[ E. K. Lingamurthy & Anr. v. Settlement Commission (IT
and WT) & Anr., (2009) 314 ITR 305 (SC)]
The Income-tax Department conducted a search u/s.132 of the
Act on 11-10-1996 on the business premises of the petitioner-assessees as well
as on their family members who were partners in various firms. The assessment
proceedings were initiated under Chapter XIV-B of the Act. A consolidated
application was filed before the Settlement Commission for the block period
1-4-1986 to 11-10-1996. The said application was admitted. The petitioners
claimed unabsorbed depreciation and business loss for the A.Y. 1995-96 and
1996-97 comprised in the block period. The claim was rejected by the
Settlement Commission by referring to S. 158BB(4) and Explanation (a) to S.
158BA(2) holding that the unabsorbed loss and current depreciation claimed in
the regular return should be determined and allowed to be carried forward for
future adjustment only in the regular assessment and consequently, the claim
for adjustment of unabsorbed depreciation against the undisclosed income in a
block assessment would not be considered. The High Court rejected the writ
petition filed by the petitioners holding that the provisions of Chapter XIV-B
did not indicate even a remote possibility for considering a claim of set-off
or brought forward losses under Chapter VI or unabsorbed depreciation
u/s.32(2) to be considered in determination of undisclosed income.
Before the Supreme Court the assessee contended that there
was a conceptual difference between current depreciation and carried forward
unabsorbed depreciation. It was the case of the assessee that Explanation (a)
to S. 158BB did not rule out current year’s losses or current year’s
depreciation; it only ruled out the brought forward losses or unabsorbed
depreciation u/s.32(2).
The Supreme Court held that S. 158BB, inter alia,
states that 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 Chapter IV. ‘Total income’ is
defined in S. 2(45) to mean the total amount of income referred to in S. 5,
computed in the manner laid down in the Act. In other words, Chapter XIV does
not rule out Chapter IV of the Act in the matter of computation of undisclosed
income under Chapter XIV-B. Ordinarily, in the case of regular assessment, the
unit of assessment is one year consisting of twelve months whereas in the case
of block assessment, the unit of assessment consists of ten previous years and
the period up to the date of the search. S. 158BB provides for aggregation of
income/loss of each previous year comprised in the block period. The block
period assessment under Chapter XIV-B is in addition to regular assessment.
According to the Supreme Court, analysing S. 158BB(4) read
with Explanation (a) thereto, it was clear that only brought forward losses of
the past years under Chapter VI and unabsorbed depreciation u/s.32(2) were to
be excluded while aggregating the total income or loss of each previous year
in the block period, but set-off of the loss suffered in any of the previous
years in the block period against the income assessed in other previous years
in the block period was not prohibited. According to the Supreme Court the
Settlement Commission had erred in disallowing the application of the assessee
for set-off of inter se losses and depreciation accruing in any of the
previous years in the block period against the income returned/assessed in any
other previous year in the block period.
