TMI Blog2011 (5) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... t setting aside such invalid assessment cannot also be sustained.- Decided in favor of assessee. - IT(SS) 62/MUM/08 & IT(SS) 111/MUM/2008 IT(SS) 61/MUM/08 & IT(SS) 112/MUM/2008 IT(SS) 60/MUM/08 & IT(SS) 110/MUM/2008 - - - Dated:- 20-5-2011 - SHRI N.V.VASUDEVAN. SHRI J.SUDHAKAR REDDY, JJ. Assessees by : Shri Satish Mody Revenue by : Mrs. Kusum Ingale ORDER PER N.V.VASUDEVAN, J.M, IT SS A 62/Mum/08 ITA No.111/M/08: These are appeals by the Assessee. The circumstances under which these appeals arise for consideration are as follows: The Assessee is a partnership firm. It deals in bullion and precious metals. The Partners of the Assessee firm are (1) M/S.Novice Investments Pvt. Ltd. (2) M/S.Exhale Investments Pvt.Ltd. and (3) M/S. Fancier Investments Pvt.Ltd. All the partners of the Assessee firm were group companies of Parekh group in which Mrs.Naina Parekh, Mrs.Kalawati Parekh and Mrs. Meena Parekh are directors. There was a search and seizure conducted u/s.132 of the Income Tax Act, 1961 (the Act)on 24/09/2002 in the case of M/S.Parekh Platinum Limited, covering residential and businesss premises belonging to Parekh family. Since the Assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee pointed out that the order for special audit has been passed without application of mind and mechanically. Not even a single instance of complexity of the accounts have been specified in the order u/s.142(2A) of the Act and the order has been passed only with a view to gain time for completion of block assessment. In this regard it is worthwhile to mention that u/s158BE of the Act, an order of Block Assessment u/s.158BC of the Act has to be passed within 2 years from the end of the month in which the search action u/s.132 of the Act, concluded. In the case of the Assessee the search took place on 24.9.2002 and the time for completion of the Block assessment was getting barred by 31.10.2004. There was no progress in the Assessment till 5.8.2004 and therefore to gain time the AO has sent a proposal for a special audit. As per the proviso to Sec.158BE of the Act, the time for completion of assessment will get automatically extended by the time taken for getting the books audited by a special auditor u/s.142(2A) of the Act (subject to a maximum of 80 days). Further an additional period of 60 days would also be available to the AO from the date of report of the special audit for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chokshi Navnitlal Sons iii) M/s. Jamnadas Nathalal Co. iv) M/s. Jyoti Traders v) M/s. Parekh Platinum Ltd. 8.3. All the above sales have been treated as second sale and the sales tax has not been charged on these transactions. The accounts of all the concerns except M/s. Chokshi Navnitlal Sons are maintained at the office of M/s. Parekh Platinum Ltd. As highlighted in the stock register seized at the premises these transactions are not reflected in their stock register. There is no evidence that the goods were physically moved from one concern to another. These bills are in fact a part of the circular transactions amongst the various group concerns and thereby to book bogus purchase so as to reduce its taxable income. 8.4 Pages 246,258,268, and 270 are the sale invoices of Sonal Enterprises to M/s. Jyoti Traders i.e. the assessee firm. These pages show that the assessee has made purchases from Sonal Enterprises of a total amount of Rs.93,94,951/-. Since the assessee has failed to produce any supporting evidences and during the search also it was established that no actual stock was transferred from Sonal Enterprises to the assessee. Therefore, in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of search, on the conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued; (b) in the case of requisition under section 132A, on the actual receipts of the books of account or other documents or assets by the Authorised Officer. 6. It is not in dispute that the provisions of section 158BE(1)(b) applies to the present case as the search was conducted on 24.9.2002. The period of limitation for the passing the order of block assessment under those provisions read with explanation-2 would expire on 31.10.2004 and this is admitted by the AO in the order of assessment as well. The period to be excluded as per Explanation 1(ii) of section 158BE is the day from which the Assessing Officer directs the assessee to get his accounts audited under subsection (2A) of section 142 and ending on the day on which the assessee is required to furnish a report of such audit under that sub-section, shall be excluded. Now we shall refer to the provisions of section 142 in so far as they are material for the present case. Sec.142: Enquiry before assessment. (1) For the purpose of making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42 or fails to comply with a direction issued under sub-section (2A) of that section, or (c) .................. the Assessing Officer, after taking into account all relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment. 8. According to the Assessee the time limit fixed by the Assessing Officer under section 142(2A) of the Act cannot be said to be only directory. According to the Assessee, Section 142(2A)of the Act, speaks in terms imperative and the language permits of no relaxation of the rigidity of the rule of time limit laid down therein except to the extent stated in section 142(2C). Therefore, section 142(2A) should be applied in its undiluted form, disregarding the consequences. The Assessee further submitted that a reading of provisions of section 142(2C) would also suggest that the assessee shall obtain the audit report within the period originally fixed. Extension of time is allowed only on an application by the assessee in this regard and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to 31.10.2004 + 34 days viz., 5.12.2004. Since between 17.9.2004 (the date on which the Assessee should have obtained the report of special audit u/s.142(2A) of the Act as originally fixed by the AO) and the last day for completion of the block assessment u/s.158BE was less than 60 days, the AO would get further time of 60 days in terms of the proviso below Expln.1 to Sec.158BE of the Act. Thus according to the Assessee, the AO ought to have completed the assessment on or before 5.1.2005. Since the Assessment order was passed on 7.4.2005, it was barred by time. It was the submission of the Assessee that the period of extension suo motto by the AO to complete the special audit should not be excluded in computing the period of limitation because the AO has no such powers to extend the period for completion of the audit suo motto. 11. The stand of the revenue that the period from 13.8.2004 till 7.2.2005, viz., the date on which the final extension of time for furnishing audit report expired has to be excluded and further a period of 60 days has to be added in terms of the proviso below Expln.1 to Sec.158BE of the Act. In that event the period of limitation would expire on 7.4.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondences made with the assessee and the special auditors and all the relevant materials gathered, the undisclosed income of the assessee is assessed as per the best judgment of the undersigned under section 144(1)(b) of the I.T. Act, as the assessee failed to comply with the directions issued u/s. 142(2A) of the I.T. Act, 1961. 16. On the issue of limitation and satisfaction of conditions for ordering special audit, the AO held as follows: 9.2 It is pertinent to mention that the search action u/s. 132(1) of the I.T. Act was carried out on 24/09/2002. the assessee was directed on 13/8/2004 under section 142(2A) of the I.T. Act to allow M/s. Bhuta Shah co. C.As to carry out the required audit. The assessee s case was getting barred by limitation of time on 31/10/2004. As per proviso to section 142(2C) of the I.T. Act, the time limit was extended twice, so as to submit the audit report on 7/2/2005 before the Assessing Officer as the assessee s application, citing reasons, for cancellation of special audit was pending with the higher authorities. However, the aggregate of the period originally fixed and the periods so extended did not exceed one hundred and eight days fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory completion of the assessment proceedings u/s. 144(1)(b) of the I.T. Act 1961. Therefore, the undersigned has no alternative but to use the materials on record and assess the concealed income of the assessee as per his best judgment. 10.1 Here it would be relevant to quote the judgement of Allahabad High Court in the case of M/s. Sahara India Mutual Benefit Company Ltd. vs. CIT (269 ITR 563) that even though when the assessee did not produce it books of accounts before the Assessing Officer, it was a matter of satisfaction of the Revenue authorities concerned that they have arrived at a definite conclusion on the basis of available material and exercise their powers under section 142(2A) of the I.T. Act. It further held that a person cannot be permitted to gain, on account of his own fault. If the assessee deliberately, knowing the consequences, refuses to produce the books of accounts, the assessee cannot be permitted to raise a hue and cry that the account books were not perused by the AO before passing the order u/s. 142(2A) of the I.T. Act. 17. Against the order of the AO dated 7.4.2005, the Assessee filed appeal before CIT(A) on 6.5.2005(wrongly mentioned as 6.5.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by limitation and was, therefore, void ab initio and bad in law. Accordingly, the said order can not be subject matter of revision u/s. 263 of the I.T. Act. (ii) The assessee is in appeal before the CIT(A) on various issues relating to jurisdiction and quantum of addition/disallowance and the appeal is still pending. Therefore, there is no scope for action under section 263. (iii) In the course of the block assessment proceedings the AO had called for specific information and the assessee had made submissions in compliance. Books of accounts for the block period were produced before the AO and entries were correlated with seized documents. The AO had taken a conscious decision in determining the assessee s undisclosed income of the block period at Rs.93,94,951/- and no more. 20. The CIT by his order dated 12.3.2008 passed u/s.263 of the Act, however rejected the stand of the Assessee and he set aside the order dated 7.4.2005 and directed the AO to frame a fresh assessment, for the following reasons: 4.1 The contentions of the assessee have been duly considered. It is noticed that the question of limitation was raised by the assessee before the AO in the course of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, it is indisputable that the verification, enquiry and investigation warranted in the facts and circumstances of the case were not madce by the AO. 5. In the light of the discussion in the preceding paragraphs, the assessment order dated 07/04/2005 passed by the AO u/s. 158 BC r.w.s. 144(1)(b) of the I.T. Act is hereby cancelled with direction to the AO to frame a fresh assessment order in accordance with law and after verification, enquiry and investigation warranted in the facts and circumstances of the case. In doing so, the AO shall given reasonable opportunity of being heard to the assessee firm. 21. Aggrieved by the order of the CIT passed under Sec. 263 of the Act, the Assessee has filed IT (SS) A. No.62/mum/08. 22. The appeal of the Assessee filed against the order of the AO dated 7.4.2005 was pending and in the meantime the proceedings u/s.263 of the Act were initiated. On 22.8.2008, the CIT(A) dismissed the appeal of the Assessee against the order of the AO dated 7.4.2005 for the reason that by virtue of the order of the CIT u/s.263 of the Act, the order of assessment dated 7.4.2005 no longer existed and therefore the appeal of the Assessee becomes infructuous. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that order passed u/s.263 of the Act will also have no effect. The Assessee cannot project this grievance in any other proceedings except in this appeal against the order passed u/s.263 of the Act, because the order of assessment dated 7.4.2005 stands cancelled by the order passed u/s.263 of the Act. The CIT(A) has already dismissed the appeal against the order of assessment dated 7.4.2005 holding that the order of assessment having been cancelled, the appeal becomes infructuous. In these circumstances, we reject the preliminary objection raised by the learned D.R. and proceed to decide the validity of the order of assessment dated 7.4.2005 on the ground that it is barred by time. 28. On the issue of limitation we have already seen that the on 13.8.2004, the AO passed the order u/s.142(2A) of the Act, directed the Assessee to get its books of Accounts audited by the special auditor by 17.9.2004. On 16.9.2004 the AO extended the period for carrying out special audit u/s.142(2A) of the Act, which period would expire on 17.9.2004. The period was extended to 1.11.2004. On 1.11.2004, the AO extended the period for completion of the special audit u/s.142(2A) of the Act, to 31.12.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous approval of the Chief Commissioner/Commissioner, may direct the assessee to get the accounts audited by the accountant. The reasons recorded by the Assessing Officer which were duly approved by the Chief Commissioner/Commissioner have been attached with the written statement. The Hon ble Court perused those reasons and was satisfied that the Assessing Officer was justified in forming the opinion that the accounts of the company require a special audit. The Assessee raised another argument that under section 142(2C) of the Act, the period fixed by the Assessing Officer for the report under sub-section (1) was three months and this period could not be extended until and unless an application was filed by the assessee for extension of the period. It was contended that the assessee did not file any such application and, therefore, the Assessing Officer erred in extending the period for submission of the report of the special audit under section 142(2A) of the Act. The Hon ble Court rejected this argument holding that the proviso to sub-section (2C) of section 142 of the Act makes it clear that the Assessing Officer may, either on the application made by the assessee and/or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leting the special audit. 31. The learned D.R. placed reliance of the decision of the Hon ble Bombay High Court in the case of CIT Vs. Godavari Devi Saraf 113 ITR 589 (bom) wherein order of penalty setting aside Penalty-was in challenge before the Hon ble High Court. The Tribunal set aside the penalty order in view of decision of High Court of another State (Madras High Court) holding sec. 140A(3) ultra vires of art. 19(1)(f) of Constitution. The Hon ble High Court held that the law declared by High Court in a State is binding on Tribunal in another State and the Tribunal did not go into constitutionality of provision of I.T. Act and only decided the case in accordance with decision of High Court. The learned D.R. submitted that the law declared by the Hon ble Punjab Haryana High Court in the case of Jagjit Sugar Mills Co. (supra) should be followed because it was the only decision of High Court (though it is decision of non-Jurisdictional High court) on the issue. The learned Counsel for the Assessee on the other hand submitted that the decisions of the High Court are binding on the subordinate courts and authorities or Tribunals under its superintendence throughout the terr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, though it is an administrative order and therefore the concept of natural justice has to be read in such administrative actions. But with a view to spare actions already taken, the Supreme Court clarified that its rule will apply prospectively, (i.e., after 11.3.2008) so that past failures would not render the assessments in pursuance of such audit report without notice, invalid. Such a view requiring prospective application was taken in view of the uncertainty of law in this regard that existed before the Hon ble Supreme Court rendered its decision in the case of Rajesh Kumar s (supra). The Finance Act, 2007, has inserted a proviso to Sec.142(2A) of the Act, w.e.f 1.6.2007 whereby it is mandatory to issue of show-cause notice before ordering special audit. Therefore the invalidity of the order u/s.142(2A) of the Act on the ground that no notice was given to the Assessee before passing the order for special audit u/s.142(2A) of the Act, cannot be raised in this case. 34. The next argument of the ld.counsel for assessee was that direction to get the books of accounts of the assessee subjected to a Special Audit was not valid because the conditions necessary for invoking such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our attention to para 5.1 of the AO s order and submitted that the AO has recorded the required satisfaction in this regard in the order of assessment. The following are the relevant observations of the AO. 5. Simultaneously, a proposal dated 5/8/2004 was sent to the Commissioner of Income Tax, Central IV, Mumbai for approval for conducting a special audit under section 1442(2A) of the Income Tax Act of the assessee s books of accounts for the block period vis- -vis the seized papers, documents and C.Ds. It was duly analysed in the proposal that the assessee was indulging into booking of bogus purchases from its own associate concerns so as to reduce its taxable income. It was also discovered from the seized documents that the assessee entered into circular transactions with it associate concerns so as to book losses. Special audit was required to unveil the multiple entries of circulation of various products amongst its associate concerns and to trade the ultimate beneficiary. Therefore, in view of the referred anomalies, detailed proposal was forwarded to the Commissioner of Income Tax, Central IV, Mumbai for the sanction of special audit u/s. 142(2A) of the I.T. Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings u/s.263 of the Act as invalid is allowed and the order u/s.263 of Act is hereby quashed. 40. As far as IT(SS)A.No.111/Mum/08 is concerned, we have already seen that the CIT(A) did not decide the appeal of the Assessee for the reason that the order of assessment has been cancelled u/s.263 of the Act. The order u/s.263 of the Act, has now been quashed and therefore in normal circumstances, the appeal would be decided by directing the CIT(A) to decide the appeal on merits. We have while deciding the appeal against the order u/s.263 of the Act, already held that the order of the AO was barred by limitation. Therefore there would no useful purpose in setting aside the order of CIT(A) and directing him to decide the appeal on merits afresh. We therefore allow the appeal of the Assessee against the order of the CIT(A) challenging the order of the AO, holding that the order of assessment is barred by time. 41. Consequently, both the appeals by the Assessee are allowed. 42. IT(SS) A No.61/Mum/08 is an appeal by the Assessee against the order dated 12.3.2008 of CIT(A), Central-IV, Mumbai, passed under Sec. 263 of the Act. 43. IT(SS) A.No.112/Mum/08 is also an appeal fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Assessee against the order dated 22.8.2008 of CIT(A), Central-III, dismissing the appeal of the Assessee against the order of the AO. 50. The Assessee is a partnership firm. It deals in bullion and precious metals. The Partners of the Assessee firm are (1) M/S.Novice Investments Pvt. Ltd. (2) M/S.Exhale Investments Pvt.Ltd. and (3) M/S. Fancier Investments Pvt.Ltd. All the partners of the Assessee firm were group companies of Parekh group in which Mrs.Naina Parekh, Mrs.Kalawati Parekh and Mrs. Meena Parekh are directors. There was a search and seizure conducted u/s.132 of the Income Tax Act, 1961 (the Act)on 24/09/2002 in the case of M/S.Parekh Platinum Limited, covering residential and businesss premises belonging to Parekh family. Since the Assessee was also part of Parekh group, the business premises of the Assessee was also searched on 24/9/2002. 51. According to the AO, in the course of search and seizure action, voluminous incriminating documents were found and seized. Mainly Assessee s books of account were also seized in the form of C.D. s and harddisk. 52. The AO made assessment in the case of this Assessee also on the same basis on which the Assessment ..... 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