Case Study 23 :
Facts of the case and issue :
1.1 The querist is an individual
carrying on business of trading in different qualities of paper and he is a
regular tax assessee. Search action was carried out at his business premises on
11th December 2001. During the course of search, lot of incriminating documents
were found along with excess cash of Rs.5 lakhs and excess stock of Rs.45 lakhs.
The querist in his 132(4) statement offered the same as income and further
offered Rs.25 lakhs towards other transactions. Sub-sequently in
response to notice, the querist filed his block return declaring
undisclosed income of Rs.75 lakhs.
1.2 The Assessing Officer
completed the block assessment and determined the undisclosed income of the
querist at Rs.2.04 crores. Among the various additions made by the Assessing
Officer, one major addition of Rs.90 lakhs was made on account of business
income from sale of plot of land. The querist had purchased a plot of land in
June 1996 for Rs.10 lakhs. He subsequently sold the said plot in August
2000 for Rs.1 crore and had offered the long-term capital gain of Rs.86,68,852/-
in his return of income for the assessment year 2001-02. The Assessing Officer,
on the basis of enquiries made during post search enquiries, inferred that the
querist had planned to develop the said plot and as he could not under-take the
proposed project, had sold the same. The Assessing Officer treated the sale of
plot as business income on the ground that the same was an adventure in the
nature of trade and the real intention of the querist was to develop the said
plot and not hold it as a capital asset. The Assessing Officer has not made
computation of total income as prescribed u/s.158BB by reducing from aggregate
of total income, the aggregate of disclosed income, but has separately added
each item of undisclosed income including the above item of Rs.90 lakhs on
account of business income and determined the total undisclosed income.
On the above facts, the querist
has raised following queries :
2.1 Whether the Assessing
Officer was right in treating the income from sale of plot as undisclosed
2.2 Whether the Assessing
Officer was justified in treating the whole of Rs.90 lakhs as business income
when the querist had already offered the capital gains in his regular return of
2.3 Whether the Assessing
Officer was correct in determining undisclosed income item-wise instead of
reducing aggregate of disclosed income from aggregate of total income as
prescribed by S. 158BB ?
income — What it means :
3.1 The concept of undisclosed
income has been a matter of great deliberation and controversy. Though the
definition of undisclosed income u/s.158B(b) is wide in the sense that it widens
the scope of the term ‘undisclosed income’, the Courts have held that the
definition is restrictive in the sense that only ‘Undisclosed’ income can be
assessed in block assessment proceedings.
3.2 Crucial words of S. 158B(b)
defining undisclosed income are ‘income which has not been or would not have
been disclosed for the purpose of this Act’, which restrict the type of income
that can be treated as undisclosed income. Before any income can be assessed as
undisclosed income, it is necessary that the nature of income is such that it
has not been and would not have been disclosed for the purpose of this Act.
of block assessment and undisclosed income :
4.1 S. 158BA(1) provides for
assessment of undisclosed income found during search.
Before any amount can be treated
as undisclosed income, it has to be income which has been detected during the
course of search. As the very purpose of introduction of Chapter XIV-B is
assessment in search cases as evidenced by the heading of Chapter itself, income
which has not been detected in pursuance of search, cannot be assessed as
undisclosed income under Chapter XIV-B. Further, S. 158BB calls for
determination of total income including undisclosed income on the basis of
evidence found during search. Some evidence as to the particular item of
undisclosed income must have been detected during search.
The Assessing Officer cannot make roving enquiries
and cannot make additions to undisclosed income by assumptions and presumptions.
[Sunder Agencies v. Dy.
Commissioner of Income-tax, (1997) 63 ITD 245 (Mum)].
and regular — Two different streams of assessment :
5.1 Chapter XIV-B lays down a
separate code of assessment of search cases. Explanation to S. 158BA(2) inserted
by Finance (No. 2) Act, 1998, w.e.f. 1-7-1995 clearly lays down that there would
be two streams of assessments and income assessable in regular assessment shall
not be assessable in block assessment and vice versa. Further, it has
been provided that same income cannot be assessed twice, once in block and
secondly in regular assessment. As such, except for the fact that there may be
some overlapping of periods, income is assessable only once, in either of the
two proceedings. Thus where primary facts are disclosed in the return or books
of accounts or otherwise, income can be assessed only in regular assessment.
However, where detection is made during search proceedings, then the income can
be assessed under Chapter XIV-B.
5.2 In the present case, the
querist has disclosed and had offered the capital gains arising from the sale of
plot of land in regular assessment. The Assessing Officer has on the basis of
post search enquiries conducted during block assessment proceedings treated the
transaction as an adventure in the nature of trade and has treated the income
from sale of plot as business income. The basic issue involved here is whether
in block assessment proceedings, the Assessing Officer can consider the income,
which has been disclosed by the querist under a particular head of income, as
assessable under a different head of income purely on basis of post-search
5.3 As discussed earlier,
provision of Chapter XIV-B is not intended to be a substitute for regular
assessment. The scope of block assessment is limited to income unearthed during
the search. [See Prakash Foods Ltd., 64 ITD 396 (Pune)]. As regards the
addition of Rs.90 lakhs made by the Assessing Officer, the same cannot be said
to be a finding of search. The transaction of sale of plot of land was duly
disclosed by the querist in his return of income and thus was already known to
the department. Further, the retrospective amendment by Finance Act, 2002, by
addition of words : ‘and relatable to such evidence’, in S. 158BB has
also accepted that scope of enquiry and additions is confined to findings of
search. The Assessing Officer thus cannot apply provisions of
Chapter XIV-B merely to assess a particular income which has been disclosed
earlier under a different head of income.
of undisclosed income :
6.1 Assuming that the Assessing
Officer had jurisdiction to enquire in block assessment proceedings, on account
of any evidence found during search relating to such transaction of sale of plot
of land, the querist can contend that the Assessing Officer erred in bringing to
tax as undisclosed income the whole amount of Rs.90 lakhs, in view of the
computation machinery provided for determining the undisclosed income in S.
6.2 S. 158BB provides for
determination of the total income including undisclosed income for each of the
years and thereafter aggregate the same, to determine the total income including
undisclosed income for the entire block period. After this aggregation, the
aggregate of income as per clauses (a) to (f) of S. 158BB, that can be described
as disclosed or returned income, has to be excluded. The provisions relating to
computa-tion of undisclosed income are mandatory and the same have to be
compulsorily followed. [See BDA Ltd., 65 ITD 501 (Mumbai)]. The Assessing
Officer while making additions and determining the undisclosed income, failed to
consider the computation provisions. The querist has already disclosed the
capital gains arising from the sale of land in the return of income. Thus while
computing the undisclosed income, the Assessing Officer should have deducted
Rs.86,68,852/-, which the querist has offered in his return for A.Y. 2001-02 as
capital gains. Thus even if the Assessing Officer considered the income arising
from the sale of plot as business income, the undisclosed income on that account
will be limited to the extent of benefit of indexation i.e.
In view of the facts narrated
and above discus-sion, the opinion on queries raised is as follows :
7.1 The Assessing Officer could
not have treated income from sale of plot as undisclosed income as the
transaction was already disclosed in the return of income and also no evidence
relating to the said transaction had been found during search.
7.2 Having regard to the fact
that capital gains had already been disclosed in the return of income, the
Assessing Officer could not have treated whole of alleged business income of
Rs.90 lakhs as undisclosed income.
7.3 Provisions of S. 158BB are mandatory for
computation of undisclosed income and the Assessing Officer was not justified in
determining undisclosed income item-wise.