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Shakti Products Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1984)9ITD630(All.)
AppellantShakti Products
Respondentincome-tax Officer
Excerpt:
.....aid of machines, whereas the assessee had done so with manual aid. the ito made enquiries from the director of industries showing that the consumption of wax should be at the rate of 180 grams per meter of canvas cloth proofed. at this rate, he found that the canvas cloth proofed came to 5,555 meters per ton of wax consumed. he, therefore, concluded that the difference of rs. 46,660 had been kept by the assessee outside the books of account. applying a rate of 27 per cent on the proportionately enhanced receipts of rs. 2,10,000, he made an addition of rs. 42,000 to the income of the assessee in round figures.4. in appeal, the learned aac noticed that no letter from the director of industries was available on the ito's file. the assessee had challenged this position and submitted before.....
Judgment:
1. The assessee is aggrieved of the order dated 29-8-1980 of the learned AAC.2. The appeal was originally decided ex parte on 27-6-1981. However, on the basis of the assessee's MA No. 141 (All.) of 1981 the ex parte order was set aside vide order dated 5-5-1982 and the appeal was re-heard.

3. The assessee is a registered firm carrying on business in proofing, dyeing and starching of canvas cloth. It did not maintain day-to-day record of consumption of wax and proofed material of cloth recovered after processing the same. In the assessment order, the ITO has referred to the issuance of a notice under Section 143(2) of the Income-tax Act, 1961 ('the Act') which fact was challenged by the assessee before the learned AAC as also before us. The trading account of the assessee disclosed a gross profit of Rs. 15,027 on gross receipts of Rs. 1,68,480 giving rise to a gross profit rate of 12.4 per cent as against the adjusted gross profit rate of 22.5 per cent declared by the assessee in the previous assessment year 1974-75. In respect of wax, which is the main raw material consumed by the assessee in the proofing of canvas cloth the following position was found by the ITO. Opening stock of wax 2 8 12 Purchase during the year 30Deduct : Closing stock at the end 2 3 75 Balance 30 4 37 The ITO found the consumption of wax to be high. He, therefore, concluded that the assessee had proofed more canvas cloth, whereas it had declared only at the rate of 4,600 meters per ton of wax consumed.

He noticed that other dealers in the same line of business had processed their cloth with the aid of machines, whereas the assessee had done so with manual aid. The ITO made enquiries from the director of industries showing that the consumption of wax should be at the rate of 180 grams per meter of canvas cloth proofed. At this rate, he found that the canvas cloth proofed came to 5,555 meters per ton of wax consumed. He, therefore, concluded that the difference of Rs. 46,660 had been kept by the assessee outside the books of account. Applying a rate of 27 per cent on the proportionately enhanced receipts of Rs. 2,10,000, he made an addition of Rs. 42,000 to the income of the assessee in round figures.

4. In appeal, the learned AAC noticed that no letter from the Director of Industries was available on the ITO's file. The assessee had challenged this position and submitted before the AAC, that this information could not have been given by the director of industries. It was also pointed out that no notice had been issued under Section 143(2). The learned AAC took the view that the omission to issue the notice under Section 143(2) did not have the effect of rendering the entire assessment void ab initio. He held it to be only a procedural irregularity and, therefore, he directed the ITO that either fresh enquiries be made from the director of industries or the assessee be confronted with the data collected by him from the director of industries. He also directed that the assessee be allowed an opportunity to furnish its own data collected by it from the director of industries and then to decide the issue. Accordingly, he set aside the assessment to be made afresh in accordance with law after giving to the assessee a reasonable opportunity of being heard.

5. The assessee, being aggrieved, has come up in appeal before us. Shri P.N. Saxena, the learned Counsel for the assessee, submitted that since an assessment could be validly made under Section 143(3) only after issuing a notice under Section 143(2) and no such notice was, in fact, issued by the ITO, the assessment was a nullity and should have been annulled by the learned AAC instead of being merely set aside.

Referring to the decision of the Hon'ble Calcutta High Court in the case of Ramendra Nath Ghosh v. CIT [1967] 66 ITR 414, 438, he pointed out that since the material collected had not been confronted to the assessee, the assessment order was vitiated. He also referred in this connection to the following decisions--Ponkunnam Traders v. Addl. ITO [1972] 83 ITR 508 (Ker.), Smt. Maneka Gandhi v. Union of India AIR 1978 SC 597, CIT v. Sham Lal [1981] 127 ITR 816 (Punj. & Har.). He submitted that the learned AAC by setting aside the assessment order, conferred a fresh jurisdiction on the ITO. In this connection, he referred to the following decisions--Smt. Lucy Kochuvareed v. CAIT [1971] 82 ITR 845, 858 (Ker.) (FB), Gargi Din Jwala Prasad v. GIT [1974] 96 ITR 97 (All.) and Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons [1974] 96 ITR 390, 397 (SC). He also submitted that if there is a flagrant violation of principles of natural justice, the assessment order is vitiated. Reference in this connection was made by him to the following decisions--Raja Jagdambika Pratap Narain Singh v. CBDT [1975] 100 ITR 698 (SC), Jai Prakash Singh v. CIT [1978] 111 ITR 507 (Gauhati) and Lakshmi Industries & Cold Storage Co. (P.) Ltd., In re. [1980] 124 ITR 828 (All.), [1981] 51 Comp. Cas. 254 (sic) S.L. Kapoor v. Jagmohan AIR 1981 SC 136, Smt. Kanti Khare v. Kali Prasad Asthana AIR 1983 All.

45, 46 and Ka. Oldphimai Mukhim v. District Council Jaintia Hills AIR 1983 Gauhati 1. Shri Saxena submitted that the assessment order could be made by the ITO in this case up to 31-3-1978 and that the effect of the setting aside by the AAC was that the period of limitation prescribed for making assessments was enlarged thereby. He argued that this could not be done. In this connection, reference was made by him to [1983] 142 ITR 5 (St.), wherein the Hon'ble Supreme Court had granted special leave petition against a decision of the Hon'ble Calcutta High Court. He also submitted that the assessment appeared to have been completed on the basis of the return of income filed on 31-12-1975 which was not on the record and that the assessment made on the basis of such a non-existent return, was itself bad in law and void. He pointed out that there was on the record only one return dated 5-7-1977 filed on 6-7-1977 in response to the notice under Section 148 of the Act and that as the reassessment proceedings were dropped, that return was nonexistent and, consequently, ineffective.

6. On the other hand, Shri Satya Prakash, the learned departmental representative, supported the order of the learned AAC. Firstly, he pointed out that the latter two submissions made on behalf of the assessee regarding the non-existence of the returns did not arise out of the order of the AAC. Secondly, he submitted that the omission to issue a notice under Section 143(2) on the facts and in the circumstances of the present case was a mere procedural irregularity which could be cured in view of the decision of the Hon'ble Supreme Court in the case of Guduthur Bros. v. ITO [1960] 40 ITR 298. He referred to the decision of the Hon'ble Supreme Court in CIT v. Electro House [1971] 82 ITR 824 for the proposition that Section 33B of the Indian Income-tax Act, 1922 ('the 1922 Act') did not require any notice to be issued by the Commissioner before he assumes jurisdiction to revise an order passed by the ITO. Referring to the decision of the Hon'ble Allahabad High Court in Sant Baba Mohan Singh v. CIT [1973] 90 ITR 197, he submitted that the omission to issue a notice under Section 23(3) of the 1922 Act, did not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceeding and that after rectifying the omission by issuing the notice, he could proceed to complete the assessment. He also referred to the decision of the Hon'ble Supreme Court in the case of Superintendent (Tech. I), Central Excise v. Pratap Rai [1978] 114 ITR 231, for the proposition that fresh proceedings were barred if the order was set aside technically because of violation of principles of natural justice. He also referred to another decision of the Hon'ble Supreme Court in Grindlays Bank Ltd. v.ITO [1980] 122 ITR 55, for the proposition that an assessment order passed pursuant to the Court's direction was not barred by limitation.

Reference was also made by him in this connection to the decision of the Hon'ble Allahabad High Court in ITO v. Gargidin Jwala Prasad [1980] 124 ITR 203. Reference was also made by him to the decision of the Hon'ble Madhya Pradesh High Court in the case of Banarsidas Bhanot & Sons v. CIT [1981] 129 ITR 488 that the case could be restored to the ITO after making a fresh assessment after serving a fresh and complete draft order on the assessee. Lastly, reference was made by him to another decision of the Hon'ble Madhya Pradesh High Court in CIT v.Prem Syndicate [1983] 141 ITR 290 for the proposition that the breach of principles of natural justice affect the legality of the order and not the jurisdiction of t he Commissioner. Reference was also made by him to Section 153(2A) of the Act for the proposition that an order of fresh assessment in pursuance of an order under Section 250 of the Act setting aside or cancelling an assessment could be made at any time before the expiry of two years from the end of the financial year in which the order was received by the Commissioner. So construed, he argued that it could not be said that limitation had been enlarged by the learned AAC or that the assessment could not be made by the ITO.7. We have carefully considered the rival submissions as also the decisions referred to above. It is not disputed that, in fact, no notice under Section 143(2) was issued by the ITO. There was also no mention of the issuance of such a notice in the order sheet. Therefore, the question is as to what was the effect of such an omission as also the effect of the ITO's relying upon some information gathered by him from the director of industries when no letter of the director of industries was available on the ITO's file. The decision of the Hon'ble Supreme Court in the case of Guduthur Bros, (supra) makes it clear that if there is only an illegality which vitiated the proceedings after they were lawfully initiated, it was open to the ITO to take up the matter at the point at which the illegality supervened to correct his proceedings. The question really is whether the issuance of the notice under Section 143(2) was a condition precedent for the ITO to assume jurisdiction to make the assessment or all that he was required to do, before reaching his decision (and not before commencing the enquiry) was to give the assessee an opportunity of being heard. This pertains to the region of natural justice, breach of which may affect the legality of the order made but could not affect the jurisdiction of the ITO. This was the very aspect which came up before the Hon'ble Supreme Court in the case of Electro House (supra) where the Supreme Court was dealing with Section 33B of the 1922 Act corresponding to Section 263 of the 1961 Act. A proceeding is a nullity when the authority taking it has no jurisdiction ab initio to take the proceedings. In the case of Sant Baba Mohan Singh (supra) it was held by the Hon'ble Allahabad High Court that the omission of the ITO to issue a notice under Section 23(3) of the 1922 Act, which corresponds to Section 143(3) of the 1961 Act, did not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceedings. It was held that after rectifying the omission by issuing the notice, he could proceed to complete the assessment. This decision helps the revenue on the facts of the present case. The return was filed by the assessee on 31-12-1975. The notice under Section 147/148 of the Act was issued on 6-6-1977 in pursuance of which another return was filed by the assessee on 6-7-1977 under Section 148. The reassessment proceedings were dropped by the ITO on 17-3-1978. There was a letter of the assessee on 17-3-1978 and it is after this letter and after the reassessment proceedings were dropped that the ITO issued another letter on 23-3-1978 for the cross-examination of the partner R.S. Shukla on the statement recorded during the reassessment proceedings. Thereafter the assessment was completed on 30-3-1978. The assessment proceedings had already commenced and it is not as if the issue of the notice under Section 143(2) was a condition precedent to the assumption of jurisdiction by the ITO to assess the assessee. It is another matter that notice had to be issued by the ITO under Section 143(2), before he could complete the assessment under Section 143(3). It is not any and every disregard of the principles of natural justice which nullifies the proceedings. Such a result follows only if the violation of the principles of natural justice cuts at the very jurisdiction of the authority concerned (the ITO in this case). For all procedural or technical violations the assessment can be completed after removing the defect or illegality as held by the Hon'ble Supreme Court in the case of Guduthur Bros, (supra). The learned AAC, therefore, rightly noticed that the information gathered by the ITO from the director of industries not having been put to the assessee and there being no letter of the director of industries on the record, fresh enquiries should be made from the director of industries or the assessee should be confronted with the data collected by the ITO and opportunity be allowed to the assessee to furnish its own data and then to frame the assessment afresh. That direction was made by the AAC to do complete justice and to neutralise the prejudice which had been caused to the assessee by the disregard of the principles of natural justice in this regard.

Section 153(2A) clearly assists the department as pointed out by the learned departmental representative, since the order was passed by the AAC under Section 250 setting aside or cancelling the assessment.

Therefore, the question of limitation for making the assessment order was to be governed under Section 153(2A), i.e., within two years from the end of the financial year in which the order under Section 250 was received by the Commissioner. If the learned AAC had the jurisdiction and justification for setting aside the assessment, the assessee cannot say that just because the consequence of such a set aside was that the period of limitation as prescribed under Section 153(2A) became attracted, the order could not be said to be vitiated. On those facts, it could not be said that the learned AAC had conferred jurisdiction on the ITO to make an assessment beyond the period of limitation prescribed under law. We are, therefore, clearly of the view that since the ITO had jurisdiction to undertake the assessment proceedings in question and there was only an omission to issue a notice under Section 143(2) and a breach of the principles of natural justice in relation to the use of the information gathered from the director of industries, the assessment order was not a nullity and was rightly set aside by the learned AAC to be made afresh in accordance with law after following the directions given by him. There is, therefore, no force in this appeal, which must fail and be dismissed.


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