9911796707
TMI Blog2005 (5) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sales outside the books of account vide para 11 of the Order. (b) Rs. 51,50,000 addition in financial year 1995-96 for alleged income from undisclosed sources vide para 78.2 of the Order. (c) Rs. 44,000 addition in financial year 1994-95 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. (d) Rs. 46,50,000 addition in financial year 1994-95 for alleged income from undisclosed income vide para 78.2 of the Order. (e) Rs. 5,11,000 addition in financial year 1994-95 for alleged income from undisclosed sources as the unexplained cash credits vide para 84 of the Order. (f) Rs. 12,33,000 addition in financial year 1993-94 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. (g) Rs. 12,60,000 addition in financial year 1993-94 for alleged income from undisclosed sources vide para 78.2 of the Order. (h) Rs. 11,83,000 addition in financial year 1993-94 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. (i) Rs. 24,32,000 addition in financial year 1992-93 for alleged income from undisclosed sources as the unexplaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of s. 144 warranting an ex parte assessment particularly when the appellant had been making full compliance in assessment proceedings and had filed the return in the prescribed form though belatedly but during assessment proceedings. (ix) That the learned AO was not justified in not properly considering and appreciating explanations filed from time to time arbitrarily rejecting adjournment application on 2nd Sept., 1996, without reasonable and sufficient cause and thereafter completing the assessment in an arbitrary manner. (x) That the learned AO has erred in law and on facts in not acceding to the request of the appellant for holding a camp at Gorakhpur and appoint Commission for enquiry at Delhi for verification of various cash creditors and shareholders whose affidavits and confirmations were filed and arbitrarily treating them as not genuine and bogus. (xi) That the cash credits allegedly treated as undisclosed income within the meaning of s. 158B(b) of the IT Act, 1961, is ultra vires the provisions of s. 158BB r/w s. 158B(b) of the IT Act, 1961. Prayer (i) The additions aggregating to Rs. 1,68,04,856 referred to above may kindly be deleted. (ii) Any other reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and failed to objectively apply his mind while giving approval to the arbitrary and unfounded additions made by the learned AO in the block assessment. The assessment order is bad in law due to the mechanical application of mind by the learned CIT which does not amount to approval." 2.4 The assessee further sought to raise an other additional ground as per application furnished on 28th Sept., 1999 and the additional ground read as under: "The learned AO failed to assume valid jurisdiction under s. 158BC inasmuch as the notice issued by him under the said section was vague and hence invalid' prayer : The assessment order, being void ab initio may be quashed." 2.5. The assessee, as per its application dt. 6th Oct., 1999 sought to raise reframed additional ground in place of additional ground having been sought to be raised as per application furnished on 28th Sept., 1999 (reproduced in para No. 2.4 above). The modified additional ground reads as under: "The assumption of jurisdiction under s. 158BC by the learned AO was improper in as much as he failed to serve on the assessee a valid notice under s. 158BC. The assessment order framed under s. 158BC is, therefore, void ab initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and verification of share capital, share application money and cash credits. It is important to mention here that in this regular assessment not a single rupee, out of share capital or share application money or cash credits was found to be ungenuine. In other words, all these were accepted as genuine after due verification. 8.1 (a) Action under s. 132 of the IT Act, 1961, (hereinafter called the Act) was taken at the appellant's premises and also in another assessee's case styled as M/s Jalan Enterprises. (b) The search in appellant's case and in case of M/s Jalan Enterprises were carried on under separate and independent search warrants and separate Panchnama was prepared. (c) So far as search in appellant's case is concerned, following cash and documents were found and seized: (i) As per Annexure B1 to the Panchnama, the appellant's regular books of account, RG-1, RG-23 and some loose papers were found and seized. (ii) As per Annexure C-1 cash of Rs. 2,23,150 was found out of which cash of Rs. 2,00,000 was seized. (iii) As per Annexure C-2 cash of Rs. 60,000 was found but was not seized. (iv) The Annexure J, S-1, S-2 and S-3 contains the details of material, raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed income for the block period has been computed at Rs. 1,68,04,856. 8.5. The yearwise details of share capital and cash credits as well as business income which have been considered as undisclosed income are as under: Assessment years S. No. Description of undisclosed income 1993-94 1994-95 1995-96 1996-97 1. Share capital/share application money (a) Companies Nil 12,60,000 46,50,000 51,50,000 (b) Non-Company 24,32,000 12,33,000 44,000 Nil 2. Cash credits 2,13,000 11,83,000 5,11,000 Nil 3. Business Income Nil Nil Nil 1,28,856 Total : 26,45,000 36,76,000 52,05,000 52,78,856 Grand Total : Rs. 1,68,04,856 8.6. It is an admitted fact that: (a) No incriminating document or books of account or valuable or undisclosed assets except cash which has been accepted as explained, were found or seized during the course of search at the appellant's premises. (b) The share capital/share application money relating to non-corporate persons, has been considered as appellant's undisclosed income solely on the basis of income-tax files of those persons found at the premises of another assessee styled as M/s Jalan Enterprises at a different place. (c) No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-compliance to this condition renders the notice as invalid. 10.2 The other defect in the notice under reference, as submitted by the counsel for the assessee, was failure to address the notice in accordance with statutory provisions of s. 282(2)(b) of the Act read with provisions of s. 2(35) of the Act. According to the counsel, any notice in case of a corporate assessee has to be issued in the name of and has to be served upon the principal officer as defined under s. 2(35) of the Act and since the present notice has neither been addressed to the principal officer nor has been served on the principal officer and also the AO having not issued any notice of his intention to treat the person on whom the notice has been served as assessee's principal officer, the notice is bad in law. 10.3 The counsel for the assessee further submitted that the notice has also not been served on the proper person and in accordance with the provisions of section--of the Act and consequently, the same is vague and invalid. Referring to the endorsement on the notice, the counsel submitted that the notice has been served on some advocate, who was neither the appellant's principal officer nor was cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 127 CTR (Cal) 238 : (1995) 213 ITR 862 (Cal) (b) Sardar Harvinder Singh Sehgal & Ors. vs. Asstt. CIT (1998) 144 CTR (Gau) 626 : (1997) 227 ITR 512 (Gau) (c) Arti Ship Breaking vs. Director of IT (Inv.) & Ors. (2000) 161 CTR (Guj) 323 : (2000) 244 ITR 333 (Guj) 11.4 The counsel further submitted that the assessee having been in the knowledge of notice and having complied with, the objection raised by the assessee is not tenable. 11.5 The counsel further submitted that so far as the service of the notice is concerned, the endorsement "for M/s Gorakhpur Petro Oils Ltd." goes to show that the person concerned was managing the affairs of the appellant's company and, therefore, the service is on the proper person. When asked by the Bench as to on what basis he was making this plea, the counsel's reply was that the recipient of the notice being an advocate, it can be well said that he was managing the affairs of the company. He however, had no other evidence in support of this claim. 12. In rejoinder to the counsel's submissions that assessee being in the knowledge of and having complied with the notice the objection is not tenable, the assessee's counsel submitted that the AO can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efects even if such omissions/defects go to affect the assumption of jurisdiction to initiate proceedings under the Act". "Sardar Havinder Singh Sehgal & Ors. vs. Asstt. CIT: In this case the Hon'ble Court was dealing with a notice under s. 148, validity of which was disputed on the ground that the said notice by itself did not contain the reason nor the particulars of business income which had escaped assessment. After having held in principal that the law did not require that the notice itself should communicate the reason or contain the details of income escaping assessment, the omission to contain such information was held to be of procedural nature, which would not go to vitiate the proceeding. In the case before us the situation is entirely different. The mistakes, as have been pointed out by the counsel for the assessee, are not of procedural nature but are the irregularities of substance which go to adversely affect and vitiate the vary assumption of jurisdiction by the AO to pass block assessment order." (b) Decision in case of Arti Ship Breaking vs. Director of IT (Inv.) & Ors. In this case the validity of notice under s. 158BC was challenged on the ground that, sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e furnished. Referring to the fourth and fifth line of the first para (main body of the notice), the assessee's counsel submitted that mentioning of the words "in respect of which an individual/HUF/Firm/Company/AOP/individual/local authority" leads one to presume that the AO was not satisfied as to whom the notice was being directed or in whose case the so-called block assessment was going to be completed. According to the counsel, this illegality has also rendered the notice vague and invalid. (iii) According to the definition given as per s. 158BA of the Act, the 'Block period is defined to be consisting of previous years relevant to 10 assessment years preceding the previous year in which the search had been conducted and period upto the date of commencement of search in the previous year in which search was conducted. According to the counsel, the definition of block period specifies the maximum number of previous assessment years which can be covered in assessment for the block period and it is not necessary that in each and every case the previous 10 assessment years are to be covered. Explaining his point, the assessee's counsel submitted that if assessee's business had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod. The assessee's counsel further submitted that simply addressing the notice in the name of company cannot be interpreted as a notice asking the company to furnish its return in the status of the company and for the period during which it existed. Giving an example, the assessee's counsel submitted that if a notice is addressed as per the provisions of s. 282(2)(b) of the Act to the principal officer, it cannot be interpreted as a notice asking the addressed person, i.e., the principal officer to furnish his return in the individual status. 3.5 The assessee's counsel, after referring to the purpose behind introducing the provisions of Chapter XIV-B of the Act, submitted that it is a complete and independent code itself in which not only the term "undisclosed income" is defined but procedure for making assessment, the period which are covered by such assessment and the requirement with regard to the service of notice as well as applicability of other provisions of the Act have been specified, and, therefore, the provisions have to be construed strictly. 3.6 In the light of the above submissions, the assessee's counsel submitted that since the notice dt. 12th Dec., 1996, claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intent and purpose of this Act. Even a plain reading of this provision conveys that the heart of the matter is that it is only a technical or venial sort of defect in any return, assessment notice, summons or other proceedings that is capable of being cured under this provision. In this connection a reference may be made to Departmental Circular No. 179, dt. 30th Sept., 1975, which, as found at page No. 692B of Chaturvedi and Pithisaria's Commentary, Edn. 4, Vol. VI, also states that s. 292B was enacted to provide against purely technical objections without substance coming in the way of the validity of assessment proceedings, etc. We are certain that to treat a return as valid for the purposes of the completion of an assessment, which as per the unambiguous provisions of law, namely, s. 139(9) "Shall be treated as valid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return" is not at all a technical or venial matter. In our considered opinion it does in nowhere come even within the legal vicinity of s. 292B of the Act. 11. In the result, we are of the view that on the facts and circumstances of the case, the AO ceased to remain ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion we consider it necessary to discuss the provisions of ss. 147, 148 and 149 on one hand, provisions of ss. 143(2) and (3) on the other hand, and provisions of ss. 158B, 158BB and 158BC on the other hand and for that purpose we would like to extract the relevant portion of the provisions, (a) Secs. 143(2) and 143(3) of the Act: " Assessment 143(1).......................... (2) Where a return has been made under s. 139, or in response to a notice under sub-s. (1) of s. 142, the AO shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return. Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished. (3) On the day specified in the notice issued under sub-s. (2), or as soon afterwards as many be, after hearing such evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny notice under this section record his reasons for doing so." (d) "Sec. 149 of the Act: "149. (1) No notice under s. 148 shall be issued for the relevant assessment year--(a) in a case where an assessment under sub-s. (3) of s. 143 or s. 147 has been made for such assessment year." (e) Chapter XIV-B Special procedure for assessment of search cases Important provisions are contained in ss. 158B, 158BA, 158BB and 158BC which are in the following terms: (i) Definitions: 158B. In this chapter, unless the context otherwise requires: (a) "block period" means the (previous years relevant to ten assessment years) preceeding the previous year in which the search was conducted under s. 132 or any requisition was made under s. 132A, and includes, in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition; (b) "Undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days; (ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after the 1st day of Jan., 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days, as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under cl. (i) of sub-s. (1) of s. 142, setting for his total income including the undisclosed income for the block period: Provided that no notice under s. 148 is required to be issued for the purpose of proceeding under this chapter: Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return; (b) the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in s. 158BB and the provisions of s. 142, sub-ss. (2) and (3) of s. 143 and s. 144 shall, so far as may be, apply; (c) the AO, on determination of the undisclosed income of the block period in accordance with this Chapter, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the prerequisite mandatory requirements before the AO can assume jurisdiction to make assessment of undisclosed income are that (i) there should have been a search action under s. 132 of the Act or a requisition for books or documents under s. 132A of the Act, which is analogous to the requirement of taxing of escaped income in the earlier scheme. It is only on fulfillment of this condition that the AO gets clothed with the jurisdiction to proceed for making a block assessment of undisclosed income, meaning thereby that the AO is said have jurisdiction to proceed with under the provisions of Chapter XIV-B of the Act. (ii) the second required prerequisite condition, before proceeding to make assessment under s. XIV-B, i.e., an assessment of block period is that the AO has to serve a notice in confirmity with the requirement of s. 158BC of the Act upon the person in whose case search has been conducted and in whose case the AO wants to make an assessment under Chapter XIV-B, meaning thereby that as in the case of assessment of escaped income, the AO can proceed to assess the escaped income only after the fulfillment of requirements upto the stage of service of valid notice in confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the cases service of a valid notice is a mandatory prerequisite condition before proceeding to make a reassessment or assessment of block period, as the case may be. 7.1 Coming to the various decisions relied upon by the parties, the ratio of the decisions, in brief, is as under: (a) Case laws relied upon by the assessee's counsel: (i) Y. Narayana Chetty & Anr. vs. ITO: "The notice prescribed by s. 34 reported in Y. Narayana Chetty & Anr. vs. ITO cannot be regarded as a mere procedural requirement; it is only if the said notice is served on the assessee as required that the ITO would be justified in taking proceedings against him. If no notice is issued or if the notice issued is shown to be invalid, then the validity of the proceedings taken by the ITO without a notice or in pursuance of an invalid notice would be illegal and void." (ii) CIT vs. Kurban Hussain Ibrahimji Mithi Borwale: "It is well-settled that the ITO's jurisdiction to reopen an assessment under s. 34 depends upon the issuance of a valid notice. If the notice issued by him is invalid for any reason the entire proceedings taken by him would become void for want of jurisdiction. In the notice issued under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act, for the purpose of commencing proceedings for reassessment, is not a mere procedural requirement; it is a condition precedent to the initiation of proceedings for assessment under s. 34. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the ITO, without a notice or in pursuance of an invalid notice, would be illegal and void : see Narayana Chetty vs. ITO, Nellore". (vi) P.N. Sasikumar vs. CIT: It is settled law that the issue of a notice under s. 148 of the IT Act, 1961, is a condition precedent to the validity of any assessment order to be passed under s. 147 of the Act. It is also settled law that if no such notice is issued or if the notice issued is invalid or not in accordance with the law or is not served on the proper person in accordance with law, the assessment would be illegal and without jurisdiction. The notice should specify the correct assessment year and should be issued to the particular assessee" 7.2 The next decision relied upon by the assessee is that of Tribunal, Allahabad, in the case of Prakash Spun Pipe in which it has been held that the provisions of s. 292B cannot validate a return which in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that as in the case of initiation of reassessment, the proceedings commence with the issue of notice under s. 148 of the Act as held by the Hon'ble High Court of Allahabad in case of Dr. Onkar Dutt Sharma vs. CIT (1967) 65 ITR 359 (All) and the service of the notice is a condition precedent for making a valid assessment, likewise, the proceedings for the assessment for block period commences on the service of notice under s. 158BC and, therefore, the service of "Valid" notice under s. 158BC is a condition precedent for making a valid assessment; meaning thereby that if there is no valid notice, there can be no valid assessment and it is because there is a clear cut distinction between jurisdiction and procedure. 10.2 Further, since the issuance of and service of notice under s. 148 is not a mere procedural requirement but a condition precedent for the validity of reassessment, if in a given case it is established that a notice under s. 148 has not been issued or if issued it is established to be invalid, the subsequent proceedings taken for making assessment would be illegal and void and this view is fully supported by the decision referred to in para 7.1(a). 11.1 In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivered in this office within 16 days of service of notice, duly verified and signed in accordance with the provision of s. 140 of the IT Act, 1961. Sd/-(illegible) Seal of the Office of (Dr. Subhash Chandra) Central Circle-11, Kanpur Asstt. CIT Central Circle - II Kanpur" 11.2 (b) If we test the validity of the notice dt. 12th Dec., 1996, issued in assessee's case, in the light of aforesaid settled principles, it is quite evident that : (i) The notice has not been addressed to the principal officer as required under s. 282 of the Act. (ii) Status, in which the return of so-called undisclosed income, was required to be furnished has not been mentioned. (iii) 'Assessment year', i.e., previous years relevant to assessment year falling within the block period, which in a way is an assessment year for the purpose of assessment of the block period, has not been mentioned. On the contrary, the notice specified the 'definition' of the block period, i.e., assessment years this purpose, which could not be equated to the specifying of the specific previous years falling within the block period. 11.3 In view of the abovementioned illegalities in the notice dt. 12th Dec., 1996 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a valid notice. 11.5 We are, further of the opinion that validity of the notice is not saved by the provisions of s. 292B of the Act because the contents of the notice, as far as sum and substance is concerned, are not in confirmity with the provisions of the Act. This proposition finds support from the Tribunal's order in case of M/s Prakash Spun Pipe 12. The next question for our decision, after having found the notice under s. 158BC dt. 12th Dec., 1996 a vague and illegal notice, is that can the assessment framed as a result of such notice be quashed. 12.1 The answer to this question is self-evident, since for the assumption of jurisdiction to proceed with the making of an assessment for block period, service of a valid notice in terms of provisions of s. 158BC is a prerequisite mandatory requirement, meaning thereby that the AO cannot have jurisdiction to make an assessment for block period if there is no service of a notice under s. 158BC or if the notice so served is found to be bad in law or invalid or vague. Consequently, the assessment framed under any of these conditions shall be bad in law and void ab initio for want of jurisdiction. 12.2 So far as present case is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not tenable. 17. The assessee's counsel has further challenged the validity of the jurisdiction of the AO to complete the block assessment on the ground that the so-called notice under s. 158BC of the Act, was not served on the proper person. According to him the advocate, on whom the notice had been served was neither the assessee's principal officer nor was controlling the affairs of the assessee-company. The additional standing counsel on the other hand has claimed the service of the notice on the proper person. 18. After careful consideration of the facts and circumstances as well as the provisions of s. 282(2)(b) r/w s. 2(35) we are of the opinion that the Revenue having failed to produce any evidence in support of his claim that the notice was served on the proper person, we are of the opinion that the notice had not been served in accordance with and on the proper person. Consequently, the proceedings under s. 158BC as well as the consequential block assessment have to be declared bad in law and void ab initio. We do so. Our decision is supported by the decision of the Tribuanl, Delhi Bench 'E', in case of Kanhya Lal Surinder Kumar vs. AO (ITA No. 2986/Del/1996 for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other association or BOI, to the principal officer or any member thereof; (d) in the case of any other person (not being an individual), to the person who managers or controls his affairs. 283. Service of notice when family is disrupted of firm, etc., is dissolved--(1) After a finding of total partition has been recorded by the AO under s. 171 in respect of any Hindu family, notices under this Act in respect of the income of the Hindu family shall be served on the person who was the last manager of the Hindu family, or, if such person is dead, then on all adults who were members of the Hindu family immediately before the partition. (2) Where a firm or other AOP is dissolved, notices under this Act in respect of the income of the firm or association may be served on any person who was a partner (not being a minor) or member of the association, as the case may be, immediately before its dissolution." As per above, s. 282 of the Act recognizes two modes of services of notice, one by post and the other as if it were a summons issued by a Court under the CPC, 1908 (5 of 1908). The expression 'service' generally connotes formal communication to a party to whom notice is sent. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be met before the valid proceedings can be taken up against the assessee. In the case of the assessee, the notice has been served subsequent to the dissolution of the firm. There are separate provisions relating to the dissolution of firm as given in s. 28 of the Act mentioned earlier. 6. On perusing the provisions of ss. 282 and 283 of the Act, it would be clear that while in the case of s. 282 of the Act, the party on whom notices are to be served is either any member of the firm or the manager, in case of dissolution of firm, the term used is 'partner' (not being a minor). Apparently, in case of dissolved firm, it is the partner, who alone can effectively represent against any action contemplated by the Department. Coming to the assessee's case, we find that while properly addressing the notice, it has been mentioned that the same is to be through Sh. Kanhaiya Lal and Sh. Davinder Singh. It is undisputed that notice has been served on Rajinder Singh, who was neither a partner of the dissolved firm nor was a member in the aforesaid firm. Nowhere it has been shown that he acted as an agent of the dissolved form. It would be relevant to mention that the assessee also did not respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h have been filed by the assessee and are placed on record", the same could not be treated as appellant's income for the purpose of income-tax or undisclosed income for the purpose of Chapter XIV-B of the Act--copy of assessment order for the asst. yr. 1994-95 placed at pp. 44 and 45 of the Vol. 1 of paper book filed by the assessee. In support of having furnished all the necessary details in this respect, the counsel referred to page Nos. 23 to 39 and 43, of Vol. 1 of the paper book which are such as balance sheet, confirmations, copies of share application money, assessment orders, etc., of the shareholders/creditors and were filed as per appellant's letter dt. 7th Jan., 1995. Further submitted that the period for furnishing return of income for asst. yr. 1995-96 having not been expired by the date of search (due date for furnishing the return of income was 31st Dec., 1995 and the date of search is 9th Nov., 1995) and the 'share capital', 'share application money' and 'cash credits' received during that period having been recorded in the regular books of account and the details furnished along with the return furnished before due date thereafter and the previous year relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responsible to explain any enquiry relating to those files. (f) That the aforesaid income-tax files could not be a material relevant even for invoking the provisions of s. 158BD of the Act because it was not the case of assessee having made any investment or entered in any transaction with those persons. The position was reverse. (g) Referring to para 4 at p. 144 of the paper book, the counsel submitted that the AO had clearly concluded that he had found "from the papers found during the search that 'modus operandi of the Jalan group' is to introduce their own unaccounted money as share capital of the appellant-company, allegedly subscribed by various persons by opening bogus income-tax files in the name of these persons" and therefore, the learned counsel submitted that what the AO was asking the assessee to explain was to explain the source of investment made by those persons or by Jalan group or the source of availability of funds with those persons for investing with the appellant and not the source of credits in appellant's books of account and since the appellant had not made any investment with any of those persons, it was not legal on the part of the AO to consider the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mad) (iii) Rishi Electronics Ltd. vs. Asstt. CIT (iv) CIT vs. Shambhulal C. Bachkaniwala (2000) 162 CTR (Guj) 435 : (2000) 245 ITR 488 (Guj) (v) Decision of Tribunal Pune Bench--In case of Sou. Vidya Aladanlal Malani vs. Asstt. CIT in ITA No. SS3/Pn/1997 for asst. yrs. 1986-87 to 1996-97 dt. 14th Sept., 1999. (copy placed on record) (vi) P.K. Noorjahan's case (vii) Ram Sukh Moti Lal's case (viii) CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC) (ix) Bharat Engg.'s case (x) CIT vs. Stellar Investments Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) (xi) CIT vs. Stellar Investments Ltd's case decided by Hon'ble Supreme Court on 20th July, 2000 in Revenue's Civil appeal No. 7968 of 1996--copy on record. (xii) CIT vs. Orissa Corporation (P) Ltd. (1986) 52 CTR (SC) 138 : (1986) 159 ITR 78 (SC) (xiii) CIT vs. Sham Lal (1980) 18 CTR (P&H) 89 : (1981) 127 ITR 816 (P&H) 20.1 Concluding the submissions, the learned counsel summed up the submissions as under : (a) That the action of the AO in considering the share capital/share application money of Rs. 24,32,000 for the asst. yr. 1993-94, Rs.24,93,000 (12,60,000 + 12,33,000) for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order for block period by submitting that the undisclosed income has been computed on the basis of material found and seized during search. In support of his submissions the learned Departmental Representative relied on decisions reported as K.M. Sadhukhan & Sons (P) Ltd. vs. CIT (2000) 162 CTR (Cal) 448 : (1999) 239 ITR 77 (Cal), and Oceanic Products Exporting Co. vs. CIT (2000) 158 CTR (Cal) 357 : (2000) 241 ITR 497 (Cal). In support of his further submissions that the confirmation alone, furnished by the appellant without establishing the identity of various shareholders and cash credits, was not sufficient for discharging the onus put on the assessee under s. 68 of the Act, the learned Departmental Representative further submitted that assessments under s. 143(1) in case of various persons who had invested the money with the appellant in the form of share capital/share application money or loan were no conclusive evidence for their capacity and those assessments could also be reopened. The learned Departmental Representative relied on the decisions reported as Nanak Chandra Laxman Das vs. CIT (1982) 28 CTR (All) 280 : (1983) 140 ITR 151 (All), Jorawar Singh Baid v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the search and considered by the AO as evidence for computing assessee's undisclosed income, the counsel just referred to para 12 of the assessment order for block period. On verification of the records referred to by the AO in para 12 of the assessment order for block period it was found that the same were the income-tax files of shareholders/creditors found and seized from the premises of M/s Jalan Enterprises with which the appellant had nothing to do with. 23. We have considered the rival submissions, facts and circumstances of the case, provisions of Chapter XIV-B of the Act and various decisions relied upon by the parties and after careful consideration of the same, we are of the opinion that we should first decide the dispute regarding the survival of the decision of Hon'ble Delhi High Court in the case of CIT vs. Stellar Investment Ltd.. 23.1 The facts of this case, as have been noticed from the decision of the Hon'ble High Court reported as (1999) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) and also the decision of Hon'ble Supreme Court in this case were that the CIT had filed a Reference Petition under s. 256(2) of the IT Act, 1961, (hereinafter referred to as "the Act") ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself." are concerned, we are of the opinion that the same are in the nature of 'order on appreciation on facts' and that is why the Hon'ble Court rejected the petition under s. 256(2) of the Act. It seems that the Revenue might have pleaded that some of the shareholders may be bogus, i.e., might have pleaded that though the concerned shareholders existed as a person but the share capital or share application money might have been contributed by someone else on their behalf. If these observations are not considered as an 'order', then the same can be either an 'obiter dicta' or mere 'observations'. 23.4 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the assessee represents that it has issued shares on the receipt of share application money then the amount so received would be credited in the books of account of the company. The ITO would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do, in fact, exist or not. If the shareholders exist then, possibly, no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words "may be charged" in s. 68 clearly indicates that the ITO would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee. It is neither necessary nor desirable to give examples to indicate under what circumstances s. 68 of the Act can or cannot be invoked. What, is clear however is that s. 68 clearly permits an ITO to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year in which the entry is made in the books of account of the assessee". 23.10 (a) From the aforesaid observations of the Hon'ble High Court and the context in which the observations seem to have been made what we are, once again, able to understand is that these observations also could be taken as either an 'order' or 'obiter dicta' or 'simply the observations' and if that is the case then in all eventualities the order in the case of Steller Investment Ltd. could be taken as having been overruled by the Full Bench but the Hon'ble Court has not said so. Consequently, what transpires from both these decisions is that the relevant part of order in case of Steller Investments Ltd. seems to be "an order on appreciation of facts" whereas, the relevant part of order in case of Sophia Finance Ltd. seems to be an order "on appreciation of law", but since the Hon'ble Supreme Court has affirmed the decision of High Court in case of Steller Investments Ltd., it has to be accepted that the relevant part of that order was an order on appreciation of facts. In case this fact is not accepted then the relevant part of these orders was neither 'order' nor 'obiter dicta' and if that is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of the powers vested in him by virtue of s. 68 of the Act and not otherwise. Simply, because, the CIT has not mentioned the s. 68 while concluding that the inquiry or the investigation for the purpose of genuineness of the 'share capital' and the 'subscribers' cannot be interpreted as to say that s. 68 was not involved in that case. (c) In view of above facts and circumstances, conclusion of the CIT and the provisions of the IT Act, 1961 we are clear in our mind that what the CIT was referring to was the failure of the AO, to carry on his functions for exercising his powers under s. 68 of the Act and nothing else. Consequently, it is the decision in case of CIT vs. Stellar Investments Ltd., since affirmed by the Hon'ble Supreme Court and not the decision in case of CIT vs. Sophia Finance Ltd.. 23.11 Without prejudice to the above, we are of the opinion that whatever the nature of the observations made in both these decisions may be the law of jurisprudence requires that the decision in the case of CIT vs. Stellar Investment Ltd. was, even if not stated by the High Court in case of CIT vs. Sophia Finance Ltd. in specific terms, overruled on law point but since the same has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for which proper advertisement including the details of the risk factors, etc.--as prescribed under the Companies Act have to be issued through various advertising channels and any individual or HUF or co-operative society or a company from anywhere in India or abroad subject to conditions thereof can subscribe to the issue by remitting the share application money along with the properly filled in and signed application for allotment of a particular number of shares. Since the application can be made by any person and from anywhere in India or abroad, the public limited company raising the share capital cannot be presumed to know the genuineness of the person or even the existence of the applicant--a fact which neither limited company is required to verify nor has power to verify. The obligation of the public company raising the share capital, in our opinion, is simply to allot the shares as per allotment scheme and issue the share certificate in the name of concerned applicant and remit the same at the address listed in the application for allotment of shares. (ii) It was probably in the context of this factual handicap of public limited company and circumstances of that case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Supreme Court in the case of Stellar Investment Ltd. and consequently the amounts found credited under the heads 'share capital' or 'share application money' in the appellant's regular books of account cannot be added to appellant's income for the purpose of IT Act. Consequently, there is no question of considering these credits as appellant's undisclosed income under Chapter XIV-B of the Act. 23.13 (i) Without prejudice to the above, even if it is assumed that the decision in the case of Stellar Investment Ltd. has been affirmed by the Hon'ble Supreme Court only in the facts and circumstances of that case and reference to s. 68 was not made, then also, we are of the opinion that the ratio of that decision still holds good. (ii) The nature of onus put on an assessee, in whose books of account the credits have been recorded differs from case to case and with the facts and circumstances of every case. The proposition of law held so far that such assessee can discharge his onus by satisfying all the three ingredients, namely, (i) Identity of the creditor, (ii) capacity of the creditor and, (iii) genuineness of the transaction is not uniformly or universally applicable as wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to establish that the 'share capital' or the 'share application money' had been received through proper procedure, such as, by way of a share allotment application or by way of a 'call notice' as the case may be and nothing else. 23.16 If we consider the case of the present appellant in the light of the above discussion, we are of the opinion that the appellant having established the existence of the shareholders which were either individual living persons or corporate bodies i.e., companies; by way of ample evidence placed on record as detailed in charts captioned 'List of shareholders--individuals' and 'List of shareholders--Corporate' for the asst. yrs. 1994-95, 1995-96 and 1996-97 and the fact that the 'share application money' was received along with the proper share allotment applications and the appellant's case being that of a public limited company, has discharged the onus placed on it by s. 68 of the Act and since the Revenue has not been able to dispute the genuineness of the documentary evidence already on record with the AO and also having not been able to contradict the submissions made by the counsel for the assessee during the course of hearing before us, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are application money' received during the period 1st April, 1995 to the date of search, i.e., 9th Nov., 1995 having been duly recorded in appellant's regular books of account, none of them could be considered as appellant's income by virtue of provisions of s. 158BB(1)(d) of the Act and, therefore, there was no question for considering the 'share capital'/'share application money' amounting to Rs. 51,50,000 received during the period 1st April, 1995 to 9th Nov., 1995 as appellant's undisclosed income for the purpose of Chapter X1V-B of the Act. 23.19 Without prejudice to the above, we are further of the opinion that so far as unsecured loans "arid share capital or share application money received by the appellant during the periods relevant to asst. yrs. 1993-94 and 1994-95 are concerned, the genuineness of the same having been accepted as a result of the assessment order for asst. yr. 1994-95 having been passed under s. 143(3) of the Act after making detailed enquiries with respect to the genuineness of the credits under all the heads, the share application money of Rs. 12,60,000 received from non-corporate bodies during the periods relevant to the asst. yr. 1994-95 and share ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of search. The counsel for the assessee submitted that the observation of the AO that the raw materials to the extent of shortage were sold by the appellant outside the books of account is not correct. Firstly, because the AO has not brought any evidence on record which may prove the sale of the raw materials outside the books of account and secondly, the counsel submitted that the raw materials used by the appellant were lubricants the appellant was carrying on the business of refining of various types of lubricants; and the net yield of the finished product was 50.35 per cent during financial year 1993-94, 57.85 per cent during the financial year 1994-95 and 52.08 per cent during the financial year 1995-96. According to the counsel the yield of final product was based on quality of the raw material and the same has not been objected to by the Revenue. Coming to the shortage, the counsel submitted that the raw materials are stored in various tanks and sometimes the raw material flows out of the tank or flows away during various processes of transferring the oils of tankers to the shortage tanks/barrels, etc. 25. The learned Departmental Representative, on the other hand, has reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 days of service of notice. Notice was served on 13th Dec., 1995 on an advocate, who has received the notice "for Gorakhpur Petro Oil Ltd." 2.2 It was argued by the assessee's counsel that the notice was issued by the AO requiring the assessee to file return of income under s. 158BC for the period from 1st April, 1985 to 9th Nov., 1995. This notice has been reproduced at p. 11 of the order of my learned Brother. It was argued by the assessee's counsel that the assessee-company was incorporated only on 3rd March, 1992. The period mentioned in the notice cannot be considered as period falling within block period relevant to the block assessment in apellant's case. The argument of the assessee has been mentioned by my learned Brother in paras 10(1) and 10(2) of the order. Further argument of assessee's counsel was that the notice was not properly addressed. The learned counsel referred to the provisions of s. 282(2) of the IT Act read with provisions of s. 2(35) of the IT Act. According to the learned counsel of the assessee, notice in the case of a corporate assessee has to be issued to the principal officer and has to be served upon the principal officer as defined under s. 2(35) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed under s. 158BC, the assessee could have sought clarification from the AO. But assessee was not having any doubt about the block period and, therefore, assessee filed the return of income under s. 158BC. The assessee-company was incorporated on 3rd March, 1992 then obviously, period prior to 3rd March, 1992 cannot be considered as falling within block period relevant to block assessment even if the AO has mentioned the period as per provision of law. The AO has only used the statutory language mentioned in s. 158B(a). As the assessee was not having any doubt (regarding) block period and in fact the assessee has filed return of income for the block period from asst. yr. 1994-95 to 1996-97. No legal prejudice has been caused to the assessee by the AO by using statutory language in the notice under s. 158BC, therefore, there was no illegality in the notice issued by the AO. The AO as per requirement of the s. 158B(a) has required the assessee-company to file return of income for the block period, therefore, there is no infirmity on this account in the notice issued by the AO. 3.2 The AO has mentioned address of the assessee on the notice issued under s. 158BC as under : "M/s Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of the notice under s. 148 was not at all the subject-matter of appeal. Even on the merits, the Tribunal had taken an unduly technical view of the matter. What is of the utmost importance was whether the person issuing the notice was identified. It might have been that the ITO by the curved line drawn in the notice only set out his initials and not his full signature. By putting his initials the officer might have left a defect but such defect should not be fatal. The officer was quite identifiable and was, in fact identified by the assessee as is evident from the fact that the assessee in due compliance with the said notice filed its return. The notice was dt. 12th March, 1984, while the return pursuant thereto was filed on 16th April, 1984. There was no doubt in the assessee's mind as to the nature of the notice or the identity of the officer issuing the notice. In view of a similar curved line appearing in the order sheet the notice under s. 148 could not be said to be illegal." 4.2 In the case of CIT vs. R. Girdhar (1984) 43 CTR (Kar) 253 : (1984) 145 ITR 246 (Kar) the Hon'ble Karnataka High Court held that the determination of the tax payable in the assessment order is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the facts that the assessee-company has filed return of income without any objection, I am of the opinion that there is no invalidity in the notice issued by the AO in the name of the company. If the AO has not mentioned the "principal officer" in the address mentioned in the notice then notice is not invalid because provisions of s. 282 are not mandatory and exhaustive. The AO has substantially complied with the provisions of law and notice was in substance and effect in conformity with or according to the intent and purpose of the Act which is not invalid under s. 292B of the IT Act, therefore, there is no invalidity in the notice and no law has been violated by the AO even if there was some minor defects in the notice, those defects do not invalidate the notice because of provisions of s. 292B of the IT Act as the assessee has not raised any objection before the AO regarding defects in the notice and so-called defects in the notice has not caused any legal prejudice to assessee who has filed return of income without objection before the AO. 6. Second issue is whether the notice was validly served in this connection. The notice under 158BC of the IT Act was issued at the add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in this case followed its earlier decision in case of Ramniwas Hanumanbux Somani vs. S. Venkataraman, ITO & Anr. (1959) 37 ITR 329 (Bom). 6.2 In the case of CWT vs. Mrs. Illa Pal Choudhury & Ors. (1971) 82 ITR 936 (Cal), the WTO served notices for reassessment on the accountant of the assessee who was authorised by the assessee to represent the assessee in connection with wealth-tax assessment proceedings but was not authorised to accept notices. The assessee duly filed returns in answer to the notices and reassessment orders were passed. At the hearing before the AAC from the reassessment orders a ground was allowed to be taken that the accountant was not accredited agent of the assessee and, therefore, the service of notice on him did not constitute proper service. The AAC held that there was proper service and that even on the footing that there was no proper service, the assessee having filed the returns without objection had waived any irregularity in service. The Hon'ble Calcutta High Court has held as under at p. 930 (Headnotes): "Held, that s. 41 of the WT Act requires that notices under the Act may be served either by post or in the same manner as summons under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the notice under s. 22(4) for the production of account books. When application was made requesting time for production of account books, time was refused and the ITO made his best judgment assessment under s. 23(4) of the IT Act, 1922. The firm appealed on the grounds that service on its salesman was not valid service. After considering the circumstances of the case, the Tribunal inferred that Salesman was authorised to receive notice and held that the service was valid. The Hon'ble Lahore High Court held as under: "Held, that although he could not be said to be empowered to accept notice on behalf of the of firm and the notice was not valid under O. V, r. 12 of the CPC, the real question to be decided was whether the service of the notice was effective, as after the issue of the notice under s. 22(4) the firm applied for time to produce the accounts, it accepted that the notice under s. 22(2) had been validly served and waived any irregularity in the service of that notice; the firm was thereafter stopped from objecting to the validity of the notice unless it showed prejudice to it. The firm not having suggested any prejudice, the service of the notice on H was effective so a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Tribunal stating that the block assessment completed under s. 158BC r/w s. 144 is not tenable in law because neither there was any non-compliance nor any other default within the meaning of s. 144 warranting an ex parte assessment particularly when the appellant has been making full compliance in assessment proceeding and had filed the return on the prescribed form though belatedly but during the assessment proceedings. 8. This ground of appeal has been taken by assessee which shows that the assessee has received notice and filed the return of income. There was irregularity in the service of notice but by filing the return of income the irregularity has been waived by assessee-company. The assessee may not waive legal right but assessee can waive procedural irregularity. The procedural irregularitry committed by AO if any, in the service of notice served on an advocate who has signed as "on behalf of the Petro Chemical Oils Mills Ltd.", has been waived by assessee by filing return of income under s. 158BC. The filing of return of income by the assessee under s. 158BC also shows that the learned advocate who has received the notice on behalf of the assessee,was having implie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edits in the case of assessee-company by the AO. During the course of search, cash, jewellery and various documents and papers were found as seized in the case of assessee as mentioned by AO in para I. 10. The brief facts of the case as follows: Search and seizure operations were conducted in the case of assessee and other cases of Jalan Group under s. 132 of the IT Act on 9th Nov., 1995. 10.1 The AO issued notice under s. 158BC of the IT Act on 5th Dec., 1995. The assessee filed the return of income under s. 158BC after the expiry of period of 16 days mentioned in the notice on 2nd Sept., 1996 declaring Nil undisclosed income for the block period. The said return was not treated as return filed under s. 158BC as the return was not filed by assessee within the period stipulated in the notice dt. 5th Dec., 1995 issued under s. 158BC to the assessee. The AO, therefore, completed assessment under s. 144 of the IT Act. During the course of search on 9th Nov., 1995 certain files/documents were seized from the premises of M/s Jalan Enterprises, Dharamshala Bazar, Gorakhpur also. These files pertain to various persons who have subscribed to the shares issued by the assessee-company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained cash credit in the books of the assessee-company and considered as undisclosed income of the assessee. 10.2 It was explained by the assessee before the AO that the relevant inquiry mentioned above was outside the scope and purview of Chapter XIV-B of the IT Act, 1961, and reasons were given by the assessee which have been summarised by the AO on p. 14 para 15 of the assessment order. The AO did not accept the explanation of the assessee on the ground that the query regarding unexplained cash credit have been raised on the basis of evidence found as a result of search and other materials or information which was available with the AO. Therefore, the AO considered the aforesaid cash credit while determining the total income of the assessee for the block period. The AO considered that new facts were found during the search and information gathered during the subsequent inquiries showed that the cash credit appearing in the books of the assessee were not genuine and the income represented by these bogus transactions has not been disclosed by the assessee in the relevant financial year. According to the AO if a transaction was disclosed by the assessee in the return of income w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing also none of the shareholders attended in response to the summons issued by the AO. The assessee failed to produce any of the shareholders though the summons were issued at the instance of the assessee and details of the summons were also supplied to the assessee. 10.4 After taking into consideration the facts of the case and the assessee's failure to produce 34 shareholders before the AO, he came to the conclusion that the onus of proving the identity of the aforesaid persons has not been discharged by the assessee. The assessee relied on the affidavits of 17 shareholders and also the fact that all the 34 shareholders were regular income-tax assessees. No explanation was given by the assessee on evidence/information found during the course of search as mentioned in paras 21 to 29 of the assessment order. AO also came to the conclusion that the assessee has maintained income-tax files in the name of non-existing persons, petty paid employees, with a view to create bogus capital build up cases and for the purposes of introduction of unaccounted money of the assessee. For the reasons mentioned in paras 37 to 43, the AO came to the conclusion as under: "37 It is clear from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd are having lot of dependents and they can neither have source nor creditworthiness for heavy transactions of investment in the assessee-company. 38. It is, therefore, seen that the assessee has no explanation to offer on the aforesaid important evidence/information found during the search. As regards the assessee's reliance on the affidavits of the so-called shareholders, it is submitted as stated earlier also that when the very existence of these persons has not been established, the contents of the affidavits cannot be relied upon; assessee also could not produce the said persons in support of the submissions made in the said affidavits. It is further seen from the affidavits of the 17 shareholders furnished by the assessee with letter dt. 19th Aug., 1996, out of the said list of 34 shareholders that all the affidavits are of the same date i.e., 17th Aug., 1996 and have been signed by the same Notary at Gorakhpur. Moreover remarks on the back of these affidavits show that the affidavits have been attested by the Notary on the basis of identification of signatures of deponents done by some advocate and it is clear that deponents were not produced before the Notary. Hence from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogus income-tax files. Moreover, the said returns in the cases of so-called shareholders were processed under s. 143(1)(a) without questioning the correctness, completeness and truthfulness of the statements/documents given in the return. There was no application of mind by the AO while processing these returns, under s. 143(1)(a). As such it cannot be said that existence of the so-called shareholders was accepted by the Department and the source of capital shown in their hands was accepted. 40. The scope of assessment orders framed under s. 143(1) also came up for consideration before the Hon'ble Tribunal, Allahabad in ITA No. 154 and 155/Alld/1989, dt. 7th Oct., 1993 in the case of M/s Bari Family Trust Varanasi. In that case, the assessment order made in the status of AOP was challenged by the assessee on the ground that assessment orders under s. 143(1) were framed earlier in the hands of the beneficiaries by the Department than the assessment order framed on the trust in question. The Hon'ble Tribunal held in para 5 of the said order that "We have heard the parties at length on the point and we are of the opinion that the argument of the learned counsel for the assessee does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... names of various companies as under: Financial year Rs. 12,00,000 1993-94 Rs. 46,50,000 1994-95 Rs. 51,50,000 1995-96 Rs. 1,10,60,000 The addition of Rs. 1,10,60,000 was made by AO to undisclosed income as the assessee-company failed to explain the genuineness of subscription to the share capital by various companies, which were treated as unexplained cash credits in the case of assessee-company by the AO. 12. The AO observed various discrepancies in the share transactions which have been mentioned in para 44 of the assessment order which are given as under: "As a result of search action, number of discrepancies were noticed in these share transactions, which indicated that these were the unexplained cash credits and the undisclosed income of the assessee-company brought into the business in the form of share capital allegedly subscribed by these companies. The following discrepancies were noticed in these share transactions: (i) No correspondence in respect of share transaction other than share application was available with the assessee-company. (ii) No letter of offer for subscribing to the share capital has been made by the assessee-company. (iii) The photo copie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to Rs. 1,10,60,000. The AO asked the assessee-company to explain why the share application money allegedly received from the said companies amounting to Rs. 1,10,60,000 may not be treated as unexplained cash credit and added to the assessee's total income. The assessee-company in its explanation vide letter dt. 27th June, 1996, stated that the query was outside the scope and purview of Chapter XIV-B of the IT Act i.e., ss. 158B(2), 158BH. The assessee-company's reply was the same which was given in the case of cash credits appearing in individual names as mentioned in the preceding paras. The assessee-company however, submitted 50 affidavits of corporate shareholders and the following documents : (i) Income-tax order/acknowledgment (ii) Confirmation (iii) Memorandum and articles of association with certificate of incorporation, balance sheet, P&L a/c and bank statement The assessee also submitted later on, affidavits of 15 companies vide letter dt. 19th Aug., 1996. Therefore, 65 affidavits of companies were submitted by the assessee upto 19th Aug., 1996. 14. From the affidavits of the director of the companies, the AO noticed that 50 affidavits filed by the assessee along w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual existence of companies when the said companies were not found to be actually existing on the addresses given. The AO considered that the companies whose share application money has been received cannot be said to be actually existing just because they have been incorporated by the Registrar of Companies. The AO came to the conclusion that the incorporation of the said companies is only on paper and bogus companies have been floated in order to give Hawala entries. 15.1 It was also claimed by the assessee before the AO that since all companies are income-tax assessees, they have PANs and bank accounts, their existence and creditworthiness cannot be doubted. The AO noticed that return of income filed by the said companies was processed under s. 143(1)(a) before search without questioning the correctness of the statement/documents filed with the return. Therefore, there was no application of mind by the AO while processing the return under s. 143(1)(a). According to the AO, the existence of the so-called companies was not accepted by the Department. 15.2 Again, the assessee-company claimed before the AO that it has sent money orders on random basis to various companies to reaff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10th Sept., 1996, in case of following two cases : (i) Mohak Trading (P) Ltd., 2150, Tilak Bazar, Khari Baoli, Delhi. Director Shri Kamal Kishore Aggrawal. (ii) Profn. Finance & Investment (P) Ltd. 2150, Tilak Bazar, Khari Baoli, Delhi. 15.4 During the course of survey it was found that no records were being maintained or kept at the office. No books of account, stock or cash was kept in the office. As per statement of Shri Kamal Kishore Agrawal and Shri Vimal Kishore Agrawal, directors of the two companies mentioned above, the books of account and other records were kept with the chartered accountants only. The directors did not know the number of shareholders authorised/subscribed/paid up capital of the company. The AO came to the conclusion that both the companies exist only on paper without any actual operations and created for the purpose of giving Hawala entries. Similarly, in the case of M/s Decent Realator (P) Ltd., B-5/217, Sector V, Rohini, Delhi-85 it was found on local inquiry that the said address is that of a residential flat in a residential colony. In the absence of evidence about the genuineness and creditworthiness, the AO came to the conclusion that the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ala entries. The ratio of full Bench decision of the Delhi High Court in CIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del) 472 : (1994) 205 ITR 98 (Del) is fully applicable in the present case as shareholders are not identified and it is not established that they have invested money in the purchases of shares of the assessee-company. Therefore, invoking the provisions of s. 68 of the IT Act, the sum credited in the books of account of the assessee as share capital in the names of these bogus companies amounting to Rs. 1,10,60,000 is treated as assessee's income from undisclosed sources. As per the details given in Annexure 7 of the assessment order, out of the said sum of Rs. 1,10,60,000 the sum of Rs. 12,60,000 falls in the financial year 1993-94 which is treated as assessee's income from undisclosed sources for the said financial year; the sum of Rs. 46,50,000 falls in the financial year 1994-95, which is added as assessee's income from undisclosed sources of the said financial year and the balance amount of Rs. 51,50,000 falls in the financial year 1995-96 (till the date of search) which is added as assessee's income from undisclosed sources for the said financial year." 17. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee creditors were not available and all the credits were sham and not genuine. Referring to the material found at the time of search, the learned Departmental Representative stated that the files were found during the course of search which shows bogus cash credits. It was stated by the learned Departmental Representative that whether the assessee has carried on business is not material for determining the undisclosed income because the assessee might have carried on some other business or earned income from other sources not known to the Department. The learned Departmental Representative pointed that the search was conducted in premises of the company and directors and certain inquiries were conducted on the basis of material found during the course of search. The learned counsel referred to various paras in the assessment order and stated that the assessee has not established the identity and creditworthiness of cash creditors and shareholders and same are not produced by the assessee. The learned Departmental Representative read various paras of the assessment order and pointed out that even the affidavits filed by the assessee was false No deponent has signed affid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders are non-existent. According to learned counsel, names and addresses of the corporate shareholders, their bank accounts, etc. have been given and the AO has not even found from the bank or Registrar of Companies whether the companies are genuine shareholders. According to learned counsel the assessee was intimated about the inquiries made in 26 cases of the company shareholders but made addition in respect of 59 company shareholders and, therefore, the AO did not mention how the balance 33 companies are bogus companies. It is stated by the learned counsel that the AO gave information about 16 companies which were considered as non-genuine but for other companies the AO did not give any intimation or show cause to the assessee. According to learned counsel the existence of corporate shareholders have been proved by the following details: (i) Bank accounts (ii) Share application forms (iii) Memorandum of association and articles of association (iv) Wherever assessments have been made or audited accounts were available, the same were filed. The learned counsel further stated that no paper was found during search relating to period upto financial year 1994-95. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reference application on the ground that no question of law arose. The Hon'ble Delhi High Court observed as under : "It is evident that even it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances can the amount of share capital be regarded as undisclosed income of the assessee." The Hon'ble Supreme Court in Civil appeal No. 1968 of 1996 vide order dt. 20th July, 2000 has dismissed the appeal of the Revenue against order of Delhi High Court (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) on the ground that the Tribunal came to the conclusion on the facts and no interference is called for. 20.1 In the case of CIT vs. Sophia Finance Ltd. again, the CIT filed a petition under s. 256(2) of the IT Act which was referred to the Full Bench because correctness of the observations in the judgment of the Division Bench of the Delhi High Court in the case of CIT vs. Stellar Investment Ltd. was doubted. In the case of Sophia Finance Ltd. also the return of income filed by the assessee-company was accepted by the AO The CIT issued a notice under s. 263 to the assessee to show cause why the assessment should not be revised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO has the jurisdiction to enquire from the assessee the nature and source of the said amount. When an explanation in regard thereto is given by the assessee, then it is for the ITO to be satisfied whether the said explanation is correct or not. It is in this regard that enquiries are usually made in order to find out as to whether, firstly, the persons from whom money is alleged to have been received actually existed or not. Secondly, depending upon the facts of each case, the ITO may even be justified in trying to ascertain the source of the depositor, assuming he is identified, in order to determine whether that depositor is a mere name-lender or not. Be that as it may, it is clear that the ITO has jurisdiction to make enquiries with regard to the nature and source of a sum credited in the books of account of assessee and it would be immaterial as to whether the amount as credited is given the colour of a loan or a sum representing the sale proceeds or even receipt of share application money. The use of the words "any sum found credited in the books" in s. 68 indicates that the said section is very widely worded and an ITO is not precluded from making an enquiry as to the true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Stellar Investment Ltd., are correct but if, on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory, then, the provisions of s. 68 may be invoked. In the latter case s. 68, being a substantive section, empowers the ITO to treat such a sum as income of the assessee which is liable to be taxed in the previous year in which the entry is made in the books of account of the assessee. After referring to the decision of the Supreme Court in the case of CIT vs. Biju Patnaik (1986) 58 CTR (SC) 65 : (1986) 160 ITR 674 (SC) and Delhi High Court decision in the case of Gee Vee Enterprises vs. CIT 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del) and certain other decisions, the Hon'ble Delhi High Court allowed reference to the CIT under s. 256(2) of the IT Act and directed the Tribunal to refer the question of law mentioned at p. 110 of 205 ITR. 20.2 It is clear from the observation of the Hon'ble Delhi High Court mentioned above in the case of Sophia Finance Ltd. that: (i) Whatever the sum is found credited in the books of account of the assessee then irrespective of the colour or the nature of the sum received which is sought to be giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicability of provision of s. 68 was not before the Supreme Court in the aforesaid civil appeal No. 1968/1996, order dt. 20th July, 2000. In the case of Stellar Investment Ltd. as decided by the Hon'ble Delhi High Court at p. 105 of 205 ITR (in case of Sophia Finance Ltd.) "Sec. 68 of the Act was not referred to and the observations in the said judgment cannot mean that ITO cannot or should not go into the question whether the alleged shareholders actually existed or not." 21. Now adverting to the facts of the case of the assessee before us, it is clear that material was found during the course of search at the business premises of the assessee-company and others on 9th Nov., 1995. As a result of search operations and availability of material found and seized from the premises of the assessee-company and others, the AO issued notice under s. 158BC of the IT Act on 5th Dec., 1995. Assessee filed the return of income in response to notice under s. 158BC on 2nd Sept., 1996, after the expiry of period mentioned in the notice under s. 158BC issued on 5th Dec., 1995. Since there was no provisions for filing the belated return under s. 158BC, the return of income filed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd details of summons issued by the AO were also supplied to the assessee. Out of the 34 summons issued by the AO, in 22 cases, summons were returned unserved by the postal authorities with the remark "incomplete address, could not be located, not known, returned, no such address". On the date of hearing, the other shareholders did not attend in response to summons which was not returned by the postal authorities. The assessee also could not produce the shareholders for verification of genuineness of issue of shares to them though shares were not issued to public in general by advertisement in newspapers. The assessee however, produced affidavits of 17 shareholders but the contents of the affidavits were not relied upon by the AO because when the persons concerned have not been produced, the contents of the said affidavits were not relied upon by the AO. Now the issue to be considered is whether the contribution of share capital shown in the books of account of the assessee-company in the names of shareholders who are neither traceable by the AO, nor produced by the assessee-company before the AO for verification of facts, can be considered as undisclosed income under Chapter XIV-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income, or as the case may be as increased by the aggregate of the losses of such previous years determined in the manner laid down in s. 158BB. Therefore, provisions of s. 158B(b) defining undisclosed income have to be considered along with the provisions of s. 158BB harmoniously. Material, documents, transactions, books of account or entry recorded in the books of account or other documents found during the search may require further clarification, inquiry or investigation. In my opinion, the material or information gathered during the course of investigation or inquiry in respect of such entry or transaction recorded in the books of account or documents, etc. found during the course of search can be used for the purpose of making assessment for the block period. Therefore, the expression "such other material or information as are available with the AO" has to be construed to include material or information which are available with the AO on the date of framing the assessment order and not only such material or information found during the course of search only, but such material found as a result of inquiry or investigation should be related or connected with documents, mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exceeds amount of Rs. 25,000. But in the case of assessee-company for the share application form for shares exceeding Rs. 25,000, there is no PAN/GIR number on the share application forms. The assessee has not maintained any receipt and despatch register to show the date on which the application was received or when the shares were issued. There is no evidence on record to show that the assessee-company issued any share allotment letter or share certificate to the alleged shareholders. It is strange that there is no indication about the number of shares on share application form as mentioned by the AO on p. 39 of the assessment order. Even the share application forms are addressed to "Director, Delhi" as mentioned by the AO on p. 39 of the assessment order and not to the company. In the absence of correspondence, receipt and despatch register, the AO specifically mentioned that no letter of allotment or share certificate has been issued to the shareholders. The assessee-company has not submitted any evidence to show that share certificates have been issued and served on the shareholders. Under these circumstances, it is not possible to consider that issue of shares in the names o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's. order that cash credit of Rs. 75,000 in the name of Smt. K. Pathu Kutty Umma was not genuine. 25.3 It is therefore, clear from the ratio laid down in these cases that payment by cheque or by cross cheque does not mean that the transaction is genuine. In the case of the assessee there is no evidence regarding the identity of the shareholders because most of the notices issued to the individual shareholders have been returned by the postal authorities unserved. Under these circumstances it cannot be stated that the amount shown as receipt by the assessee-company as share application money from the said shareholders represent genuine transaction because the AO has found that the shareholders are not traceable, and the assessee-company has not proved conclusively the existence of shareholders. Under these circumstances, the AO was justified in treating the share application money as cash credit. 26. During the course of search under s. 132 on 9th Nov. 1995 as mentioned by the AO in paras 44 to 46 of the assessment order, certain papers, documents, materials, etc. were found from the premises of assessee-company. This material found from the premises of the assessee-company reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere returned by the postal authorities with the remark that those companies did not exist at the given address. Remarks of the postal authorities and the names of such companies have been mentioned by the AO on p. 48 of the assessment order. Inquiries made through Inspector of Investigation Wing at New Delhi in the cases of companies as mentioned in para 55 of the assessment order revealed that the said companies did not have any office on the address given and the said companies did not exist on those addresses. Few inquiry reports of the Inspector were also given to the assessee as mentioned by the AO in para 15 of the assessment order. When summons issued to the companies were returned unserved and inquiry through Inspector of Investigation Wing at Delhi revealed that certain companies at the given address did not exist. The AO came to the conclusion that bogus companies have been floated and capital have been built in their names as hawala entries. From the addresses of few such companies it was found that the addresses were those of residential houses and occupants of those houses denied existence of companies on those addresses as mentioned by the AO in para 56 p. 54 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has filed 50 affidavits of the directors of companies but the existence of such directors or companies have not been proved. The AO was not satisfied about the authenticity of the affidavits because the inquiries made by the Department revealed that the companies did not exist on the given address. The AO in order to verify the genuineness of the affidavits further made inquiries and sent a registered letter in the names of the deponents in a few cases on a test check basis requesting the deponent to intimate whether the affidavits have been signed by them. However, such letters as mentioned by the AO in para 62 were returned by the postal authorities unserved. The AO came to the conclusion that the affidavits submitted by the assessee were bogus and not reliable. 28.2 It was also claimed by the assessee before the AO that the companies were incorporated by the Registrar of Companies and their existence was genuine is established. The AO did not accept this contention of the assessee on the ground that certificate of incorporation is not a conclusive evidence about the genuineness of the companies because the Registrar of Companies does not inquire about the existence or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 133A of the IT Act, 1961 by the ADIT (Inv.), New Delhi, on 10th Sept., 1996 on the 2 concerns was done as mentioned in para 71 p. 67 of the assessment order. During the course of survey it was found that no records were being maintained or kept at the office. No books of account, stock or cash was found to have been kept. It was rather revealed by 2 directors of 2 companies namely, Sh. Kamal Kishore Aggarwal,, director of Mohak Trading Company (P) Ltd. and Sh. Vimal Kishore Aggrawal, director of Profen Finance Investment Ltd. that the books of account and other records were kept with chartered accountants only. These directors did not know number of shareholders, subscribed/paid up capital, etc. The AO came to the conclusion that the said 2 companies existed only on paper without any actual operation. The details gathered by the AO were furnished to the assessee vide letter dt. 1st Oct., 1996. It seems earlier reply by the assessee-company to the AO was repeated. For the reasons mentioned in paras 74 to 78 pp. 63 to 75, the AO was not satisfied about the identity of the companies in whose name receipt of share application money has been shown by the assessee-company and he, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has failed to establish the genuineness of transaction of issue of shares in the case of these companies as well as other companies, the AO found incriminating material during search and subsequent inquiries revealed that these companies are also not traceable and therefore, it cannot be stated that the conclusion of the AO that the companies exist only on paper is wrong. 29. It is argued by the assessee's counsel that assessee-company has disclosed share capital in the balance sheet filed with the return of income and the same cannot be treated as undisclosed income of the assessee-company. The argument of assessee's counsel in my humble opinion has no force. The assessee has not disclosed the true character of receipts. The material found during the course of search i.e., share application forms and other material revealed unusual features. The material found during the course of search was never produced before the AO. Subsequent inquiries made by the AO revealed that shareholders are not traceable, and therefore, in the absence of examination of shareholders by the AO it cannot be said that they have subscribed to the share capital of the assessee-company. The assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered as genuine receipt until and unless the person, in whose name receipt of money has been shown by the assessee confirms before the AO that he has paid the money to the assessee and the AO is satisfied about the creditworthiness of the payer, cash creditor. In the case of assessee-company before us, neither the AO is able to trace the individual shareholders and company shareholders nor the assessee-company is able to produce the shareholders before the AO In the absence of verification by the AO from the shareholders about the genuineness of share application money shown in the books of account of the assessee-company, it cannot be said the assessee has proved the genuineness of receipt of money shown as share application money. Similarly, in absence of verification from shareholders, it cannot be said that the return of income filed in their name or bank account maintained in their name is genuine. 31. It is clear from the facts mentioned in preceding paras that the AO made various inquiries at various stages but could not locate the companies or their directors who have been shown as the shareholders in the case of assessee-company. The assessee-company also failed to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not traceable, the AO made addition of Rs. 5,11,000 to the total income. 33. We have heard the learned counsel of the assessee as well as learned Departmental Representative. These 3 persons are shareholders also who have applied for shares of the assessee-company. These 3 persons mentioned by the AO on p. 78 of the para 82 of the assessment order, are not traceable. Therefore, there is no evidence about the identity of the persons concerned. Though the assessee has filed affidavits but in the absence of availability of the creditors who have been shown as shareholders also, it cannot be stated that the assessee has proved the identity, creditworthiness and genuineness of the shareholders. Therefore, ground of appeal relating to addition of Rs. 5,11,000 to total issue is dismissed. 34. The learned counsel has referred to certain decisions of the Hon'ble High Court and Tribunals. Some of these decisions are considered in the following paras: (i) CIT vs. Sham Lal (1980) 18 CTR (P&H) 89 : (1981) 127 ITR 816 (P&H): In this case the material relied on by the ITO was not communicated to the assessee. It was found that the assessment was not based on facts and therefore, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at though the explanation about the nature and source of investment by the assessee in the properties was unsatisfactory and the assessee being a Muslim lady aged 20 years, who had no other source of income, it was impossible for her to have earned the amount invested in the properties. The Tribunal held that although the explanation of the assessee was liable to be rejected, s. 69 of the Act conferred only discretion on the ITO to deal with the investments as income of the assessee and that it did not make it mandatory on his part to deal with the investment as income of the assessee, as the assessee's explanation happened to be rejected. The Tribunal allowed the appeal and deleted the addition made by the ITO. In this case, the Tribunal took into account complete absence of resources of the assessee and also the fact that having regard to her age and the circumstances in which she was placed, she could not be credited with having made any income of her own. The Hon'ble Kerala High Court, therefore, held the Tribunal was right in holding that s. 69 of the IT Act, could not be invoked in respect of the investments of the assessee. In this case of assessee-company before us, the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that the assessment order was unjust and arbitrary and the additions have to be deleted. But in the case of the assessee-company before us the AO has made inquiries and given opportunity to the assessee by intimating in respect of enquiries made by the AO Similarly, in other cases cited by the assessee's counsel, the facts were totally different and not applicable to the case of the assessee. 35. The next ground of appeal is against addition of Rs. 13,46,000 for alleged income from undisclosed sources as unexplained cash credits. The AO made addition of Rs. 13,46,000 on ground of cash credits appearing in the books of account in financial year 1992-93 and 1993-94, as under: Financial year Rs. 1992-93 2,13,000 1993-94 11,83,000 Some of cash credits mentioned on p. 76 of the assessment order were shown shareholders of the assessee-company. As already mentioned, the original income-tax files in respect of said 34 shareholders were recovered during the course of search from the premises of M/s Jalan enterprises. There were credits of Rs. 25,000 in the name of Nilender Jalan, Gorakhpur and cash credit of Rs. 90,000 in the name of Shri Ram Preet, Gorakhpur. These cash cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s nature of the cash credits. AO also did not make any inquiry to find out the genuineness of 13 cash creditors on the basis of any paper found during search. As the AO has not mentioned any material or any inquiry based on material found during search, the cash credits in the name of 13 other cash creditors cannot be treated as undisclosed income of the assessee-company. Only such income can be treated as undisclosed income which is determined on the basis of material found during search or subsequent inquiries relating to material found during search. Therefore, addition of cash credits based on material found during search and inquiries made by the AO on the basis of material is confirmed in the following cases: Financial year Rs. 1992-93 Neelinder Jalan 10,000 Ram Preet 90,000 1993-94 Neelinder Jalan 15,000 Other cash credits of Rs. 1,13,000 in financial year 1992-93 and cash credit of Rs. 11,68,000 for financial year 1993-94 are deleted as they cannot be treated as undisclosed income in block assessment as the AO has not mentioned any material found during search in respect of 13 cash credits. This ground of appeal is partly allowed. 37. Another ground of appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,61,000 1993-94 2 Deepak Bindal 1,80,000 1994-95 3 Vishwanath Pd. 1,70,000 1995-96 5,11,000 (iv) Cash credits in the name of: Financial year 1992-93 Neelinder Jalan Rs. 10,000 Ram Preet Rs. 90,000 Financial year 1993-94 Neelinder Jalan Rs. 15,000 (2) Whether the notice issued by the AO under s. 158BC is valid? (3) Whether the service of notice issued by the AO under s. 158BC is proper?" 2. Both the Members have given a detailed factual matrix of the case in their respective orders, but it will be in the fitness of things to recapitulate the factual position in a summarized manner. 3. Assessee is a public limited company which was incorporated under the Companies Act, 1956, on 3rd March, 1992 for retail business of refining "used oils" (petroleum products) as its main business and manufacturing unit was set tip by the assessee-company at Bargadwa, Gorakhpur. The assessee-company has got its registered office at Faizabad. 4. Assessee-company was subjected to a search operation carried out under s. 132(1) of the Act on 9th Nov., 1995. It is also admitted fact that a partnership firm styled as M/s Jalan Enterprises was also subjected to search operation on 9th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise details of share capital and cash credit as well as business income which has been considered as undisclosed income had been reproduced by the learned JM in para 8.5 of his order which is as under: Sl. No Description of undisclosed income Assessment years 1993-94 1994-95 1995-96 1996-97 1. Share Capital/Share application money : (a) Companies Nil 12,60,000 46,50,000 51,50,000 (b) Non-Company 24,32,000 12,33,000 44,000 Nil 2. Cash credits 2,13,000 11,83,000 5,11,000 Nil 3. Business income Nil Nil Nil 1,28,856 Total 26,45,000 36,76,000 52,05,000 52,78,856 6. While computing the undisclosed income, the AO had proceeded on the basis of search materials found and seized at the business premises of M/s Jalan Enterprises which are 30 income-tax files of 30 persons, pass books of these persons and other related documents by which those persons have contributed to the share application money and share capital of the assessee-company. The AO proceeded to examine the seized materials and made detailed enquiries and his conclusion was that these income-tax files were maintained by the directors of the assessee-company and by person connected with Jal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfronted to the assessee. The assessee tried to explain that each of the company was registered with the Registrar of the Companies and each of them was income-tax assessee. The other pleas were also raised, but the AO, after discussing the issue in detail, did not agree with the contention of the assessee, but placed reliance particularly on the report of the A.D.I.T., Delhi, who has submitted a detailed report doubting the very existence of those companies and which were not found at the addresses given by them. Accordingly, the AO treated all the amounts of share capital and share application money of these companies as undisclosed income of the assessee-company and made addition and assessment was completed which were challenged before the Bench. 9. Several pleas were raised before the Bench by respective representatives of the parties and the learned JM placing reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Stellar Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) which stands approved by the Hon'ble Supreme Court of India vide order dt. 20th July, 2000 in Civil Appeal No. 7968 of 1996 reported as CIT vs. Stellar Investment Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it, the learned AM had considered the detailed enquiries and investigation carried out by the Department in respect of 30 income-tax files found and seized at the business premises of M/s Jalan Enterprises as well as in respect of companies who allegedly have contributed to share capital of the assessee-company and on the basis of finding recorded by the AO, the learned AM concluded that assessee has not been able to prove the very identity of individuals who have allegedly contributed to share capital of the assessee-company nor the very existence of the companies who allegedly have subscribed to the share capital of the assessee-company. For this, the learned AM has reproduced the relevant portion of the order of the AO and findings recorded by him. About the disclosure in the books of account in respect of share capital and share application money as well as cash credit, the learned AM opined that necessary enquiries and investigation made by the Department on the basis of seized material go to prove that the individuals and the companies have not contributed to share capital, but the amount was unaccounted money invested by the assessee-company in the garb of name-lenders, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Their Lordships have also laid down that the apex Court had not entered into the question involved nor decided the ratio laid down, but it had plainly held that it was a question of fact and thus the decision in the case of CIT vs. Stellar Investment Ltd. cannot be treated as good law. This ratio was followed in the case of CIT vs. Ruby Traders & Exporters Ltd. (2003) 182 CTR (Cal) 596 : (2003) 263 ITR 300 (Cal) and it was laid down that in case of subscription received by a company from the shareholders, it is obligatory on the part of the company to prove the genuineness of the transaction and the creditworthiness of the subscribers and the AO can enquire into the real nature of the transaction. Again the same decision was followed in the case of CIT vs. Kamdhenu Vyapar Co. Ltd. (2003) 182 CTR (Cal) 600 : (2003) 263 ITR 692 (Cal). On the basis of the above, the learned standing counsel pointed out that the AO has made extensive enquiries/investigation and had recorded categorical finding to the effect that assessee has not been able to prove the identity of the individuals who have subscribed allegedly in the share capital and also failed to prove on record the real existence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the assessee also submitted that scope of block assessment is restricted to undisclosed income as per provisions of s. 158B of the Act and their Lordships of Hon'ble Delhi High Court in the case of CIT vs. Ravi Kant Jain (2001) 167 CTR (Del) 566 : (2001) 250 ITR 141 (Del) has laid down that block assessment under Chapter XIV-B of the Act is not intended to be a substitute for regular assessment and its scope and ambit is limited in that sense to materials unearthed during search or requisition of books of account or documents and such other materials or information as are available with the AO The other decisions in the case of CIT vs. Vinod Danchand Ghodawat (2000) 163 CTR (Bom) 432 : (2001) 247 ITR 448 (Bom) and CIT vs. Rajendra Prasad Gupta (2001) 166 CTR (Raj) 83 : (2001) 248 ITR 350 (Raj) were also referred to. 16. The learned counsel for the assessee relying upon the decision of CIT vs. Shambhulal C. Bachkaniwala (2000) 162 CTR (Guj) 435 : (2000) 245 ITR 488 (Guj), in which the Hon'ble Gujarat High Court upheld the view of the Tribunal that only undisclosed income as defined in s. 158B of the Act has to be assessed under Chapter XIV-B and consequently incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... war vs. Dy. CIT (2004) 91 TTJ (Chennai) 970 : (2002) 80 ITD 429 (Chennai). 20. On the basis of the above case law, the learned counsel for the assessee submitted that there was no justification for the AO to utilize the material seized from the premises of another assessee and further no justification to conduct enquiries in respect of that seized material and to review the earlier completed assessment for asst. yr. 1994-95 under s. 143(3) of the Act and further there was no undisclosed income, as already assessee has shown the share capital/share application money for asst. yr. 1994-95 which stand accepted by the Department. 21. In respect of the additions made by the AO for asst. yrs. 1995-96 and 1996-97, the learned counsel for the assessee submitted that for asst. yr. 1995-96, assessee has to file return by 31st Oct., 1995. On the date of search i.e., on 9th Nov., 1995, the return was not due for asst. yr. 1995-96 and assessee had filed the return showing increase in the share capital/share application money in the said return, which was filed within the statutory period. Further, accounting year for asst. yr. 1996-97 was not over and return for that asst. yr. 1996-97 was fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition on undisclosed income in respect of amount noted in diary which was to be disclosed by the assessee. The learned counsel for the assessee contended that no addition for asst. yrs. 1995-96 and 1996-97 is sustainable on the above referred to ratio. 22. On the basis of above arguments, the learned counsel for the assessee submitted that no addition was warranted in respect of undisclosed income for asst. yr. 1994-95, as already assessment was completed under s. 143(3) of the Act and further there was no material seized from the premises of the assessee nor the material seized from other assessee was prima facie going to show the factum of undisclosed income and AO was not justified to conduct enquiries. 23. For asst. yrs. 1995-96 and 1996-97, the learned counsel for the assessee summarized that assessee had entered all the amounts of share capital/share application money in the books of account which is not disputed one by the Department and due date for filing of return for asst. yr. 1995-96 was not due till the date of search and even accounting year for asst. yr. 1996-97 was not yet over. The additions for these assessment years made by the AO treating all these amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Chapter because it provides special rate of taxation which is 60 per cent as against ordinary rate of 30 per cent, etc. At the cost of repetition, I am reproducing the relevant portion of s. 158B of the Act and relevant portion of s. 158BB which provide definitions and mode of computation of undisclosed income and the same are as under: "158B. Definitions.--In this Chapter, unless the context otherwise requires,-- (a) 'block period' means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted under s. 132 or any requisition was made under s. 132A and also includes the period up to the date of the commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made: Provided that where the search is initiated or the requisition is made before the 1st day of June, 2001, the provisions of this clause shall have effect as if for the words six assessment years, the words ten assessment years had been substituted; (b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-s. (1) of s. 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years; (e) where any order of settlement has been made under sub-s. (4) of s. 245D, on the basis of such order; (f) where an assessment of undisclosed income had been made earlier under cl. (c) of s. 158BC, on the basis of such assessment. (2) In computing the undisclosed income of the block period, the provisions of ss. 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. (3) The burden of proving to the satisfaction of the AO that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee. (4) For the purpose of assessment under this Chapter, losses b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these files were recovered from M/s Jalan Enterprises and a different AO was having jurisdiction over that firm, M/s Jalan Enterprises. In such situation, the provisions of s. 158BD of the Act assume significance and the AO having jurisdiction over M/s Jalan Enterprises was under obligation to examine the recovered material and after scrutiny of the seized material recovered from M/s Jalan Enterprises, he has to satisfy himself that seized material revealed undisclosed income of third party viz., assessee-company and then he should hand over all the seized materials to the concerned AO who was having jurisdiction over third party viz., assessee-company. This provision of s. 158BD of the Act is not a mere formality but a statutory requirement of the special procedure of assessment of such cases and Departmental authorities are bound to follow it. It is well-settled proposition of law that if statute provides a special procedure to be followed, then authorities are under statutory obligation to follow the same as prescribed and no deviation therefrom can be permitted. There is nothing on record to suggest that AO who was seized with the assessment of M/s Jalan Enterprises examined th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , he should have complied with the provisions of s. 158BD of the Act and handed over the material to AO of assessee-company. As AO of M/s Jalan Enterprises has not recorded such satisfaction nor there is anything on record to show that the said AO of M/s Jalan Enterprises handed over the documents as required under s. 158BD of the Act, then it was obligatory on the part of the Department to explain as to how AO of the assessee-company have utilized the seized material of M/s Jalan Enterprises in the case of assessee-company. Nothing has come on record from Department nor the learned standing counsel for Department was able to explain anything on this point. 29. A perusal of s. 158BB of the Act reproduced above shall show that fundamental statutory requirement for computation of total undisclosed income of previous years falling during the block period are that: (1) there must be a search under s. 132 of the Act. (2) some incriminating material/asset should have been unearthed in such search enabling the AO to work out the undisclosed income. (3) or, there is requisition of books of account or other documents under s. 132A of the Act on the basis of which undisclosed income can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... routed through proper channel as prescribed under s. 158BD of the Act and in the absence of anything available on record that the said procedure was followed, particularly that assessment has not been completed under s. 158BC/158BD of the Act, the conclusion will be that AO of the assessee-company cannot be said to be in possession of seized material. Secondly, AO has not requisitioned the seized material as per requirement of s. 132A of the Act. In the absence of these, AO of assessee-company cannot be permitted to utilize the seized material recovered from third party. All materials collected by AO in relation to those seized materials, in the eye of law cannot be treated in possession of the AO and can be utilized against the present assessee for working out undisclosed income for block period. 32. As this being an important flaw in completing the block assessment by the AO and both the learned Members have not addressed themselves to this legal issue in their respective orders nor the learned counsel for the assessee argued on this line, this issue was brought to the knowledge of the representatives of both the parties during the course of hearing by me. The learned standing c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. As discussed above, the availability of 30 income-tax files of those persons who allegedly have invested their amount in respective share application of the assessee-company was not going to prove the factum of undisclosed income unless enquiry as done by the AO was completed. It was beyond jurisdiction of the AO to go into lengthy enquiries to ascertain identity, creditworthiness and genuineness of these transactions in spite of the fact that provisions of s. 68 of the Act were applicable to block assessment proceedings. This is so because already assessment under s. 143(3) of the Act has been completed for asst. yr. 1994-95 and if Department wants to utilize the seized material, this may be ground for reopening of the completed assessment for asst. yr. 1994-95, but certainly it cannot be made basis for making roving enquiries as done by the AO for working out the undisclosed income. The income-tax files recovered were not such evidence which should have prima facie revealed undisclosed income and as discussed above, the AO made addition only after making roving enquiries which is beyond his power and the addition for asst. yr. 1994-95 cannot be made, as making of roving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these companies was found during the course of search as is the admitted position accepted by the representatives of both the parties, then question is whether the AO in the absence of any material seized during the search operation can be allowed to conduct enquiries, particularly when assessee had shown the amount of capital/share application money in its books of account and return of the assessee for asst. yrs. 1995-96 and 1996-97 was not yet due and even accounting year for asst. yr. 1996-97 was not over. The reply is in negative, because s. 158BB(1)(d) of the Act is very clear on this point and the learned JM has rightly appreciated that provision and concluded that AO cannot be allowed to make addition of undisclosed income in respect of those entries which are appearing in the books of account for asst. yrs. 1995-96 and 1996-97 in which date of filing of return was not yet over and even accounting year for asst. yr. 1996-97 was not over. I am in agreement with the view taken by the learned JM on this point. The AO was not justified to conduct enquiries in respect of capital/share application money appearing in the books of account of the assessee-company for asst. yr. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn in the prescribed form and verified in the same manner as a return under cl. (i) of sub-s. (1) of s. 142, setting forth his total income including the undisclosed income for the block period; Provided that no notice under s. 148 is required to be issued for the purposes of proceeding under this Chapter: Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;" 38. The notice as is required under the above referred to section is to be served and s. 282 of the Act provides the mode of service of notice and relevant portion thereof is as under : "282. Service of notice generally.--(1) A notice or requisition under this Act may be served on the person therein named either by post or as if it were a summons issued by a Court under the CPC of, 1908 (5 of 1908). (2) Any such notice or requisition may be addressed-- (a) in the case of a firm or an HUF, to any member of the firm or to the manager or any adult member of the family; (b) in the case of a local authority or company, to the principal officer thereof" 39. The admitted facts from the record are that AO before proceeding to complete the block assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot mandatory and if AO while issuing notice has not addressed the notice to the principal officer but merely addressed it to the assessee-company, the same cannot be termed as invalid notice. On other infirmity, the Department had pleaded that block period is for 10 years and if AO has mentioned that period in the impugned notice, no abnormality is committed by the AO nor any prejudice has been caused to the assessee-company. Lastly, the Department had contended the notice in question stands served on an advocate who was found available at the headquarter of the assessee-company and he has received the same on behalf of the assessee-company and that should be treated as proper service. 41. The learned counsel for the assessee as well as the learned standing counsel who appeared before me have virtually reiterated the same submissions as were put up before the Bench and also referred to the case laws which had been cited by them before the Bench seized with the issue. 42. To begin with the issue involved in these two points of difference, it will be seen that AO can assume jurisdiction to complete the block assessment only after valid service of a legal and valid notice on the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 148 of the Act was issued to an entity which was as a matter of fact, non-existent and was at any rate different from the entity which filed the return in response to that notice. 44. The following observation of the jurisdictional High Court in the case of Madan Lal Agarwal vs. CIT (1983) 32 CTR (All) 179 : (1983) 144 ITR 745 (All) will be relevant : "It is now well-settled, and we do not consider it necessary, to advert to numerous authorities in this regard cited at the Bar, that issuing of a valid notice to the assessee under s. 148 of the IT Act within the period specified under s. 149 of the Act is a condition precedent to. the validity of any assessment to be made against such assessee under s. 147 of the Act. Accordingly, where no such notice has been issued or if the notice issued is not valid or the same has not been served on the assessee in accordance with law, it will not be possible to sustain the eventual assessment made under s. 147 on the basis of such notice. We may also take it that where the notice issued to an assessee is vague, it would not be possible to rely upon it to sustain an assessment made under s. 147 of the IT Act." 45. Lastly the case of P.N. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or a requisition under the Act may be served on the assessee either by post or as if it were summons issued by a Court under the CPC. Sub-s. (2) of that section says that in the case of a firm the notice may be addressed to any member of the firm. Admittedly, none of the partners of the firm had been personally served with the notice, and the service of the notice was only on the manager of the firm. As the service of notice in this case was by the notice-server of the. Department and not by post, the procedure contemplated by the CPC for service of summons should have been followed, as per s. 282(1). In the CPC, procedure for service of summons is provided in order V. Rule 9(1) of order V is as follows: 'Where the defendant resides within the jurisdiction of the Court in which the suit is instituted, or has an agent resident within that jurisdiction who is empowered to accept the service of the summons, the summons shall, unless the Court otherwise directs, be delivered or sent to the proper officer to be served by him or one of his subordinates.' Rule 12 of order V reads: 'Wherever it is practicable, service shall be made on the defendant in person, unless he has an agent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f notice, the manager applied for time for filing of the return and also appeared on behalf of the firm in connection with the assessments for the subsequent years. Though the assessee initially came forward with a case in his application under s. 146 that the services of Balakrishna Pillai had been terminated long before the service of the notice, that case has not been established. On the contrary, it has been shown that Balakrishna Pillai has been acting as manager even subsequent to the reassessment. Therefore, that Balakrishna Pillai was the manager cannot at all be disputed by the assessee. According to the Revenue, the service of notice on the manager should be taken to be a proper or effective service as the notice had in some way or other reached the assessee. We are not inclined to agree. When the statute provides that a notice should be served in a particular mode, it is not possible to hold that there has been a proper service of notice merely from the fact that the person to whom the notice had been addressed had received the notice through some other source or that he has become aware of the contents of the notice. It has been held in Nagary Rasappa Setti vs. Hamburi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to case before the jurisdictional High Court were better than to the factual position of the present case, as in that case the agent who received notice on behalf of the assessee received notice earlier also, but their Lordships concluded that that will not be proper service as he cannot be taken as authorised agent of the assessee. In the case in hand, it is not the case of the Department that advocate who received notice on behalf of the assessee-company acted as such even in the past or was authorized to receive notice on its behalf. The ratio of the above cases is fully applicable to the facts of the case and in the absence of any authorization issued by the assessee-company in favour of that advocate who received notice, the notice cannot be taken as served on the assessee-company. 48. The learned AM has treated this fact as mere irregularity and concluded that notice to be treated as served, as assessee has participated in the assessment proceedings and by doing so he has waived off the issue of valid service on the assessee. In this connection, I may refer that the proper service of notice before completing assessment of block period is jurisdictional point and statutory re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otilal (1955) 27 ITR 54 (Bom) in which their Lordships have observed as under: "It is well-settled that no consent confers jurisdiction upon a Court if the Court has no jurisdiction, and if we take the view that the ITO can have jurisdiction only provided he complies with the conditions laid down under s. 34, then no consent by the assessee could give him a jurisdiction or no waiver on his part can confer such jurisdiction." 54. The ratio of the above decisions had been consistent that acquiescence is not going to confer jurisdiction which otherwise is lacking from the very beginning. As observed earlier, the AO can proceed to complete assessment for block period only when he issued notice and served the same on the assessee/person who was subjected to search. In the case in hand the assessee-company is admittedly subjected to search but as concluded earlier, the assessee was not served with notice. In view of these findings, the AO cannot assume jurisdiction to complete assessment for want of notice even though assessee had appeared before him and filed return belatedly and also participated in the assessment proceedings. I am in agreement with the observation of the learned AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 132(1) of the Act was taken on 9th Nov., 1995. Simultaneously, the partnership firm styled as "Jalan Enterprises" as constituted by (i) Ravindra Kumar Jalan (HUF). (ii) Shri Radhey Shyam Jalan (since deceased), (iii) Smt. Rupa Devi Jalan, wife of Shri Madhav Jalan, having its principle place of business at Dharmasala Bazar. Gorakhpur, were also subjected to search operation on 9th Nov., 1995 itself. So far as the assessee is concerned, the search operation led to the recovery of some cash only. No other material was found during the course of said search, at the premises of the assessee. 3. The assessee, by virtue of its head office at Faizabad, was being assessed to tax there. However, in the wake of search operation as aforesaid, jurisdiction in its case was transferred to the Addl. CIT (Assessment), Special Range, Gorakhpur, and notice under s. 158BC as addressed to M/s Gorakhpur Petro Oils Ltd., C/o Agarwal Forwarding Agency, Fatehganj, Faizabad" was issued from his end. The said notice contained block period from 1st April, 1985 to 9th Nov., 1995 and it was received by some advocate, who was available at the said address but who had nothing to do with the income-tax proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder, the assessee filed appeal directly before the Tribunal, wherein additions made in the said block assessment order were challenged. Apart from this, the assessment order as a whole was assailed on the ground that the notice under s. 158BC itself was not valid, nor it had been served in accordance with the provisions of law. Whereas on some of the additions (as stood comprised in the block assessment order) there was a consensus between the Hon'ble Members, they differed on the substantial part of the additions as had been made in the assessment. They also differed on the issue of validity thereof. On quantum side, the area of disagreement related to the three heads: (i) 'Share capital' received from large number of persons; (ii) 'Share capital' received from three particular persons; and (iii) 'Cash credit' as appearing in the accounts of various parties. Headwise and yearwise break-up of the additions on which the Hon'ble Members differed are as under: A. Share capital: Year ending on Share capital/Application money Undisclosed income as assessed by the AO Received from individuals Received from body corporates 31st March, 1993 57,42,600 24,32,000 - 31st March, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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