Block assessment must allow Chapter VI-A deductions and exclude pre-due-date recorded income from undisclosed income computation.

In block assessment, undisclosed income under section 158BB must be computed harmoniously with section 158BH, so Chapter VI-A deductions, including section 80-I, remain allowable unless expressly excluded. The assessee succeeded on this issue because a literal exclusion would produce unintended double taxation. Amounts represented by bogus purchase vouchers could not be taxed as undisclosed income where they were not entered in the regular books before the due date for filing the return, so Rs. 34,38,673 was deleted. The plea of double taxation on Rs. 15 lakhs failed because credit had already been given in computation, and the claim for set-off of losses from assessment years 1988-89 and 1989-90 was rejected as it did not change the net undisclosed income.

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Issues: (i) Whether deduction under Chapter VI-A, including section 80-I, is allowable while computing undisclosed income under block assessment under sections 158BB and 158BH; (ii) whether Rs. 34,38,673 pertaining to assessment year 1996-97 could be treated as undisclosed income in view of section 158BA(3) and section 158BB(1)(d); (iii) whether Rs. 15 lakhs could be taxed again in block assessment on the ground of double taxation; (iv) whether losses of assessment years 1988-89 and 1989-90 were to be set off for aggregation of undisclosed income.

Issue (i): Whether deduction under Chapter VI-A, including section 80-I, is allowable while computing undisclosed income under block assessment under sections 158BB and 158BH.

Analysis: The computation of undisclosed income was held to require a harmonious reading of section 158BB with section 158BH and the other provisions of the Act. A literal construction excluding Chapter VI-A deductions was found to produce absurd and unintended double taxation, because income already subjected to deduction in regular assessment would be taxed again as undisclosed income. The provisions governing block assessment were read as applying the general law except to the extent expressly excluded, and Chapter VI-A was not expressly excluded.

Conclusion: Deduction under Chapter VI-A, including section 80-I, is allowable while computing undisclosed income under section 158BB(1), and the assessee succeeds on this issue.

Issue (ii): Whether Rs. 34,38,673 pertaining to assessment year 1996-97 could be treated as undisclosed income in view of section 158BA(3) and section 158BB(1)(d).

Analysis: The amount represented bogus purchase vouchers found during search, but the transactions were not entered in the regular books of account and the books were otherwise complete. The due date for filing the return had not expired. On these facts, the income fell within the exclusionary principle that income duly recorded in regular books before the due date cannot be brought to tax as undisclosed income in block assessment. It was also held that an amount not taxable under the Act cannot become taxable merely because it was offered by the assessee.

Conclusion: Rs. 34,38,673 could not be included as undisclosed income and was directed to be deleted.

Issue (iii): Whether Rs. 15 lakhs could be taxed again in block assessment on the ground of double taxation.

Analysis: The amount had already been taken into account while computing the total income and the deduction granted by the Assessing Officer included that sum. Since credit had already been given in the computation, the plea of double taxation was not made out.

Conclusion: The challenge based on double taxation of Rs. 15 lakhs failed and was dismissed.

Issue (iv): Whether losses of assessment years 1988-89 and 1989-90 were to be set off for aggregation of undisclosed income.

Analysis: On the computation as worked out, the set-off of those losses did not alter the net undisclosed income determined by the Assessing Officer. No separate relief could therefore be granted on this ground.

Conclusion: The claim for reduction on account of losses of assessment years 1988-89 and 1989-90 was rejected.

Final Conclusion: The appeal succeeded on the principal legal issue concerning deduction under Chapter VI-A and also on deletion of the amount of Rs. 34,38,673, but failed on the remaining monetary claims, resulting in only partial relief to the assessee.

Ratio Decidendi: In block assessment, section 158BB must be construed harmoniously with section 158BH so that undisclosed income is computed under the Act as a whole, and deductions under Chapter VI-A are not excluded unless expressly barred; income duly recorded in regular books before the due date cannot be assessed as undisclosed income.

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