9911796707
TMI Blog2007 (3) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... isting of Mr. Rajan H. Khinvasara and Mr. H. Khinvasara as partners sharing profits and losses equally. The firm is engaged in the business of promoters and builders. The assessee firm had filed its return of income regularly upto and inclusive of asst. yr. 1996-97. The returns for the subsequent assessment years upto the assessment year fallen due before the date of search were not filed. A survey action under s. 133A was conducted on 9th Nov., 2000 initially which was converted into search and seizure. During the course of survey [sic-search) action under s. 132 of the Act certain documents, incomplete books of accounts and papers were found and seized. A notice under s. 158BC was issued by the AO which was served on the assessee-firm on 5th June, 2002 requiring the assessee to file a return of income for the block period from 1st April, 1990 to 9th Nov., 2000 in response to which the assessee furnished its block return in Form No. 2B declaring the total undisclosed income at Rs. 23,35,977. The assessee furnished a computation of undisclosed income as under: Income from business Undisclosed profit as per P&L a/c for the block period from 1st April, 1990 to 9th Nov., 2000 18,35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the aggregate of the undisclosed income of other years, by the AO while making the block assessment determining the total undisclosed income at Rs. 42,16,847. The AO has disallowed the set off of claim of losses amounting to Rs. 18,80,870 by discussing and observing as under: "As per provisions of s. 158BB(1)(c) where the due date of filing a return of income has expired, but no return of income has been filed, the undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed..... etc. as increased by aggregate of the losses of such previous years determined (A) on the basis of entries as recorded in the books of accounts and other documents maintained in the normal course on or before the date of search or requisition where such entries result incomputation of loss for any previous year falling in the block period. Thus, set off loss of any previous year where no return is filed, is available only in one circumstance i.e. where the loss is determined on the basis of entries as recorded in the books of account. In the present case, books of accounts seized do not reveal any entries pertaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod". 6. Being aggrieved with the AO's order in not allowing the assessee's claim of set off of losses amounting to Rs. 18,80,870 the assessee preferred an appeal before the CIT(A). 7. Before the CIT(A) the assessee submitted as under as reproduced by the CIT(A) in para 3 of his order. "3. In the course of appellate proceedings it was submitted as under: The AO stated that as per s. 158BB(1)(c) of the Act, the loss computed on the basis of the entries recorded in the books of account maintained on or before the date of search would only be allowed. Based on the interpretation of the s. 158BB(1)(c) of the Act, the AO held that the loss is allowed to be set off only when the loss is determined on the basis of the entries recorded in the books of account. Since the seized books do not reveal any entry in the books relating to loss, the said loss was not allowable. Hence, the AO disallowed the loss to the extent of Rs. 18,80,870 and made addition thereof assessing the income at Rs. 42,16.847. Being aggrieved by the same, the appellant has preferred the appeal and thus, this ground. The disallowance made by the AO is incorrect for the following reasons: The interpretation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by taking the aggregate total income for the entire block period which is Rs. 100 + (- Rs. 25) = Rs. 75. From this amount, the amount of loss which is computed as per the books of account should be added. Hence, the total undisclosed income would be Rs. 75 + Rs. 25 = Rs. 100 Tabulating the above figures as follows would make the picture more clear: ------------------------------------------------------------- Asst. yr. Total undisclosed income Refunded/Assessed Total (disclosed + undisclosed) income ------------------------------------------------------------- 1 Rs. 75 Rs. -25 Rs. 100 ------------------------------------------------------------- It is submitted that the AO has wrongly interpreted the said provisions and held that set off of loss is allowed only if the loss is as per the books of account. In fact, the true interpretation is other way round. What is intended by the legislature is that against the undisclosed income, only undisclosed losses should be allowed to be set off and not the losses, which are determined under the regular assessment. In view of the above, the loss falling within the block period should b~ allowed to be set off against the other i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss of Rs. 14.60 lakhs for asst. yr. 1997-98, which should be set off against the undisclosed income of the subsequent years despite the fact that no return of income was filed either for the asst. yr. 1997-98 or for the subsequent year. Subsequent to the amendment in s. 158BB, which deals with the computation of undisclosed income of the block period, the contention of the appellant deserves to be outrightly rejected. There is a specific amendment to s. 158BB(1)(c) which would deny the appellant the so-called claim of set off of undisclosed loss in an assessment year against the undisclosed income of another year both forming part of block assessment period. As per s. 158BB, the total income of the appellant has to be computed on the basis of evidences found during the course of search less the income returned or assessed or recorded in the books of account as the case may be. Where no regular return of income has been filed and the explanation of the evidences results in a computation of loss then the following method of computation of undisclosed income of this year is to be followed. The income of the appellant on the basis of the evidences found during the course of search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions: (1) BDA Ltd. vs. Asstt. CIT; (2) Singhania Polyster (P) Ltd. vs. Asstt. CIT (2005) 96 TTJ (Lucknow) 614. 12. In the written submissions of the assessee filed before the CIT(A), the assessee has quoted paras 7, 8, and 9 of the Tribunal's order in the case of BDA Ltd., where the Hon'ble Tribunal has considered the main provision of sub-s. (1) of s. 158BB r/w Expln. (a) below sub-s. (1) of s. 158BB and cl. (c) (as it then stood) of sub-s. (1) of s. 158BB of the Act. After referring the aforesaid paras of the Tribunal's order, the learned counsel for the assessee submitted that the losses claimed by the assessee during the years falling within the block period can be set off against the income for the block period. It is clearly pointed out in the aforesaid decision of the Tribunal in the case of BDA Ltd. by holding that the object of the search is to obtain evidence regarding the true income of an assessee and if such an evidence points to a loss, there could be no escape from the conclusion that the loss has to be set off. Further, the learned counsel for the assessee has also submitted that on identical facts and circumstances of the case and an identical issue involved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous years falling within the block period computed, in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence, as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined,- (a) where assessments under s. 143 or s. 144 or s. 147 have been concluded prior to the date of commencement of the search or the date of requisition on the basis of such assessments; (b) where returns of income have been filed under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns, (c) where the due date for filing a return of income has expired but no return of income has been filed. (A) On the basis of entries as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition where such ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords "in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence" have been substituted by the Finance Act, 2002 w.e.f. 1st July, 1995 for the words "in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the AO". 17. Further, the abovestated cls. (c) and (ca) of sub-s. (1) of s. 158 have also been substituted by the Finance Act, 2002 w.e.f. 1st July, 1995 for the then cl. (c). Prior to the substitution by the Finance Act, 2002 w.e.f. 1st July, 1995, the cl. (c) of sub-s. (1) of s. 158BB read as under: "158BB(1)(c): where the due date for filing a return of income has expired but no return of income has been filed, as nil". 18. It is thus found that the newly inserted cl. (c) along with its sub-cls. (A), (B) and cl. (ca) of s. 158BB(1) were not in the statute in s. 158BB(1) prior to its substitution by the Finance Act, 2002 w.e.f. 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of requisition. 61.5 Clause (b) of sub-s. (1) of s. 158BB states that the aggregate total income is to be reduced or adjusted by the income or loss disclosed in returns filed under s. 139 or under s. 147, in cases where no assessments have been completed on the basis of such returns till the date of search. However, there can be cases where returns have been filed in response to notice under s. 142(1) and assessment has not been completed till the date of search. 61.5.1 The Finance Act, 2002, has amended the said cl. (b) to include a specific reference to such returns filed in response to notices issued under s. 142(1). 61.6 Under the existing provisions of cl. (c) of s. 158BB(1), where no return has been filed and the due date has expired, no adjustment is to be made to the aggregate total income for computing undisclosed income of block period. There could be cases where the regular books of accounts of the assessees reflected losses but no returns were filed by the due dates. while filing the return for block period, the assessee, in such cases used to consider such losses in computing the aggregate total income of the block period and used to claim that no adjustment sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income has expired but no return of income has been filed, the aggregate of total income shall be increased, or as the case may be, shall be reduced, by the "nil" amount. Therefore, under the then existing provision of cl. (c) of sub-s. (1) of s. 158BB where no return has been filed and the due date for filing the return has expired, no adjustment was to be made to the aggregate total income for computing undisclosed income of block period. There could be cases where regular books of accounts of the assessee reflected losses but no returns were filed by the due date; and while filing the return for the block period, the assessee, in such cases, used to consider such losses in computing the aggregate of total income of the block period and then used to claim that no adjustment should be made in view of cl. (c) of s. 158BB(1) and such losses should not be added back for computing undisclosed income of the block period. This is what exactly has been decided by the Hon'ble Tribunal in the case of BDA Ltd. in the light of the then existing sub-cl. (c) of s. 158BB(1). Therefore, with a view to remove this anomaly in the s. 158BB(1)(c) the legislature has substituted cl. (c) of s. 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 158BB is thus clear that the assessee, who is subjected to search under s. 132 or requisition under s. 132A, shall not get the benefit of set off of the loss of any previous year. which is determined on the basis of the entries as recorded in the books of accounts and other documents maintained in the normal course on or before the date of search or requisition, against the undisclosed income of a block period, where the due date for filing the return of income has expired but no return of income has been filed. Further. where the due date for filing the return of income has expired but no return has been filed, the total income for the purposes of reduction from the aggregate of the total income shall be taken at NIL as clearly provided under cl. (ca) of sub-s. (1) of s. 158BB of the Act. 21. In the light of the above discussions, we may therefore, hold that where the due date for filing of the return of income has expired but no return of income has been filed, any loss determined on the basis of entries as recorded in the books of accounts and other documents maintained in the normal course on or before the date of search or requisition and forming part of the aggregate of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed undisclosed income at Rs. 23,35,977 by aggregating positive income of Rs. 42,16,847 and negative income of Rs. 18,80,870 as detailed above. In the block return, the assessee has not increased the aggregate of the total income amounting to Rs. 23,35,977 by the aggregate of the losses amounting to Rs. 18,80,870. The AO has increased the aggregate of total income amounting to Rs. 23,35,977 by the aggregate of the loss of Rs. 18,80,870, by saying that the seized books of accounts did not reveal any entries pertaining to loss in business. In support thereof, the AO has placed reliance upon the sworn statement of Mr. Rajan Khinvasara recorded during the course of search and had reproduced part of the relevant questions and answers given by Shri Rajan Khinvasara in his assessment order; for a ready reference, the extract thereof as reproduced by the AO in his assessment order has already been set out in para 5 of this order. 23. The AO has stated that the books of accounts seized did not reveal any entries pertaining to the loss in business. In the course of hearing. the learned Authorized Representative for the assessee has not been able to point out those seized documents and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and losses equally. The firm is engaged in the business of Promoters and builders. The firm has undertaken a construction project at Hadapsar named as Manisha Blitz. 2. The assessee firm had filed its returns of income regularly upto and inclusive of asst. yr. 1996-97, however, the returns for the subsequent years were remained to be filed in time due to ill-health of Shri Harackchand U. Khinvasara father of Shri Rajan H. Khinvsara. Unfortunately during the same period Mr. U.B. Gujar, FCA, chartered accountant of the assessee developed certain heart problem and as such had to undergo a prolonged treatment for the same. He was also advised to take compulsory bed rest and was also advised not to get involved in the activities, which may cause mental fatigue. Both of these incidents coupled together resulted in default in filing the returns of income for subsequent four years. However, notwithstanding this, the assessee had taken an abundant precaution to pay sufficient advance income tax after taking into consideration the TDS available to his credit for the estimated income, which he was having in his mind at that time. 3. The assessee was waiting for his CA to get well soon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the entries for working out the losses for the concerned years having been recorded in the books of account found and seized as contemplated under s, 158BB(1)(c) of the IT Act." 28. On reading the same, we find that the assessee has advanced a case that the loss for the concerned years has been worked out on the basis of entries recorded in the books of accounts found and seized in the course of search as contemplated under s. 158BB(1)(c) of the Act. It is thus clear that the books of account found during the course of search were the books of accounts that were maintained by the assessee in the normal course for the concerned years, in respect of which the return of income within due time could not be filed. It makes it clear that whatever loss has been worked out by the assessee for the asst. yrs. 1997-98, 1999-00 and 2001-02 is based on the entries as recorded in the books of accounts or documents maintained by the assessee in the normal course of business on or before the date of search, and, thus, the provisions of sub-cl. (A) of cl. (c) of sub-s. (1) of s. 158BB are clearly attracted in the present case, with a result that the loss so worked out by the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already been given by the AO while computing undisclosed income of the assessee. He has also clarified the stand taken by assessee that while computing the undisclosed income, the assessee himself has not taken the benefit of the incomes which were not returned till the date of search. He has clarified that under the head "returned/assessed income as on the date of search" the assessee has declared 'nil' figure pertaining to asst. yrs. 1998-99 to 2001-02 since for those years, no return was filed. Case law relied upon by him were BDA Ltd. vs. Asstt. CIT (1998) 61 TTJ (Mumbai) 197, Singhania Polyster (P) Ltd. vs. Asstt. CIT (2005) 96 TTJ (Lucknow) 614 and G.C. Associates vs. Dy. CIT (2003) 80 TTJ (Pune) 539." 30. On reading the aforesaid contentions of the learned counsel for the assessee before the Tribunal in the case of Manisha Enterprises (Prop. Rajan Khinvasara), it becomes clear that in that case also, the assessee had clarified that the books of accounts seized were maintained by the assessee in the regular course of business but they were not complete on the date of search. Therefore, from the facts of that case also, which has been relied upon by the learned counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation shows a loss. It would be the same thing as saying that, in respect of a normal previous year consisting of a period of twelve months, the result of computation for the first period of six months would be ignored, if it shows a loss and the income computed in respect of the rest of the six months only would be taken. Such an argument, if advanced in respect of an assessment of an assessee whose case is not covered by Chapter XIV-B, cannot be accepted, as it is a well accepted and recognized position that the computation must be made with reference to the whole period of twelve months comprised in the previous year and the tax is payable only if such computation shows a positive income. Losses incurred during the previous year cannot be ignored and this principle is inbuilt in the concept of an assessment under the IT Act. The principle is that for the purpose of charging income-tax the various sources of income of an assessee have got to be aggregated and the results of each source for the entire previous year have to be reckoned and merely because the first few months of the previous year show a positive income and the rest of the period shows a negative income, the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under s. 32(2). Reading sub-s. (1) in conjunction with cl. (a) of the Explanation, it is clear that while aggregating the results of the different previous years falling within the block period, the losses have also to be taken into account. It may very well happen that while determining the result of a particular previous year falling within the block period on the basis of the evidence found as a result of the search or the documents or such other materials as are available with the AO, he may find that the computation of the income as per Chapter IV (ss. 14 to 59) yields a negative result i.e. a loss. The possibility of this position has been taken into account by cl. (a) of the Explanation. It is significant that having clone so, the Explanation does not further say that if the computation results in a loss it should be ignored. On the contrary, it proceeds to say that the loss for that previous year shall be considered for aggregation. It further clarifies that only the brought forward losses under Chapter VI and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the block period, whereas losses to be carried forward to future years may have been determined in the regular assessments made prior to the date of search under the normal provisions of the Act and in that very nature of things such losses, determined and allowed to be carried forward, have no place in the context of a block assessment framed after the search. The two streams of assessment are kept apart and one is not projected into the other. The position is made clear beyond any doubt in sub-s. (4) of s. 158BB. It says that tosses brought forward from the earlier years under Chapter VI or unabsorbed depreciation under s. 32(2) will not be set off against the undisclosed income determined in the block assessment under Chapter XIV-B, but will be carried forward for being set off in the regular assessments. Thus, reading cl. (a) of the Explanation to sub-s. (1) in harmony with the said sub-s. and sub-s. (4) we are of the opinion that the prohibition against setting off the losses against the undisclosed income of the block period applies only to losses under Chapter VI (s. 72) and unabsorbed depreciation determined and permitted to be carried forward in regular assessments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, not having been filed till the date of search, the losses computed for those years cannot be set off against the income computed in respect of the other years falling within the block period." 32. The decision in the case of Singhania Polyster (P). Ltd. has been given by following the decision in the case of BDA Ltd. On reading these two decisions, we find that these decisions were rendered in the light of provisions contained in (i) main sub-s. (1) of s. 158BB providing for aggregation of total income of all the previous years falling within the block period to be computed in accordance with the provisions of Chapter IV of the Act as it then stood; (ii) the original cl. (a) of Explanation to main sub-s. (1) of s. 158BB, and (iii) cl. (c) of s. 158BB(1) as it stood prior to its substitution by the Finance Act, 2002 with retrospective effect from 1st July, 1995. The decision in the case of BDA Ltd. was rendered on 29th Sept., 1997 when the newly inserted sub-cls. (c) and (ca) by the Finance Act, 2002 with retrospective effect from 1st July, 1995 were not on the statute book. Prior to the substitution of old cl. (c) by newly inserted cls. (c) and (ca) by the Finance Act, 2002 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., the newly inserted cl. (c) and sub-cls. (A) and (B) thereto by the Finance Act, 2002 with retrospective effect from 1st July, 1995 were not brought to the notice of the Tribunal, and the Tribunal has thus proceeded to decide the issue by following the decision in the case of BDA Ltd., which was rendered in the light of old cl. (c) of s. 158BB(1) and in the light of cl. (a) of Explanation to s. 158BB(1) of the Act. In the light of the cl. (c) as it stood prior to its substitution by the Finance Act, 2002 with retrospective effect from 1st July, 1995 read with main sub-s. (1) of s. 158BB, there should not be any doubt as to the correctness of the decision rendered by the Hon'ble Tribunal in the case of BDA Ltd. which has been followed by another Bench of the Tribunal in the case of Singhania Polyster (P) Ltd. It is now only in the light of newly inserted cl. (c) and its sub-cls. (A) and (B), that the position has been changed providing that the aggregate of the losses determined on the basis of entries as recorded in the books of accounts and other documents maintained in the normal course on or before the date of search or requisition shall be added back to the aggregate of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrated by the Tribunal in para (5) of its order dt. 29th Dec., 2006. The aforesaid para (5) of the Tribunal's order narrating the assessee's submissions has been set out above in para (29) of this order. The operative portion of the Tribunal's decision in that case read as under: "6. We have heard the submissions of both the sides carefully perused the material placed before us in the light of the precedents cited. In the backdrop of the facts as discussed hereinabove, it is evident that there were books of accounts, though incomplete which were seized by the Revenue Department. This is not the case where no books of accounts have at all been maintained. Now the basic question is how to compute the aggregate total income/loss. Further, the question is that if on the basis of the seized material the resultant figure is a loss, then whether the assessee is entitled for set off of such loss against the undisclosed income. Before we proceed further, it is worth to mention at this juncture that the Revenue has not built up this case on the ground that either the loss was not genuine or incorrectly computed rather the AO has not made the disallowance on that basis but simply disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search, the losses computed for those years could not be set off against the income computed in respect of the other years falling within the block period. For the above reasons, the assessee's claim was accepted and the losses for the asst. yrs. 1989-90, 1993-94, 1994-95 and 1995-96 as computed in the block assessment, were directed to be set off against the undisclosed income computed in respect of the other previous years falling within the block period." 35. On reading the said decision, in the case of Manisha Enterprises (Prop. Rajan Khinvasara), it is clear that the Tribunal 'A' Bench, Pune has decided this issue by merely following the decision in the case of BDA Ltd. and in the case of Singhania Polyster (P) Ltd. Therefore, the decision in the case of Manisha Enterprises is also of no help to the assessee as pointed out above. 36. Further, a part of the assessee's claim of set off of loss pertaining to the asst. yr. 2001-02 amounting to Rs. 2,01,709 can be viewed from one more angle. The assessee has claimed the losses of Rs. 2,01,709 pertaining to the asst. yr. 2001-02 i.e. related to the broken period falling in the previous year in which the search had taken place on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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