Bombay High Court
Commissioner Of Income Tax vs Mrs. Ratanbai N.K. Dubhash on 24 September, 1997
Equivalent citations: [1998]230ITR495(BOM)
Author: Pratibha Upasani
Bench: Pratibha Upasani
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question of law to this Court for opinion at the instance of the assessee :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessment order passed by the ITO under s. 143(3) without reference to the IAC had rightly been cancelled by the CIT(A) ?"
2. This reference pertains to asst. yr. 1974-75. The material facts giving rise to this reference are as follows :
The assessee is an individual. She filed the return of her income for the asst. yr. 1974-75 with the ITO on 8th January, 1976, declaring total income of Rs. 3,20,048. She was heard by the ITO for the purpose of assessment. As, in the assessment to be made under sub-s. (3) of s. 143 of the IT Act, 1961, (Act) the ITO proposed to enhance the income returned by the assessee by more than rupees one lakh which was the amount fixed by the Board at the material time under sub-s. (6) of s. 144B of the Act, he forwarded the draft of the proposed order of assessment to the assessee as required by sub-s. (1) of s. 144B of the Act on 30th March, 1977. The said draft assessment was served on the assessee on 4th April, 1977. On receipt of the draft assessment order, the assessee forwarded her objection to the proposed variation in her returned income to the ITO on 6th April, 1977, which was within the stipulated period of 7 days of the receipt of the draft order. It appears that the said objection escaped the attention of the ITO. He, therefore, took it as a case of "no objection" and completed the assessment on 12th April, 1977, on the basis of the draft order. Aggrieved by the order of assessment made by the ITO, the assessee appealed to the CIT(A), Bombay. In the appeal before the CIT(A), it was contended by the assessee that the order of assessment passed by the ITO on 12th April, 1977, was illegal and without jurisdiction, because the ITO had no power or authority to make the order of assessment except in terms of the directions given by the IAC under s. 144B of the Act. The order was also challenged on the ground that it was back dated. However, for the present purpose, it is not necessary for us to enter into the merits of that ground of challenge. The case of the ITO before the CIT(A) was that he did not receive any objection to the draft order from the assessee and, as such, he was empowered to pass the order of assessment in terms of the draft order within a period of 30 days from the date on which draft order under sub-s. (1) of s. 144B was forwarded to the assessee. The ITO also denied the contention of the assessee that the order was backdated. The CIT(A) directed the ITO to make an enquiry and submit a report whether any objection to the draft order had been filed on 6th April, 1977, as contended by the assessee. Pursuant to the directions of the CIT(A), the ITO conducted an enquiry and made a report to the CIT(A). In his report, he conceded that the assessee had filed objection to the draft order on 6th April, 1977, which was received by this office on the same day. He, however, tried to justify the order of assessment made by him on 12th April, 1977, on the basis of the noting made by the record clerk on 11th April, 1977, in the assessment record that no objection had been filed by the assessee. In view of the admitted position that objection had been filed by the assessee to the draft order under s. 144B of the Act, the CIT(A) held that the impugned order of assessment made by the ITO on the basis of the draft order was illegal and without jurisdiction. According to him, the ITO had no jurisdiction to pass the order of assessment after the receipt of objection from the assessee within the stipulated time. The only authority he had thereafter was to forward the objection to the IAC and to pass the final order in terms of the directions of the IAC which were binding on him. The CIT(A) also considered the question whether in such circumstances, the order of assessment could be set aside or has to be cancelled. It appears that expression "cancel" has been used inadvertently by the CIT(A) for the expression "annul", because under s. 251 of the Act, the power of the appellate authority in disposing of an appeal against an order of assessment is to confirm, reduce, enhance or "annul" the assessment or to set aside the assessment and refer the case back to the AO to make a fresh assessment. In this case, on consideration of the fact that the order of assessment passed by the ITO on 12th April, 1977, was wholly illegal and without jurisdiction, the CIT(A) was of the opnion that it was liable to be annulled. That being so, he annulled the same. The expression "cancel" appears to have been used by him in the order inadvertently for the word "annulled", because in an appeal against assessment he does not have the power to "cancel" an assessment. The power is to annul the assessment. Against the above order of the CIT(A), Revenue appealed to the Tribunal. Before the Tribunal, it was contended by the Revenue that the order was completed by the ITO on the basis of the draft assessment order without forwarding objections to the IAC and awaiting his directions which were binding on him under which he was not empowered to do in view of the filing of objection to the draft order by the assessee within the stipulated time. The Tribunal, on consideration of the provisions of ss. 143(3) and 144B of the Act, held that the order of assessment passed by the ITO in violation to the provisions of sub-s. (4) of s. 144B of the Act was illegal and not substainable. The Tribunal, therefore, affirmed the order of the CIT(A) cancelling (annulling) the order of assessment. Hence, this reference at the instance of the Revenue.
3. We have heard Mr. Khatri, the learned counsel for the Revenue, who submits that non-compliance of the requirements s. 144B of the Act is an irregularity which would not vitiate the order of assessment. According to the learned counsel, in such case, the order passed by the ITO can be set aside with a direction to the ITO to make a fresh order after complying with the requirements of s. 144B of the Act.
4. Mr. Andhyarujina, learned counsel for the assessee, on the other hand, submits that the order of assessment passed by the ITO without complying with the mandatory requirements of s. 144B of the Act is an order without jurisdiction. The learned counsel submits that once objections to the draft assessment order are received by the ITO within the stipulated time, the only power left to him is to forward the objections to the IAC. Thereafter, it is the IAC who has the jurisdiction to consider the objection of the assessee and to decide the same and issue suitable directions to the AO to enable him to complete the assessment. Our attention was drawn by Mr. Andhyarujina to sub-s. (5) of s. 144B of the Act which provides that every direction issued by the IAC under sub-s. (4) of s. 144B shall be binding on the ITO. According to the learned counsel, the moment objections are filed by the assessee to a draft order, the jurisdiction of the ITO to make an assessment comes to an end, and the only power vested in him thereafter is to pass final order of assessment in accordance with the directions given by the IAC which are binding on him. He cannot vary or depart from those directions. That being so, according to the learned counsel, the order made by the ITO in this case, on the face of it, is not only illegal, but without jurisdiction and that being so, it is liable to be annulled. Reliance is placed in support of this contention on the decision of Gauhati High Court in Sonai River Tea Co. Ltd. vs. CIT (1990) 182 ITR 162 (Gau) : TC 11R.402 and the decision of the Orissa High Court in Commercial Enterprises vs. State of Orissa (1991) 81 STC 84 (Ori).
5. We have carefully considered the rival submissions. In this case, there is no dispute about the fact that the ITO proposed to enhance the returned income of the assessee by more than rupees one lakh and in that view of the matter, in accordance with the provisions of s. 144B(1) of the Act, made a draft assessment order and forwarded the same to the assessee on 4th April, 1977. It is also clear that though originally the filing of objection by the assessee on 6th April, 1977, was denied by the ITO, later, on enquiry being made by him under the directions of the CIT(A), it was admitted that objection had been filed by the assessee to the draft order within the stipulated time on 6th April, 1977. The said objections were not forwarded to the IAC and assessment was completed by the ITO himself on 12th April, 1977, treating it as a case of no objection from the assessee. The question that arises for consideration is whether in such a case, the ITO had the jurisdiction to pass the order of assessment after the receipt of the objection from the assessee on 6th April, 1977 and if not, whether the assessment made by him is liable to be annulled. To decide this controversy, it may be expedient to set out the relevant provisions of the Act which have a bearing on the determination of controversy. Sec. 251 of the Act deals with the powers of the appellate authority in disposing of an appeal. Clause (a) of sub-s. (1) thereof deals with his powers in disposing of an appeal against an order of assessment, whereas cl. (b) deals with the power in an appeal against an order imposing penalty. Clause (c) deals with powers in any other case. This section, so far as relevant, as it stood at the material time, reads :
"251. Powers of the AAC. - (1) In disposing of an appeal, the AAC shall have the following powers -
(a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; or he may set aside the assessment and refer the case back to the ITO for making a fresh assessment in accordance with the directions given by the AAC and after making such further inquiry as may be necessary, and the AO shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment;
(b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty;
(c) in any other case, he may pass such orders in the appeal as he thinks fit."
It is clear from the above provision that the powers of the appellate authority are different in appeals against different types of orders. In an appeal against the order of assessment, he has the power to "affirm, reduce, enhance or annul the assessment" or to set aside the assessment and refer the case back to the AO for making a fresh assessment according to the directions given by him. In case of an appeal against the order of penalty, the power is to "affirm or cancel such order" or vary it so as either to enhance or reduce the penalty. In other cases, he has power to pass such order as he thinks fit. It is clear from the above that in an appeal against the order of assessment, besides the power to reduce or enhance the assessment, he has the power to confirm or annul the assessment, or to set aside the same and refer the case back to the AO for making a fresh assessment. There is no power to set aside the order in case of penalty. In case of penalty order, the only power is to confirm or cancel the order or to vary it so as either to enhance or to reduce the penalty. The legislature has thus used different expressions, such as, "annulling the assessment", "setting aside the assessment" or "cancelling the order of penalty". The expression "cancellation of assessment" has been used in s. 146 of the Act which deals with the power of the AO to reopen a best judgment assessment under s. 144 of the Act. It is, thus, clear that the legislature has consciously and deliberately used the expression "annulment of assessment" in s. 251 of the Act. The question that arises for consideration is in which case the order should be set aside and in which case "annulled" and what is the difference between "setting aside the assessment" and "annulment of assessment". In our opinion, there is a material distinction between setting aside an assessment and annulment of assessment. In a case where the order of assessment is set aside, it is open to the AO to make a fresh assessment in accordance with law. In case of the annulment, the order becomes non est.
6. This distinction assumes importance in view of the provisions of ss. 144B of the Act, which mandates the ITO to make a reference to the IAC in certain cases and to make the assessment in terms of the directions of the IAC and s. 153 of the Act, which prescribes the time limit for assessments and reassessments. Under s. 144B, a special procedure has been laid down for assessment in cases falling thereunder and the power to decide the objections of the assessee to the draft order of the ITO is vested in the IAC only. Under sub-s. (5) of s. 144B, every direction issued by the IAC under s. 144B(1) is binding of the ITO. This section, so far as is relevant, as it stood at material time, reads :
"144B. Reference to IAC in certain cases. - (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under sub-s. (3) of s. 143, the ITO proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under sub-s. (6), the ITO shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the ITO within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the ITO may allow on an application made to him in this behalf.
(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the ITO the acceptance of the variation, the ITO shall complete the assessment on the basis of the draft order.
(4) If any objections are received, the ITO shall forward the draft order together with the objections to the IAC and the IAC shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the ITO to enable him to complete the assessment;
(5) Every direction issued by the IAC under sub-s. (4) shall be binding on the ITO.
***** ***** ***** *****"
Sec. 153 of the Act, which prescribes the time-limit for completion of assessment and reassessment, prescribes special period of limitation for making a fresh assessment pursuant to an order under ss. 250, 254, 263 or s. 264, setting aside the assessment or cancelling an assessment. It does not apply to assessment made pursuant to order under s. 251 of the Act annulling the assessment. Sec. 153, so far as is relevant, reads :
"153. Time-limit for completion of assessment and reassessments. - (1) No order of assessment shall be made under s. 143 or s. 144 at any time after -
(a) the expiry of -
***** ***** ***** *****
(iii) two years from the end of the assessment year in which the income was first assessable, where such assessment year is an assessment year commencing on or after the 1st day of April, 1969, ***** ***** ***** *****
(c) the expiry of one year from the date of the filing of a return or revised return under sub-s. (4) or sub-s. (5) of s. 139, whichever is latest.
***** ***** ***** ***** whichever is later.
(2A) Notwithstanding anything contained in sub-ss. (1) and (2) in relation to the assessment year commencing on the 1st day of April, 1971, and any subsequent assessment year, an order of fresh assessment under s. 146 or in pursuance of an order, under s. 250, s. 254, s. 263 or s. 264, setting aside or cancelling an assessment, may be made at any time before the expiry of two years from the end of the financial year in which the order under s. 146 cancelling the assessment is passed by the ITO or the order under s. 250 or s. 254 is received by the CIT or, as the case may be, the order under s. 263 or s. 264 is passed by the CIT.
(3) The provisions of sub-ss. (1) and (2) shall not apply to the following classes of assessments, reassessments and recomputations which may, subject to the provisions of sub-s. (2A), be completed at any time -
(i) where a fresh assessment is made under s. 146;
(ii) where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under ss. 250, 254, 260, 262, 263 or 264 or in an order of any Court in a proceeding otherwise than by way of appeal or reference under this Act;
(iii) where, in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under s. 147.
Explanation 1 : In computing the period of limitation for the purposes of this section. -
***** ***** ***** *****
(iv) the period (not exceeding one hundred and eighty days) commencing from the date on which the ITO forwards the draft order under sub-s. (1) of s. 144B to the assessee and ending with the date on which the ITO receives the directions from the IAC under sub-s. (4) of that section, or, in a case where no objections to the draft order are received from the assessee, a period of thirty days, or :"
On a conjoint reading of ss. 143, 144B, 251 and 153 of the Act, it becomes abundantly clear that if an assessment is set aside by the appellate authority, extended time limit is available for making a fresh assessment in pursuance to the direction of the appellate authority, but in case of annulment, no such extended time is available. There are no guidelines in s. 251 or any other provision of the Act as to when an order is to be set aside and when it is to be annulled.
7. Identical controversy came up before the Gauhati High Court in Sonai River Tea Co. Ltd. vs. CIT (supra). That was a case of an assessment under the IT Act where a variation of Rs. 3,05,735 was made in the income of the assessee by the ITO without forwarding a draft order to the assessee and inviting objections from the assessee as contemplated by s. 144B of the Act. The issue before the Court was whether the assessment made by the ITO in ignorance of s. 144B of the Act warrants the annulment of the assessment order under s. 251 of the Act or it was sufficient to set aside the order. The High Court, on elaborate discussion of the various authorities, Indian as well as English, held that the assessment was liable to be annulled. The position was aptly summed up by Raghuvir, C.J., as under :
"The assessee in the instant case showed an income of Rs. 72,288 in the return. The ITO did not accept the return. He varied the income to the sum of Rs. 3,05,735. Because of the variation, the ITO should have followed the procedure in s. 144B. He did not give a draft order to the assessee and invite objections from the assessee. Instead, he arrogated to himself the power to pass assessment order when in law he was not vested with the power to do so. In doing so, the ITO transgressed the Board's notification and transgressed the statutory provision in s. 144B. We are unable to hold that the omissions and transgressions of the ITO are mere irregularities. We hold that such an assessment order is to be annulled."
8. The question as to when an assessment order should be set aside and when it should be annulled also came to be considered by the Orissa High Court in Commercial Enterprises vs. State of Orissa (supra). It was held in that case :
"Annulment of an assessment is permissible where the taxing authority would have no jurisdiction to assess. In all other cases, where there is jurisdiction to assess, the assessment order may be set aside if there is any error, which requires further enquiry to be conducted by the appellate authority."
It is clear from the above decisions that if there is an irregularity in making an order of assessment, it may be set aside by the appellate authority with a direction to the assessing authority to make a fresh assessment in accordance with law. But if the order happens to be without jurisdiction, it has to be annulled. The word "annul" is not a technical word and may be expressed in equivalent words. In Black's Law Dictionary (Sixth Edn.), it has been defined to mean :
"To reduce to nothing; annihilate; obliterate; to make void or of no affect; to nullify; to abolish; to do away with. To cancel; destroy; abrogate. To annul a judgment or judicial proceeding is to deprive it of all force and operation, either ab initio or prospectively as to future transactions."
9. An assessment should, therefore, be annulled where the assessment proceedings is a nullity, in the sense that the AO had no jurisdiction to take the proceeding and/or to make a final order of assessment himself. Once the assessment is annulled, the order of assessment will cease to exist. The ITO will be at the stage where the illegality supervened, which resulted in the annulment of the assessment. It would be open to the ITO to take up the matter from the point at which the illegality supervened and to pass a fresh order even in case of annulment of the assessment, if it can be made according to the provisions of law and if the time-limit for taking further proceedings in the matter and making the assessment, if any, is still available. In the instant case, there is a time-limit for making an assessment. Extended time-limit has been provided for making fresh assessment in cases where the original assessment has been set aside by the appellate authority under s. 251 of the Act. No extended limitation is, however, available under s. 251 for making fresh assessment in a case when the original assessment is annulled. If the original time limit is still available, the ITO may proceed from the stage at which the illegality which resulted in the annulment of the assessment supervened and to make the assessment afresh.
10. In the instant case, the illegality supervened at the time the objections to the draft order were received by the ITO from the assessee. The only function left with the ITO thereafter was to forward the draft order, together with the objections, to the IAC. It was for the IAC to consider the draft order and the objections and after considering the draft order and objections and after going through the record relating to the draft order, issue appropriate directions in respect of the matters covered by the objection for the guidance of the ITO to enable him to complete the assessment. On receipt of the directions of the IAC, he was obliged to pass a final order of assessment pursuant to and in accordance with the directions given by the IAC. He had no power to vary or depart from the directions given by the IAC. It is thus clear that once the ITO makes a draft order of assessment as required by s. 144B of the Act and forwards the same to the assessee and assessee files objections to the same, he ceases to perform the powers and functions of the assessing authority. The power to consider the draft order and the objections of the assessee is thereafter vested in the IAC and he is the authority to determine the income of the assessee. The only remaining thing to be done by the ITO is to pass a final order of assessment pursuant to and in accordance with the directions of the IAC. If, in cases falling under s. 144B of the Act, the ITO arrogates to himself the power to pass an assessment order without referring the case to the IAC, such an assessment will be without jurisdiction and it will be liable to be annulled by the appellate authority.
11. We are supported in our above conclusion by the observations of the Supreme Court in a recent decision in Panchmahal Steel Ltd. vs. U. A. Joshi, ITO , where on leading objection under s. 144B of the Act, it was observed :
"Once a draft order is made and the matter is referred to the IAC on receiving the objections from the assessee, the function of the ITO practically comes to an end. Thereafter the only thing remaining for him to do is to pass a final order in accordance with the directions given by the IAC. He cannot vary or depart from those directions."
12. In view of the above discussion, we are of the clear opinion that in cases falling under s. 144B of the Act, the quasi-judicial function of the ITO as an assessing authority comes to an end the moment the assessee files objections to the draft order. The power to determine the income of the assessee thereafter gets vested in the IAC to whom the ITO is required to forward the draft order together with objections. The only thing that remained to be done by the ITO is to pass a final order in accordance with the directions given by the IAC. The function of the ITO to make the final assessment under s. 144B(5) of the Act is more in the nature of ministerial function because he can pass the order only in accordance with the directions of the IAC. He cannot vary or depart from the directions given by the IAC. Moreover, the requirements of s. 144B of the Act are mandatory. The ITO has no option but to follow the same. He cannot make the final order on the basis of the draft order without forwarding the same to the IAC along with the objections and without obtaining the directions of the IAC. An assessment made by the ITO in violation of provisions of s. 144B of the Act would be an assessment without jurisdiction. In the instant case, the admitted position is that on receipt of the draft order of assessment, the assessee did file objections and the ITO completed the assessment himself on the basis of the draft order without forwarding the draft order and the objections to the IAC and obtaining directions from him. Such an order, on the face of it, is beyond the powers of the ITO under s. 143 r/w s. 144B of the Act and, hence, without jurisdiction. The Tribunal, in our opinion, was, therefore, justified in its conclusion that the assessment was liable to be annulled. It was right in holding that the assessment order passed by the ITO in the instant case without reference to the IAC had not (sic) rightly been annulled by the CIT(A). In view of the above, we answer the question referred to us accordingly in favour of the assessee and against the Revenue.
13. This reference is disposed of accordingly with no order as to costs.