2005 (2) TMI 444 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the block assessment order without mandatory notice under Section 143(2).
2. Legitimacy of considering Chapter VI-A deductions in block assessment.
3. Entitlement of the assessee-firm to deductions under Section 80-IA.
4. Withdrawal of deductions under Section 80HHC.
5. Validity of the block assessment based on search conducted on premises of another entity.

Detailed Analysis:

1. Validity of the Block Assessment Order Without Mandatory Notice Under Section 143(2):
The assessee-firm contended that the block assessment order was void due to the absence of a mandatory notice under Section 143(2) of the IT Act, 1961. The Tribunal admitted additional grounds and examined the legality of the block assessment initiated on the basis of the search conducted on premises not belonging to the assessee-firm at the time of search.

2. Legitimacy of Considering Chapter VI-A Deductions in Block Assessment:
The assessee-firm argued that the CIT(A) erred in concluding that deductions under Chapter VI-A could be considered in a block assessment. The Tribunal found that the AO's withdrawal of deductions under Sections 80HHC and 80-IA was based on materials already disclosed in regular assessments, which cannot be the subject of block assessment.

3. Entitlement of the Assessee-Firm to Deductions Under Section 80-IA:
The AO concluded that the assessee-firm did not fulfill the conditions for deductions under Section 80-IA, as the business was formed by the reconstruction of an existing business (BPI), involved transfer of used plant and machinery, and did not employ the requisite number of workers. The Tribunal found that the AO's conclusions were based on materials already disclosed in regular assessments and not on any new evidence found during the search. The Tribunal held that the deductions claimed were not "false" and the AO's findings were a change of opinion rather than discovery of undisclosed income.

4. Withdrawal of Deductions Under Section 80HHC:
The AO partially withdrew deductions under Section 80HHC, arguing that excessive deductions were claimed due to non-apportionment of certain expenses. The CIT(A) reduced the disallowance and remitted part of it for re-examination. The Tribunal found that the AO's findings were based on materials already disclosed in regular assessments and not on new evidence from the search.

5. Validity of the Block Assessment Based on Search Conducted on Premises of Another Entity:
The search was conducted on 7th Dec, 1998, at premises belonging to SLL, not the assessee-firm, which had assigned its business to SLL on 12th May, 1998. The Tribunal held that the block assessment on the assessee-firm was unlawful as the search premises did not belong to the assessee-firm at the time of the search. The Tribunal cited the decision in CIT vs. Tirupati Oil Corporation, where it was held that block assessment must be on the entity whose premises were searched.

Conclusion:
The Tribunal set aside the block assessment order on the grounds that no new evidence was found during the search to prove the deductions claimed by the assessee-firm were false, and the assessment was based on materials already disclosed in regular assessments. The appeal by the assessee was allowed, and the appeal by the Revenue was dismissed.