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Addl. Commissioner of Income-tax Vs. Indian Pharmaceuticals - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 198 of 1976
Judge
Reported in[1980]123ITR874(MP)
ActsIncome Tax Act, 1961 - Sections 263, 271 and 271(1)
AppellantAddl. Commissioner of Income-tax
RespondentIndian Pharmaceuticals
Appellant AdvocateA.N. Mathura, Adv.
Respondent AdvocateG.M. Chaphekar, Adv.
Excerpt:
.....assessment does not mean only computation of income but consideration of all facts including the liability for penalty, or, as the language of section 271(1)(a) indicates, consideration of facts that may attract the provisions contained in that section. in that decision, a division bench of the madras high court took the view that under section 12(2) of the tamil nadu general sales tax act power is conferred to make the assessment and once the assessment is made the power has been exercised properly as, according to their lordships, the assessment could not be set aside on the ground that the assessing officer overlooked the provisions of section 12(3) of that act and failed to exercise the power while making the assessment. act is concerned, the scheme of assessment as considered by..........of demand notices and the filing of appeals and for reviewing assessment and section 34 deals with assessment of incomes which have escaped assessment. the expression 'assessment' used in these sections is not used merely in the sense of computation of income and there is in our judgment no ground for holding that when by section 44, it is declared that the partners or members, of the association shall be jointly and severally liable lo assessment, it is only intended to declare the liability to computation of income under section 23 and not to the application of the procedure for declaration and imposition of tax liability and the machinery, for enforcement thereof. nor has the expression, 'all the provisions of chapter iv shall so far as may be apply to such assessment' a restricted.....
Judgment:

Oza, J.

1. This is a reference made by the Income-tax Appellate Tribunal, Indore. The question of law referred by the Tribunal is :

'Whether the Tribunal was justified in holding that the exercise of jurisdiction under Section 263 by the Additional Commissioner of Income-tax in respect of penalty actions is without jurisdiction and bad in law '

2. The assessee is a registered firm of three partners. It filed its returns of income for the assessment years 1967-68 and 1968-69 on 31st October,1968. The accounting period for these two years followed by the assessee was the financial year ending on 31st March, 1967, and 31st March, 1968. The income returned in each year was accepted with slight modifications by the ITO who completed the assessments on the same day, i.e., 7th January,1969, under Section 143(3) of the I.T. Act, 1961 (hereinafter referred to as ' the Act'), determining the assessable income at Rs. 59,118 and 1,08,044. The Additional Commissioner set aside both these orders exercising jurisdiction under Section 263 of the Act on the ground that the assessee had not paid any tax on self-assessment basis nor had it filed any estimate or paid, any advance tax in terms of Section 212(3). The ITO completed the assessments without issuing any penalty notice under Section 273(b). No notices were also issued even for delay in submitting these returns nor any penalty was levied in terms of Section 271(1)(a) of the Act, The Commissioner, therefore, felt that prima facie the orders passed by the ITO were erroneous and prejudicial to the interests of the revenue.

3. Against this order of the Additional Commissioner the assessee preferred an appeal before the Tribunal in respect of both the assessment orders. The Tribunal, after hearing the appeals, came to the conclusion that the assessment orders passed by the ITO for the years 1967-68 and 1968-69 were not erroneous and the Additional Commissioner had no jurisdiction to revise them under Section 263. It was held that the exercise of jurisdiction by the Additional Commissioner under Section 263 of the Act was bad in law and the orders of the Additional Commissioner were, therefore, set aside except the order about interest. The Additional Commissioner thereafter approach-ed the Tribunal by two separate applications to make reference pertaining to both the years of assessment and as the appeals were disposed of by common order the Tribunal has made this reference as the same question arises with regard to both the assessments.

4. It was contended by learned counsel appearing for the revenue that proceedings for assessment under Section 143 of the Act are proceedings where the ITO had to apply his mind to the circumstances which would attract the provisions contained in Section 271(1)(a) as it is only during the proceedings pending before the ITO that the ITO has to be satisfied about the existence of facts which would attract the provisions contained in Section 271(1)(a) of the Act. He, therefore, contended that while proceeding with the proceedings of assessment and ultimately passing an order of assessment if the ITO has omitted to consider the facts which-would attract Section 271(1)(a) and has failed to apply his mind, this will be an error in the proceedings which would confer jurisdiction on the Commissioner under Section 263 of the Act. Learned counsel, in support of his contentions, placed reliance on C. A. Abraham v. ITO : [1961]41ITR425(SC) and CIT v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) . It was also contended that the Tribunal has placed reliance on a decision of the Madras High Court in M.A. Abdul Waheed v. CCT [1972] 30 STC 277 ; but that decision will have no application in the present case and according to learned counsel the decisions referred to above of their Lordships of the Supreme Court conclusively establish that during the proceedings of assessment under Section 143 of the Act, the ITO is expected to apply his mind to the facts attracting the provisions contained in Section 271(1)(a) of the Act.

5. Learned counsel appearing for the assessee on the other hand contended that Section 263 of the Act confers jurisdiction on the Commissioner only in cases where there is any error in the order passed by the ITO and that error is prejudicial to the interests of the revenue. He contended that the orders of assessment passed by the ITO in the instant case have not been found to be erroneous as apparently it could not be contended that there is any error in those orders under Section 143 of the Act. He contended that what their Lordships of the Supreme Court in the two cases cited by learned counsel for the revenue held was that it is in the proceedings for assessment that jurisdiction could be exercised for imposition of penalty as, according to their Lordships, the term 'assessment' is used in a wider sense. But learned counsel contended that it could not be said that if the ITO has failed to notice certain facts which could attract the provisions contained in Section 271(1)(a), the order of assessment is erroneous. He, therefore, contended that the case relied upon by the Tribunal is the case which applies with full force and the Tribunal was right in following that case.

6. Section 271(1)(a) of the Act provides:

'271(1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person-

(a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, or..........

he may direct that such person shall pay by way of penalty.......'

7. It is clear from this provision that the ITO or the AAC in the course of any proceedings under this Act, if he is satisfied about the existence of facts enumerated in Sub-clause (a) quoted above, an order for payment of penalty could be passed. It is, therefore, clear that if no proceedings are pending before the ITO, Section 271(1) could not be used to impose penalty. It is also apparent that it is only in the proceedings pending before an ITO that he may discover the facts attracting Sub-clause (a). Section 143 of the Act provides for the assessment and when proceedings of assessment are pending before an ITO it is not disputed that he is free to consider if the facts come to his notice attracting Section 271(1)(a) of the Act.

8. In C.A. Abraham v. ITO : [1961]41ITR425(SC) , while considering the word 'assessment', their Lordships of the Supreme Court observed (at page 429):

' A review of the provisions of Chapter IV of the Act sufficiently discloses that the word 'assessment' has been used in its widest connotation in that chapter. The title of the chapter is ' Deductions and Assessment '. The section which deals with assessment merely as computation of income is Section 23 ; but several sections deal not with computation of income, but determination of liability, machinery for imposing liability and the procedure in that behalf. Section 18A deals with advance payment of tax and imposition of penalties for failure to carry out the provisions therein. Section 23A deals with power to assess individual members of certain companies on the income deemed to have been distributed as dividend, Section 23B deals with assessment in case of departure from taxable territories, Section 24B deals with collection of tax out of the estate of deceased persons, Section 25 deals with assessment in case of discontinued business, Section 25A with assessment after partition of Hindu undivided families and Sections 29, 31, 33 and 35 deal with the issue of demand notices and the filing of appeals and for reviewing assessment and Section 34 deals with assessment of incomes which have escaped assessment. The expression 'assessment' used in these sections is not used merely in the sense of computation of income and there is in our judgment no ground for holding that when by Section 44, it is declared that the partners or members, of the association shall be jointly and severally liable lo assessment, it is only intended to declare the liability to computation of income under Section 23 and not to the application of the procedure for declaration and imposition of tax liability and the machinery, for enforcement thereof. Nor has the expression, 'all the provisions of Chapter IV shall so far as may be apply to such assessment' a restricted content; in terms it says that all the provisions of Chapter IV shall apply so far as may be to assessment of firms which have discontinued their business. By Section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest or contumacious conduct of the assessee. It is true that this liability arises only if the Income-tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends, upon the circumstances of the case.'

9. These observations of their Lordships, therefore, clearly indicate that the assessment does not mean only computation of income but consideration of all facts including the liability for penalty, or, as the language of Section 271(1)(a) indicates, consideration of facts that may attract the provisions contained in that section.

10. In CIT v. Bhikaji Dadabhai and Co. : [1961]42ITR123(SC) , their Lordships of the Supreme Court were considering the provisions of the Hyderabad Act, which were similar to the provisions contained in the Indian I.T. Act, Their Lordships quoted the view taken by the High Court (at page 127):

' The Hyderabad Income-tax Act also used the expression ' assessment' in different senses. In certain sections, for instance sections 31 and 39, the expression is used as in the sense of mere computation of income ; in other sections it is used in the sense of determination of liability and in certain other sections in the sense of machinery for imposing liability and procedure in that behalf. By the Finance Act, 1950, the Hyderabad Income-tax Act was expressly kept alive in respect of periods which include the assessment year in question for purposes of levy, assessment and collection of income-tax. The High Court expressed the view that the word 'assessment' in Section 13(1) included the whole procedure for imposing liability upon the taxpayer but not to the procedure for imposing a penalty, They thought that the Hyderabad Income-tax Act dealt with liability to pay income-tax and penalty in distinct provisions, both relating to imposition and recovery and that if the Legislature had intended to keep alive the Hyderabad Income-tax Act for all purposes including the levy of penalty with respect to any particular year or years of assessment, it could have said so in terms clear and unambiguous instead of limiting the operation only to ' levy, assessment and collection '. In the view of the High Court,imposition of penalty was not a necessary concomitant or incident of the process of assessment, levy and collection of tax.

The High Court proceeded upon the view that by saving the Hyderabad Income-tax Act for the purposes of levy, assessment and collection of income-tax, the entire procedure for imposing liability to pay tax and for collection of tax was saved, but penalty not being tax, provisions relating to imposition of and collection of penalty did not survive the repeal of the Hyderabad Income-tax Act.'

and thereafter following the decision in C. A. Abraham v. ITO : [1961]41ITR425(SC) quoted with approval (at p. 127):

'The expression 'assessment' used in these sections (provisions of Chapter IV of the Indian Income-tax Act) is not used merely in the sense of computation of income and there is in our judgment no ground for holding that when by Section 44, it is declared that the partners or members of the association shall be jointly and severally liable to assessment, it is only intended to declare the liability to computation of income under Section 23 and not to the application of the procedure for declaration and imposition of tax liability and the machinery for enforcement thereof...By Section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest or contumacious conduct of the assessee. '

and on this basis allowed the appeal. It is, therefore, clear that according to the view of their Lordships of the Supreme Court the word 'assessment' is not used in the Indian I.T. Act in the narrow sense of computing income only but is used in a wider perspective and, therefore, when proceedings for assessment are pending before the ITO, if facts attracting the provisions of Section 271(1)(a) come to his notice while proceeding with the assessment, it is necessary for the ITO to invoke the provisions for the recovery of penalty.

11. Learned counsel for the assessee referred to the Note at page 1207 in Kanga and Palkhivala's ' The Law and Practice of Income-tax ', seventh edn., Vol. I, wherein the observations of their Lordships of the Supreme Court in C.A. Abraham v. ITO : [1961]41ITR425(SC) have been analysed and it appears that the learned author has suggested that tax and penalty are distinct and different concepts and has noted some cases of their Lordships of the Supreme Court. But in the present case we are not concerned with the observations in : [1961]41ITR425(SC) about penalty being described as additional tax, but we are only concerned with the meaning of the word 'assessment' and learned counsel for the assessee could not contend that that view taken by their Lordships of the Supreme Court has been given up in subsequent decisions.

12. The decision reported in M. A. Abdul Waheed v. CCT [1972] 30 STC 277 on which reliance has been placed by the Tribunal is a sales tax matter.In that decision, a Division Bench of the Madras High Court took the view that under Section 12(2) of the Tamil Nadu General Sales Tax Act power is conferred to make the assessment and once the assessment is made the power has been exercised properly as, according to their Lordships, the assessment could not be set aside on the ground that the assessing officer overlooked the provisions of Section 12(3) of that Act and failed to exercise the power while making the assessment. In that case, their Lordships were dealing with the Tamil Nadu Sales Tax Act and it is not clear as to what is the scheme of assessment in that law. So far as the I.T. Act is concerned, the scheme of assessment as considered by their Lordships of the Supreme Court is not restricted to the mere computation of income and tax but a number of other things and, therefore, in the proceedings for assessment if the ITO fails to take notice of the facts attracting the provisions contained in Section 271(1)(a), it could not be said that his failure to take notice of the facts which were before him attracting the provisions of Section 271(1)(a) does not amount to an error prejudicial to the interests of the revenue.

13. It was contended by learned counsel that even if the ITO omitted to take note of the facts attracting the provisions under Section 271(1)(a) during the proceedings of assessment it may be that some error in the proceedings has been committed. But so far as the order of assessment is concerned, according to learned counsel, failure to take action under Section 271(1)(a) could not be said to be an error if the order of assessment otherwise is found to be in order. This contention of learned counsel for the assessee cannot be accepted in view of the wide meaning given to the term 'assessment' as laid down by their Lordships of the Supreme Court in the cases referred to above. It is also not disputed before us that the proceedings of assessment are, not only computation of income and tax but various other things which fall within the scheme of Chap- XIV which talks of procedure for assessment. And it also could not be disputed that when Section 271(1) talks of 'proceedings pending' it will include the proceedings for assessment within the scheme of Chap. XIV of the Act, and the proceedings of assessment under the scheme of this law ultimately culminating in an order of assessment.

14. Section 263(1) of the Act reads :

' 263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. '

15. Under this provision, jurisdiction is conferred on the Commissioner to call for and examine the record of any proceeding under this Act and on such examination if he finds that the order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the revenue, he may revise the order after following the procedure prescribed under this provision. If, therefore, the ITO during the pendency of the proceedings has omitted to take notice of facts attracting Section 271(1)(a) of the Act during the pendency of proceedings which ultimately ended in an order of assessment, the order would be erroneous and in this view of the matter, the Commissioner was right in exercising jurisdiction conferred on him under Section 263 of the Act.

16. In this view of the matter, therefore, our answer to the question referred to us is in the negative. In the circumstances of the case parties shall bear their own costs.


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