1999-VIL-108-ITAT-

Equivalent Citation: ITD 076, 344, TTJ 071, 158,

Income Tax Appellate Tribunal MADRAS

Date: 21.10.1999

L SAROJA.

Vs

ASSISTANT COMMISSIONER.

BENCH

Member(s)  : RAM SWARUP., N. BARATHVAJA SANKAR.

JUDGMENT

Per Shri N. Barathvaja Sankar, Accountant Member.---

These appeals are preferred by the various appellants against the respective orders under section 143(3)/158BD/BC of the Income-tax Act, 1961. As the issues involved are similar, the appeals were clubbed together, heard together and are being disposed of by this common order for the sake of convenience.

2. Search under section 132 of the Income-tax Act, 1961 was conducted at the residential and business permises of Shri K.V. Laxmanan at 472 to 474, Valayakara Street, Erode under warrant of authorisation issued against Shri K.V. Laxmanan at the premises mentioned. Warrant was not against the firm in which Shri K.V. Laxmanan or any member of his family might be connected or interested as partner or otherwise. However, the books of account and records belonging to the following assessees, which were found in the premises searched, were also seized:---

1. M/s. Rana Investments, Erode. (Shri K. V. Laxmanan is a partner).

2. M/s. Rana Cotton Yarn Centre, Erode. (Shri K. V. Laxmanan is a partner).

3. Ramalinga Yarn Traders, Erode. (Shri K.V. Laxmanan is a partner).

4. M/s. J.S. & Company, Erode. (Originally a partnership firm and with effect from 1-4-1991 a proprietary concern of Shri K. V. Laxmanan).

5. M/s. Ran Angappa Mudaliar, Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner).

6. M/s. Saraswathi & Co., Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner).

7. Mrs. L. Saroja, Erode (Wife of Sri K.V. Laxmanan)

8. M/s. Sakthivel Bankers, Erode. (Smt. Saroja, wife of Shri K.V. Laxmanan is a partner).

Except M/s. Ran Angappa Mudaliar and Smt. Saroja, wife of Shri K.V. Laxmanan, who were assessed to income-tax by the Assistant Commissioner of Income-tax, Circle I(4), Erode, all other assessees were under the jurisdiction of the Income-tax Officer, Circle I(4), Erode. Some time after the search the files of the above assessees were transferred to the jurisdiction of the Assistant Commissioner of Income-tax, Special Investigation Circle, Erode. Notices under section 158BC were issued on 9-4-1997 and block assessments were completed on the persons mentioned above in the previous paragraph.

3. The assessees are in appeal. There are several grounds in each of these appeals. Some of the grounds (ground Nos. 1, 2 and 3) deal with the validity of the block assessments; the other grounds relate to the merits of the additions in each case. In addition, identical additional grounds have been taken as follows :

1. The order of block assessment is bad in law and void ab initio, inasmuch as search against the persons against whom the warrant is executed is illegal and bad in law and, therefore, the consequential block assessment under section 158BD is illegal and liable to be cancelled.

2. Without prejudice to the above the income which is assessed in the hands of the appellants was never considered initially as the undisclosed income of the persons searched (Shri K.V. Laxmanan) either by the Assessing Officer at the time of search or subsequently by the Assessing Officer to invoke the provisions of section 158BD of the Act and consequently the block assessment require to be annulled.

3. The block assessment under section 158BD is bad in law, as there was no document or books evidencing any undisclosed income was found during the search and therefore the block assessments require to be annulled.

4. For the above and other grounds that may be urged at the time of hearing of the appeals your appellant humbly prays that the appeal may be allowed and justice rendered.

4. Having regard to the rival submissions and the materials on record we proceeded to deal with the additional grounds as follows:

4.1 Admittedly, the warrant of authorisation for search and seizure at the premises mentioned therein was issued only against Shri K.V. Laxmanan. In the course of search books of account and records of the appellants except Palingapandi Group of Estates were also seized as they were found in the premises. Though affected as a result of the search under section 132 against Shri K.V. Laxmanan the appellants have no locus standi to assail the validity of the search under section 132 as the same was not against them. Section 253 of the Income-tax Act, 1961 does not provide for appeal as against the order under section 132 or 132A and therefore the Tribunal cannot entertain the appeal against the validity of action under section 132 or 132A. For these reasons we dismiss ground No. 1 of the additional grounds of appeal as not entertained.

4.2 Ground Nos. 2 and 3 (third ground is only a prayer for relief) are admitted as they are purely questions of law and the issues raised therein have nexus with ground Nos. 1, 2 and 3 of the original grounds of appeal.

5. Ground Nos. 1, 2 and 3 of the original grounds of appeal (which are common in all these appeals) are as follows :

1. The order of the Assessing Officer insofar as it is against the appellant is against law weight of evidence and probabilities of the case.

2. The Officer erred in invoking the provisions of the Income-tax Act especially Chapter XIV-B read with section 132 and the reasons given by him are therefore unsound.

3. The appellant submits that the provisions of the Act, namely sections 132 158BD/BC and co-related sections are not attracted and the order is illegal, invalid and without jurisdiction.

(Note: The other grounds are on the merits of the respective appeals).

5.1 The learned Chartered Accountant for the appellants and the learned departmental representative for the Revenue have made extensive oral submissions. They have also filed a gist of main submissions in writing. The issues are considered on the basis of the rival submissions, citations and the materials on record before the Tribunal.

5.2 Shri S. Venkatesan, the learned Chartered Accountant contended that as the warrant of authorisation for search was issued only in the name of' Shri K.V. Laxmanan, there could be no valid search conducted in respect of the appellants and the seizure of books and records relating to them was illegal and uncalled for. Since the seizure of records was illegal, the same could not be used for making the block assessment on the persons not subjected to search under section 132 of the Act.

5.3 Shri T. Goraknathan, the learned senior departmental representative justified the seizure of books and records as they were found in the premises searched. He further contended that even if the search was held to be illegal (though it is not his view), yet the materials collected could be used in the assessments.

5.4 Shri Venkatesan, the learned Chartered Accountant countered by saying that the materials collected in an illegal search can be used only in making assessment or reassessment but not for making block assessment under Chapter XIV-B of the Act, which is a special code in itself.

6. Having regard to the rival submissions we find that the appellants were not subjected to action under section 132 of the Income-tax Act, 1961. Hence we hold that the issue whether the search was legal or illegal cannot arise in the facts of the cases before us. The further issue whether the materials collected in the course of an illegal search can be used in making block assessment in contra distinction to regular assessment is purely academic in the context of the facts before us, The only issue that survives for our consideration is whether in the guise of the warrant of authorisation issued against one person in the premises mentioned in the warrant can the authorised officer seize the records of other persons or entities with which that person may be connected one way or the other ? The answer to this question is provided by the Supreme Court in the case of ITO v. Seth Bros. [1969] 74 ITR 836, as has been rightly pointed out by the senior departmental representative. In the case cited supra the Supreme Court held :

"Where a warrant is issued in relation to a firm, the officer authorised thereunder is not restricted to searching for and taking possession of only those books of account and other documents which directly relate to the business carried on by the partners in the name of the firm. The books of account and other documents in respect of other businesses carried on by the partners would certainly be relevant because they would tend to show inter-relation between the dealings and supply materials having a bearing on the case of evasion of income-tax by the firm. A search or seizure does not become illegal merely because the Income-tax Officer in searching on the firm seized the books of account and documents in relation to a business carried on by any one or more of the partners in the names of other firms, or companies or of themselves."

In this view of the matter the objections of the appellants are rejected.

7. The learned Chartered Accountant appearing for the appellants argued that as there was no search on the appellants under section 132 of the Act, the provisions of Chapter XIV-B are not applicable and the block assessments made in their cases are to be held void ab initio. He relied on the following decisions :---

1. B-Bench decision of this Tribunal in the case of Urmila Chandak v. Asstt. CIT [1998] 60 TTJ (Mad.) 758.

2. Nagpur Bench decision of this Tribunal in the case of Smt. Jatan Bai Baid v. Asstt. CIT[1998] 96 Taxman 24.

3. Nagpur Bench decision of this Tribunal in the case of Kasturchand Baid v. Asstt. CIT[1997] 58 TTJ (Nag.) 253.

7.1 The learned departmental representative submitted that the provisions of Chapter XIV-B are mandatory in respect of searches commenced on or after 1-7-1995. Block assessment can be made on any other person under section 158BD even if such other persons, are not subjected to search.

7.2 We have considered the rival submissions and perused the case laws cited before us. The citations do not lay down an extreme proposition that the department cannot make block assessment on a person other than a person searched even if, on a perusal of evidence found or collected pursuant to a search in respect of one person, it came to surface that the undisclosed income belonged to some other persons. In Urmila Chandak's case the Madras Bench-B of the Tribunal has held as under at page 765:

"The search warrants were issued by the competent Income-tax authority under section 132 of the Act to conduct searches in the case of Shri Bhojraj Chandak and Shri adanmohan Chandak, father and uncle respectively of Smt. Urmila Chandak. The Assessing Officer in

the impugned orders has at more than one place repeatedly stated that no account books of any other record was maintained by the appellant assessee. When that is the case, we fail to understand how these appellant-assessees can be brought into the net of Chapter XIV-B of the Act. Therefore, the Assessing Officer did not derive any jurisdiction,

authority or power to issue notice to any appellant herein as provided in section 158BC of the Act. From these facts, it is very clear that the notice under section 158BC has been issued contrary to the legal requirements and, therefore, as contended by Shri Kumbhat, the Assessing Officer had no jurisdiction to issue any notice and consequently the impugned assessments made pursuant to such illegal notices cannot stand in the eye of law and have to be annulled."

7.3 In the Nagpur case in Smt Jatan Bai Baid's case the substance of the decision is that the Assessing Officer cannot proceed to issue notice under section 158BC to a person with respect to whom action under section 132 was not taken, but he can proceed to make block assessment in respect of that person if he is satisfied that undisclosed income belonged to that person instead of the person subjected to action under section 132.

7.4 The decision in Kasturchand Baid's case deals with the case of a person with respect to whom search was conducted and the ratio found therein is not germane to the cases on hand. Further if we were to accept the contention of Shri Venkatesan the provisions of section 158BD would become otiose and hence we reject his contention.

7.5 We uphold the contention of Shri Goraknathan but with the reservation that the conditions mentioned in section 158BD must be fulfilled before proceeding to make block assessment on the person other than the person subjected to operations under section 132.

8. The learned Chartered Accountant contends that before starting the proceedings under section 158BD a notice should have been issued under that section. He relies on the decision of the Tribunal in Smt. Jatan Bai Baid's case.

8.1 The learned senior departmental representative contends that notices were issued to the appellants under section 158BC simultaneously on 9-4-1997 along with the issue of notice under section 158BC to Shri K.V. Laxmanan, the person in respect of whom proceedings under section 132 were conducted. No doubt the notices given to the appellants did not refer to section 158BD. At the worst the omission to mention section 158BD in such notices was only a defect saved by the provisions of section 292B.

8.2 In our considered view a bare perusal of the provisions of Chapter XIVB would reveal that only one type of notice is contemplated for starting the block assessment proceedings under that chapter. Section 158BD does not require issue of prior notice before the section is invoked. Once section 158BD is invoked the only notice to be given to the assessee would be under section 158BC. May be for practical purposes in the notices issued under section 158BC if it refers to section 158BD, any confusion that may arise to the assessee (by reason of the fact that he was not the person searched) could be avoided, but the non-mentioning of section 158BD in the notice under section 158BC is not fatal to the assumption of jurisdiction. The jurisdiction under section 158BD is based of the satisfaction of the Assessing Officer that (a) there is undisclosed income; (b) such undisclosed income does not belong to the person with respect to whom action under section 132 was taken, and (c) such undisclosed income belongs to some other person.

8.3 Shri Venkatesan vehemently contends that the satisfaction envisaged in section 158BD does not and could not exist in the facts of the cases, as there were no materials before the Assessing Officer to reach such satisfaction. He especially challenged the department to show atleast the basis on which satisfaction was reached to proceed under section 158BD.

8.4 The first contention of the learned senior departmental representative in this context is that recording of satisfaction is not required under section 158BD.

8.5 It is our considered view that even if there is no specific requirement of recording the satisfaction (reached by the Assessing Officer) about fulfilment of the three cumulative conditions mentioned in section 158BD, the revenue when challenged (at any stage of the proceedings) should at least indicate the basis or the premises on which satisfaction was reached in respect of the person not subjected to search. Unfortunately this has not been done in these cases, though specifically challenged by the appellants.

8.6 The second contention of the learned departmental representative is that the satisfaction mentioned in section 158BD is that of the Assessing Officer and the Courts could not be into the adequacy of the satisfaction.

8.7 We partly agree with this contention of the department. While the adequacy of satisfaction is not justiciable and the Tribunal cannot go into that aspect of the question, nothing precludes the Tribunal from finding whether there were materials or information before the Assessing Officer on which prima facie satisfaction was reached by him about the three cumulative conditions mentioned in section 158BD. This is because the section does not use the expression 'suspect' as found in section 132(1)(i) or section 132(1A) in the place of the expression 'satisfaction'. It is for the department to show the basis or the materials, etc. on which the Assessing Officer derived the prima facie satisfaction at the threshold of invoking section 158BD. This has not been done so far in these cases. Had it been done we could not possibly go into the adequacy of the materials on which satisfaction was reached.

8.8 The third contention of the senior departmental representative is that when the books and records of the appellants had been found and seized from the premises of Shri K.V. Laxmanan, the person with respect to whom the search was conducted, the presumption envisaged in section 132(4A) came into operation immediately but when the officer was satisfied that the seized records and the books did not belong to Shri K.V. Laxmanan but belonged to the appellants, the Assessing Officer can proceed under section 158BD.

8.9 We do not accept this line of reason as it overlooks the conditions envisaged in section 158BD. Our considered view is that the impugned section does not give unbridled wide powers to the Assessing Officer to make block assessment on a person other than the person with respect to whom search under section 132 was conducted merely because the books, records or assets seized from the searched premises were held to belong to them, rather than the person subjected to action under section 132.

8.10. The fourth contention of the learned senior departmental representative is that the appellants have submitted the returns for the block period and participated in the assessment proceedings and thus subjected themselves to the jurisdiction of the Assessing Officer under section 158BD and, therefore, they cannot now turn around and question the validity of the proceedings under that section.

8.11 We are unable to accept this argument for the reason that consent cannot confer jurisdiction on an authority to do or not to do an act (see Continental Commercial Corpn. v. ITO [1975] 100 ITR 170 (Mad.), P.V. Doshi v. CIT [1978] 113 ITR 22 (Guj.).

8.12 The fifth contention of the learned senior departmental representative is, as found at pages 3 and 4 of the gist of submissions furnished by him as under :

8.13 "The search action under section 132 of the Income-tax Act was initiated in the main case of Shri K.V. Laxmanan in his business premises at Erode on 10-9-1996. It was found that Shri K.V. Laxmanan and his wife Smt. L. Saroja were intimately connected with three finance firms, viz. M/s. Rana Investments, Erode, M/s. J.S. & Co., Erode and M/s. Sakthivel Bankers, Erode as well as with the other firms. The deposits in the three finance firms were advanced mainly to other family concerns and also towards equity and unsecured loans of the assessee and his family members in M/s. Erode Rana Textile Processors Pvt. Ltd. and M/s. Kumaravel Rana Spinning Mills Pvt. Ltd. These three firms have shown deposits in several names in sums up to Rs. 20,000. It was also noticed that no interest was being paid on these deposits whereas interest was being credited to the depositor's accounts from year to year. When the assessee was requested to furnish the addresses of the depositors for verification of their genuineness, he expressed his inability to do so. However, he came forward with a declaration of undisclosed income at Rs. 125 lakhs, in his hands and in the hands of his wife Smt. L. Saroja. Reference can be had to the answer to question No. 22 of the statement recorded under section 132 dated 10-9-1996. However, he disclosed an aggregate sum of Rs. 73.65 lakhs only towards undisclosed income in the return filed by him in Form 2B as under:

Name of the firm Financial Financial Total

year 1993-94 year 1994-95

1. M/s. Rana Investments Rs. 26,71,000 Rs. 1,15,000 Rs. 27,86,000

2. M/s. J.S. & Co. Rs. 15,79,000 Rs. 30,00,000 Rs. 45,79,000

-------------------------

Rs. 73,65,000

------------------------

On verification of the books of account of the above firms produced during the course of hearing and also the seized materials, it was found that the quantum of new deposits were upto Rs. 20,000 worked out as under :----

Previous M/s. Erode Rana M/s. J. S. & Co.

year Investments

1986-87 Rs. 19,78,133 -----

1987-88 Rs. 5,05,000 Rs. 13,54,290

1988-89 ----- Rs. 1,10,000

1989-90 ----- Rs. 95,000

1990-91 ----- -----

1991-92 ----- -----

1992-93 ----- -----

1993-94 Rs. 26,7 1,000 Rs. 15,79,000

1994-95 Rs. 1,15,000 Rs. 30,00,000

------------------------ -----------------------

Total Rs. 52,69,133 Rs. 61,38,290

----------------------- -----------------------

Since the assessee could not furnish the addresses of the depositors in these two firms in respect of the earlier years also as covered in the block period from 1986-87 to 1994-95 for the purpose of verification of their genuineness the Assessing Officer proceeded to treat the entire deposits aggregating to Rs. 1,14,07,423 (Rs. 52,69,133 plus Rs. 61,38,290) as unexplained deposits. While doing so the Assessing Officer obviously ignored the assessee's offer of Rs. 125 lakhs declared under section 132(4) on 10-9-1996.

8.14 The above facts would reveal that Shri K.V. Laxmanan is the main person involved in this group against whom warrant under section 132 was issued. Since his wife Smt. L. Saroja and the 8 firms were intimately connected with him they are to be covered under the provisions of section 158BD of the Income-tax Act. He also contended that the huge additions made in the hands of the appellants justify the action under section 158BD.

8.15 As against these the learned Chartered Accountant vehemently contends that at the threshold of section 158BD there should be materials, on the basis of which satisfaction was reached, justifying action under that section. He submitted that no unexplained jewellery or other assets or records were found in respect of the appellants pointing out earning of undisclosed income by the appellants. The only material before the search party and subsequently before the Assessing Officer, prior to initiation of action under section 158BD, was the statement given by Shri K.V. Laxmanan. In the statement he had stated that even though the credits appearing in the books of M/s. Rana Investments, M/s. J.S. & Company and M/s. Sakthivel Bankers (three of the appellants) are genuine, it would not be possible for him to produce the creditors at this distance of time and for fear of (loss of) reputation, he would offer a sum of Rs. 125 lakhs to be assessed in the hands of himself and his wife. He did not mention anything about or against the credits appearing in the books of five other appellants. Even if the admission made by Shri K.V. Laxmanan is at the worst held against him and his wife, as far as the appellants are concerned no incriminating material or information was found to indict the genuineness of the credit. At any rate the Revenue has not placed any material before the Tribunal for the basis of satisfaction under section 158BD.

8.16 As for the contention of the senior departmental representative that the additions made in the block assessments would justify action under section 158BD. Shri Venkatesan strongly urged that the additions are contested tooth and nail and at any rate such additions could not be construed as supplying the basis for reaching the initial satisfaction so necessary for invoking the provisions of section 158BD.

9. Having regard to the rival submissions and the materials on record we hold that the satisfaction envisaged at the threshold of section 158BD should be on the basis of the materials gathered as a result of search or even subsequently after the proceedings under section 158BA(1) are initiated against the raided person. In the cases of the appellants as well as the person raided, proceedings were initiated simultaneously on 9-4-1997. The question of gathering further information from the person raided after starting the block assessment proceedings against him does not, therefore, arise in the cases on hand. It may be legally permissible for the Assessing Officer to make further enquiries and use the information gathered in framing the block assessment against any person under section 158BD. However, in the threshold of initiating action under that section he is confined to the information that are already available with him at that point of time. The information gathered subsequently cannot be availed of to justify the initiation of action under the impugned section. Similarly the additions made subsequently in the block assessment cannot be construed as providing the basis for action under that section. The applicability of sections 68 to 69C arise only in the course of assessment, when the assessee is called upon to explain the credits or investments or expenditure but not before. (See Ganga Prasad Maheshwari v. CIT [1981] 6 Taxman 363/[1983] 139 ITR 1043 (All.) at pp. 1051 and 1052). In point of law it may be said that the Assessing Officer may reach satisfaction to invoke section 158BD but subsequently in the assessment proceedings he may drop the entire matter based on the evidence adduced. Therefore, we hold that the factum of satisfaction at the threshold of section 158BD can not be verified with or supported by what happened subsequently in the assessment proceedings (vide case Laws under section 147). In other words, the doctrine of relate back can not be invoked. Thus we are unable to agree with the arguments of the learned senior departmental representative on this aspect.

9.1 The argument of Shri Venkatesan that though the statement of Shri K.V. Laxmanan may be used against him and his wife, it did not indict the genuineness of the credits insofar as the appellant firms are concerned is certainly an attractive argument, the consideration of which would turn on the merits of the additions with which we are not concerned at this stage of enquiry. Satisfaction is a state of mind and all that we can say in this context is that the very statement of Shri K.V. Laxmanan and his professed unwillingness to have an enquiry on the cash credit as they appeared in the books of the appellant-firms would conceivably activate the mind of the Assessing Officer to have his own views on the bona fides of the credits found in the books and prompt him to view the credits as representing the undisclosed income of the appellants. Such strand of thought (whether justified or not that is a different issue on merits) would ignite action under section 158BD.

9.2 It is on record that in many cases the return of income was not filed within the time allowed under section 139(1) or even under section 139(4) prior to the date of search. Shri Venkatesan's argument is that as the assessees were all borne in the file of the Assessing Officer, their existence was known to the department and if they failed to file the return of income action should be taken under section 147, but not under section 158BD. We reject this argument. "Undisclosed income" means the income which is liable to be taxed but which has not been taxed as a result of nondisclosure by the assessee. The date of search is the cut off date. Nondisclosure would certainly arise if the return was not filed before the date of search whether under section 139(1) or under section 139(4). Recourse of filing of return under section 139(4) on or after the date of search is not contemplated within the meaning of 'Undisclosed income'.

[Refer B. Noorsingh v. Union of India [1999] 105 Taxman 101 (Mad.)]

9.3 Now we turn to cite a few other aspects of cases in these appeals : ---

(i) M/s. Rana Investments, Erode --- The return was not filed till the date of search for the previous years 1993-94 to 1995-96. For the assessment year 1992-93 the return was filed on 27-3-1995, which is beyond the time allowed under section 139(4). The return is non est in the eye of law. As no action was taken by the department on the return, knowledge of the contents of the return cannot be imputed to the department.

(ii) M/s. Saraswathi & Co. --- Return was not filed till the date of search for the previous year 1995-96. Regarding the seized material at serial No. 74 showing a debit balance of Rs. 9,85,000 Shri K.V. Laxmanan, in his letter dated 4-11-1996 (before the date of issue of notice under section 158BC for action under section 158BD) has admitted that the impugned debit represented unaccounted purchase and sale of yarn.

(iii) M/s. J.S. & Company --- No return was filed for the assessment year 1991-92.

(iv) M/s. Ran Angappa Mudaliar --- The return for the assessment year 1992-93 was filed on 10-3-1995, which is beyond the time allowed under section 139(4). For further comments see Rana investments, supra.

(v) M/s. Rana Cotton Yarn Centre --- Shri K.V. Laxmanan while explaining the seized material at serial No. 47 had admitted in his letter dated 4-11-1996 (i.e. before the date of issue of notice under section 158BC for action under section 158BD) that these credits represented unrecorded purchase and sale of yarn. Further these credits were never found in the cash book nor in the ledger.

(vi) M/s. Sakthivel Bankers --- Return of income was not filed for the previous year 1993-94.

(vii) M/s. Shri Ramalinga Yarn Centre --- Return of income was not filed for the previous years 1994-95 and 1995-96. The seized material showed a credit of Rs. 71,200. Shri K.V. Laxmanan in his letter dated 4-11-1996 (i.e. before the date of issue of notice under section 158BC for action under section 158BD) has stated that the amount represented unaccounted purchase and sale of yarn.

(viii) Smt. Saroja --- A number of documents relating to purchase and sale of lands were seized in the course of search. It was a notorious fact that "on money" transactions are common in property dealings. There were credits in Vasakkattu account and other credits in

L.F. 6 of seized material at serial No. 64, which appeared to be disproportionate to the agricultural income admitted. This apart, the deposition of Shri K.V. Laxmanan dated 10-9-1996 dragging her name into an admission of undisclosed income.

9.4 On a prima facie view of the matter detailed above we hold that there were materials for the Assessing Officer to invoke the provisions of the section 158BD and his satisfaction could be inferred in the above cases except in the case of M/s. Palagapandi Group Estates, to which we will revert a little later. In this context we are constrained to observe that if only the department had produce the 'appraisal report' of the ADIT (Inv.) or the 'satisfaction note' of the Assessing Officer such an elaborate discussion on a short legal ground could have been avoided, thus saving the precious time and energy of the Tribunal.

9.5 However, we do not propose to enter into the merits of the additions and disallowances in the case of each of the appellants before us. The reason is that in the main case of Shri K.V. Laxmanan (Hindu undivided family) in IT(SS) A No. 259 (Mds)/ 1997 we found it fit to set aside the block assessment order and restore it to the file of the Assessing Officer with a direction to complete the assessment after affording adequate opportunity to the assessee to state its case effectively. The appellants are interconnected firms in which Shri K.V. Laxmanan and his wife Smt. Saroja are interested either as partner or otherwise. The seized books of the appellants would appear to suggest inter lacing and inter-winning of funds, finances and transactions among the appellants inter se and qua Shri K.V. Laxmanan, HUF or Smt. Saroja. To be fair to both the sides we set aside the block assessment orders in respect of the appellants before us [except in the case of M/s. Palagapandi Group Estates in IT(SS) A No. 123(Mds)/ 1998] and restore the same to the file of the Assessing Officer with a direction to frame the assessments afresh after giving adequate opportunities to the assessees of being heard.

10. The case of M/s. Palagapandi Group Estates [IT(SS) A No. 123 (Mds) 1998] stands on a different footing as far as we could see from the materials on record. Admittedly the estate is an agricultural estate. The books of M/s. Palagapandi Group Estates were not found in the premises at the time of search nor were they seized in the course of the search. No incriminating document was found at the time of search or at any time before the issue of notice on 9-4-1997 under section 158BC vis-a-vis 158BD. Even the additions that were finally made were prima facie on protective basis. In the scheme of Chapter XIVB there is no scope for protective assessment as between the person (with respect to whom search was conducted under section 132) and the person sought to be covered by the provisions of section 158BD. Protective assessment qua the person sought to be covered under section 158BD must necessarily fail as not satisfying the conditions prescribed under that section. The block assessment in the case of M/s. Palagapandi Group Estates is, therefore, cancelled.

11. In the result IT(SS) A No. 123 (Mds)/ 1998 is allowed. The other appeals in IT(SS) A Nos. 122, 124, 125, 127, 128, 129, 130 and 132 (Mds/ 1998) are treated as allowed for statistical purposes.

12. Now let us turn to IT(SS)A No. 259(Mds)/ 1997 relating to Shri K.V. Laxmanan. Search under section 132 of the Income-tax Act, was conducted at the residential and business premises of the appellant under warrant of authorisation issued against Shri K.V. Laxmanan (Karta of Hindu undivided family). Books of account and records of entities in which Shri K.V. Laxmanan or his wife Smt. L. Saroja is interested as partner or otherwise and which were found in the searched premises were seized. The statements of Shri K.V. Laxmanan were recorded in the course of the search. Notice under section 158BC(1) was issued to the assessee on 9-4-1997 and the assessment was completed on 29-9-1997 for the block period consisting of the previous years 1986-87 to 1996-97 (upto 10-9-1996).

12.1 The assessee is in appeal. There are several grounds in the appeal originally filed and they deal with the merits of the additions and disallowances made in the block assessment. Subsequently the appellant has filed an additional ground of appeal as follows :

"The order of block assessment is bad in law and void ab initio inasmuch as search itself is illegal and bad in law as not warranted by existence of the conditions specified under provisions of section 132(1)(a), (b) and (c) of the Act and therefore, the block assessment is illegal and liable to be cancelled."

12.2 Having regard to the rival submissions we hold that section 253 of the Income-tax Act, 1961 does not provide for appeal as such against the validity of action under section 132 or l32A and hence the Tribunal cannot entertain such ground of appeal. The additional ground is thus rejected.

13. In the original grounds of appeal the first objection is against the block assessment order passed in this case and the second objection is against the quantification of undisclosed income at Rs. 3,16,70,910 and tax thereon at Rs. 1,90,02,546. The other grounds are against specific additions and disallowances found in the assessment for the block period.

13.1 Shri Venkatesan, the learned Chartered Accountant submitted that in terms of the proviso (a) to section 158BG the Assessing Officer has to pass the block assessment order with the previous approval of the Commissioner of Income-tax. In the instant case the Assessing Officer has passed a detailed draft (assessment) order in the case of Shri K.V. Laxmanan (Individual), Shri K.V. Laxmanan (HUF) and one Shri Rana Muthuswamy Mudaliar as early as on 17-9-1997 itself and had submitted the same to the Commissioner of Income-tax for his approval. A copy of the draft (assessment order) was not furnished to the assessee. Only a summary of the proposed addition was supplied to the assessee by the Assessing Officer in his letter dated 24-9-1997, i.e. after he had sent the draft (assessment) order to the Commissioner of Income-tax for his approval. Thus the appellant had the proposal of the Assessing Officer for making additions in a summarised version without the reasons for 'Making such additions, though the reasons for making such additions, though the reasons were spelt out in the draft (assessment order), about which the appellant was kept in the dark. No doubt, the Assessing Officer had directed the appellant to file his objections to the proposals for additions before the Commissioner of Income-tax. Thus the assessee was not given the opportunity of being heard on the proposed additions before they were incorporated in the (draft assessment) order. Further the proposals themselves were given in the letter dated 24-9-1997 after the dispatch of the draft (assessment) order to the Commissioner and the appellant was allowed only two days time to state its objections before the Commissioner. The time allowed to the assessee was too short to be meaningful. The appellant not to displease the department, complied with the directions. The Commissioner of Income-tax made changes in the draft order, by giving directions to make protective additions in the related cases as well. He did not grant any relief to the appellant. Thus the appellant was shut out of hearing at the trial stage before making additions in the draft (assessment) order. The Assessing Officer not having heard the appellant in respect of his proposal, had not applied his mind in framing the draft (assessment) order. The Commissioner has only done public relations exercise in giving his seal of approval, not to speak of his directions to make protective additions in some other related cases. The Assessing Officer has obediently carried out the directions of the Commissioner in framing the (final) assessment order for the block period. Thus in effect the impugned order is one passed by the Commissioner himself without application of mind of the Assessing Officer. Hence he prayed that the block assessment order dated 29-9-1997 should be cancelled as illegal and invalid.

13.2 The learned senior departmental representative contested the submissions of Shri Venkatesan. Under section 158BG the Assessing Officer has to pass the block assessment order with the previous approval of the Commissioner. The assessee was apprised of the proposed additions by the Assessing Officer in his letter dated 24-9-1997 and the assessee was invited to file his objections on or before 26-9-1997 before the Commissioner. The assessee complied with the directions and was heard by the Commissioner on 25-9-1997. After the previous approval of the Commissioner, the block assessment order was passed on 29-9-1997 by the Assessing Officer. Thus there is no failure of natural justice at any stage of the proceedings. The Commissioner while considering the draft (assessment order) of the Assessing Officer can certainly guide the Assessing Officer to consider certain aspects of the matter as otherwise the expression 'previous approval' found in the proviso (a) to section 158BG would become meaningless.

14. We have heard the rival submissions and perused the records. The search took place on 10-9-1996 and the provisions of Chapter XIV-B of the Income-tax Act, 1961 are, therefore, applicable. Statements of Shri K.V. Laxmanan were recorded on 10-9-1996. Further statement was recorded on 13-9-1996 pursuant to summons issued under section 131(IA) of the Income-tax Act. Notice under section 158BC was issued on 9-4-1997. The assessee pleaded for time to furnish the return for the block period till 30-6-1997. In view of non-compliance, notice under section 142(1) was issued on 22-8-1997. The return for the block period in Form 2B was furnished on 1-9-1997. On 15-9-1997 still another statement of Shri K. V. Laxmanan was recorded. The draft (assessment) order (draft in the sense that (final) assessment order was to be passed with the previous approval of the Commissioner of Income-tax in terms of clause (a) of proviso to section 158BG) was passed on 17-9-1997 and it was submitted to the Commissioner for his approval in Assessing Officer's proceedings No. SIC/ERD/RANA/KVL/97-98 dated 17-9-1997. The draft (assessment order) has reference to the appraisal report of the ADIT, Erode in ADIT/ S&S-I/ERD/96-97 dated 6-11-1996. But it is a sad fact that the draft (assessment) order and the appraisal report of the ADIT, to which it had reference, were not furnished to the appellant. Only a summary of proposed additions was given by the Assessing Officer in his letter dated 24-9-1997 with a direction to file his objections before the Commissioner of Income-tax on or before 26-9-1997. The appellant complied with the directions by filing his objections in per-son before the Commissioner of Income-tax on 25-9-1997 and was presumably heard by the Commissioner of Income-tax on the same day. This is evident from the notings of the assessee's representative at the bottom of the letter dated 25-9-1997 to the following effect (page 34 of the assessee's paper-book) :---

"Appeared with Shri KVL before the CIT, CBE on 25-9-1997 and given the letter in person. Perused the reply to A.C., SIC's letter dated 24-9-1997 and wanted to furnish evidence for cutting of trees on 29-9 1997. said, possibly file with other matters. She is not inclined to give any relief. Power filed.

Sd/-25-9-1997."

The (final) block assessment order was passed by the Assessing Officer on 29-9-1997 after the approval of the Commissioner. This in short is the sequence of events leading to assessment.

15. In our considered opinion the mere furnishing of summarised version of the proposed additions after the additions and disallowances have in fact been made in the draft (assessment) order is just like putting the cart before the horse. The failure to furnish the appraisal report of the ADIT, to which the draft order has reference in it and the non-furnishing of the draft order itself (which contained the reasons for making not only the additions but also the disallowances) would have handicapped the assessee in making effective representations against the adverse inferences drawn.

16. We are unable to be persuaded by the argument of the learned departmental representative that even if there was any failure of natural justice at the stage of passing the draft (assessment) order on 17-9-1997, it was cured by the grant of hearing to the assessee by the Commissioner of Income-tax on 25-9-1997. A somewhat similar contention was rejected by the Kerala High Court in the case of Ponkunnam Traders v. Addl. ITO [1972] 83 ITR 508. At page 519 of the said report it was pointed out: "If the rules and the law combine to give the member the right to a fair trial and the right of appeal, why he should be told that he ought to be satisfied with an unjust trial and a fair appeal?' In this view of the matter we hold that the opportunity given to the assessee to state his objections and appear before the Commissioner of Income-tax cannot be equated with the opportunity of being heard before making adverse inferences in the draft (assessment) order. This is more so because the provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 are made applicable to the block assessment by virtue of clause (b) of section 158BC.

17. The learned Chartered Accountant vehemently contends that in case of failure of natural justice in pre-decisional stage the resulting order must be annulled as void ab initio. He relied on the decision of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. Union of India (1981) 51 Comp. Cas. 210 and also the decision in the case of T.S. Kumarasamy v. Asstt. CIT[1998] 65 ITD 188 (Mad.).

18. The decision in T.S. Kumarasamy's case is not germane to the issue on hand. In that case the Judicial Member held that the Commissioner of Income-tax cannot issue directions to the Assessing Officer in the matter of assessment and relied on certain case laws. The learned Accountant Member opined that the case laws on which reliance was placed by his learned brother might be relevant in the matter of regular assessment but not in a case where the assessment was to be framed with the 'previous approval of the Commissioner of Income-tax' under section 158BG. Further, in the case before us no material is adduced to show how the Commissioner of Income-tax exceeded his powers in the course of according his approval to the draft (assessment) order proposed by the Assessing Officer. If any other person is affected by any of the directions of the Commissioner of Income-tax in granting approval to the case of the assessee, it is for that person to agitate the matter in appeal.

19. We have carefully gone through the decision of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. That was a case arising under section 18AA of Industries (Development & Regulation) Act, 1951 in regard to the takeover of management of an industrial undertaking. The section was silent on the rule of 'audi alteram partem'. The Apex Court held that the power under section 18AA(1)(a) of the above Act is of a drastic nature and the consequences of a takeover are far-reaching and its effect on the rights and interests of the owner of the undertaking is grave and deprivatory, yet the Act does not make any provision giving a full right of a remedial hearing equatable to a full right of appeal, at the post-decisional stage. The so called right of a post-decisional hearing available to the aggrieved owner of the undertaking under section 18F is illusory as in its operation and effect the power of review, if any, conferred thereunder, is prospective and not retrospective being strictly restricted to and dependent upon the post-takeover circumstances., Therefore it is not reasonably possible to construe section 18AA (1) as universally excluding either expressly or by inevitable intendment, the application of the 'audi alteram partem' rule of natural justice of the pre-takeover stage, regardless of the facts and circumstances of the particular case. A decision rendered in violation of the 'audi alterm partem' rule is null and void and the order impugned in this case could be struck down as invalid on that score alone.' However in view of an undertaking given by the Central Government in the Court that it would within a reasonable time give a full, fair and effective hearing to the company on all aspects, the Court refrained from quashing the impugned order.

20. We have extracted the relevant portion of the judgment rendered under a different Act. In that case the Government took over the management of the industrial undertaking under section 18AA(1)(a) of the Industries (Development & Regulation) Act, 1951 without giving the owner of the undertaking an opportunity of being heard at the predecisional stage and felt that such an opportunity was not envisaged under section 18AA(1)(a) of that Act. This course of action was not upheld by the Apex Court. It is worthwhile to point out that even in that case when the Government came forward with an undertaking in the Court that it would give full and fair hearing to the company, the Court refrained from quashing the impugned order of takeover. The failure to adhere the principle of natural justice has occurred at the threshold of assuming jurisdiction (to takeover the undertaking) under section 18AA(1)(a) of that Act in that case. It was in that context that the Apex Court was all set to strike down the order as void ab initio, but refrained from so doing in view of the commitment given by the Government. In the case before us the non-compliance with the rule of natural justice did not occur at the stage of assumption of jurisdiction. The jurisdiction of the Assessing Officer to make block assessment on Shri K.V. Laxmanan was validly assumed under section 158BA(1) of the Income-tax Act as a result of the search conducted on him in his business and residential premises and upon service of notice under section 158BC. It is only in the procedure of conducting the enquiries under section 142 and in making the assessment for the block period under section 143, the Assessing Officer has, as is said, put the cart before the horse and thus failed to give an effective opportunity to the assessee to state its objections to his proposal. This could be construed only as a supervening illegality creeping at the stage of procedure for assessment. This illegality did not occur at the jurisdictional stage. Therefore, we are of the considered opinion that the Supreme Court decision rendered in the context of jurisdiction under section 18AA(1)(a) of the Industries (Development & Regulation) Act, 1951 is not on all fours with the case on hand. In the case before us the question of jurisdiction does not arise. In that case right of appeal was not provided in the statute and the right of revision was found to be illusory by the Apex Court. But in the case before us the assessee has been granted the right of appeal to the Appellate Tribunal and such a right cannot be dubbed as illusory or a mere public relation exercise.

21. No doubt the Kerala High Court in the case of Ponkunnam Traders has held that total failure of the rule of 'audi alteram partem' in the course of framing the best judgment assessment would result in that part of the order being declared as nullity. However, in the case before us there is no such total failure of the cardinal rule of natural justice in framing the assessment because the appellant was given a gist of proposed additions and was invited to state its objections before the Commissioner of income-tax before framing the final assessment order, though at the draft stage of the order no such opportunity was given. The time given to the appellant to state its objections (hardly two days) it too short to merit mention. Thus we hold that there was partial failure to comply with the rule of natural justice at the draft stage of the order unlike in the case decided by the Kerala High Court, wherein there was total failure at the stage of assessment itself. in Guduthur Bros. v. ITO [1960] 40 ITR 298 the Supreme Court held that the Appellate Assistant Commissioner having found that the Income-tax Officer imposed the penalty after valid initiation and service of notice but without affording a hearing, set aside the penalty order and the Income-tax Officer was justified in affording a hearing to the assessee and continuing the proceedings from that point.

22. Thus in cases where jurisdiction was validly assumed and there was service of notice in starting the assessment proceedings in irregularity happened to occur at any stage the proceedings may be corrected by eliminating the irregularity and retracing the proceedings back to the point upto which they were validly carried on and then continue them from that point (See Chaturvedi & Pithisaria page 5831). Also reference is invited to the decision in the case of Joseph Kuruvila v. CIT [1989]179 ITR 139/44 Taxman 318 (Ker.) and the decision in the case of Bal Erectors v. CIT [1989] 180 ITR 625/[1990] 49 Taxman 196 (Punj. & Har.). It is axiomatic that in appropriate circumstances the Court may compel the authority to comply with the rule of natural justice --- pre---decisional hearing --- at the point of its failure and thus cure the defect in the proceedings. In this view of the matter we reject the prayer of the learned Chartered Accountant for the assessee to cancel the block assessment order. As the supervening illegality has occurred at the passing of the draft order, we set aside the draft assessment order along with the block assessment order dated 29-9-1997 and restore the case back to the file of the Assessing Officer with a direction to give a full, fair and effective opportunity to the assessee to make his representations to any proposal that may be made by the Assessing Officer along with the reasons therefor, consider the objections of the assessee before sending the draft order to the Commissioner of Income-tax for his approval. The Commissioner of Income-tax is likewise directed to give the assessee adequate opportunity of being heard before he accords approval to the order proposed by the Assessing Officer. We may add that the time given to the assessee in the instant case was too short to be meaningful. Such constrictions should in fairness be avoided.

23. Elaborate arguments were advanced on both sides on the merits of the additions and disallowances found in the block assessment order. In the view we have taken, we refrain from going into them.

24. In the result IT(SS) A No. 259 (Mds)/1997 is partly allowed for statistical purposes.

 

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