Facts of the Case

A search and seizure operation under Section 132 of the Income-tax Act was conducted on 3 August 2000 against Mr. Manoj Aggarwal and M/s Friends Portfolio Pvt. Ltd.

Subsequently:

  • Block assessment under Section 158BC in the case of M/s Friends Portfolio Pvt. Ltd. was completed on 29 August 2002.
  • Block assessment proceedings in the case of Manoj Aggarwal were completed on 30 August 2005.

On 16 January 2003, the Deputy Commissioner of Income Tax recorded a satisfaction note stating that the respondent-assessee, Mr. Raghubir Singh Garg, had allegedly received accommodation entries amounting to Rs. 21,17,191/- from M/s Friends Portfolio Pvt. Ltd. through various cheques.

Based on the seized material and bank enquiries, the officer concluded that undisclosed income belonging to the respondent had been detected during the search proceedings. Accordingly, proceedings under Section 158BD read with Section 158BC were initiated against the respondent through notice dated 5 August 2003.

Issues Involved

  1. Whether the satisfaction note under Section 158BD of the Income-tax Act can be recorded after completion of assessment proceedings under Section 158BC in the case of the searched person?
  2. Whether the Assessing Officer becomes functus officio after passing the block assessment order under Section 158BC?
  3. Whether block assessment proceedings initiated under Section 158BD after recording such satisfaction are valid in law?

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The Tribunal erred in declaring the proceedings invalid merely because the satisfaction note was recorded after completion of block assessment under Section 158BC.
  • Section 158BD does not prescribe that satisfaction must be recorded before completion of assessment of the searched person.
  • The Supreme Court in Calcutta Knitwears had clarified that satisfaction could be recorded:
    • at the initiation stage,
    • during assessment proceedings, or
    • immediately after completion of assessment proceedings.
  • Therefore, the proceedings initiated against the respondent were legally valid.

Respondent’s Arguments (Assessee)

The respondent-assessee supported the Tribunal’s order and contended that:

  • The satisfaction note was recorded after passing the assessment order under Section 158BC against the searched person.
  • Once the block assessment order had been passed, the Assessing Officer became functus officio and had no authority to record satisfaction thereafter.
  • Consequently, proceedings initiated under Section 158BD were invalid.

The respondent also prayed that if the matter was decided against him on the legal issue, the case should be remanded for examination of additions on merits.

Court Findings / Court Order

The Delhi High Court held in favour of the Revenue and against the assessee.

The Court observed that:

  • The reasoning adopted by the Tribunal was contrary to the law laid down by the Supreme Court in CIT vs. Calcutta Knitwears.
  • Section 158BD is a machinery provision intended for assessment of persons other than the searched person.
  • The law does not prohibit recording of satisfaction after completion of assessment proceedings under Section 158BC.
  • The satisfaction note is mandatory, but the stage at which it may be recorded includes even the period immediately after completion of assessment of the searched person.
  • Section 158BE only prescribes limitation for completion of proceedings and does not impose any limitation for recording the satisfaction note.

Accordingly:

  • The substantial question of law was answered in favour of the Revenue.
  • The Tribunal’s finding declaring the proceedings invalid was set aside.
  • The matter was remanded to the Tribunal for adjudication on merits regarding the addition made against the assessee.

The parties were directed to appear before the Tribunal on 13 October 2014 for further proceedings.

 Important Clarification

The judgment clarifies that:

  • Recording of satisfaction under Section 158BD is mandatory.
  • However, such satisfaction note can validly be recorded:
    1. At the initiation of proceedings under Section 158BC,
    2. During assessment proceedings, or
    3. Immediately after completion of assessment proceedings against the searched person.

The Assessing Officer does not become functus officio merely because the block assessment order under Section 158BC has been passed.

This judgment reinforces the principles laid down by the Supreme Court in CIT-III vs. Calcutta Knitwears, Ludhiana (2014) 6 SCC 444.

Sections Involved

  • Section 132 – Search and Seizure
  • Section 158BC – Block Assessment of Searched Person
  • Section 158BD – Block Assessment of Other Person
  • Section 158BE – Limitation for Block Assessment
  • Section 132A – Requisition of Books of Account

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2014:DHC:4199-DB/SKN27082014ITA14202010.pdf

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