Grindlays Bank Plc. v. Commissioner Of Income-Tax.

The Judgment of the Court was delivered by

Suhas Chandra Sen, J.:— The Tribunal has referred the following question of law under section 256(1) of the Income-tax Act, 1961, to this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of the expenditure of Rs. 2,79,717 incurred by the assessee in respect of the writ petitions by applying section 80W of the Income-tax Act, 1961?”

2. In this proceeding the assessment year involved is 1979–80 for which the relevant year of account is the year ended on December 31, 1978. The facts found by the Tribunal as contained in the statement of case are as under:

“In the relevant accounting period, the assessee paid a total sum of Rs. 3,21,207 on account of fees to lawyers in connection with various writ proceedings filed by the assessee challenging notices under sections 148 and 142(1) of the Income-tax Act, 1961, and other proceedings in the High Court. Out of the said sum of Rs. 3,21,207 a sum of Rs. 41,490 is in respect of fees paid to counsel, which relate to criminal revision proceedings for quashing criminal prosecutions launched by the Income-tax Department against the assessee-bank. The remaining amount of Rs. 2,79,717 exclusively relates to fees paid to lawyers in respect of various writ petitions, which the assessee-bank filed in the High Court at Calcutta challenging the jurisdiction of the Income-tax Officer to issue notices under sections 148 and 142(1) of the Act. The proceedings in respect whereof the assessee made the said payment to various lawyers are reported in Grindlays Bank Ltd. v. ITO, [1978] 115 ITR 799 (Cal) and Grindlays Bank Ltd. v. ITO, [1979] 116 ITR 710 (Cal). The assessee claimed the said amount by way of deduction under section 37 of the Act. In making the assessment, the Income-tax Officer allowed only Rs. 4???,490 out of the total claim of Rs. 3,21,207; of the balance sum of Rs. 2,79,717, the Income-tax Officer restricted the allowance to Rs. 5,000 by applying section 80W of the Act. On appeal, the Commissioner of Income-tax (Appeals) sustained the said order of the Income-tax Officer. On further appeal before the Tribunal, it was submitted on behalf of the assessee that by the writ application the assessee challenged the competent authority and/or jurisdiction of the Income-tax Officer to initiate proceedings under section 147 of the Act and/or to issue the notices under sections 148 and/or 142(1) of the Act and the said writ proceedings do not relate to determination of any liability under the Act by way of tax, penalty or interest and, consequently, the expenditure incurred by the assessee in respect of the said proceedings does not and/or cannot come within the mischief of section 80W of the Act. It was also submitted before the Tribunal that by the Finance Act, 1985, section 80W has been omitted with effect from April 1, 1986, and re-enacted with modifications in section 40A(12). Attention of the Tribunal was drawn to the change in the language which has been introduced in section 40A(12) of the Act which has been inserted by the said Finance Act, 1985, with effect from April 1, 1986. The Tribunal negatived the aforesaid contentions made on behalf of the assessee by making the following observations:

“The issuance of notices under section 148 and/or section 142(1) is the basis for starting income-tax proceedings for determination of tax, penalty or interest. The tax, penalty or interest could not be determined unless the notices under sections 148, 142(1) and 139(2) are issued. Therefore, the notices which were issued by the Income-tax Officer are the basis for starting of the proceedings for determination of tax, penalty or interest. The assessee being aggrieved by these notices went to the High Court through writ petitions and challenged the jurisdiction. However, that is a different issue, but the expenditure was in respect of the income-tax proceedings which were started by the Income-tax Officer by issuing notices under sections 148 and 142(1) for determination of the penalty or interest. Under the above circumstances, after considering the arguments and the case-law and the paper book of the assessee, it is concluded that the amount was rightly disallowed by the Commissioner of Income-tax (Appeals) under section 80W of the Act.”

It will appear from the judgment in the case of Grindlays Bank Ltd. v. ITO, [1979] 116 ITR 710 (Cal), that two writ petitions were moved on behalf of the Grindlays Bank Ltd. challenging the notice issued under section 148 of the Income-tax Act, 1961, in respect of the assessment years 1958–59, 1966–67 to 1970–71. The two writ petitions were disposed of by a common judgment because identical questions of fact and law arose in both the cases. The case of the assessee was that although all the relevant and material facts were before the original Assessing Officer, there was no non-disclosure of any material fact on the basis of which reassessment proceedings could have been initiated for the aforesaid assessment years. It was held by T.K Basu J (at page 723) : “I am of the opinion, after going through the records and the correspondence, that the Income-tax Officers at the time of the original assessments were fully aware of the various items of claim as part of the head office expenses. If some item was wrongly allowed as a deduction, it was entirely due to an error on the part of the Assessing Officer and cannot be held to be due to any omission or failure on the part of the assessee. It is pointed out that any alleged information with regard to the reorganisation and with regard to the head office expenses in connection with the assessment year 1971–72 cannot be called any material regarding head office expenses for the earlier assessment years, viz., 1967–68 to 1971–72. Therefore, for those years, the Income-tax Officer cannot be held to have reason to believe that any income has escaped assessment because of excessive head office expenses being allowed due to any omission or failure on the part of the petitioners.”

3. It was further held that the notices under section 148 for the assessment years 1969–70 and 1970–71 could not be sustained even under section 147(b) of the Act. It was held on the basis of the materials and submissions made that even for the assessment years 1969–70 and 1970–71, there was no “information” within the meaning of section 147(b) of the Act which could justify reopening.

4. It has been submitted by Dr. Pal that this judgment was upheld by the appeal court. Section 80W does not impose any fetter upon the power of the Income-tax Officer to allow and the right of the assessee to get deduction of expenditure incurred by him in resisting unlawful reopening of assessment. Section 80W as it stood at the material time is as under:

“Section 80VV. In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under this Act, by way of tax, penalty or interest:

Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees.”

5. Dr. Pal invited our attention to section 40A(12) which is as under:

“No deduction shall be allowed in excess of ten thousand rupees for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee),—

(a) for services (not being services by way of preparation of return of income) in connection with any proceeding under this Act before any income-tax authority or the Commission constituted under section 245B or a competent authority within the meaning of clause (b) of section 269A or the Appellate Tribunal or any court;

(b) for services in connection with any other proceeding before any court, being a proceeding relating to tax, penalty, interest or any other matter under this Act; and

(c) for any advice in connection with tax, penalty, interest or any other matter under this Act.”

6. It is the contention of Dr. Pal that the scope of section 40A(12), which was introduced by the Finance Act, 1985, with effect from April 1, 1986, is much wider than the provisions of section 80W which were introduced to prevent allowance of expenditure over the stated limit in respect of tax, penalty, interest or any other matter under this Act. Therefore, if any expenditure has been incurred after April 1, 1986, in connection with any matter under the Income-tax Act, 1961, that expenditure will not be allowable irrespective of the nature of the expenditure. But in the instant case in view of the limited language of section 80W the assessee's claim for allowance of expenditure incurred in connection with section 148 has to be allowed.

7. I am of the view that the contention of the assessee must be upheld. The writ petitions were filed challenging the validity of the initiation of proceedings under section 148 of the Income-tax Act, 1961. After the assessment is over, the Income-tax Officer becomes functus officio and he cannot reopen the assessment except under very limited circumstances. In order to initiate reassessment proceedings, the Income-tax Officer has to issue a proper notice under section 148. In order to acquire jurisdiction, he has to fulfil all the conditions laid down in section 147 or section 148 of the Act. The reasons for initiating reassessment proceedings will have to be recorded and then a proper notice will have to be served upon the assessee.

8. All the steps must be taken within the period of limitation prescribed under the statute. In this case, the assessee challenged the initiation of the proceedings by way of writ petition on the ground that there were no valid reasons for issuance of the notice under section 148 against the assessee for the assessment years 1969–70 and 1970–71. The assessee's case was that there was no information in the possession of the Income-tax Officer on the basis of which he could proceed under section 147(b). Both the contentions were upheld by this court. Therefore, the challenge was to unlawful assumption of jurisdiction by the Income-tax Officer. The attempt on the part of the assessee was to prevent the Income-tax Officer from assuming jurisdiction in violation of the provisions of the statute. The writ proceedings could not in any way be described as proceedings “relating to the determination of any liability under this Act, by way of tax, penalty or interest”. The questions raised in the writ petition were more fundamental in nature. Did the Income-tax Officer have jurisdiction to reopen a completed assessment? This jurisdiction could only be acquired in accordance with the procedure laid down by the statute and after fulfilling the conditions laid down in the statute. The Tribunal was in error in holding that the provisions of section 80W of the Act did not permit the assessee to claim deduction of the expenditure incurred in connection with challenging the validity of a notice purportedly issued under section 148.

9. The next question relates to the challenge of notices issued by the Income-tax Officer under section 142(1) of the Act. These notices were also challenged by the assessee by way of a writ petition. The case of the assessee is that the notices required the bank to produce the books of account of their head office in support of the entries made in the balance-sheet. These notices were issued without any application of mind. The documents had no bearing on the assessment that was being made in India.

10. A notice under section 142(1) is not a jurisdictional notice. It is a part of the proceedings for computation of income under section 143. It is merely a step taken for the purpose of determination of the total income of the assessee under the Income-tax Act. The assessee might have had good reasons for feeling aggrieved by the notice. But the point remains that a notice under section 142 is issued in connection with and for the purpose of assessment proceedings. It is a step taken for the purpose of computation of income of the assessee and ascertaining the assessee's tax liability. If the issuance of a notice is challenged by the assessee then in effect the assessee is challenging the assessment proceedings. Therefore, the expenditure incurred for the purpose of proceedings taken to quash the notice under section 142(1) comes within the mischief of the proceedings of section 80W. The Federal Court in the case of Chatturam v. CIT, [1947] 15 ITR 302 observed (at page 308):

“The liability to pay the tax is founded on sections 3 and 4 of the Income-tax Act, which are the charging sections. Section 22, etc., are the machinery sections to determine the amount of tax.”

11. Therefore, the Income-tax Officer by issuing the notice under section 142 was merely trying to determine the tax payable by the assessee. It was a step taken for the purpose of computation of the total income and the tax payable thereon.

12. Section 22 of the 1922 Act has been split up and reproduced in a number of sections. Section 142(1) of the Income-tax Act, 1961, substantially reproduces the provisions of section 22(4) of the Indian Income-tax Act, 1922. In Chatturam's case, [1947] 15 ITR 302 (FC), the following observation of Lord Dunedin in Whitney v. IRC, [1926] AC 37 was relied upon (at page 308 of 15 ITR):

“Now, there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But the assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay.”

13. Section 142(1) deals with enquiry before assessment. For the purpose of making an assessment, the Income-tax Officer has served a notice upon the assessee asking him to produce some documents. This is specifically provided for by section 142(1). Section 142(2) generally provides that 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. All these enquiries are for the purpose of assessment and in aid of determination of the tax liability of the assessee. The expenditure incurred in connection with any proceedings taken by the assessee challenging the steps taken by the Income-tax Officer for computation of the liability of the assessee will clearly come within the mischief of section 80W. Therefore, in our view the expenditure incurred in connection with the proceedings challenging the notices under Section 142(1) of the Income-tax Act, 1961, is not allowable under the provisions of section 80W of the Act. The question raised is answered in the manner following:

The Tribunal was not justified in holding the disallowance of the expenditure incurred by the assessee, in respect of the writ petition challenging the validity of the notices under section 148 of the Income-tax Act, 1961. The Tribunal, however, was justified in upholding the disallowance of expenditure incurred by the assessee in respect of the writ petition challenging the validity of the notices under section 142(1) of the Income-tax Act, 1961.

14. There will, however, be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.