2006 (9) TMI 243 - AT - Income Tax

Summary

Issues Involved:
1. Legality of the block assessment.
2. Validity of notice issued u/s 158BC r/w s. 158BD based on material seized from third-party premises.
3. Correctness of the valuation of stock variation.
4. Correctness of addition towards unexplained investment in purchases.
5. Allowance of expenditure and profit margin on seized purchase bills.
6. Inclusion of deficit stock in block assessment.

Summary:

1. Legality of the Block Assessment:
The appellant challenged the block assessment made by the Dy. CIT, Central Circle, Visakhapatnam, arguing it was illegal and improper. The Tribunal upheld the assessment, rejecting the appellant's claim.

2. Validity of Notice Issued u/s 158BC r/w s. 158BD:
The appellant contended that the material seized from third-party premises did not belong to them, making the notice issued u/s 158BC r/w s. 158BD incorrect. The Tribunal found that the assessing authority had valid jurisdiction to initiate action under s. 158BD r/w s. 158BC, as the seized documents indicated unexplained investment by the appellant.

3. Correctness of the Valuation of Stock Variation:
The Tribunal noted that the physical stock inventory taken during the survey operation showed a deficit stock of Rs. 7,66,475. The appellant did not maintain day-to-day stock records, and the stock was determined by applying a profit rate of 20% on sales. The Tribunal upheld the valuation method used by the assessing authority.

4. Correctness of Addition Towards Unexplained Investment in Purchases:
The appellant argued that the purchase bills found during the search did not belong to them and that the AO should have considered only the peak amount of purchases. The Tribunal found that the appellant failed to provide evidence to disprove the assessing authority's findings and upheld the addition of Rs. 37,477 for AY 1995-96 and Rs. 3,59,892 for AY 1996-97 as undisclosed income.

5. Allowance of Expenditure and Profit Margin on Seized Purchase Bills:
The appellant contended that if any addition was to be made, it should be the profit margin only, not the entire bill amounts. The Tribunal rejected this plea, stating that the addition was for unexplained investment in stock, not expenditure, and the appellant failed to establish a nexus for considering the peak amount or profit margin.

6. Inclusion of Deficit Stock in Block Assessment:
The appellant argued that the deficit stock found during the survey did not constitute "such other material or information" u/s 158BB for block assessment. The Tribunal referred to the judgment of the Madras High Court in CIT vs. G.K. Senniappan, which held that material gathered during a survey cannot form the basis for computing undisclosed income of the block period. Consequently, the Tribunal directed the deletion of the addition of Rs. 7,66,475 made on account of unexplained stock.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the block assessment and additions towards unexplained investment in purchases but directing the deletion of the addition made on account of unexplained stock.