Madras High Court Holds Post-Search Return Invalid In Block Assessment, Rejects Kerala Roadways' Claim

The Madras High Court on 7 April, held that a return filed after the initiation of search proceedings and beyond the due date cannot qualify as a valid disclosure to exclude such income from undisclosed income in block assessment under the Income Tax Act.

A Division Bench of Justices G. Jayachandran and R. Sakthivel rejected the Kerala Roadways appeal. It partly accepted one of the Revenue's appeals and fully accepted another, while deciding issues on block assessment, revisional powers, and undisclosed income. It held:

“Block Assessment as a result of search cannot be substituted by the regular assessment to dilute the effect of undisclosed income unearthed during the search proceedings.”

The case arose from search and seizure proceedings conducted in January–February 2003 against Kerala Roadways Pvt. Ltd., a logistics company with a nationwide network. The Assessing Officer (AO) initiated block assessment under Section 158BC read with Section 143(3) for the block period from 1 April 1996 to 22 January 2003.

During the search, the Revenue alleged that the taxpayer suppressed income through a “token booking system” that enabled transport of goods without proper documentation. The Revenue also pointed to discrepancies between internal MIS records and the books of account, and irregularities in expenditure, including lorry hire charges.

The AO made additions treating these amounts as undisclosed income. The matter then went through revisional proceedings under Section 263 and appellate stages, leading to cross appeals before the High Court.

The taxpayer challenged the Commissioner's order under Section 263. It argued that the Commissioner could not reopen the block assessment in the manner directed. It also contended that income returned for assessment year 2002–03 could not be treated as undisclosed since it had already disclosed the amounts or paid advance tax.

The Revenue challenged the deletion of Rs.3,99,88,299 towards suppression of freight receipts and Rs.2 crores towards lorry hire charges. It argued that the appellate authority and the Tribunal wrongly accepted the taxpayer's explanation and incorrectly assumed that unaccounted receipts must be matched by unaccounted expenditure. It also challenged the deletion of Rs.1,68,90,172 on the ground that the return was filed after the search and beyond the due date.

The Court upheld the Commissioner's power under Section 263. It held that the Commissioner can revise any assessment order that is erroneous and prejudicial to the interests of the Revenue, including orders passed under Section 158BC read with Section 143(3). The judges observed:

“the Commissioner is empowered to examine any assessment order and exercise power under Section 263 of IT Act, if he is satisfied on examination of the records that the assessment order is erroneous or prejudicial to the Revenue. Whether the order is under Section 143(3) of the Act or under Section 158 BC r/w 143(3) of the IT Act, is immaterial. The plenary power of the Commissioner exercise revisional jurisdiction is to protect the interest of the revenue and same cannot be fettered by untenable reasons.”

On disclosure, the Court held that paying advance tax or filing a return after the initiation of search proceedings does not make the income “disclosed” for block assessment. It noted:

“.....paying advance tax or filing return, after initiating block assessment process, but before passing of block assessment order will no way help the assessee, who failed to disclose the income and filed his return with the normal period prescribed. Filing the return during the extended period of limitation, after initiation of search proceedings, without any proof for deduction of TDS, the income though disclosed later for the particular Assessment Year(AY), it has to be a drawn as the undisclosed income of the assessee during the block period under assessment.......”

The Court also rejected the reasoning that every unaccounted receipt must be offset by unaccounted expenditure. It held that such an approach is legally unsustainable. It held:

“.....High Court while exercising its power under Section 260 A of the Income Tax shall ensure and satisfy that the case involves a substantial question of law. Unless the conclusion drawn is perverse, contrary to mandatory provisions of law or contrary to law, same need not interfered in exercise power u/s 263 even if the said finding on facts is erroneous in the opinion of the court....”

The Bench therefore, set aside the deletion of Rs.3,99,88,299 relating to suppression of freight charges. It sustained the deletion of Rs.2 crores towards lorry hire charges. It also allowed the Revenue's appeal concerning Rs.1,68,90,172 and rejected the taxpayer's challenge to the revisional order.

Accordingly, the High Court disposed of the appeals in these terms.

For Appellant: N.V.Balaji, Advocate

For Respondent: D.Prabhu Mukund Arunkumar, Advocate