2013 (10) TMI 373 - HC - Income Tax

Block assessment - Whether material found during the search and pre/post search operations were sufficient to establish the undisclosed income as computed by the Assessing Officer - On 29.09.1987 a survey was conducted under Section 133A of the Income Tax Act in various Banks pertaining to the Accounts and Lockers of the couple - On 26.03.1998 a search and seizure operation was conducted under Section 132 of the Act at the official residence of the assessee at Butler Palace Lucknow. The Bank Accounts/Lockers of the couple were also searched. On 31.03.2000 block assessment orders were passed under Section 158BC against the couple Held that - During the search except a slip containing details of some fixed deposits with the companies worth Rs.74, 000/- (rounded up) no other material including cash and jewellery was seized from the premises. These fixed deposits have already been considered in the block assessment of Dr. Lalit Verma himself other material found was of much less value and not treated as incriminating material. The first appellate authority as well as the Tribunal after examining the entire evidence has observed that the additions had already been deleted relating to her husband Dr. Lalit Verma in whose hands additions were made on substantive basis. Regarding fixed deposits of N.B.F.C. the factual position is that remaining investments stood already disclosed (prior to the search) in the partnership firm namely M/s. Three Aces Construction & Consultants where the assessee is one of the partners. The said firm was being assessed to tax since long and the disclosures of all these transactions had duly been made there in the pre-search period. Further these additions again did not have their origin to any material found during the course of search. Regarding the firm it is an individual assessee regularly assessed to tax even in the period prior to the search - The said fixed deposits pertaining to NBFC were already disclosed in the hands of the partnership firm prior to the search - So no addition can be made in the block period. For the remaining additions which were made on the protective basis were already deleted in the hands of the assessee s husband Dr. Lalit Verma being the substantive additions are not sustainable in the eye of law for the reason that when the substantive additions were deleted then protective additions have no meaning - No incriminating material was found during the course of search in the hands of the assessee therefore no addition can be made Decided against the Revenue.

Summary

Issues Involved:
1. Validity of block assessment orders based on pre-search material.
2. Utilization of material found during search and inquiries conducted before or after the search.
3. Justification of additions made in the block assessment.
4. Deletion of additions by CIT(A) and Tribunal.
5. Substantive vs. protective additions.

Detailed Analysis:

1. Validity of Block Assessment Orders Based on Pre-Search Material:
The Department filed appeals under Section 260A of the Income-Tax Act, 1961, against the orders of the Income Tax Appellate Tribunal (ITAT) concerning block assessments for the period 01.04.1987 to 26.03.1998. The primary issue was whether the block assessments could include material gathered before the search. The ITAT observed that the Assessing Officer (A.O.) used material available before the search, which was not permissible. The Tribunal directed that the block assessment should be based solely on material found during the search on 26.03.1998.

2. Utilization of Material Found During Search and Inquiries Conducted Before or After the Search:
The High Court addressed whether assessments could include information obtained before or after the search. The Finance Act, 2002, amended Section 158BB(1) to allow assessments based on material found during the search and information gathered during inquiries related to the search. However, the court emphasized that only material directly related to the search could be used for block assessments, as per the case of CIT vs. Ravi Kant Jain and CBDT Circular No. 8 of 2002.

3. Justification of Additions Made in the Block Assessment:
The A.O. made various additions based on pre-search inquiries and material. The CIT(A) and ITAT repeatedly found that these additions were not based on material found during the search, thus falling outside the scope of block assessments. The court upheld these findings, stating that additions must be based on search-related material.

4. Deletion of Additions by CIT(A) and Tribunal:
The CIT(A) and ITAT deleted most additions, observing that they were not based on search-related material. For instance, the CIT(A) deleted an addition of Rs. 74,276 by verifying TDS and confirming that the amount could not be treated as undisclosed income. The ITAT endorsed these deletions, and the High Court found no reason to interfere with these decisions.

5. Substantive vs. Protective Additions:
In the case of the assessee's wife, the additions were made on a protective basis. The CIT(A) and ITAT found that these additions were already disclosed in regular assessments or were not based on search material. The High Court agreed, stating that protective additions have no meaning if substantive additions are deleted.

Conclusion:
The High Court dismissed the Department's appeals, affirming that block assessments must be based solely on material found during the search. The court upheld the deletions made by the CIT(A) and ITAT, emphasizing that pre-search material could not justify additions in block assessments. The substantial questions of law were answered in favor of the assessees and against the Department.