TUHADI SUPPLIERS PVT. LTD. VS ASSISTANT COMMISSIONER OF INCOME TAX -(ITAT)

1. These are five appeals preferred by the assessee against the order of CIT(A), Central III, Kolkata dated 20.03.2013 for the block period from 01.04.1996 to 07.05.2002 (for ITSSA Nos. 66, 72 & 69/Kol/2013), 01.04.1996 to 07.05.2006 (for ITSSA No.80/Kol/2013) and AY 2003-04 for ITA No.1718/Kol/2013) respectively. Since the facts are identical and issue raised are similar, we take IT(SS)A No. 72/Kol/2013 as lead case (M/s. Eldot Commotrade Pvt. Ltd.) and dispose of all these appeals by this consolidated order.

2. The grounds of appeal of the assessee are as under:

“1. The order passed by the lower authorities are arbitrary, erroneous, without proper reasonings, invalid and bad in law, to the extent to which they are prejudicial to the interests of the appellant.

2. On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the validity of the proceeding initiated u/s 158BD of the Income Tax Act, 1961, in case of the appellant company, in spite of the fact that during the course of the Search proceedings at the premises of the UIC Group, no incriminating materials against the appellant company had been found.

3. (a) On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the addition of the sum of Rs. 1,21,65,000/- u/s 68 of the Act, by considering the receipt of the said amount as unexplained in spite of there being ample evidences about the genuineness of the said receipt of money by the appellant.

3. (b) On the facts and in the circumstances of the case, the learned CIT(A) erred in not taking into consideration the fact that the appellant had not been provided with opportunity by the learned A.O. to cross-examine the depositions of four witnesses, and thereafter in relying on such unverified depositions.”

3. The assessee is also raised an addition ground of appeal which is as under: “That on the facts and in the circumstances of the case and in law, the assessment order passed u/s 158BD/144 of the Act dated 30.11.2006 is void ab initio in as much as no satisfaction u/s 158BC of the Act was recorded by the AO of the searched person about any undisclosed income of ‘other person’, although satisfaction was recorded in the order passed u/s 158BD and the Ld. CIT(A) acted illegally in having upheld such an order which was untenable in law.”

4. The brief facts of the case is that the assessee is a private limited company engaged in the business of trading / dealing in shares. A search and seizure operation was conducted in the UIC Group OF Companies on 07.05.2002. Pursuant to the said search, share scrip’s of M/s. UIC Group Companies allotted to various companies including that of the assessee company were found and seized. Based on this fact, the Assessing Officer initiated 158BD proceedings against the assessee, satisfaction note for initiating proceedings under section 158BD is reproduced below:

“A search and seizure operation was conducted in the UIC Group of cases on 07.05.2002. In the course of search in the corporate office of this Group, share scrips worth Rs. 11,63,75,000/- issued by different companies by these Group were found. Out of these scrips it was found that a large number of shares have been allotted in the name of various companies controlled and managed by outsiders viz. Shri Rajesh Kumar Jajodia and Shri Sandip Kumar Singhi. In the course of post search enquiry launched in connection with ascertaining the source of the share capital contributed by these outside companies, it was gathered that a part of the funds of the following shareholding companies had come from four bank accounts i.e. Account No. 4886, 4914, 4934 and 4933 maintained with Federal Bank of India, Bura Bazar Branch, Kolkata and standing in the name of Shri Rajendra Kumar Surana, Shri Sunil Kumar Jain, Shri Shankarlal Godh and Shri Surendra Kumar Hirawat respectively ............................. Apart from the above mentioned companies there exists some other companies (not shareholders in UIC Group of Companies) controlled by Shri Sandip Kumar Singhi which have also received money from the bank accounts of the aforesaid four persons. The names of these companies are indicated below .......................................................... Eldot Commotrade (P) Ltd. P14 CIT Road Kolkata 700012 Enquiry has further revealed that the aforesaid four persons deposited substantial cash in their four bank accounts and that these four persons are not traceable. Summons u/s 131 of the I.T. Act, 1961 could not be served in their given addresses. It establishes that fictitious bank accounts were opened in the name of those four persons. It was further observed that bank accounts were introduced by Shri Sandip Kumar Singhi. Since the cash from these four accounts had travelled to the above named companies of Shri Rajesh Kumar Jajodia and Shri Sandip Kumar Singhi, I have strong reasons to believe that the above named companies controlled by Shri Rajesh Kumar Jajodia and Shri Sandip Kumar singhi have role in channeling their own money through these bank accounts. Under the circumstances proceedings u/s 158BD of the I.T. Act, 1961 are required to be initiated in the hands of the above named twenty companies (13+7=20) for bringing the undisclosed income of those companies into the tax net.”

5. Thereafter the AO issued a notice under section 158BD for the block period from 01.04.1996 to 07.05.2002 asking the assessee to prepare true and correct return of its total income including undisclosed income for which it was assessable for the block period. Pursuant to the notice, the assessee replied that it did not had any undisclosed income and requested the AO to provide copies of books of accounts, other documents or details / information in respect of seized assets that is money, bullion, jewellery, valuable things or articles lying with the AO which is belonging to the assessee [which has been seized], so that they can prepare return accordingly. The AO notes that on the day of the search & seizure operation conducted u/s 132 on 07.05.2002 at the office premises of M/s. UIC Wires Ltd. 2 lacs share certificates bearing distinctive numbers 490301 to 690300 acquired on 12.08.2000 with a face value of Rs. 10/- amounting to a total value of Rs. 20 lacs were found and seized from the office premises of M/s. UIC Wires Ltd. According to the AO, M/s. UIC Wires Ltd. could not explain as to how shares issued and sold to the assessee company in the year 2000 were still lying at their office premises. Thus according to the AO this fact reveals that there is a clear cut connivance between the assessee company and the UIC group of channeling unaccounted cash in the form of bogus purchase / sale of shares and assessee company is acting as a facilitator.

6. The AO thereafter notes that on verification of bank accounts of the assessee company maintained the bank account no 5274 with Federal Bank of India, Bura Bazar Branch, Kolkata and the AO noted that the following amounts were transferred to the assessee’s accounts from accounts of the above named four persons during the block period which are enumerated below:

“1. From A/c No. 4934 of Shankar Lal Godh Rs. 14,50,000/-

2. From A/c No. 4933 of Surendra Kr. Hirawat Rs. 14,50,000/-

3. From A/c No. 4914 of Suil Kr. Jain Rs. 27,75,000/-

4. From A/c No. 4886 of Rajendra Kr. Surana Rs. 40,00,000/- Total Rs. 1,21,65,000/”

7. The AO notes that during verification it came to his notice that the said amounts were transferred to assessee company only after depositing cash one/two day(s) prior to the date of transfer. The AO made certain enquiries through the inspectors and came to know that these four persons were introduced to the bank to open the account by Mr. Sandip Kumr Singhi who is one of the Directors of the assessee company. The AO asked the assessee to prove the source of cash deposits and creditworthiness of the four persons who have transferred the money to assessee’s bank account. According to the AO, the assessee initially failed to produce the aforesaid four persons who had transferred the money to assessee’s bank account. Thereafter the director of assessee produced these four persons and, thereafter, after taking deposition from the director of the assessee company, Mr. Sandip Kr. Singhi, the AO concluded that “the amount of Rs. 1,21,65,000/- which has been transferred from the bank accounts of the aforesaid four persons to the assessee for shares sold by it to the four persons is not the assesssee’s actual income because the ultimate beneficiary finally the UIC Group”. Therefore, the AO noted that the entire purpose of shares sale and purchase by the three layers of share transactions undertaken by the company controlled by Mr. Sandip Kr. Singhi and Mr. Rajesh Jajodia is a clear covert and connivance operation to channeling the UIC Groups unaccounted money back to itself through the maize of cash deposits and share transactions, where there was no actual share transactions but only accommodating book entries of the respective intermediary companies. Therefore, the AO taxed the Rs. 1,21,65,000/- on a protective basis in the hands of the assessee and on substantive basis in the hands of the UIC Group. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee and was pleased to change from protective assessment to substantive assessment in the hands of the assessee company.

8. Aggrieved the assessee is before us.

9. We have heard both the parties and perused the records. We note that the assessee is a private limited company engaged in the business of trading/dealing in shares. A search and seizure operation was conducted in the UIC group of companies on 7.5.2002. Pursuant to the said search, share scrips of UIC Companies allotted in the name of the assessee company were found in their premises and they were seized during search operation. Thereafter, the AO notes that during post search enquiry, conducted for ascertaining the source of investment by the assessee company, the A.O. found that the assessee company received the funds from 4 bank accounts viz, A/c nos.4886, 4914, 4933 & 4934 maintained with Federal Bank of India. Burra Bazar Branch Kolkata which were standing in the names of the following persons:

i. Rajendra Kumar Surana

ii. Sunil Kr. Jain

iii. Surendra Kumar Hirawat

iv. Shankarlal Godh

The AO after examining the aforesaid four persons and the director of the assessee company concluded that “the amount of Rs. 1,21,65,000/- which has been transferred from the bank accounts of the aforesaid four persons to the assessee for shares sold by it to the four persons is not the assesssee’s actual income because the ultimate beneficiary finally the UIC Group”. Therefore, the AO noted that the entire purpose of shares sale and purchase by the three layers of share transactions undertaken by the company controlled by Mr. Sandip Kr. Singhi and Mr. Rajesh Jajodia is a clear covert and connivance operation to channeling the UIC Groups unaccounted money back to itself through the maize of cash deposits and share transactions, where there was no actual share transactions but only accommodating book entries of the respective intermediary companies. Therefore, the AO taxed the Rs. 1,21,65,000/- on a protective basis in the hands of the assessee and on substantive basis in the hands of the UIC Group. On appeal, the Ld. CIT(A) was pleased to dismiss the appeal of the assessee and to change assessment from protective to substantive assessment in the hands of the assessee company.

10. The main grievance of the assessee company is that sec. 158BD proceeding could not have been initiated against the assessee company because the shares seized from the premises of UIC Group did not belong to it, when the search was conducted on 07.05.2002. According to the assessee, the scrip’s in question had already been sold during years 1999, 2000 and 2001, so on the date of search the scrip’s found and seized does not belong to it. According to the assessee company, when the search happened on 07.05.2000, it had already sold the shares which it had purchased during October and November, 1999 and February, 2000 to the aforesaid four persons for a consideration of Rs.l,21,65,000/-. In connection with amount of Rs.l,21,65,000/- the Ld. AR of the assessee-company drew our attention to the following facts:

i. The appellant company had sold its investments in shares of UIC Companies before the date of search on 07.05.2000 and therefore, the seized shares does not belong to it on the date of search.

ii. The sale consideration of Rs.1,21,65,000/- was duly received by the appellant company through Account Payee cheques

iii. The cheques received as consideration have been duly deposited in the bank account of the assessee

iv. The above-mentioned sale transaction was duly recorded in the books of accounts

v. Income Tax Returns incorporating the above details have been duly filed in the relevant assessment year.

11. We note that in the block assessment u/s l58BD/144 was completed by the A.O. vide order dated 30.11.2006 making protective addition of Rs.1,21,65,000/- on account of the afore-mentioned receipt of sale consideration by the assessee company against sale of its shares and on substantive basis an addition of Rs.l2,16,501/- being l% commission on the said amount of Rs.l,21,65,000/- was passed against the assessee company.

12. The legal issue that has been raised by the assessee is as to whether the A.O. is correct in initiating the block assessment proceedings u/s l58BD of the Act. For that let us examine the validity of the impugned block assessment proceedings carried out by the Assessing Officer in respect of the assessee. The provisions of section l58BD clearly read as under:

Section 158BD. Undisclosed income of any other person,--'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 I 32 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other documents or 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 l58BC against such other person and the provisions of this Chapter shall apply accordingly.'

A bare perusal of the above section indicates that before the provisions of section l58BD are invoked against a person other than the searched person, two conditions are required to be fulfilled:

i. For assessing the undisclosed income of any other person i.e., other than the person with respect to whom search was made under section 132, the Assessing Officer must be satisfied that the undisclosed income belongs to such person i.e., the person other than the searched person. Thus the Assessing Officer cannot proceed against such other person, without having the required satisfaction. The requirement of satisfaction is, therefore, a pre- requisite condition for initiating assessment proceedings against any other person, under section l58BD. The word 'satisfaction' appearing in section l58BD clearly denotes that it should be based upon the material found during the course of search and such satisfaction should be brought on record.

ii. The Assessing Officer must hand over the seized books of accounts and other documents and assets on the basis of which satisfaction has been recorded, to the Assessing Officer having jurisdiction over such person other than the searched person.

13. The above view has been taken by the Hon’ble Supreme Court in the case of Manish Maheshwari vs ACIT [289 ITR 034].Now the question arises as to whether the above conditions have been fulfilled in the present case also.

14. We note that there was no search warrant in the name of the assessee and it is only on the basis of seized material from the premises of UIC Group which was searched under section 132 of the Act that belongs to the assessee which discloses undisclosed income, then only the case of the assessee could be covered under section l58BD and notice under section l58BD can be validly issued. Therefore, existence of material belonging to assessee must be found during the course of search, which is a sine qua non for taking action under section I58BD of the Act. So, the jurisdictional fact to invoke sec. 158BD against the assessee is the seizure of material belonging to assessee found during search conducted on 07.05.2002. Now the question is, can the seized shares found during search on 07.05.2002 at UIC Group can be said to be belonging to assessee company. From the facts emerging as noted by us the assessee company though had purchased the shares of certain UIC Group companies in October, November, 1999 and February, 2000, it had been sold to the four persons named above before the date of search on 07.05.2002 and the assessee company has received the amount of Rs.1,21,65,000/- through account payee cheque and has deposited it in bank account and have duly recorded in the books of account and incorporated the above details in the Income Tax Return. Therefore, we find that the jurisdictional fact for assumption of jurisdiction is absent and, therefore, the AO could not have invoked jurisdiction u/s. 158BD of the Act against the assessee company. Therefore, the AO erred in invoking sec. 158BD proceedings against the assessee company and, therefore, the order of AO passed after invoking section 158BD is ‘Null’ in the eyes of law and so has to be quashed.

15. Therefore, in the light of the above facts, the jurisdictional fact which is the condition precedent for invoking jurisdiction u/s. 158BD is absent, the very invocation and framing of assessment u/s. 158BD is ab initio void and consequently is null in the eyes of law and is quashed.

16. Since the facts of the other four appeals are identical and orders have been passed without satisfying the jurisdictional fact for invoking jurisdiction u/s. 158BD of the Act, the AO lacks jurisdiction to initiate and pass orders in consequence to sec. 158BD of the Act, therefore, the impugned orders passed by the AO are null in the eyes of law and are, therefore, quashed.

17. In the result, all the appeals of the assessee companies are allowed on the legal issue of jurisdiction. Therefore, we do not adjudicate the merits because it is academic.

Order is pronounced in the open court on 13.07.2018.

Sd/- Sd/-

(Waseem Ahmed) (Aby. T. Varkey)

Accountant Member Judicial Member