Block assessment rules limit taxable undisclosed income, bar retrospective surcharge, and require a valid demand notice for interest.
Surcharge under section 113 was held inapplicable to block assessments where the search concluded before the 1 June 2002 amendment, as the change was treated as non-retrospective. In block assessment computations, disallowance under section 40A(3) was ruled impermissible because only income falling within the statutory definition of undisclosed income can be taxed; the set-off of excess stock against unaccounted profits was upheld as reasonable on the facts. Interest under section 220(2) was found not chargeable because no notice of demand under section 156 existed and no default under it was shown.
Issues: (i) whether surcharge under section 113 was leviable in respect of search assessments where the search had concluded before the amendment; (ii) whether disallowance under section 40A(3) could be made while computing undisclosed income in a block assessment and whether the addition on account of excess stock could be set off against unaccounted profits; and (iii) whether interest under section 220(2) could be charged in the absence of a notice of demand under section 156.
Issue (i): whether surcharge under section 113 was leviable in respect of search assessments where the search had concluded before the amendment.
Analysis: The amendment to section 113 took effect from 1 June 2002 and was treated as having no retrospective operation. Since the searches had been concluded earlier, and the applicable CBDT circular also supported this position, surcharge could not be applied to the block assessments.
Conclusion: Surcharge under section 113 was not leviable, and the assessee succeeded on this issue.
Issue (ii): whether disallowance under section 40A(3) could be made while computing undisclosed income in a block assessment and whether the addition on account of excess stock could be set off against unaccounted profits.
Analysis: For block assessments, only income falling within the statutory definition of undisclosed income under Chapter XIV-B can be taxed. On that basis, a disallowance under section 40A(3) was held not to be permissible in computing undisclosed income. As regards the excess stock addition, the set-off allowed by the first appellate authority against unaccounted sales profits was found to be reasonable on the facts and consistent with the block assessment framework.
Conclusion: The disallowance under section 40A(3) was not sustainable, and the set-off allowed by the first appellate authority was upheld in favour of the assessee.
Issue (iii): whether interest under section 220(2) could be charged in the absence of a notice of demand under section 156.
Analysis: Interest under section 220(2) was treated as dependent on the existence of a notice of demand under section 156 and default in complying with that notice. As neither the notice nor the default was present, the levy of interest could not stand.
Conclusion: Interest under section 220(2) was not chargeable on the facts found, and the assessee succeeded on this issue.
Final Conclusion: The departmental appeals failed, while the cross-objections succeeded only to the extent of deleting the interest levy under section 220(2) and related reliefs, with the rest of the appellate reliefs maintained.
Ratio Decidendi: In block assessment proceedings, only income falling within the statutory definition of undisclosed income can be taxed, surcharge under section 113 cannot be applied retrospectively to pre-amendment searches, and interest under section 220(2) cannot be levied unless the statutory notice of demand under section 156 exists and is defaulted.