JUDGMENT M. Katju, J.
1. This writ petition has been filed for quashing the impugned orders dt. 31st July, 1997 (Annexures 1 to 5 to the petition) passed by the Addl. CIT, Muzaffarnagar, respondent No. 1. The petitioner has also prayed for a mandamus directing the respondents not to disregard or ignore the earlier orders, copies of which are Annexures 8 to 12 to the writ petition.
2. Heard learned counsel for the parties.
3. The petitioner is a company registered under the Indian Companies Act. It is engaged in the business of manufacture and sale of sugar, industrial alcohol, etc., in its three manufacturing units, (1) Upper Doab Sugar Mill located at Shamli in District Muzaffarnagar, (2) Shamli Distillery and Chemical Works, located at Shamli in District Muzaffarnagar, and (3) Pilkhani Distillery and Chemical Works, located at Pilkhani in District Saharanpur.
4. It is alleged in para 6 of the writ petition that the manufacturing operation at all the three units are of continuous nature, and, therefore, for smooth operation it is necessary that the employees of the company are available at all times to meet the emergent needs in the manufacturing operation even at odd hours. In para 7 it is alleged that the aforesaid three units of the petitioner are located in remote areas where the township is small. There are no residential accommodation available in nearby areas for the officers and workmen of these units. Hence, the petitioner was obliged to construct residential colonies to provide accommodation to various categories of its employees in the premises of the above units. The petitioner also provided furniture with the above accommodation.
5. In paras 9, 10 and 11 of the writ petition it is alleged that under the Central Wage Board (Sugar) standard rent has been fixed for different categories of residential accommodation, and the petitioner is obliged to provide accommodation to its employees only on such standard rent fixed by the Wage Board.
6. In para 12 of the petition it is alleged that prior to 1982 there were several instances in which the AOs under the IT Act, 1961, did not accept the rent of the accommodations as fixed by the Central Wage Board as the fair rent and proposed to determine the rent treating the qua as unfurnished at the rate of 10 per cent of the salary of the employees under Rule 3(a)(iii) of the IT Rules. The rent so determined was added to the income of the employees, and the value of the perquisite of furniture was also added to the above amount of rent in the income of the employees. For this addition the cost of furniture was taken in an ad hoc manner. Since the furniture was old, the exact date of its purchase was not ascertainable. The ITO added 10 per cent of the ad hoc cost of the furniture to the perquisite value in the income of the employees.
7. It is alleged in para 13 of the petition that either by direction of the IAC or by the orders is appeals the above value of the perquisites of the quarters and the furniture, which was added to the income of the employees by the ITO, was reduced to less than 10 per cent of the salary. Some details are given in para 13. To clarify the position and eliminate the possibilities of conflicting views, the petitioner approached the IAC, Muzaffarnagar for a direction for determination of the fair rental value of different categories of quarters provided by the petitioner to its employees. True copy of the representation dated 31st July, 1982, is Annexure-7 to the writ petition.
8. In para 15 it is alleged that the IAC obtained a report in regard to the fair rental value of the quarters and furniture from the AO, and then issued directions/orders to the AO regarding the value to the fixed for the perquisite of the quarters and the furniture. This order dt. 21st Aug., 1982, was for asst. yr. 1982-83, 1983-84 and 1984-85. By this direction the fair rental value was fixed ranging from Rs. 150 per month to Rs. 250 per month depending upon the categories of the quarters. The fair value of the furniture was fixed ranging from Rs. 35 to Rs. 75 per month. True copy of the said order is Annexure-8 to the writ petition. Copy of this order was communicated to the ITO, Shamli with a direction that the rental value as fixed in the letter, should be adopted in the aforesaid assessment years. For the aforesaid subsequent asst. yrs. 1985-86 to asst. yrs. 1996-97, the petitioner filed four representations in the same manner as the representation dt. 31st July, 1982, for necessary directions for fixing the fair rental value of the quarters and the furniture. The IAC and the Dy. CIT determined the fair rental value as per the chart mentioned in para 17 of the petition. The petitioner has alleged that the aforesaid order was in the nature of a direction under Section 142A of the IT Act. As for the petitioner the aforesaid communication was in the nature of an order that the petitioner should deduct the tax at source from the salary of the employees.
9. It is alleged in para 20 that in the years asst. yr. 1982-83 to asst. yr. 1996-97 the petitioner's employees were assessed by treating the aforesaid perquisite value of the quarters and furniture as fixed by the IAC/Dy. CIT, in their orders, copies of which are Annexures-8 to 12 to the writ petition as part of the salary/income. The assessment were completed accordingly.
10. In para 22 of the writ petition it is alleged that the petitioner had been filing annual returns of salaries under Section 206 of the IT Act in Form No. 24 as prescribed under Rule 37 of the IT Rules. These returns were examined and scrutinized by the ITO and were duly accepted. The petitioner has been giving remarks about the perquisite value of the residential quarters and furniture as per rates fixed by IAC/Dy. CIT. The orders (Annexures 8 to 12) were consistently followed by the petitioner and were never doubted by the AO.
11. For asst. yr. 1996-97 the petitioner approached the Addl. CIT (respondent No. 1) for the usual direction to fix the fair rental value of the quarters and furniture for the asst. yr. 1997-98 onwards. True copy of the representation dt. 4th April, 1996 is Annexure-13 to the writ petition. The respondent No. 1 sent a letter dt. 17th Sept., 1996, to the petitioner stating that there was no provision under the Act/Rules for the desired fixation, and he declined to do the same. He directed the petitioner to deduct tax at source from the income of the employees for financial year 1996-97 onwards in accordance with the IT Rules vide Annexure-14 to the writ petition. The petitioner also learnt that on the same date i.e., 17th Sept., 1996, the respondent No. 1 had also written a letter to the ITO (TDS) Muzaffarnagar, respondent No. 4 directing him to scrutinize all the annual returns of salaries (Form No. 24) filed by the petitioner right from 1982 onwards. He also directed that while scrutinizing the returns the perquisite value of quarters and furniture should be fixed in accordance with Rule 3 of the rules vide Annexure-15 to the writ petition.
In accordance with the aforesaid direction of the Asstt. CIT the ITO issued a notice dt. 8th Oct., 1996, asking for explanation as to why the perquisite was not shown by the petitioner in the relevant Form No. 24 in accordance with Rule 3 of the rules in respect of its units, namely Shamli Distillery and Chemical Works for financial years 1993-94 and 1994-95 and in respect of Upper Doab Sugar Mills for financial years 1991-92 and 1995-96. In the above note it has been stated that the Dy. CIT had issued some letters for the review of his predecessor's letter, but that has not been communicated to the petitioner.
The petitioner filed a reply objecting to the aforesaid notice but thereafter another notice dt. 15th Nov., 1996, was issued asking the petitioner for producing documents of the terms and conditions with the employees of its units for the period 1st April, 1982, onwards vide Annexure-17 to the petition. The petitioner filed a reply objecting to it on 26th Nov., 1996. However, on 6th Dec., 1996, the ITO (TDS) issued three fresh notices in respect of financial years 1994-95 for the three units. In this notice he determined the value of all the perquisites including the quarters and furniture, and required the petitioner to show-cause against it vide Annexure-18 to the writ petition. The petitioner sent a reply dt. 23rd Dec., 1996, but on 2nd Jan., 1997, the ITO (TDS) passed three orders under Section 201/201(1A) for financial years 1994-95 for all the three units of the petitioner. By these orders, the ITO (TDS) recomputed the perquisite value disregarding the earlier orders and guidelines copies of which are Annexures 8 to 12. He accordingly treated the petitioner as "assessee in default". Similar orders have been passed by the respondent No. 4 for financial year 1993-94 and 1995-96. Copy of the order dt. 2nd Jan., 1997, is Annexure-19 to the writ petition. Against the aforesaid orders the petitioner filed a writ petition No. 51 of 1997, which was disposed of with the direction that the petitioner should avail the alternative remedy of appeal.
12. In para 36 of the petition it is stated that the respondent No. 4 had also passed six orders on 8th Jan., 1997, for the three units for financial years 1993-94 and 1995-96. It is alleged that this was passed without giving opportunity of hearing to the petitioner. Against the three orders dt. 2nd Jan., 1997 and six orders dt. 8th Jan., 1997, the petitioner filed appeals before the CIT(A) who allowed the appeals by his order dt. 31st March, 1997. The CIT(A) set aside the order of the AO and remanded the matter to the ITO for proper consideration of the issues and the arguments and the evidence. True copy of the order for asst. yr. 1995-96 is Annexure-21 to the petition. Similar orders were passed in all the appeals. Against those orders an appeal was filed before the Tribunal at Delhi, which is pending. Thereafter the respondent No. 1 passed the impugned five orders Annexures 1 to 5 dt. 31st July, 1997, whereby he has rescinded the earlier order dt. 21st Aug., 1982, 21st June, 1984, 6th March, 1989, 3rd July, 1990 and 3rd Jan., 1994. It is allegect that the order dt. 31st July, 1997 was passed without issuing any show-cause notice to the petitioner and without giving him any opportunity of hearing.
13. The allegation in para 43 of the petition that petitioner was not given opportunity of hearing has not been denied in para 24 of the counter-affidavit. All that has been stated in para 24 of the counter-affidavit is that it is not necessary to give opportunity of hearing. We do not agree. In our opinion the order dt. 31st July, 1997, has civil consequences. It has been held by the Supreme Court in the leading case of State of Orissa v. Binapani De AIR 1967 SC 1297, any order which has civil consequences will be invalid if it was passed without giving opportunity of hearing. Hence, the petition deserves to be allowed on this ground alone.
14. However, we may also consider the contention in para 17 of the counter-affidavit that the directions, copies of which are Annexures 8 to 12 to the writ petition, could not be given under any provision of the IT Act. In our opinion this contention is not correct. In our opinion under Section 144A, there is power in the Inspecting Commissioner (now Dy. CIT) to issue the direction referred to in Annexures 8 to 12 of the writ petition.
15. It may be mentioned that Section 144A was inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st Jan., 1976. As originally enacted Section 144A read as follows :
"An IAC may, on his own motion, or on a reference being made to him by the AO, or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reasons, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the AO to enable him to complete the assessment, and such directions shall be binding on the AO :
Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard."
By the Direct Taxation Laws (Amendment) Act, 1987, the words 'IAC' were substituted by the words 'Dy. CIT' from 1st April, 1988. It may be noted that the orders, copies of which are Annexures 8 and 9 have been passed by the IAC who could validly pass the same under Section 144A before 1st April, 1988. The orders which are Annexures 10, 11 and 12 have been passed by the Dy. CIT, and he was the relevant authority under Section 144A after 1st April, 1988.
Thus, all the orders Annexures 8 to 12 are valid orders and have been passed by the competent authority. On the basis of these orders Annexures 8 to 12 assessments of the petitioner and also all its employees have been completed. Hence, it was wholly arbitrary on the part of the Addl. CIT, Muzaffarnagar to have suddenly recalled the above orders by the order dt. 31st July, 1997. In our opinion there is no provision in the IT Act under which the Addl. CIT, can recall the orders under Section 144A of the IT Act. The Addl. CIT does not sit in appeal under any provision of the IT Act against orders passed under Section 144A. The only power to set aside an order of the IAC (or Dy. CIT, as the case may be) is under Section 263 of the IT Act, but that power has admittedly not been exercised, and the power under Section 263 can only be exercised after giving opportunity of hearing to the petitioner. Admittedly no such hearing was given. It may be noted that Section 263 specifically mentions about giving opportunity of hearing. Hence the impugned orders are wholly arbitrary, illegal, and without jurisdiction.
16. Secondly, even assuming that there was power in the Addl. CIT to pass the impugned order, the said power cannot be exercised arbitrarily. Existence of power is one thing, and exercise of it is another, as held by a Division Bench decision of this Court in Shaukat Ali v. Allahabad Development Authority (Writ Petition No. 47222 of 2002 decided on 1st July, 2003). In the present case even assuming that the Addl. CIT had power to pass the impugned orders, in our opinion the power has been exercised totally arbitrarily because to rake up issues settled about 15 years ago will only result in total confusion and unnecessary hardship and harassment not only to the petitioner but also to a large number of employees, apart from leading to uncertainty in the administration of tax laws which should be avoided. We are living under the rule of law, and not under the rule of harassment or arbitrariness. As held by the 7 Judge Constitution Bench decision of the Supreme Court in Maneka Gandhi v. Union of India AIR 1978 SC 597, arbitrariness violates Article 14 of the Constitution. In our opinion the tax authorities should not harass persons in the manner it has been done in the present case. Petition is allowed. Impugned order is quashed.