Commissioner of Income Tax (Investigation) vs H.M.T. Bearings Ltd.

Syed Shah Mohammed Quadri, J.—At the request of the assessee, the Income Tax Appellate Tribunal referred the following question u/s 256(1) of the Income Tax Act for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal''s decision that the assessments for the assessment years 1971-72 to 1975-76 and 1978-79 are barred by time, is valid under law ? "

Sri M. Suryanarayana Murthy, learned standing counsel for Income Tax submits that as the Income Tax Officer has given as opportunity of rehearing to the assessee, further time was taken in making the assessment and that, therefore, under the proviso to section 129 of the Act, that time will have to be excluded for the purpose of limitation. Sri Y. Ratnakar, learned counsel for the assessee, on the other hand, submits that when the Inspecting Assistant Commissioner offered an opportunity of rehearing before the Income Tax Officer, there was no necessity for any further enquiry as there was nothing which required to be done by the Income Tax Officer. It was for the Inspecting Assistant Commissioner to pass orders and merely because an opportunity was given, time cannot be extended.

For appreciating the contentions of the parties and answering the question referred to us, the following relevant facts may be noticed.

The assessee, H.M.T. Bearings Limited, was assessed for the assessment year 1971-72. That order was set aside on December 7, 1978. The assessment orders for the subsequent years 1972-73 to 1975-76 were set aside on October 20, 1978. Thereafter, the reassessments for the years 1971-72 to 1975-76 and the original assessment for 1978-79 were taken up by the Income Tax Officer at the same time. The Income Tax Officer made draft assessment orders on March 17, 1981, and served copies of the same on the assessee on March 31, 1981, for objections. After receiving the objections, he forwarded the draft assessment orders along with objections to the Inspecting Assistant Commissioner u/s 144B of the Income Tax Act (for short "the Act") on May 15, 1981. While the matter was pending before the Inspecting Assistant Commissioner, the Income Tax Officer was transferred on June 16, 1981. The Inspecting Assistant Commissioner asked the assessee as to whether it would desire a rehearing. The assessee requested for a rehearing by its letter dated June 26, 1981. An opportunity of rehearing was afforded to the assessee on September 8, 1981. The Income Tax Officer sent his report on September 15, 1981, and the draft orders were ultimately approved on October 15, 1981, and the assessments for the years 1971-72 to 1975-76 and 1978-79 were completed on October 16, 1981. The assessment for the year 1978-79 should have been completed on or before March 31, 1981, u/s 153(1)(a) of the Act. So also, the reassessment for the years 1971-72 to 1975-76 (as the original assessments for the said years were set aside during the financial year 1978-79) should have been done u/s 153(2A) on or before March 31, 1981. Section 144B allowed an extra period of 180 days. But the assessment was made after the extra period of 180 days. In appeal, the assessee contended that the assessments for the said years were barred by limitations. This contention was accepted by the Appellate Tribunal. It is the common case of the parties that if the time taken for rehearing by the Income Tax Officer is excluded, the assessments for the years 1971-72 to 1975-76 would be within limitation. Can the time taken for rehearing by the Income Tax Officer be excluded ?

We may read here section 144B(1) of the Act as it stood before April 1, 1989, which was in the following terms :

" (1) Notwithstanding anything contained in this Act, where, in an assessment to be made under sub-section (3) of section 143, the Assessing Officer proposes to make, before the 1st day of October, 1984, 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 Assessing 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. "

From a reading of the above section, it is clear that when an assessment is to be made under sub-section (3) of section 143, the Assessing Officer has to make before the 1st day of October, 1984, any variation in the income or loss returned which is prejudicial to the assessee and if the amount of such variation exceeds the amount fixed by the Board, he has to forward the draft order of assessment to the assessee for his objection and after receiving the objections, if any, he has to forward the draft order together with the objections to the Deputy Commissioner (Inspecting Assistant Commissioner in this case) who has to consider the same and issue necessary direction as he thinks fit for the guidance of the Assessing Officer. Section 144B of the Act does not contemplate affording a fresh opportunity to the assessee when the matter is pending before the Inspecting Assistant Commissioner except when directions prejudicial to the assessee are to be issued and for this purpose whether or not the Income Tax Officer (Assessing Officer) remains the same is immaterial. He has to consider the objections, when opportunity of hearing is given to the assessee and after hearing him, in the light of the record relating to the draft order, issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. As the Assessing Officer is bound to give effect to the directions issued to him by the Inspecting Assistant Commissioner, further hearing by the Assessing Officer is neither contemplated nor does it serve any purpose. Therefore, there was no necessity for the Inspecting Assistant Commissioner to have invited a request from the assessee for rehearing by the Assessing Officer. In fact, a Division Bench of this court, of which one of us (Jeevan Reddy J.) was a member, in K. Venkata Ramana and Budha Appa Rao Vs. Commissioner of Income Tax, held that, u/s 144B, the Income Tax Officer is not excepted to take any fresh initiative or pass any order other than the one in accordance with the directions issued by the Inspecting Assistant Commissioner. In such a situation, if there is a change of Income Tax Officer when proceedings are pending before the Inspecting Assistant Commissioner, section 129 will not apply and the assessee cannot demand rehearing by the succeeding Income Tax Officer. Following that decision, we hold that the very order of the Inspecting Assistant Commissioner granting opportunity of rehearing of the proceedings to the assessee by the Income Tax Officer (Assessing Authority) being not called for in law, the time taken for the rehearing proceedings cannot be excluded. Consequently, the orders of assessment passed by the Income Tax Officer on October 16, 1981, are barred by limitation.

The reference is answered accordingly in favour of the assessee and against the Revenue. No costs.