By TIOL News Service

NEW DELHI, MARCH 29, 2014: THE issues before the Bench are - Whether the provsion of Section 158BD of the Act is a machinery provision and inserted in the statute book for the purpose of carrying out assessments of a person other than the searched person; Whether, for the purpose of Sec 158BD, it is mandatory for the AO to record satisfaction before he sends the records to other AO who has jurisdiction over such other person and Whether satisfaction note is to be prepared at the time of or along with the initation of proceedings against the searched person u/s 158BC of the Act or immediately after the assessment proceedings are completed under Section 158BC of the searched person. And the verdict goes against the Revenue.

Facts of the case

The assessee is a firm engaged in manufacturing of hosiery goods in the name and style of M/s. Calcutta Knitwears. The Revenue conducted a Search u/s 132 in two premises of the Bhatia Group, namely, M/s. Swastik Trading Company and M/s. Kavita International Company on 05.02.2003 and certain incriminating documents pertaining to the assessee firm were traced in the said search. After completion of the investigation by the investigating agency and handing over of the documents to the assessing authority, the assessing authority had completed the block assessments in the case of Bhatia Group. Since certain other documents did not pertain to the person searched under Section 132 of the Act, the assessing authority thought it fit to transmit those documents, which according to him, pertain to the “undisclosed income” on account of investment element and profit element of the assessee firm and required to be assessed under Section 158BC read with Section 158BD of the Act to another assessing authority in whose jurisdiction the assessments could be completed. In doing so, the assessing authority had recorded his satisfaction note dated 15.07.2005. The jurisdictional assessing authority for the assessee had issued the show cause notice under Section 158BD for the block period 01.04.1996 to 05.02.2003, dated 10.02.2006 to the assessee inter alia directing the assessee to show cause as to why should the proceedings under Section 158BC not be completed. After receipt of the said notice, the assessee firm had filed its return under Section 158BD for the said block period declaring its total income as Nil and further filed its reply to the said notice challenging the validity of the said notice under Section 158BD, dated 08.03.2006. The assessee had taken the stand that the notice issued to the assessee was (a) in violation of the provisions of Section 158BD as the conditions precedent have not been complied with by the assessing officer and (b) beyond the period of limitation as provided for under Section 158BE read with Section 158BD and therefore, no action could be initiated against the assessee and accordingly, requested the assessing officer to drop the proceedings.

The assessing authority rejected the stand of the assessee and assessed the undisclosed income as Rs. 21,76,916/- (Rs.16,05,744/- (unexplained investment) and Rs.5,71,172/- (profit element)) by order dated 08.02.2008. The assessing officer was of the view that Section 158BE of the Act did not provide for any limitation for issuance of notice and completion of the assessment proceedings under Section 158BD of the Act and therefore a notice could be issued even after completion of the proceedings of the searched person under Section 158BC of the Act.

On appeal, the CIT(A), while rejecting the stand of the assessee in respect of validity of notice issued under Section 158BD, has partly allowed the appeal filed by the assessee firm and deleted the additions.

On appeal, the Tribunal rejected the appeal of the Revenue and observed that recording of satisfaction by the assessing officer as contemplated under Section 158BD was on a date subsequent to the framing of assessment under Section 158BC in case of the searched person, that was, beyond the period prescribed under Section 158BE(1)(b) and thereby the notice issued under Section 158BD was belated and consequently the assumption of jurisdiction by the assessing authority in the impugned block assessment would be invalid, by order dated 23.04.2009. On appeal, the HC rejected the Revenue's appeal and confirmed the order passed by the Tribunal.

Having heard the parties, the SC held that,

++ we have heard Rupesh Kumar, the counsel for the Revenue and Mr R.P.Bhatt, Mr Ajay Vohra, Mr Santosh Krishan, the counsels and other counsel for the respective assessees;

++ the counsel for the Revenue would contend that the assessing authority, after completion of the assessment proceedings against the searched person under Section 158BC, being of the opinion that the other documents which have surfaced at the time of the search under Section 132 of the Act belong to a person other than the searched person had recorded his satisfaction in the said respect and transmitted the papers to the jurisdictional assessing officer for the assessments of such person other than the searched person. Further, he would submit that the assessing officer has complied with the requirements of Section 158BD of the Act in its entirety while preparing the satisfaction note and transmitting the documents to the jurisdictional assessing officer and therefore, the Tribunal and the High Court were not justified in holding that the satisfaction note ought to have been prepared by the assessing officer before the completion of the assessment proceedings of the searched person under Section 158BC of the Act and that the notice issued under Section 158BD was belated;

++ per contra, the counsels for the assessees would state that a satisfaction note requires to be made by the assessing officer before the seized documents were transmitted to another assessing officer in whose jurisdiction the person other than the searched person is assessed and submit that the said satisfaction note should be recorded before the assessment proceedings of the searched person are completed under Section 158BC of the Act and not later in time. By saying so, the learned counsel would justify the reasoning and the conclusion reached by the Tribunal as well as the High Court;

++ in order to resolve the controversy, certain provisions of the Act require to be noticed by us;

++ Chapter XIV-B of the Act is a special provision carved out by the legislature for the purpose of the assessments in cases pertaining to Sections 132 and 132A of the Act. The said chapter was introduced by the Finance Act, 1995 with effect from 01.07.1995 and comprises Sections 158B to 158BH of the Act. The provisions under this Chapter were made inapplicable in case of search initiated under Section 132 or Section 132A after 31.05.2003 by introduction of an amendment to the Chapter as Section 158BI vide the Finance Act, 2003 with effect from 01.06.2003. The lis before us requires examination of the provisions of the said Chapter, particularly Section 158BD;

++ Section 158B of the Act is the dictionary clause. It provides for the definition of “block period” and “undisclosed income”. For the purpose of this case, a reference to the definition of the “undisclosed income” as provided for in Section 158B(b) is necessary and, therefore, it is noticed;

++ Sections 158BC and 158BD of the Act are machinery provisions. Section 158BC of the Act provides the procedure for block assessment and Section 158BD of the Act provides for assessments in the case of an undisclosed income of any other person;

++ Section 158BC speaks of procedure for assessment of a person searched under Section 132 of the Act or books of accounts, other documents or assets are requisitioned under section 132A. The limitation for the purpose of completion of the block assessments for the purpose of Section 158BC of the Act is as provided under Section 158BE(1)(a) of the Act, that is the time limit for completion of block assessment;

++ Section 158BD of the Act provides for “undisclosed income” of any other person. Before we proceed to explain the said provision, we intend to remind ourselves of the first or the basic principles of interpretation of a fiscal legislation. It is time and again reiterated that the courts, while interpreting the provisions of a fiscal legislation should neither add nor subtract a word from the provisions of instant meaning of the sections. It may be mentioned that the foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule;

++ once the literal rule is departed, then any number of interpretations can be put to a statutory provision, each Judge having a free play to put his own interpretation as he likes. This would be destructive of the edifice of fiscal legislations which impose economic duties and sanctions;

++ in taxing statutes, even if the literal interpretation results in hardship or inconvenience, it has to be followed;

++ this Court in Tata Consultancy Services v. State of Andhra Pradesh has ascribed plain meaning to the terms computer and computer programme in a fiscal statute and reiterating the proposition laid down in Inland Revenue Commissioner case (supra), observed that a court should not be over zealous in searching ambiguities or obscurities in words which are plain;

++ it is the duty of the court while interpreting the machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the Courts ought not be hesitant in espousing a commonsense interpretation to the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same;

++ having said that, let us revert to discussion of Section 158BD of the Act. The said provision is a machinery provision and inserted in the statute book for the purpose of carrying out assessments of a person other than the searched person under Sections 132 or 132A of the Act. Under Section 158BD of the Act, if an officer is satisfied that there exists any undisclosed income which may belong to a other person other than the searched person under Sections 132 or 132A of the Act, after recording such satisfaction, may transmit the records/documents/chits/papers etc to the assessing officer having jurisdiction over such other person. After receipt of the aforesaid satisfaction and upon examination of the said other documents relating to such other person, the jurisdictional assessing officer may proceed to issue a notice for the purpose of completion of the assessments under Section 158BD of the Act, the other provisions of XIV-B shall apply;

++ the opening words of Section 158BD of the Act are that the assessing officer must be satisfied that “undisclosed income” belongs to any other person other than the person with respect to whom a search was made under Section 132 of the Act or a requisition of books were made under Section 132A of the Act and thereafter, transmit the records for assessment of such other person. Therefore, the short question that falls for our consideration and decision is at what stage of the proceedings should the satisfaction note be prepared by the assessing officer: whether at the time of initiating proceedings under Section 158BC for the completion of the assessments of the searched person under Section 132 and 132A of the Act or during the course of the assessment proceedings under Section 158BC of the Act or after completion of the proceedings under Section 158BC of the Act;

++ the Tribunal and the High Court are of the opinion that it could only be prepared by the assessing officer during the course of the assessment proceedings under Section 158BC of the Act and not after the completion of the said proceedings. The Courts below have relied upon the limitation period provided in Section 158BE(2)(b) of the Act in respect of the assessment proceedings initiated under Section 158BD, i.e., two years from the end of the month in which the notice under Chapter XIV-B was served on such other person in respect of search initiated or books of account or other documents or any assets are requisitioned on or after 01.01.1997. We would examine whether the Tribunal or the High Court are justified in coming to the aforesaid conclusion;

++ we would certainly say that before initiating proceedings under Section 158BD of the Act, the assessing officer who has initiated proceedings for completion of the assessments under Section 158BC of the Act should be satisfied that there is an undisclosed income which has been traced out when a person was searched under Section 132 or the books of accounts were requisitioned under Section 132A of the Act. This is in contrast to the provisions of Section 148 of the Act where recording of reasons in writing are a sine qua non. Under Section 158BD the existence of cogent and demonstrative material is germane to the assessing officers' satisfaction in concluding that the seized documents belong to a person other than the searched person is necessary for initiation of action under Section 158BD. The bare reading of the provision indicates that the satisfaction note could be prepared by the assessing officer either at the time of initiating proceedings for completion of assessment of a searched person under Section 158BC of the Act or during the stage of the assessment proceedings. It does not mean that after completion of the assessment, the assessing officer cannot prepare the satisfaction note to the effect that there exists income tax belonging to any person other than the searched person in respect of whom a search was made under Section 132 or requisition of books of accounts were made under Section 132A of the Act. The language of the provision is clear and unambiguous. The legislature has not imposed any embargo on the assessing officer in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person;

++ further, Section 158BE(2)(b) only provides for the period of limitation for completion of block assessment under section 158BD in case of the person other than the searched person as two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search carried on after 01.01.1997. The said section does neither provides for nor imposes any restrictions or conditions on the period of limitation for preparation the satisfaction note under Section 158BD and consequent issuance of notice to the other person;

++ in the lead case, the assessing officer had prepared a satisfaction note on 15.07.2005 though the assessment proceedings in the case of a searched person, namely, S.K. Bhatia were completed on 30.03.2005. As we have already noticed, the Tribunal and the High Court are of the opinion that since the satisfaction note was prepared after the proceedings were completed by the assessing officer under Section 158BC of the Act which is contrary to the provisions of Section 158BD read with Section 158BE(2)(b) and therefore, have dismissed the case of the Revenue. In our considered opinion, the reasoning of the learned Judges of the High Court is contrary to the plain and simple language employed by the legislature under Section 158BD of the Act which clearly provides adequate flexibility to the assessing officer for recording the satisfaction note after the completion of proceedings in respect of the searched person under Section 158BC. Further, the interpretation placed by the Courts below by reading into the plain language of Section 158BE(2)(b) such as to extend the period of limitation to recording of satisfaction note would run counter to the avowed object of introduction of Chapter to provide for cost- effective, efficient and expeditious completion of search assessments and avoiding or reducing long drawn proceedings;

++ in the result, we hold that for the purpose of Section 158BD of the Act a satisfaction note is sine qua non and must be prepared by the assessing officer before he transmits the records to the other assessing officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person under Section 158BC of the Act; (b) along with the assessment proceedings under Section 158BC of the Act; and (c) immediately after the assessment proceedings are completed under Section 158BC of the Act of the searched person;

++ we are informed that the assessing officer had not recorded the satisfaction note as required under Section 158BD of the Act, therefore, the Tribunal and the High Court were justified in setting aside the orders of assessment and the orders passed by the first appellate authority. We do not intend to examine the aforesaid contention canvassed by the counsel since we are remanding the matters to the High Court for consideration of the individual cases herein in light of the observations made by us on the scope and possible interpretation of Section 158BD of the Act.

(See 2014-TIOL-30-SC-IT)