The Division Bench hearing this case while camping at Srinagar, had made a reference to the Honble President, Income Tax Appellate Tribunal, under section 253(3) of the Income Tax Act, 1961 (the Act) to constitute a Special Bench consisting of three or five members in this case. Accordingly, the Honble President was pleased to constitute a Special Bench of three members to answer the following questions and to dispose of the appeal in accordance with law. The question for the consideration of the Special Bench are : 1. Whether the provisions of section 158BC relating to issue of notice are substantive in nature or procedural in nature? 2. If they are held to be procedural in nature, then can any defect in the notice or with regard to its issue, render the block assessment proceedings to be null and void? The reply to the above questions have a direct bearing on the facts of the case before and hence we straightaway proceed to answer the above questions. At the outset, Mr. Sudhir Schgal, the learned counsel for the assessee sought to clarify that the CIT (Appeals) had held the provisions of section 148 to be pari materia with the provisions of section 158 BC. Against this decision of the CIT (Appeals), the department is not in appeal and hence the assessee should not be put in a worse position vis-a-vis what the CIT (Appeals) has held in favour of the assessee. With this preface, the learned counsel embarked on making elaborate arguments on the issues posed before the Special Bench and which we now proceed to record in the paragraphs that follow.
Taking cue from the wordings of the first question, Mr. Sehgal attempted to explain the distinction between the expressions "substantive" and "procedural". With regard to the expression "substantive", the contention was that it was directly related to the rights of the assessee. On the other hand, with regard to the expression "procedural", the learned counsel drew extensive support from the judgment of the Supreme Court in the case of CWT v. Sharvan Kumar Swarup & Sons (1994) 210 ITR 886 (SC). Reliance was also placed on the judgment of the Punjab & Haryana High Court in the case of CIT v. Mrs. Manjula Sood (1997) 227 ITR 873 (P&H). By placing reliance on these two decisions, the argument advanced was that though a suitor had no vested right in matters of procedure, yet where a change in procedure affects accrued right, it has to be treated as a substantive law. In this connection, reference was made to the speech of the Finance Minister 215 ITR 70 (St.) at the time of the introduction of Chapter XIV-B in the Act wherein it was mentioned by him that under the old procedure of assessment of search cases, legal battles continued for many years to decide which income was assessable in which assessment year. No finality was reached and the seized assets remained with the department for a long time. Thus, the contention was that with the introduction of Chapter XIV-B, and with the undisclosed income being assessed at 60 per cent, substantial rights got affected and hence the provisions relating to the assessment under section 158BC were in the realm of substantive law. As regards the use of the word "Procedure" in the heading of Chapter XIV-B, it was contended that the same was used merely for convenience of reference. As to how much weight age should be given to the speeches made in the Legislature while enacting the law for its interpretation, reference was made to judgments of the Supreme Court in the case of K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) and in the case of Kerala State Industrial Development Corpn. v. CIT (2003) 259 ITR 513 (SC). Referring to the first proviso to section 158BC it was argued that by dispensing with the issue of notice under section 148, it clearly meant that the provisions of section 158BC were pari materia with the provisions of section 148 and hence all the decisions which related to defective notices issued under section 148, applied with equal force to the notices issued under section 158BC. For this contention, reliance was placed on the judgment of the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. v. Asstt. CIT (1999) 238 ITR 134 (Cal) wherein it was held that the provisions of section 158BC substituted the provisions of section 148.
Mr. Sehgal then referred to the provisions of section 158BA which, he contended, undoubtedly, gave the power to the assessing officer to assess the undisclosed income, but the assessment proceedings cannot commence without issue of notice under section 158BC. Emphasis was laid on the word "shall" appearing in section 158BC and to emphasize the purport of the word "shall", reliance was placed on the judgment of the Supreme Court in the case of Hemalatha Gargya v. CIT (2003) 259 ITR 11 (SC). The importance of issue of notice was stressed upon in more ways than one. It was argued that filing of return under section 158BC was not voluntary as it was in the case of returns filed under section 139(l) where time-limits were specified. Further, it was argued that search under section 132 was not the only foundation because even search having taken place, the assessee would not know where to file the return unless notice under section 158BC was issued, and therefore, jurisdiction by the assessing officer to assess undisclosed income was acquired only by issue of notice under section 158BC. Mr. Sehgal sought to draw an analogy from an illustration by stating that in constructing a house if 10 per cent of the cost was spent on foundation, it could not be said that the house was complete. Reverting back to the argument that provisions of section 148 were pari materia with section 158BC, it was argued that in section 158BC the requirement of recording the reasons prior to the issue of notice was dispensed with because necessary information was already available with the department as a result of which search was conducted. Referring to the provisions of section 158BFA, it was contended that interest was reckoned from the date of expiry of the time limit specified under section 158BC to file the return. Penalty was also leviable with reference to the return filed and was not related to the search. According to Mr. Sehgal, these provisions indicated that the provisions of section 158BC pursuant to which return was to be filed, were substantive in nature. Reference was then made to section 158BC wherein it is specified that block assessment cannot be made by an officer below certain rank. This also, according to Mr. Sehgal, indicated that casual approach was not permitted and hence the provisions were substantive in nature. The learned counsel placed reliance on the decision of the Chandigarh Bench of the Tribunal in the case of Ved Prakash Sanjay Kumar v. Assistant Commissioner (2001) 76 ITD 107 (Chd-Trib) and of the Allahabad Bench in the case of Verma Roadways v. Assistant Commissioner (2000) 75 ITD 183 (All) to contend that wrong mention of the block period in the notice vitiated the block assessment.
The learned counsel then referred to section 292B of the Act. The said section, it was argued, was meant only to take care of technical mistakes. The contention was that mentioning of a wrong block period or wrong status was a serious error because there was no provision to file a revised return under Chapter XIV-B. Thus, acting on a notice, if return was filed in individual capacity and tax was paid thereon, there was no machinery to get the refund of this tax if latter it turned out that actually an HUF had to file the return. It was next contended that notice had to be served on the assessee or on a person specifically authorized by the assessee for the purpose. Merely because the assessee participated in the proceedings, it did not confer jurisdiction on the assessing officer which was never there. In support of all these arguments, the learned counsel relied on the following decisions : 3. Monga Metals (P.) Ltd. v. Assistant Commissioner (2000) 67 TTJ 247 (All.) Many other decisions were relied upon but we shall deal with them later, if necessary.
On the second question referred to the Special Bench, Mr. Sehgal contended that even if the provisions of section 158BC were held to be procedural, casual approach cannot be allowed and section 292B cannot set it tight. It was contended that vested right acquired by the assessee cannot be taken away. Mr. Schgal concluded his arguments by stating that vested right acquired by the assessee cannot be taken away. Mr. Sehgal concluded his arguments by stating that jurisdiction relates to power and section 158BC gave the power to the assessing officer to assess undisclosed income. Section 132 merely provided the information but to assume proper jurisdiction, proper compliance of both the provisions, i.e. Section 132 as well as section 158BC, was required.
Mr. V.H. Patil, Advocate, appeared as intervener for First Global Stock broking Pvt. Ltd., Mumbai. His contention was that prior to the introduction of Chapter XIV-B, income escaping assessment used to be assessed only under section 147 of the Act. After the introduction of Chapter XIV-B, such income was to be assessed in either of the two ways, viz, one, income generally escaping assessment under section 147 and the other income escaping found as a result of search under section 158BC of the Act. Therefore, the argument was that when the purpose of both the provisions was the same, i.e. to assess income which has escaped assessment, then there was no reason as to why the conditions applying to notice issued under section 148 should not apply to a notice issued to make block assessment. In other words, Mr. Patil was vehement to contend that the provisions of section 158BC were pari materia with the provisions of section 148. In support of this contention, Mr. Patil referred to the following judgments :Union of India v. Ajit Jain It was pointed out that the Bangalore Special Bench also in the case of C. Ramaiah Reddy v. Assistant Commissioner (2000) 87 ITD 439 (Bang)(SD) had expressed the same view at page 479. Elaborating further on the issue, it was contended that the finding of material during the search was a condition akin to the conditions laid down in clauses (a) and (b) of section 147 as they existed prior to 1-4-1989. According to Mr.
Patil, search under section 132 alone was not sufficient to make block assessment, but evidence found during search and other relatable evidence was necessary to compute undisclosed income. Thus, two conditions were necessary prior to the issue of notice under section 158BC, (1) that there was a valid search on a particular person, and (2) that something was found during search to compute undisclosed income. These conditions, it was reiterated, were akin to section 148 of the Act.
It was then contended by Mr. Patil that notice under section 148 was a jurisdictional notice and not merely procedural. Therefore, non-issue of notice, issue of improper notice, notice not validly served and notice served outside prescribed time-limit, all the four ingredients were necessary to assume valid jurisdiction, and that there could not be any waiver of jurisdiction merely by participating in the proceedings. Not only that, any mistake in the issue of notice under section 148 was not rectifiable under section 292B of the Act.
Similarly, before issuing notice under section 158BC also, the assessing officer was required to satisfy himself about a valid search having been conducted and that some material was found during the search. Mr. Patil, in support of the above contentions referred to several authorities to which we shall advert to later, if necessary.
In reply, Mr. R.K. Goel, the learned Departmental Representative, at the outset, referred to the heading of Chapter XIV-B which according to him, suggested that the provisions contained therein were procedural in nature. He then drew our attention to the opening line of section 158BC, i.e. "where any search has been conducted and submitted that the provision itself indicated that carrying out of the search was the foundation for the procedure to be followed thereafter under Chapter XIV-B. Referring to the first proviso to section 158BC, it was contended that when the intention was to exclude the provisions of section 148, there was no question of drawing any support from the decisions pertaining to section 148. According to the learned Departmental Representative, it was section 158BA which provided the foundation for the assumption of jurisdiction and that section 158BC followed thereafter. Once search was conducted, the assessing officer was required to issue notice. Referring to section 148, it was submitted that where notice under the said provision could be issued only when the assessing officer had reason to believe that income chargeable to tax has escaped assessment, no such reasons were necessary for issue of notice under section 158BC. In this connection, the learned Departmental Representative referred to the decision in C.Ramaiah Reddys case (supra) wherein at para 11.4 the vast difference between section 147 and section 158BC was brought out. Referring to the concept of substantive and procedural law, the learned Departmental Representative referred to the judgment of the Federal court in the case of Chatturam v. CIT (1947) 15 ITR 302 (FC) and submitted that liability to pay tax was not dependent on notice and therefore, section 158BC merely prescribed the procedure to quantify the amount of tax. He also relied on the following three judgments in support of the above arguments :CIT v. Hari Om Co.
Referring to the judgments in the cases of Shaw Wallace & Co. Ltd. (supra) and Mrs. Manjula Sood (supra) on which the learned counsel for the assessee had placed reliance, the learned Departmental Representative submitted that actually both these decisions were in favour of the revenue. It was contended that section 158BA is a non-obstante provision and sub-section (2) thereof is the charging provision which goes to determine the quantum of tax and that the same has to be read with section 4 of the Act. In substance, the contention was that whereas section 158BA was in the realm of substantive law determining rights and liabilities of the parties, section 158BC was in the realm of procedural law prescribing as to how the rights and liabilities were to be exercised.
Taking his arguments on a different plain, the learned Departmental Representative submitted that the purpose of the Income Tax Act was to earn revenue to run the country. The provisions of the Act, therefore, cannot be defeated by technical infirmities. Relying on the judgment of the Punjab & Haryana High Court in the case of CIT v. Smt. Aruna Luthra (2001) 252 ITR 761 (P&H), it was contended that only the dead makes no mistakes. Referring to the judgment of the Kerala High Court in the case of Tity Thomas v. TRO (1994)207 ITR 1072 (Ker), it was contended that the provisions relating to quantification of tax were in essence to give effect to the intention of the Act. It was argued that liability to pay tax arose by the charging section alone, whereas quantification was postponed by the assessment procedure. In this connection, the learned Departmental Representative drew support from the judgments listed below : 3. United Provinces Electric Supply Co. Ltd v. CIT (1993) 204 ITR 794 (Cal.) Similarly, with regard to service of notice also the learned Departmental Representative argued that the intention of the notice was merely to make the assessee aware that the block proceedings have started and that he was required to file the return. Once the assessee files the return and participates in the proceedings, he is said to have acquiesced in the proceedings and thereafter cannot raise any objection about technical infirmities. The Jodhpur Bench of the Tribunal in the case of Lake Palace Hotels & Motels Ltd. v. Dy. CWT (2002) 83 ITD 286 (Jodh-Trib) did not consider the technicalities even in penalty proceedings which were supposed to be harsher than assessment proceedings. In this connection also, the learned Departmental Representative referred to several decisions to which we shall advert to, if necessary.
Mr. Ravi Aggarwal, another learned Departmental Representative, mainly explained the difference between the provisions of section 148 and section 158BC. His main contention was that whereas the time limit for completion of reassessment under section 147 started from the end of the financial year, for block assessment it started from the close of the search and hence no jurisdiction was attached to section 158BC.Mr. Ashwini Mahajan, the third learned Departmental Representative drew our attention to the difference in heading of section 158BA and section 158BC to contend that the former was the charging provision, the latter was procedural in nature. Referring to section 158BD, it was submitted that before invoking the said provision, satisfaction of the assessing officer was necessary. Therefore, perhaps section 158BD could be considered a substantive provision, but not section 158BC. Mr. Mahajans main emphasis was on section 292B to contend that it took care not only of mistakes but also of defects and omissions. It was submitted that mentioning of a wrong block period is a mistake, but even if it is treated as a defect, it is rectifiable under section 292B. With regard to the argument made on behalf of the assessee that before issuing notice under section 158BC, the assessing officer was required to satisfy himself about the seized documents, it was contended that the appraisal report prepared by the investigation wing had no sanctity, and, therefore, it was mandatory for the assessing officer to issue notice under section 158BC without any satisfaction mainly to enquire into the dumb documents which were often found in the course of search.
Thus, the argument was that the provisions of section 158BC were procedural in nature.
In his counter-reply, Mr. Sehgal, the learned counsel for the assessee, submitted that search did not determine the tax liability. If section 158BC was redundant, Legislature would have stopped at section 158BA only. It was further submitted that interest under section 158BFA was reckoned not from the date of search but was reckoned from the date of filing of return. Similarly, penalty was with reference to income returned. Thus, entire liability of the assessee under Chapter XIV-B was determined with reference to the return filed only in response to notice under section 158BC and hence the said provision was in the realm of substantive law. In response to the argument of Mr. Goel that due revenue of the Government should not get thwarted on account of technical reasons, Mr. Sehgal contended that under article 265 of the Constitution, no tax can be collected save by authority of law and under article 308, no person can be deprived of his property save by procedure of law. Referring to the judgment in AIR 1936 PC 263, it was contended that when a statute required something to be done in a particular manner, it should be done in that particular manner, or it should not be done at all. With this argument, Mr. Sehgal concluded his arguments on the legal issue raised before the Special Bench.
Mr. Patil, in his counter-reply, contended that if section 158BC is procedural in nature, then entire chapter for assessment is procedural, but that cannot be the case because while making the block assessment, provisions of section 158B(b) cannot be ignored just at section 147 cannot be ignored for the issue of notice under section 148. Referring to the Commentary by Chaturvedi & Pithisaria (Volume 3-5th edition) at page 5253, it was contended by Mr. Patil that it is not enough that a notice issued somehow finds its way to the proper assessee or that the proper assessee appeared and filed an objection to the proceedings.
Unless the notice is served on the proper person in the manner prescribed under section 282, the service is insufficient and the assessing officer does not have the jurisdiction to reassess escaped income. Mr. Patil referred to the decision of the Ahmedabad Bench of the Tribunal in the case of N.K. Proteins Ltd. v. Dy. CIT (2004) 83 TTJ 904 (Ahd-Trib) in which a similar issue regarding defective notice under section 158BC was considered and had decided it in favour of the revenue. In the said decision, the Tribunal had distinguished the decisions in Monga Metals P. Ltd.s case (supra), Verma Roadways v.Assistant Commissioner (2000) 75 ITD 183 (All.) and others on which heavy reliance is placed by the assessee. In this connection, the submission was that the way in which these cases were distinguished was not proper. Referring to the decision of the Allahabad Bench of the Tribunal in the case of Dr. RML Mehrotra v. Assistant Commissioner (1999) 68 ITD 288 wherein it was held that there is no difference between sections 148 and 158BC, the submission was that in the said decision, the provisions of section 158B(b) were ignored. Thus, Mr.
Patil concluded his arguments.
Lastly, Mr. Sunil Mukhi, Advocate, intervened to contend that proviso to section 158BC should be given its meaning whereby the application of section 148 was done away with. Referring to the judgment in the case of Shaw Wallace & Co. Ltd. (supra), it was contended that it was amply clarified that section 148 was pari materia with section 158BC. As regards section 292B, it was argued that the said provision was meant only for correcting mistakes and was not applicable where jurisdiction was to be acquired. It was contended that a person had a right to defend himself if he was wrongly roped in. It was finally submitted that all the judgments cited by the learned Departmental Representative were distinguishable.
We have duly considered the rival contentions and the material on record. In the controversy before us, we are primarily concerned with the concept of jurisdiction. Hence, let us first understand the meaning of the term "jurisdiction". Some of the meanings given in the Law Lexicon by P. Ramanatha Aiyar (1997 edition-page 1021) are as follows : (ii) The power of a court or a judge to entertain an action, petition, or other proceedings; (iv) The term imports authority to expound or apply the laws, and excludes the idea of power to make the laws; (v) It means, (a) the right to adjudicate on a given point, (b) the local extent within which the court can and does exercise the right when ascertained." In a recent case in CIT v. Pearl Mech. Engg. & Foundry Works(P.)Ltd. (2004) 267 ITR 11 (SC), the Supreme Court had the occasion to deal with the subject of jurisdiction. In this case, proceedings for acquisition of certain property were initiated in accordance with Chapter XX-A of the Act. Notice under section 269D(2) of the Act was published in the Official Gazette on 15-11-1980. The notices issued under section 269D(2) of the Act were served upon the transferor and the transferee on 10-10-1980. The competent authority, after hearing the objection, passed orders for acquisition of the property. The Tribunal and the High Court set aside the order of the competent authority on the ground that proceedings for acquisition were initiated by publication of the notice in the Official Gazette and service of notice to the transferor and transferee prior to the publication in the Official Gazette is meaningless and an exercise in futility rendering the entire proceedings illegal and without jurisdiction. At page 7 (of 267 ITR), the Supreme Court observed as follows : "The word jurisdiction implies a court or Tribunal with judicial power to hear and determine a cause, and such Tribunal cannot exist except by authority of law. Jurisdiction always emanates directly and immediately from the law; it is a power which nobody on whom the law has not conferred it can exercise. In other words, jurisdiction has reference to the power of the court or Tribunal over the subject matter, over the res or property in contest, and to the authority of the court to render the judgment or decree it assumes to make." The Supreme Court, of course, held that the competent authority gets the jurisdiction to make an order for acquisition of property only after publication of the notice in the Official Gazette. But it also held that any error or mistake committed in the service of the notice does not in any manner affect the jurisdiction conferred upon the competent authority to take proceedings for acquisition of property. In the process, the Apex court approved the judgment of the Karnataka High Court in the case of A. Premchand v. IAC (1985) 153 ITR 774 (Kar). In the said judgment it has been held that the jurisdiction to initiate proceedings for acquisition of immovable property is conferred on the Inspecting Assistant Commissioner by Chapter XX-A of the Act and the orders made by the Government appointing him as the authority to decide the cause. Every error committed by the 1AC in the exercise of his own jurisdiction cannot be treated as outside his jurisdiction and they are all errors in but not of jurisdiction. Accordingly, the error if any, committed by the 1AC in issuing notices under section 269D(2)(a) before the publication of the notice in the gazette was an error within his own undoubted jurisdiction and was not a case of assumption of jurisdiction and the Tribunal in holding otherwise and invalidating the proceedings on that ground was clearly in error (Emphasis talicised in print, supplied).
Now let us consider the provisions of section 158BC in the light of the above discussion. For immediate reference, we reproduce the said provision below : 158BC. Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, then (i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30-6-1995, but before the Ist day of January, 1997, serve a notice to such person requiring to furnish within such time not being less than fifteen days; (ii) in respect of search initiated or books of account or other documentary or any assets requisitioned on or before the 1-1-1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five 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 the undisclosed income for the block period : Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter : Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return; (b) the assessing officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143, section 144 and section 145 shall, so far as may be, apply; (c) the assessing officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment.
(d) the assets seized under section 132 or requisitioned under section 132A shall be dealt with in accordance with the provisions of section 132B." In substance, the above provision mandates the assessing officer to serve notice on a person in whose case search has been conducted, to furnish a return of income setting forth his total income including the undisclosed income for the block period. The question we pose to ourselves is, is it this provision which confers jurisdiction on the assessing officer to make an assessment of the undisclosed income, or does the source of his power lie somewhere else? To answer this question, we need to refer to section 158BA(l) and 158BA(2) of the Act which are reproduced below : "158BA(l) Notwithstanding anything contained in any other provisions of this Act, where after the 30-6-1995 a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.
(2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not." Sub-section (1) of section 158BA provides that where a search is initiated in the case of any person, then, the assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B. Sub-section (2) of section 158BA makes provision of the rate of tax at which the undisclosed income is to be charged.
We now proceed to analyze the above two provisions. It is true that the heading of Chapter XIV-B is "Special Procedure for Assessment of Search Cases." If we go merely by the heading of the chapter, it may lead us to say that the entire Chapter XIV-B is procedural in nature. But as is the rule of interpretation of statutes, one cannot be merely guided by the heading. The true purport of each provision has to be seen to ascertain its true nature. Undoubtedly, broadly speaking, the entire process of assessment is nothing but a machinery to effectuate the levy and collection of taxes, thereby making the statute workable, and that is why Chapter XIV which provides for the machinery of normal assessment, is titled as "Procedure for Assessment". Since-B makes a significant departure from the normal process of assessment as provided in Chapter XIV, the words "Special Procedure" have been used in the heading of Chapter XIV-B. But then, though broadly speaking, these are machinery provisions, certain provisions within these machinery provisions give rise to certain rights and responsibilities as has been observed by the Supreme Court in the case of Sharvan Kumar Swarup & Sons (supra) . that if one traces any substantive right back far enough it will be found in the interstices of procedure." Thus, to repeat, a statute, besides containing substantive provisions by themselves, may also contain certain provisions within the machinery provisions which may give rise to rights and responsibilities rendering those provisions to be substantive in nature. This answers the argument of Mr. Patil that if section 158BC is procedural, then the entire chapter of assessment will be procedural and also the substantial arguments of Mr.
Sehgal mentioned in para 2 of this order.
Keeping in view the above principles, if we analyze the provisions of Chapter XIV-B, the first three provisions viz., section 158B, section 158BA and section 158BB are substantive in nature. Clause (a) of section 158B defines "block period" as opposed to the "previous year" under the normal provisions. Clause (b) of section 158B defines "undisclosed income" as opposed to "total income" under the normal provisions. Section 158BA(l) empowers the assessing officer to assess the undisclosed income. Section 158BA(2) is the charging section to be read with section 4 of the Act as has been held by the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. (supra) (at p. 20 of ITR 238). Section 158BB prescribes the manner in which the undisclosed income is to be computed. Having provided for these substantive provisions, the actual procedure for block assessment starts from section 158BC as the heading to the said section suggests.
We now revert back to the analysis of section 158BA(l) and section 158BC which we had left incomplete in para 18 above. It is very clear from the provisions of section 158BA(l) that it is from this provision, the assessing officer derives power to assess the undisclosed income of a person who has been subjected to search under section 132 or in whose case there is a requisition under section 132A of the Act. This, in turn, is in consonance with the provisions of section 120 which deals with the jurisdiction of income-tax authorities. Again, it is interesting to note that the assessing officer acquires this power once the search is "initiated" under section 132 of the Act. On the other hand, the word used in section 158BC is "conducted". It is just logical that the assessing officer cannot serve notice unless he has the specific power to do so. Here the word "conducted" has to be understood to mean that where a search was initiated is now conducted, or that where the process of conducting a search was initiated is now conducted. In other words, the event of initiating a search is anterior in point of time to search conducted. Thus, the assessing officer acquires the power to assess undisclosed income at the time of initiation of search, but the actual exercise of that power commences only after the search is over by serving notice under section 158BC.Section 158BA(l) clearly establishes a right in favour of the assessing officer to assess the undisclosed income. Section 158BA(2) creates a tax liability against the assessee in respect of his total undisclosed income. Section 158BB casts a duty on the assessing officer to compute the undisclosed income in a particular manner and a corresponding right in favour of a person that the assessing officer shall scrupulously follow the said provisions in computing the undisclosed income. Section 158BC merely sets in motion the machinery to quantify the liability of the assessee. The notice served by the assessing officer is the first step in this direction which will make the earlier three provisions which are substantive in nature to be workable. By virtue of section 158BA(l), assessing officer obtains the power connection. Under section 158BC, he switches on that power by issue of notice. As mentioned by P.Ramanatha Aiyar in the Law Lexicon (supra), the term "jurisdiction" means authority or power to act in a matter, and not authority or power to do an act in a particular manner. The distinction between substantive law and procedural provisions has been indicated in Blacks Law Dictionary (Sixth Edition, page 1203) as follows and which has been quoted with approval by the Supreme Court in the case of Sharvan Kumar Swarup & Sons (supra) at page 892 of 210 ITR : "As a general rule, laws which fix duties, establish rights and responsibilities among and for persons, natural or otherwise, are ,substantive laws in character, while those which merely prescribe the manner in which such rights and responsibilities may be exercised and enforced in a court are procedural laws." Further, the rights, duties, responsibilities of the parties having been created by sections 158B, 158BA and 158BB, the issue of notice under section 158BC do not in any way extend or restrict them by issue of notice under the said section. In this connection, we may usefully refer to the Halsburys Law of England (Fourth edition, vol. 23, paragraph 29), again quoted with approval by the Supreme Court in Sharvan Kumar Swarup & Sons case (supra) : "It is important to distinguish between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the charge and the levying and collection of the tax in respect of the charge so imposed. Machinery provisions do not impose a charge or extend or restrict a charge elsewhere clearly imposed." Still further, in the same judgment, Their Lordships have referred to Salmonds Jurisprudence at page 892 (of 210 ITR) wherein the law of procedure has been described as the law of action-jus quod ad actiones pertinet-using the term action in a wide sense to include all legal proceedings, civil or criminal. All the residue is substantive law, and relates, not to the process of litigation, but to its purposes and subject matter. Thus, sections 158B, 158BA and 158BB spell out the purposes and subject-matter of Chapter XIV-B, whereas with section 158BC the action to achieve these purposes start. Taking guidance from the judgment in the case of Pearl Mech. Engg. (supra) discussed in paragraph 16 above, we may, without any hesitation, say that the assessing officer having acquired jurisdiction under section 158BA(l), if commits any error or mistake while issuing or serving the notice under section 158BC, it is "in but not of jurisdiction".
Another important and vehement argument which was raised before us is that the provisions of section 148 are pari materia with the provisions of section 158BC and hence all the decisions pertaining to defective notices or service thereof in connection with section 147 proceedings apply with equal force to the notice issued under section 158BC of the Act. In our considered opinion, it is not so. The reasons for our saying so now follow.
First let us examine the difference between the provisions of section 147 on the one hand, and the provisions of sections 158B, 158BA and 158BB on the other. Section 147 deals with income escaping assessment.
Provisions of Chapter XIV-B deal with undisclosed income unearthed in the course of search. The expression "income escaping assessment" has been given a wider meaning as per Explanation 2 to section 147. It takes within its ambit not only the income which the assessee himself has ommited to return, but it also includes those items for which the assessee cannot be faulted with. As an illustration, if the income is assessed at too low a rate, it will be a case of escaped assessment and in all probabilities, the fault may be on the part of departmental officials while applying the rate of tax. Similarly, it may be a case of escaped assessment if any excessive loss, depreciation allowance or any other allowance has been computed. Here, it is important to note the wording of the relevant provision. The words used are "has been computed" and not "has been claimed". In other words the fault of computing excess loss or allowance may be attributable either to the assessee or the revenue authorities. But once it is found that excess loss or allowance is computed, it becomes a case of income escaping assessment. The question now arises as to who will decide that income has escaped assessment. The opening words of section 147 make it clear that this power is vested with the assessing officer. It is he, and he alone, who has to entertain this belief and that too honestly. No appellate authority can exercise this power nor can such authority interfere if the assessing officer refuses to initiate proceedings under this section. The rationale behind this provision is that the entire income of an assessee assessable in a particular assessment year is subjected to tax in that year only. Income which is assessable in one assessment year cannot be brought to tax in another assessment year. The process, therefore, entails the reopening of a completed assessment. This infringes on the sanctity of a completed assessment.
Therefore, it is incumbent upon the assessing officer to act in a fair manner and not in a partisan manner. There is no jurisdictional fact in existence which straightaway empowers the assessing officer to enter jurisdiction. He can assume jurisdiction to reopen a completed assessment only on the basis of his own honest belief. Therefore, though section 147, in essence, is a machinery section, it also affects the substantive right of the assessee which had accrued to him on completion of the original assessment. This again is an example of what Chief Justice Venkatachaliah said in the case of Sharvan Kumar Swarup & Sons (supra) that a substantive light can be found secreted in the interstices of procedure. This process of formation of belief by the assessing officer seeks to extend the liability of the assessee. To give effect to this belief, the assessing officer assumes jurisdiction by issuing notice under section 148. Thus, again referring to the judgment of the Karnataka High Court in the case of A. Premchand (supra) and approved by the Supreme Court in the case of Pearl Mech. & Engg. (supra), if the assessing officer commits any error in issuing the notice under section 148, it would be an error of jurisdiction and not within his jurisdiction.
As against this, let us examine the power of the assessing officer under section 158BA in Chapter XIV-B of the Act. As is evident from the provisions of sub-section (1) of section 158BA and as discussed in paragraph 20 earlier, the assessing officer gets the power to assess undisclosed income on the initiation of search. It needs to be noted that the assessing officer need not wait for the completion of the search to assume jurisdiction. In other words, even if nothing is found in the course of search, the power to assess undisclosed income is very much there because it gets conferred on him on the initiation of search. It is further to be noted that by using the word "shall" in section 158BC, it has been made obligatory for the assessing officer to issue notice under the said section, irrespective of the fact whether any undisclosed income is unearthed or not during the search. It may so happen that nothing incriminating is found during the search, yet the assessing officer shall issue a notice under section 158BC and will have to complete the assessment, may be at nil undisclosed income. This only means that, it is not left to the belief, wisdom or judgment of the assessing officer to see whether there is any undisclosed income or not, unlike section 147 where it is the assessing officer who has to entertain the belief that income has escaped assessment. What is the event then, and the point of time which confers power on the assessing officer to assess the undisclosed income? The event is merely a search taking place in the case of a person which gives jurisdiction to the assessing officer. The point of time when he gets jurisdiction is the point at which the search is initiated. Obviously, the assessing officer cannot activate this power till the search is completed and hence his action to give effect to the power is postponed till the search is over. This explains the use of the word "conducted" in section 158BC. The existence of search therefore is the jurisdictional fact which is necessary to the validity of the proceeding, and without which the act of the assessing officer will be a mere nullity. It is the existence of this jurisdictional fact which will give jurisdiction to the assessing officer over the subject-matter, that is, to assess the undisclosed income of the person searched. The issue of notice under section 158BC is merely an act within this jurisdiction and hence any error in issuing such notice will not render the entire proceedings invalid.
In paragraphs 22 and 23 we have made an attempt to show the difference between the provisions of sections 148 and 158BC. However, one more aspect touching upon this issue remains to be dealt with. In their course of arguments, the learned counsel for the assessee as well as for the interveners had laid stress on the first proviso to section 158BC and for which reliance was also placed on the judgment of the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. (supra). We proceed to deal with this aspect now. The first proviso to section 158BC reads as follows : "Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter." Though there is a fundamental difference between section 148 and section 158BC, there is one commonality which one cannot lose sight of and that is that both the provisions deal with past assessment years, the assessments in respect of which may or may not have been completed.
We have noted earlier the difference between the expression "income escaping assessment" and the expression "undisclosed income" as defined in section 158B(b). The latter has a narrower meaning and is solely attributable to the assessees own fault. As an illustration, if in the course of search it is found that an allowance claimed by the assessee is false, it will form part of undisclosed income. On the other hand, it will be a case of income escaping assessment if excess allowance is computed, either by the assessee or by the department. Thus, if the purpose of Chapter XIV-B is to compute only undisclosed income, there is no need to reopen the entire assessment to bring to tax income which has escaped assessment as defined in Explanation 2 to section 147. This is one of the reasons to obviate the need to issue notice under section Secondly, in respect of certain years there may not be any undisclosed income surfacing as a result of search, but in respect of those very years, there may be income escaping assessment. To tax this escaped income, the assessing officer may issue notice under section 148 subject to fulfilment of all conditions. Now if these years form part of the block period, notice under section 158BC will have to be issued.
But along with it if notice under section 148 is also issued, it will result in multiplicity of proceedings and confusion. Thus, it is not true to say that the provisions of section 158BC are a substitute for the provisions of section 148. Section 158BH provides that all other provisions of the Act shall apply to the assessment made under Chapter XIV-B. In order to fulfil this condition, the assessing officer proceeding under this chapter may think it necessary to issue notice under section 148 also because it involves taxing the income of past years. But to proceed under Chapter XIV-B, what all is necessary is the jurisdictional fact of a search having been conducted. When the jurisdictional fact of search exists to proceed under this chapter, we see no need to bring in "the formation of belief" by the assessing officer to proceed under the chapter. It will create only chaos and confusion and may even thwart the proper working of Chapter XIV-B. In fact, this is what the Calcutta High Court meant in the case of Shaw Wallace & Co. Ltd. (supra) when it said that if notice under section 148 is issued, one would be faced with the double consequence of there being one block period assessment and may be even several other 148 reopening in regard to completed assessments. The learned counsel are banking on the observation of the High Court that "it substitutes the procedure under section 148". Yes, it is true, it does substitute, but only the procedure, that too in respect of only the undisclosed income.
But it does not whole hog substitute the concept of income escaping assessment. It substitutes the procedure because the premise under which the notices are to be issued under the two provisions are different. Issue of notice under section 158BC does not affect any substantive right of the assessee, whereas the notice under section 148 does. Hence, no confusion can be allowed to prevail, which can be created if both notices were to be issued by the assessing officer.
This is our understanding of the judgment in Shaw Wallace & Co. Ltd.s case (supra). Therefore, we see no force in the argument that because a defective notice under section 148 can render the assessment invalid, so can a defective notice under section 158BC. In this connection, we may quote with advantage, the observations of the Gujarat High Court in the case of Khandubhai Vasanji Desai v. Dy. CIT (1999) 236 ITR 731 (Guj). At page 98 of the report, Their Lordships have observed as follows : "Under Chapter XIV-B a special procedure for block assessment is devised for cases where undisclosed income is detected by virtue of the search initiated under section 132, while section 147 operates when the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year which means such income is yet to be detected. The area of operation of Chapter XIV-B is to assess undisclosed income as a result of search and seizure by treating persons to whom the "undisclosed income" belongs as a separate class and providing for separate procedure for its assessment at a flat rate. The situation where search and seizure has yielded useful material showing the existence of undisclosed income is different from a situation where no undisclosed income is in fact detected but the assessing officer only has reason to believe that some income has escaped assessment in a particular assessment year".
Again at pages 98 and 99 (of 236 ITR) Their Lordships have observed as follows : "Thus, there was a rational basis on which the search cases in which undisclosed income was detected were classified separately for the block assessment of the undisclosed income to be computed as per section 158BB of the Act on the basis of evidence found as a result of search or requisition of books of account, etc., and such other material or information as were available with the assessing officer.
The proviso to section 4(1) of the Act clearly contemplated a provision in the Act requiring income-tax to be charged in respect of income of a period other than the previous year. Thus, income-tax could be charged in respect of the undisclosed income assessed for the block period. In cases where assessment or reassessment is done under section 147 when the assessing officer has reason to believe that income has escaped assessment for any assessment year, he is not confronted with a situation where undisclosed income is detected as in search cases and that undisclosed income is to be related to the relevant previous years. Under section 147 of the Act, the assessing officer, if he has a reason to believe that some income has escaped assessment for the assessment year concerned, issues notice under section 148 on the assessee to furnish a return in the prescribed form. The form prescribed for block assessment is different though it is the same for the one who is raided and the person other than the raided person to whom any undisclosed income belongs. The special procedure for block assessment of undisclosed income is thus devised on an intelligible differentia and a separate provision for assessment of undisclosed income of the block period has a direct and reasonable nexus with the object sought to be achieved by the provisions of Chapter XIV-B, namely, to provide a less cumbersome and more efficient machinery for assessing undisclosed income of the block period in search cases".
Therefore, in the light of the above discussion, it cannot be said that the provisions of Chapter XIV-B substitute the provisions of section 147 and that notice under section 158BC is akin to the one issued under section 148. Therefore, all the decisions relied upon by the learned counsel for the assessee and the interveners in which defective notice under section 148 had rendered the assessments null and void cannot be made applicable to the defective notice under section 158BC. Further, several Tribunal decisions in which assessments were quashed on account of defective notice under section 158BC, it was done so on the premise that the law in section 158BC is a substantive law. However, we are holding it to be a procedural law and hence those decisions are also not applicable.
In the light of the above discussion, we summarize our decision as follows : (a) That the provisions of Chapter XIV-B provides for a special procedure for the assessment of undisclosed income found in the course of search; (b) That the concept of undisclosed income under Chapter XIV-B is narrower than and different from the concept of income escaping assessment under section 147 of the Act; (c) Though, broadly speaking, Chapter XIV-B contains machinery provisions for the assessment of undisclosed income, it does contain provisions which are in the realm of substantive law. At least, sections 158B, 158BA and 158BB are such provisions, whereas section 158BC is in the realm of procedure law; (d) Section 158BA(1) gives power to the assessing officer to assess undisclosed income and such power is conferred on the assessing officer at the time when search is initiated in the case of a person. Thus, the existence of the jurisdictional fact of search having been initiated gives power to the assessing officer to assess undisclosed income.
(e) The acquisition of power by the assessing officer is not at all related to the formation of belief by the assessing officer that a person has not disclosed certain income; (h) The assessing officer can and has to activate his power only on the completion of search; (g) Since the action of issuing notice under section 158BC is within the jurisdiction and not of assuming jurisdiction, any error committed in such action cannot render the whole assessment a nullity and that such errors are rectifiable by section 292B of the Act.
On the basis of our observations above, we answer the questions referred to the Special Bench as follows : 2. Any defect in the notice or with regard to its issue cannot render the block assessment proceedings to be null and void.
We now proceed to deal with each ground raised in the present appeal on merits. In the first three grounds, the assessee has challenged the validity of the block assessment mainly on the ground that the block period was wrongly mentioned in the notice and that it was not duly served on the assessee. Instead, it was served on Shri R.K Dhawan, Advocate who was not holding a valid power of attorney on behalf of the assessee. In view of our decision in para 27 above, these grounds have to be rejected. However, before doing so, some discussion may not be out of place.
So far as block period is concerned, the same is defined in clause (a) of section 15 8B. It has reference to the date of commencement of search and then one has to count ten or six assessment years backwards, as the case may be. No authority acting under the Act has any power to change the block period. When the date of search is known, every authority under the Act as well as the assessee knows which years would be covered under the block period. There can be no mistake in this except an error in counting backwards. But such mistake cannot override the provisions of law and even if the assessing officer has committed an error, the assessee, if well advised, cannot make such mistake and also cannot take any advantage of the error committed by the assessing officer. Such a mistake is easily taken care of by section 292B of the Act.
We now come to the service of notice. It may be true that Shri R.K Dhawan, Advocate, on whom the notice was served, may not have been engaged for block proceedings as was submitted by the learned counsel.
But at the same time it is equally true that Shri R.K Dhawan was the assessees advocate for each of the years covered under the block period. In good faith, therefore, the assessing officer handed over the notice to Shri Dhawan. In response to this notice, the assessee did file the return and participated in the proceedings. Be that as it may, the fact that the assessing officer already had jurisdiction by virtue of section 158BA(l) to assess the undisclosed income of the assessee, the error committed, if any, was in and not of jurisdiction. It was not a situation where the assessee conferred jurisdiction on the assessing officer by participating in the assessment proceeding. We may clarify that we are not expressing any opinion as to whether there was any error or not, but if there was any, it was rectifiable under section 292B of the Act. This will not render the block proceedings to be void and we hold accordingly. When the hearing of this case began, it was submitted by the learned counsel that in the present case the CIT (Appeals) has held the proceedings under section 158BC to be akin to the proceedings under section 148. Since the department is not in appeal against this conclusion of the CIT (Appeals), the assessee should not be put in a worse position by holding it otherwise. On a careful perusal of the order of the CIT (Appeals), we find that the CIT (Appeals) has nowhere held the proceedings under section 158BC to be pari materia with the proceedings under section 148 of the Act. What all he has held is that "a valid service of notice is crucial to the assessment". For this, he has relied on the judgments which are with reference to proceedings under section 148 and on the premise that like section 148, the provisions of section 158BC are substantive in nature.
However, we have already held the proceedings under section 158BC to be procedural in nature and hence the objection of the learned counsel does not remain. Thus, all the grounds raised by the assessee challenging the validity of the block assessment are rejected.
In ground No. 4, the assessee has challenged the additions made by the assessing officer. It is noticed that total additions of Rs. 16,35,644 are challenged in ten different grounds. Majority of these additions are made on account of unexplained jewellery. It is also noticed that the main reason for making these additions is the inadequate withdrawals shown by the assessee. According to the revenue authorities total withdrawals of the assessee amounted to Rs. 4,70,000 only. On the other hand, the main contention of the assessee was that total withdrawals of the family were of Rs. 13,05,104. It was also the contention of the assessee that some of the jewellery were old jewellery which were remade and only the difference was paid. In support of this contention, the wealth-tax return for assessment year 1985-86 was placed on record. It appears that the authorities have not considered the total withdrawals of the family and have proceeded on the presumption that the assessee did not have enough old jewellery to support the contention that most of the jewellery was remade.
Therefore, in our view, the entire addition needs a fresh look from the assessing officer keeping the above aspects in mind. One major addition of Rs. 5,48,320 challenged in ground No. 4(ix) also needs to be looked into afresh as in that case, the assessee has claimed to have purchased certain diamonds from Surat which are also stated to have been received in Delhi the same day and also fitted into the jewellery the same day.
Accordingly, we are restoring all the additions mentioned in Ground No.4 back to the file of the assessing officer with the directions to consider them afresh. The assessing officer is directed to consider the entire family withdrawals and also take into account the wealth-tax returns filed by the assessee. In this respect, it may not be out of place to mention that the assessing officer will give more weight age to withdrawals than to the wealth-tax returns. This is because of the fact that the records being old, the assessing officer may not be in a position to give clear finding in this regard. Even if wealth tax returns are found, the description of the jewellery may not match as the same may have undergone substantial changes from time to time.
Thus, after giving due opportunity of being heard to the assessee, the assessing officer will reconsider the additions mainly in the light of total family withdrawals. In this regard, the assessee will be at liberty to adduce any evidence as she deems necessary.
Ground No. 5 is general in nature and needs no adjudication. In ground No. 6, the assessee is aggrieved against the setting aside the additions of Rs. 15,36,782 and of Rs. 10,97,280. This ground was not pressed at the time of hearing and hence the same is rejected as such.
In the result, the appeal of the assessee is partly allowed for statistical purposes.