Can jurisdiction under Section 158BD of the Income Tax Act be assumed where the search material makes no reference to the assessee?

(Judgment of the Court was delivered by Dr.Anita Sumanth J.) These Tax Case (Appeals) were admitted on 29.06.2010 on the following substantial questions of law: 1. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the assessment made under Section 1158BC read with Section 158 BD is not valid on the grounds that no material evidencing undisclosed income in the case of the person in whose case the search was conducted was found ? 2. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in coming to the conclusion mentioned in the preceding question, since the very purpose of Section 158 BD is to enable proceedings to be initiated against the person in respect of whom evidence of undisclosed income was found during the course of search in the case of the person in whose case the search was conducted ? 3. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the block assessment order made on the asssessee was not based on any material or evidence found during the course of search or any post search enquiry made relating to such material? 4. Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the block assessment made on the assessee was invalid, ignoring the definition of undisclosed income given under Section 158B(b) and the manner of computation of undisclosed income for the Block period laid down in Section 158BB (1) ?

We have heard Mrs.V.Pushpa, learned Senior Standing Counsel for the appellant/Department and Mr.A.S.Sriraman, learned counsel for the assessee/respondents.

On 27.03.2003, there was a search under Section 132 of the Income Tax Act, 1961 (in short ‘Act’) in the case of one Suresh Chand Bafna (in short ‘person searched’), consequent upon which an assessment came to be framed on the person searched for the block period 01.04.1996 to 27.03.2003 under Section 158 BC read with Section 143(3) of the Act.

It is the Department’s case that the above assessment had been based on several incriminating books and documents that had been found in the course of the search, revealing undisclosed income. Ultimately, the assessment came to be quashed by the Income Tax Appellate Tribunal (in short ‘ITAT’/’Tribunal’) in IT(SS)A No.65/Mds/2007 dated 15.10.2008 and the appeal of the revenue before this Court as against that order has been withdrawn invoking the litigation policy.

Consequent on the search, notices under Section 158BD appear to have been issued to various entities. Two of those entities are respondent/assessees in the present appeals. Assessments were framed on 31.07.2007 in the case of the respondents before us making additions on three heads, i.e., (i) monies advanced to the person searched; (ii) deposits in bank accounts and (iii) increase in share capital.

The assessments were challenged in first appeal that were decided in favour of the respondents, the Commissioner of Income Tax (Appeals) rendering a categoric finding that no incriminating materials relating to the respondent/assessees had been found in the course of search. The CIT(A) also recorded that the respondents had filed returns of income for all years comprised in the block period, that had been the subject matter of regular assessments.

Those orders, dated 22.04.2008 and 21.04.2008,were challenged by the Revenue, and the appeals were dismissed by the Tribunal vide common order dated 17.07.2009. There are findings of fact to the effect that even in the case of the person searched, proper and credible books of accounts had been found to have been maintained. The entries therein related to deposits and loans that had figured in the balance sheets and in the books of accounts, that had been the subject matter of regular assessment for the years comprised in the search.

The operative portion of the order of the Tribunal, which is common to both assesses/respondents, and is self-explanatory, is extracted below: 4. We have heard the rival submissions and carefully cogitated the entire evidences available on record. The undisputed and undeniable facts of these cases are that during the search in the case of Shri Sureshchand Bafna, no undisclosed income was either found seized. Admittedly, under Chapter XIV-B only undisclosed income can be subjected to tax and that in the case of Shri Sureshchand Bafna itself no such undisclosed income was either found or seized. The legal position in this regard is that if any undisclosed income is found during the course of search and the same is seized, this can be made a basis for addition, either in the hands of the searched person if it is found to belong to him; and in case it is not so found, it is to be found as to who it belongs to; and after that the 'Assessing Officer' is bound to record his satisfaction that this income belongs to such and such person. In case no such undisclosed income is so found; block assessment order can neither be made under section 158BC nor under section 158BD of the Act. The searched assessee had disclosed each and every transaction qua which action under section 158BD has been initiated and as such no undisclosed income was found during this search. But the case of the department is that when the entries are found in the books of the searched assessee belonging to others it can be treated as undisclosed income of the other persons. The department may be technically correct. The subject of addition under Chapter XIV-B can only be an undisclosed income unearthed during search. It was brought to the notice of the Bench that the case of Shri Sureshchand Bafna travelled upto the Tribunal and it was finally held that there was no incriminating document found during search on the basis of which it could be said that there was undisclosed income. Section 158B(b) describes undisclosed income to include income or property which would not have been disclosed for the purpose of this Act. For recording satisfaction under 158BD an evidence found during the search can beused and for that purpose the undisclosed income should be found during search and only then after ascertaining the owner of such undisclosed income, action under section 158BD can be taken. A copy of the Tribunal order in the case of Dy.CIT vs. Shri Sureshchand Bafna in IT(SS)A No.65/2007 was enclosed. With reference to this order it was submitted that the books of account found during search have been treated as genuine and hence there is no question of any satisfaction that the assessees are the owners of the alleged undisclosed income can arise as it is extinct in this case. Therefore, the very basis of making the assessment under section 158BC read with section 158BD is not in existence in this case. The very genesis is absent. So no action under section 158 can be legally initiated against all these assessees. In the case of Shri Sureshchand Bafna, this Tribunal vide order dated 15thOct.2008 has come to the conclusion that no incriminating evidence was found. Hence there was no question of making any addition under section 158BC of the Act. It was clamoured by learned counsel for the assessee that unless undisclosed income is found in search, no action under section 158BD can be initiated. We are in agreement with the learned counsel for the assessee. Thus we can safely hold that the impugned block assessment order(s) is not based on any material or evidence found during the course of search or any post enquiry made relating to search material. In view of the foregoing reasoning, it can be said that at best this could be a case under section 147 of the Act but not at all a case under section 158BC read with section 158BC.Consequently, we cannot allow the appeals of the Revenue because, the learned Commissioner (A) has taken a correct decision.

We may also usefully extract certain portions of the order passed on 15.10.2008 in the case of the person searched, which would have a bearing in the present case. 36. It is to be seen that the transactions allegedly imputable to the undisclosed income of these assessees have already been recorded in their books of accounts and search conducted in the premises of Shri Suresh Chand Bafna had no role in bringing this factum to the light before the Income Tax Department. Even without the involvement of the search in the case of Shri Suresh Chand Bafna, these transactions were very much in the books of accounts of the assessee and therefore, it is not proper to say that materials have been collected in the course of search that would implicate these assessees in a case of undisclosed income computable under section158BD. 37. The factual frame work that must exist for the purpose of invoking provisions of sections 158BC and 158BD is the same. In both cases, undisclosed income must be imputable on the basis of the materials collected in the course of search or requisition. Section158BC is used to proceed on the person who is searched or requisitioned. Section 158BD is used to proceed against the person other than the person who was searched or requisitioned. But, for the above procedural difference, the pith and substance of the condition necessary for making a block assessment is the same under section158BC and section 158BD. A case of undisclosed income must survive in the light of material found out in the course of search or requisition. The law has statutorily defined what is "undisclosed income" to mean that the income not disclosed to the Department or would not have been disclosed but for the search or requisition. Therefore, the case of undisclosed income is parimateria the same both in section 158BC and in section 158BD. 38. In these cases, we have already seen that the transaction alleged to be leading to undisclosed income have already been reflected in the books of accounts of the assessees before the search was taken place. Therefore, it does not come under the purview of section 158B(b). Therefore, it is needless to say that the additions of undisclosed income made by the Assessing Officer in all these four cases are not sustainable in law. 39. Accordingly, we accept the common legal contention raised by the assessees through their Cross Objections and hold that the impugned block assessments completed under section 158BD are bad in law. Therefore, the appeals filed by the Revenue have become infructuous. The other grounds raised by the assessees in their respective Cross Objections have also become infructuous, for the reason that the assessments themselves have been held to be bad on the basis of the legal contention raised by the assesses.

To be noted that the above observations and conclusions have been rendered in order dated 15.10.2008 in the appeals filed by Padmavathy Bafna and Adit S.Bafna (IT(SS)A Nos. 89/Mds/2007 & 111/Mds/2007) who had also received notices under Section 158 BD of the Act, consequent on the search in the case of Suresh Chand Bafna.

Moreover, paragraph 14 of the order of the Tribunal dated 15.10.2008 contains an extract of the assessment order in the case of Suresh Chand Bafna, reading as follows: 14. A perusal of the assessment order is a testimonial to the above argument advanced by the assessee. The relevant portion is extracted from the assessment order:- "LOANS FROM SHELL COMPANIES During the course of search, books of accounts maintained by the assessee were verified and it was found that the assessee has received substantial amounts of unsecured loans from the following corporate entries:- (a)Dhananjeya Securities Ltd. (b)Bifour Services Ltd. (c)Net Axix Software Services Ltd. (d)Parque Foods and Exports Pvt. Ltd. (e) Mega Channel Computers Ltd.

We note that there is no reference in the above extract to Oswal Minerals Ltd. /respondent assessee in T.C.(A) No.260 of 2010. Hence, we are unconvinced as to the basis by which jurisdiction has been assumed under Section 158 BD of the Act. In fact, we had called for the records and the satisfaction note, but have not been provided with a copy of the same.

In light of the categoric findings of the Tribunal that have neither been disputed nor dislodged before us, the questions of law are answered in favour of the assessees and these appeals are dismissed. No costs. (A.S.M.,J.) (S.R.K.,J.) 28-09-2026