Karnataka High Court
Om Trading Co. And Others vs Second Income-Tax Officer on 4 January, 1991
Equivalent citations: [1991]188ITR641(KAR), [1991]188ITR641(KARN)
JUDGMENT K. Shivashankar Bhat, J.
1. All the petitions involve an identical question. Facts in W. Ps. Nos. 462 to 464 of 1988 are referred to hereinafter.
2. The petitioners are registered firms; they challenge the notices dated December 21, 1987, issued under sections 142(1) and 143(2) of the Income-tax Act ("the Act), in respect of the assessment year 1986-87, issued by the respondent. The three petitioners had declared incomes of Rs. 41,030, Rs. 34,140 and Rs. 24,650, respectively, for the year in question; the returns were accompanied and profit and loss account as well as the balance-sheet; other details were also furnished. The assessing authority (the respondent) had accepted the returns and made orders of assessment accordingly. Subsequently, the impugned notices were issued. Since assessment orders had already been made, the petitioners sought the relation behind the issuance of the notices. The petitioners were informed that their case were selected under the scheme of "selective scrutiny case" and, therefore, notices were issued. Accordingly to the petitioners, without a proper and valid reopening of the assessment, no fresh proceedings could be commenced with reference to the completed assessments; the notice under section 143(2)(b) should be preceded by the opinion formed by the Income-tax Officer that the return filed by the assessee was incorrect and incomplete; since no such option is formed and there is no material to from such an opinion, the notices issued were without jurisdiction; the petitioners further contend that, in the notices, the respondent has not specified the point upon which the petitioners had to produce the evidence.
Section 143(2) reads thus :
"143 (2) Where a return has been made under section 139, and..
(b) Whether or not an assessment has been made under sub-section (1), the Income-tax Officer considers it necessary or expedient to verity the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in the this behalf, the Income-tax Officer shall serve on the assessee a notice requiring him, on a date to be therein specified, either to attend at the Income-tax Officer's officer or to produce, or to cause to be there produced, any evidence on which the assessee may rely in support of the return :
Provided that, in a case where an assessment has been made under sub-section (1), the notice under this sub-section except where such notice is in pursuance of an application by the assessee under clause (a) shall not be issued by the Income-tax Officer unless the previous approval of the Inspecting Assistant Commissioner has been obtained to the issue of such notice :...
Explanation. - For the purposes of this section : -
(1) an assessment under sub-section (1) shall be deemed to be incorrect, inadequate or incomplete in a material respect, if -
(a) the amount of the total income as determined under sub-section (1) is greater or smaller than the amount of the total income on which the assessee is properly chargeable under this Act to tax : or
(b) the amount of the tax payable as determined under sub-section (1) is greater or smaller than the amount of the tax properly payable under this Act by the assessee; or
(c) the amount of any loss as determined under sub-section (1) is greater or smaller than the amount of the loss, if any, determinable under this Act on a proper computation; or
(d) the amount of any depreciation allowance, development rebate or any other allowance or deduction as determined under sub-section (1) is greater or smaller than the amount of the depreciation allowance, development rebate or, as the case may be, other allowance or deduction properly allowable under this Act; or
(e) the amount of the refund as determined under sub-section (1) is greater or smaller than the amount of the refund, if any, due under this Act on a proper computation; or
(f) the status in which the assessee has been assessed under sub-section (1) is different from the status in which the assessee is properly assessable under this Act..."
3. Sri Sarangan, learned counsel for the petitioners, contended that a completed assessment cannot be reopened in the manner it is sought to be done in the instant case, and the assessments being the result of quasi-judicial proceedings, relevant material should exist and had to be disclosed before taking any action to put an end to the finality of the assessment orders. Learned counsel referred to section 147 of the Act which is an analogous provision wherein a completed assessment can be reopened only if the Income-tax Officer forms a reasonable belief about the escapement of the assessee's income from tax and if so, why should there be a different procedure vesting an unbridled discretion in the Income-tax Officer under section 143(2)(b) which, in effect, is reopening of a completed assessment.
4. The Revenue has largely relied on the new scheme introduced for summary assessments in which selective cases only may be taken up for scrutiny and, in other cases, the assessee's returns are to be accepted. The two relevant circulars placed before me read as follows :
"438. Summary scheme - Steps taken for accelerating the pace of assessment without appearing before Income-tax Officers :
1. The Board attaches very great importance to the successful implementation of the 'Summary Assessment Scheme', so that the genuine small taxpayers, who form nearly 70 per cent. of the number of taxpayers borne on our registers, are not put to the avoidable inconvenience of appearing before the Income-tax Officer to prove the correctness of the income returned by them. During the current year, the Board has fixed a target of 70 per cent. of all assessments to be completed under the 'Summary Assessment Scheme' and only a small percentage of cases are selected on an objective and rational basis for scrutiny. The remaining cases will be completed summarily without calling the taxpayer to appear before the Income-tax Officer with his books of account, etc. With a view to bring home the advantages of this Scheme to the taxpayer, a massive campaign of taxpayer education was recently undertaken by the Department explaining the various provisions of the tax laws with particular emphasis on the details and advantages of the 'Summary Assessment Scheme'. This program of taxpayer education will be a continuing process.
2. However, the success of this Scheme depends, to a large extent, on the co-operation of the taxpayers and their adviser. In order to enable the Income-tax Officer to complete the assessment in a summary manner and in accordance with law, the returns of income should be correct and complete in all respects, and be accompanied by copies of trading and profit and loss accounts, balance sheets, etc., that are required under the Rules. It is also necessary that evidence in support of rebates, reliefs and tax credit, etc., claimed should accompany the returns. To remove any misgivings regarding the safety of these documents, steps have been taken to streamline the procedure for receipt and registration of returns in the income-tax offices and to ensure that documents accompanying the returns are properly docketed.
3. The above steps taken to accelerate the pace of assessments in a summary manner in all suitable cases may be brought to the notice of the general public. (Circular No. 201 (F. No. 237/16/76-A and PAC-II) dated 5-7-1976. (See [1976] 104 ITR (St) 51).
438A : Types of assessments to be completed under sub-section (1) and procedure to be followed by income-tax authorities :
1. During the Commissioners' Conference, 1985, certain recommendations were made to speed up the disposal of income-tax assessments with manpower available and to reduce the ever increasing backlog. The recommendations made in this Conference have been examined by the Board and I am directed to say that in supersession of all existing instructions on the subject, the following procedure will not be adopted.
2. Assessments in the following types of cases will be completed under section 143(1) on the basis of the returns after linking them with the assessment record.
All cases, other than company and trust cases, with returned income/loss up to Rs. 1 lakh.
Company cases with returned income/loss up to Rs. 25,000 and paid up capital not exceeding Rs. 5 lakhs. However, the first assessment in all new company cases will be a scrutiny assessment.
All trust cases and cases of charitable institutions having income below Rs. 1 lakh before applying the provisions of section 11 provided the corpus all trust cases will be a scrutiny assessment.
3. In the above cases, the arithmetical accuracy of computation of total income and taxes will be ensured and liability for penalty, interest, compulsory deposit, etc., if any, will be checked. No other checking of any sort will be necessary. All pending assessments in such cases will also be completed in the same manner along with the current assessments.
4. However, cases assigned to Inspecting Assistant Commissioners (Assessment), Central Circles, Special Investigation Circles, Special Circles search and seizure cases, cases reopened under section 147 and those selected for scrutiny on a random sample basis, etc., will not come under the purview of this scheme.
5. All other cases (i.e., cases where the assessments are not to be completed in a summary manner) will be dealt with under the normal procedure of law.
6. When assessments in cases mentioned in para 2 above are completed under section 143(1) and there is no additional demand or refund demand notices and copies of assessment orders will not be issued but as intimation that the assessment has been completed under section 143(1) resulting in 'nil' demand/refund will be issued in the attached form. This intimation may be got printed in form of an inland letter and issued after writing the name and address of the assessee.
7. Summary and scrutiny cases should be entered separately ion the demand and collection registers.
8. The initiation of penalty proceedings/completion of penalty proceedings already initiated will be governed by the instructions which are being issued separately. However, interest under the relevant provisions will be levied.
9. Five per cent. of the cases where assessments are completed in a summary manner will be taken up for scrutiny on a random sample basis. The Commissioners shall lay down the random number and the Income-tax Officers should completed selection of cases for random scrutiny by 31st August of the year. This should be done under the supervision of the Inspecting Assistant Commissioner. The number of cases so selected and disposed of should be shown separately in the Central Action Plan - II Statement. The instructions laid down for completion of assessments in cases selected for scrutiny on random basis will continue to be observed.
Instruction : No. 1617, dated 18-5-1985, extracted from 38th Report of Public Accounts Committee (1985-86), pp. 88 and 89."
5. The new scheme adopted by the Revenue basically reposes faith in assessees and expects them to disclose full particulars of their income and claim only proper deductions; this procedure referred as "summary assessment procedure" reduces the volume of the department's work as otherwise the time of the authorities would be spent in scrutinising each and every "return of income" irrespective of the income; similarly, a large number of assesses are saved the trouble of attending to their cases at the time of scrutiny. However, a likelihood of a scrutiny under section 143(2) would always act as a deterrent against an assessee taking undue advantage of the scheme by filing incorrect returns. The scheme is beneficial and is a liberal scheme from the point of view of the assessees. Its success depends on the honesty of the assessees; the faith reposed in the assessees has to be properly reciprocated by them. The power vested in the authorities to verify the correctness and completeness of the return requiring the presence of the assessee or the production of the evidence, if the Income-tax Officer considers it necessary or expedient, is a salient provision to effectuate the purposes of the summary assessment scheme this is one of the provisions by which the assessees are warned to be truthful while filing their returns. Though the condition for invoking the power under section 143(2)(b) is the opinion of the Income-tax Officer that it is "necessary" or "expedient" to do so, and these words are wide in their scope, the Board has taken sufficient care against indiscriminate resort to this power by the assessing authorities. When already an order of assessment is made, this power cannot be invoked without the prior approval of the Inspecting Assistant Commissioner as per the proviso to section 143(2)(b). The Circulars issued by the Board disclose the cases that will be normally covered by this provision for the scrutiny of the returns.
6. Cases under section 143(2)(b) are not comparable to the assessments falling under section 147; in the latter case, a reasonable belief exists that income has escaped assessment and the statutory consequences are different when an order is made thereunder. Section 143(2)(b) contemplates a "fresh assessment" as part of the power of the making the initial assessment.
7. The two relevant words are "necessary or "expedient" in section 143(2)(b). The word "expedient" is more comprehensive and would cover a wider range than "necessary". The circumstances warranting "expediency" are incapable of precise formulation. In the context of the practical measures taken under section 143 for summary assessments and the faith reposed on the assessees, the word "expediency" would cover a case for selective scrutiny of returns, solely to act as a deterrent measure to prevent filing of incorrect returns.
8. It was contended that exercise of any unguided power which would compel an assessee to face fresh proceedings without any reason will be arbitrary.
9. The above principle, if taken in isolation, certainly would aid the petitioners. But, here, the exercise of the power has to be viewed in the context of the "Summary Assessment Scheme".
10. It is necessary to remember that, normally, every assessee is bound to prove the correctness of his "return" and the claims preferred therein; it is for him to produce the books of account in support of his "return". An order of assessment is to be made only after scrutiny of the return and the materials produced in support of the return. The summary scheme envisaged under section 143 is an exception to the normal rule. Therefore, no assessee can, as a matter of right, demand to be treated as an exceptional case. The notice under section 143(2)(b) restores the normal procedure of assessment and, therefore, the assessee cannot question the exercise of such a power by the Revenue, unless patent arbitrariness or mala fides are established on the part of the authorities.
11. In the view I have taken of section 143(2)(b), it is not necessary as refer to the two decisions cited by Sri Sarangan, namely, Nirmal Kumar Singh Nowlaksha v. Secretary to State for India in Council [1925] 2 ITC 20 (Cal) and R. Krishnarjunan v. ITO [1986] 18 ITD 350 (Cochin).
12. The writ petitions are, accordingly, dismissed. No costs.