Income Tax Appellate Tribunal - Bangalore
Y. Subbaraju And Co. vs Assistant Commissioner Of Income-Tax ... on 9 July, 2004
Equivalent citations: [2004]91ITD118(BANG), [2004]270ITR174(BANG)
ORDER
G.E. Veerabhadrappa, Accountant Member
1. These are appeals by different assessees. The facts of the cases and disputes therein are almost identical.
2. The Commissioner of Income-tax, Bangalore, wrote to the Hon'ble President, Income-tax Appellate Tribunal, that there were divergent views expressed by the Bangalore Benches of the Tribunal while disposing of the appeals arising out of block assessment completed under Chapter XIV-B the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The resolve the so-called inconsistency and also to bring about uniform interpretation of the provisions of Section 158-BD, request was made for constitution of Special Bench. The Hon'ble President, ITAT, was pleased to constitute Special Bench for disposing of these appeals.
3. Parties agreed that the main controversy in all these appeals centers round the following question:
"Whether, satisfaction of the Assessing Officer needs to be recorded under Section 158-BD of the Act to assume jurisdiction and absence of such recording will result in the order of the assessment becoming bad in law and requires to be annulled?"
4. We have heard the parties on the aforesaid question and proceed to disposes of all these appeals in the light of the facts prevailing in each of these cases.
4.1 Shri S. Venkatesan, learned counsel for assessees, explained the facts of the case in Y. Subbaraju & Co. [IT(SS)A No.38/Bang/1998] and pleaded that the facts in all other cases are almost identical and may be disposed of in the light of the principles that may be laid down here.
4.2 The learned counsel for the assessee pointed out that M/s. Y. Subbaraju & Co., is a partnership firm. There was a search on 17-7-1996 in the residential premises of Shri Y. Subbaraju, who happens to be the managing partner of the said firm. As on the date of search, the firm had filed regular returns of income up to the assessment year 1995-96. The return of income of the said firm for the assessment year 1996-97 was filed belatedly on 30-12-1996. However, since the return of income for the assessment year 1996-97 was not filed on the date of search, disclosed income for this assessment year was treated as 'nil' in terms of Section 158-BB(1)(c) of the Act. Accordingly, income of Rs. 5000/- declared for the assessment year 1996-97 in the belated return was treated as the assessee's undisclosed income for the said assessment year and brought to tax for the block period. The learned counsel for the assessee contended that undisclosed income assessed in the hands of the assessee has no source material coming to light as a result of search in the case of Y. Subbaraju. In other words, as a result of search in the case of Y. Subbaraju, the Department did not find any material indicating the undisclosed income having been earned by the firm. The learned counsel for the assessee pointed out that in the absence of such source search material, the addition made requires to be deleted. Reliance was placed on to the principle laid down by the Hon'ble Supreme Court in the case of ITO v. Seth Brothers (74 ITR 836) and Pooran Mal v. Director of Inspection (Inv.) (93 ITR 505). The learned counsel for the assessee pleaded that the search action may unearth materials, which are relevant for the assessment of person searched or for the assessment of other person. In the case of the latter, there should exist collateral material suggesting undisclosed income in the hands of that other person. It was pointed out to us that if this principle is not properly followed, it might result in an anomalous situation, which is not warranted by the intention of the Legislature. He explained it by way of example that in the case of a bank, when it is subjected to search, may be having accounts of 3000 customers and as a result thereof bank itself will be subject to assessment Under Section 158-BC and 3000 customers of that bank will be subject to assessment Under Section-158-BD merely because they did not file their returns within the due date prescribed Under Section 139(1) of the Act, which is nothing to do with the transactions with the bank in respect of their regular income, which is within the knowledge of the Department. The assessees who have account with the bank would be required to pay tax at 60% of the regular incomes merely because there was a search action in the case of a bank. This, according to the learned counsel for assessees cannot be the intention of the Legislature. The satisfaction that is required for the purpose of initiating 158-BD action should be amply demonstrated. It is not the subjective satisfaction of the AO but it should be an objective satisfaction, as laid down by the Courts in the following cases:
(i) CIT v. G.M. Mittal Stainless Steel P. Ltd. (263 ITR 255)(SC)
(ii) V. Subramonia Iyer v. CIT (113 ITR 685)(Ker.)
(iii) CIT v. Smt. P.M. Celine (236 ITR 988)(Ker.)
(iv) Govind v. DCIT (246 ITR 787)(MP)
(v) Leather Trends (Pvt.) Ltd. v. CIT (215 ITR 690)(Alld.)
(vi) CIT v. Dewan kunj Lal Kanhaiya Lal (164 ITR 284)(Patna) In all these cases, existence of income of the firm was within the knowledge of the Department and the basis for making addition is that knowledge alone and not in the form of any search material.
4.3 The learned counsel for the assessee pointed out that there is absolutely no material at all in the possession of the Department, which suggests undisclosed income, which is subject matter of assessment in the hands of the firm. Therefore, the order of assessment, in any case, has to be annulled as was done by the Madras Bench of the Tribunal in the case of A.K. Narayanan (HUF) v. ACIT (69 ITD 104). The learned counsel for assesses vehemently argued that satisfaction must be reached by the Assessing Officer Under Section 158 BD on the basis of materials disclosing undisclosed income of other person. Such satisfaction, according to the learned counsel for assessees, has to be suitably recorded since such action is justifiable by the courts. Omission to reach satisfaction as required Under Section 158BD is illegal and not an irregularity and it is fatal to the assessment proceedings. Reliance was placed on the following decisions:
(i) Om Parkash Jindal Anr. v. Union of India and Ors. (104 ITR 389)(P&H)
(ii) L.R. Gupta and Ors. v. Union of India (194 ITR 32)(Del.)
(iii) Ved Prakash Sanjay Kumar v. ACIT (76 ITD 107(ITAT)(Chand.)
(iv) L. Saroja v. ACIT (76 ITD 344)(ITAT)(Mad.) and
(v) Suman Dhanji Salte v. ACIT (72 ITD 132)(ITAT)(Pune) 4.4 The learned counsel for assessees pointed out that in the Ajit Jain v. Union of India and Ors. (242 ITR 302) the Delhi High Court held that chapter XIV-B, which was inserted by the Finance Act, 1995 suggests that these are special provisions for assessment of search cases and, therefore, search Under Section 132 is prerequisite (for invoking the provisions of that chapter. It held that it is axiomatic that the search Under Section 132 as contemplated in the chapter has to be a valid search. An illegal search is no search and as a necessary corollary, in such a case chapter XIV-B would have no application. The intimation simpliciter by the CBI that cash was found in the possession of the individual, without some thing more did not constitute "information" within the meaning of Section 132 of the Act and the search based on such information and the block assessments were held to be not valid. The learned counsel for assessees pointed out that this decision of the Delhi High Court has been affirmed by the Supreme Court in 260 ITR 80 and consequently has become the law of the land on the issue.
4.5 The learned counsel for assessees pointed out that the effect of block assessment is to bring income that is computed under that chapter for a tax at a higher rate at 60% as against normal rates. Therefore, the entire provisions, according to the learned counsel for assessees, require to be strictly construed. He summed up by saying that in all these cases regular incomes of the respective assessees were already within the knowledge of the Department and has not come to surface as a result of any search nor is represented by material found during the course of search. The Department has treated the disclosed income as part of undisclosed income, which according to the learned counsel for assessees, is totally impermissible under the scheme of assessment of undisclosed income. The learned counsel for assessees pointed out that even on merits, additions made in each of these cases on the basis of returns of income filed belatedly by treating the same as undisclosed income, needs to be deleted.
5. The learned Standing Counsel for the Department Shri Indrakumar, on the other hand-took us through the scheme of the block assessment procedure. The learned Standing Counsel for the Department pointed out that all the provisions of this Chapter are in the direction of bringing some thing hidden from the Department to the surface. The moment search takes place the machinery of block assessment is set in motion. The learned Standing Counsel for the Department pointed out that the entire materials found during the course of search is the subject of consideration under this chapter.
5.1 For issue of notice Under Section 158-BC or 158-BD, no reasons are required to be recorded. When once there is a search, the learned Standing Counsel for the Department pointed out, there is no choice to the Assessing Officer except to serve a notice Under Section 158-BD of the Act whenever he satisfied that the income of some other person is undisclosed. The learned Standing Counsel for the Department pointed out that under the said scheme of assessment no notice Under Section 148 is required to be issued and therefore, there is no option to the Assessing Officer except to proceed Under Section 158-BD of the Act. The learned Standing Counsel for the Department further pointed out that there is a conscious departure in chapter XIV-B of the Act when compared to normal assessment proceedings Under Section 148 of the Act. The provisions of Section 147 require the live-link of the income escaping assessment with the reasons to be recorded in writing, where as Under Section 158-BD the Department is left with no other choice in the matter.
5.2 Placing reliance on to the decision of the Allahabad High Court in the case of Digvijay Chemicals Ltd. v. ACIT (248 ITR 381), learned Standing Counsel for the Department pointed out that materials could be taken into account while framing assessment Under Section 158-BD and that the provisions of Section 158-BD do not require giving of an opportunity before an authority records satisfaction that material could be handed over. Therefore, the very fact of issue of notice evidences that the Assessing Officer was satisfied with the undisclosed income mentioned in the seized document pertaining to other person. The provisions of Section 158 BD are not to the benefit of the assessee but are enacted in the interest of the Revenue wherein normal procedures of assessment are given go-bye and the procedure of block assessment resorted to by the Department.
5.3 The learned Standing Counsel for the Department pointed out that the case laws relied upon by the learned counsel for assessees does not required to be justified in the light of the provisions of Section 158-Bd. The said provisions do not require any recording of satisfaction Under Section 158-BD to assume jurisdiction and the absence of such recording will not result in the order of assessment becoming bad in law and therefore required to be annulled. The section itself does not require recording of any reasons for the satisfaction. The provisions of Section 147 require such recording of reasons whereas the provisions of Section 158-BD do not require authority to give any reasons for the satisfaction. The fact that the notice issued and the assessee is given a fair and reasonable opportunity of being heard does not, in any way, vitiate the principles of natural justice in the matter of assessment proceedings for the purpose of block assessment.
5.4 Our attention was also dawn by the learned Standing Counsel for the Department to the decision of the Supreme Court in the case of Ganga Saran & Sons P. Ltd. v. ITO (130 ITR 1) wherein it is observed that the important words in Section 147 are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Assessing Officer must not be arbitrary or irrational or it must be reasonable or in other words, it must be based on reasons, which are relevant and material. The Court in that case was not entitled to investigate into adequacy or sufficiency of the reasons which have weighed with the Assessing Officer in coming to the belief but the courts can certainly examine whether the reasons are relevant and have bearing on the matters in regard to which he is required to entertain the belief before he can issue notice Under Section 147(a) of the Act.
5.5 Drawing support from these observations, the learned Standing Counsel for the Department pointed out that Section 158-BD are differently worded and therefore, reading the provisions in the manner suggested by the learned counsel for assessees would only result in rewriting the provisions of section which does not require the recording of satisfaction nor to disclose any reasons for the satisfaction.
5.6 The learned Standing Counsel for the Department relying upon the decision of the Privy Council in the case of CIT v. Mahaliram Ramjidas (8 ITR 442) contended that in interpreting a provisions of a taxing Act which deals merely with the machinery of assessment and does not impose charge on the subject, consideration should be preferred which makes the machinery workable. As to the difference between "reasons to believe" and "satisfaction", our attention was specifically drawn to the discussions at pages 447 and 448 of the said decision.
5.7 Our attention was drawn to the decision of the Gujarat High Court in the case of Premjibhai & Sons v. JCIT (251 ITR 625) wherein it is observed that initiation of proceedings is not separate and independent proceeding for which a separate jurisdictional fact has to be established. The proceedings Under Section 158-BD against a person other than the person searched are part of the proceedings which commence with search Under Section 132 and culminate in proceedings under chapter XIV-B of the Act. Accordingly, the absence of an averment as to the satisfaction arrived at by the officer of the person raided, would not vitiate the notice Under Section 158-BD of the Act. The learned Standing Counsel for the Department further pointed out that a bare reading of Section 158-BD, as held by the Gujarat High Court, showed that for taking action under that section, the Assessing Officer was merely required to be satisfied with the books of account or other documents or asset found in the search showed undisclosed income of the person other than the one against whom search was conducted. Merely no books of account documents belonging to the petitioner were found in the search, it could not be said that there was no scope for action Under Section 158-BD of the Act.
5.8 Our attention was further drawn to the decision of the Supreme Court in the case of Sales tax Officer v. Uttareswari Rice Mills (30 STC 567) and the decision of the AP High Court in the case of Andhra Bank v. DCIT (255 ITR 1). The learned Standing Counsel for the Department further proceeded to make his submissions as to the difference in phraseology adopted by the Statute in Sections 131(3), 132(8), 147 and 158. It was contended that the provisions of Section 158 are offshoot of Section 132. The entire provisions will be rendered nugatory if the view canvassed by the learned counsel for assessees were to be accepted by the Tribunal. If the view canvassed by the assessees is now accepted, the provisions of Section 158BD will be dead letter provisions in the statue, which cannot be the intention of the Legislature. Our attention was drawn to the decision of the Supreme court in the case of Keshavji Ravji & Co. v. CIT (183 ITR 1) wherein the Supreme Court has clearly observed that construction, which does not lead to the result intended should be avoided.
5.9 The learned Standing Counsel for the Department, was however, fair enough to admit that there is no material found in the course of search, which can support additions that are made in the assessment framed Under Section 158-BD in all these cases. The only information is in the form of belated returns filed in those cases.
6. The learned counsel for assessees, in reply, argued that the order passed by the authorities Under Section 131(3), 132(8) are not subject to judicial review whereas the orders under Section 158-BD are subject to judicial review and in such an event, it is always open to the Tribunal to get into the records to say that there exists valid material leading to the satisfaction of the Assessing Officer. Where the material is wanting in that direction, it is open to the Tribunal to annual the assessment.
6.1 Our attention was drawn to the principle laid down by the Supreme Court in the case of Union of India v. Rai Singh Dab Singh Bist and Anr. (88 ITR 200) and the observations of the Supreme Court at page 203 of the judgment. The learned counsel for assessees has relied on the following decisions:
6.2 Our attention was further drawn to the principles laid down in the following decisions:
(i) By the Supreme Court in C.B. Gautam v. Union of India (199 ITR 530).
(ii) By the Supreme Court in Institute of Chartered Accountants of India v. L.K. Ratna and Ors. (164 ITR 1), and
(iii) By the ITAT, Allahabad Bench 'B' (Third Member) Dr. A.K. Bansal v. ACIT (73 ITD 49)
7. We have carefully gone through the facts of the case, records and the case laws to which our attention was drawn at the time of hearing.
7.1 A new chapter viz., XIV-B was brought into statute by the Finance Act, 1995 providing for a special procedure for assessment of cases in which search was initiated Under Section 132 or whose books of account, other documents or any assets were requisitioned Under Section 132A of the Act on or after 1st July 1995. In order to make the procedure of assessment of search cases cost effective, efficient and meaningful a new scheme was introduced for the assessment of undisclosed income determined as a result of search Under Section 132 or requisitioned Under Section 132A of the Act. Under the said Scheme, undisclosed income detected as a result of any search initiated or requisition made, after June 30, 1995 shall be assessed separately as income of block years. The basis for making assessment under this chapter is the search itself. If there is no search, there can be no assessment under this chapter. It is all the more necessary that an assessment framed under this chapter must have basis in the form of a search material. The assessment, under this chapter is the result of processing of the search material of the person searched and the rate of tax prescribed under this chapter is a higher percentage of 60% as against normal rate of tax. In other words, search action will result in assessment of what is known as 'undisclosed income' of certain block period ending up to the date of search and imposing a higher tax at 60%. It must be understood that if the search action does not disclose undisclosed income, the question of any assessment being framed under this chapter is simply improper and outside the purview of the chapter. Similarly, it is basically the person who is searched is subject to assessment under this chapter. The provisions of Section 158-BD try to extend the operation of these provisions to the person who is not searched. Therefore, but for the provisions of Section 158-BD, any assessment framed on that person would have been seriously open to question. Search action, as is normally results in disclosure of undisclosed income of a person searched or of some other person. In the case of the latter, the provisions of 158-BD enable the Assessing Officer who frames the assessment on a person searched, comes to a prima facie satisfaction that there exists undisclosed income of a person other than person who has been searched, the law requires him to hand over the searched material to the Assessing Officer of that other person.
7.2 Section 158-BD, which is the center of controversy in these appeals, reads as below:
"Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under Section 132 or whose books of account or other documents or any assets were requisitioned under Section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceeded against such other person and the provisions of this chapter shall apply accordingly."
The essential ingredients of the section are:
(i) the Assessing Officer of a person searched should be satisfied,
(ii) that undisclosed income belongs to person other than the person in respect of whom search was conducted,
(iii) the books of account or other documents or assets seized shall be handed over to the Assessing Officer having jurisdiction over that other person,
(iv) the Assessing Officer shall proceed against such other person under the provisions of this chapter.
On the basis of the search material in the possession of the Assessing Officer of a person who is searched must come to a prima facie view that undisclosed income belongs to such other person. Now, the question is whether such satisfaction should be expressed or recorded or should be left to the mere procedure of issue of notice. For answering these issues, it is necessary for us to go into the guiding principles that are available on the issue as pronounced by the Apex Court and other High Courts while dealing with the identical provisions.
8. The exercise of powers by the Department Under Section 132 of the Act results in serious invasion upon the rights, privacy and freedom of the taxpayer. Such power must be exercised strictly in accordance with law and only for the purpose for which the law authorizes it to be exercised. It has been held by the Apex Court in the case of Seth Brothers (supra) that if any of the actions of the officer are challenged, the officer concerned must satisfy the court about the regularity of the action. If the action is maliciously taken or power under the section is exercised for a mala fide purpose, it is liable to be struck down by the court.
8.1 In the case of Pooranmal (supra) the Apex Court held that Section 132 of the Act places reasonable restrictions on the freedom of trade and therefore cannot be held to be discriminatory and not violative of Article of 14 of the Constitution. In the said decision, the Apex Court gave a principle that even if the search and seizure were in contravention of the provisions of Section 132, still the material obtained therein could be used by the authorities for he purpose of framing assessment on a person from whom it was seized.
8.2 Again, the Apex Court, in the case of G.M. Mittal Stainless Steel P. Ltd. (supra) was concerned with the exercise of powers Under Section 263 by the CIT. The provisions of Section 263 enable the CIT to call and examine the records of any proceeding under the Act and if he is satisfied that any of the orders passed by the Assessing Officer is erroneous and prejudicial to the interests of revenue, he may proceed to revise such orders in the manner provided therein. The Assessing officer, while passing the assessment order, treated power subsidy as capital receipt because that was the law laid down by the jurisdictional High Court in CIT v. Dusad Industries (162 ITR 784) (MP). The CIT, in exercise of his powers Under Section 263 set aside the assessment order without giving any reasons as to why the Assessing Officer's order can be considered as erroneous in following that decision. The Tribunal, in the facts of that case held that the CIT had wrongly exercised the jurisdiction and he had not given any reasons to show that the order of the Assessing Officer was erroneous in the light of the jurisdictional High Court in the case of Dusad Industries (supra). The MP High Court upheld the order of the ITAT. In appeal before the Supreme Court, it was contended on behalf of the revenue that the decision in Dusad Industries (supra) was subsequently set aside by the Apex Court in the case of Sahney Steel & Press Woks Ltd. (228 ITR 253) and the Apex Court clearly came to the conclusion that the power subsidy was not in the nature of capital receipt but a revenue receipt. It was contended that the decision of MP High Court in Dusad Industries (Supra) had been held to be erroneous by the Apex Court. It was contended by the Revenue that the CIT was correct in revising the decision of the Assessing Officer in coming to the conclusion that the Assessing Officer had erroneously treated the power subsidy as a capital receipt. The Revenue also submitted that the decision of law by the Apex Court in Sahney's Steel's case (supra) can be deemed to have been the law which was at all times operative. The Revenue contended that at least so far as state of Andhra Pradesh was concerned, it had not accepted the principle as enunciated in the case of Dusad Industries (supra) and had challenged the decision of the AP High Court rendered in the case of CIT v. Sahney Steel & Press Works Ltd. (152 ITR 39). Therefore, according to the Department, the issue was still open and the CIT could, in the circumstances, keep it alive by initiation proceedings Under Section 263 of the Act. The Apex Court, considering these fact, held that Under Section 263 of the Act, the law requires that the CIT could call for and examine the record of any proceedings under the Act only on the basis of his being satisfied (i) that the Assessing Officer was erroneous in passing the assessment order and (ii) that the decision of the Assessing Officer was prejudicial to the interests of revenue. Needless to say that satisfaction must be one, which is objectively justifiable and cannot be mere ipse dixit of the CIT. In that particular case, the CIT has not recorded any reasons whatsoever for coming to the conclusion that the Assessing Officer was in error in deciding that the power subsidy was a capital receipt. The fact that the Apex Court subsequently reversed the decision of the MP High Court would not justify the CIT in treating the Assessing Officer's decision as erroneous. The power of the CIT Under Section 263 must be exercised on the basis of material that was available to him when he exercised the power. At that time there was no dispute that the issue whether the power subsidy should be treated as capital receipt had been concluded against the Revenue. Satisfaction of the CIT therefore, was, based on no material either legal or factual, which would have given him the jurisdiction to take action Under Section 263 of the Act.
8.3 Again, in the case of V. Subramonia Iyer (supra), the Kerala High Court was concerned with the provisions of Section 27 (1)(a), which require satisfaction of the Assessing Officer before imposing the penalty. It is not an invariable rule that when expressions such as "when so and so is satisfied", "in the opinion of" or other similar expressions are used, is not a subjective satisfaction that is contemplated. The content of the expression must be understood by reference to the subject matter and other provisions of the statute, which provide for appeals and remedies for rectifying orders passed by the original authority. If the ITO is to proceed on a purely subjective satisfaction, there is little scope for interference regarding the quantum of the penalty or even in regard to the question whether penalty should be imposed at all, in penalty proceedings. The scheme of the Act does not give such immunity to the order of the ITO. It has been held that the powers of the appellate authorities are very wide and the appellate authority could substitute the order of the ITO by one of its own. It is open to the appellate authority to consider the material available in the case and come to an independent conclusion whether any penalty should be imposed and if so the quantum of penalty. It was held that the provision of Section 217(1)(a) conferring the power to impose penalty on the ITO is subject to strict control by the Appellate Assistant Commissioner and the Appellate Tribunal. The fact that the ITO did not advert to the relevant material or ignored the relevant evidence or misread the evidence does not make the appellate authorities helpless in deciding the question themselves by adverting to the relevant evidence or material or by reviewing the evidence in a proper manner. A penalty order confirmed by the Appellate Tribunal would be valid even though the ITO who passed the penalty order did not consider the explanation offered by the assessee.
8.4 Again, the Kerala High Court, in the case of Smt. P.M. Celine (supra), held that satisfaction, in the very nature of things, precedes the issue of notice. It is not necessary to record satisfaction in the assessment order itself but the duty of the Revenue is to show that satisfaction was duly recorded and it precedes the issue of notice. This onus cannot be discharged by the Revenue by saying that the notices had been issued on the date of the assessment. It was held that no valid satisfaction preceded issue of notice was recorded by the Assessing Officer and hence the Tribunal was held to be right in holding that penalties levied Under Sections 271(1)(a) were liable to be quashed.
8.5 In the case of Govind (supra), Madhya Pradesh High Court was concerned with the issues relating to compulsory acquisition of property Under Section 269C and 269D of the Act wherein similar satisfaction of the competent authority regarding existence of matters specified in Sub-section (1) of Section 269C and recording of reasons of such satisfaction are required. It was found that the competent authority did not possess any material to believe that fair market value of the property was more than apparent value and no reasons were recorded for such belief before issuance of notice of such acquisition. Notice drawn up and issued to parties in those circumstances was held to be in violation of principles of natural justice and proceedings for acquisition were accordingly quashed.
8.6 Again, the Allahabad High Court, in the case of Leather Trends (Pvt.) Ltd. (supra) was concerned with the provisions of Section 80HHC, which required receipt of sale proceeds from goods, which have been exported within a period of six months from the end of the previous year. However, the CIT has been given the discretion to extend this time if he is satisfied that the assessee has been unable to receive the sum for reasons beyond his control. The power vested with the CIT under the aforesaid provision was held to be quasi-judicial in nature and should not be exercised in an arbitrary manner. If the CIT rejects application for extension of time, it is for the CIT to record his reasons howsoever short, before disbelieving the said reason to show application of mind. When it was found that the order rejecting application of extension of time did not disclose reasons or there were nor was there any indication of application of mind as to the facts pleaded by the assessee, the order of the Assessing Officer was held liable to be quashed.
8.7 Similarly, the Patna High Court was concerned with the provisions of Section 271(1)(c) of the Act in the case of Dewan Kunj Lal Kanhaiya Lal (supra) wherein the said provisions required the Assessing Officer to have been satisfied in the course of assessment proceedings regarding matters mentioned in the clauses of that sub-section. It was held that it was not essential that the notice to the person proceeded against should have also been issued during the course of assessment proceedings. The satisfaction, in the very nature of things, precedes issue of notice and it would not be correct to equate satisfaction of the ITO with the actual issue of notice.
9. In the light of the above discussions, we are of the view that satisfaction of the Assessing Officer that undisclosed income belongs to other person is justiciable and when called in question, the authorities cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the Department as a result of search. If the Department, for any reason, has no material whatsoever to come to that view, the proceedings under 158-BD itself will have to go because the very foundation for the assumption of jurisdiction becomes non-existent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In these cases, absolutely there is no iota of material from the proceedings of search that there was undisclosed income. When such is the case, the satisfaction that undisclosed income belongs to such other person is wanting. When that is the case, the entire proceedings framed with the issuance of notice Under Section 158-BD will have to go. In other words, if the basis for notice is not there, the notice itself is wrongly issued making further assessment on such other person is wholly outside the purview of the scheme. As already discussed in preceding paragraphs, satisfaction in the very nature precedes the issue of notice and it would not be correct to equate satisfaction of the ITO with the actual issuance of notice. To put it in other words, issuance of notice by itself is not the display or record of satisfaction which is the basic requirement under 158-BD of the Act. As already held by the Apex Court in the case of G.M. Mittal Stainless Steel P. Ltd. (supra) satisfaction must be one which is objectively justifiable and cannot be the mere ipse dixit of the Assessing Officer. Although in that case, the Apex Court was concerned with the assumption of jurisdiction Under Section 263, the Apex Court observed that the Commissioner has not recorded any reasons whatsoever for coming to the conclusion that the Assessing Officer was in error in deciding that the power subsidy was capital receipt. In fact, in that case, the Apex Court noticed that the decision of the MP High Court which was in favour of the assessee got subsequently reversed by the Supreme Court. The satisfaction of the authority was based on no material either legal or factual, which would have given him the jurisdiction to take action Under Section 263 of the Act. Even in this case, there is no iota of material, which can lead to any reasonable belief to come to a conclusion that undisclosed income belongs to such other person. Under Section 263, powers of the Commissioner are similar to the powers of the Assessing Officer Under Section 158-BD of the Act. There also the law never requires any satisfaction to be recorded in writing. The only requirement Under Section 263 was that upon examination of the records of any proceedings under the Act if the Commissioner considers that any order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue, he might revise the assessment.
10. On the facts and circumstances and in the light of the foregoing discussions, we are of the view that issuance of notice Under Section 158-BD of the Act is not justified. It is not justified merely on the ground that there was no material at all indicating any undisclosed income. The learned Standing Counsel who appeared on behalf of the Revenue has fairly agreed that there is no material found as a result of search which could pin point the existence of undisclosed income of a person who is not subject to search. The basic ingredient of Section 158-BD is the existence of some material. If there is no material, the question of Assessing Officer's satisfaction does not simply arise. If there is a material, then of course, it would be better if the Assessing Officer demonstrates that he is satisfied about there being some undisclosed income belonging to a person who was not searched. In all these cases, the assessments are not based on a search action or supported by any material found during the course of search but were the result of re-appraisal of facts that are already within the knowledge of the Department.
11. In the case of Premjibhai & Sons (supra), one of the arguments of the assessee was that notice Under Section 158-BD could not be issued without the verification of the Assessing Officer of the person raided that the undisclosed income belonged to some other person. The Assessing Officer had not actually recorded his satisfaction. The Hon'ble Gujarat High Court justified the departmental action by holding that a bare reading of the provisions of Section 158-BD showed that for taking action under that section, the Assessing Officer was merely required to be satisfied that the books of account or other documents or assets found in search showed undisclosed income of the person other than one against whom search was conducted. The Gujarat High Court further held the action of the Department to be justified by recording a finding that in view of the material on record, it could not be said that the income of notice Under Section 158-BD suffered from the vice of non-application of mind or for want of any material on record. On the other hand, in the present cases, admittedly there is no material at all and hence the issuance of notice Under Section 158-BD is bad in law.
To simplify the matter, it may be mentioned that satisfaction in such cases is arrived at on the basis of cogent and demonstrative evidence but might not have been specifically recorded as is normally done Under Section 148 of the Act. In other words, in a given case, where there is sufficient material to take action Under Section 158-BD, and the Assessing Officer has not specifically recorded satisfaction, it is not a lapse which would vitiate the proceedings. The main thing to be kept in mind is that proceedings Under Section 158-BD cannot be a fancy or ipse dixit of the Assessing Officer but it should be based upon some material evidence found in the course of search. It must be appreciated that by invoking the provisions of Section 158-BD, a stranger to the search proceedings is being implicated for a liability higher than normal rates of tax. Therefore, it would be in the fitness of things that the Assessing Officer demonstrates in some way his satisfaction about there being undisclosed income hidden in the search material, which as per the provision, has to be handed over to the Assessing Officer having jurisdiction over that other person. To put it straight, existence of material is a sine qua non for taking action Under Section 158-BD of the Act. If the above requirement is fulfilled in a given case, then omission to record satisfaction may not in the facts and circumstances of the case vitiate the proceedings.
12. Thus, in the present cases, the examination of the records does not show the existence of any material for the satisfaction and consequently issuance of notice Under Section 158-BD is not justified. The assessment order passed in pursuance thereof are vacated and the question referred to us is answered in the light of the above discussions.
13. In the result, all the appeals are allowed.