Appeal partly allowed by ITAT & Third Member; additions deleted, deductions permitted, surcharge not applicable.

The department's appeal was partly allowed, with the ITAT and Third Member concurring on most issues. The additions were deleted as they were not based on material found during the search, and deductions for prepaid taxes were permitted. The surcharge was also deleted as it was not applicable for the relevant assessment year.

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Issues Involved:
1. Deletion of addition made in the net profit from contract works.
2. Deletion of addition on account of undisclosed investment in construction of flats.
3. Deletion of addition on account of undisclosed sales of flats and shops.
4. Deletion of addition out of liability against sundry creditors.
5. Direction to delete the income shown in the return for the assessment years 1999-2000 and 2000-01.
6. Deletion of surcharge.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made in the Net Profit from Contract Works:
The Assessing Officer (AO) estimated the net profit at 8% on the gross contract receipts due to the absence of books of account during the search and block assessment proceedings. The CIT(A) deleted the addition, stating that the AO failed to bring on record any material suggesting that the income disclosed by the assessee was incorrect. The ITAT upheld the CIT(A)'s decision, emphasizing that the addition was not based on any material seized during the search. The Third Member also concurred with this view, stating that the determination of undisclosed income should be based on material found during the search.

2. Deletion of Addition on Account of Undisclosed Investment in Construction of Flats:
The AO made an addition based on seized documents indicating undisclosed investments. The CIT(A) deleted the addition, noting that the documents were found at the residence of third parties and related to transactions before the assessee became the proprietor of the firm. The ITAT upheld the CIT(A)'s decision, agreeing that the transactions were recorded in a diary and not on loose sheets, and the addition was based on presumption and assumption. The Third Member did not specifically address this issue, but the majority view supported the deletion of the addition.

3. Deletion of Addition on Account of Undisclosed Sales of Flats and Shops:
The AO made an addition based on documents indicating sales of flats and shops. The CIT(A) deleted the addition, stating that the documents were not signed or dated, and the transactions were not verified with the purchasers. The ITAT upheld the CIT(A)'s decision, emphasizing that the addition was based on presumption and assumption without supporting documents. The Third Member did not specifically address this issue, but the majority view supported the deletion of the addition.

4. Deletion of Addition Out of Liability Against Sundry Creditors:
The AO observed that the assessee could not prove liabilities amounting to Rs. 2,80,000 and made an intangible addition. The CIT(A) deleted the addition, stating that it was not based on any material found during the search. The ITAT upheld the CIT(A)'s decision, agreeing that the addition was not justified without examining the parties concerned. The Third Member concurred with the view that the addition could not be made without material found during the search.

5. Direction to Delete the Income Shown in the Return for the Assessment Years 1999-2000 and 2000-01:
The AO treated the returns for these years as invalid and non-est due to late filing. The CIT(A) directed the AO to delete the income shown in these returns from the undisclosed income. The ITAT partly allowed the department's appeal, directing the AO to allow deduction of income covered by prepaid taxes (TDS and advance-tax) in view of the decision in the case of Dr. (Mrs.) Alaka Goswami. The Third Member agreed with this view, emphasizing that the returns cannot be treated as non-est solely due to late filing.

6. Deletion of Surcharge:
The CIT(A) deleted the surcharge, stating that the search was conducted before the applicability of the proviso to section 113 of the Act. The ITAT upheld the CIT(A)'s decision, agreeing that the surcharge was not leviable for the assessment year relevant to the previous year during which the search was conducted. The Third Member did not specifically address this issue, but the majority view supported the deletion of the surcharge.

Conclusion:
The appeal of the department was partly allowed, with the ITAT and Third Member concurring on most issues, emphasizing the need for additions to be based on material found during the search and allowing deductions for prepaid taxes.

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