The Tribunal's method of estimating undisclosed income based on suppressed sales turnover is valid, and disallowance under Section 40A(3) cannot be applied in block assessments.

JUDGMENT :

A.K. JAYASANKARAN NAMBIAR, J.

1. Both these Income Tax Appeals by the revenue impugn the order dated 27.02.2004 in ITA No. 31/Coch/2003 and ITA No. 32/Coch/2003 respectively. The Appellate Tribunal by the aforesaid order had disposed the appeals preferred by the assessee and the Revenue against the order of the First Appellate Authority in an appeal preferred by the assessee against an order of assessment under Section158BC read with Section 143 of the Income Tax Act for the block period 01.04.1989 to 23.12.1999.

2. The brief facts necessary for the disposal of these Income Tax Appeals are as follows:

Consequent to a search and seizure action under Section 132 of the Income Tax Act at the business and residential premises of the respondent assessee on 23.12.1999, an assessment for the block period from 01.04.1989 to 23.12.1999 was completed against the respondent assessee under Section 158BC read with Section 143(3) of the Income Tax Act on 31.12.2001. The Assessing Authority had by the said order rejected the books of accounts maintained by the assessee during the aforementioned block period and had proceeded to estimate the income of the assessee for the entire block period on the basis of the average running stock of the assessee for the various years covered by the block period. The rejection of the books of accounts was based on material that was unearthed during the search on 23.12.1999 and statements recorded from various persons including the assessee’s son, who was in charge of the business of the assessee, and certain customers, who had visited the business premises of the assessee. The undisclosed income generated for the entire block period was computed at Rs.5,86,52,026/- and tax thereon was demanded from the respondent assessee.

3. Aggrieved by the order of assessment, the assessee preferred an appeal before the First Appellate Authority. The First Appellate Authority while susbtantially confirming the demand of the Assessing Officer, modified the demand by fixing the undisclosed income at two times the running stock of the assessee during the various assessment years covered in the block period, as against three times the running stock that was taken by the Assessing Officer. The First Appellate Authority also restricted the said addition to only five of the 10 years covered by the block period on the finding that incriminatory material recovered during the time of search pertained only to those five years and not to the other years covered under the block period. The five years in respect of which the undisclosed income was directed to be computed were 1995-1996, 1997-1998, 1998-1999, 1999-2000, and 2000-2001. The First Appellate Authority also confirmed the disallowance made by the Assessing Officer in relation to the expenditure claimed under Section 40(A)(3) and added back these amounts to the calculation of the undisclosed income. The assessment order was, therefore, modified by the First Appellate Authority only to a limited extent.

4. It was aggrieved by the order of the First appellate authority that both the respondent assessee as also the revenue preferred appeals before the Income Tax Appellate Tribunal. The Appellate Tribunal by the order impugned in these appeals upheld the finding of the First appellate Authority that the estimation could be done only in respect of those years where there was material to suggest that there was a suppression of the income by the assessee. The Tribunal however deprecated the practice of estimating the undisclosed income based on the average running stock method that was adopted by the Assessing Authority as also the First Appellate Authority. Relying on the submissions made on behalf of the assessee, the Appellate Tribunal directed the estimation of undisclosed income to be computed at the rate of six times the suppressed sales turnover for the respective years in which material was available with the Department to suggest actual suppression. The Tribunal also p