Nishmukh Investments and Trading Pvt. Ltd. vs Deputy Commissioner of Income Tax and Another

S.J. Kathawalla, J.—This appeal is filed by M/s. Nishmukh Investments and Trading Pvt. Ltd. (assessee) impugning the order dated June 14, 2001, passed by the Income Tax Appellate Tribunal, Mumbai, Bench "B", Mumbai in Revenue''s appeal being I. T. A. No. 5983/M/97 and the cross-objections filed by the assessee being C. O. No. 162/Mum/2009. The said appeal pertains to the assessment year 1989-90.

The above appeal was admitted by this Court on August 27, 2004, on the following substantial question of law:

Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the notice u/s 143(2) of the Act was validly issued and further that the assessment made in pursuance thereto was valid in law?

The relevant facts giving rise to the present appeal are briefly set out hereunder.

(i) The appellant (assessee) is an investment company carrying on business of dealing in investments. The appellant had originally filed a return of income for the assessment year 1989-90 before respondent No. 1 on December 29, 1989, declaring a loss of Rs. 63,07,631. By a letter dated March 16, 1990, addressed to the assessee, the Assessing Officer stated that there were certain defects in the return and requested the assessee to correct the said defects within 15 days on receipt of the letter. Since this letter was received by the assessee on March 22, 1990, the assessee was required to rectify the defects by April 16, 1990. It is the assessee''s case that on receipt of the said letter the assessee''s representative had seen the Assessing Officer and had orally requested for extension of one month''s time to rectify the defect.

(ii) Subsequently, the appellant filed a revised return of income on April 19, 1990, i.e., 27 days from the date of receipt of the letter from the Assessing Officer, declaring a total loss of Rs. 63,63,625 and rectifying all the defects mentioned in the letter dated March 16, 1990. On May 24, 1990 the Assessing Officer addressed another letter to the assessee again asking for rectification of the same defects. This was done obviously because the Income Tax return filed by the assessee on April 19, 1990 had escaped his attention.

(iii) On September 29, 1990, respondent No. 1 addressed a letter to the assessee stating that the return of loss of Rs. 63,69,625 had been ignored u/s 139(10) of the Act. Once again, it is obvious that the original return filed by the assessee on December 29, 1989, had escaped the notice of the Assistant Commissioner of Income Tax, Circle 3(4). The assessee filed a rectification application dated January 8, 1992 stating that in view of the fact that the original return was filed before the prescribed date for filing the return of income u/s 139(1) of the Act and further since it has filed a revised return of income on April 19, 1990 revising the loss figure and rectifying the defects in the original return, the loss ought to be allowed.

(iv) The Assessing Officer by his order dated February 17, 1992 rejected the rectification application filed by the assessee on the ground that the revised return filed on April 19, 1990, i.e., beyond the period of 15 days from the receipt of the notice, namely, March 22, 1990, was invalid in law. The Assessing Officer completely lost sight of the second letter addressed by him dated May 24, 1990, impliedly extending the time for rectifying the defects.

(v) Being aggrieved by the rejection of the rectification application by the Assessing Officer the assessee filed an appeal before the Commissioner of Income Tax (Appeals), (CIT(A)), on the following three grounds with a prayer set out in ground No. 4:

On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income Tax, Special Range 15 has erred in rejecting the appellant''s rectification application dated January 8, 1992 requiring the Deputy Commissioner of Income Tax, Special Range 15 to rectify the mistake apparent from record inasmuch as the original return was a valid return having been filed within the period prescribed u/s 139(1) of the Income Tax Act.

On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income Tax, Special Range 15 has failed to appreciate that the return of income filed on April 19, 1990, declaring a loss of Rs. 63,63,625 had duly rectified the defects mentioned in the letter of the Assistant Commissioner of Income Tax, Circle 3(4) dated March 16, 1990.

On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income Tax, Special Range 15, has failed to take cognizance of the letter dated May 24, 1990 of the Assistant Commissioner of Income Tax, Circle 3(4) which in effect confirmed the fact that the extension of time was granted to the appellant to rectify the defects stated in the letter of the Assistant Commissioner of Income Tax, Circle 3(4) dated March 16, 1990.

Your appellant prays that the letter refusing rectification u/s 154 of the Income Tax Act is not based on correct appreciation of the facts and that the original return filed by the appellant on December 29, 1989 is valid in law and ought to have been accepted by the Deputy Commissioner of Income Tax, Special Range 15. Your appellant further prays that the Deputy Commissioner of Income Tax, Special Range 15 may be directed to rectify the mistake apparent from record.

(vi) The order of the Assessing Officer dated February 17, 1992 rejecting the rectification application of the assessee was set aside by the Commissioner of Income Tax (Appeals) by his order dated June 29, 1994. The Commissioner of Income Tax (Appeals) was of the view that the decision of the Assessing Officer that the return filed on December 29, 1989 was invalid because the revised return was filed beyond the period of 15 days from the date of receipt of the notice u/s 139(9) is not correct. The Commissioner of Income Tax (Appeals) in the said order also held that since all the defects pointed out by the Assessing Officer were cured by filing all the documents on April 19, 1990 along with the revised return, and since the return filed on December 29, 1989, was in time, it needs to be taken cognizance of as a valid return. The Commissioner of Income Tax (Appeals) directed the Assessing Officer to take on record the return of loss filed on December 29, 1989 as a valid return and proceed further as per the provisions of law. No appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) dated June 29, 1994.

(vii) After the receipt of the order passed by the Commissioner of Income Tax (Appeals) dated June 29, 1994 the Assessing Officer on September 14, 1995 issued a notice u/s 143(2) of the Act to the assessee.

(viii) The assessee appeared before the Assessing Officer without prejudice to their contention that the notice issued u/s 143(2) was invalid. The contention of the assessee was that the Revenue was statutorily required to issue such a notice on or before December 31, 1990 and the notice issued any time thereafter would be beyond the prescribed period of one year and, therefore, invalid. The Assessing Officer took the view that the words "and proceed further as per the provisions of law" used in the order of the Commissioner of Income Tax (Appeals) dated June 29, 1994 was a direction within the meaning of Section 153(3)(ii) of the Income Tax Act, 1961 and, therefore, the ban of limitation stood lifted. The Assessing Officer by his order dated October 31, 1995 passed the assessment order u/s 143(3) of the Income Tax Act assessing the Income Tax "nil" and charging interest of Rs. 14,34,660 u/s 201(1A) of the Income Tax Act.

(ix) The assessee being aggrieved by the order of the Assessing Officer dated October 31, 1995 preferred an appeal before the Commissioner of Income Tax (Appeals) contesting the legality of the notice issued u/s 143(2). The assessee had contended before the Commissioner of Income Tax (Appeals) that the assessee had filed a valid return on December 29, 1989. Under the proviso to Section 143(2), the Assessing Officer could have issued a notice within a period of 12 months from the end of the month in which the return was furnished. In other words, the Assessing Officer could have issued a notice u/s 143(2) up to December 31, 1990 whereas the notice was issued on September 14, 1995 and was clearly time barred. It was submitted that this notice was illegal and invalid and, therefore, the order passed u/s 143(3) as a consequence thereof is also illegal and invalid and liable to be quashed. The Commissioner of Income Tax (Appeals) by his order dated July 21, 1997 recorded that he did not agree with the arguments of the Assessing Officer, that for determining the carry forward of loss, it was necessary to compute the income u/s 143(3). He further observed that if any assessee files the return of income in time, which for one reason or the other, remains to be considered, then, loss shown in the return has to be accepted subject to rectification of mistake which is apparent from the record. The Commissioner of Income Tax (Appeals), therefore, rejected the argument of the Assessing Officer and held that time limit for issuing a notice u/s 143(2) had already elapsed and as such notice issued on September 14, 1995 was invalid and bad in law. In view thereof the assessment order passed u/s 143(3) as a consequence of the same was also invalid and bad in law. The Commissioner of Income Tax (Appeals), therefore, quashed the order of the Assessing Officer and allowed the appeal.

(x) Being aggrieved by the order of the Commissioner of Income Tax (Appeals) dated July 21, 1997, the Revenue filed an appeal before the Appellate Tribunal and submitted that the notice u/s 143(2) was not barred by limitation as the same was issued in pursuance of the directions of the learned Commissioner of Income Tax (Appeals).

(xi) On behalf of the assessee it was contended before the Tribunal that the notice u/s 143(2) was barred by limitation. It was submitted that the Commissioner of Income Tax (Appeals) in the said appeal was only required to set aside the action of the Assessing Officer, namely, rejection of the rectification application. It was submitted that a finding can only be that which is necessary for disposal of the appeal. It was submitted that a finding on irrelevant and extraneous matter which is not necessary for the disposal of the appeal would be of no consequence and beyond the scope of the subject-matter of the appeal.

(xii) The Tribunal by its order dated June 14, 2001, reached a finding that the Commissioner of Income Tax (Appeals) was required to first hold the return filed on December 29, 1989 or April 19, 1990 as a valid return, then only the return could be taken on record. It was recorded that this finding was a necessary finding and, therefore, to give effect to this finding the Assessing Officer issued the notice u/s 143(2) and completed the assessment. The Tribunal, therefore, set aside the order of the Commissioner of Income Tax (Appeals).

We have heard the arguments advanced by the counsel for the assessee as well as the Revenue. The counsel for the Revenue, has at the outset, stated that in his view the order of the Commissioner of Income Tax (Appeals) stating that the return filed by the assessee on December 29, 1989 is a valid return and the Assessing Officer should proceed further as per the provisions of law is a finding and not a direction.

The learned Counsel for the assessee has submitted that the hon''ble Supreme Court in its decision in Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, had the occasion of discussing at length as to what constitutes a finding. In that decision, the hon''ble Supreme Court observed that the word "finding" is not defined in the Income Tax Act and have reproduced Order XX, Rule 5 of the CPC which reads as follows (page 344):

In suits in which the issues have been framed, the court shall state its finding or decision, with the reasons therefore ,upon each separate issue, unless the finding upon any one or more of the issues is sufficient for the decision of the suit.

The hon''ble Supreme Court has thereafter observed that under the said Order (Order XX, Rule 5), a "finding" is, therefore, a decision on an issue framed in a suit. The second part of the rule shows that such a finding should be one which by its own force or in combination with findings on other issues should lead to the decision of the suit itself. That is to say, the finding shall be one which is necessary for the disposal of the suit.

The meaning of the expression "finding" as considered by the Division Bench of the Allahabad High Court in Pt. Hazari Lal, Hatia Kanpur Vs. Income Tax Officer, Dist. II (ii), is set out hereunder (page 272):

The word ''finding'', interpreted in the sense indicated by us above, will only cover material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing.

The hon''ble Supreme Court in its decision in Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, after setting out the above interpretation to the expression "finding" given by the Division Bench of the Allahabad High Court in Pt. Hazari Lal, Hatia Kanpur Vs. Income Tax Officer, Dist. II (ii), agreed (by majority) with the same and rejected the interpretation given to the expression "finding" by the Full Bench of the Allahabad High Court in Lakshman Prakash Vs. Commissioner of Income Tax, U.P., to the effect that a finding is nothing but what one finds or decides and a decision on a question even though not absolutely necessary or not called for is a finding. The hon''ble Supreme Court has observed that if that be the correct meaning any finding on an irrelevant or extraneous matter would be a finding and that certainly cannot be the intention of the Legislature.

The learned Counsel for the assessee, strongly relying on the interpretation given to the word "finding" by the hon''ble Supreme Court in its decision in Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, , submitted that in the case in hand the only issue before the Commissioner of Income Tax (Appeals) was whether the Income Tax return filed by the assessee on December 29, 1989 was valid. It was submitted that the issue of assessment did not arise before the Commissioner of Income Tax (Appeals) and, therefore, the question of the Commissioner of Income Tax (Appeals) having given a finding pertaining to the assessment does not arise. In view thereof the notice issued by the Assessing Officer on September 14, 1995, u/s 143(2) was beyond the prescribed period of one year as bad in law. The assessment u/s 143(3) was, therefore, also invalid and bad in law. The learned Counsel for the assessee also submitted that even assuming that under the order passed by the Commissioner of Income Tax (Appeals) if a finding to the effect of directing the Assessing Officer to proceed with the assessment was found, the same would be bad in law because the issue of the assessment was not the subject-matter of the controversy between the parties concerned before the Commissioner of Income Tax (Appeals) and the same was not raised before the Commissioner of Income Tax (Appeals). Such a finding if at all given by the Commissioner of Income Tax (Appeals) would be irrelevant and ought to be treated as extraneous to the matter before Commissioner of Income Tax (Appeals). The only issue raised for determination was whether the return dated December 29, 1989, was valid or not. The Commissioner of Income Tax (Appeals) was not called upon and was not required to decide upon any other issue.

In support of his above submission, the learned Counsel for the assessee also relied upon the decision of the hon''ble Supreme Court in the case of Rajinder Nath and Others Vs. Commissioner of Income Tax , Delhi, wherein the interpretation given to the word "finding" by the hon''ble Supreme Court in the case of Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, has been reiterated and the hon''ble apex court has emphasised on the fact that "To be a necessary finding, it must be directly involved in the disposal of the case."

In support of his above submission, the learned Counsel for the assessee has also relied on the Division Bench decision of the Calcutta High Court in Goombira Tea Co. P. Ltd. Vs. Income Tax Officer, A-Ward and Others, . In that case, the appellants therein were being assessed by the Income Tax Officer, A Ward, Karimgunj, Assam. The Central Board of Direct Taxes by its order dated June 30, 1973 transferred the cases to the Income Tax Officer, Central Circle XXXIII, Calcutta. Aggrieved by this order, the appellants moved the court under Article 226 of the Constitution of India and obtained rules nisi. They also obtained an interim order under which all further proceedings were stayed. The interim order was subsequently varied at the instance of the Revenue to the extent that the proceedings may continue and the final order be passed but it will not be given effect to or communicated pending the disposal of the rules. Thereafter, the rules were made absolute and writs were issued by a single judge quashing the impugned order of transfer and directing the Income Tax authorities from giving effect or further effect to the order of transfer and also the assessment orders made by the Income Tax Officer, Central Circle XXXIII, Calcutta. Thereafter, a direction was given by the single judge to Income Tax Officer, A Ward, Karimgunj, Assam, to make fresh assessments within four months. This direction had the effect of lifting the bar of limitation and the appellants, therefore, appealed against the same. The Division Bench of the Calcutta High Court, while setting aside the direction, held that the only question that was involved in the writ petitions was whether the order of transfer should be quashed or not. Therefore, the only finding germane to the question and necessary for the disposal of the writ petitions was on the question of legality or otherwise of the impugned order. After the court found that it was illegal, the only order that was required to be made was to quash the same. The modified interim order was complete and did not reserve or contemplate making of any further order or giving of any direction along with the disposal of the rule. In view of the prayers in the writ petitions and the terms of the modified interim order, "assessment" was not the subject-matter of the writ petitions. The learned judge was, therefore, not justified in giving the direction to the Income Tax Officer, A Ward, Karimgunj, to make fresh assessments.

The learned Counsel for the appellant, therefore, reiterated his submission that in the case in hand, assessment was not the subject-matter of the appeal of the assessee before the Commissioner of Income Tax (Appeals) and even if the Commissioner of Income Tax (Appeals) has given his finding which can be treated or considered to be a finding such a finding would not be valid and would not entitle the Assessing Officer to proceed with the assessment. It was submitted that in view of such an invalid finding it cannot be said/held that the bar of limitation u/s 153(2)(iii) have been lifted. He, therefore, submitted that the notice issued by the Assessing Officer u/s 143(2) dated September 14, 1995 and the assessment made u/s 143(3) dated October 31, 1995 are void ab initio and not valid.

The learned Counsel appearing for the Revenue submitted that since the Commissioner of Income Tax (Appeals) has given his finding that the return is valid, the claim of loss was required to be adjudicated. He submitted that in view of such a finding the bar of limitation is lifted u/s 153(3)(ii) of the Income Tax Act and the Assessing Officer was right in issuing notice u/s 143(2) of the Income Tax Act and passing the assessment order u/s 143(3) of the Income Tax Act, 1961.

The learned Counsel for the Revenue relied on the decision of the hon''ble Supreme Court in Daffadar Bhagat Singh and Sons Vs. The Income Tax Officer, A-Ward, Ferozepore, . In that case, the appellant-firm comprising of father and his two sons, filed a return for the assessment year 1952-53 on March 31, 1953 and also applied for registration u/s 26A of the Indian Income Tax Act, 1922. The Income Tax Officer refused registration and passed an order of assessment on March 26, 1957 holding that the assessee constituted a Hindu undivided family. On August 11, 1959, the Appellate Assistant Commissioner, on appeal, allowed registration of the firm. He held that the business belonged to the firm and its income ought to be excluded from that of the family and directed the Income Tax Officer to assess the income of the business in the hands of the firm. Thereafter, the Income Tax Officer issued fresh notices to the appellant under Sections 22(4) and 23(2). The appellant filed a petition under Articles 226 and 227 of the Constitution for a writ prohibiting the Income Tax authorities from proceeding with the assessment. The High Court dismissed the writ petition holding that the second proviso to Section 34(3) was applicable because the members of the appellant-firm could not be regarded as strangers to the proceedings which resulted in the assessment order made in respect of them on the basis of their constituting the Hindu undivided family along with the others. The hon''ble Supreme Court affirmed the decision of the High Court and held that (i) the substantial issue before the Appellate Assistant Commissioner was one of the status of the appellant and the Appellate Assistant Commissioner held that it was a partnership and not a Hindu undivided family. This finding was necessary for deciding the appeal before him and it could not be said that it was arrived at only incidentally. Once a finding was given which was necessary for the disposal of the appeal, the second proviso to Section 34(3) was attracted and the bar of limitation lifted, and (ii) it could not be said that the appellant was a total stranger to the assessment which was under appeal before the Appellate Assistant Commissioner and had no intimate connection with the person whose assessment was made by the Income Tax Officer. It will be appropriate for us to mention here itself that the decision in Daffadar Bhagat Singh and Sons Vs. The Income Tax Officer, A-Ward, Ferozepore, will be of no assistance to the Revenue because in that case the hon''ble Supreme Court following the interpretation given to the word "finding" in the case of Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, has held that the finding of the Appellate Assistant Commissioner was necessary for deciding the appeal before him and it could not be said that it was arrived at only incidentally.

We have considered the submissions advanced on behalf of the assessee as well as the Revenue. We have also considered the above decisions cited before us. It is an admitted fact that the assessee had filed its return on December 29, 1989. In view of certain defects in the return the assessee was called upon by the Revenue by its letter dated March 16, 1990 to correct the said defects within a period of 15 days from the date of the said letter. The said letter was received on March 22, 1990. The assessee rectified the defects within 27 days from the date of receipt of the said letter, i.e., on April 19, 1990 instead of 15 days as required in the notice dated March 16, 1990. The Revenue obviously having lost sight of the fact that the assessee has already cleared the defects on April 19, 1990, once again by a letter dated May 29, 1990, called upon the assessee to clear the said defects. On September 28, 1990, the Revenue informed the assessee that the return of the assessee had been ignored by the Revenue because the defects were not cleared within the prescribed period of 15 days from the receipt of the notice dated March 16, 1990. The assessee filed the rectification application dated January 8, 1992 stating that the original return was filed before the prescribed date for filing the return of income, namely, December 31, 1989 u/s 139(1) of the Income Tax Act and further that the appellant filed the revised return of income on April 19, 1990 revising the loss figure and rectifying the defects in the original return. The request of rectification was turned down by the Revenue on February 17, 1992.

The appellant filed an appeal before Commissioner of Income Tax (Appeals) on March 12, 1992 on a very limited ground set out hereinabove, namely, that the return filed on December 29, 1989, have been filed within the period prescribed u/s 139(1) of Income Tax Act, that the defects in the said return were rectified on April 19, 1990, and that the letter dated May 24, 1990, of the Assistant Commissioner of Income Tax, Circle 3(4) confirmed the fact that the extension of time was granted to the assessee to rectify the defects stated in the letter of the Assistant Commissioner of Income Tax, Circle 3 dated March 16,1990. Therefore, in our view, the only issue before Commissioner of Income Tax (Appeals) in the said appeal was whether the return filed on December 29, 1989, was a valid return. It was the Revenue''s case that the said return was not valid because the defects set out in the letter dated March 16, 1990, were not rectified within a period of 15 days from the receipt of the notice but were rectified only on April 19, 1990, i.e., within a period of 27 days from the receipt of the notice. It was the case of the assessee that the letter dated May 24, 1990 addressed by the Revenue to the assessee calling upon the assessee to rectify the defects implied extension on the part of the Revenue and the Revenue, therefore, cannot be heard to say that the return filed on December 29, 1989, was not valid and liable to be ignored. The Commissioner of Income Tax (Appeals) came to the finding that the letter written by the Revenue dated May 24, 1990 asking for curing the defects as mentioned in the letter dated March 16, 1990 condones the earlier delay on the part of the assessee. The Commissioner of Income Tax (Appeals), therefore, came to the conclusion that the return of income filed by the assessee on December 29, 1989, was a valid return. That finding by itself would, in our view, certainly not lift the bar of limitation as prescribed u/s 153(3)(ii) of the Income Tax Act, 1961, and would not entitle the Assessing Officer to issue any notice to the assessee u/s 143(2) or to proceed with any assessment proceedings u/s 143(3) of the Income Tax Act. Since the issue of assessment was not before the Commissioner of Income Tax (Appeals), even if in the order of the Commissioner of Income Tax (Appeals) any observation or discussion or direction can be construed as a finding pertaining to the assessment, the same has to be treated as invalid and of no consequence having arisen not out of any issue directly involved in the disposal of the said appeal before the Commissioner of Income Tax (Appeals) and not being germane to the question necessary for disposal of the said appeal before the Commissioner of Income Tax (Appeals).

In view of the above, we are of the view that in the facts and in the circumstances of the case and in law the Tribunal was not right in holding that the notice u/s 143(2) of the Income Tax Act, 1961 was validly issued and that assessment made in pursuance thereto was valid in law. We, therefore, answer the question raised in the present appeal in favour of the assessee and against the Revenue.

he above appeal, therefore, stands allowed. However, there will be no order as to costs.