2007 (1) TMI 202 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of the addition of Rs. 26,24,981 made on account of unexplained fabrication charges and unexplained investment in the purchase of yarn.
2. Justification of the CIT(A) in deleting the addition.
3. Whether the matter should be remitted back for re-examination.

Detailed Analysis:

1. Deletion of the Addition of Rs. 26,24,981:
The revenue challenged the deletion of Rs. 26,24,981 by the CIT(A), which was initially added by the Assessing Officer (AO) due to unexplained fabrication charges and investments in yarn purchases. The AO based this on documents seized during a search on 23-2-2002, which indicated fabrication work from M/s. Virka Textiles and M/s. Shivam Knitting Works. The AO inferred that the books of account were not traceable and thus treated the expenses as undisclosed income.

2. Justification of the CIT(A) in Deleting the Addition:
The CIT(A) deleted the addition, reasoning that the fabrication charges were already debited in the trading account for the relevant financial years and that no evidence was found during the search to suggest that the assessee was involved in any illegal activities. The CIT(A) emphasized that the AO's addition was based on assumptions and surmises rather than concrete evidence. The CIT(A) relied on several case laws, including Pooja Bhatt v. ACIT and Dr. R.M.L. Mehrotra v. ACIT, which underscored that additions in block assessments must be based on evidence found during the search and not on presumptions.

3. Whether the Matter Should Be Remitted Back for Re-examination:
The Judicial Member suggested remanding the case back to the AO for fresh adjudication, citing the principles of natural justice and the need for the assessee to substantiate its claims. However, the Accountant Member disagreed, arguing that the CIT(A) had correctly deleted the additions as they were based on surmises and conjectures without any material evidence found during the search. The Accountant Member emphasized that the AO had not brought any material on record to substantiate the claim of undisclosed income.

Third Member Decision:
The President, acting as the Third Member, resolved the difference by agreeing with the Accountant Member. He highlighted that the incriminating documents (challans) found during the search did not conclusively prove undisclosed income. The President noted that the assessee had shown fabrication charges and purchases in its audited accounts for the relevant periods, and the AO's addition was based on insufficient evidence. He emphasized that under Chapter XIV-B of the Income-tax Act, undisclosed income must be based on evidence found during the search, and in this case, no such evidence was found. The President concluded that the CIT(A) was justified in deleting the addition, and remanding the case for re-examination was unnecessary.

Conclusion:
The appeal of the revenue was allowed for statistical purposes only, with the majority opinion favoring the deletion of the addition by the CIT(A). The judgment underscored that additions in block assessments must be based on concrete evidence found during the search and not on presumptions or guesswork.