2011 (5) TMI 332 - HC - Income Tax

Block assessment under Section 158BD - Company registered in Sikkim - Search - in order to invoke provision of Section 158BD pre-condition of satisfaction of undisclosed income of the AO who conducted the search and seizure of some other assessee has to be fulfilled. - The Chennai Assessing Officer by his communication has mentioned that the appellant assessee might have claimed for depreciation in respect of the gas cylinders which were alleged to have been leased out to Feena - claim of depreciation going by definition of undisclosed income in Section 158B(b) of the Act cannot be said to be allowable or deductible expense as it is really written down value of the assets hence it cannot be said to be an income. - initiation of the block assessment based on the said communication of the Chennai Assessing Officer is without jurisdiction. The jurisdiction of initiation block assessment cannot cover in relation to any returns in which income has been disclosed whether it is assessed or not and kept pending, under Section 158BD.

Issues Involved:
1. Applicability of the Income Tax Act, 1961 to the State of Sikkim.
2. Validity of proceeding under unamended Section 158BB of the Income Tax Act, 1961.
3. Justification of sustaining an aggregate addition of Rs.16,75,29,688/- without evidence.
4. Reliance on a single judge's judgment reversed by a Division Bench.
5. Violation of principles of natural justice in making additions.
6. Inclusion of the period from 1st April 1986 to 31st March 1989 in block assessment.
7. Conditions precedent for invoking Section 158BD of the Income Tax Act, 1961.
8. Applicability of surcharge under Section 113 for searches conducted before 1st June 2002.
9. Justification of ignoring differences between original and revised balance sheets.

Detailed Analysis:

1. Applicability of the Income Tax Act, 1961 to the State of Sikkim:
The court held that the Income Tax Act, 1961 was extended to the State of Sikkim effective from 1st April 1989, as per notification No.148(E). The Act did not apply to Sikkim before this date. This conclusion was reached despite the judgment of a learned Single Judge being reversed by a Division Bench, leaving the issue open for decision before an appropriate forum.

2. Validity of Proceeding under Unamended Section 158BB:
The court noted that the proceedings were initiated based on the provisions of Section 158BB before the amendment by the Finance Act of 2002, which came into effect retrospectively from 1st July 1995. The Tribunal was correct in considering the matter under the unamended provisions applicable at the time of initiation.

3. Justification of Sustaining an Aggregate Addition of Rs.16,75,29,688/-:
The court found that the Tribunal erred in sustaining the addition without evidence found as a result of the search. The amended Section 158BB mandates computation based solely on evidence found during the search. The Tribunal's reliance on extraneous materials was legally impermissible.

4. Reliance on a Single Judge's Judgment Reversed by a Division Bench:
The Tribunal's reliance on a single judge's judgment, which had been expressly reversed by a Division Bench, was incorrect. The Division Bench's reversal rendered the single judge's judgment inapplicable.

5. Violation of Principles of Natural Justice:
The court agreed that the addition of Rs.16,75,29,688/- violated the principles of natural justice as the assessee was not afforded a reasonable opportunity to present their case. The Tribunal's findings in this regard were arbitrary and unreasonable.

6. Inclusion of the Period from 1st April 1986 to 31st March 1989 in Block Assessment:
The court held that the inclusion of the period from 1st April 1986 to 31st March 1989 in the block assessment was unjustified as the Income Tax Act, 1961 was not applicable to Sikkim before 1st April 1989.

7. Conditions Precedent for Invoking Section 158BD:
The court emphasized that the pre-condition of satisfaction of undisclosed income by the Assessing Officer conducting the search was not fulfilled. The communication from the Chennai Assessing Officer did not record the required satisfaction, making the initiation of block assessment under Section 158BD without jurisdiction.

8. Applicability of Surcharge under Section 113:
The court found that the levy of surcharge under Section 113 did not arise as the search was conducted before the insertion of the proviso on 1st June 2002. Additionally, the issue of surcharge was referred to a Larger Bench of the Supreme Court.

9. Justification of Ignoring Differences between Original and Revised Balance Sheets:
The court noted that the Tribunal failed to compare the original unaudited balance sheets with the revised audited ones. The differences between the two sets of balance sheets were material and should have been considered.

Conclusion:
The court set aside the judgment and order of the Assessing Officer and the Tribunal, holding that the block assessment was without jurisdiction. The Revenue's appeal was dismissed, and it was clarified that this judgment would not prevent or prejudice further proceedings under different chapters of the law if permissible.

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