2013 (8) TMI 703 - HC - Income Tax

Undisclosed Capital gain - Scope of block assessment proceedings - Additions due to cross references of entries in the books of account - Transfer of membership of recognized stock exchange - CIT upheld disallowance - Tribunal deleted disallowance - Held that - Chapter XIV-B deals with the procedure for making assessment in cases of search. This block assessment is distinct and separate and independent of a regular assessment for the reason that in these block assessment proceedings, the Assessing Officer is concerned only with undisclosed income and he has no power to consider material and evidence not detected as a result of some external information or a survey or some other source other than a search, it is found that some income had escaped assessment, then it is open for the Assessing Officer to resort to a regular assessment including re-opening a completed assessment but he cannot drag these items into the block assessment proceedings envisaged under Chapter XIV-B of the Act. Thus, a block assessment proceeding is distinct and different from the regular assessment proceeding and the Chapter deals exclusively with block assessment relating to search and all other proceedings are alien to it. Whether the cross-reference in the balance sheet of the assessee and M/s Aasheesh Securities Ltd., could be treated as material on the basis of which enquiries could be made and the assessee to be reassessed on the source of income for charging income to the capital gain - Held no - decided in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Deletion of addition on account of capital gain on transfer of membership of a recognized stock exchange.
2. Validity of block assessment under Section 158BC of the Income Tax Act.
3. Consideration of cross-referenced material in block assessment.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Capital Gain on Transfer of Membership of a Recognized Stock Exchange

The primary issue in this appeal was whether the Income Tax Appellate Tribunal (ITAT) was correct in deleting the addition of Rs.48,42,517/- made on account of capital gain on the transfer of membership of a recognized stock exchange. The assessee, a Company Secretary engaged in share brokerage, had not declared this capital gain in his regular return of income. The Assessing Officer (A.O.) treated this capital gain as undisclosed income since it was only reflected in the balance sheet of Aasheesh Securities Ltd., a separate entity. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the A.O.'s addition. However, the ITAT held that the allotment of shares due to corporatisation of the membership of the stock exchange was not a transfer of capital assets and thus not chargeable to capital gains tax. The ITAT also noted that the shares were not transferred for three years due to the conditions laid down by the corporatisation of membership of the stock exchange, and when they became transferable, their value had significantly decreased, resulting in a loss. The ITAT concluded that the transaction was within the knowledge of the department prior to the search and could not be a subject matter of block assessment under Section 158BC of the Act.

Issue 2: Validity of Block Assessment under Section 158BC of the Income Tax Act

The block period for assessment after the search was between 1.4.1989 to 18.12.1999. The ITAT found that the balance sheets of Aasheesh Securities Ltd. were regularly filed by the assessee based on regular books of accounts and were not hidden from the department. The A.O. made the addition based on information already given in the balance sheet and not on any incriminating material found during the search. The ITAT emphasized that Chapter XIV-B deals with the procedure for making assessments in cases of search and is distinct from regular assessments. The A.O. in block assessment proceedings is concerned only with undisclosed income detected as a result of the search. The ITAT held that the issue of capital gain on corporatisation of the membership of the stock exchange was outside the purview of the block assessment made under Section 158BC.

Issue 3: Consideration of Cross-Referenced Material in Block Assessment

The A.O., while verifying the source of investment made by the assessee in shares of Aasheesh Securities Ltd., found that the assessee had not declared the transaction in his return. The A.O. argued that the balance sheet of the assessee and Aasheesh Securities Ltd. disclosed the transfer of shares only upon cross-reference from material recovered during the search. The department contended that it was open to make reassessment based on any material or information received during the search. However, the Tribunal and the High Court concluded that no incriminating material was found during the search, and the enquiry made by the A.O. was based on cross-reference to the balance sheet, which was already disclosed. The High Court held that the cross-reference itself would not amount to finding any new material or evidence for reassessing the assessee for capital gains. The High Court also noted that subsequent amendments to the Act allowed the A.O. to assess or reassess the total income of relevant assessment years based on evidence found in the search and post-search enquiries made on such evidence.

Conclusion:

The High Court concluded that the ITAT was correct in its findings and dismissed the income tax appeal. The court held that the cross-reference in the balance sheet did not constitute new material or evidence for reassessing the assessee for capital gains. The appeal was dismissed in favor of the assessee and against the revenue.