In Mahalaxmi Motors Ltd. vs. Secretary, Income-tax Settlement Commission, Chennai, High Court of Andhra Pradesh held that if there existed any unabsorbed loss or carried forward depreciation, that spilled over the block period then such shall not be adjusted with the undisclosed income. However, if losses or depreciation are attributable to block period, they are liable to be worked out, as though it is a regular assessment as per mandate of section 158BH. Thus, undisclosed income shall not be used to set-off unabsorbed losses or depreciation   
Facts of the case:
The assessee also the petitioner is a dealer of machines in Secunderabad. On 13.12.1995, a raid was conducted in his business premises and also in associate establishments. The procedure under Chapter XIV-B of the Income Tax Act, 1961, was invoked.
In this Chapter, “block period” means the period of ten previous years preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A, and includes, in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition.
In this case, the block assessment covering the assessment years 1985-86 till 13.12.1995 was made. An order was passed on 31.12.1996, wherein undisclosed income and tax thereon was imposed on the assessee. The petitioner approached the Settlement Commission at Chennai under Section 245D of the Act. Through its order, dated 11.02.2002, the Settlement Commission determined the undisclosed income for the block period at Rs.1,36,52,701 and imposed tax at 60%, amounting to Rs.81,91,620. The assessee challenges the said order.
It was held that:
The assessee contended that the accumulated losses and carried forward depreciation were referable to the block period, sub-section (4) of Section 158BB of the Act, was invoked to disallow them. The assessee argued that the said provision gets attracted only when there exist the unabsorbed losses or carried forward depreciation, that have spilled over beyond the block period, and not otherwise.
As per Chapter XIV-B of the Act, while a search is conducted, a detailed procedure is to be followed. The first step is to calculate the undisclosed income which is defined in Section 158BB as:
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.
On the income calculated above, tax is to levied.
For the purpose of assessment under this Chapter, losses brought forward or unabsorbed depreciation shall not be set off against the undisclosed income determined in the block assessment, but may be carried forward for being set off in the regular assessments.
The Court held that the facts of the case is not clear as to whether there existed any unabsorbed loss or carried forward depreciation that spilled over the block period. If this is the case then they are not liable to be adjusted. If, on the other hand, the losses or depreciations are those which are attributable to the block period, they are liable to be worked out, as though it is a regular assessment which, in fact, is a mandate under Section 158BH of the Act.
The Court gave the above clarification and disposed the writ petition. The Court directed that the consequential order shall be passed keeping in view the aspects pointed out.

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