2022 (1) TMI 899 - HC - Income Tax

Undisclosed income of the assessee for the purpose of Chapter XIV B of the Income Tax Act - search as well as survey and initiation of the proceedings under section 158BC read with section 158BD - assessment proceedings by determining the total and undisclosed income of the assessee - assessee is aggrieved by the addition made towards certain outstanding credits over a period of time payable to the dealers which amounts were treated as income under Section 41(1) - HELD THAT - Admittedly, the assessee filed their return only after the conduct of search. Based on the same, the assessing officer computed the total and undisclosed income and made additions for the block period. In such circumstances, the assessee ought to have rebutted the same by giving cogent and reliable evidence, whereas they failed to do so. Therefore, they cannot be permitted to contend that based on the books of accounts furnished by them, the assessing officer made such additions. Further, the liabilities were shown in the books of accounts as outstanding credits and the same were not written back by the assessee and hence, the Tribunal rightly justified the additions made by the assessing officer as undisclosed income under section 41(1) of the Act, which could not be faulted with, in the opinion of this court. See A.R. ENTERPRISES AND COMMISSIONER OF INCOME-TAX VERSUS BR. SHAH AND OTHERS 2013 (1) TMI 345 - SUPREME COURT as held for the purposes of computation of undisclosed income under Chapter XIVB, an assessee can rebut the Assessing Officer's finding of undisclosed income by showing that such income was disclosed in the return of income filed by him before the commencement of search or the requisition. In other words, when section 158BB(3) is read with section 158B(b), which defines undisclosed income, we reach the conclusion that for income to be considered as disclosed income, the same should have been disclosed in the return filed by the assessee before the search or requisition - No substantial question of law.

Summary

Issues Involved:
1. Disallowance under Section 40A(3)
2. Addition of outstanding credits as income under Section 41(1)
3. Levy of interest under Section 158BFA

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3):
The Assessing Officer (AO) disallowed ?72,32,972 under Section 40A(3) of the Income Tax Act, 1961, stating that the assessee made grey market purchases exceeding ?20,000 in cash per instance from unidentified sources. The assessee contended that no single purchase exceeded ?20,000, and thus, the provisions of Section 40A(3) were invoked on presumption. The appellate authority agreed with the assessee, stating that further disallowance under Section 40A(3) is invalid when net profit is determined on estimation. The Tribunal upheld this decision.

2. Addition of Outstanding Credits as Income under Section 41(1):
The AO treated four items of outstanding credits totaling ?11,14,465 as income under Section 41(1), based on the entries in the books of accounts. The assessee argued that these amounts were withheld due to disputes over the quality of supplies and were not written off in the books of accounts. The appellate authority partly allowed the appeal, reducing the addition to ?1,56,776, noting that two trade liabilities were written off in the regular books for the financial year 2002-03 and offered to tax in the return for 2003-04. However, the Tribunal reversed this decision, restoring the AO's order, stating that the amounts were no longer payable and hence taxable, relying on the Supreme Court decision in CIT vs. T.V. Sundaram Iyengar and Sons Limited.

3. Levy of Interest under Section 158BFA:
The appellate authority found that interest under Section 158BFA is chargeable but directed the AO to re-compute the interest while passing the appeal effect order. This aspect was not further contested in the Tribunal or the High Court.

High Court's Judgment:
The High Court dismissed the assessee's appeal, affirming the Tribunal's decision. It held that the AO's addition of ?11,14,465 as undisclosed income under Section 41(1) was justified, as the amounts were shown as outstanding credits without confirmatory letters from the parties. The court noted that the assessee filed returns only after the search, and the AO's determination based on the books of accounts was valid. The High Court referenced the decisions in R. Rangasamy v. Deputy Commissioner of Income Tax and Commissioner of Income Tax, Central, Patna vs. Harsh Kochar, supporting the AO's approach. The court also cited the Supreme Court's ruling in Assistant Commissioner of Income Tax, Chennai v. A.R. Enterprises, emphasizing that income disclosed in returns filed before the search cannot be considered undisclosed income.