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2014 (1) TMI 598 - AT - Income TaxWhether order passed by the AO u/s 143(3) r.w.s 158BC and r.w.s 264 is sustainable in law as the AO did not take prior approval of the Additional CIT Held that - The learned DR has produced the copy of the approval and it is seen there from that the relevant approval as required u/s 158BG has been obtained - The legal ground raised by the assessee does not survive Decided against assessee. Whether any incriminating material was found during the course of search for initiating proceedings u/s 158BC Held that - It was found that the assessee was not maintaining proper books of accounts and has not disclosed the correct income - For invoking the jurisdiction u/s 158BC of the IT Act, there should have been a search conducted u/s 132 or books of account and other documents or assets should have been requisitioned u/s 132A - The AO should be satisfied that the assessee has not or would not disclose its correct income but for the search - The assessee has not only not maintained proper books of accounts but has also during the course of search in the sworn statement admitted to not disclosing the proper and correct income - The AO has rightly invoked the jurisdiction u/s 158BC of the Income-tax Act Decided against assessee. Whether the cash deposits recorded by the assessee in its books of accounts could be treated as undisclosed income u/s. 158B(b) Held that - Following CIT Vs. J.M.D International 2008 (9) TMI 880 - DELHI HIGH COURT - The assessee has claimed to have maintained regular books of accounts and filed returns regularly reflecting the income but the AO has not examined this claim of the assessee - If the receipts were reflected in the regular returns of the relevant assessment years falling in the block period, then they cannot be considered as undisclosed income of the assessee for the block period - The assessee has failed to file any documents in support of its claim of filing returns regularly for the relevant assessment years - The entire receipts cannot be considered as the income of the assessee. If the assessee has not been able to prove the claim of expenditure, the AO ought to have allowed reasonable expenditure The issue was set aside for fresh adjudication. Disallowance of expenses Held that - When the assessee makes a claim of expenditure, the burden is on the assessee to prove its claim with necessary evidence - The agreements of the assessee with the principles as well as the sub-contractors were seized during the course of search - The stand of the assessee has been that these documents were the evidence in proof of necessity to make the payments made by the assessee and were in the custody of the Assessing Officer - He was rightly prevented from furnishing necessary evidence before the AO in proof of the expenditure claimed by it is correct - If the assessee fails to prove its claim, the AO has to make the assessment on the basis of the material available with him - The view taken by the CIT(A) that the entire addition has to be deleted because the AO has not looked into the material available with him, is wrong - The income of the assessee not only constitutes the receipts but also the expenditure incurred by the assessee for earning those receipts The issue was set aside for fresh adjudication.
Issues Involved:
1. Validity of the assessment order under section 158BC. 2. Whether there was incriminating material found during the search to justify invoking section 158BC. 3. Treatment of receipts and expenditures, including consultancy fees, refunds, and purchase of books. 4. Estimation of undisclosed income and disallowance of claimed expenditure. 5. Whether the expenditure on books should be considered capital or revenue expenditure. 6. Compliance with procedural requirements under section 158BG. 7. Treatment of bank deposits as undisclosed income. 8. Re-computation of income for the broken period. Detailed Analysis: 1. Validity of the Assessment Order under Section 158BC: The assessee argued that the assessment order passed under section 143(3) read with section 158BC and section 264 was unsustainable as the Assessing Officer (AO) did not obtain prior approval from the Additional CIT as required under section 158BG. The Tribunal found that the relevant approval had been obtained and thus rejected this ground of appeal. 2. Incriminating Material for Invoking Section 158BC: The assessee contended that there was no incriminating material found during the search to justify invoking section 158BC. The Tribunal noted that the search revealed the assessee was not maintaining proper books of accounts and had admitted to not disclosing proper income in sworn statements. The Tribunal concluded that the AO rightly invoked jurisdiction under section 158BC. 3. Treatment of Receipts and Expenditures: The AO observed that the assessee collected non-refundable deposits and consultancy fees from sub-contractors, which were not fully recorded in the books of accounts, leading to suppression of receipts. The CIT(A) held that the seized records were regular records maintained by the assessee and that the receipts were disclosed in the books and bank accounts. The Tribunal agreed with the CIT(A) that the expenditure for consumables, like books, should be allowed as revenue expenditure since the books became unusable after the data conversion. 4. Estimation of Undisclosed Income and Disallowance of Claimed Expenditure: The AO estimated the profit at 40% of the total receipts due to the lack of proper books of accounts and disallowed the entire claimed expenditure. The Tribunal found this estimation high and directed the AO to re-compute the undisclosed income considering comparable cases and allowing reasonable expenditure. 5. Capital vs. Revenue Expenditure: The AO treated the expenditure on books as capital expenditure, considering the books as assets. The CIT(A) and the Tribunal disagreed, holding that the expenditure was for consumables and should be treated as revenue expenditure since the books were dismembered and unusable after conversion. 6. Compliance with Procedural Requirements under Section 158BG: The Tribunal confirmed that the AO had obtained the necessary approval from the Additional CIT under section 158BG, rejecting the assessee's ground that the assessment order was procedurally invalid. 7. Treatment of Bank Deposits as Undisclosed Income: The Tribunal noted that the assessee claimed to have maintained regular books of accounts and filed returns reflecting the income. However, the assessee failed to provide evidence of filing returns regularly. The Tribunal held that if the receipts were reflected in the regular returns, they could not be considered undisclosed income. The Tribunal directed the AO to verify this claim and re-compute the income accordingly. 8. Re-computation of Income for the Broken Period: For the broken period from 31/1/2003 to 31/3/2003, the AO treated the entire receipts as income due to the lack of supporting documents. The CIT(A) deleted the addition, noting that the AO had the books of accounts but did not examine them. The Tribunal directed the AO to re-compute the income after examining the books of accounts and considering the reasonableness of the claimed expenditure. Conclusion: The Tribunal dismissed the assessee's appeals regarding the validity of the assessment order and the lack of incriminating material. It allowed the Revenue's appeals for statistical purposes, directing the AO to re-compute the undisclosed income and consider reasonable expenditure. The Tribunal emphasized the need for proper verification and consideration of comparable cases in estimating the income.
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