Madras H.C : The addition of gross profit could be made only in respect of one of the assessment years in the block

High Court Of Madras

CIT vs. R.M. Patel (HUF)

Section 158BB, 158BC, 158BD

Block period 1988-89 to 5th Nov., 1998

P.D. Dinakaran & P.P.S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 385 of 2007

18th April, 2007

Counsel Appeared :

J. Narayanasamy, for the Appellant

JUDGMENT

P.D. DINAKARAN, J. :

The above tax case appeal is directed against the order of the Tribunal in IT(SS)A No. 55/Mad/2003, dt. 18th Aug., 2006.

2.1. The relevant assessment is block period of 1988-89 to 1997-98 and 1st April, 1998 to 5th Nov., 1998. The assessee is an HUF (in short ‘HUF’). A search under s. 132 of the IT Act was carried out at the residential and business premises of the Karta of the HUF, viz. Ratanshi Patel and his brother Khimji M Patel between 5th Nov., 1998 and 30th Nov., 1998. During the search, it was found that HUF assessee had a timber trading business by name Ram Plylam during the asst. yrs. 1996-97, 1997-98 and 1998-99. The materials seized indicated that the assessee had also undisclosed income from the business and therefore, notice under s. 158BD of the Act was issued to the assessee on 13th June, 2000, as the proprietor of the concern, Ram Plylam. In response to the notice, the assessee filed a return in Form 2B on 3rd July, .2000 declaring undisclosed income as nil.

2.2. Later, in response to the notice under ss. 142(1) and 143(2), the assessee was heard and an explanation was offered that the material seized during the search were in no way connected to the assessee. But, the AO, without appreciating the explanation offered by the assessee, passed an assessment order under s. 158BD r/w ss. 158BC and 143(3), computing the undisclosed income as under, demanding income-tax thereon at 60 per cent, which worked out to Rs. 43,88,716 (sic) and proposed to initiate penalty proceedings under s. 158BFA(2) of the Act.

2.3. Aggrieved by the said assessment order, the assessee preferred an appeal before the CIT(A), who, by order dt. 24th Dec., 2002, held that the seized materials referred to by the AO related to Sri Raghuveer Timbers and Sri Muralikrishna & Co., as there was no indication in the seized materials about the suppression of sales by the business concern of the assessee, viz. Ram Plylam and that the AO was not correct in invoking s. 158BD of the Act. It was further held that the AO had not computed the undisclosed income based on the materials, but merely on the basis that the family members of the assessee had moved before the Settlement Commission disclosing additional income by offering gross profit at 8 per cent and held that the same cannot be a valid reason for invoking s. 158BB of the Act, inasmuch as s. 158BB, as amended by Finance Act, 2002 with retrospective effect from 1st July, 1995 contemplates that the undisclosed income shall be computed in accordance with the provisions of that Act on the basis of evidence found as a result of search and such other material or information as were available with the AO and relatable to such evidence. Accordingly, the CIT(A) has held that there was no basis for passing an order under s. 158BD r/w ss. 158BC and 143(3) of the Act for the alleged undisclosed income.

2.4. On further appeal by the Revenue, the Tribunal, by order dt. 18th Aug., 2006, partly allowed the appeal. Hence, the above appeal raising the following substantial questions of law :

“(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the addition of gross profit could be made only in respect of one of the assessment years in the block ?

(ii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the undisclosed income cannot be assessed as no material relating to the assessee was found during the search, even though information was arrived at during the block assessment of the related concerns ?”

Concededly, the seized materials did not relate to the assessee. On the other hand, what is contemplated under s. 158BB is that the undisclosed income shall be computed only in accordance with the provisions of the Act on the basis of evidence found as a result of search and such other material or information which are relating to such material. If the material seized does not, in any way, connect the assessee indicating that the assessee had any undisclosed income, it may not be proper to proceed against the assessee under s. 158BD r/w ss. 158BC and 143(3) of the Act without any basis whatsoever, especially in the absence of any material indicating any suppression of sales or suppression of income by the assessee. If that be so, we do not have any hesitation to hold that the undisclosed income cannot be assessed in the absence of any material collected during the search relating the assessee and that the Revenue cannot proceed on the basis of such material which is not related to the assessee invoking s. 158BD r/w ss. 158BC and 143(3) of the Act for assessing the undisclosed income during the block period of 1988-89 to 1997-98 and 1st April, 1998 to 5th Nov., 1998. If the Revenue could able to substantiate that the return filed by the assessee for the asst. yrs. 1996-97, 1997-98 and 1998-99 does not disclose the correct income, they are at liberty to take appropriate action only with respect to the relevant assessment years, as rightly held by the Tribunal.

Finding no substantial question of law, the appeal stands dismissed.

[Citation : 298 ITR 274]

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