Court Clarifies Limitation Period for Block Assessments in Income Tax Cases

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Case Name:

Commissioner of Income Tax Vs P. Shanthi (High Court of Madras)

Tax Case (Appeal) Nos.1257 of 2005 and 1128 of 2010

Date: 21st June 2012

Key Takeaways:

1. The limitation period for block assessments starts from the end of the month in which the last panchnama is recorded.

2. Multiple search authorizations can be issued, but the last panchnama is crucial for calculating the limitation period.

3. Prohibitory orders on bank accounts do not affect the calculation of the limitation period.

4. The court emphasized the importance of Explanation 2 to Section 158BE of the Income Tax Act in interpreting the limitation period.

Issue: 

Was the Tribunal correct in holding that the date of seizure of bank accounts earlier covered by a prohibitory order cannot be taken into account for calculating the limitation period to complete block assessment?

Facts:

- S.M. Pandian died in 1996, leaving behind a minor son, P. Balaji, and his mother as legal representatives.

- Based on information about undisclosed income, searches were conducted on 11.09.1997 at various premises related to the deceased.

- Multiple search authorizations were issued, with the last one on 31.10.1997 and the final search concluded on 03.11.1997.

- The block assessment was completed on 26.11.1999.

- The assessee challenged the assessment on grounds of limitation and improper initiation of search proceedings.

Arguments:

Revenue:

- The limitation period should be calculated from the last panchnama, not from the date of the prohibitory order on bank accounts.

- The assessment was completed within the two-year limitation period as per Section 158BE of the Income Tax Act.

Assessee:

- The search proceedings were illegal as no warrant was issued for the estate or legal heirs of the deceased.

- The assessment was barred by limitation.

Key Legal Precedents:

1. C. Ramaiah Reddy V. Assistant Commissioner of Income-Tax (IMV) (2011) 339 ITR 210

2. Commissioner of Income-Tax V. Anil Minda (2010) 328 ITR 320

3. T.O. Abraham and Co. and another V. Assistant Director of Income-Tax (Investigation) and others (1999) 238 ITR 501

These cases interpreted Section 158BE and Explanation 2, emphasizing that the limitation period starts from the conclusion of the search as recorded in the last panchnama.

Judgement:

The court ruled in favor of the Revenue, holding that:

1. The limitation period starts from the end of the month in which the last panchnama is recorded (30.11.1997 in this case).

2. The two-year limitation period ended on 30.11.1999, making the assessment on 26.11.1999 valid and within the time limit.

3. The search and assessment were proper, as the estate of the deceased was represented by the legal heirs, including the minor son through his mother.

FAQs:

1. Q: What is a block assessment?

  A: A block assessment is a special type of income tax assessment covering multiple years, usually initiated after a search or seizure operation.

2. Q: What is a panchnama?

  A: A panchnama is a document recording the details of a search or seizure operation, including items found and witnesses present.

3. Q: How does Explanation 2 to Section 158BE affect the calculation of the limitation period?

  A: It clarifies that the limitation period starts from the conclusion of the search as recorded in the last panchnama, not from the date of the search authorization.

4. Q: Can multiple search authorizations be issued in a single case?

  A: Yes, multiple authorizations can be issued for different premises or dates, but the last panchnama is crucial for calculating the limitation period.

5. Q: Does a prohibitory order on bank accounts affect the limitation period?

  A: No, the court clarified that prohibitory orders on bank accounts do not affect the calculation of the limitation period for block assessments.

1. Learned counsel appearing for the assessee in T.C.A.No.1257 of 2005 has filed a memo dated 6th June, 2012 stating that the minor P.Balaji has now become major. The said memo is recorded.

2. The Revenue and the assessee have filed the above Tax Case (Appeals) challenging the order of the Tribunal. The assessment herein relates to block assessment for the block period 1988-89 to 1997-98.

3. This Court, by order dated 12.12.2005, admitted T.C.(A)No.1257 of 2005, filed by the Revenue, on the following substantial questions of law:

"1.Whether in the facts and circumstances of the case, the Tribunal was right in holding that for the purpose of calculation of limitation to complete block assessment, the date of seizure of bank accounts earlier covered by a prohibitory order cannot be taken into account?

2. Whether in the facts and circumstances of the case, the Tribunal was right in holding that where material was covered by a prohibitory order would not be part of seized items, even though it was also separately seized and a panchanama was drawn?"

This Court, by order dated 18.1.2011, admitted T.C.(A)No.1128 of 2010, filed by the assessee on the following substantial questions of law:

"(i). Where the Income Tax Appellate Tribunal has held that the assessment is barred by limitation, whether the Income Tax Appellate Tribunal is right in law in setting aside the assessment on merits?

(ii). Search having been made in the case of the appellant's erstwhile wife Smt.Shanthi, whether the Income Tax Appellate Tribunal is right in law in upholding the jurisdiction of assessment in appellant's case on the basis of search conducted on the appellants erstwhile wife Smt.Shanthi?

(iii). Where no warrant of search has been issued either on the Estate of the appellant or on the legal heirs of the appellant, whether the Income Tax Appellate Tribunal is right in law in upholding the search proceedings?"

4. The appellant/assessee herein is the mother of Minor P.Balaji, legal representative of the estate of S.M.Pandian, father of minor P.Balaji. The said S.M.Pandian died during 1996. Based on an information that the said deceased Pandian had acquired lot of assets out of his undisclosed income, search was conducted on 11.9.1997 at different places including the residence of the deceased, the residence of P.Shanti, divorced wife of the deceased and the residential premises of his associates and business premises. Based on the materials gathered, the block assessment was finalised.

5. Aggrieved by this, the legal representative of the deceased, viz., the minor son, preferred an appeal through the natural guardian, mother. The assessment was challenged mainly on the ground of limitation as well as on the improper initiation of the search proceedings. The assessee contended that the search proceedings suffered legal infirmity; that the panchnama was issued in the name of Shanti, divorced wife of the deceeased. However, in the course of the proceedings before the Tribunal, learned counsel appearing for the said Shanti conceded that there was no assessment made in the name of Shanti in her own rights; that the assessment framed was in respect of the deceased person; the items included as undisclosed income of the deceased were the assets belonging to the estate of the deceased. The Tribunal further pointed out that the minor child along with his paternal grandmother were the legal representatives of the estate of the deceased Pandian; that the mere non-mentioning of the legal heir, per se, would not, make the search illegal. The Tribunal further pointed out that the Panchnama issued on 11th September, 1997 was with regard to the locker, which stood in the name of Shanti as well as her divorced husband and that the said Shanti, in her capacity as a natural guardian of the minor child, represented his interest. Consequently, the claim of the assessee, as regards the improper or illegal initiation of search by reason of non-observance of the provisions, was dismissed. However, on the plea of limitation, the Tribunal pointed out that the prohibitory order in respect of bank account was made on 11.9.1997, which was lifted subsequently.

6. Referring to the decision reported in 131 ITR 506 (L.Devarajan V. Tamil Nadu Farmers Service Co-operative Federation), the Tribunal observed that the time limit for framing the assessment was to be counted from the seized items only and not with reference to the prohibitory order issued. Since the date of search was 08.10.1997, the assessment would have to be framed within a period of two years from the end of the month in which seizure was made and this period ended on 31.10.1999. As the assessment was framed on 26.11.1999, it was clearly barred by limitation. Thus on the issue of limitation, the Tribunal held the same against the Revenue. Thus the assessee's appeal was allowed in part. Aggrieved by this, the Revenue has preferred Tax Case (Appeal) No.1257 of 2005 on the issue of limitation.

7. As far as the assessee's appeal (T.C.(A)No.1128 of 2010) is concerned, questions are raised as to the legality of the search contending that there was no search warrant issued either on the estate of the assessee or on the legal representative of the deceased Pandian.

8. As far as Revenue's appeal on limitation issue is concerned, Sub-Clause (1)(b) to Section 158 BE of the Income Tax Act, is the relevant provision, which reads as under:

"158 BE. (1) The order under section 158 BC shall be passed -

(a) within one year 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 after the 30th day of June, 1995, but before the 1st day of January, 1997;

(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 after the 1st day of January, 1997."

Explanation 2, inserted under Finance Act (No.2) of 1998 with effect from 1.7.1995 read as under:

"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."

9. The above-said provision came up for consideration before the Karnataka High Court in the decision reported in (2011) 339 ITR 210 (C.Ramaiah Reddy V. Assistant Commissioner of Income-Tax (IMV). The Karnataka High Court elaborately dealt with the object and introduction of Explanation 2 to Sub-Clause (1) to Section 158BE of the Income Tax Act. As is evident from the reading of the provisions under Section 158 BE read with Explanation 2, the period of two years limitation in respect of search carried on, on or after 1st January, 1997, has to be calculated from the end of the last month in which last of the authorisations for search was executed. The date of execution is explained in the Explanation as the date on which the search was concluded, as recorded in the last panchnama drawn in relation to any person in whose case warrant of authorisation has been issued. Thus, if there are more than one authorisation and the search is conducted on different dates as per the authorisations, the starting point for the purpose of calculating the limitation would be the last of panchnama recording the conclusion of search. The Karnataka High Court pointed out that the expression 'last panchnama' has to be read as referrable to the last of the authorisations as used in the main Section. The Karnataka High Court pointed out that once on the basis of an authorisation the search party conducts the search and after the search comes out of the premises, then there is a conclusion of search as defined in Explanation 2; that the panchnama evidencing such investigation and seizure would be the last panchnama in respect of the said premises. Where there are multiple places to search, separate search authorisation should be drawn with reference to each place of search. The authorisation may be issued on different dates, in which event, the last of such authorisation has to be looked into for the purpose of limitation. However, considering the possibility of more than one authorisation issued on the same day and executed, there should be one panchnama in respect of each such authorisation and the authorisation might have been executed on different dates also. In that event, doubt may arise as to which authorisation has to be looked into for the purpose of limitation, since all of them are last authorisation. Thus, to remove the doubts therein, Explanation was inserted.

10. The Karnataka High Court referred to the Circular of the Board No.772 dated 23rd December, 1998 reported in (1999) 235 ITR (St.)35) and pointed out to the reference on the execution of last of the authorisation as required. Thus referring to the meaning of 'execution', the Board held that the word 'execute' also means to complete. Thus, one has to wait for the conclusion of the proceedings under Section 132(3) for the purpose of computation of limitation under Section 158BE(1) and if there are more than one warrant, limitation would be counted from the execution of the last warrant. Thus, after referring to the Board's circular, the Karnataka High Court observed as follows:

"82. Therefore, the Explanation added to remove a doubt cannot be con-strued as a provision providing a longer period of limitation than the one prescribed in the main section. When under the scheme of the section there is no indication of a second search on the basis of the same authori-sation issued under the said provision, the legislative intention is clear and plain and the interpretation to be placed by the courts should be in harmony with such an intention. Therefore, one authorisation is to be issued in respect of one premises in pursuance of which there can be only one search and such a search is concluded, when the searching party comes out of the premises, which is evidenced by drawing up a panchnama. When there are multiple places to search and when multiple authorisations are issued, on different dates or on the same date or in respect of the same premises more than one authorisation is issued on different dates, the last panchnama drawn in proof of conclusion of search in respect of the authorisation is to be taken into consideration for the purpose of limitation for block assessment.

The Court concluded that .......

(4) The period of limitation starts on the date on which the last of authorisation has been executed and not when the authorised officer states that the search is finally concluded. Putting a prohibitory order under sec- tion 132(3) does not elongate the starting point of limitation."

11. Similar view was also taken in the decision reported in (2010) 328 ITR 320 (Commissioner of Income-Tax V. Anil Minda), wherein the Delhi High Court referring to the deeming clause as available in Explanation 2 held that by the deeming provision, authorisation referred to sub-section (1) would be that authorisation which was executed on the conclusion of search as recorded in the last panchnama. Thus the High Court viewed that by this deeming provision, even an authorisation which may not be otherwise a last authorisation would become the last authorisation, if that was executed and if the panchnama in respect thereto was drawn last. Thus the point of limitation has to start from the execution of the warrant on the last panchnama drawn and not before.

12. Learned Standing Counsel appearing for the Revenue fairly placed before us, apart from the above two decisions, the decision reported in Kerala High Court reported in (1999) 238 ITR 501 (T.O.Abraham and Co. and another V. Assistant Director of Income-Tax (Investigation) and others), wherein learned single Judge of the Kerala High Court considered the issue on limitation as provided for under Section 158BE prior to the insertion of Explanation 2, which was only at the stage of a finance bill only. The High Court pointed out that the plain meaning of Section 158 BE was that the period of one year would start from the end of the month of the execution of the authorisation, meaning thereby, after completion of search or implementation of search order. Thus the limitation would not stop on the date of the issue of authorisation.

13. Learned Standing Counsel appearing for the Revenue also placed reliance on the decisions reported in (2008) 307 ITR 224 (Commissioner of Income-Tax V. Shri Pashupati Tours and Travels), 308 ITR 168 (C.I.T. V. S.K.Katyal) and 180 Taxmann 293 (CIT V. Plastika Enterprises).

14. A perusal of the decision of the Delhi High Court reported in (2008) 307 ITR 224 (Commissioner of Income-Tax V. Shri Pashupati Tours and Travels) shows that turned on the fact situation therein that there was no link between one search and the other and the same were not continuous, in the sense that the authorisations were issued and executed at different point of time with intervals. In that context, the Delhi High Court held that the last of the authorisation executed would not be held to have had any link to the first authorisation issued and executed so as to have the benefit of Explanation 2.

15. As far as the law declared by the Karnataka High Court in the decision reported (2011) 339 ITR 210 (C.Ramaiah Reddy V. Assistant Commissioner of Income-Tax (IMV); Delhi High Court in the decision reported in (2010) 328 ITR 320 (Commissioner of Income-Tax V. Anil Minda) and so too the Kerala High Court in the decision reported in (1999) 238 ITR 501 (T.O.Abraham and Co. and another V. Assistant Director of Income-Tax (Investigation) and others) are concerned, we respectfully agree with the views expressed by the High Courts and on a reading of the plain words available in Section 158 BE read with Explanation 2, we have no hesitation in holding that in the case of search, the conclusion of the search as recorded in the last panchnama with reference to the authorisation issued would be the starting point for the purpose of computing the limitation for finalising the block assessment.

16. As held in the decisions of the Karnataka High Court and the Delhi High Court cited supra, if there are more than one authorisation for search, it is the conclusion of the search as recorded in the last panchnama, which would be relevant and not the date on which the authorisation was issued. In other words, in the case of multiple authorisations, the criteria for calculating the limitation would be that irrespective of the date of authorisation, the conclusion of the search as recorded in the last panchnama alone would be taken into consideration.

17. With the above view on Explanation 2 to Sub-Clause (1) to Section 158 BE of the Income Tax Act, the dates pertaining to search, which are admitted by the parties herein, needs to be noted.

18. Admittedly, as far as the first of the search is concerned, the authorisation was first issued on 10.9.1997. The search commenced on 11.9.1997 and the proceedings were completed on 11.9.1997. There was also an authorisation of the same date, in respect of which, another search was commenced on 11.9.1997 and completed on 11.9.1997. The second search commenced on 5.11.1997 was concluded on 5.11.1997. Subsequent thereto, in connection with this, there was one more authorisation dated 31.10.1997, for which the search commenced on 3.11.1997 and concluded on 3.11.1997.

19. Thus the last of the panchnama evidencing the conclusion of search with reference to the authorisation issued on 31.10.1997, was 03.11.1997. Going by the above said facts, the time limit available for completion of block assessment, as per sub-clause (1) (b) to Section 158 BE would be the end of the month in which the last of panchnama evidencing the conclusion of the search in respect of which the authorisation was executed. Hence, the relevant starting point is to be calculated taking the last panchnama dated 03.11.1997; that the period of two year time limit commenced on 30.11.1997 to expire on 30.11.1999. The assessment herein was made on 26.11.1999.

20. Thus going by the factual details as are available that the two year time limit commencing from 30.11.1997 ended on 30.11.1999, we have no hesitation in holding that the assessment made herein under Chapter XIV-B is well within the period of limitation, as provided for under Section 158BE (1)(b) of the Income Tax Act.

21. In the above circumstances, we have no hesitation in allowing the tax case filed by the Revenue in respect of first question of law.

22. As far as the second question of law is concerned, it is not necessary for us to deal with the same, considering the answer given to question No.1. Accordingly, T.C.(A)No.1257 of 2005 stands allowed.

23. As far as the assessee's Tax Case in T.C.(A) No.1128 of 2010 is concerned, we do not agree with the submissions made by the learned counsel appearing for the assessee. As pointed out in the order of the Tribunal, the contentions made by the assessee was considered that the mother represented the minor child, who was the legal representative of the deceased. Thus the estate of the deceased was represented by the minor through the mother. In the circumstances, we have no hesitation in holding that the assessment, based on the search made in the premises of the deceased and the warrant in the name of the mother as a representative of the legal heir of the deceased, is proper. The purpose of search was to find out the undisclosed income of the deceased and on his demise, the estate was represented by the legal heirs, one of whom happened to be the minor son and the property represented by him.

24. In the circumstances, we confirm the order of the Tribunal. Accordingly, T.C.(A) No.1128 of 2010 stands dismissed. No costs.

To

1. The Income Tax Appellate Tribunal Madras 'B' Bench.

2. The Commissioner of Income-Tax (A) II, Chennai 34.

3. The Deputy Commissioner of Income-Tax, Central Circle I(5), Chennai