2009 (6) TMI 45 - HC - Income Tax

Court rules against undisclosed income addition based on valuation officer's report without evidence. Personal vs business expenses to be segregated.

The court held that the addition of Rs. 40,04,369 as undisclosed income based solely on the Departmental Valuation Officer's report, without any ... Treatment of expenditures as undisclosed income – Held that Assessing Officer should have made an endeavor to segregate the items of expenditure under separate heads and only those items which were found to be unconnected with the business of the assessee or were in respect of persons not connected with the assessee which could have legitimately formed the basis of an addition to the undisclosed income. As the Assessing Officer had failed to so act, we are of the view that the learned Tribunal should have remitted the matter to the Assessing Officer for a de novo consideration. – Matter remitted to AO by setting aside the order of ITAT. Issues Involved:1. Addition of Rs. 40,04,369 as undisclosed income based on the Departmental Valuation Officer's report.2. Addition of Rs. 14,98,282 as undisclosed income for disallowable traveling expenses.Detailed Analysis:1. Addition of Rs. 40,04,369 as Undisclosed Income:Background:The Assessing Officer added Rs. 40,04,369 to the assessee's income in a block assessment order dated November 21, 2000, under sections 158BC and 143(3) of the Income-tax Act. This addition was based on the difference between the investment shown in the assessee's returns and the valuation reported by the Departmental Valuation Officer (DVO). The Commissioner of Income-tax (Appeals) and the Tribunal deleted this addition, leading to the instant appeal under section 260A of the Act.Arguments:- The appellant argued that the Assessing Officer could rely on the DVO's report as a piece of evidence under section 55A of the Act, even though the Supreme Court had overruled this in CIT v. Smt. Amiya Bala Paul (2003) 262 ITR 407 (SC). The appellant also cited Pooran Mal v. Director of Inspection (Investigation) [1974] 93 ITR 505, arguing that relevant materials, regardless of how they were obtained, could form the basis of an assessment.- The respondent countered with the Central Board of Direct Taxes (CBDT) Circular No. 8 of 2002, explaining that the amendment to section 158BB by the Finance Act of 2002 was clarificatory. The respondent argued that undisclosed income must be directly evidenced by materials found during the search and not independent of it. They cited decisions from the Delhi High Court and Madhya Pradesh High Court supporting this view.Judgment:The court held that the assessment of undisclosed income based solely on the DVO's report, which was not connected to any evidence found during the search, was not justified. The addition of Rs. 40,04,369 was rightly deleted by the Tribunal. The court agreed with the views expressed in CIT v. Khushlal Chand Nirmal Kumar [2003] 263 ITR 77 (MP) and CIT v. Manoj Jain [2007] 287 ITR 285 (Delhi).2. Addition of Rs. 14,98,282 for Disallowable Traveling Expenses:Background:The Assessing Officer added Rs. 14,98,282 as undisclosed income, claiming these traveling expenses, incurred through credit cards, were personal and not business-related. This addition was deleted by the appellate authorities.Arguments:- The appellant argued that some of the expenses were found to be personal during the search, and the Tribunal should have remitted the matter to the Assessing Officer for segregation of personal and business expenses.- The respondent contended that the expenses were reflected in the books of account and accepted in regular assessments. They argued that treating these expenses as undisclosed income was based on a mere change of opinion.Judgment:The court found that the Assessing Officer should have segregated personal expenses from business expenses instead of adding the entire amount as undisclosed income. The Tribunal should have remitted the matter for a de novo consideration by the Assessing Officer. Consequently, the court interfered with this part of the Tribunal's order and remitted the matter for fresh consideration, giving the assessee all required opportunities under the law.Conclusion:The appeal was partly allowed. The addition of Rs. 40,04,369 was rightly deleted by the Tribunal, while the issue of Rs. 14,98,282 was remitted to the Assessing Officer for fresh consideration.