Commissioner of Income Tax vs Shiv Ratan Soni

Rajesh Balia, J.—This appeal is directed against the order of Tribunal, Jodhpur Bench, Jodhpur dt. 26th May, 2003 and relates to asst. yr. 1986-87. The order of the Tribunal is common deciding appeals arising out of asst. yrs. 1986-87 to 1988-89.

The brief facts giving rise to this appeal are that the assessee is engaged in the activity of money-lending and goldsmithy. A search was conducted in the premises of the assessee on 18th Nov., 1988 and following assets/valuable articles were found:

(a) Business income : Rs. 24,00,000 (Including money-lending and pawning) (b) Investment in house : Rs. 3,73,000 (c) Unaccounted marriage expenses : Rs. 1,50,000 --------------- Rs. 29,23,000 ---------------

Besides those, some papers were also found during the course of search.

During the course of assessee''s statement u/s 132(4), he agreed to surrender Rs. 24,00,000 as his income from money-lending and goldsmithy business, investment, unexplained investment in house amounting to Rs. 3,73,000 and unaccounted marriage expenses amounting to Rs. 1,50,000. In all Rs. 29,23,000 were surrendered as his income from money-lending and goldsmithy which is represented through aforesaid assets found during the search.

As a result of search, order u/s 132(5) was passed by Asstt. CIT, Ward-I, Jodhpur, with previous approval of Dy. CIT, Jodhpur, for the purpose of retaining the assets seized during the course of search by. estimated assessment of the tax liability which may arise as a result of material discovered during the aforesaid search.

In the case of assessee, he assessed the tax liability for three asst. yrs. 1986-87, 1987-88 and 1989-90 to the tune of Rs. 18,11,000.

After the order u/s 132(5) on 10th March, 1987, notices u/s 148 were issued for asst. yrs. 1986-87, 1987-88 and 1988-89. Year 1989-90 being the assessment year relevant to previous year ending on 31st March, 1989 during which search was conducted, the necessity of issuing notice u/s 148 did not arise.

The Tribunal has quashed the notices issued u/s 148 inter alia on the ground that the satisfaction of ITO about the escapement of income could not be discovered from the reasons stated by him which are vague and which are not founded on existing material on applying his mind thereto and the notices have been issued purely following the order passed u/s 132(5) without application of his mind to the material before it. It was pointed out that in the order u/s 132(5) itself it has been stated that material found during search shall be looked into by the AO during the assessment proceedings clearly indicates that order u/s 132(5) itself was not founded on any analysis of the documents or material seized during search. Hence, it could not provide basis for formation of necessary belief required u/s 147 before issuance of notices u/s 148.

The appeal relating to asst. yr. 1988-89 against the very same order was dismissed by this Court finding that the AO has interpolated the record and has recorded his reasons by ante-dating the same after issuing notices. This Court found from the material produced before it that in the note-sheet dt. 30th Sept., 1991 he has referred to the notices issued in October, 1991 and served in October, 1991 which was clear demonstration of the fact that AO has tampered with the record and tried to create the record to support the notices u/s 148 which had been issued without fulfilling the condition precedent before issuing the same.

The AO is not required to give an opportunity to the assessee before resorting to Section 148. But he is required to record his reasons in writing about his satisfaction related to escapement of income from assessment of tax before issuing notices and validity of such notices, if the same is challenged, have to be judged in the light of reasons recorded by the AO, as they are only material by which process of reaching subjective satisfaction by the AO can be looked into by the Court within its power of judicial review, or even by the appellate authority, if the validity of notice is challenged. The fulfilment of required condition precedent has to be established and the reasons recorded before issuance of notice gives a peep into the mind of the officer, who assumed jurisdiction to initiate proceeding u/s 147/148 of the IT Act, 1961. Therefore, recording of reasons before issuing notice is an essential pre-requisite and failure to do so results in vitiating the proceedings.

Since from record of 1986-87 and 1987-88, this discrepancy is not visible from the record produced before us, we may not follow our conclusion in relation to year 1988-89. However, one factor which is common in the recorded reasons in all three years is that it refers to order u/s 132(5) framed by the Asstt. CIT, to which we have referred to above. The amount of escaped income filled in the form provided for submitting to the CIT for seeking his approval before issuing notice tallies with assessment made by the Asstt. CIT in order u/s 132(5) at verbatim and does not refer to any material or the contents of material from which he has drawn his own conclusion or has satisfied himself about the conclusion drawn by the authority making an order u/s 132(5) for the purpose of retaining the seized assets against the possible future liability.

The reasons which found place in the communication made to the CIT for seeking his approval, read as under:

According to Section 132(5) and seized records the assessee underassessed with reference to undisclosed investment and underassess of business income. Hence I have reason to believe that assessee''s income has escaped for taxes.

In clause No. 6 of the format, the quantum of income shows escaped assessment from the tax for the year 1986-87 to be Rs. 2,41,300. The authority passing order u/s 132(5) has assessed income of undisclosed income for the year 1986-87 at Rs. 2,60,000. By deducting the amount already disclosed by the assessee in return submitted for the year 1986-87, balance Rs. 2,41,300 has been stated to be the income that has escaped assessment.

Even without entering into the controversy for the time being whether for the purpose of considering the validity of notice u/s 148 only, the reasons submitted before the CIT are relevant, but reasons, if any, recorded in the note-sheet of proceeding of AO independently to communicate to the CIT for his approval are relevant, it would be apposite to refer to the reasons recorded in the note-sheet dt. 14th Oct., 1991, which are reproduced as under:

Assessee''s income underassessed in asst. yr. 1986-87. Income assessed Rs. 18,700 as per filed return only but as per Section 132(5) order passed by the AO and on the basis of seized records assessee income for asst. yr. 1986-87 should be assessed Rs. 2,60,000. Hence I have reason to believe that assessee''s income underassessed during asst. yr. 1986-87. Therefore, action u/s 148 is compulsorily required. Time limit for issue of notice u/s 148 lapsed prior approval in this case required. Necessary form regarding worthy CIT permission in this case has been send as on 14th Oct., 1991 through D.C. Range.

Apparently, this note-sheet is prepared after sending the form containing reasons on the basis of which approval of the CIT for proposed action is sought. After sending the format along with reasons recorded by him to the CIT for his approval, reason, if any, recorded cannot be a basis for seeking approval of CIT.

Apparently, apart from whether the order dt. 14th Oct., 1991, on the order sheet or the reasons placed before the CIT seeking his approval, for some unacceptable reasons, appears to have not been acted upon and another format with the same reasons in the same form as earlier was issued on 13th Nov., 1991 because the AO has received a communication dt. 29th Oct., 1991 inquiring about the fact whether the proposed action is required to be taken u/s 147(a) as existed prior to amendment of Section 147 w.e.f. 1st April, 1989 or the amended provision of Section 147.

However, there is no change or additional reasons which have come to be recorded prior to seeking approval vide letter dt. 13th Nov., 1991.

Learned Counsel for the appellant has urged that the order passed u/s 132(5) was relevant material for the purpose of forming necessary belief about the escapement of income from assessment to tax or underassessment by the AO and since there is relevant material having nexus with the formation of the belief, further enquiry in the adequacy and sufficiency of the material for holding such belief, as if the belief has to be formed objectively is not permissible.

On the other hand, learned Counsel for the respondent has urged that the order passed u/s 132(5) may be a relevant material, but the reasons recorded by the AO must show independent application of mind in respect of facts and material which have gone into consideration u/s 132(5). He further contends that the AO cannot abdicate his function of his own application of mind to facts to authorities passing order u/s 132(5). In other words, it cannot be a borrowed satisfaction unless a basic nexus is established between the formation of belief on application of mind by the AO with the material considered by him.

In the present case, one thing is apparent that the AO has not referred to any specific material in any of the reasons recorded by him which could give rise to a clue as to the process by which he could have related any material found during search to be the income escaped from assessment for the assessment year in question. In the absence of any such material finding reference in the reasons recorded by the AO, the reasons recorded by the AO remain very vague. Reasons recorded before initiating proceeding u/s 148 if need record to find some material which could be related by Court to satisfaction of AO, do not satisfy the test of an honest belief or satisfaction reached by AO about escapement of the income before issuance of notice. It remains an action more on suspicion. Law requires where AO has reason to believe and does not rest at his reason to suspect that income of the assessee has escaped assessment. Such a stand cannot be supported on specious plea that one can make a search or enquiry into any material on record which is relevant for the assessment year for holding the belief whether income for particular assessment year has escaped assessment. If that were so, legislature would not have provided an important safeguard against unnecessary harassment that reasons for such belief must be recorded before issuance of notice, and the existence of such satisfaction has to be supported within the parameter of reasons and not outside. One does not have to remember the contents of material that have gone into consideration but material that has gone into consideration must have specific reference so that check on ultra vires exercise of powers can be effectively exercised through judicial review.

Stating that considering the material seized during the search is infinitely vague, it does not refer to any material referable to assessment year in question. One is left stranded to exercise in the heap of documents to find a supportive material which the officer himself may or may not have seen. It need to be kept in mind that for issuance of notice u/s 147 for each assessment year the material on the basis of which the AO could found his belief must relate to concerned period and must have relevant nexus to formation of belief about escapement of tax relevant for assessment year for which reassessment proceedings are initiated. Therefore, the order passed u/s 132(5) for retaining seized assets may or may not have any relevance to income of any particular assessment year in the absence of which no valid foundation for initiating proceedings u/s 148 can be laid. Permitting otherwise would be taking away the only limited safeguard provided to the assessee, against enormous powers conferred on the AO for opening a completed assessment time and again.

A vague reference of ''material found during search'' on the basis of which subjective satisfaction has been arrived at, in the present case so much so during the long course of hearing not a single document could be referred having relevance to escapement of income from tax for period in question except the order u/s 132(5).

A perusal of Section 132(5) goes to show that primarily retention of assets seized during search against the possible estimated liability that may be created is not in exercise of finding the undisclosed income for any particular assessment year.

Be that as it may, we do not find force in extreme position taken by the assessee that in no circumstance an order u/s 132(5) can be considered a relevant piece of material for framing of necessary belief before initiating proceedings u/s 148. Undoubtedly, when any order like u/s 132(5) may contain the material which may have relevant contents for the purpose of holding belief requisite for initiating proceedings u/s 148 and when brought to the notice of AO like any other material, an order u/s 132(5) to provide such foundation also has to be judged on the touchstone of having relevant nexus to the formation of belief.

We have already noticed above the quantum of assets found during search and quantum of assets seized and the income from undisclosed sources surrendered by the assessee in the course of statement u/s 132(4). We have also noticed that assessee has surrendered his income from business to the tune of Rs. 24,00,000 and he has also said that this undisclosed income is represented in the form of assets found during search. It is not in dispute before us that said Rs. 24,00,000 which has been surrendered during the course of search has been subjected to estimate in different assessment years and is not related to asst. yr. 1986-87 in question. In this background, reading of order u/s 132(5) clearly goes to show that it has remanded the income from undisclosed sources to the assets seized from the assessee and explanation furnished by the assessee in respect thereof. Apparently, once the assessee has surrendered the income from his business to the tune of Rs. 24,00,000 represented by the assets found during search and the same has been subjected to assessment, the question of considering the very same assets as representing income from undisclosed sources other than surrendered by the assessee could not be reached reasonably by any person of ordinary prudence in the facts and circumstances. This further goes to show that order u/s 132(5) was merely an exercise to estimate the total tax liability that may arise as a result of search and to retain assets worth that value for the purpose of discharge of such liability as and when it crystallises into a demand on completion of regular assessment proceedings. It is not directed to find income from undisclosed sources for each assessment year.

We have already noticed the bifurcation of income surrendered by the assessee. The assessment order u/s 132(5) refers to gold and silver ornaments found during search and seizure and investment made in immovable properties and about unspecified documents.

The discussion in respect of loose papers found during the search shows that officer passing order u/s 132(5) had not really made any inquiry thereto. He records that assessee has said that "unless specific query with reference to specific seized document is raised, it is impossible to submit an explanation". He further says that "he would certainly like to get explanation about each paper and not a few ones". He also records that "assessee is willing to furnish fullest and correct explanation with reference to any seized documents as may be required" and he goes on to say that "he will be getting fullest opportunity at the time of regular assessment to explain his case. At present, I would treat the transactions of loose papers as undisclosed business activity" and close discussion with following observations:

It will be necessary for the assessee to explain the above entries satisfactorily at the time of regular assessment. At present, the above undisclosed income is also taken into consideration for estimating anticipated liability.

Similarly, considering the accounts showing "making charges", the AO records as under:

This appears to be account showing making charges received by the assessee during the period 1st Aug., 1988 to 15th Nov., 1988. This is a sort of cash book showing everyday opening balance as Rs. 111 and then receipts are entered for a day like Rs. 151, 832, 2,012, 2,300 and 3,086 etc. The total receipts for this period are around Rs. 41,000 which gives a broad indication of assessee''s business income. Taking these receipts as base for three months earning, the average monthly receipts can be estimated around Rs. 12,000, thus, the annual income may be estimated safely around Rs. 1,50,000 leaving aside the matter for earlier years to be investigated by the assessing authority, the current income will have to be estimated around Rs. 1,50,000, apart from undisclosed investment as discussed above.

Apparently, officer passing order u/s 132(5) had made additions by referring to bunch of loose papers and the account showing making charges receipts by the assessee during the period 1st Aug., 1988 to 15th Nov., 1988 without applying their relevance for holding belief on that basis that income for asst. yr. 1986-87 had also escaped assessment.

We have already noticed above that the assessee had surrendered in all Rs. 29,23,000 as income from different sources detailing Rs. 25,00,000 as income from his business including money-lending and pawning, Rs. 3,73,000 as investment in house and Rs. 1,50,000 as undisclosed income utilised in marriage expenses. All these were considered income pertaining to current assessment year. Even computing the estimated tax liability, investment in the house has been shown to be in asst. yr. 1988-89 and that did not relate to asst. yr. 1986-87. The additions made in the name of investment and business income for asst. yr. 1986-87 were referable only to discussion which we have referred to above i.e. to say on the basis of loose papers and estimated income of business on the basis of accounts of making charges examined by the concerned officer had entries for the period 1st Aug., 1988 to 13th Nov., 1988 only. Thus, estimated income from undisclosed sources for asst. yr. 1986-87 under order u/s 132(5) was not founded on any specific material referable to asst. yr. 1986-87 could not provide any nexus and basis for formation of necessary belief about escapement of income for asst. yr. 1986-87 by the AO before issuing notice u/s 148.

There is yet another aspect of the matter, the assessee during the course of his examination u/s 132(4) had surrendered income of Rs. 29,23,000, as aforesaid, and has clearly stated that same is represented through assets found during search. Question of initiating proceedings for reassessment in respect of surrendered income on the basis of value of assets found during the course of search would not arise as the same can be taken outrightly as income from undisclosed sources, in the assessment of assessment year during previous year during which search was conducted and such disclosure had been made, yet the order u/s 132(5) relied on by the AO for recording his reasons reveals in detail the item of assessment found during search for the purpose of estimating income as a result of unexplained investment in those assets. That is only to point out that really speaking, order u/s 132(5) was focused on estimating liability for the purpose of retaining the assets found during search and seizure and not on any other issue.

Nothing has been stated either in order u/s 132(5) or the reasons recorded by the AO that any asset or investment other than recorded under order u/s 132(5) was found and was not explained by the assessee during the course of search.

In the circumstances, we are of the opinion that the conclusion arrived at by the AO before issuing notice u/s 148 is not his own but a borrowed satisfaction held by the Asstt. CIT, Ward-I, Jodhpur while making order u/s 132(5) retaining the seized assets until regular proceedings are held, pertinently leaving it to be investigated by the AO as income from undisclosed sources of business for relevant assessment year prior to current assessment year for which no material before the AO or the authority passing the order u/s 132(5) has been placed.

Apparently, the AO has not applied its mind to the facts and circumstances before him and was solely dependent on the conclusion noticed u/s 132(5) for the purpose of retaining assets, apart from surrender of Rs. 24,00,000 as income from business and Rs. 5,23,000 as income represented through unexplained investment and expenses representing the assets found during the course of search and which have been accepted in assessment order for the current year; no other material was before the AO to hold on the basis of which the subjective satisfaction that the income for asst. yr. 1986-87 has escaped assessment could be reached.

This is beside the fact that the conduct of the AO in maintaining record is far from satisfactory standard and he has been found manipulating records at least for the asst. yr. 1988-89, affecting his credibility in this regard as the initiation of proceedings for assessment year in question is a part of the same exercise.

That weakens the credibility of correctness of record itself but we have found the conclusion independent of the point by referring to the material which has been placed before us which has been gone into consideration as per AO himself.

Before parting with this discussion, we may refer to contention of Revenue that since he has referred to the seized documents and the order u/s 132(5), the Court must look to all the material which was in possession of the AO and details given in the order u/s 132(5). We do not find any substance in this contention.

The subjective satisfaction is state of mind which could be judged through reason recorded by the AO before initiating proceedings u/s 148. The statute requires recording of such reasons prior to issuance of notice u/s 148 with an object to keep a check on unruly horse of subjective satisfaction and if there is challenge to assumption of jurisdiction, the foundation of action can be tested on the basis of state of mind revealed in expression of reasons.

The limited ground on which the subjective satisfaction of the AO could be judged is to be found in those reasons through which the AO discloses his mind. To travel beyond the territory of reasons recorded and material specified therein would be to substitute the satisfaction of Court for that of AO, which is not permissible.

In these circumstances, we are in agreement with the Tribunal that the satisfaction about escapement of income for asst. yr. 1986-87 was founded without any relevant material going into consideration of the AO and the material which has been stated in the reasons recorded by the AO does not connect any existing material which could relate to the assessment year in question having nexus for formation of belief by him that income for asst. yr. 1986-87 has escaped assessment. Significantly, the AO has also not recorded his satisfaction that underestimate was due to any failure on the part of the assessee to disclose his income for relevant assessment year in question.

As a result, the appeal fails and is hereby dismissed.