Commissioner of Income Tax vs N.C. John and Sons Ltd.

Balasubramanyan, J.

These references are at the instance of the revenue and they arise out of the separate decision rendered by the Tribunal in Income Tax Appeal Nos. 979 and 1028 of 1989, the first filed by the assessee and the second filed by the department. Both the references relate to the assessment year 1984-85. The following questions, as arising out of the orders of the Tribunal, have been referred to us for opinion :

"1.Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding :

(i) the direction to have an audit by an accountant in terms of section 142(2A) was without legal sanction?

(ii) the proceedings initiated u/s 132 of the Income Tax Act on 23-2-1984 has come to an end with the passing of the order u/s 132(5) on 7-5-1984. Hence, from the records, it is seen that no proceedings were pending before the assessing officer?

(iii) it is only when some proceedings are pending the assessing officer is empowered to invoke the provisions of section 142(2A).

Whether, on the facts and in the circumstances of the case and in view of clause (iii) of Explanation 1 to sub-section (3) of section 153 (by which the period commencing from date, on which the Income Tax Officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and ending with the date, on which the assessee furnishes a report on such audit under that sub-section-to be excluded) the Tribunal is right in law in holding that the assessment should have been completed on or before 31-3-1987 but as it was completed on 23-9-1987, it is barred by limitation ?

Whether, on the facts and in the circumstances of the case, the special audit orders u/s 142(2A) was an unauthorised one ?"

The relevant previous year for the assessment year 1984-85, ending on 30-6-1983. The return was due on 30-6-1984. But in the meanwhile, there was search in the premises of the assessee on 23-2-1984, and certain documents, cash and other materials were recovered. On 7-5-1984, an order u/s 132(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was passed. The books of account were retained with the department. On 1-9-1984, the assessing officer invoked the provisions of section 142(2A) of the Act and directed the assessee to get the accounts audited by an auditor, nominated by the Commissioner and to obtain the report of such audit in the prescribed form. On 27-12-1984, a notice u/s 139(2) of the Act was issued to the assessee calling upon the assessee to furnish returns of income. The assessee did not comply with that notice. But the assessee filed returns on its own on 9-7-1985, admitting a total income of Rs. 3,94,140.

A provisional assessment u/s 141A of the Act was made on 5-1-1986. The audit report was received on 18-8-1987. Further details were called for on 26-8-1987 and the assessment was completed on 23-9-1987. The assessee challenged the order of the assessment before the Commissioner (Appeals) on various grounds. No ground to the effect, that the assessment was barred by limitation was raised before the Commissioner (Appeals). The Commissioner (Appeals) partly allowed the appeal filed by the assessee. Feeling aggrieved, the assessee challenged that part of the order of the Commissioner (Appeals) which was against the assessee in Income Tax Appeal No. 979 (Coch.) of 1989 before the Tribunal, Cochin Bench. All the grounds in the memorandum of appeal related to the merits of assessment. The department in turn filed an appeal, Income Tax Appeal No. 1028 (Coch.) of 1989, questioning the relief granted by the Commissioner (Appeals) to the assessee. While the appeals were pending before the Tribunal, the assessee filed an application seeking permission to raise three additional grounds. For the purpose of these references, especially in the context of the stand adopted by the learned counsel for the assessee, the only relevant ground was the ground to the effect, that the assessment was barred by limitation, and was one without jurisdiction. The Tribunal permitted those grounds to be raised. The Tribunal held that the assessment should have been completed on or before 31-3-1987, and since it was completed only on 23-9-1987 it was barred by limitation, as provided for u/s 153 of the Act. We may notice here that the reason that weighed with the Appellate Tribunal was that the order of reference u/s 142(2A) made on 1-9-1984 was unauthorised in the sense that there was no pending proceeding in which such an order could be made by the assessing officer, and consequently, the department could not get the benefit of the extended time under the proviso to section 153(1) of the Act. Taking this view, the Tribunal refused to go into the merits of the contentions raised by the assessee in its appeal against the decision of the Commissioner (Appeals). Following this finding, the Tribunal also dismissed the appeal filed by the department by declining to go into the merits of that appeal. It is in this context that the questions of law, referred to above, have been referred for our opinion at the instance of the revenue.

The first question, posed for our consideration is, whether the Tribunal was justified in holding that making a reference u/s 142(2A) of the Act by the assessing officer was without jurisdiction in that there was no proceeding pending when the reference was made. We may notice here that the return was due to be filed by the assessee before 30-6-1984, and the assessee had requested for extension of time to file the return till 30-9-1984 in Form No. 6 in terms of rule 13 of the Income Tax Rules. Further, the assessees premises were searched on 23-2-1984, and the books of account were being scrutinised by the assessing officer, who took a decision to make a reference u/s 142(2A) in view of the complicated nature of accounts. Moreover, the assessee paid advance tax for the relevant assessment year on the basis of original estimate and had subsequently filed a revised estimate in December 1983 and had paid the balance amount of tax on 5-12-1983. In this situation, the assessing officer was under legal obligation to complete the assessment and to pass an order of assessment. It cannot, therefore, be said that no proceeding was pending before the assessing officer as on the date of the order u/s 142(2A). Moreover, section 142(2A) enables the making of a reference to an auditor if at any stage of the proceedings before him, the assessing officer forms the opinion in terms of that provision. We cannot certainly say that there was no proceeding pending before the assessing officer in the circumstances of the case, which would make the reference made by him u/s 142(2A) one without jurisdiction or nullity. Therefore we have no difficulty in disagreeing with the reasoning and conclusion of the Tribunal on this aspect.

In fact, the learned counsel for the assessee pitched his case on a different track all together. Though the Tribunal had not considered that aspect, we thought that, that was an aspect required to be considered in the circumstances of this case. The learned counsel for the assessee contended that the period of limitation in terms of section 153 commenced on 1-4-1985 and the assessing officer had a period of two years from the date to complete the assessment. To avail of the benefit of extension or exclusion of time under Explanation 1(iii) of section 153(3), the reference u/s 142(2A) should have been made after the time has started to run u/s 153(1) and any action under that provision by the assessing officer before the time commences to run, had no relevance in calculating the period of limitation for completion of assessment u/s 153, and, therefore, the period between the date of order u/s 142(2A) and the submission of report of the audit in the light of section 142(2A), being maximum period of six months, could not be claimed by the assessing officer in the case on hand. Explanation 1(iii) to section 153(3), relevant for the assessment year reads as follows :

"the period, commencing from the date, on which the assessing officer directs the assessee to get his accounts audited under sub-section (2A) of section 142 and ending with the date, on which the assessee furnishes a report of such audit under that sub-section".

The subsequent restriction placed on this Explanation by the amendment is not relevant for the purpose of the assessment year, we are concerned with, since the same was effective from 1-4-1997. Going by the Explanation above quoted, the period commencing from the date, on which the assessing officer directed the assessee to get its accounts audited under sub-section (2A) of section 142 and ending with the date, on which the assessee furnishes the report of such audit is liable to be excluded. Therefore, in this case, eventhough the Explanation does not indicate that it applies only in cases, where the reference u/s 142(2A) is made subsequent to commencement of time for completing the assessment u/s 153, when an order is made u/s 142(2A) by the assessing officer, the period from that date till the submission of report by the assessee, pursuant to that order, would stand excluded in view of the Explanation. Here, therefore, the period from 1-9-1984 to 18-8-1987, on which date, the report was made available would stand excluded. Even going by the case of the assessee, the time started to run from 1-4-1985. In any event, therefore, the period from 1-4-1985 till 18-8-1987 is liable to be excluded. Since u/s 142(2A) the period for which, the filing of report could be extended can only be a maximum of six months, it can be argued that only a period of six months is liable to be excluded going by Explanation 1(iii) to section 153(3) eventhough the Explanation itself is widely worded. Since in this case, therefore, in any event the period of six months was liable to be added to the period of two years available u/s 153, the assessment was admittedly completed on 23-9-1987, which was within six months from 31-3-1987, which was the last date by which the assessment had to be completed by the assessing officer, in case no exclusion was available. Since in our view, the assessing officer is entitled to a further period of six months for completing the assessment, on the facts and in the circumstances of the case, it has to be held that the assessment was completed within the time provided for by section 153, in the light of Explanation 1(iii) to section 153(3).

We, therefore, answer the questions referred to us for opinion in favour of the revenue and against the assessee. Both the appeals have been disposed of by the Tribunal without going into the merits of the contentions of respective sides, on the basis that the assessment is barred by limitation. The Tribunal, in the light of our answer, has to reconsider both the appeals on merits after issuing consequential orders in the light of our answer to the questions referred to us.

Both the references are disposed of as above.