2014 (9) TMI 786 - HC - Income Tax

Computation of undisclosed income of the block period u/s 158BB Held that - The record is not clear as to whether there existed any unabsorbed loss or carried forward depreciation, that spilled over the block period of the assessee - If there exists any such components, they are not liable to be adjusted - If, on the other hand, the losses or depreciations are those which are referable to the block period, they are liable to be worked out, as though it is a regular assessment which, in fact, is a mandate u/s 158BH of the Act direction has been made to pass the consequential order keeping in view the aspects pointed by the court Decided in favour of assessee.

Summary

Issues:
1. Challenge to the order of the Settlement Commission under Section 245D of the Income Tax Act.
2. Disallowance of deductions under Chapter XIV-B of the Act.
3. Scope of determination under Section 245D.
4. Computation of undisclosed income of the block period under Section 158BB.
5. Application of other provisions of the Act to block assessments.
6. Treatment of unabsorbed losses and carried forward depreciation in block assessments.

Analysis:
1. The petitioner challenged the order of the Settlement Commission under Section 245D of the Income Tax Act, contending that relevant provisions of Chapter XIV-B were not considered, resulting in the disallowance of deductions permissible by law. The petitioner argued that the provision invoked to disallow accumulated losses and carried forward depreciations should only apply if they spilled over beyond the block period, citing a Supreme Court judgment for support.

2. The respondents argued that the scope of determination under Section 245D is limited and not equivalent to adjudication under the Act. They maintained that the order passed by the Settlement Commission was in accordance with Chapter XIV-B, emphasizing that the Commission had the authority to reject claims if disclosures were unsatisfactory.

3. The computation of undisclosed income of the block period is governed by Section 158BB, which outlines the procedure for determining such income based on evidence found during a search or requisition. The Act mandates that tax be levied on the undisclosed income, applying the regular assessment procedure even for block assessments, as stated in Section 158BH.

4. Section 158BH clarifies that apart from specific provisions in Chapter XIV-B, all other provisions of the Income Tax Act are applicable to assessments made under this chapter. However, Section 158BB(4) restricts the set-off of losses brought forward from previous years or unabsorbed depreciation against undisclosed income in block assessments, preserving them for adjustment in regular assessments.

5. The judgment highlighted the importance of distinguishing between unabsorbed losses or carried forward depreciation that spilled over the block period and those specific to the block period. If losses or depreciations are related to the block period, they should be treated as in regular assessments, complying with the mandate of Section 158BH.

6. The court clarified that if there were unabsorbed losses or carried forward depreciation spilled over the block period for the petitioner, they should not be adjusted against undisclosed income. However, if these components were relevant to the block period, they should be considered akin to regular assessments, ensuring compliance with Section 158BH. The court directed the consequential order to be passed accordingly, disposing of the writ petition and the miscellaneous petition without costs.