Reopening of a block assessment

    1.1 Chapter XIV-B, inserted in the Income-tax Act, 1961 by the Finance Act, 1995 w.e.f. 1-7-1995, provides for a special assessment procedure for taxing an undisclosed income detected as a result of a search action u/s.132 that took place on or after 1st July, 1995 but before 31st May, 2003.

    1.2 The chapter contains complete mechanism for computation and assessment of the total undisclosed income of the block period and includes mechanisms for filing of a return of income, issue of a notice, payment of taxes, interest and penalty. The chapter, as considered by the Courts, is a code by itself.

    1.3 The regular income, i.e., the disclosed income of the block period continues to be governed by the general provisions of the Income-tax Act including those providing for regular assessment of such income.

    1.4 The provisions for special assessment, under Chapter XIV-B, of undisclosed income and that for regular assessment u/s.143(3), operate in different fields and run parallel to each other for assessment of income of an year; one for taxing an undisclosed income, while the other for bringing to tax a disclosed income.

    1.5 Chapter XIV-B also provides for an application of all those provisions of the Act other than those that are specifically differentiated under Chapter XIV-B. In other words, unless otherwise provided in Chapter XIVB, the provisions contained in general law of the Act will apply to the assessment of an undisclosed income even for a block period, except in cases where the chapter provides for any specific departure from the general provisions of the Act by specially providing a different course.

    1.6 An interesting issue that arises, in the context, is about the possibility of reopening a block assessment made under Chapter XIVB and the consequent reassessment of the undisclosed income of the block period. The Courts have been asked to examine the possibility of application of provisions of S. 147 and S. 148 for reopening of a completed block assessment. While the Gujarat High Court finds it to be not possible, the Gauhati High Court has held that it is possible to reopen a completed block assessment.

2. Cargo Clearing Agency (Gujarat)’s case, 307 ITR 1 (Guj.) :

    2.1 In the case of CIT v. Cargo Clearing Agency (Gujarat), 307 ITR 1, certain loose papers were found and seized during the search proceedings u/s.132 of the Act from the residential premises of one of the erstwhile partners of the petitioner-firm and his statement was recorded. An order u/s.158BD of the Act was made on a total income of Rs.40,50,900 after taking approval of the Commissioner of Income-tax, Rajkot for the block period in the status of AOP pursuant to the return of income for the block period filed showing a total undisclosed income at Rs.30,00,000. The assessment was made after various details and explanation were called for, vide notice issued under Chapter XIVB.

    2.2 Subsequently a notice u/s.148 of the Act was issued seeking to reassess the income for the block period by stating that there was a reason to believe that the income for the block period had escaped assessment within the meaning of S. 147 of the Act and that the notice was issued after obtaining the necessary satisfaction of the Commissioner. In spite of repeated letters asking for the reasons recorded u/s.148(2) of the Act, the same were not supplied. In a correspondence addressed to one of the ex-partners it was stated that it was not obligatory to supply reasons recorded and the addressee was directed to file return immediately. It is at this stage that the petitioner had approached the Court challenging the impugned notice issued u/s.148 of the Act.

    2.3 The principal issue raised in the petition was whether it was open to the assessing authority to issue notice u/s.148 of the Act in respect of an assessment framed for a block period under Chapter XIVB of the Act.

    2.4 On behalf of the petitioners, it was contended that S. 147 of the Act permitted an Assessing Officer to reassess an income which had escaped assessment for any assessment year. Emphasising the language of the provision, it was contended that an assessment Chapter XIB was not in respect of any assessment year but was for the block of years and as such it was impossible for the Assessing Officer to form a belief that any income chargeable to tax for any assessment year had escaped assessment.

    2.5 Based on the provisions of S. 147 of the Act and the proviso therein it was submitted that the scheme would fail in the case of assessment for the block period as the limitation u/s.147 that has been prescribed for issuance of notice has been reckoned from the end of a particular assessment year and as such it was not possible to specify the assessment year, in the case of a block assessment, from the end of which the time limit could be computed.

    2.6 The provisions of S. 151 and S. 153 of the Act were also relied upon by the petitioners to point out that the condition for obtaining the sanction of the higher authority as provided by S. 151 of the Act in cases where four years had expired from the relevant assessment year could not be complied with and fulfilled, as in respect of the block period there was no relevant assessment year w.r.t which the time limit could be observed. Similarly, S. 153 of the Act also provided different period of limitation as against the provisions of S. 158BE of the Act which provides for time limit for completion of block assessment.

    2.7 It was also contended that the order of block assessment was passed after the approval of the Commissioner and therefore a reopening with the sanction of the subordinate authority was bad in law.

    2.8 On behalf of the Revenue, it was submitted that S. 158BH of the Act specifically provided that save as otherwise provided in Chapter XIVB, all other provisions of the Act shall apply to assessment made under Chapter XIVB. It was, therefore, contended that when one considered the definition of ‘block period’ as provided in S. 158B(a) of the Act, it was clear that the said term covered the period comprising previous years relevant to 10/6 assessment years preceding the previous year in which the search was conducted u/s.132 of the Act and therefore, wherever the words ‘assessment year’ appeared in Chapter XIV of the Act relating to procedure for assessment, the term ’block period’ had to be read in the place of ‘assessment year’ to make the scheme workable.

2.9 Referring to Ss.(2) of S. 158BA of the Act, it was submitted for the Revenue that for the purpose of charging tax not only S. 113 of the Act was mate-rial, but even S. 4 had to be considered as laid down by the Apex Court in the case of CIT v. Suresh N. Gupta, 297 ITR 322. It was submitted that the Apex Court has considered the entire scheme of Chapter XIVB of the Act and had come to the conclusion that computation of undisclosed income had to be made u/s. 158BB in the manner provided in Chapter IV of the Act and therefore, the application of the said Chapter was not ruled out by the provisions of Chapter XIVB of the Act; that non obstante clause appearing in S. 158BA of the Act had to be read in juxtaposition with S. 158BH of the Act; that the concepts of ‘previous year’ and ‘total income’ were retained in Chapter XIVB of the Act and, therefore, ap-plication of Chapter XIV of the Act could not be ruled out from the block assessment procedure.

2.10 To begin with, the Gujarat High Court observed that in the aforesaid circumstances, when one considered the entire scheme relating to procedure for assessment/reassessment as laid down in the group of Sections from S. 147 to S. 153 of the Act and compared the same with special procedure for assessment of search cases under Chapter XIVB of the Act, it became apparent that the normal procedure laid down in Chapter XIV of the Act had been given a go by when Chapter XIVB of the Act itself laid down that the said Chapter provided for a special procedure for assessment of search cases and the stand of the Revenue that S. 158BH of the Act permitted all other provisions of the Act to apply to assessment made under Chapter XIVB of the Act did not merit acceptance.

2.11 The Apex Court decision, the Court proceeded further, on which great emphasis has been placed on behalf of the Revenue in fact went on to support the view adopted by the petitioner. The Court noted that the controversy before the Apex Court was in relation to the rate of tax which was to be applied to the undisclosed income assessed in terms of Chapter XIVB of the Act and the Apex Court in that case was concerned mainly with computation of undisclosed income u/s.158BB(1) of the Act. The Gujarat High Court pointed out that it had already noticed that S. 158BH of the Act provided for invoking other machinery provisions to an assessment made under Chapter XIVB of the Act which did not require other provisions of the Act to be applied to a block assessment to be made under Chapter XIVB of the Act.

2.12 The Apex Court decision, the Court further noted, also provided for a harmonious construction on the basis of reading of the mode of computation provided in Chapter IV of the Act and provided under Chapter XIVB of the Act by stating that S. 158BH inter alia, provided that other provisions of the Act should apply if there was no conflict between the provisions of Chapter XIVB of the Act and other provisions of the Act. The Court further noted that in a situation where there was a conflict between the provisions of block assessment procedure prescribed under Chapter XIVB of the Act and other provisions of the Act, it would be the special procedure prescribed under Chapter XIVB of the Act which had to prevail.

2.13 The Court further noted that the entire scheme under Chapter XIV of the Act, more particularly from S. 147 to S. 153 of the Act pertaining to reassessment and the special procedure for assessing the undisclosed income of the block period under Chapter XIVB of the Act, were separate and distinct from each other and in the circumstances, as per the established rules of interpretation, unless and until a plain reading of the two streams of assessment procedure did not result in the procedures being independently workable, only then the question of resolving the conflict would arise; to the contrary, in the present case, in the light of the provisions of S. 158BH of the Act, once there was a conflict between the two streams of procedure, as laid down by the Apex Court, the provisions of Chapter XIVB of the Act shall prevail and have primacy.

2.14 Thus, viewed from any angle, the Court held, the stand of the Revenue did not merit acceptance. Once assessment had been framed u/s.158BA of the Act in relation to undisclosed income from the block period as a result of search there was no question of the Assessing Officer issuing notice u/s.148 of the Act for reopening such assessment as the said concept was abhorrent to the special scheme of assessment of undisclosed income for block period. At the cost of repetition it was required to be stated and emphasised that the first proviso u/d 158BC(a) of the Act specifically provided that no notice u/s.148 of the Act was required to be issued for the purpose of proceeding under Chapter XIVB of the Act.
 
Peerchand Ratanlal Baid (HUF)’s case :

3.1 The brief facts in the case of CIT v. Peerchand Ratanlal Baid (HUF), 226 CTR 189 (Gau.) were that a search in the Baid Group of Companies had taken place u/s.132 in the year 1995 . The assessee, a HUF, as the proprietor of one of the group companies, filed the return for the block period 1986-87 to 1996-97 showing undisclosed income of Rs.60 lakhs. The assessment was completed u/s.158BC of the Act, determining an undisclosed income of Rs.1,17,25,416. The assessee filed an appeal before the Tribunal against the aforesaid order of assessment which was partly allowed and the undisclosed income for the block period was revised to Rs.24,37,850. Subsequently it was found that some of the documents seized in the case of another group company i.e., M/s. Baid Commercial Enterprises, for the same block period i.e., 1986-87 to 1996-97, pertained to the assessee. Accordingly, the AO initiated the proceedings for reopening asking the assessee to explain why the amount of Rs.59,18,246 covered by the aforesaid seized documents or any part thereof should not be added to the total undisclosed income of the assessee for the block period. The explanation given by the assessee having been found to be unsatisfactory the AO added a sum of Rs.13,66,715 to the undisclosed income of the assessee for the block period revising the assessed income to Rs.38,04,570.

3.2 The Gauhati High Court while upholding the order of the Tribunal allowing the appeal of the assessee on merits and other facets of the case, the Court at the request of the counsel appearing for the assessee, adjudicated a question raised by him to the effect that it was not within the power and jurisdiction of the assessing authority to issue notice u/s.148 of the Act in respect of an assessment for a block period made under Chapter XIV-B of the Act by placing reliance on the judgment of the High Court of Gujarat in Cargo Clearing Agency (Gujarat) v. JCIT, 307 ITR 1 (Guj.).

3.3 The Gauhati High Court expressed its inabil-ity to subscribe to the views recorded by the Gujarat High Court and the reasons contained in support thereof. In reaching the aforesaid conclusion the Court relied on a judgment of the Apex Court in CIT v. Suresh N. Gupta, 297 ITR 322 (SC) which in the respectful opinion of the Court succinctly summed up the situation and provided adequate justification for the Court’s respectful disagreement with the views of the Gujarat High Court expressed in Cargo Clearing Agency’s case (supra).

3.4 Culling from the decision on the said case of Suresh N. Gupta (supra), the Court observed that each ‘previous year’ under the Act was a distinct unit of time for the purpose of assessment and the block period under the scheme of Chapter XIVB; it was an expanded unit of time comprising of 10/6 assessment years preceding the previous years; that the unit of time in both situations above remains constant; that it was open for Parliament to treat 10/ 6 previous years as one unit of time for the purposes of assessment for the block period; that the concept of previous year was retained in Chapter XIVB of the Act; that the non obstante clause in S. 158BA had to be read in juxtaposition with S. 158BH and if so read, other provisions of the Act would be applicable to the scheme under Chapter XIVB, if no conflict arose upon such application.

3.5 The principles noted above, the Court observed, took adequate care of the contrary view of the Gujarat High Court holding that S. 147 could not have any application to a block assessment which was made for 10/6 years without reference to any particular assessment year, as S. 147 of the Act provided only for reassessment of escaped income of any assessment year specified therein.

3.6 As regards the observation of the Gujarat High Court to the effect that all material, in course of block assessment following a search, was available with the AO and therefore the conditions precedent for the exercise of power u/s.147/148 were not satisfied, the Gauhati High Court stated that “we may straightway point out that the aforesaid view does not take care of the situation that has arisen in the present case, details of which have been set out hereinabove. We, therefore, deem it appropriate to understand that the view expressed in Cargo Clearing Agency (supra) cannot be considered to be comprehensive covering all situations to justify exclusion of the power u/s.147/u/s.148 from the provision of the special procedure for block assessments contemplated by Chapter XIVB of the Act”.

3.7 The question of limitation dealt with by the Gujarat High Court, in the considered view of the Court, had to be understood in the context of the separate period of limitation provided by S. 158BE of the Act for completion of block assessments and not for reopening such assessment for the block period; that in the absence of any separate and specific period of limitation for reopening of block assessments in Chapter XIVB, on the ratio of the judgment in CIT v. Suresh N. Gupta (supra), the provisions contained in Chapter XIV prescribing the period of limitation for reopening of assessment must be understood to be applicable to assessments under Chapter XIVB of the Act inasmuch as such application would not bring in any conflict between the provisions of Chapter XIVB and those contained in Chapter XIV.

3.8 The exclusion of S. 148 by the first proviso to S. 158BC(a) of the Act was understood by the Court to be in the context of the notice that was required to be issued by the AO following action taken u/ s.132 and/or S. 132A of the Act; that such notice, in the fact of a concluded assessment for any of the assessment years included in the block period, might partake the character of reopening such an assessment, to clarify which the first proviso to S. 158BC(a) had been inserted; that the question that confronted the Court in the case under consideration was in relation to a stage after conclusion of the assessment for the block period, whereas the afore-said proviso dealt with the stage of initiation of the block assessment proceeding. Consequently and in the light of the foregoing discussions while dismissing the appeal of the Revenue, the Gauhati High Court deemed it proper and appropriate to record their conclusion that the provisions of S. 147 and S. 148 would apply to an assessment for a block pe-riod made under Chapter XIVB of the Act.

Observations :

4.1 The controversy surrounds one of the important clauses that saves the application of the other provisions of Income-tax Act, contained in Chapter XIVB. It reads as under :

“Save as otherwise provided in this chapter, all other provisions of this Act shall apply to assessment made under this chapter.”

4.2 On a bare reading of the provisions of Chapter XIVB, it is confirmed that there are no express or apparently implied provisions in the chapter which provides for reopening of a completed block assessment. It is therefore to be examined whether the general provisions for reopening and reassessment as applicable to a regular assessment con-tained in Chapter XIV, particularly u/s.147 to u/s. 153 can be applied to the case of the block assessment under Chapter XIVB for its successful reopen-ing and succeeding reassessment.

4.3 Again on a bare reading of the abovementioned clause, it is apparent that it is possible to apply all those provisions of the Act in situations and circumstances not dealt with by Chapter XIVB. In other words, the general provisions of the Act would not apply where express provision is made in Chapter XIVB, so however, they will apply with equal force where the chapter does not contain any express provision to deal with an unspecified situation. Reopening of a completed block assessment, as noted above, is one such situation which has not been expressly dealt with by Chapter XIVB.

4.4 In the above stated analysis, on a primary reading of the provisions, one is likely to concur with the decision of the Gauhati High Court in the case of Peerchand Ratilal Baid (HUF) which has for the reasons noted has held that subject to compliance of other conditions it is possible to reopen a completed block assessment.

4.5 Having observed that it is possible to reopen a block assessment, it remains to be seen that whether the ratio of the decision in the case of Cargo Clearing Agency (Gujarat) would nonetheless hold water. The Gujarat High Court decision is a very well reasoned and detailed decision has ruled out the possibility of reopening of a completed block assessment and has supported the conclusion with various findings in law.

4.6 The Gujarat High Court in Cargo Clearing Agency’s case in particular held that; (1) while S. 147 of the Act permits reassessment of income that has escaped assessment for any assessment year, assessment under Chapter XIVB of the Act is for a block period of 10/6 years without reference to any particular assessment year, (2) reassessment of escaped income u/s.147 of the Act is made where income chargeable to tax has escaped assessment either due to the failure of the assessee to file return or failure to disclose fully or truly all material facts for the purposes of assessment or where material already on record had not been processed. In a case of block assessment under Chapter XIVB of the Act escapement of undisclosed income, following a search, cannot be envisaged, as all the materials recovered in the course of the search are available with the AO and there can be no case of non-disclosure of ma-terial facts by the assessee, (3) S. 158BA and S. 158BH, read in juxtaposition, leads to the conclusion that in the absence of any provision for reassessment under Chapter XIVB of the Act the provisions contained in S. 147 under Chapter XIV will not apply to assessments made for the block period, (4) the period of limitation for completion of block assessment provided for by S. 158BE of the Act is shorter than the period of limitation prescribed by S. 153 of the Act. It, therefore, cannot be envisaged that the period of limitation u/s.153 of the Act would apply to block assessment. Any such application of the provisions contained in S. 153 will make the scheme visualised u/s.158BE unworkable, and (5) under Chapter XIVB of the Act certain provisions contained in Chapter XIV have been specifically incorporated, whereas certain other provisions have been specifically excluded. S. 148 has been excluded by the first proviso to S. 158BC(a), whereas S. 142, S. 143, S. 144 and S. 145 have been specifically incorporated by sub-clause (b) of S. 158BC.

4.7 Amongst several reasons advanced by the Gujarat High Court for coming to the conclusion, the two that stand apart for our consideration are :

•  the Supreme Court’s decision in Suresh Gupta’s case was noted and its implications were considered by the Court while holding that it was not possible to read the provisions of reopening into the chapter of block assessment by suitably modifying the provisions of S. 147 to S. 153 of the Act.

•  the scheme of block assessment per se ruled out any possibility of a reopening of a block assessment altogether.

4.8 The entire present controversy can be considered and appreciated in light of the legislative intent expressed at the time when Chapter XIVB was introduced vide the Memorandum Explaining the Provisions in the Finance Bill, 1995. The purpose and the object for introducing the said Chapter was explained in the following terms :

“Special procedure for assessment of search cases. Searches conducted by the IT Department are important means of unearthing black money. How-ever, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. In order to make the procedure of assessment of search cases cost effective, efficient and meaningful, it is proposed to introduce a new scheme of assessment of undisclosed income determined as a result of search u/s.132 or requisition u/s.132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30th June, 1995, shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income recorded on or before the date of the search or requisition in the books of account or other documents, maintained in the normal course, relating to such previous years shall not be included in the block.”

4.9 The memorandum referred to above, is a pointer to the fact that undisclosed income, in other words, the income which has not been disclosed and which has not been taxed, has to be assessed by adopting a special procedure. The special procedure has been evolved to save valuable time which is otherwise lost in the process of co-relating the un-disclosed income to different assessment years by obviating the legal battles involving issues of procedure and interpretation of law. The Legislature found it necessary to arrive at a cost effective, efficient and meaningful procedure to avoid litigations which continue for many years to decide which income, or part of income, is assessable in which assessment year.

4.10 Looking from several angles, to us the view expressed by the Gujarat High Court is a better view inasmuch as the reassessment of escaped income u/ s.147 of the Act is made in cases where income chargeable to tax has escaped assessment either due to the failure of the assessee to file return or failure to disclose fully or truly all material facts for the purposes of assessment or where material already on record had not been processed. It therefore pre-supposes a failure on the part of the assessee to comply with the requirements of the law. In a case of block assessment, on the contrary, under Chapter XIVB of the Act, the escapement of undisclosed income, following a search, cannot be envisaged at all, as all the material recovered in the course of the search is available with the AO and there can be no case of non-disclosure of material facts by the assessee. Not using such material indicates a possible failure on the part of the AO for which no power can not be vested in him to confer benefit for inaction. Moreover, the Gujarat High Court did examine the implications of Suresh N. Gupta’s decision in coming to the conclusion advanced by the Court.