Block assessment limitation depends on the last valid search panchnama, while mutuality protects member-only co-operative surplus.
Block assessment limitation is computed from the last valid panchnama drawn in continuation of a search; a later visit without search or seizure, and an unjustified prohibitory order, cannot extend the limitation period. Extension for special audit requires an application by the assessee under the prescribed condition. Mutuality applies where housing co-operative society transactions are confined to members and contributors and participators have complete identity. Project-based construction income may be recognised under the completed contract method where projects remain incomplete. Unsupported allegations of fund diversion, cash-payment disallowance, and site-allotment receipts not accruing to the society cannot constitute undisclosed income in block assessment.
Issues: (i) whether the block assessment was barred by limitation under the search assessment provisions, (ii) whether the assessee housing co-operative society's surplus was exempt on the principle of mutuality and whether the completed contract method of accounting was permissible, and (iii) whether the additions for alleged diversion of funds, disallowance under Section 40A(3), and site-sale receipts constituted undisclosed income.
Issue (i): whether the block assessment was barred by limitation under the search assessment provisions.
Analysis: The limitation for completion of a block assessment had to be computed with reference to the last valid panchnama drawn in continuation of the search. The record showed that after the initial search and seizures, a prohibitory order was passed under Section 132(3) of the Income-tax Act, 1961, and the proceedings were purportedly continued by later panchnamas. However, the final visit on 25 April 1996 did not involve any search or seizure, and the Department did not establish any practical difficulty justifying the continued restraint. The extension claimed on account of special audit was also not accepted as valid, because the application for extension was not made by the assessee as contemplated by the proviso to Section 142(2A) of the Income-tax Act, 1961.
Conclusion: The block assessment was time-barred and liable to be quashed.
Issue (ii): whether the assessee housing co-operative society's surplus was exempt on the principle of mutuality and whether the completed contract method of accounting was permissible.
Analysis: The assessee's activities were confined to its members, with no outside participants shown to be involved in the relevant transactions. On that footing, the conditions of complete identity between contributors and participators were satisfied. The material relied upon by the Revenue, including the co-operative audit report, was found to be unreliable in view of the subsequent enquiry and governmental action. The assessee was also entitled to adopt the completed contract method for project-based construction activity, since the projects were still incomplete and income could not be correctly ascertained until completion.
Conclusion: The surplus was held exempt on mutuality, and the completed contract method was accepted.
Issue (iii): whether the additions for alleged diversion of funds, disallowance under Section 40A(3), and site-sale receipts constituted undisclosed income.
Analysis: The alleged diversion of funds through amounts shown against contractors and directors was not established as personal diversion, because the payments were linked to project expenditure and the contractors' accounts. The disallowance under Section 40A(3) of the Income-tax Act, 1961 could not be sustained in the block assessment context on the facts found. The receipts from site allotments attributed to a director were also not assessable as the assessee's undisclosed income, since the amount belonged to the contractor's quota under the arrangement and was not shown to have accrued to the society as its own income.
Conclusion: The impugned additions and disallowances were deleted.
Final Conclusion: The assessment was set aside as time-barred, and on merits the assessee succeeded on mutuality, accounting method, and deletion of the disputed additions.
Ratio Decidendi: For search assessments, limitation runs from the last valid search panchnama, and where the assessee's activities remain confined to members without outsider participation, the principle of mutuality applies; in project-based construction activity, the completed contract method may be adopted, and unsupported allegations of diversion or disallowance cannot be treated as undisclosed income in block assessment.