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M/S. V.K Packaging Industries v. Tax Recovery Officer, I.T Deptt., Allahabad And Others

Allahabad High Court

Jan 12, 2004

Judgment

Subsequent
References

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Factual and Procedural Background

The petitioner is a registered partnership firm engaged in the manufacture of corrugated/card board boxes. For the assessment year 1997-1998 the petitioner filed a return on 31-10-1997 declaring income of Rs. 27,374.28. The Assessing Officer (Income Tax Officer, Ward No. 5, Allahabad) passed an assessment order dated 15-3-2000 under Section 143(3) determining the petitioner's income at Rs. 7,40,750 (Annexure 1).

During assessment, notices under Section 133(6) were issued to certain third parties (M/s. Shiv Datt and Sons, M/s. K. Lal and Company and M/s. Shakumbhari Pulp and Paper Mills Ltd.) and copies of their accounts were obtained. Additions (notably Rs. 4,25,000 and Rs. 50,080) were made in the petitioner’s assessment on the basis of those third-party account copies. The petitioner alleges it was not supplied those copies, the third parties were not summoned and the Assessing Officer himself recorded in the assessment order that, due to shortage of time, proper verification was impossible.

The petitioner appealed to the Commissioner of Income Tax (Appeals). The CIT(A) decided the appeal by an ex parte order dated 30-4-2002 (Annexure 3). The petitioner then filed a further appeal to the Income Tax Appellate Tribunal (Tribunal), which on 30-12-2002 set aside the CIT(A) order and remanded the matter to the CIT(A) directing that the petitioner be supplied copies of the third-party accounts and that all grounds be considered (Annexure 4). The remanded appeal is pending before the CIT(A).

Meanwhile, the Tax Recovery Officer (respondent No. 1) issued notices under Section 226(3) for recovery of the tax demand assessed by the Assessing Officer (Annexure 5). Pursuant to such a notice, Saraiya Distillery Ltd., Gorakhpur deducted Rs. 2,00,000 from the petitioner's account and deposited it with the Income Tax Department (Annexure 6); it also withheld further payments due to the petitioner on account of supplies. The petitioner had earlier deposited Rs. 75,000 with the Income Tax Department (three challans; Annexure 7) and sought refund of sums recovered under the Section 226(3) notices and refund of the Rs. 75,000 with interest; petitioner also sought a direction to respondent No. 3 to decide the remanded appeal expeditiously.

Legal Issues Presented

Whether the notice under Section 226(3) of the Income Tax Act issued for recovery of tax (and amounts realized pursuant thereto) was legally sustainable when the assessment order on which it was based had been set aside/remitted on appeal to the Tribunal.
Whether the petitioner is entitled to restitution (refund with interest) of amounts realized under the impugned Section 226(3) notice where the assessment order has ceased to exist by reason of merger into a superior court/tribunal order.
Whether the issuance of a notice under Section 148 (reassessment) affects the continuing validity of the original assessment order for purposes of recovery under Section 226(3).
Whether an assessment which relies on third-party accounts is illegal if copies of those third-party accounts were not supplied to the assessee.

Arguments of the Parties

Petitioner's Arguments

The assessment order dated 15-3-2000 is illegal as major additions were made on the basis of third-party account copies which were not supplied to the petitioner and were not properly verified (Assessing Officer admitted shortage of time).
The Tribunal’s order dated 30-12-2002 (setting aside the CIT(A) order and remanding the matter) has the effect of merging prior orders, so that the assessment order dated 15-3-2000 has ceased to exist; consequently, no valid demand existed and recovery under Section 226(3) was illegal.
The petitioner relied on Saran Engineering Co. Ltd. v. C.I.T and its affirmation in I.T.O v. K.L. Srihari to contend that once reassessment proceedings are started the earlier order ceases to exist.
The petitioner relied on Kanhaiya Lal v. C.I.T and Chiranjit Steel Rolling Mills v. C.I.T to contend that an assessment is illegal where copies of third-party accounts are not supplied to the assessee.
The petitioner sought restitution (refund) of amounts realized and deposit of Rs. 75,000 with interest and prayed for expeditious disposal of the remanded appeal.

Respondents' Arguments

The original assessment order is valid and effective until it is substituted by a reassessment order; mere issuance of a notice under Section 148 does not affect the validity of the original assessment order.
Respondent No. 1 (Tax Recovery Officer) correctly issued the notice under Section 226(3) because no stay had been granted by the CIT(A) in the pending appeal.
The respondent contended that the petitioner was supplied the relevant documents on 2-9-2002.
The counter-affidavit also asserted there was no statutory provision for filing an appeal/objection against the impugned order of the CIT(A), implying no alternative remedy.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Saran Engineering Co. Ltd. v. C.I.T., (1983) 143 ITR 765 (1983 Tax LR 340)	Once reassessment proceedings are started the earlier order ceases to exist.	The petitioner relied on this decision to argue that a notice under Section 148 (reassessment) renders the earlier assessment order non-existent; the Court considered this line of authority in the context of merger and validity of demand.
I.T.O. v. K.L. Srihari, (2001) 250 ITR 193	Affirmation of the ratio in Saran Engineering regarding effect of reassessment on earlier order.	The Court noted that the Supreme Court had affirmed the ratio and treated it as supporting the petitioner's position on the effect of reassessment notices and the non-existence of earlier orders.
Kunhayammed v. State of Kerala, (2000) 6 SCC 359 : AIR 2000 SC 2587	Doctrine that a superior court's decree/order is final, binding and operative and that the decree/order of the court below merges into that of the superior court.	The Court relied on this authority (quoted at para 12) to explain and apply the doctrine of merger: earlier orders of the AO and CIT(A) merged into the Tribunal's order dated 30-12-2002 and thus ceased to exist.
Raj Singh v. Board of Revenue, 1967 All LJ 1054	Principle that a decree of a trial court merges in the decree of the appellate court; effect of merger is that the lower court's decree loses identity.	The Court cited this decision to support the proposition that earlier orders are extinguished by the appellate order and so cannot serve as a basis for recovery after merger.
South Eastern Coalfields Ltd. v. State of M.P., (2003) 8 SCC 648 : AIR 2003 SC 4482	Definition and scope of "restitution" — restoring to a party what has been lost as a direct consequence of a decree or order which is later modified/varied/reversed.	The Court relied on this authority to justify restitution (refund) of amounts realized under the impugned order and to ground the award of interest; the decision was quoted on the nature of restitution.
Zafar Khan v. Board of Revenue, U.P., (1984 Supp SCC 505) : AIR 1985 SC 39	Authority referenced for the etymological and legal understanding of restitution in the context of appellate reversal.	South Eastern Coalfields (which the Court relied upon) itself referred to Zafar Khan; the Court cited the chain of authority to support the restitution principle applied here.
Kanhaiya Lal v. C.I.T., (2001) 162 Taxation 649 : (2001 Tax LR 232)	Proposition that assessment is illegal if copies of third-party accounts (on which additions are based) are not supplied to the assessee.	The petitioner relied on this decision to support the contention that the assessment (and therefore recoveries based on it) was illegal because third-party accounts were not supplied; the Court considered the principle in the factual matrix.
Chiranjit Steel Rolling Mills v. C.I.T., (1972) 84 ITR 222 : (1971 Tax LR 1340)	Similar proposition that non-supply of third-party account copies may render an assessment invalid.	The petitioner cited this High Court decision to support the illegality of the assessment; the Court referenced the petitioner’s reliance on this line of authority when addressing the legality of the original assessment.

Court's Reasoning and Analysis

The Court evaluated the chronological sequence of orders and the content of the Tribunal's order of 30-12-2002. The Tribunal had set aside the CIT(A) order on the ground that the Assessing Officer and the CIT(A) had not furnished copies of the third-party accounts to the petitioner. Given that sequence, the Court applied the doctrine of merger: the Assessing Officer's order dated 15-3-2000 and the CIT(A)'s ex parte order dated 30-4-2002 merged into the Tribunal's order dated 30-12-2002 and thereby ceased to exist.

Relying on settled authorities (including Kunhayammed and Raj Singh), the Court explained that once a superior forum disposes of the lis, the order of the inferior forum merges into the superior forum's order and loses independent legal existence. On that basis the Court found it impossible to sustain any demand or recovery purportedly made pursuant to the earlier assessment order of 15-3-2000 since that order had, in law, ceased to operate.

The Court considered the respondents' contentions — that an original assessment remains valid until substituted and that no stay had been granted — and the assertion that documents had been supplied on 2-9-2002. Nevertheless, the Tribunal's express direction that third-party accounts be furnished and that the matter be decided after considering all grounds showed that the Tribunal had set aside the earlier order. The Court held that the mere remand did not revive the original assessment order.

Having concluded that the recovery was effected pursuant to an assessment order that had ceased to exist, the Court turned to restitution. It invoked the principle (as explained in South Eastern Coalfields and statutory provision S.144 CPC) that when an order is set aside or modified, the successful party on appeal is entitled to restitution — i.e., restoration of what was lost by reason of the now-set-aside order. The Court therefore held that amounts realized pursuant to the impugned Section 226(3) notice should be refunded with interest.

The Court also expressed strong disapproval of the administrative practice of hurried assessments shortly before limitation expiry resulting in unverified additions "due to shortage of time," warning that such practice causes hardship and is legally and administratively objectionable.

Holding and Implications

Holding: The writ petition was allowed. The Court's core ruling is summarized as follows:

The notice under Section 226(3) of the Income Tax Act and the recoveries made pursuant to it were quashed.

Direct consequences ordered by the Court (as stated in the opinion):

All amounts realized from the petitioner pursuant to the impugned notice under Section 226(3) and the assessment order dated 15-3-2000 shall be refunded forthwith to the petitioner with interest at 12% per annum from the date of realization to the date of refund.
The refund is to be made within one month from the date the authority concerned is produced a copy of this order.
The appeal pending before the CIT(A) in pursuance of the Tribunal’s remand is directed to be decided expeditiously.
No order as to costs was made.

Broader implications: The Court applied established doctrines (merger and restitution) and admonished the Income Tax Department against hurried, inadequately verified assessments. The opinion directs restitution and expedited appellate consideration but does not purport to create a new precedent beyond applying and reiterating existing authorities.

Show all summary ...

1. This writ petition has been filed for a writ of certiorari to quash the impugned notice under Section 226(3) of the Income Tax Act vide Annexure 5 to the writ petition. The petitioner has also prayed for a mandamus directing the respondent No. 1 to refund the amount recovered under the notice under Section 226(3) with interest. The petitioner has also prayed for a direction to respondent No. 1 to refund Rs. 75,000/- deposited by the petitioner with interest and has also prayed that respondent No. 3 be directed to decide the appeal of the petitioner on merits expeditiously. Heard learned counsel for the parties.

2. The petitioner is a registered partnership firm which is doing the business of manufacture of Corrugated boxes/Card Board boxes. The relevant A.Y is 1997-1998 and in this year the petitioner filed a return on 31-10-1997 disclosing income of Rs. 27,374.28 paise. The petitioner has alleged that it has maintained regular and proper books of account in the ordinary and regular course of business.

3. The petitioner appeared before the Assessing Officer/Income Tax Officer, Ward No. 5, Allahabad, and the Assessing Officer by his order dated 15-3-2000 determined the petitioner's income at Rs. 7,40,750/-. True copy of the assessment order dated 15-3-2000 is Annexure 1 to the writ petition. This assessment was made under Section 143(3) of the Income Tax Act.

4. It is alleged in para 7 of the petition that during the course of the hearing the Assessing Officer issued notices under Section 133(6) of the Income Tax Act to M/s. Shiv Datt and Sons, M/s. K. Lal and Company and M/s. Shakumbhari Pulp and Paper Mills Ltd., apart from other parties. It is alleged that these notices were issued only for obtaining copies of accounts of the petitioner's firm from the books of the above three respective parties in compliance to the notices under Section 133(6) of the Act. The parties sent copies of the accounts to the Assessing Officer, and on the basis of those copies of accounts additions were made in the hands of the petitioner on the allegation that there are differences in the accounts. Those differences were added in the hands of the petitioner as undisclosed income. The major additions were of Rs. 4,25,000 and Rs. 50,080. The addition of Rs. 4,25,000 was made on the allegation that payment of the said amount was made by M/s. Shakumbari Paper and Pulp Mills, but no entries were recorded in the petitioner's books, though the entries were recorded in the books of Shakumbari Paper and Pulp Mills. The other additions were also on similar ground.

5. It is alleged in para 8 of the petition that the copies of the said accounts of the aforesaid three parties were not supplied to the petitioner, nor were the parties summoned, nor were the books examined, and instead the additions were made simply on the basis of these copies of the accounts. In fact the Assessing Officer himself admitted in the assessment order dated 15-3-2000 in para 6 that due to shortage of time it was impossible to verify the facts properly and hence the additions were made.

6. Against the assessment order the petitioner filed an appeal before the C.I.T (Appeals). The appellate authority fixed the hearing on various dates, but it is alleged that copies of the accounts were not sup-plied to the petitioner despite repeated requests in writing as well as orally. Copy of the application filed by the petitioner before the appellate authority praying for supplying of these documents is Annexure 2 to the petition. The petitioner stated before the Assessing Officer as well as the C.I.T (Appeals) that the records were misplaced somewhere by the Chartered Accountant and therefore the petitioner was helpless in conducting the appeal. However the C.I.T (Appeals) decided the appeal by the ex parte order dated 30-4-2002. True copy of the said order is Annexure 3 to the writ petition.

7. Thereafter a second appeal was filed by the petitioner before the Tribunal on 28-5-2002 which was decided on 30-12-2002 vide Annexure 4. The Tribunal by its order dated 30-12-2002 set aside the order of the C.I.T (Appeals) and remanded the matter back to the C.I.T (Appeals) with certain directions as stated in para 5 of this order. The main direction of the Tribunal was that the party should be provided copies with the accounts of the third parties and the matter should be decided after considering each and every ground taken by the petitioner. True copy of the order of the Tribunal dated 30-12-2002 is Annexure 4 to the petition. The appeal is now pending before the C.I.T (Appeals).

8. In the meantime the respondent No. 1, the Tax Recovery Officer, issued notices under Section 226(3) for realisation of the demand assessed by the Assessing Officer. True copy of this notice issued to various parties is Annexure 5 to the writ petition.

9. It is alleged in para 15 of the petition that due to the notice under Section 226(3) issued to Saraiya Distillery Limited, Gorakhpur by the respondent No. 1 the Saraiya Distillery Ltd., Gorakhpur has deducted Rs. two lacs from the account of the petitioner and has deposited the same with the Income Tax Department vide Annexure 6 to the petition. The Saraiya Distillery Ltd. has also withheld the payment which is due to the petitioner on supply of the packaging materials to them on the ground of notice under Section 226(3). Thus a huge amount of the petitioner has been detained by Saraiya Distillery Ltd. Gorakhpur because of the notice under Section 226(3) of the Income Tax Act which is said to have adversely affected the business of the petitioner.

10. It is alleged in para 16 of the petition that the petitioner had already deposited Rs. 75,000/- with the Income Tax Department on account of the demand for A.Y 1997-1998. Copy of three challans of deposits of Rs. 75,000/- is Annexure 7. During the pendency of the appeal the petitioner gave an application to the Tax Recovery Officer requesting him to revoke the order passed under Section 226(3). The petitioner deposited Rs. 75,000/- in three instalments.

11. However, the T.R.O has again initiated proceeding under Section 226(3) and consequently on receiving the notice the Saraiya Distillery Ltd., Gorakhpur deducted Rs. two lacs from the account of the petitioner and has deposited the same with the Income Tax Department.

12. It is alleged in para 18 of the petition that due to illegal proceedings under Section 226(3) initiated by the T.R.O the petitioner is facing great hardship as it will not get the payment for its supply of packaging materials from its customers. These customers are taking the supply of package materials for running the business. The petitioner needs the money for the supply for keeping its regular turnover of the business. It is alleged that since the incoming of the money for the supplied materials has been stopped due to notice under Section 226(3) of the Income Tax Act the petitioner is in great financial crisis and is on the verge of closure.

13. It is alleged that the demand under Section 226(3) is illegal and is based on illegal assessment. The Assessing Officer has himself stated in the assessment order that due to shortage of time it was impossible to verify the facts properly and therefore he made major additions. He has also stated that the difference of Rs. 4,25,000/- which has been stated to have been paid by the assessee to other parties could not be verified due to shortage of time.

14. For the same assessment year a notice under Section 148 of the Income Tax Act was issued by the ITO Ward No. 5 Allahabad. The petitioner gave a letter to the Joint Commissioner of Income Tax, Allahabad requesting him to withdraw the demand against the petitioner for A.Y 1997-1998. In that letter the petitioner stated that when a notice is issued under Section 148 then the order dated 15-3-2000 should remain under abey-ance and hence the demand should be withdrawn. True copy of the letter dated 22-10-2001 is Annexure 8 to the writ petition.

15. The petitioner relied on the decision of this Court reported in Saran Engineering Co. Ltd. v. C.I.T, (1983) 143 ITR 765 : (1983 Tax LR 340) in which it was observed:

“Once reassessment proceedings are started the earlier order ceased to exist, and the ITO starts the assessment proceedings afresh.”

16. The ratio of this decision has been affirmed by the Supreme Court in I.T.O v. K.L Srihari, (2001) 250 ITR 193.

17. On the basis of the said decision it is alleged in para 22 of the petition that since notice under Section 148 has been issued the assessment order dated 15-3-2000 has become non-existent, and hence the Income Tax Department cannot make any demand on the basis of the assessment order dated 15-3-2002. True copy of the notice under Section 148 is Annexure 9 to the writ petition.

18. It is alleged in para 23 of the petition that Saraiya Distillery Ltd., Gorakhpur has deducted Rs. 2 lacs from the petitioner's account on the basis of the illegal notice under Section 226(3) and has also detained other payments from the petitioner for supplying packaging material on the basis of illegal notices under Section 226(3) of the Income Tax Act which is adversely affecting the business of the petitioner.

19. A counter-affidavit has been filed on behalf of the respondents and we have perused the same.

20. It is alleged in para 8 of the counter-affidavit that the original assessment order is good and effective till it is substituted by a reassessment order. Mere issuance of notice under Section 148 does not effect the validity of the original assessment order.

21. It is alleged in para 9 of the counter-affidavit that the respondent No. 1 has rightly issued the notice under Section 226(3) as no stay order has been passed by the C.I.T (Appeals) in the appeal pending before him.

22. In para 10 of the counter-affidavit it is alleged that the petitioner was duly supplied the relevant documents as required by him on 2-9-2002. A rejoinder-affidavit has also been filed.

23. In para 4 thereof it is stated that there is no statutory provision for filing an appeal/objection against the impugned order of the C.I.T (Appeals), and hence there is no alternative remedy.

24. Learned counsel for the petitioner has relied on the decision of this Court in Kanhaiya Lal v. C.I.T, (2001) 162 Taxation 649 : (2001 Tax LR 232) and the decision of the Punjab and Haryana High Court in Chiranjit Steel Rolling Mills v. C.I.T, (1972) 84 ITR 222 : (1971 Tax LR 1340) for the proposition that where the copies of the third party's account are not supplied to the petitioner the assessment order is illegal.

25. Learned counsel for the petitioner has also submitted that the petitioner filed a stay application along with his appeal but there was no C.I.T (Appeals) for hearing the appeal for a long time. The financial condition of the petitioner was bad and the firm has become sick, and hence it was wholly arbitrary and illegal to attach the petitioner's property.

26. From the facts mentioned above it appears that the assessment order dated 15-3-2000 (Annexure 1 to the writ petition) on the basis of which the impugned notice under Section 226(3) was issued merged into the order of the C.I.T (Appeals) dated 30-4-2002, copy of which is Annexure 3 to the writ petition, and the aforesaid order of the C.I.T (Appeals) in turn merged into the order of the Income Tax Appellate Tribunal dated 30-12-2002, copy of which is Annexure 4 to the writ petition. A perusal of the order of the Tribunal dated 30-12-2002 shows that the Tribunal has set aside the order of the C.I.T (Appeals) on the ground that the Assessing Officer as well as the C.I.T (Appeals) had not given copies of the accounts of the third party to the petitioner.

27. Thus under the doctrine of merger the orders of the Assessing Officer dated 15-3-2000 and the C.I.T (Appeals) dated 30-4-2002 have both merged into the order of the Tribunal dated 30-12-2002. Hence the orders of the Assessing Officer dated 15-3-2000 and the C.I.T (Appeals) dated 30-4-2002 ceased to exist after the order of the Tribunal dated 30-12-2002.

28. In Kunhayammed v. State of Kerala, (2000) 6 SCC 359 : AIR 2000 SC 2587 (vide para 12) the Supreme Court observed:

“Once the superior Court has disposed of the lis before it either way — whether the decree or order under appeal is set aside or modified or simply confirmed, it is the decree or order of the superior Court, tribunal or authority which is the final, binding and operative decree or order wherein merges the decree or order passed by the Court, tribunal or the authority below.”

29. Similarly, in Raj Singh v. Board of Revenue, 1967 All LJ 1054 this Court observed:

“It is well-settled that the decree of the trial Court merges in that of the appellate Court. The effect of merger is that in the eye of law it dies a civil death. The trial Court's decree loses its identity.”

30. In these circumstances we fail to understand how any demand could be is sued against the petitioner and how any sum could have been realised from the petitioner in pursuance of the assessment order dated 15-3-2000 when the said assessment order dated 15-3-2000 has in fact ceased to exist. Merely because the Tribunal has remanded the matter to the C.I.T (Appeals) it does not follow that the assessment order dated 15-3-2000 has revived. Consequently we are of the opinion that the impugned notice under Section 226(3) of the Income Tax Act was wholly illegal as there was be no valid demand against the petitioner.

31. In our opinion the petitioner is entitled to restitution in respect of any amount of tax realised in pursuance of the assessment order dated 15-3-2000. It is well-settled that when a decree or order is set aside or modified in appeal it is the duty of the Court to grant restitution.

32. In South Eastern Coalfields Ltd. v. State of M.P, (2003) 8 SCC 648 : AIR 2003 SC 4482 the Supreme Court observed:

“The word ‘restitution’ in its etymological sense means restoring to a party on the modification, variation or reversal of a decree or order, what has been lost to him in execution of decree or order of the Court or in direct consequence of a decree or order (See Zafar Khan v. Board of Revenue, U.P, 1984 Supp SCC 505 : AIR 1985 SC 39 : (1984 All LJ 994)).

33. The Principle of restitution has been statutorily recognised in S. 144 of the Code of Civil Procedure, 1908. Section 144 of the C.P.C speaks not only of a decree being varied, reversed, set aside or modified but also includes an order on par with a decree. The scope of the provision is wide enough so as to include therein almost all the kinds of variation, reversal, setting aside or modification of a decree or order. The interim order passed by the Court merges into a final decision. The validity of an interim order, passed in favour of a party, stands reversed in the event of final decision going against the party successful at the interim stage. Unless otherwise ordered by the Court, the successful party at the end would be justified with all expediency in demanding compensation and being placed in the same situation in which it would have been if the interim order would not have been passed against it.”

34. On the facts and circumstances of the case we quash the notice under Section 226(3) and the recovery made in pursuance of the impugned notice under Section 226(3) of the Income Tax Act. Any amount realised from the petitioner in pursuance of the notice under Section 226(3) and the assessment order dated 15-3-2000 shall be refunded to him forthwith with interest at 12% per annum from the date of realisation to the date of refund. The refund must be made within a month from the date of production of copy of this order before the authority concerned.

35. We hope and trust that the appeal pending before the C.I.T (Appeals) in pursuance of the remand order of the Tribunal will be decided expeditiously by the said authority.

36. The petition is allowed. No order as to costs.

37. Before parting with the case we would like to state that we cannot appreciate this practice of the Income Tax Department of hurriedly passing assessment orders shortly before the limitation period is about to expire and justifying this practice by saying that there was shortage of time and hence it was impossible to verify the facts properly, and hence the additions were being made. It is of common knowledge that when the limitation for making an assessment is about to expire (usually on 31st March) there is a sudden rush and scramble to complete the assessments. If this practice is countenanced the citizens of the country will be put to great harassment as exorbitant demands can be made against them merely by saying that there was shortage of time and hence additions were being made for this reason without verifying the facts correctly. It is the duty of the department to make a correct assessment and not to make an excessive assessment merely on the ground of shortage of time. No doubt the department has to assess and collect the correct tax, but for this purpose it should devise and set up a rational scheme in accordance with law. It should certainly not make assessments hurriedly merely by saying that there is shortage of time, (as often happens), thus putting the citizens to great harassment.

38. Petition allowed.