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  • Mr. K.D. Sharma
  • Mr. Guman Mal Lodha
  • Kumari Kanta Bhatnagar
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  • Mr. Guman Mal Lodha
  • Kumari Kanta Bhatnagar
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Smart Summary

Structured Summary of the Opinion (Income-tax reference under s.256(1) of the Income-tax Act, 1961)

Factual and Procedural Background

The assessee, M/s. Kanhaiyalal, Cycle Dealer, Bhilwara, who dealt in cycle parts, accessories and cycle hiring, filed a return for the assessment year 1962-63. The ITO made an initial assessment under section 143(1) on March 30, 1967 assessing total income at Rs. 4,106 (the amount declared in the return). The ITO later initiated proceedings under section 147 on the ground that certain investments in a house property were not satisfactorily explained and, on January 22, 1968, completed a reassessment under section 143(3) read with section 147 fixing total income at Rs. 29,399.

The assessee appealed to the AAC, which on September 5, 1968 held that the action taken under section 147(1) was illegal and set aside the reassessment. Thereafter the Commissioner, exercising powers under section 263, issued a show-cause notice and on March 26, 1969 passed an order under section 263 setting aside the original 143(1) assessment dated March 30, 1967 on the ground that it was prejudicial to the revenue for not taking note of the unexplained investments.

The assessee appealed to the Income-tax Appellate Tribunal (Tribunal) challenging the Commissioner's order. The Tribunal (vide order dated October 25, 1971) held that the action under section 147 stood wiped off by the AAC's order and that the original assessment under section 143(1) survived; it rejected the assessee's contention that the Commissioner's order amounted to revision of a reassessment. The assessee sought a reference of questions of law to the High Court under section 256(1); the Tribunal made the reference containing two specific questions of law.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the order of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 dated March 26, 1969 had the effect of revising an order of reassessment made under section 147?
  2. Whether, on the facts and in the circumstances of the case, the impugned order of the Commissioner of Income-tax was valid in law?

Arguments of the Parties

Appellant (Assessee) — Mr. S.K. Kackar

  • The assessment order passed by the ITO under section 143(1) on March 30, 1967 merged into the reassessment under section 143(3) read with section 147 dated January 22, 1968, and that reassessment in turn merged in the AAC's order setting aside the reassessment; therefore, the Commissioner could not, under section 263, revise what was effectively an order of reassessment made under section 147.
  • The investments relating to the house construction had been fully explained and inquired into by the ITO in the original assessment, so that the Commissioner's exercise under section 263 was not justified because the original order was not erroneous or prejudicial to the revenue.
  • Relied on the authorities: Commissioner Of Commercial Taxes, Bihar v. Rohtas Industries Ltd. and CIT v. Gopal Krishna Singhania; later referred also to CIT v. R.K. Metal Works and Commissioner Of Income Tax v. Messrs Kishori Lal Sunder Lal to support his contention regarding enquiry and correctness of original assessment.

Respondent (Revenue) — Mr. L.R. Mehta

  • Proceedings under section 147 (reassessment) are supplementary to the original assessment and are not identical with the original assessment; if reassessment is set aside, the original assessment (section 143(1)) subsists and does not merge into the AAC's order setting aside reassessment.
  • The Commissioner has power under section 263 to revise an order if it is erroneous and prejudicial to revenue; the term "erroneous" includes failure of the ITO to make necessary inquiries into facts stated in the return.
  • Relied upon the Full Bench authority in CIT v. Gopal Krishna Singhania for the supplementary-character contention and on Gee Vee Enterprise v. Additional Commissioner of Income Tax for the proposition that "erroneous" may include failure to inquire into the truth of facts stated in the return.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Commercial Taxes, Bihar v. Rohtas Industries Ltd., [1979] 43 STC 484 (Pat) Cited by the assessee in support of the contention that the initial assessment merged in the reassessment and so could not be revised by the Commissioner under section 263. The Court recorded that the assessee relied on this authority but rejected the underlying merger contention on the facts: the Court held the original 143(1) assessment subsists despite the subsequent illegal reassessment and AAC order.
CIT v. Gopal Krishna Singhania, [1973] 89 ITR 27 (All) (Full Bench) Relied upon by both parties: cited by the assessee for merger-type arguments, and relied upon by the revenue (Full Bench) for the proposition that proceedings under section 147 are supplementary to the original assessment. The Court considered the competing uses of this precedent and, on the facts, agreed with the revenue's position that reassessment proceedings are supplementary and that the original assessment remains subsisting when reassessment is set aside; thus the Court did not accept the assessee's reliance to establish merger.
CIT v. R.K. Metal Works, [1978] 112 ITR 445 Cited by the assessee in support of the submission that the ITO had properly inquired into the investments and that the original assessment was not erroneous. The Court noted the citation but found on the record that the ITO had not applied his mind to the relevant facts in the original assessment; therefore the precedent, as invoked, did not alter the Court's conclusion that the Commissioner's revisional action was justified on these facts.
Commissioner Of Income Tax v. Messrs Kishori Lal Sunder Lal, [1974] 96 ITR 310 (All) Cited by the assessee (in support of the contention that the ITO had inquired and the original order was not erroneous). The Court recorded the reference but concluded that the factual record did not show adequate inquiry by the ITO; accordingly the Court did not accept the assessee's reliance as defeating the Commissioner's action under section 263.
Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax…, [1975] 99 ITR 375 (Delhi) Cited by the revenue for the proposition that the word "erroneous" in section 263 can include the ITO's failure to make inquiries into the truth of facts stated in the return. The Court applied this principle in substance: having found no evidence that the ITO had in fact considered the explanations regarding the property investment in the 143(1) assessment, the Court held that the Commissioner's characterization of the 143(1) order as erroneous and prejudicial to revenue was justified and the revisional order valid on the facts.

Court's Reasoning and Analysis

The Court proceeded in two stages corresponding to the two referred questions.

  1. On Question No. 1 (whether the Commissioner's order under section 263 had the effect of revising an order of reassessment under section 147), the Court analyzed the statutory roles of section 143(1) (original assessment) and section 147 (reassessment for escaped income). The Court emphasized that reassessment under section 147 is limited in scope to income that escaped assessment and is supplementary to the original assessment; it cannot legitimately be extended to re-open matters beyond the subject-matter of the section 147 proceedings. Where a section 147-based reassessment is set aside as illegal by the AAC, the Court held that the original assessment under section 143(1) remains subsisting and effective in law. Consequently, the Commissioner's order under section 263 was not an improper revision of a reassessment made under section 147. The Court answered Question No. 1 in the negative.
  2. On Question No. 2 (validity of the impugned order of the Commissioner under section 263), the Court set out the statutory conditions for exercise of revisional power under section 263: the Commissioner may revise an ITO's order only if it is both erroneous and prejudicial to the interests of the revenue, and the power is quasi-judicial, requiring examination of the records and an opportunity to the assessee. The Commissioner had reviewed the records and concluded there was no evidence that the ITO had made requisite inquiries about the construction and source of funds for the house investment in the 143(1) assessment; alternatively, even if such inquiries had been made, the Commissioner could intervene where conclusions drawn by the ITO were "erroneous on the face of it" and prejudicial.

The Court examined the factual record: the plot purchase/house construction timeline, admissions by the assessee on the cost (Rs. 18,000) versus a PWD Assistant Engineer certificate estimating cost at Rs. 20,000, and the absence of any construction cost account by the assessee. The Court found that the ITO in the original assessment had not applied his mind to these relevant facts and therefore the original 143(1) order was erroneous and prejudicial to revenue. On these findings the Court concluded that the Commissioner was justified in setting aside the assessment and directing a fresh assessment after proper inquiry. The Court therefore held the Commissioner's order under section 263 to be valid in law.

Holding and Implications

Holding: The Court resolved the reference as follows:

  • Question No. 1: answered in the negative — the order of the Commissioner dated March 26, 1969 under section 263 did not have the effect of revising an order of reassessment under section 147.
  • Question No. 2: answered in the affirmative — the impugned order of the Commissioner under section 263 was valid in law.

Implications:

  • Direct effect on the parties: The Court upheld the Commissioner's power to set aside the original section 143(1) assessment and to direct the ITO to make a fresh assessment after proper inquiry into the source of the investments in the house property; the assessee's contention that the Commissioner's order was an impermissible revision of a reassessment was rejected.
  • Broader impact: The opinion applies statutory distinctions between original assessments (section 143(1)) and reassessments for escaped income (section 147) and affirms that a reassessment set aside by appellate authority does not ipso facto extinguish the original assessment; it also endorses the proposition (as applied to the facts) that an ITO's failure to inquire into material facts may render an order "erroneous" within the meaning of section 263. The opinion does not purport to set out any novel principle beyond its statutory interpretation and application to the facts of this case.

Disposition: The reference made by the Income-tax Appellate Tribunal, Jaipur, is decided in accordance with the answers given above.

Show full summary ...

    Kanhaiyalal v. Commissioner Of Income-Tax.

    Sharma, A.C.J:— The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has drawn up a statement of case and referred it to this court under s. 256(1) of the I.T Act, 1961, hereinafter referred to as “the Act”, upon an application by the assessee, M/s. Kanhaiyalal, Cycle Dealer, Bhilwara.

    2. The statement of the case is as follows:

    The assessee was dealing in cycle parts and accessories and in hiring of cycles. The ITO assessed the income of the assessee for the assessment year 1962-63 under s. 143(1) of the Act on March 30, 1967, at Rs. 4,106 which amount was declared by the assessee in its return. Subsequently, the ITO took proceedings against the assessee under s. 147 of the Act in respect of the aforesaid assessment year on the ground that certain investments made by the assessee in a house property were not properly explained by him. Pursuant to this action the ITO made another assessment of the income of the assessee under s. 143(3) read with s. 147 of the Act on January 22, 1968, and determined his total income at Rs. 29,399. Aggrieved by this order of the ITO dated January 22, 1968, the assessee preferred an appeal to the AAC of Income-tax on the ground that all the material facts relating to the investments made in the house property were disclosed by him to the ITO at the time of the first assessment which was completed on March 30, 1967, and there was no failure on his part to make a full and true disclosure of the material particulars. The AAC carefully went through the record of the case and came to a conclusion that the ground taken by the assessee in his appeal was well founded. Accordingly, he passed an order on September 5, 1968, that the action taken by the ITO under s. 147(a) of the Act was illegal and the assessment made by him was liable to be set aside. After this order was passed by the AAC of Income-tax, the Commissioner of Income-tax exercising his powers under s. 263 of the Act, issued a notice to the assessee that the order passed by the ITO under s. 143(1) of the Act on March 30, 1967, was prejudicial to the interests of the revenue inasmuch as it failed to take note of the unexplained investments made by the assessee in the property. He, therefore, called upon the assessee to show cause why the assessment order dated March 30, 1967, under s. 143(1) of the Act should not be set aside. In response to the notice, the assessee filed a written reply wherein he contended that the proposed action under s. 263 of the Act would be in contravention of the provisions of s. 263(2) of the Act, because the order passed by the ITO under s. 143(1) of the Act merged in the order of the AAC and the one proposed to be passed by the Commissioner under s. 263(1) of the Act would virtually amount to revision of an order of reassessment made under s. 147 of the Act. The Commissioner dealt with the aforesaid objection and was of the view that the action taken by the ITO under s. 147 of the Act had merged in the order of the AAC vacating it and, therefore, no order under s. 147 of the Act is subsisting and so the action proposed to be taken by him under s. 263 of the Act would not amount to revision of the order of reassessment made under s. 147 of the Act. In this view of the matter, he overruled the objection raised by the assessee and passed an order under s. 263 of the Act setting aside the order of assessment passed by the ITO under s. 143(1) of the Act on March 30, 1967.

    3. The assessee, thereupon, preferred an appeal against the order of the Commissioner dated March 26, 1969, to the I.T Appellate Tribunal and assailed the order on various grounds. The main ground in the appeal was that the assessment order passed by the ITO under s. 143(1) on March 30, 1967, had merged in the order of reassessment passed by him under s. 143(3) read with s. 147 on January 22, 1968, and this order of reassessment had again merged in the order of the AAC dated September 5, 1969, and so the orders sought to be revised by the Commissioner under s. 263 of the Act is the order which had merged in the order passed under s. 147 of the Act and no order under s. 263(1) of the Act could legally be made by the Commissioner to revise an order of reassessment made under s. 147 of the Act. The Tribunal heard the appeal and was of the view that the action taken against the assessee under s. 147(a) of the Act stands wiped off after it was set aside by the AAC, vide his order dated September 5, 1969, and the order under s. 143(1) of the Act survived and so the order of the Commissioner under s. 263(1) of the Act cannot be held to have revised the order of reassessment made under s. 147 of the Act. Accordingly, the Tribunal held, vide its order dated October 25, 1971, that the order of the Commissioner did not suffer from the infirmity pointed out by the assessee. The assessee, thereupon, required the Income-tax Tribunal to refer to the High Court this question of law arising out of its order and filed an application before the Tribunal to this effect. The I.T Tribunal, therefore, has made this reference to this court on the following questions of law which, in its opinion, arise out of its order:

    “1. Whether, on the facts and in the circumstances of the case, the order of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, dated March 26, 1969 had the effect, of revising an order of reassessment made under s. 147?

    2. Whether, on the facts and in the circumstances of the case, the impugned order of the Commissioner of Income-tax was valid in law?”

    4. Notice of this reference was issued to the assessee as well as to the I.T authorities. Mr. S.K Kackar appeared on behalf of the assessee and Mr. Lekh Raj Mehta put in his appearance on behalf of the I.T authorities. We have carefully perused the record and heard the learned counsel for the parties.

    5. Before dealing with question No. 1, referred to us for our decision by the I.T Appellate Tribunal we would like to observe that s. 147 of the Act empowers the ITO to take proceedings under this section against an assessee who had concealed his income or to assess income which escaped assessment in the relevant assessment year. In the instant case, the ITO, in the first instance, made an assessment of the total income of the assessee for the assessment year 1962-63 under s. 143(1) of the Act after making such adjustments to the income declared in the return as are required to be made under cl. (b) of sub-s. (1) of s. 143 of the Act. The assessment under s. 143(1) of the Act was made at Rs. 4,106 which amount was declared by the assesee in the return. Later on, the ITO took proceedings under s. 147 of the Act against the assessee in respect of the same assessment year as he was of the view that certain investments made by the assessee in a house property had escaped assessment for the relevant year and determined the total income of the assessee at Rs. 29,399 under s. 143(3) read with s. 147 of the Act. Aggrieved by this order of the ITO, dated January 22, 1968, the assessee preferred an appeal to the AAC on the ground that neither the assessee had concealed his income nor his income had escaped assessment in the relevant assessment year. The AAC accepted the appeal and passed an order on September 5, 1968, that the action taken by the ITO under s. 147(1) of the Act was illegal. Accordingly, he set aside the assessment made by him. Thereafter, the Commissioner while exercising his power under s. 263 of the Act, served a notice on the assessee that the order passed by the ITO under s. 143(1) of the Act on March 30, 1967, was prejudicial to the interests of the revenue inasmuch as the unexplained investments made by the assessee in the house property were not taken note of or considered in the order. He, therefore, called upon the assessee to show cause why the assessment order dated March 30, 1967, under s. 143(1) of the Act should not be set aside. The assessee has, therefore, contended that the proposed action taken by the Commissioner under s. 263 of the Act is illegal as it contravenes the provisions of s. 263(2) of the Act, because the order passed by the ITO in the first instance under section 143(1) of the Act had merged in the order of the AAC and so no order can be made under s. 263(1) of the Act to revise an order of reassessment made under s. 147 of the Act. In support of his above contention Mr. S.K Kackar, appearing on behalf on the petitioner, placed reliance upon Commissioner Of Commercial Taxes, Bihar v. Rohtas Industries Ltd., [1979] 43 STC 484 (Pat) and CIT v. Gopal Krishna Singhania, [1973] 89 ITR 27 (All) [FB]. Mr. L.R Mehta, appearing on behalf of the revenue, contended that the proceedings under s. 147 of the Act for assessment of the escaped income are not identical with the original assessment proceedings, but they are proceedings supplementary to the original assessment proceedings and if the assessment made in the proceedings under s. 147 of the Act is set aside by the AAC the original assessment still subsists and cannot be held to have merged in the order of the AAC setting aside the proceedings for escaped income. In support of his above contention, Mr. L.R Mehta relied upon an authority of the Full Bench of the Allahabad High Court in CIT v. Gopal Krishna Singhania, [1973] 89 ITR 27 (All) [FB].

    6. We have considered the rival contentions. The contention put forward before us by S.K Kackar is devoid of substance, because the order passed by the ITO in the first instance under s. 143(1) of the Act must be regarded as subsisting and effective in law in spite of the fact that the subsequent order under s. 147(a) read with s. 143(3) of the Act was held to be illegal by the AAC and the assessment of the total income of the assessee for the relevant assessment year at Rs. 29,399 was set aside by him. Hence, in our opinion, it cannot be safely held that the Commissioner lost jurisdiction under s. 263(1) of the Act to revise the assessment order passed by the ITO under s. 143(1) of the Act after the order of the AAC setting aside the subsequent action taken by the ITO under s. 147(a) read with s. 143(3) of the Act. The proceedings taken under s. 147 of the Act, no doubt, could be deemed to relate to the original assessment proceedings which commenced with the return filed under s. 139(1) or the issue of the notice under s. 139(2) calling for a return of income. But when such proceedings taken under this section were held to be illegal and set aside by the AAC, the assessment order passed by the ITO in the first instance under s. 143(1) of the Act being separate from and independent of the assessment or reassessment of the income of the assessee under s. 147 read with s. 143(3) of the Act subsists and is not rendered ineffective. Under s. 147 of the Act, reassessment is made in respect of the income which has escaped assessment and the jurisdiction of the ITO under this section is restricted to such income which has escaped assessment and cannot be extended to revising, reopening or reconsidering the whole assessment. In a proceeding under this section, the assessee is not permitted to agitate again questions which had been decided in the original assessment, nor can the ITO make a reassessment which is not consistent with the original assessment in respect of the matters which do not form part of the subject-matter of the proceedings under s. 147 of the Act. In this view of the matter, we answer question No. 1 in the negative. In our opinion, the order of the Commissioner dated March 26, 1969, under s. 263 of the Act had not the effect of revising an order of reassessment made by the ITO under s. 147 of the Act.

    7. The second question referred to us is whether on the facts and in the circumstances of the case the impugned order of the Commissioner under s. 263 of the Act was valid in law. Before dealing with this question, we would like to observe that under s. 263 of the Act, the Commissioner is empowered to revise an order passed by the ITO only if it is erroneous and it is prejudicial to the interests of the revenue. If the order under revision is not erroneous and prejudicial to the interests of the revenue, the Commissioner has no jurisdiction to revise it. If after calling for and examining the record the Commissioner considers that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the revenue, then he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he thinks fit, pass such order thereon as the circumstances of the case justify including an order directing a fresh assessment. This clearly indicates that the revisional power conferred by s. 263 of the Act is a quasi-judicial power. In the instant case the Commissioner after calling for and examining the records came to a conclusion that there was no evidence to show that inquiries were made by the ITO in regard to the construction of the property in the course of the assessment for the year 1962-63, the return for which was filed voluntarily by the assessee on January 19, 1966. In the alternative, the Commissioner observed that even if inquiries had been made, he could revise the order of the ITO under s. 263, if the conclusions drawn by the ITO from the facts available are erroneous on the face of it and are prejudicial to the interests of the revenue. The relevant portion of the order of the Commissioner is quoted below as it discloses the reasons for passing an order under s. 263 of the Act:

    “There is no evidence on record to show that the inquiries were made in regard to the property constructed in the course of the assessment for this year. Shri Vyas pleads that the proceedings for 1962-63, 1963-64 and 1964-65 were going on simultaneously and these enquiries may have been made in the course of the 1964-65 proceedings. This shows that January 19, 1966, appears to be correct. The miscellaneous file for 1964-65 shows that on January 19, 1966, a hearing was fixed. In the course of hearing for that year enquiries regarding property construction were made. It is on this date, January 19, 1966, the assessee on his own voluntarily filed his return for these years. As the records stand, it cannot be said that the proceedings for the investigation in the construction of property related to the year 1962-63, to which they were relevant. In the circumstances, it is not possible to accept this contention of the assessee's counsel also. In any case, even if the enquiries had been made, it still does not bar an order under section 263 being passed if the conclusion drawn by the ITO from the facts available is erroneous on the face of it or if there has been an escapement of income liable to be assessed.”

    8. In our opinion, the aforesaid reasons given by the Commissioner are sound. It has been vehemently contended before us by the learned counsel for the assessee that the investments in question relating to the construction of the property were fully explained before the ITO who made the original assessment under s. 143(1) of the Act and it was after making a thorough inquiry about the genuineness of the source of these investments that the ITO excluded them from the total income of the assessee and, therefore, the Commissioner was not justified in revising the order under s. 263 of the Act as the order was neither erroneous, nor prejudicial to the interests of the revenue. In support of his contention Mr. S.K Kackar has referred us to CIT v. R.K Metal Works, [1978] 112 ITR 445 (Commissioner Of Income Tax… v. Messrs Kishori Lal Sunder Lal…, [1974] 96 ITR 310 (All). Mr. L.R Mehta appearing on behalf of the revenue, on the other hand, argued that the word “erroneous” used in 263 of the Act includes failure on the part of the ITO to make an inquiry into the truth of the facts stated in the return filed by the assessee and as, in the present case, the ITO did not make such an inquiry about the investments made by the assessee in the house property in the relevant assessment year before accepting the statements made by the assessee in his return, his order became erroneous and the Commissioner was justified in recording the order as erroneous on the ground that in the circumstances of the case such an inquiry should have been made. In support of his above proposition, Mr. Mehta relied upon an authority of the Delhi High Court in Gee Vee Enterprise…Petitioner v. Additional Commissioner Of Income Tax…, [1975] 99 ITR 375 (Delhi). We have considered the above contentions. The records of the case do not reveal that the ITO, while assessing the income of the assessee under s. 143(1) of the Act for the assessment year 1962-63, had considered the explanation of the assessee regarding the source of funds for the investments made in the property. It appears from the record that in this year the assessee constructed a house, the covered area of which was 133 sq. ft. The plot on which the house was constructed was purchased by him for Rs. 1,500 on August 2, 1961. After purchasing the plot, the assessee started construction work and it was alleged to have been completed within 4 or 5 months after sanction was obtained from the Municipal Board on August 2, 1961. According to the admission of the assessee, the cost of construction was Rs. 18,000, but the certificate of the Asst. Engineer, PWD (B & R), discloses that the cost of the house construction was estimated and certified to be at Rs. 20,000. The assessee denied having maintained any construction cost account or “Kamthana account”. The ITO, while assessing the income of the assessee under s. 143(1) of the Act, did not apply his mind to these relevant facts and so the Commissioner was justified in holding that the assessment made by the ITO was erroneous and prejudicial to the revenue. In our opinion, the Commissioner committed no error in setting aside the assessment and directing the ITO to make a fresh assessment after going into the merits of the explanation of the assessee regarding the sources of the funds for the investments and to arrive at a proper conclusion thereon. In this view of the matter, the order of the Commissioner revising the assessment order passed by the ITO under s. 143(1) of the Act is neither illegal nor unreasonable. Accordingly, the second question is answered in the affirmative as, in our opinion, the impugned order of the Commissioner was valid in law.

    9. The reference made by the Income-tax Appellate Tribunal, Jaipur, is, therefore, decided accordingly.

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    Comments

    Kanhaiyalal v. Commissioner Of Income-Tax.
    (Aug 19, 1980)