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P. Palaniswami Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 474 of 1970 (Reference No. 135 of 1970)
Judge
Reported in[1977]106ITR811(Mad)
ActsIncome Tax Act, 1961 - Sections 147 and 154
AppellantP. Palaniswami
RespondentCommissioner of Income-tax
Appellant AdvocateT.S. Viswanatha Rao and ;A.G. Gajapathi, Advs.
Respondent AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Excerpt:
.....and 154 of income tax act, 1961 - whether reassessment proceedings valid notwithstanding order of appellate assistant commissioner - order passed by appellate assistant commissioner within jurisdiction - assessee preferred appeal against order of income-tax officer made under section 154 - resort to machinery under section 154 and existence or otherwise of error in earlier order of income-tax officer were subject matter of appeal before appellate assistant commissioner - order became final and accepted by department - not open to income-tax officer to reinitiate proceedings under section 147 (b) as if there had been escapement of income to assessment - question answered in negative in favour of assessee. - - as the extract from the order of the appellate assistant commissioner.....ismail, j.1. the income-tax appellate tribunal, madras bench, under section 256(1) of the income-tax act, 1961, has referred the following questions of law for the opinion of this court:'1. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the commissioner's letter constituted information for re-opening the assessment under section 147(b) especially when the income-tax officer had referred to the order of the appellate assistant commissioner dated march 5, 1966, for re-opening the assessment? 2. whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the commissioner's letter dated may 13, 1966, constituted information from an extraneous source within the meaning of section 147(b)? 3. whether,.....
Judgment:

Ismail, J.

1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Income-tax Act, 1961, has referred the following questions of law for the opinion of this court:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner's letter constituted information for re-opening the assessment under Section 147(b) especially when the Income-tax Officer had referred to the order of the Appellate Assistant Commissioner dated March 5, 1966, for re-opening the assessment?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner's letter dated May 13, 1966, constituted information from an extraneous source within the meaning of section 147(b)?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment proceedings are valid notwithstanding the order of the Appellate Assistant Commissioner dated March 5, 1966?

2. The short fads that are necessary for appreciating the above questions are as follows ;

The assessee is an individual and carries on business as a contractor. The assessment tor the year 1962-63 was made in the first instance on November 23, 1962. While assessing the assessee, the Income-tax Officer found that there were no books of account kept by the assessee except the memorandum book. Consequently, he had to make an estimate of the business income, and he did so, firstly, by estimating the net profits at 11% on certain receipts and 12 1/2% on certain other receipts, adding that 'depreciation admissible will be deducted from the profits so determined'. He accordingly worked out the net profits. The details of the admissible depreciation are contained in the assessment order itself, and we are concerned with a sum of Rs. 5,547, which was the depreciation at 25% on the written down value of Rs. 22,189 of lorry No. 9360. Admittedly, the said lorry was sold in the year of account ended March 31, 1962.

3. Realising that under Section 34(2)(ii) of the Income-tax Act, 1961, depreciation allowance was not allowable in respect of an asset sold in the year of account, the Income-tax Officer took proceedings for withdrawing the said depreciation and assessing the same under Section 154 of the Income-tax Act. On August 20, 1964, he issued a notice to the assessee under Section 155 of the Act and, after considering his objections, he purported to rectify the mistake by withdrawing the depreciation.

4. Against this order of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-t-ix, 'A' Range, Madras. That officer, by an order dated 5th March, 1966, allowed the appeal preferred by the assessee. Thereafter, the question as to whether an appeal to the Tribunal against the order of the Appellate Assistant Commissioner of Income-tax should be filed or not was considered by the Commissioner of Income-tax. On 13th May, 1966, the Commissioner of Income-tax sent the following communication to the Income-tax Officer :

'No appeal to the Appellate Tribunal is necessary against the Appellate Assistant Commissioner's order first cited above.

The Appellate Assistant Commissioner's order has been accepted as the alternative remedy of re-opening the assessment under Section 147(b) is available to withdraw the depreciation allowed. The Income-tax Officer is requested to take necessary action to give effect to this.'

5. On receipt of this communication, on May 20, 1966, the Income-tax Officer made the following note :

'(1) Seen C.I.T.'s memo:

(2) The excess depreciation allowed has resulted in the escapement of taxable income. Issue notice under Section 148/147(b).' Pursuant to this, the assessment was re-opened and the depreciation allowance referred to already was withdrawn and assessed to tax. The assessee's appeal to the Appellate Assistant Commissioner was allowed and thereafter the department took the matter in further appeal to the Income-tax Appellate Tribunal. The Tribunal by its order dated 7th May, 1969, held that the proceedings initiated under Section 147(b) were validly initiated since the Commissioner's letter dated 13th May, 1966, constituted information within the meaning of Section 147(b) of the Income-tax Act, 1961. It is with reference to this order the above three questions have been referred for the opinion of this court.

6. Since we are answering the third question in favour of the assessee, it is not necessary to consider the other two questions, and therefore we are setting out the facts relevant for answering the third question only.

7. We have already pointed out that the Appellate Assistant Commissioner allowed the appeal preferred by the assessee against the order of the Income-tax Officer seeking to rectify the mistake of the wrong allowance of depreciation under Section 154 of the Income-tax Act, 1961. However, in doing so, what the Appellate Assistant Commissioner did was not merely to hold that the mistake was not capable of being rectified under Section 154 of the Act, but there was no mistake at all, or, in other words, there was no escapement of the taxable income. This is what the Appellate Assistant Commissioner has stated in his order :

'So I consider that there is firstly no error capable of rectification in the assessment made by the Income-tax Officer originally because ultimately what he did was to arrive at the net income on a suitable basis by allowing a deduction in the name of depreciation, the Income-tax Officer was not really giving away anything. Perhaps, the same result might have been achieved by applying a net rate by one leap instead of arriving at it stage by stage. This is a matter for the Income-tax Officer to decide and that is beside the scope of consideration at this stage. To sum up this is a case where the Income-tax Officer has only estimated the net income by a process of comparable cases and not a case where the Income-tax Officer had allowed any specific deduction by way of depreciation or terminal allowance in which case only the objection of no account will apply. In that view of the matter there is nothing to be rectified and the order under Section 154 is cancelled.'

8. Thus, it is clear that the Appellate Assistant Commissioner has actually held that there was no mistake on the part of the Income-tax Officer in allowing the depreciation and, therefore, there was no escapement of taxable income at all. It is not necessary for us to consider whether that view of the Appellate Assistant Commissioner was right or wrong. All that we are concerned is to point out that that order of the Appellate Assistant Commissioner has become final. It is not merely that there was no appeal preferred against that order by the department, but the department expressly took a decision to accept the order of the Appellate Assistant Commissioner. It may be that while taking that decision, the department did not realise the implications of the order of the Appellate Assistant Commissioner and proceeded on the basis that the Appellate Assistant Commissioner allowed the appeal only on the ground that Section 154 of the Income-tax Act, 1961, could not have been resorted to in the circumstances of the case. As the extract from the order of the Appellate Assistant Commissioner clearly shows that that order did not stop there, but it went into the merits and actually found that there was no mistake at all to be rectified, and the Income-tax Officer had not allowed any taxable income to escape. If so, the acceptance by the department of the order of the Appellate Assistant Commissioner makes that order final with the result that the conclusion of the Appellate Assistant Commissioner that there was no escapement of tax is also final. Once it has become so final, it is not open to the Income-tax Officer subsequently to destroy that finality by purporting to take action under Section 147(b) of the Act.

9. The decision of the Supreme Court in Commissioner of Income-tax v. Rao Thakur Narayan Singh : [1965]56ITR234(SC) will support our conclusion. In that case from a reassessment for the assessment year 1942-43 made in July, 1945, bringing to tax certain forest income and interest income, the assessee preferred an appeal to the Appellate Tribunal objecting to the Income-tax Officer's jurisdiction to initiate reassessment proceedings in respect of the forest income on the ground that he had knowledge of such income when the original assessment was made. The Appellate Tribunal upheld his contention but by mistake set aside the entire reassessment order and restored the original assessment order. No steps wore taken under Section 35 of the Indian Income-tax Act, 1922 (corresponding to Section 254(2) of the Income-tax Act, 1961) to rectify the mistake nor was any reference to the High Court sought against the order of the Appellate Tribunal. Thereafter, in 1950, the Income-tax Officer initiated fresh reassessment proceedings under Section 34 of the Indian Income-tax Act, 1922 (corresponding to Section 147(b) of the Income-tax Act, 1961), with respect to the interest income and made a fresh reassessment order for the year 1942-43, to include the interest income. The Supreme Court held that it was not open to the Income-tax Officer to do so. The Supreme Court, after referring to Section 34(1)(a) of the Indian Income-tax Act, 1922, as amended in 1948, observed (page 239):

'It could not have been the intention of the legislature by amending the section to enable the Income-tax Officer to reopen final decisions made against the revenue in respect of questions that directly arose for decision in earlier proceedings. The Tribunal held in the earlier proceedings that the Income-tax Officer knew all the facts at the time he made the original assessment in regard to the income he later on sought to tax. The said finding necessarily implies that the Income-tax Officer had no reason to believe that because of the assessee's failure to disclose the facts income has escaped assessment. The earlier finding is comprehensive enough to negative 'any such reason' on the part of the Income-tax Officer. That finding is binding on him. He could not on the same facts reopen the proceedings on the ground 1hat he had new information. If he did so, it would be a clear attempt to circumvent the said order, which had become final. We are not concerned in this appeal with a case where the Income-tax Officer got new information which he did not have at the time when the Tribunal made the order. The finding of the Tribunal is, therefore, binding on the Income-tax Officer and he cannot, in the circumstances of the case, reopen the assessment and initiate proceedings over again. If that was not the legal position, we would be placing an unrestricted power of review in the hands of an Income-tax Officer to go behind the findings given by a hierarchy of Tribunals and even those of the High Court and the Supreme Court with his changing moods.'

10. The above observations of the Supreme Court made with reference to the order of the Tribunil will apply to the order of the Appellate Assistant Commissioner in the present case which has been accepted by the department. It cannot be disputed that the order passed by the Appellate Assistant Commissioner was within his jurisdiction. When the assessee preferred the appeal against the order of the Income-tax Officer made under Section 154 of the Income-tax Act, 1961, both the resort to the machinery of Section 154 and the existence or otherwise of an error in the earlier order of the Income-tax Officer were the subject-matter of the appeal before the Appellate Assistant Commissioner. In this case, as already pointed out, the Appellate Assistant Commissioner held that there was no error at all, because no income escaped assessment. In those circumstances that order having become final and having been accepted by the department, it is not now open to the Income-tax Officer, on whom the said order is binding, to go behind that order and initiate proceedings under Section 147(b) of the Income-tax Act, 1961, as if there had been escapement of income to assessment. In view of these circumstance?, we answer the third question referred to us in the negative and in favour of the assessee. Since, by virtue of our answer to the third question, the controversy between the parties can be completely disposed of, it is unnecessary to answer the first two questions, and, therefore, we do not answer these two questions.

11. Having regard to the circumstances of the case, there will be no order as to costs.


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