COMMISSIONER OF INCOME TAX Vs. K.V. SUDHAKARAN

JUDGEMENT

(1.) THIS appeal is filed by the Revenue challenging the order of the Tribunal quashing the block assessment completed against the respondent-assessee for the block period 1st April, 1987 to 10th March, 1998 on the ground that the assessment made is not based on any material or evidence gathered in the course of search in the place of another person by name Sri Anandan, who along with the respondent-assessee was a partner in M/s Hotel Indraprastha. We have heard senior counsel appearing for the Revenue and Sri T.M. Sreedharan, counsel appearing for the respondent-assessee.

(2.) THE facts leading to the dispute are the following. The respondent-assessee was employed abroad for a long period and during his stay outside and after return he has made certain investments in business particularly in a bar hotel as its partner, along with one Sri Anandan. Respondent was not an assessee under the IT Act and has not filed any returns under the IT Act until notice was served under S. 158BC r/w s. 158BD of the Act after search in the premises of one Sri Anandan. During search conducted in the business and residential premises of Anandan on 10th March, 1998 certain documents were seized including the balance sheet of M/s Hotel Indraprastha in which the respondent-assessee was a partner. From the balance sheet it was found that the assessee had contributed towards capital in the form of Rs. 1,50,000 in March, 1996. The capital contribution was increased to Rs. 5,58,500 in May, 1997 and the evidence gathered in the form of balance sheet of the firm, M/s Hotel Indraprastha, the AO issued notice under S. 158BC r/w S. 158BD and the assessee was called upon to file written explanation for the investments. Even though the assessee filed "Nil" return the AO collected information and called upon the assessee to file cash flow statement showing investment and expenditure. Based on information gathered, the AO made assessment for the block period from 1st April, 1987 to 10th March, 1998 determining the total undisclosed income for the block period at Rs. 8,02,635. The assessee challenged the assessment in appeal before the CIT(A) on the ground that the proceedings under S. 158BD are not maintainable for the reason that income assessed is not based on any evidence or material gathered during search, but is based on cash flow statement, and therefore block assessment itself is without jurisdiction. The alternate contention was against various additions sustained in assessment. The CIT(A) though upheld the assessment granted certain modifications to the amount assessed for the block period. The Department filed appeal against the order of the CIT(A) modifying the assessment and assessee filed cross-objections challenging that part of the order of the CIT(A) upholding block assessment. The Tribunal after hearing both sides allowed the cross-objections and since cross-objections was allowed cancelling the assessment, the Departmental appeal for restoring the deletions made by CIT(A) was rejected as infructuous. It is against this order of the Tribunal that the Department has filed this appeal raising question on the validity of assessment completed under S. 158BD of the Act.

(3.) THE question to be considered is whether the Tribunal's finding that assessment in this case is based on cash flow statement furnished by the assessee is correct or not ? We have to necessarily disagree with the Tribunal's finding because the main document based on which proceedings for assessment were initiated against the assessee is the balance sheet of the firm, M/s Hotel Indraprastha seized from Anandan which showed substantial investment by the assessee during 1996-97 as stated above which is not donich by the assessee. In fact, cash flow statements were called for from the assessee only to find out the source for investment and it is not as if the assessment is made based on cash flow statement. All that the AO has done is rejection of cash flow statement and estimation of income based on investment made by the assessee in the hotel business and once assessment proceedings are initiated under S. 158BD based on evidence found in the course of search about undisclosed income of the person other than the person searched, then it would be open to the AO to make use of any other information available with him or collected by him for making block assessment for such period. Since the finding of the Tribunal that assessment is solely based on cash flow statement furnished by the assessee is factually incorrect and since the assessment is based on information collected in the form of balance sheet and other documents of the firm, M/s Hotel Indraprastha seized from Anandan in the course of search carried out in his premises, the block assessment under S. 158BC r/w S. 158BD is tenable as found by the CIT(A). We therefore allow the appeal by reversing the order of the Tribunal and restoring the appeal to the file of the Tribunal for decision on merits after hearing the assessee and the Department. If there is any other issue raised in the cross-objections on merit on addition sustained by the CIT(A), the same shall stand restored to the Tribunal for consideration along with Departmental appeal.