2006 (3) TMI 217 - AT - Income Tax

Summary

Issues Involved:
1. Validity of search and assessment on non-existent companies.
2. Applicability of section 92 to the transaction.
3. Whether disclosed transactions can give rise to undisclosed income.
4. Validity of invoking section 93.
5. Validity of block assessment and defective notice under section 158BC.

Summary:

1. Validity of Search and Assessment on Non-Existent Companies:
The Tribunal held that a search cannot be conducted on a non-existent company nor can a notice u/s 158BC be issued to non-existent companies. The assessment of undisclosed income for a block period under Chapter XIV-B in respect of a predecessor of a business cannot be made in the hands of the successor in such business because a successor's liability to tax in respect of a predecessor's income cannot be beyond the period specified in section 170(2). The block period defined in section 158B(a) contradicts section 170(2), making the latter inapplicable in block assessments.

2. Applicability of Section 92 to the Transaction:
The Tribunal concluded that the conditions precedent for applying section 92 were not fully satisfied in the present case. The transaction of sale of shares between the assessee and M/s. Wintech Investments Pvt. Ltd. was not a business transaction as contemplated in section 92. The shares were held as investments and not as stock-in-trade, and the income arising from the sale was capital gains, not business profits. Therefore, the provisions of section 92 were not applicable.

3. Whether Disclosed Transactions Can Give Rise to Undisclosed Income:
The Tribunal held that disclosed transactions cannot give rise to undisclosed income. The assessee had disclosed the transaction of sale of shares in the regular returns of income filed prior to the search. The definition of undisclosed income u/s 158B(b) and the scope of block assessments under Chapter XIV-B do not cover disclosed transactions. The Tribunal relied on various judicial pronouncements to support this view.

4. Validity of Invoking Section 93:
The Tribunal did not permit the Revenue to raise the new plea of invoking section 93 for the first time before the Tribunal. The facts necessary for adjudicating the applicability of section 93 were not available on record. The Tribunal emphasized that the Revenue has other avenues such as section 263 and section 147 to address issues not covered in the original assessment. The Tribunal also noted that the basic premise of the Assessing Officer regarding the flow of funds was incorrect.

5. Validity of Block Assessment and Defective Notice under Section 158BC:
The Tribunal referred to the decisions of the Special Bench of ITAT and the Hon'ble High Court, which held that the Tribunal does not have the power to adjudicate upon the validity of search on the ground of non-satisfaction of conditions prior to the issue of a warrant of search. The Tribunal also held that any defect in the notice u/s 158BC does not vitiate the order of assessment.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The Tribunal confirmed the deletion of the addition made by the Assessing Officer and held that the disclosed transactions could not be treated as undisclosed income in the block assessment.