2017 (6) TMI 291 - AT - Income Tax

Addition on bogus loan entries - assessment proceedings initiated against the assessee u/s. 158BD - Held that - In the present case since proceeding u/s. 158BC have been dropped there is no question of initiation proceedings u/s. 158BD of the Act. The road to Section 158BD pass through Section 158BC. In the present case since there is no assessment u/s. 158BC, the proceeding u/s. 158BD has to fail. Considering the provisions of section 158BD r.w.s. 158BC and the decision in the case of Commissioner of Income Tax Vs. Smt. Annapoornamma Chandrashekar (2011 (9) TMI 751 - KARNATAKA HIGH COURT ) we are of the considered view that the assessment proceedings initiated against the assessee u/s. 158BD are invalid and are liable to be quashed. Accordingly, the appeal of the assessee is allowed and that of the Department is dismissed.

Issues Involved:
1. Validity of the assessment proceedings under Section 158BC(c) read with Section 158BD of the Income Tax Act, 1961.
2. Validity of the assessment order on the grounds of limitation.
3. Deletion of the addition of ?21,00,000/- made on account of bogus loan entries.

Detailed Analysis:

1. Validity of the Assessment Proceedings under Section 158BC(c) read with Section 158BD:
The assessee challenged the assessment proceedings on the grounds that once the proceedings under Section 158BC were dropped due to technical defects, the initiation of proceedings under Section 158BD against a person other than the searched person is invalid. The documents on record showed that the initial notices under Section 158BC were issued in the name of non-existing firms, leading to the cancellation of these notices. The Department, realizing the mistake, dropped the proceedings initiated under Section 158BC. The Tribunal observed that the warrant of authorization, which is the foundation of the search proceedings, was flawed as it was issued in the name of a non-existing firm. Consequently, the subsequent proceedings under Section 158BD were also vitiated.

The Tribunal emphasized that for initiating any action under Section 158BD, the procedure set out under Section 158BC must be followed. Since the proceedings under Section 158BC were dropped, there was no basis for initiating proceedings under Section 158BD. The Tribunal cited the decision of the Hon’ble Karnataka High Court in Commissioner of Income Tax Vs. Smt. Annapoornamma Chandrashekar, which clarified that the notice for block assessment under Section 158BD must be issued in accordance with Section 158BC. The Tribunal concluded that the assessment proceedings initiated under Section 158BD were invalid.

2. Validity of the Assessment Order on the Grounds of Limitation:
The assessee argued that the notice under Section 158BD was issued on 16-10-2003, more than two years after the date of the search, and the assessment order was passed on 28-10-2005, beyond the period of limitation. The Tribunal did not specifically address this issue in detail as the primary ground of the invalidity of the proceedings under Section 158BD was sufficient to quash the assessment order.

3. Deletion of the Addition of ?21,00,000/- Made on Account of Bogus Loan Entries:
The Department contended that the Commissioner of Income Tax (Appeals) erred in deleting the addition of ?21,00,000/- made by the Assessing Officer on account of bogus loan entries. The modus operandi involved cash being taken from parties and deposited in the bank accounts of M/s. Rajashree Enterprises and Maheshwari Financiers, and then cheques equivalent to the cash were issued to the parties, giving the appearance of loans. The Tribunal, however, did not delve into the merits of this issue, as the primary issue of the validity of the assessment proceedings was sufficient to decide the appeals.

Conclusion:
The Tribunal allowed the appeal of the assessee and dismissed the appeal of the Department. The assessment proceedings initiated under Section 158BD were held to be invalid, and the assessment order was quashed. Consequently, the addition of ?21,00,000/- made on account of bogus loan entries was also deleted. The judgment emphasized the importance of following the correct procedural requirements for initiating block assessment proceedings under the Income Tax Act.

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