M.A. Rahman and Co. vs Commissioner of Income Tax

S.V. Maruthi, J.—At the instance of the assessee, the following two questions are referred for the opinion of this Court :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that it had no jurisdiction to cancel the protective assessment made by the income tax Officer ?

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in not cancelling the protective assessment after holding that the basis of the said assessment was not correct ?"

The facts in brief are as follows :

The assessee is an unregistered firm. It had got 850 sq. yards of land in Abids Road, Hyderabad, bearing Municipal Nos. 5-6-600 to 604. On the said land, the assessee started construction of shopping- cum -office complex with an intention to sell the same to the intending buyers ultimately. The relevant assessment year is 1981-82. During the whole of the accounting year, the complex was in the process of construction. The assessee began showing income even when the construction was going on by following a method, i.e., he used to take the whole of expenditure incurred during the year for construction and from out of it the value of work-in-progress is deducted and on the remaining 10 per cent used to be shown as profits or net income said to have been derived by the assessee. He filed a voluntary return by disclosing an income of Rs. 11,088 for the assessment year 1981-82.

The ITO held that the profits on the sale of shops and offices arise only in the year in which these are registered in the names of buyers and when possession of the shops and offices are handed over to the buyers. However, the ITO accepted the income returned on protective basis. On appeal, the AAC held that the income should have been taxed on regular basis by the ITO since the project is an �on going one� and it should be only years later that shops and office premises would be finally transferred to the intending buyers. Since the assessee had to incur considerable expenditure over the years, he is entitled to declare profit at a fixed percentage of a figure arrived at by reducing the work-in-progress from total expenditure. The accounts will be finalised when the premises is transferred and net profit and loss offered to tax accordingly. The AAC also held that the principle adopted by the assessee is a well-established principle upheld by the CBDT. He also held that the ITO is not justified in assessing the income protectively. As regards the percentage of net profit at 10 per cent in preference to 12� per cent, he declined to interfere because ultimately the profit or loss will have to be accounted for in the year when the premises is finally transferred. Aggrieved by the order of the AAC, the revenue filed an appeal before the Tribunal.

Before the Tribunal, the counsel for the assessee filed a memo. On the basis of the memo, the appeal filed by the revenue was allowed. Since the assessee sought for cancellation of the protective assessment, the Tribunal held that it has no jurisdiction to cancel the protective assessment as it was made by the ITO. Against the order of the Tribunal, the assessee filed a review which was dismissed on the ground that they have no power to review the order. At the instance of the assessee, the questions set out in the earlier paragraphs were referred to by the Tribunal for the opinion of this Court.

From a reading of the order of the Tribunal, it appears that they proceeded on the basis that the assessee has agreed to protective assessment in the memo filed by them while agreeing that the profits would arise for assessment only in the year when the sale is effected. During the course of arguments when we pointed out to the learned counsel for the assessee that the Tribunal proceeded on the basis that the assessee has agreed to the protective assessment, he filed a copy of the memo and contended that in the memo he had only extracted the grounds of appeal filed by the ITO before the Tribunal and, therefore, the Tribunal wrongly proceeded on the basis that he had agreed to the protective assessment by the ITO.

We agree with the contention of the learned counsel for the assessee. If the assessee had agreed to the assessment on protective basis, he would not have asked for cancellation of the protective assessment before the Tribunal.

The next question that would arise for our consideration is whether the Tribunal is right in its view that it has no jurisdiction to cancel the protective assessment.

The ITO assessed the income on protective basis. On appeal, the AAC set aside the protective assessment and made the assessment on regular basis. On a further appeal to the Tribunal, the Tribunal set aside the regular assessment made by the AAC, but the effect of the order of the Tribunal is that the appellate order stands set aside.

It is obvious that when an appeal is made, the appellate authority can do one of the three things, namely, (i) it may reverse the order under appeal; (ii) it may modify that order; and (iii) it may merely dismiss the appeal and, thus, confirm the order without any modification. In the first two cases, the order of the income tax Commissioner, where the order of the original authority is either reversed or modified, is the order of the appellate authority which is the operative order Collector of Customs, Calcutta Vs. East India Commercial Co. Ltd., . Therefore, in the present case, the Assistant Commissioner reversed the order of the assessing authority making protective assessment and made regular assessment and the Assistant Commissioner�s order is the operative order. Hence, the protective assessment no longer exists. Similarly, the Tribunal while allowing the appeal filed by the revenue set aside the regular assessment but did not restore protective assessment as it is not the subject-matter of the appeal. The order of the Tribunal is the operative order, the effect of which is that the regular assessment stands set aside with the result that there is neither protective assessment nor regular assessment of the income. In other words, when the protective assessment was not the subject-matter of appeal, the Tribunal could not have restored the protective assessment while setting aside the regular assessment. Consequently, the question of cancelling the protective assessment did not arise. In view of the above analysis, the questions referred do not arise from the facts of the case and, hence, it is not necessary to answer them. The reference is, therefore, disposed of accordingly.