VLS Finacne Ltd. & Anr. Vs. Commissioner of Income Tax & Anr, On 28th April, 2016, Supreme Court of India – Judgement

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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2667 OF 2007
VLS FINANCE LTD. & ANR. …..APPELLANT(S)

VERSUS
COMMISSIONER OF INCOME TAX & ANR. …..RESPONDENT(S)
J U D G M E N T
A.K. SIKRI, J.
In this appeal, challenge is laid to that part of the
judgment of High Court of Delhi dated 15th December, 2006 whereby High
Court has held that the block assessment proceedings initiated by the
respondent-Department against the appellants herein have not become time
barred, by giving the respondents benefit of the period during which
proceedings were pending in the High Court, in view of some interim orders
passed in those proceedings which remained operative till the writ petition
filed by the appellants were decided finally. Factual background leading
to the present appeal is as under:

Search and seizure took place in the business premises of the appellant
companies on 22nd June, 1998 on the strength of warrant of autorization
dated 19th June, 1998 which went upto in the morning hours of 23rd June,
1998. It was followed by further searches from time to time which went on
till 5th August.

Notice under Section 158BC(c) of the Income Tax Act, 1961 (hereinafter
referred to as the “Act’) was issued on 28th June, 1999 requiring the
appellants to furnish return for the block period from April 1, 1988 to
22nd June, 1998. This notice was withdrawn and another notice was issued
on 26.07.1999. In response thereto, the appellants filed return for the
aforesaid block period on 10th September, 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 authorisation for search under Section 132
or for requisition under Section 132A, as the case may be. However, the
assessing officer could not do so because of certain developments which
took place and are narrated hereinafter.

A direction under Section 142(2A) was issued on 29.06.2000, which was
served to the appellants on 19th July, 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 29th June, 2000
issued by respondent no. 2 directing a special audit in respect of
appellants under Section 142(2A) of the Act. In the said writ petition,
the appellants also challenged the clarificatory order dated 10th August,
2000 issued by respondent no. 2 with regard to special audit in respect of
appellant no. 1 for the period from the Assessment Year 1994-95 to
Assessment Year 1998-99 and insofar 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. 9305/2006, seeking to add additional ground that the
Block Assessment Proceedings under Section 158BC(c) of the Act were time
barred. The appellants submitted that the time limit for completion of
Block Assessment expired on 30th June, 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 22nd June, 1998 could not have
been utilized for conducting further search till August, 1998. it was also
contended that the order under Section 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 under Section 142(2A) of the Act.

The respondents filed their affidavit in reply to the show cause explaining
that the order for special audit under Section 142(2A) of the Act was
issued with proper authorization made by 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 31st August, 2000 and not on 30th June, 2000 as claimed by the
appellants. As per the respondents, since seizure operation were conducted
from 22nd June, 1998 and these operations concluded only on 5th August,
1998, the time limit of two years for completion of “Block Assessment” was
to expire only on 31st August, 2000.

In Writ Petition (Civil) No. 4685 of 2000, interim order dated 24th August,
2000 was passed, which reads as under:
“C.W. No. 4685/2000
Notice to the respondents to show cause as to why petition by
not admitted, returnable on 14th September, 2000.

Mr. R.D. Jolly, Advocate accepts notice on behalf of
respondents.

C.M. No. 7227/2000
Notice for 14th September, 2000. Mr. Jolly accepts notice.

Counter be filed by 13th September, 2000.

Interim stay of the orders dated 29th June, 2000.

Annexure-A read with Annexure-B dated 10th August, 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 15th December, 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 and others Vs. Dy. Commissioner of
Income Tax and others[1].

However, the High Court decided the question of limitation in favour of the
Department holding that the period between 24th August, 2000, i.e, date on
which interim order was passed staying special audit direction under
Section 142(2A) dated 29th June, 2000 and 15th December, 2016, i.e., when
the High Court has passed the order setting aside the direction for special
audit, be excluded in counting limitation for concluding block assessment.

The appellants contended before the High Court that since there was no stay
on block assessment proceedings in terms of interim order dated 24th
August, 2000, the direction to exclude the period between 24th August, 2000
to 15th December, 2006 was beyond its jurisdiction. It was alternatively
contended before the High Court that the limitation for passing the block
assessment having expired on 30th June, 2000 in terms of Section 158BE(1)
of the Act, the direction to exclude the limitation period between 24th
August, 2000 to 15th December, 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 to be
calculated from 5th August, 1998, on which date last panchnama was drawn.

In the instant appeal, impugning the decision of the High Court, following
substantial questions of law are raised for consideration by this Court:
(a) Whether on the facts and circumstances of the case, the High Court
having quashed the direction under Section 142(2A) of the Act was justified
in law in directing to exclude the period between 24th August, 2000 to 15th
December, 2006 in counting the period of limitation for passing the block
assessment order?
(b) Whether on the facts and circumstances of the case, the interim order
dated 24th August, 2000 staying the direction for special audit contained
in order dated 29th June, 2000, could be construed as amounting to stay of
assessment proceedings?
(c) Whether on the facts and circumstances of the case, the High Court
erred in law in holding that the period of limitation expired on 31st
August, 2000, instead of 30th June, 2000, in terms of Section 158BE(1) read
with Explanation 2 thereto?
(d) Whether on the facts and in the circumstances of the case, it is
permissible under Section 132 of the Act that the same warrant of
authorization be executed 16 times and be revalidated again and again
instead of issuing fresh authorization for each visit and whether such
revalidation can be done without recording any reasons justifying the
revalidation as in the present case.

In effect the central issue is one of limitation, which has the following
two facets, viz.;
(a) Whether the period of limitation expired on 31st August, 2000 or the
last date for completing block assessment was 30th June, 2000?
(b) Whether the period between 24th August, 2000 to 15th December, 2006,
when interim stay was in operation, required to be excluded for the
purposes of counting limitation period?

First, we shall take up the second issue for discussion. It is not in
dispute that the period during which interim stay of the order passed by
the court is in operation has to be excluded while computing the period of
two years as limitation period prescribed for completing the block
assessment. The parties have, however, joined issue on the nature of stay
order which qualify for such exclusion. For this, it would be necessary to
scan through the language of Explanation 1 to Section 158BE(2) of the Act.
This provision makes the following reading:
“Explanation 1. – In computing the period of limitation for the purposes of
this section, –

(i) the period during which the assessment proceeding is stayed by an
order or injunction of any court; or

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(ii) the period commencing from the day on which the Assessing Officer
directs the assessee to get his accounts audited under sub-section (2A) of
section 142 and ending on the day on which the assessee is required to
furnish a report of such audit under that sub-section; or

(iii) & (iv) xxx xxx xxx

shall be excluded:

Provided xxx xxx xxx”
The plea of the appellants is that only that period can 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 24th August, 2000 which has 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.

M/s. Ganesh and Vohra, learned senior counsel appearing for the appellants
made a fervent plea to the effect that in the absence of any stay of the
assessment proceedings, there was no embargo on the part of the assessing
authority to proceed with the assessment even when the order directing
special audit was stayed, and therefore, benefit of the aforesaid
explanation would not be available to the respondents. It was argued that
the High Court had committed an error in giving the benefit of the
exclusion of the said period on a wrong premise that special audit was an
integral part of the assessment proceedings. It was also argued that
Explanation 1, as it existed at the relevant time, did not make any
provision for excluding the period from the date when assessing officer
directs the assessee to get his accounts audited till the date when the
assessee is required to furnish the report of such audit. Such an
amendment, it was pointed out, is made in Clause (ii) of Explanation to
Section 153B of the Finance Act, 2013, w.e.f. 1st June, 2013 to fill the
lacunae that existed in the statutory framework and this would also fortify
the submissions of the appellants that at the relevant time there was no
such provision for exclusion of the time period during which there was a
stay of special audit but no stay assessment proceedings. It was also
argued that insofar as the provision relating to limitation is concerned it
needs strict interpretation, and certain judgments were referred to, by the
learned counsel, in this behalf.

Ms. Pinky Anand, learned ASG, on the other hand, supported the order of the
High Court by arguing that with the passing of High Court order staying the
orders dated 29th June, 2000 and 10th August, 2000 passed under Section
142(2A) of the Act which meant that the Department was prevented from
carrying out special audit, it was not possible to proceed with the
assessment as well as inasmuch as the assessing officer at the time of
passing the order under Section 142(2A) of the Act recorded his
satisfaction that in order to carry out the proper assessment, special
audit was essential. She, thus, submitted that the High Court rightly held
that special audit was integral part of the assessment.

We have already reproduced the language of Explanation 1. it is not in
doubt that this explanation grants 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 becomes clear from
the reading of this provision that the period that is to be excluded while
computing the period of limitation for completion of Block Assessments is
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, is passed. The counsel
for the appellants are justified in their contention that the provision
relating to limitation need to be strictly construed. In the case of K.M.
Sharma Vs. ITO[2], this principle is laid down in the following words:
“13. Fiscal statute, more particularly a provision such as the present one
regulating period of limitation must receive strict construction. The law
of limitation is intended to give certainty and finality to legal
proceedings and to avoid exposure to risk of litigation to litigant for
indefinite period on future unforeseen events. Proceedings, which have
attained finality under existing law due to bar of limitation cannot be
held to be open for revival unless the amended provision is clearly given
retrospective operation so as to allow upsetting of proceedings, which had
already been concluded and attained finality.”
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
injuncting 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, we would like to comment that the High
Court, in the impugned judgment has propounded the correct and relevant
test, viz., whether the special audit is an integral part 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, then stay of
the special audit may qualify as stay of assessment proceedings and,
therefore, would be covered by the said explanation.

The question, therefore, is as to whether, in the given case, the High
Court was right in holding that the special audit was not only a step in
the assessment proceedings, but an important and integral step, in the
absence of which an assessment order could not be made. In support of the
aforesaid conclusion, the High Court referred to the judgment in Auto and
Metal Engineers and other Vs. Union of India and Others[3] wherein this
Court examined in detail as to what constitutes assessment proceedings.
The Court in that case was interpreting Explanation 1 to Section 153 of the
Act, which is pari materia to Explanation 1 of 158BE of the Act. The said
provision was interpreted in the following manner:
“Sub-section (1) of section 153 prescribed the period of limitation within
which an order of assessment could be passed. For the assessment years in
question the last date for making the order of assessment under the said
provision was March 31, 1972. By Explanation 1 to section 153 the period
of limitation prescribed under sub-section (1) for making the order of
assessment was extended by the period during which the assessment
proceeding was stayed by an order or injunction of any court. The object
of the Explanation seems to be that if the Assessing Officer was unable to
complete the assessment on account of an order or injunction staying the
assessment proceeding passed by a court the period during which such order
or injunction was in operation should be excluded for the purpose of
computing the period of limitation for making the assessment order. The
process of assessment thus commences with the filing of the return or where
the return is not filed, by the issuance by the Assessing Officer of notice
to file the return under section 142 (1) and it culminates with the
issuance of the notice of demand under section 156. The making of the
order of assessment is, therefore, an integral part of the process of
assessment. Having regard to the fact that the object underlying the
Explanation is to extend the period prescribed for making the order of
assessment, the expression “assessment proceeding” in the Explanation must
be construed to comprehend the entire process of assessment starting from
the stage of filing of the return under section 139 or issuance of notice
under section 142(1) till the making of the order of assessment under
section 143(3) or section 144. Since the making of the order of assessment
under section 143 (3) or section 144 of the Act is an integral part of the
assessment proceeding, it is not possible to split the assessment
proceeding and confine it up to the stage of inquiry under sections 142 and
143 and exclude the making of the order of assessment from its ambit. An
order staying the passing of the final order of assessment is nothing but
an order staying the assessment proceeding. Since the passing of the final
order of assessment had been stayed by the Delhi High Court by its order
dated November 23, 1971, in the writ petitions, it must be held that there
was a stay of assessment proceedings for the purpose of Explanation 1 to
section 153.”

The aforesaid judgment applies on all force, as rightly held by the High
Court. We may also refer to the judgment of the Madhya Pradesh High Court
in Commissioner of Income Tax Vs. Dhariwal Sales Enterprises[4]. That was
a case where special audit report under Section 142(2A) of the Act was
called for but could not be submitted. The High Court held that time
period spent for obtaining a copy of the report upto the time when
intimation of non-submission was given by the assessee would be excluded.

We, therefore, agree 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, may not be a valid argument to the
issue that is 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 the 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.

We, therefore, answer this question in favour of Revenue.

With this, we revert to the other question, viz. from which date the period
of limitation is to be counted, i.e. from 22nd June, 1998 when the
respondent authorities visited the premises of the appellants on the basis
of Warrant of Authorisation dated 19th June, 1998 or 5th August, 1998, on
which date the Revenue authorities last visited the premises of the
appellants on the basis of the same Warrant of Authorisation dated 19th
June, 1998 and conducted the search of the appellants premises. If the
period is to be counted from 19th June, 1998, the last date by which the
assessment was to be carried would be 30th June, 2000. If it is to be
counted from 5th August, 1998, then the limitation period was to expire on
31st August, 2000. In the event the last date for completing the block
assessment is held to be 30th June, 2000, then the assessment became time
barred even before the interim stay was granted by the High Court as it was
granted on 24th August, 2000, i.e. after the supposed limitation period was
over and, therefore, the conclusion which we have recorded 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 31st
August, 2000, then by virtue of our answer to the first issue, the period
of limitation for block assessment has not expired inasmuch as this Court
has passed an order dated 5th February, 2007 that audit may go on but no
final assessment order be passed. Because of this reason, it becomes
necessary to decide this aspect of the matter as well.

The argument of learned counsel for the appellants on this issue is that
there was only one warrant of authorisation which empowered the Revenue
authorities to carry out search and visit of the revenue officials on 22nd
June, 1998 on the basis of said Warrant of Authorisation dated 19th June,
1998, would end in exhausting the said warrant of authorisation. It was
argued that for subsequent visits, fresh authorisation was required and no
such authorisation was taken and, therefore, subsequent searches are
illegal and no benefit thereof should enure to be respondent.

We may point out that the appellants never challenged subsequent visits and
searches of their premises by the respondents on the ground that in the
absence of a fresh authorisation those searches were illegal, null and
void. Notwithstanding the same, it was argued that at least for the
purpose of limitation the subsequent searches could not be taken into
consideration, as according to the learned counsel, the legal position was
that the authorisation dated 19th June, 1998, was executed on 22nd June,
1998 and the search came to an end with that when the search party left the
premises on 23rd June, 1998 after making seizure of certain documents etc
and issuing restraint order under Section 132(3) of the Act in respect of
certain items which they allegedly could not seize due to impracticability
on that day. Some judgments of various High Courts are relied upon to
support this proposition. It was also argued that there was no concept of
‘revalidation of authorisation’ provided under the Act, which has been
applied by the High Court in the impugned judgment, which according to the
learned counsel for the appellants, amounts to legislating a new concept
which is contrary to law.

The learned Additional Solicitor General, refuting the aforesaid
contention, submitted that as per explanation (2) to Section 158BE, when it
is a case of search, period of limitation is to be counted ‘on the
conclusion of search as recorded in the last panchnama drawn…..’ It was
argued that last panchnama was admittedly drawn on 5th August, 1998 and,
therefore, period of limitation is to be counted from that date.

After considering the respective submissions, we are of the opinion that on
the facts of this case, the issue also has to be answered in favour of the
Revenue without going into the legal niceties.

As noticed above, the revenue authorities visited and searched the premises
of the appellants for the first time on 22nd June, 1998. In the panchnama
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 is only on 5th August, 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 5th August,
1998 and panchnama was duly drawn on the said date as well. The
appellants, in the writ petition filed, had no where challenged the
validity of searches on the subsequent dates raising a plea that the same
was illegal in the absence of any fresh and valid authorisation. On the
contrary, the appellants proceeded on the basis that search was conduced
from 22nd June, 1998 and finally concluded on 5th August, 1998.

On the aforesaid facts and in the absence of any challenge laid by the
appellants to the subsequent searches, we cannot countenance the arguments
of the appellants that limitation period is not to be counted from the last
date of search when the search operation completed, i.e. 5th August, 1998.
Therefore, this issue is also decided in favour of the respondents.

In view of the foregoing, this appeal is liable to be dismissed and is,
accordingly, dismissed with costs.

………………………J.(A.K. SIKRI)

………………………J. (ROHINTON FALI NARIMAN)

NEW DELHI;
APRIL 28, 2016.
———————–
[1] (2007) 2 SCC 181
[2] (2002) 254 ITR 772 (SC)
[3] (1998) 229 ITR 399
[4] (1996) 221 ITR 240

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