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JUDGEMENTS                                              I.T. R. 6/2000                                          Back To Index

HIGH COURT OF JAMMU AND KASHMIR
I.T. Ref. 6 2000

Date of Decision :17-11-2000

Commissioner of Income-tax, Amritsar Versus M/S State Agro Dev. Corp.Srinagar.

Coram:
The Hon’ble Mr. Justice Dr. B. P. Saraf, Chief Justice.
The Hon’ble Mr. Justice Syed Bashir-ud-Din.

Mr. Anil Bhan, Senior Central Government Standing Counsel.

JUDGEMENT AND ORDER

Per Dr. B. P. Saraf, Chief Justice

By this reference under section 256(1) of the Income-tax Act, 1961 ("Act"), the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar ("Tribunal") has referred the following question of law to this Court for opinion at the instance of the revenue:

"Whether on the facts and the circumstances of the case, the Tribunal is correct in law in holding that the assessee is entitled to the benefit of the carry forward of loss determined on the basis of return filed in response to notice u/s 148 of the Income-tax Act."

2. The material facts giving rise to this controversy, briefly stated, are as follows. The assessee, M/S. Agro Industries Corporation, was established for promotion of agro industries and improvement of agriculture in the State of Jammu and Kashmir. For the assessment year 1975-76, the assessee did not file its return of income under the Income-tax Act within the period allowed under section 139(1). No notice was issued under section 139(2) of the Act to the assessee by the Income-tax Officer. However, on 27.2.1978, a notice under section 148 of the Act was issued and served upon the assessee. In response to the said notice, the assessee filed its return of income for the said assessment year declaring a loss of Rs.16,58,038/-. The Income-tax Officer, after considering the assessee’s claim of depreciation, completed the assessment on net loss of Rs.16,54,626/-. The Income-tax Officer, however, held that the loss determined by him could not be carried forward since the return had not been filed voluntarily. The assessee appealed to the Commissioner of Income-tax (Appeals). Before the Commissioner (Appeals), it was contended on behalf of the assessee that the return filed pursuant to the notice under section 148 of the Act was also a return within the meaning of section 139(4) read with section 139(1) of the Act. The contention of the assessee was that the action taken pursuant to a notice under section 148 of the Act has to be in accordance with the provisions of section 139(2) of the Act which does not place any embargo on the carry forward of the losses. In support of this contention, the assessee relied upon the decision of the Supreme Court in CIT v Kulu Valley Transport Co. Pvt. Ltd (1970) 77 ITR 517. The Commissioner (Appeals) accepted the assessee’s contention and held that the assessee Corporation was entitled to carry forward the loss determined by the Income-tax Officer as, according to him, notice under section 148 had been issued to the assessee even before the time for filing the return under section 139(4) of the Act had expired. In that view of the matter, he held that the assessee had filed return within the extended time. The appeal of the revenue was dismissed by the Tribunal. Hence this reference at the instance of the revenue.

3. We have heard Mr. Anil Bhan, learned counsel for the revenue. The assessment in the present case was made by the Income-tax Officer in proceedings under section 147 of the Act initiated by issue of notice under section 148 of the Act. The question that arises for consideration is whether in such proceedings, initiated for the purpose of assessment of escaped income, the assessee is entitled to claim determination of loss to enable him to carry forward the same to be set off against the income of subsequent years to the detriment of the revenue. The Income-tax Officer made the assessment in proceedings under section 147 of the Act initiated with a view to assessing income which had escaped assessment and having not found any escaped income, determined a loss of Rs.16,54,626/-. He, however, held that the loss could not be carried forward since the assessment had been made in proceedings initiated under section 147 of the Act for assessing the escaped income. The assessee appealed to the Commissioner of Income-tax (Appeals) who reversed the order of the Income-tax Officer and held that the assessee was entitled to determination of loss in proceedings under section 148 of the Act. Revenue appealed to the Tribunal against the above order of the Commissioner (Appeals). The Tribunal dismissed the appeal of the revenue and affirmed the order of the Commissioner of Income-tax (Appeals).

4. The question that arises for consideration is whether in proceedings reassessment of income, income can be reduced below the income originally assessed or in case where no assessment had been made earlier, income can be determined at a negative figure to the detriment of the revenue. The real controversy, therefore, is about the scope and ambit of the power of the Income-tax Officer in proceedings initiated under section 147 of the Act for assessment of income which has escaped assessment.

5. Section 147 of the Act empowers the Income-tax Officer to assess income which escaped assessment in the relevant assessment year. It is applicable only to a case where the Income-tax Officer has reason to believe that the income of the assessee has escaped assessment. The power under this section can also be exercised in cases where excessive loss or depreciation allowance has been computed. In the instant case, re-assessment proceedings were initiated by the Income-tax Officer for the assessment year 1975-76 by issue of notice under section 148 of the Act because he was satisfied that the income of the petitioner-Corporation for that year had escaped assessment by reason of the non –submission of return by the assessee. In such a case, if at any stage of the proceedings, the Income-tax Officer finds that income chargeable to tax has not escaped assessment, he is free not to take further action pursuant to the notice under section 148 of the Act and drop the proceedings . He is not bound to conclude the proceedings and make assessment to the detriment of the revenue. If, pursuant to notice under section 148 of the Act, the assessee submits a loss return, and the Income-tax is satisfied that the income of the assessee during the relevant year was really negative as claimed by the assessee in his return, he is entitled to close the proceedings. He cannot complete the assessment to determine the loss thereby giving the assessee a right to claim set off of the loss in subsequent years to the detriment of the revenue . Such an act will be contrary to the object, scope and ambit of section 147 of the Act. Proceedings under section 147 being for the benefit of the revenue and not the assessee, the assessee cannot be permitted to take advantage of the reassessment proceedings and seek relief which, in the absence of the proceedings for assessment of escaped income , he could not have claimed . Income for the purpose of assessment under section 147 of the Act cannot be a negative figure. Similarly, in case of reassessment of income already assessed, , the income cannot be reduced beyond the income originally assessed nor the loss originally determined can be re-determined at a higher figure.

6. The object, scope and ambit of section 147 of the Act is now well settled by the decision of the Supreme Court in CIT v Sun Engineering Works P. Ltd, [1992] 198 ITR 297. Prior to that decision there was a sharp cleavage of opinion between different High Courts on the subject. The Supreme Court considered various decisions of different High Courts which had held that once valid proceedings under section 147 of the Act are started, the Income-tax Officer has the jurisdiction and duty to complete the whole assessment de novo. The Supreme Court also considered the observations in its earlier decision in V. Jaganmohan Rao v CIT/EPT [1970] 75 ITR 373 to the effect that once an assessment is validly reopened by issuance of a notice under sub-section (2) of section 22 read with section 34 of the Indian Income-tax Act, 1922 (corresponding to section 148 of the Act), the previous under- assessment is set aside and the Income-tax Officer has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. The Supreme Court observed that an order made in relation to the escaped income does not affect the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and identity. What is set aside is only the previous under- assessment and not the original assessment proceedings. The Supreme Court made it clear that its earlier judgment in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC) cannot be read to imply as laying down that in the reassessment proceedings validly initiated, the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim re-computation of the income or redoing of an assessment and be allowed a claim which he either failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. In the reassessment proceedings, it is of course open to an assessee to show that the income alleged to have escaped assessment has, in truth and in fact, not escaped assessment but that the same had been shown under some inappropriate head in the original return. The Supreme Court, therefore, said in clear terms that to read the judgment in V. Jaganmohan Rao's case (Supra), as laying down that reassessment wipes out the original assessment and that re-assessment is not only confined to "escaped assessment" or "under-assessment" but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to re-agitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of section 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case.

7. The Supreme Court observed:

"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes it colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings."

  1. In view of the above legal position, in the case before it, the Supreme held:

"Since the original assessment had been concluded finally against the assessee, it was not permissible for the assessee in the reassessment proceedings to seek a review/revision of the concluded assessment for the purpose of computation of the escaped income. The High Court clearly fell in error in permitting the assessee to re-agitate, in the reassessment proceedings under section 147(a) of the Act the finally concluded assessment proceedings and to grant to him relief in respect of items not only earlier rejected, but also unconnected with the escapement of income by assuming as if the original assessment had not been concluded or was 'still open'."

9. It is clear from the above decision of the Supreme Court that proceedings under section 147 of the Act are for the benefit of the revenue and not of the assessee and the assessee cannot be permitted to convert the reassessment proceedings to his advantage. The assessee cannot claim that assessment should be completed and loss should be determined to enable him to claim the benefit of carry forward and set off against the income of subsequent years. In such a case, the proper course for the Income-tax Officer would be to drop the proceedings under section 147 of the Act.

10. In the instant case, by refusing to allow the assessee the benefit of carry forward of loss, the Income–tax Officer had, in effect, dropped the proceedings under section 148 of the Act. In our opinion, he was right in doing so. In proceedings under section 147 of the Act, he could not have allowed the assessee the benefit of carry forward of loss of Rs. 16,58,038/-, which obviously was to the detriment of the revenue. The Commissioner of Income-tax (Appeals) and the Tribunal were not justified in law in reversing the above action of the Income-tax Officer.

11. In view of the above, we answer the question referred to us in the negative, i.e., in favour of the revenue and against the assessee.

The reference is answered accordingly with no order as to costs.