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Commissioner Of Income-Tax v. Dhanalakshmi Mills Ltd.

Madras High Court

Aug 10, 1998

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

The assessee is a textile company that filed its income-tax return for the assessment year 1980-81 on 3 November 1980, declaring a total income of Rs. 42,83,750. On 8 November 1982 the Income-tax Officer (ITO), acting under section 144B, forwarded a draft assessment order proposing an assessed income of Rs. 48,64,844 (the proposed enhancement exceeded Rs. 1,00,000). The assessee furnished objections on 30 November 1982. The draft order and objections were forwarded to the Inspecting Assistant Commissioner (IAC) on 7 January 1983. After discussions, the IAC sent a memo requesting another draft order on or before 31 January 1983. The ITO sent a second draft on 1 February 1983 proposing Rs. 50,68,515. On 26 February 1983 the IAC gave directions and the assessment was completed at Rs. 50,41,738.

Aggrieved, the assessee appealed to the Commissioner of Income-tax (Appeals), who upheld the assessee's objection that section 144B did not authorise the ITO to make a second draft assessment order, relying on Sudhir Sareen v. ITO ([1981] 128 ITR 445). The Revenue appealed; the Tribunal rejected the Revenue's appeal and confirmed the Commissioner’s order.

The Revenue referred two questions to the High Court arising from the Tribunal's order: (1) whether the Inspecting Assistant Commissioner (Deputy Commissioner level) could invoke section 144A in a proceeding pending under section 144B and direct the ITO to make a second draft assessment order before finalising the assessment; and (2) if the answer to question (1) is negative, whether section 144B authorises the ITO to make a second draft assessment before the assessment is completed.

Legal Issues Presented

Whether, on the facts and circumstances of the case, the Inspecting Assistant Commissioner can invoke the provisions of section 144A in a proceeding pending before him under section 144B and direct the Income-tax Officer to make a second draft assessment order before finalising the assessment?
If the answer to the first question is in the negative, whether the provisions of section 144B authorise the Income-tax Officer to make a second draft assessment before the assessment is completed?

Arguments of the Parties

Revenue's Arguments

The Revenue contended (before the Tribunal and on reference) that the higher figure arrived at in the second draft assessment order (on which the assessment was completed) was sustainable because the Deputy Commissioner had power under section 144A, and thus the direction to prepare a second draft could be treated as being pursuant to section 144A.
The Revenue's counsel relied on several precedents, including Sudhir Sareen v. ITO (Delhi High Court) and decisions of the Calcutta and Kerala High Courts, to support the proposition that either section 144A can operate notwithstanding section 144B in some circumstances or that amendment/reshaping of a draft after submission may be permissible.

Assessee's Arguments

The assessee objected to the ITO making a second draft assessment order under section 144B, contending that section 144B did not authorise a second draft and that the procedure under section 144B must be followed as stipulated, with only one draft being the basis for objections and Deputy Commissioner directions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Sudhir Sareen v. ITO, [1981] 128 ITR 445 (Delhi High Court)	Supported the proposition that section 144B does not authorise a second draft assessment order; consistent with a restrictive view on repeated drafts under 144B.	The Commissioner of Income-tax (Appeals) relied upon this decision to uphold the assessee's objection; the High Court noted the Delhi High Court had taken a similar view and treated it as supporting the assessee's position.
Arrah Sasaram Light Railway Co. Ltd. v. Commissioner of Income-Tax, [1993] 204 ITR 807 (Calcutta High Court)	Held that an order under section 144B can be made notwithstanding that a proceeding under section 144A had taken place prior to invocation of section 144B.	The High Court expressed respectful agreement with this view (i.e., it is permissible that a prior section 144A proceeding may precede section 144B).
Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT, [1994] 208 ITR 882 (Calcutta High Court)	Held that remitting the draft assessment order by the Inspecting Assistant Commissioner to the Income-tax Officer for further consideration and re-submission would not debar the ITO from forwarding another assessment order to the Inspecting Assistant Commissioner.	The High Court explicitly disagreed with this view and stated an inability to subscribe to it, explaining that section 144B does not permit the Deputy Commissioner to direct a fresh draft at that stage.
Aspinwall and Co. Ltd. v. CIT (No. 2), [1996] 220 ITR 617 (Kerala High Court)	Held that it was open to a successor Income-tax Officer to amend the draft assessment order after sending it to the Deputy Commissioner together with the assessee’s objections; treated as a modification rather than a second draft.	The High Court mentioned this decision and its differing view but did not adopt it for the present case; it noted the Kerala High Court treated such change as modification rather than a new independent draft.

Court's Reasoning and Analysis

The court undertook a comparative analysis of sections 144A and 144B and applied the statutory language and structure to the facts.

Key points of the court's reasoning:

Nature and scope of section 144A: The court observed that section 144A confers wide, discretionary and general powers on the Deputy Commissioner (Deputy Commissioner or equivalent). Those powers may be exercised suo motu, on reference by the Assessing Officer, or on application by the assessee. The provision is optional — no party is compelled to invoke it — and any directions issued under it are binding on the Assessing Officer. The assessee must be given an opportunity to be heard if a proposed direction is prejudicial to him (except where the direction concerns the lines of investigation).
Nature and scope of section 144B: Section 144B is a specific, mandatory provision with a non-obstante clause and special procedure. It requires the Assessing Officer to forward a single draft assessment order to the assessee when the proposed variation exceeds board-fixed limits; the assessee has a short, prescribed period to object. If objections are filed, the draft and objections go to the Deputy Commissioner, who must consider them, provide an opportunity to be heard (if directions would be prejudicial), and issue binding directions for completion of assessment. Section 144B contemplates one draft order and does not provide for a second draft.
Relationship between the two provisions: The court emphasised that section 144A and section 144B are not integrated parts of a single scheme. Section 144A cannot be read as supplemental to section 144B. The legislature's use of a non-obstante clause in section 144B and the absence of language such as "subject to" or "without prejudice to section 144A" indicate an intention that section 144B proceedings should be conducted only in the manner specified therein. Thus, once proceedings under section 144B commence, matters falling within that section must be concluded in the manner provided and the powers under section 144A cannot be freely imported to alter the procedure set out by section 144B.
On the permissibility of a second draft: The court reasoned that allowing the Deputy Commissioner to direct repeated drafts would defeat the statutory purpose of expeditious resolution and the tight time limits for objections. The Deputy Commissioner’s role under section 144B is to decide the validity of objections and then issue directions to enable completion of assessment; it is not to call for fresh drafts or to treat an earlier draft as if it had no consequence. Hence a direction that effectively compels the Assessing Officer to produce a second draft assessment order lies outside the powers conferred by section 144B.
Precedents and divergence: The court considered decisions from the Delhi, Calcutta and Kerala High Courts. It agreed with the Delhi High Court (Sudhir Sareen) that a second draft is not authorised and with the Calcutta High Court's view that section 144B can operate notwithstanding a prior section 144A. It disagreed with the Calcutta decision (Shahdara) to the extent that it suggested remittance for re-submission would permit repeated drafts, and it noted the Kerala High Court treated modification as distinct from a second draft but did not adopt that position for the present facts.

Applying the foregoing analysis to the facts, the court concluded that the Deputy Commissioner’s direction to the Assessing Officer to submit a fresh draft assessment order — thereby treating the earlier draft as of no consequence — was not within the powers under section 144B.

Holding and Implications

Holding:

Answer to Question 1: In the negative — it is not permissible for the Inspecting Assistant Commissioner (Deputy Commissioner) to invoke section 144A in proceedings pending under section 144B so as to direct the Assessing Officer to make a second draft assessment order.
Answer to Question 2: In the negative — section 144B does not authorise the Assessing Officer to make a second draft assessment before the completion of the assessment.

Direct consequences on the parties:

The court upheld the view that the procedure under section 144B permits only the single draft envisaged by the statute and does not allow the Deputy Commissioner to call for a fresh draft once the draft and objections are before him.
The assessee was awarded costs in the sum of Rs. 1,500.

Broader implications: The opinion confines itself to statutory construction and application to the facts; it emphasises that section 144B is a special, self-contained procedure that should not be supplemented by section 144A once section 144B proceedings have commenced. The opinion does not purport to lay down any broader new principle beyond that statutory interpretation.

Show all summary ...

R. Jayasimha Babu, J.:— The factual matrix in the background of which the questions referred for our decision are required to be considered may first be set out before we deal with the questions.

2. The assessee, which is a textile company, had furnished its return for the assessment year 1980-81. The return was filed on November 3, 1980, showing a total income of Rs. 42,83,750. On November 8, 1982, the Income-tax Officer acting under section 144B forwarded a draft assessment order proposing to assess the income of Rs. 48,64,844, as the enhancement of ‘the income for the purpose of assessment, was higher by more than Rs. 1,00,000 as compared to the amount shown in the return. On November 30, 1982, the assessee gave its objections. The objections along with the draft assessment order were duly forwarded to the Inspecting Assistant Commissioner on January 7, 1983, the Inspecting Assistant Commissioner after some discussions with the assessee, sent a memo to the Income-tax Officer pointing out that certain aspects have not been properly considered, and requesting him to send another draft order on or before January 31, 1983. The Income-tax Officer sent a second draft assessment order on February 1, 1983, proposing to assess a sum of Rs. 50,68,515. On February 26, 1983, the Inspecting Assistant Commissioner gave his directions and assessment was completed on a total income of Rs. 50,41,738. The assessee, being aggrieved, appealed to the Commissioner of Income-tax (Appeals) who upheld the assessee's objections that section 144B did not authorise the Income-tax Officer to make a second draft assessment order. The Commissioner relied upon the decision of the Delhi High Court in Sudhir Sareen v. ITO, [1981] 128 ITR 445. That order of the Commissioner was taken up in further appeal by the Revenue. The Tribunal has rejected the Revenue's appeal and confirmed the order of the Commissioner. The questions now brought before us by the Revenue arising out of that order of the Tribunal, are as to whether, on the facts and in the circumstances of the case, the Inspecting Assistant Commissioner of Income-tax can invoke the provisions of section 144A in a proceeding pending before him under section 144B and direct the Income-tax Officer to make a second draft assessment order before finalising the assessment, and if the answer to that question is in the negative, whether the provisions of section 144B authorise the Income-tax Officer to make a second draft assessment before the assessment is completed?

3. It is useful to set out the two provisions, section 144A and 144B at this point:

“144A. Power of Deputy Commissioner to issue directions in certain cases—A Deputy Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer:

Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard.

Explanation.—For the purposes of this section, no direction as to the lines on which an investigation connected with the assessment should be made, shall be deemed to be a direction prejudical to the assessee.”

“144B. Reference to Deputy Commissioner in certain cases. —(1) Notwithstanding anything contained in this Act, where, in an assessment to be made under sub-section (3) of section 143, the Assessing Officer pro- poses to make, before the 1st day of October, 1984, any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under sub-section (6), the Assessing Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.

(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the Assessing Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the Assessing Officer may allow on an application made to him in this behalf.

(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the Assessing Officer the acceptance of the variation, the Assessing Officer shall complete the assessment on the basis of the draft order.

(4) If any objections are received, the Assessing Officer shall forward the draft order together with the objections to the Deputy Commissioner and the Deputy Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment:

Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard.

(5) Every direction issued by the Deputy Commissioner under subsection (4) shall be binding on the Assessing Officer.

(6) For the purposes of sub-section (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems fit:

Provided that different amounts may be fixed for different areas:

Provided further that the amount fixed under this sub-section shall, in no case, be less than twenty-five thousand rupees.

(7) Nothing in this section shall apply to a case where a Deputy Commissioner exercises the powers or performs the functions of an Assessing Officer in pursuance of an order made under section 125 or section 125A.”

4. Section 144A confers wide discretionary powers on the Deputy Commissioner. The powers so conferred may be exercised by him suo motu, or at the instance of the assessee, or at the instance of the Assessing Officer. There is no compulsion on any of them to resort to this provision. It is purely optional. Option has been given to all three, the assessee, the Assessing Officer, and the Deputy Commissioner to invoke the provision— power to be exercised before the completion of the assessment. Directions which can be issued under that section are directions, which the Deputy Commissioner considers to be appropriate. Though the word “guidance” is used in the section, the directions are not merely words of advice, but they are commands, which are binding on the Assessing Officer. Before issuing such directions, the assessee is entitled to be heard except in cases where the direction issued is regarding the lines on which an investigation connected with the assessment should be made. The obligation to provide a hearing to the assessee arises in all cases where the direction that is proposed to be made is prejudicial to the assessee.

5. Section 144B, which provision is no longer in the statute book with effect from October 1, 1984, opens with a non obstante clause and is meant to be applied notwithstanding anything contained in any of the other provisions of the Act. It imposes a duty on the Assessing Officer to make a draft assessment order where the amount of the variation in the income or loss returned by the assessee and the amount proposed in the draft assessment order is in excess of the amount fixed by the Board under sub-section (6). The draft order so made by the Assessing Officer is to be forwarded to the assessee for its objections, if any. The assessee has been given a very limited period of seven days within which he should file the objection extendable by a maximum further period of 15 days. At that stage, the draft order is not required to be sent to the Deputy Commissioner or the Inspecting Assistant Commissioner. If no objections are filed by the assessee, the assessment is to be finalised in terms of the draft. When the assessment is so finalised, the matters do not go before the Inspecting Assistant Commissioner. It is only in cases where the objection is filed within the time prescribed, the draft assessment order together with the objections are required to be forwarded to the Deputy Commissioner, who “shall consider the same and issue such directions as he may think fit for the guidance of the Assessing Officer to enable him to complete the assessment. Directions which are prejudicial to the assessee are not to be given unless the assessee has first been given an opportunity of being heard. Directions so issued are binding on the Assessing Officer.

6. There are several differences as between section 144A and section 144B. Section 144A vests general and unlimited power to the Deputy Commissioner in giving directions to the Assessing Officer for the purpose of enabling him to complete the assessment. The power, which may be exercised suo motu or at the instance of the assessee or the Assessing Officer, is not a power, which is required to be exercised in the case of every assessment. It is only when one of the three parties choose to invoke the provision that the occasion for the exercise-of the power under section 144A will arise.

7. In contrast section 144B deals with a specific situation where the Deputy Commissioner is called upon to give directions to the Assessing Officer, and makes it mandatory for the Assessing Officer to make a draft assessment order, and thereafter follow the further steps outlined in the provision. The common, feature in the two provisions is that under both the provisions the Deputy Commissioner is to give directions to the Assessing Officer for the purpose of completing the assessment, and the directions so given are to be binding on the Assessing Officer. Section 144B besides being mandatory is required to be complied with notwithstanding anything contained in the other provisions of the Act. The intention of Parliament appears to be that matters dealt with in section 144B, to the extent provided therein, are required to be dealt with only in the manner specified in that special provision notwithstanding the existence of the other provisions of the Act, which may encompass the situations contemplated in section 144B, whether in whole or in part.

8. Matters covered by section 144B, therefore, are not to be dealt with by importing the powers conferred under section 144A. Section 144A cannot be read as supplemental to section 144B. It is significant that section 144B does not use words such as “subject to”, “without prejudice to the power conferred by section 144A”, or other suitable language indicating an intention for the simultaneous exercise of the powers under sections 144A and 144B or using section 144A to fill in what may be regarded as gaps in section 144B.

9. The draft assessment order made by the Assessing Officer as required under section 144B(1) is the foundation for the further orders or order to be made under that provision. The objection which the assessee is required to file is with reference to that draft assessment order, and in the event of the objections not being filed, the assessment is to be completed on the basis of the draft assessment order. In cases where objections are filed, such objections together with the draft assessment order are required to be considered by the Deputy Commissioner, and he is required to examine the objections raised by the assessee and after giving due opportunity to the assessee, uphold or reject all or any part of the objections so raised, and thereafter proceed to give such directions as he considers necessary to the Assessing Officer to complete the assessment. The section does not provide for a second draft order. It contemplates one draft assessment order with reference to which objections are to be filed. The specification of the time limit for filing the objections is because of the legislative intention that the proceedings under that section are to be dealt with expeditiously. The Deputy Commissioner, when he examines the draft assessment order and objections, is required to decide the validity or otherwise of the objections, and thereafter proceed to give the directions, required for the completion of the assessment.

10. It is not permissible for the Deputy Commissioner to direct the Assessing Officer to make a second draft assessment order under the guise of giving instructions. The directions which he is empowered to give are direc- tions for the purpose of completing the assessment pursuant to the draft order made by the Assessing Officer. The object of the provision in compelling the assessee to file objections if any, within the time specified and requiring the Deputy Commissioner to give directions, for completion of the assessment would not be served if it were to be held that the Deputy Commissioner has the freedom to call for repeated drafts of the assessment order, and the assessee is required to file objections again and again, to different drafts that the Assessing Officer may be compelled to give pursuant to the directions issued by the Deputy Commissioner. The power conferred on the Deputy Commissioner is required to be exercised within the four corners of the section. While exercising the power under section 144B, it would not be permissible for the Deputy Commissioner to import section 144A for the purpose of directing the Assessing Officer to submit a second draft assessment order. While it is conceivable that before the initiation of the proceedings under section 144B, a prior proceeding under section 144A may possibly take place; once the proceeding's under section 144B begin, they must end only in the manner contemplated in that section, although the assessment which results therefrom is one which is made under section 143(3).

11. Learned counsel for the Revenue relied upon the decision of the Delhi High Court, which has taken a similar view in Sudhir Sareen's case, [1981] 128 ITR 445 already referred to. He also placed before us the judgments of the Calcutta High Court in Arrah Sasaram Light Railway Co. Ltd. v. Commissioner Of Income-Tax., [1993] 204 ITR 807 and Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT, [1994] 208 ITR 882. In the first of these cases, it was held that an order under section 144B can be made notwithstanding the fact that a proceeding under section 144A had taken place prior to the invocation of section 144B. We are in respectful agreement with that view. In the latter case, it was held that remitting of the draft assessment order made by the Inspecting Assistant Commissioner to the Income-tax Officer for further consideration and re-submission would not debar the Income-tax Officer from forwarding another assessment order to the Inspecting Assistant Commissioner. With respect we are unable to subscribe to that view. Section 144B does not require the Assessing Officer to submit the draft assessment order to the Deputy Commissioner at the initial stage. It is only if the assessee chooses to object, after the draft order has been sent, that the draft order, as also the objections are required to be placed before the Deputy Commissioner. At that stage, it is the duty of the Deputy Commissioner to consider the validity of the objections, and it would not be open to him to direct the Assessing Officer to submit a fresh draft assessment order. Within the ambit of his powers the Deputy Commissioner is required to give the directions required for completing the assessment, and not call upon the Assessing Officer to submit a fresh draft assessment order. From the facts stated in the decision of the Calcutta High Court, it is not clear as to the stage at which the draft assessment order had been sent to the Deputy Commissioner.

12. Counsel placed before us the decision of the Kerala High Court in Aspinwall and Co. Ltd. v. CIT (No. 2), [1996] 220 ITR 617, wherein the court disagreed with the view taken by the Delhi High Court and held that it was open to the successor Income-tax Officer to amend the draft assessment order after having sent the same to the Deputy Commissioner together with the objections which the assessee had filed. The court took the view that there was no second draft assessment order in the circumstances and that was merely a modification of the draft assessment order.

13. What has been done in this case is that the Deputy Commissioner has directed the Assessing Officer to submit a fresh draft assessment order, and thereby requiring him to treat the earlier draft as of no consequence, and treating the proceedings already taken as if such proceedings had not taken place at all. Such an order cannot be regarded as one within the ambit of the powers conferred on the Deputy Commissioner under section 144B of the Act.

14. Before the Tribunal, the Revenue had sought to contend that the higher figure mentioned in the second draft assessment order on the basis of which the assessment was completed, was sustainable on the ground that the power exercised by the Deputy Commissioner in directing the preparation of a second draft assessment order should be regarded as being pursuant to the power conferred on him by section 144A of the Act. The Tribunal rejected that contention. The first question referred to us is the legality or otherwise of the invocation of section 144A in a proceeding pending before the Deputy Commissioner under section 144B. As observed by us, the two provisions are not part of the integrated scheme. While dealing with a case under section 144B, the power under section 144A cannot be freely imported, and in respect of the same matter power cannot be exercised under both the provisions even after proceedings had commenced under section 144B. Even though a proceeding under section 144A may precede the commencement of proceedings under section 144B, after the proceedings have commenced under, section 144B it is impermissible to invoke section 144A with reference to matters, which are required to be dealt with in terms of section 144B. Our answer to the first question is, therefore, in the negative. As regards the second question as we have already held that it is not permissible for the Assessing Officer to make a second draft assessment before the completion of the assessment, out; answer to the second question, therefore, is also in the negative.

15. The assessee shall be entitled to costs in the sum of Rs. 1,500.