1. The Income-tax Appellate Tribunal, Allahabad has referred the following two questions under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for opinion of this court:

“1. Whether on the facts and circumstances of the case, the learned Tribunal was correct in law in holding that in a block assessment there is no scope of an assessment based on the best judgment of an Assessing Officer and that the ratio of the apex court's judgment in the case of CST v. H.M Esufali H.M Abdulali, [1973] 90 ITR 271 will not apply to it?

2. Whether, on the facts and circumstances of the case, the learned Tribunal was justified in holding that since no hidden assets, movable or immovable, had been found, the assessee could not be expected to have made a fortune of unaccounted professional receipts?”

2. The reference relates to the block period from April 1, 1986 to September 25, 1996.

3. Briefly stated the facts giving rise to the present reference are as follows:

The respondent assisted by his son, Dr. Sanjay Mehrotra, his wife, Dr. Bandana Mehrotra and certain other doctors, were running a pathology clinic in the capital city of Lucknow. The aforesaid trio of doctors together with other connected doctors, all members of bigger family, were subjected to search on September 25, 1996, when certain assets, account books and other documents etc. were found and seized. The assessments were completed by the learned Assistant Commissioner of Income-tax, Circle-II(1), Lucknow, vide separate orders, both dated September 22, 1997, with the previous approval of the Commissioner of Income-tax, Lucknow. The working pattern of the assessee-doctors in the matter of receipts by them, as explained before the Tribunal was that a patient went to the clinic for some pathological test, either he would be making the whole payment and collecting his reports after they were ready or he would be making part payment at the time of the examination and balance paid at the time of collection of the reports. There was yet a third category of persons who, though made certain part payment at the time of examination, but never turned up to collect the reports and in such cases, the question of balance payment never arose. Proceeding to refer to the quantification of the three types of receipts made by the assessee, group I where both advance and balance payments were received and receipts issued, aggregated to an amount of Rs. 63,490. In the second list there is a dispute of a sum of Rs. 6,670 out of the amount of Rs. 23,160 which amount according to the assessee was also received but did not reach them, as it had been embezzled by their employees. The Tribunal decided the issue in the assessee's favour by observing as under:

“25. We have considered the matter carefully. Taking up the treatment of the two amounts of Rs. 6,670 and Rs. 85,920, the admitted position is that the amounts in question were collected by the employee of the doctor trio from the patients. This being so, it cannot be gainsaid that these amounts would partake of the character of receipts in their hands. Both on the principles of accounting as well as the law, the amounts in question became the receipt of the assessees. About their embezzlement, as claimed by the assessees, again it would suffice to say that whatever be the compulsion of the assessees in not taking action against their employees, a bald statement on their part that the amount in question were embezzled by their employees is neither here not there, in law. If such submissions are accepted, there would be no end to such claims. We are, therefore, of the considered view that the two amounts in question are the receipts of the assessees.

25.1 Taking up the assessee's plea about non-receipt of the amount of Rs. 72,915, we are of the opinion that the amount in question actually does not appear to have been received by the assessees. Firstly, because the stand specifically taken by the assessees in this behalf, as per letter dated August 20, 1997, filed before the Assessing Officer is to the effect that the concerned patients did not come to collect their reports and that the uncollected reports which were duly shown to the predecessor Assessing Officer and perused by the then Commissioner, were available with them and that the detailed classification lists made available to the Assessing Officer in any manner. Secondly, and more importantly we ourselves devoted some time in the random check to the reports in respect of the patients who did not, as per the assessee's version, turn up to collect them by tendering the remaining payment and found that they were actually lying with them. In our opinion, this would lead to the irresistible conclusion that the patients in question, whatever reasons there might have been did not turn up at the assessee's place to collect the reports. If that were so, there was no question at all about the receipt of the remaining payments from such patients. Therefore, any addition on the strength of this figure of Rs. 72,915 cannot be made worked out. In view of the foregoing, an inference against the assessees can be drawn for not showing receipts to the tune of Rs. 92,490 only as against the amount taken by the Assessing Officer at Rs. 1,65,035

26. Now passing on to the multiplication formula adopted by the Assessing Officer, we find ourselves unable to accord our nod to it. In the first place, one should not forget that it is a search case in which a search party is supposed and expected to find out all the incriminating documents, material as also undisclosed assets. A search assessment, much less a block assessment, therefore, stands on a footing different than a normal assessment much less an assessment based on the best judgment of an Assessing Officer. It is for this reason that the ratio of the apex court decision reported in the case of H.M Esu-fali H.M Abdulali, [1973] 90 ITR 271 would not come to the rescue of the Department, as there it was a sales tax matter and a best judgment assessment was required to be made. The material that the Sales Tax Officer was possessed of was the figure of 19 days sale by the assessee not entered in their books of accounting. The Supreme Court held that in such situation it was not possible for the officer to find out precisely the turnover suppressed and he could only embark on estimating the suppressed turnover on the basis of the material before him, in which some amount of guess work was inevitable. In contradistinction to these facts, in the present case the assessee was searched (emphasis1 provided). During this search firstly, no other diary or other record comparable to the note book marked as “B-1/23” were found by the search party for the remaining period, which normally would have been, were it being maintained and kept. We are conscious that such a record could have been destroyed also from time to time. But in such a situation also, if the assessees had actually made a fortune of similar receipts in respect of the remaining part of the year, they must be reflected by certain assets, movable or immovable ought to have been found during the course of search. No such assets, despite the extreme step of search which amounts to a serious invasion on the rights of subjects and which is perhaps the last weapon in the arsenal of the Department, were found, which could be attributed to any such hypothetical receipts. In view of this we are unable to concur with the Department to the multiplication formula adopted by the learned Assessing Officer.

27. In the result, what finally emerges out is the only additions of Rs. 6,670 and Rs. 85,820, aggregating Rs. 92,490, could be made in the case of doctor trio. The Assessing Officer would work out the proportionate addition in the case of the appellant in the same ratio, which his individual receipt bore to the total receipts of the trio.”

4. We have heard Sri R.K Upadhyaya, learned standing counsel for the Revenue and Sri S.K Garg has appeared on behalf of the respondent.

5. Sri R.K Upadhyaya submitted that even in a case of search where some concealed income, undisclosed assets and expenditure are detected the assessing authority can make assessment for the block period and estimate the income for the entire year on that basis.

6. He has relied upon the decision of the apex court in CST v. H.M Esufali H.M Abdulali, [1973] 90 ITR 271.

7. Sri S.K Garg, learned counsel for the respondent submitted that in a case where a search was conducted and proceedings for assessment have been initiated under Chapter XIV-B of the Act, the assessment can be made only as per the provisions of section 158BB of the Act and if any undisclosed income, expenditure, investments and assets have not been detected the best judgment assessment cannot be made and the Department is free to make reassessment under section 147/148 of the Act.

8. Under section 158BB of the Act the procedure for computing the undisclosed income of the block period has been given. It provides 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 computed, in accordance with the provisions of this Act, on the basis of evidence found as the 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 with certain other conditions. The emphasis has been given for determination of total income on the basis of evidence found as the 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. It is not in dispute that in the search conducted on September 25, 1996 certain papers were found marked “B-1/23” which showed receipt of Rs. 6,670, Rs. 85,820 and Rs. 72,915. However, there was no material to show that any other income which may have been concealed and any undisclosed assets have been found in the search. Therefore, best judgment assessment, which had been made on the basis of search alone could not have been made as the block assessment in case of search has to be confined to income attributable to the material and evidence found therein or other information available with the Assessing Officer relating to such materials. The principle laid down by the apex court in the case of H.M Esufali H.M Abdulali, [1973] 90 ITR 271 is, therefore not applicable to the facts of the present case. We may mention here that if the Assessing Officer had come to the conclusion that some other income of the assessee (unconnected with the materials found at the time of search) has escaped assessment he is at liberty to initiate proceedings under section 147/148 of the Act in accordance with law.

9. Accordingly, we answer the questions referred to us in the affirmative, i.e, in favour of the assessee and against the Revenue. However, there shall be no order as to costs.