SCA/6215/1999 1/62 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 6215 of 1999 With SPECIAL CIVIL APPLICATION No. 4380 of 1999 With SPECIAL CIVIL APPLICATION No. 4387 of 1999 With SPECIAL CIVIL APPLICATION No. 919 of 2000 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA Sd/- HONOURABLE MR.JUSTICE H.B.ANTANI Sd/- ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ========================================================= CARGO CLEARING AGENCY (GUJARAT) - Petitioner(s) Versus JOINT COMMISSIONER OF INCOME TAX - Respondent(s) ========================================================= Appearance : MR SN SOPARKAR AND MR KH KAJI for Petitioner(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, ========================================================= : SYNOPSIS : SCA/6215/1999 2/62 JUDGMENT Sr.No. CONTENTS Paragraph Nos. 01 FACTS 1 to 6 02 CONTENTIONS : (a) Petitioners (b) Respondent (c) Rejoinder 7 to 7.4. 8 to 8.1 9 03 LEGISLATIVE HISTORY 10, 12 to 12.4 04 REASONING 11, 13 to 33 05 CONCLUSION/ORDER 34 to 38 CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE H.B.ANTANI Date : 08/08/2008 CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. All these petitions have been heard together as it is an accepted position that the issue involved is common. Special Civil Application No. 6215 of 1999 has been taken as the lead matter and accordingly detailed facts are taken from the said petition. 2. The petitioner was a Firm comprised of four partners. The Firm continued business up to 31.03.1992 i.e. the day on which the Firm was dissolved. In the subsequent period, viz. previous year relevant to Assessment Year 1993-94 certain SCA/6215/1999 3/62 JUDGMENT transactions were carried out and hence, a return of income in the status of Association of Persons (AOP) declaring income of Rs.5,05,087/- came to be filed. 3. On 24.11.1995 search proceedings u/s. 132 of the Income Tax Act, 1961 (the Act) were carried out at the residential premises of three erstwhile partners of the petitioner Firm. Certain loose papers were found from the residence of one of the partners Mr. T.V.Sujan. The said documents were seized and statement of Mr.Sujan was recorded. An order u/s.158BD of the Act came to be made on 31.03.1997 for the block period ending on 24.11.1995 in the status of AOP. The assessment was made pursuant to return of income for the block period filed on 03.03.1997 showing total undisclosed income at Rs.30 lacs. The assessment was made after various details and explanation were called for vide Notice dated 05.03.1997 to which a detailed reply was filed on 12.03.1997. The assessment was framed on a total income of Rs.40,50,900/- after taking approval of Commissioner of Income Tax, Rajkot. SCA/6215/1999 4/62 JUDGMENT 4. On 16.04.1999 Notice under section 148 of the Act came to be issued seeking to reassess the income for the block period ending on 24.11.1995 by stating that the respondent had reason to believe that the income for the block period ending on 24.11.1995 had escaped assessment within the meaning of section 147 of the Act. The impugned Notice further stated that the Notice was being issued after obtaining necessary satisfaction of the Commissioner of Income Tax. Thereafter correspondence ensued between some of the erstwhile partners of the petitioner Firm and the respondent authority. Though repeated letters were addressed by the partners asking for the reasons recorded u/s. 148(2) of the Act, the same were not supplied. Some of the partners also made a grievance that the Notice u/s.148 of the Act had not been served upon them and they were not in receipt of any Notice. The last such correspondence resting with communication dated 28.07.1999 from the respondent authority to one of the ex-partners wherein it is stated that it was not obligatory to supply reasons recorded and the addressee was directed to file return immediately. It is at this stage that the SCA/6215/1999 5/62 JUDGMENT petitioner has approached this Court challenging the impugned Notice issued u/s.148 of the Act. 5. The principal issue raised in this petition and other cognate petitions is whether it is open to the assessing authority to issue Notice u/s. 148 of the Act in respect of an assessment framed for a block period under Chapter XIVB of the Act. 6. Learned Senior Advocate Mr.S.N.Soparkar as well as Mr. K.H.Kazi, learned Advocate appearing for the petitioners have been heard. The Revenue was represented by Mr. M.R.Bhatt, learned Senior Standing Counsel. 7. On behalf of the petitioners it was contended that section 147 of the Act permits an Assessing Officer to reassess an income which has escaped assessment “for any assessment year”. Emphasing the language of the provision, it was contended that in case of a “Block Period ” the same is not in respect of any assessment year and once the assessment of income is for the entire block period the Assessing SCA/6215/1999 6/62 JUDGMENT Officer can never form a belief that any income chargeable to tax for any assessment year has escaped assessment. 7.1 The next contention was based on provisions of section 147 of the Act as well as the Proviso to section 147 of the Act to submit that where the limitation has been prescribed for issuance of Notice reckoned from the end of a particular assessment year the scheme would fail in case of assessment for the block period because it was not possible to specify the assessment year from the end of which the time limit could be computed. 7.2 Similarly provisions of sections 151 & 153 of the Act were also pointed out to reiterate submission that in a case where the sanction was required as provided by section 151 of the Act, again same was from the expiry of four years from the relevant assessment year and the conditions could not be fulfilled. Similarly section 153 of the Act also provided different period of limitation as against the provisions of section 158BE of the Act which SCA/6215/1999 7/62 JUDGMENT provides for time limit for completion of block assessment. 7.3 Another contention was that the assessment framed under Chapter XIV-B of the Act had to be framed after the final order was approved by the Commissioner of Income Tax and a subordinate authority cannot seek to re-open such assessment, as in the present case where the impugned Notice has been issued by the Joint Commissioner of Income Tax. 7.4 The period of limitation prescribed under section 158BE of the Act was less than the period of limitation prescribed under section 153 of the Act and therefore also the scheme did not permit such an exercise. 8. On behalf of the respondent authority it was submitted that section 158BH of the Act specifically provided that save as otherwise provided in Chapter XIV-B, all other provisions of the Act shall apply to assessment made under Chapter XIV-B. It was therefore contended that when one considered the definition of SCA/6215/1999 8/62 JUDGMENT “block period” as provided in section 158B(a) of the Act, it was clear that the said term covered the period comprising previous years relevant to 10/6 assessment years preceding the previous year in which the search was conducted u/s. 132 of the Act and therefore, wherever the words “assessment year” appear in Chapter XIV of the Act relating to Procedure for assessment the term block period had to be read in place of assessment year to make the scheme workable. 8.1 Referring to sub-section (2) of section 158BA of the Act, it was submitted that for the purpose of charging tax not only section 113 of the Act was material but even section 4 had to be considered as laid down by the Apex Court in the case of Commissioner of Income Tax Vs. Suresh N. Gupta (2008) 297 ITR 322 (SC). It was submitted that the Apex Court has considered the entire scheme of Chapter XIV-B of the Act and come to the conclusion that computation of undisclosed income had to be made u/s.158BB in the manner provided in Chapter IV of the Act and therefore the said Chapter is not ruled out by SCA/6215/1999 9/62 JUDGMENT provisions of Chapter XIV-B of the Act. That the non- obstante clause appearing in section 158BA of the Act had to be read in juxtaposition with section 158BH of the Act. That the concepts of “previous year” and “total income” were retained in Chapter XIV-B of the Act and therefore Chapter IV of the Act cannot be ruled out from block assessment procedure. The following extract from the Apex Court decision was read and emphasized by the learned Counsel : “11 Reading of the relevant provisions of Chapter XIV-B one finds that section 158BA deals with assessment of 'undisclosed income' as a result of search whereas computation of such income falls under section 158BB. The procedure for block assessment falls in section 158BC. Section 158BA begins with a non obstante clause. It states that nothing contained in any other provisions of the 1961 Act, where search is initiated after June 30, 1995, under section 132 or in cases of requisition under section 132A after the cut off date, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B. 12 Relying on section 158BA(1) the assessee claims that Chapter XIV-B is a special procedure for assessment of cases; that it constitutes a self- contained mechanism and, hence, it falls outside the scope of section 4(1) of the 1961 Act, SCA/6215/1999 10/62 JUDGMENT particularly when section 4(1) imposes a charge on the “total income” and not on the undisclosed income and, particularly when section 158BA(2) is an independent charging section in contrast to section 4(1) of the 1961 Act, which imposes a charge on the 'total income' of the previous year. According to the assessee, the charge under section 158BA(2) is on the 'block period' and not on the total income of the 'previous year'. Therefore, according to the assessee, Chapter XIV-B is a self-contained mechanism. 13 As stated above, these arguments advanced on behalf of the assessee have no merit. Section 158B defines 'block period' to mean the period comprising the previous years relevant to 10/6 assessment years preceding the previous year in which the search was conducted under section 132. It also includes the period up to the date of commencement of such search or date of requisition. Under section 4, the subject of charge is the income of the previous year and not the income of the assessment year. Thus, tax is levied on the actual income of the previous year. Each 'previous year' is a distinct unit of time for the purposes of assessment. However, when we come to section 158BA, we find that Parliament has taken the block period to mean the period comprising previous years relevant to 10/6 assessment years preceding the previous year in which the search is conducted. In other words, Parliament has in search cases expanded the unit of time for block assessment purposes from 1 year SCA/6215/1999 11/62 JUDGMENT to 10/6 previous years. However, it is important to note that the unit of time remains constant. It is open to Parliament to treat the unit of time as one year in normal assessment cases and, at the same time, it is also open to Parliament to treat 10/6 previous years as a unit of time for the block assessment period. The important thing to be noted is that the block assessment computation in section 158BB does not exclude the concept of 'previous years' as well as the concept of 'total income'. Those concepts are retained. Further, we need to examine the scheme of Chapter XIV-B. The said Chapter has three parts consisting of assessment, computation and procedure for making block assessment. Assessment of undisclosed income as a result of search stands covered by section 158BA whereas computation of undisclosed income of the block period falls in section 158BB and procedure for block assessment falls in section 158BC. In this case, we are mainly concerned with computation of undisclosed income under section 158BB(1). This section incorporates the principle of aggregation of total income of the previous years falling within the block period computed in accordance with the provisions of Chapter IV. The important thing to be noted is that the computation has to be done even under section 158BB of 'undisclosed income' in the manner provided for in Chapter IV of the 1961 Act which deals with “computation of total income”. Chapter IV deals with computation in cases of normal assessment. Chapter IV is not ruled out by the provisions of Chapter XIV-B. In this connection, we may also SCA/6215/1999 12/62 JUDGMENT take note of section 158BH which deals with application of other provisions of the 1961 Act to the block assessment procedure in Chapter XIV-B. Section 158BH makes it clear that save as otherwise provided in Chapter XIV-B, all other provisions of the 1961 Act shall equally apply to block assessment. Therefore, one has to read the non obstante clause in section 158BA in juxtaposition with section 158BH. Keeping in mind the provisions of section 158BB and keeping in mind the Chapter XIV-B, we are of the view that Chapter IV is not ruled out from block assessment procedure and, therefore, one has to read section 158BB with section 4 of the 1961 Act. 14 There is one more fact which needs to be noted. A bare reading of the provisions of section 158BA and section 158BB indicates that the searches conducted by the Department are an important means of unearthing black money. However, undisclosed income has to be related to the different years in which the income was earned. The essence of the block assessment procedure, therefore, is a separate single assessment of undisclosed income, detected as a result of a search. This separate assessment is in addition to normal or regular assessment covering the same period. A separate return is a pre-requisite for making a 'block- assessment'. However, in the matter of computation, the principle of aggregation of total incomes, is inbuilt into section 158BB. We have to subtract one aggregate from the other. Further, while applying the principle of aggregation of the SCA/6215/1999 13/62 JUDGMENT total incomes, computation is required to be done in accordance with the provisions of Chapter IV. Therefore, in our view, section 4 has to be read with section 158BB. That section is not ruled out by section 158BB. If section 4 has to be read with section 158BB for computing undisclosed income then the provisions of the relevant Finance Act have got to be read into the block assessment scheme under Chapter XIV-B, even prior to June 1,2002. 15. Under section 158BB, there is the theory of 'block period'. It is based on 'the principle of aggregation of total incomes'. Under that section, the first aggregate to be computed is the total income of the previous years falling within the block period including returned/assessed incomes as per regular returns and regular assessments. The second aggregate to be computed is the aggregate of the total incomes/losses of the previous years determined in terms of clauses (a) to (f) of section 158BB(1). The difference between the first aggregate and the second aggregate is described in section 158B(b) as the 'undisclosed income' to be taxed under the provisions of section 113 of the 1961 Act at the special rates prescribed. Further, clause (a) of the Explanation to section 158BB clarifies that the total income/loss of each previous years shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI SCA/6215/1999 14/62 JUDGMENT or unabsorbed depreciation under section 32(2) of the 1961 Act. Hence, one has to read section 158BB with section 4 of the 1961 Act. There is no conflict between the computation machinery under Chapter XIV-B and normal computation machinery under Chapter IV. This is the importance behind enactment of section 158BH which inter alia states that if there is no conflict between the provisions of Chapter XIV-B and any other provisions of the 1961 Act, then the latter will operate. There is a fallacy in the argument of the assessee that the concepts of 'total income' and 'previous year' are given a go by in Chapter XIV-B. The above analysis of section 158BB indicates that both the concepts are retained in Chapter XIV-B. The only difference is that section 4 of the 1961 Act charges the total income of a person of one single previous year (unit of assessment) whereas section 158BA(2) levies a charge on the income of a person for the block period of previous years relevant to 10/6 assessment years. In our view, the words 'block period', as defined in section 158B(a), comprises previous years relevant to 10/6 assessment years as one unit of time for the purposes of assessment. As stated above, the object behind the enactment of Chapter XIV-B is to assess and compute 'undisclosed incomes' relatable to different accounting years in which the income is earned. Therefore, if the block period comprising of previous years relevant to 10/6 assessment years is treated by Parliament as one unit of time for assessment purposes, one has to correlate 'undisclosed income' to each of the years in which SCA/6215/1999 15/62 JUDGMENT income was earned by the assessee. It is true that under Chapter XIV-B, computation of regular income and computation of undisclosed income has to be worked out separately. However, to arrive at the figure of undisclosed income, the said parallel calculations have to converge in order to work out the difference between the first and the second aggregates of the total incomes/losses of the previous year, in which undisclosed income is taxed under section 113. Therefore, in our view, the concept of a charge on the 'total income' of the previous year under the 1961 Act is retained even under Chapter XIV-B. Therefore, section 158BB which deals with computation of undisclosed income of the block period has to be read with computation of total income under Chapter IV of the 1961 Act.” (emphasis supplied) 9. In rejoinder, the learned Counsel appearing for the petitioner has placed reliance on decision of High Court of Rajasthan in the case of Commissioner of Income Tax Vs. Ramesh Chand Soni (2005) 194 CTR (Raj) 84. It was reiterated that section 158BE of the Act was a complete code on the subject of prescribing and computing limitation for the purpose of completing block assessment and hence other provisions of the Act, like section 153 of the Act, had to be necessarily excluded. SCA/6215/1999 16/62 JUDGMENT 10. When Chapter XIV-B was introduced the Memorandum Explaining the Provisions in the Finance Bill,1995 stated the purpose and the object for introducing the said chapter in following terms : “SPECIAL PROCEDURE FOR ASSESSMENT OF SEARCH CASES. Searches conducted by the Income-tax Department are important means of unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search- related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. In order to make the procedure of assessment of search cases cost- effective efficient and meaningful, it is proposed to introduce a new scheme of assessment of undisclosed income determined as a result of search under SCA/6215/1999 17/62 JUDGMENT section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30-6-1995, shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income recorded on or before the date of the search or requisition in the books of account or other documents, maintained in the normal course, relating to such previous years shall not be included in the block” 11. Therefore, this is a pointer to the fact that undisclosed income, in other words, the income which has not been disclosed and which has not been taxed, has to be assessed by adopting a special procedure. The special procedure has been evolved to save valuable time which is otherwise lost in the process of co-relating the undisclosed income to different assessment years by obviating the legal battles involving issues of procedure and interpretation of law. The legislature found it necessary to arrive at a cost effective, efficient and meaningful procedure SCA/6215/1999 18/62 JUDGMENT to avoid litigations which continue for many years to decide which income, or part of income, is assessable in which assessment year. The entire present controversy has to be considered and the submissions appreciated in light of the aforesaid legislative intent. 12. Chapter XIV-B of the Act lays down a SPECIAL PROCEDURE FOR ASSESSMENT OF SEARCH CASES. The legislative history of the said Chapter, inclusive of all relevant amendments till date, may be borne in mind to appreciate the controversy. The said Chapter was inserted by the Finance Act, 1995. The scope and effect of the said Chapter has been explained by Central Board of Direct Taxes (CBDT) by issuing Circular No. 717 dated 14.08.1995. The relevant extract of the said Circular reads as under : “Special Procedure for assessment of search cases.- 39.1 Searches conducted by the Income-tax Department are important means for unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax-evaders generally manage to divert the focus to SCA/6215/1999 19/62 JUDGMENT procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. 39.2. In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced for the assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30-6-1995 shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income or the transaction recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course of business relating to such previous years shall not be included in the block assessment. 39.3. The salient features of this scheme are as under:- SCA/6215/1999 20/62 JUDGMENT (a) Block period. - The undisclosed income of a person shall be assessed as the income of the block period consisting of a period of 10 previous years, preceding the previous year in which the search was conducted or the books of accounts, assets, etc. were requisitioned. The period of the current year upto the date of the search will also form part of the block period. (b) Undisclosed income.- The