P.P.M.S. Nagarathinam vs Commissioner of Income Tax

Ratnam, J.—u/s 256(1) of the Income Tax Act, 1961, (hereinafter referred to as ""the Act""), at the instance of the assessee, the following

two questions of law have been referred to this court for its opinion :

Whether the reopening of the assessment u/s 147 for the assessment year 1971-72 was valid in law ?

Whether, on the facts and in the circumstances of the case, the sum of Rs. 73,479 was assessable u/s 41(1) of the Income Tax Act, 1961, for

the assessment year 1971-72 ?

The assessee is a Hindu undivided family. While completing the assessments for the assessment years 1968-69, 1969-70, 1970-71 and 1971-

72, the Income Tax Officer allowed the amounts of Rs. 15,174, Rs. 17,063, Rs, 19,480 and Rs. 21,762, respectively, totalling Rs. 73,479, on

account of the amounts payable by the assessee under the provisions of the Provident Funds Act.

A writ petition in W. P. No. 2764 of 1966 was filed by the assessee objecting to the claim of the Provident Fund Commissioner and on August

12, 1969, the writ petition was allowed holding that to the employees of the assessee, the provisions of the Employees'' Provident Funds Act and

the Employees'' Provident Funds Scheme are inapplicable and the demand made on the assessee stood quashed. Against that, the Regional

Provident Fund Commissioner purported to file an appeal and there was considerable delay in preferring that appeal to condone which the

Regional Provident Fund Commissioner filed C. M. P. No. 6738 of 1971 in the intended writ appeal sought to be preferred against W. P. No.

2764 of 1966. On December 8, 1971, the petition for condonation of the delay was dismissed on the ground that there was negligence and that no

sufficient cause was made out to condone the long delay. The Income Tax Officer reopened the assessment for the assessment year 1971-72 and

concluded that the amount of Rs. 21,762 was not an admissible deduction for 1971-72. In respect of the amounts allowed as deduction in the

earlier assessment years, the Income Tax Officer withdrew those allowances u/s 41(1) of the Act and brought to tax in the reassessment made a

sum of Rs. 73,479. Aggrieved by this, the assessee preferred an appeal and the Appellate Assistant Commissioner held that only on December 8,

1971, it was established that no provident fund contributions were payable by the assessee to the Provident Fund Commissioner and, therefore,

the disallowance should have been made only for the assessment year 1972-73 and not for 1971-72. In that view, the Appellate Assistant

Commissioner deleted the addition of Rs. 73,479. Against that, the Department preferred an appeal before the Tribunal contending that the

adjudication in the writ petition became final of August 12, 1969, when the writ petition was allowed and no effective writ appeal had been filed

against that and that the dismissal of the application for condonation of the delay would not in any manner affect the decision so that the assessment

of the sum of Rs. 73,479 for the assessment year 1971-72 was in order. The Tribunal took the view that as the order in the petition became final

on August 12, 1969, and the remission having occured on a date in the accounting period ending on June 30, 1970, the Income Tax Officer

correctly brought to tax the amount of Rs. 73,479 in the assessment year 1971-72 and accordingly restored the addition as made by the Income

Tax Officer.

Learned counset for the assessee contended that the proceedings in the writ petition became final on December 8, 1971, and, therefore, no

amount could be brought to tax in the assessment year 1971-72. On the other hand, learned counsel for the Revenue maintained that the order

dated December 8, 1971, did not in any manner affect the adjudication in the writ petition made on August 12, 1969, and, it has, therefore, to be

taken that the proceedings in the writ petition attained finality on August 12, 1969, and so, the allowance granted earlier were rightly brought to tax

in the assessment year 1971-72.

There is no dispute that the writ petition field by the assessee in W. P. No. 2764 of 1966 was allowed on August 12, 1969. No doubt, there

was an attempt by the Regional Provident Fund Commissioner to file an appeal against the order in W. P. No. 2764 of 1966, but there was

considerable delay in doing so, which necessitated the filing of an application in C. M. P. No. 6738 of 1971 in the intended writ appeal. However,

by an order dated December 8, 1971, that application was dismissed. While on the one hand, the assessee claims that the order in the writ petition

can be considered to have attainted allowed in the earlier assessment years cannot be brought to tax in the assessment year 1971-72, the Revenue

maintains that such finality was attainted even on August 12, 1969. We have, therefore, to consider whether the filing of the application for

condonation of the delay in C. M. P. No. 6738 of 1971 in any manner affected the adjudication in the writ petition disposed of on August 12,

1969.

In order to effectively question the correctness of the decision in W. P. No. 2764 of 1966, an appeal therefrom ought to have been preferred

within the time prescribed for the filing of such appeals. That, however, was not done and there was enormous delay and the appeal itself was filed

out of time with an application for condonation of the delay. That application was dismissed on December 8, 1971. The dismissal of that

application did not imperil the decision in the writ petition and left its effect and oration totally untouched. We have, therefore, to hold that the

decision in the writ petition attained finality on and from August 12, 1969, when it was rendered and not from December 8, 1971, when the

application of condonation of the delay in preferring an appeal therefrom was dismissed. The analogy of the merger of the order is also in

appropriate. We can conceive of an order of a lower authority being upheld by a higher or superior authority in a properly constituted appeal or

other appropriate proceedings as mergering in the order of the higher or superior authority. In order to treat an adjudication of a lower authority as

having merged in the order of a higher or superior authority, it must be established that the higher or superior authority in the proceeding properly

brought before it had considered the grounds upon which the decision of the lower authority was based and had either upheld or disapproved it.

The mere filing, as in this case, of an application for condonation of the delay and its subsequent dismissal without there being an effective appeal

against the order in the writ petition, cannot enable the assessee to put forward the plea that the order in the writ petition merged in the order

dismissing the application for the condonation of the delay. The order dismissing the application for condonation of the delay cannot by any strech

of imagination be contrued as in any manner affectings the grounds on which the order in the writ petition was passed. Indeed, the dismissal of the

application for condonation of the dealy had left the decision in the writ petition on the grounds stated therein wholly and totally unaffected. We

are, therefore, of the view that the finality in the writ proceedings was attained on August 12, 1969, and not on December 8, 1971, and in that

event, on the strength of that adjudication, the allowence of the amounts paid towards the provident fund could be assessed only in the assessment

year 1971-72 invoking section 41(1) of the Act.

We may also refer in this connection to the decision in Erode Yarn Stores Vs. The State of Madras, , where the assessee contended that once

an appeal is filed before the Tribunal, the Board is precluded from invoking its power u/s 34 of the Tamil Nadu General sales Tax Act, which was

disputed by the state on the ground that before the jurisdiction of the Board to exercise its powers u/s 34 can be held to be taken away, the appeal

filed before the Tribunal must have been an effective appeal. This court held that the words ""subject of an appeal"" mean ""subject of an effective

appeal""; as, otherwise, it would enable an assessee, who wants to avoid or stifle the Board''s suo motu power of revision, to file a time-barred

appeal and get it dismissed. Similar would be the situation in this case also in that the acceptance of the contention of the assessee that the finality

was attained only on December 8, 1971, would result in the assessee being enabled to rely on an incidental order in an ineffective appeal to

effectivly prevent the assessment of the irregular allowence of the amounts claimed by the assessee in the prior assessment years either in the

assessment year 1971-72 or even subsequently owing to the operation of the bar of limitation. We may also point out that in CHIRANJILAL

DAGA Vs. COMMISSIONER OF Income Tax, TAMIL NADU V, MADRAS, AND ANOTHER., , an assessment was completed ex parte

and against that order, an appeal was preferred, which was rejected on the ground that it was barred by time. A further appeal to the Tribunal was

also filed out of time and though the dealy was condoned, ultimatly, the order of the Appellate Assistant Commissioner rejecting the appeal as time

barred was confirmed without going into the merits. Thereupon, the assessee filed a revision before the Commissioner of Income Tax u/s 264 of

the Act, but that was rejected on the ground that the assessee had gone an appeal before the Appellate Assistant Commissioner and also before

the Tribunal and, therefore, the revision preferred by the assessee cannot be maintained. It was held that the filing of an ineffective or incompetent

appeal before the Appellate Assistant Commissioner or the Tribunal did not deprive the assessee of the right of revision u/s 264 of the Act and that

the revision before the Commissioner of Income Tax u/s 264 of the Act was maintainable. In other words, the decision rendered was to the effect

that an uneffective or incompetent appeal was, in the eye of law, no appeal at all precluding the assessee from invoking the revisional powers of the

Commissioner of Income Tax u/s 264 of the Act. Applying the principle of this decision also, we have to hold that there was no appeal at all

against the decision in W. P. No. 2764 of 1966 and that order be came final on and from August 12, 1969, which would justify the assessment of

the amounts allowed earlier, in the assessment year 1971-72 by applying section 41(1) of the Act. We, therefore, answer the questions referred to

us in the affirmative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel''s fee Rs. 500.