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  • V.V Kamat
  • G. Sivarajan, JJ.
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  • V.V Kamat
  • G. Sivarajan, JJ.
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Smart Summary

Summary of the Judgment delivered by V. V. Kamat, J.

Factual and Procedural Background

The assessment year in question is 1980-81. The reference posed the question whether the Tribunal was right in holding that an assessment made on a "second draft assessment" was valid.

The factual matrix as recorded by the Tribunal is that the Income-tax Officer (ITO) prepared a draft assessment order on 7 July 1981 and forwarded it to the Inspecting Assistant Commissioner under sections 144A and 144B of the Income-tax Act, 1961. Subsequently the incumbency of the ITO changed. The successor ITO considered that the earlier draft order required modification. The successor asked the assessee whether a fresh opportunity of being heard was required in view of the change of incumbent; the assessee replied in the negative. Despite that negative reply, the succeeding ITO granted an opportunity and prepared a modified draft order on 6 February 1982, which was again forwarded to the Inspecting Assistant Commissioner in a similar manner.

The question referred for decision was framed as to the validity of the assessment made on what was described as a second draft assessment.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment made on the second draft assessment was valid?

Arguments of the Parties

Recorded Contentions

  • A contention based on section 129 of the Income-tax Act was raised arguing that the successor ITO should continue the proceedings from the stage at which they were left by his predecessor (i.e., there should be continuity rather than reopening).
  • A contention based on section 144B(1) of the Income-tax Act was advanced that there can be only one draft assessment order, thereby ruling out the justification of issuing a second draft order.
  • It is recorded that the assessee declined a fresh opportunity of being heard when asked by the succeeding ITO, but the successor ITO nevertheless afforded an opportunity and prepared a modified draft order.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Aspinwall & Co. Ltd. v. CIT (Income-tax Reference No. 28 of 1991), [1996] 220 ITR 611 Related reference decided earlier by the Court; treated together for convenience by the Tribunal but decided separately by this Court. The judgment indicates that while the Tribunal treated the two references as amenable to a common order, the Court chose to decide this reference separately, and it refers to that earlier decision as the companion matter.
Guduthur Bros. v. Income Tax Officer, Special Circle, Bangalore, [1960] 40 ITR 298 Illustrates that a successor officer may continue proceedings from the stage at which illegality occurred; a notice that remained undisposed could relate back to the day when the first notice was issued. The Court relied on this authority to support the proposition that successive proceedings can be understood to relate back in appropriate circumstances and to show that continuation by a successor is permissible.
H.H. Maharaja Raja Pawer Dewas v. CIT, [1982] 138 ITR 518 Held that the provisions of section 144B are procedural in nature and that any irregularity would be curable by appropriate directions. The legislative intent is to safeguard the assessee by giving opportunity to raise objections to proposed additions. The Court cited this decision to underline the procedural character of section 144B and that the provisions are intended as safeguards for the assessee rather than as absolute substantive bars to corrective action.
Sudhir Sareen v. ITO, [1981] 128 ITR 445 (Delhi High Court, learned single judge) Held (in that decision) that only one draft order of assessment could be issued and the ITO could not issue more than one draft order; emphasized literal meaning of "in the first instance" and "a draft". The Court considered this decision as persuasive only (single judge) and examined its literalist approach. The Court declined to accept that strict literal reading and rejected the conclusion that only one draft can ever be issued in all circumstances.

Court's Reasoning and Analysis

The Court examined the relevant statutory provisions—sections 144A and 144B (and the reference to section 129)—focusing on their procedural character. It reasoned as follows:

  • Section 129: A plain reading shows it is conditioned by a proviso requiring rehearing; it is procedural and operates as a guideline for situations where the ITO changes. The Court emphasized that the provision does not legislate an absolute mandate to continue purely from the predecessor's stage without power to revisit where necessary.
  • Section 144B(1) and related subsections: The Court analyzed the language requiring the ITO to forward a draft assessment to the assessee when making variations prejudicial to the assessee, and to invite objections. Section 144B(4) contemplates placing the draft and objections before the Inspecting Assistant Commissioner, who can issue directions and whose directions bind the ITO. The Court treated these provisions as procedural safeguards designed to protect the assessee's right to be heard.
  • Section 144A: The Court noted that it empowers the Inspecting Assistant Commissioner to call for and examine records of proceedings pending before the ITO and to issue directions deemed necessary or expedient, with a requirement to afford reasonable opportunity. Again, the Court stressed the procedural and supervisory nature of this provision.
  • Interpretation approach: The Court rejected an overly literal and restrictive interpretation (as advocated by the single judge decision in Sudhir Sareen) which would permit strictly only one draft order in all circumstances. Instead, the Court emphasized flexibility in procedural enactments, observing that procedural law should assist administration and justice and should not be a fetter preventing consideration of necessary amendments or corrections.
  • Application to facts: Given that the successor ITO considered modifications necessary and, despite the assessee's negative response to a fresh hearing request, still afforded an opportunity and prepared a modified draft, the Court regarded such an action as consistent with the procedural safeguards of sections 144A and 144B. The Court concluded that a modification to a draft does not necessarily amount to an impermissible "second draft assessment" in the sense prohibited by a literal reading; rather it could be a legitimate amendment or modification of the original draft.
  • Reliance on authority: The Court relied on Guduthur Bros. to illustrate that continuation or relating back of proceedings by a successor is permissible where the notice remained undisposed. It also cited H.H. Maharaja Raja Pawer Dewas to reinforce that section 144B is procedural and curable by directions. The Court considered the Delhi High Court's Sudhir Sareen decision persuasive but ultimately found its strict literalism unconvincing in the present context.

Holding and Implications

Holding: The Court confirmed the view of the Tribunal and answered the question referred in the affirmative — in favour of the Department and against the assessee — with a clarification that, on the material on record, there was in fact no second draft assessment.

Direct consequences: The Tribunal's order was affirmed; the assessment made (as challenged) was held to be valid and the Department succeeded. The Court directed that a copy of the judgment be sent under the seal of the Court to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.

Broader implications: The Court's reasoning emphasizes that sections 144A and 144B are procedural safeguards and that procedural provisions should be interpreted with flexibility to allow necessary modifications; the judgment does not purport to lay down a new broad precedent beyond the resolution in this reference and the reconciliation of literal versus purposive interpretation as applied to these facts.

This summary is derived exclusively from the provided opinion and does not add or infer facts or arguments beyond what the opinion records.

Show full summary ...

    Aspinwall And Co. Ltd. v. Commissioner Of Income-Tax (No. 2).

    The Judgment of the Court was delivered by

    V.V Kamat, J.:— Although the proceedings of this reference and of Income-tax Reference No. 28 of 1991 (Aspinwall and Co. Ltd. v. CIT (No. 1), [1996] 220 ITR 611 (decided by us earlier to this judgment), are treated for the purpose of decision by the Tribunal as could be done by a common order, on hearing counsel for the parties and considering the questions involved we thought it more convenient and desirable to decide this reference by a separate judgment and accordingly decided in Income-tax Reference No. 28 of 1991 (Aspinwall and Co. Ltd. v. CIT (No. 1), [1996] 220 ITR 611) in that way.

    2. The assessment year in question is 1980-81 posing the question referred for our consideration and consequent decision as follows:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment made on the second draft assessment was valid?”

    3. The necessary factual matrix is available in paragraph three of the order of the Tribunal (annexure “P”). We find therefrom that the Income-tax Officer prepared a draft assessment order on July 7, 1981, and forwarded the same to the Inspecting Assistant Commissioner for further action under sections 144A and 144B of the Income-tax Act, 1961. It was thereafter that the Income-tax Officer changed and his successor felt the need for an amendment of the draft assessment order. The successor-Income-tax Officer asked the assessee whether he requires any fresh opportunity of being heard in view of the change in the incumbency of the Income-tax Officer. It is recorded that the assessee submitted in the negative to the effect that he did not want an opportunity in question. The succeeding Income-tax Officer thought that the earlier draft order requires certain modifications and in spite of the negative reply granted an opportunity to the assessee of being heard and thus prepared a modified draft order on February 6, 1982. This modified draft order was forwarded to the Inspecting Assistant Commissioner in the similar manner.

    4. It is in the state of this factual situation that the contention based on the provisions of section 129 of the Income-tax Act is taken up with the succeeding Income-tax Officer as to continue the proceedings from the stage at which the proceeding was left by his predecessor. A bare reading of the said section 129 would show that the section does not legislate a mandate and is conditioned by a proviso requiring rehearing of the concerned assessee. Apart therefrom the provision also is clearly of a procedural character as a guideline in a situation where the Income-tax Officer changes allowing his successor to assume the concerned office.

    5. On the basis of the provisions of section 144B(1) of the Act, it is contended and as such the issue referred is framed that there can be only one draft assessment order, ruling out justification of the second draft order altogether as is crystal clear from the language of the section.

    6. Reading the contents of section 144B of the Act, it would appear and it is submitted accordingly that when the Income-tax Officer proposes to make any variation in the income or loss prejudicial to the assessee, the Income-tax Officer has to forward a draft of the proposed order of assessment to the assessee. The provision is further elicited specifying inviting objections and procedure to deal with the objections on the basis of the draft order. The provisions of section 144B(4) further spell out as to what is to be done by the Income-tax Officer on receipt of the objections from the assessee. It is enacted that such draft order together with the objections is to be placed before the Inspecting Assistant Commissioner who is empowered to issue such directions for the guidance of the Income-tax Officer in the process of completion of assessment. The provision spells out particulars regarding affording an opportunity to the assessee making it clear that the Income-tax Officer shall be bound by the directions issued by the Inspecting Assistant Commissioner.

    7. It would be convenient also to consider the provisions of section 144A of the Act in the context as the provisions of both the sections relate to the same purpose in regard to the action of the Income-tax Officer. The said provision empowers the Inspecting Assistant Commissioner under the specified situations to call for and examine the record of any proceedings pending before the Income-tax Officer for the purpose of issuing directions, necessary or expedient as felt by the Inspecting Assistant Commissioner. The provision also particularises the requirement of affording reasonable opportunity in the matter relating to the proceedings before the Inspecting Assistant Commissioner.

    8. Firstly, reading the provisions of these sections, the sections introduce and provide procedure to be adopted by the Income-tax Officer on the one hand and the Inspecting Assistant Commissioner on the other, in regard to the matters which are considered necessary or expedient in regard to which certain directions are decided. The provisions also relate to a situation requiring a fresh look at situations which have escaped assessment and in that process certain safeguards are provided and it will have to be observed that these safeguards are provided for the protection of the interest of the assessee in question. The safeguards relate to the right of hearing on the basis of principles of natural justice statutorily embodied as a consequence. The normal position that the succeeding authority has to carry forward the situation from the stage at which the situation is left by the earlier authority, it cannot be disputed, would be a norfnal situation and it is, therefore, the word “may” again to the directory nature of the provision in question. It is true that normally the stage where the proceedings are left by the earlier authority have to be continued by the succeeding authority. However, that does not mean that if it is necessary and expedient, there is no statutory power to look back even in the interest of justice. The approach to interpretation of the procedural enactment is beset with the notions of flexibility in consonance with the principle that the law of procedure is the helpmate in the process of administration and justice and cannot be a fetter in closing the view altogether with an attitude of refusal to look back.

    9. In a similar situation relating to the initiation of penalty proceedings under the earlier Indian Income-tax Act of 1922—section 28(1)(a), the Supreme Court in Guduthur Bros. v. Income Tax Officer, Special Circle, Bangalore , [1960] 40 ITR 298 had an occasion to observe that the jurisdiction of the Income-tax Officer to continue the proceedings from the stage at which the illegality occur would be to see that it is open to him to continue the proceedings because the notice under section 28(1)(a) having remained still undisposed of could be understood to be relating back to the day when the first notice was issued.

    10. In fact the provisions of section 144B of the Income-tax Act with regard to its procedural character came up for consideration before the Madhya Pradesh High Court in H.H Maharaja Raja Pawer Dewas v. CIT, [1982] 138 ITR 518, and it is observed that the provision is only on procedural matter and would be only in the nature of a procedural irregularity curable by appropriate directions by the Income-tax Officer, the prime legislative intent being to safeguard the interest of the assessee, by giving him to raise an objection, against the additions proposed to be made by the Income-tax Officer.

    11. Mention must be made to the decision of the Delhi High Court in Sudhir Sareen v. ITO, [1981] 128 ITR 445 laying down a proposition that only one draft order of assessment could be passed and the Income-tax Officer in this connection cannot be understood to have any power to issue more than one draft order. Although the decision is of the learned single judge of the Delhi High Court and thereby could be only of a persuasive value, we have carefully gone through the said decision and the emphasis is on the literal and grammatical meaning of the terms “in the first instance” and “a draft” in the said provision. It is observed that the object of the section appears to be to avoid multiplicity of proceedings and unnecessary appeals and reading the provision by reason of the use of the word “shall” used in the proviso thereto the section would be mandatory. It is further observed that the provision is bad because it might lead to a multiplicity of proceedings naturally resulting in additional harassment to an assessee.

    12. We are unable to accept the process of reasoning because of the inbuilt provisions of the two Sections making it clear that the sections came on the statute book for safeguarding the interest of the assessee to the extent that the provisions provide hearing in the matter of there being necessity or expediency to locate situations of escaped assessment. Even otherwise, as observed above occasions of coming to notice situation of irregular assessment or obvious mistakes could not be understood to be legislatively controlled to a single occasion in regard thereto. It will have to be appreciated that the draft order if it is found to be required to be modified could not also be considered to be a second draft order. It appears that the parties have proceeded on the basis that the second draft order has come into emergence when the material on record clarifies the situation to the contrary, bringing on record a situation of modification in the nature of necessary amendment to the original situation. In our judgment, such statutory provisions relating to the matters of procedure cannot be understood in the restrictive sense of literal interpretation and have to be understood that an occasion of issuance of draft assessment has to be meaningfully understood in relation to an occasion for modification. Such occasion cannot be in isolation in continuity of time and such occasion can be legitimately contemplated to occur more than once depending on the situation demanding.

    13. In our judgment, the Tribunal has taken the correct view of the situation and accordingly we confirm the same. The question referred is answered in the affirmative — in favour of the Department and against the assessee, with a clarification that in fact there is no second draft assessment from the material on record.

    14. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.

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    Comments

    Aspinwall And Co. Ltd. v. Commissioner Of Income-Tax (No. 2).
    (Feb 2, 1996)