Shankar Lahiri vs Commissioner of Income Tax

Sen, J.—The Tribunal has referred the following question of law to this Court u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, and on the true and correct interpretation of section 144B of the income tax Act, 1961, there is a legal bar for the income tax Officer to send a second draft assessment order and for the Inspecting Assistant Commissioner to issue second set of directions and/or that the income tax Officer had no power and authority to make a second draft assessment and complete the assessment on the said basis ?

The facts relevant for the purpose of the case as stated by the Tribunal in the statement of the case are as under :

The year of assessment involved is 1976-77 for which the previous year ended 31-12-1975. In that year, the assessee was carrying on business of stevedoring under the name and style of C. Laurie & Co. The assessee died in the course of the assessment proceedings on 2-3-1979.

Pursuant to the search conducted at the business premises and the residence of the deceased-assessee on 7/8-1-1976 u/s 132 of the Act, cash, fixed deposit receipts and other documents and papers including a diary were seized during that search. An order u/s 132(5) was made on 5-4-1976 and the appeal against that order is still pending. After the search, the deceased-assessee filed the return for the year under consideration on 25-3-1977.

The said return was processed by the ITO and thereafter a draft assessment order was prepared by the ITO. A copy of the said order was forwarded by the ITO to the assessee on 23-3-1978 inviting his objections, if any, to the following additions, among others, as income from undisclosed source in the said draft order :

(i) Payments of illegal gratification of Rs. 1,22,032 mainly made to M.L. Jha and Capt. Sikand of Angus Co. Ltd. Since the source of the payments of the said illegal gratification to the aforesaid two persons of Angus Co. Ltd. with whom the deceased-assessee had business connection could not be explained, the ITO had proposed to treat those payments amounting to Rs. 1,22,032 as the deceased-assessee''s income from undisclosed sources; and

(ii) Investment in fixed deposit account in the name of Mrs. Basanti Lahiri, wife of the deceased-assessee, of Rs. 17,000 which was also.

The assessee by his letter dated 30-3-1978 objected to the aforesaid additions proposed in the draft assessment order. On 31-3-1978, the ITO forwarded the draft order along with the assessee''s objections to the IAC, Range-III, Calcutta. During the course of hearing u/s 144B of the Act before the IAC, the assessee had requested the IAC to issue summons u/s 131 to the aforesaid parties to whom payments of the illegal gratification were alleged to have been made. The IAC, however, did not consider it worthwhile to summon them. According to the IAC, the diary seized in the course of the search being in the own hand writing of the assessee himself containing detailed records of mostly unaccounted money, should be taken as a genuine document. It was not for the department to prove that the diary was not genuine. According to the IAC, the assessee did not adduce any evidence to show that the diary and the entries recorded therein were in any way bogus or fictitious. Under these circumstances, the IAC approved the aforesaid addition of Rs. 1,22,032. He also approved the addition of Rs. 17,000 being the fixed deposit in the name of the deceased-assessee''s wife. The order covering the approval of the IAC was sent to the ITO on 18-9-1978 and a copy thereof was endorsed to the assessee.

After the receipt of the aforesaid approval of the IAC, the ITO on 26-9-1978 wrote a letter to the assessee seeking clarification in respect of certain entries made by him in the diary from January 1975 to December 1975. After some adjournments, on 30-1-1979 some explanation was given regarding the expenses recorded in the said diary. At the same time, the assessee''s son prayed for further time on the ground of serious illness of the assessee. This was not acceded to by the ITO, who on 23-2-1979 drew up another draft assessment order contemplating a further proposed addition of Rs. 1,68,590 found to be noted in the said personal diary of the deceased-assessee under the head ''Personal and domestic expenses'', unaccounted for in regular books of account maintained by the assessee. A copy of the said draft order was once again forwarded to the assessee inviting his objections, if any, to the additions proposed in the draft assessment order. In the meanwhile, the assessee died. The ITO brought his legal heirs on the records. He, therefore, invited objections, if any, from the said legal heirs of the deceased-assessee to the additions proposed in the second draft order. The legal heirs, vide their letter dated 10-7-1979, objected to the additions proposed in the draft order. On 12-3-1979, the ITO forwarded the second draft assessment order along with the objections, referred to herein-before, to the IAC, Range-Ill, Calcutta. The IAC, after due hearing in accordance with law, made certain adjustments and reduced the additions proposed for the first time in the second draft order from Rs. 1,68,590 to Rs. 1,48,490. On receipt of the second approval of the IAC, the ITO passed the assessment order u/s 143(3) of the Act on 30-3-1979 on a total income of Rs. 3,58,129 against the legal heirs of the deceased-assessee.

Aggrieved by the said order, the legal heirs brought the matter by way of appeal before the Commissioner (Appeals)-IX, Calcutta. The first point taken before him was that after the issue of the directions by the IAC on the first occasion in September 1976, in respect of the first draft order, the ITO had no option but to complete the assessment in accordance with such instructions. He (ITO) after receiving these instructions could not once again re-embark on fresh enquiry. As such, proceedings resulting in the second draft assessment order and culminating in the directions by the IAC in respect of the second draft order were illegal and void ab initio. The ITO, according to the legal heirs of the deceased-assessee, travelled outside his jurisdiction when he started fresh investigation after receipt of the first set of instructions from the IAC. The assessment order passed on 31-3-1979 should be annulled.

The Commissioner (Appeals) held :

I am unable to accept the proposition that the ITO is precluded from submitting more than one draft order within the period of limitation fixed u/s 153, but without taking into account the period referred to in clause (iv) of Explanation I to section 144B. The section does not say that the IAC is not competent to issue more than one set of directions. Section 144B(5) states that the directions of the IAC shall be binding on the ITO but there is nothing in the section to suggest that the IAC is precluded from issuing more than one set of directions.

The Commissioner, however, on merits was not satisfied with the assessment and directed the assessee to make proper enquiry and pass a fresh order after giving the legal heirs of the deceased-assessee to explain certain matters which are not relevant for the purpose of this case.

In the appeal before the Tribunal, the learned counsel for the assessee, Mr. S. Bhattacharjee argued that in a case where the ITO proposed to make an assessment order, there could be one and only one draft assessment order, a copy whereof had to be sent to the assessee for objections, if any, and if objections were received from the assessee, the ITO was under a legal obligation to forward the draft assessment order with the objections, if any, of the assessee to the IAC and the IAC was under the statutory obligation, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, to issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the ITO to enable him to complete the assessment. There could be only one set of instructions. There could not be two draft assessment orders and two sets of instructions as in the present case. According to Mr. Bhattacharjee, the ITO after the issue of the draft assessment order and the receipt of the instructions from the IAC became functus officio as to the matters beyond the said draft assessment order and the instructions issued by the IAC.

The controversy in this case centres around the scope of section 144B. Section 144B provides as follows :

Reference to Inspecting Assistant Commissioner in certain cases. -(1) Notwithstanding anything contained in this Act, where, in an assessment to be made under sub-section (3) of section 143, the income tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under sub-section (6), the income tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.

(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the income tax Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the income tax Officer may allow on an application made to him in this behalf.

(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the income tax Officer the acceptance of the variation, the income tax Officer shall complete the assessment on the basis of the draft order.

(4) If any objections are received, the income tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the income tax Officer to enable him to complete the assessment:

Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard.

(5) Every direction issued by the Inspecting Assistant Commissioner under sub-section (4) shall be binding on the income tax Officer.

Dr. Pal on behalf of the assessee has argued that the ITO has to prepare a draft assessment order. In view of the circumstances mentioned in that section if the draft assessment is accepted by the IAC or any direction is given in respect of that draft, then the matter becomes final. At that stage after the IAC has passed his order, whether approving the draft or giving any direction, the ITO cannot go on making any addition or alteration except in the manner suggested by the IAC. Secondly, he has argued that a time limit has been fixed for making assessment u/s 153 of the Act. That time limit can be extended from the date on which the ITO forwards the draft order under sub-section (1) of section 144B to the assessee and ending with the day on which the ITO receives direction from the income tax Commissioner under sub-section (4) of section 154 of the Act. In a case where no objection was received from the assessee, the time to be excluded could be for a period of 30 days.

Therefore, Dr. Pal''s argument is that the ITO by making successive draft orders unnecessarily prolonged the assessment proceedings and thereby frustrated the object of section 153 which provides for a period of limitation for completion of assessment proceedings.

In my judgment, both the points taken by Dr. Pal are without any substance. Usually when a return has been filed u/s 139 of the Act, the ITO may proceed to assess the income on the basis of the return. The proceedings will be u/s 143(3). If there is any failure to file return or any other failure as mentioned in section 144, an assessment order can be passed u/s 144 of the Act. But where the ITO proposes to pass an order under sub-section (3) of section 143 and the ITO is of the view that variation in the income or loss prejudicial to the assessee will take place and the amount of such variation will exceed the amount fixed by the Board under sub-section (6) of section 144B, then the ITO shall in the first instance forward a draft order, of proposed assessment to the assessee. On receipt of the draft order the assessee will forward his objection, if any, to such variation to the ITO within 7 days of the receipt of the draft order. If no objections were received, within that period or within any extended period by the ITO or the assessee intimates the ITO his acceptance of the variation, the ITO shall complete the assessment on the basis of the draft order. Sub-section (4) of section 144B provides that if any objections were received the ITO shall forward the draft order together with the objection to the IAC. The IAC shall thereafter considering the draft and the objection and after going through the records issue such direction as he thinks fit for the guidance of the ITO to enable him to complete the assessment. If any direction prejudicial to the assessee is given, the assessee will be given a hearing. It is further provided that every direction issued by the IAC shall be binding on the ITO.

Section 144B is merely a step to be taken in the completion of assessment u/s 143(3). Therefore, when a reference has been made to the IAC u/s 144B, the ITO does not become functus officio. After the preparation of draft order and referring the matter to the IAC, the ITO may, discover new facts or materials connected with the assessment proceedings. The ITO cannot possibly ignore those materials because he has forwarded the draft order to the IAC.

Dr. Pal contended that the draft order subject to the decision of the IAC must be treated as a final order. I am unable to uphold this contention. Even u/s 144B(4), it is specifically provided that the IAC can issue direction as he thinks fit for the guidance of the ITO to enable him to complete the assessment. This goes to show that the assessment proceedings are not completed by forwarding the draft order. The ITO has forwarded a draft order to the IAC who may give suitable direction to the ITO to enable him to complete the assessment. At this stage if any new material is found, the ITO will be entitled to rely on the material and if that material is of such magnitude that there will be variation in income or loss in excess of the amount prescribed u/s 144B, then the ITO will have no alternative but to follow the procedure laid down in section 144B(1) and send another draft order to the IAC. That is precisely what has been done in this case. The ITO found an entry in the diary of the deceased-assessee showing huge transaction which he could not possibly ignore.

Moreover, it is to be noted that if the ITO with full knowledge decides not to take any action on the basis of his discovery of facts then he will not be able to reopen the case u/s 147 or rectify the assessment u/s 154. If Dr. Pal''s argument has to be accepted, then the fact that comes to the knowledge which is relevant to the assessment will have to be ignored after the draft order is forwarded.

In this connection Dr. Pal cited a decision of this Court in the case of Jagmohan Goenka v. K.D. Banerjee [1954] 26 ITR 637. A question was raised whether a successive reassessment can be made. In that case it was held by this Court that within the time limit specified in section 34 of the Indian income tax Act, 1922, there is no restriction as to the number of proceedings which can be taken to reopen the assessment, whether by way of assessment or reassessment for computation or recomputation.

In that case adverting to the question of limitation it was observed that if the process of reassessment was repeated mala fide, the High Court could or will always interfere. This judgment was cited with the approval in the case of GURDAYAL BERLIA Vs. COMMISSIONER OF Income Tax, CALCUTTA.,

Dr. Pal drew our attention to a decision of a Single Judge of the Delhi High Court in the case of Sudhir Sareen Vs. Income Tax Officer, Central Circle XVII, New Delhi and another, There it was held that where the ITO acting u/s 144B proposes to make any variation to the prejudice of the assessee in the income or loss returned in excess of the limit fixed, he can issue only one draft order of the assessment. He has no power under that section to issue more than one draft order.

We respectfully differ with the view expressed in the case of Sudhir Sareen (supra). We are of the view that the power that has been conferred u/s 144B is to be exercised in course of assessment proceeding. Till such time as the assessment order is passed, the ITO has all the powers u/s 143, which include making further enquiry and making further discovery and also to receive new information relevant for assessment. u/s 144B, the ITO does not become functus officio by merely passing or forwarding the draft order. It is only after the final assessment order is made that the ITO loses jurisdiction over the assessment proceeding.

In that view of the matter, the question is answered in the negative and in favour of the revenue. There will be no order as to costs.

Banerjee, J.

I agree.