TMI Blog1992 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... against the assessee, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item for the purpose of computation of the escaped income ? The circumstances leading to the formulation of the aforesaid question and the grant of certificate of fitness to file the appeals are as follows : The respondent in both the appeals is the assessee. For the assessment year 1960-61, the assessee filed the return of income on November 17, 1960, showing a loss of ₹ 36,418. For the assessment year 1961-62, the return of income was filed on October 4, 1961, declaring a loss of ₹ 24,314. The Income-tax Officer, after discussion with the authorised representative of the assessee, Shri A. B. Chowdhury, considered both the returns on December 12, 1962, and, in respect of the return for the assessment year 1960-61, recorded on the order sheet that the return filed beyond time. No action is necessary, filed - N. D. . For the assessment year 1961-62, the Income-tax Officer recorded the loss return is beyond time. Filed as N. D. The Income-tax Officer conveyed to the respondent, vide communication dated December 12, 1962 (see a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Commissioner accepted the plea of the assessee that the Income-tax Officer should have redetermined the loss as declared in the original returns and set it off against the escaped income from other sources and even carried forward the loss, if necessary, to the subsequent assessment years. Accordingly, the Appellate Assistant Commissioner allowed the appeal and directed the Income-tax Officer in the reassessment proceedings not only to redetermine the loss as per the original loss returns and set it off against the escaped income from other sources but also that the unabsorbed loss, if any, should be carried forward and set off against the income in the subsequent years. Aggrieved by this order, the Revenue went up in appeal before the Income-tax Appellate Tribunal. The Tribunal accepted the plea of the Revenue that the action of the Income-tax Officer in filing the assessment proceedings for 1960-61 and 1961-62 on the grounds indicated by him in the letter dated December 12, 1962, referred to amounted to nil assessment and that the Income-tax Officer had not allowed the losses as claimed by the assessee in the returns which has been filed beyond time. The Tribunal opined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year. To the extent as stated above, we answer the question referred in the negative and in favour of the assessee. The Revenue, thereupon, filed an application under section 261 of the Act for leave to appeal to the Supreme Court against the judgment of the Division Bench of the High Court. The case of the Revenue before the High Court was that, since the loss claimed by the assessee originally was concluded finally against the assessee, the question was not open to review in the reassessment proceedings and the Income-tax Officer in proceedings under section 147 of the Act could not consider items which had become final in the original assessment proceedings unconnected with any escapement of income. On behalf of the assessee, however, it was contended that once reassessment proceedings are initiated, the initial order of assessment does not survive for any purpose whatsoever and, while making a fresh order of assessment in the reassessment proceedings, the Income-tax Officer has the power to give benefit to the assessee which might have been available to it in the original assessment Proceedings. In support of these submissions, the assessee had relied upon the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1922, and the conditions and circumstances under which the same could be granted. The question before this court was (at page 83) : Whether, on the facts and in the circumstances of the case, when an assessment has been made under section 23(1) of the Indian Incometax Act, 1922, determining the assessee company's income as 'nil' and when proceedings under section 34 were subsequently started to assess the income which the Income-tax Officer believed to have escaped assessment the assessee company is entitled to claim that the loss of profits and gains (including depreciation allowance) sustained by it in the previous year should be determined in the course of such proceedings. The Bench noticed that the assessee had, in response to the notice calling for a return submitted a nil return which was accepted by the assessing authority. Subsequently, the Income-tax Officer sent the assessee a notice tinder section 34(1)(b) of the 1922 Act in the following terms (at page 84): Whereas in consequence of definite information which has come into my possession, I have discovered that your income assessable to income-tax for the year ending March 31, 1942, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It follows that when there is no income under any head at all, there is nothing against which the loss can be set off in that year and unless that can be done, sub-section (2) does not come into play. Next, a set-off under section 24(1) can only be claimed when the loss arises under one head and the profit against which it is sought to be set off arises under a different head. When the two arise under the same head, of course, the loss can be deducted but that is done under section 10 and not under section 24(1). See the decision of the Privy Council in Rm. Ar. Ar. Rm. Arunachalam Chettiar v. CIT [1936] 4 ITR 173. In the present case, the loss is computed by striking a balance in the profit and loss account of just the one business and consequently no question of different heads arises. On both these grounds, therefore, the assessee's contention must fail because, unless the loss can be set off under sub-section (1) of section 24, it cannot be carried forward under sub-section (2) and if it cannot be carried forward the question of its determination and computation becomes irrelevant. (emphasis supplied). Dealing with the reasoning of the High Court, the learned judge ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the appeals against that order, the order of the Income-tax Officer dated December 12, 1962, had acquired finality. The High Court clearly fell in error in holding that, in the assessment proceedings there had been no final determination of losses for the relevant year and to assume as if the loss return had not been finally disposed of or to be still open.The income-tax Officer had disposed of the assessment proceedings accepting the plea of the assessee that, for the relevant year, it had no income and that is why the proceedings were filed as No demand . The order of assessment had, thus, become final on the conclusion of the proceedings and dismissal of the appeal. Could the assessee in the above fact situation be permitted to claim set off , not granted in the original assessment proceedings by raising that plea once again in the reassessment proceedings initiated under section 147 of the Act ? To answer this question, it is necessary to first extract the provisions of sections 147 and 148 of the Act (as they existed at the relevant time).Section 147 read thus : 147. Income escaping assessment. -if (a) the Income-tax Officer has reason to believe that, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be furnished under section 139. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so. Section 147, which is subject to section 148, divides cases of income escaping assessment into two classes, viz., (a) those due to the non-submission of the return of income or non-disclosure of true and full facts, and (b) other instances. Explanation 1 defines as to what constitutes escape of assessment. In order to invoke the jurisdiction under section 147(a) of the Act, the Income-tax Officer must have reason to believe that some income chargeable to tax of an assessee has escaped assessment by reason of the omission or failure on the part of the assessee either to make return under section 139 for the relevant assessment year or to disclose fully and truly material facts necessary for the assessment for that year. Both the conditions must exist before an Income-tax Officer can proceed to exercise jurisdiction under section 147(a) of the Act. Under section 147(b), the Income-tax Officer also has the jurisdiction to initiate proceedings for reassessment where he has reason to believe, on the basis of information in his posse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the financial year 1931-32 (was levied on July 31, 1931) (sic) ? Beaumont, C. J., repelled the plea raised on behalf of the assessee that, in reassessment proceedings, an assessee could obtain redress in respect of an erroneous assessment made at the time of original order of assessment also and get credit in respect thereof during the reassessment proceedings. The learned Chief justice opined (at page 458) ....that under section 34 of the Act it is income which has escaped assessment which can be subsequently charged and that it is not open to an assessee, when charged in that way, to reopen the whole assessment and seek to be allowed credit in respect of some item which has been overassessed, but on the other hand it is open for an assessee to show that income alleged to have escaped assessment has in truth and in fact not escaped assessment but has been brought in under some inappropriate head. . . . The Rajasthan High Court in Hiralal v., CIT [1980] 121 ITR 89 (Raj), was requested to answer the following question in a reference under section 256(1) of the Income-tax Act, 1961 (at page 91) : Whether, on the facts and circumstances of this case, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant year and that reassessment is not confined to those items in respect of which there is initiation of proceedings and once an assessment is reopened, the Income-tax Officer is duty-bound to determine the tax liability of an assessee and, for the said purpose, he would necessarily have to take into account not only the escaped income in respect of which a notice under section 148 read with section 147 had been issued but also the entire income that had escaped assessment during that year. The Kerala High Court in CWT v. C. Ravindran [1977] 107 ITR 547, after following the judgment of the Division Bench of the Bombay High Court in Kevaldas Ranchhoddas v. CIT [1968] 68 ITR 842 and of the Allahabad High Court in Sir Shadi Lal and Sons v. CIT [1973] 92 ITR 453, held, in a case arising under the Wealth-tax Act, that during the reassessment proceedings initiated by the Wealth-tax Officer to assess the escaped net wealth under section 17(1) of the Wealth-tax Act, 1957, an assessee could not, during the reassessment proceedings to tax the escaped net wealth, be allowed to seek recomputation of the net wealth and redoing of the assessment and be allowed a claim which the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1964, the reopening of an assessment can only be for the benefit of the Revenue subject to one exception, viz., that where a particular item is sought to be brought to charge for the first time in the reassessment proceedings, any allowance, deduction or other relief in relation to that item can be put forward by the assessee and will have to be considered by the assessing authority for grant of relief or otherwise. However, if any disallowance made in the course of the original assessment which the assessee wants to be reconsidered during the reassessment is relevant or has any nexus with items of income that are brought to charge in the reassessment, they can also be considered. But other items of disallowance or relief claimed by the assessee which are not relevant to items which are the subject-matter of the enquiry in the reassessment proceedings cannot be considered again by the Income-tax Officer at the stage of reassessment. (emphasis supplied). In Deputy Commissioner of Commercial Taxes v. Indian Refrigeration Industries P. Ltd. [1980] 46 STC 264, the Madras High Court, in a sales tax case, opined that, when the Assessing Officer proceeds to make reassessment, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment is reopened on account of escapement of income and by allowing an assessee to claim deductions, it is not permissible under law to reduce the income originally assessed. Even if the assessee's fresh claims during the course of reassessment enquiry are accepted, still the allowance of the claims should be limited to the extent to which they reduce the income to that originally assessed under section 143(3). The Bench, however, went on to add (headnote): If a claim for deduction or a claim for non-taxability of a receipt was put forward in the original assessment proceedings and was considered and rejected by the tax authorities and that finding had become final, it is not open to an assessee to put forward those claims once again during the course of reassessment proceedings. The Rajasthan High Court in CIT v. Rangnath Bangur [1984] 149 ITR 487 opined (at page 498) : ...... that once a reassessment proceeding is initiated, the original order of assessment is set aside or ceases to be operative. The finality of such an assessment order is wiped out and a fresh order of assessment would take the place of and completely substitute the initial order of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction even though such claim was not made during the course of the original assessment proceedings. The question which fell for the decision of the Supreme Court in CST v. H. M. Esufali H. M. Abdulali [1973] 90 ITR 271 ; 32 STC 77 was somewhat different. In that case, an assessment under the Madhya Pradesh General Sales Tax Act, 1958, was made on a dealer for a particular year. Later, on a surprise inspection of the dealer's account books, it was discovered that certain items of sales had escaped assessment. The assessing authority, thereupon, reopened the assessment and, while making the reassessment, did not confine its attention to the addition of just those suppressed items of sales which were actually brought to light during the subsequent inspection, but invoked his powers by assessing the entire turnover to the best of his judgment by including what he considered to be suppressed turnover. The estimated figure was larger than the aggregate of the amounts noted down in the surprise inspection report. The argument of the assessee that the assessing authority, while reopening the assessment for bringing to charge the escaped turnover, had no power to make a best ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income that had escaped assessment during that year. The High Courts which have taken the view that, in the proceedings under section 147 of the Act, the entire assessment is reopened, the original assessment, is wiped off and the assessee can put forward all pleas even if rejected during the original proceedings, support their conclusions, relying on the observation from V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC) to the effect that the previous underassessment is set aside and the whole assessment proceedings start afresh , while the High Courts taking the view that the reassessment is confined only to the escaped assessment and an assessee can put forward pleas only in respect thereof, rely upon the observations (at page 180 of 39 STC) : When once valid proceedings are started under section 34(1)(b), the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. Let us now examine the judgment in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC) to appreciate as to what was laid down in that case as regards the scope of reassessment proceedings. In V. Jaganmoh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e underassessment previously made. It was in that context that this court had made the observations as noticed in the earlier part of the judgment. The principle laid down by this court in V Jaganmohan Rao's case, therefore, is only to the extent that once an assessment is validly reopened by issuance of a notice under section 22(2) of the 1922 Act (corresponding to section 148 of the Act), the previous underassessment 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. What is set aside is, thus, only the previous underassessment and not the original assessment proceedings. An order made in relation to the escaped turnover 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. It is only in cases of underassessment based on clauses (a) to (d) of Explanation 1 to section 147, that the assessment of tax due has to be recomputed on the entire taxable income. The judgment in V. Jaganmohan Rao's case, [1970] 75 ITR 373 (SC), therefore, cannot be read to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment. Although section 147 is part of a taxing statute, it imposes no charge on the subject but deals merely with the machinery of assessment and in interpreting a provision of that kind, the rule is that that construction should be preferred which makes the machinery workable. Since the proceedings tinder section 147 of the Act are for the benefit of the Revenue and not an assessee and are aimed at garnering the escaped income of an assessee, the same cannot be allowed to be converted as revisional or review proceedings at the instance of the assessee, thereby making the machinery unworkable. As a result of the aforesaid discussion, we find that, in proceedings under section 147 of the Act, the Income-tax Officer may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of the notice under section 148 and where reassessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to escaped income , and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of reassessment cannot be reduced beyond the income originally assessed. It would be seen that whereas in the case of Anglo-French Textile Co. Ltd.'s case [1953] 23 ITR 82 (SC), the question as to the rights of an assessee to claim redoing , revising or recomputing the entire income during the reassessment proceedings was left open, that question did not come up for consideration in the case of H. R. Sri Ramulu [1977] 39 STC 177 (SC) or H. M. Esufali's case [1973] 90 ITR 271 (SC) or even in V. Jaganmohan Rao's case [1970] 75 ITR 373 (SC). Some of the High Courts, therefore, fell in error in reading those judgments, divorced from the context in which the precise que ..... 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