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Hindustan General Industries Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1982)2ITD343(Delhi)
AppellantHindustan General Industries
Respondentincome-tax Officer
Excerpt:
1. since the above appeals relate to the same assessee, they are taken up together for disposal by this consolidated order, for the sake of convenience.2. we will first take the assessee's appeal. the main contention in this appeal relates to the jurisdiction of the ito for passing the assessment order on 15-3-1976. the assessee which is a limited company is engaged in the business of manufacturing railway wagons, aircraft refuelers and lpg cylinders. it filed its return of income on 31-7-1972, declaring an income of rs. 4,76,654. subsequently, a revised return was filed on 17-2-1975 declaring an income of rs. 4,73,125 (somewhere mentioned as rs. 4,77,125). on 23-1-1976, the ito wrote a letter to the assessee requiring it to furnish among others, details of unsecured loans with a.....
Judgment:
1. Since the above appeals relate to the same assessee, they are taken up together for disposal by this consolidated order, for the sake of convenience.

2. We will first take the assessee's appeal. The main contention in this appeal relates to the jurisdiction of the ITO for passing the assessment order on 15-3-1976. The assessee which is a limited company is engaged in the business of manufacturing railway wagons, aircraft refuelers and LPG cylinders. It filed its return of income on 31-7-1972, declaring an income of Rs. 4,76,654. Subsequently, a revised return was filed on 17-2-1975 declaring an income of Rs. 4,73,125 (somewhere mentioned as Rs. 4,77,125). On 23-1-1976, the ITO wrote a letter to the assessee requiring it to furnish among others, details of unsecured loans with a separate list of fresh loans (including squared up loans) and confirmations of the parties with their permanent account numbers. This was replied by the assessee on 30-1-1976 when required details were furnished to the ITO. However, on 9-2-1976, the assessee suo motu wrote a letter to the ITO by which it surrendered the peak of the various loan accounts, being Rs. 2,66,700, for inclusion in its total income. It was stated in this letter that the assessee was facing difficulty in producing the necessary evidence to prove the genuineness of the credits in its books of account and had, therefore, decided to offer the above amount for inclusion in its total income. The letter, inter alia, also stated as under : It is also with a sincere desire to settle and compromise the matter with the department that the peak amount is being voluntarily surrendered for assessment and we trust that you would be kind enough not to levy any penalty in this respect. The taxation of the peak amount which is being offered voluntarily for the purpose of assessment is to avoid litigation and also to save time both of the assessee and the department....

It is not necessary to quote further from the above letter of the assessee. Suffice it to say, that the assessee while offering the amount did not accept that the amount of Rs. 2,66,700 form part of its income. Throughout the letter, the assessee emphasised its inability to produce the necessary evidence in support of the credits and the motive to settle and compromise the matter with the department.

3. On 11-2-1976, the ITO made a draft assessment order on a total income of Rs. 8,13,542. In para 3 of this order, the ITO pointed out the defects noticed by him in the maintenance of the books of account as also narrated the circumstances leading to the surrender of the amount of Rs. 2,66,700. The ITO finally observed in para 4 of the order as under: The offer of the assessee surrendering the peak amount of the loans is reasonable and accepted. The request for not levying the penalty will be considered on merits while deciding the matter of penalty.

With these observations and discussion stated above, the ITO included the sum of Rs. 2,66,700 in the total income of Rs. 8,13,542 under the head 'Income from other sources'. Besides this, the ITO also proposed the following additions in the draft order :- Aggregate cash credits in four accounts 29,000- Disallowance out of wages and fabrication charges 26,998- Interest 1,055- Disallowance out of general charges 11,878 --------- The ITO then proceeded to comply with the terms of Section 144B of the Income-tax Act, 1961 ('the Act'). As required under Sub-section (1) of the above section, he forwarded a copy of the proposed order of assessment to the assessee. The assessee, in terms of Sub-section (2) of the said section, submitted its objections to the ITO on 23-2-1976.

One of the objections related to the observations of the ITO in para 3 of the draft order. The assessee objected to the various defects as pointed out by the ITO in para 3 of the said order on the ground that they caused prejudice to the assessee's case and, therefore, deserved to be deleted. The assessee vide above letter dated 23-2-1976, took various other objections to the other proposed additions by the ITO. It is not known when the ITO forwarded the draft order together with the objections to the IAC. However, there is no dispute that the directions of the IAC were received by him on 15-3-1976. There is also no dispute that the said directions related only to the proposed additions of Rs. 68,931 and were issued after allowing the assessee an opportunity of being heard. In these directions, the IAC also observed that the remarks of the ITO as contained in para 3 of the draft order were passed on facts and might stay in the assessment order also. The ITO finally passed the assessment order on 15-3-1976, i.e., the date on which he had received the directions of the IAC relating thereto. The assessment was made on an income of Rs. 8,09,430. This amount, inter alia, included the surrendered amount of Rs. 2,66,700 also as it was also included in the total income computed in the draft order.

4. The assessee appealed to the AAC in regard to the various additions made by the ITO. An additional ground was also taken before him by which the very validity of the assessment order framed by the ITO was challenged before him. It was submitted before him that the ITO had to complete the assessment within one year from the date of filing of the revised return, i.e., by 16-2-1976, and that he could not take advantage of the extended time permitted by Clause (iv) of Explanation 1 to Section 153 of the Act. According to this clause in computing the period of limitation for the purpose of the above section, the period (not exceeding 180 days) commencing from the date on which the ITO forwards the draft order under Sub-section (1) of Section 144B to the assessee and ending with the date on which he receives the directions from the IAC shall be excluded. The contention of the assessee before the AAC was that the provisions of Section 144B were not attracted to the case inasmuch as the variation between the income proposed and that returned did not exceed the sum of Rs. 1 lakh as was prescribed by the CBDT under Sub-section (6) of Section 144B. It was also contended before him that the assessee's submission to the wrong jurisdiction did not validate the proceedings. A number of authorities were also relied upon in this connection. On behalf of the department it was submitted that the assessee had not furnished any revised return even after surrendering the amount of Rs. 2,66,700 and that the last return submitted was only on 17-2-1975, declaring an income of Rs. 4,73,125.

It was pointed out to the AAC on behalf of the department that there was variation of over Rs. 1 lakh between the income declared being Rs. 4,73,125 and Rs. 8,13,542 proposed in the draft assessment order. An alternative submission was also made before the AAC that in any case the draft order itself was the final order in the light of the principle laid down by the Punjab High Court in the case of S. Sewa Singh Gill v. CIT [1962] 46 ITR 152 and as this order was made on 11-2-1976, it was well within the period of limitation.

5. The learned AAC rejected the contention of the assessee in the following words : After hearing both the parties, I am of the opinion that the viewpoint of the department must succeed. There is no denying the fact that the appellant during the course of assessment proceedings merely surrendered the amount of Rs. 2,66,700 but did not file any revised return. The surrender offer does not amount to filing a revised return in view of the ratio laid down in the two judgments relied upon by the learned departmental representative and referred to above. Section 144B has to be read conjectively and if so read the only conclusion possible is that there was a variation in the income returned and income assessed to the extent of more than Rs. 1 lakh and hence the provisions of Section 144B were clearly attracted. The ITO was well within his jurisdiction to refer the case to the learned IAC and the learned IAC was well within his jurisdiction to issue instructions to the ITO. The additional ground raised by the appellant, therefore, fails and is accordingly dismissed.

6. The above finding of the AAC has been challenged before us by the counsel for the assessee. It was reiterated before us that the provisions of Section 144B did not apply to the case and, therefore, the ITO could not take advantage of the extended time limit laid down in Clause (iv) of Explanation 1 to Section 153 and that the assessment had to be made in accordance with the time limit laid down in Clause (c) of Sub-section (1) of Section 153. According to this clause, the assessment should have been made by 16-2-1976. Since it was made on 15-3-1976, it was submitted on behalf of the assessee, it was beyond the period of limitation and, therefore, it had to be annulled by us.

7. The basis of the arguments of the learned counsel for the assessee before us, was that the assessee itself had surrendered Rs. 2,66,700 for inclusion in its total income and, therefore, there was no question of proposing it as an addition in the draft assessment order. He also emphasised the fact that the ITO had clearly observed in his order, which observations have already been quoted by us above, that the offer of the assessee had been accepted by him. It was also pointed out to us that the assessee by surrendering the amount, had burnt its boats, and could not agitate its addition either in an appeal or otherwise.

Reliance in this connection was placed on a decision of the Bombay High Court in the case of Jivallal Purtapshi v. CIT [1967] 65 ITR 261. In this case, the department had agreed to delete certain amounts from the assessment and had conceded the deletion before the AAC. It was held that it could not be treated as aggrieved by this part of the order to enable it to file an appeal to the Tribunal. It was next pointed out by the counsel for the assessee that if the sum of Rs. 2,66,700 was excluded from consideration, then the proposed addition in the draft assessment order amounted only to Rs. 68,931 which was less than Rs. 1 lakh. He, of course, plainly admitted before us that the assessee had not filed any revised return after 17-2-1975, declaring an income of Rs. 4,73,125. His argument, however, was that the sum of Rs. 2,66,700 could not be held in the nature of a variation and prejudicial to the assessee, in terms of Sub-section (1) of Section 144B, as at the time of making the draft order, it was no more the subject of contest, nor the assessee after offering the addition was in any way prejudiced by it. He also emphasised the fact that even the IAC had not applied his mind to this amount of Rs. 2,66,700. His further submission, which was based on the decision of the Jammu and Kashmir High Court in S Mubarik Shah Naqshbandi v. CIT [1977] 110 ITR 217 was as under, the words having been taken from head note of the judgment : Though in this case no prejudice was caused to the assessee by the omission to determine the tax in the assessment order because the notice of demand was issued to him on the same date on which the assessment order was made, physical statutes have to be strictly construed and wherever there is a lacuna or non-observance of the statutory provisions, the benefit should go to the assessee. (p.

218) He supported his submissions by referring to the judgment of the Bombay High Court in CIT v. Godavaridevi Sara [1978] 113 ITR 589. His submissions in nutshell were that there was no proposal in the draft assessment order by the ITO regarding the addition of Rs. 2,66,700, that the above addition did not cause any prejudice to the assessee, that the IAC had not commented upon the above amount and finally the assessee could not suo motu revise the return by including the above amount as that would amount to admission of an omission of income which was not the case as the amount had been surrendered in the circumstances stated in the assessee's letter dated 9-2-1976 only. He finally referred to a number of authorities for the propositions that the question of jurisdiction could be challenged at any stage, that the sections of the Act should be strictly construed, that the admission for surrender of Rs. 2,66,700 was binding on the assessee and could not be challenged, that the time limit for completing the assessment had to be strictly observed and any violation thereof made the assessment null and void, and finally, that if the two views were possible on the interpretation of a section, the one favourable to the assessee should have been adopted in view of the decision of the Supreme Court in Vegetable Products (supra).

8. The learned departmental representative, however, submitted that there could not be any dispute to the various principles laid down in the cases cited by the counsel for the assessee, namely, that the sections of the Act had to be strictly construed or had to be read as a whole, that no violation could be done to the language of the statute and that if time had expired, it could not be revived and the assessment had to be declared as a nullity. He submitted that 'any variation' to the returned income could be either a negative variation or a positive variation, meaning thereby that the income could either be less than the returned income or more than the returned income. He further submitted that the variation must be prejudicial to the assessee and if these conditions were satisfied arid if the variation was of Rs. 1 lakh, then the ITO had no option but to prepare a draft assessment order and forward it to the assessee calling for objections and then forward the said order to the IAC for his directions. He further submitted that the assessee's surrender of the amount of Rs. 2,66,700 did not amount to the revision of the return in the light of the decisions of the Allahabad and Nagpur High Courts in Gopaldas Parshottamdas v. CIT [1941] 9 ITR 130 and Woman Padmanabh Dande v. CIT [l952] 22 ITR 339 and in any case, it was admitted by the counsel for the assessee that the latter had not submitted any revised return after 17-2-1975. He submitted that if this was the situation, then there was no escape that the provisions of Section 144B applied to the case. He also elaborated his arguments by submitting that the word 'proposed' signifies an act prior to the decision. He submitted that in the present case, the ITO had not only proposed the addition of Rs. 2,66,700 but that it had also made the said addition in the draft order and that it had to be looked into with reference to the returned income. If this was done, then there was clearly a variation of more than Rs. 1 lakh, namely, that the variation amounted to Rs. 2,66,700 plus Rs. 68,931. He also submitted that there could not be the denial of the fact that the variation to the above extent was not favourable to the assessee which in other words meant that it was prejudicial to the assessee. He further submitted that the mere fact that the ITO had proposed in the draft order acceptance of the amount of Rs. 2,66,700 or the fact that the IAC had not made any comments thereon did not mean that it did not amount to variation as contemplated in Section 144B. He also pointed out as a fact that even while surrendering the above amount, the assessee had not straightaway accepted that the credits were not genuine or that they form part of its total income and that such a surrender was not legally binding on the assessee which could be challenged even before the AAC. He also submitted that the assessee had in fact objected to the various observations relating to the said addition in its letter dated 23-2-1976 referred to above. His alternative submission was that in any case the draft order itself could be treated as a final order in the light of the decision of the Punjab High Court in the case of Sewa Singh Gill (supra).

9. We have given careful thought to the whole matter. In our opinion, there is no merit in the submissions of the learned counsel for the assessee while the stand taken by the department is clearly correct.

Section 144B(1) reads as under : (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under sub section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the assessee.

It meant that whatever may be the position, with reference to the other sections in the Act, if the conditions laid down in Section 144B(1) are satisfied, then the provisions of this section have to be complied with. The first condition is that the ITO should propose to make any variation in the income or loss returned by the assessee. The second condition is that such a variation must be prejudicial to the assessee.

The third condition is that the amount of such variation must exceed the amount of Rs. 1 lakh as fixed under Sub-section (6) of the above section by the CBDT. Admittedly, the returned income of the assessee was only Rs. 4,73,125. We have already stated that the counsel for the assessee admitted before us that the last return was that filed on 17-2-1975 which was not subsequently revised by it. It was further admitted before us that the surrendering the amount of Rs. 2,66,700 for inclusion in its total income, the assessee never meant to revise its return as that would have amounted to the admission of omission to return the correct income on its part. Even otherwise in law, the surrender of the amount of Rs. 2,66,700 by a separate application dated 9-2-1976 did not amount to the revision of the return in the light of the principles laid down by the Allahabad and Nagpur High Courts in the cases of Gopal Das Parshottamdas (supra) and Woman Padmanabh Dande (supra). There is also no dispute before us that the ITO did propose to make variation in the income returned by the assessee. The contention of the assessee is that such variation amounted to Rs. 68,931 only. The contention of the department on the other hand is that the variation was of the above amount as enhanced by Rs. 2,66,700. The first condition as stated above is that the variation must be in the income or loss returned. If the assessee returned an income of Rs. 4,73,125 only and the ITO suggested in the draft order that the assessment be made on an income of Rs. 8,13,542, we fail to understand how it could be said that the variation in the income returned and the income proposed was not the difference of the two amounts, i.e., Rs. 8,13,542 and Rs. 4,73,125. In our opinion, the variation clearly amounted to the difference of the above two amounts. We may also state that the section lays down that the ITO should alone propose to make such a variation in the total income returned. Merely because the assessee had surrendered a particular amount it could not be said that the ITO was prohibited from making any proposal for its addition. The section does not give any right to the assessee to propose any addition. That right vests only in the ITO in terms of Sub-section (1) of Section 144B. The ITO clearly proposed the variation of an amount exceeding Rs. 1 lakh as stated above. We also do not think that the mere fact that the ITO was prepared to accept the offer of the surrender on the ground of its reasonableness, could suggest that either he had no legal right to propose the variation of the surrendered amount or that he had not made any such proposal in the draft assessment order. Even factually, we are not inclined to agree with the assessee. The ITO as stated above, gave the background of the surrender by the assessee in para 3 of the draft order. That background was not accepted by the assessee and objection was taken to its mention in the order vide the assessee's letter dated 23-2-1976. The IAC also applied his mind to this part of the objection of the assessee and directed the ITO that the said remarks were based on facts and should stay in the assessment order.

It will, therefore, be incorrect to suggest that the IAC had not applied his mind completely to this aspect of the matter. Merely because he had nothing further to say about the surrendered amount would not go to show that it did not form part of the variation as proposed by the ITO. The second condition is also clearly satisfied inasmuch as the entire variation including the sum of Rs. 2,66,700 was prejudicial to the assessee. The above variation also exceeded the sum of Rs. 1 lakh so as to fulfil even the third condition also. In our opinion, therefore, all the ingredients of Sub-section (1) of Section 144B are satisfied in the present case, namely, the ITO proposed to make a variation in the income returned by the assessee, that such variation was prejudicial to the assessee and that the amount of such variation exceeded the sum of Rs. 1 lakh as fixed by the Board under Sub-section (6) of Section 144B. It was, therefore, incumbent on the ITO to follow the procedure laid down in Section 144B. It was not denied before us that if the provisions of Section 144B were applicable to the case, then the assessment was made well within the period of time. To recapitulate, we may state that in the normal course the assessment should have been made by 16-2-1976 under Section 153(1)(c).

Before that on 11-2-1976, the ITO forwarded the draft order to the assessee. He received the directions of the IAC on 15-3-1976. The assessment was, therefore, correctly made by him on 15-3-1976, in terms of the extended period of time laid down in Clause (iv) of Explanation I to Section 153. We, therefore, reject this part of the assessee's contention.

10. The assessee has taken another ground in the appeal requesting for the expunging of the observations made by the ITO in para 4 of the assessment order. We may recall here that these observations are the same which were contained in para 3 of the draft assessment order and to which the assessee had objected even before the IAC. These observations merely give the history of the addition of Rs. 2,66,700 and the circumstances leading to the surrender of that amount. We do not agree with the submission of the counsel for the assessee that the observations should be expunged by us. We have already stated above that the assessee had not filed a revised return nor had amended its earlier return submitted on 17-2-1975. It was, therefore, absolutely necessary for the ITO to make those observations in his order. This contention of the assessee, therefore, fails.

11. In the view, we have taken, we do not think that it is necessary to consider the alternate contention of the learned departmental representative that in any case the draft of the order made by the ITO on 11-2-1976 could be treated as final order. Even otherwise we do not think that it is possible to say so. In the draft order, the income computed was Rs. 8,13,545 while the assessment was actually made on an income of Rs. 8,09,430, and it was with reference to this income that the tax was calculated and the demand notice was issued. It is, therefore, too late in the day to say that the income computed in the draft order could be treated as the final income and that order by itself could be treated as a regular assessment order.

12. We will not deal with the other contentions raised in the assessee's appeal. The ITO noticed a credit of Rs. 9,000 in the name of Hira Nand on 14-7-1970. When called upon to furnish evidence in support of the genuineness of the above credit, it was stated that the assessee had furnished the name and address of the creditor. It was further submitted that the creditor was not co-operating with the assessee and, therefore, any further evidence could not be produced. In the circumstances, the ITO treated the amount as the assessee's income from other sources. The addition was also upheld by the AAC.13. Beyond what was stated before the lower authorities, no further evidence was produced before us. Section 68 of the Act states that where any sum is found credited in the books of an assessee, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the ITO, satisfactory, the sum so credited may be charged to income-tax, as the income of the assessee. In this case, the assessee has not offered any explanation about the nature and source of the credit. The ITO was, therefore, justified to charge it to income-tax as its income. The addition is, therefore, confirmed.

14. The ITO noticed another credit of Rs. 5,000 on 17-7-1970 in the name of one Ram Parshad. His examination of the assessee's books of account showed that the entry had been mutilated and altered in the day book. The original entry was in the name of Sh. Devi Prasad and subsequently the name of Ram Parshad was substituted. He also found that another entry of Rs. 5,000 on 17-7-1970 in the name of Sh. Devi Prasad had been surrendered by the assessee for the assessment. The assessee merely produced a confirmatory letter from the alleged creditor. The ITO, in the circumstances, required the presence of Sh.

Ram Parshad which was not complied with. He, therefore, held that the amount represented the assessee's own income from other sources. There was no improvement in the situation before the AAC also. He, therefore, confirmed the addition.

15. After hearing the parties, we agree with the finding of the lower authorities. This is also a case where the explanation offered by the assessee is not, in the opinion of the ITO, satisfactory. It is no doubt correct that by furnishing the confirmatory letter, the assessee discharged its initial burden. However, it again shifted to the assessee when the ITO noticed the alterations in the day book particularly when original credit appeared in the name of Devi Prasad and which he voluntarily surrendered for inclusion in the total income.

The burden after it was shifted to the assessee had not been discharged. We, therefore, hold that the credit of Rs. 5,000 has also been rightly assessed as the assessee's income from other sources.

16. The ITO noticed another credit of Rs. 5,000 on 17-7-1970 in the name of Sh. Nand Lal Bhalla. This credit also originally stood in the name of Sh. Devi Prasad but was subsequently changed in the name of Sh.

Nand Lal Bhalla. Except a letter of confirmation, no other evidence was produced. The ITO treated the amount as the assessee's income from other sources and the AAC upheld the addition.

17. We have heard the parties about this credit also. The position is exactly similar to that as in the name of Sh. Ram Parshad. For the reasons already given by us above, we hold that the addition of this amount as the assessee's income from other sources, was also justified.

18. The counsel for the assessee, however, raised a general objection before us that even if the above additions could not be treated as genuine credits, they were covered by various additions made in the past. It was, however, admitted before us that such a contention was not raised before the AAC and was not dealt with by him. We, therefore, reject this contention of the assessee on this ground alone.

19. The last contention in the assessee's appeal relates to an addition of Rs. 3,410. This amount represents the expenditure of the assessee in providing tea, coffee and other common drinks to its constituents. The ITO treated it as entertainment expenditure and disallowed it under Section 37(2B) of the Act. The AAC confirmed the disallowance following the decisions of the Allahabad and the Kerala High Courts in Brij Raman Das & Sons v. CIT [1976] 104 ITR 541 and CIT v. Veeriah Reddiar [1977] 106 ITR 610 (FB).

20. After hearing the parties, we are of the opinion that the disallowance is not in order. The above expenditure falls within the ratio laid down by the Gujarat High Court in the case of CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424. The Supreme Court in the case of Vegetable Products (supra) has held that if two interpretations are possible, then one which is favourable to the assessee should be followed. Respectfully, following this principle, we delete the addition of Rs. 3,410.

21. We will now take the departmental appeal. The first contention in this appeal relates to the deletion of Rs. 10,000. The ITO had also noticed a credit of Rs. 10,000 on 31-1-1977 in the account of one Sh.

Mohinder Pratap. He also found that the original entry stood in the name of Sh. Prem Chandand the name of Sh. Mohinder Pratap was substituted subsequently. A credit of Rs. 6,000 appearing on 9-9-1970 in the name of Sh. Prem Chand was surrendered by the assessee. The ITO, therefore, felt suspicious. He also found that Sh. Mohinder Pratap was a relation of Sh. M.R. Bhalla, the managing director of the company, and that his father had been paid a similar amount by the assessee-company about a month back. He, therefore, held that the amount represented the assessee's own income from undisclosed sources.

The addition was, however, deleted by the AAC as he found that Sh.

Mohinder Pratap had been examined by the ITO and that he had also explained the source of the amount.

22. The department has challenged the above deletion. We find that Sh.

Mohinder Pratap was examined by the ITO on 2-2-1976. In his statement, he had stated that his father had also made a deposit of Rs. 10,000 with the assessee which was returned to him on 20-11-1970. According to him, it was this amount which was re-deposited with the assessee on 31-1-1971. In the face of this evidence, it cannot be said that the assessee has not discharged its burden in terms of Section 68. The mere fact that the entry originally stood in the name of Sh. Prem Chand, by itself is not sufficient to discard the evidence of the assessee. We, therefore, confirm the deletion of the said amount by the AAC.23. The next contention in the departmental appeal relates to another deletion of Rs. 26,998. It was claimed before the ITO that the above amount was paid to one Sh. S.P. Bhalla, brother of the managing director, for using his labour in the month of February/March 1971, for dismantling the old jigs and fixtures. The ITO disallowed the claim mainly for the following reasons : 1. That there was no written agreement between Sh. Bhalla and the assessee for making any such payment.

2. That the entries relating to the payment had been interpolated in the day book through voucher No. 515A. 3. That there was no evidence in the possession of the assessee that any such work was done by Sh. S.P. Bhalla.

The AAC, however, in his order has successfully met with the above objections raised by the ITO. He has found that due to the clerical mistake, voucher No. 515 relating to the payment had subsequently to be entered as voucher No. 515A. He has also found that there was no clause in the agreement with Sh. Bhalla for not utilising his labour for any purpose by the assessee-company. He also examined the attendance register, as also Sh. Bhalla personally. He further found that the details of the labour provided to the assessee were properly recorded by Sh. Bhalla in his registers. He, therefore, felt satisfied that the payment was for the work done by Sh. Bhalla and that it represented an allowable expenditure.

24. After hearing the parties, we find no reasons to interfere with the findings of the AAC. We are in agreement with his findings that there is enough evidence for the utilisation of Sh. Bhalla's labour for the work in the assessee's premises and that there is also evidence of the payment having been made to him. We, therefore, confirm the order of the AAC in deleting the said addition.

25. In the result, while the assessee's appeal is partly allowed, that by the department is dismissed.

1. I have carefully perused the order of my learned brother wherein he has given the undisputed facts. I agree with all his conclusions, but for the one, in paragraph 9 of his order which relates to the contention of the assessee regarding the applicability and the interpretation of Section 144B, its scope and implications. Even otherwise as the issue regarding the scope of Section 144B is res Integra, it is worthwhile understanding its scope. As the facts obtaining on the issue are undisputed, I will not advert to them in details again but confine myself to the legal issues involved. The original return was filed on 31-7-1972 at Rs. 4,76,654. A revised return was filed on 17-2-1975 declaring an income of Rs. 4,73,125. On an enquiry from the ITO on 23-1-1976, regarding the details of unsecured loans with a separate list of fresh loans (including squared up loans) and confirmations of the parties with their permanent account numbers the assessee sent his reply giving the required particulars.

However, on 9-2-1976, the assessee, on his own, wrote a letter to the ITO in which he surrendered the peak of the various loan accounts aggregating to Rs. 2,66,700 for the inclusion in the total income.

2. The ITO accepted the offer finding the same to be reasonable.

However, on 11-2-1976 the ITO made a draft assessment order on a total income of Rs. 8,13,542. In that order, the ITO adverted to the circumstances under which the sum of Rs. 2,66,700 came to be surrendered. After so observing, the ITO proposed the additions aggregating to Rs. 68,931. Keeping in view the provisions of Section 144B, he forwarded the copy of the proposed order to the assessee. The assessee filed his objections in terms of Sub-section (2) of Section 144B on 23-2-1976. After receiving the objections which need not be adverted to once again, the ITO forwarded the draft order together with the objections of the assessee to the IAC, on a date which is not borne out from record. However, the directions of the IAC were received by him on 25-3-1976. There is no dispute about the fact that the directions of the IAC related only to the proposed addition of Rs. 68,931 which were issued after allowing the assessee an opportunity of being heard. In those directions, he had also adverted to the stand taken by the ITO in respect of the sum of Rs. 2,66,700. The assessment came to be made at Rs. 8,09,430 which included the sum so surrendered.

3. The assessee went in appeal and raised an additional ground challenging the validity of the assessment made under Section 144B on the ground that as the proposed variations amounted to only Rs. 68,931 and there being no proposal or variation prejudicial to the assessee in respect of the sum of Rs. 2,66,700 which had earlier been surrendered, the assessment was time-barred, within the meaning of Section 153(1)(c) and the limitation was not saved by Explanation l(iv) to Section 153.

The AAC negatived the contention of the assessee. My learned brother has upheld the order of the revenue authorities.

4. The grounds touching on this issue as raised before us are as follows : (a) That the learned AAC has grievously erred in upholding the illegal order of assessment passed by the learned ITO. (b) That the learned AAC has gone legally wrong in holding that the provisions of Section 144B were attracted in the present case.

(c) That the learned AAC should have held that the assessment made by the ITO was not in accordance with the law and it was made beyond the period of limitation prescribed under Section 153(c) and the case was not covered by Explanation l(iv) of Section 153. The assessment order deserved to be annulled.

(d) That the learned AAC has failed to appreciate properly the legal import of Section 144B of the Act, wrong interpretation has been put on the said section.

(e) That the learned AAC has failed to appreciate the written and the verbal submissions and the case law cited at the instance of the assessee. The judgments cited by the revenue had no relevance at all. In any case these are distinguishable on facts, no reliance could be placed on the said judgments. The order of the ITO has been upheld on erroneous and insufficient grounds. The assessment order under the facts and circumstances of the case deserves to be annulled.

5. Before I proceed to deal with the contentions, it will be useful to reproduce the provisions of Section 144B(1), 153(1)(c) and Explanation l(iv) to Section 153 as they stood at the relevant point of time : 144B(1). Notwithstanding anything contained in this Act, where, in an assessment to be made under Sub-section (3) of Section 143, the Income-tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the Income-tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.

153(1). No order of assessment shall be made under Section 143 or Section 144 at any time after- (c) the expiry of one year from the date of the filing of a return or a revised return under Sub-section (4) or Sub-section (5) of Section 139, whichever is latest.

Explanation 1 : In computing the period of limitation for the purposes of this section- (iv) the period (not exceeding one hundred and eighty days) commencing from the date on which the Income-tax Officer forwards the draft order under Sub-section (1) of Section 144B to the assessee and ending with the date on which the Income-tax Officer receives the directions from the Inspecting Assistant Commissioner under Sub-section (4) of that section, or, in a case where no objections to the draft order are received from the assessee, a period of thirty days, or 6. The provisions of Section 144B are attracted wherein an assessment to be made under Section 143(3), the ITO proposes to make any variation in the income or loss returned which is prejudicial to the assessee. As ordinarily the limitation for framing the assessment is governed by the provisions of Section 153 in order that the ITO may invoke the provisions of Section 144B for the purposes of extending the limitation in regard to the passing of the assessment order, the conditions precedents are : It is common ground that the variations must exceed the sum prescribed by the Board under Sub-section (6) of Section 144B.7. I will deal with these three terms in their etymological sense.

According to the Concise Oxford Dictionary, 5th edition, 'Propose' means put forward for consideration, propound. 'Variation' means varying, departure from a former or normal condition or action or amount. 'Prejudicial' means causing prejudice, detrimental to rights, interests, etc. According to the New International Webster Dictionary, 'Prejudice' means injury and damaging due to some judgment or action of another (as in regard of a personal right) resulting detriment to injure or damage by some judgment or action.

8.1 It is common ground that the surrender of the amount of Rs. 2,66,700 emanated from the assessment and the ITO accepted the same treating the surrender as reasonable. Therefore, the question arises, who proposed The assessee or the ITO. On the face of it, it may appear that when the assessee surrendered the amount and the ITO accepted the surrender, the proposal in the draft assessment order came from the ITO but this fact cannot bear scrutiny. The fact is that the assessee surrendered the amount and the ITO accepted. He communicated that acceptance to the IAC and proposed other variations to the extent of Rs. 68,931. The IAC approved the action of the ITO accepting the surrender but issued directions only to the proposed addition of Rs. 68,931 as mentioned by my learned brother in his order at page 3, line 13 from the bottom. Therefore, the ITO did not propose.

8.2 In respect of variation it appears that as the draft order of the ITO mentioned a figure much higher than the revised return even there was a variation between the income or the loss returned, and the assessment proposed. But it is also not so. When the ITO took recourse to Section 144B, the amount had already been surrendered and accepted by the ITO. Though, therefore, the return or the revised return did not indicate the surrendered amount but when the ITO was on the verge of exercising his power under Section 144B, the amount already stood surrendered as the income of the assessee. Supposing the ITO had chosen not to proceed further under Section 144B, he would have completed the assessment at the figures shown in the revised return together with the surrendered amount. But as he chose to invoke the provisions of Section 144B, at the point of time when he chose to do so, the surrendered amount had already been accepted by the assessee as his income for the purposes of assessment. Therefore, at that point of time technically speaking it may appear that there was variation in the return income or loss. But factually, it was not so. When an assessee surrenders an amount for assessment he may not have indicated the same in the revised return but he cannot go back on the surrender and, therefore, he says put there as in Jivatlal Purtapshi v. CIT [1967] 65 ITR 261 (Bom.).

Therefore, even the variation as understood within the meaning of Section 144B was not there.

8.3 Having dealt with these two conditions, I will go to the third condition, prejudicial to the assessee. If an assessee surrenders an amount for purposes of assessment, no prejudice is caused to the interests of the assessee. He cannot have any grievance. Prejudice is an act which is not of the assessee's volition. A person of reasonable prudence is supposed to act in the best of his interest but when his action is against his interest, he is supposed to have done so in full awareness of the consequences and, therefore, it cannot be said that the action done by such a person, which is against his own interest, is prejudicial to his interest. Prejudice is caused by the action of 'A' on the rights of 'B'. When the assessee surrendered the amount for purposes of the assessment, can we say that such surrender was prejudicial to the interest of the assessee No. A prejudice would have been caused to the interest of the assessee if the sum of Rs. 2,66,700 had been added by the ITO or proposed to be added by the ITO on his own to the income of the assessee. When the assessee himself surrendered the amount, there could be no prejudice to the interest of the assessee. Therefore, even the surrender was not prejudicial to the interest of the assessee.

9. As I have held that the ITO did not propose the variation but the proposal emanated from the assessee, there was no proposal from the said order of the ITO and, therefore, the first condition is not satisfied. In as-much as the variation was already there on record by the factum of surrender of the amount by the assessee much earlier than the stage when the ITO took recourse to Section 144B even that variation did not exist. As the assessee had himself surrendered the amount for purposes of the assessment even that variation, if it could be taken to be so, for argument sake for purposes of Section 144B, was not predudicial to the interest of the assessee. As all the three conditions are not satisfied under which the ITO could assume jurisdiction under Section 144B for extending the time of limitation, I am of the view that the limitation for the framing of the assessment was governed by the provisions of Section 153(1)(c) and the Explanation l(iv) to that section did not save the limitation. As the assessment was framed clearly beyond the period of limitation as provided for under Section 153(1)(c), the same was non est. The assessment being non est has no existence in law and, therefore, has to be annulled. I annul the assessment.

10. As I have annulled the assessment on the three issues discussed above, I need not go into the other issues raised by both the parties.

Perhaps it could be said that the revenue has a good case but it also cannot be said that the assessee has no case. As the viewpoints of both the parties are possible, I have taken the view in favour of the assessee keeping in view the judgment of their Lordships of the Supreme Court in the case of Vegetable Products (supra).

11. The revenue could say that if the assessment was annulled the assessee would run away with the tax which was otherwise due from him, in view of the returned income and the surrendered amount. Well it may be so, but if the assessee can run away with the tax in accordance with law, it cannot be helped. When the words fail, the tax must fail.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 - Difference of opinion has arisen amongst the members, who constituted the Bench.

The following point of difference is referred to the Hon'ble President of the Appellate Tribunal under Section 255(4) : Whether, on the facts and in the circumstances of the case, the provisions of Section 144B were applicable 1. On a difference of opinion between the learned members, who heard these appeals originally, the case has come to me for decision under Section 255(4) of the Act. The point of difference is "Whether, on the facts and in the circumstances of the case, the provisions of Section 144B were applicable ?".

2. Briefly stated, the relevant facts are that the assessee is a public limited company and the proceedings relate to its assessment for the assessment year 1972-73. Return was originally filed on 31-7-1972 disclosing an income of Rs. 4,76,654. A revised return was filed on 17-2-1975 in which income disclosed was Rs. 4,77,125. During the course of the assessment proceedings, a questionnaire was issued by the ITO to the assessee on 23-1-1976, inter alia, calling for details of fresh loans accounts including squared up loans along with confirmation letters from the depositors and their permanent account numbers. The details of fresh loans were filed by the assessee vide its letter dated 30-1-1976 but no details of squared up loans were given. However, on scrutiny of accounts, the ITO found that there were a large number of squared up loans and that entries relating to some of the loans had been altered, interpolated and mutilated. Accordingly, he impounded the assessee's pay book and ledger on 3-2-1976. Thereafter the assessee came forward and surrendered all the squared up loans and some of the fresh loans appearing in the balance sheet on the basis of peak amount and made an offer vide its letter dated 9-2-1976 that an amount of Rs. 2,66,700, representing the peak of credits, the nature and source of which the assessee was not able to explain, might be included in its total income. It is pertinent that the assessee had, inter alia, mentioned in its aforesaid letter that it was voluntarily surrendering the sum of Rs. 2.66,700 with a sincere desire to settle and compromise the matter with the department and the ITO was requested not to levy any penalty in this respect. The ITO, it may be stated, has accepted the assessee's computation of peak amount of such loans regarding which satisfactory explanation was not forthcoming, as reasonable and has made the addition of Rs. 2,66,700 as offered by the assessee. As regards the request for not levying the penalty, however, the ITO has observed that the matter would be considered on merits. The ITO has also felt that a further addition/disallowance of Rs. 68,931 was called for in the case of the assessee. Thus, according to the ITO, the total income of the assessee was to be computed at Rs. 8,13,542 as against the returned income of Rs. 4,76,654 and revised returned income of Rs. 4,77,125.

3. Being of the view that the provisions of Section 144B were applicable in this case, the ITO prepared a draft assessment order on 11-2-1976 proposing to compute the total income at Rs. 8.13.542 and served a copy of the same on the assessee on 12-2-1976. The ITO has mentioned in the draft assessment order that the penalty proceedings under Section 271(1)(c) were being separately initiated. The assessee filed its objections, which were against the additions/disallowance of Rs. 68,931 as well as against certain observations made by the ITO with regard to addition of Rs. 2,66,700. The case was referred to the IAC who had after considering the draft assessment order and the assessee's objections, directed the ITO to complete the assessment in a particular manner and the ITO has in pursuance of the directions of the IAC passed the final assessment order on 15-3-1976, computing the total income at Rs. 8,09,430. The order of assessment, it is common ground, was served on the assessee on the same day.

4. At the time of hearing before the AAC, the assessee raised an additional ground. It was contended that the assessment was barred by limitation inasmuch as the provisions of Section 144B were not applicable in the case and, therefore, the assessment should have been completed before 16-2-1976. The AAC has considered the additional ground on merits and for reasons given in paragraph 5 of his order, has rejected the additional ground. As already stated, both the learned members have differed on the question of applicability of the provisions of Section 144B in this case. That is how this matter has come up before me as a Third Member.

5. Sri Monga, the learned counsel for the assessee, and Sri Kapila, the learned senior departmental representative, have mainly relied upon and supported the orders of the learned Judicial and Accountant Members, respectively. In particular, Sri Kapila has contended that assuming that the provisions of Section 144B were not applicable in this case, the assessment would still be not barred by limitation inasmuch as the provisions of Section 153(1)(6) were clearly applicable in this case.

For this purpose, Sri Kapila invited my attention to the fact that in draft assessment order dated 11-2-1976, the ITO had stated that penalty proceedings under Section 271(1)(c) were being separately initiated.

This draft assessment order, it was stated, was served on the assessee on 12-2-1976 within one year of the filing of the revised return. The learned counsel for the assessee, on the other hand, vehemently opposed the consideration of the new plea raised by Sri Kapila for the first time before me as a Third Member. On merits, it was stated that the fact of penalty proceedings was still not known and, therefore, just because the ITO had indicated his mind to start penalty proceedings under Section 271(1)(c), it cannot and should not be held that the case fell within the mischief of Section 153(1)(&). In this connection, the counsel submitted that the Supreme Court decision in the case of Guduthur Bros. v. ITO [1960] 40 ITR 298 and the Allahabad High Court decision in the case of Ram Bilas Kedar Nath v. ITO [1964] 54 ITR 11, relied upon by Sri Kapila, were not applicable to the facts of the case.

6. I have heard the parties at length. I have also gone through the order of assessment, the order of the AAC and other material on record carefully. To my mind, the question before me is very short and an interesting one. It being common ground that the assessee had not filed a revised return including the impugned sum of Rs. 2,66,700 as a part of its total income. It cannot be disputed that the returned income in this case is and has to be taken at Rs. 4,77,125 as per revised return.

The assessee's case appears to be that before it can be held that the provisions of Section 144B are attracted, the following three conditions must be satisfied : 1. The ITO proposes to make any variation in the income or loss returned.

3. The amount of such variation exceeds the amount fixed by the Board, i.e., Rs. 1 lakh.

Further, that if an amount is added to the assessee's income as a result of surrender by the assessee, the said addition will not satisfy condition numbers (1) and (2). In other words, the contention is that an addition/ disallowance resulting in the variation in the income or loss returned contemplated in Section 144B is an addition or disallowance, which has not been agreed upon by the assessee. Because an addition or disallowance agreed upon by the assessee cannot be said to be prejudicial to him which is the second condition laid down in the provision (sic).

7. In my view, however, this reading of the provision is not quite correct. As laid down by the Supreme Court in the case of Mansukhlal & Bros. v. CIT [1969] 73 ITR 546, there cannot be any doubt that the expression 'income or loss returned' means nothing more than the income or loss disclosed in the return. The addition or disallowance agreed upon by means of a letter or otherwise does not alter the income or loss so returned. If this aspect of the matter is kept in mind, the first condition, namely, that the ITO proposed to make any variation in the income or loss returned, means and can only mean the difference between the income or loss returned and the income proposed to be computed. The fine distinction drawn by the assessee's counsel that the proposal to make any variation would not cover a case where the addition has been made on agreement or as a result of surrender is, to my mind, an over-refinement of the provision and is not tenable.

Therefore, I have no difficulty in holding that in view of the total income proposed at Rs. 8,13,542, the ITO proposed to make variation of more than Rs. 3 lakhs in the income or loss returned. As regards the second condition also, I am of the view that the variation in the total income is one lump and is not capable of being broken into the additions and disallowances on agreement and the additions and disallowances objected to by the assessee. The variations will have to be held to be prejudicial to the assessee even if only a small portion of it is objected to by the assessee. In this context, I would like to make clear that I am not expressing myself on the question whether in a case where the total amount of additions/ disallowances are agreed upon by the assessee, the condition number (2) would be or would not be satisfied. In view of what I have stated regarding condition numbers (1) and (2), the third condition stands automatically satisfied.

8. It may be stated that the assessee's counsel tried to lay great emphasis on the adjectives used before the word 'variation' in Section 144B, such as, 'such' and 'the', which according to him indicated that the variation contemplated in the section refers to only such variation which has not been agreed upon by the assessee and which alone can be said to be prejudicial to the assessee. Since, however, in my view these adjectives used before the word 'variation' in the section only refer to the words 'any variation in the income or loss returned', the argument is too good to be accepted. Having regard to the above discussion, I agree with the learned Accountant Member and hold that the amount of Rs. 2,66,700 added to the assessee's income, which was surrendered by the assessee, forms part of the total variation in the income or loss returned and that the variation including such a variation is prejudicial to the assessee and that the amount of variation being more than Rs. 1 lakh, the provisions of Section 144B are applicable.

9. In the view I have taken, it is not necessary for me to examine whether or not the case is covered by Section 153(1)(6). That apart, the point of difference stated by the leared members, to my mind, does not envisage such an examination.

10. Before concluding I would like to observe that the facts stated by me above clearly show that the assessee had not voluntarily surrendered the amount of Rs. 2,66,700 as claimed. The facts show that the ITO had noticed a number of squared up accounts in the assessee's books as well as alterations, interpolations and mutilations relating to some of the loans. In fact, some of the assessee's books were impounded. No doubt the assessee thereafter offered the aforesaid amount of Rs. 2,66,700 to be included in its total income. This, however, does not mean that this is not an addition to the total income or that it is not a variation in the income or loss returned.

It may also be mentioned that the learned counsel for the assessee had urged that even if it was held that two views were possible as regards the applicability of the provisions of Section 144B in this case, the decision has got to be in favour of the assessee in view of the decision of the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. So far as the legal position is concerned, one cannot possibly have any difficulty about it. However, it has to be borne in mind that the Supreme Court has in its another decision in the case of CIT v. TV. Sundaram Iyengar & Sons (P.) Ltd. [1975] 101 ITR 764 held that this principle will not apply where the provision is clear and distinct. Since, to my mind, the provisions of Section 144B are quite clear and distinct, I do not think that the decision in Vegetable Products (supra) is of any help to the assessee.

11. The order will now go back to the Bench, which originally heard these appeals for deciding the appeals according to the majority view.


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