2008 (11) TMI 299 - AT - Income Tax

Assessment in block assessment u/s 158BB - Unexplained cash credits u/s.68 - Search and Seizure u/s 132 - identity and creditworthiness of the creditors not established - AO made addition u/s. 68 by applying a flat rate to the total deposits received by the bank - CIT(A) deleted the entire addition on the ground that the AO has not referred to any seized material while making addition in block assessment. HELD THAT - The computation of undisclosed income of the block period in a block assessment must be related to evidence found as a result of search proceedings. The Finance Act, 2002, by the amendment to s. 158BB with retrospective effect from 1st July, 1995, added the words 'and relatable to such evidence. In the present case, the AO enquired into 225 depositors out of large number of depositors and found that 15 per cent depositors are not found at the given address. He applied the ratio of 35 to 225 i.e., 15 per cent to all the deposits made with the bank. Thus, it would cover those deposits as well, about which the assessee has not been asked even a single question. The right course would have been to consider the addition only in respect of those individual cases where identity of the depositors and nature and source of deposits was not established. addition u/s. 68 also has been made by estimate. We are of the considered view that such approach is not legally sustainable. Since in the assessment order, the AO has not discussed any individual deposit/credit but has applied a flat rate of 15 per cent, the question thereof being considered by the CIT(A) on individual basis is also not sustainable. Notwithstanding, as no material was found during the course of search, the addition proposed by the AO by applying a rate of 15 per cent on the total deposits received by the bank cannot be sustained. On that account also the order of the AO is required to be quashed. Therefore, on both accounts firstly, no material was found as a result of search which could indicate that deposits received by the bank are undisclosed income of the bank and secondly that addition u/s. 68 could not be made by applying a flat rate to the total deposits received by the bank, we confirm the order of the CIT(A) and dismiss the appeal filed by the Revenue.

Issues Involved:
1. Deletion of addition of Rs. 2,90,71,929 on account of unexplained deposits.
2. Deletion of addition of Rs. 1,88,05,367 on account of interest on unexplained deposits.
3. Set off of losses against income disclosed in respective years.
4. Admittance of fresh evidence during appellate proceedings.

Issue-wise Detailed Analysis:

1. Deletion of addition of Rs. 2,90,71,929 on account of unexplained deposits:

The assessing officer made an addition of Rs. 2,90,71,929 by treating 15% of the total deposits as unexplained based on the non-service of notices to some depositors. The Commissioner (Appeals) deleted this addition on the ground that the assessing officer did not refer to any seized material while making the addition. The Commissioner (Appeals) emphasized that additions in block assessment can be made only on the basis of material and evidence found during the course of the search. The Tribunal upheld this view, stating that the documents seized were part of the regular books of account and under the supervision of the Registrar of Co-operative Societies and RBI. The Tribunal concluded that the assessing officer had mixed up block assessment with regular assessment and that no material evidence found in the search indicated undisclosed income.

2. Deletion of addition of Rs. 1,88,05,367 on account of interest on unexplained deposits:

Similar to the first issue, the assessing officer disallowed interest paid on deposits by treating 15% of the interest as fictitious. The Commissioner (Appeals) deleted this addition on the same grounds as the unexplained deposits, stating that there was no seized material indicating undisclosed income. The Tribunal agreed, noting that the post-search investigations did not have relevance or connection with the seized material indicating undisclosed income. The Tribunal reiterated that Section 68 requires specific identification of each credit and that the assessing officer cannot make additions based on estimates.

3. Set off of losses against income disclosed in respective years:

The assessing officer disallowed the set off of losses against income disclosed in the respective years, citing provisions of Section 158BA(2). The Commissioner (Appeals) directed to allow the set off of losses, and the Tribunal upheld this decision. The Tribunal referred to the definition of undisclosed income under Section 158B(b) and concluded that the assessing officer's approach was not legally sustainable as it was based on estimates rather than specific identification of income.

4. Admittance of fresh evidence during appellate proceedings:

The revenue argued that the Commissioner (Appeals) admitted fresh evidence in violation of Rule 46A. The Commissioner (Appeals) considered the case of each depositor individually and found that all were identifiable. The Tribunal noted that the assessing officer did not discuss any individual deposit but applied a flat rate of 15% to all deposits, which was not legally sustainable. The Tribunal confirmed the order of the Commissioner (Appeals) and dismissed the revenue's appeal.

Conclusion:

The Tribunal confirmed the order of the Commissioner (Appeals) on all accounts, emphasizing that no material was found as a result of the search indicating undisclosed income and that additions under Section 68 cannot be made by applying a flat rate to total deposits. The appeal filed by the revenue was dismissed, and the cross-objection filed by the assessee in support of the Commissioner (Appeals) was allowed.

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