2006 (3) TMI 86 - HC - Income Tax

Undisclosed income - Whether the Tribunal is right in confirming the disallowance of supervisory charges which were duly recorded in the accounts regularly maintained by the appellant and which were not seized or requisitioned either under section 132 or section 132A?- In the absence of a finding that the said expenditure is bogus or false the Revenue cannot treat the same as undisclosed income. The order of the block assessment was passed before the amendment but when the Tribunal passed the order the definition of undisclosed income was amended by the Finance Act of 2002 w.e.f. July 1, 1995. Unfortunately the Tribunal did not give any factual finding whether the claim of supervisory charges is a bogus one or not. Even taking into account the amended provision mere disallowance made under section 40A(2) could not be treated as undisclosed income. The scope of section 40A(2) is to disallow only unreasonable or excessive payments in computing the income of the assessee. - therefore we answer the question in favour of the assessee

Summary

Issues:
1. Validity of assessment based on action under section 132A
2. Disallowance of supervisory charges not seized or requisitioned
3. Fresh assessment based on seized records of third party assessee

Issue 1: Validity of assessment based on action under section 132A
The court admitted the appeals under section 260A of the Income-tax Act against the order of the Income-tax Appellate Tribunal. The substantial questions of law formulated included the validity of assessment under section 158BD based on action under section 132A in the case of a third party assessee. The senior counsel for the assessee did not press questions 1 and 3, focusing on question 2.

Issue 2: Disallowance of supervisory charges not seized or requisitioned
The appellant, a company engaged in civil engineering contracts, claimed higher depreciation rates and supervisory charges payable to a related party. The Assessing Officer disallowed the supervisory charges under section 40A(2) of the Income-tax Act, treating it as undisclosed income. The Tribunal upheld the disallowance, considering the excessive nature of the charges. The court analyzed the provisions of section 40A(2) and emphasized the need for expenses to be judged based on fair market value and legitimate business needs. The court clarified that disallowance under section 40A(2) does not automatically constitute undisclosed income unless found false by the Revenue. The court ruled in favor of the assessee, stating that the disallowance of supervisory charges did not amount to undisclosed income.

Issue 3: Fresh assessment based on seized records of third party assessee
The court's decision primarily focused on the disallowance of supervisory charges claimed by the appellant. The court highlighted the importance of factual findings regarding the legitimacy of expenses claimed by the assessee. The court emphasized that mere disallowance under section 40A(2) does not warrant treating the amount as undisclosed income. The court's ruling favored the assessee, emphasizing that unless expenses are proven false by the Revenue, disallowance under section 40A(2) does not constitute undisclosed income. The judgment concluded in favor of the assessee, with no costs awarded.