2014 (10) TMI 363 - HC - Income Tax

Meaning of undisclosed income u/s 158BB Computation of undisclosed income of the block period Whether the share certificates belongs to assessee or not - Held that - The items, such as, money, bullion, jewellery and other residuary items, which constitute the wealth or income, would be treated as an undisclosed income, provided that such items were not disclosed for the purpose of the Act - It means such items were not the subject matter of any returns filed under the Act - once the items mentioned in the definition were the subject matter of the returns filed under the Act, they cannot be treated as undisclosed income - the returns need not be those filed by the concerned assessee alone - The provision does not indicate or that the returns insist covering those items must be that of the concerned assessee alone - the provisions of a taxation law, that too of the punitive nature, need to be interpreted in a strict manner - The basis for the AO to disbelieve those statements was that the filing of returns, though before the search was conducted, was done as an afterthought, in some cases, or that filing of returns was not warranted at all, having regard to the financial status of the concerned assessee. The Tribunal took the view that the scope of powers of an officer conducting search cannot be expanded to cover the adjudication or verification of the assessments already made - the block assessment is to be made strictly in accordance with Section 158BB of the Act the AO propose to treat the undisclosed income as an independent entity and subject to making tax without following the provision u/s 158BB of the Act - Such a course would push the assessee to a further hardship and result in denial of the very safeguard that was prescribed by the Legislature - the persons, in whose names they were issued, have stated that they belong to them and it was also found in the search itself, that shareholders have submitted their returns - there was no basis for treating the share certificates as belonging to anybody else - relying upon Commissioner of Income Tax v. Lovely Exports Private Limited 2008 (1) TMI 575 - SUPREME COURT OF INDIA Decided against revenue.

Summary

Issues Involved:
1. Definition and scope of "undisclosed income" under Section 158BB of the Income Tax Act.
2. Legitimacy of the share certificates found during the search.
3. Authority and limitations of the assessing officer in making block assessments.
4. Treatment of perquisites claimed by the Managing Director and Executive Director.
5. Tribunal's interference with the assessing officer's findings.

Issue-wise Detailed Analysis:

1. Definition and Scope of "Undisclosed Income" under Section 158BB of the Income Tax Act:
The central issue revolves around the interpretation of "undisclosed income" as defined under Section 158BB of the Act. The court clarified that "undisclosed income" includes items such as money, bullion, jewelry, and other assets that were not disclosed for tax purposes. The definition emphasizes that these items must not have been part of any returns filed under the Act. The court stressed that the provisions of taxation law, especially those of a punitive nature, must be interpreted strictly to avoid undue hardship to the assessee.

2. Legitimacy of the Share Certificates Found During the Search:
A significant part of the block assessment involved share certificates found in the company's premises. These certificates were issued in the names of third parties, who confirmed ownership and had filed returns disclosing them. The assessing officer doubted the genuineness of these returns, considering them an afterthought. However, the court noted that once items are disclosed in returns, they cannot be treated as "undisclosed income." The Tribunal concluded that the assessing officer's scope did not extend to verifying or adjudicating previously assessed returns.

3. Authority and Limitations of the Assessing Officer in Making Block Assessments:
The court observed that the assessing officer must follow the procedures outlined in Sections 158BB and 158BC of the Act when making block assessments. The Tribunal found that the assessing officer overstepped by treating disclosed items as undisclosed income and by attempting to reassess previously filed returns. The court underscored that the block assessment should not transform into a reassessment of earlier returns, which is beyond the scope of the assessing officer's authority.

4. Treatment of Perquisites Claimed by the Managing Director and Executive Director:
The assessing officer disallowed certain perquisites claimed by the Managing Director and Executive Director, treating them as undisclosed income. The court referenced the Supreme Court's judgment in Commissioner of Income Tax v. Lovely Exports Private Limited, which supported the respondents' position. The court found no basis for the assessing officer's treatment of the share certificates as belonging to anyone other than the named shareholders.

5. Tribunal's Interference with the Assessing Officer's Findings:
The Revenue contended that the Tribunal unjustifiably interfered with the assessing officer's findings. However, the court upheld the Tribunal's decision, noting that the assessing officer did not adhere to the strict requirements of Section 158BB. The Tribunal rightly observed that the assessing officer's powers do not extend to re-evaluating the correctness of returns or previous assessments.

Conclusion:
The appeals were dismissed, affirming the Tribunal's decision to set aside the assessing officer's findings. The court emphasized the need for strict adherence to statutory provisions when making block assessments and reiterated that disclosed items in returns cannot be treated as undisclosed income. The judgment underscores the importance of limiting the assessing officer's authority to prevent undue hardship to assessees. The miscellaneous petitions filed in these appeals were also disposed of without any order as to costs.