Whether when alleged undisclosed income is made a subject matter of block assessment, it can be again subjected to regular assessment - NO: HC

THE issues before the Bench are - Whether once income has been assessed under the provisions of block assessment as per Chapter XIVB, and the income added was deleted on merits by the appellate authorities, whether AO can still proceed to reopen the assessment on the grounds that such income has escaped assessment; Whether when an alleged undisclosed income has been made a subject matter of block assessment, it can be again subject to regular assessment under chapter XIV of the Act and Whether when CIT(A) has ordered as per section 158BA(3) for exclusion of certain items from block assessment, the AO
can use it as a license to reopen the assessment in respect of the very same items which were subject matter of the block assessment. And the verdict goes in favour of the assessee.

Facts of the case

The assessee was engaged in the business of ornaments. On 27th January, 1999, search proceedings were conducted u/s 132. The authorized officers seized certain ornaments as also registers which were showing the names of parties who had given these ornaments by way of loan or for remaking. Such registers also showed the weight of the ornaments given by the parties. During the course of block assessment proceedings under Chapter XIV-B, the petitioner filed its return disclosing 'nil' income. The petitioner produced affidavits of various parties who had given these ornaments and also produced such parties before the AO who confirmed the fact of lending or giving of ornaments and also replied the questions put by the AO about the source, ownership, capacity, identity etc. Pursuant to inquiry made by him, the AO did not propose any addition in respect of jewellery. However, when the order was presented for the approval of the Joint Commissioner of Income Tax, he directed such addition. Accordingly, block assessment was framed u/s 158BC computing the undisclosed income at Rs.48,49,902 which was the value of the ornaments taken as undisclosed investments of the petitioner. The petitioner carried the matter in appeal before the CIT (A), who allowed the appeal on almost all points except the point of application of section 40A(3) of the Act. Against the order of the CIT (A), the Department went in appeal to the Tribunal. In the said appeal, the petitioner preferred cross-objections against the upholding of the addition u/s 40A(3) of the Act. The Tribunal disposed of the appeal as well as the cross-objections, wherein it upheld the deletion of addition of Rs.29,77,726.

After the CIT(A) had decided the appeals, the AO issued the impugned notice before the Tribunal had decided the appeal preferred by the Department, proposing to reopen the petitioner’s assessment for AYs 1999 - 2000. This was objected by the assessee and this petition was filed before the High Court.

The AR assailed the impugned notice by submitting that the AO seeks to reopen the assessment on issues which have already been decided by the CIT (A) in favour of the petitioner as confirmed by the Tribunal. From the order passed by the Tribunal in the appeal preferred by the Department, the AR pointed out that the Tribunal has recorded that the assessee was successful in proving to the hilt the genuineness of the transactions encompassing all its aspects. The assessee had duly discharged its onus. Therefore, there was no justification at all for reversing the order of the CIT (A) on this issue. It was argued that the reopening of assessment was contrary to the scheme of the Act, inasmuch as matters detected during the course of search, would be subject matter of block assessment and not regular assessment. Therefore, for this reason also the reopening of assessment was bad in law and under the circumstances, the impugned notice being without jurisdiction was required to be quashed and set aside.

Having heard the parties, the High Court held that,

++ thus two things are apparent. Firstly, that the issue in respect of which the assessment is sought to be reopened was subject matter of the block assessment. Secondly, that the addition of Rs.29,77,726/- made by the Assessing Officer during the course of block assessment under section 158BC of the Act had been deleted by the Commissioner (Appeals);

++ at this juncture, it may be germane to refer to leading two decisions of this court on the question of reopening of assessment in the context of block assessment. In N.R. Paper and Board Limited v. Deputy Commissioner of Income-tax, a Division Bench of this court held that the assessment of undisclosed income is altogether a different matter from the regular assessments. Under section 158BB of the Act, for computing the undisclosed income of the block period, the Assessing Officer has to compute the total income of the relevant previous years on the basis of the evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with the Assessing Officer. The evidence found as a result of search or requisition would be the evidence that has been gathered by the authorised officer under sections 132 and 132A of the Act, which would include the statements recorded by the authorised officer during the course of search and seizure under section 132(4) of the Act. The evidence found and material available is to be the basis for computing the aggregate of the total income of the previous years falling in the block period. The court held that under section 158BB(1), read with section 158BC of the Act, what is assessed is the undisclosed income of the block period and not the total income or loss of the previous year required to be assessed in the normal regular assessment under section 143(3), where the Assessing Officer makes an inquiry to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner and on the basis of the evidence produced by the assessee, the evidence obtained on the specific points and all relevant material which he has gathered assesses the total income or loss and determines the sum payable thereon as per that assessment. This exercise under section 143(2) and (3) for regular assessment stands in contrast to the exercise of the Assessing Officer under section 158BB read with section 158BC (b), where he has to assess only the undisclosed income of the block period on the basis of the evidence found and material available as a result of the search conducted by the authorised officer under section 132 of the Act. These provisions operate entirely for different purposes, one for assessing undisclosed income of the block period while the other for assessing the total income or loss of the previous year in a regular assessment;

++ in Cargo Clearing Agency (Gujarat) v. Joint Commissioner of Income-tax, a Division Bench of this court after an in-depth study of the scheme of Chapters XIV and XIVB of the Act held that the Legislature does not intend to reopen assessments completed under Chapter XIV-B of the Act assessing the undisclosed income by adopting the special procedure provided in the said Chapter. Observing that the entire Chapter XIV-B of the Act relates to assessment of search cases, viz., undisclosed income found as a result of search, the court expressed the view that one cannot envisage escapement of undisclosed income once a search has taken place and material recovered, on processing of which undisclosed income is brought to tax. Section 147 of the Act itself indicates that the same is in relation to income escaping assessment and applies in a case where either income chargeable to tax has escaped assessment by virtue of non-disclosure by way of non-filing of return, or non-disclosure by way of omission to disclose fully and truly all material facts for the purpose of assessment, or processing of material already available on record, if the same is within the stipulated period of limitation. Therefore, to contend that undisclosed income has escaped assessment despite an assessment having been framed under Chapter XIVB of the Act by adopting the special procedure by the said Chapter is to contend what is inherently not possible. The court held that once assessment has been framed under section 158BA of the Act in relation to undisclosed income for the block period as a result of search there is no question of the Assessing Officer issuing notice under section 148 of the Act for reopening such assessment as the said concept is abhorrent to the special scheme of assessment of undisclosed income for block period;

++ examining the facts of the present case in the light of the principles enunciated in the above decisions, admittedly as is apparent on a plain reading of the reasons recorded, the stock of gold ornaments valued at Rs.29,77,726/- was subject matter of block assessment under section 158BC of the Act. The Assessing Officer after considering the material on record in fact made an addition of Rs.29,77,726/- as undisclosed income of the petitioner. Such addition was set aside by the Commissioner (Appeals). The order of Commissioner (Appeals) deleting such addition was upheld by the Tribunal. Thus, when the undisclosed income determined by the Assessing Officer included Rs.29,77,726/- being the value of gold ornaments which the assessee claimed to be belonging to its customers was subject matter of block assessment, the same cannot be made the subject matter of regular assessment under Chapter XIV of the Act. Under the circumstances, the reopening of assessment in relation to a matter which was subject matter of block assessment is evidently without jurisdiction;

++ another notable aspect of the matter is that in the block assessment the issue regarding gold ornaments valued at Rs.29,77,726/- had been considered by the Assessing Officer. In the assessee’s appeal, the Commissioner (Appeals) had examined the issue on merits and had recorded that in the facts of the present case, the assessee had discharged the onus in respect of the deposits of gold received by it. It was recorded that the assessee had not only filed confirmations of parties but had filed affidavits of the depositors. The genuineness of the affidavits has been verified by the Assessing Officer through examination of the depositors in person over a few days. The depositors were produced by the assessee for such examination at the instance of the Assessing Officer. It was further recorded that the Assessing Officer also sent the Ward Inspector to the area the depositors came from and the Inspector duly submitted a report on these enquiries. Nothing amiss was found in all these enquiries conducted by the Assessing Officer himself and through Ward Inspector. In not a single case did the Assessing Officer record any finding that the facts narrated in any affidavit were false. The Commissioner (Appeals), accordingly, was of the view that the onus that lay on the assessee had been amply discharged and if the Assessing Officer still wanted to make an addition, the onus was on the Assessing Officer to establish that the claim was not genuine and that the facts stated in the affidavits were false etc. Such onus had not been discharged by the Assessing Officer to the slightest. Finding that there was no justification in making the addition, the Commissioner (Appeals) had directed deletion of such addition;

++ in appeal by the Department, the Tribunal after reappreciating the evidence on record has found as a matter of fact that the assessee had successfully proved to the hilt the genuineness of the transactions encompassing all its aspects. The Tribunal found that the assessee had duly discharged its onus, and, therefore, did not find any justification for reversing the order passed by the Commissioner (Appeals) and upheld the deletion of addition of Rs.29,77,726/-. Now, the Assessing Officer seeks to reopen such concluded issue by issuance of the impugned notice. The sole ground appears to be a passing remark made by the Commissioner (Appeals) in his order wherein the Commissioner (Appeals), while dealing with the contention raised on behalf of the petitioner that what is found recorded at the time of search cannot be treated as undisclosed income for the purpose of Chapter XIV-B and that section 158BA (3) clarifies this position, has agreed with the said contention that what is found recorded is to be excluded for the purpose of block assessment. He has further recorded that it is not that addition cannot be made in respect of recorded material, but such addition can be made only in the regular assessment under section 143(3)/144 and not in the block assessment under section 158BC. Thus, such remark of the Commissioner (Appeals) relating to what was found recorded at the time of the search namely, items which were excluded for the purpose of block assessment has been misconstrued by the Assessing Officer as a licence to reopen the assessment in respect of the very same items which were subject matter of the block assessment;

++ thus, it is apparent that the Assessing Officer seeks to reopen the assessment in relation to an item, viz., gold ornaments valued at Rs.29,77,726/- which was already subject matter of block assessment wherein such addition was made in the order under section 158BC of the Act and was subject matter of appeal before the Commissioner (Appeals) (and subsequently before the Tribunal). The said issue has been treated as being subject matter of block assessment and examined on merits by the Commissioner (Appeals) and has been deleted. Such addition was not deleted on the ground that the same was subject matter of regular assessment. Under the circumstances, once such issue has already been decided by the appellate authority, it is not open for the Assessing Officer to seek to reopen the assessment on the same grounds as this would tantamount to the Assessing Officer sitting in appeal over the order of the Commissioner (Appeals). Moreover, as has rightly been contended by the counsel for the petitioner, when the Commissioner (Appeals) as well as the Tribunal have examined the issue on merits and have held in favour of the petitioner, the Assessing Officer can have no reason to believe that income chargeable to tax has escaped assessment. For this reason also, the reopening of assessment under section 147 of the Act is without jurisdiction. Consequently, the notice under section 148 of the Act is rendered unsustainable.