Block assessment limits undisclosed income additions to search-found material; recorded commission and profit differences could not be taxed.

Block assessment under Chapter XIV-B is confined to income or transactions that are truly undisclosed and discovered as a result of search. Commission expenditure already recorded in the regular books and disclosed before the search could not be disallowed as undisclosed income merely because its deductibility under section 37(1) was questioned, so the addition was deleted. Likewise, a difference between profit shown in seized books and audited accounts, where both figures arose from regular book entries and accounting adjustments, could not be treated as undisclosed income under section 158BB, so that addition was also deleted.

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Issues: (i) whether commission expenditure recorded in the assessee's books could be disallowed as undisclosed income in block assessment under Chapter XIV-B; (ii) whether the difference between profit as per seized books and audited accounts for the relevant previous year could be assessed as undisclosed income under section 158BB.

Issue (i): whether commission expenditure recorded in the assessee's books could be disallowed as undisclosed income in block assessment under Chapter XIV-B.

Analysis: The commission claim arose from an agreement and had already been disclosed in the return filed before the search. The expenditure was reflected in the regular books and was not a secret or unrecorded payment. In block assessment, the enquiry is confined to undisclosed income found as a result of search, and an item already recorded in the books cannot be treated as undisclosed merely because the Assessing Officer takes a different view on its allowability under section 37(1).

Conclusion: The disallowance of commission as undisclosed income was not sustainable and was deleted, in favour of the assessee.

Issue (ii): whether the difference between profit as per seized books and audited accounts for the relevant previous year could be assessed as undisclosed income under section 158BB.

Analysis: The figures compared by the Assessing Officer were both derived from entries in books and other documents maintained in the ordinary course. The adjustments leading to the audited profit represented normal accounting adjustments and statutory computation items, not unrecorded income. Since the relevant previous year had not ended and the return due date had not expired on the date of search, the income recorded in the books could not be converted into undisclosed income merely by recalculating it differently. The statutory scheme of sections 158BA(3) and 158BB did not permit such treatment.

Conclusion: The addition of the profit difference was unsustainable and was deleted, in favour of the assessee.

Final Conclusion: Block assessment under Chapter XIV-B could not be used to bring to tax amounts already disclosed in the regular books or to make ordinary disallowances and recomputation not founded on undisclosed material found in search.

Ratio Decidendi: Only income or transactions that are truly undisclosed and discovered as a result of search can be assessed in block proceedings under Chapter XIV-B; items already recorded in the books are outside that scope even if their allowability is disputed on merits.

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