$ * IN HIGH COURT OF DELHI AT NEW DELHI 3. + ITA 537/2015 HARYANA PANEER BHANDAR ..... Appellant Through: Mr S. Krishnan, Advocate. versus COMMISSIONER OF INCOME-TAX ..... Respondent Through: Ms Suruchi Aggarwal, Senior Standing Counsel, Ms Lakshmi Gurung, Junior Standing Counsel, Mr Abhishek Sharma and Ms Radhika Gupta, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE VIBHU BAKHRU ORDER % 05.11.2015 S. Muralidhar, J.: 1. This is appeal by Assessee against order dated 21st July, 2014 passed by Third Member and consequential confirmatory order dated 8th December 2014 of Income Tax Appellate Tribunal ( ITAT ) in IT(SS) 26 & 33/Delhi/2010 for block period 1 st April, 1987 to 15th December, 1997. 2. Admit. 3. For purposes of present appeal, only two following questions ITA 537/2015 Page 1 of 10 are framed for consideration: (a) Whether on facts and in circumstances of present case, notice under Section 158-BD is bad in law? (b) Whether recording of satisfaction by Assessing Officer of person searched is necessary ingredient to validate block assessment proceedings under Section 158-BD? 4. brief facts are that Assessee is partnership firm engaged in business of manufacture and sale of paneer and snack items at Fateh Puri, Delhi. search and seizure operation under Section 132 of Act was conducted on 15th December, 1997 at premises of one Mr. Kamal Chand Jain, wherein certain hundis as stated to have been issued by him were seized. It appears that some of hundis which purportedly pertained to Assessee were forwarded by Assessing Officer ( AO ) of Mr. Jain to his counterpart having jurisdiction over Assessee herein. Subsequently, AO having jurisdiction over Assessee recorded reasons for reopening of assessment and proceeded to issue notice to Assessee under Section 148 of Act on 29th January, 2001. 5. re-assessment order was passed by AO on 28th March, 2002 making addition of sum of Rs.65 lakhs to income of Assessee under Section 69D of Act. In appeal filed against said order by Assessee, Commissioner of Income Tax (Appeals) by order dated 12th December, 2002 held that proceedings in assessment could only be resorted to under Section 158 BA (1) of Act and, therefore, ITA 537/2015 Page 2 of 10 proceedings under Section 147/143(3) of Act was bad in law. CIT (A) observed that AO was free to initiate fresh proceedings under Section 158BD of Act provided requirement under Section 158 BE (2) (b) of Act was followed. 6. Against aforementioned order Revenue filed appeal before ITAT on limited question whether addition made by AO under Section 69D of Act could have been directed to be deleted by CIT(A). This question was answered against Revenue by ITAT by order dated 10th March 2006. 7. In meanwhile, on 25th September, 2006, notice was issued to Assessee under Section 158BD of Act for block period i.e. 1988-89 to 1998 to 1999. Assessee filed its return for said block period on 10th November, 2008 and asked for copy of satisfaction note in terms of Section 158 BD of Act. No copy of such satisfaction note was provided to Assessee. AO nevertheless proceeded to complete block assessment by order dated 29th September, 2008 and made addition of Rs.6,85,120/-. 8. In appeal filed against said order before CIT(A) Assessee again made request for copy of satisfaction note. remand report dated 10th June, 2009 was received from AO and in respect of satisfaction note it was stated that satisfaction note on basis of which notice under Section 158-BD of Act dated 25th September, 2006 was issued had been supplied to Assessee on 10th September, 2008. ITA 537/2015 Page 3 of 10 9. CIT(A) on 25th March, 2010 upheld order of AO. Assessee then preferred appeal before ITAT. While Accountant Member (AM) of ITAT by order dated Nil March 2013 agreed with Assessee that no satisfaction was recorded by AO and, therefore, proceedings under Section 158 BD were bad in law, Judicial Member (JM) disagreed and held in favour of Revenue. matter was then referred to Third Member of ITAT. Although there were subsequent orders passed by both AM and JM even while matter was pending before Third Member, it is not necessary to refer to those orders since what mattered thereafter was order of Third Member. That order came to be passed on 21st July, 2014. Third Member held that onus of having to show that there was no satisfaction note recorded by AO of Mr Kamal Chand Jain in file was on Assessee. Since it had failed to do so, requirement of Section 158BD of Act stood satisfied. Thereafter Division Bench of ITAT passed confirmatory order on 8th December 2014 dismissing Assessee's appeal. 10. At hearing of this appeal on 24th September 2015, Ms. Suruchi Aggarwal, learned Senior Standing counsel for Revenue, sought some time to seek instruction on aspect of satisfaction note as well as on question of limitation. At hearing today she stated that pursuant to order passed by this Court on previous date, she had asked Department to give her information about existence of satisfaction note in file. She has shown to Court letter dated 28th October, 2015 written by ITO, Ward 47(2) New Delhi where, inter alia, ITA 537/2015 Page 4 of 10 reference is made to letter received from ITO/Ward 47[1]/ dated 19th October, 2015 which reads as under: In this connection, it is submitted that I have gone through file and find that ACIT, Central Circle-14, New Delhi vide his letter dated 23.09.2008 informed ACIT Circle-29(1), New Delhi that no satisfaction note, regarding intimation of proceedings u/s 158-BD in case of M/S Haryana Paneer Bhandar, of then AO of Central Circle 14, New Delhi is readily available in block assessment of Sri Kamal Chand Jain. In view of above this office is unable to provide copy of satisfaction note in case of M/s Haryana Paneer Bhandar. 11. fact of matter is that Revenue is unable to produce before this Court satisfaction note as referred to by AO in his remand report. It could not do so at any stage of proceedings before AO, CIT (A) and ITAT as well. 12. Before proceeding to discuss two questions framed for consideration, Court proposes to refer to Sections 158BD and 158 BE (2) (b) of Act which read as under: Section 158 BD- Where Assessing Officer is satisfied that any undisclosed income belongs to any person, other than 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, books of account, other documents or assets seized or requisitioned shall be handed over to Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed under section 158 BC against such other person and provisions of this Chapter shall apply accordingly. XXXXX ITA 537/2015 Page 5 of 10 Section 158BE Time limit for completion of block assessment (2) period of limitation for completion of block assessment in case of other person referred to in section 158 BD shall be - (b)- two years from end of month in which notice under this Chapter was served on such other person in respect of search initiated or books of account or other documents or any assets are requisitioned on or after 1st day of January, 1997. 13. Section 158BD requires AO of searched person to record proper note of satisfaction that there is cogent and demonstrated material to conclude that seized documents show that some undisclosed income belongs to person other than searched person. Explaining mandatory nature of this requirement, Supreme Court in Commissioner of Income-Tax v. Calcutta Knitwears (2014) 362 ITR 673 (SC) observed as under: 41. We would certainly say that before initiating proceedings under section 158BD of Act, Assessing Officer who has initiated proceedings for completion of assessments under section 158BC of Act should be satisfied that there is undisclosed income which has been traced out when person was searched under section 132 or books of account were requisitioned under section 132A of Act. This is in contrast to provisions of section 148 of Act where recording of reasons in writing are sine qua non. Under section 158BD, existence of cogent and demonstrative material is germane to Assessing Officers satisfaction in concluding that seized documents belong to person other than searched person is necessary for initiation of action under section 158BD. bare reading of provision ITA 537/2015 Page 6 of 10 indicates that satisfaction note could be prepared by Assessing Officer either at time of initiating proceedings for completion of assessment of searched person under section 158BC of Act or during stage of assessment proceedings. It does not mean that after completion of assessment, Assessing Officer cannot prepare satisfaction note to effect that there exists income tax (sic income) belonging to any person other than searched person in respect of whom search was made under section 132 or requisition of books of account were made under section 132A of Act. language of provision is clear and unambiguous. Legislature has not imposed any embargo on Assessing Officer in respect of stage of proceedings during which satisfaction is to be reached and recorded in respect of person other than searched person. 14. It was further held in paragraph 44 as under: 44. In result, we hold that for purpose of section 158BD of Act satisfaction note is sine qua non and must be prepared by Assessing Officer before he transmits records to other Assessing Officer who has jurisdiction over such other person. satisfaction note could be prepared at either of following stages: (a) at time of or along with initiation of proceedings against searched person under section 158BC of Act ; (b) along with assessment proceedings under section 158BC of Act ; and (c) immediately after assessment proceedings are completed under section 158BC of Act of searched person. 15. Turning to decisions of this Court, in Commissioner of Income Tax v. Sunil Bhala (2011) 336 ITR 50 (Del) Court held that AO of searched person "has to record satisfaction to effect that there was undisclosed income belonging to assessees." in absence of there ITA 537/2015 Page 7 of 10 being any recording of satisfaction of AO while forwarding case to AO of 'other person', block assessment proceedings were held to have been rightly invalidated. In Commissioner of Income Tax v. Feather Breweries & Market (2008) 166 Taxman 271 (Del) Court noted that Revenue "is unable to produce satisfaction recorded by Assessing Officer in terms of Section 158 BD of Act" and held that in view of decision of Supreme Court in Manish Maheshwari v. Asst. CIT (2007) 289 ITR 341 (SC), block assessment proceedings were unsustainable in law. 16. Recently, in Commissioner of Income Tax v. Manju Finance Corporation (2015) 231 Taxman 44 (Del) Court reiterated as under: "The requirement of Section 158 BD is that Assessing Officer of person searched or against whom order under Section 132 has been passed, should be satisfied that any undisclosed income belongs to third person. This is statutory mandate and jurisdictional prerequisite before proceedings under Section 158 BD are initiated. Violation of said requisite and mandatory requirement would result in annulment of assessment under Section 158 BD read with Section 158 BC." 17. In present case, as already noticed, Revenue has been unable to produce satisfaction note of AO of searched person, to effect that there was "cogent and demonstrative" material to conclude that seized documents showed undisclosed income belonging to Assessee. absence of such satisfaction note on file also explains why AO resorted to Section 147 of Act to reopen assessment in first place instead of issuing notice under Section 158 BD of Act. Consequently, on this short ground of there being no satisfaction note, which is mandatory ITA 537/2015 Page 8 of 10 requirement under Section 158 BD of Act, as explained by Supreme Court in Commissioner of Income-Tax v. Calcutta Knitwears (supra), entire block assessment proceedings are held to be bad in law. Question (b) is accordingly answered in affirmative and in favour of Assessee and against Revenue. 18. In view of answer to question (b), answer to question (a) has also to be in affirmative i.e. in circumstances of present case, notice under Section 158-BD issued to Assessee is held to be bad in law. 19. Court also notes that order of CIT (A) dated 12th December, 2002 held that re-assessment proceedings under Section 147 of Act were bad in law and that AO was however free to initiate fresh block assessment proceedings under Section 158BD of Act subject to fulfilling requirement under Section 158 BE (2) (b) of Act. That part of said order of CIT (A) was not challenged by Revenue. Section 158BE(2)(b) makes it clear that limitation period for completion of block assessment in case of person other than searched person, which in present case is Assessee, is two years from end of month in which notice under this Chapter was served on such other person.... . Although said notice under Section 158 BD was served on Assessee only on 25th September 2006, i.e. nearly nine years after search of premises of Mr. Jain, said notice was itself bad in law since it was not preceded by recording of note of satisfaction which was sine qua non. In any event, such notice could not have been served nine years after search when object of Section 158 BE (2) is to complete ITA 537/2015 Page 9 of 10 block assessment proceedings within two years of service of notice, which obviously had to be within reasonable period after search. In any event, as far as present case is concerned, answers to questions (a) and (b) above are sufficient to invalidate block assessment proceedings. 20. impugned orders dated 28th May and 15th July 2013 of JM, order dated 21st July 2014 of Third Member and confirmatory order dated 8th December 2014 of ITAT, and corresponding orders of AO and CIT (A) to extent they hold against Assessee are hereby set aside. appeal is allowed with no order as to costs. S. MURALIDHAR, J VIBHU BAKHRU, J NOVEMBER 5, 2015 MK ITA 537/2015 Page 10 of 10 Haryana Paneer Bhandar v. Commissioner of Income-Tax