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T. C. A. Ramanujam

T. C. A. Ramanujam on the confusion that prevails in the computation of undisclosed income

CHAPTER XIV B of the Income-Tax Act, 1961, permitted assessment of undisclosed income for a block period of 10 years ending with the date of search. There was much confusion with regard to the computation of the undisclosed income of the block period.

A question that often cropped up was whether salary income would form part of undisclosed income? Several High Courts had taken the view that where tax had been deducted at source on the salaried income and paid into the government account, there would be no question of holding such salary income as undisclosed income for taxing it again in the block year after search (CIT vs Ashok Taksali — 2002 124 Taxman 45 Raj).

What about income below taxable limit? Will it form part of undisclosed income? The Kerala High Court ruled that the assessment under Section 158 B is for a block period and for this purpose, it is not necessary to find out whether income in any year is below taxable limit. Note 5 in Form 2(b) states that if the return had not been furnished for the reason that the taxable income was not above the maximum amount not chargeable to tax, the total income is to be mentioned against that previous year.

It does not state that such income has to be excluded while computing the income for the block period. Even if the Note contains anything, which is inconsistent with the section, then the section will prevail. The section cannot be interpreted on the basis of a Note (CIT vs M. M. George — 254 ITR 45).

Chapter XIV B had undergone significant amendments through the Finance Act, 2002 with retrospective effect from July 1, 1995. The effect of the amendment was considered by the Madhya Pradhesh High Court in CIT vs Purushottamlal Tamrakar Uchehra Satna (2003 176 Taxation 622 MP). After a search, block period assessment came to be made for the assessment years from 1986-87 to 1996-97. The assessee had maintained books of accounts and the income as per the accounts was below the taxable limit for three out of the ten years and no return had been filed for those years. The question was whether those incomes should form part of undisclosed income or should be deducted under the amended Section 158BB.

Sub-clause (c) of the amended Section 158BB provided for deduction of income below the amounts chargeable to tax for any previous year falling in the block period in the computation of the undisclosed income. The MP High Court referred to this amendment and pointed out that much of the confusion had got cleared and the picture was frescoed without any kind of haze.

Once the books of accounts disclosed income below taxable limits for some year, and taxable income for certain other periods, liability will have to be fixed on the basis of such incomes. If the amended provision is carefully read, it would be graphically clear that in respect of a block period assessment, benefit would be given in respect of the period which would not come within the frame of tax liability as per the books of accounts. The undisclosed income is confined to the period for which tax liability is determined on the basis of the entries in the account books or on the basis of material found in the course of search and seizure. The matter was decided in favour of the taxpayer.

Even as courts were clarifying the issue and amendments were being made, Chapter XIV B itself has been dropped from the statute book and yet another new procedure introduced, destabilising the law relating to search cases. Whatever be the procedural law, it is now well established that no assessment can be made on alleged undisclosed investments on the basis of the departmental valuer's report when the search itself did not disclose incriminating material.

Thus, in CIT vs M/s. Khushal Chand Nirmal Kumar (2003 176 Taxation 616 MP), The MP High Court ruled that addition made on the basis of the departmental valuer's report about understatement of cost of construction cannot be sustained when the search brought forth no material regarding understatement. Here again, the court relied on the amended Section 158 BB, which requires that the block assessment of the undisclosed income is to be based on the evidence found in the search.

Finance Act, 2003 has inserted Section 153 A for assessment of search cases. The total income of six assessment years immediately preceding the date of search will have to be brought to charge under Section 153 A. Of course, the computation will be year-wise and not for a block period. The principles enunciated by the MP High Court in the above two cases will apply even to assessments framed under Section 153 A.

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