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Commissioner Of Income-Tax v. Indore Constructions P. Ltd.

Madhya Pradesh High Court
Mar 14, 2005
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Legal Opinion Summary — A.M. Sapre, J.

Factual and Procedural Background

This is an appeal under section 260A of the Income-tax Act, 1961, brought by the Commissioner of Income-tax against an order dated December 29, 1998 in IT(SS) A No. 81.Ind/96 for the assessment year covering September 20, 1986 to November 20, 1995.

Procedurally, the appeal was admitted on March 16, 2000 by a Division Bench which ordered notice to the other side. The High Court observed that under section 260A it was obligatory to formulate substantial questions of law and therefore framed four questions of law for determination.

On the facts: the respondent (assessee) is a private limited company engaged in construction and sale of flats, controlled by its director Mr. R.R. Maheshwari. On November 21, 1995 a search under section 132 was conducted at premises of Mr. R.R. Maheshwari and Smt. Lalita Devi. Incriminating documents, including some pertaining to the assessee's business, were seized during that search. Pursuant to these seizures, assessment proceedings under section 158BC (block assessment provisions of Chapter XIV-B) were initiated against the assessee. The Assessing Officer passed an assessment order dated November 29, 1996. The assessee appealed to the Tribunal, raising a preliminary objection that no search warrant had been issued in the name of the assessee-company and that therefore the Assessing Officer lacked jurisdiction to make a block assessment under Chapter XIV-B. The Tribunal upheld the preliminary objection, set aside the assessment order and allowed the assessee's appeal. The Commissioner has challenged that Tribunal order in this appeal.

Legal Issues Presented

  1. Whether the Tribunal was justified on the facts in holding that no assessment under Chapter XIV-B could be made by the Assessing Officer for want of any authorization of search warrant under section 132 of the Act in relation to the premises of the assessee?
  2. In the absence of any search warrant under section 132, whether the Assessing Officer had the jurisdiction to make any assessment under Chapter XIV-B of the assessee for the block period in question?
  3. Whether the Assessing Officer had jurisdiction to proceed against the assessee by taking recourse to the provisions of section 158BD for making assessment under Chapter XIV-B even in the absence of search warrant under section 132 issued in respect of the assessee's premises?
  4. Whether the Tribunal was justified in allowing the assessee to challenge the assessment order on a preliminary ground having once submitted to the jurisdiction of the Assessing Officer by not raising any objection before him?

Arguments of the Parties

Appellant's (Commissioner of Income-tax) Arguments

  • The appeal challenges the Tribunal's order setting aside the assessment. The appellant relied on the statutory scheme, particularly section 158BD read with section 2(31), to contend that the Assessing Officer had jurisdiction to proceed against the assessee-company even though the search authorization may have been in the name of an individual (the director).
  • The appellant submitted that recovery of incriminating documents relating to the assessee's business from the director's premises was sufficient to attract section 158BD and thereby empower the Assessing Officer to proceed under section 158BC against the company.
  • The appellant argued that the Tribunal erred in relying on a statement of a Minister; instead the Tribunal should have confined itself to a statutory interpretation of section 158BD and section 2(31).

Respondent's (Assessee) Arguments

  • The assessee's preliminary objection was that no search warrant under section 132 was issued in the name of the assessee-company; therefore the Assessing Officer lacked jurisdiction to make a block assessment under section 158BC.
  • It was contended that a survey under section 133A cannot empower the Assessing Officer to proceed under section 158BC against an assessee.
  • The assessee urged that proceedings under Chapter XIV-B are of a special nature and must be strictly confined; because the raid and the thrust were against the director and his premises, the separate legal entity (the company) could not be made to suffer.
  • The assessee relied on authorities — notably CIT v. Kurban Hussain Ibrqhamji Mithiborwala and Upper Doab Sugar Mills Ltd. v. CIT — to support upholding the impugned order in its favour.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Kurban Hussain Ibrqhamji Mithiborwala, [1971] 82 ITR 821 (SC) Relied upon by counsel for the assessee to support upholding the impugned order (i.e., to argue against jurisdiction in the circumstances). The court found the case relied upon by the assessee distinguishable on its facts and declined to follow it for deciding the present appeal; the court did not deal with the authority in detail.
Upper Doab Sugar Mills Ltd. v. CIT, [2003] 263 ITR 97 (All) (and cited [2001] 248 ITR 356) Relied upon by counsel for the assessee in support of maintaining the Tribunal's order. The court held this authority to be distinguishable on the facts of the present case and therefore did not accept the assessee's reliance on it; the court did not examine these authorities in detail.

Court's Reasoning and Analysis

Procedural requirement under section 260A: The court first observed that under sub-sections (3) and (4) of section 260A it was obligatory for the High Court to formulate substantial questions of law and to hear the appeal only on those questions. Because that formulation had not been done when the appeal was admitted, the court explicitly framed four substantial questions of law and proceeded to hear the parties on those questions; the court found no prejudice to the parties because arguments had been heard on the merits of such questions.

Statutory interpretation — sections 158BD and 2(31): The court then examined the statutory provisions relevant to jurisdiction. It quoted and relied upon the text of section 158BD and the definition of "person" in section 2(31). The court noted that "person" expressly includes a company; therefore a private limited company falls within the scope of "any person" in section 158BD.

Application of section 158BD to the facts: Section 158BD empowers the Assessing Officer, when satisfied that undisclosed income belongs to any person other than the person in respect of whom the search was carried out (or whose books/ assets were requisitioned), to hand over seized books/documents/assets to the Assessing Officer having jurisdiction over that other person, who shall proceed under section 158BC. On the facts, incriminating documents relating to the assessee's business were seized from the director's premises; the court held that this was sufficient to attract section 158BD and to confer jurisdiction to proceed against the company even though the search warrant may have been in the name of the director and not in the name of the company.

On the Tribunal's reliance and on the Assessing Officer's statements: The court held that the Tribunal committed an error of law by placing reliance on a statement of the Minister instead of focusing on the statutory provisions (section 158BD read with section 2(31)). The court also observed that any incorrect recital by the Assessing Officer that the raid was on the assessee's premises was of no real consequence once the statutory jurisdiction under section 158BD is established by recovery of documents relating to the assessee from the director's premises.

Entity separateness argument: The court rejected the assessee's contention that, because the company is a separate legal entity and the raid was on the director's premises, the company could not be proceeded against. The court concluded that the case falls squarely within section 158BD and that the Assessing Officer thereby acquired jurisdiction to proceed against the company.

Precedents relied upon by the assessee: The court noted the authorities cited by the assessee but considered them distinguishable on facts and therefore declined to follow them for deciding the present issue.

Disposal and remand: The court concluded that the Tribunal's view on lack of jurisdiction was incorrect, allowed the appeal, set aside the impugned Tribunal order and held that the Assessing Officer was justified in proceeding against the assessee under Chapter XIV-B (section 158BC). The court remanded the matter to the Tribunal to decide all other issues raised on the merits by the assessee within three months from the date of the order.

Holding and Implications

Core Holding: The appeal is ALLOWED and the impugned order of the Tribunal is set aside. The High Court held that the Assessing Officer was justified in proceeding against the assessee-company under Chapter XIV-B (i.e., under section 158BC) by relying on section 158BD read with section 2(31).

Immediate consequences and directions:

  • The Tribunal's finding that the Assessing Officer lacked jurisdiction was overturned.
  • The matter is remitted to the Tribunal to decide all other issues raised by the assessee on the merits within three months from the date of the High Court's order.
  • The court ordered no costs.

Broader implications: The opinion grounds its decision on the statutory scheme (section 158BD read with section 2(31)). The court did not articulate any broader precedent beyond the application of those provisions to the facts; it found earlier authorities relied upon by the assessee distinguishable and therefore did not adopt them for the present decision.

Show all summary ...

A.M Sapre, J.:— This is an appeal filed under section 260A of the Income-tax Act, 1961, by the Commissioner of Income-tax against an order dated December 29, 1998 in IT(SS) A No. 81.Ind/96 for the assessment year September 20, 1986, to November 20, 1995.

2. On March 16, 2000, this appeal came up for hearing on the question of admission before the Division Bench of this court (comprising R.D Vyas J and Shambhoo Singh J.) when following order was passed:—

“16-3-2000

Shri Mohan Pathak, LC for the appellant. Heard on admission.

Admit.

Issue notice to the other side on payment of P.F within a week.”

3. Section 260A of the Income-tax Act is akin to section 100 of the Civil Procedure Code. Sub-section (3) of section 260A provides rather makes it obligatory upon the High Court to formulate a substantial question of law for deciding the appeal. Sub-section (4) then provides that the appeal shall be heard only on the question so formulated. Any appeal, whether under section 100 of the Civil Procedure Code or under section 260A of the Act cannot be heard much less decided without there being a specific question of law formulated by the court for decision. In other words, the jurisdiction of this court to hear and decide the appeal filed under section 260A ibid depends upon the formulation of substantial question of law. Since this exercise was not done on the date when the appeal was admitted for final hearing and hence, we formulate the following substantial questions of law for our decision. In our opinion, the questions of law do arise out of the impugned order of the Tribunal impugned in this appeal. Indeed, the arguments were heard only on these questions at length and, hence, there is no real prejudice which is likely to be caused to the parties and in particular to the respondent if the mandate of law is complied with though at a later stage but after affording an opportunity to argue on the merits of these questions. Indeed, on being pointed out the aforesaid infirmity in the order dated March 16, 2000, it was fairly conceded by the counsel that questions of law have got to be framed to make the appeal in conformity with the requirement of section 260A of the Act. Both learned counsel then addressed the court on the questions of law arising out of the case on the merits thereby causing no real prejudice to either in framing the questions at a later stage:

“1. Whether the Tribunal was justified on the facts of this case in holding that no assessment under Chapter XIV-B could be made by the Assessing Officer for want of any authorization of search warrant under section 132 of the Act in relation to the premises of the asses-see?

2. In the absence of any search warrant under section 132 ibid whether the Assessing Officer had the jurisdiction to make any assessment under Chapter XTV-B of the assessee for the block period in question?

3. Whether, the Assessing Officer had the jurisdiction to proceed against the assessee by taking recourse to the provisions of section 158BD for making assessment under Chapter XIV-B even in the absence of search warrant under section 132 of the Act issued in respect of the assessee's premises?

4. Whether the Tribunal was justified in allowing the assessee to challenge the assessment order on a preliminary ground having once submitted to the jurisdiction of the Assessing Officer by not raising any objection before him?”

4. The assessee is a private limited company engaged in the business of construction and sale of residential flats. One Mr. R.R Maheshwari is the director of the assessee-company. In fact, the assessee being a private limited company, is fully controlled by Mr. R.R Maheshwari—being its promoter and rather controlling director. Mr. Maheshwari is also having other business/professional activity in addition to the construction business, such as tax consultant, etc. On November 21, 1995, a search operation as contemplated under section 132 ibid was carried out in the premises of Mr. R.R Maheshwari and Smt. Lalita Devi by the income-tax sleuths. It is in this search operation, several incriminating documents including some documents relating to the assessee's business were seized.

5. It is this raid operation, which gave rise to initiating assessment proceeding against the assessee under section 158BC of the Act. The assessee submitted to the jurisdiction of the Assessing Officer, and eventually an order of assessment dated November 29, 1996 (pages 22 to 31 of PB) came to be passed on the merits. It is against this order of assessment; the assessee (respondent) filed an appeal to the Tribunal out of which this appeal arises. In the appeal, before the Tribunal, the assessee raised a preliminary ground contending inter alia that since there was no warrant of search issued against the assessee under section 132 ibid and hence, the Assessing Officer had no jurisdiction to proceed against the assessee for making a block assessment under Chapter XIV-B, i.e, under section 158BC. In other words, the preliminary objection was that in order to proceed to make block assessment under section 158BC there has to be an authorization as required under section 132 ibid and since in this case there was no authorization so far as the assessee is concerned, but it was in the name of Mr./Mrs. Maheshwari, no assessment under section 158BC could have been made of the assessee. It was also contended that the survey conducted under section 133A cannot empower the Assessing Officer to proceed under section 158BC against an assessee. In the alternative, the assessee also raised other grounds on the merits in challenging the assessment order.

6. The Tribunal by the impugned order upheld the preliminary ground urged by the assessee and while allowing the appeal filed by the assessee struck down the assessment order dated November 29, 1996, referred to supra. In this view, the Tribunal did not consider it necessary to examine the other points raised on the merits by the assessee. It is against this order of the Tribunal, the Commissioner of Income-tax has come up in appeal.

7. Heard Shri R.L Jain, learned senior counsel with Ku. V. Mandlik, learned counsel for the appellant, and Shri G.M Chafekar, learned senior counsel with Shri Sarda, learned counsel for the respondent.

8. Having heard learned counsel for the parties and having perused the record of the case, we are inclined to allow the appeal and while setting aside the impugned order remand the appeal to the Tribunal for deciding the same on the merits.

9. Section 158BD and section 2(31) which alone are relevant for deciding the question involved in this appeal read as under:

“158BD.— 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 132 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 158BC against such other person and the provisions of this Chapter shall apply accordingly.

2(31) ‘person’ includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceeding sub-clauses.

Explanation.— For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;”

10. A mere perusal of the aforequoted sections would show that “any person” defined in section 158BD in this case would be the “assessee” for the purpose of initiating action under section 158BC ibid in this case. One cannot dispute that person includes “company” and hence the assessee being a private limited company would come within the mischief of any person as defined in section 158BD. In this view of the matter, assuming that the search warrant was issued in the name of Mr. R.R Maheshwari/Mrs. Lilawati Maheshwari i.e, the director of the assessee-company under section 132 ibid, even then, by virtue of powers conferred under section 158BD, the Assessing Officer had jurisdiction to proceed against the assessee under section 158BC of the Act. It is for the reason that certain incriminating documents had been seized in relation to the business of the assessee in the premises of Mr. R.R Maheshwari who happened to be a director of the assessee-company. In our opinion, it is enough to attract the rigour of section 158BD for proceeding against the assessee. In such case, no separate authorization as contemplated under section 132 of the Income-tax Act for this assessee i.e, company is required. Indeed, the very object of section 158BD is to give jurisdiction to the Assessing Officer to proceed against any person (assessee) other than the person against whom a search warrant is issued under section 132 or section 132A ibid provided any undisclosed income belonging to such persons as in this case the assessee is recovered in the search operation.

11. In our opinion, the Tribunal committed an error of law in placing reliance on some statement of the Minister in deciding the case in favour of the assessee. In fact, the Tribunal should have concentrated and confined its discussion on section 158BD read with section 2(31) for deciding the issue involved. In our opinion, section 158BD read with section 2(31) of the Act is the complete answer to the question involved in this appeal against the assessee and in favour of the Commissioner on the facts found by the lower authorities.

12. In view of the aforesaid discussion, we cannot accept the submission of learned counsel for the assessee when he urged that warrant of search was required to be issued under section 132 of the Act for searching the place of the assessee and secondly, no assessment under section 158BC could be made for want of authorization.

13. Much emphasis was being laid by the parties on what has been observed by the Assessing Officer in his order. In our considered opinion, nothing really turns on what is mentioned by the Assessing Officer in his assessment order. It is hardly of any consequence even if the Assessing Officer had wrongly mentioned in his order that raid had taken place in the premises of the assessee. Once this court holds that even without there being any raid/search in the premises of the assessee, the Assessing Officer had the jurisdiction to proceed under section 158BD then in such event, it is of no significance whether search has taken place in the assessee's premises or not. No serious attempt was made by learned counsel for the assessee to contend that no case whatsoever is made out for invoking even section 158BD against the assessee. We have already held on the facts supra that the Assessing Officer had acquired the jurisdiction to proceed under section 158BD against the assessee because of recovery of some documents in relation to the assessee's business in the raid that was carried out in the premises of the assessee's director—Mr. R.R Maheshwari.

14. Learned counsel for the assessee vehemently contended that the proceedings for assessment under Chapter XIV-B being of a special nature, the issue has to be dealt with strictly and since the whole thrust was against the director and his business/residential premises, the assessee cannot be made to suffer it being a separate legal entity. We do not agree. In our view, this submission has no merit. At the cost of repetition, we may observe that the case falls in section 158BD of the Act and hence, nothing survives.

15. Learned counsel for the assessee placing reliance on the cases reported in CIT v. Kurban Hussain Ibrqhamji Mithiborwala, [1971] 82 ITR 821 (SC); Upper Doab Sugar Mills Ltd. v. CIT, [2003] 263 ITR 97 (All) and [2001] 248 ITR 356 (sic) contended that the impugned order be upheld. We find no merit in this submission. In our opinion, the cases relied upon by learned counsel for the assessee are distinguishable on the facts of this case and hence, we do not wish to deal with them in detail. As held supra, we have in this case relied on section 158BD read with section 2(31) for deciding the case against the assessee.

16. In view of the aforesaid discussion, we allow the appeal and set aside the impugned order. We hold that the Assessing Officer was justified in proceeding against the assessee under Chapter XIV-B i.e, under section 158BC for making block assessment of the period in question. In view of this finding returned by us, we need not discuss any other question framed by us which stands answered. However, in the light of finding so returned by us, the Tribunal is now directed to decide all other issues/questions that may have been raised by the assessee on the merits in their appeal on the facts. Let the same be decided within three months from the date of this order strictly in accordance with law. No costs.

17. C.C within a week.