Judgment:
Y.V. Anjaneyulu, J.
1. This reference under section 256(1) of the Income-tax Act, 1961, made by the Income-tax Appellate Tribunal at the instance of the assessee relates to the assessment years 1963-64 to 1971-72 (both the years inclusive). Two questions are referred by the Tribunal for the consideration of this court and they are :
'1. Whether, on the facts and in the circumstances of the case, investment in securities made by the assessee in pursuance of section 24 of the Banking Regulation Act being a statutory obligation can be treated as a transaction in the course of carrying on of trade
2. Whether, on the facts and in the circumstances of the case, the assessee is precluded from agitating the claims relating to gratuity, pension fund and staff welfare expenses for all the years and the difference arising out of the devaluation of the rupee to the extent of Rs. 11,04,484 for the assessment year 1967-68 and Rs. 57,530 for the assessment year 1968-69 in the reassessment proceedings under section 147 especially when in the assessments relating to the subsequent assessment years the said claims were allowed ?'
So far as the first question is concerned, it is common ground that it is covered against the assessee by the decision of this court in State Bank of Hyderabad v. CIT : [1985]151ITR703(AP) . We accordingly answer the question in the affirmative, that is to say, in favour of the Revenue and against the assessee.
3. The facts concerning question No. 2 may be noticed. The assessments were initially made under section 143(3) of the Income-tax Act for the years 1963-64 to 1971-72 (both the years inclusive). These assessments were reopened under section 148 as it was found that certain income escaped assessment in the original proceedings. Pursuant to the notices under section 148, the Income-tax Officer completed the assessments for all the years. During the course of the reassessment proceedings, the assessee claimed deduction on account of liability towards gratuity as per actuarial valuation; the assessee also claimed deduction on account of liability towards pension fund as per actuarial valuation. Claim for deduction was made by the assessee towards labour welfare expenses also. It was further claimed, during the course of reassessment enquiry for the years 1967-68 and 1968-69, that the surplus arising on account of devaluation of the rupee to the extent of Rs. 11,04,484 and Rs. 57,530, respectively, was not liable to be assessed as income. The Income-tax Officer rejected the claims for deduction of actuarial valuation on account of gratuity and pension fund and also the claim for deduction of labour welfare expenses. The Income-tax Officer also rejected the claim that the surplus arising on account of the devaluation of the rupee for the assessment years 1967-68 and 1968-69 was not liable to be taxed. We may point out at this stage that in the assessment orders the Income-tax Officer observed that the claim for deduction of actuarial valuation on account of gratuity and pension fund was made in the original assessments and was rejected and it was not, therefore, permissible for the assessee to reagitate these claims in the reassessment proceedings. So far as the labour welfare expenses were concerned, it would appear from the Income-tax Officer's observations that the claim was allowed in the original assessment proceedings to the extent claimed, but further sums were claimed by way of deduction during the course of the reassessment enquiry. The Income-tax Officer held that inasmuch as the claim for deduction of these further sums by way of labour welfare expenses was not made in the original assessment proceedings, it was not liable to be allowed. We may also point out that the Income-tax Officer had discussed the merits relating to the allowability of the claim for deduction on account of gratuity and pension fund and held that it was not liable to be allowed in any event.
4. The assessee preferred appeals to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax upheld the Income-tax Officer's orders. The Commissioner referred to the Income-tax Officer's findings in the assessment orders and held that the assessee's claims were considered and disallowed in the original assessments. The learned Commissioner also referred to the Income-tax officer's observations concerning the deductibility or otherwise of these claims on merits. He eventually held that the amounts are not liable to be deducted in the reassessments.
5. So far as the surplus arising on account of the devaluation of the rupee for the assessment years 1967-68 and 1968-69 was concerned, the Commissioner of Income-tax held that inasmuch as this claim was considered and rejected in the original assessment proceedings, it cannot be considered once again in the reassessment proceedings.
6. The assessee carried the matter in further appeal to the Tribunal. The Tribunal upheld the orders of the Commissioner of Income-tax (Appeals). It does not appear that the Tribunal has gone into the question of the merits of the assessee's claims but held that the assessee's claims are not liable to be considered as they were not made in connection with the original assessments. The assessee applied for and obtained this reference under section 256(1) of the Income-tax Act for considering the two questions we have already referred.
7. Sri K. Srinivasa Murthy, learned counsel for the assessee, contended basically that there can be no objection to an assessee making claims for deductions which were not made in the original assessment. It is claimed that once an assessment is reopened under section 148, the finality of the original assessment is lost and the entire assessment proceedings are at large before the Income-tax Officer so that it is permissible to consider all items of income which escaped assessment and also all claims of deduction which an assessee omitted to make by inadvertence in the original assessment proceedings. Learned counsel fairly contended that in any event the reassessment cannot be reduced beyond the income originally assessed even after allowing the deductions claimed. Learned counsel pointed out that the claims for allowing by way of deduction of actuarial valuation on account of gratuity and pension fund and also the labour welfare expenses for all the assessment years were not made in the original assessments and rejected. Learned counsel represented that observations to that effect in the assessment orders of the Income-tax Officer were not correct. Learned counsel also claimed that so far as the labour welfare expenses were concerned, a much lesser claim was put forward in the original assessments which was allowed. But, during the course of the reassessments, it was found that the expenditure incurred on this account was much larger and consequently a claim was put forward for allowance of the entire expenditure incurred. It is said that this is not a case where the further claim in the reassessment proceedings was considered and rejected by the Income-tax Officer in the original assessments. As regards the assessment years 1967-68 and 1968-69, learned counsel did not dispute the fact that the Revenue considered and rejected in the original assessments, the contention that considered and rejected in the original assessments, the contention that the surplus arising on account of devaluation of the rupee was not liable to be taxed.
8. Learned counsel invited our attention to the decision of the Rajasthan High Court in CIT v. Ranganath Bangur which had occasion to deal with the principles concerning this matter. That is a case where the High Court was considering the scope and amplitude of assessments made under section 148. After referring to a catena of decisions of the Supreme Court as well as of other High Courts, it was held that the finality of the assessment order passed as a result of the original assessment proceedings is wiped out when the entire matter relating to determination of the total income and the tax payable in respect thereof by the assessee is reopened as a result of the reassessment proceedings. The High Court observed that the assessee cannot be stopped from claiming rebate in the course of the reassessment proceedings or in the appeal against the reassessment order, merely on the ground that no such objection was raised by the assessee in the original assessment proceedings or in the appeal filed therefrom. It was further observed by the High Court that if the question was not raised in the original assessment proceedings or in the appeal against the original assessment order, there could be no prohibition against the assessee raising a question relating to the computation of income and tax payable by him at the time of reassessment or in the appeals.
9. Learned counsel invited our attention to the decision of the Calcutta High Court in CIT v. Assam Oil Co. Ltd. : [1982]133ITR204(Cal) . The Calcutta High Court had examined in detail the scope of reassessments under section 148 and held (at page 220) that in view of the scheme of the Income-tax Act, once a reopening is made, the entire assessments is set aside and the income which had escaped assessment, even though there is nothing to show the escapement of the assessment, should be examined and even in a case where the assessee is entitled to any deduction which not granted in the original assessment, the assessee would be so granted the deduction. The Calcutta High Court had referred to the judicial pronouncements of other courts supporting this principle.
10. Adverting to the aforesaid decisions, learned counsel for the assessee contended that the claims of the assessee for deduction of actuarial valuation on account of gratuity and pension fund and also the expenditure on account of labour welfare were liable to be allowed. Learned counsel placed before us a statement showing the details of the income determined in the original assessment, the income finally determined in the reassessment under section 148 and the sum total of the claim made in the reassessment enquiry on account of gratuity pension fund and labour welfare expenses. It is pointed out that the claims for deduction have to be allowed to the extent of the difference between the income originally assessed and the income assessed on reopening under section 148. It is accordingly pointed out that for the assessment years 1963-64 to 1971-72, the assessee would be entitled to claim deduction of the following sums :
Assessment year Amount liable tobe allowedRs.1963-64 34,8921964-65 3,62,9601965-66 44,0671966-67 1,12,5951967-68 12,5911968-69 19,7101969-70 16,1611970-71 16,4091971-72 82,507
11. Learned counsel for the Revenue did not fairly dispute the correctness of the principle enunciated by the Calcutta and the Rajasthan High Courts. He, however, pointed out that this is a case where, according to the Income-tax Officer and the Commissioner of Income-tax (Appeals), the claims were already put forward by the assessee in connection with the original assessments and were rejected. In such an event, claims learned counsel for the Revenue, it is not open to the assessee to put forward the same claims once again in the course of the reassessment proceedings. It is also pointed out that in the assessment orders, the Income-tax Officer considered on merits the assessee's claims for deduction of gratuity and pension fund without prejudice to his contention that it is not open to the assessee to claim in the reassessment proceedings, deductions which were considered and rejected in the original assessment proceedings. Learned counsel for the Revenue pointed out that a claim for deduction of labour welfare expenses was made in connection with the original assessments and it was allowed and consequently a further claim for a much larger sum cannot be allowed in the reassessment enquiry. On this ground, learned counsel submits that the assessee's claims for deduction are not liable to be considered. So far as the assessment years 1967-68 and 1968-69 are concerned, it was pointed out by learned standing counsel that in the original assessment proceedings, the claim that the surplus arising on account of devaluation of the rupee was not liable to be taxed was duly considered and rejected. Hence, it is not open to the assessee to raise this plea in the reassessment proceedings.
12. Fortunately, we find that there is no difference in approach between learned counsel for the assessee and learned standing counsel in the matter of principles and we may sum up the principles as under :
(i) Once an assessment is reopended under section 148, the entire assessment proceedings are at large. It is open to the tax authorities to reconsider in such reassessment all items of escapement of income without limitation; at the same time it is open to the assessee to put forward claim for deduction of any expenditure which was inadvertently omitted in the original assessment proceedings. Likewise, the assessee can also put forward claims for non-taxability of items of receipt which were not put forward in the original assessment.
(ii) In any event, the income for purposes of reassessment cannot be reduced beyond the income originally assessed, as basically the assessment 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 claim should be limited to the extent to which they reduce the income to that originally assessed under section 143(3).
(iii) 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.
13. The aforesaid principles derive support from the decisions of the Rajasthan High Court and the Calcutta High Court to which we have referred earlier.
14. There is, however, a controversy on the correctness of the fact in the present case. The order of the Income-tax Appellate Tribunal does not categorically indicate that the claims for deduction on account of gratuity and pension fund were put forward by the assessee and were rejected in the original assesseement proceedings. It is true that the Income-tax Officer as well as the Commissioner of Income-tax (Appeals) did refer to this part of the matter, but apparently the Tribunal did not refer to this aspect but was carried away by the legal principle that a claim not put forward in the original assessment proceedings cannot be put forward in the reassessment proceedings. It is, therefore, necessary that the correctness or otherwise of the findings of the Income-tax Officer and the Commissioner of Income-tax (Appeals) that the gratuity and pension fund claims were put forward by the assessee in the original assessment proceedings and were considered and rejected, should be verified by the Income-tax Appellate Tribunal.
15. As regards the labour welfare expenses, it is common ground that in the original assessments, the Income-tax Officer allowed the claim to the extent to which it was preferred. It was not stated that there was any disallowance of any portion of the claim made by the assessee. It would appear that in connection with the reassessments, the assessee put forward a claim for deduction of a much larger sum when compared with the deduction claimed and allowed in the original assessments. In that event, the assessee will be entitled to claim the deduction subject to the Tribunal satisfying itself of the genuineness of the expenditure and the deductibility of this expenditure under law. As regards the assessment of devaluation profits, there is no dispute that the matter was considered and rejected in connection with the original assessment proceedings. It is not, therefore, open to the assessee to reagitate this question in the present reassessment proceedings.
16. Having regard to the aforesaid principles set out, the Tribunal will have to consider the matter while passing an order conformably to the judgment of this court under section 260(1) of the Income-tax Act. The Tribunal shall go into the matter on the lines indicated by us and determine whether or not the assessee is entitled to claim the deduction on account of gratuity, pension fund and labour welfare expenses. In any event, the Tribunal should bear in mind that the claim for deduction by the assessee, if found admissible, cannot be allowed to an extent beyond reducing the income which was determined in the original assessment. The Tribunal shall examine the correctness of the sums which are extracted by us at page 238 (supra).
17. In the result, we decline to answer question No. 2 to the extent it related to the allowability of expenses under the gratuity, pension fund and labour welfare expenses and remit the matter to the Tribunal for consideration as indicated above. To the extent the question related to the assessability of devaluation profits for the assessment years 1967-68 and 1968-69, the question is answered in favour of the Revenue and against the assessee. As far as question No. 1 is concerned, we have already indicated that the question is answered in the affirmative, that is to say, in favour of the Revenue and against the assessee. The reference is accordingly disposed of. No costs.