income-tax Officer Vs. G.N. Agarwal - Court Judgment

Excerpt:
1. the revenue has filed the appeal against the order of the commissioner (appeals) on two grounds 2&3 [these paras are not being printed here as they relate to minor issue not covered in the synopsis.] 4. the next ground of appeal is that as the case was patently covered by section 144b of the income-tax act, 1961 ("the act") the ito submitted a draft assessment order to the iacon 26-2-1977.simultaneously the draft assessment was several by the ito on the assessee also. at that stage on 26-2-1977 the assessee addressed a letter to the ito objecting to certain additions proposed to be made by the ito in the draft assessment order. while concluding this letter of objection, the assessee put in a fresh claim before the ito for enhanced exports development expenditure under section 35b of the act in the following terms : "xiv. export development expenditure - in the earlier year the aac has allowed rebate on certain additional expenditure though incurred in india. we accordingly, claim the rebate on the expenditure incurred on staff engaged directly on export of rs. 35,760 shipment and sampling expenses rs. 71,427, export credit guarantee premium of rs. 24,132, and difference due to foreign exchange fluctuation on remittance of supervision charges abroad of rs 5,789. the last item of rs. 5,789 is, however, paid outside india." the iac declined to entertain this claim under section 144b of the act.on the ground that since this claim was not before the ito, he could not allow the relief at that stage of proceedings under section 144b.the ito consequently completed the assessment without referring to the assessee's claim in respect of the aforesaid four items.5. on an appeal by the assessee before the commissioner (appeals), the commissioner (appeals) addressed himself a question weather it was open for the iac, to consider matters under section 144b which did not arise out of the draft assessment order submitted by the ito. for the detailed reasons mentioned by the commissioner (appeals) in his order, the commissioner (appeals) held that when the claim under section 35b was made by the assessee before the ito and when a satisfactory clarification was furnished for the belated enlargement of the claim, he was of the opinion that the assessee was entitled to a consideration of the claim. he directed the ito to examine the claim under section 35b and dispose of the same in accordance with law.6. the revenue is appeal against the order of the commissioner (appeals) on this issue. it is submitted on behalf of the revenue that at the assessment stage before the ito, the assessee had not made any such claim in respect of these four items. therefore, there was no variation between the income as returned by the assessee and the income proposed to be determined by the ito. once the ito submitted a draft assessment order to the iac, he became functus officio and he was entirely subordinate to the iac under section 144b (5). therefore, the assessee's plea before the ito in its letter dated 26-2-1977 claiming additional relief under section 35b was of no consequence and has to be ignored. further it is submitted by the learned departmental representative that the assessee could not have taken up this ground before the commissioner (appeals) at all as explained by the learned the judgment of the court was delivered byges of the supreme court in the case of addi. cit v. gurjargravures (p.) ltd. [1978] 111 itr 1. therefore, the learned departmental representative has proceeded to arguer that the commissioner (appeals) was not competent to entertain the assessee's appeal on this ground an his direction on this issue being without authority should be vacated.7. on behalf of the assessee, the learned counsel has proceeded to argue that any objection could be raised by the assessee before the ito at any time before the assessment was made. the provisions of section 144b were placed on the statute book as an additional safeguard to the assessee in respect of the items where there was any variation between the assessee and the ito and where such variation resulted in an addition of over rs. 1 lakh to the returned income. there was nothing to prevent an assessee from making any claim before the assessment was made. according to the learned counsel section 144b did not take away any of the rights of the assessee's claim under section 35b in respect of the aforesaid four items wa not outside the scope of the assessment order. therefore, the assessee had a right of appeal. no additional evidence was necessary for consideration of the assessee's claim, when the assessee made the claim before the ito. the facts were already on record. formerly the assessee had not made this claim. the assessee by its letter dated 26-2-1977 brought to the notice of the ito that it was entitled to certain additional deductions under section 35b which should be allowed while framing the assessment. therefore, the commissioner (appeals) was competent to entertain the assessee's appeal on this ground and the commissioner (appeals) order did not suffer from any infirmity on the basis of the dictum laid down by the learned judges of the supreme court in the case of gurjargravures (p.) ltd. (supra).8. we have carefully considered the facts and circumstances of the case in respect of this issue and the submission on either side. the assessee in this case had filed a return of income on 15-1-1975 declaring a total income of rs. 16,46,690. the ito did not accept this return. he proposed to add certain items of income and disallowed certain claims of the assessee. thus, enhancing the assessee's income over and above the amount declared by the assessee as its income. there was a variation between the income as declared by the assessee and the income as proposed to be assessed by the ito. the proposed variation was exceeding the amount fixed by the cbdt under section 144b (6), namely, rs. 1 lakh. the ito, therefore forwarded a draft of the proposed assessment order to the assessee. the assessee objected to some of the items or which there was a difference between the assessee and the ito. the iac considered the contents of the draft order and after considering the assessee's objections received to the proposed draft assessment order under section 144b (2), gave certain directness to the ito in respect of the proposed variations. the ito was bound to carry out the directions issued by the iac in respect of such variations by virtue of the provisions of section 144b (5); about this there is no dispute.9. the dispute in the present appeal, with which we are concerned arises from the fact that while submitting its objections to the variations proposed by the ito under section 144(2), the assessee made a fresh claim before the ito for further deduction under section 35b, which according to the assessee it was entitled on the basis of the facts already on record. the question to be considered is whether the ito was justified in ignoring the assessee's claim. according to the learned departmental representative in a case to which the provisions of section 144b applied, once the ito forwarded a draft assessment order to the iac under section 144b (1), he became functus officio. he had nothing further to do except to carry out the orders of the iac issued by the iac under section 144b (4). further, under section 144b (5) every direction issued by the iac under sub-section (4) was binding on the ito.10. to our mind, the dispute between the parties in the present appeal cannot disposed of so easily. first we have to consider the normal functions of an ito under section 143(3) under which the ito expected to make the assessment and has in fact made the present assessment and has in fact made the present assessment. thereafter we have to examine how far the provisions of section 144b encroach upon the complete discretion granted to the ito under section 143(3). to our mind this is the nature of the real dispute between the parties in the present appeal, namely, having submitted a draft assessment order to the iac under section 144b (1), whether the ito was prevented from entertaining any claims which the assessee had made before the ito.11. on a perusal of section 143(3), it would appear that on the date fixed for hearing under section 143(2) or as soon afterward as may be after hearing such evidence as the assessee may produce and such other evidence as the ito may require on specific points, and after taking into account all relevant material which he has gathered, the ito is expected to make an assessment under section 143(3). this authority of the ito to make such an assessment has been on the statute book for decades either under the income-tax act, 1961, or under its all predecessor legislations. section 144b is, however, a comparatively recent piece of legislation placed on the statute book by the taxation laws (amendment) act, 1974, with effect from 1-1-1976. under section 144b, wherein an assessment to be made under section 143(3) the ito proposed to make any variation in the income or loss returned by the assessee which was prejudicial to the assessee and the amount of such variation exceeded the amount fixed by the cbdt under section 144b (6), the ito was under an obligation, in the first instance, to forward a draft of the proposed order to the assessee. thereafter, after following the further formalities laid down in section 144b, he was to finalise the assessment. by placing the two provisions alongside, namely, section 143(3) and section 144b (1) it is abundantly clear that the provisions of section 144b came into operation only where there was a variation between the income as returned by the assessee and the income as proposed to be assessed by the ito and where such variation exceeded the amount fixed by the cbdt only in respect of items of income or loss where there were variations, the ito was bound by the guidance of the iac. thus, to our mind, the provisions of section 144b have a very limited operation. section 144b is merely in the nature of an additional safeguard to the assessee against frivolous and fantastic assessments. it did not take away the right of an assessee to raise issues before the ito in respect of any other item of claim or deduction which it would be entitled to, which it had omitted to claim in the first instance before the ito through ignorance of law or otherwise. the assessee had always got such a right before section 144b was placed on the statute book. under section 143(3), the ito was under an obligation to take into consideration all relevant material on the subject of the assessee's income or loss and then to frame an assessment. the assessee's entitlement to any statutory relief is a material very relevant for the assessment. before section 144b was placed on the statue book the assessee could always claim such a relief at any time before the ito signed the order. we are unable to find anything in the language of section 144b which would take away this precious right of the assessee. further, we find no impediment created in the exercise of the full discretion by an ito while considering all the claims for deductions, remissions, allowances, etc., which the assessee would make before the ito actually made an assessment under section 143(3).12. to our mind, in the facts and circumstances of the case, the mere fact that the assessee included its claim for additional allowance under section 35b in its letter placing on record its objections to the additions proposed in the draft assessment order did not detract the basic nature of the assessee's claim, it was a claim made before the ito before he made an assessment under section 143(3). the claim should have been dealt with by the ito in the normal course. since he failed to deal with this claim either allowing or rejecting it, it was an outstanding issue between the assessee and the ito. the assessee had every right to appeal to the commissioner (appeals) in respect of this claim for additional allowance. we, therefore, see no reason to interfere with the order of the commissioner (appeals) entertaining the assessee's appeal on this ground and directing ito to deal with it on merits. in our opinion, there is no substance in the objection on behalf of the revenue on the basis of the supreme court ruling in the case of gurjargravures (p.) ltd. (supra). the dictum of the supreme court in the aforesaid case has no application to the facts of the present case whatsoever. needless to say that in the circumstances, the commissioner (appeals), direction directing the ito to examine the claim on merits was the only proper direction which perhaps he could give. it is fair and just and calls for no interference. the order of the commissioner (appeals) on this issue is confirmed.

Judgment:
1. The revenue has filed the appeal against the order of the Commissioner (Appeals) on two grounds 2&3 [These paras are not being printed here as they relate to minor issue not covered in the synopsis.] 4. The next ground of appeal is that as the case was patently covered by section 144B of the Income-tax Act, 1961 ("the act") the ITO submitted a draft assessment order to the IACon 26-2-1977.

Simultaneously the draft assessment was several by the ITO on the assessee also. At that stage on 26-2-1977 the assessee addressed a letter to the ITO objecting to certain additions proposed to be made by the ITO in the draft assessment order. While concluding this letter of objection, the assessee put in a fresh claim before the ITO for enhanced exports development expenditure under section 35B of the Act in the following terms : "XIV. Export development expenditure - In the earlier year the AAC has allowed rebate on certain additional expenditure though incurred in India. We accordingly, claim the rebate on the expenditure incurred on staff engaged directly on export of Rs. 35,760 shipment and sampling expenses Rs. 71,427, export credit guarantee premium of Rs. 24,132, and difference due to foreign exchange fluctuation on remittance of supervision charges abroad of Rs 5,789. The last item of Rs. 5,789 is, however, paid outside India." The IAC declined to entertain this claim under section 144B of the Act.

On the ground that since this claim was not before the ITO, he could not allow the relief at that stage of proceedings under section 144B.The ITO consequently completed the assessment without referring to the assessee's claim in respect of the aforesaid four items.

5. On an appeal by the assessee before the Commissioner (Appeals), the Commissioner (Appeals) addressed himself a question weather it was open for the IAC, to consider matters under section 144B which did not arise out of the draft assessment order submitted by the ITO. For the detailed reasons mentioned by the Commissioner (Appeals) in his order, the Commissioner (Appeals) held that when the claim under section 35B was made by the assessee before the ITO and when a satisfactory clarification was furnished for the belated enlargement of the claim, he was of the opinion that the assessee was entitled to a consideration of the claim. He directed the ITO to examine the claim under section 35B and dispose of the same in accordance with law.

6. The revenue is appeal against the order of the Commissioner (Appeals) on this issue. It is submitted on behalf of the revenue that at the assessment stage before the ITO, the assessee had not made any such claim in respect of these four items. Therefore, there was no variation between the income as returned by the assessee and the income proposed to be determined by the ITO. Once the ITO submitted a draft assessment order to the IAC, he became functus officio and he was entirely subordinate to the IAC under section 144B (5). Therefore, the assessee's plea before the ITO in its letter dated 26-2-1977 claiming additional relief under section 35B was of no consequence and has to be ignored. Further it is submitted by the learned departmental representative that the assessee could not have taken up this ground before the Commissioner (Appeals) at all as explained by the learned The Judgment of the Court was delivered byges of the Supreme Court in the case of Addi. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1. Therefore, the learned departmental representative has proceeded to arguer that the Commissioner (Appeals) was not competent to entertain the assessee's appeal on this ground an his direction on this issue being without authority should be vacated.

7. On behalf of the assessee, the learned counsel has proceeded to argue that any objection could be raised by the assessee before the ITO at any time before the assessment was made. The provisions of section 144B were placed on the statute book as an additional safeguard to the assessee in respect of the items where there was any variation between the assessee and the ITO and where such variation resulted in an addition of over Rs. 1 lakh to the returned income. There was nothing to prevent an assessee from making any claim before the assessment was made. According to the learned counsel section 144B did not take away any of the rights of The assessee's claim under section 35B in respect of the aforesaid four items wa not outside the scope of the assessment order. Therefore, the assessee had a right of appeal. No additional evidence was necessary for consideration of the assessee's claim, when the assessee made the claim before the ITO. The facts were already on record. Formerly the assessee had not made this claim. The assessee by its letter dated 26-2-1977 brought to the notice of the ITO that it was entitled to certain additional deductions under section 35B which should be allowed while framing the assessment. Therefore, the Commissioner (Appeals) was competent to entertain the assessee's appeal on this ground and the Commissioner (Appeals) order did not suffer from any infirmity on the basis of the dictum laid down by the learned judges of the Supreme Court in the case of Gurjargravures (P.) Ltd. (supra).

8. We have carefully considered the facts and circumstances of the case in respect of this issue and the submission on either side. The assessee in this case had filed a return of income on 15-1-1975 declaring a total income of Rs. 16,46,690. The ITO did not accept this return. He proposed to add certain items of income and disallowed certain claims of the assessee. Thus, enhancing the assessee's income over and above the amount declared by the assessee as its income. There was a variation between the income as declared by the assessee and the income as proposed to be assessed by the ITO. The proposed variation was exceeding the amount fixed by the CBDT under section 144B (6), namely, Rs. 1 lakh. The ITO, therefore forwarded a draft of the proposed assessment order to the assessee. The assessee objected to some of the items or which there was a difference between the assessee and the ITO. The IAC considered the contents of the draft order and after considering the assessee's objections received to the proposed draft assessment order under section 144B (2), gave certain directness to the ITO in respect of the proposed variations. The ITO was bound to carry out the directions issued by the IAC in respect of such variations by virtue of the provisions of section 144B (5); about this there is no dispute.

9. The dispute in the present appeal, with which we are concerned arises from the fact that while submitting its objections to the variations proposed by the ITO under section 144(2), the assessee made a fresh claim before the ITO for further deduction under section 35B, which according to the assessee it was entitled on the basis of the facts already on record. The question to be considered is whether the ITO was justified in ignoring the assessee's claim. According to the learned departmental representative in a case to which the provisions of section 144B applied, once the ITO forwarded a draft assessment order to the IAC under section 144B (1), he became functus officio. He had nothing further to do except to carry out the orders of the IAC issued by the IAC under section 144B (4). Further, under section 144B (5) every direction issued by the IAC under sub-section (4) was binding on the ITO.10. To our mind, the dispute between the parties in the present appeal cannot disposed of so easily. First we have to consider the normal functions of an ITO under section 143(3) under which the ITO expected to make the assessment and has in fact made the present assessment and has in fact made the present assessment. Thereafter we have to examine how far the provisions of section 144B encroach upon the complete discretion granted to the ITO under section 143(3). To our mind this is the nature of the real dispute between the parties in the present appeal, namely, having submitted a draft assessment order to the IAC under section 144B (1), whether the ITO was prevented from entertaining any claims which the assessee had made before the ITO.11. On a perusal of section 143(3), it would appear that on the date fixed for hearing under section 143(2) or as soon afterward as may be after hearing such evidence as the assessee may produce and such other evidence as the ITO may require on specific points, and after taking into account all relevant material which he has gathered, the ITO is expected to make an assessment under section 143(3). This authority of the ITO to make such an assessment has been on the statute book for decades either under the Income-tax Act, 1961, or under its all predecessor legislations. Section 144B is, however, a comparatively recent piece of legislation placed on the statute book by the Taxation Laws (Amendment) Act, 1974, with effect from 1-1-1976. Under section 144B, wherein an assessment to be made under section 143(3) the ITO proposed to make any variation in the income or loss returned by the assessee which was prejudicial to the assessee and the amount of such variation exceeded the amount fixed by the CBDT under section 144B (6), the ITO was under an obligation, in the first instance, to forward a draft of the proposed order to the assessee. Thereafter, after following the further formalities laid down in section 144B, he was to finalise the assessment. By placing the two provisions alongside, namely, section 143(3) and section 144B (1) it is abundantly clear that the provisions of section 144B came into operation only where there was a variation between the income as returned by the assessee and the income as proposed to be assessed by the ITO and where such variation exceeded the amount fixed by the CBDT only in respect of items of income or loss where there were variations, the ITO was bound by the guidance of the IAC. Thus, to our mind, the provisions of section 144B have a very limited operation. Section 144B is merely in the nature of an additional safeguard to the assessee against frivolous and fantastic assessments. It did not take away the right of an assessee to raise issues before the ITO in respect of any other item of claim or deduction which it would be entitled to, which it had omitted to claim in the first instance before the ITO through ignorance of law or otherwise. The assessee had always got such a right before section 144B was placed on the statute book. Under section 143(3), the ITO was under an obligation to take into consideration all relevant material on the subject of the assessee's income or loss and then to frame an assessment. The assessee's entitlement to any statutory relief is a material very relevant for the assessment. Before section 144B was placed on the statue book the assessee could always claim such a relief at any time before the ITO signed the order. We are unable to find anything in the language of section 144B which would take away this precious right of the assessee. Further, we find no impediment created in the exercise of the full discretion by an ITO while considering all the claims for deductions, remissions, allowances, etc., which the assessee would make before the ITO actually made an assessment under section 143(3).

12. To our mind, in the facts and circumstances of the case, the mere fact that the assessee included its claim for additional allowance under section 35B in its letter placing on record its objections to the additions proposed in the draft assessment order did not detract the basic nature of the assessee's claim, it was a claim made before the ITO before he made an assessment under section 143(3). The claim should have been dealt with by the ITO in the normal course. Since he failed to deal with this claim either allowing or rejecting it, it was an outstanding issue between the assessee and the ITO. The assessee had every right to appeal to the Commissioner (Appeals) in respect of this claim for additional allowance. We, therefore, see no reason to interfere with the order of the Commissioner (Appeals) entertaining the assessee's appeal on this ground and directing ITO to deal with it on merits. In our opinion, there is no substance in the objection on behalf of the revenue on the basis of the Supreme Court ruling in the case of Gurjargravures (P.) Ltd. (supra). The dictum of the Supreme Court in the aforesaid case has no application to the facts of the present case whatsoever. Needless to say that in the circumstances, the Commissioner (Appeals), direction directing the ITO to examine the claim on merits was the only proper direction which perhaps he could give. It is fair and just and calls for no interference. The order of the Commissioner (Appeals) on this issue is confirmed.