Itta/48/2003 Of Sri.ch.mohan Rao v. Asst.commssr.of Income Tax Hyd

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A Nos. 48 AND 153 OF 2003 03-09-2014 BETWEEN Sri Ch. Mohan and another …Appellants And The Assistant Commissioner of Income Tax,Circle 2(3), Hyderabad …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A Nos. 48 AND 153 OF 2003 COMMON JUDGMENT:(per the Hon'ble Sri Justice L. Narasimha Reddy) These two appeals are filed by the respective assesseesfeeling aggrieved by the common order dated 30-08-2002 passedby the Hyderabad Bench ‘A’ of the Income Tax Appellate Tribunal(for short, ‘the Tribunal’) in I.T (S.S) A.Nos.50and 51/Hyd/1997. For the sake of convenience, the parties are referred as the 1[st] appellant and the 2[nd] appellant. The facts, in brief, are as under: The appellants are individual and independent assessees. Incidentally, both of them are the shareholders of a company byname M.K. Securities Limited. They have been submitting returnsyear after year. A search was conducted on 24-01-1996 underSection 132 of the Income Tax Act, 1961 (for short, ‘the Act’) inthe respective premises of the appellants. On the basis of thesearch, the block assessments for the period covering 1986-87 to1996-97 were made. The 1[st] appellant admitted the undisclosedincome of Rs.26,0,9000/- and the 2[nd] appellant stated that he hasundisclosed income of Rs.3,96,000/-. However, both of them havemade an attempt to post losses either equivalent to or exceedingthe income so discovered for the assessment year 1996-97 on theground that as on the date of search, they still have time to file thereturns for that assessment year. The assessing officer did notagree with the same and passed block assessment orders dated31-01-1997 imposing tax on the undisclosed income. The saidorders were challenged before the Tribunal. The appeals weredismissed through common order dated 30-08-2002. Sri S. Ravi, learned Senior Counsel for the appellantssubmits that the action of the respondent in refusing to take thelosses for the corresponding period is contrary to Section 158BBof the Act. He submits that the prohibition, if at all is only underSection 158BB(4) as regards the setting of the unabsorbed losswithin the block period. Learned counsel submits that any part ofan assessment order preceding the date of search needs to be treated as a unit in this regard and that there was no justification indisallowing the unabsorbed loss, posted by the appellants. Sri S.R. Ashok, learned Senior Counsel for the Income TaxDepartment submits that through out the block period as regardswhich the returns were filed, no loss whatever was posted by theappellants and the attempt to show the loss for the part of theassessment year, that too as regards which no returns were filedwas only to neutralise what has been unearthed in the course ofsearch. He contends that the assessing officer and the Tribunalhave taken the correct view of the matter and no interference iswarranted in the appeals. The proceedings are the result of a search made in thepremises of the appellants. The search is so perfunctory that whathas come out is in the form of declaration by the appellantsthemselves of certain amounts as undisclosed income viz.,Rs.26,00,900/- by the 1[st] appellant and Rs.3,96,000/- by the 2[nd]appellant. Since the search was conducted on 24-01-1996, theblock period is comprised of the assessment years 1986-87 to1996-97. A perusal of the block assessment discloses that therewas no discrepancy or disparity of facts and figures in relation toall the assessment years within the block, except the last year. Even for that year, the returns were not filed. It so happened thatin the year of search, the appellants still had time to file returns. Incidentally, the entire controversy is only with reference to thefacts and figures of the year of search. It is too well known that Section 158BB(1) prescribes theprocedure to be followed to determine the undisclosed income forthe purpose of the proceedings under Chapter XIVB. Thatincidentally happens to be the first step in the process. Everycaution is taken to ensure that only such of the amounts as areactually covered by the assessment in the block period are added;and amounts not covered by that period are not permitted to beadded. Once the process of computation of undisclosed incomeunder sub-section (1) is concluded, the manner in which theamount so arrived at must be dealt with in the context of brining itunder the tax, is dealt with under the subsequent provisions. Forexample, sub-section (4) of Section 158BB prohibits the setting offof carried forward losses under Chapter VI or unabsorbeddepreciation under Chapter IV of the Act, against the undisclosedincome. The very expression “brought forward losses or unabsorbeddepreciation” under the relevant provisions discloses that theamounts have spilled over or crossed the concerned assessmentyear. In other words, the income in the concerned assessmentyear was so inadequate that the loss that was noticed or thedepreciation which was deductable, could not be absorbed. Sincethe Act provides for the facility to be availed in the subsequentassessment years, they partake the character of unabsorbed lossor carried forward depreciation. The appellants pleaded that they have incurred losses in theassessment year 1996-97 in which the search was conducted and if the losses are taken into account, the undisclosed incomevirtually gets neutralised. That however did not weigh with theassessing officer as well as the Tribunal. Chapter XIVB, is virtually as a self-contained code. Itprescribes the procedure to be followed whenever searches areconducted and the undisclosed income is discovered or found. Tobe fair to the assessee, the chapter provides for allowing all thedeductions etc., as is done in the ordinary assessments. Section158BH makes this aspect clear. Though in the process ofreckoning the undisclosed income that is discernable from theorders of assessment covering block period is to be deducted andthe losses, if any, are to be added, in the ultimate processing ofthe block assessment, the deductions or allowances covering thatvery period must be done as though it is a regular assessment. The substantial difference, if at all, is the rate of tax which is at60% on the undisclosed income as against 30% on the regularassessments. The Parliament has taken every possible care to ensure thatthe result of the search is not watered down by pitting it againstthe unabsorbed losses or carried forward depreciation, meaningthereby, the losses or depreciations which have crossed the blockperiod. In B.D.A Ltd., vs. Assistant Commissioner of Income Tax[[1]], the Bombay High Court dealt with this aspect in detail,taking note of, not only the purport of section but also the circularsissued by the department from time to time. In its application tothe facts of the present case, the concept would be that in case the appellants had to their credit, any unabsorbed losses within theblock period, they shall be entitled to have the benefit thereof inaccordance with the procedure prescribed under sub-section (1) ofSection 158BB. If on the other hand, the loss is referable to anyperiod subsequent to the block period notwithstanding its originand assuming the character of the unabsorbed loss; it would notbe available to them to be adjusted against the undisclosedincome. The relevant provision reads: “Section 158BB(4): For the purpose ofassessment under this Chapter, losses brought forwardfrom the previous year under Chapter VI or unabsorbeddepreciation under sub-section (2) of section 32 shallnot be set off against the undisclosed incomedetermined in the block assessment under this Chapter,but may be carried forward for being set off in theregular assessments.” “Section 158BB(4): For the purpose ofassessment under this Chapter, losses brought forwardfrom the previous year under Chapter VI or unabsorbeddepreciation under sub-section (2) of section 32 shallnot be set off against the undisclosed incomedetermined in the block assessment under this Chapter,but may be carried forward for being set off in theregular assessments.” Since the appellants did not file any returns for theassessment year 1996-97, it is difficult to straightaway concludeas to whether they had any unabsorbed loss to their credit. Another fact which needs to be taken into account, is that they didnot have any unabsorbed loss since such a loss did not cross theassessment year 1995-96. Therefore, they have to fall back uponthe losses, if any incurred in that part of the year 1996-97 whichpreceded the date of search. For this purpose, the verification oftheir books of accounts is necessary. It is only when theassessing officer is satisfied on verification of the books, that theappellants incurred loss during the period preceding search, thatan occasion may arise to adjust the same. If in the course of verification it emerges that the appellants have incurred anylosses during that period, such losses do not answer thedescription of ‘unabsorbed loss’. In fact, it is yet to be absorbed. Therefore, even while upholding the view taken by the assessingofficer as well as the Tribunal, we find that the verification of thebooks of accounts for the assessment year 1996-97 preceding thedate of search needs to be undertaken. We, therefore, partly allow the appeals directing that therespondent shall undertake verification of the books of accounts ofthe appellants for the assessment year 1996-97 referable to theperiod, preceding the date of search and if the respondent issatisfied that the appellants have incurred loss during that period,he shall take the same into account for determining theundisclosed income, as well as for passing the block assessmentorder. The miscellaneous petitions filed in these appeals shall alsostand disposed of. There shall be no order as to costs. ___________________________ L. NARASIMHA REDDY, J 03-09-2014ksNote: LR copy to be marked. B/O ks ____________________________ CHALLA KODANDA RAM, J [1](1998) 61 TTJ (Mumbai) 197