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Himmatsingka Motor Works Ltd. v. Commissioner Of Income-Tax

Calcutta High Court

Jan 24, 1990

Judgment

Subsequent
References

CaseIQ

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Factual and Procedural Background

This reference arises under section 256(1) of the Income-tax Act, 1961. The Tribunal referred the following question:

Whether, on the facts, the Tribunal was justified in holding that the Income-tax Officer (ITO) was entitled to drop proceedings initiated under section 147 on ascertaining that there was no escapement of income, and that the ITO was not obliged to determine the loss on the basis of returns filed within the time available to the assessee under section 139(4).

The assessment years are 1973–74 and 1974–75 (accounting periods ending October 31, 1972 and October 31, 1973). The assessee is a limited company which did not file returns suo motu within the time prescribed by section 139(1) for the relevant financial years. The ITO issued notices under section 148 on May 12, 1975 (served June 21, 1975). The assessee filed returns pursuant to those notices declaring losses of Rs. 64,699 and Rs. 30,644 for the two years.

After examining the books, the ITO concluded that the business resulted in losses as declared and dropped the proceedings under section 147/148 by an order stating: “After examination of accounts, I find that the net result of the business was loss. As, under section 147, loss cannot be determined, the proceedings with the issue of notice under section 148 are hereby dropped.”

The Commissioner of Income-tax (Appeals) affirmed the ITO's order. The assessee appealed to the Tribunal, which held that the ITO's action in dropping proceedings was correct if, on the returns, the ITO concluded there was no escapement. The Tribunal accordingly framed the legal question referred to this court.

Legal Issues Presented

Whether the Tribunal was justified in holding that the Income-tax Officer could drop proceedings under section 147 after ascertaining that there was no escapement of income, and therefore was not obliged to determine the loss on the basis of returns filed within the time available under section 139(4).

Arguments of the Parties

Arguments Presented by the Revenue (Mr. Bagchi)

Section 147 allows the ITO to "assess or reassess such income or recompute the loss or the depreciation allowance". The use of the word "recompute" demonstrates that section 147 presupposes an earlier computation of loss; recomputation presupposes prior computation.
Therefore, section 147 cannot be used to perform an initial computation of loss or to permit the assessee to have a loss computed and carried forward where there was no prior computation.

The opinion does not provide a detailed, separate statement of the assessee's counter-arguments in the form presented by counsel; the assessee's position is reflected through the Tribunal's and the court's discussion and through cited authorities.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Burdwan Wholesale Consumers' Co-Operative Society Ltd. v. Commissioner Of Income-Tax, [1991] 191 ITR 570 (I.T. Reference No. 22 of 1985)	Held that where a return showing loss is filed pursuant to a section 148 notice (and within the time for filing under section 139(4)), the assessee could claim that the loss be computed and carried forward; a loss return may be filed any time before assessment under section 143.	The court applied this authority as directly on point, treating the instant case as squarely within the principles laid down in Burdwan and relying on it to permit computation and carry forward of loss.
V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373 (Supreme Court)	Principle that once assessment is reopened by issuing a notice under the relevant provision, the previous underassessment is set aside and the whole assessment proceedings start afresh (i.e., assessment proceedings proceed de novo).	Used to support the proposition that reopening under section 148/147 sets the assessment at large and requires fresh proceedings, which would include assessing loss if a return discloses loss.
ITO v. Mewalal Dwarka Prasad, [1989] 176 ITR 529 (Supreme Court)	Reiterated the principle that reopening sets the assessment at large and proceedings proceed afresh.	Relied upon as a recent reiteration of the de novo assessment principle supporting fresh consideration of items including losses.
CIT v. Assam Oil Co. Ltd., [1982] 133 ITR 204 (Cal)	Held that upon reopening the entire assessment is at large and the whole assessment proceedings start afresh.	Cited as judicial support (Calcutta High Court) for the view that a reopened assessment permits comprehensive reassessment including computation of loss.
CIT v. Ramsevak Paul, [1977] 110 ITR 527 (Division Bench)	Reiterated the view that reopening renders the entire assessment at large.	Used as an additional authority confirming that reopened assessments are to be dealt with de novo.
CIT v. Indian Rare Earth Ltd., [1990] 181 ITR 22 (Bombay High Court, Full Bench)	Held that once valid proceedings under section 147 are started, the duty of the ITO is to complete the whole assessment de novo.	Applied to show that the ITO cannot drop proceedings merely because the de novo assessment might result in a loss which could be carried forward; duty is to complete assessment.
Co-operative Marketing Society Ltd. v. CIT, [1983] 143 ITR 99 (Madhya Pradesh High Court)	Assessed that the assessee could claim loss on a return filed pursuant to a section 148 notice, provided the return was filed within time.	Relied upon for the proposition that returns filed under section 148 (within statutory time) can support a claim to compute and carry forward losses.
M.P. Jalan v. CWT (Wealth-tax Act matter, judgment dated December 22, 1989)	Under a provision analogous to section 147 of the Income-tax Act (but in the Wealth-tax Act), the assessee in reassessment proceedings was entitled to claim deduction in accordance with law; the assessing officer could not ignore a lawfully filed return.	Cited by the court by analogy to reinforce that an officer in reassessment proceedings must assess on the basis of a return lawfully filed and cannot ignore it.
CST v. H.M. Esufali H.M. Abdulali, [1973] 90 ITR 271	Expressed a similar view in the sales tax context that supports the principle of reopening leading to fresh proceedings.	Used as supporting authority in the broader survey of case law parallel principles across taxes.
State of Maharashtra v. Central Provinces Manganese Ore Co. Ltd., [1977] 39 STC 340 (SC)	Applied similar principles in sales tax jurisprudence.	Referenced as part of the body of authorities endorsing that reopening permits reconsideration of the whole assessment.

Court's Reasoning and Analysis

The court proceeded by examining the statutory framework and earlier authorities, and applied that law to the facts. The principal steps in the court's analysis were:

Characterisation of the reopening: The court noted that the assessment was reopened under section 147(a) because the assessee had failed to file returns within the time prescribed. Section 152(2) (which permits dropping proceedings) was observed to be framed in a way that specifically allows dropping only where reopening arises under clause (b) of section 147, and there is no specific statutory power to drop proceedings when reopening is under section 147(a). The court thus emphasized that the case concerned reopening for non-filing of returns.
Factual sequence and timing: The ITO issued section 148 notices on May 12, 1975, at which time the assessee still had the statutory right to file loss returns under section 139(4) (deadlines being March 31, 1976 and March 31, 1977 for the respective years). The assessee filed returns pursuant to the section 148 notices declaring losses. The ITO later dropped proceedings on the ground that “under section 147, loss cannot be determined.”
Precedent directly on point (Burdwan): The court relied on the Burdwan Wholesale Consumers' Co-Operative Society Ltd. decision which held that an assessee who files a loss return pursuant to a section 148 notice (and within the time for filing under section 139(4)) may claim computation and carry forward of the loss; a loss return may be filed any time before assessment under section 143.
Analysis of the Revenue's textual argument: The Revenue contended that section 147's use of the word "recompute" indicates that recomputation presupposes a prior computation, so section 147 could not be used to compute loss where there was no earlier computation. The court rejected this narrow construction, noting the express language of section 147 permits the ITO to "assess or reassess such income or recompute the loss or the depreciation allowance" — in other words, the ITO has power to assess income or loss whether or not an earlier assessment of loss exists. The Explanation to section 147 (referenced by the court) confirms that cases where excessive loss has been computed are examples of escapement; but this does not curtail the ITO's basic power to make an assessment.
Legal fiction and assessment machinery: The court explained that when a notice is given under section 148 and the assessee files a return pursuant to that notice, the proceedings must be treated as if the return had been filed under section 139(2) — a legal fiction. The only statutory machinery available to the ITO for making assessment in that scenario is under section 143 (or section 144 where relevant), and specifically section 143(3)(a) contemplates assessment of total income or loss. Therefore, if the return discloses a loss, the ITO is bound to make an assessment of that loss.
Construction for assessee vs. Revenue and supporting authority: The court rejected a construction that would interpret section 147/148 for the exclusive benefit of the Revenue. It cited V. Jaganmohan Rao v. CIT and several subsequent authorities (including ITO v. Mewalal Dwarka Prasad, CIT v. Assam Oil Co. Ltd., and decisions of various High Courts) to underscore the principle that once assessment is reopened it is at large and the assessment proceedings must proceed de novo. The court reasoned that this duty to complete the assessment de novo cannot be circumvented by the ITO dropping proceedings on the basis that the result of such a full assessment might be a loss to be carried forward.
Protection of assessee's statutory right to file a loss return: The court emphasized that the statutory right of an assessee to file a loss return under section 139(4) up to the relevant date for assessment cannot be destroyed by the mere issuance of a section 148 notice. A section 148 notice does not deprive the assessee of the right to file a loss return within the statutory period, and the ITO cannot ignore a lawfully filed return.
Analogous authority under the Wealth-tax Act: The court cited a comparable decision under the Wealth-tax Act (M.P. Jalan v. CWT) to illustrate that an assessing officer in reassessment proceedings is obliged to assess on the basis of a lawfully filed return.

Holding and Implications

Holding: The court answered the referred question in the negative and ruled in favour of the assessee. The ITO was not justified in dropping the proceedings on the ground stated; where a return disclosing loss is filed pursuant to a section 148 notice (and within the time permitted under section 139(4)), the loss must be assessed and may be carried forward in accordance with law.

Direct implications for the parties:

The assessee is entitled to have the declared losses computed (i.e., assessed) and to claim carry forward of those losses in accordance with the statute and established principles.
The ITO, having initiated valid proceedings under section 147/148 and having received a return disclosing loss, must proceed to make the assessment through the machinery of section 143 (not drop proceedings on the stated ground).
There will be no order as to costs.

Broader implications and precedent: The court's decision applies existing principles of law and expressly relies on earlier authorities; the opinion does not purport to lay down a novel legal principle beyond reaffirming that reopening leads to de novo proceedings and that lawfully filed returns pursuant to section 148 cannot be ignored. (The opinion applies prior case law rather than announcing a new departure from earlier jurisprudence.)

Show all summary ...

The Judgment of the Court was delivered by

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

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Income-tax Officer was entitled to drop the proceedings initiated by him under section 147 on ascertaining that there was no escapement of income, and that the Income-tax Officer was not obliged to determine the loss on the basis of the said returns on the ground that the returns in question had been filed within the time available to the assessee for filing the return in terms of sub-section (4) of section 139?”

2. The assessment years involved in this reference are the assessment years 1973–74 and 1974–75, for which the relevant accounting period were the years ending on October 31, 1972, and October 31, 1973, respectively. The facts of the case as narrated by the Tribunal in the statement of case are as under:

“The assessee is a limited company. Returns of income for the assessment years 1973–74 and 1974–75 were not filed by it suo motu within the time prescribed under section 139(1) or for that matter in the finan-cial years Concerned, namely, financial years 1973–74 and 1974–75. The Income-tax Officer, therefore, initiated proceedings against the assessee-company under section 148 by issuing notices under the said section in respect of the aforesaid two years on May 12, 1975. The notices in question came to be served on the assessee-company on June 21, 1975. The assessee-company filed its returns of income in compliance with the afore-said notices declaring losses of Rs. 64,699 and Rs. 30,644 in respect of the two years referred to above. The Income-tax Officer called for the account books of the assessee-company in respect of the two years and, after examination thereof, he was convinced that the net result of the assessee's business in respect of the aforesaid two years was loss as declared by the assessee-company. He, therefore, refused to proceed further and accordingly he dropped the proceedings under section 147/148 in respect of the two years. The operative part of the order of the Income-tax Officer reads in respect of both the assessment years as follows : “After examination of accounts, I find that the net result of the business was loss. As, under section 147, loss cannot be determined, the proceedings with the issue of notice under section 148 are hereby dropped.”

3. The Commissioner of Income-tax (Appeals) affirmed the order of the Income-tax Officer on this point. There was a further appeal to the Tribunal by the assessee in which the Tribunal held, inter alia, as follows:

“The Tribunal, after examining the rival submissions, observed that resort to provisions of section 147 could be had only if the Income-tax Officer came to the conclusion on the basis of the returns filed under section 147 that there was no escapement of income, the Income-tax Officer could drop the proceedings initiated under section 147. The action of the Income-tax Officer according to the Tribunal was, therefore, correct.”

4. It must be noted that, under section 152(2), the Income-tax Officer has been specifically empowered to drop a proceeding initiated under section 147 only where the assessment is reopened in circumstances falling under clause (b) of section 147. There is no specific power given to the Income-tax Officer to drop the proceedings after initiating a proceeding under the circumstances mentioned in section 147(a). In the instant case, no return was filed by the assessee for the relevant two assessment years. The reopening of the assessment, therefore, was on the ground of non-filing of the return which would be under section 147(a).

5. The Income-tax Officer has recorded in the assessment order that since the assessee had not filed the return even within the extended time, the assessee's income chargeable to tax had wholly escaped assessment and, accordingly, the proceedings under section 147 of the Income-tax Act were started and a notice under section 148 was issued on May 12, 1975.

6. Therefore, there cannot be any controversy that the reopening of the case was made under section 147(a) for non-filing of the return.

7. The next question is whether the assessee was entitled to claim computation or assessment of loss on the basis of the returns filed by it pursuant to a notice under section 148. The assessment years involved in this case are the assessment years 1973–74 and 1974–75. The returns of income could be filed by the assessee in respect of these two assessment years showing loss by March 31, 1976, and March 31, 1977, respectively. But, on May 12, 1975, the Income-tax Officer issued notices under section 148 for both the assessment years. In other words, on the date on which the Income-tax Officer issued the notices under section 148 calling upon the assessee to file the returns in the prescribed form, the assessee still had time to file the returns voluntarily showing the loss for these two assessment years 1973–74 and 1974–75. On November 18, 1977, the Income-tax Officer came to the conclusion that:

“After examination of accounts, I find that the net result of the business was loss. As, under section 147, loss cannot be determined, the proceedings started with the issue of notice under section 148 are hereby dropped.”

8. The question is whether, in such circumstances, the assessee can claim computation of the loss for these two years and also carry forward of the losses. This controversy was gone into and decided in the case of Burdwan Wholesale Consumers' Co-Operative Society Ltd. v. Commissioner Of Income-Tax., [1991] 191 ITR 570 (I.T Reference No. 22 of 1985), by this court on January 9, 1990, where it was held that, in such a situation, that assessee could claim that the loss must be computed and carried forward, even though the return of income showing loss and filed pursuant to the notice under section 148. It was further held in that case that a loss return could be filed by the assessee at any time before making of the assessment under section 143. Therefore, the assessee, within that time limit, could file a loss return under section 139(4) but if section 148 notice was issued even before the period for filing such loss return was over, the assessee could take advantage of the notice under section 148, by filing a return showing loss. The instant case comes squarely within the principles of law laid down in that case.

9. Mr. Bagchi, appearing for the Revenue, has contended that there are certain aspects of the case which were overlooked in the earlier judgment. He has drawn our attention to the language of section 147 which is as follows:

“147. Income escaping assessment.— If—

(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assesement year,

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allow-ance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).”

10. Section 148 of the Income-tax Act reads as follows:

“148. Issue of notice where income has escaped assessment.— (1) Before making the assessment, reassessment or recomputation under section 147, the Income-tax Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.

(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.”

11. Mr. Bagchi has contended that under section 147, the Income-tax Officer may only recompute the loss or depreciation allowance or he can assess or reassess the income that has escaped assessment. His contention is that the language of the section is quite clear, namely, that if the loss has been already assessed, then the Income-tax Officer has got the power to recompute the same under section 148 but if there was no assessment or if there was no computation of loss, there cannot be any question of recomputation of the loss. According to him, recomputation pre-supposes earlier computation of loss. Therefore, Mr. Bagchi has contended that section 147 cannot be utilised for computation of loss and carry forward of the same.

12. In our view, this argument cannot be sustained in view of the clear language of the section itself. The Income-tax Officer has been empowered to assess or reassess such income or compute the loss or the depreciation allowance as the case may be. In other words, the Income-tax Officer can assess the income or the loss or the depreciation allowance, whether this has been done previously or not. The Explanation to section 147 makes it quite clear that certain cases shall be deemed to be cases where the income chargeable to tax had escaped assessment and one of such cases is where excessive loss or depreciation allowance has been computed. In such a situation, the Income-tax Officer is entitled to reopen a case under section 147 and can recompute the excessive loss or depreciation allow-ance. But the basic right of the Income-tax Officer to make an assessment has not been taken away or curtailed by this provision.

13. If a notice has been given under section 148 and if the assessee files a return pursuant to that notice, the entire proceedings of the assessment will have to be gone through from the stage of return filed by the assessee, as if the return has been filed under section 139(2) of the Act. This is the legal fiction. The only section under which the Income-tax Officer can make an assessment is under section 143 or section 144. Section 143(3)(a) provides as follows:

“143. (3)(a) in a case where no assessment has been made under sub-section (1), the Income-tax Officer shall, by an order in writing, make an assessment of 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.”

14. Having initiated the proceeding under section 148, the Income-tax Officer will have to make an asessment through the machinery of section 143(3)(a). If the return discloses loss, the Income-tax Officer will have to make an assessment of that loss. It is to be noted that the Legislature has not used the expression “computation of loss” in section 143(3). The Income-tax Officer can make the assessment of total income or loss as the case may be.

15. The next question is whether the section must be confined to the purpose of roping in income which had escaped assessment. Or, in other words, should the section be construed for the benefit of the Revenue and not for the benefit of the assessee. The Supreme Court in the case of V. Jaganmohan Rao v. CIT/CEPT, [1970] 75 ITR 373, has held at page. 380 as follows:

“It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous underassessment is set aside and the whole assessment proceedings start afresh.”

16. The above principle has been reiterated by the Supreme Court recently in the case of ITO v. Mewalal Dwarka Prasad, [1989] 176 ITR 529.

17. In the case of CIT v. Assam Oil Co. Ltd., [1982] 133 ITR 204 (Cal), it was held by Sabyasachi Mukharji J. (as His Lordship then was) as follows (at pages 219 and 220):

“It was urged that upon the assessment being reopened the entire assessment was at large. It appears to us that it is so. Once an assessment is reopened, a notice is given for a fresh return in respect of all the items. This view is corroborated by the observations of the Supreme Court, though it was made in a different context, in the case of V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373, where at page 380, the Supreme Court, inter alia, made the following observations:

‘Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous underassessment is set aside and the whole assessment proceedings start afresh.’”

18. This view was also reiterated by the Division Bench of this court in the case of CIT v. Ramsevak Paul, [1977] 110 ITR 527. In the case of Cit v. Bombay Dyeing & Mfg. Co. Ltd, [1971] 82 ITR 892, at page 895, the Supreme Court had left this question open “… The Supreme Court in a sales tax case in the case of CST v. H.M Esufali H.M Abdulali, [1973] 90 ITR 271, at page 280, expressed the same view as also in the case of State Of Maharashtra v. Central Provinces Manganese Ore Co. Ltd., [1977] 39 STC 340 (SC). The Andhra Pradesh High Court in the case of CWT v. Subakaran Gangabhishan, [1980] 121 ITR 69 [FB] applied the sales tax principle in the case of a wealth-tax case.”

19. Recently, the Madhya Pradesh High Court in the case of Co-opera-tive Marketing Society Ltd. v. CIT, [1983] 143 ITR 99 has also taken the view that the assessee could claim loss on the basis of the return filed pursuant to a notice under section 148, provided the return was filed within time. A Full Bench of the Bombay High Court in the case of CIT v. Indian Rare Earth Ltd., [1990] 181 ITR 22 held that once valid proceedings under section 147 of the Income-tax Act, 1961, were started, it was the duty of the Income tax Officer to complete the whole assessment de novo. The Bombay High Court has also taken the view that once a valid proceeding was started, the assessment was nothing but a fresh assessment. It must be noted that the Supreme Court, in the case of Jaganmohan Rao (V.) v. CIT, [1970] 75 ITR 373, has said that it is not only the juris-diction but the duty of the Income-tax Department to complete the whole assessment de novo. If that be so, the Income-tax Officer is not entitled to drop the proceedings on the ground that if the assessment proceeding has to be gone through with full force, then the result would be loss which may have to be carried over.

20. There is another aspect of the case. The assessee could have filed a loss return at any time before the assessment was made. Therefore, it could as of right file a return under section 139(4) up to March 31, 1976, and March 31, 1977, for the assessment years 1973–74 and 1974–75, respec-tively. That right could not be taken away by issuing a notice under section 148. In the instant case, when the notices under section 148 were issued on May 12, 1975, the assessee could still file the return of loss. The issuance of the notice under section 148 cannot destroy that right of the assessee to file a claim for loss to be computed and carried forward. Such a construction of the provision of section 148 should be avoided.

21. On a similar provision under the Wealth-tax Act, this court also held in the case of M.P Jalan v. CWT (Matter No. 113 of 1981-judgment dated December 22, 1989), that the assessee in a reassessment proceeding under the Wealth-tax Act was entitled to claim deduction in accordance with law. The Income-tax Officer could not ignore a return lawfully filed and had to make assessment on the basis of the return filed.

22. In that view of the matter, the question is answered in the negative and in favour of the assessee. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.