Commissioner of Income Tax, Tamilnadu - I vs B. Nagi Reddi

Bladubrahmanyam, J.—The question of law referred for our opinion in this Income Tax reference is as follows :

Whether, on the facts and in the circumstances of the case, the reassessment made by the Income Tax Officer to bring to tax the capital gains

which were said to have accrued to the assessee, on the sale of his business, M/s. Chandamama Publications in favour of M/s. Sarada Binding

Works, for the assessment year 1959-60 u/s 147(a) of the Income Tax Act was valid?

The assessee was assessed to Income Tax under the original assessment for the year 1959-60 on June 14, 1960, on a total income of Rs.

71,555. This assessment was subsequently rectified when a mistake which appeared in the record was found out. That, however, need not

concern us in this reference. Subsequently, on November 11, 1963, a notice under s. 148 of the I. T. Act was issued by the ITO to the assessee

on the score that a part of the income had escaped assessment when the assessment was originally made for the assessment year concerned. But

this time 4 years had elapsed from the commencement of the assessment year 1959-60. However, the reopening of the assessment, if it were

under s. 147(a), was quite within time. The ITO purported to reopen the assessment only under s. 147(a) and not under s. 147(b). The a finding

that income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the facts material for

the assessment. The particular amount of income which, according to the ITO, had not been properly disclosed by the assessee in the original

assessment proceedings related to the value of certain perquisites, which the assessee was in receipt of as a member of a closed company of which

he was the managing director. However, after reopening the assessment under s. 147(a) of the Act for the purpose of including the value of the

said perquisites as part of his assessable income, the ITO also included another sum, as capital gains, in the amount of Rs. 1,50,000. This amount

represented the capitalisation of annual payment which the assessee was entitled to get in consideration of the transfer of his interest in a publication

firm called Chandamama Publications. It may be stated that the facts relating to the transfer of this publication business as well as the particulars of

consideration payable to the assessee thereunder had also been the subject of detailed examination by the ITO not only in this assessment year

during the course of the original assessment proceedings but also in the subsequent assessment years where the original assessments had already

been completed. In all those proceedings the view taken by the ITO was that what the assessee got out of the transaction of transfer of the

publication business was not got our of the transaction of transfer of the publication business was not realisation of any capital but only the

substitution of a service of annual payments in consideration of parting with a capital asset. It was on that basis that the ITO had proceeded to tax

the assessee every year in respect of a fixed payment plus a percentage on the profits in the publication business. Notwithstanding this pattern of all

the original assessments, following the assessee''s transfer of the publication business, when the officer reopened the assessment for 1959-60 under

s. 147(a) of the Act, he was disposed to give a different interpretation of the nature of the transaction. He held that the publication business in the

hands of the assessee was a capital asset, as such and since it was transferred must be regarded as a capital gain. The capital gain, according to the

ITO, was to be derived by ascertaining the discounted value of the series of annual payments which the assessee was entitled to get in the transfer.

The officer computed the discounted value to be Rs. 1,50,000 which he regarded as the net capital gain to be brought into the assessment for

1959-60 since the transfer took place during the relevant previous year. When the reassessment was ultimately completed the ITO added this

amount of Rs. 1,50,000 also as part of the total income.

This reassessment was objected to by the assessee in appeal both on merits and on the ground that the officer had no jurisdiction to reopen the

assessment. The assessee contended generally that the reopening of the assessment under s. 147 of the Act was invlaid. The assessee also

contended that, in any case, the inclusion of Rs. 1,50,000 could not be sustained either under s. 147(a) or under s. 147(b). According to the

AAC, there was no warrant for the inclusion of Rs. 1,50,000 since all the material facts relating to the transaction of sale by the assessee of the

publication business were already fully disclosed before the Department even in the original assessment proceedings and it could not be said that

the ITO became aware of the assessability of Rs. 1,50,000 only by virtue of subsequent information which came before him after the original

assessment was completed.

The Department took the matter in appeal before the Tribunal contending that when once the reassessment was sustained as having been

properly reopended under s. 147(a), the entire assessment process was again at large and the officer would have ample jurisdiction to go into all

income which had not already found its place in the original assessment. The Tribunal rejected this contention of the Department. The Tribunal

proceeded to hold that even assuming that s. 147(b) can be invoked in this case, the officer did not come by any subsequent information, sub-

sequent to the original assessment, so as to enable him to exercise his powers under the said provision. The Tribunal, accordingly, dismissed the

departmental appeal and sustained the order of the AAC. It is in these circumstances, that the Tribunal had made a reference to this court on the

question of law which we have set out in the beginning of this judgment.

The short point before us is this : when the ITO reopend an assessment, under s. 147(a), has he jurisdiction to reopen the entire assessment so

as to include in the total income all income which had not already found its place in the original assessment?

A question of this kind was answered against the departmental contention in a Bench decision of this court in Al. Vr. St. Veerappa Chettiar Vs.

Commissioner of Income Tax, . The Bench, while dealing with the reassessment proceedings arising under the provisions of s. 34 of the Indian I.

T. Act, 1922, held that when the reassessment proceedings are validly initiated by the ITO in respect of an item of income falling under s. 34(1) (a)

or under s. 34(1) (b), his jurisdiction is not confined to the items of income in respect of which he had issued notice to the assessee for reopening

the assessment, but his jurisdiction extended to all items of income which had escaped assessment, subject, however, to the limitation that items in

respect of which reassessment proceedings had been of 4 years under s. 147(b) would not be brought within the reassessment initiated under s.

147(a) if the said initiation were subsequent to the four year period. In a later decision of a Bench of this court in T. C. Nos. 945 of 1977, etc., in

judgment dated March 30, 1982, the Bench took a different view Commissioner of Income Tax, Tamil Nadu Vs. Standard Motor Products of

India Ltd., . They held that when once an assessment was reopended, the ITO not only has the jurisdiction, but it will be his duty, to determine the

tax liability of an assessee as a whole, and for that purpose, he would have necessarily taken into account not only the escaped income in respect

of which a notice under s. 147 had been issued, but also the entire income that had escaped assessment during the year. The Bench noticed the

earlier decision in Al. Vr. St. Veerappa Chettiar Vs. Commissioner of Income Tax, , but were inclined to hold that the decision of the earlier Bench

could not be regarded as good in law in view of the subsequent enuciation of law in The Deputy Commissioner of Commercial Taxes Vs. H.R. Sri

Ramulu, .

Mr. Uttama Reddy, learned counsel for the assessee in this case happened to argue at length the unreported decision of this court in T. C. Nos.

945 of 1977 etc. (since reported as Commissioner of Income Tax, Tamil Nadu Vs. Standard Motor Products of India Ltd., . Learned counsel did

not wish to go over the same ground either by way of re-argument or by way of an attempt to obtain a review of the earlier decision of this court.

His endeavor was to supplement his argument in the earlier case by citation of one or two decisions which had been left out of consideration on the

earlier occasion. Learned counsel cited two decisions of other High Courts, one by the Allahabad High Court''s and the other by the Kerala High

Court. The Allahabad High Court''s decision is Sir Shadi Lal and Sons Vs. Commissioner of Income Tax, . That was a case where an assessee

whose claim for exemption had been rejected in the original assessment proceedings re-agitated it in the reassessment proceedings taking

advantage of the fact that the officer had reopend the assessment subsequently. Holding that the assessee was not entitled to reopen a lost claim in

the reassessment proceedings, the Allahabad High Court held that on reassessment what is reopened is not the entire assessment, but is confined

only to matters which are relevant in respect of the income which had not been brought to tax during the course of the original assessment. This

view of the Allahabad High Court was endorsed without any discussion, in the subsequent wealth-tax decision of the Kerala High Court in

Commissioner of Wealth-tax Vs. C. Ravindran and Others, with the only observation that the provisions of s. 147 of the Act were in pari material

with the provisions of the W. T. Act, 1957.

Mr. Uttama Reddy, learned counsel, also brought to our notice a passing observation of the Supreme Court in Commissioner of Income Tax,

Bombay City I Vs. Bombay Dyeing and Manufacturing Co. Ltd., . That was an appeal by special leave in which the limited point for the decision

before the Supreme Court was whether the Tribunal ought to have been directed by the Bombay High Court to state a case and refer certain

questions of law. The assessment happened to be one which had been reopened under s. 147(b) of the Act. At the time of the reopening of the

assessment, the officer apparently had in mind only a particular income. Subsequently, in the course of the reassessment proceedings, he included

certain other incomes to the total income. The contention of the assessee before the Supreme Court was that when once an assessment was

reopened under s. 147(b) of the Act, it was limited to a consideration of the income which had given rise to the reopening and the officer was

precluded from travelling out-side that item of income. This contention was put forward by the assessee in that case since the Tribunal had taken

the view that if a notice under s. 147(b) was valid in one respect, it was sufficient to reopen the entire assessment. On this part of the case,

however, the Supreme Court observed that they were not expressing any opinion as to whether the Tribunal''s view was correct or not.

This last citation by Mr. Uttama Reddy indicates that, as on date, there is no direct decision of the Supreme Court on the point which arises in

this case. That does not obviate the obligation of this court, sitting as a Division Bench, to follow a decision of a previous Division Bench of this

court.

Following the unreported decision of this court in T. C. Nos. 945 of 1977, etc., in judgment dated March 30, 1982 (since reported as

Commissioner of Income Tax, Tamil Nadu Vs. Standard Motor Products of India Ltd., , in which the cases of The Deputy Commissioner of

Commercial Taxes Vs. H.R. Sri Ramulu, and V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra

Pradesh, , are cited, we answer the question of law in this case in the affirmative and against the assessee. There will be no order as