2006 (1) TMI 181 - AT - Income Tax

Block Assessment - Validity of notice issued u/s 158BC r/w s.158BD - sale and purchase of shares - addition made on account of brokerage payment - recording of satisfaction - Bogus transactions - Request of assessee to cross-examine the person (whose statement was made base to initiate proceedings and make block assessment), was not acceded by the assessing officer - violation of principle of natural justice - HELD THAT - On going through the alleged office note available on pp. 202 to 226, it is found that the office note has been allegedly signed on 29th Aug., 2002 that is the date on which the assessment order in the case of M/s Friends Portfolio (P) Ltd. was completed. On closer scrutiny of the facts and circumstances mentioned above including the fact regarding the mention of satisfaction note in the case of this company and proposal for centralization of the case in the circle in which the cases of searched persons fell, as referred to above, and also in view of the circumstances relating to this issue, we find force in the submissions of the learned counsel for the assessee made before us and conclude that no satisfaction note was prepared on 29th Aug., 2002 and this note has been prepared even after 26th Nov., 2002. Thus, it is clear that on or before29th Aug., 2002, the AO of M/s Friends Portfolio (P) Limited and that of Shri Manoj Aggarwal did not record any satisfaction. The note dt.29th Aug., 2002is, therefore, not to be taken for recording satisfaction required u/s 158BC/158BD. If we exclude the alleged note dt.29th Aug., 2002 as recording the required satisfaction then there remains the satisfaction note dt.26th Nov., 2002. The objection of the learned counsel for the assessee for challenging the legal validity of this note is that the AO making assessment in the case of the searched person had jurisdiction to record satisfaction only up to the date of passing assessment order in the case of searched person u/s 158BC and after passing the assessment order, he became functus officio and did not retain any seizin or jurisdiction over the matter and thus he is not authorized or empowered to record satisfaction when he was not seized of the matter. The AO of the searched person can record satisfaction regarding the undisclosed income of the other person at any stage during the assessment proceedings u/s 158BC or even thereafter but such satisfaction has to be recorded in writing as held in the case of Amity Hotels (P) Ltd. Ors. vs. CIT 2004 (10) TMI 27 - DELHI HIGH COURT . In the Act, there is no period of limitation provided for recording for satisfaction. The only period prescribed is for completing the assessment u/s 158BD, which is two years from the end of the month in which the notice u/s 158BD has been issued in the cases where search is initiated after 1st Jan., 1997. Violation of the principles of natural justice - It has to be pointed out that it is not the case of the Department that Shri Manoj Aggarwal was not available or it was not within the control of the AO to summon him. The powers of the AO as are available under s. 131 of IT Act are very wide and such powers have to be utilized for meeting out the ends of justice. In fact, the AO has exercised this power frequently and if statutory power can be exercised against the assessee, it has to be equally examined for the benefit of the assessee more particularly when he craves the concerned authorities for doing so. The denial of such power for the disadvantage of the assessee shows glaring conduct of bias and unfairness on the part of the authority and such a conduct is an attempt to cause injustice to him. It may be pointed out that the AO has also utilized the statement of Shri Neeraj Gupta against the assessee although this witness has not made any statement against the assessee. Again, no opportunity was given to the assessee to cross-examine even this witness, which further strengthened the allegation of the assessee that the denial of cross-examination of this witness was also to the disadvantage of the assessee. On examination of the entire material, therefore, we are unable to appreciate the approach of the AO who was expected to be fair to the assessee also in the quasi-judicial proceedings conducted by him. Thus, we find full force in the submissions of the learned counsel for the assessee. A similar plea of the Department was considered by Chandigarh Bench of Tribunal in the case of Smt. Neena Syal vs. Asstt. CIT 1998 (9) TMI 114 - ITAT CHANDIGARH . In that case also, the seized documents were not confronted to the assessee before making the additions. Since, in the present case, the repeated requests of the assessee were turned down by the AO as well as by the learned CIT(A) for cross-examining Shri Manoj Aggarwal and Shri Neeraj Gupta, it will not be proper to restore the matter back to the AO for this purpose. Thus, the statement of Shri Manoj Aggarwal, which has been used against the assessee, cannot be utilized against it because in denying the right of cross-examination, the AO and the learned CIT(A) have flouted the settled canons of natural justice. On the basis of above observations, we allow ground No. 3 in favour of the assessee. Bogus accommodation book entries in the form of share profits - On the perusal of the show-cause notice dt. 17th Nov., 2004 and the assessment order, it is found that the AO has placed reliance on the documents found and seized during the course of search from the premises of Shri Manoj Aggarwal, the statement of Shri Manoj Aggarwal and that of Shri Neeraj Gupta and certain other circumstances for making the addition. It has to be mentioned here that no search or survey was conducted upon the assessee. During the search in the premises of Shri Manoj Aggarwal and M/s Friends Portfolio (P) Ltd., no document or material of the assessee was found and seized to show undisclosed income of the assessee. Neither the AO nor the CIT(A) made any enquiry or carried out any investigation at the time of completion of assessment of Shri Manoj Aggarwal and M/s Friends Portfolio (P) Ltd. by independently examining the genuineness and the correctness of his statements. His statement has been accepted on its face value without any verification and cross-verification from any other person with whom he carried out the transactions and received cheques etc. Since the cheques were deposited in his account and in the account of M/s Friends Portfolio (P) Ltd., it was to be examined as to whether such transactions were benami in nature. The learned CIT(A) has supported the view taken by the AO without going into the documentary evidence filed by the assessee on record and without assigning reasons for discarding the same. The evidentiary value of Shri Manoj Aggarwal was required to have been examined in the context of the facts stated above but the learned CIT(A) upheld the allegation made by the AO regarding the addition although no direct testimony was available to sustain this addition. There is not an iota of evidence to show that the whole amount transferred by the assessee to M/s Friends Portfolio (P) Ltd. was refunded back to the assessee and was, in fact, its own income. In absence of documentary or circumstantial evidence, the addition cannot be justified in the block assessment done u/s 158BD without there being material found in the course of search to substantiate the same. The addition is, therefore, based on assumption without there being any material or evidence to substantiate the same and, therefore, cannot be upheld. The oral testimony of Shri S.C. Aggarwal supports and corroborates the documentary evidence. Thus, the documentary evidence adduced by the assessee in which no discrepancy is found cannot be discredited only by statement of a person whose testimony is not free from doubt. In the case of R.S. Nayak vs. A.R. Antulayv 1986 (4) TMI 338 - SUPREME COURT , the Hon'ble apex Court has held that documentary evidence is to be preferred over oral evidence in case conflict between the two. Thus, the addition made by the AO cannot be sustained and the same is directed to be deleted. These grounds of assessee, therefore, stands allowed. In the result, the appeal is partly allowed as above

Issues Involved:
1. Validity of notice issued under Section 158BC read with Section 158BD.
2. Violation of principles of natural justice.
3. Sustenance of addition of Rs. 3,26,48,898.84.
4. Levy of surcharge under Section 113.

Issue-Wise Detailed Analysis:

1. Validity of Notice Issued under Section 158BC read with Section 158BD:
The assessee challenged the validity of the notice issued under Section 158BC read with Section 158BD on multiple grounds. The primary contention was that the Assessing Officer (AO) did not record any satisfaction as required under Section 158BD during the course of assessment proceedings of M/s Friends Portfolio (P) Ltd. or Mr. Manoj Aggarwal or before the completion of these assessment orders. The AO issued the notice much after the completion of the assessment order in the case of M/s Friends Portfolio (P) Ltd. and Mr. Manoj Aggarwal.

The Tribunal found that the satisfaction note dated 29th August 2002 was antedated and the actual satisfaction note was recorded on 26th November 2002, which was after the completion of the assessment in the case of the searched person. The Tribunal held that the AO making the assessment in the case of the searched person had jurisdiction to record satisfaction only up to the date of passing the assessment order under Section 158BC and after passing the assessment order, he became functus officio and did not retain any seizin or jurisdiction over the matter. Therefore, the proceedings initiated on the basis of the satisfaction note dated 26th November 2002 were not legally justified.

2. Violation of Principles of Natural Justice:
The assessee contended that the assessment was concluded in violation of the principles of natural justice as the material gathered at the back of the assessee was used without giving an opportunity to rebut the same. The main basis for the addition was the statement of Mr. Manoj Aggarwal, which was recorded at the back of the assessee, and despite repeated requests, the assessee was not allowed the opportunity to cross-examine him.

The Tribunal observed that the statement of Mr. Manoj Aggarwal was recorded on multiple occasions, and the assessee was never given an opportunity to cross-examine him. The Tribunal held that the denial of the right to cross-examine Mr. Manoj Aggarwal seriously affected the basic right of the assessee and was fatal to the entire proceedings. The Tribunal allowed this ground in favor of the assessee, stating that the statement of Mr. Manoj Aggarwal could not be utilized against the assessee due to the violation of the principles of natural justice.

3. Sustenance of Addition of Rs. 3,26,48,898.84:
The AO made an addition of Rs. 3,33,24,965.84 on account of bogus accommodation book entries in the form of share profits, relying on the entries in the diaries seized during the search and the statement of Mr. Manoj Aggarwal. The assessee contended that all transactions were genuine and fully supported by the books of account maintained in the regular course of business.

The Tribunal found that the documents found during the search, such as the copy of the account of M/s Friends Portfolio (P) Ltd. and the diary entries, did not constitute incriminating evidence against the assessee. The Tribunal noted that the transactions were carried out through banking channels and were duly recorded in the books of account. The Tribunal also observed that the statement of Mr. Manoj Aggarwal was not reliable and could not be used against the assessee without cross-examination. The Tribunal concluded that the addition made by the AO was based on assumptions without any material or evidence to substantiate the same and directed the deletion of the addition.

4. Levy of Surcharge under Section 113:
The assessee challenged the levy of surcharge on the ground that the amendment to Section 113 for levy of surcharge was effective only from 1st June 2002, and the search in this case was carried out before that date. The Tribunal referred to the decision of the Amritsar Bench of the Tribunal in the case of Manohar Lal Rattan Lal vs. Dy. CIT, which held that the proviso to Section 113 shall be applicable in respect of searches carried out on or after 1st June 2002. Therefore, the Tribunal allowed this ground in favor of the assessee and held that the levy of surcharge was not justified.

Conclusion:
The Tribunal allowed the appeal partly, holding that the notice issued under Section 158BC read with Section 158BD was not legally justified, the principles of natural justice were violated, the addition of Rs. 3,26,48,898.84 was not sustainable, and the levy of surcharge was not justified.

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