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TMI Blog1997 (9) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... of the various additions made in the block assessment at this stage. Since we also felt so, we heard arguments only in respect of this ground. 3 The block period consists of the assessment years 1986-87 to 1995-96 (10 years) and the period from 1-4-95 to 2-8-95, the date of search. The details of the income returned, profit or loss assessed for the different previous years, etc., are as below : Assessment year Income returned (Rs.) Income assessed (Rs.) 1986-87 N.A. N.A. 1987-88 N.A. N.A. 1988-89 N.A. N.A. 1989-90 Loss 11,62,679 Loss 11,62,679 1990-91 85,360 85,360 1991-92 39,01,035 52,93,894 1992-93 Loss 5,36,62,350 6,18,60,079 1993-94 Loss 3,35,15,530 Loss 2,74,19,057 1994-95 Loss 1,81,42,420 Loss 1,39,09,732 1995-96 Loss 3,77,27,460 Loss 2,74,20,857 The Assessing Officer has raised a demand on the assessee on the basis of the income assessed in respect of the assessment years 1990-91, 1991-92 and 1992-93. The contention of the assessee is that the losses assessed in respect of the assessment years 1989-90, 1993-94, 1994-95 and 1995-96 are to be adjusted against the aforesaid income and if they are so adjusted, there would be a net loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d then arrive at a net loss in the assessment. His second point was that in any event the losses cannot be set off in the manner claimed by the assessee because of the clear prohibition contained in clause (c) of sub-section (1) of section 158BB. He relied on the observations at page 2 of the assessment order in this regard. 6. Chapter XIV-B, consisting of sections 158B to 158BH, was inserted by the Finance Act, 1995 with effect from 1-7-1995. It provided for a "special procedure for assessment of search cases", where search action has been initiated after 30-6-1995. Section 158BA(1) provides that notwithstanding anything contained in any other provisions of the Income-tax Act, in the case of an assessee in whose case action for search has been taken after 30-6-1995, then the Assessing Officer "shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter". Sub-section (2) provides for charging of tax in respect of the undisclosed income of the block period at the rate prescribed by section 113, uniformly irrespective of the year or years to which the income is referable and irrespective of the fact whether the regular assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32; (b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called: Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement; (c) assessment under section 143 includes determination of income under sub-section (1) or sub-section (1B) of section 143. (2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to 'financial year' in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced in respect of an assessment of an assessee whose case is not covered by Chapter XIV-B, cannot be accepted, as it is a well-accepted and recognised position that the computation must be made with reference to the whole period of twelve months comprised in the previous year and the tax is payable only if such computation shows a positive income. Losses incurred during the previous year cannot be ignored and this principle is in-built in the concept of an assessment under the Income-tax Act. The principle is that for the purpose of charging income-tax the various sources of income of an assessee have got to be aggregated and the results of each source for the entire previous year have to the reckoned and merely because the first few months of the previous year show a positive income and the rest of the period shows a negative income, the result of the later period cannot be ignored. The income-tax law does not permit this. In CIT v. National Syndicate [1961] 41 ITR 225 , the Supreme Court held that "if the profits or gains of a business for a particular year are to be taxed they must be computed for the whole year taking into account losses incurred during the same year&quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Chapter VI or unabsorbed depreciation under section 32(2). Reading sub-section (1) in conjunction with clause (a) of the Explanation, it is clear that while aggregating the results of the different previous years falling within the block period, the losses have also to be taken into account. It may very well happen that while determining the result of a particular previous year falling within the block period on the basis of the evidence found as a result of the search or the documents or such other materials as are available with the Assessing Officer, he may find that the computation of the income as per Chapter IV (sections 14 to 59) yields a negative result, i.e., a loss. The possibility of this position has been taken into account by clause (a) of the Explanation. It is significant that having done so, the Explanation does not further say that if the computation results in a loss it should be ignored. On the contrary, it proceeds to say that the loss for that previous year shall be considered for aggregation. It further clarifies that only the brought forward losses under Chapter VI and the un- absorbed depreciation under section 32(2) cannot be adjusted against the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uture years may have been determined in the regular assessments made prior to the date of search under the normal provisions of the Act and in the very nature of things such losses, determined and allowed to be carried forward, have no place in the context of a block assessment framed after the search. The two streams of assessment are kept apart and one is not projected into the other. The position is made clear beyond any doubt in sub-section (4) of section 158BB. It says that losses brought forward from the earlier years under Chapter VI or unabsorbed depreciation under section 32(2) will not be set off against the undisclosed income determined in the block assessment under Chapter XIV-B, but will be carried forward for being set off in the regular assessments. Thus, reading clause (a) of the Explanation to sub-section (1) in harmony with the said sub-section and sub-section (4), we are of the opinion that the prohibition against setting off the losses against the undisclosed income of the block period applies only to losses under Chapter VI (section 72) and unabsorbed depreciation determined and permitted to be carried forward in regular assessments and does not apply to adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted in the block assessment, not having been filed till the date of search, the losses computed for those years cannot be set off against the income computed in respect of the other years falling within the block period. 10. The answer to Mr. Sudhir Chandra's poser whether the cumbersome exercise of a search is undertaken merely to compute the assessee's losses for being set-off against the undisclosed income is that section 158BB itself accepts the possibility of such a situation by referring to the computation of a loss in respect of a previous year falling within the block period, on the basis of the evidence or materials found during the search and as per the provisions of Chapter IV. That apart, one of the objects of a search is to obtain evidence regarding the true income of an assessee and if such evidence points to a loss, the computation being made under the statute itself, there can be no escape from the conclusion that the loss is to be set off, howsoever reluctant one may be to do so. 11. To sum up, we hold that for the reasons stated above, the assessee's claim is accepted and the losses for the assessment years 1989-90, 1993-94, 1994-95 and 1995-96, as computed in ..... 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