Hindu Bank Karur Ltd. v. Additional Commissioner Of Income-Tax, Madras.

1. In this reference the Income-tax Appellate Tribunal has referred the following questions to this court:

"(i) Whether, on the facts and in the circumstances of the case, the order of the Commissioner under Section 263 of the Act directing the assessment of Rs. 25,045 as profits under Section 41(2) of the Act as upheld by the Tribunal was valid in law ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in its conclusion on the scope of the Commissioner's powers under Section 263 of the Act, that there was any prejudice to the interests of the revenue in the instant case to justify interference ?

(iii) Whether, on the facts and in the circumstances of the case, the decision of the Tribunal adjudicating upon the nature of profit arising as taxable under Section 41(2) of the Act without adjudicating upon the nature of the losses arising from the same transaction, is valid and justified in law ?"

2. The facts are common to all the questions. Hindu Bank Karur Ltd. was carrying on banking business. We are concerned in this reference with the calendar year 1962, which is the previous year for the assessment year 1963-64. On 12th August, 1962, there was an agreement between the assessee-bank and the Canara Industrial and Banking Syndicate Ltd., hereinafter called the Syndicate Bank. The Syndicate Bank was to take over from the assessee-bank all its liabilities including contingent liabilities and account the entire assets except the surplus assets amounting to Rs. 3,59,010, such surplus assets being left with the assessee in cash. The liabilities were taken over at their face value. The assets like G. P. Notes and shares were taken over at the market value. The furniture, fixtures, stationery, etc., were taken over at reasonable market value. The other assets including loans and advances were taken over at a value mutually agreed upon after making necessary provisions for bad and doubtful debts. After making necessary provision for income-tax and such other contingent liabilities, there was a surplus arrived at as follows :

Rs.

Valuation adopted for the assets 34,39,684 Less : Liabilities taken over 30,80,674 Surplus 3,59,010

3. On and after the transfer, the Syndicate Bank was to be the full owner of the assets so transferred and had to discharge all the liabilities which were taken over. The transfer of liabilities and making over of the assets was to be completed as on the close of the business of the assessee-bank on 15th August, 1962, or such other convenient date. The staff of the assessee-bank was to be absorbed by the Syndicate Bank subject to certain agreed terms. On and after the date of transfer, the Hindu Bank was not to carry on any banking-business.

4. The assessee-bank carried on the banking business till 26th August, 1962. The taking over of the assets and liabilities by the Syndicate Bank took place on that date, The assessee thereafter kept the sum of Rs. 3,59,010 in deposit with the Syndicate Bank and earned interest therefrom. The assessee closed its accounts on 26th August, 1962, and again at the end of the year, i.e., on 31st December, 1962. The assessee went into liquidation under a special resolution passed on 28th October, 1963.

5. The book value of the assets, viz., balances with other banks, Government securities, clean overdrafts, mortgage loans, decreed debts, furniture and fixtures and non-banking assets came to Rs. 9,65,737.04. They were taken over for Rs. 8,90,575.55. As a result of the said taking over, there was a loss or deficiency in the transfer of the aforesaid items amounting to Rs. 1,10,748. There was a profit or surplus on the transfer of furniture and fixtures amounting to Rs. 35,586.87 which represents the difference between Rs. 53,779, their realised value, and Rs. 18,182, their depreciated value, as per the books. The actual cost of the said furniture and fixtures now under consideration came to Rs. 40,075. Depreciation of Rs. 25,045 in the aggregate had been granted in the income-tax assessments on the said items and the depreciated value thereof was Rs. 15,030. After adjusting the book surplus of Rs. 35,586.87 against the net loss of Rs. 1,10,748, there was a net loss or deficiency of Rs. 75,161.

6. The Income-tax assessment came to be made on 19th January, 1965. The relevant return disclosed a loss of Rs. 95,694. The Income-tax Officer considered, in particular, the loss of Rs. 75,161, mentioned above. He held that the said loss had not arisen in the course of the banking business of the assessee and that it had arisen by the cessation of the said business. He, therefore, disallowed it as capital loss. The result was that even after making the adjustment to the returned income including the disallowance of the loss of Rs. 75,161, there was a net loss of Rs. 1,564. The Income-tax Officer declared the company as not liable to tax. Since the business had been stopped on 26th August, 1962, he held that the loss would lapse.

7. The assessee did not take any proceeding to contest the assessment so made, obviously because the result was only a loss and any appeal regarding the said disallowance of Rs. 75,161 was not likely to make any impact financially. The Commissioner of Income-tax went through this order of the Income-tax Officer and he was of the view that the Income-tax Officer had not considered the profit chargeable under Section 41(2) of the Income-tax Act in respect of the furniture and fixtures transferred to the Syndicate Bank. As the order of the Income-tax Officer was, thus, in his view, erroneous in law and prejudicial to the interests of the revenue, he took proceedings under Section 263 of the Income-tax Act of 1961 and asked the assessee to show cause why the assessment should not be modified by including the said profit in the assessable income. The assessee took the following objections, viz.:--(1) its business was only merged in the business of the Syndicate Bank and such a transaction was not covered by the term "sold" used in Section 41(2) of the Act; (2) in a case of this type where all the assets of a business were transferred as a going concern, there was no question of allotting separate values to the different assets transferred; and (3) if the profit on the sale of furniture and fixtures is sought, to be taxed under Section 41(2), it should be set off against the loss incurred on the transfer of such items as Government securities, etc. The Commissioner of Income-tax held that there was sale by transfer of assets for a consideration. From the profit and loss account and the balance-sheet of the assessee. he found that each different asset was valued at a particular figure according to market value and he was, therefore, unable to accept the argument put forward by the assessee that it was not possible to allot any particular value as the sale price of furniture and fixtures transferred to the Syndicate Bank. Regarding the adjustment for the losses, he pointed out that the said loss had not arisen in the course of carrying on the business, but in connection with discontinuation thereof and hence had to be regarded as a capital loss. In his view, the profit on the sale of furniture and fixtures was taxable under the specific provisions of Section 41(2) of the Act. He directed the Income-tax Officer to revise the assessment by including the sum of Rs. 25,045 which represents, as seen already, the depreciation granted to the assessee in the earlier years on the items of transfer.

8. The assessee appealed to the Appellate Tribunal. It did not accept the assessee's contention that there was a merger of the assessee's business with the business of the Syndicate Bank not amounting to a sale as visualised in Section 41(2) of the Act. It was held that the assessee continued as a separate entity, so that there was no merger as such. From the materials on record, the Tribunal found that the value to be placed on the furniture and fixtures transferred by the assessee came to Rs. 53,779 and held that the assessee's claim that no particular price or consideration was attributable to the transfer of the furniture and fixtures was not correct. On the question as to whether the assessee was eligible for the adjustment of the loss of Rs. 75,161 the Tribunal held that the assessee had accepted the Income-tax Officer's finding regarding the loss of Rs. 75,161 and could not now question the said finding. It held also that the Commissioner in the proceedings under Section 263 could only seek to set right or remove the prejudice caused to the revenue and that the matters concluded by the Income-tax Officer in his assessment order to the prejudice of the assessee could not be considered in the proceedings under Section 263 of the Act. The result was that the Commissioner's order was confirmed.

9. It was on the above facts that the throe questions already set out have been referred to this court. The first question raises the point as to whether the assessment of Rs. 25,045 as upheld by the Tribunal under Section 41(2) of the Act was valid in law. . Section 41(2) in so far as it is material runs as follows :

Where any...... furniture which is owned by the assessee and which was or has been used for the purposes of business......is sold......and the moneys payable in respect of such......furniture....exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down, value shall be chargeable to income-tax as income of the business... ...of the previous year in which the moneys payable for the......furniture became due.

10. There is an Explanation to this provision, which provides that, where the moneys payable in respect of the furnitures, etc., referred to in the provision became due in a previous year in which the business for the purpose of which the furniture, etc., was being used was no longer in existence, the provisions of that Sub-section (Section 41(2)) would apply as if the business was in existence in that previous year. In the present case there is an excess realisation over and above the written down value of. the furniture owned by the assessee and used for the purpose of the business. There was a transfer of the said furniture for consideration which was separately and specifically arrived at. In paragraph 4 of its order the Tribunal has set out the break-up of the several figures which showed the total loss of Rs. 1,10,748 and which also showed the surplus of Rs. 35,587 on the sale of furniture and fixtures. This is not a case where the business, as such, was sold without any itemised consideration. The assets under the agreement were separately taken over at mutually agreed valuation. There is no need on the facts here to go into the Explanation to Section 41(2) of the Act as that Explanation would apply only with reference to a previous year in which the business was no longer in existence. In other words, the Explanation is intended to apply to a case where in the whole of the relevant previous year, the business was not in existence, but the furniture or the other assets which were used in the said business were sold for a sum exceeding the written down value. In such a case the section is intended to be applied, as if the business was in existence in the previous year. In the present case the business was very much in existence in the relevant previous year, so that there is no need to invoke the Explanation to Section 41(2) of the Act. The sum of Rs. 25,045 represents the difference between the actual cost and the written down value of the furniture contemplated by Section 41(2) of the Act, and was rightly brought to tax under Section 41(2) of the Act.

11. We now turn to question No. 2. The point raised in this question is whether there was any prejudice to the interest of the revenue in the instant case to justify the interference under Section 263 of the Income-tax Act. Section 263 runs as follows:

"263. (1) The Commissioner may call for and examine the record of any proceeding 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. The predecessor of this provision in the Indian Income-tax Act of 1922 was Section 33B. In the case of an assessment, the assessee alone has a right of appeal before the Appellate Assistant Commissioner. Where there is any error, which is in favour of the assessee or which is, in other words, prejudicial to the revenue, there was no remedy open to the revenue authorities to set right the error except by taking recourse to the provision for reopening the assessment or rectification thereof. The reopening of the assessment or rectification had to be done only by the Income-tax Officer and the application of this provision was circumscribed by several conditions. In order to provide a remedy to the income-tax department to set right such errors Section 33B was enacted and the same provision got repeated in the Income-tax Act of 1961 as Section 263. Where the Commissioner of Income-tax found that the order of the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the revenue, then he could, after making the necessary enquiry, pass such orders thereon as the circumstances of the case justified. He could not, however, revise an order of reassessment made under Section 147 nor could he take proceedings under Section 263 of the Act after the expiry of two years from the date of the order sought to be revised.

13. The question as to when an order of the Income-tax Officer is prejudicial to the interests of the revenue would depend upon the facts in each case. There can be no universal formula applicable to finding out any such prejudicial error. In Rampyari Devi Saraogi v. Commissioner of Income-tax, . the Supreme Court had occasion to consider a case where the Income-tax Officer had made the assessment in undue haste without any evidence or enquiry. It was held that Section 33B could be applied to such a case. It would be seen that the prejudice to the revenue was inferred in that case not from any finding that there was a loss of revenue, but from the mere fact that the procedure employed was defective.

14. Similarly in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, the Supreme Court was concerned with the applicability of Section 33B on the following facts:

The asses see-filed voluntary returns for the assessment years 1955-56 to 1959-60. The return for 1958-59 was dated 22nd August, 1959, and those for the other years were ante-dated. The cases were heard on 21st and 22nd December, 1959, and the assessments completed on 23rd December, 1959. The assessee had claimed that she had received certain presents and dowry at the time of her marriage, had made investment thereof and had earned income therefrom. She claimed to have invested the amounts available with her with another firm. The Income-tax Officer substantially accepted the returns after making some modifications to the income returned. For the assessment year 1960-61, the return was filed on 20th July, 1960. The Income-tax Officer made an assessment on 10th July, 1961. The assessee had claimed she had income from speculation and interest on investment. The Income-tax Officer had not investigated into the source, but assessed her on the income. The Commissioner took proceedings under Section 33B and held that the Income-tax Officer, who made the assessments, had no jurisdiction over the assessee, that he was not justified in accepting the claim of initial capital without any evidence being placed on record and that he was not justified in accepting the cases of speculation without any evidence. For the assessment years 1955-56 to 1959-60, the proceedings under Section 33B had become time-barred. He, therefore, cancelled the assessment only for 1960-61 and directed the Income-tax Officer to make a fresh assessment. The Tribunal held on appeal against the order of the Commissioner of Income-tax that the assessment order for 1960-61 could not be said to be prejudicial to the interests of the revenue as in the earlier years the existence of initial capital, realisation by sale of gold ornaments and the carrying on money lending and speculative business had already been accepted. The High Court disagreed with the Tribunal's view and upheld the order of the Commissioner. In the appeal by assessee to the Supreme Court, it was held that the prejudice to the interest of the revenue did not arise only when in the assessment for the year any income liable to tax had not been taxed. It was pointed out :

"Even where an income has not been earned and is not assessable, merely because the assessee wants it to be assessed in his or her hands in order to assist someone else who would have been assessed to a larger amount, an assessment so made can certainly be erroneous and prejudicial to the interests of the revenue."

15. It may be Seen that in the case before the Supreme Court the real complaint of the Commissioner was that the assessee had not earned the particular income and had disclosed it for assessment only for the purpose of assisting someone else. Making an assessment with reference to an income, which had not been earned by the assessee, would not have been prejudicial to the interests of the revenue if prejudice is to be spelt out only in a case where some income assessable to tax had not been assessed. The result of the above decision is that even where an assessment is made with reference to an income which, but for the return voluntarily filed by the assessee, would not be assessable in his or her hands it would be prejudicial. Thus, the expression "erroneous in so far as it is prejudicial to the interests of the revenue" requires to be widely considered. In the present case even that wide construction is unnecessary because there is a demonstrable prejudice to the revenue in so far as the amount assessable to tax under Section 41(2) had not been assessed. As we shall presently show, this prejudice is not to be ascertained by taking the assessment as a whole. The Tribunal's conclusion was, therefore, right.

16. The last question involves the consideration of the point as to whether the assessee could ask for the adjustment of the loss on the sale of some other items against the profit sought to be taxed under Section 41(2) of the Act. The point raised by the learned counsel for the assessee is that Section 263, which we have already extracted, enables the Commissioner to call for and examine the records of any proceeding and if he considered that any order passed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the revenue, then he could, after giving the assessee the necessary opportunity, pass such order on the assessment as the circumstances of the case justified. The submission was that the entire assessment was open before the Commissioner of Income-tax when he invoked Section 263. For the revenue the submission was that the Commissioner had no doubt to go through the order passed by the Income-tax Officer, but he had to go through the order for the purpose of Section 263 of the Act only to find out whether there was any error which was prejudicial to the interests of the revenue. If there was any other error, then in the submission of the learned counsel for the revenue, the matter had to be agitated by the assessee under a different proceeding.

17. The real point is whether in the proceedings taken by the Commissioner to set right the errors in so far as they were prejudicial to the interests of the revenue, the assessee could ask for adjustment of the errors in so far as they were prejudicial to him. Section 264 provides for revision by the Commissioner of Income-tax of orders of subordinate authorities, either on his own motion or on an application made by the assessee. In such a case he could pass such order as he thought fit provided such an order was not one prejudicial to the assessee. Thus, apart from the provision for an appeal to the Appellate Assistant Commissioner available under Section 246 and the further appeal to the Tribunal from the order of the Appellate Assistant Commissioner under Section 253 of the Act, there is an alternative remedy available to the assessee to go before the Commissioner under Section 264. The Commissioner could then examine the grievance of the assessee and adjudicate on it in such a manner as his order did not involve any prejudice to the assessee. The order can be said to be prejudical to the assessee only when the assessee as a result of the said order is in a different and worse position than that in which he was placed before the order of the Commissioner was passed under Section 264 of the Act, See Commissioner of Income-tax v. Tribune Trust, [1948] 16 ITR 214 (PC) Thus, if the assessee had any grievance with reference to the non-adjustment of the loss in other items, he had to take proceedings under the other provisions mentioned above. Having failed to take any such step, the assessee cannot in defence to the proceedings under Section 263 seek to show that there was no prejudice to the interests of the revenue, because there was some other error which was in favour of the revenue.

18. In cases where the income had escaped assessment and where proceedings were taken under Section 34 of the Indian Income-tax Act, 1922, corresponding to Section 147 of the Income-tax Act of 1961, questions had arisen as to whether an assessee could resist such proceedings, by showing that other income, which was not assessable, had been assessed. The several cases in which the assessee's attempt to resist such proceedings in this manner had failed are set out at page 782 of Kanga and Palkhivala on Income-tax, volume I, sixth edition, pages 782-783. Under Section 152(2) of the Income-tax Act of 1961, a special right has been given to the assessee in cases coming under Section 147(b) to show that he had been assessed on an amount or to a sum not lower than what he would rightly be liable for even if the income alleged to have escaped assessment had been taken into account. Thus, the rigour of the principle that the assessment as a whole is not open for reconsideration was relaxed in favour of the assessee under Section 152(2). Even that provision is not available in cases were Section 147(a) is invoked. If Parliament was so minded, it would have enacted a similar provision in section 263 on the same lines as Section 152(2) of the Act, As this has not been done, we are unable to accept the claim of the assessee that he could resist the proceedings under Section 263 of the Act by seeking to show that there was some other benefit in favour of the revenue which was prejudicial to the assessee. The words "erroneous in so far as it was prejudicial to the interests of the revenue" have to be taken together. It is not any error that the Commissioner can rectify under Section 263. His power is restricted to the errors in so far as they are prejudicial to the interests of the revenue. If there was any other error, it was necessary for the assessee to take up other proceeding, Any other construction would not fit in with the scheme of sections 263 and 264.

19. It was stated for the assessee that he did not take up any proceedings under Section 264 as by the time the Commissioner invoked Section 263 the period of one year contemplated by Section 264 had elapsed. Section 264(3) empowers the Commissioner to admit an application made after the expiry of that period. Therefore, the time limit of one year is not something which was rigid. We consider that the Commissioner would have entertained the application under Section 264 if the assessee had shown that he was prevented by sufficient cause from making the application within that period. Therefore, the plea that the assessee is prejudiced by the Commissioner taking up the proceedings beyond the period of one year cannot be accepted. The Commissioner had powers under Section 263 to examine the records within a period of two years. He has acted within the said time-limit as contemplated by this provision.

20. In the circumstances, we are unable to accept the submission of the assessee that the Commissioner of Income-tax should have entertained the assessee's objection with reference to the loss of Rs. 75,161.

21. One other submission that was made was that the Commissioner of Income-tax had himself considered the merits of the assessee's claim regarding the adjustment of Rs. 75,161 and rejected it. It was submitted that the Tribunal should have gone into the question for itself and should not have merely rejected the assessee's objection in limine. Having regard to the language of Section 263 no exception could be taken to the order of the Tribunal in so far as it rejected the assessee's claim for adjustment of Rs. 75,161 in limine. The fact that the Commissioner had made certain observations on the merits of the admissibility of the adjustment of the sum of Rs. 75,161 cannot stand in the way of the Tribunal looking into the provisions and finding out whether the assessee's claim deserved to be entertained or not. There is no question of estoppel in such a matter.

22. For the reasons mentioned above, we answer all the three questions in the affirmative and against the assessee. The Commissioner will have his costs. Counsel's fee Rs. 250.