1. These two appeals by the revenue are directed against the orders of the AAC deleting the disallowance of a sum of Rs. 6,000 claimed as a deduction in computing the total income for the assessment years 1974-75 and 1975-76.
2. The assessee is an individual who was employed by Thambawala Products Agencies (P.) Ltd. on a salary of Rs. 6,000. In addition, he was paid a commission on the sales effected by the assessee in Madras.
The assessee had shown the income of salary and commission amounting to Rs. 33,706 for the assessment year 1974-75 and Rs. 82,901 for the assessment year 1975-76. Later, the assessee filed a letter dated 15-9-1975 claiming that for earning the commission, the assessee had paid salary of Rs. 6,000 to Fakruddin Abdul Hussain and that amount should be deducted in each of the assessment years for computing the income. The ITO made assessments ex parte under Section 144 of the Income-tax Act, 1961 ('the Act'), because there was no response to his notices and in such assessments he disallowed the claim for deduction by stating that since the entire income has been assessed under the head 'Salaries', the only deduction allowable was under Section 16 of the Act and no other deduction should be allowed. On appeal, the AAC found that for the earlier assessment years, similar deduction claimed has been allowed and he, therefore, deleted the disallowance made by the ITO.3. In these appeals it was contended on behalf of the revenue that the deductions allowed in the earlier assessment years could not be a precedent because the concept of standard deduction under Section 16 had come into force from the present assessment year 1974-75 which excluded any other deduction. It was also submitted that the assessee had not proved that the expenditure had been incurred because it was an ex parte assessment. On the other hand, it was pointed out on behalf of the assessee that even though the question of allowing the deduction may not arise in terms of Section 16, the commission income itself could be taken only as the net income after the deduction of the expenditure incurred for earning it as has been held by the Tribunal in the case of Rajendran [IT Appeal Nos. 1324 and 1325 (Mad.) of 1978-79].
In the alternative, it is submitted that since the assessee had filed an application under Section 146 of the Act to set aside the assessment and no order has been passed within the period specified, the assessee could be given an opportunity to place his case before the ITO.4. On consideration of the rival submissions, we are of the opinion that the matter requires to be reconsidered by the ITO. No doubt, in the earlier assessment years the claim of the assessee for deduction of the salary paid to Shri Fakruddin Abdul Hussain out of the commission receipts have been allowed as a deduction. But, then in those assessment years Section 16 did not provide for standard deduction but a regular deduction of expenditure incurred for earning the salary income. Therefore, the decision given for the earlier assessment years cannot be directly applicable on the facts of these assessment years.
However, the question remains whether the commission income of the assessee was only the net income after the deduction of the salary paid to Shri Fakruddin Abdul Hussain or whether the gross commission income should be assessed as salary under the head 'Salaries'. This aspect has not been considered by the authorities below. We notice that though the assessments were made on 15-2-1977, the assessee has filed application under Section 146 on 9-9-1977, the same date on which it filed appeals before the AAC. The applications were presumably in time because the appeals have been entertained within the same period of limitation.
Section 146 has since been amended to provide that every application made thereunder shall be disposed of within ninety days from the date of receipt thereof by the ITO, provided that in computing the period of ninety days, any delay in disposing of the applications which is attributable to the assessee shall be excluded. This section does not say what will happen if even when the assessee is co-operating, the ITO does not dispose of the application within ninety days. The notes on clauses ( 89 ITR (St.) 115] and the Select Committee Report  Indian Tax Laws Part III, p. 71 merely state that the amendment is made for providing time limit for disposal of the application.
Circular No. 179 [F.No. 131(17)/75 TPL] dated 30-9-1975 - see  102 ITR (St.) 9--issued by the CBDT giving the explanatory note on the provision of the Taxation Laws (Amendment) Act, 1975, states that these amendments were made for streamlining the administrative set up with a view to making it functionally more efficient. Paragraph 30 of this circular states that with a view to obviate the necessity on the part of the assessee to file an unnecessary appeal against the best judgment assessment when an application under Section 146 is pending, an amendment has been introduced for excluding the time taken for the disposal of the application under Section 146 in computing the period of limitation for filing the appeal. These provisions indicate that the limitation prescribed under Section 146 is not merely directory but mandatory and the ITO is expected to dispose of the application within the period of ninety days prescribed therein. It cannot be said that the appeal of the assessee against the best judgment assessment is stalled for ever by the ITO not disposing of the application under Section 146. Of course it is possible to say that this period of limitation prescribed under Section 146 being a provision for the benefit of the assessee, it could be waived by him. But to what effect Such a waiver can be only if the disposal of the application is to be in favour of the assessee for we cannot imagine an assessee waiving the period of limitation if the order to be passed beyond the period of limitation should be against him. Moreover, if the orders to be passed were to be against him, then again, the question of appeal against that order comes into the picture and it will be difficult to speculate about the date from which the period of limitation for such an appeal should run. In that case it is to be assumed that on expiry of the period of ninety days, the application was rejected and the assessee should file the appeal within a period of sixty days from that date.
Such an assumption would defeat the very purpose and object of the amendment which is for the benefit of the assessee because it would make the position far onerous on the assessee who would be forced to file the appeals on the expiry of the period of ninety days after the application is filed. On the other hand, since the claim in the application under Section 146 is itself that the assessee was denied an adequate opportunity of being heard and should be afforded a fresh opportunity before making an assessment, the silence of the ITO beyond the period of limitation prescribed must be considered to be consent for the claim of the assessee and that it is agreed that the assessee was denied an adequate opportunity of being heard. This assumption is in consonance with the spirit and object of the amendment for it would not only be required that application under Section 146 is filed within the period of limitation but also ensure that whether the limitation prescribed is not complied with the assessments got automatically reopened so that the ITO may make fresh assessment in accordance with the law after giving opportunity of being heard to the assessee. It follows that if an appeal has been filed against the assessment itself, the AAC can on the expiry of the limitation for the ITO to pass an order under Section 146 and without waiting for another appeal against an order under Section 146 declare that the assessment is cancelled and direct the ITO to make a fresh assessment. From this point of view also, it appears to us that the only reasonable implication of this section is that where the ITO does not pass an order within the period of limitation prescribed under Section 146(2), the assessment order is deemed to be cancelled and the ITO will be required to make a fresh assessment. We may notice that in a similar situation in Section 220 of the Tamil Nadu District Municipalities Act it has been provided that where a statutory authority does not grant the approval for which an application has been made within the time prescribed, such an approval is deemed to be granted. If we do not assume such a result, the section itself would become meaningless and remain a pious wish on the part of the Parliament that the ITO should dispose of the application within the period prescribed. In order to make it effective, we have to make the necessary direction that where the ITO does not pass the orders within the period of limitation prescribed, the ex parte assessment made under Section 144 stands cancelled. In this view of the matter also, we deem it fit to declare that the assessment made by the ITO has been cancelled and, therefore, we direct the ITO to make a fresh assessment in accordance with law after giving the assessee a reasonable opportunity of being heard.