2017 (3) TMI 1388 - HC - Income Tax

Validity of block assessment notice u/s 158BD - open to the assessing officer to include the income of the assessee, which is not disclosed for assessment for the block period though the transaction relating to such income is reflected in the account books of the respective years - Held that - Given the nature of the material seized in the facts of this case, the ITAT s findings that block assessment notice under Section 158BD of the Act was unwarranted, cannot be sustained. Undoubtedly, the A38 and A97 of the panchnama were fresh materials unearthed during the course of search, albeit in a third party premises, but they clearly related to the assessee. In these circumstances, the notice issued under Section 158BD of the Act and the consequential block assessment proceedings were warranted. Although this Court has answered the question framed, at the same time the facts are that such answer does not dispose of the appeal or the matter. For an addition under Section 68 of the Act, it is now well settled CIT vs Lovely Exports (P) Ltd. (2008 (1) TMI 575 - SUPREME COURT OF INDIA) that the AO has to be satisfied about the identity of the share application, the genuineness of the transaction, and the credit worthiness of the investor. Whilst the inquiry in this case i.e. the seizure of materials from the searched party, were entirely justified, a notice of final assessment with the additions that were ultimately made, could have been justified only after a proper finding in that regard. Here, the AO s actions were lacking inasmuch as he did not diligently perform the task required of him. It was quite possible for the AO to have inquired from the assessee and also found for himself, on the basis of inquiries into the bank accounts of the share applicants, as to whether the transactions were in fact as suspect as he concluded. The addition under Section 68 of the Act can be justified only if the AO also discharges the onus which is cast on him after the initial material is disclosed. The order nowhere reveals that the AO ever bothered to make such inquiry. Although the question of law is answered in favour of the Revenue, the appeal has to fail.

Summary

Issues:
Question of law regarding the inclusion of undisclosed income for assessment, validity of block assessment notice under Section 158BD, sufficiency of materials relatable to the assessee, justification of additions made by the assessing officer, compliance with requirements under Section 68 of the Income Tax Act.

Analysis:

1. Inclusion of Undisclosed Income:
The main issue revolved around whether the assessing officer could include the income of the assessee, not disclosed for assessment for the block period, even if the transaction relating to such income was reflected in the account books of the respective years. The court examined the facts where the AO added specific amounts for certain assessment years based on seized materials and the rationale provided. The court considered the arguments presented by both the assessee and the Revenue regarding the justification of these additions.

2. Validity of Block Assessment Notice:
The ITAT opined that since no material related to the assessee was found during the search, the additions made by the AO were unsustainable. However, the Revenue contended that the materials seized, including blank share transfer forms and confirmation affidavits, were indicative of questionable transactions, justifying the search assessment. The court analyzed the nature of the seized materials and the relevance to the assessee to determine the validity of the block assessment notice under Section 158BD.

3. Sufficiency of Materials Relatable to the Assessee:
The counsel for the assessee argued that credible materials directly related to the assessee were necessary to warrant a block assessment notice under Section 158BD. On the contrary, the court found that the materials seized, although from a third party premises, were linked to the assessee, justifying the issuance of the notice and the subsequent assessment proceedings.

4. Compliance with Section 68 Requirements:
While addressing the issue of additions under Section 68 of the Act, the court emphasized the significance of the AO being satisfied about the identity of the share applicants, genuineness of the transactions, and creditworthiness of the investors. It was noted that the AO's actions were lacking as he did not diligently inquire into these crucial aspects before making the additions. The court highlighted the necessity for the AO to discharge the onus cast on him by thoroughly investigating the transactions before justifying any additions under Section 68.

In conclusion, although the question of law was answered in favor of the Revenue, the court dismissed the appeal due to the AO's failure to diligently perform the required tasks and make necessary inquiries before making the additions. The judgment underscored the importance of proper investigation and compliance with statutory requirements in assessment proceedings under the Income Tax Act.