Commissioner of Income Tax vs Laxmidebi Mehta

Ajit K. Sengupta, J.—In this consolidated reference u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment year 1973-74, the following common question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income tax Officer had no jurisdiction to initiate subsequent proceedings u/s 147 of the income tax Act, 1961 ?

Shortly stated, the facts are that the original assessments in both the cases were completed u/s 143(3) of the Act on 17-6-1974. Later, the ITO found that the assessees did not give any indication in the original returns of income that some of the shares sold by the assessees in the previous year relevant to the assessment year were bonus shares for which there was no cost of acquisition and, therefore, correct amount of capital gains escaped assessment. The ITO therefore, issued notice dated 7-3-1976 to both the assessees u/s 148 of the Act. In pursuance thereof the assessees filed returns on 25-2-1977. The ITO thereafter issued notice u/s 143(2) on 17-3-1977. The cases were taken up for hearing on that date but the ITO did not pass any order.

Thereafter, fresh notices dated 6-12-1977 were issued u/s 148, read with section 147(a), of the Act along with letters to the assessees informing them that the earlier proceedings had been dropped. It may be mentioned that the latter notices dated 6-12-1977 issued u/s 148 did not specify if the ITO wanted to reopen the assessments under clause (a) or clause (b) of section 147 but from the circumstances pertaining to this case it appears that the ITO intended to reopen the proceedings under clause (a) of section 147.

No return pursuant to the second notice u/s 148 dated 6-12-1977 was filed by any of the assessees. Accordingly, notices u/s 142(1) of the Act were served upon the assessees fixing the date of hearing on 10-3-1982. The assessees by their written explanations dated 10-3-1982 challenged the jurisdiction of the ITO to re-initiate proceedings u/s 147 after the earlier proceedings had been dropped. The ITO completed the assessments u/s 144 and thereby made addition of the capital gains to the income of the assessees.

Being aggrieved, the assessees preferred appeals before the Commissioner (Appeals) and reiterated the same plea taken before the ITO. The Commissioner (Appeals) did not agree with the contention of the assessees and dismissed the appeals.

The assessees went in appeal before the Tribunal against the order of the Commissioner (Appeals). The Tribunal held that the ITO had no jurisdiction to initiate subsequent proceedings u/s 147 and allowed the assessees'' appeals.

At the hearing before us it has been contended by the learned counsel appearing for the Commissioner that the Tribunal was not justified in holding that the ITO had no jurisdiction to initiate second reassessment proceedings by the notice dated 6-12-1977. It is his contention that so long as the conditions precedent for assumption of jurisdiction u/s 147 are satisfied, the ITO is not precluded from initiating proceedings more than once.

We have considered the contentions raised on behalf of the revenue. On the facts and circumstances of the case, we are, however, not inclined to accept this contention. It is necessary to set out a few further facts found by the Tribunal.

It appears that in the original assessment made on 17-6-1974 a sum of Rs. 1,07,400 was added as capital gains on the sale of shares held by each of the assessees as investment. Subsequently, the revenue audit pointed out that the company whose shares were sold issued bonus shares few years back and as such the cost claimed by the assessees and accepted in the original assessments was grossly over-valued and as a result, income relating to capital gains was under-assessed.

Following the observation of the revenue audit, the ITO initiated proceedings u/s 147 on 5-3-1976 and returns of income were filed pursuant to the notices u/s 148. No order of assessment was passed. The second reopening was also based on the said audit report. The second notice was issued u/s 147(a). The ITO, however, pursuant to the first notice dated 5-3-1976, did not complete the assessments but dropped the proceedings. He could, however, proceed u/s 147(a) although notice might have been issued u/s 147(b). It is not necessary to state in the notice u/s 148 whether the proceeding was initiated u/s 147(a) or section 147(b). The reopening was made within 4 years and, accordingly, the ITO was at liberty to make the assessment either u/s 147(a) or u/s 147(b), but he did not do so.

The question is whether there was any omission or failure on the part of the assessees to disclose fully and truly the material facts. Admittedly, there was no column in the return for showing the number of bonus shares. Once the fact of sale of the shares was disclosed, it was for the ITO to check up the correctness of the assessees'' claim. Even when the second reassessment proceedings were initiated, the ITO did not consider it proper to complete the assessment proceedings already initiated on 5-3-1976. It is not the case of the ITO that the returns were pending pursuant to the first notice dated 5-3-1976 or that the returns were not bona fide returns. It is the case of the assessees that the ITO while making the original assessments did not check up the claim of cost of shares properly and did not complete the assessments.

In Chatturam Horilram Ltd. Vs. Commissioner of Income Tax, Bihar and Orissa, , the Supreme Court held that where earlier assessment proceedings had in fact been taken but failed to result in a valid assessment owing to some lacuna other than that attributable to the assessing authorities, notwithstanding the chargeability of income to the tax, it would be a case of chargeable income escaping assessment and not a case of mere non-assessment of income.

As we have already noted that although the valid returns were filed pursuant to the notices u/s 148, both dated 6-3-1976, the ITO thought it fit to drop the said proceedings. The first assessment proceedings in this case had failed to result in a valid assessment due to the lapse on the part of the income tax authorities which would not clothe them with the jurisdiction to initiate fresh reassessment proceedings on the identical facts and particularly in view of the fact that there was no obligation on the assessee to disclose the number of bonus shares in the return and the ITO applied his mind to the non-disclosure, if any, in the first reassessment proceedings.

The Supreme Court in Gemini Leather Stores Vs. The Income Tax Officer, ''B'' Ward, Agra and Others, observed as follows:

The law laid down in Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, has been restated in several subsequent decisions of this Court: Commissioner of Income Tax, West Bengal, and Another Vs. Hemchandra Kar and Others, ; CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC), and The Commissioner of Income Tax, Calcutta Vs. Burlop Dealers Ltd., , to name only a few. In the case before us the assessee did not disclose the transactions evidenced by the drafts which the income tax Officer discovered. After this discovery the income tax Officer had in his possession all the primary facts, and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the draft could be treated as part of the total income of the assessee during the relevant year. This the income tax Officer did not do. It was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The income tax Officer had all the material facts before him when he made the original assessment. He cannot now take recourse to section 147(a) to remedy the error resulting from his own oversight." (p. 4)

In First First Income Tax Officer, Davanagere Circle Vs. A.Y. Panduranga Rao and Others, , a similar case was considered by the Karnataka High Court. In that case proceedings reopened u/s 147(b) for the assessment year 1962-63 were dropped. Thereafter he initiated the proceedings u/s 147(a) to reopen the assessment for the same year. In that case the Karnataka High Court was of the view that the ITO is not authorised to reopen any proceedings in case of error of judgment on his part.

On the facts and circumstances of this case we are of the view that when the ITO dropped the proceedings after valid returns had been filed pursuant to the notices dated 6-3-1976 issued u/s 148, he had full knowledge that the income arising out of sale of shares escaped assessment. He could have found out all the necessary information pursuant to the reassessment proceedings by issuing appropriate notices. A notice u/s 143(2) was in fact issued after the return in each case had been filed. But for some reason or the other the Assessing Officer thought that the proceedings having been initiated u/s 147(b) he could not bring to tax the income which had escaped assessment for omission or failure on the part of the assessees to disclose fully and truly all material facts necessary for such assessments. Thus, it was plainly a case of error of judgment on his part in not bringing to tax that income. It was not due to any omission or failure on the part of the assessees to disclose fully and truly all material facts relating to such assessments. The Assessing Officer had the audit report regarding non-disclosure at the time of initiation of the first reassessment proceedings where returns had been filed but no valid assessment resulted.

For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the assessees. There will be no order as to costs.

Banerjee, J. -

I agree.