Whether once AO has passed block assessment order, fresh notice u/s 148 can be issued to reopen assessment on basis of certain materials found post-search - YES: HC

THE issue before the Bench is - Whether once AO has passed block assessment order, a fresh notice u/s 148 can be issued to reopen assessment on the basis of certain materials found post-search. And the answer is YES.

Facts of the case

Assessee's returns were accepted and intimation u/s 143(1) was issued. A search and seizure operation was conducted u/s 132(1). Based on this search and seizure, block assessment order was made u/s 158BC. After passing block assessment, AO issued notice u/s 148 giving the reason

that certain income chargeable to tax had escaped assessment for the year 1999-2000 and which has come to his notice subsequently. Similar notices were issued for AY 2000-01 and 2001-02.

The reasons stated that subsequent to the search and seizure operation, post search enquiries were made and it was found that the gift transaction shown in the return of income were not regular transactions but purely arranged transactions. The bank account of three donors indicated that just before the date of issuing the gift cheque, there was no availability of fund and that one day before the issuance of the cheque, an amount was transferred in the said Account for the purpose of issuing the gift cheque. The donors were strangers and that none of the donors were related to the assessee's family. Thus, AO formed an opinion that the gift appeared to be not genuine and that the genuineness of the gift was required to be enquired into. It was opined that the assessee had understated the income within the meaning of Explanation 2(b) of Section 147.

Assessee contended that the reasons are based solely on post search enquiry. The material found through post search enquiry cannot constitute the “material” which could lead to form a “reason to believe” that any income chargeable to tax had escaped assessment. The material found on the basis of post search enquiry could only be considered in block assessment proceedings u/s 158BC. The Finance Act 2002 has amended Section 158 B(b) to clarify that block assessment of “undisclosed income” is based on the evidence found in the search and seizure operation and the material or information recovered during post search enquiry. The reasons so recorded were nothing but a change of opinion which cannot be permitted. Thus, the notice was patently illegal and was liable to be quashed.

Revenue contended that AO had wide powers to re-open the assessment if he had reasons to believe that the income chargeable to income tax had escaped assessment. If AO has reason to believe that there has been a non-disclosure of the primary fact, which could have a material bearing on the question that the assessment so made was under assessed, in that event it would be sufficient to initiate proceedings for reassessment. The assessment for the block period could be done on the basis of the books of account or document and such other material by which the information was available to the AO. Only “undisclosed income” found in proceedings under Section 132A of the Act could be utilised in block assessment under Chapter XIV B of the Act but such income, which had already been disclosed in the return but had escaped taxation could not be assessed in block proceedings and that the same could be done in proceeding initiated under Section 148 of the Act. Where the transaction itself on the basis of subsequent information was found to be a bogus transaction, the mere disclosure of the transaction at the time of original proceeding could not be said to be a disclosure of true and full facts. Thus, the notice was validly issued.

After hearing both the parties, the High Court held that,

++ the chapter XIV-B provides for an assessment of the undisclosed income unearthed as a result of search without affecting the regular assessment made or to be made. Search is the sine qua non for the block assessment. The special provisions are devised to operate in the distinct field of undisclosed income and are clearly in addition to the regular assessments covering the previous years falling in the block period. The special procedure of Chapter XIV-B is intended to provide a mode of assessment of the undisclosed income, which has been detected as a result of search. It is not intended to be substituted for regular assessment. Its scope and ambit is limited in that sense to materials unearthed during a search. It is in addition to the regular assessment already done or to be done. The assessment for the block period can only be done on the basis of 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 AO. Therefore, the income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as the result of search under section 132 or requisition under section 132A of the Act;

++ the Finance Act, 2002, while amending the definition of “undisclosed income” in Section 158B, specially included income based on entries in books of account or other documents which represents a false claim of any expense, deduction, or allowance under the Act. The Finance Act, 2002 further clarified that block assessment of “undisclosed income” is to based on the evidence found in the search and material or information gathered in post search enquiries made on the basis of evidence found in the search. The petitioner had disclosed the gift cheques in his return filed u/s 139. No notice was issued to the petitioner u/s 143(2) by AO and the returns were accepted by issuance of an intimation u/s 143(1). U/s 143, it is the discretion of AO to accept the return as it is or to proceed further with the assessment of income. Once AO decides to proceed, he has to issue notice u/s 143(2) of the Act within the prescribed period;

++ if AO had reasons to believe that any claim made in the return was inadmissible, he would serve a notice to the assessee under Section 143(2) of the Act directing him to produce evidence in support of his claim. This was not done as there was no material before AO except the return filed u/s 139. The material came into existence during post search enquiry, when it became known that the gift cheques shown in the return filed u/s 139, were not regular transactions but were purely arranged transactions to avoid income tax;

++ the income disclosed in the return filed u/s 139 could not become “undisclosed income”, merely because in post search enquiry, it came known that the gift cheques was a sham transaction. An amount which has already been included in the regular assessment cannot be assessed again in the course of block assessment. The gift cheques, having been disclosed in the return u/s 139 could not be re-assessed in block assessment proceedings u/s 158BC. The authorities were justified in not including the gift cheques in block assessment proceedings. The material found in post search enquiries could form a “reason to believe” that income had escaped assessment by issuance of a notice u/s 143(2). Since the period u/s 143(2) had expired, the AO having genuine reasons to believe that income had escaped assessment and consequently, could issue a notice u/s 148 of the Act. Such notices so issued were perfectly justified and was within the powers of AO. At the stage of issue of notice, the only question is, whether there was relevant material on which a reasonable person could form the requisite belief that income had escaped assessment. We are of the opinion that in the given circumstances, the Assessing Officer was justified in forming an opinion, that income had escaped assessment and was, therefore, justified in issuing notice u/s 148 of the Act