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Bennett Coleman & Co... v. Allahiri, Income-Tax...
Factual and Procedural Background
The petitioners, Bennett Coleman & Co. Ltd., publishers of newspapers and periodicals, historically adopted the calendar year (12 months ending 31 December) as their "previous year" for income-tax purposes. On 25 February 1976 the petitioners applied to the Commissioner of Income-tax (with copies to the IAC and their ITO) for approval to change their accounting year to July–June and to prepare accounts for an 18-month period starting 1 January 1976. The application explained that the Government's annual newsprint policy, covering April–March and usually announced in May, made budgeting and business decision-making impractical under the then accounting year.
After budget proposals were announced on 28 February 1976 (which included reliefs to newspapers), the petitioners modified their request on 3 April 1976 to seek a change so the accounting year would end on 30 April — effectively seeking a 16-month previous year from 1 January 1975 to 30 April 1976 for the 1977-78 assessment year. On 15 April 1976 the ITO approved a change (to May/April) subject to specified conditions, including: (a) no previous year for assessment year 1976-77 with a NIL return; (b) a 16-month previous year for 1977-78; (c) transfer/adjustment of advance tax paid for 1976-77 against 1977-78; and (d) no interest under section 214 on that advance tax.
The petitioners accepted those conditions on 3 May 1976, passed board resolutions, and prepared accounts accordingly. The Finance Bill, incorporating the reliefs, received assent on 26 May 1976.
On 24 January 1977 the Commissioner (CIT, Bombay City VI) issued a notice under section 263, stating the ITO's order of 15 April 1976 was erroneous and prejudicial to Revenue because subsequent legislative provisions (Finance Act, 1976) altered tax consequences in a way that disadvantaged Revenue (e.g., less surtax and possible surcharge avoidance). The Commissioner proposed cancelling the ITO's order and directed the ITO to re-examine and impose conditions to safeguard Revenue; the petitioners were given an opportunity to show cause.
By order dated 25 June 1977 the Commissioner under s.263 set aside the ITO's order and directed the ITO to pass a fresh order after safeguarding Revenue and allowing the petitioners to be heard. On 21 March 1979 the ITO (first respondent) refused to grant the change, stating that granting it would be seriously prejudicial to Revenue and ordered the previous year to remain the calendar year.
On 26 March 1979 the petitioners filed the present petition impugning both the Commissioner's s.263 order of 25 June 1977 and the ITO's refusal dated 21 March 1979. The petitioners challenged, inter alia, (i) whether the ITO's consent or refusal under s.3(4) constituted an "order" amenable to revision under s.263; (ii) whether the Commissioner could take into account post-order legislative changes or the announced budget proposals; (iii) whether promissory estoppel barred revision; and (iv) whether the later refusal was arbitrary and made without hearing or application of mind.
Legal Issues Presented
- Whether the grant or refusal of consent by the Income-tax Officer under section 3(4) of the Income-tax Act, 1961, constitutes an "order" within the meaning of section 263 and is therefore revisable by the Commissioner.
- Whether the Commissioner, in exercising powers under section 263, may take into account budget proposals or legislative changes announced or in progress at the time the ITO passed the order.
- Whether the doctrine of promissory estoppel can prevent the Commissioner from revising an ITO's order under section 263 when the assessee has acted on the ITO's earlier consent.
- Whether the ITO's refusal to grant consent (in the fresh order) was invalid because it was arbitrary, made without hearing the assessee, and showed failure to apply mind or to consider imposing conditions to safeguard Revenue.
Arguments of the Parties
Petitioners' (Appellants') Arguments — Mr. Kolah
- The accord or refusal of consent under s.3(4) is not an "order" of the Income-tax Officer; consequently section 263 cannot be used by the Commissioner to revise such a consent.
- The Commissioner, when calling for revision under s.263, was limited to the record and law as they existed when the ITO passed the order; he could not validly rely on the subsequent Finance Bill or its eventual enactment.
- The petitioners relied on the ITO's consent (acted upon it and prepared accounts); promissory estoppel should prevent the Commissioner from revising the earlier consent.
- The fresh refusal of consent dated 21 March 1979 was invalid because it was passed by a different officer without hearing the petitioners, was mechanical and lacking any application of mind, and denied reasonable exercise of discretion (refusal could not be justified by an insignificant loss to Revenue).
Respondents' Arguments — Mr. Joshi
- The accord or refusal of consent by the ITO under s.3(4) is an "order" and therefore amenable to revision under section 263.
- The Commissioner validly took into account the budget proposals that had been announced at the time the ITO passed the order; those budget proposals could be considered in the exercise of s.263 powers.
- As to the fresh refusal, the respondent contended the ITO had carefully considered the issues based on the record and that the refusal was justified as being protective of Revenue.
- Mr. Joshi relied upon the Supreme Court judgment in Esthuri Aswathiah v. Commissioner Of Income Tax, Mysore ([1966] 60 ITR 411) as treating an ITO's consent under s.3(4) as an order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Esthuri Aswathiah v. Commissioner Of Income Tax, Mysore, [1966] 60 ITR 411 | Characterisation of an ITO's grant of consent under s.3(4) as an "order". | The respondent relied on this judgment to support the proposition that consent is an order. The court observed that the cited judgment termed such a grant an order but did not give reasons for doing so, and concluded that the judgment does not assist the respondent's case; the court reached its own determination that consent/refusal is an order. |
Court's Reasoning and Analysis
The court's reasoning proceeded in clear steps, grounded in statutory text and the record:
- Statutory Framework: The court examined section 3 (definition of "previous year") and particularly s.3(4), which allows an assessee to vary the meaning of "previous year" only with the consent of the ITO and "upon such conditions as the Income-tax Officer may think fit to impose." The court also set out the text of s.263, which empowers the Commissioner to call for and examine records and to revise "orders" that are erroneous and prejudicial to Revenue after giving the assessee an opportunity of being heard.
- What Constitutes an "Order": The petitioners contended the ITO's consent/refusal under s.3(4) was not an "order" within s.263. The court rejected this contention. It held that the grant or refusal of consent under s.3(4) is an order in the ordinary meaning because:
- It is made on the application of the assessee;
- The decision requires exercise of discretion (consent may be granted subject to conditions);
- It calls for an application of mind and should be set out in a speaking order explaining any conditions or reasons for refusal;
- Therefore such a grant or refusal falls within the scope of s.263 and is revisable by the Commissioner.
- Proper Scope of s.263 and Timing Considerations: The petitioners argued that the Commissioner should only consider the law and record as they stood when the ITO passed the order and could not have regard to the Finance Bill subsequently enacted. The court observed that the budget proposals had in fact been announced at the time the ITO passed the order and that the Commissioner validly took those announced proposals into account in exercising powers under s.263. The court therefore upheld the Commissioner's consideration of the announced proposals.
- Promissory Estoppel Argument: The petitioners argued they had acted on the ITO's consent and were estopped from having the consent revoked. The court rejected this, holding that estoppel cannot operate against a statutory power: section 263 confers the power on the Commissioner to revise the ITO's order and the Commissioner was not estopped from exercising that statutory power.
- Validity of the Fresh Refusal by the ITO (21 March 1979): The court examined the ITO's subsequent refusal and found that:
- s.3(4) must be exercised reasonably; refusing consent to a bona fide request merely because of a comparatively insignificant loss to Revenue is impermissible;
- The ITO was empowered to impose conditions to protect Revenue, and should have considered such conditions rather than flatly refusing consent;
- The ITO's order gave no indication of reasons or of any application of mind and therefore smacked of arbitrariness;
- It was imperative that an order refusing or granting consent on conditions should not be passed without first hearing the assessee; the petitioners were not heard before the refusal;
- The ITO failed to comply with the direction implicit in the Commissioner's s.263 order to hear the petitioners and to prescribe conditions to offset loss to Revenue.
- Relief to Be Granted: Because the ITO's refusal was arbitrary, lacked reasons, and was passed without hearing, the court concluded that the refusal order had to be quashed and set aside. The matter was remitted: the ITO (Company Circle VI(3)) was directed to consider the petitioners' application afresh and to pass an order in accordance with the court's guidance (i.e., apply mind, hear the petitioners, and consider reasonable conditions to safeguard Revenue).
Holding and Implications
Holding: The court made the rule absolute. It held that the grant or refusal of consent under s.3(4) is an "order" within the meaning of section 263 and is revisable by the Commissioner. The ITO's order dated 21 March 1979 refusing consent was quashed and set aside, and the ITO was directed to consider the petitioners' application afresh, hearing them and applying his mind to possible conditions to safeguard Revenue.
Implications:
- Direct effect on the parties: The petitioners' challenge succeeded; the ITO's refusal dated 21 March 1979 has been quashed and the ITO must reconsider the application for change of previous year in accordance with the court's directions. The rule was made absolute and there was no order as to costs.
- Broader implications: The opinion articulates that a grant or refusal of consent under s.3(4) qualifies as an "order" for purposes of s.263 (requiring application of mind and, where appropriate, a speaking order and hearing). The text of the opinion does not expressly state that it is creating a binding precedent beyond the case's disposition; the court applied these principles to the facts and remitted the matter for reconsideration with directions.
Order: Rule made absolute. No order as to costs.
S.P Bharucha, J.:— The petitioners, Bennett Coleman & Co. Ltd., are publishers of newspapers and periodicals. Their previous year for the purposes of the I.T Act, 1961, was the period of 12 months ending on the preceding 31st December. On 25th February, 1976, the petitioners wrote to the Commissioner of Income-tax, with copies to the IAC and their ITO, asking for approval to their request contained in the said letter to change the previous year to July/June and to prepare accounts for the period of 18 months from 1st January, 1976. The letter stated that the Government's annual newsprint policy covered the period April to March and was usually announced in May. It, therefore, became unrealistic for the petitioners to work on the budget and review the performance for business decisions and action for almost five months in their accounting year. By changing the accounting year to July/June, this difficulty would be overcome and it would facilitate decision making.
2. On 28th February, 1976, the budget proposals were announced and contained some reliefs to newspapers. On 3rd April, 1976, the petitioners wrote to their ITO modifying the request made in their letter dated 25th February, 1976, and asked for approval of the change of the previous year to end on 30th April. In other words, they requested that the period of 16 months, namely, 1st January, 1975, to 30th April, 1976, be accepted as the previous year for 1977-78 income-tax assessment, after the 1975-76 assessment, the previous year of which ended on 31st December, 1974. On 15th April, 1976, the ITO addressed a communication to the petitioners stating that the petitioners' request for change of the previous year from January/December to May/April was allowed subject to the following conditions:
“(a) There will be no previous year relevant to the assessment year 1976-77. However, the assessee-company should file the return of income for the said year showing ‘NIL’ income.
(b) The previous year relevant to the assessment year 1977-78 will be for 16 months commencing from 1st January, 1975, and ending on 30th April, 1976.
(c) The advance tax paid by the assessee-company for the assessment year 1976-77 on the basis of estimate filed under section 212(3A) of the Income-tax Act, 1961, will be transferred and adjusted against the advance tax payable for the assessment year 1977-78.
(d) No interest under section 214 of the Income-tax Act, 1961, will be payable on the advance tax paid for the assessment year 1976-77, which will be adjusted against the advance tax demand for the assessment year 1977-78.”
3. The ITO asked the petitioners to intimate to him whether they were agreeable to the conditions mentioned. On 3rd May, 1976, the petitioners informed the ITO that they were so agreeable. Appropriate resolutions were passed by the petitioners' board and accounts were prepared on the aforesaid basis.
4. On 26th May, 1976, the Finance Bill received assent. It incorporated the relief to newspapers.
5. On 24th January, 1977, the CIT, Bombay City VI, addressed to the petitioners a notice under s. 263 of the Act. The notice stated that the ITO's order dated 15th April, 1976, giving approval to the change in the previous year was erroneous and prejudicial to the interests of the Revenue. At the time when the order was made the Finance Bill had been introduced but its provisions had not been considered. The petitioners' income from 1st January, 1975, to 31st December, 1975, which would have been liable to tax for the assessment year 1976-77, would now be liable to be taxed for the assessment year 1977-78 as per the provisions of the Finance Act, 1976. Thus, the petitioners' income for the period 1st January, 1975, to 31st December, 1976, would bear no surcharge if a deposit of the equivalent amount was made with the Industrial Development Bank of India and the petitioners would be entitled to pay less surtax. The notice stated:
“In view of this, the Income-tax Officer should not have given approval to the change of previous year without safeguarding the interests of Revenue.
In view of the reasons given above, I propose to cancel the above order of the Income-tax Officer and direct him to examine the matter afresh and impose all suitable conditions to safeguard the interests of the Revenue.”
6. By the notice the petitioners were given an opportunity to show cause why such order should not be passed.
7. On 25th June, 1977, the Commissioner passed an order under s. 263 of the Act. He recorded that the petitioners' representative at the hearing had only stated that the change requested for was for genuine reasons and if any conditions were required to be imposed to safeguard the interests of the Revenue the petitioners should be allowed an opportunity to discuss the same. The order of the ITO, dated 15th April, 1976, allowing a change in the previous year was set aside and the ITO was directed to pass a fresh order according to law after safeguarding the interests of the Revenue and after allowing an opportunity to the petitioners to be heard.
8. On 21st March, 1979, the first respondent, then the petitioners' ITO, passed this order:
“The assessee has applied, vide their letters dated 25-2-1976 and 3-4-1976, that they may be permitted to change the previous year from the calendar year to the year ending on 30th April, 1976. The change requested for was originally granted by my predecessor, vide his letter dated 15th April, 1976. The CIT, vide his order under section 263 dated 25-6-1977 has set aside the above-mentioned change in the previous year. After a careful consideration of the issues involved, I am of the opinion that the change requested for, if granted, would be seriously prejudicial to the interests of the Revenue. Therefore, I hereby refuse to grant change in the previous year requested for by the assessee. The previous year of the assessee-company shall continue to be the calendar year ending on 31st December, of each year.”
9. On 26th March, 1979, the petitioners filed this petition impugning the order dated 25th June, 1977, under s. 263 of the Act and the order dated 21st March, 1979, declining approval.
10. It was contended by Mr. Kolah, learned counsel for the petitioners, that the accord or refusal of consent to the change of the previous year was not an order of the ITO. Not being an order, the provisions of s. 263 were not attracted and the Commissioner was not entitled to revise it.
‘Previous year’, under the provisions of s. 3 of the Act, means the financial year immediately preceding the assessment year, or if the accounts of the assessee have been made up to a date within the said financial year, then at the option of the assessee the twelve months ending on such date. Sub-section (4) of s. 3 provides that an assessee shall not be entitled “to vary the meaning of the expression ‘previous year’ as then applicable to him, except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose”.
11. Section 263(1) of the Act reads thus;
“The Commissioner may call for and examine the record of any proceedings under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.”
12. It is thus clear that the Commissioner can only revise: (a) an order, and (b) an order that is prejudicial to the interests of the Revenue.
13. It was Mr. Kolah's submission that under s. 3(4) of the Act, accord or refusal of consent was not required to be given by the passing of an order nor was the consent given by the ITO on 15th April, 1976, in fact an order. Mr. Joshi, learned counsel for the respondents, submitted that accord or refusal of consent by the ITO under s. 3(4) was an order. The consent of the ITO dated 15th April, 1976, was, therefore, an order, which could be revised by the Commissioner under s. 263. Mr. Joshi made a reference to a judgment of the Supreme Court in Esthuri Aswathiah v. Commissioner Of Income Tax, Mysore, [1966] 60 ITR 411. An order of the ITO granting consent under s. 3(4) was termed therein an order. Whether or not it was an order was not in question nor have any reasons been given for so terming it. This judgment does not assist Mr. Joshi.
14. In my view, the grant of consent or the refusal to do so under s. 3(4) of the Act amounts to an order within the ordinary meaning of that word. The grant or refusal is made on the application of the assessee. The exercise of discretion is required. Consent may be granted subject to such conditions as the ITO may think fit to impose. This calls for an application of mind. The accord of sanction subject to conditions must be explained in a speaking order as must the refusal of consent. The grant or refusal of consent would, therefore, be an order and would fall within the scope of s. 263.
15. It was contended by Mr. Kolah that the only record which the Commissioner had to take into account under s. 263 of the Act was the record as it existed when the ITO passed the order under s. 3(4) and the law as it stood then. It was, therefore, not open to the Commissioner to take the Finance Bill that became law subsequent to the ITO's order into account. Mr. Joshi is right when he points out that at the time the ITO passed the order the budget proposals had been announced and were validly taken into consideration by the Commissioner in passing the order under s. 263.
16. Mr. Kolah submitted that the doctrine of promissory estoppel applied in that the petitioners had acted upon the order granting consent and had prepared their accounts accordingly and had, therefore, altered their position to their prejudice. This argument can be disposed of simply: no estoppel can operate against the provisions of a statute. Section 263 of the Act gave the Commissioner the power to revise the ITO's order, and he was not estopped from doing so.
17. This brings me to the last argument advanced by Mr. Kolah which attacks the fresh order dated 21st March, 1979, passed by the 1st respondent under s. 3(4). It was pointed out that the order had been passed by a person other than the ITO who had passed the original order, and he had passed it without hearing the petitioners. It was submitted that the order had been passed mechanically, without application of mind, by borrowing the phraseology of the section. It was also submitted that the discretion exercisable under s. 3(4) had to be reasonably exercised and could not be controlled by some insignificant loss. It was Urged, on the other hand, by Mr. Joshi that the order had been passed after a careful consideration of the issues involved based upon the records of the case;
18. The provisions of s. 3(4) of the Act cannot be used to decline consent to a bona fide request by the assessee because of a (comparatively) insignificant loss of revenue. Section 3(4) empowers the ITO to impose such conditions as he may think fit. The 1st respondent ought to have applied his mind to the conditions that he should impose rather than flatly turn down the petitioners' request. There is no indication in the order of what induced him to follow this course. It smacks of arbitrariness. Refusal of consent could have serious consequences for the assessee. It is imperative that an order refusing consent or even an order granting consent on conditions should not be passed without first hearing the assessee. The petitioners were not heard before the order refusing consent was passed. It would appear from a perusal of the 1st respondent's order that the only real reason for passing it was that the Commissioner had in the order under s. 263 of the Act said that the original order granting consent affected the interests of the Revenue. The 1st respondent failed to notice that the order under s. 263 required him to hear the petitioners and to prescribe conditions that would offset the loss to the Revenue. In the circumstances, the order of the 1st respondent under s. 3(4) dated 21st March, 1979, must be quashed and set aside. The ITO, Company Circle VI(3), shall consider the petitioners' application for consent for alteration of the previous year afresh and pass an order having regard to what is stated herein.
19. Rule made absolute. No order as to costs.
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