2014 (7) TMI 161 - AT - Income Tax

Tribunal quashes block assessment for lack of definitive initiation, dismissing revenue's surcharge appeal.

The Tribunal quashed the block assessment under Section 158BD due to the invalid initiation of proceedings, as the Assessing Officer's satisfaction lacked ... Block assessment u/s 158BD of the Act – Quantification of assessment – Held that:- The decision in Commissioner of Income Tax – III Versus M/s. Calcutta Knitwears, Ludhiana [2014 (4) TMI 33 - SUPREME COURT] followed - the requirement of satisfaction for initiation of proceedings u/s 158BD is essential, however there is no bar on the AO in respect of the stage of the proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person - the existence of cogent and demonstrative material is germane to the AOs satisfaction in concluding that the seized documents belong to a person other than the searched person is necessary for initiation of action u/s 158BD - the cardinal rule for initiation of proceedings u/s 158BD is the existence of cogent material which lead to detection of undisclosed income of the person other than the searched person. There is no mention of any particular document or material or any particular item of undisclosed income which was detected during the course of search in question or from the Books of Accounts or seized material – there is merit in the contention of the revenue that if the satisfaction is recorded or expressed by the AO in respect of the undisclosed income belonging to the person other than the searched person in the assessment order of the searched person passed u/s 158BC then the requirement of initiation of proceedings u/s 158BC will be regarded as satisfied - the AO has not made any addition of undisclosed income on account of such business conducting charge/rental income on the ground that the assessee has claimed expenses of only ₹ 15,000/- PM - when the AO has concluded in the assessment order that since the assessee has claimed only ₹ 15,000 PM on account of payment of rent and excess payment is not allowed - other than the rental charges neither the assessment order passed u/s 158BC nor the satisfaction recorded on 10.01.2003 disclosed any other undisclosed income detected by the AO from the Books of Accounts and other seized papers. At the time of recording satisfaction the AO should reach a clear conclusion that prima facie the material available establishes undisclosed income of third party - In the absence of existence of any cogent material which demonstrates the undisclosed income belonging to the person other than the searched person, the proceedings initiated u/s 158BD and consequent block assessment are invalid - it is clear that the AO has not brought out any record, Books of Accounts or seized material to demonstrate undisclosed income of the assessee - the initiation of the proceedings and consequential block assessment u/s 158BD are invalid and are quashed – Decided in favour of Assessee. Issues Involved:1. Validity of initiation of proceedings under Section 158BD.2. Confirmation of quantification and assessment of income.3. Disallowances of expenses claimed.4. Assessment of initial investment as income from undisclosed sources.5. Confirmation of addition of income for the block period.6. Addition of investment in a flat by the appellant's wife.7. Addition of interest in the wife's bank account.8. Levy of surcharge on the tax on undisclosed income.Detailed Analysis:1. Validity of Initiation of Proceedings under Section 158BD:The assessee challenged the initiation of proceedings under Section 158BD on the grounds that there was no definite satisfaction recorded by the Assessing Officer (AO) that any undisclosed income belonging to the assessee was detected from the books of accounts and other documents or assets requisitioned or seized during the search. The Tribunal noted that the AO's satisfaction note stated, 'I am satisfied that undisclosed income is likely to be detected in the case of the assessee on the basis of seized books of accounts and papers.' This was deemed insufficient as it did not indicate a definite undisclosed income detected. The Tribunal referenced the Supreme Court decision in CIT Vs. Knitwears, which requires the existence of cogent and demonstrative material for the AO's satisfaction. The Tribunal found that the satisfaction recorded did not meet this requirement and thus quashed the initiation of proceedings and the consequent block assessment under Section 158BD as invalid.2. Confirmation of Quantification and Assessment of Income:The assessee argued that the Commissioner of Income-tax (Appeals) (CIT(A)) erred in confirming the assessment of income for the period 17-7-1998 to 15-8-1999 at Rs. 6,16,953. The CIT(A) failed to appreciate that the income from running the Hotel Relax Bar & Restaurant was disclosed based on regular books of account maintained by Smt. Ila R. Patil at Rs. 90,300 for the previous year ended 31-3-1999, and she had been assessed for the same. The Tribunal did not address this issue separately as the block assessment itself was quashed.3. Disallowances of Expenses Claimed:The CIT(A) had confirmed disallowances of various expenses claimed by the assessee, totaling Rs. 11,85,376, including miscellaneous expenses, commission to barmaids, utensils & crockeries, and repairs. The Tribunal noted that the disallowances were made on the basis that the expenditure was not supported by evidence found during the search. However, since the block assessment was quashed, these disallowances became infructuous.4. Assessment of Initial Investment as Income from Undisclosed Sources:The CIT(A) had assessed Rs. 1,55,800 as income from undisclosed sources under Section 69 for the block period. The Tribunal did not address this issue separately due to the quashing of the block assessment.5. Confirmation of Addition of Income for the Block Period:The CIT(A) confirmed an addition of Rs. 73,034 as income for the block period, which included income taxable under the head salary from Hotel Relax Bar & Restaurant at Rs. 40,000. The Tribunal did not address this issue separately due to the quashing of the block assessment.6. Addition of Investment in a Flat by the Appellant's Wife:The CIT(A) confirmed an addition of Rs. 1,30,000 as income for the block period for investment in a flat made on 27-6-1991 by the appellant's wife. The Tribunal did not address this issue separately due to the quashing of the block assessment.7. Addition of Interest in the Wife's Bank Account:The CIT(A) confirmed an addition of interest in the wife's bank account at Rs. 146. The Tribunal did not address this issue separately due to the quashing of the block assessment.8. Levy of Surcharge on the Tax on Undisclosed Income:The revenue raised a solitary ground regarding the deletion of surcharge of Rs. 2,65,148 leviable on the tax on the undisclosed income. The Tribunal quashed the block assessment under Section 158BD, and consequently, the question of levy of surcharge did not arise.Conclusion:The Tribunal quashed the block assessment under Section 158BD on the grounds of invalid initiation of proceedings due to the lack of definite satisfaction by the AO. Consequently, all other grounds raised in the appeal became infructuous, and the revenue's appeal regarding the levy of surcharge was dismissed. The order was pronounced in the open court on 20-06-2014.