The appeal by the assessee arises out of the order dt. 28th June, 1993 of Dy. CIT(A), Bhopal, pertaining to the asst. yr. 1984-85.
2. The facts relating to the grounds of appeal are these. One Shri Dharmichand left India around 1962 and settled in USA, where he is working as a Professor. With a view to settle in India, the non-resident, Shri Dharmichand, purchased a plot of land admeasuring 3,600 sq.ft. at Saket, Indore. The Plot No. was E-22. This was purchased on 19th July, 1972, for Rs. 14,000. However, he could not construct the house thereon and sold the plot for a consideration of Rs. 1,26,000 in the year 1984.
3. The ITO, A-Ward, Ujjain, issued notice dt. 21st February, 1986, under s. 148 to one Shri Rameshchandra Bordia of Ujjain as agent of non-resident, Dharmichand, of USA for asst. yr. 1984-85. The notice was served on the said Rameshchandra Bordia on 25th February, 1986. On receipt of the notice, he wrote a letter dt. 16th March, 1986, to the ITO starting therein that Shri Dharmichand is coming to India by end of April, 1986, and as such it is requested that time upto 31st May, 1986, may be allowed to submit the return for the above assessment year. It was also stated therein that the necessary details and particulars required to complete the return are not ready and the same are being collected and affirmed from the non-resident. This letter was followed by yet another letter to the ITO, dt. 21st April, 1986, saying that Shri Dharmichand did not come to India in April, as was expected.
Therefore, further time of three months be allowed to the agent of the above non-resident. It was also stated that there are certain legal complications and further necessary documents have to be gathered to submit the return. This letter was signed by Shri Rameshchandra Bordia mentioning below his name the word Agent.
4. Shri Rameshchandra Bordia filed return for asst. yr. 1984-85 on 11th February, 1987, enclosing therewith computation of capital gain. As per this computation, net capital gain was worked out at Rs. 50,797 and tax thereon at Rs. 10,159. A note below was also appended saying that non-resident has no other sources of income in this year.
5. At this stage, it may be stated that the return was accompanied by a covering letter dt. 11th February, 1987, wherein it was, inter alia, stated that the notice was bad in law, as there is no document or circumstances to address Shri Rameshchandra Bordia as agent of the non-resident, Shri Dharmichand.
6. On 19th February, 1987, the ITO addressed a letter to Shri Rameshchandra Bordia stating therein that he has been treated as agent of Shri Dharmichand, non-resident under s. 163 of the Act. The ITO invited objection from him to be treated as agent of Shri Dharmichand, non-resident. It appears that no objection was taken by Shri Rameshchandra Bordia in regard to the ITOs letter dt. 15th February, 1987.
7. During the course of assessment proceedings, it was claimed in written submission dt. 20th March, 1988, that the capital gain on sale of plot is casual income and, hence, it is not taxable. An alternate submission was also made that again on sale of plot is not an adventure in nature of business.
8. The ITO completed the assessment after discussion with Shri Rameshchandra Bordia and Shri A. L. Jain, Chartered Accountant. He accepted the returned income of Rs. 55,320 vide order dt. 25th March, 1988, under s. 143(3) of the Act. The assessee appealed.
9. Before the Dy. CIT(A), the assessment was challenged on the ground that the ITO erred in treating the appellant as agent of non-resident, Shri Dharmichand, without giving him an opportunity of being heard. It was, inter alia, contended during the appellate proceedings that there was no show cause notice before issue of notice under s. 148 to the agent. It was urged that the assessment be quashed.
10. Dy. CIT(A) confirmed the assessment holding that the contention of the assessee that gain is casual income is not tenable and that it is a case of long-term capital gain and observing thus : "In my view, the show cause notice to the agent was not necessary because the agent was appointed by the non-resident, Shri Dharmichand, himself. It is not the case that the Department held Shri Rameshchandra Bordia as an agent of Shri Dharmichand suo motu." 11. The assessee is aggrieved by the above findings of the Dy. CIT(A) and all the three grounds of appeal relate thereto.
12. Inviting our attention to para 3 of the ITOs letter dt. 19th February, 1987 (copy at page 29 of paper book), Shri A. L. Jain, the learned counsel for the assessee, submitted that there is nothing in the affidavit dt. 30th December, 1983, copy of which is available at page 15 of the paper book, whereby Shri Rameshchandra Bordia had been authorised by the non-resident, Dharmichand, to act on his behalf in the transaction of plot owned by him.
He vehemently asserted that it is incorrect statement of the ITO. He argued that on the basis of the said incorrect facts, the ITO had proceeded to initiate income-tax proceedings against Shri Rameshchandra Bordia. He submitted that any action taken under the IT Act pursuant to misappreciation of facts cannot have any legal sanctity. Under the said wrong notion, the ITO had issued notice under s. 148 to Shri Rameshchandra Bordia addressing him as agent of the non-resident, Dharmichand.
12.1 Shri Jain admitted that on receipt of notice under s. 148 Shri Rameshchandra Bordia did not object to his being treated as agent of Dharmichand and after seeking time to file the return did file the return for the asst. yr. 1984-85 but it was a qualified return inasmuch as in the covering letter dt. 11th February, 1987 (copy at page 25 of the paper book) Shri Rameshchandra Bordia stated that he has been addressed to be an agent of the non-resident, though, in fact, there is no such document and circumstances and as such the notice is bad in law.
12.2 Shri Jain further submitted that specific ground was taken before Dy. CIT(A) that the ITO erred in treating the appellant as an agent of the non-resident, Dharmichand, without allowing him an opportunity of being heard and, therefore, the assessment is bad in law. But contrary to the material on record, the Dy. CIT(A) summarily rejected the above ground(s) saying that appellant was appointed as agent by the non-resident, Dharmichand, himself. He argued, from what document on the records the Dy. CIT(A) reached the above conclusion is not known.
Drawing our attention to the copy of sale deed appearing at pages 16-20 of the paper book, Shri Jain pointed out that Shri Rameshchandra Bordia is only one of the two witnesses to the sale transaction of the plot.
There is absolutely no material on record which even by implication suggests that Rameshchandra Bordia was appointed by the non-resident, Dharmichand.
12.3 Shri Jain also submitted that Dy. CIT(A) did not stop at that. He denied that the Department treated Shri Rameshchandra Bordia as agent of non-resident, Dharmichand. Further, contrary to legal provisions, he reached the finding that before issue of notice under s. 148, it is not necessary to issue show cause notice to treat the person as agent of the non-resident. According to him, the ITO has not only to issue a notice of his intention to treat the person as an agent of a non-resident but he has to pass an order under s. 163 treating him as an agent of the non-resident after hearing him. In this case, nothing of the sort has been done by the AO. In support of his stand that the ITO has to pass an order under s. 163 of the Act before initiating proceedings by issue of a notice under s. 148, he placed reliance on the decision in CIT v. Kanhaiyalal Gurmukh Singh (1973) 87 ITR 476 (P&H).
13. Shri G. L. Verma, the learned Departmental Representative, supported the orders of the Revenue authorities. Placing reliance on the letter dt. 19th February, 1987 of the ITO, he argued that during the course of assessment proceedings, the ITO had allowed opportunity to Shri Rameshchandra Bordia to state objections, if any, if he is treated as an agent of Dharmichand, non-resident. This opportunity was given with reference to the letter dt. 11th February, 1987, of Shri Rameshchandra Bordia filed along with the return for the asst. yr.
1984-85. Shri Verma further argued that the assessment proceedings were attended by Shri Rameshchandra Bordia as also his counsel, Shri A. L.
Jain, Chartered Accountant. Therefore, there is no infirmity in the orders of the Revenue authorities.
14. We have considered the rival submissions, perused the orders of the authorities below as also the documents contained in the paper book of the assessee. The first issue which arises for our consideration is whether on the facts and in the circumstances of the case, the ITO was correct in law in treating Shri Rameshchandra Bordia as agent of non-resident, Dharmichand, without giving notice of his intention to do so. Before we proceed further, let us notice relevant provisions of s.
163 of the Act : "163. (1) For the purpose of this Act, "agent", in relation to a non-resident, includes any person in India - (c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India; (2) No person shall be treated as the agent of a non-resident unless he had an opportunity of being heard by the AO as to his liability to be treated as such." 14.1 It would, thus, be seen that sub-s. (1) of s. 163 provides for the persons, who may be treated as agents in relation to a non-resident. It is also apparent that the person who may be treated as an agent may belong to one of the five categories mentioned in sub-s. (1) of s. 163.
In Barendra Prasad Ray v. ITO (1981) 129 ITR 295 (SC), their Lordships of the apex Court have held that it is the ITO who has jurisdiction to decide the question whether a particular person should or should not be treated as an agent of the non-resident. Sub-s. (2) of s. 163 provides that no person shall be treated as agent of non-resident unless he had an opportunity of being heard by the ITO as to his liability to be treated as such. If we examine the instant case, it would be observed from the facts narrated already that no notice was given to Shri Rameshchandra Bordia by the ITO conveying his intention to treat him as the agent of Shri Dharmichand, non-resident. It appears that the notice under s. 148 of the Act was issued by the ITO on the basis of information that the non-resident had sold the plot No. E-22 of Saket Nagar, Indore and in his affidavit dt. 30th December, 1983 the said Dharmichand, non-resident, had authorised Shri Rameshchandra Bordia to act on his behalf in respect of the sale transaction. On examination of the sale deed dt. 24th February, 1984 as also the affidavit dt. 30th December, 1983 of Shri Dharmichand we find that there is no inkling at all in the above documents that Shri Rameshchandra Bordia was authorised to act on behalf of Dharmichand, non-resident. The statement of the ITO that in affidavit dt. 30th December, 1983, Shri Dharmichand had authorised Shri Rameshchandra Bordia to act on his behalf in the transaction of sale is factually incorrect. So is the case with regard to the observations of Dy. CIT(A) that the agent was appointed by the non-resident, Dharmichand himself. Even assuming for the sake of argument that what the ITO/Dy. CIT(A) are stating is correct, then also the requirement of notice of his intention to treat Shri Rameshchandra Bordia as the agent of Dharmichand, non-resident cannot be dispensed with. In the case of National Newsprint & Paper Mills Ltd. v. CIT (1961) 41 ITR 60 (MP), their Lordships of Honble Madhya Pradesh High Court observed at page 64 of the report that under s. 43 of the 1922 Act corresponding to s. 163 of 1961 Act, no person can be deemed to be an agent of non-resident unless the ITO has served on him a notice of his intention to treat him as an agent and has further given him an opportunity of being heard as to his liability. Their Lordships went on to observe further that the procedure laid down under the above section has to be followed if the Department desires to impose substantive liability on the agent in respect of the non-resident assessees income.
As stated earlier, the ITO did not follow the procedure laid down in s.
163 of the Act.
15. The next question, which arises for our consideration is whether issue of notice under s. 148 to Shri Rameshchand Bordia without passing an order under s. 163 of the Act is sustainable in law 15.1 In CIT v. Naval Kishore Kharaiti Lal (1938) 6 ITR 61 (PC), the Privy Council while deciding the case under the old Act held that if a reasonable opportunity of being heard was given, it was not further necessary to validity of a notice calling for a return of income where it was served on a person as agent of a non-resident that it should be preceded by an order declaring him to be the agent of the non-resident.
It was further held that it was open to the ITO to postpone any final determination of the question of agency until the time came to make an assessment. It is quite obvious that the above decision was rendered under the old Act and not in the context of notice to be issued under s. 148 of the 1961 Act. In the case of Kanhaiyalal Gurumukh Singh (supra), their Lordships of Punjab & Haryana High Court took a different view and held that the principle laid down in Nawal Kishores case (supra) does not apply whether a notice is to be issued under s.
148 of the 1961 Act and an order treating a person as an agent of non-resident must be made under s. 163 before he is served with such notice. We may quote the observations of their Lordships : "Sub-s. (2) of s. 163 of the 1961 Act provides that no person shall be treated as the agent of a non-resident unless he has had an opportunity of being heard by the ITO as to his liability to be treated as agent.
It is, therefore, necessary under this sub-section not only to issue a notice of his intention to treat the person as the agent of a non-resident, but to pass an order treating him as an agent of the non-resident after hearing him. This result also follows from the language of sub-s. (3) of s. 149 of the 1961 Act wherein, it is mentioned that "if the person on whom a notice under s. 148 is to be served is a person treated as the agent of a non-resident under s.
163". This means that his status was an agent of the non-resident must have been determined before the issue of a notice under s. 148. Sec.
34(1) and s. 43 of the old Act used the words "deemed to be the agent".
What is implied by the words "deemed" is that whether a person is or is not the agent of a non-resident in actual fact, he will be treated as such.
Under the old Act, no appeal lay against the order of the ITO by which a person was deemed to be an agent under s. 43 of the old Act. The contention that a person was wrongly deemed to be an agent could only be taken as one of the grounds of attack against the assessment order.
Sec. 246(g) of the 1961 Act provides for an appeal from an order under s. 163 treating an assessee as the agent of a non-resident. Sec. 249(2) provides that the appeal should be presented within 30 days from the date on which intimation of the order treating him as agent is served.
Secs. 246 and 249 leave no manner of doubt that the ITO has to pass an order under s. 163 before initiating proceedings by issuing a notice under s. 148 of the Act.
Nawal Kishores case (supra) is not applicable to a notice issued under s. 148 of the 1961 Act to a person as an agent of a non-resident".
15.2 In CIT v. Express Newspapers (P) Ltd. (1978) 111 ITR 347 (Mad), their Lordships of Madras High Court concurred with the view taken by Punjab & Haryana High Court in Kanhaiyalal Gurumukh Singh (supra). At pages 351-352 of the report (ITR) while considering the decision in Nawal Kishores case (supra) cited by the Revenue, their Lordships of Madras High Court held thus : "In our view, the ratio of this case cannot support the Revenue for the reason that the Privy Council propounded the principle that the final determination of the question of agency has to be done, but it could be postponed till the final assessment order is made under the Act.
Incidentally the principle in CIT v. Nawal Kishore Kharaiti Lal (supra) also contemplates an opportunity being given to the representative-assessee to make his representations not only against the proposed assessment but also against his treatment as a representative-assessee as such. Equally there is a fallacy in the contention that no order recognising an assessee as an agent is necessary, as it is not expressly provided. By way of a comparison, it is seen that the ITO has the power on sufficient cause being shown, to cancel an ex parte order of assessment made under s. 144. There are no express words in s. 146 which compel the ITO to pass any order. Sec.
246(d) provides for a right of appeal against it. Thus, it is seen that there are provisions in the Act which obligate the IT authorities to act in a particular situation and pass an order but there is no specific literature in those sections compelling them to make written order as such. But, such orders are made appealable. It is this provision as to right of appeal which creates the necessity to pass an order for a right of appeal cannot be lightly treated and dealt with. A right of appeal is one of the modes by which a decision which could otherwise be final can be challenged. It is not a procedural right but substantive right. Indeed, it is a vested right. And such a right to enter the superior Court accrues to the litigant and exists as on and from the date of lis commences, and although it may be actually exercised when the adverse situation comes into play, the record must disclose that such an order has been passed so that the aggrieved person may exercise his vested right of appeal and obtain redress. In our view, therefore, a written order treating the representative assessee as the agent of the non-resident is necessary. Even if a person without being called upon to submit a return voluntarily submits a return as agent of a non-resident, the necessity to pass an order recognising him as such agent cannot be dispensed with. The case of Jadavji Narshidas & Co. v. CIT (1957) 31 ITR 1 (Bom), is distinguishable on the ground that it arose under the Act of 1922 which did not provide for a right of appeal against such treatment orders. In CIT v. Kanhaiya Lal Gurumukh Singh (1973) 87 ITR 476 (Punj) a similar question arose which was in fact decided by a majority of judges as there was a difference of opinion." "Having agreed to the express provisions which create a vicarious liability on the representative-assessee to be liable to tax, as it is popularly understood the necessity to provide him with an order treating him as agent of the non-resident becomes all the more important. This would enable him to place his difficulties in the matter of the delays in submission of his return even in the appeal under s. 246(g) of the Act and secure a limited relief. He could have by initiating and participating in such an appeal relieve himself of the liability to pay penalty for no fault of his." 15.4 Similar view has been taken by the Honble Bombay High Court in CIT v. Belapur Sugar & Allied Industries Ltd. (1983) 141 ITR 404 (Bom). At page 412 of the report (ITR), their Lordships held, thus : "In our opinion, it is necessary to concur with the view taken by the majority of the judges in Kanhaiya Lals case (supra). This view appears to be in accord with the plain language of the statutory provisions, and we are inclined to agree with the majority view that the decision of the Privy Council in Nawal Kishores case (supra), is no longer applicable to the IT Act, 1961, by reason of the specific statutory changes, which the Division Bench of the said Court has noted in extenso. If the right of appeal of the assessee is to have any real meaning, then the decision under s. 163 must be given previous to the notice under s. 148 being issued to an assessee on the basis that the alleged income which had escaped assessment is the income on which the assessee is liable as a representative-assessee being the agent of a non-resident covered by s. 163." 16. The above decisions lead us to conclude that the ITO must pass an order under s. 163(2) treating the assessee as an agent of non-resident before issuing a notice under s. 148 of the Act. It is an admitted position that the ITO has not passed an order under s. 163 of the Act before initiating proceedings under s. 148 of the Act. If that be so, the notice issued by the AO on 21st February, 1986 under s. 148 to Shri Rameshchandra Bordia is vitiated and is not sustainable in law.
17. We do not find any substance in the arguments of Shri Verma, the learned Departmental Representative, that during the course of assessment proceedings, Shri Rameshchandra Bordia was given an opportunity to state objections if he had any for being treated as agent of Dharmichand, non-resident. Likewise, there is no merit that Shri Rameshchandra Bordia had filed the return of income for the asst.
yr. 1984-85 suo motu in response to notice under s. 148 and that he had attended the assessment proceedings along with his counsel, Shri Jain.
An identical situation had arisen before Amritsar Bench of the Tribunal in the case of Sudarshan Kumar v. ITO (1997) 59 TTJ (Asr)(TM) 276 : (1997) 62 ITD 243 (Asr)(TM), wherein the Honble Third Member, inter alia, agreed with the approach of the learned A.M. who observed, thus : "The fact of the filing of the return by Shri Sudarshan Kumar voluntarily on behalf of non-resident Shri Prem Kumar Bhagat cannot be read as obliterating the necessity of passing order under s. 163 of the IT Act treating him to be the agent of the non-resident, which is an appealable order under the IT Act. All that perhaps can be said is that while appointing him as an agent in accordance with the provisions of law the concession implied can be availed of by the Revenue to pass an order under s. 163 of the Act. The order itself in such circumstances cannot be given a go by. The point can be illustrated. It is well-known that when an assessee agrees to be assessed on a particular income with the ITO, the necessity of passing an assessment order is not dispensed with. The law has to take its own course and the assessment order in such a case has to be passed and is, in fact invariably passed by the IT Department." 18. For the reasons aforesaid, we vacate the orders of the Revenue authorities holding that without order under s. 163(2) of the Act issue of notice under s. 148 by the ITO to Shri Rameshchandra Bordia and the assessment framed consequent thereto are not in accordance with law.