Page 1 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 15

th

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:

Civil Appeal No. 2 667 of 2007 Page 1 of 21

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

appellant companies on 22

nd

June, 1998 on the strength of

warrant of autorization dated 19

th

June, 1998 which went upto in

the morning hours of 23

rd

June, 1998. It was followed by further

searches from time to time which went on till 5

th

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 22

nd

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 This notice was withdrawn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 10

th

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 19

th

July, 2000 for

conducting special audit for the aforesaid block period.

Civil Appeal No. 2 667 of 2007 Page 2 of 21

Page 3 5)A Writ Petition (Civil) No. 4685 of 2000 was filed by the

appellants, wherein a challenge was laid to the aforesaid order

dated 29

th

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 10

th

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 30

th

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 22

nd

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

Civil Appeal No. 2 667 of 2007 Page 3 of 21

Page 4 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 31

st

August, 2000 and not on 30

th

June, 2000 as claimed by the

appellants. As per the respondents, since seizure operation were

conducted from 22

nd

June, 1998 and these operations concluded

only on 5

th

August, 1998, the time limit of two years for completion

of “Block Assessment” was to expire only on 31

st

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 14

th

September, 2000.

Mr. R.D. Jolly, Advocate accepts notice on

behalf of respondents.

Civil Appeal No. 2 667 of 2007 Page 4 of 21

Page 5 C.M. No. 7227/2000

Notice for 14

th

September, 2000. Mr. Jolly

accepts notice.

Counter be filed by 13

th

September, 2000.

Interim stay of the orders dated 29

th

June,

2000.

Annexure-A read with Annexure-B dated

10

th

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 15

th

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 others

1

.

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

favour of the Department holding that the period between 24

th

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

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

th

June,

2000 and 15

th

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

Civil Appeal No. 2 667 of 2007 Page 5 of 21

Page 6 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 24

th

August, 2000, the direction to exclude the period

between 24

th

August, 2000 to 15

th

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 30

th

June, 2000 in terms of Section 158BE(1) of the

Act, the direction to exclude the limitation period between 24

th

August, 2000 to 15

th

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 5

th

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:

Civil Appeal No. 2 667 of 2007 Page 6 of 21

Page 7 (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 24

th

August, 2000 to 15

th

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 24

th

August, 2000 staying the direction for

special audit contained in order dated 29

th

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 31

st

August, 2000, instead of 30

th

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.;

Civil Appeal No. 2 667 of 2007 Page 7 of 21

Page 8 (a)Whether the period of limitation expired on 31

st

August, 2000 or

the last date for completing block assessment was 30

th

June,

2000?

(b)Whether the period between 24

th

August, 2000 to 15

th

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

Civil Appeal No. 2 667 of 2007 Page 8 of 21

Page 9 (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 24

th

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

Civil Appeal No. 2 667 of 2007 Page 9 of 21

Page 10 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. 1

st

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 29

th

June, 2000 and 10

th

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

Civil Appeal No. 2 667 of 2007 Page 10 of 21

Page 11 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. ITO

2

, 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)

Civil Appeal No. 2 667 of 2007 Page 11 of 21

Page 12 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

Civil Appeal No. 2 667 of 2007 Page 12 of 21

Page 13 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 Others

3

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

Civil Appeal No. 2 667 of 2007 Page 13 of 21

Page 14 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

Civil Appeal No. 2 667 of 2007 Page 14 of 21

Page 15 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 Enterprises

4

. 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

Civil Appeal No. 2 667 of 2007 Page 15 of 21

Page 16 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

Civil Appeal No. 2 667 of 2007 Page 16 of 21

Page 17 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 22

nd

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 5

th

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 19

th

June, 1998, the last date by which the

assessment was to be carried would be 30

th

June, 2000. If it is to

be counted from 5

th

August, 1998, then the limitation period was

to expire on 31

st

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 24

th

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

Civil Appeal No. 2 667 of 2007 Page 17 of 21

Page 18 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 31

st

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 5

th

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 22

nd

June, 1998 on the basis of said

Warrant of Authorisation dated 19

th

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

Civil Appeal No. 2 667 of 2007 Page 18 of 21

Page 19 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 19

th

June, 1998, was

executed on 22

nd

June, 1998 and the search came to an end with

that when the search party left the premises on 23

rd

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

Civil Appeal No. 2 667 of 2007 Page 19 of 21

Page 20 counted 'on the conclusion of search as recorded in the last

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

admittedly drawn on 5

th

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 22

nd

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

5

th

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

Civil Appeal No. 2 667 of 2007 Page 20 of 21

Page 21 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 22

nd

June, 1998 and finally concluded on 5

th

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. 5

th

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.

Civil Appeal No. 2 667 of 2007 Page 21 of 21