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Gowdar Jayadevappa Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1985)11ITD216(Bang.)
AppellantGowdar Jayadevappa
RespondentFirst Income-tax Officer
Excerpt:
1. these six appeals relating to the same assessee are taken up for disposal by this common order. five of them are by the assessee and one [it appeal no. 986 (bang.) of 1982] is by the revenue. the assessment years involved are 1973-74 to 1978-79.2. the assessee is an individual. he carries on business as a retailer in handloom cloth. it appears, a survey under section 133a of the income-tax act, 1961 ('the act'), was done by the assistant director of inspection on 3-8-1978. some books of account of the assessee were also seized by the department on that date. the accounting year seems to be the deepawali year, though it is not so mentioned in the assessment orders. we shall now take up the appeals yearwise.3. it appeal no. 967 (bang.) of 1982 [assessment year 1973-74] - after the.....
Judgment:
1. These six appeals relating to the same assessee are taken up for disposal by this common order. Five of them are by the assessee and one [IT Appeal No. 986 (Bang.) of 1982] is by the revenue. The assessment years involved are 1973-74 to 1978-79.

2. The assessee is an individual. He carries on business as a retailer in handloom cloth. It appears, a survey under Section 133A of the Income-tax Act, 1961 ('the Act'), was done by the Assistant Director of Inspection on 3-8-1978. Some books of account of the assessee were also seized by the department on that date. The accounting year seems to be the Deepawali year, though it is not so mentioned in the assessment orders. We shall now take up the appeals yearwise.

3. IT Appeal No. 967 (Bang.) of 1982 [Assessment year 1973-74] - After the action under Section 133A, the ITO issued a notice under Section 148 of the Act. The assessee filed a return 'in response thereto'. This disclosed a total income of Rs. 14,520. The ITO noticed with reference to the books that had been kept by the assessee, i.e., 'Bota-khata' (seized at the time of survey) and loose sheets comprising pages 1 to 38 (also seized) that a complete verification of the trading done this year was not possible. He listed various defects in this regard. He concluded that the assessee had suppressed sales to the extent of Rs. 87,000. He then estimated the total sales at Rs. 6,07,390 and applied a flat rate of 121/2 per cent as gross profit. This assessment, made under Section 147(a) of the Act, resulted in an addition of Rs. 23,885.

The assessee appealed.

4. Before the AAC, it was pointed out that the ITO had estimated the total sales on the basis of the loose sheets impounded by the department; and that these sheets had been relied upon by the ITO without further verification. For example, sales for the assessment year 1973-74 (the year in appeal) as per books were Rs. 5,20,390. As against this, the ITO recorded that the total sales for the year as per the loose sheets amounted to Rs. 6,07,390. It was explained for the assessee that the above discrepancy was on account of a totalling mistake in the loose sheet figures, as was evident from the monthly totals not only for this year but also for the assessment year 1974-75.

The correct total for the assessment year 1973-74 amounted to only Rs. 5,21,490 and the correct total for the assessment year 1974-75 was only Rs. 5,25,750. These figures more or less tallied with the sales figures as per the books of account also, i.e., Rs. 5,20,390 and Rs. 5,25,750.

The assessee also filed a certificate from the STO to the effect that the details of turnover filed before the Saks Tax Department in Form No. 3 tallied with the sales as per the books of account disclosed before the ITO. The AAC found substance in this explanation. He concluded that there was no justification for rejecting the sales shown by the assessee, not only for this year but also for the subsequent assessment year. He, therefore, directed the ITO to accept the sales as returned by the assessee. (There is no appeal from the revenue against this direction either for this assessment year or for the subsequent assessment year and the matter as regards this aspect stands concluded.) 5. The AAC then considered the gross profit estimated at 121/2 per cent for this assessment year. He found that the assessee had disclosed gross profit of 10 per cent but only on estimate basis. He noticed that no proper trading accounts had been kept by the assessee. In his view, looking to the volume of the business (sales Rs. 5,20,390) and the nature of the business done, it was reasonable to estimate the gross profit at 11.5 per cent. He directed accordingly. Thus, the AAC ordered a reduction of Rs. 16,079 from the trading profit estimated by the ITO.The assessee is in further appeal.

6. Shri K.R. Prasad, the learned Counsel for the assessee, took us not only through the facts relevant for this year (as regards the trading profit) but the facts relating to the subsequent years also, so as to give an overall picture of the case. He did not dispute the fact that looking to the nature of the defects in the accounts kept and more especially the fact that the assessee himself had estimated gross profit of 10 per cent to arrive at the income returned, the income disclosed could not be accepted and had to be estimated. But his submission was that the estimate of gross profit at 11.5 per cent for this year (as well as for the assessment year 1974-75) was excessive and should be reduced. For the revenue, Shri A. Suryanarayana Rao strongly supported the order of the AAC. He referred to the background in which the assessments came to be made, i.e., after a survey under Section 133A and discovery of adverse material. According to him, the gross profit estimate ordered by the AAC was quite reasonable and should be supported.

7. We find that the only dispute before us is with regard to the estimate of gross profit. If books of account had been kept in a verifiable manner, i.e., purchases and sales being supported by vouchers and bills and a proper stock tally being available, then it would have been for the ITO to show that the margin of profit disclosed by the books was too low. But that is not the case here. The assessee himself returned an estimated gross profit of 10 per cent. The AAC has raised it to 11.5 per cent. Prima facie, this appears to be reasonable, looking to the volume and nature of the business. No material has been placed before us to hold that the AAC's estimate is excessive, capricious or arbitrary. There is also some substance in the point made for the department that this was not a case of voluntary return but of a return filed following action under Section 133A. In these circumstances, we decline to interfere.

8. The next objection relates to some disallowance of salary paid by the assessee to his sons in running the business. We, however, find that there was no such disallowance for this assessment year. In fact, there was no such objection before the AAC also for this assessment year. This ground of objection does not arise out of the orders of the authorities below and is, hence, rejected.

9. The next objection, relating to depreciation on building and furniture, was not pressed and is, hence, rejected.

10. The next objection is with regard to levy of interest under Section 139(8) and Section 217 of the Act. The ITO had levied interest of Rs. 10,130 under Section 139(8) and interest of Rs. 12,042 under Section 217, as recorded in the assessment order passed by him on 4-11-1981.

The assessee did not contest these levies before the AAC. Objection to these levies has been taken before us for the first time. The first question is whether the assessee is entitled to raise such an objection for the first time in second appeal.

11. After hearing the parties, we are of the view that there is no bar to this question being raised for the first time before--us Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232 (SC). The Tribunal should allow such questions to be raised if they could be decided on the facts already on record, vide Gundathur Thimmappa & Sons v. CIT [1968] 70 ITR 70 (Mys.). It is nobody's case that the facts necessary to decide the above question are not already on record. We, therefore, allow the assessee to raise this new question at the second appeal stage.

12. Shri Prasad urges that on merits, neither the interest levied under Section 139(8) nor that levied under Section 217, in the instant case, can survive. He refers to the decision of the Karnataka High Court in Charles D'Souza v. CIT [1984] 147 ITR 694. In that case, the Court held that interest under Section 139(8) and Section 217 cannot be levied in the case of an assessment or reassessment made under Section 147. In the Court's view, it could only be levied in cases of 'regular assessment', as defined in Section 2(40) of the Act, i.e., an assessment made under Section 143 or 144 of the Act in contradistinction to assessments under Section 140A of the Act before its abolition in 1971 and an assessment/reassessment under Section 147, Shri Prasad, therefore, contends that levy of such interest under Sections 139 and 217 in the assessment here made under Section 147 be struck clown as bad in law. Alternatively, he submits that in the light of the decision of the Karnataka High Court in CIT v. Executors of the Estate of Late H.H. Rajkuverba Dowager Maharani Saheb of Gondal [1978] 115 ITR 301, the matter be restored to the ITO for passing separate orders for levy of such interest. (Levying interest under Section 217 as part of the assessment order was held to be not valid by the Karnataka High Court in this case.) Attention is also invited in this regard to a prior order of the Tribunal in the case of Bishindas Taliram v. ITO [IT Appeal No. 602 (Bang.) of 1977-78, dated 27-2-1979], which was also a case of levy of interest under sections 139 and 215 of the Act and such levy was part of an order of assessment. The Tribunal directed in that case as under: 5....In a case like the present one, however, where the levy of interest forms part of the assessment order itself, we are of the opinion that a single appeal is competent and it is not necessary for the assessee to file two separate appeals.

6. Since the Karnataka High Court has held in CIT v. H.H. Rajkuverba Dowager Maharani Saheb [1978] 115 ITR 301, that the order levying interest under Sections 139, 215, etc., cannot be made automatic as part of the order of assessment, but has to be made after giving the assessee an opportunity of being heard, the levy of interest under both the sections as an automatic measure by the ITO is not correct and cannot be sustained. It is true that such a ground of appeal was not raised before the AAC, but the question being purely of law, requiring no investigation of the facts, we have admitted this ground of appeal and have disposed it of on merits. We, accordingly, quash the levy of interest, leaving it open to the ITO to re-consider the levy of interest after hearing the assessee.

Shri Prasad's alternative submission, therefore, is that if we do not quash the levy on merits, the matter should be restored to the ITO for consideration afresh on the lines indicated by the Tribunal in its order of 27-2-1979 supra. The departmental representative defended the levies.

13. We find that the matter is directly covered by the decision of the Karnataka High Court in the case of Charles D'Souza (supra). We are bound by the decisions of the Karnataka High Court. We would, therefore, hold that levy of interest under Section 139 and under Section 217 in an assessment made under Section 147 as in this case is bad in law. The interest levies of Rs. 10,130 and Rs. 12,042 are, therefore, cancelled.

14. IT Appeal No. 968 (Bang.) of 1982 [Assessment year 1974-75] - The first objection is with regard to the estimate of gross profit at 111/2 per cent by the AAC. For this year also, action under Section 147 was taken after the survey under Section 133A on 3-8-1978. The assessee returned an income of Rs. 16,670, which was based on estimating the gross profit at 10 per cent. The nature of the business, state of the books of account as regards verification of trading profit disclosed, etc., were materially the same as for the preceding year. The ITO estimated the sales on the basis of the loose sheets at Rs. 6,55,750 and applied a gross profit rate of 121/2 per cent. The AAC reduced the sales to Rs. 5,25,546. (There was only a totalling mistake in the loose sheets, as noticed for the preceding year. The above sales of Rs. 5,25,546 also tallied more or less with the sales of Rs. 5,25,750 shown by the books.) In these circumstances, the AAC did not disturb the sales disclosed by the assessee but only reduced the gross profit of 121/2 per cent estimated by the ITO to 111/2 per cent. Arguments for the parties were the same before us on this issue as for the preceding year. After hearing the parties, we would maintain the order of the AAC for the reasons recorded by us in para 7 supra. The objection of the assessee is, therefore, rejected.

15. The next objection is with regard to some disallowance of salary paid to the assessee's sons. We find from the assessment order as well as the appellate order that such an issue does not arise out of them.

Hence, we reject this contention.

16. The next objection relates to depreciation on building and furniture. This was not pressed and, hence, rejected.

17. The next objection relates to levy of interest under Section 139(8) (Rs. 12,600) and of interest under Section 217 (Rs. 15,900). These levies are part of the assessment order of the ITO passed under Section 143(3)/147 on 4-11-1981. Objection relating to such levy has been raised before us for the first time and for the reasons recorded in paragraph 11 supra, we permit such an issue to be raised. Arguments for the parties on this question (on merits) were the same as for the preceding year. For the detailed reasons recorded by us in paras 12 and 13 supra, we cancel the levy of interest of Rs. 12,600 [under section 139(8)] and of interest of Rs. 15,900 (under Section 217).

18. I.T. Appeal No. 969 (Bang.) of 1982 [Assessment year 1975-76] - This. is also an assessment made under Section 143(3), read with Section 147 The first objection relates to estimate of gross profit of 111/2 percent sustained by the AAC. The ITO listed various defects in the trading account as per books and noted that the sales admitted were Rs. 7,68,215. He estimated them at Rs. 8,20,000, as the sales were not properly verifiable; there were no details of opening and closing stocks and the books maintained were irregular and imperfect. On such sales, he estimated the gross profit at 111/2 per cent. This resulted in an addition of Rs. 18,279 to the trading accounts. The assessee appealed. The AAC, however, disposed of the objection not only as regards this assessment year but also for the two preceding years by para 6 of his consolidated appellate order dated 14-9-1982 for the assessment years 1973-74 to 1976-77. The AAC recorded therein the view that there was no room for rejecting the sales disclosed by the assessee. He directed the ITO to accept the sales admitted by the assessee. As regards the estimate of gross profit, he held as under in para 6 of the order of 14-9-1982 supra: 6. The ITO has estimated the gross profit for the first two years at 121-percent and from the assessment year 1975-76 onwards at 111/2 per cent. These are also disputed by the assessee. However, I find that the assessee himself had returned the gross profit on estimate basis only. No proper trading accounts have been kept. The gross profit was estimated by him at 10 per cent. Considering the volume of turnover and the usual margin of profit in this line of business and also keeping in view the margin estimated by the ITO himself, for the assessment years from 1975-76 onwards, I feel it will be reasonable to estimate the gross profit at 111/2 per cent. In the result, the gross profit may be estimated at 111/2 per cent for each of these years. The turnover figure as returned by the assessee should be accepted. The consequent reduction for the four years will work out to Rs. 16,079, Rs. 21,509, Rs. 6,756 and Rs. 11,810, respectively.

The assessee is, hence, in appeal before us, contending that the gross profit estimate of 111/2 per cent ordered by the AAC is excessive and unreasonable. The learned Counsel for the assessee emphasised the fact that the turnover had really gone up very high this year and, therefore, there should have been a lower gross profit; hence, the gross profit estimate should have been lower. For the department, Shri Suryanarayana Rao, stressed the fact that this was a case forced out into the open by action under Section 133A and the state of accounts being what they were, the gross profit estimated by the AAC could not be assailed as unreasonable.

19. After hearing the parties, we would maintain the AAC's order because here again, there is no material on record to suggest that either the gross profit rate of 10 per cent estimated by the assessee was fair looking to the volume and the nature of the business; or that the rate of profit estimated by the AAC is so unreasonable or excessive as to call for our interference. This objection of the assessee is, therefore, rejected.

20. The next objection is with regard to disallowance of part of the salary paid by the assessee to his two sons in running the business.

Shri Prasad filed a factual statement before us in this regard. This gives the position not only for this year but for the two subsequent years as well. The details are as under:Assessment Salary Salary Total Disallowed Disallowance year to sons to others by ITO restricted by1975-76 13,200 13,684 26,884 18,884 7,2001976-77 24,000 12,262 36,262 28,262 15,6001978-79 27,000 9,959 36,959 28,959 17,400 There was no supporting evidence to justify the salary of Rs. 13,200 paid by the assessee to his two sons this year and claimed as business expenditure. The assessee was assessed in the status of HUF up to the assessment year 1974-75 in respect of cloth business. The salary payments claimed were only Rs. 2,777 for the assessment year 1974-75. The total turnover of the business for the said year was claimed to be Rs. 5,25,750. On the other hand (the ITO goes on to record), the turnover for this year (the assessment year 1975-76) as disclosed was Rs. 7,68,215. But this increase in the turnover did not justify the increase in salary payments. The sons of the assessee, who were said to be employees, were then examined by the ITO. According to the ITO, the sons did not even know whether their salary was being 'debited in the assessee's books'. In fact, 50 per cent of the total salary payments this year represented salary paid to the two sons. It was admitted by the sons that they were living with their father. They had no specific qualifications so as to be eligible for such a huge amount of salary. However, the ITO concluded, taking into account the increase in turnover and also the estimate of turnover made in the assessment and also considering the nature and requirements of the business as well as increase in the cost of labour, it was reasonable to allow in all Rs. 8,000 as genuine business expenditure on account of salary. The balance of Rs. 18,884 was, therefore, disallowed by the ITO out of the total salary debit of Rs. 26,884. The assesses appealed.

21. The AAC, in his consolidated order of 14-9-1982 covering the assessment years 1973-74 to 1976-77, discussed this issue in paras 7 and 8 of his order. He analysed the salary payments of Rs. 26,884 as salary paid to the sons, i.e., Rs. 13,200 in all and salary paid to outsiders, i.e., Rs. 13,684. So far as the salary paid to outsiders was concerned, he saw no reason why any part of such salary should be disallowed. He, therefore, directed full allowance of such allowance and the revenue is not in appeal against such direction either for this year or for the subsequent year. As regards salary paid to the sons, in AAC's view, some disallowance was certainly called for. But such disallowance had to be restricted to Rs. 7,200 for this assessment year. His reasons for this conclusion were briefly as follows: 1. From the statements of the sons, it was seen that one of them had been working in his father's shop from 1970. The other son had been working there from 1971.

2. One of the sons was getting a salary of Rs. 500 a month and the other Rs. 600 per month. These salaries were, subsequently, increased also.

3. The sons have been attending to this business full time from November 1973. All the payments were duly supported and these payments were also clearly recorded in the books impounded and kept with the ITO. 4. It cannot be said that the payment of salary to the sons was totally for non-business consideration. The sons were attending to the business as regular employees. But taking into account the salary paid to other employees, it would be reasonable to restrict the salary of the sons to Rs. 250 per month each. Thus, the disallowance for the assessment year 1975-76 would be Rs. 7,200.

Shri Prasad contends before us that the disallowance of Rs. 7,200 by the AAC is excessive on the facts of the case. Shri Suryanarayana Rao, on the other hand, supported the disallowance maintained by the AAC.22. After hearing the parties, we find that a disallowance was certainly called for. However, it is not wholly correct to proceed on the principle that the disallowance should be based on a comparison with the salaries paid to outsiders, unless, of course, there is material on record to show that the outsiders were equally competent and had equal experience as the sons. That is not the case here nor is there any dispute that the sons did render services as employees. The fact, however, remains that there is a very close relationship between the employee-sons and the master. Keeping in view the whole picture, we hold that the salary of Rs. 400 per month to each of the two sons for this year would be reasonable. This would reduce the disallowance to Rs. 3,600. The assessment shall be modified accordingly.

23. The next objection relates to depreciation on building and furniture. This was not pressed and is, hence, rejected.

24. The next objection relates to levy of interest under Section 139 and under Section 217. This has been raised before us for the first time. However, we find from the assessment order dated 4-11-1981, that there was no such levy. Hence, this issue does not arise out of the orders of the authorities below and the assessee's objection is, therefore, rejected.

25. IT Appeal No. 970 (Bang.) of 1982 [Assessment year 1976-77] - The first objection relates to estimate of gross profit of 111/2 per cent sustained by the AAC. The ITO estimated the sales at Rs. 9,18,320 and estimated the gross profit at 111/2 per cent. This was against the sales admitted at Rs. 8,15,623 and gross profit estimated by the assessee at 10 per cent. This resulted in an addition of Rs. 24,044 as extra trading profit. The AAC, by his order dated 14-9-1982 supra, directed the ITO to accept the sales returned by the assessee but confirmed the ITO's estimate of gross profit at 111/2 per cent. He, thus, gave a reduction of Rs. 6,756. The assessee is in further appeal.

26. Arguments for the parties on this issue were substantially the same as in the preceding years. For the reasons recorded by us supra on similar additions for the preceding years, we see no room for interference as regards this year also. The objection of the assessee in this regard is rejected.

27. The second objection relates to disallowance (in part) of salary paid to the sons of the assessee. We find that out of total salary payments of Rs. 36,262 this year, the salary paid to the sons amounted to Rs. 24,000 and that to the outsiders came to Rs. 12,262. The ITO disallowed Rs. 28,262 in all. The AAC, as noted in para 21 supra, allowed the salary paid to outsiders amounting to Rs. 12,262 fully and the revenue is not in appeal on that. As regards the balance of Rs. 24,000, the AAC considered it reasonable to allow Rs. 350 per month to each of the sons and on this basis, he sustained a disallowance of Rs. 15,600.

28. Arguments for the parties were the same as for the preceding year.

We note that the AAC has himself considered an increase of Rs. 100 per month per son was reasonable this year. On that basis, which we think is reasonable, we would direct that salary be allowed at Rs. 500 per month per son for this year. The disallowance would, therefore, be restricted to Rs. 12,000. The assessment shall be modified accordingly.

29. The next objection relates to depreciation on building and furniture. This was not pressed and is, hence, rejected.

30. The next objection relates to levy of interest under Section 139(8) (Rs. 10,082) and levy of interest under Section 217. These levies are part of the assessment order of the ITO passed under Section 143(3)/147 on 4-11-1981. Objection relating to such levy has been raised before us for the first time and we have permitted such an objection to be taken, for the reasons recorded in paragraph 11 supra. Arguments for the parties on this question on merits were the same as for the assessment year 1973-74. For the reasons recorded by us in paras 12 and 13 supra, we cancel the levy of interest under Section 139(8) and of interest under Section 217.

31. IT Appeal No. 979 (Bang.) of 1982 [Assessment year 1978-79] - We may mention at the outset that the assessment for this year has itself to be quashed as bad in law as prayed for by the assessee in ground No.6 of its appeal. However, for the sake of completeness, we will deal with all the objections raised on merits, first: 31.1 The first objection relates to estimate of gross profit at 111/2 per cent maintained by the AAC. The ITO rejected the sales disclosed at Rs. 6,86,614. He estimated them at Rs. 8,00,450 and gross profit was estimated at 111/2 per cent. This resulted in an addition of Rs. 23,390 to the trading account. The AAC, who passed a consolidated order for the assessment years 1977-78 and 1978-79, directed the ITO to accept the sales as disclosed by the assessee but maintained the gross profit estimate of 111/2 per cent. For this, he relied on the reasons given by him in his appellate order for the earlier assessment years and which have also been referred to by us in para 7 supra. Arguments for the parties on this point were the same as for the earlier years. On the facts on record, we see nothing unreasonable in the order of the AAC on this issue. The objection of the assessee in this regard is rejected.

32. The next objection relates to disallowance of part of the salary paid to the sons of the assessee. The ITO disallowed Rs. 28,959 out of the total salary payments of Rs. 36,959 this year. This debit included salary payments of Rs. 27,000 to the two sons of the assessee. The AAC held that salary payments of Rs. 9,959 to outsiders could not in any case be disallowed. As regards the balance of Rs. 27,000 (being salary paid to the sons), he sustained a disallowance of Rs. 12,600, on the basis that salary of Rs. 400 per month per son would be reasonable for this year, i.e., he allowed an increase of Rs. 50 per month per son as reasonable increment in salary this year. Thereby, he sustained a disallowance of Rs. 17,400. Arguments for the parties were the same as for the preceding year. After hearing the parties, we hold that salary of Rs. 600 per month per son for this year, looking to the volume of the business this year and the increment allowed by the AAC, would be reasonable. On this basis, the disallowance would come to Rs. 12,600.

The assessment shall be modified accordingly.

33. The next objection relates to depreciation on building and furniture. This was not pressed and is, hence, rejected.

34. The next objection relates to levy of interest under Section 139(8) (Rs. 3,283) and of interest under Section 217 (Rs. 8,300). These levies are part of the assessment order of the ITO passed under Section 143(3)/147 on 4-11-1981. Objection relating to such levy has been raised before us for the first time and was also permitted to be so raised. Arguments for the parties on this question were the same as for the preceding year. For the detailed reasons recorded by us in paras 12 and 13 supra, we cancel the levy of interest of Rs. 3,283 under section 139(8) and interest of Rs. 8,300 under Section 217.

The learned Appellate Assistant Commissioner ought to have held the assessment to be barred by limitation, as it could not have been made after 31-3-1981 on the facts and in the circumstances of the case.

So far as this is concerned, we would first take up the appeal for the assessment year 1977-78 filed by the revenue. A similar issue was decided by the AAC there, but in favour of the assessee and the revenue is, therefore, in appeal. Hence, it would be preferable to notice the facts relating to that year first and dispose of the appeal for the assessment year 1977-78 before reverting to this issue for the assessment year 1978-79.

36. IT Appeal No. 986 (Bang.) of 1982 (Assessment year 1977-78] - Though there are six grounds of appeal, in substance, the objection for the revenue is: The AAC erred in cancelling the assessment for this year on the ground that it is barred by limitation. The relevant facts are as follows: 37. The assessee filed a return on 31-12-1979. This disclosed a loss of Rs. 12,730. As already noticed, there had been a survey under Section 133A on 3-8-1978. Following that, the ITO had issued notices under section 148 right from the assessment year 1973-74 onwards. When a similar notice was received for this year, the assessee stated that the return already filed by him on 13-12-1979 be looked upon as a return filed in response to the said notice under Section 148. Thereupon, the ITO proceeded with the assessment for completion under section 147. He closed the assessment, accordingly, under Section 147 on 4-11-1981 making certain additions to the income returned and converting the loss shown into taxable income. The assessee appealed.

38. The contention before the AAC was that the assessment made for this year was not valid, as it was completed beyond the period of limitation. It was submitted that the assessee had filed voluntarily a return for this year under Section 139(4) on 13-12-1979. This return should have been acted upon and the assessment completed before 31-3-1980 in terms of Section 153(1)(a)(iii) or in terms of Section 153(1)(c) of the Act by or before 12-12-1980 in any case. In other words, the assessment for this year should have been completed in any case by or before 12-12-1980. It was not so done. It was completed only on 4-11-1981 and, hence, the assessment had to be quashed. The AAC, accepting this contention, held as follows: The contention, insofar as it relates to the assessment year 1977-78, is found to be quite valid. When the return is filed and the original assessment is pending, no income could be said to have escaped assessment. The notice issued under Section 148 itself was, therefore, not legally valid. The assessment order passed on 4-11-1981 is clearly barred by limitation of time.

39. Shri Suryanarayana Rao submitted that the AAC's conclusion was totally wrong in law. His arguments may be summarised as follows: 1. The assessee filed a loss return this year. It was not a return under Section 139(1). Nor was it a return under Section 139(2). Both these subsections refer to returns of 'income'. So far as loss returns are concerned, there is a separate specific provision governing the filing of such returns. That provision is Section 139(3).

2. Reading Section 139(3), it is quite clear that a valid return of loss can be filed only where either of the two conditions prescribed in the said section itself is satisfied, i.e., such a return has to be filed within the time allowed under Sub-section (1) of section 139; or it has to be filed within such further time which, on an application made by the assessee in the prescribed manner, the ITO may in his discretion allow. The return filed in the instant case, is, hence, not a valid return. It was not filed within the time allowed under Section 139(1), i.e., before 30-6-1977. Nor was this a case of the assessee filing a return within the time allowed on an application in the prescribed manner made to the ITO. There was no such application in fact. The result is, the return was not even one under Section 139(3).

3. No doubt, in CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC), it was held while interpreting Section 22(2A) of the Indian Income-tax Act, 1922 ('the 1922 Act'), a provision in pari materia with Section 139(3) of the Income-tax Act, 1961 that in order to get the benefit of Section 24(2) of the 1922 Act (corresponding to Section 72 of the 1961 Act), it was enough if the return was submitted at any time before the assessment is made; that a return whether it is a return of income or of loss must be considered as having been made within the time prescribed if it is made within the time specified in Section 22(3) of the 1922 Act (corresponding to section 139(4) of the 1961 Act), and that if Section 22(3) is complied with, Section 22(1) also must be held to have been complied with. But this decision was rendered under the 1922 Act and the language of the provisions of the 1922 Act and of the 1961 Act not being identical, this decision of the Supreme Court was not a bar to the claim of the revenue that the loss return filed by the assessee in the circumstances noted above was not a valid return at all.

4. Under Section 139(8)(a), if a return was filed after the 'specified date', the assessee would have to pay simple interest at 12 per cent per annum. It follows, a return filed beyond the dates stipulated in Section 139(3) cannot be deemed to be one filed under Section 139(1). This statutory position was not present in the 1922 Act and, hence, the return filed by the assessee here cannot be accepted as a valid return, i.e., no interest can be charged on a loss return filed under Section 139(3).

5. The terms of section 139(3), read with Section 80 (relating to loss returns), must be complied with strictly for a loss return to be accepted as valid. To apply the principle laid down in Kulu Valley Transport Co. (P.) Ltd.'s case (supra) and declare even returns filed beyond the time limit specified in section 139 as valid, would be to render the section itself otiose. No statutory provision should be so interpreted as to render it superfluous as that would be frustrating the legislative intent.

6. The assessee himself wrote to the ITO that the return filed by him on 13-12-1979 could be taken as one filed in response to the notice under Section 148 served on him for this year. Hence, this is a case of an assessment under Section 147 based on a return filed by the assessee in response to the notice under section 148 served on the assessee and in that view, no question of limitation arises as the assessment was completed well within the period of 8 years allowed to the ITO for the completion of such an assessment under Section 147.

7. Alternatively, even assuming that the return has to be looked upon as one filed under Section 139(4), the ITO, as is evident from the assessment order itself, initiated action under Section 271(1)(c) of the Act, i.e., this is a case where the assessment could be made before the expiry of eight years from the end of the assessment year 1977-78, i.e., before 31-3-1986, in terms of Section 153(1)(b).

In view of the above position, Shri Suryanarayana Rao contends that the AAC was wrong in cancelling the assessment as time barred.

40. In reply, Shri Prasad strongly relied on Kulu Valley Transport Co.

(P.) Ltd.'s case (supra). In fact, he filed a copy of a circular of the CBDT, which specifically accepted that the ratio of Kulu Valley Transport Co. (P.) Ltd.'s case (supra) would be applicable to assessments under the Act of 1961 also [Circular F. No.208/9/70-IT(A-II) dated 28-8-1970]. This is what the Board stated in this circular: 3. Even though the decision was given in the above case on the interpretation of provisions of Section 22(2A) of the Indian Income-tax Act, 1922, the same would be applicable mutatis mutandis to Section 139(3) of Income-tax Act, 1961, since the provisions in the Acts of 1922 and 1961 in this respect are in pari materia.

No doubt, the above circular was withdrawn by the Board under Instruction No. 1528, dated 20-9-1983. But then the circular dated 28-8-1970 was in force fully for the assessment year 1977-78. The counsel draws our attention to the decision of the Kerala High Court in the case of CIT v. B.M. Edward India Sea Foods [1979] 119 ITR 334 (FB).

In that case, the Court considered the scope of Section 119 of the Act and held that the circulars of the Board are binding upon its subordinate authorities vested with the administration of the taxing Act. The facts there were: There was in operation from 1944, a circular of the Central Board of Revenue issued under the 1922 Act, under Section 5(8) of that Act [corresponding to Section 119(1) of the 1961 Act], which allowed the loss suffered by a spouse to be set off against the income of the other spouse. This circular was withdrawn on 6-4-1972. The assessment year concerned was 1971-72. The Tribunal held that although the circular had been so withdrawn by the time the assessment came to be made, it had been in operation at the commencement of the assessment year 1971-72 and, hence, the circular was binding upon the income-tax authorities for that assessment year.

The Court held that having regard to the scope, effect and purport of the circular involved and particularly to the fact that the circular was in force and operation throughout the assessment year 1971-72 and was withdrawn only on 6-4-1972, the assessee was entitled to have the assessment made and completed in accordance with the circular. Shri Prasad further points out that there was another case also of the Kerala High Court, where a similar decision was given by the Court on the effect of subsequent withdrawal of a Board's circular; that the department took up the matter under a special leave petition against that decision--CIT v. Geeva Films [1983] 141 ITR 632 (Ker.) and that this petition was dismissed by the Supreme Court on 17-11-1982--[1983] 140 ITR (St. 1). The submission for the assessee, therefore, is that the ITO was bound to follow the circular, dated 28-8-1970, and that being so, it was not open to the department to contend that the return filed by the assessee in the instant case, was not a valid return at all.

41. The counsel then submits that this was also not a case to which the provisions of Section 271(1)(c) would apply. There was a voluntary return filed on 13-12-1979. This was a valid return in terms of Section 139(4). The assessment could have been completed at any time before 12-12-1980 in terms of Section 153(1)(c). If before that time, the ITO had recorded his satisfaction regarding any concealment on the part of the assessee, in whatsoever and howsoever a brief manner, then only could it be argued that in terms of Section 153(1)(i), the assessment could be completed by or before 31-3-1986. But for this, there must be on record some material for a prima facie conclusion regarding concealment. There is no such material brought on record by the ITO showing his 'satisfaction', at any time before 12-12-1980. There is no such conclusion even in the assessment order, though the ITO has ordered that a notice under Section 271(1)(c) should issue. All that the ITO has done in making the assessment, is to reject the gross profit declared and the sales disclosed by the assessee and to make certain disallowances out of the expenditure claimed on general grounds. No doubt, he included the share of profit from a firm called Karnataka Finance Corporation (Rs. 10,867), which had not been returned by the assessee. But as would be evident from the order of the AAC for the assessment year 1978-79, this pertained to the assessment of the HUF of the karta of the assessee and not to the assessee as individual.

The result, therefore, was: no material for even a prima facie conclusion of any concealment by the assessee this year is on record.

The counsel also invited our attention in this regard to the decisions in the cases of Mir Suba Hari Bhakta v. ITO [1960] 39 ITR 617 (All.) and Ram Bilas Kedar Nath v. ITO [1964] 54 ITR 11 (All.), to contend that the ITO will have no jurisdiction to invoke the eight-year limit in terms of Section 153(1)(b) in the absence of any material on record to show that Section 271(1)(c) could be invoked. Extension of the time limit in such a context would only amount to harassment.

42. After hearing the parties, we are unable to find fault with the AAC in cancelling this assessment as bad in law on the ground of limitation. Return was filed by the assessee for this year on 13-12-1979. This was not a return in response to a notice under Section 139(1). Nor was it a return in response to a notice under Section 139(2). It was a return showing loss of Rs. 12,730. It cannot be dismissed as not a valid return at all, on the ground that such a loss return should have been filed only under Section 139(3) and the return not having been filed in terms of the conditions laid down therein, there was no valid return at all. We think, the counsel for the assessee is correct in contending that this return filed on 13-12-1979 could be looked upon as a return under Section 139(4). The moment that conclusion is reached, there is no question of the ITO issuing a notice under section 148. Where a return is filed under Section 139(4), that return has to be processed for an assessment under Section 143 or 144.

If in such a case notice is issued under Section 148, it would be inoperative in law. see CIT v. Ranchhoddas Karsondas [1959] 36 ITR 569 (SC) as also CIT v. S. Raman Chettiar [1965] 55 ITR 630 (SC). Hence, the notice issued by the ITO under Section 148 was bad in law and the AAC was correct in cancelling the assessment made in pursuance of such a notice, on 4-11-1981, i.e., beyond the limitation date. It was common ground before us that if the return was to be looked upon as one under Section 139(4), assessment ought to have been completed by or before 12-12-1980. That is not the case here and we would, therefore, maintain the AAC's order on this issue.

43. No doubt, Shri Suryanarayana Rao argued that the assessee having stated by his letter of 5-1-1980 that the return filed on 13-12-1979 should be treated as a return in response to the notice under Section 148, it should be taken that the assessee waived all objections to the jurisdiction of the ITO under Section 147. But this is not a valid contention in law. The conditions precedent for initiating reassessment proceedings are: 1. A reasonable belief reached by the ITO under Clause (a) or (b) of Section 147.

3. Sanction before issue of notice of reassessment by the authority concerned under Section 151.

In this case, we have seen the reasons recorded by the ITO. These reasons were recorded on 29-11-1980. These are as under: After the survey was conducted by the A.D.I., Bangalore, on 3-8-1978, it was noticed that turnover exceeding Rs. 6,22,748 relevant for the assessment year 1977-78 has escaped assessment in respect of cloth business. After considering the permissible trade expenses, net income that has escaped assessment is estimated at Rs. 8,200.

Therefore, I have reason to believe that income chargeable to tax has escaped assessment within the meaning of Section 147(a) by reason of the assessee's failure to furnish a return under Section 139 within the stipulated time and to disclose fully and truly all material facts necessary for the assessment of his income for the assessment year 1977-78.

It will be evident from the above that the ITO has wholly ignored the return filed on 13-12-1979. Until that return was processed, the ITO could not have recorded that income had escaped assessment for the assessment year 1977-78. Hence, it is obvious that the ITO had no jurisdiction under Section 147(a). That the assessee 'waived' his objection to such jurisdiction does not improve matters. Jurisdiction cannot be conferred by consent. In any case, there is no estoppel against law. The assessee could always raise objections relating to jurisdiction at any stage of the assessment/ appeal proceedings. This is what the learned Counsel for the assessee has urged before us and we think he is right in this contention--P. V. Doshi v. CIT [1978] 113 ITR 22 (Guj.).

44. The objection relating to extension of the limitation up to 31-3-1986 in terms of Section 153(1)(b) has to be disposed of. Here also, the learned Counsel for the assessee is correct in contending that the ITO has not recorded his satisfaction regarding any concealment on the part of the assessee during the assessment proceedings. Even the assessment order does not in terms show that the assessee has been guilty of 'concealment', so that it could be described as a case to which the provisions of Section 271(1)(c) are attracted. No doubt, proceedings under Section 271(1)(c) have been initiated, but that appears to be because the ITO was under the erroneous belief that no valid return has been filed for this year. The question of extension of limitation in terms of section 153(1)(b) does not, therefore, arise at all. The result is, we see no reason for interference with the order of the AAC.45. We now revert to the assessee's appeal for the assessment year 1978-79--see para 35 supra. The objection for the assessee has been extracted therein. The facts are: The return of income was filed originally on 13-12-1979, disclosing a loss of Rs. 12,240. On 29-11-1980, a notice under Section 148 was issued by the ITO ignoring the said return. The assessee stated in reply that the return already filed by him on 13-12-1979 be treated as one in response to the notice under Section 148. Subsequently, the assessee filed a revised return on 12-3-1981. The assessment was thereafter completed on 4-11-1981. The contention before the AAC was that the 'revised return' filed by the assessee on 12-3-1981 was not a valid return at all and, hence, assessment ought to have been completed by or before 31-3-1981 in terms of Section 153(1)(a)(iii); and the assessment completed on 4-11-1981 was, therefore, bad in law and should be quashed as such. The AAC did not accept this contention. He noted that the assessee had voluntarily filed a return under Section 139(4) on 13-12-1979. That meant the assessee was entitled to file a revised return (at any time before the assessment could have been completed) in terms of Section 139(5). Such a revised return was filed on 12-3-1981. In this view, the AAC held that the assessment made on 4-11-1981 was perfectly in order. The assessee is, therefore, in appeal.

46. We have heard the parties. The issue whether a return under Section 139(4) can be revised under Section 139(5) is not free from controversy. In O.P. Malhotra v. CIT [1981] 129 ITR 379 (Delhi) and Dr.

S.B. Bhargava v. CIT [1982] 136 ITR 559 (All.), the opinion expressed was: where a return was filed under Section 139(4), there could be no valid revised return thereafter under Section 139(5). On the other hand, in Mst. Zulekha Begum (Khatoon) v. CIT [1981] 129 ITR 560 (Cal.) and Kumar Jagadish Chandra Sinha v. CIT [1982] 137 ITR 722 (Cal.), the opinion expressed was that a revised return under Section 139(5) could be filed in respect of an earlier return filed under Section 139(4).

Shri Prasad's contention in the matter was that since this is a matter which has given rise to two interpretations, the one favouring the assessee should be adopted. That was the law of the land under Article 141 of the Constitution of India. Apart from this, he also relied strongly on Instruction No. 888 of the CBDT, issued under F. No.243/13/75-A & P (AC-II), dated 1-10-1975. Here the Board clearly expressed its view that the extended time; limit of one year under Section 153(1)(c) will not be available in respect of a return purported to be filed under Section 139(5), where originally the return was filed under Section 139(4). In other words, the Board has instructed its officers that an assessee is not entitled to life a revised return under Section 139(5), where a return under Section 139(4) has already been filed. In this situation, looking to the mandatory terms of Section 119 as well as the case law in support of the stand taken for the assessee, we are obliged to hold that the authorities were not justified in looking upon the return filed on 12-3-1981 as a valid return. In other words, assessment ought to have been completed by or before 31-3-1981 on the basis of the return under Section 139(4) filed on 13-12-1979. That not having been done, the assessment for 1978-79 purporting to have been made under Section 147 on 4-11-1981 is cancelled.

47. In the result, IT Appeal Nos. 967 to 970 and 979 (Bang.) of 1982 are partly allowed and IT Appeal No. 986 (Bang.) of 1982 is dismissed.


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