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Additional Income-Tax Officer, Kottayam v. Ponkunnam Traders.

Kerala High Court

Feb 12, 1973

Judgment

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Judgment Summary — Raghavan, C.J. (Ponkunnam Traders v. Addl. Income-tax Officer, appeal)

Factual and Procedural Background

The appellants are the Additional Income-tax Officer and the Commissioner of Income-tax (revenue). The respondent is Ponkunnam Traders (the assessee). The respondent's accounts were rejected by the Income-tax Officer, and the respondent was assessed by a best judgment method. The assessment proceeded without the assessee being informed of what materials were being used against it. The assessee filed a writ petition seeking quashing of that assessment on the ground that it was not given an opportunity to explain or be heard. The single judge accepted the assessee's contention and allowed the writ petition. The present appeal is by the revenue against that decision.

Legal Issues Presented

Whether, when an Income-tax Officer uses materials "gathered on the basis of any enquiry under" section 142(2) of the Income-tax Act, 1961, the assessee must be given an opportunity of being heard under section 142(3) before a best-judgment assessment is made.
Whether an assessment made after rejection of accounts under section 145(2) — described in the statute as an assessment "in the manner provided in section 144" — is excluded from the section 142(3) requirement of an opportunity to be heard (i.e., whether such an assessment is effectively an assessment "under section 144").
Whether the High Court should exercise its discretion under article 226 of the Constitution where the failure to comply with natural justice (audi alteram partem) was not urged before the appellate or revisional authorities.

Arguments of the Parties

Appellant (Revenue) — Arguments

The revenue argued that the requirement in section 142(3) to give the assessee an opportunity of being heard applies only to materials gathered as a result of an enquiry under section 142(2); therefore, if the Income-tax Officer merely had knowledge of the assessee's previous return, that knowledge does not amount to "materials gathered on the basis of enquiry" within s.142(3).
The revenue contended that the assessment after rejection of accounts was an assessment "in the manner provided in section 144" pursuant to section 145(2), and that the manner of assessment under section 144 is a best-judgment assessment without notice as contemplated by section 142(3); consequently, no opportunity was necessary in the present case.
The revenue further argued that the case was not one for exercise of the High Court's jurisdiction under article 226 because the breach of natural justice was not raised before the appellate or revisional authorities (which, here, were departmental officers), and therefore the writ should not be entertained.

Respondent (Assessee) — Arguments

The assessee contended that the Income-tax Officer had gathered materials (including reference to profits of other dealers and to the assessee's previous return) and used those materials for assessment; accordingly the assessee was entitled to notice and an opportunity under section 142(3) and the assessment made without such opportunity should be quashed.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ponkunnam Traders v. Addl. Income-tax Officer, Kottayam [1972] 83 ITR 508 (judgment under appeal)	The single judge held that when an Income-tax Officer gathers materials from sources other than records relevant to the year of assessment, those are materials gathered under section 142(2), requiring an opportunity under section 142(3).	The court agreed with the single judge's conclusion and confirmed that the assessee should have been given an opportunity in respect of such materials; the appeal was dismissed confirming the single judge's order.
State of Uttar Pradesh v. Mohammad Nooh and Baburam Prakash Chandra Maheshwari v. Antarim Zila Parishad, Muzaffarnagar, AIR 1969 SC 556	Principles concerning (i) distinction between appellate/revisional authorities that are courts of law presided over by legally trained judges and departmental authorities, (ii) the discretionary nature of writ relief (certiorari) and the relevance (but not absolute bar) of alternative remedies, and (iii) that it is not an inflexible rule to deny writ where inferior tribunal discards principles of natural justice.	The court relied on these Supreme Court decisions to uphold the High Court's discretionary exercise under article 226 in favour of the assessee, noting appeals and revisions in the present case were to departmental officers and therefore non-exhaustion of those remedies was not a bar to issuing the writ.

Court's Reasoning and Analysis

The court analyzed the relevant statutory provisions and the parties' contentions by reference to sections 142, 143, 144 and 145 of the Income-tax Act, 1961:

Statutory text considered:
- Section 142(2): permits an Income-tax Officer to make such enquiry as he considers necessary to obtain full information.
- Section 142(3): requires the assessee to be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry under subsection (2), except where the assessment is made under section 144.
- Section 143(2)–(3): provides for notice to the assessee where the Officer is not satisfied with the return and for assessment after hearing evidence and taking into account all relevant material gathered by the Officer.
- Section 144: provides for best judgment assessments in specified circumstances.
- Section 145(2): where accounts are rejected or no regular method of accounting is used, the Income-tax Officer may make an assessment in the manner provided in section 144.
On the revenue's primary contention that an assessment "in the manner provided in section 144" under section 145(2) dispenses with the section 142(3) requirement:
- The court noted that section 144 itself supplies only the substantive mode of best-judgment assessment and does not prescribe the pre-assessment procedure; the requirement for an opportunity is expressly found in section 142(3).
- The exemption in section 142(3) is confined to assessments actually made "under section 144". The court accepted the revenue's concession that the assessment after rejection under section 145(2) is not technically an assessment under section 144 but rather an assessment "in the manner provided in section 144".
- Accordingly, that concession and the statutory language mean the exclusion in section 142(3) does not apply: where the Officer has gathered material by enquiry under section 142(2) and proposes to use it, the assessee must be given an opportunity unless the assessment is specifically one "under section 144".
On the specific nature of the materials used:
- The court accepted the single judge's finding that the Income-tax Officer's knowledge of the assessee's previous return (and the reliance on profits of other dealers) constitutes material "gathered in an enquiry" within the meaning of section 142(2).
- Because such materials were used for the assessment, section 142(3)'s requirement to give the assessee an opportunity to be heard applied.
On the alternate construction:
- Even if the assessment "in the manner provided in section 144" were to be construed as an assessment under section 144, the court observed that in the present case the assessment was admittedly an assessment under section 143(3) (as evidenced by the assessment order, exhibit P-1) and not under section 144; section 143(3) itself may also result in a best-judgment assessment but does not trigger the exclusion in section 142(3).
On the question of remedy under article 226 and exhaustion of alternative remedies:
- The revenue argued that because the breach of natural justice was not raised before the appellate or revisional authorities, article 226 should not be available.
- The court applied the principles from the cited Supreme Court decisions to distinguish between appeals to judicially constituted courts and departmental authorities. Since the appeal and revision in this case lay to departmental officers (Appellate Assistant Commissioner and Commissioner of Income-tax), non-exhaustion of those remedies was not a strong bar.
- The court further observed that the High Court's discretionary jurisdiction in issuing certiorari is not governed by an inflexible rule denying relief whenever an alternative remedy exists; the adequacy of the alternative remedy is a relevant consideration but not an absolute bar. Given the single judge had considered the matter and exercised discretion in favour of the assessee, the appellate court would not lightly interfere with that exercise of discretion.

Holding and Implications

Final Ruling: The court confirmed the single judge's decision and dismissed the appeal.

Implications and Direct Effects:

The court upheld that where an Income-tax Officer gathers materials by enquiry under section 142(2) and proposes to use those materials for assessment, the assessee must be given an opportunity to be heard under section 142(3), unless the assessment is one made under section 144 (the statutory exclusion in section 142(3)).
In the present case the assessment was not an assessment "under section 144" (it was under section 143(3) as per the assessment order) and therefore the exclusion did not apply; the assessment made without giving the assessee the opportunity required by section 142(3) was set aside by the single judge and that order was maintained.
The High Court was entitled, in its discretion under article 226, to grant relief notwithstanding that the failure to raise the natural justice objection had not been pressed before departmental appellate and revisional officers; the fact that those remedies were to departmental authorities meant non-exhaustion did not bar writ relief in the circumstances.
The court made no order as to costs.
No novel legal principle or binding new precedent was formulated beyond the court's application and confirmation of existing statutory interpretation and the discretionary principles drawn from the cited Supreme Court authorities.

This summary is based exclusively on the content of the provided opinion and does not add or infer facts beyond the text of that opinion.

Show all summary ...

The Judgment of the Court was delivered by

Raghavan, C.J:— The appellants are the Additional Income-tax Officer and the Commissioner of Income-tax (the revenue); and the respondent, Ponkunnam Traders, a firm, is the assessee. The judgment under appeal is reported as Ponkunnam Traders v. Addl. Income-tax Officer, Kottayam [1972] 83 ITR 508 Ker.. Since the question involved is fairly simple, we do not propose to state the facts of the case in any detail. The skeleton facts necessary are that the respondent's accounts having been rejected by the Income-tax Officer, the respondent was assessed on the best judgment method without being told what materials were being used against it for such assessment. The respondent took objection in the writ petition filed by it that such assessment without giving it an opportunity to explain was to be quashed. The single judge accepted the contention and allowed the writ petition; and the appeal is against that.

2. We may just refer to one or two observations from the judgment of the single judge, which would make the position clear. The learned judge has stated in paragraph 3 of his judgment:

“In the order of assessment the Income-tax Officer said that after rejecting the accounts of the assessee he made enquiries and that he was satisfied from the materials gathered by him, namely, the profits made by other dealers carrying on similar businesses and from the profits disclosed in the return for the previous year by the petitioner himself, that the profit of the petitioner from transactions in dry ginger is 10% of the turnover.”

3. The contention of the assessee, as we have indicated, was that it was entitled to notice (under section 142(3) of the Income-tax Act of 1961), since materials gathered by the Income-tax Officer were used in the assessment.

4. The counsel for the revenue contended that it was only in respect of materials gathered by the Income-tax Officer as a result of his enquiry under sub-section (2) of section 142 that he was bound to give the assessee an opportunity of being heard, that the knowledge of the Income-tax Officer of the previous return submitted by the assessee was sufficient material for a best judgment assessment and such knowledge could not by any stretch of imagination be regarded as materials gathered on the basis of enquiry within the meaning of section 142(3), and so, no opportunity of being heard in respect of that material was required (paragraph 4). In other words, the contention of the revenue was that the assessment was based only on the material by way of the previous year's assessment of the same assessee and that materials collected from dealers similarly situated or carrying on similar businesses were not considered in making the assessment. The single judge, after considering this question, held that, when an Income-tax Officer gathered materials from a source other than the records relevant to the year of assessment, he had gathered materials on the basis of enquiry within the meaning of section 142(3) and, therefore, he would be bound to give an opportunity to the assessee to have his say in respect of the materials so gathered (vide paragraph 4 again).

5. Before us, the question has been raised by the counsel for the revenue in a slightly different fashion: the counsel does not attack the reasoning of the single judge pointed out above. Before we go to this aspect, we shall briefly refer to the provisions of the Act which we will have to consider in deciding the question. Section 142 of the Act of 1961 provides for enquiry before assessment; and sub-sections (2) and (3) of the section read:

“(2) For the purpose of obtaining full information in respect of the income or loss of any person, the Income-tax Officer may make such enquiry as he considers necessary.

(3) The assessee shall, except where the assessment is made under section 144, be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry under sub-section (2) and proposed to be utilised for the purpose of the assessment.”

6. Section 143 provides for assessment; and sub-sections (2) and (3) of the section read:

“(2) Where a return has been made under section 139, but the Income-tax Officer is not satisfied, without requiring the presence of the assessee or the production of evidence that the return is correct and complete, he shall serve on the assessee a notice requiring him, on a date to be therein specified, either to attend at the Income-tax Officer's office or to produce, or to cause to be there produced, any evidence on which the assessee may rely in support of the return.

(3) On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, the Income-tax Officer, after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require on specified points, and after taking into account all relevant material which the Income-tax Officer has gathered, shall, by an order in writing, assess the total income or loss of the assessee, and determine the sum payable by him or refundable to him on the basis of such assessment.”

7. Then comes section 144 providing for best judgment assessment. The section provides:

“If any person—

(a) fails to make the return required by any notice given under sub-section (2) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or

(b) fails to comply with all the terms of a notice issued under subsection (1) of section 142, or

the Income-tax Officer, after taking into account all relevant material which the Income-tax Officer has gathered, shall make the assessment of the total income or loss to the best of his judgment………..”

8. And the only other section which we have to bear in mind is section 145 providing for the method of accounting. Sub-section (2) of the section reads:

“(2) Where the Income-tax Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting had been regularly employed by the assessee, the Income-tax Officer may make an assessment in the manner provided in section 144.”

9. Now, the argument of the counsel for the revenue is that the accounts of the assessee having been rejected, the assessment that followed was an assessment as contemplated by section 145(2), viz., “an assessment in the manner provided in section 144”. And the counsel has argued further that the manner of assessment contemplated by section 144 is a best judgment assessment without notice to the assessee as contemplated by section 142(3). Let us now examine this contention.

10. We straightaway point out that, under section 144, no manner of assessment is provided for, excepting that the assessment under that sec tion is a best judgment assessment. Provision is made for a notice before the assessment in section 142(3), which enacts that the assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry under sub-section (2) of the section. Thus, the manner, if at all, is provided under section 142(3) and not under section 144. The counsel for the revenue has rightly conceded that the assessment that has to be made after the accounts of the assessee are rejected under section 145(2) is not an assessment under section 144, but is only an assessment “in the manner provided in section 144”. The counsel has also conceded, again rightly, that, though section 144 provides for best judgment assessments, all best judgment assessments are not covered by section 144. We may refer to Income-tax by Kanga and Palkhivala, 6th edition, volume I, page 762, where this question is discussed. Since this is not disputed by the counsel for the revenue, we do not propose to go into the matter any further. The language of section 142(3) is that “the assessee shall, except where the assess ment is made under section 144, be given an opportunity of being heard ………” This makes the position clear that, in an enquiry before assess ment, an opportunity has to be given to the assessee of being heard, if any material gathered on the basis of the enquiry under sub-section (2) of the section is proposed to be used against him. We repeat that the only exception to the rule that the assessee should be given such an opportunity to be heard is an assessment “under section 144”. Since it is conceded by the counsel for the revenue (that seems to be the correct position too) that the assessment in this case, after rejecting the accounts under section 143(2), though it is a best judgment assessment, is not an assessment under sec tion 144, it is patent that the case will not come within the exclusion contemplated by section 145(2). If so, it must naturally follow that the Income-tax Officer should have given an opportunity to the assessee as to what materials he proposed to use against it to make the best judgment assessment. And we agree with the single judge that the knowledge of the Income-tax Officer of the assessment for the previous year of the same assessee is material which he gathered in an enquiry under section 142(2) of the Act.

11. Even if we construe the assessment “in the manner provided in section 144” as an assessment under section 144 (we only assume this), even then, the present case will not come within the exclusion contemplated by section 142(3), since the assessment in this case is admittedly under section 143(3) of the Act, and not under section 144 (vide the assessment order, exhibit P-1). We point out in this connection that an assessment under section 143(3) is also a best judgment assessment.

12. The next question urged by the counsel for the revenue is that this is not a case for article 226 of the Constitution, since the failure in complying with the principle of audi alteram partem was not raised either before the appellate authority or the revisional authority. (We point out at this stage that the respondent questioned the assessment before the appellate authority and the revisional authority, wherein the failure to comply with the principle of natural justice was not urged). This question has been considered at length by the single judge, who has referred to several decisions of English courts and courts in India and have come to the conclusion that this was a case where the discretion vested in the High Court under article 226 should be exercised in favour of the assessee. We do not propose to consider this question elaborately, in view of the decisions of the Supreme Court in State of Uttar Pradesh v. Mohammad Nooh and in Baburam Prakash Chandra Maheshwari v. Antarim Zila Parishad, Muzaffarnagar AIR 1969 SC 556.. In the first of these decisions, the Supreme Court has pointed out the distinction between a case where the appellate and revisional authorities are courts of law presided over by judges with legal training and a case where the appellate and revisional authorities are departmental authorities: in the latter, the failure to exhaust such remedies by way of appeal and revision is not such a strong bar as in the case of the former. The Supreme Court has also pointed out that there is no rule, with regard to certiorari as there is with mandamus, that it will be only where there is no other equally effective remedy: the fact that the aggrieved party has another and adequate remedy “may be taken into consideration by the superior court in arriving at a conclusion as to whether it should, in exercise of its discretion, issue a writ of certiorari”. Still further, the Supreme Court has pointed out, it cannot be laid down “as an inflexible rule of law” that the superior court must deny the writ when an inferior court or Tribunal passes an order discarding all principles of natural justice. In the second decision, the Supreme Court has followed its earlier decision and affirmed the principles contained therein.

13. In the case before us, the appeal and revision were to two departmental officers, the Appellate Assistant Commissioner and the Commissioner of Income-tax: and the complaint now is that the principle of natural justice of audi alteram partem was not complied with. Moreover, the single judge has considered this question elaborately and has chosen to exercise his discretion in favour of issuing a writ. In these circumstances, we do not think it is proper to interfere in appeal and disturb the discretion exercised by the single judge. Therefore, this contention is also rejected.

14. In the result, we confirm the decision of the single judge and dismiss the appeal. However, we do not pass any order regarding costs.