Records of subsequent assessment year can provide information for reopening earlier years’ assessment: Supreme Court – CA Naresh Jakhotia

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Presentation2

Reassessment under s. 147(b) has always been a matter of agitation and disputes in enormous cases. More particularly, the question is raised about the power of the AO in reopening the case u/s 148.

 

There are judgment on the either side on the issue as to the applicability of section 148. However, there is one judgment CLAGGETT BRACHI CO. LTD. vs. COMMISSIONER OF INCOME TAX  (1989) 77 CTR 0072 : (1989) 177 ITR 0409
which is often referred and relied by the Revenue.

The question in the present case was whether AO, when in the process of making assessment for a subsequent year, can reopen the case of earlier years for the reason that excess expenditure was claimed as deduction. Here, in this case, AO came to know overhead expenses related to the entire business including the business as commission agents and were not confined to the business of purchase and sale was claimed as deduction in earlier years.

The court observed that
“It is true, as the High Court has observed, that this information could have been acquired by the ITO if he had exercised due diligence at the time of the original assessment itself. It does not appear however that the attention of the ITO was directed by anything before him to the fact that the overhead expenses related to the entire business. The information derived by the ITO evidently came into his possession when taking assessment proceedings for the subsequent year.”

In the circumstances it cannot be doubted that the case falls within the terms of cl. (b) of s. 147.”

 

 

CLAGGETT BRACHI CO. LTD. vs. COMMISSIONER OF INCOME TAX

SUPREME COURT OF INDIA

R.S. Pathak, C.J. & Ranganath Misra, J.

Civil Appeal Nos. 208 & 209 (NT) of 1975

26th April, 1989

(1989) 57 CCH 0469 ISCC

(1989) 77 CTR 0072 : (1989) 177 ITR 0409 : (1989) 44 TAXMAN 0186

Legislation Referred to

Sections 147(b), 148, 149(3), 163(1)

Case pertains to

Asst. Year1959-60, 1960-61

Decision in favour of:

Revenue

Counsel appeared:

K.B. Rohtagi, for the Appellant : Dr. V. Gauri Shankar with Miss A. Subhashini, for the Respondent

R. S. PATHAK, C.J.

These appeals by special leave are directed against the judgment of the High Court of Andhra Pradesh answering the following two questions of law in favour of the Revenue and against the assessee:

“(1) Whether the Tribunal was right in holding that the reassessments being only consequent to a change as to the method of computation of the profits the initiation of proceedings under s. 148 for each of the asst. yrs. 1959-60 and 1960-61 was justified ?

(2) Whether the Tribunal was right in law in holding that the original assessment for each of the years having been made on the agents, the reassessment proceedings could not be initiated against the assessee direct ?”

2. The appellant assessee is a non-resident sterling company whose business consists in the purchase of tobacco from India and its sale outside. The tobacco is sold directly on the assessee’s own account and for commission on behalf of others. The purchases of tobacco were effected through the British India Corporation Ltd. Guntur who were appointed agents of the assessee under s. 43 of the Indian IT Act, 1922. For the asst. yrs. 1959-60 and 1960- 61 the agents filed returns of income on behalf of the assessee. The ITO. Guntur after examining the balance sheet and profit and loss account of the assessee for the relevant previous years, the calendar years 1958 and 1959, completed the assessment under s. 23(3) of the Indian IT Act, 1922. For the year 1958 the gross profit on the sale of Indian tobacco including commission, was shown in the balance sheet and profit and loss account of the assessee at £11,108. As the assessee carried on business not only in India but in other places also, the ITO worked out the proportionate overhead expenses of the assessee for its business in India at £16,760 taking the total sales of tobacco at £ 5,34,031 and the sales of Indian tobacco at £ 4.48,590. The ITO computed the loss at £ 5,652 and one-half of this amount, namely £ 2,826 (Rs. 37,680) was taken as the adjusted loss being the percentage attributable to the purchasing operation in India. On the same basis for the asst. yr. 1960-61, after setting off the income against the previous loss, the total loss was found to be Rs. 96,482.

3. Subsequently, in the course of assessment proceedings for the asst. yr. 1962-63, the ITO appears to have noticed that a mistake had been committed in the computation of the overhead expenditure. The return filed on behalf of the assessee for that year had disclosed that the overhead expenses were attributable to the entire business of the assessee, including the business as commission agents, and not merely for the business of purchase and sale of tobacco. The ITO believed that he ought to have first computed the proportionate overhead expenses in relation to the total profits by taking the proportion which the profits bore to the total of profits and commission and then worked out the proportionate overhead expenses for the profits arising out of the Indian sales. On that basis, he determined that the adjusted profits would be £ 160 (Rs. 2,253) and that this would have to be substituted in place of the loss of Rs. 37,680 arrived in the original assessment. Similarly for the asst. yr. 1960-61, the ITO realised that the original assessment would have to be varied accordingly. Being of the opinion that income had escaped assessment for the two asst. yrs. 1959-60 and 1960-61, he issued notices on 18th Jan., 1964 under s. 148 of the IT Act, 1961, to the statutory agents. The agents contested the validity of the notices and contended that in view of s. 149(3) of the Act, no notice of reassessment could be served on the agent of a non- resident assessee after the expiry of two years from the end of the relevant assessment year. The ITO upheld the objection and dropped the proceedings.

Thereupon the ITO issued notice under s. 148 for the two assessment years directly to the assessee to their London address on 29th Feb., 1965. The assessee filed returns on 19th Aug., 1964, for both the years under protest, contending that it could not be served with those notices inasmuch as the ITO had already proceeded against its agents. The ITO rejected the objections and made reassessments on the assessee for the two assessment years.

The appeals filed by the assessee before the AAC were dismissed, but in second appeal, the Tribunal took the view that the reassessments proceeded on a mere change of opinion on the part of the ITO and, therefore, were without jurisdiction and further as the assessments had been made originally on the agents, it was not open to the ITO to proceed directly against the assessee. Accordingly the Tribunal allowed the appeals and set aside the reassessments made on the assessee.

4. At the instance of the Revenue, the Tribunal referred the two questions of law set forth earlier, to the High Court of Andhra Pradesh for its opinion. On the first question, the High Court held that it was not a mere change of opinion on the part of the ITO pursuant to which he made the reassessments, but that the ITO had received information subsequent to the original assessments from the records of the subsequent assessment year that the overhead expenses related to the entire business, including the business as commission agents, and not merely to the business of purchases and sales of tobacco. On the second question, the High Court held that there was nothing to prevent the ITO, when he found that reassessment proceedings could not be taken against the agents. from proceeding directly against the assessee and reassessing it for the two assessment years.

5. Two points have been urged before us by learned counsel for the assessee. It is contended that the ITO has no jurisdiction to take proceedings under ss. 147 and 148 of the IT Act because the conditions prerequisite for making the reassessments were not satisfied. The reassessments were made with reference to cl. (b) of s. 147 of the Act, and apparently the ITO proceeded on the basis that in consequence of information in his possession, he had reasons to believe that income chargeable to tax had escaped assessment for the two assessments years. From the material before us it appears that the ITO came to realised that income had escaped assessment for the two asssessment years when he was in the process of making assessment for a subsequent assessment year. While making that assessment, he came to know from the documents pertaining to that assessment that the overhead expenses related to the entire business including the business as commission agents and were not confined to the business of purchase and sale. It is true, as the High Court has observed, that this information could have been acquired by the ITO if he had exercised due diligence at the time of the original assessment itself. It does not appear, however, that the attention of the ITO was directed by anything before him to the facts that the overhead expenses related to the entire business. The information derived by the ITO evidently came into his possession when taking assessment proceedings for the subsequent year. In the circumstances, it cannot be doubted that the case falls within the terms of cl. (b) of s. 147 of the Act, and that, therefore, the High Court is right in holding against the assessee.

6. The second point urged before us is that when the ITO had taken the assessment proceedings against the Indian agent of the assessee, it was not open to him to take assessment proceeding against the assessee. It is open to an ITO to assess either a non-resident assessee or to assess the agent of such non-resident assessee. It cannot be disputed also that if an assessment is made on one, there can be no assessment on the other, and therefore, in this case if the assessment had been made on the Indian agent, the assessment could not have been made on the assessee. However, facts show that the reassessment proceedings commenced against the agent were found to be barred by time by reason of s. 149(3) of the Act. The issue of notice under s. 148 of the Act to the agent after the expiry of two years from the end of the relevant assessment year is prohibited by the statute. The ITO dropped the proceedings when he was made aware of that prohibition. The assessment proceedings taken by him against the agent have to be ignored and cannot operate as a bar to assessment proceedings directly against the assessee. On this point also, the High Court has taken the correct view when it answered the question in favour of the Revenue.

In the result the appeals fail and are dismissed with costs.

 

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