Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Referred Cases Nos. 208 and 209 of 1987

Judges

N. Venkatachala
K. Shivashankar Bhat, JJ.

Acts

section 256(2) of the Income-tax Act, 1961 (the Act for short),
section 23(4) of the earlier Income-tax Act
section 148 read with section 147(a)

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Smart Summary

Structured Summary of the Opinion — K. Shivashankar Bhat, J.

Factual and Procedural Background

The assessee was a firm which dissolved on 30 June 1972; one partner died in January 1975. No returns had been filed and there were no assessment orders for assessment years 1972-73 and 1973-74. On 6 February 1975 the Income-tax Officer (ITO) issued notices under section 148 read with section 147(a) to the living partners and the legal representative of the deceased partner. Only the legal representative responded and filed a return purporting to be of the erstwhile firm. On 21 March 1975 the ITO made an order of assessment.

On appeal the Appellate Assistant Commissioner (AAC) held that the notice was to the erstwhile firm but the return was filed by a non-partner (the legal representative), not binding on the firm or other partners; the return was not in the form prescribed by section 139 and was not properly signed and verified under section 140 on behalf of the firm. Consequently, the AAC cancelled the assessment orders on 7 February 1977.

Subsequently the ITO wrote to the partners; they filed fresh returns without protest and the ITO made fresh assessment orders. The assessee challenged those fresh orders, contending that because the AAC had not remanded the matter to the ITO under section 251(1)(a) the ITO had no jurisdiction to make fresh assessments for the period covered by the earlier (cancelled) order. The AAC accepted the assessee's contention. The Revenue appealed to the Appellate Tribunal which held that the earlier ITO order was vitiated by irregularity (entertaining a return filed by a non-partner) and hence void; cancellation by the appellate authority did not require remand and the ITO could revive proceedings and make fresh orders. The Tribunal also held that notices to each living partner were independent proceedings and that a proceeding initiated by such a notice could still be pending. These questions were referred to the court under section 256(2) of the Income-tax Act, 1961.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, even if the power to redo the assessment did not revive in the Income-tax Officer after the annulment of his first order of assessment (the ITO having become functus officio on passing such an order), he was competent to proceed upon the three returns filed by the surviving partners subsequently and to complete the assessment on the firm?
Whether the power to redo the assessment revived in the Income-tax Officer who had become functus officio on making the original assessment, on the Appellate Assistant Commissioner annulling the assessment order even though the Appellate Assistant Commissioner had annulled the assessment without a direction to redo the assessment?

Arguments of the Parties

Assessee's (Appellant's) Arguments — as advanced by Sri K.R. Prasad

The Income-tax Officer became functus officio on making the initial order of assessment and therefore could not make another assessment for the same period without the proceedings being remanded to him by the Appellate Assistant Commissioner under section 251(1)(a).
Section 251(1)(a) gives the AAC alternative powers: to annul an order simpliciter or to annul and refer the case back for fresh assessment. Because the AAC did not direct a remand, the concluded proceedings could not be reopened.
The earlier order of the ITO was not wholly void but illegal; when such an illegal order is set aside, a specific direction to make a legal order is necessary to revive the assessing officer's power.
Reliance was placed on the Supreme Court decision in CIT v. Bidhu Bhusan Sarkar ([1967] 63 ITR 278) for the proposition that even an invalid order terminating proceedings has the effect of terminating them until set aside.

Revenue / Appellate Tribunal's Position

The earlier ITO order was vitiated by an irregularity (entertaining a return filed by a non-partner) and therefore amounted to a void order as against the firm and the living partners.
When such an order is cancelled by the appellate authority, it is not necessary for the appellate authority to remand the matter; the assessing officer may revive the earlier-initiated proceedings and proceed to make a fresh assessment.
Each notice issued to a living partner constitutes an independent proceeding; where such proceedings have not culminated in a valid order as against the firm/partners, they remain pending and can be proceeded with.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Bidhu Bhusan Sarkar, [1967] 63 ITR 278 (Supreme Court)	Principle that even an invalid order terminating proceedings has the effect of terminating them until set aside; an order of transfer can be valid even if there are no proceedings pending because the word "case" may include concluded proceedings.	The assessee relied on this authority to argue that the ITO's earlier (invalid or illegal) order terminated proceedings and could not be reopened absent a remand. The court examined the decision but held that even accepting the assessee's reliance, the facts of the present case were different and that the earlier order was without jurisdiction as against the firm, so no finality had been attained vis-à-vis the firm and living partners.
CIT v. Khemchand Ramdas, [1938] 6 ITR 414 (Privy Council)	Concerned an assessment under section 23(4) of the earlier Income-tax Act where no appeal lay; such finality (no appeal) cannot be overcome by resort to other powers.	The court treated these facts as materially different and therefore not applicable to the present case. The decision was noted and distinguished on the basis that the earlier case involved an assessment against which no appeal was available.

Court's Reasoning and Analysis

The court proceeded by examining the nature and legal effect of the earlier ITO order and the consequences of the AAC's cancellation. The analysis followed these principal steps:

The court reviewed the assessee's reliance on Bidhu Bhusan Sarkar, which holds that even an invalid order terminating proceedings has the practical effect of terminating them until set aside; the Supreme Court also observed that a transfer may be valid even where proceedings are concluded because the term "case" can include concluded proceedings.
The court observed that even if that reasoning were accepted fully, in the present case the outcome would not benefit the assessee because the AAC's ultimate conclusion was that no effective order of assessment could be made against the firm on the basis of the return filed by an incompetent person (the legal representative). Therefore, as against the firm and its living partners, there was effectively no order of assessment at all.
The court distinguished Khemchand Ramdas on fact and legal basis: that decision concerned a statutory situation (assessment under section 23(4) of the earlier Act) where no appeal lay, producing a finality that could not be overcome — a situation materially different from the present case.
The court characterized three relevant categories of appellate outcomes:
- An appellate modification where the appellate order becomes the final operative order.
- A remand where the appellate authority refers the matter back to the assessing officer to rectify procedural irregularities and enable a proper order to be made.
- A setting aside of the original order on grounds that render it void (for example, failure to observe natural justice or assessment by an incompetent officer), in which case a remand is not necessary because a competent assessing authority may make a proper order, subject to limitation rules.
The court held that whether the assessing officer retains competence to make a fresh order after appellate cancellation depends on the nature of the appellate order. It rejected the view that section 251(1)(a) should be construed as a blanket statutory bar preventing the assessing officer from making a fresh order in the absence of an express remand in every situation.
Applying these principles to the facts, the court concluded that the earlier ITO order was entirely without jurisdiction as against the firm and could not be treated as conclusively terminating the proceedings that had been initiated by notices to the partners. Accordingly, the ITO was competent to proceed to make fresh assessments in pursuance of those earlier-initiated proceedings.
The court therefore found the assumption in the referred questions — that the ITO had become functus officio upon making the original assessment — legally unsound.

Holding and Implications

Both questions referred under section 256(2) are answered in the affirmative and against the assessee.

Direct consequences and implications:

The court held that the Income-tax Officer was competent to proceed upon the fresh returns filed by the surviving partners and to complete assessment of the firm for the years in question despite the earlier order having been made and later annulled by the appellate authority without an express remand.
The court rejected the contention that the ITO had become functus officio so as to prohibit fresh assessment absent a remand under section 251(1)(a).
The decision turns on the characterization of the earlier ITO order as being without jurisdiction as against the firm (because the return had been filed by an incompetent person), and the court explained that where an appellate order sets aside an assessment as void, a remand is not invariably required for the assessing authority to act afresh (subject to limitation rules).

The opinion confines its outcome to the facts and legal reasoning in this case; it does not state that it is laying down a broader, novel precedent beyond applying established distinctions about when an appellate order requires remand and when an assessing authority remains competent to act.

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Ashok And Co. v. Commissioner Of Income-Tax.

K. Shivashankar Bhat, J.:— The questions referred under section 256(2) of the Income-tax Act, 1961 (“the Act” for short), read thus:

“1. Whether, on the facts and in the circumstances of the case, even if the power to redo the assessment did not revive in the Income-tax Officer, after the annulment of his first order of assessment, he having become functus officio on passing such an order, he was Competent to proceed upon the three returns filed by the surviving partners subsequently and to complete the assessment on the firm?

2. Whether the power to redo the assessment revived in the Income-tax Officer who had become functus officio on making the original assessment, on the Appellate Assistant Commissioner annulling the assessment order even though the Appellate Assistant Commissioner had annulled the assessment without a direction to redo the assessment?”

2. The assessee is a firm; it was dissolved on June 30, 1972. One of its partners died in January, 1975. In the meanwhile, no return was filed by the assessee and there was no order of assessment for the assessment years 1972-73 and 1973-74. Hence, on February 6, 1975, the Income-tax Officer issued a notice under section 148 read with section 147(a) to the living partners and the legal representative of the deceased partner; the response was only by the legal representative who filed a return of income, purporting to be of the erstwhile firm. On March 21, 1975, an order of assessment was made. In the appeal, the Appellate Assistant Commissioner held that the notice was issued to the erstwhile firm, but the return was filed by a non-partner (i.e, the legal representative of the deceased partner), which was not binding on the firm (or the other partners) and that the return was not in the form prescribed under section 139; further, the return was not properly signed and verified as per section 140 on behalf of the firm; consequently, the orders of assessment were cancelled. This was on February 7, 1977. Thereafter, it seems that the Income-tax Officer wrote letters to the partners who filed fresh returns without any protest; consequently, assessment orders were made afresh. These orders were challenged by the assessee contending that the Appellate Assistant Commissioner, while cancelling the earlier order of assessment, had not remanded the matter to the Income-tax Officer enabling the latter to make a fresh order and, consequently, the Income-tax Officer had no jurisdiction to make a fresh order of assessment for the period covered by the earlier order. The Appellate Assistant Commissioner accepted this contention. The Revenue approached the Appellate Tribunal which held that the earlier order of the Income-tax Officer was vitiated by an irregularity in entertaining the return filed by a non-partner and hence the consequential assessment order was void; when the said order was cancelled, it was not necessary for the appellate authority to remand the proceedings; even otherwise, the Income-tax Officer can revive the proceedings and proceed to make a fresh order. The Appellate Tribunal further held that every notice to each of the living partners is an independent proceeding and such a proceeding was still pending without culminating in an order of assessment. Hence, these references.

3. Sri K.R Prasad, learned counsel for the assessee, contended that the Income-tax Officer became functus officio on the making of an order of assessment. In response to the return filed by the legal representative of the erstwhile partner and, for the same period, the Income-tax Officer cannot make another order of assessment without the proceedings being remanded to the Income-tax Officer by the Appellate Assistant Commissioner under section 251(1)(a) of the Act. Learned counsel referred to section 251(1)(a) wherein alternative powers are given to the Appellate Assistant Commissioner either to annul an order of assessment simpliciter or to annul an order of assessment and then refer the case back to the Income-tax Officer for making a fresh assessment; since the Appellate Assistant Commissioner has not issued any such direction and did not refer the case back to the Income-tax Officer, after cancelling the order of assessment, proceedings for the years in question concluded finally. Learned counsel further urged that the earlier order of the Income-tax Officer was not a void order, but an illegal order and hence, when the illegal order was set aside, a specific direction to make a legal order was necessary. The decision of the Supreme Court in CIT v. Bidhu Bhusan Sarkar, [1967] 63 ITR 278 was relied on.

4. In the said case, the question pertained to the effect of an order made by an Additional Income-tax Officer, wherein he stated, in a proceeding initiated by him that “the case is, therefore, filed”. Whether this resulted in the final culmination of the proceedings or kept alive the proceedings, so that it was capable of being transferred; it was contended that the said order of the Additional Income-tax Officer was an invalid order and hence did not conclude the proceedings. The Supreme Court held, at page 286:

“Even if it be accepted that the order made by the Additional Income-tax Officer in the present case was invalid, its effect cannot be that the proceedings before the Additional Income-tax Officer must be held to have continued after that order was made by him. Even an invalid order terminating proceedings has the effect of terminating them; and in such a case, the appropriate method for correcting the illegality committed is to have that order vacated by an appellate or other higher authorities having jurisdiction to intervene. As long as the order is not set aside, it remains in force and takes full effect. The order was not totally without jurisdiction; at best it was an order not contemplated by law and it could not be treated as a non-existent order. In the present case also, the order of the Additional Income-tax Officer directing that the case be filed could have been set right on appeal, or by a reference to the High Court, in case the Tribunal refused to correct it. While it was not set aside, the only conclusion possible is that the proceedings before the Additional Income-tax Officer terminated and did not any longer continue to remain pending.”

5. Sri Prasad relied on the observation that even an invalid order is an effective order, unless it is set aside and, therefore, the order of the Income-tax Officer was, at the most, an invalid order, but had all the qualities of an effective order; this effective order was substituted by another order in appeal, which did not revive the concluded proceedings. Instead of an order of assessment levying tax as made by the Income-tax Officer, the appellate order resulted in a substituted order of assessment resulting in “nil” assessment; the resultant position is as if the Income-tax Officer had made such an order earlier giving finality to the proceedings. To complete the narration, it is to be noted that, in the aforesaid decision of the Supreme Court, ultimately, the Supreme Court held that (at p. 287):

“an order of transfer can be validly made even if there be no proceedings pending for assessment of tax and the purpose of the transfer may simply be that all future proceedings are to take place before the officer to whom the case of the assessee is transferred”,

because, the word “case” included concluded proceedings also.

6. Even accepting Sri Prasad's contention in its totality, the resultant position cannot enure to the assessee's benefit; no finality was attained in the proceedings by the ultimate order, which held that no effective order of assessment can be made against the firm on the basis of an invalid return, because the return was filed by an incompetent person. In other words, as against the firm and its living partners, there was no order at all. The proceedings initiated against them by the issuance of the notices to them earlier came to be pending, as no order was made thereon.

7. In CIT v. Khemchand Ramdas, [1938] 6 ITR 414, the Privy Council was concerned with an entirely different set of facts. As could be seen from page 424, the assessment in question was made under section 23(4) of the earlier Income-tax Act against which no appeal lay. Such a finality cannot be overcome by resort to other powers under the Act.

8. In the instant case, it is too obvious that the earlier order of the Income-tax Officer was without jurisdiction as against the firm and hence it cannot be held as concluding the proceedings. The order of the Appellate Assistant Commissioner, made earlier, need not preserve the right to make a fresh order by the statement such as “without prejudice” or by remanding the case. An order of assessment, on an appeal, may stand modified; the final operative order in such a case will be the appellate order. An appellate authority may, under certain circumstances, refer the case back, so that procedural irregularities could be rectified and a proper order be made. There may be a third category of cases wherein the appellate authority may set aside the original order of assessment on the ground that the said order was void such as, when the assessing authority fails to follow the principle of natural justice or when an incompetent officer makes the assessment order; in this category of cases, a specific order of remand is unnecessary because the competent assessing authority can always make a proper order provided further proceedings are not barred by any rule of limitation. An order of assessment may be invalid, voidable or void. Technically, all orders require to be set aside, as otherwise, the assessee always faces the threat of their enforcement. Cases do exist wherein, if the order is entirely void, its enforcement may be resisted collaterally also. But, in all these cases, uniformly, without exception, it cannot be said that the assessing authority lacks competence to make a fresh order. The competence to make a fresh order of assessment consequent upon the cancellation of an earlier order of assessment by the appellate authority depends upon the nature of the appellate authority's order. Section 251(1)(a) cannot be construed as a statutory bar against the competence of the assessing authority to make a fresh order of assessment in the absence of a remand order under all situations. The power given to the Appellate Assistant Commissioner to refer back the case to the assessing authority is only an aspect of the appellate power given to the Appellate Assistant Commissioner. In the facts of the instant case, the assessing authority was fully within his competence to make an order of assessment in pursuance of the proceedings initiated by him earlier since his earlier order made in pursuance of the return filed by the legal-representative of the deceased partner was entirely without jurisdiction. The assumption in the questions that the Income-tax Officer had became functus officio is not legally sound.

9. The common answer to the questions referred, therefore, is in the affirmative and against the assessee.

Ashok And Co. v. Commissioner Of Income-Tax.

Structured Summary of the Opinion — K. Shivashankar Bhat, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's (Appellant's) Arguments — as advanced by Sri K.R. Prasad

Revenue / Appellate Tribunal's Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ashok And Co. v. Commissioner Of Income-Tax.

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