Mukti Properties (P) Ltd. vs Commissioner of Income Tax

Kalyan Jyoti Sengupta, J.—This appeal is at the instance of the Assessee abovenamed against the judgment and order of the learned income tax Appellate Tribunal (hereinafter referred to as the said Tribunal''), Kolkata on the following substantial questions of law:

Whether the Tribunal was justified in law in not considering and deciding whether the proceedings u/s 147 r/w Section 148 of the Act are legally sustainable in law before deciding the case on the merits of the contention of the Assessee ?

Whether on the facts and in the circumstances of the case when the Assessee had disclosed its return and its claim for allowable expenses for a sum of Rs. 3,50,000 at the time of assessment of proceeding can be reopened u/s 147 on a mere change of opinion ?

Whether on the facts and in the circumstances of the case, the learned Tribunal committed a jurisdictional error in reversing the order of the CIT(A) and restoring the order of the AO who reassessed the entire income, even though the recorded reasons u/s 148(2) were limited to alleged escapement of income of Rs. 3,50,000 on account of commission and brokerage ?

The fact of the case as it appears from the records and also submitted in the written notes of argument is as follows.

The Assessee/Appellant is a company carrying on real estate business including construction of the building, letting out the same as well as providing maintenance and other services. The Appellant duly filed return of income for the asst. yr. 2003-04 with audited accounts, tax audit report u/s 44AB, computation sheet, and other documents were filed on 29th Nov., 2004 declaring gross total income at Rs. 26,889 after setting off business loss of Rs. 10,13,614 against income under the head house property of Rs. 10,40,503. The return was duly processed u/s 143(1). Thereafter AO initiated proceeding u/s 147 of the Act and issued notice u/s 148 dt. 2nd July, 2005. On receipt of the said notice the Appellant through his learned lawyer duly protested questioning validity and jurisdiction, and also asked for reason. The Appellant without prejudice and with protest called upon to treat earlier return filed u/s 139 as return in response to the said notice, if reassessment is required to be done at all. The AO disallowed deduction claimed on account of brokerage and commission of a sum of Rs. 3,50,000. The Assessee though had challenged notices u/s 148 of the said Act before the AO, however he did not deal with the said contention. The matter was taken to the CIT(A) pointing out that even in the asst. yr. 1998-99, 50 per cent of the additional expenses which had been incurred in carrying on its real estate business had been allowed but the balance 50 per cent was disallowed as it related to house property. The said decision made in the asst. yr. 1998-99 had been followed in the subsequent year also. Following the said decision the CIT(A) in this assessment year has allowed 50 per cent of the administrative expenses relatable to real estate business but the balance amount had been disallowed as it related to house property income.

Thus the appeal was allowed.

The Revenue went on appeal against order of the CIT(A). Since the Assessee did not prefer any appeal against the order of CIT(A) as the relief on which was granted, question relating to the jurisdiction of the AO to issue notice u/s 148 could not be raised by the Assessee before the learned Tribunal. The learned Tribunal allowed appeal preferred by the Revenue restored the order of AO so far the amount of Rs. 3,50,000 as brokerage and commission expenses is concerned.

Dr. Debi Prasad Pal learned senior counsel appearing for the Appellant/Assessee submits that intimation u/s 143(1) is not an assessment as decided by the Supreme Court in the case Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., Actually the return filed by the Appellant was not assessed u/s 143(3) of the Act, but only an intimation was made u/s 143(1) of the Act on the basis of which total tax liability had been paid by the Assessee. Therefore, there cannot be any sort of escapement of any income. In view of the Supreme Court decision as above he contends that the proceeding u/s 147 r/w Section 148 is patently illegal, invalid and without jurisdiction. It is settled law that unless the income escaped assessment reassessment by notice u/s 148 of the Act is clearly invalid illegal and without jurisdiction. He submits that before the learned Tribunal question of jurisdiction could not be raised since no appeal could be preferred because Appellant succeeded before the CIT(A) on merit. However before this Court in view of the provision of Section 100 r/w Order 41 Rule 33 of the CPC question of law can be raised even at the appellate stage also. The scope and power of the appeal Court u/s 260A of the Act have been explained by the Supreme Court in the case reported in Santosh Hazari Vs. Purushottam Tiwai (Dead) by Lrs., . Moreover the provision of CPC relatable to appeal to High Court has been incorporated in Sub-section (7) of Section 260A of the Act. Besides the point of law can be raised at any stage in view of law settled by a catena of judicial pronouncements which are as follows:

(i) Tarini Kamal Pandit and Others Vs. Prafulla Kumar Chatterjee (Dead) by Legal Representatives,

(ii) B. K. GOOYEE Vs. COMMISSIONER OF Income Tax, WEST BENGAL.,

(iii)(2009) 314 ITR 206 (sic);

(iv) Commissioner of Income Tax Vs. Madan Lal Mehra.,

Since question of jurisdiction goes to the very root of the matter the order of the AO so also the Tribunal is not tenable.

Mr Agarwal learned Counsel appearing for the Revenue contends that the question Nos. 1 and 2 formulated by this Court need not be answered as those questions were never raised before any of the three fora below. Unless those questions are raised at all levels this Court cannot decide the same. In support of his contention he has relied on the following decisions: Commissioner of Income Tax and Another Vs. Prabhat Zarda Factory, , Commissioner of Income Tax Vs. Tata Chemicals Ltd., , M. Janardhana Rao Vs. Joint Commissioner of Income Tax, .

He submits that in this case the AO committed legal mistake by allowing deduction @ 30 per cent of the rent u/s 24(1) of the Act as well as the brokerage and commission. No further claim for expenses incurred for earning rental income towards brokerage and commission was permissible u/s 24(1) of the Act against the income from house property over and above 30 per cent deduction. Accordingly, as there was a mistake of law in accepting the return u/s 143(1)(a) of the Act, the assessment could be reopened within 4 years even if there was a change of opinion on the part of the AO. He further submits that it is not correct contention of the Appellant that the assessment had been made by the AO u/s 143(3) of the Act and, hence, he was not entitled to change his opinion and the proceedings u/s 147 were invalid. Only adjustments were made u/s 143(1)(a) of the IT Act which did not require formation of opinion and question of change of opinion did not arise.

He citing decision of Patna High Court in the case of Ranchi Club Ltd. Vs. Commissioner of Income Tax and Others, , submits that in view of the provisions contained in Expln. 2(b) to Section 147 of the Act to the effect that, where no assessment has been made and it is noticed by the AO that the Assessee has understated his income or has claimed excessive deduction, it would be deemed to be a case where income chargeable to tax has escaped assessment. In a case where only an intimation has been sent, notice can be issued u/s 148 of the Act. He referring to Supreme Court decision in case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra)contends that intimation u/s 143(1)(a) cannot be treated as an order of assessment; when there being no assessment u/s 143(1)(a), question of change of opinion did not arise. The scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, as also Sections 148 - 152 are substantially different from the provisions as they stood prior to such substitution. If AO for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. The AO is not powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued. He contends further that the income in respect of any issue, which has escaped assessment notwithstanding that the reasons for such issue have not been included in the reasons recorded u/s 148(2) of the Act.

On merit with regard to third question he submits that if reasons for reopening of the assessment were limited to income of Rs. 3,50,000, it was open to the CIT(A) to restore the order of the AO who reassessed the entire income.

After having considered submissions of the learned Counsel for the parties and going through records it appears to us in this appeal that first two questions relating to reopening of assessment under Sections 147 and 148 of the said Act need to be dealt with or answered though the same were not taken at the hearing of the AO, nor whispered before CIT(A) and Tribunal. The law is settled that pure question of law which goes to the very root of the jurisdiction and further initiation of proceedings can be raised at any stage even at the stage of Supreme Court. In the case reported in Tarini Kamal Pandit and Others Vs. Prafulla Kumar Chatterjee (Dead) by Legal Representatives, the Supreme Court allowed pure question of law not involving any question of fact could be raised for the first time before the Supreme Court. In this case it was found that the question of law was not taken by the learned lawyers on given facts, as such point of law was allowed to be raised, as public policy always demands that the law is to be applied appropriately on given facts and circumstances. Similarly in the case of Santosh Hazari v. Purushottam Tiwari (supra) the Supreme Court allowed to raise substantial question of law at a late stage though such plea was not taken before the learned Court of Appeal.

It appears that those decisions were rendered in civil matters and the principle thereof cannot be applied in this case by reason of the fact that in this case point was not agitated at the time of hearing before any authority below. Moreover the Appellant/Assessee itself invited AO and CIT(A) to decide the matter on merit waiving its right to question the validity and legality of the notice and action of reassessment. In real sense there was no order of assessment earlier. There is yet another decision of this Court in case of B.K. Gooyee v. CIT (supra) wherein illegality and invalidity of a notice u/s 34 of the earlier Act which is corresponding provision of Section 147 of the present Act were not raised before all the fora below and the same was allowed to be raised in the High Court for the first time. We have examined carefully and read those decisions and we find that the factual aspect of the matter in those cases went to the root of the matter. Unless it was allowed to be raised there would have been wrong application of law which could result in injustice. The aforesaid principle in our view cannot be allowed to be made applicable wherever and whenever any illegality is to be noted. On considering the case if it is found that the question is waivable in nature and it does not touch the root of the matter so as to render entire proceeding invalid, the aforesaid pronouncements of the high authorities are not appropriate.

Turning to the present case we notice that Section 143(1) notice was issued first followed by notice u/s 148. On receipt of the notice the Assessee/Appellant asked for reasons from the AO for reopening assessment and the same were supplied. On receipt of those reasons the reply dt. 8th Sept., 2005 was given and it was stated that the Assessee was protesting against the issue of notice u/s 148 calling upon to file fresh returns and it was also called upon, under protest to treat earlier returns filed u/s 139 as returns in response to the notice. Hence with mild reservation the Assessee invited the AO to decide and to pass assessment order. It is also admitted position when the notice u/s 148 was issued there was no order of assessment only return was processed u/s 143(1). It appears from the order of the AO that invalidity and illegality of the notice issued u/s 148 and also the question of jurisdiction with regard to reopening of the assessment u/s 147 were not raised. In the memorandum of appeal ground of illegality and invalidity of the notice as well as jurisdiction was not taken before the CIT(A), nor before the learned Tribunal.

The argument of Dr. Pal that since the CIT(A) being the first appellate authority granted relief to the Assessee, there was no occasion to raise the point of jurisdiction does not impress us. We fail to understand why this point was not raised before the first appellate authority [CIT(A)1 who would have decided the matter. We hold that the Appellant waived this point to urge. This waiver legally estop the Appellant from raising this question here particularly when factually there has been no order of assessment earlier. The scope of Sections 147 and 148 as it stood then and now stands has been interpreted and explained by the Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra). Considering earlier decisions, the Supreme Court held in para 16 as follows:

At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove that the escapement is not the concern at that stage ? This is so because the formation of belief by the AO is within the realm of subjective satisfaction.

In paras 17 and 18 it is observed as follows:

The scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, as also Sections 148 - 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate clause. (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction u/s 147 two conditions were required to be satisfied: firstly the AO must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the Assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the AO could have jurisdiction to issue notice u/s 148 r/w Section 147(a). But under substituted Section 147 existence of only the first condition suffices. In other words if the AO for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso.

So long as the ingredients of Section 147 are fulfilled, the AO is free to initiate proceeding u/s 147 and failure to take steps u/s 143(3) will not render the AO powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued.

We are therefore of the view the question Nos. 1 and 2 do not require to be dealt with as such we have refrained ourselves from giving any answer as rightly pointed out by Mr. Agarwal on the strength of Bombay High Court''s decision reported in Commissioner of Income Tax Vs. Tata Chemicals Ltd., which records statement of law as follows:

When this question was not determined by the Tribunal nor even the CIT(A) the High Court should refrain itself from answering the question raised.

Now we consider the decision of the learned Tribunal on merit. We have read assessment order passed by the AO and that of decisions of the two authorities thence. It appears to us AO as well as the learned Tribunal thought that Appellant/Assessee is not entitled to any deduction otherwise than u/s 21 (sic--24) of the IT Act @ 30 per cent of rent. In the premises both the two authorities have held the sum of Rs. 3,50,000 as brokerage and commission and also expenses relating to building and property are not deductable. It further appears to us both the AO as well as the Tribunal proceeded as if the income is from house property and both the authorities though having recorded in their orders that the Assessee has been carrying on real estate business also, therefore, his income is not rental of house property alone but construction and the maintenance of the building. The type of business being carried on by the Assessee is to be found from articles of association annexed with this paper book and also from the audit report. Under such circumstances approach of the learned Tribunal is patently erroneous. According to us deduction u/s 24 of the Act is applicable when the income is exclusively derived from house property as mentioned in Section 22. The language of Section 24 of the said Act clearly suggests so as the same is relatable to the head of income from house property. The said section is set out hereunder:

Income chargeable under the head ''Income from house property'' shall be computed after making the following deductions, namely--

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital.

Section 14 provides for several heads of income. Income from house property is one of such heads whereas gains from business and profession is another head. In this case we find that in this case there has been mixed income arising out of profits and gains of business and real estate as well as income from house property both. Under such circumstances usual statutory deduction as allowable under different heads has to be taken note of. The CIT(A) has taken pain in examining P&L a/c attached to the returns and has found that the brokerage and commission and administrative expenses are allowable deductions as such granted relief. The decision of the first appellate authority found support of the decision of earlier assessment year in respect of the same heads of deduction. As rightly contended by Dr. Pal it appears from the records that in the asst. yr. of 1998-99 the CIT(A) had allowed 50 per cent of the administrative expenses as relatable to real estate business and such deduction was allowed.

It is true the principle of res judicata has no application in the tax assessment but when it is found that on the same facts and point on earlier occasion without there being any change of position of law decides the matter there cannot be different decision in the subsequent year for the same Assessee. It is not a question of res judicata but the question of quasi judicial discipline which demands that the decision of the superior authority should not be attempted to be upset on identical fact and law on the plea of different assessment years. Therefore, the judgment and order of the learned Tribunal is not sustainable, and the judgment of the CIT(A) is restored on file. Thus we answer the third question in the affirmative. We direct the AO in terms of this judgment to do the needful in accordance with law. Thus the appeal is disposed of without any order as to costs.