2010 (5) TMI 648 - AT - Income Tax

Block assessment - undisclosed income - Held that - No evidence found as a result of search - undisclosed income has been computed merely on the basis of the surrender made by the assessee in the course of the block assessment proceedings. De hors the surrender there is no evidence which could have been said to have been found as a result of the search and therefore the computation of undisclosed income by the Assessing Officer in the block assessment proceedings cannot be construed as a determination of undisclosed income contemplated under section 158BC(c) or 158BB addition is not made on the basis of any evidence found in the course of search the penalty imposed by the Assessing Officer under section 158BFA(2) is not sustainable - appeal of the assessee is allowed.

Summary

Issues Involved:
1. Invocation of Section 158BFA(2) of the Income-tax Act.
2. Confirmation of penalty amounting to Rs. 12,36,060.
3. Submission of return of income for the block period.
4. Rejection of books of account and estimation of gross profit.
5. Alleged concealment of income and cooperation with the Department.
6. Lack of evidence found during the search operation.
7. Applicability of precedents and judicial decisions.

Issue-wise Detailed Analysis:

1. Invocation of Section 158BFA(2) of the Income-tax Act:
The core issue revolves around the invocation of Section 158BFA(2) by the Assessing Officer (AO) and the subsequent confirmation of the penalty by the Commissioner of Income-tax (Appeals). The assessee argued that the penalty was wrongly imposed as there was no undisclosed income found during the search operation.

2. Confirmation of Penalty Amounting to Rs. 12,36,060:
The penalty of Rs. 12,36,060, which is 2000% of the tax payable on the alleged undisclosed income, was upheld by the Commissioner of Income-tax (Appeals). The assessee contended that the penalty was unjustified as the income was declared "nil" in the block return and the addition was made by estimating the gross profit at a higher rate without any substantial evidence.

3. Submission of Return of Income for the Block Period:
The assessee submitted the return of income for the block period within the due time as mentioned in the notice under Section 158BC(a). The return declared "nil" undisclosed income, which the AO did not accept, leading to the imposition of the penalty.

4. Rejection of Books of Account and Estimation of Gross Profit:
The AO rejected the books of account and increased the gross profit on an estimated basis. The assessee argued that no undisclosed income was found during the search, and the estimation was arbitrary. The Tribunal noted that the addition was made based on information available with the AO regarding under-recording of purchase consideration, which was not related to any evidence found during the search.

5. Alleged Concealment of Income and Cooperation with the Department:
The assessee contended that the acceptance of the inflated gross profit was to avoid unnecessary tension and expedite the proceedings. The cooperation was misconstrued as an admission of concealment of income by the AO and the Commissioner of Income-tax (Appeals).

6. Lack of Evidence Found During the Search Operation:
The Tribunal emphasized that no evidence was found during the search that suggested any undisclosed income or warranted an addition based on a higher gross profit rate. The Tribunal referred to Section 158BB(1), which mandates that undisclosed income for the block period must be computed based on evidence found during the search and other related material.

7. Applicability of Precedents and Judicial Decisions:
The assessee relied on the Tribunal's decision in the case of the husband of the assessee, where a similar addition was made by estimating the gross profit, and the penalty under Section 158BFA(2) was not imposed. The Tribunal also referred to the Delhi High Court's judgment in CIT v. Harkaran Das Ved Pal, which held that if the computation of undisclosed income is based on material other than what was found during the search, it cannot be treated as undisclosed income determined under Section 158BC(c), and hence, no penalty under Section 158BFA(2) can be imposed.

Conclusion:
The Tribunal concluded that the penalty imposed under Section 158BFA(2) was not sustainable as the addition was not based on any evidence found during the search. The Tribunal followed the Delhi High Court's judgment and held that the undisclosed income must be determined based on evidence discovered during the search. Since no such evidence was found in this case, the penalty was set aside, and the appeal of the assessee was allowed.