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TMI Blog2004 (7) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench. The Hon'ble President, ITAT, was pleased to constitute Special Bench for disposing of these appeals. 3. Parties agreed that the main controversy in all these appeals centers round the following question: "Whether, satisfaction of the Assessing Officer needs to be recorded under section 158BD of the Act to assume jurisdiction and absence of such recording will result in the order of the assessment becoming bad in law and requires to be annulled?" 4. We have heard the parties on the aforesaid question and proceed to dispose of all these appeals in the light of the facts prevailing in each of these cases. 4.1 Shri S. Venkatesan, learned counsel for assessees, explained the facts of the case in Y. Subbaraju & Co. [IT (SS) Appeal No. 38 (Bang.) of 1998] and pleaded that the facts in all other cases are almost identical and may be disposed of in the light of the principles that may be laid down here. 4.2 The learned counsel for the assessee pointed out that M/s. Y. Subbaraju & Co. is a partnership firm. There was a search on 17-7-1996 in the residential premises of Shri Y. Subbaraju, who happens to be the managing partner of the said firm. As on the date of search, the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The assessees who have account with the bank would be required to pay tax at 60% of the regular incomes merely because there was a search action in the case of a bank. This, according to the learned counsel for assessees cannot be the intention of the Legislature. The satisfaction that is required for the purpose of initiating section 158BD action should be amply demonstrated. It is not the subjective satisfaction of the Assessing Officer but it should be an objective satisfaction, as laid down by the Courts in the following cases: (i) CIT v. G.M. Mittal Stainless Steel (P.) Ltd. [2003] 263 ITR 255 (SC) (ii) V. Subramonia Iyer v. CIT [1978] 113 ITR 685 (Ker.) (iii) CIT v. Smt. P.M. Celine [1999] 236 ITR 988 (Ker.) (iv) Govind v. Dy. CIT [2000] 246 ITR 787 (MP) (v) Leather Trends (P.) Ltd. v. CIT [1995] 215 ITR 690 (All.) (vi) CIT v. Dewan Kunj Lal Kanhaiya Lal [1987] 164 ITR 284 (Pat.) In all these cases, existence of income of the firm was within the knowledge of the Department and the basis for making addition is that knowledge alone and not in the form of any search material. 4.3 The learned counsel for the assessee pointed out that there is absolutely no mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect of block assessment is to bring income that is computed under that chapter for a tax at a higher rate at 60% as against normal rates. Therefore, the entire provisions, according to the learned counsel for assessees, required to be strictly construed. He summed up by saying that in all these cases regular incomes of the respective assessees were already within the knowledge of the Department and had not come to surface as a result of any search nor is represented by material found during the course of search. The Department has treated the disclosed income as part of undisclosed income, which according to the learned counsel for assessees, is totally impermissible under the scheme of assessment of undisclosed income. The learned counsel for assessees pointed out that even on merits, additions made in each of these cases on the basis of returns of income filed belatedly by treating the same as undisclosed income, needs to be deleted. 5. The learned Standing Counsel for the Department Shri Indrakumar, on the other hand took us through the scheme of the block assessment procedure. The learned Standing Counsel for the Department pointed out that all the provisions of this Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not required to be justified in the light of the provisions of section 158BD. The said provisions do not require any recording of satisfaction under section 158BD to assume jurisdiction and the absence of such recording will not result in the order of assessment becoming bad in law and therefore required to be annulled. The section itself does not require recording of any reasons for the satisfaction. The provisions of section 147 require such recording of reasons whereas the provisions of section 158BD do not require authority to give any reasons for the satisfaction. The fact that the notice issued and the assessee is given a fair and reasonable opportunity of being heard does not, in any way, vitiate the principles of natural justice in the matter of assessment proceedings for the purpose of block assessment. 5.4 Our attention was also drawn by the learned Standing Counsel for the Department to the decision of the Supreme Court in the case of Ganga Saran & Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 wherein it is observed that the important words in section 147 are 'has reason to believe' and these words are stronger than the words "is satisfied". The belief entertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer was merely required to be satisfied with the books of account or other documents or asset found in the search showed undisclosed income of the person other than the one against whom search was conducted. Merely no books of account documents belonging to the petitioner were found in the search, it could not be said that there was no scope for action under section 158BD of the Act. 5.8 Our attention was further drawn to the decision of the Supreme Court in the case of STO v. Uttareswari Rice Mills [1972] 30 STC 567 and the decision of the AP High Court in the case of Andhra Bank v. Dy, CIT [2002] 255 ITR I. The learned Standing Counsel for the Department further proceeded to make his submissions as to the difference in phraseology adopted by the Statute in sections 131(3), 132(8), 147 and 158. It was contended that the provisions of section 158 are offshoot of section 132. The entire provisions will be rendered nugatory if the view canvassed by the learned counsel for assessees were to be accepted by the Tribunal. If the view canvassed by the assessees is now accepted, the provisions of section 158BD will be dead letter provisions in the statute, which cannot be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment of undisclosed income determined as a result of search under section 132 or requisitioned under section 132A of the Act. Under the said scheme, undisclosed income detected as a result of any search initiated or requisition made, after June 30, 1995 shall be assessed separately as income of block years. The basis for making assessment under this chapter is the search itself. If there is no search, there can be no assessment under this chapter. It is all the more necessary that an assessment framed under this chapter must have basis in the form of a search material. The assessment, under this chapter is the result of processing of the search material of the person searched and the rate of tax prescribed under this chapter is a higher percentage of 60% as against normal rate of tax. In other words, search action will result in assessment of what is known as 'undisclosed income' of certain block period ending up to the dale of search and imposing a higher tax at 60%. It must be understood that if the search action does not disclose undisclosed income, the question of any assessment being framed under this chapter is simply improper and outside the purview of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples that are available on the issue as pronounced by the Apex Court and other High Courts while dealing with the identical provisions. 8. The exercise of powers by the Department under section 132 of the Act results in serious invasion upon the rights, privacy and freedom of the taxpayer. Such power must be exercised strictly in accordance with law and only for the purpose for which the law authorizes it to be exercised. It has been held by the Apex Court in the case of Seth Bros, that if any of the actions of the officer are challenged, the officer concerned must satisfy the court about the regularity of the action. If the action is maliciously taken or power under the section is exercised for a mala fide purpose, it is liable to be struck down by the court. 8.1 In the case of Pooran Mal the Apex Court held that section 132 of the Act places reasonable restrictions on the freedom of trade and therefore cannot be held to be discriminatory and not violative of Article 14 of the Constitution. In the said decision, the Apex Court gave a principle that even if the search and seizure were in contravention of the provisions of section 132, still the material obtained therein could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries and had challenged the decision of the A.P. High Court rendered in the case of CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39 (AP). Therefore, according to the Department, the issue was still open arid the CIT could, in the circumstances, keep it alive by initiating proceedings under section 263 of the Act. The Apex Court, considering these facts, held that under section 263 of the Act, the law requires that the CIT could call for and examine the record of any proceedings under the Act only on the basis of his being satisfied (i) that the Assessing Officer was erroneous in passing the assessment order and (ii) that the decision of the Assessing Officer was prejudicial to the interests of revenue. Needless to say that satisfaction must be one, which is objectively justifiable and cannot be mere ipse dixit of the CIT. In that particular case, the CIT has not recorded any reasons whatsoever for coming to the conclusion that the Assessing Officer was in error in deciding that the power subsidy was a capital receipt. The fact that the Apex Court subsequently reversed the decision of the MP High Court would not justify the CIT in treating the Assessing Officer's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder did not consider the explanation offered by the assessee. 8.4 Again, the Kerala High Court, in the case of Smt. P.M. Celine, held that satisfaction, in the very nature of things, precedes the issue of notice. It is not necessary to record satisfaction in the assessment order itself but the duty of the Revenue is to show that satisfaction was duly recorded and it preceded the issue of notice. This onus cannot be discharged by the Revenue by saying that the notices had been issued on the date of the assessment. It was held that no valid satisfaction preceded issue of notice was recorded by the Assessing Officer and hence the Tribunal was held to be right in holding that penalties levied under sections 271(1)(a) and 273(1)(b) were liable to be quashed. 8.5 In the case of Govind, Madhya Pradesh High Court was concerned with the issue relating to compulsory acquisition of property under sections 269C and 269D of the Act wherein similar satisfaction of the competent authority regarding existence of matters specified in subsection (1) of section 269C and recording of reasons of such satisfaction are required. It was found that the competent authority did not possess any material to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under section 158BD itself will have to go because the very foundation for the assumption of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In these cases, absolutely there is no iota of material from the proceedings of search that there was undisclosed income. When such is the case, the satisfaction that undisclosed income belongs to such other person is wanting. When that is the case, the entire proceedings framed with the issuance of notice under section 158BD will have to go. In other words, if the basis for notice is not there, the notice itself is wrongly issued making further assessment on such other person is wholly outside the purview of the scheme. As already discussed in preceding paragraphs, satisfaction in the very nature precedes the issue of notice and it would not be correct to equate satisfaction of the ITO with the actual issuance of notice. To put it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial, then of course, it would be better if the Assessing Officer demonstrates that he is satisfied about there being some undisclosed income belonging to a person who was not searched. In all these cases, the assessments are not based on a search action or supported by any material found during the course of search but were the result of re-appraisal of facts that are already within the knowledge of the department. 11. In the case of Premjibhai & Sons, one of the arguments of the assessee was that notice under section 158BD could not be issued without the verification of the Assessing Officer of the person raided that the undisclosed income belonged to some other person. The Assessing Officer had not actually recorded his satisfaction. The Hon'ble Gujarat High Court justified the departmental action by holding that a bare reading of the provisions of section 158BD showed that for taking action under that section, the Assessing Officer was merely required to be satisfied that the books of account or other documents or assets found in search showed undisclosed income of the person other than one against whom search was conducted. The Gujarat High Court further held the actio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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