Patna High Court
Commissioner Of Income-Tax vs C.M. Rajgarhia on 19 July, 1979
Equivalent citations: [1980]121ITR778(PATNA)
JUDGMENT
1. At the instance of the Commissioner of Income-tax, Patna Bench "A", the Income-tax Appellate Tribunal has made a reference under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as "the Act".
2. The question which has been referred for the opinion of this court reads as under :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Appellate Assistant Commissioner directing the allowance of expenses in different assessment years while they had been claimed before the Income-tax Officer in later assessment years ? "
3. The facts which I am detailing will clarify the issue arising in this case :
The assessee is a registered firm dealing in mica. The assessment years, with which the said common question of law is involved are 1965-66, 1966-67 and 1967-68. Certain items of expenditure were claimed by the assessee as deductible against the profits for one or the other respective years of assessment. The ITO rejected the claims on the ground that since the assessee follows the mercantile system of accounting, the deductions claimed did not fall for consideration during the year in which they had been claimed. We will presently give the details of the expenses which have been claimed and for the years for which they have been allowed.
4. The assessee being aggrieved by the disallowances appealed to the AAC for all these years. The AAC took up all the appeals for hearing together and found that although some of the expenses were not allowable for the year for which they had been claimed, they were duly admissible against the profits of another year, of which he was in seisin in appeal. The AAC, accordingly, while upholding the disallowance of the expenses claimed against the profits of a particular year, allowed it against the profits of another year which also was in appeal before him.
5. The department, being aggrieved' by such a decision of the AAC, appealed to the Income-tax Appellate Tribunal. The Tribunal found that all the assessments were before the AAC and the assessee had claimed before him that as the expenses were disallowed only on the ground that they pertained to other years, the AAC was justified in going into the entire matter and directing the allowance of those expenses in the respective years to which they pertained. The Tribunal further found that there was no dispute that the expenses were allowable, the only dispute being about the year of allowance. The Tribunal, therefore, dismissed the departmental appeals and upheld the orders passed by the AAC. The CIT being aggrieved, has then got this matter referred to this court for opinion on the question as stated.
6. We may now indicate the nature of expenses which had been claimed by the assessee and the years for which they had been claimed, as also the year in which they had been allowed by the AAC. It will be proper to give it in a table (sic) form :
Sl. No. Nature of expenses claimed Amount claimed & allowed Asstt. year in which claimed Asstt. year in which allowed 1 2 3 4 5 Rs.
1.
Commission to Mudial Saheb 21,693 66-67 65-66
2. Audit fee 2,000 66-67 65-66
3. Bonus 6,719 67-68 65-66
4. Profit bonus payment 29,662 67-68 65-66
5. Emergency Risk Insurance 2,394 66-67 66-67
6. Emergency Risk Insurance 5,987 67-68 66-67
7. Quality claim 5,040 67-68 66-67
8. Loss for payment of defective quality 2,222 68-69 67-68
7. To put the question framed in other words, it is to the effect that if an item of income or expenditure has been considered by the ITO, but not for another assessment year could it be considered for that another assessment year by the AAC ?
8. Mr. Rajgarhia, learned standing counsel for the department, says that it could not be so considered by the AAC. For this proposition he has relied on certain decisions of the Supreme Court which I shall presently advert to. The first decision cited by him is the decision in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC). The next decision is in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC). The third decision is in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1 (SC). Mr. Rajgarhia's argument is that the AAC was not competent to give any finding with regard to any item of expenditure, while considering the appeal for one year, so as to affect the assessment of another year. These decisions, according to Mr. Rajgarhia, supported such an argument. According to learned counsel, it was immaterial that the AAC at the time when he made the observations, was in seisin of the appeals pertaining to all the years which were affected by such findings or consideration ; his findings or observations must remain confined to the single assessment year, with which he was dealing at that time. Relying upon another decision of the Supreme Court in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC), he submitted that each year of assessment was a unit by itself an II findings or consideration or observations made in connection with the essment year must remain confined to it. He, therefore, submitted that the question must be answered in the negative and in favour of the department.
9. Mr. Jain, appearing for the opposite party-assessee, submitted that the powers of the AAC were conterminous with that of the ITO, and when he was in seisin of assessments pertaining to assessment years more than one at a time and was looking into all of them together, he would be competent to modify each assessment, in the same manner and to the same extent as the ITO could have done. If, therefore, the AAC finds any error in the assessments as made, he was competent to make such modifications in each of those assessments, so as to make them legal and valid assessments. May be, that in doing so, some items of expenses which duly fell to be allowed in one year but had not been considered for that year by the ITO could be allowed by him for that year, if such claim was put forth before him by the assessee, supported by good materials for it. Learned counsel for the assessee further submitted that it was true that any finding, observations or consideration made by the AAC or the Tribunal must relate to the assessment in question, if it was regarding taxability or non-taxability of certain items. If, however, an observation, consideration or finding spilled over to another assessment year, such finding, observation, or consideration could only be treated as incidental observations or findings which were not required to be given effect to by the authorities concerned. In other words, by virtue of the consideration made in respect of certain items of income or expenditure, if it is found or observed that the said expenditure did not fall to be added or allowed for the assessment year in question, but duly fell for consideration in another assessment year, such a finding or observation would not give jurisdiction to the ITO to give effect to the finding either by reopening the assessments, or by taking such other steps under the law. According to Mr. Jain, this proposition was undisputed. He, however, submitted that the said proposition was not relevant for the case in question, because here the question related to the powers which have been conferred upon the AAC under the Act, and not as to what would be the effect of his finding or observation made in respect of an assessment for a year of assessment.
10. Mr. Jain has, therefore, submitted that the question must be answered in the affirmative and in favour of the assessee, because the AAC had acted within the limits of his power, which action of the AAC has been confirmed by the Tribunal.
11. The controversy, as I said earlier, was whether an item of expenditure or income processed by the ITO but not for a particular assessment year, could be reprocessed or could be considered by the AAC for being allowed against the profits of another assessment year. In the context of this question, the decisions cited by the learned standing counsel for the department lose relevance. The decision in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) was in connection with an action taken under Section 34 of the Indian I.T. Act, 1922, on the basis of a finding that a particular item of income was assessable not in the year in which it had been assessed but for an earlier assessment. In consequence of that, the assessment had been made by recourse to Section 34 of the said Act. Their Lordships held that the action under Section 34 was not valid, because the finding must be confined to the year concerned. It could not go beyond.
"The expressions 'finding' and 'direction' in the second proviso to Section 34(3) ", their Lordships observed, "meant, respectively, a finding necessary for giving relief in respect of the assessment for the year in question, and a direction which the appellate or revisional authority, as the case may be, was empowered to give under the Sections mentioned in that proviso. A 'finding', therefore, could only be that which was necessary for the disposal of an appeal in respect of an assessment of a particular year." (See headnote).
12. Their Lordships further observed that (See headnote):
"The Appellate Assistant Commissioner might hold, on the evidence, that the income shown by the assessee was not the income for the relevant year and thereby exclude that income from the assessment of the year under appeal...... He might incidentally and that the income belonged to another year, but that was not a finding necessary for the disposal of an appeal in respect of the year of assessment in question."
13. A similar observation was made by the Supreme Court in the case of CIT v. Rai Bahadur Hardutory Motilal Chamaria [1961] 66 ITR 443 (SC). In this case the AAC, while dealing with the assessee's appeal for a particular assessment year, gave a finding that a particular amount of cash credit should also be included in the income of the assessee for that assessment year. The source of the amount had neither been disclosed in the return filed by the assessee nor had the ITO processed that amount in the course of the assessment proceedings. Their Lordships, therefore, held that the enhancement which the AAC had made was not valid, because the said subject-matter had not been subjected to processing by the ITO from the view of its taxability.
14. It will thus be seen that both these decisions relate to a subject-matter, on which a "finding" could or could not be given by the tax authorities. They do not deal with the powers which the AAC could exercise while dealing with the matter which had been processed by the ITO in the course of an assessment, which assessment was in the course of being re-examined and reprocessed by the AAC. The instant case, it may be stated, is one in which the item of expenditure had been claimed by the assessee and had even been processed by the ITO. They had, of course, been claimed for a particular assessment year, but having regard to the mercantile system of accountancy they were found to be non-deductible for that assessment year. The very same assessment along with subsequent assessments were being processed by the AAC. The question, therefore, which has to be dealt with in the instant case, is not answered by these decisions. Learned standing counsel for the department has also placed reliance on the decision of the Supreme Court in the case of Addl. CIT v. Gurjargravures P. Ltd. [1978] 111 ITR 1 (SC). Once again I must say that this decision also has no hearing on the question in issue in the instant case. Here what had happened was that the assessee had made no claim for exemption allowable under Section 84 of the I.T. Act, 1961. The ITO, therefore, did not pass any orders in that regard. In appeal it was contended before the AAC that the ITO had erred in not granting the relief admissible to the assessee under Section 84 of the Act. The AAC rejected the contention, holding that since a claim had not been raised before the ITO, he could not be said to have erred in not allowing that relief. The matter then came to the Tribunal which held that having regard to the wide powers of the AAC, he should have considered the said claim of the assessee. The Tribunal then allowed the appeal. The reference made at the instance of the department to the High Court was answered in favour of the assessee. The matter then came before the Supreme Court and the question was:
"Whether, on the facts and in the circumstances of the case, it was competent for the Tribunal to hold that the Appellate Assistant Commissioner should have entertained the question of relief under Section 84 and to direct the Income-tax Officer to allow necessary relief ?"
15. Their Lordships, while allowing the appeal, observed that (p. 5):
"In the present case neither any claim was made before the Income-tax Officer, nor was there any material on record supporting such a claim."
16. It may be seen at once that the facts and the circumstances, under which this decision has been given, is wholly different from the one which is before this court. Here, to reiterate once again, a claim was in fact made before the ITO for the allowance or the said expenditure. The claim was disallowed for the particular assessment year, because under the mercantile system of accounting, the claim should have been made in the year in which the expenses arose. There was no dispute, rather, it was admitted that so far as the claim was concerned, it was genuine. The only question then left was as to which year the expenses really pertained. It is here that the AAC processed it and found out that the expenses pertained not to the year in which they have been claimed, but to the year in which they were now being claimed. This decision also, therefore, has no bearing on the facts and in the circumstances obtaining in the instant case.
17. As stated earlier, the crux of the matter is what are the powers of the AAC while dealing with an appeal against an assessment. Section 251 of the Act is relevant in this regard. In so far as it is relevant for the purpose of this case, this section reads:
"In disposing of an appeal, the Appellate Assistant Commissioner 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 Income-tax Officer for making a fresh assessment in accordance with the directions given by the Appellate Assistant Commissioner and after making such further enquiry as may be necessary, and the Income-tax Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax pay able on the basis of such fresh assessment......... "
18. The Supreme Court in the case of CIT v. McMillan & Co. [1958] 33 ITR 182 was seized with the question relating to the powers conferred on the AAC under Section 31 of the Indian I.T. Act, 1922, which would be equivalent to Section 251 of the present Act. In that case the ITO had failed to apply, his mind as to whether the proviso to Section 13 of the I.T. Act, 1922, would be applicable to the assessee's case and had made the computation of the assessee's income without applying his mind to that provision of the Act. When the matter came up in appeal, the AAC applied his mind to the assessment and then modified the assessment by applying the proviso to Section 13 of the said Act to the case. A question arose as to whether the AAC was justified in making such modification to the said assessment order. In that context their Lordships have observed (p. 190):
"It is not disputed that in an appeal from an assessment under Section 23, the Appellate Assistant Commissioner can interfere with the determination or judgment of the Income-tax Officer, and in such an appeal the Appellate Assistant Commissioner can make his own assessment and exercise the power which the Income-tax Officer could exercise."
19. Their Lordships further observed (p. 191):
"Before disposing of the appeal, the Appellate Assistant Commissioner may, if he thinks fit, make a further enquiry himself or cause it to be made by the Income-tax Officer, and in disposing of the appeal he may, in the case of an order of assessment, confirm, reduce, enhance or annul the assessment: he may set it aside and order a fresh assessment. There is nothing in the language of Section 31 of the Act which imposes any restriction on the powers of an Appellate Assistant Commissioner so as to prevent him from exercising the power under the proviso to Section 13...... It is true that the decision as to the method of accounting has to be arrived at first by the Income-tax Officer after a careful scrutiny of the accounts whether they are simple or complicated, and the power is to be reasonably and judicially exercised, which excludes any subjective or arbitrary decision by the Income-tax Officer. It cannot, however, be said that a power so exercised is clothed with finality and would be excluded from review by the Appellate Assistant Commissioner; and, in reviewing the order of the appellate authority can exercise the same powers which the Income-tax Officer could exercise."
20. The same view has been reiterated by the Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225. Their Lordships have observed that the AAC has plenary powers in disposing of an appeal. The scope of his powers is conterminous ; he can do what the Income-tax Officer can do and he can also direct him to do what he has failed to do.
21. Bearing in mind, therefore, the powers of the AAC under Section 251 of the Act, the question is whether he, being in seisin of the assessments in question, could make such adjustments or modifications in either of them, particularly when the assessee claimed it. There is no provision in the Act which debars the AAC from taking up appeals against assesment for a number of assessment years at one and the same time. Naturally, there fore, when assessment for a number of years are being considered together at one and the same time, if an item of expenditure, which, though processed and disallowed at the assessment stage by the ITO, is again claimed to be admissible against the profits of another year, the same, when being re-examined and reprocessed at the appellate stage by the AAC, could be allowed against the profits of the year to which it rightly pertained and more so when such claim is raised before him by the assessee. It has to be borne in mind that in doing so, the AAC was not giving a finding or an observation directing an ITO to exclude or include a certain sum of money in the assessee's income or from the assessee's income in respect of a year of assessment other than that of which he was in seisin. The AAC was in seisin of all the assessments and what he was doing was only to reprocess and re-examine the assessment for all these years. There being no doubt about the genuineness of the claims, the AAC has only put it against the profit of the year to which it rightly pertained. Such an action on the part of the AAC is within his competence in terms of Section 251 of the Act. In our opinion, the question has, therefore, to be answered in the affirmative and in favour of the assessee,
22. We accordingly answer the question in the affirmative and in favour of the assessee. The assessee will be entitled to costs. Hearing fee, Rs. 250.