Where best judgment assessment was found invalid, Appellate Assistant Commissioner was right in setting it aside for redoing, instead of annulling it.
The first appellate authority under section 251, has powers to set aside the assessment and refer the matter to the Income Tax Officer for a fresh assessment. As section 251 provides him with the power to confirm, reduce, enhance and annual the assessment, it cannot be said that he could only do these things, and not set aside the matter for redoing.
1. These three appeals--all by Shri Ram Ratan of Hyderabad--one as partner of Ram Ratan and Co., Hyderabad, and the other two as legal representative of late Shri Bherulal Tiwari of Hyderabad, involve common issues and they are conveniently dealt with together.
2. It appears that there was a search in the premises of late Shri Bherulal Tiwari on 3-9-1976 when, according to the authorities, some materials which were incriminating against the assessee were found.
There was acquisition of property in the name of his wife Smt. Jaji Bai and business allegedly in the name of Ram Ratan and Co., though claimed to be a partnership. According to the authorities, the assessee maintained 3 sets of accounts, one of which was explained by the assessee during his lifetime as having been manipulated to show better results for sales tax purposes. The authorities felt that there has been considerable evasion of tax. Action under Section 148 of the Income-tax Act, 1961 ('the Act') for the assessment year 1975-76 was initiated and the assessment was set aside. It was subsequently made under Section 144 of the Act and reopened under Section 146 of the Act.
The reopened assessment came to be pending and was taken up at the same time as for the assessment year 1976-77 when the ITO passed orders for both the years on the same day. An assessment which was made as a protective measure in respect of Ram Ratan and Co., claimed as firm but treated as a benami concern of Shri Bherulal Tiwari, had been set aside earlier and this was also made again under Section 144 on the same day, i.e., on 24-9-1982. This assessment was again made as a protective measure, though the assessee complains that the authorities tried to recover the tax. In all these three cases, it is the department's contention that Shri Ram Ratan had not furnished evidence and information required of him under Section 142(1) of the Act. It was for this reason that the assessments under Section 144 came to be made. No application under Section 146 for reopening the assessments were filed in respect of all the three assessments. Lot of arguments were advanced for the plea that the assessments were illegal. It was claimed that there was no formal notice under Section 142(1) and that there has been compliance to notice under Section 143(2) of the Act. In effect, it was claimed that the ex parte assessments were for non-compliance with summons under Section 131 on the Act and that this could not be a ground for orders under Section 144. It was contended that the assessee had furnished all the evidence, in his command and within his knowledge and that there was no default whatsoever in complying with any of the requirements of the law. It was contended that the assessment is illegal for the reason that not all the legal representatives were heard, and that only Shri Ram Ratan was made responsible for the estate though he was one of the legal respresentatives. It was also contended that there was no proper enquiry as one other partner in Ram Ratan and Co., who would have explained this, was not called by the ITO though he was specifically requested to do so. The ITO did not also place before Shri Ram Ratan his proposal so that he could have rebutted his presumptions with whatever materials or arguments which were in his possession. It was contended that the assessment was unconceivably high and without any relationship between the facts found and the estimate made. It was claimed that the books of account did not belong to the deceased. It was further claimed that Ram Ratan and Co. was a partnership firm in its own right and its income could not be included in the assessee's hands. It was further argued that the mandatory requirement of Section 144B was not followed for all these three years.
Even a ground was taken to the effect that the books of account were, without the authority of law, retained by the authorities and that they could not have been made the basis of any assessments. A grievance was also raised on the ground that there has been double taxation of the same amount in the hands of Ram Ratan & Co., as well as in respect of assessment for the assessment year 1975-76. The first appellate authority did not deal with all the claims of the assessee in any detail. He has, however, mentioned that the assessee was unabie to come on the last date of hearing because Shri Adul Razack, the assessee's advocate and tax adviser was ill on that date. He dealt with only one of the grounds and that was that the assessee was not in possession of the information or documents required of him. He wanted further enquiry on this issue because the assessee had not stated this fact in an affidavit on oath. He set aside the assessment not only for this examination but also for giving the assessee an opportunity to examine the documents and books of account in the custody of the department.
The operative part of his orders is that the assessments were 'set aside' with a direction to the ITQ to make fresh assessments in accordance with law. At any rate, we should imagine that the taxpayer would have been satisfied with the relief. It is, however, the assessee's case that in respect of these assessments, the assessments themselves are illegal. Such illegal assessments must be quashed in the sense that they should be annulled and not merely set aside. The arguments for holding that the assessments arc illegal raised before the first appellate authority were repeated before us. The learned Counsel claimed that the reasons on which the assessments were set aside were incorrect as a statement made before the ITO need not be rejected merely because it was not in the form of an affidavit. If the first appellate authority required an affidavit, he could have got it himself. He also pointed out that the other grounds raised on his behalf were not dealt with. He wanted us to deal with them and hold that the assessments should be annulled. Even if we were to confirm the view that they were merely set aside, he claimed that the direction to make a fresh assessment was invalid and we should hold so. He had cited a number of authorities for his submissions. He specifically referred to the decision of the Calcutta High Court in the case of Mohini Debi Malpani v. ITO  77 ITR 674 at 681 where a similar view was expressed. He cited the decision of the Delhi High Court in the case of Narinder Singh Dhingra v.CIT  90 ITR 110 for the proposition that an illegal assessment is non est in law and a direction to redo the same after the limitation period has expired will be wrong. He pointed out to a decision of the Andhra Pradesh High Court in the case of Addl.
CIT v. N.V. Ganapathi Rao  115 ITR 277 at 285 and 286 and the decision of the Supreme Court in the case of Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons  96 ITR 390 at 397 for the proposition that even a superior Tribunal cannot direct an illegal assessment after the expiry of the limitation. The decisions of the Gauhati High Court in the case of Tarulata Syam v. AITO  99 ITR 532 at 533 and Jai Prakash Singh v. CIT  111 ITR 507 were also relied upon. The decision of the Kerala High Court in the case of T.C.N. Menon v. ITO  96 ITR 148 at 150 and 151 was cited for holding that an assessment is illegal if it does not provide an opportunity to the taxpayer. The decision of the Gujarat High Court in the case of P.V. Doshi v. CIT  113 ITR 22 at 34 to 36 was cited for the proposition that no remand can be made if the original jurisdiction did not vest with the officer, which would, if made, tantamount to conferring of jurisdiction which was initially lacking.
He also cited number of other decisions. The learned departmental representative, however, claimed that the Supreme Court in the case of Guduthur Bros. v. ITO  40 ITR 298 had pointed out that where there is initial jurisdiction, any illegality which creeps in at the stage of assessment is only in the nature of a supervening illegality and that does not result in the entire proceedings being void. This statement was made even in the context of penalty. Here, the learned departmental representative pointed out, there was valid initiation of proceedings either by issue of notice or by the assessee filing return or both. The illegality that is canvassed is in the procedure of assessment culminating in the final assessment which has already been set aside by the first appellate authority. The learned departmental representative has relied heavily on the decision of the Supreme Court in the case of Kapurchand Shrimal v. CIT  131 ITR 451 wherein their Lordships of the Supreme Court have clearly pointed out that where an assessment was made without an enquiry, the assessment was liable to be set aside. In fact, the Supreme Court pointed out that it is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute.
He, therefore, claimed that the first appellate authority had a statutory duty to direct fresh assessment in the light of what the Supreme Court has stated. Even if it had not stated so, such right of public revenues could not be lost. He cited the decision of the Allahabad High Court in the case of Sant Baba Mohan Singh v. CIT  90 ITR 197. He also relied upon the decision of the Supreme Court in the case of Grindlays Bank Ltd. v. ITO  122 ITR 55 where it was pointed out that even a time barred assessment made in consequence of a stay order was held to be valid and was not barred by limitation. The Supreme Court also observed that where a party obtains an advantage by having the order set aside, is bound to submit to a fresh assessment order as the Court has inherent powers to do complete justice and neutralise unfair advantage gained by the party invoking the Court's jurisdiction. He claimed that this would squarely apply to the assessee's case as assessee had obtained the advantage of getting the assessments set aside and should, therefore, submit even to a time barred assessment. He hastened to add that the fresh assessment would not be time barred as it will be within the law. He claimed that in view of the Supreme Court decisions pointed out by him, the orders of the first appellate authority should be upheld.3. We have carefully considered the records as well as the arguments.
The assessee has raised many grounds for claiming that the assessments are illegal. Only one of them was considered. No doubt, the acceptance of that claim was qualified in the sense that further enquiry was directed on the same in the fresh assessment in pursuance to the appellate order. However, a reading of the whole order especially the operative part further indicates that the assessment has been set aside. The first appellate authority was apparently convinced that the assessment was made without giving the assessee a proper opportunity to explain the records considered to be incriminating. Though there are many grounds, some of which are clearly acceptable, for holding that the assessments are illegal, we do not consider it necessary to go into them. It is not necessary that every argument for holding an assessment to be illegal should be vetted and adjudicated upon. After all, the revenue has not come in further appeal against the order of the first appellate authority holding that the assessment orders are not valid orders. It is in this context we hold that the first appellate authority was justified in holding them to be invalid and consider that his further direction to examine Shri Ram Ratan in an affidavit is more meant to assuage the grievance of the assessee than as a specific direction to bind the ITO to a particular course of action. We do, therefore, think that it is not necessary for us to do any hair-splitting about this direction. It is sufficient for the purpose of disposal of the present appeal that we do agree with the appellant that the assessments were invalid. In fact, the revenue itself does not seem to have any objection to this finding of the first appellate authority inasmuch as it has not come up in appeal. We will, therefore, now deal with the assessee's objections as to whether his prayer to annul the assessment is incorrect in law as was contended before us.
Section 251 of the Act under the heading 'Powers of the AAC or, as the case may be, the Commissioner (Appeals)' states that "in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the ITO for making a fresh assessment to accordance with the directions given by the AAC or as the case may be the Commissioner (Appeals) and after making such further enquiry as may be necessary the ITO shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment". It is, therefore, certainly open to the first appellate authority to set aside an assessment and refer the case back to the ITO for making fresh assessment. He does have the power to do so. Merely because it may also be open to him to confirm, reduce, enhance or annul the assessment, it cannot be said that he could do only these things. The Allahabad High Court, while dealing with an analogous provision under the Indian Income-tax Act, 1922, held that in similar circumstances the AAC was right in setting aside the assessment and directing the ITO to make a fresh assessment in the case of Sant Baba Mohan Singh (supra). The Supreme Court in Guduthur Bros.' case (supra) had upheld the action of the ITO in initiating fresh proceedings after the original proceedings were set aside, where there was no opportunity to the taxpayer before the ITO. We must presume that the position in respect of the assessment should be better because the penalty proceedings unlike the assessment proceedings are quasi-criminal in nature. No doubt, the learned Counsel explained that there was no time limit prescribed for the penalty proceedings under the 1922 Act, under which the decision was rendered. However, the issue before us is not whether the fresh assessment, if any, will be within the time limit or not. The issue is whether the AAC had the power to set aside an assessment directing a fresh assessment. When he had directed a fresh assessment, it can only mean that he had directed a fresh assessment in accordance with law. If such fresh assessment is time barred or otherwise bad in law, this order cannot validate such an assessment. No doubt, the learned Counsel for the assessee would expect us to pre-judge the issue and hold that such a fresh assessment would be bad in law for a number of reasons which he wanted us to consider.
We do not think that we can do so at this stage. It is open to him to convince the ITO that any further action would be illegal. The Commissioner (Appeals)'s direction to the ITO to make a fresh assessment does not mean that such assessment must be made if it is otherwise untenable, say, for lack of taxable income or invalidity of the notice under Section 148 or any such reason. It is under these circumstances that we should consider ourselves unable to interfere with the orders of the first appellate authority. No doubt, the learned departmental representative relied upon the decision of the Supreme Court in the case of Grindlays Bank Ltd. (supra) where it was held that the time provided by the stay cannot be reckoned for time limit purposes because of the inherent powers of the High Court to neutralise unfair advantage gained by a party in getting the stay. This decision cannot obviously help the revenue because neither the AAC nor this Tribunal has any such inherent power as has the High Court. But, here again, the issue is per-mature because the learned departmental representative in citing this decision is asking us to pre-judge the issue and hold that the subsequent assessment will be valid in the same manner as the counsel for the assessee wants us to hold that the subsequent assessment would be invalid. Validity or otherwise would depend upon the facts and the law relating to such subsequent assessment and any opinion at this stage would be prejudging the issue and seizing jurisdiction on a future assessment over which this Tribunal can have no competent jurisdiction. The learned departmental representative, however, is right in drawing our attention to the decision of the Supreme Court in the case of Kapurchand Shrimal (supra) wherein the Supreme Court pointed out that the duty of the Tribunal does not end in making a declaration that a particular assessment is illegal. It further pointed out that "the proper order to be passed in such a case would be to set aside the assessment and to direct the ITO to make a fresh assessment in accordance with the procedure prescribed by law". It observed specifically as under: ... It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. The statute does not say that such a direction cannot be issued by the appellate authority in a case of this nature . . .
Hence, if the learned Commissioner (Appeals) had annulled or merely set aside the assessment because the assessment was illegal, without a direction to make a fresh assessment, we might have well modified his order in the light of the above direction of the Supreme Court because we must assume that no taxpayer has a vested right to the gains of the tax payable by him by the fault of the tax collector. It is not to say that any illegal assessment or a time barred assessment should be supported by the appellate authorities, but a direction to do a fresh assessment cannot be set aside or modified merely because the original assessment was illegal. We understand that every direction to redo a fresh assessment as one which authorises a fresh assessment in accordance with law and not otherwise, whether the appellate authority specifically says so or not. Any observation he might have made as in this case as to the facts, must generally be considered as not binding the ITO to the extent of passing an illegal order. A careful reading of the appellate order in this case shows that he has clearly set aside the assessments. Though he had made certain suggestions, he has not bound the ITO to them. If there be any ambiguity or doubt on this matter, we are of the view that this order should clarify such doubt and should satisfy the taxpayer in these appeals.
4. We have, however, to deal with the decisions cited by the learned Counsel for the assessee before parting with the case. The Supreme Court in Pooran Mall & Son's case (supra) was dealing with an order of summary assessments and retention order passed beyond the time limit.
It is in this context, the Supreme Court had held that a fresh assessment cannot be directed under these circumstances. It is not so in the assessee's case. The Gauhati High Court in Tarulata Syam's case (supra) quashed an assessment without an opportunity and was not concerned with a fresh assessment. The decision was rendered under writ jurisdiction of the High Court. It was under similar circumstances that the Calcutta High Court in the case of Mohini Debi Malpani (supra) struck down a similar ex parte assessment-under its writ jurisdiction.
The question of a fresh assessment was not the issue before the High Court in this case as well. So were the facts in the decision of the Kerala High Court in the case of T.C.N. Menon (supra) where again the order of assessment was quashed for lack of opportunity to the ITO, under the writ jurisdiction of the High Court. The operative portion of the judgment in the last paragraph says "for the reasons stated above, I quash the impugned order of assessment, and remit the case to the respondent for being disposed of according to law and in the light of observations herein". This itself shows that all that the High Court intended was a fair opportunity to the taxpayer before a final decision. The decision of the Gauhati High Court in Jai Prakash Singh's case (supra) directed annulment of the assessment. But what the High Court meant by annulment is clear by the fact that the High Court proceeded to observe "after annulment of the assessment order, if the law permits and there is no bar under the limitation prescribed by law, fresh assessment proceedings may be drawn up in appropriate cases . . .
.". Though, no doubt, the High Court held that in such cases the assessment must be annulled, we are of the view that this decision is not the authority for the proposition that the first appellate authority should not have authorised the ITO to make a fresh assessment if such a fresh assessment would be valid in law. In fact, the ITO does not always require such a fresh authorisation for making a fresh assessment in case of annulment as is evident from the use of the word 'annulment' in the case referred. The Delhi High Court in the case of Narinder Singh Dhingra (supra) found that an assessment had been made after the period of limitation permitted by law because the ITO wrongly took umbrage under the Act while the provisions of the 1922 Act applied in assessee's case. Having found that the assessment was illegal, the Tribunal directed the ITO to continue the assessment proceedings. Since the case deals with the fact of an assessment 'long after the expiry of the period of 4 years' permitted by law, such an order was obviously illegal. It is not the assessee's case here that the original assessment itself was time barred in which case we could have certainly appreciated the assessee's stand. P.V. Doshi's case (supra) was again a case where the notice under Section 147 of the Act was itself illegal inasmuch as no reasons were recorded by the ITO though he was statutorily required to record such reasons. There were also defects in the notice. Obviously in such a case, the Gujarat High Court held that the Appellate Tribunal was in error in remitting the matter to the ITO inasmuch as the ITO did not have the jurisdiction to proceed with the assessment ab initio. It is not the case here because the assessment proceedings have been started either by notice or by returns from the assessee and it is not the complaint of the assessee that the assessment proceedings were not initiated or that there was no valid proceeding pending before the ITO. Hence, perusal of these citations on behalf of the assessee shows that none of these decisions are of any assistance to the taxpayers in this case as they rest on facts which are clearly distinguishable. In fact, these decisions merely serve to buttress our conclusion that there could be no bar against a direction to make a fresh assessment in a case where the ITO had validly assumed jurisdiction.
5. It is under these circumstances that even after hearing the learned Counsel for the taxpayers at great length, we are not convinced that there was anything wrong with the order of the Commissioner (Appeals) in setting the assessments which were illegal with a direction to make a fresh assessment, which as stated earlier, has to be in accordance with law. We are not prepared to presume that such assessment, if made, will be made contrary to law at this stage.