2011 (4) TMI 883 - HC - Income Tax

Reopening of assessment - Set off of suppressed sales with the excess stock detected at the time of survey - Held that - Undisputedly in the previous two assessment years 1995-96 and 1996-97, there was reassessment and the undisclosed income of the assessee was disclosed and the assessee made payment of tax on those undisclosed incomes. Once such fact is established and is not in dispute, substance in the contention of assessee that while considering the assessment for the year 1997-98, it was the duty of the AO to consider the question of set-off on account of intangible additions made in the past against unexplained income of the assessee over which he paid tax. Set aside the order passed by the Tribunal and direct AO to give effect to the principle of set-off on account of intangible additions after considering the final reassessment of the previous two assessment years, viz., 1995-96 and 1996-97 - in favour of assessee.

Summary

Issues:
- Set-off of intangible additions against excess stock
- Consideration of undisclosed income from previous assessment years for set-off

Analysis:
1. Set-off of intangible additions against excess stock:
- The appeal raised questions regarding the justification of not allowing the set-off of intangible additions made in the past on account of suppressed sales with the excess stock detected at the time of survey. The Tribunal dismissed the appeal, leading to the current appeal.
- The appellant argued that undisclosed incomes from previous assessment years, which became lawful property after payment of tax, should be allowed as a deduction against unexplained cash. The contention was that once undisclosed profits were assessed and taxed, they could be brought into the books for distribution or other purposes.
- The Revenue opposed this argument, stating that the reassessment in previous years had been accepted by the assessee and could not be reopened. However, the Court found merit in the appellant's contention.
- The Court held that the Assessing Officer should have considered the set-off of intangible additions against unexplained income over which tax had been paid in previous assessment years. The Tribunal had failed to address this critical aspect, leading to the order being set aside.

2. Consideration of undisclosed income for set-off:
- The Court noted that in the previous assessment years of 1995-96 and 1996-97, undisclosed income was disclosed, and tax was paid on it. Given this undisputed fact, the Court agreed with the appellant's advocate that the Assessing Officer should have considered the set-off of intangible additions in the subsequent assessment year of 1997-98.
- The order passed by the Tribunal was set aside, directing the Assessing Officer to apply the principle of set-off based on the final reassessment of the previous two assessment years. If tax had been paid on undisclosed income detected during the survey in those years, the Assessing Officer should allow the set-off in the assessment for the year 1997-98.

In conclusion, the Court allowed the appeal, setting aside the Tribunal's order and directing the Assessing Officer to consider the set-off of intangible additions against undisclosed income from previous assessment years. The formulated questions were answered in favor of the assessee, and no costs were awarded in the circumstances.