Skip to content


Second Income-tax Officer Vs. Muthulakshmi Timber Depot - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1985)13ITD865(Mad.)
AppellantSecond Income-tax Officer
RespondentMuthulakshmi Timber Depot
Excerpt:
1. this appeal by the department relates to the income-tax assessment for the year 1979-80 of the assessee, muthulakshmi timber depot, theni.the assessee is a registered firm carrying on business as timber merchants. for the assessment year 1979-80 under appeal, for which the accounting year ended on 31-3-1979, the assessee filed its return of income on 22-3-1980 declaring a total income of rs. 45,360. the ito, however, proposed to make an addition of more than rs. 1 lakh and in view of the extent of variation he issued a draft assessment order to the assessee under section 144b(1) of the income-tax act, 1961 ('the act') as required therein on 29-3-1982. this draft assessment order was served on the assessee on 1-4-1982. in the said draft assessment order the ito proposed an addition of.....
Judgment:
1. This appeal by the department relates to the Income-tax assessment for the year 1979-80 of the assessee, Muthulakshmi Timber Depot, Theni.

The assessee is a registered firm carrying on business as timber merchants. For the assessment year 1979-80 under appeal, for which the accounting year ended on 31-3-1979, the assessee filed its return of income on 22-3-1980 declaring a total income of Rs. 45,360. The ITO, however, proposed to make an addition of more than Rs. 1 lakh and in view of the extent of variation he issued a draft assessment order to the assessee under Section 144B(1) of the Income-tax Act, 1961 ('the Act') as required therein on 29-3-1982. This draft assessment order was served on the assessee on 1-4-1982. In the said draft assessment order the ITO proposed an addition of Rs. 10,000 on account of general defects in the account books of the assessee and a further addition of Rs. 1,04,555 on account of unexplained credits appearing in the name of one Sebastian & Co., Nagercoil. The assessee sent a letter dated 5-4-1982 objecting to the addition proposed under Section 144B, which was received by the ITO on 7-4-1982. In that letter the assessee pointed out that at the time of hearing they had submitted many facts to prove the genuineness of all the transactions and stated that they object to the proposed addition, which is arbitrary. It is also further stated that they have to get further particulars to submit their detailed objection against the proposal and requested further time of at least 14 days for the same. It appears, the ITO had in his order-sheet on 8-4-1982 noted that 'time granted as requested', but this note, it appears, was not communicated to the assessee. On 16-4-1982, the assessee sent another letter to the ITO which was received by him on 17-4-1982 wherein the assessee wanted further time of 15 days for filing further particulars, but the ITO in this connection noted in the order-sheet on 24-4-1982 as under : Further time cannot be granted under Section 144B. Assessment order dictated.

He, therefore, made a final assessment order on 24-4-1982, which was received by the assessee on 30-4-1982.

2. The assessee preferred an appeal against the assessment order contending, inter alia, that the assessment is bad in law as it violated the statutory requirements and, therefore, should be annulled.

The Commissioner (Appeals) accepted this contention and held that the assessment order passed by the ITO himself, when it ought to have been made after reference to the IAC under Section 144B, suffered from a fundamental infirmity. He also considered that the final assessment order passed on 24-4-1982 was time barred as the assessment for that year should normally have been made by 31-3-1982. Posing the question as to whether in such a case where the order of assessment suffers from major infirmity the appellate authority should set aside the assessment with a direction to the ITO to make it de novo or he should annul the assessment in toto, the Commissioner (Appeals) following an order of the Tribunal, Bombay Bench 'D', in Rajendra V. Deshprabhu Cos. v. First ITO [1982] 8 Taxman 41 annulled the assessment. Aggrieved by his order, the department is in appeal before the Tribunal.

3. The learned departmental representative contended that on the facts of this case, the Commissioner (Appeals) is not justified in annulling the assessment relying on the decisions of the Punjab and Haryana High Court and the Gauhati High Court on the ground that the principles of natural justice were violated. It is argued that the failure of the ITO to forward the draft assessment order and refer the matter to the JAC is only a procedural irregularity which can always be rectified and, therefore, the Commissioner (Appeals) should have set aside the assessment and directed the ITO to follow the procedure laid down under Section 144B after referring the matter to the IAC. He submitted that the decisions of the Punjab and Haryana High Court and the Gauhati High Court relied on by the Commissioner (Appeals) in this connection are distinguishable. The learned departmental representative relied in this connection on the order of the Special Bench of the Tribunal in the case of Third ITO v. Shivaji Park Gymkhana [1983] 4 ITD 462 (Bom.).

4. The learned Counsel for the assessee, on the other hand, supported the order of the Commissioner (Appeals). He pointed out that the Commissioner (Appeals) has annulled the assessment not for mere non-compliance under Section 144B, but for certain fundamental infirmities stated in paragraph No. 6. The learned Counsel submitted that the Special Bench decision referred to and relied on by the departmental representative is distinguishable because in that case no draft order at all was sent to the assessee. He also took us through the Special Bench order, paragraph No. 9 in this connection. It is pointed out that in the present case a draft order was sent proposing certain additions in regard to which there we're earlier some discussions and the final order of assessment refers to certain attempts to cross-verify the transactions claimed by the assessee, but the result of such cross-verifications have not been put to the assessee for rebuttal and, thus, there has been a gross violation of natural justice, which has rendered the assessment illegal and void and in such a situation there is no case for sending back the matter to the departmental authorities for a fresh assessment. It was submitted that the decision of the Madhya Pradesh High Court in Banarsidas Bhanot & Sons v. CIT [1981] 129 ITR 488 is distinguishable. Reliance is also placed in this connection on the decision of the Tribunal, in Rajendra V. Deshprabhu Co.'s case (supra). The learned departmental representative submitted that the observations of the Commissioner (Appeals) in paragraph Nos. 6, 7 and 8 all touch on the question whether the provisions of Section 144B are applicable. He also further brought to our notice that there has been an amendment by Section 26 of the Taxation Laws (Amendment) Act, 1984, with effect from 1-4-1984 by which reference under Section 144B has been done away with.

5. The rival contentions of the parties before us on the facts involved in this case throw for our consideration and decision only one point, namely, whether the assessment made by the ITO in this case without referring the matter to the IAC as required under Section 144B has to be struck down as illegal and without jurisdiction or whether the assessment made merely reveals a mere procedural irregularity curable by setting it aside and directing the ITO to follow the procedure prescribed under the Act. On a careful consideration of the facts involved and the submissions, we are not inclined to accept the department's stand that the assessment does not suffer from a fatal infirmity, but involves only a procedural defect which can be remedied by setting aside the assessment and directing the ITO to follow the procedure prescribed under the Act.

6. It is common ground that before the ITO framed the draft assessment order, there was a hearing given to the assessee and discussion on the various items of additions proposed in the draft assessment order including objections from the assessee against any proposal to include any such item. It is borne out by the draft assessment order under Section 144B dated 24-3-1982 itself. Therefore, it is obvious that even when the ITO framed the draft assessment order and sent it to the assessee, there had already been objections of the assessee against the additions supported by its explanation in regard to the different items. The draft assessment order has apparently become necessary for the ITO to frame and forward to the assessee because the various explanations and objections of the assessee to the items considered by the ITO in the course of discussion were not found to the acceptable to him and the aggregate of the additions in respect of those items amounted to Rs. 1 lakh. This is not a case where without a prior hearing of the assessee and discussions on the various doubtful items considered by the ITO as warranting addition, he has proposed additions of certain items on his own and was yet to receive the assessee's explanation or objection to the proposal. In other words, even when he had issued a draft assessment order, there was already on record the objections raised by the assessee which were considered by him to be not satisfactory. In such circumstance what he has done by sending the draft assessment order is only to comply with the statutory requirement of Section 144B of having to forward the draft assessment of the proposed order of assessment and to invite the formal objection. It is seen that the draft order was served on the assessee on 1-4-1982. The assessee sent its objection letter dated 5-4-1982 which was received by the ITO on 7-4-1982. In that letter the assessee, inter alia, pointed out that at the time of hearing they have submitted many facts to prove the genuineness of all transactions and that they object to the proposed addition, which is arbitrary. In the second paragraph they stated that they have to gather further particulars to submit their detailed objection for the proposal and requested for further time of 14 days for submission of such detailed objections. It is the finding of the Commissioner (Appeals) that the ITO in his order sheet on 8-4-1982 had noted that time was granted as requested, but this was not communicated to the assessee. On 16-4-1982 the assessee sent another letter received by the ITO on 17-4-1982 seeking further time of 15 days for filing further particulars of its objections. The ITO, however, has dictated the assessment on 24-4-1982 noting in the order-sheet that further time cannot be granted under Section 144B. Thus, it is obvious that the ITO has made the assessment on his own without referring the draft to the 1AC as required under the Act. In the final assessment order passed by him the ITO states with reference to the request of the assessee for time that "the assessee had applied for time to the extent of 14 days for filing their objections to the proposed draft assessment order. The assessee-firm did not file any objections but filed another letter on 17-4-1982 asking for further extension of 15 days' time to file the objection. Under Section 144B(2) the assessee has to forward its objection within 7 days of the receipt of the draft order. He is permitted to file the objection within further period of not exceeding 15 days as the ITO may allow on application made in this regard. Thus, the maximum time allowed to the assessee to file the objection from the date of receipt of the order is only 22 days and the ITO does not have any power to grant further extension of time. In these circumstances, in accordance with the provisions of Section 144B, I proceed to complete the assessment on the basis of the draft order sent to the assessee". We fail to see how the ITO can proceed on the face of the facts stated earlier, that there was no objection of the assessee to the additions proposed by him in the draft assessment order. The letter of the assessee quoted above clearly and categorically records its objection to the proposed additions contending it to be arbitrary. All that the assessee had requested in that letter is time to gather further particulars to submit the detailed objections against the proposal. The absence or failure to submit further particulars to support its objections within the time prescribed does not obliterate the positive objection taken by the assessee against the proposed addition in the draft order and we fail to see how the ITO can reasonably believe that there was no objection to the proposed order.

We need not go into the question whether when the assessee objects to the addition proposed in the draft assessment order he must adduce reasons therefor even at that stage and any failure to do so would render the objection non est because as we have already noticed, the proposed additions have already been earlier discussed and the assessee has given its reasons and explanations against the proposed additions and unless the assessee has categorically withdrawn those explanations or reasons, they continue to constitute the reasons for the objections taken by the assessee against the addition proposed in the draft assessment order. All that the assessee has stated in the letter in reply to the draft order is that it wanted to reinforce the objection by further particulars for which time was sought. Further, in our view, there is nothing in the provisions of Section 144B to show that the assessee must send its objections to the ITO along with the reasons therefor and that unless the reasons are adduced, the objections cannot be regarded as objections. This is because the assessee has the opportunity, in the proposed draft assessment order objected to by it, to explain its stand and stating the reasons against the additions proposed before the IAC, the superior authority, and even if the assessee were to submit its reasons along with the objections to the ITO, it will be a mere idle formality because the ITO is not competent at that stage to consider such objections and take any decision thereon and that will have to be considered only by the IAC in the course of hearing before him. What is required under the section, therefore, in our view, is that in order to divest the jurisdiction of the ITO to make the assessment straightaway without referring the matter to the IAC is that the assessee must object to the proposed additions and need not necessarily support the objection with any reasons or explanations which it can always do at the hearing before the IAC. On the particular facts of this case, the ITO has proceeded to make the assessment not on the ground that the assessee has not supported its objection with proper or valid reasons, but on the ground that there are no objections at all from the assessee, which is contrary to the facts and materials on record and we cannot help observing that such a finding is perverse.

Consequently, we come to the finding that the ITO had completed the assessment without jurisdiction because once it is found that the assessee objected to the proposed additions in the draft assessment order, the ITO loses his jurisdiction to complete the assessment on his own as he has to refer the matter to the IAC and abide by the latter's directions. Indeed, the department does not dispute that the ITO's order making the assessment is contrary to the provisions of Section 144B on the facts of this case and all that is agitated in the grounds of appeal before us is that the Commissioner (Appeals) should not have annulled the assessment as invalid because all that happened is that a procedural irregularity has intervened in the process of assessment and he should have set aside the assessment with a direction to redo the same according to the procedure laid down under Section 144B. Whether the assessment was rightly annulled by the Commissioner (Appeals) or it ought to have been set aside, by him with a direction to redo it after observing the procedure is the question that arises for our consideration.

7. We may now consider the decisions stated by the parties. In Banarsidas Bhanot & Sons' case (supra), a case relied on by the department, the facts were that a draft assessment order was served on the assessee setting out various proposed additions and disallowances, but the quantum of total income was not computed. The assessee's objections to the proposed draft assessment order were not received within the prescribed time, but were received by the ITO after he completed the assessment. The Tribunal in that case set aside the assessment order and restored the matter to the ITO for making a fresh assessment after serving a fresh and complete draft order on the assessee. It is in these circumstances that the High Court upheld the order of the Tribunal. It was pointed out that in that case the draft order contained full details of the proposed additions and variations and all that it lacked was the computation of total income which could not have caused any prejudice to the assessee. It was not a case where the ITO did not start the proceeding or complete the assessment within the time prescribed. In H.H. Maharaja Raja Power Dewas v. CIT [1982] 138 ITR 518 (MP) relied on by the department, the facts were that an assessment for the year 1973-74 was made on an income of Rs. 1,19,760 against the returned income of Rs. 17,354 disclosing a variation of a lakh of rupees, but without following the procedure under Section 144B.The Commissioner revised the order of assessment under Section 263 of the Act on the ground, inter alia, that the assessment order not following the procedure under Section 144B prejudiced the interests of the revenue. The Tribunal in the appeal held that the revenue is prejudiced because there is always the risk to the revenue in the sense that the objection regarding non-compliance of Section 144B can be taken at any time and it is in the interests of the revenue to get the irregularity cured. The High Court held that though the assessment order without compliance with the procedure laid down under Section 144B is erroneous, it is not prejudicial to the interests of revenue so as to confer revisional jurisdiction on the Commissioner under Section 8. We may now turn to the Special Bench decision of the Tribunal in the case of Shivaji Park Gymkhana (supra). In that case, against nil income returned by the assessee, the ITO determined the assessable income at over Rs. 1 lakh thereby disclosing a variation of Rs. 1 lakh. In such a situation the provisions of Section 144B were attracted, but the ITO completed the assessment without such a reference. The Commissioner (Appeals) accepted the assessee's submission that the assessment order was not legal and, hence, a nullity, but the Tribunal in further appeal held that the omission to make a reference under Section 144B was only a procedural irregularity which could not render the assessment a nullity, but it was curable by setting aside the assessment for being redone according to law. It must be observed that in that case apparently the ITO was not aware of the presence of Section 144B or its requirement and had proceeded to make the assessment as if he had the jurisdiction to do so in the regular course. It was also observed in that order that there is nothing wrong with the assumption of initial jurisdiction, but if some mandatory provision has not been complied with while computing the assessment, the assessment cannot be sustained and will have to be set aside, but the appellate authority has also to give a direction to make a fresh assessment after complying with the legal requirements. The facts in this case are distinguishable from the facts in the case before us. This is not a case where the ITO was not aware of the procedure and had made the assessment which he had jurisdiction to do. He was fully aware of the requirement of Section 144B and had followed it up to the stage of sending the draft assessment order and inviting the objections of the assessee. Where he has committed an illegality, which, in our opinion, is not curable, but fatal, is to assume jurisdiction to make the assessment on the face of the categorical objection of the assessee in the proposed draft assessment order by perversely holding that there is no objection and, thus, trying to vest himself with the jurisdiction to make the assessment, even though the requirement under the section required that he should refer the matter to the IAC and abide by his directions.

Further, as pointed out by the learned Counsel for the assessee, the ITO appears to have gathered materials and information in regard to certain items subsequent to the draft assessment order, which is used in his final order and obviously these materials could not have been put to the assessee for rebuttal. Thus, there is gross violation of the principles of natural justice, which is fatal to the validity of the assessment. The decision of the Punjab and Haryana High Court in CIT v.Sham Lal [1981] 127 ITR 816 relied on by the assessee supports the assessee's contention. It was held in that case that where the assessment is made based on material relied on by the ITO and not communicated to the assessee, the only correct course for the Tribunal was to annul the assessment orders passed by the ITO. Similarly, in the case of the Gauhati High Court in Jai Prakash Singh v. CIT [1978] 111 ITR 507 it was held that violation of statutory principles of natural justice takes away jurisdiction of the authority concerned to continue with the proceedings and pass orders and necessarily invalidate the proceedings and the orders passed therein. It is to be noted that in this decision, the assessment was made by issue of notice under Section 143(2) to only one of several legal representatives. In the case of Sudhir Sareen v. ITO [1981] 128 ITR 445 (Delhi) the ITO sent a draft assessment order for an enhanced amount after the assessee was heard on his objections against the earlier draft order before the IAC and it was found that the draft order was on the directions of the IAC without hearing the assessee in respect of the same. The High Court held that the opportunity of being heard is a condition precedent to the issuance of any prejudicial directions and the entire procedure from the stage of directions given by the IAC were quashed. The point emphasised in all these decisions is that any order in violation of natural justice by denying the assessee a reasonable opportunity of being heard in respect of matters prejudicial to the interests of the assessee is not a mere irregularity but it is illegal and requires to be quashed and there is no question of setting aside such an order and directing a fresh order.

9. There is one more reason why, according to us, the assessment cannot be set aside with a direction to make a fresh one, but must be struck down as a nullity. It would be seen that the assessment year involved is 1979-80. Under the ordinary period of limitation prescribed under Section 153 of the Act, the assessment will be required to be completed by 31-3-1982, but under Explanation 1 to that section, in a case where the procedure under Section 144B is resorted to, the period not exceeding 180 days from the date on which the ITO forwards the draft order under Section 144B(1) to the assessee and ending with the date on which the ITO receives the directions from the IAC or in a case where no objections to the draft order are received from the assessee, a period of 30 days is excluded. In the present case, as we have already found and it was also undisputed on behalf of the department, that objection has been received from the assessee to the draft order and, therefore, the period of 30 days applicable to a case where no objection is received is not applicable, but only the period ending on the date on which the ITO receives directions from the IAC if he had referred the matter to the IAC and obtained his directions within the period of 180 days allowed under the section. The ITO cannot avail himself of the period of 30 days from the date on which he forwarded the draft order as it applies only to a case where no objections are received from the assessee and, therefore, the assessment made by him is clearly time barred. All the decisions where it is held that the assessment can be set aside and the ITO directed to redo the assessment afresh proceeded on the proposition of law that the ITO had the jurisdiction to make the assessment when he made the assessment and only certain procedural irregularity had intervened and not cases where the ITO was divested of his jurisdiction to make the assessment.

Moreover, it is apparent from the facts stated in the assessment order of the ITO that he was aware of the fact that the assessment was getting time barred and, therefore, proceeded to issue the draft order even before the results of certain enquiry made by him were received and as already stated he has acted on the basis of the materials subsequently received without giving an opportunity to the assessee to rebut the evidence thereof. To set aside an. assessment and direct the ITO to make a fresh assessment in these circumstances would not only amount to authorising the ITO to make an assessment after the period of limitation has expired, which is illegal, but also putting a premium on the lapse on the part of the ITO in not taking appropriate steps to complete the assessment within the period of limitation and observing the procedure prescribed in law, especially when, as it appears to us in this case, he has consciously flouted the mandatory provisions of the Act.

10. In view of the reasons stated above, we reject the objections of the department and uphold the order of the Commissioner (Appeals) annulling the assessment. The appeal is dismissed.

1. I am unable to agree with my learned brother, upholding the order of the Commissioner (Appeals) that the assessment is annulled. I do not agree that the infirmity in the assessment is so fatal as to cut at the root of the jurisdiction of the ITO in making the assessment.

2. I need not repeat the facts. I would, however, point out one aspect of the factual position. The controversial additions proposed by the ITO in the draft assessment order are two. They are in the sums of Rs. 1,04,555 and Rs. 10,000. The first figure has not been adhered to in the final assessment order issued by the ITO. He has changed it to Rs. 91,055. It is to be noticed that he has actually reduced the addition originally proposed by him by Rs. 13,500. This was by his taking into account the reply received by the ITO from his counterpart at Nagercoil. This reply confirmed one of the transactions propounded by the assessee and the ITO has accepted the claim of the assessee by reducing the addition by Rs. 13,500.

3. One of the points made out by the assessee and accepted by my brother is that the ITO has varied the draft assessment order on the basis of material not disclosed to the assessee, to wit, the aforesaid reply from the ITO, Nagercoil, and has, thus, violated the principles of natural justice. It is difficult to accept this point in view of the fact that the ITO's acting on the information in this letter has only been to reduce the addition originally proposed. The action of the ITO has enured to the benefit of the assessee and not to his detriment. It cannot, therefore, be said that the ITO has acted in violation of the principles of natural justice. As far as the rest of the additions are concerned, the ITO has provided opportunity to the assessee of being heard before he issued the draft assessment order. The assessment, in my opinion, cannot be annulled on this score.

4. The ITO has passed the final assessment order without referring the draft assessment order to his IAC. He has considered that the assessee has not really made any objections in the draft assessment order proposed by him. It is on this reading of the reaction of the assessee to the draft assessment order that the ITO has chosen to pass the final assessment order without reference to the IAC. I agree with my learned brother that in so doing the ITO cannot be considered to have correctly followed the procedure laid down in Section 144B. The assessee has stated in its first letter to the ITO that it has objections to the draft assessment order proposed. It may not be necessary for the assessee to give in detail the various objections that he may have for the proposed draft assessment at this stage. The proper thing for the ITO could have been to refer the draft assessment order to his IAC as envisaged in Section 144B.5. However, it cannot be said that because he has not referred the draft assessment order to his IAC, he has acted without jurisdiction in passing the final assessment order. His completing the assessment without reference to his IAC might be beyond his jurisdiction at this stage. But that does not, in my opinion, upset the valid jurisdiction that the ITO had assumed for making the assessment on the assessee. His action in finalising the assessment without reference to his IAC stands, in my opinion, on the same footing, as the case in H.H.Maharaja Raja Power Dewas (supra), where even though the variation between the returned income and the assessed income was more than Rs. 1 lakh, the ITO had not followed the procedure under Section 144B. The difference between the two cases is only one of degree and not of kind.

In that case, the Commissioner revised the order of assessment under Section 263 on the ground that the assessment order not following the procedure under Section 144B prejudiced the interests of the revenue.

The Tribunal upheld this view, but the High Court held that not following the procedure laid down under Section 144B was not prejudicial to the interests of the revenue on the footing that the assessment has been made with valid jurisdiction. In the case of Banarsidas Bhanot & Sons (supra), the High Court held, even though there were certain defects in the draft order, the assessee had no difficulty in filing its objections but as he did not do so within seven days the assessment order passed by the ITO before the receipt of the objections by the ITO could not be said to be a nullity, that though the Tribunal could have affirmed the assessment made by the ITO, it took a view more favourable to the assessee by setting aside the assessment and sending back the case to the ITO which would enable the assessee to object within time to the variation which the ITO proposed to make. These cases clearly show that any irregularity in following the procedure laid down in Section 144B cannot have the effect of displacing the jurisdiction of the ITO to make the assessment and the assessment so made cannot be annulled but necessary orders will have to be passed to rectify the error in procedure which might have caused prejudice to the assessee.

6. The order of the Special Bench of the Tribunal in the case of Shivaji Park Gymkhana (supra) has drawn a distinction between cases where the assessments should be annulled and cases where the assessments could only be set aside. It has been held that it is only in cases where there was an inherent lack of jurisdiction to assess, that the assessment could be annulled. It cannot be said in this case that the ITO did not have the jurisdiction at the time he commenced the proceedings for making the assessment on the assessee herein. He had valid jurisdiction to make the assessment. Such valid jurisdiction cannot become ineffective because of an irregularity in the observance of the procedure laid down in one of the provisions for making the assessment, namely, Section 144B. I would, therefore, set aside the assessment and direct the ITO to make a proper assessment according to law.

7. An objection has been taken by the learned Counsel for the assessee that the Taxation Laws (Amendment) Act, 1984 has deleted the provisions of Section 144B from the Act and, therefore, if the assessment is set aside, the assessee would not have the benefit of the procedure contemplated in Section 144B. It has been held that Section 144B is only a procedural section in various decisions. If and when the ITO proceeds to make an assessment afresh, he can only follow the procedure laid down in the Act as it stands at the time of making the assessment.

I do not think that any prejudice would be caused to the assessee because Section 144B has been removed from the statute. In any event, that cannot be an argument for supporting the case that the assessment should be annulled.

ORDER UNDER SECTION 255(4) OF THE Income-tax ACT, 1961 As required by Section 255(4) of the Act, we hereby state the following point of difference between us in this case for the President for necessary action : Whether the assessment in this case requires to be annulled as illegal and invalid or it only requires to be set aside with a direction to make a fresh assessment 1. On a difference of opinion between the Members who heard the appeal, originally, the following point of difference was stated : Whether the assessment in this case requires to be annulled as illegal and invalid or it only requires to be set aside with a direction to make a fresh assessment 2. The assessee is a registered firm and the proceedings relate to its assessment for the assessment year 1979-80. Return was filed on 22-3-1980 disclosing an income of Rs. 45,361. The ITO examined the case from time to time and proposed to make an addition of Rs. 1,14,555. The proposed addition being more than Rs. 1 lakh, he forwarded a copy of the draft assessment order to the assessee on 29-3-1982 as laid down in Section 144B. The copy of the draft assessment order was received by the assessee on 1-4-1982. The assessee sent a letter dated 5-4-1982 objecting to the addition proposed by the ITO. This letter was received by the ITO on 7-4-1982. In the above letter, the assessee had, inter alia, requested for time of at least 14 days for submitting its detailed objections against the additions/disallowances. It is evident from the entry dated 8-4-1982 in the order-sheet that the time was granted by the ITO as requested. It, however, appears that the contents of the entry were not communicated to the assessee. On 16-4-1982 the assessee sent another letter to the ITO which was received by him on 17-4-1982 requesting for further time of 15 days for filing the detailed objections. The ITO has passed the following order in his order-sheet on 24-4-1982 : Further time cannot be granted under Section 144B--Assessment order dictated.

The final assessment order has been made by him on 24-4-1982 which has been received by the assessee on 30-4-1982.

3. It was submitted on behalf of the assessee before the Commissioner (Appeals) that the assessment order passed by the ITO was bad in law and required to be annulled. Following the order of the Tribunal in Rajendra V. Deshprabhu Cos. case (supra), the Commissioner (Appeals) annulled the assessment. As stated above, the learned Members who heard the appeal, originally, have differed. While, according to the learned Judicial Member, the assessment, as made, is illegal and without jurisdiction and requires to be annulled, the learned Accountant Member has, though agreed with the learned Judicial Member that the assessment, as made, is invalid and cannot be upheld, held that the assessment only requires to be set aside with a direction to make a fresh assessment according to law.

4. The departmental representative has strongly relied on the order of the learned Accountant Member. In particular, he has laid emphasis on the observations of the Special Bench of the Tribunal in the case of Shivaji Park Gymkhana (supra) at page 475. Inviting my attention to the fact that one of the reasons given by the learned Judicial Member for holding the assessment altogether void, being certain alterations made by him in the computation of income without giving the assessee an opportunity of being heard, he submits that no principles of natural justice were involved in this case as through the alterations made suo motu, the ITO had reduced the additions/disallowances. It was pointed out that as against the proposed addition of Rs. 1,14,555 in the draft assessment order, the ITO made an addition of Rs. 1,01,055 only in the final assessment. Particular reference in this regard has been made to paragraph No. 5 of the learned Accountant Member's order. It is also stated that a new situation has arisen because of the deletion of Section 144B with effect from 1-4-1985. The provisions being procedural and if the assessment is set aside and the assessment is to be made afresh, the assessee would not have the benefit of the procedure contemplated in Section 144B.5. The counsel for the assessee has, on the other hand, strongly relied on the order of the learned Judicial Member. It is pointed out that in all decisions where the assessments have been set aside with a direction to make fresh assessments even though the assessments were found to be invalid, two conditions were satisfied, namely, initial assumption of jurisdiction to make assessment was properly acquired and the assessment was made within the time limit prescribed for it. In the present case, the assessment (which is invalid) has been made by the ITO, on 24-4-1982, i.e., after the time limit for completion of the assessment had expired. Time barred assessments, according to the counsel for the assessee, can never be set aside with a direction to make them afresh. In this context, the counsel strongly relied on paragraph No. 2 of the order of the Commissioner (Appeals), the observations of the Madhya Pradesh High Court in the case of Banarsidas Bhanot & Sons (supra) at page 492, of the Delhi High Court in the case of Sudhir Sareen (supra) at page 449 of the Gauhati High Court in the case of Sashi Prasad Baruah v. A1T0 [1973] 91 ITR 488 and of the Gauhati High Court in the case of Jai Prakash Singh (supra).

6. In order to appreciate the rival contentions properly, it is desirable to mention that both the learned Members have held that the provisions of Section 144B are applicable in this case, that it was not a case of 'no objection' by the assessee and that, therefore, a valid assessment could have been made by the ITO by forwarding the draft assessment order along with the assessee's objections to the IAC and completing the assessment thereafter in accordance with the directions received from the IAC under Section 144B(4). They agree that the assessment, as made on 24-4-1982 on the assumption that it is a case of 'no objection', is invalid and cannot be sustained. The difference between them has been on the question whether the assessment should be annulled altogether or whether it be set aside with a direction to make fresh assessment according to law. There is no dispute between the parties about the controversy.

7. It is pertinent to mention that the learned Judicial Member has mainly given two reasons for annulling the assessment altogether. For reasons given in paragraph Nos. 5 to 7 he has held that the assessment made is illegal and without jurisdiction and, therefore, requires to be annulled. For this purpose he has relied on his finding (about which there is no dispute) that the ITO has not complied with the mandatory provisions of Section 144B. He has also referred to the fact that the ITO's completing the assessment treating the case to be that of a 'no objection' and yet altering the computation of income while passing the final order is against the principles of natural justice. For reasons given in paragraph No. 9 he has held that the assessment has been made after the expiry of time limit provided for it and, therefore, it has to be annulled.

8. The learned Accountant Member has not agreed with the learned Judicial Member. According to him, mere non-compliance with the mandatory provisions of Section 144B does not displace the jurisdiction of the ITO duly vested in him. For his this view he has derived support from the Madhya Pradesh High Court decisions in the cases of Banarsidas Bhanot & Sons (supra), H.H. Maharaja Raja Power Dewas (supra) and the Special Bench order of the Tribunal in the case of Shivaji Park Gymkhana (supra).

9. The Special Bench of the Tribunal in its decision in Shivaji Park Gymkhana's case (supra), it may be stated, has followed besides the abovesaid two Madhya Pradesh High Court decisions the Supreme Court decision in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451.

Following the Special Bench order in Shivaji Park, Gymkhana's case (supra), where all relevant aspects have been considered in great details, I am inclined to agree with the learned Accountant Member that the fact of mere non-compliance with the mandatory procedural provisions after assuming valid jurisdiction to make the assessment while completing the final assessment, makes the assessment invalid but not illegal and without jurisdiction so as to justify the annulment of the assessment altogether instead of setting it aside with a direction to make it afresh. I also do not agree with the learned Judicial Member that any principles of natural justice is or can be said to be violated in the ITO's allowing relief to the assessee without giving an opportunity as distinct from making some additions/disallowances. In this context it may not be out of place to mention that as against the proposed addition of Rs. 1,14,555 in the draft assessment order, the ITO made an addition of Rs. 1,01,055 only in the final assessment completed on 24-4-1982.

10. This takes me to the question of limitation about which the learned Accountant Member has not made any observation. Section 153(1) prescribes the time limit for completion of assessments. It lays down that no order of assessment shall be made under Section 143 or 144 at any time after two years from the end of the assessment year in which the income was first assessable where such assessment year is an assessment year, commencing on or after 1-4-1969. Thus, no order of assessment could have been passed for the year under appeal after 31-3-1982 as laid down in Section 153(1). The assessment has admittedly been made on 24-4-1982. In other words, the assessment in the present case is on the fact of it barred by limitation by 24 days. No doubt, Explanation 1(iv) to Section 153 provides for extension of time for completion of assessment in cases where the provisions of Section 144B are applicable. However, on carefully going through Clause (iv) of Explanation 1 it is seen that the extension of time limit is not automatic. It depends upon the satisfaction of certain conditions. For instance, in a case where no objections to the draft assessment order are received the time limit is extended by 30 days. In a case where objections are received the time limit is extended by a period not exceeding 180 days, commencing from the date on which the ITO forwards the draft order and ending with the date he receives directions from the IAC under Section 144B(4). It is, admittedly, not a case of 'no objection'. The period cannot also be extended by treating it as objections from the assessee as in that case it would be necessary to also have the date on which he receives the directions from the IAC under Section 144B(4). In the absence of the latter date the time limit cannot be said to have been extended at all. Thus, the assessment as made on 24-4-1982 is barred by limitation.

11. The next question that arises for consideration is whether the assessment which is barred by limitation can or cannot be set aside with a direction to make it afresh according to law. I am afraid I find it difficult to agree with the departmental representative that the decisions of the Supreme Court, the High Courts and Special Benches of the Tribunal, where it has been held that in cases where initial assumption of jurisdiction is validly acquired, but some procedural mandatory irregularity has been committed while completing the assessments, the assessment should be set aside with a direction to make them afresh according to law are applicable in this case. The assessments in all the cited cases were made within time. Therefore, I have no hesitation in holding that these decisions will not help the department. On the other hand, in a number of cases it has been held that an assessment barred by limitation has got to be annulled.

12. In this context it may be desirable to mention that the Madhya Pradesh High Court has in its decision in the case of Banarsidas Bhanot & Sons (supra) clearly stated that they were proceeding in the case on the basis that--"This is not a case where the ITO did not start the assessment proceedings within limitation or did not complete them within limitation." The Supreme Court has also held in the case of Grindlays Bank Ltd. v.ITO [1980] 122 ITR 55 that setting aside of the order of assessment with a direction to make fresh assessment in that case was in order as the original assessment had been made within time permitted under Clause (ii) of Explanation 1 to Section 153. One need hardly refer to the Supreme Court decision in the case of Ahmedabad Mfg. & Calico Printing Co. Ltd. v. S.G. Mehta, ITO [1963] 48 ITR 154 at page 171 in support of the proposition that where the Act prescribes a time limit within which an order is to be passed, the department cannot pass such an order on the expiry of that period. The Supreme Court in CIT v.National Taj Traders [1980] 121 ITR 535, where it was held that the time limit applies to suo motu orders passed by the Commissioner under Section 263 and not to orders made by him pursuant to a direction or order passed by the Tribunal, also supports the view indirectly I am taking in this case. In this view of the matter, I eventually agree with the Judicial Member that the assessment order in this case has got to be annulled.

13. In the result, the Third Member's order will now go to the Division Bench for deciding the appeal according to the majority view.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //