Judgment:
M.M. Kumar, J.
1. Whether passing of an order under Section 163(2) of the Income Tax Act, 1961 (for brevity 'the Act') declaring a person as an agent of his NRI assessee brother is mandatory' is the question which permeate through this reference made at the instance of the revenue by the Income Tax Appellate Tribunal (for brevity 'the Tribunal') under Section 256(1) of the Act. The revenue has claimed that three questions would emerge from the order dated 9th Dec, 1997 passed in ITA No, 97/Asr/1985 in respect of assessment year 1973-74 which are as under:
(i) Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in cancelling the assessment made by the assessing officer and confirmed by the learned first appellate authority on the agent of the nonresident assessee who himself admitted to be an agent by signing the return of income;
(ii) Whether , on the facts and in the circumstances of the case, the learned Tribunal was right in law in holding that the assessing officer was required to pass an order under Section 163(2) of the Income Tax Act, 1961 to treat Sh. Sudershan Kumar as an agent of the non-resident assessee, who signed and made the return himself, to be an agent of the non-resident assessee ?
(iii) Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in holding that the first appellate order passed on 25th Aug., 1978 setting aside the order passed by the Income Tax Officer to be made afresh had become final as the same was not challenged ?
2. Facts are not in dispute and are being noticed insofar as relevant for the controversy raised. The assessee filed return for the assessment year 1973-74 declaring total income of Rs. 6,417 as an agent of his NRI brother Shri Prem Kumar Bhagat. The Income Tax Officer completed the original assessment under Section 144 of the Act on 23-3-1976. No appeal was filed against this order under Section 146 of the Act but he came before the Appellate Assistant Commissioner (for brevity 'the Appellate Assistant Commissioner) challenging the order of the Income Tax Officer. The Appellate Assistant Commissioner vide his order dated 25th Aug., 1978 set aside the assessment order with a direction that the Income Tax Officer should first of all record a finding whether Shri Prem Kumar Bhagat is an NRI. Thereafter he was to consider whether Shri Sudershan Kumar has got no objection to be appointed as an agent of his brother Shri Prem Kumar Bhagat and then to frame the assessment order after giving due opportunity to Sudershan Kumar of being heard.
3. The Income Tax Officer issued notice under Section 143(2) but the assessee did not reply to the notice. Consequently the Income Tax Officer proceeded to frame the best judgment assessment under Section 144 of the Act which was completed at a net income of Rs. 67,420 vide his order dated 30-3-1981. However, no findings on the status of NRI or his agent brother Sudershan Kumar were recorded. The assessment order was reopened under Section 146 of the Act on 23-7-1981. Again a notice under Section 143(2) was issued and again the assessee failed to turn up despite service. The Income Tax Officer framed the assessment ex parte and assessed the income at Rs. 67,420 vide order dated 30-3-1981. The order of the Income Tax Officer was challenged before Appellate Assistant Commissioner by the assessee raising the contentions that the Income Tax Officer was not justified in appointing Sudershan Kumar as an agent of Shri Prem Bhagat-NRI without granting opportunity of hearing under Section 163 of the Act. The Appellate Assistant Commissioner rejected the contention and held that Sudershan Kumar held out himself as an agent by filing return of income of his NRI brother on 18-5-1973 wherein declaration was made to the effect that he was his agent. The fact was confirmed by two letters dated 20-2-1976 and 27-2-1976 by Sudershan Kumar himself. Accordingly, assessment order passed by the Income Tax Officer was confirmed.
4. On further appeal, the order of Appellate Assistant Commissioner was challenged before the Tribunal. There was difference of opinion between JM who expressed the opinion for affirmation of the order whereas AM expressed the opinion against the order. He observed that the issue was required to be decided concerning appointment of Shri Sudershan Kumar as an agent of non-resident Shri Prem Kumar Bhagat under Section 163 of the Act prior to making of the assessment and particularly in view of the specific orders of the Appellate Assistant Commissioner dated 25-8-1978 and 10th Nov., 1982, which had not been complied with by the Income Tax Officer. He further distinguished the decision of the Bombay High Court in the case of Harakchand Makanji & Co. v. Commissioner : [1948]16ITR119(Bom) and concluded that it was not applicable to the case as that was rendered under the old Act of 1922 in which there was no provision for filing an appeal against order of appointment of agent of non-resident. The learned AM held that the issue was fully covered in favour of the assessee as per the decision of the jurisdictional High Court in the case of Commissioner v. Kanhaya Lai Gmmukh Singh which has been followed by the Madras High Court in the case of Commissioner v. Expiess Newspapers (P) Ltd. : [1978]111ITR347(Mad) .
5. The matter was then referred to Third Member who opined that matter in controversy was fully covered by the decision of the jurisdictional High Court in the case of Kanhaya Lai Gmmukh Singh (supra) which has since been followed by the Madras High Court in the case of Express Newspapers (P) Ltd. (supra). It was concluded by the Third Member that before assessment proceedings, the Income Tax Officer was required to pass order under Section 163(2) of the Act treating the assessee as an agent of non-resident and it had not been done in the present case. He further opined that the Income Tax Officer was given two opportunities to comply with the directions of the Appellate Assistant Commissioner under Section 163(2) to appoint Shri Sudershan Kumar as an agent of non-resident Shri Prem Kumar Bhagat after serving notice as required under law but in spite of these two opportunities he felt no need to allow fresh opportunity. The orders thus were not complied. The assessment order was found to be vitiated and bad in law for non-compliance of the provisions of Section 163(2) of the Act.
6. Feeling aggrieved, revenue sought reference under Section 256(1) of the Act and accordingly the Tribunal has referred the aforementioned questions for the opinion of this Court.
7. After hearing learned Counsel for the parties, we are of the view that theprovisions of Section 163(2) of the Act would require examination and the same readsas under:
163(2) No person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the assessing officer as to his liability to be treated as such.
8. These provisions are mandatory in character because in Section 163(2) the expression 'shall' has been used and therefore an order was required to be passed by the Income Tax Officer declaring Shri Sudershan Kumar as an agent of his assessee brother Prem Kumar Bhagat. The fact that he had signed and filed the return holding himself out as an agent of his NRI brother could not adversely affect his legal obligation because on two occasions on 25th Aug., 1978 and again on 10th Nov., 1982 the Appellate Assistant Commissioner had asked the Income Tax Officer to pass a specific order on that issue and those two orders had attained finality as no appeal by the revenue was preferred. Therefore, question Nos. 1 and 2 have to be answered against the revenue especially in view of the law laid down by a Division Bench of this Court in the case of Kanhaya Lai Guimukh Singh (supra). It has been held that the principles of natural justice of issuing notice and granting of reasonable opportunity of being heard are mandatory which must be complied with. It has further been held that an order treating a person as an agent of NRI assessee must be made under Section 163 of the Act even in cases where a notice under Section 148 of the Act is to be issued. The aforementioned view taken by this Court has been followed and applied by Bombay High Court in the cases of Commissioner v. Balapur Sugar & Allied Industries Ltd. : [1983]141ITR404(Bom) and Commissioner v. S.G. Sambandam & Co. : [2000]242ITR708(Mad) as well as Madras High Court in the case of Express Newspapers (P) Ltd. (supra). It is also appropriate to mention that even if the assessee was found to be an agent in one assessment year it does not necessarily lead to an inference that he would also be an agent in the next assessment year as has been held by Hon'ble the Supreme Court in the case of H.L. Sud, LTO v. Tata Engineering & Locomotive Co. Ltd. : [1969]71ITR457(SC) .
9. It is true that Sudershan Kumar himself held out by his conduct that he was agent of his NRI brother when he filed the return and paid tax and, therefore, failure to serve notice under Section 163(2) of the Act may not have invalidated the assessment order but in the present case, the aforementioned view cannot be taken for the reason that the Appellate Assistant Commissioner vide his orders dated 25th Aug., 1978 and 10th Nov., 1982 had directed the Income Tax Officer to pass a specific order on the issue of appointing Sudershan Kumar as agent of his brother. Those two orders had attained finality because no appeal against those orders was filed by revenue or by assessee. Therefore, in the facts and circumstances of this case, question No. (iii) has to be answered against the revenue by holding that the order dated 25th Aug., 1978 had attained finality and a specific order under Section 163(2) of the Act was required to be passed by the Income Tax Officer.
10. For the reasons stated above, the questions posed are answered in favour of the assessee and against the revenue.