2004 (2) TMI 272 - AT - Income Tax

Summary

Issues Involved:
1. Relief of Rs. 31,89,238 in respect of 23 accounts.
2. Relief of Rs. 21,96,984 as regards bad debts.
3. Relief as regards excess stock/shortage of stock.
4. Validity of notice u/s 158BC.
5. Validity of order u/s 154 r/w s. 158BC.
6. Computation of undisclosed income based on peak credit theory.

Summary:

1. Relief of Rs. 31,89,238 in respect of 23 accounts:
The CIT(A) reduced the peak of Rs. 1.79 crores to Rs. 1,47,680, granting relief of Rs. 31,89,238 on the ground that certain accounts did not represent cash credits. The Tribunal found that the AO did not consider all the ledger accounts while working out the peak and directed the AO to recompute the peak considering all entries chronologically.

2. Relief of Rs. 21,96,984 as regards bad debts:
The CIT(A) allowed the claim of bad debts, but the Tribunal reversed this decision, stating that bad debts can only be claimed against business income and not against undisclosed income. The Tribunal restored the findings of the AO, disallowing the bad debt claim.

3. Relief as regards excess stock/shortage of stock:
The CIT(A) deleted the addition made by the AO on account of discrepancy in stock found during the survey. The Tribunal upheld the CIT(A)'s decision, stating that additions based on survey findings cannot be made in block assessments, which should be based on material found during the search.

4. Validity of notice u/s 158BC:
The assessee argued that the notice under s. 158BC was not validly issued and served. However, the Tribunal noted that this point was decided against the assessee by the Special Bench of the Tribunal in the case of Oswal Kishore & Sons vs. Dy. CIT, and thus, the additional grounds taken in cross-objections were dismissed as not pressed.

5. Validity of order u/s 154 r/w s. 158BC:
The AO issued a notice under s. 154 to rectify mistakes in the peak calculation, enhancing the undisclosed income. The CIT(A) upheld the AO's action but directed the AO to verify facts and rework the peak. The Tribunal found that the block assessment order had merged with the appellate order, and thus, the AO had no jurisdiction to rectify the order under s. 154. The Tribunal quashed the rectification order.

6. Computation of undisclosed income based on peak credit theory:
The Tribunal directed the AO to recompute the undisclosed income by arranging each credit/debit entry chronologically and preparing a day-to-day cash book. The recomputed undisclosed income should be allocated between the two firms in the same ratio as done earlier. The Tribunal emphasized that the computation should be based on the entire seized material and not on a selective basis.

Conclusion:
The Tribunal allowed the Departmental appeals partly, the cross-objections of the assessee partly, and the appeals against the order under s. 154 in favor of the assessee. The AO was directed to recompute the undisclosed income based on the entire seized material within four months.