Unreliable search inventory and block income computation permit deletion of stock-based addition and Chapter VI-A deductions

An unreliable search inventory based on round figures and estimated damaged goods could not, on these facts, justify an addition for alleged unrecorded sales; the stock difference was not conclusive evidence of suppressed sales and the addition was deleted. For block assessment, undisclosed income had to be computed under the governing provision as amended, and the retrospective substitution of "this Act" in the Explanation to section 158BB(1) allowed Chapter VI-A deductions while working out block income. The assessee succeeded on both issues, though only partial relief resulted overall.

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Issues: (i) Whether addition could be sustained on account of alleged unrecorded sales arising from the stock difference found during search. (ii) Whether deductions under Chapter VI-A were allowable while computing undisclosed income for the block period.

Issue (i): Whether addition could be sustained on account of alleged unrecorded sales arising from the stock difference found during search.

Analysis: The stock inventory prepared during search was found to be unreliable because the values were taken in round figures and damaged goods were estimated without proper basis. On the facts, the difference in stock could not safely be treated as conclusive evidence of suppressed sales, and the addition based on alleged negative stock was not sustainable.

Conclusion: The addition of Rs. 1,80,526 was deleted and the assessee succeeded on this issue.

Issue (ii): Whether deductions under Chapter VI-A were allowable while computing undisclosed income for the block period.

Analysis: The computation of block income had to be made in accordance with the governing provision for block assessment. In view of the retrospective amendment substituting the earlier reference to Chapter IV with "this Act" in the relevant Explanation to section 158BB(1), the assessee was entitled to claim deductions under Chapter VI-A while working out the block income.

Conclusion: The assessee was entitled to Chapter VI-A deductions and the assessee succeeded on this issue.

Final Conclusion: The appeal was allowed on the stock-addition issue and on the computation of block income, resulting in only partial relief overall.

Ratio Decidendi: In block assessment, a stock discrepancy based on an unreliable search inventory cannot by itself justify an addition as unrecorded sales, and the computation of undisclosed income must permit deductions where the statute, as amended, so provides.

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