Itta/44/2004 Of The Commissioner Of Income Tax v. G.mohan Rao

HON’BLE SRI JUSTICE DILIP B. BHOSALEANDHON’BLE SRI JUSTICE A. RAMALINGESWARA RAOITTA No. 44 OF 2004 JUDGMENT:(per the Hon'ble Sri Justice Dilip B. Bhosale) This appeal under Section 260A of the Income Tax Act, 1961(for short, ‘the Act’) is directed against the order dated 18-11-2002rendered by the Income Tax Appellate Tribunal, Visakhapatnam (forshort, ‘the Tribunal’) in IT(SS)A No.26/Vizag/98 for the block period 01-04-1986 to 10-10-1996. The appeal before the Tribunal was filed by the respondent –assessee against the block assessment order dated 28-08-1998, forthe block period from 01-04-1986 to 10-10-1996, passed by the ACIT(Inv.), Circle-I, Vijayawada. The assessee is an individual andengaged in the business of transport. Search operations wereconducted at the residential premises of one KondapalliSatyanarayana Rao, a transport contractor of Vijayawada on 10-10-1996. Simultaneously, a search was also conducted at theresidential premises of G. Nageswara Rao, the father-in-law ofSatyanarayana Rao and the father of the assessee. In the course ofsearch, an amount of Rs.11,725/- was found in the bed room ofNageswara Rao and an amount of Rs.5,50,000/- was found in the bedroom of G. Mohana Rao (assessee). At the time of search operation,the assessee and his wife were not present at the residence and hisfather Nageswara Rao could not explain the source of income forwhich the same was seized and the proceedings under Section158BC(a) read with Section 158BD were initiated by issue of notice on14-08-1997. The notice was served on the assessee on 23-08-1997. In response to the notice, the assessee filed a return for the blockperiod on 28-04-1998, admitting undisclosed income at Rs.6,46,420/-. Along with the return, relevant computation statement and evidence inrespect of the transactions of properties were also filed. During theassessment proceedings, a statement of the assessee on oath wasalso recorded on 03-08-1998. After hearing the case and examiningthe submissions made, the assessing officer completed theassessment determining the undisclosed income at Rs.1,02,08,942/-by his order dated 28-08-1998. After setting off, the total undisclosedincome worked out to Rs.92,42,002/-. It is against this order, therespondent – assessee filed an appeal before the Tribunal. In theappeal, the assessee raised several grounds. However, in the presentappeal, we are concerned only with the following question of law, asraised in the memorandum of appeal: “Whether on the facts and in the circumstances ofthe case, the Tribunal was justified in law in holding that theincome in the block assessment cannot be determined onestimate basis, in the absence of materials found by thedepartment during search?” The appellant – Revenue did not raise any other question oflaw for our determination. Finding of cash during the search is also notthe subject matter of this appeal. The Tribunal after considering the entire material that wasplaced for consideration, in para 3.6, in respect of the question thatfalls for our consideration observed thus: “We have carefully considered the submissionsmade by the rival parties, the facts of the case, the caselaws relied upon and materials produced before us. It is anun-disputed fact that no material was found by theDepartment regarding the transport contract businessof the assessee. There was also no iota of anyevidence regarding the extent of undisclosed incomeearned from the said source. There is no finding bythe AO that estimate of income was made afterconsideration of material that came to light during thecourse of search and seizure operation. It is only afterthe filing of the return by the assessee the Departmentverified the matter regarding the receipts received from thecontractees i.e., Rasi Cements and Kesoram Cements. It “We have carefully considered the submissionsmade by the rival parties, the facts of the case, the caselaws relied upon and materials produced before us. It is anun-disputed fact that no material was found by theDepartment regarding the transport contract businessof the assessee. There was also no iota of anyevidence regarding the extent of undisclosed incomeearned from the said source. There is no finding bythe AO that estimate of income was made afterconsideration of material that came to light during thecourse of search and seizure operation. It is only afterthe filing of the return by the assessee the Departmentverified the matter regarding the receipts received from thecontractees i.e., Rasi Cements and Kesoram Cements. It is also seen that no discrepancy was found between thefigures shown by the assessee and the figures obtained bythe AO as no much discrepancy has been pointed out. Wehave also perused the case laws relied upon by theassessee. In all the cases it has been held that in ablock assessment income cannot be determined onestimate basis in the absence of details found fromseized documents. This can be done only on regularassessment. It has also been held that no rovingenquiry can be made without fresh material in respectof completed assessments. Under the circumstancesthe income arrived by the AO on estimate basis in the caseof the assessee cannot be held to be correct. As pointedout above the search and seizure operation mainly startedin the case of Kondapalle Satyanarayana Rao whoseincome was also estimated on estimate basis. Suchincome arrived on estimate basis has been deleted by theI.T.A.T., Hyderabad in their order dated 29-10-99. In view ofthese facts the income worked out on estimate basis invarious years are directed to be deleted. (Emphasis supplied)” The observations made by the Tribunal in the above paragraphon factual matrix are not in dispute before this Court. It is against this backdrop, learned counsel appearing for theappellant – Revenue at the outset invited our attention to Sections 145 and 144 of the Act to contend that it is open for theassessing officer to determine income, in case of block assessment, asprovided for in Chapter XIV-B of the Act on estimate basis, if nomaterial is available and or in the absence of evidence found in thesearch operation. The Supreme Court in Assistant Commissioner of Income- tax v. Hotel Blue Moon[[1]]had an occasion to deal with all therelevant provisions in Chapter XIV-B of the Act. While dealing with theprovisions contained in this chapter, the Supreme Court in paragraphs12, 13, 14 and 15 observed thus: “12) Chapter XIV-B provides for an assessment of theundisclosed income unearthed as a result of searchwithout affecting the regular assessment made or to be made. Search is the sine qua non for the Blockassessment. The special provisions are devised to operatein the distinct field of undisclosed income and are clearly inaddition to the regular assessments covering the previousyears falling in the block period. The special procedure ofChapter XIV-B is intended to provide a mode ofassessment of undisclosed income, which has beendetected as a result of search. It is not intended to besubstituted for regular assessment. Its scope and ambit islimited in that sense to materials unearthed during search.It is in addition to the regular assessment already done orto be done. The assessment for the block period can onlybe done on the basis of evidence found as a result ofsearch or requisition of books of accounts or documentsand such other materials or information as are availablewith the Assessing Officer. Therefore, the incomeassessable in Block assessment under Chapter XIV-B isthe income not disclosed but found and determined as theresult of search under Section 132 or requisition underSection 132A of the Act. 13) Section 158 BC stipulates that the Chapter would haveapplication where search has been effected under Section132 or on requisition of books of accounts, otherdocuments or assets under Section 132A. By making thenotice issued under this Section mandatory, it makes suchnotice the very foundation for jurisdiction. Such noticeunder the Section is required to be served on the personwho is found to be having undisclosed income. The Sectionitself prescribes the time limit of 15 days for compliance. Inrespect of searches on or after 1-1-1997, the time limit maybe given up to 45 days instead of 15 days for compliance.Such notice is prescribed under Rule 12(1A) which in turnprescribes Form 2B for block return. 14) Section 158 BC(b) is a procedural provision for makinga regular assessment applicable to Block assessment aswell. Section 158 BC(c) would require the AssessingOfficer to compute the income as well as tax on completionof the proceedings to be made. Section 158 BC(d) wouldauthorise the Assessing Officer to apply the assets seizedin the same manner as are applied under Section 132B. 15) We may now revert back to Section 158 BC(b) whichis the material provision which requires our consideration.Section 158 BC(b) provides for enquiry and assessment.The said provision reads "that the assessing officer shallproceed to determine the undisclosed income of the Blockperiod in the manner laid down in Section 158 BB and the provisions of Section 142, sub-section (2) and (3) ofSection 143, Section 144 and Section 145 shall, so far asmay be, apply." An analysis of this sub section indicatesthat, after the return is filed, this clause enables theassessing officer to complete the assessment by followingthe procedure like issue of notice under Sections143(2)/142 and complete the assessment under Section143(3). This Section does not provide for accepting thereturn as provided under Section 143(i)(a). The assessingofficer has to complete the assessment under Section143(3) only. In case of default in not filing the return or notcomplying with the notice under Sections 143(2)/142, theassessing officer is authorized to complete theassessment ex-parte under Section 144. Clause (b) ofSection 158 BC by referring to Section 143(2) and (3)would appear to imply that the provisions of Section 143(1)are excluded. But Section 143(2) itself becomes necessaryonly where it becomes necessary to check the return, sothat where block return conforms to the undisclosedincome inferred by the authorities, there is no reason, whythe authorities should issue notice under Section 143(2).However, if an assessment is to be completed underSection 143(3) read with Section 158-BC, notice underSection 143(2) should be issued within one year from thedate of filing of block return. Omission on the part of theassessing authority to issue notice under Section 143(2)cannot be a procedural irregularity and the same is notcurable and, therefore, the requirement of notice underSection 143(2) cannot be dispensed with. The otherimportant feature that requires to be noticed is that theSection 158 BC(b) specifically refers to some of theprovisions of the Act which requires to be followed by theassessing officer while completing the block assessmentsunder Chapter XIV-B of the Act. This legislation is byincorporation. " It is thus clear, the provisions contained in Chapter XIV-B aredevised to operate in the distinct field of undisclosed income and areclearly in addition to the regular assessment covering the previousyears falling in the block period. The special procedure contemplatedby Chapter XIV-B is intended to provide a mode of assessment ofundisclosed income, which has been detected as a result of search. Itis not intended to be substituted for regular assessment. Its scope and It is thus clear, the provisions contained in Chapter XIV-B aredevised to operate in the distinct field of undisclosed income and areclearly in addition to the regular assessment covering the previousyears falling in the block period. The special procedure contemplatedby Chapter XIV-B is intended to provide a mode of assessment ofundisclosed income, which has been detected as a result of search. Itis not intended to be substituted for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during search. Insofar as Section 158BC (b), where the provisions contained inSections 142, 143 (2) and (3), 144 and 145 are referred to and onanalysis thereof, as observed by the Supreme Court in Hotel BlueMoon (supra) is concerned, it would indicate that, after the return isfiled, this sub-section enables the assessing officer to complete theassessment by following the procedure like issue of notice underSection 143(2)/142 and complete the assessment under Section143(3). The assessing officer has to complete the assessment underSection 143(3). In case of default in not filing return or not complyingwith the notice under Section 143(2)/142, the assessing officer isauthorised to complete the assessment ex parte under Section 144. Even under Section 144, the assessing officer is expected to take intoaccount all relevant material which he has gathered. Having regard to the position of law settled by the SupremeCourt in the aforementioned judgment, in the present case,determination of income on the basis of estimate and not on the basisof material found during search, in our opinion, is wrong. Admittedly,in the present case, no material was found by the departmentregarding the transport contract business of the assessee. In otherwords, there was no evidence regarding the extent of the allegedundisclosed income earned from the said source. In the circumstances, we find no merit in the appeal and, hence,the appeal is dismissed answering the question of law against theRevenue and in favour of the assessee. No order as to costs. ______________________ DILIP B. BHOSALE, J 01-04-2015ks _______________________________ A. RAMALINGESWARA RAO, J [1][2010] 188 Taxman 113 (SC)[2010] 188 Taxman 113 (SC)