Delhi H.C : validity of proceedings initiated under section 158BD

High Court Of Delhi

CIT Vs. Mittal Consul And Co.

Section : 158BD

A.K. Sikri And M.L. Mehta, JJ.

It Appeal Nos. 1277 Of 2007 And 572 And 928 Of 2008

Block Periods 1-4-1986 To 10-1-1997

March  25, 2011

JUDGMENT

L. Mehta, J.-By this common judgment we propose to dispose of the aforesaid three appeals, arising out of separate orders dated May 30, 2005 and October 31, 2007 of the Income-tax Appellate Tribunal (hereinafter, referred to as “the Tribunal”). All these three appeals are interrelated. The respondents/assessees were assessed separately for the block periods. Vide common order dated December 3, 2004, their appeals against the orders of the Assessing Officers were rejected by the Commissioner of Income-tax (Appeals) (hereinafter referred to as “the CIT(A)”). The assessees filed separate appeals before the Tribunal. Vide the impugned order dated May 30, 2005, the Tribunal allowed the appeal of the assessee M/s. Mittal Consul and Company (hereinafter, referred to as “MCC”) which is under challenge in I. T. A. No. 1277 of 2007. Similarly vide separate orders dated October 31, 2007, the Tribunal also allowed the appeal of the assessee M/s. Tushar Stock and Share Brokers (Pvt.) Ltd. (in short “Tushar”) which is under challenge in I. T. A. No. 572 of 2008 and the appeal of R. K. Mittal (hereinafter, referred to as “Mittal”) which is under challenge in I. T. A. No. 928 of 2008.

A raid was conducted on the assessee Tushar by the Enforcement Directorate (hereinafter, for short “ED”), which led to discovery of cash as well as other documents relating to all the respondents/assessees. Relevant proceedings were initiated by the Department against the respondents. Since the impugned order of the Tribunal dated May 30, 2005 (in the case of MCC) came to be passed prior in time and was also relied upon by the Tribunal in their subsequent impugned orders of October 31, 2007 with respect to the other respondents/assessees (Tushar and Mittal), we can safely rely upon the facts as noted by the Tribunal in its impugned order of May 30, 2005 and also by the Commissioner of Income-tax (Appeals) in his order dated December 3, 2004 without any fear of contradiction. We, therefore, refer to the facts from the said orders.

Search and seizure operation was conducted by the Enforcement Directorate in the premises of Tushar on December 12, 1995. During the course of search, thirty cheque books as well as cash worth Rs. 2,41,000 were found besides other documents. A notice under section 132A of the Income-tax Act (hereinafter referred to as “the Act”) was issued requisitioning the cash and other documents which were seized by the Enforcement Directorate at the time of search. During the course of search, the statement of Mittal, director of Tushar and partner of MCC was recorded by the Enforcement Directorate. Mittal had stated that the cheque books found and seized during the course of search, either belonged to his clients, he being a chartered accountant, or to the companies/firms in which his relatives/friends were directors/partners. MCC was also found to be operating from the premises of M/s. Tushar which were searched by the Enforcement Directorate. Cash of Rs. 2,41,000 was seized by the Enforcement Directorate from two persons, namely, Shri Vimal Verma and Shri Vinod Kumar, who were present in the premises at the time of search. These persons claimed ownership of the cash. A notice under section 158BC was issued by the Joint Commissioner Income-tax, Special Range (hereinafter, referred to as “the JCIT”) to Tushar on April 8, 1997. It may be noted here that in the case of Tushar, the Joint Commissioner of Income-tax was the Assessing Officer. In response to this notice, Tushar filed return declaring nil undisclosed income. The Joint Commissioner of Income-tax did not consider the said cash at the hands of Tushar and also did not draw any adverse inference in this regard. With regard to the seized thirty cheque books (in fact 27 as there was repetition of three), the Income-tax Department wrote a number of letters to the Enforcement Directorate for sending copies of the seized documents. Even the Joint Commissioner of Income-tax wrote a few letters for sending the seized documents and since they were not received, the Joint Commissioner of Income-tax proceeded with investigation in respect of twenty-seven bank accounts by writing to different banks asking for copies of those accounts, account opening forms, names and addresses of the introducers and copies of cheques issued. Based on the information received, it was noted that substantial cash deposits made in these bank accounts from time to time were immediately withdrawn. Tushar was asked to explain the source of deposits. Mittal had claimed that these cheque books belonged to his clients who had given the same to him for completing the accounts and income-tax returns. This he had confirmed vide letter dated January 15, 1999 and also in his statement recorded on February 21, 1999. He was required to produce the account holders physically as well as furnish confirmation/affidavits along with PAN/GIR number and income-tax jurisdiction. Mittal produced confirmation in respect of some of the bank accounts, but despite offering he could not produce the bank account holders, except two, namely, Gigo Thomas and Ramesh Chander. It was found that out of the twenty-seven bank accounts only seven were of existing companies/concerns. The genuineness of these accounts was accepted. Out of the remaining twenty, affidavits of only four individual account holders were produced. Even out of those four, two affidavits of Ramesh Chander were found to be full of inconsistencies from his statement. To the same effect was the statement of Gigo Thomas, who was also found to be unreliable. Hence, the money invested in their accounts was considered as not belonging to them. However, Mittal produced copy of client register and copies of return acknowledgments in respect of some individuals. Neither of these two documents was found to be reliable in the absence of supporting books of account. Based on this, the aggregate deposits were treated as unaccounted investment of either of the assessees. Since Mittal had himself owned the seized cheque books in respect of all the above account holders claiming them to be his clients, the investments in these deposits was opined to be in the hands of MCC on substantive basis. However, to protect the interests of the Revenue, the said amount was also treated as undisclosed income of Tushar and Mittal on protective basis. This amount of undisclosed income was calculated to be Rs. 86,07,403.

A diary was also seized from the residential premises of Shri A. S. Aneja, director of Tushar. It contained the following entries :

“Rs. 5,10,000 share applications

Rs. 4,00,000 advance against property March 31, 1994.

Rs. 4,00,000 advance against property March 31, 1995

Rs. 13,10,000.”

 The plea taken by Tushar before the Joint Commissioner of Income-tax with regard to this diary that it was rough sheet and jottings, was rejected by the Joint Commissioner of Income-tax and he proceeded to treat this amount of Rs. 13,10,000 as undisclosed income of Tushar for the block period April 1, 1986 to January 20, 1997.

In its return for the block period filed in response to notice under section 158BC, Tushar had debited some amounts towards telephone expenses, petrol car expenses or car insurance for the present block year. The Joint Commissioner of Income-tax added 1/10th of these expenses as income for the block period, thereby making a total income of Rs. 7,83,351. Tushar had also given details of additions in share capital/ application money of some shareholders of the block period as under :

Assessment year 1995-96 Rs. 1,02,11,000.

Assessment year 1996-97 Rs. 1,65,02,000.

(i) Confirmations in respect of the shareholders along with their PAN/GIR number were furnished, but, in respect of some confirmations, either jurisdiction was not stated properly or it was not stated at all. The details of such persons are as under :
 

A.Y. 1995-96 : Amount (Rs.)
(i) Naewatia Consultants P. Ltd. 1,80,000
(ii) Busy Traders and Finance P. Ltd. 1,00,000
Total 2,80,000
A.Y. 1995-96 : Amount (Rs.)
(i) M/s. Aneja and Sons 3,00,000
(ii) Paramjeet Kumar 18,000
Total 3,18,000

(ii) Since no confirmation was filed in respect of the above persons nor were they produced, therefore the aforesaid amounts were treated as undisclosed income of the assessee/Tushar for the block period under section 68.
   
(iii) Furthermore, confirmations from various persons were furnished in respect share capital/application money of Rs. 2,11,000 for the assessment year 1995-96 and Rs. 2,71,000 for the assessment year 1996-97. Thus the total additions which were made were worked out as under :
  

  Amount (Rs.)
A.Y. 1995-96 :  
(i) On account of jurisdiction not stated 2,80,000
(ii) On account of confirmations not filed 2,11,000
A.Y. 1995-96 :  
(i) On account of jurisdiction not stated 3,18,000
(ii) On account of confirmations not filed 2,71,000
  10,80,000

    
The Joint Commissioner of Income-tax informed the concerned Income-tax Officer of MCC and Mittal about the search operation and of recovered cash and cheque books. Based on this, Assistant Commissioner of Income-tax (Assessing Officer of MCC and Mittal) issued notices to MCC and Mittal under section 158BD of the Act. In response thereto, both MCC and Mittal filed their returns for the block period of April 1, 1986 to January 10, 1997.

In the proceedings initiated by the Assistant Commissioner of Income-tax (Assessing Officer) against MCC and Mittal under section 158BD, both these respondents/assessees contended that the proceedings were not valid because there had been no search or seizure under section 132 and no books of account or other documents relating to them were either requisitioned from the Enforcement Directorate or handed over to the Assistant Commissioner of Income-tax under section 132A. Contentions were also raised that the proceedings initiated under section 158BD of the Act were not valid inasmuch as no satisfaction was recorded by the Assessing Officer of Tushar that undisclosed income belonged to MCC or Mittal as was contemplated under section 158BD. These contentions were rejected holding that proper requisition was made under section 132A by the Investigation Wing of the Income-tax Department and that notices under section 158BD were validly and legally issued to the assessees as per the conditions mentioned therein. The Assistant Commissioner of Income-tax also made inquiries in respect of the bank accounts as intimated by the Joint Commissioner of Income-tax. The Assistant Commissioner of Income-tax in both cases recorded that Mr. Mittal was asked to give the details of the account holders and file their affidavits, but, he could neither produce them nor give the details of the account holders or their identities in respect of the said 20 account holders. Though Mittal had been claiming the accounts to be of his clients, he could neither produce them in person nor file their confirmations. He, however, produced one client register and the income-tax return acknowledgment in respect of some individuals, but since these were not supported by the books of account, were not relied upon by the Assistant Commissioner of Income-tax. The Assistant Commissioner of Income-tax found that in respect of eight account holders, the addresses were shown as 7477, Tel Mill Marg, Ram Nagar and 16226, Nai Wala, Karol Bagh, which were the past and present addresses of MCC. It was also found that some of these accounts were introduced by the assessee or by a person having address as 7477, Tel Mill Marg. This fact was found substantiated as after the search and seizure, these accounts had not been operated by anyone. Based on all this, it was concluded that these accounts are not genuine but belonged to the assessee-firm and were being operated by Mittal and his persons. In respect of 20 bank accounts, the Assistant Commissioner of Income-tax calculated the figure at Rs. 1,06,23,044. In addition to this, the Assistant Commissioner of Income-tax also estimated Rs. 5 lakhs each as deposit in unverified four bank accounts and also further amount of Rs. 5 lakhs each as deposit in the bank accounts belonging to MCC in which Mittal or his relatives or friends were stated to be the partners or the directors. This way, the Assistant Commissioner of Income-tax estimated Rs. 40 lakhs as undisclosed income on this account and thereby arrived at a total undisclosed income of MCC as Rs. 1,46,23,044. This was treated as undisclosed income of MCC on substantive basis and in the case of Mittal on protective basis.

The assessees preferred appeals against the orders of their respective assessments. These were disposed of by a common order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held as under :

“(a) The proceedings under section 158BC in the case of M/s. Tushar Stock and Share Brokers P. Ltd. and under section 158BD in the case of M/s. Mittal Consul and Co., and Shri R. K. Mittal are treated as valid, in order and within the time prescribed under the Act.

(b) The assessment orders in all the three cases have been framed after considering the submissions of the appellants.

(c) The seized documents were properly requisitioned by the Investigation Wing of the Income-tax Department.

(d) The addition of Rs. 1,06,23,044 in the hands of M/s. Mittal Consul and Co. on substantive basis is confirmed. The same amount is treated as income of M/s. Tushar Stock and Share Brokers P. Ltd. and Shri R.K. Mittal on protective basis. All other additions made on estimate basis as deposits in bank accounts are deleted.

(e) The interest under section 158BFA will be recalculated by the Assessing Officer.

(f) In the case of M/s. Tushar Stock and Share Brokers P. Ltd. additions of Rs. 13,10,000 and Rs. 10,80,000 and disallowance of Rs.78,335 out of telephone and car expenses are confirmed.

In the result, all the three appeals are partly allowed.”

The assessees preferred further appeals before the Tribunal. The appeal of the appellant/assessee MCC was disposed of by the Tribunal on May 30, 2005 and that of Tushar and Mittal vide separate orders dated October 31, 2007. With regard to the plea regarding validity of proceedings initiated under section 158BD against MCC and Mittal, the Tribunal in its order of May 30, 2005 in the case of MCC recorded as under :

“8. As is evident from the perusal of the aforesaid provisions, the satisfaction of the Assessing Officer about any ‘undisclosed income being belonged to any persons 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 is a condition precedent for proceeding against that person under section 158BD. The expression ‘undisclosed income is defined in section 158BB contained in Chapter XIVB and as per the provisions of sub-section (1) of section 158BB, such undisclosed income for the block period is required to be computed, in accordance with the provisions of the Act, on the basis of evidence found as a result of search or requisition of the books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence. A conjoint reading of these provisions makes it clear that the satisfaction of the Assessing Officer as regards any undisclosed income belonging to other person as envisaged in section 158BD has to be on the basis of evidence found as a result of search or requisition of the books of account or other documents and such other material or information as are available with the Assessing Officer and relatable to such evidence and unless it is found on the basis of such evidence that any undisclosed income belongs to the assessee, no proceedings under section 158BD can be validly initiated against him.
In the present case, nothing other than cash was requisitioned by the Department under section 132A made in the case of M/s. Tushar Stock and Share Brokers P. Ltd. and since the said cash did not admittedly belong to the assessee, there was no evidence found as a result of the requisition of books of account or other documents for deriving satisfaction that any undisclosed income belonged to the assessee. It is thus clear that the condition precedent for initiating proceedings under section 158BD against the assessee was not satisfied in the present case and consequently, the proceedings so initiated were bad in law. As such, considering all the facts of the case and keeping in view the relevant provisions of Chapter XIV-B as discussed above, we hold that the assessment made by the Assessing Officer under section 158BC read with section 158BD was void ab-initio and the same, therefore, is liable to be quashed…”   

The above findings of the Tribunal with regard to invalidity of proceedings under sections 158BD and 158BC in the case of MCC were accepted by the Tribunal in the cases of Tushar and Mittal also. The Tribunal in the cases of Tushar and Mittal also quashed the assessments and consequently deleted the additions made on protective basis.

Based on the reasoning of invalidity of proceedings, the Tribunal deleted the addition of Rs. 10.80 lakhs in the case of Tushar, and recorded as under :

“17.3 We have carefully considered the entire material on record and the rival submissions. It is undisputed that no search was conducted in the case of the assessee by the Income-tax Department nor was any requisition made under section 132A of the Act. Therefore, the amount of Rs. 10,80,000 representing share application money cannot be treated to be undisclosed income for making block assessment order under section 158BC. The fact that the assessee had disclosed the share application money in the return filed has also not been controverted. From this fact also the contention of the assessee that the addition is not based on any material found during the course of search and therefore is not maintainable, is acceptable.”

Similarly, the addition of Rs. 13.10 lakhs in the case of Tushar was also deleted by the Tribunal with the following reasons :

“18.3 We have carefully considered the entire material on record and the rival submissions. It may be pointed out that no proper requisition regarding this document was made by the income-tax Department from the FERA authorities under section 132A. Merely because the Department obtained a copy of the seized diary it could not be said that the material came through a valid and proper requisition, order or warrant as prescribed under section 132A. The matter has been considered in detail in the case of Sukh Ram v. Asst. CIT [2006] 99 ITD 417 (Delhi) wherein it has been held by the Tribunal that any evidence which has not been found as a result of search or such evidence which has been gathered is not relatable to evidence found as a result of search cannot be made the basis of block assessment under Chapter XIV-B of the Income-tax Act.”

    Likewise, the addition of Rs. 78,335 on account of personal use of car and telephone expenses was also deleted by the Tribunal with the following reasons :

“19… As observed earlier, no search was conducted in the case of the assessee nor was any material found during the course of survey or search so as to justify the ad hoc addition made on estimate basis. The course adopted by the Assessing Officer cannot be justified in the block assessment proceedings under Chapter XIV-B because in the block assessment proceedings any addition on account of undisclosed income can be made only on the basis of material found during the course of search or on the basis of any other material in the possession of the Assessing Officer relatable to such material or evidence found during the course of search. In the present case no such material is found during the course of search or on the basis of any survey under section 132A. Therefore, the provisions of Chapter XIV-B cannot be invoked for justifying such addition. In view of the above this addition is also not justified.”

The present appeals have been preferred by the respondents/assessees against the aforesaid impugned orders of the Tribunal. The appeals are admitted on the following substantial questions of law :
    T. A. No. 572 of 2008

Whether the Tribunal was correct in law and on the merits in holding that the proceedings under section 158BC were not validly initiated in the present case and as such the block assessment is liable to be quashed ?

  T. A. Nos. 1277 of 2007 and 928 of 2008

Whether the Tribunal was right in holding that the proceedings under sections 158BD and 158BC were void ab initio and are liable to be quashed ?

Learned counsel for the respondents/assessees submitted that the proceedings under sections 158BC and 158BD could not be justified because there was neither any material nor evidence found during the course of search from the possession of the assessees nor was any material requisitioned from the Enforcement Directorate to form the basis of block assessment proceedings. He submitted that since there was no requisition by the Income-tax Department under section 132A of the Act for any books of account or documents seized by the Enforcement Directorate and it was only for cash which too admittedly did not belong to any of the assessees, but to Vimal Verma and Vinod Kumar, the initiation of proceedings under section 158BD was not valid. He further submitted that the diary which was made basis of additions of Rs. 13,10,000 in the case of Tushar could not be relied upon inasmuch as there was no requisition made under section 132A in respect thereof. In this regard, he further submitted that scope of framing block assessment under section 158BD is limited to the material found as a result of search conducted on third party and requisition made in that regard. Since no requisition was made, no addition could have been made on the basis of the entries found in the diary. He relied upon CIT v. G.K. Senniappan [2006] 284 ITR 220 (Mad) and CIT v. R.M. Patel (HUF) [2008] 298 ITR 274 (Mad).

The learned counsel also submitted that in any case, requisition was made under section 132A on January 20, 1997 of Rs. 2,41,000 seized by the Enforcement Directorate, but notice under section 158BC was issued to the assessees only on October 22, 1999 and that being highly belated, the proceedings initiated under section 158BD of the Act are untenable in law. In this regard he relied upon Khandubhai Vasanji Desai v. Deputy CIT [1999] 236 ITR 73 (Guj).

With regard to the addition of Rs. 10,80,000 on account of share capital in the case of Tushar, he submitted that the same was duly recorded in the books of account and the addition was rightly held as untenable by the Tribunal. He also submitted that the addition of Rs. 1,06,23,044 in the hands of MCC on substantive basis and in the hands of Tushar and Mittal on protective basis was untenable in the absence of any evidence found as a result of search or requisition of books of account or other documents deriving satisfaction.

On the other hand, learned counsel for the Revenue submitted that in the process of search of Tushar, the Enforcement Directorate not only recovered cash of Rs. 2.41 lakhs but also 30 cheque books (in fact 27 as there is repetition of three accounts) and also a diary which were seized by the Enforcement Directorate. A requisition was made under section 132A of the Act. Details of the cheque books accounts were furnished by the Enforcement Directorate. The copy of the diary was also received by the Investigation Wing of the Income-tax Department. It was based on the contents of the cheque books that the investigation was conducted from the banks and from the assessees. He submitted that in the postsearch inquiry also, Mr. Mittal stated that some of the cheque books related to his clients and some to his companies/concerns in which his relatives/friends were interested. He submitted that the post-search inquiry was based on the documents seized and the information received was relatable to the assessees and that being so, was a relevant piece of evidence/information. He relied upon CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC) and Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341 (SC).

Chapter XIV-B provides for “Special procedure for assessment of search cases”. How a search would be conducted is provided for in section 132 of the Act.

For the present purpose, it would be useful to refer to the relevant provisions as contained in sections 132A, 158BB, 158BC and 158BD of the Act.

“132A. Power to requisition books of account, etc.-(1) Where the Director General or Director or the Chief Commissioner or Commissioner, in consequence of information in his possession, has reason to believe that-…

(b) any books of account or other documents will be useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act and any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, such books of account or other documents on the return of such books of account or other documents by any officer or authority by whom or which such books of account or other documents have been taken into custody under any other law for the time being in force, or…

(2) On a requisition being made under sub-section (1), the officer or authority referred to in clause (a) or clause (b) or clause (c), as the case may be, of that sub-section shall deliver the books of account, other documents or assets to the requisitioning officer either forthwith or when such officer or authority is of the opinion that it is no longer necessary to retain the same in his or its custody.”

“158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer, as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years, determined.”

“158BC. 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,…

(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 and section 144 shall, so far as may be, apply ;”

“158BD. 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 against such other person and the provisions of this Chapter shall apply accordingly.”

The above provisions came to be interpreted by the apex court in the case of Manish Maheshwari v. Asst. CIT [2007] 289 ITR 341 (SC), wherein it was held as under (page 348) :

“The condition precedent for invoking a block assessment is that a search has been conducted under section 132, or documents or assets have been requisitioned under section 132A. The said provision would apply in the case of any person in respect of whom search has been carried out under section 132A or documents or assets have been requisitioned under section 132A. Section 158BD, however, provides for taking recourse to a block assessment in terms of section 158BC in respect of any other person, the conditions precedent where for are : (i) satisfaction must be recorded by the Assessing Officer that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 of the Act ; (ii) the books of account or other documents or assets seized or requisitioned had been handed over to the Assessing Officer having jurisdiction over such other person ; and (iii) the Assessing Officer has proceeded under section 158BC against such other person.

The conditions precedent for invoking the provisions of section 158BD, thus, are required to be satisfied before the provisions of the said Chapter are applied in relation to any person other than the person whose premises had been searched or whose documents and other assets had been requisitioned under section 132A of the Act.”

    In the case of Manish Maheshwari [2007] 289 ITR 341 (SC) the apex court also referred to various judgments of different High Courts and particularly that of the Gujarat High Court in Khandubhai Vasanji Desai v. Deputy CIT [1999] 236 ITR 73 , wherein it was held as under (page 85) :

“This provision indicates that where the Assessing Officer who is seized of the matter and has jurisdiction over the 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, he shall proceed against such other person as per the provisions of Chapter XIV-B which would mean that on such satisfaction being reached that any undisclosed income belongs to such other person, he must proceed to serve a notice to such other person as per the provisions of section 158BC of the Act. If the Assessing Officer who is seized of the matter against the raided person reaches such satisfaction that any undisclosed income belongs to such other person over whom he has no jurisdiction, then, in that event, he has to transmit the material to the Assessing Officer having jurisdiction over such other person and in such cases the Assessing Officer who has jurisdiction will proceed against such other person by issuing the requisite notice contemplated by section 158BC of the Act.”

    In the present case the Tribunal had recorded that no material other than cash was requisitioned and hence there was no material before the Assessing Officer to confirm the information or to record satisfaction as contemplated under section 158BD. In this regard, at the outset, it was submitted by learned counsel for the Revenue, and rightly so, that these findings of the Tribunal are contrary to the facts inasmuch as it was not only the cash which was requisitioned but the other documents seized by the Enforcement Directorate also. It was in response to the requisition that details of 27 cheque books was furnished by the Enforcement Directorate to the Joint Commissioner of Income-tax. The Joint Commissioner of Income-tax proceeded to enquire the details of information so furnished by the Enforcement Directorate relating to those cheque books from different banks. It was sequitur to the above information related to the cheque books that the course of inquiry/information was conducted by the Joint Commissioner of Income-tax from the banks and Mittal. The information so gathered by the Joint Commissioner of Income-tax was related to the third party, i.e., MCC and relatable to the information so furnished by the Enforcement Directorate. Post-search material information developed by the Joint Commissioner of Income-tax (Assessing Officer of Tushar), was very much relevant for arriving at the satisfaction of undisclosed income at the hands of MCC and the same was correctly considered at the time of drawing of satisfaction by the Joint Commissioner of Income-tax. It was after making inquiry from the banks and Mittal that the Joint Commissioner of Income-tax recorded his satisfaction and communicated it to the Assistant Commissioner of Income-tax on February 17, 1990. A perusal of this detailed information contained in as many as five pages reveals the conclusive finding arrived at by the Joint Commissioner of Income-tax regarding the undisclosed income of MCC.
 In the case of CIT v. R.M. Patel (HUF) [2008] 298 ITR 274 (Mad), it was held as under (page 277):

“Concededly, the seized materials did not relate to the assessee. On the other hand, what is contemplated under section 158BB is that the undisclosed income shall be computed only in accordance with the provisions of the Act on the basis of evidence found as a result of search and such other material or information which are relating to such material. If the material seized does not, in any way, connect the assessee indicating that the assessee had any undisclosed income, it may not be proper to proceed against the assessee under section 158BD read with sections 158BC and 143(3) of the Act without any basis whatsoever, especially in the absence of any material indicating any suppression of sales or suppression of income by the assessee. If that be so, we do not have any hesitation to hold that the undisclosed income cannot be assessed in the absence of any material collected during the search relating to the assessee and that the Revenue cannot proceed on the basis of such material which is not related to the assessee invoking section 158BD read with sections 158BC and 143(3) of the Act for assessing the undisclosed income during the block period of 1988-89 to 1997-98 and April 1, 1998 to November 5, 1998.”

In the case of CIT v. G.K. Senniappan [2006] 284 ITR 220 (Mad) also section 158BB was under consideration and it was held as (page 221) :

“Section 158BB occurs in Chapter XIV-B, which provides for special procedure for assessment of search cases. The computation of undisclosed income of the block period is contemplated under section 158BB. As per the section, the undisclosed income of the block period should be the aggregate of the total income of the previous years falling within the block period computed in accordance with the provisions of this Act, on the basis of the evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence, as reduced by the aggregate of the total income, or, as the case may be, as increased by the aggregate of the losses of such previous years.

A mere reading of the above provision clearly indicates that the sentence ‘such other materials or information as are available with the Assessing Officer’ cannot be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the Assessing Officer, should as per the section relatable to such evidence. The word ‘such’ used as a prefix to the word ‘evidence’ assumes much significance, in this provision, as it indicates only the evidence found, as a result of search or requisition of books of account or other documents, at the time of search. Any other material cannot form basis for computation of undisclosed income of the block period.”

In the case of CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC), the same provisions came to be considered by the apex court. In this case the assessment order originated on search conducted under section 132(1) in which a diary was identified. That identification was a starting point of the enquiry relating to the detection of undisclosed income. The diary made the Assessing Officer to hold an enquiry and in the enquiry the cash flow statement emerged and resulted in detection of undisclosed income. It was held that the undisclosed income did not arise from any scrutiny proceedings, tax evasion, surveys, information received from external agency, etc., but was detected by the Assessing Officer wholly and exclusively as a result of search and therefore the Department was right in invoking the provisions of Chapter XIV-B.

In the present case, the search was conducted on Tushar in the premises which was not only that of Tushar but also of MCC and Mittal. During the search, not only cash of Rs. 2.41 lakhs was recovered, but as many as 30 cheque books (in fact only twenty-seven because of repetition of three names) were also recovered. A diary was also seized from the residence of the director, A.S. Aneja. The seized cash and documents were requisitioned under section 132A of the Act by the Income-tax Department. Though the original cheque books were not given by the Enforcement Directorate, detailed information with regard to the accounts etc., of those cheque books was furnished. It was based on the details of these accounts that the Assessing Officer of Tushar proceeded to issue notice under section 158BC to Tushar. It was during the course of assessment of Tushar that detailed information regarding those cheque books accounts etc. came to be known. Mittal who was not only director of Tushar but also a partner of MCC, a chartered accountant firm, had claimed some of those cheque books to be of his clients and some of his friends and relatives. He, however, could not give any satisfactory or documentary evidence. He also failed to produce account details except those of two, who were also found not reliable being inconsistent in their statements with the bank records.

From our above discussion, we are of the considered view that the proceedings, as initiated under section 158BD and also under section 158BC against the respondents/assessees were legally valid. That being so, we answer all the questions in favour of the Revenue and against the respondents/assessees.   

As noted above, the Tribunal in the case of MCC vide order dated May 30, 2005 arrived at a conclusion that the proceedings under section 158BC read with section 158BD were void ab initio since the condition precedent for quashing the proceedings thereunder against the assessee were not satisfied. It was based on this reasoning alone that the Tribunal quashed the assessment against MCC. The Tribunal did not go into the merits of the case of the assessee/MCC. It was based on this finding of the Tribunal with regard to the invalidity of the proceedings in the case of MCC, the Tribunal in the cases of Tushar and Mittal as well vide separate impugned orders quashed the assessments and consequently deleted the additions made on protective basis in their cases. The Tribunal did not go into the merits of these cases simply by recording that no search was conducted in the case of the assessee/Tushar nor any requisition was made under section 132A and, therefore, the additions of Rs. 10.80 lakhs, Rs. 13.10 lakhs and Rs.78,335 could not be treated as undisclosed income. Since the Tribunal has not gone into the merits of the cases based on the finding that the proceedings under sections 158BC and 158BD were bad in law, the cases are being remitted back to the Tribunal in view of our findings with regard to the validity of the proceedings under those provisions of law.

The present appeals are, accordingly, disposed of.

[Citation : 333 ITR 163]

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