Supreme Court’s decision in the case of Hotel Blue Moon

Case of the Income-tax Department

2. The arguments on behalf of the Income-tax Department before the Supreme Court were :

  (a)  Chapter XIV-B of the Act provides a special procedure for search cases and is a complete Code in itself dealing with both the substantive as well as procedural aspects of search cases. Therefore, for the purpose of block assessments, the assessing authority need not follow the procedure prescribed under Chapter XIV, which includes issuance of notice under section 143(2).

  (b)  In a proceeding under section 158BC, there is no requirement of a notice to be issued under section 143(2), since issuance of notice for the purpose of section 158BC is separately prescribed.

  (c)  Block assessment is in addition to regular assessment, and what is included in regular assessment, cannot be assessed again in the course of a block assessment and similarly, what is assessed in block assessment, cannot be the subject-matter of regular assessment.

  (d)  Section 143(2) of the Act is in two parts. The first part deals with jurisdiction and the second with the procedure. The proviso to section 143(2) puts an embargo on the Assessing Officer to exercise jurisdiction after the expiry of 12 months from the end of the month in which the return was filed by the assessee. It is the discretion of the Assessing Officer to accept the return as it is or to proceed further with the assessment of income. Once the Assessing Officer decides to proceed, he has to issue notice under section 143(2) within the prescribed time-limit to make the assessee aware that his return has been selected for scrutiny assessment. In contrast to this procedure, under the special procedure prescribed in Chapter XIV-B, there is no discretion left with the Assessing Officer.

(d1)  The Assessing Officer proceeded with the return without issue of a notice under section 143(2) because the material concerning the assessment to be made was already with the Assessing Officer consequent to search operations and computation of undisclosed income of the block period has to be done in accordance with the provisions of section 158BB and on the basis of evidence found as a result of search or requisition of books of account, or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence and, therefore, issuance of notice under section 143(2) is not required for block assessment proceedings.

  (e)  Procedure for block assessment is outlined in section 158BC and the section merely stipulates that the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 155BB and the provisions of section 142, sub-sections (2) and (3) of section 143, sections 144 and 145 shall, ‘so far as may be, apply’. This implies that discretion, inter alia, to issue notice under section 143(2) is with the Assessing Officer and if he considers that the assessment can be completed without issuing such a notice, he would be within his right to complete the assessment without issue of such a notice because the scheme of assessment prescribed under Chapter XIV-B ‘Special procedure for assessment of search cases’ is different from assessments in regular course.

In this context, it may be said that in the case of regular assessments under Chapter XIV of the Act, sub-section (2) provides for a mandatory issuance of notice under this sub-section by using the word ‘shall’. While in Chapter XIV-B section 158BC(b) merely mentions about the issuance of notice, inter alia, under sub-sections (2) and (3) of section 143, ‘so far as may be’. Since both the schemes under Chapter XIV for a regular assessment and under Chapter XIV-B for block assessments are different that while no assessment under section 143(3) could be completed without the issuance of notice under section 143(2), the same restriction would not be applicable in the case of block assessment.

The assessee’s case

3. The arguments of assessee were as given below :

  (a)  For the purpose of block assessment under section 158BC, the provisions of section 142 and sub-sections (2) and (3) of section 143 are applicable and, therefore, no block assessments could be made without issuing notice under section 143(2) of the Act.

  (b)  Notice under section 143(2) could be dispensed with by the Assessing Officer if he proceeds to determine the income on the basis of the return without going for scrutiny .

  (c)  Referring to the provisions in clause (v) of the second proviso to section 158BC, it was argued that the words ‘so far as may be’ do not give any discretion to the Assessing Officer to dispense with the requirement of such a notice under section 143(2), when he proceeds to make an enquiry within the scope and ambit of section 143(2).

  (d)  After a notice under section 158BC is issued, the assessee is required to file a return within a stipulated period. Once the return is filed, it is open to the Assessing Officer to accept the same or to require further investigation. If he accepts the return of undisclosed income as it is, then there would be no necessity of issuing any notice under section 143(2) of the Act. However, if the Assessing Officer is not satisfied with the return so filed, then he is required to issue further notice under section 143(2) before an assessment order is passed under Chapter XIV-B of the Act.

4. Supreme Court’s decision

(A) General observations of the Court

The Court started with the premise that the only question that arose for its consideration was whether service of notice on the assessee under section 143(2) within the prescribed period of time is a pre-requisite for framing the block assessment under Chapter XIV-B of the Income-tax Act and has decided this issue against the revenue for the reasons mentioned later.

  (a)  Section 158BA is an enabling section, empowering the Assessing Officer, to assess ‘undisclosed income’ as a result of search in accordance with the provisions of Chapter XIV-B and tax the same at the fixed rate specified in section 113. Section 158BB provides the methodology for computation of undisclosed income of the block period.

  (b)  Section 158BC prescribes the procedure for making the block assessment of the searched person.

  (c)  The income assessable in block assessment under Chapter XIV-B is the income not disclosed but found and determined as a result of search under section 132 or requisition under section 132A and it is an assessment in addition to the regular assessment already done or to be done.

  (d)  Section 158BC stipulates that the chapter would have application where search has been effected under section 132 or on requisition of books of account, other documents or assets under section 132A. By making the notice issued under this section mandatory, it makes such notice the very foundation for jurisdiction.

  (e)  Section 158BC(b) is a procedural provision for making a regular assessment applicable to block assessment as well. Section 158BC(c) would require the Assessing Officer to compute the income as well as tax on completion of the proceedings to be made.

(B) Court’s interpretation of section 158BC(b)

  (a)  Analyzing section 158BC(b), the Court has said that this section comes into play after the return is filed. This clause enables the Assessing Officer to complete the assessment by following the procedure like issue of notice under section 143(2)/142 and complete the assessment under section 143(3). This section does not provide for accepting the return as provided under section 143(i)(a). The Assessing Officer has to complete the assessment under section 143(3) only. Clause (b) of section 158BC by referring to section 143(2) itself becomes necessary (where it becomes necessary to check the return) so that where block return conforms to the undisclosed income inferred by the authorities, there is no reason, why the authorities should issue notice under section 143(2). However, if an assessment is to be completed under section 143(3) read with section 158BC, notice under section 143(2) should be issued within one year from the date of filing of block return.     

  (b)  Omission on the part of the assessing authority to issue notice under section 143(2) cannot be a procedural irregularity and the same is not curable and, therefore, the requirement of notice under section 143(2) cannot be dispensed with. This is so because section 158BC(b) specifically refers to some of the provisions of the Act which are required to be followed by the Assessing Officer while completing the block assessments under Chapter XIV-B of the Act. This legislation is by incorporation.

  (c)  A reading of provision [section 158BC(b)] would clearly indicate that if the Assessing Officer, if for any reason, repudiates the return filed by the assessee in response to notice under section 158BC(a), the Assessing Officer must necessarily issue notice under section 143(2) of the Act within the time prescribed in the proviso to section 143(2) of the Act.

  (d)  Circular No. 717, dated August 14, 1995 issued by the CBDT clarifying the requirement of law in respect of service of notice under section 143(2) of the Act which is binding on the field officers, supports the interpretation of section 158BC(b) by the Court.

  (e)  The decision of the Supreme Court in Dr. Partap Singh v. Director of Enforcement [1985] 155 ITR 166/22 Taxman 30 is of no assistance to the Income-tax Department in the cases before the Court.

  (f)  The expression ‘so far as may be’ has always been construed to mean that those provisions may be generally followed to the extent possible.

  (g)  In the case of Maganlal v. Jaiswal Industries [1989] 4 SCC 344, it has been held by the Supreme Court while dealing with the scope and import of the expression ‘as far as practicable’ that this expression means “without anything more the expression ‘as far as possible’ will mean that the manner provided in the code for attachment or sale of property in execution of a decree shall be applicable in its entirety, except such provision therein which may not be practicable to be applied.”

(C) Final summing up by the Court

It is as under :

“The case of the revenue is that the expression ‘so far as may be apply’ indicates that it is not expected to follow the provisions of section 142, sub-sections (2) and (3) of section 143 strictly for the purpose of block assessments. We do not agree with the submissions of the learned counsel for the revenue, since we do not see any reason to restrict the scope and meaning of the expression ‘so far as may be apply’. In our view, where the Assessing Officer in repudiation of the return filed under section 158BC(a) proceeds to make an enquiry, he has necessarily to follow the provisions of section 142, sub-sections (2) and (3) of section 143.” (p. 122)

An Analysis of the decision

5. The views expressed hereinafter are in the nature of academic exercise with utmost respect to the Apex Court of the country and are an attempt to examine whether there could be other aspects also of the issue decided by the Supreme Court.

The question involved could be said to hinge on the interpretation of clause (b) of section 158BC of the Act whose title is ‘procedure for block assessments’. It provides that the Assessing Officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 155BB and, as stated earlier, ‘the provisions of section 142, sub-sections (2) and (3) of section 143, sections 144 and 145 shall, so far as may be, apply in making such an assessment. The Supreme Court has interpreted the phrase ‘so far as may be’, saying that where the Assessing Officer in repudiation of the return filed under section 158BC(a) proceeds to make an enquiry, he has necessarily to follow the provisions of section 142, sub-sections (2) and (3) of section 143. Respectfully, it may be said that if that would have been the intention of the Legislature, it would have used the expression ‘accordingly’ instead of ‘as far as may be’. The word ‘accordingly’, has been interpreted to mean in a similar manner (see National Insurance Co. v. LIC of India AIR 1963 SC 1911). The word has been mentioned in section 117 of the Cr. PC, 1973 to mean ‘in accordance with the premises’. Hence, if the intention would have been that in making the assessment under section 158BB, the provisions of sections 142 and 143(2) & (3) have to be mandatorily/necessarily to be complied with, this could have been achieved by using the word ‘accordingly’ and there could have been no need to use the phrase ‘as far as may be’. The use of these words is for a ‘purpose’ and that should not be lost sight of while interpreting these words.

The judicial view regarding interpretation of these words had been that the words ‘as far as may be’ tone down the rigour of the word ‘shall’ - a word which is normally considered as mandatory [see R. Natarajan v. State Transport Appellate Tribunal, Ernakulam AIR 1999 Kerala 207, 210 para 4 (M.V. Act [59 of 1988] section 70)]. These words indicate in-built flexibility in decision making. These words indicate that a discretion has been vested in the authority for being exercised at the time of decision taking and the Assessing Officer is at liberty to take resort to the provisions of sub-sections (2) and (3) of section 145 or not - not under any obligation to use these before making the assessments.

Thus whether notices under section 142 or 143(2) should be issued or not issued in a particular case is to be decided by the person charged with the duty of making block assessment and the same cannot be said to mean that there is mandatory requirement that he should do so and assessment can be made only after issuing such notice.

Prima facie it appears that by interpreting the words ‘ as far as may be’ as equivalent to ‘shall’, i.e., equating these with the words ‘mandatorily’ or ‘necessarily’, the Court has accepted an interpretation which negates the phrase ‘as far as may be’ and substitutes it with ‘shall’. In Ashwani Kumar Ghose v. Arabinda Bose AIR 1952 SC 369, the then learned CJ. Patanjali Shashtry had said :

“. . . It is not a sound principle of construction to brush aside words in a statute as being in apposite surplusage if they can have appropriate application in the circumstances conceivable within the contemplation of statute.” (p. 377)

The Courts have even said that they will presume that the Legislature has inserted every part in a statute ‘for a purpose’ and the legislative intention is that every part of the statute should have effect. The Legislature is deemed not to waste its words or to say anything in vain and a construction which attributes redundancy to the Legislature cannot be accepted, except for compelling reasons [See CIT v. Kanpur Coal Syndicate AIR 1965 SC 325, Ghanshyam Das v. Regional Asstt. CST AIR 1964 SC 766 and many similar others].

The Court’s interpretation that assessments under the block assessment can only be completed under section 143(3), it is said with utmost respect, is not borne out from the scheme of assessment in Chapter XIV-B. The phrase ‘as far as may be’ supports this view because notice under section 143(2) becomes necessary only where the assessment is to be completed under section 143(3).

5.1 REFERENCE TO CBDT’S CIRCULAR - Referring to the CBDT’s Circular No. 717 (supra), the Court has said that the same is binding on the field officer meaning thereby that as per this circular, issue of notice under section 143(2) is mandatory. Reliance for this view has been placed on clause (e) of the circular which reads thus :

“(e)        Procedure for making block assessment - (i) The Assessing Officer shall serve a notice on such person requiring him to furnish within such time, not being less than 15 days, as may be specified in the notice, a return in the prescribed form and verified in the same manner as a return under clause (i) of sub-section (1) of section 142 setting forth his total income including undisclosed income for the block period. The officer shall proceed to determine the undisclosed income of the block period and the provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 shall apply accordingly.”

In the circular, the CBDT has used the expression ‘accordingly’ - not ‘so far as may be’ and, therefore, the interpretation by the CBDT is in accordance with the view expressed earlier in para 5 and, hence, the views expressed by the counsel of the Income-tax Department mentioned in the Court’s decision are in conformity with the CBDT’s circular referred to by the Supreme Court - not contrary to the same and, hence, the circular cannot be relied upon to hold against the department.

Decision in Dr. Pratap Singh’s case (supra)

6. The meaning of the words ‘so far as may be’ has been explained in Dr. Pratap Singh’s case (supra) to mean that the provisions in question may be generally followed to the extent possible. The Court has said that in order to give full meaning of the expression ‘so far as may be’ in sub-section (2) of section 37 (of the Foreign Exchange Regulation Act, 1973), it should be interpreted to mean that broadly, the procedure relating to search as enacted in section 165 shall be followed. But if a deviation becomes necessary to carry out the purpose of the Act in which section 37(1) is incorporated, it would be permissible except that when challenged before a Court of law, justification will have to be offered for the deviation. This view gives full play to the expression ‘so far as may be’. These observations, it is respectfully submitted, support the view expressed earlier that there is no inflexibility in the words ‘so far as may be’ - as has been held by the Court in the decision under discussion - and it may be correct to say that the expression does not convey the idea of ‘mandatorily’ or ‘necessarily’ as has been said by the Court.

Other decisions

7. The following other decisions also support the stand that the words ‘so far as may be’ are only to be construed as meaning to the extent possible and no more :

   (i)  Vir Bhan Bansi Lal v. CIT [1936] 4 ITR 111 (Lahore)

  (ii)  Bhimraj Panna Lal v. CIT [1957] 32 ITR 289 (SC)

(iii)  Bhimraj Panna Lal v. CIT [1961] 41 ITR 221 (SC)

(iv)  Orient Trading Co. v. CIT [1985] 152 ITR 26/20 Taxman 330 (Guj.)

8. Some other aspects

  (a)    Regarding Guwahati High Court’s decision approved by the Supreme Court - The Guwahati High Court’s decision is per incuriam as it has failed to take note of or even discuss the decision in Dr. Pratap Singh’s case (supra) of the Supreme Court as regards interpretation of the words ‘so far as may be’ in arriving at its decision and, hence, cannot be a binding precedent.

  (b)  The decision of the Supreme Court in the case of Bhavnagar University v. Palitana Sugar Mill (P.) Ltd. [2003] 2 SCC 111 clearly elucidates the position in law that when a public functionary is directed to follow certain procedure without any consequence being spelt out - as to its non-compliance - it is only directory and only when consequences for its failure/non-compliance are spelt out - only then it is imperative - and this failure affects the entire proceedings and not otherwise.

(b1)  The aforesaid test too as delineated by the Supreme Court has not been discussed in the Guwahati High Court’s judgment in the case of Hotel Blue Moon (supra) and other connected cases and thus failure to incorporate the above ratio decidendi by the Supreme Court renders the above-mentioned decision per incuriam, as under article 141 of the Constitution of India - it is the law of the land to be followed and binding.

  (c)  Even presuming for a moment (without conceding) that the provisions are mandatory, the further test would be whether the provisions of section 143(2) are substantially complied with and no prejudice has been caused to the assessee. If so, then the assessment cannot be held to be null and void - as held by the Supreme Court in the following judgments :

   (i)        Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons [1974] 96 ITR 390 (SC).

  (ii)  T.V. Usman v. Food Inspector, Tellicherry Municipality AIR 1994 SC 1818.

(iii)        Rachhpal Singh v. State of Punjab 2002 (6) SCC 462.

(iv)        State of UP v. Harendra Arora 2001 (6) SCC 392.

  (d)  If the assessee partakes/participates in the proceedings initiated by the Assessing Officer, then no stand can be taken by the assessee regarding non-issuance of notice under section 143(2) because of the doctrine of waiver/acquiescence. Some decisions supporting this view are :

   (i)        Commissioner of Customs v. Virgo Steels 2002 (4) SCC 316.

  (ii)        Vellayan Chettiar v. Government of Province of Madras AIR 1947 PC 197 (referred to in Commissioner of Customs v. Virgo Steels).

(iii)        Chatturam v. CIT [1947] 15 ITR 302 (FC).

(iv)        State Bank of Patiala v. S.K. Sharma AIR 1996 (SC) 1669.

  (v)        Pooran Mall & Sons’ case (supra).

(vi)        Karnataka State Road Transport Corporation v. KSRTC Staff and Workers’ Federation [1999] 2 SCC 687.

(vii)        Doctrine of acquiescence as explained in P. Ramanatha Aiyar, Law Lexicon, second edition, reported in 2000, general edition, Justice Y.V. Chandrachud, at page 32.

  (e)  Section 143(2) is not a jurisdictional provision and omission to issue such notice is only procedural irregularity. Consequently, mere omission to issue such a notice cannot be a ground for holding the resultant assessment proceedings as null and void :

   (i)        Guduthur Brothers v. ITO [1960] 40 ITR 298 (SC).

  (ii)        Kapurchand Shrimal v. CIT [1981] 131 ITR 451/7 Taxman 6 (SC).

(iii)        United Bank of India v. Naresh Kumar [1997] 90 Comp. Cas. 329, 333 (SC) (Procedural irregularity not to defeat substantive right).

        This is because the proceedings can be cured at the stage when the irregularity has intervened/supervened.

  (f)  Headnote of section 158BC is ‘Procedure for block assessment’ which clearly shows that it is only a procedural section and not substantive one. Whereas, headnote of section 158BA ‘Assessment of undisclosed income as a result of search’ - clearly shows that the Assessing Officer has the power/jurisdiction to assess the undisclosed income as a result of search under section 158BA and not under section 158BC which is only procedural provision.

  (g)  It is well-established proposition that any procedural failure/irregularity will not go to the root of the matter, i.e., the search conducted under section 132 (it cannot be vitiated by any procedural irregula-rity subsequently) or the assessment under section 158BA - which remains valid. Hence, the substantive provisions of sections 132 and 158BA cannot be tested and failed on the touchstone of procedural section 158BC - which are independent and valid on their own.

  (h)  The provisions relating to assessment of search cases are laid in Chapter XIV-B of the Act with the heading ‘Special procedure for assessment of search cases’ and, therefore, cannot be whittled down by any reference to the general provisions of law like Chapter XIV - which states ‘procedure for assessment’ under which section 143(2) falls and the maxim ‘GENERALIA SPECIALIBUS NON DEROGANT’ - that general things do not derogate from special - applies and, thus, the procedure of section 143(2) cannot be allowed to defeat the avowed intent of section 158BA read with section 132 vis-a-vis section 158BC.

   (i)  The Supreme Court in Ashok Lanka v. Rishi Dixit AIR 2005 SC 2821, has held that whether a statute is mandatory or directory would depend upon the statutory scheme. The Court while construing a statute must consider all relevant factors including the purpose and object the statute seeks to achieve. This proposition, it is said with great respect, seems to have escaped the attention of the Court.

Impact of the Supreme Court’s decision

9. After the pronouncement of the Supreme Court’s decision, the Benches of the ITAT, it is said, have started nullifying the orders of the Assessing Officers where block assessments have been made without issue of notices under section 143(2) of the Act. This could cause considerable loss of revenue to the Government besides conferring unintended benefits to the persons who have been found to be deficient in the discharge of their tax obligations by not giving true account of their income and wealth. There could also be demands for reopening of the concluded assessments where no appeals are pending for cancellation of assessments made by taking action under section 154 of the Act. Hence, action to supersede the impact of the decision is necessary even though the block assessments scheme is not operative since June 1, 2003.

The way out

10. A two-fold action needs to be taken in regard to the judgment of the Court, namely :

(A) A review petition before the Supreme Court for review of the judgment can be filed. The Court can be requested to review its decision giving the arguments mentioned in earlier paragraphs. The Court has been liberal in the past in correcting mistakes crept in its orders and has made observations to the effect that if any errors are noticed in the Court’s order, the same need to be corrected. In this context, the following observations of the Court in the case of Distributors (Baroda) (P.) Ltd. v. UOI [1985] 155 ITR 120/22 Taxman 49 (SC) are as under :

“. . . But there may be circumstances where public interest demands that the previous decision be reviewed and reconsidered. The doctrine of stare decisis should not deter the court from overruling an earlier decision, if it is satisfied that such decision is manifestly wrong or proceeds upon a mistaken assumption in regard to the existence or continuance of a statutory provision or is contrary to another decision of the court. It was Jackson, J., who said in his dissenting opinion in Massachusetts v. United State (333 US 611) : ‘I see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday’. Lord Denning also said to the same effect when he observed in Ostime v. Australian Mutual Provident Society [1960] AC 450, 480 : ‘The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff. . . .” (p. 140)

The view taken in that case (in Cloth Traders’ case) in regard to the construction of section 80M must be held to be erroneous and it must be corrected. To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter (A.M.Y. at page 18) : ‘a Judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn : great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors.”

Thus, there seems to be a good case for review of the decision and for its reversal by the Court itself.

(B) The other course could be if the review exercise fails to amend the law retrospectively to make the position clear in section 158BC(b) that the issue of notice under section 143(2) shall not be mandatory for computing the income under section 158BB.

There is a precedent for amendment from a retrospective date in the section 14A of the Act which was inserted with retrospective effect, i.e., from April 1, 1962 to overcome the decision of the Supreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 which amendment was made to clarify the intention of the Legislature since the coming into force of the Act. In the present situation, the amendment can be made operative from 1-7-1995 - the date from which Chapter XIV-B was inserted in the Act.

24-T/SEC. 158BC