IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 3021 of 1998 with SPECIAL CIVIL APPLICATION No 3160 of 1998 to SPECIAL CIVIL APPLICATION NO 3176 of 1998 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------- KHANDUBHAI VASANJI DESAI Versus DY COMMISSIONER OF INCOME TAX SPECIAL RANGE 2 -------------------------------------------------------- PRAKASHCHAND C. DESAI VS DY COMMISSIONER OF INCOME TAX SPECIAL RANGE 2 ------------------------------------------------------- NARENDRA LAXMICHAND GAJIWALA VS DY. COMISSIONER OF INCOME TAX SPECIAL RANGE 2 -------------------------------------------------------- DEVENDRA AJITRAI DESAI VS DY. COMMISSIONER OF INCOME TAX -------------------------------------------------------- GAURANG SUBHODRAI DESAI VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- NAISHADRAI RAMCHAND DESAI VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- KIRTIDA MAHESH DESAI VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- REVANT MAHESH DESAI VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- INDUBEN SUBHODRAI DESAI VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- DAXA RAMCHANDRA DESAI VS DY COMMISSIONER OF INCOME TAX SPECIAL RANGE 2 -------------------------------------------------------- KANISHA SHYAMBHAI LOKHANDWALA VS DY COMMISSIONER OF INCOME TAX -------------------------------------------------------- HARSHIDA DHIRUBHAI DESAI VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- SANDHIYA RAJENDRA DESAI VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- SABNAM AKBAR LOKHANDWALA VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- USHABEN DAYABHAI JARIWALA VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- HANSABEN AJITRAI DESAI VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- NEELABEN BHIKHUBHAI DESAI VS DY COMMISSIONER OF INCOME TAX --------------------------------------------------------- Appearance: Mr. K.H. Kaji for Petitioners in all the petitions. Mr. Mihir Joshi for Mr. M.R. Bhatt for Respondent No. 1 in all the petitions. Mr. Jayant Patel for Respondent No. 2 in all the petitions. -------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 15/10/98 ORAL JUDGEMENT (Per R.K. Abichandani, J.) This group of petitions seeks to challenge the constitutional validity of the provisions of Sec. 158BD of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') on the ground that they violate the fundamental rights of the petitioners guaranteed by Articles 14, 19(1)(g) and 21 of the Constitution of India and the impugned Notice dated 15.5.1998 and the Assessment Order dated 14.7.1998 passed pursuant thereto as having been passed without jurisdiction on that ground. 2. Earlier, by an order dated 6.5.1998, the Division Bench comprising of Hon'ble the Chief Justice and one of us (A.R. Dave, J.) had made an order directing all these matters to be posted for final disposal on 15.7.1998 in the Admission Board itself and that is how this group of maters came to be finally heard while they were on the admission board. Both the sides have referred to and argued on the basis of the record of Special Civil Application No. 3021/98 which is the lead matter since all other matters of the group are identical. 3. The petitioners' case in these matters is that they were members of Dhawal Co-operative Housing Society which was registered under the provisions of the Gujarat Co-operative Housing Societies Act on 3.4.1978. The promoters of that society had entered into an agreement for purchase of a plot of land with one Lalitkumar T. Desai on 29.10.1975 for the purpose of putting up a building for providing residential accommodation to its members. Since the land was agricultural land, N.A. permission was required to be obtained by the seller. The necessary permission under Sec. 20 of the Urban Land (Ceiling & Regulation) Act, 1976, came to be obtained on 21.4.1990. In the meantime, the vendor had passed away on 22.8.1989 and ultimately the sale deed came to be executed by his heirs on the said date when permission was obtained, i.e., on 21.4.1990. Under the sale deed, the said land admeasuring 3383 square meters was sold for Rs. 67,660/-. Thereafter, the society entered into a development agreement on 11.8.1995 with one Madhavji Dhanjibhai Patel, who, as it transpired, was the sole owner of M/s. Dhruvin Enterprises. Under the terms of that agreement, it was stipulated that each of the original members of the society, who were 17 in number, had to pay Rs. 1,21,000/- as the cost of each flat to be allotted to such member. The said developer became entitled, under the agreement, to enrol new members for the said society with a written consent of the society after the original 17 members were handed over the possession of the flats which were to be constructed by him. Accordingly, after the building was constructed by the developer, Madhavji Dhanjibhai Patel, the society issued allotment letters on 3.4.1996 to the said original 17 members who are the petitioners before us in this group of petitions and the possession thereof was taken by them some time in February 1997. They had paid the stipulated amount of Rs. 1,21,000/- as the cost of construction of each flat as per the agreement. According to the petitioners, the society had thereafter, as per the agreement, inducted additional members on the request of the developer. In the meantime, on 14.7.1996, the Income-tax Department initiated search and seizure proceedings against Madhavji Dhanjibhai Patel at his residence and office premises as well as in respect of bank lockers and assessment proceedings as per the special procedure laid down by Chapter XIV-B of the Act were initiated against him which were completed on 30.7.1997, assessing the total undisclosed income at Rs. 5,65,66,211/-. In those proceedings against Madhavji, his statements were recorded at various stages and on 24.7.1997 it was recorded in Question-Answer form. In August 1997, the petitioners received notices dated 25.7.1997 from the respondent No. 1, the Deputy Commissioner of Income-tax, under Sec.158BD calling upon the petitioners to file returns of income including the undisclosed income in respect of which they were assessable for the block period of 10 years mentioned in Sec. 158B(a) of the Act. A similar notice was also issued in the name of the Association of Persons consisting of these 17 members. A copy of such notice is at Annexure-A to the petition. The petitioners had initially taken up a contention that the impugned notice which was issued to them by the Assessing Officer, the Respondent No.1, who was assessing the person subjected to raid, i.e., Madhavji, was without jurisdiction since the Assessing Officer having jurisdiction over the petitioners was different and not the first respondent. It was contended that the notice under Sec. 158BD could be issued only by the Assessing Officer having jurisdiction over the petitioners after the record is handed over to him. After the filing of these petitions fresh notices dated 15.5.1998 were issued by the respondent No.1 under Sec. 158BD in identical terms since he was, by then, vested with the jurisdiction to assess these petitioners. In view of this development, the petitioners amended the petitions by adding paragraph 18A in which it is now stated that the contention raised by the petitioners in para 16 of the petition, which was against the validity of the earlier notice issued on 25.7.1997 as per Annexure-A to the petition, did not now survive. The assessment orders have thereafter been made in case of all these petitioners on 14.7.1998. It is stated by the petitioners in the said amended para 18A that the merits of the assessment are not in issue in these petitions and will be contested before the appellate authorities in due course. The fresh notice dated 15.5.1998 and the assessment orders dated 14.7.1998 are however challenged as illegal and void on the ground that the provisions of Sec. 158BD are ultra vires Article 14, 19(1)(g) and 21 of the Constitution and, therefore, all action taken under that provision is equally without jurisdiction and void. 4. The respondents in their affidavit-in-reply have contended that the Assessing Officer who was given jurisdiction over these petitioners has issued a fresh notice to them. The earlier notice dated 28.7.1997 was issued before the block assessment proceedings in the case of Shri Madhavji Dhanjibhai Patel were completed since the information regarding the Wards/Circles in which these 17 petitioners were being assessed was not forthcoming. As noted above, the petitioners have themselves stated by an amendment in the petition that the contentions which were raised by them in para 16 of the petition against the earlier notice dated 28.7.1997 did not now survive. According to the respondents, Shri Madhavji Dhanjibhai Patel was the proprietor of M/s. Dhruvin Enterprises and not its partner. Though Madhavji was permitted to enrol new members for the said society with the written consent of the society, after the original 17 members were given possession of the flats, all the new members had already been enrolled as on 30.6.1995 as per the details filed during the course of the block assessment proceedings in the case of Shri Madhavji. It was held in the case of Shri Madhavji that the development agreement was a sham agreement because, in fact, the entire land belonging to the society had been transferred to Madhavji. It is stated in the said affidavit-in-reply that Madhavji for whom the search and seizure was made had stated on oath in his statement taken on 24.7.1997 in reply to Question No. 4 as under: Qn. No. 4 --------- "As per seized diary B-2 page No. 19 where the area of land and the rate per sq.yd. has been written by you, the total price of land was written as 329. After making the calculation for 17 flats of 2200 sq.ft. at the rate of Rs. 641 approx. the value was calculated at Rs. 237. The value of land to be paid after deducting 237 from 329 was calculated at 92. This reconcile the payment made to the 17 land owners." Answer: ------ "As per document referred above, the total price of land was Rs. 3.29 crores. Against the above land price, 17 flats were delivered and, therefore, the payment was calculated at Rs. 2.37 crores in kind. Rs. 92 lakhs was paid alongwith the total expenditure on account of U.L.C. permission, Corporation permission, N.A. permission, land filing and other expenses the details of which has not been kept by me. It is not possible for me to give the details of land filling expenses separately." It is further stated in the affidavit-in-reply that in the Satisfaction Note recorded before the issuance of notice under Sec.158BD of the Act, it was noted that the land had been transferred to Shri Madhavji Dhanjibhai Patel for the consideration of Rs. 2.37 crores in kind and Rs. 92 lakhs in cash paid to the 17 persons who were the initial members of the co-operative society. According to the respondents, there was no question of the 17 members paying any amount for getting the said flats in addition to Rs. 1,21,000.00 per flat since these 17 members had transferred the land valuing Rs. 3.29 crores in consideration for 17 flats and Rs. 92 lakhs in cash. It is stated that the detailed satisfaction note was recorded on the basis of the documents and other material seized in the case of Shri Madhavji Dhanjibhai Patel for whom the search and seizure proceedings were initiated, before a notice under Sec. 158BD of the Act was issued on the petitioners. The reasons for issuance of the notice under Sec. 158BD have been annexed at Annexure-A to the affidavit-in-reply. For very detailed reasons which are given in the said satisfaction note for issuance of the notice under Sec. 158BD of the Act to these petitioners, the Assessing officer was satisfied that the agreement with the co-operative society was a sham agreement and the land had, in fact, been transferred to Shri Madhavji D. Patel for a consideration of Rs. 2.37 crores in kind and Rs. 92 lakhs in cash paid to 17 persons who were the initial members of the said society, that is, these petitioners. From the said satisfaction note, it appears that the Assessing Officer had reached his satisfaction for issuing notice under Sec. 158BD of the Act on these petitioners on the basis of the material which was seized during the search and the statements which were recorded under Sec. 132(4) of the Act. In the affidavit-in-rejoinder filed by the petitioners, it is contended that, even assuming that the reasons recorded in the said satisfaction note are on the basis that Rs. 92 lakhs were paid to the original 17 members of the society, there was no basis for recording such reasons and that the reasons were recorded by the first respondent who was the Assessing Officer of the raided person Madhavji and not the Assessing Officer of the petitioners. It is contended that Sec. 158BD of the Act unreasonably bifurcated the functions of the Assessing Officer who is to record satisfaction and the Assessing Officer who is required to issue notice under Sec. 158BD of the Act. 5. During the arguments, the Learned Counsel appearing for the petitioners has confined his challenge to the constitutionality of the provisions of Sec. 158BD of the Act on the ground that it violates the fundamental rights of the petitioners under Art. 14 of the Constitution inasmuch as it creates an invidious discrimination against the petitioners vis-a-vis similarly situated persons who can be dealt with under the provisions of sections 147 and 148 of the Act. Elaborating his argument, the Learned Counsel contended that the provisions of Sec. 158BD of the Act were really an interloper in providing for special assessment in search cases because the person other than the person with respect to whom the raid was made was never searched and no warrant of authorisation was issued nor any belief or information that any undisclosed income existed in his hands was reached under Sec. 132 of the Act. He contended that discrimination was writ large on the provisions of Sec. 158BD of the Act because they not only discriminated the persons who were not actually searched vis-a-vis the persons who could have been proceeded under sec. 147 read with sec. 148 of the Act for assessment or reassessment of any income that may have escaped assessment, but, they also discriminated such "other persons" vis-a-vis the person who was raided. It was submitted that the procedural discrimination against these "other persons" was hostile inasmuch as it entailed automatic reopening of the assessment of the block period of 10 years. Moreover, the time-limit, for completion of the assessment of such "other persons", was to commence only from the end of the month in which the notice was given to such other persons under sec. 158BD read with sec. 158BC(1) read with rule 12 of the Rules by which the assessee was required to fill in return in Form 2B prescribed thereunder unlike the time-limit fixed for the raided persons on the basis of the execution of the last authorisation. It was also contended that the method of computation of the undisclosed income was also specially devised and was more stringent than the normal method of assessment of total income; and finally, a flat rate of tax of 60% was prescribed in respect of total undisclosed income of the block period as provided by sec. 113 of the Act. It was contended that the distinction between persons other than the raided person whose undisclosed income is found in the course of the raid, and persons who could be proceeded against under Section 147 on the ground that their income had escaped assessment which would also include undisclosed income, was not warranted, as they belonged to the same class. Moreover, as regards the raided party, the limitation was fixed at one year from the end of the month in which the last authorisation for search or requisition was executed while in the case of 'other person' referred to in sec. 158BD, the limitation provided was one year from the end of the month in which the notice under Chapter XIVB was served on such other person in the cases where search was initiated after 30.6.1995 but before 1.1.1997 as in the present case. It was contended that "other person" referred to in sec. 158BD of the Act was thus treated in a more disadvantageous manner than the raided person himself because a notice under Chapter XIVB may be served on such other person at any time. It was submitted that since there was no time prescribed in the Act for issuance of such notice to the "other person" referred to in sec. 158BD of the Act, it was not for the court to read any time-limit for issuance of such notice. It was submitted that virtually the time-limit stood lifted in case of such other persons while the time-limit of one year from the end of the month in which the last authorisation for search or requisition was executed operated to the benefit of the person who was searched. Thus, there was invidious discrimination between the raided person and the other person to whom the undisclosed income belonged as per the satisfaction of the Assessing Officer. The learned counsel relied upon the decisions of the Supreme Court in Suraj Mall Mohta and Anr. v. A.V. Visvanatha Sastri and Anr., reported in 26 ITR 1 and in S.C. Prashar and Anr. v. Vasantsen Dwarkadas and Ors., reported in 49 ITR 1, in support of his contentions. 6. The Learned Counsel appearing for the respondents contended that the said procedure for assessment of search cases had to be devised because of the inefficacy of the earlier provisions, which led to complications which are referred to in the memorandum of explanation of the new provisions. He referred to the Notes on Clauses and Memorandum explaining the provisions in the Finance Bill 1995 to point out the reasons which promoted the framing of the present scheme. He submitted that the persons to whom the undisclosed income detected in the search and seizure proceedings belonged form a separate class. This had to be done because earlier, while proceeding to make assessments and reassessments in respect of the undisclosed income which was estimated under sec. 132B, it became very difficult to relate the undisclosed income to any particular year and in the process of assessment where the facts remained clouded, the assessees were not too co-operative to help the department in relating the undisclosed income to the particular years. It was submitted that a person whose undisclosed income is detected could be legitimately classified separately from the other persons in whose case the Assessing Officer can initiate proceedings under sec. 147 read with sec. 148 of the Act on a reason to believe that some income of a particular previous year had escaped assessment. In the latter case, there was no detected undisclosed income which was required to be related to particular previous years. It was further submitted that the Assessing Officer who was required to proceed against the raided person in respect of the undisclosed income found from his possession or control had no reason to wait any further after the material was transmitted to him under sec. 132(9A) of the Act and that is why the time-limit for assessment of such persons was fixed as one year from the end of the month in which the last authorisation was executed. It was argued that the fact that the undisclosed income belongs to some other person may come to light when the assessment proceedings against the raided person are commenced. Such other person to whom the undisclosed income belongs also stands on the same footing as the raided person to whom a part of the undisclosed income belongs. However, the commencement of the point of limitation in case of such other persons could not be the same as was provided for the raided persons and by the very nature of things the time-limit was made to commence in such cases from the date of receipt of the notice by such other person. It was argued that there was no warrant for any assumption that the notice to such other person could be issued at any time. He submitted that there were sufficient indications in the provisions of sec. 132 as well as Chapter XIVB to show that such notice was required to be issued soon after the Assessing Officer was satisfied that any undisclosed income belonged to such other person. If any notice is unduly delayed, that would be a lapse in executing the provisions of the Act for which the statutory provision cannot be struck down. He submitted that a wide range and flexibility is permissible to the legislature in fiscal statutes and the legislature need not be all embracing in making such provisions. He relied upon the decisions of the Supreme Court in R.K. Garg v. Union of India reported in 133 ITR 239, Sakhawant Ali v. State of Orissa reported in AIR 1955 SC 166,Twyfold Tea Co. v. The State of Kerala reported in AIR 1970 SC 1133, and State of Bihar v. S.K. Sinha reported in AIR 1995 SC 885 in support of his contentions. He also referred to the decisions of the Constitution Bench of the Supreme Court in A. Thangal Kunju Musaliar v. M. Venkatachalam Potti and Anr. reported in 29 ITR 349 and ITO v. Murlidhar Bhagwandas reported in 52 ITR 335 in which the earlier decisions in Prashar v. Vasantsen (supra) and Suraj Mall Mohta (supra) were considered, and the decision of the Supreme Court in Hungerford Investment Trust Ltd. v. ITO and ors. reported in 231 ITR 175 in which ITO v. Murlidhar Bhagandas (supra) was explained and applied and the decision in Prashar v. Vasantsen (supra) was also considered. 7. Under the proviso to Sec. 4(1) of the said Act, it is laid down that, where, by virtue of any provision of the Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. Therefore, the charging section clearly envisaged that there could be made a provision in the Act for charging income-tax in respect of the income of a period other than the previous year. But for this proviso under sec. 4(1), income-tax could be charged only for any assessment year in respect of the total income of the previous year. The block period contemplated by Chapter XIV-B would be a period other than the previous year within the meaning of the proviso to Sec. 4(1) of the Act and the income for such block period would be an income of a period other than the previous year as per that proviso. 8. Chapter XIV of the Act provides for the procedure for assessment and it contains Sec. 147 relating to income escaping assessment whereunder the Assessing Officer, having reason to believe that any income chargeable to tax has escaped assessment for any assessment year, can proceed to assess or reassess such income and also any other chargeable income which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under sec.147 for the assessment year concerned. Thus, the provision of sec. 147 enabled the Assessing Officer to tax income that has escaped assessment for any assessment year and was inapplicable to any assessment of income for a block period. A time-limit for issuance of notice under sec. 148 for the purpose of assessment, reassessment or recomputation is prescribed under sec. 149 of the Act and this time-limit extended upto 10 years from the end of the relevant assessment year depending upon the amount of income chargeable to tax which had escaped assessment. Such notice may be issued at any time if assessment, reassessment or recomputation was required to be made to give effect to any finding or direction contained in the order in