C.K Banerji, J.:— This reference under s. 66(1) of the Indian I.T Act, 1922 (hereinafter referred to as “the Act”) is at the instance of the assessee, Katihar Jute Mills (P.) Ltd., Howrah. The relevant assessment year is 1955-56 for which the relevant accounting year is the calandar year 1954. The facts found by and/or admitted before the Tribunal are as follows
2. The assessee is a limited company owning a jute mill. The original assessment under s. 23(3) of the Act was made on the 27th January, 1960. In the said assessment a sum of Rs. 5,22,450 was brought to tax representing the price of loom hours. The assessee preferred an appeal before the AAC with regard to two points, namely, (1) treatment of the loss in speculative transactions, and (2) certain disallowances out of expenses. The AAC disposed of the appeal in the following terms
“Before the Income-tax Officer the contract papers were not produced. These are now produced. I have examined the account books also. I find that these are genuine business transactions and losses. However, since the Income-tax Officer has not examined the vouchers and the contract papers, I set aside the assessment with a direction to the Income-tax Officer to make the assessment again after going through the contract papers and other vouchers.
3. The next contention in the appeal regarding certain disallowances was not pressed. There is no merit in this contention and the claim is rejected.
4. In the result, the assessment is set aside with a direction to the Income-tax Officer to go through the contract papers again and do the assessment afresh.”
5. Thus the assessment went back to the ITO to be made afresh, which was not made by the ITO till 27th September, 1965. It appears, that in the meantime on the 25th April, 1965, the Supreme Court delivered its judgment in CIT v. Maheshwari Devi Jute Mills Ltd., [1965] 57 ITR 36 holding that the proceeds from sale of loom hours were of a capital nature, not assessable as income. The assessee, therefore, filed a revised return on 7th September, 1965, claiming that the sum of Rs. 5,22,450 representing the sale proceeds of loom hours was not taxable. The ITO was of the view that this claim of the assessee could not be considered at that stage because in the original assessment made on the 27th January, 1960, the said sum of Rs. 5,22,450 was included in the income of the assessee and the assessee did not prefer any appeal against this issue before the AAC. The ITO was also of the view that in view of the specific direction of the AAC to confine the enquiry to speculation loss only, he had no power at all to add to or allow any other item of income or expenditure. The ITO, accordingly, rejected the assessee's request for excluding the sum of Rs. 5,22,450 and passed a fresh assessment order dated 27th September, 1965.
6. The assessee being aggrieved, preferred an appeal before the AAC and urged that once the assessment was set aside, the whole assessment was to be made afresh and that the correct income had to be computed in accordance with the law. It was also urged that the assessee was entitled to furnish a revised return claiming certain receipts as not taxable, if in law they were so. The AAC found in favour of the assessee and held that the sum of Rs. 5,22,450 was a capital receipt not liable to tax. The AAC held that the receipt of Rs. 5,22,450 arising out of sale of loom hours was not taxable.
7. The revenue being aggrieved by the order of the AAC appealed before the Tribunal. The Tribunal held that having regard to the terms of s. 31(3)(b) of the Act and having regard to the language of the order passed by the AAC, the ITO had jurisdiction only to look into the point that had been before the AAC relating to the speculative losses and that the ITO had no power to travel outside the scope of the remand order. There was no dispute about the sum of Rs. 5,22,450 before the ITO or before the AAC and it was not open to the assessee to take advantage of the fact that the assessment had been set aside for a limited purpose and claim a different relief which was nowhere in the picture previously and that there was no method by which the assessee could raise the issue in the reassessment proceedings.
8. On the application of the assessee, the Tribunal has referred the following question to this court for determination:
“Whether, on the facts and circumstances of the case, the Tribunal was right in holding that in case of an appeal from an assessment framed after being set aside with the direction by the Appellate Assistant Commissioner, the Appellate Assistant Commissioner was precluded from entertaining a plea based on the latest decision of the Supreme Court in the subsequent appeal?”
9. Mr. J.C Paul, learned counsel for the assessee, inter alia, urged that the assessee did not know at the time when the original assessment was made by the ITO, that the receipt from sale proceeds of loom hours was a capital receipt and not a revenue receipt and as such was not taxable. He urged that the order dated 17th October, 1960, of the A AC (hereinafter for the sake of brevity referred to as “the first order”) set aside the assessment and, therefore, the whole assessment was at large and it was open to the assessee to urge any question or make any claim before the ITO in the fresh assessment proceedings. The Supreme Court had laid down that receipt from sale proceeds from loom hours is not a revenue receipt, but a capital receipt, and, therefore, not taxable. The ITO, therefore, could not and had no jurisdiction to include it in the taxable income of the assessee and his action in assessing the sale proceeds of the loom hours, was, therefore, wholly illegal and without jurisdiction. Mr. J.C Paul further contended that the entire assessment proceedings, after it went back to the ITO was open and at large before the ITO and he could not ignore the fact that the sale proceeds of loom hours was not taxable, and it was his duty to take into account the latest legal position and make a fresh assessment subject, however, to the directions given by the AAC.
10. In support of his above contentions Mr. J.C Paul referred to and relied on a decision of the Allahabad High Court in J.K Cotton Spg. & Wvg. Mills Co. Ltd. v. CIT, [1963] 47 ITR 906, where the ITO had assessed the assessee in the original assessment on the basis of dividend declared by the company in which it held shares and on appeal the AAC set aside the assessment and directed the ITO to make a fresh assessment. But pending appeal, orders were passed under s. 23A of the Indian I.T Act, 1922, in regard to that company and dividends were deemed to be distributed out of its undistributed profits. The question was whether the ITO could in the fresh assessment include the dividends in the assessment of the assessee which the assessee was deemed to have received under s. 23A of the Act. It does not appear from the said decision as to what were the exact terms of the order of the AAC directing fresh assessment by the ITO. Their Lordships of the Allahabad High Court, however, held that, (1) the ITO could in the fresh assessment include the dividend which the assessee was deemed to have received under s. 23A; and (2) the second proviso to s. 34(3) applied and the fresh assessment could be made more than 4 years after the end of the relevant assessment year and the dividends deemed to be distributed can be included in such fresh assessment made beyond 4 years. Their Lord ships further observed as under (p. 910):
“When an Income-tax Officer makes a fresh assessment in compliance with the Appellate Assistant Commissioner's directions, he is of course bound by the directions, but, subject to them, he has the same powers as he had originally when making an assessment under section 23. The reassessment is nothing but a second assessment in substitution of the assessment made previously and set aside by the Appellate Assistant Commissioner on appeal. There are no restrictions at all on the powers of the Income-tax Officer when he proceeds to reassess the income; subject to the directions given in the Appellate Assistant Commissioner's order, he has to proceed as if he were making an assessment under section 23 at the time when he proceeds to reassess. He is not bound or restricted by anything that had happened either when he made the original assessment or when the appeal was heard by the Appellate Assistant Commissioner; he is governed only by the findings of the Appellate Assistant Commissioner. He is not bound by his own findings arrived at in the original assessment; they do not operate as res judicata and undoubtedly have not the force of an order. The findings arrived at by the Appellate Assistant Commissioner and the directions given by him are binding on him, not as res judicata, but as orders to which he is subject. He is free to take into consideration any relevant material that came into existence for the first time after the original assessment order was made by him. Consequently, the Income-tax Officer in the instant case was competent, when reassessing the income of the assessee, to consider the orders passed by him under section 23A and to treat the assessee as having derived larger income from the dividends than that shown by it in its returns and accepted as correct in the original assessment orders. He was free to take into account the materials which existed on the date of the reassessment and was not confined to those materials which existed on the date of the original assessment orders.”
11. Relying on the above observations of their Lordships of the Allahabad High Court J.C Paul argued that in the present case also, the ITO was free to take into consideration the relevant fact or material that has come into existence on the date of the fresh assessment which was made by him, namely, that the sale proceeds of loom hours were not taxable as revenue receipts and the ITO was not bound by his own findings arrived at in the original assessment orders where he had included the sale proceeds of the loom hours as revenue receipts in the taxable income of the assessee.
12. The facts and the circumstances of the above Allahabad case were entirely different from those in the case before us. In the Allahabad case, it appears that the whole assessment had been set aside by the AAC whereby the ITO in the fresh proceedings had a free hand to make the assessment afresh and new or further materials could be considered by him. This, however, is not the case before us.
13. Mr. J.C Pal next relied on another decision of the Allahabad High Court in Pt Sheo Nath Prasad Sharma v. CIT, [1967] 66 ITR 647. This was a writ application before the Allahabad High Court. The petitioner returned the amount received by him for the assessment years 1944-45 and 1945-46 as income and was assessed accordingly. Though, for the assessment year 1946-47 he claimed similar receipt as not taxable, the ITO assessed the same. The appeals to the AAC against the assessment for all the years were dismissed. Appeals before the Tribunal were also dismissed. Thereafter, the petitioner filed revision petition before the CIT under s. 33A(2) of the Indian I.T Act, 1922, for all the said 3 years. The Commissioner dismissed all the petitions on the ground that as the petitioner himself had returned the said income there was no case for interference. He, however, observed that, if assessment of Pandit Deo Sharma, the eldest brother of the assessee which was pending before the High Court in reference were confirmed by the High Court, the petitioner could move the Commissioner under s. 33A(2)(i) of the Act. Pandit Deo Sharma did not take any steps to prosecute the reference before the High Court and the same was returned by the High Court unanswered. Within one year of the High Court's order the petitioner filed a second revision petition before the Commissioner purporting to be in pursuance of the observations of the Commissioner in the earlier order. The Commissioner dismissed the said petition on the ground that as a final order has been made under s. 33A(2) another order in revision on a point which had already been covered by the earlier order in revision, could not be passed. The petitioner thereupon filed a writ petition in the High Court to quash the orders of the ITO and the Commissioner as also the recovery proceedings. On the above facts, the Allahabad High Court held, inter alia, that (pp. 651, 652)
“……the order of the Commissioner rejecting the previous applications on the mere ground that the petitioner had shown the income in his return is erroneous. The Commissioner was bound to apply his mind to the question whether the petitioner was taxable on that income…… An assessee is liable to tax, only, upon such receipt as can be included in his total income and is assessable under the Income-tax Act. The law empowers the Income-tax Officer to assess the income of an assessee and determine the tax payable thereon But whether the receipt can be considered as taxable income is quite another matter, and consideration of that question leads into the realm of law. If the Income-tax Officer assesses an assessee upon a receipt which is not taxable in law it is always open to the assessee to take the case in appeal or in revision thereafter.”
14. In Pt Sheo Nath Sharma's case, [1967] 66 ITR 647 (All), the Allahabad High Court was concerned with the question as to the powers of the different taxing authorities, in a writ application, where the entire question of jurisdiction and taxability was open before the court to be urged and decided by the court. The above observations were made in a different context and on a different set of facts and circumstances. It was not a matter, as before us, where the AAC has sent back the matter to the ITO for fresh assessment on certain specific points. Pt. Sheo Nath Sharma's case, therefore, has no application to the facts and circumstances of the present case.
15. Mr. Ajit Sen Gupta, learned counsel, appearing for the revenue, submitted that the matter before us really is a matter of construction of the first order of the AAC when he sent back the matter to the ITO. Mr. Sen Gupta urged that the first order of the AAC is to be read as a whole and a single line or sentence out of context, will not be correct in appreciating the correct intent and purpose of the order.
16. In the instant case, Mr. Sen Gupta contended that the appeal by the assessee before the AAC was only on two grounds, viz., (1) the question of treatment of loss in speculative transactions, and (2) certain disallowances out of expenses. The question of the sale proceeds of loom hours, whether the same is a capital receipt or revenue receipt or whether it is taxable or not was not at all the subject-matter of the appeal before the AAC and the said question is concluded and has merged in the order of the AAC as the finding of the ITO on that question has not been disturbed by the AAC.
17. Mr. Sen Gupta, therefore, argued that the first order, if read as a whole in its proper context, will clearly show that the entire assessment was not set aside by the AAC. On the contrary, it set aside only that part of the order which was appealed against and accepted by the AAC and that also with specific directions to the ITO to reconsider the matter on that part only. We entirely agree with the above contention of Mr. Sen Gupta. We have already quoted the first order in extenso which will clearly show that the order of the AAC did not mean or import that the entire assessment was being set aside; it set aside only that part of the assessment which related to the specific question as to the treatment of loss in speculative transactions.
18. The other question in the appeal not being pressed by the assessee itself was rejected by the AAC as unmeritorious.
19. Mr. Sen Gupta in support of his above contention relied on a decision of the Bombay High Court in the case of CIT v. Indo-Aden Salt Works Co., [1959] 36 ITR 429. The main question, however, in that case was as to the grant of relief asked for by the assessee in respect of super-tax. In the assessment, the ITO declined to grant any relief in respect of supertax. There was an appeal to the AAC by the assessee and the only point which was raised and urged by the assessee before him, was that relief in respect of super-tax had wrongly been denied to it. The AAC did not go into the merits of the question but dismissed the appeal on some other ground. He held that a registered firm not being an assessable entity quoad super-tax could not claim any such relief. At that time, he did not pass any order for enhancement of the assessment as was subsequently done by another officer who heard another appeal as the AAC. The only order that he passed in the appeal was that the appeal was dismissed. The matter was carried to the Tribunal. The Tribunal reversed the decision of the AAC. The counsel for the assessee before the Tribunal requested the Tribunal not to dispose of the question about the super-tax as the assessee wanted to lead certain evidence before the AAC in the matter of the claim relating to super-tax. The material part of the order of the Tribunal was as under
“Mr. Palkhivala for the assessee did not desire us to go into the merits of the view taken by the Income-tax Officer, for he said that the assessee wanted to lead certain evidence before the Appellate Assistant Commissioner to rebut certain statements made by the Income-tax Officer but the Appellate Assistant Commissioner did not find it necessary to go into this on the view he was going to take. He, therefore, desired that the Tribunal should set aside the Appellate Assistant Commissioner's order and direct him to deal with the assessee-firm's claim for relief from super-tax on its merits. This request is not only reasonable but proper. I would, therefore, vacate the Appellate Assistant Commissioner's order and restore the appeal with direction that it be disposed of on its merits.”
20. When the matter went back to the AAC pursuant to the directions given by the Tribunal, he fully inquired into the facts relating to supertax relief and recorded his finding. The AAC suo motu went into the question whether there was any discontinuance of business in 1933 and held that there was such discontinuance and no relief under s. 25(4) could be granted to the assessee-firm either for income-tax or super-tax. Since the ITO had already granted relief in respect of income-tax to the assessee, he withdrew that order for relief after giving due notice of enhancement to the assessee. One of the contentions of the assessee before the AAC at this hearing was that, only the question of relief in respect of super-tax was directed by the Tribunal, to be determined by him. The AAC, however, took the view that the Tribunal, in referring to the earlier order of the AAC, had used the expression “vacated” and, therefore, the Tribunal had vacated the entire order made in the earlier appeal. According to him, it was open to him to go into the entire appeal. The matter went before the Tribunal and ultimately came before the Bombay High Court in reference. Their Lordships of the Bombay High Court observed as follows (p. 435):
“It appears from that order that it was a common ground before the Tribunal at the hearing of that appeal that it was a case of succession within the meaning of section 25(4). It is also clear that the only question which the Tribunal was asked to consider and which the Tribunal had jurisdiction to consider was whether the Appellate Assistant Commissioner was right in deciding the appeal on the sole legal contention that there was no right in the assessee to claim relief in respect of super-tax. The Tribunal having reached the conclusion that the Appellate Assistant Commissioner had taken a technical and narrow view of the matter would have proceeded to go into the merits of the claim for relief in respect of supertax. It was at that stage that counsel for the assessee stated that he wanted to lead certain evidence in respect of the claim for the assessee-firm for relief from super-tax. That this was what happened before the Tribunal is expressly stated in the order of the Tribunal and it is only in this background and in this context that the words relating to vacating the order of the Appellate Assistant Commissioner and restoring of the appeal must be read. It is true that read by itself the last sentence of the order would suggest that the Appellate Assistant Commissioner was being directed to deal with the entire appeal on its own merits. The order of the Tribunal must, however, be read and understood in the proper context and in the light of all that is stated in the order itself and if we do so, as indeed we should do so, there is considerable force in the submission on behalf of the assessee that the order must be read as restricting the scope of the enquiry by the Appellate Assistant Commissioner only to the question of merits affecting the claim for relief from super-tax.”
21. Mr. Sen Gupta next relied on a decision of the Andhra Pradesh High Court in the case of Pulipati Subbarao and Co. v. AAC, [1959] 35 ITR 673. In this case, the petitioner-firm which was previously assessed in the status of a registered firm was assessed for the year 1952-53, as an unregistered firm on the ground that it did not file an application for registration. The petitioner appealed to the AAC not on the actual assessment but only with regard to the refusal of the ITO to treat the firm as a registered firm. The AAC was satisfied that there was an application for registration. He, therefore, set aside the assessment and directed the ITO to receive a duplicate application and to deal with it according to law. The ITO, however, called upon the petitioner to produce its account books to make a fresh assessment. The petitioner applied to the High Court, inter alia, for the issue of a writ of prohibition restraining the ITO from making a de novo assessment.
22. Mr. Sen Gupta relying on this decision submitted that undoubtedly under s. 31 powers of the AAC are wide enough. He can confirm an assessment, he can set aside the entire assessment, he can make a fresh assessment, he can enhance the assessment, he can entertain the appeal in his file and send it back to the ITO for certain enquiries and to submit a report. He can also set aside the assessment on specific grounds or questions and send it back to the ITO for fresh assessment on those points as has been done in the present case.
23. Mr. Sen Gupta relied on the following observations of their Lordships of the Andhra Pradesh High Court in Pulipati Subbarao & Co.'s case, [1959] 35 ITR 673 which may be quoted as under (p. 675):
“Pursuant to the order passed by the Appellate Assistant Commissioner it is open to the Income-tax Officer to consider the one and the only question referred to him, viz., whether the firm's application for registration should be allowed. There is no other question before the Income-tax Officer and he would certainly be transgressing the limits set down by law if he were to embark upon a fresh enquiry as to the quantum of the income or the loss incurred by the petitioner.”
24. Mr. J.C Paul further submitted that it was a fundamental question and a fundamental right of the assessee as to the taxability or non-taxability of an amount and that cannot be taken away by the order of the AAC which set aside the assessment order.
25. In the case before us, if the entire assessment order had been set aside, the contention of Mr. J.C Paul would have been unassailable but unfortunately the fact is not so. There was no dispute with regard to the assessability of the sale proceeds of the loom hours at any stage of the proceedings. The AAC also did not consider that question at all, inasmuch as, that was not one of the points before him in appeal. The order of the AAC setting aside the assessment was only partial and to the extent as to the question of treatment of a loss in speculative transaction, as clearly indicated in the order itself. The order of the AAC, if read as a whole, in its proper context would clearly show that it was neither the intent nor the purpose nor the import of the order that the whole assessment was set aside and everything is kept at large so as to allow the ITO to make a fresh assessment on all the aspects of the matter and give a free hand to the assessee to make all claims and all arguments in that assessment. In that view of the matter, we are unable to accept the contentions of Mr. J.C Paul. The hands of the ITO and in appeal against his order, of the AAC were tied.
26. We, therefore, answer the question in the affirmative and in favour of the revenue. There will be no order as to costs.
Dipak Kumar Sen, J.:— I agree.