V.V.S. Alloys Ltd. vs Assistant Commissioner Of Income ...

ORDER I.S. Verma J.M.

This is an appeal by the assessee against block assessment order dated 30-9-1997, passed by the Assistant Commissioner, Central Circle-2, Kanpur as a result of search operation simultaneously carried out at the business premises of the assessee-company and also at the residential premises of its directors which commenced at 8.30 AM on 3-9-1996, and concluded on the same date at 6.15 PM (as per the Panchnama, copy of which has been placed before us). In terms of the said order the undisclosed income was determined at Rs. 2,37,56,400 which got modified in terms of 3 separate orders dated 25-8-1998, 15-9-1998, and 15-9-1998, under section 154, at a figure of Rs. 2,43,77,990 which resulted into a demand of Rs. 1,57,53,794 including surcharge also. The assessee had filed three separate appeals against the three subsequent orders (referred to above) also being ITA No. 1192, 1193 & 1194 (A11)/1998 which have already been dismissed by us on the short ground that the appeal against order under section 154, even if such an order related to block period assessment, was not maintainable directly before Tribunal.

2. In relation to the 'block assessment order' referred to above, the assessee initially came up with a petition for stay of the demand which contained an additional prayer for early hearing of appeal also, and the same was disposed of vide order dated 23-2-1999, whereby the prayer for stay of demand was accepted subject to certain conditions. Against the said order the assessee filed a writ petition before the Hon'ble Allahabad High Court which disposed of the same vide order dated 27-3-1999, concluding part of which reads as under :

"The learned counsel for the petitioner submitted that the appeal itself may be disposed of expeditiously. The petitioner can approach the Tribunal, directly submitting the application for disposing of the same as early as possible. The Tribunal shall fix the date for hearing of the appeal as early as possible. "

(Emphasis here, italicised in print, supplied) Later on the assessee moved a petition before the Hon'ble Supreme Court also which passed an interim order, grating unqualified stay of demand.

3. It is in the aforesaid background that the hearing of the appeal was taken up on priority basis. The assessee was represented by S/Sri S.K. Garg, FCA and M.L. Jain, Advocate, whereas the department was represented by Sri S. Chopra, Addl. Standing counsel and Sri Pratap Singh the present incumbent in the office of the assessing officer. Both sides filed voluminous paper books. The assessee has submitted in all three paper books which contain even a brief synopsis of the entire case with reference to the documents appearing in its paper book, (hereinafter referred to as `the APB') and also cross reference of the paper book filed by the department, (hereinafter referred to as `the DPB'). The department in its paper book (DPB) has filed copies of the seized material found during the course of search as have been referred to in the assessment order which is under appeal before us, and also a separate paper book containing, inter aha, comments on the documents appearing in its paper book.filed by the assessee and also other documents which were sought to be highlighted during the course of hearing of appeal.

4.1. At the very outset Sri S.K. Garg the learned counsel for the appellant sought our premises to withdraw the grounds. 3.1 and 3.2 reading as under :

"3.1. Because in any case and without prejudice to the objections taken to the inherent lack, it is contended that the impugned order has not been validly passed as the 'approval' as envisaged under section 158BG cannot be said to have been validly given by the learned Commissioner (Central), Kanpur.

3.2. That the search operation in pursuance of which block assessment order has been passed had neither been validly initiated nor concluded."

As there was no objection from the side of the department to the request for withdrawal of the said grounds, it was granted by us.

4.2 At the same time, it sought for admission of 'additional ground' reading as under :

"Because in any case and without prejudice to the contention raised in ground Nos. 1 to 8 above, the income for the block period as has been determined by the learned assessing officer vide order dated 30-9-1997, should be subjected to deduction under section 80IA".

5. The learned counsel for the appellant then took up the issue of very validity of the assessment, precisely on the following grounds :

(a) The notice under section 158BC has not been validly issued and served on the appellant and, therefore, no valid order under section 158BC (Chapter XIV-B of the Act) could be passed.

(b) The assessment order, at any rate, did not reflect independent exercise of mind of the assessing officer (in passing the order) as he was being continuously influenced and guided by the parallel proceedings as had been taken up by the DDI Wing, through examination of various persons (for which the DDI, Wing did not have the power, after the search under section 132 had been concluded).

(c) The manner in which search was actually conducted, particularly at the business premises of the appellant was neither proper nor in conformity with the rules laid down by the department itself.

6. As far as the first aspect which, according to the learned counsel for the appellant, effects the very assumption of jurisdiction by the assessing officer to pass block assessment order in the case of the appellant, is concerned, elaborate arguments were made by the learned counsel for the appellant with reference to various case laws (list of which has been placed at APB 95 and 96). The sum and substance of the argument put forth by him is that the notice under section 158BC, which confers jurisdiction on the assessing officer to pass block assessment order in search cases, is like the notice under section 148 where under action is taken to assess the 'income escaping assessment' and any infirmity, irregularity or invalidity in the said notice strikes at the very root of the assumption of jurisdiction by the assessing officer to make block assessment and thereby at the assessment itself. According to the counsel the notice dated 12-12-1996, (typed copy appearing at p. 89 of the documents appearing in paper books), in the present case contains the following infirmities :

(a) The block period has been mentioned as "the previous year relevant to ten assessment years preceding the previous year 1996-97 and including the period upto the last date of search warrant executed in your case, upto 3-9-1996, (As defined under section 158B(a))", whereas the assessee- company itself got incorporated on 15-7-1994, relevant for the assessment year 1995-96. Accordingly the block period could not have covered the period prior to the assessment year 1995-96. Moreover, the notice merely contains the reproduction of the definition of 'block period' and it does not specify the 'block period' applicable to the assessee.

(b) The notice cannot be said to have been addressed to the assessee- company as it merely mentions "To, V.V.S. Alloys Ltd., 76/43 Halsey Road, Kanpur" whereas according to the provisions contained in sub-section (2) of section 282 it should have been addressed to the principal officer of the company.

(c) Even the text of the notice was wholly vague as the assessee- company on one hand was expected to prepare its true and correct return and at the sum time it was required to include in such return "the undisclosed income in respect of which as individual/HUF/firm/company/Association of Person/BOI local authority are assessable for the block period mentioned in section 158B(a) of the Income Tax Act, 196l."

(d) on account of such a vagueness, even the status in which the notice was issued or meant to be served cannot be made out and it would not be any exaggeration to plead that status is not even mentioned in the said notice.

(e) The notice was not served as per the provisions of law.

7. Elaborating his objections, the learned counsel submitted that the company is managed by three directors namely S/Sri Vijay Kumar Agarwal, Vinod Kumar Agarwal and Sanjay Agarwal. It has no managing director as such nor any of the directors or officers of the company has been designated as principal officer. In such a situation, it was incumbent on the assessing officer to treat any person connected with the management of the company as its principal officer, by serving a notice of his intention of treating him (such person) as principal officer of the company, as required by the provisions of section 2(35). The notice in the present case, is neither addressed to the principal officer of the company nor any notice has even been served on any of the three directors connected with the management of the company, by treating any one of them as 'principal officer' of the company. Mere service of the notice dated 12-12-1996, (referred to above) on Sri Vijay Kumar Agarwal (the department in its paper book has mentioned that notice had been served upon the main director of the company Sri Vinod Kumar Agarwal) was not enough to meet the requirement of law. Thus, the said notice cannot be said to have been either addressed to the company or served in accordance with the provisions of law.

8.1. According to the learned counsel for the appellant the said infirmity was much more pronounced in the instant case because of vagueness even in the text of the notice whereby company was required to include in its return the undisclosed income of various "persons" each one of which constitutes a class by itself. The block assessment can be made in relation to the "undisclosed income" only in relation to such "person" who has been subjected to search operation under section 132(1) of the Act. Accordingly to him such "person" cannot be subjected to assessment of 'undisclosed income" belonging to some other "person". In other words, even if it is assumed for a moment that the notice was meant for the company, yet the contradiction/discrepancy in its text has rendered the notice as a whole, a nullity. The learned counsel for the appellant has also submitted that none of these infirmities ate capable of being cured by the provisions of section 292B. To support various arguments he sought to rely on the case laws listed at APB 95 and 96 which are reproduced hereunder :

CASE LAWS Sl. No. Case laws Ratio of the decision

(i) Y Narayana Chetty & Anr v. Income Tax Officer (1959) 35 ITR 388 (SC) The notice prescribed by the 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 Mithiborwala (1971) 82 ITR 821 (SC) 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 them 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 that 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 (1981) 131 ITR 480 (All).

On the facts found by the Tribunal it is clear that the notice under section 148 was 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 as 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 Agrawal v. CIT (1983) 144 ITR 745 (All).

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 142 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 under section 147 of the Income Tax Act.

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

In this case the Hon'ble Supreme Court referred to its earlier decision in the case of Narayana Chetty & Anr. v. Income Tax Officer (1959) 35 ITR 388 (SC) and held as under:

"Service of notice prescribed by section 34 of the Income Tax Act, for the purposes of commencing proceedings for reassessment, is not a mere procedural requirement, it is a condition precedent to the initiation or 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 & Anr. v. ITO)."

(vi) P. N. Sasikumar & Ors. v. CIT (1988) 170 ITR 80 (Kar) We have already held that the issue and service of a notice under section 148 is a condition precedent or a matter of jurisdiction. In that view, before assessing an 'assessing officer ?' as enjoined by section 282(2)(c) of the Income Tax Act, the notice should be addressed to the principal officer or a member thereof. Admittedly, it has not been done in this case. That means. there was no notice to the "assessing officer ?' which was assessed to tax. We are of the view that it is a case where "no notice" was sent to "the assessee", the "assessing officer ?' as enjoined by law, The entire proceedings are, in the circumstances, void and illegal and totally without jurisdiction. Such a fundamental infirmity cannot be called a "technical objection" or a mere "irregularity" and such vital infirmity cannot be cured or obliterated by relying on section 292B of the Income Tax Act.

8.2. Further reliance was placed on Tribunal order dated 30-6-1999, in the case of Monga Metals (P) Ltd. v. Asstt. CITin ITA No. 1377/All/1997 (copy appearing at pp. 334 to 463 of APB). Our attention was specifically invited to the discussion appearing and findings given in para 9 to 12.2 (APB 357 to 362) of the order (supra).

9.1. Sri S. Chopra, Addl. Standing Counsel vehemently opposed the argument put forth on behalf of the assessee. First of all he referred to paras 1, 2.1, 2.3 and 2.4 of the department in its paper book and the case laws mentioned therein and to some other case laws also which we shall deal at the appropriate place. He very forcefully pleaded that the notice under section 158BC was wholly valid and various irregularities/infirmities (as have been pointed on behalf of the assessee) were either non-existent or were of no consequence whatsoever and, in any case the same should be treated to be protected and cured by the provisions of section 292B of the Act.

9.2. The notice in this case was duly addressed to the company and was served on one of its directors, namely Sri Vijay Kumar Agarwal. He clarified that in the department's paper book the name of the director on whom the notice has been served, was wrongly mentioned as Vinod Kumar Agarwal, it should have been Vijay Kumar Agarwal, which should be treated to have been corrected. As the notice has been duly addressed to the company, it was not necessary that it should be addressed to the principal officer of the company and this was more so in the present case when the notice found its way directly into the hands of one of the directors of the company who was concerned and entrusted with the day-to-day management of the assessee-company.

9.3. He further submitted that the notice under section 158BC cannot be said to be a jurisdictional notice. After search had been carried out under section 132(1), the assessing officer had no option but to complete the block assessment under section 158BC. The notice as prescribed therein cannot be said to be more than a formality like issuing notice under section 142(1), before making an assessment. Therefore, even if the said notice dated 12-12-1996, is said to be containing certain errors which in the present case are of extremely routine nature, like that a portion of the said notice had not been scored out or the block period has not been correctly mentioned, did not go to affect the validity of the notice.

9.4. As to our decision in the case of Monga Metals (P) Ltd, (supra) on the issue of validity of notice he tacitly admitted that the issue was covered against the department in terms of the said order. However, he hastened to add that the matter deserved to be reconsidered in the present case in view of various case laws as have been referred to and relied upon by him.

10. It was also submitted by Sri Chopra that the assessee never took any objection to the validity of the notice at the assessment stage. The assessee-company cannot, therefore, be heard now, objecting to the validity of the notice and thereby the validity of the assessment order itself.

11. By way of rejoinder on the limited issue of validity of notice and its effect on the assessment order that has been impugned before us, Sri Garg submitted that the matter was squarely covered by our decision in the case of Monga Metals (P) Ltd. (supra) and the same deserved to be followed here also as the facts are identical. As to various case laws as have been relied upon by the learned additional standing counsel he dealt with each one of them in detail and tried to make out that all the case laws (as have been referred to and relied upon by the Addl. Standing Counsel) were distinguishable on facts as well as in law. He further went on to submit that the assessee company had specifically raised the issue of validity of the notice, time and again and gave it in writing also to the assessing officer vide letter dated 26-9-1997 (relevant portion at p. 92 of APB).

12.1. We have carefully considered the rival submissions. Before dealing with the same, we refer to certain undisputed facts. The appellant is a public limited company which got incorporated on 15-7-1994. Prior to this date, company was absolutely non-existent. It is engaged in the business of manufacturing of CTD bars, colloquially known as "saria" and the date of commencement of commercial production is 22-6-1995. Thus, at the most the assessment year 1995-96 when the company was in the stage of constructing its factory building and installation of plant and machinery and the assessment year 1996-97 (when the company started production) could be roped in, in the block period. As per the Panchnama the search operation commenced at 8.30 AM on 3-9-1996, and got concluded on the same day at 6.15 PM after preparing the inventory of the stocks worth several crores (as per the estimates of the authorised officer) and other material found during the material seized during the course of search operation. Thereafter the assessee was served with a notice dated 12-12-1996. (copy from the 'original' of the notice is at p. 88 and typed copy thereof at 89 of APB) in the following manner :

"NOTICE UNDER SECTION 158BC OF THE INCOME TAX ACT, 1961 PAN/GIR No. :

Block Period : The previous year relevant to ten assessment years preceding the previous year 1996-97 and including the period upto the last date of search warrant executed in your case upto 3-9-1996, (As defined under section 158B(a)) Income Tax Office Central Circle II, Kanpur 12-12-1996 To V.V.S. Alloys Ltd., 76/43, Hasley 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/AOP? local authority are assessable for the block period mentioned in 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/-

(Dr. Subhash Chandra) Assistant Commissioner, Central Circle-II, Kanpur,"

(PB 88/89) 12.2. The assessee- company, did not take any cognizance of the said notice did not file any return for the block period till the conclusion of the block assessment proceedings. No doubt, it responded to various queries as raised by the assessing officer from time to time, yet it kept its objection to the validity of the notice alive as may be readily seen from the following :

12.2. The assessee- company, did not take any cognizance of the said notice did not file any return for the block period till the conclusion of the block assessment proceedings. No doubt, it responded to various queries as raised by the assessing officer from time to time, yet it kept its objection to the validity of the notice alive as may be readily seen from the following :

(Extracted from letter dated 26-9-1997 (APB-92)-Extract not given-Ed.) 12.3. The learned Addl. Standing Counsel appearing on behalf of the department accepted that the aforesaid objection was on record. It has also not been refuted in any manner that the assessing officer at no point of time or stage has served the company with a notice of his (assessing officer's) intention to treat any of the three directors of the company, as its principal officer. The company by itself never designated anyone of its director or any other officer to act as its principal officer. The notice dated 12-12-1996, was get served on Sri Vijay Kumar Agarwal (not Vinod Kumar Agarwal as has been mentioned in department in its paper book without the assessing officer at any stage, having expressed his intention to treat him the principal officer of the company. The notice dated 12-12-1996, was, of course, addressed to VVS Alloys Ltd.

12.3. The learned Addl. Standing Counsel appearing on behalf of the department accepted that the aforesaid objection was on record. It has also not been refuted in any manner that the assessing officer at no point of time or stage has served the company with a notice of his (assessing officer's) intention to treat any of the three directors of the company, as its principal officer. The company by itself never designated anyone of its director or any other officer to act as its principal officer. The notice dated 12-12-1996, was get served on Sri Vijay Kumar Agarwal (not Vinod Kumar Agarwal as has been mentioned in department in its paper book without the assessing officer at any stage, having expressed his intention to treat him the principal officer of the company. The notice dated 12-12-1996, was, of course, addressed to VVS Alloys Ltd.

13. In the case of Monga Metals (P) Ltd. (supra) a company which was being managed by the same set of directors at the time of search which, in that case too took place on 3-9-1996, we have already held vide order dated 30-6-1999 (supra) after in-depth analysis of the provisions of section 158BC vis-a-vis section 148 that :

'We are of the opinion that a notice, required to be served under the provisions of section 158BC is akin, analogous 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. "

Our said view gets fortified by the specific provision as have been inserted in terms of the proviso to clause (ii) of sub-section (a) of section 158BC, which reads as under :

"Provided that no notice under section 148 is required to be issued for the purpose of proceedings under this chapter."

Thus, the legislature in its wisdom thought it fit to dispense with the requirement of issuing notice under section 148, in the search cases covered by section 158BC. This is enough to support the plea that the notice under section 158BC is at pari materia with section 148, in so far as the matters related to issuance of such notice and service thereof are concerned.

14.1. The learned Additional Standing Counsel made a valiant effort to distinguish the case of Monga Metals (P) Ltd. (supra) by referring to various case laws which, in our considered opinion fail to persuade us to deviate from the view taken by us in the abovementioned case, in view of the following analysis of the said case laws (referred to and relied upon on behalf of the department) vis-a-vis the submissions made by both the parties in relation thereto.

(i) General Commercial Corpn. Ltd. v. CIT (1966) 62 ITR 459 (Mad).

(a) This was a case where notice under section 34 of the Income Tax Act, 1922, corresponding to the provisions of section 148 of the new Act was issued to the assessee-company. The said notice was assailed as illegal on the ground that the same had not been addressed to the principal officer. The Hon'ble court rejected the plea by observing that section 34 prescribe that notice thereunder, in the case of a company should be served on its principal officer and it nowhere provides that it should be addressed to the principal officer also and section 63 of the old Act had just enabled the effectuation of service on the principal officer of the company. The said case law is not relevant in the present context as, while drafting the corresponding section 282, "company" and "local authority" were added in the list contained in sub-section (2) of section 282 which now reads as under :

"(2) Any such notice or requisition may be addressed

(a) in the case of a firm or an HUF, to any member of the firm or to the manager or any audit member of the family.,

(b) in the case of a local authority or company, to the principal officer thereof;

(c) in the case of any other association or BOI, to the principal officer or any member thereof.,

(d) in the case of any other person (not being an individual), to the person who manages or controls his affairs. "

Thus, under the new provisions as are applicable to the present case, in the case of a company a notice shall be treated to have been served validly, only after it has been found that the same had been addressed too, to the principal officer of the company. The objection of the learned Additional Standing Counsel that the word used in section 282(2) is "may" and not "shall" does not make any difference as in our considered opinion, the section as a whole has been couched in a language in which no opinion has been left to the assessing officer, in the matter of addressing the notice or service is concerned. In view of this position it is not even necessary to refer to a large number of cases where the courts have expressed the opinion that the word "may" shall be interpreted as "shall".

(b) There is one more distinguishing fact in the case. The notice in the case of General Commercial Corporation Ltd. (supra) was found to have been served on the secretary of the managing director who was principal officer of the company and the company had acknowledged receipt of such notice subsequently as may be seen from the following :

"In the present case, there is no such infirmity. Service must be deemed to have been effected on the principal officer, namely, the managing director through his secretary who was authorised to receive such notices or, at any rate, the receipt by him had been acknowledged on behalf of the company subsequently. A notice under section 34 of the Act must no doubt be served, if the assessee happens to be a company, on its principal officer."

This admittedly is not the case here. Sri Vijay Kumar Agarwal was never intended to be treated as principal officer of the company, by the assessing officer. Therefore, service on him cannot be treated as to be the service on the principal officer of the company and on that basis it cannot even be argued that the notice having been served on the principal officer of the company, it was not necessary that it should be addressed also to the company. Moreover, in the present case the company has been disputing the validity of such notice as may be seen from the letter dated 26-9-1997, relevant portion of which had been extracted by us in para 12.2 of this order, whereas in the case under consideration before the Hon'ble Madras High Court, no such plea was taken at the assessment stage and it was only at the stage of the Tribunal that the plea of illegality of notice was raised. This proposition we are discussing for the sake of completeness only, otherwise the decision is not applicable here at all for the reason that there is a marked change in the terminology of section 63 of the old Act of 1922, under which the said decision had been rendered and in the terminology used in section 282 of the New Act, New Act contains an addition of "company" and "local authority", which was not there in section 63 of the old "Act".

(ii) Devarajan & Ors. v. Tamil Nadu Farmers Service Co-operative Federation (1981) 131 ITR 506 (Mad), reliance placed on p. 534..

In this case, the Hon'ble court was dealing with a warrant of authorisation which according to the plea taken by the assessee showed lack of application of mind for the reason that the form had been kept intact and various portions thereof had not been scored out. In the situation the Hon'ble court held that the omission to score a part of the authorisation would not go to affect the validity of the search, as undisclosed asset which required examination through search had been duly specified therein and in any case an omission was cured by section 292B. In other words, the court found that the undisclosed assets having been specified with precision, it was of no consequence if some irrelevant portion had been omitted from being scored out as such an omission would not mislead anybody. Here it is not a case of omission in scoring out any irrelevant portion. If the notice is perused it will go to show that the company was required to include the income of various other entities also each one of which falls in different category of "persons" as defined in section 2(31) of the Act. The observations by the Hon'ble court to the effect that the omission as noted by it in the said case stood cured by the provisions of section 292B, cannot be said to be having any relevance here as the same had been made in different context altogether.

(iii) National Insurance Co. Ltd. v. CIT (1995) 213 ITR 862 (Cal).

In this case the Hon'ble court was dealing with a return of income filed by a company which had not been signed by the managing director thereof. The assessee's case was that it was just as a defective return and validity thereof should not be affected in view of the provisions contained in section 292B. The assessee's plea was rejected and the Hon'ble court even went to hold that :

"Section 292B has been inserted to provide against purely technical objections without substance coming in the way of the validity of the assessment proceedings. In the instant case, the original return was invalid as it was not signed and verified by the person competent to do so."

Obviously, reliance on this decision is misplaced by the revenue . On the other hand it goes to support the assessee's case that the section 292B is not meant to cover all omissions/defects even if such omissions/defects go to affect the assumption of jurisdiction to initiate proceedings under the Act.

(iv) Sardar Harvinder Singh v. Assistant Commissioner (1998) 227 ITR 512 (Gau).

In this case the Hon'be court was dealing with a notice under section 148, validity of which was disputed on the ground that the said notice by itself did not contain the reason nor the particulars of business income which had escaped assessment. After having held in principle that the law did not require that the notice itself should communicate the reason or contain the details of income escaping assessment, the omission to contain such information was held to be procedural nature, which would not go to vitiate the proceedings.

In the case before us the situation is entirely different. The mistake, as have been pointed out by the learned counsel for the assessee, are not of procedural nature but are the irregularities of substance which go to adversely affect and vitiate the very assumption of jurisdiction by the assessing officer to pass block assessment order.

15.1. Shri Chopra also referred to and relied upon :

(a) the passage appearing at p. 1216 of Kanga and Palkhivala's the Law and Practice of income-tax" Eighth Edition reading as under:

"Waiver of notice-The earlier view of the Calcutta and Kerala High Courts was that the requirement of a valid notice, though a condition precedent to the validity of an assessment order section 147 could be waived. The Bombay, Gujarat, Assam and Allahabad High Courts-and the Calcutta and Kerala High Courts themselves in later cases-have taken the view that the requirement of a valid notice cannot be waived. It is submitted that the latter view is incorrect. The issue of a valid notice is a condition precedent to a valid assessment in exercise of the assessing officer's jurisdiction, but it has no bearing on the question of the assessing officer's inherent or fundamental jurisdiction. If the assessing officer makes an assessment under section 147 without issuing a valid notice under this section, he cannot be said to act without inherent or fundamental jurisdiction. His action would only amount to irregular exercise or assumption of jurisdiction and objection to such irregularity can always be waived."

(b) and various case laws viz :

(i) CIT v. Vimlaben (1979) 118 ITR 134 (Guj),

(ii) CIT v. Shilaben (1980) 124 ITR 420 (Guj),

(iii) CIT v. Premanand (1980) 124 ITR 772 (Guj) and

(iv) Smt. Lalita Todi & Ors. v. CIT (1980) 123 ITR 40 (Pat).

15.2. On a careful analysis of the said opinion, we find that it comes directly in conflict with the view expressed by the Hon'ble Allahabad High Court in the case of Banarasi Silk Palace v. CIT (1964) 52 ITR 220 (All), a case which has been listed at the footnote of p. 1216 itself. The relevant portion appears at p. 230 of the said report which reads as under :

"The language of section 34 makes it clear that the issue of notice as contemplated by section 34(1) is a jurisdictional step without which the further proceedings would be rendered null and void. It is not quite true to say that once a return has been filed no useful purpose would be served by the issue of a notice. Even if the object of a notice is to require the assessee to file a return and he has already filed one, it cannot be said that there is no further object to be served by a notice. A notice is required to be issued as a preliminary to a proceeding to assess under section 34(1) and the issue of it puts the assessee on guard by warning him that the proceeding is under section 34 and not under section 23. In certain circumstances a notice contemplated by section 34(1) cannot be issued by an Income Tax Officer at all and, if it cannot issue, no assessment order can be passed. If the requirement of a notice is dispensed with there would be nothing to prevent his passing an assessment order even in the absence of these circumstances (by the proviso to the provision only the issue of a notice is barred and not the passing of an assessment order). The Supreme Court has held that the issue of a notice is a condition precedent to the exercise of jurisdiction. Jurisdiction can be conferred only by a statute and not by consent or acquiescence. Since jurisdiction is conferred upon an Income Tax Officer to proceed under section 34(1) only if he issues a notice, an assessee cannot confer jurisdiction upon him by waiving the requirement of a notice because jurisdiction cannot be conferred by consent or acquiescence. In CIT v. Ramsukh Motilal, Chidambaram Chettiar v. CIT R.K. Das & Co. v. CIT and CIT v. Maharaja Pratap Singh it was held that the issue of a notice is a condition precedent to the exercise of jurisdiction under section 34(1) and that there can be no waiver of it. This view was affirmed by the Supreme Court in Narayana Chetty v. Income Tax Officer".

15.3. In view of the aforesaid, we are, unable to persuade ourselves to the proposition that irregularity in the notice does not affect the jurisdiction of the assessing officer to pass an order under section 158BC.

15.4. The other case laws are also not applicable here. It will be sufficient to mention here that the said case deal with issuance of notice under section 269D meant for acquisition of property. Not only the phraseology of the said section is different, the scope also of the said section is altogether different from section 148/158BC.

16. All these aspects, in any case are fully covered by various case laws as have been referred to in para 8.1 above and also the detailed discussions made by us in the judgment dated 30-6-1999, in the case of Monga Metals Pvt. Ltd. (supra) to which both of us were parties and we are unable to persuade ourselves to take a different view in the present case.

16.1. Therefore, our findings on this issue is that the notice dated 12-12-1996, claimed to be a notice under section 158BC (by the revenue) is bad in law and the assessment made in consequence upon the assumption of jurisdiction on the basis of such notice got vitiated at the very threshhold of it, as it fails to meet the requirement of a valid notice and for the detailed reasons as have been given by us in our order dated 30-6-1999, in the case of Monga Metals (P) Ltd. in ITA No. 1377(All) 1997 in paras 3.1 to 12.2 which apply mutatis mutandis to this case as well.

16.2. In view of the above discussion, so far as the present case is concerned, our conclusion is that :

(i) notice under section 158BC is not merely a procedural requirement but a condition precedent for assuming jurisdiction to pass block assessment order under Chapter XIV-B;

(ii) any infirmity/illegality in the notice under section 158BC, go to the very root of the assumption of jurisdiction to pass an order under section 158BC and thereby to the very validity of the assessment order itself;

(iii) in the case before us the notice dated 12-12-1996, is invalid and it does not meet the requirement of a valid notice; the grounds being as under :

(a) the notice has not been addressed to the principal officer as required under section 282(2) of the Act;

(b) status in which the return of the so-called undisclosed income was required to be furnished, has not been mentioned;

(c) otherwise also the notice is vague and from this notice it cannot even be inferred as to the "person" who has been required to file the return for the reason that the addressee mentioned in the said notice has been required on one hand to 'prepare a true and correct return of your total income' and at the same time to include in such income, 'the undisclosed income in respect of which "you" as individual/HUF/firm/company/Association of persons/BOI/local authority are assessable'.

(d) There is a blatant lack of application of mind, while issuing notice which is manifest by the narration given before the "block period" which makes a reference to the 10 years preceding the year of search, whereas the appellant company itself came into existence in the assessment year 1995-96;

(e) the notice is wholly deficient as it did not even contain the particulars of assessment year i.e. previous years relevant to the assessment years falling in the block period, which in a way the assessment year for the purpose of assessment of block period. On the contrary the notice merely indicates the definition of block period which could not be equated or held to be, specifying the specific previous year falling in the block period.

(iv) The assessment made in consequence upon the said notice is bad in law and void ab initio.

The assessment is, therefore, quashed as nullity and we rest at that. The assessing officer, if the law so permits may taken up the proceedings from the stage of the requirement of services of valid notice under section 158BC.

17.1. The counsel for the appellant next disputed the manner in which the search operations were actually carried out at the business premises of the appellant. His contention, in brief, was that as per the ground rules for carrying out search and other related matters (summary of which as extracted from the Commentary by Sri O.S. Bajpai appears at p. 53-57 of supplementary APBIII it was necessary for the authorised officers to call upon two respectable persons of the locality to attend and witness the search. Such persons should be independent persons who should remain present throughout the search. In the present case, according to the learned counsel for the appellant, the ground rules laid down by the Central Board of Direct Taxes and also sub- rule (6) of rule 112 which provides for attendance of witnesses have not been followed which was a serious irregularity committed by the search party. Explaining his stand further, the learned counsel submitted that on the basis of such an irregularity, he was not claiming the search itself to be illegal. What he aimed at by taking this plea is that a serious irregularity had been committed in the search operation which has gone to affect vitally the findings on various issues, particularly the stocks etc. found at the time of search for which specific ground had been taken by the appellant in this appeal.

17.2. Sri S. Chopra the Additional Standing Counsel seriously objected to this plea, mainly on the ground that after having withdrawn the ground relating to validity of search (Ground No. 3.2) the assessee is debarred from taking this plea and it should be treated to be of no consequence so far as the present appeal was concerned.

17.3. After hearing both the sides we are of the opinion' that the ground, irrespective of the merits thereof on which we reserve our comments at this stage, does not have any bearing on the validity of assessment and therefore, so far as the otherwise validity of the assessment as a whole is concerned the plea therefore, rejected at this stage.

18.1. The very validity of the assessment order as a whole has been challenged by the assessee's counsel on the basis of another ground that the order (that has been impugned before us) did not reflect independent exercise of mind by the assessing officer and while passing the said order he was guided rather influenced by the extraneous exercise that was being continuously carried on by the DDI wing, even after conclusion of search on 3-9-1996, itself. He placed before us the specific instances where statements were recorded by the Assistant Director of Income Tax after concluding the search operation, which are as under :

Sl No. Name of persons whose statements were recorded Date of statement (1) Sanjay Kumar Agarwal Director 15-10-1996 (2) Vinod Kumar Agarwal Director 17-10-1996 (3) Akil Ahmad Transporter 29-10-1996 (4) Mukhtar Abbas Transporter 6-11-1996 (5) Rajeev Rastogi Transporter 6-11-1996 (6) Devi Prasad Transporter 18-11-1996 (7) Ganga Sagar Bajpai Transporter 19-11-1996 (8) Hira Singh Transporter 20-11-1996 (9) Dulara.

Transporter 20-11-1996 (10) Satish Chandra Agnihotri Prop. Basi Ispat Trader 18.2. He invited our attention to various paragraphs also wherein the said statements have been referred to and relied upon by the assessing officer in drawing various inferences and conclusions. Reference was also made to the notice dated 23-7-1997, issued by the assessing officer (copy at p. 98 to 101 of APB) along with which statements of various persons as recorded by the Assistant Director of Income Tax, Kanpur were supplied to the assessee, with the following paraphrasing :

18.2. He invited our attention to various paragraphs also wherein the said statements have been referred to and relied upon by the assessing officer in drawing various inferences and conclusions. Reference was also made to the notice dated 23-7-1997, issued by the assessing officer (copy at p. 98 to 101 of APB) along with which statements of various persons as recorded by the Assistant Director of Income Tax, Kanpur were supplied to the assessee, with the following paraphrasing :

"I am also enclosing herewith the copy of the statement following persons from p. 25 to p. No. 38 of the Annexure, recorded by the Assistant Director of Income Tax in consequence of search operation.

Sl. No. Name of the persons with address (1) Sri Surendra Singh s/o Sardar Amar Singh r/o 120/903, Ranjit Nagar, Kanpur.

Sri Akil Ahmad s/o Sri Shakil Ahmad r/o 5/2, Labour Colony, Fahimabad, Kanpur.

Sri Mukhtar Abbas, s/o Sri Sahadat Ali 83/K-15, Param Purwa, Juhi, Kanpur (4) Sri Ram Bahadur s/o Sri Naku Lal Vill Katra, P.O. Bakewar, Allahabad.

Sri Vijai Singh,. s/o Sri Sukhdeo Singh Kabana Bindki, Fatehpur.

I propose to use this statement as evidence in this case and in case you have any objections to the same, it may be communicated alongwith the reply."

(Extract from notice dated 23-7-1997, documents appearing in its paper book 100) 18.3. Counsel further submitted that eventually in the impugned assessment order these statements have been extensively referred to and relied upon for making an addition of Rs. 77,34,961 in the assessment year 1997-98, on account of alleged suppression of production and sale. Such suppressed production and sale in the assessment year 1997-98 has been referred to by the assessing officer, while estimating the requirement of working capital also for the business alleged to have been done outside the books of account. Thus, the assessment has not been made, as a result of independent exercise of mind by the assessing officer, but is based on the instructions continuously given by the DDI Wing and, therefore, such an assessment was bad in law. In support of the said submissions, he referred to the decision of Hon'ble Supreme Court in the case of Sirpur Paper Mills Ltd. v. CWT (1970) 77 ITR 6 (SC), CIT v. S. P. Jain (1973) 87 ITR 370 (SC) and a number of other decisions as rendered by various Benches of the Tribunal in the specific context of search and seizure case including the order in the case of Monga Metals (P) Ltd. (supra) to which both of us were parties.

18.3. Counsel further submitted that eventually in the impugned assessment order these statements have been extensively referred to and relied upon for making an addition of Rs. 77,34,961 in the assessment year 1997-98, on account of alleged suppression of production and sale. Such suppressed production and sale in the assessment year 1997-98 has been referred to by the assessing officer, while estimating the requirement of working capital also for the business alleged to have been done outside the books of account. Thus, the assessment has not been made, as a result of independent exercise of mind by the assessing officer, but is based on the instructions continuously given by the DDI Wing and, therefore, such an assessment was bad in law. In support of the said submissions, he referred to the decision of Hon'ble Supreme Court in the case of Sirpur Paper Mills Ltd. v. CWT (1970) 77 ITR 6 (SC), CIT v. S. P. Jain (1973) 87 ITR 370 (SC) and a number of other decisions as rendered by various Benches of the Tribunal in the specific context of search and seizure case including the order in the case of Monga Metals (P) Ltd. (supra) to which both of us were parties.

18.4 On the other hand the Additional Standing Counsel vehemently opposed the said submissions. He pleaded that the hierarchy in the (P) DI Wing has got the powers to call for witnesses and examine them under various provisions as are contained in Part C of Chapter XIII of the Act, particularly those contained in section 131(1A). It was further argued that even if the authorised officer or the Assistant Director of Income Tax does not have jurisdiction of the assessing officer, he is not debarred from exercising the powers conferred on him under sub-section (1A) of section 131. As per the provisions of sub-section (8) the books of account and other documents seized during the course of search can be retained by the authorised officer for a period of 6 months and for such further period as may be approved by the Chief Commissioner/Commissioner, Director General or Director as the case may be. In this context it was further submitted by him that the provisions of sub-section (9A) of section 132 should be read with sub-section (8) and on an harmonious consideration of both the provisions, it should be held that even after carrying out search operation, the Assistant Director of income-tax continued to have jurisdiction in the present case to collect information through the process of law and make the same available to the assessing officer for the purpose of framing the assessment. No mala fide was involved nor any undue influence was exercised by the Assistant Director of Income Tax, over the assessing officer in this matter. What the Assistant Director of Income Tax did was merely to collect information for the assistance of the assessing officer and to hand over the same to the assessing officer. It was nowhere borne out from the records that the Assistant Director of Income Tax has ever dictated the assessing officer to pass the order in a particular manner and/or to make any particular addition.

The assessing officer was absolutely free to make use of the same in the manner he thought in his sole discretion. In the instant case it is manifest that the assessing officer had passed the order after his own application of mind and, in all fairness, after giving the assessee an opportunity to make submissions on the information collected by him from the Assistant Director of Income Tax Wing. In any case he emphatically pleaded that the effect of said statement was clearly discernible and limited to the addition of Rs. 77,34,961 for the assessment year 1997-98. There too the statements recorded by the Assistant Director of Income Tax has been used just to corroborate the findings as have been arrived at by the assessing officer independently after due appraisal of the seized material. Thus, in the present case the assessing officer cannot be said to have been influenced by any advice or 'dictate' of the DDI Wing, which could be said to be having any bearing on validity of the assessment order.

18.5. We have carefully considered the arguments put forth before us on behalf of the assessee as well as the revenue . We are unable to agree with the learned Additional Standing Counsel that even after carrying out search and seizure operation the authorised officers continue to have jurisdiction in the case of "person" who has been subjected to search and seizure operation and have therefore, the authority to call for the witnesses, examine them, record their statements and/or collect other information and pass on the same to the assessing officer having jurisdiction in the case, for passing block assessment order. The issue had already come up for consideration before us in the case of M/s Monga Metals (P) Ltd. and after in-depth analysis of various provisions we have held as under :

'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 :

"Search and seizure 132 (1) where the Director General or director or the Chief Commissioner or Commissioner or any such Joint Director or Joint 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 eight 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, 1922 (11 of 1922), or this Act in respect of the years for which the books of account or other documents are relevant are completed.

(9) ............

(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 :

(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 sub-section (1) of section 132;

(ii) In view of the provisions of sub-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 authorization 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 to has jurisdiction exercise in view of provisions of sub-sections (8) and (9) are to be exercised by the Income Tax Officer.

27.2. The reference to the jurisdiction over the periods in sub-section (9A) is in relation to the jurisdiction to frame the assessment because of the reference for handing over the seized material, is to be 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 be exercised in view of provisions of sub-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 (9A) 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 cases 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 period searched.

28.1. The 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 authorized 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 now 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 provisions 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 (ACIT) 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 Assistant Director of Income Tax on 8-11-1996, lends 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 or the statement recorded cannot be made the basis of the assessment 18.6. Now comes the issue as to what is the effect of the statements recorded by the Assistant Director of Income Tax, after conclusion of search on 3-9-1990, which have undisputedly been used by the assessing officer while framing the assessment order. Specific references to the said statements are found at pp. 23.24, 29 and 33 of the assessment order (references to the pages are to the typed copy of the assessment order as appearing at pp. 1 to 46 of the documents appearing in its paper book) and we find that the said statements have largely gone to influence and affect the decision of the assessing officer in the matter of addition of Rs. 77,34,961 as has been made by him on account of alleged suppression of production in the months of April, 1996 to 3-9-1996 (date of search), and remotely on the addition of Rs. 25 lakhs as has been made on the account of requirement of working capital for the business alleged to have been done by the assessee, outside the books of account. The effect of the material referred to above is severable and limited to the addition of Rs. 77,34,961 only and cannot be said to have permeated on the assessment order as a whole. To this extent we agree with the Additional Standing Counsel and accordingly we hold that the addition of Rs. 77,34,961 cannot be said to have been validly made. However, these directions of ours are subservient to the findings given by us earlier that the assessment order as a whole stood vitiated because of illegality/infirmity in the notice under section 158BC. In pursuance of which we have already quashed the assessment order.

18.6. Now comes the issue as to what is the effect of the statements recorded by the Assistant Director of Income Tax, after conclusion of search on 3-9-1990, which have undisputedly been used by the assessing officer while framing the assessment order. Specific references to the said statements are found at pp. 23.24, 29 and 33 of the assessment order (references to the pages are to the typed copy of the assessment order as appearing at pp. 1 to 46 of the documents appearing in its paper book) and we find that the said statements have largely gone to influence and affect the decision of the assessing officer in the matter of addition of Rs. 77,34,961 as has been made by him on account of alleged suppression of production in the months of April, 1996 to 3-9-1996 (date of search), and remotely on the addition of Rs. 25 lakhs as has been made on the account of requirement of working capital for the business alleged to have been done by the assessee, outside the books of account. The effect of the material referred to above is severable and limited to the addition of Rs. 77,34,961 only and cannot be said to have permeated on the assessment order as a whole. To this extent we agree with the Additional Standing Counsel and accordingly we hold that the addition of Rs. 77,34,961 cannot be said to have been validly made. However, these directions of ours are subservient to the findings given by us earlier that the assessment order as a whole stood vitiated because of illegality/infirmity in the notice under section 158BC. In pursuance of which we have already quashed the assessment order.

19. Although we have already quashed the block assessment order dated 30-9-1997, on various legal grounds as have been referred to above, we think it expedient and in the interest of justice to deal with other grounds also which have been taken by the appellant on various items of addition as are comprised in the computation of undisclosed income of Rs. 2,37,56,400.

Ground No. 41-Addition of Rs. 6,21,593 for assessment year 1996-97.

Facts 20.1. During the course of search, certain loose papers were found which had been marked as parcha Nos. 21, 22, 23, 27, 36, 37 and 38 to Annexure LP-2 from the residential premises 128/119 K Block, Kidwai Nagar, Kanpur owned by Smt. Shakuntala Devi Agarwal mother of the three directors and Smt. Neeru Agarwal and Smt. Vimmi Agarwal, wives of Sri Vijay Kumar Agarwal and Sri Vinod Kumar Agarwal (directors of the company) respectively and the residents of the directors. These papers have been placed at pp. 1 to 7 of DPB and have been referred to on pp. 14 and 15 of the assessment order (Reference to page numbers is from the typed copy of the assessment order at pp. 1 to 46 of APB), in the following manner :

20.1. During the course of search, certain loose papers were found which had been marked as parcha Nos. 21, 22, 23, 27, 36, 37 and 38 to Annexure LP-2 from the residential premises 128/119 K Block, Kidwai Nagar, Kanpur owned by Smt. Shakuntala Devi Agarwal mother of the three directors and Smt. Neeru Agarwal and Smt. Vimmi Agarwal, wives of Sri Vijay Kumar Agarwal and Sri Vinod Kumar Agarwal (directors of the company) respectively and the residents of the directors. These papers have been placed at pp. 1 to 7 of DPB and have been referred to on pp. 14 and 15 of the assessment order (Reference to page numbers is from the typed copy of the assessment order at pp. 1 to 46 of APB), in the following manner :

"(A) Assessment yr. 1996-97 Unaccounted sale of C.T.D. bar during the period relevant to assessment year 1996-97 has been found in seized document LP-2. From page Nos. 21 to 23 of this Annexure, details of C.T.D. bars are given from 24-11-1995, to 11-3-1996. On all these 3 pages and on their back, total sale of 571.025 MT for 70,31,537 is recorded. Further on page No. 27 of this seized record, receipt of amount in cash has been shown. These amounts are in lacs. Total receipt of 43 lacs have been shown on this paper. These receipts appear to be against the above mentioned unaccounted sale of C.T.D. bars, On page Nos. 36 to 38 of this Annexure again details of unaccounted sale of C.T.D. bars in November and December, 1995, has been given. These sales have already been found recorded from page Nos. 21 to 23 as discussed above. On top of page No. 36 V.V.S. is written clearly showing that these sales belonged to M/s V.V.S. Alloys Ltd, Sales on this page are recorded from 10-11-1995, to 20-11-1995, totalling to the weight of 106.75 for 13,01,920. 95. This very sale of C.T.D. bars are recorded on the back of page No. 23. For this sale receipt of amount on different dates from 12-11-1995 to 27-11-1995, are recorded on lower side of page No. 36 totalling to Rs. 13,25,000.

On page No. 37 also V.V.S. is written very clearly on top showing that the sales recorded on this page belongs to M/s V.V.S. Alloys Ltd. Sale on this page are recorded from 13-12-1995 to 18-12-1995 totalling to Rs. 77.245 M.T. for Rs. 9,32,800. Those very sale receipt of Rs. 7 lacs in shown on 23-12-1995. Receipt of this particular cash amount is also available at first entry on page No. 27 wherein 700.00 is written on 23.12 and total receipts available on this page is 43.00. Taking into account page Nos. 37 and 27 it can be very wen said that all the figures in page No. 27 are in lakhs and details or receipt of 43 lakhs are available on page No. 27 against the sale of C.T.D. bars during December, 1995 to March, 1996.

On page No. 38 details of sale of C.T.D. bars of M/s V.V.S. Alloys Ltd. are available from 5-11-1995 to 3-12-1995, totalling to 47.59 MT for 5,72,490. On the top of this page also V.V.S. in written very clearly. Details given on this page is exactly telling net details of sale and receipt of amount given on page No. 23. On the back of this page receipt of 6,54,076 is shown.

Taking into account page Nos. 21 to 23 and page Nos. 36 to 38, it is very clear that total unaccounted sales of C.T.D. bars made by M/s V.V.S. Alloys Ltd., during the period November, 1995 to March, 1996, is found to the extent of 571.025 MT for Rs. 70,31,537 because this sales have been found recorded in the regular books of account of the assessee- company. Against this sale details of receipt of 62,79,072 are available on page Nos. 23,27,36 and back of 38. "

20.2. On the basis of the said loose papers the assessing officer worked out the sales from November, 1995 to March, 1996, at Rs. 70,31,537 and receipts against such sales at Rs. 62,79,072. Further as per the working given in the assessment order (APB 41 to 43) the quantum of addition was worked out in the following manner:

G.P.

13.8 per cent on undisclosed sales of Rs. 70,31,537 Less:

Deduction for expenses (on proportionate basis)

(i) Stores 1,93,458 9,70,352

(ii) Misc. exps.

27,000

(iii) Salary 1,28,301 3,48,759 Net Profit worked out 6,21,593 The assessee's reply with reference to the said loose papers is at p. 179 of documents appearing in its paper book. Reliance was also placed on the assessment order in the case of Vandana Steels Limited (which were subjected to search-APB 188 to 192, in the matter of application of GP/NP rate. As per the assessee, the calculation of GP has been given in p. 196 to documents appearing in its book.

21.1 The learned counsel for the appellant vehementally opposed the conclusion drawn by the learned assessing officer. It was contended that the said loose papers (found from the resident of the directors) had nothing to do with the business of the appellant. No presumption could be drawn against the appellant company as the said papers were not found from the business premises of the appellant. The name of V.V.S. as found mentioned on some loose papers merely refers to the names of 3 directors, Viz. Shri Vijai Kumar Agarwal, Shri Vinod Kumar Agarwal and Shri Sanjai Kumar Agarwal. The said papers remained wholly uncorroborated. The appellant company had already disclosed much more sales during this period and there was no material to show that the said papers revealed at the first instance any sales made outside the books of account and in second instance that such sales are not covered by the sales recorded in the regular books of account of the appellant. He also referred to the explanation dated 22-9-1997, which is reproduced herein below :

(1) That there was no undisclosed production of its sales and as such there is no question of estimating the sales and any working of the undisclosed income as prepared in your letter, dated 3-9-1997.

(2) That for the assessment year 1996-97 you have proposed an addition of Rs. 17,57,884 as gross profit adopted @ 25 per cent on the alleged sale's of Rs. 70,31,537 outside books of accounts. For this purpose, you have referred pp. 21, 23 and pp. 36 to 38 of Annexure LP-2. In these papers there are some rough notings and they do not give any indication about sales of goods outside our books by our factory. Without prejudice the sales of goods outside books of accounts will require the sales of goods outside book of accounts will require the availability of raw material and other things and unless such raw material is available, there cannot be any extra production of goods which could be sold. There is no such evidence or material and as such only on the basis of some rough notings it is not justified to adopt the figures of turnover as mentioned in your letter. Without prejudice, the working of profit of Rs. 17,57,884 is also not based on any evidence of material prejudice, the working profit of Rs. 17,57,884 is also not based on any evidence or material and unless the income is reflected from such notings, no such income can be assessed as undisclosed income in the block assessment proceedings.

For various reasons there can be no income or even losses may happen. There is also no indication about the investment in any assets out of the undisclosed income because no unexplained investment or any assets was found. We have already explained about the incorrect inventory prepared at the time of search. In our previous letters as well as in the detailed letter which is enclosed herewith separately.

Without prejudice, it is also not known as to how the G.P. rate of 25 per cent has been worked out on sales because in similar case, G.P. rate of 2.6 per cent has been adopted in the case of M/s Vandana Steels (P) Ltd. in their search assessment for assessment year 1995-96. A copy of their assessment order is enclosed herewith. No addition is therefore, justified. Without prejudice the addition proposed is high, arbitrary and without any basis.

21.2. Alternatively, it was submitted that according to the observations made by the assessing officer himself as against the sale figures of Rs. 70,31,537 between the period commencing from November, 1995 to March, 1996 (covered by the said loose papers) the realisation was only Rs. 62,79,072 which meant that there was an overall loss of Rs. 7,52,465 (Rs. 70,31,537-Rs. 62,79,072). Therefore, if seized material referred to by the assessing officer is presumed to be the record of unaccounted sales, there was no undisclosed income as the said very papers revealed a loss of Rs. 7,52,465 in the alleged transaction of sale.

21.3 Without prejudice to all these submissions yet another plea was taken by the learned counsel for the appellant. As per the discussions appearing on pp. 41 to 43 (assessment order typed copy of which appears in the documents appearing in its paper book), the net profit rate of 13.8 per cent has been applied, subject to certain deductions, to arrive at undisclosed income or Rs. 6,21,593. The G.P., rate of 13.8 per cent was, in term, said to be on the profit rate disclosed by the assessee as per regular books of account for the assessment year 1996-97. It was submitted that the account of the assessment year 1996-97 nowhere disclosed such G.P. rate. He specifically invited our attention to p. 196 of APB wherein calculation of G.P. rate which excise duty and without excise duty have been given, which worked out to 1.70 per cent and 1.91 per cent respectively. On this basis it was pleaded that the application of 13.8 per cent was based on fallacious grounds. A reference was also made to assessment order passed by the Deputy Commissioner (now Joint Commissioner) (Asst.), Special Range, Kanpur in the case of M/s Vandana Steel (P) Ltd. for the assessment year 1995-96, copy of which appears at pp. 188 to 195 of APB. It was a case of manufacturer of ingots and the assessee was subjected to search operation also. The G.P. rate applied in that case was 2.66 per cent only. According to the learned counsel it was a matter of common knowledge that in the manufacture and sale of CTD bars, the G.P. rate is much lower and in any case the assessee itself has shown a G.P. rate of 1.91 per cent after excluding the element of excise duty and such G.P. rate was accepted also in the regular assessment made under section 143(3) by the same assessing officer (who had passed the block assessment order in the case of the appellant) on 15-3-1999, copy appearing at pp. 283 to 284 of the paper book. With reference to all these material it was pleaded that in case the loose papers referred to above are treated to be the record of any undisclosed sale, then undisclosed income should be worked out with reference to the G.P. rate of 1.91 per cent subject to deduction on account of other overheads which go to affect earning of taxable income.

21.4 On the request of Sri S. Chopra, Sri Pratap Singh Deputy Commissioner, Central Circle-2, Kanpur presently having the charge of the assessing officer in the case of the appellant was permitted to make submissions on behalf of the department, to which Sri Garg readily conveyed his no objection. He referred to the department's paper book pp. 1 to 7 which are photostat copies of loose papers numbered as 21, 22, 23, 27, 36, 37 and 32 of Annexure LP/2 to the Panchnama and submitted that the entries appearing in the said loose parchas go to show that these are nothing but the records of sales made by the appellant company. As such sales are not verifiable from the regular books of account, the same had rightly been treated to be the unaccounted sales outside the books of account. As regards ownership over the said loose papers, Sri Pratap Singh took pain to point out that most of the loose papers were superscribed with "V.V.S." which is the name of the company. The said loose papers cannot be said to be related to any individual business of the directors as any information about the independent business activities of the. three directors in this very line of business was neither available in their respective income-tax records nor found during the course of search.

21.5. As regards alternate claim of the appellant that the said loose papers did not go to show that the appellant had earned any income in the transaction recorded therein but there was a loss on account of short realization, Sri Pratap Singh submitted that there was no question of any loss particularly when the corresponding business as recorded in regular books of account showed a profit. It was possible that complete records of loose papers might not have become available to the search party at the time of search, on account of which full particulars about cash realisation against sales were not available.

21.6 As far as computation of income in the said business was concerned, initially he stoutly defended the working made by the assessing officer. Later he submitted that even if there was some incorrect observation in the assessment order about the G.P. rate disclosed by the assessee in its regular books of account, yet the rate of profit applied by the assessing officer (for the purpose of computation of undisclosed income) cannot be said to be excessive or unreasonable. To a query put by us about the appellant's contention that the G.P. rate disclosed in the books of account worked out to 1.91 per cent only (as per the working given at p. 196 of APB) he did not offer any comment.

22.1. We have carefully considered the rival submissions. We are not convinced by the appellant's outright denial about the ownership of the said loose papers. As has been pointed out by Sri Pratap Singh the present assessing officer in this case, most of the parchas bear the name 'V.V.S.' which can be nothing but the name of the appellant company itself. This is more so for the reason that none of the three directors of the company came forward to own these papers nor any information about their individual business in this field is available either in the income-tax records or found during the course of search. It is also evident from the narration appearing in the said loose paper that they contained record of sale which could not become verifiable from the assessment records of the appellant company.

22.2. Now the question remains is as to whether on the basis of said loose papers any "undisclosed income" is addable in the block assessment of the appellant. It has been found by the assessing officer himself, on the basis of the said loose papers that against the sale of Rs. 70,31,537 during the period from November, 1995 to March, 1996, the receipts were only Rs. 62,79,072 which shows a shortfall of Rs. 7,52,465. No information is available which could go to show that the shortfall is represented by sundry debtors. No such information was available in the seized material, nor the assessing officer himself has been able to collect any information in this regard. At least nothing has been brought on record, nor shown to us.

22.3. Now the question remains is as to whether on the basis of said loose papers any "undisclosed income" is addable in the block assessment of the appellant. It has been found by the assessing officer himself, on the basis of the said loose papers that against the sale of Rs. 70,31,537 during the period from November, 1995 to March, 1996, the receipts were only Rs. 62,79,072 which shows a shortfall of Rs. 7,52,465. No information is available which could go to show that the shortfall is represented by sundry debtors. No such information was available in the seized material, nor the assessing officer himself has been able to collect any information in this regard. At least nothing has been brought on record, nor shown to us. Considering the definition of the term undisclosed income, as given in Chapter XIV-B which is reproduced hereunder for the sake of ready reference.

"(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 is 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 purposes of this Act."

It can easily be said that no income arises out of these transactions but it is not the case because the transaction having been recorded in the documents found during the search, the income is covered by the definition of undisclosed income. Consequently it is not correct to say that no undisclosed income can be found on the basis of these documents. Coming to the quantum of undisclosed income, we are of the opinion that so far as the question of undisclosed investment is concerned, there is no evidence on this account and, therefore, we are unable to sustain any involvement of undisclosed income. However coming to the profit, we, in view of the facts and circumstances of the case are of the opinion that if there can be any undisclosed income on this account, it could, as we have held in the case of M/s Monga Metals Ltd. (supra), and at the most equal to 5 per cent of the sale. On the basis of principle adopted in the M/s Monga Metals Ltd., we direct the assessing officer to compute the undisclosed income on this account at the net rate of 5 per cent of the turnover of Rs. 70,31,537. These directions are subject to the assessment if being held valid at any later stage.

Ground No. 4.2 (1) Undisclosed business income of Rs. 77,34,961 for the assessment year. 1997-98.

23.1. At this stage itself it will be very appropriate to deal with this ground also as the same is connected with the addition of Rs. 6,21,593 as had been made in the assessment year 1996-97 which has been discussed by us in the foregoing paragraphs.

23.2. So far as the facts are concerned, as revealed from the record, during the course of search and as per the narration appearing at p. 16 (APB) of the assessment order, some diaries, etc. were found from the residence of the directors of the company which were taken to be containing the details of loading of CTD bars (saria), not found recorded in the books of account. On that basis undisclosed turn over was worked out at Rs. 7,36,44.274 and income in relation to such undisclosed turnover was worked out at Rs. 77,34,961. Detailed working of the turnover as also the element of income therein, as culled out from the discussion appearing on pp. 16 to 39 of the assessment order (APB) are given hereunder :

(A) Quantity of turnover and value thereof Month Qty in MT Value Remarks Detailed working at APB April, 1996 2,883.519 3,31,60,466 Rate 11,500/MT Pages 26 to 30 (working at p. 30 based on assumption) May, 1996 2,722.906 3,26.74,872 Rate 12,000/MT Pages 16 to 26 (2891,26 (-) as per books 168.354) working at p. 25 June & July, 1996 411.440 57.04,187 Pages 30 & 31 Aug., 1996 & till date of search 144.470 20,94,815 As found on pp. 50 & 51 of LP/2 rate 14,500/MT Pages 31 to 34 6,162.335 MT 7,36,34,340 mentioned as 7,36,46,274 (B) Computation of profit

(i) Undisclosed turnover worked out at Rs. 7,36,44,274

(ii) G.P. rate-Purchase and sale of material -variation 15.73%

(iii) Gross Profit @ 15.73 Rs. 1, 15,84,244 Less : Deduction for following expenses By applying factor at 2.98% (correct factor comes to) (1) Stores = 21,35,211 (2) Misc. exp.

= 2,98,000 (3) Salary = 14,16,072 38,49,283 Extra income 77,34,961 23.3. Sri Garg, at the very outset submitted that the addition in question stood wholly vitiated as the same has been made under the influence and guidance of the DDI Wing. He referred to the particulars of various statements recorded by the Assistant Director of income-tax even after conclusion of search and reliance placed by the assessing officer on such statement (in para 18.1 of this order we have already extracted the relevant particulars in this regard). Then he took us to the seized material vis-a-vis the inference drawn by the assessing officer, which was in the following terms.

23.3. Sri Garg, at the very outset submitted that the addition in question stood wholly vitiated as the same has been made under the influence and guidance of the DDI Wing. He referred to the particulars of various statements recorded by the Assistant Director of income-tax even after conclusion of search and reliance placed by the assessing officer on such statement (in para 18.1 of this order we have already extracted the relevant particulars in this regard). Then he took us to the seized material vis-a-vis the inference drawn by the assessing officer, which was in the following terms.

April, 1996 24.1. As could be readily seen from the discussion appearing on pp. 26 to 30 (APB) the assessing officer held that p. 32 of LP6 (department in its paper book) contained the details of production to the tune of 3700 MT outside the books of account and p. 31 of LP6 (department in its paper book 30) contained the details of loading outside the books of account to the extent of 752.61 MT and after taking the said figure as base, he worked out the undisclosed sale for the month of April, 1996, in the following manner 24.1. As could be readily seen from the discussion appearing on pp. 26 to 30 (APB) the assessing officer held that p. 32 of LP6 (department in its paper book) contained the details of production to the tune of 3700 MT outside the books of account and p. 31 of LP6 (department in its paper book 30) contained the details of loading outside the books of account to the extent of 752.61 MT and after taking the said figure as base, he worked out the undisclosed sale for the month of April, 1996, in the following manner "G.P. As per RG-1 Production of April, 1996-409.16 + 3,700-4109.16 Less :

Accounted sale of April, 1996 (4,109.16-236.725) 3,872.435 Add:

Production of May, 1996 (3,872.435 + 2,891) 6,763.435 Less :

Accounted sale and unaccounted sale of May, 1996 6,763.435-(426.96 + 2,722.906) 3,613.580 Less :

closing stock of May, 1996 (3,613,589-730.070) 2,883.519 Undisclosed sale of April, 1996 2,883.519"

It was submitted that the loose paper 32 could not have been taken to be the production of the appellant company for the month of April, 1996. In the explanation dated 22-9-1997, submitted by the assessing officer it was clearly stated that the said paper did not belong to the assessee nor its factory had the capacity to carry out so much of manufacturing. The details of electricity consumption were also referred to in support of the contention that the company did not carry out the said manufacturing. As regards p. No. 31 of LP6, it has wrongly been taken to be containing loading details of 752.61 MT of CTD bars said to have been despatched outside the books of account. Sri Garg took pains to show that the quantities mentioned against various truck numbers is as little as .020 MT which cannot be the figure of loading for the purpose of despatches and sales outside the books of account. Very rarely, the figures mentioned in the said loose papers marked the quantity of the full truck. In fact the company had a very big campus within which handling of goods takes place very often for the sake of proper stacking, etc. The said loose papers could not have been treated to be a material to support the conclusion that

(a) the assessee- company suppressed its production;

(b) such production had even been sold also outside the books of account : and

(c) a part of such sales outside the books of account were reflected in the loose parcha No. 31 (said to containing the loading details of 752.61 MT of saria).

May, 1996 24.2. During the course of search some diaries were found which are stated to contain the details of loading done by the appellant company in the month of May, 1996, and on that basis it was held that the loading to the extent of 2,722.906 MT, as per working given below:

24.2. During the course of search some diaries were found which are stated to contain the details of loading done by the appellant company in the month of May, 1996, and on that basis it was held that the loading to the extent of 2,722.906 MT, as per working given below:

Reference of Seized Documents Name of contractor Total Quantity loaded (MT) Quantity recorded in regular sale invoices (MT) Balance sale outside the books LP-12 (pp. 6 to 22) Bhagat 958.75 55.81 903.565 LP- 12(pp. 41 to P58) Raju Singh 732.555 17.25 715.305 LP. 12 (P25 to P35) Amrit Lal 418.175 30,609 387.566 (Loading done by purchaser contractor) LP 12(p.62 to p. 69) Chotteylal (loading done by purchaser contractor) 139.815 10.855 128,96 LP-13(p. 42) Ambika (loading done by purchaser contractor) 641.84 54.33 587.51 2,891.26 168.354 2,722.906 (extracted from page 25 of APB-typed copy of the assessment order) represented unaccounted sales having been effected by the appellant during the month of May, 1996. By applying an average rate of Rs. 12,000 per MT, the sales figures have been quantified at Rs. 3,26,74,872. It has been further observed. in the aforesaid page of the assessment order itself that the loading figures of 2,891.26 MT was found to be tallying with the production details recorded in a seized document market as p. No. 41 of LP-6 (copy available at p. 39 of department in its paper book ).

25.1. In the light of above facts the assessee's counsel submitted that in response to the notice dated 23-7-1997, and subsequent notice dated 3-9-1997, the assessee filed explanation dated 22-9-1997, in which it was contended that the diaries (referred to at p. 25 of the assessment order documents appearing in its paper book, which has been reproduced by us in para 24.2 above) did not belong to the appellant. The same belonged to different persons who are carrying out various jobs like loading, twisting, shifting, bundling, etc. in various factories in the region. For preparing the bills for the job work carried out by them for different principals, they had been taking assistance of Sri S.D. Verma, an employee of the company and it was for this reason that the said diaries were found at the premises of the appellant during the course of search operation. It was also submitted that the appellant did not have the capacity to produce this much of CTD bars (saria). As regards the loose paper No. 41 of LP-6, it was claimed to be belonging to Sri Jabbar Singh contractor who had been carrying out the job of twisting of CTD. bars (saria) on piece meal basis at different places. He had brought the said paper to show to the directors of the appellant company, his performance elsewhere. In support of this contention the appellant filed an affidavit from Sri S.D. Verma, copy appearing at p. 183 of the APB and also an affidavit from Sri Jabbar Singh. Sri Jabbar Singh was produced before the assessing officer on 25-9-1997, when his statement was also recorded (copy at p. 317 of APB). In his statement he clearly stated that the seized papers (41 of LP-6) did not belong to the appellant company but it belonged to some other rolling mill. The said paper contains the details of twisting done by him for some other mills and it had been taken by him to Sri Sanjay Agarwal (one of the directors of the company) to convince him about his capacity to handle the job. It was emphasised by Sri Garg that the conclusion drawn by the assessing officer about the production of 2,891.26 MT was wholly unfounded and inconsistent with the material seized during the course of search operation.

25.2. Further submitted that notwithstanding his objection to the assessing officer holding that there was unaccounted for loading of 2,722.906 MT (which has been equated to the sales outside the books of account) in the month of May, 1996, Sri Garg submitted that the assessing officer went wholly wrong in treating all the diaries (copies appearing at pp. 44 to 97 of department in its paper book) to be containing the details of loading. Except pp. 6 to 22 of LP-12 which belonged to Sri Bhagat and contained the details of 958.875 MT, rest of the diaries contained the details of other job works not related to production as such, like twisting, shifting, bundling, etc. 25.2. Further submitted that notwithstanding his objection to the assessing officer holding that there was unaccounted for loading of 2,722.906 MT (which has been equated to the sales outside the books of account) in the month of May, 1996, Sri Garg submitted that the assessing officer went wholly wrong in treating all the diaries (copies appearing at pp. 44 to 97 of department in its paper book) to be containing the details of loading. Except pp. 6 to 22 of LP-12 which belonged to Sri Bhagat and contained the details of 958.875 MT, rest of the diaries contained the details of other job works not related to production as such, like twisting, shifting, bundling, etc. In this regard he referred to the following explanation as contained in letter dated 22-9-1997 :

"Without prejudice to our above submission, it will be seen from Annexure-12 that as per diary of Sri Bhagat, there is loading of 958.875 MT and the diaries of other persons indicate the other connected work like twisting, bundling and shifting which are done prior to its loading and if any figure of production or turnover is assumed the same can be only on the basis of work of loading and not for the other work.

(documents appearing in its paper books 181) 25.3. It was further submitted by the learned counsel for the appellant that the evidence about the said contention was available in the seized records itself as could be seen from p. 34 (both sides of LP-6 copy appearing at p. 32-both sides of documents appearing in its paper books), which contains the details of payments to various contractors, namely Sarvashri Bhagat, Raju Singh, Amrit Lal, Chottey Lal & Ambika (names are verifiable from the table appearing at page of the assessment order reproduced by us in para 24.2 above) for facility of ready reference the relevant portion of such pages are reproduced hereunder :

25.3. It was further submitted by the learned counsel for the appellant that the evidence about the said contention was available in the seized records itself as could be seen from p. 34 (both sides of LP-6 copy appearing at p. 32-both sides of documents appearing in its paper books), which contains the details of payments to various contractors, namely Sarvashri Bhagat, Raju Singh, Amrit Lal, Chottey Lal & Ambika (names are verifiable from the table appearing at page of the assessment order reproduced by us in para 24.2 above) for facility of ready reference the relevant portion of such pages are reproduced hereunder :

"Payment of Contt. May, 1996 Chotey Lal S. No. M/C 139.815 MT @ 5,173 Shifting 102 MT @ 10 105 39 Lab. @ 35 1,365 6,643 10 lab. camping @ 38 6,643 350 6,293 Ambika Contt. 578.910 MT @ 37 23,395 632.285 Ad.

19,000 6 Lab. @ 35 4,395 210 4,785 Mukesh Twisting 96.860 MT @ 37 3,583 Shifting 3 MT @ 10 30 7 Lamp 7D/work 35 245 Cylinder loading unloading 50 3,908 AD 2,000 1,908 Bhura Contt. Challa 12.372 MT @ 400 4,948 Tak Lab Balance 490 Milling 4 days 28/5 to 31.5 1,000 6,438 Bhagat-Loading 958.875 MT @ 25 23,972 Shifting 158.900 @ 10 1,589 Cement loading unloading 116 DCM in load 50 25,727 11,000 14,727"

25.4. From the said papers it was evident that only in the case of Sri Bhagat loading has been mentioned for which payment had been made at the rate of Rs. 25 per MT. In no other case loading has been mentioned. Then in the case of Mukesh where twisting is mentioned for which payment had been made at the rate of 37 per MT. The same rate has been mentioned in the case of Chotey Lal, Ambika and Amrit Lal also. All these narration go to show that the diaries seized during the course of search (copies at p. 44 to 97 of departments in its paper books) did not contain the details of loading done during the month, but, other activities also which have nothing to do with production of saria and loading thereof. Only the diary of Bhagat the loader could be said to be relevant for the purposes of findings out the figures of loading and on that basis, the same worked out to 958.875 MT only.

June and July, 1996 25.5. For these two months, the assessing officer has estimated the unaccounted sales at Rs. 57,04,187 by referring to the loose parchas No. 46 to 51 of LP- 12 (copy appearing at pp. 8 to 13 of department in its paper books). The inference about unaccounted sale to the tune of Rs. 57.04 lakhs has been drawn in the following manner :

25.5. For these two months, the assessing officer has estimated the unaccounted sales at Rs. 57,04,187 by referring to the loose parchas No. 46 to 51 of LP- 12 (copy appearing at pp. 8 to 13 of department in its paper books). The inference about unaccounted sale to the tune of Rs. 57.04 lakhs has been drawn in the following manner :

Details of unaccounted sales made in the months of June and July, 1996, have been found from page Nos. 46 to 61 of LP-2. On page no. 51 total quantitative details of sale of CTD bars (saria) on different dates of June, 1996 are given and total sale value is calculated to Rs. 26,53,905. On page no. 50, sale of CTD bars (saria) on different dates of July, 1996, are given and total sale value is calculated to Rs. 30,50,137. After adding both the sale amount total is coming to Rs. 57,04,042, on page no. 53 it has been shown that out of sale amount of Rs. 57,04,042, amount of Rs. 44,44,623 has been received in cash and balance Rs. 12,59,417 is shown as amount to be received. On pp. 46 and 47 full details of amount of Rs. 44,44,000 received from different persons are given. Taking into consideration the page nos. 46,47,50 and 51 of LP-2, it has been found that total sale of CTD bars (saria) carried cum in the month of June and July, 1996, is of Rs. 57,04,042. Necessary verification from the books of account of the assessee- company was made to verify the above sale, however, these sales were not found recorded in the books of account. Therefore, the sale amount of Rs. 57,04,042 found on these seized papers are treated as unaccounted sales of the assessee- company.

25.6. The learned counsel submitted that the writings on the said loose parches could not have been treated to be the unaccounted sales of the appellant. There was no corroborative evidence which could go to show that the appellant carried out any such production, as for carrying out such production there is a requirement of raw material and other inputs. No materials was found even during the course of extensive search which could even remotely suggest that the appellant company had made any purchase of raw material and other inputs which remained unrecorded in the books of account and which could provide for the source of extra production (and sales thereof).

25.7. For this period also the unaccounted sale has been worked out at Rs. 20,94,815 based on loose papers No. 50 and 51 of LP-2 (copy at pp. 12 and 13 of DPB) which had been taken as basis for working out the unaccounted sale for June and July, 1996.

25.8. Submissions similar to the foregoing one have been made by the learned counsel for this estimate also. A reference was made to the explanation dated 22-9-1997, which is reproduced hereunder :

"The papers considered for the month of June to the date of search are the rough notings and they do not suggest production of sales as mentioned in the Annexure 'B'. As stated earlier for any production there must be raw material and extra expenses to be incurred for such production. Page no. 1 of Annexure A-8 relates to noting of labour payment and p. 5 of this Annexure is the nothing of stock taking in weight in the month of August."

25.9. Apart from disputing the inference drawn by the assessing officer about the unaccounted sale having been made by the appellant company during the period commencing from April, 1996 to the date of search i.e., 3-9-1996, and quantum thereof, the learned counsel for the appellant vehemently opposed the computation of undisclosed income at Rs. 77,34,961 as per the working given on pp. 34 and 35 (documents in its paper book) of the assessment order, has been extracted by us in para 23.1 above. It was submitted that the regular books of account did not disclose the gross profit rate of 15.73 per cent and the computation of undisclosed income taking said GP rate as base is wholly erroneous. The assessee's past record itself shows a GP rate of 1.91 per cent (working at p. 196 of APB). On this basis it was urged that the addition made by the assessing officer is wholly arbitrary and excessive.

25.10. On behalf of the revenue , Sri S. Chopra defended the conclusions drawn by the assessing officer in the matter of computing the unaccounted sale at Rs. 7,56,44,274 during the period commencing from April, 1996 to 3-9-1996. He forcefully pleaded that the quantum of turnover has been worked out by applying the selling rate to the quantities of sales as had been found recorded in the diaries of the contractors as had been found and seized during the course of search operation from the position and control of the directors of the company (copies appearing at pp. 44 to 97 of DPB). Quantities mentioned in seized dairies (page 44 to 97 of DPB) details stood fully corroborate from the seized material in the form of date wise statement prepared by Jabbar Singh which too was found during the course of search, marked as paper nos. 32 and 41 of Annexure LP-6 has been referred to by the assessing officer in the assessment order. The statement of Jabbar Singh does not inspire confidence as no reason whatsoever, much less a valid reason, could be given by him in his statement, about the recovery of the said statement from the possession of directors of the company. To a pointed question made by the assessing officer (who recorded the statement of Sri Jabbar Singh) as to whom the said statement belonged, he could not even tell the name of the concerned rolling mill. Loading contractors to whom the diaries have been stated to be belonging, were not even produced till as late as 22-9-1999, Sri S.D. Verma and employee of the company, who had verified these diaries was not produced for examination.

25.11 Similarly for the month of April, 1996, although loading details showing unrecorded despatches found during the course of search were incomplete, yet from the working given by the assessing officer at p. 30 documents in its paper books of the assessment order the conclusion of the unaccounted sale gets confirmed. As regards the remaining months starting from June, 1996, to the date of search, here also papers were found which contained date-wise details of sales which could not be verified from the regular books of account. He, thus, concluded that no interference was called for, so far as the working of sales outside the books of account was concerned.

25.12 As to the application of rate (as has been applied by the assessing officer for working out the quantum of undisclosed income) he referred to the discussion made in relation to the similar addition of Rs. 6,21,593 as had been made in the assessment year 1996-97. He emphasised that, in case the rate applied by the assessing officer was held to be excessive, then the rate 2.66 per cent as had been applied in the case of Vandana Steels Ltd. can also, not be taken as basis, as no comparative details were made available by the assessee.

26. In this rejoinder Sri Garg reiterated the submissions made by him earlier. As to the statements of the contractors, he pointed out that it was only with reference to the order sheet dated 24-9-1997, that the assessee was required to produce some of the contractors (to whom the diaries belonged) and Sri S.D. Verma (employee of the appellant company) and for compliance the date fixed was 25-9-1997. On the appointed date, Sri Jabar Singh was duly produced and his statement was also recorded (copy of statement at pp. 317-320 documents in its paper book). For the remaining person, the assessee offered that they all had come and they may be examined on the subsequent date, as may be seen from the letter dated 25-9-1997 (documents in its paper book 321) filed on the same date, which is reproduced hereunder :

"From V. V. S. Ltd. 76/43, Halsey Road, Kanpur 25-9-1997 To, The Assistant Commissioner, Central Circle II, Kanpur.

Sir, Ref : Block assessment proceedings Kindly refer to your order sheet entry dated 24-9-1997, requiring us to produce the following persons on 25-9-1997 (i.e. today), (1) Jabbar Singh (2) S. D. Verma (3) Bhagat (4) Ambica Statement of Shri Jabbar Singh has been recorded today, by your goodself. However, the other three persons have come late to Kanpur from their respective outside places. If desired their statements may be recorded today, they are ready to stay today in Kanpur if they are allowed time for tomorrow for this purpose.

Thanking you.

For V.V.S. Alloys Ltd.

Sd/-

POA"

It was again pleaded that the addition was not maintainable either on facts or in law and in any case the same got wholly vitiated as it had been made at the behest of and under the instructions of the DDI Wing.

27.1. We have carefully considered the rival submissions. First of all we shall deal with the objection with regard to the very legality of the addition. It has not been disputed from the side of the revenue and in fact it could not have been, in view of the letter dated 23-9-1997, written by the assessing officer himself, to the appellant company, copy appearing at pp. 98 to 101 of APB, relevant portion of which has already been reproduced by us in para 18.1 hereinfore. This goes to show that even after the search operation the DDI Wing continued to record statements of various persons at its own and passing on the same to the assessing officer. Not only this, the assessing officer has fully utilized the same, while making the addition. In our order dated 30-6-1999, (supra) the case of Monga Metals Ltd. (supra) we have already taken a view that the assessment if it is found to have been influenced by any other authority even if it is superior in hierarchy to the assessing officer, such an assessment is vitiated. For the sake of reference, we reproduce herein below the relevant paragraphs from the said order :

"33.1. Further, in depth analysis of the provisions (supra) reveals that each one of the income-tax authority 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 in 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 interference 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 proposition of law is fortified by the following decisions on which the, assessee's counsel has placed reliance :

(i) Decision of Hon'ble Tribunal Madras Bench in case of Kirtilal Kalidas & Co. v. CIT (1998) 67 ITD 573 (Mad-Trib).

(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 his 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 undisclosed (undisclosed income). The appellants initially did not file such return contending that there was no undisclosed income. 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 undisclosed income 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 assessment 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 undisclosed income 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 ADI (Inv.) 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, direction 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 any 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 order 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 (1970) 77 ITR 6 (SC). In this case the Hon'ble Supreme Court while considering the scope and instruction 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 Commission of Wealth Tax 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 Commission of Wealth Tax 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 on independent judgment in passing his order thereof, the Supreme Court, in appeals by special leave under Article 136 of the Constitution against his order, set aside the order passed by the Commission of Wealth Tax 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 ADIC(Inv.) 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, 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."

27.2. Following the said principle, we hold that the addition of Rs. 77,34,961 to undisclosed income as a whole stands vitiated and the same is liable to be quashed, we order accordingly.

28.1. On merits whole of the said addition is not tenable. As far as the month of April, 1996, is concerned, the assessing officer has mainly relied on two documents p. 30 of LP6 and p. 32 of LP6 (copies appearing at pp. 30 and 31 of the department in its paper book). In fact with correlation of these two papers the assessing officer has reached a conclusion of suppressed production and sale in the month of April, 1996, to the tune of 2,883.519 MT. we have carefully perused p. 30 to LP6 said to be containing the details of loading which has been equated with the sales outside the books of account. We find that the said parcha although contained truck numbers, quantities mentioned against such truck number is as low as 0.020 tonnes in same case, whereas the normal truck load is 12 tonnes. In a very few cases, numbering 11 in all out of nearly 100 entries, that the quantities between 9 MT to 12 MT have been mentioned. It is unbelievable that a truck will carry a load of such a low quantity of 0.020 MT outside the factory. The assessee's explanation that the said paper refers to shifting of material in the factory premises, not necessarily of finished goods, which cover an area of more than 6 acres has not been considered in the proper prospective. It is not unusual that such shifting might have taken place for proper stacking, storing etc. In any case, looking to the quantities mentioned therein the page No. 30 of LP 6 cannot be held to be containing the details of loading into the trucks of the finished goods for the purpose of despatches (which remained unaccounted). Once it is found and held that the entries in the said parcha could not be treated to be containing the details of unrecorded despatches, there remains no evidence which could go to show that the appellant made sales outside the books of account in the month of April, 1996. There is also force in the appellant's contention that another parcha (on the basis of which it has been inferred that the appellant produced 3700 MT of CTD bars in April, 1996) cannot be said to be containing the details of production. The appellant raised specific objection to the effect that firstly the production as stood already recorded in the excise records of the assessee was commensurate with the electricity consumption and secondly the appellant's factory could not have produced so much of the quantity of CTD bars. Apart from huge electricity consumption, the unaccounted production of such level would have required purchases of raw material and other inputs also. No information was available on the record, nor even could be collected after the search, which could even remotely suggest that the assessee made purchases outside the books of account. Therefore, on a consideration of totality of facts and circumstances of the case and a thorough perusal of loose papers referred to by the assessing officer, we hold that the inference about suppression of production and sale in the month of April, 1996, was wholly unfounded.

28.2. As far as the month of May 1996 is concerned, the assessing officer has treated the quantities mentioned in the diaries related to various contractors, as containing the details of production of CTD bars and aggregate of the quantities mentioned therein was taken as production. After adjusting the sales made in this month, the resultant figure was taken to be representing undisclosed sale for the month of May, 1996. The working given by the assessing officer suffers from serious infirmities. The counsel for the appellant could demonstrate before us that the said diaries do not relate to the production of CTD bars, and except the diary of Bhagat contractor (department in its paper book 44 to 60) which could be said to be containing details of loading of CTD bars weighing 958.875 MT, other diaries (department in its paper book 61 to 97) merely referred to the jobs of twisting, shifting and bundling, etc. This fact is amply borne out from p. 34 of LP6, (both sides) which has been reproduced by us in para 24.4 above. As the job works do not relate to the production as such, the same could not have been treated to be the suppressed production that could not have been treated to be the suppressed production that could become available for sale outside the books of account. Therefore, it has to be necessarily held that the loading details of 958.875 MT can at the most, be said to be related to production. As per the table given by the assessing officer on p. 25 (document appearing in its paper books) of the assessment order which has been reproduced by us in para 24.2 above, it is seen that the sales recorded by the appellant in the month of May, 1996, was 168.354 MT which even included the loading got done by the purchaser's contractor. Therefore, the quantity so handled directly by the purchasers contractors would not form part of the loading done by Bhagat contractor independently. In this manner the loading in relation to the sales having not been entered in the books of the appellant, would work out to 885.815 MT only as per the working given hereinbelow :

Oty. in Tonne Loading done by Bhagat contractor 958.875 Deduct : Quantity despatched, other than the quantity handled by the purchaser's contractor 55.81 + 17.25 73,060 885.815 Now the question remains as to what inference should be drawn with reference to the said quantity of 885.815 MT. It remains undisputed that the said quantity is over and above the despatches recorded by the appellant in its books of account. The only inference that follows from this, is that the said loading represented unrecorded sales. By applying a rate of 12,000 per MT as has been done by the assessing officer himself, the sale value shall work out to 1,06,29,780 (885.815 x 12,000). This would be treated as unrecorded sale for the month of May, 1996.

28.3. As far as the remaining period is concerned, the undisputed position is that loose papers were found from the possession of the directors, containing various entries which cannot be anything but sales effected by the appellant company. Such sales having not been found entered in the books, the same would be treated as unaccounted sales effected during this period. Thus, the figures of unaccounted sale of Rs. 7,36,44,274 (as worked out by the assessing officer) would be substituted by the figure of 1,84,28,782 as worked out hereunder :

Period Quantity in MT Value of sales (Rs.) May, 1996 885.815 1,06,29,780 June & July, 1996 411.440 57,04,187 August 1996 to the date of search 144.470 20,94,815 1,84,28,782

29. Other question that remains to be considered now, is the computation of the element of 'undisclosed income' in relation to the undisclosed sales as per the computation given above. The assessing officer has applied a GP rate of 15.73 per cent and thereafter allowed some deductions, so as to arrive at the figure of undisclosed income. In relation to the similar addition of Rs. 6,21,593 as had been made in the assessment year 1996-97 (comprised in the block period) it was found that the G.P. rate as per the disclosed version of the assessee for the assessment year 1996-97 was 1.91 per cent only. This figure is nearer to the GP rate of 2.66 per cent as has been applied by the assessing officer herself in another search case of Vandana Steels Ltd. which is engaged in the manufacturing of ingots (where profit margin is usually higher than in the manufacturing and sale of CTD bars, which also related to Kanpur region, and being assessed at Kanpur itself). Therefore, on a consideration of totality of facts and circumstances of the case we hold that a net profit rate of 5 per cent on the undisclosed sale of Rs. 1,84,28,782 as has been computed above, would meet the ends of justice. On this basis "the undisclosed income" which is held to be addable to the undisclosed income of the appellant works out to Rs. 9,21,439 (Rs. 9,21,500 in round figures) only. The undisclosed income on this account, therefore, shall be restricted to that extent only if the assessment is otherwise held to be valid.

Ground No. 4(2)-Addition on account of working capital Rs. 25 lakhs

30. Closely connected with undisclosed income of Rs. 6,21,593 and Rs. 77,34,961 computed on account of undisclosed business income for the assessment years 1996-97 and 1997-98 respectively and as have been dealt with by us in the foregoing paragraphs, is the issue of undisclosed income of Rs. 25 lakhs on account of working capital requirement in the business alleged to have been done outside the books of account. During the course of assessment proceedings and in pursuance of his observation about the undisclosed business activities of the appellant company, the assessing officer required the assessee in terms of his notice dated 13-9-1997, to show cause as to why the requirement of working capital in both the years be not estimated at Rs. 81,65,572 and Rs. 75,00,000 for the assessment years 1996-97 and 1997-98 as worked out by him on the basis of pattern of working capital requirement said to have emerged as per the disclosed version in the assessment year 196-97 and addition for the same be not made to the "undisclosed income" of these two years. The appellant responded to the said query vide its letter dated 22-9-1997 (copy appearing at pp. 199 to 200) and gave detailed working to demonstrate that even if some business activities are held to be carried on outside the books of account still there would not be any requirement of working capital. A chart was submitted to show that the business activities are held to be carried on outside the books of account still there would not be any requirement of working capital. A chart was submitted to show that the business activities outside of the books of accounts, various investments/outgoings would not be required. The assessing officer did not accept the said contention and made an addition of Rs. 25 lakhs with the following observations/findings :

"As regards the reply of working capital though technically it is true that no working capital will be needed for undisclosed business. However, the undisclosed business is quicker, faster and mostly in cash. Looking to the volume and nature of business, the working capital of the assessment year 1996-97 is estimated at Rs- 25,00,000 which will be available as circulating capital for the subsequent assessment year."

31. With reference to the said observation, it was vehemently argued by Sri S.K. Garg that firstly even on the basis of the material seized during the course of search operations it could not have been held that the appellant made any sales outside the books of account. There were no unrecorded purchases of other inputs required for carrying out manufacturing activities over and above the disclosed version, nor any such information came to the knowledge of the assessing officer even in the post-search period. The electricity consumption was commensurate with the disclosed version of production and no irregularity has been found. Alternatively, it was pleaded that from the disclosed version of the appellant as stood reflected in the balance Sheet as at 31-3-1996, relevant to the assessment year 1996-97 (copy appearing at pp. 271 of documents appearing in its paper book), it would be seen that as against the figure of current assets (after excluding the figures of security with UPSEB and interest accrued on bond) which stood at Rs. 1,33,51,168, the company had current liabilities to the tune of Rs. 1,42,28,197, this was besides the secured loans from Bank of Baroda, against hypothecation of stock-in-trade and book debts, amounting to Rs. 53,11,059. Thus, the disclosed pattern of the working of the appellant company itself showed that the liabilities in the form of trade creditors, etc. were available, at the first instance and in the second instance, it was sufficient to cover the current assets (including stock, etc.) and no further requirement of funds was there. In the absence of any other basis to estimate the working capital requirement, the disclosed version has to be followed and on that basis, no working capital requirement as such was there. The learned counsel for the appellant raised a legal objection also, to the effect that in order to make any such addition, it has to be shown that the appellant company had made investment also in purchases of raw material and other inputs. The onus was on the revenue which raised an allegation about the undisclosed business activities, to show that there was investment also in purchases, source of which remained unexplained. The point at issue, according to the learned counsel for the appellant, is squarely covered in favour of the assessee, by the decision of the Hon'ble Allahabad High Court in the case of Ashok Kumar Rastogi v. CIT (1991) 100 CTR (All) 204.

32. In reply Shri Chopra submitted that it was unthinkable that there would be no requirement of capital for the business done outside the books of account. The seized material unmistakably pointed out that the appellant carried substantial business activities outside the books of account. The assessing officer has already given margin for the factors like quick turnover and the turnover made in cash. Looking to the fact that the turnover outside the books of account for the assessment year 1996-97 has been estimated to be of the order of Rs. 70.31 lakhs and for the period of nearly 5 months in the assessment year 1997-98, at Rs. 7.36 crores, the estimate of requirement of working capital as had been made by the assessing officer, at Rs. 25 lakhs, was rather a conservative one, and in view of the fact that source of such funds remained unexplained, the addition had rightly been made.

33.1 We have carefully considered the arguments put forth by the parties before us. We have already upheld, in principle that search operations revealed some undisclosed business activities. The appellant's argument that it did not carry out any business outside the books of account and the addition on account of working capital was, therefore, not tenable, fails squarely. However, there are merits in the alternate plea raised by the appellant, to the effect that even the disclosed version of appellant's activities showed that the same was financed by trade liabilities, even if we exclude the figures of loan taken from bank, against the security of stocks and book debts. In the absence of any information about making actual investment in purchases of raw material and other inputs which were the only venues, wherein there could have been any requirement of funds (investment in various fixed assets, etc. already stood recorded in the books of account), the assessing officer could not have proceeded to estimate the so-called requirement of 'working capital' and make addition for the same. In fact if we examine the findings given by the assessing officer himself (which have been reproduced by us in para 30 above) it would be seen that he has taken contradictory stand. On one hand, he says that there was no requirement of working capital in the business done outside the books of account and at the same time he goes to make an estimate of such working capital.

33.2. A similar issue had come for consideration, in case of assessee's similar concern M/s Moga Metals Ltd., ITA No. 1377/All/1997 (supra) where, we, after following the decision of Hon'ble Allahabad High Court in the case of Ashok Kumar Rastogi v. CIT (supra) in which the Hon'ble High Court after referring to observations by Supreme Court in the case of Dhakeshwari Cotton Mfg. Mills Ltd. v. CIT (1954) 26 ITR 775 (SC), expressed our opinion in the following terms :

Para 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 held 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. 17, 00, 000 is to be deleted."

Respectfully following the jurisdictional High Court's decision and also for the sake of consistency we direct the deletion of undisclosed income of Rs. 25,00,000.

Ground No. 4.1(4) and 4.2(2) : Undisclosed income on account of Introduction of cash Rs. 75,295 for the assessment year 1996-97 and Rs. 18, 11, 060 for the assessment year 1997-98 34.1. The aforesaid amounts have been considered assessee's undisclosed income on the basis of cash book recovered from the residence of the director covering the period from 22-3-1996 to 26-8-1996, which disclosed the receipts aggregating Rs. 18,86,355, year, wise break-up of which being as under :

34.1. The aforesaid amounts have been considered assessee's undisclosed income on the basis of cash book recovered from the residence of the director covering the period from 22-3-1996 to 26-8-1996, which disclosed the receipts aggregating Rs. 18,86,355, year, wise break-up of which being as under :

Rs.

Assessment year 1996-97 75,295 Assessment year 1997-98 18,11,060 (upto the date of search) 34.2 Copies of the seized material is available at pp. 102 to 197 of the DIPB. In response to specific query raised by the assessing officer in terms of para 10 of the notice dated 23-7-1997, which is reproduced hereunder :

34.2 Copies of the seized material is available at pp. 102 to 197 of the DIPB. In response to specific query raised by the assessing officer in terms of para 10 of the notice dated 23-7-1997, which is reproduced hereunder :

"10. The chart of the cash receipt as per No. 20 of the Annexure enclosed herewith (Annexure-4) was recovered from the premises of the VVS Alloys Steel Ltd. giving the total cash receipt of Rs. 18,86,355. You are required to state as to whether these cash receipts are accounted for and source of the same."

The appellant's reply dated 26-9-1997, seems to be very cryptic, rather evasive, as may be seen from the following :

"With reference to para 10 of your letter dated 23-7-1997, we have to submit that these papers do not relate to our factory and we have also not been able to know as to who have prepared these papers. Without prejudice, for a perusal of these papers we find that there is debits and credits both and as such it can not be said that they are unexplained investment. No adverse inference may kindly be drawn." (documents appearing in its paper books-91) 34.3. The assessee has not given any further information at the assessment stage, and also failed to explain even about the net effect of various debits and credits as appearing in the said papers. During the course of hearing of appeal before us too no further clarifications was given, except the submission that in case any business activities is held to be carried out outside the books of account, then the said receipts (so-called) be treated to be the realisations of such business activities. The appellant's submissions is far from being satisfactory and the grounds are, therefore, rejected. In the result, the two additions of Rs. 76,295 and Rs, 18,11,060 are sustained.

34.3. The assessee has not given any further information at the assessment stage, and also failed to explain even about the net effect of various debits and credits as appearing in the said papers. During the course of hearing of appeal before us too no further clarifications was given, except the submission that in case any business activities is held to be carried out outside the books of account, then the said receipts (so-called) be treated to be the realisations of such business activities. The appellant's submissions is far from being satisfactory and the grounds are, therefore, rejected. In the result, the two additions of Rs. 76,295 and Rs, 18,11,060 are sustained.

Ground No. 4.1(3)-Addition on account of investment in factory building-Rs. 18,17,623 35.1. As stated earlier, the appellant company got incorporated on 15-7-1994, and commercial production was started from 22-6-1995. The construction took place during this intervening period of less than 1 year which falls in the 2 assessment years. As per the assessee, the construction cost amounted to Rs. 33,67,877 and as per Valuation Officer of the valuation cell of the Income Tax Department, hereinafter referred to as V.0, it was estimated at Rs. 52,38,500 and the difference of Rs. 18,70,623 (Rs, 53,67,877-Rs. 33,67,877) was treated as "undisclosed income" on account of unexplained investment in factory building.

35.1. As stated earlier, the appellant company got incorporated on 15-7-1994, and commercial production was started from 22-6-1995. The construction took place during this intervening period of less than 1 year which falls in the 2 assessment years. As per the assessee, the construction cost amounted to Rs. 33,67,877 and as per Valuation Officer of the valuation cell of the Income Tax Department, hereinafter referred to as V.0, it was estimated at Rs. 52,38,500 and the difference of Rs. 18,70,623 (Rs, 53,67,877-Rs. 33,67,877) was treated as "undisclosed income" on account of unexplained investment in factory building.

35.2. The learned counsel for the appellant submitted that at the time of search operation which commenced on 3-9-1996, regular books of account were found to have been maintained wherein the cost of construction as incurred by the appellant company stood fully reflected at a figure of Rs. 33,67,877. Such books of account, wherein cost of construction has been debited were accepted for the purposes of assessment as could be seen from the regular assessment order for the assessment year 1996-97 dated 15-3-1999 (copy appearing on pp. 283 to 286 of documents appearing in its paper book). The search and seizure operation did not reveal or led to the recovery of any information/material which could go to show that the appellant company had incurred any expenditure over and above what stood disclosed in its books of account, (as had been found during the course of search operation). Further, the appellant had duly filed, during the course of block assessment proceedings "valuation pleadings" as prepared by the approved valuer Shri J.N. Dubey. The said pleading, not only contained detailed objections to the application of Central Public Works Department rates (as had been done by the V. O. in his report referred to above), but also detailed working of his own estimate. From the cost of construction, as worked out by the approved valuer, based on his on the spot inspection, the appellant's version stood fully proved and supported. The report was prepared not by 'anybody' but by a person duly approved by the very Central Board of Direct Taxes which is the apex body for the valuation cell of the Income Tax Department also. 'Pleadings' of the approved valuer and his 'estimates' had to be given due weight and consideration and could not have been brushed aside by making a casual observation to the effect that the said report (prepared by the approved valuers) was not acceptable in view of the approved valuer's estimate being lower than the assessee's version.

35.3. Further, Shri Garg pointed out that there was no occasion for making a reference to the valuation cell for determining the cost of construction. For making such a reference, even under section 131(1)(d), it was incumbent upon the assessing officer to record the reasons and specify the material on the basis of which he held an opinion, at least prima facie, that the appellant's version of investment was not correct. This having not been done the 'reference' to valuation cell under section 131(1)(d) cannot be said to be a valid reference in the law. Further, the valuation report prepared by the valuation cell could not have been taken to be an evidence against the assessee, unless the Valuation Officer preparing the said report, has been called for and the assessee is given an opportunity to cross-examine him. This requirement too has not been fulfilled in this case and, therefore, no evidentiary value could have been attached to the report of the Valuation Officer. In support of this contention a 'resume' of various case laws was submitted in supplementary paper book No. III.

35.4. It was also submitted by the learned counsel for the appellant that on the basis of report prepared by the Valuation Officer it could not have been held that there was variation between the assessee's version and the estimate of valuation cell. The valuation report shows the 'fair market value of the property as on 3-9-1997, whereas the construction was carried out during the financial year 1994-95 and 1995-96 and the cost incurred by the appellant during that period could not be compared with the fair market value thereof on 3-9-1997.

35.5. A reference was also made to various case laws in support of the contention that where books of account have been maintained in regular course of business and the cost incurred by the assessee is debited in such books of account, no addition can be made unless the books are rejected for the purposes of assessment. Reliance in this regard was also place on our decision dated 30-6-1999, in the case of Monga Metals (P) Ltd. (supra) 35.5. A reference was also made to various case laws in support of the contention that where books of account have been maintained in regular course of business and the cost incurred by the assessee is debited in such books of account, no addition can be made unless the books are rejected for the purposes of assessment. Reliance in this regard was also place on our decision dated 30-6-1999, in the case of Monga Metals (P) Ltd. (supra)

36. At this stage, we requested the Additional Standing Counsel, Sri S. Chopra to produce the Valuation Officer and also to produce before us, the records relating to the issue of Commission by assessing officer as well as the records for transfer of commission by DVO, Kanpur to Valuation Officer Allahabad. For this purpose, hearing was adjourned. On the next date of hearing the Valuation Officer based at Allahabad appeared before us. Learned Departmental Representative furnished the certified copies of Assistant Commissioner letter No. ACIT/CC-II/W/Moriga Group/1997-98, dated 17-7-1997, issuing commission in favour of District Valuation Officer, Income Tax Department. Kanpur and DVO Kanpur letter No. RUC/DVO/ITI)/KNP/1997-98/339 dated 22nd/24-7-1997, addressed to Assistant Commissioner, Kanpur informing him of entrusting the job of valuation to Valuation Officer Allahabad of his own. From a perusal of the letters, we find that the assessing officer had made a reference under section 131(1)(d) to the District Valuation Officer at Kanpur who delegated/transferred the same to the Valuation Officer at Allahabad on the ground that the assessee's factory was situated in his (Valuation Officer, Allahabad) jurisdiction. Enquiries were also made by us from the Valuation Officer to ascertain as to what was basis of applying a particular rate for estimating the cost of construction. His reply was that he had followed the rates of Central Public Works Department as on 1-10-1976, as circulated by the Central Board of Direct Taxes and such rates were suitably increased' so as to cover the increase in cost in the intervening period. However, even after specific query made by us, he could not show that any working was done or nothing made by the Valuation Officer so as to find out the precise specifications of the building which was subject matter of 'reference', material used therein and other relevant information and to compare the same with the 'specification' covered by the rates of Central Public Works Department as circulated by the Central Board of Direct Taxes and applied by the Valuation Officer in this particular case.

37. Shri Garg continued his argument on the issue from this stage. He submitted that the basis of application of rate for the purposes of valuation as adopted by the valuation cell had not been given. It was not known nor any such information could be placed on record which could go to show that the specification covered by the Central Public Works Department rates (as have been applied by the valuation cell) match the specification of the factory building which got constructed by the appellant itself by procuring the labour and material by itself. It was further submitted by him that the cost of construction as recorded by the appellant company in its books of accounts supported by bills and vouchers and its version stood corroborated by the 'valuation pleadings' of a valuer approved by the Central Board of Direct Taxes itself. The status of such an 'approved valuer' and the 'report' prepared by him could not have been under rated/underscored unless some deficiency or defect was noted in such report. Merely for the reason that estimates of the approved valuer were on a little lower side than the 'actual' of the assessee, his report could not have been thrown. Reliance was also placed on the decision of Hon'ble Third Member of Tribunal in the case of Shanti Complex v. Asstt. CIT (1999) 237 ITR 27 (AT). A reference was also made to other submissions made before the assessing officer which remained unattended to/unanswered. It was also submitted by the learned counsel for the appellant that the capital cost of the project, which included the investment in factory building also, was financed by the U.P. Financial Corporation Ltd. The 'cost' as incurred by the assessee was within the purview of the financial institution also, which did not find any irregularity in this regard and the stipulated finance was provided.

38. On behalf of the department, Shri S. Chopra submitted that the report prepared by the valuation cell was based on the authentic rates as declared by the Central Public Works Department and such report had rightly been given preference over the assessee's version of cost and even over the report prepared by the approved valuer; the reason being that in the pleading made by the approved valuer there were inherent infirmities inasmuch as he had even gone to estimate the cost, even below the cost declared by the appellant company itself.

39.1. On a careful consideration of the pleadings made before us, we find that the addition of Rs. 18,17,623 is not supported by any valid material or ground. First of all we find serious infirmities in the information collected by the assessing officer in the form of valuer report. There is no provision under the Income Tax Act, like one available under the Wealth Tax Act, where matter can be referred to the valuation cell. The assessing officer, of course can collect information under section 131(1)(d), but, before proceeding to collect information by invoking his jurisdiction under section 131(1)(d), he has to have some material at least prima facie before him, to show that the assessee's version is understated and such material should be borne out from the records as were in existence, before making a reference. If the books of account have been maintained wherein investment is recorded, as is the case here, the assessing officer has to find some infirmities in the said books of account particularly with reference to the cost of construction as entered therein, so as to clothe himself with the jurisdiction to get an information about the true 'cost' thereof by making a reference to the Valuation Officer of from any other source. Further, section 69 of the Act clearly says that only such investment can be treated as 'undisclosed income' of the assessee, which has not been found recorded in the books of account. In the present case there is nothing on record which may suggest so. No material whatsoever has been found during the course of extensive search operation which covered the factory premises as also the residential premises of the directors, which could even remotely suggest that the assessee had incurred any expenditure on construction of factory building which was not found recorded in the book of account (which too were found during the course of search). The reference made to the valuation cell under section 131(1)(d) fails at this stage itself.

39.2 Further, it is also a part of the record that the commission had been issued in favour of the DVO, Kanpur and not to the Valuation Officer at Allahabad, who has submitted his report about the factory building of the assessee-company. Such a valuation report prepared by the Valuation Officer, Allahabad who was not appointed on commission by the assessing officer was, therefore, a wholly extraneous material which came to the possession of the assessing officer without any valid process of law. We fail to understand as to how such an information could constitute a material for the purpose of arriving at a conclusion that the appellant's version of investment in factory building was understated. If at all the assessing officer wanted to treat the said 'information' as a 'material', the principle of natural justice demanded that the person supplying the information should have been made available for cross-examination by the appellant against whom the said information was sought to be, and in fact, utilized. This was all the more necessary in the present case where the information sought to have been relied upon against the appellant, had been collected from an unauthorized source :

39.3 To have a clarity of understanding in relation to the ambit and scope of the powers of the assessing officer under section 131(1)(d), let us go to the relevant provisions contained in the CPC. Section 75 of the CPC which provided for the powers of a court to issue commissions reads as under :

"Subject to such conditions and limitation as may be prescribed, the court may issue a commission .. (a) to examine any person; (b) to make a local investigation., (c) to examine or adjust accounts., (d) to make a partition; (e) to hold a scientific, technical or expert investigation., (f) to conduct sale of property which is subject to speedy and natural decay and which is in the custody of the court pending the determination of the suit; (f) to perform any ministerial act."

As is evident from a plain reading of section 75 of the CPC out of the various purposes as contained therein for which a court may issue a commission, the purposes which are of relevance in the context of the situation presently under discussion and which can be made use of by the assessing officer in utilising the agency of a Valuation Officer to ascertain the cost of construction of a building, are purposes under clauses (b) and (e) of section 75 of the CPC i.e., to make a local investigation and to hold a scientific, technical or expert investigation. Other purposes provided for in section 75 of the CPC being not relevant, need not be gone into order 26 of the CPC lays down the rules relating to issue of commission and allied matters. Rule 9 of 0. 26 provides for commission to make local investigation, rule 10 thereof lays down the procedure of commission and rule 10-A in respect of commission for scientific investigation. Rule 16 specifies the powers of Commissioners and provides that unless otherwise directed by the order of appointment, commission may., (a) examined the parties themselves or any witness produced by the parties or any other person called upon by the Commissioner to give evidence in the matter; (b) call for and examine documents and other things relevant to the subject of inquiry and (c) at any reasonable time enter upon or into any land or building mentioned in the order. Thus, it is clear that subject to the order of appointment, Valuation Officer, on being appointed by the-assessing officer as a Commissioner under section 131(1)(d) for the purpose of ascertaining the cost of construction of a building, can enter into, inspect and survey the building, examine the owner of the building, and any other person called upon by him to give evidence in the matter and call for and examine all the documents and other things relevant for such ascertainment. Here a pertinent question, that arises is, does the exercise of discretion by the assessing officer in favour of issuing a commission to a Valuation Officer for ascertaining the cost of construction of a building presupposes judicial application of mind by the assessing officer or can so be done by the assessing officer at his sweet will in each and every case where a building is constructed by an assessee ? The answer to this question will necessitate probing into the legal implication of rule 9 of 0. 26 of the CPC.

Rule 9 of the order of CPC reads as follows :

"In any suit in which the court deems a local investigation to be requisite or proper for the purpose or elucidating any matter in dispute, or of ascertaining the market value of any property, or the amount of any mesne profits or damages, or annual net profits, the court may issue a commission to such person as it think fit directing him to make such investigation and to thereon to the court :

Provided that, where the State Government has made rules as to the persons to whom such commission shall be issued, the court shall be bound by such rules. "

A bare perusal of the above rule leads one to infer that purposes like ascertaining the market value of any property, or the amount of any mesne profits or damages or annual net profits, provided for therein are contextually inapplicable for the purpose of ascertaining the cost of construction of a building in relation to which the assessing officer seeks to appoint a Valuation Officer as Commissioner under section 131(1)(d) of the Act. Once the aforesaid purposes are rule out, there remains the only purpose "of elucidating any matter in dispute" for which the assessing officer can fall back upon the powers of a civil court under rule 9, 0. 26-CPC which has to be a dispute about any matter which requires elucidation. In other words, the court must first get itself judicially satisfied that there is a matter in dispute and then it must also further get satisfied that for the purposes of elucidating such matter in dispute, issuance of a commission is requisite or proper.

39.4. The Shorter Oxford English Dictionary on Historical Principles, Third Edition, defines the word 'elucidate' to mean, "to render lucid, to throw light upon to explain". Thus, it is only for the purposes of clarifying or explaining any matter in dispute that, under rule 9 0.26, CPC, the court may issue a commission to a person of its choice to carry out the required investigation and report back to the court.

39.5. The powers of the assessing officer under section 131(1) cannot be wider than those of the civil court under the provisions of CPC. Coming to the application of these powers to matters under this Act, be it said that when an assessee furnishes his return under the Act showing in the financial statements accompanying the return an expenditure in the construction of building at a certain figure, it cannot be said that by the very act of furnishing the return, the assessee has led to a situation where it can be said that there is a matter which is in dispute. The assessee of our case may have with his detailed accounts backed-up by supporting bills and vouchers or other such materials and/or evidences which can fully substantiate the adequacy and reasonableness or the cost of construction shown by him. However, he can prove this only if the assessing officer so asks him and allows him a reasonable opportunity to do so. Agreed that the assessing officer in determining the total income of an assessee under the Act has to play the dual role of a prosecutor and a Judge but by no stretch of imagination can it be said that in every case where an assessee has constructed a building there has to be a dispute which requires elucidation. The assessing officer can ascertain the adequacy or otherwise of the cost of construction of building shown by an assessee only after he has given to the concerned assessee's chance to substantiate the same and has looked into the materials and/or evidences produced by the assessee. After such examination, if the assessing officer, for lawful and valid reasons, comes to a conclusion that the quantum of expenditure shown by the assessee is inadequate, then and then only, can it be said that he has derived a judicial satisfaction which can be interpreted to give rise to a dispute about the matter of adequacy or otherwise of the amount of the cost of construction. Thus, before a commission or favour of a Valuation Officer can be issued by the assessing officer in terms of section 131(1)(d), the assessing officer must get himself judicially satisfied about the inadequacy of the cost of construction shown by an assessee. As explained above, the assessing officer can derive the above satisfaction only after he has granted an opportunity to the assessee to explain his investment and has looked into the materials and/or evidence produced by the assessee. It is an established position of law that "no commission can be issued for the purposes of collecting evidence in suit". (Basant Kumar Swain v. Baidya Kumar Parid & Ors. AIR 1989 Ori 118. The Institute of Engineers (India) & Anr. v. Bishnu Pada Bag & Anr. AIR 1978 Cal 296). The object and purpose of local investigation under rule 9, 0. 26, CPC is to clarify or explain any point which is left doubtful on the evidence on record.

Reasons to be recorded before issuing commission under section 131(1)(d) 39.6. As held by the Orissa High Court in the case of K. Raghunath Rao v. Smt. Tumula Jailaxmi AIR 1988 Ori 30, "An order to issue a commission to any person under rule 9, 0. 26, CPC is discriminatory. Being a judicial order it is required to be supported by reasons so that propriety of the exercise of discretion would be visible". On the facts of this case, it was held "a bare perusal of the order shows that the same is not supported by any reason. On this short grounds, the order is liable to be set aside on account of jurisdiction with material irregularity". The High Court further elucidated the requirement of law by observing "Since issue of a writ to a person for local investigation would depend upon the facts and circumstances of each case, no hard and fast rule can be laid down. This much can be said that the basic prerequisite for issue of such a writ is the satisfaction of the court that a local investigation is requisite or proper. This satisfaction is to be judicial satisfaction based on reason.

39.6. As held by the Orissa High Court in the case of K. Raghunath Rao v. Smt. Tumula Jailaxmi AIR 1988 Ori 30, "An order to issue a commission to any person under rule 9, 0. 26, CPC is discriminatory. Being a judicial order it is required to be supported by reasons so that propriety of the exercise of discretion would be visible". On the facts of this case, it was held "a bare perusal of the order shows that the same is not supported by any reason. On this short grounds, the order is liable to be set aside on account of jurisdiction with material irregularity". The High Court further elucidated the requirement of law by observing "Since issue of a writ to a person for local investigation would depend upon the facts and circumstances of each case, no hard and fast rule can be laid down. This much can be said that the basic prerequisite for issue of such a writ is the satisfaction of the court that a local investigation is requisite or proper. This satisfaction is to be judicial satisfaction based on reason.

Omission to record satisfaction with reason, it can be argued on the strength of the above judgment would warrant setting aside of the order issuing writ of local investigation.

39.7. From the above enunciation of law, it can be safely concluded that the assessing officer before he issues a commission under section 131(1)(d), must apply his judicial mind and derive satisfaction that such a commission, in the facts and circumstances of the case before him, is requisite or proper, such satisfaction of the assessing officer must be supported by reasons which ought to be recorded by him so that the property of the exercise of discretion by him is visible. If the order of the assessing officer to issue a commission under section 131(1)(d) of the Act is not supported by any reason, such an order would be liable to be set aside on account of exercise of jurisdiction with material irregularity.

39.8. The power of the Commissioner as specified under rule 16 of 0. XXVI of CPC are as under :

Rule 16, 0. XXVI Commission to examine or adjust account.-(1) In any suit in which an examination of adjustment of accounts is necessary, the court may issue a commission to such person as it thinks fit directing him to make such examination or adjustment.

39.9. It is, therefore, evident that it is the person who is appointed on 'Commission' alone who is authorised to elucidate the matter and nobody else. Such person has no power to delegate his power to be carried out as commission' to anybody else, and if the Commissioner delegates his power or appoints somebody else to be the Commissioner in his place, such an action is bad in law and the consequential report of such delegated/authorised person is without jurisdiction. So far as the present case is concerned, the assessing officer having appointed the DVO Kanpur as Commissioner, it was DVO, Kanpur alone who could carry on the functions of Commissioner. His monetary jurisdiction for the purpose of Wealth Tax Act or for the purpose of Income Tax Act had nothing to do with his functions as Commissioner meaning thereby that it was only DVO, Kanpur alone who, irrespective of his monetary jurisdiction under the Wealth Tax Act/Income Tax Act, was the authorised person to exercise the power of Commissioner appointed by the assessing officer and to carry on the functions of such Commissioner.

39.10. In view of these facts and circumstances the delegation of power and functions of a Commissioner by DVO, Kanpur, to Valuation Officer Allahabad and/or appointment of Valuation Officer Allahabad as Commissioner was illegal, bad in law and, therefore, the report of Valuation Officer Allahabad was not a lawful report.

39.11. In view of the above, we are of the opinion that so far as the present case is concerned, the issuance of Commission by the assessing officer in absence of any opportunity to assessee, application of his mind and recording of reasons was bad in law. Similarly the subsequent delegation of power and functions of a Commissioner by DVO, Kanpur to Valuation Officer Allahabad was illegal, bad in law and without jurisdiction and, therefore, the so-called valuation report in the present case was not a legal report and has no sanctity in law. Consequently there could not be any undisclosed income on the basis of such report.

39.12. On merits we are of the opinion that assessee deserved a rebate on account of self supervision and the quantities specified by the Valuation Officer Allahabad on account of builders efforts could not form the part of investment made by the assessee and, therefore, such amount could not be undisclosed income.

39.13. Even otherwise, as admitted the Valuation Officer Allahabad, who was present at the time of hearing, that the valuation is done on the basis of rates approved by Central Public Works Department and Central Board of Direct Taxes as on particular date adjusted according to the passage of time and also the admission that while preparing the report neither the actual quality of the material used nor the actual market rates were taken into account, we are of the opinion that such a method of determining the cost of construction could not be said to be settled methods for valuation or on a scientific basis and consequently such a report is of no use.

39.14. Further, the undisclosed income under Chapter XIV-B has to be on the basis of books and documents, etc. found during the search and the so-called valuation report of the Valuation Officer being neither a part of such seizure nor there being any material to show that the cost of construction recorded in assessee's books was not the correct, there could not be any undisclosed income on this account.

39.15. Otherwise also, the valuation report as prepared by the Valuation Officer Allahabad is devoid of any merits. As admitted by the Valuation Officer himself, during the course of hearing of appeal before us, the report had been prepared on the basis of Central Public Works Department rates without even comparing the specifications (covered by the said Central Public Works Department rates) and the specifications of the factory building of the appellant. The Valuation Officer's report does not contain the factual information about the type of material used in construction, the manner in which the construction was carried out, nor such 'information' was available in the records of the Valuation Officer. These are the important omissions, which affect the determination or cost of construction, as worked out by the Valuation Officer.

39.16. Moreover, the Central Public Works Department rates as have been applied by the Valuation Officer cannot be said to be relevant for the purposes of estimating the cost of construction and the same cannot be held to be of universal application in each and every case which is referred to the 'valuation cell' at least for following reasons 39.16. Moreover, the Central Public Works Department rates as have been applied by the Valuation Officer cannot be said to be relevant for the purposes of estimating the cost of construction and the same cannot be held to be of universal application in each and every case which is referred to the 'valuation cell' at least for following reasons (1) Cost of construction is the actual expenditure incurred by the owner in constructing the building which comprises of cost of construction material, labour components, overhead and miscellaneous unforeseen expenditure.

(2) The plinth area rate fixed by Central Public Works Department /State Public Works Department are meant for preparing preliminary/approximate estimate with fixed specification and standard quality of material and workmanship. These rates are worked out from the various tenders and cost of completion of different types of building executed by the concerned departments. This plinth area rate is rough/assessment of cost for obtaining administrative approval/budget sanction and then other detailed estimate for actual working are prepared.

(3) It is well known fact that when one constructs his own house/factory building by expending from his pocket he always takes care of procuring the material most economically without bothering for the make and manufactures name.

(4) That strict supervision by himself and his working staff and cash down payments towards purchase of material through his clients in bulk directly from source at cost price and being himself industrialist, and engaging/skilled/ unskilled labourers locally, the better output and economical construction was ensured.

(5) The owner curtailed the overhead expenditure to the minimum possible extent.

(6) The utilisation of fund is planned and reviewed weekly/fortnightly basis thus saves the interest cost, which is otherwise embedded in 'rates' whether fixed by Central Public Works Department or UPPWD.

(7) The expeditious construction obviates the extra expenditure involved in delayed and protective circumstances whereas in the government contracts the excessive investment in construction 'takes. place on the following accounts.

(i) Advance investment by the gvernment contractors towards earnest money, security deposit and purchases of raw materials.

(ii) Government works are subject of supervision by the officers from Asstt. Engineer to Chief Engineer contributing delay in progress of works.

(iii) Departmental expenses.

(iv) Post-payment made on finished items.

(v) Delay in the preparation of the bills, check measurements, pre-audit and release of payment on the executed works.

(vi) Check-up by Central Vigilance.

(vii) Payment of sale-tax and other land taxes which are avoided by the private owners.

(viii) Labour regulations and fir wages clause.

(ix) Superior specification of material from prescribed/approved manufacturers only is not taken but the quality suitable with his pocket ' is considered.

(x) The bearing capacity of soil considered in CPWD plinth area rate is 10 tonne/m2 whereas in actual the bearing capacity of soil is 20 tonn/m2 in area. Thus saving in foundation cost.

(As extracted by us from the valuation pleadings, at APB 219 to 225 which appeal to common sense and with which we concur.) 39.17. Unless a case is specifically made out for applying such rates, the valuation done mechanically just by taking Central Public Works Department rates, as the base is not sustainable The Central Public Works Department rates are the representative rates formulated after different zones of Central Public Works Department spread over throughout the country. In day-to-day practice it is found that the Public Works Department of various states are executing 'works' at a much lower rate. As has been pointed out by the learned counsel for the appellant that Tribunal allowed in a case, reduction in 'cost of construction' by applying UP PWD rates. On a `reference' made under section 256(2) the Hon'ble Allahabad High Court, did not find any infirmity in the said approach. Reference is made to the case of CIT v. Raj Kumar (1990) 182 ITR 436 (All). In any case there is no 'rebuttal' from the side of the Valuation Officer, even during the course of hearing before us, to the plea taken by the 'approved valuer' for not following the Central Public Works Department rates.

39.17. Unless a case is specifically made out for applying such rates, the valuation done mechanically just by taking Central Public Works Department rates, as the base is not sustainable The Central Public Works Department rates are the representative rates formulated after different zones of Central Public Works Department spread over throughout the country. In day-to-day practice it is found that the Public Works Department of various states are executing 'works' at a much lower rate. As has been pointed out by the learned counsel for the appellant that Tribunal allowed in a case, reduction in 'cost of construction' by applying UP PWD rates. On a `reference' made under section 256(2) the Hon'ble Allahabad High Court, did not find any infirmity in the said approach. Reference is made to the case of CIT v. Raj Kumar (1990) 182 ITR 436 (All). In any case there is no 'rebuttal' from the side of the Valuation Officer, even during the course of hearing before us, to the plea taken by the 'approved valuer' for not following the Central Public Works Department rates.

39.18. Thus from whatever angle we may examine the matter the conclusion is that the appellant's version of construction which is otherwise supported by its books of account which have been made the basis of regular assessment also, has to be accepted. In this situation, the addition on account of alleged unexplained investment in building cannot be sustained and we hold so.

Grounds No. 4.2(3)-Investment in stocks, addition-Rs, 1,93,10,480 40.1 As has been noted by us in the very beginning, search and seizure operations under section 132(1) were carried out at the factory of the appellant, situated in Malwa (District Fatehpur) Industrial Area, Distt. Fatehpur, which commenced at 8.30 AM on 3-9-1996, and got concluded on the same day at 6.15 P.M. after preparation of inventory of stocks of scrap, CTD bars of various dimensions and other material (valued at Rs. 3,60,91,726) as is borne out from Panchnama dated 3-9-1996, itself (copy available in assessee's paper book at pp. 292 to 297). At the time of entry into the factory premises, Sri Virendra Ojha, Assistant Commissioner and one of the authorised officers recorded the statement of Shri Shiva Kant (copy available at p. 326 of the documents appearing in its paper book). In the said statement, Shri Shrikant stated that he had been looking after the security of the factory in his capacity as security guard and he was not aware of the working of the factory, its stock position availability of books of account and other records, etc. In the Panchnama the names of the Pancha's are S/Sri Ganga Prasad, R/o Village Kotia, Post Malwa and Santosh Kumar, r/o Bindkhi District Fatehpur who also happened to be the security guards posted at the factory site. A copy of the said Panchnama was delivered on the same day to the abovenamed Shivakant, security guard. None of the directors of the company were available at the factory at the time of search operation as they had been detained at their residential premises situated ' at Kidwai Nagar, Kanpur, which were also covered by simultaneous action under section 132(1), nor the directors were called at the factory site during the course of search operation. It was only on the subsequent date i.e., 4-9-1996, that a copy of the Panchnama was delivered to Sri Vinod Kumar Agarwal, by the DDI (Inv.) Unit-II, Kanpur, at his camp at Malwa (District Fatehpur). While handing over a copy of the Panchnama to Sri Vinod Kumar Agarwal, his statement was also recorded (copy available at p. 333 of APB). For further reference the said statement is reproduced hereunder :

40.1 As has been noted by us in the very beginning, search and seizure operations under section 132(1) were carried out at the factory of the appellant, situated in Malwa (District Fatehpur) Industrial Area, Distt. Fatehpur, which commenced at 8.30 AM on 3-9-1996, and got concluded on the same day at 6.15 P.M. after preparation of inventory of stocks of scrap, CTD bars of various dimensions and other material (valued at Rs. 3,60,91,726) as is borne out from Panchnama dated 3-9-1996, itself (copy available in assessee's paper book at pp. 292 to 297). At the time of entry into the factory premises, Sri Virendra Ojha, Assistant Commissioner and one of the authorised officers recorded the statement of Shri Shiva Kant (copy available at p. 326 of the documents appearing in its paper book). In the said statement, Shri Shrikant stated that he had been looking after the security of the factory in his capacity as security guard and he was not aware of the working of the factory, its stock position availability of books of account and other records, etc. In the Panchnama the names of the Pancha's are S/Sri Ganga Prasad, R/o Village Kotia, Post Malwa and Santosh Kumar, r/o Bindkhi District Fatehpur who also happened to be the security guards posted at the factory site. A copy of the said Panchnama was delivered on the same day to the abovenamed Shivakant, security guard. None of the directors of the company were available at the factory at the time of search operation as they had been detained at their residential premises situated ' at Kidwai Nagar, Kanpur, which were also covered by simultaneous action under section 132(1), nor the directors were called at the factory site during the course of search operation. It was only on the subsequent date i.e., 4-9-1996, that a copy of the Panchnama was delivered to Sri Vinod Kumar Agarwal, by the DDI (Inv.) Unit-II, Kanpur, at his camp at Malwa (District Fatehpur). While handing over a copy of the Panchnama to Sri Vinod Kumar Agarwal, his statement was also recorded (copy available at p. 333 of APB). For further reference the said statement is reproduced hereunder :

"Statement on oath recorded under section 131 of the Income Tax Act 1961, from Sri Vinod Kumar Agarwal on 4-4-1996.

Oath administered Sd/- Vinod Kumar Agarwal 4/9 Before me Sd/-

Q1.

In the course of the search proceedings under section 132 of the Income Tax Act, 1961, at the factory premises of V.V.S. Alloys Ltd., stock taking has been done on 3-9-1996, for which a copy of the Panchnama along with annexure is being shown to you. Do you have any objection to this stock taking ?

A1.

Yes I have objection. The stock is not so much.

Q2.

What is the basis of your disagreement ?

A2.

On the basis of excise records which have been recorded by me today.

03. Is there any other basis ?

A3.

No Q4.

Are you sure ?

A4, Yes.

Sd/-

Vinod Kumar Agarwal 4-9-1996 All that has been said is true and correct to the best of my knowledge and belief. The statement has been given by me voluntarily and without any coercion. I have understood the statement and certify that it is correctly recorded.

Sd/- Vinod Kr. Agarwal"

40.2. In the wake of the said search operation the entire stock as inventorised by the authorised officers was put under deemed seizure as per 2nd proviso to section 132 (copy appearing at p. 322 and 323 of Supplementary APB and typed copy thereof at P. 324 and 325). Immediately after receiving the copy of Panchnama on 4-9-1996 (by Sri Vinod Kumar Agarwal) representations were made at various levels, objecting to the very process of inventorisation as adopted by the authorised officers, mistakes in noting down the quantities which were repeated and further supplemented by facts and figures before the assessing officer also during the course of assessment proceedings, in compliance with the queries raised by him. Brief particulars of the representations made after the search as well as during the assessment proceedings is given hereunder :

"(a) Representations made to DI Wing and assessing officer after search for correction of stock inventory.

Page No. (APB) Particulars 236 Telegram dated 4th Sept., 1996 to Director of Investigation.

Report dated 4th Sept., 1996 lodged with Malwa Thana.

Letter dated 4th Sept., 1996, of Loha Vyapar Mandal filed at 5.45 pm. 238 to 245 Letter dated 6th Sept., 1996, to DDI wherein detailed information was given about various irregularities in the inventory.

250-251 Letter dated 20th Sept., 1996, to Assistant Director of Income Tax.

Letter dated 25th Sept., 1996, to Assistant Director of Income Tax (lnv.) with copies given to Chief Commissioner, and Commissioner, Kanpur.

253-254 Letter dated 9th Oct., 1996, addressed to Assistant Director of Income Tax (Inv), Kanpur reiterating the objections, as may be seen from the following narration :

"Besides other points relating to inventory of stock prepared at the time of search, we, in our letter dated 6th Sept., 1996, have stated that the standard weight of one bundle of iron bar is approx, 100 Kg. and the weight of 200 Kg. adopted for item No. 4 of Annexure N-1 of the V.V.S. Alloys Ltd. is apparently wrong. We are enclosing herewith the certificate of some of the parties of lion trade for your kind consideration. Also in item Nos. 9 & 10 of inventory shows the 28 mm. round and the weight of each rod has been taken as 95 Kgs. & 40 Kgs. respectively which is also apparently wrong."

(b) Letters written to assessing officer after the centralisation of cases of Assistant Commissioner, Central Circle, Kanpur 233-234 Letter dated 18th Oct., 1996, along with copics of various representations referred to above and copies of various letters, Lelegrams, etc. submitted before DI Wing attached.

153-154 Letter dated 4th Aug., 1997, (1) About Assistant Director of Income Tax report and working sheet first time shown to the assessee on 31st July, 1997; (2) About mistakes in inventory and bundle of bar taken at 200 Kg as against 100 Kg(approx). (3) Other comparable cases where department had reinventorised the stock and method adopted by them.

Letter dated 11th Aug., 1997, Explanation of search party and other persons involved in the preparation of stock inventory.

Letter dated 1st Sept., 1997, for examination of Sri A.N. Misra by Sri Tilak, Advocate.

161 to 166 Detail letter about inventory of stock.

Position of stock as per books as per inventory prepared by search party on 31st Sept., 1996, as prepared by excise department.

Certificate of V.V.S. Con-Cast Ltd. about their material as listed in the inventory dated 3rd Sept., 1996, prepared by the authorised officer.

Letter dated 25th Sept., 1997, about weight of bundle of CTD bar 208-209 Affidavit dated 24th Sept., 1997, of Sri Mukhtiar Abbas transporter about 100 Kg. per bundle of CTD bar.

210-211 Affidavit of Sri Dulare transporter, about 100 Kg. per bundle of CTD bar.

212-213 Letter dated Nil about working stock of ingots, weighing 225.78 MT.

230-232 Letter of Shri Ganga Prasad one of the witnesses and his affidavit.

255-257 Certificates of traders engaged in the business of iron bars about weight of one bundle being 100 Kg.

40.3. The objections raised by the appellant in the post-search period as also during the course of assessment proceedings remained unattended to/overruled by the authorities concerned and in the assessment order that has been impugned before us, as addition of Rs. 1,93,10,480 was made under section 69 on account of excess stock as per the particulars given below:

Sl. No. as per inventory Item Stock as per inventory Stock as per books Excess stock Value Rs.

M.S. ingot 554.5 180.700 373.800 38,87,520 (010.400) 2 to 11 CTD bar 1,767.309 691.660 1,075.649 1,26,92,658 (011.800)

12. Kunda 20

-

2,50,000

13. Cutting scrap 418.000 179.160 238.840 19,10,720 (08000)

14. Enguit rod 21

-

2,38,770

15. Angle for platform 22.125

-

22.125 3,30,812 1,93,10,480 40.4. Sri S.K. Garg learned counsel for the appellant object to the said addition and in support of his objection he referred to the representations made from time to time, which included the submissions made before the assessing officer during the course of assessment proceedings (all such representations/submissions have been listed in para 1.2 above). The objections taken by the appellant at various stages originate from his grievance that no actual weighment/counting of pieces, bundles, heaps was carried out and the quantities mentioned in the inventory were just estimated ones, which resulted into grave errors which even stare at ones face. For example :

40.4. Sri S.K. Garg learned counsel for the appellant object to the said addition and in support of his objection he referred to the representations made from time to time, which included the submissions made before the assessing officer during the course of assessment proceedings (all such representations/submissions have been listed in para 1.2 above). The objections taken by the appellant at various stages originate from his grievance that no actual weighment/counting of pieces, bundles, heaps was carried out and the quantities mentioned in the inventory were just estimated ones, which resulted into grave errors which even stare at ones face. For example :

(a) The weight of CTD bars which along account for an addition of Rs. 1,26,92,658 has been taken as 200 Kg. per bundles whereas, as per the standard practice followed throughout the country, the weight of one bundle of CTD bars (irrespective of the thickness and dimension thereof) varies between 95 Kgs. to 100 Kgs. In support of the said contention certificates from various dealers in this line, affidavit of transporters who are regularly engaged in transportation of all sorts of grounds and merchandise, including CTD bars and other persons involved in the trade were filed. The seized records namely LP- 12 (which were maintained by labour contractors for the work done by them at various factories were also referred to (which have even been annexed to the assessment oider) These records showed that the quantity per bundle varied between 95 Kg and 105 Kgs (reference was made to pp. 56, 57 and 58 of the documents appearing in its paper book). With reference to documents appearing in its paper book 57 it was clarified that in the 12th line from the top, the number of bundles had been typed as 65 whereas it should have been 1100 (65 - 30 + 5) as was verifiable from Department in its paper book 81,

(b) Quantity of ingot mentioned as 5545 pieces was wrong and unverifiable, in as much as no working sheet (for the county said to have been done by the authorised officer) framed past of the Panchnama dated 3rd Sept., 1996.

(c) Weight of ingot has been adopted as 100 Kg. per piece whereas the weight in other cases has been taken as 94 Kgs. Sizes of the ingot have not been mentioned. In the stock, there were ingots of lesser size having lesser weight also which have not been identified and segregated. There were many rejected hollow ingot also which were much less in weight than the uniform weight adopted by the authorised officers.

(d) While working out the discrepancy in ingots, the benefit of stock weighing 45.080 tonnes as had been received from three parties on just preceding day (which were not entered in the stock register) had not been given. The necessary particulars being as under :

Name and address of party Date of Bill Truck number Excise duty paid Wt. Of ingot Bill amount Rajee Steels (P) Ltd. A20, SIDA, Mungra Badshahpur, Jalaun 31st Aug., 1996 UHJ 8377 16,902 12.520 1,29,582 Parerhat Steel Ltd. 9-A, Ind. Estate Teliarganj, Allahabad. Factory : Village Moorkamau, Distt. Banda 29th Aug., 1996 UP78B-2069 24,298 17.220 1,86,660

-do-

30th Aug., 1996 UMO-9123 21,646 15.340 1,66,281 45.080 (extracted from letter dt . document appearing in its paper book 2121 In support of the receipt of goods from the said parties the relevant documents which included excise gate passes also had been filed before the assessing officer (copies available at pp. 214, 215 and 216 of document appearing in its paper book).

(e) Exclusion of item belonging to the sister concern M/s V.V.S. Con-Cast Ltd. had wrongly been denied on the ground that the nomenclature of the items as mentioned in the said bills was different than that mentioned in the inventory. It had duly been pointed out before the assessing officer that the items were same and had been procured by the said concerned for setting up its industrial unit.

40.5. It was further emphasised by the learned counsel for the appellant that the so called working sheets were shown to the assessee for the first time on 1-7-1997, although the appellant had been making repeated request for making such calculation sheets available to it ever since the search had taken place. This fact itself went to show that no actual counting/measurement was taken and it was only to cover up their own lapse that some sheets in the name of working sheet was hurriedly prepared. The said working sheet was at least not prepared at the time of search operation, as is borne out from the fact that it does not bear the signatures of even the security guards who had been treated as Panchas by the authorised Officers. In order to extract truth the assessee had made a request vide letter dated 11-8-1997, for examination of members of the search party involved in the preparation of stock inventory and for that purpose even the name of the advocate was given to the assessing officer. The request was originally granted but later on turned down, obviously to avoid any embarrassing situation to the department. This is borne out from the letter dated 18-9-1997, written by the assessing officer. The appellant also made before us a specific reference to the letter dated 22-9-1997, written by the assessing officer. The appellant also made before us a specific reference to the letter dated 22-9-1996, (documents appearing in its paper book APB 176) which page 176 gave information about the figures of stock as noted by the excise department on 6-9-1996, to demonstrate that the 'inventory' of stock, was prepared by the authorised officer was not reliable. During the course of hearing the Panchnama dated 6-9-1996, prepared by the excise authorities according to which the stock was much less than recorded by the authorised officers of the Income Tax Department. According to the learned counsel for the appellant such Panchnama also went to expose the fallacy in the inventory prepared by the department.

41. With reference to all these submissions it was finally pleaded that the inference drawn about the stock said to have been found in 'excess' on the date of search was wholly unfounded, based on mere hear say and estimate, without carrying out any physical counting/weighment. The narration of the authorised officers was not worthy of reliance and addition made on such unreliable narration cannot be sustained. The onus squarely lied on the department to prove that the appellant was the owner of stock of the magnitude mentioned in the inventory and as the said burden had not been discharged, the addition deserves to be deleted.

42. On behalf of the revenue Sri S. Chopra supported the conclusion drawn by the assessing officer about the excess stock found during the course of search and addition made on that basis. He pleaded that the inventory had been prepared in the presence of the staff of the appellant company and the stage for objection to the process of inventorisation, was the stage when the inventory was being prepared. No such objection was raised at that time. Moreover, the working sheet prepared by Sri Virendra Ojha a responsible officer of the department and one of the authorised officers in the search goes to show that actual counting/weighment was done. The reason for not making the working sheet as a part of the Panchnama was not vital, as it is not usually done. Shri Ojha in his report has pointed out that while preparing the inventory even zero mistake in the weighing scale was sought to be eliminated by comparing standard weight of certain things (such things have not been specified in the report). He also pointed out that the appellant could not have claimed his records to be truthful as the search operation led to the recovery of large number of incriminating documents connected with business done by the appellant outside the books of account. This was a serious factor which cannot be ignored. He further referred to page 176 of document appearing in its paper book, which is a part of the explanation submitted by the appellant itself during the course of assessment proceedings. The said chart contained the figures of stock-taking as done by the excise authorities on 6-9-1996. Even the inventory prepared by the excise authorities revealed that the appellant had been carrying stock of finished goods as well as raw material in excess than what was revealed by the so called excise records as have been claimed to have been maintained by it.

43. We have considered the submissions made on behalf of the parties before us, perused the papers referred to by each one of them as also the assessment order. The undisputed position is that the entire process of search and seizure operation, and preparation of inventory has been completed in a short period of less than 10 hours. It is unbelievable that during such a short period, the stock worth Rs. 3.61 crores (in round figure) as per the estimate made by the authorised officers themselves could be weighed/counted physically. It was a very tedious task which would have taken several days. Moreover, for counting/weighing such a huge volume of stock substantial manpower was needed. The Panchnama nowhere makes a mention that such manpower was arranged by them or was otherwise available to the authorised officers. In his undated report (copy appearing at document appearing in its paper book 327) Sri Virendra Ojha the authorised officer has mentioned that there were 100=150 labourers available in the factory whose assistance was taken in the valuation, we repeat valuation of the stock, we are unable to appreciate as to how the assistance of 100-150 labourers could have been taken in the valuation of stock. Moreover, about CTD bars (saria) he has mentioned that there were approximately 42 heaps. If the report does not contain precise information about such a small quantity then it is unimaginable that the search party might have actually counted the huge volume of stocks and noted its quantity correctly. As has been pointed out by the learned counsel for the appellant, the calculation sheets (copy at page 330 of document appearing in its paper book) is also undated and the way it has been prepared it does not inspire confidence. No explanation could be given even by the learned counsel for the revenue , at the time of hearing of appeal, for not making the said calculation sheet and the report of the authorised officer available to Sri Vinod Kumar Agarwal to whom copy of Panchnama was delivered on 4-9-1996, when he was summoned at the camp office of the DDI at Malwa on 4-9-1996. The appellant had been repeatedly representing about the mistakes in the inventory, before DI Wing and kept even the Commissioner/Chief Commissioner, Kanpur informed about its grievance. The same remained unattended to. On the face of such repeated representations, the delay in making the calculation sheet and the report of the authorised officer, available to the assessee after more than 10 months had passed, precisely on 31-7-1997, is also inexplicable. The appellant's argument that the weight of CTD bars had been taken at 200 Kgs, per bundle was erroneous as the standard weight varies between 95 and 105 Kgs. could also not be met by the learned Additional Standing Counsel for the department. On the other hand, as has been rightly pointed out by the counsel for the appellant, the seized material itself contains an evidence to the fact that weight of each bundle, irrespective of its dimension varies between 95 and 105 Kgs. giving an average of 100 Kg per bundle. Certificates/affidavits given by the transporters about the standard weight per bundle, which go to support the appellant's version also remained unrebutted. This irregularity along, which is so glaring and for which no further reference is needed, itself has the effect of diminishing the credibility of the inventory prepared by the authorised officers. Therefore, the said inventory cannot alone be taken as a basis for coming to the conclusion that there was excess stock to the tune of Rs. 1,93,10,418.

44. However, the matter does not rest here. It is also a fact that incriminating material which went to suggest business transactions outside the books of account were found. Therefore, all is not well with the appellant and the excise records as kept by the appellant cannot be treated to be, reflecting the stock position correctly. As per the Panchnama dated 6-9-1996, as prepared by the excise authorities, on being called by the Income Tax Department (copy of which was placed before us during the course of hearing) also goes to show that the excise officials also noted excess stock to the tune of Rs. 27,76,456. During the intervening period of 3rd, 4th and 5-9-1996, there was no production. In our considered opinion the information contained in the Panchnama prepared by the excise department on 6-9-1996, provides a reliable data of the stock position on the date of search. As per the Panchnama the excess stock worked out to Rs. 27,76,456 as per details given below:

Particulars Stock as per excise records (MT) Stock as per excise records (MT) Stock found by the excise department (MT) Stock found by the excise department (MT) Excess stock (MT) Excess stock (MT) Value (Rs.) Value (Rs.) Ingots 148.24 343.58 195.34 20,31;536 CTD bars 691.66 716.41 24.75 2,92,050 Scrap 179.16 200.00 20.84 1,66,720 Ingot found loaded in two trucks (parked in the factory premises) Nil 24.25 24.25 2,86,450 27,76,456 In the statement given by the assessee during the course of assessment proceedings (copy at page 176 of documents appearing in its paper book) the figures of steel ingot was taken at 225.78 as against 148.24; the difference of 77.50 MT has been claimed on account of "stock" received from five parties, but which could not be entered in the excise records on 2-9-1996. Two bills were found during the course of search and the same are under seizure also. The remaining 3 bills were duly submitted before the assessing officer during the course of assessment proceedings, copies of which are available in the documents appearing in its paper book also. The assessing officer while making and addition of Rs. 1.93 crores in round figure has given credit for 2 bills which are under seizure. Looking to the fact that remaining 3 bills were also produced before the assessing officer and such bills were accompanied by excise gatepasses (issued at the end of the suppliers) it would be just and proper to allow credit for all the 5 bills (instead of 2 bills for which credit has already been allowed by the assessing officer) from the quantity working out by the excise department as per Panchnama dated 6-9-1996, particulars of which have been given above. On doing such an exercise, the value of excess stock works out to Rs. 19,70,040 as per the working given below:

Rs.

Value of excess stock as worked out by the excise department 27,76,456 Deduct : Proportionate value of Steel ingot weighing 77.54 Mt as covered by 5 bills 20,31,536 x 77.54/195.34 8,06.416 Say 19,70,000 Our finding therefore, is that the value of excess stock for which addition is called for under section 69 of the Act is Rs. 19,70,000.

45. So far as the assessee's claim to set off, of undisclosed income determined on account of undisclosed investment in excess stock, against the undisclosed income, if any, determined on account of profit of undisclosed business or on account of undisclosed income determined separately, we are of the opinion that in the fairness of things, the appellant deserves such set off and consequently we direct the assessing officer to allow the appropriate set off.

46. Coming to the assessee's claim of deduction under section 80IA, we, after considering the submissions of the parties are of the opinion that the issue requires consideration at the level of assessing officer, consequently the issue relating to the deduction under section 80IA is remanded back to the assessing officer with the directions that the same may be considered and decided in accordance with law after allowing the assessee an opportunity of being heard.

47. In the result the assessment order for block period dated 30-9-1997, framed under section 158BC of the Income Tax Act, is quashed on legal ground. On merits the undisclosed income is to be computed as per our observations at appropriate places.