2012 (9) TMI 701 - HC - Income Tax

Additions in the block assessment - ITAT deleted the addition as no addition on the basis of facts declared in the regular return of income filed prior to the date of search - Reopening of assessment - Held that - The search was not conducted at the premises of the respondent-assessee, and no incriminating material was found in the search conducted in the premises of Shri Narendra Kumar Khanna on the basis of which notices were issued to the respondent-assessee. In the block assessment, the undisclosed income is required to be computed on the basis of evidence found during the search, or being directly relatable to the evidence found in the search. When nothing was found during the search, which may suggest that the books maintained by the assessee were unreliable or doubtful, the Assessing Officer cannot rely upon the material disclosed by the assessee in the return of the relevant year for the purpose of computation under Section 158BB - As decided in CIT v. Ravi Kant Jain 2001 (3) TMI 52 - DELHI HIGH COURT Chapter XIV-B is intended to provide a mode of assessment of undisclosed income which has been detected as a result of search. It is not intended to be a substitute for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. Evidence found as a result of search is clearly relatable to Sections 132 and 132A - no substance in the contention of the revenue, that those assessments, which were not subjected to scrutiny, can be reopened and that the assessee may require to prove the source of income all over again, even if no incriminating material has been found in the search - against revenue.

Summary

Issues:
Block assessment under Section 158BD read with Section 158BC of the Income Tax Act, 1961 based on search operation; Validity of additions made in block assessment without incriminating material found during search; Interpretation of Section 158BB post amendment by Finance Act, 2002; Applicability of previous returns in block assessment; Judicial precedents on assessment of undisclosed income in search cases.

Analysis:
1. The case involved a block assessment under Section 158BD read with Section 158BC of the Income Tax Act, 1961, initiated against the assessee based on a search operation conducted at the premises of another individual, Shri Narendra Kumar Khanna. The block assessment was completed on undisclosed income found during the search, totaling Rs. 35,99,024, with the approval of the Commissioner of Income Tax, Kanpur.

2. The Tribunal partially allowed the appeal of the assessee, noting that the revenue failed to establish a connection between the seized papers and the assessee. The Tribunal held that no additions could be made in the block assessment based on facts declared in the regular return of income filed before the search, especially when no evidence from the search contradicted the declared facts.

3. The key issue raised in the Income Tax Appeal was whether the Tribunal was justified in deleting the additions made by the Assessing Officer in the block assessment. The revenue argued that even in the absence of incriminating material during the search, the previous returns filed by the assessee could be relied upon, citing an amendment to Section 158BB by the Finance Act, 2002.

4. The respondent-assessee contended that the amendment to Section 158BB primarily related to the computation of undisclosed income for the block period and did not mandate proving the genuineness of transactions disclosed in previous returns during the block assessment post-search operations.

5. The respondent relied on judicial precedents, including Commissioner of Income Tax v. Bimal Auto Agency, to support the argument that assessments under Chapter XIV-B, including block assessments, should be based on evidence directly linked to the search or evidence found during the search, not on previously disclosed information without incriminating material from the search.

6. The High Court upheld the Tribunal's decision, emphasizing that in the absence of incriminating material found during the search, the Assessing Officer cannot rely on the material disclosed in previous returns for computing undisclosed income in the block assessment. The Court ruled against the revenue, stating that assessments without incriminating material cannot be reopened to require the assessee to prove the source of income again.

7. Ultimately, both substantial questions of law raised in the Income Tax Appeal were decided against the revenue and in favor of the respondent-assessee. The Court dismissed the appeal, affirming the Tribunal's decision to delete the additions made by the Assessing Officer in the block assessment.