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  • For the Appellant: G. Sarangan, H. RAGHAVENDRA RAO, J.N.S. PRASAD, K. SRINIVASAN INDRAJEETH SHAH, Advocates.
Judges
  • K.S Puttaswamy, J.
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citation codes
Case Number
Advocates
  • For the Appellant: G. Sarangan, H. RAGHAVENDRA RAO, J.N.S. PRASAD, K. SRINIVASAN INDRAJEETH SHAH, Advocates.
Judges
  • K.S Puttaswamy, J.
Acts
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The original petitioner was Smith Kline & French (India) Limited, a foreign company incorporated in England, which had a manufacturing unit and a branch office at Bangalore. Under a scheme of amalgamation sanctioned by the Court the foreign company merged into an Indian company, Eskey Ltd., which is now on record as the petitioner for these matters. For purposes of analysis in the opinion the Court treated the matters as if there had been no amalgamation and referred to the foreign company as the assessee.

For the assessment year 1979-1980 (accounting year ending 30-11-1978) the assessee filed a return under Section 5 of the Companies (Profits) Surtax Act, 1964, disclosing that it was not liable to surtax. The Income-tax Officer (I.T.O.), relying on other materials and the preceding year's assessment, served a notice dated 24-1-1980 proposing a provisional assessment of Rs. 34,69,552. The assessee filed objections on 8-2-1980, asserting non-liability or, alternatively, a liability of Rs. 10,69,234. On 30-11-1980 the I.T.O. made a provisional assessment under Section 7(2) for Rs. 18,18,646 and issued a demand notice. The assessee challenged the constitutional validity of Section 7, the provisional assessment and the demand notice in W.P. 4849 of 1980. The Court issued a rule nisi and an interim order on 29-3-1980. During pendency, the I.T.O. made a regular assessment on 29-6-1980 under Section 6, which the assessee has separately appealed.

For the succeeding assessment year 1980-1981 the assessee filed a return and the I.T.O. again issued a notice (26-2-1981) proposing to make a provisional assessment. The assessee challenged the constitutional validity of Section 7 and the notice in W.P. 3959 of 1981. This Court stayed operation of that notice on 10-3-1981 and the stay has continued.

Legal Issues Presented

  1. Whether Section 7 of the Companies (Profits) Surtax Act, 1964 empowers the Income-tax Officer to adjudicate objections and determine matters in making a provisional assessment, or whether the I.T.O. is bound to accept the assessee's objections without adjudication.
  2. Whether, alternatively, Section 7 confers unguided, uncanalised, uncontrolled and arbitrary powers on the I.T.O. and is therefore violative of Article 14 of the Constitution.

Arguments of the Parties

Assessee's Arguments (Petitioner)

  • Section 7 does not empower the I.T.O. to adjudicate objections raised; the I.T.O. is bound to accept the objections without making adjudicative determinations.
  • In support of the foregoing contention, reliance was placed on the Supreme Court ruling in Jaipur Udyog Ltd. v. Commissioner of Income Tax, Delhi (71 I.T.R. 799).
  • Alternatively, if Section 7 is construed to permit adjudication by the I.T.O., then the Section confers unguided, uncanalised, uncontrolled and arbitrary powers and is violative of Article 14 of the Constitution.

Revenue's Arguments (Respondent)

  • Section 7 authorises the I.T.O. to make provisional assessments and to provisionally determine objections submitted by the assessee.
  • The principles in Jaipur Udyog Ltd.'s case do not apply to Section 7 of the Companies (Profits) Surtax Act because the language, scheme and object of Section 7 differ materially from Section 141 of the Income-tax Act interpreted in that case.
  • Section 7 does not violate Article 14 because the Act together with its schedules provides sufficient guidelines for provisional assessments, and the provisional assessment is subject to a subsequent final assessment and refunds where appropriate.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Jaipur Udyog Ltd. v. Commissioner of Income Tax, Delhi (71 I.T.R. 799) The Supreme Court had interpreted Section 141 of the Income-tax Act (then in force) to indicate that the I.T.O. could not make an adjudication when making a provisional assessment under that provision. The Court distinguished Jaipur Udyog Ltd.'s ratio, holding that Section 7 of the Companies (Profits) Surtax Act has a different language, scheme and object from Section 141 of the Income-tax Act; therefore Jaipur Udyog Ltd.'s principle did not apply to the construction of Section 7.
In Re Special Courts Bill, 1978 ((1979) 1 SCC 380 : AIR 1979 SC 478) Authority on constitutional principles relevant to challenges under Article 14 (as cited by the opinion). The Court relied on this ruling among other Supreme Court rulings to find little merit in the assessee's Article 14 challenge to Section 7, concluding that sufficient guidelines exist under the Act.
R.K. Garg v. Union of India ((1981) 4 SCC 675 : AIR 1981 SC 2138) Authority on constitutional interpretation relevant to Article 14 challenges (as cited by the opinion). The Court cited R.K. Garg along with In Re Special Courts Bill to reject the contention that Section 7 conferred arbitrary powers violative of Article 14.

Court's Reasoning and Analysis

The Court began by setting out the text of Section 7 (provisional assessment) of the Companies (Profits) Surtax Act, 1964 and observed that the provision, in clear and unambiguous language, authorises an I.T.O. to make a provisional assessment "in a summary manner" of chargeable profits and the surtax payable, to demand and recover such amounts.

The Court analysed the procedural steps mandated by Section 7: the I.T.O. must give prescribed notice enclosing a statement of particulars and allow at least fourteen days for the assessee to file objections. The Court emphasised that once objections are filed, Section 7 empowers the I.T.O. to take those objections into account and to make a provisional assessment and furnish a copy of the order to the assessee.

From this scheme the Court concluded that the power to "take into account" objections necessarily includes the power to adjudicate upon them — i.e., to accept all or some objections or to reject them. The opinion rejects any construction that would treat the assessee's objections as automatically binding on the I.T.O., reasoning that such a construction would be inconsistent with the language and object of Section 7 and would defeat the statutory scheme.

The Court addressed the reliance placed on Jaipur Udyog Ltd.'s case. It explained that the Jaipur Udyog decision involved Section 141 of the Income-tax Act and held that, under that provision, the I.T.O. could not make adjudications in a provisional assessment. The Court held that Section 7 of the Surtax Act differs in language, scheme and object from Section 141; accordingly, the ratio in Jaipur Udyog Ltd.'s case did not govern the interpretation of Section 7.

On the Article 14 challenge, the Court considered whether Section 7 conferred unguided or arbitrary powers. It observed that Section 7 must be read in light of the Act and its schedules, which provide guidelines relevant to provisional assessments. Further, the provisional nature of the assessment (subject to final assessment under Section 6 and to refunds where applicable) militates against the conclusion that Section 7 creates arbitrary power. The Court also relied on the cited Supreme Court authorities (In Re Special Courts Bill and R.K. Garg) to find little merit in the Article 14 challenge.

Applying these conclusions to the facts, the Court found that the provisional assessment which was the subject of W.P. 4849 of 1980 conformed to Section 7. After noting that a final assessment had since been made, the Court indicated there was little ground to interfere. Regarding W.P. 3959 of 1981, in which only the notice proposing provisional assessment was challenged, the Court held that the assessee is permitted to raise objections and the authority is bound to examine them; therefore, interference with the notice at that preliminary stage was not justified.

Holding and Implications

Holding: The writ petitions were dismissed and the rule issued was discharged. The Court directed that the parties bear their own costs.

Implications:

  • The Court ruled that Section 7 authorises the I.T.O. to consider and adjudicate objections when making a provisional assessment; it is not limited to mechanically accepting the assessee's objections.
  • The Court rejected the contention that Section 7, properly construed, confers unguided or arbitrary powers violative of Article 14, relying on the structure of the Act (including schedules), the provisional nature of assessments and referenced Supreme Court authorities.
  • With respect to the specific proceedings: the provisional assessment challenged in W.P. 4849 of 1980 was found to conform with Section 7 and, after final assessment, there was insufficient ground for interference; the challenge to the notice in W.P. 3959 of 1981 was not sustained at the interlocutory stage because objections could still be raised and examined.
  • No broader or novel precedent is announced beyond the Court's interpretation and application of Section 7 to the facts before it; the decision operates to dismiss the petitions and leaves other statutory remedies (including appeal against the regular assessment) intact as reflected in the opinion.
Show full summary ...

    M/S. Eskayef Ltd. v. Income-Tax Officer, Company Circle & Anr.

    1. As the parties and the questions that arise for determination in these cases are common, I propose to dispose of them by a common order.

    2. Smith Kline & French (India) Limited a foreign Company incorporated in England with limited liability, which had a manufacturing unit for manufacture of drugs and pharmaceuticals and a branch office at Bangalore city, was the original petitioner in these cases and under a scheme of amalgamation sanctioned by this Court, has merged in, an Indian Company called Eskey Ltd., which has now come on record as the petitioner in the place of the original petitioner. But in order to appreciate the questions raised, these cases will be examined as if there was no amalgamation and the foreign company will hereafter referred to as the assessee. For the assessment year 1979-1980, relevant to the accounting year ending on 30-11-1978, the assessee filed its return under Section 5 of the Companies (Profits) Surtax Act, 1964 (Central Act No. VII of 1964) (the Act) before the Income-tax Officer, Company Circle-I, Bangalore (I.T.O) (Annexure-A) inter-alia disclosing that it was not liable to pay any tax under the said Act. But the I.T.O without accepting the same and on the basis of other materials available with him like the assessment order for the year preceeding the assessment year issued a notice on 24-1-1980 (Annexure-B) to the assessee proposing to make a provisional assessment for the aforesaid year determining its liability for a sum of Rs. 34,69,552/- as set out in a detailed computation statement annexed to the same. In response to the said notice of the I.T.O, the assessee filed its objections before the ITO on 8-2-1980 (Annexure-C) reiterating that it was not assessable to tax under the Act and even if it was so assessable, it was assessable for a sum of Rs. 10,69,234/- as against a sum of Rs. 34,69,552/- detailed in the computation statement. On an examination of the return and the objections filed by the assessee, the I.T.O on 30-11-1980 (Annexure-E) made his provisional assessment order under Sec. 7(2) of the Act determining a sum of Rs. 18,18,646/- as surtax payable by the assessee for the aforesaid assessment year and also issued a consequent demand notice for the aforesaid sum (Annexure-E1). In W.P 4849 of 1980, the assessee has challenged the constitutional validity of Section 7 of the Act, the consequent assessment order and the demand notice issued by the I.T.O On 29-3-1980, this Court while issuing rule nisi made an interim order on terms. But during the pendency of this petition, the I.T.O on 29-6-1980 made his regular assessment for the aforesaid assessment year under Sec. 6 of the Act which has been separately challenged in an appeal by the assessee under the Act.

    3. For the succeeding assessment year 1980-1981, the assessee filed its return before the I.T.O under the Act But the I.T.O as in the past, issued a notice on 26-2-1981 (Annexure-A) to the assessee proposing to make a provisional assessment for the aforesaid year on the basis of the computation detailed therein. In W.P 3959 of 1981, the assessee challenging the constitutional validity of Sec. 7 of the Act, has challenged the said notice also. On 10-3-1981, this court has stayed the operation of the said notice, which has continued eversince then.

    4. The assessee has urged that Section 7 of the Act, does not empower the I.T.O to adjudicate disputes and he was bound to accept every plea urged before him. Secondly the assessee has urged that if that construction of—Sec. 7 of the Act did not find favour by this court, then that Section conferring unguided, uncanalised, uncontrolled and arbitrary powers, was violative of Article 14 of the Constitution.

    5. The respondents, to be hereinafter referred to as the ‘Revenue’ have resisted these writ petitions.

    6. In order to appreciate the challenge of the assessee to Section 7 of the Act, based on Article 14 of the Constitution and otherwise also, it is first necessary to ascertain its true scope and ambit.

    7. Sri G. Sarangan, learned counsel for the assessee contends that Sec. 7 of the Act, does not empower the ITO to adjudicate any of the objections raised before him and that he was bound to accept them without any adjudication on any of them. In support of his contention, Sri Sarangan strongly relies on the ruling of the Supreme Court in Jaipur Udyog Ltd. v. Commissioner of Income Tax, Delhi (71 I.T.R 799).

    8. Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department, appearing for the Revenue, refuting the contentions of Sri Sarangan, contends that Section 7 of the Act empowers the ITO to provisionally determine every one of the objections and the principles enunciated in Jaipur Udyog Ltd's case, has no application.

    9. The Act has been enacted to impose a special tax called ‘surtax’ on the profits of certain companies. Section 2 of the Act defines certain terms that generally occur in the Act. Section 3 deals with tax authorities that administer the Act. Sec. 4 is the charging section of the Act. Sec. 4 provides for levy of surtax on the chargeable profits of the Companies of the previous year subject to various deduction at the rates specified in the third schedule to the Act.

    10. Section 5 of the Act requires the Companies governed by the Act, to file their returns under the Act. Sec. 6 provides for making regular assessment on the returns filed or otherwise. But even before a regular assessment under Sec. 6 of the Act is made, Sec. 7 empowers the I.T.O to make a provisional assessment and collect the taxes found due thereon from a Company. Section 7 which is material, the true construction of which as also its validity arises reads thus—

    “Sec. 7 ….provisional assessment—

    (1) The Income-tax Officer, before proceeding to make an assessment under section 6 (in this section referred to as the regular assessment) may, at any time after the expiry of the period allowed under sub-section (1) of sub-section (2) of sections for the furnishing of the return and whether the return has or has not been furnished, proceed to make in a summary manner a provisional assessment of the chargeable profits and the amount of the surtax payable thereon.

    (2) Before making such provisional assessment, the Income-tax Officer shall give notice in the prescribed form to the person on whom the provisional assessment is to be made of his intention to do so, and shall with the notice forward a statement of the amount of the proposed assessment, and the said person shall be entitled to deliver to the Income-tax Officer at any time within fourteen days of the service of the said notice a statement of his objections, if any, to the amount of the proposed assessment.

    (3) On expiry of the said fourteen days from the date of service of the notice referred to in sub-section (2), or earlier, if the assessee agrees to the proposed provisional assessment, the Income-tax Officer may, after taking into account the objections, if any, made under sub-section (2), make a provisional assessment, and shall furnish a copy of the order of the assessment to the assessee;

    Provided that assessment to the amount of the provisional assessment, or failure to make objection to it, shall in no way prejudice the assessee in relation to the regular assessment.

    (4) There shall be no right of appeal against a provisional assessment made under this section.

    (5) After a regular assessment has been made, any amount paid or deemed to have been paid towards the provisional assessment made under this section shall be deemed to have been paid towards the regular assessment, and where the amount paid or deemed to have been paid towards the provisional assessment exceeds the amount payable under the regular assessment, the excess shall be refunded to the assessee.”

    11. In very clear and unambigious language, this section confers power to make a provisional assessment in a summary manner on the chargeable profits of a Company, demand the amounts found due and recover them also.

    12. But before making his provisional assessment in a summary manner, the ITO is required to give notice to the assessee in the prescribed farm enclosing a statement of particulars on the basis of which he proposes to make his assessment giving it not less than 14 days time from the date of service of such notice to file all such objections as are available to it with reference to such proposed assessment. On receipt of such notice, it is open to the assessee to accept or not accept the same and file all such objections as are available to it within a period of 14 days from the date of service of such notice. When objections are filed Sec. 7 empowers the ITO to make a determination and serve a copy of his order on the assessee. The very power to consider objections and make a provisional assessment comprahends in itself the power to accept all or any of them or reject all or any of them. Sec. 7 of the Act, no where provides for a mechanical or automatic acceptance of the objections filed by an assessee. If one were to read any such limitation in Sec. 7 of the Act, then the same will be opposed to the language of that provision and defeat the very scheme and object of the Act. Sub-Sec. (4) of Sec. 7, which expressly prohibits an appeal cannot be relied to restrict the power conferred in the preceeding sub-sections of that Section.

    13. Every provisional assessment and every payment made thereto is subject to final assessment to be made under Sec. 6 of the Act.

    14. In Jaipur Udyog Ltd's case, the Supreme Court interpreting Sec. 141 of the Income Tax, Act 1961 (I.T Act) that was then in force, had expressed that the language of that provision did not permit an ITO to make an adjudication in making a provisional assessment under the Act. The language, its scheme and object of that provision, are entirely different to the language, scheme and object of Section 7 of the Act. Hence R. 60 the ratio of Jaipur Udyog Ltd's case does not bear on the construction of Sec. 7 of the Act.

    15. On the foregoing discussion, I see no merit in this contention of Sri Sarangan and I reject the same.

    16. Sri Sarangan next contends that Sec. 7 of the Act, on the construction placed by me, confers unguided, uncanalised, uncontrolled and arbitrary powers and is violative of Art. 14 of the Constitution.

    17. Sri Srinivasan refuting the contentions of Sri Sarangan contends that Sec. 7 of the Act was not violative of Article 14 of the Constitution.

    18. Sec. 7 has been enacted to subserve the main purposes of the Act. When one reads Sec. 7 along with the schedules, there are sufficient guide lines in every aspect of provisional assessment to be made under the Act. When the provisional assessment is subject to a final assessment and refunds thereto, the mere absence of an appeal against the former, cannot be construed as conferring arbitrary powers on the ITO. When one examines this provision in the light of the numerous rulings of the Supreme Court, in particular, in two of its later rulings in In Re Special Courts Bill, 1978 ((1979) 1 SCC 380 : AIR 1979 SC 478) and R.K Garg v. Union of India ((1981) 4 SCC 675 : AIR 1981 SC 2138) there is hardly any merit in this challenge of the assessee to Sec. 7 of the Act. I, therefore, reject the contention of Sri Sarangan.

    19. An examination of the proceedings culminating in the provisional assessment challenged in W.P 4849 of 1980 shows that the same is in conformity with Sec. 7 of the Act. Even otherwise, when a final assessment has been made, there is hardly any ground to interfere with the same. In W.P 3959 of 1981, the petitioner has only challenged the validity of notice issued by the ITO proposing to make a provisional assessment under Sec. 7(2) of the Act. Earlier, I have held that it is open to the assessee to raise all such objections as are open to it under the Act which the authority is bound to examine and decide them. But before that, there is no justification to interfere with the same.

    20. As all the contentions urged for the petitioner fail, these writ petitions are liable to be dismissed. I, therefore, dismiss these writ petitions and discharge the rule issued in these cases. But in the circumstances of the cases, I direct the parties to bear their own costs.

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    Comments

    M/S. Eskayef Ltd. v. Income-Tax Officer, Company Circle & Anr.
    (Aug 8, 1985)