Commissioner of Income Tax vs B. Nagi Reddi

V. Balasubrahmanyan, J.—The question of law for our opinion in this income tax reference is as follows: Whether, on the facts and in the circumstances of the case, the reassessment made by the ITO to bring to tax the capital gains which were said to have accrued to the assessee, on the sale of his business, Chandamama Publications in favour of Saradha Binding Works, for the assessment year 1959-60 u/s 147(a) of the income tax Act, was valid?

The assessee was assessed to income tax under the original assessment for the year 1959-60 on 14-6-1960 on a total income of Rs. 71,555. This assessment was subsequently rectified when a mistake which appeared in the record was found out. That, however, need not concern us in this reference. Subsequently, on 11-11-1963, a notice u/s 148 of the income tax Act, 1961 (''the Act'') was issued by the ITO on the assessee, on the score that a part of the income had escaped assessment when the assessment was originally made for the assessment year concerned. By this time, four years had elapsed from the commencement of the assessment year 1959-60. However, the reopening of the assessment if it were u/s 147(a) of the Act, was quite within time. The ITO purported to reopen the assessment only u/s 147(a) and not u/s 147(b). The officer'' recorded a finding that income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the material facts for the assessment. The particular amount of income which, according to the ITO, had not been properly disclosed by the assessee in the original assessment proceedings related to the value of certain perquisites which the assessee was in receipt of as a member of a closed company of which he was the managing director. However, after reopening the assessment u/s 147(a) for the purpose of including the value of the said perquisites as part of his assessable income, the ITO also included another sum as capital gains in the amount of Rs. 1,50,000. This amount represented the capitalisation of annual payments, which the assessee was entitled to get in consideration of transfer of his interest in a publication firm called Chandamama Publications. It may be stated that the facts relating to the transfer of this publication business as well as the particulars of consideration payable to the assessee there under had also been the subject of detailed examination by the ITO not only in this assessment year, during the course of the original assessment proceedings but also in the subsequent assessment years where the original assessments had already been completed. In all those proceedings, the view taken by the ITO was that what the assessee got out of the transaction of transfer of the publication business was not realisation of any capital but only the substitution of a service of annual payments in consideration of parting with a capital asset. It was on that basis that the ITO had proceeded to tax the assessee every year in respect of a fixed payment plus a percentage on the profits in the publications business. Notwithstanding this pattern of all the original assessments, following the assessee''s transfer of the publications business, when the officer reopened the assessment for 1959-60 u/s 147(a) he was disposed to give a different interpretation of the nature of the transaction. He held that the publications business in the hands of the assessee was a capital asset, as such, and since it was transferred by him, whatever he obtained in consideration of that transfer must be regarded as a capital gain. The capital gain, according to the ITO, was to be derived by ascertaining the discounted value of the series of annual payment which the assessee was entitled to get in the transfer. The officer computed the discounted value to be Rs. 1,50,000 which he regarded as the net capital gain to be brought into the assessment for 1959-60 since the transfer took place during the relevant previous year. When the reassessment was ultimately completed, the ITO added this amount of Rs. 1,50,000 also as part of the total income.

This reassessment was objected by the assessee in appeal both on merits and on the ground that the officer had no jurisdiction to reopen the assessment. The assessee contended generally that the reopening of the assessment u/s 147 was invalid. The assessee also contended that, in any case, the inclusion of Rs. 1,50,000 could not be sustained either u/s 147(a) or u/s 147(b). According to the AAC, there was no warrant for the inclusion of Rs. 1,50,000 since all the material facts relating to the transaction of sale by the assessee of the publications business were already fully disclosed before the department even in the original assessment proceedings and it could not be said that the ITO became aware of the assessability of Rs. 1,50,000 only by virtue of subsequent information which came before him after the original assessment was completed.

The department took the matter in appeal before the Tribunal contending that when once the reassessment was sustained as having been properly reopened u/s 147(a), the entire assessment process was again at large and the officer would have ample jurisdiction to go into all income which had not already found its place in the original assessment. The Tribunal rejected this contention of the department. The Tribunal proceeded to hold that even assuming that section 147(b) can be invoked in this case, the officer did not come by any subsequent information, subsequent to the original assessment, so as to enable him to exercise his powers under the said provision. The Tribunal, accordingly, dismissed the departmental appeal and sustained the order of the AAC. It is in these circumstances that the Tribunal had made a reference to this Court on the question of law which we have set out in the beginning of this judgment.

The short point before us is this: When the ITO reopened an assessment u/s 147(a) of the Act, he has jurisdiction to reopen the entire assessment so as to include in the total income all income which had not already found its place in the original assessment.

A question of this kind was answered against the departmental contention in a Bench decision of this Court in Al. Vr. St. Veerappa Chettiar Vs. Commissioner of Income Tax, . The Bench, while dealing with the reassessment proceedings arising under the provisions of section 34 of the Indian income tax Act, 1922, held that when the reassessment proceedings are validly initiated by the ITO in respect of an item of income falling u/s 34(1)(a) or u/s 34(1)(b), his jurisdiction is not confined to the items of income in respect of which he had issued a notice to the assessee for reopening the assessment, but his jurisdiction extended to all items of income which had escaped assessment, subject, however, to the limitation that items in respect of which reassessment proceedings had been initiated within a period of four years u/s 147(b) would not be brought within the reassessment initiated u/s 147(a) if the said intimation were subsequent to the four years period. In a later decision of a Bench of this Court in TC No. 945 of 1977, etc., in judgment dated 30-3-1982, the Bench took a different view. They held that when once an assessment was reopened, the ITO not only has the jurisdiction but it will be his duty to determine the tax liability of an assessee as a whole, and for the purpose he would have necessarily taken into account not only the escaped income in respect of which a notice u/s 147 had been issued, but also the entire income that had escaped assessment during the year. The Bench noticed the earlier decision in AL. VR. ST. Veerappa Chettiar (supra) but were inclined to hold that the decision of the earlier Bench could not be regarded as good law in view of the subsequent enunciation of law in Deputy Commissioner of Commercial Taxes v. H.R. Sri Ramulu (1977) 39 STC 117 (SC).

Mr. Uttama Reddy, learned counsel for the assessee in this case, happened to argue at length the decision of this Court in CIT v. Standard Motor Products of India Ltd. (1983) 13 Taxman 269. The learned counsel did not wish to go over the same ground either by way of reargument or by way of an attempt to obtain a review of the earlier decision of this Court. His endeavour was to supplement his argument in the earlier case by citation of one or two decisions which had been left out of consideration on the earlier occasion. The learned counsel cited two decisions of other High Courts, one by the Allahabad High Court and the other by the Kerala High Court. The Allahabad High Court''s decision is reported in Sir Shadi Lal and Sons Vs. Commissioner of Income Tax, . That was a case where an assessee whose claim for exemption had been rejected in the original assessment proceedings reagitated it in the reassessment proceedings taking advantage of the fact that the officer had reopened the assessment subsequently. Holding that the assessee was not entitled to reopen a lost claim in the reassessment proceedings, the Allahabad High Court held that the reassessment which is reopened is not the entire assessment but is confined only to matters which are relevant in respect of the income which had not been brought to tax during the course of the original assessment. This view of the Allahabad High Court was endorsed, without any discussion, in the subsequent wealth-tax decision of the Kerala High Court in Commissioner of Wealth-tax Vs. C. Ravindran and Others, with the only observation that the provisions of section 147 of the Act are in pan materia with the provisions of the Wealth-tax Act, 1957.

Mr. Uttama Reddy, learned counsel, also brought to our notice a passing observation of the Supreme Court in Commissioner of Income Tax, Bombay City I Vs. Bombay Dyeing and Manufacturing Co. Ltd., That was an appeal by special leave in which the limited point for the decision before the Supreme Court was whether the Tribunal ought to have been directed by the Bombay High Court to state a case and refer certain questions of law. The assessment happened to be one which had been reopened u/s 147(b). At the time of the reopening of the assessment, the officer apparently had in mind only a particular income. Subsequently, in the course of the reassessment proceedings, he included certain other income to the total income. The contention of the assessee before the Supreme Court was that when once an assessment was reopened u/s 147(b), it was limited to a consideration of the income which had given rise to the reopening and the officer was precluded from travelling outside that item of income. This contention was put forward by the assessee in that case since the Tribunal had taken the view that if a notice u/s 147(b) was valid in one respect, it was sufficient to reopen the entire assessment. On this part of the case, however, the Supreme Court observed that they were not expressing any opinion as to whether the Tribunal''s view was correct or not.

This last citation by Mr. Uttama Reddy indicates that, as on date, there is no direct decision of the Supreme Court on the point which arises in this case. That does not obviate the obligation of this Court, sitting as a Division Bench, to follow a decision of a previous Division Bench of this Court. Following the decision of this Court in Standard Motor Products of India, Ltd.''s case (supra) in which the cases V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, are cited, we answer the question of law in this case in the affirmative and against the assessee. There will be no order as to costs.