2014 (4) TMI 33 - SC - Income Tax

Assessing officer must record written satisfaction before Section 158BD proceedings for undisclosed income of third parties

Commissioner of Income Tax – III Versus M/s. Calcutta Knitwears, Ludhiana

The SC held that before initiating proceedings under Section 158BD for assessment of undisclosed income belonging to persons other than the searched ... Block Assessment - Requirement to record the satisfaction – Notice to be issued u/s 158BD of the Act - Notice for undisclosed income of any other person - At what stage of the proceedings under Chapter XIV-B does the assessing authority require to record his satisfaction for issuing a notice u/s 158BD of the Act - Held that:- The provisions of section 158BD is a machinery provision and inserted in the statute book for the purpose of carrying out assessments of a person other than the searched person under Sections 132 or 132A of the Act - Under Section 158BD of the Act, if an officer is satisfied that there exists any undisclosed income which may belong to a other person other than the searched person u/s 132 or 132A of the Act, after recording such satisfaction, may transmit the records/documents/chits/papers etc. to the assessing officer having jurisdiction over such other person - Relying upon In Prakash Nath Khanna v. C.I.T. [2004 (2) TMI 3 - SUPREME COURT] - the language employed in a statute is the determinative factor of the legislative intent - The legislature is presumed to have made no mistake - The presumption is that it intended to say what it has said - Assuming there is a defect or an omission in the words used by the legislature, the Court cannot correct or make up the deficiency - Where the legislative intent is clear from the language, the Court should give effect to it. Before initiating proceedings u/s 158BD of the Act, the AO who has initiated proceedings for completion of the assessments u/s 158BC of the Act should be satisfied that there is an undisclosed income which has been traced out when a person was searched under Section 132 or the books of accounts were requisitioned under Section 132A of the Act - This is in contrast to the provisions of Section 148 of the Act where recording of reasons in writing are a sine qua non – u/s 158BD 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. For the purpose of Section 158BD of the Act 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 assessing officer had not recorded the satisfaction note as required u/s 158BD of the Act - thus, the Tribunal and the High Court were justified in setting aside the orders of assessment and the orders passed by the first appellate authority –the matter is remitted back to the HC for consideration - Decided against Revenue. The core legal question considered by the Court is the stage at which the assessing authority must record satisfaction for issuing a notice under Section 158BD of the Income Tax Act, 1961 ('the Act'). Specifically, the Court examined whether the satisfaction note required under Section 158BD must be recorded before or during the assessment proceedings under Section 158BC of the Act relating to the searched person, or whether it may be recorded after the completion of such proceedings.The case arose from a search operation under Section 132 of the Act on certain premises, where incriminating documents related to the assessee firm were found. The assessing officer completed block assessments under Section 158BC for the searched person but later recorded satisfaction under Section 158BD that certain undisclosed income pertained to another person. The assessing officer then transmitted those documents to the jurisdictional assessing officer of the other person and issued a notice under Section 158BD. The assessee challenged the validity of the notice on grounds that the satisfaction note was recorded after completion of the block assessment proceedings and that the notice was beyond the limitation period under Section 158BE.The Tribunal and High Court held that the satisfaction note must be recorded before completion of the assessment proceedings under Section 158BC and that the notice issued after completion was invalid. The Revenue challenged this view before the Supreme Court.The Court analyzed the relevant provisions of Chapter XIV-B of the Act, particularly Sections 158BC, 158BD, and 158BE. Section 158BC provides the procedure for block assessments in cases of search or requisition under Sections 132/132A. Section 158BD allows the assessing officer, upon satisfaction that undisclosed income belongs to a person other than the searched person, to transmit seized documents to the jurisdictional officer of such other person and proceed with assessment under Section 158BC. Section 158BE prescribes limitation periods for completion of assessments under this Chapter.The Court emphasized the principle of strict literal interpretation of taxing statutes, citing authoritative precedents from domestic and foreign jurisdictions. It reiterated that courts must adhere to the clear language of the statute and not add or subtract words or imply conditions not found in the text. The Court noted that while charging provisions are strictly construed, machinery provisions (such as those prescribing procedures) are construed more liberally to effectuate the statute's purpose.Applying these principles, the Court observed that Section 158BD requires the assessing officer to be satisfied that undisclosed income belongs to another person and then transmit the documents to the officer having jurisdiction over that person. The statute does not specify the precise stage at which this satisfaction must be recorded, nor does it impose any embargo on recording satisfaction after completion of block assessment proceedings under Section 158BC of the searched person.The Court rejected the interpretation of the Tribunal and High Court which read a limitation on the timing of recording satisfaction into Section 158BD by relying on Section 158BE(2)(b). The Court held that Section 158BE(2)(b) only prescribes the limitation period for completion of assessments under Section 158BD but does not restrict when the satisfaction note must be recorded. The Court found that the satisfaction note may be recorded at any of the following stages: (a) at or along with initiation of proceedings under Section 158BC against the searched person; (b) during the assessment proceedings under Section 158BC; or (c) immediately after completion of such proceedings.Regarding the facts of the lead case, the assessing officer recorded satisfaction after completion of block assessment proceedings against the searched person but before issuing notice under Section 158BD to the other person. The Court held this was permissible and consistent with the statute's language and purpose. It noted that requiring satisfaction to be recorded before completion of proceedings under Section 158BC would unnecessarily restrict the assessing officer's ability to assess undisclosed income belonging to other persons and frustrate the object of Chapter XIV-B, which is to provide for efficient and expeditious completion of search assessments.The Court underscored that the satisfaction note is a sine qua non for initiating proceedings under Section 158BD and must be recorded before transmitting records to the other assessing officer. However, the timing is flexible and not confined to any particular stage before completion of proceedings under Section 158BC of the searched person.The Court also observed that in some appeals, the assessing officer had failed to record the satisfaction note altogether, justifying the setting aside of assessments by the Tribunal and High Court in those cases. The Court remanded the matters to the High Courts for fresh consideration in light of its interpretation of Section 158BD.Significant holdings and principles established include:'The language of the provision is clear and unambiguous. The legislature 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.''For the purpose of Section 158BD of the Act 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 the Act; (b) along with the assessment proceedings under Section 158BC of the Act; and (c) immediately after the assessment proceedings are completed under Section 158BC of the Act of the searched person.''Section 158BE(2)(b) 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... The said section does neither provides for nor imposes any restrictions or conditions on the period of limitation for preparation the satisfaction note under Section 158BD and consequent issuance of notice to the other person.''A taxing statute should be strictly construed; common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less.''Wherever the intention to impose liability is clear, the Courts ought not be hesitant in espousing a commonsense interpretation to the machinery provisions so that the charge does not fail.'In conclusion, the Court clarified that the assessing officer's satisfaction under Section 158BD may be recorded at any stage before or immediately after completion of assessment proceedings under Section 158BC of the searched person, and that the limitation period under Section 158BE does not restrict the timing of recording such satisfaction. The Court remanded the matters for fresh adjudication consistent with these principles.