ITA No. 535 of 2007 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 535 of 2007 Date of Decision: 6.4.2011 Commissioner of Income-tax ....Appellant. Versus M/s Amritsar Processors (P) Ltd. ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Sukant Gupta, Standing counsel for the appellant. None for the respondent. AJAY KUMAR MITTAL, J. 1. The appeal was admitted by this Court vide order dated 18.8.2008 for consideration of the following substantial questions of law:- “(i) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in allowing the assessee's clam of loss of later years against the undisclosed income of Rs.12 lacs determined for an earlier year of block period, disregarding the fact that the loss was not disclosed in the returns filed u/s 139? (ii) Whether, on the facts and in the circumstances of the ITA No. 535 of 2007 -2- case, the Tribunal was correct in law in deleting the surcharge on the tax worked out on the undisclosed income for the reason that search took place in the case prior to 01.06.2002, whereas the amendment in the proviso to Section 113 had been made effective from 01.06.2002?” 2. Briefly stated, the facts necessary, for adjudication as narrated in the appeal are that the search and seizure operation under Section 132(1) of the Income Tax Act, 1961 (in short “the Act”) was carried out at the business and residential premises of the assessee on 16.1.2001. The Assessing Officer vide order dated 31.1.2003 disallowed the claim of loss amounting to Rs.12,00,000/- incurred in the block period from 01.4.1990 to 16.1.2001 and also levied surcharge on the undisclosed income. The assessment was completed at a total undisclosed income of Rs.12,00,000/-. Being aggrieved, the assessee took the matter in appeal before the Commissioner of Income Tax (Appeals) [hereinafter referred to as “the CIT(A)”] who vide order dated 17.9.2004 allowed the claim of loss of the assessee and also deleted the surcharge levied on the undisclosed income holding that proviso to Section 113 was inserted in the Act prospectively w.e.f. 1.6.2002. Against the order of the CIT(A), the revenue filed an appeal before the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short “the Tribunal”). The Tribunal vide order dated 10.11.2005 upheld the view of the CIT(A) and dismissed the appeal. Hence, the present appeal by the revenue. 3. We have heard learned counsel for the revenue. ITA No. 535 of 2007 -3- 4. The issue that arises for consideration in this appeal is two fold; (I) Whether the assessee's claim of loss of later years could be set off against the undisclosed income relating to previous years of an earlier year falling within the block period. (II) Whether the deletion of surcharge by the CIT (A) and the Tribunal holding that the surcharge is not leviable as the search took place prior to 1.6.2002 was justified. 5. Learned counsel for the Revenue argued that the year- wise detail of undisclosed income for the block period filed along with the return depicts that the assessee had undisclosed income of Rs.8,54,947/- relating to assessment year 1992-93 whereas the loss claimed of Rs.3,54,053/- is relating to each of the assessment years from 1993-94 to 1998-99 and loss of Rs.54,000/- in respect of assessment year 2000-01. It was urged that the losses of subsequent years could not be set off against the income of earlier years even under normal provisions of the Act and while framing block assessment, thus, undisclosed income of Rs.8,54,947/- in respect of assessment year 1992-93 could not have been adjusted against future losses though of block period. It was submitted that the CIT(A) and the Tribunal had not considered this aspect and had mechanically followed earlier decision of the Tribunal in the case of B.D.A vs. ACIT, 65 ITD 501 (Mumbai). Reference was made to the decision of the Hon'ble Supreme Court in E.K. Lingamurthy and another v. Settlement ITA No. 535 of 2007 -4- Commission (Income Tax and Wealth Tax) and another, [2009] 314 ITR 305. 6. Section 158BB of the Act provides for computation of undisclosed income of the block period. Sub-section (4) thereof stipulates that while framing assessment under that Chapter, losses under Chapter VI or unabsorbed depreciation under Section 32(2) which had been allowed to be brought forward from the previous years shall not be set off against the undisclosed income of the block assessment. It shall, however, be carried forward and set off in the regular assessments. Sub-section (4) of Section 158BB of the Act reads thus: COMPUTATION OF UNDISCLOSED INCOME OF THE BLOCK PERIOD “158BB ... ... .... (4) 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.” 7. The Apex Court in E.K. Lingamurthy and another's case (supra) examining the scheme of 158BB of the Act, had laid down that there is no prohibition in the statute for setting off of losses incurred in any of the previous years falling in the block period against the income assessed in other previous years in the block period. It was observed as ITA No. 535 of 2007 -5- under: “In order to answer the contention raised on behalf of the assessee, one has to examine the scheme of Section 158BB of the 1961 Act. It is not in the controversy that Chapter XIV-B constitutes a fraud by itself. In this case, we are concerned with the computation of “undisclosed income” under Section 158BB of the Act. Section 158BB, inter alia, states that undisclosed income of the block period shall be “the aggregate of the total income of the previous years falling within the block period” computed in accordance with the provisions of Chapter IV. “Total income” is defined in Section 2(45) to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. In other words, Chapter XIV does not rule out. Chapter IV of the Act in the matter of computation of undisclosed income under Chapter XIV-B. It may be mentioned that ordinarily, in the case of regular assessment, the unit of assessment is one year consisting of twelve months whereas in the case of block assessment, the unit of assessment consists of ten previous years and the period up to date of the search. Section 158BB provides for aggregation of income/loss of each previous year comprised in the block period. The block period assessment under Chapter XIV-B is in addition to regular assessment. Analysing Section 158BB(4) read with Explanation ITA No. 535 of 2007 -6- (a) thereto, one finds that only brought forward losses of the past years under Chapter VI and unabsorbed depreciation under Section 32(2) are to be excluded while aggregating the total income or loss of each previous year in the block period but set off of the loss suffered in any of the previous year in the block period against the income assessed in other previous years in the block period is not prohibited.” 8. According to judgment of the Apex Court in E.K. Lingamurthy and another's case (supra) only those losses which are incurred in any of the previous years falling in the block period are to be adjusted or set off against income assessed in other previous years in the block period. The issue before the Apex Court in the aforesaid pronouncement was not relating to adjustment or set off of losses relating to pervious years falling in the block period against undisclosed income of the previous years arising prior to the year of losses. In absence of any specific provision, the losses of subsequent years under the Act cannot be set off or adjusted against income arising in the previous years prior to the said year. Thus, any undisclosed income which had been shown in the return is not available for adjustment or set off of losses arising in subsequent previous years falling in the block period even if the previous year of undisclosed income falls within the block period. Therefore, undisclosed income of Rs.8,54,947/- relating to assessment year 1992-93 could not have been held to be available for set off of losses relating to block period from 1993-94 to 2000-01. The issue, therefore, stands answered in favour of the Revenue as indicated ITA No. 535 of 2007 -7- above. 9. The second issue relating to levy of surcharge on the assessee where the search had taken place prior to 1.6.2002 stands concluded in favour of the Revenue by the decision of this Court in Income Tax Appeal No. 126 of 2004, (Commissioner of Income Tax (Central) vs. M/s. Bansal Sweet House, Amritsar), decided on 22.2.2011, wherein following the decision of the apex Court in Commissioner of Income Tax vs. Suresh N. Gupta, (2009) 297 ITR 322 (SC), it was held as under: “8.The matter is no longer res integra. The similar issue came up for consideration before the Hon’ble Supreme Court of India in Suresh N. Gupta’s case (supra), wherein it was held that the proviso to Section 113 which was inserted by Finance Act, 2002 was curative in nature. The relevant observations of the Apex Court in the context are as under: “There is one more reason for rejecting the above submission. Prior to June 1,2002, in several cases, tax was prescribed sometimes in the 1961 Act and sometimes in the Finance Act and after in both. This made liability uncertain. In the present case, however, the rate of tax in case of block assessment at 60 per cent was prescribed by section 113 but the year of the Finance Act imposing surcharge was not stipulated. This resulted in the above four ambiguities. Therefore, clarification was needed. The proviso was curative in nature. Hence, the proviso inserted ITA No. 535 of 2007 -8- in section 113 merely clarifies that out of the above four dates, the relevant date for applicability of the Finance Act would be the year in which the search stood initiated under section 158BC.” 9. Accordingly, the issue stands concluded by the aforesaid decision of the Supreme Court wherein it has been laid down that the proviso to Section 113, inserted vide Finance Act, 2002, with effect from June 1, 2002, was applicable to block assessments under Chapter XIV-B of the Act and surcharge on income tax would be imposable even in those cases where search had taken place prior to 1.6.2002 according to the Finance Act of the particular year in which search had taken place. It has further been held that the proviso was only clarificatory and, therefore, question of its retrospective effect did not arise.” 10. Accordingly, the aforesaid issue is adjudicated in favour of the Revenue. 11. In view of the above, the substantial questions of law are answered in favour of the Revenue. The appeal stands allowed. (AJAY KUMAR MITTAL) JUDGE April 6, 2011 (ADARSH KUMAR GOEL) gbs JUDGE