2011 (9) TMI 1000 - AT - Income Tax

Tribunal directs AO to determine undisclosed income per appellate order, emphasizing reliance on seized material.

ACIT Versus M/s. United Phosphorous Ltd. And Vice-Versa

The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals, directing the AO to determine the undisclosed income as per the appellate ... Validity of search actions - admitting additional evidence - treatment of disallowance of certain portion of the expenses incurred - sales promotion expenses and commission payable on exports - addition in the block assessment - Addition of Un-moved balances as income - determining the total income/undisclosed income less than the returned income - determining the undisclosed income at Nil. Issues Involved:1. Validity of Search Action under Section 132 of the Act.2. Disallowance Treated as Undisclosed Income.3. Disallowance out of Clearing & Forwarding Expenses.4. Deletion of Addition on Account of Sales Promotion Expenses.5. Deletion of Addition on Account of Commission Payable on Exports.6. Deletion of Addition on Account of Unmoved Balances.Issue-wise Detailed Analysis:1. Validity of Search Action under Section 132 of the Act:The assessee did not press ground No. 1 pertaining to the validity of the search, hence it was treated as withdrawn.2. Disallowance Treated as Undisclosed Income:The CIT(A) partly allowed the disallowance out of clearing and forwarding expenses and deleted the additions on sales promotion expenses, export commission, and unmoved balances. The Revenue contested the deletion of disallowances made, and the assessee contested the part confirmation of disallowance pertaining to clearing and forwarding expenses.3. Disallowance out of Clearing & Forwarding Expenses:The issue of disallowance on account of clearing and forwarding expenses was addressed by both the assessee and the Revenue. The AO treated Rs. 1.53 crore as undisclosed income due to unverifiable cash expenses. The CIT(A) restricted the disallowance to Rs. 93,82,411/- and gave relief for Rs. 59,70,625/-. The Tribunal found no evidence of false or bogus expenses and ruled that the disallowance of expenses towards customs clearance due to unverifiable nature cannot be made in the block assessment. The Tribunal allowed the assessee's grounds and dismissed the Revenue's grounds on this issue.4. Deletion of Addition on Account of Sales Promotion Expenses:The AO made an ad-hoc disallowance of Rs. 60,00,000/- based on earlier years' disallowances. The CIT(A) found no evidence of false expenses and ruled that unverifiability of an expense does not make it false. The Tribunal upheld the CIT(A)'s findings, confirming that the disallowance was not justified as there was no incriminating material found during the search.5. Deletion of Addition on Account of Commission Payable on Exports:The AO disallowed Rs. 5,12,99,210/- on the basis that the commission payable was for a period of one to three years and lacked documentary evidence. The CIT(A) found that the commission was properly provided in the books and had been largely paid subsequently. The Tribunal confirmed the CIT(A)'s findings, ruling that there was no basis for disallowance as the commission provided was not false.6. Deletion of Addition on Account of Unmoved Balances:The AO treated unmoved balances as unexplained income. The CIT(A) ruled that the AO erred in treating unmoved debit balances and payments received from trade debtors as income. The Tribunal confirmed the CIT(A)'s order, stating that there cannot be any addition of debtors' amounts which were already offered as income in earlier years.Legal Principles:The Tribunal agreed with the CIT(A) that additions not based on evidence uncovered by search cannot be the subject of block assessment under Chapter XIV-B. The Tribunal cited various judicial precedents supporting this view, emphasizing that block assessment proceedings cannot travel beyond the evidence discovered during the search.Conclusion:The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals, directing the AO to determine the undisclosed income as per the appellate order, which may result in determining the undisclosed income at Nil. The Tribunal emphasized that the determination of undisclosed income in block assessment must be based on seized material and in accordance with the provisions of the Act.