A search and seizure action was carried out at the residence of Devdas A.Alva on 13.9. 2001.During the action,a loose paper file marked A-1was seized.Pages No 1-17 contained a copy of the catering contract entered into by Apporva caterers and Ooters Club and Page No. 26 to 28 were the bills raised by the assessee on M/s. Silver Line technologies Ltd. for Rs. 10.63 lacs.A simultaneous search was also carried out in the case of M/s. Lalit Refreshments. Statements of partners were recorded u/s.131 of the Act on 24.10.01 and 8.11.2001by the DDIT(Inv.).As per the AO,in the statements,the partners admitted undisclosed income of Rs.70.00 lacs approx. The assessee had filed return of income for AY 97-98 sand 98-99 prior to the date of search.However,it had not filed its return for AY.1999-00.The AO issued notice u/s. 158BD of the Act and directed the assessee to fiurnish block return within 16 days.It filed return on 23.8.2005 disclosing loss of Rs.9.84 lacs.The AO directed the assessee to furnish explanation regarding seized papers and to produce books of account with supporting evidences.After considering the submission of the assessee,the AO assessed the undisclosed income for the block period as under :
|Sr.No.||Nature of Income||Asstt. Year||Undisclosed Income(Rs.)|
|5.||GP on Silver Line contract||2000-01||4,25,593|
The assessee agitated the matter before the First Appellate Authority(FAA).Before him,the assessee stated that the order passed by the AO was illegal,unjustified and bad in law,that notice u/s.158BD was served after two years,that no satisfaction was recorded by the AO passing on search material that undisclosed income belonged to any other person.It made elaborate submissions about the additions made by the AO for various AY.s.
After considering the block assessment order and the submissions of the assessee the FAA upheld that notice u/s.158BD was issued in time,that estimated additions made by the AO were not based on any documentary evidences,that the GP and NP shown by the assessee was bound to be lower than the other assessing engaged in general catering business,that the DDIT(Inv.)had asked question about the seized papers to the non-working partners and not to the managing partner i.e.Devdas Alva,that it was not proved that the seized material belonged to the assessee though the AO had made such an allegation,that that no papers were found for the AY.2000-01,that AO had mechanically applied same rate of GP and NP of AT.1999- 00,that the addition made by him for the AY.1999-00(Rs.22.81lakhs)and AY.2001-02 (Rs. 11.49 lakhs) were not justified,that the AO, while finalising the block-assessment,had not considered the expenses incurred by the assessee.However he upheld the action of the AO in rejecting the books of accounts u/s.145(1)of the Act.He further observed that block assessment had to be made on the basis of material found during the search action only,that imputing of profit on estimate basis had to be restricted to part of the block period for which material seized was found.He reworked the results of books of accounts for the block period.
Before taking up the appeal filed by the AO,we would like to deal with the issues raised by the assessee in its CO.The first issue is about recording of satisfaction for initiating proceed – ings u/s.158BD of the Act.The Authorised Representative(AR)stated that in there was no material on record to show the AO’s satisfaction that documents seized from the searched person indicated that income belonging to the assessee was not offered for taxation. Departmental Represnetative(DR)supported the order of the FAA.
ITAT have heard the rival submissions and perused the material before us.We find that the assessee had raised the issue before the FAA also.We are of the opinion that a bare reading of the provisions of section 158BD shows that for taking action under the said section, the AO is required to be satisfied that the books of account or other documents or assets found in the search showed undisclosed income of the person other than one against whom the search was conducted and that the satisfaction is required to be preceded by the investigation and the investigation is not required to be preceded by the satisfaction.In the case of Janki Export International (278 ITR 296) Hon’ble Delhi High Court has held as under
“Section 158BD of the Income-tax Act, 1961, is somewhat analogous to section 147 in so far as the procedure that is required to be followed. Section 147 contemplates that if the Assessing Officer has reasons to believe that there is escapement of income, then notice can be issued under section 148 of the Act. So far as section 158BD of the Act is concerned, the Assessing Officer has to be satisfied that there is undisclosed income. Upon such satisfaction, the Assessing Officer is required to forward the relevant documents, papers, etc., to the Assessing Officer who is required to assess the person in respect of whom the undisclosed income has been discovered. Once this is done, the person who is to be proceeded against under section 158BD and then section 158BC must be informed about the satisfaction of the Assessing Officer which has been recorded and must be given a reasonable opportunity to object to the same.
In the case of Mridula, Prop. Dhruv Fabrics(335 ITR 266),the Hon’ble P&H High Court has held as follow:
“According to the plain reading of section 158BD ibid, the Assess ing Officer, while framing assessment of an assessee under section 158BC of the Act against whom action has been taken under section 132 or 132A of the Act, is mandatorily required to record satisfaction before action can be initiated under section 158BD of the Act against such other person. In other words, the satisfaction by the Assessing Officer making assessment under section 158BC of the Act, in the case of the person searched, that there is certain undisclosed income as a result of examination of the seized material which belongs to some other identified person, is essential for assuming jurisdiction under section 158BD of the Act. The satisfaction required to be recorded is prima facie satisfaction and is not firm or conclusive satisfaction at that stage.
Finally,we would like to refer to the matter of Radheyshyam Bansal (337ITR217)of the Hon’ble Delhi High Court,who has dealt the section in following manner:
“Section 158BD of the Income-tax Act, 1961,provides that for assessing the undisclosed income of any other person, that is, other than the person with respect to whom search was made under section 132, the Assessing Officer must be satisfied that the undisclosed income belongs to such person that is, the person other than the searched person. The Assessing Officer cannot proceed against “such other person” without having the required satisfaction. The requirement of satisfaction is a prerequisite condition for initiating assessment proceedings against “any other person” under section 158BD. The word “satisfaction”, appearing in section 158BD, clearly denotes that it should be based upon the material before the Assessing Officer and such satisfaction should be brought on record. The requirement of satisfaction is a statutory requirement and it cannot be assumed merely on the basis of certain material. It cannot also be correlated to any material until and unless it is shown on record that the satisfaction required under section 158BD was based on such record or material. Wherever “reason to believe” or “satisfaction” are to be recorded in writing, at least the Assessing Officer should demonstrate in some way his satisfaction about there being undisclosed income hidden in the searched material.”
From the above discussion,it is clear that the requirement of satisfaction is a prerequisite condition for initiating assessment proceedings against any other person u/s.158BD. The word satisfaction,appearing in the section clearly denotes that it should be based upon the material before the AO and such satisfaction should be brought on record.The requirement of satisfaction is a statutory requirement and it cannot be assumed merely on the basis of certain material.It cannot also be correlated to any material until and unless it is shown on record that the satisfaction required under section 158BD was based on such record or material. Wherever reason to believe or satisfaction are to be recorded in writing, at least the AO should demonstrate in some way his satisfaction about there being undisclosed income hidden in the searched material.In the present case,we find there was nothing to indicate that the AO could have formed an opinion and arrived at a satisfaction that the assessee had not truly disclosed its income.As the basic satisfaction for issuing notice u/s. 158 is missing,so,the action taken in pursuance of it cannot be endorsed.