M.K. Chaturvedi, VP. - These four appeals by the assessees rotate around the identical issues. For the sake of convenience these are consolidated and disposed of by a common order.

2. A search action under section 132 of the Income-tax Act, 1961 (hereinafter called the Act) was conducted on 20-11-1995 at the office and residential premises of K.P. Irani Group. Appellants belong to this group. The business of the group was production of bread and its sale under the trade name "Wibs". Among other things, unaccounted cash purchases and sales were also found at the time of search. The assessee group offered the undisclosed income at Rs. 228.94 lakhs on account of profit on undisclosed sales of Rs. 829.75 lakhs and undisclosed purchases of Rs. 600.81 lakhs. The undisclosed purchases/expenses amounting to Rs. 600.81 lakhs were incurred by the assessee in cash.

3. As per the assessment order and details filed during the course of assessment proceedings, the total unrecorded expenses as per loose leaf papers were as under :—

4. During the course of assessment proceedings it was submitted that the above unrecorded expenses pertains to four manufacturing units, viz. (1) M/s Irani Foods & Investment Co. Pvt. Ltd., (2) M/s Western India Bakers’ Pvt. Ltd., (3) M/s Model Bakers & Confectioners and (4) M/s Hygienic Bakery.

5. It was further stated by the assessee that out of the total purchases of raw materials, it is estimated that 40% of such purchases were consumed by M/s. Irani Foods & Investment Co. Pvt. Ltd. and balance 60% were consumed by other three units almost equally.

6. On the basis of the aforesaid submission, Assessing Officer apportioned the unrecorded expenditure among the four following units as under :—

7. At the time of hearing Shri Dave produced before us reasons recorded for re-opening the block assessment. It was further stated that the re-opening was made pursuant to the audit objection. Assessing Officer had reason to believe that income chargeable to tax has escaped assessment for the block period inasmuch as assessee did not follow the prescription of section 40A(3) of the Act in regard to the expenditure. The entire cash expenditure was found to be not allowable in respect of the entire group in proportion among the four assessees as mentioned above.

8. On that basis Assessing Officer formed the belief that the income has escaped assessment for the block period as under :—

9. Consequently, by resorting to the provisions under section 147 of the Act, notices under section 148 were issued and the assessments were completed by making the additions of the aforesaid amounts. Being aggrieved of the order, assessee group preferred appeals before the Tribunal.

10. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Shri Dastur argued the following three issues :—

(1)Whether it is possible to invoke the reassessment proceedings in respect of a block assessment.

(2)Assuming that reassessment is possible in respect of block assessment, whether re-opening of the case in the facts and circumstances of the present case meets the requirement of law.

(3)Assuming that block assessment can be re-opened and requirements of law are meted with, whether in the facts and circumstances of the present case the disallowance can be made under section 40A(3) of the Act.

11. Shri Dave, learned CIT (DR) argued the first issue. In regard to the second and third issues he relied on the orders of the Assessing Officer.

12. We have considered the various precedents appropos the invocation of the reassessment proceedings. We have also perused the scheme of block assessment. Section 147 authorizes an Assessing Officer to assess or reassess income chargeable to tax, if he has any reason to believe that the said income for any assessment year has escaped assessment. The expression "escaped assessment" clearly connotes a very basic postulate that the income for a particular assessment year went un-noticed by the Assessing Officer and because of it not being noticed by him for any reason, it escaped assessment. The meaning of the expression "escaped assessment" is so simple and straight that it does not leave any one in doubt that power under section 147 could be invoked by the Assessing Officer if it is a case of escape of assessment of income for a particular year.

13. The Finance Act, 1995, introduced a scheme of assessment of undisclosed income determined as a result of search. Under this scheme, the undisclosed income detected as a result of a search initiated after 30th June, 1995, is assessed separately as the income of a block period. As defined under section 158B(a) of the Act, block period means the period comprising previous years relevant to ten assessment years (the period of ten assessment years was reduced to six assessment years by the Finance Act, 2001, with effect from 1-6-2000) preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A and also includes the period up to the date of commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made.

14. Chapter XIV-B, consisting of sections 158B to 158BH was inserted by the Finance Act, 1995, with effect from 1-7-1995. The heading of the Chapter is "Special Procedure for Assessment of Search Cases". Section 158BA deals with assessment of undisclosed income as a result of search. This section opens with a non obstante clause and thus enacts provisions of overriding nature so as to prevail over any other provisions of the Act. The assessed undisclosed income is assessed at the higher rate of 60% under section 113 of the Act.

15. Under section 147, Assessing Officer has bestowed with power to assess or re-assess the escaped income of the assessee relating to any assessment year. Assessment year necessarily contemplates a previous year. In the case of block assessment, there is no previous year. In proviso to section 147, there is reference to assessment year but there is no reference to Chapter XIV-B. In section 158BC(b) there is no reference to section 147. In the context of block assessment, section 151 cannot be applied. This section deals with the sanction for issue of notice. Proviso to section 151 stipulates that after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the CCIT or CIT satisfied on the reasons recorded by the Assessing Officer that it is a fit case for the issue of such notice. Order of block assessment is required to be passed with the approval of CIT. As such, it is not open for the Assessing Officer to re-open the assessment. Section 149 speaks about the time limit for notice. No notice under section 148 can be issued after the expiry of the time stipulated in the section. This section cannot be applied in relation to block period. Similarly, time limit for completion of assessment and reassessment, as mentioned under section 153, cannot be fitted with the scheme of Chapter XIV-B. These provisions cannot be applied even mutatis mutandis. Section 158BC speaks about the procedure of block assessment. It is stipulated under sub-section (b) of section 158BC that Assessing Officer shall proceed to determine the undisclosed income of the block period laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, shall, so far as may be, apply. There is no mention of section 147. In the Circular reproduced at Para 17, it has been mentioned that Assessing Officer shall not be required to issue any notice under section 148 for the purposes of proceedings under Chapter XIV-B.

16. Adverting to the cases relied on by the learned DR, we find that these are not relevant in deciding the issue. We discuss briefly the ratio laid down in these cases. In the case of Dy. CIT v. Shaw Wallace & Co. Ltd. [2001] 248 ITR 81¹ (Cal.), it was held that regular assessment of disclosed income can be made in addition to assessment under Chapter XIV-B. In the case of Jayalakshmi Leasing Co., In re [1997] 228 ITR (AT) 1, it was held that Settlement Commission has jurisdiction to admit and deal with application in respect of cases arising under Chapter XIV-B. In the case of Simplex Concrete Piles (India) (P.) Ltd. v. Dy. CIT [2002] 255 ITR 49 ² (Cal.), while deciding the validity of notice under section 148, the Court has held that it is not necessary to come to the conclusion that reassessment is valid. It is only necessary to find out whether there are prima facie reasons on record to re-open the case. In the case of Assam Bengal Carriers Ltd.…Applicant; v. Commissioner Of Income-Tax, Ner…. [1999] 239 ITR 862 (Gauhati), it was held that when a legal fiction is created for an obvious purpose, full effect of it is to be given. In the case of CIT v. Kishoresinh Kalyansinh Solanki [1960] 39 ITR 522 (Bom.), order of revision was passed within two years. ITAT set aside this order with direction to pass fresh order. Second order was passed beyond two years. The Court held that rule of limitation did not reach the second order. In the case of Onkarmal Meghraj v. Commissioner Of Income-Tax, Bombay City I, Bombay* [1960] 38 ITR 369 (Bom.), the Court was concerned with the limitation of reassessment proceedings. As such, in our opinion, these decisions are not relevant for deciding the present issue.

17. It is a tenet of law that general things will not derogate from special things. This principle is canonized in the dictum :- "Generalia specialibus non derogant". Chapter XIV-B undoubtedly is a special provision. It, therefore, prevails over the general provision. Rules applicable to the assessment of undisclosed income found during the search cases are contained under this provision. The order of assessment for the block period is to be passed within one year from the end of the month in which the last of the search warrant was executed. The assessment order for the block period is to be passed by the Assessing Officer, not below the rank of ACIT, with the prior approval of the CIT. In computing the undisclosed income for the block period, the provisions of sections 68, 69, 69A, 69B and 69C apply mutatis mutandis. The term "financial year" mentioned in these sections means the relevant financial years falling within the block period. The procedure for making block assessment is laid down in CBDT Circular No. 717 dated 14th August, 1995 as under :—

"(e) Procedure for making block assessment : (i ) The Assessing Officer shall serve a notice on such person requiring him to furnish within such time, not being less than 15 days, as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of section 142 setting forth his total income including undisclosed income for the block period. The officer shall proceed to determine the undisclosed income of the block period and the provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 shall apply accordingly. The Assessing Officer shall not be required to issue any notice under section 148 for the purpose of proceedings under this Chapter. Though the block period can be extended up to ten years in a case where the assessee has not disclosed undisclosed income in any one or more of the previous years in the block periods and the Assessing Officer also does not find any material indicating undisclosed income in any one or more of the previous years comprised in the block period, it will not be necessary to do the exercise of computing the undisclosed income for the relevant years and the exercise may be limited to the years in respect of which the undisclosed income has been found. On the determination of the undisclosed income of the block period, the Assessing Officer shall issue an order of assessment and determine the demand payable by him on the basis of such assessment. The assets seized in the course of search or taken possession of as a result of requisition under section 132A shall be retained to the extent necessary and shall be dealt with in the manner laid down under section 132B."

18. Searches conducted by the Income-tax Department are important means for unearthing the black money. It was felt that under the old system lot of time was required to relate the undisclosed income to the different years. It was possible for the tax evaders to divert the focus to procedural and legal issues and to invent new evidence to explain the undisclosed income. Besides it was also very tiresome for the assessee to continue with the legal battle. The Department used to keep seized assets for a long time for want of final order. In order to avoid prejudice and hardship to the assessee and for the sake of better administration of justice. The procedure for the search cases was streamlined. Statute prescribed time frame for the completion of assessment. So, once the assessment becomes final, let Damocle’s sword be not hang over the head of the assessee for all times.

19. The primary object of the Government is to secure justice. "Interest republica ut sit finis litum" said Lord Coke long back; it is just as true today. The expression loses its terseness in translation, but what Lord Coke said, in modern language was : "it concerns the State that law suits be not protracted, otherwise great oppression might be done, under the colour and pretence of law".

20. Justice delayed is justice denied. Legislature felt the need for the quick dispensation of justice, so Chapter XIV-B was enacted. The litigant is not interested in ponderous procedure. He is not interested in allegantia juris. He is only interested in results. Keeping all this in mind, the special provision was enacted to deal with a case concerning the search operation.

21. Section 158BH prescribes that "save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter". Saving clauses are introduced into Acts to safeguard rights which, but for the savings would be lost and these clauses are seldom used to construe the Act. Saving repugnant to the enactment would be void. When two interpretations are sought to be put upon a provision, that which fits the description which the Legislature has chosen is to be applied. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve as has been laid down. The provision wholly un-applicable cannot be applied in the guise of a saving provision.

22. Chapter XIV-B enacts a special procedure to deal with the search cases. The assessment pursuant to search cases cannot be equated with the ordinary assessment. The purpose of section 147 is to bring to tax the escaped income. Section 147 is a device to detect the escaped income under the normal assessment procedure. Normal assessment is being done on the basis of material and evidence available on record. In the normal assessment procedure, Assessing Officer sees the facts through the records. In the search cases facts get exposed directly. If you go to a Doctor, he will first examine you through his stethoscope. If doubt persists, he will advise X-ray, etc. But once Surgeon cut open the body, he can see the things directly. Likewise, in the search cases, when things get exposed to the revenue official, there is nothing further left to see. Chances of escapement are not there. Escapement is possible so long the object is hidden from the eyes. Once you see to it, where is the question of escapement ? Probably due to these reasons only Legislature, in its wisdom, not put the block assessments within the ken of reassessment proceedings.

23. The policy of law is that there must be a point of finality in all legal proceedings. State issues should not be re-activated beyond a particular stage. Lapse of time must induce repose in and set at rest judicial controversies. The effect of re-opening an assessment is to vacate or set aside the original order of assessment and to substitute in its place the order made on reassessment. There is no indication in Chapter XIV-B that assessments completed under this Chapter could be reopened. When Legislature prescribes a particular procedure, it is incumbent on the Assessing Officer to follow that procedure only. He cannot travel beyond that. It is abundantly clear from the perusal of Chapter XIV-B and the scheme of reassessment that section 147 of the Act cannot be applied in the context of block assessment. We, therefore, decide this issue in favour of the assessee and against the revenue.

24. Coming now to the next aspect that whether re-opening meets the requirement of law or not, we have considered the various details filed before us. Admittedly notice was issued beyond four years. As per proviso to section 147 of the Act, notice beyond four years can be issued only if the assessee fails to disclose wholly and truly all material facts necessary for his assessment, for that assessment year. The assessee disclosed all the material facts. There is no dispute on this point. In the case of Kaira District Co-operative Milk Producers’ Union Ltd. v. Asstt. CIT [1995] 216 ITR 371 (Guj.), it was held that a notice for re-opening of completed assessment after the expiry of four years from the end of the relevant assessment year can be issued only in a case where the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose material facts necessary for assessment. In the present case we find that the assessee did disclose all the material facts necessary for assessment.

25. Assuming that re-opening is possible, Assessing Officer is required to issue the proper notice. Assessment cannot be re-opened without the issuance of proper notice. In the present case we find that Assessing Officer did issue only one notice for all the years. As such, there was no proper notice and the assessment made pursuant to that notice is bad in law.

26. We have also noticed that the case was reopened on the basis of audit party objection. In the present case, apart from the information furnished by the audit party, Assessing Officer did not have any other information for re-opening the assessment. The opinion expressed by the audit party would go to show that they had pointed out to the Assessing Officer that he failed to apply the provisions of section 40A(3) of the Act. This would amount to pointing out the law and the interpretation of the provisions contained in section 40A(3), which is clearly barred in view of the decision of the Apex Court rendered in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996¹ (SC).

27. In view of this we hold that re-opening of assessment was not in accordance with the law.

28. Coming now to the last issue that whether disallowance under section 40A(3) was possible in the facts of the present case, we have noted that the assessment was made on the basis of undisclosed investment. Where the basis is undisclosed investment, one cannot apply the prescription of section 40A(3) of the Act. In the case of Commissioner Of Income-Tax, Orissa v. Aloo Supply Co. [1980] 121 ITR 680 (Ori.), the Hon’ble High Court has held that if an assessee makes payments at different times during the day and he has no idea that he has to pay to the same person on more than one occasion, he cannot be subjected to the statutory provision contained in section 40A(3) of the Act, unless any one payment is above the prescribed limit. The statutory limit under section 40A(3) of the Act applies to payment made to a party at a time and not to the aggregate of the payments made to a party in the course of the day as recorded in the cash book. In the present case there is no finding that the assessee did make any payment exceeding the prescribed statutory limit contained in section 40A(3) of the Act. As such, it cannot be said that the assessee violated the provision under section 40A(3) of the Act.

29. In the case of Hynoup Food & Oil Industries (P.) Ltd. v. Asstt. CIT [1994] 48 ITD 202 (Ahd.), it was held that if an overall estimate of income has been made, there would not be any scope for applying the prescription of section 40A(3) of the Act.When a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. If it is not possible to find out that how the violation of the provision was done, addition cannot be made on the basis of inference and surmises. In the present case it is not known that at what point of time and how assessee violated the provisions of section 40A(3) of the Act. As such, no addition on this count is warranted. We decide this issue in favour of the assessee and against the revenue.

30. In the result, appeals of the assessees stand allowed.

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