2002 (11) TMI 266 - AT - Income Tax

Summary

Issues Involved:
1. Deduction for interest paid on borrowed funds.
2. Jurisdiction and validity of the order under sections 158BD read with 143(3) of the IT Act.
3. Computation of block assessment without materials from search under section 132.
4. Assessment of interest income as 'undisclosed income' for the block period.

Issue-wise Detailed Analysis:

1. Deduction for Interest Paid on Borrowed Funds:
The assessee contended that the AO erred in not allowing the deduction for interest paid on borrowed funds against the interest income assessed under the head income from "other sources" under section 57(iii) of the IT Act. The Tribunal did not specifically address this issue in the final judgment, focusing instead on the broader issues of jurisdiction and the validity of the block assessment.

2. Jurisdiction and Validity of the Order under Sections 158BD read with 143(3) of the IT Act:
The assessee argued that the order passed under section 158BD read with section 143(3) was without jurisdiction, beyond limitation, bad in law, and void ab initio. The Tribunal admitted this additional ground, agreeing with the assessee's counsel that it did not require investigation into fresh facts. The Tribunal found that the Department was aware of the interest income derived by the assessee in the respective years and that no new material relating to this income was detected during the search action on M/s Cosmos Enterprises. Therefore, the initiation of proceedings under section 158BD was unjustified, leading to the conclusion that the block assessment was invalid.

3. Computation of Block Assessment without Materials from Search under Section 132:
The assessee contended that the AO erred in computing the block assessment de hors the materials and evidence found as a result of the search under section 132 of the Act. The Tribunal agreed, noting that the special procedure prescribed in Chapter XIV-B is intended to assess undisclosed income detected as a result of a search. Since no material was unearthed during the search to warrant an inference of undisclosed income, the block assessment was deemed unjustified.

4. Assessment of Interest Income as 'Undisclosed Income' for the Block Period:
The AO assessed the interest income amounting to Rs. 47,65,712 as 'undisclosed income' for the block period. The Tribunal found that the interest income had been accounted for in the assessee's financial statements and that the Department was aware of this income prior to the search. The Tribunal emphasized that the scope of Chapter XIV-B is limited to the assessment of undisclosed income detected during a search, and since no such material was found, the interest income could not be assessed as undisclosed income in the block assessment. The Tribunal cited various case laws supporting this view and concluded that the block assessment was invalid.

Conclusion:
The Tribunal concluded that the block assessment was unjustified and invalid, as it was not based on any material found during the search. The Tribunal canceled the impugned block assessment and allowed the assessee's appeal. The Department was advised to take appropriate action in the context of regular assessments for the respective years.