2003 (9) TMI 332 - AT - Income Tax

Summary

Issues Involved:
1. Computation of undisclosed income for the block period.
2. Set-off of losses within the block period.
3. Application of GP rate.
4. Treatment of seized materials and unexplained entries.
5. Carry forward and set-off of losses.

Issue-wise Detailed Analysis:

1. Computation of Undisclosed Income for the Block Period:
The assessee-company was subjected to a search and seizure operation under Section 132 of the IT Act, 1961, resulting in the discovery of incriminating documents. The AO issued a notice under Section 158BC for the block period from 1st April 1988 to 28th November 1998. The assessee filed a return declaring NIL undisclosed income. The AO computed the total undisclosed income of Rs. 42,08,626 after considering the recasted trading accounts and comparing the GP rate with another company, M/s Quality Zippers (P) Ltd.

2. Set-off of Losses within the Block Period:
The AO noted losses for certain assessment years within the block period but did not allow these losses to be set off against the undisclosed income. The CIT(A) provided relief on the GP rate but did not allow the aggregate of undisclosed income to be set off by the business losses shown in the years within the block period. The assessee argued that the negative figure of Rs. 47,47,381 should be considered, resulting in no tax liability under Section 113. The Tribunal referred to the decision in BDA Ltd. vs. Asstt. CIT, which allowed the set-off of losses computed in the block assessment against undisclosed income.

3. Application of GP Rate:
The AO applied the GP rate of M/s Quality Zippers (P) Ltd. to the assessee-company, which was objected to by the assessee. The CIT(A) provided partial relief by reducing the GP rate by 2%. The Tribunal upheld the CIT(A)'s decision on this matter.

4. Treatment of Seized Materials and Unexplained Entries:
The AO made additions based on unexplained entries found in the seized materials. The CIT(A) provided some relief, but the Tribunal did not delve into this issue further as the primary contention was regarding the set-off of losses.

5. Carry Forward and Set-off of Losses:
The Tribunal examined the legal provisions, including Sections 158BB and 80, and relevant case laws. It concluded that the losses computed by the AO for the block period should be set off against the undisclosed income. The Tribunal emphasized that the block period should be treated as one unit, and the losses and income should be aggregated. The Tribunal referred to the CBDT Circular and the decision in BDA Ltd. vs. Asstt. CIT, which supported the assessee's contention. The Tribunal directed the AO to adjust the losses against the undisclosed income and clarified that the assessee would not be entitled to carry forward the difference to subsequent years.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the AO to adjust the computed losses against the undisclosed income for the block period, resulting in no positive figure of undisclosed income to be taxed under Section 113. The remaining grounds and the Departmental appeal were dismissed as infructuous.