Gulabchand Motilal vs Commissioner of Income Tax

G.G. Sohani, J.—By this reference u/s 256(1) of the income tax Act, 1961 (''the Act''), the Tribunal, Indore Bench has referred the following question of law to this Court for its opinion:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 153(2A) of the income tax Act, 1961, was not applicable to the facts of these cases and the period of limitation prescribed u/s 153(2) was applicable to the reassessments?

The material facts giving rise to this reference, briefly, are as follows:

The assessee is assessed in the status of a HUF and the assessment years in question are 1971-72 to 1974-75. While framing assessment for the assessment year 1975-76, the ITO made an addition of Rs. 95,000 to the income of the assessee on account of income from undisclosed sources. On appeal, the Commissioner (Appeals) held that the amount of income evaded by the assessee was Rs. 1,20,000; that the whole of that evaded income was not referable to the assessment year 1975-76 but related to the assessment years beginning with 1964-65 and the ITO was accordingly directed to initiate proceedings u/s 147 of the Act for all those assessment years. In pursuance of that order passed by the Commissioner (Appeals), assessment of the assessee for the assessment years 1964-65 to 1974-75 was reopened u/s 147(a) read with section 150(1) of the Act and were completed by the ITO on 10-9-1981. Aggrieved by these orders, the assessee preferred appeals before the AAC and contended that the reassessments made on 10-9-1981 were barred by time. Time contention was rejected by the AAC and the appeals were dismissed. On further appeal filed before the Tribunal, the learned counsel for the assessee conceded that though the assessments for the assessment years up to 1970-71 would not be barred by limitation, the assessment for the assessment year 1970-71 onwards would be barred by limitation, by virtue of the provisions of sub-section (2A) of section 153 of the Act. This contention was rejected by the Tribunal. The Tribunal held that the provisions of sub-section (2A) of section 153 were not attracted. In this view of the matter, the Tribunal dismissed the appeals. Aggrieved by the order passed by the Tribunal, the assessee sought reference and it is at the instance of the assessee that the aforesaid question of law has been referred to this Court for its opinion.

Shri Chaphekar, the learned counsel for the assessee, contended that by virtue of Explanation 2 to section 153, reassessment made by the ITO for the assessment years 1971-72 to 1974-75 would be deemed to be assessment made in consequence of or to give effect to the direction contained in the order u/s 250 of the Act passed in appeal, setting aside the assessment for the relevant assessment years and the provisions of sub-section (2A) of section 153 were, therefore, attracted. It was urged that as the assessment for the assessment year from the end of the financial year 1978-79, in which the order u/s 250 was passed in appeal, the assessment for these years was barred by limitation.

The short question for consideration in this case is whether the reassessment proceedings for the relevant assessment years were subject to the bar of limitation imposed by sub-section (2A) of section 153. That provision reads as under:

(2A) Notwithstanding anything contained in sub-sections (1) and (2), in relation to the assessment year commencing on the 1st day of April, 1971, and any subsequent assessment year, an order of fresh assessment u/s 146 or in pursuance of an order, u/s 250, section 254, section 263 or section 264, setting aside or cancelling an assessment, may be made at any time before the expiry of two years from the end of the financial year in which the order u/s 146 cancelling the assessment is passed by the income tax Officer or the order u/s 250 or section 254 is received by the Commissioner or, as the case may be, the order u/s 263 or section 264 is passed by the Commissioner.

From a perusal of the aforesaid provision, it is clear that to attract the bar of limitation prescribed by that provision, the order of assessment in question should be an order of fresh assessment u/s 146 or in pursuance of an order u/s 250, section 254, section 263 or section 264 of the Act, setting aside or cancelling an assessment. Prior to the insertion of sub-section (2A) in section 153 by the Taxation Laws (Amendment) Act, 1970, where an assessment was set aside or cancelled u/s 146 or on appeal, revision or reference, the ITO could complete the fresh assessment any time because such a case was governed by sub-section (3) of section 153, which provides that the provisions of sub-sections (1) and (2) of section 153 would not apply to cases covered by section 153(3). This resulted in delay and harassment to the assessee and, hence, sub-section (2A) was inserted in section 153 by the Taxation Laws (Amendment) Act, 1970, introducing a time limit. By virtue of sub-section (2A) of section 153, assessments covered by sub-section (2A) of section 153, have to be completed within the time limit prescribed by that provision. It was not disputed before us that in case the provisions of sub-section (2A) of section 153 were attracted, then the assessment made for the assessment years 1971-72 to 1974-75 were beyond the period prescribed by sub-section (2A) of section 153.

Now the Tribunal has held that in the instant case, the provisions of sub-section (2A) of section 153 are not attracted because the Commissioner (Appeals) had neither set aside nor cancelled the assessment for the years in question. The Tribunal, however, lost sight of the fact that it was only on account of the operation of Explanation 2 to section 153 that assessments for the assessment years 1964-65 to 1974-75 could be reopened by the ITO. That Explanation provides that where by an order referred to in clause (ii) of sub-section (3) of section 153, any income is excluded in appeal, reference or revision or in other legal proceeding, from the assessment for any year, then an assessment of such income for another assessment year shall be deemed to be one made in consequence of, or to give effect to, any finding or direction by the authority contained in the said order. The object of introducing this fiction was to partially supersede the Supreme Court decisions in ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 and N.K.T. Sivalingam Chettiar v. CIT [1967] 66 ITR 586 holding that the ''finding'' or ''direction'' referred to in the second proviso to section 34(3) of the Indian income tax Act, 1922 corresponding to section 153(3)(ii) of the 1961 Act, should be such as the authority is empowered to give assessment year under appeal, revision or reference and that the authority could not give a finding in respect of the assessment relating to a year, which is not the subject-matter of the appeal, revision or reference. It is well settled that in interpreting a provision creating a legal fiction, the Court, after ascertaining the purpose for which the fiction is created, has to assume all those facts and consequences, which are identical or inevitable corollaries to the giving effect to the fiction. It, therefore, follows that to give full effect to the fiction introduced by Explanation 2 to section 153, and to the object for insertion of sub-section (2A) in section 153, it must be held that where fresh assessment is being made for a particular assessment year, in pursuance of finding or direction incorporated in an order u/s 250, section 254, section 263 or section 264 passed in proceedings relating to another assessment year, then the fresh assessment would be deemed to have been made, for the purpose of section 150 and section 153, in consequence of or to give effect to any finding or direction setting aside or cancelling the assessment for that particular year. That is how full effect can be given to the statutory fiction created by Explanation 2 to section 153. If the provisions of sub-section (2A) in section 153 are held to be inapplicable to a case, where a fresh assessment is made in consequence of a fiction introduced by Explanation 2 to section 153, the effect would be that though subsequent to the assessment year 1970-71, there would be time-limit for making a fresh assessment in pursuance of an appellate or revisional order setting aside or cancelling an assessment to give effect to a finding or direction contained in that order, there would be no such time-limit for making a fresh assessment for any assessment year to give effect to a finding or direction contained in any appellate or revisional order passed in proceedings relating to any other assessment year. Such an interpretation would frustrate the object of insertion of sub-section (2A) in section 153 and would also result in not giving full effect to the legal fiction introduced by Explanation 2 to section 153. In our opinion, therefore, on the facts and in the circumstances of the case, the Tribunal was not right in holding that section 153(2A) was not attracted in the instant case. For all these reasons, our answer to the question referred to this Court is in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.