Kerala H.C : issuance of notice under section 158BD read with section 158BC is sufficient for initiation of assessment

High Court Of Kerala

CIT Vs. Panchajanyam Management Agencies And Services

Section : 158BD

C.N. Ramachandran Nair And B.P. Ray, JJ.

ITA Nos. 1011 And 1069 Of 2009

November  15, 2010

JUDGMENT

C.N. Ramachandran Nair, J. – These appeals are filed by the Revenue challenging the order of the Tribunal declaring the respondent’s assessment made under section 158BD read with section 158BC as invalid. We have heard senior counsel Sri P. K. R. Menon, appearing for the revenue and Sri T. M. Sreedharan, counsel appearing for the respondent-assessee.

2. The assessee is a partnership firm, which was engaged in various lines of business, including running of bar hotels. A search was made under section 132 of the Income-tax Act in the premises of the managing partner of the assessee-firm in which documents and records pertaining to undisclosed income of the respondent-firm, particularly unaccounted income of two hotels run by the firm were recovered. The Assessing Officer who has jurisdiction to assess the searched assessee, namely, managing partner of the firm, is the very same officer who has jurisdiction to assess the respondent-firm also. Based on evidence and materials gathered about the undisclosed income of the respondent-firm during search conducted in the premises of the managing partner of the said firm, the Assessing Officer issued notice under section 158BD read with section 158BC to the respondent-firm calling upon the firm to file return of undisclosed income in Form 2B. Though the respondent-firm filed nil return, the Assessing Officer based on materials gathered during search in the premises of the managing partner completed the assessment on the respondent-firm on a total income of Rs. 83,51,600. In the appeal filed by the assessee-firm before the Commissioner of Income-tax (Appeals), though the validity of the assessment was questioned for the reason that no satisfaction was recorded by the officer before proceeding with the assessment, the same was rejected holding that since the assessment is made by the very same officer, who has jurisdiction to assess the searched assessee, namely the managing partner of the firm, and the respondent-firm, against which materials are recovered in the course of search, there was no need to transfer the file to another officer and so much so, there was no need to record any satisfaction by the Assessing Officer. However, the first appellate authority granted substantial quantum relief to the assessee-firm. Second appeals were filed both by the assessee-firm as well as by the Department before the Tribunal. During hearing of the appeals before the Tribunal, the assessee-firm filed petition to raise additional ground questioning the validity of assessment mainly relying on the decision of the Supreme Court in Manish Maheshwari v. Asst. CIT reported in [2007] 289 ITR 341 and contended that the assessment made against the respondent-firm is invalid because the Assessing Officer has not recorded his satisfaction under section 158BD of the Act. The Tribunal accepted the assessee-firm’s contention and declared the assessment made under section 158BD read with section 158BC as invalid and therefore the other grounds raised by the assessee-firm against quantum addition sustained by the first appellate authority and the appeal filed by the Department against quantum relief granted by the Commissioner of Income-tax (Appeals) were not considered by the Tribunal. It is against this finding of the Tribunal that the Department has filed both appeals raising only one question, that is, whether the Tribunal was justified in cancelling the assessment completed under section 158BD read with section 158BC as invalid for the reason that the Assessing Officer did not record and communicate his satisfaction under section 158BD of the Act.

3. Since the Tribunal has cancelled the assessment mainly following the decision of the Supreme Court above stated, we have gone through the entire judgment and we notice that the case decided by the Supreme Court pertains to assessment of a limited company based on materials seized in the search conducted under section 132 in the premises of one of the directors of the said company and his wife. In that case, the Assessing Officer who had jurisdiction to assess the director and his wife did not have jurisdiction to assess the company and so much so the file had to be transferred to another officer located in another station for assessment of the company under section 158BD read with section 158BC of the Act. The Supreme Court after going through the notice issued under section 158BD noticed that satisfaction of the officer who transferred the file was not recorded or communicated to the assessee. The further finding of the Supreme Court in paragraphs 16 and 17 of the judgment is as follows (page 349) :

“The said notice does not record any satisfaction on the part of the Assessing Officer. Documents and other assets recovered during search had not been handed over to the Assessing Officer having jurisdiction in the matter.

No proceeding under section 158BC had been initiated. There is, thus, a patent non-application of mind.”

4. The Supreme Court declared section 158BD assessment made as invalid based on the facts narrated above. However, in this case, the facts are entirely different, inasmuch as the very same Assessing Officer who has jurisdiction to assess the searched assessee, namely, managing partner of the respondent-firm, has jurisdiction to assess the respondent-firm. Therefore there was no question of transfer of materials seized during search to another officer for assessment as contemplated under section 158BD. The Assessing Officer who has jurisdiction to assess the searched assessee, namely, managing partner of the respondent-firm, on verifying the records and documents seized from him, noticed that the respondent-firm had undisclosed income assessable under the Act by virtue of the powers conferred under section 158BD. Therefore he issued notice under section 158BD read with section 158BC and completed the assessment. The question to be considered is whether the procedure adopted by the Assessing Officer in this case leading to assessment is in accordance with statute and if not whether the assessment is invalid as held by the Tribunal, the decision of the Supreme Court relied upon by the assessee having been found not applicable to the facts of this case.

5. In this context, we have to necessarily consider the scope of sections 158BC and 158BD and for easy reference we extract hereunder both the sections :

“158BC. Procedure for block assessment.-Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then,-

(a) the Assessing Officer shall-

(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995, but before the 1st day of January, 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 January, 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 clause (i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period :

Provided that no notice under section 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 Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply ;

(c) the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment ;

(d) the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B.

158BD. Undisclosed income of any other person.-Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under section 158BC against such other person and the provisions of this Chapter shall apply accordingly.”

6. Section 158BC provides for procedure for completion of assessment of an assessee who is searched under section 132 or whose books of account or other documents or assets are requisitioned under section 132A of the Act. The procedure contemplated under the section visualises issuing of notice and requiring the assessee to file the return in the prescribed form, which is Form 2B. Clause (b) of the said section makes it clear that section 142, section 143(2) and (3) and sections 144 and 145 are made applicable. In other words, a block assessment should be initiated first by calling for a return and the assessment is completed after giving proper opportunity to the assessee as if it is a regular assessment if possible with the co-operation of the assessee and after considering the evidence produced and the contentions urged by the assessee or otherwise he will make a best judgment assessment. It is pertinent to note that in the first proviso to clause (a) of section 158BC it is provided that there is no need to issue notice under section 148 of the Act, which means that there is no need for the Assessing Officer to record reasons for initiating assessment as required under sub-section (2) of section 148 of the Act.

7. We have now to consider the scope of section 158BD which states that where the Assessing Officer on verifying the documents or materials obtained on search made under section 132 or based on the documents or accounts requisitioned under section 132A is satisfied that such records or documents or materials seized reveal undisclosed income of any other person that is of any person other than the searched assessee, or the assessee whose accounts or documents are called for, then he shall hand over all those records pertaining to search or inspection to the Assessing Officer having jurisdiction over such other person who is to be assessed based on such materials. It is specifically provided that such other Assessing Officer to whom the file is transferred shall proceed for assessment under section 158BC and the provisions of Chapter XIV-B are applicable for such assessment. In our view, this is only an enabling provision to assess a person other than the assessee searched or other than the assessee whose books of account and documents were called for and verified under section 132A of the Act. What the statute visualises is the possibility of recovery of cash, valuables or records in the course of search of an assessee which may pertain to another assessee or other assessees. In the normal course, an assessment in such cases could be initiated against such other assessee about whose income materials are gathered by the Department by making income escaping assessment under section 147 of the Act, which in many cases may be time barred. In order to safeguard the interest of the Revenue, the Legislature gave enabling power to the departmental officers to make assessment on persons about whose income, details are collected in the course of search of other assessees. Even though section 158BD is an enabling provision authorising the Department to assess any person other than the searched assessee or assessees against whom documents and records are called for under section 132A, still assessment in such case has to be completed strictly in accordance with the procedure provided under section 158BC as stated above. In our view, in the first place, there is no mention in section 158BD that the Assessing Officer before transferring the file to another officer having jurisdiction to assess the person other than the assessee proceeded under section 132 or 132A has to record his satisfaction in writing. It is pertinent to note that wherever Assessing Officers are required to record their satisfaction before issuance of notice, the statute prescribes the same. A situation of that nature is covered by section 148(2) which requires the officer to record reasons for reopening an assessment before issuing notice. Not only is there no such requirement in section 158BD but what we notice is that the satisfaction referred to therein is only about undisclosed income of a person other than the assessee searched under section 132 or investigated under section 132A and the satisfaction is only for the purpose of transferring the file to the officer having jurisdiction to assess such other person. In fact, after receipt of the documents and materials from the Assessing Officer transferring it, the officer to whom materials are transferred should follow the procedure under section 158BC, that is to issue notice to the assessee requiring him to file return in Form 2B and to make regular assessment after following the procedure contained in section 142, and if required to follow the procedure in sections 143(2) and (3), 144 and 145 of the Act. So much so, in our view, non-recording of reason and non-communication of the same by the Assessing Officer while issuing notice under section 158BC will not invalidate assessment completed under section 158BD read with section 158BC. In fact when records are received by the Assessing Officer from another officer under section 158BD he has to only issue notice to file return in Form 2B. The reasons and materials based on which undisclosed income is proposed to be assessed should be communicated to the assessee when assessment is made based on the return filed which is a step after issuing notice and after receipt of return. By virtue of operation of section 142 every assessee assessed under sections 158BC and 158BD gets an opportunity to file objections. In other words, the validity of the assessment is not affected by reason of the Assessing Officer’s failure to record his satisfaction under section 158BD which is only for the purpose of transferring the file and once the file is transferred, the transferring officer becomes functus officio and the jurisdiction for all purposes is transferred to the officer to whom the file is transferred and who has jurisdiction to assess the assessee about whom details are obtained in the course of search of another assessee. The peculiar features of this case are such that there was no necessity for transferring the file from one officer to another, because the person searched is the managing partner and based on the materials gathered during search assessment is made on the partnership firm, wherein the searched assessee is the managing partner. So much so, issuance of notice under section 158BD read with section 158BC is sufficient for initiation of assessment which in this case is admittedly done and the assessee has filed return in Form 2B in terms of notice issued. Therefore what remains is only the assessee’s contest against the assessment on the merits which the Tribunal has not done.

8. We therefore answer the questions raised in favour of the Revenue and against the assessee and consequently allow the appeals, set aside the order of the Tribunal and restore the appeals to the file of the Tribunal for decision on the merits after hearing both sides.


[Citation : 333 ITR 281]

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