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  • B.P Saraf
  • D.K Deshmukh, JJ.
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  • B.P Saraf
  • D.K Deshmukh, JJ.
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Smart Summary

Structured Summary of the Opinion (Dr. B.P. Saraf, J.)

Factual and Procedural Background

The petitioner paid advance tax for assessment years 1987–1988 (Rs. 66,750) and 1988–1989 (Rs. 51,709) but did not file returns under section 139 for those years. On 23 March 1991 the Income-tax Officer (ITO), Satara issued notices under section 148 (reopening) for both assessment years. The petitioner submitted returns in response, declaring incomes of Rs. 1,02,700 and Rs. 75,200 respectively, which produced tax liabilities lower than the advance tax paid (differences of Rs. 34,200 and Rs. 30,212 respectively). The ITO did not complete assessments and eventually dropped the proceedings under section 147. The petitioner applied for refund of the alleged excess (claiming deemed acceptance of the returns), but the refund application was time-barred under section 239 and the Central Board of Direct Taxes declined to condone delay. The petitioner then filed this writ petition seeking directions to the ITO to complete assessments under section 147 and to refund the excess advance tax, and alternatively to direct the Board to condone delay and allow refund.

Legal Issues Presented

  1. Whether issuance of notices under section 148 and submission of returns pursuant thereto entitle an assessee to a direction that the Income-tax Officer must complete assessment/reassessment under section 147 and refund any excess advance tax shown by those returns.
  2. Whether advance tax, once paid and not followed by a regular assessment, can be treated (or reduced) by completing reassessment proceedings so as to result in a refund to the assessee.
  3. Whether the Board's refusal to condone delay in filing the refund application (under section 239) can be interfered with by this Court and whether the Board exercised its condonation power in a quasi-judicial manner.

Arguments of the Parties

Petitioner (as advanced by counsel Mr. A.K. Jasani)

  • Issuance of notices under section 148 gave the petitioner the right to file returns for those assessment years and vested a statutory obligation on the ITO to complete assessment/reassessment under section 147.
  • The ITO was therefore bound to complete reassessment even if it resulted in refund of amounts already paid by way of advance tax.
  • Reliance was placed on the Full Bench decision in C.I.T. v. Indian Rare Earth Ltd. and the Gauhati High Court decision in Kamalpur (Assam) Tea Estate Pvt. Ltd. v. Superintendent of Taxes to support the contention that reassessment proceedings should be completed and refunds made where due.
  • Refusal to refund was submitted to be violative of Article 265 of the Constitution (taxes not to be imposed except by law), and the Board's refusal to condone delay was said not to have been exercised in a quasi-judicial manner.
  • Relief sought: direction to the Board to condone delay in the refund application and direction to the ITO to complete assessments and/or refund the claimed amounts.

Revenue

No appearance for the revenue; no affidavit filed on behalf of the revenue in the record.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
C.I.T. v. Indian Rare Earth Ltd. (Full Bench) Cited by petitioner to support the proposition that reassessment proceedings once initiated should be completed and could result in refunds. The decision was relied upon by the petitioner; the court's opinion records this reliance but does not adopt that case as controlling. The court instead applied Supreme Court authority limiting reassessment to escaped income and did not accept the petitioner's reliance.
Kamalpur (Assam) Tea Estate Pvt. Ltd. v. Superintendent of Taxes (Gauhati High Court) Cited by petitioner as supportive authority for completing reassessment and refunding amounts where returns filed under reopening notices disclose lower tax than advance tax paid. The decision was relied upon by petitioner; the court noted the reliance but did not treat it as determining the outcome. The court followed Supreme Court pronouncements that restrict reassessment to escaped income.
C.I.T. v. Sun Engineering Works P. Ltd. (Supreme Court) Held that the object, scope and ambit of section 147 are settled: reassessment is confined to escaped income; reassessment does not wipe out the original assessment; an assessee cannot use reassessment to re-agitate finally concluded matters or reduce income below the originally assessed figure. The court treated this Supreme Court decision as settling the legal position and applied it to find that reassessment proceedings cannot be used by the petitioner to reduce tax liability below the amount already charged; therefore the ITO properly dropped proceedings and the petition failed.
V. Jaganmohan Rao v. Commissioner of Income-tax and Excess Profits Tax (earlier Supreme Court decision) Discussed the effects of reopening under the corresponding earlier statute; observed that once assessment is validly reopened the previous under-assessment is set aside and the ITO has jurisdiction to assess escaped income. The present opinion records the Supreme Court's clarification of the proper scope of that observation. The court quoted the Supreme Court's explanation that V. Jaganmohan Rao must not be read to mean reassessment wipes out original assessment or allows re-agitation of matters finally concluded; the present court followed that clarification in rejecting the petitioner's claim.
Modi Industries Ltd. v. C.I.T. (Supreme Court) Used to explain that section 219 creates a legal fiction treating advance tax as payment of tax in respect of the relevant previous year. The court applied the principle to hold that the petitioner's advance tax had, by legal fiction, become income-tax paid for the assessment years, and hence could not be reduced by reassessment proceedings so as to produce a refund in favour of the petitioner under the facts of this case.

Court's Reasoning and Analysis

The court proceeded in a stepwise manner, closely following statutory provisions and Supreme Court authority:

  1. Identification of the petitioner's factual stance: notices under section 148 were issued, returns were filed pursuant to those notices showing lower income than the figures underpinning advance tax, and the petitioner sought refund of the difference after the ITO did not complete assessments and dropped proceedings.
  2. The court observed that the central legal issue was whether reopening/reassessment proceedings under section 147, initiated by issuance of notices under section 148, obliges the ITO to complete assessments in a manner that could reduce the tax liability below the amount already paid by way of advance tax (and thereby trigger refunds).
  3. The court relied principally on the Supreme Court's decision in C.I.T. v. Sun Engineering Works P. Ltd., which clarified the scope of section 147: reassessment is for escaped income and does not permit re-opening or re-computation of matters that were finally concluded in the original assessment. The court emphasized that reassessment proceedings benefit the revenue and cannot be converted into a disguised appeal or revision by the assessee to secure relief on matters previously decided.
  4. The court considered the earlier decision in V. Jaganmohan Rao and recorded the Supreme Court's clarification that the earlier judgment must not be read as allowing reassessment to wipe out the original assessment or to permit an assessee to reagitate matters concluded in the original assessment.
  5. Statutory analysis of section 219: the court explained (citing Modi Industries Ltd.) that advance tax, once paid, is by legal fiction treated as payment of tax for the relevant assessment year and thus loses its character as merely "advance tax" and becomes "income-tax paid" for that assessment year. Section 199 was also noted to reinforce that treatment as payment of income-tax on total income.
  6. Applying these principles to the facts, the court concluded that the advance tax paid had become income-tax paid by legal fiction. The petitioner, by failing to submit returns earlier and by seeking to obtain reduction of tax liability via reassessment, sought to achieve a result inconsistent with the settled principle that reassessment cannot reduce the income for reassessment below the amount originally assessed (or charged).
  7. Because completing the reassessment as the petitioner requested would have produced a reduction in tax liability below the amount already treated as tax paid and would therefore be contrary to the law laid down by the Supreme Court, the ITO's decision to drop the proceedings was held to be correct. The court held that the petitioner could not compel the ITO or the Board to accept the petitioner's preferred outcome or to condone limitation where the underlying legal position did not support the petitioner's relief.

Holding and Implications

Holding: Writ petition dismissed.

Direct implications for the parties:

  • The petitioner is not entitled to a direction requiring the Income-tax Officer to complete reassessment proceedings under section 147 in a manner that would have the effect of reducing the petitioner's tax liability below the amount already treated (by section 219) as tax paid for the relevant years.
  • The petitioner is not entitled to a direction to the Central Board of Direct Taxes to condone the delay in filing the refund application or to direct the ITO to accept the hypothetical refund claim based on the returns filed under section 148.
  • The ITO’s decision to drop the proceedings under section 147 was held to be lawful and appropriate in the circumstances.

Broader implications:

The opinion applies and reinforces existing Supreme Court jurisprudence limiting reassessment under section 147 to escaped income and clarifying that reassessment does not permit re-opening or re-computation of matters finally concluded in the original assessment. The court did not purport to lay down any new principle of law beyond applying settled authority.

Rule discharged.

Show full summary ...

    Mr. K. Sudhakar S. Shanbhag v. Income Tax Officer

    Dr. B.P Saraf, J.:— By this writ petition, the petitioner seeks a direction to the Income-tax Officer, Satara to complete the assessments of his income for the assessment years 1987–1988 and 1988–1989 on the basis of the returns submitted by him pursuant to notices under section 148 of the Income-tax Act, 1961 (“Act”) and to refund the amount paid by him as advance tax which according to him, is in excess of the amount due as per the returns submitted pursuant to the said notices. The contention of the petitioner is that having initiated proceedings for assessment or reassessment of the income of the petitioner for the assessment years 1987–1988 and 1988–1989 under section 147 by issue of notices under section 148 of the Act, the Income-tax Officer is under a statutory obligation to bring those proceedings to a logical end by making the assessments and refunding the amount paid by the petitioner as advance tax which is in excess of the amount that might be due as per the assessments, if made, under section 147 of the Act.

    2. The material facts giving rise to this petition are as follows: The petitioner is an individual. For the assessment year 1987–1988, he paid in three instalments a sum of Rs. 66,750/- by way of advance tax. Similarly for the assessment year 1988–1989, he paid by way of advance tax a sum of Rs. 51,709/- No return however was submitted under section 139 of the Act for any of the above two assessment years. On 23rd March 1991 the petitioner received two notices from the Income-tax Officer. Satara under section 148 of the Act for these two assessment years. The petitioner submitted returns declaring income of Rs. 1,02,700/- and Rs. 75,200/- for the assessment years 1987–1988 and 1988–1989 respectively. The tax due from the petitioner on the basis of the returns submitted pursuant to the notices under section 148 of the Act was lesser than the advance tax paid by him Rs. 34,200/- and Rs. 30,212/- for the assessment years 1987–1988 and 1988–1989 respectively. The Income-tax Officer did not make any assessment order and dropped the proceedings initiated under section 147 of the Act. On expiry of time limit for completion of assessment proceedings pursuant to the above notices under section 148 of the Act, the petitioner claimed refund of advance tax paid or the difference between the advance tax and the amount due as per returns submitted pursuant to notices under section 148 of the Act. The basis for this claim was that the tax payable on the income disclosed in the returns submitted pursuant to the notices under section 148 of the Act for the two assessment years was lesser than the advance tax paid by the petitioner and if the proceedings for assessment initiated under section 147 of the Act were completed by the Income-tax Officer, the petitioner would have been entitled to refund of Rs. 34,200/- and Rs. 30,212/- for the assessment years 1987–1988 and 1988–1989 respectively. The petitioner applied for refund of the above amounts on the basis of deemed acceptance of the returns by the Income-tax Officer in the proceedings under section 147 of the Act. As the application for refund was barred by limitation under section 239 of the Act, he applied to the Central Board of Direct Taxes (“Board”) to condone the delay in filing the same. The said application was rejected by the Board. The petitioner, thereafter, filed this writ petition seeking a direction to the Income-tax Officer to bring the proceedings under section 147 of the Act to a logical end by completing the assessments and refunding the excess tax paid by him by way of advance tax.

    3. Mr. A.K Jasani, learned counsel for the petitioner, submits that on issuance of notices under section 148 of the Act to the petitioner for the assessment years 1987–1988 and 1988–1989, the petitioner got a right to submit returns for those assessment years and the Income-tax Officer was under a statutory obligation to complete the proceedings for assessment or reassessment under section 147 of the Act and to refund any amount paid by the petitioner as advance tax which might be in excess of the amounts shown in the returns or the amount that might be due as per such assessments. In other words, the case of the petitioner is that the Income-tax Officer was bound to complete the proceedings under section 147 of the Act even if it resulted in refund of the amounts already paid by the petitioner by way of advance tax for those assessment years and to refund the excess amount to the petitioner. Reliance is placed in support of this contention on the decision of the Full Bench of this Court in C.I.T v. Indian Rare Earth Ltd.,1. Reliance is also placed on the decision of the Gauhati High Court in Kamalpur (Assam) Tea Estate Private Ltd. v. Superintendent of Taxes . 1989 175 ITR 142.. Relying on the above decisions. The learned counsel submits that refusal to refund the amount in such a case is violative of article 265 of the Constitution of India. The learned counsel also submits that the Board, which has powers to condone the delay in making application for refund, has not exercised that power in a quasi-judicial manner. He, therefore, seeks a direction to the Board to condone the delay in making the application for refund and to the Income-tax Officer to complete the assessments under section 147 of the Act and/or to refund the amounts claimed by the petitioner.

    4. None appears for the revenue. No affidavit has been filed by the revenue.

    5. We have carefully perused the facts of the case and the submissions of the learned counsel for the petitioner. The sole basis of the claim of the petitioner for refund of a part of the advance tax paid in this case for the assessment years 1987–1988 and 1988–1989 is initiation of proceedings under section 147 of the Act by the Income-tax Officer and submission of returns in the proceedings under section 148 of the Act by the petitioner showing lesser income than what was shown in the estimate for advance tax. The case of the petitioner appears to be that once notice is issued under section 148 of the Act, the Income-tax Officer is bound to complete the assessment or reassessment even if such action results in refund of the tax already paid by the assessee and appropriated by the revenue.

    6. We have carefully considered the above submissions. The object, scope and ambit of section 147 of the Act is now well-settled by the decision of the Supreme Court in C.I.T v. Sun Engineering Works P. Ltd.. Prior to that decision there were divergent views of different High Courts on the subject. The Supreme Court considered the decisions of various High Courts which had held that once valid proceedings under section 147 of the Income-tax Act are started, the Income-tax Officer has the jurisdiction and duty to complete the whole assessment de novo. The Supreme Court considered the observations in its earlier decision in V. Jaganmohan Rao v. Commissioner of Income-tax and Excess Profits Tax, that once assessment is validly reopened by issuance of a notice under sub-section (2) of section 22 of the Indian Income-tax Act, 1922 (corresponding to section 148 of the Act), the previous under-assessment is set aside and the Income-tax Officer has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. The Supreme Court observed that an order made in relation to the escaped income does not affect the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and identity. It was observed that what is set aside is the only previous under-assessment and not the original assessment proceedings. The Supreme Court said:

    “The judgment of V. Jaganmohan Rao's case, (supra) therefore, cannot be read to imply as laying down that, in the reassessment proceedings validly initiated, the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim recomputation of the income or redoing of an assessment and be allowed a claim which he either failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. Of course, in the reassessment proceedings, it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Rao's case (supra), as laying down that reassessment wipes out the original assessment and that reassessment is not only confined to “escaped assessment” or “underassessment” but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that Judgment totally out of context in which questions arose for decision in that case.”

    7. The Supreme Court further said that:

    “It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgments have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings.”

    8. The legal position was summed up by the Supreme Court as follows:

    “Since the original assessment had been concluded finally against the assessee, it was not permissible for the assessee in the reassessment proceedings to seek a review/revision of the concluded assessment for the purpose of computation of the escaped income. The High Court clearly fell in error in permitting the assessee to reagitate, in the reassessment proceedings under section 147(a) of the Act, the finally concluded assessment proceedings and to grant to him relief in respect of items not only earlier rejected, but also unconnected with the escapement of income by assuming as if the original assessment had not been concluded or was “still open”.

    9. It is clear from the above decision of the Supreme Court that proceedings under section 147 of the Act are for the benefit of the revenue and not of the assessee and the petitioner cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relateable to escaped income and reagitate the concluded matters. It is further clear that allowance of such claim in respect of escaped assessment in case of reassessment has to be limited to the extent to which they reduce the income to that originally assessed. The Supreme Court has categorically held that the income for purpose of reassessment cannot be reduced beyond the income originally assessed.

    10. There is no dispute about the fact that section 147 of the Act is applicable only to a case where the Income-tax Officer has reason to believe that the income has escaped assessment. In the instant case, the reassessment proceedings under section 148 of the Act were initiated by the Income-tax Officer for the two assessment years, viz., 1987–1988 and 1988–1989, by issuing notices under section 148 of the Act, obviously, because he was satisfied that the income of the petitioner had escaped assessment by reason of non-submission of the returns by the petitioner. In other words, in his opinion, the advance tax paid by the petitioner, which by virtue of section 219 of the Income-tax Act is treated as payment of tax in respect of income of the previous year, was less them the tax due by the petitioner. On receipt of returns of the petitioner, the Income-tax Officer found that the income shown by the petitioner was less than the income shown by him for the purpose of advance tax and that by submission of the returns the petitioner claimed assessment at a figure lesser than the one disclosed by him for the purpose of advance tax, which by virtue of section 219 is treated as tax paid on the income of that year. section 219 of the Income-tax Act reads as follows:

    “Any sum, other than a penally or interest, paid by or recovered from an assessee as advance tax in pursuance of this Chapter shall be treated as a payment of tax in respect of the income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable, and credit therefore shall be given to the assessee in the regular assessment:

    Provided that where, before the completion of the regular assessment, a provisional assessment is made under section 141 A, the credit shall be given also in such provisional assessment.”

    11. It is clear from the above section that any sum paid by or recovered from the petitioner as advance tax shall be treated as payment of tax in respect of income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable. By virtue of above section, the advance tax paid by the petitioner for the previous years relevant to the assessment years 1987–1988 and 1988–1989 has to be treated as payment of tax in respect of those assessment years. Admittedly, after payment of advance tax, neither the petitioner submitted returns for these two assessments years nor any regular assessment was made by the Income-tax Officer. As a result, the advance tax paid by him shall be treated as payment of tax in respect of those two assessment years. As observed by the Supreme Court in Modi Industries Ltd. v. C.I.T,. Section 219 introduces a legal fiction that the amount of advance tax paid shall be treated as payment of tax in respect of income of the relevant previous year. Section 199 of the Income-tax Act further declares that the amount of advance tax paid by the petitioner is to be treated as payment of income-tax which is levied by section 4 on the total income of the previous year. In other words, by legal fiction, the amount of advance tax paid by or recovered from the petitioner is treated as payment of income-tax in respect of income of the period “which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable”. Once the amount of advance tax is treated as payment of tax in respect of income of the relevant previous year, the amount loses its character of advance tax and is treated as income-tax paid in respect of the income of the relevant previous year.

    12. In the present case, advance tax paid by the petitioner lost the character of advance tax and became income-tax paid on his income of the relevant previous year.

    13. If the petitioner felt that the advance tax paid by him was more than the tax that would be correctly chargeable on his income, it was open to him to submit returns and get his assessments completed. On the failure of the petitioner to submit the returns of income for the two assessment years, the advance tax lost its character of advance tax and attained the character of tax paid by the petitioner for these two assessment years. On the basis of the returns submitted by the petitioner pursuant to notices under section 148 of the Act for the two above assessment years, the petitioner sought to get the tax payable by him reduced below the amount paid by him by way of advance tax which, by virtue of legal fiction, had already attained the character of tax paid by him for those two assessment years. In other words, the petitioner wanted the Income-tax Officer to complete the reassessment proceedings to his advantage and refund certain amounts to him, which without such reassessment, was not possible. The Income-tax Officer, in the facts and circumstances of the case, did not take any action pursuant to notices under section 148 of the Act and dropped the proceedings under section 147 of the Act. The petitioner is aggrieved by this action of the Income-tax Officer. We do not find any merit in his grievance. The Income-tax Officer, in our opinion, rightly dropped the proceedings for assessment of escaped income under section 147 of the Act in the present case. The petitioner cannot claim that the Income-tax Officer should complete proceedings for assessment of escaped income and reduce income-tax liability of the petitioner below the amount of the advance tax paid by him which had attained the character of tax paid by him on the income of those years. If the Income-tax Officer would have done so, he would have made a mistake. His action would have been contrary to law laid down by the Supreme Court in C.I.T v. Sun Engineers Works P. Ltd. (supra). We are of the firm opinion that the petitioner in this case is neither entitled to get a direction to the Income-tax Officer to complete the proceedings under section 147 of the Act by making assessment which would have the effect of reducing the income beyond the figure already charged to tax, nor a direction to the Board to direct the Income-tax Officer to accept the hypothetical claim of the petitioner for refund of the advance tax paid by him or a part thereof. The claim of the petitioner is wholly misconceived and the petitioner is not entitled to any relief. In the premises, this writ petition is devoid of any merit and hence dismissed.

    14. Rule discharged.

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    Comments

    Mr. K. Sudhakar S. Shanbhag v. Income Tax Officer
    (Aug 30, 1999)