Court Excludes Returned Income from Block Assessment in Tax Search Case

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Case Name:

Commissioner of Income Tax vs. Binoy Mathai (High Court of Kerala)

ITR. No. 215 of 1999

Date: 4th April 2008

Key Takeaways:

1. Income for a year where the filing deadline hasn't passed can be excluded from block assessment if recorded in books before the search date.

2. The absence of negative findings by tax authorities can work in favor of the assessee.

3. The court prioritized practical considerations over strict technical interpretations, given the age of the case.

Issue: 

Was the Income Tax Appellate Tribunal correct in excluding the sum of Rs. 1,69,278 as undisclosed income for the assessment year 1995-96 from the block assessment under Section 158BB (of Income Tax Act, 1961)?

Facts:

1. A search was conducted on the assessee's premises on 27.10.1995. 

2. The Board of Direct Taxes had extended the deadline for filing returns for the assessment year 1995-96 to 31.10.1995. 

3. The assessee filed a return for the assessment year 1995-96 on the due date.

4. The Income Tax Department included the returned income in the block assessment.

5. The case relates to a search that took place more than 13 years before the judgment. 

Arguments:

Revenue's Argument:

- The assessee is not entitled to exclusion of returned income even if the filing deadline hadn't passed, unless it was recorded in the books of accounts before the search date. 

Assessee's Argument:

- There was no finding that the income wasn't recorded in the books before the search date.

- The assessment was based on the income returned in the filed return. 

Key Legal Precedents:

The judgment doesn't cite specific case laws but relies heavily on the interpretation of Sections 158BA and 158BB of the Income Tax Act. 

Judgment:

1. The court agreed with the Revenue's principle that income could be excluded only if recorded in books before the search date. 

2. However, the court didn't remand the case for verification due to its age (over 13 years). 

3. In the absence of any finding that the assessee hadn't recorded the income in the books, the court assumed it was based on the books of accounts. 

4. The court answered the question in favor of the assessee, excluding the returned income from the block assessment. 

FAQs:

Q1: What is a block assessment?

A1: A block assessment is a special type of tax assessment covering multiple years, typically following a search operation by tax authorities.

Q2: Why did the court consider the age of the case in its decision?

A2: The court felt it impractical to remand a 13-year-old case for further verification of books of accounts.

Q3: What's the significance of recording income in books before the search date?

A3: It's crucial for excluding income from a block assessment when the return filing deadline hasn't passed at the time of the search.

Q4: How did the absence of negative findings affect the case?

A4: The court assumed in favor of the assessee that the income was recorded in the books, as there were no contrary findings by tax authorities.

Q5: What sections of the Income Tax Act were key to this case?

A5: Sections 158BA and 158BB were central to the interpretation and decision in this case.

The reference case arises out of the order of the Income Tax Appellate Tribunal disposing of the respondent/assessee's appeal against the assessment under Section 158BC (of Income Tax Act, 1961) for the block period 1.4.1985 to 27.12.1985. A search was conducted in the premises of the assessee who is a medical practitioner, on 27.10.1985. Based on the materials gathered, assessment was made for the entire block period which included income assessable for the assessment year 1995-96. In the appeal filed by the assessee, the Tribunal noticed that the time for filing return for the assessment year 1995-96 was extended by the Board of Direct Taxes, till 31.10.1995 and therefore the assessee had time to file return for the assessment year 1995-96 as on the date of search. He, therefore, allowed the assessee's claim by deleting from the income assessed for the block period so much of the income returned by the assessee and assessed for the year 1995-96 by granting the benefit of Section 158BB(1)(d) (of Income Tax Act, 1961). At the request of the Department, the Tribunal has referred the following question for our decision:

“Whether, on the facts and in the circumstances of the case and on an interpretation of clause (d) of Sec.158BB (of Income Tax Act, 1961) of the Incometax Act, the Tribunal is right in law and fact in holding that the assessing officer is not justified in including in the block assessment the sum of Rs.1,69,278 as the undisclosed income for the assessment year 1995- 96?”

Learned Standing Counsel appearing for the Revenue contended that the assessee is not entitled to exclusion of income returned for the assessment year 1995-96, even though time for filing return was not over as on the date of search, for the reason that Section 158BB(1)(d) (of Income Tax Act, 1961) does not authorise exclusion of returned income but only income seen as accounted in the books of accounts by the assessee at least on or before the date of search.

2. Learned counsel for the assessee, on the other hand, contended that there is no finding in the block assessment that the assessee has not recorded the amount in the books of accounts before the date of search and the assessment itself is based on the income returned in the return filed for the assessment year 1995-96. In order to appreciate the contentions, we have to refer to two provisions which are relevant for the disposal of this appeal. The same are extracted below:

“158BA. Assessment of undisclosed income as a result of search 3. Where the assessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-section (1) relates to an assessment year for which the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 (of Income Tax Act, 1961) for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period.”

158BB. Computation of undisclosed income of the block period:

(1) 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, 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 Assessing Officer, 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,-

(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 (of Income Tax Act, 1961) has not expired, on the basis of entries relating to such income or transactions 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 relating to such previous years;

Both the above provisions provide for exclusion of income of the previous year for which the time for filing return was not over as on the date of search. In this case, even though the time for filing the return under Section 139(1) (of Income Tax Act, 1961) was over, by virtue of general extension of time granted by the Board of Direct Taxes for filing return for the assessment year 1995-96, the assessee had time till 31.10.1995 to file the return. In fact, the assessee had filed the return on the due date and what is added in the block assessment under challenge was the income returned by the assessee in the return for the assessment year 1995-96. The question is whether on these facts, the assessee is entitled to the exclusion of income returned for the assessment year 1995-96 in the block assessment.

3. We find from a combined operation of the above two provisions that income of the previous year for which time for filing return was not over as on the date of search, could be excluded only if such income or transactions pertaining to such income are recorded in the books of accounts or other documents maintained in the normal course of business on or before the date of search. Therefore, exclusion can be granted for the income of the previous year, in respect of which time for filing return was not due or not over, only if the assessee is found to have entered in the books of accounts such income or the transactions pertaining to such income on or before the date of search. Unfortunately, this crucial issue is not considered by any of the authorities including the Tribunal while disposing of the appeal. We are in agreement with the argument of the learned counsel for the Revenue that even though time for filing return was not over as on the date of search, the assessee was entitled to exclusion only if he is found to have recorded the returned income or the transactions pertaining to such income in the books of accounts. Therefore, the order of the Tribunal excluding such income without a finding that the said income or transactions pertaining to such income were recorded in the books of accounts maintained by the assessee, at least on the date of search is not tenable. Even though in principle we uphold the contention of the Revenue,we are not inclined to remand the matter for verification of the books of accounts pertaining to the search that took place more than 13 years back.

In the absence of any finding by the assessing officer in the block assessment or by the Tribunal in the appellate order that the assessee has not entered the income returned for the year 1995-96 in the books of accounts or the transactions pertaining to the same in the books of accounts at least on the date of search and since assessment is based on income returned, we have to assume that the assessee filed return based on the books of accounts only.

In the above view of the matter, we answer the question in favour of the assessee and against the Revenue. The Reference Case is disposed of as above.

The Registry is directed to forward a copy of the judgment to the Tribunal for passing consequential orders under Section 260(1) (of Income Tax Act, 1961).

(C.N. Ramachandran Nair, Judge.)

(T.R. Ramachandran Nair, Judge.) C.N. Ramachandran Nair &

T.R. Ramachandran Nair, JJ.

JUDGMENT

17th March, 2008.