Satisfaction u/s 158BD can not be arrived without examination, verification of seized books documents. SC uphelds validity of notice issued by AO
The appellant assessee had filed the instant appeal against the impugned judgment passed by the High Court by which it dismissed the appeal of the appellant and upheld the order passed by the Income Tax Appellate Tribunal (‘Tribunal/ITAT’) on the issue of validity of notice issued by the Assessing Officer (AO) u/s 158BD of the Income Tax Act, 1961 (the Act).
ABCAUS Case Law Citation:
ABCAUS 2304 (2018) (04) SC
Satisfaction u/s 158BD can not be arrived without examination, verification
The Appellant was a partner in a Partnership Firm. A search was conducted at the business premises of the Firm by the Income Tax Department and several documents/books including money were seized. Thereafter, a notice was issued to the appellant by the AO u/s 158BC of Act to prepare and file a true and correct return of his total income including the undisclosed income in respect of which he was assessed for the block period. simultaneously, a separate notice u/s 158BC was issued in the name of the said Firm also by the same AO.
Pursuant to the notice u/s 158BC, the appellant filed his block return and also moved an application before the Additional Commissioner of Income Tax, praying for his intervention and issue of necessary direction to the AO under Section 144A of the Act.
The Additional Commissioner perused the records and directed the AO to take appropriate steps in order to determine the income of the assessee. The Additional Commissioner issued separate directions under Section 144A in the cases of the firm and the assessee. However, the Draft Assessment Order u/s 158BC sent to the Joint Commissioner of Income Tax (JCIT) for approval was returned by him stating that no warrant for authorization was issued in the names of the persons mentioned in the Draft Assessment Order.
The AO passed the Block Assessment Order accepting the return of the firm as ‘Nil’ and also directed to initiate proceedings against the appellant for the assessment of undisclosed income for the block period under Section 158BD of the Act. Pursuant to the said order a fresh notice u/s 158DB was issued to the appellant.
However, the appellant objected to the notice and contended that the issue of fresh notice did not extend the time allowed for completion of the assessment under Chapter XIV of the Act.
The AO went on to pass the assessment order assessing the undisclosed income of the appellant. Being aggrieved, the Appellant preferred an appeal before the CIT(A) who gave part relief with respect to the undisclosed income assessed.
Both, the appellant and the Revenue contested the order of the CIT(A) before the ITAT dismissed the appeal filed by the appellant while partly allowing the appeal filed by the Revenue. High Court also dismissed the appeal filed by the assessee.
Thus the point for consideration by the Hon’ble Supreme Court was as to whether in the instant case, the issue of Second (Fresh) Notice u/s 158BD was valid or not?
The assessee contended that the second notice issued u/s 158BD was not valid and competent since the first notice issued by the same Assessing Officer u/s 158BC was valid and the assessment ought to be made in pursuance of that notice and, therefore, the AO had no authority to issue the second notice.
The Hon’ble Supreme Court observed that the jurisdiction u/s 158BD is based on the satisfaction of the Assessing Officer that:-
(a) there is undisclosed income;
(b) such undisclosed income does not belong to the person with respect to whom action under Section 132 was taken and;
(c) such undisclosed income belongs to some other person.
Therefore, mere disclosure made by the present assessee before the authority cannot be the basis for reaching a satisfaction that any undisclosed income belongs to him unless the seized books of accounts or other documents or assets are perused, examined or verified by the concerned Assessing Officer.
The Hon’ble Supreme Court opined that in the instant case, only after being satisfied that the Appellant fell within the ambit of Section 158BD, a notice was issued by the AO.
The Apex Court further clarified that a conjoint reading of Sections 158BC and 158BD, makes it clear that no satisfaction to the effect that undisclosed income belongs to the searched person is necessary before issuing the notice under Section 158BC against the searched person as Section 158BC speaks of a condition that where any search had been conducted under Section 132 or books of accounts or other documents or assets or requisition under Section 132A in case of any person, then, the AO shall serve notice to such person requiring him to furnish within specified time a return in the prescribed form.
Therefore, the Hon’ble Supreme Court opined that at the time when notice under Section 158BC was issued by the AO to the firm, it was not necessary for the him to arrive at a satisfaction that any undisclosed income belongs to firm. A search was conducted against the firm under Section 132 of the Act. Since the notice under Section 158BC issued to the firm and the notice under Section 158BC issued to the appellant were on the same day, the question of coming to a satisfaction that any undisclosed income based on seized books of accounts or documents or assets belonged to the appellant did or could not arise inasmuch as no reasonable or prudent man can come to such satisfaction unless the seized books of accounts or documents or assets are perused, examined and verified.
According to the Hon’ble Supreme Court, the AO was right in arriving at a decision that the notice u/s 158BC issued to the appellant did not satisfy the requirement of Section 158BD of the Act. He, therefore, rightly proceeded to issue fresh/second notice under Section 158BD later after recording a satisfaction that any undisclosed income based on seized books of account or document or assets or other materials may belong to the appellant.
The Hon’ble Supreme Court observed that a perusal of Section 158BD of the Act makes it clear that the AO needs to satisfy himself that the undisclosed income belongs to any person other than the person with respect to whom the search was made under Section 132 or whose books of accounts or other documents or assets were requisitioned under Section 132A. The very object of the Section 158BD is to give jurisdiction to the AO to proceed against any person other than the person against whom a search warrant is issued. Although Section 158BD does not speak of ‘recording of reasons’ as postulated in Section 148, but since proceedings under Section 158BD may have monetary implications, such satisfaction must reveal mental and dispassionate thought process of the AO in arriving at a conclusion and must contain reasons which should be the basis of initiating the proceedings under Section 158BD.
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