Commissioner of Income Tax vs Royal Textiles

Sethuraman, J.—The Appellate Tribunal has referred the following question u/s 256(1) of the I.T. Act, 1961 (hereinafter called ""the Act""),

at the instance of the Commissioner of Income Tax :

Whether it is open to the department to treat the return filed by the assessee on March 10, 1968, as invalid for the purpose of charging interest

u/s 139(1) of the Income Tax Act, 1961, after having made a provisional assessment thereon, despite the fact that the said return was not in the

prescribed form and was not accompanied by the prescribed statements ?

The assessee is a firm consisting of three partners which filed a return in Form No. 3 on March 10, 1968, disclosing an income of Rs. 1,90,000

for the assessment year 1967-68. The ITO made a provisional assessment u/s 141 of the Act on May 20, 1968, and issued a demand requiring

the assessee to pay Rs. 21,516 by way of tax. On August 20, 1968, the ITO sent to the assessee a letter stating that he should file the return in

Form No. 2 and enclosed a form with that letter. The assessee paid the tax provisionally assessed on September 2, 1968. He took action on the

ITO''s letter dated August 20, 1968, only on October 15, 1970. On that date, he filed the return in Form No. 2 enclosing with it the statements of

adjusted total income, trading and profit and loss account, balance-sheet, etc. The ITO completed the assessment on December 28, 1970,

determining the taxable income at Rs. 2,79,260 and the tax payable-was assessed at Rs. 25,843. He charged interest u/s 139(1) in a sum ""of Rs.

3,082, calculating the interest for the period from January 1, 1968, to March 10, 1968. This period was taken as representing, the delay in filing

the return.

It appears that the revenue audit raised an objection that the return filed on March 10, 1968, was not a valid one and that since the valid return

was filed only on October 15, 1970, interest should have been charged for the period from January 1, 1968, to October 15, 1970. The Addl. CIT

initiated proceedings u/s 263 as he considered that the ITO should have charged interest for the period from January 1, 1968, to October 15,

1970, and his failure to do so was an error prejudicial to the interest of the revenue. The assessce objected to the proceedings u/s 263, but the

Commissioner overruling the said objection directed the ITO to charge further interest for the period from March 11, 1968, to October 15, 1970,

at the prescribed rate and in the prescribed manner. He was also directed to issue a fresh demand notice for the amount due.

The assessee appealed to the Tribunal, which, by its order dated April 21, 1976, held that it was not justifiable for the department to charge

interest u/s 139(1) for the period beyond March 10, 1968, after making a provisional assessment on the basis of the return submitted on March

10, 1968. It was also pointed out that it was not open to the department to contend that the said return was invalid and that interest should be

charged for the period subsequent to March 10, 1968. This order of the Tribunal is now under reference on the question already extracted.

Section 139(1), as it stood at the relevant time, provided as follows :

Every person, if his total income...exceeded the maximum amount which is not chargeable to Income Tax, shall furnish a return of his income

......in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed......

The proviso to Section 139(1) empowered the ITO to extend the date for furnishing the return---

in the case of any person whose total income includes any income from business or profession the previous year in respect of which expired after

the 31st day of December of the year immediately preceding the assessment year, up to the 31st day of December, of the assessment year without

charging any interest.

Thereafter interest at 9% per annum was liable to be charged. The starting point of charging of interest is the 1st day of January following the

commencement of the assessment year and the termination point is the date of filing of the return. There are three forms prescribed under the Act.

Form No. 2 is the form for return of income for persons other than companies. Form No. 3 is the return of income for persons other than

companies, co-operative societies and local authorities whose total income does not exceed Rs. 15,000 or whose total income exceeds Rs.

15,000 but who have no income under the head "" Business or profession "". In the present case, even in the original return the assessee disclosed an

income of Rs. 1,90,000. It was actually assessed on a higher figure. Therefore, the appropriate form in the present case should have been only

Form No. 2 and not Form No. 3.

The question that now arises is--whether the return filed under Form No. 3 could be treated to be non est or invalid so that the return filed on

October 15, 1970, in Form No, 2 could alone be taken as the proper or appropriate return. Section 139(1), as already extracted, requires the

assessee to file the return in the prescribed form. In Malik Damsaz Khan v. CIT [1947] 15 ITR 445, the Privy Council was concerned with a case

where the asseasee who had been carrying on business as a supply contractor submitted a return in pursuance of a notice issued u/s 22 of the

Indian IT. Act, 1922, showing an income of Rs. 10,000 under the head "" Business "". The declaration was duly signed but the details required by

note 5(b) of the Form were not supplied. The assessee did not have proper accounts, and he admitted that the return had been filed only on the

basis of an approximate calculation of his income. The ITO after making enquiries assessed him on a net income of Rs. 1,00,488. The assessment

was completed u/s 23(3) of that Act. The AAC to whom the assessee appealed came to the conclusion that the assessee had concealed

particulars of his income and had deliberately furnished inaccurate particulars thereunder and he, therefore, imposed a penalty of Rs. 14,000 u/s 28

of that Act. The assessee contended that he had not filed a valid return and that the assessment must, therefore, be deemed to have been made u/s

23(4) of that Act, that he had no right of appeal to the AAC and that consequently the AAC had no jurisdiction to impose a penalty. The Privy

Council held that it was clearly competent for the ITO to accept the return as a valid one and proceed to assess the assessee u/s 23(3) and that

neither the incompleteness of the return nor the fact that in an accompanying statement the assessee referred to his return as an estimate could be a

possible justification for the plea that the appeal was incompetent or that the AAC had no jurisdiction to entertain the appeal which the assessee

himself had initiated. Consequently, the order u/s 28 imposing the penalty was found to be a valid order. The principle of this decision is that the

return filed by the assessee can be treated to be a valid return and processed accordingly, in spite of its being incomplete or in spite of non-

compliance with some legal requirements in its submission. The Supreme Court in The Commissioner of Income Tax, Bombay Vs. Ranchhoddas

Karsondas, Bombay, , considered the validity of a return where the assessee had shown the income below the taxable limit. The Supreme Court

pointed out (p. 575) :

It is a little difficult to understand how the existence of a return can be ignored, once it has been filed......No doubt it is futile for a person not

liable to tax to rush in with a return, but the return in law is not a mere scrap of paper. It is a return, such as the assessee considers represents his

true income.

Though the assessee in the present case had used a wrong form, it did not mean that the return was non est so that the return which was filed on

October 15, 1970, could be treated as the only return filed by the assessee. In the plethora of forms that are prescribed, sometimes the assessee

makes mistakes. We would be under a tyranny of the rules, if we subscribe to the view that an innocuous mistake on the part of the assessee in

choosing a wrong form is so serious as to result in the return being treated as a mere scrap of paper and to visit him with a penalty of a substantial

amount on the basis that this return solemnly filed is "" nonexistent "". In the present case, there is nothing to show that the assessee deliberately

chose a wrong form and filed the return in that form. It is also to be remembered that the ITO himself accepted this return for making a provisional

assessment u/s 141, which he would not have been in a position to make if it was a mere scrap of paper. Section 141 of the Act contemplates

provisional assessment "" being made by the ITO "" at any time after the receipt of a return made u/s 139 "". It is not the department''s case that the

provisional assessment made was an invalid assessment. When the ITO himself treated the return filed by the assessee on March 10, 1968, as a

valid one, and proceeded on that basis, it did not lie in his mouth to say that the same return on which he has acted is a non-existent return. After

all, he could not have acted on the basis of a return which did not exist in law and made a demand. In addition he had also levied interest u/s

139(1) on the basis that the return was actually filed only on March 10, 1968. Though in the present proceedings the Commissioner has directed

levy of interest only from March 11, 1968, up to October 15, 1970, in effect what he has done is to ignore the return filed on March 10, 1968,

and proceeded to hold that interest was liable to be charged from January 1, 1968. The Commissioner was not acting within the scope of the

powers under the Act, as in exercising his power of revision he was doing what the ITO had to do. In the circumstances, as the ITO himself had

acted on the return and could not have charged interest subsequent to March 10, 1968, which is the date of filing of a return before him, the

Commissioner bad no power to do- so. In this case, there is no error on the part of the ITO which can be described as prejudicial to the revenue

which alone can give jurisdiction to the Commissioner to act u/s 263 of the Act. When there was no error, there is no question of any prejudice.

The learned counsel for the revenue then referred to the decision of the Calcutta High Court in Maya Debi Bansal Vs. Commissioner of

Income Tax, , That was a case where the assessee submitted a return for the assessment year 1960-61, in the form prescribed under the Act of

1961 which came into force only from 1962-63. The said form was sent to the assessee by the ITO. Against the assessment made accepting the

said form, the assessee filed an appeal before the AAC contending, inter alia, that her return having been filed in the new form, the entire

proceedings were illegal and void. The AAC upheld this contention of the assessee and directed the ITO to proceed on the basis that the assessee

had not filed a return in response to the notice u/s 148 issued by him. The revenue thereafter appealed to the Tribunal and the Tribunal held that the

fact that a wrong return form was forwarded to the assessee would not absolve the assessee from filing the return in the correct form and the ITO

had no legal obligation to issue any form. The matter was taken on reference and the Calcutta High Court held that the Tribunal was not justified in

holding that the assessment should be treated as one u/s 144 on the basis that the assessee had not filed a proper return. The learned judges held

(p. 131) :

There has been a return, though an invalid return, on the basis of which an assessment order u/s 143(3) of the Act has been made. This cannot be

treated as best judgment assessment as if no return has been filed.

This decision lays down that even an "" invalid "" return or a return in a wrong form was a proper return. If in a case where the assessee filed the

return in a wrong form prescribed by a different statute that return cannot be said to be a non-existent return, the position would be a fortiori where

the assessee files a return by using a wrong form prescribed by the same statute.

For the above reasons, the question referred is answered in the negative and in favour of the assessee. The assessee will be entitled to his

costs. Counsel''s fee Rs. 500.