whether the sums of Rs.39,78,315/- and Rs.20.00 lakh reflected in the regular books of account could form the subject matter of block assessment.
2. Whether the findings of the Tribunal upholding the disallowance of purchase of Rs.39,78,315/- for the financial year 1992-93 are arbitrary, unreasonable, and perverse.
3. Whether the findings of the Tribunal upholding the addition of Rs.20.00 lakh for the financial year 1995-96 are arbitrary, unreasonable, and perverse.
4. Whether the income-tax payable on the undisclosed income at the rate specified in Section 113 of the Income-tax Act, 1961, can be increased by the levy of any surcharge.

Detailed Analysis:

Issue 1: Subject Matter of Block Assessment
The court examined whether the sums of Rs.39,78,315/- and Rs.20.00 lakh, which were reflected in the regular books of account, could be included in the block assessment. The court concluded that the findings of the Assessing Officer (AO) regarding these sums were not based on any material recovered during the search and seizure operation. The court emphasized that block assessment under Chapter XIV-B of the Income-tax Act is intended for assessing undisclosed income unearthed as a result of search and seizure, and not for items already reflected in the regular books of account.

Issue 2: Disallowance of Purchase of Rs.39,78,315/-
The AO had disallowed the purchase of Rs.39,78,315/- on the grounds that the assessee did not require HTS wire for fabrication work and hence, the purchase was deemed bogus. The court found that this finding was not based on any material obtained during the search and seizure but was instead based on documents already reflected in the assessee's return. The AO's assumption was also based on further inquiries indicating that no such persons existed at the address given by the assessee. The court held that such a finding could not justify inclusion in the block assessment.

Issue 3: Addition of Rs.20.00 Lakh
The AO had also included two payments of Rs.10 lakh each, made to M/s. Faissan Construction and M/s. Sakti Construction, as undisclosed income. The court found that the payments were shown in the regular books of account, and the cheques were encashed as self-drawn cheques, not made to the named parties. The court concluded that the AO's finding was not based on any material recovered during the search and seizure. Therefore, the addition of Rs.20 lakh in the block assessment was deemed illegal.

Issue 4: Levy of Surcharge
The court addressed whether the income-tax payable on undisclosed income at the rate specified in Section 113 could be increased by a surcharge. The court referred to the Supreme Court decision in CIT vs. Suresh N. Gupta, which held that the proviso to Section 113 is curative in nature. Therefore, the surcharge is applicable even if the search and seizure took place before the insertion of the proviso.

Conclusion:
The court modified the Tribunal's order, directing that the sums of Rs.39,78,315/- and Rs.20 lakh should not have been assessed in the block assessment under Chapter XIV-B as the findings were not based on material recovered during the search and seizure. The court upheld the surcharge applicability as per the Supreme Court's decision. The appeal was allowed in part, answering the first issue in the negative and against the Revenue, rendering the second and third issues redundant, and answering the fourth issue in the negative and against the assessee. No order as to costs was made.