2017 (12) TMI 920 - AT - Income Tax

Undisclosed income on account of the speculation losses in block assessment - imagination of undisclosed income within the meaning of Section 158BB - articles shown to the department prior to the search - Held that - Nothing is brought on record, whether the A.O. at the assessment stage has allowed cross-examination to such statements on behalf of the assessee-company. Therefore, such statements have otherwise been cannot be read in evidence against the assessee- company. It is also brought on record that ultimately the persons who made the statements after the search have retracted from their statements by filing affidavits and their statements have been recorded thereafter. But A.O. did not discuss anything on this aspect in the assessment order. Therefore, there were nothing on record to disallow the speculation losses suffered by assessee-company in block assessment because it was accepted by the Revenue Department in scrutiny assessments prior to the date of search. The decisions relied upon by Ld. D.R. would not support the case of the Revenue. Considering the totality of the facts and circumstances of the case, it is clear that assessee-company did not earn any undisclosed income on account of the speculation losses in block assessment under Chapter-XIVB of the I.T. Act, 1961. Therefore, the A.O. was not justified in making the additions. As regards addition on account of difference in valuation as reported by the assessee-company and computed by the Valuation Officer, it is clear that no incriminating material or evidence was found during the course of search so as to indicate any unaccounted investment in the property. The reference to the DVO was made after the search which could not be construed as incriminating material or document found during the course of search. Therefore, such addition also could not be made in the block assessment. The addition of ₹ 65,609 is accordingly, deleted.

Summary

Issues Involved:
1. Validity of the search warrant and the block assessment order.
2. Disallowance of speculation losses as undisclosed income.
3. Addition on account of investment in property renovation.

Issue-wise Detailed Analysis:

1. Validity of the Search Warrant and the Block Assessment Order:
The assessee challenged the block assessment order on the grounds that there was no authorization of search against the assessee-company. The Tribunal initially found that the department could not produce any authorization for conducting the search specifically in the name of the assessee-company, leading to the block assessment being quashed. However, upon appeal, the High Court found the warrant of authorization was indeed in the name of the assessee-company, reversing the Tribunal's decision and remanding the matter back to the Tribunal for a fresh examination on merits.

2. Disallowance of Speculation Losses as Undisclosed Income:
The assessee-company, an investment company, was alleged to have facilitated the ploughing back of undisclosed income of the flagship company of the Mody Group, HDC, through arranged speculative share transactions. The AO disallowed speculation losses of ?1.11 crores (A.Y. 1993-94) and ?83,18,750 (A.Y. 1994-95), totaling ?1,94,18,750, considering them sham transactions and adding them as undisclosed income. The Tribunal found that these losses were disclosed in regular assessments prior to the search and were accepted by the Revenue Department. The Tribunal held that no incriminating material was found during the search to support the disallowance and that the addition was based on post-search inquiries, which are not permissible under Chapter XIVB. The Tribunal emphasized that the statements of brokers and other individuals, recorded post-search, were not under section 132(4) and thus could not be used as evidence against the assessee-company. The Tribunal concluded that the speculation losses were genuine and deleted the addition.

3. Addition on Account of Investment in Property Renovation:
The AO made an addition of ?65,609 based on the difference between the reported investment in property renovation and the valuation by the Departmental Valuation Officer. The Tribunal found that no incriminating material or evidence was discovered during the search to indicate any unaccounted investment in the property. The reference to the DVO was made post-search, and thus, it could not be construed as incriminating material found during the search. Consequently, the Tribunal deleted the addition.

Conclusion:
The Tribunal set aside the block assessment order, deleting the entire additions of ?1,94,18,750 on account of speculation losses and ?65,609 on account of property renovation investment, concluding that no undisclosed income was earned by the assessee-company for the block period. The appeal of the assessee was allowed.