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  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Shailesh Bhadrayulal Majmudar
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  • Hon'ble Mr. Justice Bipinchandra Jivanlal Divan
  • Hon'ble Mr. Justice Shailesh Bhadrayulal Majmudar
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The Commissioner of Income-tax, Ahmedabad caused a reference under s. 256(1) of the Income-tax Act, 1961 to be made by the Income-tax Appellate Tribunal (Ahmedabad) to this Court arising from its order dated February 16, 1977. The principal question (question No. 1) referred by the Tribunal at the instance of the revenue was whether the salary amount of Rs. 49,521 could be said to have accrued or arisen in India.

Relevant assessment year: 1972-73 (previous year August 22, 1971 to March 31, 1972). The assessee is an individual with status "not ordinarily resident."

In his return the assessee declared nil total income but disclosed receipts including Rs. 18,213 as "living allowance" (claimed exempt under s. 10(14)) and Rs. 29,521 as retention remuneration (claimed not taxable on the basis that s. 5(1)(c) did not apply). The ITO assessed total income at Rs. 52,360, rejecting both exemptions/claims. The AAC dismissed the appeal. Before the Tribunal the appeal was partially allowed: the Tribunal held that the retention remuneration (the Rs. 29,521) was not earned in India (and thus not includible), but the living allowance was a perquisite under s. 17(2) and includible, with limited exemption under s. 10(6)(vii)(a) applying to a part of it. Thus the Tribunal's order was partly for and partly against the assessee.

The revenue filed a reference under s. 256(1) challenging the Tribunal's holding on retention remuneration. The assessee, who had been a non-applicant before the Tribunal, did not file a separate reference but sought to have two additional questions (Nos. 2 and 3) — concerning the taxability and possible exemption of the living allowance — referred to the High Court on the basis of the revenue's reference. The Tribunal allowed that request despite the revenue's objection, relying on a practice it attributed to earlier decisions.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the salary amount of Rs. 49,521 could be said to have accrued or arisen in India?
  2. Whether, on the facts and in the circumstances of the case, the living allowance payable to the assessee in India is a perquisite taxable as per the provisions of the Income-tax Act, 1961?
  3. If the foregoing question is answered in the affirmative, whether the living allowance is exempt under section 10(14) or clause (v) of section 16 of the Income-tax Act?

Arguments of the Parties

Revenue's Arguments

  • The assessee was a non-applicant before the Tribunal and, where a Tribunal's order is partly against an assessee, that assessee must himself apply for a reference under s. 256(1) to the High Court. The non-applicant cannot rely on a reference application filed by the adverse party to obtain a reference on questions arising from the adverse part of the order.
  • The reference of questions Nos. 2 and 3 at the instance of the assessee (a non-applicant) was therefore impermissible and the Tribunal had no competence to make such a reference.

Assessee's / Tribunal's Position

  • The assessee sought a reference of questions Nos. 2 and 3 relying on the reference application already filed by the revenue; the Tribunal followed a long-standing practice (as it understood it) of referring relevant questions of law to the High Court even when the reference application had been filed by only some of the concerned parties.
  • The Tribunal stated that its practice was founded on this High Court's decision in Dhirajben Amin v. CIT [1968] 70 ITR 194 (which in turn had approved the ratio of CIT v. Banthia Bank Ltd.), and it had been consistently following that practice.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Dhirajben Amin v. CIT [1968] 70 ITR 194 Identified by the Tribunal as authority for the practice of referring questions of law even when the reference application was filed by only some of the concerned parties (i.e., permitting references at the instance of non-applicants under certain practices followed by the Tribunal). The Tribunal relied on this decision as the basis for its practice of referring the additional questions (Nos. 2 and 3) at the instance of the non-applicant assessee. The Court noted that the Tribunal claimed to follow this precedent but ultimately found the later Supreme Court decision dispositive.
CIT v. Banthia Bank Ltd. Described in the opinion as having its ratio approved in Dhirajben Amin; cited as part of the lineage supporting the Tribunal's practice. The Tribunal's practice was said to be based on Dhirajben Amin which had in turn approved the ratio of Banthia Bank Ltd.; the Court recorded that background but relied on a later Supreme Court ruling to reject the Tribunal's competence to refer questions Nos. 2 and 3 at the instance of a non-applicant.
CIT v. Damodaran [1980] 121 ITR 572 (Supreme Court) Holds that only the party applying for a reference is entitled to specify the question(s) of law to be referred; the non-applicant has no right to ask for a reference on an application made by the applicant where the Tribunal's order is partly for one party and partly against another. The Court treated this Supreme Court decision as settling the controversy. Applying Damodaran, the Court held that questions Nos. 2 and 3 were not competent references at the instance of the non-applicant assessee and therefore must be regarded as void; the Court declined to answer them.

Court's Reasoning and Analysis

The Court analyzed the matter in two parts corresponding to the separate sets of questions referred to it.

First, question No. 1 (whether the salary amount of Rs. 49,521 accrued or arose in India) was determined by reference to a contemporaneous decision of this Bench in ITR No. 270 of 1977 (decided the same day) in which Divan C.J., speaking for the Bench, had answered an identical question of law against the revenue and in favour of the assessee. On that footing, the Court answered question No. 1 in the affirmative in favour of the assessee.

Second, the Court turned to questions Nos. 2 and 3 (concerning the taxability of the living allowance as a perquisite and any exemption under s. 10(14) or s. 16(v)). The revenue objected to these references on the ground that the assessee was a non-applicant before the Tribunal and had not himself filed a reference application under s. 256(1) with respect to the parts of the Tribunal's order that were adverse to him. The Tribunal had overruled that objection, asserting a long-standing practice (based on Dhirajben Amin and Banthia Bank Ltd.) of referring relevant questions irrespective of which party filed the reference application.

The Court examined the legal position as settled by the Supreme Court in CIT v. Damodaran [1980] 121 ITR 572. That decision, the Court observed, states that only the party applying for a reference is entitled to specify questions of law to be referred; the non-applicant has no right to ask for reference on another party's application where the Tribunal's order is partly for and partly against the parties. Applying this binding Supreme Court authority, the Court concluded that the Tribunal was not competent to refer questions Nos. 2 and 3 at the instance of the non-applicant assessee and that such reference must be regarded as void.

Accordingly, the Court declined to answer questions Nos. 2 and 3. The Court acknowledged the Tribunal's stated practice and the hardship that may result to a party who had relied on that practice over the years, but it concluded that the Supreme Court decision had settled the law and left no alternative but to decline to entertain those questions.

Holding and Implications

Holding:

  • Question No. 1: Answered in the affirmative in favour of the assessee and against the revenue — the salary amount (as posed in question No. 1) was held not to have accrued or arisen in India as decided by reference to the Bench's contemporaneous decision in ITR No. 270 of 1977.
  • Questions Nos. 2 and 3: The references made at the instance of the non-applicant assessee were held to be void and the Court declined to answer them, applying the Supreme Court's decision in CIT v. Damodaran.

Implications:

  • Direct effect on the parties: The Tribunal's finding that the retention remuneration was not taxable (question No. 1) is upheld in favour of the assessee; however, the Court will not decide the additional questions about the living allowance because the reference of those questions was incompetent. The reference is disposed of with no order as to costs.
  • Broader legal consequence: The Court applied and treated as controlling the Supreme Court's pronouncement in CIT v. Damodaran that the right to specify questions in a reference lies with the party who files the reference application; where a Tribunal's order is partly for and partly against the parties, a non-applicant cannot, by relying on another party's reference application, compel the Tribunal to refer questions adverse to him. The opinion records the justice-related concerns raised by counsel but adheres to the Supreme Court's settled position. The Court did not purport to establish a new precedent beyond applying Damodaran.

Disposition: The reference is disposed of accordingly with no order as to costs. The Court noted that the assessee remains free to pursue any other remedy available in law.

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    Commissioner Of Income-Tax, Gujarat-Iv v. Mascalchi Mario

    1. At the instance of the Commissioner of Income-tax, Ahmedabad, the Income-tax Appellate Tribunal at Ahmedabad has referred under s. 256(1) of the I.T. Act, 1961, for our decision a question of law arising out of its order dated February 16, 1977. The question referred by the Tribunal at the instance of the revenue is as under :

    "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the salary amount of Rs. 49,521 could not be said to have accrued or arisen in India ?"

    So far as this question is concerned, it is fully covered by our decision rendered in ITR No. 270 of 1977, decided today. Divan C.J., speaking for this Bench, has answered an identical question of law arising form similar facts against the revenue and in favour of the assessee. In the light of the aforesaid decision, the aforesaid question is answered in the affirmative, i.e., in favour of the assessee and against the revenue.

    2. In the present case, two additional questions Nos. 2 and 3 are also referred to this court by the Tribunal at the instance of the assessee. To these questions a serious objection has been raised on behalf of revenue to the effect that the assessee was a non-applicant before the Tribunal and the Tribunal's order was partly in favour of the assessee and partly against him. So far as the order partly against the assessee is concerned the assessee ought to have approached the Tribunal for a reference under s. 256(1) of the I.T. Act, 1961. But he did not ask for such a reference. In the submission of the revenue, in the reference application at the instance of the revenue, the non-applicant assessee could not have demanded a reference on questions Nos. 2 and 3 for a decision of this court and hence the said questions cannot be answered by this court.

    3. In order to appreciate this objection on behalf of the revenue, it is necessary to have a brief reference to certain salient facts of this case. The relevant year of assessment is 1972-73. The assessee is an individual and his status is "not ordinarily resident". The assessment in question relates to the income under the head "Salary". The period August 22, 1971, to March 31, 1972, is the previous year. The ITO, Circle III, Ward-A, Baroda, assessed the total income at Rs. 52,360 as against the declared "nil" total income. In this return, the assessee had shown receipt of Rs. 18,213 as "living allowance" but his contention was that the said income was exempt by virtue of the provisions of s. 10(14) of the Act. The assessee has also shown in the return a receipt of Rs. 29,521 being retention remuneration. But his contention was that the said remuneration was not taxable as according to the assessee, the provisions of section 5(1)(c) of the Act were not applicable to the said remuneration. The ITO negatived both the contentions of the assessee. The assessee preferred an appeal before the AAC, A-Range, Baroda. That appeal was wholly dismissed and the order passed by the ITO was fully maintained by the AAC. The assessee thereafter preferred a second appeal to the Tribunal at Ahmedabad. The Tribunal partially allowed the appeal in so far as the retention remuneration received during the relevant period by the assessee was concerned. The Tribunal took the view that the said remuneration was not earned by the assessee in India and hence it had not accrued or arisen in India and, therefore, it was not includible in the computation of the assessee's total income. So far as the assessee's contention regarding non-payability of tax on living allowance went the Tribunal took the view that the living allowance paid to the assessee during the relevant year constituted a "perquisite" within the meaning of Section 17(2) of the Act and consequently was includible in his total income. It was further held by the Tribunal on this aspect that exemption under section 10(14) or section 16(v) was not attracted regarding the said receipt. The Tribunal took the view that the benefit of exemption under section 10(6)(vii)(a) to the extent of the rate mentioned in that provision was attracted to the said receipt. Thus, it is clear that the Tribunal's order at Annexure 'B' to the paper book was partly in favour of the assessee and partly against him.

    4. So far as the first contention regarding retention remuneration was concerned, the order of the Tribunal was in favour of the assessee. In so far as the question of payability of income-tax on living allowance was concerned, the decision of the Tribunal was against the assessee. It is partinent to note that the revenue being aggrieved by that part of decision of the Tribunal by which the retention remuneration received by the assessee was held to be non-taxable, preferred a reference application under section 256(1) before the Tribunal but the assessee did not prefer a separate reference application challenging that part of the order of the Tribunal which was against him. Instead he sought a reference of two more questions of law arising from the adverse part of the Tribunal's order only on the basis of the reference application of the revenue and requested the Tribunal to refer these questions which were decided against the assessee for the decision of this court. The revenue objected to this attempt on the part of the assessee and submitted that the assessee could not seek a reference on the questions which were held against by the Tribunal by merely relying upon the reference application of the revenue and without filing a separated application of his own. The Tribunal overruled this objection. The Tribunal took the view that it was all along referring all the relevant questions arising from its orders for the decision of this court without being inhibited by the fact that the reference applications were filed not by all the concerned parties but only on or more of them. The Tribunal had consistently held that relevant questions could be referred for the decision of the High Court irrespective of the fact that they arose from the reference applications. In such eventualities the time lag between the filing of the concerned replies to the reference applications and service of the copies of the Tribunal's appellate orders on the concerned respondents were never given any importance. This practice was held to have been based on the decision of this court in Dhirajben Amin v. CIT [1968] 70 ITR 194, which, in turn, had approved the ratio of a previous judgment in the case of CIT v. Banthia Bank Ltd., at page 198. The Tribunal did not think it fit to accept the objection of the department which had a tendency to unsettle the well-settled position and hence the department's objection was repelled and at the instance of the assessee two more questions were referred to this court. The said two questions are question Nos. 2 and 3, which read as under :

    "(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the living allowance payable to the assessee in India is a perquisite taxable as per the provisions of the Income-tax Act, 1961 ?

    (3) If the answer to the aforesaid question is in the affirmative, whether the said amount of living allowance is exempt under section 10((14) or clause (v) of section 16 of the I.T. Act ?"

    5. Now, so far as this controversy centring round the reference regarding additional questions Nos. 2 and 3 is concerned, it has been set at rest by a recent decision of the Supreme court in CIT v. Damodaran [1980] 121 ITR 572. The Supreme Court : in the aforesaid decision was concerned with an identical question which has been posed for our consideration in this reference. The Supreme Court has in terms observed on this aspect that in every case, it is only the party applying for a reference who is entitled to specify the question of law which should be referred. Nowhere in the Income-tax Act, 1961, is there a right given to the non-applicant to ask for a reference of questions of law on the application made by the applicant. Where the order of the Tribunal under s. 254 has decided the appeal partly against one party and partly against the other, the party who is aggrieved and who desires a reference to the High Court must file a reference application. It is not open to him to make a reference application filed by the other party the basis of his claim that a question of law sought by him should be referred. Where, however, the order made by the Tribunal operates entirely in favour of one party, although in the course of making the order the Tribunal may have negatived some points of law raised by that party, not being a party aggrieved by the result of the appeal, it is not open to that party to file a reference application. On a reference application being filed by the aggrieved party, it is open to the non-applicant to ask for a reference of these questions of law which arise on its submissions negatived in the appeal by the Tribunal. In view of the aforesaid settled legal position, it must be held that the objections raised by the department on additional questions Nos. 2 and 3 have got to be upheld and it must be held that the aforesaid questions Nos. 2 and 3 ought not to have been referred to us, and, to adopt the phraseology of the aforesaid Supreme Court judgment, the Tribunal was not competent to refer these questions at the instance of the non-applicant and the reference on these questions must be held to be void. As narrated by us earlier, the Tribunal's order under s. 254 was partly in favour of the assessee and partly against him. This is not a case when the Tribunal's order is wholly is his favour. Hence, the non-applicant assessee could not have demanded reference of questions Nos. 2 and 3 for our decision without undergoing the procedure of s. 256(1). We cannot entertain such a void reference. Accordingly, we decline to answer questions Nos. 2 and 3 which are referred to us for our decision at the instance of the assessee who was a non-applicant before the Tribunal.

    6. Before parting with this question we must point out that the Tribunal had observed while making reference of questions Nos. 2 and 3 to this court that it had followed a long settled practice of the Ahmedabad Benches of the Tribunal based on the decision of this High Court in Dhirajben's case [1968] 70 ITR 194, and it used to refer questions of law even at the instance of the parties who were non-applicants and the litigant-assessee as well as the department have all consistently followed that practice over a number of years. Consequently, in such cases, we hope that a way may be found out by the department to see that no injustice results to a party who has been guided by the consistent practice spread over a large number of years especially when such a practice was followed not only the party concerned but by the Tribunal itself. The learned Advocate-General submitted to us that for no fault of the assessee, the questions referred to this court years back in 1978 will remain unanswered. We appreciate the contention of learned Advocate-General and we sympathise with his predicament but as the latest decision of the Supreme Court had finally settled this question, we have no alternative but to decline to answer the referred questions Nos. 2 and 3. The learned Advocate-General submitted that the assessee may be permitted to have recourse to any other remedy permissible at law. We cannot make any more observations about it save and except stating that it is open to the assessee to have recourse to any other remedy that may be permissible at law and we are sure that in such an eventuality the concerned authority will deal with the case of the assessee with due sympathy and in accordance with law in the interests of justice with a view to advance the cause of justice and not to place reliance on any undue technicalities. This reference is disposed of accordingly with no order as to costs.

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    Comments

    Commissioner Of Income-Tax, Gujarat-Iv v. Mascalchi Mario
    (Feb 25, 1980)