2010 (4) TMI 100 - HC - Income Tax

Unexplained expenditure - Applicability of section 69C in block assessment setting off of off interest and bank charges against interest income for determining benefit under Section 80 HHC ambit and scope of sectin 41(1) cessation of liability deemed income - during the search and seizure operations as indicated in para 3.1 of the order passed by the Commissioner of Income-tax (Appeals) no evidence was found indicating that the assessee had any undisclosed income. However the Assessing Officer had directed the assessee to get its accounts audited as per the provisions of Section 142(2A) of the said Act. It is on the basis of the audit report prepared under Section 142(2A) of the said Act that the addition appears to have been made by the Assessing Officer. held that - Clearly Section 69C refers to the source of the expenditure and not to the expenditure itself. Consequently the Assessing Officer was clearly wrong in treating the said expenditure as unexplained expenditure under Section 69C of the said Act and the lower appellate authorities were right in their conclusions in deleting the said addition - No material as such was found during the search and seizure operations and it is only in the special audit directed by the Assessing Officer who was unable to find any material at the time of search that the authenticity of the expenditures were doubted. We are of the view that both the lower appellate authorities correctly came to the conclusion that this was not a case where the addition would be justified in block assessment proceedings. question of netting of interest under section 80 HHC the issue already stands decided in favour of the assessee and against the revenue by virtue of this court s decision in the case of Commissioner of Income-tax v. Shriram Honda Power Equipment 2008 -TMI - 2891 - HIGH COURT DELHI Regarding section 41(1) - One part deals with the question of extinguishment of the liability because the period of limitation had expired. The second part deals with the aspect that in the case of block assessment the undisclosed income can be determined only on the basis of the material found during the search. Inasmuch as no material was found during the search to show that the liability was either bogus or had ceased to exist the addition could not be made in the block assessment. We are not going into the first aspect of the matter because of our view on the second aspect. Since nothing was found during the search this in itself is sufficient to decide the matter in favour of the assessee.

Summary

Issues:
1. Whether unexplained expenditure can be added under Section 69C of the Income-tax Act.
2. Whether additions in block assessment can be made without material found during search.
3. Netting of interest under Section 80 HHC.
4. Cessation of liability in block assessment.
5. Perversity in the findings.

Analysis:
1. The first issue revolves around the addition of unexplained expenditure under Section 69C of the Income-tax Act. The Assessing Officer added a specific amount as unexplained expenditure due to lack of authentication by vouchers. However, the High Court clarified that Section 69C focuses on the source of expenditure, not its authenticity. As the expenditure was recorded in the regular books of accounts, the source was explained, rendering Section 69C inapplicable. The court upheld the lower authorities' decision to delete the addition, emphasizing that the Assessing Officer erred in treating the expenditure as unexplained under Section 69C.

2. The second issue concerns additions in block assessment without material found during search. Both the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal concluded that additions in block assessment must be based on material discovered during the search. Since no such material was found during the search and only arose during a subsequent audit, the court agreed with the lower authorities that the addition was not justified in block assessment proceedings.

3. Regarding netting of interest under Section 80 HHC, the court referenced a previous decision in favor of the assessee, establishing that no further consideration was necessary on this matter.

4. The issue of cessation of liability in block assessment was also addressed. The Tribunal highlighted that liability does not cease to exist solely due to the expiration of the limitation period. As no material was found during the search to prove the liability as bogus or ceased, the addition in block assessment was deemed unjustified. The court concurred with this reasoning, emphasizing that in the absence of any material found during the search, the addition could not be sustained.

5. Lastly, the court dismissed the issue of perversity in the findings as no specific instances were pointed out. Consequently, the appeal was dismissed based on the comprehensive analysis and conclusions reached on the various legal issues presented in the case.