TMI Blog1999 (10) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. M/s. Rana Investments, Erode. (Shri K. V. Laxmanan is a partner). 2. M/s. Rana Cotton Yarn Centre, Erode. (Shri K. V. Laxmanan is a partner). 3. Ramalinga Yarn Traders, Erode. (Shri K.V. Laxmanan is a partner). 4. M/s. J.S. Company, Erode. (Originally a partnership firm and with effect from 1-4-1991 a proprietary concern of Shri K. V. Laxmanan). 5. M/s. Ran Angappa Mudaliar, Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner). 6. M/s. Saraswathi Co., Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner). 7. Mrs. L. Saroja, Erode (Wife of Sri K.V. Laxmanan) 8. M/s. Sakthivel Bankers, Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner). Except M/s. Ran Angappa Mudaliar and Smt. Saroja, wife of Shri K.V. Laxmanan, who were assessed to income-tax by the Assistant Commissioner of Income-tax, Circle I(4), Erode, all other assessees were under the jurisdiction of the Income-tax Officer, Circle I(4), Erode. Some time after the search the files of the above assessees were transferred to the jurisdiction of the Assistant Commissioner of Income-tax, Special Investigation Circle, Erode. Notices under section 158BC were issued on 9-4-1997 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... miss ground No. 1 of the additional grounds of appeal as not entertained. 4.2 Ground Nos. 2 and 3 (third ground is only a prayer for relief) are admitted as they are purely questions of law and the issues raised therein have nexus with ground Nos. 1, 2 and 3 of the original grounds of appeal. 5. Ground Nos. 1, 2 and 3 of the original grounds of appeal (which are common in all these appeals) are as follows : 1. The order of the Assessing Officer insofar as it is against the appellant is against law weight of evidence and probabilities of the case. 2. The Officer erred in invoking the provisions of the Income-tax Act especially Chapter XIV-B read with section 132 and the reasons given by him are therefore unsound. 3. The appellant submits that the provisions of the Act, namely sections 132 158BD/BC and co-related sections are not attracted and the order is illegal, invalid and without jurisdiction. (Note: The other grounds are on the merits of the respective appeals). 5.1 The learned Chartered Accountant for the appellants and the learned departmental representative for the Revenue have made extensive oral submissions. They have also filed a gist of main submissions in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng possession of only those books of account and other documents which directly relate to the business carried on by the partners in the name of the firm. The books of account and other documents in respect of other businesses carried on by the partners would certainly be relevant because they would tend to show inter-relation between the dealings and supply materials having a bearing on the case of evasion of income-tax by the firm. A search or seizure does not become illegal merely because the Income-tax Officer in searching on the firm seized the books of account and documents in relation to a business carried on by any one or more of the partners in the names of other firms, or companies or of themselves." In this view of the matter the objections of the appellants are rejected. 7. The learned Chartered Accountant appearing for the appellants argued that as there was no search on the appellants under section 132 of the Act, the provisions of Chapter XIV-B are not applicable and the block assessments made in their cases are to be held void ab initio. He relied on the following decisions :--- 1. B-Bench decision of this Tribunal in the case of Urmila Chandak v. Asstt. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment in respect of that person if he is satisfied that undisclosed income belonged to that person instead of the person subjected to action under section 132. 7.4 The decision in Kasturchand Baid's case deals with the case of a person with respect to whom search was conducted and the ratio found therein is not germane to the cases on hand. Further if we were to accept the contention of Shri Venkatesan the provisions of section 158BD would become otiose and hence we reject his contention. 7.5 We uphold the contention of Shri Goraknathan but with the reservation that the conditions mentioned in section 158BD must be fulfilled before proceeding to make block assessment on the person other than the person subjected to operations under section 132. 8. The learned Chartered Accountant contends that before starting the proceedings under section 158BD a notice should have been issued under that section. He relies on the decision of the Tribunal in Smt. Jatan Bai Baid's case. 8.1 The learned senior departmental representative contends that notices were issued to the appellants under section 158BC simultaneously on 9-4-1997 along with the issue of notice under section 158BC to Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second contention of the learned departmental representative is that the satisfaction mentioned in section 158BD is that of the Assessing Officer and the Courts could not be into the adequacy of the satisfaction. 8.7 We partly agree with this contention of the department. While the adequacy of satisfaction is not justiciable and the Tribunal cannot go into that aspect of the question, nothing precludes the Tribunal from finding whether there were materials or information before the Assessing Officer on which prima facie satisfaction was reached by him about the three cumulative conditions mentioned in section 158BD. This is because the section does not use the expression 'suspect' as found in section 132(1)(i) or section 132(1A) in the place of the expression 'satisfaction'. It is for the department to show the basis or the materials, etc. on which the Assessing Officer derived the prima facie satisfaction at the threshold of invoking section 158BD. This has not been done so far in these cases. Had it been done we could not possibly go into the adequacy of the materials on which satisfaction was reached. 8.8 The third contention of the senior departmental representative is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kumaravel Rana Spinning Mills Pvt. Ltd. These three firms have shown deposits in several names in sums up to Rs. 20,000. It was also noticed that no interest was being paid on these deposits whereas interest was being credited to the depositor's accounts from year to year. When the assessee was requested to furnish the addresses of the depositors for verification of their genuineness, he expressed his inability to do so. However, he came forward with a declaration of undisclosed income at Rs. 125 lakhs, in his hands and in the hands of his wife Smt. L. Saroja. Reference can be had to the answer to question No. 22 of the statement recorded under section 132 dated 10-9-1996. However, he disclosed an aggregate sum of Rs. 73.65 lakhs only towards undisclosed income in the return filed by him in Form 2B as under: Name of the firm Financial Financial Total year 1993-94 year 1994-95 1. M/s. Rana Investments Rs. 26,71,000 Rs. 1,15,000 Rs. 27,86,000 2. M/s. J.S. Co. Rs. 15,79,000 Rs. 30,00,000 Rs. 45,79,000 ------------------------- Rs. 73,65,000 ------------------------ On verification of the books of account of the above firms produced during the course of hearing and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of time and for fear of (loss of) reputation, he would offer a sum of Rs. 125 lakhs to be assessed in the hands of himself and his wife. He did not mention anything about or against the credits appearing in the books of five other appellants. Even if the admission made by Shri K.V. Laxmanan is at the worst held against him and his wife, as far as the appellants are concerned no incriminating material or information was found to indict the genuineness of the credit. At any rate the Revenue has not placed any material before the Tribunal for the basis of satisfaction under section 158BD. 8.16 As for the contention of the senior departmental representative that the additions made in the block assessments would justify action under section 158BD. Shri Venkatesan strongly urged that the additions are contested tooth and nail and at any rate such additions could not be construed as supplying the basis for reaching the initial satisfaction so necessary for invoking the provisions of section 158BD. 9. Having regard to the rival submissions and the materials on record we hold that the satisfaction envisaged at the threshold of section 158BD should be on the basis of the materials gath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very statement of Shri K.V. Laxmanan and his professed unwillingness to have an enquiry on the cash credit as they appeared in the books of the appellant-firms would conceivably activate the mind of the Assessing Officer to have his own views on the bona fides of the credits found in the books and prompt him to view the credits as representing the undisclosed income of the appellants. Such strand of thought (whether justified or not that is a different issue on merits) would ignite action under section 158BD. 9.2 It is on record that in many cases the return of income was not filed within the time allowed under section 139(1) or even under section 139(4) prior to the date of search. Shri Venkatesan's argument is that as the assessees were all borne in the file of the Assessing Officer, their existence was known to the department and if they failed to file the return of income action should be taken under section 147, but not under section 158BD. We reject this argument. "Undisclosed income" means the income which is liable to be taxed but which has not been taxed as a result of nondisclosure by the assessee. The date of search is the cut off date. Nondisclosure would certainly ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase and sale of yarn. (viii) Smt. Saroja --- A number of documents relating to purchase and sale of lands were seized in the course of search. It was a notorious fact that "on money" transactions are common in property dealings. There were credits in Vasakkattu account and other credits in L.F. 6 of seized material at serial No. 64, which appeared to be disproportionate to the agricultural income admitted. This apart, the deposition of Shri K.V. Laxmanan dated 10-9-1996 dragging her name into an admission of undisclosed income. 9.4 On a prima facie view of the matter detailed above we hold that there were materials for the Assessing Officer to invoke the provisions of the section 158BD and his satisfaction could be inferred in the above cases except in the case of M/s. Palagapandi Group Estates, to which we will revert a little later. In this context we are constrained to observe that if only the department had produce the 'appraisal report' of the ADIT (Inv.) or the 'satisfaction note' of the Assessing Officer such an elaborate discussion on a short legal ground could have been avoided, thus saving the precious time and energy of the Tribunal. 9.5 However, we do not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998) are treated as allowed for statistical purposes. 12. Now let us turn to IT(SS)A No. 259(Mds)/ 1997 relating to Shri K.V. Laxmanan. Search under section 132 of the Income-tax Act, was conducted at the residential and business premises of the appellant under warrant of authorisation issued against Shri K.V. Laxmanan (Karta of Hindu undivided family). Books of account and records of entities in which Shri K.V. Laxmanan or his wife Smt. L. Saroja is interested as partner or otherwise and which were found in the searched premises were seized. The statements of Shri K.V. Laxmanan were recorded in the course of the search. Notice under section 158BC(1) was issued to the assessee on 9-4-1997 and the assessment was completed on 29-9-1997 for the block period consisting of the previous years 1986-87 to 1996-97 (upto 10-9-1996). 12.1 The assessee is in appeal. There are several grounds in the appeal originally filed and they deal with the merits of the additions and disallowances made in the block assessment. Subsequently the appellant has filed an additional ground of appeal as follows : "The order of block assessment is bad in law and void ab initio inasmuch as search itself is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter dated 24-9-1997 after the dispatch of the draft (assessment) order to the Commissioner and the appellant was allowed only two days time to state its objections before the Commissioner. The time allowed to the assessee was too short to be meaningful. The appellant not to displease the department, complied with the directions. The Commissioner of Income-tax made changes in the draft order, by giving directions to make protective additions in the related cases as well. He did not grant any relief to the appellant. Thus the appellant was shut out of hearing at the trial stage before making additions in the draft (assessment) order. The Assessing Officer not having heard the appellant in respect of his proposal, had not applied his mind in framing the draft (assessment) order. The Commissioner has only done public relations exercise in giving his seal of approval, not to speak of his directions to make protective additions in some other related cases. The Assessing Officer has obediently carried out the directions of the Commissioner in framing the (final) assessment order for the block period. Thus in effect the impugned order is one passed by the Commissioner himself without ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. But it is a sad fact that the draft (assessment) order and the appraisal report of the ADIT, to which it had reference, were not furnished to the appellant. Only a summary of proposed additions was given by the Assessing Officer in his letter dated 24-9-1997 with a direction to file his objections before the Commissioner of Income-tax on or before 26-9-1997. The appellant complied with the directions by filing his objections in per-son before the Commissioner of Income-tax on 25-9-1997 and was presumably heard by the Commissioner of Income-tax on the same day. This is evident from the notings of the assessee's representative at the bottom of the letter dated 25-9-1997 to the following effect (page 34 of the assessee's paper-book) :--- "Appeared with Shri KVL before the CIT, CBE on 25-9-1997 and given the letter in person. Perused the reply to A.C., SIC's letter dated 24-9-1997 and wanted to furnish evidence for cutting of trees on 29-9 1997. said, possibly file with other matters. She is not inclined to give any relief. Power filed. Sd/-25-9-1997." The (final) block assessment order was passed by the Assessing Officer on 29-9-1997 after the approval of the Commissioner. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irections to the Assessing Officer in the matter of assessment and relied on certain case laws. The learned Accountant Member opined that the case laws on which reliance was placed by his learned brother might be relevant in the matter of regular assessment but not in a case where the assessment was to be framed with the 'previous approval of the Commissioner of Income-tax' under section 158BG. Further, in the case before us no material is adduced to show how the Commissioner of Income-tax exceeded his powers in the course of according his approval to the draft (assessment) order proposed by the Assessing Officer. If any other person is affected by any of the directions of the Commissioner of Income-tax in granting approval to the case of the assessee, it is for that person to agitate the matter in appeal. 19. We have carefully gone through the decision of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. That was a case arising under section 18AA of Industries (Development Regulation) Act, 1951 in regard to the takeover of management of an industrial undertaking. The section was silent on the rule of 'audi alteram partem'. The Apex Court held that the power under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et to strike down the order as void ab initio, but refrained from so doing in view of the commitment given by the Government. In the case before us the non-compliance with the rule of natural justice did not occur at the stage of assumption of jurisdiction. The jurisdiction of the Assessing Officer to make block assessment on Shri K.V. Laxmanan was validly assumed under section 158BA(1) of the Income-tax Act as a result of the search conducted on him in his business and residential premises and upon service of notice under section 158BC. It is only in the procedure of conducting the enquiries under section 142 and in making the assessment for the block period under section 143, the Assessing Officer has, as is said, put the cart before the horse and thus failed to give an effective opportunity to the assessee to state its objections to his proposal. This could be construed only as a supervening illegality creeping at the stage of procedure for assessment. This illegality did not occur at the jurisdictional stage. Therefore, we are of the considered opinion that the Supreme Court decision rendered in the context of jurisdiction under section 18AA(1)(a) of the Industries (Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors v. CIT [1989] 180 ITR 625/[1990] 49 Taxman 196 (Punj. Har.). It is axiomatic that in appropriate circumstances the Court may compel the authority to comply with the rule of natural justice --- pre---decisional hearing --- at the point of its failure and thus cure the defect in the proceedings. In this view of the matter we reject the prayer of the learned Chartered Accountant for the assessee to cancel the block assessment order. As the supervening illegality has occurred at the passing of the draft order, we set aside the draft assessment order along with the block assessment order dated 29-9-1997 and restore the case back to the file of the Assessing Officer with a direction to give a full, fair and effective opportunity to the assessee to make his representations to any proposal that may be made by the Assessing Officer along with the reasons therefor, consider the objections of the assessee before sending the draft order to the Commissioner of Income-tax for his approval. The Commissioner of Income-tax is likewise directed to give the assessee adequate opportunity of being heard before he accords approval to the order proposed by the Assessing Officer. We may add that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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