2014 (10) TMI 71 - HC - Income Tax

High Court decision on block assessments under Income Tax Act emphasizes Section 158BB provisions.

The High Court of Andhra Pradesh partially allowed two appeals challenging a Tribunal's order on block assessments for 1986-87 to 1996-97 under the Income ... Block assessment order u/s 158BB - Facts and figures of the year of search - Held that:- A perusal of the block assessment discloses that there was no discrepancy or disparity of facts and figures in relation to all the AYs within the block, except the last year - Chapter XIVB is virtually as a self-contained code - It prescribes the procedure to be followed whenever searches are conducted and the undisclosed income is discovered or found - To be fair to the assessee, the chapter provides for allowing all the deductions etc., as is done in the ordinary assessments - since the assessee did not file any returns for the AYs 1996-97, it is difficult to straightaway conclude as to whether they had any unabsorbed loss to their credit - the verification of their books of accounts is necessary. It is only when the AO is satisfied on verification of the books, that the assessee incurred loss during the period preceding search, that an occasion may arise to adjust the same - If in the course of verification it emerges that the assessee have incurred any losses during that period, losses do not answer the description of unabsorbed loss - even while upholding the view taken by the AO as well as the Tribunal, the verification of the books of accounts for the AY 1996-97 preceding the date of search needs to be undertaken – thus, the revenue is directed to undertake verification of the books of accounts for AY 1996-97referable to the period, preceding the date of search and if the respondent is satisfied that the appellants have incurred loss during that period, he shall take the same into account for determining the undisclosed income, as well as for passing the block assessment order – Decided partly in favour of assessee. Issues:- Disallowance of unabsorbed loss in block assessment- Interpretation of Section 158BB of the Income Tax Act- Verification of books of accounts for assessment year 1996-97Analysis:The High Court of Andhra Pradesh heard two appeals challenging a common order by the Income Tax Appellate Tribunal regarding block assessments for the period 1986-87 to 1996-97. The appellants, shareholders of a company, admitted undisclosed income following a search under Section 132 of the Income Tax Act. The assessing officer imposed tax on the undisclosed income, which was challenged before the Tribunal and dismissed in 2002. The appellants argued that the refusal to consider losses for the corresponding period was against Section 158BB of the Act, emphasizing that the prohibition under Section 158BB(4) only pertains to setting unabsorbed losses within the block period. The Income Tax Department contended that no losses were posted during the block period, and any attempt to show losses for the unfiled assessment year was to neutralize the discovered income.The Court noted that the search resulted in the appellants declaring undisclosed income, primarily for the year of search. Section 158BB(1) outlines the procedure for determining undisclosed income under Chapter XIVB, ensuring only amounts covered by the block period are added. The prohibition in Section 158BB(4) prevents setting off carried forward losses against undisclosed income. The Court highlighted that losses or depreciation must have spilled over to become unabsorbed, and the Act provides for their adjustment in subsequent years. The appellants' claim of losses in the unfiled assessment year 1996-97 to neutralize undisclosed income was not accepted by the assessing officer and the Tribunal.The Court emphasized that Chapter XIVB is a self-contained code, allowing deductions as in regular assessments but with a higher tax rate on undisclosed income. Referring to a Bombay High Court case, the Court clarified that unabsorbed losses within the block period can be adjusted, but losses from subsequent periods cannot. As the appellants did not file returns for 1996-97, the Court directed verification of their books to determine if losses were incurred before the search date. If verified, these losses should be considered for determining undisclosed income and the block assessment order. The Court partly allowed the appeals, instructing the respondent to verify the books for the relevant period before the search date for the assessment year 1996-97.In conclusion, the Court's decision focused on the proper application of Section 158BB, the treatment of unabsorbed losses, and the necessity of verifying the appellants' books for the assessment year in question.