Block assessment requires seized material for additions; cash expenditure nexus allowed, section 40A(3) disallowance and estimated on-money addition deleted.

In block assessment, undisclosed income must be computed from seized material, and additions cannot rest on mere presumption or estimate. Cash expenditure linked to plot No. 33 was allowed because seized papers and surrounding material established the nexus between the project, the negotiating parties, and the cash outgoings, so the payment could be treated as deductible against on-money receipts. A further disallowance under section 40A(3) was not sustained, as undisclosed income in block assessment is computed on the basis of search material and not by applying that disallowance to already assessed cash transactions. The estimated addition for on-money receipts on two flats was deleted because no incriminating seized material supported it.

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Issues: (i) Whether the cash payment of Rs. 26,09,350 claimed to have been made in relation to plot No. 33 could be allowed as expenditure against the on-money receipts of the project; (ii) whether disallowance under section 40A(3) could be made while computing undisclosed income in block assessment; (iii) whether the estimated addition of Rs. 3,99,763 towards on-money receipts for two flats could be sustained without incriminating seized material.

Issue (i): Whether the cash payment of Rs. 26,09,350 claimed to have been made in relation to plot No. 33 could be allowed as expenditure against the on-money receipts of the project.

Analysis: The seized papers showed cash outgoings connected with the project and the surrounding material established the nexus between the assessee, the persons negotiating the plot, and the cash payments reflected in the seized documents. Once the existence of the payment and its connection with the project stood evidenced from the seized material, the amount could not be ignored merely because the recipient was not the recorded owner or because the payment was routed through another person associated with the transaction.

Conclusion: The deduction was rightly allowed and the disallowance was not justified.

Issue (ii): Whether disallowance under section 40A(3) could be made while computing undisclosed income in block assessment.

Analysis: The dispute turned on whether the special scheme of block assessment under Chapter XIV-B permitted a further disallowance under section 40A(3) in respect of cash transactions already treated as undisclosed. The decision followed the line of authority holding that undisclosed income in a block assessment is to be computed on the basis of material found in search, and that in the absence of binding contrary authority from the jurisdictional High Court, the interpretation favourable to the assessee must prevail.

Conclusion: The disallowance under section 40A(3) was not sustainable in block assessment.

Issue (iii): Whether the estimated addition of Rs. 3,99,763 towards on-money receipts for two flats could be sustained without incriminating seized material.

Analysis: The addition was founded only on estimate and inference, while the block assessment framework requires reliance on material found during search. In the absence of seized documents supporting the alleged on-money receipts for the two flats, an addition based merely on presumption and surmise could not be made.

Conclusion: The estimated addition was rightly deleted.

Final Conclusion: The appellate order was upheld in full and the revenue's challenge failed on all substantive issues.

Ratio Decidendi: In block assessment, undisclosed income must be computed from seized material, and additions or disallowances cannot be sustained on mere presumption or estimation when the nexus is established only through the search record.

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