Bhagwat Prasad v. Commissioner Of Income-Tax.

R.K Gulati, J.:— At the instance of the assessee, the Income-tax Appellate Tribunal, Allahabad Bench; Allahabad, has made this reference to this court under section 256(1) of the Income-tax Act, 1961 (for short “the Act”).

2. The brief facts are these:

The assessee is a Hindu undivided family and the dispute pertains to the assessment year 1975-76. As a result of a search and seizure under section 132 of the Act at the business and residential premises of the assessee, it was detected that the assessee was doing pawning business for the past several years. Pursuant to the search and seizure, the concealed income was summarily determined at Rs. 10,45,565 Under section 132(5) of the Act. The income-tax returns for the assessment years 1967-68 to 1975-76 were filed after the date of search and certain income was also disclosed under the voluntary disclosure scheme. For the assessment year in dispute, initially an income of Rs. 19,000 was returned from pawning which was revised at Rs. 25,000. Under the voluntary disclosure scheme an income of Rs. 12,000 was also declared for the assessment year in dispute. As the income returned was not found acceptable by the Income-tax Officer, he drew up a draft assessment order under section 144B(1) of the Act and forwarded it together with the objections of the assessee to the concerned Inspecting Assistant Commissioner as contemplated under section 144B of the Act, proposing an assessment on a total income of Rs. 1,84,470 after giving allowance of proposed reduction of Rs. 58,116 for possible savings.

3. Sub-section (4) of section 144B as it stood at the relevant time provided as under:

“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.”

4. It may be observed that sub-section (5) of that provision provides that directions issued under sub-section (4) shall be binding on the Income-tax Officer. During the pendency of the proceedings under section 144B of the Act, the Inspecting Assistant Commissioner in the purported exercise of his power under sub-section (1) of section 144A of the Act, issued a notice to the assessee in connection with the proposed reduction of Rs. 58,116 for possible savings referred to in the draft assessment order. After hearing the assessee, the Inspecting Assistant Commissioner issued instructions under section 144B as well as under 144A. In the instructions issued under section 144A the Inspecting Assistant Commissioner directed as under:

“In the computation of savings you have proceeded with a presumption that there was no partition in the Hindu undivided family and you have clubbed the income, both sarrafa business and pawning business. You have also added together the income declared by the individual as well as by the Hindu undivided family. However, I have given a finding that there was a partial partition in the Hindu undivided family and Shri Anirudh Prasad and Bhagwat Prasad were living separately. I have also held that sarrafa business was done by the above two persons in the individual capacity. Hence, presumption on which you have determined the income of the Hindu undivided family for probable savings falls through. Therefore, your computation is ab initio wrong. Moreover, as per provisions of the Disclosure Scheme of 1975, the declaration made by the Hindu undivided family under section 14 is not binding on the Department. Therefore, unless very positive proof is given to show that unexplained investment found during seizure were made out of past savings simply because the assessee has stated so, cannot be accepted.”

5. After the receipt of instructions, the Income-tax Officer completed the assessment under section 143(3) of the Act on a total income of Rs. 2,20,270 against the proposed assessment of Rs. 1,84,470 in the draft assessment order.

6. The assessee felt aggrieved and challenged the assessment order in appeal before the Commissioner of Income-tax (Appeals), in which a preliminary objection was taken that the assessment order was passed contrary to the procedure prescribed under the Act and in violation of the principles of natural justice. The appellate authority found that the assessment order was completed without confronting the assessee with the directions under section 144A of the Act and without providing an opportunity to the assessee to produce evidence in connection with the plea of savings. The appellate authority opined that if any further additions were called for to the returned income then another draft assessment order should have been prepared and sent to the assessee, inviting its directions and the procedure contemplated under section 144B should have been followed afresh. As this procedure was not followed, the appellate authority set aside the assessment order with the following directions:

“…The assessment, thus suffers from a procedural lacuna. The assessee has not been given reasonable opportunity of hearing showing cause. The assessment, therefore, is set aside to be made afresh giving due opportunity to the assessee according to the provisions of law.”

7. Feeling still aggrieved, the assessee filed a further appeal before the Income-tax Appellate Tribunal. The case taken was that on the findings recorded by the Commissioner of Income-tax (Appeals), the assessment should have been annulled for it was made in contravention of the mandatory provisions of section 144B of the Act and the view that the assessment, order suffered from a procedural lacuna was incorrect. However, these contentions were repelled by the Tribunal and the order appealed against was upheld.

8. From and out of these facts, the Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in upholding the order of the Commissioner of Income-tax (Appeals) in not annulling the assessment framed against the rules of natural justice and in contravention of the provisions of section 144B of the Income-tax Act, 1961, but in only setting it aside to be made afresh after giving due opportunity to the assessee in accordance with law?”

9. Learned counsel for the assessee contended that the power of the Inspecting Assistant Commissioner to issue directions under sub-section (1) of section 144B was confined only to the material covered by the objections. Any assessment pursuant to such directions on an income in excess of the amount proposed in the draft assessment order, which was not covered by the objections was invalid, inasmuch as the Inspecting Assistant Commissioner had no power to issue directions for disallowance of “reduction for past savings” stated in the draft assessment order. Yet another contention was that as the assessment was completed without making statutory compliance with the mandatory provisions of section 144B and in violation of the principles of natural justice, it was without jurisdiction and a nullity. It was urged that on the facts obtaining in the case, the assessment order should have been annulled instead of restoring it to the Income-tax Officer for fresh assessment. In support of these submissions, reliance was placed on the decisions in Bengal and Assam Investors Ltd. v. CIT, [1983] 142 ITR 156 (Cal); Manipal Industries Ltd. v. CIT, [1991] 188 ITR 445 (Kar) and Asiatic Oxygen Ltd. v. CIT, [1991] 190 ITR 328 (Cal).

10. We have considered these submissions carefully.

11. The contention that no assessment on an amount in excess of what was proposed in the draft assessment order, on the facts of the case, was admissible, is wholly misconceived. It is true that the jurisdiction of the Inspecting Assistant Commissioner under sub-section (4) of section 144B is confined only to the material covered by the objections but in the instant case, as already stated, the Inspecting Assistant Commissioner had taken recourse to section 144A of the Act. Separate instructions under section 144A were given which have already been extracted above. Those instructions were in addition to the instruction under section 144B of the Act.

12. It may be observed that sub-section (1) of section 144A postulates that the Inspecting Assistant Commissioner may, either on his own motion or on a reference from the Income-tax Officer or on the application of the assessee, call for and examine the assessment record of any assessee in which an assessment is pending and issue such directions to an Income-tax Officer, as he deems fit so as to enable the Income-tax Officer to complete the assessment. The proviso attached to sub-section (1) of section 144A mandates that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.

13. On a scrutiny of sub-section (1) of section 144A it is apparent that the Inspecting Assistant Commissioner is enjoined with a power to call for and examine the record of any proceedings of an assessment which is pending and to issue such directions as “he thinks fit” for the guidance of the Income-tax Officer. The implication of the expression “such directions he thinks fit” is very wide. Such directions could be in respect of any matter relevant for the purposes of the pending assessment of an assessee. This power of the Inspecting Assistant Commissioner is not circumscribed by any limitation like the one provided under sub-section (4) of section 144B of the Act where he cannot traverse beyond the subject-matter of the draft assessment order which is not covered by the objections. The sweep of section 144A is much wider and it extends to the entire assessment record of a case. The powers entrusted to the Inspecting Assistant Commissioner under section 144A to issue pre-assessment directions in individual cases are independent of the powers under section 144B and are in addition to his powers under any other provisions of the Act, which he can invoke in an appropriate case after due notice to the assessee even during the course of proceedings under section 144B, where he considers it necessary or expedient to do so, having regard to the nature of the case or the amount involved or for any other reason.

14. The provisions contained in sections 144A and 144B come into play in different contingencies and are procedural in nature. They are part of the machinery to complete the making of an assessment order. These provisions are designed to provide a pre-assessment review and a forum to the assessee to know the merits of the proposed assessment before actual assessment is made and he is saddled with a pecuniary liability resulting from it. The object appears to be to avoid multiplicity of proceedings and to reduce the area of dispute between the assessee and the Department and also to provide for a check and balance against an arbitrary assessment causing unnecessary harassment which could otherwise be avoided.

15. In CIT v. M.S.P Exports Pvt. Ltd., [1992] 196 ITR 762, a Division Bench of the Karnataka High Court was confronted with the question whether it was open to the Inspecting Assistant Commissioner to issue directions under section 144A of the Act when a draft assessment order had been submitted to him by the Income-tax Officer under section 144B on the ground that the assessment proceedings are still pending before the Income-tax Officer. The view taken was that the provisions of section 144A can be invoked while exercising the power under section 144B subject to the assessee being heard in the matter. It was observed that there could be no doubt that an assessment is not complete when only a proceeding under section 144B is pending. In fact, under section 144B only a draft order is prepared. The assessment is to be completed only after the Inspecting Assistant Commissioner issues appropriate directions under section 144B(4), after which, the Income-tax Officer will have to complete the assessment. Similarly, under section 144A(1) the direction that may be issued by the Inspecting Assistant Commissioner is to enable the Income-tax Officer to complete the assessment and until an assessment is completed, the proceedings for assessment will be treated as pending. Having said so it was held as under (page 766):

“It can be safely stated that these two provisions are procedural and part of the machinery to complete the making of an assessment order. The procedural provisions are liberally construed to smoothen the working of the machinery and to advance the object behind the said provisions. A technical and literal approach is not normally resorted to. The two provisions empower the Inspecting Assistant Commissioner to issue appropriate directions to the Income-tax Officer, but the basic requirement is that the assessee will have to be heard before a direction is issued. In the instant case, there is no dispute that such an opportunity was given to the assessee. If there was an omission to consider any matter by the Income-tax Officer and he fails to make a reference under section 144B and thereafter it is to be held that section 144A is not applicable, the Revenue may have thereafter to resort to the power of revising an order of assessment and it is not understandable as to why only such a procedure should be permitted. By permitting the invocation of section 144A at the time of exercising the power under section 144B, no prejudice will result to the assessee.”

16. In CIT v. N. Krishnan, [1988] 172 ITR 604 (Ker), it was held (page G07):

“Since the Inspecting Assistant Commissioner has power under section 144A to issue directions either suo motu or on a reference or on an application by an assessee, he may suo motu issue directions whenever he finds it necessary to do so in regard to any matter relating to the assessment. If directions are issued by him on matters not arising from the reference, as in the present case, such directions emanate from his suo motu power under section 144A.”

17. In view of the above discussion, we have no hesitation to say that on the facts of the case, the Inspecting Assistant Commissioner had every jurisdiction to issue directions with regard to disallowance of “reduction for past savings” stated in the draft assessment order in exercise of his power under section 144A of the Act, notwithstanding the said matter was not covered by the reference made under section 144B of the Act.

18. In so far as the cases relied upon by learned counsel for the assessee are concerned, in our opinion, they are clearly distinguishable and have no application to the facts of the instant case.

19. In the case of Asiatic Oxygen Ltd., [1991] 190 ITR 328 (Cal), the assessee had incurred certain expenditure in the preparation of a feasibility report in connection with a project to produce raw materials required by it and had claimed it as a Revenue expenditure. The claim was allowed by the Income-tax Officer in the draft assessment order. However, the Inspecting Assistant Commissioner disallowed the claim and directed its being added back to the income of the assessee. The Tribunal upheld the addition. On a reference, it was held that in the draft assessment order the amount claimed as expenditure was not disallowed by the Income-tax Officer and, therefore, the question of its disallowance did not arise as the matter was not covered by the objections raised by the assessee. It may be observed that it was not a case in which the provisions under section 144A were resorted to by the Inspecting Assistant Commissioner, as in the case before us. In fact, the decision in the case of N. Krishnan, [1988] 172 ITR 604 (Ker) which was cited, was distinguished on this ground alone. Moreover, on the merits the revenue nature of the expenditure was upheld by the High Court.

20. In Manipal Industries Ltd.'s case, [1991] 188 ITR 445 (Kar), what had happened was that in the draft assessment order the Income-tax Officer had accepted the assessee's claim for depreciation as per return. The Inspecting Assistant Commissioner, however, approved the claim of depreciation for a much lesser amount without any notice to the assessee as contemplated under sub-section (4) of section 144B of the Act. On these facts it was held that the amount of depreciation allowed in the draft assessment order could not have been withdrawn without affording an opportunity of being heard, which means a personal hearing to the assessee. No such situation arises in the instant case before us.

21. Likewise, in the case of Bengal and Assam Investors, [1983] 142 ITR 156 (Cal), it was held that because of enhancement of an assessment as a result of the directions issued by the Inspecting Assistant Commissioner under section 144B(4) on an item not covered by the draft assessment order, the assessment will be invalid to that extent “which was not covered by the draft assessment”. This was also not a case where the Inspecting Assistant Commissioner had exercised his power under section 144A of the Act.

22. This brings us to the other contention of the assessee. The question for consideration is as to whether the assessment order which was made in violation of the mandatory requirements of section 144B and otherwise also in breach of the principles of natural justice was an order ab initio void and non est in law or it suffered from a procedural irregularity which was curable. Another aspect of the question relates to the power of the Income-tax Appellate Tribunal to give direction to the Income-tax Officer, as it has given while setting aside the assessment to frame a fresh assessment order observing the due procedure of law.

23. It could not be disputed that the Income-tax Officer had seisin over the case and had acquired a valid jurisdiction under the Act and in that sense had power to initiate the proceedings. Where a case is referred under section 144B to the. Inspecting Assistant Commissioner or it becomes the subject-matter of scrutiny under section 144A, the assessing authority continues to hold the overall jurisdiction over the case to frame the assessment order as contemplated under section 143(3) of the Act, after the termination of proceedings before the Inspecting Assistant Commissioner. The assessing authority does not become functus officio while the proceedings are pending under section 144A or section 144B or both. The only effect is that making of the final assessment order is deferred or kept in abeyance so long as the matter is under consideration of the Inspecting Assistant Commissioner subject to the period of limitation provided under section 153 of the Act. In our opinion, where an assessment is completed pursuant to the directions under section 144A without affording an opportunity to the assessee or without following the procedure under section 144B afresh, it would not render such an assessment non est or ab initio void. A proceeding is a nullity when the authority taking it had no jurisdiction of any kind either for want of pecuniary or territorial jurisdiction or otherwise there was inherent lack of jurisdiction over the subject-matter of the proceedings. There is a clear-cut distinction between jurisdiction and procedure. A defect in procedure will not ordinarily amount to lack of jurisdiction. As already observed earlier, both the provisions in section 144B or section 144A are procedural in nature and part of the assessment machinery. Any procedural omission or irregularity in observing these provisions in a given case would not render the assessment order a nullity. The lapse or omission on the part of the assessing authority has no impact on its jurisdiction to pass a valid assessment order after correcting the infirmity complained of and thereafter to effect the final assessment order. To put it differently, the non-compliance of the statutory requirement or breach of the principles of natural justice might affect the legality of the order but does not affect the jurisdiction to take the proceedings de novo for completion of the assessment order afresh. By the illegality which vitiated the proceedings after the same were lawfully initiated, the notice issued if any, did not cease to operate and it is always open to the concerned authority to take up the matter at the point at which illegality supervened to correct those proceedings. If an order passed by a statutory authority is struck down as invalid for non-compliance with statutory provisions or not giving effect to the maxim audi alteram partem the proceedings do not come to an end. All that is done is that the order assailed by virtue of its inherent defects is vacated but the proceedings are not terminated. They will stand restored to the stage before the order was passed. This position is well settled in law.

24. In Vishwanath Prasad Bhagwati Prasad v. CIT, [1993] 202 ITR 469 (All), the assessment was completed without taking recourse to section 144B when admittedly, that section was attracted on the facts of that case. Two questions were raised for consideration of this court. Firstly, whether non-compliance of section 144B was only a procedural lapse and, secondly, whether the Tribunal was justified in upholding the order of the Appellate Assistant Commissioner in restoring the assessment to the Income-tax Officer with directions to consider the matter afresh from the stage where the irregularity intervened. Both the questions were answered in the affirmative. It was pointed out that section 144B merely sets out specific procedure to be followed in the cases where the Income-tax Officer proposed to make any variation in the income or loss shown by the assessee, which is more than rupees one lakh. It does not confer jurisdiction on the assessing authority to make assessment and, therefore, non-compliance of it cannot render the assessment void and liable to be annulled. The court held as under (headnote):

“Section 144B of the Income-tax Act, 1961, falls in Chapter XIV which bears the caption ‘procedure for assessment’. It is, therefore, manifest that sections 139 to 158 falling in Chapter XIV relate to procedure for making assessment. Section 144B is, therefore, procedural in nature, non-compliance with which cannot render an assessment a nullity. Section 144B was enacted with a view to ensuring that the assessment made by the assessing authority is not arbitrary, whimsical, capricious or unreasonable. It does not confer jurisdiction on the assessing authority to make the assessment and, therefore, non-compliance with it cannot render the assessment void.”

25. In the ultimate analysis it was held that the order of the appellate authority in setting aside the assessment for fresh assessment was valid in law.

26. The ratio decidendi of the aforesaid case applies on all fours to the facts of the instant case. There are several other pronouncements of different High Courts in which a similar view has also been taken and some of them have been referred to in the case of Vishwanath Prasad Bhagwati Prasad, [1993] 202 ITR 469 (All), but it is not necessary to refer to them again in this judgment.

27. Section 251(1)(a), inter alia, states that in disposing of an appeal, the Deputy Commissioner (Appeals) in an appeal against an order of assessment may confirm, reduce, enhance or annul the assessment or he may set aside the assessment or refer the case back to the Assessing Officer for making assessment in accordance with the directions given by the Deputy Commissioner (Appeals) and after making such further enquiry as may be necessary, and the Assessing Officer shall thereupon proceed to make fresh assessment and determine, where necessary, the amount of tax payable on the basis of such assessment. The Income-tax Appellate Tribunal under sub-section (1) of section 254 has jurisdiction to pass such orders as it may deem fit after giving both the parties an opportunity of being heard. In view of these provisions the power of the appellate authority to set aside the assessment in an appropriate case for the purposes of making assessment in accordance with the directions in the order passed in appeal and after any such inquiry as may be required, cannot be seriously disputed. In Kapurchand Shrimal v. CIT, [1981] 131 ITR 451, the Supreme Court has held as under (page 460):

“It is, however, difficult to agree with the submission made on behalf of the assessee that the duty of the Tribunal ends with making a declaration that the assessments are illegal and it has, no duty to issue any further direction. It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute.”

28. For what we have said above, we feel inclined to agree with the view taken by the Income-tax Appellate Tribunal. The second contention is accordingly rejected.

29. In the result, the question referred to this court is answered in the affirmative, that is, in favour of the Revenue and against the assessee. There shall be no order as to costs.