S. Prabhakar Tholar Vs. Wealth-tax Officer - Court Judgment

Excerpt:
1. there was a delay of 120 days in filing these appeals. after hearing the parties, the delay is condoned and the appeals are admitted.2. wt appeal nos. 521 and 522/bang./1985 : these two appeals are directed against the order of the commissioner of wealth-tax passed under section 25(2) of the wealth-tax act for the assessment years 1982-83 and 1983-84. the assessee was assessed for these two years originally by the wealth-tax officer on total wealth of rs. 17,13,974 and rs. 18,51,800 respectively. while computing the assessee's wealth at the above figures, the wealth-tax officer had allowed income-tax liability to the extent of rs. 5,41,829 and rs. 2,86,502 for these two years. the commissioner of wealth-tax, after noticing that the actual income-tax liability due from the assessee as on the valuation dates, was rs. 75,575 for the assessment year 1982-83 and 'nil' for the assessment year 1983-84, considered that the wealth-tax officer's action in allowing higher amounts of deduction towards such liabilities was erroneous and prejudicial to the interests of revenue and accordingly initiated action under section 25(2) for the above two years. it was contended before the commissioner that the assessee was a partner in a number of firms. one of the firms, m/s. prabhakar tile works, was closing its accounts on the 30th june of each year. while accounting for the assessee's interest in the above partnership firm, the credit balance in the name of the assessee as on 30th june 1981 and 30th june 1982 was taken into account, though the valuation dates in the assessee's case, were 31st march, 1982 and 31st march, 1983. after the 30th june of the respective years, the assessee had withdrawn considerable amounts from that firm to pay advance tax and also to pay for life insurance and other payments. if the credit balances in the case of the assessee on 31-3-1982 and 31-3-1983 are taken into account, the assessee's interest in the firm will come down substantially and in this context there is no necessity to make any adjustment on account of tax liabilities which had already been allowed by the wealth-tax officer. in fact, it is pointed out that the tax liabilities have been discharged by the assessee by withdrawing the amounts from this partnership firm and it is for this reason that the tax liability has come down. in the circumstances, it was not just to take the reduced tax liability but include the higher credit balance, without reducing the same by the withdrawals made for tax payments towards assessee's interest in the firm. in the circumstances, it is stated that there is no error in the orders of the wealth-tax officer which could be said to be prejudicial to the interests of revenue. the commissioner, however, did not accept the assessee's contentions and directed the wealth-tax officer to reduce the tax liability already allowed to rs. 75,575 and nil for the assessment years 1982-83 and 1983-84 respectively.3. shri venkatesan, the learned representative of the assessee, once again reiterates the arguments he advanced before the commissioner. he points out that for the purpose of computing the assessee's wealth for these two years the assessee's interest in the firm of m/s. prabhakar tile works was taken at rs. 16,42,063 and rs. 10,95,250 as on 30-6-1981 and 30-6-1982 being the credit balances in favour of the assessee in the books of the above firm. he stated that the advance tax liability of rs. 4,65,487 and rs. 2,63,067 was paid from out of the above amount after 1-7-1981 and 1-7-1982 respectively and it is because of these payments that the income-tax liability as on the valuation dates has come down to rs. 75,575 for the first year and 'nil' for the second year. it is further pointed out that apart from the above advance tax payments the assessee paid substantial amounts towards compulsory deposits for these two years and also made payments towards insurance and other expenses. if the balances of his capital account in the above firm as on 31-3-1982 and 31-3-1983, which come to rs. 11,46,320 and rs. 7,16,461, are taken into account, it will be clear that the assessee was already overassessed in respect of the two assessment years. in these circumstances, it is contended that it is not necessary to make any further adjustment towards the tax liabilities on the ground that the tax liability on the valuation dates was much less than what was allowed by the wealth-tax officer. in other words, if an overall picture is taken into account, it is contended that there is no wealth escaping assessment and so, the commissioner is not correct in invoking the provisions of section 25(2) of the wealth-tax act. it is also contended that before the commissioner can take action under section 25(2), he has to come to a finding that not only that there was an error in the order of the wealth-tax officer but it was also prejudicial to the interests of revenue. reliance, in this connection, was placed on the decision of the mysore high court in the case of v.k.uchal v. commissioner of commercial taxes [1967] 20 stc 67 and the decision of the karnataka high court in the case of v.g. krishnamurthy v. cit [1985] 1 52 itr 683.4. shri ravibalan, the learned departmental representative, relies on the orders of the commissioner. he also points out that the assessee cannot, during the course of proceedings under section 25(2), request the commissioner to revise certain errors which are prejudicial to him.he has to take other remedies for getting such errors remedied by filing appeals or revision petitions but the commissioner, while acting under section 25(2), cannot revise the orders which are prejudicial to the assessee. reliance in this connection is placed on the decisions of the madras high court in the cases of hindu bank karur ltd. v. addl.cit [1976] 103 itr 553 and cit v. eimco-k. c.p. ltd. [1984] 147 itr 5. after considering the rival submissions, we are of the opinion that the assessee is entitled to succeed in these appeals. there is no dispute that the actual income-tax liability of the assessee as on the dates of valuation, i.e., 31-3-1982 and 31-3-1983, was only rs. 75,575 and 'nil' as against rs. 5,41,829 and rs. 2,86,502 taken by the wealth-tax officer. however, the assessee's case is that these lower liabilities have come down because he has withdrawn the amounts necessary for payment of the tax from out of his account with m/s.prabhakar tile works in which he was a partner. if the income-tax liability is reduced because of the withdrawals from the above account, the balance to his credit as on the valuation date, should also be taken as equally reduced by those withdrawals. otherwise, it will result in a double assessment, in that, the higher credit balance is taken as representing the assessee's interest in the above firm while lower tax liability is allowed because of the withdrawals made by him from that firm. this difficulty has come because for purposes of ascertaining the assessee's interest in the above partnership firm, the wealth-tax officer has taken the assessee's credit balances with the firm as on 30-6-1981 sand 30-6-1982 and not 31-3-1982 and 31-3-1983, which are the valuation dates for these two assessment years. if the withdrawals made by the assessee towards tax payments, payment of compulsory deposit, insurance payments and other expenses, between the period from 1-7-1981 to 31-3-1982 and 1-7-1982 to 31-3-1983, are taken into account, the assessee's credit balance, which in turn, represents the assessee's interest in the above firm on the valuation dates, comes to rs. 11,46,320 for the assessment year 1982-83 and rs. 7,16,461 for the assessment year 1983-84 as against rs. 16,42,153 and rs. 10,95,250 taken by the wealth-tax officer. this clearly shows that by not taking into account the withdrawals made by the assessee from the above firm, mostly for making tax payments, the assessee's interest in the firm has been arrived at a higher figure than what it ought to have been correctly arrived at and the same tax payments, which are debited in that account, are sought to be reduced from the tax liability due from the assessee as on the valuation dates. if the assessee's interest in the above partnership is correctly worked out on the above basis, there will be no under-assessment of the wealth-tax for these two years with the result that the assessments made by the wealth-tax officer for these two years cannot be said to be in any way prejudicial to the interests of revenue. it is true that the decisions of the madras high court in hindu bank karur ltd.'s case (supra) and eimco - k.c.p. ltd.'s case (supra) laid down that in proceedings under section 263 of the income-tax act, 1961 [corresponding to section 25(2) of the wealth-tax act, 1957], the assessee cannot seek to show that there was some other benefit in favour of the revenue which was prejudicial to the assessee and that the words 'erroneous in so far as they are prejudicial to the interests of the revenue' have to be taken together and require to be widely construed. the power of the commissioner is restricted only to the errors so far as they are prejudicial to the interests of the revenue and if there was any other error, it was necessary for the assessee to take up other appropriate proceedings. in this case, however, the quantum of tax liability to be allowed as a deduction is so intricately related to the question of the assessee's interest in the partnership firm, inasmuch as it is the withdrawals from the firm which has brought about the reduction in the tax liability, that it cannot be said that both the issues are to be considered separately in order to consider the question whether there was any error which is prejudicial to the interests of the revenue in the assessment orders passed by the wealth-tax officer. it may also be noticed that the karnataka high court in the case of v.g. krishnamurthy (supra) held that section 263 of the income-tax act could be invoked only when the commissioner prima facie finds that the order made by the income-tax officer was erroneous and prejudicial to the interests of revenue. both these facts must exist simultaneously. if one or the other factor is absent, that the commissioner cannot exercise suo motu the powers of revision under section 263. while coming to the above conclusion, they relied on the earlier decision of the mysore high court in v.k. uchal's case (supra) in which it was held that it cannot be said correctly that there has been any prejudice to the revenue unless it could be shown, at least prima facie, that tax which was lawfully exigible was not imposed. as we have pointed out earlier, if the assessee's interest in the partnership firm as on 31-3-1982 and 31-3-1983 is taken into account as it ought to be, after debiting the withdrawals made by him between the period from 1-7-1981 to 31-3-1982 and 1-7-1982 to 31-3-1983, even if the deduction allowable towards tax liability is reduced in the manner the commissioner has done, there will be no prejudice to the interests of revenue inasmuch as the actual wealth assessed is more than what it ought to have been assessed otherwise.taking all these aspects into account and also the decisions of the karnataka high court referred to above, we are of the opinion that this is a case where, though there may be an error in the orders of the wealth-tax officer, there is no prejudice to the interests of revenue caused by the wealth-tax assessments made by the wealth-tax officer. in the circumstances, we cancel the orders of the commissioner of wealth-tax passed under section 25(2) of the wealth-tax act.7. wta nos. 520 & 523 bang. 1985 : these appeals are to be dismissed as infructuous as they have been filed against the orders passed by the wealth-tax officer in consequence of the commissioner's orders under section 25(2). the assessee has filed separate appeals against the order of the commissioner under section 25(2), which have been disposed of as above, these appeals become infructuous and are dismissed as such.

Judgment:
1. There was a delay of 120 days in filing these appeals. After hearing the parties, the delay is condoned and the appeals are admitted.

2. WT Appeal Nos. 521 and 522/Bang./1985 : These two appeals are directed against the order of the Commissioner of Wealth-tax passed under Section 25(2) of the Wealth-tax Act for the assessment years 1982-83 and 1983-84. The assessee was assessed for these two years originally by the Wealth-tax Officer on total wealth of Rs. 17,13,974 and Rs. 18,51,800 respectively. While computing the assessee's wealth at the above figures, the Wealth-tax Officer had allowed income-tax liability to the extent of Rs. 5,41,829 and Rs. 2,86,502 for these two years. The Commissioner of Wealth-tax, after noticing that the actual income-tax liability due from the assessee as on the valuation dates, was Rs. 75,575 for the assessment year 1982-83 and 'nil' for the assessment year 1983-84, considered that the Wealth-tax Officer's action in allowing higher amounts of deduction towards such liabilities was erroneous and prejudicial to the interests of revenue and accordingly initiated action under Section 25(2) for the above two years. It was contended before the Commissioner that the assessee was a partner in a number of firms. One of the firms, M/s. Prabhakar Tile Works, was closing its accounts on the 30th June of each year. While accounting for the assessee's interest in the above partnership firm, the credit balance in the name of the assessee as on 30th June 1981 and 30th June 1982 was taken into account, though the valuation dates in the assessee's case, were 31st March, 1982 and 31st March, 1983. After the 30th June of the respective years, the assessee had withdrawn considerable amounts from that firm to pay advance tax and also to pay for life insurance and other payments. If the credit balances in the case of the assessee on 31-3-1982 and 31-3-1983 are taken into account, the assessee's interest in the firm will come down substantially and in this context there is no necessity to make any adjustment on account of tax liabilities which had already been allowed by the Wealth-tax Officer. In fact, it is pointed out that the tax liabilities have been discharged by the assessee by withdrawing the amounts from this partnership firm and it is for this reason that the tax liability has come down. In the circumstances, it was not just to take the reduced tax liability but include the higher credit balance, without reducing the same by the withdrawals made for tax payments towards assessee's interest in the firm. In the circumstances, it is stated that there is no error in the orders of the Wealth-tax Officer which could be said to be prejudicial to the interests of revenue. The Commissioner, however, did not accept the assessee's contentions and directed the Wealth-tax Officer to reduce the tax liability already allowed to Rs. 75,575 and nil for the assessment years 1982-83 and 1983-84 respectively.

3. Shri Venkatesan, the learned representative of the assessee, once again reiterates the arguments he advanced before the Commissioner. He points out that for the purpose of computing the assessee's wealth for these two years the assessee's interest in the firm of M/s. Prabhakar Tile Works was taken at Rs. 16,42,063 and Rs. 10,95,250 as on 30-6-1981 and 30-6-1982 being the credit balances in favour of the assessee in the books of the above firm. He stated that the advance tax liability of Rs. 4,65,487 and Rs. 2,63,067 was paid from out of the above amount after 1-7-1981 and 1-7-1982 respectively and it is because of these payments that the income-tax liability as on the valuation dates has come down to Rs. 75,575 for the first year and 'nil' for the second year. It is further pointed out that apart from the above advance tax payments the assessee paid substantial amounts towards compulsory deposits for these two years and also made payments towards insurance and other expenses. If the balances of his capital account in the above firm as on 31-3-1982 and 31-3-1983, which come to Rs. 11,46,320 and Rs. 7,16,461, are taken into account, it will be clear that the assessee was already overassessed in respect of the two assessment years. In these circumstances, it is contended that it is not necessary to make any further adjustment towards the tax liabilities on the ground that the tax liability on the valuation dates was much less than what was allowed by the Wealth-tax Officer. In other words, if an overall picture is taken into account, it is contended that there is no wealth escaping assessment and so, the Commissioner is not correct in invoking the provisions of Section 25(2) of the Wealth-tax Act. It is also contended that before the Commissioner can take action under Section 25(2), he has to come to a finding that not only that there was an error in the order of the Wealth-tax Officer but it was also prejudicial to the interests of revenue. Reliance, in this connection, was placed on the decision of the Mysore High Court in the case of V.K.Uchal v. Commissioner of Commercial Taxes [1967] 20 STC 67 and the decision of the Karnataka High Court in the case of V.G. Krishnamurthy v. CIT [1985] 1 52 ITR 683.

4. Shri Ravibalan, the learned departmental representative, relies on the orders of the Commissioner. He also points out that the assessee cannot, during the course of proceedings under Section 25(2), request the Commissioner to revise certain errors which are prejudicial to him.

He has to take other remedies for getting such errors remedied by filing appeals or revision petitions but the Commissioner, while acting under Section 25(2), cannot revise the orders which are prejudicial to the assessee. Reliance in this connection is placed on the decisions of the Madras High Court in the cases of Hindu Bank Karur Ltd. v. Addl.

CIT [1976] 103 ITR 553 and CIT v. EIMCO-K. C.P. Ltd. [1984] 147 ITR 5. After considering the rival submissions, we are of the opinion that the assessee is entitled to succeed in these appeals. There is no dispute that the actual income-tax liability of the assessee as on the dates of valuation, i.e., 31-3-1982 and 31-3-1983, was only Rs. 75,575 and 'nil' as against Rs. 5,41,829 and Rs. 2,86,502 taken by the Wealth-tax Officer. However, the assessee's case is that these lower liabilities have come down because he has withdrawn the amounts necessary for payment of the tax from out of his account with M/s.

Prabhakar Tile Works in which he was a partner. If the income-tax liability is reduced because of the withdrawals from the above account, the balance to his credit as on the valuation date, should also be taken as equally reduced by those withdrawals. Otherwise, it will result in a double assessment, in that, the higher credit balance is taken as representing the assessee's interest in the above firm while lower tax liability is allowed because of the withdrawals made by him from that firm. This difficulty has come because for purposes of ascertaining the assessee's interest in the above partnership firm, the Wealth-tax Officer has taken the assessee's credit balances with the firm as on 30-6-1981 Sand 30-6-1982 and not 31-3-1982 and 31-3-1983, which are the valuation dates for these two assessment years. If the withdrawals made by the assessee towards tax payments, payment of compulsory deposit, insurance payments and other expenses, between the period from 1-7-1981 to 31-3-1982 and 1-7-1982 to 31-3-1983, are taken into account, the assessee's credit balance, which in turn, represents the assessee's interest in the above firm on the valuation dates, comes to Rs. 11,46,320 for the assessment year 1982-83 and Rs. 7,16,461 for the assessment year 1983-84 as against Rs. 16,42,153 and Rs. 10,95,250 taken by the Wealth-tax Officer. This clearly shows that by not taking into account the withdrawals made by the assessee from the above firm, mostly for making tax payments, the assessee's interest in the firm has been arrived at a higher figure than what it ought to have been correctly arrived at and the same tax payments, which are debited in that account, are sought to be reduced from the tax liability due from the assessee as on the valuation dates. If the assessee's interest in the above partnership is correctly worked out on the above basis, there will be no under-assessment of the wealth-tax for these two years with the result that the assessments made by the Wealth-tax Officer for these two years cannot be said to be in any way prejudicial to the interests of revenue. It is true that the decisions of the Madras High Court in Hindu Bank Karur Ltd.'s case (supra) and EIMCO - K.C.P. Ltd.'s case (supra) laid down that in proceedings under Section 263 of the Income-tax Act, 1961 [corresponding to Section 25(2) of the Wealth-tax Act, 1957], the assessee cannot seek to show that there was some other benefit in favour of the revenue which was prejudicial to the assessee and that the words 'erroneous in so far as they are prejudicial to the interests of the revenue' have to be taken together and require to be widely construed. The power of the Commissioner is restricted only to the errors so far as they are prejudicial to the interests of the revenue and if there was any other error, it was necessary for the assessee to take up other appropriate proceedings. In this case, however, the quantum of tax liability to be allowed as a deduction is so intricately related to the question of the assessee's interest in the partnership firm, inasmuch as it is the withdrawals from the firm which has brought about the reduction in the tax liability, that it cannot be said that both the issues are to be considered separately in order to consider the question whether there was any error which is prejudicial to the interests of the revenue in the assessment orders passed by the Wealth-tax Officer. It may also be noticed that the Karnataka High Court in the case of V.G. Krishnamurthy (supra) held that Section 263 of the Income-tax Act could be invoked only when the Commissioner prima facie finds that the order made by the Income-tax Officer was erroneous and prejudicial to the interests of revenue. Both these facts must exist simultaneously. If one or the other factor is absent, that the Commissioner cannot exercise suo motu the powers of revision under Section 263. While coming to the above conclusion, they relied on the earlier decision of the Mysore High Court in V.K. Uchal's case (supra) in which it was held that it cannot be said correctly that there has been any prejudice to the revenue unless it could be shown, at least prima facie, that tax which was lawfully exigible was not imposed. As we have pointed out earlier, if the assessee's interest in the partnership firm as on 31-3-1982 and 31-3-1983 is taken into account as it ought to be, after debiting the withdrawals made by him between the period from 1-7-1981 to 31-3-1982 and 1-7-1982 to 31-3-1983, even if the deduction allowable towards tax liability is reduced in the manner the Commissioner has done, there will be no prejudice to the interests of revenue inasmuch as the actual wealth assessed is more than what it ought to have been assessed otherwise.

Taking all these aspects into account and also the decisions of the Karnataka High Court referred to above, we are of the opinion that this is a case where, though there may be an error in the orders of the Wealth-tax Officer, there is no prejudice to the interests of revenue caused by the wealth-tax assessments made by the Wealth-tax Officer. In the circumstances, we cancel the orders of the Commissioner of Wealth-tax passed under Section 25(2) of the Wealth-tax Act.

7. WTA Nos. 520 & 523 Bang. 1985 : These appeals are to be dismissed as infructuous as they have been filed against the orders passed by the Wealth-tax Officer in consequence of the Commissioner's orders under Section 25(2). The assessee has filed separate appeals against the order of the Commissioner under Section 25(2), which have been disposed of as above, these appeals become infructuous and are dismissed as such.