2003 (3) TMI 10 - HC - Income Tax

Block assessment of 'undisclosed income' u/s158BB, and s.40A(3) cash-payment disallowance after net-profit estimation-assessee wins.

In block assessment under s.158BB (as retrospectively amended by Finance Act, 2002 w.e.f. 01.07.1995), undisclosed income is limited to the portion of the ... Undisclosed income of the block period - Deduction u/s 158BB - income as per books of account - disallowance u/s 40A(3) - HELD THAT:- It is pertinent to state that the major part of this provision has been amended by the Finance Act, 2002, giving retrospective effect with effect from July 1,1995. If the provisions so inserted in the main sub-section (1) and clause (c) are read conjointly, it would be graphically clear that in respect of a block period assessment, even if no return is filed, the benefit would be given in respect of the period which would not come within the frame of tax liability as per the books of account but as far as the balance period is concerned, the tax liability would be treated as undisclosed income. Needless to emphasise if for some years which constitute the block period, the tax liability is not accruable on the foundation of the books of account, then the assessee would also get the benefit and it will not be treated wholly and entirely as the undisclosed income. The undisclosed income is confined to the period for which tax liability is determined on the basis of the entries in the account books or on the basis of material found in the course of search and seizure. Disallowance under section 40A(3) - Assessing Officer has determined the income by applying the principle of net profit rate thereby taking into consideration the whole amount which was transacted below the permissible limit under section 40A(3). It is contended by him that once the whole amount is computed on the formula of net rate income, there is no question of grant of deduction as envisaged under section 40A(3). Tribunal has rightly treated that section 40A(3) is not applicable when a net profit rate is applied by the Assessing Officer. Answered in favour of the assessee and against the Revenue. Issues:1. Interpretation of deduction under section 158BB for assessment years 1988-89, 1989-90, and 1994-95.2. Application of disallowance under section 40A(3) for assessment years 1995-96 and 1996-97.Analysis:Issue 1:The case involved a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred two questions to the High Court. The first question pertained to the deduction under section 158BB for certain assessment years. The Tribunal directed the Assessing Officer to allow deduction under section 158BB based on the income as per the books of account, which was below the taxable limit. The court examined the relevant provisions of section 158BB and emphasized that the undisclosed income of the block period should be computed based on the evidence found during search or seizure. The court noted that the amendment by the Finance Act, 2002, clarified the treatment of income below the taxable limit as per the books of account. It was held that the tax liability should be fixed according to the income as per the books of account for certain years within the block period.Issue 2:The second question revolved around the application of disallowance under section 40A(3) for specific assessment years. The Tribunal had granted benefit to the assessee under section 40A(3), leading to an appeal by the Revenue. The court examined the provisions of section 40A(3) and the Tribunal's decision in the original appeal. The Tribunal had deleted the addition under section 40A(3) for the relevant assessment years based on the application of a net profit rate. The court agreed with the submission that when the income is computed using a net profit rate, there is no need for further deduction under section 40A(3). Consequently, the court ruled in favor of the assessee and against the Revenue on both issues, highlighting the correct application of the provisions in each scenario.In conclusion, the High Court provided a detailed analysis of the legal provisions involved in the case, addressing the interpretation of deduction under section 158BB and the application of disallowance under section 40A(3) for the respective assessment years. The judgment clarified the tax treatment based on the income as per the books of account and the implications of applying a net profit rate in determining the taxable income.