2014 (2) TMI 1118 - HC - Income Tax

Search u/s 132 of the Act - Block Assessment Reference made to DVO for valuation u/s 133(6) of the Act - Notice under Section 158-BD of the Act issued Held that - During the course of search, no incriminating documents were traced As on the date of search, the building was not completed and there was no income from the building - There was no positive comments from the DVO with regard to suppression of material facts by the assessee which would amount to undisclosed income - The difference in the cost of construction cannot constitute undisclosed income for the block period - On verification of the revised report submitted by the DVO, the differences between the valuation of the assessee- Firm and the DVO is less than 15% - There is no specific finding by the Assessing Officer with regard to any concealment - there was no material found during the search indicating that there were expenses incurred on construction by the assessee that were not recorded in the books of accounts - In the absence of any seized material and solely on the basis of the report of the DVO, there cannot be any finding with regard to the undisclosed income - No material has been found at the time of search for initiating proceedings under Section 158-BD of the Act. Rectification of mistake u/s 154 of the Act Held that - Solely on the basis of the Valuation report, block assessment cannot be made - it is not open to the appellant to tax again in the guise of undisclosed income Relying upon the decision in the case of M/s. Hotel Blue Moon 2010 (2) TMI 1 - SUPREME COURT OF INDIA - the undisclosed income unearthed as a result of search - The scope and its ambit is limited in that sense to materials unearthed during the search - The Appellate Authority as well as the Tribunal after considering the matter in detail corrected the mistake committed by the Assessing Officer thus, there was no infirmity or irregularity in the order passed by the Appellate Authority and the Tribunal Decided against Revenue.

Summary

Issues Involved:
1. Validity of Block Assessment based on material detected during search.
2. Consideration of valuation report by the District Valuation Officer (DVO) as evidence.
3. Relevance of materials found during the search and their impact on undisclosed income.

Issue-wise Detailed Analysis:

1. Validity of Block Assessment Based on Material Detected During Search:
The revenue appealed against the Tribunal's decision, which dismissed the revenue's appeal and confirmed the Appellate Authority's order setting aside the Assessing Authority's order for the block period from 1-4-1989 to 28-1-2000. The respondent, a partnership firm engaged in construction, was searched on 28-1-2000, leading to the seizure of documents like bills and cheques. Based on these, a notice under Section 158-BD was issued, and the firm filed a NIL income return. The Assessing Officer, after referring to the DVO's report, assessed a difference in construction costs as undisclosed income. However, the Appellate Authority and Tribunal found that the difference in valuation was a matter of opinion and not sufficient to constitute undisclosed income for the block period. The Tribunal emphasized that no material found during the search indicated unrecorded expenses, thus dismissing the revenue's appeal.

2. Consideration of Valuation Report by the District Valuation Officer (DVO) as Evidence:
The DVO estimated the construction costs of the buildings, leading to a difference of Rs.20,97,351/- from the firm's records. The Assessing Officer added this as undisclosed income. The Appellate Authority, however, held that such differences in valuation were opinions and could not be used to tax undisclosed income in the block period. The Tribunal upheld this view, stating that without material evidence from the search indicating unrecorded expenses, the DVO's report alone could not justify the addition of undisclosed income. The Tribunal noted that the valuation difference was less than 15%, and no specific concealment was found by the Assessing Officer.

3. Relevance of Materials Found During the Search and Their Impact on Undisclosed Income:
During the search, documents like bills and cheques were seized, but no incriminating documents were found. The firm, newly established in 1998, had not completed the buildings, and there was no income from them at the time of the search. The Tribunal found no material evidence of unrecorded expenses. The Supreme Court's judgment in the case of Hotel Blue Moon emphasized that block assessments should be based on materials unearthed during the search. Similarly, the Gauhati High Court held that the DVO's report alone does not constitute material evidence for undisclosed income. The Appellate Authority and Tribunal corrected the Assessing Officer's mistake, finding no irregularity in their orders and dismissing the revenue's appeal.

Conclusion:
The High Court dismissed the revenue's appeal, affirming that the difference in construction cost valuation could not constitute undisclosed income without material evidence from the search. The appeal was found to be without merit, and the substantial questions of law were held against the revenue.