K.P. Mohammed Sayyed vs Commissioner of Income Tax

P.R. Raman, J.—All these appeals raise common questions of fact and law and hence disposed of by this common judgment.

For the purpose of convenience, IT Appeal No. 283 of 2002 is taken as the leading case in which arguments are addressed.

This appeal arises under the IT Act, 1961 (hereinafter referred to as ''the Act''). The assessment relates to a block period of ten years 1986-87 to 1996-97 and assessment was made in accordance with Section 158BC r/w Section 158BD of the Act. The subject-matter relates mainly to the legality and validity of the said block assessment of undisclosed income on the ground that there was no search on the assessee but search was on another person.

Appellants are the sons of one Kader Haji, who being an assessee and resident of Mercara, was within the jurisdiction of the IT authorities in Koorg District in Karnataka State. The appellants, on the other hand, were residents of Mattannur, in Kannur District. A search was conducted in the business premises and the residence of Kader Haji on 22nd Nov., 1995 in which various incriminating documents, investment details and account books relating to the appellants-assessees were seized. In the course of examination, Kader Haji explained that investments in the names of his sons, all undisclosed investments and other outgoings shall be considered separately in their assessments. Hence notices were issued to the sons u/s 158BD of the IT Act. In response thereto, the assessee-appellant filed return for the block period in Form No. II B declaring the undisclosed income as ''nil''.

The appellants are partners in the firm M/s Safa Wood Industries, Mattannur, M/s Cresent Medicals and M/s Kayyee Associates, Medikara. They are also partners in KVKM Enterprises, Bangalore. In the course of the assessment, the assessee also furnished statement of wealth relevant to the period included in the block assessment. The assessee''s various investments and sources were also scrutinised. After examining the available evidence and discussions, the ITO worked out the assessee''s receipts and payments and also the undisclosed income for the block period in question. It was in the course of assessment proceedings against Kader Haji, the father of the appellants for the block assessment u/s 158BC that a cash balance statement was filed which showed certain undisclosed investments and further outgoings which are to be considered separately in the assessments of the appellants herein. The files were, therefore, transferred by the CIT, Kochi, to the Dy. CIT, Calicut, and pursuant to the notice issued by the said officer, block assessments were finally completed.

The order of assessment passed is Annex. A produced in the case. Aggrieved thereby, the appellant preferred appeal before the Tribunal. The main contention was that the officer has no jurisdiction to make the, block assessment u/s 158BC in Kader Haji''s, i.e., his father''s case. It was contended that the Dy. CIT, Central Circle, Calicut, has no jurisdiction on the assessee as he is not the "AO" as stipulated in Section 158BD of the Act. It was contended that in the case, the assessment has been made by the same AO who has assessed and completed the assessment of late Kader Haji, the father of the appellants. It was contended that the appellant in IT Appeal No. 283 of 2002 Mohammed Salim was assessed at Kannur and an order was passed u/s 158BC(c) r/w Section 158BD which was without jurisdiction. The Tribunal noticed that the assessee has been previously assessed to tax at Kannur. The Tribunal found in para 8 that except making a claim that the assessee was previously assessed to tax at Kannur, no evidence whatsoever has been furnished to substantiate the same. It was contended that for the year 1996-97, the capital gain of Rs. 3,53,969 should not be included as undisclosed income, that being the income relating to the part of the year for which previous year has not ended. The Tribunal, however, overruled these contentions and upheld the assessments granting some marginal relief. Annex. B is the order of the Tribunal. The appellants aggrieved thereby, preferred these IT Appeals invoking Section 260A(2)(c) of the IT Act.

According to the appellant, the following substantial questions of law arise for consideration;

"(i) Was the Tribunal correct in law in not holding that the block assessment initiated u/s 158BC r/w Section 158BD on the appellant is bad in the eye of law being violative of Section 127 of the Act?

(ii) Was the Tribunal correct in law in not holding that the Dy. CIT, Central Circle, Calicut, cannot assess the appellant under block assessment based on another person''s income?

(iii) Was the Tribunal correct in law in ratifying the block assessment made on the basis of cash flow statement called for from the appellant?

Is not the block assessment based on cash flow statement, one which is contrary to the provisions of Section 158B and Section 158BB of the Act?

(iv) Was the Tribunal correct in law in not holding that the computation of capital gains of the appellant is different from his father Kader Haji is bad in law and that the capital gains for the year 1996-97 cannot be treated as undisclosed income for that year as the relevant previous year was yet to end at the particular point of time and there was time to file regular return for that particular year?"

We have heard the arguments of the learned counsel, Sri Kochunni Nair, on behalf of the assessee and Sri P.K. Ravindranatha Menon, senior standing counsel for the IT Department.

It was contended on behalf of the assessee reiterating two aspects-one regarding the validity of the block assessment and the other pertaining to capital gains, that the capital gains for the year 1996-97 cannot be treated as undisclosed income for that year as the relevant period was yet to end at the particular point of time and there was time for filing regular return for that particular period. On the other hand, it was submitted on behalf of the Revenue that when a search is conducted in the premises of an assessee and the AO was satisfied that any undisclosed income belongs to any other person other than the persons with respect to whom the search was made or whose books of account or other documents were requisitioned, then the officer can hand over to the AO having jurisdiction over such other person and that the proceedings in the present case were thus initiated by the officer to whom the file was transferred, which is strictly in accordance with law.

Before considering the contentions raised, it will be useful to refer to the relevant section which is extracted hereunder:

"158BC. Procedure for block assessment.-Where any search has been conducted u/s 132 or books of account, other documents or assets are requisitioned u/s 132A, in the case of any person, then,-

(a) the AO shall-

(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995, but before the 1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days;

(ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after the 1st day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days,

as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under Clause (i) of Sub-section (1) of Section 142, setting forth his total income including the undisclosed income for the block period :

Provided that no notice u/s 148 is required to be issued for the purpose of proceeding under this Chapter:

Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return.

(b) the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in Section 158BB and the provisions of Section 142, Sub-sections (2) and (3) of Section 143, Section 144 and Section 145 shall so far as may be, apply;

(c) the AO on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment.

(d) the assets seized u/s 132 or requisitioned u/s 132A shall be dealt with in accordance with the provisions of Section 132B."

"158BD. Undisclosed income of any other person.-Where the AO is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made u/s 132 or whose books of account or other documents or any assets were requisitioned u/s 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the AO having jurisdiction over such other person and that AO shall proceed u/s 158BC against such other person and the provisions of this Chapter shall apply accordingly."

On a combined reading of these two provisions, it can be seen that as per Section 158BD, if a search conducted in the premises of any person discloses income belonging to any other person and the AO is satisfied about the same, then files, books of account, etc. can be handed over to the AO having jurisdiction over such other person and that AO may proceed against such other person as though the entire Chapter or provisions will apply accordingly. Therefore, it is not necessary that the search should be conducted in the premises of the appellant/assessee and since the search conducted in the case of the father of the assessee namely Kader Haji, disclosed concealed income belonging to the appellant and other sons of Kader Haji, then the AO is entitled to hand over the file to the AO concerned who has jurisdiction over the appellant and other sons.

In this case, the Chief CIT, by exercise of his power u/s 127 of the IT Act, transferred the file in the case of Kader Haji, the father of the appellants, to the Asstt. CIT at Calicut. The CIT, Kochi, transferred the case of the assessees also to the same officer and as a result, the same AO, by virtue of the transfers u/s 127 and Section 158BD made assessments of Kader Haji, the father of the appellants as well as that of the appellants.

The case of Kader Haji came up for consideration before this Court in K.V. Kader Haji (Decd.) through LR Vs. Commissioner of Income Tax, . The question considered was whether the block assessment under Chapter XIV-B would fall within the meaning of "case" in the Explanation to Section 127 enabling the Chief CIT to transfer the block assessment to a subordinate officer ? It was noticed that Kader Haji who expired and is represented by his son in appeal was under the rolls of ITO, Ward-I, Mercara. It was further found that Kader Haji-the original assessee, was a timber merchant having business interests in Mattannur in Kerala and in Mercara, in Karnataka State and that a search was conducted on 22nd Nov., 1995 in his residence and business premises and consequent on such search u/s 132 of the IT Act, in order to facilitate effective and co-ordinate investigation, by proceedings dt. 28th Feb., 1996, of the Chief CIT, Bangalore, Karnataka, in exercise of his powers u/s 127(2), transferred all the cases of the said assessee to the jurisdiction of the Asstt. CIT (Inv.), Circle, Calicut, whereupon that authority issued notice u/s 158BC to file a return setting forth the total income including undisclosed income for the block period. Kader Haji filed writ petitions before the Karnataka High Court, challenging the order passed by the Chief CIT, Bangalore, contending that the show-cause notice issued by that authority did not contain the entire reasons which prompted them to pass the impugned order. The High Court dismissed the writ petition and the appeals filed therefrom also ended with the same fate. Thereafter, assessments were completed and against the order passed by the AO, appeals were preferred before the Tribunal, Cochin Bench, wherein a contention was raised that the Asstt. CIT (Inv.) Circle, Calicut, had no jurisdiction to make the block assessment and that such jurisdiction still remained with the AO originally having jurisdiction over the assessee u/s 2(7A) of the IT Act. It was also submitted that only the ITO, Mercara, who conducted the search had jurisdiction to make assessment for the block period in accordance with the provisions contained in Chapter XIV-B and even though the Chief CIT, Bangalore, has passed an order u/s 127(2) of the IT Act transferring the file to the Asstt. CIT, Investigation Circle-I, Calicut, he can transfer only a case in relation to any proceedings under the Act in respect of any year and the CIT could have transferred only a case in relation to any "proceedings under the Act in respect of any year". It was also submitted that the assessment for the block period in accordance with the provisions contained in Chapter XIV-B is different from a regular assessment and different from "proceedings" under the Act in respect of any year, as mentioned in the Explanation. This Court considered the meaning and scope of block assessment and the reasons for introduction of Chapter XIV-B dealing with the special procedure for assessment of search cases. It was contended on behalf of the assessee drawing a distinction between the case relating to block assessment, stressing on the word "any case" and the words "in respect of" and the expression "any year" and contend for the position that the expression "case" would take in only with regard to case relating to a particular period and not regarding any block period. After referring to the various case law on the subject and after referring to relevant provisions in the statute, this Court held that the expressions "any year" and "any case" exclude limitation or qualification, which point in a distributive construction. Considering the object and purpose of Section 127 and to facilitate effective and co-ordinate investigation, the Explanation to Section 127 has to be liberally construed and therefore, "block assessment" would fall within the expression "case" enabling the CIT to transfer those cases relating to block assessment to the subordinate officer.

The same argument is reiterated and the learned counsel for the assessee would contend that Section 158BD of the IT Act contemplates the handing over of the documents to the AO having jurisdiction over such other person and hence according to him, the officer who conducted the search and the officer to whom the files are handed over in the case of the other person must be a different officer and even though the transfer in the case of Kader Haji is sustained by this Court, according to him, he is not raising any ground as against the transfer as such in the case of the appellant; but would contend that the order transferring the case by the Chief CIT, Bangalore, to the Asstt. CIT, Investigation Circle-1, at Calicut will only enable the officer to complete the assessment in any particular year; but not to make any block assessment.

We find no force in this contention. Section 158BD only enables the officer who conducted the search in the case of a person to hand over the documents to the officer concerned in respect of the other person since the very same officer who conducted the search may not be the officer concerned to proceed with the assessment of such other person. Therefore, the intention of the legislature is clear that when an officer conducted search in the case of a person, he is able to unearth certain documents, incriminating materials against any other person the search can be made use of to proceed against such other person by the concerned officer who has jurisdiction over such other person and all the provisions under the Chapter will apply. Hence, if the same officer happens to be the AO in the case of such other person also, there is no necessity to hand over the file. In this case, by virtue of the transfer of the case file, the Asstt. CIT, Calicut, is competent to proceed to make the block assessment, u/s 158BC r/w Section 158BD of the IT Act. The arguments advanced by the learned counsel appearing for the assessee that the officer to whom the file was transferred could only make a regular assessment and not a block assessment, is without any force and is concluded by the decision of this Court in the decision reported as K.V. Kader Haji (Decd.) through LR vs. CIT (supra) as referred to above. We are in complete agreement with the said judgment.

Even though it was contended that the assessment has not been made based on net wealth statement no such question was raised at any point of time before the Tribunal or before the officer concerned. The only argument raised was that a block assessment cannot be made by the same officer to whom the case was transferred u/s 127. Only if a question is raised and left undecided by the Tribunal, could rise a situation to consider whether the matter required to be remanded. We do not find any such situation arising for consideration in the case on hand.

As regards the capital gains of an amount of Rs. 1,81,000 the Tribunal found that the assessee, along with his brothers and father sold 1.75 acres of land for a consideration of Rs. 57,75,000. The land belonged to them jointly and each of the sharer had got 1/8th share. The AO rejected the claim regarding the income for the year 1996-97 for which previous year had not ended on the date of the search, holding that a notice u/s 158BD was served on the assessee only by January, 1998, and up to that time the assessee has not filed any return offering this year''s income for taxation and this view of the AO was upheld by the Tribunal. This fact found by the AO as confirmed by the Tribunal that the assessee did not file any return offering this item for taxation and notice u/s 158BD was served only by the end of January, 1998, are not disputed and are pure questions of fact. When the assessee has thus failed to file any return there is no merit in his contention that the said amount shall not be treated as the undisclosed income for the year 1996-97. No other contentions were raised.

Hence, we find no merit in these appeals. Accordingly, they are dismissed.