W.P.(C)/4685/2000 of M/S VLS FINANCE LTD. Vs COMM. OF INCOME TAX on 8 December 2006

1. M/s. VLS Finance Ltd.C-489, Defence ColonyC-489, Defence Colony New Delhi.

2. M/s. South Asian Enterprises Ltd.C-489, DefenceColonyNew Delhi.C-489, DefenceColonyNew Delhi.

Petitioners

Through

Mr. O.S. Bajpai withMr. V.N. Jha, Advocates

versus

1. The Commissionerof Income Tax (Central-II)5th Floor, Mayur BhawanConnaught Place, New Delhi.5th Floor, Mayur BhawanConnaught Place, New Delhi.

2. Deputy Commissioner of Income Tax

Central Circle-XXI7th Floor, Mayur BhawanConnaughtPlace,New Delhi.7th Floor, Mayur BhawanConnaughtPlace,New Delhi.

Respondents

Through

Mr. P.P. Malhotra, ASG with

Mr. R.D. Jolly, Mr.Chetan Chawlaand Mr.Gaurav Sharma, Advocatesand Mr.Gaurav Sharma, Advocates

V

Coram;

HON'BLE MR. JUSTICE MADAN B. LOKURHON'BLE MR. JUSTICE VIPIN SANGHI

MADAN B. LOKUR. J.

A writ petition under Article 226 of the Constitutionhasbeen filed by two companiessharing the same address. Thoughfrom the record it is not very explicit, but it appears that theDirectors in both the companies are common.

2. Initially,the writ petitionwas filed primarilychallenginganorder dated 29^ June, 2000 issued by Respondent No.2 directingthat a special audit be conducted in respect of the Petitionersunder Section 142 (2A) of the Income Tax Act, 1961 (the Act) byM/s. Khanna and Anandam & Co., Chartered Accountants. A

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challenge was also made to an order dated 10"^ August, 2000which clarified that the special audit in respect of Petitioner No.lcovers the period from the assessment year 1994-95 to assessment No.2 it coversyear 1998-99 and in respect of Petitionerthe periodfrom the assessment year 1994-95 to assessment year 1996-97.

3. Subsequently, the Petitioners sought to amend the writpetition by including a prayer challenging a notice dated 28*^August, 2000 issued under Section 143 (2) of the Act.Thatamendment application (CM No.10173/2000) has not yet beenallowed although the writ petition was admitted for final hearing.We now allow the amendment application and dispense with thefiling of a formal amended writ petition.

4. A further application for amendment (CM No.9305/2006)was made by the Petitioners seeking to add some additionalgrounds and also a prayer to the effect that the block assessmentproceedingsunder Section158 BC (c) of the Act may be held as

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time barred.This amendmentwas allowed by us on 1st August, 2006 and the filing of a formal writ petition was dispensed with.

5. The Respondents have filed their affidavits in response tothe various allegations made in the writ petition as also to theapplications filed by the Petitioners.

6. Accordingto the Petitioners,a search and seizure took placein their business premises and at the residential premises of thepromotersand Directorsof the Petitionercompanies. The searchand seizure operationscommencedand concludedon 22"'^ June,1998 but were illegallycontinuedtill 5^^ August,1998.

7. It is submitted that the time limit for completing the blockassessment expired on 30*^ June, 2000 in terms of Section 158BCof the Act since the two year period expired on that date.Thiscontentionof the Petitioners is based on the premise that thesearch authorization, having been executed on 22^^^ June, 1998,

8. The Petitionersfurther submit that on 29^ June, 2000, thatis, a day before the period of limitationwas to expire as per thecalculation of the Petitioners, an order was passed by RespondentNo.2 under Section 142 (2A) of the Act, which was communicatedto them on 19'^ July, 2000, that is after expiry of the limitationperiod for making the block assessment.Nevertheless, thePetitioners filed their block returns on lO'^ September, 1999 andthereafterno further notices have been received by them forinitiation of block assessment proceedings.

9. The Petitioners contend that the order passed under Section142 (2A) of the Act was issued without complying with theprinciplesof naturaljusticeand without any applicationof mind inas much as there is no complexity in the accounts of thePetitionersandthatthe Assessing Officer only desired theaccountsto be re-writtenand insteadof explicitlysayingso,WP (C) No.4685/2000Page5 of 33

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perhaps because the assessments were likely to become timebarred, an order was passed under Section 142 (2A) of the Act.

10. It is submittedthat in the case of PetitionerNo.l regularassessment for the assessment year 1997-98 was completed on 3V^March, 2000 without the need for a special audit and that thisassessment year also falls in the block period.Similarly,in thecase of Petitioner No.2, a regular assessment was made for theassessmentyears 1996-97and 1997-98 on SO'^ March, 1999 and31'' March, 2000 respectivelyagain without the need for a specialaudit and both these assessment years are included in the periodcovered by the special audit.

11. The principal preliminarycontention of learned counsel forthePetitionersis that the blockassessmenthad becometimebarredon30^^ June,2000 and thatcontinuedsearchesandseizures by the Respondentsuntil 5*^ August, 1998 were not onlymala fide but were not authorized by law.These illegal searchesand seizures could not extend the period of limitation and theWP (C) No.4685/2000Page 6 of 33

Respondents have proceeded on a wrong understanding of thelegal position in this regard.

12. The Respondents filed an affidavit in answer to show causein which it is contended that the search and seizure proceedingsthat continued till 5"^ August, 1998 were valid in law and that theperiod of completionof the blockassessmentwas to expireon 31®'August, 2000 and not on SO'^ June, 2000, as alleged by thePetitioners.

13. It is stated by the Respondents by way of background factsthat on 28*^ April, 2000 Respondent No.2 had sent a detailedproposal to the Commissionerof Income Tax, Delhi (Central)-IIgiving the reasons for seeking approval of a special audit underSection 142 (2A) of the Act. It was explained that the accountsmaintained by the Petitioners were intricate and complex andinvolved a huge revenue, which is why a special audit wasnecessary.Paraphrasing the reasons, it has been stated onaffidavit as follows:- WP (C) NoA685/2000

"The deponent had mentioned that the petitioner hadmanipulated their figures in such a manner that heavybook profits have eventually been converted to heavylosses. It was mentioned by the Assessing Officer thatthe initial enquiries at Madras as well as the perusalreport by DDIT has shown a bogus claim of 100%depreciation by the petitioner.The evidence inpossession of the Department indicated that theallegedlosstransactionswereinfactshamtransactionsand these transactionsactually involvedre-routing of money through third parties, throughcircular entries, after payment of minor amount forassistancein the dubiousactivities.Variousexpenseshave been claimed which are to be disallowedand infact the Balance Sheet will have to undergo a see (sic)change because of over-valuationof the assets andchange of other important heads.It was alsomentioned by the deponent that basically all theentries relating to the loss have to be put backtrackedand fresh positionhas to be ascertained, therefore, theentirefinancialstatementsare to be re-drawn.Thedeponent was of the view that the entire exercise isvery complex and require inputs from a professionalChartered Accountant. The deponent therefore madea proposalvide its letter dated 28.4.2000 to the CITseeking approval of Special audit."

14. The matter was then examined by the Commissioner ofIncome Tax who made certain enquiries from Respondent No.2and thereafter on 24th May, 2000 he granted approval to have theaccounts of the Petitioners audited through a special audit.It is

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statedonaffidavitthattheorderwaseventuallypassedbyRespondent No.2 on 29'^ June, 2000 and it was sent to thePetitioners by registered post on 17th July, 2000. On 19'^ July,2000,theCharteredAccountantof thePetitionerscontactedRespondent No.2 and received another copy of the order passedunder Section 142 (2A) of the Act.It was stated that the specialauditor appointed by Respondent No.2 had raised certain queriesandin answerto thosequeriesand to keepthe Petitionersinformed. Respondent No.2 issued the letter dated 10*^ August,2000 clarifying the assessment years for which the special auditwas required to be carried out.

15. The Petitionershave refutedthe avermentsmade by theRespondentsand have denied receipt of the order dated 29^^ June,2000, alleged to have been sent by registered post on 30"^ June,2000. It is stated that the order was sent on 17^ July, 2000, afterthe period of limitation for making the block assessment hadexpired.

16. As can be seen from the above, the broad issues that needconsideration,and this is what was argued before us, are whetherthe search of the premises could be conducted until 5^ August,1998 on the basis of a single search authorizationwhich wasexecuted on 22""^ June, 1998 and whether the period of limitationfor completing the block assessment had expired onJune,2000, as contended by learned counsel for the Petitioners or thatthe period of limitation was to expire on 31"^ August, 2000, ascontended by the Respondents.The third issue in this case iswhether the principles of natural justice were complied with andwhether the accounts of the Petitioners were complex enough tojustify the ordering of a special audit under Section 142 (2A) ofthe Act.

17. It may be mentioned that in the writ petition the Petitionershave also challenged the constitutional validity of Explanation (2)to Section 158BE of the Act but no arguments were addressed inthis regard and indeed no such issue was urged before us.

Conclusion

BE of the Act read as follows:

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"158 BE (1)The order under section 158 BC shall bepassed - (a)XXXXXXXXX

(b) within two years from the end of the month inwhich the last of the authorisationsfor search underSection 132 or for requisitionunder section 132A, asthe case may be, was executed in cases where a searchis initiatedor books of account or other documentsorany assets are requisitioned on or after the 1st day ofJanuary, 1997.

(2) XXXXXXXXX

Explanation 1.xxxxxxxxx

Explanation 2. - For the removal of doubts, it is herebydeclaredthattheauthorisationreferredtoin subsection (1) shall be deemed to have been executed, - (a)in the case of search, on the conclusion of searchas recorded in the last panchnama drawn in relation toany person in whose case the warrant of authorisationhas been issued; (b)in the case of requisition under section 132A, onthe actual receipt of the books of account or otherdocuments or assets by the Authorised Officer."

19. On a plain reading of this section as well as the explanation,it is quite clear that a search under Section 132 of the Act willconclude on the day the last panchnama is drawn.This is also theview taken by a Division Bench of this Court in B.M. Lai v. CIT(Delhi),[2005] 279 ITR 298 wherein it was observedand wequote:"11.From a plain reading of Explanation 2(a), it isevident that an authorizationreferred to in sub-section(1) is deemed to have been executed on the conclusionof the search as recorded in the last panchnama drawnin relation to any person in whose case the warrant ofauthorizationhas been issued.What is note worthy isthat the time-limit for the making of an order underSection158BG read with Section158BE(1)will startfrom the last of panchnamas."

20. A similar view has also been taken by the Kerala High Courtin T.O. Abraham and Co. and Another v. Assistant Director ofIncome Tax (Investigation)and others, [1999] 238 ITR 501.

21. The Petitionerhas annexed as AnnexuresC to C-15, a totalof 16 panchnamas that were prepared as a result of the searchconducted on various dates starting from 23rd June, 1998 till 5thWP (C) No.4685/2000Page 12 of 33

August, 1998.The last panchnamahaving been drawn on 5thAugust, 1998, in terms of Section 158BE (l)(b)of the Act, theperiod of two years will come to an end in the end of August,2000.

22. A perusal of these panchnamas clearly shows that a warrantof authorizationwas signed and shown each time the search wasconducted and the contents thereof were explained to the personpresent at the premises to be searched.Therefore, it is not as ifthe officers of the Respondents conducted the search without anyvalid authorization.That it took several days for the search to beconcluded is an indication of the fact, as contended by the learnedAdditional Solicitor General, that a large number of documentshad to be gone through. In fact, we were told during the course oforal submissions that the Respondents had to go through as manyas 5000 documentsand this was not controvertedby learnedcounsel for the Petitioners.Of course, we would have been muchhappier if this had been so stated by the Respondents on affidavit,but in the absenceof any denialby learnedcounselfor theWP (C) No.4685/2000Page 13 of 33

Petitioners,we will assume that what we are told at the Bar iscorrectand that the Respondentsinspectedas many as 5000documents.

23. During the course of hearing we were also shown the searchauthorization.It hasbeen'revalidated',asit were,beforeconductingthe search,althoughthe panchnamasdo not soindicate.We would only comment, in this regard, that it would beprocedurally much healthier if a separate search authorization isissued on every occasion or at the least the panchnama shouldmake a reference to the subsequent dates of issue of the searchauthorization.

24. LearnedcounselforthePetitionersrelieduponB.K.Nowlakhav. Union of India,[1991]192 ITR 436 to contendthat the Respondents could have, and if it was necessary, ought tohave, seized the books of accountratherthan pass a restraintorder and return several times to go through the accounts of thePetitioners.We are not able to appreciatethe relevance of thisWP (C) No.4685/2000Page 14 of 33

decision to the facts of this case. If it is practicableto seize thebooksof accountunderSection132(1)of theAct,thentheauthorized officer should do so. If it is not possible or practicableto do so, the authorizedofficer may then pass a restraint orderunder Section 132(3) of the Act. Prior to its amendmentin 2002(the period with which we are concerned), Section 132(8A) of theAct provided that an order passed under Section 132(3) shall notbe in force for a period exceeding 60 days, except where anextensionis grantedfor reasons to be recordedin writing. InNowlakha the articles in question, some antiques, were believedto represent undisclosed income and could be seized but were not.Instead, restraint orders were passed in respect thereof "solelywith a view to circumvent the provisions of section 132(8A)". Inview of these facts, it was held that continuationof the restraintorder under Section 132(3) of the Act was not warrantedand adirection was given to the authorized officer to release the articlesin question. This issue does not at all arise in the present case.Assuming for the sake of argument that the books of account ofthe Petitionerscould be seized but were not seized (wrongly), theWP (C) No.4685/2000Page 15 of 33

seizure could have been affected on 22"^^ June,1998 (the firstday). The last panchnama was drawn on 5*^ August, 1998 wellbefore the 60 day period was to expire. Therefore, no ulteriormotives can be attributed to the Respondents in failing to seize thebooks of account and instead passing a restraint order in theirrespect. Learned counsel for the Petitioners has not been able toshow us any prejudice caused to his clients.

25. Similarly, reliance on C.J.T. v. Mrs. SandhyaP. Naik,[2002] 253 ITR 534 is misplaced. In that case, the Income TaxAppellate Tribunal found as a matter of fact that the search wasconcluded on 20*^ October, 1996. It was in this context that theHigh Court observed that by merely stating in the panchnama thatthe search is temporarily suspended, the authorized officer couldnot keep the search proceedings alive by passing a restraint orderunder Section 132(3) of the Act. No doubt the assessee requestedfor the release of some articles for pooja etc. and this request wasgranted and on 26*^ October, 1996 some articles were released.But the High Court held, agreeing with the Income Tax AppellateWP (C) NoA685/2000Page 16 of 33

Tribunal that the proceedingson 26*^ October, 1996 were not incontinuation of the proceedings that had already concluded on20'^ October, 1996.

26. The question that therefore arises for our consideration iswhether the search, subject matter of this writ petition, hadconcludedonJune,1998or not?If it did not, was itunreasonablyprolonged for some collateral reason? If it did, (ascontended by learned counsel for the Petitioners), then thelimitation period for making the assessment order would end on30"" June, 2000. However, if the search proceedings did not endon22'''^ June, 1998buton5*^ August, 1998 as contended bythe learned Additional Solicitor General, then the limitation periodfor making the assessment order would end on 31"'August, 2000.

27. The answer to these questions lies in the averments made inthe writ petition itself, the Respondents being completely silent ontheseissuesin theiraffidavits.It has beenstatedin the writpetition that the Respondentshad drawn up 16 panchnamasinm> CO No.4685/2000Page 17 of 33

respect of the visits that they had made to the premises of theRespondents.No seizures were made on 10 occasions, meaningthereby that the Respondents had affected seizures on 6 occasions.It must be remembered that the Respondents were concerned withthe books of account of the Petitionersand documentsto confirmthat they had undisclosed income - the Respondents were notconcerned with articles representing undisclosed income, unlike inNowlakhaandP.Naik.WhattohaveSandhyaappearshappened, from a perusal of the various panchnamas, is that theRespondents went through the books and seized only thosedocuments that were necessary, rather than seizing all the booksand documents of the Petitioners. Can the Respondents be faultedfor following a less drastic procedure? We do not think so.

28. That the task of examining the documents relevant forseizure was quite cumbersome is clear from an illustration given filed onby the Respondents in their additional affidavitAugust, 2001.On29^ June,1998(Annexure C-2)dieRespondents seized books of account and documents as perWP (C)No.4685/2000Page 18 of 33

inventory in Annexure AAA-1 to AAA-5. A perusal of thedocuments(which run into at least 215 pages)as per Annexure AAA-3 shows, as stated on affidavit that, "From the perusal of the above, it is seen that M/sDivya Films Internationalhas identified11 films to bepurchasedfrom M/s GaneshEnterprisesand has askedM/sVLSFinanceLtd.topurchasethemforR.2,11,54,551.11andthatM/sDivyaFilmsInternationalwould take these films on lease from M/sVLSFinanceLtd.forquarterlyleaserentalofRs.20,80,200/-for12quartersaggregatedtoRs.2,49,62,400/-forwhichM/sDivyaFilmsInternational Ltd. have given promissory notes. Thesepromissory notes have again been discounted by M/sVLS Finance Ltd. from M/s Flex Finance Ltd. Thus themoney originally spent by M/s VLS Finance Ltd. hasagain circulated back to it only."

The Respondentscould have, on the very first day of the search,seizedall relevantand irrelevantdocumentsand books of thePetitioners, but they did not do so. We are of the view that theirdecision on this (in favour of the Petitioners)cannot be usedagainst them. We have also kept in mind two facts, namely, thateven by adopting this procedure, the Respondents did not exceedthe 60 day limit as provided by Section 132(8A) of the Act andthat for making the assessment order the Respondents had stillWP (C) No.4685/2000Page 19 of 33

more than adequate time available, making it unnecessaryforthem to resort to any subterfuge so early on. Consequently,we areof the opinion that the Respondentsdid not completethe searchon 22°^^ June, 1998 as alleged by the Petitioners, nor did theyunduly prolong it. The search concludedon 5'^ August, 1998 andso in terms of Explanation 2 to Section 158 BE of the Act theperiod of limitation would begin from the end of August, 1998,that is, 31st August, 1998 onwards.[See B.M. Lai].The secondissue raised by learned counsel for die Petitioners would standanswered accordingly.

29. The final issue is with regard to the validity of the orderpassed by the Respondentson 29*^ June, 2000 under Section142(2A) of the Act. According to learned counsel for the Petitioners,the principles of natural justice were not complied with beforepassing that order. Moreover, the accounts of his clients were notcomplex nor was there any meaningful interaction between theRespondentsandthePetitioners whichcouldleadthe

Respondents to conclude that the accounts were complex andnecessitated a special audit.

30. After we hadconcluded hearing,thedecision of theSupremeCourtinRajeshKumar&Othersv.DeputyCommissionerof IncomeTax & Others,[2006]287 ITR 91came to our notice and it appeared to have a material bearing onthis issue.Consequently, we thought it appropriateto list thematterfor directionsso that we could explainthe position tolearned counsel for the parties and hear them on the applicabilityof the decision before pronouncing judgment.

31. Accordingly, the matter was listed for directions on 24thNovember, 2006 and after the position was explained to learnedcounsel, it was adjourned to 1st December, 2006 for furtherhearing. On 1st December,2006, the matter was adjourned to 8thDecember, 2006 on which date learned counsel for the parties

addressed arguments on the applicabilityof the decision of theSupreme Court.

32. Having examined the decision of the Supreme Court, wefind that it has been held by the Supreme Court that an orderpassed under Section142(2A) of the Act is not an administrativeorder but a judicial order which affects the rights of the assessee.Consequently,it is necessarythat notice is given to the assesseebefore an order is passed under Section142(2A) of the Act. Theoperativeportion of the decision of the Supreme Court reads asfollows "The hearing given, however, need not be elaborate.The notice issued may only contain briefly the issueswhich the Assessing Officer thinks to be necessary.The reasons assigned therefor need not be detailedones. But, that would not mean that the principles ofjustice are not required to be complied with.Onlybecause certain consequences would ensue if theprinciples of natural justice are required to becompliedwith, the same by itselfwould not mean thatthe court would not insist on complying with thefundamental principles of law.If the principles ofnatural justice are to be excluded, Parliament couldhave said so expressly. The hearing given is only interms of section 142(3) which is limited only to the

findings of thespecial auditor.The order ofassessment would be based upon the findings of thespecialauditor subjectof course to their acceptancebythe Assessing Officer. Even at that stage the assesseecannot (can?) put forward a case that power undersection 142(2A) of the Act had wrongly been exercisedand he has unnecessarily been saddled with a heavyexpenditure.Anappeal against theorder ofassessment,as noticed hereinbefore,would not serveany real purpose as the appellate authority would notgo into such a question since the direction issuedunder section 142 (2A) of the Act is not an appealableorder."

Analysis

33. In view of the decision renderedby the Supreme Court, itmust be held that the order dated 29th June, 2000 passed underSection 142(2A) of the Act could have been passed only after anotice was issued to the Petitioner which has not been done in thiscase.Consequently, the order dated 29th June, 2000 must be,and is, set aside. We propose to consider the effect of this a littlelater.

34. One of the issues canvassed by learnedcounsel for thePetitionerswas that even if it is assumedthat the period oflimitation was to expire on 3V^ August, 2000 that date is longWP CO No.4685/2000Page 23 of 33

since over and there being no order restrainingthe Respondentsfrom completingthe assessment,and the Respondentsnot havingcompletedit, the assessmentproceedingsare now time barred.Wecannot agree with learned counsel. On 29'^ June, 2000 theRespondentshad passed an order under Section 142(2A) of theAct directing the Petitionersto get their accounts audited througha specialauditor. By a subsequentorder dated lO*^ August, 2000the period of the special audit was mentioned. When thePetitioners challenged these orders, a Division Bench passed anorder on 24^ August, 2000 stating, inter alia:

"Interim stay of the orders dated 29.6.2000 Annexure-^read with Annexure-B dated 10.8.2000."

On 17^ October, 2000 the interim order was made absolute andhas continuedtill date.

35. What is the effect of the interim order granted by this Court?As a result of the orders passed by this Court, the RespondentswererestrainedfrominsistinguponaspecialauditbeingWP (C) No.4685/2000Page 24 of 33

conducted.Consequently,theassessmentorder,whichisdependent on the completion of the special audit, could not bemade. It is not correct to say that the assessment order could havebeen made notwithstanding that no special audit is carried out. Inthe given facts of the case, a special audit is not only a step in theassessment proceedings, but it is an important and integral step, inthe absenceof which an assessmentordercannotbe made.Itwould, therefore, be a little facetious to say that the assessmentproceedingscould have gone on without the specialaudit havingbeenconductedandif theRespondentsdidnotmake anassessmentorder,it was at their peril. In Shree ChamundiMopeds Ltd. v. Church of South India Trust Assn., (1992) 3 SCC1 the Supreme Court considered the effect of an interim orderpassed by a Court and held, "While considering the effect of an interim orderstaying the operation of the order under challenge, adistinction has to be made between quashing of anorder and stay of operation of an order. Quashing ofan order results in the restorationof the position as itstood on the date of the passing of the order which hasbeen quashed. The stay of operation of an order doesnot, however, lead to such a result. It only means thattheorderwhichhasbeenstayedwouldnotbe

operativefrom the date of the passingof the stay orderand it does not mean that the said order has beenwiped out from existence."

In a slightlydifferent context, the Supreme Court consideredtheissue in BPL Ltd. v. R. Sudhakar,(2004)7 SCC 219 andobserved:

"If in a pending proceeding operation of order isstayed pending disposalof the main matter such as anappeal or revision,obviouslythe impugnedorder doesnot get quashed or wiped out. It only remainssuspended."

36. In Raj Kumar Dey & Ors. v. Tarapada Dey & Ors., AIR

1987 SC 2195, the Supreme Court examined the scope of a stayorder on calculationof time/limitation.In this case, an awardcould not be registered within the time stipulated by theRegistration Act owing to an interim injunction and an orderdirecting the award to be deposited in Court. The Supreme Courtallowed the entire period during which the stay order was inoperationto be excludedwhile applyingthe maxim lex non cogit

ad impossibilia or the law does not compel a man to do that which he cannot possibly perform.

37. Explanation1 to Section 158BE (2) of the Act enlists thevarious periods that would be excludedin the computationof the of limitationfor theof that section. In so far as itperiod purpose is relevant, Explanation 1 reads as follows "ExplanationL - In computingthe periodof limitation for the purposes of this section, -

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

(ii) the period commencingfrom the day on which theAssessing Officer directs the assessee to get hisaccountsauditedundersub-section(2A)of section142 and ending on the day on which the assessee isrequired to furnish a report of such audit under thatsub-section;or

(iii) & (iv) xxx xxx xxx

shall be excluded:

Provided xxx xxx xxx"

38. This leads us to examine the meaningof the expression"assessment proceedings".

39. The Supreme Court in Auto and Metal Engineers & Ors. v.

Union of India & Ors., [1998] 229 ITR 399 has examined indetail as to what constitutes assessment proceeding.The ApexCourt, while interpreting a provision pari materia to Explanation 1to Section 158BE (2) of the Act, which also provides for extensionof limitation for completion of assessment in certain contingencies, observed and we quote:

"Sub-section (1) of section 153 prescribed the period oflimitation within which an order of assessmentcould bepassed. For the assessment years in question the lastdate for making the order of assessment under the saidprovision was March 31, 1972. By Explanation 1 tosection 153 the period of limitation prescribed undersub-section (1) for making the order of assessment wasextended by the period during which the assessmentwasproceeding stayed by an order or injunctionof anycourt. The object of the Explanationseems to be that ifthe Assessing Officer was unable to complete theassessment on account of an order or injunction stayingthe assessment proceeding passed by a court the periodduring which such order or injunction was in operationshould be excluded for the purpose of computing theperiod of limitation for makingthe assessmentorder."

"The process of assessment thus commences with thefiling of the return or where the return is not filed, bythe issuance by the Assessing Officer of notice to file thereturn under section 142 (1) and it culminates with theissuance of the notice of demand under section 156. Themaking of the order of assessment is, therefore, anintegralpartof the process of assessment.Havingregard to the fact thatthe object underlying theExplanation is to extend the period prescribed formakingtheorderofassessment,theexpression"assessment proceeding" in the Explanationmust beconstruedtocomprehendtheentireprocessofassessment starting from the stage of filing of the returnunder section139 or issuanceof noticeunder section142 (1) till the making of the order of assessment undersection 143 (3) or section 144. Since the making of theorder of assessmentunder section143 (3) or section144 of the Act is an integral part of the assessmentproceeding, it is not possible to split the assessmentproceeding and confine it up to the stage of inquiryunder sections 142 and 143 and exclude the making ofthe order of assessment from its ambit. An order stayingthe passing of the final order of assessment is nothingbut an order staying the assessment proceeding. Sincethe passing of the final order of assessment had beenstayed by the Delhi High Court by its order datedNovember 23, 1971, in the writ petitions, it must beheld that there was a stay of assessment proceedings forthe purpose oi Explanation 1 to section 153."

40. InCommissionerof IncomeTaxv.DhariwalSalesEnterprises, [1996] 221 ITR 240, a Division Bench of theMadhya Pradesh High Court observed that in a case where specialWP (C) No.4685/2000Page29 of 33

audit report under 142 (2A) of the Act was called for but couldnot be submitted, the time period spent for obtaining a copy of thereport upto the time whenintimation of non submission wasgiven by assessee could be excluded.

41. In the present case, with a stay of the operation of the orderdated 29th June, 2000 read with order dated 10th August, 2000,the special audit was stayed, which was an integral part of theassessment proceedings. Moreover, the effect of the stay orderdated 24^^ August, 2000 which was confirmed on l?'^ October2000, was that the period which commenced with the issuance ofthe order dated 29th June, 2000 for the completion of the specialaudit, was interdicted by the said orders and did not come to anend. Consequently, the period from the date of the first interimorder passed by this Court, that is, from 24th August, 2000 till will have to be excluded for the oftoday, purposes calculatinglimitation.

WP (C) NoA685/2000

42..LearnedcounselforthePetitionersraisedafewotherancillarysubmissions.It was submittedthat the order dated 29^June, 2000 was not received till much later and that it was quitevague since the assessment years for which the special audit wasrequired to be made was not mentioned. There is no substance ineither of these contentions. Admittedly, the Petitioners receivedthe order dated 29th June 2000 beforethe cut-off date of 31''August, 2000 and the assessmentyears for which the specialauditwas to be made were also specified before that date. No prejudicehasbeencausedto thePetitionersby theallegeddelayincommunication, as long as the Petitioners received it before 31''August, 2000.

43. It wasalso submittedby learnedcounselthatregularassessments had been made in respect of some assessment yearscovered by the block period. Since for these assessment years aspecial audit was not necessary, therefore, the entire exercise bythe Respondents is vitiated. We are of the view that this is of nosignificance. Assessment includes reassessment (Section 2(8) ofWP CO No.4685/2000Page 31 of 33

the Act) and if reassessment was permissible in law, it does notmatter at all if a special audit is ordered for that particular year aswell.

44. Having quashed the order dated 29th June, 2000, it is notfor us to say what the consequence of this will be. All that we cansay is that for all practicalpurposes, die period from 24th August,2000 until today shall be excluded for any calculations that theRespondentswish to make in respectofthe periodoflimitation. Ifafter exclusion of this period the Respondents are still entitled, inlaw, to issue a notice to the Petitioners for passing an order underSection 142(2A) of the Act, then of course they may do so. On theother hand, if they are not now entitled to issue a notice forwhatever reason, then the result thereof will follow. We are notcommenting on this one way or the other since no submissionswere made before us in this regard one way or the other.

4f

45. With theseobservations,we disposeof the writ petitic[n]making it clear that the period spent in litigation, that is, from24th August, 2000 till today will inure to the benefits of theRespondents and will not be included for calculation of time.making it clear that the period spent in litigation, that is, from24th August, 2000 till today will inure to the benefits of theRespondents and will not be included for calculation of time.

46. Dasti.

Madan B. Lokur, J

Vipin Sanghi, J

December 15, 2006

ncg

Certified that a corrected copy of thejudgmenthas been transmittedinthe main Server.

WP (C) NoA685/2000