9911796707
TMI Blog2000 (4) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... ledgers maintained. According to the Assessing Officer, the debit entries were identified as sales made to various dealers outside the books of account. Such sales totalled Rs.14.80 crores. The diary also consisted of some cash collections, amounts sent by DDs, payments made to suppliers like Chemplast, R.K. Mills, Coal and some interest payments to parties. The Director of the assessee-company, Sri Krishnakumar, was confronted with these entries and in the absence of satisfactory explanation from him, a declaration under section 132(4) was made by him admitting Rs.1.90 crores as profit out of the above unaccounted--for transactions. During the course of the search, Sri H. Kishan was confronted with the investments made by his family group, i.e., 'Haridas Group', in promoters quota shares and he has disclosed an amount of Rs.19,00,000 towards unaccounted for investment in promoters quota equity in Fenoplast Ltd. Also the assessee admitted undisclosed income for the asst. year 1991-92 at Rs.4,25,000 towards unexplained cash credits in sister concerns. Thus, the disclosure made by the assessee-company under section 132(4) is as follows: ------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position of decided law, the method working of undisclosed income as admitted by the assessee in the block return is contrary to law and against the spirit of section 158BB. Therefore, he concluded that the unabsorbed depreciation of the current year should be treated as 'business loss' contrary to the assessee's claim that the resultant income should be taken as 'Nil' and the unabsorbed depreciation should be carried forward for the future years while reducing the income returned or assessed as per the provisions of section 158BB(1) of the Act to arrive at the undisclosed income. Accordingly, the Assessing Officer determined the undisclosed income for the block period at Rs.1,46,02,752 and tax thereon at Rs.87,61,651. Secondly, he did not accept the contention that income for the regular assessment and assessment under section 158BC including the undisclosed income could be 'nil'. He rejected the assessee's submission that current year's depreciation for each year was enough to neutralize the addition of undisclosed income, holding as under:-- "...If the resultant figure after setting off the current year's income against the current year's depreciation, is negative, the same s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down and the department proceeded on the presumption that the figures noted therein were all undisclosed sales; but the assessee in its reply reconciled some of the transactions with the regular books. In regard to some of the transactions, it was asserted that the assessee could not prove to the satisfaction of the Assessing Officer that they were all genuine and noted in the regular books. Under these circumstances, the assessee had agreed that a sum of Rs.71,92,864 for the assessment year 1995-96 and Rs.4,25,000 for the assessment year 1991-92 could be treated as undisclosed income. The assessee, however, admitted that certain figures as undisclosed during the course of investigation following the search and in the return filed the assessee had shown 'nil' income for the purpose of the assessment under section 158BC. The assessee wanted to explain as to how he has shown 'Nil' income for the block assessment and thereby he contended that if the figure for the assessment year 1995-96 were to be considered by way of business loss for this year, the regular assessment had been completed and accordingly the assessee-company was entitled to current year's depreciation of Rs.2,93,14,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. He, however, explained that there is no dispute that the figure of Rs.1,28,04,522 is the unabsorbed depreciation as per the regular assessment for this year. But, for the purpose of block assessment, it was converted into business loss. He explained that by the addition of undisclosed income of Rs.1.10 crores, the claim was reduced and therefore this was undisclosed income for the purpose of section 158BB. Before us, the learned authroised representative challenged the assessment order mainly on two grounds, viz., (1) The addition made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of section 32(2) since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying the provisions of Chapter IV of the Act which contains section 32. If the income is so computed, the total income for these years before the inclusion of undisclosed income could only be nil with certain amount of unadjusted depreciation to be carried forward to the next year. But the computation of income has to be nil because there is neither profit nor loss. It is absolute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Elphinstone Spg. Wvg. Mills Co. Ltd. [1960] 40 ITR 142 (SC), Indo-Gulf Fertilizers Chemicals Corpn. Ltd. v. Union of India [1992] 195 ITR 485 (All.), B.D.A. Ltd. v. Asstt. CIT [1998] 65 ITD 501 (Mum.), CIT v. Prithipal Singh Co. [1990] 183 ITR 69 (P H) and CIT v. Sri Vijayalakshmi Mineral Trading Co. [1999] 151 CTR (AP) 166. 6. On the other hand, the learned departmental representative contended as under: It is always mentioned in the block return (D-B) to declare that undisclosed income has been detected and 'D' would always be greater than 'B'. The assessed or the returned loss, i.e. 'D', would be greater than 'B'(assessed or returned loss as reduced by undisclosed income). In view of the same, D-B would always be a positive figure and hence that itself is to be taken as undisclosed income for the purpose of taxation. It is the intention of the Legislature not to give set off adjustments and Chapter VI adjustments and also Chapter VI-A deductions, the interpretation to allow the undisclosed income detected during the search adjusted against the loss that was available in books or unabsorbed depreciation that was available in books in terms of Column figures would de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness profits. A reading of sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two -- one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be the allowance of the following previous year cannot, at the same time, represent the allowance of the current assessment year. The view that the balance of the current year's depreciation would continue to be the allowance relatable to the current assessment year, goes against the statutory provisions. Therefore, in case of inadequate business profits, the current year's depreciation is admissible only to the extent of availability of business profits and the result would be the business profit would be reduced to 'nil'. Accordingly, there would be neither profit (because the available current year's depreciation has been adjusted against the total current year's business profits) nor loss [b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consequence of concealment of income. But, the consequence of concealment is affecting only subsequent assessment years. We, therefore, hold that the amounts taxed for the assessment years 1994-95 and 1995-96 cannot form part of the block assessment. They stand deleted. 10. Now, we have to consider the following amounts:-- --------------------------------------------------------------------------------- Assessment year 1991-92 Rs. 4,25,000 Assessment year 1996-97 Rs. 8,18,585 Assessment year 1997-98 Rs. 2,84,520 ---------------- Total Rs. 15,26,105 --------------------------------------------------------------------------------- With respect to the above years, the assessee has no case to contend that the current year's depreciation is enough to absorb the additions towards concealed income. The assessments had resulted in business losses and so there is no question of adjusting the current year's depreciation. Business loss as per the assessment orders under section 143 or as per return have to be shown in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the income computed under section 158BB are the same; both are 'Nil'. Therefore, there is no question of reducing the income arrived at after the inclusion of undisclosed income by the income assessed under section 143. When both are 'nil', the difference between the figures would also be 'nil'. 14. In the result, the appeal is pertly allowed as indicated above. Per O.K. Narayanan, Accountant Member -- I have had the privilege of perusing the order proposed by the Hon'ble Vice-President (C.S.). With great respect to my learned brother, I am unable to agree with the view expressed by him in that order. Hence, I proceed to pass this dissenting order on this appeal. 2. As a matter of fact, there is no serious dispute against the quantum of undisclosed income estimated by the Assessing Officer. The assessee-company has raised a contention for telescoping certain investments made in the promoters' equity. As pointed out by my learned brother in his order (para 7), that claim has not been substantiated by the assessee-company. Therefore, the estimate of undisclosed income at Rs.1,46,02,752 is liable to be confirmed. 3. The thrust of the contention of the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the income either under section 32(1) or section 32(2). Where the profits of a particular previous year is not sufficient to absorb the depreciation of that previous year, under section 32(1), the balance of the depreciation not absorbed is to be carried forward to the succeeding previous years so that the unabsorbed depreciation is adjusted against the profits of the succeeding previous years. For the purpose of this carry forward and adjustment, the unabsorbed depreciation assumes the colour of "current depreciation" of the succeeding previous years. The unabsorbed depreciation is transformed in to current depreciation of the prospective previous years by virtue of the operation of section 32(2). Therefore, the adjustment sought for by the assessee-company is possible only under the provisions of law contained in section 32(2) of the Act. 6. The assessee-company has rightly pointed out that the undisclosed income of the block period has to be computed in accordance with the provisions of Chapter IV, as provided in section 158BB(1). But a reading of the provisions contained in section 158BB makes it clear that the provisions of Chapter IV are applicable, subject to cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry forward and set off of unabsorbed depreciation and business loss, the genus of the depreciation and loss is the same. The above decision has been referred to and considered by the Apex Court in its recent judgment in V.V. TransInvestments (P.) Ltd. v. CIT [1999] 237 ITR 777 in which Their Lordships have held that for the purposes of section 115J of the Income-tax Act read with section 205 of the Companies Act, losses include depreciation also. This judgment has reversed the decision of the Hon'ble High Court of Andhra Pradesh in V.V. Trans-Investments (P.) Ltd.'s case which decision has been relied on by the assessee-company and acted upon by the learned brother. The decisions of the Apex Court in Garden Silk Wvg. Factory's case was rendered in the context of the allocation and set off of depreciation in the case of a firm and its partners; and in V.V. TransInvestments (P.) Ltd.'s case was rendered in the context of section I 15J of the Act. In both the cases, the Court has held that depreciation and business loss are of the same genus and depreciation is a part of the loss or loss includes depreciation also, and they are treated differently only for certain purposes of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s insulation is explicitly provided by Explanation given under sub-section (2)of section 158BA. For the sake of convenience, the Explanation is reproduced below:-- Explanation.--For the removal of doubts it is hereby declared that-- (a) the assessment made under this chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; (b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period; (c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period." Explanation (b) makes the position very clear by stating that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period. The ultimate loss mentioned by the assessee-company is the unabsorbed loss considered in the regular assessments. Such loss considered in the regular assessments cannot be read alongwith the undisclosed income. The quantum of undisclosed income determined by the Assessing Officer is Rs.1,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is right in law in levying the tax on the undisclosed income determined in the impugned block assessment. The assessment is accordingly confirmed. 16. In the result, the appeal is dismissed. REFERENCE TO THE HON'BLE PRESIDENT, ITAT, UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Shri R. Swarup, Vice President -- As we differ in opinion, after due deliberation on the point in adjudication in this appeal, we refer the matter to the Hon'ble President, Income-tax Appellate Tribunal, under section 255(4) of the Income-tax Act, 1961, for nominating a Third Member to resolve the following points of difference:-- (1) "Whether, on the facts and circumstances of the case, the Assessing Officer is correct in treating the current year's unabsorbed depreciation as 'loss' for the purpose of computation of undis closed income under section 158BB of the Income-tax Act, 1961?" (2) "Whether block assessment can be framed where aggregated total income (including undisclosed income) determined under section 158BC for each assessment years and assessed/returned income is loss and whether tax under section 113 can be charged on the difference between the loss determined under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and circumstances of the case, the Assessing Officer is correct in treating the current year's unabsorbed depreciation as 'loss' for the purpose of computation of undisclosed income under section 158BB of the I.T. Act, 1961? (2) Whether block assessment can be framed where aggregated total income (including undisclosed income) determined under section 158BC for each assessment years and assessed/returned income is loss and whether tax under section 113 can be charged on the difference between the loss determined under section 158BC for each assessment year and loss assessed for each year under section 143(3) or returned by the assessee where assessment is not completed? (3) Whether unabsorbed depreciation which cannot be absorbed for want to profit while framing the regular assessment under section 143(3) for the assessment years 1991-92 and 1995-96, can be considered and allowed deduction out of the income for the relevant year i.e. 1991-92 and 1995-96 while computing the income for the block period consisting of 10 years under section 158BC of the Act?" 3. The questions framed by the learned Accountant Member read as follows: "(1) Whether on the facts and in the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------- Profit on unaccounted sales for the assessment year 1995-96 Rs. 52,92,864 Unaccounted investment in promoter's quota shares of Haridas family for the assessment year 1995-96 Rs. 19,00,000 Cash credits in the books of account of sister companies in the assessment year 1991-92 Rs. 4,25,000 ---------------- Total Rs. 76,17,864 ---------------- --------------------------------------------------------------------------------- The assessee-company, however, set off the above mentioned undisclosed income against the business loss/unabsorbed depreciation of each year and accordingly worked out the undisclosed income at a Nil figure and thus filed the block return showing the undisclosed income only at a Nil figure. The year-wise details furnished by the assessee-company in the block return read as follows:-- --------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,59,936 - - Nil 52,56,436 27,03,387 Nil 1,02,58,573 16,49,855 Nil - - Nil - 3,26,35,713 Nil - 1,36,65,373 Nil 4,03,12,335 2,43,53,512 Nil - - ------------- ---------------- ---------------- 25,94,956 5,58,27,344 7,69,85,919 ------------- ---------------- ---------------- Total Undisclosed Income for the Block period = Nil --------------------------------------------------------------------------------- It may be observed from the above statement that the assessee-company has shown the undisclosed income at Nil even though there are variations between the figures shown in Columns E and F on the one hand and Band C on the other hand in the table. Columns E and F relate to business loss and depreciation as per the regular returns and as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the undisclosed income required to be done in Part-II and Part-III in Form No. 2B, the assessee should have reflected the undisclosed income of Rs.76,17,864 as per the following table: --------------------------------------------------------------------------------- Previous Asst. Total Income including undisclosed Year Year income computed under section 158BB (chrono- ---------------------------------------- logically) Total Losses Income ------------------------- Source Amount (Rs.) (Rs.) -------------------------------------------------------------------------------- 1st Earliest 1987-88 13,58,400 2nd 1988-89 1,76,620 3rd 1989-90 19,78,079 4th 1990-91 10,59,936 5th 1991-92 75,34,823 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------- --------------------------------------------------------------------------------- 6. I have referred to the above table given by the learned DR at this stage only to bring out the difference between the modes of working out the undisclosed income adopted by the assessee and that held by the Department to be the correct method. 7. The Assessing Officer, however, made certain additions to the undisclosed income and computed it at Rs.1,46,02,756 as against the admitted figure of Rs.76,17,864 adopted by the assessee. There is no dispute between the two learned Members about the computation of the undisclosed income of Rs.1,46,02,756. The only dispute is how to compute the undisclosed income for taxing it under the provisions of section 113 of the Income-tax Act when the business loss and unabsorbed depreciation of each assessment year included in the block period is more than the undisclosed income arrived at for each of the years. It is the contention of the assessee that as the business loss and depreciation for each of the concerned years included in the block period is more than the undisclosed income, the undisclosed income for the block period has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the transformation of the character of unabsorbed depreciation into business loss and "the addition of undisclosed income became a simple matter of overstatement of business losses to the extent of undisclosed income". He decided the issue, in para 8 at pages 10 and 11 of his order, in favour of the assessee and his remarks are as follows:-- "8. The main point for consideration is whether the assessee's computation of income at 'Nil' for the purpose of regular assessment as well as under section 158BB is correct. The assessee's case is that if the current year's depreciation exceeds the business income as computed, the allowance of depreciation for that year would be only equal to the business profits. A reading of sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two--one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 158BB as well as income as per regular assessments would be 'Nil'." The learned Judicial Member also explained that the above view taken by him need not necessarily result in escapement of undisclosed income from being taxed inasmuch as the carried forward depreciation to the subsequent years would get reduced and the consequences of concealment is felt in subsequent assessment years. So for the assessment years 1994-95 and 1995-96, the learned JM went by the criterion of section 32(2) of the Act prohibiting the set-off of only unabsorbed depreciation of earlier years against undisclosed income and it did not raise any bar against the set-off of unabsorbed depreciation of the current year against the undisclosed income. For the assessment years 1991-92, 1996-97 and 1997-98, the learned JM observed that there were no positive incomes for these years even after the inclusion of undisclosed income and when there is no positive income for any year or in the aggregate for the block period, there cannot be any undisclosed income to be brought to tax under section 113. The relevant observations of the learned JM are contained in paras 11 and 12 at page 13 of his order and they re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company for the adjustment of the current depreciation under section 32(2) against the undisclosed income of the concerned assessment year. He also observed that in terms of the columns prescribed in Form 2B of the block return in Part-II and Part-III thereof, a reduction in loss has to be categorised as undisclosed income. His comments in this regard are in paras 13 and 14 and page 21 of his order, and they are as follows:-- "13. Undisclosed income when aggregated to the income assessed in the regular assessments, the ultimate income of the assessee may increase or the accumulated loss may reduce. This is an accounting concept. But this concept is not applicable to the case of taxation of undisclosed income as it cannot be merged with 'disclosed income'; the income or loss considered in the regular assessments. The basis of the assessee's contention of positive income is the integration of 'undisclosed income' with 'disclosed income', which is not permitted in the Scheme of Chapter XIVB. This position is clear from the computation format of undisclosed income provided in Part-II of Form 2B return. Column B and Column D therein relate to case of losses. Column-B is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islature and the return form and the rules cannot override the statutory provisions. In this context, reliance is placed upon the ratio of the decision of the Tribunal in the case of Ginners Pressers Ltd. v. Dy. CIT [1993] 46 ITD 185 (Bom.) (SMC) wherein interpreting the provisions of section 272A(2)(c) it was held that the time limit for furnishing annual returns prescribed under rule 37 of the Income-tax Rules was in excess of the power of rule-making authority and, therefore, it has to be ignored. In other words, it is claimed that the computation of the undisclosed income filed by the assessee in the block return is in consonance with law, though it may not be in consonance with the format of the block return in Form 2B. 12. The next limb of the contention of the learned counsel for the assessee is that clause (a) of Explanation to section 158BB prohibited the set-off of only the carried forward unabsorbed depreciation of the earlier years against the undisclosed income inasmuch as it referred to the set-off of unabsorbed depreciation under sub-section (2) of section 32 and the said clause in no way prohibited the set-off of the depreciation of the current year against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income as per the regular returns in the undisclosed income worked out on the basis of the block return and vice versa, and this Explanation cannot deprive the assessee of the rightful claim in the form of deduction for depreciation available to it under Chapter IV as per the provisions of which Chapter the undisclosed income has to be computed under the provisions of clause (a) of Explanation to section 158BB. In other words, it is claimed that the learned JM was correct when he held that current year's depreciation is available for being set off against the undisclosed income and while granting such deduction, the provisions of section 32(2) do not come into play and only the provisions of section 32(1) are involved. It is also claimed that as in the present case the depreciation can be absorbed against the undisclosed income, the business loss, exclusive of depreciation, determined in regular assessment will remain unchanged. 13. The next limb of the argument of the learned counsel for the assessee is that the scheme of the Chapter XIVB is such that there cannot be a tax on aggregate loss or on a simple reduction of loss. It is claimed that what is to be assessed is the undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,58,400 (earliest) ------------------------------------------------------------------------------- 2nd 88-89 1,76,620 ------------------------------------------------------------------------------- 3rd 89-90 14,78,079 ------------------------------------------------------------------------------- 4th 90-91 10,59,936 ------------------------------------------------------------------------------- 5th 91-92 (x) 75,34,823 ------------------------------------------------------------------------------- 6th 92-93 1,19,08,428 ------------------------------------------------------------------------------- 7th 93-94 24,49,921 ------------------------------------------------------------------------------- 8th 94-95 (x) 3,08,53,238 ----------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------- 7th 24,49,921 ------------------------------------------------------------------------------- 8th 3,28,71,054 ------------------------------------------------------------------------------- 9th 1,28,04,522 ------------------------------------------------------------------------------- 10th ------------------------------------------------------------------------------- 11th 6,40,01,511 ------------------------------------------------------------------------------- 50,44,877 13,10,23,417 (C) (D) ------------------------------------------------------------------------------- [(D) - (B)] 1,42,18,232 = 1,46,02,752 --------------------------------------------------------------------------------- It may be noted that the undisclosed income is computed by the Assessing Officer at Rs.1,46,02,752 as against the undisclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been that Part-II of Form 2B, while it provides for yearwise losses either as assessed/returned earlier or as worked out after taking into account the undisclosed income, does not have a column for depreciation and so necessarily the losses reflected in Part-II in columns D and B are inclusive of the current depreciation of the relevant years. So it is claimed that the mode of computation of the undisclosed income adopted by the assessee, as indicated by me hereinabove, taking into account business loss and depreciation separately, is not correct and is against the scheme of Chapter XIV-B of the Income-tax Act. It is also pleaded that when undisclosed income is located and brought to tax, it may result in either an enhancement of incomes already assessed or it may result in a reduction of losses computed in the regular assessments. Either way, there is an undisclosed income, which is a positive figure and has necessarily to be brought to tax. It is also pleaded that the figures in columns C and D, which are as per the returned/assessed incomes, are constants and cannot be tampered with. The figures in columns A and B in Part-II have to be worked out after taking into account the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s undisclosed income in terms of Chapter XIV-B of the Income-tax Act. It is also claimed that Part-II and Part-III of the block return clearly provide that the difference between the assessed/returned incomes and the incomes brought to tax in the block assessment, though a loss in the aggregate, has to be brought to tax as undisclosed income. As already mentioned, it is also claimed by the learned DR that depreciation is part of the business loss for the purpose of reflecting the figures in Part-II of the block return as no separate column is provided for depreciation. It is also claimed that even in terms of normal commercial practice, depreciation has to be regarded as part of business loss, as held by the Apex Court in the case of Garden Silk Wvg. Factory and also the decision of the Apex Court in the case of V.V. Trans-Investments (P.) Ltd. 17. In the rejoinder, the learned counsel for the assessee wondered how an assessee can be asked to pay tax on the so-called undisclosed income of Rs.1,46,02,752 when the total loss for the block period has been computed at Rs.11,67,05,185. According to the learned counsel for the assessee, it is a travesty of justice and the Act does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposing a new Scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent." It was mentioned in the memorandum explaining the provisions of Chapter XIVB that the intention was "to make the procedure of assessment of search cases cost-effective, efficient and meaningful". The learned author, D.M. Harish, has explained the essence of the new procedure in the following terms:-- "The essence of the new procedure, therefore, is a separate single assessment of the undisclosed income, detected as a result of a search and this separate assessment will be in addition to the normal or regular assessments covering the same period. A separate return covering the years of the block period is an obvious pre-requisite for making a 'block assessment'. Since the assessment to be made under the new procedure is of 'undisclosed income' of the 'block period', these two concepts require an explanation. Section 158B defines the two concepts of 'block period' and 'undisclosed income'". (D.M. Harish on Income-tax, Page 7403, Volume 6, First Edition) Clause (a) of Explanation to section 158BB which has figured very prominently in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act." The substance of the new procedure for computing the undisclosed income for the block period has to be ascertained from the conspectus of the above and other related provisions. It may be noticed that under the provisions of section 158BB, the total income of the previous years falling within the block period has to be computed in accordance with the provisions of Chapter IV on the basis of search material and all other material available with the Assessing Officer which includes the returns filed by the assessee, if any, and the assessments already made, if any, and the aggregate of the total income of the previous years falling within the block period so computed in accordance with the provisions of Chapter IV has to be worked out. It may be observed that the words "total income" has been defined in section 2(45) of the Income-tax Act and it reads as follows:-- "'total income' means the total amount of income referred to in section 5, computed in the manner laid down in this Act;" As the total income has to be computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference computed in terms of section 158BB(1) would also be a positive figure. There can be other situations where either the first aggregate mentioned above or the second aggregate mentioned above, or both, can be negative figures. Whether the relevant figures are positive or negative, the mode of quantification is only by working out the difference. The mode of working out the difference may be illustrated as follows:-- ---------------------------------------------------------------------------------- First Aggregate Second Aggregate Difference ---------------------------------------------------------------------------------- Rs. Rs. Rs. ---------------------------------------------------------------------------------- (1) 15,00,000 10,00,000 5,00,000 (2) 15,00,000 (-)10,00,000 25,00,000 (3) (-)10,00,000 (-)15,00,000 5,00,000 (4) (-)15,00,000 (-)10,00,000 Nil ---------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and the increase happens when the said aggregate is a loss or a negative figure. The words "as increased by the aggregate of the losses of such previous years" figuring in section 158BB(1) invariably result in this mode of quantification. The statutorily stipulated mode of quantification cannot be ignored. In the undated written submissions filed by the learned counsel for the assessee before me, it is pleaded that the computation of the undisclosed income in the present case on the basis of the reasoning adopted by the Assessing Officer would result in an absurd figure of Rs.23,73,54,328. The relevant portion of the written submissions reads as follows:-- "In the instant case, the assessee has computed the total income for each of the previous years as per the provisions of the Act. However, each of the previous years losses and depreciation were enough to neutralize the addition of undisclosed income. Thereby the total income of the respective years has remained negative. Therefore in view of the heavy losses incurred by the assessee in some of the previous years the aggregate total income of all the previous years is turned into negative. Further for deriving the undisclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------- Aggregate total income as per the block return (-) Rs. 11,13,75,788 Add: Aggregate total income as returned/assessed Rs. 12,59,78,540 ----------------------- Difference or undisclosed income Rs. 1,46,02,752 ----------------------- ---------------------------------------------------------------------------------- It is also made out in the written submissions that on the basis of the method adopted by the Assessing Officer, an assessee who had not filed any returns for some of the years in the block period and so was not assessed on any negative figure stands to gain compared to somebody who complied with the statutory provisions, filed the returns and was assessed on losses. He gave a hypothetical illustration in Annexure-III of his written submissions, which reads as follows: ---------------------------------------------------------------------------------- "Assess- Total income including Income/loss returned/ ment undisclosed income/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------------- Total undisclosed income: (A - C) + (D - B) = Rs. (53,29,397 - 50,44,877) + Rs. (8,53,47,841 - 11,67,05,185) = Rs. 2,84,520 - 3,13,57,344 = (-) Rs. 3,10,72,824" ---------------------------------------------------------------------------------- The figures given in the above table are the same as those reproduced by me hereinabove as having been given by the learned DR on the basis of the block assessment order. Actually, the assessee itself gave those figures as Annexure-II to the written submissions filed before me. The only difference between the two sets of figures is that the loss of Rs.3,28,71,054 for the assessment year 1994-95 in column D and the loss of Rs.1,28,04,522 for the assessment year 1995-96 in column D have been omitted in the said Annexure-III. In the light of the said figures in Annexure-III, it is pleaded that if the assessee had not submitted the returns for the assessment years 1994-95 and 1995-96, the undisclosed income would have been a loss as per the method adopted by the Department and only because the assessee had filed the returns for these two years and wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,-- (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and-- (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r working out the undisclosed income, the points of difference made out by the learned JM and the learned AM as to whether the unabsorbed current depreciation can be set off against the undisclosed income are somewhat misconceived as the Assessing Officer has not denied such deduction. When the undisclosed income computed on the basis of the search material is reduced from the loss, assessed, including depreciation, it follows that the entire depreciation claimed is considered and allowed as a deduction against the undisclosed income. This may be observed from the statement of total income given by the assessee for the assessment year 1995-96 along with the original return, which is at page 79 of the Departmental Paper Book (DPB), and it reads as follows:-- ---------------------------------------------------------------------------------- "Statement of total income ---------------------------------------------------------------------------------- Rs. ---------------------------------------------------------------------------------- Profit before Tax as per Profit Loss ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -II of the return in Form No. 2B furnished by the learned DR, which I have extracted hereinabove. In other words, the loss of Rs.17,47,691 reflected in column B of the table furnished by the learned DR as the assessed loss for the assessment year 1995-96 in the block return is arrived at after set-off of the unabsorbed current depreciation of Rs.1,28,04,522 as per the regular assessment order. The same is the position for the other assessment years. So the entire controversy as to whether the current depreciation, which remains unabsorbed in the regular assessment order, should be allowed as a deduction from the undisclosed income computed in a particular year in the block assessment seems off the mark as the Assessing Officer himself has allowed such set-off or deduction. I may also mention that the dispute raised by the learned counsel for the assessee is only with regard to current depreciation and not with regard to the carried forward unabsorbed depreciation of the earlier years which, admittedly, is prohibited from setoff by the provisions of sub-section (4) of section 158BB. In this view of the matter, the reliance placed by the learned counsel for the assessee that such a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of a business on commercial principles (quite apart from statute) and it is difficult to say why, when such deduction yields a negative figure of profits, it cannot be a 'loss' as generally understood. CITv. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 (SC) relied on. There is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciation in this regard although it is a component element of the genus described as 'loss'." In the light of the above observations of the Apex Court regarding depreciation being a component part of loss except for the purpose of carry forward under the provisions of the Income-tax Act and the special mode of working out the undisclosed income stipulated in the provisions of section 158BB(1) and also the format of the return which is not at variance with the provisions of Chapter XIV-B, I see no infirmity in the computation of undisclosed income at the figure of Rs.1,46,02,752 by the Assessing Officer. 21. I may mention that even though the learned counsel for the assessee pleaded before me t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regular assessments. Chapter XIV-B is a self-contained code and it appears to me that the scheme laid down in the Chapter for quantification and taxing of the undisclosed income has to be adhered to. 23. For the above reasons, I find myself generally in agreement with the learned AM. 24. I may also mention that Chapter XIV-B is intended as a deterrent against tax evasion and an interpretation has to be placed on the said Chapter which does not defeat the legislative purpose. If a view is taken that when the aggregate of the total income of the previous years falling within the block period is a loss, there can be no levy under section 113 of the Act under any circumstances, it would, to my mind, defeat the legislative purpose. It would lead to the result that when there is a substantial loss for one of the initial years included in the block return and it is determined by the Assessing Officer, the assessee can even deliberately file inaccurate returns for subsequent years under the bold assumption that he cannot be visited with any consequences under Chapter XIV-B because of the determined loss in the earlier year. So I agree with the view taken by the learned AM that the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erate that I am in agreement with the learned AM and I am of the view that the undisclosed income of Rs.1,46,02,752 computed by the Assessing Officer can be brought to tax under section 113 of the Income-tax Act. 33. The case will go before the Bench for an order to be passed in terms of section 255(4) of the Income-tax Act. Per Dr. O.K. Narayanan, Accountant Member -- This is a block assessment appeal. It arises out of the block assessment order dated 12-3-1998. Assessment years covered by the block assessment under appeal are from 1987-88 to 1997-98. 2. This appeal was originally heard on 10-2-1997 by the Division Bench of this Tribunal, consisting of Hon'ble Vice President, Shri Ram Swarup and the author--Member of this order, Dr. O.K. Narayanan. There were differences of opinion between the Members constituting the original Bench, with regard to the following contentions:-- (a) The additions made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of section 32(2), since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to agree with the view that current depreciation could be adjusted under section 32(2) against the undisclosed income, so as to make the undisclosed income 'NIL'. With regard to the other contention, he held that wherever an amount of undisclosed income is determined under the provisions of section 158BB, that undisclosed income shall always be a positive figure. It may increase the aggregate income of the assessee or reduce the aggregate loss of the assessee, but that part of final result is not relevant for the recognition of undisclosed income and the levy of tax thereon. He held that the moment undisclosed income is determined in a block assessment, it attracts the levy of tax prescribed under section 113. 5. When the relevant questions proposed by the Members constituting the original Bench have been referred by the Hon'ble President to the Third Member nominated by him, the learned Third Member held as follows:-- (1) The current year's depreciation which is not absorbed in the regular assessment is available for deduction while computing the undisclosed income under section 158BB. (2) In the method of computation adopted by the Assessing Officer, such deduction has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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