Commissioner Of Inco... v. Trustees Of H.E.H Th...

Punnayya, J.:— The trustees of late Nizam Supplemental Family Trust, Hyderabad, filed income-tax returns for the year 1962-63 on behalf of the beneficiaries on April 2, 1964, along with the application under s. 237 of the I.T Act for the refund of the tax of Rs. 20,050.52 deducted at source on interest on government securities and dividends. But the refund application was not disposed of. The trustees, therefore, reminded the ITO on June 17, 1964, for the disposal of the refund application. On June 22, 1964, the ITO gave a reply stating that the refund cannot be granted to the trustees unless the reference on the same question for the preceding assessment years filed by the trustees are disposed of by the High Court. On September 23, 1966, the assessee once again reminded the ITO for the grant of refund but there was no reply from the ITO. The ITO issued a notice under s. 148 of the I.T Act requiring the trustees to file a return for the assessment year 1962-63. The assessee filed a return on July 3, 1970, in compliance with the notice given under s. 148 declaring that the amount of Rs. 6,26,200 is a long-term capital gain. The Department accepted it and made the assessment on July 3, 1970, under s. 143(3) read with s. 147. After receiving the assessment order, the assessee wrote on July 13, 1970, to the ITO that the return filed by the assessee along with refund application on April 2, 1964 was still pending and, hence, the proceedings initiated under s. 147 are invalid. The assessee also claimed that the assessment made pursuant to the notice made under s. 148 on July 3, 1970, was equally invalid. Then the ITO gave a reply to the trustee on July 16, 1970, stating that the return filed on April 2, 1964, was disposed of on November 10, 1965, by a note recorded by the ITO in his file. The assessee then filed an appeal before the AAC questioning the validity of the reassessment made on July 3, 1970.

2. The AAC took the view that the ITO has not passed final orders and it was not disposed of. He, therefore, held that the reassessment made by the ITO pursuant to the notice under s. 148 is invalid and, accordingly, cancelled it. Then the Department took the matter in appeal to the Tribunal.

3. Before the Tribunal, two questions were raised by the Department, which are to the following effect:

“(1) Whether the return filed by the assessee on April 2, 1964, along with the refund application was one filed under section 139(1) of the Income-tax Act?

(2) Even if it is assumed that the return filed by the assessee along with the refund application commences assessment proceedings, whether the proceedings should be treated to ha ve been finalised by the Income-tax Officer at least by his note dated November 10, 1965, if not earlier by his letter dated September 26, 1964, addressed to the assessee, and as the proceedings for the refund were terminated by the Income-tax Officer by his note dated November 10, 1965, there is no bar for the reassessment proceedings for the same year and, hence, the reassessment proceedings in respect of the income of such year would be valid?”

4. The learned standing counsel for the Department contended that the procedure for assessment is dealt under Chapter XIV, while the procedure for refund is dealt under Chapter XIX, that the two procedures are distinct and different and different periods of limitation are prescribed for the completion of the assessment and for the refund.

5. Sri Y.V Anjaneyulu, the learned counsel for the assessee, on the other hand, contended that since sub-rule (2) of rule 41 requires filing of a return in the form prescribed under s. 139, which is the starting point for assessment proceedings, it should be construed that when once an assessee files a return along with a refund application, the assessment proceedings are commenced.

6. There was difference of opinion between the accountant member and the judicial member.

7. The accountant member took the view that the return in question did not commence any assessment proceedings, that even if it is accepted that such assessment proceedings commenced, they were terminated by the note of the ITO dated November 10, 1965, that when once the refund application was disposed of by the ITO's note dated November 10, 1965, the proceedings for the reassessment for the same year are not barred, and, hence, the assessment made by the ITO under s. 143(3) read with s. 147 for the assessment year 1962-63 was quite valid and the AAC was not correct in cancelling the assessment.

8. The judicial member, on the other hand, took the view that the return filed on April 2, 1964, was a valid return and the ITO has erred in ignoring it. According to him, s. 234 of the I.T Act and rules 41(1) and 41(2) of the I.T Rules deal with the claim for refund of tax paid in excess. Under s. 237, the assessee is entitled to grant of refund if the tax paid by the assessee exceeds the amount with which he is properly chargeable under the Act for that year. The ITO cannot pass such an order unless he is satisfied that the return was filed properly and assessment was correctly made and if a return was not filed, the assessee should be required to furnish a return before the refund is granted to him in order to enable the ITO to reach satisfaction, that where a refund claim is filed under s. 237 read with rule 41(2) accompanied by a return in the form prescribed under s. 139, the ITO is bound under law to take cognizance of such a return and has to finalise the assessment on the basis of the same and the learned judicial member, therefore, held that the return filed by the assessee on April 2, 1964, under rule 41(2) is a valid return. On the second question, the judicial member took the view that in view of the fact that the endorsement of the ITO cannot be treated as an order resulting in the disposal of the return, the ITO ought to have disposed of the return and, hence, the assessment made by the ITO under s. 148 ignoring the return filed by the assessee on April 2, 1964, is invalid.

9. As there was difference of opinion between the accountant member and the judicial member, they referred the matter to the Vice-President of the Appellate Tribunal formulating the question: Whether, on the facts and in the circumstances of the case, the order of reassessment made by the Income-tax Officer for the assessment year 1962-63 under s. 147 of the Income-tax Act is valid in law?

10. Regarding the return, the Vice-President took the view that a return required to be filed along with an application for refund would not cease to be a return but would possess the requisite validity of a return under s. 139. He, therefore, held that the return filed along with the application for refund was a return-filed under s. 139. On the second question, the learned Vice-President took the view that as the endorsement made on the order sheet for the assessment year 1962-63 has to be considered along with his note on the order sheet for 1963-64, he found that it is an internal endorsement in the order sheet without there being any specific indication that the refund application has finally been rejected and no credit for tax was allowed. He, therefore, agreed with the view of the learned judicial member that he has merely expressed his view in the form of a note. Hence, the reassessment made by the ITO pursuant to the notice under s. 147 was invalid and it has to be, accordingly, cancelled.

11. Aggrieved with the decision of the Appellate Tribunal, as found in the order of the Vice-President, an application in Form No. 37 under rule 48 read with s. 256(1) of the Act was filed by the Revenue before the Appellate Tribunal. The Appellate Tribunal referred the following question for our decision:

“Whether, on the facts and in the circumstances of the case, the assessment made by the Income-tax Officer for the assessment year 1962-63 under section 143(3) read with section 147 is valid in law?”

12. Admittedly, the assessee did not file a return under s. 139 of the I.T Act, but he filed an application for refund under s. 237 of the Act on April 2, 1964, for the assessment year 1962-63 claiming refund. Accompanying the refund application, a return disclosing nil income for that year was filed. The assessee was not previously assessed to income-tax and, hence, nil income was stated in the return.

13. The learned standing counsel for the Revenue contends that the return filed along with the refund application cannot be treated to be a return that can be filed under s. 139 of the Act and, hence, a valid return was not filed on April 2, 1964.

14. Sri Y.V Anjaneyulu, the learned counsel for the assessee, on” the other hand, contends that since sub-rule (2) of rule 41 of the Rules requires filing of a return in the form prescribed under s. 139, the return filed along with the refund application should be treated to be the same as one required to be filed under s. 139 of the Act.

15. It is true that the return filed along with the refund application under sub-rule (1) of rule 41 of the Rules is for the purpose of refund, but that does not make any difference between a return filed under s. 139(1) or (2) of the Act and a return filed under sub-rule (2) of rule 41 of the Rules, as the particulars to be given in both the returns are the same. Further, it is clearly stated under sub-rule (2) of rule 41 of the Rules that the claim under sub-rule (1) shall be accompanied by a return in the form prescribed under s. 139 of the Act, unless the claimant has already made such a return to the ITO. Sub-rule (2), therefore, postulates that if already a return was submitted in the prescribed form under s. 139 to the ITO, the assessee need not file a return along with the application for refund under subrule (1) of rule 41. If, on the other hand, a return was not filed already in the prescribed form under s. 139, then the assessee should file a return in the prescribed form along with the application for refund filed under sub-rule (2) of rule 41. Thus, the return required to be filed along with the application for refund under sub-rule (2) of rule 41 of the Rules is one that was filed under s. 139 of the Act for the purpose of assessment. Section 237 of the Act, which provides for the refund of excess tax, mandates that the assessee is entitled to the grant of the refund if the tax paid by the assessee exceeds the amount with which he is properly chargeable under the Act for that year. Thus, it is clear that it is only on the basis of the return filed by the assessee that the ITO would come to the conclusion whether the assessee is either entitled to or not entitled to any refund. Such a return may be filed either under s. 139 of the Act or under subrule (2) of rule 41 of the Rules along with the refund application. Further, under s. 139(4), an assessee, who has not furnished a return within the time allowed to him under sub-ss. (1) and (2) of s. 139 of the Act, may before the assessment is made, furnish the return for any previous year at any time before the end of the period specified in clause (b) and the provisions of sub-s. (8), i.e, before the end of four years of the assessment year commencing on or before the first day of April, 1967. Thus, it is clear that a return filed along with the refund application under sub-rule (2) of rule 41 of the Rules read with s. 237 of the Act falls under s. 139(4) of the Act. Hence, there is no difference either in form or in substance between a return filed under s. 139(1) or (2) for the purpose of assessment and a return filed under sub-rule (2) of rule 41 of the Rules along with a refund application. The ITO is, therefore, bound under the law to take cognizance of such a return and has to finalise the assessment on the basis of the particulars given in the said return. The return filed under sub-rule (2) of rule 41 is, therefore, a valid return.

16. Sri M. Suryanarayana Mur thy, the learned standing counsel for the Revenue, relies upon the observations made by Balakrishna Ayyar J. in Udaya Ltd. v. CIT, [1959] 36 ITR 469 (Mad) [FB], in support of his contention that the return filed under s. 237 read with sub-rule (2) of rule 41 cannot be treated as a return filed under s. 139(1) or (2). The assessee in that case derived income from three sources, viz., interest on securities, dividends and business. During the years 1948-49 and 1949-50, its losses in business far exceeded its income from the other two sources. During the year 1950-51, the company derived a net aggregate income of Rs. 13,611. In March, 1951, the assessee submitted for the first time its returns of income for three years, showing losses for the years 1948-49 and 1949-50, and in November, 1951, submitted a fourth return showing income for 1951-52. The ITO accepted the returns for 1950-51 and 1951-52, disallowing the claim of the assessee to have the losses for 1948-49 and 1949-50 ascertained and carried forward and set off against the income for the subsequent years. He, however, ordered refund, in respect of those years, of excess tax deducted at source under s. 48 of the I.T Act. The assessee's appeals were dismissed successively by the AAC and the Appellate Tribunal. Hence, there was a reference to the High Court. The matter came before the Bench consisting of Rajagopalan and Balakrishna Ayyar JJ. Before the learned judges, Mr. Jagadisa Aiyar raised the contention that the ITO is in every case bound to compute or quantify the loss which an assessee, who has filed an application for refund under s. 48, claims to have suffered. The learned judges did not accept this contention and observed at page 478 of 36 ITR as follows:

“When dealing with an application under section 48, the Income-tax Officer has only to satisfy himself that the tax paid by or on behalf of the assessee or treated as paid on his behalf exceeds the amount with which he is chargeable. Ordinarily it will suffice for the Income-tax Officer to scrutinise the return to a limited extent, that is to say, to the extent necessary to determine what the tax properly chargeable on the assessee is. When the examination of the return shows that the income is nil or that it is a negative quantity; he is not bound to proceed further with his examination and ascertain how much the loss amounts to.”

17. Sri M. Suryanarayana Murthy, the learned standing counsel for the Revenue, contends that these observations clearly show that if the return shows that the income is nil, the ITO is not bound to proceed further. The observations further reveal that it will suffice for the ITO to scrutinise the return to a limited extent, that is to say, the extent necessary to determine what the tax properly chargeable on the assessee is. He, therefore, contends that in the case of a return filed under s. 139(1) or (2), the ITO is required to follow the procedure prescribed under ss. 142 and 143 of the Act to determine the assessment. He, therefore, contends that the return filed under sub-rule (2) of rule 41 along with the refund application is not at all valid. We find no substance in the contention of the learned counsel for the Revenue.

18. It is true that the above-cited observations of Balakrishna Ayyar J., show that the scrutiny of the ITO is limited to the extent necessary to determine what the tax properly chargeable on the assessee is in respect of the return filed along with the refund application. Thus it is clear that for determining the assessment in the case of a return filed under s. 139, the ITO may follow the procedure prescribed under s. 142 or under s. 143, as the case may be, and in the case of refund, the ITO may scrutinise the return to the extent necessary to determine what the tax properly chargeable on the assessee is. While determining so, he need not follow the procedure prescribed under s. 142 or under s. 143, but can determine what the tax properly chargeable on the assessee is on the basis of the material furnished in the return. But because of this difference in the procedure to be followed for determining the assessment under s. 139 or for determining what the tax properly chargeable on the assessee is for the purpose of refund of the excess paid by the assessee, the return filed under sub-rule (2) of rule 41 cannot be said to be invalid. Hence, the contention of the learned standing counsel for the Revenue cannot be accepted. We have, therefore, no hesitation to say that the return filed under sub-rule (2) of rule 41 is a valid return.

19. As the return filed along with the refund application is found to be valid, we have to examine the next question whether the reassessment is sustainable.

20. Sri Y.V Anjaneyulu, the learned counsel for the assessee, contends that as the refund application was not disposed of, a reassessment for the same year is illegal. The learned standing counsel for the Revenue, on the other hand, contends that the return filed on April 2, 1964, along with the refund application was disposed of by the ITO on November 10, 1965, and, hence, the reassessment is sustainable.

21. It is now well settled that where a return filed even along with the refund application is not disposed of, a reassessment for the same year is not sustainable. But the Revenue contends that the return was disposed of on November 10, 1965. It is admitted by the learned counsel for the assessee that the ITO recorded a note in his file on November 10, 1965, for the assessment year 1963-64, to the following effect: “In view of the Supreme Court judgment in the case of H.E.H Nizam, the question of giving credit for tax deducted at source can be considered in the hands of the beneficiaries. Hence, no credit for the tax deducted at source is to be allowed here. The question of refunding the additional surcharge will have to be considered.”

22. The above note was, however, not communicated to the assessee. It is now well settled that even if the ITO has not communicated the assessment order passed on the return, it cannot be argued that the assessment order was not passed. In other words, the termination of the proceedings need not be communicated to the assessee. This legal position is made clear in Muthuraman v. CIT, [1963] 50 ITR 656 (Mad) and Sivalingam Chettiar v. CIT, [1966] 62 ITR 678 (Mad).

23. As non-communication of the assessment order by the ITO on the return filed along with the refund application does not make the assessment order invalid, we are left with the only question whether the order dated November 10, 1965, on the note file can be treated as an order of disposal. The AAC treated it as an order of disposal. The accountant member of the Tribunal also treated the note of the ITO as one amounting to disposal of the refund application and, hence, the reassessment for the same year is not barred. The judicial member, on the other hand, did not treat it as an order of disposal. The Vice-President on reference also agreed with the judicial member and did not treat it as an order of disposal and, hence, they held that the reassessment proceedings are barred. A careful reading of the order (note) clearly shows that it is a complete order which amounts to a final order disposing of the refund application. Whether it is a correct order or not, we need not examine. But the question is whether it is an order terminating the assessment proceedings or not. The answer is that it is an order terminating the assessment proceedings. The first part of the order gives reasons and the second part of the order clearly speaks of the conclusion when it reads as follows:

“Hence no credit for tax deducted at source is to be allowed here.”

24. We, therefore, hold that the order dated November 10, 1965, on the note (sheet) is an order of disposal.

25. Having regard to the above discussion, we hold that the return filed by the assessee on April 2, 1964, along with the refund application was one filed under s. 139 of the I.T Act and it is, therefore, valid. As the refund application was disposed of by the ITO by his order (note) dated November 10, 1965, there is no bar for the reassessment proceedings for the same year and the reassessment proceedings, therefore, are valid.

26. On the basis of these findings our answer to the question referred to this court is in the affirmative, i.e, in favour of the Revenue and against the assessee. No costs.

27. Sri Y.V Anjaneyulu, the learned counsel for the assessee, seeks for oral leave. We do not certify that this is a fit case to appeal to the Supreme Court as it does not involve any substantial question of law of general importance to be decided by the Supreme Court. Leave is, therefore, refused.