2014 (11) TMI 53 - HC - Income Tax

Treatment of income recovered during search - Whether the amount, which is discovered during the search, has the effect of just reducing the losses for the block period or it can be treated as income separately for the block period Held that - In CIT v. Harprasad and Co. P. Ltd. 1975 (2) TMI 2 - SUPREME Court - if an assessee has incurred losses, more than the income, in an assessment year, he does not incur any tax liability, and if the loss spills over the concerned AY, he shall be entitled to claim adjustment against profits, if any, in the subsequent assessment year and for that purpose, filing of a return, albeit showing loss; is necessary - the undisclosed income attributed to the assessee did not have the effect of wiping off the accumulated losses - whatever may be the character of the undisclosed income, vis-a-vis the total income , it cannot be treated as income within the connotation of Chapter XIV-B of the Act - there was nothing to be brought under the tax regime of Chapter XIV-B of the Act. The immediate concern of the Revenue was that the result of a search and unearthing of undisclosed incomes was proving futile, if it was being pitted against the aggregate or accumulated losses, and thereby, a device to penalise such concealments was invented - where the undisclosed income has the effect of just reducing the loss, thereby, disabling the Revenue, to levy any tax, whatever - The anomaly and the remedy was found in a different form, namely, to levy penalty , as distinguished from tax at a higher rate , on the undisclosed income - the subject-matter is not levy of penalty u/s 271(1) of the Act the order of the Tribunal cannot be upheld Decided in favour of assessee. Adjustment against amount of undisclosed income - Whether he is entitled to seek adjustment against any amount of undisclosed income, noticed in the search when there is unabsorbed depreciation available to an assessee in the previous assessment years Held that - The irregularities committed by the assessee remain unpunished, if such a course is adopted - There is no substance in the submission - whenever an undisclosed income is noticed against an assessee, and if it is set at naught, through accumulated depreciation, the corresponding amount of depreciation would not be available to be utilized by the assessee at a future date - The assessee feels the brunt of his concealment, to that effect - the ITO or Tribunal, have just to implement, what Parliament has handed out to its citizens, and they can neither expand nor restrict the scope of the relevant provisions Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of tax on undisclosed income that only reduces losses.
2. Adjustment of unabsorbed depreciation against undisclosed income.

Issue-wise Detailed Analysis:

1. Levy of Tax on Undisclosed Income That Only Reduces Losses:

The primary issue was whether the undisclosed income discovered during a search, which merely reduces the losses for the block period, could be treated as taxable income. The appellant argued that if the undisclosed income only reduces the losses, no tax could be levied. The Tribunal, however, had a divided opinion, with the Vice-President supporting the appellant's view and the Accountant Member opposing it. The third member agreed with the Accountant Member, leading to the appeal's dismissal.

The court examined Section 158BA of the Income-tax Act, which deals with the assessment of undisclosed income as a result of a search. The court noted the distinction between "income" and "total income," emphasizing that the term "undisclosed income" is used throughout Chapter XIV-B, contrasting with "total income" under Section 2(45). Referring to the Supreme Court's decision in CIT v. Harprasad and Co. P. Ltd. [1975] 99 ITR 118 (SC), the court highlighted that if an assessee has incurred losses exceeding income, no tax liability arises, and losses can be carried forward for set-off against future profits.

The court concluded that if the undisclosed income merely reduces the loss without resulting in a net income, it cannot be treated as taxable income. The court also distinguished the purpose of Section 271(1)(c) of the Act, which deals with penalties for concealment, from the assessment of undisclosed income under Chapter XIV-B. The court held that the undisclosed income, which did not wipe out the accumulated losses, could not be treated as income within the meaning of Chapter XIV-B. The court thus answered the first question in favor of the appellant, stating that the undisclosed income submerged in the losses and lost its identity, making it non-taxable under Chapter XIV-B.

2. Adjustment of Unabsorbed Depreciation Against Undisclosed Income:

The second issue was whether the appellant could seek adjustment of unabsorbed depreciation against the undisclosed income discovered during the search. The appellant contended that even if the undisclosed income is treated as independent of the accumulated losses, it should be subjected to the same assessment as regular income, allowing for depreciation and other deductions.

The court referred to Section 158BH, which states that all other provisions of the Act apply to assessments under Chapter XIV-B unless otherwise provided. This implies that the undisclosed income must be assessed similarly to regular income, allowing for standard deductions and depreciation. The court reiterated that the undisclosed income should be treated as part of the total income and subjected to the same assessment criteria, including the allowance of depreciation.

The court criticized the Tribunal's reliance on Explanation 4(c) to Section 271(1) of the Act, which deals with penalties, stating that it was a misapplication to import principles from the penalty provisions into the assessment of undisclosed income. The court emphasized that Chapter XIV-B is a self-contained code, and the principles from the penalty provisions should not be applied to it.

The court concluded that the appellant was entitled to claim depreciation against the undisclosed income. However, since the first question was answered in favor of the appellant, the need to address the second question did not arise. Nevertheless, the court answered the second question in favor of the appellant, stating that the accumulated depreciation exceeded the undisclosed income, and the appellant could claim the benefit of depreciation.

Conclusion:

The court allowed the appeal, setting aside the order of the Income-tax Officer and the Tribunal. The court held that the undisclosed income, which only reduced the losses, could not be treated as taxable income under Chapter XIV-B. Additionally, the court affirmed that the appellant was entitled to claim depreciation against the undisclosed income. The court emphasized that the Income-tax Officer and the Tribunal must implement the provisions as laid out by Parliament without expanding or restricting their scope. The appeal was allowed with no order as to costs.