Income Tax Appellate Tribunal - Hyderabad
Dr. Vijaykumar Datla vs Assistant Commissioner Of Income-Tax on 28 March, 1996
Equivalent citations: [1996]58ITD339(HYD)
ORDER
Garg, AM
1. In all these appeals, the assessment year involved is 1991-92. The returns for this year were to be filed voluntarily under section 139 of the Income-tax Act, 1961 before the due dates varying between 30th June, 1991 and 31st October, 1991. They were not filed. The Assessing Officer issued notices under section 142 (1)(i) of the Income-tax Act in all these cases on 26-5-1992. The assessees did not file any return in pursuance thereof. Another notice was issued under section 142 (1)(i) on 28-5-1993. The assessees filed returns on 22-12-1993. These returns were treated as invalid returns by the Assessing Officer as they were filed beyond one year from the end of the assessment year, i.e., 31-3-1991. The assessments were completed under section 144 of the Income-tax Act by ignoring the returns.
2. The main contention of the assessees is that it was a case of income escaping assessment and, therefore, the initiation of assessment proceedings without the issue of notice under section 148 in each case was invalid. Reference to Explanation 2 (a) to section 147 was also made wherein income chargeable to tax is deemed to have escaped assessment if no return was furnished by the assessee. According to the assessees, the provisions of section 148, being special provisions, would override the general provisions of section 142 (1). It was further contended that the notices under section 142 (1) were issued after the end of the assessment year and were, therefore, invalid and in that context our attention was invited to the provisions of section 139 (2) before their deletion by Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989, requiring such a notice to be issued before the end of the assessment year. As the notice under section 142 (1) is a substitution of the requirement under section 139 (2), the time limit for its issuance in the assessment year is inbuilt.
3. The revenue's case, on the other hand, is that no such time limit, up to what time the notice could be issued, is prescribed under section 142 (1). As not outer limit is prescribed for its issuance, such a limit cannot, therefore, be inferred or read into the provision. A reference to the provisions of section 142 (1) prior to their amendment w.e.f. 1-4-1990 was made wherein the notice calling upon an assessee to file return was to be issued only after the end of the assessee. It was, therefore, submitted that under the plain language of the section, the notice under section 142 (1)(i) can be issued at any time after the assessee's failure to file return under section 139. The irresistible conclusion, therefore, according to the learned departmental representative, is that proceedings for assessment were initiated in May 1992 and were to be pending up to 31-3-1994. The assessments were completed on 18-3-1994, i.e., during that period and before 31st March, 1994. In these circumstances, the issuance of notice under section 148 would be uncalled for, and in his submission, the Assessing Officer was right in completing the assessments on 18-3-1994 without issuing a notice under section 148. As regards Explanation 2 (a) to section 147, a provision claimed to be a special provision, it was submitted by the learned departmental representative that it would not change the legal position. It is an enabling provision to issue a notice for assessing the escaped income on account of non-filing of a return by the assessee. The action for filing the return had already been initiated by the issue of notice under section 142 (1)(i) and, therefore, the provisions of section 148 would not come into play and the consequences of filing or non-filing or non-filing of return in pursuance thereof would follow. He further contended that the assessees filed the returns of income in pursuance of notices under section 142 (1)(i) and, therefore, it would not be a case of income escaping assessment within the meaning of the provisions of clause (a) of Explanation 2 to section 147. In any case, he submitted, this clause is only an inclusive one and is for the purposes of making an assessment under section 147 only. The notice under section 142 (1)(i) having been issued, the assessment proceedings were started and consequently the Assessing Officer was within his right to complete the assessments under section 143/144 within two years from the end of the assessment year as prescribed under section 153 (1)(a). He, therefore, submitted that there was no necessity to issue notice under section 148 in such a case.
4. We have heard the parties and considered their rival submissions. A notice under section 148 has to be issued when an assessment, reassessment or recomputation is made under section 147 to tax income which has escaped assessment. This is not a case of reassessment nor a case of recomputation. This is a case of an assessment without there being an earlier assessment. As long back as in 1932, the Privy Council in the case of Sir Rajendranath Mukerjee v. CIT [1934] 2 ITR 71, held that the provision of section 34 of the Indian Income-tax Act, 1922 [equivalent to sections 147 and 148 of the Income-tax Act, 1961], are to tax income that escaped assessment and not to tax income which was not assessed, that there is a difference in the expressions "has escaped assessment" and "has not been assessed". In that case, the return was filed but the assessment was pending. The assessee's contention was that no assessment was made within the assessment year and therefore, it was a case of reassessment. This was not accepted by the Privy Council and it was held that "if no assessment was made in tax year (assessment year) it would be a case of not assessed and not escaped assessment as assessment can be made at any time". It was, however, clarified by the Privy Council, at page 77 of the report :
"It may be that if no notice calling for a return under section 22 is issued within the tax year then section 34 provides the only means available to the Crown of remedying the omission, but that is a different matter".
5. In Ghanshyamdas v. Regional Assistant Commissioner of Sales Tax [1964] 51 ITR 557, the Supreme Court held that the income cannot be said to have escaped assessment until a final order of assessment is passed or the proceedings initiated are pending. In that case, the proceedings were held to have commenced where return was filed and also where a notice calling upon the assessee to filed the return was served.
6. In both the aforesaid cases, the proceedings were held to be pending as no assessment was made in pursuance of a return filed. On the contrary, in the latter case, it was held to be not a case of proceedings pending where no return was filed and/or no notice under the relevant Act was issued. The contention that by the existence of the provisions to file a return suo moto under section 11 (1) of the C. P. & Barrier Sales Tax Act (XXI of 1947) [equivalent to section 139 (1) of the Income-tax Act, 1961], a statutory notice is deemed to be given to the assessee and the proceedings were thereby initiated, was not accepted. The default in making a return suo moto may be an occasion for initiating the proceedings, but the default itself "proprio vigore" cannot initiate the proceedings.
7. Under the Indian Income-tax Act, 1922, originally there was no time limit for completion of assessment until the amendment in 1939 and Courts have held that the notice under section 34 was not required to be served if the proceedings were pending on either the assessee filing the return suo moto or by issuance of notice under section 22 [equivalent to section 142 of Income-tax Act, 1961]. After the introduction of time limit for completing the assessment, in our opinion, the proceedings can be said to be pending during the period the period starting from the date of filing of the return by the assessee suo moto or issuance of notice under section 142 by the Assessing Officer and till the time limit prescribed to complete the assessment under section 153, i.e., two years from the end of the assessment year which the income was first assessable.
8. Explanation 2 (a) to section 147 of the Income-tax Act includes not-filing of return in the expression "escaped assessment". The said Explanation reads :
"Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; "
The scope of this Explanation, in our opinion, has to be restricted to the failure of the assessee to file return suo moto or a voluntary return under section 139 (1) or section 139 (4) within the the prescribed time limit and not to cases where a notice under section 142 (1) requiring the assessee to file return has already been issued. Say, for example, an assessee is obliged to file a return on or before 31-12-1991 under section 139 (1), or before 31-3-1992 under section 139 (4). Can it be said that before expiry of either of the periods, notice under section 148 is to be issued? The requirement of "where not return of income has been furnished by the assessee" as appearing in the Explanation, for treating it as a case of "income escaping assessment", has to be seen on the expiry of the period within which the assessee can file the return. Otherwise, even on the first day of the assessment year, i.e., on 1-4-1991, itself the Assessing Officer can issue notice under section 148 when the process of assessment itself has not yet come into being. I would thus be too wide a proposition to be accepted.
9. As regards the outer limit of issuing notice under section 142 (1)(i), we may state that there is apparently no time limit prescribed, but if one reads the other provisions, it can be deduced therefrom. Section 139 (4) reads as under :-
"Any person who has not furnished a return within the time allowed to him under sub-section (1), or within the time allowed under a notice issued under sub-section (1) of section 142, may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier."
A reading of this provision gives an impression that the outer limit is one year from the end of the assessment year. Otherwise, the assessee's failure to submit the return under section 142 (1) would not entitle him to file the return thereafter. Therefore, it has to before that period, i.e., 31-3-1992 in these cases. Once that time limit is over and the assessee has not filed any return, it becomes a case of income escaping assessment and for that issuance of notice under section 148 is a must.
10. Next section is section 149 which provides for issuance of notice under section 148 within 10 years if the income chargeable to tax which escaped assessment amounted to Rs. 1 lakh or more, 7 years if such income was Rs. 50,000 or more and 4 years in other cases. Inferentially, as held by the Bombay High Court as noted in the Supreme Court's decision in the case of CIT v. Narsee Nagsee & Co. [1960] 40 ITR 307, the notice under section 142 has to be prior to that period.
11. Next provision is section 153 prescribing time limit for completing assessment - 2 years from the end of the assessment year in which it was first assessable. This is what the department contends should be the outer limit for issuing a notice under section 142 and a starting limit for issuing a notice under section 148. This limit comes into play when the proceedings for assessment have been initiated by filing a return suo moto under section 139 (1) or by issuance of a valid notice under section 142 (1).
12. Next section is section 239 dealing with refund of tax. Sub-section (2) of section 239 states that no claim for refund shall be allowed unless it is made within 2 years (one year w.e.f. 1-4-1993) from the last day of the assessment year in which the income was assessable. This also gives the outer limit for issuing the notice under section 142 (1)(i). Section 239 prescribes the starting point of limitation for claiming refund as the day following the last day the assessment year. This has been stated to be the key by the Supreme Court in the case of Narsee Nagsee & Co. (supra) and it was held that the notice calling for a return from an assessment year itself. It was a case under the provisions of the Business Profits Tax Act, 1947. Under that Act, there was to issue a notice under section 11 to furnish return in the prescribed form in respect of a chargeable accounting period. The chargeable accounting period under section 11 to furnish return in the prescribed form in respect of a chargeable accounting period. The chargeable accounting period under that Act was equivalent to the previous year under the Income-tax Act. No time limit was prescribed within which the notice under section 11 (1) was to be issued by the Income-tax Officer, like under section 142 (1)(i) of the Income-tax Act, though under the latter, the notice can be issued after the expiry of the due date prescribed for filing voluntary return under section 139 (1); and there was no corresponding section under Business Profits Tax Act for filing a voluntary return. The assessment under that Act also was to be made in the financial year immediately following the chargeable accounting period. The year of assessment was 1949-50 in the said case. A notice under section 11 (1) of that Act was issued by the Income-tax Officer on 12-1-1953 and served on the assessee on 21-1-1953. The assessee challenged the assessment as the notice calling upon the assessee to file the return was beyond the time limit prescribed under section 14 of that Act which is equivalent to sections 147 to 149 of the Income-tax Act, 1961. Section 14 of that Act provided that if the Income-tax Officer in consequence of definite information which has come into his possession discovered that profits of any chargeable accounting period escaped assessment, he could issue a notice at any time within 4 years from the end of the chargeable accounting period calling upon the assessee to file the return containing all or any of the requirements that may be included in a notice under section 11 of that Act. The Appellate Assistant Commissioner quashed the assessment on the ground that it was made beyond four years time limit prescribed under section 14. The Tribunal confirmed the order of the Appellate Assistant Commissioner and held that as under section 14 the period of limitation commenced from the end of the chargeable accounting period in question, the notice under section 11 (1) had to be issued before that period. The High Court did not accept that view of the Tribunal and held that both sections 11 and 14 were to be read together and the mention of four years in section 14 was an important indication of the period of limitation in regard to period of notice under section 11 also and further, if profits which escaped assessment could only be taxed within four years of the end of the chargeable accounting period because of section 14 of that Act, then, inferentially, the escapement of income must be at some time anterior to the period mentioned in section 14 and as the notice was issued four years after the close the chargeable accounting period, the notice under section 11 was not valid. The Supreme Court, by majority decision, held at pp. 315, 316 and 317 as under :-
"As the tax under the Act is charged, levied and paid on the taxable profits of a chargeable accounting period but assessment is in respect of the financial year in which the Act operates it is not an unreasonable inference that notice for the chargeable accounting period must issue in the financial year following that period. No difficulty would arise in regard to accounting periods which coincide with previous years, i.e., 1946-47, 1947-48 and 1948-49. For these years the notice will be the financial year in which the At would be operative. But the question is how the proviso to section 2 (4) added by the Finance Act of 1948 would affect this rule. Taking a calendar year 1946 as the accounting period, for the financial year 1947-48 the chargeable accounting period would be the nine months period from April 1, 1946 to December 31, 1946, and notice under section 11 (1) of the Act came into force and remained operative during the year 1947-48. After the Finance Act of 1948, the accounting year, if it was a calendar year, became divided into two parts and both were assessable in the assessment year beginning with April 1, 1948, and therefore, notice had to be given in the financial year 1948-49. Similarly in the financial year 1949-50 notice would have to given in that year for the preceding chargeable accounting period. In this view of the matter the contention that there is not provision in section 11 (1) of the Act as to the chargeable accounting period as there is for the previous year in section 22 (2) of the Income-tax Act is not well-founded.
That, the notion of the previous year of the accounting period is as much applicable to the Act as to the Indian Income-tax Act is shown by reference to Computation of Profits Rules in the Schedule to the Act. There the computation is related to the accounting periods. The previous year is shown applicable by reference to the rules under the Act by which some of the rules of the Income-tax Act are made applicable to the Act; and some of the sections of that Act are made applicable by section 19 and by the rules under the Act. Amongst the rules applicable is rule 8 which inter alia related to allowances under section 10 (2)(vi) of the Indian Income-tax Act. The first and the second provisos to this rule are as follows :
Provided that if the buildings, machinery, plant or furniture have been used by the assessee in his business for not less that two months during the previous year, the percentage shall be increased proportionately according to the number of complete months of user by the assessee :
Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the buildings, machinery, plant or furniture had been in use throughout the period the assessee was the owner thereof during the previous year.' Both these provisos use the word previous year which is same as the accounting year under the Act.
By rule 4A of the Rules made under the Act certain sections of the Indian Income-tax have been adapted with modifications therein mentioned. Of those section 50 of the Income-tax Act is one. In the Act it has been substituted by the following :
'No claim to any refund of tax under the Act shall be allowed unless it is made within four years from the last day of the financial year commencing next after the expiry of the accounting period which constitutes or includes the chargeable accounting period in respect of which the claim to such refund arises.
All these sections show not only that the two statutes, i.e., the Act and the Indian Income-tax Act, have to be read together but also that the notion of the previous year has been inducted into the Act.
The modified section 50, as introduced into the Act by the rules, means this that the refund, if any, can only be allowed within four years of the financial year which commences after the expiry of the accounting period which itself constitutes the chargeable accounting period or includes in it the chargeable accounting period in respect of which the refund is claimed. If the contention of the appellant is correct then this section will be wholly otiose where the assessment is levied after say 10 years from the end of the chargeable accounting period because by no method of calculation will a refund of tax in than circumstance be climbable under section 50. This furnishes a key to when a notice under section 11 (1) has to be given. It must be given within the financial year which commences next after the expiry of the accounting period or the previous year which is by itself or includes the chargeable accounting period in question. Section 48 of the Income-tax Act, as amended and applied to the Act, does not affect the operation of section 50 because the two sections have to be read together and the assessee must apply for the refund within the period specified by section : Adam Haji Dawood & Co. Ltd. v. Commissioner of Income-tax [1936] 4 ITR 100. "
13. The revenue's contention that the notice under section 1 could be issued at any time without limitation was rejected by the majority decision of their Lordships, though accepted by Hidayatullah, J., who dissented. Under the Income-tax Act, however, the dissenting Judge also held :
"... By the force of section 22 (2) it could be said at the end of any assessment year that insofar as the income of the corresponding previous year was concerned, it has escaped assessment. The logical result of this was that if no notice calling for a return under section 22 was issued within the assessment year, then section 34 was the only means to get at the tax, See Rajendranath Mukerjee v. Commissioner of Income-tax (supra). The schemes of the Indian Income-tax Act is entirely different, and by fixing a time limit for the issuance of a notice under section 22 (2) makes it clear that in section 34 of the Indian Income-tax Act the words 'escaped assessment' ex facie covered all cases of escaped assessment whether within or without a prior assessment. The assessment there 'escapes' when once the assessment year expires. The cases under the Income-tax Act which expound section 34 are, thus, not in point."
14. In view of the decision in the case of Narsee Nagsee & Co. (supra), the position insofar as income-tax is concerned is that the income escaped assessment the moment the assessment year is over if no proceedings have been initiated during the assessment year itself - under the general scheme of taxation in view of majority decision, and by the force of section 22 (2) of the Indian Income-tax Act as per minority decision.
15. Let us see whether there is any change brought about on this aspect by deleting section 139 (2) of the Income-tax Act, 1961, and retaining the provision in the amended provisions of section 142 (1)(i). Prior to 1-4-1989, an assessee was to be issued a notice under section 139 (2) calling upon him to file return. If he fails to so file or has not made a return under section made the Assessing Officer to wait till the issue of notice under 139 (2) and statutory period of 30 days was over. In order to eliminate the time taken on these legal formalities and also to enforce voluntary compliance on the part of the assessee, the Direct Tax Laws (Amendment) Act 1987, deleted section 139 (2) and simultaneously empowered the Assessing Officer to make ex parte assessment if the assessee fails to make the return under section 139 (1) itself. This was the object of deleting section 139 (2) as stated in para 4. 4 of of the Circular No. 549 dated 31-10-1989 as an explanatory note on the provision of Direct Tax Laws (Amendment) Act, 1987 [182 ITR 1 (St. )]. As a substitute to section 139 (2), the provision for calling a return was inserted in section 142 (1)(i) with an exception however that this notice was to be issued only after the end of an assessment year. Non-filing of the return has also been made a case of escaped assessment by Explanation 2 (a) added to section 147 by the said Amendment Act.
16. This had given rise to problems, because, if the taxpayer did not file the return of income in time, the department had no power to enforce compliance till the assessment year was over. To solve this practical difficulty, clause (i) of sub-section (1) of section 142 was amended by Finance Act, 1990, so that if a person fails to furnish a return of income by the due date mentioned in section 139 (1), a notice calling upon him to file the return cab be sent to him within the relevant assessment year itself. [See para 32 of the Memorandum explaining the provisions, 182 ITR 1 (St. ) at 345]. The object of deleting section 139 (2) for calling a return and saving time could not be achieved as before completing assessment under section 144 it was made compulsory to give an opportunity to the assessee calling upon him to explain as to why an ex parte assessment by not made or a notice under section 142 (1) was issued to him. Be that as it may, the requirement of initiating the assessment proceedings within the assessment year. Rather the amendment by finance Act, 1990, was in the direction of empowering the Assessing Officer to even complete the assessment within the assessment year itself. The requirement of issuing a notice to initiate proceedings within the assessment year itself is inbuilt in the system as discussed above and if no such initiation was taken within the assessment year, it would be a case of escaped assessment within the meaning of explanation 2 to section 147 and, therefore, a notice under section 148 would be a must to empower the Assessing Officer to proceed with the assessment.
17. The scheme of the Income-tax Act is that under section 4 tax is levied on the income of a previous year in the assessment year for which any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates. Such rates are generally provided by the Finance Act annually. Section 294 enables the levy of income-tax at the preceding year's rate until the Central Act has made the provisions for charging tax or as per the bill pending in the Parliament, whichever is more favourable to an assessee. The procedure for levying the tax is laid down in the Income-tax Act by casting a statutory obligation upon the assessee to file a return voluntarily under section 139 (1) on or before the due date within the assessment year or by issuing a notice to the assessee calling upon him to file it. Such a notice was also to be issued before the close of the assessment year as was prescribed under section 139 (2) prior to 1-4-1989. Some action within the assessment year was a must. Though the provisions of section 139 (2) were deleted by Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and this requirement was inserted in section 142 (1) instead, the requirement of issuing notice to initiate proceedings was not taken away. As aforesaid, under the general scheme of the Act, the proceedings to assess income of the previous year must start in the assessment year itself. This can be either by the assessee filing a suo moto return or by the Assessing Officer issuing notice before the end of the relevant assessment year. If no such initiation has taken place during the assessment year, it would be a case of escaped assessment and, therefore, to proceed with the assessment, a notice under section 148 was compulsorily to be issued empowering the Assessing Officer with jurisdiction.
18. As aforesaid, the assessee had not filed the returns suo moto within the time prescribed under section 139 (1), the revenue had not issued any notice under section 142 (1) before the end of the assessment year, viz, 31-3-1992 and the returns furnished by the assessees on 22-12-1993 had been filed beyond the time limit prescribed under section 139 (4) and were rightly treated to be invalid by the Assessing Officer. These were cases of "escaped assessment" under section 147 and, therefore, the assessments completed without issuing notice under section 148 were invalid and bad in law and are accordingly quashed.
19. Similar is the position in the wealth-tax appeals. The provision of the Wealth-tax Act are in pari materia with the provision of the Income-tax Act which we have discussed above. Therefore, for the reasons stated by us in the Income-tax Appeals, the wealth-tax assessments are cancelled.
20. We have been informed that the time limit for issuing notice under section 148 of the Income-tax Act, 1961, and under section 17 of the Wealth-tax Act, 1957, is still available and is not over. The department would be at liberty to issue notices under section 148/17 and proceed with the assessments, if so advised.
21. In view of our order cancelling the assessments, we do not express any opinion on the various other issues raised in these appeals and they need not be discussed.
22. In the result, all these appeals are allowed.