Ita/1011/2009 Of The Commissioner Of Income Tax v. Panchajanyam Management Agencies

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 15TH NOVEMBER 2010 / 24TH KARTHIKA 1932 ITA.No. 1011 of 2009() ---------------------- AGAINST THE ORDER DATED 23/11/2007 IN IT(S & S) A.106/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX COCHIN BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- PANCHAJANYAM MANAGEMENT AGENCIES & SERVICES, SREELAKAM PARK, KAITHATHODE JN THODUPUZHA. ADV. SRI.T.M.SREEDHARAN FOR R1 SRI.V.P.NARAYANAN FOR R1 SMT.C.K.SHERIN FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 15/11/2010, ALONG WITH ITA NO. 1069 OF 2009 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C .N. RAMACHANDRAN NAIR, &BHABANI PRASAD RAY, JJ. -------------------------------------------- I. T. A. Nos. 1011 & 1069 of 2009 -------------------------------------------- Dated this the 15th day of November, 2010 JUDGMENT Ramachandran Nair, J. These appeals are filed by the revenue challenging the order ofthe Tribunal declaring the respondent's assessment made under Section158BD read with Section 158BC as invalid. We have heard seniorcounsel 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 invarious lines of business, including running of bar hotels. A searchwas made under Section 132 of the Income Tax Act in the premises ofthe managing partner of the assessee-firm in which documents andrecords pertaining to undisclosed income of the respondent-Firm,particularly unaccounted income of two hotels run by the Firm wererecovered. The assessing officer who has jurisdiction to assess thesearched assessee, namely, Managing Partner of the Firm, is the very ITA 1011 & 1069/2009 same officer who has jurisdiction to assess the respondent-Firm also.Based on evidence and materials gathered about the undisclosedincome of the respondent-Firm during search conducted in thepremises of the managing partner of the said Firm, the assessing officerissued notice under Section 158BD read with Section 158BC to therespondent-Firm calling upon the Firm to file return of undisclosedincome in Form No.2B. Though the respondent-Firm filed nil return,the assessing officer based on materials gathered during search in thepremises of the managing partner completed assessment on respondent-Firm on a total income of Rs. 83,51,600/-. In the appeal filed by theassessee-Firm before the CIT (Appeals), though the validity ofassessment was questioned for the reason that no satisfaction wasrecorded by the Officer before proceeding with the assessment, thesame was rejected holding that since the assessment is made by thevery 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 wasno need to transfer the file to another officer and so much so , there wasno need to record any satisfaction by the assessing officer. However, ITA 1011 & 1069/2009 ITA 1011 & 1069/2009 the first appellate authority granted substantial quantum relief to theassessee-Firm. Second appeals were filed both by the assessee-Firm aswell as by the department before the Tribunal. During hearing of theappeals before the Tribunal, assessee-Firm filed petition to raiseadditional ground questioning the validity of assessment mainly relyingon the decision of the Supreme Court in MANISH MAHESWARI'scase reported in 289 ITR 341 and contended that assessment madeagainst the respondent-Firm is invalid because the assessing officer hasnot recorded his satisfaction under Section 158BD of the Act. TheTribunal accepted the assessee-Firm's contention and declared theassessment made under Section 158BD read with Section 158BC asinvalid and therefore the other grounds raised by the assessee-Firmagainst quantum addition sustained by the first appellate authority andthe appeal filed by the department against quantum relief granted bythe CIT (Appeals) were not considered by the Tribunal. It is againstthis finding of the Tribunal that the department has filed both theappeals raising only one question, that is, whether the Tribunal wasjustified in cancelling the assessment completed under Section 158BDread with Section 158BC as invalid for the reason that the assessing ITA 1011 & 1069/2009 officer did not record and communicate his satisfaction under Section158BD of the Act. 3. Since the Tribunal has cancelled the assessment mainlyfollowing the decision of the Supreme Court above stated, we havegone through the entire judgment and we notice that the case decidedby the Supreme Court pertains to assessment of a limited companybased on materials seized in the search conducted under Section 132 inthe premises of one of the directors of the said company and his wife.In that case, the assessing officer who had jurisdiction to assess thedirector and his wife did not have jurisdiction to assess the companyand so much so file had to be transferred to another officer located inanother station for assessment of the company under Section 158BDread with Section 158BC of the Act. The Supreme Court after goingthrough the notice issued under Section 158BD noticed that satisfactionof the officer who transferred the file was not recorded orcommunicated to the assessee. The further finding of the SupremeCourt in paragraphs 16 and 17 of the judgment is as follows: The said notice does not record any satisfaction on the partof the assessing officer. Documents and other assetsrecovered during search had not been handed over to theassessing officer having jurisdiction in the matter. ITA 1011 & 1069/2009 No proceeding under Section 158BC had beeninitiated. There is, thus, a patent non-application of mind. The Supreme Court declared Section 158BD assessment made asinvalid based on facts narrated above. However, in this case, facts areentirely different, inasmuch as the very same assessing officer who hasjurisdiction to assess the searched assessee, namely, managing partnerof the respondent-Firm, has jurisdiction to assess the respondent-Firm.Therefore there was no question of transfer of materials seized duringsearch to another officer for assessment as contemplated under Section158BD. The assessing officer who has jurisdiction to assess thesearched assessee, namely, managing partner of the respondent-Firm,on verifying the records and documents seized from him, noticed thatrespondent-Firm had undisclosed income assessable under the Act byvirtue of the powers conferred under Section 158BD. Therefore heissued notice under Section 158BD read with Section 158BC andcompleted the assessment. The question to be considered is whetherthe procedure adopted by the assessing officer in this case leading toassessment is in accordance with statute and if not whether theassessment is invalid as held by the Tribunal, the decision of theSupreme Court relied upon by the assessee having been found not ITA 1011 & 1069/2009 ITA 1011 & 1069/2009 applicable to the facts of this case. 4. 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 Section132 or books of account, other documents or assets arerequisitioned under section 132A, in the case of any person,then,-- (a) the Assessing Officer shall -- (i) in respect of search initiated or books of accountsor other documents or any assets requisitioned afterthe 30th day of June, 1995 but before the 1st day ofJanuary, 1997 serve a notice to such person requiringhim to furnish within such time not being less thanfifteen days; (ii) in respect of search initiated or books of accountsor other documents or any assets requisitioned on orafter the 1st day of January, 1997 serve a notice tosuch person requiring him to furnish within such timenot being less than fifteen days but not more thanforty-five days, as may be specified in the notice a return in the prescribedform and verified in the same manner as a return underclause (i) of sub-section (1) of Section 142, setting forth histotal income including the undisclosed income for the blockperiod: Provided that no notice under Section 148 is required to be issued for the purpose of proceeding under thisChapter: Provided further that a person who has furnished areturn under this clause shall not be entitled to file a revisedreturn; (b) the Assessing Officer shall proceed to determine theundisclosed income of the block period in the manner laiddown in section 158BB and the provisions of section 142,sub-sections (2) and (3) of Section 143, section 144 andsection 145 shall, so far as may be, apply; (c) the Assessing Officer, on determination of theundisclosed income of the block period in accordance withthis Chapter, shall pass an order of assessment anddetermine the tax payable by him on the basis of suchassessment; (d) the assets seized under section 132 or requisitionedunder section 132A shall be dealt with in accordance withthe provisions of section 132B. 158BD. Undisclosed income of any other person. Where the Assessing Officer is satisfied that anyundisclosed income belongs to any person, other than theperson with respect to whom search was made undersection 132 or whose books of account or other documentsor any assets were requisitioned under section 132A, then,the books of account, other documents or assets seized orrequisitioned shall be handed over to the Assessing Officerhaving jurisdiction over such other person and thatAssessing Officer shall proceed under Section 158BCagainst such other person and the provisions of this Chaptershall apply accordingly. Section 158BC provides for procedure for completion of assessment of ITA 1011 & 1069/2009 an assessee who is searched under Section 132 or whose books ofaccounts or other documents or assets are requisitioned under Section132A of the Act. The procedure contemplated under the Sectionvisualises issuing of notice and requiring the assessee to file the returnin the prescribed form, which is Form 2B. Clause (b) of the saidSection makes it clear that Section 142, Section 143(2) and (3) andSections 144 & 145 are made applicable. In other words, a blockassessment should be initiated first by calling for return and theassessment is completed after giving proper opportunity to the assesseeas if it is a regular assessment if possible with the co-operation of theassessee and after considering the evidence produced and contentionsurged by the assessee or otherwise he will make best judgmentassessment. 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 noticeunder Section 148 of the Act, which means that there is no need for theassessing officer to record reasons for initiating assessment as requiredunder sub-section (2) of Section 148 of the Act. 5. We have now to consider the scope of Section 158BD whichstates that assessing officer on verifying the documents or materials ITA 1011 & 1069/2009 obtained on search made under Section 132 or based on the documentsor accounts requisitioned under Section 132A is satisfied that suchrecords or documents or materials seized reveal undisclosed income ofany other person that is of any person other than the searched assessee,or the assessee whose accounts or documents are called for, then heshall hand over all those records pertaining to search or inspection tothe assessing officer having jurisdiction over such other person who isto be assessed based on such materials. It is specifically provided thatsuch other assessing officer to whom file is transferred shall proceedfor assessment under Section 158BC and the provisions of ChapterXIVB are applicable for such assessment. In our view, this is only anenabling provision to assess a person other than the assessee searchedor other than the assessee whose books of accounts and documentswere called for and verified under Section 132A of the Act. What thestatute visualises is possibility of recovery of cash, valuables or recordsin the course of search of an assessee which may pertain to anotherassessee or other assessees. In the normal course, an assessment insuch cases could be initiated against such other assessee about whoseincome materials are gathered by the department by making income escaping assessment under Section 147 of the Act, which in many casesmay be time barred. In order to safeguard the interest of the revenue,Legislature gave enabling power to the departmental officers to makeassessment on persons about whose income, details are collected in thecourse of search of other assessees. Even though Section 158BD is anenabling provision authorising the department to assess any personother than the searched assessee or assessees against whom documentsand records are called for under Section 132A, still assessment in suchcase has to be completed strictly in accordance with the procedureprovided under Section 158BC as stated above. In our view, in the firstplace, there is no mention in Section 158BD that the assessing officerbefore transferring the file to another officer having jurisdiction toassess the person other than the assessee proceeded under Section 132or 132A has to record his satisfaction in writing. It is pertinent to notethat wherever assessing officers are required to record their satisfactionbefore issuance of notice, statute prescribes the same. A situation ofthat nature is covered by Section 148(2) which requires the officer torecord reasons for reopening an assessment before issuing notice. Notonly there is no such requirement in Section 158BD but what we notice is that the satisfaction referred to therein is only about undisclosedincome of a person other than the assessee searched under Section 132or investigated under Section 132A and the satisfaction is only for thepurpose of transferring the file to the officer having jurisdiction toassess such other person. In fact, after receipt of the documents andmaterials from the assessing officer transferring it, the officer to whommaterials are transferred should follow the procedure under Section158BC, that is to issue notice to the assessee requiring him to filereturn in Form 2B and to make regular assessment after following theprocedure contained in Section 142, and if required to follow theprocedure in Sections 143(2) & (3), 144 and 145 of the Act. So muchso, in our view, non-recording of reason and non-communication of thesame by the assessing officer while issuing notice under Section158BC will not invalidate assessment completed under Section 158BDread with Section 158BC. In fact when records are received by theassessing officer from another officer under Section 158BD he has toonly issue notice to file return in Form 2B. Reasons and materialsbased on which undisclosed income is proposed to be assessed shouldbe communicated to the assessee when assessment is made based on return filed which is a step after issuing notice and after receipt ofreturn. By virtue of operation of Section 142 every assessee assessedunder Section 158BC and 158BD gets an opportunity to file objections.In other words, validity of assessment is not affected by reason ofassessing officer's failure to record his satisfaction under Section158BD which is only for the purpose of transferring the file and oncethe file is transferred, the transferring officer becomes functus officioand the jurisdiction for all purposes is transferred to the officer towhom file is transferred and who has jurisdiction to assess the assesseeabout whom details are obtained in the course of search of anotherassessee. The peculiar features of this case are such that there was nonecessity for transferring the file from one officer to another, becausethe person searched is the managing partner and based on the materialsgathered during search assessment is made on the partnership firm,wherein searched assessee is the managing partner. So much so,issuance of notice under Section 158BD read with Section 158BC issufficient for initiation of assessment which in this case is admittedlydone and the assessee has filed return in Form 2B in terms of noticeissued. Therefore what remains is only assessee's contest against assessment on merits which the Tribunal has not done. We therefore answer the questions raised in favour of therevenue and against the assessee and consequently allow the appeals,set aside the order of the Tribunal and restore the appeals to the file ofthe Tribunal for decision on merits after hearing both sides. (C.N.RAMACHANDRAN NAIR)Judge. (BHABANI PRASAD RAY) Judge. kk