1999 (6) TMI 47 - HC - Income Tax

Summary

Issues Involved:
1. Validity of Notice u/s 158BC.
2. Assessment of Undisclosed Income based on Seized Documents.
3. Alleged Introduction of Undisclosed Cash.
4. Excess Stock of Scrap.
5. Allowance of Depreciation.

Summary:

1. Validity of Notice u/s 158BC:
The assessee challenged the validity of the notice dated 12th Dec 1996 issued u/s 158BC on grounds of vagueness and non-compliance with legal requirements. The Tribunal found the notice to be invalid due to:
- Non-addressing to the principal officer as required by s. 282(2)(b).
- Failure to specify the status in which the return was required.
- Incorrect definition of the block period.
- The notice was not saved by s. 292B as the defects were not merely technical.

2. Assessment of Undisclosed Income based on Seized Documents:
The Tribunal examined various loose papers (LP1 to LP31) found at the residence of Mr. Madan Hada. The Tribunal concluded:
- The documents did not conclusively belong to the assessee.
- The statement of Mr. Madan Hada was unreliable and not corroborated by other evidence.
- Specific documents like LP5, LP9, LP11, LP12, LP15, and LP22 were scrutinized, and it was found that they did not bear the name of the appellant or provide sufficient evidence to attribute them to the assessee's business.
- The Tribunal directed that if at any stage these documents are held as belonging to the appellant, the turnover should be computed excluding entries marked 'A' and applying a net profit rate of 5%.

3. Alleged Introduction of Undisclosed Cash:
The AO alleged that the assessee introduced undisclosed cash into the books through bogus trading transactions. The Tribunal found:
- The AO's conclusion was based on suspicion without proper evidence.
- The transactions recorded in the books do not indicate introduction of undisclosed cash.
- The Tribunal held that the theory of introduction of undisclosed cash was impractical and unprofitable, and thus, the computation of undisclosed income on this account was deleted.

4. Excess Stock of Scrap:
The AO estimated the stock of scrap at 720 MT and valued the excess stock at Rs. 21,99,000. The Tribunal found:
- The stock inventory was based on guesswork and not actual weighment.
- The assessee's objections and requests for actual weighment and cross-examination were unjustifiably denied.
- The Tribunal estimated the quantity of stock at 540 MT and directed the AO to compute the undisclosed income at a rate of Rs. 11,000 per MT.

5. Allowance of Depreciation:
The Tribunal directed that depreciation should be allowed as per law since the AO had accepted the carrying on of manufacturing and trading activities by the appellant.

Conclusion:
The Tribunal quashed the assessment for the block period dated 30th Sept 1997 as being bad in law and void ab initio due to the invalid notice and violation of principles of natural justice. The AO was directed to delete the undisclosed income of Rs. 3,42,357 on account of alleged undisclosed investment in the construction of the factory building. If the assessment is held valid at a later stage, the Tribunal provided specific directions for computing the undisclosed income. The appeal was allowed on legal grounds and partly allowed on merits.