2005 (2) TMI 490 - AT - Income Tax

Tribunal annuls block assessment, deletes additions; stresses evidence-based assessments

Madhavi Finvest (P) Limited. Versus Assistant Commissioner Of Income-Tax.

The Tribunal annulled the block assessment proceedings and deleted the additions made by the AO. It was concluded that the block assessment proceedings ... Search And Seizure Issues Involved:1. Legality of the block assessment proceedings under sections 158BC/158BD.2. Validity of the notice issued under section 158BC.3. Additions made on the basis of evidence found during the search.4. Additions based on material gathered after the search.5. Presumptive interest on funds diverted by the directors.6. Validity of additions made on the basis of bank statements.Issue-wise Detailed Analysis:1. Legality of the Block Assessment Proceedings under Sections 158BC/158BD:The Tribunal examined whether the block assessment proceedings initiated under sections 158BC/158BD were valid. It was found that there was no material to initiate proceedings under section 158BC/158BD, and the search was conducted in the case of Smt. B. Surya Prabha, not the assessee. The Tribunal noted that for initiating action under section 158BC, there must be a search in the case of the assessee, and for section 158BD, the AO must be satisfied that the assessee had undisclosed income based on material seized. The Tribunal concluded that the block assessment proceedings were void ab initio due to the absence of any material found during the search indicating undisclosed income.2. Validity of the Notice Issued under Section 158BC:The Tribunal found that the notice issued under section 158BC was invalid because it was issued without any material indicating undisclosed income. The AO issued the notice based on roving inquiries rather than material found during the search. The Tribunal emphasized that valid initiation of assessment proceedings is the foundation for a valid assessment, and since there was no material to justify the notice, the assessment was annulled.3. Additions Made on the Basis of Evidence Found During the Search:The Tribunal examined the additions made based on evidence found during the search. It was found that the AO made additions without any evidence or material seized during the search. The Tribunal noted that the income disclosed in the regular returns and books of account cannot be treated as undisclosed income unless there is material indicating that the entries are bogus. The Tribunal concluded that the additions made in the block assessment were not justified as they were not based on evidence found during the search.4. Additions Based on Material Gathered After the Search:The Tribunal found that the AO made additions based on material gathered after the search, such as bank statements and receipt and payment accounts filed by the assessee during the block assessment proceedings. The Tribunal emphasized that undisclosed income must be computed based on evidence found as a result of the search and material relatable to such evidence. Since the additions were based on material gathered after the search, they were not justified and were deleted.5. Presumptive Interest on Funds Diverted by the Directors:The Tribunal examined the addition of presumptive interest on funds diverted by the directors. It was found that the AO added interest income based on the presumption that the assessee diverted funds for non-business purposes. The Tribunal noted that no income can be charged to tax until it accrues or is received by the assessee. Since there was no material or evidence proving that the assessee earned the income, the addition was deleted.6. Validity of Additions Made on the Basis of Bank Statements:The Tribunal found that the AO made additions based on bank statements filed by the assessee during the block assessment proceedings. The Tribunal emphasized that bank statements cannot be regarded as books of account, and additions cannot be made under section 68 based on bank statements. The Tribunal concluded that the additions made on the basis of bank statements were not justified and were deleted.Conclusion:The Tribunal annulled the block assessment proceedings and deleted the additions made by the AO. The Tribunal emphasized that block assessments under Chapter XIV-B should be based on evidence found during the search and material relatable to such evidence. Additions based on material gathered after the search and presumptive income were not justified and were deleted. The Tribunal also highlighted the importance of valid initiation of assessment proceedings and proper service of notice under section 158BC/158BD.