2011 (8) TMI 764 - HC - Income Tax

Undisclosed Income - Block Assessment - The assessing authority though acted on the diaries seized during search has disputed the entries in the said book. If he wants to act on the books and hold that the assessee is liable to pay tax he cannot accept one portion of the book and refuse to accept the other portion. Either he should take the entire book as a whole and reject it as a whole. Therefore the Tribunal was justified in relying on the account books which is the subject matter of block assessment proceedings. Bad Debt - As per Section 36(1)(vii) the obligation to prove debt is bad and producing evidence is not required.

Summary

Issues:
1. Addition of undisclosed income and income tax levy based on seized diaries.
2. Treatment of loans received as cash credits.
3. Disallowance of bad debts claimed by the assessee.

Analysis:

Issue 1: Addition of undisclosed income and income tax levy based on seized diaries
The assessing officer treated the diaries maintained by the assessee as books of account, noting financial transactions and balance sheets. The officer added the balance cash credit as undisclosed income under Section 68, totaling Rs. 49.28 lakhs. The Commissioner(Appeals) partially allowed the bad debts, leading to undisclosed income of Rs. 39,38,900/-. The Tribunal held that the assessing authority erred in accepting only a portion of the diary, rejecting the rest. The Tribunal found the diary contents credible and disallowed the addition under Section 68. The Tribunal also ruled that the debts in the accounts were proven, disagreeing with the assessing authority's decision. The Tribunal set aside the orders, stating the assessing authority should accept or reject the entire book, not parts. The Tribunal's decision was based on the account books and lack of excess income beyond what was declared.

Issue 2: Treatment of loans received as cash credits
The assessing authority disputed the entries in the diaries but accepted transactions covered by cheques. However, the cash component lacked substantiation through evidence of lenders and recipients. The Tribunal considered certificates from lenders under the voluntary disclosure scheme, indicating undisclosed payments. The Tribunal upheld the account books' credibility, showing receipts, payments, and bad debts, resulting in no excess income. The Tribunal rejected the Revenue's claim of undisclosed income, emphasizing the need to consider the entire book for assessment.

Issue 3: Disallowance of bad debts claimed by the assessee
The assessing authority disallowed a significant portion of bad debts claimed by the assessee, citing lack of proof and recovery efforts. The Commissioner(Appeals) partially allowed the bad debts, but the Tribunal ruled in favor of the assessee. The Tribunal highlighted the amendment to Section 36(1)(vii), eliminating the need to prove bad debts if recorded in the accounts. As the account books showed the bad debts, the Tribunal granted the deduction, affirming the legality of its decision.

In conclusion, the High Court dismissed the appeal, favoring the assessee and rejecting the Revenue's claims. The Tribunal's decisions were upheld, emphasizing the credibility of the account books and the lack of undisclosed income or improper treatment of bad debts.