K. Kesava Reddiar vs Commissioner of Income Tax Commissioner of Income Tax Vs K. Kesava Reddiar

Kochu Thommen, J.—The following two questions have been referred to us by the Income Tax Appellate Tribunal, Cochin Bench ;

" 1. Whether, on the facts and in the circumstances of the case, the assessment made on May 2, 1987, was not legal and within the time prescribed therefore ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 1 lakh sustained by the Appellate Assistant Commissioner out of Rs. 7 lakhs being the addition made by the Income Tax Officer for the assessment year under consideration ? "

Question No. 1 has been referred at the instance of the assessee and question No. 2 at the instance of the Revenue. The assessment for the year 1974-75 was completed by the Income Tax Officer u/s 143(3) read with Section 144B of the Income Tax Act, 1961. The assessee''s returns disclosed a total income of Rs. 69,119 for the relevant accounting year. Since the officer was of the view that an addition in excess of Rs. 1 lakh would have to be made, a draft assessment order was issued to the assessee on March 15, 1976. The assessee filed objections on April 5, 1976. The draft order together with the objections were forwarded by the Income Tax Officer on April 5, 1976, to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner by his letter dated July 8, 1976, informed the Income Tax Officer that a fresh opportunity had to be given to the assessee so as to enable him to prove his rate of profit with reference to the purchase and sales memos. Such opportunity was accordingly afforded to the assessee. After hearing the assessee, the Income Tax Officer forwarded the amended draft assessment order dated January 10, 1977, (wrongly, in our view, referred to as the second draft assessment order) to the Inspecting Assistant Commissioner. On the basis of the objections and the draft order, as amended, the Inspecting Assistant Commissioner issued directions in terms of Section 144B(4) on April 28, 1977. On the strength of these directions, the assessment was completed by the Income Tax Officer on May 2, 1977, by adding a sum of Rs. 7,75,813. Aggrieved by the additions made, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner by his order dated October 29, 1977, deleted a sum of Rs. 6,75,813 out of the total additions, thereby sustaining an addition of only Rs. 1 lakh. The assessee as well as the Revenue appealed to the Income Tax Appellate Tribunal. It had been contended before the Tribunal by the assessee that the assessment was completed out of time. This contention was rejected by the Tribunal, The Tribunal, however, held that, on the facts and circumstances of the case, no addition was justifiable. Accordingly, the Tribunal deleted the additions completely.

Counsel for the assessee submits that the assessment completed on May 2, 1977 was invalid by reason of limitation. Counsel says that the original draft assessment order was superseded by a subsequent draft assessment order. The section does not contemplate more than one draft assessment order. The second order was, according to him, non est and the directions purported to have been issued on the second order were not directions contemplated by law. In the absence of any valid directions, the advantage of extension of time under Explanation 1(iv) to Section 153(3), would not be available to the Revenue in computing the period of limitation for the purpose of that section. When the period of limitation is computed without the benefit of the Explanation 1(iv) to Section 153(3), counsel points out, the assessment completed on May 2, 1977, was beyond the period of two years postulated u/s 153(1)(a)(iii).

The fallacy of this argument is, in our view, the assumption that there were two draft assessment orders. If there was a second draft assessment order, and such order was non est, counsel''s submission would be right. But, in our view, there was only one draft assessment order. That was the order which was issued on March 15, 1976. Objections were filed against that draft order and the objections were considered by the Inspecting Assistant Commissioner. Under Sub-section (4) of Section 144B, he was empowered to issue directions prejudicial to the assessee only after affording the assessee a second opportunity of being heard. Since the directions which he contemplated were of a prejudicial character, he could not issue them until a fresh opportunity was afforded. It was so afforded before January 10, 1977. On the basis of the second hearing, directions were issued by the Inspecting Assistant Commissioner as contemplated under Sub-section (4) of Section 144B. Those directions form part of the original draft assessment order. It is that order, as amended by the directions, which forms the basis of the assessment made by the Income Tax Officer on May 2, 1977. In our view, although wrongly referred to by all concerned as the second draft assessment order, there was only one draft order and that is the order dated March 15, 1976. It was on the basis of that order, directions were issued and the assessment made, all within time, if time is computed by recourse to Explanation l(iv) to Section 153(3). Accordingly, we are of the view that the assessment made on May 2, 1977 was perfectly valid. Question No. 1 is answered in favour of the Revenue and against the assessee.

As regards the second question, we must at the outset point out that the finding is one of fact. The Judicial Member of the Tribunal, with whom the Accountant Member agreed, stated that the computation made by the Income Tax Officer was defective. He was of the view that no addition was called for on the facts of the case. In a concurring order, the Accountant Member observed :

" ......Now the Income Tax Officer has no case that the sales of such sales have been understated in the accounts. So the position is this. Certain sales had been purchased and properly accounted for. They were not brought into the closing stock. They were sold subsequently. The sale proceeds have been included in the book. From these facts it would be clear that for the subsequent assessment year of 1975-76 the assessee''s accounts showed the full sale value as the gross profit itself and the assessee had suffered tax thereon......"

The Tribunal, determining the relevant questions of fact, held that no additions were liable to be made. We see no reason to doubt the correctness of that finding. In the circumstances, we answer question No. 2 in the affirmative, that is, in favour of the assessee and against the Revenue.

We direct the parties to bear their respective costs in these tax referred cases.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.