2010 (9) TMI 862 - HC - Income Tax

Block assessment - validity and legality of the search - Circular No. 772, dated 23rd December, 1998 - Power of the tribunal - starting point of limitation - Held that - In the case of block assessment, the Assessing Officer on determination of undisclosed income of the block period in accordance with this Chapter shall pass an order of assessment and determine the tax payable by him on the basis of such assessment. This block assessment as contained in Chapter XIV-B is a special procedure provided for unearthing undisclosed income and bringing to tax the said income by imposing tax. Under the scheme of the block assessment as is clear from the wordings in each and every section, the block assessment is based on search and seizure. (1) The Tribunal has got powers to look into all aspects of search and a valid search is sine qua non for initiating block assessment. (2) Materials seized during an invalid search cannot be used in block assessment proceeding but can be used in other assessment proceedings under the Act.(3) The power to put prohibitory order under section 132(3) is under law but the reasons for doing so has to be recorded in writing and are justiciable - (4) The period of limitation starts on the date on which the last of authorisation has been executed and not when the authorised officer states that the search is finally concluded. Putting a prohibitory order under section 132(3) does not elongate the starting point of limitation. In the light of the aforesaid discussion, as the Tribunal has declined to go into the jurisdictional aspect, the appropriate course would be to set aside the order and remit the entire matter back to the Tribunal for fresh consideration keeping in mind the observations made in this judgment and also consider the jurisdiction aspect which it had declined to consider while passing the impugned order. Therefore, the finding recorded by the Tribunal that action of the Income-tax authorities anterior to search cannot be the subject-matter of the appeal, the legality of the validity of the search proceedings cannot be gone into in the appeal against the order of block assessment and statute has not provided any right of appeal, against such an order cannot be sustained - substantial questions of law answered in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Scope of Appeal
2. Limitation
3. Panchnama

Detailed Analysis:

Scope of Appeal:
The Tribunal can examine the search activity from its initiation to its conclusion to determine the validity of the search proceedings. The Tribunal has jurisdiction to look into the validity of search proceedings, including whether the officer who authorized the search had the necessary "reason to believe" that a search was warranted. This jurisdictional aspect is crucial as a valid search is a sine qua non for initiating block assessment proceedings. If the search is found invalid, the subsequent assessment order would be void. Therefore, the Tribunal must ensure all procedural aspects and requirements are complied with before upholding the validity of the search.

Limitation:
The limitation period for passing a block assessment order starts from the end of the month in which the last of the authorizations for search was executed. The term "executed" refers to the conclusion of the search as recorded in the last panchnama. The Tribunal held that the starting point of limitation is the day on which the first panchnama is made in respect of the last authorization for search. Subsequent visits based on the same authorization are considered inspections and do not extend the limitation period. The law does not permit the authorized officer to adjourn the search proceedings and fix a date for continuation. If the search is not completed on the first visit, the subsequent visit is not a continuation of the search but an inspection of the items under the prohibitory order.

Panchnama:
A panchnama is a written record of what the panchas witness during the search. It documents the search proceedings, including any seizures made. The last panchnama, which records the conclusion of the search, is crucial for determining the limitation period. The Tribunal emphasized that the search must be conducted continuously without interruption, and the search concludes when the search party leaves the premises. Any subsequent visit for inspection of items under a prohibitory order does not constitute a new search and does not extend the limitation period. The panchnama drawn during such inspections is not considered the last panchnama for computing the limitation period.

Conclusions:
1. The Tribunal has the power to examine all aspects of the search, and a valid search is essential for initiating block assessment.
2. Materials seized during an invalid search cannot be used in block assessment proceedings but can be used in other assessment proceedings.
3. The power to issue a prohibitory order under section 132(3) is valid, but the reasons must be recorded in writing and are subject to judicial review.
4. The limitation period starts from the date the last authorization is executed, not when the authorized officer states the search is finally concluded. A prohibitory order does not extend the limitation period.

Order:
1. The appeal is allowed.
2. The substantial questions of law are answered in favor of the assessee and against the Revenue.
3. The matter is remitted back to the Tribunal for fresh consideration on the merits, including the jurisdictional points.
4. No costs.