Block assessment limits and retracted search admissions: recorded transactions and corroborative evidence defeated disputed additions.

In block assessment under Chapter XIV-B, a disallowance under section 40A(3) was treated as outside the scope of undisclosed income where the underlying purchases were already recorded in the regular books. The Tribunal also accepted the first appellate finding on the quantified undisclosed income, holding the adopted figure to be correct on the facts. On the seized diary entries and the statement under section 132(4), the Tribunal noted that such admissions are not conclusive and may be displaced by a credible retraction and corroborative material; the diary entries, surrounding circumstances, affidavits and VDIS declarations supported the assessee's explanation, so the addition based on peak cash credits was deleted.

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Issues: (i) whether disallowance under section 40A(3) could be made in block assessment under Chapter XIV-B; (ii) whether the addition of Rs. 1,71,398 towards alleged excess undisclosed income was sustainable; (iii) whether the addition of Rs. 51,90,000 on account of peak credit of cash transactions recorded in the seized diary was sustainable on the basis of the statement recorded under section 132(4).

Issue (i): whether disallowance under section 40A(3) could be made in block assessment under Chapter XIV-B

Analysis: The relevant purchase transactions were already recorded in the regular books of account and were not part of the undisclosed income found as a result of search. A disallowance under section 40A(3) is a regular assessment issue and does not itself constitute undisclosed income for block assessment merely because the payment details emerge during search.

Conclusion: The disallowance under section 40A(3) was outside the ambit of Chapter XIV-B and its deletion was ; the finding is in favour of the assessee.

Issue (ii): whether the addition of Rs. 1,71,398 towards alleged excess undisclosed income was sustainable

Analysis: The undisclosed income for the block period had already been determined on the basis of the order under appeal, and the Tribunal followed its earlier decision on identical facts to hold that the figure adopted by the first appellate authority was correct.

Conclusion: The direction to adopt undisclosed income at Rs. 8,28,607 instead of the higher returned figure was upheld; the issue is in favour of the assessee.

Issue (iii): whether the addition of Rs. 51,90,000 on account of peak credit of cash transactions recorded in the seized diary was sustainable on the basis of the statement recorded under section 132(4)

Analysis: The seized diary contained regular ledger-style entries and interest accounts consistent with borrowings from named persons, attracting the presumption under section 132(4A). The statement recorded under section 132(4), though important, was not conclusive and could be retracted when shown to be obtained under pressure or duress. The surrounding circumstances, the prolonged search, the immediate affidavit retracting the surrender, the non-disclosure in the block return, and the corroborative affidavits and VDIS declarations sufficiently rebutted the admission and supported the assessee's version. The additional evidence was properly admitted and considered in accordance with natural justice and rule 46A.

Conclusion: The addition of Rs. 51,90,000 was unsustainable and its deletion was upheld; the issue is in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on all substantial grounds, and the assessee's cross-objection also failed, leaving the assessee successful on the disputed additions and disallowance.

Ratio Decidendi: A disallowance under section 40A(3) cannot be brought into block assessment as undisclosed income where the underlying transactions are already recorded in regular books, and a surrender made in a search statement under section 132(4) may be displaced by credible retraction and corroborative evidence, especially where the seized material itself supports a different inference.

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