TMI Blog2005 (2) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... was assigned to M/s Sankalp Laboratories Ltd. (SLL) as a going concern. The business of the assessee-firm was assigned as a going concern through a deed of assignment executed on 12th May, 1998. 3. The business carried on by the assessee-company for the period from 1st Oct., 1994 to 12th May, 1998, was assigned to M/s Sankalp Pharmaceuticals Ltd. (SLL) as a going concern lock, stock and barrel. The assessee-firm has not been formally dissolved even though the business was discontinued on assignment of the same to SLL. 4. There was a search and seizure operation conducted on 7th Dec, 1998, in the premises of Sun group of concerns. In the course of said search operation, the premises at plot No. 223, Span Industrial Estate, Dadra, was also searched. It was in these premises that the assessee-firm (SPEX) had in fact carried on its business for the initial period from 1st Oct., 1994 to 12th May, 1998 and where afterwards M/s SLL, carried on the business. 5. On the basis of the materials collected in the course of search conducted at the premises at plot No. 223, Span Industrial Estate, Dadra, the AO came to the conclusion that evidences are available against the assessee-firm jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94. The deductions have been regularly allowed by the Department. 8. It is the above deductions claimed by the assessee-firm and allowed by the assessing authority in the regular assessments that have now become the basis for the impugned block assessment. The AO has held out a case that those claims under ss. 80HHC and 80-IA were made by the assessee-firm wrongly. As far as the deduction under s. 80-IA is concerned, the assessee-firm was supposed to fulfil five conditions enumerated therein for claiming the deduction. The first condition is that the unit should not have been formed by splitting up or the reconstruction of a business already in existence. It is the opinion of the assessing authority that it has to be seen as a result of search that the business set up by the assessee-firm as SPEX had been formed by the reconstruction of the business already in existence and carried on by another firm, M/s Bhaskar Pharma Industries (BPI). According to the assessing authority, the business was carried on by BPI and the same was assigned to the assessee as a going concern and no new business was established by the assessee-firm. According to the assessing authority, the first condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l conclusion arrived at by the AO as found in p. 42 of the assessment order is extracted below: "Hence, for the purpose of this order, the deduction under s. 80-IA allowed to the assessee in the regular assessments is withdrawn and added to the undisclosed income of the assessee for the block period. The year-wise quantum of deduction under s. 80-IA allowed to the assessee in the regular assessment which is withdrawn in this order and added to the undisclosed income of the assessee for the block period is as under: -------------------------------------- Asst. yr. Rs. -------------------------------------- 1997-98 3,70,72,993 1998-99 8,01,43,266 1999-2000 76,64,004 ------------- 12,48,80,263 -------------------------------------- Accordingly, a sum of Rs. 12,48,80,263 is added as undisclosed income for the block period for the various assessment years specified above which represents withdrawal of the deduction under s. 80-IA allowed to the assessee in the regular assessments in view of the evidences found during the course of the search as discussed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36,05,000 Asst. yr. 1999-2000 5,53,000 -------------- 1,24,55,000" --------------------------------------------- 16. The impugned block assessment has been initiated and completed by the assessing authority on the basis of the abovementioned withdrawals of deductions which have been otherwise allowed in the regular assessments. The assessing authority has withdrawn the deductions under s. 80-IA in full and has withdrawn the deduction under s. 80HHC in part. 17. The abstract of the computation of the undisclosed income is extracted from p. 49 of the assessment order, below. "Subject to the above discussion, the undisclosed income for the block period is computed as under: -------------------------------------------------------- Asst. yr. Description Undisclosed income (Rs.) -------------------------------------------------------- 1995-96 Withdrawal of deduction under s. 80HHC 2,53,000 1996-97 Withdrawal of deduction under s. 80HHC 37,73,000 1997-98 Withd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished any such case in the order of block assessment. He, therefore, held that s. 80-IA(10) was not to be held against the assessee-firm. 21. Regarding the withdrawal of deductions availed under s. 80HHC, the CIT(A) held that the recomputing of deduction under s. 80HHC was within the scope of block assessment and, therefore, the assessing authority was justified in doing so. But on the merit of the issue, the CIT(A) has made two interventions. At the first instance, he held that for the purpose cl. (baa) of Explanation to s. 80HHC, the net amount of interest alone needs to be considered and not the gross interest receipt. Therefore he reduced the disallowance of interest to the extent of Rs. 79,57,000, resulting in direct modification in favour of the assessee. Regarding the balance amount of Rs. 44,98,000, the CIT(A) directed the assessing authority to reexamine the case in the light of the decision of the Tribunal in the case of its associate concern, M/s SPL. Thus, as against the total withdrawal of Rs. 1,24,55,000 made by the assessing authority with reference to the deduction under s. 80HHC, the CIT(A) deleted an amount of Rs. 79,57,000 and remitted back the balance of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely on paper without any assets and liabilities. The AO and the CIT(A) both erred in having held that the search was conducted in the business premises of the appellant-firm." 28. The Revenue has challenged in its appeal, the findings of the CIT(A) made with reference to the withdrawal of deduction allowed under s. 80HHC. The grounds raised by the Revenue read as follows: "1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was right in not confirming the disallowance of Rs. 44,98,000 made out of the assessee's claim of deduction under s. 80HHC and in directing that AO should take a decision regarding the said claim of Rs. 44,98,000 in keeping with the decision of the Hon'ble Tribunal on the same issue in the case of the flagship company of the group, namely, M/s SPIL. 2. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) was right in directing the AO to consider only the net amount debited in the P L a/c and not the gross interest receipt of Rs. 79,57,000 for applying the provisions of cl. (baa) of Explanation to sub-s. 80HHC(4A)." 29. Shri S.K. Tulsiyan, the learned counsel appearing for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC), wherein the apex Court has considered the scope of the power available to the Tribunal in matters of rectification of mistakes so also in matters of admitting new grounds before it. The Court has held that the Tribunal had jurisdiction to examine a question of law which arose from the facts as found by the IT authorities and having a bearing on the tax liability of the assessee. 31. The learned counsel also relied on the decision of the Gauhati High Court in Assam Company (India) Ltd. vs. CIT (2002) 176 CTR (Gau) 406 : (2002) 256 ITR 423 (Gau), in which case, again the Court has considered the power of the Tribunal to consider a new ground in the course of hearing the appeal filed before it. The Court has held that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor it filed a cross-objection in the appeal filed by the other party. 32. Relying on the above two decisions, the learned counsel submitted that the power conferred on the Tribunal in the matter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in Assam Company (India) Ltd. vs. CIT. In the present case, the facts giving rise to the additional grounds are discussed by the lower authorities in their orders and admitted by them without any dispute. In the facts and circumstances of the case, we find that the additional grounds now urged before us arise out of the records of the case and, therefore, the additional grounds need to be admitted and brought on record. 34. Therefore, in the facts and the circumstances of the case, we admit the above three additional grounds on record and they are numbered as grounds Nos. 8, 9 and 10 respectively. 35. On the additional grounds admitted on record, the learned counsel argued that the impugned block assessment completed under s. 158BC is bad in law. The assessee-firm, SPEX, is a partnership firm constituted through a partnership deed dt. 30th Sept., 1994. The assessee-firm came into existence on 1st Oct., 1994. It carried on the business till 12th May, 1998, on which date a deed of assignment was executed and the business was assigned as a going concern to SLL. M/s SLL is a company registered under the Companies Act, 1956, having its registered office at Sinergy House, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is unlawful. The learned counsel relied on the decision of the Karnataka High Court in the case of Abdul Sattar M. Mokashi vs. CIT (1988) 73 CTR (Kar) 72 : (1988) 174 ITR 368 (Kar), wherein it was held that reassessment of an assessee in a different status than in the original assessment was invalid. The learned counsel further relied on the decision of the Bombay High Court in Madhav Motor Stores vs. CIT (1978) 115 ITR 887 (Bom), wherein it was held that where the notice of reassessment under s. 34(1A) of the IT Act, 1922, was issued to the assessee in the status of a firm and there was no valid notice issued in the status of a HUF, an assessment in the status of a HUF would not be valid. The learned counsel argued that in the light of the abovementioned decisions and on examining the facts of assessee's case, the block assessment has been done on an entirely different assessee being M/s SPEX whereas the search was conducted on an entirely different assessee, M/s SLL alias SPEL. The learned counsel further explained that the search was carried out on 7th Dec, 1998, and on that date searched premises did not belong to the assessee-firm and the assessee-firm had not carried on any b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst that assessee, an assessment under s. 158BC could not be framed on the said assessee. In the above case considered by the Bombay High Court, the searched person and the assessed person were different. In the present case also, exactly this is the issue. The assessee-firm and SLL are different persons and different entities for the purpose of income-tax. The search was made in the premises of SLL whereas the consequent block assessment has been made on the assessee-firm. In the light of the above decision of the Bombay High Court, the impugned block assessment is to be annulled as null and void. 39. Shri K.S. Bhatti, the learned CIT, appearing for the Revenue, replied in detail. The learned CIT contended that even though the assessee-firm was not carrying on any business on the date of search on 7th Dec., 1998, the firm was very much in existence. The firm was constituted on the basis of a partnership deed executed on 30th Sept., 1994. It commenced its business operations from 1st Oct., 1994, onwards. The assessee-firm carried on its business till 12th May, 1998. Thereafter, the business was assigned as a going concern to SLL. The learned CIT pointed out that there is no dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of 1st Oct., 1994 to 12th May, 1998. He submitted that there is no illegality in the impugned block assessment on the ground of incorrect identity. 41. The learned CIT further relied on the decision of the Supreme Court in the case of CIT vs. Jai Prakash Singh (1996) 132 CTR (SC) 262 : (1996) 219 ITR 737 (SC), wherein the Court has held that an assessment made on the basis of returns filed by one of the legal representatives cannot be said to be null and void on the ground that notices were sent to other legal representative. An omission to serve or a defect in the service of notice provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions. Any such omission or defect may render the order made irregular, depending upon the nature of the provisions not complied with, but certainly not void or illegal. The learned CIT submitted that the dictum laid down by the apex Court in the above decision squarely applied to the present case. He submitted that the additional grounds raised by the assessee-firm may be dismissed on merits. 42. The learned counsel appearing for the assessee further ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated by the assessing authority that the earlier claims of deductions made by the assessee-firm under ss. 80HHC and 80-IA were unjustified. 45. Sec. 158B(b) defines undisclosed income in the following manner: 'Undisclosed income1 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 would not have been disclosed for the purposes of this Act (or any expense, deduction or allowance claimed under this Act which is found to be false)." 46. The definition of undisclosed income as extracted above provides for two situations in which a case of undisclosed income may be fastened on an assessee. In the first situation, the undisclosed income may be made out on the basis of gold, jewellery, bullion or any other valuable or entries in the books of account relating to income or property found in the course of search, but not so far disclosed to the Department. The second situation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A mistake in the particulars of or in the computation of those deductions claimed by the assessee or a subsequent different view or opinion expressed by the assessing authority would not make the claim 'false'. The claims need to be proved to be untrue on the basis of material evidence collected in the course of search. 51. In p. 2 of the assessment order, the assessing authority has observed that during the course of search, of the assessee in its factory at plot No. 223, Span Industrial Estate, Dadra, and other premises of the assessee-group on 7th Dec, 1998, evidences have been found which prove that the assessee had claimed wrong deduction under s. 80-IA. The evidences so explained by the assessing authority relate to the fact that the plant and machinery in the factory of the assessee-firm were initially erected by another concern under the name and style of M/s Bhaskar Pharma Industries (BPI). After discussing the issue in detail, the assessing authority in p. 5 of his order has come to the following findings: "Hence, if the principle enunciated above is applied to the facts of the case, which has come to light as a result of the search, it is clear that the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eets which were filed along with the regular returns of income. 54. This is the same case with the next defect pointed out by the assessing authority that the value of the plant and machinery transferred by the assessee from another concern exceeded 20 per cent of the total value of the plant and machinery used in assessee's business. 55. The next defect pointed out by the assessing authority was that the assessee-firm did not manufacture or produce any article or thing. This issue is considered by the assessing authority in detail from pp. 13 to 26 of his order. The case of the assessing authority is that the basic activity carried on by the assessee-firm was that of pulverizing. Bulk drugs purchased by the assessee-firm were pulverized and made amenable to micro-size, necessary for the final production of Pharmaceuticals. The assessee-firm never claimed that it had ever manufactured or produced anything other than this. All these details were available before the AO in the course of regular assessments. The only claim of the assessee-firm was that it had carried on the activities of pulverizing and that the said pulverizing amounted to manufacturing of a different commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck assessment proceedings". He has not referred to any evidence or materials collected in the course of search. 58. On a perusal of the block assessment order running to 52 pages including annexures to the assessment order, we find that the assessing authority has not referred to any specific material or evidence collected in the course of search based on which it would be possible for him to hold that the claims of deductions made by the assessee-firm under ss. 80HHC and 80-IA were false. 59. The details and particulars considered and discussed by the assessing authority in the impugned block assessments have been gathered from the regular books of account, other registers maintained by the assessee-firm in the ordinary course of business which have already been placed before the assessing authority in the course of regular assessments. The search has not resulted in unearthing any evidence to prove that the deductions claimed by the assessee-firm were in fact "false". 60. The whole discussion made by the assessing authority in the impugned block assessment order in fact is in the nature of a review of the earlier assessments concluded in the normal course. The assessing aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of CIT vs. Hindustan Electro Graphites Ltd. (2000) 160 CTR (SC) 8 : (2000) 243 ITR 48 (SC) has considered the principle regarding the applicability of a provision of law contained in the statute book, in the context of filing of return of income. The Supreme Court has held that where a return is filed, the law applicable would be the law as it stood on the date of filing of the return. There is an impression in some quarters that the above law declared by the Supreme Court in the case of CIT vs. Hindustan Electro Graphites Ltd. has been later disproved by the Supreme Court in the case of Asstt. CIT vs. J.K. Synthetics Ltd. (2001) 166 CTR (SC) 498 : (2001) 251 ITR 200 (SC). This impression is created because of the observation made by the Hon'ble Supreme Court in the last portion of the judgment that "we should add that we have reservations about the correctness of the judgment in Hindustan Electro Graphites Ltd.'s case, principally because the assessee in that case had not challenged the provisions of sub-s. (1A)....." The above reservation is since made in the context of examining the validity of the provisions of sub-s. (1A) of s. 143 and has not disproved the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination of the details already disclosed to the Department. 66. Matters which are already part of the record cannot be subject-matter of block assessment. Where the assessee had claimed exemption of house rent allowance on the basis of rent paid on sub-lease to his wife for his own property leased out to her and such information is part of the record, denial of exemption cannot be subject-matter of block assessment. It was so held in A. Sadasivam vs. Asstt. CIT (2002) 255 ITR 1 (Cal)(AT). 67. On this short ground itself, the computation of undisclosed income by withdrawing the deductions granted under ss. 80HHC and 80-IA are unlawful and unsustainable. Accordingly, the impugned block assessment is liable to be set aside. 68. In the facts and circumstances, the impugned block assessment order is set aside on the following short grounds: (i) The search has not brought out any evidence and material to hold that the deductions claimed by the assessee-firm under ss. 80HHC and 80-IA were false. (ii) The deductions allowed under ss. 80HHC and 80-IA have been withdrawn by the assessing authority on the basis of materials already disclosed to the Department in the course of regula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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