1. This appeal preferred by the assessee is against the order dt. 12th March, 1998, of the AO passed under Section 158BC of the IT Act, 1961, for the block assessment period 1987-88 to 1997-98.
2. The brief facts of the case are: According to the AO, there was a search and seizure operation on the business premises of the assessee-company on 8th Oct., 1996, as well as the residences of the directors of the assessee-company. The assessee-company is engaged in the business of manufacturing of PVC leather cloth manifolds and also PVC film which is used by the pharmaceutical industry and stationery applications. During the course of the search, one diary marked as HR/1 was seized from the residence of H. Raviraj, company executive, which consisted of certain debit and credit entries and the various party-wise ledgers maintained. According to the AO, the debit entries were identified as sales made to various dealers outside the books of account. Such sales totalled Rs. 14.80 crores. The diary also consisted of some cash collections, amounts sent by DDs, payments made to suppliers like Chempiast, R.K. Mills, Coal and some interest payments to parties. The director of the assessee-company, Sri Krishnakumar, was confronted with these entries and in the absence of satisfactory explanation from him, a declaration under Section 132(4) was made by him admitting Rs. 1.90 crores as profit out of the above unaccounted-for transactions.
During the course of the search, Sri H. Kishan was confronted with the investments made by his family group, i.e., 'Haridas Group', in promoters quota shares and he has disclosed an amount of Rs. 19,00,000 towards unaccounted for investment in promoters quota equity in Fenoplast Ltd. Also the assessee admitted undisclosed income for the asst. yr. 1991-92 at Rs. 4,25,000 towards unexplained cash credits in sister concerns. Thus, the disclosure made by the assessee-company under Section 132(4) is as follows : A notice under Section 158BC of the Act was issued to the assessee on 20th March, 1997, in response to which the assessee filed its return for the block period 1987-88 to 1997-98 on 3rd Sept., 1997, admitting undisclosed income at Rs. nil. While filing the nil return for the block period under consideration, the assessee has aggregated the current year's loss with the undisclosed income admitted at Rs. 52,92,864 towards undisclosed income generated out of turnover in the diary and Rs. 19,00,000 admitted towards investment in promoters quota shares of 'Haridas family' for the asst. yr. 1995-96 and Rs. 4,25,000 towards cash credits in the books of account of the sister companies in the asst. yr. 1991-92 and aggregated the same with the respective losses of those years on account of current year's depreciation. While deducting column-C of Part-11 of the block return, they have taken income returned as nil for the asst. yrs. 1991-92 and 1995-96. As a result of this, the entire undisclosed income admitted by the assessee has become nil. However, after elaborate discussion, the AO was of the view that while arriving at the undisclosed income by reducing returned/assessed income under Sections 139, 143, 144 and 147, if the resultant figure after setting off the current year's income against the current year's depreciation is negative, the same should be taken as loss' but not as 'Nil', as admitted and argued by the assessee. In support of this view, the AO relied on the decision of the Supreme Court in the case of Garden Silk Wvg. Factory v. CIT (1991) 189 ITR 512 (SC). The AO further held that in view of the detailed discussion and the position of decided law, the method working of undisclosed income as admitted by'the assessee in the block return is contrary to law and against the spirit of Section 158BB. Therefore, he concluded that the unabsorbed depreciation of the current year should be treated as 'business loss' contrary to the assessee's claim that the resultant income should be taken as 'nil' and the unabsorbed deprecration should be carried forward for the future years while reducing the income returned or assessed as per the provisions of Section 158BB(1) of the Act to arrive at the undisclosed income. Accordingly, the AO determined the undisclosed income for the block period at Rs. 1,46,02,752 and tax thereon at Rs. 87,61,651. Secondly, he did not accept the contention that income for the regular assessment and assessment under Section 158BC including the undisclosed income could be 'nil'. He rejected the assessee's submission that current year's depreciation for each year was enough to neutralize the addition of undisclosed income, holding as under : "...if the resultant figure after setting off the current year's income against the current year's depreciation, is negative, the same should be taken as 'loss' but not as nil as admitted and argued by the assessee. This opinion gets strength from the Hon'ble Supreme Court judgment in the case of Garden Silk Wvg. Factory v. CIT (1991) 189 ITR 512 (SC)...." Thus, he treated the balance of the current year's depreciation available to the assessee (before the inclusion of undisclosed income) as business loss. The consequence of this treatment was the transformation of the character of unabsorbed depreciation into business loss and the addition of undisclosed income became a simple matter of overstatement of business losses to the extent of undisclosed income.
This would be clear if the computation of undisclosed income for asst.
yr. 1995-96 is studied : Net profit as estimated on the undisclosed turnover as discussed at para 10 Net profit as estimated on the undisclosed turnover as discussed in para 11 Investment in promoters' quota shares of Fenoplast as discussed in para 13 The assessee is aggrieved by this order of the AO and has come up before this Tribunal.
3. The authorised representative for the assessee contended before us that the only material found in the course of the search was a diary and the same was utilised by the AO for framing the block assessment with the contents of the diary found at the premises of one of the executives. In this diary certain sales made in the course of the last three years before the said search were noted down and the Department proceeded on the presumption that the figures noted therein were all undisclosed sales; but the assessee in its reply reconciled some of the transactions with the regular books. In regard to some of the transactions, it was asserted that the assessee could not prove to the satisfaction of the AO that they were all genuine and noted in the regular books. Under these circumstances, the assessee had agreed that a sum of Rs. 71,92,864 for the asst. yr. 1995-96 and Rs. 4,25,000 for the asst. yr. 1991-92 could be treated as undisclosed income. The assessee, however, admitted that certain figures as undisclosed during the course of investigation following the search and in the return filed the assessee had shown 'nil' income for the purpose of the assessment under Section 158BC. The assessee wanted to explain as to how he has shown 'Nil' income for the block assessment and thereby he contended that if the figure for the asst. yr. 1995-96 were to be considered by way of business loss for this year, the regular assessment had been completed and accordingly the assessee-company was entitled to current year's depreciation of Rs. 2,93,14,847. He, however, contended that there is no dispute about this figure. He also emphasized that after adjustment of the business profits of the year, there was still a balance of Rs. 1,28,04,522 out of the current depreciation. The assessee has shown nil income for this year because under Section 32(2) depreciation can be adjusted against business profits only to the extent of business profits available and the balance has to be considered only in the next assessment year. In this case, according to the assessee, the available business profits would be only to the extent of adjustment of depreciation of Rs. 2,93,14,847 minus Rs. 1,28,04,522. So, under Section 32(2) the balance of Rs. 1.28 crores cannot be adjusted this year because income for this year is nil, meaning thereby that there was neither profit nor loss. The position after the addition of undisclosed income of Rs. 71.92 lakhs was also the same. The additional figure of undisclosed income increased the assessable income for this year to that extent.
Consequently, the business profits available to adjust the current depreciation have increased and, as a matter of fact, it should have been adjusted against the balance of current year's depreciation of Rs. 1.28 crores to the extent of reducing the profit to nil and the balance of current year's depreciation is to be carried forward. According to the assessee, the computation of income in the regular assessment for the assessment year was nil and it continues to be nil after addition of undisclosed income because the current year's depreciation was much more than the business income of that year including the undisclosed income. This position is more or less the same for the other years also.
4. The authorised representative emphasized that the AO did not accept the computation of the undisclosed income as given in the return. He made two changes while framing the assessment. Firstly, he calculated the undisclosed income for the block period at Rs. 1,46,02,752 as against Rs. 71.9 lakhs shown by the assessee. Secondly, he did not accept that the income for the regular assessment made under Section 158BC including undisclosed income would be nil. The AO rejected the contention of the assessee that current year's depreciation for each year was more than enough to neutralize the addition of undisclosed income in the assessment year.
5. He, however, explained that there is no dispute that the figure of Rs. 1,28,04,522 is the unabsorbed depreciation as per the regular assessment for this year. But, for the purpose of block assessment, it was converted into business loss. He explained that by the addition of undisclosed income of Rs. 1.10 crores, the claim was reduced and, therefore, this was undisclosed income for the purpose of Section 158BB. Before us, the learned authorised representative challenged the assessment order mainly on two grounds, viz., (1) The addition made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of Section 32(2) since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying the provisions of Chapter IV of the Act which contains Section 32. If the income is so computed, the total income for these years before the inclusion of undisclosed income could only be nil, with certain amount of unadjusted depreciation to be carried forward to the next year. But the computation of income has to be nil because there is neither profit nor loss. It is absolutely clear that there was no profit since the available business profit would be adjusted against the depreciation leaving nil profit; there would be no loss because the unadjusted balance of depreciation cannot be deducted this year since Section 32(2) specifically stipulates that the balance of unadjusted depreciation would be treated as part of the current year's depreciation of the year following next. When there is neither profit nor loss, the income would be nil. Proceeding further, he contended that the position would be the same even after inclusion of the undisclosed income because of the fact that admissible current depreciation is much more than the business income including the undisclosed income. When there is nil income both in the regular assessment as well as under Section 158BG, there is no undisclosed income which could be taxed.
(2) The total aggregate income for the block assessment years as fixed in the assessment order inclusive of undisclosed income was the loss of Rs. 11,13,75,788 as against the assessed total loss of Rs. 12,59,78,540 for the assessment years falling within the block period. It is thus simply clear that there was no positive income and unless there is positive income, there could be no assessment to tax. According to him, the position is parallel to Section 143(1A) before its amendment in 1993 under which the additional tax was levied on the prima facie, adjustment effected in the return.
Proceeding further, he contended that in cases where loss return was filed and by prima facie adjustment the loss claimed was reduced, nevertheless the net result was only loss, the Courts had held that additional tax cannot be levied. According to him, this is the correct position of law which has been accepted by the Government and that is why this section was amended in 1993. But, there is no such change effected in Section 158BB or in Section 113 under which the undisclosed income is taxed.
In support of his contentions, the authorised representative relied on the following case laws : (iii) CIT v. Mother India Refrigeration Industries (P) Ltd. (1985) 155 ITR 711 (SC); (iv) Addl. CIT v. Andhra Printers Ltd. (1979) 117 ITR 555 (AP); (v) CIT v. Man Mohan Das (1966) 59 ITR 699 (SC); (vi) Western India Oil Distributing Co. Ltd- v. CIT (1980) 126 ITR 497 (Bom); (vii) CIT v. Elphinstone Spg. & Wvg. Mills Co. Ltd. (1960) 40 ITR 142 (SC);Indo-Gulf Fertilizers & Chemicals Corporation Ltd. v. Union of India (ix) B.D.A. Ltd. v. Asstt. CIT (1998) 61 TTJ (Mumbai) 197 : (1998) 65 ITD 501 (Mumbai);CIT v. Sri Vijayalakshmi Mineral & Trading Co.
6. On the other hand, the learned Departmental Representative contended as under: It is always mentioned in the block return (D-B) to declare that undisclosed income has been detected and 'D' would always be greater than 'B'. The assessed or the returned loss, i.e. 'D', would be greater than 'B' (assessed or returned loss as reduced by undisclosed income). In view of the same, D-B would always be a positive figure and hence that itself is to be taken as undisclosed income for the purpose of taxation. It is the intention of the legislature not to give set off adjustments and Chapter VI adjustments and also Chapter VI-A deductions, the interpretation to allow the undisclosed income detected during the search adjusted against the loss that was available in books or unabsorbed depreciation that was available in books in terms of column figures would defeat the purpose of the law itself. In the expression "undisclosed income", the word 'income' always includes loss also as defined in Chapter XIV-B. So long as the disclosed loss is reduced due to addition or undisclosed income, the quantum difference is a positive figure which should be brought to tax. In the case of ITO v. Lakshmi Cotton Traders IT Appeal No. 295 (Hyd) of 1989, Hyderabad Bench 'B' of the Tribunal has upheld the view that penalty can be levied even in cases where assessed income and returned income are loss. Loss includes depreciation in the case of block assessments, as the columns of return would show. The column 'B' should depict total undisclosed income along with disclosed income all of them resulting in a loss. Column D should reflect assessed or returned loss. They cannot be depicted as 'nil', as claimed by the assessee. In support of his contentions, the learned Departmental Representative relied on the decision of the Supreme Court in the case of Lohia Machines Ltd. v.Union of India 7. We have considered the rival submissions of the parties and have gone through the materials available on record as well as the decisions cited supra. At the outset, we would state that the estimate of unaccounted income from the diaries is not seriously disputed. The only issue is regarding the telescoping of Rs. 49 lakhs representing the investment in the assessee-company for their quota, by the promoters against the income referable to the diaries. No argument was adduced before us on this point. Nevertheless, since the issue is in the grounds of appeal and it has not been specifically given up, we would deal with it. No discussion appears in the assessment order regarding the claim of telescoping. Besides, no material has been placed before us to show the date on which these investments were made so as to enable us to enquire whether the unaccounted income generated was available even notionally for this investment. In the absence of any materials, the ground is rejected.
8. The main point for consideration is whether the assessee's computation of income at 'Nil' for the purpose of regular assessment as well as under Section 158BB is correct. The assessee's case is that if the current year's depreciation exceeds the business income as computed, the allowance of depreciation for that year would be only equal to the business profits. A reading of Sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two--one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be the allowance of the following previous year cannot, at the same time, represent the allowance of the current assessment year. The view that the balance of the current year's depreciation would continue to be the allowance relatable to the current assessment year, goes against the statutory provisions.
Therefore, in case of inadequate business profits, the current year's depreciation is admissible only to the extent of availability of business profits and the result would be the business profit would be reduced to 'nil'. Accordingly, there would be neither profit (because the available current year's depreciation has been adjusted against the total current year's business profits) nor loss (because the balance of the current year's depreciation ceases to be the allowance of the current year and becomes, consequent to the deeming provision in Section 32(2), the allowance of the following previous year). This view of ours is strengthened by the decision of the Supreme Court in the case of Garden Silk Wvg. Factory (supra) and that of the Bombay High Court in the case of Ravi Industries Ltd. (supra). However, the AO has relied on the above cited decision of the Supreme Court, stating that depreciation loss and business loss are the same. The AO has misread the said decision and quoted it out of context. In this connection, the observations of the Andhra Pradesh High Court in the case of V.V.Trans-Investments (P) Ltd. v. CIT (1994) 207 JTR 508 (AP). which are extracted below, are also relevant: "...the finding of the Special Bench that loss includes unabsorbed depreciation was contrary to the provisions of the IT Act. The reliance placed by the Special Bench on the observations of the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 (SC) is misplaced." We are unable to accept the contention of the learned Departmental Representative on this point, since the requirement in Part-Ill of Form 2B supports the assessee's contention that unabsorbed depreciation cannot form part of the figures shown in the various columns. We, therefore, accept the contention that the computation of income at 'nil' in those years where the depreciation admissible for the current year exceeds the business profits of the year. Therefore, for the asst.
yrs. 1994-95 and 1995-96 the income under Section 158BB as well as income as per regular assessments would be 'nil'.
9. However, an impression may be created that the income is escaping assessment for these years even after admitting concealed income. That impression is not right and the assessee has to pay for his misdeeds.
If the search and the addition were not made, the assessee would have the benefit of carry-forward of unabsorbed depreciation of Rs. 1.20 crores for the assessment years following 1995-96. This benefit is not available to them now. The carried forward depreciation has been reduced to the extent of undisclosed income. For the asst. yr. 1995-96, the carry-forward is only Rs. 17,47,691 as against the original figure of Rs. 1.28 crores. Thus, the assessee reaps the consequence of concealment of income. But, the consequence of concealment is affecting only subsequent assessment years. We, therefore, hold that the amounts taxed for the asst. yrs. 1994-95 and 1995-96 cannot form part of the block assessment. They stand deleted.
With respect to the above years, the assessee has no case to contend that the current year's depreciation is enough to absorb the additions towards concealed income. The assessments had resulted in business losses and so there is no question of adjusting the current year's depreciation. Business loss as per the assessment orders under Section 143 or as per return have to be shown in column 'D' and the recomputation of the income for those periods has to be shown in column 'B'. The difference between columns D and B would represent the concealed income. The assessee's contention for these years is different. It is contended that there is no positive income at all for any of the years even after inclusion of undisclosed income. On the other hand, it is the contention of the Revenue that the business loss has been overstated by Rs. 15,26,105 and to that extent there is concealed income.
11. After considering the rival submissions of the parties as well as the relevant provisions of the Act, we are of the view that the computation of concealed income under Section 158BB envisages a positive figure of assessment on the basis of the search materials.
Therefore, it is to be seen whether such a positive figure is shown in the assessment order. We find that the total aggregate income is a loss of Rs. 11,13,75,788. This does not satisfy the provisions of the section enabling one to compute the undisclosed income strictly in accordance with the provisions of the Act.
12. We. have also looked into the authorities wherein it has been held that for certain purposes income would include loss also. Those cases pertain to the concept of 'income' which is different from 'total income', which is the phrase requiring interpretation here. Further, the meaning has to be ascertained from the context in which the expression appears. As pointed out earlier, the legislature clearly envisages an aggregation of losses computed under Section 143. In such cases, it has been provided that undisclosed income would be the total income under Section 158BB as 'increased' by the losses under Section 143. Hence, it would be difficult to hold that envisaging losses under Section 158BB was a mere omission. The intention seems to be only to levy taxes on those who have positive income which was unearthed by search. If the aggregate under Section 158BB is a loss, prima facie, a loss cannot attract tax. That may be the reason why the legislature left out of the purview of Section 158BB cases like that of the assessee where the aggregation results in a loss.
13. Under these circumstances, we hold that the levy of tax under Section 113 is not valid. For the asst. yrs. 1994-95 and 1995-96, the levy is invalid for the additional reason that the income under Section 143 as well as the income computed under Section 158BB are the same; both are 'nil'. Therefore, there is no question of reducing the income arrived at after the inclusion of undisclosed income by the income assessed under Section 143. When both are 'nil', the difference between the figures would also be 'nil'.
1. I have had the privilege of perusing the order proposed by the Hon'ble Vice-President (C.S.). With great respect to my learned brother, I am unable to agree with the view expressed by him in that order. Hence, I proceed to pass this dissenting order on this appeal.
2. As a matter of fact, there is no serious dispute against the quantum of undisclosed income estimated by the AO. The assessee-company has raised a contention for telescoping certain investments made in the promoters' equity. As pointed out by my learned brother in his order (para 7), that claim has not been substantiated by the assessee-company. Therefore, the estimate of undisclosed income at Rs. 1,46,02,752 is liable to be confirmed.
3. The thrust of the contention of the assessee-company is that the undisclosed income estimated by the AO does not result in a demand to income-tax in praesenti, but only reduces the quantum of unabsorbed depreciation and losses available for set off in the prospective assessment years to the extent of the undisclosed income. The first ground on which the above proposition is made by the assessee is that the addition made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of Section 32(2), since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying the provisions of Chapter IV of the Act, which contains Section 32. Therefore, according to the assessee-company, the unabsorbed depreciation cannot form part of the loss or figures shown in the various columns provided in form 2B return. As a result, according to the assessee-company, where the depreciation admissible for the current year exceeds the business profits of the year, the income shall be 'nil' and accordingly for the asst. yrs. 1994-95 and 1995-96, the income under Section 158BB as well as the income as per regular assessments would be 'nil'. The assessee-company reinforces the principle of "current depreciation" within the meaning of Section 32(2) by distinguishing unabsorbed depreciation far away from unabsorbed business loss, relying on the decision of the Hon'ble High Court of Andhra Pradesh in V.V. Trans-Investments (P) Ltd.'s case (supra). The assessee-company has also pointed out that the AO has misread the ratio in the decision of Hon'ble Supreme Court in Garden Silk Wvg. Factory's case (supra).
4. The second ground urged by the assessee-company is that undisclosed income would attract the levy of tax under Section 113 only if there is a positive income. That if the aggregate under Section 158BB is a loss, there cannot be a levy of tax. That the assessments for the asst. yrs.
1991-92, 1996-97 and 1997-98 have resulted in business losses. There is no positive income at all for these three assessment years even after inclusion of undisclosed income pertaining to those years. That, therefore, on the basis of positive income concept, there cannot be any undisclosed income susceptible to Section 113 tax.
5. Under the IT Act, depreciation is allowed as a deduction in computing the income either under Section 32(1) or Section 32(2). Where the profits of a particular previous year is not sufficient to absorb the depreciation of that previous year, under Section 32(1), the balance of the depreciation not absorbed is to be carried forward to the succeeding previous years so that the unabsorbed depreciation is adjusted against the profits of the succeeding previous years. For the purpose of this carry forward and adjustment, the unabsorbed depreciation assumes the colour of "current depreciation" of the succeeding previous years. The unabsorbed depreciation is transformed into current depreciation of the prospective previous years by virtue of the operation of Section 32(2). Therefore, the adjustment sought for by the assessee-company is possible only under the provisions of law contained in Section 32(2) of the Act.
6. The assessee-company has rightly pointed out that the undisclosed income of the block period has to be computed in accordance with the provisions of Chapter IV, as provided in Section 158BB(1). But a reading of the provisions contained in Section 158BB makes it clear that the provisions of Chapter IV are applicable, subject to certain exceptions provided in the section itself. One such exception is provided in Expln. (a) given to Section 158BB(1), which reads as under : "Explanation--For the purposes of determination of undisclosed income,-- (a) the total income or loss of each previous year shall, for the purposes of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32." Another exception is given as Sub-section (4) of Section 158BB. It is also reproduced below: "(4) For the purpose of assessment under this chapter, losses brought forward from previous year under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments." 7. The two exceptions noticed above, do not allow the adjustment of any depreciation under Section 32(2). Sec. 32(2) is excluded from the ambit of Chapter XIV-B not only for computing the undisclosed income for each previous year included in the block period, but also for the aggregation of the undisclosed income [Expln. (a)] and further also for the assessment and levy of undisclosed income and tax [Sub-section (4)]. There is no application of Section 32(2) for the assessment of undisclosed income. The right of set off of depreciation under s, 32(2) is available to the assessee only in regular assessments. Though the brought forward losses and unabsorbed depreciation will be given a set off while making regular assessments, they will have to be ignored while computing the undisclosed income of the block period. Therefore, the argument of the assessee-company to adjust the 'current depreciation' under Section 32(2) against the undisclosed income is not sustainable in law.
8. As the statutory provisions in respect of the role of Section 32(2) in search assessment proceedings are clear in Chapter XIV-B of the Act, the contention of the assessee-company that unabsorbed depreciation is different from loss becomes only incidental. In Garden Silk Wvg.
Factory v. CIT (supra), the Hon'ble Supreme Court has held that even though special sets of rules are provided for the carry forward and set off of unabsorbed depreciation and business loss, the genus of the depreciation and loss is the same. The above decision has been referred to and considered by the apex Court in its recent judgment in V.V.Trans-Investments (P) Ltd. v. CIT (1999) 237 ITR 777 (SC) in which their Lordships have held that for the purposes of Section 115J of the IT Act r/w Section 205 of the Companies Act, losses include depreciation also. This judgment has reversed the decision of the Hon'ble High Court of Andhra Pradesh in V.V. Trans-Investments (P) Ltd.'s case (supra) which decision has been relied on by the assessee-company and acted upon by the learned brother. The decisions of the apex Court in Garden Silk Wvg. Factory's case (supra) was rendered in the context of the allocation and set off of depreciation in the case of a firm and its partners; and in V.V. Trans-Investments (P) Ltd.'s case (supra) was rendered in the context of Section 115J of the Act. In both the cases, the Court has held that depreciation and business loss are of the same genus and depreciation is a part of the loss or loss includes depreciation also, and they are treated differently only for certain purposes of assessment and determination of business loss, carry forward and set off of unabsorbed business loss and depreciation and the like.
9. The arithmetical framework for the computation of undisclosed income of the block period in accordance with the provisions contained in Section 158BB is manifest in Part-II of Form 2B return of undisclosed income. In columns (B) and (D) therein, what is provided is "Losses" without any distinction made for unabsorbed depreciation. The "current depreciation" pointed out by the assessee-company is nothing but unabsorbed depreciation in specie. "Losses", in the light of the above mentioned Supreme Court decisions include unabsorbed depreciation also.
10. For the reasons stated in paras 7, 8 and 9 above, it is not possible to agree to the view that current depreciation could be adjusted under Section 32(2) against the undisclosed income, so as to make the undisclosed income 'nil'. Therefore, the first ground of the assessee-company is liable to be rejected.
11. The second ground urged by the assessee-company is that for the asst. yrs. 1991-92, 1996-97 and 1997-98 have resulted in business losses even after the inclusion of the undisclosed income and as there is no 'positive income' in the block period, there cannot be an assessment of undisclosed income and levy of tax thereon. The undisclosed income determined by the AO is Rs. 1,46,02,752. The aggregate loss of the assessee-company for the block period before inclusion of undisclosed income is Rs. 12,59,78,540. After the block assessment, the aggregate loss has been reduced to Rs. 1,13,75,788.
According to the assessee-company, the undisclosed income determined in its case has only reduced the ultimate loss and has not resulted in a positive income, which should be there for the purpose of levying tax.
12. Chapter XIV-B contains special procedure for assessment of undisclosed income in search cases. Sec. 158B(b) defines 'undisclosed income'. According to the said definition, undisclosed income is that income which has not been or would not have been disclosed by the assessee for the purposes of IT Act. The subject of undisclosed income has to be considered separately from income or loss considered in the regular assessments. Therefore, undisclosed income is sufficiently insulated from the income or loss considered in the regular assessments. This insulation is explicitly provided by Explanation given under Sub-section (2) of Section 158BA. For the sake of convenience, the Explanation is reproduced below: (a) the assessment made under this chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; (b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period; (c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period." Explanation (b) makes the position very clear by stating that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period. The ultimate loss mentioned by the assessee-company is the unabsorbed loss considered in the regular assessments. Such loss considered in the regular assessments cannot be read along with the undisclosed income. The quantum of undisclosed income determined by the AO is Rs. 1,46,02,752. This undisclosed income by itself, when considered independent of the regularly assessed loss of the assessee-company, is a positive income. This positive income converts into a negative income only when it is merged into the unabsorbed loss of the assessee-company, determined in the regular assessments. Clause (b) of Section 158B and Expln. (b) to Section 158BA(2) read together, do not provide for such a merger. Undisclosed income stands on its own legs provided by the statute.
13. Undisclosed income when aggregated to the income assessed in the regular assessments, the ultimate income of the assessee may increase or the accumulated loss may reduce. This is an accounting concept. But this concept is not applicable to the case of taxation of undisclosed income as it cannot be merged with "disclosed income"; the income or loss considered in the regular assessments. The basis of the assessee's contention of positive income is the integration of 'undisclosed income' with 'disclosed income', which is not permitted in the scheme of Chapter XIV-B. This position is clear from the computation format of undisclosed income provided in Part-II of Form 2B return. Column B and column D therein relate to case of losses. Column B is for losses including undisclosed income and column D is for losses returned/assessed. For the computation of undisclosed income, column D is always bigger than column B, whereby the formula (D) - (B) invariably brings out a positive figure of undisclosed income. As rightly pointed out by the learned Departmental Representative, the aggregate of the returned/assessed loss of the assessee-company has been reduced to a lesser amount only because of the intervention of a positive undisclosed income.
14. Wherever an amount of undisclosed income is determined under the provisions of Section 158BB, that undisclosed income shall always be a positive figure. It may increase the aggregate income of the assessee or reduce the aggregate loss of the assessee. That part of final result is not relevant for the recognition of undisclosed income and the levy of tax thereon. The moment of undisclosed income is determined in a block assessment, it attracts the levy of tax prescribed under Section 15. Accordingly, the contentions of the assessee-company fail. The AO is right in law in levying the tax on the undisclosed income determined in the impugned block assessment. The assessment is accordingly confirmed 1. As we differ in opinion, after due deliberation on the point in adjudication in this appeal, we refer the matter to the Hon'ble President, Tribunal, under Section 255(4) of the IT Act, 1961, for nominating a Third Member to resolve the following points of difference : "Whether, on the facts and circumstances of the case, the AO is correct in treating the current year's unabsorbed depreciation as loss' for the purpose of computation of undisclosed income under Section 158BB of the IT Act, 1961?" (2) "Whether block assessment can be framed where 'aggregated total income (including undisclosed income) determined under Section 158BC for each assessment years and assessed/returned income is loss and whether tax under Section 113 can be charged on the difference between the loss determined under Section 158BC for each assessment year and loss assessed for each year under Section 143(3} or returned by the assessee where assessment is not completed?" (3) "Whether unabsorbed depreciation which cannot be absorbed for want of profit while framing the regular assessment under Section 143(3) for the asst. yrs. 1991-92 and 1995-96, can be considered and allowed deduction out of the income for the relevant years i.e., 1991-92 and 1995-96 while computing the income for the block period consisting of 10 years under Section 158BC of the Act?" 1. As we differ in opinion, after due deliberation on the point in adjudication in this appeal, we refer the matter to the Hon'ble President, Tribunal, under Section 255(4) of the IT Act, 1961, for nominating a Third Member to resolve the following points of difference- 1. "Whether, on the facts and in the circumstances of the case and in the light of the provisions contained in Expln. (a) to Sub-section (1) and Sub-section (4) of Section 158BB of the IT Act, 1961, the unabsorbed depreciation designated as 'current depreciation' under Section 32(2) of the IT Act, 1961, is available for set off against the undisclosed income determined in a block assessment".
2. "Whether on the facts and in the circumstances of the case and in the light of the provisions contained in Explanation to Sub-section (2) of Section 1583A of the IT Act, 1961, it is necessary that the aggregate income computed in a block assessment should be a positive income, so as to attract levy of tax under Section 113 of the IT Act, 1961, on the amount of undisclosed income determined in that block assessment." 1. As there was a difference of opinion between the learned Vice President and the learned AM, the Hon'ble President of the ITAT referred the matter to me under the provisions of Section 255(4) of the IT Act as Third Member. Apparently, there was no agreement between the two learned Members even on the points of difference. 2. The questions framed by the learned Vice President (JM) read as follows : "(1) Whether, on the facts and circumstances of the case, the AO is correct in treating the current year's unabsorbed depreciation as loss' for the purpose of computation of undisclosed income under Section 158BB of the IT Act, 1961 (2) Whether block assessment can be framed where aggregated total income (including undisclosed income) determined under Section 158BC for each assessment years and assessed/returned income is loss and whether tax under Section 113 can be charged on the difference between the loss determined under Section 158BC for each assessment year and loss assessed for each year under Section 143(3) or returned by the assessee where assessment is not completed? (3) Whether unabsorbed depreciation which cannot be absorbed for want to profit while framing the regular assessment under Section 143(3) for the asst. yrs. 1991-92 and 1995-96, can be considered and allowed deduction out of the income for the relevant year i.e.
1991-92 and 1995-96 while computing the income for the block period consisting of 10 years under Section 158BC of the Act ?" "(1) Whether, on the facts and in the circumstances of the case and in the light of the provisions contained in Expln. (a) to Sub-section (1) and Sub-section (4) of Section 158BB of the IT Act, 1961 the unabsorbed depreciation designated as 'current depreciation' under Section 32(2) of the IT Act, 1961, is available for set off against the undisclosed income determined in a block assessment.
(2) Whether, on the facts and in the circumstances of the case and in the light of the provisions contained in Explanation to Sub-section (2) of Section 158BA of the IT Act, 1961, it is necessary that the aggregate income computed in a block assessment should be a positive income, so as to attract levy of tax under Section 113 of the IT Act, 1961, on the amount of undisclosed income determined in that block assessment." 4. The assessee-company is engaged in the business of manufacturing PVC leather cloth and PVC film. A search was conducted at the business premises of the assessee-company and the residences of its directors and company executive on 8th Oct., 1996 and in the course of the search, certain incriminating documents, mainly by way of a diary, was seized from the premises of Shri H. Raviraj, company executive and nephew of the Chairman and Managing Director of the assessee-company.
In the course of the search itself, the assessee-cornpany was confronted with the contents of the diary and the assessee made a disclosure under Section 132{4) of Rs. 2,13,25,000, as per the following details : In the block return filed by the assessee-cornpany in response to the notice under Section 158BC of the IT Act, the assessee-company disclosed an income of Rs. 76,17,864 as per the following details : Unaccounted investment in promoter's quota shares of Haridas family for the asst. yr. 1995-96 Cash credits in the books of account of sister companies in the asst.
yr. 1991-92 The assessee-company, however, set off the above mentioned undisclosed income against the business loss/unabsorbed depreciation of each year and accordingly worked out the undisclosed income at a nil figure and thus filed the block return showing the undisclosed income only at a nil figure. The year-wise details furnished by the assessee-company in the block return read as follows : It may be observed from the above statement that the assessee-company has shown the undisclosed income at nil even though there are variations between the figures shown in columns E and F on the one hand and B and C on the other hand in the table. Columns E and F relate to business loss and depreciation as per the regular returns and as per the assessment orders, whereas columns B and C relate to business loss and depreciation after taking into account the undisclosed incomes. The undisclosed 'income of Rs. 76,17,864 mentioned heremabove is reflected in the above table as follows : It may be observed that the assessee-company has not disclosed the above undisclosed income of Rs. 76,17,864, notwithstanding the fact that there is a reduction in business loss and unabsorbed depreciation to the tune of Rs. 76,17,864. On the other hand, it adjusted the said undisclosed income of Rs. 76,17,864 against business loss and depreciation of each year and worked out the undisclosed income at a nil figure.
5. Before me, the learned Departmental Representative claimed that the assessee-company should have returned the undisclosed income at Rs. 76,17,864 even on the basis of the figures adopted by it in the block return. It is claimed that as per the mode of computation of the undisclosed income required to be done in Part-II and Part-in in Form No. 2B, the assessee should have reflected the undisclosed income of Rs. 76,17,864 as per the following table : 6. I have referred to the above table given by the learned Departmental Representative at this stage only to bring out the difference between the modes of working out the undisclosed income adopted by the assessee and that held by the Department to be the correct method.
7. The AO, however, made certain additions to the undisclosed income and computed it at Rs. 1,46,02,756 as against the admitted figure of Rs. 76,17,864 adopted by the assessee. There is no dispute between the two learned Members about the computation of the undisclosed income of Rs. 1,46,02.756. The only dispute is how to compute the undisclosed income for taxing it under the provisions of Section 113 of the IT Act when the business loss and unabsorbed depreciation of each assessment year included in the block period is more than the undisclosed income arrived at for each of the years. It is the contention of the assessee that as the business loss and depreciation for each of the concerned years included in the block period is more than the undisclosed income, the Undisclosed income for the block period has to be determined at a nil figure and so there is no income that can be brought to tax under the provisions of Section 113. The learned JM has agreed with the stand of the assessee. The stand of the Department is that even if there is an aggregate loss for the entire block period, if such loss happens to be less than the aggregate of the losses assessed/returned in the regular returns, as there is a net reduction in the loss disclosed consequent to the search action, such reduction in the loss has to be treated as the undisclosed income of the block period and should be brought to tax under the provisions of Section 113 of the Act. The learned AM has upheld this stand. This, in short, is the dispute raised in this reference even though it has further ramifications which shall be discussed hereinafter.
8. The claim of the assessee before the AO has been that when the net result of the computation of income for any assessment year resulted in unabsorbed depreciation for the year and there is no business loss of the year, the total income of the year has to be determined at a nil figure and the unabsorbed depreciation has to be carried forward to subsequent years. By this method, the assessee set off the unabsorbed depreciation of each year against the undisclosed income of that year and arrived at nil income for that year and thus worked out the aggregate of the undisclosed income for all the years at a nil figure.
The stand of the AO has been that, when there is only unabsorbed depreciation and there is no business loss for that year, such unabsorbed depreciation itself has to be taken as loss in terms of the requirements of Part-II and Part-III of the block return in Form No. 2B for working out the undisclosed income for the entire block period. In support of this view, the AO relied upon the decision of the apex Court in the case of Garden Silk Wvg. Factory v. CIT (1991) 189 ITR 512 (SC), wherein it was held that depreciation is a species of the genus of business loss even though the two are treated differently for the purpose of carry forward and set off in subsequent years. The learned JM did not agree with the stand of the AO. He mentioned in para 2 at p.
4 of his order that the AO treated the unabsorbed depreciation of the year as business loss and the consequence of this treatment is the transformation of the character of unabsorbed depreciation into business loss and "the addition of undisclosed income became a simple matter of overstatement of business losses to the extent of undisclosed income".
He decided the issue, in para 8 at pp. 10 and 11 of his order, in favour of the assessee and his remarks are as follows : "8. The main point for consideration is whether the assessee's computation of income at 'nil' for the purpose of regular assessment as well as under Section 158BB is correct. The assessee's case is that if the current year's depreciation exceeds the business income as computed, the allowance of depreciation for that year would be only equal to the business profits. A reading of Sections 32(2), 72(2) and 72(3) of the Act would go to show that if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two--one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. It, therefore, follows that the part which is deemed to be the allowance of the following previous year cannot, at the same time, represent the allowance of the current assessment year. The view that the balance of the current year's depreciation would continue to be the allowance relatable to the current assessment year, goes against the statutory provisions. Therefore, in. case of inadequate business profits, the current year's depreciation is admissible only to the extent of availability of business profits and the result would be the business profit would be reduced to 'nil'. Accordingly, there would be neither profit (because the available current year's depreciation has been adjusted against the total current year's business profits) nor loss (because the balance of the current year's depreciation ceases to be the allowance of the current year and becomes, consequent to the deeming provision in Section 32(2), the allowance of the following previous year). This view of ours is strengthened by the decision of the Supreme Court in the case of Garden Silk Wvg. Factory v. CIT (supra) and that of the Bombay High Court in the case of CIT v. Ravi Industries Ltd. (1963) 49 ITR 145 (Bom). However, the AO has relied on the above cited decision of the Supreme Court, stating that depreciation loss and business loss are the same. The AO has misread the said decision and quoted it out of context. In this connection, the observations of the Andhra Pradesh High Court in the case of V.V. Trans-Investments (P) Ltd. v. CIT (1994) 207 ITR 508 (AP), which are extracted below, are also relevant: '....the finding of the Special Bench that loss includes unabsorbed depreciation was contrary to the provisions of the IT Act. The reliance placed by the Special Bench on the observations of the Supreme Court in Garden Silk Wvg. Factory v. CIT (1991) 189 ITR 512 (SC) is misplaced'.
We are unable to accept the contention of the learned Departmental Representative on this point, since the requirement in Part-III of Form 2B supports the assessee's contention that unabsorbed depreciation cannot form part of the figures shown in the various columns. We, therefore, accept the contention that the computation of income at 'nil' in those years where the depreciation admissible for the current year exceeds the business profits of the year.
Therefore, for the asst. yrs. 1994-95 and 1995-96 the income under Section 158BB as well as income as per regular assessments would be 'nil'." The learned JM also explained that the above view taken by him need not necessarily result in escapement of undisclosed income from being taxed inasmuch as the carried forward depreciation to the subsequent years would get reduced and the consequences of concealment is felt in subsequent assessment years. So for the asst. yrs. 1994-95 and 1995-96, the learned JM went by the criterion of Section 32(2) of the Act prohibiting the set off of only unabsorbed depreciation of earlier years against undisclosed income and it did not raise any bar against the set off of unabsorbed depreciation of the current year against the undisclosed income. For the asst. yrs. 1991-92, 1996-97 and 1997-98, the learned JM observed that there were no positive incomes for these years even after the inclusion of undisclosed income and when there is no positive income for any year or in the aggregate for the block period, there cannot be any undisclosed income to be brought to tax under Section 113. The relevant observations of the learned JM are contained in paras 11 and 12 at p. 13 of his order and they read as follows : "11. After considering the rival submissions of the parties as well as the relevant provisions of the Act, we are of the view that the computation of concealed income under Section 158BB envisages a positive figure of assessment on the basis of the search materials.
Therefore, it is to be seen whether such a positive figure is shown in the assessment order. We find that the total aggregate income is a loss of Rs. 11,13,75,788. This does not satisfy the provisions of the section enabling one to compute the undisclosed income strictly in accordance with the provisions of the Act.
12. We have also looked into the authorities wherein it has been held that for certain purposes income would include loss also. Those cases pertain to the concept of 'income' which is different from 'total income', which is the phrase requiring interpretation here.
Further, the meaning has to be ascertained from the context in which the expression appears. As pointed out earlier, the legislature clearly envisages an aggregation of losses computed under Section 143. In such cases, it has been provided that undisclosed income would be the total income under Section 158BB as 'increased' by the losses under Section 143. Hence, it would be difficult to hold that envisaging losses under Section 158BB was a mere omission. The intention seems to be only to levy taxes on those who have positive income which was unearthed by search. If the aggregate under Section 158BB is a loss, prima facie, a loss cannot attract tax. That may be the reason why the legislature left out of the purview of Section 158BB cases like that of the assessee where the aggregation results in a loss." 9. The learned AM on the other hand was of the view that the unabsorbed depreciation of any year is part of loss and for this proposition, he relied, as was done by the AO, upon the decision of the apex Court in the case of Garden Silk Wvg. Factory (supra) and also the decision of the apex Court in the case of V. V. Trans-Investments (P.) Ltd. (supra). He also relied upon Clause (a) of Explanation to Section 158BB and held that in view of these provisions, the brought forward losses and unabsorbed depreciation will be given set off only while making regular assessments and they have to be ignored while computing the undisclosed income of the block period. He accordingly rejected the plea of the assessee-company for the adjustment of the current depreciation under Section 32(2) against the undisclosed income of the concerned assessment year. He also observed that in terms of the columns prescribed in Form 2B of the block return in Part-II and Part-III thereof, a reduction in loss has to be categorised as undisclosed income. His comments in this regard are in paras 13 arid 14 and p. 21 of his order, and they are as follows : "13. Undisclosed income when aggregated to the income assessed in the regular assessments, the ultimate income of the assessee may increase or the accumulated loss may reduce. This is an accounting concept. But this concept is not applicable to the case of taxation of undisclosed income as it cannot be merged with 'disclosed income'; the income or loss considered in the regular assessments.
The basis of the assessee's contention of positive income is the integration of 'undisclosed income' with 'disclosed income', which is not permitted in the scheme of Chapter XIV-B. This position is clear from the computation format of undisclosed income provided in Part-II of Form 2B return. Column B and column D therein relate to case of losses. Column B is for losses including undisclosed income and column D is for losses returned/ assessed. For the computation of undisclosed income, column D is always bigger than column B, whereby the formula (D)-(B) invariably brings out a positive figure of undisclosed income. As rightly pointed out by the learned Departmental Representative, the aggregate of the returned/assessed loss of the assessee-company has been reduced to a lesser amount only because of the intervention of a positive undisclosed income.
14. Wherever an amount of undisclosed income is determined under the provisions of Section 158BB, that undisclosed income shall always be a positive figure. It may increase the aggregate income of the assessee or reduce the aggregate loss of the assessee. That part of final result is not relevant for the recognition of undisclosed income and the levy of tax thereon. The moment undisclosed income is determined in a block assessment, it attracts the levy of tax prescribed under Section 113...." The learned AM also referred to Explanation in Sub-section (2) of Section 158BA, which has been inserted retrospectively, to make clear the insulation of the undisclosed income from income assessed in the regular assessments.
10. For the above reasons, the learned AM held that as the aggregate losses (inclusive of unabsorbed depreciation of each year) are less than the aggregate losses as per the regular assessments, there is a positive undisclosed income as worked out by the AO and accordingly, the determination of the undisclosed income at Rs. 1,46,02,756 as done by the AO was upheld by him.
11. Before me, the learned counsel for the assessee, at the outset, pleaded that the conclusions arrived at by the learned JM in favour of.
the assessee can be defended even by a reasoning different from that adopted by him and in support of this proposition, he relied upon the decision of the Tribunal in the case of Ajay Gupta v. Asstt. CIT (1999) 65 TTJ (Chd)(TM) 155 : (1999) 240 ITR 78 (Chd)(AT). He confirmed that there was no dispute about the computation of the undisclosed income at Rs. 1,46,02,756. He, however, claimed that Part-n of the block return (Form 2B) is not in consonance with the Act inasmuch as it contemplates a situation where the greater loss should be reduced by the lower loss and the balance is taxed. It is claimed that this is not the intention of the legislature and the return form and the rules cannot override the statutory provisions. In this context, reliance is placed upon the ratio of the decision of the Tribunal in the case of Owners & Pressers Ltd. v. Dy. CIT (1993) 47 TTJ (Bom) 393 : (1993) 46 ITD 185 (Bom)(SMC) wherein interpreting the provisions of Section 272A(2)(c) it was held that the time-limit for furnishing annual returns prescribed under Rule 37 of the IT Rules was in excess of the power of rule-making authority and, therefore, it has to be ignored. In other words, it is claimed that the computation of the undisclosed income filed by the assessee in the block return is in consonance with law, though it may not be in consonance with the format of the block return in Form 2B.12. The next limb of the contention of the learned counsel for the assessee is that Clause (a) of Expln. to Section 158BB prohibited the set off of only the carried forward unabsorbed depreciation of the earlier years against the undisclosed income inasmuch as it referred to the set off of unabsorbed depreciation under Sub-section (2) of Section 32 and the said clause in noway prohibited the set off of the depreciation of the current year against the undisclosed income inasmuch as there is no reference to the provisions of Section 32(1) in the said clause. It is claimed that if the current year's depreciation is not to be set off, the legislature would specifically have mentioned that such a set off of current depreciation is not permissible. On the other hand, the provision specifically refers to Section 32(2) but omits any reference to Section 32(1). The provision further stipulates that the undisclosed income has to be computed in accordance with the provisions of Chapter IV, but the prohibition is only against the set off of unabsorbed depreciation under Section 32(2) and not set off of current depreciation under Section 32(1). It is also claimed that even Sub-section (4) of Section 158BB, which refers to the block assessment as a whole, also talks of only set off of unabsorbed depreciation under Section 32(2) and it in noway refers to the deduction of depreciation under Section 32(1). In this context, the learned counsel for the assessee has also relied upon the decision of the apex Court in the case of Garden Silk Wvg. Factory (supra) and mentioned that depreciation is a notional expenditure and should be setoff against all income, and that in this case the apex Court held that in the case of the depreciation allowable in the hands of the registered firm, the unabsorbed depreciation can be apportioned to the partners and can be allowed even in their hands against their personal income. In the light of the ratio of this decision of the apex Court, it is pleaded that depreciation can travel beyond the boundaries of the assessed incomes as per regular returns and can be adjusted even against the undisclosed income worked out on the basis of the block return. It is pleaded that in the absence of any prohibition like that in respect of the set off of unabsorbed depreciation under the provisions of Section 32(2), the deduction for current depreciation of each year comprised in the block period against the undisclosed income of that year has to be allowed in the light of the ratio of the decision of the apex Court in the case of Garden Silk Wvg. Factory (supra)'. Referring to the provisions of the Expln to Section 158BA inserted with retrospective effect from 1st July, 1995 by the Finance (No. 2) Act, 1998, it is claimed that this is only a protection to the assessee inasmuch as it prohibits the inclusion of the assessed income as per the regular returns in the undisclosed income worked out on the basis of the block return and vice versa, and this Explanation cannot deprive the assessee of the rightful claim in the form of deduction for depreciation available to it under Chapter IV as per the provisions of which chapter the undisclosed income has to be computed under the provisions of Clause (a) of Expln to Section 158BB. In other words, it is claimed that the learned JM was correct when he held that current year's depreciation is available for being set off against the undisclosed income and while granting such deduction, the provisions of Section 32(2) do not come into play and only the provisions of Section 32{1) are involved. It is also claimed that as in the present case the depreciation can be absorbed against the undisclosed income, the business loss, exclusive of depreciation, determined in regular assessment will remain unchanged.
13. The next limb of the argument of the learned counsel for the assessee is that the scheme of the Chapter XIV-B is such that there cannot be a tax on aggregate loss or on a simple reduction of loss. It is claimed that what is to be assessed is the undisclosed income and assessment cannot be of reduced loss. In other words, it is claimed that the assessee cannot be taxed, as held by the learned JM, unless there is aggregate income for being taxed.
14. Finally, it is also mentioned in the written submissions of the assessee that if the method adopted by the AO to bring the reduction in the loss as undisclosed income consequent to the completion of the block assessment for the block period is approved, it would in some cases result in an anomalous situation inasmuch as an assessee who had filed regular returns and was assessed on losses in those assessments would be assessed on higher undisclosed income than somebody who did not file such loss returns and consequently was not assessed at all on any losses. In the former case, the undisclosed income would be higher because of the earlier losses and in the latter case there is no such increase, as no losses were assessed in the regular assessments.
15. The learned Departmental Representative, on the other hand, relied mainly on the format of the prescribed block return in Form 2B, and particularly Parts n and in thereof. He invited our attention to the columns of Part n of Form 2B and has also filled the said Part n with the figures computed by the AO in the block assessment order. The said Part n as filled up by the learned Departmental Representative with the computed figures (not the figures returned by the assessee-company) reads as follows : 4. Compute the total income without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Section 32(2) in excess of whatever has been allowed for determining the total income returned/assessed.
5. Give the details in respect of the previous year on the basis of assessment order if the assessment/prima facie adjustment has been completed. Else, give the details on the basis of return of income filed. For the previous year which has not ended or for which the date of filing of the return under Section 139(1) has not expired and you are in a position to prove to the satisfaction of the AO that such income or the transactions relating to such income have been recorded in the books of account and documents maintained in the normal course, such income is to be indicated against the previous year. For any year, if the return has not been furnished for the reason that the total income was not above the maximum amount not chargeable to tax, the total income is to be mentioned against that previous year.
6. Losses of the year remaining unadjusted after set off under Chapter VI." It may be noted that the undisclosed income is computed by the AO at Hs. 1,46,02,752 as against the undisclosed income returned by the assessee in the block return of Rs. 76,17,864. As per the computation given by the learned Departmental Representative before me, the year wise details of the undisclosed income are as follows : The correctness of the above figures is not disputed before me or even before the two Members who heard this appeal earlier. The above figures can be tallied as follows : 16. The main plank of the argument of the learned Departmental Representative has been that Part II of Form 2B, while it provides for yearwise losses either as assessed/returned earlier or as worked out after taking into account the undisclosed income, does not have a column for depreciation and so necessarily the losses reflected in Part II in columns D and B are inclusive of the current depreciation of the relevant years. So it is claimed that the mode of computation of the undisclosed income adopted by the assessee, as indicated by me hereinabove, taking into account business loss and depreciation separately, is not correct and is against the scheme of Chapter XIV-B of the IT Act. It is also pleaded that when undisclosed income is located and brought to tax, it may result in either an enhancement of incomes already assessed or it may result in a reduction of losses computed in the regular assessments. Either way, there is an undisclosed income, which is a positive figure and has necessarily to be brought to tax. It is also pleaded that the figures in columns C and D, which are as per the returned/assessed incomes, are constants and cannot be tampered with. The figures in columns A and B in Part II have to be worked out after taking into account the undisclosed income of each year and they are inclusive of the figures already assessed/returned which are separately reflected in columns E and D.Columns A and C relate to positive figures and columns B and E relate to negative figures. In terms of Section 158BB, the incomes of the previous years falling within the block period have to be computed 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 is available with the AO and the aggregate of the total income of all the previous years is also to be worked out. From such aggregate of the total income of the previous years falling in the block period, the aggregate of the total income of the same previous years on the basis of the assessed/returned incomes has to be reduced as mentioned in Clauses (a) to (f) of Section 158BB. It is pleaded that by this method, the reduction in the aggregate loss has also to be considered as undisclosed income along with any enhancement in positive incomes.
Adverting to the contention of the learned counsel for the assessee that Clause (a) of Expln. to Section 158BB does not prohibit the set off of current depreciation against the undisclosed income while it prohibits such set off of the unabsorbed depreciation of the earlier years, the learned Departmental Representative mentioned that the mode of computation adopted by the AO does allow such set off of current depreciation in the computation of yearwise figures taken into account in columns A and B of the above statement. It is also refuted that the prescribed return form for block assessment, i.e., Form No. 2B, is not in conformity with the statute. It is claimed that the return form is very much in consonance with the provisions of Chapter XIV-B of the IT Act. The learned Departmental Representative also pleaded that in terms of the scheme of the IT Act, even penalty under Section 271(l)(c) can be levied for overstatement of loss, as held by the Hon'ble Kerala High Court in the case of CIT v. Rowther Brother (1979) 119 ITR 353 (Ker) and also by the Hyderabad Bench of the Tribunal in the case of Lakshmi Cotton Traders (supra), referred to by the learned JM in p. 9 of his order, and as such there is no reason to hold that overstatement of loss in the regular returns or reduction of loss consequent to block assessment cannot be brought to tax as undisclosed income in terms of Chapter XIV-B of the IT Act. It is also claimed that Part II and Part in of the block return clearly provide that the difference between the assessed/returned incomes and the incomes brought to tax in the block assessment, though a loss in the aggregate, has to be brought to tax as undisclosed income. As already mentioned, it is also claimed by the learned Departmental Representative that depreciation is part of the business loss for the purpose of reflecting the figures in Part n of the block return as no separate column is provided for depreciation. It is also claimed that even in terms of normal commercial practice, depreciation has to be regarded as part of business loss, as held by the apex Court in the case of Garden Silk Wvg. Factory (supra) and also the decision of the apex Court in the case of V.V. Trans-Investments (P) Ltd. (supra).
17. In the rejoinder, the learned counsel for the assessee wondered how an assessee can be asked to pay tax on the so-called undisclosed income of Rs. 1,46,02,752 when the total loss for the block period has been computed at Rs. 11,67,05,185. According to the learned counsel for the ' assessee, it is a travesty of justice and the Act does not contemplate a situation like that. He once again reiterated that Clause (a) of Explanation to Section 158BB stipulates that the total income for the block period has to be computed in accordance with the provisions of Chapter IV and as current depreciation is an allowance to be granted in terms of Chapter IV, there is no reason for not giving set off for the current depreciation against the undisclosed income. In other words, it is pleaded that as the aggregate losses exceed the undisclosed income, there is no income taxable under Section 113 of the IT Act.
18. I find I have to agree with the learned AM, though I do not entirely subscribe to some of his observations. The admitted fact is that the assessee has disclosed additional income of Rs. 76,17,864 in the block return filed by it. This additional income has been enhanced by the AO to a figure of Rs. 1,46,02,752. It bears repetition that there is no dispute between the two learned Members who heard the appeal on the question whether the additional income of Rs. 1,46,02,762 has been correctly computed. The only dispute is whether in view of the fact that there is an aggregate loss of Rs. 11,67,05,185 for the block period as computed by the AO (without taking into consideration the aggregate income for the same period of Rs. 53,29,397) as evident from the table furnished before me by the learned. Departmental Representative on the basis of the computed figures in the block assessment order and extracted by me hereinabove, the undisclosed income can be computed at a figure of Rs. 1,46,02,752 as done by the AO.18(a). To understand the issue raised in this reference, it is worthwhile to look at some of the relevant provisions of Chapter XIV-B of the Income- tax Act. The purpose of this Chapter is to lay down a special procedure for assessment of search cases with a view to combat tax evasion and also to expedite and simplify assessments in search cases. The purpose of the Chapter was explained by the Finance Minister in his Budget Speech for 1995-96 in the following words : "The searches conducted by the IT Department are an important means of unearthing black money. However, undisclosed incomes have to be related to the different years in which income was earned and as such assessments are unduly delayed. In order to make the procedure more effective, I am proposing a new scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent." It was mentioned in the Memorandum explaining the provisions of Chapter XIV-B that the intention was "to make the procedure of assessment of search cases cost-effective, efficient and meaningful". The learned author, D.M. Harish, has explained the essence of the new procedure in the following terms: "The essence of the new procedure, therefore, is a separate single assessment of the undisclosed income, detected as a result of a search and this separate assessment will be in addition to the normal or regular assessments covering the same period. A separate return covering the years of the block period is an obvious prerequisite for making a 'block assessment'. Since the assessment to be made under the new procedure is of 'undisclosed income' of the 'block period', these two concepts require an Explanation. Sec. 158B defines the two concepts of 'block period' and 'undisclosed income." [D.M. Harish on Income-tax, p. 7403, Volume 6, First Edition] Clause (a) of Explanation to Section 158BB which has figured very prominently in the orders of both the learned JM and the learned AM reads as follows : "The total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32;" Sub-s. (4) of Section 158BB which has also figured prominently in the orders of the two learned Members who have heard this appeal earlier, reads as follows : "For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments." Explanation to Section 158BA which has been inserted by the Finance (No. 2) Act, 1998, with retrospective effect from 1st July, 1995 reads as follows : "Explanation : For the removal of doubts, it is hereby declared that- (a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period; (b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period; (c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period." Sec. 158B which defines - "block period" and "undisclosed income" reads as follows : "(a) 'block period' means the previous years relevant to ten assessment years preceding the previous year in which the search was conducted under Section 132 or any requisition was made under Section 132A, and includes, in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition; (b) 'undisclosed income' 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." The substance of the new procedure for computing the undisclosed income for the block period has to be ascertained from the conspectus of the above and other related provisions. It may be noticed that under the provisions of Section 158BB, the total income of the previous years falling within the block period has to be computed in accordance with the provisions of Chapter IV on the basis of search material and all other material available with the AO which includes the returns filed by the assessee, if any, and the assessments already made, if any, and the aggregate of the total income of the previous years falling within the block period so computed in accordance with the provisions of Chapter IV has to be worked out. It may be observed that the words "total income" has been defined in Section 2(45) of the IT Act and it reads as follows : '"total income' means the total amount of income referred to in Section 5, computed in the manner laid down in this Act;" As the total income has to be computed as per the provisions of the Act, it is evident that it need not always necessarily be a positive figure. The total income can even be a negative figure. For this proposition, reference may be made to the decision of the Hon'ble Bombay High Court in the case of CIT v. Mercantile Bank Ltd. (1988) 169 ITR 44 (Bom) in which considering the provisions of Section 80A(2) relating to deductions to be made under Chapter VI-A, the Hon'ble High Court held that the said deductions can be allowed only if the gross total income which is defined in Section 80B(5) as total income before making any deductions under Chapter VI-A is a positive income. In other words, conceptually, gross total income or total income can be a loss.
Expln. 2 to Section 64 mentions that for the purposes of the said section, income includes loss. So it is evident that in terms of the scheme of the IT Act, total income of a particular year can be a negative figure and so the aggregate of the total incomes of all the previous years included in the block period can also be a negative figure. Under the provisions of Section 158BB, the first aggregate to be computed is the total income of the previous years falling within the block period which includes returned/assessed incomes as per regular returns and regular assessments. The second aggregate to be worked out is the aggregate of the total incomes/losses of the previous years determined as per Clauses (a) to (f) of Section 158BB(1). In other words, this is the aggregate of the returned/assessed incomes/losses as per regular returns and regular assessments. The difference between the first aggregate and the second aggregate has to be worked out and that difference is described in Section 158B(b) as the 'undisclosed income' to be taxed under the provisions of Section 113 of the Act at the special rates prescribed. In other words, while Section 158B(b) defines "undisclosed income", the mode of quantification of the undisclosed income is laid down in Section 158BB(1). The essence of the mode of quantification of the undisclosed income is by working out the difference between the two aggregates mentioned hereinabove. When the aggregate of the total income of the relevant previous years as per the block return is a positive figure and the aggregate of the total incomes as per the relevant regular returns and assessments is also a positive figure, the difference computed in terms of Section 158BB(1) would also be a positive figure.
There can be other situations where either the first aggregate mentioned above or the second aggregate mentioned above, or both, can be negative figures. Whether the relevant figures are positive or negative, the mode of quantification is only by working out the difference. The mode of working out the difference may be illustrated as follows : In situation (1) above, the difference is between two positive figures.
In situation (2) above, the difference is between a positive figure and a negative figure, and so the positive figure is increased by the negative figure, i.e., losses as per the regular returns/assessments as stipulated Section 158BB. In the third situation above, the difference is only between two negative figures, and the first negative figure is less than the second negative figure and the difference is only 5,00,000. Normally, the situation visualised at (4) above should not arise, because the undisclosed income on the basis of search material should only go to reduce the returned/assessed losses and cannot result in enhancement of the losses. In a hypothetical situation, the search material may disclose some undisclosed income for some years but the material may also throw up losses which were not recorded in the regular books and so the possibility of the situation at (4) above cannot entirely be ruled out. However, for the purpose of the present reference, one need not go into the theoretical possibility of situation (4) above. The assessee does not dispute the computation of the undisclosed income at Rs. 5,00,000 and Rs. 25,00,000 at situations (1) and (2) above. The dispute is only about the computation of the difference of the undisclosed income at Rs. 5,00,000 in situation (3) above. Firstly, it is contended that as the net result of the aggregation is only a loss, the working of the undisclosed income at Rs. 5,00,000 in the above example is not justified. I do not agree with this contention because, as already mentioned, the total income can be a negative figure, and as pleaded by the learned Departmental Representative, the Act does not rule out the levy of penalty for concealment even for understatement of loss in a return. The decision of the Hon'ble Kerala High Court in the case of CIT v. Rowther Brothers (supra) is an authority for this proposition. At any rate, the wordings in Section 158BB are that the aggregate of the total incomes of the previous years computed as per the block return has to be reduced or increased, as the case may be, by the aggregate of the total incomes of the previous years determined as per Clauses (a) to (f) of Section 158BB(1). The decrease is in case the aggregate of the incomes returned/assessed as per regular returns and regular assessments is a positive figure and the increase happens when the said aggregate is a loss or a negative figure. The words "as increased by the aggregate of the losses of such previous years" figuring in Section 158BB(1) invariably result in this mode of quantification. The statutorily stipulated mode of quantification cannot be ignored. In the undated written submissions filed by the learned counsel for the assessee before me, it is pleaded that the computation of the undisclosed income in the present case on the basis of the reasoning adopted by the AO would result in an absurd figure of Rs. 23,73,54,328. The relevant portion of the written submissions reads as follows : "In the instant case, the assessee has computed the total income for each of the previous years as per the provisions of the Act.
However, each of the previous years losses and depreciation were enough to neutralize the addition of undisclosed income. Thereby the total income of the respective years has remained negative.
Therefore, in view of the heavy losses incurred by the assessee in some of the previous years the aggregate total income of all the previous years is turned into negative. Further for deriving the undisclosed income the aggregate total income computed as per the Section 158BB(1), shall be increased by the income/losses assessed or returned income/losses. The result of it in the instant case is as under: Total aggregate income including undisclosed income as per computation under s, 158BB(1) Add : Total assessed income losses (as per s. 158BB(l)(a) to (f)) From the above it may be observed that while giving effect to the provisions of the Act, in toto, there was negative undisclosed income. When you increase the negative aggregate total income by aggregate total losses which is also a negative figure, obviously, the net figure would be a negative undisclosed income which cannot be taxed. But the AO while increasing the negative aggregate total income with the assessed aggregate total loss, had converted negative total losses into positive total losses, which is incorrect." It may be observed that the above two figures are culled from the table of computed figures on the basis of the block assessment order given by the Departmental Representative and extracted by me at p. 17 of this order hereinabove. Rs. 11,13,75,788 is the difference between columns B and A in the above table and Rs. 12,59,78,540 is the difference between columns D and C in the same table. It may be observed that if Rs. 12,59,78,540 is taken as a positive figure, the difference between the two figures would work out to Rs. 1,46,02,752, which is the undisclosed income determined by the AO. In other words, the illustration given by the learned counsel for the assessee only proves the confusion arising from transcribing the language of the statute into mathematical symbols. I see no merit in the above contention. The correct way of working out the undisclosed income in the present case is as follows :Aggregate total income as per the block return (-) Rs. 11,13,75,788Add: Aggregate total income as returned/assessed Rs. 12,59,78,540Difference or undisclosed income _____________________ Rs. 1,46,02,752 It is also made out in the written submissions that on the basis of the method adopted by the AO, an assessee who had not filed any returns for some of the years in the block period and so was not assessed on any negative figure stands to gain compared to somebody who complied with the statutory provisions, filed the returns and was assessed on losses.
He gave a hypothetical illustration in Annexure-III of his written submissions, which reads as follows : The figures given in the above table are the same as those reproduced by me hereinabove as having been given by the learned Departmental Representative on the basis of the block assessment order. Actually, the assessee itself gave those figures as Annexure-II to the written submissions filed before me. The only difference between the two sets of figures is that the loss of Rs. 3,28,71,054 for the asst. yr.
1994-95 in column D and the loss of Rs. 1,28,04,522 for the asst. yr.
1995-96 in column D have been omitted in the said Annexure-III. In the light of the said figures in Annexure-III, it is pleaded that if the assessee had not submitted the returns for the asst. yrs. 1994-95 and 1995-96, the undisclosed income would have been a loss as per the method adopted by the Department and only because the assessee had filed the returns for these two years and was assessed on losses, it should not be penalised. It may be observed that the assessee had worked out a hypothetical example where the aggregate of the losses in column D is less than the aggregate of the losses in column B of Annexure-III above. Such a situation, as I have mentioned hereinabove, should not normally arise. Even if it arises because of certain possibilities resulting from the scrutiny of the search material, I see no particular absurdity in the results obtained. It only means that an assessee who had actually incurred a loss of Rs. 3,08,53,238 for the asst. yr. 1994-95 and Rs. 17,47,691 for the asst. yr. 1995-96 had not cared to claim the benefit of getting the losses determined with a view to getting them carried forward and such losses came to the fore only consequent to the search. A search normally results only in undisclosed incomes but there can hypothetically be cases where it can result in undisclosed losses. If there is an understatement of income or overstatement of losses in the regular returns and regular assessments as per the mode of computation stipulated in Section 158BB(1), there is an undisclosed income which is always a positive figure. If, on the other hand, the completion of the block assessment results in not so usual but not an impossible situation that the assessee had only understated his losses or overstated his income, there can be no undisclosed income as per the provisions of Section 158BB. There is no logical absurdity in the mode of computation prescribed in Section 158BB(1). The AO has only followed the mode of computation prescribed in Section 158BB(1) and so there is no reason not to tax the income in question of Rs. 1,46,02,752 under the provisions of Section 113.
19. The main plank of the order of the learned JM and also the argument of the learned counsel before me is that Clause (a) of Expln. to Section 158BB(1) prohibits the set off of brought forward losses from earlier years and of unabsorbed depreciation under Section 32(2) but there is no prohibition against the set off of current depreciation which has remained unabsorbed in the regular returns and so is carried forward in regular assessments. The provisions of Section 32(2) read as follows : "Where in the assessment of the assessee full effect cannot be given to any allowance under Clause (ii) of Sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be,-- (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under cl, (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under Clause (i) and Clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and- (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed;" It may be observed that Section 32(2) relates not only to the set-off of unabsorbed depreciation of earlier years but also to set-off of unabsorbed depreciation of the current year. In other words, while the income from a particular source under the head "Business" is being computed, if the income of that source is not sufficient to absorb the depreciation on the assets relatable to that source, the unabsorbed portion of such current depreciation can be set off against the income of the second and other sources under the head "Business". This is one aspect of the matter. So the prohibition contained in Clause (a) of Explanation to Section 158BB cannot be restricted to the unabsorbed depreciation of the earlier years. Actually, that is not the issue arising in this reference. The fact of the matter is that in the mode of computation adopted by the AO which is in consonance with the provisions of Section 158BB(1), the current depreciation which is not absorbed in the regular return and so is carried forward in such regular assessment is set off against the undisclosed income in the respective years in the block period. Because of the undisclosed incomes which have been determined in the block assessment, the total income in column A of Part II of the return in Form No. 2B, as filled up by the learned Departmental Representative, reproduced hereinabove, is determined at a higher figure of Rs. 53,29,397 than the total income in column C of Rs. 50,44,877, and for the same reason, the total loss in column B at Rs. 11,67,05,185 is determined at a lower figure than the total loss in column D of Rs. 13,10,23,417. In other words, both the incomes and the expenses/allowances computed in the regular assessments have been taken into account while determining either the total income or total loss of the previous years in the block period.
The unabsorbed portion of the loss which includes depreciation in the previous years included in the block period as per the block assessment order cannot be carried forward in terms of Sub-section (4) of Section 158BB which we have extracted hereinabove. In this view of the matter and in the light of the mode of computation adopted by the AO for working out the undisclosed income, the points of difference made out by the learned JM and the learned AM as to whether the unabsorbed current depreciation can be set off against the undisclosed income are somewhat misconceived as the AO has not denied such deduction. When the undisclosed income computed on the basis of the search material is reduced from the loss assessed, including depreciation, it follows that the entire depreciation claimed is considered and allowed as a deduction against the undisclosed income. This may be observed from the statement of total income .given by the assessee for the asst. yr.
1995- 96 along with the original return, which is at p. 79 of the Departmental paper book (DPB), and it reads as follows : Export benefit actually received during the previous year relevant to asst. yr. 1994-95 It may be observed that the above loss of Rs. 1,36,65,373 is actually unabsorbed depreciation out of the depreciation claimed of Rs. 2,93,14,847. It is stated in the order under Section 143(3) dt. 31st March, 1998, which may be seen at pp. 83 and 85 of the DPB that the said loss has been reduced to Rs. 1,28,04,522 vide an order under Section 154 dt. 23rd Feb., 1998. It is this loss of Rs. 1,28,04,522 which has been set off against the undisclosed income computed for the asst. yr. 1995-96 in the block assessment at Rs. 1,10,56,831 and the balance of Rs. 17,47,691 is reflected in column B of the table as per Part II of the return in Form No. 2B furnished by the learned Departmental Representative which I have extracted hereinabove. In other words, the loss of Rs. 17,47,691 reflected in column B of the table furnished by the learned Departmental Representative as the assessed loss for the asst. yr. 1995-96 in the block return is arrived at after set-off of the unabsorbed current depreciation of Rs. 1,28,04,522 as per the regular assessment order. The same is the position for the other assessment years. So the entire controversy as to whether the current depreciation, which remains unabsorbed in the regular assessment order, should be allowed as a deduction from the undisclosed income computed in a particular year in the block assessment seems off the mark as the AO himself has allowed such set off or deduction. I may also mention that the dispute raised by the learned counsel for the assessee is only with regard to current depreciation and not with regard to the carried forward unabsorbed depreciation of the earlier years which, admittedly, is prohibited from set off by the provisions of Sub-section (4) of Section 158BB. In this view of the matter, the reliance placed by the learned counsel for the assessee that such a set off for unabsorbed current depreciation should be allowed against the undisclosed income by virtue of the decision of the Tribunal in the case of B.D.A. Ltd. v. Asstt. CIT (1998) 61 TTJ (Mumbai) 197 : (1998) 65 TTD 501 (Mumbai) is also off the mark as this controversy has no basis. I may, however, mention that the decision of the Tribunal in the case of B.D.A. Ltd. v. Asstt. CIT (supra) relates to a loss which has been computed on the basis of the search material for one of the years included in the block period and the question considered by the Tribunal was whether such a loss computed on the basis of the search material should be allowed as a set off against the undisclosed income computed for another year in the block period on the basis of the search material. The said decision of the Tribunal deals with altogether a different situation than the one arising in the present reference. In the present reference, there are no losses which are computed on the basis of the search material for any year included in the block period. In other words, the loss and depreciation of each year are taken into account even in the block assessment order just as they are taken into account in the regular assessment order. It is only the carry forward of such business loss or depreciation that have not been allowed and this is in consonance with the provisions of Sub-section (4) of Section 158BB.20. The next plank of the order of the learned JM and also of the learned counsel before me is that the loss figuring in column B and column D of Part n of the block return cannot include depreciation. I find myself unable to agree with this contention. There is no separate column for depreciation and so depreciation has to be included in the loss reflected in columns B and D of Part n of the return. There is also the authority of the apex Court by way of the decision in the case of Garden Silk Wvg. Factory v. CIT (supra) and V.V. Trans-Investments (P) Ltd. v. CIT (supra) for the proposition that as per normal commercial practice, business loss includes depreciation as the loss is worked out only after debiting depreciation to the P&L a/c. The relevant portion of the remarks of the apex Court in the case of Garden Silk Wvg. Factory v. CTT (supra), as per the headnote, reads as follows : "Unabsorbed depreciation is indeed a part of the 'loss'. This is so because, in the first place, depreciation is a normal outgoing, though in a sense notional, which has to be debited in the computation of the profits of a business on commercial principles (quite apart from statute) and it is difficult to say why, when such deduction yields a negative figure of profits, it cannot be a 'loss' as generally understood. [CIT v. Jaipuria China Clay Mines (P) Ltd. (1966) 59 ITR 555 (SC) relied on] There is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciation in this regard although it is a component element of the genus described as 'loss'." In the light of the above observations of the apex Court regarding depreciation being a component part of loss except for the purpose of carry forward under the provisions of the IT Act and the special mode of working out the undisclosed income stipulated in the provisions of Section 158BB(1) and also the format of the return which is not at variance with the provisions of Chapter XIV-B, I see no infirmity in the computation of undisclosed income at the figure of Rs. 1,46,02,752 by the AO.21. I may mention that even though the learned counsel for the assessee pleaded before me that the format of the return in Form No. 2B is not in consonance with the statute, he has not specified as to what exactly is the variance between the statute and the return form. On the other hand, I find that the format used in Form No. 2B is in consonance with the language of Section 158BB(1) which talks of the difference between two aggregates as indicated hereinabove. The two aggregates, as already mentioned, can either be positive or negative figures, and that is how the format speaks of the difference between columns A-C on the one hand and D-B on the other. If A-C is neutral, D-B is only a difference between two aggregate losses and the quantification of such a difference between two aggregate losses is warranted by the expression in Section 158BB(1) "as increased by the losses".
22. I also find merit in the contention of the learned Departmental Representative that in terms of the formula for the quantification of the undisclosed income laid down in Part n of the return in Form No.2B, the figures in columns C and D are constants, i.e., they are culled from the returns filed by the assessee and its assessment records. They figure in Part n of the return only for the quantification of the undisclosed income. They are not affected by such quantification. They go back to the regular assessment record and the losses under specified circumstances are carried forward. The provisions of Explanation to Section 158BA, retrospectively introduced w.e.f. 1st July, 1995 by the Finance (No. 2) Act, 1998, ensure the insulation of the block assessment figures from the regular assessment figures and wee versa. I find no warrant for the observations of the learned JM that the undisclosed income can result in the carry forward of the lesser business loss or lesser unabsorbed depreciation in the regular assessments. The learned counsel for the assessee pleaded before me that the Explanation to Section 158BA mentioned above are a protection to the assessee. I am of the view that they are no protection to either the assessee or the Revenue. They only clarify the procedure laid down for the quantification of the undisclosed income and in the face of this provision and the provisions of Sub-section (4) of Section 158BB, it is difficult to hold that the undisclosed income need not be taxed and can go simply to reduce carried forward losses and unabsorbed depreciation of various years in the regular assessments. Chapter XIV-B is a self-contained code and it appears to me that the scheme laid down in the Chapter for quantification and taxing of the undisclosed income has to be adhered to.
23. For the above reasons, I find myself generally in agreement with the learned AM.24. I may also mention that Chapter XIV-B is intended as a deterrent against tax evasion and an interpretation has to be placed on the said chapter which does not defeat the legislative purpose. If a view is taken that when the aggregate of the total income of the previous years falling within the block period is a loss, there can be no levy under Section 113 of the Act under any circumstances, it would, to my mind, defeat the legislative purpose. It would lead to the result that when there is a substantial loss for one of the initial years included in the block return and it is determined by the AO, the assessee can even deliberately file inaccurate returns for subsequent years under the bold assumption that he cannot be visited with any consequences under Chapter XIV-B because of the determined loss in the earlier year. So I agree with the view taken by the learned AM that the undisclosed income of Rs. 1,46,02,752 has to be brought to tax under Section 113.
25. In the light of the above discussions, my position on the points of difference framed by the learned JM is as follows : 26. Point 1 : The AO is correct in treating the current year's depreciation as part of loss for the purpose of computation of undisclosed income under Section 158BB.27. Point 2 : There can be undisclosed income even in a case where the aggregate of the total income of the previous years falling within the block period is computed at a loss if the said aggregate is less than the aggregate of the losses of the previous years determined as per Clauses (a) to (f) of Section 158BB. When there is such undisclosed income, though by way of a reduction in the aggregate of the losses, it can be brought to tax under Section 113.
28. Point 3 : Current depreciation which is not absorbed in the regular assessment should also be taken into consideration while computing the relevant year's income included in the block period for the purposes of working out the undisclosed income- In the method adopted by the AO for computing the undisclosed income, such unabsorbed current depreciation has been given deduction.
29. My position in respect of the points of difference framed by the learned AM is as follows : 30. Point 1 : The current year's depreciation which is not absorbed in the regular assessment is available for deduction while computing the undisclosed income under Section 158BB. However, this point of difference as well as the point of difference No. 3 framed by the learned JM proceed on the wrong assumption that the AO had not given such deduction. In the method of computation adopted by the AO, such deduction is already given. I am making this point only by way of clarification of the position.
31. Point 2 : I have indicated my position while dealing with point No.2 framed by the learned JM. In other words, even when the two aggregates referred to in Section 158BB are losses, there can be undisclosed income and so a liability for tax under Section 113 of the IT Act. The undisclosed income has necessarily to be computed in terms of Section 158BB and by following the formula [(A) - (C) + (D) -(B)] given in Part II of the return in Form No. 2B.32. In view of the above replies, I have to reiterate that I am in agreement with the learned AM and I am of the view that the undisclosed income of Rs. 1,46,02,752 computed by the AO can be brought to tax under Section 113 of the IT Act.
33. The case will go before the Bench for an order to be passed in terms of s. 255(4) of the IT Act.
1. This is a block assessment appeal. It arises out of the block assessment order dt. 12th March, 1998. Assessment years covered by the block assessment under appeal are from 1987-88 to 1997-98.
2. This appeal was originally heard on 10th Feb., 1997 by the Division Bench of this Tribunal, consisting of Hon'ble Vice President, Shri Ram Swarup and the author-Member of this order, Dr. O.K. Narayanan. There were differences of opinion between the Members constituting the original Bench, with regard to the following contentions : (a) The additions made by way of undisclosed income should be adjusted against the available balance of current year's depreciation as per the provisions of Section 32(2), since the computation of income both for the purpose of aggregation as well as in the regular assessment should be by applying the provisions of Chapter-IV of the Act, which contains Section 32.
(b) Undisclosed income would attract levy of tax under Section 113 only if there is a positive income, and if the aggregate under Section 158BB is a figure of loss, there cannot be a levy of tax.
The Hon'ble Vice President, who proposed the original order was of the view that as per Sections 32(2), 72(2) and 72(3), if the profits of the business are inadequate to give effect to the admissible depreciation, then the depreciation allowable gets split into two parts--one part relating to the assessment year for which it is current depreciation and the second part, which statutorily is made to relate to the allowance and deductions of the following previous year. According to him, there would be neither profit (because the available current year's depreciation has been adjusted against the total current year's business profits) nor loss (because the balance of the current year's depreciation ceases to be the allowance of the current year and becomes, consequent to the deeming provision in Section 32(2) the allowance of the following previous year).
According to him therefore, the contention of the assessee that the computation of income at 'nil' for those years where the depreciation admissible for current year exceeded the business profits of that year, was acceptable. Thus, according to him for the asst. yrs. 1994-95 and 1995-96, the income under Section 158BB as well as income as per regular assessments would be 'nil'.
3. Dealing with the asst. yrs. 1991-92, 1996-97 and 1997-98, the Hon'ble Vice President in the order proposed by him observed that computation of concealed income under Section 158BB envisaged a positive figure of assessment on the basis of search materials, and in the case on hand, since the total aggregate income determined is a figure of loss of Rs. 11,13,75,788, levy of tax under Section 113 is not valid.
4. Dissenting from the order proposed by the Hon'ble Vice President, the AM held the right of set off of depreciation under Section 32(2) is available to the assessee only in regular assessments, and though the brought forward losses and unabsorbed depreciation will be given a set off while making regular assessments, they have to be ignored while computing the undisclosed income of the block period. As such according to him, it is not possible to agree with the view that current depreciation could be adjusted under Section 32(2) against the undisclosed income, so as to make the undisclosed income 'nil'. With regard to the other contention, he held that wherever an amount of undisclosed income is determined under the provisions of Section 158BB, that undisclosed income shall always be a positive figure. It may increase " aggregate income of the assessee or reduce the aggregate loss of assessee, but that part of final result is not relevant for the recognitioi undisclosed income and the levy of tax thereon. He held that the moment undisclosed income is determined in a block assessment, it attracts the levy of tax prescribed under Section 113.
5. When the relevant questions proposed by the Members constituting the original Bench have been referred by the Hon'ble President to the Third Member nominated by him, the learned Third Member held as follows: (1) The current year's depreciation which is not absorbed in the regular assessment is available for deduction while computing the undisclosed morn" under Section 158BB. (2) In the method of computation adopted by the AO, such deduction has already been given.
(3) Even when the two aggregates referred to in Section 158BB are losses, there can be undisclosed income, and so a liability for tax under Section 113 of the IT Act. The undisclosed income has necessarily to be computed in terms of Section 158BB and by following the formula [(A) - (C) + (D) - (B)] given in Part n of the return in Form No. 2B. The learned Third Member, holding thus, expressed agreement with the AM who passed the dissenting order, and held the view that the undisclospfi income of Rs. 1,46,02,752 computed by the AO can be brought to tax under Section 113 of the IT Act, 1961.
6. In accordance with the majority view, we uphold the impugned block assessment, and reject the contentions of the assessee in this appeal.