HMT Bearing Limited vs Commissioner of Income Tax and Another

B.P. Jeevan Reddy, J.—This writ petition is directed against the judgment and order of the Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, on a revision petition filed by the petitioner u/s 264 of the Income Tax Act. The facts leading up to the present stage, as found recorded in the orders of the authorities under the Act, are as follows :

The petitioner, "HMT Bearings Ltd. ", is a Corporation owned and controlled by the Central Government. Formerly, it was known as Indo-Nippon Precision Bearings Ltd. ". It was initially a State Government undertaking, but in February, 1980, it was taken over by the HMT and the name changed to "HMT Bearings Ltd. ". The assessment year concerned herein is 1978-79, the previous year being the financial year ending on March 31, 1978. The Income Tax return for the said assessment year had to be filed on or before July 31, 1978, but it was not so filed. On August 10, 1978, a notice undersection 139(2) was issued by the Income Tax Officer, C-Ward, Company Circle, Hyderabad (2nd respondent), calling upon the petitioner to file a return. On receiving the said notice, the petitioner filed Form No. 6 on September 26, 1978, seeking extension of time till December 31, 1978. This request was refused by the Income Tax Officer, yet no return was filed. A notice u/s 142(1) was served on the assessee, posting the case to January 2, 1981. On that date, Mr. Iqbal Kishan, accounts officer of the petitioner, appeared before the Income Tax Officer. But, even on that date, no return was filed. On that date, he was specifically asked to file the return by January 17, 1981. Again it was not filed. Since the assessment was likely to get barred by limitation by March 31, 1981, an order of assessment was made on March 12, 1981, u/s 144 of the Act. No return was filed even by the date the assessment was made. In his assessment order, the Income Tax Officer mentioned that the assessee had merely filed a "computation of income admitting a loss of Rs. 74,79,749". He, however, observed that "in the absence of a return of income, the profit and loss account and the details therefor, loss is not allowed. The total income is determined at Rs. nil.... " On receiving this order, the petitioner filed an application on April 18, 1981, u/s 146 of the Act to reopen the assessment and to accept the return which was submitted along with the said application. By his order dated July 9, 1981, the Income Tax Officer allowed the said petition, observing, that "in view of the assessee''s petition and submission of the manager, accounts, I feel that the assessee had reasonable cause for failure to file the return of income and so I reopen the assessment u/s 146. ..." Accordingly, the Income Tax Officer received the return and made a fresh assessment order on June 16, 1984. The order dated June 16, 1984, recites that the petitioner did not file the return even by the date of the previous assessment order March 12, 1981, in spite of the service of notices under sections 139(2) and 142(1), and that, on this occasion, since the addition proposed was more than Rs. 1,00,000, the procedure u/s 144B was followed and after receiving instructions from the Inspecting Assistant Commissioner, the assessment was being completed. The order then recites that the return now filed along with the application u/s 146 is accepted and the same is treated as a return filed u/s 139(4). Indeed, it appears that, after reopening the assessment, another notice u/s 142(1) was issued, in pursuance of which the petitioner filed the very same return which it had submitted along with its application u/s 146. The order then determines the loss at Rs. 42,92,674 and the depreciation at Rs. 22,40,981, the total of which comes to Rs. 65,33,655. Finally, the order says :

"The assessee filed the return u/s 139(4). As the return is not filed u/s 139(3) of the Income Tax Act, the loss determined is not allowed to be carried forward as per the Supreme Court decision in the case of Commissioner of Income Tax, Uttar Pradesh Vs. Manmohan Das (Deceased), . .."

The purport of this order is that the loss of Rs. 42,92,674 was not allowed to be carried forward to the next year. But, so far as the unabsorbed depreciation of Rs. 22,40,981 is concerned, it was allowed to be carried forward.

Against the assessment order dated June 16, 1984, in so far as it rejected the petitioner''s plea to carry forward the loss, the petitioner filed a revision u/s 264 of the Act before the Commissioner of Income Tax. Two contentions were urged by the petitioner before the Commissioner, viz., (i) that, having accepted the return in pursuance of the order dated July 9, 1981, u/s 146 and having further treated the said return as having been filed u/s 139(4), the Income Tax officer was in error in not allowing the loss to be carried forward, his view is contrary to law; and (ii) that, in this case, a return was in fact filed in September, 1979, which is established by the material placed before the Commissioner and hence the refusal to allow the petitioner to carry forward the loss is not sustainable in law.

Having entertained the revision, the Commissioner issued a notice to the petitioner u/s 263 of the Act to show cause why the order of the Income Tax Officer, in so far as it allowed the petitioner to carry forward the unabsorbed depreciation should not be revised. The petitioner filed its objections after considering which the proposed action u/s 263 was dropped. The Commissioner then took up the petitioner''s revision and dismissed the same by his order dated May 22, 1986, impugned herein. The Commissioner rejected the petitioner''s contention that a return was in fact filed in September, 1979. He referred to various circumstances, and, in particular, to the petitioner''s own applications and representations, militating against the said plea. So far as the question of law is concerned, the Commissioner was of the opinion that inasmuch as "the return filed by the assessee on April 18, 1981, was no return at all and as there was in fact no return filed by the assessee u/s 139, any loss determined by the Income Tax Officer on the basis of such return cannot be carried forward and set off in the assessments for the following years". He observed : "where the two-year period, as referred to above (reference is to sub-section (4) of section 139), has expired but the assessment is open, having been reopened u/s 146, the assessee will have no right to file the return. In the case of the assessee, the return was in fact filed on April 18, 1981, i.e., after the expiry of two years from the end of the relevant assessment year. Therefore, the return actually filed could not be regarded as a valid return, although the statements furnished along with the return of income or loos disclosed in the return, could be takes into consideration by the Income Tax Officer for determining the income or loss in the assessment made..... " The above findings of the Commissioner on both the above questions are challenged in this writ petition.

With a view to clear ground, we may first take up the contention of Mr. Y. Ratnakar that the material placed by the petitioner before the Income Tax Officer did in fact establish that a return was filed in September, 1979. He submitted that the finding of the Commissioner on this aspect is vitiated, inasmuch as he totally failed to refer to, or deal with, the material placed before him, and that he recorded his finding merely on the basis of, and after referring to, the orders and proceedings of the Income Tax Officer. In view of the said contention, we allowed Mr. Y. Ratnakar to invite our attention to that material which, according to him, is material on the said aspect but has not been considered by the Commissioner. Before we refer to the said material, however, it is necessary to notice certain prominent features of the petitioner''s case on this aspect. Even today, the petitioner is not in a position to mention the date on which the return was filed. Neither a copy of the return said to have been submitted is placed before us, nor is any other receipt or acknowledgment in proof thereof available. The records of the Income Tax Officer also do not contain any such return. Now, the material relied upon before us are the following : The first document is an extract of the handing-over note of Sri P. Narasimha Ramulu, said to be an accounts officer of the petitioner, dated September 7, 1979. In this note, under the heading "III. B : Income Assessment of the Company", the following statement occurs :

"The returns for the years 1976-77, 1977-78 and 1978-79 are filed."

The next document is a letter dated September 13, 1985, written by one Mr. K. Narasimhan, I. A. & A. S., Deputy Director of Audit (Defence Services), Southern Command, Madras, addressed to the Deputy Controller of Accounts of the petitioner company, stating that when he took charge of the records from Sri Narasimha Ramulu, he was given a clear endorsement that the return for 1978-79 has already been filed. He, however, stated that he does not remember whether there was an acknowledgment in the file to that effect. The third document is a report of some officer who visited the petitioner''s office and inspected the records in the last week of February, 1980. This report says that the returns of income for the years 1977-78, 1978-79 and 1979-80 have been filed, but that the assessments are yet to be completed. In our opinion, these three documents are totally insufficient to establish the petitioner''s plea. They are merely notes or correspondence of the officers of the company. In this behalf, it must be remembered that when a notice was issued to the petitioner u/s 139(2), the petitioner itself applied for extension of time. Even after the petitioner''s representative appeared before the Income Tax Officer, he was given one more opportunity to file the return by January 17, 1981, but it was not so filed. At no stage was it contended by the petitioner before the Income Tax Officer that a return was already filed. Moreover, the petitioner filed a petition u/s 146 expressly setting out the circumstances in which it could not file the return and submitted a return along with the said application, i.e., on June 14, 1981. Even on this occasion, no statement was made that the return was already filed and that the return submitted along with the petition u/s 146 was a copy of the return already submitted. This plea was taken for the first time before the Commissioner and, in our opinion, he was right in rejecting the plea.

Now, coming to the other question urged by Sri Y. Ratnakar, which is a pure question of law, his contention runs thus : It is no doubt true that the petitioner did not file the return within the time prescribed by section 139(1), nor did it file the return within the time specified in the notice issued u/s 139(2) and extended from time to time, thereby inviting a best judgment assessment u/s 144; but, once the petitioner''s application u/s 146 was allowed accepting the reasons assigned by it for not filing the return within the period specified in the notice u/s 139(2) and the return filed is accepted by the Income Tax Officer, it must be deemed to be a return filed u/s 139 for purposes of and within the meaning of section 80. The Commissioner was not right in holding that the return filed on June 14, 1981, was no return in the eye of law, and that, notwithstanding the reopening of the assessment, the only course open to the Income Tax Officer was to make a best judgment assessment u/s 144. The Commissioner was equally in error in holding that where an assessment is reopened after the expiry of the two-year period, referred to in section 139(4), the assessee has no right to file the return. Once the assessment is reopened and the return is accepted, it is a return filed u/s 139, and is good for all purposes, including section 80.

On the other hand, it is submitted by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, that the power to extend time for filing the return u/s 139(2) cannot be exercised beyond the two-year period prescribed in section 139(4). He submitted that, after the expiry of the said period, the assessment cannot be reopened u/s 146 on the ground mentioned in clause (i) of sub-section (1) thereof, and no return can be allowed to be filed, nor can it be received by the Income Tax Officer. He submitted that the very order of the Income Tax Officer dated July 9,1981, reopening the assessment u/s 146 and receiving the return is itself incompetent and invalid. Alternately, he submitted that the return filed on June 14, 1981, cannot be called a return filed u/s 139. It is a return filed u/s 146 and, therefore. the loss cannot be allowed to be carried forward u/s 80 of the Act, which permits the loss to be carried forward only where a return is filed u/s 139.

For a proper appreciation of the question, it is necessary to refer to the relevant provisions of the Act. Sub-section (1) of section 139 obliges every person, whose total income during the previous year exceeds the prescribed limit, to furnish a return of his income before a particular prescribed date which can, however, be extended by the Income Tax Officer on sufficient cause being shown. Sub-section (2) empowers the Income Tax Officer to call upon a person who, in his opinion, has assessable income, to furnish a return of his income within thirty days of the date of service of a notice. This period can, however, be extended by the Income Tax Officer on sufficient cause being shown. Sub-section (3) provides that where a person, who has not been served with a notice under sub-section (2), has sustained a loss in the previous year and wishes to carry forward the same for future years, he may furnish, within the time allowed under sub-section (1) or within such further time as may have been allowed by the Income Tax Officer in his discretion, a return of loss in the prescribed form, whereupon it shall be deemed to be a return filed u/s 139(1). Sub-section (4) provides a further opportunity to the person to file a return. It says that even where a person has not filed a return within the time prescribed by sub-section (1), or within the time prescribed in the notice issued under sub-section (2), he may still file a return before the assessment is made provided he files the same before the expiry of two years from the end of such assessment year.

Section 142 provides for an enquiry which the Income Tax Officer is entitled to make for the purpose of making an assessment. Section 143 provides for making assessment on the basis of a return made u/s 139, whereas section 144 provides for best judgment assessment. A best judgment can be made in three situations, viz. :

(a) where a person fails to submit a return as required by a notice given u/s 139(2) and has also not filed a return or refused to file a return under sub-section (4) or (5) of section 139 : or

(b) fails to comply with all the terms of a notice issued u/s 142(1) or a direction issued u/s 142(2A); or

(c) having submitted a return, fails to comply with all the terms of a notice u/s 143(2).

Section 146 provides that where an assessment has been made u/s 144, the assessee may apply, within one month of the date of service of the order, to set aside the best judgment assessment. Under this provision, an application to set aside a best judgment assessment can be made on three grounds, viz. :

" (i) that he was prevented by sufficient cause from making the return required under sub-section (2) of section 139, or

(ii) that he did not receive the notice issued under sub-section (1) of section 142 or sub-section (2) of section 143, or

(iii) that he had not a reasonable opportunity to comply, or was prevented by sufficient cause from complying, with the terms of any notice referred to in clause (ii)..."

If the Income Tax Officer is satisfied about the existence of any of the above grounds, he shall cancel the assessment already made and proceed to make a fresh assessment in accordance with section 143 or section 144. Sub-section (2) provides that an order u/s 146 shall be made within ninety days of the filing of the application.

Reference may also be made to section 147, which provides for assessing or reassessing the income which has escaped assessment. The grounds upon which such action can be taken are mentioned in clauses (a) and (b). Section 148 provides that before making an assessment, reassessment or recomputation u/s 147, the Income Tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice u/s 139(2), and thereupon all the provisions relevant and applicable in that behalf apply.

We may also refer to section 80 (as it stood then). It provides that "no loss which has not been determined in pursuance of a return filed u/s 139, shall be carried forward and set off" under the preceding provisions.

The precise question which has to be answered is, whether a return filed and accepted in pursuance of an order made u/s 146, particularly on the ground mentioned in clause (i) of sub-section (1) thereof, can be treated as a return filed u/s 139 for the purpose of section 80 ? If it is, the losses can be carried forward; if it is not, the losses will not be allowed to be carried forward. The Commissioner has taken the view - which is supported by learned standing counsel for the Revenue - that a return filed beyond the periods prescribed by the several provisions in section 139, is no return at all. He has opined that, after the expiry of the period of two years prescribed in section 139(4), the assessee has no right to file the return, nor is the Income Tax Officer empowered to receive it. According to him, in such a case, there is no other option left to the Income Tax Officer except to make an assessment u/s 144. According to learned counsel for the assessee, this view is plainly contrary to the express language, spirit and intendment of section 146. Both counsel stated that there is no reported decision of any court on the question at issue.

In our opinion, where a best judgment assessment is set aside u/s 146 on the Income Tax officer being satisfied that the assessee was prevented by sufficient cause from making the return required under sub-section (2) of section 139, he would naturally have to receive the return filed along with the application u/s 146 or within such time as he may specify. Such a return would then be a return filed u/s 139 for the purpose of section 80, as it then stood. (In this connection, it is necessary to mention that section 80 has been amended by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985, and the words "under section 139" have been substituted by the words "within the time allowed under sub-section (1) of section 139 or within such further time as may be allowed by the Income Tax officer"). It would not be correct to say that even though a best judgment assessment is set aside u/s 146 on the ground mentioned above, the Income Tax Officer has no power to receive the return if, meanwhile, the period of two years prescribed in sub-section (4) of section 139 has expired. We see no warrant for reading such a limitation into section 146. On the contrary, section 146 expressly says that after setting aside the best judgment assessment, the Income Tax Officer shall "proceed to make a fresh assessment in accordance with the provisions of section 143 or section 144". And both sub-sections (1) and (2) of section 143 open with the words "where a return has been made u/s 139. ..." By bringing in section 143, section 139 has also been brought in by necessary implication. This circumstance also reinforces our opinion that the return so filed and accepted after the passing of an order u/s 146 should be deemed to be a return filed in pursuance of the notice issued under sub-section (2) of section 139.

Learned standing counsel for the Revenue argued, on the basis of certain observations in the decision of this court in CIT v. Padma Timber Depot [1988] 169 ITR 646, that any return filed beyond the periods prescribed in section 139 is no return in the eye of law and that the only way in which such a return can be accepted is by issuing a notice u/s 148, read with section 147. It is submitted that in no other situation can the return be accepted. We are, however, of the opinion that where an assessment is reopened u/s 146, particularly on the ground mentioned in clause (i) of sub-section (1) thereof, it would be a contradiction in terms to say that the Income Tax officer has no power to receive or accept a return filed along with the petition u/s 146 or filed within such time as may be specified by the Income Tax Officer in his order u/s 146. It may be that the assessment made in such a case would be an assessment u/s 146, as seems to have been assumed in Commissioner of Income Tax, Assam, Tripura, Manipur and Nagaland Vs. Rameshwarlal Sanwarmal, ; but, none the less, it must be said that the return so filed is a return made in pursuance of the notice issued under sub-section (2) of section 139. Once this is so, section 80 is satisfied and the losses determined have to be carried forward as provided therein.

Learned standing counsel for the Revenue submitted that an order u/s 146 cannot be made beyond the two-year period prescribed in sub-section (4) of section 139. We are unable to agree. We see no warrant to read a period of limitation into section 146 when Parliament has not done so. The only period of limitation Parliament has prescribed is that an application u/s 146 ought to be made within one month from the date of service of a notice of demand issued in consequence of the assessment sought to be set aside - and no other. The circumstance that a notice under sub-section (2) of section 139 can be issued only before the end of the relevant assessment year, or that the notice should specify only a period of thirty days from the date of its service for filing the return, or the further circumstance that the power to extend time conferred by the proviso is not unbridled, do not and cannot lead to the conclusion that the period mentioned in sub-section (4) of section 139 ought to be read into section 146. Sub-section (4) merely gives yet another opportunity to the assessee to file the return before the assessment is made, even though he may not have filed the return within the period prescribed in sub-section (1) or in the notice issued under sub-section (2); he can do so provided he files the return before the expiry of two years from the end of the relevant assessment year. In the very scheme of things, thus, the period prescribed in sub-section (4) cannot be applied or extended to section 146. We must, however, say that the power to extend time, conferred on the Income Tax officer by the proviso to sub-section (2), must be exercised fairly and having regard to the relevant facts and circumstances of the case. It is a discretion conferred upon him, and like any other discretion, it has to be exercised fairly having regard to the circumstances of the case and also keeping in view the provisions of the Act. It may be that since the original notice itself provides for thirty days'' time, the extended period cannot be too long; hut that again depends upon the facts of each case. The Income Tax Officer shall keep in mind, while extending the time, that the statute itself prescribes only a period of thirty days to be given in the notice issued under sub-section (2).

For the above reasons, we allow the writ petition and direct the Income Tax officer to allow the petitioner-assessee to carry forward the loss in accordance with law. There shall be no order as to costs.

Before parting with this case, we feel constrained to make a few observations. At the relevant time the petitioner, "Indo-Nippon Precision Bearings Ltd. ", was a fairly large concern, owned by the State Government. It is rather surprising, nay, even shocking, that a return of its income/loss was not filed by the appropriate authorities within the prescribed time. It is sad to see that in spite of a notice given under sub-section (2) and in spite of giving time repeatedly, spread over three years, for filing such a return, no return was filed. It passes our comprehension as to why this should have been so ? It is inconceivable that such a thing could have happened in a private sector organisation. Probably, because it was a public sector organisation, the persons responsible for filing the return were not bothered - for public money is nobody''s money. It is a matter of regret that very often persons in charge of such public undertakings have no sense of discipline or commitment necessary for running such enterprises. They also appear to be unaccountable to anyone. This is probably one of the main reasons why the public sector in this country is losing hundreds of crores of rupees every year, notwithstanding monopolistic conditions in several sectors. In our opinion, this is a matter which the concerned authorities must enquire into and determine the persons responsible for this state of affairs and deal with them appropriately. It is merely fortuitous that, notwithstanding the said default, the company is saved because of the language of section 80, as it then stood. Today it may not be saved in similar circumstances.

A copy of this order may be communicated to the Secretary, Ministry of Industries, Government of India, New Delhi, and also to the Secretary, Ministry of Industries, Government of Andhra Pradesh, Hyderabad.