A.M. Zainalabdeen Muscliar vs Commissioner of Income Tax

T.L. Viswanatha Iyer, J.—The assessee is an exporter of cashew kernels. We are concerned with the assessment year 1979-80, for which the accounting year ended on 31-3-1979. The assessee filed a return of loss of Rs. 1,10,384 on 4-11-1981. Thereafter the ITO wrote to the assessee on 6-3-1982 that he found with reference to the records maintained by the Cashew Special Officer, Kollam, that the assessee had an excess closing stock of 502 bags of raw nuts. He sought an explanation from the assessee in relation to this matter. He wrote again on 15-5-1982 pointing out that the excess was really 506 bags of raw nuts, which had not been included in the purchases recorded in the assessee''s books. He, therefore, proposed to add an amount of Rs. 3,01,222 as income from undisclosed sources. He also proposed therein to make an addition of Rs. 1,87,291 towards under-valuation of the closing stock by showing a larger quantity of African nuts in the closing stock than the actuals. This inflation in the quantity of African nuts was pointed out with reference to the statement furnished by the assessee before the Cashew Special Officer which showed only a lesser quantity of African nuts. According to the ITO, this inflation of the quantity of African nuts had been made to reduce the value of the closing stock. The ITO thereafter issued a notice on 13-8-1982 u/s 274, read with section 271(1)(c), of the income tax Act, 1961 (''the Act'') a copy of which was furnished to us calling upon the assessee to show cause why penalty should not be imposed u/s 271(1)(c). He followed it up with a further notice dated 19-10-1982 containing elaborate proposals for assessment and calling upon the assessee to offer his explanation, if any. The assessment was thereafter completed on 30-7-1983 on an income of Rs. 3,68,740. The assessment was completed u/s 143(3), read with section 144B, of the Act. The assessee was aggrieved by the assessment on two grounds. According to him, the addition and the assessment in a manner at variance with his return was unjustified. He also contended that the assessment was time-barred.

The Commissioner (Appeals) took the view that the assessment was time-barred. In his view the period of eight years prescribed by section 153(1)(b) of the Act was not available to the ITO as the case was not one falling u/s 271(1)(c). According to the Commissioner, the additions made in the assessment order did not justify the plea that the case was one covered by section 271(1)(c). He, therefore, cancelled the assessment as time-barred without considering the contentions raised by the assessee on the merits. The revenue challenged this order in appeal before the Tribunal. The Tribunal held on an elaborate consideration of the facts and materials in the case that section 271(1)(c) squarely applied to the case and, therefore, the extended time-limit u/s 153(1)(b) was available to the ITO. The Tribunal also held that the ITO had adequate materials before him to hold prima facie that there was concealment of income by the assessee.

In arriving at this conclusion the Tribunal noted in particular the fact that there was variation between the details of the closing stock furnished by the assessee before the ITO and before the Cashew Special Officer. There was material difference in the quantity of African raw nuts which had been inflated before the ITO while a lesser quantity had been disclosed before the Cashew Special Officer. This wrong classification in stock, according to the Tribunal, was done with a view to understate the income by an amount of Rs. 1,86,313 leading to concealment of income. It was based on this and other facts that the Tribunal came to the conclusion that the case of the assessee was one falling u/s 271(1)(c) attracting the extended time limit u/s 153(1)(b). The assessee sought reference of certain questions of law to this Court, but the Tribunal refused to refer any such question. The assessee is, there fore, before us u/s 256(2) of the Act for compelling reference of certain questions of law.

The contention of the counsel for the assessee is that the assessment is time-barred. According to him, the revenue is not entitled to the longer period of limitation provided in section 153(1)(b). To avail of that longer period, the action u/s 271(1)(c) should have been taken before the expiry of what the counsel terms the normal period of two years prescribed for completing an assessment, and a finding rendered on the point with opportunity to the assessee. That is, a finding on this point, after hearing the assessee, should have been rendered on or before 31-3-1982. The officer is not entitled to take advantage of the longer period, by rendering such a finding beyond that date. Reliance for this is placed on the decision of the Calcutta High Court in M.B. Mercantile Co. Vs. Commissioner of Income Tax, and of the Allahabad High Court in Commissioner of Income Tax Vs. Surajpal Singh, , the appeal against which was dismissed by the Supreme Court with a short judgment in Commissioner of Income Tax Vs. Suraj Pal Singh (Decd., by legal representatives), .

Section 153(1) prescribes the period of time within which an assessment should be completed. As it stood at the relevant time it provided that an assessment had to be completed within a period of two years from the end of the assessment year in which the income first became assessable or within a period of eight years from the end of the assessment year in a case, which fell within the purview of section 271(1)(c) or within a period of one year from the date of filing of the return or a revised return under sub-section (4) or (5) of section 139 of the Act, whichever was later. In this case, the return of income was admittedly filed only on 4-11-1981 so that even, according to the assessee, the ITO had time up to and inclusive of 3-11-1982 to complete the assessment. But the assessment was completed only on 30-7-1983 and this, according to the assessee, is time-barred. On the other hand, the standing counsel for the revenue supports the finding of the Tribunal that the case was one which fell within the purview of section 271(1)(c) and, therefore, the assessing authority had a period of eight years within which to complete the assessment.

We do not agree with the counsel for the petitioner that the normal period of time fixed for completing an assessment is only that prescribed by clause (a) of section 153(1). This sub-section contemplates three contingencies of which the periods prescribed by clauses (a) and (c) apply automatically without any volition or finding on the part of the ITO. An assessment, in the normal course, has to be completed, either within the period of two years prescribed by clause (a) or within the period prescribed by clause (c) of section 153(1), according to the circumstances of the cases. These are the normal periods fixed by the section itself, which do not depend upon the existence or otherwise of any other factor. Clause (b), on the other hand, provides for a special situation, where the case is one falling u/s 271(1)(c).

What the Calcutta High Court stated in M.B. Mercantile Co.''s case (supra) was that in a case in which the Assessing Officer seeks to invoke the longer period of time under clause (b), he should record a finding within the normal period of limitation about the applicability of section 271(1)(c). But the Calcutta High Court did not deal with the question as to what is the normal period as that question did not arise in the case. We cannot, therefore, read the decision as laying down that the normal period of time is the one prescribed by clause (a).

So is the case with the decision of the Allahabad High Court in Surajpal Singh''s case (supra) which the counsel stressed had been affirmed by the Supreme Court in the decision we have already referred to. The Allahabad High Court was also not directly concerned with the question as to what is the normal period of limitation. The observations in that judgment and in the judgment of the Supreme Court have to be considered in this background.

The further contention of the counsel is that, to avail of the longer period of time allowed by sub-clause (b) of section 153(1), a categoric finding had to be recorded by the ITO about the applicability or otherwise of section 271(1)(c) to the facts of that case, within the ''normal'' period of limitation, after affording an opportunity to the assessee to be heard. Reliance is placed on the decision in M.B. Mercantile Co.''s case (supra). That was a case where the assessee filed return of its income for the year 1962-63 in July 1962. The four years'' period for completing the assessment expired on 31-3-1967. The ITO did not take any steps to complete the assessment within the said period. On 19-5-1967, the assessee filed a petition u/s 271(4A) disclosing an income of Rs. 2,48,962 for the assessment years 1960-61 to 1964-65 with request to distribute it uniformly for a period of six years from 1960-61. It was only thereafter that the ITO issued, for the first time, the notice u/s 142(1) and completed the assessment u/s 143(3) of the Act. He purported to treat the assessment as in time under clause (b), in the view that the case was one to which section 271(1)(c) applied. In that context, the Calcutta High Court observed that the ITO cannot sit over the assessment with the expectation that after the expiry of the normal period of limitation, some concealment or furnishing of inaccurate particulars of income might come to light. He has no jurisdiction to enlarge the period of limitation unless during the course of the pending assessment proceedings, he has, on the materials, come to the prima facie finding that section 271(1)(c) would be applicable to the facts of the case. He has to record a finding after making necessary enquiries as to why the assessment may not be completed within the normal period of limitation. He has to record the facts regarding the concealment, supported by the materials on record, before the expiry of the normal period of limitation. Before such a finding is arrived at, he should also hear the assessee and after giving an opportunity to the assessee on the question of alleged concealment, he has to record his finding. It is based on these observations that the counsel contends that the instant proceedings are barred by limitation.

Sub-section (1)(b) of section 153 applies to a case where section 271(1)(c) applies to the facts of the case. Since the question is one of extending the period of limitation, necessarily the ITO must apply his mind and find, within the period prescribed by clause (a) or (c), whichever is later, as to whether the case is one to which section 271(1)(c), applies. That finding is to be on an objective consideration of the materials available with him. What the officer is expected to do is only to reach a prima facie conclusion that the case is one to which section 271(1)(c) would be applicable. We do not find any necessity for an elaborate enquiry, or a conclusive finding on the question at this stage, with opportunity to the assessee to show cause or to be heard as to why the extended period may not be applied to this case. Such a requirement is not implicit in section 153(1)(b). All that is required is that the ITO should act on materials and those materials should be sufficient to support a prima facie finding that the ingredients of section 271(1)(c) existed. The ITO cannot keep the Damocles sword hanging over the assessee beyond the period prescribed by clause (a) or (c) and invoke clause (b) at any time he liked in the expectation that he could fish out or come by, some material at a future point of time that will take the case within the ambit of section 271(1)(c). Those materials must be available within the period prescribed by clauses (a) and (c) and the officer must prima facie be satisfied on those materials that the case fell within the purview of section 271(1)(b). We are satisfied on the facts of this case that the ITO had sufficient materials with him to come to a prima facie conclusion that section 271(1)(c) applied to the case. We have already referred to the two notices issued by him on 6-3-1982 and 15-5-1982 pointing out the discrepancy in the closing stock of nuts. He followed it up with a further notice on 13-8-1992 specifically u/s 271(1)(c), calling upon the assessee to show cause why penalty under that section shall not be imposed on him for the reasons stated therein. The subsequent notice dated 19-10-1992 also contained elaborate details about the concealment of particulars. The Tribunal has discussed the matter at length and come to the conclusion that there was clear concealment of particulars, particularly by the mis-classification of the closing stock of the raw nuts. The materials discussed by the Tribunal are sufficient for the ITO to find prima facie that section 271(1)(c) applied to the case. Since that finding had been arrived at before 3-11-1982 when the time allowed for completion of the assessment expired under clause (c), clause (b) was rightly attracted and the assessment could be completed within the extended period of eight years fixed thereunder. The assessment made on 30-7-1983 was, therefore, well within time. On the facts of the case, we do not find any referable question of law.

This petition is, therefore, dismissed.