Inventors Industrial Corpn. Ltd. vs Commissioner of Income Tax

T.D. Sugla, J.—The question of law referred to this court by the income tax Appellate Tribunal u/s 256(1) of the income tax Act, 1961, is:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in taking the view that the Appellate Assistant Commissioner was not justified in entertaining the ground regarding the validity of initiation of reassessment proceedings u/s 147(a) of the Act when the assessee had not challenged the same at the time of filing first appeal against the order of the income tax Officer passed on March 28, 1970?

The assessee is a company. The proceedings relate to its assessment year 1958-59. The assessment was originally completed u/s 23(3) of the Indian income tax Act, 1922, on August 27, 1959, computing nil income after setting off loss brought forward for 1953-54. Declared income was Rs. 688. The assessment was, thereafter, reopened u/s 147(a) by serving notice u/s 148 on the assessee on March 17, 1967. Reassessment was completed u/s 143(3) read with section 147(a) on March 18, 1970. Total income therein was determined at Rs. 1,16,184. The amount added in the reassessment was Rs. 1,16,184. This represented a number of cash credits. According to the income tax Officer, the nature and source thereof was not satisfactorily explained and that amount, therefore, was added as income from undisclosed sources.

In the appeal against the above order of reassessment, the pleading was that the assessee was in a position to prove the genuineness of the parties and that it could not do so at the time of hearing before the income tax Officer as the creditors were from far away places. The income tax Officer was present at the time of hearing. It appears that, with the consent of the parties, the Appellate Assistant Commissioner set aside the reassessment so that opportunity could be given to the assessee to prove its case. The appellate order is dated November 28, 1970.

In pursuance of the above order of the Appellate Assistant Commissioner, the income tax Officer passed a fresh reassessment order on January 4, 1972, of course, after giving the assessee an opportunity to prove the genuineness of the credits. However, he again held that the cash credits were not satisfactorily proved and treated the amount of Rs. 1,16,184 as the assessee''s income from undisclosed sources.

The assessee again filed appeal there against. The grounds taken in appeal memo were:

The learned income tax Officer has erred in adding an amount of Rs. 1,16,184 as the income of the assessee for the assessment year 1958-59.

The learned income tax Officer has further erred in stating that the assessee has not produced any evidence or additional information in the matter.

At the time of hearing, however, a new ground was taken for the first time challenging the validity of the initiation of the proceedings u/s 147(a). For reasons given in paragraphs 7 and 8 of the order, the Appellate Assistant Commissioner accepted the assessee''s submission following the Calcutta High Court decision in the case of Textile Mills Agents (P.) Ltd. v. ITO [1972] TLR 1135, the Karnataka High Court decision in the case of Commissioner of Income Tax, Bangalore Vs. Hajee C.M. Abdul Rahiman Khan, , the Gauhati High Court decision in the case of Assam Cane Suppliers Vs. Income Tax Officer, ''A'' Ward, , the Supreme Court decisions in the cases of Calcutta Discount Company Limited Vs. Income Tax Officer, Companies District, I and Another, and The Commissioner of Income Tax, Calcutta Vs. Gillanders Arbuthnot and Co., and the Gujarat and Madras High Court decisions in the cases of CIT v. Bhanji Lavji 70 ITR 502 and S. Hastimal Vs. Commissioner of Income Tax, Madras, respectively. It was held that the income tax Officer was not justified in invoking the provisions of section 147(a). It was in substance held that the initiation of reassessment proceedings was without jurisdiction. The assessment order was, accordingly, cancelled. This appellate order is dated June 1, 1973.

The Department filed appeal. The ground of challenge was that the Appellate Assistant Commissioner had no jurisdiction to entertain the ground about the validity of the reassessment raised before him for the first time in appeal arising from reassessment made in pursuance of the appellate order dated November 28, 1970, which had become final. The Tribunal agreed with the Department''s contention that the Appellate Assistant Commissioner was not justified in entertaining the ground regarding the validity of initiation of the reassessment proceedings u/s 147(a) as the assessee had not challenged the reassessment in the appeal filed for the first time against the order of reassessment. The only contention raised in that appeal was that the assessee was in a position to prove the genuineness of the parties but was not able to before the income tax Officer for certain reasons. That contention was accepted and the reassessment order was set aside for the purpose of giving the assessee full opportunity to prove its case. The scope of fresh reassessment made in pursuance of the appellate order as well as appeal against such a reassessment, according to the Tribunal, was limited. The Tribunal, accordingly, set aside the order of the Appellate Assistant Commissioner on this ground and restored the appeal to his file directing him to decide the appeal on merits as regards the addition of the cash credits.

The facts are not in dispute. Shri Sathe, learned counsel for the assessee, has contended that the Tribunal ought to have appreciated that a ground which goes to the root of the matter can be taken at any stage of the proceedings. Challenge to the validity of the initiation of proceedings u/s 147(a), he stated, goes to the root of the matter. In support, he placed reliance on the Gujarat High Court decisions in the case of Commissioner of Income Tax, Gujarat II Vs. Nanalal Tribhovandas and Another, and P. DOSHI Vs. COMMISSIONER OF Income Tax, GUJARAT, and a recent Supreme Court decision in the case of Jute of Corporation of India Ltd. Vs. Commissioner of Income Tax and another, ; he stated that the order of the Tribunal must be set aside.

Shri Jetley and Dr. Balasubramanian for the Department, on the other hand, reiterated that the assessee had not challenged the initiation of reassessment proceedings u/s 147(a) before the income tax Officer. Nor was the initiation of reassessment proceedings challenged before the Appellate Assistant Commissioner in the appeal filed against the reassessment order on the earlier occasion before the passing of the order of remand dated November 28, 1970. The validity of initiation of reassessment proceedings was also not challenged in the reassessment proceedings before the income tax Officer in pursuance of the appellate order of the Appellate Assistant Commissioner. Even in the memo of appeal filed before the Appellate Assistant Commissioner for the second time against the fresh reassessment, no such ground was taken. It was contended by learned counsel for the Revenue that the assessee was, therefore, precluded from taking such a ground before the Appellate Assistant Commissioner as an additional ground in these proceedings. It was pointed out that though the ground raised, goes to the root of the matter, it was not in the nature of a pure question of law. The contention now raised required examination of the reasons recorded by the income tax Officer for initiation of reassessment proceedings with a view to consider whether the reasons so recorded have a reasonable or direct nexus with the formation of belief about the concealment of income. In the two Gujarat High Court decisions, it was pointed out that the fact that the assumption of jurisdiction was not proper and valid was evident on the face of the record. In one case, 15 days'' time was given for filing return in the notice as against the statutory requirement of not less than 30 days. In another case, the reasons for initiation of reassessment proceedings were not recorded at all which again was in violation of the statutory provisions of section 148(2). So far as the Supreme Court decision in Jute of Corporation of India Ltd. Vs. Commissioner of Income Tax and another, is concerned, it was stated that the observations made therein were general observations. It was submitted that the general observations made by the Supreme Court in the above case regarding the wide powers of the Appellate Assistant Commissioner could be applied to a situation only when the Appellate Assistant Commissioner was seized of the appeal for the first time and not to the proceedings against fresh reassessment made in pursuance of the order of remand passed by the Appellate Assistant Commissioner in the earlier appeal.

In order to answer the question of law referred to us, it is first necessary to consider the nature of the new ground raised, i.e., whether it really questions the jurisdiction of the income tax Officer to make reassessment, in other words, whether it goes to the very root of the matter. We will then have to consider whether such a ground can be raised for the first time before the Appellate Assistant Commissioner, jurisdiction to make reassessment not having been challenged before the income tax Officer himself. Lastly, we will have to consider whether the fact of such a ground not having been raised in the earlier appeal against the order of reassessment completed u/s 147/143(3) would make any difference in the legal position.

For this purpose, it is desirable to refer to the new ground urged by the assessee in appeal in the words of the Appellate Assistant Commissioner himself:

Mr. Mehta attended before he has first challenged the validity of the initiation of the proceedings u/s 147(a) of the Act. In his view, the said provisions of section 147(a) can be invoked only in a case where the income tax Officer had reason to believe that by reason of the omission or failure on the part of the assessee to make a return u/s 139 for any assessment year to the income tax Officer or to disclose fully and truly all material facts for the assessment for that year, income chargeable to tax had escaped assessment for that year..." (Note : the original order contains grammatical mistakes and typing errors. The extracted portion reproduced as it is.)

Having regard to the following observations of the Supreme Court in the case of Commissioner of Income Tax, Gujarat II Vs. Kurban Hussain Ibrahimji Mithiborwala, :

It is well-settled that the income tax Officer''s jurisdiction to reopen an assessment u/s 34 depends upon the issuance of a valid notice. If the notice issued by him is invalid for any reason, the entire proceedings taken by him would become void for want of jurisdiction.

and the following observations of the Supreme Court in Johri Lal (H.U.F.), Agra Vs. The Commissioner of Income Tax, :

Before proceedings u/s 34(1)(a) could be validly initiated, the income tax Officer must have reasons to believe that by reason of the omission or failure on the part of the assessee to make a return of his income u/s 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits and gains chargeable to income tax have escaped assessment for that year, or have been under assessed, or assessed at too low a rate, or have been made the subject matter of excessive relief under the Act, or excessive loss or depreciation allowance have been computed. The formation of the required opinion by the income tax Officer is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings u/s 34(1)(a). The fulfillment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings...

We hold that the formation of belief by the income tax Officer to the effect that income of the assessee had escaped assessment is one of the conditions precedent for the assumption of jurisdiction to make a re-assessment. Placing reliance on section 21 of the CPC and the Supreme Court decision in the case of The Director of Inspection of Income Tax (Investigation), New Delhi and Another Vs. Pooran Mal and Sons and Another, , it was suggested on behalf of the Revenue that all cases of challenge to jurisdiction did not result in making an order of reassessment a nullity. There was a marked distinction between want of basic or inherent jurisdiction and irregular exercise of jurisdiction and that, in the present case, the income tax Officer had basic and/or inherent jurisdiction to make an order of reassessment on the assessee and the assessee was merely questioning the initiation of the reassessment proceedings. With respect, we do not see any merit in this submission on behalf of the Revenue for more than one reason. In the first place, in view of the Supreme Court judgments referred to in the earlier paragraph, it must be shown by the Revenue that the material relied on had a nexus to the formation of the belief that the assessee''s income had escaped assessment and formation of the requisite belief must be considered as one of the conditions precedent for the assumption of jurisdiction to make assessment u/s 148. Secondly, it has also been held by the Supreme Court in a number of judgments that assessment made u/s 148/143(3) without the valid formation of belief as to the escapement of income is void ab initio or a nullity. For this purpose, it is desirable to refer to another Supreme Court decision in the case of Supdt. of Taxes, Dhubri and Others Vs. Onkarmal Nathmal Trust and Others, , where in the context of the provisions of section 7 of the Assam Taxation (On Goods Carried by Road or on Inland Waterways) Act (10 of 1961), it was held that the provision which confers jurisdiction for assessment and reassessment could never be waived for the simple reason that the jurisdiction could neither be waived nor created by consent. His Lordship Beg J., as he then was, pointed out in his concurring judgment at page 2077 that, if the notice u/s 7(2) was a condition precedent to the exercise of jurisdiction to make the best judgment assessment, the doctrine of waiver could never confer jurisdiction so as to enable parties to avoid the effect of violating a mandatory provision on a jurisdictional matter even by agreement. Accordingly, this ground raised before the Appellate Assistant Commissioner, in our judgment, questioned the very jurisdiction of the income tax Officer to make a reassessment and was as such a ground that went into the root of the matter.

This takes us to the second aspect of the question, namely, whether such a ground could be taken before the Appellate Assistant Commissioner, the assessee not having challenged the jurisdiction of the income tax Officer to make a reassessment before the income tax Officer himself. This aspect, in our view, does not present any difficulty at all in view of the recent judgment of the Supreme Court in the case of Jute of Corporation of India Ltd. Vs. Commissioner of Income Tax and another, , which is specifically on the question of jurisdiction of the Appellate Assistant Commissioner or the Commissioner of income tax (Appeals). The Supreme Court, it may be stated, in that case, referred to its earlier decision in The Additional Commissioner of Income Tax, Gujarat Vs. Gurjargravures Private Ltd., and explained and distinguished the same. The law in this regard is, thus, to be taken as settled. The powers of the first appellate authority, whether the Appellate Assistant Commissioner or the Commissioner of income tax (Appeals) are coterminous with those of the income tax Officer, subject to the limit that these authorities could do all that the income tax Officer could do or have done. It is a different thing whether, in a given case, these authorities might or might not entertain a ground not urged before the income tax Officer in the exercise of their judicial discretion. It cannot, however, be said that they have no jurisdiction to do so. Accordingly, we hold that the Appellate Assistant Commissioner had jurisdiction to entertain the impugned ground urged before him by the assessee even though the jurisdiction to make reassessment as such was not challenged before the income tax Officer.

Coming now to the third and the last aspect of the question, pertinent facts may be stated once again. What has been held by us so far is applicable to a case in which a ground is taken for the first time before the Appellate Assistant Commissioner in appeal against the original assessment or reassessment. In the present case, in the appeal against the original or the first order of reassessment, the order of assessment was not challenged on the ground of jurisdiction. The only ground taken was that the income tax Officer was not justified in rejecting the assessee''s explanation as regards genuineness of certain cash credits and that if proper opportunity was given, the assessee could prove the genuineness of the cash credits. The Appellate Assistant Commissioner accepted the assessee''s contention and he, with the consent of the income tax Officer who was present, set aside the assessment for the purpose. The assessee had not even challenged the jurisdiction of the income tax Officer to make a reassessment when he was making the reassessment after giving the assessee an opportunity in pursuance of the aforesaid order of the Appellate Assistant Commissioner. In the appeal filed by the assessee for the second time before the Appellate Assistant Commissioner against an order of reassessment on remand, the ground challenging the jurisdiction of the income tax Officer to make the reassessment was not taken. This was taken as an additional ground at the time of hearing of appeal against the fresh order of reassessment passed on remand. It is in this background that it was strongly urged on behalf of the Revenue that the jurisdiction of the income tax Officer to make a fresh reassessment in pursuance of the order of the Appellate Assistant Commissioner itself being limited, the jurisdiction of the Appellate Assistant Commissioner in an appeal against such an order of reassessment must necessarily be limited and, therefore, the Tribunal justifiably held that the Appellate Assistant Commissioner had no jurisdiction to admit such a ground. Great emphasis was laid on the fact that in both the Gujarat High Court decisions relied upon by Shri Sathe, the fresh or new ground was taken in the same or original proceedings and not in the second round of proceedings unlike the case before us.

The question to be considered is as to whether the assessee has to urge the plea of lack of jurisdiction before the income tax Officer would make any material difference qua ground challenging the jurisdiction to initiate re-assessment proceedings. For this purpose, it is necessary to refer to our court''s judgment in Commissioner of Wealth-tax, Bombay City-II Vs. N.A. Narielwalla, . Referring, with approval, to the Punjab and Haryana High Court decision in the case of Vijay Kumar Jain Vs. Commissioner of Income Tax, , our court held that a ground by which the jurisdiction of the income tax Officer to make assessment is challenged can be allowed to be taken in an appeal before the Tribunal even though such a ground was not taken before the income tax Officer or the Appellate Assistant Commissioner. The facts in that case were that for the assessment year 1961-62, the Wealth-tax Officer, acting u/s 19A, had assessed the wealth of the deceased in the hands of the executor. On appeal, the Appellate Assistant Commissioner confirmed the assessment order. On appeal to the Tribunal, a new ground was taken for the first time that section 19A was introduced in the Wealth-tax Act with effect from April 1, 1965, and the assessment was, therefore, without jurisdiction. The Tribunal entertained the ground and our court upheld the order of the Tribunal. In Ugar Sugar Works Ltd. Vs. Commissioner of Income Tax, Poona, , our court was faced with a similar problem. In this case, the question of the Tribunal''s jurisdiction was considered at length. It was held that the Tribunal''s jurisdiction u/s 254 was restricted to passing of orders on the subject-matter of the appeal though within the four corners of the subject-matter of appeal. However, within the four corners of that jurisdiction, the Tribunal was clothed with almost the same powers as those of the Appellate Assistant Commissioner except that of enhancement. The judgment in Commissioner of Wealth-tax, Bombay City-II Vs. N.A. Narielwalla, was noticed and not adversely commented upon. It was distinguished observing that (headnote):

The question as to the initial jurisdiction in making an order would stand on a different footing, as in such cases the question of jurisdiction of the income tax Officer would always be present as a part of the subject-matter of the appeal at all stages of the appeal, either before the Appellate Assistant Commissioner or the Tribunal, as, such jurisdiction is always presumed to be existing in an authority before the passing of the order.

In Commissioner of Income Tax Vs. Balapur Sugar and Allied Industries Ltd., , our court followed the decision in Commissioner of Wealth-tax, Bombay City-II Vs. N.A. Narielwalla, and held (headnote):

...that the earlier notices issued u/s 148 of the income tax Act, 1961, that is, the three notices issued on March 31, 1965, March 31, 1965, and December 10, 1965, respectively, were invalid, because by that time the determination u/s 163 of the said Act had not properly taken place. Since these notices were invalid, the reassessment done in pursuance thereof was also invalid.

Thus, so far as our court is concerned, it can be taken to be settled law that a point which goes to the jurisdiction of the assessment can be allowed to be taken in an appeal before the Tribunal even though it was not taken before the income tax Officer or the Appellate Assistant Commissioner.

We find that the Supreme Court also, in the case of R.J. Singh Ahuluwalia Vs. The State of Delhi, , held in the context of new ground raised before it for the first time:

This ground of challenge had, of course, not been raised in either of the two courts below but since it went to the root of the case, being a jurisdictional point, we considered it just and proper to allow it to be raised.

Again, in the case of G.M. Contractor and Others Vs. Gujarat Electricity Board and Others, the Supreme Court held as under:

It is stated that this ground goes to the very root of the matter but was not raised before the High Court. The appellants objected to this fresh ground being allowed to be taken up, but we consider that as this ground goes to the very root of the matter, it should be allowed after the appellants are compensated by costs.

The Gujarat High Court has, of course, taken the very view in its two decisions in Commissioner of Income Tax, Gujarat II Vs. Nanalal Tribhovandas and Another, and P. DOSHI Vs. COMMISSIONER OF Income Tax, GUJARAT, . Indirectly, the Allahabad High Court in Commissioner of Income Tax Vs. Hari Raj Swarup and Sons, , has also taken the same view.

We, therefore, hold that a ground by which the jurisdiction to make assessment itself is challenged can be urged before any authority for the first time.

This, however, does not solve the problem before us. All the cases referred to by us above are the cases dealing with same round of litigation. In the case before us, the new ground was raised for the first time not in appeals arising out of the same proceedings. It was taken in collateral proceedings. Reassessment u/s 147 was made on August 27, 1959. More or less a consent order was obtained in appeal thereagainst as a result of which the order of reassessment stood set aside for the purpose of giving an opportunity to the assessee to prove the genuineness of certain cash credits. The ground questioning jurisdiction to reassess was not raised even in the second round of proceedings before the income tax Officer who completed reassessment afresh on March 28, 1970. No such ground was taken originally even in the appeal filed against the second reassessment. The ground in dispute was taken at the time of hearing before the Appellate Assistant Commissioner. In view of the latest decision of the Supreme Court in the case of Jute of Corporation of India Ltd. Vs. Commissioner of Income Tax and another, , it cannot be disputed that the assessee could have raised this ground before the Appellate Assistant Commissioner in his appeal against the first order of reassessment. The pertinent question is whether the new ground could be taken in reassessment proceedings after remand. This takes us to another aspect of the question, namely, whether the assessee could have taken such a ground before the income tax Officer himself in these proceedings because if he could have done so, the powers of the Appellate Assistant Commissioner being coterminous, it would be open to him to do so before the Appellate Assistant Commissioner as well. The other aspect would be whether being a ground challenging the very jurisdiction to make reassessment, such a ground could be taken before any authority and at any stage of the proceedings. In this context, it will be necessary in the first instance to ascertain the scope of fresh assessment to be made by an income tax Officer when the Appellate Assistant Commissioner sets aside the assessment and directs the income tax Officer to make fresh assessment with some directions. The legal position does not appear to be very clear on the subject. One view is that while making a fresh assessment, the income tax Officer has, subject to the Appellate Assistant Commissioner''s directions, the same powers which he had while making the original assessment. He is entitled to disregard his own previous findings. He can take into account materials not previously existing and tax income not originally assessed. Likewise, it may be open to the assessee to raise objections to the assessment or to the quantum which he had not raised originally before him or the Appellate Assistant Commissioner. The other view is that the income tax Officer is, while passing orders in pursuance of the orders of the appellate authority, required to consider only those matters about which there was a dispute before the appellate authority and directions had been given. Even where the appellate order does not contain such specific directions, under certain circumstances, it may have to be read as remitting the case only on the issues in appeal and, in that event also, the income tax Officer cannot re-examine other issues. Consequently, the assessee may not be able to raise contentions which were not raised by him in the original proceedings.

However, in this case, it is not really necessary to go into this question. The impugned ground raised before the Appellate Assistant Commissioner admittedly goes to the very root of the income tax Officer''s jurisdiction to make reassessment.

In our view, the jurisdiction of the income tax Officer to initiate reassessment proceedings u/s 34 of the Act depends solely on the existence of the conditions precedent prescribed by law and the jurisdictional defect, if any, cannot be made good by relying on the order of remand passed by the Appellate Assistant Commissioner. In fact, the Appellate Assistant Commissioner has no jurisdiction u/s 31 of the 1922 Act to issue directions to the extent of conferring jurisdiction upon the income tax Officer which he is not lawfully seized of. This view was taken by the Madras High Court in the case of N. Naganatha Iyer Vs. Commissioner of Income Tax, Madras, . The said decision was followed by the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. Nanalal Tribhovandas and Another, . We are in respectful agreement with the view taken by the Madras and Gujarat High Courts in this regard. If it is found that the income tax Officer had no jurisdiction to make an order of reassessment, it is irrelevant that the jurisdiction of the income tax Officer to reassess was not challenged at any of the earlier stages. The assessee was entitled to challenge the jurisdiction of the income tax Officer to initiate reassessment proceedings before the Appellate Assistant Commissioner in the second round of proceedings even though he had not raised it earlier before the income tax Officer or in the earlier appeal. The Calcutta High Court has taken the view in the case of Commissioner of Income Tax Vs. Shree Ganesh Jute Mills Ltd., that any new ground, not necessarily a ground pertaining to jurisdictional aspect, could be taken for the first time before the Appellate Assistant Commissioner in the second round of proceedings. But, for the present, we need not go that far. We leave this question open.

In the light of the discussion above, we answer the question in the negative and in favour of the assessee. No order as to costs.