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Determination of Undisclosed Income in case of Block Assessment

Subject : Income Tax Law
Month-Year : Oct 2002
Author/s : Chetan A. Karia
Chartered Accountant
Topic : Determination of Undisclosed Income in case of Block Assessment
Article Details :

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 :

Queries :

2.1 Whether the Assessing Officer was right in treating the income from sale of plot as undisclosed income ?

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 income ?

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 ?

Opinion :

3. ‘Undisclosed’ 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.

4. Scope 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)].

5. Block 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 enquiries.

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.

6. Computation 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. 158BB.

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. Rs.3,31,148/-.

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.

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