Supreme Court Upholds Second Notice under Section 158BD of IT Act in Income Tax Assessment: Tapan Kumar Dutta vs. Commissioner of Income Tax (2018)

Date of the Judgment: 24 April 2018

Citation: (2018) INSC 363

Judges: R.K. Agrawal, J., Abhay Manohar Sapre, J.

Can an Assessing Officer issue a second notice under Section 158BD of the Income Tax Act, 1961, to an individual when a prior notice under Section 158BC was already issued to the same individual? The Supreme Court of India addressed this question in a recent case involving the assessment of undisclosed income. The core issue revolved around the validity of a second notice issued to the appellant, Tapan Kumar Dutta, after an initial notice had already been served. The bench comprised Justices R.K. Agrawal and Abhay Manohar Sapre, with the judgment authored by Justice R.K. Agrawal.

Case Background

The appellant, Tapan Kumar Dutta, was a partner in a firm named “Nityakali Rice Mill”. On 6 November 1998, the Income Tax Department conducted a search at the firm’s business premises, seizing documents and Rs. 34 lakhs. Subsequently, on 9 September 1999, the Assessing Officer (AO) issued a notice to the appellant under Section 158BC of the Income Tax Act, 1961 (IT Act), requiring him to file a return of his total income, including undisclosed income, for the block period 1989-90 to 1999-2000. On the same day, a separate notice under Section 158BC was issued to the firm. The appellant filed his block return on 8 November 1999, declaring an undisclosed income of Rs 14 lakhs.

The Additional Commissioner of Income Tax, Asansol, directed the AO to determine the assessee’s income on 14 August 2000. The Joint Commissioner returned the draft assessment order on 16 November 2000, stating that no warrant for authorization was issued in the names of the persons mentioned in the order. On 20 November 2000, the Deputy Commissioner of Income Tax passed a block assessment order accepting the firm’s income as ‘Nil’ and directed proceedings against the appellant under Section 158BD of the IT Act. Consequently, a fresh notice under Section 158BC read with Section 158BD was issued to the appellant. The appellant responded on 21 October 2002, stating that he had already filed his return on 8 November 1999.

On 29 November 2002, the AO assessed the appellant’s undisclosed income at Rs. 3,48,56,430/-. The Commissioner of Income Tax (Appeals) reduced this amount to Rs. 66,55,911/- on 18 September 2003. Both the appellant and the Revenue appealed to the Income Tax Appellate Tribunal (Tribunal). The Tribunal dismissed the appellant’s appeal and partly allowed the Revenue’s appeal on 29 April 2005. The High Court dismissed the appellant’s appeal on 17 November 2005, leading to the present appeal before the Supreme Court.

Timeline:

Legal Framework

The case primarily revolves around the interpretation of Section 158BC and Section 158BD of the Income Tax Act, 1961. Section 158BC deals with the assessment of undisclosed income in cases where a search has been conducted under Section 132 or books of accounts or other documents or assets are requisitioned under Section 132A. It mandates the Assessing Officer to issue a notice to such person requiring them to file a return of income.

Section 158BD of the IT Act, titled “Undisclosed income of any other person,” states:

“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.”

This section allows for the assessment of undisclosed income belonging to a person other than the one whose premises were searched, provided the Assessing Officer is satisfied that the undisclosed income belongs to such other person. This section is crucial in determining the validity of the second notice issued to the appellant.

Arguments

Appellant’s Arguments:

• The first notice issued under Section 158BC of the IT Act on 9 September 1999, was the valid notice, and the assessment should have been made based on that notice.
• The Assessing Officer had no authority to issue a second notice under Section 158BD of the IT Act.
• Section 158BD applies only when the Assessing Officer assessing the firm and the appellant are different. Here, the same Assessing Officer assessed both the firm and the appellant.
• The proceedings under Section 158BD were invalid and without jurisdiction.

Respondent’s Arguments:

• The seized documents and bank accounts in the name of Kartick Dutta and Shambhu Mondal were related to the appellant’s personal business, not the firm’s.
• The undisclosed income belonged to the appellant, not the firm.
• A notice under Section 158BD can be issued to a person with respect to whom a search was not conducted, but undisclosed income was found as belonging to such person from the material seized.
• The Assessing Officer rightly issued the notice under Section 158BC read with Section 158BD after recording satisfaction that the undisclosed income belonged to the appellant.
• The High Court was correct in rejecting the appellant’s claim.

The core of the appellant’s argument was that the first notice under Section 158BC was valid and the second notice under Section 158BD was unnecessary and beyond the Assessing Officer’s jurisdiction. The respondent contended that the second notice was valid because the undisclosed income was found to belong to the appellant, not the firm, and the Assessing Officer had recorded the necessary satisfaction.

Submissions of the Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether, in the facts and circumstances of the present case, the issue of the Second (Fresh) Notice under Section 158BD of the IT Act is valid or not?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Legal Provisions:

• Section 132 of the IT Act: This section deals with the search and seizure powers of the Income Tax Department.
• Section 132A of the IT Act: This section deals with the power to requisition books of accounts, etc.
• Section 144A of the IT Act: This section deals with the power of the Additional Commissioner to issue directions.
• Section 148 of the IT Act: This section deals with the issue of notice for reassessment.
• Section 158BC of the IT Act: This section deals with the procedure for block assessment in cases of search and seizure.
• Section 158BD of the IT Act: This section deals with the assessment of undisclosed income of any person other than the person searched.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court clarified that while a notice under Section 158BC can be issued to the searched person without any prior satisfaction, a notice under Section 158BD requires the Assessing Officer to be satisfied that the undisclosed income belongs to a person other than the searched person.
• The Court held that the order passed by the Additional Commissioner of Income Tax (Appeals) under Section 144A of the IT Act was not sustainable.
• The Court observed that though Section 158BD does not specifically mention recording of reasons, the satisfaction must reveal the mental thought process of the Assessing Officer.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The Assessing Officer’s satisfaction that the undisclosed income belonged to the appellant, based on seized documents and other materials.
• The interpretation of Section 158BD, which requires the Assessing Officer to be satisfied that the undisclosed income belongs to a person other than the searched person before issuing a notice.
• The fact that the first notice under Section 158BC was issued on the same day to both the firm and the appellant, making it impossible for the Assessing Officer to have arrived at a satisfaction under Section 158BD at that time.
• The need for the Assessing Officer to have a mental and dispassionate thought process in arriving at a conclusion under Section 158BD.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

The Court considered the argument that the first notice under Section 158BC was sufficient. However, it rejected this argument as the first notice was issued on the same day to both the firm and the appellant. The Court reasoned that it was impossible for the Assessing Officer to have arrived at a satisfaction that the undisclosed income belonged to the appellant at the time of issuing the first notice. The Court also considered the argument that the second notice was not valid as the same Assessing Officer was assessing both the firm and the appellant, but rejected it.

The Court stated: “In the present case, only after being satisfied that the Appellant fell within the ambit of Section 158BD, a notice was issued by the Assessing Officer.”

The Court further observed: “A perusal of Section 158BD of the IT Act makes it clear that the Assessing Officer needs to satisfy himself that the undisclosed income belongs to any person other than the person with respect to whom the search was made under Section 132…”

The Court also noted that: “Although Section 158BD does not speak of ‘recording of reasons’ as postulated in Section 148, but since proceedings under Section 158BD may have monetary implications, such satisfaction must reveal mental and dispassionate thought process of the Assessing Officer…”

Key Takeaways

• A second notice under Section 158BD of the IT Act can be validly issued to an assessee even if a prior notice under Section 158BC was issued, provided the Assessing Officer is satisfied that the undisclosed income belongs to the assessee and not the searched person.
• The Assessing Officer must have a mental and dispassionate thought process in arriving at a conclusion under Section 158BD, even if it does not specifically require the recording of reasons.
• The satisfaction required under Section 158BD must be based on seized books of accounts, documents, or assets.
• The timing of the notice is crucial, and the Assessing Officer must have sufficient time to examine the seized materials before forming a satisfaction under Section 158BD.

Potential Future Impact: This judgment clarifies the scope and application of Section 158BD of the IT Act, providing guidance to tax authorities and taxpayers on the validity of notices issued under this section. It emphasizes the importance of a proper assessment and satisfaction by the Assessing Officer before initiating proceedings under Section 158BD.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that a second notice under Section 158BD of the IT Act is valid if the Assessing Officer, after examining the seized documents, is satisfied that the undisclosed income belongs to a person other than the searched person. This judgment clarifies that the satisfaction under Section 158BD must be based on seized materials and that the Assessing Officer must have a mental and dispassionate thought process in arriving at this conclusion. This case reinforces the interpretation of Section 158BD and provides clarity on its application.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision. The Court held that the second notice issued under Section 158BD of the IT Act was valid, as the Assessing Officer had recorded the necessary satisfaction that the undisclosed income belonged to the appellant. The Court clarified the scope of Section 158BD and emphasized the importance of a proper assessment and satisfaction by the Assessing Officer before initiating proceedings under this section.