1996 (9) TMI 8 - SC - Income Tax

Once the Income-tax Officer has done all that he has to do under the Act and makes a draft order and then refers to the Inspecting Assistant Commissioner as required by section 144B permitting the assessee to file a revised return would involve duplication of work and multiplicity of proceedings - held that the said right has to be exercised before the making of draft assessment order in cases where section 144B was applicable

The core legal questions considered in this judgment include:

1. Whether an assessee has the right to file a revised income tax return after the Income-tax Officer has made a draft assessment order under Section 144B of the Income-tax Act and referred the matter to the Inspecting Assistant Commissioner for directions.

2. The interpretation and scope of Section 139(5) of the Income-tax Act, which allows filing of revised returns before the assessment is made, in the context of the procedural requirements under Section 144B.

3. The legal effect of the draft assessment order and the referral to the Inspecting Assistant Commissioner on the assessee's right to revise returns and on the Income-tax Officer's functions.

4. The consistency and applicability of precedents, particularly a Gujarat High Court decision allowing consideration of a revised return filed after the draft order and referral.

Issue-wise detailed analysis:

Issue 1: Right to file a revised return after draft assessment order and referral under Section 144B

The relevant legal framework includes Section 139(5) of the Income-tax Act, which states that a person who has furnished a return under Sub-section (1) or (2) of Section 139 may furnish a revised return at any time before the assessment is made if any omission or wrong statement is discovered. Section 144B prescribes a special procedure where the Income-tax Officer, upon proposing a variation prejudicial to the assessee exceeding a prescribed amount, must first forward a draft assessment order to the assessee, allow objections, and then refer the matter to the Inspecting Assistant Commissioner for directions before completing the assessment.

The Court interpreted that once the Income-tax Officer has made the draft order and referred the matter to the Inspecting Assistant Commissioner, the Income-tax Officer's function is effectively concluded except to pass the final order in accordance with the directions received. The Court reasoned that permitting a revised return at this stage would necessitate redoing the entire exercise, including recalling the referral to the Inspecting Assistant Commissioner, a scenario not contemplated by the Act.

The key finding is that the right to file a revised return under Section 139(5) must be exercised before the draft order is made and the referral under Section 144B is triggered. Allowing it thereafter would cause duplication and multiplicity of proceedings, undermining the procedural efficiency intended by Section 144B.

The Court rejected the assessee's argument that the right to file a revised return extends until the final assessment order is made, holding that the draft order and referral mark the effective end of the Income-tax Officer's preliminary functions.

Issue 2: Construction of Section 139(5) in context of Section 144B

The Court emphasized that Section 139(5) must be construed in the context of the entire Income-tax Act, including the procedural safeguards and requirements under Section 144B. The Court held that the right to file a revised return is not absolute up to the final assessment but must be exercised reasonably and in harmony with the statutory scheme.

The Court noted that construing Section 139(5) to permit revised returns after the draft order and referral would render the procedural provisions of Section 144B impractical and lead to inefficiency. Hence, a reasonable construction limits the right to file revised returns to the period before the draft order is made under Section 144B.

This interpretation preserves the efficacy of Section 144B's mechanism for variation and objections, ensuring that once the draft order and referral occur, the process moves forward without reopening issues through revised returns.

Issue 3: Effect of draft assessment order and referral on Income-tax Officer's functions

The Court analyzed Section 144B in detail, noting that after the draft order is forwarded and objections received, the Income-tax Officer must refer the matter to the Inspecting Assistant Commissioner, who issues binding directions. The Income-tax Officer is then bound to complete the assessment in accordance with those directions.

The Court concluded that the Income-tax Officer's function is practically over once the draft order is made and referral is done. The final assessment order is a ministerial act following the directions. Therefore, allowing a revised return after this stage would disrupt the statutory process and the binding nature of directions issued by the Inspecting Assistant Commissioner.

Issue 4: Treatment of conflicting precedent

The appellant relied on a Gujarat High Court decision where a revised return was filed after the draft order and referral, and the Inspecting Assistant Commissioner was held bound to consider it since no final order had been passed.

The Court distinguished this precedent, holding that the view expressed therein was inconsistent with the statutory provisions of Section 139(5) read with Section 144B as they stood at the relevant time. The Court affirmed that the correct and consistent view is that the right to file a revised return ceases once the draft order is made and the matter referred.

Significant holdings include the following verbatim excerpts and principles:

"A reading of Section 144B shows that once a draft order is made and the matter is referred to the Inspecting Assistant Commissioner on receiving the objections of the assessee, the function of the Income-tax Officer practically comes to an end."

"If the assessee's contention is accepted and if it is held that even after making such a reference, the assessee is entitled to file a revised return, it may mean re-doing the entire exercise over again. It may also happen that as a result of such re-doing, the reference already made to the Inspecting Assistant Commissioner may become unnecessary and has to be called back. The Act, however, does not provide for such a situation."

"Sub-section (5) has to be construed and understood in the context of Section 139, indeed in the context of the entire enactment. It has to be construed and understood in a reasonable manner. Once the Income-tax Officer has done all that he has to do under the Act and makes a draft order and then refers to the Inspecting Assistant Commissioner as required by Section 144B, permitting the assessee to file a revised return would involve duplication of work and multiplicity of proceedings."

"All that it means is that the said right has to be exercised before the making of draft assessment order in cases where Section 144B was applicable."

The Court's final determinations are that the assessee cannot file a revised return after the Income-tax Officer has made the draft assessment order and referred the matter to the Inspecting Assistant Commissioner under Section 144B. The right to file a revised return under Section 139(5) must be exercised prior to the draft order stage in such cases. The appeal was dismissed accordingly.

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