Court rules on validity of tax assessments under Section 153C (of Income Tax Act, 1961), favoring the assessee.

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Case Name:

Commissioner of Income Tax vs. IBC Knowledge Park (P) Ltd. (High Court of Karnataka)

ITA No. 403 of 2009, C/w 402 of 2009, 394, 399, 400, 402,410-412 of 2014, 271, 351, 352 of 2015

Date: 28th April 2016

Key Takeaways:

- The court emphasized the necessity of incriminating evidence for valid assessments under Section 153C (of Income Tax Act, 1961).

- It clarified that assessments cannot be reopened without evidence of undisclosed income.

- The ruling reinforces the legal principle that mere possession of documents does not justify tax assessments without evidence of wrongdoing.

Issue:

Was the initiation of proceedings and the consequent order passed under Section 153C (of Income Tax Act, 1961) valid, given the absence of incriminating evidence?

Facts:

- The assessee, IBC Knowledge Park Pvt. Ltd., was involved in property development and construction.

- A search was conducted on June 17, 2008, at the premises of individuals associated with the company, leading to the seizure of documents.

- The Assessing Officer initiated proceedings under Section 153C (of Income Tax Act, 1961) based on

these documents.

- The assessee contested the validity of these proceedings, arguing that no incriminating material was found that would justify the assessments.

Arguments:

- For the Revenue: The Revenue argued that the documents seized during the search justified the initiation of proceedings under Section 153C (of Income Tax Act, 1961), asserting that the mere presence of the documents indicated potential undisclosed income.

- For the Assessee: The assessee contended that the documents did not reveal any incriminating evidence and that the assessments were based on previously concluded assessments, thus invalidating the reopening of the case.

Key Legal Precedents:

- The court referenced Manish Maheshwari vs. Asst. Commissioner of Income-Tax [(2007) 289 ITR 341 (SC)], which established that a search must yield incriminating evidence for assessments to be valid.

- It also cited K.Raheja Development and other relevant cases to support the argument that the absence of incriminating material precludes the reopening of assessments under Section 153C (of Income Tax Act, 1961).

Judgement:

The court ruled in favor of the assessee, stating that the assessments made under Section 153C (of Income Tax Act, 1961) were invalid due to the lack of incriminating evidence. The court emphasized that the initiation of proceedings under this section requires a clear demonstration of undisclosed income, which was not present in this case. Consequently, the assessments were quashed, and the Revenue's appeals were dismissed.

FAQs:

Q1: What does this ruling mean for future tax assessments?

A1: This ruling reinforces the requirement for incriminating evidence before tax assessments can be initiated under Section 153C (of Income Tax Act, 1961), potentially limiting the scope of future assessments based solely on document seizures.

Q2: Can the Revenue appeal this decision?

A2: The ruling is a final decision from the court, but the Revenue may seek further legal recourse depending on the specifics of the case and applicable laws.

Q3: What are the implications for the assessee?

A3: The assessee is relieved from the tax liabilities that were imposed based on the invalid assessments, allowing them to continue their business without the burden of these claims.

Q4: How does this case impact the interpretation of Section 153C (of Income Tax Act, 1961)?

A4: The case clarifies that Section 153C (of Income Tax Act, 1961) cannot be invoked without evidence of undisclosed income, setting a precedent for how similar cases will be handled in the future.

1. These appeals, filed by the Revenue as well as the assessee, assail order dated 25/4/2014, passed by the Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal” for the sake of convenience), in ITA. Nos.903-905/Bang/2013 and C.O.Nos.103-105/Bang/2013 dated 25/4/2014. By the said order, the Tribunal has confirmed the order of the Commissioner of Income Tax (Appeals) (hereinafter referred to as “the Appellate Commissioner”) and dismissed the appeals.

2. ITA.Nos.410-412/2014 are filed by the assessee, while ITA.Nos.403/2009 C/w. ITA.Nos.402/2009, 394/2014 & 271/2015, 399/2014, 400/2014 & 351/2015,

402/2014 & 352/2015 are filed by the Revenue.

3. By order dated 3/8/2015, the appeals filed by the assessee were admitted on the following substantial questions of law:

a) Whether the Tribunal was right in holding

that the initiation of proceedings and the

consequent order passed under Section

153C of the Act were valid, on a mere

coincidence that the appellant was also

carrying on its business in the searched

premises along with the searched

persons?

b) Whether the Tribunal was correct in

holding that the assessment under

Section 153C (of Income Tax Act, 1961) was valid despite there

being no satisfaction recorded that the

documents found during the search on

17.06.2008 were incriminating in nature

and prima facie represented undisclosed

income?

c) Whether the Tribunal was justified in

rejecting the contention of the appellant

that proceedings under Section 153C (of Income Tax Act, 1961)

ought to be initiated only for assessment

years in respect of which the documents

were found during the search?

d) Whether the Tribunal was correct in

upholding the validity of the order under

Section 153C (of Income Tax Act, 1961) for the

assessment year 2005-06 despite there

being no pending assessment as on the

date of search and the documents not

revealing any undisclosed income?

4. The appeals filed by the Revenue raise the

following substantial questions of law and were admitted

on 28/5/2010 and 3/8/2015:

“(i) Whether the Appellate Authorities were

correct in holding that separate

depreciation is allowable in respect of

‘Electrical installations, elevators, DG set’

installed in building which has been let-

out and the assessee is receiving rental

income on the buildings?

(ii) Whether the Appellate Authorities were

correct in holding that a sum of Rs.72

lakhs interest on borrowed capital is an

allowable business expenditure, when

the assessee’s buiness had not

commenced and there was no

declaration of income from business and

the assessee had only received rental

income under the head ‘House property’?

(iii) Whether the Appellate Authorities were

correct in holding that a sum of Rs.1.91

crores cannot be disallowed as held by

the Assessing Officer despite the same

not been reflected in the Balance Sheet

and no particulars having been furnished

recorded a perverse finding, not

supported by materials?

(iv) Whether the Tribunal was correct in

holding that the claim of

Rs.1,29,08,375/- shown as construction

management fee is allowable to the

extent of 25% even though no evidence

has been adduced in support of the claim

when this expense related to the

property constructed by the assessee

was let-out and rental income was

received under the head ‘Income from

House Property’ and the question of

earning expenses did not arise and the

same could be capitalized?

“Whether the Tribunal was correct in

allowing depreciation on elevators, DG

sets, Transformers and fixtures without

appreciating that the assessee is not in

the business of leasing out any of these

assets and these fixtures are affixed with

the building and were part of the leased

are part of the leased building which do

not have any independent existence and

that no independent receipt/fees/

maintenance charges were received

against these facilities/services and

therefore, they are receipts are taxable

as “income from house property?”

5. Briefly stated, the facts are that the assessee

is a company registered under the Companies Act, 1956

and is engaged in the business of development of

properties, construction and engineering activities and

such other activities in relation to development of

properties. One Mr.Yunus Zia, Mr.Ziaulla Sheriff and

M/s.India Builders Corporation were subjected to a search

operation on 17/6/2008 under Section 132 (of Income Tax Act, 1961) (hereinafter referred to as “the Act” for

short). The assessee i.e., M/s. IBC Knowledge Park Pvt.

Ltd., has its registered office at the ver same premises

where the search was conducted. During the search

operation, certain documents and books of accounts

ybelonging to the assessee were seized from the premises

searched. Documents of the assessee seized during the

search operation were transferred by the Assessing Officer,

who searched the premises, to the Deputy Commissioner

of Income Tax, Central Circle-1(3) (hereinafter referred to

as “the Assessing Officer”) of the assessee. The Assessing

Officer issued notice under Section 153C (of Income Tax Act, 1961). The

assessee requested the Assessing Officer to furnish

reasons for initiating action under that section. The

Assessing Officer, then proceeded to pass assessment

orders under Section 143(3) (of Income Tax Act, 1961) read with Section 153C (of Income Tax Act, 1961) of the

Act for the assessment years 2004-05 to 2008-09 making

several disallowances of deductions claimed as well as

additions to the income of the assessee. Copies of the

assessment orders for the aforesaid assessment years, all

dated 31/12/2012, are produced as Annexures-A1, A2 and

A3 respectively, in ITA.Nos.410-412/2014.

6. The disallowance made by the Assessing

Officer for the relevant assessment years are in respect of

the following:

i) Depreciation on Elevators, DG Set and

other such items (for all assessment

years)

ii) Professional charges (for assessment

year 2004-05)

iii) Interest expenses (for assessment year

2004-05)

iv) Disallowance of interest capitalized (for

assessment years 2004-05 and 2006-07)

7. That in respect of the assessment year 2004-

05, the order under Section 143(3) (of Income Tax Act, 1961) had been passed on

27/12/2006 and in that assessment order, all deductions

were disallowed by the order passed under Section 153C (of Income Tax Act, 1961),

except one, which had already been disallowed.

8. The assessee filed an appeal against the

assessment order dated 31/12/2012 before the Appellate

Commissioner.

9. In the appeal preferred before the Appellate

Commissioner by the assessee by common order dated

21/3/2013, the Appellate Commissioner disposed of the

appeals rejecting the challenge made by the assessee with

regard to initiation of proceedings under Section 153C (of Income Tax Act, 1961) of

the Act, while granting relief against disallowances made

by the Assessing Officer by following the earlier order of

the Tribunal for the assessment year 2004-05. The orders

of the Assessing Officer, Appellate Authority and the

Tribunal are at Annexures-A to F respectively.

10. Against the order of the Appellate

Commissioner, Revenue had filed appeals before the

Tribunal for three assessment years in question, which

were numbered as ITA.Nos.903-905/2013. As regards the

initiation of proceedings under Section 153C (of Income Tax Act, 1961), the

assessee filed cross-objections before the Tribunal and the

same were numbered as C.O.Nos.103-105/Bang/2013.

The Tribunal considered all the matters together and

dismissed the appeals filed by the Revenue as well as the

assessee’s cross-objections by its order dated 25/4/2014,

a copy of which is produced as Annexure-F. Thus, we

have before us the appeals filed by the Revenue as well as

by the assessee as noted above.

11. We have heard Sri. K.VS.Aravind, learned

counsel for the Revenue, Sri. K.P.Kumar, learned Senior

Counsel appearing for Sri.J.Suryanarayana, learned

counsel for M/s. King & Partridge as well as Sri. A.Shankar,

learned counsel for the assessee and perused the material

on record.

We now consider the substantial questions of law

raised by the Revenue in seriatim along with the

submissions of the learned counsel.

12. The first substantial question of law is with

regard to depreciation allowable in respect of electrical

installations, elevators, DG sets installed in the building,

which have been let-out by the assessee, which is

receiving rental income from the said building. The

Appellate Commissioner had directed the Assessing Officer

to allow depreciation on DG sets, transformers,

photocopier system and security camera, but not elevators

(lifts). Aggrieved by the finding, the Revenue had filed the

appeal and the assessee has taken a ground in the cross-

objection before the Tribunal. The Tribunal on going

through the agreement of lease entered into by the

assessee with various lessees held that the agreement

indicated that rentals of the building and rent for the

electrical installation were being separately charged, which

was not denied by the Revenue. The assessee was also

entitled to claim depreciation in respect of maintenance of

amenities for which it received a separate fee. The

assessee had computed such income under the head profit

and gains of business and profession and therefore, the

claim of depreciation was permissible. The assessee was

supposed to provide services like lift, transformer, DG

sets, which required employment of personnel to discharge

such responsibility. While the Assessing Officer held that

elevators, transformers, DG sets etc., were held to be part

of the commercial building and did not grant any

depreciation on those items, the Appellate Authority had

granted depreciation on those items except elevators or

lifts, while the Tribunal granted depreciation on elevators

and lifts also.

13. It is contended on behalf of the Revenue that

the fixtures such as, transformers, D.G.sets, elevators

etc., were part of the building and income from letting out

of building is chargeable to tax under the head income

from house property. That the assessing officer had

rightly disallowed the claim of the assessee for deduction

on account of depreciation on the aforesaid assets against

income received in the form of maintenance fee charged

from the tenants of the building, which was offered to tax

under the head income from business by the assessee.

Reference was made to various clauses of the lease

agreement dated 11/8/2003 entered into with M/s.

Accenture Services Pvt. Ltd., to contend that the aforesaid

facilities are fixtures and the maintenance fee received

from the lessee in respect of those fixtures ought to be

considered as income from house property and not income

from business. He therefore contended that the assessee

was not entitled to seek depreciation in respect of

maintenance of amenities for which it received a separate

fee.

14. Per contra, the submission of learned counsel

for the assessee is that the issue was already decided by

the Tribunal in the case of this very assessee for the

assessment year 2004-05, wherein the Tribunal had held

that rentals for the building and rent for the aforesaid

facilities were separately charged and that the assessee

was entitled to claim depreciation on the said assets in

respect of maintenance of amenities for which it has

received a separate fee. Items like elevators,

transformers, DG sets etc., are not integral to the building

as such, the income received from providing such facilities

has to be charged under the head profits and gains of

business and profession and therefore, depreciation has to

be allowed. That reference made to Section 24 (of Income Tax Act, 1961)

by the counsel for the Revenue is incorrect. He, therefore,

contended that the Tribunal has rightly granted the

depreciation on elevators also.

15. We have considered the aforesaid submissions

in light of the lease agreement dated 11/8/2003, which

was submitted during the course of arguments. On perusal

of the said agreement, relevant portions of Clause 1

provides as under:

“1. The LESSORS doth hereby grant on lease

and the LESSEE doth hereby take on lease the

Demised Premises (Demised Premises are

described in Schedule “B” hereto).

a)

(i) The first term of the lease for the

Demised Premises shall be for a period of

Five (5) years, commencing from the

date provided in Clause 1 (b) below, at a

monthly rent at the rate of Rs. 22/-

(Rupees Twenty Two only) per sq. ft. (of

which 18% shall be towards Electro

Mechanical charges throughout the

tenure of the lease) calculated for the

first 3 years, and Rs. 25.30 per sq., ft.

calculated for the 4th and the 5th years,

for the super built up area of the said six

floors of the Building, including bridge

areas but not including any of the

terraces or basements of the demised

premises or any other portion/building of

IBC Knowledge Park. The exact amount

of rent payable shall be as provided in

Clause 1(a)(iv) below and at present is

estimated at Rs. 52,44,962 (Rupees Fifty

Two Lakhs Forty Four Thousand Nine

Hundred Sixty Two Only).

It is agreed that the area being leased to

the LESSEE is as described in Schedule

“B” and only as regards the rent agreed,

the super built up area of the ground

plus six floors of Tower A (including

bridge areas), shall be taken into

account, and shall not include the areas

of any terraces or basements or the

common / service areas attributable to

the Tower “A” for purposes of calculation

of rent payable, and the same is the rent

agreed to be payable for the entire

Demised Premises. For clarification it is

understood that the calculation of the

rent shall be arrived at in terms of

Clause (1(a)(iv) below;

The LESSEE shall be entitled to renew

the lease for an additional term of 4

years as per Clause 7 (d), by execution

of a fresh lease which shall be duly

registered, and the rent payable for the

renewed term shall also be as provided

in Annexure III. The detailed

calculations of rent payable by the

LESSEE for the entire duration of the

lease and its renewal, is set out in

Annexure III.

The LESSEE shall pay an amount of

Rs.52,44,962/= to the LESSORS, towards

one month’s rent in advance and to be

adjusted against rent for Tower A on

commencement of the lease and after

complete adjustment of the said amount,

the LESSEE shall pay further amounts

towards rent as provided herein. If,

however, the lease is terminated prior to

April 1, 2004, the said amount shall be

refunded to the LESSEE and / or adjusted

by the LESSEE against proceeds of the

said Instruments.

(iv) Notwithstanding anything contained to

the contrary, the rent payable shall be

[(Actual Plinth Area + (27% of Actual

Plinth Area)) multiplied by Rs.22/-] for

the first three years and thereafter for

the 4th and the 5th year it shall be

multiplied Rs.25.30p (instead of Rs.22/-)

per Sq. Ft. per month of actual plinth

area.”

Clauses 3 (a) and (f) read as under:

“3.

a) The LESSORS agree that it is imperative

for the quiet and peaceful occupation and

use of the Demised Premises by the

LESSEE and for the purpose the LESSEE

intends to occupy and use the Demised

Premises, that the Demised Premises

have, at all times, the provision of

services and facilities stipulated in

Annexure II and as per the specifications

and requirements stipulated therein,

Annexure V and elsewhere in this lease

or any of the annexures, which include

but are not limited to requisite lifts and

generators, Primary Power and 100%

Power Back-up for Common Areas,

cleanliness and upkeep of Tower A

maintenance of lawn security services,

water etc. for Tower A and such

necessary area of IBC Knowledge Park

for ingress and egress to and from Tower

“A”. Accordingly, the LESSORS shall

provide and agree to be responsible for

ensuring that the services and facilities

set out in Annexure II and provision of

primary power and 100% power backup

for common Areas, and in the manner

they are set out in this lease and all the

Annexures, are provided to the LESSEE

by the LESSORS at all times while the

LESSEE is in occupation of the Demised

Premises or any portion thereof.

However, the LESSORS shall be entitled

to nominate a Maintenance Agency to

maintain the said services, while being

responsible for all acts of the

Maintenance Agency and for the

provision of the said services and

facilities.

f) The LESSEE shall, over and above the

rent herein reserved, be required to pay

only the following charges, which are

towards provision and maintenance of

facilities and services provided in

Annexure II

i. For the first term of the lease, a monthly

maintenance charge of Rs.3/- (Rupees

Three only) per Sq. Ft. of super built up

area of the Ground plus six floors,

including bridge areas only if they are

authorized for commercial use, being an

amount of Rs. 7,15,222/= per month if

the bridge area is authorized for

commercial use, and being an amount of

Rs,. 6,43,715/- per month if the bridge

area is not authorized for commercial

use. The LESSORS shall not be entitled

to any escalation during the three years

of the first term, for any reason

whatsoever. The said amounts to be

paid alongwith lease rents.

ii. For the second term of the lease, if the

charges exceed Rs. 4/= per square foot

per month, the same shall be payable by

the LESSEE, only on the same being

justified by the LESSOR and subject to

LESSORS providing information and

documents, to the satisfaction of the

LESSEE, entitling the LESSORS to the

escalation.”

16. Thus, the lessee is required to pay not only the

rentals on the building but also charges for the facilities

provided by the assessee. The facilities and services

provided by the assessee are at Annexure–2 to the said

agreement. On a conjoint reading, it becomes clear that

the rental income is income from house property. But the

charges received towards provision and maintenance of

facilities and services as per Annexure-2 cannot be

construed to be income from house property. The said

income, in our view, has to be considered as income from

business and therefore, the claim for depreciation has to

be allowed, which has been rightly done so by the

Tribunal. Substantial question of law No.1 is accordingly

answered in favour of the assessee.

17. As far as the second question of law is

concerned, the same relates to payment of interest of

Rs.72.00 lakh on borrowed capital, as an allowable

business expenditure. The contention of the Revenue is

that there was no income from business i.e., in respect of

sale of building and therefore, interest could not be

allowed as business expenditure. According to the

Revenue, under Section 24 (of Income Tax Act, 1961), only interest on amount

borrowed for the purposes of acquisition or construction of

the property is eligible for deduction. But the assessee

had not sold any building and therefore, the business of

the assessee had not commenced. The stand of the

Revenue is that the sale of flats or building constructed

was a sine qua non for commencement of its business.

18. On the other hand, the assessee had

contended that it had purchased land and on obtaining

sanctioned plan had started construction and had

completed a few towers by 31/3/2004. Therefore,

assessee’s business had commenced. Disallowance of

interest was incorrect. The Tribunal noted that the

assessee was in the business of developing immovable

property and selling them. During the financial year 2003-

04, it has constructed M/s. IBC Knowledge Park Pvt. Ltd.,

on Bannerghatta Road, Bengaluru. Disputes arose

between the assessee and Bengaluru Housing

Development and Investment, a partnership firm with

whom assessee had entered into a joint development

agreement. On account of the said dispute, assessee

could not proceed with the sale of properties.

19. It is noted that the Assessing Officer had

disallowed a sum of Rs.52.56 crore related to investment

in the construction of the towers, which have been let-out

and proportionate interest was allowed under Section 24 (of Income Tax Act, 1961) of

the Act, but the balance amount of Rs.72.00 lakh was

disallowed on the ground that the building in respect of

which the loan was taken had not yet been let-out. But

the Tribunal noted that where interest on borrowed funds

were utilized towards other current assets and the loan

was not taken for a specific construction activity, then the

interest paid had to be allowed as a business expenditure.

20. Learned counsel for the appellant contended

before us that the Appellate Authorities were not right in

holding that a sum of Rs.72.00 lakh paid as interest on

borrowed capital was not an allowable business

expenditure when assessee’s business had not commenced

as there was no declaration of income from business and

assessee had received only rental income, which was

income from house property.

21. Per contra, learned counsel for the assessee

contended that merely because the assessee had not sold

the flats it had constructed, it could not be said that the

assessee had not commenced business. The moment land

was purchased and several steps were taken towards

construction of towers would imply that the assessee had

commenced business. Therefore, disallowance on payment

of interest was incorrect.

22. It is noted that in the financial year 2003-04,

assessee had constructed a project known as M/s.IBC

Knowledge Park Pvt. Ltd., on Bannerghatta Road,

Bengaluru. However, there were disputes between the

assessee and Bangalore Housing Development and

Investments, a partnership firm, with whom the assessee

had entered into a joint development agreement. As a

result, assessee could not sell the constructed properties.

Sale of constructed properties is not a sine qua non for

commencement of business. Assessee’s business

commenced when it had purchased land, obtained plan

sanction and put up construction. Thus, when the

business of the assessee had commenced during the

financial year 2003-04, interest paid by the assessee on

borrowed capital cannot be added back to the work in

progress. The Tribunal in this regard has relied upon a

decision in the case of K.Raheja Development [102 ITD

414], which has been held to be correct by this court. We

hold that the Tribunal was right in giving relief to the

assessee and the findings of the Tribunal would not call for

any interference. Accordingly, the second substantial

question of law is answered against the Revenue.

23. Third substantial question of law is with regard

to the disallowance of interest of Rs.1,91,14,354/-. The

Assessing Officer had held that the balance sheet did not

reflect any accrued interest and hence, the same could not

be allowed as a deduction. The Appellate Commissioner

had directed the Assessing Officer to allow deduction on

payment of interest. As noted from the order, in

ITA.Nos.903 to 906/Bang/2013, letter dated 30/9/2006

was filed by the assessee before the Assessing Officer,

which was furnished to the Tribunal as well. The Appellate

Commissioner had held that the detailed working of

interest on borrowings for Tower ‘A’ were furnished and

that Tower ‘A’ had been let-out and the interest pertaining

to the said aspect amounted to Rs.1,91,14,354/- paid

during the previous years. The Tribunal held that there

was no infirmity in the order of the Appellate

Commissioner in granting relief to the assessee.

Therefore, the same was confirmed.

24. Learned counsel for the Revenue, however,

contended that the Appellate Authorities were not right in

holding that a sum of Rs.1.91 crore cannot be disallowed

as a deduction. He submitted that the said amount was

not reflected in the balance sheet and no particulars had

been furnished by the assessee in that regard. Learned

counsel contended that the Appellate Authorities were not

right in directing the Assessing Officer to allow the

interest, which direction has been affirmed by the Tribunal.

25. Per contra, learned counsel for the assessee

supported the order of the Appellate Commissioner as well

as the Tribunal on this issue. The Tribunal has found that

the assessee had filed a letter dated 30/9/2006 before the

Assessing Officer. In paragraph No. 21 of the said letter,

detailed workout of interest on borrowings for ‘Tower A’ is

furnished. ‘Tower A’ had been let-out and the interest

amount was paid during the previous year. Interest in

respect of ‘Tower B’ had not been claimed as deduction.

26. On going through the letter dated 30/9/2006,

the Tribunal did not find any infirmity in the order of the

Appellate Commissioner in granting relief to the assessee.

We do not find any infirmity in the order of the Tribunal.

Accordingly, substantial question of law No.3 is answered

against the Revenue.

27. Fourth substantial question of law is with

regard to the correctness of allowing the claim of

deduction on construction management fee to an extent of

25% even though no evidence has been adduced in

support of the claim, when this expense related to the

property constructed by the assessee which was let-out

and rental income was received under the head Income

from House Property and therefore, the question of

earning expense did not arise and therefore, the same

could not be capitalized. The case of the assessee is that

it had supervised all the setting up of the interiors on

behalf of M/s. Accenture Services Pvt. Ltd., and had

earned income of Rs.78.25 lakh towards construction

management fee. During the course of such work, it had

incurred certain expenses towards payment of professional

charges to consultants and other services. According to

the Revenue, expenses incurred under the head

professional charges was Rs.1,29,08,375/- had to be

disallowed as it was not meant for management of

construction, but on other expenses, such as

advertisement, sales promotion etc. Therefore, the

income had to be assessed under the head income from

other sources. The Tribunal held that the income had to

be assessed as business income and the assessee could

not have received a sum of Rs.78.25 lakh without incurring

expenses. Therefore, 25% of the gross fee earned was

allowed as expenses.

28. Learned counsel for the Revenue contended

that the assessee had not produced any evidence with

regard to the claim of Rs.1,29,08,375/- as construction

management fee for being deducted from the income. He

contended that the said expense related to the property

constructed and the assessee had let-out the said property

and had received rental income from the house property.

Hence, expenses in that regard did not arise.

29. Per contra, assessee’s counsel supported the

finding of the Tribunal by contending that the assessee had

earned income of Rs.78.25 lakh as construction

management fee. It had set up the interiors of

M/s.Accenture Services Pvt. Ltd., and the aforesaid

disputed amount was the expenses incurred in the

process.

30. It is noted that M/s. Accenture Services Pvt.

Ltd., had engaged the services of the assessee herein as

construction management services. The income earned is

business income and cannot be considered as income from

other sources. Also, if the assessee had received income

of Rs.78.25 lakh towards construction management

services, it would have incurred expenditure in various

forms. But the details of expenditure was not putforth by

the assessee. In the circumstances, the Tribunal assessed

the expenditure to be allowed as expenses at 25% of the

gross fee. We think that the Tribunal was right in

construing the said income as business income and not as

income from other sources. We do not find any perversity

in the said assessment of 25% being the expenditure

incurred from the gross fee. Therefore, there is no merit

in the substantial question of law raised, which is answered

against the Revenue. In the result, the appeals filed by

the Revenue are liable to be dismissed.

ASSESSEE’S APPEALS:

31. As far as the appeals filed by the assessee with

regard to the proceedings under Section 153C (of Income Tax Act, 1961) is

concerned, submission of learned Senior Counsel,

Sri.K.P.Kumar, appearing for the assessee is that under

Section 132 (of Income Tax Act, 1961), search was conducted on Mr. Yunus

Zia, Mr.Ziaulla Sheriff and M/s. India Builders Corporation

on 17/6/2008. One of the offices of the assessee is in the

same premises where the search took place. Certain

documents belonging to the assessee were seized and the

Assessing Officer of the persons searched transferred the

documents to the Assessing Officer of the assessee under

Section 153C (of Income Tax Act, 1961). The Assessment Orders under

Section 153(3) (of Income Tax Act, 1961) read with section 153C (of Income Tax Act, 1961) were passed for the

assessment years 2004-05 to 2008-09. The assessee’s

appeals pertain to 2004-05 to 2006-07 only. While

highlighting the aforesaid factual details, learned Senior

Counsel contended that in the absence of any incriminating

material found during the search operation, the

assessments made under Section 153C (of Income Tax Act, 1961) were without

jurisdiction. That the purpose of Sections 153A to 153C of

the Act is to bring to tax undisclosed income. However, for

the relevant assessment years no new additions were

made on the basis of the documents seized. That the

additions made were the very same ones made in the

earlier assessment order dated 27/12/2006. That before

any notice under Section 153C (of Income Tax Act, 1961) is issued, the Assessing

Officer must be satisfied that the documents seized have a

bearing on the total income of the assessee, which is not

so in the present case. In support of these legal

propositions, learned Senior Counsel for the assessee,

Sri.K.P.Kumar, relied on certain decisions which shall be

adverted later.

32. Learned Senior Counsel further contended that

the documents belonging to the assessee which were

seized during the search of the aforesaid three parties

were bound to be found in the premises searched as it

carries on business from the very same premises. Merely

because documents of the assessee were found and

seized, proceedings under Section 153C (of Income Tax Act, 1961) could not have

been initiated. The requisite procedure under Section 132 (of Income Tax Act, 1961)

of the Act cannot be ignored while invoking Section 153C (of Income Tax Act, 1961)

of the Act. Further, for the accounting year 2004-05,

assessment had been completed on 12/12/2006 and thus,

the assessment proceedings did not abate. Hence, no

order under Section 153C (of Income Tax Act, 1961) could have been made except

with regard to any undisclosed income based on

incriminating material. That the Revenue has filed an

appeal against the order of the Tribunal in this regard,

which is without merit. For the accounting year 2005-06,

an intimation under Section 143(1)(a) (of Income Tax Act, 1961) had already been

issued and the time for issuance of notice under Section

143(2) had already lapsed and therefore, no assessment

could be said to be pending, for it to abate. As far as

accounting year 2006-07 is concerned, no notice for

assessment was pending under Section 143(2) (of Income Tax Act, 1961) had been

issued.

33. Learned Senior Counsel further contended that

the precedents relied upon by the Revenue do not support

the proposition, that even in the absence of any

incriminating material found assessment under Section

153A/153C could be made. Learned Senior Counsel lastly

contended on merits, the judgment to be passed in

ITA.No.402/2009 arising out of original scrutiny

assessment proceedings for assessment year 2004-05

would be applicable to the assessee and that in other

respects, Revenue’s appeals may be dismissed and

assessee’s appeals may be allowed.

34. Per contra, learned counsel for the Revenue

submitted that prior to the insertion of Sections 153A and

153C of the Act with effect from 1/6/2003, the

assessments made pursuant to a search conducted under

Section 132 (of Income Tax Act, 1961) or a requisition under Section 132A (of Income Tax Act, 1961),

were made under Sections 158BB (of Income Tax Act, 1961), 158BC and 158BD of

the Act. The aforesaid three sections deal with undisclosed

income on the basis of the evidence found as a result of

search or requisition of books of accounts or other

documents and such other materials or information that

are available with the Assessing Officer and such other

relatable evidence. In other words, detection of

undisclosed income was a sine qua non for invocation of

those sections. But Section 153C (of Income Tax Act, 1961) mandates

recording of satisfaction only to the extent of any money,

bullion or other valuable articles or books of accounts or

documents seized, which belong to the person other than

the person who is searched. Therefore, what is required is

recording of satisfaction regarding finding of material

belonging to the other person. Sections 153A and 153C

are silent about tracing of any undisclosed income.

Further, on account of change in the scheme of the Act,

introducing the concept of single assessment under

Sections 153A and 153C of the Act, any incriminating

material found during the course of search or requisition is

sufficient for reopening the assessment, it is not necessary

that undisclosed income must be found. Thus, according

to learned counsel, detection of any undisclosed income

during search operation or requisition is not a sine qua non

for reopening of assessment under Sections 153A (of Income Tax Act, 1961) and

153C and that the finding of the Tribunal in that regard is

not correct.

35. He further submitted that as per the earlier

scheme under Sections 158BC (of Income Tax Act, 1961) and 158BD of the Act, block

assessment had to be made for six assessment years

preceding previous year in which the search or requisition

was made and until the date of commencement of the

search or date of such requisition in the previous year in

which the search was conducted or requisition made. That

is not so under the present scheme as an independent

assessment could be made. That in the instant case, out

of six assessment years, no undisclosed income was found

for the assessment year 2004-05 and hence, the

assessment under Section 153C (of Income Tax Act, 1961) was not valid

and the original assessment was reiterated, but all the six

assessment years were rightly reopened under Section

153C of the Act.

36. Thus, according to learned counsel for

Revenue, the finding of the Tribunal that assessment

under Sections 153A (of Income Tax Act, 1961) and 153C have to be confined to only

when undisclosed income was detected on the basis of the

incriminating material found during the course of search

would imply that the Assessing Officer cannot make use of

any other information coming to his notice while

assessment under Sections 153A (of Income Tax Act, 1961) and 153C is made. Also,

if the limitation period prescribed as provided under

Section 153C (of Income Tax Act, 1961) has lapsed and no action could be taken

regarding escapement of income under that section and if

the interpretation as made by the Tribunal is to be applied

with regard to Sections 153A and 153C, there would, in

fact, be escapement of income. This is not intended under

the scheme of the Act, is the submission.

37. Learned counsel for the Revenue contended

that the Assessing Officer under Section 153C (of Income Tax Act, 1961)

has to record satisfaction regarding the material seized in

the course of search of a person when it belonged to any

other person. But detection of undisclosed income is not

material. Relying on certain decisions of the Hon’ble

Supreme Court as well as various High Courts, learned

counsel for Revenue sought for dismissal of assessee’s

appeals.

38. Both sides have relied upon decisions of the

Hon’ble Supreme Court as well as various High Courts

including this Court in support of their respective

contentions, which shall be referred to later.

39. On a perusal of the material on record, it is

noted that during the course of search in the premises of

M/s.India Builders Corporation on 17/06/2008, certain

documents of the assessee company were found and

seized by the concerned officer. Subsequently, proceedings

under Section 153C (of Income Tax Act, 1961) were initiated by the

Assessing Officer of the assessee. Assessee’s contention

that the proceedings were not initiated in accordance with

law, was not accepted by the appellate Commissioner, who

dismissed the appeals. Before the Tribunal, it was

contended that the assessee also carried out its functions

from the very premises which was searched. Therefore,

assesse’s documents were bound to be found in the said

premises. Therefore, it was contended that Section 153C (of Income Tax Act, 1961)

could not be invoked.

40. It was next contended before the Tribunal that

the documents found did not lead to disclosure of

undisclosed income of the assessee nor were they

incriminating in nature. That the fundamental purpose of

the search is to unearth undisclosed income. Therefore,

unless the documents seized prima facie showed

undisclosed income, Section 153C (of Income Tax Act, 1961) could not be

invoked. That before any satisfaction under Section 153C (of Income Tax Act, 1961)

of the Act was recorded, the Assessing Officer must make

enquiries and find out prima facie that the documents

represented undisclosed income. It was also contended

that the assessment under Section 153A (of Income Tax Act, 1961) read with Section

153C could be made only in respect of those assessment

years relating to the documents detected.

41. The Tribunal while considering the aforesaid

contentions held that the assessee shared common

business premises with the person searched. But the fact

that it ipso facto could not face proceedings under Section

153C of the Act, unless there was undisclosed income on

the part of the assessee detected in the search operation,

was not correct. Also, it was not necessary that

satisfaction should be recorded regarding the seized

articles found in the course of search which lead to

undisclosed income at the stage of detection during the

course of search. The Tribunal also held that once the

condition for invoking Section 153A (of Income Tax Act, 1961) was satisfied, the

Assessing Officer could proceed in accordance with Section

153C of the Act and pass an order of assessment for six

assessment years immediately preceding the assessment

year relevant to previous year in which search was

conducted or requisition was made.

42. As far as the assessment year 2004-05 was

concerned, the Tribunal noted that as on the date the

search was conducted i.e., on 17/06/2008, no assessment

proceeding for that year was pending and the additions

made for the assessment year under Section 153A (of Income Tax Act, 1961) r/w

Section 153C (of Income Tax Act, 1961) are identical to the ones made in the

assessment order dated 27/12/2006 for the said year. As

no undisclosed income was detected, the assessment

made under Section 153A (of Income Tax Act, 1961) r/w Section 153C (of Income Tax Act, 1961) was

quashed by the Tribunal.

43. As far as assessment year 2005-06 was

concerned, though order under Section 143(3) (of Income Tax Act, 1961) was not

passed, an intimation under Section 143(1) (of Income Tax Act, 1961) was issued on

28/03/2007 which fact is noted in the order 31/12/2010

passed under Section 153A (of Income Tax Act, 1961) r/w 153C of the Act. The

Tribunal held that for the purpose of Section 153A (of Income Tax Act, 1961) r/w

153C of the Act, an intimation under Section 143(1) (of Income Tax Act, 1961) is also

an order of assessment, and therefore, the argument of

the assessee was not accepted. In the circumstances,

cross-objection of the assessee was partly allowed for the

assessment year 2004-05 and for the assessment years

2005-06 and 2006-07 were dismissed by the Tribunal.

44. Before considering the rival contentions, it is

necessary to advert to the scheme of the Act regarding

special procedure for assessment in cases of search. Sub-

section (1) of Section 132 (of Income Tax Act, 1961) states that where the

Chief Commissioner or any other officer mentioned therein

having information in his possession, has reason to believe

that inter alia, any person is in possession of any money,

bullion, jewellery or other valuable article or thing

(hereinafter referred to as “valuable assets” for the sake of

convenience) and such valuable assets represents either

wholly or partly income or property, which has not been,

or would not be, disclosed for the purposes of the Act,

then, the authorized officer can enter and search any

building, place, vessel, vehicle or aircraft, where he has

reason to suspect that such books of account, other

documents, or valuable assets are kept or search any

person, break open the lock of any door etc., seize any

books of account, other documents, or other valuable

assets found as a result of such search and do all other

things necessary as prescribed under Section 132 (of Income Tax Act, 1961) of the

Act.

45. Sections 153A, 153B and 153C were inserted

by the Finance Act, 2003, with effect from 1/6/2003. They

have replaced the post-search block assessment scheme in

respect of any search or requisition made after 31/5/2003.

Sub-section (1) of Section 153A (of Income Tax Act, 1961) inter alia deals with

assessment in case of search or requisition. It begins with

a non obstante clause and states that notwithstanding

anything contained in Sections 139, 147, 148, 149, 151

and 153, in the case of a person where a search is initiated

under Section 132 (of Income Tax Act, 1961) or books of account, other documents

or any valuable assets are requisitioned under Section

132A, the Assessing Officer shall issue notice to such

person requiring him to furnish within such period, as may

be specified in the notice, return of income in respect of

each assessment year falling within six assessment years

referred to in clause (b) of Section 153(1) (of Income Tax Act, 1961) in the

prescribed form and verified in the prescribed manner and

setting forth such other particulars as may be prescribed

and the provisions of the Act shall, so far as may be, apply

accordingly as if such return were a return required to be

furnished under Section 139 (of Income Tax Act, 1961). The Assessing Officer can

assess or re-assess the total income of six assessment

years immediately preceding the assessment year relevant

to the previous year in which such search is conducted or

requisition is made. However, assessment or re-

assessment, if any, relating to any assessment year falling

within the period of six assessment years referred to in

this sub-section pending on the date of initiation of the

search under Section 132 (of Income Tax Act, 1961) or making of requisition under

Section 132A (of Income Tax Act, 1961), as the case may be, shall abate. The

explanation states, save as otherwise provided in Sections

153A, 153B and 153C, all other provisions of the Act shall

apply to the assessment made under Section 153A (of Income Tax Act, 1961).

Section 153B (of Income Tax Act, 1961) speaks about time-limit for completion of

assessment under Section 153A (of Income Tax Act, 1961).

46. 153C is relevant for the purposes of this case.

Sub-section (1) of Section 153C (of Income Tax Act, 1961) begins with a non

obstante clause and it states that notwithstanding anything

contained in Sections 139, 147, 148, 149, 151 and 153,

where the Assessing Officer is satisfied that any valuable

assets, seized or requisitioned, belongs to, or any books of

account or documents, seized or requisitioned, pertains or

pertain to, or any information contained therein, relates to

a person other than the person referred to in Section

153A, then, the books of account or documents or valuable

assets, seized or requisitioned shall be handed over to the

Assessing Officer having jurisdiction over such other

person and that Assessing Officer shall proceed against

each such other person and issue notice and assess or re-

assess the income of the other person in accordance with

the provisions of Section 153A (of Income Tax Act, 1961), if that Assessing Officer is

satisfied that the books of account or documents or

valuable assets seized or requisitioned have a bearing on

the determination of the total income of such other person

for the relevant assessment year or years referred to in

sub-section (1) of Section 153A (of Income Tax Act, 1961).

Sub-section (2) of Section 153C (of Income Tax Act, 1961) states that where

books of account or documents or valuable assets seized

or requisitioned as referred to in sub-section (1) has or

have been received by the Assessing Officer having

jurisdiction over such other person after the due date for

furnishing the return of income for the assessment year

relevant to the previous year in which search is conducted

under Section 132 (of Income Tax Act, 1961) or requisition is made under Section

132A and in respect of such assessment year - (a) no

return of income has been furnished by such other person

and no notice under sub-section (1) of Section 142 (of Income Tax Act, 1961) has

been issued to him, or (b) a return of income has been

furnished by such other person but no notice under sub-

section (2) of Section 143 (of Income Tax Act, 1961) has been served and limitation

of serving the notice under sub-section (2) of Section 143 (of Income Tax Act, 1961)

has expired, or (c) assessment or reassessment, if any,

has been made, before the date of receiving the books of

account or documents or valuable assets seized or

requisitioned by the Assessing Officer having jurisdiction

over such other person, such Assessing Officer shall issue

notice and assess or reassess total income of such other

person of such assessment year in the manner provided in

Section 153A (of Income Tax Act, 1961).

47. Chapter XIV-B consists of Section 158B (of Income Tax Act, 1961) to

158BH, inserted with effect from 01/07/1995, deals with

special procedure for assessment in search cases. The

Finance Act, 1995 inserted Chapter XIV-B in the Act,

incorporating a new scheme of block assessment in cases

relating to search conducted under Section 132 (of Income Tax Act, 1961)

or requisitions made under Section 132A (of Income Tax Act, 1961) after

30/06/1995. Section 158B(b) (of Income Tax Act, 1961) defines ‘undisclosed income’

to include any money, bullion, jewellery or other valuable

article or thing or any income based on any entry in the

books of account or other documents or transactions,

where such money, bullion, jewellery, valuable article,

thing, entry in the books of account or other document or

transaction represents wholly or partly income or property,

which has not been or would not have been disclosed for

the purposes of this Act or any expense, deduction or

allowance claimed under this Act which is found to be

false. Section 158BA (of Income Tax Act, 1961) deals with assessment of undisclosed

income as a result of search, while Section 158BB (of Income Tax Act, 1961) deals

with computation of undisclosed income of the block

period. Block period is defined in Section 158B(a) (of Income Tax Act, 1961) to mean

the period comprising previous years relevant to six

assessment years preceding the previous year in which the

search was conducted under Section 132 (of Income Tax Act, 1961) or any requisition

was made under Section 132A (of Income Tax Act, 1961) and also includes the period

up to the date of commencement of such search or date of

such requisition in the previous year in which the said

search was conducted or requisition was made. The

proviso is not relevant for the purpose of this case.

48. Section 158BD (of Income Tax Act, 1961) is relevant for the present case

and it states that where the Assessing Officer is satisfied

that any undisclosed income belongs to any person, other

than the person with respect to whom search was made

under Section 132 (of Income Tax Act, 1961) or whose books of account or other

documents or any assets were requisitioned under Section

132A, then the books of account, other documents or

valuable assets seized or requisitioned shall be handed

over to the Assessing Officer having jurisdiction over such

other person and that Assessing Officer shall proceed

under Section 158BC (of Income Tax Act, 1961) against such other person and the

provisions of Chapter XIV-B shall apply accordingly.

Section 158BE (of Income Tax Act, 1961) prescribes time limit for completion of block

assessment. Section 158BH (of Income Tax Act, 1961) states that except as

otherwise provided in Chapter XIV-B all other provisions of

the Act shall apply to the assessment made under the said

chapter. Section 153C (of Income Tax Act, 1961) provides for the role of the

Assessing Officer having jurisdiction over the person

searched/requisitioned as regards third party liability. The

said section covers assessments which have become

necessary, because of books of accounts, documents or

valuable assets of third parties indicating their undisclosed

income found during the search or requisition under

Section 132 (of Income Tax Act, 1961)/132A leading to a prima facie tax liability. A

special procedure is contemplated in such cases. Such

books of accounts, documents or valuable assets are

required to be handed over by the Assessing Officer having

jurisdiction over the persons searched requisitioned to the

assessing officer of a third party on his satisfaction that

they belong to a third party before handing over.

49. On a conjoint reading of the aforesaid

provisions, it becomes clear that a search can take place

only when a concerned officer has information and reason

to believe that any person is in possession of any valuable

assets, which has not been or would not be disclosed

under the Act. In such a case, a search can take place.

Following the search, if any books of account, other

documents, any valuable assets is or are found in the

possession or control of any person in the course of a

search, then the books of account or other documents or

valuable assets could be seized. Under Section 153A (of Income Tax Act, 1961), the

satisfaction regarding an inference of liability must be

recorded. The Assessing Officer has to issue notice to the

assessee i.e., the person searched for the purpose of

assessment or re-assessment of the total income of six

assessment years immediately preceding the assessment

year relevant to the previous year in which such search is

conducted. Section 153C (of Income Tax Act, 1961) as already noted, deals with

assessment of income of any other person, when the

Assessing Officer is satisfied that the books of account or

documents or valuable assets seized or requisitioned have

a bearing on the determination of the total income of such

other person for the relevant assessment year or years

referred to under sub-section(1) of Section 153A (of Income Tax Act, 1961) of the

Act. In such a case, the Assessing Officer has to issue

notice to assess or re-assess income of other person under

Section 153A (of Income Tax Act, 1961). Thus, the fact that search has

been conducted would not justify issuance of notice under

Section 153A (of Income Tax Act, 1961). If it is only during a valid search when

certain incriminating materials are detected, notice could

be issued.

50. Chapter XIV-B which deals with special

procedure for assessment of search cases deals with

undisclosed income as a result of search, the computation

thereof and such other provisions. Undisclosed income is

defined in Clause (b) of Section 153B (of Income Tax Act, 1961). Undisclosed income

includes money, bullion or other valuable assets. It is

only when the concerned officer has information about the

same and has reason to believe that the said valuable

assets has not been or would not be disclosed would give

jurisdiction to the officer authorized to conduct a search

operation. Therefore, the object and purpose of a search

is to detect undisclosed income. As defined under Clause

(b) of Section 158B (of Income Tax Act, 1961), it is only when the

undisclosed income is detected in a search operation that

there would be assessment or re-assessment, under the

provisions of Chapter XIV-B of the Act, of the person who

is presumed to be in possession of the undisclosed income.

If during the course of search, any valuable assets

belongs to or any books of account or document seized or

requisitioned pertains to or any information contained

therein relates to a person other than the persons

searched, then the Assessing Officer, on recording

satisfaction, can also assess and re-assess the income of

any other person. Thus, what emerges is that the sine qua

non for the purpose of assessment or re-assessment

pursuant to a search operation is detection of undisclosed

income. In fact, the initiation of search proceeding is also

based on possession of information and reason to believe

that a person is in possession of certain valuable assets,

which has not been or would not be disclosed under the

Act. The same is nothing but ‘undisclosed income’ as

defined in Clause (b) of Section 158B(b) (of Income Tax Act, 1961). This

becomes even more clear on a comparison of section

132(1)(c) with Section 158B(b) (of Income Tax Act, 1961). It is for the

above reason that Sections 153A and 153C begin with a

non obstante clause in order to make these provisions

exclusive of Sections 139, 147, 148, 149, 151 and 153 of

the Act. If a search operation does not lead to detection of

undisclosed income as defined in Chapter XIV-B of the Act,

then no purpose would be served in reopening the

assessment already completed. Also, if there is no

detection of any undisclosed income, then there would be

no need for pending assessment to abate. Thus, when

particulars of income declared in the return is already

available with the Assessing Officer, such income cannot

form part of undisclosed income even if such return is filed

beyond the time limit, but before search, as long as they

relate to any year covered in the block. Thus, a block

assessment is justified only on the basis of evidence found

during search and the materials or information relatable

thereto.

Section 153C (of Income Tax Act, 1961) is in pari materia with Section 158BD (of Income Tax Act, 1961)

conferring jurisdiction over third parties to a search

providing certain conditions before the Assessing Officer

having jurisdiction over a third party can assume

jurisdiction. Materials such as books of accounts,

documents or valuable assets found during a search should

belong to a third party which would lead to an inference of

undisclosed income of such third party. Such an inference

should be recorded by the Assessing Officer having

jurisdiction over the searched persons and communicated

to the Assessing Officer having jurisdiction over such third

party along with the seized documents and other

incriminating materials on the basis of which the Assessing

Officer having jurisdiction over such third party would

issue notice under Section 153C (of Income Tax Act, 1961). On receipt of the

aforesaid material, the Assessing Officer having jurisdiction

over such third party would proceed against the said third

party. Thus, where no material belonging to a third party

is found during a search, but only an inference of an

undisclosed income is drawn during the course of enquiry,

during search or during post-search enquiry, Section 153C (of Income Tax Act, 1961)

would have no application. Thus, the detection of

incriminating material leading to an inference of

undisclosed income is a sine qua non for invocation of

Section 153C (of Income Tax Act, 1961).

51. Before considering the decisions cited at the

Bar, it is necessary to refer to a decision of the Hon’ble

Supreme Court in Manish Maheshwari vs. Asst.

Commissioner of Income-Tax & another [(2007) 289

ITR 341 (SC)]. In that case, search was conducted on

one of the directors of the assessee-company M/s.Indore

Construction (Pvt.) Ltd. When the search was conducted

in the premises of the director Sri. Manish Maheshwari and

his wife several incriminating documents relating to the

company were seized. While dealing with Section 158BD (of Income Tax Act, 1961)

of the Act, the Hon’ble Supreme Court has observed as

under:

“Condition precedent for invoking a block

assessment is that a search has been

conducted under Section 132 (of Income Tax Act, 1961), or documents or

assets have been requisitioned under Section

132A. The said provision would apply in the

case of any person in respect of whom search

has been carried out under Section 132A (of Income Tax Act, 1961) or

documents or assets have been requisitioned

under Section 132A (of Income Tax Act, 1961). Section 158BD (of Income Tax Act, 1961), however,

provides for taking recourse to a block

assessment in terms of Section 158BC (of Income Tax Act, 1961) in

respect of any other person, the conditions

precedents wherefor are : (i) Satisfaction must

be recorded by the Assessing Officer that any

undisclosed income belongs to any person,

other than the person with respect to whom

search was made under Section 132 (of Income Tax Act, 1961) of the

Act; (ii) The books of account or other

documents or assets seized or requisitioned

had been handed over to the Assessing Officer

having jurisdiction over such other person; and

(iii) The Assessing Officer has proceeded

under Section 158BC (of Income Tax Act, 1961) against such other

person.

The conditions precedent for invoking the

provisions of Section 158BD (of Income Tax Act, 1961), thus, are required

to be satisfied before the provisions of the said

chapter are applied in relation to any person

other than the person whose premises had

been searched or whose documents and other

assets had been requisitioned under Section

132A of the Act.”

In that case, it was held that the Assessing Officer

had not recorded his satisfaction, which is mandatory; nor

had he transferred the case to the Assessing Officer having

jurisdiction over the matter. Therefore, the judgment of

the High Court was set aside and the appeals were

allowed.

52. The decisions relied upon by the learned Senior

Counsel appearing for the assessee are as under:

(a) In Commissioner of Income-Tax vs.

Calcutta Knitwears [(2014)362 ITR 673 (SC)], the

Hon’ble Supreme Court considered the question, as to at

what stage of the proceedings under Chapter XIV-B, the

Assessing Authority was required to record his satisfaction

for issuing notice under Section 158BD (of Income Tax Act, 1961). In that

case, the facts were that a search operation under Section

132 of the Act was carried out in two premises of the

Bhatia Group, namely M/s. Swastik Trading Co., and

M/s.Kavita International Co., on 5/2/2003 and certain

incriminating documents pertaining to the assessee-firm

i.e., Calcutta Knitwear were traced in the said search.

After completion of the investigation by the investigating

agency and handing over of the documents to the

assessee to the Assessing Authority, the latter had

completed the block assessments in the case of Bhatia

group. Since certain other documents did not pertain to

the person searched under Section 132 (of Income Tax Act, 1961), the

Assessing Authority therein thought it fit to transmit those

documents, which according to him pertained to

undisclosed income on account of investment element and

profit element of the assessee-firm and required to be

assessed under Section 158BC (of Income Tax Act, 1961) read with Section 158BD (of Income Tax Act, 1961) of

the Act to another Assessing Authority in whose

jurisdiction the assessments could be completed. In doing

so, the Assessing Authority recorded his satisfaction note

dated 15/7/2005. The jurisdictional Assessing Authority

for the assessee had issued show-cause notice under

Section 158BD (of Income Tax Act, 1961) for the block period of six years dated

10/2/2006 to the assessee. The assessee had replied that

no action could be initiated against the assessee and

requested the Assessing Authority to drop the proceedings.

The stand of the assessee was rejected by the Assessing

Authority, who concluded the assessment proceedings

under Section 158BD (of Income Tax Act, 1961). It was also held that

notice could be issued even after completion of the

proceedings of the searched person under Section 158BC (of Income Tax Act, 1961)

of the Act.

Aggrieved by the order of the Assessing Officer, the

assessee therein had filed an appeal before the Appellate

Authority, who had partly allowed the appeal. The

Revenue had carried the matter further by filing an appeal

before the Tribunal and the assessee therein filed cross-

objection. The Tribunal rejected Revenue’s appeal, which

filed an appeal before the High Court, which also rejected

the Revenue’s appeal and confirmed the order of the

Tribunal. The Revenue, then approached the Hon’ble

Supreme Court. While dealing with various provisions of

Chapter XIV-B of the Act pertaining to assessment in the

case of search operation, the Hon’ble Supreme Court held

that Section 158BD (of Income Tax Act, 1961) deals with undisclosed

income of any other person. On the question of recording

satisfaction that there is an undisclosed income, which had

been traced where a person was searched under Section

132 of the Act or books of accounts, other documents or

valuable assets are requisitioned under Section 132A (of Income Tax Act, 1961) of

the Act, the Hon’ble Supreme Court opined as under:

“We would certainly say that before

initiating proceedings under section 158BD (of Income Tax Act, 1961) of

the Act , the Assessing Officer who has

initiated proceedings for completion of the

assessments under section 158BC (of Income Tax Act, 1961)

should be satisfied that there is an undisclosed

income which has been traced out when a

person was searched under Section 132 (of Income Tax Act, 1961) or the

books of account were requisitioned under

Section 132A (of Income Tax Act, 1961). This is in contrast to

the provisions of section 148 (of Income Tax Act, 1961) where

recording of reasons in writing are a sine qua

non. Under Section 158BD (of Income Tax Act, 1961), the existence of

cogent and demonstrative material is germane

to the Assessing Officers’ satisfaction in

concluding that the seized documents belong

to a person other than the searched person is

necessary for initiation of action under Section

158BD. The bare reading of the provision

indicates that the satisfaction note could be

prepared by the Assessing Officer either at the

time of initiating proceedings for completion of

assessment of a searched person under

Section 158BC (of Income Tax Act, 1961) or during the stage of

the assessment proceedings. It does not mean

that after completion of the assessment, the

Assessing Officer cannot prepare the

satisfaction note to the effect that there exists

income-tax belonging to any person other than

the searched person in respect of whom a

search was made under Section 132 (of Income Tax Act, 1961) or

requisition of books of account were made

under Section 132A (of Income Tax Act, 1961). The language

of the provision is clear and unambiguous. The

Legislation has not imposed any embargo on

the Assessing Officer in respect of the stage of

proceedings during which the satisfaction is to

be reached and recorded in respect of the

person other than the searched person.

Further Section 158BE(2)(b) (of Income Tax Act, 1961) only

provides for the period of limitation for

completion of block assessment under Section

158BD in case of the person other than the

searched person as two years from the end of

the month in which the notice under this

Chapter was served on such other person in

respect of search carried on after January 1,

1997. The said section does neither provide

for nor impose any restrictions or conditions on

the period of limitation for preparation of the

satisfaction note under Section 158BD (of Income Tax Act, 1961) and

consequent issuance of notice to the other

person.

In the result, we hold that for the

purpose of Section 158BD (of Income Tax Act, 1961) a

satisfaction note is sine qua non and must be

prepared by the Assessing Officer before he

transmits the records to the other Assessing

Officer who has jurisdiction over such other

person. The satisfaction note could be

prepared at either of the following stages: (a)

at the time of or along with the initiation of

proceedings against the searched person under

Section 158BC (of Income Tax Act, 1961); (b) along with the

assessment proceedings under Section 158BC (of Income Tax Act, 1961)

of the Act; and (c) immediately after the

assessment proceedings are completed under

Section 158BC (of Income Tax Act, 1961) of the searched

person.”

In that case, the Hon’ble Supreme Court remanded

the matters to the concerned High Court for consideration

of the individual cases in light of observations made above

on the scope and interpretation of Section 158BD (of Income Tax Act, 1961) of the

Act.

(b) In Commissioner of Income Tax vs.

M/s.Lancy Constructions [ITA.No.528/2014 &

connected matters disposed of by this Court on

15/12/2015], it was held that there were no

incriminating documents during the course of search on

the basis of which additions could have been made by the

Assessing Officer. That the accounts which were

submitted by the assessee at the time of regular

assessment were duly verified during the course of such

assessment and accepted by the Assessing Officer. In the

absence of any incriminating documents having been

found, the same accounts of the assessee were re-

assessed by making further investigations, which was

impermissible, as the same would amount to reopening of

a concluded assessment, without there being any

additional material found at the time of search. Otherwise,

it would give the Revenue a second opportunity to reopen

a concluded assessment, which is impermissible in law.

Merely because a search is conducted in the premises of

the assessee, would not entitle the Revenue to initiate the

process of re-assessment, for which, there is a separate

procedure prescribed in the statute. It is only when the

conditions prescribed for re-assessment are fulfilled that a

concluded assessment can be reopened. The very same

accounts which were submitted by the assessee, on the

basis of which assessment had been concluded, cannot be

re-appreciated by the Assessing Officer merely because a

search had been conducted in the premises of the

assessee.

(c) In Jai Steel (India), Jodhpur vs. Assistant

Commissioner of Income-tax [(2013) 36

taxmann.com 523 (Rajasthan)], it was held that no

doubt the Assessing Officer is free to disturb income,

expenditure or deduction de hors any incriminating

material, while making an assessment under Section 153A (of Income Tax Act, 1961)

of the Act. But in the context of a search, Section 153A (of Income Tax Act, 1961) to

153C cannot be interpreted to be a “further innings” for

the Assessing Officer and/or the assessee beyond the

provisions of Sections 139 (return of income); 139(5)

(revised return of income); 147 (income escaping

assessment) and 263 (revision of orders) of the Act.

It was also held that it was not open for the assessee

to seek deduction or claim expenditure, which had not

been claimed in the original assessment, which

assessment already stood completed, only because a

assessment under Section 153A (of Income Tax Act, 1961) in pursuance of

search or requisition was required to be made.

(d) In Commissioner of Income-Tax vs. Kabul

Chawla [(2016) 380 ITR 573 (Delhi)], the Delhi High

Court has held that (i) once a search takes place under

Section 132 (of Income Tax Act, 1961), notice under Section 153A(1) (of Income Tax Act, 1961) will

have to be mandatorily issued to the person in respect of

whom search was conducted requiring him to file returns

for six assessment years immediately proceeding the

previous year relevant to the assessment year in which the

search takes place. (ii) Assessment and re-assessments

pending on the date of the search shall abate. The total

income for such assessment years will have to be

computed by the Assessing Officers as a fresh exercise.

(iii) The Assessing Officer will exercise normal assessment

powers in respect of the six years previous to the relevant

assessment year in which the search takes place. The

Assessing Officer has the power to assess and re-assess

the “total income” of the six years in separate assessment

orders for each of the six years. In other words, there will

be only one assessment order in respect of each of the six

assessment years in which both the disclosed and the

undisclosed income would be brought to tax. (iv) Although

Section 153A (of Income Tax Act, 1961) does not say that additions should be strictly

made on the basis of evidence found in the course of the

search, or other post-search material or information

available with the Assessing Officer which can be related to

the evidence found, it does not mean that the assessment

can be arbitrary or made without any relevance or nexus

with the seized material. Obviously, an assessment has to

be made under this section only on the basis of the seized

material. (v) In the absence of any incriminating material,

the completed assessment can be reiterated and the

abated assessment or reassessment can be made. The

word “assess” in Section 153A (of Income Tax Act, 1961) is relatable to abated

proceedings (i.e., those pending on the date of search)

and the word “reassess” to completed assessment

proceedings. (vi) Insofar as pending assessments are

concerned, the jurisdiction to make the original

assessment and the assessment under Section 153A (of Income Tax Act, 1961)

merges into one. Only one assessment shall be made

separately for each assessment year on the basis of the

finding of the search and any other material existing or

brought on record of the Assessing Officer. (vii) Completed

assessments can be interfered with by the Assessing

Officer while making the assessment under Section 153A (of Income Tax Act, 1961)

only on the basis of some incriminating material unearthed

during the course of search or requisition of documents or

undisclosed income or property discovered in the course of

search which were not produced or not already disclosed

or made known in the course of original assessment.

The Delhi High Court further held that in the cases

before it on the date of the search the assessment already

stood concluded since no incriminating material was

unearthed during the search, no additions could have been

made to the income already assessed. The questions were

accordingly answered in favour of the assessee.

53. Learned counsel for the Revenue has relied

upon the following citations in support of his contentions:

(a) In Kamleshbhai Dharamshibhai Patel vs.

CIT [(2013) 31 Taxmann.com 50 (Gujarat)], on

considering Section 153C (of Income Tax Act, 1961), it was observed that

the said section begins with a non obstante clause.

Requirements for assuming jurisdiction under Section 153C (of Income Tax Act, 1961)

(1) are, that the Assessing Officer is satisfied that any

valuable assets or books of account or document seized or

requisitioned belongs to a person other than the person

referred in section 153A (of Income Tax Act, 1961). In such a case, he

shall handover to the Assessing Officer having jurisdiction

of such other person, the books of account or document or

documents or valuable assets seized or requisitioned. That

the valuable assets or books of account seized or

documents seized or requisitioned should belong to a

person other than a person referred in Section 153A (of Income Tax Act, 1961) of the

Act.

(b) In Filatex India Ltd. vs. CIT [49 Taxman

465 (Delhi)], the court rejected the argument that during

assessment under Section 153A (of Income Tax Act, 1961) additions had to be

restricted or limited to incriminating material only, found

during course of search.

(c) In Savesh Kumar Agarwal vs. Union of

India ((2013) 35 Taxmann.com 85 (Allahabad)], the

question considered was whether on receipt of satisfaction

note, the Assessing Officer had not found anything adverse

against the assessee and seized goods having been

released in favour of the assessee, notice could be issued

under Section 153C (of Income Tax Act, 1961) to file returns for six years.

The stand of the Revenue therein was that the Assessing

Officer could still proceed under Section 153A (of Income Tax Act, 1961) in

order to find out the source of income. In that case the

writ petition filed under Article 226 of the Constitution of

India challenging the notice was dismissed on the premises

that the power under Section 153C (of Income Tax Act, 1961) exists in the Assessing

Officer, if he is satisfied with regard to the need for

examination of the source of income.

(d) In Dr. K.M.Mehaboob vs. DCIT [(2012) 26

Taxmann.com 54 (Kerala)], it was held that unlike

under Section 158BD (of Income Tax Act, 1961), for transferring a file under Section

153C, there is no need to examine whether the books of

accounts or other evidence or materials seized in the

course of search of an assessee represents or proves

undisclosed income of another assessee. On the other

hand, for transferring the file to the Assessing Officer of

such other assessee, all that is required to be considered is

whether the materials or books of accounts or evidence

recovered relates to another assessee, which may or may

not lead to an assessment in the case of the other

assessee after transfer of the file to his Assessing Officer.

This is only an internal arrangement to be made between

two Departmental Officers and in this regard the only fact

that needs to be verified is whether the assessee whose

books of accounts or materials are recovered in the course

of search of any other assessee, is a regular assessee

before another Officer, and if so, to transfer the file to such

other Officer for his consideration and for passing orders,

whether assessment or penalty or such other order

permissible under the Act by that Officer.

(e) In Canara Housing Developnment Co. vs.

D.C.I.T. [(2015) 274 CTR 122 (Kar.)], a Division Bench

of this court in the said case noted that in the course of

search, incriminating material leading to undisclosed

income being seized, held that the block assessment roped

in only the undisclosed income and the regular assessment

proceedings were preserved, resulting in multiple

assessments. Under Section 153A (of Income Tax Act, 1961), however, the Assessing

Officer has been given the power to assess or reassess the

“total income” of the six assessment years in question in

separate assessment orders. Once the assessment is

reopened, the Assessing Authority can take note of the

income disclosed in the earlier return, any undisclosed

income found during search or any other income which is

not disclosed in the earlier return or which is not

unearthed during the search, in order to find out what is

the total income of each year and then pass assessment

order.

(f) Similarly, in Gopal Lal Badruka vs. DCIT

[(2012) 346 ITR 106], the search revealed incriminating

material and undisclosed income.

(g) in SSP Aviation Ltd. vs. DCIT [(2012) 20

Taxmann.com 214 (Delhi)], the observations of the

court were in light of the fact that incriminating material

had been found.

(h) In CIT vs. Anil Kumar Bhatia [(2012) 211

Taxman 453 (Delhi)], the court did not express any

opinion as to whether Section 153 (of Income Tax Act, 1961) A can be invoked in a

case where no incriminating material was found during the

search as it was in fact dealing with a case where

incriminating material had been found.

54. On a consideration of the relevant sections as

well as judicial precedent referred to above, what emerges

is that, Section 158BD (of Income Tax Act, 1961) deals with undisclosed

income of a third party. However, insofar as the

incriminating material of the searched person or other

person detected during the course of search is concerned,

the same can be considered during the course of

assessment. Further, such incriminating material must

relate to undisclosed income which would empower the

Assessing Officer to upset or disturb a concluded

assessment of the other person. Otherwise, a concluded

assessment would be disturbed without there being any

basis for doing so which is impermissible in law. Even in

case of a searched person, the same reason would hold

good as in case of any other person. As observed by us,

detection or the existence of incriminating material is a

must for disturbing the assessment already made and

concluded. But, at the same time, such can be at three

stages: one, at the stage when the re-assessment is

initiated, the second, at the stage during the course of re-

assessment and third, at a stage where the re-assessment

is altered by a different assessment in respect of searched

person or in respect of third party. In this regard,

reference may be made to the decision of Apex Court in

case of M/s.Calcutta Knitwear (supra) and based on the

said decision, the CBDT has also issued circular dated

31.12.2015 vide No.24/2015.The relevant extract of the

circular for ready reference can be extracted as under:

“The issue of recording of satisfaction for

the purposes of section 158BD (of Income Tax Act, 1961)/153C has been

subject matter of litigation.

2. The Hon’ble Supreme Court in the case of

M/s Calcutta Knitwears in its detailed judgment

in Civil Appeal No.3958 of 2014 dated

12.3.2014(available in NJRS at 2014-LL-0312-

51) has laid down that for the purpose of

Section 158BD (of Income Tax Act, 1961), recording of a

satisfaction note is a prerequisite and the

satisfaction note must be prepared by the AO

before he transmits the record to the other AO

who has jurisdiction over such other person u/s

158BD. The Hon’ble Court held that “the

satisfaction note could be prepared at any of

the following stages:

(a) at the time of or along with the initiation

of proceedings against the searched person

under section 158BC (of Income Tax Act, 1961); or (b) in the

course of the assessment proceedings under

section 158BC (of Income Tax Act, 1961); or (c) immediately

after the assessment proceedings are

completed under section 158BC (of Income Tax Act, 1961) of

the searched person.”

2. Several High Courts have held that the

provisions of section 153C (of Income Tax Act, 1961) are

substantially similar/pari-materia to the

provisions of section 158BD (of Income Tax Act, 1961) and

therefore, the above guidelines of the Hon’ble

SC, apply to proceedings u/s 153C (of Income Tax Act, 1961), for the purposes of assessment of income

of other than the searched person. This view

has been accepted by CBDT.

3. The guidelines of the Hon’ble Supreme

Court as referred to in para 2 above, with

regard to recording of satisfaction note, may

be brought to the notice of all for strict

compliance. It is further clarified that even if

the AO of the searched person and the “other

person” is one and the same, then also he is

required to record his satisfaction as has been

held by the Courts.

4. In view of the above, filing of appeals on

the issue of recording of satisfaction note

should also be decided in the light of the above

judgment. Accordingly, the Board hereby

directs that pending litigation with regard to

recording of satisfaction note under section

158BD/153C should be withdrawn/not pressed

if it does not meet the guidelines laid down by

the Apex Court.”

As per the aforesaid circular, at the time of or along

with initiation of the proceedings, against the searched

person or third party under Section 153C (of Income Tax Act, 1961) or in the course

of assessment proceedings under Section 153C (of Income Tax Act, 1961)

or immediately after the assessment proceedings are

completed under Section 153C (of Income Tax Act, 1961), recording of

satisfaction is required.

55. If the observations made by the Tribunal are

considered in this regard, it is noted by the Tribunal that it

is not necessary that satisfaction should be recorded that

documents or valuable assets found in the course of search

showed undisclosed

income. In view of the aforesaid

discussion, we do not think that such can be the correct

position of law.

56. Further, in the judgments referred to by the

learned counsel for the Revenue, where incriminating

material leading to undisclosed income of another assessee

was detected in a search operation, in those cases,

reopening of the concluded assessment have taken place.

There has been no single decision cited by the learned

counsel for the Revenue where the assumption of

jurisdiction of the Assessing Officer is in the absence of

any incriminating material or undisclosed income having

been detected during the course of search leading to

reopening of a concluded assessment. In the instant case,

though documents belonging to the assessee were seized

at the time of search operation, there was no incriminating

material found leading to undisclosed income. Therefore,

assessment of income of the assessee was unwarranted.

Consequently, no satisfaction was recorded in the case of the

assessee.

We answer substantial question of law No.2 by

holding that the Tribunal was not correct in holding that

the assessment under Section 153C (of Income Tax Act, 1961) was valid despite

there being no satisfaction recorded to the effect that the

documents found during the search on 17/06/2008 were

incriminating in nature and prima facie represented

undisclosed income.

57. In the instant case, one of the conditions

precedent for invoking a block assessment pursuant to a

search in respect of a third party under Section 158BD (of Income Tax Act, 1961) of

the Act, i.e., recording satisfaction that undisclosed income

belongs to the third party, which was detected pursuant to

a search under Section 133 (of Income Tax Act, 1961), has not been

complied with in the instant case. Therefore, the

reassessment as such made under Section 158BD (of Income Tax Act, 1961) in

respect of the assessee is not in accordance with law. We

accordingly answer substantial question No.2 in favour of

assessee. In view of our answer to the aforesaid question,

we do not find it necessary to answer substantial question

of law Nos.1, 3 and 4 in these appeals. The said questions

are kept open to be raised at an appropriate time if the

occasion arises.

58. In the result, the appeals filed by the Revenue

are dismissed. The appeals filed by the assessee are

allowed to the aforesaid extent.

59. Parties to bear their respective costs.

Sd/-

JUDGE

Sd/-

JUDGE