% * HIGH COURT OF DELHI : NEW DELHI + Writ Petition (C) No.4685 of 2000 Judgment reserved on: August 4. 2006 % Judgment delivered on: December 15. 2006 1. M/s. VLS Finance Ltd. C-489, Defence Colony New Delhi. 2. M/s. South Asian Enterprises Ltd. .^ C-489, DefenceColony ' New Delhi. Petitioners Through Mr. O.S. Bajpai with Mr. V.N. Jha, Advocates versus b 1. The Commissioner of Income Tax (Central-II) 5th Floor, Mayur Bhawan Connaught Place, New Delhi. 2. Deputy Commissioner of Income Tax Central Circle-XXI 7th Floor, Mayur Bhawan ' ConnaughtPlace,New Delhi. Respondents Through Mr. P.P. Malhotra, ASG with Mr. R.D. Jolly, Mr.Chetan Chawla and Mr.Gaurav Sharma, Advocates WP (C) No.4685/2000 Page 1 of 33 Digitally Signed By:AMULYA Signing Date:31.08.2023 16:47 Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified V Coram; HON'BLE MR. JUSTICE MADAN B. LOKUR HON'BLE MR. JUSTICE VIPIN SANGHI 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? MADAN B. LOKUR. J. A writ petition under Article 226 of the Constitutionhas been filed by two companiessharing the same address. Though from the record it is not very explicit, but it appears that the Directors in both the companies are common. 2. Initially,the writ petitionwas filed primarilychallengingan order dated 29^ June, 2000 issued by Respondent No.2 directing that a special audit be conducted in respect of the Petitioners under Section 142 (2A) of the Income Tax Act, 1961 (the Act) by M/s. Khanna and Anandam & Co., Chartered Accountants. A WP (C) No.4685/2000 2 of 33 •J challenge was also made to an order dated 10"^ August, 2000 which clarified that the special audit in respect of Petitioner No.l covers the period from the assessment year 1994-95 to assessment year 1998-99 and in respect of Petitioner No.2 it coversthe period from the assessment year 1994-95 to assessment year 1996-97. 3. Subsequently, the Petitioners sought to amend the writ petition by including a prayer challenging a notice dated 28*^ August, 2000 issued under Section 143 (2) of the Act. That amendment application (CM No.10173/2000) has not yet been allowed although the writ petition was admitted for final hearing. We now allow the amendment application and dispense with the filing of a formal amended writ petition. 4. A further application for amendment (CM No.9305/2006) was made by the Petitioners seeking to add some additional grounds and also a prayer to the effect that the block assessment proceedingsunder Section158 BC (c) of the Act may be held as WP (C) No.4685/2000 Page3 of 33 •J lo^ time barred. This amendment was allowed by us on 1st August, 2006 and the filing of a formal writ petition was dispensed with. 5. The Respondents have filed their affidavits in response to the various allegations made in the writ petition as also to the applications filed by the Petitioners. 6. Accordingto the Petitioners,a search and seizure took place in their business premises and at the residential premises of the promotersand Directorsof the Petitionercompanies. The search and seizure operationscommencedand concludedon 22"'^ June, 1998 but were illegallycontinuedtill 5^^ August,1998. 7. It is submitted that the time limit for completing the block assessment expired on 30*^ June, 2000 in terms of Section 158BC of the Act since the two year period expired on that date. This contention of the Petitioners is based on the premise that the search authorization, having been executed on 22^^^ June, 1998, WP (C) No.4685/2000 Page 4 of 33 could not have been utilized for conducting further searches till 5*^ August, 1998. 8. The Petitioners further submit that on 29^ June, 2000, that is, a day before the period of limitationwas to expire as per the calculation of the Petitioners, an order was passed by Respondent No.2 under Section 142 (2A) of the Act, which was communicated to them on 19'^ July, 2000, that is after expiry of the limitation period for making the block assessment. Nevertheless, the Petitioners filed their block returns on lO'^ September, 1999 and thereafter no further notices have been received by them for initiation of block assessment proceedings. 9. The Petitioners contend that the order passed under Section 142 (2A) of the Act was issued without complying with the principlesof naturaljusticeand without any applicationof mind in as much as there is no complexity in the accounts of the Petitioners and that the Assessing Officer only desired the accounts to be re-written and instead of explicitly saying so, WP (C) No.4685/2000 Page5 of 33 V •V 7^ perhaps because the assessments were likely to become time barred, an order was passed under Section 142 (2A) of the Act. 10. It is submitted that in the case of Petitioner No.l regular assessment for the assessment year 1997-98 was completed on 3V^ March, 2000 without the need for a special audit and that this assessment year also falls in the block period. Similarly,in the case of Petitioner No.2, a regular assessment was made for the assessmentyears 1996-97and 1997-98 on SO'^ March, 1999 and 31'' March, 2000 respectivelyagain without the need for a special audit and both these assessment years are included in the period covered by the special audit. 11. The principal preliminarycontention of learned counsel for the Petitioners is that the block assessment had become time barred on 30^^ June, 2000 and that continued searches and seizures by the Respondentsuntil 5*^ August, 1998 were not only mala fide but were not authorized by law. These illegal searches and seizures could not extend the period of limitation and the WP (C) No.4685/2000 Page 6 of 33 Respondents have proceeded on a wrong understanding of the legal position in this regard. 12. The Respondents filed an affidavit in answer to show cause in which it is contended that the search and seizure proceedings that continued till 5"^ August, 1998 were valid in law and that the period of completionof the blockassessmentwas to expireon 31®' August, 2000 and not on SO'^ June, 2000, as alleged by the Petitioners. 13. It is stated by the Respondents by way of background facts that on 28*^ April, 2000 Respondent No.2 had sent a detailed proposal to the Commissionerof Income Tax, Delhi (Central)-II giving the reasons for seeking approval of a special audit under Section 142 (2A) of the Act. It was explained that the accounts maintained by the Petitioners were intricate and complex and involved a huge revenue, which is why a special audit was necessary. Paraphrasing the reasons, it has been stated on affidavit as follows: - WP (C) NoA685/2000 Page 7of 33 "The deponent had mentioned that the petitioner had manipulated their figures in such a manner that heavy book profits have eventually been converted to heavy losses. It was mentioned by the Assessing Officer that the initial enquiries at Madras as well as the perusal report by DDIT has shown a bogus claim of 100% depreciation by the petitioner. The evidence in possession of the Department indicated that the alleged loss transactions were in fact sham transactions and these transactions actually involved re-routing of money through third parties, through circular entries, after payment of minor amount for assistance in the dubious activities. Various expenses have been claimed which are to be disallowed and in fact the Balance Sheet will have to undergo a see (sic) change because of over-valuationof the assets and change of other important heads. It was also mentioned by the deponent that basically all the entries relating to the loss have to be put backtracked and fresh positionhas to be ascertained, therefore, the entire financial statements are to be re-drawn. The deponent was of the view that the entire exercise is very complex and require inputs from a professional Chartered Accountant. The deponent therefore made a proposalvide its letter dated 28.4.2000 to the CIT seeking approval of Special audit." 14. The matter was then examined by the Commissioner of Income Tax who made certain enquiries from Respondent No.2 and thereafter on 24th May, 2000 he granted approval to have the accounts of the Petitioners audited through a special audit. It is WP (C) No.4685/2000 Page 8 of 33 -v stated on affidavit that the order was eventually passed by Respondent No.2 on 29'^ June, 2000 and it was sent to the Petitioners by registered post on 17th July, 2000. On 19'^ July, 2000, the Chartered Accountant of the Petitioners contacted Respondent No.2 and received another copy of the order passed under Section 142 (2A) of the Act. It was stated that the special auditor appointed by Respondent No.2 had raised certain queries and in answer to those queries and to keep the Petitioners informed. Respondent No.2 issued the letter dated 10*^ August, 2000 clarifying the assessment years for which the special audit was required to be carried out. 15. The Petitioners have refuted the averments made by the Respondentsand have denied receipt of the order dated 29^^ June, 2000, alleged to have been sent by registered post on 30"^ June, 2000. It is stated that the order was sent on 17^ July, 2000, after the period of limitation for making the block assessment had expired. WP (C) No.4685/2000 Page 9 of 33 16. As can be seen from the above, the broad issues that need consideration, and this is what was argued before us, are whether the search of the premises could be conducted until 5^ August, 1998 on the basis of a single search authorization which was executed on 22""^ June, 1998 and whether the period of limitation for completing the block assessment had expired on June, 2000, as contended by learned counsel for the Petitioners or that the period of limitation was to expire on 31"^ August, 2000, as contended by the Respondents. The third issue in this case is whether the principles of natural justice were complied with and whether the accounts of the Petitioners were complex enough to justify the ordering of a special audit under Section 142 (2A) of the Act. 17. It may be mentioned that in the writ petition the Petitioners have also challenged the constitutional validity of Explanation (2) to Section 158BE of the Act but no arguments were addressed in this regard and indeed no such issue was urged before us. WP (C) No.4685/2000 Page 10 of 33 It 18. Section 158 BE (l)(b) and Explanation (2) to Section 158 BE of the Act read as follows: - "158 BE (1) The order under section 158 BC shall be passed - (a) XXX XXX XXX (b) within two years from the end of the month in which the last of the authorisations for search under Section 132 or for requisition under section 132A, as the case may be, was executed in cases where a search is initiated or books of account or other documents or any assets are requisitioned on or after the 1st day of January, 1997. (2) XXX XXX XXX Explanation 1. xxx xxx xxx Explanation 2. - For the removal of doubts, it is hereby declared that the authorisation referred to in sub section (1) shall be deemed to have been executed, - (a) in the case of search, on the conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued; (b) in the case of requisition under section 132A, on the actual receipt of the books of account or other documents or assets by the Authorised Officer." WP (C) No.4685/2000 Page 11 of 33 19. On a plain reading of this section as well as the explanation, it is quite clear that a search under Section 132 of the Act will conclude on the day the last panchnama is drawn. This is also the view taken by a Division Bench of this Court in B.M. Lai v. CIT (Delhi), [2005] 279 ITR 298 wherein it was observed and we quote: "11. From a plain reading of Explanation 2(a), it is evident that an authorization referred to in sub-section (1) is deemed to have been executed on the conclusion of the search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorization has been issued. What is note worthy is that the time-limit for the making of an order under Section 158BG read with Section 158BE(1) will start from the last of panchnamas." 20. A similar view has also been taken by the Kerala High Court in T.O. Abraham and Co. and Another v. Assistant Director of Income Tax (Investigation) and others, [1999] 238 ITR 501. 21. The Petitioner has annexed as Annexures C to C-15, a total of 16 panchnamas that were prepared as a result of the search conducted on various dates starting from 23rd June, 1998 till 5th WP (C) No.4685/2000 Page 12 of 33 August, 1998. The last panchnama having been drawn on 5th August, 1998, in terms of Section 158BE (l)(b) of the Act, the period of two years will come to an end in the end of August, 2000. 22. A perusal of these panchnamas clearly shows that a warrant of authorization was signed and shown each time the search was conducted and the contents thereof were explained to the person present at the premises to be searched. Therefore, it is not as if the officers of the Respondents conducted the search without any valid authorization. That it took several days for the search to be concluded is an indication of the fact, as contended by the learned Additional Solicitor General, that a large number of documents had to be gone through. In fact, we were told during the course of oral submissions that the Respondents had to go through as many as 5000 documents and this was not controverted by learned counsel for the Petitioners. Of course, we would have been much happier if this had been so stated by the Respondents on affidavit, but in the absence of any denial by learned counsel for the WP (C) No.4685/2000 Page 13 of 33 Petitioners, we will assume that what we are told at the Bar is correct and that the Respondents inspected as many as 5000 documents. 23. During the course of hearing we were also shown the search authorization. It has been 'revalidated', as it were, before conducting the search, although the panchnamas do not so indicate. We would only comment, in this regard, that it would be procedurally much healthier if a separate search authorization is issued on every occasion or at the least the panchnama should make a reference to the subsequent dates of issue of the search authorization. 24. Learned counsel for the Petitioners relied upon B.K. Nowlakha v. Union of India, [1991] 192 ITR 436 to contend that the Respondents could have, and if it was necessary, ought to have, seized the books of account rather than pass a restraint order and return several times to go through the accounts of the Petitioners. We are not able to appreciate the relevance of this WP (C) No.4685/2000 Page 14 of 33 decision to the facts of this case. If it is practicable to seize the books of account under Section 132(1) of the Act, then the authorized officer should do so. If it is not possible or practicable to do so, the authorized officer may then pass a restraint order under Section 132(3) of the Act. Prior to its amendment in 2002 (the period with which we are concerned), Section 132(8A) of the Act provided that an order passed under Section 132(3) shall not be in force for a period exceeding 60 days, except where an extension is granted for reasons to be recorded in writing. In Nowlakha the articles in question, some antiques, were believed to represent undisclosed income and could be seized but were not. Instead, restraint orders were passed in respect thereof "solely with a view to circumvent the provisions of section 132(8A)". In view of these facts, it was held that continuation of the restraint order under Section 132(3) of the Act was not warranted and a direction was given to the authorized officer to release the articles in question. This issue does not at all arise in the present case. Assuming for the sake of argument that the books of account of the Petitioners could be seized but were not seized (wrongly), the WP (C) No.4685/2000 Page 15 of 33 seizure could have been affected on 22"^^ June, 1998 (the first day). The last panchnama was drawn on 5*^ August, 1998 well before the 60 day period was to expire. Therefore, no ulterior motives can be attributed to the Respondents in failing to seize the books of account and instead passing a restraint order in their respect. Learned counsel for the Petitioners has not been able to show us any prejudice caused to his clients. 25. Similarly, reliance on C.J.T. v. Mrs. Sandhya P. Naik, [2002] 253 ITR 534 is misplaced. In that case, the Income Tax Appellate Tribunal found as a matter of fact that the search was concluded on 20*^ October, 1996. It was in this context that the High Court observed that by merely stating in the panchnama that the search is temporarily suspended, the authorized officer could not keep the search proceedings alive by passing a restraint order under Section 132(3) of the Act. No doubt the assessee requested for the release of some articles for pooja etc. and this request was granted and on 26*^ October, 1996 some articles were released. But the High Court held, agreeing with the Income Tax Appellate WP (C) NoA685/2000 Page 16 of 33 Tribunal that the proceedingson 26*^ October, 1996 were not in continuation of the proceedings that had already concluded on 20'^ October, 1996. 26. The question that therefore arises for our consideration is whether the search, subject matter of this writ petition, had concluded on June, 1998 or not? If it did not, was it unreasonablyprolonged for some collateral reason? If it did, (as contended by learned counsel for the Petitioners), then the limitation period for making the assessment order would end on 30"" June, 2000. However, if the search proceedings did not end on 22'''^ June, 1998 but on 5*^ August, 1998 as contended by the learned Additional Solicitor General, then the limitation period for making the assessment order would end on 31"'August, 2000. 27. The answer to these questions lies in the averments made in the writ petition itself, the Respondents being completely silent on these issues in their affidavits. It has been stated in the writ petition that the Respondents had drawn up 16 panchnamas in m> CO No.4685/2000 Page 17 of 33 respect of the visits that they had made to the premises of the Respondents. No seizures were made on 10 occasions, meaning thereby that the Respondents had affected seizures on 6 occasions. It must be remembered that the Respondents were concerned with the books of account of the Petitioners and documents to confirm that they had undisclosed income - the Respondents were not concerned with articles representing undisclosed income, unlike in Nowlakha and Sandhya P. Naik. What appears to have happened, from a perusal of the various panchnamas, is that the Respondents went through the books and seized only those documents that were necessary, rather than seizing all the books and documents of the Petitioners. Can the Respondents be faulted for following a less drastic procedure? We do not think so. 28. That the task of examining the documents relevant for seizure was quite cumbersome is clear from an illustration given by the Respondents in their additional affidavit filed on August, 2001. On 29^ June, 1998 (Annexure C-2) die Respondents seized books of account and documents as per WP (C)No.4685/2000 Page 18 of 33 inventory in Annexure AAA-1 to AAA-5. A perusal of the documents (which run into at least 215 pages) as per Annexure AAA-3 shows, as stated on affidavit that, "From the perusal of the above, it is seen that M/s Divya Films Internationalhas identified11 films to be purchasedfrom M/s GaneshEnterprisesand has asked M/s VLS Finance Ltd. to purchase them for R.2,11,54,551.11 and that M/s Divya Films International would take these films on lease from M/s VLS Finance Ltd. for quarterly lease rental of Rs.20,80,200/- for 12 quarters aggregated to Rs.2,49,62,400/-for which M/s Divya Films International Ltd. have given promissory notes. These promissory notes have again been discounted by M/s VLS Finance Ltd. from M/s Flex Finance Ltd. Thus the money originally spent by M/s VLS Finance Ltd. has again circulated back to it only." The Respondentscould have, on the very first day of the search, seized all relevant and irrelevant documents and books of the Petitioners, but they did not do so. We are of the view that their decision on this (in favour of the Petitioners) cannot be used against them. We have also kept in mind two facts, namely, that even by adopting this procedure, the Respondents did not exceed the 60 day limit as provided by Section 132(8A) of the Act and that for making the assessment order the Respondents had still WP (C) No.4685/2000 Page 19 of 33 more than adequate time available, making it unnecessaryfor them to resort to any subterfuge so early on. Consequently,we are of the opinion that the Respondentsdid not completethe search on 22°^^ June, 1998 as alleged by the Petitioners, nor did they unduly prolong it. The search concludedon 5'^ August, 1998 and so in terms of Explanation 2 to Section 158 BE of the Act the period of limitation would begin from the end of August, 1998, that is, 31st August, 1998 onwards. [See B.M. Lai]. The second issue raised by learned counsel for die Petitioners would stand answered accordingly. 29. The final issue is with regard to the validity of the order passed by the Respondentson 29*^ June, 2000 under Section142 (2A) of the Act. According to learned counsel for the Petitioners, the principles of natural justice were not complied with before passing that order. Moreover, the accounts of his clients were not complex nor was there any meaningful interaction between the Respondents and the Petitioners which could lead the WP (C) No.4685/2000 Page 20 of 33 Respondents to conclude that the accounts were complex and necessitated a special audit. 30. After we had concluded hearing, the decision of the Supreme Court in Rajesh Kumar & Others v. Deputy Commissioner of Income Tax & Others, [2006] 287 ITR 91 came to our notice and it appeared to have a material bearing on this issue. Consequently, we thought it appropriate to list the matter for directions so that we could explain the position to learned counsel for the parties and hear them on the applicability of the decision before pronouncing judgment. 31. Accordingly, the matter was listed for directions on 24th November, 2006 and after the position was explained to learned counsel, it was adjourned to 1st December, 2006 for further hearing. On 1st December,2006, the matter was adjourned to 8th December, 2006 on which date learned counsel for the parties WP (C) No.4685/2000 Page21 of 33 •o addressed arguments on the applicabilityof the decision of the Supreme Court. 32. Having examined the decision of the Supreme Court, we find that it has been held by the Supreme Court that an order passed under Section142(2A) of the Act is not an administrative order but a judicial order which affects the rights of the assessee. Consequently,it is necessarythat notice is given to the assessee before an order is passed under Section142(2A) of the Act. The operativeportion of the decision of the Supreme Court reads as follows "The hearing given, however, need not be elaborate. The notice issued may only contain briefly the issues which the Assessing Officer thinks to