2019 (1) TMI 891 - HC - Income Tax

Undisclosed investments - Additions based on balance-sheet submitted to the Bank for obtaining loan - Block assessment u/s 158BC - Block Period - undisclosed income detected under four separate heads of under-invoicing, undisclosed sales, investments in unaccounted purchases, and interest income - AO found that the undisclosed income was in excess of the undisclosed investments - Held that - We have already found that there is lack of material insofar as the prior years of the block period, but the same has been held to be inconsequential, in so far as the A.O being conferred with the power to make assessment in the best of his judgment. The AO was perfectly justified in carrying out an assessment on the best of judgment, making estimations on the basis of the materials recovered. In the instant case a block period of 6 years. There is also no presumption insofar as the suppression having occurred only in the year in which the search was conducted. If at all, the presumption is otherwise insofar as the special procedure prescribed under Chapter XIV-B to assess undisclosed income for a block period, comprising of assessment years prior to the date of search, on the basis of the materials recovered at the search and other other evidences available before the AO relatable to such material. At the risk of repetition, it has to be noticed that the block assessment prescribed under Chapter XIV-B also confers power on the AO to make assessment on the best of judgment. Question Nos.(i) and (ii) are answered in favour of the Revenue and against the assessee. We hence set aside the order of the Tribunal and the first appellate authority and confirm the under-invoicing of sale bills at ₹ 90,50,924/-. Undisclosed purchases - There is no claim by the assessee that the Bank did not eventually grant the loan and even if it was so, it was incumbent upon the assessee to establish that the balance-sheet was not prepared in accordance with law and not based on the actual stock retained in the assessee s premises. The fact that there was a lesser stock at the end of the year only raises a presumption that the excess stock as disclosed in the balance-sheet and profit and loss account filed before the Bank was sold off in the intervening period. In such circumstances, there is absolutely no error in law on the AO relying on the same and adding on an undisclosed income on the basis of the unexplained investment in the unaccounted purchases. We, hence, answer question No.(iii) against the assessee and in favour of the Revenue. We also find that the reliance placed on the balance-sheet and profit and loss account as obtained from the Bank in pursuance of the enquiry conducted after the search was a material relatable to the suppression established on search. On the question of estimation made by the AO at the rate of ₹ 5 lakhs per year, we find the same to be unreasonable. As we have found, the unaccounted purchases would have been sold in the intervening period. Hence, in the very same assessment year in which the purchases were made, the sale has to be presumed and the profit on such sale has to be treated as undisclosed income of the assessee. We direct the AO to add gross profit at 10% to the unaccounted purchases and make addition of profit alone being ₹ 2,86,630/- especially since the unaccounted purchases has already been added on as an undisclosed income. We, hence, answer question No.(iv) partly in favour of the assessee and partly in favour of the Revenue. On the undisclosed interest income, we find that there is absolutely no basis for the AO to have taken the figures from the rough book and converted it into lakhs. We do not think, there is any basis for the additions made. We, hence, answer question No.(v) in favour of the assessee and against the Revenue and confirm the deletion of the undisclosed interest income made by the AO. Gifts and loans disclosed in the block returns of the Director - On question No.(vi) raised, we find on the aspects in which it was held in favour of the Revenue that the Tribunal had egregiously erred and acted in a perverse manner. We, hence, confirm the addition made by the AO. We also reduce from the total, NRE gifts and loans as disclosed from the block returns of the Directors, coming to ₹ 15,19,000/-. The appeal would stand partly allowed.

Issues Involved:
1. Undisclosed investments.
2. Undisclosed income from under-invoicing.
3. Unaccounted purchases and sales.
4. Undisclosed interest income.
5. Legality of estimation methods for undisclosed income.

Issue-wise Detailed Analysis:

1. Undisclosed Investments:
The assessment order challenged by the assessee before the Tribunal included undisclosed investments in excess stock, land and property, gifts and loans from non-residents, office building investments, and property development. The appellate authority confirmed the undisclosed investment in excess stock at ?19,61,480/- after allowing a reduction for broken materials. The investment in land and property was reduced to ?1,51,000/- based on agreements recovered, and gifts and loans were confined to ?84,000/-. The investment in the office building was confirmed at ?1,25,720/-, and the development of property at Kothakulangara was set aside due to lack of evidence. The total undisclosed investment confirmed was ?23,22,200/-.

2. Undisclosed Income from Under-invoicing:
The AO found suppression of sales at 10% for each assessment year in the block period. The first appellate authority limited this to the year of the search (2000-2001) due to lack of material evidence for other years. The Tribunal upheld this, relying on the decision in CIT v. J.K.Narayanan, which stated that additions of undisclosed income could be made only based on search materials. The Tribunal found the estimation for other years unsustainable due to the absence of tangible material.

3. Unaccounted Purchases and Sales:
The AO determined undisclosed investments in purchases at ?28,66,305/- and corresponding unaccounted sales at ?25 lakhs for the block period. The appellate authority set aside these additions, finding the balance-sheet submitted to the Bank unreliable and not recovered during the search. The Tribunal affirmed this decision, emphasizing that the balance-sheet figures were anomalous and not admissible in block assessment proceedings.

4. Undisclosed Interest Income:
The AO added ?66,65,000/- as undisclosed interest income based on a diary named "Essar Collection Book," decoding the figures as lakhs. The first appellate authority found this determination baseless and set aside the entire interest income addition. The Tribunal upheld this decision, finding no basis for the AO's decoding.

5. Legality of Estimation Methods for Undisclosed Income:
The Tribunal's decision was challenged on several grounds, including the correctness of limiting under-invoicing additions to the year 2000-01, the legality of estimating income for prior years without specific evidence, and the reliance on the balance-sheet submitted to the Bank. The Tribunal was found to have acted perversely in deleting additions made by the AO. The High Court held that the AO was justified in making estimations based on materials recovered during the search and other relevant information. The Tribunal's decision to limit under-invoicing additions to one year was set aside, and the AO's estimation of under-invoicing at 10% for the block period was restored.

Conclusion:
The High Court upheld the AO's power to make best judgment assessments and estimations based on materials recovered during the search and other relevant information. The Tribunal's decisions were partly set aside, and the AO's additions for under-invoicing and unaccounted purchases were restored. The appeal was partly allowed, confirming the total undisclosed income at ?1,06,84,859/- after reducing disclosed gifts and loans.

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