K.A Ramaswamy Chettiar And Another v. Commissioner Of Income-Tax.

JUDGMENT

1. At the instance of the assessees, the Tribunal referred the following four common questions of law for the opinion of this court under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”):

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the jurisdiction under section 263 of the Income-tax Act was rightly assumed by the Commissioner of Income-tax?

2. Whether the Appellate Tribunal was right in law in holding that the omission to enquire about the consideration itself would amount to causing prejudice to the Revenue and that the act was enough to confer jurisdiction under section 263 notwithstanding that the materials on record at the time of assessment did not indicate any prejudice to the Revenue?

3. Whether, the Appellate Tribunal was right in holding that the argument that the Commissioner had acted on the material extraneous to the record received subsequently was merely academic?

4. Whether the Appellate Tribunal had no material to interfere with the order of the Commissioner of Income-tax setting aside the assessment for being redone notwithstanding that the authorities for registration and acquisition were satisfied about the stated consideration?”

2. Mr. V.V Ramaswamy Chettiar and Mr. K.A Ramaswamy Chettiar are partners in a partnership firm. They are the assessees herein. The assessment years involved in the case of both the assessees are 1974-75 and 1975-76.

3. Mr. V.V Ramaswamy Chettiar is an individual deriving income from property and share income from a firm, viz., V.V Ramaswamy Chettiar and Company. The original assessments have been completed on incomes of Rs. 53,210 and Rs. 3,98,290 for the assessment years 1974-75 and 1975-76, respectively. He had purchased the properties one on November 28, 1973, and the other on July 5, 1974, and the documents indicated the purchase consideration at Rs. 47,250 and Rs. 45,000, respectively, during the two years under consideration. The purchases have been made from two members of the family of Raja of Venkatagiri. No enquiries had been made with regard to the value of the properties at the time of completing the original assessment. Subsequent to the assessment, there was a search in the premises of the sellers and certain documents were recovered indicating “on-money” payments of Rs. 17,850 and Rs. 20,000, respectively. The receipt of “on money” was also admitted by the sellers before the income-tax authorities in settlement proceedings. The Commissioner of Income-tax noticed these facts on a report from the Income-tax Officer and initiated proceedings under section 263 of the Act by issuing notice for both the years.

4. In his notice the Commissioner of Income-tax has mentioned that he had examined and perused the records. The Commissioner has also stated that he gathered information with regard to the abovesaid transactions and asked the assessee to show cause why the assessment made should not be cancelled for making fresh assessment in accordance with law. The assessee was given an opportunity either for a personal hearing or to state his objections in writing. The assessee chose to give a reply in writing and in his reply the assessee denied the allegations made in the proposed notice. There was no request for any personal hearing. The Commissioner of Income-tax stated that mere denial of specific allegations cannot be accepted as supporting the correctness of the original assessment. He also submitted that there was no original enquiry. It is under these circumstances, the Commissioner of Income-tax-came to the conclusion that the assessment made by the Income-tax Officer for the assessment years under consideration are erroneous and prejudicial to the interests of the Revenue and accordingly set aside the assessment made by the Income-tax Officer and remitted back the assessment with a direction to redo the same afresh in accordance with law after giving opportunity of being heard to the assessee.

5. As against the said order, the assessee preferred an appeal before the Tribunal. According to the assessee, the materials present at the time of making assessment did not make any prejudice to the Revenue and, therefore, there was no jurisdiction to be exercised under section 263 of the Act. Subsequent information, according to the assessee, could not be utilised for the purpose of very same prejudice which is a pre-condition for exercising the jurisdiction under section 263 of the Act. It was also claimed that the records and the alleged admission of the sellers were one sided and could not have been even otherwise treated as a basis for any inference of prejudicial assessment. It was claimed that the valuation was considered fair for the purposes of stamp duty and no acquisition proceeding was also taken by the income-tax authorities for understatement. In these circumstances, it was submitted that the order of the Commissioner of Income-tax was bad in law.

6. The Tribunal found that there was no enquiry as to the actual consideration paid for the properties and that by itself justified the jurisdiction of the Commissioner of Income-tax. It was also pointed out that the Commissioner himself had the power of enquiry and that his reference to the allegations subsequently brought to his notice did not invalidate the notice because of mere reference to such subsequent facts. It did hot consider it necessary to deal with the assessee's arguments regarding the necessity for strict proof of cross-examination and the alleged corrections of the price with reference to the other criteria like stamp duty, valuation, conclusion of the acquisition authorities, etc., as in its view the Commissioner has merely set aside the order and had not concluded against the assessee on the merits. Therefore, the Tribunal stated that it did not express any opinion as to whether there was actual understatement since it was neither necessary nor proper to go into the question on the merits which had to be done at the time of reassessment. The Tribunal found that nonenquiry as to the extent and source of investment made by a taxpayer constituted law on the subject. Therefore, the Tribunal held that there was justification on the part of the Commissioner to issue notice under section 263 of the Act. Accordingly, the assessee's appeals were dismissed.

7. In the case of K.A Ramaswamy Chettiar, the facts are similar. Only the figure varies. For the assessment year 1974-75 with which alone the Tribunal was concerned, the allegation of the authorities was that the real consideration was Rs. 83,700 as against the stated consideration of Rs. 60,750 with a difference of Rs. 22,950. In all other respects the notice, reply and the arguments of the assessee are identical. Therefore, the order passed by the Tribunal was also similar to the order passed in the case of V.V Ramaswamy Chettiar.

8. Before us learned counsel for the assessee submitted that the Income-tax Officer completed the assessment in the case of both the assessees in the assessment years under consideration on the basis of the materials produced by the assessee. In respect of proving the sale consideration the assessee has produced registered sale deeds. In the sale deeds the considerations for purchase of properties are mentioned. Therefore, the Income-tax Officer accepted the consideration mentioned in the registered sale deeds. At the time of making the assessments, the Income-tax Officer cannot be expected to suspect the registered sale deeds produced by the assessee. No material was available before the Income-tax Officer at the time of making assessment to suspect the consideration paid for the purchase of the properties. The Commissioner of Income-tax came to possess the knowledge with regard to the statements made by the sellers for having received considerations more than what were stated in the registered sale deeds. In fact, at one place one person said that he came to know that he received more than what is stated in the sale deed as per the statement made by his clerk. The Commissioner of Income-tax also came into possession of the proceedings held before the Settlement Commission wherein the sellers admitted having received considerations more than what were stated in the sale deeds. The Commissioner of Income-tax also mentioned that he received a letter dated January 30, 1979, from the seller stating that he has received consideration more than what were stated in the sale deeds. The show-cause notice under section 263 of the Act was issued on January 24, 1979. While so, the letter said to have been sent by the seller would have been received only after the show-cause notice was sent to the assessee. Therefore, according to learned counsel for the assessee, all the materials gathered after the assessment was over cannot be utilised for the purpose of exercising the jurisdiction under section 263 of the Act.

9. The Explanation to section 263 of the Act, especially with regard to clause (b), which was inserted by the Finance Act, 1989, came into effect from June 1, 1988. Therefore, the assessment years under consideration being prior to June 1, 1988, the Commissioner of Income-tax has got no jurisdiction to make use of the materials gathered after the order of assessments were passed. In other words, the Commissioner of Income-tax cannot make use of the materials gathered at the time of issuance of notice under section 263 of the Act for the purpose of coming to the conclusion that the order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue.

10. On the other hand, learned standing counsel appearing for the Department, submitted that the Commissioner of Income-tax came to the conclusion that the order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue, because, the Income-tax Officer failed to make enquiry at the time of making the assessment with, regard to the considerations recorded in the sale deeds. Therefore, according to learned standing counsel, when the order passed by the Income-tax Officer is without any proper enquiry, that would give jurisdiction to the Commissioner of Income-tax to exercise his power under section 263 of the Act. Again learned standing counsel for the Department submitted that even otherwise the Commissioner of Income-tax can utilise the materials gathered by him after the order of assessment was completed by the Income-tax Officer for the purpose of exercising the jurisdiction under section 263. In other words, according to learned standing counsel, even on the materials gathered on the date of issuing the show-cause notice under section 263 of the Act, the Commissioner of Income-tax can come to the conclusion that the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. Learned standing counsel submitted that:

“The Finance Act, 1989, made the following amendments in the Explanation to sub-section (1) with retrospective effect from June 1, 1988:

(i) In clause (a), the words ‘on or before or after the 1st day of June, 1988’ were inserted, (ii) in clause (b), the words ‘shall include and shall be deemed always to have included’ were substituted for ‘includes’, (iii) in clause (c), the words ‘filed on or before or after the 1st day of June, 1988’ and ‘and shall be deemed always to have extended’ were inserted.”

11. Therefore, according to learned standing counsel the newly introduced clause (b) would enable the Commissioner of Income-tax to utilise the materials gathered at the time of issuing notice under section 263 of the Act for the purpose of coming to the conclusion that the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. Therefore, according to learned standing counsel, the Explanation introduced to section 263 would apply retrospectively for the period even prior to June 1, 1988, since the Explanation is only declaratory in nature.

12. We have heard the rival submissions. According to the Commissioner of Income-tax, the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue since the Income-tax Officer failed to conduct an enquiry before accepting the sale consideration as stated in the registered sale deeds. Therefore, the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue.

13. It remains to be seen that at the time of completing the assessment, the assessee produced registered sale deeds to show that the sale considerations were paid by the assessee for the purpose of purchasing houses. What are the exact implications of the expression “assessment made” in undue haste and without proper enquiry or investigation by the Assessing Officer, in what circumstances the Assessing Officer can accept the statements of an assessee without being blamed for it and what exactly is expected of an Assessing Officer in view of his powers under section 143 whether he is required to suspect every case and whether he should put off his assessment and if so how long, are questions that are not capable of a general answer. It would depend upon the facts and circumstances of each case whether the officer can be said to have completed the assessment in such circumstances as to make it erroneous and prejudicial to the interests of the Revenue. However, the Commissioner of Income-tax in the instant case on the materials gathered from the Settlement Commission and the letter said to have been written by the sellers, came to the conclusion that the Income-tax Officer has not conducted proper enquiry in the matter of ascertaining the true consideration that passed between the parties in the matter of sale transactions. Learned counsel for the petitioner pointed out that the notice dated January 30, 1979, said to have been sent by the seller would have been received after the show-cause notice was sent on January 24, 1979. It was also pointed out that the materials from the Settlement Commission would have been obtained subsequent to the completion of the assessment. Therefore, it was submitted that on the materials gathered subsequent to the assessment order, the Commissioner could not form his opinion as to the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. However, in the order passed by the tribunal, it was shown that the Commissioner of Income-tax came to the conclusion that the order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue because, the Income-tax Officer has not conducted enquiry with regard to the sale consideration said to have passed between the parties. In the case of Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax…, [1975] 99 ITR 375 (Delhi), it was held that (at page 386) “it is the duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an enquiry. The meaning to be given to the word ‘erroneous’ in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an enquiry prudent that the word ‘erroneous’ in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct”.

14. In the case of Addl. CIT v. Mukur Corporation, [1978] 111 ITR 312, 323 (Guj), it was held that “in the present case it was obvious that the Income-tax Officer had committed an error in not making enquiry into the details as regards both the deductions but also that want of such enquiry had resulted in prejudice to the interests of the Revenue. To this extent the initiation of action under section 263 by the Commissioner was quite proper”. In Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323 (SC) “where an assessee is assessed on an income voluntarily returned, it is not prejudicial to the interests of the Revenue only if it is found that the assessment was made on the basis that the income had been earned by the assessee which was assessable. 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 some one else who would have been assessed to a larger amount, an assessment so made will be erroneous and prejudicial to the Revenue and the Commissioner has jurisdiction under section 33B of the Indian Income-tax Act, 1922, to cancel the assessment and proceedings for assessment may be initiated under the provisions of the Act against some other assessee, who according to the income-tax authorities, would be liable for the income thereof”. Therefore, the abovesaid decisions would postulate that when the Income-tax Officer is expected to make an enquiry of a particular item of income and if he does not make an enquiry as expected, that would be a ground for the Commissioner of Income-tax to interfere with the order passed by the Income-tax Officer since such an order passed by the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue.

15. However, learned counsel for the assessee submitted that while exercising jurisdiction under section 263, the Commissioner of Income-tax in order to find out whether there is any error in the order passed by the Income-tax Officer at the time when he was making the assessment cannot rely upon the materials gathered after the assessment was completed. In order to support this contention reliance was placed upon the decision of the Calcutta High Court in the case of Ganga Properties v. ITO, [1979] 118 ITR 447, wherein the Calcutta High Court held that “the materials which were not in existence at the time the assessment was made and came into existence afterwards cannot form part of the record of the proceedings of the Income-tax Officer at the time he passed the order and cannot be taken into consideration by the Commissioner for the purpose of invoking his jurisdiction under section 263(1) of the Act for he is not acting as an appellate authority but exercised only revisional jurisdiction”. In the present case we are supporting the order passed by the Tribunal in upholding the order passed by the Commissioner under section 263 of any enquiry for ascertaining as to what was the correct consideration that was passed between the parties in the matter of selling the properties. In order to come to this conclusion we rely upon the decision of the Delhi High Court in Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax…, [1975] 99 ITR 375, the decision of the Gujarat High Court in CIT (Addl.) v. Mukur Corporation, [1978] 111 ITR 312 and the decision of the Supreme Court in Smt. Tara Devi Aggarwal v. CIT, [1973] 88 ITR 323, cited supra.

16. Another submission made by learned counsel for the assessee was that clause (b) in Explanation to section 263(1) was introduced or inserted by the Finance Act, 1989, which came into effect from June 1, 1988. In clause (b) it is stated that the word “record” shall include and shall be deemed always to have included all records relating to any proceedings under this Act, available at the time of examination by the Commissioner. It is the contention of learned counsel for the assessee that inasmuch as this amendment came into force with retrospective effect from June 1, 1988, for the matters arising before June 1, 1988, under section 263 of the Act this clause (b) cannot be made applicable. In order to support this contention reliance was placed upon the following decisions:

(1) Commissioner Of Income-Tax v. Godavari Sugar Mills Ltd., [1992] 198 ITR 196 (Bom);

(2) S. Murugappa Chettiar v. Commissioner Of Income-Tax, [1992] 197 ITR 586 (Ker) (sic);

(3) Ritz Ltd. v. Union of India, [1990] 184 ITR 599 (Bom);

(4) CIT v. Orissa Oil Industries Ltd., [1992] 193 ITR 183 (Orissa).

17. On the other hand, learned standing counsel for the Department submitted that the Explanation introduced by the Finance Act, 1988, with effect from June 1, 1988, was only clarificatory in nature and, therefore, it would be having retrospective effect and, therefore, it would be applicable to the period even earlier to June 1, 1988. In order to support this contention reliance was placed upon the following decisions:

(1) Punjab State Civil Supplies Corporation Ltd. v. CIT, [1993] 200 ITR 536 (P&H) [FB];

(2) CIT v. Vincentian Orissa Society, [1992] 194 ITR 743 (Orissa);

(3) 100 CTR 206 (Cal) (sic);

(4) Hamilton and Co. (P.) Ltd. v. CIT, [1991] 187 ITR 568 (Cal);

(5) CIT v. East Coast Marine Products (P.) Ltd., [1990] 181 ITR 314 (AP);

(6) Commissioner Of Income-Tax v. N. Sundareswaran., [1991] 190 ITR 137 (Ker);

(7) CWT v. Smt. B. Indira Devi, [1994] 208 ITR 26 (Ker).

18. While considering the interpretation of statutes especially while considering the meaning of the word “Explanation” the Supreme Court in the case of S. Sundaram, Pillai v. V.R Pattabiraman, (1985) 1 SCC 591 : AIR 1985 SC 582, held as under (headnote):

“It is now well-settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision.

The object of an Explanation to a statutory provision is—

(a) to explain the meaning and intendment of the Act itself;

(b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve;

(c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful;

(d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the court in interpreting the true purport and intendment of the enactment; and

(e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming a hindrance in the interpretation of the same.”

19. Thus, there are conflicting views of the various High Courts in the matter of applicability of the Explanation to section 263(1) of the Act beyond the period of June 1, 1988. According to us, the Explanation to section 263(1) of the Act was introduced by the Finance Act, 1988, with effect from June 1, 1988, which contains clauses (a) to (c). Therefore, from June 1, 1988, onwards the Explanation is in the statute book. Once the Explanation is incorporated in the statute book, then what is stated in the Explanation is to be followed both for the period earlier to June 1, 1988, and later to June 1, 1988. Thus, we see that there is no controversy in the matter of considering whether the Explanation would be applicable before June 1, 1988, or not because after June 1, 1988, clause (b) in the Explanation states that the word “record” shall include and shall be deemed always to have included all records relating to any proceedings under the Act available at the time of examination by the Commissioner. Hence, after June 1, 1988, as per clause (b) of the Explanation, it is applicable for all times even for the period prior to June 1, 1988. In that view of the matter, we hold that the Explanation to section 263(1) would be applicable even prior to June 1, 1988. If that is so, the Commissioner of Income-tax can make use of the materials gathered by him on the date when he issued notice under section 263 of the Act for the purpose of invoking his jurisdiction under section 263. In that view of the matter, we hold that there is no infirmity in the order passed by the Tribunal in upholding the order passed by the Commissioner of Income-tax under section 263 of the Act. Further, the Commissioner, while passing the order under section 263 set aside the assessment made by the Income-tax Officer with regard to the sale consideration of the properties in question and remitted back this issue to the file of the Income-tax Officer with a direction to reconsider this issue afresh on the merits in accordance with law. If that is so, it is open to the assessees to plead their case before the Income-tax Officer on the merits in order to make their claim a success. Therefore, the assessees are not prejudiced by the order passed by the Commissioner under section 263 of the Act. Accordingly, we answer questions Nos. 1 to 3 in the affirmative and against the assessee and question No. 4 in the negative and against the assessee. No costs.