Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 375 of 1975

Judges

Dipak Kumar Sen
C.K Banerji, JJ.

Acts

s. 271(1)(c) read with s. 274(2) of the I.T Act, 1961.
section 271(1)(c) of the Income-tax Act, 1961,
s. 147(a) of the I.T Act, 1961,
s. 147 of the I.T Act, 1961,

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Smart Summary

Judgment Summary — Sen, J. (with Banerjee, J. concur.)

Factual and Procedural Background

This reference concerns reassessment proceedings against Rawatmal Harakchand (the assessee) for the assessment year 1957-58. The ITO issued a notice under section 147 of the Income-tax Act, 1961, and brought to tax two sums — Rs. 51,711 and Rs. 1,86,061 — on the ground that these amounts had escaped assessment because the assessee allegedly failed to disclose necessary material particulars.

Penalty proceedings followed and the IAC imposed a penalty of Rs. 2,00,000 under section 271(1)(c) read with section 274(2). On appeal to the AAC, the addition of Rs. 1,86,061 was upheld while a relief of Rs. 6,000 was granted against the Rs. 51,711 addition. Further appeals were taken to the Tribunal.

The Tribunal examined the validity of reassessment under section 147(a) and found procedural defects: the ITO had not recorded reasons to support his belief of omission and the Commissioner had given approval under section 151(2) in a mechanical fashion without applying his mind. Relying on Supreme Court decisions (Chhuga-mal Rajpal and Sheo Nath Singh), the Tribunal held the notice under section 148 invalid for lack of two essential pre-requisites.

Despite earlier noting that only the validity would be agitated and merits would be heard later if proceedings were valid, the Tribunal proceeded to consider merits and deleted the addition of Rs. 1,86,061 but sustained the other addition (Rs. 51,711, net of a Rs. 6,000 relief by the AAC, i.e., Rs. 45,711).

Both the Commissioner (revenue) and the assessee applied for a reference under section 256(1); several questions were referred to this Court for decision.

Legal Issues Presented

Whether, having held the reassessment invalid in respect of one addition, the Tribunal was justified in sustaining the retained addition of Rs. 45,711 (assessee's referred question)?
Whether the Tribunal, having upheld the addition of Rs. 45,711, was justified in holding the reassessment invalid in respect of the other addition of Rs. 1,86,061 (revenue's Question No. 1)?
Whether, given that the assessee disclosed Rs. 51,711 in a revised return filed in response to the notice under section 148, the department had no onus to adduce further proof that the assessee furnished incorrect particulars of income (revenue's Question No. 2)?
Whether, on a correct interpretation of section 271(1)(c), the Tribunal was justified in cancelling the penalty (revenue's Question No. 3)?

Arguments of the Parties

Assessee's Arguments (Mr. Sanjoy Bhattacharyya)

The sole issue before the Tribunal was the validity of the reassessment under section 147; if reassessment was invalid then reassessments and associated penalty would be annulled.
The Tribunal itself recorded that appeals should be adjourned on merits if proceedings were validly initiated; the Tribunal later held the section 148 notice invalid because (a) the ITO did not record reasons when initiating proceedings, and (b) the Commissioner did not apply his mind when giving approval.
Therefore, once initiation was held invalid, all subsequent proceedings and orders (including sustaining the Rs. 45,711 addition) were also invalid; the Tribunal could not sustain that addition in the same invalid proceedings.

Revenue's Arguments (Mr. Bagchi)

The contentions of the assessee raised a new and different question; the Tribunal did not hold that the reassessment was wholly invalid.
Before the AAC the assessee only sought a set-off of Rs. 12,000 against the Rs. 51,711 (and not deletion of the entire sum), and the AAC granted a relief of Rs. 6,000; on that basis the assessee had effectively waived objection to the reassessment's machinery and was estopped from challenging the entire addition.
Authorities were cited to support the principle that statutory procedural conditions may be waived and that waiver can preclude later objections (cases cited: Chalturam v. CIT; Commissioner of Agrl. I.T. v. Sultan Ali Gharami; Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons, with reference to Phillips v. Martin and Craies on Statute Law).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chhuga-mal Rajpal v. S.P. Chaliha, [1971] 79 ITR 603 (Supreme Court)	Support for invalidity of notices under s.148 where essential pre-requisites are absent.	The Tribunal relied on this decision in holding the notice under s.148 invalid; the Court noted the Tribunal followed this authority to find essential pre-requisites were missing.
Sheo Nath Singh v. AAC, [1971] 82 ITR 147 (Supreme Court)	Support for invalidity of notices under s.148 where essential pre-requisites are absent.	The Tribunal relied on this decision alongside Chhuga-mal Rajpal to hold the s.148 notice invalid; the Court recorded that the Tribunal applied these authorities in reaching invalidity.
Chalturam v. CIT, [1947] 15 ITR 302 (Federal Court)	Principle that issue/receipt of a notice is not necessarily the foundation of the ITO's jurisdiction to assess; statutory procedural conditions may not always be jurisdictional.	Cited by revenue counsel (Mr. Bagchi) to support waiver/estoppel arguments. The Court observed that the decision was relied on by revenue but ultimately held such authorities had little application to the facts of the present case.
Commissioner of Agrl. I.T. v. Sultan Ali Gharami, [1951] 20 ITR 432 (This Court)	Authority on possible waiver as to the machinery of taxation (in the context of a Bengal Agrl. I.T. Act matter).	Cited by revenue counsel to support waiver arguments. The Court found the case of limited application to the present facts and did not accept the waiver argument as applicable here.
Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons, [1974] 96 ITR 390 (Supreme Court)	Principle (quoting English authority) that a party may waive statutory provisions intended for his benefit and equity may prevent a party using statutory machinery to defeat equities created by his own conduct.	Cited by revenue counsel to support waiver/estoppel. The Court recorded the citation but held that the principle had little application in the instant facts; the Court rejected the submission that the assessee had waived objections to reassessment.
Phillips v. Martin (English authority, cited in Pooran Mall)	Illustrative English authority on waiver: a party may by conduct waive statutory provisions intended for his benefit.	Quoted in Pooran Mall and relied upon by revenue's submissions. The Court noted the citation but determined the waiver principle did not assist the revenue in this case.

Court's Reasoning and Analysis

The Court examined the factual and procedural record and the questions referred. It addressed the competing contentions in turn:

On the assessee's contention that the Tribunal's finding of invalid initiation of reassessment (because the ITO had not recorded reasons and the Commissioner had approved mechanically) necessarily invalidated all subsequent proceedings: the Court agreed with this legal proposition. It stated that once initiation is held invalid, whatever follows must also be invalid, and none of the additions could lawfully be sustained.
On the revenue's contention that the assessee had waived objections (because it had sought only a limited set-off before the AAC and obtained a partial concession), the Court rejected this. The Court found no evidence of waiver or any agreement between the parties. It observed that the assessee had preferred two appeals before the Tribunal, including one against retention of the addition. There was no basis to conclude the assessee had waived objections to the reassessment jurisdiction.
The Court considered the authorities cited by the revenue (including Chalturam, Sultan Ali Gharami, Pooran Mall). It concluded that those decisions and the principles of statutory construction relied upon had little application in the facts of the present case.
The Court criticized the Tribunal for proceeding to decide the merits of additions despite earlier recording that only the validity of initiation would be considered and that merits would be heard later if necessary. The Court described it as surprising that the Tribunal determined the merits after concluding invalidity of initiation.
Having applied these principles to the specific referred questions, the Court answered the questions in the manner stated below (see Holding and Implications). The Court also noted that one of the revenue's referred questions (Question No. 2) did not call for an answer in view of the other answers rendered.

Holding and Implications

Core Ruling: The initiation of the reassessment proceedings was invalid; consequently the addition of Rs. 45,711 could not lawfully be sustained, and the penalty under section 271(1)(c) was canceled.

More specifically, the Court answered the referred questions as follows (as recorded in the judgment):

The assessee's referred question — whether the Tribunal was justified in sustaining the addition of Rs. 45,711 after holding reassessment invalid for the other addition — was answered in the negative and in favour of the assessee. (The Tribunal was not justified in sustaining that addition when initiation was invalid.)
Revenue's Question No. 1 — whether the Tribunal, having upheld the addition of Rs. 45,711, was justified in holding the reassessment invalid in respect of the other addition — was answered in the affirmative and in favour of the assessee (i.e., the Court upheld the Tribunal's finding of invalidity as to the other addition).
Revenue's Question No. 2 did not call for an answer in view of the above determinations.
Revenue's Question No. 3 — whether the Tribunal was justified in cancelling the penalty under section 271(1)(c) — was answered in the affirmative and in favour of the assessee (penalty cancelled).

Direct consequences for the parties:

The reassessment initiation was held invalid in respect of the questioned additions; the addition of Rs. 1,86,061 was deleted by the Tribunal and the Court's findings mean the retained addition (Rs. 45,711 net after AAC relief) could not be sustained because it arose in proceedings whose initiation was invalid.
The penalty of Rs. 2,00,000 imposed under section 271(1)(c) read with section 274(2) was cancelled.
There was no order as to costs.

The opinion does not set out broader doctrinal changes beyond applying established principles that procedural invalidity in initiation of reassessment vitiates subsequent additions; the judgment confines itself to the facts and questions referred in this case.

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Rawatmal Harakchand v. Commissioner Of Income-Tax (And Vice Versa)

The Judgment of the Court was delivered by

Sen, J.:— This reference relates to reassessment of Rawatmal Harakchand, the assessee, in respect of its income for the assessment year 1957-58. After issuing a notice under s. 147 of the I.T Act, 1961, the ITO brought to tax two sums, respectively, of Rs. 51,711 and Rs. 1,86,061, on the ground that the same escaped assessment in the said assessment year as the assessee failed to disclose necessary material particulars.

2. Pursuant to the reassessment there were penalty proceedings and a penalty of Rs. 2,00,000 was imposed by the IAC under s. 271(1)(c) read with s. 274(2) of the I.T Act, 1961. In the appeal preferred by the assessee against the reassessment, the AAC upheld the addition of Rs. 1,86,061 but gave a relief of Rs. 6,000 in respect of the addition of Rs. 51,21-1.

3. Thereafter, further appeals were preferred by the assessee against the order of the AAC as also against that of the IAC.

4. The Tribunal went into the question of the validity of the reassessment made under s. 147(a) of the I.T Act, 1961, and found that the ITO had not recorded any reasons to establish his belief that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts. It was found further that all that the ITO had recorded was merely his belief that some income had escaped assessment.

5. The Tribunal also found that, prior to the issue of the notice under s. 148 of the Act, the Commissioner recorded his satisfaction under s. 151(2) of the Act in a mechanical fashion. The Tribunal observed that it did not appear that the Commissioner had applied his mind before he accorded his approval.

6. Following the decisions of the Supreme Court in the case of Chhuga-mal Rajpal v. S.P Chaliha, [1971] 79 ITR 603 and in the case of Sheo Nath Singh v. AAC, [1971] 82 ITR 147, the Tribunal held that the notice issued under s. 148 of the Act was invalid inasmuch as two essential pre-requisites for the issuance thereof did not exist.

7. Thereafter, the Tribunal went on to consider the reassessment order on its merits, though the Tribunal had noted earlier in its order that it was understood that only the validity of the reassessment would be agitated before the Tribunal and if it were held that the proceedings were validly initiated then there will be a further hearing on merits on an adjourned date.

8. The Tribunal held that the addition of Rs. 1,86,061 was to be deleted But held that the addition of the other sum, i.e, Rs. 51,711 against which the AAC had given a relief of Rs. 6,000 was correct.

9. From this order of the Tribunal both the Commissioner, West Bengal, and the assessee applied for a reference and, under s. 256(1) of the Act, the following question has been referred to this coart at the instance of the assessee:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the addition in respect of the addition of Rs. 45,711 having held the reassessment to be invalid in respect of the addition of Rs. 1,86,061?”

10. The following questions have been referred at the instance of the revenue:—

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal, having upheld the addition of Rs. 45,711 was justified in holding the reassessment to be invalid in respect of the other addition of Rs. 1,86,061?

(2) Whether, on the facts and in the circumstances of the case and in view of the fact that the assessee had disclosed in its revised return filed in response to the notice under section 148 an income of Rs. 51,711 which it failed to disclose in its original return, the department had no onus to adduce any further proof of the assessee having furnished incorrect particulars of its income?

(3) Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 271(1)(c) of the Income-tax Act, 1961, the Tribunal was justified in cancelling the penalty?”

11. Mr. Sanjoy Bhattacharyya, learned counsel for the assessee, has contended before us that the only issue before the Tribunal was the validity of the reassessment made under s. 147 of the I.T Act, 1961. It was the admitted position before the Tribunal that both the reassessments and penalty were liable to be annulled in case it was held that the proceedings were invalid. The Tribunal recorded that the appeals should be posted for further hearing on merits in case it was held that the reassessment proceedings were validly initiated.

12. Mr. Bhattacharyya submitted further that the Tribunal has categorically held that the notice issued under s. 148 to the assessee was invalid by reason of: (a) no reasons having been recorded by the ITO while initiating the proceedings, and (b) the Commissioner not applying his mind before according his approval to the proceedings. Therefore, it must be held that all proceedings and orders passed thereafter must be held to be invalid. The conclusion was inescapable that the initiation of the reassessment proceedings having been held to be invalid, the Tribunal could not sustain the addition of Rs. 45,711 in the same invalid proceedings. He urged that the question raised by the assessee must be answered in its favour.

13. Mr. Bagchi, learned advocate appearing for the revenue, contended on the other hand that the contentions of the assessee raised a new and different question. He submitted that the Tribunal has nowhere held that the reassessment was wholly invalid. Mr. Bagchi drew our attention to the fact that before the AAC the only contention of the assessee was that there should be a set-off of Rs. 12,000 from the amount added, that is, Rs. 51,211. The assessee did not claim that the entire sum should be deleted. On the basis of the submission of the assessee, the AAC allowed a relief of Rs. 6,000.

14. Mr. Bagchi submitted that, in the circumstances, it must be held that the assessee waived its objection to the inherent jurisdiction of the ITO to reassess the assessee's income for the said assessment year and obtain a relief in its favour and, therefore, the assessee was estopped from contending that the entire addition must be deleted. It was open to the assessee to only agitate the question of further set-off.

15. In support of his contentions Mr. Bagchi cited the following decisions.

16. First was a decision of the Federal Court in the case of Chalturam v. CIT, [1947] 15 ITR 302. This decision was cited for the proposition laid down by the Federal Court as follows (p. 307):

“The income-tax assessment proceedings commence with the issue of a notice. The issue of receipt of a notice is not, however, the foundation of the jurisdiction of the Income-tax Officer to make the assessment or of the liability of the assessees to pay the tax. It may be urged that the issue and service of a notice under section 22(1) or (2) may affect the liability under the penal clauses which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice.”

17. Mr. Bagchi next cited a decision of this court in the case of Commr. of Agrl. I.T v. Sultan Ali Gharami, [1951] 20 ITR 432. This case relates to proceedings under the Bengal Agrl. I.T Act and a Division Bench of this court observed that there could be a waiver as to the machinery of taxation which inures against the subject.

18. Lastly, Mr. Bagchi cited a decision of the Supreme Court in the case of Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sons, [1974] 96 ITR 390. In this case the Supreme Court quoted with approval the principle laid down in an English case, Phillips v. Martin (11 NSWLR 153) as follows:

“‘Here there is abundant evidence of waiver, and it is quite clear that a man may by his conduct waive a provision of an Act of Parliament intended for his benefit. The caveator was not brought into court in any way until the caveat had lapsed. And now the applicant, after all these proceedings have been taken by him, after doubtless much expense, has been incurred on the part of the caveator, and after lying by and hoping to get a judgment of the court in his favour, asks the court to do that which but for some reasons known to himself he might have asked the court to do before any other steps in the proceedings had been taken. I think he is altogether too late. It is to my mind a clear principle of equity and I have no doubt there are abundant authorities on the point, that equity will interfere to prevent the machinery of an Act of Parliament being used by a person to defeat equities which he has himself raised, and to get rid of a waiver created by his own acts

19. Following the above principle the Supreme Court held that there was an agreement between the parties in that case to the effect that the ITO may pass a fresh order within two months of the order of the High Court and such an agreement proceeded on the basis that the ITO had jurisdiction to pass a fresh order. The Supreme Court held that thereby the respondent had waived the period of limitation prescribed by s. 132(5) of the Act and the ITO had jurisdiction to pass a fresh order. The Supreme Court also quoted with approval the following passage from Craies on Statute Law, 6th edn., p. 249:

“As a general rule, the conditions imposed by statutes which authorise legal proceedings are treated as being indispensable to giving the court jurisdiction. But if it appears that the statutory conditions were inserted by the legislature simply for the security or benefit of the parties to the action themselves, and that no public interests are involved, such conditions will not be considered as indispensable and either party may waive them without affecting the jurisdiction of the court.”

20. On a consideration of the facts and circumstances of the present case, we are unable to accept the contentions of Mr. Bagchi. The question which has been referred at the instance of the assessee and the question No. 1 referred at the instance of the department, both proceeded on the basis that addition on reassessment has been retained and some other addition has been deleted. The deletion has been made on the sole ground that the initiation of the reassessment proceedings were invalid. In that view of the matter, it is open to the assessee to contend within the framework of the question referred that the addition of Rs. 45,711 retained by the Tribunal was incorrect. This is not a new question.

21. Further, it does not appear to us that in the instant case there has been any waiver by the assessee. It was the assessee who preferred two appeals before the Income-tax Appellate Tribunal, one being against the retention of the addition in reassessment by the AAC. There was no question of any waiver nor any agreement between the assessee and the revenue. The decisions cited by Mr. Bagchi and the principles of statutory construction as enunciated by the said decisions have little application in the facts and circumstances of the instant case.

22. The law is quite clear. Once the initiation of reassessment proceedings is held to be invalid whatever follows thereafter must also necessarily be invalid and none of the additions could have been sustained by the Tribunal. It is surprising that the Tribunal having proceeded to deter-mine the matter only on the question of invalidity of the initiation and postponing the hearing of the appeals on merits, went on to consider the merits of the additions.

23. For the reasons stated above we answer the questions as follows:

24. The question of the assessee is answered in the negative and in favour of the assessee.

25. The question No. 1 raised by the department is answered in the affirmative and in favour of the assessee.

26. In view of the answer to the above questions, question No. 2 as raised by the revenue does not call for any answer. Question No. 3 is answered in the affirmative and in favour of the assessee.

27. In the facts and circumstances, there will be no order as to costs.

Banerjee, J.:— I agree.

Rawatmal Harakchand v. Commissioner Of Income-Tax (And Vice Versa)

Judgment Summary — Sen, J. (with Banerjee, J. concur.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Mr. Sanjoy Bhattacharyya)

Revenue's Arguments (Mr. Bagchi)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Rawatmal Harakchand v. Commissioner Of Income-Tax (And Vice Versa)

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