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Case Number

Writ Petitions Nos. 905, 3138 and 3152 of 1978

Judges

Ramanujam
Ratnam, JJ.

Acts

s. 255(4) of the I.T Act, 1961 (for short the Act). W.P No. 3138 of 1978

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Smart Summary

Judicial Opinion Summary — Ramanujam, J.

Factual and Procedural Background

The dispute arises from the sale by the assessee of 26.01 acres of land to the Government of India on 28 March 1970 for Rs. 23,40,000. After deducting the assessee's stated cost of Rs. 1,06,855, the Income-tax Officer (ITO) assessed capital gains of Rs. 22,33,145. The assessee claimed exemption on the ground that the lands were agricultural and thus exempt from capital gains; the ITO rejected this claim. The assessee's appeals to the Appellate Assistant Commissioner (AAC) and then to the Income-tax Appellate Tribunal (the Tribunal) were unsuccessful.

Before the Tribunal the assessee advanced two principal contentions: (1) that the lands were agricultural and therefore not subject to capital gains, and (2) if non-agricultural status made capital gains exigible, capital gains should be computed using the date of conversion to non-agricultural use rather than the original acquisition date.

The two-member Bench of the Tribunal agreed that, on the materials, the lands were non-agricultural at the time of sale and thus capital gains were exigible, but the members differed on computation: the judicial member used the original acquisition date, while the accountant member used the date of conversion. The members framed the question: “Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1971–72 would be Rs. 22,33,145 or any lesser amount?” and referred it to the President for reference to a third member under s. 255(4) of the Income-tax Act, 1961.

The President referred the question to a third member (the Vice‑President, Thiru D. Rangaswamy). Before the third member the assessee raised three additional points not previously urged: (i) a Central Board of Direct Taxes circular dated 1 August 1969 on the “cost of acquisition” had not been considered by the original members; (ii) portions of the land used for removing clay for brick manufacture should be treated as stock‑in‑trade and thus not subject to capital gains; and (iii) the sale date placed the transaction in assessment year 1970–71 and required adoption of a separate previous year for capital gains. Instead of expressing an opinion, the third member remitted the matter back to the original two members for rehearing and fresh consideration of those points.

Three writ petitions followed: W.P. No. 905 of 1978 by the Income‑tax Officer seeking certiorari to quash the Vice‑President's order on the ground of excess of jurisdiction under s. 255(4); W.P. No. 3138 of 1978 by the assessee seeking a mandamus for a fresh, de novo hearing before the Tribunal; and W.P. No. 3152 of 1978 challenging the orders of the two members and the third member.

Legal Issues Presented

Whether the third member (a member to whom a point is referred under s. 255(4) of the Income‑tax Act, 1961) had jurisdiction to remit the matter to the original two‑member Bench for rehearing without pronouncing an opinion on the referred point(s).
Whether, when the third member remitted the matter without expressing any opinion, that created a deadlock making it necessary for the Court to direct a de novo hearing of the appeal by a differently constituted Tribunal.
Whether the third member, acting under s. 255(4), may entertain additional points not argued before the original Bench and, if so, whether he may (or must) decide them and thereby influence the majority opinion of the Tribunal.

Arguments of the Parties

Revenue / Department (Income‑tax Officer)

Filed W.P. No. 905/1978 seeking certiorari to quash the third member's order dated 31 January 1978 on the ground that the third member exceeded his jurisdiction under s. 255(4) of the Income‑tax Act by remitting the matter to the original Bench instead of deciding the point(s) referred.

Assessee

Contended that the third member's order did not disclose any opinion and thus produced a complete deadlock, preventing determination of the majority view of the Tribunal; accordingly the assessee sought quashing of the Tribunal orders and a direction for a de novo hearing of its appeal.

Learned Advocate‑General / Counsel appearing for the Assessee

Argued that s. 255(4) should be read with s. 254(1) of the Act so that the third member is to be treated as having the full powers of the Tribunal under s. 254(1), and hence possessed power to pass such orders as he thought fit (including remission to the original Bench).

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court commenced its analysis by examining s. 255(4) of the Income‑tax Act, 1961 (quoted in the opinion). It observed that the statutory scheme contemplates that where members of a Bench differ, the point shall, if members are equally divided, be referred by the President for hearing by one or more other members and “such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it.”

From the language and scheme of s. 255(4), the Court concluded that the power of the third member is confined to giving a decision on the specific point or points referred by the original Bench. The third member's jurisdiction “springs from s. 255(4) … and he has no other power inherent or otherwise.” The third member must therefore pronounce an opinion on the point(s) of difference so that the majority opinion of the Tribunal can be ascertained for disposal of the appeal.

The Court rejected the Advocate‑General’s submission that s. 255(4) should be read with s. 254(1) so as to vest the third member with all the Tribunal's powers. The Court held that such a reading would conflict with the language and object of s. 255(4) by effectively converting the third member into an appellate authority over the original Bench—contrary to the purpose of the provision. The provisions of the Act must be construed harmoniously, but not so as to obliterate the distinct, limited role assigned by s. 255(4).

Applying these principles to the facts, the Court found that the third member had not expressed any opinion either on the point of difference (mode of computation of capital gains) or on the additional points raised before him. Instead, he remitted the matter to the original two members for rehearing. The Court held that such a remit order, made without expressing an opinion, was beyond the jurisdiction conferred by s. 255(4).

The Court further explained that had the third member entertained the additional points and given his opinion on them and on the main point of difference, he would have acted within his jurisdiction (subject to subsequent challenges on admissibility of such points). But the third member gave no opinion; he simply remitted the matter, which was an exercise of power not vested in a third member under s. 255(4).

Because the third member (Thiru D. Rangaswamy) is no longer in service and thus unavailable to decide the reference, the Court directed the President of the Tribunal to nominate or empower another member to hear the reference and give an opinion on the points of dispute.

Regarding the assessee’s petitions seeking a de novo hearing on the ground of a deadlock, the Court held that there was no present deadlock arising from the statutory process because the third member had not expressed an opinion (and his remit order was invalid). The correct course was to obtain a valid opinion from a properly appointed third member and then determine the majority view of the Tribunal. Consequently, the Court declined to quash the opinions of the original two members or to order a de novo hearing by a different Tribunal.

Holding and Implications

Primary Holding: W.P. No. 905 of 1978 is allowed and the order of the third member dated 31 January 1978 (Thiru D. Rangaswamy) is quashed as being beyond the jurisdiction conferred by s. 255(4) of the Income‑tax Act, 1961.

Secondary Outcome: The writ petitions filed by the assessee (W.P. Nos. 3138 and 3152 of 1978) seeking quashing of the Tribunal's opinions and a direction for a de novo hearing are dismissed.

Implications

The immediate legal consequence is that the reference from the original two‑member Bench remains pending and must be decided according to law by the majority opinion of the members who have heard the case, which will now include the opinion of a new third member to be nominated or empowered by the President of the Tribunal.
The third member, when appointed under s. 255(4), must pronounce an opinion on the point(s) referred; he does not have jurisdiction to remit the matter to the original two members for rehearing in the manner attempted in the impugned order.
No broader precedent was established beyond the statutory interpretation and application in this case: the Court enforced a strict limitation on the scope of a third member’s power under s. 255(4). The Court did note, however, that had a properly constituted third member entertained additional points and expressed an opinion, that could be within jurisdiction (subject to later challenge), but that did not occur here.
There will be no order as to costs in any of the writ petitions.

This summary is confined strictly to the content of the provided opinion and does not add information beyond that text.

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Income-Tax Officer, Company Circle-Ii(I), Madras, And Others v. Vice-President, Income-Tax Appellate Tribunal, Madras, And Others

Ramanujam, J.:— W.P No. 905 of 1978 has been filed by the Income-tax Officer, Company Circle 11(1), Madras, for the issue of a writ of certiorari to quash the order of the Vice-President, Income-tax Appellate Tribunal, Madras, dated January 31, 1978, on the ground that he has exceeded his jurisdiction under s. 255(4) of the I.T Act, 1961 (for short the “Act”). W.P No. 3138 of 1978 has been filed by the assessee for the issue of a mandamus directing a fresh and de novo disposal of its appeal filed before the Income-tax Appellate Tribunal and W.P No. 3152 of 1978 is one for the issue of a writ of certiorari to quash the orders passed by the two members of the Tribunal and the Vice-President, the third member, in its appeal.

2. The circumstances under which these writ petitions came to be filed may be briefly set out.

3. The assessee sold an extent of 26.01 acres of land to the Government of India on March 28, 1970 for a sum of Rs. 23,40,000. After deducting the assessee's cost of Rs. 1,06,855, the capital gains arising out of the said sale was determined by the ITO at Rs. 22,33,145. Before the ITO, the assessee claimed exemption in respect of the entire sum of Rs. 22,33,145 on the only ground that the lands were sold as agricultural land and, therefore, the sale will not attract the levy of tax under the head “Capital gains”. The ITO rejected that claim of the assessee. Therefore, the assessee went before the AAC but without success. Thereafter, the assessee went before the Tribunal. However, before the Tribunal, two contentions were put forward by the assessee. One was that the lands sold being agricultural lands, the sale will not attract the levy of capital gains. The second was that even if the levy of capital gains is exigible on the ground that the lands sold are non-agricultural lands, still, capital gains has to be computed taking the date of conversion of the agricultural land into non-agricultural land as the basis. So far as the first question is concerned, the Tribunal which consisted of a judicial member and an accountant member held that on the materials on record, though the lands were originally acquired as agricultural lands, when they were sold, they were non-agricultural land and that, therefore, such sale of non-agricultural land would attract the levy of capital gains. However, the two members of the Tribunal differed on the mode of computation of the capital gains. The judicial member took the view that the capital gains must be computed taking the original date of acquisition of agricultural land as the basis. The accountant member, however, disagreed with that view and held that the date of conversion should be taken as the basis for computation of the capital gains. In view of the difference of opinion between the two members of the Tribunal on the mode of computation of the capital gains, they framed the following question and forwarded the same to the President for reference to a third member:

“Whether, on the facts and in the circumstances of the case, the capital gains assessable for the assessment year 1971–72 would be Rs. 22,33,145 or any lesser amount?”

4. The President had referred the said question to a third member, Thiru D. Rangaswamy, the then Vice-president of the Income-tax Appellate Tribunal, Madras. Before the third member, the counsel for the assessee raised three additional points which were not urged before the two members of the Tribunal or before any of the lower authorities and those points were : (1) A circular issued by the Central Board of Direct Taxes dated August 1, 1969, clarifying the expression “cost of acquisition of the capital asset” throwing light on the mode of computation of the capital assets has not been considered by the two members of the Tribunal; (2) that the lands which are mainly used for removing clay for the manufacture of brick should be taken to be the stock-in-trade and the sale of such a stock-in-trade cannot attract the levy of capital gains; (3) that the sale having taken place on March 28, 1970, the sale fell within the assessment year 1970–71 and outside the previous year, and capital gains being a separate source of income, a separate previous year should be adopted. The third member after hearing the parties at length on the question referred to him, as also on the additional points referred to above, felt that the matter should be reconsidered by the two members of the Tribunal. In that view, the third member remitted the matter back to the original Bench which heard the appeal first to consider primarily the application of the circular of the Central Board of Direct Taxes referred to above and also whether the land sold was capital asset throughout the period between the date of purchase and the date of sale. The validity of this order has been challenged by the Department in W.P No. 905 of 1978 mainly on the ground that the third member has no jurisdiction to remit the matter for fresh consideration to the original Bench as such a power is not conferred on the third member under s. 255(4) of the Act. Having regard to the nature of the order passed by the third member, from which one cannot decide as to what is the majority opinion of the Tribunal, the assessee contends that there is a complete deadlock and, therefore, according to the assessee, the orders of the two members of the original Tribunal as also of the third member may be quashed and a direction may be issued for a de novo hearing of its appeal filed before the Tribunal. It cannot be disputed that the jurisdiction of the third member springs from s. 255(4) of the Act and he has no other power inherent or otherwise. Section 255(4) of the Act is to the following effect:

“If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it.”

5. Admittedly, in this case, the President of the Appellate Tribunal has referred the matter to the third member (Thiru D. Rangaswamy) to hear on the point or points on which the two members of the Tribunal had differed and on the third member giving his decision on the point or points referred to it, the appeal should be taken to have been decided by the opinion of the majority of the members of the Appellate Tribunal who have heard the case including those who first heard it. Thus, the power of the third member to whom the case is referred is confined to giving of a decision on the point on which the members had differed and which has been formulated by them as a question for the decision of a third member.

6. In this case, the third member has proceeded on the basis that the question referred by the two members of the Tribunal is wide enough to enable the assessee to raise additional points and, therefore, the additional points pressed by the assessee should be considered. Even so, we are of the view that the third member should have pronounced his opinion on the point of difference as also on the additional points raised by the assessee. But without doing so, the third member has remitted the matter to the original two members of the Tribunal for a fresh decision. We are of the view that the third member who is functioning under s. 255(4) of the Act does not have such a power as to direct the two members of the Tribunal who had differed on the point referred to the third member, to decide a particular point or act in a particular manner. Such a power vests only with an appellate or revisional authorities, if there are any. The power of the third member to whom the points of difference have been referred cannot act as if it were an appellate authority over the two members of the Tribunal and direct them to rehear and dispose of the matter afresh. No doubt, the third member, in this case, happened to be the Vice-president. But that will not clothe him with the power to give directions or remit the matters while functioning under s. 255(4) of the Act. The learned Advocate-General appearing for the assessee would say that s. 255(4) of the Act should be read in conjunction with s. 254(1) of the Act which deals with the powers of the Appellate Tribunal. According to him, the third member to whom the points of difference have been referred, should be taken to have all the powers of the Tribunal under s. 254(1) and as such the Tribunal can pass such orders as it thinks fit. Therefore, the third member has got the power to pass any order as he thinks fit. The submission of the learned Advocate-General is in direct conflict with the language and the object behind s. 255(4) of the Act. When s. 255(4) says that the third member shall decide the points of difference referred to him and the decision of the Tribunal will be as per the majority opinion, the third member is expected to give his decision, whatever it is, so that the majority opinion could be determined for the purpose of disposal of the appeal before the Tribunal. If, based on the language of s. 254(1) of the Act, we were to hold that the third member can pass any order he likes, then such an order will not serve the purpose for which s. 255(4) of the Act was introduced in the statute book. It is well established that the provisions of the Act have to be construed harmoniously so as to give effect to all the provisions of the Act and to carry out the objects sought to be achieved by the various statutory provisions. In this case, the third member has not chosen to give his opinion one way or the other either on the point of dispute, i.e, on the mode of computation of the capital gains or on the new points urged by the assessee before him. If the third member has entertained the new points and has given his opinion one way or the other, as also on the point of dispute referred to it, it can be said that he has acted within his jurisdiction, though it may be open to the Revenue to contend before the appropriate forum that the third member should not have entertained the new points which were not urged before the two members of the original Tribunal. In this case, as already stated, without giving his decision on any of the points, the third member has merely remitted the matter to the two members of the Tribunal for a fresh consideration on all the points. We do not see how the third member to whom the point of dispute is referred under s. 255(4) can claim to have any larger power than the two members who originally constituted the Tribunal. The third member has no higher power or jurisdiction than the members who originally constituted the Tribunal, and, therefore, the remit order directing them to rehear the matter will be clearly outside the jurisdiction of the third member. Hence, we cannot sustain legally the order of the third member, in this case, remitting the matter to the two members of the original Tribunal without expressing any opinion on the question which he had to consider. Therefore, W.P No. 905 of 1978 is allowed and the order of the first respondent therein dated January 31, 1978, will stand quashed. The result is that the original reference referring the point of dispute should be taken to be pending and that has to be disposed of as per law. In this case, we find that the third member (Thiru D. Rangaswamy) is no longer in service and, therefore, he is not in a position to hear the reference. In view of this peculiar situation, the President will nominate or empower any other member of the Tribunal to hear the reference and give his opinion on the points of dispute.

7. Coming to the other two writ petitions, we find that these writ petitions have been filed on the basis that there is a deadlock in view of the order passed by the third member from which it is not possible to find out as to what is the majority opinion of the Tribunal in the appeal filed by the assessee challenging the assessment of the capital gains. The main contention urged by the writ petitioner is that the order of the third member does not contain his opinion, one way or the other, and, therefore, it is not possible to determine as to what is the majority opinion, and since as a result of the order of the third member, the appeal filed by the assessee before the Tribunal cannot be disposed of, it is just and equitable that this court should direct a de novo hearing of the appeal by the Tribunal. But, we have already held that the order passed by the third member expressing no opinion on the points of dispute cannot legally be sustained. We have, in fact, quashed the order of the third member on the ground that the order has been passed in excess of his jurisdiction. As a result of that order, a fresh decision has to be rendered by a third member on the points of dispute and the petitioners' appeal before the Tribunal will be disposed of according to the opinion of the third member taken in conjunction with the opinions expressed by the original two members of the Tribunal. The learned Advocate-General would contend that even after the third member has given his opinion, it is not possible to find out the result of the appeal which has to be decided by a majority of the opinion expressed by the three members and, therefore, a direction to dispose of the matter afresh by the Tribunal should be given. But, as stated already, the third member has not given his decision or opinion but he has merely remitted the matter back to the Tribunal. That order cannot be said to be an opinion or decision as contemplated by s. 255(4) of the Act. Only if the third member expressed his opinion one way or the other and that opinion does not fit in with the opinion of either of the members of the Tribunal, then a deadlock should be taken to have occurred, but, at this stage, we cannot say that there is any deadlock when the third member has merely passed an order remitting the order back to the Tribunal without giving his decision or opinion in the matter. We, therefore, do not see any justification for quashing the opinion expresssd by the two members of the Tribunal or for giving a direction to hear the assessee's appeal de novo by a different Tribunal as prayed for by the petitioners. The writ petitions filed by the assessee are, therefore, dismissed. There will be no order as to costs in any of the writ petitions.

Income-Tax Officer, ... v. Vice-President, Inco...