1. This appeal by Revenue and cross-objection by assessee against the order dt. 22nd March, 2002 of learned CIT(A)-1, Hyderabad, in block assessment for the period 1st April, 1989 to 10th Dec, 1999 raise the following grounds: 2. The learned CIT(A) ought to have appreciated that non-issue of notice under Section 143(2) within the time-limit of 12 months is only a technical flaw and on that only count the assessment need not be quashed.
3. The learned CIT(A) ought to have taken into consideration the order of the Hon'ble Supreme Court of India in the case of CIT v. Jai Prakash Singh according to which the non-issue of notice under Section 143(2) within the stipulated was only a procedural irregularity and the assessment made could be irregular but not void or illegal. The learned CIT(A) ought to have taken note of the apex Court's opinion and sustained the assessment.
1. The learned CIT(A) ought to have held that there is no undisclosed income as contemplated under the provisions of Chapter XIV-B of the IT Act, under the circumstances that on the previous day of the search, a survey under Section 133A was carried out and the findings of the search and seizure and survey operations are one and same.
2. The learned CIT(A) ought to have held that the AO is not correct in assessing the voluntary donations given to the assessee society of Rs. 23 lakhs under the provisions of Section 68 of the IT Act.
3. The learned CIT(A) ought to have held that the AO has erred in adding the sum of Rs. 16.64 lakhs as unexplained income in the absence of any incriminating material found during the course of search.
4. The learned CIT(A) ought to have held that the AO is not correct in making the addition of Rs. 87,870 towards unexplained investment in purchase of land and Rs. 13,420 towards unexplained expenditure under the facts and circumstances of the case.
5. The learned CIT(A) ought to have held that the society is exempt from tax under the provisions of Section 19(23C)(vi) of the IT Act.
6. The AO is not correct in levying surcharge of Rs. 2,43,917 as the provisions of Section 113 are not applicable to the facts of the case.
7. Any other grounds that will be urged at the time of hearing of the appeal.
1. The learned CIT(A) erred in considering the facts and circumstances of the case regarding the assessment completed under Chapter XIV-B. A survey under Section 133A was conducted in the assessee's premises on 9th Nov., 1999 and later on it was converted into search and seizure operation under Section 132 of the IT Act. A warrant of authorization under Section 132 of IT Act issued by Director of IT (Inv.), Hyderabad, dt. 10th Dec, 1999 was served on the assessee and books of account and loose sheets were impounded on the strength of the authorization. As a search under Section 132 was conducted, the CIT(A) ought to have appreciated that the assessment proceedings were rightly completed under Chapter XIV-B of IT Act.
2. The learned CIT(A) ought to have appreciated that the assessee did not offer any additional income on which it wanted to pay tax during the course of survey under Section 133A and that the entire income as found during the course of search under Section 132 of IT Act has been rightly assessed for the block period.
3. From the facts and circumstances, the CIT(A) ought to have confirmed the order of the AO.2. The above additional grounds raised by Revenue had not been objected by the assessee. Moreover, the grounds being legal and since the same go to the root of the matter, the grounds so raised have been admitted for adjudication.
3. Briefly, the facts are that the respondent is a society registered under Societies Registration Act, 1860 with the objectives, inter alia, of formulating, establishing and running of educational institutions.
The assessee did not file any return of income. There was a survey operation on 9th Dec, 1999 under Section 133A of the Act, when certain Kucha slips/receipts, register and fixed deposits of about Rs. 9.50 lakhs were found. A statement of the secretary of the society was recorded, who admitted to make surrender of an income of Rs. 11,43,000 and pay taxes thereon. This action was followed by search operation carried under Section 132 of the Act on the same very day, when the Kucha slips and other incriminating documents found were seized. The assessee did not maintain books of account for the MCA course although substantial collections were made from students and expenditure was incurred without accounting for the same. In his statement recorded on 17th Dec, 1999 on oath by DDIT, Unit-1, Visakhapatnam, the secretary of society in reply to question No. 16, replied and made admission of undisclosed income of Rs. 11.43 lakhs as under: In view of the defects pointed out above, I would like to offer as the undisclosed income of the society a sum of Rs. 11.43 lakhs which represents the excess amount over and above the stipulated fee of Rs. 21,000 per year per candidate collected by the society for the MCA admission, particulars of which are contained in the loose slips seized today. I also undertake to file the return of my undisclosed income and pay the taxes due thereon as soon as possible.
4. Consequent to issuance of notice under Section 158BC of the Act on 19th April, 2000, the respondent filed return of undisclosed income on 12th May, 2000 declaring nil income. A notice under Section 142(1) of the Act was also issued on 18th June, 2001 requiring the assessee to furnish certain information. Thereafter, another notice under Section 143(2) of the Act was issued on 15th Oct., 2001 which was served on 27th Oct., 2001. The assessment of undisclosed income of Rs. 40,65,290 has been completed on 28th Dec, 2001.
5. Before the learned CIT(A), the assessee challenged validity of assessment on two counts: 1. Notices issued under Sections 142 and 143(2) were beyond 12 months from the end of the month in which the return was filed and, therefore, the notices were not valid.
2. That the findings of survey cannot be taken for arriving as undisclosed income as the same does not come under the purview of provisions of Section 158BA of the Act.
6. The learned CIT(A) following various Tribunal judgments where it was held that the AO having failed to initiate assessment proceedings within the time-limit prescribed under proviso to Section 143(2) of the Act, the entire block assessment as made would be without jurisdiction and as such, the same has to be quashed and also anything found or detected as a result of survey under Section 133A of the Act is outside the scope of assessment in Chapter XIV-B which deals only with assessment of undisclosed income as a result of search, quashed the assessment. He, however, did not consider it fair and proper to adjudicate on various other grounds raised in appeal.
7. The learned Departmental Representative while assailing the decision taken by learned CIT(A) contends that learned CIT(A) acted beyond his jurisdiction to say on the basis of an opinion published in Taxman Magazine Vol. 18, p. 50 that income found and disclosed in the course of survey, cannot be subjected to assessment for block period merely on the ground of seizure made under Section 132 of the Act. In fact, the learned CIT(A) cannot touch upon the jurisdictional aspect as validity of action under Section 132 of the Act could not be examined by him.
Reference to the Mowing passage in the judgment rendered by Hon'ble Delhi High Court in the case of M.B. Lal v. CIT , was made: The Tribunal has, as noticed earlier, answered both these questions in favour of the Revenue. It has, relying upon the decision of a Special Bench of the Tribunal at Bangalore in C. Ramaiah Reddy v. Asstt. CIT (Inv.) (2003) 81 TTJ (Bang)(SB) 1044 : (2004) 268 FIR 49 (Bang)(SB)(AT), held that the validity of the action taken under Section 132 of the Act could not be examined in the appeal filed before it. We see no reason to take a different view. Any appeal before the Tribunal against the block assessment made under Section 158BC does not take within its fold questions touching the validity of the search conducted under Section 132 of the Act. Whether or not the conditions precedent for a search stipulated under Clauses (a), (b) and (c) of Section 132(1) of the Act were satisfied in a given case fall beyond the scope of assessment proceedings instituted under Section 158BC of the Act or any statutory appeal preferred against the order made under that provision. If the petitioner was keen to test the validity of the said proceedings, his remedy lay in a writ petition under Article 226 of the Constitution.
8. It was further contended that material and evidence was found and seized under Section 132 of the Act, which gave jurisdiction to make assessment for the block period in terms of Section 158BA(1) of the Act. The respondent had not filed regular returns of income even though material was there to show that the assessee had received income. This income was not accounted for in the regular books of account also, which was liable to be assessed as undisclosed income of the block period. As regards information, it may come from any source. In the case of the respondent the action under Section 132 was initiated after the findings of survey carried on 9th Dec, 1999. There is no event to say that assessment has been made on the basis of material found in survey under Section 133A of the Act and that the AO did not act on the basis of material or evidence found as a result of search. The learned CIT(A) therefore erred in quashing the assessment on that basis.
9. The learned CIT(A) also relied upon certain Tribunal decision to hold that notices under Sections 142 and 143(2) having not been issued within one year of expiry of the month in which return was filed and thus it was a nullity is contrary to the view entertained by a larger Bench of the Tribunal in the case of Nawal Kishore & Sons Jewellers v.Dy. CIT (2003) 81 TTJ (Luck)(SB) 362 : (2003) 87 ITD 407 (Luck)(SB) at paras 55 and 56 of the judgment as under: 55. In view of the above legal position, we hold that non-issuance of notice under Section 143(2) would only be an irregularity which is curable and not as nullity. Hence, the assessment order passed in violation of such requirement cannot be declared as null and void.
56. Having held that non-issuance of notice under Section 143(2) is not a nullity but is an irregularity, the question may arise as to what course should be adopted in such cases by the appellate authority. One easy course would be to set aside the assessment and restore the matter to the file of the AO for fresh assessment after giving reasonable opportunity of being heard to the assessee. But there may be cases where sufficient opportunity might have already been given by the AO or the assessee might have participated in the proceedings before the AO or there may be sufficient material on the record for adjudication. In such cases, mere restoration may prove to be a futile exercise, therefore, in such cases, the appellate authority may adjudicate the issue itself after giving reasonable opportunity to the assessee to explain his case. These observations are mere guidelines and no limitations are being placed on the powers of the appellate authority. The appellate authority would be free to choose the right course depending upon the facts of each case.
10. Furthermore, there has been an amendment in the statute by the Finance Act, 2006 w.r.e.f. 1st Oct., 1991 and also an Explanation has been inserted below Section 148 as under: (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005 in response to a notice served under this section, and (b) subsequently a notice has been served under Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Sub-section (2) of Section 143, as it stood immediately before the amendment of said sub-section by the Finance Act, 2002 (20 of 2002) but before the expiry of the time-limit for making the assessment, assessment or recomputation as specified in Sub-section (2) of Section 153, every such notice referred to in this clauses shall be deemed to be a valid notice: (a) where a return has been furnished during the period commencing on the 1st day of October, 1991 and ending on the 30th day of September, 2005, in response to a notice served under this section, and (b) subsequently a notice has been served under Clause (ii) of Sub-section (2) of Section 143 after the expiry of twelve months specified in the proviso to Clause (ii) of Sub-section (2) of Section 143, but before the expiry of the time-limit for making the assessment, reassessment or to computation as specified in Sub-section (2) of Section 153, every such notice referred to in this clause shall be deemed to be a valid notice.
(Explanation-For the removal of doubts, it is hereby declared that nothing contained in the first proviso or the second proviso shall apply to any return which has been furnished on or after the 1st day of October, 2005 in response to a notice served under this section.) 11. It has, therefore, been contended that the aforesaid legal provisions have to be taken in existence at the time when assessment proceedings in this case were taken up. The respondent had already been given sufficient and reasonable time to explain as to how there is no undisclosed income assessable for the block period. The learned CIT(A), therefore, erred in holding that the assessment made by non-issuance of notice under Sections 142 and 143(2) of the Act within one year from the end of the month in which return for block period was filed was a nullity.
12. On the other hand, authorised counsel, Sri C. Subramanyam, fairly admits that in view of the decision rendered by Special Bench of the Tribunal in the case of Nawal, Kishow & Sons Jewellers v. Dy. CIT (supra) and also amendment in the Act brought with retrospective effect from, it cannot be held that the assessment made for block period without issuing notices under Section 142 and Section 143(2) of the Act within one year from the end of the month in which the block return has been made, shall be a nullity, and as such, the decision taken by learned CIT(A) on that count can be set aside, 13. He also admits that the learned CIT(A) or the Tribunal cannot touch upon the validity of the jurisdiction under Section 132 of the Act as was held by the Hon'ble Delhi High Court in the case of M.B. Lal v. CIT (supra). He, however, states that the learned CIT(A) did not quash the assessment on that ground nor gave any finding about validity of action under Section 132 of the Act. In fact, the case of the assessee all through before the authorities below is that the information or material found or collected in survey proceedings under Section 133A of the Act cannot be used for making assessment of undisclosed income for the block period. In this case, the assessee in particular, had admitted to make surrender of an income of Rs. 11.43 lakhs in survey proceedings. This amount cannot be taken as "not disclosed or would not have been disclosed" for the purpose of this Act, and as such, the same shall be outside the scope of undisclosed income defined in Sub-section (b) of Section 158B of the Act. An identical statement was recorded by the search party and nothing new other than what was already disclosed had come to their notice. In that view of the matter, the findings of survey or disclosure made in survey could not be used for making block assessment of the assessee. The assessee made reference to para 8 of the order of learned CIT(A) where such glaring facts are duly recorded as under: With regard to survey conducted under Section 133A on 9th Dec, 1999, converted into search on next day i.e. 10th Dec, 1999 which lasted about 15 minutes, it has been submitted that to establish undisclosed income it is essential that transaction must be discovered during the course of search and seizure operation. If the Department before the search already knows the transaction and then search proceedings were started it will not fall within the definition of undisclosed income. In this connection, it would be relevant to reproduce the statement recorded from the secretary of the society on the date of survey and at the search under Section 132 of the IT Act: Ans. The total collection made so far is Rs. 16.61 lakhs, out of which Rs. 10.30 lakhs were deposited in the form of FDRs in Vysya Bank, Ramnagar, Visakhapatnam, in the name of the society. Amount of Rs. 1.50 lakhs was spent for purpose of purchase of furniture and preparation of the application forms and the balance amount has been spent for certain purposes which did not qualify for expenditure in the normal course of business and for the same no vouchers have been maintained and I am not in a position to offer evidence in respect of the same.
Q. No. 18. From the various application forms and loose scribblings indicating payments by MCA students, it is found that you have collected an amount of Rs. 16.64 lakhs till date from 25 students as against a sum of Rs. 21,000 per student which the university stipulates to be collected from them. Have you issued any receipts to your students from whom such amounts were collected Q. No. 19. There is also no evidence as to the purpose for which the excess amounts have been collected. From the note books in which the collection particulars have been mentioned, it is seen that against each candidate you have mentioned a figure like Rs. 2.3, 2.0 to be collected as against the prescribed course fees of Rs. 21,000.
Further, the non-maintenance of books of account and non-issue of receipts to the concerned students clearly indicate your intention not to bring into accounts the excess amounts collected from the students. Moreover, you have also admitted that you have already incurred expenditures to the tune of approximately Rs. 5 lakhs for various purposes, which you cannot substantiate or cannot claim as a normal expenditure of your day-to-day business. In view of this, what is the income you would like to disclose as your income, which has not been indicated in your books of account and accounted for so far Ans. In view of the deficiencies observed by you in course of survey operations today, I would like to offer as the income of the society a sum of Rs. 11.43 lakhs which represents the differential amount over and above the stipulated fees of Rs. 21,000 per each candidate.
The amount will be offered by me as an additional income of the society for the asst. yr. 2000-01 (financial year 1999-2000) and I will pay the advance tax due on the above additional income on or before 15th Dec, 1999. I am offering this additional income voluntarily to purchase peace with the Department and request that no penalty or prosecution proceedings are initiated against me. In order to prove my commitment for paying the taxes, I undertake to pay at least Rs. 1 lakh by Monday, i.e. 13th Dec., 1999.
14. The learned Counsel for assessee placed reliance on certain decisions on the prepositions set out against each as under: (i) Words "has not been" in Section 158B(b) are to be considered in those cases where the disclosure has already been made by the assessee for any assessment year before the date of search and the words "would not have been disclosed" are to be considered in those cases where returns have not been filed by the assessee before the date of search as held in Vidya Madanlal Malani v. Asstt. CIT (2000) 69 TTJ (Pune) 456 : (2000) 74 ED 341 (Pune).
(ii) Information gathered during survey cannot be made basis of addition in block assessment. Material found during search can only be made the basis for block assessment as was held in Asstt. CIT v. Fertilizer Traders (2004) 83 TTJ (AH) 473.
(iii) The assessee having disclosed investment or material before the search, the AO shall not be justified in making use of the said material in computing undisclosed income as the same is outside the meaning of Section 158(b) of the Act as was held in Smt. Sivabala Devi v. Asstt. CIT (2004) 88 TTJ (Mad) 955 : (2004) 88 ITD) 333 (Mad).
(iv) Reading of Section 158BA(1) makes it specifically clear that action under Sections 132 and 132A alone is to be considered for making the assessment of undisclosed income material detected or found as a result of survey under Section 133A is to be excluded from the purview of Section 158BA of the Act. Amount in question cannot be treated as the assessee's undisclosed income as it is covered by regular assessment. In view of the above, there is no justification in treating such amount as undisclosed income of the assessee as was held in Prakash Tulsidas v. Asstt. CIT (2000) 68 TTJ (Nag) 479 : (2000) 73 ITD 444 (Nag).
(v) The AO included under Section 158BB the undisclosed income found during the survey made under Section 133A. The CIT(A) excluded that portion which had been included based on the material found during the survey on the premises that in respect of block assessment under Section 158BB, material collected during the survey under Section 133A could not be taken into consideration. This was confirmed by the Tribunal and upheld by Hon'ble Madras High Court in CIT v. G.K. Senniappan (Mad).
15. It was thus contended by the learned Counsel for assessee that the learned CIT(A) cannot be said to have erred in quashing the assessment made on the basis of material or evidence found as a result of survey carried under Section 133A of the Act.
16. As regards the cross-objections, it was contended that the learned CIT(A) did not render any decision on merits of the case though such grounds were duly raised by him. In case the Tribunal sets aside the decision taken by learned CIT(A), the matter has to be restored back to the learned CIT(A) for taking a decision on merit of the grounds raised before him for which no adjudication has been done by him as has clearly been stated in the impugned order.
17. We have heard the parties with reference to precedents on record and perused the material carefully. The jurisdiction to make assessment for the block period vests with the AO immediately after an action under Section 132 is taken on a person. In this case, it is an admitted position that action under Section 132 was taken on 10th Dec, 1999 as is evident from copy of Panchnama placed at paper book pp. 48 and 49.
The Special Bench of the Tribunal in the case of Nawal Kishore & Sons Jewellers v. Dy. CIT (supra) has already entertained a view that non-issuance of notice under Section 143(2) or under Section 142 of the Act within one year from, the end of the month in which the block return is filed is not fatal to the jurisdiction to make assessment.
Non-issuance of notice is merely an irregularity and if sufficient opportunity has been given by issuance of notices prior to completion of assessment, the same cannot be made a basis to quash the assessment.
Moreover, there has been an amendment with respect to the issuance of notice beyond a period of one year which has been made w.r.e.f. 1st Oct., 1991. If the notice is issued beyond a period of one year from the end of the month in which the return was filed, such notice shall be deemed to be a valid notice. This amendment shall also apply with full force to the assessment made for block period. In that view of the matter and as has also fairly been admitted by the learned Counsel for assessee, the learned CIT(A) could not have come to the conclusion that by non-issuance of notice within the period of one year from the end of the month in which return was filed will render such notices as invalid and consequently quashed the assessment. The respondent was given sufficient time by issuance of notices under Sections 143(2) and 142 of the Act much prior to completion of assessment so that there is no denial of adequate opportunity to him to show that there was no undisclosed income assessable for the block period in his case. There was thus, no legal infirmity committed by AO in making block assessment. The decision taken by learned CIT(A), therefore, being contrary to the provision of law, is hereby set aside.
18. Furthermore, Section 158BB of the Act mandates computation of undisclosed income of the block period on the basis of evidence found as a result of search or other documents and such other material or information as are available with the AO and relatable to such evidence. The Hon'ble Madras High Court in CIT v. G.K. Senniappan (supra), on which assessee's counsel has also placed reliance, had an occasion to consider the expression "such other materials or information as are available with the AO" in Section 158BB of the IT Act and also the expression "such evidence", and has given interpretation as under: A mere reading of the above provision clearly indicates that the sentence 'such other materials or information as are available with the AO' cannot be bisected or taken in isolation for the purpose of computation. Such other materials or information as are available with the AO, should as per the section relatable to such evidence.
The word 'such' used as a prefix to the word 'evidence' assumes much significance, in this provision, as it indicates only the evidence found, as a result of search or requisition of books of account or other documents, at; the time of search. Any other material cannot form basis for computation of undisclosed income of the block period.
19. In the present case in appeal, the survey was undertaken on the assessee on 9th Dec, 1999 and it was found that the assessee had not recorded the full receipts in the regular books of account, Kuccha slips for receipts were also found in his possession and regular returns had also not been filed by the assessee. All this information led to an action under Section 132 of the Act, on 10th Dec, 1999 when all such materials and evidence showing income having not been disclosed in the books of account were found and seized. The assessee has made assertion that it had agreed to declare an income of Rs. 11.43 lakhs in his statement recorded in survey proceedings. This statement was made on the basis of material or information found as a result of survey on 9th Dec, 1999. It has, therefore, been pleaded that the amount so admitted as assessee's income cannot be taken as the amount which would not have been disclosed for the purpose of the IT Act and as such, the amount of Rs. 11.43 lakhs could not have been taken as undisclosed income within the meaning of Sub-section (b) of Section 158B of the Act. We, however, are not inclined to agree with the proposition being laid down by learned Counsel for the assessee. Under the peculiar facts of the case, it is evident that the assessee has not filed any return of income for any of the earlier years nor for the year in which search was conducted on him. . He had also not maintained regular books of account for the amounts collected by him rather has maintained only Kuccha slips for the receipts from MCA course and expenses incurred against that. Merely because he agreed to disclose an income of Rs. 11.43 lakhs cannot be taken that such an amount would have been disclosed by him which, in fact also, he did not do on any of the later date till block assessment was completed on him. Both from the facts and conduct of the assessee, it is evident that the income through the seized document was such which the assessee had neither disclosed nor it would have disclosed for the purpose of this Act.
Furthermore, the AO is found to have made the block assessment on the basis of material and evidence found as a result of search on the assessee on 10th Dec, 1999 and did not rest its decision to treat undisclosed income only on the basis of material or evidence found during survey proceedings under Section 133A of the Act carried on 9th Dec, 1999.
20. It is true and we are also fully in agreement to the proposition that income found on the basis of material or evidence discovered in survey proceedings under Section 133A of the Act cannot be taken to make assessment of undisclosed income of the block period but such a statement is true when such a material or evidence is not found as a result of search or information is not available to the AO relatable to the evidence found as a result of search. In other words, if an action to search does not reveal any material or evidence of undisclosed income and an independent survey is carried on a person, then the findings of such survey or material or evidence found in such survey cannot be taken as a basis for making assessment of undisclosed income for the block period. The decision rendered by Madras High Court in CIT v. G.K. Senniappan (supra) is one such case where a search was conducted against a third person in which it was found that the assessee had utilized undisclosed income for making contributions to certain unregistered chits conducted by the said person. Thereafter, a survey was conducted in the business premises of the assessee which indicated certain real estate transactions carried on by the assessee but the profits derived thereon had not been disclosed to the Department. The income so found in survey proceedings was treated as undisclosed income under Section 158BB of the Act but the CIT(A) excluded the income found in survey from the total income assessed as undisclosed income and his order also stood confirmed by the Tribunal.
Before the Hon'ble High Court, it was contended that the material gathered in the course of survey under Section 133A of the Act can also have been regarded as a material for the purpose of making of block assessment under Section 158BB of the Act. The Hon'ble High Court agreeing with the CIT(A) and the Tribunal found that the decision taken by them was in accordance with the provisions of law.
21. From the aforesaid judgment, it is thus evident that the material gathered in the course of survey under Section 133A which is not found or seized in search carried out under Section 132 of the Act, cannot be made as a basis for making assessment of undisclosed income for the block period on a person. However, in the peculiar facts of the case at hand and as has also been found by us earlier, the AO assessed the undisclosed income on the basis of material found and seized as a result of search on the assessee and he did not rest his decision to include the evidence found as a result of survey only for making assessment of undisclosed income of the assessee. The learned CIT(A), thus, in the present case, did not take into consideration the correct facts and applied the law halfheartedly only so as to come to the conclusion that the addition was illegally made. Quashing of order thus, was uncalled for and unjustified. We, therefore, set aside his decision on that count as well.
22. The learned CIT(A), however, did not render decision on the merits of all other grounds taken before him by the assessee. We, therefore, restore the matter back to him so that he takes a decision on merit on all other grounds in appeal, after providing reasonable opportunity of being heard to the assessee.
23. As a result of this, appeal of Revenue as well as the cross-objection by assessee are allowed for statistical purposes only.