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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2667 OF 2007

VLS FINANCE LTD. & ANR. .....APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX & ANR. .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

In this appeal, challenge is laid to that part of the judgment

of High Court of Delhi dated 15th December, 2006 whereby High

Court has held that the block assessment proceedings initiated by

the  respondent-Department  against  the  appellants  herein  have

not become time barred, by giving the respondents benefit of the

period during which proceedings were pending in the High Court,

in view of some interim orders passed in those proceedings which

remained operative till the writ petition filed by the appellants were

decided finally.  Factual background leading to the present appeal

is as under:

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2) Search and seizure took place in the business premises of the

appellant  companies  on  22nd June,  1998  on  the  strength  of

warrant of autorization dated 19th June, 1998 which went upto in

the morning hours of 23rd June, 1998.  It was followed by further

searches from time to time which went on till 5th August.

3) Notice  under  Section  158BC(c)  of  the  Income  Tax  Act,  1961

(hereinafter  referred  to  as  the  “Act')  was  issued on  28 th June,

1999 requiring the appellants to furnish return for the block period

from April 1, 1988 to 22nd June, 1998.  This notice was withdrawn

and  another  notice  was  issued  on  26.07.1999.   In  response

thereto, the appellants filed return for the aforesaid block period

on 10th September, 1999.    As per  Section 158BE of  the Act,

assessment is to be completed within two years from the end of

the month in which the last of the authorisation for search under

Section 132 or for requisition under Section 132A, as the case

may be.  However, the assessing officer could not do so because

of  certain  developments  which  took  place  and  are  narrated

hereinafter.

4) A direction  under  Section  142(2A)  was  issued  on  29.06.2000,

which  was  served  to  the  appellants  on  19th July,  2000  for

conducting special audit for the aforesaid block period.  

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5) A  Writ  Petition  (Civil)  No.   4685  of  2000  was  filed  by  the

appellants, wherein a challenge was laid to the aforesaid order

dated  29th June,  2000 issued by  respondent  no.  2  directing  a

special audit in respect of appellants under Section 142(2A) of the

Act.  In the said writ petition, the appellants also challenged the

clarificatory order dated 10th August, 2000 issued by respondent

no. 2 with regard to special audit in respect of appellant no. 1 for

the  period  from the  Assessment  Year  1994-95  to  Assessment

Year  1998-99  and  insofar  as  appellant  no.  2-the  period  for

Assessment Year 1994-95 to Assessment Year 1996-97.

6) During  the  pendency  of  the  writ  petition,  as  amendment

application was filed being CM No. 9305/2006, seeking to add

additional ground that the Block Assessment Proceedings under

Section 158BC(c) of the Act were time barred.  The appellants

submitted that the time limit for completion of Block Assessment

expired on 30th June, 2000 in terms of Section 158BE of the Act,

since  2  years  period  expired  on  that  date.   It  was  further

submitted  that  the  authorization  executed  on  22nd June,  1998

could  not  have  been  utilized  for  conducting  further  search  till

August, 1998.  it was also contended that the order under Section

142(2A) of the Act was issued in violation of principles of natural

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justice  as  there  was  no  complexity  in  the  accounts  of  the

appellants and, therefore, there was no justification in law to order

special audit under Section 142(2A) of the Act.

7) The respondents filed their  affidavit  in reply to the show cause

explaining that the order for special audit under Section 142(2A)

of  the  Act  was  issued  with  proper  authorization  made  by

Commissioner of Income Tax after due deliberation and on the

basis  of  the  report  of  the  Assessing  Officer  viz.  Assistant

Commissioner of Income Tax, New Delhi.  It was further submitted

that the period of completion of block assessment was to expire

on 31st August, 2000 and not on 30th June, 2000 as claimed by the

appellants.  As per the respondents, since seizure operation were

conducted from 22nd June, 1998 and these operations concluded

only on 5th August, 1998, the time limit of two years for completion

of “Block Assessment” was to expire only on 31st August, 2000.

8) In Writ Petition (Civil) No. 4685 of 2000, interim order dated 24 th

August, 2000 was passed, which reads as under:

“C.W. No. 4685/2000 Notice to the respondents to show cause as

to why petition by not admitted, returnable on 14th September, 2000.

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

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

accepts notice.

Counter be filed by 13th September, 2000.

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

Annexure-A  read  with  Annexure-B  dated 10th August, 2000.”

   9) This stay remained in operation during the pendency of the writ

petition.

10) The matter was finally heard and decided by the Delhi High Court

vide judgment dated 15th December, 2006.  It  has quashed the

direction for special audit in view of the fact that no hearing was

afforded to the appellant before issuing such direction, which was

necessary as per the law laid down in the case of Rajesh Kumar

and others Vs. Dy. Commissioner of Income Tax and others1.

11) However,  the  High  Court  decided  the  question  of  limitation  in

favour  of  the Department  holding that  the period between 24th

August, 2000, i.e, date on which interim order was passed staying

special  audit  direction  under  Section  142(2A)  dated  29th June,

2000 and 15th December, 2016,  i.e.,  when the High Court  has

passed the order setting aside the direction for special audit, be

1 (2007) 2 SCC 181

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excluded in counting limitation for concluding block assessment.

12) The appellants contended before the High Court that since there

was no stay on block assessment proceedings in terms of interim

order dated 24th August, 2000, the direction to exclude the period

between 24th August, 2000 to 15th December, 2006 was beyond

its  jurisdiction.   It  was alternatively  contended before  the  High

Court that the limitation for passing the block assessment having

expired on 30th June, 2000 in terms of Section 158BE(1) of the

Act,  the direction to  exclude the limitation period between 24 th

August,  2000 to  15th December, 2006 would  not,  in  any case,

save limitation.  While rejecting the aforesaid contentions raised

by the appellants, the High Court held that since special audit was

an important  and integral  step in the assessment  proceedings,

once the direction for special audit was stayed by the High Court,

assessment  proceedings  ipso facto  could not  go on.  The High

Court  rejected  the  assessee's  second  alternative  argument

holding that limitation period of two years was to be calculated

from 5th August, 1998, on which date last panchnama was drawn.

13) In the instant appeal, impugning the decision of the High Court,

following substantial questions of law are raised for consideration

by this Court:

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(a) Whether on the facts and circumstances of the case, the

High Court having quashed the direction under Section 142(2A)

of the Act was justified in law in directing to exclude the period

between 24th August, 2000 to 15th December, 2006 in counting

the period of limitation for passing the block assessment order?

(b) Whether on the facts and circumstances of the case, the

interim order  dated 24th August,  2000 staying the  direction  for

special audit contained in order dated 29th June, 2000, could be

construed as amounting to stay of assessment proceedings?

(c) Whether on the facts and circumstances of the case, the

High Court  erred in  law in holding that  the period of  limitation

expired on 31st August, 2000, instead of 30th June, 2000, in terms

of Section 158BE(1) read with Explanation 2 thereto?

(d) Whether on the facts and in the circumstances of the case,

it  is  permissible  under  Section  132  of  the  Act  that  the  same

warrant of authorization be executed 16 times and be revalidated

again and again instead of issuing fresh authorization for each

visit and whether such revalidation can be done without recording

any reasons justifying the revalidation as in the present case.

14) In  effect  the  central  issue  is  one  of  limitation,  which  has  the

following two facets, viz.;

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(a) Whether the period of limitation expired on 31st August, 2000 or

the  last  date  for  completing  block  assessment  was  30 th June,

2000?

(b) Whether the period between 24th August, 2000 to 15th December,

2006, when interim stay was in operation, required to be excluded

for the purposes of counting limitation period?

15) First, we shall take up the second issue for discussion.  It is not in

dispute  that  the  period  during  which  interim  stay  of  the  order

passed by  the  court  is  in  operation  has  to  be  excluded  while

computing the period of two years as limitation period prescribed

for completing the block assessment.  The parties have, however,

joined issue on the nature of stay order which qualify for such

exclusion.  For this, it  would be necessary to scan through the

language of Explanation 1 to Section 158BE(2) of the Act.  This

provision makes the following reading:

“Explanation  1.  -  In  computing  the  period  of limitation for the purposes of this section, -

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

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

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(iii) & (iv) xxx xxx xxx

shall be excluded:

Provided xxx xxx xxx”

16) The plea of the appellants is that only that period can be excluded

in computing the period of  limitation,  during which assessment

proceedings were stayed.  A certain distinction was tried to be

drawn in the instant case by referring to the interim order which

was passed by the High Court on 24th August, 2000 which has

stayed the order of the Department directing compulsory audit.  It

was,  thus,  argued  that  stay  was  limited  only  to  conducting

compulsory  audit  and  there  was  no  stay  of  the  assessment

proceedings.  

17) M/s. Ganesh and Vohra, learned senior counsel appearing for the

appellants made a fervent plea to the effect that in the absence of

any stay of the assessment proceedings, there was no embargo

on  the  part  of  the  assessing  authority  to  proceed  with  the

assessment  even  when  the  order  directing  special  audit  was

stayed, and therefore, benefit of the aforesaid explanation would

not be available to the respondents.  It was argued that the High

Court had committed an error in giving the benefit of the exclusion

of the said period on a wrong premise that special audit was an

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integral part of the assessment proceedings.  It was also argued

that Explanation 1, as it existed at the relevant time, did not make

any  provision  for  excluding  the  period  from  the  date  when

assessing officer directs the assessee to get his accounts audited

till the date when the assessee is required to furnish the report of

such audit.  Such an amendment, it was pointed out, is made in

Clause (ii)  of  Explanation to Section 153B of  the Finance Act,

2013, w.e.f. 1st June, 2013 to fill the lacunae that existed in the

statutory framework and this would also fortify the submissions of

the  appellants  that  at  the  relevant  time  there  was  no  such

provision for exclusion of the time period during which there was a

stay of special audit but no stay assessment proceedings.  It was

also argued that insofar as the provision relating to limitation is

concerned  it  needs  strict  interpretation,  and  certain  judgments

were referred to, by the learned counsel, in this behalf.

18) Ms. Pinky Anand, learned ASG, on the other hand, supported the

order of the High Court by arguing that with the passing of High

Court  order  staying the orders dated 29th June,  2000 and 10th

August,  2000 passed under  Section  142(2A)  of  the  Act  which

meant  that  the  Department  was  prevented  from  carrying  out

special audit, it was not possible to proceed with the assessment

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as  well  as  inasmuch  as  the  assessing  officer  at  the  time  of

passing the order under Section 142(2A) of the Act recorded his

satisfaction  that  in  order  to  carry  out  the  proper  assessment,

special audit was essential.  She, thus, submitted that the High

Court  rightly  held  that  special  audit  was  integral  part  of  the

assessment.

19) We have already reproduced the language of Explanation 1.  it is

not in doubt that this explanation grants benefit of exclusion only

for those cases where 'the assessment proceeding is stayed by

an  order  or  injunction'  of  the  court.  On  literal  construction,

therefore,  it becomes clear from the reading of this provision that

the period that is to be excluded while computing the period of

limitation  for  completion  of  Block  Assessments  is  the  period

during which assessment proceedings are stayed by an order of a

court and this provision shall not apply if the stay of some other

kind,  i.e,  other  than  staying  the  assessment  proceedings,  is

passed.   The  counsel  for  the  appellants  are  justified  in  their

contention  that  the  provision  relating  to  limitation  need  to  be

strictly  construed.   In  the case of  K.M.  Sharma Vs.  ITO2,  this

principle is laid down in the following words:

“13.   Fiscal  statute,  more particularly  a provision such  as  the  present  one  regulating  period  of

2 (2002) 254 ITR 772 (SC)

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limitation must receive strict construction.  The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to litigant for indefinite period on future unforeseen  events.   Proceedings,  which  have attained  finality  under  existing  law due to  bar  of limitation  cannot  be  held  to  be  open  for  revival unless  the  amended  provision  is  clearly  given retrospective operation so as to allow upsetting of proceedings,  which  had  already  been  concluded and attained finality.”

20) As  a  general  rule,  therefore,  when  there  is  no  stay  of  the

assessment proceedings passed by the Court, Explanation 1 to

Section 158BE of the Act may not be attracted.  However, this

general statement of legal principle has to be read subject to an

exception in order to interpret it rationally and practically.  In those

cases where stay of some other nature is granted than the stay of

the  assessment  proceedings  but  the  effect  of  such  stay  is  to

prevent the assessing officer from effectively passing assessment

order, even that kind of stay order may be treated as stay of the

assessment proceedings because of the reason that  such stay

order becomes an obstacle for the assessing officer to pass an

assessment  order  thereby  preventing  the  assessing  officer  to

proceed  with  the  assessment  proceedings  and  carry  out

appropriate assessment.  For an example, if the court passes an

order  injuncting  the  assessing  officer  from  summoning  certain

records either from the assessee or even from a third party and

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without  those  records  it  is  not  possible  to  proceed  with  the

assessment proceedings and pass the assessment order, even

such  type  of  order  may  amount  to  staying  the  assessment

proceedings.  In that context, we would like to comment that the

High  Court,  in  the  impugned  judgment  has  propounded  the

correct  and  relevant  test,  viz.,  whether  the  special  audit  is  an

integral part of the assessment proceedings, i.e., without special

audit it is not possible for the assessing officer to carry out the

assessment?  If it is so, then stay of the special audit may qualify

as  stay  of  assessment  proceedings  and,  therefore,  would  be

covered by the said explanation.

21) The question, therefore, is as to whether, in the given case, the

High Court was right in holding that the special audit was not only

a  step  in  the  assessment  proceedings,  but  an  important  and

integral step, in the absence of which an assessment order could

not be made.  In support of the aforesaid conclusion, the High

Court referred to the judgment in Auto and Metal Engineers and

other  Vs.  Union  of  India  and  Others3 wherein  this  Court

examined  in  detail  as  to  what  constitutes  assessment

proceedings.  The Court in that case was interpreting Explanation

1 to Section 153 of the Act, which is pari materia to Explanation 1

3 (1998) 229 ITR 399

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of 158BE of the Act.  The said provision was interpreted in the

following manner:

“Sub-section  (1)  of  section  153  prescribed  the period  of  limitation  within  which  an  order  of assessment could be passed.  For the assessment years in question the last date for making the order of assessment under the said provision was March 31,  1972.   By  Explanation  1  to  section  153  the period of limitation prescribed under sub-section (1) for making the order of assessment was extended by  the  period  during  which  the  assessment proceeding was stayed by an order or injunction of any court.  The object of the Explanation seems to be  that  if  the  Assessing  Officer  was  unable  to complete the assessment on account of an order or injunction  staying  the  assessment  proceeding passed by  a court  the  period  during  which  such order  or  injunction  was  in  operation  should  be excluded for the purpose of computing the period of limitation for making the assessment order.  The process of assessment thus commences with the filing of the return or where the return is not filed, by the issuance by the Assessing Officer of notice to  file  the  return  under  section  142  (1)  and  it culminates  with  the  issuance  of  the  notice  of demand  under  section  156.   The  making  of  the order of assessment is, therefore, an integral part of  the process of  assessment.   Having regard to the fact that the object underlying the Explanation is to extend the period prescribed for making the order of assessment, the expression “assessment proceeding” in the Explanation must be construed to comprehend the entire process of  assessment starting from the stage of filing of the return under section  139  or  issuance  of  notice  under  section 142(1) till  the making of the order of assessment under  section  143(3)  or  section  144.   Since  the making of the order of assessment under section 143 (3) or section 144 of the Act is an integral part of the assessment proceeding, it is not possible to split the assessment proceeding and confine it up to the stage of inquiry under sections 142 and 143 and exclude the making of the order of assessment from its ambit.  An order staying the passing of the final order of assessment is nothing but an order

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staying  the  assessment  proceeding.   Since  the passing of the final order of assessment had been stayed by the Delhi High Court by its order dated November 23, 1971, in the writ petitions, it must be held  that  there  was  a  stay  of  assessment proceedings  for  the  purpose  of  Explanation  1  to section 153.”

22) The aforesaid judgment applies on all force, as rightly held by the

High Court.  We may also refer to the judgment of the Madhya

Pradesh  High  Court  in  Commissioner  of  Income  Tax  Vs.

Dhariwal Sales Enterprises4.  That was a case where special

audit report under Section 142(2A) of the Act was called for but

could not  be submitted.   The High Court  held that  time period

spent  for  obtaining  a  copy  of  the  report  upto  the  time  when

intimation of non-submission was given by the assessee would be

excluded.   

23) We, therefore, agree with the High Court that the special audit

was  an  integral  step  towards  assessment  proceedings.   The

argument of the appellants that the writ petition of the appellant

was  ultimately  allowed  and  the  Court  had  quashed  the  order

directing  special  audit  would  mean  that  no  special  audit  was

needed and, therefore, it was not open to the respondent to wait

for special audit, may not be a valid argument to the issue that is

being dealt with.  The assessing officer had, after going through

4 (1996) 221 ITR 240

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the matter, formed an opinion that  there was a need for special

audit and the report of special audit was necessary for carrying

out the assessment.  Once such an opinion was formed, naturally,

the assessing officer would not proceed with the assessment till

the time the special audit report is received, inasmuch as in his

opinion,  report  of  the  special  audit  was  necessary.   Take  a

situation where the order of special audit is not challenged.  The

assessing  officer  would  naturally  wait  for  this  report  before

proceeding further.  Order of special audit followed by conducting

special audit and report thereof, thus, become part of assessment

proceedings.  If the order directing special audit is challenged and

an interim order is granted staying the making of a special report,

the assessing officer would not proceed with the assessment in

the absence of the audit as he thought, in his wisdom, that special

audit report is needed.  That  would be the normal and natural

approach of the assessing officer at that time.  It is stated at the

cost of repetition that in the estimation of the assessing officer

special audit was essential for passing proper assessment order.

If the court, while undertaking judicial review of such an order of

the assessing officer directing special audit ultimately holds that

such an order is wrong (for whatever reason) that event happens

at a later date and would not mean that the benefit of exclusion of

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the period during which there was a stay order is not to be given

to the Revenue.  Explanation 1 which permits exclusion of such a

time is not dependent upon the final outcome of the proceedings

in which interim stay was granted.   

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

25) With this, we revert to the other question, viz. from which date the

period of  limitation is  to  be counted,  i.e.  from 22nd June,  1998

when  the  respondent  authorities  visited  the  premises  of  the

appellants  on  the  basis  of  Warrant  of  Authorisation  dated  19 th

June,  1998  or  5th August,  1998,  on  which  date  the  Revenue

authorities last visited the premises of the appellants on the basis

of the same Warrant of Authorisation dated 19 th June, 1998 and

conducted the search of the appellants premises.  If the period is

to be counted from 19th June, 1998, the last date by which the

assessment was to be carried would be 30th June, 2000.  If it is to

be counted from 5th August, 1998, then the limitation period was

to expire on 31st August,  2000.   In  the event  the last  date for

completing the block assessment is held to be 30 th June, 2000,

then the assessment became time barred even before the interim

stay was granted by the High Court  as it  was granted on 24th

August, 2000, i.e. after the supposed limitation period was over

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and,  therefore,  the  conclusion  which  we  have  recorded  in

answering the other question, as above, would not come to the

rescue of the Department.  On the other hand, if  the period of

limitation was to expire on 31st August, 2000, then by virtue of our

answer  to  the  first  issue,  the  period  of  limitation  for  block

assessment has not expired inasmuch as this Court has passed

an order dated 5th February, 2007 that audit may go on but no

final  assessment  order  be passed.   Because of  this  reason,  it

becomes necessary to decide this aspect of the matter as well.

26) The argument of learned counsel for the appellants on this issue

is  that  there  was  only  one  warrant  of  authorisation  which

empowered the Revenue authorities to carry out search and visit

of the revenue officials on 22nd June, 1998 on the basis of said

Warrant  of  Authorisation  dated  19th June,  1998,  would  end  in

exhausting the said warrant of authorisation.  It was argued that

for  subsequent  visits,  fresh  authorisation  was  required  and  no

such  authorisation  was  taken  and,  therefore,  subsequent

searches are illegal  and no benefit  thereof should enure to be

respondent.

27) We  may  point  out  that  the  appellants  never  challenged

subsequent  visits  and  searches  of  their  premises  by  the

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respondents  on  the  ground  that  in  the  absence  of  a  fresh

authorisation  those  searches  were  illegal,  null  and  void.

Notwithstanding  the  same,  it  was  argued  that  at  least  for  the

purpose of limitation the subsequent searches could not be taken

into consideration, as according to the learned counsel, the legal

position was that  the authorisation dated 19th June, 1998,  was

executed on 22nd June, 1998 and the search came to an end with

that when the search party left the premises on 23rd June, 1998

after  making  seizure  of  certain  documents  etc  and  issuing

restraint  order  under  Section  132(3)  of  the  Act  in  respect  of

certain  items  which  they  allegedly  could  not  seize  due  to

impracticability  on  that  day.  Some judgments  of  various  High

Courts are relied upon to support this proposition.  It  was also

argued that there was no concept of 'revalidation of authorisation'

provided under the Act, which has been applied by the High Court

in  the  impugned  judgment,  which  according  to  the  learned

counsel for the appellants, amounts to legislating a new concept

which is contrary to law.

28) The learned Additional  Solicitor  General,  refuting the aforesaid

contention,  submitted  that  as  per  explanation  (2)  to  Section

158BE, when it is a case of search, period of limitation is to be

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counted  'on  the  conclusion  of  search  as  recorded  in  the  last

panchnama  drawn.....'   It  was argued that last  panchnama  was

admittedly drawn on 5th August,  1998 and, therefore,  period of

limitation is to be counted from that date.

29) After  considering  the  respective  submissions,  we  are  of  the

opinion that on the facts of this case, the issue also has to be

answered in favour of the Revenue without going into the legal

niceties.

30) As noticed above, the revenue authorities visited and searched

the premises of  the appellants  for  the  first  time on 22nd June,

1998.  In the  panchnama  drawn on that date, it  was remarked

'temporarily  concluded',  meaning  thereby,  according  to  the

revenue authorities,  search had not  been concluded.   For  this

reason,  the  respondent  authorities  visited  many  times  on

subsequent  occasions  and  every  time  panchnama  was  drawn

with the same remarks, i.e. 'temporarily concluded'.  It is only on

5th August,  1998  when  the  premises  were  searched  last,  the

panchnama  drawn on that  date  recorded the remarks that  the

search  was  'finally  concluded'.   Thus,  according  to  the

respondents, the search had finally been completed only on 5 th

August, 1998 and panchnama was duly drawn on the said date as

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well.   The  appellants,  in  the  writ  petition  filed,  had  no  where

challenged  the  validity  of  searches  on  the  subsequent  dates

raising a plea that the same was illegal in the absence of any

fresh  and  valid  authorisation.   On  the  contrary, the  appellants

proceeded  on  the  basis  that  search  was  conduced  from  22nd

June, 1998 and finally concluded on 5th August, 1998.

31) On the aforesaid facts and in the absence of any challenge laid by

the  appellants  to  the  subsequent  searches,  we  cannot

countenance the arguments of the appellants that limitation period

is not to be counted from the last date of search when the search

operation completed, i.e. 5th August, 1998.  Therefore, this issue

is also decided in favour of the respondents.

32) In view of the foregoing, this appeal is liable to be dismissed and

is, accordingly, dismissed with costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; APRIL 28, 2016.

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