2020 (10) TMI 752 - AT - Income Tax

Block assessment order on the issue of limitation - Time limit for completion of block assessment - special audit u/s.142(2A) - time limit available for completing assessment in terms of proviso to Explanation 1 to section 158BE - AR contended that the Hon ble Bombay High Court did not render any specific adjudication on the validity of second order u/s.142(2A) in its interim order dated 3.6.2008 and hence the period of limitation should not considered with reference to such date - HELD THAT - There remains no iota of doubt on this position, when we observe that the writ petition filed against the second order u/s 142(2A) was eventually withdrawn by the assessee. We hold that the block assessment order passed by the AO on 26.6.2008 is within the limitation period seen in the light of clause (ii) of Explanation 1 to section 158BE read with the proviso. Ex consequenti, these grounds are dismissed. Unexplained investment in Sai Farm House and Cattle Shed - HELD THAT - Despite the fact that the amount of investment in Cattle Shed as per the seized material was ₹ 2,77,727/-, the AO preferred to go with the higher value, on the basis of Registered valuer s report, at the time of determining total undisclosed income towards the investment in Cattle Shed. While considering undisclosed investment in Sai Farm House, the AO adopted the value as per the seized material, which was more than the amount determined by the Registered Valuer at ₹ 37,05,500/- and the DVO at ₹ 49,76,921/-. However, while finding out unexplained investment in Cattle Shed, the AO chose to go with the higher value given by the Registered Valuer in preference to the amount as appearing in the seized material. Such approach, in our considered opinion, is not correct. The AO was supposed to determine the extent of undisclosed income towards undisclosed investment in Sai Farm House and Cattle shed on the basis of seized material. The total amount which called for the addition comes to ₹ 57,66,245/- (₹ 54,88,518 ₹ 2,77,727). As against this, the assessee voluntarily declared undisclosed income of ₹ 53,91,887/-. This shows that further addition on this score is called for at ₹ 3,74,358/-. We, therefore, restrict the addition made and sustained in the first appeal at ₹ 13,34,231/- to ₹ 3,74,358/-. This sub-ground is partly allowed. Disallowance of Bad Debts in relation to Vaishnavi Petrol Pump - HELD THAT - We are concerned with the sale of petrol and diesel etc. outside the books of account, which runs on thin margin. Once there is a cycle of making purchase of petrol and diesel etc. outside and books of account and its later sale, the AO should have considered the profit element from such sale and the initial investment. As against the total sale outside the books of account at ₹ 1.59 crore, the assessee itself offered undisclosed income of ₹ 68.69 lakh. It is duty of the authorities to guide the assessee, if there is some excess offering of income on a misconception and then correct it. Attempt should be to determine correct income and not to take undue advantage of the assessee s ignorance. Since the suo motu offering of income by the assessee on this count is much more than the income that ought to have been offered, if properly instructed, we order to delete the addition of ₹ 90.51 lakh. Disallowance of Bad Debts relating to M. S. Swami Petrol Pump - HELD THAT - The combined position of both the petrol pumps on this score is that there were gross sales outside the books of account at ₹ 2.28 crore (₹ 1.59 crore plus ₹ 68.57 lakh). Combined amount of bad debts is ₹ 1.01 crore (₹ 80.51 lakh plus ₹ 20.86 lakh). Combined net good sales made outside the books of account come to ₹ 1.27 crore (₹ 2.28 crore minus ₹ 1.01 crore). As against this, the combined amount offered by the assessee is ₹ 73.73 lakh (₹ 68.69 lakh plus ₹ 5.04 lakh). This gives income at the rate of 58% of the net sales made outside the books of account. When we consider the lower level of profit on the sale of petrol and diesel etc., this amount turns out to be much more than the normal initial investment in such type of business and the profit thereon. Addition u/s 40A(3) could not be made in the computation of undisclosed income u/s.158BC - See DHANVARSHA BUILDERS AND DEVELOPERS (P.) LIMITED. 2005 (10) TMI 276 - ITAT PUNE-A

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3) read with section 158BC.
2. Limitation period for completion of block assessment.
3. Addition towards unexplained investment in Sai Farm House and Cattle Shed.
4. Disallowance of Bad Debts related to Vaishnavi Petrol Pump.
5. Disallowance of Bad Debts related to M. S. Swami Petrol Pump.
6. Unexplained assets over liabilities of two petrol pumps.
7. Addition under section 40A(3) of the Income-tax Act.

Issue-wise Analysis:

1. Validity of the Assessment Order:
The assessee argued that the assessment order should have been passed under section 144 read with section 158BC instead of section 143(3) read with section 158BC due to a default as per section 144. This additional ground was dismissed as no argument was advanced during the hearing.

2. Limitation Period for Completion of Block Assessment:
The search was conducted on 27-08-2002, and the assessment should have been completed by 31-08-2004. However, the assessee filed an application before the Settlement Commission, which was rejected on 19-06-2006. The time limit was extended to 18-08-2006. The assessment order was passed on 26-06-2008. The Tribunal analyzed section 158BE and its explanations, concluding that the period during which the special audit was ordered and the writ petition was pending should be excluded. The final judgment by the Bombay High Court on 03-06-2008 allowed the AO 60 days to complete the assessment, making the assessment order within the limitation period.

3. Addition Towards Unexplained Investment in Sai Farm House and Cattle Shed:
The AO determined the total undisclosed investment at ?66,26,118/-, but the assessee declared ?53,91,887/-. The Tribunal found that the AO should have considered the amount as per the seized material for both Sai Farm House and Cattle Shed, totaling ?57,66,245/-. The addition was restricted to ?3,74,358/-.

4. Disallowance of Bad Debts Related to Vaishnavi Petrol Pump:
The AO added ?90,51,032/- as bad debts, which the assessee claimed were not recoverable. The Tribunal noted that the documents found at the time of search supported the assessee's claim of bad debts amounting to ?80,51,032/-. The Tribunal deleted the addition, emphasizing that the correct income should be determined without taking undue advantage of the assessee's ignorance.

5. Disallowance of Bad Debts Related to M. S. Swami Petrol Pump:
The AO added ?63,53,316/- as bad debts. The Tribunal found that the facts were similar to the Vaishnavi Petrol Pump case. The Tribunal accepted the bad debts of ?20,86,788/- and deleted the addition, considering the combined sales and bad debts of both petrol pumps.

6. Unexplained Assets Over Liabilities of Two Petrol Pumps:
The AO computed unexplained assets over liabilities at ?24,14,161/-, which the CIT(A) deleted. The Tribunal found that the correct computation should consider the excess of assets over liabilities at the beginning of the block period and those pertaining to the apparent owners. The Tribunal confirmed the addition to the extent of ?9,93,429/-.

7. Addition Under Section 40A(3) of the Income-tax Act:
The AO disallowed ?2,01,43,022/- under section 40A(3) for cash payments exceeding ?20,000/-. The CIT(A) deleted the addition, and the Tribunal upheld this decision, noting that section 40A(3) does not apply to block assessments as per several judicial precedents.

Conclusion:
Both the appeals were partly allowed. The Tribunal provided a detailed analysis of each issue, considering the relevant legal provisions and judicial precedents, ensuring a fair and comprehensive judgment.