2004 (10) TMI 19 - HC - Income Tax

AO made addition in the total income of assessee on the basis of seized documents in which explanation relating to settlement of accounts of the outgoing director and his group and negotiation with buyers for purchase of flats - The documents were not consider conclusive proof to arrive at the undisclosed income and set aside the addition

Issues Involved:
1. Determination of undisclosed income based on seized documents.
2. Validity of 100% depreciation claim on windmill installation.
3. Tribunal's computation of undisclosed income and profit margin.
4. Rejection of books of accounts and method of accounting by the Assessing Officer.
5. Tribunal's decision on the total profit and its implications on tax liability.

Detailed Analysis:

1. Determination of Undisclosed Income Based on Seized Documents:
The primary issue revolves around the materials seized during the search under Section 132 of the Income Tax Act, 1961, which included:
- Statement of accounts by V.C. Gupta for settling accounts with the outgoing Director Subba Reddy.
- Work Sheet by Chartered Accountants Giri and Prabhakar.
- Paper showing negotiations with buyers for flats.

The Assessing Officer concluded that the entire sale consideration for 85% of the constructed area was received, leading to an assessment of undisclosed income amounting to Rs.10,24,64,660/-. The Tribunal, however, computed the undisclosed income at Rs.1,64,59,292/- after giving a 40% margin for the unsold portion.

The assessee contended that the documents were meant for internal settlement purposes and did not reflect actual receipts. They argued that the actual receipts were shown in subsequent returns and taxes were duly paid. The Court found that the documents seized were not conclusive proof of undisclosed income, especially in the absence of other seized valuables or cash.

2. Validity of 100% Depreciation Claim on Windmill Installation:
The Tribunal accepted the assessee's claim for 100% depreciation on the windmill, which was commissioned on September 30, 1985, as certified by the Electricity Board. The Revenue's contention that production started on October 25, 1985, was dismissed. The Court upheld the Tribunal's decision, granting the depreciation claim to the assessee.

3. Tribunal's Computation of Undisclosed Income and Profit Margin:
The Tribunal's decision to allow a 40% margin on the estimated profit of Rs.642.00 lakhs from the Kences Enclave Project was challenged by the Revenue. The Court noted that the Tribunal's computation lacked specific findings on the reliability and relevancy of the seized documents. The Court emphasized that the seized documents alone could not be the sole criterion for estimating undisclosed income without corroborative evidence.

4. Rejection of Books of Accounts and Method of Accounting by the Assessing Officer:
The assessee questioned the Tribunal's determination of undisclosed income without the Assessing Officer explicitly rejecting the books of accounts or the method of accounting adopted. The Court observed that the Assessing Officer's reliance on the seized documents without considering actual receipts and subsequent tax payments was arbitrary and unreasonable.

5. Tribunal's Decision on Total Profit and Its Implications on Tax Liability:
The assessee argued that the Tribunal should have clarified that the amount of Rs.385.00 lakhs constituted the total profit before tax and that profits already offered should be excluded. The Court agreed that the Tribunal and the Assessing Officer failed to consider the actual receipts and tax payments reflected in the returns filed by the assessee.

Conclusion:
The Court set aside both the orders of the Assessing Officer and the Tribunal, remanding the matter back to the Assessing Officer to compute the correct undisclosed income in accordance with the law, taking into account the actual receipts and subsequent tax payments. The appeals were disposed of in these terms.

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