Commissioner of Income Tax vs Ranicherra Tea Co. Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the Income Tax Act, 1961, at the instance of the Revenue, the following question of law has been referred by the Tribunal for the opinion of this court:

''''Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the Commissioner of Income Tax (Appeals) order determining the loss at Rs. 4,20,000 which was done without any verification of the various claims made in the return as against the assessment order passed by the Income Tax Officer u/s 144 at "nil" income ?"

This reference relates to the Income Tax assessment of the assessee-company for the previous year, being the calendar year 1981 corresponding to the assessment year 1982-83. In respect of the said year, the assessee-company filed its return of total income on June 26, 1982, declaring a net assessable loss of Rs. 4,45,140. The said return was accompanied by the audited profit and loss account, balance-sheet and other relevant details in respect of the calendar year 1981. The Income Tax Officer issued a notice u/s 143(2) of the Income Tax Act, 1961, asking the assessee-company to produce its books of account and other evidence on which it may rely in support of the return filed by it. The authorised representative of the assessee sought time to furnish the details and produce books of account. The case was adjourned from time to time and ultimately when there was no compliance, on May 27, 1985, the Income Tax Officer felt that the assessee-company was not prepared to co-operate with the Department and, therefore, proceeded to make an ex parte assessment to the best of his judgment u/s 144 of the Income Tax Act, 1961. The Assessing Officer only observed that, in the absence of accounts and other details and there being nothing on record to establish the assessee''s claim of loss, he was not prepared to accept the loss return. The Income Tax Officer, therefore, rejected the loss return filed by the assessee and computed the total income at "nil".

The assessee-company filed an appeal against the said ex parte assessment to the Commissioner of Income Tax (Appeals) and submitted that the Income Tax Officer erred in ignoring its audited accounts and in rejecting its book results. It was also submitted on behalf of the assessee that proper opportunity was not given to the assessee-company for complying with the notice issued to it u/s 143(2) of the said Act and, in any event, the ex parte assessment made by the Assessing Officer without looking into the audited accounts filed with the return as well as past assessment records of the assessee-company was wholly arbitrary, mala fide, capricious and based on conjectures and surmises and was also contrary to the provisions of law. The Commissioner of Income Tax (Appeals) found that, even if there were good reasons for passing an ex parte order, the Income Tax Officer was wholly unjustified in totally ignoring the loss claimed by the assessee-company. The Commissioner observed that the Income Tax Officer should have based his judgment on the records of the assessee-company for earlier years. He could have derived support from the trend in the tea trade during the calendar year 1981 ; he could have looked around and seen how other tea companies were functioning. Instead of doing this, the Income Tax Officer was piqued and peeved by the behaviour of the appellant and passed his impugned assessment order ignoring the return and the accompanying statements. The Commissioner of Income Tax (Appeals) noted that the assessee was a public limited company and that its shares were regularly quoted on the Calcutta Stock Exchange. The Commissioner also looked into the past assessment records of the assessee-company and found that, in the immediately preceding year, that is to say, in the assessment year 1981-82, the Income Tax Officer, under directions from the Inspecting Assistant Commissioner given in the course of proceedings u/s 144B of the said Act, had determined the loss of the appellant before applying rule 8 of the Income Tax Rules, 1962, at Rs. 24,46,384 and in making the said assessment, the aggregate disallowance made was only Rs. 12,490.

The Commissioner of Income Tax (Appeals), therefore, observed that, in the light of the past records, there was absolutely no reason for the Income Tax Officer to disallow the claim of loss in toto when the audited accounts and certain other details were already filed for the assessment year 1982-83 along with the return. The Commissioner of Income Tax (Appeals), therefore, himself proceeded to compute the total income of the assessee-company after looking into the audited accounts and past records. In doing so, the Commissioner of Income Tax (Appeals) made an addition of Rs. 30,000 on account of expenses in addition to various other disallowances and ultimately computed the loss of the assessee-company for the said year after giving effect to rule 8 of the Income Tax Rules, 1962, at Rs. 4,20,900 as against the returned loss of Rs. 4,45,140.

The Revenue appealed to the Appellate Tribunal against the said order passed by the Commissioner of Income Tax (Appeals). The Tribunal found that the Income Tax Officer, while framing the ex parte assessment, had not given any basis for determining the assessee''s income at "nil" and erred in totally ignoring the loss disclosed by the assessee-company in its return of total income for the assessment year 1982-83. The Tribunal observed that, while framing an ex parte assessment u/s 144, it was the duty of the Income Tax Officer to consider all the relevant materials available to him including the return filed by the assessee-company for the earlier assessment years as well as the assessments made in those years. The Income Tax Officer failed to consider the aforesaid material in the instant case of the assessee-company including the audited accounts for the year under reference. In this background, the Tribunal noted that the Commissioner of Income Tax (Appeals) was fully justified in determining the total loss at Rs. 4,20,900 after looking into the past records of the assessee-company including the audited accounts for the year under appeal.

The Revenue is now in reference before us. It is no doubt true that the facts of this case justified an ex parte best judgment assessment u/s 144 because of the defaults committed by the assessee, but in making a "best judgment assessment", the Assessing Officer cannot act dishonestly or vindictively or capriciously because he must exercise the judgment in the matter. In making a "best judgment assessment", the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes and that although he is not bound by strict judicial principles, he should be guided by rules of justice, equity and good conscience. The limits of the power of the Assessing Officer are implicit in the expression "best of his judgment". Though there is an element of guess work in a "best judgment assessment", it shall not be a wild one but shall have reasonable nexus to the available material and the circumstances of each case. In State of Orissa Vs. Maharaja Shri B.P. Singh Deo, , the Supreme Court has observed (at page 691) :

"Apart from coming to the conclusion that the material placed before him by the assessee were not reliable, the Assistant Collector has given no reasons for enhancing the assessment. His order does not disclose the basis on which he has enhanced the assessment. The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power ; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this court."

As it would appear from the narration of the facts, the Income Tax Officer did not disclose any basis or reasons for determining the quantum of loss as "nil". He should have given his reasons for arriving at a particular figure of income so that the assessee may be enabled to appreciate the mental process leading to the assessment and the figure assessed. Such order being subject to appeal needs also to be a speaking order. The Assessing Officer did not at all look into the audited balance-sheet accompanying the return nor did he reject the accounts as unreliable.

The question, however, remains as to whether the appellate authority should have in such circumstances remanded the matter to the Assessing Officer for determining the loss on the basis of the materials on record. In our view, in disposing of an appeal from an assessment u/s 144, the first appellate authority need not confine itself only to the materials on record at the time of assessment. It may make such enquiries as it thinks fit. The first appellate authority has all the powers which the original authority may have. In the absence of any statutory provision to the contrary, the appellate authority is vested with all the plenary powers, which the subordinate authority has in the matter.

In Commissioner of Income Tax, U.P.,Lucknow Vs. Kanpur Coal Syndicate, , the Supreme Court held that the Appellate Assistant Commissioner has plenary powers in disposing of an appeal. The scope of his powers is conterminous with that of the Income Tax Officer. He can do what the Income Tax Officer can do and also direct him to do what he has failed to do. This view was reiterated by the Supreme Court in Jute of Corporation of India Ltd. Vs. Commissioner of Income Tax and another,

In this case, the Commissioner of Income Tax (Appeals) himself looked into the audited accounts as well as the past assessment records of the assessee-company and, thereafter, computed the total income of the assessee for the assessment year 1982-83. The procedure adopted by the Commissioner of Income Tax (Appeals), in our opinion, was fully justified. In fact, the Income Tax Officer should have himself followed the same procedure which the Commissioner of Income Tax (Appeals) did. The Income Tax Officer, in our view, was not justified in rejecting the loss return filed by the assessee-company in toto without examining the audited profit and loss account, balance-sheet and other statements accompanying the return as well as the past assessment records of the assessee-company.

We, therefore, answer the question referred by the Tribunal in the . affirmative and in favour of the assessee.

There will be no order as to costs.

Shyamal Kumar Sen, J.

I agree.