ORDER
Ram Swarup, Vice President
1. This is an appeal by the assessee against the order of the AO dt. 30th August, 1996, passed under s. 158BC of the IT Act, 1961.
2. The brief facts of the case are : The assessee is a company manufacturing Indian-made Foreign Liquor (shortly referred as IMFL) under a licence from M/s. Shaw Wallace & Co. Ltd. On 2nd August, 1995, the premises of the assessee-company was searched under s. 132 of the Act. As a consequence thereof a notice under s. 158BC was issued to the assessee-company requiring it to file a return of income from the block period from 1st April, 1985 to 2nd March, 1995. The company filed a return showing the income as ‘Nil’ under Chapter XIV-B of the Act. The AO, however, determined the total income under the said Chapter of the Act at Rs. 21,68,992, which consisted of two items of income-one of which was a commission paid of Rs. 15,47,492 relevant to the asst. yr. 1994-95 and the other excess of income as per seized books over the income returned by the company as per its books of account relevant for the asst. yr. 1995-96. Thus, there are two grounds of appeal raised, which are reproduced below :
(1) That on the facts and in the circumstances of the case, the learned AO has erred in disallowing commission paid Rs. 15,47,492 under s. 37(1) of the IT Act, in an assessment under s. 158BC of IT Act.
(2) That on the facts and in the circumstances of the case, the learned AO has erred in making addition of Rs. 6,22,400 on account of difference in the figures of income as per seized books of account and audited books of account.”
3. Ground one relates to the addition of Rs. 15,47,492 which is the commission paid by the assessee to one Ashahi Construction and Housing Finance Company Ltd. The assessee entered into an agreement with Ashahi Construction and Housing Finance Co. Ltd. This agreement was executed on 25th March, 1993, under the terms of which the said construction company was appointed as agent. The duty of the agent under the agreement was to canvass and secure orders and push up sales for IMFL manufactured by the assessee and for rendering such services, the agent was to be paid a commission as detailed in the said agreement. The assessee filed its return of income for the asst. yr. 1994-95 on 30th November, 1994, showing a total income of Rs. 29,23,190. While determining such total income for purposes of IT Act, the assessee deducted the commission of Rs. 15,47,492 as an allowable deduction as per the provisions of the Act. The AO subjected the return to the mandatory requirement of ascertaining the correct total income and the tax payable as required under sub-s. (1) of s. 143 and sent an intimation dt. 31st March, 1995, under that section to the assessee without any prima facie adjustments to the income returned. But when the proceedings commenced under s. 158BC the AO critically examined the contents of the said agreement. After a detailed analysis of the various clauses of the agreement, the AO came to the conclusion that the amount of commission paid to the agent was not laid out wholly and exclusively for the purpose of business. Accordingly he disallowed the commission payment and added the same to the total income.
4. Before us, the learned counsel for the assessee challenged the findings of the AO as to the admissibility of the expenses but confined it only to the fact that a disallowance under s. 37(1) of the Act is not permitted under the provisions of Chapter XIV-B which could be examined only when a regular assessment is made under s. 143(3). He placed reliance on the following decisions :
(a) Parakh Foods Ltd. vs. Dy. CIT (1998) 64 ITD 396 (Pune);
(b) Microland Ltd. vs. Asstt. CIT (1999) 63 TTJ (Bang) 701 : (1998) 67 ITD 446 (Bang); and
(c) Agrawal Motors vs. Asstt. CIT (2000) 66 TTJ (Jab) 130 : (1999) 68 ITD 407 (Jab).
5. The learned Departmental Representative, however, argued that but for the search the agreement dt. 25th March, 1993, would not have seen the light of the day, that the unearthing of the agreement resulted in detecting an inadmissible commission paid by the assessee, that under Chapter XIV-B there was no bar to the disallowance of expenditure and the same could be tested on the touchstone of the provisions of s. 37(1), and that therefore, the disallowance was fully justified for the reasons elaborated by the AO in the assessment order.
6. We have considered the rival submissions of the parties and perused the materials available on record as well as the decisions relied on. We have no indecision or uncertainty in our mind in repelling the argument of the learned Departmental Representative that but for the search, the agreement dt. 25th March, 1993 would not have been unearthed. The return for the asst. yr. 1994-95 was filed on 30th November, 1994, wherein the commission was claimed as a deduction as per agreement. That was long before the search on 3rd August, 1995, in question. The existence of the agreement was therefore, embedded in the computation of income. It is not the case that the agreement is a secret document and commission was paid outside the books of account. In fact, part of the commission to the extent of Rs. 10 lakhs was actually paid on 26th July, 1995, by D.D. and that has been recorded in the books.
7. The AO himself has not taken such a plea, which the learned Departmental Representative has taken. The AO has disallowed it only on the ground of its inadmissibility under s. 37(1) and not otherwise. Therefore we cannot allow the learned Departmental Representative to set up a new argument on a non-existing fact as under law it is not permissible.
8. Now coming to the disallowance, the position is clear in view of the various decisions of the Tribunal referred to above. It is not, therefore, necessary to go into the question of admissibility under s. 37(1) in these proceedings arising out of the order passed under s. 158BC. The determination of the undisclosed income under the Chapter lies in a narrow compass than what it could be where proceedings are initiated under s. 143(2) and the income is determined under s. 143(3). The amplitude of income under s. 158B is the income or property, which has not been or would not have been disclosed for purpose of IT Act. That means the income arising from any transaction not disclosed to the IT Department. An expenditure of this nature recorded in the books of account cannot by any stretch of imagination be called as an undisclosed income. It does not satisfy the yardstick or norms of undisclosed income under s. 158B.
9. In the case of Parakh Foods Ltd.’s case (supra), the Pune Bench of the Tribunal held as under at p. 418 :
“In view of what we have expressed above, we are unable to accept the contention of Mr. Gupta, learned Departmental Representative that any income which is includible in the total income but not returned by the assessee would be undisclosed income under s. 158B. Such contention of Mr. Gupta is too extreme to be accepted. Even at the cost of repetition it is clarified that if the assessee has disclosed the particulars of income before the date of search and the AO draws an adverse inference and intends to assess the same as income, then, in our considered opinion, such income cannot be treated as undisclosed income. For example, the assessee may claim a particular receipt as not taxable or may claim a particular expenditure as allowable deduction under the provisions of IT Act. In such cases, if the assessee has disclosed particulars of such income or expenditure and the AO intends to take a different view, then such income, in our opinion, cannot be termed as undisclosed income, though the same may be considered for inclusion in the total income during the course of regular assessment or reassessment as the case may be, in accordance with law.”
10. In the case in Agrawal Motor’s case (supra), the Jabalpur Bench of the Tribunal observed as under at pp. 433-434 :
“We have considered the arguments of both the sides. In the present appeal, we are considering the assessment of block period as per Chapter XIV-B of the IT Act. We have already discussed while deciding ground Nos. 8 and 9 of the assessee’s appeal. In our opinion, under Chapter XIV-B, the assessment of undisclosed income found as a result of search is to be made and any other addition/disallowance which is not covered by such undisclosed income found as a result of search is out of the purview of the Chapter XIV-B. The expenditure incurred on a foreign travel of the assessee was duly mentioned in the books of account. The only dispute is whether the expenditure was incurred for the purpose of business or not. In our opinion, this point has to be examined in a regular assessment and not in the assessment of block period under Chapter XIV-B. Accordingly we delete the addition of Rs. 24,920.”
11. In the case in Microland Ltd.’s case (supra), the Bangalore Bench of the Tribunal held at p. 490 as under :
“It will not therefore, be possible to say that the income that has been considered in the impugned assessment has got any connection with the search and seizure proceeding. Furthermore, the acquisition of the assets by the assessee are clearly recorded in the books of the assessee, the claim of depreciation is also debited to its regular accounts although as lower rate as per the provisions of Companies Act and not at the higher rates as per the Income-tax Rules, and the interest payments also stand debited to the regular accounts of the assessee. We agree with the assessee that the so-called discounting charges were neither debited to the books not claimed in the assessments and hence the question of adding back the same does not arise at all. We will revert back to this particular issue once more when we look at the merits of the claim of the assessee in paragraphs to come below. The search did not reveal any materials by virtue of which alone or even in conjunction with certain other materials, the AO was in a position to come to the conclusion that the claims of the assessee towards depreciation, etc. were fictitious and disallowable.
Hence, we are of the opinion that strictly going by the definition of “undisclosed income” as finding place in Chapter XIV-B, it is neither possible to say that what has been added back in the impugned assessment represents the undisclosed income of the assessee nor even can the same be considered to be connected with the search and seizure proceedings. On both these counts therefore, the Departmental effort to treat the disallowance of depreciation, etc. not only as undisclosed income but that too in a search and seizure assessment made under s. 158BC, must be considered to be without any basis. Ultimately therefore, we agree with the contention of the assessee that the addition not actually representing undisclosed income of the assessee discovered as a result of the search, the assessment made under Chapter XIV-B containing such addition must be considered to be illegal, invalid and unwarranted. On this count also, we strike down the impugned assessment.”
12. The Delhi D-Bench of the Tribunal has also taken the same view in IT(SS)A. No. 306/Del/1997, dated the 9th January, 1999, in the case of General Exporters vs. Asstt. CIT [reported at (2000) 67 TTJ (Del) 119].
13. We have considered the submissions of the parties and have gone through the decisions of the Tribunal referred to above. On going through the said decisions of the Tribunal, we are of the opinion that the issue in controversy is squarely covered in favour of the assessee. Respectfully following the ratio of the said decisions of the Tribunal, we hold that commission paid has nothing to do with any undisclosed income. As a matter of fact, the search did not reveal any undisclosed income and no incriminating materials were seized from which any undisclosed income could be determined. All that have been seized are books of account and other documents kept in the normal course of conduct of the business. Accordingly, the addition of Rs. 15,47,492 is deleted as it did not represent any undisclosed income.
14. The next ground is in respect of the addition of Rs. 6,22,400. The AO found that the net profit as per the seized books is Rs. 43,22,184.84 and the net profit as per audited accounts is Rs. 36,99,782.46. The AO after considering the explanation of the assessee in regard to the difference held that provisions of s. 158BB are quite specific in the computation of the undisclosed income for the block period and the said income had to be computed on the basis of evidence found as a result of search and any bona fide claims of expenditure for which there is no entry in the seized books cannot be considered in the computation of income. Accordingly, he rejected the claim of the assessee that for purpose of s. 158BB the net profit as per the audited accounts should be taken, and he determined Rs. 43,22,184.84 as the income under main sub-s. (1) of s. 158BB and deducted the net profits as per the audited accounts of Rs. 36,99,782.46 under cl. (d) of sub-s. (1) of the same section to arrive at the undisclosed income of Rs. 6,22,400.
15. The learned counsel for the assessee has questioned the wisdom of computing the income in the manner done by the AO. He submitted that the income has to be assessed according to the method of accounting employed by the assessee which is mercantile system of accounting and accordingly the income has to be taken on the basis of the audited accounts. If that is so, there is no undisclosed income of Rs. 6,22,400 coming within the provisions of s. 158BB but there is income within the provisions of s. 139(1) for purpose of assessment under s. 143. The addition of Rs. 6,22,400 is thus unintelligible and incomprehensible.
16. The learned Departmental Representative has, however, strongly relied on the order of the AO and submitted that the addition was legitimate and indefeasible.
17. At the outside we would like to state that the reasons given by AO in making the addition of Rs. 6,22,400 is fallacious and illogical. The assessment year involved is 1995-96. The assessee was entitled to file the return by 30th November, 1995. The assessee being a company was obliged to have the accounts audited in accordance with the Companies Act, 1956. It has also to get the accounts audited in accordance with the Companies Act, 1956. It has also to get the account audited under s. 44AB of the IT Act, and furnish a report of the auditor along with the return under r. 6G(1)(b) in Form No. 3CA & 3CD. Thus, the net profit shown of Rs. 36,99,782 is in consonance with the provisions of the IT Act and is based only on the material found during the search on 3rd August, 1995.
18. Sec. 158BB and sub-s. (3) of s. 158BA which are relevant for our purpose are reproduced below :
“158BB(1) The undisclosed income of the block period shall be 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 evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with AO, as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate or the losses of such previous years determined :
(d) where the previous year has not ended or the date of filing the return of income under sub-s. (1) of s. 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years.”
“158BA(3) – Where the assessee proves to the satisfaction of the AO that any part of income referred to in sub-s. (1) relates to an assessment year for which the previous year has not ended or the date of filing the return of income under sub-s. (1) of s. 139 for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period.”
19. The only previous year involved is 1994-95 relevant to the asst. yr. 1995-96 for which the addition has been made. According to the AO, the income from the seized books works out to Rs. 43,22,184.84. This will be the income for purpose of the main sub-s. (1) of s. 158BB reproduced above. Chapter IV contains as many as 88 sections covering the entire heads of income (Secs. 14 to 56). The said income has been determined only on entries relating to such income or the transactions as recorded in the books of account and other documents maintained in the normal course seized during the search and that there is not even a whisper or hint or suggestion in the order that any part of the income is undisclosed income, much less the amount of Rs. 6,22,400 within the meaning of s. 158B. From this income, the income referred to in cl. (d) reproduced above has to be excluded as the date of filing of the return under s. 139(1) has not expired before the date of search. The AO rejected the assessee’s claim of substitution of net profit as per audited accounts on the specious ground that the computation should be on the basis of evidence found as a result of search disregarding any claim not based on any entry not recorded in the seized books. There can be no quarrel with the statement in its correct perspective. But the provisions of s. 158BB have been clearly misinterpreted in arriving at the undisclosed income where none existed. If the income based on the seized books is Rs. 43,22,184.84 for purpose of main part of sub-s. (1) of s. 158BB, we are at a loss to understand how the same income fails the test of income under cl. (d) of the same section when the question of deductions comes. Further, sub-s. (3) of s. 158BA reproduced above makes the position crystal clear when it directs that any income relates to an assessment year for which the due date of filing of the return has not expired under s. 139(1), and clearly in this case the time had not expired, on the date of search, such income or transactions relating to such income are recorded on or before the date of search in the books of account or other documents maintained in the normal course, then the said income shall not be included in the block period. Therefore, the income determined by the AO on the basis of the seized books and other documents should not have formed part of the undisclosed income of the block period at all. In either way the income for the asst. yr. 1995-96, which is part of the block period is nil because on the basis of the AO’s own computation of Rs. 43,22,184.84 the said income has either to be altogether excluded under s. 158BA(3) before computation begins under s. 158BB or if it is included under the main sub-s. (1) of s. 158BB, then it has to be reduced under cl. (d) of the same sub-section. For the asst. yr. 1995-96 there is only one computation permitted by law. If the AO’s computation is correct, then that income has to be excluded or deducted and he has no choice of deduction of any other income either under sub-s. (3) of 158BA or under cl. (d) of sub-s. (1) of s. 158BB because there is no element of undisclosed income in the AO’s computation at all. In this background, the income of Rs. 36,99,782.46 as per audited accounts does not come for any reckoning and should have been rejected at the threshold. In fact, both sub-s. (3) of s. 158BA, cl. (d) of sub-s. (1) of s. 158BB deal with the same matter. We, therefore, accept the plea of the learned counsel for the assessee that the addition of Rs. 6,22,400 is incomprehensible and unintelligible and as it is impossible to hold that there is undisclosed income of Rs. 6,22,400 the same cannot be sustained.
20. The matter can be looked into from another angle. The assessee has furnished a reconciliation of the income as per the audited accounts of Rs. 36,99,782.46 with that of the seized books of Rs. 43,22,184.84. Both these figures have been worked only on the basis of entries recorded in the books of account or other documents relating to the income seized from the assessee during search. The difference arises because while working out the income of Rs. 43,22,184.84 certain income which accrued during the previous year and certain expenditure, for which liability was incurred during the previous year, were not considered. However, entries relating to the income or expenditure are recorded in the books of account or other documents and the AO has not disputed this fact. To illustrate, the interest received on the income-tax refund during the previous year, which was income, was wrongly credited to the income-tax account. This was rectified and income was increased to this extent. In the same way bonus payments to staff for which liability is incurred during the previous year was not provided in the accounts but is worked out after the P&L a/c is prepared, because bonus has correlation to net profit. Even if no entry is made in the accounts during the previous year, which is not possible, it arises out of the wages paid, which itself is recorded in the books. In this way all other adjustments were duly carried out and the accounts were audited and the net profit was ascertained at Rs. 36,99,782.46. These adjustments pertained to the income accrued and liability to the expenditure incurred during the previous year for which entries are recorded in the books of account or other documents on or before the date of search. They are an integral and indivisible part of the computation of income, profit and gains from business and they cannot be divorced merely on account of the intervention of search before the due date of filing of the return. A search by itself does not deprive an assessee the benefit of law to which he is otherwise entitled to. Even in the computation of income for the block period these provisions of Chapter IV covering ss. 14 to 56 have necessarily to be applied in terms of sub-s. (1) of s. 158BB and, therefore, these adjustments were permissible for determining the income and hence it was wrong on the part of the AO to have worked out the income of Rs. 43,22,184.84 without the statutory deductions and additions. The income for asst. yr. 1995-96 is, therefore, Rs. 36,99,782.46 as per the audited accounts. This amount of Rs. 6,22,400, which arises and results out of the net and final adjustments of additions of income and deductions of expenditure, where neither the income nor the expenditure is unrecorded, is not an undisclosed income in any sense of the that words. The addition of Rs. 6,22,400 is unwarranted and deserves to be cancelled. The addition made on this count is accordingly deleted.
21. In the result, the appeal is allowed as indicated above.