The Judgment of the Court was delivered by

K.M Joseph, J.:— The respondent/assessee is the proprietrix of a hospital. A search was carried out under section 132 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) in the hospital premises and also the assessee's residence. The search was finally concluded on September 3, 2002. Proceedings were initiated against the respondent for block assessment. Pursuant to the notice issued, the respondent filed a block return showing undisclosed income of Rs. 62,77,417 for the assessment years 1997-98 to 2003-04. The assessment was completed on August 30, 2004, determining an undisclosed income for the block period at Rs. 3,38,96,980. In appeal, the appellate authority ordered deletion of various amounts and finally sustained an undisclosed income of Rs. 72,08,230. The appellant impugned the matter before the Tribunal. The Tribunal dismissed the appeal.

2. The following are the substantial questions of law which are purported to raise in this appeal:

“1. (a) Whether, on the facts and in the circumstances of the case and in the light of the reasons given by the Assessing Officer in the assessment order (vide last paragraph of page 8 of the assessment order), the Tribunal is right in law in interfering with the addition of Rs. 45,19,238?

(b) Whether, on the facts and in the circumstances of the case and in the absence of any material evidence either during the assessment proceedings or during the appeal proceedings to prove that the receipt of Rs. 45,19,238 was a computer error, the Tribunal is right in law in deleting the addition of Rs. 45,19,238?

(c) Did the assessee discharge the burden of proof?

(d) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the claim of the assessee that the receipt entry in respect of bill No. 42 for Rs. 45,19,238 reflected in the computer print out as a computer error and is not the allowance by the Commissioner of Income-tax (Appeals) and the Tribunal being not based only supporting material or evidence or proof by the assessee, against the law and uncalled for?

(e) Should not the Tribunal, in the light of the failure of the assessee to discharge the burden, either confirmed the addition or remitted the case to the Assessing Officer for a de novo consideration in the light of Kapurchand Shrimal v. CIT, [1981] 131 ITR 451 (SC) followed in [2006] 280 ITR 55 (Ker)?”

2. Whether, on the facts and in the circumstances of the case:

(i) The assessee is entitled to claim depreciation for the assessment year 2002-03 in the block assessment and the Tribunal is right in law in allowing the same?

(ii) Should not the assessee have claimed depreciation in the regular assessment either initially or on a revised return before the Assessing Officer and the Tribunal is right in law in allowing the same in the block assessment?

3. (a) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the deletion of the addition of Rs. 12,75,035 being undisclosed income for the period April 1, 2001, to May 2, 2001, estimated on the basis of actual receipt for the remaining 333 days?

(b) Whether, on the facts and in the circumstances of the case and also in view of the fact that there was no books of account for the period and no case for the assessee that the income for the period is included in the return, the Tribunal is justified in interfering with the estimation of income made by the Assessing Officer and is not the interference against law, logic and absolutely perverse and whimsical?

4. Whether, on the facts and in the circumstances of the case and also in view of the fact that the cost was determined by the Assessing Officer based on the statement of Shri Kunhammed, the assessee's father, recorded under section 132(4) of the Income-tax Act at the time of search, the Tribunal is justified in deleting the addition of Rs. 1,95,41,744 made on account of unexplained cost of construction?”

3. We heard Shri Jose Joseph, learned counsel for the appellant and Shri T.N Seetharaman, learned senior counsel appearing for the respondent. As far as the first question of law is concerned, the following is the submission of the learned counsel for the appellant:

4. From the computer print out which was seized, the receipt entry in respect of bill No. 42 for Rs. 45,19,238, the case of the respondent was that it is an error. According to the respondent, the bill amount was Rs. 1,715. The Assessing Officer rejected the claim of the respondent while the appellate authority and the Tribunal accepted the case of the respondent that it was a case of an error. Learned counsel for the appellant would point out that in terms of the provisions relating to block assessment, the Assessing Officer was justified in relying upon this material which was unearthed in the search, namely, the computer print out which unambiguously revealed that the respondent had received Rs. 45,19,238. It is his contention that there was no evidence before the Assessing Officer to show that the correct amount is Rs. 1,715. He would submit that the bill for Rs. 1,715 was manually written up as against the other documents which were machine generated. Therefore, he would contend that the Tribunal erred in sustaining the finding of the appellate authority that the correct amount is Rs. 1,715.

5. Per contra, learned senior counsel for the respondent points out that the very fact that the amount is so colossal and that it related to a receipt in a single day was itself reflective of it being an error. The Tribunal held as follows:

“6. We have heard the rival submissions and considered the facts and materials on record. There is no dispute about the fact that in the pre-assessment notice dated June 15, 2004, issued by the Assessing Officer, the Assessing Officer has explicitly deducted the sum of Rs. 45,19,238 with a narration ‘income credited at SI. No. 42(A1)’. As rightly observed by the Commissioner of Income-tax (Appeals), the Assessing Officer has not set out any reason in the assessment order for changing his mind and including the same as undisclosed income in the assessment order. We also find that the Assessing Officer has not made any attempt to find out whether it was an error in the computer print out or otherwise, even though the assessee has produced the actual bill for the amount of Rs. 1,715 against IP No. 1. In this view of the matter, we do not find any infirmity in the order of the first appellate authority and as such we uphold the order of the Commissioner of Income-tax (Appeals) by rejecting this ground of appeal of the Revenue.”

6. We notice that the Tribunal has taken note of the contention of the respondent that no in-patients who had the capacity to pay such huge amount as treatment will get admitted to a hospital in a village, mainly specialised in Gynaecology. We also note the contention of the respondent that the hospital was not having such sophisticated machines to conduct such costly high tech treatments. It is pointed out that when this was pointed out to the Assessing Officer during the proceedings, he had reduced the amount while issuing the pre-assessment proposal. But, it was while completing the assessment, the said amount was also added. Learned counsel for the appellant would point out that it may be true that the includibility of the amount of Rs. 45,19,238 was not mentioned in the pre-assessment notice. He would submit that in such circumstances, what the appellate authority should have done, was he should have remanded the matter for a fresh consideration.

7. After having considered the matter, we are of the view that the appellant has failed to establish a substantial question of law in regard to the matter. Findings have been entered into by the appellate authority and the Tribunal that the inclusion of more than Rs. 45 lakhs under a single receipt, is essentially an error. It is also not in dispute that the Assessing Officer himself did not choose to include the same in the pre-assessment notice. We cannot overlook the argument of the respondent that in the course of the proceedings, the respondent was apparently able to convince the Assessing Officer of the nature of the error. In such circumstances, we reject the contention of the appellant. We also do not think that a case is made out for remanding it back to the Assessing Officer.

8. As regards the second substantial question of law which is raised and pressed before us is concerned, the contentions of the appellant are as follows:

For the assessment year 2002-03, before the search, the claim of the assessee on account of depreciation was Rs. 8,64,823. But, in the block return, the assessee made a claim for depreciation at Rs. 22,79,586 as on March 31, 2002. The contention of the appellant is that if the respondent had a claim for a higher amount as depreciation, the proper course for the respondent was to have filed a revised return and claimed what she was advised to claim therein. The appellant contends that in proceedings for block assessment pursuant to a search, it was not open to the authority to allow the higher amount which was claimed in the return filed for the block period contrary to what was claimed by the respondent herself while filing the regular return for the assessment year in question.

9. Per contra, learned senior counsel for the respondent would submit that the relevant provisions of the Act do not prohibit the assessee from claiming the benefit of the depreciation legally available to the asses, see under the Act, even in a proceeding for determination of the undisclosed income for the block period.

10. In order to answer the question, we must advert to the following provisions contained in Chapter XIV-B which provides for a special procedure. Section 158BA(1) reads as follows:

“158BA. Assessment of undisclosed income as a result of search.— (1) Notwithstanding anything contained in any other provisions of this Act, where after the 30th day of June, 1995, a search is initiated under section 132 or books of account, other documents, or any assets are requisitioned under section 132A in the case of any person, then, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.”

11. Section 158BB provides for the computation of the undisclosed income of the block period. Sub-section (1)(d) reads as follows:

“158BB. Computation of undisclosed income of the block period.— (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 Assessing Officer 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, —”

The Explanation in section 158BB reads as follows:

“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 depredation under sub-section (2) of section 32.”

12. We further notice section 158BH which reads as follows:

“158BH. Application of other provisions of this Act.— Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”

13. Thus, section 158BH makes all the other provisions applicable to the assessment under Chapter XTV-B unless it is otherwise provided for. Therefore, we would have to examine whether there is anything in Chapter XIV-B which taboos the assessee setting up a claim for depreciation as permitted under the Act, even though a lesser amount was claimed by the assessee in the regular return filed by her. The key provision appears to be section 158BB itself. It, inter alia, provides that the undisclosed income shall be the aggregate of the total income of the previous years within the block period which is to be computed in accordance with the provisions of this Act. The aforesaid provisions would lead us to the irresistible conclusion that the learned counsel for the respondent is correct in contending that even in a block assessment, under Chapter XIV-B, the Assessing Officer must allow the claim of the assessee for the depreciation which is legally permitted under the provisions of the Act. Of course, we have referred to the Explanation. On the one hand, the main provision of the Explanation provides that in computing the total income or loss for the purpose of aggregation, unabsorbed depreciation under sub-section (2) of section 32 is not to enter into the reckoning. The proviso declares that in computing deduction under Chapter VI-A for the purpose of the said aggregation, effect is to be given, inter alia, to unabsorbed depreciation under sub-section (2) of section 32. Learned counsel for the appellant has not placed reliance on the main clause as aforesaid in his submissions and hence we are not to be detained by the said provision. At any rate, in view of the direction given by the appellate authority as confirmed by the Tribunal, necessarily when the matter is computed, the officer must necessarily bear in mind the provisions of the Explanation. Subject to the same, we see no merit at all in the contention of the learned counsel for the appellant. Hence, we answer the second substantial question of law against the Revenue and in favour of the assessee and we hold that subject to the restrictions imposed in the Explanation to section 158BB, there is no embargo against the assessee claiming the benefit of the depreciation as per the provisions of the Act and the Rules. It is entitled to in law, even in proceedings under Chapter XIV-B to do so, and further, notwithstanding the fact that the amount of depreciation claimed is higher than the amount claimed by the assessee in the regular return filed by her.

14. In regard to the third substantial question of law which is purported to be raised, learned counsel for the appellant would submit as follows:

The controversy is raised in respect of the period April 1, 2001, to May 2, 2001. The Assessing Officer noting that no income was disclosed for the aforesaid period, ascertained the undisclosed income for the period by estimating the income on the basis of the actual receipt for the remaining 333 days in the year. He would submit that there is no basis for the Tribunal not to have accepted the complaint of the appellant that the appellate authority erred in interfering with the amount of undisclosed income for the aforesaid period which was arrived at on a rational basis. In this regard, he would submit the following facts before us:

In the course of the proceedings, a statement was given by none other than the father of the respondent who, in fact, was managing the entire affairs of the hospital. The case of the respondent was that the hospital had become fully functional only from May 1, 2001, and hence estimating the income for the period April 1, 2001, to May 2, 2001, on the basis of the actual collection details seized for the period May 3, 2001, to March 31, 2002, would be unsustainable. The Assessing Officer, however, took the view that the estimation of income for the period in question was being considered on the basis of the actual receipts for the respondent for the subsequent 333 days. He found that the estimation proposed was far less than ten per cent, of the total number of days of the financial year. He also noted that the respondent did not produce copies of the bills or any other documents in regard to the actual receipts for the hospital for the 32 days. The appellate authority took the view that no materials are available as regards the income for the period from April 1, 2001, to May 2, 2001. Thereafter, it is stated that when considered with the contention of the respondent that the hospital started functioning in a fullfledged manner with effect from May 1, 2001, and in the absence of any material regarding income for April 1, 2001, to May 2, 2001, there is no justification for the Assessing Officer in estimating the income for the period in question based on the income of the subsequent period of the year. The finding of the Tribunal is as follows:

“11. We heard the rival submissions and considered the facts and materials on record. There is no dispute about the fact that no materials were seized for the period from April 1, 2001, to May 2, 2001. In the block assessment income is to be determined based on the seized materials. Even though the estimate is permissible it should be with reference to the seized materials only. When there was no material found for the period April 1, 2001, to May 2, 2001, we do not find any force in the contention of the learned Departmental representative that estimate can be made for that period also. We find force in the contentions of the learned counsel for the assessee in confirming the order of the Commissioner of Income-tax (Appeals) for the reasons stated therein. Thus, this ground of appeal of the Revenue also fails.”

15. Section 158BB permits ascertainment of undisclosed income in the case of a search on the basis of evidence found and such other materials or information as are available with the Assessing Officer and relatable to such evidence. In this regard, learned counsel for the appellant would refer to the statement of Shri Kunhammed under section 132(4) of the Act. In answer to a query as to when the hospital commenced its activities, it is, inter alia, stated as follows:

“‘Manzoor Hospital’ commenced its activities in the new building in the year 1996. The land on which the hospital building was constructed has been received by my wife as gift which she subsequently gifted to my daughter Smt. C. Sabira. The construction work of the hospital was commenced in the year 1994. Three floors on one side of the hospital was completed in the year 1996 and the hospital started its functioning. By around 1999 three floors on the adjacent side too was completed. By March, 2001, construction of all the seven floors, on both the sides were fully completed. Each floor of the hospital building admeasures 731. 24 sq. mt. Thus the total constructed area for all the 7 floors when put together is 5, 118. 68 sq. mt. There are 29 rooms in each of the first five floors including ground floor and each of such rooms is bath attached.”

16. In fact, the Assessing Officer has noted that in regard to the question of 17 investment in the hospital construction (which incidentally, we will be dealing as the last question of law), though the respondent stated that she did not know anything about it and all the details are known only to her husband Shri Kunhammed. Learned counsel for the appellant would submit, therefore, that the hospital was functioning since 1996 and for the period April 1, 2001, to May 2, 2001, if on the basis of the income for the remaining period in the financial year, estimation is made in the facts of this case, the Tribunal ought not to have confirmed the finding of the appellate authority. Learned counsel for the respondent, on the other hand, supported the reasoning of the Tribunal. He would submit that there was no material unearthed in relation to the period in question for justifying an estimation of undisclosed income as was done. Learned counsel would place reliance on the decision of the Bombay High Court reported in CIT v. C.J Shah and Co., [2000] 246 ITR 671 (Bom) and the decision in Commissioner Of Income-Tax v. Smt. Usha Tripathi, [2001] 249 ITR 4 (All).

17. We see merit in the contention of the appellant. There is no case for the appellant that there is any material unearthed during the search which would disclose any income for the period April 1, 2001, to May 2, 2001. However, the appellant would apparently resort to the process of estimation of the income for the said period on the basis of the income arrived at for the remaining period of the financial year. That apart, of course, the appellant would also seek to take advantage of the statement given on behalf of the appellant that the hospital was functioning since 1996. In other words, there would be income for the broken period in question and in a situation where no income is disclosed on the basis that the hospital became fully operational only in 2001 also, the authorities have proceeded to compute the income for the broken period in question, it is submitted.

18. We would think that having regard to the nature of the proceedings under Chapter XIV-B which is geared to ascertainment of the undisclosed income, but based on the evidence unearthed during the search and other materials and information relatable to such evidence, the approach of the Assessing Officer is insupportable. As we have already noted, no evidence was available as a result of the search related to the broken period in question. There is no material or information with him relatable to such evidence also, in regard to the income from the broken period in question. What is done is estimation of the income on the basis of the income ascertained for the remaining period on the basis of probability. We do not think that the provisions of the Act in question support the officer in his endeavour. Accordingly, we find no merit in the contention of the appellant and we answer the said substantial question of law against the appellant.

19. In regard to the last substantial question of law which is purported to be raised, the learned counsel for the appellant would make the following submissions before us:

The Assessing Officer estimated the cost of construction of the building at Rs. 3 crores. In this regard, it is pointed out the statement given by Shri Kunhammed under section 132(4). He has further stated apart from what we have extracted earlier, as follows:

“OTIS Lift has been installed in the hospital for an approximate cost of Rs. 10 lakhs. As far as I remember, an amount of Rs. 1 crore has been approximately spent on construction of the hospital building. I do not exactly remember how much had been spent. The accounts of the construction work are lying with Shri Dinesh Babu who is keeping my accounts also.”

20. The Assessing Officer found that on verification of the income-tax returned for the assessment year 2001-02, it was seen that the total expenditure shown by the assessee on the hospital building up to March 31, 2001, is Rs. 89,51,229. In the return of income for the assessment year 2002-03, which was filed before the date of search, the total construction cost is Rs. 1,04,58,256. In the cash flow statement for the period ended August 29, 2002, the assessee has shown to have spent a further sum of Rs. 26,55,000 on the hospital, taking the total investment in the building at Rs. 1,31,13,256. Thereafter, he entered the following reasoning:

“Considering the total constructed area of the hospital building, which is an RCC framed 7 storeyed structure having total built up area of 5, 118. 68 sq. mt. the total cost of construction shown is substantially suppressed. As per the schedule of rates being adopted by the CPWD for RCC framed hospital structures, the rate per sq. mt. for the year 1992, was Rs. 2,920 per sq. mt. Considering the additional rate to be adopted in cases of structure having more than 6 floors, the water supply and sanitation, electrical work, external services, flooring, windows, etc., addition of at least 25 per cent, to the basic rate is required to be given. Also, considering the fact that the basic rate of Rs. 2,920 per sq. mt. was applicable to the year 1992, appropriate cost indexation on the rate per sq. mt. will have to be applied in this case, as the construction of the hospital building was completed in various stages from the year 1994 to March, 2001.”

21. It is thereafter by applying the parameters indicated, it was found that even by any conservative estimate, the cost of construction was determined as Rs. 3 crores (rounded off figure). Thereafter, the Assessing Officer reasons that the assessee was utilising gifts received by her for construction work and purchase of immovable properties. She did not have any other source of income. The difference between the estimated cost of construction and the cost of construction actually shown by her up to March 31, 2002, was, inter alia, found to represent the undisclosed income which was determined as Rs. 1,95,41,744. The Tribunal has entered the following finding:

“14. We have heard rival submissions and considered the facts and materials on record. In the decisions relied upon by the learned counsel for the assessee, it has been held that in the block assessment, even the DVO's report cannot be relied upon. In this case on hand, the Assessing Officer has not even referred the matter of valuation to the valuation cell, but has made his own valuation by adopting CPWD rates. There is force in the contention of the learned, counsel for the assessee that even statement recorded under section 132(4) from Shri Kunhammed, the cost of construction was stated to be only Rs. 1 crore, which was far below the value shown in the accounts at Rs. 1,31,13,256. In this view of the matter, we find that the block assessment was made on estimate basis without any seized material. This method of assessment is not permitted under the Act. Hence, we are inclined to confirm the order of the Commissioner of Income-tax (Appeals) by rejecting this ground of appeal of the Revenue.”

22. Learned counsel for the appellant would submit that having regard to the known source of income, which was gifts received by the respondent, and the nature and extent of the contributions admittedly made by the respondent, estimation by the officer on the basis of the search and the statement given ought not to have been interfered with by the appellate authority.

23. Per contra, learned counsel appearing on behalf of the respondent would impress upon us the purport of section 158BB of the Act. He cited before us the following case law:

(1) CIT v. Vinod Danchand Ghodawat, [2001] 247 ITR 448. (Bom);

(2) Commissioner Of Income-Tax v. Ashok Khetrapal, [2007] 294 ITR 143 (Delhi); and

(3) CIT v. Pramod Kumar Gupta, [2010] 320 ITR 408 (Delhi).

24. It is submitted that the Supreme Court has dismissed the special leave petition filed against the last judgment by its judgment reported in [2009] 312 ITR (St.) 6. He would contend that the Assessing Officer has in this case gone to the extent of estimating the income all by himself with reference to some criteria. But, he would contend that this is beyond the powers conferred on him under Chapter XIV-B. We are of the view that there is no merit in the contention of the appellant. Chapter XIV-B deals with ascertainment of the undisclosed income of the party for the block period. In the case of a search, the undisclosed income must be determined with reference to the evidence unearthed during the search and also the other materials or information available which are relatable to such evidence. Therefore, the focus must be on the evidence which were unearthed during the course of the search or other material or information relating to such evidence. There is no relevant matter as such which can be relied on by the appellant to justify the finding about the cost of construction being what was estimated. In the statement, in fact, what is stated is, as already noted, approximately one crore of rupees was spent. The Assessing Officer could not have by way of estimation in proceedings under Chapter XIV-B, determined the cost of construction and therefrom arriving at the undisclosed income by deducting the alleged admitted cost of construction.

25. Accordingly, we answer the aforesaid substantial question of law against 27 the Revenue and in favour of the assessee. The appeal is dismissed.