Commissioner of Income Tax vs Sitaram Jaipuria (HUF)

S.B. Sinha, C.J.—The questions, which have been referred by the Tribunal, Delhi Bench ''D'', for opinion of this Court, are as follows:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was legally right in holding that the second draft order which was sent to the assessee before the date of normal limitation was an invalid order?

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was correct in law in holding that the capital gains should be assessed as long-term capital gains?

Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that it is clear finding to the effect that a part of the capital gains was merely academic, and in directing that such short-term capital gains should be assessed as long-term capital gains?

The relevant facts, which are required to be noticed, are as follows:

The assessment of capital gains on the sale of 355 kg. of silver utensils, which were sold by the assessee during the accounting year ending on 7-4-1976, is in dispute. The assessee claimed that the gains arose on the said sale could not be taxed as the personal effects held for personal use by the assessee and the dependant members of his family being exempt u/s 2(14) (ii) of the income tax Act, 1961 (''the Act''). The ITO passed the draft assessment order dated 9-2-1979 wherein the ITO proposed that the capital gains would be taxed as long-term capital gains, pursuant whereto the assessee filed his objection on 15-2-1979. The ITO thereafter passed another draft assessment order dated 15-3-1979 wherein the ITO changed his opinion on further reflection and held that the capital gains would be taxed as short-term capital gains. The assessee filed objection dated 23-3-1979 questioning the jurisdiction of the ITO to pass second draft assessment order. The IAC passed the order dated 27-7-1979 u/s 144B of the Act after considering both the draft assessment orders and the objections of the assessee wherein it was directed that the capital gains be assessed as short-term capital gains without giving the exemption u/s 2(14) (ii). The assessee preferred an appeal before the Commissioner (Appeals), who held that more than one draft assessment order could be issued by the ITO, and, therefore, there was no illegality in the action of the ITO in passing two draft assessment orders. It was further held that the silver utensils did not constitute personal effects, and, therefore, capital gains on sale thereof was taxable. Hence, the profits on sale of 213 kgs. of silver utensils were taxable as long-term capital gains and on sale of 142 kgs., as short-term capital gains. The assessee again preferred an appeal before the Tribunal, who held that the ITO had no jurisdiction to pass the second draft assessment order.

On being moved by the revenue for reference, the questions, as set out above, have been referred for opinion of this Court.

The questions referred to this Bench, thus, involve a question as regards interpretation of section 144B.

The said provision is in the following terms:

144B. Reference to Inspecting Assistant Commissioner in certain cases.- (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under sub-section (3) of section 143, the income tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under sub-section (6), the income tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.

(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the income tax Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the income tax Officer may allow on an application made to him in this behalf.

(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the income tax Officer the acceptance of the variation, the income tax Officer shall complete the assessment on the basis of the draft order.

(4) If any objections are received, the income tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the income tax Officer to enable him to complete the assessment:

Provided that no directions, which are prejudicial to the assessee, shall be issued under this sub-section before an opportunity is given to the assessee to be heard.

(5) Every direction issued by the Inspecting Assistant Commissioner under sub-section (4) shall be binding on the income tax Officer.

(6) For the purposes of sub-section (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems fit:

Provided that different amounts may be fixed for different areas:

Provided further that the amount fixed under this sub-section shall, in no case, be less than twenty-five thousand rupees.

(7) Nothing in this section shall apply to a case where an Inspecting Assistant Commissioner exercises the powers or performs the functions of an income tax Officer in pursuance of an order made u/s 125 or section 125A.

The said section was inserted by the Taxation Laws (Amendment) Act, 1975, which took effect from 1-1-1976. The purpose of the said section appears to be the reduction of the area of dispute between the ITO and/or the department making the assessment and the assessee.

Mr. Anoop Sharma, the learned counsel appearing on behalf of the assessee, submitted that language of the said provision is absolutely clear and explicit. It refers to a draft order, which having regard to the purpose that seeks to achieve must be held to be final, inasmuch as once an objection thereto is filed, the ITO has no other option but to send the same to the income tax Appellate Commissioner.

The learned counsel contended that once a draft order is issued, the second one would amount to review of his decision, which is not permissible in law.

The learned counsel further submitted that having regard to the provisions contained in section 154 of the Act, the only jurisdiction of the assessing authority is to make corrections in relation to clerical errors.

In support of the aforementioned contentions, reliance has been placed on Sudhir Sareen Vs. Income Tax Officer, Central Circle XVII, New Delhi and another, Aspinwall and Co. Ltd. Vs. Commissioner of Income Tax (No. 2), . Ambica Mills Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax, Bangalore Vs. Hade Navigation (P.) Ltd., Goa, .

Mr. R.D. Jolly, the learned counsel appearing on behalf of the revenue, on the other hand, contended that the aforementioned provision contains a procedure and does not deal with the substantive rights of the parties. According to the learned counsel, once mistake committed by the ITO is rectified by issuing a second draft order and an opportunity of hearing in relation thereto is granted, the assessee does not suffer any prejudice thereby. In support of the said contention, reliance has been placed on Aspinwall & Co. Ltd.''s case (supra); Sarabjit Singh Vs. The Commissioner of Income Tax, ; R. Dalmia and Another Vs. Commissioner of Income Tax,

Chapter XIV of the Act relates to procedure for assessment. Section 143 of the Act deals with the procedure for making assessment. Sub-sections (1) and (3) of section 143 provide for computation of total income of the assessee respectively without issuance of any notice as is otherwise provided under sub-section (2) thereof.

It is beyond doubt whatsoever that section 143 is a procedural provision, as thereby tax is not charged. Section 143, in other words, cannot be said to be a substantive provision, being not a charging provision. Section 144B applies to all assessments completed after 1-1-1976. The said provision was amended with effect from 1-10-1984 as in terms thereof for the words "the income tax Officer proposes to make any variation" the words "the income tax Officer proposes to make before the 1st of October, 1984 any variation" were substituted.

By reason of the aforementioned provision, the assessee is given an opportunity to make an objection as regards an order proposed to be passed, which is prejudicial to him. In the event, the amount of variation exceeds the amount specified by the Board, the ITO is required to forward a draft of the proposed assessment to the assessee and upon obtaining his objection, if any, as regards such variation, the draft order is to be forwarded together with the objection filed by the assessee thereto to the Deputy Commissioner, who thereupon issues such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment after giving an opportunity of hearing to the assessee and the ITO makes his assessment accordingly.

Section 144B, in our considered view, cannot be construed in isolation. It has to be construed having regard to the object and purport of making a draft order. Such a provision has been made with a view to prevent arbitrariness or unreasonableness on the part of the assessing authority and multiplicity of the assessment proceedings. The procedure laid down therein although mandatory, but it cannot be said that only because an expression ''a order'' has been used in Circular, more than one draft order cannot be issued. In terms of section 13(2) of the General Clauses Act, 1897, a ''singular'' would include ''plural''. For the purpose of interpretation of a procedural provision like section 144B, the prejudice doctrine may also be invoked. Section 21 of the General Clauses Act envisages that power to issue an order would include a power exercisable in the like manner and subject to the like sanctions and conditions (if any), to add, amend, vary or rescind the same. Interpretation of the provisions of law must be made having regard to the object and purport thereof. It may be true that the ITO does not have a power of substantive review but the question of exercising a power to review would arise only when the order would otherwise be final. A draft order, as noticed hereinbefore, is not a final one and merely embodies the opinion of the ITO. Reasons for changing his opinion have been stated by the ITO, as would appear from the facts noticed hereinbefore. Once such change in opinion is made and an opportunity of being heard is given, the opinion of the ITO together with such objections is required to be forwarded to the Deputy Commissioner before whom also the assessee gets an opportunity of hearing. Guidelines issued by the said higher authority to the ITO would be binding on the latter and only on the basis thereof the assessment proceedings shall be finalised. It is, thus, evident that only because a second draft order is served, ordinarily the assessee would not be prejudiced, as the final outcome depends upon the opinion of the Deputy Commissioner. It is also not a case where the second draft order was issued upon considering the objections filed by the assessee.

In our opinion, therefore, it would be incorrect to contend that the second draft order under no circumstances can be issued. It is one thing to say that the ITO has absolutely no jurisdiction to issue a second draft order, but it is another thing to say that in the facts and circumstances of the case, he should not have issued the same.

In Sudhir Sareen''s case (supra), a learned Single Judge of this Court interfered with the matter, inter alia, on the ground that such a second draft order was issued at the instance of the higher authority. Such is not the position here.

In Hade Navigation (P.) Ltd.''s case (supra), whereupon strong reliance has been placed by the learned counsel appearing on behalf of the assessee, it appears that the question had not been viewed from this angle.

We do not also, with utmost respect to the learned Judges of this Court and the Bombay High Court, subscribe to the view that once the draft assessment order is prepared and the variation in the returned income is forwarded to the assessee, the quasi-judicial function of the ITO comes to an end and the same is final assessment order, so far as the ITO is concerned.

Such an observation, in our opinion, overlooks the fact that draft order passed by the ITO together with the objection, which may be made thereto by the assessee, would still not be final inasmuch as the same would be dependent on the final opinion, which may be expressed by the higher authority pursuant to the guidelines, which may be issued.

The Division Bench of the Bombay High Court has relied upon the decision of the Division Bench of the Apex Court in Panchamahal Steel Ltd. Vs. U.A. Joshi, ITO and Another, but in the said case, the Apex Court was concerned with absolutely a different situation as therein it was held, having regard to the provisions contained in sub-section (5) of section 139 of the Act, that after a draft order is issued, the assessee cannot file any revised return. The question raised herein had neither been raised nor answered by the Apex Court. It is now well-settled that a decision shall not constitute a binding precedent on a point, which was not argued.

In Aspinwall & Co. Ltd.''s case (supra), the Kerala High Court has distinguished the decision of this Court in Sudhir Sareen''s case (supra) stating that:

We are unable to accept the process of reasoning because of the inbuilt provisions of the two sections making it clear that the sections came on the statute book for safeguarding the interest of the assessee to the extent that the provisions provide hearing in the matter of there being necessity or expediency to locate situations of escaped assessment. Even otherwise, as observed above occasions of coming to notice situation of irregular assessment or obvious mistakes could not be understood to be legislatively controlled to a single occasion in regard thereto. It will have to be appreciated that the draft order if it is found to be required to be modified could not also be considered to be a second draft order. It appears that the parties have proceeded on the basis that the second draft order has come into emergence when the material on record clarifies the situation to the contrary, bringing on record a situation of modification in the nature of necessary amendment to the original situation. In our judgment, such statutory provisions relating to the matters of procedure cannot be understood in the restrictive sense of literal interpretation and have to be understood that an occasion of issuance of draft assessment has to be meaningfully understood in relation to an occasion for modification. Such occasion cannot be in isolation in continuity of time and such occasion can be legitimately contemplated to occur more than once depending on the situation demanding." (p. 621)

In Ambica Mills Ltd.''s case (supra), the Gujarat High Court has stated the law in the following terms:

(viii). That section 144B of the income tax Act, 1961 is a procedural provision under which the income tax Officer forwards a draft order to the assessee. At that time, such draft order is only a draft of the proposed order of assessment in which the income tax Officer proposes to make variations in the income or loss returned, which is prejudicial to the assessee and the amount of variation exceeds the amount fixed by the Board. At that stage of the assessment proceedings taken u/s 143(3) of the Act, nothing is final. Therefore, if the income tax Officer detects some error or omission in the proposed order and revises it at that earlier point of time forwarding the revised draft order to the assessee, it cannot be said that he has made two independent proposed orders. The proposed order as revised remains the draft order only. The proceedings do not in any way get vitiated especially when he followed again the procedure of sending it to the assessee to enable him to object against the revised proposed order. There is no prejudice whatsoever caused to the assessee nor is any vested right of the assessee adversely affected thereby. Until the assessment is completed by the income tax Officer u/s 143(3) of the Act, he remains free to exercise his powers to complete the assessment by sending a revised draft order." (p. 267)

Yet again D.K. Jain, J. on a difference of opinion between the two learned Judges of this Court in Sarabjit Singh''s case (supra), has clearly held that section 144B is a procedural provision.

It is now well-known that a decision is an authority for what it decides and not what can be logically deduced therefrom. For the reasons aforementioned, we are of the opinion that the answers to the questions must be rendered in the negative, i.e., in favour of the revenue and against the assessee.

The reference is disposed of accordingly.