9911796707
TMI Blog2000 (4) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the Assessing Officer, the debit entries were identified as sales made to various dealers outside the books of account. Such sales totalled Rs.14.80 crores. The diary also consisted of some cash collections, amounts sent by DDs, payments made to suppliers like Chemplast, R.K. Mills, Coal and some interest payments to parties. The Director of the assessee-company, Sri Krishnakumar, was confronted with these entries and in the absence of satisfactory explanation from him, a declaration under section 132(4) was made by him admitting Rs.1.90 crores as profit out of the above unaccounted--for transactions. During the course of the search, Sri H. Kishan was confronted with the investments made by his family group, i.e., 'Haridas Group', in promoters quota shares and he has disclosed an amount of Rs.19,00,000 towards unaccounted for investment in promoters quota equity in Fenoplast Ltd. Also the assessee admitted undisclosed income for the asst. year 1991-92 at Rs.4,25,000 towards unexplained cash credits in sister concerns. Thus, the disclosure made by the assessee-company under section 132(4) is as follows: ----------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he current year's loss with the undisclosed income admitted at Rs.52,92,864 towards undisclosed income generated out of turnover in the diary and Rs.19,00,000 admitted towards investment in promoters quota shares of 'Haridas family' for the assessment year 1995-96 and Rs.4,25,000 towards cash credits in the books of account of the sister companies in the assessment year 1991-92 and aggregated the same with the respective losses of those years on account of current year's deprecation. While deducting Column-C of Part-II of the block return, they have taken income returned as Nil for the assessment years 1991-92 and 1995-96. As a result of this, the entire undisclosed income admitted by the assessee has become Nil. However, after elaborate discussion, the Assessing Officer was of the view that while arriving at the undisclosed income by reducing returned/assessed income under sections 139, 143, 144 and 147, if the resultant figure after setting off the current year's income against the current year's depreciation is negative, the same should be taken as 'loss' but not as 'Nil', as admitted and argued by the assessee. In support of this view, the Assessing Officer relied on the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. --------------------------------------------------------------------------------- Loss assessed 1,28,04,522 Less: Net profit as estimate on the undisclosed turnover as discussed at para 10 87,60,789 Net profit as estimated on the undisclosed turnover as discussed in para 11 3,96,042 Investment in promoters' quota shares of Fenoplast as discussed in para 13 19,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of the last three years before the said search were noted down and the department proceeded on the presumption that the figures noted therein were all undisclosed sales; but the assessee in its reply reconciled some of the transactions with the regular books. In regard to some of the transactions, it was asserted that the assessee could not prove to the satisfaction of the Assessing Officer that they were all genuine and noted in the regular books. Under these circumstances, the assessee had agreed that a sum of Rs.71,92,864 for the assessment year 1995-96 and Rs.4,25,000 for the assessment year 1991-92 could be treated as undisclosed income. The assessee, however, admitted that certain figures as undisclosed during the course of investigation following the search and in the return filed the assessee had shown 'nil' income for the purpose of the assessment under section 158BC. The assessee wanted to explain as to how he has shown 'Nil' income for the block assessment and thereby he contended that if the figure for the assessment year 1995-96 were to be considered by way of business loss for this year, the regular assessment had been completed and accordingly the assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lize the addition of undisclosed income in the assessment year. 5. He, however, explained that there is no dispute that the figure of Rs.1,28,04,522 is the unabsorbed depreciation as per the regular assessment for this year. But, for the purpose of block assessment, it was converted into business loss. He explained that by the addition of undisclosed income of Rs.1.10 crores, the claim was reduced and therefore this was undisclosed income for the purpose of section 158BB. Before us, the learned authroised representative challenged the assessment order mainly on two grounds, viz., (1) The addition made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of section 32(2) since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying the provisions of Chapter IV of the Act which contains section 32. If the income is so computed, the total income for these years before the inclusion of undisclosed income could only be nil with certain amount of unadjusted depreciation to be carried forward to the next year. But the computation of income has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Oil Distributing Co. Ltd v. CIT [1980] 126 ITR 497 (Bom.), CIT v. Elphinstone Spg. & Wvg. Mills Co. Ltd. [1960] 40 ITR 142 (SC), Indo-Gulf Fertilizers & Chemicals Corpn. Ltd. v. Union of India [1992] 195 ITR 485 (All.), B.D.A. Ltd. v. Asstt. CIT [1998] 65 ITD 501 (Mum.), CIT v. Prithipal Singh & Co. [1990] 183 ITR 69 (P&H) and CIT v. Sri Vijayalakshmi Mineral& Trading Co. [1999] 151 CTR (AP) 166. 6. On the other hand, the learned departmental representative contended as under: It is always mentioned in the block return (D-B) to declare that undisclosed income has been detected and 'D' would always be greater than 'B'. The assessed or the returned loss, i.e. 'D', would be greater than 'B'(assessed or returned loss as reduced by undisclosed income). In view of the same, D-B would always be a positive figure and hence that itself is to be taken as undisclosed income for the purpose of taxation. It is the intention of the Legislature not to give set off adjustments and Chapter VI adjustments and also Chapter VI-A deductions, the interpretation to allow the undisclosed income detected during the search adjusted against the loss that was available in books or unabsorbed depreciation tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation for that year would be only equal to the business profits. A reading of sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two -- one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be the allowance of the following previous year cannot, at the same time, represent the allowance of the current assessment year. The view that the balance of the current year's depreciation would continue to be the allowance relatable to the current assessment year, goes against the statutory provisions. Therefore, in case of inadequate business profits, the current year's depreciation is admissible only to the extent of availability of business profits and the result would be the business profit would be reduced to 'nil'. Accordingly, there would be neither profit (because the available current year's depreciation has been adjusted again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... figure of Rs.1.28 crores. Thus, the assessee reaps the consequence of concealment of income. But, the consequence of concealment is affecting only subsequent assessment years. We, therefore, hold that the amounts taxed for the assessment years 1994-95 and 1995-96 cannot form part of the block assessment. They stand deleted. 10. Now, we have to consider the following amounts:-- --------------------------------------------------------------------------------- Assessment year 1991-92 Rs. 4,25,000 Assessment year 1996-97 Rs. 8,18,585 Assessment year 1997-98 Rs. 2,84,520 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n provided that undisclosed income would be the total income under section 158BB as 'increased' by the losses under section 143. Hence, it would be difficult to hold that envisaging losses under section 158BB was a mere omission. The intention seems to be only to levy taxes on those who have positive income which was unearthed by search. If the aggregate under section 158BB is a loss, prima facie, a loss cannot attract tax. That may be the reason why the Legislature left out of the purview of section 158BB cases like that of the assessee where the aggregation results in a loss. 13. Under these circumstances, we hold that the levy of tax under section 113 is not valid. For the assessment years 1994-95 and 1995-96, the levy is invalid for the additional reason that the income under section 143 as well as the income computed under section 158BB are the same; both are 'Nil'. Therefore, there is no question of reducing the income arrived at after the inclusion of undisclosed income by the income assessed under section 143. When both are 'nil', the difference between the figures would also be 'nil'. 14. In the result, the appeal is pertly allowed as indicated above. Per O.K. Narayanan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer has misread the ratio in the decision of Hon'ble Supreme Court in Garden Silk Wvg. Factory's case. 4. The second ground urged by the assessee-company is that undisclosed income would attract the levy of tax under section 113 only if there is a positive income. That if the aggregate under section 158BB is a loss, there cannot be a levy of tax. That the assessments for the assessment years 1991-92, 1996-97 and 1997-98 have resulted in business losses. There is no positive income at all for these three assessment years even after inclusion of undisclosed income pertaining to those years. That, therefore, on the basis of positive income concept, there cannot be any undisclosed income susceptible to section 113 tax. 5. Under the Income-tax Act, depreciation is allowed as a deduction in computing the income either under section 32(1) or section 32(2). Where the profits of a particular previous year is not sufficient to absorb the depreciation of that previous year, under section 32(1), the balance of the depreciation not absorbed is to be carried forward to the succeeding previous years so that the unabsorbed depreciation is adjusted against the profits of the succeeding previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in regular assessments. Though the brought forward losses and unabsorbed depreciation will be given a set off while making regular assessments, they will have to be ignored while computing the undisclosed income of the block period. Therefore, the argument of the assessee-company to adjust the 'current depreciation' under section 32(2) against the undisclosed income is not sustainable in law. 8. As the statutory provisions in respect of, the role of section 32(2) in search assessment proceedings are clear in Chapter XIV-B of the Act, the contention of the assessee-company that unabsorbed depreciation is different from loss becomes only incidental. In Garden Silk Wvg. Factory's case, the Hon'ble Supreme Court has held that even though special sets of rules are provided for the carry forward and set off of unabsorbed depreciation and business loss, the genus of the depreciation and loss is the same. The above decision has been referred to and considered by the Apex Court in its recent judgment in V.V. TransInvestments (P.) Ltd. v. CIT [1999] 237 ITR 777 in which Their Lordships have held that for the purposes of section 115J of the Income-tax Act read with section 205 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,75,788. According to the assessee-company, the undisclosed income determined in its case has only reduced the ultimate loss and has not resulted in a positive income, which should be there for the purpose of levying tax. 12. Chapter XIV-B contains special procedure for assessment of undisclosed income in search cases. Section 158B(b) defines 'undisclosed income'. According to the said definition, undisclosed income is that income which has not been or would not have been disclosed by the assessee for the purposes of Income-tax Act. The subject of undisclosed income has to be considered separately from income or loss considered in the regular assessments. Therefore, undisclosed income is sufficiently insulated from the income or loss considered in the regular assessments. This insulation is explicitly provided by Explanation given under sub-section (2)of section 158BA. For the sake of convenience, the Explanation is reproduced below:-- Explanation.--For the removal of doubts it is hereby declared that-- (a) the assessment made under this chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; (b) the total undisclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed loss of the assessee-company has been reduced to a lesser amount only because of the intervention of a positive undisclosed income. 14. Wherever an amount of undisclosed income is determined under the provisions of section 158BB, that undisclosed income shall always be a positive figure. It may increase the aggregate income of the assessee or reduce the aggregate loss of the assessee. That part of final result is not relevant for the recognition of undisclosed income and the levy of tax thereon. The moment of undisclosed income is determined in a block assessment, it attracts the levy of tax prescribed under section 113. Therefore, the second ground also is liable to be rejected. 15. Accordingly, the contentions of the assessee-company fail. The Assessing Officer is right in law in levying the tax on the undisclosed income determined in the impugned block assessment. The assessment is accordingly confirmed. 16. In the result, the appeal is dismissed. REFERENCE TO THE HON'BLE PRESIDENT, ITAT, UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Shri R. Swarup, Vice President -- As we differ in opinion, after due deliberation on the point in adjudication in this appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome computed in a block assessment should be a positive income, so as to attract levy of tax under section 113 of the Income-tax Act, 1961, on the amount of undisclosed income determined in that block assessment." THIRD MEMBER ORDER Per Shri M.V.R. Prasad, Accountant Member -- As there was a difference of opinion between the learned Vice President and the learned Accountant Member, the Hon'ble President of the Income Tax Appellate Tribunal referred the matter to me under the provisions of section 255(4) of the Income-tax Act as Third Member. Apparently, there was no agreement between the two learned Members even on the points of difference. 2. The questions framed by the learned Vice President (JM) read as follows:-- "(1) Whether, on the facts and circumstances of the case, the Assessing Officer is correct in treating the current year's unabsorbed depreciation as 'loss' for the purpose of computation of undisclosed income under section 158BB of the I.T. Act, 1961? (2) Whether block assessment can be framed where aggregated total income (including undisclosed income) determined under section 158BC for each assessment years and assessed/returned income is loss and whether tax u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Rs.1,90,00,000 Unaccounted investment in promoter's equity of Haridas group Rs. 19,00,000 Unexplained cash credits Rs. 4,25,000 ------------------ Total Rs. 2,13,25,000 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; ---------------- --------------------------------------------------------------------------------- The assessee-company, however, set off the above mentioned undisclosed income against the business loss/unabsorbed depreciation of each year and accordingly worked out the undisclosed income at a Nil figure and thus filed the block return showing the undisclosed income only at a Nil figure. The year-wise details furnished by the assessee-company in the block return read as follows:-- --------------------------------------------------------------------------------- Previous Asst. Total Income including undisclosed Income Year Year ------------------------------------------- Total Income Business Depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; - - 8th 1994-95 Nil - 3,26,35,713 9th 1995-96 Nil - 64,72,509 10th 1996-97 Nil 4,03,12,335 2,43,53,512 11th 1997-98 Nil - - & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 13,58,400 - - 1,76,620 - - Nil - 19,78,079 10,59,936 - - Nil &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Total Undisclosed Income for the Block period = Nil --------------------------------------------------------------------------------- It may be observed from the above statement that the assessee-company has shown the undisclosed income at Nil even though there are variations between the figures shown in Columns E and F on the one hand and Band C on the other hand in the table. Columns E and F relate to business loss and depreciation as per the regular returns and as per the assessment orders, whereas columns B and C relate to business loss and depreciation after taking into account the undisclosed incomes. The undisclosed income of Rs.76,17,864 mentioned hereinabove is reflected in the above table as follows:-- --------------------------------------------------------------------------------- Rs. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; business loss) Assessment year 1995-96 Rs. 1,36,65,373- Rs. 64,72,509 = Rs. 71,92,864 (Reduction in unabsorbed depreciation) ---- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Losses Income ------------------------- Source Amount (Rs.) (Rs.) -------------------------------------------------------------------------------- 1st Earliest 1987-88 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 6,46,65,847 11th(latest) 1997-98 --------------- ---------------- Total (A) 25,94,956 (B)12,51,95,399 --------------- ---------------- Total undisclosed income for the block period = [(A) - (C)] + [(D) - (B)],i.e., (A) 25,94,956- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income ----------------------------------------- Source Amount (Rs.) (Rs.) -------------------------------------------------------------------------------- 13,58,400 1,76,620 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble given by the learned DR at this stage only to bring out the difference between the modes of working out the undisclosed income adopted by the assessee and that held by the Department to be the correct method. 7. The Assessing Officer, however, made certain additions to the undisclosed income and computed it at Rs.1,46,02,756 as against the admitted figure of Rs.76,17,864 adopted by the assessee. There is no dispute between the two learned Members about the computation of the undisclosed income of Rs.1,46,02,756. The only dispute is how to compute the undisclosed income for taxing it under the provisions of section 113 of the Income-tax Act when the business loss and unabsorbed depreciation of each assessment year included in the block period is more than the undisclosed income arrived at for each of the years. It is the contention of the assessee that as the business loss and depreciation for each of the concerned years included in the block period is more than the undisclosed income, the undisclosed income for the block period has to be determined at a Nil figure and so there is no income that can be brought to tax under the provisions of section 113. The learned Judicial Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of overstatement of business losses to the extent of undisclosed income". He decided the issue, in para 8 at pages 10 and 11 of his order, in favour of the assessee and his remarks are as follows:-- "8. The main point for consideration is whether the assessee's computation of income at 'Nil' for the purpose of regular assessment as well as under section 158BB is correct. The assessee's case is that if the current year's depreciation exceeds the business income as computed, the allowance of depreciation for that year would be only equal to the business profits. A reading of sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two--one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be the allowance of the following previous year cannot, at the same time, represent the allowance of the current assessment year. The view that the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need not necessarily result in escapement of undisclosed income from being taxed inasmuch as the carried forward depreciation to the subsequent years would get reduced and the consequences of concealment is felt in subsequent assessment years. So for the assessment years 1994-95 and 1995-96, the learned JM went by the criterion of section 32(2) of the Act prohibiting the set-off of only unabsorbed depreciation of earlier years against undisclosed income and it did not raise any bar against the set-off of unabsorbed depreciation of the current year against the undisclosed income. For the assessment years 1991-92, 1996-97 and 1997-98, the learned JM observed that there were no positive incomes for these years even after the inclusion of undisclosed income and when there is no positive income for any year or in the aggregate for the block period, there cannot be any undisclosed income to be brought to tax under section 113. The relevant observations of the learned JM are contained in paras 11 and 12 at page 13 of his order and they read as follows:-- "11. After considering the rival submissions of the parties as well as the relevant provisions of the Act, we are of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also observed that in terms of the columns prescribed in Form 2B of the block return in Part-II and Part-III thereof, a reduction in loss has to be categorised as undisclosed income. His comments in this regard are in paras 13 and 14 and page 21 of his order, and they are as follows:-- "13. Undisclosed income when aggregated to the income assessed in the regular assessments, the ultimate income of the assessee may increase or the accumulated loss may reduce. This is an accounting concept. But this concept is not applicable to the case of taxation of undisclosed income as it cannot be merged with 'disclosed income'; the income or loss considered in the regular assessments. The basis of the assessee's contention of positive income is the integration of 'undisclosed income' with 'disclosed income', which is not permitted in the Scheme of Chapter XIVB. This position is clear from the computation format of undisclosed income provided in Part-II of Form 2B return. Column B and Column D therein relate to case of losses. Column-B is for losses including undisclosed income and Column-D is for losses returned/assessed. For the computation of undisclosed income, Column-D is always bigger th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in the case of Ginners & Pressers Ltd. v. Dy. CIT [1993] 46 ITD 185 (Bom.) (SMC) wherein interpreting the provisions of section 272A(2)(c) it was held that the time limit for furnishing annual returns prescribed under rule 37 of the Income-tax Rules was in excess of the power of rule-making authority and, therefore, it has to be ignored. In other words, it is claimed that the computation of the undisclosed income filed by the assessee in the block return is in consonance with law, though it may not be in consonance with the format of the block return in Form 2B. 12. The next limb of the contention of the learned counsel for the assessee is that clause (a) of Explanation to section 158BB prohibited the set-off of only the carried forward unabsorbed depreciation of the earlier years against the undisclosed income inasmuch as it referred to the set-off of unabsorbed depreciation under sub-section (2) of section 32 and the said clause in no way prohibited the set-off of the depreciation of the current year against the undisclosed income inasmuch as there is no reference to the provisions of section 32(1) in the said clause. It is claimed that if the current year's depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee of the rightful claim in the form of deduction for depreciation available to it under Chapter IV as per the provisions of which Chapter the undisclosed income has to be computed under the provisions of clause (a) of Explanation to section 158BB. In other words, it is claimed that the learned JM was correct when he held that current year's depreciation is available for being set off against the undisclosed income and while granting such deduction, the provisions of section 32(2) do not come into play and only the provisions of section 32(1) are involved. It is also claimed that as in the present case the depreciation can be absorbed against the undisclosed income, the business loss, exclusive of depreciation, determined in regular assessment will remain unchanged. 13. The next limb of the argument of the learned counsel for the assessee is that the scheme of the Chapter XIVB is such that there cannot be a tax on aggregate loss or on a simple reduction of loss. It is claimed that what is to be assessed is the undisclosed income and assessment cannot be of reduced loss. In other words, it is claimed that the assessee cannot be taxed, as held by the learned JM, unless there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Losses logically) Income -------------------------------- Source Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 93-94 24,49,921 ------------------------------------------------------------------------------- 8th 94-95 (x) 3,08,53,238 ------------------------------------------------------------------------------- 9th 95-96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 2, 84,520 + to be cont... ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- cont... Returned/Assessed as on the date of search/ requisition --------------------------------------------------------- Total Losses Income & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1,19,08,428 ------------------------------------------------------------------------------- 7th 24,49,921 ------------------------------------------------------------------------------- 8th 3,28,71,054 ------------------------------------------------------------------------------- 9th 1,28,04,522 ------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 1994-95 Rs. 20,17,816 1995-96 Rs. 1,10,56,831 1996-97 Rs. 8,18,585 1997-98 Rs. 2,84,520 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; (A)- Rs........... (C) Rs. 2,84,520 -------------------------------- -------------------- Total Rs. 1,46,02,752 -------------------- --------------------------------------------------------------------------------- 16. The main plank of the argument of the learned DR has been that Part-II of Form 2B, while it provides for yearwise losses eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hibits such set-off of the unabsorbed depreciation of the earlier years, the learned DR mentioned that the mode of computation adopted by the Assessing Officer does allow such set-off of current depreciation in the computation of yearwise figures taken into account in columns A and B of the above statement. It is also refuted that the prescribed return form for block assessment, i.e., Form No. 2B, is not in conformity with the statute. It is claimed that the return form is very much in consonance with the provisions of Chapter XIV-B of the Income-tax Act. The learned DR also pleaded that in terms of the scheme of the Income-tax Act, even penalty under section 271(1)(c) can be levied for overstatement of loss, as held by the Hon'ble Kerala High Court in the case of CIT v. Rowther Brother [1979] 119 ITR 353 and also by the Hyderabad Bench of the Tribunal in the case of Lakshmi Cotton Traders, referred to by the learned JM in page 9 of his order, and as such there is no reason to hold that overstatement of loss in the regular returns or reduction of loss consequent to block assessment cannot be brought to tax as undisclosed income in terms of Chapter XIV-B of the Income-tax Act. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king into consideration the aggregate income for the same period of Rs.53,29,397) as evident from the table furnished before me by the learned DR on the basis of the computed figures in the block assessment order and extracted by me hereinabove, the undisclosed income can be computed at a figure of Rs.1,46,02,752 as done by the Assessing Officer. 18(a). To understand the issue raised in this reference, it is worthwhile to look at some of the relevant provisions of Chapter XIV-B of the Income-tax Act. The purpose of this Chapter is to lay down a special procedure for assessment of search cases with a view to combat tax evasion and also to expedite and simplify assessments in search cases. The purpose of the Chapter was explained by the Finance Minister in his budget speech for 1995-96 in the following words:-- "The searches conducted by the Income-tax Department are an important means of unearthing black money. However, undisclosed incomes have to be related to the different years in which income was earned and as such assessments are unduly delayed. In order to make the procedure more effective, I am proposing a new Scheme under which undisclosed income detected as a result of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock period; (b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period; (c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period." Section 158B which defines "block period" and "undisclosed income" reads as follows:-- "(a) 'block period' means the previous years relevant to ten assessment years preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A, and includes, in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition. (b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sments. The second aggregate to be worked out is the aggregate of the total incomes/losses of the previous years determined as per clauses (a) to (f) of section 158BB(1). In other words, this is the aggregate of the returned/assessed incomes/losses as per regular returns and regular assessments. The difference between the first aggregate and the second aggregate has to be worked out and that difference is described in section 158B(b) as the 'undisclosed income' to be taxed under the provisions of section 113 of the Act at the special rates prescribed. In other words, while section 158B(b) defines "undisclosed income", the mode of quantification of the undisclosed income is laid down in section 158BB(1). The essence of the mode of quantification of the undisclosed income is by working out the difference between the two aggregates mentioned hereinabove. When the aggregate of the total income of the relevant previous years as per the block return is a positive figure and the aggregate of the total incomes as per the relevant regular returns and assessments is also a positive figure, the difference computed in terms of section 158BB(1) would also be a positive figure. There can be othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... figure, and so the positive figure is increased by the negative figure, i.e., losses as per the regular returns/assessments as stipulated in section 158BB. In the third situation above, the difference is only between two negative figures, and the first negative figure is less than the second negative figure and the difference is only 5,00,000. Normally, the situation visualised at (4) above should not arise, because the undisclosed income on the basis of search material should only go to reduce the returned/ assessed losses and cannot result in enhancement of the losses. In a hypothetical situation, the search material may disclose some undisclosed income for some years but the material may also throw up losses which were not recorded in the regular books and so the possibility of the situation at (4) above cannot entirely be ruled out. However, for the purpose of the present reference, one need not go into the theoretical possibility of situation (4) above. The assessee does not dispute the computation of the undisclosed income at Rs.5,00,000 and Rs.25,00,000 at situations (1) and (2) above. The dispute is only about the computation of the difference of the undisclosed income at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant case is as under: ---------------------------------------------------------------------------------- Examples : Total aggregate income including (-) Rs. 11,13,75,788.00 undisclosed income as per computation under section 158BB(1) Add: Total assessed income losses (-) Rs. 12,59,78,540.00 [as per section 158BB(1)(a) to (f)] --------------------------- Undisclosed income for the block period (-) Rs. 23,73,54,328.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Rs. 1,46,02,752 ----------------------- ---------------------------------------------------------------------------------- It is also made out in the written submissions that on the basis of the method adopted by the Assessing Officer, an assessee who had not filed any returns for some of the years in the block period and so was not assessed on any negative figure stands to gain compared to somebody who complied with the statutory provisions, filed the returns and was assessed on losses. He gave a hypothetical illustration in Annexure-III of his written submissions, which reads as follows: ---------------------------------------------------------------------------------- "Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------- 1988-89 1,76,620 -- 1,76,620 -- -------------------------------------------------------------------------------- 1989-90 -- 14,78,079 -- 14,78,079 -------------------------------------------------------------------------------- 1990-91 10,59,936 -- 10,59,936 -- -------------------------------------------------------------------------------- 1991-92 -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil -------------------------------------------------------------------------------- Total 53,29,397 11,67,05,185 50,44,877 8,53,47,841 -------------------------------------------------------------------------------- Total undisclosed income: (A - C) + (D - B) = Rs. (53,29,397 - 50,44,877) + Rs. (8,53,47,841 - 11,67,05,185) = Rs. 2,84,520 - 3,13,57,344 = (-) Rs. 3,10,72,824" ---------------------------------------------------------------------------------- The figures given in the above table are the same as those reproduced by me hereinabove as having been given by the learned DR on the basis of the block assessment order. Actually, the assessee itself gave those figures as Annexure-II to the written submissions filed before me. The only difference between the two sets of figures is that the loss of Rs.3,28,71,054 for the assessment year 1994-95 in column D and the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward losses from earlier years and of unabsorbed depreciation under section 32(2) but there is no prohibition against the set-off of current depreciation which has remained unabsorbed in the regular returns and so is carried forward in regular assessments. The provisions of section 32(2) read as follows:-- "Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,-- (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income or total loss of the previous years in the block period. The unabsorbed portion of the loss which includes depreciation in the previous years included in the block period as per the block assessment order cannot be carried forward in terms of sub-section (4) of section 158BB which we have extracted hereinabove. In this view of the matter and in the light of the mode of computation adopted by the Assessing Officer for working out the undisclosed income, the points of difference made out by the learned JM and the learned AM as to whether the unabsorbed current depreciation can be set off against the undisclosed income are somewhat misconceived as the Assessing Officer has not denied such deduction. When the undisclosed income computed on the basis of the search material is reduced from the loss, assessed, including depreciation, it follows that the entire depreciation claimed is considered and allowed as a deduction against the undisclosed income. This may be observed from the statement of total income given by the assessee for the assessment year 1995-96 along with the original return, which is at page 79 of the Departmental Paper Book (DPB), and it reads as follows:-- - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -------------- Add: Sale of Design Rollers (Refer Note No. 11 of Notes on Accounts) 2,52,79,700 Depreciation considered separately 90,69,713 Entertainment Disallowance under section 37(2) 12,960 Disallowance on Credit Card payments 1,619 Donations considered separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; ---------------- Carry forward to next year -1,36,65,373" ---------------------------------------------------------------------------------- It may be observed that the above loss of Rs.1,36,65,373 is actually unabsorbed depreciation out of the depreciation claimed of Rs.2,93,14,847. It is stated in the order under section 143(3) dated 31-3-1998, which may be seen at pages 83 and 85 of the DPB that the said loss has been reduced to Rs.1,28,04,522 vide an order under section 154 dated 23-2-1998. It is this loss of Rs.1,28,04,522 which has been set-off against the undisclosed income computed for the assessment year 1995-96 in the block assessment at Rs.1,10,56,831 and the balance of Rs.17,47,691 is reflected in column B of the table as per Part-II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that have not been allowed and this is in consonance with the provisions of subsection (4) of section 158BB. 20. The next plank of the order of the learned JM and also of the learned counsel before me is that the loss figuring in column B and column D of Part-II of the block return cannot include depreciation. I find myself unable to agree with this contention. There is no separate column for depreciation and so depreciation has to be included in the loss reflected in columns B and D of Part-II of the return. There is also the authority of the Apex Court by way of the decision in the case of Garden Silk Wvg. Factory and V.V. Trans-Investments (P.) Ltd. for the proposition that as per normal commercial practice, business loss includes depreciation as the loss is worked out only after debiting depreciation to the profit and loss account. The relevant portion of the remarks of the Apex Court in the case of Garden Silk Wvg. Factory, as per the head note, reads as follows: "Unabsorbed depreciation is indeed a part of the 'loss'. This is so because, in the first place, depreciation is a normal outgoing, though in a sense notional, which has to be debited in the computation of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. They are not affected by such quantification. The go back to the regular assessment record and the losses under specified circumstances are carried forward. The provisions of Explanation to section 158BA, retrospectively introduced with effect from 1-7-1995 by the Finance (No. 2) Act, 1998, ensure the insulation of the block assessment figures from the regular assessment figures and vice versa I find no warrant for the observations of the learned JM that the undisclosed income can result in the carry forward of the lesser business loss or lesser unabsorbed depreciation in the regular assessments. The learned counsel for the assessee pleaded before me that the Explanation to section 158BA mentioned above are a protection to the assessee. I am of the view that they are no protection to either the assessee or the revenue. They only clarify the procedure laid down for the quantification of the undisclosed income and in the face of this provision and the provisions of sub-section (4) of section 158BB, it is difficult to hold that the undisclosed income need not be taxed and can go simply to reduce carried forward losses and unabsorbed depreciation of various years in the regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation has been given deduction. 29. My position in respect of the points of difference framed by the learned AM is as follows:-- 30. Point 1: The current year's depreciation which is not absorbed in the regular assessment is available for deduction while computing the undisclosed income under section 158BB. However, this point of difference as well as the point of difference No. 3 framed by the learned JM proceed on the wrong assumption that the Assessing Officer had not given such deduction. In the method of computation adopted by the Assessing Officer, such deduction is already given. I am making this point only by way of clarification of the position. 31. Point 2: I have indicated my position while dealing with point No. 2 framed by the learned JM. In other words, even when the two aggregates referred to in section 158BB are losses, there can be undisclosed income and so a liability for tax under section 113 of the Income-tax Act. The undisclosed income has necessarily to be computed in terms of section 158BB and by following the formula [(A) - (C) + (D) - (B)] given in Part-II of the return in Form No. 2B. 32. In view of the above replies, I have to reiterate that I am in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' for those years where the depreciation admissible for current year exceeded the business profits of that year, was acceptable. Thus, according to him for the assessment years 1994-95 and 1995-96, the income under section 158BB as well as income as per regular assessments would be 'NIL'. 3. Dealing with the assessment years 1991-92, 1996-97 and 1997-98, the Hon'ble Vice President in the order proposed by him observed that computation of concealed income under section 158BB envisaged a positive figure of assessment on the basis of search materials, and in the case on hand, since the total aggregate income determined is a figure of loss of Rs.11,13,75,788, levy of tax under section 113 is not valid. 4. Dissenting from the order proposed by the Hon'ble Vice President, the Accountant Member held the right of set off of depreciation under section 32(2) is available to the assessee only in regular assessments, and though the brought forward losses and unabsorbed depreciation will be given a set off while making regular assessments, they have to be ignored while computing the undisclosed income of the block period. As such according to him, it is not possible to agree with the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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