VLS Finance Ltd. & Anr. vs. CIT & Anr. [2016] 384 ITR 1 (SC)
Search and seizure took place in the business premises of the appellant companies on June 22, 1998 on the strength of warrant of authorisation dated June 19, 1998, which went up to in the morning hours of June 23, 1998. It was followed by further searches from time to time which went on till August 5.
Notice u/s. 158BC(c) of the Income-tax Act, 1991 (hereinafter referred to as the “Act”), was issued on June 28, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to June 22, 1998. This notice was withdrawn and another notice was issued on July 26, 1999. In response thereto, the appellants filed return for the aforesaid block period on September 10, 1999. As per section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorised for search under section 132 or for requisition u/s. 132A, as the case may be. However, the Assessing Officer could not do so because of certain developments which took place.
A direction u/s. 142(2A) was issued on June 29, 2000, which was served to the appellants on July 19, 2000 for conducting special audit for the aforesaid block period.
A writ petition (Civil) no.4685 of 2000 was filed by the Appellants, wherein a challenge was laid to the aforesaid order dated June 29, 2000, issued by Respondent No.2 directing a special audit in respect of appellants u/s. 142(2A) of the Act. In the said writ petition, the appellants also challenged the clarificatory order dated August 10, 2000 issued by respondent No.2 with regasrd to special audit in respect of appellant No.1 for the period from the assessment year 1994-95 to assessment year 1998-99 and in so far as appellant No.2 the period for assessment year 1994-95 to assessment year 1996-97.
During the pendency of the writ petition, as amendment application was filed being CM No. 9305 of 2006, seeking to add addional ground that the block assessment proceedings u/s. 158BC (c) of the Act were time barred. The appellant submitted that the time limit for completion of block assessment expired on June 30, 2000 in terms of section 158BE of the Act, since 2 years period expired on that date. It was further submitted that the authorization executed on June 22, 1998 could not have been utilised for conducting further search till August, 1998. It was also contended that the order u/s. 142(2A) of the Act was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit u/s. 142(2A) of the Act.
The respondents filed their affidavit in reply to the show cause explaining that the order for special audit u/s. 142(2A) of the Act was issued with proper authorization made by the Commissioner of Income Tax after due deliberation and on the basis of the report of the Assessing Officer, viz., Assistant Commissioner of Income Tax, New Delhi. It was further submitted that the period of completion of block assessment was to expire on August 31, 2000 and not on June 30, 2000 as claimed by the appellants. As per the respondents, since seizure operations were conducted from June 22, 1998 and there operations concluded only on August 5, 1998, the time limit of two years for completion of “block assessment” was to expire only on August 31, 2000.
In Writ Petition (Civil) No.4685 of 2000, interim order dated August 24, 2000 was passed, giving interim stay of the orders dated June 29, 2000.
This stay remained in operation during the pendency of the writ petition.
The matter was finally heard and decided by the Delhi High Court vide judgment dated December 15, 2006. It has quashed the direction for special audit in view of the fact that no hearing was afforded to the appellant before issuing such direction, which was necessary as per the law laid down in the case of Rajesh Kumar vs. Deputy CIT(287 ITR 91).
However, the High Court decided the question of limitation in favour of the Department holding that the period between August 24, 2000, i.e., date on which interim order was passed staying special audit direction under section 142(2A) dated June 29, 2000 and December 15, 2016, i.e., when the High Court has passed the order setting aside the direction for appeal audit, be excluded in counting limitation for concluding block assessment.
The appellant contended before the High Court that since there was no stay on block assessment proceedings in terms of interim order dated August 24, 2000, the direction to exclude the period between August 24, 2000 to December 15, 2006 was beyond its jurisdiction. It was alternatively contended before the High Court that the limitation for passing the block assessment having expired on June 30, 2000 in terms of section 158.
BE(1) of the Act, the direction to exclude the limitation period between August 24, 2000 to December 15, 2006 would not, in any case, save limitation. While rejecting the aforesaid contentions raised by the appellants, the High Court held that since special audit was an important and integral step in the assessment proceedings, once the direction for special audit was stayed by the High Court, assessment proceedings ipso facto could not go on. The High Court rejected the assessee’s second alternative argument holding that limitation period of two years was years was to be calculated from August 5, 1998, on which date last panchnama was drawn.
On appeal, the Supreme Court observed that in effect the central issue was one of limitation, which had the following two facts, viz:
(a) Whether the period of limitation expired on August 31, 2000 or the last date for completing block assessment was June 30, 2000?
(b) Whether the period between August 24, 2000 and December 15, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?
The Supreme Court taking the second issue first, noted that it was not in dispute that the period during which interim stay of the order passed by the court was in operation had to be excluded while computing the period of two years as limitation period prescribed for completing the block assessment. The parties had, however, joined issue on the nature of stay order which qualify for such exclusion.
The Supreme Court noted that the plea of the appellants was that only that period could be excluded in computing the period of limitation, during which assessment proceedings were stayed. A certain distinction was tried to be drawn in the instant case by referring to the interim order which was passed by the High Court on August 24, 2000 which had stayed the order of the Department directing compulsory audit. It was, thus, argued that stay was limited only to conducting compulsory audit and there was no stay of the assessment proceedings.
The Supreme Court referring the language of Explanation 1 held that it was not in doubt that this explanation granted benefit of exclusion only for those cases where “the assessment proceeding is stayed by an order or injunction” of the court. On literal construction, therefore, it became clear from the reading of this provision that the period that was to be excluded while computing the period of limitation for completion of block assessments was the period during which assessment proceedings are stayed by an order of a court and this provision shall not apply if the stay of some other kind, i.e., other than staying the assessment proceedings, was passed. The counsel for the appellants were justified in their contention that the provision relating to limitation need to be strictly construed.
The Supreme Court further held that as a general rule, therefore, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. However, this general statement of legal principle has to be read subject to an exception in order to interpret it rationally and practically. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings because of the reason that such stay order becomes an obstacle for the Assessing Officer to pass an assessment order thereby preventing the Assessing Officer to proceed with the assessment proceedings and carry out appropriate assessment. For an example, if the court passes an order injecting the Assessing Officer from summoning certain records either from the assessee or even from a third party and without those records it is not possible to proceed with the assessment proceedings and pass the assessment order even such type of order may amount to staying the assessment proceedings. In that context, the High Court, in the impugned judgment had propounded the correct and relevant test, viz,. whether the special audit is an intergral pat of the assessment proceedings, i.e., without special audit it is not possible for the Assessing Officer to carry out the assessment ? If it is so, the stay of the special audit may qualify as stay of assessment proceedings and, therefore, would be covered by the said Explanation.
The Supreme Court agreed with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, would not be a valid argument to the issue that was being dealt with. The Assessing Officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the Assessing Officer would not proceed with the assessment till the time that special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The Assessing Officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the Assessing Officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the Assessing Officer at that time. It is stated at the cost of repetition that in the estimation of the Assessing Officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the Assessing Officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.
The Supreme Court therefore, answered this question in favour of Revenue.
With this, the Supreme Court reverted to the other question, viz., from which date the period of limitation was to be counted, i.e., from June 22, 1998 when the respondent authorities visited the premises of the appellants on the basis of warrant of authorization dated June 19, 1998 or August 5, 1998, on which date the Revenue authorities last visited the premises of the appellants on the basis of the same warrant of authorization dated June 19, 1998 and conducted the search of the appellant’s premises. If the period was to be counted from June 19, 1998, the last date by which the assessment was to be carried would be June 30, 2000. If it was to be counted from August 5, 1998, then the limitation period was to expire on August 31, 2000. In the event the last date for completing the block assessment was held to be June 30, 2000, then the assessment became time barred even before the interim stay was granted by the High Court as it was granted on August 24, 2000, i.e., after the supposed limitation period was over and, therefore, the conclusion was reached in answering the other question, as above, would not come to the rescue of the Department. On the other hand, if the period of limitation was to expire on August 31, 2000, then by virtue of our answer to the first issue, the period of limitation for block assessment had not expired inasmuch as this court had passed an order dated February 5, 2007 that audit may go on but no final assessment order be passed.
The Supreme Court observed that the Revenue authorities visited and searched the premises of the appellants for the first time on June 22, 1998. In the panchanama drawn on that date, it was remarked “temporarily concluded”, meaning thereby, according to the Revenue authorities, search had not been concluded. For this reason, the respondent authorities visited many times on subsequent occasions and every time panchnama was drawn with the same remarks, i.e., “temporarily concluded”. It was only on August 5, 1998 when the premises were searched last, the panchnama drawn on that date recorded the remarks that the search was “finally concluded”. Thus, according to the respondents, the search had finally been completed only on August 5, 1998 and panchnama was duly drawn on the said date as well. The appellants, in the writ petition filed, had nowhere challenged the validity of searches on the subsequent dates raising a plea that the same were illegal in the absence of any fresh and valid authorization. On the contrary, the appellant proceeded on the basis that search was conducted from June 22, 1998 and finally concluded on August 5, 1998.
On the aforesaid facts and in the absence of any challenge by the appellants to the subsequent searches, the Court held that it cannot countenance the arguments of the appellants that limitation period was not to be counted from the last date of search when the search operation completed, i.e., August 5, 1998. The Supreme Court, therefore, decided this issue also in favour of the respondents.
