Himachal Pradesh High Court
Green World Corporation vs Income-Tax Officer And Ors. on 2 March, 2006
Equivalent citations: I(2007)ACC441, 2007ACJ1472, (2006)205CTR(HP)524, [2006]285ITR118(HP), 2006(2)SHIMLC22
Author: Surjit Singh
Bench: Surjit Singh
JUDGMENT Surjit Singh, J.
1. The writ petition and the income-tax appeal, whose numbers and particulars are given in the title of the judgment, raise common questions of law, arising out of the facts common to both the matters and, therefore, the same are being disposed of by a common judgment.
2. First the facts may be noticed. Green World Corporation, a partnership concern of Shri R. S. Gupta and his wife Smt. Sushila Gupta, apparently set up two units at Parwanoo in Himachal Pradesh for manufacturing exercise books, writing pads, etc., some time in the year 1995, soon after the declaration and enforcement of tax holiday for certain period specified in the Union Budget. Later on they claimed to have set up a third unit for manufacturing of computer software. They started filing income-tax returns in the year 1996-97 (assessment year) showing huge profits. In the return for the year 2000-01 they stated that their total sales were to the tune of Rs. 1,51,69,515 out of which a sum of Rs. 74,69,314 was net profit, meaning thereby that the profits bore a proportion of 49 per cent, to the gross sales. For the earlier assessment year, i.e., 1999-2000, the proportion of the net profit to the total sales was as high as 66 per cent, because out of the total sales of Rs. 2,97,12,106 net profits were declared to be to the tune of Rs. 1,96,77,631. For the subsequent three assessment years, i.e., 2001-02, 2002-03 and 2003-04, the proportionate net profits to the gross sales were 81 per cent., 95 per cent, and 95 per cent, respectively. The total investment on plant and machinery for unit No. 1 was shown to be just Rs. 1,25,000 and a very small amount of money was shown to have been spent on plant and machinery for the second unit. The Assessing Officer, Parwanoo, on receipt of the return of income for the year 2000-01 on July 26, 2001, in which the entire amount of income i.e., Rs. 74,69,314 was claimed by way of deduction, under Section 80-IA of the Income-tax Act, proceeded to conduct a survey under Section 133A of the Act on February 7, 2002. On December 19, 2002, he completed the assessment by passing an order, under Section 143(3) of the Income-tax Act, accepting the return in which the taxable income was shown to be nil, because the entire amount of net profits was claimed as deduction, under Section 80-IA of the Act. According to the appellant, i.e., the Commissioner of Income-tax, Shimla, this order dated December 19, 2002, was passed by the Assessing Officer on uncalled for interference by his predecessor in the performance of judicial functions of the Assessing Officer and the fact was borne out from a footnote recorded by the said Assessing Officer on the order itself. When the incumbent of the post of the Commissioner of Income-tax, who allegedly interfered and on whose dictates the order dated December 19, 2002, purports to have been passed, was transferred and his successor came to know that the said order had been passed on account of illegal interference by his predecessor, he proceeded to exercise, suo motu, the revisional power of the Commissioner, under Section 263 of the Income-tax Act. He issued notice to the assessee-firm, which is the respondent in the appeal and the petitioner in the writ petition, and after hearing it, passed a detailed order dated July 12, 2004, holding that the firm had not been engaged in any manufacturing process at Parwanoo, within the meaning of Sections 80-IA and 80-IB of the Income-tax Act, inasmuch as it appeared to have not engaged between ten and twenty workers, no power had been used in the manufacturing process, the business transacted between the firm and a sister concern of the partners of the firm, situated at Delhi, indicated that it (the business) was so arranged that it yielded to the assessee-firm more profits than ordinarily expected, the value of the plant and machinery transferred from unit I to unit II of the assessee-firm, was much higher than the 20 per cent, of the total value of the machinery and plant used in the business of unit I and hence no deduction could have been claimed, under Section 80-IA in view of Explanation 2 to Sub-section (2) of the said provision and the activities of the firm did not amount to manufacturing of any goods or Articles for the purpose of claiming tax holiday, under Sections 80-IA and 80-IB of the Income-tax Act. Consequently the Commissioner of Income-tax ordered that only 5 per cent, of the total declared net profits of the assessee-firm could be said to be its income from the business at Parwanoo, with respect to which deduction, under Section 80-IB of the Income-tax Act could be allowed and that the rest of the amount declared as net profits to the rune of 95 per cent., was the income of the firm from undisclosed sources and hence taxable under the relevant provisions of the Income-tax Act. At the same time the Income-tax Officer, Parwanoo, was directed to reassess the income of the firm for the earlier assessment years.
3. After the passing of the aforesaid order, the Income-tax Officer, Parwanoo, issued notices, under Section 148 of the Income-tax Act to the assessee-firm in respect of the returns filed for the assessment years 1996-97, 1997-98, 1998-99, 1999-2000, 2000-01, 2001-02, 2002-03 and 2003-04.
4. The assessee-firm filed an appeal before the Income-tax Appellate Tribunal challenging the order dated July 12, 2004 of the Commissioner of Income-tax. The Appellate Tribunal has accepted the appeal and set aside the order of the Commissioner, holding that the Assessing Officer had passed the order dated December 19, 2002, which the Commissioner of Income-tax revised purportedly in the exercise of powers, under Section 263 of the Income-tax Act, on the basis of enquiry conducted by her (Income-tax Officer) and as such the said order called for no interference by the Commissioner of Income-tax. The Tribunal has held that when the order of the Assessing Officer was based on enquiry, the Commissioner of Income-tax could not have interfered with the same, merely for the reason that his view was different from that of the Assessing Officer and while holding such a view, the Tribunal has relied upon a judgment of the hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83. The Tribunal, has also set aside the order advising the Assessing Officer to reopen the assessment for the earlier years by issuing notices, under Section 148 of the Income-tax Act.
5. The appeal has been filed under Section 260A of the Income-tax Act, through the Commissioner of Income-tax, Shimla, challenging the order the Income-tax Appellate Tribunal, whereby the order of the Commissioner of Income-tax, passed under Section 263 of the Income-tax Act, has been set aside. It is alleged that the order of the Commissioner of Income-tax, under Section 263 was well-reasoned and had been passed in lawful exercise of the revisional jurisdiction and, therefore, the Tribunal was not justified in interfering with it. It is alleged that the order of the Assessing Officer, which the Commissioner of Income-tax, has set aside, was in fact an illegal order as it had been passed on the dictates of the Commissioner of Income-tax, which dictates amounted to illegal and unwarranted interference in the judicial function of the Assessing Officer. It is also alleged that the order of the Assessing Officer was thus passed without application of mind and was, therefore, no order in the eyes of law. It is also alleged that the judgment of the hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 relied upon by the Tribunal, in holding that the Commissioner of Income-tax could not have interfered with the order of the Assessing Officer, in exercise of powers under Section 263 of the Income-tax Act, is not attracted to the facts of the case, because the order of the Assessing Officer was in fact no order as it had been passed just on the dictates of a superior officer, without application of mind.
6. The further contention of the appellant is that without countering the well-founded and sound reasons recorded by the Commissioner of Income-tax, in support of his order, the Appellate Tribunal has held that the firm was engaged in manufacturing process and so the entire income earned by it is eligible for deduction under Sections 80-IA and 80-IB of the income-tax Act.
7. The writ petition has been filed by the assessee-firm, challenging the action of the Assessing Officer in issuing the notices, under Section 148 of the Income-tax Act in respect of the assessment years prior to the year 2000-01 and continuing with the proceedings based on such notices, even after the acceptance of the appeal by the Appellate Tribunal and the setting aside of the order of the Commissioner of Income-tax, whereby the Assessing Officer was advised to issue such notices and to take action under Section 148 of the Income-tax Act. The assessee also seeks the quashing of the notices under Section 148 of the Income-tax Act in respect of the assessment years subsequent to the assessment year 2000-01, which are alleged to have been issued by the Assessing Officer taking a cue from the order dated July 12, 2004, passed by the Commissioner of Income-tax, under Section 263 of the Income-tax Act, which has since been set aside by the Appellate Tribunal.
8. The Commissioner of Income-tax, Shimla impleaded as respondent No. 2 in the writ petition, as also the Income-tax Officer, Shimla, impleaded as respondent No. 1, have stated in their reply that the notices, under Section 148 of the Income-tax Act, have been issued by the Assessing Officer (Income-tax Officer), Shimla, by applying his mind to the facts and the circumstances of the case, pertaining to each assessment year and not just on account of the direction contained in the order of the Commissioner of Income-tax. It has also been stated that the order of the Appellate Tribunal setting aside the order of the Commissioner of Income-tax, has not yet become final, because, the appeal filed against the same is pending and hence the notices need not be withdrawn. It is asserted that the Commissioner of Income-tax, by virtue of the provisions of Section 263 of the Income-tax Act had the jurisdiction to pass any order, including an order for reassessment of the income for the assessment years earlier to the assessment year to which the proceedings pertained and, therefore, the Appellate Tribunal's order, setting aside the direction contained in the order of the Commissioner of Income-tax for reassessment of the income for the earlier assessment years, is liable to be set aside, being based on erroneous construction of the provision of Section 263 of the Act.
9. The appeal filed by the Commissioner of Income-tax was admitted on questions of law formulated by the appellant in the memorandum of appeal itself, which are reproduced below:
1. Whether, on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in denying the opportunity of being heard and then agreeing to allow it partly on facts, to Shri A.K. Manchanda, Commissioner of Income-tax, Shimla who was the respondent also ?
2. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in quashing a lawful direction of the Commissioner of Income-tax and basing its finding on a totally wrong understanding of facts and incorrect appreciation of legal provisions especially Section 150(1) and Section 153(3), of Explanations 2 and 3 ?
3. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in holding that during the appellate or revisional proceedings in respect of a particular assessment year, no direction in respect of any other assessment year could be given even if it was relevant and necessary for the disposal of the matter under consideration ?
4. Whether, on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal failed to consider the material aspect that the assessee-firm did not fulfil the basic condition of installing new machinery and was thus not eligible to claim deduction under Section 80-IA ?
5. Whether, on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was correct in holding that asking the assessee to produce sale vouchers, etc., tantamounts to the Assessing Officer expressing his view on the reasonability of the extraordinarily high profits declared by the assessee as well as the applicability of the provisions of Sub-sections (8) and (10) of Section 80-IA ?
6. Whether the hon'ble Income-tax Appellate Tribunal has not grossly erred in ignoring the overwhelming facts and circumstances which proved that the assessee had been artificially and deliberately inflating its profits to claim higher deduction under Section 80-1 ?
7. Whether the hon'ble Income-tax Appellate Tribunal was justified in admitting fresh evidence about the production of exercise books being exempt from Central excise duty, without giving any opportunity to the Department to rebut the same ?
8. Whether the Income-tax Appellate Tribunal was justified in quashing the order under Section 263 without striking down the finding of the Commissioner of Income-tax in the order under Section 263 to the effect that the activities of the assessee resulting in the production of note pads, did not amount to manufacturing and thus unit 2 was also not eligible for deduction under Section 80-IB ?
9. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that allowing less depreciation by not following the method prescribed in the Income-tax Act in the year in which the entire income is claimed deductible under Section 80-IA is not erroneous and prejudicial to the interests of the Revenue ?
10. Whether, on the facts and circumstances of the case, has the hon'ble Income-tax Appellate Tribunal not grossly erred in holding that the Commissioner of Income-tax could not exercise powers under Section 263 since his predecessor had issued certain directions to the Assessing Officer by ignoring the ratio of /. K. Synthetics v. CBDT [1972] 83 ITR 335 of the apex court, and instead relying upon the case of Hari Iron Trading Co. v. CIT (P and H) which was given in the context of entirely different facts ?
11. Whether the Income-tax Appellate Tribunal was correct in holding that the issues concerning non-fulfilment of the condition of manufacturing process being with the aid of power and thus requiring the employment of 20 workers was considered by the Assessing Officer and she had formulated her view, whereas the facts on record show that the above aspects were not considered and she had passed the order acting on the dictates of the then Commissioner of Income-tax ?
12. Whether, on the facts and circumstances of the case, was the Income-tax Appellate Tribunal justified in invoking Malabar Industrial case [2000] 243 ITR 83 (SC) on important aspects and matters which had not been enquired into and considered by the Assessing Officer during the assessment proceedings or on which the Assessing Officer had not expressed any view ?
10. During the course of the hearing of the appeal an objection was raised by learned Counsel for the respondent-assessee that the Commissioner of Income-tax, Shimla, by whom the appeal is filed, did not have the competence and the locus standi to file the appeal, because, the area falling in the jurisdiction of the Income-tax Officer, Parwanoo, stands transferred to the supervisory and revisional jurisdiction of the Commissioner of Income-tax, New Delhi, with effect from September 5, 2005, per order, under Section 127 of Sub-section (2), passed by the Central Board of Direct Taxes. He submitted that the appeal was filed in October, 2005, that is to say, after the passing of the aforesaid order dated September 5, 2005, by the Central Board of Direct Taxes and hence the Commissioner of Income-tax, New Delhi, to whose supervisory and revisional jurisdiction the area, controlled by the Income-tax Officer, Parwanoo, stands transferred, had the locus standi to file the appeal. To meet the aforesaid technical objection, learned Counsel representing the appellant-Commissioner of Income-tax, Shimla, made a prayer for impleadment of the Commissioner of Income-tax, New Delhi, as a co-appellant. That prayer was granted by us, vide order dated January 9, 2006. On account of the impleadment of the Commissioner of Income-tax, New Delhi, the aforesaid technical objection does not survive.
11 Otherwise also, the contention raised on behalf of the respondent is without merit. learned Counsel placed reliance upon CIT v. Pearl Mech. Engg. and Foundry Works P. Ltd. ; Kiran Singh v. Chaman Paswan, and CIT v. D. K. Nawlakha in support of his contention. The judgments relied upon pertain to a different question, viz., the jurisdiction and competence of an authority to adjudicate upon the matter involved in the proceedings before such authority. They do not bear even a semblance to, what to speak of having a direct bearing on, the contention raised by learned Counsel for the respondent. The legal position on the question is well-settled. This is a case of defect in the authority of the person filing the appeal. The hon'ble Supreme Court, very recently in Civil Appeal No. 6701 of 2005, arising out of SLP(C) No. 22578 of 2003, titled Uday Shankar Triyar v. Ram Kalewar Prasad Singh decided on November 10, 2005, has held that any defect in signing the memorandum of appeal or in the authority of the person signing the memorandum of appeal, does not invalidate the memorandum of appeal, if such defect is not deliberate. It has further been held that such a defect, being procedural in nature, can subsequently be corrected and that when the defect is noticed or pointed out, the court should, either on an application by the appellant or suo motu, permit the rectification of such a defect. In the present case, as soon as it was brought to the notice of the court by learned Counsel for the respondent, during the course of hearing of the appeal, that the appeal by the Commissioner of Income-tax, Shimla, was not competent inasmuch as the area falling within the jurisdiction of the Income-tax Officer, Parwanoo, stood transferred to the supervisory and revisional jurisdiction of the Commissioner of Income-tax, New Delhi, a prayer was made by learned Counsel for the Revenue that the Commissioner of Income-tax, Delhi may be impleaded as appellant No. 2 to cure the alleged defect in the appeal. His prayer was granted vide order dated January 9, 2006. This order was in consonance with the law laid down by the hon'ble Supreme Court in Uday Shanker Triyar's case (supra).
12 As regards the merits, learned Counsel for the assessee urged that as a matter of fact no substantial question of law arises in the present appeal and that the questions formulated by the appellant and incorporated in the grounds of appeal, are nothing but jugglery of words, to get the appeal heard on the merits. While addressing the arguments, learned Counsel for the parties mainly confined their submissions to the scope of Section 263 of the Income-tax Act, pertaining to the revisional jurisdiction of the Commissioner of Income-tax. learned Counsel for the respondent-assessee urged that when the Assessing Officer had passed the order after conducting survey, under Section 133A of the Income-tax Act, the Commissioner of Income-tax could not have interfered with the same even though he held a view different from that of the Assessing Officer. He submitted that where two views are possible, the revisional authority cannot substitute its own view for that of the subordinate authority. Further he submitted that the view of the Commissioner of Income-tax was not based on the facts and the material available on record, but on conjectures and surmises and, therefore, the Income-tax Appellate Tribunal had rightly set aside that order. He controverted the plea, raised in the grounds of appeal, that the order of the Assessing Officer had been passed on the dictates of the Commissioner of Income-tax and, therefore, the said order could not be said to have been passed by application of mind, with the submission that the Commissioner of Income-tax, in the course of proceedings under Section 263 of the Income-tax Act, did not make it a ground for interfering with the order of the Assessing Officer that the said order had been passed without application of mind and just on the dictates of the Commissioner of Income-tax. He also submitted that the Commissioner of Income-tax simply monitored the enquiry/survey that was conducted by the Assessing Officer but did not influence the decision of the Assessing Officer as incorporated in her order, under Section 147, that the entire income of the assessee was eligible for deduction, under Section 80-IB of the Income-tax Act and accepting the return, as filed by the assessee.
13. learned Counsel for the appellant, on the other hand, urged that the Assessing Officer's order had been passed in a mechanical manner, on the dictates of the Commissioner of Income-tax, without application of her own mind and as such the submission made by learned Counsel for the respondent that the view taken by the Income-tax Officer was possible and, therefore, could not have been interfered with in exercise of the revisional jurisdiction, holds no ground, because the Assessing Officer in fact did not take any view as she did not address herself to the facts and the circumstances of the case nor did she examine the material, collected during the course of the survey, but passed the order just on the dictates of the superior administrative officer. He also countered the contention of counsel for the assessee-respondent that the Commissioner of Income-tax had simply monitored the survey being conducted by the Assessing Officer. He drew the attention of the court to the order of the Assessing Officer, particularly the footnote recorded on it, in support of his contention that the order had been passed without application of mind, just on the unwarranted and illegal dictates of the Commissioner of Income-tax.
14 From the submissions made by learned Counsel for the assessee himself, as noticed hereinabove, it is clear that the following substantial questions of law arise in the appeal:
(1) Whether, on the facts and in the circumstances of the case, the Commissioner of Income-tax, in exercise of his revisional powers, under Section 263 of the Income-tax Act, could have set aside the order of the Assessing Officer and modified the assessment for the assessment year 2000-01 ?
(2) Whether the Commissioner of Income-tax, in exercise of his revisional jurisdiction, under Section 263 of the Income-tax Act, could have advised/directed the Assessing Officer to reopen the assessments for the earlier assessment years, pertaining to the respondent (assessee-firm) ?
15 For appreciation of the submissions of learned Counsel for the parties with respect to the point whether the Assessing Officer had passed the order on the dictates of the Commissioner of Income-tax or independently by applying her mind to the material available with her, the order passed by the Assessing Officer needs to be noticed. The same is reproduced below:
Return declaring nil income after deduction under Section 80-IB on the profit of Rs. 74,79,995 was filed on October 31, 2000, which was processed under Section 143(1) (a) on July 26, 2001, at returned income by my predecessor.
Survey under Section 133A was conducted in the business premises of the assessee on February 7, 2000, by the then Income-tax Officer. The case was selected under compulsory scrutiny. Detailed questionnaire along with statutory notices under Section 143(2)/ 142(1) was issued and in response to the same, Shri Surinder Babbar, CA, attended the assessment proceedings from time to time. Various details/information called for were supplied which were verified. The case is discussed as under:
The assessee deals in manufacturing of exercise books and writing pads. The firm has two partners, namely, Shri Radhey Shyam Gupta and Smt. Sushila Gupta. Two units were set up by the assessee for manufacturing of exercise books in unit I and that of writing pads in unit II. Separate books of account were maintained for both the units and 11 workers were found working at the time of survey. Certain discrepancies as per cash book to that of day book were found which could not be explained by the accountant at the time of survey which were reconciled by counsel of the assessee during the course of assessment proceedings. On sale of Rs. 88,55,592 gross profit of Rs. 57,28,980 giving rate of 64.69 per cent, for unit I and on sale of Rs. 63,16,392, gross profit of Rs. 19,12,565 for unit II giving 30.29 per cent, has been declared by the assessee. Sales were made both on credit as well as cash basis. Confirmed copy of account of the creditors has been produced, which is placed on record.
Keeping in view the information supplied by the assessee and, facts on file, the income returned by the assessee is hereby accepted.
(Sd.)....
Sunita Duggal, Income-tax Officer, Parwanoo.
Office Note:
After receiving a call from Shimla on December 3, 2002, I visited the office of worthy Commissioner of Income-tax, Shimla, on December 4, 2002, along with all the assessment records and relevant documents of M/s. Green World Corporation. The case was thoroughly discussed with worthy Commissioner of Income-tax, Shimla, in the presence of the learned Additional Commissioner of Income-tax, Solan Range, Solan. All the documents and queries raised and further reply submitted by the assessee were properly glanced through by the worthy Commissioner of Income-tax and after going through the questionnaire issued to the assessee on October 18, 2002, and reply submitted by the assessee in response to that on November 7, 2002, November 13, 2002, and November 25, 2002, worthy Commissioner of Income-tax has directed that since the reply submitted by the assessee is satisfactory and up to the mark, no more information is required to be called for and to assess the case as such. He therefore directed in the presence of the learned Additional Commissioner of Income-tax, Solan Range, Solan, to incorporate that discussion in the body of the order sheet. Needful has been done as directed. A copy of the draft assessment order was sent to the Additional Commissioner of Income-tax, Solan Range, Solan, under this office letter No. ITO/PWN/2002-03/21127 dated December 13, 2002, for according necessary approval. Approval to complete the assessment was received through telephonic from the office of the Additional Commissioner of Income-tax, Solan Range, Solan and assessment has been completed and the assessment order has been served upon the assessee on December 19, 2002.
(Sd.)....
Income-tax Officer.
16. A careful reading of the order shows that though the operative part of the order records that the return had been accepted in view of the information supplied by the assessee and the facts on file, yet the office note recorded below the said order, makes it plainly clear that the aforesaid order was passed by the Income-Tax Officer under pressure from the Commissioner of Income-tax. The order is dated December 4, 2002. In the note below the order it is stated that the Income-tax Officer was called to the office of the Commissioner of Income-tax, Shimla on December 3, 2002, and the said Commissioner of Income-tax himself went through the questionnaires and the response of the assessee to the said questionnaires as also various replies submitted by the assessee and directed that since the reply submitted by the assessee was satisfactory and up to the mark, no more information was required to be called for and further directed to assess the case as such. This note unmistakably indicates that the Income-tax Officer herself was not satisfied with the reply of the assessee and wanted to have some more information. If it were not so, why should have the Commissioner of Income-tax directed that no more information was required to be called for and that the assessment be finalised as per return. Also, the Income-tax Officer would not have recorded this footnote had there been no pressure upon her. The note is indicative of the fact that the Income-tax Officer was not only under pressure from the Commissioner of Income-tax to accept the return submitted by the assessee, but she was also of the view that the return was not in order and that if she accepted it as such, she could be in trouble at some later point of time when the matter came to the notice of some superior officer (other than the person holding the office of the Commissioner of Income-tax, Shimla at that time). That is why she recorded this footnote on the order to safeguard herself against apprehended trouble in future. Under these circumstances, we have no hesitation in holding that the order was passed by the Assessing Officer, not only without application of mind, but also on account of illegal and unwarranted interference in her statutory functioning by the then Commissioner of Income-tax, Shimla. In other words, the order of the Income-tax Officer was not based on any view formed by her, on the basis of the material before her, but on the dictates of a superior officer. If that is so, the contention of the respondent-assessee that the Assessing Officer had formed a view on the basis of the material before her and the said view was not perverse or was not such which could have been formed on the basis of the material on record, the Commissioner of Income-tax, in exercise of the power under Section 263 of the Income-tax Act, could not have substituted that view with his own view, cannot be accepted.
17. Before proceeding further in the matter, we would like to add that tax holiday has been allowed to newly established manufacturing units in the State of Himachal Pradesh for a period of ten years and profits and gains from such manufacturing units are deductible from the income assessable to tax to the extent of 100 per cent. Many bogus units had been set up in the State to illegally claim benefit of tax holiday. The modus operandi was that some premises were arranged in the State by the alleged manufacturers in which machinery and plants were installed. Goods were manufactured, furnished and disposed of outside the State, but records were fabricated to show that raw material was received, goods were manufactured and workers were employed in such premises. It is in the light of this ground reality that the factual aspect of the matter needs to be dealt with.
18. The Commissioner of Income-tax in his order dated April 12, 2004, which has been set aside in appeal by the Appellate Tribunal, has observed that no manufacturing activities or at least manufacturing activities of such a magnitude as to yield huge profits to the extent claimed by the assessee, were being carried out.
19. The assessee, in the return for the assessment year 2000-01, claimed that it had earned profits worth Rs. 74,69,314 from its two units. Unit I, was stated to have remained operative for five months from April 1, 1999 to September 30, 1999, and yielded a profit of Rs. 56,60,307 out of total proceeds of Rs. 88,55,592. The other unit was stated to have yielded net profits of Rs. 18,09,007 out of total sales of Rs. 63,13,923. The Commissioner of Income-tax has stated in his order that the records available with him, reveal that in unit I a total number of 2180 units of electricity had been consumed during the year 1999-2000, that is to say, previous year in relation to the assessment year 2000-01 and that out of this total consumption of electricity, 1405 units had been consumed from April 1, 1999 to September 30, 1999, when the unit was claimed to have operated and the remaining 775 units had been consumed from October 1, 1999 to December 31, 1999, when the unit was not operational, because it had been closed down on September 30, 1999. The aforesaid figures show that when the unit was allegedly operational, the average monthly consumption of electricity was a meager 234 units, but when it was not operational, the consumption was 258 units per month. This fact knocks the bottom out of the assessee's claim that it had been manufacturing exercise books and note pads, etc., by use of power driven machinery. The sanctioned load for unit I was 9700 KWs., which meant that about 10 units per hour could have been consumed and if the unit operated every day just for eight hours, the approximate consumption of electricity would have been to the extent of more than 2300 units per month. As regards the second unit, which was claimed to have produced goods worth Rs. 63,13,923, 4610 units of electricity had been consumed during the entire period of the financial year 1999-2000, meaning thereby that the average monthly consumption was less than 400 units, though the sanctioned load was 14.970 KWs. The assessee-respondent does not deny the figures regarding consumption of electricity. The consumption of electricity in the two units is indicative of the fact that probably electricity was being consumed for purposes which fall in the category of domestic use, like running of fans, lighting of rooms and functioning of T. V., refrigerator, etc., etc. 20 Then the proportions which the profits bear to the sales, are so huge that the same are far from being realistic. For example, in respect of unit I out of the total sales of Rs. 88,55,592 the profits are Rs. 56,60,307 or say 250 per cent., approximately, on the cost of the material and expenses on salary, wages, electricity, freight and consumable stores, etc. The percentage of profits is not only unbelievable but even unimaginable. And when the unit is claimed to have been yielding such high profits, it was closed down all of a sudden in the middle of the financial year and a new unit was made operational, which though yielded lesser profits, but even those were unbelievably on the higher side. This unit was also closed down during the relevant financial year itself.
21 It is not believable that any man of ordinary prudence, much less a business man like the male partner of the assessee-firm, who is supposed to be quite wise, would close down such manufacturing units and that too for the sake of managing his business concerns at another place, which in the present case is Delhi, yielding as low profits as 0.2 per cent, to 1 per cent, of the total sales. These facts are also noticed in the order of the Commissioner of Income-tax and the assessee-respondent does not deny the same in the rejoinder to the reply filed by the Revenue in the writ petition.
22. In light of what has been stated above, the contention of the respondent-assessee that since two views are possible from the material on record, the Commissioner of Income-tax was not right in substituting his own view for that of the Assessing Officer, merits outright rejection. Judicial precedents, cited in support of the contention by learned Counsel, need not be noticed.
23.It was also contended on behalf of the assessee-respondent that the revisional power, under Section 263 of the Income-tax Act, can be exercised only when the order sought to be revised is erroneous and also prejudicial to the interests of the Revenue, as is clear from a reading of the bare provision of Section 263 of the Income-tax Act.
24. There cannot be any dispute so far as the legal proposition, stated by learned Counsel is concerned. However, in the present case both the prerequisites, viz., the order being erroneous and also prejudicial to the interests of the Revenue for exercise of revisional power, were there. The circumstances under which the order was passed by the Assessing Officer, as discussed hereinabove leave little doubt that the Assessing Officer was pressurised to accept the return filed by the assessee, by her superior officer, even though she herself wanted to have some more information from the assessee before making up her mind. If that is so, the order of the Assessing Officer is not only erroneous but even worse than that. In any case, when there was overwhelming material, like non-consumption of electricity, unbelievably huge profits and then the closing down of such "highly profitable" manufacturing activity all of a sudden, the order of the Assessing Officer, even if it were passed by application of mind, could not have been a correct order but only an erroneous one within the meaning of Section 263 of the Income-tax Act.
25. As regards the second condition, viz., the order of the Assessing Officer being prejudicial to the interests of the Revenue, when the officer competent to pass the order was prevented from making complete enquiry/survey and was directed to accept the return as filed by the assessee without asking for further information, it can legitimately be presumed that the order so passed was prejudicial to the interests of the Revenue, because had the Assessing Officer collected more information from the assessee, as she wanted to, she might not have accepted the return as filed and instead would have treated the income reported by the assessee, to be from some undisclosed sources and levied tax as per prescribed rates.
26. learned Counsel for the assessee also urged that from the note appearing at the foot of the order of the Assessing Officer, it cannot be assumed that she was under pressure or there was any unwarranted or unlawful interference in her judicial working and that at the most this was a case of monitoring of the survey by the Commissioner of Income-tax. The contention has been noticed only to be rejected. As already pointed out, the note at the foot of the order of the Assessing Officer clearly shows that she intended to have more information from the assessee, which fact implies that she was not satisfied with the answers to the questionnaires furnished by the assessee. But she was prevented from doing so and, therefore, this is a clear case of interference in the statutory functioning of a statutory authority by a superior authority and not a case of monitoring of the functioning of a subordinate authority by the superior authority, as has been tried to be made out by learned Counsel for the assessee.
27 The Appellate Tribunal in its order has held that the Assessing Officer passed the order after scrutinizing the record and conducting the survey and that the view taken by her was not an impossible one and, therefore, the Commissioner of Income-tax, in exercise of his revisional power, could not have interfered with the said order. In view of what has been noticed hereinabove, we are constrained to say that the view taken by the Tribunal is perverse.
28 It was then urged on behalf of the assessee that there are several undisputed facts, which conclusively establish that manufacturing activity had been going on in the premises at Parwanoo, during the relevant assessment year, and making the profits reported in the return. The facts pointed by him are as follows:
(a) genuineness certificate issued by District Industries Centre, Government of Himachal Pradesh after spot inspection.
(b) movement of raw material to the assessee's premises by way of Form No. 26A issued by the local sales tax authority, duly verified at the Kalka-Pawanoo barrier ;
(c) payment of freight on material by way of GR bills of the transport companies ;
(d) payment of wages with reference to attendance register duly supported by registration of employees with PF and ESI authorities,
(e) electricity consumption by way of electricity bills ;
(f) list of plant and machinery along with bills of purchase thereof;
(g) movement of finished goods by way of sale bills along with Form No. 26A along with ledger accounts of the customers,
(h) books of account maintained in regular course of business including stock register, etc. ;
(i) tax audit report under Section 44AB of the Income-tax Act,(i) tax audit report under Section 44 AB of the Income-tax Act,
(j) certificate in Form No. 10CCB evidencing deduction claimed under Section 80-IA/80IB of the Act;
29. In the light of the facts and the circumstances, noticed by the Commissioner of Income-tax in his order dated July 12, 2004, more particularly the fact that no electricity appears to have been consumed in the alleged manufacturing activity and the conduct of the partners of the assessee in suddenly closing down the industry when it was allegedly yielding unimaginable huge profits, the argument merits summary rejection. It appears that the assessee simply got installed machinery and plant worth around rupees 1.5 lakhs, procured electricity connections for industrial activity, got the workers registered for ESI benefits with the ESI Corporation and with the provident fund authorities for contribution to the provident fund and also manipulated other entries and documents like transportation of raw material and goods etc. to give a colour of genuineness to the alleged manufacturing activity, which was either totally nonexistent or was carried out only at a nominal scale, to hoodwink the income-tax authorities for claiming the benefit of tax holiday.
30. While making the submissions with regard to the question whether the Commissioner of Income-tax had the power to advise/direct the Assessing Officer to reopen the assessment for the earlier assessment years, learned Counsel for the assessee (writ petitioner) urged that in view of the law laid down by a Constitution Bench of the hon'ble Supreme Court in ITO v. Murlidhar Bhagwan Das , there cannot be any escape from the finding that the Commissioner of Income-tax did not have the power to issue such an advice or direction.
31. learned Counsel for the Revenue, on the other hand, urged that the aforesaid judgment of the Constitution Bench is under the old Act of 1922 and that the provisions of the old Act dealing with a situation of this type were different from the provisions of the present Act. He stated that the judgment of the Supreme Court has been distinguished by a Division Bench of the Madhya Pradesh High Court in Gulabchand Motilal v. CIT [1988] 174 ITR 117.
32. The submissions made by learned Counsel for the parties can be appreciated only if a reference is made to the relevant provisions under the old Act as also the extant Act. Section 34(3) of the old Act provided for limitation of four years from the end of the year, in which the income was first assessable, for making an order of assessment or reassessment. There was a proviso to the said provision, which said that the provision would not be applicable to an assessment or reassessment, made on the assessee or any other person, in consequence of or to give effect to any finding or direction, contained in an order, passed under Sections 31, 33, 33A, 33B, 66 or 66A. Section 33A of the said Act pertained to the revisional jurisdiction of the Commissioner of Income-tax. That provision of Section 33A was in substance similar to the provision of Section 263 of the present Act. The question arose before the Constitution Bench of the hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das whether a finding or direction given by the appellate authority in respect of an assessment year other than that to which the appeal pertained, was covered by the aforesaid proviso to Section 34(3) of the Act and hence the limitation, provided under Section 34(3), could not operate as a bar for assessment or reassessment by the Assessing Officer to give effect to such finding or direction. The Constitution Bench, by a majority judgment, held that the finding or direction, referred to in the proviso to Section 33(4), meant a finding or direction in relation to the assessment year, which was the subject matter of the appeal or revision and not to a finding or direction pertaining to any other assessment year.
33. In the extant Act, i.e. the Income-tax Act, 1961, there are two provisions covering limitation for dealing with the cases of assessment, reassessment or recomputation of income in the matters like the present one. Section 149 of the Income-tax Act provides for limitation for issuance of notice, under Section 148 of the Act. Section 150 is in the nature of an exception to Section 149. It says that notwithstanding anything contained in Section 149, a notice under Section 148 may be issued at any time for making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority under the Act by way of appeal, reference or revision. Then there is Sub-section (2) of Section 153 of the Act of 1961, which says that no order of assessment, reassessment or recomputation shall be made, under Section 147 after the expiry of one year from the end of the financial year in which notice under Section 148 was served. There is an exception to Sub-section (2) of Section 153, which is contained in Sub-section (3)(ii), which says that the provision of Sub-section (2) shall not apply to assessment, reassessment and recomputation, made in consequence of or to give effect to any finding or direction contained in an order, under Sections 250, 254, 260, 262, 263 or 264. The provisions of Sections 149 and 153(2) of the extant Act are almost similar to Section 34(3) of the old Act of 1922. The only difference is that while Section 34(3) provides for limitation only for making the assessment or reassessment, Sections 149 and 153(2) of the present Act provide for limitation for issuance of notice, under Section 148 and also for making assessment or reassessment or recomputation after the service of notice, under Section 148. In other words, the only difference is that in the provisions of the present Act, limitation is prescribed not only for making order for assessment or reassessment but also for issuance of notice for assessment or reassessment, while the old Act provided for limitation only for making an order of assessment or reassessment. The provisions in the old Act in the form of proviso to Section 34(3) excluding the operation of Section 34(3) in regard to the cases mentioned therein, was similar to the provisions of Sub-section (1) of Section 150 excluding the application of Section 149 and Sub-section (3)(ii) of Section 153 excluding the application of Sub-section (2) of Section 153 in respect of the cases mentioned therein.
34. The cases mentioned in the proviso to Section 34(3) of the old Act and Sections 150(1) and 153(3) (ii) are similar, viz., in which the notice is issued or assessment, reassessment or recomputation are made in consequence of or to give effect to any finding or direction contained in any order passed by any appellate or revisional authority.
35. Now, when the proviso to Section 34(3) and Section 150(1) and Section 153(3) (ii) cover similar situations and have similar effect, and moreover the same words and phraseology, viz , "in consequence of or to give effect to any finding or direction contained in an order", figure in them, interpretation of the words and phraseology "in consequence of or to give effect to any finding or direction contained in an order", occurring in Sections 150(1) and 153(3)(ii), cannot be different from the construction placed on similar words and phraseology in the proviso to Section 34(3) of the Act of 1922, by the hon'ble Supreme Court in ITO v. Murlidhar Bhagwan Das . As already noticed, the hon'ble Supreme Court, in the aforesaid judgment has held that any finding or direction contained in an order of appellate or revisional authority, has to be with respect to the assessment year, to which the appeal or revision pertains, to attract the provision lifting the bar of limitation.
36. The counter argument, advanced by the learned Counsel for the Revenue, cannot be accepted. The judgment relied upon by learned Counsel Gulabchand Motilal v. CIT [1988] 174 ITR 117 (MP) itself negates the contention. The only difference of substance in the relevant provisions of the old Act and the extant Act is that two Explanations have been added to Section 153 of the extant Act to slightly expand the meaning of the words "in consequence of or to give effect to an order of appellate or revisional authority" occurring in Sections 150(1) and 153(2) by legal fiction. Explanation 2 says that where, by an order, passed, inter alia, by a revisional authority, any income is excluded from the total income of the assessee for an assessment year, then an assessment of such income for another assessment year shall, for the purposes of Sections 150 and 153, be deemed to be made in consequence of or to give effect to any finding or direction contained in the said order. Explanation 3 says that where, by an order, inter alia, of a revisional authority, any income is excluded from the total income of one person and held to be the income of another person, then, an assessment of such income on such other person shall, for the purposes of Sections 150 and 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, provided such other person was given an opportunity of being heard before the said order was passed. The addition of these two Explanations, expanding the meaning of words "in consequence of or to give effect to any finding or direction contained in the said order" by legal fiction itself manifests that the Legislature was aware that the order of the appellate or the revisional authority, referred to in Sections 150(1) and 153(2), meant an order pertaining to the assessment year, which was the subject-matter of the appeal or revision. In the judgment relied upon by learned Counsel for the Revenue, i.e. Gulabchand Motilal v. CIT [1988] 174 ITR 117 (MP), also it has been observed that the object of Explanation 2 to Section 153 is to partially supersede the Supreme Court decisions in ITO v. Murlidhar Bhagwan Das and N. Kt. Sivalingam Chettiar v. CIT , by legal fiction so as to cover an assessment year different from the assessment year, to which the appeal or revision pertained, if the income reported was found to pertain not to the assessment year that was the subject matter of the appeal or revision but to some different assessment year.
37 The aforesaid discussion pertaining to the interpretation of Sections 150(1) and 153(2), excluding the operation of Section 149, prescribing limitation for issue of notice, under Section 148 and Section 153(2) providing limitation for passing an order, under Section 147, however, does not mean that the Commissioner of Income-tax, in exercise of his power, under Section 263 of the Income-tax Act, cannot record a finding or give a direction for reopening the assessment pertaining to the assessment years other than the assessment year(s) covered by the revisional proceedings. The only effect of the above discussion and interpretation is that the bar of limitation contained in Sections 149 and 153(2) will not be lifted, if the order or the finding or the direction of the appellate or the revisional authority, pertains to an assessment year other than the assessment year which was the subject-matter of the appellate or revisional proceedings, unless, the case is covered by Explanations 2 and 3 to Section 153. In other words, the Revenue cannot successfully press into service the provisions of Sections 150(1) and 153(2) lifting the bar of limitation in cases where the order of revisional or appellate authority relates to the assessment year(s) other than the assessment year(s) to which the appeal or revision pertained.
38. The net result of the aforesaid discussion is that though the direction of the Commissioner of Income-tax for reopening the assessment for the earlier assessment years is not without jurisdiction, the bar of limitation contained in Sections 150(1) and 153(2) shall be applicable to the reopening of assessments.
39. It was urged before us on behalf of the assessee that the notices issued under Section 148 of the Income-tax Act, were barred by limitation prescribed in Section 149 of the Act. Section 149(1) provides for different limitation based on the quantum of the income chargeable to tax. We do not think it proper to look into this aspect of the matter. The assessee can raise the question that the notices are barred by limitation, before the Assessing Officer, once we have held that the provisions of limitation contained in Sections 149 and 153(2) are applicable and the provisions of Sections 150(1) and 153(3), lifting the bar of limitation in respect of the cases mentioned therein, are not attracted in the present case. In case the assessee is dissatisfied with the decision of the Assessing Officer, it can avail of the remedies of appeal/revision available to it under the Income-tax Act and/or any other remedy available under any other law.
40. As a result of the above discussion, findings and observations, we accept the appeal, set aside the order of the Income-tax Appellate Tribunal, dated April 15, 2005, and restore that of the Commissioner of Income-tax, dated July 12, 2004. The writ petition filed by the assessee, for quashing the notices under Section 148, is dismissed. However, it is clarified that the notices under Section 148 of the Income-tax Act, issued by the Assessing Officer, i.e., the Income-tax Officer, Shimla, on the direction of the Commissioner of Income-tax contained in his order dated July 12, 2004, for reopening the assessment in respect of earlier years other than the assessment year 2000-01 (which was the subject matter of the revision), shall be subject to the limitation contained in Sections 149 and 153(2) of the Income-tax Act. We reiterate for the sake of clarity that the notices under Section 148 of the Act issued by the Assessing Officer pursuant to the aforesaid direction, are not saved from the limitation, under the exclusionary provisions of Sections 150(1) and 153(3) (ii) of the Act.
41. Before parting with the judgment, we feel that it is desirable and in the public interest that the Chief Vigilance Commissioner is approached by the appointing authority of the Commissioner of Income-tax, who interfered in the statutory functioning of the Assessing Officer and pressurized her to pass the order accepting the return of the assessee, to inquire into the matter and if on inquiry the Chief Vigilance Commissioner finds and reports that the said Commissioner of Income-tax was guilty of misconduct, action is taken against him by his such authority, as per law. We direct the appointing authority of the said Commissioner accordingly.
42 A copy of this judgment be given dasti to learned Counsel for the Revenue, who shall send it to the appointing authority of the Commissioner of Income-tax concerned, by registered post, immediately on its receipt.