Satisfaction that undisclosed income belongs to some person other than person searched needs to be recorded by AO

From the noted portion of the Tribunal’s impugned judgment, it clearly emerges that no such satisfaction was recorded by the Assessing Officer of the searched person. At any rate, no such satisfaction was produced before the Tribunal. In fact the Tribunal found that the satisfaction recorded for issuance of notice was by the Assessing Officer of the present respondent and not by the Assessing Officer of the person who was subjected to search. Such recording of satisfaction and issuance of notice were also long after the last date for completion of the assessment. We also notice that in fact the Assessing Officer of the searched persons had made additions with respect to same issues in the hands of the Acharya Group. Only when such additions were deleted in appeal, the question of proceeding against the respondent- assessee cropped up.

Obviously therefore, the Assessing Officer of the searched person during the pendency of the assessment proceedings, could not have arrived at the satisfaction that the income was that of the present assessee and not the persons originally searched.

A very similar issue came up before the Apex Court in the case of Manish Maheshwari Vs. Asst. Commissioner of Income Tax & Anr., (2007 289 ITR 341 (SC) highlighting the requirement for issuance of notice against the person other than the searched person, it was held that the Assessing Officer, having not recorded the satisfaction that undisclosed income belonged to the company which was not searched, proceeding against the company would not be valid.

HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 1040 of 2011

COMMISSIONER OF INCOME TAX
Versus
M/S JYOTI SALT INDUSTRIES C/O JAGDISH R ACHARYA

Date : 20/09/2012

ORAL ORDER

(Per : HONORABLE MR. JUSTICE AKIL KURESHI)

1) Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal (hereinafter to be referred to as “the Tribunal”) dated 31.1.2011 raising following questions for our consideration:-

“[A] Whether the Appellate Tribunal is right in law and on facts in annulling the assessment order, holding that the Assessing Officer wrongly acquired jurisdiction to proceed against the appellant under section 158BD of the Income Tax Act, 1961?

[B]Whether the Appellate Tribunal is right in law and on facts in not deciding the issue of penalty u/s.158FA(2) on merits?”

2) Though two questions have been framed by the Revenue in the tax appeal, to our mind, only question No.1 arises out of the judgment of the Tribunal and the same arises in the following factual background:-

2.1) One Acharya Group of persons were subjected to search on 8.11.2000. Notices under section 158BC of the Income Tax Act, 1961 (hereinafter to be referred to as “the Act”) were also issued against such searched persons by the Assessing Officer having jurisdiction over them. Long after the assessment was completed in such cases, apparently upon the Assessing Officer of the searched persons forwarding the documents to the Assessing Officer having jurisdiction over the respondent- assessee, issued notice under section 158BC of the Act on 24.8.2003. The Assessing Officer completed the assessment on the basis of such notices and further inquiries carried out. Such order of the Assessing Officer dated 31.8.2005 came to be challenged by the respondent before the Commissioner (Appeals). The Commissioner (Appeals) held that the reasons recorded by the Assessing Officer for issuing notice under section 158BC read with section 158BD of the Act were not supported by any evidence as required in the law and, therefore, the Assessing Officer wrongly assumed jurisdiction to proceed against the respondent under section 158BD of the Act. Having said so, the Commissioner also proceeded to examine the additions made by the Assessing Officer on merits. He held that the additions were wrongly made. On such grounds, the Commissioner (Appeals) allowed the appeal of the respondent by his order dated 30^th January 2006.

3) Revenue carried such order in appeal before the Tribunal. The Tribunal dismissed the appeal only on short ground that no satisfaction of the Assessing Officer of the searched persons was recorded before proceeding against the respondent under section 158BD of the Act. Relevant observations of the Tribunal read as under:-

“From the above, it is evident that the satisfaction for issue of notice under Section 158BD is to be recorded by the AO of the persons searched during the course of proceedings under Section 158BC. In the case of the assessee, the Revenue was unable to produce any such satisfaction recorded by the AO of the persons searched. The satisfaction recorded by the AO which is reproduced in the order of the CIT(A) appears to have been recorded by the AO of the assessee in whose case notice under Section 158BD was issued and not by the AO who completed the assessment of person searched. Moreover, the above satisfaction for issue of notice under Section 158BD was recorded on 14.8.2003. Search under section 132 had taken place in Achraya Group of cases on 8.11.2000. The Revenue has not filed copy of assessment order of person searched, but it must have been completed on or before 8.11.2002 (because there is time limit for completion of block assessment within the period of two years.) Thus, the satisfaction for issue of notice under Section 158BD was neither recorded, by the AO of person searched nor it is recorded prior to completion of assessment under Section 158BC of person searched. On these facts, decision do Special Bench of the ITAT in the case of Manoj Agrawal (supra) would be squarely applicable. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the appeal filed by the Revenue.”

4) Section 158BD of the Act pertains to undisclosed income of any person other than the searched person and reads as under:-

“Section 158BD:- Where the Assessing Officer is satisfied that any undisclosed income belongs to any person, other than the person with respect to whom search was made under section 132 or whose books of account or other documents or any assets were requisitioned under section 132A, then, the books of account, other documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed [under section 158BC] against such other person and the provisions of this Chapter shall apply accordingly.”