Krishna Gujarathi for the Assessee. Deepak Garg for the Revenue.

These two cross appeals – one by the assessee and the other by the Revenue arise out of the order passed by the CIT(A)-13, Pune on 28-03-2016 in relation to the block period 01-04-1996 to 27-08-2002.

2. Briefly stated, the facts of the case are that a search u/s.132 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) was carried out in Rao Group of cases on 27-08-2002, of which the assessee is a member. Several incriminating documents/material were found during the course of search. Notice u/s.158BC of the Act was issued and was served on the assessee on 18-02-2003 requiring him to file return for the block period. The assessee filed block return on 04-04-2003 declaring undisclosed income of Rs.4,43,77,020/-. The Assessing Officer (AO) passed the block assessment order on 26.6.2008 determining total undisclosed income at Rs.9,16,76,879/-. The assessee partly succeeded before the ld. CIT(A). This is how, both the sides have preferred respective appeals before the Tribunal.

3. The assessee has filed concise grounds and also an additional ground. The assessee, through the additional ground, claims that the assessment order passed u/s.143(3) r.w.s. 158BC is bad in law inasmuch as the same should have been passed u/s.144 r.w.s. 158BC because the assessee committed default as laid down in section 144. However, no argument was advanced by the ld. AR on such additional ground during the course of hearing before the Tribunal. As such, the same is dismissed.

4. Through the first three concise grounds, the assessee has challenged the block assessment order on the issue of limitation. For appreciating the contention on the question of limitation, chronology of the events in this case is required to be seen. The same has been set out by the ld. CIT(A) on pages 7 to 9 of the impugned order, which is as under:-

S.No. Particulars Date

01. Search and seizure took place on 27-08-2002

02. The AO undisputedly admitted vide Para No.4(d) Page No.2 of submission made before Hon. Bombay High Court, dated 14-02-2008, that the last authorization served on the Appellant on 27-08-2002

03. A notice u/s.158(BC) for filing the return of block period was served on the Appellant 18-08-2002

04. Appellant submitted block return declaring undisclosed income of Rs.443.77 lakhs 04-04-2003

05. First notice u/s.143(2) served for assessment on the Appellant 07-11-2003

06. During the course of assessment proceeding, Appellant filed petition for settlement of income to the Income-tax Settlement Commission 26-07-2004

07. CIT filed report before the Settlement Commission stating that, there are no complexities in the accounts, therefore, the petition of the Appellant needs to be rejected 18-20-2004

08. Settlement Commission rejected the petition of the applicant and the order of rejection received by CIT 19-06-2006

09. The second notice u/s.143(2) and 142(1) was served on the Appellant with a view to complete the assessment proceeding after the rejection of settlement petition 11-07-2006

10. The AO passed an order u/s.142(2A) for Special Audit and served the order on the same day 02-08-2006

11. Appellant filed Writ Petition No.2534 of 2006 before Hon. Bombay High Court against order u/s.142(2A) and other grounds 17-09-2006

12. Hon. Bombay High court granted the stay against the proceeding u/s.142(2A) only (no stay was granted against the assessment proceeding) 09-10-2006

13. Hon. Bombay High court quashed and set aside the order dated 02-08-2006 of AO passed u/s.142(2A) and issued the directives for fresh opportunity to the Appellant for the purpose of Special Audit 14-01-2008

14. AO issued third notice u/s.143(2) 11-02-2008

15. AO issued notice u/s.142(2A), dated 11-02-2008 and served on 11-02-2008

16. Appellant filed his stay in respect of show cause Notice u/s.142(2A) 13-02-2008

17. AO passed the order u/s.142(2A) 14-02-2008

18. Appellant further filed a Writ Petition to Bombay High court against the notice u/s.143(2) dated 11-02-2008 and an order u/s 142(2A) dated 14.2.2008 u/s 143(2) dated 11-02-2008 and an order u/s.142(2A) dated 14-02-2008 02-04-2008

19. AO filed an affidavit, dated 16-04-2008 to the Hon. Bombay High Court 16-04-2008

20. Hon. Bombay High Court passed the order directing the AO to complete the assessment subject to the contention of the petitioner assessment barred by limitation. Petition be placed for final hearing after the assessment proceedings are completed. Liberty to the parties to move this court for a fixed date of hearing after the assessment proceedings are completed 03-06-2008

21. The assessment was completed by the AO and block assessment order served on the Appellant 26-06-2008

5. The ld. AR has made out a case that the last authorization for search u/s.132 in this case was executed on 27-08-2002 and going by the period prescribed u/s.158BE(b), the assessment ought to have been ordinarily completed by 31-08-2004. Since the assessee filed application before the Settlement Commission on 26-07-2004 during the course of assessment proceedings, which was rejected on 19-06-2006, the time limit available for completing assessment in terms of proviso to Explanation 1 to section 158BE got extended to 18-08-2006, being a period of two months from the date of rejection of application by the Settlement Commission. As against that, the assessment order was actually passed on 26-06-2008, which was claimed to be time barred.

6. In order to properly analyze the question of limitation raked up in this appeal, it would be apposite to consider the mandate of the relevant parts of section 158BE dealing with the time limit for completion of block assessment, as under: -

Time limit for completion of block assessment. 158BE. (1) The order under section 158BC shall be passed—

(b) within two years from the end of the month in which the last of the authorisations for search under section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned on or after the 1st day of January, 1997. (2) ....

Explanation 1.—In computing the period of limitation for the purposes of this section,—

(ii) the period commencing from the day on which the Assessing Officer directs the assessee to get his accounts audited under sub- section (2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub- section; or

(iv) in a case where an application made before the Settlement Commission under section 245C is rejected by it or is not allowed to be proceeded with by it, the period commencing on the date on which such application is made and ending with the date on which the order under sub-section (1) of section 245D is received by the Principal Commissioner or Commissioner under sub-section (2) of that section, shall be excluded:

Provided that where immediately after the exclusion of the aforesaid period, the period of limitation referred to in sub-section (1) or sub- section (2) available to the Assessing Officer for making an order under clause (c) of section 158BC is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly. Explanation 2....

(emphasis supplied by us)

7. A glance at the provision transpires that the time limit for completion of assessment u/s 158BC is two years from the end of the month in which the last of the authorisations for search under section 132 was executed. Indisputably, last authorization in this case was executed on 27.8.2002. This provided a limitation for completion of assessment to the AO by 31.8.2004. Explanation 1 to section 158BE expands the limitation period in certain cases by providing that in the stipulated four situations as enumerated in clauses (i) to (iv), the limitation will be counted by excluding the period given in such four clauses. Proviso to the Explanation 1 to section 158BE, further states that where immediately after the exclusion of the period in the four clauses, the period available with the AO for completing the assessment is reduced to less than 60 days, then such remaining period shall be extended to 60 days. The relevant clauses in the extant appeal are (ii) and (iv). Clauses (iv) deals with a situation in which the assessee moves the Settlement Commission and such application is rejected or not allowed to be proceeded. In such a situation, the period commencing on the date on which such application is made and ending with the date on which the order u/s 245D(1) is received by the Principal Commissioner etc., is excluded and if after such exclusion, the time available for completion of assessment falls short of 60 days, then the time limit gets extended to 60 days. The ld. AR has accepted this position and has made out a case that the time limit in the case of the assessee stood increased to 18.8.2006, being, a period of 60 days from the date of the rejection of application by the Settlement Commission.

8. In the chronology of events, we have noticed above that the AO passed orders u/s 142(2A) twice in this case, namely, on 2.8.2006 and 14.2.2008. When the attention of the ld. AR was invited towards this fact and the corresponding clause (ii) of Explanation 1, he submitted that such orders passed by the AO were invalid and the period given in the clause could not be excluded. This contention was based on the fact that the assessee had not maintained any regular books of account and hence there could have been no question of ordering any audit u/s 142(2A) of the Act.

9. We are afraid that this contention is sans merit. It is noticed that when the AO passed the first order u/s 142(2A) on 2.8.2006, the assessee filed a writ petition before the Hon’ble Bombay High Court. In the first writ petition, the assessee challenged two issues covered by two orders, viz., the order of the Settlement Commission refusing to admit his application and second, the first order passed by the AO u/s 142(2A) of the Act. Insofar as the second issue is concerned, the operative part of the final judgment dated 14.1.2008 of the Hon’ble High Court, as contained in para 8, reads as under :

`In so far as consequential order dated 2.8.2006 under section 142(2A) of the Income Tax Act, learned Counsel fairly conceded that they would give hearing to the petitioner. In the light of that, order dated 2.8.2006 is quashed and set aside. The matter is referred back to the respondent no. 2 to pass fresh order after giving the petitioner an opportunity of hearing’.

10. On going through the operative part of the Hon’ble Bombay High Court judgment, it is manifested that the order u/s 142(2A) was not quashed on merits. Rather, the matter was restored to the AO for passing a separate order after giving opportunity of hearing to the assessee.

11. On passing of the final judgment by the Hon’ble High Court on 14.01.2008 setting aside the order u/s 142(2A), the time for exclusion stopped running in terms of clause (ii) of Explanation 1 to section 158BE, which talks of excluding the period commencing from the day on which the Assessing Officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub-section. In such panorama, it became incumbent upon the AO to either proceed with the assessment and finalize the same by 13.3.2008 (a period of 60 days from the date of the judgment, that is, 14.1.2008) without making any reference for the further special audit; or make a reference for the special audit u/s 142(2A) by 13.3.2008. The AO issued notice u/s 142(2A) on 11.2.2008 and passed an order making reference for special audit, after giving opportunity of hearing to the assessee, on 14.2.2008 itself, that is much prior to the limitation period.

12. The assessee again approached the Hon’ble High Court contending, inter alia, that in the absence of any books of account maintained by the assessee, there could have been no order of audit u/s 142(2A). Such assertion of the assessee appears on page 94 of the paper book which is a part of the writ petition filed before the Hon’ble Bombay High court. The Revenue in its affidavit in reply, copy at page 124 of the paper book, submitted before the Hon’ble Bombay High Court that maintenance of regular books of account was not a condition precedent for audit u/s.142(2A). The Revenue relied on the judgment of Hon’ble Delhi High court in Rajesh Kumar, Prop. Suraj Trading in DCIT (2005) 275 ITR 641(Del) laying down that: `There is also no merit in the contention raised on behalf of the petitioner that the expression 'accounts of the assessee’ can only refer to the books of account of the assessee and not the other records available before the AO for examination or otherwise. The complexity of accounts of the assessee is to be determined not only by the books of account, but even by other documents which are available, in the course of an assessment and at any stage subsequent thereto may become available to the AO. To give a narrow meaning to the expression 'accounts' so as to confine it to the books of account, submitted by the assessee simplicitor, would amount to giving an interpretation which would completely defeat the very object of the section’. The Revenue in its affidavit in reply further argued that incriminating documents were seized from the premises of the assessee, which required expert examination and further during the course of hearing before the Respondent No.2, before granting approval for proposal of order u/s.142(2A), it was conceded by the petitioner that books of account were maintained but these were not presently with the petitioner, as was enumerated in para 6 of the order grating approval of the proposal u/s.142(2A) by Respondent No.2 on 14-02-2008. Considering the arguments from both the sides, the Hon’ble Bombay High Court in its interim order passed on 3.6.2008, against the second order u/s 142(2A), held as under:-

`Heard the learned Counsel for the parties. Perused the affidavit in reply. Specially for the reason stated in the affidavit in reply, we are not inclined to stay the Assessment Proceedings. However, we make it clear that the Assessment Proceedings will be subject to the contention of the petition that it is barred by the Law of Limitation.’

13. It is a matter of record that pursuant to the passing of the assessment order on 26.6.2008, the assessee withdrew its writ petition from the Hon’ble Bombay High Court, which is apparent from its judgment dated 23.6.2014, copy at page 143 of the paper book.

14. It was pursuant to such order of the Hon’ble High court passed on 03-06-2008 that the AO got a period of 60 days for completing the assessment from 3.6.2008, even if we presume that the audit report was submitted during the currency of proceedings before the Hon’ble High Court. As against that, the AO completed the assessment on 26-06-2008, which is well within the limitation period. Thus, it clearly emerges that the case of the assessee is eventually covered by clause (ii) of Explanation 1 to section 158BE read along with the proviso, being the date on which the Hon’ble Bombay High Court disposed off the assessee’s writ petition on 03-06-2008 and not the date of rejection of application by the Settlement Commission, as has been contended by the ld. AR.

15. The ld. AR contended that the Hon’ble Bombay High Court did not render any specific adjudication on the validity of second order u/s.142(2A) in its interim order dated 3.6.2008 and hence the period of limitation should not considered with reference to such date.

16. We are again unable to comprehend the view point of the assessee. The Hon’ble Bombay High Court in its order dated 03- 06-2008 has categorically held that: `Specially for the reason stated in the affidavit in reply, we are not inclined to stay the Assessment Proceedings’. At this juncture, it is relevant to reiterate the settled legal position on the meaning of the term “Assessment Proceedings” - as the one starting with the filing of return or issue of notice and terminating with the issue of demand notice. Such view has been taken by none other than the Hon’ble Supreme Court in Auto and Metal Engineers & Ors. Vs. Union of India & Ors. (1998) 229 ITR 399 (SC) and reiterated in VLS Finance Ltd. & Anr. Vs. CIT & Anr. (2016) 384 ITR 1 (SC). The assessment proceedings thus apparently commence with the filing of return or issue of notice and terminate with the issuance of notice of demand on completion of assessment. Special Audit u/s.142(2A) is a part of assessment proceedings. Even the caption of section 142 namely “Inquiry before the Assessment”, which falls within Chapter XIV, being, Procedure for assessment, makes it clear that special audit u/s.142(2A) is a part of assessment proceedings. Even sub-section (2A) of section 142, dealing with the special audit, itself states that: `If, at any stage of the proceedings before him, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may,.... direct the assessee to get the accounts audited’. As the Hon’ble High court in its interim judgment dated 03-06-2008 categorically ordered that it was `not inclined to stay the assessment proceedings’, it evidently meant that the 2nd order u/s.142(2A) was not invalidated by it. There remains no iota of doubt on this position, when we observe that the writ petition filed against the second order u/s 142(2A) was eventually withdrawn by the assessee.

17. To sum up, we hold that the block assessment order passed by the AO on 26.6.2008 is within the limitation period seen in the light of clause (ii) of Explanation 1 to section 158BE read with the proviso. Ex consequenti, these grounds are dismissed.

18. Concise ground No.4 of the assessee’s appeal has sub- grounds (a) to (l). The ld. AR pressed only sub-grounds at (a), (d) and (e). The other sub-grounds, therefore, stand dismissed as ‘not pressed’.

19. Ground No. 4(a) is against the confirmation of addition of Rs.13,34,231/- towards unexplained investment in Sai Farm House and Cattle Shed.

20. The factual matrix of this ground is that during the course of search, the assessee was found to have invested certain sum in Sai Farm House and Cattle Shed as per the seized material. In the block return, the assessee offered Rs.53,91,887/- on this count. The AO observed that the assessee did not offer full amount in the block return. On being called upon to explain the reason, the assessee submitted that Cattle Shed and Sai Farm House were located in the same plot on which expenditure was incurred simultaneously. He further submitted that total withdrawal as per seized material worked out to Rs.53,91,887/- on this score. The AO made a reference to the Departmental Valuation Officer for determining the value of Sai Farm House and Cattle Shed, who determined such value at Rs.49,76,971/- and Rs.9,82,430/- respectively totaling to Rs.59,59,401/-. The assessee also furnished report of a Registered Valuer valuing investment in Sai Farm House at Rs.37,05,500/- and Cattle Shed at Rs.12,37,000/- totaling to Rs.49,42,500/-. The AO noticed itemized value of investment made in Sai Farm House at Rs.54,88,518/- and Cattle Shed at Rs.2,77,727/-, as per the seized documents, break-up of which has been tabulated at pages 13 and 14 of the block assessment order. He took value of total investment in Sai Farm House at Rs.54,88,518/-, being, the amount as per seized material and the Cattle Shed at Rs.12,37,000/-, being, the amount determined by the Registered valuer. In this way, he computed the total undisclosed investment made by the assessee in Sai Farm House and Cattle Shed at Rs.66,26,118/- (Rs.54,88,518 + 12,37,600). After reducing the amount offered by the assessee at Rs.53,91,887/-, the AO made addition of Rs.13,34,231/-. No relief was allowed in the first appeal, against which the assessee has preferred the instant appeal.

21. We have heard both the sides and gone through the relevant material on record. Before proceeding to decide the amount liable to be added because of unexplained investment in Sai Farm House and Cattle Shed, it is relevant to note that section 158BC deals with the procedure for block assessment in the case of person searched u/s.132 of the Act. Clause (b) of section 158BC, which is relevant for our purpose, provides that: `the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142. . . . . . . shall, so far as may be apply’. This brings us to section 158BB, which deals with the Computation of undisclosed income of the block period. Sub section (1) of section 158BB provides that “The undisclosed income of the block period shall be the aggregate of the total income ..... 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 Assessing Officer and relatable to such evidence, ....’. Definition of `Undisclosed income’ has been enshrined in 158BB(b) to include : `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’. On circumspection of the definition of `undisclosed income’ and section 158BC r.w.s. 158BB, it clearly emerges that undisclosed income, which is the subject matter of taxation in block assessment, inter alia, refers to any income based on the evidence found as a result of search etc.

22. With the above understanding, we now proceed to determine the instant issue. It is seen that the amount as per seized material representing investment in Sai Farm House stood at Rs.54,88,518/- which the AO has rightly considered for the purposes of addition. Insofar as the investment in Cattle Shed is concerned, the AO took value of Rs.12,37,000/- as per the Valuation Report of the Registered Valuer. As against that, the amount of undisclosed investment in Cattle Shed as per the seized material stood at Rs.2,77,727/-. The ld. AR contended that the investment in Sai Farm House and Cattle Shed was common, which amount was Rs.54,88,518/- only in total. On going through pages 13 and 14 of the assessment order dealing with the seized material found relating to investment in Sai Farm house and Cattle Shed, we find that all the items on both the pages are different from each other. In other words, there is no common expenditure which has been recorded on both the pages. This shows that the amount of undisclosed investment in Sai Farm House, as per the seized material, stood at Rs.54,88,518/- and in Cattle Shed separately stood at Rs.2,77,727/-. Despite the fact that the amount of investment in Cattle Shed as per the seized material was Rs.2,77,727/-, the AO preferred to go with the higher value, on the basis of Registered valuer’s report, at the time of determining total undisclosed income towards the investment in Cattle Shed. While considering undisclosed investment in Sai Farm House, the AO adopted the value as per the seized material, which was more than the amount determined by the Registered Valuer at Rs.37,05,500/- and the DVO at Rs.49,76,921/-. However, while finding out unexplained investment in Cattle Shed, the AO chose to go with the higher value given by the Registered Valuer in preference to the amount as appearing in the seized material. Such approach, in our considered opinion, is not correct. The AO was supposed to determine the extent of undisclosed income towards undisclosed investment in Sai Farm House and Cattle shed on the basis of seized material. The total amount which called for the addition comes to Rs.57,66,245/- (Rs.54,88,518 + Rs.2,77,727). As against this, the assessee voluntarily declared undisclosed income of Rs.53,91,887/-. This shows that further addition on this score is called for at Rs.3,74,358/-. We, therefore, restrict the addition made and sustained in the first appeal at Rs.13,34,231/- to Rs.3,74,358/-. This sub-ground is partly allowed.

23. Ground No.4(d) deals with confirmation of addition of Rs.90,51,032/- towards disallowance of Bad Debts in relation to Vaishnavi Petrol Pump.

24. The factual matrix of this ground is connected with Item No.5 of Annexure-A to the Panchanama prepared at the business premises of M/s Sushila Vansale Highway Services, Takali. This book contained full transactions, i.e. Opening reading of the meter, opening stock and closing stock, total sales etc. effected on day-to- day basis. On the reverse side of page 42 (numbered by machine), pertaining to the date 26-08-2002, the narration was as under :

DAY OP Standing 1,61,35,853.60 Credit 53,208.83

1,61,89,062.43

Debit 2,68,395.89

Closing 1,59,20,666.54

Actual 1,59,20,666.54

25. From the above details containing business done outside the books of account, the AO observed that outstanding debtors of M/s Sushila Vansale Highway Services, Takali were Rs.1,59,20,667/- as on 26-08-2002. The said debtors were not reflected in the regular books of account maintained for the said business. Ms. S.D. Vansale, licensee of the said business, in her statement submitted that she received only commission @0.5% of sales of Diesel, Petrol etc. purchased from BPCL. She further denied the ownership of the petrol pump business including such debtors. The assessee, in his statement, accepted that he looked after the business and enjoyed profits there from as owner. He further admitted that only commission @0.5% on sales was given to the licensee as a consideration. As against the outstanding debtors from the business run outside the books of account, recorded on such page at Rs.1.59 crore, the assessee included a sum of Rs.68,69,634/- in the block return as undisclosed income..

The AO observed that the assessee wrote off debtors of Rs.90,51,032/- as Bad Debts out of such total debtors and offered only Rs.68.69 lakh as undisclosed income. On being called upon to explain his stand, the assessee submitted that during the course of search and seizure, computer disk of sundry debtors was seized from the hardware maintained at Vansale Highway Services which contained details of year-wise debtors turning bad starting with the Financial Year 1996-97. As regards the F.Y. 96-97, there were 192 accounts of the truck owners to whom credit sales were made but the amount of Rs.3,25,637/- was not realizable. Similarly for the F.Y.1997-98, the assessee stated that there were 58 accounts of the truck owners to whom credit sales were made but there were no operations in such accounts, making the amount recoverable as bad debt. Amount of such bad debts was determined at Rs.1,28,953/-. Similarly for the F.Y. 1998-99, there were 104 accounts of the truck owners to whom credit sales were made with whom there were no operations amounting to Rs.2,39,473/-. In the like manner, from the F.Y.1998-99 upto 31-08-2002, the amount of such Bad Debts was tabulated at Rs.8,22,841/-, Rs.18,02,789, Rs.34,80,771/- and Rs.12,50,568/- respectively, totaling in all to Rs.80,51,032/-. The assessee submitted that he maintained party- wise credit sale cards which reflected sale transactions as well as recovery from debtors which was actually verified in the course of search u/s.132. The assessee further submitted that the reasons for such Bad Debts was that if vehicle did not turn up to Petrol Pump within a period of 3 to 6 months, the amount due from such truck owners was considered as Bad Debt because in most of such cases the possibilities were either vehicle was seized by the Finance Company or vehicle was sold or vehicle met with an accident or change of driver or change of route by the driver or deliberate intention of non-payment by the driver. However, while offering undisclosed income, the assessee reduced a sum of Rs.90,51,032/- towards actual Bad Debts. Not convinced with the assessee’s submissions, the AO made addition of Rs.90,51,032/- by holding that there was no Bad Debts of this magnitude. The assessee remained unsuccessful before the ld. CIT(A) as well.

26. Having heard both the sides and gone through the relevant material on record, it is indisputably found that the assessee accepted the ownership of the petrol pump, though run in the name of Ms. S.D.Vansale. Item No.5 of Annexure-A of Panchanama prepared at the business premises of M/s Sushila Vansale High Services revealed that on the backside of page 42 there was a table depicting the carrying on business of sale of Petrol, Diesel outside the books of account. Description on the backside of page 42 has been set out above, which was the position as on 26-08-2002. As per this document, the amount receivable from debtors as on the opening of the day stood at Rs.1.61 crore. Fresh credit sales of Rs.53,208/- were made on 26-08-2002. A sum of Rs.2,68,395/- was received, leaving closing balance of debtors of unaccounted business at Rs.1.59 crore. The assessee suo motu offered undisclosed income Rs.68.69 lakh on this score in the block return by explaining that the remaining amount of Rs.90.51 lakh was Bad Debts. However, the documents found at the time of search containing details of amounts not realized relating to the relevant financial years divulged actual unrealized amount at Rs.80,51,032/-. As against that, the assessee wrongly wrote off Rs.90,51,032/- by making totalling mistake of Rs.10.00 lakh. Since the very basis of the gross amount of addition of Rs.1.59 crore is the document found at the time of search, it is but natural that other documents found at the time of search having record of transactions relating to such gross undisclosed income of Rs.1.59 crore also ought to have been considered for determining the net undisclosed income includible in the total income. Details of bad debts from such business outside the books of account found at the time of search depicted a figure of Rs.80.51 lac, which should also have been considered.

27. It is cardinal principle that insofar as business outside the books of account is concerned, it is the initial investment and profit margin from such business, which calls for addition and not the full amount of sale. Instantly, we are concerned with the sale of petrol and diesel etc. outside the books of account, which runs on thin margin. Once there is a cycle of making purchase of petrol and diesel etc. outside and books of account and its later sale, the AO should have considered the profit element from such sale and the initial investment. As against the total sale outside the books of account at Rs.1.59 crore, the assessee itself offered undisclosed income of Rs.68.69 lakh.

28. It is duty of the authorities to guide the assessee, if there is some excess offering of income on a misconception and then correct it. Attempt should be to determine correct income and not to take undue advantage of the assessee’s ignorance. Since the suo motu offering of income by the assessee on this count is much more than the income that ought to have been offered, if properly instructed, we order to delete the addition of Rs.90.51 lakh.

29. Ground No.4(e) is against the confirmation of addition of Rs.63,53,316/- towards disallowance of Bad Debts relating to M. S. Swami Petrol Pump.

30. The assessee was running another Petrol Pump in the name of M/s. M.S. Swami Highway Services, Omerga. Here again, the same modus operandi was adopted that M.S. Swami, the apparent owner, was entitled to only certain commission. The assessee admitted such fact during the course of search. Here also, the same mechanism of making sales outside the books of account was adopted. A sum of Rs.68,57,438/- was found as recorded on seized papers representing debtors from undisclosed business as on 03-06-2002. As against such outstanding debtors, the assessee offered a sum of Rs.5,04,122/- in the block return. Regarding the differential amount, the assessee submitted that a sum of Rs.28,22,774/- reflected recoveries from 03-06-2002 to 17-08- 2002; a sum of Rs.14,43,754/- represented the amount due from M.S. Swami wrongly entered in the list; a sum of Rs.20,86,788/- was amount of Bad Debts pertaining to Financial years 1996-97 till 2001-02, thereby leaving net income of Rs.5,04,122/-, which was offered for taxation. Not convinced with the assessee’s submissions, the AO made an addition of Rs.63,53,316/- (Rs.68,57,438 minus Rs.5,04,122), which came to be upheld in the first appeal.

31. Having heard both the sides and gone through the relevant material on record, it is found as an admitted position that the facts and circumstances of this ground are mutatis mutandis similar to Ground No.4(d) which has been dealt with hereinabove. From the relevant claim by the assessee before the AO, enumerated at pages 33 and 34 of the assessment order, it is seen that the assessee claimed that a sum of Rs.28,22,794/- were recovered between 03- 06-2002 to 17-08-2002, which the ld. AR could not substantiate with any evidence. Similarly, the assessee could not produce any evidence regarding the amount of Rs.14,43,754/- due from M.S. Swami Highway Services wrongly entered in the list. The assessee’s contention to this extent cannot be accepted. As regards the Bad Debts of Rs.20,86,788/-, we are inclined to accept the contention of the assessee for the reasons given hereinbefore. If the amount of bad debts is reduced, the net amount of debtors outside the books of account comes to Rs.47,70,650/-. When we consider such sale outside the books of account and the amount offered by the assessee at Rs.5.04 lakh with the surplus amount offered in respect of M/s Sushila Vansale Highway Services, we hold that no addition is called for. The combined position of both the petrol pumps on this score is that there were gross sales outside the books of account at Rs.2.28 crore (Rs.1.59 crore plus Rs.68.57 lakh). Combined amount of bad debts is Rs.1.01 crore (Rs.80.51 lakh plus Rs.20.86 lakh). Combined net good sales made outside the books of account come to Rs. 1.27 crore (Rs.2.28 crore minus Rs.1.01 crore). As against this, the combined amount offered by the assessee is Rs.73.73 lakh (Rs.68.69 lakh plus Rs.5.04 lakh). This gives income at the rate of 58% of the net sales made outside the books of account. When we consider the lower level of profit on the sale of petrol and diesel etc., this amount turns out to be much more than the normal initial investment in such type of business and the profit thereon. Grounds no. 4(d) and (e) are thus allowed.

ITA No.1259/PUN/2016 (Revenue’s appeal) :

32. Ground No.1 of the Revenue’s appeal is against the deletion of addition of Rs.24,14,161/- on account of unexplained assets over liabilities of the two petrol pumps.

33. The facts anent to this issue are that the AO computed unexplained assets over liabilities in the case of Ms.Sushila Vansale and Mr. M.S. Swami from the respective balance sheets of the petrol pumps as on the date of search. The assessee filed bifurcation of the assets belonging to Ms.Sushila Vansale and Mr.M.S. Swami in their individual and separate capacities and remaining assets and liabilities from such Petrol pumps belonging to him, which has been tabulated at pages 55 and 56 of the assessment order. The AO computed value of excess of assets over liabilities pertaining to the assessee at Rs.16,16,352/- in relation to S.D. Vansale and Rs.7,97,807/- in relation to Mr. M. S. Swami, as includible in the total income of the assessee. The ld. CIT(A) deleted such addition.

34. Having heard both the sides and gone through the relevant material on record, it is seen that there is no dispute that the AO accepted that some of the assets and liabilities from both the petrol pumps did not belong to the assessee but to Ms. S.D. Vansale and M.S. Swami, for which obviously no addition has been made in the hands of the assessee. However, as regards the excess of other assets over liabilities pertaining to the assessee, the AO made computation by reducing the figures of Rs.3,95,896 and Rs.1,52,803 as relatable to the apparent owners. Actually these two figures represent the excess of assets over liabilities at the beginning of the block period and not the figures pertaining to the apparent owners. The correct procedure for calculating the undisclosed block income of the assessee on this issue was to find out the excess of assets over liabilities of the two petrol pumps on the date of search, then reduce the excess of assets over liabilities as at the beginning of the block period and then further reduce it by the figure of excess of assets over liabilities as pertaining to the apparent owners. If we make such a calculation, the amount of excess of assets over liabilities relatable to the assessee in relation to the two petrol pumps comes to Rs.9,93,429, as has been tabulated at page 95 of the impugned order. It is this amount which was liable to be included in the total income. The ld. AR admitted that Rs.9,93,429/- was not included by the assessee the block return. We, therefore, confirm the addition to the extent of Rs.9,93,429/- against Rs.24,14,161/- deleted by the ld.CIT(A).

35. The only other ground which remains in the Revenue’s appeal is against the deletion of addition of Rs.2.01 crore made by the AO u/s.40A(3) of the Act.

36. Succinctly, the facts of this ground are that during the course of verification of record, the AO found that the assessee made payments in cash of Rs.10,07,15,113/- exceeding Rs.20,000/- in contravention of section 40A(3) of the Act. 20% of such amount was disallowed u/s.40A(3) leading to addition of Rs.2,01,43,022/-. The ld. CIT(A), relying on certain decisions referred to on pages 113 and 114 of his order, came to hold that addition u/s.40A(3) could not be made in the computation of undisclosed income u/s.158BC of the Act. Aggrieved thereby, the Revenue has approached the Tribunal.

37. We have heard the rival submissions and gone through the relevant material on record. The ld. DR relied on CIT Vs. Hynoup Food & Oil Industries (P) Ltd. (2007) 290 ITR 702 (Guj) to support the contention that addition u/s.40A(3) was called for. However, on perusal of this judgment, we find that it pertains to A.Y. 1986-87. As against that, the Chapter XIV-B containing Special procedure in assessment of search cases was inserted by the Finance Act, 1995 w.e.f. 01-07-1995. Since the case considered by the Hon’ble Gujarat High Court does not deal with block assessment, reliance on this judgment is misplaced. The ld. DR relied on another judgment of Hon’ble Andhra Pradesh High court in S. Venkata Subba Rao Vs. CIT (1988) 173 ITR 340 (AP). This judgment relates to the A.Y. 1974-75. Though the subject matter is disallowance u/s.40A(3) but it is de hors the block assessment. This judgment again does not fortify the view of the Revenue. Per contra, the ld. CIT(A) has relied on several decisions holding that section 40A(3) does not apply in respect of block assessment. The ld. AR relied on another judgment of Pune Bench of the Tribunal in Dhanvarsha Builders & Developers Pvt. Ltd. Vs. DCIT (2006) 105 TTJ 376 (Pune). This case pertains to block assessment wherein it has been categorically held that provisions of section 40A(3) are not applicable to the block assessment. In view of the foregoing discussion, we are satisfied that no infirmity can be traced in view point canvassed by the ld. CIT(A) in deleting this addition.

38. In the result, the both the appeals are partly allowed.

Order pronounced in the Open Court on 16th October, 2020.

Sd/- Sd/-

(PARTHA SARATHI CHAUDHURY) (R.S.SYAL)

JUDICIAL MEMBER VICE PRESIDENT

Pune; Dated : 16th October, 2020