Patna High Court
Fourth Income Tax Officer vs Karimia Trust. on 18 February, 1993
Equivalent citations: (1993)47TTJ(NULL)98
ORDER
U. S. DHUSIA, J. M. :
25th October, 1985.
The Revenue is aggrieved at whose instance these four appeals for the asst. yrs. 1969-70, 1970-71, 1971-72 and 1972-73 have been filed. According to the Revenue, the CIT(A) in disposing of the appeal filed by the assessee had made erroneous findings.
2. One of the issues raised in all these appeals is regarding the nature of the assessment made by the ITO. The ITO had made the assessments apparently under S. 144. According to the ITO, the assessee had defaulted in producing the books of accounts maintained by him for these years and, therefore, he invoked the provisions contained under S. 144 for making the assessments. According to the assessee, the ITO was misdirected in making the assessments under S. 144. The assessment made under S. 144 was an instance of erroneous finding and the assessment should be considered as having been made only under S. 143(3). The assessee no doubt maintained the books of accounts for the year but at the time when the books of accounts were called during the assessment proceedings under S. 147 for which notices were served for all these years, books of accounts maintained for these years had been lost or destroyed in riot which had affected the peace of the city in the year 1979. In April, 1979, Jamshedpur was the scene of a severe communal riot which had compelled the trustee to leave the city to another place for safety. The building where the books of accounts for the years were stored had been used by the authorities as refugee camp where some of the destitutes driven from their homes were accommodated. To support his claim, the Trustee S. M. Shafiq, filed an affidavit duly sworned before an Executive Magistrate, Jamshedpur. The ITO without bringing any material to show that the assessee had made a false claim that the books of accounts for all these years have been lost during the riot and without examining the trustee whose affidavit was filed reached a finding that the assessee had failed to produce books. This in finding in his view entitled him to make the assessment under S. 144 of the IT Act. The assessee challenged the assessment under S. 144 on the ground that on the facts and circumstances, the ITO was not justified in making the assessment under S. 144 when he has not been able to prove that the assessee had defaulted in producing the books of accounts. In fact, the assessments could be considered only as those made under S. 143(3). The CIT(A) moved by the plea of the assessee held that the assessment made by the ITO on the facts and circumstances of the case could not be considered as made under S. 144. The ITO had not brought any material to show that the assessee had defaulted in producing the books of accounts. The assessee had already explained that the books of accounts had been lost in the course of the severest communal riot which had taken place in April, 1979. Without dislodging this plea, the ITO was not entitled according to CIT(A) to hold that the assessee had defaulted in producing the books of accounts which entitled him to make the assessment ex parte. On the facts and circumstances of the case, the assessments should be considered as made under S. 143(3). The assessee had already furnished copies of the audited account together with returns filed by him, in compliance of the notices issued under S. 147. Revenue felt aggrieved and has raised this issue in appeal before the Tribunal.
3. According to the Standing counsel, Mr. Rajgarhia, the assessee was not justified in raising an issue regarding the validity of the assessments made under S. 144 without taking recourse to the procedure prescribed in S. 146 for having the assessments reopened. A perusal of S. 246 showed that cl. (d) of sub-s. (1) provided a specific remedy by way of appeal in respect of the assessment made under S. 144. He was, therefore, not entitled to raise this issue in an appeal against the quantum assessment. The CIT(A) misdirected himself in entertaining the appeal on this issue. The learned counsel for the assessee, Mr. N. P. Poddar, on the other hand controverted the plea of Revenue. He submitted that the assessee had not challenged the validity of the assessments made under S. 144. Besides he had not sought the assessment to be reopened and, therefore, it was not necessary to take recourse to the remedy provided under S. 146 of the IT Act. For that reason it was not necessary for the assessee to file an appeal under cl. (d) of sub-s. (1) of S. 246.
4. We have considered the facts of the case but we are unable to persuade ourselves that the plea of Revenue is one which can be adopted by us in recording a finding on the issue raised. Revenue has made its reliance on the well-known pronouncement of Bombay High Court in the case of Mauladin Ayub Firm vs. CIT (1959) 35 ITR 449 (Bom) where their Lordships held that the validity of assessment under S. 23(4) or a best judgment assessment could not be made the subject-matter of a dispute in a quantum appeal filed against best judgment assessment. Validity could be assailed only in an appeal filed against the order passed under S. 27 refusing to reopen the assessment. But this is not what the assessee has sought in the case before the CIT(A). He had not questioned the validity of the assessments made by the ITO. What he had questioned was the correctness of the assessment being made under S. 144 instead of S. 143(3). When the assessee had affirmed that he had lost account books, the ITO without bringing any material to show that he was making a false statement proceeded to make the assessment on the basis of the audited accounts accompanying the return. He had not sought that the assessments so made were invalid and had no longer legal existence. What the assessee had claimed was that the assessment so made by the ITO should be considered as one made under S. 143(3) and not one made under S. 144. He had assailed the assessments being labelled as those made under S. 144 and not as the facts, showed, should be considered made under S. 143(3). Therefore, in our view, there being no challenge to the validity of the assessments, the ratio of the Bombay High Courts pronouncement did not apply. We have another reason also to support this finding. We reproduce a part of the ITOs order as under :
"Hearing of the case was adjourned to 16th July, 1981 on the request of the assessee. It is on this date i.e., 16th July, 1981 that the return referred to above was filed. A notice under S. 143(2) was served on the same date while a notice under S. 142(1) was already served on the assessee, calling upon him to produce all the books of account, relevant for the asst. yr. 1970-71. No books of account were produced. However, the assessee was requested to state the reasons for non-production of the books of account and he was also requested to produce evidences in support of the claim regarding application of income for charitable purpose. The assessee was given one more opportunity for production of the relevant books of account and other documents in support of the return and compliance was required on 24th July, 1981. On 24th July, 1981, again adjournment was sought and the case was accordingly adjourned to 6th Aug., 1981. Again on 6th Aug., 1981, a time petition was moved, seeking further extension of time for making compliance. The case was again adjourned to 13th Aug., 1981 as per the request of the assessee. On 13th Aug., 1981 Shri D. Sengupta, Advocate appeared on behalf of the assessee but compliance with the terms of the notices under S. 142(1) and 143(2) already served were not made. On the other hand, the assessee filed a petition dt. 11th Aug., 1981, seeking my replies to certain irrelevant matters, introducing a novel concept of taxation of income of a trust. I did not feel bound to reply to the assessees letter. However, the assessee was requested once more to comply with the notices under S. 143(2) and 142(1) on 27th Aug., 1981. The assessee was duly warned on this date that failure on his part to make compliance may lead to ex parte assessment under S. 144 with attendant penal liabilities. Again, on this date a time petition was filed and the case was adjourned to 31st Aug., 1981. On 31st Aug., 1981, Shri S. M. Shafiq and Shri D. Sengupta, Advocate both appeared. The books of account and other relevant documents were not produced on the plea that they were lost in the circumstances mentioned in an affidavit sworn in by the trustee before the Executive Magistrate, Jamshedpur on 31st Aug., 1981. In the absence of the supporting books and documents I am obliged to make assessment ex parte under S. 144."
A perusal of the above extract shows that after the return was filed on 16th July, 1981, only the notice that was issued was one under S. 143(2). The ITO depended upon the notices issued under S. 142(1) prior to the filing of the returns. In his view these notices subsisted. As brought in the extract reproduced above he insisted for the compliance of those notices. A careful perusal of the above shows beyond doubt that no notice under S. 142(1) was issued after the filing of the returns. As far as the notices issued under S. 143(2) are concerned, the ITO himself noted that the Trustee Shri S. M. Shafiq and Shir D. Sengupta both appeared when they explained that the books of account had been lost in the circumstances mentioned in an affidavit filed before him which was sworn by the Trustee before the Executive Magistrate, Jamshedpur on 31st Aug., 1981. On the basis of these facts, we are unable to appreciate that the notices issued under S. 142(1) prior to the filing of the returns subsisted for those default, the ITO could proceed to make the assessments under S. 144. The ITO after filing of the returns issued notices under S. 143(2) which had been duly complied. We are, therefore, at a loss to understand the default committed by the assessee which entitled the ITO to proceed to make the ex parte assessments. We have no doubt that the notices under S. 142(1) lapsed after the filing and under the effect of the filing of the returns. The ITO would have been on firmer ground if he had proceeded to make ex parte assessments before the filing of the returns on the basis of default of notices issued under S. 142(1) but he could not proceed to make assessment under S. 144 on the basis of notices issued under S. 142(1) when these had lapsed after the filing of the returns. As there was no non-compliance of any notice, the assessments were rightly considered by the CIT(A) as made under S. 143(3) only and not as those made for any default under S. 144. We would not go further in the matter and point out that the scheme of the Act as laid out in S. 246 for enabling the assessee to go in appeal is somewhat different from that which was prescribed under 1922 Act. Clause (c) of S. 246 entitled the assessee to file an appeal against an order passed under S. 143 as well as 144. If an assessee acting under the effect of this provision can question the validity of assessments made under S. 143(3), we are unable to appreciate how an assessee can be prevented from challenging the validity of an assessment made under S. 144. The presence of an additional remedy provided to the assessee in case of ex parte assessments made under S. 144 by taking recourse to procedure presented under S. 146, cannot disentitle the assessee apart of the effect of the remedy provided by cl. (c) as is ensured against assessments made under S. 143(3). A little though about the effect of S. 146 would show that the panacea presented in this provision cannot be understood as one ruling out other remedies provided in the Act under S. 246(1)(c), S. 154, S. 264 and so on. But again we reiterate in this connection that the assessee had not challenged the validity of the assessments as such. He had not sought the assessments to be reopened which might have been obligatory to take recourse to the procedure prescribed under S. 146. His grievance was that the assessments being rightly made under S. 143(3) were incorrectly labelled as made under S. 144. There was a mistake only in nomenclature of the section which the assessee had objected to and which the CIT(A) has allowed. Supreme Court has again and again said mistake in mentioning of the section will not, if assessability is not challenged, invalidate the assessment. Therefore, as we have brought about in the above analysis, we are unable to appreciate the error pointed out by the Revenue in the order of the CIT(A) who has corrected the section under which assessment was made. We, therefore, reject its plea and dismiss its appeal on this issue for all four years.
5. There is another issue raised by the Revenue regarding the assessability of the excess of income estimate over income disclosed for the gross surplus which was not covered by the amount applied for charitable purposes. There are another two allied issues raised in the appeal. One is that CIT(A) was not justified in reducing estimates of income made by ITO for these years, nor hold that expenditure incurred on Waqf fee, trustees remuneration or repair over furniture and fixtures which had been disallowed by ITO in these years were allowable. We will deal with these issues relating to different aspects of computation of income of the present assessment together. The ITO had no doubt proceeded on the premise that the assessee is a public charitable trust whose income is exempt. But since the assessee was carrying on business of running the two cinema houses styled as Jamshedpur and Karim Talkies, benefit of exemption was not permissible under the effect of S. 13. He, therefore, computed the profit derived from these cinemas. The assessee had worked the income from running of two cinemas at Rs. 67,189 for asst. yr. 1969-70, Rs. 1,07,342 for asst. yr. 1970-71, Rs. 1,47,769 for asst. yr. 1971-72 and Rs. 1,14,608 for asst. yr. 1972-73. According to the working of the ITO, rates of percentage of profit being 9.4% for the asst. yr. 1969-70, 13.2% for asst. yr. 1970-71, 18.8% for asst. yr. 1971-72 and 12.6% for asst. yr. 1972-73, rate of profit was not uniform. The rates of profit not being uniform and according to ITO being quite low for some years he felt he could not accept the trading results as fair and reasonable. Accordingly, he made his own estimates of income. He estimated the income for asst. yr. 1969-70 at Rs. 1,05,000, for asst. yr. 1970-71 at Rs. 1,50,000, for asst. yr. 1971-72 as Rs. 1,60,000 and for asst. yr. 1972-73 at Rs. 1,70,000. He worked out the surplus at Rs. 48,950 for asst. yr. 1969-70. Rs. 1,09,474 for asst. yr. 1970-71, Rs. 50,910 for asst. yr. 1971-72 and Rs. 74,260 for asst. yr. 1972-73. According to him, these incomes were not covered by application towards charity and, therefore, they were taxable. In working out the surpluses he also disallowed expenditure incurred on waqf fee, trustees remuneration and expenses incurred on furniture and fixtures. He had disallowed an aggregate of amounts incurred under these heads Rs. 7,865 for asst. yr. 1969-70, Rs. 45,055 for asst. yr. 1970-71, Rs. 27,937 for asst. yr. 1971-72 and Rs. 43,826 for asst. yr. 1972-73. The assessee felt aggrieved and he impugned the working of the ITO before the CIT(A). The CIT(A) found that the estimates made by the ITO were rather excessive and he, therefore, made his own estimates at Rs. 84,000 for asst. yr. 1969-70, at Rs. 1,20,000 for asst. yr. 1970-71, at Rs. 1,58,000 for asst. yr. 1971-72 and at Rs. 1,20,000 for asst yr. 1972-73. He also allowed the claim of the assessee in respect of expenses incurred on waqf fees, trustees remuneration and those on furniture and fixtures. He accepted that these expenses were to be considered as applications towards charity. According to the CIT(A), the surplus came to Rs. 20,088 for asst. yr. 1969-70, Rs. 17,006 for asst. yr. 1970-71, Rs. 15,974 for asst. yr. 1971-72 and Rs. 7,006 for asst. yr. 1972-73. These sums he arrived at by excluding the application by the assessee towards charity for the respective years from the income estimated by him. According to him, since the assessee applied more than 75% of the income earned in each of these years, no liability for tax arose. He observed as under :
"The appellant has, therefore, clearly applied more than 75% of the income earned in these two years towards the charitable purposes. Accordingly, I hold that this being a case of trust, the appellant was not liable to any tax. Accordingly, I hold that no tax was chargeable from the appellant for the two assessment years."
The Revenue has felt aggrieved by these findings regarding the estimates of income, the expenses incurred towards charity and the resulting surpluses in these years. According to the learned Standing Counsel for the Department, the CIT(A) had not appreciated the notional income which resulted from estimates of income being in excess of income disclosed for these years could not be considered as applied towards the charity nor could be considered set apart for accumulation to be applied in charity in future. According to him, these were profits determined outside the books of account. Therefore, there could be no possibility of application of these towards charity which were detailed in the books of accounts. Therefore, as far as this aspect of the matter was concerned, the CIT(A) in his view was not correctly advised. The learned counsel for the assessee, on the other hand, submitted that the parts of income which resulted from the estimates of income exceeding the income disclosed or the amounts applied towards charity should be considered a part of the income of the trust for considering the application of income towards charity under sub-s. (2) of S. 11. No doubt, such income was only notional income which was outside the books but nevertheless such income was a part of the total income of the assessee-trust.
6. We have considered the facts of the case and it appears to us that the plea of Revenue in this respect is not well conceived in law. It is an axiom of law that law does not seek the impossible to be accomplished nor prescribes an impossible obligation to be discharged for invoking a provision granting relief to subject. What is impossible cannot form subject-matter of obligation contemplated by any legislature. Law never calls upon a citizen to accomplish the impossible. Therefore, who made the law that not less than 75% of income should be applied towards the charity to avail exemption under S. 11 of the Act could not have contemplated that any Act impossible of achievement should be prescribed as a part of the obligation to be carried out by the trust. As it was a notional income resulting from the estimate and was placed outside books of accounts it could not be applied towards charity taking a strict view of the matter. It is only when we consider that it was as real and live income and not merely notional that it would be allowed to be considered as a part of total income out of which application could be made.
Umpteen times Courts have ordained that it is the real income which is being assessed under the IT Act. It is not the notional income which is not real income and which has no existence can be sought to be assessed under the provisions of the IT Act. Therefore, we cannot allow any objection on the score that the surplus was notional income resulting from the estimate and did not find a place in the books of accounts and, therefore, could not be applied towards charity to succeed. We endorse the view of the CIT(A) that what the provision contained in sub-s. (2) of S. 11 enjoins upon is to ensure that 75% of the income was applied. We cannot allow a distinction between the parts of the real income and notional income to crop in to support that notional income could not have been applied to charity. In case the distinction is pressed such notional income which is incapable of being applied to charity has to be ignored. We, therefore, reject the contention of the Revenue and uphold the findings of the CIT(A). We also uphold his finding about the estimates of income as also his finding about the allowability of expenses disallowed by the ITO regarding waqf fee, remuneration of trustees and expenditure on furniture and fixtures.
7. We take up for disposal now another issue raised in these appeals. The one issue raised in these appeals is that the CIT(A) erred in holding that the assessee is not liable for payment of interest under S. 139(8) and that chargeable under S. 217(1A). The CIT(A) has observed in para 4.10 as under :
"In the light of the aforesaid, the appellant was also not liable to pay any interest under S. 139(8) and 217(1A) of the Act. The interest of Rs. 21,609 and Rs. 26,110 charged by the ITO under S. 139(8) and 217(1A) of the Act respectively for asst. yr. 1969-70 and Rs. 26,199 and Rs. 24,126 and Rs. 26,189 under S. 139(8) and 217(1A) respectively for the asst. yr. 1971-72 are cancelled."
In the light of the aforesaid, the appellant was also not liable to pay any interest under Ss. 139(8) and 217(1A) of the Act. The ITO had levied interest of Rs. 21,609 for asst. yr. 1969-70, Rs. 72,887 for asst. yr. 1970-71, Rs. 24,126 for asst. yr. 1971-72 and Rs. 40,935 for asst. yr. 1972-73. Similarly, he has caused interest under S. 217(1A) to be levied for these assessment years, Rs. 26,110 for asst. yr. 1969-70, Rs. 81,138 for asst. yr. 1970-71, Rs. 26,189 for asst. yr. 1971-72 and Rs. 46,405 for asst. yr. 1972-73. Since, the CIT(A) has held that as the assessee was not liable for income-tax for any of these years, he could not be held liable for interest under S. 139(8) nor under S. 217(1A). Revenue has assailed also the entertainability of the appeal against the levy of interest under these sections. It is now well settled in law and there is unanimity in judicial pronouncements that wherever levy of interest under these provisions are assailed alongwith other grounds of appeal filed against an assessment order, right of the assessee to impugn the levy of interest cannot be denied. Acting on the consensus of the judicial pronouncements we over rule the plea of the Revenue that the appeal against the levy of interest was not under these sections maintainable. Similarly, we overrule the plea of the Revenue in respect of interest under these sections and uphold the finding of the CIT(A) that on facts of the case levy of interest under these sections was an erroneous exercise. When the assessee was not liable for tax he could not be held liable for interest under these sections. Therefore, we find no error in the finding of the CIT(A) who had entertained the appeal and recorded a finding on the issue against the Revenue. We reject the contrary contention of the Revenue and dismiss its appeal on the issue.
8. In the result, the appeals of the Revenue for all these years are dismissed.
B. NATH, A. M. :
25th October, 1985.
I have not been able to agree with the decision of my learned brother on 3 issues in these appeals. I would discuss each of them separately.
2. I would first take up the issue regarding the contention of the assessee that the assessments in question should be taken to have been made under S. 143(3) and not under S. 144. The ITO had issued notices under S. 142(1) as also under S. 143(2) and had given several opportunities to the assessee for compliance the details of which are mentioned in the ITOs order as under :
"This return has been filed by the assessee in the course of assessment proceedings which was initiated by issuing a notice under S. 148 on 28th Feb., 1978. This notice was served on the assessee on 4th March, 1978 vide office copy of the said notice placed on record. It was issued after obtaining the satisfaction of the Commissioner regarding fitness of the case for the issue of notice under S. 148 had been recorded on 22nd Feb., 1978 and communicated to the ITO vide his letter No IT-VI-11/BR-1/78372, Patna, the dt. 22nd Feb., 1978. As already mentioned, the notice under S. 148 was served on Shir S. M. Shafiq on 4th March, 1978 but the assessee did not deliver any return within 30 days from the date of service. Subsequently a notice under S. 142(1) dt. 21st Sept., 1978 requiring compliance on 25th Sept., 1978 was served on the assessee. Nothing was heard from the assessee in response to this notice either. Later on, another notice under S. 142(1) dt. 1st June, 1981 was served on the assessee and compliance was required on 11th June, 1981. On this date, i.e., 11th June, 1981, the assessee requested for time for about 5 weeks for compliance with the said notice. Hearing of the case was adjourned to 16th June, 1981 on the request of the assessee. It is on this date, i.e., 16th June, 1981 that the return referred to above was filed. A notice under S. 143(2) was served on the same date while a notice under S. 142(1) was already served on the assessee, calling upon him to produce all the books of account, relevant for the asst. yr. 1969-70. No books of accounts were produced. However, the assessee was requested to state the reasons for non-production of the books of account and he was also requested to adduce evidence in support of the claim regarding application of income for charitable purposes. The assessee was given one more opportunity for production of the relevant books of accounts and other documents in support of the return and compliance was required on 24th July, 1981. On 24th July, 1981, again adjournment was sought and the case was accordingly adjourned to 6th Aug., 1981. Again on 6th Aug., 1981, a time petition was moved, seeking further extension of time for making compliance. The case was again adjourned to 13th Aug., 1981 as per the request of the assessee. On 13th Aug., 1981, Shri D. Sengupta, Advocate appeared on behalf of the assessee but compliance with the terms of the notices under Ss. 142(1) and 143(2) already served were not made. On the other hand, the assessee filed a petition dt. 11th Aug., 1981, seeking my replies to certain irrelevant matters, introducing a novel concept of taxation of income of a trust. I did not feel bound to reply to the assessees letter. However, the assessee was requested once more to comply with the notice under Ss. 142(1) and 143(2) on 27th Aug., 1981. The assessee was duly warned on this date that failure on his part to make compliance may lead to ex parte assessment under S. 144 with attendant penal liability. Again, on this date, a time petition was filed and the case was adjourned to 31st Aug., 1981. On 31st Aug., 1981, Shri S. M. Shafiq and Shri D. Sengupta, Advocate both appeared. The books of account and other relevant documents were not produced on the plea that they were lost in the circumstances mentioned in an affidavit sworn in by the trustee before the Executive Magistrate, Jamshedpur on 31st Aug., 1981. In the absence of the supporting books of account and documents I am obliged to make assessment ex parte under S. 144."
3. The plea of the assessee is that the books of accounts were lost or destroyed in riot which broke out in Jamshedpur in 1979. The assessee, it is argued, was not in a position to produce the books as the books were not available. This plea of the assessee has been accepted by the CIT(A) and my learned brother. The basic issue, however, is as to whether the assessee had the right to challenge in quantum appeals under consideration the finding of the ITO that the assessments had to be done under S. 144 as the assessee had not complied with the terms of the notice under S. 142(1) by not producing the books of accounts. According to the learned Standing Counsel this issue could only be raised by filing a petition under S. 146 which was admittedly not filed. The question now arises whether the assessee can raise this plea in a quantum appeal even when no petition under S. 146 has been filed. In this connection the Standing Counsel has relied upon the decision of Bombay High Court reported at Mauladin Ayub Firm vs. CIT (1959) 35 ITR 449 (Bom). It was held in that case as under :
"(ii) that, therefore, S. 27 applied to the case of the assessee and as the assessee did not avail himself of the right under S. 27 to show cause and have the best judgment assessment set aside he was precluded from agitating the validity of the best judgment assessment under S. 23(4) in the appeal to the AAC under S. 30.
When a case falls under S. 27 then any grievance of the assessee as against the ITO for not making the requisite order must be litigated in an appeal against an order under S. 27. When S. 27 has no application, then any question that might arise in appeal which has a bearing with regard to an order made by the ITO under S. 23(4) can be litigated in an appeal under S. 30. But apart from cases of cancellation of registration of a firm which in terms do not fall under S. 27, every other case of contumacious refusal of an assessee to comply with any notice issued by the ITO under S. 23(4) can only be challenged under S. 27."
4. It is clear that the validity of the ex parte assessment cannot be challenged in quantum appeal as per decision of Lordships of Bombay High Court in the said case. My learned brother in this connection has stated that no notice under S. 142(1) was issued after the return was filed and my learned brother has also held that notice under S. 142(1) lapsed after the filing and under the effect of filing the returns. I do not find any provision of law by which notice under S. 142(1) lapses or becomes redundant after the filing of return. I do not agree with the finding at all. The ITO, as detailed in his order (quoted above) had issued notice under S. 142(1) dt. 21st Sept., 1978 which was duly served. Further notice under S. 142(1) dt. 1st June, 1981 was served on 11th June, 1981. No compliance was made of these notices. As the Departmental Representative pointed out the first notice under S. 142(1) was issued and served in 1978 when the books were admittedly with the assessee (the plea of the assessee is that the books were lost/destroyed in 1979). Moreover, the assessee always kept on asking for time till 31st Aug., 1981 only when the assessee raised the plea that the books were destroyed/lost in the riot in 1979. Thus, I hold that notice under S. 142(1) was duly served for production of books which was not complied with even at a time when the assessee had admittedly the books. The mention of S. 144 has been made by the ITO after a thorough discussion in the assessment order and it is not a mistake of nomenclature as has been argued on behalf of the assessee. It is true that the plea regarding the alleged loss of the books were raised but the ITO did not accept the said plea. Whether the ITO was correct or not in not accepting the said plea could only be raised by filing a petition under S. 146 which the assessee chose not to file. As per decision of Bombay High Court in Mauladin Ayub Firm vs. CIT (supra) this issue could not be raised in quantum appeals. Here again the CIT(A) and my learned brother have stated that the assessee did not challenge the validity of assessments but only S. 144 under which the assessments were made. In this connection, I would mention provisions of Ss. 144 and 146 as under :
"144. If any person -
(a) fails to make the return required by any notice given under sub-s. (2) of S. 139 and has not made a return or a revised return under sub-s. (4) or sub-s. (5) of that section, or
(b) fails to comply with all the terms of a notice issued under sub-s. (1) of S. 142 or fails to comply with a direction issued under sub-s. (2A) of that section, or
(c) having made a return, fails to comply with all terms of a notice issued under sub-s. (2) of S. 143, the ITO, after taking into account all relevant materials which the ITO has gathered shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment."
"146. (1) where an assessee assessed under S. 144 makes an application to the ITO, within one month from the date of service of a notice of demand issued in consequence of the assessment, for the cancellation of the assessment on the ground -
(i) that he was prevented by sufficient cause from making the return required under sub-s. (2) of S. 139, or
(ii) that he did not receive the notice issued under sub-s. (1) of S. 142 or sub-s. (2) or S. 143, or
(iii) that he had not a reasonable opportunity to comply, or was prevented by sufficient cause from complying, with the terms of any notice referred to in cl. (ii), the ITO shall, if satisfied about the existence of such ground, cancel the assessment and proceed to make a fresh assessment in accordance with the provisions of S. 143 or S. 144.
(2) Every application made under sub-s. (1) shall be disposed of within ninety days from the date of receipt thereof by the ITO :
Provided that in computing the period of ninety days aforesaid, any delay in disposing of the application which is attributable to the assessee shall be excluded."
From a perusal of the above sections, it would be clear that the assessment under S. 144 cannot be changed into an assessment under S. 143(3) without setting aside the assessment and making the assessment afresh. This is the scheme of the IT Act and it, in my opinion, cannot be circumvented by the device adopted by the assessee. If an ex parte assessment is sought to be changed to an assessment under S. 143(3), the only way, in my opinion, is to challenge it by filing petition under S. 146. My learned brother has also stated that there is change in the appellate procedure under the Act of 1961 as compared to the Act, 1922 in this connection. In my opinion there is absolutely no change in the appellate procedure brought about by the Act of 1961 as far as the right of appeal against the validity of ex parte assessment is concerned. Under the Act of 1922, the aggrieved assessee had the remedy to file petition under S. 27. In the same way now under the Act of 1961, the assessee can file petition under S. 146. There is absolutely no provision under the law entitling the assessee to get the assessment made under S. 144 changed to assessment under S. 143(3) without filing petition under S. 146 and without getting the assessment set aside to be made afresh. I may again repeat that the nomenclature of S. 144 is not given by the ITO here by mistake but quite consciously after a thorough discussion.
5. I am, therefore, of the opinion that CIT(A) was not correct in entertaining this plea of the assessee in the quantum appeals. This ground of appeal of the Department in the four years, in my opinion should be allowed.
6. The second issue under consideration is that part of the total income which is over and above the income disclosed and which is clearly taxable according to the provisions of S. 11(4) which reads as under :
"11(4) For the purposes of this section "property held under trust" includes a business undertaking so held and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the ITO shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes."
The assessee has income from two cinema houses which were run. The provisions of S. 11(4) were applicable and relevant to all the years under consideration. CIT(A) has held that as the assessee had utilised more than 75% of the total income for charitable purposes no part of the total income is taxable. My learned brother has agreed with his view and has also stated that the total income which is over and above the income disclosed was no doubt income outside the books and notional income. But according to him the same has to be taken into consideration in finding out whether the assessee has applied 75% for purposes of charity or not. It has also been mentioned by him that an impossible act cannot be contemplated by the legislature.
7. It would be relevant here to mention the arguments of the Standing Counsel on this topic. He argued that the part of the total income which is estimated over and above the disclosed being outside the books could not be treated to have been part of the expenditure for charitable purposes as per books nor can it be treated to have been accumulated for charitable purposes being outside the books. Moreover, the provisions of S. 11(4) are clear that the part of total income which is in excess of the total income disclosed shall be deemed to have been utilised for non-charitable objects. The word used in S. 11(4) is shall. Thus it is obligatory and there is no discretion left to treat it in any other way [as has been done by the CIT(A)]. It is, thus argued on behalf of the Department that the CIT(A) gave a decision completely against the clear provisions of S. 11(4).
8. I have given my careful consideration to the rival arguments and the views of my learned brother. I have not been able to agree with his views. Provisions of S. 11(4) are clear and unambiguous. According to these provisions the excess income has to be deemed to have been utilised for non-charitable objects. The word shall in S. 11(4) does not leave any room for having any other interpretation or conclusion. In my opinion, the excess income estimated is clearly taxable as it has to be deemed to have been spent for non-charitable objects. It cannot also be treated to have been accumulated for charitable purposes. In my opinion, thus, the order of CIT(A) on this issue is liable to be reversed. I do not agree with the view of my learned brother on this issue.
9. The third issue is with regard to the charge of interest under Ss. 139(8) and 217(1A). CIT(A) has held that the charge of interest under Ss. 139(8) and 217(1A) was not correct as no part of total income was taxable. My learned brother has agreed with him. I have already held above that the excess estimated in the total income over the income disclosed is taxable under S. 11(4). I, therefore, am of the opinion that the order of the CIT(A) is liable to be reversed on this point. I, thus, do not agree with the conclusion of my learned brother on this issue as well.
ORDER OF REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961.
27th December, 1985.
We, the Members of Patna Bench having differed on the above issue while deciding the case of M/s. Karimia Trust, Jamshedpur (In ITA Nos. mentioned above) for the asst. yrs. 1969-70 to 1972-73, refer the following questions to the President, ITAT under S. 255(4) :
"1. Whether, on the facts and in the circumstances of the case, the assessments made for the asst. yrs. 1969-70 to 1972-73 should be treated as made under S. 143(3) and not under S. 144 as was done by the ITO ?
2. Whether, on the facts and in the circumstances of the case, there was any excess income at all which was not reflected in the return shown by the assessee for any of the four asst. yrs. 1969-70 to 1972-73 ?
3. Whether, the excess income worked out in assessment which was not reflected in the return on the facts and in the circumstances of the case would affect the claim of the assessee-trust for allowing exemption from tax under S. 11(4) for any of the four asst. yrs. 1969-70 to 1972-73 ?
4. Whether, on the facts and in the circumstances of the case, the assessee-trust was liable to be charged with interest either under S. 139(8) or under S. 217(1A) for asst. yrs. 1969-70 to 1972-73 ?"
P. J. GORADIA, A. M. (AS THIRD MEMBER) :
18th February, 1993.
Because of the difference between the two members, following four questions are referred for the opinion of the Third Member :
"1. Whether, on the facts and in the circumstances of the case, the assessments made for the asst. yrs. 1969-70 to 1972-73 should be treated as made under S. 143(3) and not under S. 144 as was done by the ITO ?
2. Whether, on the facts and in the circumstances of the case, there was any excess income at all which was not reflected in the returns shown by the assessee for any of the four asst. yrs. 1969-70 to 1972-73 ?
3. Whether, the excess income worked out in assessment which was not reflected in the returns on the facts and in the circumstances of the case would affect the claim of the assessee-trust for allowing exemption from tax under S. 11(4) for any of the four asst. yrs. 1969-70 to 1972-73 ?"
4. Whether, on the facts and in the circumstances of the case, the assessee trust was liable to be charged with interest either under S. 139(8) or under S. 217(1A) for asst. yrs. 1969-70 to 1972-73 ?"
2. The two separate orders passed by the learned Judicial Member and the learned Accountant Member were already forwarded to both the parties. The elaborate facts stated in both the orders are not repeated here for the sake of convenience because there is no dispute on facts. There is dispute only with regard to the interpretation of the relevant provisions of law while applying the same to the facts of the case.
3. Representatives of both the sides were heard at length.
4. With regard to question No. 1 the representatives of both the sides agreed that the question proposed is purely academic in the sense that the variation in the income determined and the tax payable, if any, is not dependent upon answer to the question proposed. Since, however, the reference is made I am duty bound to express my opinion. I have gone through both the orders over and over again and I am of the opinion that the view taken by the learned Accountant Member, which is against the assessee is required to be upheld. Subsequent to the differing orders passed in October, 1985 I find that in H. S. Imam vs. CIT (1988) 171 ITR 214 (AP), similar controversy was decided where it was held that in an appeal against the order of assessment made under S. 144, it is not open to an assessee to raise a ground concerning the validity of making of the assessment ex parte under S. 144 without availing of the remedy provided under S. 146 of the Act. It was further held that S. 251 of the Act sets out the power of the first appellate authority while disposing of an appeal, but such powers will not extend to going into the validity of the assessment made by the Assessing Officer under S. 144 of the Act, where the assessee had not availed of the remedy provided under S. 146 of the Act. This view was further approved by Punjab & Haryana High Court in the case of Kishan Chand vs. CIT (1990) 183 ITR 83 (P&H). Therefore, I am in entire agreement with the learned Accountant Member who held in paragraph 4 of his order that validity of the ex parte assessment could not be challenged in quantum appeal, thus, disagreeing with the learned Judicial Member, who opined that this could be done as stated in para 4 of his order.
4.1 The learned Judicial Member has further stated that notice under S. 142(1) was issued at a time when return of income was not filed by the assessee and since no fresh notice was issued under S. 142(1) of the Act after the assessee filed the returns of income, no notice of earlier default could be taken by the Assessing Officer while framing assessment on the basis of returns filed by the assessee. But this aspect is not properly appreciated because, in the assessment order, the relevant portion of which is extracted in the order passed by the learned Accountant Member, it is specifically stated by the Assessing Officer that even on 27th Aug., 1981, that is to say, after the returns of income were filed by the assessee, the assessee was specifically requested once more to comply with the notices under Ss. 142(1) and 143(2). Therefore, mere technical lapse, if it is assumed to be a lapse, of not giving a fresh notice and asking the assessee to produce the books of accounts, could not be treated as lack of notice subsequent to the filing of the returns of income. However, this point also becomes immaterial because on going through the assessment order for asst. yr. 1969-70 I find in paragraph 2 of the assessment order that the Assessing Officer has made the assessment ex parte under S. 144 only in the absence of supporting books of accounts and documents. Therefore, certainly there was non-compliance even with the requirement of S. 143(2) requiring the assessee to produce the relevant books of accounts in support of the returns of income filed by the assessee. Even for such non-compliance the assessment could be made under S. 144. The learned Judicial Member appears to have been influenced by an impression that the ex parte assessments were made by the Assessing Officer only because of default, i.e., non-compliance of terms of notice under S. 142(1) with regard to the production of books of accounts. This is incorrect appreciation of facts.
5. With regard to question No. 2, no submissions were made by the representatives of both the sides. On going through the assessment order for asst. yr. 1969-70 I find that the excess income refers to the difference between the income shown in the books of accounts and the amount of income determined under the assessments. The higher income determined in the assessment is not on account of any addition made by way of income. This is clear from the assessment order for asst. yr. 1969-70 when the learned Assessing Officer observed that the expenses claimed under various heads in these four years did not appear to be commensurate with the gross receipts disclosed in the respective years and thereafter he further observed that while he was inclined to accept the gross receipts disclosed by the assessee because of the fact that the same had been subject to verifications by the Commercial Tax Authorities from time to time, yet the expenses claimed were not verifiable. He proceeded to estimate the net profits from the two cinema houses from which the profits were earned. Therefore, neither it is the case of the Assessing Officer nor is there any finding that the excess income, that is to say, the differential amount between the income returned and the income assessed, was on account of any non-disclosure of income by the assessee. Such differential amount would normally arise in the case of income from business because the income has to be computed for the purpose of assessment under the IT Act which allows deductions from income only as per the provisions of the IT Act irrespective of the accounting principles governing the profits disclosed as per the books of accounts and that is why in S. 11(4) of the Act special reference is made to the power of the Assessing Officer to determine the income of business undertaking in accordance with the provisions of the IT Act. Besides, under the Act the Assessing Officer only assesses the income which is a base for raising tax demand and it is not his function to determine the actual income of the assessee as per the books of accounts which are maintained on principles of accountancy. Therefore, merely because of such variation it cannot be said that there was any excess income at all which is not reflected in the books of the assessee or declared in returns. Similar is the position of assessment in other years.
6. With regard to question No. 3, it is not in dispute that S. 11(4) of the Act is applicable to the facts of the case, inasmuch as, the cinema houses owned by the assessee trust is the property held under the trust and that the income of the cinema houses cannot be included in the total income of the persons in receipt thereof, if there is no variation between the income disclosed by the assessee and income assessed. As stated earlier, in accordance with the provisions of the IT Act governing the computation of income under the head business, income determined for the purpose of assessment would normally vary from the income disclosed by the books of accounts but this itself will not amount to forfeiture of the exemption under S. 11(4) of the Act. That is why it was found necessary to refer in section to the treatment to be given to such differential amount while determining the income of the assessee trust for the purpose of IT Act. Sec. 11 under other various sub-sections and clauses states that to the extent the income of the trust is applied to charitable purposes the same shall be excluded while determining the income for the purpose of assessment to tax. Similarly the income which is set apart and accumulated upto a certain percentage is also required to be excluded from income subjected to tax, if any. Therefore, to clarify this position it was provided in S. 11(4) of the Act that such differential amount, as stated earlier, will neither be treated as income applied to charitable purposes nor will it be available for consideration as income for the purpose of setting apart and accumulation. Only thing is that such differential amount shall be deemed to have been spent and that too on non-charitable purpose and accordingly chargeable to tax within the meaning of sub-s. (3) of S. 11. This underlined portion was deleted by the Finance Act, 1970 w.e.f. 1st April, 1971. It may be stated here that neither the learned Judicial Member nor the learned Accountant Member has referred to this particular amendment while considering S. 11(4) of the Act and, therefore, considering the facts of this case I do not find it necessary to go into details and advert to the implications of the pre-amended provision in the two years, i.e., asst. yrs. 1969-70 and 1970-71 and post-amendment period, i.e., asst. yrs. 1971-72 and 1972-73. Suffice it to say that claim for exemption from tax under S. 11(4) has nothing to do with such differential amount on assessment. If a property is held under trust for the purpose of S. 11 then its income shall be exempt under S. 11(4) of the Act.
7. With regard to the question No. 4 I find that the controversy is now limited to the income on account of differential amount because of provision of S. 11(4) empowering the Assessing Officer to determine the business income under S. 29 r/w S. 11(4) of the Act. The learned Judicial Member is of the opinion that since the income of the trust itself is exempt, interest could not be charged neither under S. 139(8) of the Act nor under S. 217(1A) of the Act, However, the learned Accountant Member is of the view that to the extent the income equivalent to differential amount as determined under S. 11(4), which is deemed to have been applied to non-charitable purpose, the assessee is liable to pay tax thereon and, hence, interest is leviable. The learned counsel for the assessee, Mr. Jain submitted that S. 139(4A) of the Act came on the statute book only w.e.f. 1st April, 1971 and, therefore, until then there were no obligations upon the trustees of the charitable trusts to file the return of income. I accept this proposition because I find that earlier to such amendment the statute had not provided for any liability upon the trustees of the trust to file the return of income and only because of amendment appropriate rule was also inserted in the IT Rules prescribing the manner in which and the particulars required to be filed in the form newly inserted for charitable or religious trusts or institutions. Mr. Jain further submitted that for the remaining two years since the assessments were completed consequent to action under S. 148, no interest could be charged, because the assessment could not be treated as regular assessment within the meaning of S. 2(40) of the Act. This contention of Mr. Jain is also acceptable and this will apply to all the four years because I find that all the assessments were completed under S. 147(a) of the Act. This position is clear from the decision of Patna High Court, Ranchi Bench in the case of Prakash Lal Khandelwal vs. ITO & Anr. (1989) 180 ITR 604 (Pat). Besides, to settle the controversy appropriate amendment was made to S. 139 by inserting an Expln. 2 to S. 139 by the Taxation Laws (Amendment) Act, 1984. Therefore, no interest is chargeable either under S. 139, obviously and also for same reasons no interest can be charged even under S. 217(1A) of the Act.
8. The appeals are now restored to the Division Bench for passing an appropriate order in conformity with the majority views expressed on all the four points of law referred under S. 255(4) of the Act.