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Kanhaiyalal Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 48 of 1972
Judge
Reported in[1982]136ITR243(Raj)
ActsIncome Tax Act, 1961 - Sections 143, 143(1), 143(3), 147, 147(1), 263 and 263(2)
AppellantKanhaiyalal
RespondentCommissioner of Income-tax
Appellant Advocate S.K. Kackar, Adv.
Respondent Advocate L.R. Mehta, Adv.
Cases ReferredGee Vee Enterprises v. Addl.
Excerpt:
.....assessee who had concealed his income or to assess income which escaped assessment in the relevant assessment year. before dealing with this question, wewould like to observe that under section 263 of the act, the commissioner is empowered to revise an order passed by the ito only if it is erroneous and it is prejudicial to the interests of the revenue. this clearly indicates that the revisional power conferred by section 263 of the act is a quasi-judicial power. mehta appearing on behalf of the revenue, on the other hand, argued that the word 'erroneous' used in 263 of the act includes failure on the part of the ito to make an inquiry into the truth of the facts stated in the return filed by the assessee and as, in the present case, the ito did not make such an inquiry about the..........source of funds for the investments made in the property. it appears from the record that in this year the assessee constructed a house, the covered area of which was 133 sq. ft. the plot on which the house was constructed was purchased by him for rs. 1,500 on august 2, 1961. after purchasing the plot, the assessee started construction work and it was alleged to have been completed within 4 or 5 months after sanction was obtained from the municipal board on august 2, 1961. according to the admission of the assessee, the cost of construction was rs. 18,000, but the certificate of the asst. engineer, pwd (b & r), discloses that the cost of the house construction was estimated and certified to be at rs. 20,000. the assessee denied having maintained any construction cost account or.....
Judgment:

Sharma, Actg. C.J.

1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has drawn up a statement of case and referred it to thiscourt under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as 'the Act', upon an application by the assesses, M/s. Kanhaiyalal, Cycle Dealer, Bhilwara.

2. The statement of the case is as follows :

The assessee was dealing in cycle parts and accessories and in hiring of cycles. The ITO assessed the income of the assessee for the assessment year 1962-63 under Section 143(1) of the Act on March 30, 1967, at Rs. 4,106 which amount was declared by the assessee in its return. Subsequently, the ITO took proceedings against the assessee under Section 147 of the Act in respect of the aforesaid assessment year on the ground that certain investments made by the assessee in a house property were not properly explained by him. Pursuant to this action the ITO made another assessment of the income of the assessee under Section 143(3) read with Section 147 of the Act on January 22, 1968, and determined his total income at Rs. 29,399. Aggrieved by this order of the ITO dated January 22, 1968, the assessee preferred an appeal to the AAC of Income-tax on the ground that all the material facts relating to the investments made in the house property were disclosed by him to the ITO at the time of the first assessment which was completed on March 30, 1967, and there was no failure on his part to make a full and true disclosure of the material particulars. The AAC carefully went through the record of the case and came to a conclusion that the ground taken by the assessee in his appeal was well founded. Accordingly, he passed an order on September 5, 1968, that the action taken by the ITO under Section 147(a) of the Act was illegal and the assessment made by him was liable to be set aside. After this order was passed by the AAC of Income-tax, the Commissioner of Income-tax exercising his powers under Section 263 of the Act, issued a notice to the assessee that the order passed by the ITO under Section 143(1) of the Act on March 30, 1967, was prejudicial to the interests of the revenue inasmuch as it failed to take note of the unexplained investments made by the assessee in the property. He, therefore, called upon the assessee to show cause why the assessment order dated March 30, 1967, under Section 143(1) of the Act should not be set aside. In response to the notice, the assessee filed a written reply wherein he contended that the proposed action under Section 263 of the Act would be in contravention of the provisions of Section 263(2) of the Act, because the order passed by the ITO under Section 143(1) of the Act merged in the order of the AAC and the one proposed to be passed by the Commissioner under Section 263(1) of the Act would virtually amount to revision of an order of reassessment made under Section 147 of the Act. The Commissioner dealt with the aforesaid objection and was of the view that the action taken by the ITO under Section 147 of the Act had merged in the order of the AAC vacating it and, therefore, no order under Section 147 of the Act is subsisting and so the actionproposed to be taken by him under Section 263 of the Act would not amount to revision of the order of reassessment made under Section 147 of the Act. In this view of the matter, he overruled the objection raised by the assessee and passed an order under Section 263 of the Act setting aside the order of assessment passed by the ITO under Section 143(1) of the Act on March 30, 1967.

3. The assessee, thereupon, preferred an appeal against the order of the Commissioner dated March 26, 1969, to the I.T. Appellate Tribunal and assailed the order on various grounds. The main ground in the appeal was that the assessment order passed by the ITO under Section 143(1) on March 30, 1967, had merged in the order of reassessment passed by him under Section 143(3) read with Section 147 on January 22, 1968, and this order of reassessment had again merged in the order of the AAC dated September 5, 1969, and so the orders sought to be revised by the Commissioner under Section 263 of the Act is the order which had merged in the order passed under Section 147 of the Act and no order under Section 263(1) of the Act could legally be made by the Commissioner to revise an order of reassessment made under Section 147 of the Act. The Tribunal heard the appeal and was of the view that the action taken against the assessee under Section 147(a) of the Act stands wiped off after it was set aside by the AAC, vide his order dated September 5, 1969, and the order under Section 143(1) of the Act survived and so the order of the Commissioner under Section 263(1) of the Act cannot be held to have revised the order of reassessment made under Section 147 of the Act. Accordingly, the Tribunal held, vide its order dated October 25, 1971, that the order of the Commissioner did not suffer from the infirmity pointed out by the assessee. The assessee, thereupon, required the Income-tax Tribunal to refer to the High Court this question of law arising out of its order and filed an application before the Tribunal to this effect. The I.T. Tribunal, therefore, has made this reference to this court on the following questions of law which, in its opinion, arise out of its order :

'1. Whether, on the facts and in the circumstances of the case, the order of the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961, dated March 26, 1969 had the effect, of revising an order of reassessment made under Section 147 ?

2. Whether, on the facts and in the circumstances of the case, the impugned order of the Commissioner of Income-tax was valid in law ?'

4. Notice of this reference was issued to the assessee as well as to the I.T. authorities. Mr. S. K. Kackar appeared on behalf of the assessee and Mr. Lekh Raj Mehta put in his appearance on behalf of the I.T. authorities.

5. We have carefully perused the record and heard the learned counsel for the parties.

6. Before dealing with question No. 1, referred to us for our decision by the I.T. Appellate Tribunal we would like to observe that Section 147 of the Act empowers the ITO to take proceedings under this section against an assessee who had concealed his income or to assess income which escaped assessment in the relevant assessment year. In the instant case, the ITO, in the first instance, made an assessment of the total income of the assessee for the assessment year 1962-63 under Section 143(1) of the Act after making such adjustments to the income declared in the return as are required to be made under Clause (b) of Sub-section (1) of Section 143 of the Act. The assessment under Section 143(1) of the Act was made at Rs. 4,106 which amount was declared by the assesee in the return. Later on, the ITO took proceedings under Section 147 of the Act against the assessee in respect of the same assessment year as he was of the view that certain investments made by the assessee in a house property had escaped assessment for the relevant year and determined the total income of the assessee at Rs. 29,399 under Section 143(3) read with Section 147 of the Act. Aggrieved by this order of the ITO, dated January 22, 1968, the assessee preferred an appeal to the AAC on the ground that neither the assessee had concealed his income nor his income had escaped assessment in the relevant assessment year. The AAC accepted the appeal and passed an order on September 5, 1968, that the action taken by the ITO under Section 147(1) of the Act was illegal. Accordingly, he set aside the assessment made by him. Thereafter, the Commissioner while exercising his power under Section 263 of the Act, served a notice on the assessee that the order passed by the ITO under Section 143(1) of the Act on March 30, 1967, was prejudicial to the interests of the revenue inasmuch as the unexplained investments made by the assessee in the house property were not taken note of or considered in the order. He, therefore, called upon the assessee to show cause why the assessment order dated March 30, 1967, under Section 143(1) of the Act should not be set aside. The assessee has, therefore, contended that the proposed action taken by the Commissioner under Section 263 of the Act is illegal as it contravenes the provisions of Section 263(2) of the Act, because the order passed by the ITO in the first instance under Section 143(1) of the Act had merged in the order of the AAC and so no order can be made under Section 263(1) of the Act to revise an order of reassessment made under Section 147 of the Act. In support of his above contention Mr. S. K. Kackar, appearing on behalf on the petitioner, placed reliance upon Commissioner oj Commercial Taxes v. Rohtas Industries Ltd. and CIT v. Gopal Krishna Singhania : [1973]89ITR27(All) . Mr. L. R. Mehta, appearing on behalf of the revenue, contended that the proceedings under Section 147 of the Act for assessment of the escaped income are not identical with the original assessment proceedings, but they are proceedings supplementary to the original assessment proceedings and ifthe assessment made in the proceedings under Section 147 of the Act is set aside by the AAC the original assessment still subsists and cannot be held to have merged in the order of the AAC setting aside the proceedings for escaped income. In support of his above contention, Mr. L. R. Mehta relied upon an authority of the Full Banch of the Allahabad High Court in CIT v. Gopal Krishna Singhania : [1973]89ITR27(All) .

7. We have considered the rival contentions. The contention put forward before us by S. K. Kackar is devoid of substance, because the order passed by the ITO in the first instance under Section 143(1) of the Act must be regarded as subsisting and effective in law in spite of the fact that the subsequent order under Section 147(a) read with Section 143(3) of the Act was held to be illegal by the AAC and the assessment of the total income of the asses.-ee for the relevant assessment year at Rs. 29,399 was set aside by him. Hence, in our opinion, it cannot be safely held that the Commissioner lost jurisdiction under Section 263(1) of the Act to revise the assessment order passed by the, ITO under Section 143(1) of the Act after the order of the AAC setting aside the subsequent action taken by the ITO under Section 147(a) read with Section 143(3) of the Act. The proceedings taken under Section 147 of the Act, no doubt, could be deemed to relate to the original assessment proceedings which commenced with the return filed under Section 139(1) or the issue of the notice under Section 139(2) calling for a return of income. But when such proceedings taken under this Section were held to be illegal and set aside by the AAC, the assessment order passed by the ITO in the first instance under Section 143(1) of the Act being separate from and independent of the assessment or reassessment of the income of the assessee under Section 147 read with Section 143(3) of the Act subsists and is not rendered ineffective. Under Section 147 of the Act, reassessment is made in respect of the income which has escaped assessment and the jurisdiction of the ITO under this section is restricted to such income which has escaped assessment and cannot be extended to revising, reopening or reconsidering the whole assessment. In a proceeding under this section, the assessee is not permitted to agitate again questions which had been decided in the original assessment, nor can the ITO make a reassessment which is not consistent with the original assessment in respect of the matters which do not form part of the subject-matter of the proceedings under Section 147 of the Act. In this view of the matter, we answer question No. 1 in the negative. In our opinion, the order of the Commissioner dated March 26, 1969, under Section 263 of the Act had not the effect of revising an order of reassessment made by the ITO under Section 147 of the Act.

8. The second question referred to us is whether on the facts and in the circumstances of the case the impugned order of the Commissioner under Section 263 of the Act was valid in law. Before dealing with this question, wewould like to observe that under Section 263 of the Act, the Commissioner is empowered to revise an order passed by the ITO only if it is erroneous and it is prejudicial to the interests of the revenue. If the order under revision is not erroneous and prejudicial to the interests of the revenue, the Commissioner has no jurisdiction to revise it. If after calling for and examining the record the Commissioner considers that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the revenue, then he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he thinks fit, pass such order thereon as the circumstances of the case justify including an order directing a fresh assessment. This clearly indicates that the revisional power conferred by Section 263 of the Act is a quasi-judicial power. In the instant case the Commissioner after calling for and examining the records came to a conclusion that there was no evidence to show that inquiries were made by the ITO in regard to the construction of the property in the course of the assessment for the year 1962-63, the return for which was filed voluntarily by the assessee on January 19, 1966. In the alternative, the Commissioner observed that even if inquiries had been made, he could revise the order of the ITO under Section 263, if the conclusions drawn by the ITO from the facts available are erroneous on the face of it and are prejudicial to the interests of the revenue. The relevant portion of the order of the Commissioner is quoted below as it discloses the reasons for passing an order under Section 263 of the Act:

'There is no evidence on record to show that the inquiries were made in regard to the property constructed in the course of the assessment for this year. Shri Vyas pleads that the proceedings for 1962-63, 1963-64 and 1964-65 were going on simultaneously and these enquiries may have been made in the course of the 1964-65 proceedings. This shows that January 19, 1966, appears to be correct. The miscellaneous file for 1964-65 shows that on January 19, 1966, a hearing was fixed. In the course of hearing for that year enquiries regarding property construction were made. It is on this date, January 19, 1966, the assessee on his own voluntarily filed his return for these years. As the records stand, it cannot be said that the proceedings for the investigation in the construction of property related to the year 1962-63, to which they were relevant. In the circumstances, it is not possible to accept this contention of the assessee's counsel also. In any case, even if the enquiries had been made, it still does not bar an order under Section 263 being passed if the conclusion drawn by the ITO from the facts available is erroneous on the face of it or if there has been an escapement of income liable to be assessed.'

9. In our opinion, the aforesaid reasons given by the Commissioner are sound. It has been vehemently contended before us by the learnedcounsel for the assessee that the investments in question relating to the construction of the property were fully explained before the ITO who made the original assessment under Section 143(1) of the Act and it was after making a thorough inquiry about the genuineness of the source of these investments that the ITO excluded them from the total income of the assessee and, therefore, the Commissioner was not justified in revising the order under Section 263 of the Act as the order was neither erroneous, nor prejudicial to the interests of the revenue. In support of his contention Mr. S. K, Kackar has referred us to CIT v. R. K. Metal Works [1978] 112 ITR 445 and CIT v. Sunder Lal : [1974]96ITR310(All) . Mr. L. R. Mehta appearing on behalf of the revenue, on the other hand, argued that the word 'erroneous' used in 263 of the Act includes failure on the part of the ITO to make an inquiry into the truth of the facts stated in the return filed by the assessee and as, in the present case, the ITO did not make such an inquiry about the investments made by the assessee in the house property in the relevant assessment year before accepting the statements made by the assessee in his return, his order became erroneous and the Commissioner was justified in recording the order as erroneous on the ground that in the circumstances of the case such an inquiry should have been made. In support of his above proposition, Mr. Mehta relied upon an authority of the Delhi High Court in Gee Vee Enterprises v. Addl. CIT : [1975]99ITR375(Delhi) .

10. We have considered the above contentions. The records of the case do not reveal that the ITO, while assessing the income of the assessee under Section 143(1) of the Act for the assessment year 1962-63, had considered the explanation of the assessee regarding the source of funds for the investments made in the property. It appears from the record that in this year the assessee constructed a house, the covered area of which was 133 sq. ft. The plot on which the house was constructed was purchased by him for Rs. 1,500 on August 2, 1961. After purchasing the plot, the assessee started construction work and it was alleged to have been completed within 4 or 5 months after sanction was obtained from the Municipal Board on August 2, 1961. According to the admission of the assessee, the cost of construction was Rs. 18,000, but the certificate of the Asst. Engineer, PWD (B & R), discloses that the cost of the house construction was estimated and certified to be at Rs. 20,000. The assessee denied having maintained any construction cost account or 'Kamthana account'. The ITO, while assessing the income of the assessee under Section 143(1) of the Act, did not apply his mind to these relevant facts and so the Commissioner was justified in holding that the assessment made by the ITO was erroneous and prejudicial to the revenue. In our opinion, the Commissioner committed no error in setting aside the assessment and directing the ITO to make a fresh assessment after going into the merits of the explanation of the assessee regarding the sources of the funds for the investments and to arrive at a proper conclusion thereon. In this view of the matter, the order of the Commissioner revising the assessmentorder passed by the ITO under Section 143(1) of the Act is neither illegal nor unreasonable. Accordingly, the second question is answered in the affirmative as, in our opinion, the impugned order of the Commissioner was valid in law.

11. The reference made by the Income-tax Appellate Tribunal, Jaipur, is, therefore, decided accordingly.


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