1994-VIL-71-ITAT-BLR

Equivalent Citation: ITD 051, 548,

Income Tax Appellate Tribunal BANGALORE

Date: 21.02.1994

PRABHAT SAW MILLS AND TIMBER MERCHANTS.

Vs

INCOME-TAX OFFICER.

BENCH

Member(s)  : A. V. BALASUBRAMANYAM., S. BANDYOPADHYAY.

JUDGMENT

Per Balasubramanyam, JM --- The source of these appeals by the assessee is the reassessments made for the years 1987-88 and 1988-89. They were heard together since the grounds are common.

2. The assessee is a firm doing business. On the basis of a return filed the original assessments had been made under section 143(1) for both these years. The assessee had claimed that certain credits in the accounts were loans taken from certain persons. The firm had also paid interest to those creditors and deduction had been sought in that behalf. Naturally this had been accepted in the original assessments made under section 143(1).

3. During the course of assessment for 1989-90 the Income-tax Officer had occasion to examine the cash credits. He had addressed a letter in this behalf to the assessee on 10-8-1990 which had been received by the assessee on 14-8-1990.

4. On 22-8-1990 the Income-tax Officer recorded his reasons of belief as he was of the view that income chargeable to tax had escaped assessment on account of certain factors and he had decided to reopen the assessments. A record was made on the aforementioned date and he reopened the assessments.

5. Notices under section 148 had been issued on the same date in respect of both the assessments. Apparently they had been received by the assessee. Subsequently, the Income-tax Officer passed reassessment orders whereby he made additions. There were certain cash credits and in the view of the Income-tax Officer there was no plausible explanation by the assessee. The additions were made under section 68 in both the reassessments. We do not go into the figures as they are not very material for the purpose of this order.

6. The assessee had appealed from the reassessments and they were dismissed by the Commissioner of Income-tax (Appeals) who passed separate orders. But the reasons are more or less the same.

7. The assessee has brought these appeals to the Tribunal and before us Shri Venkatesan, the learned representative of the assessee, raised two grounds to challenge the validity of the reassessments. One was that the notices issued under section 148 are invalid; and consequently the reassessments are rendered bad in law. The other point raised by him was that there was no material before the Income-tax Officer to reasonably form an opinion that income chargeable to tax had escaped assessment and that the reopening made on mere suspicion or surmise had not given him the required jurisdiction.

8. Elaborate arguments were addressed on the two questions mentioned in earlier paragraph. We will first of all deal with the second question for convenience sake.

9. We have on record a copy of the reasons recorded by the Income-tax Officer which is dated 22-8-1990. The substance of it is that during the examination of the records of the assessee for 1989-90 it was noticed that assessee had introduced cash in the books of account in the names of certain persons who were relatives of the partners in the earlier two assessments and also had paid interest; and that enquiries revealed that creditors did not have source of funds and, hence, he was satisfied that taxable income had escaped assessment. Shri Venkatesan argued that the Income-tax Officer did not have any fresh information to believe that income had escaped assessment and that he was merely trying to entertain a suspicion. Relying on the decision of the Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, he argued that pre-conditions for exercise of jurisdiction under section 147 should be fulfilled by existing facts and so long as those facts are lacking formation of the belief did not really exist. In other words, his submission was reason to believe cannot be substituted by reason to suspect. Once again facts have to be verified to knowing whether the pre-condition for the exercise of jurisdiction existed or not.

10. During the assessment proceeding for 1989-90 the question of cash credit was there. Being not satisfied the Income-tax Officer had addressed a letter to the assessee on 10-8-1990 to substantiate its case. The creditors relevant to 1987-88 and 1988-89 were also creditors, among others, in the assessment for 1989-90. The capacity to advance was not satisfactory. It is this that mainly led the Income-tax Officer to believe that income chargeable to tax had escaped assessment in the earlier years also though the assessments were under section 143(1).

11. On 2-7-1990 the Income-tax Officer had addressed a letter to the Dy. Commissioner of Income-tax which also goes to show that he had reasonably doubted the genuineness of the cash credits. It is not necessary that all the facts that came to the notice of the Income-tax Officer should be incorporated in the record he is required to make under section 148(2). From the facts of this case we are satisfied that the Income-tax Officer had reasonably formed the belief that income chargeable to tax had escaped assessment and the pre-condition to the exercise of jurisdiction under section 147 is fulfilled.

12. We now consider the other objection taken by Shri Venkatesan. To state facts, the notices under section 148 issued to the assessee (firm) called upon it to deliver "within thirty days from the date of service" of those notices returns in the prescribed form as the Income-tax Officer proposes to reassess the income for those years. Shri Venkatesan's argument was that these notices which prescribed a period of thirty days were invalid in law and consequently the reassessments are void in law.

13. Section 148(1), as it stood originally, required notice to be issued containing all or any of the requirements that may be included in a notice under section 139(2). Section 139(2) stipulated issue of a notice requiring the assessee to furnish return within thirty days from the date of service of that notice. The forms adopted in the present cases were those which are in conformity with section 139(2) as it then stood.

14. Section 148 was amended by Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. The amended provision required the Income-tax Officer to issue a notice requiring the assessee to furnish a return within such period, but not being less than thirty days, as may be specified in the notice. From 1-4-1989, a notice under section 148(1) should give the assessee a minimum period of thirty days.

15. The question is whether the amended provision applied to the notices issues in respect of these assessments for 1987-88 and 1988-89. Section 148 deals with procedural law. It should apply to pending matters. If reassessment proceeding is to be initiated, the law as it existed on the day of initiation should be applied. The Central Board of Direct Taxes has clarified this position in the Circular bearing No. 549, dated 31-10-1989, and the relevant portion is found. It is clarified that the amendment to section 148 which has come into effect from 1-4-1989 is retrospective in the sense that the amended law will apply to all matters which were pending as on 1-4-1989.

16. In the instant case, the initiation of the reassessment proceedings was itself subsequent to 1-4-1989. Therefore, section 148 in its amended form applied to these cases.

17. The amended law required that the assessee should be given a minimum period of thirty days. The impugned notices do not conform to this condition. Our attention was drawn to the unreported judgment of the Karnataka High Court in the case of Winter Care (P.) Ltd. [WP No. 33832 of 1992, dated 15-2-1993]. In that case, notice under section 147 had been issued proposing reassessment in respect of an assessment for the year 1989-90 and the notice issued under section 148 fixed a period of thirty days from the date of service. His Lordship held that the said notice did not conform to the requirement of amended section 148(1) and the same was quashed.

18. Shri Venkatesan's argument was that the notices issued in the instant cases are defective particularly in the light of the decision of the Karnataka High Court in the case of Winter Care (P.) Ltd. and the consequential reassessments are a nullity. He invited our attention to the passages in the commentary of Chaturvedi and Pithisaria (4th Edn., Vol. III, pp. 3669-70) and also invited our attention to case law to which we will presently make a reference. Before that it is necessary to point out one thing.

19. Under section 34 of Income-tax Act, 1922, reopening of the assessment or for making an assessment of income which had escaped assessment could be made and this provision corresponds to section 147 of Income-tax Act, 1961. According to section 34 a notice was required to be issued including all or any of the requirements under section 22(2) which stipulated a period not less than thirty days. The requirements under the 1922 Act are the same as the requirements of section 148 of 1961 Act after amendment by Direct Tax Laws (Amendment) Act, 1989, which is effective from 1-4-1989. This position is indisputable.

20. In the case of Y. Narayana Chetty v. ITO [1959] 35 ITR 388 the Supreme Court considered this question from the point of section 34 of the 1922 Act. Their Lordships held:

"The notice prescribed by section 34 of the Income-tax Act for the purpose of initiating reassessment proceedings is not a mere procedural requirement: the service of the prescribed notice on the assessee is a condition precedent to the validity of any reassessment made under section 34. If no notice is issued or if the notice issued is shown to be invalid then the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void."

The question was again considered by the Supreme Court in the case of CIT v. Kurban Hussain Ibrahimji Mithiborwala [1971] 82 ITR 821. There was a defect in the notice and Their Lordships held that if notice issued to the assessee was invalid, the entire proceeding taken by the Income-tax Officer would become void for want of jurisdiction.

21. In the case of CIT v. Ramsukh Motilal [1955] 27 ITR 54 (Bom.) the notice issued under section 22(2) prescribed a period which was less than thirty days. Chagla, C.J. pointed out:

"If a notice under section 34 of the Indian Income-tax Act, 1922, embodies any of the requirements under section 22(2) it must at the same time permit the assessee to comply with that requirement within a period which is not less than 30 days. If therefore a notice under section 34 gave only six days to the assessee to make a return under that section, the notice is clearly illegal and such illegality cannot be waived by the assessee.

Whereas it will be perfectly true to say that section 22(2) is a procedural section and the failure to give notice or a defect in a notice is a procedural defect, in the case of section 34 it is not a procedural defect but is a failure to comply with a condition precedent to the assumption of jurisdiction."

22. The Kerala High Court considered the same point in the case of CAIT v. Amalgamated Coffee Estates Ltd. [1962] 45 ITR 348 and Their Lordships' view is that a reassessment made pursuant to a defective notice is illegal and void.

22A. To the same effect are the Full Bench decision of the Assam High Court in the case of Tansukhrai Bodulal v. ITO [1962] 46 ITR 325; the decision of the Gujarat High Court in the case of CIT v. Nanalal Tribhovandas [1975] 100 ITR 734; the decision of the Mysore High Court in the case of C.N. Nataraj v. Fifth ITO [1965] 56 ITR 250; and the decision of the Allahabad High Court in the case of Mir Iqbal Husain v. State of UP [1964] 52 ITR 625.

23. To our knowledge there is no case law falling on the other side of the line. Neither any was cited.

24. Shri Puniha's argument was that an assessee could waive a notice to be issued under section 148(1) and in this behalf he cited the decision of the Andhra Pradesh High Court in the case of Gudivada Madhava Rao v. ITO [1959] 35 ITR 481; the decision of the Supreme Court in the case of Director of Inspection of Income-tax (Investigation) v. Pooran Mall & Sorts [1974] 96 ITR 390; and the decision of the Smt. Lalita Todi v. CIT [1980] 123 ITR 40. In the case of Uppala Nookaiah Chetty v. Addl. ITO [1959] 35 ITR 483 (AP). Kumarayya, J. held:

"... that although the assessees had after a final assessment the right not to be assessed to an enhanced tax save in cases falling under sections 34 and 35, that right was for their personal benefit and could be waived; and as the assessees knowingly waived that right by agreement they must be deemed to have relinquished it."

25. The case of Pooran Mall & Sons related to proceedings of search and seizure under section 132 under which an order had been passed beyond ninety days. The question was whether that can be waived by the assessee aggrieved.

26. In the case of Smt. Lalita Todi a notice to the parties had to be given before publication in Gazette for acquisition of property under Chapter XX-C of IT Act. It was held that the parties had not raised any objection that the provision of issuing of notice had not been complied with strictly before the competent authority or the Tribunal and that it must be taken that they have waived the benefit conferred on them under section 269D.

27. Both in the cases of Pooran Mall & Sons and Lalita Todi are cases entirely of a different domain. The principles laid down therein cannot be extended to a reassessment proceeding initiated under section 147 after 1-4-1989.

28. It is true that the judgment of the Andhra Pradesh High Court in the case of Uppala Nookaiah Chetty lends support to the argument on behalf of the revenue. But, first, this is a single Bench decision. Majority of the High Courts, including the High Court of Mysore, have taken a different view. What is more, the Supreme Court has, in the cases of Y. Narayana Chetty and Kurban Hussain Ibrahimji Mithiborwala laid down the law in reference to section 34 of Income-tax Act, 1922. This principle applies to section 148(1) after amendment by Direct Tax Laws (Amendment) Act, 1989. That a notice allowing a period less than thirty days is defective has been pointed out by the Karnataka High Court in the case of Winter Care (P.) Ltd. When once a notice is defective consequential reassessments would be illegal and void, as pointed out by the Supreme Court and other High Courts to which we have made a reference in detail.

29. Shri Puniha submitted that in several of the cases, which are in favour of the revenue, the Income-tax Officer had cut down the period considerably and in that context the Courts held that the defect in the notice vitiated the subsequent proceedings. In the instant case, the period fixed in the notices fell short by one day. Technically they were defective. If one should think that shortening the period by one day did not materially affect the assessee, it would be to validate a defective notice on the reason that reasonable time had been granted ignoring the statutory condition. When a statute fixes a period of thirty days and if courts were to hold, on the ground of reasonableness, that notice giving twenty-nine or thirty days is a curable defect, then virtually we would be drawing a line different from that drawn by the statute. If validity of the notice is to be judged it should be strictly in reference to the conditions irrespective of the period allowed by the Income-tax Officer.

30. It was argued that the assessee had filed returns, paid tax and that it had waived the notice. Mere compliance of the notice by the assessee will not amount to waiver of the defect as pointed out by the authorities to which we have made a reference already. The Bombay High Court points out in the case of Ramsukh Motilal that there cannot be a waiver to illegality in notice. There cannot be a waiver to cover an omission of a step which the statute regards as a condition precedent to the exercise of jurisdiction under section 147 and there could be no waiver of illegality to validate an assessment made pursuant to a defective notice. This is the law stated by the Calcutta High Court in the case of CAIT v. Sultan Ali Gharami [1951] 20 ITR 432 and by the Kerala High Court in the case of Amalgamated Coffee Estates Ltd.

31. For the foregoing we hold that the notices issued under section 148, in the pursuant cases, were bad in law and consequently the reassessments made are illegal and void. They are liable to be cancelled and we do so.

32. In the result, the appeals by the assessee are allowed.

 

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