ORDER
P.N. Parashar, Judicial Member
1. This appeal has been filed by the assessee firm, namely, M/s Sakun International. New Delhi against the block assessment order dated 29-10-1998 for the block period from 1-4-86 to 10-10-96 in the case of the assessee, passed Under Section 158BC/158BD of the Income-tax Act.
2. Shri C.S. Agarwal, Senior Advocate along with Shri R.K. Gupta, Chartered Accountant appeared for the assesses while Shri Amitab Mishra, Senior D.R. (CIT) represented the Department.
3. The assessee has taken as many as 46 grounds in the appeal. Condensed grounds of appeal have also been filed by the assessee which are 17 in number. The grounds of appeal originally taken are mainly in two parts i.e. ground No. 1 and 2 which are legal grounds and which have been taken to challenge the competency and validity of the jurisdiction of the AO and consequently the validity of the assessment order itself whereas Ground No. 3 to 44 assail various additions made in the block assessment order. Ground No. 45 also challenges the assessment order by alleging that the same is liable to be set aside since it has been framed in great haste and without appreciating the facts and circumstances, without confronting the assessee with the material considered adversely and without allowing proper opportunity of hearing to the assessee. Ground No. 46 contains a prayer to amend and substitute any ground of appeal.
4. On going through the order sheets pertaining to this appeal it is noticed that this matter has a chequred history. The appeal was filed on 27-11-98 and the hearing was concluded only on 4th Feb., 2005. In fact much of the delay in concluding the hearing in this case appears to be on account of the non production of record by the Revenue and also on account of lengthy submissions on interim matters including the issue relating to transfer of jurisdiction to the AO who has passed the impugned assessment order. This was in relation to one of the legal grounds being ground No. 2 of this appeal.
5. The learned counsel for the assessee submitted detailed arguments with regard to the following grounds :
1. That Assessment proceedings Under Section 158BD of the I.T. Act, 1961 are without jurisdiction in the absence of any satisfaction recorded by the Ld.A.O. for existence of any undisclosed income belonging to the applicant.
2. That under the facts and circumstances of the case, the asstt. Order is again without jurisdiction since the Ld.A.O. who framed the assessment, was not having proper jurisdiction in the matter.
6. In view of the above grounds, request of the learned counsel of the assessee was that these grounds which assail the assumption of jurisdiction by the AO and which involve purely legal aspects, should be decided first. In the alternative the learned counsel also submitted brief arguments in relation to the other grounds of appeal, namely, ground No. 3 to 44. As detailed arguments have been advanced in respect of ground No. 1 and 2 referred to above, we consider it proper to adjudicate the issues involved in these grounds.
7. Ground No. 1:
In this ground, the assessee has challenged the very validity of the jurisdiction exercised by the AO in passing the impugned assessment order. The facts concerning this matter as brought out from the assessment order, are that in the case of Shri Satish Agarwal. Sakun Chains (P) Ltd. and others, a search was conducted Under Section 132 of the IT Act which was completed, on 10-10-96. During the course of search certain loose slips were found and seized from the residence of Shri Satish Agarwal and also from the factory premises at Daya Basti, Delhi. During the course of assessment proceedings Under Section 158BC. in the case of Shri Satish Agarwal. affidavit was filed by him as partner of the assessee firm, namely. Sakun International deposing that certain seized material, details of which have been given in Annexure A-2. A-3. A-4. A-8. A-9. A-10(Factory). Annexure A-5. A-6. A-7, A-8. A-9 (residence) belong to M/s Sakun international i.e. the present assessee. While completing the assessment in the case of Shri Satish Agarwal Under Section 158BC the AO issued notice Under Section 158BC read with Section 158BD of the IT Act to the present assessee. This notice is as under:
” In pursuance of the provisions of Section 158BC read with Section 158BD of the IT Act. you are required to prepare true and correct return of your total income including the undisclosed income in respect of which you as Individual HUE Firm Company, AOP SCL Local Authority are assessable for the block period mentioned in Section 158B(a) of the I.T. Act, 1961.
The return should be in the prescribed form No. 28 and be delivered in this office within 10 days of service of this notice, duly verified and signed in accordance with the provisions of Section 140 of the I.T. Act.
This notice Under Section 158BD is being issued on the basis of order Under Section 158BC in the case of S.G. Satish Kumar Aggarwal in which search Under Section 132(1) was completed on 11-10-96.”
8. In compliance to this notice, the assessee filed return of income in Form No. 2B on 29-10-97. Thereafter notices Under Section 142(1) and 143(2) were issued. Vide letter dated 21st August, 98 copy of which is available at pages 16 to 19 of the paper book, the assessee raised certain objections. These objections) included the legality of jurisdiction to frame block assessment order against the assessee. It was specifically submitted vide letter dated 18th Sept. 1998 that the block assessment should be framed on the basis of material and evidence seized during the course of search. Vide letter dated 9th Oct. 98 available at page 36 of the paper book also it was submitted that there was no search warrant in the name of the assessee and it is only on the basis of certain seized material that the case of the assessee was covered Under Section 158BD for which notice us 158BD dated 1-10-97 was issued. In these notices, besides challenging the legality of the jurisdiction of the AO various pleas were also taken to challenge various additions. The assesses also filed detailed objection against the draft assessment order and explained the documents seized during the course of search from the premises of Shri Satish Agarwal.
9. Before finalizing the assessment order, the AO also issued a notice dated 5th Oct., 98 calling upon the assessee to submit written submissions on or before 12-10-98 failing which proposed addition on account of undisclosed income were to be made. After considering the reply of the assessee against this notice the assessment was framed by the AO on 29-10-98.
10. In support of ground No. 1 taken in this appeal the submission of the learned counsel for the assessee Shri C.S. Agarwal was that in the present case no satisfaction had been recorded before issuing notice Under Section 158BD or before passing the assessment order and, therefore, the proceedings initiated Under Section 158BD read with Section 158BC of the IT Act cannot be justified in the eye of law. According to him, no block assessment Under Section 158BD read with Section 158BC can be undertaken without prerecording of such satisfaction. In support of this contention the learned counsel placed reliance on the following decisions :
1. Amity Hotels Pvt. Ltd. v. CIT
2. Unreported decision of Hon’ble Delhi High Court in the case of CIT v. Karan Engineering Pvt. Ltd. in ITA No. 686/2004 decided vide order dated 6-12-2004.
3. Unreported decision of ‘C’ Bench of ITAT, Delhi dated 28-12-2004 in the case of B.L. Leather Pvt. Ltd. v. DCIT in IT(SS) No. 13/Del/99.
After placing reliance on the aforesaid decisions and also on the decision in the case of Ashok Kumar Sen v. Income-tax Officer, Spl.Cir.V. New Delhi 132 ITR 707 (Del), the emphatic contention of the learned counsel for the assessee was that the AO was duty bound in law to satisfy himself that the documents seized reveal undisclosed income of the assessee and required further investigation. Regarding the affidavit of Shri Satish Agarwal, the reference to which has been made in the assessment order, it was submitted by him that this affidavit simply owns certain seized papers as belonging to the present assessee and it is no where stated that these are of incriminating nature and show undisclosed income.
11. The learned DR. in reply, submitted that the satisfaction of the AO can be found from the assessment order itself., He explained that the documents which are listed at various Annexures establish that the income of the assessee has escaped assessment and on the basis of these documents the AO proceeded to frame assessment against the present assessee. The Ld.Sr.DR also placed reliance on the decision of Hon’ble Allahabad High Court in the case of Digvijay Chemicals v. ACIT (248 ITR 381).
12. We have carefully considered the entire material on record and the rival submissions, At the outset, we may point out that in this matter the Department was given sufficient opportunities to produce the relevant material and the assessment records. However, despite the repeated directions the relevant assessment records were not produced. We may point out that on 7th May, 2002 the then Sr.D.R. Smt. Anita Kapur requested for time for producing the record relating to this appeal and on her request the matter was adjourned to 3rd June, 2002. Then the matter was adjourned on one ground or the other. The Department filed certain papers in compliance to the direction of the Tribunal but no document relating to recording of satisfaction Under Section 158BD was filed. In the case of the present assessee no search was conducted nor any document was found from its possession. The assessment proceedings have been initialed Under Section 158BD on the basis of material seized from the possession of Shri Satish Agarwal. The provisions contained Under Section 158BD are as under:
“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.”
14. A bare perusal of the above provision indicates that for assessing the undisclosed income of any other person, i.e. other then the person with respect to whom search was made Under Section 132, the AO must be satisfied that the undisclosed income belongs to such person i.e. the person other than the searched person. Thus the AO cannot proceed against such other person”, without having required satisfaction. The requirement of satisfaction is. therefore, a pre-requisite 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 AO and such satisfaction should be brought on record.
15. To reiterate, the Department has not been able to produce any document before us to show that any such satisfaction was recorded by the AO while making assessment in the case of Shri Satish Agarwal or before issuing notice Under Section 158BD to the present assessee or before completing the assessment against the present assessee. We have reproduced the notice issued Under Section 158BC read with Section 158BD to the assessee which is dated 1-10-97. In this notice nothing is mentioned about the satisfaction of the AO issuing this notice.
16. The contention of the learned DR was that on the basis of the affidavit of the essessee the AO was satisfied that the income of the present assessee has escaped assessment. We have also gone through the affidavit of Shri Satish Kumar Aggarwal a copy of which has been tiled on record and which is available at page 50 of the paper book. This affidavit is as under:
“I. Satish Kumar Aggarwal s/o Shri Amar Nath Aggarwal R/o 156. Mahendru Enclave. N. Delhi partner of M/s Sakun International do hereby state on solemn declaration as under:
1. That during search some loose papers were seized which were bundled as Annexure A-5, A-6, A-7, A-8, A-9 (From Residence)and Annexure A-2, A-3, A-4, A-8, A-9, A-10(from factory premises). These annexure relates to and are connected with Sakun International. Dt.
01.10.97 (DEPONENT) Verification: I, Satish K. Aggarwal the above named deponent do hereby state and verify that the facts given in the affidavit above are true and correct to the best of knowledge & belief."
On perusal of the above document, it is found that Shri Satish Kumar Aggarwal has only stated that various documents relate or are connected with Sakun International i.e. the present assessee. The above referred document does no where say that such document relate to undisclosed income of the present assessee. Thus we do not find force in the submission of the learned Sr. D.R. that this affidavit was the basis for having the required satisfaction. In any case, even on the basis of this affidavit if the AO gathered any inference or came to any conclusion that the seized documents referred to in this affidavit disclosed the undisclosed income of the present assessee then also he was required to record such a finding before proceeding Under Section 158BD against the present assessee.
17. It may further be pointed out that the notice issued Under Section 158BD is dated 1-10-97. The affidavit regarding which reference has been made above is also dated 1-10-97. On perusal of the notice it is found that no mention of the affidavit has been made in the notice. In any case, since the notice and affidavit are both dated 1-10-97, it cannot be said that prior to issuance of the notice the AO had in his possession the affidavit and issue notice Under Section 158BD on that basis. Thus the contention of the learned DR that the satisfaction can be shown on the basis of affidavit cannot be accepted. The basis of issuance of notice as mentioned in the notice itself is the block assessment order Under Section 158BC in the case of Shri Satish Kumar Aggarwal and not the affidavit. As observed earlier the Department has not been able to show that the satisfaction required Under Section 158BD was recorded during the course of assessment proceedings in the case of Shri Satish Kumar Aggarwal before issuance of notice Under Section 158BC. The Department has also not been able to show that before issuance of notice dt. 1-10-97 there was any material before the AO to be satisfied for initiating proceedings Under Section 158BD. Thus the proceedings Under Section 158BD have not been issued by the AO on the basis of any material to justify his satisfaction for assuming jurisdiction Under Section 158BD and as there was no basis for issuing the notice. Thus the notice itself is wrongly issued and making further assessment on the basis of such notice would be wholly outside the purview of the scheme incorporated Under Section 158. As observed by the Special Bench, ITAT, Bangalore in the case of Y. Subbaraju & Co. v. ACIT (supra), the issuance of notice by itself is not the display or record of satisfaction which is the basic requirement Under Section 158BD). Thus the contention of learned DR that on the basis of the notice satisfaction can be invoked, is not acceptable.
18. The requirement of satisfaction is a statutory requirement. It cannot be assumed merely on the basis of certain material. It can also not 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. Thus no presumption can be drawn in absence of any specific material, finding or order of the AO specifically made in this regard. It is also a settled legal position that wherever under any statutory provision such requirement is given by incorporating specific words then in order to make proper compliance of the provisions, the requirement can be satisfied by recording a finding to that effect on record. Thus the satisfaction has to be recorded in writing. Thus in view of this approach wherever the words like ‘reason to believe’ or ‘satisfaction’ are incorporated in the statutory provisions, then the reasons or satisfaction are to be recorded in writing or at least the Act should demonstrate in some way his satisfaction about there being undisclosed income hidden in the searched material’ as observed by the Special Bench of ITAT in the case of Y. Subbaraju & Co. v. ACIT 91 ITD 118. The intention of the legislature in its specifically incorporating such words in such enacted provisions cannot be fulfilled unless the requirement is brought on record. In other words, unless the ‘satisfaction’ or ‘reasons to believe” are brought on record or are sufficiently shown on record.
19. In the case of Ashok Kumar Sen v. ITO 132 ITR 707 the issue related to issuance of notice Under Section 147(a) and 148 of IT Act for bringing to lax income escaping assessment. During the hearing of writ petition the ITO filed counter affidavit stating that he was of the opinion that inasmuch as in the preceding years personal and household expenses of the petitioners were to the tune of Rs. 40,000/- to Rs. 50.000/- a year. It was difficult to believe that in the previous year relevant to assessment year 1962-63 the petitioner had been able to meet his household expenses from out of his net income of Rs. 9930/- and as such there was reason to believe that income changed under tax had escaped assessment. The Hon’ble Delhi High Court while interpreting the words “If the Income-tax Officer has reason to believe” appearing in Section 147(a) observed that the powers in this section are not plenary. After referring to the decision in the case of Nakkuda Ali v. Jayaratne (1951) AC 66, 77(PC) it was observed by the Hon’ble Court that these words must be intended to serve in some sense as a condition limiting the exercise of an otherwise arbitrary power. The Hon’ble Court not being satisfied with the affidavit of the ITO held that there was no material before him on which he could have termed the required belief for reopening the assessment proceedings. Notice Under Section 147(a) was therefore, held to be held.
20. In the case of Amity Hotels Pvt. Ltd. and Ors. v. CIT and Ors. the Hon’ble Delhi High Court has examined the scope of Section 158BD and after referring to the provisions of Section 132, 132A, 158BC and 158BD the Hon’ble Delhi High court has observed as under:
” Search and seizure – Block assessment – proceedings under as 158BD- It is necessary for the AO to record his satisfaction for taking action under Section 158BD against any person other than one covered by Sections 132 or 132A- The satisfaction is required to be preceded by the investigation and not that the investigation is required to be proceeded by the satisfaction- Satisfaction may be on the basis of material which is seized not from the notice but from the other assessee or a person in respect of whom action as taken under Section 132 or 132A- in the present case, there is nothing to indicate that the AO formed an opinion and arrived at a satisfaction that the petitioner has not truly disclosed its income. In his noting, AO has clearly indicated that the matter requires further investigation and in depth scrutiny and has recorded in writing that he was satisfied about the enquiry to be initiated- Proceedings under Section 158BD are not in accordance with law and liable to be quashed.”
21. The issue has again been dealt with by the Hon’ble High Court in a latest decision in the case of Janki export International through S.P. Gupta v. Union of India and Ors. In this case the Hon’ble High Court has compared Section 158 with Section 147 of the IT Act and has observed as under:
We find that Section 158BD is somewhat analogous to Section 147 insofar as the procedure that is required to be followed Section 147 contemplates that, if the AO has reasons to believe that there is escapement of income, then notice can be issued under Section 148 of the Act. So far as a 158BD of the Act is concerned, the AO has to be satisfied that there is undisclosed income. Upon such satisfaction, the AO is required to forward the relevant documents, papers, etc. to the AO who is required to assess the person in respect of whom the undisclosed income has been discovered. Once this is done, we feel that the person who is to be proceeded with under Section 158BD and then Section 158BC, must be informed about the satisfaction of the AO which has been recorded and he must be given a reasonable opportunity to object to the same. Satisfaction can be arrived on some material. That material would provide the reasonable satisfaction.
22. We may mention here that in the case of Digvijay Chemicals 248 ITR 381, the Hon’ble Allahabad High Court has held that there was no requirement in Section 158BD of affording opportunity of hearing to a party before recording satisfaction. According to the Hon’ble Court this satisfaction is not a quasi-judicial order but an administrative order. However, the issue has been elaborated and threshed out in the decisions of Hon’ble Delhi High Court referred to above.
It is to be pointed out that the decisions of the Hon’ble Delhi High Court, which is a jurisdictional High Court are binding upon us. Otherwise also, we do not have any factual or legal material before us to deviate from the propositions laid down in these authorities. Hence the ratio of the above decisions are fully applicable to the facts of the instant matter and the same has to be applied and followed.
23. The issue was also considered by the Special Bench in the case of Y. Subbaraju & Co. v. ACIT 91 ITD 118 on me requirement of satisfaction for framing assessment Under Section 158BD and the following observations were made:
“If the satisfaction of the Assessing Officer that undisclosed income belongs to other person is justifiable the authorities when called in question, cannot escape to demonstrate the material that led to the satisfaction that undisclosed income of other person has been detected by the department as a result of search. If the department, for any reason, has no material whatsoever to come to that view, the proceedings under Section 158BD would have to be dropped because the very foundation for the assumption of jurisdiction becomes nonexistent. Although the judicial authorities are not entitled to go into the sufficiency of the reasons, the existence of the reasons for satisfaction can always be gone into by the judicial authorities. In the instant cases, there was no iota of material to show that there was undisclosed income. When such was the case, the satisfaction that the undisclosed income belonged to such other person was wanting. When that was the case, the entire proceedings framed with the issuance of notice under Section 158BD would have to go. In other words, if the basis for notice is not there, the notice itself is wrongly issued and making further assessment on such person would be wholly outside the purview of the scheme. Thus, issuance of notice by itself is not the display or record of satisfaction which is the basic requirement under Section 158BD (para 7.1, 7.2 and 9)
24. The Delhi Bench of ITAT has also considered the issue in the case of B.L. Leather Pvt. Ltd., New Delhi v. DCIT, Cir:1(6), New Delhi and vide its order dated 28th Dec., 2004 rendered in IT(SS) No. l3/Del/99. In that case also the assessee had challenged the block assessment order by contending that as no satisfaction has been recorded nor the AO had any material to form the belief that there was undisclosed income which belongs to the assessee, the jurisdiction Under Section 158BD was not properly invoked and as such the assessment framed consequent thereto were without jurisdiction and to be annulled. The Tribunal accepting this plea observed that whenever the question of satisfaction comes, it must re done before the completion of assessment in the case of the searched assessee and not thereafter. The observations of the Tribunal as contained in para 8 of the order are as under:
“Having carefully examined the assessment order and the documents placed on record, we find that the search was conducted on the Bharat Leather Group cases on 13th & 14th Oct., 1995 and the assessment was required to be framed for the block period in those Gases on or before 31.10.96 as per the provisions of Section 158BB(1)(a) and assessment in case of Bharat Leather House was correctly framed on 25.10.96. The provisions of Section 158BD can only be invoked when the A.O. having jurisdiction over the searched assessee. is satisfied on the basis of seized material than an undisclosed income belong to any person other than the person with respect to whom the search was made Under Section 132 and upon his satisfaction, the assets shall be handed over to the A.O. having jurisdiction over third person and thereafter the A.O. shall proceed against the third person as per provisions of Chapter XIV-B of the I.T. Act. Whenever the question of satisfaction comes, it must be done before the completion of the assessment in the case of the searched assessee and not thereafter. Admittedly in the instant case the period of limitation for framing an assessment in the case of the searched assessee was only 31.10.96. Meaning thereby the A.O. having jurisdiction over the searched parties must have been satisfied before 31.10.96 on the basis of the seized materials that there was some undisclosed income which relate to the assessee in question.”
In that case the Bench after placing reliance on the decision of ITAT Special Bench in the case of Y. Subbaraju & Co. v. ACIT (supra) also held as under:
So far as recording of satisfaction is concerned, we have carefully perused the judgments relied upon by the panics and we find that the Tribunal has taken a consistent view that before handing over the seized materials to the concerned A.O. the A.O. having jurisdiction over the searched parties is required to record the satisfaction in writing.”
25. It may be pointed out that in that case also the DR was directed to produce the record but the Revenue could not do so and under these circumstances the Tribunal held that it had no reason to disbelieve the contention of the assessee that satisfaction was never recorded before handing over the seized material to the AO having jurisdiction over the assessee.
26. On the facts and in the circumstances of the present case also as the Department has pot been able to produce any record relating to the satisfaction of the AO. It could not be established by the Revenue that the AO had any incriminating material to be satisfied that there was undisclosed income which belonged to the present assessee.
27. In view of the above we are of the considered opinion that the jurisdiction Under Section 158BD was not properly assumed and exercised by the AO inasmuch as before assuming such jurisdiction he had not indicated any incriminating material belonging to the assessee upon the basis of which he had any satisfaction that undisclosed income of the assessee required assessment Under Section 158BD. Thus as the jurisdiction Under Section 158BD has not been invoked validly, the assessment made consequent thereto deserves to be annulled and quashed. We accordingly quash the assessment order on this around.
28. In the result, ground No. 1. taken in this appeal is allowed in favour of the assessee.
29. Ground No. 2:
In this ground also detailed submissions have been made by the learned counsel for the assessee and it was argued that in absence of any valid order of transfer made Under Section 127(1) of IT Act and without recording reasons for invoking powers Under Section 127 of the IT Act. the assessment made by the present AO cannot be sustained in the eye of law. On this issue reference was made by the learned counsel for the assessee to several directions issued by the Tribunal to the Department and also to the alleged order passed Under Section 127 which is dated 2-4-97. The objection of the learned Sr. D.R. against this ground was that as no appeal is provided before the Tribunal against the orders passed Under Section 127, the order so passed is not justifiable by the Tribunal.
30. The learned counsel for the assesses, on the other hand, submitted that the issue regarding valid exercise of jurisdiction by the competent authority Under Section 127 and the procedure adopted for that purpose can definitely be raised as a part of challenge to the assessment order itself. According to him the assessee can challenge the assumption of jurisdiction by the AO and for that purpose he can also challenge the order passed Under Section 127.
31. As we have annulled the assessment order by accepting ground No. 1 raised in this appeal, we do not consider it proper to adjudicate this ground because the discussion on this ground will remain only of academic interest.
32. In view of the above, we also do not consider it proper to adjudicate upon other grounds taken in this appeal for challenging the additions made in the assessment order as consequent upon the annulment of the assessment order the additions stand automatically deleted.
33. In the result, the appeal of the assessee stands allowed as above.