2012 (11) TMI 943 - AT - Income Tax

Validity of Service of Notice in Block Assessment held that - Irregularity in proper service of notice which can be treated as curable under section 292B of the income tax act is only in the cases where the notice under section 143 (2) was issued properly and within the period of limitation and the assessee did not raise any objection regarding the service of the notice during the assessment proceedings and also participated in the assessment proceedings then at a later stage the assessee is precluded from raising such objection. Therefore, the provisions of section 292B are not applicable in the case where the Assessing Officer has not at all issued notice under section 143 (2) within the period as prescribed. Requirement of section 143 (2) cannot be dispensed with as it is mandatory and therefore, the notice under section 143 (2) issued after the expiry of prescribed period is an uncurable defect and consequently, the block assessment is erroneous and not sustainable - block assessment in the case in hand is without jurisdiction and consequently, the same is set aside. Undisclosed Income as per section 158 BB Held that - As Block assessment being invalid is set aside; therefore, no need to go into the merits of the issue of addition. Consequently the appeal filed by the revenue is liable to be dismissed - In the result appeal filed by the assessee is allowed whereas the appeal filed by the revenue is dismissed.

Issues Involved:
1. Validity of additions made by the Assessing Officer (AO) based on conjectures and presumptions.
2. Proper procedure for determining undisclosed income under Chapter XIVB.
3. Correctness of the assessment procedure under sections 158 BC and 158 BD.
4. Legitimacy of documents seized from the registered office of companies.
5. Impact of joint family living arrangements on the search warrant.
6. Accuracy of declared brokerage income and its assessment.
7. Method of accounting (mercantile vs. cash basis) used by the assessee.
8. Validity of notice under section 158 BD and subsequent assessment.
9. Timeliness of notice under section 143(2) and its impact on assessment validity.

Detailed Analysis:

1. Validity of Additions Based on Conjectures and Presumptions:
The assessee contended that the AO erred in making additions based on conjectures, surmises, estimates, and presumptions not supported by any evidence or documents. The tribunal emphasized that undisclosed income must be determined based on authentic, reliable, and verifiable information found during the search.

2. Procedure for Determining Undisclosed Income Under Chapter XIVB:
The AO's failure to appreciate that the undisclosed income under Chapter XIVB must be determined based on evidence found during the search was highlighted. The tribunal reiterated that the assessment should follow the procedures laid down under sections 158BC and 158BB.

3. Correctness of Assessment Procedure Under Sections 158 BC and 158 BD:
The assessee argued that the AO framed the assessment as a regular assessment instead of following the procedures under sections 158 BC and 158 BD. The tribunal noted that the proper procedure involves issuing a notice under section 158 BD, followed by an assessment under section 143(3).

4. Legitimacy of Documents Seized from Registered Office:
The assessee claimed that the documents seized from the registered office of the companies were erroneously considered as belonging to the assessee. The tribunal acknowledged that the registered office of companies is expected to hold such documents, and the AO's consideration of these documents as the assessee's income was incorrect.

5. Impact of Joint Family Living Arrangements on Search Warrant:
The assessee argued that the search warrants were in the name of the assessee's brother and a group company, and no substantial assets were found. The tribunal noted that the joint family living arrangements and the specifics of the search warrant should have been considered by the AO.

6. Accuracy of Declared Brokerage Income and Its Assessment:
The AO's calculation of brokerage income at a higher rate than the market was contested. The tribunal emphasized that the brokerage income should be assessed based on the prevailing market rate and the actual income declared and taxes paid by the assessee.

7. Method of Accounting (Mercantile vs. Cash Basis):
The assessee followed the cash basis of accounting, but the AO assessed the income on a mercantile basis. The tribunal highlighted that the assessment should align with the method of accounting consistently followed by the assessee.

8. Validity of Notice Under Section 158 BD and Subsequent Assessment:
The tribunal examined the validity of the notice issued under section 158 BD. It was argued that the notice was issued without the satisfaction of the AO having jurisdiction over the person searched. The tribunal referred to the Supreme Court's decision in Manish Maheshwari v. Asst. Commissioner of Income-tax, which mandates the recording of satisfaction by the AO. The tribunal found that the notice under section 158 BD was issued without such satisfaction, rendering the block assessment null and void.

9. Timeliness of Notice Under Section 143(2) and Its Impact on Assessment Validity:
The tribunal scrutinized the timeliness of the notice under section 143(2). The assessee filed the return on 22/6/2001, but the notice under section 143(2) was issued on 9/5/2003, beyond the prescribed statutory period. Citing the Supreme Court's decision in Assistant Commissioner of Income-tax v. Hotel Blue Moon, the tribunal held that the failure to issue the notice within the prescribed period is not a procedural irregularity but an incurable defect. Consequently, the block assessment was deemed invalid.

Conclusion:
The tribunal concluded that the block assessment was invalid due to the improper issuance of notice under section 158 BD and the untimely notice under section 143(2). Therefore, the appeal filed by the assessee was allowed, and the appeal filed by the revenue was dismissed.

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