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Addl. Commissioner Of Income-Tax vs Kamlapat Moti Lal

High Court Of Judicature at Allahabad|23 September, 1976

JUDGMENT / ORDER

JUDGMENT Chandrashekhar, J.
1. At the instance of the revenue, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad (hereinafter referred to as "the Tribunal") has referred to this court the following question of law :
" Whether, on the facts and in the circumstances of the case, the proceedings under Section 147(b) of the Income-tax Act, 1961, for the assessment year 1961-62 were barred by limitation and Sections 150(1) and 153(3), Explanation 2, did not save the limitation for issue of notice as provided under Section 149 of the Act ? "
2. The material facts of the case are these : The assessee is a firm engaged in the manufacture of sugar. The original orders of assessment of its income for the assessment years 1960-61 and 1961-62 were made on March 31, 1964. For the assessment year 1960-61, the assessee had claimed deduction of Rs. 4,49,704 and Rs. 4,18,291 as expenditure on excise duty on stocks of sugar held at its factories on the last day of the relevant previous year. The assessee who had adopted the mercantile system of accounting had made provision in its accounts for payment of such excise duty. The Income-tax Officer had disallowed this claim for the assessment year 1960-61, but had allowed these two sums as expenditure for the assessment year 1961-62.
3. In the appeal preferred by the assessee from the order of assessment for the year 1960-61, the Appellate Assistant Commissioner held that these two sums should be allowed as expenditure towards excise duty for the assessment year 1960-61, since it (the assessee), who was following the mercantile system of accounting, had made provision for payment of these two sums towards excise duty in its accounts in the relevant previous year.
4. Consequent on the decision of the Appellate Assistant Commissioner, the Income-tax Officer modified the assessment for the year 1960-61 by allowing the expenditure of Rs. 8,67,995 in that year. Since the very same two amounts had been allowed as expenditure in the assessment for the year 1961-62 also, the Income-tax Officer initiated proceedings under Section 147 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), in respect of that year and issued to the assessee on March 17, 1969, a notice under Section 148 of the Act. After considering its objections, he reassessed its income for the year 1961-62, by adding back these two sums which he had allowed as expenditure in his original order of assessment for the year 1961-62.
5. The appeal by the assessee against the order of reassessment for the year 1961-62 was dismissed by the Appellate Assistant Commissioner. In the further appeal by the assessee, the Tribunal held that the reassessment proceedings for that year were barred by time and that hence the reassessment was invalid.
6. In this reference, the learned standing counsel for the income-tax department contended that as the reassessment for the year 1961-62 was made in consequence of the finding of the Appellate Assistant Commissioner that the aforesaid two sums were allowable towards excise duty in the assessment year 1960-61 itself, there was no time-limit for making such reassessment and that the Tribunal was in error in holding that the reassessment was barred by time. The learned standing counsel maintained that in view of Explanation 3 to Sub-section (3) of Section 153 of the Act, there was no time limit for making such reassessment.
7. On the other hand, Shri/Ashok Gupta, learned counsel for the assessee, contended that the condition precedent for initiating reassessment proceedings for any particular year was escapement of income from, assessment for that year and that in the present case there was no escapement of income for the assessment year 1961-62 by reason of those two sums having been wrongly allowed as expenditure towards excise duty for that year.
8. Shri Gupta further contended that the Appellate Assistant Commissioner, while holding that those two sums should be allowed as expenditure towards excise duty in the assessment year 1960-61, had no jurisdiction to give a finding or direction that those two amounts should riot have been allowed as expenditure towards excise duty for the assessment year 1961-62, and that hence the reassessment for the year 1961-62 could not be said to be made in consequence of, or to give effect to, any finding or direction contained in his order in disposing of the appeal relating to assessment year 1960-61.
9. It was also contended by Shri Gupta that since the appeal from the order of assessment for the year 1960-61 was disposed of under Section 31 of the Indian Income-tax Act, 1922 (hereinafter referred to as the "old Act"), and not under the provisions of the Act, Explanation 3 to Sub-section (3) of Section 153 of the Act could not be invoked to save the time-limit for reassessment.
10. We shall first deal with the contention of Shri Gupta that there was no escapement of income from assessment for the year 1961-62 by reason of the Income-tax Officer wrongly allowing those two sums as expenditure towards excise duty for that year. According to Shri Gupta what Section 147 contemplates is some item of income being left out altogether or being under-assessed and not some item of expenditure or some deduction being wrongly allowed in the original assessment order.
11. Explanation 1 to Section 147 of the Act reads :
" Explanation 1.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :
12. According to Clause (a) of the aforesaid Explanation, income chargeable to tax shall be regarded as having escaped assessment if it has been under assessed. The short question is whether an income chargeable to tax can be regarded as being under-assessed if certain expenditure is wrongly allowed to be deducted in arriving at such income for the purpose of assessment to tax.
13. As observed by the Privy Council in Probhat Chandra Barua v. Emperor AIR 1930 PC 209, 212, the charge of income-taxis not on gross receipts but on profits and gains properly so called. In Badridas Daga v. Commissioner of Income-tax [1958] 34 ITR 10, 15 (SC) the Supreme Court quoted with approval the following observations of Lord Halsbury in Gresham Life Assurance Society v. Styles [1892] 3 TC 185 (HL) :
"'The word " profits "......is, to be understood in its natural and proper sense--in a sense which no commercial man would misunderstand'."
14. In Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 363 (SC), the Supreme Court observed thus at page 365 :
" The profits of a business which are to be assessed to tax must be real profits......Where an assessee is under a liability or is bound to make certain payment from the gross receipts, the profits and gains can only be the net amount after such an amount is deducted from the gross profits or receipts."
14. From the above observations it follows that income chargeable to tax can only be the net income after deduction of expenditure properly allowable and that where any expenditure which is not properly allowable, is allowed, the net income assessable to tax is pro tanto under-assessed and consequently escapes assessment. In the present case since the Income-tax Officer, while making the original assessment for the year 1961-62, had wrongly allowed deduction of Rs. 8,67,995 as expenditure on excise duty for that year (which amount, in the light of the order of the Appellate Assistant Commissioner, was allowable for the assessment year 1960-61), the net income assessable to tax for the year 1961-62 had been under assessed to the extent of Rs. 8,67,995 and had consequently escaped assessment.
15. Thus, the present case squarely comes within the ambit of Clause (a) of Explanation 1 to Section 148 of the Act. We are unable to accept the contention of Shri Gupta that there was no escapement of income chargeable to tax for the year 1961-62 which could form the foundation for reassessment for that year.
16. We shall next deal with the contention of Shri Gupta that the reassessment for the year 1961-62 could not be said to be in consequence of or to give effect to any direction or finding of the Appellate Assistant Commissioner. No doubt, in Income-tax Officer v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), the Supreme Court held that in deciding an appeal relating to one assessment year the appellate authority cannot give a direction or a finding that a particular income which was not chargeable to tax in that assessment year, was chargeable to tax in another assessment year. But the effect of this decision of the Supreme Court has been partly nullified by the amendment of Section 153 of the Act by adding Explanation 2 to Sub-section (3) of that section. The relevant portion of Sub-section (3) of Section. 153, after such amendment, reads :
(3) The provisions of Sub-sections (1) and (2) shall not apply to the following classes of assessments, reassessments and recomputations which may be completed at any time--
(i) where a fresh assessment is made under Section 146,; (ii) where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 250, 254, 260, 262, 263 or 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act;
(iii) where in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under Section 147......
Explanation 2.--Where, by an order referred to in Clause (ii) of Sub-section (3), any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of Section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order......"
17. Explanation 2 specifically provides that where by an order in an appeal, any income is excluded from the total income of an assessee for an assessment year, then an assessment of such income for another assessment year shall be deemed to be one made in consequence of, or to give effect to, any finding or direction contained in that order (in appeal).
18. Even so, Shri Gupta contended that Explanation 2 to Sub-section (3) of Section 153 read with Clause (ii) of that sub-section can apply to a reassessment made in consequence of or to give effect to any finding or direction contained in an order in an appeal under the present Act and not in an appeal under the old Act and that in the present case since the appeal in respect of the assessment year 1960-61 was disposed of by the Appellate Assistant Commissioner in an appeal under Section 30 of the old Act, and not under Section 250 of the present Act, Explanation 2 to Section 153(3) could not be invoked to overcome the time-limit of four years from the end of the relevant assessment year, prescribed in Sub-clause (ii) of Clause (a) of Sub-section (1) of Section 149 of the Act.
19. In support of his aforesaid contention, Shri Gupta strongly relied on the following observations of the Supreme Court in R.B. Seth Gujar Mal Modi v. Commissioner of Income-tax [1972] 84 ITR 261, 263, 264 (SC) :
" Mr. B. Sen, learned counsel for the department, contended that in view of Section 150(1) of the 1961 Act it was open to the Income-tax Officer to issue the impugned notices. That section reads:......
Quite clearly Mr. Sen's contention is unsustainable because the Appel late Assistant Commissioner's order was not passed under the 1961 Act.
Therefore, the department cannot take any support from Section 150(1) of the Act of 1961."
20. At first sight, the above observations of the Supreme Court seem to support the contention of Shri Gupta, but on a careful reading of the decision of the Supreme Court, it appears to us that those observations must be understood with reference to the facts of that case and have no application to the present case. There, the Income-tax Officer had issued a notice under Section 34(1)(b) of the old Act on November 7, 1958 (i.e., before the present Act came into force). ' But, in the present case, no notice under Section 34(1)(b) of the old Act had been issued to the assessee prior to the coming into force of the present Act and a notice was issued to the assessee under Section 148 of the Act.
21. Clause (d) of Sub-section (2) of Section 297 of the Act, which deals with the repeal of the old Act and savings, reads :
" (d) where in respect of any assessment year after the year ending on the 31st day of March, 1940,--
(i) a notice under Section 34 of the repealed Act had been issued before the commencement of this Act, the proceedings in pursuance of such notice may be continued and disposed of as if this Act had not been passed;
(ii) any income chargeable to tax had escaped assessment within the meaning of that expression in Section 147 and no proceedings under Section 34 of the repealed Act in respect of any such income are pending at the commencement of this Act, a notice under Section 148 may, subject to the provisions contained in Section 149 or Section 150, be issued with respect to that assessment year and all the provisions of this Act shall apply accordingly."
22. Sub-clause (ii) of Clause (d) of Section 297 of the Act clearly provides that where no proceedings under Section 34 of the old Act are pending at the commencement of the present Act and a notice under Section 148 is issued, all the provisions of the present Act shall apply accordingly to the reassessment proceedings.
23. In Third Income-tax Officer v. M. Damodar Bhat [1969] 71 ITR 806, 813 (SC) the Supreme Court, while construing Clause (j) of Section 297(2) of the Act, observed thus :
" But in a case falling within Section 297(2)(j) of the new Act, for example, in a proceeding for recovery of tax and penalty imposed under the old Act, it is not required that all the sections of the new 'Act relating to recovery and collection should be literally applied but only such of the sections will apply as are appropriate in the particular case and subject, if sectary, to suitable modifications. In other words, the procedure of the new Act will apply to the cases contemplated by Section 297(2)(j) of the new Act mutatis mutandis."
24. In view of the above observations of the Supreme Court, it follows that in a case falling under Clause (d) of Section 297(2), the provisions of the new Act must be read mutatis mutandis. Hence, for the purpose of Explanation 2 to Sub-section (3) of Section 153 of the Act, Section 250 occurring in Sub-clause (ii) of that sub-section should be read as Section 30 of the old Act and an order under Section 30 of the old Act should be regarded as an order under Section 250 of the present Act.
25. The above quoted observations of the Supreme Court in Seth Gujar Mal's case [1972] 84 ITR 261 (SC) while dealing with a case coming under Sub-clause (i) of Clause (d) of Section 297(2) of the Act, cannot be understood as laying down that even in cases which come under Sub-clause (ii) of Clause (d) of Section 297(2) of the Act, in order to make Explanation 2 to Sub-section (3) of Section 153 applicable, the order should have been in an appeal under Section 150 of the present Act and not under Section 30 of the old Act. The view that we have taken receives support from the decision of the Calcutta High Court in Income-tax Officer v. Eastern Coal Co. Ltd. [1975] 101 ITR 477 (Cal). There, their Lordships, after referring to the decision of the Supreme Court in Seth Gujar Mal's case [1972] 84 ITR 261 (SC), observed at page 486 :
" Therefore, we are of the opinion that the provision of Section 150(1) of the Income-tax Act, 1961, would apply in respect of a notice issued under the 1961 Act even though the direction or the finding out of which this notice was issued was passed under the provisions of the Act of 1922."
26. In view of the foregoing discussion, our answer to the question referred to us should be in favour of the revenue and against the assessee and is as follows:
" On the facts and in the circumstances of the case, the proceedings under Section 147(b) of the Income-tax Act, 1961, for the assessment year 1961-62 were not barred by limitation in view of the provisions of Section 150(1) read with Explanation 2 to Section 153(3) of the Act."
27. The assessee will pay the costs of the revenue. Advocate's fee is assessed at Rs. 200.
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Title

Addl. Commissioner Of Income-Tax vs Kamlapat Moti Lal

Court

High Court Of Judicature at Allahabad

JudgmentDate
23 September, 1976
Judges
  • D Chandrashekhar
  • R Sahai