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TMI Blog2005 (2) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... e the entire business of the assessee-firm 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der s. 80HHC since its inception in 1994. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee-firm. The final 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 above." 14. On further verification of the seized materials, the assessing authority came to a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 Withdrawal of deduction under s. 80HHC 42,71,000 1997-98 Withdrawal of deduction under s. 80-IA 3,70,72,993 1998-99 Withdrawal of deduction under s. 80HHC 36,05,000 1998-99 Withdrawal of deduction under s. 80-IA 8,01,43,266 1999-2000 Withdrawal of deduction under s. 80HHC 5,53,000 1999-2000 Withdrawal of deduction under s. 80-IA 76,64,004 Undisclosed income for the block period 13,73,35,263" ---------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 44,98,000 to the assessing authority. 22. The assessee-firm as well as the Revenue are aggrieved by the order passed by the CIT(A), and, therefore, these cross appeals before the Tribunal. 23. The assessee-firm has raised four principal grounds in the original memorandum of appeal filed before the Tribunal. The first principal ground is that the impugned block assessment order is void for the reason that the AO had not issued any mandatory notice under s. 143(2) of the IT Act, 1961 This principal ground is highlighted by the assessee in grounds No. 1.01 and 1.02. 24. The second principal ground raised by the assessee in ground No. 2.01 is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee-firm, first argued on the admissibility of the additional grounds, now filed before us. The learned counsel stated that the assessee-firm, SPEX, was carrying on the business only for a short period from 1st Oct., 1994 to 12th May, 1998. The business carried on by the assessee-firm was assigned to SLL by lock, stock and barrel through a deed of assignment executed on 12th May, 1998. The assessee-firm had assigned its business to SLL as a going concern. Thereafter, the assessee-firm had no assets or properties of its own and it was not carrying on any business whatsoever and it was only an entity remained in paper. The assessee-firm for all purposes d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of admitting new grounds in the course of appeal has been held in the widest possible terms by the Courts of law and particularly for the purpose of rendering justice. The learned counsel submitted that the question raised in the additional grounds directly come out of the facts of the case as admitted and recorded by the lower authorities in their orders. He, therefore, submitted that the additional grounds now filed by the assessee-firm have to be admitted and adjudicated upon. 33. We considered the rival contentions on the admissibility of the additional grounds in detail. The facts relating to the constitution of the assessee-firm on the basis of the partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Subhanpura, Gorwa Road, Baroda. The assessee-firm and the assignee company are two different entities. They are having different PA numbers and different assessments. The business was assigned as a whole together with all the rights, benefits and interests in the said business and all its assets including plant and machinery, work-in-progress, buildings, advances, deposits, stocks, receivables, accruals, etc. In accordance with the said assignment, the factory premises at plot No. 223, Span Industrial Estate, Dadra, also stood transferred to SLL and was undoubtedly the factory premises of SLL, on the date of search on 7th Dec, 1998. The learned counsel submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business there. The search was in fact made in the premises of SLL and accordingly, the notice issued under s. 158BC was quite unlawful. Where the notice issued under s. 158BC itself was an unlawful notice, the subsequent assessment under s. 158BC framed on the assessee-firm is again void ab initio. The learned counsel submitted that the search was carried out on SLL and not on the assessee. The assessing authority as well as the CIT(A) even after admitting that the business of the assessee-firm was transferred to SLL on 12th May, 1998, erred in utilising the materials collected in the course of search from the premises of SLL against the assessee-firm so as to impli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied 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 dispute on the fact that the assessee-firm carried on its business for the period from 1st Oct., 1994 to 12th May, 1998, at plot No. 223, Span Industrial Estate, Dadra. Therefore, the assessing authority has rightly adopted the block period for the impugned block assessment from 1st Oct., 1994 to 12th May, 1998. The assessing authority has utilised the materials collected in the course of search for the impugned block assessment. Even though the business in plot No. 223, Span Industrial Estate, Dadra, has been carried on by SLL from 12th May, 1998, onwards, the assessee-firm did not cease to have its address and identity at the said premises. The learned CIT submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 argued on the merits of the case. He has furnished detailed discussions on various stipulations attached to s. 80-IA in the paper book filed before us to support his contention that the assessee has not violated any of those conditions laid down in the Act for claiming the deduction under s. 80-IA. The learned counsel submitted that no incriminating evidences were found in the course of search to suggest that the assessee had earned undisclosed income by way of wrong claim of deductions made under Chapter VI-A. He submitted that in the course of search, wage registers, excise applications, certificates issued by various authorities were found. All those documents found in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 where undisclosed income could be made out is the discovery of evidence to prove that the deductions, expenditures, allowances claimed by the assessee are false. 47. In the present block assessment, no case is alleged against the assessee-firm under the first situation. The case of undisclosed income has been imputed against the assessee-firm under the second situation on the ground that the deductions claimed under ss. 80HHC and 80-IA in the regular returns were false. 48. Therefore, the inquiry to be made in the present must be whether the deductions claimed by the assessee-firm under ss. 80HHC and 80-IA in the regular returns filed by it were false. Whether the search has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplained 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 BPI was already in existence prior to the date of assignment. As discussed, BPI was a partnership firm of the two group companies of the Sun group. After the assignment of the business of BPI to Sun Pharma Exports, Mumbai, since the same business is being carried on substantially by the same persons of the Sun Pharma group, it is clear that this undertaking has been formed by the reconstruction of the business already in existence." 52. When we examine the details on the basis of which the assessing authority has come to the above finding, we are afraid that we may draw a blank. The assessing authority has not mentioned anything about any specific material which was found out in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 commodity and, therefore, resulted in manufacturing of a new thing or article. The claim of the assessee never went beyond this. In the block assessment also, the assessee has not explained anything different. In the course of search operations, no materials were collected by the Department to show that the assessee was not carrying on the activities of pulverizing. Where is the falsity in the information furnished by the assessee-firm in its original returns? The main contention of the assessing authority is that the assessee-firm should have done "something more" so as to claim that it had produced or manufactured a thing or article. Is it not an expression of opinion? 56. The next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authority was in fact re-examining the materials which have already been considered in the regular assessments. It is possible for an assessing authority to come to a different finding on an issue in the course of a subsequent review of the earlier order passed on the same set of facts, circumstances and evidences. Such different view held by the assessing authority amounts only to change of opinion. Change of opinion does not make the claims considered in the regular assessments, false. 61. In the facts and circumstances of the case, we are of the considered view that no evidence or materials were collected in the course of search so as to hold that the deductions claimed by the assessee und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 the case of Hindustan Electro Graphites Ltd.'s case. Therefore, the law declared by the Supreme Court in the case of Hindustan Graphites Ltd.'s case holds good on this subject. 64. In the circumstances explained above, the definition of "undisclosed income" prior to the amendment brought in by the Finance Act, 2002, is the correct law to be applied in the present case. The block return was filed by the assessee on 12th July, 1999, before the enactment of the Finance Act, 2002. Therefore, the definition of "undisclosed income" as stood at the relevant time of filing of the block return is to be considered in the present case. The definition at the relevant time stood as follows: "(b) 'undisc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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