2011 (7) TMI 797 - AT - Income Tax

Tribunal Invalidates Assessment Order, Emphasizes Procedural Fairness

The Tribunal invalidated the assessment order dated 28-03-2002 due to being barred by limitation and lacking justification for search proceedings ... Block Assessment - Validity of Search and seizure - Time limitation - held that:- Though we have found that there are two warrants of authorization and consequently there should be two assessments, we are of the view that this is only a technical hitch which could be rectified insofar as the issues could be sent back to the Assessing Officer for passing two separate assessment orders. However, we are not doing so in the present case as the limitation for passing the assessment orders itself expired on 31-12-2001 and after 11 years sending it back would in no way help insofar as the limitation would continue to operate against the assessment order that could be passed afresh. Action u/s 132(3) can be resorted to only if there is any practical difficulty in seizing the item which is required to be seized. In the present case, it has been categorically found that there was no practical difficulty in seizing the items which are liable to be seized and which themselves had been specifically identified when the Prohibitory Order was imposed on 09- 12-1999. The cross objection filed by the assessee on the technical grounds stands allowed insofar as (i) what has been found in the course of survey cannot be included in the block assessment and (ii) the assessment order dated 28-03-2002 is barred by limitation. As we have quashed the assessment order as barred by limitation, we are not going into the merits of each of the additions. - Decided in favor of assessee. Issues Involved:1. Validity of the assessment order dated 28-03-2002 under Section 143(3) read with Section 158BC of the Income-tax Act, 1961.2. Whether the block assessment order was barred by limitation.3. Whether the block assessment order was made without determining the undisclosed income for each previous year, violating Section 158BB(1) of the Act.4. Whether disallowance of depreciation could be a subject of block assessment.5. Whether the block assessment order made without issuing a show-cause notice violated the principles of natural justice.6. Specific additions and deletions made by the Assessing Officer and the CIT(A) regarding excess depreciation, bogus purchases, foreign exchange fluctuation, and other expenses.Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the validity of the assessment order dated 28-03-2002 under Section 143(3) read with Section 158BC, arguing that the assessment order was void and illegal. The Tribunal considered the facts and submissions, including the search operations and subsequent proceedings. It was noted that the search at the assessee's premises commenced on 08-12-1999 and was temporarily concluded on 09-12-1999, with prohibitory orders issued on certain documents and premises. The search was resumed on 21-01-2000 and finally concluded on 02-03-2000. The Tribunal found that the search proceedings were extended by placing prohibitory orders, which were not justified as there was no practical difficulty in seizing the documents. Consequently, the assessment order was deemed invalid.2. Limitation of the Block Assessment Order:The Tribunal held that the limitation for passing the assessment order expired on 31-12-2001, as the search was effectively concluded on 08-12-1999. The subsequent prohibitory orders and Panchnamas dated 21-01-2000 and 02-03-2000 were found to be invalid, as they were issued without practical difficulty in seizing the documents. Therefore, the assessment order dated 28-03-2002 was barred by limitation and annulled.3. Determination of Undisclosed Income for Each Previous Year:The assessee argued that the block assessment order was made without determining the undisclosed income for each previous year, violating Section 158BB(1) of the Act. The Tribunal acknowledged that the assessment should have been done year-wise for the purpose of aggregation of the undisclosed income. However, this was considered an irregularity or error, which could be cured by remitting the matter to the Assessing Officer for re-computation. The Tribunal dismissed this ground as it did not affect the validity of the assessment order.4. Disallowance of Depreciation:The Tribunal considered whether disallowance of depreciation could be a subject of block assessment. The assessee argued that disallowance of depreciation was made without jurisdiction and could not be part of the block assessment. The Tribunal found that the evidence indicating irregularities in the purchase of steel and inflation of cost came to light as a result of the search operations. The CIT(A) had upheld the disallowance of depreciation to the extent of Rs. 27.50 crores based on the Chairman's statement. The Tribunal held that the disallowance of depreciation was valid as it was based on evidence found during the search.5. Show-Cause Notice and Principles of Natural Justice:The assessee argued that the block assessment order was made without issuing a show-cause notice, violating the principles of natural justice. The Tribunal noted that the assessee was given several opportunities to present its case, and substantial hearings were held. Therefore, the Tribunal found no violation of the principles of natural justice and dismissed this ground.6. Specific Additions and Deletions:The Tribunal addressed various specific additions and deletions made by the Assessing Officer and the CIT(A):- Excess Depreciation: The CIT(A) had upheld the addition of Rs. 27.50 crores and deleted the balance of Rs. 7.89 crores. The Tribunal found that the disallowance of depreciation was valid based on evidence found during the search.- Bogus Purchases: The Tribunal upheld the disallowance of depreciation related to bogus purchases of steel.- Foreign Exchange Fluctuation: The Tribunal found that the disallowance of depreciation related to the capitalized component of foreign exchange fluctuation was valid as it was based on evidence found during the search.- Cash Salary: The Tribunal upheld the addition of Rs. 5.60 lakhs on account of cash salary to Mr. B.K. Pansari.- Expenditure on INDAL Shares: The Tribunal upheld the deletion of Rs. 5.91 crores on account of expenditure related to the acquisition of INDAL shares, as it could not be considered undisclosed income in the block assessment.- Cost of Paintings: The Tribunal upheld the deletion of Rs. 5 lakhs on account of the cost of paintings found at the residence of Mr. D.P. Agarwal.- Donation: The Tribunal upheld the deletion of Rs. 5 lakhs on account of donation to Adivasi Vikas Sangathan.- Surcharge: The Tribunal upheld the CIT(A)'s decision that no separate surcharge was leviable on the tax rate of 60% on the undisclosed income computed for the block period.Conclusion:The Tribunal quashed the assessment order dated 28-03-2002 as barred by limitation and allowed the cross-objection filed by the assessee. The appeal filed by the Revenue was dismissed. The Tribunal did not go into the merits of each addition as the assessment order was annulled.