2005 (7) TMI 286 - AT - Income Tax

Appeal allowed, depreciation claim deleted, lease income taxable, surcharge inapplicable

Sigma Securities. Versus Joint Commissioner Of Income-tax, Special Range - 28, Mumbai.

The appeal of the assessee was allowed in its entirety. The disallowance of depreciation claim of Rs. 60,68,690 was deleted as the assets were disclosed ... Block Assessment in search case Issues Involved:1. Disallowance of depreciation claim of Rs. 60,68,690.2. Taxability of lease rental income of Rs. 19,07,000.3. Charging of surcharge.Detailed Analysis:1. Disallowance of Depreciation Claim of Rs. 60,68,690:The primary grievance of the assessee was the disallowance of the depreciation claim amounting to Rs. 60,68,690. The search and seizure operation under section 132 revealed a file containing 91 pages from M/s. Sigma Credit & Capital Services Pvt. Ltd., indicating that the assessee had leased assets to M/s. Gujarat Health Care Ltd. The Assessing Officer (AO) required the assessee to provide various documents to substantiate the claim, such as insurance particulars, purchase consideration, sales tax return, and transportation documents.The AO observed that the assessee failed to produce the required documents and hence, concluded that the transaction was sham, thereby disallowing the depreciation claim. The CIT(A) upheld this disallowance.The assessee argued that the transaction was genuine and that the disallowance could not be made in block assessment. The assessee provided evidence such as the invoice, computation of income, balance sheet, and Board's resolution. It was contended that all documents were disclosed to the revenue and no incriminating material was found during the search.The Tribunal examined the scope of 'undisclosed income' under section 158B(b) and its computation under section 158BB. It was emphasized that block assessment should be based on evidence found during search and not on material already in possession of the AO. The Tribunal cited various judgments to support the argument that the AO cannot make roving enquiries in block assessment.The Tribunal concluded that the assets were disclosed in the return for the assessment year 1995-96 and were part of the balance sheet. No new evidence was found during the search to justify the disallowance. Therefore, the disallowance of depreciation was beyond the scope of block assessment and was deleted.2. Taxability of Lease Rental Income of Rs. 19,07,000:The assessee contested the taxability of lease rental income of Rs. 19,07,000 if the lease was held to be non-genuine. The CIT(A) directed the AO to examine this issue in accordance with the provisions of the Act.Since the Tribunal reversed the finding of the CIT(A) and allowed the depreciation claim, the rental income shown by the assessee on leased assets in the assessment year 1996-97 would be taxable. The AO was instructed to reconsider this aspect in light of the Tribunal's findings.3. Charging of Surcharge:The assessee raised an additional ground challenging the levy of surcharge, arguing that it was a legal issue affecting tax liability. The search occurred in January 1997, and at that time, section 113 did not prescribe a surcharge. The amendment to section 113, introducing the surcharge, was effective from 1-6-2002.The Tribunal agreed with the assessee, noting that the surcharge could not be applied retrospectively. Citing the decision in Om Prakash Sharma v. Dy. CIT, the Tribunal held that the surcharge was not applicable to searches conducted prior to the amendment. Consequently, the additional ground of appeal was allowed.Conclusion:The appeal of the assessee was allowed in its entirety. The disallowance of depreciation was deleted, the lease rental income was deemed taxable, and the levy of surcharge was not applicable.