ORDER
Phool Singh, J.M.
1. These cross-appeals are directed against the order dt. 26th March, 2001, recorded by the CIT(A)-II, Kanpur, by which the appeal of the assessee for block period ending 18th Nov., 1998, was disposed of. The assessee has also filed cross-objection against the Departmental appeal.
ITA No. 366/Luck/2001 :
2. Facts giving rise to this appeal are that the assessee-company was incorporated on 15th May, 1986, and its directors were Gopal Singhania and his wife, Smt. Radha Singhania. The company commenced the production and sale of polyester zips w.e.f. asst. yr. 1989-90, onwards in its factory situated at Mandhana Bithoor Road, Kanpur. Company was having its registered office and sale depot at 66, Chamanlal Market, Gumati No. 5, Kanpur. A search and seizure operation was carried out at the office/factory premises of the assessee -company as well as residential premises of the directors on 18th Nov., 1998, under Section 132 of the IT Act, 1961 (hereinafter referred to as the Act’), resulting into seizure of incriminating documents, cash and other assets for which respective Panchanamas were prepared. The assessee was called upon by the AO through notice under Section 158BC of the Act to file return for the block period 1st April, 1988 to 28th Nov., 1998, corresponding to asst. yrs. 1989-90 to 1998- 99. The assessee in pursuance to the said notice filed return declaring the undisclosed income at NIL. The assessment proceedings for block period commenced by issuance of notice under Section 143(2) issued on 22nd June, 2000, and during the assessment proceedings, the AO has taken note of the fact that the assessee had not filed returns of income prior to asst. yr. 1995-96 and for asst. yr. 1995-96 to asst. yr. 1997-98, the assessee filed return showing loss at Rs. 45,948, Rs. 20,000, Rs. 49,064, respectively, and these returns were said to have been processed under Section 143(1)(a) of the Act on the returned loss,
3. It was noted by the AO that search resulted into set of papers containing tax audit report under Section 44AB in respect of another case in the name of M/s Radha Exports Ltd. and during assessment proceedings, it was admitted by the assessee-company that existence of M/s Radha Exports Ltd. was only on papers, while all the purchases and sales shown in the tax audit report were only to make arrangement and procure loans from the respective banks and actual sales mentioned in the tax audit report were that of assessee-company. It was also gathered during the course of search that another bank account in the name of Kanpur Industrial Oil Corporation was also operated during financial year 1990-91 and financial year 1991-92 by S.G. Singhania for the purpose of the business of the assessee-company, while, in fact, the transactions were actually belonging to the assessee-company. The AO has taken note of the bank transactions being carried out by the directors of the company which were in the name of the assessee-company, M/s Radha Exports Ltd., and M/s Kanpur Industrial Oil Corporation, and on the basis of sales declared in the returns of income for asst. yr. 1995-96, onwards the AO had looked into the recasted trading account as furnished in Form No. 2B. From the perusal of all the figures available on record, the AO was of the view that rate of GP shown by assessee-company was lesser than the rate of GP shown by M/s Quality Zippers (P) Ltd., which were also found dealing in the same business as of assessee. He called upon the.assessee-company to explain as to why rate declared by M/s Quality Zippers (P) Ltd., which were also found dealing in the same business as of the assessee, be not applied. It appears that the assessee-company objected to the proposed applications of the higher GP rate on different counts and those objections were discussed by the AO and he rejected the objections and concluded that application of the GP rate as shown by M/s Quality Zippers (P) Ltd. shall be applied. In this view of the matter, the AO proceeded to complete the assessment for the block period and certain other additions were also made on the basis of unexplained entries found in the seized material. The computation of the income/loss in the assessment years in the block period is as under :
Assessment Total income Reduction as Loss as asse-
year including per earlier assessed ssed by the AO
undisclosed or returnedincome or in block
income as increase as per assessment
assessed earlier assessed or (Rs.)
(Rs.) returned loss
(Rs.)
1989-90 (-) 24,82,540
1990-91 (-) 4,94,086
1991-92 6,75,925 -
1992-93 (-) 4,15,552
1993-94 3,99,693
1994-95 12,84,762
1995-96 (-) 45,948 (-) 6,80,664
1996-97 4,71,884 (-) 20,000
1997-98 10,30,353 (-) 49,060
1998-99 (-) 6,70,539
1999-2000 2,31,001
Total 40,93,618 (-) 1,15,008 (-) 47,47,381
4. While coming to the total of undisclosed income of the block period, the AO noted that in asst. yr. 1989-90, the assessed undisclosed loss is Rs. 24,82,540, but the amount of loss is not to be carried forward under the provisions of Expln. (a) to Section 158BB(1) of the Act. Same was the fate of the assessed loss of Rs. 4,94,086 and Rs. 4,15,552 assessed in asst. yrs. 1990-91, and 1992-93. For asst. yr. 1995-96 and asst. yr. 1998-99, the AO assessed the loss of Rs. 6,80,664 and Rs. 6,70,539, respectively, but he has not taken note of these losses also in view of Expln. (a) to Section 158BB(1) of the Act. The AO has taken positive figures of the total undisclosed income as assessed by him at Rs. 40,93,618 and added to it the figure of Rs. 1,15,008 on account of returned losses for asst. yrs. 1995- 96 to 1997-98, and arrived at figure of total undisclosed income of Rs. 42,08,626. The assessee preferred appeal and it appears that the assessee raised the different plea about the rate of GP applied by the AO and also in respect of undisclosed income arrived at by the AO in respect of certain seized material. The learned CIT(A) after considering all the factual position decided the appeal giving certain relief to the assessee in respect of the rate of GP as the learned CIT(A) gave relief of 2 per cent on account of GP rate as applied by the AO on account of variation in the rate of GP and the assessee being aggrieved has preferred this appeal.
5. Ground No. 5 in the ground of appeal reads as under :
“5. Because the learned CIT(A) has erred in not allowing the aggregate of the undisclosed income (as modified in appeal) to be set off by the business loss shown in the years falling in the block assessment, on the ground that the appellant itself did not claim a set off.”
6. It was noted by the Bench that this was not the ground before the CIT(A) and it was treated as additional, ground for which the assessee moved application before the Bench with the request that the assessee be allowed to raise the said ground and the Bench after considering the legal position on the issue was of the view that the above referred to ground is purely legal one requiring no investigation at the hands of lower authorities, permitted the assessee to raise this ground and learned counsel as well as learned senior Departmental Representative proceeded to argue on this ground .
7. The learned counsel for the assessee submitted that the AO was not justified while computing the tax liability of the assessee to ignore the negative figure of Rs. 47,97,381 and determining the undisclosed income at Rs. 42,08,636. The contention of the learned counsel is that negative figure of Rs. 47,47,381 should be taken into account for aggregate purpose and as the said figure is more than the aggregate of undisclosed income arrived at by the AO at Rs. 44,08,626, the resultant will be loss of Rs. 5,38,755 and there will be no liability of tax under Section 113 of the Act. To support this contention, the learned, counsel for the assessee had referred to the decision of Mumbai Bench of the Tribunal in the case of BDA Ltd. v. Asstt. CIT (1998) 61 TTJ (Mumbai) 197 : (1998) 65 ITD 501 (Mumbai) in which facts were said to be identical to the facts available in the case of the assessee and the Bench after considering the legal position had concluded that losses as computed in the block assessment had to be set off against undisclosed income computed in respect of other previous years falling within the block period. The learned counsel had referred to the relevant portions of the observation of the Bench to substantiate that the issue is entirely covered by the said decision of Mumbai Bench in the case of BDA Ltd. v. Asstt. CIT (supra).
8. As against it, the learned senior Departmental Representative submitted that the computation of undisclosed income by the AO was justified as the benefit of carry forward and set off of loss is not permissible in view of Expln. (a) to Section 158BB(1) of the Act. The learned senior Departmental Representative submitted that benefit of carried forward and set off of loss is specifically allowed under the special provisions contained in Chapter VI of the Act subject to the conditions. The first condition is that carry forward and set off of loss cannot be allowed unless the loss has been determined in pursuance of return of loss filed in accordance with Section 139(3) of the Act. Secondly, Section 139(3) requires a return of loss to be furnished in the prescribed form and within the time-limit laid down therein. Thirdly, the other statutory conditions are also required to be complied with. The learned senior Departmental Representative submitted further that it is well-settled proposition of law that when a law requires a particular thing to be done in a particular manner to obtain benefit that thing must be done in the prescribed manner and in no other manner. The learned senior Departmental Representative referred to the decision of Smt. Atmajit Singh v. CIT and that of Novopan India Ltd. v. CCE (1994) Suppl. 3 SCC 606. On the basis of this proposition, the learned senior Departmental Representative submitted that the assessee had not fulfilled those conditions and hence not entitled to the benefit of carried forward and set off of business losses.
9. The other contention of the learned senior Departmental Representative is that Section 80 of the Act is non obstante clause having overriding effect over other provisions of the Act in the matter of carry forward and set off of losses. Section 80 makes it clear that the benefit of carry forward and set off of losses is not available to a block assessment as the conditions prescribed therein cannot be fulfilled by him, but by a regular assessee. Apart from it. the learned senior Departmental Representative submitted that this position has further been made clear by Expln. (a) to Section 158BB(1) of the Act, which requires that the aggregation of total income or loss computed in accordance with the provisions of the Act to be made without giving effect to set off of brought forward losses under Chapter VI of unabsorbed depreciation under Section 32(2) of the Act except for the limited purposes of computing deduction under Chapter VI-A. Not only this, the learned senior Departmental Representative contended further that Sub-section (4) of Section 158BB further mandates that the losses determined in regular assessment shall not be carried forward and set off against undisclosed income. On the basis of above, the contention is that carry forward and set off of losses is not permitted in any situation whatsoever in block assessment. Elaborating further, he has submitted that losses determined in previous year falling within the block assessment cannot be allowed to be carried forward and set off against the undisclosed income of another previous year within the same block period nor can the losses be determined in the regular assessment being the carried forward and set off against the undisclosed income of the block period, as evident from conjoint reading of Section 80 and Expln. (a) to Section 158BB(1) as well as from sub Section (4) of Section 158BB.
10. The learned senior Departmental Representative placed reliance on the order of the recent decision in the case of Fenoplast Ltd. v. Asstt. CIT (2002) 77 TTJ (Hyd)(TM) 806 : (2002) 82 LTD 178 (Hyd)(TM) in which the AM whose view was found favoured with the Third Member had observed at p. 194 of 82 ITD that brought forward losses and unabsorbed depreciation will be given a set off while making regular assessment but they will have to be ignored while computing the undisclosed income of the block period. The learned senior Departmental Representative pointed out that Third Member at p. 215 of 82 ITD has also taken note of the fact of the said proposition and has observed as under :
“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.
xxxx
Wherever an amount of undisclosed income is determined under the provisions of Section 158BB, that undisclosed income shall always be a positive figure xxxx ”
11. The learned senior Departmental Representative also placed reliance on the decision of Hon’ble Gujarat High Court in the case of N.R. Paper & Board Ltd & Ors. v. Dy. CIT in which the following observations of their Lordships was specifically referred to :
“It would be important to note that for the purpose of determination of undisclosed income under Sub-section (1) of Section 158BB, the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off or brought forward losses under Chapter VI or unabsorbed depreciation under Section 32(2) of the Act, as provided by the Explanation to Section 158BB(1) of the Act. It would thus be clear that the total income of the previous year computed by the AO in respect of the block period would not be the same total income which is assessed in respect of the previous years during the regular assessment proceedings. In the assessments in the regular assessment proceedings, there would be no scope for applying the Explanation which lays down a special formula for working out the total income of the previous years falling in the block period for the purposes of determination of ndisclosed income.”
12. To the same effect was the observation in the case of Rakesh S. Mardia v. Dy. CIT (2002) 74 TTJ (Ahd) 836, which was also referred to by the learned, senior Departmental Representative. It was also contended by him that AO has been statutorily debarred from allowing the set off of brought forward losses while aggregating the total income and loss under sub Section (1) of Section 158BB.
13. The learned senior Departmental Representative also submitted that set off of brought forward losses is not admissible in block assessment and that can be proved by the fact that form of return of income to be filed in the block assessment is to be filled in Form No. 2-B and there is no column for claiming set off of brought forward losses, which is available in the case of regular assessee, who is supposed to file return of income in Form No. 2, which requires elaborate information to be furnished in respect of claim of set off of brought forward losses.
14. The other contention of the learned senior Departmental Representative is that in case the assessee had not complied with statutory requirement in lodging its claim for carry forward and set off of brought forward losses as per law, it cannot be allowed to get benefit of its lapse in the block assessment proceedings as the same proceedings are for the benefit of Revenue and not of the assessee. The learned senior Departmental Representative placing reliance on the decision of Hon’ble Jammu & Kashmir High Court in the case of CIT v. State Agro Development Corporation in which it was laid down by their Lordships that the assessee, who did not file return of income under Section 139(1) cannot get benefit of carry forward and set off of the loss in reassessment proceedings, the contention was that the same analogy will apply to the assessee, who has not claimed the losses by complying with the statutory requirement and that cannot be available to the assessee.
15. So far as the ratio of Mumbai Bench of Tribunal in the case of BDA Ltd. v. Asstt. CIT (supra) is concerned, the learned senior Departmental Representative submitted that the case of Fenoplast Ltd. v. Asstt. CIT (supra) is the latest decision on the issue and it is by three Members. The ratio of BDL Ltd (supra) lost its force. It was also submitted that law relating to computation of undisclosed income has since undergone substantial change with retrospective effect since 1st July, 1995, and Expln. (a) to Section 158BB(1) has clarified the position. Further, the learned senior Departmental Representative pointed out that in the case of BDA Ltd. v. Asstt. CIT (supra), the Bench proceeded to presume that in the context of Section 158BB(1) of the Act, the previous year was the block period without appreciating that Section 3 of the Act provides 12 months in a previous year and that provisions is still applicable to the proceedings of block assessment.
16. In view of these facts, the learned senior Departmental Representative submitted that action of AO in ignoring the losses as computed by him for the earlier years was justified and the assessee cannot claim benefit of set off of brought forward losses as argued by the learned counsel.
17. In rejoinder, the learned counsel submitted that the learned senior Departmental Representative was not justified to pick out a word or a sentence from a judgment of the Tribunal as reproduced by Mm in the written submission as the Hon’ble Supreme Court of India in the case of Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India has observed as under :
“It is not proper to regard a word, a clause or a sentence occurring in the judgment of this Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.”
18. Learned counsel submitted that this principle was reiterated in the case of CIT v. Sun Engineering Works (P) Ltd. . Giving out the factual position, the learned counsel submitted that books of account for asst. yrs. 1989-90, 1990-91, 1992-93, 1995-96 and 1998-99, falling in the block period were not found at the time of search and assessee had also not filed returns for the assessment years prior to asst. yr. 1995-96. The AO himself had computed losses at Rs. 47,47,341 for the block period and that amount of loss is in the block period itself and cannot be ignored. The contention of the learned counsel is that Rs. 5,38,755 was the difference in between the figure of losses computed by the AO and the figure of undisclosed income arrived by him for the block period and assessee is not claiming carry forward of this amount of difference, viz., loss of Rs. 5,38,555 to subsequent years. The argument of the learned senior Departmental Representative that the assessee is claiming carry forward of losses is misplaced.
19. About the decision of Third Member in the case of Fenoplast Ltd. v. Asstt. CIT (supra), the learned counsel submitted that the issue involved in that case was altogether different and it was not on the point in issue while the factual position of the case of BDA Ltd. (supra) was identical to the factual position of the case and ratio laid down by that Bench of Tribunal is squarely applicable. Not only this, the learned counsel has also referred to some of the observations of the Third Member in the case of Fenoplast Ltd. v. Asstt. CIT (supra), which also helped the case of the assessee and in this connection referred to the observation appearing at p. 224 of 82 ITD, in which Third Member has also noted that there may be situation where the assessee had only understated his losses or overstated his income and in such a situation, there can be, no undisclosed income as per provision under Section 158BB(1) of the Act. The learned counsel also submitted that fact of the present case is alike to this situation envisaged by the learned Third Member as in the case of the assessee. There are more losses than to the undisclosed income, both computed by the AO and in such a situation, there can be no undisclosed income. Further, the learned counsel also pointed out that the ratio of BDA Ltd. v. Asstt. CIT (supra), was also referred to and the Third Member at p. 224 itself has taken note of that ratio and noted that decision of the Bench in the case of BDA Ltd. (supra) deals with altogether a different situation than the one involved in that case. The contention is that ratio of the decision of BDA Ltd. v. Asstt. CIT (supra) is not overruled, but it was found involving altogether different issue. On the basis of these facts, the learned counsel submitted that the same view as laid down in the case of BDA Ltd v. Asstt. CIT (supra) be taken and ground may be allowed.
20. We have considered the rival submissions and the matter to which our attention was drawn during the course of hearing. It is to be noted that provision of Chapter XIV-B of the Act which deals in special procedure for assessment of such cases was brought on statute with a specific purpose to unearth undisclosed income. The said chapter contains complete procedure for assessment of undisclosed income in search cases, Section 158B(a) defines the block period, as it existed prior to amendment and relevant to the assessment years involved, which reads as under :
“(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.”
21. The very contention of the learned senior Departmental Representative that previous year as defined in Section 3 of the Act means the financial year immediately preceding the assessment year is not to be taken into consideration as we are concerned with the assessment of block period. The very computation of undisclosed income of the block period is prescribed by Section 158BB and relevant portions of that section are extracted hereunder :
“158BB. (1) The 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 this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence, as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined,-
(a) to (f) xx xx xx xx xx xx
Explanation. : For the purposes of determination of undisclosed income,-
(a) 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 this Act without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32 :
Provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32;
(b) xx xx xx xx xx
(c) xx xx xx xx xx
(2) XX XX XX XX XX
(3) XX XX XX XX XX
(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 ”
22. The facts in the case in hand are not in dispute as the assessee had not filed return of income prior to asst. yr. 1995-96 and for asst. yrs. 1995-96 to 1997-98, the return of income was filed at losses. For asst. yr. 1995-96, the loss shown by the assessee was Rs. 45,948, but the AO computed the losses at Rs. 6,80,664 and against losses returned by the assessee for asst. yrs. 1996-97 and 1997-98, the AO computed undisclosed income in positive figure. It is also admitted fact that the amount of total losses as assessed by the AO for the block assessment is Rs. 47,47,381 as against total undisclosed income as assessed by the AO at Rs. 40,93,618. The only issue which requires scrutiny in the present case is as to whether the loss figure of Rs. 47,47,381 is to be completely ignored by the AO or it is to be adjusted against the undisclosed income for Rs. 44,93,618 as assessed by the AO.
23. We have perused the decision of Tribunal, Mumbai Bench, in the case of BDA Ltd. v. Asstt. CUT (supra) and facts of that case were identical as in the case in hand. The Bench had discussed at length and relevant position, which deals with the issue in hand had been replied in favour of the assessee and it will be beneficial to extract the relevant portion as the same will give answer to all the points raised by the learned senior Departmental Representative :
“7. In our opinion, there is no prohibition against the losses of some of the previous years comprised in the block period being set off against the income of the other years comprised in the block period. Even on first principles, it is not possible to countenance the argument of the Revenue that the result of the computation of a particular period comprised in the block period has to be ignored, if such computation shows a loss. It would be the same thing as saying that in respect of a normal previous year consisting of a period of twelve months, the result of computation for the first period of six months would be ignored, if it shows a loss, and the income computed in respect of the rest of the six months only would be taken. Such an argument, if advanced in respect of an assessment of an assessee whose case is not covered by Chapter XIV-B, cannot be accepted, as it is a well accepted and recognized position that the computation must be made with reference to the whole period of twelve months comprised in the previous year and the tax is payable only if such computation shows a positive income. Losses incurred during the previous year cannot be ignored and this principle is inbuilt in the concept of an assessment under the IT Act. The principle is that for the purpose of charging income-tax the various sources of income of an assessee have got to be aggregated and (if) the results of each source for the entire previous year show a positive income and the rest of the period shows a negative income, the result of the later period cannot be ignored. The income-tax law does not permit this. In CIT v. National Syndicate , the Supreme Court held that “if the profits or gains of a business for a particular year are to be taxed they must be computed for the whole year taking into account losses incurred during the same year” (at p. 234). What is true of the assessment of an assessee who has not been brought under Section 132 and in whose case Chapter XIV-B does not apply is also true in respect of an assessee who has been searched and whose assessment is to be made under Chapter XIV-B. There is no difference between the two types of cases so far as the application of the principle is concerned. In the former, the previous year is the period with reference to which the income is to be ascertained, as defined in Section 3 of the Act; in the latter, it is the block period with reference to which the income is to be ascertained, and the block period consists of previous years relevant to ten assessment years preceding the previous year in which the search took place and includes the further period up to the date of commencement of the search. But, the undisclosed income is to be computed with reference to the entire block period and it is the total undisclosed income relating to the block period that is charged to income- tax under Sub-section (2) of Section 158BA. It follows that the results of the different previous years comprised in the block period will have to be aggregated in order to find out the ‘total undisclosed income relating to the block period. In other words, the block period is to be treated as the previous year and so it follows that the losses suffered during certain parts or periods of the block period have to be set off or adjusted against the income earned during the remaining parts or periods thereof.
8. We now proceed to examine whether the principle of aggregation has been given effect to in Chapter XIV-B and if so, to what extent. Section 158BB, which we have extracted earlier, gives effect to the principle of aggregation. To paraphrase Sub-section (1), it says that the undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period. The undisclosed income of the previous years falling within the block period. The undisclosed income is to be computed in accordance with Chapter IV of the Act (Sections 14 to 59). Expln. (a).says further that for the purposes of determination of the undisclosed income, 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 VI without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Section 32(2). Reading Sub-section (1) in conjunction with Clause. (a) of the Explanation, it is clear that while aggregating the results of the different previous years falling within the block period, the losses have also to be taken into account. It may very well happen that while determining the result of a particular previous year falling within the block period on the basis of the evidence found as a result of the search or the documents or such other materials as are available with the AO, he may find that the computation of the income as per Chapter IV (Sections 14 to 59) yields a negative result, i.e., a loss. The possibility of this position has been taken into account by Clause. (a) of the Explanation. It is significant that having done so, the Explanation does not further say that if the computation results in a loss, it should be ignored. On the contrary, it proceeds to say that the loss for that previous year shall be considered for aggregation. It further clarifies that only the brought forward losses under Chapter VI and the unabsorbed depreciation under Section 32(2) cannot be adjusted against the income of a previous year while resorting to aggregation. Mr. Sudhir Chandra says that Clause. (a) of the Explanation prohibits set off of brought forward losses under Chapter VI or unabsorbed depreciation, and, therefore, the assessee’s claim is untenable. We do not think so. Sub-block period to 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 on the basis of the evidence and materials found at the time of the search. As already seen, such computation may yield in a negative income (i.e., loss) for a particular previous year. That is why Expln. (a) says that such losses are also to be aggregated while determining the aggregate undisclosed income. One reason for excluding the brought forward losses and unabsorbed depreciation from being set off against the undisclosed income computed in accordance with the provisions of Chapter IV may be to get over the decision of the Supreme Court in Cambay Electric Supply Industrial Ltd. v. CIT , wherein it has been held that Section 72, which deals with the carry forward and set off of business loss, has a direct impact upon the computation of the income under the head ‘profits and gains of business or profession’. It has been clearly held that it is not possible to accept the view that Section 72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the above head. Relying on this decision, an assessee whose case is covered by the provisions of Chapter XIV-B may attempt to reduce the undisclosed income by seeking to set off the past business losses, which have been determined in the regular assessments made earlier for the years falling within the block period and which have been permitted to be carried forward to the future years. The legislature might have thought that such an attempt cannot be allowed to succeed and that the block assessment under Chapter XIV-B would have to be made untrammeled by what happened in the earlier regular assessments. The other reason why the brought forward losses under Chapter VI are excluded is because the block assessment is confined only to the determination of the undisclosed income of the block period, whereas losses to be carried forward to future years may have been determined in the regular assessments made prior to the date of search under the normal provisions of the Act and in the very nature of things such losses, determined and allowed to be earned forward, have no place in the context of a block a assessment framed after the search. The two streams of assessment are kept apart and one is not projected into the other. The position is made clear beyond any doubt in sub Section (4) of Section 158BB. It says that losses brought forward from the earlier years under Chapter VI or unabsorbed depreciation under Section 32(2) will not be set off against the undisclosed income determined in the block assessment under Section XIV-B, but will be carried forward for being set off in the regular assessments. Thus, reading Clause. (a) of the Explanation to Sub-section (1) in harmony with the said Sub-section and Sub-section (4), we are of the opinion that the prohibition against setting off the losses against the undisclosed income of the block period applies only to losses under Chapter VI (Section 72) and unabsorbed depreciation determined and permitted to be carried forward in regular assessments and does not apply to adjustment of the loss computed in respect of a particular previous year falling within the block period against the income computed in respect of the other years falling within the block period. Such adjustment or set-off, in fact, cannot be considered to fall under the category of ‘brought forward losses under Chapter VI’ at all. In this respect, we are of the view that both Clause. (a) of the Explanation to Sub-section. (1) of Section 158BB and Sub-section (4) thereof convey the same idea. We are fortified in this by the view expressed by the Board in its circular cited (supra) at p. 98 (of (1995) 215 ITR St) to the effect that ‘where in the regular assessment proceedings set off of loss or unabsorbed depreciation has been allowed in the regular assessment proceedings, the same shall be ignored for determining the undisclosed income for the block period’. Thus, the object of the provisions appears to be to ensure that the assessee does not walk away with double set off of the brought forward losses under Chapter VI, once in the regular assessments and again in the block assessment. Nothing more can be read into the provisions.”
24. Not only this, the Bench has also taken note of the factual position that even in case the assessee has not filed return claiming loss as per statutory requirement, still that loss cannot be ignored. The Bench has also negatived the plea of the Departmental Representative that cumbersome search action were not meant to bring the negative figure and undisclosed income which has been worked out alone to be taken into consideration. The above analogy of the Bench is fully applicable to the factual position of the case in hand.
25. Not only this, we may also refer that CBDT vide its circular [No. 717 dt. 14th Aug., 1995-Ed.] as reported at (1995) 215 ITR (St) 70, 98 has also dealt with situation and clarified the situation as under :
“(d) Treatment of unabsorbed losses, depreciation, etc. : Brought forward losses or unabsorbed depreciation will be allowed to be carried forward and set off in subsequent regular assessments and shall not be set off in subsequent regular assessments and shall not be set off against the undisclosed income determined in the block assessment. Therefore, the total income or total losses of each previous year shall for the purpose of aggregation be taken as the total income or total losses without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Section 32. In other words, where in the regular assessment proceedings, set off of loss or unabsorbed depreciation has been allowed in the regular assessment proceedings, the same shall be ignored for determining the undisclosed income for the block period.”
(underlined, italicised in print, by us to supply emphasis)
26. This clarification of the CBDT makes it abundantly clear that set off of loss or unabsorbed depreciation, which has been allowed in the regular assessment to be carried forward alone was to be ignored, but in the case like our, where the AO had himself computed losses on the basis of seized material and figure of losses is much more than to the figure of undisclosed income appearing in the block assessment period, cannot be allowed to be ignored the losses as block period for all the purposes is one unit and figures of loss and income have to be looked into as a whole and not in the context of each previous year.
27. Further, the assessee is not claiming set off of brought forward losses as argued by the learned senior Departmental Representative, but here it is the question of adjustment of losses in one unit of block assessment period as computed by the AO himself as against the figure of undisclosed income assessed by him. The set off of brought forward losses and unabsorbed depreciation relates to the period prior to the block assessment or as assessed in the regular assessment as clarified by the CBDT, which altogether have to be ignored but the Tribunal, Mumbai Bench, rightly appreciated the factual position in respect of claim of adjustment of losses as computed by the AO against undisclosed income computed in the block period.
28. So far as the decision of Fenoplast Ltd. v. Asstt. CIT (supra), relied by the learned senior Departmental Representative is concerned, the issue involved in that case was altogether different. The Members, who heard the case were having difference of opinion on different points and the following questions were referred by the Vice President, who was author Member of the said order, which are as under :
(1) Whether in the facts and circumstances, 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 year 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 ?
29. The AM, who dissented with the Hon’ble Vice President also referred his own question and difference which are as under :
1. Whether on the facts and 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 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 ?
30. A perusal of the above shall reveal, the actual controversy is not at all identical to the issue involved before us. Further, the observations of the Hon’ble Third Member at p. 221 of 82 LTD (TM) is relevant, which are as under :
“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).”
(Emphasis, italicized in print, supplied by us)
31. This position makes the issue clear and this is one of the situations, which was envisaged by the learned. Third Member. That situation is appearing in the case in hand and as observed by him, there can be no undisclosed, income as per provision of Section 158BB, because the figure of the loss as computed by the AO during the block period is more than to the undisclosed income assessed by him. This observation also helps the case of the assessee.
32. It is also to be pointed out that in the Case of Fenoplast Ltd. v. Asstt. CIT (supra), which had been vehemently relied upon by the learned senior, Departmental Representative, the Third Member had taken note of the decision of Tribunal, Mumbai Bench, in the case of BDA Ltd. v. Asstt. CIT (supra), which was relied upon by the learned counsel for the assessee and it was observed by him that the said decision of the Tribunal deals with an altogether different situation than the one arising in the present reference and relevant observation is as under :
“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 BDA Ltd. (supra) 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 BDA Ltd. (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.”
33. The above observation makes the position clear and view of the decision in the case of BDA Ltd. v. Asstt. CIT (supra) is not distinguished nor overruled and that view still holds good, which is admittedly involving the factual position, which is identical to the facts before us and this fact has not been disputed by the learned senior Departmental Representative also. In view of these discussions, we are following the decision of the Mumbai Bench in the case of BDA Ltd. v. Asstt. CIT (supra) and result will be that computation arrived at by the AO was not in consonance with the mode of computation of undisclosed income as laid down in Section 158BB of the Act and losses computed by the AO himself on the basis of seized material are to be adjusted against the undisclosed income computed by the AO during the block period. Result is that ground raised by the assessee is allowed and the AO is directed not to ignore the figure of losses as computed but to adjust the same against the amount of undisclosed income as assessed by him. However, it is made clear that the assessee will not be entitled to claim carried forward of the amount of difference in between the assessed loss and assessed undisclosed income on two subsequent years, which has also not been claimed by the assessee.
34. So far as the other grounds are concerned, the learned counsel submitted that in case finding on the ground No. 5 is in favour of the assessee, there will be no undisclosed income as laid down in the case of BDA Ltd. v. Asstt. CIT (supra), as figure of loss was more than to the figure of undisclosed income computed by the AO. This argument prevails and the Bench did not consider fit to decide the remaining grounds argued by the learned. counsel for the assessee and learned senior Departmental Representative as there will be no positive figure of undisclosed income to be taxed under Section 113 of the Act. Result is that other grounds stand rejected being infructuous and the Departmental appeal as well as cross-objection of the assessee are also dismissed being infructuous.
35. The appeal of the assessee, that of the Department and the cross-objection of the assessee against Departmental appeal stand disposed off accordingly.