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B.R. MILLS versus C.I.T.

High Court of Judicature at Allahabad

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B.R. Mills v. C.I.T. - INCOME TAX REFERENCE No. 170 of 1990 [2005] RD-AH 1282 (9 May 2005)

 

This is an UNCERTIFIED copy for information/reference. For authentic copy please refer to certified copy only. In case of any mistake, please bring it to the notice of Joint Registrar(Copying).

HIGH COURT OF JUDICATURE OF ALLAHABAD

Reserved

Income Tax Reference No.170 of 1990

M/s. Bharat Rice Mill,Khuttar, Shahjahanpur v. Commissioner of Income Tax, Lucknow.

And

Income Tax Reference No.62 of 1992

M/s. Bharat Rice Mills, Shahjahanpur v. The commissioner of Income-tax, Lucknow.

Hon'ble R.K.Agrawal, J.

Hon'ble Rajes Kumar, J.

(Delivered by R.K.Agrawal, J.)

In Income Tax Reference No.170 of 1990, the Income Tax  Appellate Tribunal, Allahabad, hereinafter referred to as  "the Tribunal",  has referred the following question of law under Section 256(1) of the Income Tax Act, 1961, hereinafter referred to as "the Act" for opinion to this Court.

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that proceedings u/s 148 were validly initiated in the present case and that, therefore, it would not be correct to quash the penalty proceedings on the ground that the re-assessment proceedings were void ab initio for the failure of the I.T.O. To record the reasons for initiating proceedings u/s 147 for assessment year 1981-82."

Whereas  in Income Tax Reference No.62 of 1992, the Tribunal has referred the following question of law under Section 256(2) of the Act for opinion to this Court.

"Whether, on the facts and in the circumstances of the case, the levy of penalty under section 271(1)(c) is justified?"

As both the references relate to the same assessee and pertains to the Assessment Year 1981-82 in proceeding arising out of imposition of penalty under Section 271(1)(c) of the Act, they have been heard together and are being decided by a common order.

Briefly stated the facts giving rise to the present Reference are as follows:-

The applicant is a firm.  Its accounting period is financial year.  It filed its return of income for the Assessment year 1981-82 showing an income of Rs.6,390/-.  The assessment was originally completed on 5th April, 1982 on a total income of Rs.12,390/-. Subsequently while completing the assessment proceedings for assessment year 1982-83, the Income-tax Officer noticed that the applicant had sold 209 quintals of Ghuta rice in the first week of April, 1981 whereas till the date of sale, there had been no hulling of paddy, nor was there any opening stock of Ghuta rice.  On being asked to explain this discrepancy, the applicant submitted that it had 309 quintals of Ghuta rice as its closing stock of the previous year relevant to the Assessment Year 1981-82 and that it was this stock which was sold in April, 1981.  The Income-tax Officer further noticed that the applicant had undertaken hulling of Government paddy during the previous year relevant to the Assessment Year 1981-82 and had received 433.04 quintals of Kinki rice, as its own share out of the Government rice hulling. This share of the applicant was shown in the levy Register of the relevant previous year, but was not included in the closing stock on the last date of the previous year relevant to the Assessment Year 1981-82. When the applicant was confronted with the aforesaid facts, the applicant filed a revised return of income for the Assessment Year 1981-82, including the value of undisclosed Ghuta rice and the applicant's share of Kinki rice received on account of Government hulling.  Re-assessment was completed including the value of the aforesaid stock at Rs.37,548/-.  The additions made were as follows:-

(1)Value of 209 quintals of Ghuta rice Rs.16,093

(2)Value of closing stock of Kinki rice Rs. 71,455

                                     Rs.87,548

While completing the re-assessment as above, the Income-tax Officer issued penalty notice to the applicant in terms of Section 271(1)(c).  It was explained on behalf of the applicant before the Income-tax Officer that "non disclosure of closing stock of Ghuta (rice) was not intentional and it was only a mistake by the Accountant not to have included it in the closing stock."  similarly, regarding non-disclosure of applicant's share of rice in custom hulling, it was stated that the applicant was under impression "that it can include its share only when it is sold and therefore 433 quintals of Kinki rice was not shown by it as its closing stock.

The Income-tax Officer did not accept the above explanation to be satisfactory and he imposed the penalty of Rs.33,380/-.

The applicant appealed against the aforesaid order before the Commissioner of Income Tax (Appeals), who confirmed the order in question.  The applicant further appealed against the aforesaid order in the Tribunal. At the time of hearing the applicant's learned counsel moved the following additional grounds:-

"1.  That in the absence of proper initiation of proceedings u/s 148 the assessment order passed by the Income-tax Officer is void ab initio and as such the penalty initiated in the course of assessment is void assessment is a nullity and no penalty can be imposed.

2.that the penalty imposed is illegal since the assessment itself is void ab initio and penalty deserves to be quashed."

    On behalf of the Revenue admission of the aforesaid additional ground was passed by the Tribunal admitted the said additional ground as in its opinion the question raised by the applicant went to the root of the matter.

The Tribunal examined the imposition of penalty on the applicant first on merits and upheld the imposition of penalty by observing as follows:-

"9. We have given careful consideration to the facts stated above and to the rival submissions.  It is pertinent to remember that the penalty proceedings,which are presently under consideration, relates to assessment year 1981-82 and not to assessment year 1982-83 and the charge of the Revenue in respect of assessment year 1981-82, is that the assessee furnished its return of income, which did not furnish accurate particulars of applicant's income and in which the stock of the applicant had not been fully disclosed. This charge, on the face of it, is correct. The applicant, admittedly, held stocks, part of which might have been seized; but a mere seizure does not extinguish the ownership of the assessee in the stock.  It could, therefore, be no explanation not to show the stock in question in the closing stock of the assessee. The understatement of the income by the assessee is, thus, obvious and it is the assessee's onus to show that the said understatement of income did not amount to concealment of income or furnishing of inaccurate particulars of income in terms of the Explanation 1 to section 271(1)(c) of the Income-tax Act, 1961.  It is true that the proviso to the said Explanation applies to the assessee's case, but, for that, the assessee should be able to show that in respect of assessment year 1981-82, it had disclosed all the material facts and that its explanation was bona fide. The assessee had, prima facie, not given all the material along with the return of income, which was originally filed by the assessee, and the understatement of total income for the assessment year 1981-82 was, in fact, detected by the Income-tax  Officer while finalising the assessment for the assessment year 1982-83.  If the Income-tax Officer had not been alert for that year, apparently the understatement for the assessment year 1981-82 would have gone undetected.  The revised return incorporating the closing stock in question was filed by the assessee only after it was confronted by the Income-tax Officer with the hard facts regarding the omission of the stock from the assessee's accounts for the assessment year 1981-82. The conduct of the applicant cannot, therefore, be regarded as bona fide; nor can it be said that the assessee had placed all the relevant material on record while filing the return of income for the assessment year 1981-82.

10. It is true that in respect of assessment year 1982-83, the assessee has assessed on an income which is more than the real income of the assessee of that year because the set off of the opening stock against sales of rice was not claimed by and given to the assessee. This is, however, a mistake, which has occurred in respect of assessment year 1982-83, which is apparent from record and it was for the assessee to have taken proper action to get the mistake rectified. The mistake of 1982-83 cannot, however, cloud the issue of concealment of income for the assessment year 1981-82 which, according to us, has been established on the basis of the facts of the present case discussed above.  On merits, therefore, the assessee has, in our opinion, no case to persuade us to reverse the order of the learned Commissioner of Income-tax (Appeals)."

So far as the additional ground was concerned, the Tribunal examined the record of the Income-tax Officer and gave the finding that taking all the facts on the file together it had to be held that the income-tax Officer had recorded the reasons for initiating action under Section 148 of the Act in respect of Assessment Year 1981-82. The observations of the Tribunal on this point are contained in paragraph 11, of its order which is quoted here-in-below for ready reference:-

"That leaves the question of the additional grounds raised by the assessee and referred to above. The additional grounds do go to the root of the matter and, therefore, in our opinion, they deserve to be admitted. The assessee is only relying, in support of the above grounds, on the material, which is already on record, and does not desire any fresh investigation into facts. The material, which is on record, has been examined by us. It was, in the course of assessment proceedings for the assessment year 1982-83 that the Income-tax Officer detected the understatement of the c losing stock for the assessment year 1981-82.  In the assessment order dated 15th of February, 1983, these facts have been clearly stated by the Income-tax Officer.   He has also stated in the said order that the assessee, when asked to explain the aforesaid omission of the closing stock filed a return of the assessment year 1981-82 in which it showed the value of Ghuta and custom hulling kinki. The said return was filed on 14th February, 1983, that is, a day before the assessment for the assessment year 1982-83 was completed. The order sheet entries have to be read in the above setting of the facts. The order sheet entry dated 14th of Feb., 1983 reads as below:-

"Return received on 14.2.1983 and issue notice under section 148 as per I.T.Act, 1961."

The return disclosed the income, which had not earlier been included by the assessee while filing the original return of income. The under statement was, thus, patent, and if, in the setting of the facts stated above, the Income-tax Officer directed the issue of notice under section 148 stating in the said notice itself that it was a case of under assessment of income, the reasons in question have, in our opinion, been clearly made explicit on the record. There is no standard proforma for recording the reasons. What is to be gathered is whether there is any material on record on the basis of which the I.T.O. formed the opinion that there was concealment of Income due to the assessee's default and whether the I.T.O. Has spelt out his reasons to come to the above conclusion.   In the present case, it is vital to remember that re-assessment proceedings for 1981-82 arose out of investigation done by the I.T.O. has spelt out his reasons to come to the above conclusion. In the present case, it is vital to remember that re-assessment proceedings for 1981-82 arose out of investigation done by the I.T.O. for the assessment year 1982-83, and as a result of putting a specific query by him to the assessee with regard to the omission of the closing stock, and consequent income.  It was as a result of this specific query that the revised return declaring income of about Rs.87,000/- more than the originally assessed income was filed by the assessee. The direction of the Income-tax Officer to issue notice under section 148 in the aforesaid setting of the facts cannot be without any reasoning. Return, showing income undisclosed earlier, is itself the reason for forming the belief that the income has escaped assessment. We are, therefore, unable to accept the assessee's contention that in the present case, initiation of action under section 148 was not valid. The assessee's additional grounds of appeal, therefore stand rejected."

We have heard Sri Vikram Gulati, learned counsel for the applicant and Sri Shambhu Chopra, learned Standing Counsel for the Revenue.

Learned counsel for the applicant submitted that the proceedings under Section148 of the Act in the present case had not been properly initiated inasmuch as no reasons had been recorded before issuing notice which is a precondition for assuming jurisdiction to re-assessment, thus the entire re-assessment proceedings including the order passed by the Income-tax Officer is void ab initio and, therefore, no penalty could have been imposed.  In support of his aforesaid plea, he has relied upon the following decisions:-

1.Commissioner of Income-tax v. Babu Ram Chander Bhan, (1973) 90 ITR 230(All.)

2.K.R.S.Gurumurthy Pathar (By L.R.) v. Commissioner of Income-tax, Madras, (1974) 96 ITR 404(Mad.)

3.Commissioner of Income-tax, Delhi II v. Narang & Co., (1975) 98 ITR 462(Delhi)

4.Commissioner of Income-tax v. K.T. Thomas, (1980) 123 ITR 31 (Ker.)

5.Jute Corporation of India Ltd. v. Commissioner of Income-tax and another, (1991) 187 ITR 688(SC)

6.Commissioner of Income-tax v. A. Yonus Kunju, (1997)228 ITR 147(Ker. )      

      According to him, even if the applicant had participated in the re-assessment proceeding or had given its consent it would not confer any jurisdiction.  In support of his plea, he relied upon the following decisions:-

1.R.Vijayaraghavan v. Commissioner of Agricultural Income-tax, (1977) 110 ITR 535(Mad.)

2. P.V.Doshi v. Commissioner of Income-tax, Gujarat, (1978)113 ITR 22 (Guj.)

         Sri Vikram Gulati has further submitted that  as reasons have not been recorded, the re-assessment proceedings are nullity, therefore, it cannot be made basis for imposition of penalty.  In support of his submission he relied upon the following decisions.

1.Commissioner of Income-tax, Gujarat II v. Kurban Hussain Ibrahimji Mithiborwala,(1971) 82 ITR 821(SC)

2.Commissioner of Income-tax, Gujarat II v. Nanalal Tribhovandas and another, (1975) 100 ITR 734(Guj.)

3.Commissioner of Income-tax v. Rose Lock Factory, (1993) 204 ITR 753(All)

4.Inventors Industrial Corporation Ltd. v. Commissioner of Income-tax,(1992) 194 ITR 548 (Bom.)

5.Commissioner of Income-tax, Meerut v. Hari Raj Swarup & Sons, (1982) 138 ITR 462.(All)

6.Johri Lal (H.U.F.) v. Commissioner of Income-tax, U.P., (1973) 88 ITR 439(SC)

7.Ess Ess Kay Engineering Co.P.Ltd. v. Commissioner of Income-tax, (2001) 247 ITR 818.(SC)

On merits he submitted that the applicant was under a bona fide belief that the stock of Kinki rice had been seized and was never released in the previous year relevant to the Assessment Year 1982-83. The applicant had disclosed the same in the Assessment Year 1982-83 and only when the mistake was pointed out it had voluntarily filed a revised return disclosing the stock of Ghuta rice as also of Kinki rice, thus, the applicant had offered the explanation which has not been found to be false or unsubstantiated and,therefore, no penalty is leviable.  In support of the aforesaid plea he has relied upon the following decisions:-

1.D.M. Dahanukar v. Commissioner of Income-tax, Bombay, (1967) 65 ITR 280(Bom.)

2.Sir Shadilal Sugar and General Mills Ltd. and another  v. Commissioner of Income-tax, Delhi, (1987) 168 ITR 705.(SC)

3.Commissioner of Income-tax v. Bedi and Co.(P) Ltd., (1990) 183 ITR 59(Karnatka).

4.Commissioner of Income-tax v. Agarwalla Brothers, (1991) 189 ITR 786(Patna)

5.Commissioner of Income-tax v. A Yonus Kunju, (1997) 228 ITR 147(Ker.)

6.Commissioner of Income-tax v. Dhoolie Tea Co.Ltd., (1998) 231 ITR 65(Cal)

7.Commissioner of Income-tax v. Suresh Chandra Mittal, (2000) 241 ITR 124(M.P.)

8.Baldev Singh Giani v. Commissioner of Income-tax and others, (2001) 248 ITR 266(P.& H.)

9.Ess Ess Kay Engineering Co.Ltd. v. Commissioner of Income-tax, (2001) 247 ITR 818 (SC)

    Sri Shambhu Chopra, learned Standing Counsel for the Revenue submitted that the assessment in the present case had been completed on 5th April, 1982 on a total income of Rs.12,390/-. While completing the assessment proceedings for the subsequent Assessment Year 1982-83, the Income-tax Officer had noticed that the applicant had sold 209 quintals of Ghuta rice in the first week of April, 1981 whereas till then there was no hulling of paddy nor there was any pending stock of Ghuta rice.  It was further noticed by the Income-tax Officer that the applicant had undertaking hulling of Government paddy during the previous relevant to the assessment year in question and had received 430.04 quintals of Kinki rice as its own share out of Kinki rice hulling, which was not disclosed towards closing stock on the last date of the previous year relevant to the assessment year in question and only when the applicant was confronted, he just filed a revised return of income for the Assessment Year 1981-82, which assessment had already been completed, by including the value of the undisclosed Ghuta rice and its share of Kinki rice received on account of Government hulling. On the basis of the revised return filed by the applicant, the Assessing Authority proceeded for re-assessment under Section 147 of the Act by issuing notice under Section 148 of the Act.  The Assessing Authority had recorded the following reasons

"Return received on 14.2.1983 and issue notice under Section 148  as per I.T. Act, 1961."  

He submitted that the re-assessment order has become final between the parties and, therefore, it is not open for the applicant to assail the validity of the re-assessment order or the proceeding under Section 147 of the Act  in the present case which arises under Section 271(1)(c) of the Act relating to imposition of penalty.  He further submitted that the proceeding having been validly initiated inasmuch as on the basis of the revised return filed  by the applicant, the Assessing Authority had taken cognizance of the same and had issued notice under Section 148 of the Act by recording  reasons and after obtaining approval of the higher authorities.  He, thus, submitted that the proceedings are not void ab initio. According to him, as the re-assessment has become final between the parties in treating it as void, a declaration is required by a competent court of law without which the said proceedings would be treated to have been validly initiated.  He has relied upon the following decision in respect of the aforesaid plea.

1.State of Kerala v. M.K.Kunhikannan Nambiar Manjeri Manikoth, (1996)1 SCC 435.

2.Rafique Bibi(Dead) by LRS. v. Sayed Waliuddin(Dead)by LRs. and others, (2004)1 SCC 287.

   On merits he submitted that as the explanation offered by the applicant has not been believed nor it has been substantiated, the income disclosed in the revised return upon being detected in the proceeding for assessment in the subsequent  Assessment Year 1982-83 constituted sufficient material for imposition of penalty.

Having given our anxious consideration to the various pleas raised by the learned counsel for the parties, we find that it is not in dispute that the applicant had not disclosed in the closing stock on the last date of the previous year relevant to the assessment year in question, the quantity of 433.04 quintals of Kinki rice  as its own share out of Government rice hulling. The applicant had further not disclosed any closing stock of Ghuta rice  which it had sold in the first week of April, 1981, which fell in the previous year relevant to the Assessment Year 1982-83.  The two discrepancies/omissions were noticed by the Income-tax Officer while completing the assessment proceeding for the subsequent assessment year i.e. 1982-83 whereupon even though the assessment for the Assessment year 1981-82 i.e. year in question having been already completed on 5th April, 1982, the applicant had filed a revised return.   The Assessing Authority had made an entry on the order sheet on 14th February, 1983 to the following effect:-

"Return received on 14.2.83 and issue notice under Section 148 as per I.T. Act, 1961."

In the revised return filed by the applicant, it had included the value of the closing stock of Ghuta rice and Kinki rice. The re-assessment was made on an income of Rs.96,300/-.  The applicant had not raised any objection to the re-assessment being made nor at any point of time he had challenged the reasons recorded by the Assessing Authority  as irrelevant.   The re-assessment order has become final. The penalty proceeding under Section 271(1)(c) of the Act was initiated in the course of re-assessment proceeding and vide order dated 23rd March, 1985, the Income-tax Officer had imposed a sum of Rs.33,360/- as penalty, which order has been upheld by the Commissioner of Income Tax (Appeals) as also by the Tribunal. For the first time before the Tribunal the validity of the re-assessment proceeding vis-a-vis non-recording of reasons was raised, which has been negatived by the Tribunal on merits. The question for consideration is as to whether in the collateral proceeding for imposition of penalty such a plea regarding invalidity of the re-assessment can be raised or not and if it can be raised what should be the effect.

In the case of Babu Ram Chander Bhan (supra), this Court has held that evidence which has come into existence subsequent to the assessment proceedings but before the penalty proceedings are finalised is admissible in penalty proceedings and the parties may bring on record such additional material for determining if the penalty should be imposed.

In the case of K.P.S. Gurumurthy Pathar(By L.R.)(supra),  the Madras High Court has held that merely because the partition deed which is not shown to be sham or nominal had come into existence after the assessment proceedings had commenced, the document cannot be said to have no evidentiary value.

In the case of Narang & Co.(supra), the Delhi High Court has held that the penalty proceedings are distinct from assessment proceedings and even if the assessee had failed to give a satisfactory explanation in respect of cash credits in the assessment proceedings, it would be open to him in the penalty proceedings to offer explanation on the basis of fresh material.

In the case of K.T. Thomas(supra), the Kerala High Court has held that Section 271(1)(c) authorises the relevant income-tax authority, if he is satisfied in the course of any proceedings, to levy a penalty on the ground, inter alia, that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. The provision is quite wide in scope. And the additional material considered in appeal from the assessment order, would be available to the authority in proceeding for the levy of penalty under Section 271(1)(c) of the Act.

In the case of Jute Corporation of India Ltd.(supra),  the Apex Court has held as follows:-

"(ii)  An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions.  In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer."

Thus, from the aforesaid decisions it is established that the appellate authority has power to permit the party to raise additional ground which has not been raised in the memorandum of appeal and further in the penalty proceedings fresh material can be considered which was not available at the time of the assessment or while passing the penalty order.

In the case of A. Yunus Kunju(supra), the Kerala High Court has held that if there could not be any sustained and valid assessment there was no question of penalty.  In the aforesaid case the validity of the re-assessment proceeding under Section 147(a) of the Act was up for consideration in a reference made by the Tribunal.  The order of penalty was also up for consideration in a separate question referred to by the Tribunal in the penalty proceedings.  The Kerala High Court has held that it is not possible to accept the submission in view of the clear situation that the penalty gets initiated simultaneously with the order of re-assessment and,therefore, the penalty stands initiated once it is held that re-assessment proceedings were not sustainable.

In the case of P.V. Doshi (supra), the Gujarat High Court has held as follows:-

"The conditions precedent for initiating reassessment proceedings are:(i) reasonable belief reached by the Income-tax Officer under clause (a) or clause (b) of section 147; (ii) recording of reasons by the Income-tax Officer under section 148(2); (iii) sanction before issuing the notice of reassessment by the higher authorities under section 151. These three conditions have been introduced by way of safeguards in public interest so that the finally concluded proceedings, which at the time of the original assessment could be reopened through the initial procedure of appeal, revision or rectification before the assessment became final, could not be lightly reopened with the consequent hardship to the assessee and also unnecessary waste of public time and money in such proceedings.  These conditions have, therefore, to be treated as being mandatory. There could never be a waiver of a mandatory provision for the simple reason that in such cases jurisdiction could not be conferred on the authority by mere consent,but only on conditions precedent for the exercise of jurisdiction being fulfilled.  If jurisdiction cannot be conferred by consent, there would be no question of waiver, acquiescence or estoppel or the bar of res judicata being attracted because the order in such cases would lack inherent jurisdiction and would be a void order or a nullity.  If an original order is without jurisdiction it would be a nullity confirmed in further appeals. The appellate order of the Tribunal thereon would also be a nullity and the Tribunal cannot confer any jurisdiction on the Income-tax Officer by making a remand order."

In the case of R. Vijayaraghavan (supra), the Madras High Court has held as follows:-

"The jurisdiction to revise an order of assessment would arise only if the order was wrong and further discovery has enabled the authority to revise. Accordingly, when in a partition, minor daughters are allotted shares though they were not entitled thereto, that will not militate against the partition deed if they so desired. As partition is not a transfer, the provisions of section 9(2)(iv) of the Tamil Nadu Agricultural Income-tax Act, 1955, would not apply.  In the circumstances, the orders of reassessment of the original orders of composition on the ground that the partition under which the lands were partitioned was not valid, was without jurisdiction."

In the case of Kurban Hussain Ibrahimji Mithiborwala(supra), the Apex Court has held that it is well settled that the Income-tax Officer's jurisdiction to reopen an assessment under Section 34 of the Income-tax Act, 1922, depends upon the issuance of a valid notice. If the notice issued by him is invalid for any reason the entire proceedings taken by him would become void for want of jurisdiction.

In the case of Nanalal Tribhovandas and another (supra), the Gujarat High Court has held that the validity of the notices under Section 34 goes to the very basis of the jurisdiction of the Income-tax Officer to entertain reassessment proceedings under Section 34, and in the absence of such notices, the Income-tax Officer has no jurisdiction to initiate reassessment proceedings.  It is further held that if in fact the Income-tax  Officer had no jurisdiction to initiate reassessment proceedings or to pass any order in reassessment proceedings, then the fact that this particular contention was not urged at an earlier stage was beside the point.  Therefore, the Appellate Assistant Commissioner was competent to entertain the assessee's objection in regard to the validity of the notices under Section 34.

In the case of Inventors Industrial Corporation Ltd.(supra), the Bombay High Court has held as follows:-

"The provisions of section 147(a) of the Income-tax Act, 1961, can be invoked only in a case where the Income-tax Officer had reason to believe that, by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts for the assessment for the year, income chargeable to tax had escaped assessment for that year. The formation of belief by the Income-tax Officer to the effect that income of the assessee had escaped assessment is one of the conditions precedent for the assumption of jurisdiction to make reassessment. Assessment made under section 148/143(3) without the valid formation of belief as to the escapement of income is void ab initio or a nullity.

A ground by which the jurisdiction to make assessment itself is challenged can be urged before any   authority for the first time. If it is found that the Income-tax Officer had no jurisdiction to make an order of reassessment, it is irrelevant that the jurisdiction of the Income-tax Officer to reassess was not challenged at any of the earlier stages. The Officer to initiate reassessment proceedings before the Appellate Assistant Commissioner in the second round of proceedings even though he had not raised it earlier before the Income-tax Officer or in the earlier appeal.

The powers of the first appellate authority, whether the Appellate Assistant Commissioner or the Commissioner of Income-tax (Appeals), are coterminous with that of the Income-tax Officer. The appellate authority has jurisdiction to entertain a ground regarding jurisdiction to make reassessment in an appeal following remand."

In the case of Johri Lal(H.U.F.) (supra), the Apex Court has held as follows:-

"The formation of the required belief by the Income-tax Officer before proceedings can be validly initiated under section34(1)(a) is a condition precedent: the fulfilment of this condition is not a mere formality, it is mandatory, and failure to fulfil that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement: the officer is further required to record his reasons for taking action under section 34(1)(a) and obtain the sanction of the Central Board or the Commissioner,as the case may be."

In the case of Hari Raj Swarup & Sons(supra), this Court has held that if the initiation of the proceedings itself was not permissible in law, the consent given by the assessee to be assessed at a particular figure would not give jurisdiction to the ITO to make the assessment on that figure. Conduct of the assessee, revealed by conceding the concealment of the income, is also not relevant and, therefore, the reassessment made on March,28 1970, for the assessment year 1950-51 in pursuance of Section 147(a) constituted a mistake apparent from the record which could be rectified under Section 154 of the Act.

In the case of Ess Ess Kay Engineering Co.P. Ltd.(supra), the Apex Court has held as follows:-

"This is a case of reopening. We have perused the documents. We find there was material on the basis of which the Income-tax Officer could proceed to reopen the case, it is not a case of mere change of opinion.  We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year.  It does not preclude the Income-tax Officer to reopen the assessment of an earlier year on the basis of his findings of fact made on the basis of fresh material s in the course of assessment of the next assessment year. The appeal is dismissed. No order as to costs."

In the case of Baldev Singh Giani(supra) the Punjab and Haryana High Court has held that the requirement of recording of reasons enshrined in Section 148(2) of the Act is mandatory and since the record did not contain the reasons recorded by the Assessing Officer, the notice of re-assessment proceedings had to be treated as a nullity and was liable to be quashed.

Thus, from the aforesaid decisions, it is well settled that the recourse to proceeding under Section 147 of the Act for re-assessment can be assumed validly on fulfilment of certain conditions, namely,  there should be reasonable belief that the income has escaped assessment, reasons have to be recorded in writing and valid notice has to be issued under Section 148 of the Act before making re-assessment.  If any of the conditions mentioned above is missing the proceeding would be invalid and vitiated.

Applying the principles laid down in the aforesaid decisions to the facts of the present case, we find that in the present case the applicant itself had filed a revised return on 1.2.1983, which was taken note of by the Assessing Authority  and thereafter a notice was issued under Section 148 of the Act on 14th February, 1983.  Moreover, we find that no specific form for recording reasons has been prescribed under the Act or the Rules made thereunder.  If, the assessee voluntarily files a return for which omission has been detected in the assessment proceedings in the subsequent assessment year and taking note of the revised return, a notice under Section 148 of the Act is issued, the reasons would be sufficient. Thus, it cannot be said that no reasons have been recorded by the Assessing Authority while issuing notice in the peculiar facts and circumstances of the case under Section 148 of the Act.  It may also be mentioned here that the re-assessment had become final between the parties and unless and until it is specifically challenged in appropriate proceedings, either by way of an appeal, revision or by way of writ petition under Article 226 of the Constitution of India, no advantage can be taken by the applicant regarding invalidity of the re-assessment proceedings in the collateral proceedings with the penalty proceedings

In the case of  M.K. Kunhikannan Nambiar Manjeri Manikoth, Naduvil (Dead) and others(supra), the Apex Court has held that even a void order or decision rendered between parties cannot be said to non-existent in all cases and in all situations. Ordinarily, such an order will, in fact, be effective inter partes until it is successfully avoided or challenged in a higher forum. Mere use of the word 'void' is not determinative of its legal impact. The word 'void' has a relative rather than an absolute meaning.  It only conveys the idea depending upon the gravity of the infirmity, as to whether it is fundamental or otherwise.

In the case of Rafique Bibi(dead) by LRs(supra), the Apex Court has held as follows:-

"6.What is 'void' has to be clearly understood. A decree can be said to be without jurisdiction, and hence a nullity, if the court passing the decree has usurped a jurisdiction which it did not have; a mere wrong exercise of jurisdiction does not result in a nullity.  The lack of jurisdiction in the court passing the decree must be patent on its face in order to enable the executing court to take cognizance of such a nullity based on want of jurisdiction, else the normal rule that an executing court cannot go behind the decree must prevail.

7.Two things must be clearly borne in mind. Firstly, "the court will invalidate an order only if the right remedy is sought by the right person in the right proceedings and circumstances. The order may be ' a nullity' and 'void' but these terms have no absolute sense: their meaning is relative, depending upon the court's willingness to grant relief in any particular situation. If this principle of illegal relativity is borne in mind, the law can be made to operate justly and reasonably in cases where the doctrine of ultra vires, rigidly applied, would produce unacceptable results."(Administrative Law, Wade and Forsyth, 8th Edn. 2000, p.308) Secondly, there is a distinction between mere administrative orders and the decrees of courts, especially a superior court. "The order of a superior court such as the High Court, must always be obeyed no matter what flaws it may be thought to contain. Thus a party who disobeys a High Court injunction is punishable for contempt of court even though it was granted in proceedings deemed to have been irrevocably abandoned owning to the expiry of a time-limit." (ibid.,p.312)

8.A distinction exists between a decree passed by a court having no jurisdiction and consequently being a nullity and not executable and a decree of the  court which is merely illegal or not passed in accordance with the procedure laid down by law. A decree suffering from illegality or irregularity of procedure, cannot be termed inexecutable by the executing court; the remedy of a person aggrieved by such a decree is to have it set aside in a duly constituted legal proceedings or by a superior court failing which he must obey the command of the decree. A decree passed by a court of competent jurisdiction cannot be denuded of its efficacy by any collateral attack or in incidental proceedings."

Thus, applying the principles laid down by the Apex Court in the aforesaid cases to the facts of the present case, we find that the re-assessment order having not been challenged in an appeal or any other proceeding, it cannot be said to be a void order in a collateral proceeding.

Now, coming to the merits of the case, we find that the applicant had voluntarily filed a revised return declaring the closing stock of Ghuta rice and Kinki rice on having been detected of its omission in the course of the assessment proceedings for the subsequent Assessment Year 1982-83. The explanation given by the applicant was that as the stocks had been seized it was under a bona fide belief that it is not required to be disclosed in the closing stock for the assessment year in question.  In respect of Kinki rice, the explanation was that it was to be included in its share when it is sold.  The stock of these two commodities had been disclosed by the applicant during the previous year relevant to the Assessment Year 1982-83 i.e. subsequent assessment year. The question is as to whether on these facts, the applicant can be said to be guilty of concealment of particulars of his income or furnishing inaccurate particulars of said income so as  to attract the provisions of sub-clause (c)sub-section (1)  of Section 271 of the Act.  It may be mentioned here that under the Explanation (1) to Section 271 (1) of the Act, if the explanation offered by such person is found to be false or where the explanation offered by  such person is not substantiated or he fails to prove that the said explanation is bona fide then the amount added or disallowed in completing total income is deemed to represent income in respect of which particulars have been concealed.

In the case of D.M.Dahanukar (supra) the Bombay High Court has held that mere omission will not amount to concealment or deliberate furnishing of inaccurate particulars unless the omission is attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon.  The Bombay High Court was considering the imposition of penalty under section 28(1) (c)  of the Indian Income-tax Act, 1922, which provisions are materially different than that of the present Act inasmuch as the explanation (1) was not there.

In the case of Sir Shadilal Sugar & General Mills Ltd.(supra),  the Apex Court has held that from the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of quasi-criminal offence.  

In the case of Bedi and Co.(P) Ltd.(supra), the Karnataka High Court has held that where re-assessment has been set aside, there was no basis of imposition of penalty.

In the case of Agarwalla Brothers(supra), the Patna High Court has held that where the re-assessment has been held to be not valid, and has been set aside, the penalty was not leviable as it has been imposed consequentially on re-assessment.  In the aforesaid case the validity of the re-assessment proceedings by way of separate question as also the penalty was up for consideration.

In the case of Dhoolie Tea Co.Ltd.(supra) Calcutta High Court has held that where the assessee has bona fie belief that his income is not taxable and he has failed to disclose such income under bona fide belief, no penalty should be imposed under Section 271(1)(c) of the Act.

In the case of Suresh Chandra Mittal(supra), the Madhya Pradesh High Court has held as follows:

"That the assessment was made by the Revenue and once the assessing authority had failed to take any objection in the matter the declaration of income made by the assessee in his revised returns and the explanation that he had done so to buy peace with the Department and to come out of vexed litigation could be treated as bona fide in the facts and circumstances of the case. Accordingly, no penalty could be levied for concealment."

Each of the aforesaid decisions proceeded on the peculiar facts of their cases.  In the present case, we find that by omission the applicant had not disclosed the stock of Kinki rice and Ghuta rice in its closing stock while filing return for Assessment Year 1981-82 even though the sale of the said items  had been disclosed in the subsequent assessement year 1982-83 and when the omission was noticed the applicant had filed revised return including the said quantity in its closing stock.  The explanation offered by the applicant is bona fide. He has been able to substantiate the said explanation also and, therefore, the amount assessed pursuant to the revised return cannot be said to represent income in respect of which particulars have been concealed.  

In the case of Rose Lock Factory (supra), this Court has held that where the Tribunal has come to the conclusion that there was bona fide omission on the part of the assessee it was justified in reducing the penalty.  The facts of the case were as follows:-

"During the accounting year relevant to the assessment year 1968-69, which ended on March 31, 1968, the assessee obtained an import licence for import of nickel anodes and for that two bills were made, one of them in the name of J of U.K. For L1,482 and another in the name of B of Vienna for L2,494. The amounts of these two bills in Indian currency worked out to Rs.30,863. These goods were not received by the assessee during the relevant accounting year, but in April, 1968, the Income-tax Officer found that the assessee had paid Rs.8,500 to D towards clearing, forwarding and shipping charges; this amount was paid in February, March, 1968, and was then entered in the books of account of the assessee on March 13, 1968. The assessee then debited to the goods account the entire amount of Rs.39,363 (30,863 + 8,500), but in drawing up the profit and loss account, the assessee did not include the value of the above mentioned goods in the closing stock.  However, when the assessee was asked to explain, it immediately filed a revised return in which the income with reference to the original return was increased by Rs.30,863, while the amount of Rs.8,500 paid to D was not included even at that stage. The Inspecting Assistant Commissioner, therefore, initiated penalty proceedings in regard to the total amount of Rs.39,363 and levied penalty under section 271(1)(c). The Tribunal found that there was a technical mistake in the accounting so far as the amount of Rs.30,863 was concerned since the goods were in transit, but the non-disclosure of Rs.8,500, which was paid in March, 1968, could not be said to be a technical mistake."

We find that the Apex Court in the case of K.C. Builders and another v. The Assistant Commissioner of Income Tax, JT 2004(2) SC 100 has held as follows:-

"15.One of the amendments made to the above mentioned provisions is the omission of the word"deliberately" from the expression "deliberately furnished inaccurate particulars of such income".  It is implicit in the word"concealed" that there has been a deliberate act on the part of the assessee. The meaning of the word "concealment" as found in Short Oxford English Dictionary, 3rd Edition, Volume I, is as follows:-

"In law, the intentional suppression of truth or fact known, to the injury or prejudice of another."

16. The word "concealment" inherently carries with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even it takes out the case from the purview of non-disclosure, it cannot be itself take out the case from the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon.  In order that a penalty under section 271(1)(c) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. Where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and therefore, in such a case no such penalty can survive and the same is liable to be cancelled as in the instant case.  Ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation of penalty by the authorities."

Therefore, the word "concealment" inherently carries with it the element of mens rea .  The explanation offered  by the applicant in the present case is bona fide and also stands substantiated specially when the closing stocks  of Ghuta rice and Kinki rice though omitted to have been disclosed in the previous year relevant to the assessment year in question have been voluntarily disclosed in the revised return filed by the applicant and which stocks have been bonafidely disclosed by the applicant in the subsequent assessment year i.e. 1982-83 and had also been subjected to tax in that year also apart from being subjected to tax in the assessment year 1981-82 by the reassessment order. Thus, in our considered opinion, the Tribunal was not justified in upholding the levy of penalty.

In view of the foregoing discussion,  we answer the question referred to us in I.T.R. No.170 of 1990 in the affirmative i.e. in favour of the Revenue and against the assessee. whereas the question referred to us in I.T.R. No.62 of 1992 is answered in the negative  i.e. in favour of the assessee and against the Revenue.  However, there shall be no order as to costs.

9.5.2005

mt


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Reproduced in accordance with s52(q) of the Copyright Act 1957 (India) from judis.nic.in, indiacode.nic.in and other Indian High Court Websites

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