Skip to content


Punjab Produce and Trading Co. Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 235 of 1977
Judge
Reported in[1986]158ITR524(Cal)
ActsIncome Tax Act, 1961 - Sections 70 to 74 and 147
AppellantPunjab Produce and Trading Co. Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateD. Pal, Adv.
Respondent AdvocateS. Bagchi, Adv.
Excerpt:
- .....of the act and holding that the capital loss of rs. 2,14,181 arising from the sale of short-term capital assets should be first set off against capital gains of rs. 1,34,840 arising from the sale of long-term capital assets and that thereafter the balance of rs. 79,291 of the said capital loss of rs. 2,34,131 was to be set off against income coming under other heads of income ' 2. the assessee is a company and the relevant assessment year is 1969-70. the original assessment was completed on march 31, 1971, on a total income of rs. 7,38,030. the assessee had income from house property, business, other sources and capital gains. in the original assessment, in computing the capital gains, profits relating to capital assets other than short-term capital assets were computed at rs......
Judgment:

Ajit K. Sengupta, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following two questions of law for opinion of this court :

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income-tax Officer validly initiated proceedings under Section 147(b) of the Income-tax Act, 1961, for reassessment for the assessment year 1969-70 ?

2. If the answer to question No. 1 is in the affirmative, then whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 70(2)(i), Section 71(3) and Section 74(1)(a)(ii) of the Income-tax Act, 1961, the Tribunal was right in giving precedence to Section 72(1) over Section 74(1)(a)(ii) of the Act and holding that the capital loss of Rs. 2,14,181 arising from the sale of short-term capital assets should be first set off against capital gains of Rs. 1,34,840 arising from the sale of long-term capital assets and that thereafter the balance of Rs. 79,291 of the said capital loss of Rs. 2,34,131 was to be set off against income coming under other heads of income '

2. The assessee is a company and the relevant assessment year is 1969-70. The original assessment was completed on March 31, 1971, on a total income of Rs. 7,38,030. The assessee had income from house property, business, other sources and capital gains. In the original assessment, in computing the capital gains, profits relating to capital assets other than short-term capital assets were computed at Rs. 1,34,840 and loss relating to short-term capital assets was arrived at Rs. 2,14,131 and, this apart, losses of Rs. 62,606 and Rs. 5,275 relating to the assessment years 1968-69 and 1969-70, respectively, on account of capital assets other than short-term capital assets were brought forward for consideration in the instant assessment year. Sum total of such brought forward losses amounted to Rs. 67,881 which the Income-tax Officer in the original assessment deducted from the gains relating to capital assets other than short-term capital assets of the instant year and the balance of Rs. 66,959 was deducted from the loss relating to short-term capital assets, i.e., Rs. 2,14,131, leaving a balance of Rs. 1,47,172 of the loss relating to short-term capital assets. The said balance of loss relating to short-term capital assets was deducted from income from various other sources.

3. Subsequent to the original assessment, the Revenue Audit Party had reported in L.A.R. No. 252 dated October 10, 1972, that the total incomehad been under assessed as the long-term capital loss brought forward from the assessment years 1967-68 and 1968-69 had been wrongly set off against capital gains relating to assets other than short-term capital assets of the year. In consequence of the above opinion, the Income-tax Officer initiated proceeding under Section 147(b) of the Income-tax Act, 1961. In this re-computation of the income, the Income-tax Officer first set off the gains relating to assets other than short-term capital assets against loss relating to short-term capital assets and the balance of loss of Rs. 79,291 was set off under section 71(3) of the Act against income under other heads.

4. Being aggrieved, the matter was taken in appeal before the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner that the Revenue Audit Party was not the proper authority to pronounce upon law and, hence, the opinion expressed by it should not constitute 'information' as contemplated by Section 147(b) of the said Act. According to the Appellate Assistant Commissioner, the expression 'information' must also include information as to the true and correct state of the law and as to law relating to matter bearing on the assessment. The Appellate Assistant Commissioner also held that the mistake by the Income-tax Officer was apparent on the face of the earlier order itself and constituted 'information ' for action under Section 147(b) of the said Act. Therefore, the reopening of the assessment was held to be quite in order.

5. On merits too, the Appellate Assistant Commissioner rejected the assessee's contention relying upon the provisions of Section 71(3) and Section 74(1)(a)(ii) of the Act. The assessee's learned counsel argued that the short-term capital loss of Rs. 2,14,131 relating to the year under appeal should first be set off against income from property and the remaining balance against the dividend income. It was also contended that the loss relating to the loss other than short-term capital assets brought forward from the preceding years should be set off first against gains relating to assets other than short-term capital assets assessable for the year. The Appellate Assistant Commissioner rejected the contention of the assessee and held that the provisions of law in this regard are clear. Under Section 70(2)(i), any loss arising from a transfer of a short-term capital asset may be set off and adjusted against income, if any, of the year from another short-term capital asset and/or a long-term capital asset. In his opinion, the Income-tax Officer was correct in law in setting off long-term capital gains of Rs. 1,34,840 against short-term capital loss of Rs. 2,14,131 and the balance of short-term capital loss of Rs. 79,291 set off under Section 71(3) against income under other heads of Rs. 23,70,241. Thus the order of reassessment was confirmed and the appeal was dismissed.

6. The assessee preferred an appeal before the Appellate Tribunal It was contended that the Revenue Audit Party is not a higher authority, and their opinion based on facts already available on record at the time of the original assessment was merely a change of opinion and the Income-tax Officer was not justified in invoking the provisions of Section 147(b) of the Act. It was also contended that the Appellate Assistant Commissioner was not right in observing that the correct state of law was that which was applied by the Income-tax Officer in the reassessment order.

7. The Tribunal dealing with this contention held as follows :

' The Revenue Audit Party works under the Comptroller and Auditor-General of India and their function is to scrutinise assessments and to bring to the notice of the Department that the Income-tax Officer had committed mistakes either in respect of facts or as to legal issues. In the instant case before us, the Income-tax Officer initiated proceedings under Section 147(b) on the basis of a report submitted to (sic) us various case laws and it has been admitted before us that on that issue faced by us in this case, there is no authority of the Calcutta High Court. In the case of Kasturbhai Lalbhai : [1971]80ITR188(Guj) , information was provided by the Revenue Audit Party, so also in the case of H.H. Smt. Chand Kanwarji : [1972]84ITR584(Delhi) ; the ratio of the decision in these two cases is different inasmuch as the former is against the Revenue whereas the latter is in its favour. In the case of Muthukrishna Reddiar v. CIT : [1973]90ITR503(Ker) , it was held that information from Departmental Audit Staff was sufficient for action under Section 147(b) of the Act. In the instant case, had the Income-tax Officer without any report from the Revenue Audit Party initiated reassessment proceedings under Section 147(b), we would have agreed with the contentions taken on behalf of the assessee, but the initiation was based on the report of the Revenue Audit Party working under the Comptroller and Auditor-General of India who cannot be equated to a co-ordinate authority of the Income-tax Officer. In our opinion, the Revenue Audit Party stands on a higher footing than that of the Income-tax Officer and, therefore, respectfully following the decision of the Delhi High Court reported in Chand Kanwarji's case : [1972]84ITR584(Delhi) , we uphold the legality of the reassessment proceedings in the instant case.'

8. The Tribunal upheld the order of the Appellate Assistant Commissioner on merits as well. The Tribunal after considering the relevant provision of the Act held that what the law requires is that the computation of income under different heads for a particular assessment year should first be worked out and then the question, if the circumstances so demand, will arise as to aggregation of income and set off or carry forward of loss. Section 70 provides the machinery for set off ofloss from one source against income from another source under the same head of income. Therefore, capital gains arising from assets, whether short-term capital assets or assets other than short-term capital assets should first be computed and then only the question will arise for giving the benefit of set off of loss under one head against income from another in accordance with the provisions of Section 71. According to the Tribunal, it is mandatory for the Income-tax Officer to compute the income under different heads for a particular assessment year first and then the benefit of losses carried forward from the preceding years under the head 'Capital gains' would be set off against capital gains of the relevant assessment year. Hereto the losses under the head 'Capital gains' carried forward from the preceding years can only be set off against gains from the same type of capital assets in the following year. An assessee cannot obtain the benefit of loss under the head 'Capital gains' carried forward from the preceding years against gains relating to the same type of asset in the following year without first determining the capital gains from both types of assets assessable to tax in the following year.

9. On the aforesaid facts and circumstances, the questions as set out hereinabove have been referred to this court by the Tribunal. Dr. Pal, learned advocate for the assessee, has contended that the first question has been concluded by the judgment of the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT : [1979]119ITR996(SC) . It is the contention of Dr. Pal that the judgment on which the Tribunal relied in support of its conclusion that the Income-tax Officer has jurisdiction to initiate the proceeding under Section 147(b) of the Act was overruled by the Supreme Court in that case. He submits that if the first question is answered in favour of the assessee, then the second question would be academic.

10. Mr. Bagchi, the learned advocate on behalf of the Revenue, has also relied on the said decision of the Supreme Court and has referred to a passage in the said judgment in support of his contention that in this case, the Income-tax Officer was justified in invoking the provision of Section 147(b) of the Act. The passage relied on by Mr. Bagchi is at page 1004 of the Reports which reads as follows :

' In the present case, an internal audit party of the income-tax department expressed the view that the receipts from the occupation of the conference hall and rooms did not attract Section 10 of the Act and that the assessment should have been made under Section 9. While Sections 9 and 10 can be described as law, the opinion of the audit party in regard to their application is not law. It is not a declaration by a body authorised to declare the law. That part alone of the note of an auditparty which mentions the law which escaped the notice of the Income-tax Officer constitutes ' information ' within the meaning of Section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income-tax Officer. In every case, the Income-tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income-tax Officer.'

11. Mr. Bagchi has submitted that the Income-tax Officer has not proceeded on the opinion of the audit party. He only became aware of the correct state of law. Thus, he rightly invoked Section 147(b).

12. We have considered the rival submissions. In our judgment, the contention raised on behalf of the Revenue cannot be accepted in view of the principles laid down by the Supreme Court in the aforesaid judgment. The Tribunal upheld the legality of the initiation of the reassessment proceeding in this case following the decision of the Delhi High Court in the case of CIT v. H.H. Smt. Chand Kanwarji : [1972]84ITR584(Delhi) , which was overruled by the Supreme Court in Indian & Eastern Newspaper Society : [1979]119ITR996(SC) . It has been laid down by the Supreme Court that the Revenue Audit Party does not possess the power to pronounce on the law but it may draw the attention of the Income-tax Officer to it. The question is whether, in this case, the audit party is the source of the law or the communicator of the law. The audit report which has been relied on by the Income-tax Officer and the Tribunal would go to show that the Revenue Audit Party in its note had expressed an opinion in regard to the application or interpretation of Sections 70 to 74 of the Act. Whether or not in the original assessment the Income-tax Officer correctly applied the provisions of Sections 70 to 74 as regards set off of loss brought forward from the earlier years would depend on the application or interpretation of the aforesaid provisions. The Income-tax Officer did not have any occasion to determine for himself the effect and consequence of the law mentioned in the audit note. He proceeded on the communication as regards application or interpretation of the said provisions relating to the set off of loss under the head 'Capital gains'. It is not the case of the Revenue that the Income-tax Officer had not considered the aforesaid provisions when hemade the original assessment. He granted relief to the assessee on his own understanding of the relevant provisions of the Act including Sections 70 to 74. No authority who is competent to pronounce on the law has interpreted the said provisions nor considered what is the correct application of Sections 70 to 74. On such facts as are found in this case, the Income-tax Officer has taken a different view on the application of those provisions which would amount to a change of opinion on material already considered by him. In Indian & Eastern Newspaper Society's case : [1979]119ITR996(SC) , the Supreme Court has held that an error discovered on a reconsideration of the same material (and no more) does not give him that power to reopen the assessment. It is not a case where on the fact found by the Income-tax Officer only and only one conclusion would automatically follow upon that fact and no controversy in law would arise on that point. The Income-tax Officer in the original assessment understood the provisions in a particular way and applied the same and the Revenue Audit Party expressed the opinion to the contrary. It shows that there is a divergence of opinion and there is a controversy in law. Unless the controversy is settled by any judicial pronouncement, the Income-tax Officer cannot, solely relying on the opinion of the Revenue Audit Party, reopen the assessment. It may be that the view taken on the interpretation of Sections 70 to 74 is the correct view but it is not for the Revenue Audit Party to interpret the law. If the Income-tax Officer failed to apply the provisions of Sections 70 to 74 to the facts of this case, the Revenue Audit Party could have drawn the attention of the Income-tax Officer to the provisions of Sections 70 to 74 and thereafter the Income-tax Officer would have determined for himself the effect and consequence of the provision of Sections 70 to 74 of the Act. This has not been done in this case. We are, therefore, unable to uphold the view taken by the Tribunal on the initiation of the proceeding under Section 147(b).

13. In the result, the first question referred to us is answered in the negative and in favour of the assessee and against the Revenue. In view of our answer to the first question in the negative, the second question does not survive. We, therefore, decline to answer the second question. Each party will pay and bear its own costs in this reference.

R.N. Pyne, J.

14. I agree.


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