P. Palaniswami vs Commissioner of Income Tax

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961, has referred the following

questions of law for the opinion of this court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner''s letter constituted

information for re-opening the assessment u/s 147(b) especially when the Income Tax Officer had referred to the order of the Appellate Assistant

Commissioner dated March 5, 1966, for re-opening the assessment?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Commissioner''s letter dated May 13,

1966, constituted information from an extraneous source within the meaning of section 147(b)?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reassessment proceedings are valid

notwithstanding the order of the Appellate Assistant Commissioner dated March 5, 1966?

The short fads that are necessary for appreciating the above questions are as follows ;

The assessee is an individual and carries on business as a contractor. The assessment tor the year 1962-63 was made in the first instance on

November 23, 1962. While assessing the assessee, the Income Tax Officer found that there were no books of account kept by the assessee

except the memorandum book. Consequently, he had to make an estimate of the business income, and he did so, firstly, by estimating the net

profits at 11% on certain receipts and 12 1/2% on certain other receipts, adding that ''depreciation admissible will be deducted from the profits so

determined''. He accordingly worked out the net profits. The details of the admissible depreciation are contained in the assessment order itself, and

we are concerned with a sum of Rs. 5,547, which was the depreciation at 25% on the written down value of Rs. 22,189 of lorry No. 9360.

Admittedly, the said lorry was sold in the year of account ended March 31, 1962.

Realising that u/s 34(2)(ii) of the Income Tax Act, 1961, depreciation allowance was not allowable in respect of an asset sold in the year of

account, the Income Tax Officer took proceedings for withdrawing the said depreciation and assessing the same u/s 154 of the Income Tax Act.

On August 20, 1964, he issued a notice to the assessee u/s 155 of the Act and, after considering his objections, he purported to rectify the mistake

by withdrawing the depreciation.

Against this order of the Income Tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-t-ix, ""A

Range, Madras. That officer, by an order dated 5th March, 1966, allowed the appeal preferred by the assessee. Thereafter, the question as to

whether an appeal to the Tribunal against the order of the Appellate Assistant Commissioner of Income Tax should be filed or not was considered

by the Commissioner of Income Tax. On 13th May, 1966, the Commissioner of Income Tax sent the following communication to the Income Tax

Officer :

No appeal to the Appellate Tribunal is necessary against the Appellate Assistant Commissioner''s order first cited above.

The Appellate Assistant Commissioner''s order has been accepted as the alternative remedy of re-opening the assessment u/s 147(b) is available

to withdraw the depreciation allowed. The Income Tax Officer is requested to take necessary action to give effect to this.

On receipt of this communication, on May 20, 1966, the Income Tax Officer made the following note :

(1) Seen C.I.T.''s memo:

(2) The excess depreciation allowed has resulted in the escapement of taxable income. Issue notice u/s 148/147(b)."" Pursuant to this, the

assessment was re-opened and the depreciation allowance referred to already was withdrawn and assessed to tax. The assessee''s appeal to the

Appellate Assistant Commissioner was allowed and thereafter the department took the matter in further appeal to the Income Tax Appellate

Tribunal. The Tribunal by its order dated 7th May, 1969, held that the proceedings initiated u/s 147(b) were validly initiated since the

Commissioner''s letter dated 13th May, 1966, constituted information within the meaning of Section 147(b) of the Income Tax Act, 1961. It is

with reference to this order the above three questions have been referred for the opinion of this court.

Since we are answering the third question in favour of the assessee, it is not necessary to consider the other two questions, and therefore we are

setting out the facts relevant for answering the third question only.

We have already pointed out that the Appellate Assistant Commissioner allowed the appeal preferred by the assessee against the order of the

Income Tax Officer seeking to rectify the mistake of the wrong allowance of depreciation u/s 154 of the Income Tax Act, 1961. However, in

doing so, what the Appellate Assistant Commissioner did was not merely to hold that the mistake was not capable of being rectified u/s 154 of the

Act, but there was no mistake at all, or, in other words, there was no escapement of the taxable income. This is what the Appellate Assistant

Commissioner has stated in his order :

So I consider that there is firstly no error capable of rectification in the assessment made by the Income Tax Officer originally because ultimately

what he did was to arrive at the net income on a suitable basis by allowing a deduction in the name of depreciation, the Income Tax Officer was

not really giving away anything. Perhaps, the same result might have been achieved by applying a net rate by one leap instead of arriving at it stage

by stage. This is a matter for the Income Tax Officer to decide and that is beside the scope of consideration at this stage. To sum up this is a case

where the Income Tax Officer has only estimated the net income by a process of comparable cases and not a case where the Income Tax Officer

had allowed any specific deduction by way of depreciation or terminal allowance in which case only the objection of no account will apply. In that

view of the matter there is nothing to be rectified and the order u/s 154 is cancelled.

Thus, it is clear that the Appellate Assistant Commissioner has actually held that there was no mistake on the part of the Income Tax Officer in

allowing the depreciation and, therefore, there was no escapement of taxable income at all. It is not necessary for us to consider whether that view

of the Appellate Assistant Commissioner was right or wrong. All that we are concerned is to point out that that order of the Appellate Assistant

Commissioner has become final. It is not merely that there was no appeal preferred against that order by the department, but the department

expressly took a decision to accept the order of the Appellate Assistant Commissioner. It may be that while taking that decision, the department

did not realise the implications of the order of the Appellate Assistant Commissioner and proceeded on the basis that the Appellate Assistant

Commissioner allowed the appeal only on the ground that Section 154 of the Income Tax Act, 1961, could not have been resorted to in the

circumstances of the case. As the extract from the order of the Appellate Assistant Commissioner clearly shows that that order did not stop there,

but it went into the merits and actually found that there was no mistake at all to be rectified, and the Income Tax Officer had not allowed any

taxable income to escape. If so, the acceptance by the department of the order of the Appellate Assistant Commissioner makes that order final

with the result that the conclusion of the Appellate Assistant Commissioner that there was no escapement of tax is also final. Once it has become

so final, it is not open to the Income Tax Officer subsequently to destroy that finality by purporting to take action u/s 147(b) of the Act.

The decision of the Supreme Court in Commissioner of Income Tax, New Delhi Vs. Rao Thakur Narayan Singh, will support our conclusion. In

that case from a reassessment for the assessment year 1942-43 made in July, 1945, bringing to tax certain forest income and interest income, the

assessee preferred an appeal to the Appellate Tribunal objecting to the Income Tax Officer''s jurisdiction to initiate reassessment proceedings in

respect of the forest income on the ground that he had knowledge of such income when the original assessment was made. The Appellate Tribunal

upheld his contention but by mistake set aside the entire reassessment order and restored the original assessment order. No steps wore taken u/s

35 of the Indian Income Tax Act, 1922 (corresponding to Section 254(2) of the Income Tax Act, 1961) to rectify the mistake nor was any

reference to the High Court sought against the order of the Appellate Tribunal. Thereafter, in 1950, the Income Tax Officer initiated fresh

reassessment proceedings u/s 34 of the Indian Income Tax Act, 1922 (corresponding to Section 147(b) of the Income Tax Act, 1961), with

respect to the interest income and made a fresh reassessment order for the year 1942-43, to include the interest income. The Supreme Court held

that it was not open to the Income Tax Officer to do so. The Supreme Court, after referring to Section 34(1)(a) of the Indian Income Tax Act,

1922, as amended in 1948, observed (page 239):

It could not have been the intention of the legislature by amending the section to enable the Income Tax Officer to reopen final decisions made

against the revenue in respect of questions that directly arose for decision in earlier proceedings. The Tribunal held in the earlier proceedings that

the Income Tax Officer knew all the facts at the time he made the original assessment in regard to the income he later on sought to tax. The said

finding necessarily implies that the Income Tax Officer had no reason to believe that because of the assessee''s failure to disclose the facts income

has escaped assessment. The earlier finding is comprehensive enough to negative ''any such reason'' on the part of the Income Tax Officer. That

finding is binding on him. He could not on the same facts reopen the proceedings on the ground 1hat he had new information. If he did so, it would

be a clear attempt to circumvent the said order, which had become final. We are not concerned in this appeal with a case where the Income Tax

Officer got new information which he did not have at the time when the Tribunal made the order. The finding of the Tribunal is, therefore, binding

on the Income Tax Officer and he cannot, in the circumstances of the case, reopen the assessment and initiate proceedings over again. If that was

not the legal position, we would be placing an unrestricted power of review in the hands of an Income Tax Officer to go behind the findings given

by a hierarchy of Tribunals and even those of the High Court and the Supreme Court with his changing moods.

The above observations of the Supreme Court made with reference to the order of the Tribunil will apply to the order of the Appellate

Assistant Commissioner in the present case which has been accepted by the department. It cannot be disputed that the order passed by the

Appellate Assistant Commissioner was within his jurisdiction. When the assessee preferred the appeal against the order of the Income Tax Officer

made u/s 154 of the Income Tax Act, 1961, both the resort to the machinery of Section 154 and the existence or otherwise of an error in the

earlier order of the Income Tax Officer were the subject-matter of the appeal before the Appellate Assistant Commissioner. In this case, as

already pointed out, the Appellate Assistant Commissioner held that there was no error at all, because no income escaped assessment. In those

circumstances that order having become final and having been accepted by the department, it is not now open to the Income Tax Officer, on

whom the said order is binding, to go behind that order and initiate proceedings u/s 147(b) of the Income Tax Act, 1961, as if there had been

escapement of income to assessment. In view of these circumstance?, we answer the third question referred to us in the negative and in favour of

the assessee. Since, by virtue of our answer to the third question, the controversy between the parties can be completely disposed of, it is

unnecessary to answer the first two questions, and, therefore, we do not answer these two questions.

Having regard to the circumstances of the case, there will be no order as to costs.