Block assessment stock discrepancies need incriminating evidence, and export-linked deduction remains available on sustained income.

Stock differences and valuation variations in block assessment were not taxable as undisclosed income absent incriminating material showing unrecorded sales, excess stock, hidden business activity, or other suppressed transactions. The tribunal noted that the finished goods and work-in-progress were later accounted for, the catalyst stock was already reflected under a different description, and the valuation gap arose from differing accounting methods; only a limited raw-material discrepancy in HCO remained sustained. It further held that export-linked deduction under section 80HHC was allowable on the amount ultimately sustained, because the deduction was not barred merely due to assessment under Chapter XIV-B and the export receipts formed part of business turnover.

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Issues: (i) Whether additions made on account of finished goods, work-in-progress, raw materials, and valuation difference could be treated as undisclosed income in block assessment; (ii) Whether deduction under section 80HHC was allowable against the income sustained in block assessment.

Issue (i): Whether additions made on account of finished goods, work-in-progress, raw materials, and valuation difference could be treated as undisclosed income in block assessment.

Analysis: The assessment under Chapter XIV-B applies only where income or transactions were not recorded in the books and fall within the concept of undisclosed income. The stock found during search represented movements within the production cycle, and there was no material showing sales outside the books, excess stock, shortage leading to hidden income, or other incriminating evidence of unrecorded business activity. The finished goods and work-in-progress were later exported and accounted for, the catalyst stock was already reflected in the records under a different description, and the balance discrepancy in HCO was only partly unexplained. The valuation difference arose from different accounting methods, with the assessee following a consistent weighted-average basis while the MIS statement used estimated current rates.

Conclusion: The major stock additions and the valuation difference were not sustainable as undisclosed income, and only the limited discrepancy in HCO remained to be confirmed.

Issue (ii): Whether deduction under section 80HHC was allowable against the income sustained in block assessment.

Analysis: The seized stock, to the extent it resulted in sustained addition, was shown to have been exported and the export proceeds were part of the business receipts. In the absence of any material showing suppression of export turnover or alteration of book results, the deduction under section 80HHC could not be denied merely because the assessment was made under Chapter XIV-B. The general applicability of other provisions through section 158BH supported allowance of the deduction on the amount ultimately sustained.

Conclusion: Deduction under section 80HHC was allowable on the amount sustained in assessment.

Final Conclusion: The additions on account of the main stock discrepancies and valuation difference were deleted, only a limited raw-material discrepancy was sustained, and the assessee was held entitled to deduction under section 80HHC on the amount sustained.

Ratio Decidendi: In block assessment, stock differences and valuation variations cannot be taxed as undisclosed income in the absence of incriminating material showing unrecorded income or transactions, and export-linked deductions otherwise available under the Act are not excluded merely because the income is assessed under Chapter XIV-B.

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