TMI Blog2005 (5) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... he books of account vide para 11 of the Order. (b) Rs. 51,50,000 addition in financial year 1995-96 for alleged income from undisclosed sources vide para 78.2 of the Order. (c) Rs. 44,000 addition in financial year 1994-95 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. (d) Rs. 46,50,000 addition in financial year 1994-95 for alleged income from undisclosed income vide para 78.2 of the Order. (e) Rs. 5,11,000 addition in financial year 1994-95 for alleged income from undisclosed sources as the unexplained cash credits vide para 84 of the Order. (f) Rs. 12,33,000 addition in financial year 1993-94 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. (g) Rs. 12,60,000 addition in financial year 1993-94 for alleged income from undisclosed sources vide para 78.2 of the Order. (h) Rs. 11,83,000 addition in financial year 1993-94 for alleged income from undisclosed sources as the unexplained cash credits vide para 43 of the Order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the block assessment completed under s. 158BC r/w s. 144 is not tenable in law because neither there was any non-compliance nor any other default within the meaning of s. 144 warranting an ex parte assessment particularly when the appellant had been making full compliance in assessment proceedings and had filed the return in the prescribed form though belatedly but during assessment proceedings. (ix) That the learned AO was not justified in not properly considering and appreciating explanations filed from time to time arbitrarily rejecting adjournment application on 2nd Sept., 1996, without reasonable and sufficient cause and thereafter completing the assessment in an arbitrary manner. (x) That the learned AO has erred in law and on facts in not acceding to the request of the appellant for holding a camp at Gorakhpur and appoint Commission for enquiry at Delhi for verification of various cash creditors and shareholders whose affidavits and confirmations were filed and arbitrarily treating them as not genuine and bogus. (xi) That the cash credits allegedly treated as undisclosed income within the meaning of s. 158B(b) of the IT Act, 1961, is ultra vires the provisions of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to plead an additional ground as below: The assessment order is bad in law due to the mechanical application of mind by the learned CIT, which does not amount to approval. 2.3. The assessee, later on, as per its letter dt. 7th Dec., 1998 sought permission to raise the following additional ground: "That learned CIT, Allahabad, has erred in law and failed to objectively apply his mind while giving approval to the arbitrary and unfounded additions made by the learned AO in the block assessment. The assessment order is bad in law due to the mechanical application of mind by the learned CIT which does not amount to approval." 2.4 The assessee further sought to raise an other additional ground as per application furnished on 28th Sept., 1999 and the additional ground read as under: "The learned AO failed to assume valid jurisdiction under s. 158BC inasmuch as the notice issued by him under the said section was vague and hence invalid' prayer : The assessment order, being void ab initio may be quashed." 2.5. The assessee, as per its application dt. 6th Oct., 1999 sought to raise reframed additional ground in place of additional ground having been sought to be raised as per ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24,32,000 2 Upto 31.03.94 93,09,600 1,50,000 94,59,600 24,93,000 3 Upto 31.03.95 1,79,69,600 2,60,000 1,82,29,600 46,94,000 4 Upto 31.03.96 2,61,19,600 13,60,000 2,74,79,600 51,50,000 7. Return of income for the asst. yr. 1994-95, along with audited accounts was furnished by the assessee on 28th Nov., 1994 and the regular assessment under s. 143(3) was completed on 25th Jan., 1995 after detailed scrutiny and verification of share capital, share application money and cash credits. It is important to mention here that in this regular assessment not a single rupee, out of share capital or share application money or cash credits was found to be ungenuine. In other words, all these were accepted as genuine after due verification. 8.1 (a) Action under s. 132 of the IT Act, 1961, (hereinafter called the Act) was taken at the appellant's premises and also in another assessee's case styled as M/s Jalan Enterprises. (b) The search in appellant's case and in case of M/s Jalan Enterprises were carried on under separate and independent search warrants and separate P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the office of the AO) Name : Atulesh Jindal Designation: Karyaly, Aaikar Upper Ayukt (Nirdharn) Special Range, Allahabad (In Hindi) (There is following endorsment on the certified copy of this notice furnished by the assessee). For Gorakhpur Petro Oils Ltd. Signed Advocate 13.12.1995 8.4. The appellant furnished the return showing nil undisclosed income on 2nd Sept., 1996 and since this return was filed after the expiry of prescribed period, the AO ignored the same and proceeded to complete the block assessment under s. 144 of the Act after considering the assessee's various explanations/replies and ultimately completed the block assessment on 27th Nov., 1996 in which the total undisclosed income for the block period has been computed at Rs. 1,68,04,856. 8.5. The yearwise details of share capital and cash credits as well as business income which have been considered as undisclosed income are as under: Assessment years S. No. Description of undisclosed income 1993-94 1994-95 1995-96 1996-97 1. Share capital/share applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to the appellant was found or seized. 9. It was on the basis of above fact that the parties have argued their respective stand 10.1 The counsel for the assessee, after referring to the so-called notice under s. 158BC of the Act, copy of which has been placed on record, submitted that the assessee-company having been incorporated only on 3rd March, 1992, the period prior to it cannot be considered as the period falling within the "Block period" relevant to the block assessment in appellant's case. According to him, when the assessee had even not born, how the period prior to date of birth can be included in the block period. Pointing out the block period mentioned in the notice which reads as "block period 1-4-85 to 9-11-95" the counsel submitted that what the notice specifies is the block period as per definition under the Act and not the block period as relevant to the assessee's case and since the requirement of mentioning the correct assessment year in this case, the block period; is a mandatory prerequisite condition for a valid notice, non-compliance to this condition renders the notice as invalid. 10.2 The other defect in the notice under reference, as submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of block period. According to him, the block period has been rightly mentioned. Coming to the assessee's objection against addressing the notice to the principal officer, the counsel submitted that the principal officer as per s. 2(35) can be anybody either director or somebody else, who is managing the affairs of the company and, therefore, the notice under reference has been served on the principal officer. When the Bench asked the counsel as to on whom the notice in appellant's case is served, the counsel's reply was that "It has been served on the company". When Bench further asked the counsel about the AO having given any notice of his intention to treat the company itself as principal officer, the counsel's reply was that "It is not required". 11.2 The counsel further submitted that the notice in question was saved by the saving provisions of s. 292B of the Act and, therefore, was valid in the eye of law. 11.3 In support of above submissions the counsel has relied on the decisions in following cases: (a) National Insurance Co. Ltd. vs. CIT (1995) 127 CTR (Cal) 238 : (1995) 213 ITR 862 (Cal) (b) Sardar Harvinder Singh Sehgal Ors. vs. Asstt. CIT (1998) 144 CT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e party, and were held to be not applicable to the facts and circumstances which were similar to the facts and circumstances before us in this case. The relevant part as per para Nos. 13(iii) and 13(iv) reads as under : "National Insurance Co. Ltd. vs. CIT: In this case, the Hon'ble Court was dealing with a return of income filed by company which had not been signed by the managing director thereof. The assessee's case was that it was just as a defective return and validity thereof should not be affected in view of the provisions contained in s. 292B. The assessee's plea was rejected and the Hon'ble Court even went to hold that 'Sec. 292B has been inserted to provide against purely technical objections without substance coming in the way of the validity of the assessment proceedings. In the instant case, the original return was invalid as it was not signed and verified by the person competent to do so Obviously, reliance on this decision is misplaced by the Revenue. On the other hand, it goes to support the assessee's case that s. 292B is not meant to cover all omissions/defects even if such omissions/defects go to affect the assumption of jurisdiction to initiate proceedings u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved upon the assessee as per the provisions of s. 158BC is analogous/within the parameter of the requirements for a notice under s. 148 of the IT Act and, therefore, the law relating to the requirements for the validity of the notice under s. 148 and the case laws thereof, are fully applicable, so far as the requirements for a valid notice under s. 158BC of the Act are concerned. 3.3 Referring to the copy of the notice dt. 12th Dec., 1996 (Placed at page No. 1 of assessee's paper book A copy, certified by both the parties, was filed during the course of hearing also). The assessee's counsel submitted that the notice is vague and invalid because of the following illegalities in the notice: (i) According to the provisions of s. 282(2)(b), every notice issued, under the Act, in case of a company has to be addressed to the principal officer of the company and since the impugned notice has not been addressed in accordance with the requirement of this provision, the notice in question is vague and invalid; (ii) The notice is also silent as to the 'status' in which the return was required to be furnished. Referring to the fourth and fifth line of the first para (main body of the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the return of undisclosed income. (iv) From the period mentioned by the AO in the notice, the counsel for the assessee further submitted, that as per the provisions of s. 158B of the Act the block period is to include the period upto the date of commencement of search and not upto the "last date of search warrant executed in one's case" and, therefore, on this account also the AO cannot be said to have mentioned the block period/assessment year correctly. 3.4. In view of the above alleged illegalities claimed to have been committed in the notice under s. 158BC of the Act, the assessee's counsel submitted that the assessee-company was not able to understand as to whose, for which period and in which status, the return was required to be furnished. Explaining the illegalities further, the counsel submitted that since the AO has mentioned various status such as individual/HUF/Firm/Company/AOP/Body of individuals/local authority in the notice, it is clear that the AO was not satisfied as to from whom he was going to ask for a return and in whose case was going to make assessment for block period. The assessee's counsel further submitted that simply addressing the notice in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the assessee has no choice to claim a particular status. 3.9 The assessee's counsel further submitted that the illegalities pointed out in the notice under s. 158BC of the Act were not curable and consequently such notice cannot be cured/saved by the provisions of s. 292B of the Act and for this purpose relied on the Tribunal's decision in case of Prakash Spun Pipe, in asst. yr. 1990-91 ITA No. 1014/All/1994 dt. 1st Feb., 1998 and the relevant part is contained in paras 10 and 11 of the order which is reproduced as under : "10. Referring to the view taken by the learned CIT, that the AO had condoned the defect, with reference to s. 292B of the Act, we have no hesitation in saying that this provision of law is not a panacea, pulling the AO out of any and all sort of statutory non-compliances by him. Sec. 292B only says that a return, assessment notice, summons or other proceedings shall not become invalid merely by reasons of any mistake, defect or omission in such return, assessment notice, summons or other proceedings if these are in substance and effect in conformity with or according to the intent and purpose of this Act. Even a plain reading of this provision co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 4.2 In support of above submissions, the additional standing counsel has relied on the decisions in the case of Balchand vs. ITO (1969) 72 ITR 197 (SC) and Parameswara Ballakuraya vs. Commr. of Agrl. IT (1987) 164 ITR 536 (Ker). 5. We have considered the rival submissions, provisions of the Act necessary and relevant for deciding the issue in hand and various decisions relied upon by the parties and after careful consideration, are of the opinion that for the decision of the dispute raised by the appellant the following 3 questions have to be decided: (i) The first question, in our opinion, for our decision is with respect to the nature/status of the notice required to be served under s. 158BC of the Act, i.e., is such a notice akin/analogous and within the parameters of a notice under s. 148 of the Act? (ii) If so, can the points raised by the assessee's counsel amount to illegalities in the notice and consequently, have they rendered the notice illegal, bad in law and vague; (iii) If the notice is found to be vague, can the assessment for block period be quashed as a nullity? 6.1 To decide the first question we consider it necessary to discuss the provisions of ss. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for the assessment for that assessment year." (c) Sec. 148 of the Act: 148. "Issue of notice where income has escaped assessment: (1) Before making the assessment, reassessment or recomputation under s. 147, the AO shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall so far as may be, apply accordingly, as if such return were a return required to be furnished under s. 139. (2) The AO shall, before issuing any notice under this section record his reasons f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 AO, 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 (2) In computing the undisclosed income of the block period, the provisions of ss. 68, 69, 69A, 69B and 69C shall, so far as may be apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition." (iv) "Procedure for block assessment 158BC. Where any search has been conducted under s. 132 or books of account, other documents or assets are requisitioned under s. 132A, in the case of any person, then (a) the AO shall (i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th June, 1995, but before the 1st day of Jan., 1997, serve a notice to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-compliance of this requirement has resulted in setting aside of the assessment for proceeding from the stage of irregularity and it is so because after furnishing of a valid return the AO assumes a valid jurisdiction to proceed for making a regular assessment but as far as the other two schemes, i.e., the scheme provided for "assessment of escaped income in provisions of ss. 147, 148 and 149 and the scheme of "special procedure for assessment in search cases" as provided under Chapter XIV-B, i.e., under the provisions of ss. 158B, 158BA, 158BB and 158BC, etc., are concerned these go to show that (i) object of both the scheme is same, i.e., object is to tax the income which has not already been taxed. Under the former scheme, the requirement is that in the opinion of the AO the income should have escaped the assessment and search is not necessary and the prerequisite conditions to assume jurisdiction to tax the escaped income, are (i) limits with respect to the quantum of escaped income as provided under s. 147, (ii) service of valid notice under s. 148 upon the person and (iii) within the limitation prescribed under s. 149, whereas, in the later scheme the prerequisite mandato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the block period which is inclusive of 10 previous assessment years. The dispensation with the requirement of issuing of a notice under s. 148 of the Act and the fact that assessment of block period includes the assessment of 10 previous years leaves one in no doubt about the purpose, nature, status and effect of a notice under s. 158BC, which according to us is, (i) to get already completed assessment falling within the block period reopened and the AO is clothed with the power to make assessment of undisclosed income for those assessment years; (ii) If assessments have not been completed, then the AO gets clothed with the powers to make assessment resembling with the assessment framed under s. 147 of the Act; (iii) If return has been furnished, then the AO is clothed with the power to make assessment of undisclosed income. 6.4 The above provisions envisaged in the 2 schemes confirm beyond any doubt that: (1) Purpose of both the notices is same viz.: (i) A notice under s. 148 and under s. 158BC can be issued only after fulfillment of required conditions such as an escapement of income or action under s. 132 of the Act, as the case may be. (ii) In both the cases servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in our opinion, the Tribunal has been right in holding that the assessment in question was not valid in law." (iv) Madan Lal Agarwal vs. CIT : "It is now well-settled, and we do not consider it necessary, to advert to numerous authorities in this regard cited at the Bar, that issuing of a valid notice to the assessee under s. 148 of the IT Act within the period specified under s. 149 of the Act is a condition precedent to the validity of any assessment to be made against such assessee under s. 147 of the Act. Accordingly, where no such notice has been issued or if the notice issued is not valid or the same has not been served on the assessee in accordance with law, it will not be possible to sustain the eventual assessment made under s. 147 on the basis of such notice. We may also take it that where the notice issued to an assessee is vague, it would not be possible to rely upon it to sustain an assessment made under s. 147 of the IT Act." (v) CIT vs. Thayaballi Mulla Jeevaji Kapasi (Decd.): In this case the Hon'ble Supreme Court referred to its earlier decision in the case of Y. Narayan Chetty vs. ITO and held as under: "Service of notice prescribed by s. 34 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement to be fulfilled before the AO can proceed to make assessment of the block period or before the assessment proceedings for the block period are set into motion and consequently, the service of a notice under s. 158BC give rise to jurisdiction to the AO to proceed with the proceedings for assessment of block period. 8.2 Having held so, the next question for our decision is with respect to the validity of the notice but since there is no codified law on the point or circumstances under which a notice could be held to be invalid, we are of the opinion that for deciding the issue relating to the validity of the notice, it is necessary to consider the circumstances under which a notice can be termed as invalid or bad in law as per the law laid down in various cases relied upon by the parties and then decide the validity of the impugned notice in the light of preposition of law laid down therein. 9. We have heard the parties in relation to the submissions made for pointing out as to how the notice was illegal/invalid one and as to how it was not illegal/invalid one. 10.1 After considering the facts and circumstances of the case and the rival submissions we are of the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully, following the ratio of this decision, we hold that for a notice under s. 158BC to be a valid notice, the assessment year covered by the block period, in a given case, must also be specified clearly. 11.2 (a) For deciding the issue relating to the existence of illegalities in notice under attack, first of all we prefer to reproduce the notice, which runs as under: "Notice under s. 158BC of the IT Act, 1961. PAN/GIR NO..................... Block Period : The previous years relevant to ten assessment years preceding the P.Y. 1996-97 and includes the period upto the last date of search warrant executed in your case (as defined under s. 158B(a) upto 3.9.96. Income-tax Office : Central Circle - II Kanpur Date : 12th Dec., 1996 To, M/s Monga Metals (P) Ltd. 76/43, Gopal Market, Halsey Road, Kanpur, In pursuance of the provisions of s. 158 (sic) of the IT Act, 1961, you are requested to prepare a true and correct return of your total income including the disclosed income in respect of which as individual/HUF/Firm/Company/AOP/BOI, local authority are assessable for the block period mentioned s. 158B(a) of the IT Act, 1961. The return should be in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not the previous assessment years as in the case of notice under s. 148 or under s. 158BC. (ii) Further, so far as the requirement of addressing the notice as per the terms of s. 282, specifying the status and the "assessment year" and, prerequisite mandatory requirements for a valid notice under s. 142(1)(i) are concerned the same are as are for a notice under ss. 148 and 158BC, and consequently, the Revenues's plea, instead of advancing its interest, goes against it, meaning thereby that if the illegalities referred to for the purpose of notice under s. 148 are found in the notice under s. 142 (1)(i) also, then the notice under s. 142(1)(i) shall also be rendered bad in law. (iii) In view of the above discussions we are of the opinion that a notice under s. 158BC, as far as purpose and scope is concerned is not akin to a notice under s. 142(1)(i) but as far as the prerequisite mandatory requirements, for a notice to be valid, are concerned they are same for both the notices and consequently, even if Revenue's plea that a notice under s. 158BC is akin to a notice under s. 142(1)(i), then also, in view the illegalities pointed out in the forgoing part of the order, the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid decisions and for the reasons stated in case of Monga Metal Ltd., we hold the notice dt. 5th Dec., 1995 claimed to have been issued by the Revenue as a notice under s. 158BC of the Act, is bad in law and vague. Consequently, the block assessment framed in consequence of proceedings initiated by way of such notice and completed on 27th Nov., 1996 is also held to be bad in law and void ab initio. The AO, however, can proceed afresh from the stage of requirement of issue and service of a notice under s. 158BC, if the law so permits. 16. So far as Revenue's plea that the notice is saved by the provisions of s. 292B of the Act, we are of the opinion that it is not so because, in our opinion the notice in question could be said to be in conformity with sum and substance of the Act if it conforms to the mandatory requirements of law such as specification of correct assessment year, issuance of the notice and service thereof in accordance with provisions of law. Nothing else can be said to be the requirements of this notice and consequently, if the aforesaid requirements of law are not fulfilled then such a notice cannot be said to be in conformity with the sum and substance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of partner Sh. Kanhaya Lal. The assessee challenged the validity of service of notice under s. 148 and consequential assessment on the ground that Sh. Rajinder Kumar was neither the partner of assessees-firm nor the employee and also was not authorised to receive the notice. On the facts and circumstances the Hon'ble Tribunal, on appeal by the assessee, quashed the proceedings under s. 147 as well as, the consequential, assessment by observing as under: "Secs. 282 to 284 of the Act prescribe a procedure for service of notice in given circumstances. While s. 282 of the Act relates to service of notice when family is disrupted or firm, etc., is dissolved, s. 284 of the Act on the other hand, prescribes procedure of service of notice in the case of discontinued business. These sections, viz., 282 and 283 read as under: "282. Service of notice generally (1) A notice or requisition under this Act may be served on the person under the CPC, 1908 (5 of 1908). (2) Any such notice or requisition may be addressed (a) in the case of a firm or an HUF, to any member of the firm or to the manager or any adult member of the family; (b) in the case of a local authority or company, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression 'may' in sub-s. (1) of s. 282 of the Act would show that modes as prescribed are not exhaustive. As held by the Hon'ble Gujarat High Court in the case of CIT vs. Bhanji Kanji's Shop (1968) 68 ITR 416 (Guj), "It is permissible to have a notice sent in a way not mentioned in s. 63(1) of 1922 Act (corresponding to s. 282 of the IT Act, 1961)." It has also been so held by their Lordships of Bombay High Court in the case of Ramnivas Hanumanbux Somani vs. S. Venkataraman, ITO Anr. (1959) 37 ITR 329 (Bom). The main purpose is effective communication to the party to whom a notice has been sent so as to afford him an opportunity of being heard in order to avoid any injustice being done. The service is to be an effective one. Mere knowledge of the notice cannot be equated to the service. This is as held by their Lordships of Jammu Kashmir High Court in the case of B. Johar Forest Works vs. CIT (1977) 107 ITR 409 (J K). Thus, it has to be shown that the service of the notice was on the party either on himself in person or his authorised agent. The mere fact that in earlier occasions the notice has been received by person unconnected with the assessee would not make the notice val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in case of CIT vs. Stellar Investment Ltd., Civil appeal No. 7968 of 1996 (432440) dt. 20th July, 2000 copy placed on record. (ii) The counsel further submitted that all the receipts relating to 'Share capital', 'Share application money' and 'Cash credits' having been recorded in the regular books of account and there being no business during the period relevant for asst. yr. 1993-94, the same could not be treated as appellant's income and for this purpose has relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Bharat Engineering Construction Co. 1972 CTR (SC) 247 : (1972) 83 ITR 187 (SC), in the case of CIT vs. Smt. P.K. Noorjahan (1999) 155 CTR (SC) 509 and the decision reported as CIT vs. Smt. P.K. Noorjehan (1980) 15 CTR (Ker) 138 : (1980) 123 ITR 3 (Ker), the counsel further submitted that assessment for 1994-95 having been completed under s. 143(3) on 25th Jan., 1995, after detailed investigation regarding genuineness of 'Share Capital', 'share application money' and 'cash credits' as is evident from the observations of the AO in para 2 at p. 1 of the assessment order for block period which reads as "various details/explanations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant and its directors and, therefore, it is illegal and bad in law based on conjectures and surmises. (d) That none of the documents found and seized from the appellant and its director's premises contain any transaction or detail which was not found recorded in the regular books of account and, therefore, there was neither any reason for there being any undisclosed income nor the AO has determined on the basis of aforesaid documents; and, therefore, any undisclosed income determined on the basis of documents not found and seized from the appellant's or its director's premises without complying with the requirements of s. 158BD of the Act, is bad in law. (e) That the documents and income-tax files relating to various individuals, who had contributed towards appellant's share capital or had advanced loans by way of account payee crossed cheques were found and seized from the premises of M/s Jalan Enterprises with which the appellant or its directors had no connection whatsoever and, therefore, even the presumption under s. 132(4) of the Act could not be said to be available with the Revenue so as to attribute the same to be relating to the appellant. In that case the presump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 184 to 218 of the paper book, had filed the affidavits in case of 14 companies, documentary evidence in case of 28 companies confirming that all these companies were available at the given address (out of companies whose availability at the given address was doubted by the AO) and, therefore, there was no question of non-availability of those companies at the given addresses he, therefore, submitted there was no question of considering any company as bogus. The learned counsel further submitted that since all the companies were registered with the Registrar of Companies, the AO was specifically requested to make necessary enquiries with respect to genuineness of those companies from his office but failed to do so. According to him, the AO, without making enquiries from the Registrar of Companies and in view of the evidence furnished by the appellant, was not justified to term those companies as bogus and consequently considering their investments with the appellant as appellant's undisclosed income. (j) In support of aforesaid submissions, the assessee's counsel had relied on the decisions in following cases : (i) Sunder Agencies vs. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 87 ITR 349 (SC). 21. The additional standing counsel on the other hand, in addition to heavily relying on the block assessment order, pleaded that the Supreme Court decision in case of Stellar Investment Ltd. will not apply because the decision of the High Court in this vary case and reported as (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) was overruled by the Full Bench Decision of Delhi High Court itself in case of CIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del)(FB) 477 : (1994) 205 ITR 98 (Del)(FB) and, therefore, the decision in case of Stellar Investment Ltd. is no more a good law. According to him, the decision of the Hon'ble Supreme Court affirming the Delhi High Court's decision in case of Stellar Investments Ltd. has not overruled the decision of the Full Bench of the Delhi High Court in case of Sophia Finance Ltd. and therefore, the AO was quite justified in making enquiries under s. 68 of the Act. He further submitted that if on investigation, the 'share capital' or the 'share application money' or the 'Cash credits' are found to be bogus, then the AO would be justified in considering the same as undisclosed income even in those cases where the assessments stoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that the undisclosed income has to be on the basis of books of account/documents/valuables/assets found during the search and which have either not been disclosed in the returns furnished by that time or there is material to show that the same would not have been disclosed had there been no search and since in assessee's case nothing incriminating evidence or valuables or assets, which could be said to have not been disclosed or would not have been disclosed were found, nothing could be considered as assessee's undisclosed income. With regards to the record and material referred to and relied upon by the AO, the counsel submitted that the same was found from the premises of a third party M/s Jalan Enterprises, with which the appellant had no connection whatsoever and, therefore, computation of undisclosed income on the basis of that material was illegal and bad in law. Counsel further submitted that the cash found during the search had been duly accepted as explained. He, therefore, relied on decisions reported as (2000) 161 CTR (Guj) 323 : (2000) 244 ITR 333 (Guj) and (2000) 162 CTR (Guj) 435 : (2000) 245 ITR 488 (Guj). 22.1. When the counsel for the Revenue was asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lp of formation of an investment company. The CIT further held that the AO did not make enquiries with regard to the genuineness of the subscribers of the share capital. He thereupon set aside the order of assessment. The Tribunal reversed this decision for reasons which we need not go into. It is evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself." 23.3 From the decision of the Hon'ble High Court what is evident is that the findings of the Tribunal for setting aside the order under s. 263 of the Act were found to be the "findings of fact" and that is why the petition under s. 256(2) of the Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be referred by way of petition under s. 256(1) of the Act, it has to be taken that the question stated in petition under s. 256(2) was the same as was before the Tribunal (in CIT's petition under s. 256(1) of the Act. 23.7 On the aforesaid facts, the Hon'ble Full Bench of the High Court of Delhi, at pp. 109 and 110 held as under: "In our opinion, a question of law does arise and we, therefore, direct the Tribunal to state the case and refer the following reframed question to the Court: "Was the Tribunal right in setting aside the order of the CIT under s. 263 of the IT Act and in holding that the assessment order of the assessee could not be said to be erroneous or prejudicial to the Revenue?" 23.8 The Hon'ble High Court before arriving at the findings and after considering the nature of enquiries liable to be conducted for the purpose of s. 68 of the Act, at pp. 104 and 105, observed as under: "If the amount credited is a capital receipt, then it cannot be taxed but it is for the ITO to be satisfied that the true nature of the receipt is that of capital. Merely because the company chooses to show the receipt of the money as capital, it does not preclude the ITO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee which is liable to be taxed in the previous year in which the entry is made in the books of account of the assessee". 23.9 The Hon'ble High Court after having observed as above, went on to consider the decision of Delhi High Court itself in the case of CIT vs. Stellar Investment Ltd. and at p. 105 observed as under: "In the case of CIT vs. Stellar Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del), the ITO had accepted the increased subscribed share capital. Sec. 68 of the Act was not referred to and the observations in the said judgment cannot mean that the ITO cannot or should not go into the question as to whether the alleged shareholders actually existed or not. If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt and to that extent the observations in the case of CIT vs. Stellar Investment Ltd., are correct but if, on the other hand, the assessee offers no explanation at all or the explanation offered is not satisfactory then the provisions of s. 68 may be invoked. In the latter case s. 68, being a substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guish the decision of Hon'ble Supreme Court in case of Stellar Investment Ltd. on the plea that in that decision the CIT had not referred to s. 68 of the Act and, therefore, the decision of Hon'ble Supreme Court was only on the facts of the case and, therefore, decision of Full Bench of Delhi High Court in case of Sophia Finance Ltd. shall survive, we are unable to accept this interpretation of the three decisions because, in case of Stellar Investment Ltd., the conclusion of the CIT that "the AO did not carry out a detailed investigation inasmuch as there had been a device of converting black money into white by issuing shares with the help of formation of an investment company. The CIT further held that the AO did not make enquiries with regard to the genuineness of the subscribers of the share capital", shows that the reason for setting aside the assessment order was the failure of the AO to carry out detailed investigations with regard to the genuineness of the 'share capital' and the 'subscribers' of the 'share capital', which in other words, was to investigate or make inquiries with respect to the genuineness of the credits found recorded in the books of M/s Stellar Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share capital can be assessed in the hands of the company itself" have been revived and consequently we are of the opinion that the decision in the case of Stellar Investment Ltd. still survives, though, in our opinion subject to the fact that it cannot be applied blindly or without making inquiries, though, of course, to the limited extent (as discussed hereunder) under s. 68 of the Act: (i) In view of the above we are of the opinion that the decision in case of M/s Stellar Investments Ltd. still survives but to the extent that it applies to a case of a public limited company only and still not blindly because, in our opinion, in that case also the company has to comply with the requirements of s. 68 to the following extent: (a) That the credits found recorded in its books of account, in fact, were on account of 'share capital' or 'share application money'; and (b) That the same had been received through proper channels, i.e., along with a proper 'share allotment application' or 'call notice', as the case may be. 23.12 (i) It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge of the existence/genuineness of the persons whom they want to be shareholders of such company and, therefore, they cannot claim exemption as may be available to a public limited company. Consequently, we are of the opinion that in the case of privated limited company the decision in the case of Stellar Investment Co. can be applied only if it succeeds in establishing : (a) the existence/identity of the applicant paying share application money; (b) Capacity of the person concerned subscriber; (c) Genuineness of the transaction In other words, in case of a privated limited company, the company has to discharge the onus put under s. 68 of the Act, i.e., a privated limited company has to prove all the three aforesaid ingredients before pleading that the said share application money cannot be considered as income under s. 68 of the Act. (iv) So far as the present case is concerned, we are, therefore, of the opinion that the same being of a public limited company" that the provisions of s. 263 have not been validly invoked in this case by ignoring the material fact that the AO had failed to discharge his dues regarding the investigation with regard to the genuineness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate limited company because in that case the founders or the persons in control of the affairs of the company are in the complete knowledge of the persons whom they prefer to make shareholders. In other words it is the only nature of inquiry to be made by the AO and not his powers under s. 68 of the Act, which differs from case to case. 23.14 In other words, if the public limited company is able to give a satisfactory explanation to establish that the 'share capital' or the 'share application money' had been received through proper channel, i.e., through application for allotment of shares or through call notice, as the case may be, then irrespective of the fact that the share capital or share application money might have been contributed by someone else (on behalf of the concerned subscriber) the amount cannot be considered as assessee's income under s. 68 of the Act. 23.15 In view of the above, we are of the opinion that whether the decision in the case of Stellar Investment Ltd. stands overruled by the Full Bench decision of the Hon'ble Delhi High Court in the case of CIT vs. Sophia Finance Ltd. or survives as a result of decision of the Hon'ble Supreme Court, the law, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons was received during the period relevant to asst. yr. 1994-95 (para 8.5 of this order) and the assessment for the asst. yr. 1994-95 having been completed under s. 143(3) of the Act after making detailed enquiries as to the genuineness of 'share capital', 'share application money', the same have to be taken as having been disclosed and accepted prior to the date of search and, therefore, by virtue of the provisions of s. 15BB(1)(d) of the Act and the various decisions relied upon by the counsel for the assessee already listed by us, we are of the opinion that the said share capital/share application money amounting to Rs. 12,60,000 and of Rs. 12,33,000 received from corporate bodies and non-corporate persons, respectively, during the periods relevant to asst. yr. 1994-95, cannot be appellant's undisclosed income and, therefore, we delete the same. For the reasons as stated above we delete the undisclosed income of Rs. 11,83,000 computed by the AO by considering the cash credits to this extent and found credited in appellant's books of account for the asst. yr. 1994-95 as ungenuine. 23.18 Further, since the previous year relevant to the asst. yr. 1996-97 (which was to end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that undisclosed income has to be computed only on the basis of books of account and documents found and seized during the course of search, cannot be considered as the appellant's undisclosed income by virtue of the s. 158BB(1)(d) of the Act. 23.21 In view of the above discussion and the various decisions relied upon by the learned counsel for the assessee as well as the law relating to the concept of 'undisclosed income 'for the purpose of Chapter XIV-B pronounced by various Courts as well as the Tribunal and also the provisions of s. 158BB(1)(d) of the Act, we are of the opinion that the impugned 'share capital', 'share application money' and the 'unsecured loans/cash credits' found credited in the appellant's regular books of account maintained for the periods relevant to the asst. yrs. 1993-94 to 1996-97 (upto 9th Nov., 1995) cannot be considered as appellant's undisclosed income for the purpose of Chapter XIV-B of the Act and consequently, we direct the exclusion of the same from the appellant's undisclosed income. 24. With regard to the addition in trading account amounting to Rs. 1,28,856 as appellant's undisclosed income, the counsel for the assessee has submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reversed by the Hon'ble High Court or the Hon'ble Supreme Court, as the case may be, then the amounts found credited in the appellant's books of account under the head 'share capital', 'share application money' and 'unsecured loans'/cash credits during the periods relevant to the asst. yrs. 1993-94 to 1996-97 (upto 9th Nov., 1995) as detailed in the chart reproduced in para 8.5 of this Order shall stand excluded from the ambit of undisclosed income for the purpose of Chapter XIV-B of the Act and amount equal to the value of 10,000 liters of raw material i.e. Rs. 60,000 shall also stand excluded from the ambit of undisclosed income computed as a result of addition in trading account and in that case assessee's appeal shall be deemed to have been partly allowed. P. S. Kalsian, A.M. : 29th Jan., 2001 I have gone through the order proposed by my learned Brother but after going through order and discussions with learned Brother I am unable to agree with the conclusion of my learned Brother on the following issues: 2. First issue is whether the notice issued by the AO under s. 158BC is valid. 2.1 Search under s. 132 of the IT Act, was conducted on the premises of the assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provision of s. 292B. The learned Departmental Representative referred to the decisions of the High Court in: (i) National Insurance Co. Ltd. vs. CIT (1995) 127 CTR (Cal) 238 : (1995) 213 ITR 862 (Cal) (ii) Sardar Harvinder Singh Sehgal Ors. vs. Asstt. CIT Ors. (1998) 144 CTR (Gau) 626 : (1997) 227 ITR 512 (Gau) (iii) The English Scottish Jt. Co-Operative Wholesale Society Ltd. vs. CIT (1945) 13 ITR 295 (Cal) It is also mentioned by the learned Departmental Representative that the AO has mentioned the block period as per provision of s. 158BC in the notice and therefore, there was no invalidity in the notice. 3. I have considered the rival submission, facts of the case and material on records. The copy of the notice has been reproduced at p. 11 of my learned Brother. Under s. 158B(a) the block period has been defined. The block period means the period of previous years preceding the previous year in which search was conducted under s. 132 and includes the previous year in which such search was conducted, the period upto the date of commencement of such search. 3.1 The AO has required the assessee to furnish the return of income under s. 158BC for the block ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts: 4. In the case of CIT vs. Anand Co. (1994) 207 ITR 418 (Cal), the Hon'ble Calcutta High Court held as under as per headnotes (A): "The Revenue authorities must act uninfluenced by procedural technicalities in guarding the public exchequer as well as the taxpayer against undue jeopardy by inflexible interpretation of the procedural laws except where the law puts absolute fetters without leaving any scope for relaxation. It is precisely from that awareness that the provisions of s. 292B of the IT Act, 1961, were introduced and grafted as part of the statute enjoining that procedural rigidity should not stand in the way of substance of the procedure." 4.1 In this case reassessment was completed by AO pursuant to the notice under s. 148 r/w s. 147(b). In first appeal, assessee raised objection that notice was not valid as notice did not contain distinguished signature of the ITO. The CIT(A) did not give finding on these issues as the assessment itself was quashed on the ground of want of initial jurisdiction. In second appeal, the Tribunal also held that the notice did not bear authentic signature of the ITO The Hon'ble Calcutta High Court held as under: "Held, that there s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices under s. 148 in the name of person who has expired. All the six notices under s. 148 were received by Sh. C.B. Tahliyani for the deceased assessee. Smt. Kaushalya Bai wife of deceased filed return of income for all the six years in response to notices under s. 148 of the IT Act. Kaushalya Bai, widow of deceased, participated in reassessment proceeding. In this case, the issue considered by the Hon'ble High Court was whether the Tribunal was justified in holding even with the aid of s. 292B of the IT Act that the reassessment proceedings were valid, when the notice under s. 148 was issued in the name of the dead person and was served upon a person not shown to be authorised on behalf of the legal representative of the assessee. The Hon'ble Madhya Pradesh High Court held as under: "That since the widow of the deceased had already participated in the proceedings notwithstanding the fact that notice was issued in the name of the dead person, the defect in the notice stood automatically cured." 4.5 In the case of Ganeshi Lal Sons Anr. vs. ITO Ors. (1981) 130 ITR 846 (All) the Hon'ble Allahabad High Court also held that provisions of s. 282 are permissive in nature and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om). The Hon'ble High Court considered the validity of service of notice on manager of assessee who has no written authority to accept service. The Hon'ble Bombay High Court held as under: "The mode of service of notice or requisition provided in s. 63(1) of the IT Act, 1922, is not exhaustive and it is permissible to have the notice effected in a way other than the two modes mentioned in s. 63(1) of the IT Act, 1922, (which is corresponding to s. 282 of the IT Act 1961). Even if there is a procedural irregularity in serving to notice (e.g., serving the notice on a manager who has no written authority to accept service) if the assessee admits that he has received the notice and asks for adjournment, the assessee cannot subsequently be allowed to plead that there was no valid and legal service." In this case, though the manager had no written authority to receive the notice, but Tribunal came to the conclusion that on the facts and the circumstances of the case and considering the conduct of the assessee and the manager, recorded a finding that the manager had such implied authority. This finding of fact of the Tribunal was not interfered by the Hon'ble High Court. In this case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t even if there was any procedural irregularity in the service of the notice of reassessment if assessee admits that he had received the notice, the contention on behalf of the assessee that notice was improperly served must be rejected. In that case, the notice for reassessment under s. 34 of the IT Act, 1922, was served on a temporary agent of any assessee who was not authorised agent for receipt of notice on behalf of the assessee. The assessee filed the return in pursuance of the notice and order of reassessment was passed. In appeal against the reassessment order, the assessee had contended that the notice of reassessment have been improperly served and so the order of reassessment was bad in law. It was held by the Hon'ble Gujarat High Court that in view of the fact that the return had been filed by the assessee in pursuance of the notice served on temporary employee, it was clear that the notice had been received by him. The reassessment proceedings, therefore, have been properly instituted. 6.4 In the case of Mohammed Idrees Barry Co. vs. CIT (1957) 32 ITR 180 (Lahore), notice under s. 22(2) of the IT Act, 1922, calling upon an unregistered firm to file a return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Madras High Court after considering the facts and the circumstances of the case held as under: "That in the instant case, the Tribunal had found that there was no exclusive agent for service of notice and more than one person had been acting as an agent of the assessee. The assessee did not raise any objection at any time before the ITO that the notice was not served on the assessee personally or was not served on the agent who was empowered to receive notice. The objection raised regarding the validity of the service of notice had lost significance when the assessee acted upon the notice and filed the return in pursuance of the reassessment proceedings. The reassessment proceedings were valid." It is clear from the decision of the various High Courts that if the assessee has complied with the notice issued by the AO for furnishing of return of income, then even if the notice is not served directly on assessee but served on some other person who handed over notice to the assessee, then the presumption is that notice has been served on assessee in view of the ratio mentioned in abovementioned various decisions. 7. In the case of assessee before us, company has filed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id. Thus, issue regarding waiver of procedural irregularity in the service of notice by the assessee was not considered by Hon'ble High Court in the cases cited by learned counsel on behalf of assessee and were also not considered by the Tribunal in the case of Monga Metal (P) Ltd. 9. Now the grounds of appeal raised by the assessee-company are considered on merits. Various grounds of appeal have been raised by the assessee-company against the following additions as the undisclosed income in the block assessment under s. 158BC for the period 1st April, 1992 to 31st March, 1995: (Financial year) 1 (a) 24,32,000 1992-93 (para 43 of the (b) 12,33,000 1993-94 assessment order) (c) 44,000 1994-95 37,09,000 The abovementioned additions of Rs. 37,09,000 at S. No. I(a), (b) and (c) have been made by the AO as the assessee failed to prove the genuineness of subscription of share capital by 34 individuals which were treated as unexplained cash credit in the case of assessee-company by the AO. (Financial year) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of about Rs. 90,000 by way of share capital in the name of each person was found by the AO. The AO also noticed that these persons have issued cheques as share application money which are the only transactions made by them. In fact, pass-books of some of these persons have also been found in the premises of a group company. Most of these persons have deposited cash in the bank account just before the issue of cheques in subscription to the shares of the assessee-company. For the purpose of opening bank account most of these persons were introduced by the members of the Jalan Group and sometimes even the cash deposits in their account have been made by one of the directors of the assessee-company. The income-tax records of these persons seized from the premises of Jalan Enterprises revealed that their cases have been processed under s. 143(1)(a) of the IT Act. The returns of income of these persons were filed on the same day, the cheques/drafts shown to have been issued by these persons towards share application money were also in same series of serial numbers. The AO came to the conclusion that all these bogus files were maintained by the directors of the assessee-company bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that summons under s. 131 can be issued to all shareholders and creditors who are within 320 kms. from Allahabad at the cost of the assessee and in case of others, inquiry can be instituted by issuing commission. It was also stated before the AO that identity of the person cannot be doubted in the light of Permanent Account Number, filing of income-tax return by them, their bank account, etc. The assessee also submitted vide his letter dt. 18th Aug., 1996, letters and affidavits from 17 shareholders out of 34 shareholders mentioned in query No. 01 of show cause dt. 31st May, 1996. The AO also issued summons under s. 131 as requested by the assessee to 34 shareholders mentioned in the chart as per Annexure 1 of the assessment order. The summons were issued to these persons by Regd. Post A.D. from 14th Aug., 1996 to 3rd Sept., 1997. Summons were issued to these 34 shareholders on the addresses given by them in their share application forms. The same addresses were given by the assessee also. However, the assessee also took the plea by letter dt. 19th Aug., 1996 that the address at which summons have been issued were not full and complete. The AO came to the conclusion as me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal build up cases and for the purposes of introduction of unaccounted money of assessee by building up fictitious capital in bogus names. The assessee has no explanation to offer on various evidences found e.g. (a) Recovery of original income-tax files created in the names of various persons containing the original documents e.g. acknowledgement of filing return, orders obtained under s. 143(1)(a), original income-tax deposit challans, etc. from the premises of Jalan Enterprises, a group concern. (b) Various evidences showing that captive income-tax files were maintained by directors of assessee-company e.g. opening of bank accounts in various names with the help of introduction from directors of the assessee-company, deposits of money in bank account in some cases by directors of the company, etc. (c) Clinching evidence in the form of seized paper in File 2 of Annexure 'A' which is a consolidated bill raised by advocate in respect of these various bogus income-tax files created for capital build up purposes, which shows that consolidated charges were paid by the members of Jalan family to advocate for creating these bogus income-tax files. (d) Evidence showing that bank a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements, and in the absence of any supporting evidence, the same need not always be accepted as correct. In the present case, there is adequate evidence on the contrary which shows that the contents of the affidavits are not correct. Hence no reliance can be placed on the affidavits filed by the assessee and the same are, therefore, rejected. 39. The assessee has further contended that since all the said 34 sharesholders are income-tax assessees having PANs their existence and creditworthiness cannot be doubted. In this regard it is submitted that from the ample evidence found during the search and as discussed in details in the preceding paragraphs, it is evident that bogus income-tax files have been created by the assessee in the names of various fictitious persons and the said 34 cases are only capital building up cases. It is actually the unaccounted money of the assessee which has been introduced in the names of the so-called individual shareholders. Despite adequate opportunities allowed, even the existence of these shareholders could not be established by the assessee. On the other hand, the summons issued by registered post were returned unserved in most of the cases showi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l buildup cases, when actually the said shareholders do not exist and it is assessee's own money which has been introduced in the names of these various bogus persons. 42. As per the details given in chart placed at Annexure "1" of assessment order, the total investment in shares in these bogus names comes to Rs. 37,09,000 whose break-up financial yearwise is as under: (Financial year) (Rs.) 1992-93 24,32,000 1993-94 12,33,000 1994-95 44,000 Total : 37,09,000 43. As per the detailed discussion in the preceding paragraphs (paras 12 to 42) above and on the basis of evidence found during the course of search and other material and information as is available with the AO, the sum of Rs. 37,09,000 credited in the books of the assessee is held as unexplained cash credits as the identity and the creditworthiness of the various creditors (shareholders) could not be established by the assessee. The assessee's explanation regarding the said sum of Rs. 37,09,000 credited in the books of the assessee is not found satisfactory and is rejected. Accordingly, the sum of Rs. 24,32,000 falling in financial year 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he number of share applied for has not been mentioned. (viii) Share application forms do not bear any serial number. (ix) Most of the demand drafts sent by the investors are not in serial order. (x) Addresses of many of the applicants are the same. (xi) In many cases it was seen that drafts were obtained from the banks where applicants had no account. These drafts are in excess of Rs. 50,000 and, therefore, could not have been issued by bank in cash. (xii) Share application forms are simply addressed to director, Delhi. Obviously application forms cannot be sent on such vague address. (xiii) Share application forms sent by investors from New Delhi mentioned about company's prospectus, which as per company's admission was not sent. (xiv) As no correspondence in respect of share transaction other than the share application is available with the company, it only implies that no letter of allotment or even share certificate was issued to the holders." 13. On the basis of above discrepancies noted during the course of search, the AO got the matter investigated through the Investigation Wing of the Department at Delhi to verify the genuineness of the companies/parties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disclose the name of the advocate who brought various affidavits before the Notary Public for signature. The Notary Public even did not enter the fact about attestations of 50 affidavits and the names and addresses of the deponents in the register which a Notary Public is required to maintain in respect of affidavits attested by him. Notary Public admitted that the directors of the companies were not personally present before him as deponents signing the affidavits. In order to verify the genuineness of the affidavits, the AO issued registered letters in the name of deponents in a certain cases as a test-check. A copy of the affidavit signed by the deponent was also enclosed with the letter and information was called for under s. 133(6) of the IT Act. The AO wanted to know from the deponents whether the affidavits were signed by them but all the letters written by the AO to the deponents were returned unserved by the postal authorities. The details of letters to 5 deponents have been mentioned by the AO in para 62 p. 60 of the assessment order. The AO came to the conclusion that various affidavits submitted by the assessee were bogus and not reliable. The AO, therefore, rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to what were the addresses on which the money orders to said companies were sent. The AO considered that the possibility that the said money orders were collected by the same person from the post office at Delhi could not have been ruled out. The AO also observed that the signature of the payee were in different link and the name of the company on whose behalf money orders were allegedly received were in different ink in a few cases. It was considered as very unusual by the AO as the persons receiving the money order is likely to use the same pen acknowledging the receipt. However, in order to again verify the genuineness of the evidence submitted by the assessee regarding the receipt of money orders by the companies, the AO again issued commission under s. 131 of the IT Act on 19th Aug., 1996, in favour of the ADI (Inv.), Unit-III, New Delhi, for examining the directors/signatories of the said 11 companies under s. 131 of the IT Act. Accordingly, summons were issued by the ADIT (Inv.), Unit-III, to the said 11 persons. Summons were returned by the postal authorities in case of 6 companies mentioned in para 68 of the assessment order. The AO came to the conclusion that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t mean that the company did not exist or that the transactions are sham. It was again stated by the assessee that the genuineness and creditworthiness of the companies are established because they are regularly assessed to tax, they have bank accounts and they have been incorporated with the Registrar of Companies. 16. After considering the reply of the assessee and decision of the Hon'ble Delhi High Court in CIT vs. Sophia Finance Ltd. (1993) 113 CTR (Del) 472 : (1994) 205 ITR 98 (Del), AO came to the conclusion that corporate shareholders are not identified and it is not established that they have invested money in the purchase of shares of the assessee-company. In paras 77 and 78.2 p. 73 of the assessment order, AO has held as under: "77. In the case of the assessee, as per detailed discussion made in the preceding paragraphs, it is clear that the shareholders are not identified and it is not established that they have invested money in the purchase of shares of the assessee-company. The ratio of the said full Bench decision of the Delhi High Court is, therefore, applicable in the case of the assessee and invoking the provisions of s. 68 of the IT Act, the said sum of Rs. 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly such cash credits can be considered in the block period which are recorded in duplicate sets of books of account but the cash credit recorded in regular books of account cannot be considered as undisclosed income of the block period because they are disclosed in the books of account. Share capital of Rs. 93,09,600 was also disclosed in the regular books of account and return of income and documents already filed before the search. Once the facts are accepted by the AO at the time of regular assessment, it was not for the AO to reopen the issue without fresh material. The learned counsel stated that the assessment for asst. yr. 1994-95 has been completed and same evidence cannot be examined by the AO which has been admitted at the time of regular assessment. The learned counsel therefore, referred to the Supreme Court decision in CIT vs. Bharat Engineering Construction Co. 1972 CTR (SC) 247 : (1972) 83 ITR 187 (SC). For asst. yr. 1993-94, the company has not started production and the factory was under construction, and the share capital receipt during that period could not be treated as assessee's undisclosed income from asst. yr. 1993-94. According to learned counsel the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to learned Departmental Representative the facts in the case of CIT vs. Stellar Investment Ltd. were different from the fact of the case reported in CIT vs. Sophia Finance Ltd.. According to learned Departmental Representative case of Sophia Finance Ltd. lays down good law. The learned Departmental Representative on behalf of the Department, therefore, relied on the finding given by the AO in the assessment order. 19. Learned counsel of the assessee further, pointed out that certain files were found from the premises of Jalan Enterprises and not from the premises of assessee-company. He has referred to para 12 of the assessment order. According to learned counsel maintenance of files by M/s Jalan Enterprises does not prove that the assessee-company has introduced the bogus cash credit. Though subsequent inquiries were made by the AO but no document was found from the premises of the assessee-company. The learned counsel referred to certain pages in the paper book which contains details of shareholders, their confirmation regarding the purchase of shares. The learned counsel has furnished list of individual shareholders whose files were found from the premises of M/s Jalan Ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and this company was incorporated in May, 1990. Learned counsel stated that this company has filed income-tax return and assessed to tax. Bansal Consultants (P) Ltd. was incorporated in 1992 and applied for 10,000 shares. 20. I have considered facts of the case, rival submissions and material on record. The issue to be considered first, is whether the amount of share capital can be considered as undisclosed income of the assessee. This issue arose before the Hon'ble Delhi High Court in the case of CIT vs. Stellar Investment Ltd. In the case of Stellar Investment Ltd., the assessee-company had increased subscribed capital which was accepted by the AO. The CIT in revision under s. 263 of the IT Act set aside the order of assessment being of the view that there had been a device of converting black money into white by issuing shares with the help of formation of an investment company and that the AO did not make any inquiry with regard to genuineness of the subscribers to the share capital. On appeal the Tribunal reversed the decision of the CIT and restored the order of the AO. It seems that the CIT requested the Tribunal to refer the question of law whether the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case, the Tribunal was right in setting aside the order of the CIT under s. 263 of IT Act by holding that assessment order of the company cannot be said to be erroneous and hence, prejudicial to Revenue." The Tribunal dismissed reference application under s. 256 on the ground that the question as projected by the Revenue is not a referable question of law. The CIT filed a petition under s. 256(2) of the IT Act before the Hon'ble Delhi High Court. When the petition under s. 256(2) came up for hearing before the Division Bench of the Court, as the correctness of the observations of the Division Bench of the Delhi High Court in the case of Stellar Investment Ltd. were doubted on the ground that provisions of s. 68 of the IT Act were not referred to in the case of Sophia Investment Ltd. It was argued that s. 68 would come into play if the ITO finds on inquiry that the shareholders were fictitious persons. In view of the submissions of the Revenue's counsel which were construed running contrary to the ratio of the judgment in Sophia Investment Ltd.'s, the case was referred to the Full Bench. After hearing the reival submissions and submission of Sri M.S. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has issued shares on the receipt of share application money then the amount so received would be credited in the books of account of the company. The ITO would be entitled to enquire, and it would indeed be his duty to do so, whether the alleged shareholders do, in fact, exist or not. If the shareholders exist then, possibly, no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. The use of the words "may be charged" in s. 68 clearly indicates that the ITO would then have the jurisdiction, if the facts so warrant, to treat such a credit to be the income of the assessee. It is neither necessary nor desirable to give examples to indicate under what circumstances s. 68 of the Act can or cannot be invoked. What is clear, however, is that s. 68 clearly permits an ITO to make enquiries with regard to the nature and source of any or all the sums credited in the books of account of the company irrespective of the nomenclature or the source indicated by the assessee. In other words, the truthfulness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to inquire and it would indeed be his duty to do so whether the alleged shareholder do in fact exist or not. If the AO finds that the alleged shareholder did not exist then in fact it would mean there is no valid issuance of share capital. Share cannot be issued in the name of non-existing persons. The use of the words "may be charged" in s. 68 clearly indicates that the AO would have the jurisdiction if the facts so warrant, to treat such a credit to be income of the assessee. (iv) In the case of Stellar Investment Ltd., s. 68 of the IT Act was not referred to. Full Bench of the Delhi High Court, in the case of Sophia Finance Ltd. clarified that the observation in the said judgment cannot mean that the ITO cannot or should not go into the question as to whether the alleged shareholder actually exists or not. It is, therefore, clear from the decision of the Delhi High Court (Full Bench) in the case of Sophia Finance Ltd. that the AO has the jurisdiction rather indeed it is his duty to inquire whether the shareholders shown by the assessee-company in its records exist or not. If the AO after taking into consideration of the facts and circumstances of the case is not sati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sept., 1996. The AO has made addition of share capital in the name of 34 individual shareholders and other company shareholders which were not considered as genuine by the AO 22. The AO made addition of Rs. 37,09,000 on account of share capital issued to 34 persons (individuals) in the following Financial Years: Financial year Rs. 1992-93 24,32,000 1993-94 12,33,000 1994-95 44,000 The undisclosed income of Rs. 37,09,000 has been determined by the AO on the basis of documents/files seized from the premises of Jalan Enterprises, Gorakhpur also. These files are original income-tax files of various persons who have subscribed to the share capital issued by the assessee-company. Bank pass books of some of these persons was also found from the premises of a group company. The AO found that these persons (shareholders) have shown receipt of small amounts of salary. They have large family but have shown low withdrawals. They have shown source of income as business in their return but no nature of business was disclosed. These persons have deposited cash in their bank accounts before issue of cheque for subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, entry in the books of account or other documents or transactions represents wholly or partly income or property which has not been or would not have been declared for the purpose of this Act". Sec. 158BB(2) provides that in computing the undisclosed income for the block period, the provisions of ss. 68, 69, 69A, 69B and 69C shall, so far as may be, apply and reference to financial year under these sections shall be construed as reference to the block previous year falling in the block period including the previous year ended with the date of search. In view of the provisions of sub-s. (2) of s. 158BB, it is clear that the cash credits, unexplained investments, etc. can be considered as undisclosed income if the facts and circumstances of the case justify. In the case of the assessee-company before us, the AO has found certain income-tax files of certain persons from the office of Jalan Enterprises in whose case search was also conducted under s. 132 of the IT Act. Under s. 158BD, if the AO is satisfied that any undisclosed income belongs to any person other than the person with respect to whom search was made under s. 132 then the books of account, other documents or assets se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO on the date of assessment order but he cannot use the same because the same was not available with him on the date of search and was not found during the course of search. There is no prohibition in law to prohibit the AO to use such material which is available with him on the date of assessment order, if such material is gathered by further inquiry with reference to documents or material found during search. 24. In the case of assessee-company before us, the material in the shape of income-tax return, bank pass-book, etc, of shareholders shown in the books of assessee-company were found from the premises of M/s Jalan Enterprises. The AO made further inquiries as finding of such material relating to income-tax return or bank pass-book of various shareholders in the assessee-company at the premises of Jalan Enterprises was very unusual. The AO even issued summons to the shareholders but summons in the case of 22 shareholders were returned unserved by postal authorities with the remark such as 'incomplete address, could not be located, not known, no such address, etc. The assessee-company is a public limited company. Most of the public limited companies issue advertisement off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Sophia Finance Ltd. the Hon'ble Delhi High Court Full Bench have laid down proposition of law that if the assessee offers no explanation or the explanation offered is not satisfactory then the provisions of s. 68 may be invoked. Sec. 68 is a substantive section and empowers the AO to treat such sum, the nature and source of which has not been satisfactorily explained, as income of the assessee. Under s. 68 if the AO is not satisfied about the (i) identity of the payee (ii) creditworthiness of the payee and (iii) genuineness of the transaction, then the AO can include such amount shown in the name of such persons in the total income of the assessee under s. 68 as observed by the Delhi High in the case of CIT vs. Sophia Finance Ltd. It would be immaterial as to whether the amount so credited is given the colour of a loan or a sum representing sale proceeds or even receipt of share application money. The Hon'ble Delhi High Court further held as under (at p. 104 of 205 ITR): "the use of the words 'any sum found credited in the books' in s. 68 indicates that the said section is very widely worded and an ITO is not precluded from making an inquiry as to the true nature and source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO, particularly in paras 44 to 46 of the assessment order, the AO asked the assessee to explain why the share application money received from bogus companies should not be treated as unexplained cash credit and added as assessee's income from undisclosed sources. It was contended by the assessee that the query made by the AO was outside the scope and purview of Chapter XIV-B of the IT Act. The AO rejected the contention of the assessee-company. The assessee submitted 50 affidavits of various corporate shareholders and also submitted income-tax orders, acknowledgment, confirmation, memorandum and articles of association with certificate of incorporation, balance sheet, P L a/c and bank statement. The AO had made inquiries through Inspector of the Investigation Wing of IT Department at Delhi about the existence of these companies. The inquiry made through Investigation Wing at Delhi revealed that 59 companies did not have their offices at the addresses given and that those companies did not exist. Summons under s. 131 of IT Act were issued to 9 companies on the addresses given by the assessee-company by registered post, but the summons were returned by the postal authorities wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t order. 28. It was claimed by the assessee-company before the AO that addresses of the corporate shareholders given by the assessee were the last known addresses and if the concerned persons have shifted from their last known addresses, no adverse view should be taken. The AO noted that the share capital of Rs. 51 lac was subscribed during the financial year 1995-96 before the date of search. Local inquiries were conducted towards the end of 1995 and beginning of 1996. The AO pointed out that if the companies had ever existed on the given addresses, the occupants of the premises would have remembered the existence of those companies but the occupants of the premises had denied the existence of the companies as mentioned in para 59 of the assessment order. The AO also observed that the assessee has filed 50 affidavits on behalf of those companies on 20th July, 1996 which were all attested on 19th July, 1996 and the same addresses were given which shows there was no change in the addresses of companies. 28.1 The assessee has filed 50 affidavits of the companies along with the letter dt. 27th July, 1996. These affidavits were dt. 17th July, 1996 and were attested by the Notary Pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 143(1)(a) does not mean that existence of the so-called companies was accepted by the Department and source of capital shown in their hands was also accepted. 28.3 It was claimed that the assessee has also sent moneyorders on random basis to various companies to reaffirm the addresses and their identity. It was claimed that Post and Telegraph Department had paid petty amount sent by moneyorders without any difficulty and the list of such companies was submitted to the AO as mentioned by the AO in para 66 p. 64 of the assessment order. The AO, however, observed that the details submitted by the assessee did not show as to what were the addresses of the companies on which money orders were sent. The AO considered that the possibility that the money orders were collected by the same person at the post office at Delhi could not be ruled out. The AO also observed that the signature of the payee were in different ink and the name of the companies on whose behalf money orders were allegedly received were in different ink a few cases which was very unusual as the person receiving the money order is likely to use the same pen while acknowledging the receipt. But even then in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, has been mentioned by the AO at p. 65 para 68 of the assessment order as under: Surinder Singh, Director, Bankey Bihari Growth Fund (P) Ltd., B-773, Chabiganj, Nikalason Road, shmeri Gate, Delhi-6. In order to verify the genuineness and creditworthiness of transaction of shares, the AO issued commission in favour of DIT (Inv.), Unit-III, New Delhi. The ADIT issued summons to the company but postal authorities returned the same with the remark that no such person resides at this place. Therefore, the whereabouts of this company could not be located. What is material is not the incorporation of the Company but whether the company M/s Bankey Bihari Growth Fund (P) Ltd., has acquired shares of the assessee-company. When on inquiry by the AO the company is not traceable at the address given by the assessee, it is not possible to presume that Bankey Bihari Growth Fund (P) Ltd. has acquired shares of the company. The learned counsel also referred to name of Ram Lal Garments (P) Ltd. This company is also not traceable at the address given by the assessee-company. As per the remarks of the postal authorities, as mentioned in para 69 of the assessment order. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney shown by the assessee-company in the name of shareholders is genuine. True character of nature of receipt came to the knowledge of the AO as a result of search on the basis of material found during the course of search and subsequent inquiries made by the AO. As the shareholders are not traceable, the share capital shown in these names does not represent the true character of receipt. If the true character of the receipt is found out after search as a result of material found during search, then such receipt can be treated as undisclosed income under s. 68 of the IT Act. The assessee has failed to prove the nature, source and genuineness of the amount shown by the assessee-company as share application money. 30. Briefly stated, the following facts shows that transaction of issue of shares and receipt of share application money is not genuine as mentioned by the AO in para 44 of assessment order and these facts have not been controverted by the assessee-company : (a) There is no letter of offer for subscription to the share capital by the assessee-company. (b) In many cases the number of share application has not been mentioned in the share application form. (c) There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. AO made various enquiries at various stages on the basis of material found during search but could not locate the companies who are having shares in the assessee-company or their directors. Under these circumstances, the assessee has also failed to discharge the onus to prove the identity of the company shareholders, creditworthiness of the shareholders and genuineness of the transaction. Simply because the companies have been registered with the Registrar of Companies, it cannot be stated that the companies are really functioning because whereabouts of the companies and their activities are not known. The creditworthiness of the companies is also not proved because it seems that someone has filed return of income in the name of companies and such returns have been accepted under s. 143(1)(a) of IT Act. The share application money might have been forwarded through the bank but unless the corporate shareholder proves that they have sufficient funds to contribute to subscribe to the shares of the assessee-company, it cannot be stated that the transaction is genuine because payment through banks seems to be manipulated. Under these circumstance there is no ground to interfere wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, an engineering construction company, commenced business in May, 1943. In its accounts there were several cash credit entries in the first year of its business totalling to Rs. 2,50,000. Though the explanation regarding the cash credit entry was found to be false, the Tribunal held that these cash credits could not represent the income or profits of the company as they were all made very soon after the company commenced its activities. The Hon'ble High Court came to the conclusion that the Tribunal's findings are findings of fact and the Hon'ble Supreme Court agreed with the conclusion. This decision was under the old IT Act, 1922 and not applicable to this case by assessee-company in view of the express wordings of s. 68 of the IT Act, 1961. Sec. 68 of IT Act, 1961 lays down that unexplained cash credits may be treated as income of the same previous year. Such unexplained cash credit has to be assessed under the head "Income from other sources" and not "Profit and gains of business" (Basantipur Tea Co. (P) Ltd. vs. CIT (1989) 80 CTR (Cal) 67 : (1989) 180 ITR 261 (Cal) and CIT vs. Maduri Rajaiahgari Kistaiah (1979) 120 ITR 294 (AP). In the case of Basantipur Tea Co. (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of assessee-company before us there are cash credits in the form of share application money, in the books of account. The AO has made enquiries and found that the so-called shareholders are not traceable at the address furnished by the assessee-company. The assessee-company is also not able to produce the shareholders before the AO Under these circumstances the facts in the case of CIT vs. Smt. P.K. Noorjehan, are totally different from the facts in the case of assessee-company before us. (iv) N.R. Paper Board Ltd. Ors. vs. Dy. CIT (1998) 146 CTR (Guj) 612 : (1998) 234 ITR 733 (Guj) In this case, the only issue involved was the difference between regular assessment under s. 143(3) and block assessment under s. 158BC in case of search. The AO issued notice under s. 143(2) in respect of regular assessment. In the writ petition it was contended by the assessee that the total income for the asst. yr. 1995-96 was already completed in the assessment order for the block period under s. 158BC and therefore, no regular assessment for the asst. yr. 1995-96 could be completed. The Hon'ble Gujarat High Court held that the notice issued under s. 143(2) were in respect of regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worthiness of various loan creditors appearing in the books of account during the financial year 1992-93, 1993-94 and 1994-95. Since the assessee failed to prove the genuineness of the transaction, creditworthiness of the creditors, the AO considered the income of Rs. 13,46,000 as undisclosed income of the assessee. 36. We have heard rival submissions and considered the facts of the case. Income-tax files and other materials relating to 34 shareholders was found from the premises of M/s Jalan Enterprises. Sh. Neelinder Singh and Sh. Ram Preet "in whose names cash credits of Rs. 25,000 and Rs. 90,000, respectively, have been shown are also shown as shareholders. AO made inquiries but these 2 persons were not traceable, and their whereabouts and existence is not known as mentioned by the AO in para 81 p. 77 of the assessment order. AO has made inquiries about these 2 persons on the basis of material found during the search and there is no reliable evidence about the identity and creditworthiness of these two persons. The assessee-company has also failed to prove the genuineness of transaction and identity and creditworthiness of these two persons and the AO was justified in making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue I agree with the conclusion of my learned brother in para 26 p. 72 of his order. 38. In the result appeal is partly allowed. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961. 4th Feb., 2002 With reference to the abovementioned appeal, after discussion, we differ in our opinion on the following points for adjudication. We refer to the Hon'ble President of the Tribunal, for the hearing by one or more other Members of the Tribunal to be constituted by him as Third Member the following points in the abovementioned appeal: (1) Whether, on the facts and in the circumstances of the case, the AO was justified in treating the following share application money as undisclosed income of the assessee for the following years: Rs. Financial year (i) (a) 24,32,000 1992-93 (b) 12,33,000 1993-94 (para 43 of the assessment order) (c) 44,000 1994-95 (ii) (a) 1,25,000 1993-94 (b) 46,50,000 1994-95 (para 78.2 of the assessment order) (c) 51,50,000 1995-96 (iii) Share capital in the name of ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies Act, 1956, on 3rd March, 1992 for retail business of refining "used oils" (petroleum products) as its main business and manufacturing unit was set tip by the assessee-company at Bargadwa, Gorakhpur. The assessee-company has got its registered office at Faizabad. 4. Assessee-company was subjected to a search operation carried out under s. 132(1) of the Act on 9th Nov., 1995. It is also admitted fact that a partnership firm styled as M/s Jalan Enterprises was also subjected to search operation on 9th Nov., 1995 itself and that firm was having its business place at Dharmshala Bazar, Gorakhpur. During the search operation carried out at the business premises of the assessee-company, the following cash, documents and raw material were found and seized: (i) As per Annexure B1 to the Panchnama, the appellant's regular books of account, RG-1, RG-23 and some loose papers were found and seized. (ii) As per Annexure C-1, cash of Rs. 2,23,150 was found out of which cash of Rs. 2,00,000 was seized. (iii) As per Annexure C-2, cash of Rs. 60,000 was found but was not seized. (iv) The Annexure J, S-1, S-2 and S-3 contains the details of material, raw material and finished g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 5,11,000 Nil 3. Business income Nil Nil Nil 1,28,856 Total 26,45,000 36,76,000 52,05,000 52,78,856 6. While computing the undisclosed income, the AO had proceeded on the basis of search materials found and seized at the business premises of M/s Jalan Enterprises which are 30 income-tax files of 30 persons, pass books of these persons and other related documents by which those persons have contributed to the share application money and share capital of the assessee-company. The AO proceeded to examine the seized materials and made detailed enquiries and his conclusion was that these income-tax files were maintained by the directors of the assessee-company and by person connected with Jalan group, a firm for the purposes of introduction of unaccounted money of the assessee-company in the names of these various bogus name-lenders and ultimately he treated an amount of Rs. 37,09,000 which was total investment in shares in these bogus names for financial years 1992-93 to 1994-95, as the total income of the assessee-company after rejecting the explanation of the assessee which were found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed report doubting the very existence of those companies and which were not found at the addresses given by them. Accordingly, the AO treated all the amounts of share capital and share application money of these companies as undisclosed income of the assessee-company and made addition and assessment was completed which were challenged before the Bench. 9. Several pleas were raised before the Bench by respective representatives of the parties and the learned JM placing reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Stellar Investment Ltd. (1991) 99 CTR (Del) 40 : (1991) 192 ITR 287 (Del) which stands approved by the Hon'ble Supreme Court of India vide order dt. 20th July, 2000 in Civil Appeal No. 7968 of 1996 reported as CIT vs. Stellar Investment Ltd. (2000) 164 CTR (SC) 287 : (2001) 251 ITR 263 (SC) was of the view that assessee being a public limited company was fully covered by the decision of the Hon'ble Supreme Court of India in the case of CIT vs. Stellar Investment Ltd. and amounts found credited in the heads "share capital" or "share application money" in the regular books of the account being maintained by the assessee-company cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has not been able to prove the very identity of individuals who have allegedly contributed to share capital of the assessee-company nor the very existence of the companies who allegedly have subscribed to the share capital of the assessee-company. For this, the learned AM has reproduced the relevant portion of the order of the AO and findings recorded by him. About the disclosure in the books of account in respect of share capital and share application money as well as cash credit, the learned AM opined that necessary enquiries and investigation made by the Department on the basis of seized material go to prove that the individuals and the companies have not contributed to share capital, but the amount was unaccounted money invested by the assessee-company in the garb of name-lenders, individuals and companies. Accordingly, the learned AM concluded against the assessee and confirmed the action of the AO. 12. At the time of hearing, the learned representatives of the parties have virtually placed reliance on respective orders of the Bench and the respective arguments placed by each of them before the Bench. 13. The learned standing counsel, Shri Shambhoo Chopra had extensive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 263 ITR 300 (Cal) and it was laid down that in case of subscription received by a company from the shareholders, it is obligatory on the part of the company to prove the genuineness of the transaction and the creditworthiness of the subscribers and the AO can enquire into the real nature of the transaction. Again the same decision was followed in the case of CIT vs. Kamdhenu Vyapar Co. Ltd. (2003) 182 CTR (Cal) 600 : (2003) 263 ITR 692 (Cal). On the basis of the above, the learned standing counsel pointed out that the AO has made extensive enquiries/investigation and had recorded categorical finding to the effect that assessee has not been able to prove the identity of the individuals who have subscribed allegedly in the share capital and also failed to prove on record the real existence of the companies who allegedly have subscribed to share capital of the assessee-company and thus the AO was justified to treat the alleged amount of share capital and share application money on behalf of the individuals and the companies who were not traceable at the addresses given by the assessee as not genuine and the learned AM has appreciated the factual position in the correct perspective a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or regular assessment and its scope and ambit is limited in that sense to materials unearthed during search or requisition of books of account or documents and such other materials or information as are available with the AO The other decisions in the case of CIT vs. Vinod Danchand Ghodawat (2000) 163 CTR (Bom) 432 : (2001) 247 ITR 448 (Bom) and CIT vs. Rajendra Prasad Gupta (2001) 166 CTR (Raj) 83 : (2001) 248 ITR 350 (Raj) were also referred to. 16. The learned counsel for the assessee relying upon the decision of CIT vs. Shambhulal C. Bachkaniwala (2000) 162 CTR (Guj) 435 : (2000) 245 ITR 488 (Guj), in which the Hon'ble Gujarat High Court upheld the view of the Tribunal that only undisclosed income as defined in s. 158B of the Act has to be assessed under Chapter XIV-B and consequently income other than undisclosed income has to be assessed under Chapter XIV, submitted that assessee has already disclosed share capital/share application money relating to previous year of asst. yr. 1994-95 and once that stand assessed under s. 143(3) of the Act, then the said amount cannot be treated as undisclosed income of the assessee. 17. The next plea of the assessee was that scope of blo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleted assessment for asst. yr. 1994-95 under s. 143(3) of the Act and further there was no undisclosed income, as already assessee has shown the share capital/share application money for asst. yr. 1994-95 which stand accepted by the Department. 21. In respect of the additions made by the AO for asst. yrs. 1995-96 and 1996-97, the learned counsel for the assessee submitted that for asst. yr. 1995-96, assessee has to file return by 31st Oct., 1995. On the date of search i.e., on 9th Nov., 1995, the return was not due for asst. yr. 1995-96 and assessee had filed the return showing increase in the share capital/share application money in the said return, which was filed within the statutory period. Further, accounting year for asst. yr. 1996-97 was not over and return for that asst. yr. 1996-97 was filed subsequently and in that return assessee has also disclosed all the facts including the increase in the share capital/share application money. Not only this, the books of account of the assessee found during the search contain all the entries regarding share application money and share capital received from different sources during previous year relating to asst. yrs. 1995-96 and 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisclosed income for asst. yr. 1994-95, as already assessment was completed under s. 143(3) of the Act and further there was no material seized from the premises of the assessee nor the material seized from other assessee was prima facie going to show the factum of undisclosed income and AO was not justified to conduct enquiries. 23. For asst. yrs. 1995-96 and 1996-97, the learned counsel for the assessee summarized that assessee had entered all the amounts of share capital/share application money in the books of account which is not disputed one by the Department and due date for filing of return for asst. yr. 1995-96 was not due till the date of search and even accounting year for asst. yr. 1996-97 was not yet over. The additions for these assessment years made by the AO treating all these amounts of share capital/share application money duly entered in the books of account, which assessee was bound to show, cannot be treated as undisclosed income. The learned counsel for the assessee, therefore, supported the order of the learned JM who has appreciated all these points of the assessee in correct perspective and he contended that the said order be upheld. 24. I have consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the context otherwise requires, (a) 'block period' means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted under s. 132 or any requisition was made under s. 132A and also includes the period up to the date of the commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made: Provided that where the search is initiated or the requisition is made before the 1st day of June, 2001, the provisions of this clause shall have effect as if for the words six assessment years, the words ten assessment years had been substituted; (b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der; (f) where an assessment of undisclosed income had been made earlier under cl. (c) of s. 158BC, on the basis of such assessment. (2) In computing the undisclosed income of the block period, the provisions of ss. 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. (3) The burden of proving to the satisfaction of the AO that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee. (4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under sub-s. (2) of s. 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments." 26. A perusal of the above provisions shall show that assessment of undisclosed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered from M/s Jalan Enterprises, he has to satisfy himself that seized material revealed undisclosed income of third party viz., assessee-company and then he should hand over all the seized materials to the concerned AO who was having jurisdiction over third party viz., assessee-company. This provision of s. 158BD of the Act is not a mere formality but a statutory requirement of the special procedure of assessment of such cases and Departmental authorities are bound to follow it. It is well-settled proposition of law that if statute provides a special procedure to be followed, then authorities are under statutory obligation to follow the same as prescribed and no deviation therefrom can be permitted. There is nothing on record to suggest that AO who was seized with the assessment of M/s Jalan Enterprises examined the record and satisfied himself that the said materials disclose the undisclosed income of assessee-company or after that he had handed over the seized materials to the AO having jurisdiction over the assessee-company. The learned standing counsel appearing for the Department was apprised of this fact and he was not in a position to assert specifically that provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the Department to explain as to how AO of the assessee-company have utilized the seized material of M/s Jalan Enterprises in the case of assessee-company. Nothing has come on record from Department nor the learned standing counsel for Department was able to explain anything on this point. 29. A perusal of s. 158BB of the Act reproduced above shall show that fundamental statutory requirement for computation of total undisclosed income of previous years falling during the block period are that: (1) there must be a search under s. 132 of the Act. (2) some incriminating material/asset should have been unearthed in such search enabling the AO to work out the undisclosed income. (3) or, there is requisition of books of account or other documents under s. 132A of the Act on the basis of which undisclosed income can be worked out. (4) or, there should be such other material or information as are available with the AO and relatable to such evidence for working out the undisclosed income. 30. If we examine the case of the assessee-company to find out as to all requirements of s. 158BB of the Act were available or not, then, admittedly there was a search in the case of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has not requisitioned the seized material as per requirement of s. 132A of the Act. In the absence of these, AO of assessee-company cannot be permitted to utilize the seized material recovered from third party. All materials collected by AO in relation to those seized materials, in the eye of law cannot be treated in possession of the AO and can be utilized against the present assessee for working out undisclosed income for block period. 32. As this being an important flaw in completing the block assessment by the AO and both the learned Members have not addressed themselves to this legal issue in their respective orders nor the learned counsel for the assessee argued on this line, this issue was brought to the knowledge of the representatives of both the parties during the course of hearing by me. The learned standing counsel for the Department was having no explanation about this infirmity committed by the AO in completing the block assessment on the basis of material which in the eye of law cannot be called in his possession. So all additions made on the basis of seized materials not recovered from the possession of assessee-company nor came into possession of present AO b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain identity, creditworthiness and genuineness of these transactions in spite of the fact that provisions of s. 68 of the Act were applicable to block assessment proceedings. This is so because already assessment under s. 143(3) of the Act has been completed for asst. yr. 1994-95 and if Department wants to utilize the seized material, this may be ground for reopening of the completed assessment for asst. yr. 1994-95, but certainly it cannot be made basis for making roving enquiries as done by the AO for working out the undisclosed income. The income-tax files recovered were not such evidence which should have prima facie revealed undisclosed income and as discussed above, the AO made addition only after making roving enquiries which is beyond his power and the addition for asst. yr. 1994-95 cannot be made, as making of roving enquiries was outside the jurisdiction of the AO and recovered material was not such which was going to reveal that share capital/share application money was the undisclosed income of the assessee-company. The amount of cash credit, appearing in the books of assessee upto asst. yr. 1994-95 stand accepted by the Department as assessments of those assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its books of account and return of the assessee for asst. yrs. 1995-96 and 1996-97 was not yet due and even accounting year for asst. yr. 1996-97 was not over. The reply is in negative, because s. 158BB(1)(d) of the Act is very clear on this point and the learned JM has rightly appreciated that provision and concluded that AO cannot be allowed to make addition of undisclosed income in respect of those entries which are appearing in the books of account for asst. yrs. 1995-96 and 1996-97 in which date of filing of return was not yet over and even accounting year for asst. yr. 1996-97 was not over. I am in agreement with the view taken by the learned JM on this point. The AO was not justified to conduct enquiries in respect of capital/share application money appearing in the books of account of the assessee-company for asst. yr. 1995-96 and 1996-97 in the absence of any seized material indicating that companies were not in existence. Whatever exercise the AO has done in the absence of any material seized during the search in respect of these companies, can be permitted while completing assessment under s. 143(3) of the Act in respect of asst. yrs. 1995-96 and 1996-97, but as is the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnished a return under this clause shall not be entitled to file a revised return;" 38. The notice as is required under the above referred to section is to be served and s. 282 of the Act provides the mode of service of notice and relevant portion thereof is as under : "282. Service of notice generally. (1) A notice or requisition under this Act may be served on the person therein named either by post or as if it were a summons issued by a Court under the CPC of, 1908 (5 of 1908). (2) Any such notice or requisition may be addressed (a) in the case of a firm or an HUF, to any member of the firm or to the manager or any adult member of the family; (b) in the case of a local authority or company, to the principal officer thereof" 39. The admitted facts from the record are that AO before proceeding to complete the block assessment of the assessee-company issued a notice to the assessee and the learned JM has reproduced copy of that notice at p. 11 of his order. A perusal thereof shall reveal that it is addressed to M/s Gorakhpur Petro Oils Ltd., C/o Agarwal Forwarding Agency, Fatehganj, Faizabad, and admittedly it is not addressed to the "Principal officer" as is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is committed by the AO nor any prejudice has been caused to the assessee-company. Lastly, the Department had contended the notice in question stands served on an advocate who was found available at the headquarter of the assessee-company and he has received the same on behalf of the assessee-company and that should be treated as proper service. 41. The learned counsel for the assessee as well as the learned standing counsel who appeared before me have virtually reiterated the same submissions as were put up before the Bench and also referred to the case laws which had been cited by them before the Bench seized with the issue. 42. To begin with the issue involved in these two points of difference, it will be seen that AO can assume jurisdiction to complete the block assessment only after valid service of a legal and valid notice on the assessee, which has been subjected to search. A perusal of s. 158BC of the Act will go to show that block assessment can be completed in respect of a person who is subjected to search under s. 132 of the Act and that too after a notice is served upon him. 43. Provisions of s. 147 to 149 of the Act and provisions of s. 158BC of the Act are havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be relevant : "It is now well-settled, and we do not consider it necessary, to advert to numerous authorities in this regard cited at the Bar, that issuing of a valid notice to the assessee under s. 148 of the IT Act within the period specified under s. 149 of the Act is a condition precedent to. the validity of any assessment to be made against such assessee under s. 147 of the Act. Accordingly, where no such notice has been issued or if the notice issued is not valid or the same has not been served on the assessee in accordance with law, it will not be possible to sustain the eventual assessment made under s. 147 on the basis of such notice. We may also take it that where the notice issued to an assessee is vague, it would not be possible to rely upon it to sustain an assessment made under s. 147 of the IT Act." 45. Lastly the case of P.N. Sasikumar Ors. vs. CIT (1988) 69 CTR (Ker) 78 : (1988) 170 ITR 80 (Ker) can also be referred in which their Lordships have laid down that if no such notice under s. 147 of the Act is issued or if the notice issued is invalid or not in accordance with the law or is not served on the proper person in accordance with the law, the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the service of the notice was only on the manager of the firm. As the service of notice in this case was by the notice-server of the. Department and not by post, the procedure contemplated by the CPC for service of summons should have been followed, as per s. 282(1). In the CPC, procedure for service of summons is provided in order V. Rule 9(1) of order V is as follows: 'Where the defendant resides within the jurisdiction of the Court in which the suit is instituted, or has an agent resident within that jurisdiction who is empowered to accept the service of the summons, the summons shall, unless the Court otherwise directs, be delivered or sent to the proper officer to be served by him or one of his subordinates.' Rule 12 of order V reads: 'Wherever it is practicable, service shall be made on the defendant in person, unless he has an agent empowered to accept service, in which case service on such agent shall be sufficient.' Rule 15 of order V says: 'Where in any suit the defendant is absent and has no agent empowered to accept service of the summons on his behalf, service may be made on any adult male member of the family of the defendant who is residing with him.' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice of the notice, that case has not been established. On the contrary, it has been shown that Balakrishna Pillai has been acting as manager even subsequent to the reassessment. Therefore, that Balakrishna Pillai was the manager cannot at all be disputed by the assessee. According to the Revenue, the service of notice on the manager should be taken to be a proper or effective service as the notice had in some way or other reached the assessee. We are not inclined to agree. When the statute provides that a notice should be served in a particular mode, it is not possible to hold that there has been a proper service of notice merely from the fact that the person to whom the notice had been addressed had received the notice through some other source or that he has become aware of the contents of the notice. It has been held in Nagary Rasappa Setti vs. Hamburi Venkataratnam (1913) MWN 1028 (Mad) that where the summons has not been personally served on the party but was served on his gumastha, it must be shown that the requirements of order V, r. 12 or r. 13 have been complied with and that it cannot be assumed, without further enquiry, that service on the gumastha was sufficient. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. In the case in hand, it is not the case of the Department that advocate who received notice on behalf of the assessee-company acted as such even in the past or was authorized to receive notice on its behalf. The ratio of the above cases is fully applicable to the facts of the case and in the absence of any authorization issued by the assessee-company in favour of that advocate who received notice, the notice cannot be taken as served on the assessee-company. 48. The learned AM has treated this fact as mere irregularity and concluded that notice to be treated as served, as assessee has participated in the assessment proceedings and by doing so he has waived off the issue of valid service on the assessee. In this connection, I may refer that the proper service of notice before completing assessment of block period is jurisdictional point and statutory requirement. If notice is not taken as served on the assessee, jurisdiction on AO cannot be conferred by consent or acquiescence. 49. The jurisdictional High Court in the case of Banarasi Silk Palace vs. CIT (1964) 52 ITR 220 (All) has observed as under: "Since jurisdiction is conferred upon an ITO to proceed under s. 34( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no consent by the assessee could give him a jurisdiction or no waiver on his part can confer such jurisdiction." 54. The ratio of the above decisions had been consistent that acquiescence is not going to confer jurisdiction which otherwise is lacking from the very beginning. As observed earlier, the AO can proceed to complete assessment for block period only when he issued notice and served the same on the assessee/person who was subjected to search. In the case in hand the assessee-company is admittedly subjected to search but as concluded earlier, the assessee was not served with notice. In view of these findings, the AO cannot assume jurisdiction to complete assessment for want of notice even though assessee had appeared before him and filed return belatedly and also participated in the assessment proceedings. I am in agreement with the observation of the learned AM that procedural irregularities can be waived off by the assessee, but at the same time the conduct of the assessee in participating in assessment proceedings will not be sufficient to confer the jurisdiction on the AO without service of notice on the assessee-company. It was fundamental requirement to get the notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Dharmasala Bazar. Gorakhpur, were also subjected to search operation on 9th Nov., 1995 itself. So far as the assessee is concerned, the search operation led to the recovery of some cash only. No other material was found during the course of said search, at the premises of the assessee. 3. The assessee, by virtue of its head office at Faizabad, was being assessed to tax there. However, in the wake of search operation as aforesaid, jurisdiction in its case was transferred to the Addl. CIT (Assessment), Special Range, Gorakhpur, and notice under s. 158BC as addressed to M/s Gorakhpur Petro Oils Ltd., C/o Agarwal Forwarding Agency, Fatehganj, Faizabad" was issued from his end. The said notice contained block period from 1st April, 1985 to 9th Nov., 1995 and it was received by some advocate, who was available at the said address but who had nothing to do with the income-tax proceedings in the case of the assessee. Neither before nor any time thereafter he ever attended to any income-tax proceedings of the assessee. The assessee complied with the notice and filed a return in prescribed form showing "undisclosed income" at NIL. As against this, the block assessment order was passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere challenged. Apart from this, the assessment order as a whole was assailed on the ground that the notice under s. 158BC itself was not valid, nor it had been served in accordance with the provisions of law. Whereas on some of the additions (as stood comprised in the block assessment order) there was a consensus between the Hon'ble Members, they differed on the substantial part of the additions as had been made in the assessment. They also differed on the issue of validity thereof. On quantum side, the area of disagreement related to the three heads: (i) 'Share capital' received from large number of persons; (ii) 'Share capital' received from three particular persons; and (iii) 'Cash credit' as appearing in the accounts of various parties. Headwise and yearwise break-up of the additions on which the Hon'ble Members differed are as under: A. Share capital: Year ending on Share capital/Application money Undisclosed income as assessed by the AO Received from individuals Received from body corporates 31st March, 1993 57,42,600 24,32,000 - 31st March, 1994 94,59,600 12,33,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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