2007 (6) TMI 299 - AT - Income Tax

Block assessment - Validity of issuance of notice u/s 158BD - Undisclosed income of any other person - search and seizure operation u/s 132(1) - Statements of the Dalal - recording of satisfaction by the Assessing Officer - Time limit for initiation of proceedings u/s 1158BD - Nature of satisfaction that is contemplated u/s 158BD - HELD THAT - A search u/s 132(1) was carried out in the case of the dalal on 14-9-1999. A notice u/s 158BC was issued to dalal requiring him to file return of income declaring undisclosed income for the block period on 5-5-2000. The assessment u/s 158BC was finalized by the Assessing Officer on 21-5-2001. Subsequently in the case of the assessee before us a notice u/s 158BD was issued on 15-3-2002 calling upon the assessee to file return of income of undisclosed income for the block period. Firstly the satisfaction is much after the date of assessment of undisclosed income in the case of the person searched i.e. dalal and hence the same is belated. Such assessment has been completed on 21-5-2001 whereas this satisfaction has been recorded on 15-3-2002. Moreover on 15-3-2002. The ACIT Yamuna Nagar could not be construed to be acting as an Assessing Officer of the person searched i.e. dalal qua the recording of satisfaction is the assessment in the case of dalal had been computed on an anterior date. On this count also we are of the opinion that the said satisfaction note does not comply with the requirements of section 158BD of the Act. The mechanics of section 158BD are governed by the provisions contained therein and section 158BG only comes into play only when the order of assessment is required to be made in the case of a person covered under Chapter XIV-B of the Act. Therefore the inference of the revenue that the assessing authority in the case of the assessee is to be understood as ACIT Yamuna Nagar automatically is not justified. If it were to be so then there is no rationale for the order dated 13-12-2001 issued by the competent income-tax authority whereby the ACIT Yamuna Nagar has been authorized to exercise jurisdiction and perform the functions of an Assessing Officer under Chapter XIV-B of the Act with respect to the assessee. Ostensibly the said order is governed by the statutory provisions provided in Chapter XIII-A and XIII-B of the Act. Thus the revenue is not justified to argue that there was no Assessing Officer to whom the satisfaction along with the search material could be transmitted in terms of section 158BD and that the jurisdiction over the assessee under Chapter XIV-B automatically vested with the ACIT Yamuna Nagar i.e. Assessing Officer of dalal . Thus the said plea does not help in the case of the revenue that the requirements of section 158BD stood complied. On the basis of the foregoing we hold that the satisfaction note dated 15-3-2002 does not comply with the requirement of section 158BD of the Act. We are of the opinion that the assumption of jurisdiction by the Assessing Officer by issuance of notice u/s 158BD dated 15-3-2002 is vitiated in law. As we have noted earlier the invoking of section 158BD is a jurisdictional aspect and its validity is critical to justify the subsequent proceedings. As we have already deduced in the present case that the invoking of section 158BD is vitiated we therefore are of the opinion that the subsequent assessment framed by the Assessing Officer vide order dated 19-3-2004 u/s 158BD r/w section 158BC is liable to be quashed as lacking in jurisdiction. We hold so. Addition on Unexplained investment - whether on the basis of the material before the Assessing Officer could it be inferred that the assessee had indulged in money lending transactions outside the books of account - The sole basis for making the addition is the statement of Dalal. It is only on the basis of the statement of Dalal that the entries in the Annexure have been comprehended. The names and addresses of the parties have also been given by Dalal. In our considered view the impugned evidence is not sufficient to charge the assessee with any tax liability. The test of regularity of recording of transactions cannot by itself be a guarantee regarding its correctness and trustworthiness. The probative value of such evidence is to be tested on the basis of an independent and corroborative evidence. The entries in the Diary cannot be taken as correct and authentic without any corroborative evidence. The plea of the Revenue is that the entries in the Annexure which pertained to the transaction carried out through banking channels have been put to verifications and stand admitted by the respective parties. This aspect is stated to be a corroborative evidence regarding the correctness of the contents of the said Annexure. In our view the verifiability and subsequent confirmation of the bank transactions can at best be viewed as proof of reliability of such entries alone and not to the other entries in the said Annexure. Moreover this evidence does not corroborate the entries against the assessee. This is for the reason that factually it is admitted by the Revenue that none of the bank entries pertain to the assessee in question. Therefore the evidence regarding the verifiability of bank entries do not corroborate Annexure A-1 against the assessee. The stand of the Assessing Officer was corroborated by the material found during the search of a third party. Such material showed payments to assessee for illegal gratification. This corroborative evidence supported the case of the Revenue against the assessee and it was in this context the observation of the Tribunal that the material seized from a third person during the search is presumed to be correct and such observations have been thereafter approved by the Hon ble High Court. Now insofar as the instant case is concerned first of all nothing incriminating has been either found or seized from the assessee. The evidence and material in question belongs to and is found from a third person namely dalal . There is nothing to corroborate the contents of the same. As the facts show in the instant case the situation stands on a totally different footing than it was in the case before the Hon ble High Court. In the instant case there is no material to corroborate the stand of the Assessing Officer against the assessee. Two specific evidences have been used by the revenue. First is the Diary ( i.e . Annexure A-1) and second is the statement of Dalal the scribe of the Diary. Insofar as the Annexure A-1 is concerned the entries recorded therein do not by itself convey any meaning to any person other than the scribe himself. Therefore the only specific evidence i.e . meaningful and which requires scrutiny is in the shape of the statements of Dalal. This evidence is alone required to be scrutinized and evaluated as to whether it supports the inference drawn by the Assessing Officer that the assessee has indulged in transactions of money lending outside the books of account. In our view the verifiability and subsequent confirmation of the bank transactions can at best be viewed as proof of reliability of such entries alone and not to the other entries in the said Annexure. Moreover this evidence does not corroborate the entries against the assessee. This is for the reason that factually it is admitted by the Revenue that none of the bank entries pertain to the assessee in question. Therefore the evidence regarding the verifiability of bank entries do not corroborate Annexure A-1 against the assessee. The position taken by Dalal in the statement recorded by DDIT on 20-1-2000 and before the Assessing Officer in the course of impugned assessment proceedings is by and large consistent. On both the occasions Dalal has claimed that assessee has undertaken money lending dealings in cash. However on both the occasions it also emerges that he admitted or not having actually witnessed the money lending. In fact he has confirmed on the both the occasions that neither the money was exchanged through him and nor was he a witness to the exchange of money. He categorically confirmed that the money was transacted by the parties amongst themselves without his knowledge. He claimed that his role was merely to bring together the party in need of money with the party who was willing to lend. From the aforesaid it emerges that the said evidence does not justify an inference that any transactions in cash have indeed taken place. Firstly the parties ( i.e. the lender and borrower) named by Dalal have denied having undertaken any such transactions. Secondly Dalal himself also does not admit of having either witnessed the cash transaction or of having transacted it himself. In the face of this it cannot be established that the transactions as narrated by Dalal ever took place. In the absence of any such evidence the correctness of entries in Annexure A-1 cannot be established. After all the entries in the Annexure A-1 can be considered as corroborated only once the direct evidence of the person who is said to have made the payments or the direct evidence of a person who is said to have witnessed the exchange of payment is available on record. As the position stands before us there is no such evidence on record. Thus there is no material on the basis of which it can be said that transaction in cash have been entered into by the assessee as recorded in the Annexure A-1. We therefore are satisfied that the material and evidence brought on record by the Revenue is not sufficient to conclude that the assessee had indulged in money lending transactions in cash outside the books of account. During cross examination done during the impugned assessment proceedings Dalal stated that the name of the parties in Annexure A-1 are written by him as told by the parties who indulged in money lending. This also supports the inference that the recording in Annexure A-1 are not on the basis of the first hand knowledge of Dalal. In other words it can be safely deduced that the charge made out by Dalal against the assessee is not on the basis of his personal knowledge. Thus we feel that the evidence brought on record by the Revenue does not carry its case any further. The evidence in question is not amenable to be taken as true and correct to implicate the assessee with any tax liability under Chapter XIV-B of the Act. Evidently in the case of Dalal no adverse view has been taken in the face of the denials by the borrowers regarding the commission income in the hands of Dalal . Curiously similar denials of the parties have not found credence with the revenue and adverse inference against such parties i.e. the assessee before us has been drawn. Evidently such a contradictory approach from the side of the Revenue is untenable. Thus the addition has been deleted by the CIT(Appeals) is hereby affirmed. The revenue has thus to fail in its appeal.

Summary

Issues Involved:
1. Validity of assumption of jurisdiction under section 158BD.
2. Merits of the addition made by the Assessing Officer.
3. Admission of additional evidence by the Tribunal.

Issue-wise Detailed Analysis:

1. Validity of Assumption of Jurisdiction under Section 158BD:

The Tribunal examined whether the Assessing Officer (AO) correctly assumed jurisdiction under section 158BD. The AO issued a notice under section 158BD on 15-3-2002, but the assessment under section 158BC for the person searched (Dalal) was finalized on 21-5-2001. The Tribunal noted that the satisfaction required under section 158BD should be recorded by the AO of the person searched before the completion of the assessment under section 158BC. Since the satisfaction was recorded after the completion of the assessment of Dalal, it was deemed belated and invalid. The Tribunal emphasized that the satisfaction must be based on material found during the search and should be recorded in writing by the AO of the person searched. The Tribunal rejected the Revenue's argument that the same AO could issue the notice without recording satisfaction due to the commonality of the AO for both the searched person and the assessee.

2. Merits of the Addition Made by the Assessing Officer:

The Tribunal scrutinized the evidence used by the AO to make the addition, primarily the Annexure A-1 (a red diary) and the statements of Dalal. The Tribunal found that the entries in Annexure A-1 were vague, incomprehensible, and lacked corroborative evidence. The statements of Dalal, which formed the basis of the AO's inference, were inconsistent and unreliable. Dalal admitted that he did not witness the transactions and that the entries were based on information provided by the parties involved. The Tribunal concluded that the evidence was insufficient to establish that the assessee indulged in money lending transactions outside the books of account. The Tribunal affirmed the CIT(A)'s deletion of the addition of Rs. 4,98,650.

3. Admission of Additional Evidence by the Tribunal:

The Revenue sought to admit additional evidence, including a forensic report and an affidavit of Dalal, collected after the completion of the assessment. The Tribunal, following the precedent set in R.K. Syal v. Asstt. CIT, declined to admit the additional evidence. It was noted that the evidence was available during the first appellate proceedings but was not presented. The Tribunal emphasized that admitting such evidence would bypass the provisions of Chapter XIV-B, which does not allow reopening assessments to consider new evidence collected post-assessment.

Conclusion:

The Tribunal quashed the assessment framed under section 158BD read with section 158BC due to the invalid assumption of jurisdiction and lack of sufficient evidence to support the addition. The appeals of the Revenue were dismissed, and the cross-objections of the assessee were allowed. The Tribunal's decision applied mutatis mutandis to other similar appeals and cross-objections.