2004 (3) TMI 340 - AT - Income Tax

Issues Involved:
1. Addition of Rs. 62,430 on account of undisclosed cash found during search and seizure operations.
2. Addition of Rs. 30,51,589 on account of undisclosed profit worked out by the AO for the block period of assessment.
3. Addition of Rs. 32,65,000 on account of depreciation on assets not belonging to the assessee-firm and held in the names of partners.
4. Addition of Rs. 45,31,202 on account of undisclosed investment made in the construction of Sarvodaya Hospital building based on the valuation report of the valuation officer.

Issue-wise Detailed Analysis:

1. Addition of Rs. 62,430 on account of undisclosed cash:
The cash of Rs. 62,430 was found at the residence of one of the partners, Dr. Naresh Pamnani, during a search operation. The cash was claimed to belong to the hospital and was brought home for safekeeping before depositing it in the bank. The AO rejected this explanation citing the maintenance of two sets of books by the assessee. However, the CIT(A) verified the explanation with the white card, a primary record of receipts and payments, and found no discrepancy in the cash balance. The CIT(A) concluded that the cash was duly recorded in the books and deleted the addition. The Tribunal upheld this decision, rejecting the Revenue's ground.

2. Addition of Rs. 30,51,589 on account of undisclosed profit:
The AO noted two sets of books, an 'original cash book' and a 'fair cash book,' and suspected manipulation of profits. The AO recalculated the profits for the financial years 1993-94 to 1995-96 based on the original cash book, resulting in an addition of Rs. 30,51,589 as undisclosed income. The assessee explained that the original cash book was a day book for convenience, while the fair cash book was the regular book. The CIT(A) accepted the explanation, noting that all receipts were recorded consistently across both books and the white card. The CIT(A) found that the discrepancies were reconciled and that the expenses were genuine and supported by vouchers. The Tribunal agreed, stating that block assessment is not a substitute for regular assessment and that the AO should have verified the entries in the regular books before making additions. The Tribunal upheld the deletion of the addition.

3. Addition of Rs. 32,65,000 on account of depreciation:
The AO disallowed the claim of depreciation on assets held in the names of partners, treating the amount as undisclosed income. The CIT(A) found that the assets were contributed by partners as capital and used exclusively for the business of the assessee. The Tribunal noted that if the assets were used in the business and depreciation was allowed in regular assessments, it could not be withdrawn in block assessment. The Tribunal restored the issue to the AO for verification of whether the assets were reflected in the accounts filed with the returns. If verified, the depreciation should not be withdrawn, and it cannot be treated as undisclosed income.

4. Addition of Rs. 45,31,202 on account of undisclosed investment in hospital construction:
The AO referred the construction cost of the hospital building to the Valuation Officer, who estimated it at Rs. 62,16,786 against the declared cost of Rs. 16,25,590, resulting in an addition of Rs. 45,31,202. The CIT(A) held that the AO had no jurisdiction to make such a reference in block assessment without any incriminating evidence found during the search. The Tribunal agreed, stating that block assessment under Chapter XIV-B is limited to material unearthed during the search and cannot rely solely on the DVO's report. The Tribunal upheld the deletion of the addition.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the additions of Rs. 62,430, Rs. 30,51,589, and Rs. 45,31,202, and restored the issue of depreciation of Rs. 32,65,000 to the AO for verification. The Revenue's appeal was partly allowed.

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