Monga Metals (P) Ltd. vs Assistant Commissioner Of Income ...

ORDER I.S. Verma, J. M.

This is an appeal by the assessee in which the assessee has challenged the assessment for the block period completed under the provisions of Chapter XIV-B of the Income Tax Act, 1961 (hereinafter referred to as `the Act) on various grounds.

Hearing of this appeal has been fixed on priority basis as directed by the Hon'ble High Court of Allahabad vide order dated 16-3-1999.

2. In the grounds of appeal enclosed along with the memorandum of appeal the assessee has listed as many as 9 grounds but at the time of hearing the assessee's learned counsel Shri S.K. Garg, withdrew Ground No. 3.1 and 3.4 which are dismissed as withdrawn.

3. Ground Nos. 1, 2.1, 2.2, 2.3 and 2.4

3. Ground Nos. 1, 2.1, 2.2, 2.3 and 2.4 In these grounds the assessee has objected to the validity of the notice dated 12-12-1996, issued as required by the provisions of section 158BC of the Act.

3.1. We have heard the assessee's counsel as well as the learned Addl. standing counsel.

3.2. The counsel for the assessee first of all submitted that the notice required to be served upon the assessee as per the provisions of section 158BC is analogous/within the parameter of the requirements for a notice under section 148 of the Income Tax Act and, therefore, the law relating to the requirements for the validity of the notice under section 148 and the case laws thereof, are fully applicable, so far as the requirements for a valid notice under section 158BC of the Act are concerned.

3.3. Referring to the copy of the notice dated 12-12-1996 (placed at p. 1 of assessee's paper booka copy, certified by both the parties, was filed during the course of hearing also), The assessee's counsel submitted that the notice is vague and invalid because of the following illegalities in the notice :

(i)According to the provisions of section 282(2)(b), every notice issued, under the Act, in case of a company has to be addressed to the principal officer of the company and since the impugned notice has not been addressed in accordance with the requirement of this provision, the notice in question is vague and invalid ;

(ii) The notice is also silent as to the 'status' in which the return was required to be furnished. Referring to the IVth and Vth line of the first paragraph (main body of the notice), the assessee's counsel submitted that submitted mentioning of the words" in respect of which an individual/HUF/firm/company/Association of persons/Body of individual local authority 'leads one to presume that the assessing officer was not satisfied as to whom the notice was being directed or in whose case the so-called block assessment was going to be completed. According to the counsel this illegality has also rendered the notice vague and invalid.

(iii) According to the definition given as per section 158BA of Act, the block period is defined to be consisting of previous years relevant to 10 assessment years preceding the previous year in which the search had been conducted and period upto the date of commencement of search in the previous year in which search was conducted. According to the counsel, the definition of block period specifies the maximum number of previous assessment years which can be covered in assessment for the block period and it is not necessary that in each and every case the previous 10 assessment years are to be covered. Explaining his point the assessee's counsel submitted that if assessee's business had been in existence, say for only 3 previous assessment years, then the block period in that case will include only 3 assessment years and not 10 assessment years. From this interpretation of the provisions the assessee's counsel made out a case that in the notice under reference the exact period falling within the block period i.e. assessment years; has not been mentioned and since non mentioning of assessment year in a notice under section 148 of the Act has been held to have rendered the notice under section 148 of the Act as a vague notice, the present notice alleged to have been issued under section 158BC of the Act is also rendered vague and invalid. He further submitted that the business of the assessee's company was started during the previous year relevant to assessment year 1993-94 and since this fact was well within the knowledge of the assessing officer, mentioning of the block period as "the previous years relevant to 10 assessment years preceding the previous year 1996-97 and including the period upto the last date of search warrant executed in the case as defined under section 158BA upto the 3-9-1996", clearly goes to show that the assessing officer has simply mentioned the definition of block period given under section 158BA of the Act and not the assessment year which are requirement for a valid notice asking for the return of undisclosed income.

(iv) From the period mentioned by the assessing officer in the notice the counsel for the assessee further submitted that as per the provisions of section 158B of the Act the block period is to include the period upto the date of commencement of search" and not upto the "last date of search warrant executed in one's case" and therefore on this account also the assessing officer cannot be said to have mentioned the block period/assessment year correctly.

3.4. In view of the above alleged illegalities claimed to have been committed in the notice under section 158BC of the Act, the assessee's counsel submitted that the assessee- company was not able to understand as to whose, for which period and in which status, the return was required to be furnished.

Explaining the illegalities further, the counsel submitted that since the assessing officer has mentioned various status such as individual/HUF/firm/company/assessing officer/BOI/local authority in the notice, it is clear that the assessing officer was not satisfied as to from whom he was going to ask for a return and in whose case was going to make assessment for block period. The assessee's counsel further submitted that simply addressing the notice in the name of company cannot be interpreted as a notice asking the company to furnish its return in the status of the company and for the period during which it existed. Giving an example, the assessee's counsel submitted that if a notice is addressed as per the provisions of section 282(2)(b) of the Act to the principal officer, it cannot be interpreted as a notice asking the addressed person i.e. the principal officer to furnish his return in the individual status.

3.5. The assessee's counsel, after referring to the purpose behind introducing the provisions of Chapter XIV-B of the Act submitted that it is a complete and independent code itself in which not only the term "undisclosed income" is defined but procedure for making assessment, the period which are covered by such assessment and the requirement with regard to the service of notice as well as applicability of other provisions of the Act have been specified, and, therefore, the provisions have to be construed strictly.

3.6. In the light of the above submissions the assessee's counsel submitted that since the notice dated 12-12-1996, claimed by the department to have been issued as required under section 158BC of the Act is vague and bad in law, all the consequential actions including the assessment for block period are illegal and void ab initio.

3.7. In support of the submissions that the notice was illegal and bad in law, the assessee's counsel has placed reliance on the decisions in following case:

(i) Y. Narayana Chetty & Anr. v. Income Tax Officer (1959) 35 ITR 388 (SC);

(ii) CIT v. Kurban Hussain Ibrahimji Mithiborwala (1971) 82 ITR 821 (SC);

(iii) CIT v. Ishwar Singh & Sons (1981) 131 ITR 480 (All);

(iv) Madan Lal Agarwal v. CIT (1983) 144 ITR 745 (All);

(v) CIT v. Thayaballi Mulla Jeevaji Kapasi (1967) 66 ITR 147 (SC); and

(vi) P. N. Sasi Kumar v. CIT (1988) 170 ITR 80 (Ker).

3.8. The assessee's counsel further submitted that the notice under section 158BC is neither akin nor analogous to a notice under section 142(1) of the Act nor can amount to an obligation for a return to be furnished under section 139(1) because in those cases it is the assessee who is to choose the status, but under the provisions of section 158BC of the Act the assessee is to furnish the return in the status in which notice has been issued to the assessee is required and, therefore, the assessee has no choice to claim a particular status.

3.9. The assessee's counsel further submitted that the illegalities pointed out in the notice under section 158BC of the Act were not curable and consequently such notice cannot be cured/saved by the provisions of section 292B of the Act and for this purpose relied on the Tribunal's decision in case of M/s Prakash Spun Pipe, in assessment year 1990-91 ITA No. 1014/All/1994, dated 1-2-1998, and the relevant part is contained in paras 10 and 11 of the order which is reproduced as under :

"10. Referring to the view taken by the learned Commissioner that the assessing officer had condoned the defect, with reference to section 292B of the Act, we have no hesitation in saying that this provision of law is not a panacea, pulling the assessing officer out of any and all sort of statutory non-compliances by him. Section 292B only says that a return, assessment notice, summons or other proceedings shall not become invalid merely by reasons of any mistake, defect or omission in such return assessment notice, summons or other proceedings if these are in substance and effect in conformity with or according to the intent and purpose of this Act. Even a plain reading of this provision conveys that the heart of the matter is that it is only a technical or venial sort of defect in any return, assessment notice, summons or other proceedings that is capable of being cured under this provision. In this connection a reference may be made to Departmental Circular No. 179, dated 30-9- 1975, which, as found at p. 6928 of Chaturvedi and Pithisaria's Commentary, 4th Edn. Vol. VI, also states that section 292B was enacted to provide against purely technical objections without substance coming the way of the validity of assessment proceedings, etc. We are certain that to treat a return as, valid for the purposes of the completion of an assessment which as per unambiguous provisions of law, namely, section 139(9)" shall be treated as valid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return" is not at all a technical or venial matter. In our considered opinion it does in nowhere come even within the legal vicinity of section 292B of the Act

11. In the result, we are of the view that on the facts and circumstances of the case, 'the assessing officer ceased to remain vested with the legal power to complete the assessment'. If he had wanted to do so, he should have issued either a notice under section 142(1) or resorted to proceedings under section 147 of the Act. Not having done so, the resultant assessment is void ab initio. "

4.1. The Addl. standing counsel on the other hand submitted that :

(i) It is not mandatory to address the notice to the principal officer as claimed by the assessee relying on the provisions of section 282;

(ii) since it was addressed to the company itself i.e. "to M/s Monga Metals (P) Ltd. 76/43, Gopal Market, Halsey Road, Kanpur", the status was deemed to have been specified as that of a company;

(iii) the option to chose the status was left to the assessee because it is the assessee who is to decide the status in which status it wants to be assessed;

(iv) since the definition of block period defines the block period as consisting of previous years relevant to 10 previous assessment years and a part of current period, there was no illegality in mentioning the block period/assessment year as has been maintained in the notice; and

(v) in the alternate the notice being, in sum and substance, in conformity with the provisions of the Act, the defect if any is cured by the provisions of section 292B of the Act.

4.2. In support of above submissions the Addl. standing counsel has relied on the decisions in the case of Bal Chand v. Income Tax Officer (1969) 72 ITR 197 (SC) and Parameswara Ballakuraya v. Commr. of Agrl. IT (1987) 164 ITR 536 (Ker).

5. We have considered the rival submissions, provisions of the Act necessary and relevant for deciding the issue in hand and various decisions relied upon by the parties and after careful consideration, are of the opinion that for the decision of the dispute raised by the appellant the following 3 questions have to be decided :

(i) The first question, in our opinion, for our decision is with respect to the nature/status of the notice required to be served under section 158BC of the Act i.e. is such a notice akin/analogous and within the parameter of a notice under section 148 of the Act ?

(ii) If so can the points raised by the assessee's counsel amounts to illegalities in the notice and consequently have they rendered the notice illegal, bad in law and vague ?

(iii) If the notice is found to be vague, can the assessment for block period be quashed as a nullity ?

6.1. To decide the first question we consider it necessary to discuss the provisions of sections 147, 148 and 149 on one hand, provisions of sections 143(2) and (3) on the other hand and provisions of sections 158B, 158BA, 158BB and 158BC on the other hand and for that purpose we would like to extract the relevant portion of the provisions, 6.1. To decide the first question we consider it necessary to discuss the provisions of sections 147, 148 and 149 on one hand, provisions of sections 143(2) and (3) on the other hand and provisions of sections 158B, 158BA, 158BB and 158BC on the other hand and for that purpose we would like to extract the relevant portion of the provisions,

(a) Sections 143(2) and 143(3) of the Act "143. Assessment(1)(a) ........

(2) Where a return has been made under section 139, or in response to a notice under sub sections (1) of section 142, the assessing officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return.

Provided that no notice under this sub-section shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished.

(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the assessing officer may require on specified points and after taking into account all relevant material which he has gathered, the assessing officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him (or refund of any amount due to him) on the basis of such assessment)."

(b) Section 147 of the Act :

'147. Income escaping assessmentIf the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for assessment year concerned (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year;) Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and trully all material facts necessary for the assessment for that assessment year."

(c) Section 148 of the Act :

" 148. Issue of notice where income has escaped assessment-(1) Before making the assessment, reassessment or computation under section 147 the assessing officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner; and setting forth such other particulars as may be prescribed and the provisions of this Act shall so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

(2). The assessing officer shall, before issuing any notice under this section, record his reasons for doing so."

(d) Section 149 of the Act "149. Time-limit for noticeW No notice under section 148 shall be issued for the relevant assessment year

(a) in a case where an assessment under sub-sections (3) of section 143 or section 147 has been made for such assessment year."

(e) Chapter XIV-BSpecial procedure for assessment of search cases Important provisions are contained in sections 158B, 158BA, 158BB and 158BC which are in the following terms ..

"158B. DefinitionsIn this chapter, unless the context otherwise requires :

(a) "block period" means the previous years relevant to ten assessment years preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A and includes, in the previous year in which such search was conducted or requisition made, the period up to the date of the commencement of such search or, as the case may be, the date of such requisition;

(b) "Undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act."

"158BA, Assessment of undisclosed income as a result of search(1) Notwithstanding anything contained in any other provisions of this Act, where after the 30-6-1995 a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the assessing officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.

(2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.

Explanation ........."

'158BB. Computation of undisclosed income of the block period(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with assessing officer as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years determined ......

(2) In computing the undisclosed income of the block period, the provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to "financial year" in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition."

158BC. Procedure for block assessment-Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in the case of any person, the

(a) the assessing officer shall :

(i) in respect of search initiated or books of account or other documents or any assets requisitioned after the 30th day of June, 1995, but before the Ist day of January, 1997, serve a notice to such person requiring him to furnish within such time not being less than fifteen days;

(ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after the Ist day of January, 1997 serve a notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days, as may be specified in the notice a return in the prescribed form and verified in the same manner as a return under clauses (i) of sub-section (1) of section 142, setting forth his total income including the undisclosed income for the block period;

Provided that no notice under section 148 is required to be issued for the purpose of proceeding under this Chapter :

Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return;

(b) the assessing officer shall proceed to determine the undisclosed income of the block period in the manner laid down in section 158BB and the provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 shall, so far as may be, apply;

(c) the assessing officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment;

(d) the assets seized under section 132 or requisitioned under section 132A shall be retained to the extent necessary and the provisions of section 132B shall apply subject to such modifications as may be necessary and the references to `regular assessment' or 'reassessment' in section 132B shall be construed as references to 'block assessment'.

6.2. From the indepth analysis of aforesaid scheme of provisions relevant for making of a regular assessment, assessment of escaped income and assessment of search cases what we have been able to understand is that so far as the regular assessment is concerned, the assessing officer is to complete the same after serving on the assessee a notice under section 143(2) and on the date specified in such notice or as soon as afterwards, as may be, on the basis of evidence which the assessee may like to produce or such other evidence which the assessing officer may require the assessee to furnish on specified points and after taking into account the relevant material which he has gathered. Under this scheme of assessment the requirement of service of notice under section 143(2) has been held to be a procedural irregularity and non-compliance of this requirement has resulted in setting aside of the assessment for proceeding from the stage of irregularity and it is so because after furnishing of a valid return the assessing officer issues a valid jurisdiction to proceed for making a regular assessment but as far as the other two schemes i.e. the scheme provided for 'assessment of escaped income contained in provisions of sections 147, 148 and 149 and the scheme of special procedure for assessment in search cases" as provided under Chapter XIV-B i.e. under the provisions of sections 158B, 158BA, 158BB and 158BC etc. are concerned these go to show that : (i) object of both the schemes is same i.e. object is to tax the income which has not already been taxed. Under the former scheme the requirement is that in the opinion of the assessing officer the income should have escaped the assessment and search is not necessary and the prerequisite conditions to assume jurisdiction to tax the escaped income limits are (i) with respect to the quantum of escaped income as provided under section 147(ii) and service of a valid notice under section 148 has to be served upon the person and (iii) within the limitation prescribed under section 149, whereas in the later scheme the prerequisite mandatory requirements before the assessing officer can assume jurisdiction to make assessment of undisclosed income are that : (i) there should have been a search action under section 132 of the Act or a requisition for books or documents under section 132A of the Act, which is analogous to the requirement of taxing of escaped income in the earlier scheme. It is only on fulfilment of this condition that the assessing officer gets clothed with the jurisdiction to proceed for making a block assessment of undisclosed income, meaning thereby that the assessing officer is said have jurisdiction to proceed with under the provisions of Chapter XIV-B of the Act.

The second required prerequisite condition, before proceeding to make assessment under section XIV-B i.e, and assessment of block period is that the assessing officer has to serve a notice in confirmity with the requirement of section 158BC of the Act upon the person in whose case search has been conducted and in whose case the assessing officer wants to make an assessment under Chapter XIV-B, meaning thereby that as in the case of assessment of escaped income, the assessing officer can proceed to assess the escaped income only after the fulfilment of requirements upto the stage of service of a valid notice in confirmity with the provisions of section 148, in case of search i.e. in case of assessment of block period to be made under Chapter XIV-B of the Act the assessing officer can proceed to assess the undisclosed income after satisfaction of the requirements up to the stage of service of a valid notice in confirmity with the provisions of section 158BC of the Act. Since under both these schemes the requirement of service of a notice, before proceeding to make assessment, is a must, the requirement cannot be said to be a procedural and different one.

6.3. These schemes further go to show that the moment a notice under section 148 is served (in the scheme of assessment of escaped income) or the moment a notice under section 158BC is served (in the scheme of assessment of undisclosed income-Chapter XIV-B), the already completed assessments or the assessment for the year for which income has escaped (where there is no search) and the assessments falling within the block period, for the assessment of undisclosed income (where there is a search), get reopened. This view in fortified by the existence of first proviso to section 158BC(a), according to which the necessity of issuing a notice under section 148 of the Act has been dispensed with for making an assessment for the block period which is inclusive of 10 previous assessment years. The dispensation with the requirement of issuing of a notice under section 148 of the Act and the fact that assessment of block period includes the assessment of 10 previous years leaves one in no doubt about the purpose, nature, status and effect of a notice under section 158BC, which according to us is, (i) to get already completed assessment falling within the block period reopened and the assessing officer is clothed with the power to make assessment of undisclosed income for those assessment years; (ii) If assessments have not been completed then the assessing officer gets clothed with the powers to make assessment resembling with the assessment framed under section 147 of the Act; (iii) If return has been furnished, then the assessing officer is clothed with the power to make assessment of undisclosed income.

6.4. The above provisions envisaged in the 2 schemes (supra) confirm beyond any doubt that :

(1) Purpose of both the notices is same viz;

(i) A notice under section 148 and under section 158BC can be issued only after fulfilment of required conditions such as a escapement of income or action under section 132 of the Act, as the case may be.

(ii) In both the cases service of a valid notice is a mandatory prerequisite condition before proceeding to make a reassessment or assessment of block period, as the case may be.

7.1. Coming to the various decisions relied upon by the parties, the ratio of the decisions, in brief, is as under :

(a) Case laws relied upon by the assessee's counsel :

(i) Y Narayana Chetty & Anr. v. Income Tax Officer (supra) "The notice prescribed by section 34 cannot be regarded as a mere procedural requirement; it is only if the said notice is served on the assessee as required that the Income Tax Officer would be justified in taking proceedings against him. If no notice is issued or if the notice issued is shown to be invalid then the validity of the proceedings taken by the Income Tax Officer without a notice or in pursuance of an invalid notice would be illegal and void.

(ii) CIT v. Kurban Hussain Ibrahimji Mithiborewalla (supra) "It is well-settled that the Income Tax Officer's jurisdiction to reopen an assessment under section 34 depends upon the issuance of a valid notice. If the notice issued by him is invalid for any reason the entire proceedings taken by him would become void for want of jurisdiction. In the notice issued under section 34 the Income Tax Officer sought to reopen the assessment of the assessee for the assessment year 1948-49 but in fact he reopened the assessment of the year 1949-50. Hence, in our opinion, the High Court was right in holding that the notice in question was invalid and as such the Income Tax Officer had no jurisdiction to revise the assessment of the assessee for the year 1949- 50. "

(iii) CIT v. Ishwar Singh (supra) "On the facts as found by the Tribunal it is clear that the notice under section 148 as issued to an entity which was, as a matter of fact, non-existent and was at any rate different from the entity which filed the return in response to that notice. The notice had been issued to Sardar Arjun Singh, individual, and the return was filed by Sardar Sampuran Singh, Karta of his HUF. The two are absolutely distinct entities in law, as also, as a matter of fact, as no notice had been issued to it under section 148 of the Act. We have already indicated above that the issue of notice under section 148(1) is the condition precedent to the validity of an assessment under section 147. It is a jurisdictional issue and unless such a notice is issued the Income Tax Officer does not get jurisdiction to make an assessment on a particular assessee. In this view of the matter, in our opinion, the Tribunal has been right in holding that the assessment in question was not valid in law."

(iv) Madan Lal Agarwal v. CIT (supra) "It is now well settled, and we do not consider it necessary, to advert to numerous authorities in this regard cited at the Bar, that issuing of a valid notice to the assessee under section 148 of the Income Tax Act within the period specified under section 149 of the Act is a condition precedent to the validity of any assessment to be made against such assessee under section 147 of the Act. Accordingly, where no such notice has been issued or if the notice issued is not valid or the same has not been served on the assessee in accordance with law, it will not be possible to sustain the eventual assessment made under section 147 on the basis of such notice. We may also take it that where the notice issued to an assessee is vague, it would not be possible to rely upon it to sustain an assessment made."

(v) CIT v. Thayaballi Mulla Jeevaji Kapasi (supra) In this case the Hon'ble Supreme Court referred to its earlier decision in the case of Narayan Chetty v. Income Tax Officer (supra) and held as under :

"Service of notice prescribed by section 34 of the Income Tax Act, for the purpose of commencing proceedings for reassessment, is not a mere procedural requirement; it is a condition precedent to the initiation of proceedings for assessment under section 34. If no notice is issued or if the notice issued is shown to be invalid, then the proceedings taken by the Income Tax Officer, without a notice or in pursuance of an invalid notice, would be illegal and void see Narayana Chetty v. ITO (supra)".

(vi) P. N. Sasi Kumar v. CIT (supra) "It is settled law that the issue of a notice under section 148 of the Income Tax Act, 1961, is a condition precedent to the validity of any assessment order to be passed under section 147 of the Act. It is also settled law that if no such notice is issued or if the notice issued is invalid or not in accordance with the law or is not served on the proper person in accordance with law, the assessment would be illegal and without jurisdiction. The notice should specify the correct assessment year and should be issued to the particular assessee. "

7.2. The next decision relied upon by the assessee is that of Tribunal, Allahabad in the case of Prakash Spun Pipe (supra) in which it has been held that the provisions of section 292B cannot validate a return which is in sum and substance is not in confirmity with the provisions of the Act.

7.3. As far as the decision relied upon by the Additional standing counsel are concerned, we are of the opinion that the same are distinguishable on facts and are not applicable to the facts of the case.

7.4. In view of the above discussion, we are of the opinion that a notice required to be served under the provisions of section 158BC is akin, analoguous and within the same parameter, as a notice under section 148 and therefore, the grounds on which a notice under section 148 can be held to be bad in law are sufficient to hold a notice under section 158BC as bad in law.

8.1. The next question for our decision, as we have already formulated in the beginning of the order, is that can the illegalities pointed out by the assessee render the notice vague/bad in law. To decide this issue first of all we are of the opinion that since the notice under section 158BC has been held to be akin/analogous to notice under section 148, requirement of service of notice under section 158BC, in view of the various decisions relied upon by the assessee and discussed by us (supra) issuance and service of a notice of 158BC is not a procedural formality but substantive requirement to be fulfilled before the assessing officer can proceed to make assessment of the block period or before the assessment proceedings for the block period are set into motion and consequently the service of a notice under section 158BC gives rise to the jurisdiction of the assessing officer to proceed with the proceedings for assessment of block period.

8.2. Having held so, the next question for our decision in with respect to the validity of the notice but since there is no codified law on the point or circumstances under which a notice could be held to be invalid, we are of the opinion that for deciding the issue relating to the validity of the notice it is necessary to consider the circumstances under which a notice can be termed as invalid or bad in law as per the law laid down in various cases relied upon by the parties and then decide the validity of the impugned notice in the light of preposition of law laid down therein.

9. We have heard the parties in relation to the submissions made for pointing out as to how the notice was illegal/invalid one and as to how it was not illegal/invalid one.

10.1. After considering the facts and circumstances of the case and the rival submission we are of the opinion that as in the case of initiation of reassessment, the proceedings commences with the issue of notice under section 148 of the Act as held by the Hon'ble High Court of Allahabad in case of Onkar Dutt Sharma v. CIT (1967) 65 ITR 359 (All) and the service of the notice is a condition precedent for making a valid assessment, likewise, the proceedings for the assessment for block period commences on the service of notice under section 158BC and, therefore, the service of "valid" notice under section 158BC is a condition precedent for making a valid assessment; meaning thereby that if there is no valid notice, there can be no valid assessment and it is because there is a clear cut distinction between jurisdiction and procedure.

10.2. Further since the issuance of and service of notice under section 148 is not a mere procedural requirement but a condition precedent for the validity of reassessment, if in a given case it is established that a notice under section 148 has not been issued or if issued it is established to be invalid, the subsequent proceedings taken for making assessment would be illegal and void and this view is fully supported by the decision referred to in para 7.1 (a) (supra).

11.1. In view of the above discussion we are of the opinion that a notice is said to be illegal/invalid if :

(i)(a) It has not been addressed in accordance with the provisions of section 282.

(i)(b) Status of the person has not been mentioned.

(ii) The Hon'ble Bombay High Court in case of CIT v. Narain Das Dwarka Das (1976) 102 ITR 767-775 (Bom) has held that it is a condition precedent for initiation of reassessment proceedings under section 147 that a status of a person, to be reassessed or assessed, must be specified, mentioned and clearly stated in the notice itself.

Respectfully following the ratio of this decision we are of the opinion that it is a condition precedent for initiation of assessment proceedings for block period that the status of the assessee should be clearly stated in the notice under section 158BC and, therefore, if the status of the person for whom a notice of 158BC is issued, is not clearly mentioned, the notice shall be invalid.

(iii) Similarly, as the Hon'ble Supreme Court has in case of CIT v. Kurban Hussain Ibrahimji Mithiborwala (supra), held that for a notice under section 148 to be valid, the assessment year for which the assessment should be reopened must be specified clearly. Respectfully, following the ratio of this decision, we hold that for a notice under section 158BC to be a valid notice, the assessment year covered by the block period, in a given case, must also be specified clearly.

11.2(a) For deciding the issue relating to the existence of illegalities in notice under attack, first of all we prefer to reproduce the notice, which runs as under:

"NOTICE UNDER SECTION 158BC OF THE INCOME TAX ACT, 1961.

PAN/GIR No.. ...........

Block Period Block Period The previous years relevant to ten assessment years preceding the previous year 1996-97 and includes the period upto the last date of search warrant executed in your case (as defined under section 158B(a) upto 3rd Sept., 1996.

The previous years relevant to ten assessment years preceding the previous year 1996-97 and includes the period upto the last date of search warrant executed in your case (as defined under section 158B(a) upto 3rd Sept., 1996.

Income Tax Office Central Circle-II Kanpur Date : 12-12-1996 To, M/s Monga Metals (P) Ltd.

76/43, Gopal Market, Halsey Road, Kanpur.

In pursuance of the provisions of section 158 of the Income Tax Act, 1961, you are requested to prepare a true and correct return of your total income including the disclosed income in respect of which as individual/HUF/Firm/Company/Association of persons/Body of Individuallocal authority are assessable for the block period mentioned a section 158B(a) of the Income Tax Act, 1961.

The return should be in the prescribed form and be delivered in this office within 16 days of service of notice, duly verified and signed in accordance with the provision of section 140 of the Income Tax Act, 1961.

Sd/-(Illegible) Seal of the office of Central Circle-II, Kanpur Seal of the office of Central Circle-II, Kanpur (Dr. Subhash Chandra) (Dr. Subhash Chandra) Assistant Commissioner Central Circle-II Kanpur"

11.2(b). It we test the validity of the notice dated 12-12-1996, (supra) issued in assessee's case, in the light of aforesaid settled principles, it is quite evident that 11.2(b). It we test the validity of the notice dated 12-12-1996, (supra) issued in assessee's case, in the light of aforesaid settled principles, it is quite evident that

(i) The notice has not been addressed to the Principal Officer as required under section 282 of the Act.

(ii) Status, in which the return of so-called undisclosed income was required to be furnished has not been mentioned.

(iii) 'Assessment year' i.e. previous years relevant to assessment year faling within the block period, which in a way is an assessment year for the purpose of assessment of the block period, has not been mentioned. On the contrary, the notice specifies the 'definition' of the block period i.e, assessment years for this purpose, which could not be equated to the specifying of the specific previous years falling within the block period.

11.3. In view of the above mentioned illegalities in the notice dated 12-12-1996 claimed by the revenue to be a notice in terms of provisions of section 158BC and the decision in case of CIT v. Narain Das Dwarka Das (supra) and in case of CIT v. Kurban Hussain Ibrahimji Mithiborwala (supra) and other decisions referred to in para 3. 7 of this order, we are of the opinion that the impugned notice is vague and illegal and cannot be said to be a valid notice as required under the provisions of section 158BC.

11.4. (i) So far as the Revenue's plea that notice under section 158BC is akin to notice under section 142(1)(i) is concerned, we are unable to agree with the submission, because, as explained below, not only the purpose and scope of the notice under section 142(1)(i) are altogether different from the purpose and scope of notice under section 158BC but are limited also to say, 11.4. (i) So far as the Revenue's plea that notice under section 158BC is akin to notice under section 142(1)(i) is concerned, we are unable to agree with the submission, because, as explained below, not only the purpose and scope of the notice under section 142(1)(i) are altogether different from the purpose and scope of notice under section 158BC but are limited also to say, Firstly the service of a notice under section 142(1)(i) is not mandatory rather is optional as there is use of term 'may serve" and not "shall serve" as in the provisions of section 158BC.

Secondly, the notice is meant both for enquiry purpose as well as for furnishing of the return and;

Thirdly the notice under section 142(1)(i) can be meant for furnishing of the return for the current assessment year alone and not the previous assessment yearsas in the case of notice under section 148 or under section 158BC.

(ii) Further, so far as the requirement of addressing the notice as per the terms of section 282, specifying the status and the "assessment year" and, prerequisite mandatory requirements for a valid notice under section 142(1)(i) are concerned the same are as are for a notice under sections 148 and 158BC, and consequently the Revenue's plea, instead of advancing its interest, goes against it meaning thereby that if the illegalities referred to the purpose of notice under section 148 are found in the notice under section 142(1)(i) also then the notice under section 142(1)(i) shall also be rendered bad in law.

(iii) In view of the above discussions we are of the opinion that a notice under section 158BC, as far as purpose and scope is concerned is not akin to a notice under section 142(1)(i) but as far as the prerequisite mandatory requirements for a notice to be valid, are concerned they are same for both the notices and consequently even if Revenue's plea that a notice under section 158BC is akin to a notice under section 142(1)(i) then also, in view the illegalities pointed out in the forgoing part of the order the notice under section 158BC cannot be said to be a valid notice.

11.5. We are, further of the opinion that validity of the notice is not saved by the provisions of section 292B of the Act because the contents of the notice, as far as sum and substance is concerned, are not in confirmity with the provisions of the Act. This proposition finds support from the Tribunal's order in case of M/s Prakash Spun Pipe (supra).

12. The next question for our decision, after having found the notice under section 158BC dated 12-12-1996, a vague and illegal notice, is that can the assessment framed as a result of such notice be quashed.

12.1. The answer to this question is self-evident, since, for the assumption of jurisdiction to proceed with the making of an assessment for block period, service of a valid notice in terms of provisions of section 158BC is a prerequisite mandatory requirement, meaning thereby that the assessing officer cannot have jurisdiction to make an assessment for block period if there is no service of a notice under section 158BC or if the notice so served is found to be bad in law or invalid or vague. Consequently the assessment framed under any of these conditions shall be bad in the law and void ab initio for want of jurisdiction.

12.2. So far as present case is concerned, since we have already held the notice claimed to be a notice in terms of section 158BC by the Revenue, as bad in law and vague, the assessment framed in consequence upon the assumption of jurisdiction on the basis of such notice is also bad in law and void ab intio and we hold so. The assessing officer, however, can proceed with the proceedings from the stage of requirement of service of a notice under section 158BC, if the law so permits.

13. Ground 9

13. Ground 9 Ground No. 9 reads as under:

"That the order of the learned Assistant Commissioner is against law, facts and principles of natural justice."

14. We have heard the assessee's counsel as well as the learned Departmental Representative.

14.1. The assessee's counsel has submitted that since the alleged undisclosed income of 1,53,28,020 is on account of manufacturing and trading activities of ingots outside the books of accounts, undisclosed income of Rs. 18,00,000 is on account of alleged undisclosed working capital required for carrying on the so called manufacturing and trading activities of ingots, undisclosed income of Rs. 19,99,858 (reduced from 33,99,568 after order under section 154) and of Rs. 14,39,448 (reduced from Rs. 55,38,565 as per order under section 154) for assessment years 1995-96 and 1996-97 respectively on account of alleged introduction of assessee's undisclosed cash in books, and undisclosed income of Rs. 21,99,000 on account of alleged undisclosed investment is stock of scrap found at the time of search, have been computed solely on the basis of statement of Mr. Madan Handa, Mr. Muktar Abbas, Mr. Aquil Ahmed, Mr. Deepak Handa and Mr. Surendar Singh without allowing the assessee an opportunity for cross-examining any of those persons, and the assessment order, so far as the aforesaid undisclosed income on various accounts is concerned, has been made in complete violation of the principle of natural justice and consequently is liable to be quashed being bad-in-law. In support of this submission the assessee's counsel has relied on the decisions in following cases :

(i) Malwa Vanaspati v. CST 1995 UPTC 98 (Copy at p. 515 of assessee's paper book)

(ii) Colonisers v. Asstt, CIT (1992) 41 ITD 57 (Hyd-Trib)(SB)

(iii) S.K. Gupta v. Dy. CIT (1999) 12 DTC 531 (Del-Trib) : (1999) 63 TTJ (Del-Trib) 532 (Copy of p. 529 of assessee's paper book)

(v) State of Kerala v. Shaduli Grossery Dealers, 13 Etc. AIR 1977 SC 1627 (Copy at Vol V of assessee's paper-book)

(v) Raj Kumar Jain v. Assistant Commissioner of Income Tax (1994) 208 ITR 22 (AT) (All-Trib), 14.2. The learned Departmental Representative on the other hand has supported the validity of the assessment including the assessing officer's action refusing the assessee to cross-examine Mr. Madan Handa as well as other persons.

14.2. The learned Departmental Representative on the other hand has supported the validity of the assessment including the assessing officer's action refusing the assessee to cross-examine Mr. Madan Handa as well as other persons.

15. We have considered the rival submissions, facts and circumstances of the case and various case laws relied upon by the parties and before dwelling upon to the merits of the rival submissions, consider it necessary to state the facts in brief as have been revealed from the record before us and are relevant for the decision on the issue.

16. The facts relating to the issue are that the assessing officer has computed the undisclosed income as referred to in the arguments advanced by the assessee's counsel after presuming the various loose papers found during the search at the residence of one Mr. Madan Handa as belonging to the assessee's business, on the basis of the admission/denial by the various persons in their statements recorded by the Assistant Director of Income Tax (Investigation), Kanpur (hereinafter called' ADI) after the search and without allowing the assessee to cross-examine the said persons.

16.1. The persons whose statement have been relied upon by the assessing officer and their various statements are as under 16.1. The persons whose statement have been relied upon by the assessing officer and their various statements are as under

(i) Mr. Madan Hada

(a) Statement recorded by ADI. on 8-11-1996 (photocopy at p. 189 and typed copy at p. 226 of the assessee's paper book).

(b) Statement recorded by assessing officer on 11th Sept., 1997 (photocopy at p. 251 and typed copy at p, 265 of assessee's paper book).

(ii) Mr. Deepak Hada

(a) Statement recorded by ADI on 10-11-1996 (copy available at p. 204 of assessee's paper book).

These statement have been relied upon for attributing the loose papers marked as LP to LP 31, found from the residential premises of Mr. Madan Hada, to the assessee's business and also for holding that business of M/s Arpit Steels whose proprietor was Mr. Deepak Hada related to Shri Vinod Agarwal and Sri. Vijay Agarwal (reference in para 12(VII) at p. 10 of assessment order.

(iii) Mr. Ram Singhstatement recorded during search at the site where stock was lying, on 3-9- 1996 (copy available at p. 209 of assessee's paper book). This statement has been relied upon by the revenue in support of claim that stock inventory with respect to scrap available at the time of search was correct inventory.

(iv) Mr. Mukhtar AbbasStatement recorded by ADI on 6-11-1996 (copy at p. 86 of assessee's paper book).

(v) Mr. Aquil Ahmed-Statement recorded by ADI on 29-10-1996 (copy available at p. 83 of assessee's paper book).

(vi) Mr. Surendra Singh-Statement recorded by ADI on 14th Oct., 1996 (copy at p 81 of assessee's paper book),

(vii) Ram BahadurStatement recorded during search on 3-9-1996 (copy at p. 91 of assessee's paper book).

(viii) Vijay SinghStatement recorded during search on 3-9-1996 (copy available at p. 94 of assessee's paper book).

16.2. The statement of Mr. Mukhtar Abbas, Aquil Ahmed, Surendra Singh, Ram Bahadur and Vijay Singh have been used against the assessee as is evident from intentions of the assessing officer expressed in para 11 of his letter No. ACIT/CC/IT/block assessment/ 1997-98 dated 23-7-1997 (copy available at p. 63 of assessee's paper book) for the purpose of holding that the sales and purchases done by the assessee were not genuine and the assessee had introduced in the books, its undisclosed cash. Assessee had made a request for cross-examination of aforesaid persons as per reply furnished on 18-9-1997. As per order sheet entry dated 18-9-1997, the assessing officer fixed the date of cross-examination of these persons by the assessee as 23-9-1997, but after this entry the assessing officer made another entry, on 18-9-1997 itself, in which he has recorded that there is no time for cross-examination of Mr. Madan Hada. The entry is silent about the cross-examination of other persons, but as per discussion at p. 21 of the assessment order, these persons were also not allowed to be cross-examined. The details of entries in the order sheet, and the observation of the assessing officer, as are available in the copy placed at p. 415 of assessee paper book and at p. 21 of the assessment order are reproduced as under :

(i) Extract of order sheet (1) "18-9-1997Sri M.N. Jain authorised representative and Shri Govind Agarwal, C.A. appeared and filed his reply regarding cross-examination of Sri. Ram Singh, Shri Madan Hada and Shri. Deepak Hada.

Sd/-

Assistant Commissioner 18-9-1997Shri. MI. Jain, authorised representative and Shri Govind Agarwal, C. A. appeared and requested for time. Case adjourned for 23-9-1997. No further time will be allowed.

Sd/-

Assistant Commissioner 18-8-1997As regard Shri Ram Singh, he stayed till 7,00 PM and then left. As regards Hada, since on "A" have been given the copies of relevant annexures which are being used in the case of company, Shri Madan Hada and Deepak Hada should be specifically examine in respect of those annexures only- The date fixed is 22-9-1997.

Sd/-

Assistant Commissioner Comment given by A.R.

Sri. Madan Lal Jain (2) 18-9-1997The Annexures LP were recovered from the residence of Shri Madan Hada H-37, Kidwai Nagar, at a time of search.

Now there is no time for any cross-examination.

Case Adjourned for 23-9-1997.

Sd/-

Asstt, CIT (3) 22-9-1997Summon issued, statement recorded of Shri Gunjan Handa Sd/-

Assistant Commissioner 22-9-1997Shri M.L. Jain and Shri Govind Agarwal C.A. attends. File reply discussion continued adjourned for 23-9-1997.

Sd/-

Assistant Commissioner 23-9-1997Shri M.L. Jain, A.R. appeared and filed reply regarding cash statement of all the cases of Monga Group. Heard -Discussed.

Sd/-

Assistant Commissioner

(ii) Extract from Assessment order-p. 21 "Regarding cross-examination of Shri Ram Singh, Shri Madan Hada and Deepak Hada, the assessee insisted that Shri Deepak Hada and Madan Hada should be cross-examined simultaneously. Though this demand was not fair and reasonable yet in the interest of justice the same was conceded and by mutual consent 17-9-1997, was fixed for cross-examination. Regarding cross-examination another demand was made for supply of copies of all Panchnamas details and annexures of Shri Madan Hada which is not fair. If this demand is viewed in light of the demand of cross-examination of Shri Madan Hada and Shri Deepak Hada together, it amply shows the intention of the assessee that it, in fact never wanted to cross-examination and only wanted excuses. In the case of cross-examination of Ram Singh an employee whose statement was recorded on oath, it is true that he was not available in the morning hours on 17-9-1997, in the office even though he came to office. He again visited the office in the evening but then the assessee was not available for cross-examining him.

Since Shri Ram Singh is now not residing at Kanpur, he showed his inlability to be available for next 10-12 days and as such he could not be offered again for cross-examination."

16.3. To concluded the fact remains that the assessee was not allowed to cross-examine any of the aforesaid persons.

17. In the light of the above facts and circumstances the question for our decision are :

(i) Can the assessment framed by relying on the statements of 3rd parties who were not allowed to be cross-examined by the assessee be said to be and assessment in violation of principle of natural justice;

(ii) If so, can the assessment be considered as having been vitiated and be quashed.

18. As far as first question is concerned, now the law is well settled that when the finding of the quasi-judicial authority are found to have been influenced by the advice/information/evidence which have been obtained from 3rd party and brought on record without the knowledge of the assessee or without allowing the assessee an opportunity to controvert or disapprove the information, evidence or statement of fact contained in such information or without allowing the assessee to cross-examine such 3rd party, the order has to be found violative of principle of natural justice i.e. such an order is an order in violation of principle of natural justice.

This view finds force from the decision of Hon'ble Kerala High Court in case of M.S. Thomakutty v. CIT (1958) 34 ITR 501 (Ker) and in case of Koyamman Kutty v. Addl. Income Tax Officer (1965) 58 ITR 871 (Ker).

18.1. As far as present case is concerned, it is quite evident from the admitted facts extracted in the earlier part of para Nos. 16 and 17 that the assessment order dated 30-9-1997, for the block period has been passed solely on the basis of the statements of persons referred to in the facts already extracted and the assessee was not allowed to cross-examine any one of them (as is evident from the order sheet entries and observations at p. 21 of the assessment order already extracted.

19. In view of these facts and circumstances we have no option but hold that the undisclosed income referred to in the arguments of the assessee has been determined as a result of assessment order which is completely in violation of principle of natural justice, the next question for our decision is that should the assessment be quashed ?

20. After having held the assessment order to be in violation of the principle of natural justice the next question for our decision is that, should the assessment be quashed ?

20.1. It is now settled law that tax authorities entrusted with the power to make assessment of tax discharge quasi-judicial functions and they are bound to observe principles of natural justice in reaching their conclusions. A taxing officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but that does not absolve him from the obligation to comply with the principles of natural justice. It must, however, be remembered that the rules of natural justice are not constant; that are not absolute and rigid rules having universal application, Suresh Koshy George v. University of Kerala AIR 1969 SC 198.

One of the rules which constitutes a part of the principles of natural justice is the rule of audi alteram partem which requires that no man should be condemned unheard. It is indeed a requirement of the duty to act fairly which lies on all quasi-judicial authorities and this duty has been extended also to the authorities holding administrative enquiries involving civil consequences of affecting rights of parties. The quasi-judicial decision rendered and order made in violation of audi alteram partem rule is null and void and the order impugned in such case can be struck down as invalid on that score only and this view is fortified by the decisions in the following cases :

(i) Swadeshi Cotton Mills Company Ltd. v. Union of India 51 ITC 210 (SC);

(ii) Menaka Gandhi v. Union of India AIR 1978 SC 597;

(iii) Smt. Kanti Khare v. Kali Prasad Asthan AIR 1983 All 45;

(iv) State of Kerala v. K. C. Shaduli Grocery Dealers, Etc. AIR 1977 SC 1627;

(v) Colonisers v. Assistant Commissioner of Income Tax (1992) 41 ITD 57 (Hyd-Trib) (SB);

(vi) Malwa Vanaspati & Chemicals Ltd. v. CIT 1995 UPTC 987

(vii) Dhakeshwari Cotton Mills Ltd. v. CIT AIR 1955 SC 65

(viii) Suresh Koshy George v. University of Kerala AIR 1996 SC 198 20.2 (a). (i) In case of State of Kerala v. KT Shaduli Grocery Dealers, Etc. (supra), the Hon'ble Supreme Court followed the provision of law laid down in case of Dhakeshwari Cotton Mills Ltd. (supra) and Suresh Koshy Georges case (supra) and quashed the assessments which were found to be in violation of principle of natural justice.

20.2 (a). (i) In case of State of Kerala v. KT Shaduli Grocery Dealers, Etc. (supra), the Hon'ble Supreme Court followed the provision of law laid down in case of Dhakeshwari Cotton Mills Ltd. (supra) and Suresh Koshy Georges case (supra) and quashed the assessments which were found to be in violation of principle of natural justice.

(ii) The facts in the Shadul Grocery Dealers case (supra) were that in assessments of the assessee to sales-tax for three assessment years, the returns filed by him on the basis of his books of account appeared to the STO to be incorrect and incomplete since certain sales appearing in the books of a account of the Haji P.K. Usmani Kutty as having been effected by the assessee in his favour were not accounted for in the books of account maintained by the assessee. The assessee applied to the STO for affording him an opportunity to cross-examine Haji Usmankutty in regard to the correctness of his accounts, but this opportunity was denied to him and the STO proceeded to make a best judgment assessment under section 18, 8b-s. (3) of the Kerala General ST Act, 1963. The assessee appealed but without success and this was followed by a revision application to the High Court. The High Court took the view that the assessee was entitled to an opportunity to cross-examine Haji Usmankutty before any finding could be arrived at by the STO that the returns filed by the assessee were incorrect and incomplete so as to warrant the making of the best judgment assessment and since no such opportunity had been given to the assessee, the High Court quashed the order of the ST authorities and remanded the case to the STO for making fresh assessments according to law after giving an opportunity to the assessee to cross-examine Haji Usmankutty. The facts in Civil Appeal No. 575 of 1972 are almost identical, save that instead of Hair Usmankutty, certain wholesale dealers were sought to be cross-examined in that case and the opportunity to cross-examine them was denied by the ST authorities. Since the High Court quashed the orders of assessments of both cases, the state preferred an appeal by special leave in each case challenging the correctness of the view taken by the High Court.

(iii) It was on the aforesaid facts that the Hon'ble Supreme Court has held that the act of STO in refusing to summon the wholesale dealer for cross-examination by the assessee clearly constituted infraction of the right conferred on the assessee by the second part of the proviso and that vitiated the orders of the assessment made against the assessee. The following part of the decision of the Hon'ble Supreme Court is worthy of notice and we, prefer to make the relevant part as part of this order which is in the following terms :

"Now, the law is well settled that tax authorities entrusted with the power to make assessment of tax discharge quashi-judicial functions and they are bound to observe principles of natural justice in reaching their conclusions. It is true, as pointed out by this court in Dhakeswari Cotton Mills Ltd. v. CIT AIR 1995 SC 95 that a taxing officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law" but that does not absolve him from the obligation to comply with the fundamental rules of justice which have come to be known in the jurisprudence of administrative law as principles of natural justice. It is, however, necessary to remember that the rules of natural justice are not constant, they are not absolute and rigid rules having universal application. It was pointed but by this court in Suresh Koshy George v. The University of Kerala AIR 1969 SC 198 that 'the rules of natural justice are not embodied rules' and in the same case this court approved the following observations from the judgment of Tuker, L.J. in Russell v. Duek of Norfolk, (1949) 1 All ER 109. "

There are, in my view, no words which are of universal application to every kind of inquiry and every kind of domestic Tribunal. The requirements of natural justice must depend on the circumstances of the case, the nature of the inquiry, the rules under which the Tribunal is acting, the subject-matter that is being dealt with, and so forth.

Accordingly, I do not derive much assistance from the definitions of natural justice which have been from time to time used, but whatever standard is adopted, one essential is that the person concerned should have a reasonable opportunity of presenting this case". One of the rules which constitutes a part of the principles of natural justice is the rule of audi alteram partem which required that no man should be condemned unheard. It is indeed a requirement of the duty to act fairly which lies on all quasi-judicial authorities and this duty has been extended also to the authorities holding administrative enquiries involving civil consequences or affecting rights of parties because, as pointed out by this court in A.K. Kraipak v. Union of India (1970) 1 SCR 457: AIR 1970 SC 150 "the aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice" and justice, in a society which has accepted socialism as its article of faith in the Constitution, is dispensed not only by judicial or quasi-judicial authorities but also by authorities discharging administrative functions. This rule which requires an opportunity to be heard to be given to a person likely to be affected by a decision is also, like the genus of which it is a species, not a inflexible rule having a fixed connotation. It has a variable content depending on the nature of the inquiry, the framework of the law under which it is held, the constitution of the authority holding the enquiry, the nature and character of the rights affected and the consequence following from the decision. It is, therefore, not possible to say that in every case the ' rule of audi alteram partem requires that a particular specified procedure is to be followed. It was be that in a given case the rule of audi alteram partem may import a requirement that witness whose statements are sought to be relied upon by the authority holding the inquiry should be permitted to be cross-examined by the party affected while in some other case it may not. The procedure required to be adopted for giving an opportunity to a person to be heard must necessarily depend on facts and circumstances of each case."

20.2(b). In case of Coloniser v. Assistant Commissioner of Income Tax Tribunal, Special Bench (supra), as per head notes, has also held that an order rendered in violation of rule audi alteram partem is null and void and the order made in such a case can be struck down as invalid on that score only. The relevant part of head notes, which is quite important and worth of noting reads as under :

"In regard to the second point of difference, two segments of it existed. The first segment was as to whether the additions made in violation of the principles of natural justice should be set aside as void ab initio. The second segment was as to whether addition should be deleted or should the case be resorted to the Income Tax Officer with a direction for redoing. The rules of natural justice operate as implied mandatory requirement, non-observance of which amounts to arbitrariness and discrimination. The principles of natural justice have been elevated to the status of fundamental rights guaranteed in the constitution as is evident from the decision of the Full Bench of the Supreme Court in the case of Union of India v. Tulsiram Patel AIR 1985 SC 1416, holding that the principles of natural justice have thus come to be recognised as being a part of the guarantee contained in Art. 14 of the Constitution because of the new and dynamic interpretation given by the Supreme Court to the concept of equality which is the subject-matter of that article and that violation of principles of natural justice by a state action is a violation of Article 14.

In fact, the principles of natural justice, in the realm of life and liberty, would ipso facto even be read into Article 21 because any procedure which affected life or liberty had to be a just, fair and reasonable procedure which necessarily meant the observance of the principles of natural justice. That is why these principles have been called as part of the universal law, as part of the rule of law and have also been termed as fair play in action.

Audi alterim partem is one of the fundamental principles of natural justice. A quasi-judicial or administrative decision rendered or an order made in violation of the rule of audi alteram partem is null and void and the order made in such a case can be struck down as invalid on that score aloneManeka Gandhi v. Union of India AIR 1980 SC 597 , Gangadharan Pillai v. Asstt. CED (1980) 126 ITR 356 (Ker) at pp. 365 to 367. In other words, the order which infringes the fundamental principle, passed in violation of audi alteram partem rule, is a nullity. When a competent court of authority holds such an order as invalid or sets it aside, the impugned order becomes null and voidNawabkhan Abbaskhan v. State of Gujarat AIR 1974 SC 1471 at p. 1479. In the light of these decisions, the additions made by the assessing officer in violation of the principles of natural justice had to be set aside as void only insofar as the additions by way of cash credits alone were concerned, which were separable from the other additions in the order that were not challenged."

20.2(c). In case of Swadeshi Cotton Mills (P) Ltd; in case of Menaka Gandhi, in case of Smt. Kanti Khare and in other decisions relied upon by the assessee (supra) the courts have followed the same principle and have quashed the order as being a nullity and void.

21.1. In view of aforesaid settled principle of law and various decisions which we are bound to follow there remains no doubt about the answer to the question before us i.e. our answer to the question is that once the assessment is found to be in violation of principle of natural justice it has to be quashed as being bad in law and void or a nullity.

21.2. As far as the assessment before us is concerned since we have already held in para 19 the assessment to be in violation of principle of natural justice, we respectfully following the decision of various courts including Hon'ble Supreme Court and also the decision of Tribunal (supra), have no hesitation in holding that the assessing officer's action refusing the permission to the assessee for cross-examination of Mr. Madan Hada and others not only constituted infraction of right conferred to the assessee in view of the principles of natural justice but was in gross violation of the principle of natural justice and has vitiated the assessment on the issues relating to the undisclosed income referred to in the assessee's arguments and also with respect to the undisclosed income on account of so-called excess stock of scrap alleged to be available on the date of search and the assessment order to that extent has to be declared as bad-in-law, a nullity and void. We, subject to the direction that assessing officer may proceed with the matter afresh if the law so permits, hold accordingly.

This ground reads as under :

"That the assessment as a whole is vitiated as the same is based on contradictory finding/observations given/made by the learned assessing officer and on relying on extraneous material which had no relevance for the purpose of asset. "

22.1. We have heard the counsel for the assessee as well as the Department's Representative.

22.2. (i) The assessee's counsel had submitted that as per the provisions of section 132, the authorised officer has a limited jurisdiction with respect to dealing with the seized material and examination of persons. According to him the authorised officer :

(a) As per sub-section (4) of section 132, can examine the person who is found to be in possession or control of any books of account, documents, money or valuable articles or things, etc. and is present during the course of search.

(b) According to the provisions of sub-section (8) the authorised officer has power to retain the assessee's documents for a period not exceeding 180 days from the date of seizure unless the reasons for retaining the same are recorded and approval of CCIT/CIT/DG/DDI is sought,

(c) As per the provisions of sub-section (9A), if the authorised officer has no jurisdiction over the person referred to in clauses. (a), (b) and (c) of sub-section (1), then he has to hand over the assessee's books of account or other documents or assets to the Income Tax Officer having jurisdiction over such person within a period of 15 days and in no case can retain the same after expiry of a period of 15 days.

(ii) In view of the aforesaid provisions the assessee's counsel has tried to derive a proposition that, (a) if the authorised officer ceases to have power or jurisdiction to examine a person or to record the statement of a person connected with the matter relating to the person searched or for the purpose of Income Tax Act, effecting the case of such person or in the context or in relation to the case of the person in whose case search has been conducted, immediately after the close of the search' and (b) if the authorised officer for the search has no jurisdiction over the person in whose case the search has been conducted then he has no powers to retain the assessee's documents or assets seized during the search after a period of 15 days, and (c) if the authorised officer retains the books of account after the prescribed period or records the statement or examines any person then his action is wholly illegal, bad in law and assessment based on such action has to be declared as bad-in-law.

From the aforesaid proposition the assessee's counsel further derived a legal proposition that if the result of examination of assessee's documents by the authorised officer carried out after the expiry of 15 days or the statement recorded by him after the conclusion of the search are used for framing the assessment detrimental to the assessee's interest, such an assessment having been passed as a result of influence/advice/instruction of outsider, has to be held to be bad in law.

22.3. So far as the assessee's case is concerned, the assessee's counsel submitted that the statement of Shri Madan Hada on 8-11-1996 and statement of Shri Deepak Hada on 1-11-1996, which have been used by the assessing officer (para. 9 p. 3 of the assessment order) for determining the undisclosed income of Rs. 1,53,28,028 of Rs. 18,00,000 were recorded by the Assistant Director of Income Tax (Investigation), HQ, Kanpur, meaning thereby that the assessing officer's mind as well as action are based on the evidence collected by way of statement of these 2 persons by the ADI which is turn amount to the conducting of assessment proceedings by the ADI. Such action is illegal, bad-in-law.

22.4. The assessee's counsel advanced similar arguments relating to the use of statement of Shri. Mukhtar Ahmed, Mr. Aquil Ahmed and Mr. Surendra Singh recorded by the ADI on 6-11-1996, 29-10-1996 and 14-10-1996 respectively, which have been relied upon for holding that the assessee's trading activities were not genuine and that assessee's has introduced its undisclosed cash in book by adopting via-media of ungenuine purchases and sales.

22.5. Concluding his arguments the assessee's counsel submitted that the assessment order for the block period dated 30-9-1997, with respect to undisclosed income of Rs. 1,53,28,028, Rs. 18,00,000, Rs. 19,99,858, Rs. 14,39,448 and Rs. 21,99,000 has been passed solely on the basis of statements recorded by the ADI and the advice/directions/instructions given from time to time by him which is against the settled principle of law because to make the assessment is absolute domain of the assessing officer. He therefore, submitted that assessment with regard to the aforesaid undisclosed income has to be quashed. In support of this submission, the assessee's counsel relied on the decisions in case of Super Paper Mills Ltd. v. CWT (1970) 77 ITR 6 (SC) and Kirtilal Kali Das & Co. v. CIT (1998) 3 DTC 158 (Mad-Trib) : (1998) 67 ITD 573 (Mad-Trib).

23. The learned Departmental Representative on the other hand, in addition to supporting the assessment order submitted that the statement in question were recorded by the Assistant Director of Income Tax (Investigation) HQ, Kanpur in pursuance to the commission issued by the assessing officer but when asked, to led evidence in support of this submission by the Bench, the learned departmental Representative instead of furnishing evidence in this regard produced a copy of the letter addressed by the assessing officer to the Deputy Director of Income Tax (Investigation), Calcutta calling for certain information from him. No evidence whatsoever, in support of the claim that the statement referred to by the assessee's counsel in his arguments were recorded by the ADI, Kanpur as a result of commission used by the assessing officer was furnished.

24. We have considered the rival submissions, facts and circumstances of the case, the statement recorded by the ADI copies of which have been placed in the assessee's compilation, assessment order wherein the aforesaid statements have been relied upon by the assessing officer, provisions of section 132 with respect to power of authorised officer and also the provisions with respect to jurisdiction of the ADI and case law relied upon by the assessee, very carefully.

25. As far as the factum of recording of the statements by the ADI and reliance by the assessing officer on the contents of those statements is concerned, it is now admitted fact that the statements were recorded after the conclusion of the search by the Assistant Director of Income Tax (Investigation), HQ, Kanpur and have been relied upon by the assessing officer for computing the undisclosed income referred to by the assessee's counsel in his arguments.

26. To adjudicate upon the issue raised by the assessee's counsel we are of the opinion that first question for our decision is with regard to the jurisdiction of the Assistant Director of Income Tax (Investigation), HQ, Kanpur an Income Tax authority under the provisions of section 116 and also the jurisdiction of the authorised officer as referred to in the provisions of section 132 and it is so because as a matter of chance as it would have been, in the present case the Assistant Director of Income Tax (Investigation), HQ Kanpur (ADI) happens to be one of the authorised officer for carrying out search at assessee's premises as is evident from copy of Panchnama-Annexure-39/SS-(F0/6 placed at p. 364 of the assessee's paper book), and for this purpose we consider it necessary to consider the provisions of sections 120 and 132 of the Income Tax Act.

26.1. So far as the provisions of section 120 are concerned, these prescribe the jurisdiction of various Income Tax Authorities, as assigned to them by or under the Act in accordance with the directions of the Central Board of Direct Taxes or by any other Income Tax Authority who has been authorised by the CBDT in this behalf, but in the present case as far as jurisdiction of Assistant Director of Income Tax (Investigation), HQ Kanpur is concerned, the revenue has not produced any material which may show that at the time of recording of statement of persons (supra). The ADI had jurisdiction over assessee's case or over the cases of the persons so examined. The revenue had also not produced any evidence as to the functions which the ADI was authorised to carry on. The revenue's claim that the statements were recorded as a result of commission issued by the assessing officer is also not supported by any evidence, in spite of specific query raised by the Bench.

26.2. In these circumstances we have to hold that the Assistant Director of Income Tax (Investigation), HQ Kanpur had neither jurisdiction over the assessee's case nor was authorised to carry on the functions of an assessing officer and consequently, he was not authorised either to record the statement of any person or to help the assessing officer in framing the assessment, by way of collecting evidence in this respect.

27. As far as jurisdiction of authorised officer referred to in section 132 of the Act is concerned we would like to consider relevant provisions as contained in section 132 and are as under :

"132. Search and seizure.-(1) Where the Director General or Director or the Chief Commissioner or Commissioner or any such Assistant Director or Assistant Commissioner as may be empowered in this behalf by the Board, in consequence of information in his possession, has reason to believe that (2) .......

(3) .......

(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income Tax Act, 1922 (11 of 1922), or under this Act.

Explanation. For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income Tax Act, 1922 (11 of 1922), or under this Act.

(5).. ..

(6) .... ..

(7).... .

(8) The books of account or other documents seized under sub-section (1) or sub-section (1A) shall not be retained by the authorised officer for a period exceeding one hundred and eighty days from the date of the seizure unless the reasons for retaining the same are recorded by him in writing and the approval of the Chief Commissioner , Commissioner, Director General or Director for such retention is obtained Provided that the Chief Commissioner, Commissioner, Director General or Director shall not authorise the retention of the books of account and other documents for a period exceeding thirty days after all the proceedings under the Indian Income Tax Act, 19212 (11 of 1922), or this Act in respect of the years for which the books of account or other documents are relevant are completed.

(9A) Where the authorised officer has no jurisdiction over the person referred to in clause (a) or clause (b) or clause (c) of sub-section (1), the books of account or other documents or assets seized under that sub-section shall be handed over by the authorised officer to the Income Tax Officer having jurisdiction over such person within a period of fifteen days of such seizure and thereupon the powers exercisable by the authorised officer under sub-section (8) or sub-section (9) shall be exercisable by such Income Tax Officer.

27.1. From the above provisions, it is evident that 27.1. From the above provisions, it is evident that

(i) An authorised officer is a person who has been authorised, to carry out the search action and exercise the powers vested under section 132, by the Appropriate Authority referred to in section (1) of section 132;

(ii) In view of the provisions of section (4) it is the authorised officer alone who can examine any person present at the place of search and is found to be in possession or control of any books of account, document, money, bullion, jewellery or other valuable articles or things.

(iii) In view of the provisions of sub-section (8) the authorised officer is entitled to retain the assessee's seized material for a period of 180 days and in case he wants to retain the same material for more than 180 days he has to record reasons and seek the approval of the Commissioner /Chief Commissioner..

(iv) Contrary to the provisions of sub-section (4) if the authorised officer has no jurisdiction over the person in whose case search has been carried on as a result of authorisation under section 132(1)(a), (b) and (c) then the seized material as well as the assets have to be handed over to the Income Tax Officer having jurisdiction over the person in whose case search has been conducted, within the period of 15 days from date of search and thereupon the power which the authorised officer has jurisdiction to exercise in view of provisions of sections 8 and 9 are to be exercised by the Income Tax Officer.

27.2. The reference to the jurisdiction over the person in sub-section 9(A) is in relation to the jurisdiction to frame the assessment because of the reference for handling over the seized material, is to the Income Tax Officer meaning thereby that since the provisions states that the seized material has to be handed over to the Income Tax Officer, having jurisdiction over the person searched and thereafter the powers to exercised in view of provisions of sections 8 and 9 shall be exercised by such Income Tax Officer, it is very much clear that the jurisdiction is with respect to the "Jurisdiction with relation to the making of assessment" and not anything else.

27.3 Another requirement of sub-section (9)(A) is that the seized material and assets are to be handed over to the "Income Tax Officer" and nobody else.

28. In view of our aforesaid analysis of the various provisions we are of the opinion that an authorised officer who has no jurisdiction over the person in whose case search has been conducted, has no powers either to retain the seized materials for a period more than 15 days or to examine any person or to record statement of any person connected with the case of the person searched and on the contrary, has to hand over the seized material to the "Income Tax Officer" having jurisdiction over the persons searched.

28.1. This analysis leads to one more conclusion that after expiry of period of 15 days from the conclusion of the search, it is the Income Tax Officer having jurisdiction over the person searched who can use the seized material and can proceed with the making of assessment after exercising the powers vested under the Act.

28.2. It is further clear that the authority to whom the seized material is to be handed over by the authorised officer, referred in the provisions of sub section (9A) is the Income Tax Officer only, meaning thereby that the seized material cannot be handed over to anybody else except the Income Tax Officer having jurisdiction for the purpose of assessment over the person concerned.

29. As far as present case is concerned as we have held in para no. 24.1 and no. it is admitted fact that the Assistant Director of Income Tax, who has recorded the statements under reference was the authorised officer but was not an assessing officer of the assessee i.e. he had no jurisdiction, as envisaged in the provision of section 132(9A), over the assessee and, therefore, under these circumstances, the only option left with the said authorised officer for the purpose of search and seizure was to hand over the seized material and assets to the Income Tax Officer having jurisdiction over the assessee's case and not to anybody else, but in the present case the seized material has been handed over to the Assistant Commissioner, Central Circle for making the assessment for the block period under section 158BC of the Act, who was an authority (Assistant Commissioner) not referred to in the provisions of sub-section 9A.

29.2. Under these circumstances we are of the opinion that such an act has vitiated the assessment and the same has to be declared void ab initio for want of jurisdiction.

29.3. Even otherwise, recording of statement of Mr. Madan Hada by the said officer (ADI) on 8-11-1996, leads to show that till that date the documents were retained by the authorised officer, which was in violation of provisions of section 132(9A) and, therefore, the reports as a result of examination of such unlawful retention of record of the statement recorded cannot be made the basis of the assessment.

30. Coming to the question as to whether the ADI had power to perform the functions of an assessing officer, so far as the case of present assessee is concerned, we have to look to the provisions of section 116 and 120 of the Act, and after indepths study of the same it is gathered that :

(i) The provisions of section 116 of the Act have prescribed the different authorities who are to exercise the powers performing the functions as conferred on every one of them by virtue of the provisions of section 120 of the Act and therefore, it is incumbent upon the concerned authorities to exercise the powers and perform and functions conferred on it and not to engross upon or encroach upon the powers and functions conferred on some one else.

(ii) Similarly each one of the authorities specified in section 116 of the Act has to exercise his powers to carryout the functions assigned to do with respect to the area or the persons or the class of persons as the case may be and authorised by the Central Board of Direct Taxes or any other authority so authorised by the Central Board of Direct Taxes in exercise of the powers vested by the provisions of section 120/124.

(iii) In the present case since the revenue had not lead any evidence with respect to the jurisdiction of the concerned Assistant Director of Income Tax, it seems that Assistant Director of Income Tax had no jurisdiction over the assessee's case.

31. Coming to the plea that the assessing officer has been influenced by the statements recorded, proceedings conducted, over letters, advice etc. given by the Assistant Director of Income Tax who had since ceased to be an authorised officer after the conclusion of the search, it is revealed from the assessment order that following letters/statement (originating from the said Assistant Director of Income Tax (Investigation) might have been used for the purpose as detained below :

Statement recorded by Assistant Director of Income Tax and user by assessing officer

(i) Statement of Surendra Singh recorded on 14-10-1986;

(ii) Statement of Shri Aquil Ahmed recorded on 29-10-1996;

(iii) Statement of Shri Mukhtar Abbas recorded on 6-11-1996.

Aforesaid these statements have been used by the assessing officer for arriving at the finding detrimental to the assessee's interest.

(iv) Statement of Shri Madan Hada recorded on 8-11-1996-this statement has been relied upon by the assessing officer for holding that the LP-1 to LP-31 seized from the residence of Shri Madan Hada belonged to the assessee's business and as a result of such conclusion the undisclosed income of Rs. 1,53,28,028, Rs. 19,99,858, Rs. 14,29,448 and Rs. 21,99,000 and Rs. 18 lakhs have been determined.

(v) Statement of Mr. Deepak Hada recorded on 1-11-1996-his statement has been relied upon to hold that the business of the concern styled as M/s Arpit Steel related to Shri Vinod Agarwal, and/or Mr. Deepak Agarwal and not to Deepak Hada.

32. The aforesaid facts clearly shows that the assessment has been framed on the basis of statements recorded of Assistant Director of Income Tax (Investigation), HQ Kanpur, who on these dates had neither the power to carry out the functions of any authorising officer nor had the jurisdiction over the assessee's case.

33. Next question is that should the assessment be quashed as bad in law?

33.1. Further, in-depth analysis of the provisions (supra) reveals that each one of the Income Tax Authority has to exercise his powers/jurisdiction over the different or any other person or class of persons and to carry on the functions assigned to it and, since the functions assigned or to be carried on under the Act, as is now settled law, by a quasi-judicial authority is to exercise the powers and perform the functions conferred on it independently without getting its mind/conclusion/approach influenced by advice/instruction/direction or any other kind of interference by any of the other authority the order passed in contravention of such settled law is a nullity and void. If it is not so then the concerned authority will not be able to exercise its powers and perform the functions conferred on it judicially and there is likely to be a complete chaos due to inter reference by others i.e. by the higher authorities, and therefore, it seems to be this reason that the Hon'ble Courts have held the orders passed by a quasi-judicial authority on the basis of advice/instruction/directions or guidance of other authorities as bad in law and void ab initio.

33.2. The aforesaid preposition of law is fortified by the following decisions on which the assessee's counsel has placed reliance :

(1) Decision of Hon'ble Tribunal, Madras Bench in case of Kirtilal Kalidas & Co. v. CIT (supra)

(a) The fact of this case were that in terms of section 132 separate search warrants were issued by the concerned authorities on 26-8-1995/30-8-1995, in respect of different premises in which the business was carried on by the assessee. After the searches were conducted on 30-8-1995, separate Panchnamas were prepared for separate premises recording seized materials, and an appraisal report was prepared by them which was forwarded to the relevant assessing officer who on the basis of appraisal report issued notices to the appellants in terms of section 158BC read with section 158BD. In this statement on oath in terms of section 132(4) "T" admitted that he would disclose a sum of Rs. 40 lakhs for the block period to cover up any shortage of deficiencies in the group of search cases. The assessing officer framed the assessments under section 143(3) read with section 158BD, yet he issued notices to all the appellants under section 158BC directing them to file return for the block period for income including UDI (undisclosed income). The appellants initially did not file such return contending that there was no UDI. However, ultimately they filed return after expiry of prescribed period. The assessing officer after scrutinising seized materials and obtaining details/clarifications from appellants, made assessment for the block period determining respective UDI on 31-3-1997.

On appeal, the appellant assessee sought quashing of assessment orders on ground that : (1) search operations having been conducted on 30-8-1995, according to section 158BE assessments framed on 31-3-1997 were barred by limitation, (2) that the assessing officer did not act independently in making enquiries and in framing the impugned assessment but was greatly influenced and carried by the directions/instructions issued by DDI (Inv.) through appraisal report (3) that the Commissioner had given approval to the draft assessment orders without hearing the assessees and without giving or recording any reasons in the approval order, thereby violating the norms of natural justice, and (4) that there was no UDI as claimed by the Revenue.

On the aforesaid facts the Hon'ble Bench decided the assessee's plea that the assessment had been vitiated due to the assessing officer having been influenced and carried away by the directions/instructions issued by the Assistant Director of Income Tax (Investigation) through the appraisal report and held as under :

'Further, the enquiries by the assessing officer for making the assessment of income are quasi-judicial proceedings and the act of framing the assessment is quasi judicial proceedings and the act of framing the assessment is quasi-judicial act. It is a trite law that a judicial or quasi-judicial authority should act independently and that there shall not be any interference, nor any advice, opinion, instructions, directions can be given to any Income Tax Authority in such proceedings, etc. by any stranger/outsider even if such stranger/outsider is higher or highest authority in the hierarchy of the department. If an order is passed or a decision is rendered by an Income Tax Authority in such semi-judicial proceeding at the behest of or upon the directions or instructions of any superior officer or authority then such an order/decision is illegal and a nullity in law because it shall be deemed in law that such an other authority who directed or issued orders/instructions to the lower authority to act and thereafter pass an order/decision in a particular manner and frame the block period assessments. The refusal by the department to furnish a copy of the questioned appraisal report for perusal and study compelled one to accept that the impugned assessments were vitiated and illegal. The department was in custody and possession of the appraisal report of the DDI which according to the appellants were adverse to their interest in as much as the assessing officer had been influenced, dictated and directed to act not on his own independently but as directed and dictated by the superior officer in a particular document, namely, in the instant case, the appraisal report of the DDI. It was on account of this conduct and attitude of the departmental authorities in withholding the appraisal report which compelled one to draw an inference that what the assessees submitted was true and correct and, therefore, the same was true correct and acceptable. It was on the account of these reasons that the impugned assessments, were vitiated and were not sustainable in law requiring vacation. "

(ii) Sirpur Paper Mills Ltd. v. CWT (supra) In this case the Hon'ble Supreme Court while considering the scope and instructions and directions of Central Board of Direct Taxes as contemplated by section 13 of the Wealth Tax Act has held as under :

"The orders, instructions and directions of the Central Board contemplated by section 13 of the Wealth Tax Act, 1957, may control the exercise of the power of the officers of the department in matters administrative but not quasi-judicial. The proviso to the section does not imply that the Board may give any directions or instructions to the Wealth Tax Officer or to the CWT in the exercise of his quasi-judicial functions.

Accordingly, where, in certain applications for revision under section 25 of the Wealth Tax Act, 1957, from the inception of the proceedings, the CWT put himself in communication with the Central Board and so brought instructions from the Board as to how the revision applications filed before him should be decided and exercised no independent judgment in passing his order thereon, the Supreme Court, in appeals by special leave under Article 136 of the constitution against his order, set aside the order passed by the CWT and directed that the revision applications be heard and disposed of according to law and uninfluenced by any instructions or directions given by the Board."

33.3. In view of the admitted facts that the assessment under appeal has been framed on the basis of various statements recorded after the conclusion of the search by the Assistant Director of Income Tax (Investigation), HQ Kanpur, who at that time had neither jurisdiction over the assessee's case nor was acting as authorised officer and respectfully following the decision of Hon'ble Supreme court in case of Sirpur Paper Mills Ltd. v. CWT (supra) and of Tribunal. Madras Bench in case of Kirtilal Kalidas & Co. (supra), we hold that the assessment under appeal has been vitiated and is not sustainable in law requiring vacation we hold accordingly.

34. Having quashed the assessment for block period dated 30-9-1997, on the legal grounds itself (supra) though it is not necessary to decide the appeal on merits but in the interest of justice, we are of the opinion that the merits of the appeal should also be decided and, therefore, we proceed to decide the various issues, relating to merits, raised by the assessee in Ground Nos. 4.1 to 4.8, 5.6 and 7. ,

34. Having quashed the assessment for block period dated 30-9-1997, on the legal grounds itself (supra) though it is not necessary to decide the appeal on merits but in the interest of justice, we are of the opinion that the merits of the appeal should also be decided and, therefore, we proceed to decide the various issues, relating to merits, raised by the assessee in Ground Nos. 4.1 to 4.8, 5.6 and 7. , 34.1. All the aforesaid grounds are against the determination of assessee's undisclosed income of various assessment years, falling within the block period and the details of undisclosed income determined by the revenue and disputed by the assessee in the aforesaid grounds are as under :

34.1. All the aforesaid grounds are against the determination of assessee's undisclosed income of various assessment years, falling within the block period and the details of undisclosed income determined by the revenue and disputed by the assessee in the aforesaid grounds are as under :

(i) Assessment year 1993-94 assessing officer has determined undisclosed income on the basis of alleged undisclosed investment in the construction of assessee's factory building at Rs. 3,42,337 and the same is disputed by the assessee,.

(ii) Assessment year 1995-96 assessing officer has computed the assessee's undisclosed income for assessment year 1995-96 as under

(a) Undisclosed income as a result of manufacturing of ingots and sale of the same but not recorded in the books of account Rs. 1,53,28,028 and after allowing depreciation net undisclosed income from business outside the books at Rs. 1,41,51,178.

(b) Undisclosed income on account of alleged undisclosed capital required for carrying on the alleged undisclosed manufacturing and trading activity of ingots at Rs. 18,00,000;

(c) Undisclosed income on the basis of findings that assessee's trading activity such as purchases and sales were not genuine and assessee had introduced its undisclosed cash in its books of account at Rs. 19,99,858 (after order under section 154).

(iii) Assessment year 1996-97 Undisclosed income on the basis of findings that assessee's trading activity such as purchases and sale were not genuine and assessee had introduced its undisclosed cash in its books of account at Rs. 14,39,448 (after order under section 154).

(iv) Assessment year 1997-98 Undisclosed income on the basis of findings that assessee trading activity such as purchases and sale were not genuine and assessee had introduced its undisclosed cash in its books of account at nil.

(v) Undisclosed income for assessment year 1997-98 for the period August-September, 1996 as a result of manufacturing of ingots and sale of the same but not recorded in the books of account of Rs. 33,85,210.

(vi) The assessing officer has further computed undisclosed income on account of alleged excess stock of scrap found at the time of search Rs. 21,99,000

35. We now proceed to decide the issue relating to individual undisclosed income on merits.

35.1. Undisclosed income on account of alleged undisclosed investment in the construction of factory building 35.1. Undisclosed income on account of alleged undisclosed investment in the construction of factory building The facts relating to the issue are that the assessee had constructed its factory building during the financial year 1991-92 and 1992-93. The business was started with effect from 30-1-1993. Admittedly the assessee had maintained regular books of account with respect to the business activities as well as the construction activities and the details relating to investment in the construction of building were part of the books of account.

The cost of construction of the factory building as per assessee's record was Rs. 33,99,643 as is evident from the depreciation chart furnished along with return for assessment year 1993-94 and is available at p. 23 of assessee's paper book. The assessee's books of accounts were duly audited and return of income for assessment year 1993-94 was accompanied by the audited balance sheet as well as valuers report for the cost of construction of the building.

35.2. The assessment for assessment year 1993-94 as per assessment order available at pp. 32 and 33 of the assessee's paper book was completed on 10-4-1995, under section 143(3) of the Act in which the cost of construction shown by the assessee was accepted because the depreciation has been allowed, as claimed by the assessee and is as per depreciation chart available at p. 23 of the assessee's paper book wherein the assessee had claimed depreciation on Rs. 33,99,643 being the cost of building. The depreciation on building in assessment years 1994-95 and 1995-96 also has been allowed on the basis of brought forward WDVs which confirms that the cost of construction of the building as declared by the assessee was accepted by the Revenue.

35.3. The first assessment for assessment year 1993-94 has been completed after due investigations and scrutiny of assessee's books of account as is evident from the observations of the assessing officer which are in the following terms :

"The assessee- company vide its return of income for the first time declaring loss of Rs. 22,19,460. The income-tax return also accompanied with audited copy of balance sheet, profit and loss account and TAR, etc. which are placed on record.

The details of purchases, sales and other details as filed by the assessee with reference to audited copy of balance sheet, profit and loss account and the TAR filed along with the income-tax return. The books of account produced were also put to test check.

After discussion the points in dispute/disallowances are being discussed as under : "

35.4. While making assessment for the block period the learned assessing officer in spite of the facts that there was nothing in any of the books of account or documents found or seized during the course of search at assessee's premises which could be taken as to reveal that the cost of construction declared as per assessee record was not correct or was less than the actual cost, made reference to the valuation officer who after allowing a rebate at the rate of 5 per cent for self supervision and adding an amount @ 1 per cent on account of builders efforts determined the cost of construction of the building at Rs. 37,42,000. The cost of construction declared by the assessee has been mentioned at Rs. 36,99,643 by the valuation officer in his report which seems to be incorrect because the cost of construction as claimed by the assessee and not disputed by the revenue as per assessee's record was Rs. 33,99,643.

35.5. The learned assessing officer accepted the cost determined by the valuation officer and considered the difference of Rs. 3,42,357 as assessee's undisclosed income on account of undisclosed investment in the construction of the building by observing as under :

"Unexplained investment in the property The factory premises of the assessee at Malwan, District Fatehpur wals constructed in the year 1992-93 and disclosed investment in Rs. 33,99,643. To ascertain the reasonable investment in the construction of factory building, the matter was referred to the valuation officer, Allahabad on 29-7-1997. The departmental valuer vide his report dated 16-9-1997 communicated vide letter/TT/97-98/Vo/All/234 has estimated the cost of construction at Rs. 37,42,000. The copy of the valuation report of the departmental valuer was given to the assessee and it was required to explain the reasons as to why the cost of construction estimated by the departmental Valuer at Rs. 37,42,000 may not be treated as reasonable investment in place of Rs. 33,99,643 disclosed in the books of account.

The unexplained investment in the cost of construction comes to Rs. 3,42,357. The assessee in its reply dated nil has raised objections that the reference was not made validly.

Most of the objections are general in nature. The procurement of material at cheaper rate is not substantiated. The main object of the assessee is for allowance of self-supervision charges for construction of factory building at the rate of 7.5 per cent against 9.1 per cent being allowed in very many cases.

The directors of the assessee-company have no experience in civil construction. They do not have proper infrastructure and appliances to carry out the civil and mechanical construction as in the case of regular contractors. In view of these facts, the margins of profit as available in the case of these facts, the valuation officer has rightly allowed the credit for self-supervision charges at the rate of 7.5 per cent. Besides, the assessee has also objected to the adoption of schedules of CPWD rates as against PWD rates. The Hon'ble High Court in the cases relied by the assessee has not directly dealt with the issue of applicability of PWD and CPWD rates. In addition to this it has also been argued that since the difference in valuation and disclosed value is arrived 105, the same could be ignored.

Looking to the facts and circumstances of the case, the objections of assessee are not acceptable. Therefore, the difference be taken of Rs. 33,99,643 disclosed by the assessee and Rs. 37,42,000 estimated by the departmental valuer comes to Rs. 3,42,357 and is treated as unexplained investment in the construction of factory building which is added to the assessee's income."

36.1. In the light of the aforesaid facts the assessee's counsel first of all submitted that the issue relating to the cost of construction of the building having become final as a result of regular assessment for assessment year 1993-94 framed under section 143(3) after scrutiny of assessee's books of account and there being not even an iota of information or detail in any of the books of account documents found or seized during the search to suggest that the cost declared by the assessee's account was either not correct or was less than the actual cost, the assessing officer has no reason or jurisdiction for making a reference to the valuation officer for the purpose of determining the cost of construction of the factory building. The counsel has further submitted that Chapter XIV-B of the Act is a self-contained code for the purpose of determination of undisclosed income which has to be computed only on the basis of evidence or details or transactions contained in assessee's documents or on the basis of assets found during the search and not on the basis of subsequent procured valuation report.

"The assessee's counsel further submitted that valuation officer has allowed the rebate on account of self-supervision only @ 5 per cent as against 10 per cent allowed in other cases and held to be justified by the various case laws. According to the counsel if the assessee is allowed rebate of 10 per cent then the difference between the cost of construction declared by the assessee and the one determined by the valuation officer will be negligible and since the value determined by the valuation officer is only an estimate where-as the cost of construction declared by the assessee is on the basis of complete details maintained in the regular course of business activities, the same is liable to be ignored. In support of his submission the assessee's counsel has relied on the Tribunal's decision in case of Smt. Parvin Bai dated 29-2-1996, and in case of M/s Uma Brothers dated 18-2-1996 (copies available at pp. 50 to 52 and 53 to 57 of the assessee's paper book), on the valuation report in case of other assessee where the valuation officer has allowed rebate on account of self-supervisions @ 9. 1 per cent to 10 per cent (copies placed at pp. 58 to 62 of assessee's paper book) as well as on another decision of Tribunal, Madras Bench in case of Baby Land Hostel v. Income Tax Officer (1989) 31 ITD 136 (Mad-Trib) (copy at p. 551 of assessee's paper book.)"

36.2. The learned Departmental Representative on the other hand in addition to supporting the order of the assessing officer has, as per synopsis filed during the course of hearing submitted as under :

"Unexplained investment in factory building Rs. 3,42,374 assessment year 1993-94-The difference between the cost of investment in the factory building of the appellant and that estimated by the District Valuation Officer, Income Tax Department has been treated as unexplained investment in the factory building during the relevant assessment year 1993-94. The appellant disputes this addition on the strength of two decisions of the Hon'ble Tribunal, Allahabad, stating that since it maintained records of construction in books of account the same should be accepted. It has been further stated that the book value of investment is being accepted by the department even during the course of regular assessment proceedings including that for assessment year 1996-97.

The fact that the value of factory as appearing in the balance sheet of the appellant has not been altered, does not help the case of the appellant. As regards adjustments in the books of account, that is to be carried out by the appellant itself by taking into account the unexplained investment and making suitable adjustment in the reserves appearing in the liability side. However, the appellant is entitled to extra claim of depreciation on the enhanced value of investment also. As regards maintenance of records of construction activity in regular books of account, the appellant does not maintain any regular record for payment of labour etc."

37. We have considered rival submissions, the facts and circumstances of the case as well as the case laws relied upon by the parties.

37.1. It is now settled law that assessment under Chapter XIV-B of the Act not a regular assessment or akin to an assessment under section 143(3). The provisions of Chapter XIV-B meant for assessment of undisclosed income is a self-contained code in itself and the undisclosed income is to be computed on the basis of information/details/evidence/transactions available in seized documents/books of account, etc. or on the basis of assets found during the search.

37.2. In view of this legal preposition the assessing officer could deal with the matter relating to cost of construction of the factory building, which has since been concluded as a result of regular assessment under section 143(3), only when there was any information or evidence or transaction in the seized books of account or documents to indicate. That the cost declared by the assessee and accepted by the revenue was not correct or was less than the actual, otherwise the assessing officer has no jurisdiction to reconsider the concluded issue.

37.3. Even otherwise, the issue having become final as a result of completion of assessment for assessment year 1993-94, i.e. upto the period when the investment in construction was made, under section 143(3) and after scrutiny of seized books of account and assessee having furnished the report of the valuer along with return itself, even if, we for the sake of arguments, assume that the assessment for block period to be at par with the regular assessment then also the assessing officer had no jurisdiction to reconsider the concluded issue and make a reference to the valuation officer.

37.4. In view of the above, we are of the opinion that the reference made to the valuation officer by the assessing officer for determining the cost of construction of the building was without jurisdiction and therefore, the assessing officer had no power to consider the valuation report and consequently had no jurisdiction to determine any undisclosed income on account of so-called undisclosed investment in the construction of the factory building.

38. On merits, first of all we are of the opinion that the determination undisclosed income at Rs. 3,42,347 on account of alleged undisclosed investment is not correct because the valuation officer while determining the cost of construction has considered as amount of Rs. 37,049 (on account of builders efforts) which cannot be investment by the assessee. The amount determined by the valuation officer on account of builders effort is a notional saving made by every builder as a result of his personal efforts during purchases of material or engagement of labour, etc. This amount may be considered for the purpose of market value of the building because the saving made as a result of builders efforts are definitely to be reflected in the market value but cannot be considered as investment by the builders. This is simple saving in the case and nothing has flowed from the builders pocket.

38.1. Under the provisions of section 69 or 69B of the Act, as the case may be the amount which has flown from the pocket of some one including assessee which can be considered as undisclosed investment, meaning by that if nothing has flown from the assessee's pocket then nothing ca said to have been invested and consequently nothing can be considered undisclosed investment. Since the savings made by the person as a result personal effort are notional one, the same cannot be considered as undisclosed investment by the person.

38.2. In view of this legal preposition, we do not subscribe to the Valuation Officer's method of confirmation of the valuation, where he has considered 1 per cent of the amount on other cost of construction having been saved on account of personal/Builders efforts as part of the construction and consequently the amount of Rs. 37,049 cannot be considered assessee's undisclosed income.

38.3. Secondly, since the Valuation Officer himself has been allowing rebate on account of personal supervision in other cases @ 10 per cent and Tribunal has also upheld such percentage the assessee is also entitled to rebate on this account @ 10 per cent and if the assessee is allowed the aforesaid amount then the cost of construction as per Valuation Officer comes to Rs. 35.09,865 (38,99,849 minus 10 per cent for self- supervision) and in this way the difference comes to Rs. 1, 10,222 which is less than 3.5 per cent of the cost of construction as per assessee's account. Since the report of the Valuation Officer is only an estimate it cannot be said that assessee had not declared the true cost or was less than the correct cost of construction.

38.4. Furthermore, since the assessee had maintained complete record for construction, the absence of day today details of labour expenses, as alleged by the revenue , also cannot be a reason for disbelieving the assessee's accounts, which in view of the decision relied upon by the assessee (supra) have to be accepted.

39. In view of the above discussions, we are of the opinion that the determination of undisclosed income on account of alleged undisclosed investment in the construction of factory building at Rs. 3,42,000 cannot be sustained, we therefore, direct the assessing officer to delete the same.

40. Ground No. 4.1 [assessment year 1995-96 (a)], relates to computation of undisclosed income of Rs. 1,53,28,028 on account of alleged manufacturing and trading activities of ingots claimed to be by the revenue as being outside the regular books of account and based on LP1 to LP31 found and seized during the course of search at the residence of one Mr. Madan Hada, erstwhile director of the assessee company :

40.1. The brief facts relating to the aforesaid addition, revealed from the discussion contained from para 9 at p. 3 to p. 34 of the order of the assessment for block period, are that the learned assessing officer assumed the loose papers in documents marked as LPI to LP 31 found and seized during the course of search under section 132 of the Act at the residence of Mr. Madan Hada-erstwhile director of the assessee- company, after relying on the possibility of both these papers are belonging to the assessee expressed by Madan Hada in his statement recorded under section 131 of the Act on 8-11-1996, by the ADI copy of statement available at pp. 189 to 192 typed copy at pp. 276 to 279 of the assessee's paper book. The relevant part of the statement, as contained in answers to question Nos. 5 to 11 of this statement reads as under :

(See Annexure A to this order) 40.2. Another important fact, worth of mention here, is that at the time of search at the residence of Shri Madan Hada on 3-9-1996, Shri Madan Hada had not, during his examination under section 132(4) of the Act, expressed any apprehension or doubt with regard to the ownership of the documents marked as LPI to LP 31 as belonging to the assessee. He had not alleged or expressed any possibility of these documents as belonging to the assessee, on the contrary, he on the basis of these very documents had disclosed an income of Rs. 78,00,000 and these fact are evident from his statement recorded during examination under section 132(4) of the Act on 3-9-1996, itself which we have preferred to extract, as part of facts of this order and is as under :

40.2. Another important fact, worth of mention here, is that at the time of search at the residence of Shri Madan Hada on 3-9-1996, Shri Madan Hada had not, during his examination under section 132(4) of the Act, expressed any apprehension or doubt with regard to the ownership of the documents marked as LPI to LP 31 as belonging to the assessee. He had not alleged or expressed any possibility of these documents as belonging to the assessee, on the contrary, he on the basis of these very documents had disclosed an income of Rs. 78,00,000 and these fact are evident from his statement recorded during examination under section 132(4) of the Act on 3-9-1996, itself which we have preferred to extract, as part of facts of this order and is as under :

(See Annexure B of this order) 40.3(a). The learned assessing officer specially considered the contents of LP 5, 11, 12,15 and 22 out of LPs found at the residence of Shri Madan Hada and computed the turnover on account of alleged manufactured and sold quantity of ingots by the assessee alleged to be outside the books on monthwise basis as under :

40.3(a). The learned assessing officer specially considered the contents of LP 5, 11, 12,15 and 22 out of LPs found at the residence of Shri Madan Hada and computed the turnover on account of alleged manufactured and sold quantity of ingots by the assessee alleged to be outside the books on monthwise basis as under :

Month Month Month Turnover (Rs.) Turnover (Rs.) Turnover (Rs.) June,1994 June,1994 22,78,254 22,78,254 July, 1994 July, 1994 24,83,351 24,83,351 August, 1994 August, 1994 1,90,69,388 1,90,69,388 September, 1994 September, 1994 2,13,32,789 2,13,32,789 October, 1994 October, 1994 1,64,09,595 1,64,09,595 November, 1994 November, 1994 1,67,57,854 1,67,57,854 January, 1995 January, 1995 2,24,67,777 2,24,67,777 40.3(b). The turnover an account of manufactured and sold quantity of Ingots alleged to be outside the books for the month of December 1994, and January, 1995 were computed at Rs. 59,03,820 and Rs. 38,63,869 respectively. After allowing a benefit of 13 per cent burning loss but the documents, on the basis of which the alleged sales have been computed, have not been mentioned.

40.3(b). The turnover an account of manufactured and sold quantity of Ingots alleged to be outside the books for the month of December 1994, and January, 1995 were computed at Rs. 59,03,820 and Rs. 38,63,869 respectively. After allowing a benefit of 13 per cent burning loss but the documents, on the basis of which the alleged sales have been computed, have not been mentioned.

40.4(a). The final outcome of aforesaid action of the assessing officer is that the alleged outside the books i.e., undisclosed net income for the financial year 1994-95 i.e. Assessment Year 1995-96 on account of manufactured and sold quantity of ingots outside the books have been computed at Rs. 1,53,28,028 after applying a net profit rate of 14.59 per cent on the total alleged outside the books turnover on this account of Rs. 10,97,66,734.

40.4(b). While computing the undisclosed turnover and net undisclosed income (supra) the learned assessing officer followed the following criteria :

"(1) Where actual sale value is available in seized material, the same has been taken.

(2) Where actual sale value is not available and also no indications are available of any sale bill on undisclosed turnover, the rate of Rs. 10,100 per metric tonne has been applied on the undisclosed quantity of turnover, being the average as per LP5.

(3) Where the rate of turnover is available, the same has been applied on the undisclosed quantity of turnover. (On the basis of any bill for the relevant period) :

(4) As regards the assessee's contention of exclusion of sales of R.R. on the assumption that they are already included in the sale of ingots, the same is not acceptable for want of any evidence. Therefore, the sale of R.R. are estimated at an average rate of Rs. 8,800 and those of scrap has been valued at an average rate of Rs. 7,220 per metric ton. (Annexure LP-5) Accordingly, the total undisclosed sales as per annexurefor the accounting period relevant for the assessment year 1995-96 which is part of block period have been worked out to Rs. 10, 50,64,349.

40.5. The details of loose papers found at the residence of Mr. Madan Hada, their reference in the assessment order for block period and purpose for what these have been relied upon and also the details of loose papers found at the residence of Mr. Agarwal, their reference in the assessment order and purpose for which they have been led by the assessing officer, as per chart filed by the learned departmental representative are as under :

S. No. S. No. S. No. Document marked as Document marked as Document marked as Page No. of document Page No. of document Page No. of document Purpose for which used in the assessment order Purpose for which used in the assessment order Purpose for which used in the assessment order Page nos. of asst. Order u/s. 158BC Page nos. of asst. Order u/s. 158BC Page nos. of asst. Order u/s. 158BC

1.

1. PP- 1 PP- 1 Page No. 8-22 Page No. 8-22 Used for purchase of scrap in the month of Feb., 1995.

Used for purchase of scrap in the month of Feb., 1995.

3,4,28 3,4,28 Page No. 23,34 to 40,43,44 Page No. 23,34 to 40,43,44 Purchase of scrap for the month of Jan. 1995 linked with LP-22 Purchase of scrap for the month of Jan. 1995 linked with LP-22

2.

2. LP-5 LP-5 Page 5 Page 5 For the month of Sept., 1994 For the month of Sept., 1994

3.

3. LP-9 LP-9 Page 1-8 Page 1-8 Sale for the month of Aug., Sale for the month of Aug., 4,5,16,18,20 4,5,16,18,20 Page 11-12 Page 11-12 1994 of 2411.355 MT 1994 of 2411.355 MT 30,32,33,34 30,32,33,34 Purchase of scrap for Dec., 1994, including one purchase of Jan., 1995 linked with LP-22 Purchase of scrap for Dec., 1994, including one purchase of Jan., 1995 linked with LP-22

4.

4. LP-11 LP-11 Page 14-16 Page 14-16 Purchase of scrap for Nov., 1994 Purchase of scrap for Nov., 1994 Page 29-38 Page 92-93 Page 92-93 Sale of Sept., 1994 Tallies with LP-5 2457 MT record of scrap production and sale of ignots for the month of Oct., Nov., 1994 Sale of Sept., 1994 Tallies with LP-5 2457 MT record of scrap production and sale of ignots for the month of Oct., Nov., 1994 4,5,18,30 530 530

5.

5. LP-12 LP-12 Page 25-48 Page 25-48 Purchase of scrap.

Purchase of scrap.

5,30 5,30

6.

6. LP-12 LP-12 Page 49,53-56 Page 8 Page 8 Purchase of scrap for month of Dec., 1994 but it correspond to LP-1,LP-9.

Purchase of scrap for month of Dec., 1994 but it correspond to LP-1,LP-9.

5,30 5,30 LP-15 LP-15 Page 1-7 Page 1-7 Purchase of scrap for the month of Aug., 1994. Inward freight, is not shown except in stray cases.

Purchase of scrap for the month of Aug., 1994. Inward freight, is not shown except in stray cases.

7,30 7,30

8.

8. LP-16 LP-16 Page 3 Page 3 Sales for the month of July, 1994. The bills claimed by the assessee to be posted are different amount-cash payments are also there.

Sales for the month of July, 1994. The bills claimed by the assessee to be posted are different amount-cash payments are also there.

26,27,29,30 26,27,29,30

9.

9. LP-22 LP-22 Page 2 Page 2 Sale for the month of June, 1994 Sale for the month of June, 1994 5,7,31 5,7,31 Page 1-31 Page 1-31 Purchase of scrap & sale of ignots for Jan., 1995 Purchase of scrap & sale of ignots for Jan., 1995 1997-98 1997-98 1997-98

10.

10. A-8 A-8 Page 5,1 Page 5,1 Records dispatch of ignots on 1st Sept., 1996 and on page No. 1, it records production of ignots on 1st Sept., 1996.

Records dispatch of ignots on 1st Sept., 1996 and on page No. 1, it records production of ignots on 1st Sept., 1996.

14,15,22 14,15,22

11.

11. A-3 A-3 Page 147 Page 147 Shows receipt of ignots by way of despatches from Monga Metal on 31st Sept., 1996 Shows receipt of ignots by way of despatches from Monga Metal on 31st Sept., 1996 23,39,24 23,39,24

12.

12. Agarwal Residence Agarwal Residence LP-3 LP-3 Page 26,15 Page 26,15 Records of despatch of M/s ignots and receipt of the same by VVS Alloys from Monga Metal corresponds to p. No. 147 of A-3.

Records of despatch of M/s ignots and receipt of the same by VVS Alloys from Monga Metal corresponds to p. No. 147 of A-3.

14,15,16,22, 23,39,24 23,39,24

13.

13. MMB-2 MMB-2 Page 1-32 Page 1-32 Capacity of production Capacity of production 15 15

14.

14. MMB-3 MMB-3 Page 10-11 Page 10-11 Capacity of production Capacity of production 15 15

15.

15. BKFF-2 BKFF-2 Page 100 & 123 Page 100 & 123 Undisclosed sales for the month of June and July 1994 Undisclosed sales for the month of June and July 1994 26,27 26,27

41. Submissions by the counsel for the appellant :

(a) The assessee's counsel advanced the following arguments :

(i) That the loose papers marked as LP1 to LP31 found at the time of search at the residence of assessee's erstwhile director Mr. Madan Hada did not relate to assessee's business and since Mr. Madan Hada was himself carrying on the business of sale and purchase of ingots and scrap and might had got ingots manufactured from some other manufacturer, transactions recorded in these documents related to the personal business of Mr. Madan Hada. According to him had it not been so then Madan Hada would not have disclosed, during his examination under section 134(4) of the Act on 3rd Sept., 1996, an income of Rs. 78,00,000. The assessee's counsel stressed the point that the disclosure of income of Rs. 78,00,000 by Mr. Madan Hada as his personal income was after accepting the fact that the details in these documents related to this personal business and assessee had nothing to do with them. The assessee's counsel further submitted that the second statement of Mr. Madan Hada recorded by ADI (Inv) HQ, Kanpur on 8th Nov., 1996, is a tutored statement extorted from Mr. Madan Hada probably in the garb of making him a departmental witness, but, still, in this statement also Shri Madan Hada had not confirmed the ownership of these documents as that of assessee. He has just expressed his apprehension or doubt or possibility.

(ii) Referring to the order sheet entries-copy placed at pp. 392 to 416 and also p. 21 of the assessment order, the counsel submitted that the assessee was denied an opportunity for cross-examination of Mr. Madan Hada in an arbitrary and unjustified manner and, therefore, the presumption based on the statement of Mr. Madan Hada recorded on 8th Nov., 1996, is not only unreliable but in violation of the principle of natural justice also.

(iii) The apprehension or possibility expressed by Mr. Madan Hada in his statement recorded on 8th Nov., 1996, may raise a suspicion but since it is well settled that the suspicion, however high it may be, alone cannot be basis for taking a view detrimental to interest of party. The said expression of possibility by Shri Madan Hada and relied upon by the assessing officer for presuming the said loose papers are belonging to the assessee's business and consequently computing the undisclosed income under dispute, is not a sufficient evidence.

(iv) Since Mr. Madan Hada was changing his stand with respect to ownership of the documents found from his residential premises, his deposition was not reliable in anyway and has to be ignored.

(v) On merits :

(a) The assessee's counsel submitted that there is mention of word "M" and "A" against various entries contained in LP 11 and LP 22 which as per p. 7 of the assessment ' order have been considered as trading account for the months of September, 1994 and January, 1995 respectively by attributing these entries as relating to assessee's business. The assessee's counsel case was that in case the word "M" is taken as representing "M/s Monga Steel Ltd." then the word 'A' should have been taken as representing "Arpit Steels",- a concern owned by the son of Mr. Madan Hada and explained as claimed by the director of assessee- company in various replies and consequently the entries against which 'A' is mentioned should not have been taken as relating to the business of assessee- company. In support of his submission the assessee's submitted that it is an admitted fact that the revenue has accepted the existence of a concern styled as M/s Arpit Steel, as a genuine concern and belonging to son of Mr. Madan Hada. According to him the assessment of this concern has also been completed. He therefore, submitted that ownership of loose documents have been attributed as that of the appellant without any supporting evidence and therefore, this action is not sustainable in law.

(b) In support of above submissions the assessee's counsel had relied on the observations of the Hon'ble Supreme Court in case of Dr. N.G. Dastan v. S. Dastan 1975 AIR SC 1534 and in case of Durga Prasad More v. CIT (1971) 82 ITR 540 (SC), which read as under:

(i) 1975 AIR SC 1534 "The belief regarding the existence of a fact may be founded on a balance of probabilities. A prudent man faced with conflicting probabilities concerning a fact-situation will act on the supposition that the fact exists, if on weighing the various probabilities he finds that the preponderance is in favour of the existence of the particular fact. As a prudent man, so the court applies this test for finding whether a fact in issue can be said to be proved. The first step in the process is to fix the probabilities, the second to weight them, though the two may often intermingle. The impossible is weeded out at the first stage, the improbable at the second.

(ii) (1971) 82 ITR 540 (SC) (supra) "Science has not yet invented any instrument to test the reliability of the evidence placed before a court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities. "

(iii) The assessee's counsel has also relied on the decision in case of S.K. Gupta v. Dy. CIT (1989) 63 TTJ (Del-Trib) 532, copy at p. 529 of the paper book, for the proposition that there being no collaborating evidence for attributing the contents of loose paper as that of assessee, the findings of the assessee's officer on this point cannot be sustained.

(iv) Referring to the p. 3 of the assessee's reply, dated 22nd Sept., 1997, placed at p. 178 to 185 of the assessee's paper book, where the assessee had requested the assessing officer to confirm to contents of loose papers from the parties mentioned therein, the assessee's counsel submitted that the assessing officer did not consider the assessee's request and therefore, in absence of any confirmation from the concerned party, it cannot be said that the assessee had entered into the transaction of purchase and sales alleged to be contained in LP1 to LP 31.

(c) The assessee's counsel further submitted that the turnover computed by the assessing officer on monthly basis, totalling to Rs. 10,97,66,724 cannot be, for the reasons explained against each month's alleged turnover by the assessee in its reply dated 22nd Sept., 1997 (copy at pp. 178-180) attributed to be the assessee's business and therefore neither the turnover belongs to the assessee nor there is any question of so-called undisclosed income from such alleged turnover out-side the books.

(d) The assessee's counsel further submissions, which was without prejudice to the aforesaid submissions were as under :

"Without Prejudice

(i) The figures of sales worked out in Annexure 'A' appears to be incorrect and excessive mainly on account of adoption of higher rate of sales on estimate basis. The quantity of sales have also not been found correct. We are enclosing herewith a chart from which it will be seen.

(ii) Regarding G.P. rate it may be submitted that working of GP of 30 per cent as mentioned at p. 4 of the your notice is also not correct because figures of closing stock has been taken at Rs. 16,00,000 which includes stock of traded goods. Besides this figures of sales have been adopted including excise duty whereas the purchases have been taken net of excise. If we reconcile the figures the G.P. rate as per books comes to 14.88 per cent.

(iii) That if the department wants to consider the seized papers then the expenses like freight, brokerage and the expenses mentioned in Annexure LP-5 (Trading & P&L a/c of September, 1994), have to be considered then the working of profit on the basis of these papers by adopting different method of calculation comes as under :

1. Calculation of G.P. rate on sales of 9,69,50,621 as per above annexure comes to 3.54 per cent.

2. Calculation of consolidated GP with excise comes to 1.89 per cent.

3. Calculation of consolidated GP without excise comes to 1.27 per cent.

4. Calculation of combined GP on the basis of LP-5 gives gross loss of Rs. 13,02,382.

Necessary charts are enclosed.

The above figures are of gross profit from which allowable expenses of P&L a/c have to be considered which will mean that there was no profit.

In the case of M/s Vandana Steels (P) Ltd. search was conducted by Income Tax Department in 1994, the assessing officer by Deputy Commissioner Special Range, Kanpur had adopted a GP rate of 2.66 per cent of the assessment order is enclosed.

In view of the above there is no question of adopting G.P. rate of 30 per cent which is even not the difference of scrap value and sale value of ingot.

This aspect also needs serious consideration at your end, so that injustice may not be caused to any person."

(e) The assessee's counsel after referring to its computation on various basis (placed at pp. 224 to 227 of assessee's paper book) submitted that if at all there is occasion to compute the assessee's undisclosed income on account of socalled outside the books manufacture and sale of ingots, the G.P. rate should be somewhere between 1.2 per cent to 3.4 per cent and therefore, the G.P. rate should be adopted as disclosed by assessee's regular books of account. To support this submission, the assessee's counsel relied on the assessment order of another assessee namely M/s Vandana Steel (P) Ltd. which is also a search case and where the assessing officer, while making assessment of block period, has accepted a G.P. rate of 2.66 per cent for the similar line of business-copy of order dated 31st March, 1997 placed at p. 212 of assessee's paper book.

(f) The assessee's counsel further submitted that in case the assessing officer finding, at pp. 50,51 and 52 of the assessment order, to the effect that assessee had not carried out any trading activity and had introduced its unaccounted funds in the books of account, is accepted then there is no necessity of determination of any extra undisclosed income i.e. in addition to undisclosed income computed on account of alleged introduction of cash, because in that case the whole of the undisclosed income stand introduced in the books of account. According to the assessee's counsel the undisclosed income to the extent of Rs. 1,72,67,650 as computed by the Assessment Officer for alleged introduction of cash has to be out of alleged undisclosed income and therefore, there is no reason for estimating an additional undisclosed income of Rs. 1,53,28,028.

(g) With regard to the ownership of M/s Arpit Steel, the assessee's counsel submitted that if at all the revenue 's version is accepted then as far as assessee is concerned, the transaction related to it had to be excluded and could be assessed in the hands of Mr. Vinod Agarwal, after making necessary enquiries.

42. The learned Departmental Representative on the other hand, first of all relied on the discussion and finding of the learned assessing officer contained in page Nos. 3 to 34 of the assessment order and while enlarging the field of the arguments it submitted :

(i) That Mr. Madan Hada, Deepak Hada and Sri Ram Singh were not allowed to be cross-examined because the assessee's insistence for cross-examination of Shri Deepak Hada and Madan Hada simultaneously was unfair and assessee's this demand goes to show that the assessee did not want to cross-examine but was only to finding excuses. He further submitted that the denial for cross-examination was neither arbitrary nor against the principle of natural justice, more so when the copies of statement of these persons were provided to the assessee:

(ii) that the assessee had also insisted for the supply of copies of all the Panchnama details and annexures relating to Shri Madan Hada, which was also not fair because it related to the 3rd party. In view of these facts the learned Departmental Representative supported the action of the assessing officer denying the cross-examination;

(iii) that with regard to charge in the stand of Mr. Madan Hada relating to the ownership of the documents found at his residence the learned Departmental Representative submitted that disclosure of income of Rs. 78 lakhs made during the examination under section 132(4) by Mr. Madan Hada was without going into the details of seized documents, whereas the statement recorded by the ADI on 8th Nov., 1996, was after going through the contents of the seized documents and therefore, statement recorded on 8th Nov.,1996, was more reliable. He further submitted that there is no inconsistency in any of the statement of Mr. Madan Hada and there is ample evidence in LP 5 and LP 11 to hold that assessee was carrying on business outside the books;

(iv) the Representative has further relied on the written submissions furnished in the shape of synopsis as contained in paragraph 8.3 which run as under :

"3. Addition on account of profit in suppressed production-Rs. 1,53,28,028, assessment year 1995-96 The appellant has disputed this addition on the ground that the loose papers on the basis of which the suppressed production and sales have been worked were recovered from residence of Shri Madan Hada, ex-director and not from the premises of the appellant or its directors. Shri Madan Hada was director of company till February, 1995. The loose papers recovered from his residence which have been held to belong to the appellant company relate to period from June, 1994 to February, 1995, during which Sri Madan Hada was an active director of the company. The appellant has emphasized that at the time of search Shri Madan Hada did not say that loose papers (LP- 1 to LP-31) related to the appellant. It has been argued by the appellant that it was an 'after thought' on the part of Shri Madan 'Hada who has compute with the explanation that these loose papers recovered from his residence related to the appellant company. During the course of search operations, various papers, assets, investments are recovered and at the heat of moment, the owner of the premises will naturally not disown them. It is also a fact that during the course of search operations, it is not possible to identify each paper and documents being recovered from a premises. It is only after the search operations, when papers were analysed, Shri Madan Hada was again confronted to explain them. After looking into the specific papers and their nature, Shri Madan Hada could say that these papers related to the appellant company and were relevant for the period when he was director in the company. The recovery of any paper from an active director is not any unnatural phenomenon. The loose papers recovered from the residence of Shri Madan Hada were held to belong to the appellant company not only on the basis of statement of the Ex-Director, Shri Madan Hada but also due to the fact that they were clearly relatable to the appellant company part of the papers were prepared by the regular employees of the appellant company and even part of the entries appearing in the loose papers seized from the residence of Shri Madan Hada were being reflected in the regular books of account of the appellant company, for the accounting period relevant to assessment year 1995-96. A detailed discussion in this regard is already available in the body of order from p. no. 3 to 34. There is clear evidence in the seized material recovered from the residence of Shri Madan Hada which suggests that scrap was purchased, brought to the factory premises of the appellant, weighed and classified by the regular employees of the appellant company namely Shri Ram Singh, supervisor and Shri R.D. Verma. There are daywise details of receipt and even of despatch of ingot from the premises of the appellant company as maintained by these two regular employees. There is also evidence in the seized material wherein the suppliers of scrap have clearly stated that supplies were intended to Shri Vinod Ji, who is the present Director of the company. The fact is that Shri Ram Singh and Shri R.D. Verma who prepared the receipt and despatch statements in the factory premises of the appellant company as per seized records are regular employees is also not disputed by the appellant company. The names of Shri R.D. Verma and Shri Ram Singh duly appeared in the wage sheet of the appellant company which is also part of the seizure. There is unassailable evidence to suggest that purchases of scrap and despatch of ingot as available in the seized material recovered from residence of Shri Madan Hada was done in side the factory premises and by the regular employees of the appellant company. There is also evidence that part of the transactions recorded in the seized material are also reflected in the regular books of accounts of the appellant company Therefore, while holding the seized material as relatable to the appellant co., reliance has been placed not only on the statements of ex and active director of the appellant company but also on the contents of the seized material. The seized materials reflecting the purchases of scrap and sales of ingots, do suggest the existence of the manufacturing activity. During financial year 1994-95, to which these loose papers relate, Shri Madan Hada did not have any manufacturing facility. The only manufacturing facility available in the group was with appellant company. The evidence for receipt of scrap, its weighment, its classification and sale of finished product in the factory premises of the appellant is available in the seized material from the residence of Shri Madan Hada. Thus, looking to the entirety of circumstances, relatable contents of the seized material undoubtedly related to the appellant company and could not be wished away simply on account of the facts that in the first instance at the time of search about operations Shri Madan Hada did not specifically stated about these papers. More so, when these papers were not specifically confronted during the course of search operations. The appellant was given opportunity to rebut this finding and instead of availing this opportunity, it chose to put up unreasonable demands such as examining together on the same day one by one more than one witnesses. It also chose to send an affidavit of Shri R.D. Verma by registered post on 29-9-1997 knowing fully well that the limitation was expiring on 30-9-1997 and as such there was no time to examine Shri R.D. Verma. While working out the undisclosed manufacturing activity, suppressed production and sales, care has been taken to restrict it to the material available in the seized loose papers vis-a-vis regular books of account of the appellant company for assessment year 1995-96. No ad hoc addition has been made on account of suppressed sales and profit thereon.

Similarly an addition of Rs. 33,85,210 has been made in assessment year 1997-98 on account of suppressed production and sales on the basis of loose papers and diaries recovered from the residence of present directors of the appellant company. The issue has been discussed in detail, in the body of the order under section 158BC on page Nos. 20 to 24. The papers recovered from the residence of directors are clearly relatable to the production activity of the appellant company and are also related to the receipt of the despatched goods from the appellant company since the production of material not recorded in the regular books of account is established and also the despatch of the same and receipt by M/s VVS Alloys Ltd. is proved, mere denial of the director in this regard does not help the case of the appellant. There is overwhelming documentary evidence to suggest suppressed production on 31-8-1996 and 1-9-1996. The directors of the appellant company on this issue have been evasive in the replies to the question put to them during the course of proceedings under section 158BC."

43.1. We have considered the rival submissions, facts and circumstances of the case and various case laws relied upon and are of the opinion that for a judicious decision on the issue it is necessary to consider the nature as well as the impact of the contents of every document found at the residence of Madan Hada and relied upon by the assessing officer and for this purpose we proceed to consider the same :

(i) LP-5 The contents and nature of document No. LP 5 found at the residence of Mr. M. Hada and considered by the assessing officer as belonging to the assessee business i.e. the document No. LP 5 copy of which has been furnished by the revenue reads as under :

"Balance Sheet as on 31-9-1994 Page No. Page No. Page No. Particulars Particulars Particulars Amount Rs.

Amount Rs.

Page No. Page No. Page No. Particulars Particulars Particulars Amount Rs.

Amount Rs.

BF 11102214 BF 11102214 BF 15484000 BF 15484000 19 19 Rajjan Rajjan 1,458 1,458 13 13 Radhelal Radhelal 54,500 54,500 19 19 Ram Prakash Ram Prakash 2,305 2,305 18 18 Flind Iron Store Flind Iron Store 4,800 4,800 20 20 Sri G.N. Agarwal Sri G.N. Agarwal 7,65,000 7,65,000 34 34 Arpit Steel Arpit Steel 3,26,867 3,26,867 54 54 Smt. Sarada Hada Smt. Sarada Hada 12,25,000 12,25,000 51 51 Bihar Sponge Bihar Sponge 2,79,596 2,79,596 52 52 Desraj Collection a/c Desraj Collection a/c 0000000 0000000 50 50 Frontiex Alloy Frontiex Alloy 7,220 7,220 01 01 B.R. residence B.R. residence 19,29,440 19,29,440 08 08 Bank Bank 25,92,648 25,92,648 30 30 B.R. residence sus.

B.R. residence sus.

25,000 25,000 54 54 G.E.C.

G.E.C.

20,530 20,530 30 30 Bank of Baroda Bank of Baroda 10,67,178 10,67,178 02 02 Durga Steel Durga Steel 4,26,611 4,26,611 14 14 Picup Reserve Picup Reserve 18,00,238 18,00,238 02 02 Madan Hada Madan Hada 44,182 44,182 14 14 Electricity Electricity 12,94,879 12,94,879 27 27 Sudhirjee Sudhirjee 19,26,260 19,26,260 44 44 Picup interest Picup interest 12,13,164 12,13,164 50 50 Shyamial Broker Shyamial Broker 859 859 44 44 Bank interest Bank interest 52,205 52,205 50 50 Kishan Broker Kishan Broker 1,328 1,328 55 55 Rokar interest Rokar interest 1,79,170 1,79,170 30 30 Sanjay Factory Sanjay Factory 20,000 20,000 52 52 Dadiji Dadiji 50,426 50,426 22 22 Nemani Nemani 58,272 58,272 60 60 Channu Sardar Channu Sardar 2,60,000 2,60,000 01 01 Cash with Ram Singh Cash with Ram Singh 5,171 5,171 61 61 Int. on own.

Int. on own.

23,60,000 23,60,000 01 01 Cash at office Cash at office 34,414 34,414 64 64 6ZB Quality a/c 6ZB Quality a/c 75,000 75,000 55 55 Suspense a/c Suspense a/c 1,60,472 1,60,472 46 46 GZB a/c GZB a/c 1,34,321 1,34,321 Supplementary Supplementary 3,12,562 3,12,562 45 45 Unit No. 2 Unit No. 2 2,91,204 2,91,204 Closing Stock Closing Stock 54,00,549 54,00,549 47 47 Store July Store July 7,10,279 7,10,279 Difference A/c Difference A/c 7,336 7,336 47 47 Store August Store August 4,00,000 4,00,000 03 03 Store September Store September 8,00,000 8,00,000 30 30 Sanjay Factory Sanjay Factory 431 431 Nett Profit TS Fd Nett Profit TS Fd 19,63,530 19,63,530 Total Total 2,77,02,442 2,77,02,442 Total Total 2,77,02,442 2,77,02,442 Supplement Balance Sheet Supplement Balance Sheet Supplement Balance Sheet 22 22 Nemani Bill Nemani Bill 1,10,278 1,10,278 55 55 Balance Brought forward Balance Brought forward 4,19,780 4,19,780 19 19 Gopal Sukla Gopal Sukla 2,000 2,000 37 37 N. Singh N. Singh 5,000 5,000 1,12,218 1,12,218 4,24,780 4,24,780 1.12.218 1.12.218 3,12,562 3,12,562 From the contents appearing in LP 5 (supra) it is evident that this document neither bears the name of appellant nor the year in which it has been drawn and therefore, in absence of any corroborating evidence to support the revenue 's stand it is not possible to accept that this document is for the month of September, 1994 and relates to the appellant's business. Simply apprehension expressed of Mr. M. Hada cannot be accepted to be sufficient for corroborating the evidence when he himself had disclosed an income of Rs. 78,00,000 on the basis of documents including LPS.

(ii) LP 9

(a) We have gone through the copy of this document furnished by the revenue and have found that this document also do not bear that appellant's name but still, as observed by the assessing officer himself the transactions allegedly to be with M/s Usha Martin being verifiable from the assessee's books of account, we are of the opinion that these transactions cannot be considered for the purpose of assessee's undisclosed income. If at all, there details raise a suspicion that it belongs to the appellant then also on the basis of such suspicion alone it cannot be held to be as belonging to the appellant because it is well settled law that suspicion however strong it may be, cannot be basis for taking a view detrimental to the assessee. In our opinion the assessing officer should have made proper enquiries from various parties including Mr. Madan Hada as to with whom the said transactions had been effected and after bringing cogent material on record should have come to his conclusion as to the ownership of the documents.

(b) Further, the assessing officer, while attributing this document' as that of the appellants, has relied on the entry in this document against date 2nd Jan., 1995, which reads as "(37) 2nd Jan., 1995 PJ 119/0086-146.05 x 3213" and, according to him tallies with the entry at pp. 3 and 4 of LP 32 which in turn are alleged also has to be details of purchase of scrap by M/s Monga Steel Ltd. from M/s Venkateshwar Scrap, Aligarh and also have relied on another entry dated lst Jan., 1995, claimed to be purchased through Truck No. USZ 2882 as tallying with entry at p. 3 of LP 22.

(c)(i) We have gone through the copies of the pp. 11 and 12 of LP 9, pp. 2, 3 and 4 of p. 22 and have noticed that name of appellant company i.e. M/s Monga Steel Ltd. is not mentioned in any of these documents as alleged by the assessing officer.

(ii) The entry dated 1st Jan., 1995 as per p. 11 of LP 9 reads as "(36) 1195 USZ 2882 15940 x 3286 whereas the entry on p. 3 of LP 22 read as (8) and USZ 2882 Venkateshwar Scrap Private Aligarh-14,940 Kgs, 22016 Kgs minus 7120 Kgs1495 Kgs"

Similarly the entry dated 2nd Jan., 1995, in LP 9 is also different than the entry at pp. 3 and 4 of LP 22.

How the assessing officer attributed these entries as tallying with and belonging to the appellant's business is not known from the contents of these documents. The findings of the assessing officer seems to be simply on his own astronomical presumption borne out from extra constitutional mind which cannot be sustained under the Income Tax Law, and under these circumstances unable to accept the conclusion that LP 9 also belong to the appellant's business.

(iii) LP 11

(a) From p. 5 of assessment order it is observed that this document has been considered as belonging to the appellant on the basis that :

(aa) it has been written by the assessee employee Mr. R.B. Verma.

(bb) That the contents of p. 5 of Annexure LP 5 which is a trading/Profit and loss are identical and tally with the receipt details in LP 11.

(b) We have seen p. 5 of LP 5 appearing at p. 13 of revenue 's paper book vol. 1 and LP 11 containing entries for the period Ist Sept., 1994 to 30th September and have not found any similarity either with respect to the details or anything else of these documents. On the contrary none of these documents bears appellant's name and therefore, in view of these facts and circumstances and our observations against LP 5, we are unable to accept assessing officer's conclusion that LP 5 and 11 have ample evidence that these documents relates to the appellant's business.

(iv) LP 12

(a) As observed from p. 5 of the assessment order, the assessing officer has presumed this document as belonging to the appellant's business on the basis of his findings at p. 7 of the assessment order :

(b) After careful consideration of the contents of the documents under reference, we are unable to accept the assessing officer's conclusion, because, in the socalled Trading Account for the month of September (year not mentioned) available at p. 13 of the revenue 's paper book, the closing stock of scrap is mentioned as 579.245 MT and total stock at 708.245 MT (579.245 MT scrap plus 65.00 MT plus 64.00 MT ingots), whereas the opening stock of scrap at p. 93, i.e for the month of October (year not mentioned) is 129 MTs. At the same time, the closing stock of scrap at the end of month of October as per p. 93 is 182 MTs whereas opening stock of scrap at the beginning of month of November as per p. 92, is 582.090 MTs. These different details show that closing stock of scrap for the month of September (as per LP 5) was 579.245 MTs whereas opening of stock in the beginning of October (as per pp. 93 of LP 12) is only 129 MTs. How these two can be said to belonging to the appellant's business without any corroborating evidence, is beyond anybody's imagination and we are unable to subscribe to the conclusion arrived at by the assessing officer.

(v) LP 15

(a) As observed at p. 7 of the assessment order the assessing officer has considered the contents of LP 15 as sales and purchases made by the appellant during the month of August, 1994 on the basis of his finding that these statements have the name of parties whose names are recorded appearing in the assessee's books of account also. The observation of the assessing officer are as under "Annexure LP 15 The page Nos. 1 to 7 are the details of purchases of MS scrap for the month of August, 1994. In fact these are the purchase which might have been used for produced of ingots which have been sold out in the month of August, 1994, as per Annexure LP-9. These receipt statements have also names of the parties which are also recorded in the regular books of account of the assessee-company in the relevant, "

(b) After careful consideration of photocopy of documents LP-15 and LP 9, it is observed that none of the documents contains the appellant's name, none of them was found from the appellant's premises and the assessing officer has not been able to co-relate any of the entries in these documents with the entries in the appellant's books of account also.

Simply because names of certain parties were appearing in the appellant's regular books as well as in these documents itself cannot be sufficient ground for holding that these documents belonged to the appellant, or contents of these documents were appellant's undisclosed purchases and sales for the month of August, 1994. The findings of the assessing officer are therefore, not sustainable.

(vi) LP 22

(a) From p. 7 of the assessment order it is observed that assessing officer has considered these documents as that of the appellant on the basis of following observations:

"Annexure LP-22 This is also a record of quantitative receipt and despatch on day-to-day basis for the month of January, 1995 and is similar to the contents of Annexure LP11. The total receipts and despatches are prepared by the employee Shri R.D. Verma. As per this annexure the total sales during the month of January are to the tune of 2,639.74 M. Tonnes. "

(b) After careful screening the photocopy of the document No. LP 22 containing 31 pages, filed by the revenue , it is observed that none of the pages bears the appellant's name and since the documents were found from the residence of Mr. Madan Hada it cannot be attributed to the assessee without any corroborating evidence which is lacking in this case.

43.2. As regards the alleged turnover for the month of December, 1994 and February, 1995 (para 9 of assessment order at p. 8) since the assessing officer has not referred to any document. We are unable to verify the authenticity of these documents and therefore, the same is held to be on conjectures and surmises and consequently cannot be accepted as belonging to the appellant.

44. Before parting with the matter relating to the ownership of the documents i.e. LP1 to LP 31 found from the residence of Mr. Madan Hada, we would like to state that ownership of these documents, on the facts and circumstances as exist on record cannot be held to be as that of appellant's and reasons for conclusion are that :

(i)(a) Mr. Madan Hada, in his statement recorded during search on 3rd Sept., 1996, had not confirmed the ownership of these documents as that of assessee:

(b) On the contrary, he seems to have admitted the documents as belonging to him and that seems to be the reason that he had disclosed/offered an income of Rs. 78 lakhs. Had the documents related to the assessee's business, Mr. Madan Hada, who at that time was not in good terms with the assessee's director would not have even tried to save the assessee by concealing the fact of ownership. I was psychologically impossible. The human nature would have compelled him to disclose the fact of ownership because by doing it he was not going to loose anything rather would have succeeded in harming his enemy, the assessee. Another factor which support our views, is that no prudent person will accept the tax liabilities on an income of Rs. 78 lacs on the basis of document which belongs to his enemy. Every person would, not only tried but will disclosed the facts relating to ownership of such documents as that of the enemy at the earliest possible opportunity. In this case Mr. Madan Hada had not mentioned anything about the assessee's ownership of the documents in the statement recorded under section 132(4) and, rather, had disclosed an income of Rs. 78 lacs. The doctrine of preponderance and probabilities, so far as the assessee's ownership is concerned, also do not advance the revenue 's case. It is only as a result of some behind the curtail activities that Mr. Madan Hada was made to express his apprehension as to the ownership of the documents as that of the assessee.

(ii) The second statement recorded by the ADI on 8th Nov., 1996, is neither admissible in evidence nor can be taken as reliable one, because, statement smacks of not only of the hostile attitude of Mr. Madan Hada but seems to be a unlawful tutored extortion also. The statement of such unreliable and hostile witness, brought by the revenue on record by unlawful means and used in an arbitrary manner in disregard to all canons of settled law on this point, can't form the basis of assumption that the documents belonged to the appellant.

(iii) revenue has not led any evidence with regard to action taken on undisclosed income of Rs. 78,00,000 by Madan Hada and also has not said anything with regard to the finding relating to his ownership of these documents.

(iv) As discussed against individual LPs assessing officer has considered these documents as belonging to the appellant simply on the basis of statement of Mr. Madan Hada which cannot be sustained.

(v) The assessing officer has completely ignored the fact that Mr. Madan Hada has admitted that he was carrying on the trading business of scrap.

45. In view of above discussion, and the facts and circumstances of the case and our findings while deciding the issue relating to the violation of the principle of natural justice, due to assessing officer's refusal for cross-examination of Mr. Madan Hada and other persons by the assessee, the action of assessing officer computing the undisclosed income on the basis of LPs (supra) at Rs. 1,53,28,028 by applying a net profit rate' of 4.59 per cent on the total estimated alleged turnover of Rs. 10,97,66,720 cannot be sustained and the same is quashed without prejudice to our aforesaid findings. If at any stage it is found that law permits the computation of assessee's undisclosed income on the basis of LPs (supra) seized from the residence of Mr. Madan Hada then we are of the opinion that :

(i) While determining the turnover as per LP 11 and LP 12 the entries against which word 'A' is appearing have to be excluded because the revenue has not denied that the word 'A' do not represent "Arpit Steels" or at the most such entries may be considered in the hands of Vinod Agarwal who had been alleged to be carrying on the affairs of M/s Artic Steels, if so proved, but since the assessing officer, who was present during the hearing of this appeal, admitted that M/s Arpit Steel has been accepted to be genuine concern owned by Deepak Hada, we are of the opinion that there remains no question of considering the entries relating to Arpit Steel either as belonging to appellant or to Mr. Vinod Agarwal and consequently the same have to be excluded. We direct accordingly.

(ii) As far as quantum of undisclosed income is concerned, since the assessing officer has himself, while considering the genuineness of assessee's trading activities as per books (pp. 41 and 42 of the assessment order) has held the G.P. rate of 15 per cent for assessment year 1995-96, G.P. rate of 12 per cent for assessment year 1996-97 and G.P. rate of 10 per cent for 1997-98 to be high on the plea that such rates are unheard of and has observed that in fact in Steel Trading rates are very low which are in the range of 2 to 3 per cent as well as in view of assessee's computation of G.P rate on various basis, we are of the opinion that adoption of net profit rate of 14.5 per cent cannot be held to be reasonable or justified. However, keeping in view overall facts and circumstances of the case, we are of the opinion that if at any stage the appellant's undisclosed income on this account is to be computed it should be computed at the net profit rate of 5 per cent of the total turnover to be computed as per observations and directions here in before.

46. Ground No. 4.1 (Asst. yr. 1995-96 (b) and 4.5)

46. Ground No. 4.1 (Asst. yr. 1995-96 (b) and 4.5) Undisclosed income of Rs. 18,00,000 on account of alleged undisclosed working capital required for carrying out manufacturing and sale of ingots outside the books :

46.1. We have heard the assessee's counsel as well as the learned Departmental Representative.

46.2. The assessee's counsel, after referring to pp. 16 to 19 and 184 and 228 which are assessee's balance sheets as on 31-3-1995, and 31-3-1996 and assessee's reply against the assumption of working capital, submitted that there was no requirement of any capital for carrying on the alleged manufacturing and trading activity of ingots outside the books of account. The assessee's counsel further submitted that the undisclosed income of Rs. 18,00,000 has been determined only on the basis of presumption about the requirement of capital for carrying out the business outside the books is not sustainable because undisclosed income under Chapter XIV-B of the Income Tax Act is to be computed only on the basis of entries in the documents or books of account or valuables, etc. found during the search and since the documents or books of account seized during the search do not speak of any such undisclosed investment, the alleged undisclosed income cannot be held to be justified. He further submitted that even otherwise there is no need for working capital for carrying on alleged business and for this purpose relied on the decision of Hon'ble Allahabad High Court in case of Ashok Kumar Rastogi v. CIT (1991) 55 Taxman 433 (All) (Copy at p. 518 of the assessee's paper book).

46.3. The learned Departmental Representative on the other hand, in addition to relying on the finding of the assessing officer, submitted that :

"Initial Investment in Undisclosed Trading Activities.

An addition of Rs. 18 lakhs has been made as unexplained investment in capital required to sustain the undisclosed manufacturing activities to the tune of Rs. 10.5 crores in assessment year 1995-96. The net of current liabilities and assets is taken as requirement of initial investment. Alternatively, there is no material available in the seized records to suggest that to carry out the undisclosed production, the assessee purchased raw material on credit. The attendant expenses, like salary, wages, stores, etc. must have been incurred in cash only. Therefore, not only on the basis of net of current liabilities and assets, but also for the reason of cash expenses in purchase of raw material and manufacturing expenses, the requirement of 'working capital' can't be ruled out. The undisclosed manufacturing activity started in June, 1994 with turnover in the month at Rs. 22,78,254 only and, therefore, the estimate of working capital, required for effecting turnover of Rs. 22,78,384, in the month of June, 1994 at Rs. 18 lakhs cannot be said to be unjustified or unreasonable."

47. We have considered the rival submissions, facts and circumstances of the case as well as the decision in case of Ashok Kumar Rastogi (supra) carefully.

47.1 So far as the facts relating to the issue are concerned, there is no material either in the assessment order or in the seized record which may indicate the involvement of such undisclosed working capital. The only material available for our consideration, as are borne our from the assessment order and as discussed by the assessing officer are as under :

"Working capital As has been discussed in the foregoing para, the assessee had been doing extensive business to the tune of more than Rs. 10.5 crores, outside the regular books of accounts. Accordingly vide notice dated 2-9-1997, on the basis of regular books accounts of the assessee, it was required to state reasons as to why a sum of Rs. 50 lacs may not be treated as additional requirement of funds for running the business outside the books of accounts, as per balance sheet as on 31-3-1995, the difference of current assets and current liabilities was around 23,00,000. In the normal principles of accountancy this is supposed to be the requirement of working capital to run the disclosed business of the assessee to the tune of. Rs. 6 crores approximately (excluding trading transactions of around 4 crores approximately). Assessee in its reply stated that if the security deposit with KESA and the FDR appearing in the asset side of the balance sheet is removed, there will be no requirement of working capital as per regular books of the assessee. Assessee further argued that since against the undisclosed turnover, these investments would not be required, by applying this principle, no additional requirement of working capital is called for to transact the undisclosed business. Inter alia it was argued that the credit transactions in steel trade are very common and assessee could have very well managed the affairs of undisclosed transactions, whatsoever, even without additional funds.

The argument of the assessee sounds reasonable as long as the conditions, circumstances and parameters of undisclosed business are treated as per with those of the recorded business activities. However, the facts are otherwise. While in the recorded business the credit transactions are normal but in unrecorded business the credit transactions are normal but in unrecorded business for obvious reasons, the credit transactions are rare and even when they are, they are for short duration. The facts on the case of assessee are themselves suggesting that the undisclosed transactions are quicker, faster and mostly in cash. Therefore, the identical principles for working capital as in the case of regular books of accounts cannot be exactly applied in the case of undisclosed business.

M/s Monga Metal (P) Ltd. order under section 158BC of Income Tax Act It is seen that the assessee has started the undisclosed business activity in the month of June 1994, and the total turnover is Rs. 22,78,254. Since it is a manufacturing concern, the investment starts right from purchase of raw material and ends at the door of customers and obviously, in the given circumstances and for the reasons discussed above the investment in effecting turnover of 22,00,000 and odd in the month of June 1994 is, therefore, considered as requirement of working capital for the undisclosed business. In succeeding months, the money will be available for circulation and it will buildup further with the passage of time. Considering the profit rate of 15 per cent as per Annexure LP-5 the requirement of working capital is rounded off at Rs. 18,00,000. Since there is no explanation available for the source of this additional requirement of working capital in respect of undisclosed business, the sum of Rs. 18 lacs will be treated as undisclosed investment in the working capital against the disclosed business."

47.2. As far as question of requirement of undisclosed working capital is concerned, it is everybody's knowledge that the working capital is required only for purchases which are made in cash meaning thereby that if one is capable of procuring purchases on credit then there is no requirement of any working capital. The other expenses can be met out either from the cash, available (so-called working capital) or with the cash available out of receipts from sales. This aspect of the problem, no doubt, indicates that there is possibility of prior requirement of cash with a person who want to carry on the business but to allege such situation without having any evidence, is an unreasonable and based approach of the quasi judicial authorities.

47.3. So far as the present case is concerned we agree with the submission of the learned Departmental Representative that there is no evidence in the seized record which may go to show that the assessee had procured the purchases on credit but, we at the same time, are also conscious of the fact that there is no evidence in the seized record and at least the assessing officer has pointed out none, which may indicate the purchases in cash either and, therefore, the findings of the assessing officer have to be held as based on suspicion, which as per settled law that the suspicion however strong it may be cannot take place of the evidence, can't sustained. Similarly the presumption regarding meeting out other expenses out of alleged working capital is not supported by any evidence from the seized record and therefore, we have no hesitation in holding that the so-called working capital is simply the brainchild of assessing officer's presumption without any cogent material or evidence.

47.4. Even otherwise, the assessee's case is covered in assessee's favour and against the revenue by the decision of Hon'ble Allahabad High Court in the case of A. K. Rastogi (supra) where the Hon'ble jurisdictional High Court after following the observations of Hon'ble Supreme Court in case of Dhakeshwari Cotton Manufacturing Mills Ltd. v. CIT (1954) 26 ITR 775 (SC) to the effect that "As regards the second contention we are in entire agreement with the learned Solicitor General when he says that the Income Tax Officer is not fettered by the technical rules of evidence and pleadings and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there that agreement ends; because it is equally clear that in making the assessment sub-section (3) of section 23 of the Act, the Income Tax Officer is not entitled to make a pure guess and make assessment without reference to any evidence or any material at all. There must be something more than the suspicion to support the addition under section 23", held that from the estimate sales it cannot necessarily be inferred that the assessee has invested Rs. 50,000 in some unexplained business and that it being not a necessary inference is pure guess and finding seems to be based on surmises and conjecture without there being any evidence or material in support thereof.

47.5. The facts in the case before the Hon'ble High Court (supra) were that a raid was conducted on the residential premises of the assessee who is an individual, on 13-8-1976, as a result of which 244 documents were seized-some of which related to the transaction regarding the assessment year 1976-77 i.e. Assessment year under consideration, the Income Tax Officer after giving an opportunity of being heard to the assessee, completed the assessment whereby transaction as per documents found during search were totalled at Rs. 4,24,396 and profit of Rs. 42,440 was estimated after applying a rate of 10 per cent. In addition to this, a sum of Rs. 50,000 was added as unexplained investment and in this way total sum of Rs. 92,000 was assessed as income from unexplained sources. There were 2 more additions of Rs. 3,692 and Rs. 4,747 on account of income from other sources based on seized documents. The assessee's appeal before the Commissioner (Appeals) as well as before the Tribunal were dismissed. As a result of direction of the Hon'ble High Court under section 256(2) of the Act. The Tribunal referred the following 2 questions for the opinion of the Hon'ble High Court :

(i) Whether there was any material before the Tribunal to hold that the assessee had made unexplained investment of Rs. 50,000 outside the account books during the relevant previous years ?

(ii) Whether Tribunal was justified in law and on facts in holding that inspections granted on 13th March, 1979, 22nd March, 1979 and 24th March, 1979 were sufficient opportunity to the assessee for examining 247 documents?

47.6. The Hon'ble High Court on the facts and circumstances of the case, answered the first question in negative i.e. in favour of the assessee by holding as under :

"Regarding question No. 1, the finding recorded by the Tribunal is:

''So far as the addition of Rs. 50,000 as unexplained capital is concerned, the same was based on the extent of sales, viz., Rs. 4,24,396. "

For recording its finding, the Tribunal has not relied upon or referred to any document and addition of Rs. 50,000 as unexplained investment has been made merely on the basis of the sale transactions amounting to Rs. 4,24,396. Even the Income Tax Officer and the Commissioner (Appeals) have given the same reason for adding aforesaid Rs. 50,000 as unexplained investment. As laid down by the Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT (supra), the Income Tax Officer is not bound by the technical rules of evidence and pleading and is entitled to act on any material which may not be technically accepted as evidence in a Civil Court, but he cannot make the assessment on a pure guess without reference to any evidence or material. In this connection it is appropriate to refer the following passage from the aforesaid decision :

"As regards the second contention, we are in entire agreement with the technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a court of law, but there that agreement ends; because it is equally clear that in making the assessment under sub-section (3) of section 23 of the Act, the Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3)."

As mentioned hereinbefore, no evidence or material has been referred to or relied upon for treating the aforesaid sum of Rs. 50,000 as unexplained investment and the only circumstance, which has been referred in this connection is the estimated sale of Rs. 4,24,396. From the estimated sale it cannot necessarily be inferred that the assessee has invested Rs. 50,000 in some unexplained business. It being not a necessary inference is a pure guess and the findings seem to be based on surmises and conjectures without there being any evidence or material in support thereof."

48. As far as present case is concerned, we are of the opinion that same is covered by the decision of Hon'ble High Court (supra) and respectfully following the same we hold that the assessing officer's action while determining the undisclosed income on account of so-called working capital, was a result of pure guess work and findings are based on conjecture and surmises without there being any evidence or material in support thereof consequently the undisclosed income of Rs. 18,00,000 is to be deleted.

49. Ground No. 41 (Asst. yr. 1997-98 (a) and 4.61)

49. Ground No. 41 (Asst. yr. 1997-98 (a) and 4.61) Addition on account of undisclosed income of Rs. 33,85,210 on account of alleged undisclosed sale of ingots during the period 1-4-1996 to 3-9-1996.

49.1. We have heard the assessee's counsel as well as the learned Departmental Representative but before divulging to their respective submission, prefer to extract brief facts relating to the addition as borne out from the record available with us.

49.2. The facts relating to the issue are that the learned assessing officer on the basis of documents marked p. 15 of LP3 (Agarwal's residence) and p. 1 document marked as Annexure A/8 of Panchnama relating to the search at the residence of Mr. Agarwal, which have been made the annexures to the assessment order also; computed the undisclosed income for the period 1-4-1996 to 3-9-1996 on account of alleged undisclosed sale of ingots outside the books of account at Rs. 33,85,210. The relevant part of the order runs as under :

"Assessment year 1997-98 (1-4-1996 to 3-9-1996) As has been discussed above, as per loose paper No. 15 of LP-3 and p. No. 1 of Annexure A/8 of Panchnama of residence of Agarwals, total sales of ingots for the month of August, 1996 and 1-9-1996, works out at Rs. 2,32,02,266. The total sale of ingots of 1,932.395 MT. has been valued at the rate of Rs. 12,007 per M.T. as per prevailing rate in the regular books of accounts. Accordingly vide this notice dated 19-9-1997, the assessee was required to state reasons as to why a profit on this undisclosed turnover may not be worked out. In reply as well as in various statements, the assessee had been all along reiterating that the paper LP-3 was not the paper related to production but for labour payments. This has been discussed in detail in the foregoing para and this paper has been held to be production detail written by Shri Vinod Agarwal, Director for the month of August and 1-9-1996.

The actual production in the month of August and 1-9-1996, works out at 1932.395 M.T. which is valued at Rs. 2,32,02,26,666.

As regard, the basis for calculation of profit on those undisclosed turnovers, I again revert back to the assessee's own paper LP-5. According to this paper as stated earlier in this order, the profit rate worksout at 14.59 per cent. In absence of any other detail, it would be reasonable to presume that the assessee earned profit on this undisclosed turnover also at the rate of 14.59 per cent. Accordingly, the undisclosed income for August and 1-9-1996 works out at Rs. 33,85,810 (2,32,02,266 X 14.59%)."

The discussion with respect to p. No. 15 of LP 3 and p. 1 of Annexure A8 finds placed at pp. 12,13 and 14 where the statement of directors Sanjay Agarwal and Vinod Agarwal have been discussed.

49.3. Both the parties advanced their arguments based on the aforesaid facts and the documents referred above.

50.1. The assessee's counsel, after referring to the copies of p. 15 of LP 3 and p. 5 of Annexure A8 to "Panchnama" submitted that none of these documents contains any details with respect to the nature of the entries listed therein and simple arithmetical figural details cannot, by stretch of any imagination or any provision of law, we consider as the details relating to the sale and purchase of goods and that too by the assessee. According to him, since the documents have no such details, there was no justification in assuming any arithmetical figures as quantity of ingots sold by the assessee outside the books.

50.2. He, therefore, emphasised that these documents do not reveal either any factum of manufacturing of ingots or of sale or factum of assessee's involvement and consequently there do not eldest any undisclosed income.

51. The learned Departmental Representative on the other hand has supported the order of the assessing officer.

52. We have considered the rival submissions, facts and circumstances of the case and have gone through the contents of the documents relied upon by the assessing officer for determining the undisclosed income of Rs. 33,85,210 and are of the opinion that to decide the controversy it is necessary to see as to what the documents contain and for that purpose we consider it necessary to reproduce the documents-copies of which are available at pp. 333 and 334 as under :

"Copy of LP- 3, Page No. 15 (Agarwal's) A A B B 1 1 11 11 9 9 453+373-4 2 2 11 11 11 11 385-532-2 3 3 12 12 10 10 406+447-2 4 4 12 12 11 11 419+494-1 5 5 12 12 12 12 418+504 6 6 13 13 11 11 460+454 7 7 9 9 8 8 312+351-7 8 8 13 13 12 12 456+502+1 9 9 13 13 11 11 374+569 10 10 14 14 13 13 495+552+3 11 11 11 11 11 11 379+492-2 12 12 14 14 12 12 475+499+2 13 13 10 10 11 11 350+454-3 14 14 13 13 12 12 439+482+1 15 15 12 12 7 7 416+287-5 16 16 12 12 9 9 422+340-3 17 17 13 13 15 15 447+566+6 18 18 12 12 11 11 413+397-1 19 19 13 13 11 11 473+381 20 20 14 14 11 11 500+474+1 21 21 14 14 10 10 492+447 22 22 12 12 14 14 417+557 23 23 10 10 3 3 359+124 24 24 12 12 2 2 422+84 25 25 7 7 7 7 242+308 26 26 9 9 10 10 27 27 11 11 12 12 376+555 28 28 7 7 8 8 236+319 29 29 15 15 15 15 518+622 30 30 11 11 9 9 374-358 31 31 14 14 13 13 481+545 Copy of Document LP A/8 Page No. 5 1/9 1/9 Monga Monga 16010 16010 167 167 Ingot UP 78B9891 Ingot UP 78B9891 1/9 1/9 Monga Monga 15980 15980 164 164 Ingot UP-78B9891 Ingot UP-78B9891 1/9 1/9 Monga Monga 14430 14430 149 149 Ingot UP-78B9891 Ingot UP-78B9891 1/9 1/9 Monga Monga 14155 14155 151 151 Ingot UP-78B 9891 Ingot UP-78B 9891 1/9 1/9 Monga Monga 16250 16250 169 169 Ingot UP-78N1589 Ingot UP-78N1589 1/9 1/9 Monga Monga 15730 15730 162 162 Ingot UP-78N1589 Ingot UP-78N1589 1/9 1/9 Monga Monga 13665 13665 148 148 Ingot UP-78N1589 Ingot UP-78N1589 1/9 1/9 Monga Monga 14440 14440 153 153 Ingot UP-78N1589"

Ingot UP-78N1589"

53.1. Before analysing the contents or interpreting the contents of the aforesaid two documents relied upon by the learned assessing officer, we are of the opinion that the outcome of such analysis depends on the question relating to the onus to explain the details in such loose papers found during the search-was it assessee's onus or revenue 's onus.

After going through the provisions contained in the provisions of sections 132, 139(l), 142(l) and 143 on the one hand and provisions of Chapter XIV-B on the other hand we are of the opinion that under the scheme relating to the regular assessment under section 143 and where the assessee had furnished the return of income, first it is the assessee's onus to substantiate the return and if the revenue is not going to accept the return then onus shifts on the revenue, to substantiate its stand, but, under the later scheme for assessment of undisclosed income under Chapter XIV-B of the Act, which comes into play after the action under section 132 of the Act as a result of which the citizen's every kind of privacy is evaded. we are of the opinion that it is the revenue 's onus first to prove as to which entry and in which books of account or document or which transaction or money bullion, jewellery, or valuable articles siezed are considered to be assessee's undisclosed income. It is only after Revenue discharges this onus, the onus shifts on the assessee to show-cause as to why the present proposed action is unjustified. What we mean to say is that after search under section 132 of the Act, the onus is on the revenue first to prove that any entry in books of account or documents or transaction or assets represents assessee's undisclosed income and if the revenue is not capable of or fails to discharge this onus, the assessee cannot be clothed with the liability to explain the contents of seized documents of the source of assets except if the case is brought under the deeming provisions of sections 68, 69, 69A, 69B and 69C.

53.2. As far as the present case is concerned, the two documents having been seized by the revenue as a result of search, the onus to prove as to how the contents of those documents represented purchase or sale of ingots or scrap and how that resulted in income liable to be taxed as undisclosed income under Chapter XIV-B of the Act on the revenue but the revenue has failed to discharge this onus. The observations of the assessing officer are purely astronomical presumption and consequently are liable to be quashed.

53.3. (i) So far as the contents of the p. 15 of LP 3 are concerned, every prudent person, after going to the contents as extracted above will come to the only and only conclusion that details in these documents cannot, by stretch of any imagination, be consider as purchase and sale of any goods what to say of ingots or scrap and that too outside the appellant's books of account. The finding of the assessing officer that the assessee's claim of these figures as representing the deployment of day-to-day number of workers cannot be accepted because there is deployment on holiday and no deployment on working day, is absolutely irrelevant for determining the nature of the contents of these documents. As already held that the onus to prove that the details represented the assessee's undisclosed income was on the revenue . The assessee failure to provided further details was also not detrimental to its interest. If the assessing officer's logic in presuming the contents to be sale and purchase of ingots is accepted then on the same logic why it cannot be taken as purchase and sale of something else or receipt of money itself or payment of money. The fact remains that if the assessee has failed to substantiate its explanation the revenue has also failed to bring any evidence to support its conclusion and content of documents do not support the assessment order.

(ii) So far as the document No. LP A/8 page No. 5 is concerned the assessing officer before arriving at any conclusion, should have made proper enquiries as to the nature of the transactionsat least from the owners of truck whose numbers appear in the document. The transaction should also have been verified from the assessee's books of account. This issue is set aside for reconsideration.

53.4. It is further evident that the assessing officer has not invoked the deeming provisions of sections 69 and 69A, meaning thereby that the contents of these documents have been considered as representing the assessee's undisclosed income under the substantive provisions of the Act. According to which- every receipt is not necessary and cannot be income in the hands of the recipient. The question whether any particular receipt is income or not depends on the nature of the receipt and true scope as well as the fact of relevant taxing provisions-as has been held by the Hon'ble Bombay High Court in case of Mehboob Production (P) Ltd. v. CIT (1977) 106 ITR 758 (Bom). In view of this settled proposition, what follows is that revenue can tax only those receipts, which, firstly, have been proved to be income in the hands of the recipients and secondly the same have to be proved as non-exempt from tax. In view of the aforesaid decisions, we are of the opinion that it is revenue 's onus, before the assessing any receipt as taxable income and much less the undisclosed income, to prove that the receipts in the hands of the recipient is income and this can be proved or established only on the basis of some material or evidence, which, even otherwise, is the requirement of provisions of Chapter XIV-B of the Act. This is view further finds support from the decision of Hon'ble High Court Allahabad in case of Lal Chand Gopal Das v. CIT (1963) 48 ITR 324 (All) and also of the Delhi High Court in case of CIT v. Netar Krishna Sahgels (P) Ltd. (1983) 141 ITR 681 (Del) as well as of Kerala High Court in case of Bedi & Co. (P) Ltd. v. CIT (1983) 144 ITR 352 (Ker).

53.5. In case of Bedi & Co. (P) Ltd. (supra) assessee has taken a loan from a foreign company under an agreement after obtaining RBI's permission. The assessing officer treated the amount of loan as commission earned by the assessee on the ground that no interest was paid, term for installment of repayment was not implemented and so security was taken by the foreign company. On this fact, it was held that revenue failed to discharge the onus that lay heavily on it to prove that the loan was by way of commission and not a loan.

54. In view of the above discussion, we are of the opinion that it was the revenue 's onus first to prove that the arithmetic figure appearing on two loose papers (supra) were receipts, were in the nature of sale of ingots and amounted to undisclosed income in the assessee's hand which has not been discharged.

55. Proceeding further we are of the opinion that before asking the assessee to explain as to how certain receipts in his hands are not taxable as undisclosed income, the burden is on revenue to prove that it is within the taxing provisions, which in the present case seems to have not been discharged by the revenue because from the order of the assessing officer as well as submissions of the learned Departmental Representative we have not been able to come across to any iota of evidence whatsoever which may show that the arithmetical figure appearing on these 2 loose papers considered as assessee's sales of ingots outside the books resulting in undisclosed income and therefore we hold that there is no evidence on record which may support the findings of the assessing officer.

56. In the ultimate analysis of cumulative facts and circumstances relating to the issue, one thing has become clear is that except suspicion, there is no evidence in favour of the conclusion arrived at by the assessing officer, and since it is settled law, that if decision of quasi-judicial authority is based on suspicion, conjecture and surmises or on material or partly on evidence and partly on suspicion, the same is likely to be set aside by the higher court.

Keeping in view these propositions of law we are of the opinion that findings of the assessing officer being based only on suspicion, and since suspicion however strong it may be cannot take the place of proof : we are unable to sustain the findings, our view is further supported by the decisions of Hon'ble Supreme Court in case of Omar Salay Mohamed Sait v. CIT (1959) 37 ITR 151 (SC) Dhakeshwari Cotton Mills Ltd. v. CIT (supra) and Umacharan Showe Bros v. CIT (supra) which are as under :

(i) In the case of Omar Salay Mohamed Sait v. CIT (supra) where the Hon'ble Apex Court on the facts and circumstances of the case, held at p. 170 as under :

"We are aware that the Tribunal is a fact-finding Tribunal and if it arrives at its own conclusion of fact after due consideration of the evidence before it this court will not interfere, It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which required to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account what ever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings, even though on questions of fact, will be liable to be set aside by this court."

(ii) In the case of Dhakeswari Cotton Mills Ltd. v. CIT (supra), the Hon'ble Apex Court has held as under :

"The powers given to the Income Tax Officer under section 23(3) of the Income Tax Act, however wide, did not entitle him to base the assessment on pure guess without reference to any evidence or material. An assessment under section 23(3) of the Act could not be made only on bare suspicion. An assessment so made without disclosing to the assessee the information supplied by the Departmental Representative and without giving any opportunity to the assessee to rebut the information so supplied and declining to take into consideration all materials which the assessee wanted to produce in support of his case constituted a violation of the fundamental rules of justice and called for exercise of the powers under Art. 136 of the constitution."

(iii) Similarly, our conclusion that suspicion cannot take the place of proof is supported by the finding of the Hon'ble Supreme Court in the case of Umacharan Shaw & Bros v. CIT (supra), where on the facts and circumstances of the case, the Hon'ble Supreme Court set aside the order of the Tribunal holding at p. 277 as under :

"Taking into consideration the entire circumstances of the case, we are satisfied that there was no material on which the Income Tax Officer could come to the conclusion that the firm was not genuine. There are many surmises and conjectures and the conclusion is the result of suspicion which cannot take the place of proof in these matters."

57. In view of the above facts and circumstances of the case and the discussion, various case laws as well as the settled principle of law, we hold that conclusion arrived at by the assessing officer was based purely on suspicion and, therefore, cannot be sustained. The addition of Rs. 33,85,410 as undisclosed income from assessment year 1997-98 is, therefore, directed to be deleted.

58. Ground No. 4.1 (Asst. yr. 1997-98 (b) and 4.7)

58. Ground No. 4.1 (Asst. yr. 1997-98 (b) and 4.7) Undisclosed income of Rs. 21,99,000 on account of alleged excess stock of scrap available on the date of search i-e. 3rd September :

58.1 The fact relating to the issue are that at the time of search on 3-9-1996 at the factory premises of assessee where the assessee's stock of scrap was also available, the authorised officer prepared a inventory of assessee's stock of various items, including scrap, in the presence of assessee's supervisor Mr. Ram Singh which was under section 132(4) (copy of his statement available at p. 280 of assessee's paper book) which runs as under :

(See Annexure 'C' to this order) The assessing officer, thus, estimated the stock of scrap, after estimating each heep of scrap as one truck load having capacity of 15 M.T. at 900 MTs.

58.2. The assessee, from the very beginning after the close of search i.e., with effect from 4-9-1996, itself started objecting to the quantity of stock of scrap estimated in the inventory on the plea that each heep was not equal to one truck load of material and capacity of trucks also varied which was from 9 to 15 MTs as well as on the plea that stock of used moulds weighing 380.7 MT was also part of the stock of scrap and should not be considered separately. The assessee, stressed this point and had made reference to the following communications addressed in this behalf :

(i) Telegram sent to Dy. DDI (Inv), Kanpur on 4-9-1996, objecting the quantity taken in the inventory and requesting for the actual weighment of stock which was still lying in the factory; (copy available at p. 377 to 379 of assessee's paper book).

(ii) Letter to the S.H.O. of the area for security of the factory, which was sealed by the authorised officer on 4th Sept., 1996, after the search, with the intention to let the stock remain intact (copy available at p. 240 of the assessee's paper book).

(iii) Vyapar Mandal's letter to the DDI, Kanpur written at 5. 25 P.M. on 4th Sept., 1996 requesting for correcting the inventory of stock of scrap (copy at p. 380 of paper book).

(iv) Assessee's letter to the DDI (Inv), Kanpur written on 25-9-1996, with the similar request as above (copy at p. 389 of paper book).

(v) Assessee's counsel's objection to the inventory of stock of scrap during the course of hearing on 31st July, 1997 and 11-8-1997 (order-sheet entries copy available at p. 409)~

(vi) Assessee's request dated 11-8-1997, for cross-examination of authorised officer who had prepared the inventory of stock of scrap.

(vii) Letter No. Assistant Commissioner/CC-II/KMP/S&S/Block Assessment/Monga Group/ 1997- 98/192 dated 18th Sept., 1997, addressed by the assessing officer to the assessee's principal officer denied the assessee's request for examination of the authorised officer who had prepared the stock inventory. (Para 6 of the letter, copy of which is available at 417-18 of assessee's paper book).

58.3. In the assessment of block period the assessing officer estimated the stock of scrap as on 3-9-1996, at 720 MT by considering each one of 60 heaps of scrap as one truck load of 12 MTs and after allowing the set off of 427.945 MT available as per books and valued the excess stock at Rs. 21,99,000 (pp. 34 and 35 of assessment order).

59. On the basis of the aforesaid facts and circumstances, the assessee's counsel's main objection is that stock inventory of scrap was based purely on guess work and consideration of one heap of one truck load of 12 MTs is absolutely unreasonable and impracticable computation. According to him when the scrap is unloaded from the truck it has to be unloaded in shape of 2 or 3 heaps and similarly weight of each truck can never be 12 MTs. According to him total stock of scrap should not have been more than 20 to 30 trucks load and if the authorities were so sure of stock as per inventory then they should not have remained silent on the assessee's request made since 4-9-1996, for actual weighment. As regards to the statement of Shri Ram Singh, the assessee's counsel submitted that he had nowhere stated or confirmed that one heap was one truck load of scrap weighing 12 MTs. The assessee's counsel further submitted that the revenue 's refusal to allow the assessee cross-examination of authorised officer has vitiated the order and the same should be quashed.

59.1 The learned Departmental Representative, in addition to relying on the findings of the A U_ contained at pp. 34 and 35 of the assessment order, submitted that the stock on the date of search was actually physically taken and the details of the same were furnished to the appellant also. The stocktaking was done in the presence of the employees of the appellant and later on confronted to the director. Since the stock taking is done on a particular date, in a running concern it is neither possible nor practicable to verify the stock physically at a latter stage. As regards to the stock of moulds, it was submitted that since the stock of moulds has already been taken separately in the inventory, it cannot be considered as a part of the stock of scrap. It was further submitted that since the undisclosed income on account of investment in excess stock has been set off against other undisclosed income, no separate addition has been made on account of undisclosed investment in excess stock and therefore, the assessee should not have any grievance. He further submitted that the addition on account of undisclosed stock cannot be set off against the undisclosed income computed on account of introduction of cash in books by way of ungenuine trading transaction.

60. We have considered the rival submission, the facts and circumstances of the case as well as the statement of Mr. Ram Singh recorded on 3-9-1996 and after careful consideration, are of the opinion that action of the authorities speaks of arbitrary exercise of powers vested in a quasi-judicial authority. It is well settled that quasi-judicial authority should be fair and honest while exercising his power and should adhere to the principle of fair play as well as the principles of natural justice and in case it is found to have not adhered to, then the action is arbitrary and can be struck down.

60.1. As far as present case is concerned, it is abundantly clear from the facts on record, findings of the assessing officer and denial for cross-examination of authorised officer that the authorities have acted in an arbitrary manner while considering the assessee's request and objection for actual weighment as well as request for the cross-examination of the authorised officer, which is in complete disregard to the settled principles of law relating to the principles of natural justice and fair play and, therefore, the action of the assessing officer is liable to be struck down on this score alone.

60.2. So far as the stand taken by the revenue that the stock on the date of search was actually physically taken and details were furnished to the appellant, it is of no use to the revenue , because, it is admitted fact that the stock was not actually weighed rather was mere on physical look of the authorised officer that the stock of 60 heaps was estimated to be 60 trucks load. The Law required the authorised officer to weigh the stock which was not done. The subsequent confrontation into the assessee is also of no help to the revenue . So far as the presence of the assessee's employee is concerned, we after having gone through the statement (supra Annexure 'C'), are of the opinion that he had nowhere confirmed or accepted each heap as one truck load of stock of scrap. The revenue 's stand that it was not possible or practicable to verify these stock in a running concern at a later stage is also of no use, because, in the present case search was concluded on 4-9-1996, and the premises where stock was lying were sealed as is evident from the assessee's -letter to the SHO and since the assessee was crying from 4-9-1996, itself and was requesting time and again for actual weighment of the stock of scrap (which was still lying in the sealed premises) it is unjustified on the part of the revenue now to take the stand that it was not possible to verify the stock at a later date. whatever the case may be i.e. whether it was possible to verify the stock on a latter date or not the fact remains that on 3rd/4-9-1996, the authorities had taken stock inventory on estimate basis and has not weighed the stock available there. The revenue cannot take advantage of its own failure so as to dismiss the assessee's request for actual weighment.

60.3. In view of the above facts we are of the opinion that revenue has proceeded in an arbitrary and unjustified manner and had assumed the excess stock purely on the basis of conjectures and surmises which cannot be sustained under any provisions of law but since the appellant had also not tried to weigh the stock of its own and seems to had, in a way, harping on the revenue 's failure to weigh the stock appellant's in action debars it from the relief by way of annulment of the action. On merits, since it is a case of estimate and, we are of the opinion that if one truck load is unloaded than it may give, though more than one heap, but each one will not be of equal quality as has been pleaded by the assessee. Under these circumstances we estimate the quantity of stock of scrap in 60 heaps at 45 truck load each one of 12 MTs. capacity. It will give rise to excess stock of 540 MT. As regards the rate since the assessing officer himself had adopted purchase rate of scrap at Rs. 7,220 per MT while computing the undisclosed income from manufacturing activities (p. 34 of assessment order), and assessee has pleaded the rates between 10,000 to 15,000, we are of the opinion that rate of Rs. 11,000 per MT will meet the ends of justice and consequently the assessing officer is directed to compute the undisclosed income on this account by adopting this rate.

61. Ground 4.1 (Assessment years 1995-96, 1996-97 & 1997-98) & 4.8

61. Ground 4.1 (Assessment years 1995-96, 1996-97 & 1997-98) & 4.8 Computation of undisclosed income for assessment years 1995-96, 1996-97 and 1997-98 after holding the trading activities with respect to purchases and sales with various parties referred to at p. Nos. 41 to 52 of the assessment order for block period as ungenuine and holding that the undisclosed cash has been introduced in the books of account by adopting via media of such ungenuine transaction.

61.1. We have heard the assessee's counsel as well as the learned Departmental Representative but before divulging to their respective stand, it is deemed necessary to extract the brief facts as revealed from the assessment order and the records available before us, as under 61.1. We have heard the assessee's counsel as well as the learned Departmental Representative but before divulging to their respective stand, it is deemed necessary to extract the brief facts as revealed from the assessment order and the records available before us, as under 61.2. The appellant's books of account for assessment years 1995-96, 1996-97 and 1997-98, which were in respect of manufacturing as well as trading activities, depicted the G.P. rate of 16 per cent, 12 per cent and 10 per cent respectively. The assessing officer rejected the G.P. rates depicted by the appellant books of account by holding that the appellant has squared up the amounts of various parties from whom the purchases were shown to have been made by sales and if such purchases (which according the assessing officer were not genuine) excluded, then the G.P. rate for each year comes to 32 per cent, 24 per cent and 87 per cent respectively which are abnormally high and unheard of the trading business of steel. The assessing officer further observed that the profit in such trading activities is in the range of 2 to 3 per cent.

61.2. The appellant's books of account for assessment years 1995-96, 1996-97 and 1997-98, which were in respect of manufacturing as well as trading activities, depicted the G.P. rate of 16 per cent, 12 per cent and 10 per cent respectively. The assessing officer rejected the G.P. rates depicted by the appellant books of account by holding that the appellant has squared up the amounts of various parties from whom the purchases were shown to have been made by sales and if such purchases (which according the assessing officer were not genuine) excluded, then the G.P. rate for each year comes to 32 per cent, 24 per cent and 87 per cent respectively which are abnormally high and unheard of the trading business of steel. The assessing officer further observed that the profit in such trading activities is in the range of 2 to 3 per cent.

61.3 The assessing officer, conducted the verification with regard to various purchases and sales shown by the assessee and according to him out of 20 parties, from whom the appellant had shown purchases and had squared up their accounts by way of sale, the parties namely :

(1) M/s Saral Enterprises, (2) M/s Sharda Enterprises, (3) M/s Shukla Steel, (4) M/s V.K. Trading Company, could not be served with summons and 5 parties namely :

(1) M/s P.B. Traders, (2) M/s Bharat Traders, (3) M/s Anjani Traders, (4) M/s Bhagwati Sales Corporation, (5) M/s Shri Bal Krishan Gopi Krishan, denied having made any transaction with the appellant. According to the assessing officer the total purchases shown from these parties were to the tune of Rs. 4,29,72,179.

61.4. The assessing officer after making enquiries from the parties, recorded the following findings :

(i) The proprietor of M/s P.B. Traders, Agra denied having any transaction with the appellant :

(ii) In case of M/s Bharat Traders the appellant had shown purchases worth Rs. 82.18 lakhs and the amount has been squared up by way of sale worth Rs. 1, 18 crores but the books of M/s Bharat Traders showed neither receivable nor payable to the appellant into any transaction with the appellant.

(iii) In case of M/s Anjani Traders the total purchases shown by the appellant are as Rs. 1.68 crores but M/s Anjani Traders accepted to have sold goods worth Rs, 30 lakhs only and balance of goods worth Rs. 1.38 crores were not sold to the appellant. The appellant however, has squared up the accounts by way of sales.

(iv) The appellant has shown purchases from M/s Bhagwati Sales Corporation at Rs. 70.94 lakhs and total amount has been shown as outstanding but the proprietor of M/s Bhagwati Traders denied having made any sales to the appellant.

(v) The appellant has shown purchases worth Rs. 13.3 lakhs from M/s Bal Krishna Gopi Krishna and has squared up the accounts by showing sales to them but the party has denied having entered into any transaction with the appellant.

(i) The assessing officer similarly conducted investigation for the verification of sales and observed that the appellant has made 3 types of sales namely:

(a) Cash sales.

(b) Sales to square up the accounts.

(c) Sales to the parties from whom payments were received by cheque or draft.

One of the parties from whom the payments were received by cheque or draft was M/s K.C.P. Fueller Ltd. of Madras and the total sales to this party made by the appellant were to the extent of Rs. 1.75 crores.

(ii) The assessing officer further observed that with regard to the cash sales no enquiry is possible whereas the sales which have resulted in squaring up of the accounts have been shown to inflated the sale and bring down the G.P.

(iii) With regard to 3rd category of sale i.e. sales to M/s K.C.P. Fueller Ltd., the assessing officer, after making enquiries from the transporter concluded that number of vehicles claimed for sending the goods were not the number of trucks and the so-called sales to this party were not genuine i.e. according to the assessing officer there was no actual delivery of goods.

(iv) The other important fact to be noticed is that the assessing officer asked the appellant to explain the details of M/s K.C.P. Fueller Ltd. only which were explained by way of return reply to the effect that these transactions are appearing in the regular books of account and may be considered in the course of regular assessment and not for the purpose of assessment for block period.

Here it is important to mention that the learned assessing officer did not confront the appellant with the evidence collected or enquiry made with regard to appellant's trading activities with other parties on the ground that the appellant has refused to give any further detail or replies with respect to the dealings with M/s K.C.P. Fueller Ltd. and this fact is borne out from the second para at p. 49 of the assessment order reproduced below :

"The issue of K.C.P. Fueller Ltd. was confronted to the assessee and the assessee has replied that since these transactions are appearing in the regular set of books of accounts, these may be taken up in the course of regular assessment rather than in the block assessment. The assessee has therefore, refused to give any details/replies in this issue. Consequently the other trading transactions i.e. with other parties and in other areas were not confronted. The stand taken by the assessee is incorrect. In the block assessment "total income" for each of the years comprising the block has got to be calculated for computing the undisclosed income. Total income inter alia includes any income emerging from any entries in the books of account of the assessee. Therefore, the issue under consideration has got to be treated in the block assessment itself. "

The learned assessing officer on the basis of above facts and circumstances, concluded that there were no genuine trading activities of the appellant as introduced its undisclosed cash in books. Undisclosed cash alleged to have been introduced in the books has been computed at Rs. 91,52,894 for the period relevant to assessment year 1995-96; Rs. 1,31,68,720 for the period relevant to assessment year 1996-97, Rs. 31,60,957 for the period relevant to assessment year 1997-98 as against profit of Rs. 64,54,540 for assessment year 1985-86, profit of Rs. 67,30,168 for the assessment year 1996-97 and profit of Rs. 30,25,133 for the assessment year 1997-98. The basis for computation of cash alleged to have been introduced in the books, is claimed to be peak of cash flow statement.

62. Submissions by the parties

(i) The appellant's counsel on the basis of above facts and circumstances, first of all relied on appellants reply dated 22nd Sept., 1997, available at p. 230 of paper book and the relevant part of appellant's reply reads as under:

"M/s Monga Metals (P) Ltd.

76/43, Halsey Road Kanpur Date : 22nd Sept.,1997 To The Asstt. Commissioner of Income Tax Central Circle-II, Kanpur Re : Block assessment proceeding With reference to your letter dated 19th Sept., 1997, we respectfully beg to submit as under :

The other points raised are in respect of trading activities done by us in assessment years 1995-96, 1996-97 and 1997-98 which are duly disclosed and appearing in our regular books of accounts which were seized during the course of search.

From para 3 of page (sic) of your letter it has been observed that by making trading activities, unaccounted profit of the assessee's company has been introduced in the books of accounts"

Without Prejudice We may submit if the department has reached to this conclusion then it will be seen that the trading profits as shown below in these three years have been introduced by the assessee- company in its books of accounts .

Asst yr.

Income from Trading Transactions Rs Income from Trading Transactions Rs Income from Trading Transactions Rs 1995-96 1995-96 64,72,528.00 64,72,528.00 1996-97 1996-97 76,30,167.16 76,30,167.16 1997-98 (upto 3rd Sept., 1996) 1997-98 (upto 3rd Sept., 1996) 31,60,954.50 31,60,954.50 Your allegation about no purchases and sales made from and to the parties are also not justified because the purchases were made from the recognised parties and profits earned as shown above were disclosed and assessed. We have also furnished the details required for sales made to M/s Fuller K.C.P. Ltd. just after search the department had made various enquiries from the parties at Kanpur, Agra, etc. and nothing adverse was intimated. Moreover the various parties had confirmed their purchases and sales and they had given their statements and copies of accounts, etc. You have referred to names of M/s Bharat Traders and M/s Bhagwati Sales Corp. (at p. 4 of your letter). Sri Prakash Chand Goyal, is proprietor of these two concerns and just after search he confirmed the transactions before ADI. Sri Prakash Chand Goyal had given false statement later on which is proved from his cross-examination done before your goodself. He intentionally did not bring his books of accounts and other papers just to blackmail us, He should be penalised for not making due compliance under section 131 of the Income Tax Act 1961.

Proprietors of M/s Anjani Traders, Agra had also confirmed the transaction in his earlier statement and the transactions were got verified through ADI, Agra. Sri Baij Nath Agarwal has informed us that he had not given any statement before ADI, Agra on 15-9-1997, because in the morning of 15th September his brother-in-law (Jija) had expired after some serious illness. Purchases and sales with accounts of the parties till 3-9-1996, have been squared up. Some times the parties make the transactions through their 'Dalal' and goods are received from them which were sold by us in due course. Your observation about fictitious credit are also not correct, Moreover because there has been no fictitious credits. From the balance sheet it will be seen that there are following items at assets side in respect of these goods.

(a) Stock;

(b) sundry debtors (Trade); and

(c) profit merged with other losses.

We have received so many notices and enquiries in last 10 days and we have been attending your office almost even whole day and we had very little time left in making lot of compliances required by you.

Looking to the above facts and circumstances of the case no addition is called for on the points raised in your notice dated 19-9-1997, also.

In case any further clarification is needed kindly let us know and proper and sufficient time may kindly be granted.

Thanking you."

(ii) So far as assessment year 1997-98 is concerned, he further submitted that all the transactions having been recorded in the regular books of account, there is no scope of consideration of any of these transactions as representing undisclosed income and at least unless and until the revenue proves that the appellant would not have disclosed the sales in the return for assessment year 1997-98 for which even the previous year has not ended.

(iii) The appellant's counsel further submitted that even if it is assumed that the transaction with some of the parties were not genuine then also there is no case for introduction of undisclosed cash for holding that all the trading activities were ungenuine. The appellant's counsel has made another alternate plea to the effect that if undisclosed cash is taken as having been introduced in the books then the whole of the alleged undisclosed income got introduced in the books and therefore of course, there is no case for any assessment of undisclosed income or at least to assessee the undisclosed income to the extent as alleged in the assessment order.

63. The learned Departmental Representative on the other hand in addition to relying on the assessment order, relied on para 8 at p. 11 of the "Synopsis furnished during the hearing of the appeal, which runs as under :

"Trading Activities :

Though the appellant is primarly a manufacturing company, interestingly, the co. also engaged itself in trading activity in iron and steel material on a massive scales where the sales were in crores. Since the main activity of the appellant was manufacturing, it looked strange that it should indulge in such heavy trading activity also. Further scrutiny revealed that the profit rate disclosed on the trading turnovers were very high. Detailed discussion about the trading activities is available from p. 40 to 51 of the order under section 158BC. In many cases, the account of parties from whom purchases were shown to have been made were again squared up by showing sales to such parties and in such cases the margin of profit was found to be as high as from 32 per cent to 87 per cent which appeared to be ab initio wrong. The detailed enquiry showed that the parties from whom the appellant showed purchases, never existed. Their accounts were opened in the bank on introduction by the director of the company. The payment received by those parties from the appellant was immediately taken away in cash from those accounts. The appellant stated to have supplied these goods to one M/s Fuller K.C.P. Ltd. to the extent of Rs. 1 crore 76 lacs and odd. The detailed investigation showed that the trucks shown to have transported goods from Kanpur to Sirohi in Rajasthan were found to be bogus. The truck numbers mentioned in the bilties turned out to be numbers of two wheelers, three wheelers and roadways buses. In some cases where even truck numbers existed, the owners refused to have transported any such goods. In fact these trading transactions were bogus and were resorted to by the appellant to introduce unaccounted cash in the books of account. Therefore, the net cash inflow resulting from these bogus transactions has been worked out in assessment years 1995-96, 1996-97 & 1997-98. From these amounts, the profit already disclosed on these bogus transactions and included and incorporated in the regular books of account has been deducted. The remaining amount has been treated as unexplained introduction of cash by bogus trading transactions and has been accordingly taxed in the block assessment proceedings.

64. After having considered the rival submission, the facts and circumstances of the case, overall effect of so-called ungenuine purchases and sales in the light of principles of accountancy and the purpose with which someone will prefer to indulge in such activities, the first question for our decision is with regard to the genuineness of the purchase and sales recorded in the assessee's books of account but alleged to be ungenuine by the assessing officer.

(i) So far as the denial of parties such as M/s P.B. Traders, M/s Bharat Traders, M/s Anjani Traders, M/s Bhagwati Sales Corporation and M/s Balkrishan Gopi Krishan for having entered into any transaction with the assessee, is concerned, we are of the opinion that the conclusion arrived at by the assessing officer without allowing the assessee an opportunity to cross-examine the parties and without investigating the business interest of any of these parties is nothing but arbitrary conclusion arrived at with a pre-determined mind. Had the assessing officer investigated the business interest of the parties, we are sure, the assessing officer could have dig out the truth because it is very common for the parties who carry on the so-called undisclosed business activity to deny having done any business These parties may not be telling the truth and one example is M/s Anjani Traders. In this case the assessing officer has observed that M/s Anjani Traders accepted to have sold the goods worth Rs. 30 lakhs as against Rs. 1.68 crores shown by the assessee. Under these circumstances how the assessing officer came to the conclusion that the whole of the purchases from these parties were bogus. Similarly in case of M/s Bhagwati Sales Corporation and M/s P.B. Traders, the assessing officer should have called for their books of account or should have investigated their business interest. Further, squaring up of the accounts by showing sales of manufactured products was in noway illegal or prohibited and in those accounts also there were cash payments which the assessing officer should have investigated.

Since the assessing officer has not dealt with the aspect relating to the genuineness of purchases in the proper prospective, we are of the opinion that the conclusion arrived at by the assessing officer requires fresh consideration in accordance with law and after allowing the assessee an opportunity of being heard.

(ii) So far as the sales are concerned since the assessing officer has considered sales to M/s K.C.P. Fueller Ltd., Bharat Traders, Anjani Traders and M/s Bal Krishna Gopi Krishan only, the whole of the sales cannot be said to be ungenuine.

(iii) Coming to the question of revenue 's stand that the appellant has, by indulging in such ungenuine purchases and sales, has introduced its undisclosed cash, in books;

(ai) First of all we would like to record that it was not fair on the part of the assessing officer not to confront the appellant with the enquiries made for parties other than M/s K.P. Fueller Ltd. In our opinion, whatever may have been approved or stand of the appellant while responding to various queries or requirements of the assessing officer with respect to sales to M/s K.P. Fueller Ltd. the need of the hour, in view of the principles of natural justice, was that the assessing officer should have confronted the appellant with such enquiries and should have allowed a reasonable opportunity for explaining the appellants stand..

(aii) This arbitrary action on the part of the quasi-judicial authority i.e. Assessing Officer amounts to violation of the principles of natural justice which has vitiated the findings of the assessing officer on the point which are to be quashed.

(aiii) Since the assessing officer himself has concluded that the appellant was carrying on manufacturing and trading activities of ingots outside the books, it cannot, simply on the basis of certain transactions having been termed as not genuine, be held that all the transactions of purchases and sales were not genuine.

(aiv) Further since the assessing officer, himself has observed that account of various parties, from whom purchases were shown to have been made, were squared up by way of sales, we are of the opinion that the transaction itself confirms that no cash was involved and if at all was, it could be only to the extent of profit in that account, if any.

(av) There is no valid basis of computing cash at Rs. 91,52,894 for asst. yr 1995-96 and Rs. 1,31,68,732 for assessment year 1996-97 and Rs. 31,60,957 for assessment year 1997-98 and consequently undisclosed income determined on this account cannot be sustained.

(avi) Simply, if we examine the possibility of introduction of cash in books by way of an example it will be noticed that there no on possibility of introduction of undisclosed cash in books.

Example

(a) If the transaction of purchases and sales are found entered in the books of account, then irrespective of the fact as to whether there was actual involvement of goods or not or as to whether transaction was genuine or ungenuine, the possibility of introduction of cash can be only to the extent of and in the circumstances detailed below :

(i) Since all the transactions are recorded in the books, the person is under obligation to explain the source of payment made (recorded in books) for purchases be it in cash or by way of draft or by way of squaring up of the account with sales and it is only when the person is unable to explain the source of such payment that the payment can be said to have been out of undisclosed fund brought in books and in that situation the fund so brought can be taxed under the deeming provisions of section 68 or 69 or 69A;

(ii) Otherwise, it is only the amount to the extent of profit element which can be said to have been introduced in books but before it can be said to be so, the revenue has to prove that the profit element has been brought into due to convenience of 3rd party be it seller or the purchaser; this aspect of the issue can be explained by way of an example as given hereunder.

Trading Account Rs.

Rs.

Opening stock Opening stock Nil Nil Sale Sale 5,00,000 5,00,000 Purchases Purchases 5,00,000 5,00,000 C. Stock C. Stock 1,00,000 1,00,000 G.P.

G.P.

1,00,000 1,00,000 6,00,000 6,00,000 6,00,000 6,00,000 P&L A/c Rs.

Rs.

Expenses Expenses 10,000.00 10,000.00 G. Profit G. Profit 1,00,000 1,00,000 Net Profit Net Profit 90,000.00 90,000.00 Total Total 1,00,000.00 1,00,000.00 1,00,000 1,00,000 In the above example, since the transactions are recorded in the books, the person is under the obligation to explain the source of funds available for making payment against purchases worth Rs. 5 lakhs: and it is only when such source is not explained the amount available in books can be said to be received from undisclosed sources or undisclosed cash to have been introduced but if source is explained satisfactorily then the profit element only can be said to have been introduced which is possible with the convenience of 3rd party.

(b) If transactions are not recorded in books, aforesaid, the cash to the extent of each of the purchases, if made at different occasions; or the whole of all the purchases if made in one go; can be said to be availabie with the person but in no case such available cash can be said to have been introduced in the books and such available cash can be taxed under section 69 of the Act.

"Secondly it is quite impossible and impracticable for anybody to introduce the undisclosed cash under the garb of ungenuine purchases or sales, because by indulging in such transactions, one can at the most introduce cash to the extent of net profit as in the example (supra) but still the question remains will anybody or any prudent person will choose this part ?

In our opinion it is not only impossible, impracticable but unprofitable also, and cannot be done without convenience of 3rd person. Here again a question arises as to why the 3rd party shall associate itself. If any party chooses to associate itself it will do so with the intention of procuring some benefit or earning some income and ultimately to get lost ab initio, so that it is out of reach of the taxman.

(c) Even if it is taken that some one will take risk to associate itself then the question arises as to why the assessee will extend any benefit or allow any 3rd party to earn some income, when the assessee can disclose its cash by taking recourse to the provisions of section 273A of the Act and by paying the regular tax.

(d) Further by introducing cash to the extent of gross profit as in the above example one is left with, in the shape of working capital; is sum to the extent of net profit only which no prudent person will prefer.

65.1. In view of above discussion, we are of the opinion that such type of activity do not result introduction of undisclosed cash, though, they may result in some help to 3rd party or may result in assessee's earning some income.

For example in the case of sales of K.C.P. Fueller Ltd. since all the sales affected by the appellant are admittedly recorded in the books and payments have been received by drafts or cheques the only possible outcome of such transaction can be that the appellant might have repaid the amount, after deducting its margin, back in cash to M/s K.C.P. Ltd. which ultimately might have resulted in conversion of disclosed money (so-called white money) of M/s K.C.P. Ltd. into undisclosed money (so-called black money) and not the introduced of assessee's undisclosed cash.

65.2. Further, we are of the opinion that such type of transaction may also result in 3rd party getting cost of its assets inflated and withdrawing such inflated amount in cash which again will be in the form of undisclosed (so-called black money) one but cannot, in anyway, result in introduction of appellant's undisclosed cash in books. The involvement of anybody in such type of activities, therefore, do not fall within the ambit of taxing provisions such as invoked by the assessing officer. The indulgence of someone in such type of activity may fall within the ambit of some other provisions of the Act, such as abatement for evasion of income-tax and the remedial action for such type of assessee's lies under some other provisions of Act and not under the provisions invoked by the assessing officer.

65.3. In view of the foregoing discussions, we are of the opinion that revenue 's theory of introduction of undisclosed cash is impractiable, if not possible, and unprofitable which we are unable to sustain at least to the extent the revenue has alleged.

65.4. We are, therefore, of the opinion that if at all any cash were introduced it was to the extent of net profit of such transaction, which in view of the transactions as having been recorded in the books, has already been offered for taxation by way of net profit as per P&L a/cs for various assessment years, and therefore, there is no question of any undisclosed income on this account. The computation of so-called undisclosed income for the assessment years 1995-96, 1996-97 and 1997-98 on this account is deleted.

65.5 (a) So far as assessment year 1997-98 is concerned, though we have already held that there cannot be any undisclosed income and the assessing officer also has not determined any undisclosed income there is one more reason for which there cannot be any undisclosed income for this assessment year even if revenue 's theory of introduction of cash is accepted and that reason is the provisions of section 158BB(l)(b) according to which the undisclosed income on the basis of entries in the regular books of account, for the period for which the return of income is not due by the date the search has been conducted, can be determined only if it is proved by the revenue that had there been no search the person would not have disclosed such entries or transaction or income, otherwise as per the provisions of section 158BB(l)(b) income for the periods for which the time for furnishing the return under section 139(l) has not expired and computed on the basis of entries relating to such income found recorded before the date of search in the books of account and other documents maintained in the normal course of business has to be deducted for arriving at the undisclosed income for that year.

(b) As far as the present case is concerned, since the assessing officer has admitted in the assessment order that the purchases and sales, which as per him are not genuine, have been recorded in the regular books of accounts and there being no evidence to show that the appellant would not have disclosed those transactions, the income computed on the basis of such transaction has to be excluded by virtue of provisions of section 158BB(l)(b) for arriving at the undisclosed income and consequently there will be no undisclosed income, so far as the assessment year 1997-98 is concerned.

65.6. With regard to appellant's plea that in case the theory of introduction of undisclosed cash is accepted then the undisclosed cash/income to that extent is liable to be set off, we are in agreement with the submissions and direct the assessing officer to allow to that extent.

These grounds relate to allowance of depreciation. After hearing the parties, we are of the opinion that whether there is any undisclosed income or not the assessing officer having accepted carrying on of the manufacturing and trading activities by the appellant and having allowed depreciation in part, the appellant is entitled to depreciation as per the law and we direct the assessing officer to allow the same.

67. In view of our findings against various issues, our resultant decision is that:

(i) The assessment for block period dated 30th Sept., 1997, is quashed being bad-in-law and void ab initio for want of service of a legal/valid notice as required under the provisions of section 158BC of the Act, as well as being in violation of principles of natural justice. The assessing officer, however, can proceed with the proceedings from the stage of illegalities if the law so permits :

(ii) The assessing officer is directed to delete the undisclosed income of Rs. 3,42,357 computed on account of alleged undisclosed investment in construction of the appellant's factory building.

(iii) If at any later stage the assessment for block period is held to be valid then on merits our decision is as follows :

(a) Undisclosed income of Rs. 1,53,28,028 and of Rs. 18,00,000 are directed to be deleted, though of course subject to the directions that :

(ai) If at any stage, the loose papers i.e. LPs found and seized from the premises of Mr. Madan Hada are held to be as relating to the appellant's business, then the total income over on account of manufacturing and sale of ingots outside the books should be computed after excluding the entries against which remark 'A' appears in the documents and the entries against which Mark M appears in the documents should be verified in view of assessee's claim that these entries may have been recorded in the books of account.

(aii) Undisclosed income of this account, therefore, should be computed after applying a net profit rate of 5 per cent on the turnover arrived as per (a) and (ai) above.

(b) Undisclosed income computed on the basis of LP 3 and annexure p. 5 of Annexure p. A8, is directed to be deleted;

(c) Undisclosed income determined on the basis of so-called introduction of undisclosed cash are directed to be deleted subject to observations and directions at the appropriate place;

(d) the undisclosed income on account of excess stock of scrap should be computed as per our directions in paras 60 to 60.3.

68. In the result assessee's appeal is allowed on legal grounds. On merits the assessee's appeal is partly allowed.