2004 (3) TMI 358 - AT - Income Tax

Block assessment in search cases - Sustainability of block assessment in view of amended clause (c) of section 158BB - Whether, remission of income on the basis of regular books of accounts found during the search could be sustained with reference to the provisions of s. 145 of the IT Act, 1961, which has been made retrospectively applicable to the block assessment w.e.f. 1st July, 1995, but which provisions were not applicable at the time of making of the block assessment without there being compliance of the requirement of s. 145 before resorting to best judgment assessment? HELD THAT - Undisputedly this is a case of search as per the amended law, which is applicable with retrospective effect from 1st July, 1995 made in s. 158BB of the Act. Any document, etc. found during the course of search and any evidence relatable to such evidence found during the course of search can be the basis of computation of income. But at the same time, it is well settled principle of law that in such search cases no estimation of income is permissible. In the instant case, the entire books of accounts were available with the AO and except these books of accounts, there was no material or information which was in the possession of the AO to show that the assessee had earned any income over and above the income shown in the books of accounts. The income could be estimated only keeping in view the above three types of evidence on record. In this case, to our opinion, the learned AO has estimated the income on hypothetical basis taking into consideration the over all nature of the business in question of the same and similar line of business without giving any example on record. It is the fact that the labour charges by goldsmith on order basis are received with reference to the weight of the gold/silver ornaments manufactured as well as the design in question which involves a particular amount of labour. To that extent the learned CIT(A) has also accepted the plea of the appellant. But he has reduced the addition from 20 per cent to 5 per cent. The CIT(A) has rightly observed that the receipts from customers for working out the income of the appellant from labour charges, on account of retention of gold and on account of income from nagina setting, etc. is very very high and is not supported by any documentary evidence. It is revealed from the documents seized during the course of search that the appellant had recorded labour charges income from nagina setting and also had recorded cheejat wherever received. So, in our opinion, the income estimated by AO and sustained to some extent by the learned CIT(A) is not borne out of the three types of evidence which are detailed above and available on record. So the act of the AO in estimating the income of the assessee at the rate of 20 per cent on receipts from customers is erroneous since there is no material/document suggesting any income other than that declared by the appellant found during the course of search. It is a fact that the books of accounts of the appellant were incomplete to the extent that various expenditure like salaries, electricity expenses, purchase of chemicals, telephone, conveyance, etc. which are bound to be incurred are not recorded in the books of accounts of the assessee. But the gross income from labour charges which is claimed to be the only source of income are fully recorded which is not disputed by the Department as well. In the case of the appellant, no undisclosed assets have been found as a result of search and further, the gross labour charges received by the appellant to the extent of Rs. 19,93,373 should be made a basis for computation of income, after allowing a reasonable amount for estimation of the gross income as declared by the appellant after allowing reasonable expenditure like salaries, telephone, conveyance, etc. which are necessary for earning such gross income. For the estimation of net income after allowing the reasonable expenses the method nearest to the real state of affairs would be the estimation on the basis of assets/expenditure theory. The total assets disclosed are not disputed by the Department and no undisclosed assets have been found as a result of search. So, the net income for the block period from job charges and interest totalling at Rs. 5,01,240 declared by the appellant is duly supported by accretions and withdrawals made by the members of the HUF and as such, the income declared by the appellant should be accepted. The best judgment assessment is not a punitive assessment and one has to try and make a fair estimate nearer to the true affairs. An estimation based on assets and expenditure is obviously better than making a wild guess without backing of assets/expenditure particularly when the Department has no case of any asset remained undermined. In the result, this appeal of the assessee is partly allowed and the appeal of the Department is dismissed.

Issues Involved:
1. Remission of income based on regular books of accounts found during the search.
2. Inclusion of income for the assessment year 1997-98 in the block period.
3. Sustainability of block assessment in view of amended clause (c) of section 158BB.
4. Foundation for resorting to best judgment assessment.
5. Admission of additional ground regarding the assessment order being barred by limitation.

Summary:

Issue 1: Remission of Income Based on Regular Books of Accounts
The Hon'ble High Court framed the question of whether remission of income based on regular books of accounts found during the search could be sustained with reference to the provisions of section 145 of the IT Act, 1961. The Tribunal noted that the income should be computed based on material seized during search proceedings and that the AO is not conferred with the power to make estimations de hors of the material in his possession. The Tribunal concluded that the estimation of income by the AO at 20% on receipts from customers was erroneous as there was no material/document suggesting any income other than that declared by the appellant found during the search.

Issue 2: Inclusion of Income for Assessment Year 1997-98
The Tribunal addressed whether income for the assessment year 1997-98, for which the return had not fallen due, could be included in the block period. The Tribunal noted that the block assessment should be based on evidence found during the search and that the AO should not include income for the assessment year 1997-98 without proper evidence.

Issue 3: Sustainability of Block Assessment
The Tribunal considered whether the block assessment made by the assessing authority, as modified by the Tribunal, could be sustained in view of the amended clause (c) of section 158BB of the IT Act, 1961. The Tribunal followed the decision of the Hon'ble Supreme Court in Shaw Wallace & Co. Ltd. vs. CIT, which allowed the appellant to raise all contentions available in law. The Tribunal concluded that the block assessment should be based on the material seized during the search and not on estimations.

Issue 4: Foundation for Resorting to Best Judgment Assessment
The Tribunal examined whether there was any foundation for resorting to best judgment assessment. The Tribunal emphasized that best judgment assessment should be based on material seized during the search and not on hypothetical estimations. The Tribunal found that the AO's estimation of income at 20% on receipts was not supported by any documentary evidence and was therefore erroneous.

Issue 5: Admission of Additional Ground Regarding Limitation
The appellant raised an additional ground that the assessment order passed u/s 158BD on 28th March 2001 was barred by limitation as per the provisions of section 158BE(1)(a). The Tribunal allowed this additional ground, noting that it was a purely legal ground and could be disposed of based on available evidence without further investigation. The Tribunal concluded that the assessment order was within the limitation period as the search was initiated on 3rd Jan 1997, and the period of limitation was two years from the end of the month in which the notice u/s 158BD was served.

Conclusion:
The Tribunal partly allowed the appeal of the assessee and dismissed the appeal of the Department. The Tribunal emphasized that the income should be computed based on material seized during the search and not on hypothetical estimations. The Tribunal also concluded that the assessment order was within the limitation period.

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