"High Court Upholds Interpretation of Section 127 (of Income Tax Act, 1961) in Block Assessment Cases; Assessee's Appeal Dismissed"

This appeal arises from the interpretation/application of Section 127 (of Income Tax Act, 1961), in relation to the provision on Block Assessment.

The Income Tax Department conducted a search in the residence and business premises of the assessee and his associates, which led to a proposed transfer of the assessee's cases to the Income Tax (Inv.) Circle, Calicut for effective investigation. This transfer was enacted by the Chief Commissioner of Income Tax, Bangalore under Section 127(2) (of Income Tax Act, 1961).

The assessee challenged the transfer order in the High Court of Karnataka, but the petition was dismissed. The Assessing Officer in Calicut issued a notice asking the assessee to file a return setting forth the total income, including the undisclosed income for the block period, which was done. The Assessing Officer determined the undisclosed income and this determination was challenged on the grounds that the Assessing Officer in Calicut lacked jurisdiction for block assessment.

A Division Bench of the High Court ruled that Section 127 (of Income Tax Act, 1961) could be used for a block assessment, which the petitioner disputed, arguing that the definition of block assessment in Chapter XIV-B of the Act did not permit the application of Section 127 (of Income Tax Act, 1961). However, the Revenue, represented by the Additional Solicitor General, supported the judgment.

The Supreme Court agreed with the High Court's judgment, concluding that the power under Section 127 (of Income Tax Act, 1961) could be exercised for block assessment, citing the principle of purposive construction and the consideration of Section 127 (of Income Tax Act, 1961) as a machinery provision. The court dismissed the appeal with costs.

1. Leave granted.

2. Interpretation/ application of Section 127 (of Income Tax Act, 1961),

1961 (for short, "the Act") vis-vis the provision regarding Block

Assessment is in question in this appeal which arises out of a judgment and

order dated 2.4.2004 passed by the High Court of Kerala at Ernakulam in

ITA No. 172 of 2000 and WPC No. 23449 of 2003.

A search was conducted by the Officers of the Income Tax Department in the residence as also in the business premises of the assessee, his sons and other associates, consequent whereupon, it was proposed to transfer the cases pertaining to the assessee to the Income Tax (Inv.) Circle,

Calicut to facilitate effective and coordinate investigation. An order was

passed to that effect by the Chief Commissioner of Income Tax, Bangalore

under Section 127(2) (of Income Tax Act, 1961). A notice was issued by the Assessing

Officer under Section 158BC (of Income Tax Act, 1961) to file a return setting forth the total income including the undisclosed income for the block period.

The assessee filed a writ petition in the High Court of Karnataka

challenging the said order of transfer of cases passed by the Chief

Commissioner of Income Tax. The said writ petition was dismissed. Writ

Appeals preferred thereagainst were also dismissed.

A notice was thereafter issued by the assessing authority asking the

assessee to file a return setting forth the total income including the

undisclosed income for the block period. Pursuant thereto, the return was

filed. The purported undisclosed income of the assessee was determined.

The said order of the Assessing Officer, Calicut was challenged on the

ground that he had no jurisdiction to make the block assessment as the

authority therefor remained with the Assessing Officer originally having the

jurisdiction over the assessee.

3. A Division Bench of the High Court by reason of the impugned

judgment opined that the provisions of Section 127 (of Income Tax Act, 1961) can also be

resorted to for a block assessment.

4. Mr. TLV Iyer, learned Senior Counsel appearing on behalf of the

petitioner would submit that having regard to the definition of block

assessment occurring in Chapter XIV-B of the Act, Section 127 (of Income Tax Act, 1961) thereof ex

facie cannot have any application thereto.

5. Mr. Gopal Subramaniam, the learned Additional Solicitor General

appearing on behalf of the Revenue, however, would support the impugned

judgment.

6. The power to conduct a search by the authorities of the Income Tax

Department in terms of Section 132 (of Income Tax Act, 1961) is not in dispute. It is further not in dispute that Chapter XIV-B shall apply in a case of this nature. Clause (a) of Section 158 (of Income Tax Act, 1961) B defines ’block period’, which reads as under:

"(a) "block period" means 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 and also includes the period upto the

date of the commencement of such search or

date of such requisition in the previous year

in which the said search was conducted or

requisition was made:

Provided that where the search is initiated or

the requisition is made before the 1st day of

June, 2001, the provisions of this clause

shall have effect as if for the words "six

assessment years", the words "ten

assessment years" had been substituted;"

A block period, therefore, not only would include ten years of

assessment but also that portion of the assessment year in which assessment

was to take place as on the date of the search.

7. Chapter XIV-B provides for special procedure. Section 158 (of Income Tax Act, 1961) BC lays

down the procedure for block assessment. Section 158 (of Income Tax Act, 1961) BD provides for

taking into consideration undisclosed income of any other person. Section

158 BE provides for the time limit for completion of block assessment.

Section 158 (of Income Tax Act, 1961) BH of the Act reads as under:

"158BH. Application of other provisions of

this Act. Save as otherwise provided in this

Chapter, all other provisions of this Act shall apply

to assessment made under this Chapter."

Chapter XIV-B only lays down special procedure for assessment but

thereby the effect and purport for which the assessment of income tax is

done does not stand obliterated.

8. An order of transfer as noticed here in before can be passed by the

appropriate authority in terms of Section 127 (of Income Tax Act, 1961), which reads as

under:

"127. Power to transfer cases (1) The Director

General or Chief Commissioner or Commissioner

may, after giving the assessee a reasonable

opportunity of being heard in the matter, wherever

it is possible to do so, and after recording his

reasons for doing so, transfer any case from one or

more Assessing Officers subordinate to him

(whether with or without concurrent jurisdiction)

to any other Assessing Officer or Assessing

Officers (whether with or without concurrent

jurisdiction) also subordinate to him.

(2) Where the Assessing Officer or Assessing

Officers from whom the case is to be transferred

and the Assessing Officer or Assessing Officers to

whom the case is to be transferred are not

subordinate to the same Director General or Chief

Commissioner or Commissioner,-

(a) Where the Directors General or Chief

Commissioners or Commissioners to whom such

Assessing Officers are subordinate are in agreement, then

the Director General or Chief Commissioner or

Commissioner from whose jurisdiction the case is to be

transferred may, after giving the assessee a reasonable

opportunity of being heard in the matter, wherever it is

possible to do so, and after recording his reasons for

doing so, pass the order;

(b) Where the Directors General or Chief

Commissioners or Commissioners aforesaid are not in

agreement, the order transferring the case may, similarly,

be passed by the Board or any such Director General or

Chief Commissioner or Commissioner as the Board may,

by notification in the Official Gazette, authorize in this

behalf.

Explanation: In Section 120 (of Income Tax Act, 1961) and this Section, the

word "case", in relation to any person whose name

is specified in any order or direction issued

thereunder, means all proceedings under this Act

in respect of any year which may be pending on

the date of such order or direction or which may

have been completed on or before such date, and

includes also all proceedings under this Act which

may be commenced after the date of such order or

direction in respect of any year.

9. An order of transfer is passed for the purpose of assessment of

income. It serves a larger purpose. Such an order has to be passed in public

interest.

Only because in the said provision the words "any case" has been

mentioned, the same, in our opinion, would not mean that an order of

transfer cannot be passed in respect of cases involving more than one

assessment year.

It would not be correct to contend that only because explanation

appended to Section 127 (of Income Tax Act, 1961) refers to the word ’case’ for the purpose of the said Section as also Section 120 (of Income Tax Act, 1961), the source of power for transfer of the case involving block assessment is relatable only to Section 120 (of Income Tax Act, 1961). It is a well-settled principle of interpretation of statute that a provision must be construed in such a manner so as to make it workable. When the Income Tax Act was originally enacted, Chapter XIVB was not in the statute book. It was brought in the statute book only in the year 1996.

10. The power of transfer is in effect provides for a machinery provision.

It must be given its full effect. It must be construed in a manner so as to

make it workable. Even Section 127 (of Income Tax Act, 1961) is a machinery provision. It

should be construed to effectuate a charging Section so as to allow the

authorities concerned to do so in a manner wherefor the statute was enacted.

The question came up for consideration before a Division Bench of

the Andhra Pradesh High Court in Mukutla Lalita vs. Commissioner of

Income Tax & ors. Reported in [1997] ITR 226 23 wherein it was held:

"Hence it can be imagined that an order has to be

passed as to who shall be the Assessing Officer

under Section 158BG (of Income Tax Act, 1961) in the case of a search. Such

an order can be passed only by a higher officer

who may be either the Commissioner or the Chief

Commissioner, as the case may be. Hence, unless

such an order has been passed, the Assessing

Officer to whom the records have been handed

over under section 158BD (of Income Tax Act, 1961) cannot ipso facto hand

over the records to the Assistant Commissioner,

until he has been chosen to act as the Assessing

Officer under Section 158BG (of Income Tax Act, 1961). For doing so, a

procedure for transfer of the records and the

passing of orders to that effect is necessary for the

records to be transferred to the officer selected

under section 158BG (of Income Tax Act, 1961). It is in this context that the

provisions of Section 127 (of Income Tax Act, 1961) have to be resorted to. It

is for such reason, we are unable to agree with

learned standing counsel that Chapter XIV-B is a

self-contained special provision relating to search

procedures and assessments to which Section 127 (of Income Tax Act, 1961)

has no application. The submission would have

been correct if Section 127 (of Income Tax Act, 1961) and Chapter XIV-B

were inconsistent with each other and it has to be

held because of such reason that a specific

provision like Chapter XIV-B would displace a

general provision like section 127 (of Income Tax Act, 1961). But as we see

it, both provisions are supplemental to each other

and that the provisions of section 127 (of Income Tax Act, 1961) fill in the

gap between the stage of sections 158BD and

158BG. The impugned order passed under Section

127 hence cannot be faulted by saying that the

section was not applicable. It is also not correct, as

has been contended, that giving a notice under

Section 127 (of Income Tax Act, 1961) in the event of a proceeding under

Chapter XIV-B would be a mere formality without

any substance as records are to be compulsorily

handed over to the officer under section 158BG (of Income Tax Act, 1961).

While in most of the cases the submission may be

correct, yet it is conceivable that in some cases,

reasonable opportunity being given as

contemplated under Section 127(1) (of Income Tax Act, 1961) or (2) of the

Act, the person concerned may be able to convince

the authority giving the notice that he is actually

unrelated or unconnected to the proceeding started

under Chapter XIV-B. If such conclusion is

reached, the authority at that stage may

disassociate the person concerned from the specific

proceeding in Chapter XIV-B and may not transfer

the papers to the other officer. As has been fairly

pointed out by learned standing counsel himself,

the provisions of section 127(1) (of Income Tax Act, 1961) apply when the

transfer is contemplated not only between the

officers of the subordinate rank but also officers

either with or without concurrent jurisdiction.

Hence, even when the records are to be transmitted

to the officer not higher in rank than the officer to

whom the papers are handed over in the first

instance under section 158BD (of Income Tax Act, 1961), the provisions of

section 127 (of Income Tax Act, 1961) are to be complied with to give notice."

11. We agree with the opinion of the Division Bench, but we may also

notice that the provisions of Section 158BH (of Income Tax Act, 1961) had not been brought to its

notice, which categorically states that all other provisions of the Act shall apply to assessment made under the said Chapter. Section 127 (of Income Tax Act, 1961), which falls under Chapter XIII would therefore mutatis mutandis apply to Chapter XIVB particularly when the jurisdiction of the Income Tax

Authorities, inter alia, relates to passing an order of assessment.

The word ’any’ must be read in the context of the statute and for the

said purpose, it may in a situation of this nature, means all. The principles of purposive construction for the said purpose may be resorted to. [See New India Insurance vs. Nusli Neville Wadia [(2007) 13 S.C.R. 598 (of Income Tax Rules, 1962)]. Thus, in the context of a statute, the word ’any’ may be read as all in the context of the Income Tax Act for which the power of transfer has been conferred upon the authorities specified under Section 127 (of Income Tax Act, 1961).

10. We have no hesitation in arriving at the conclusion that the power

under Section 127 (of Income Tax Act, 1961) can also be exercised in respect of a block assessment.

For the reasons aforementioned, we find no merit in these appeals. The

appeals are dismissed accordingly with costs. Counsel’s fee assessed at

Rs.25,000/- (Rupees twenty five thousand only).