Sri Balasubramania Traders vs Assistant Commissioner of Income Tax and Others

N.V. Balasubramanian, J.—The petitioner is a partnership firm constituted under a deed of partnership dated January 30, 1987, and the firm

consisted of several persons including persons outside the family and when some difference of opinion arose, according to the petitioner, a memo

of understanding was reached and under the said memo, the firm suspended its business on October 31, 1987, and handed over the movable

assets and liabilities as per the schedule recorded in the books which were taken over by one Karthikeyan, son of Krishnan, one of the partners,

on November 1, 1987. The said Karthikeyan was permitted to continue the trading business in the name and style of the petitioner firm.

The writ petition relates to the assessment year 1990-91. The Assistant Commissioner of Income Tax (Assessing Officer) for the assessment

year 1988-89 took the view that the memo of understanding entered into between the petitioner and the said Karthikeyan indicated that the

business was not abandoned, nor the firm dissolved and the arrangement was revocable and in that view of the matter, he invoked the provisions

of Section 61 of the Income Tax Act, 1961 (hereinafter to be referred to as ""the Act""), and held that the income arising out of the business run by

the said Karthikeyan accrued to the petitioner firm. The Assessing Officer proceeded on the basis that the firm was not dissolved and the firm had

the right to resume the business. The petitioner challenged the order for the assessment year 1988-89 before the Commissioner of Income Tax

(Appeals) and it must be stated here that the assessment year 1988-89 is the first year of dispute. The Commissioner of Income Tax (Appeals)

held that there was no power to revoke the transfer to support the inclusion of income in the hands of the petitioner firm and he therefore directed

the Assessing Officer to exclude the amount included in the assessable income of the petitioner firm relating to the assessment year 1988-89, In this

connection, it is relevant to notice that there were five different firms in which most of the family members and also strangers were partners and

similar transactions also took place in the other firms as well and similar tax treatment also took place with reference to the said five firms. For the

assessment year 1990-91, the present assessment year, the Assessing Officer followed his earlier order made for the assessment year 1988-89

and in the order of assessment, he mentioned that C. Krishnan took over the assets and liabilities, but it was only K. Karthikeyan, son of C.

Krishnan, who took over the assets and liabilities as there was no memo of understanding entered into with C. Krishnan. The Assessing Officer

also made a remark that the business was not closed and it was revocable and invoking the provisions of Section 61 of the Act, he included the

income in the hands of the petitioner firm.

The petitioner, aggrieved by the order of assessment, preferred an appeal before the Commissioner of Income Tax (Appeals) stating that the

provisions of Section 61 of the Act have no application. The Commissioner of Income Tax (Appeals) following his earlier order rendered in the

petitioner''s own case for the assessment year 1988-89, came to the conclusion that the provisions of Section 61 of the Act have no application

and directed the Assessing Officer to exclude the assessable income of the petitioner firm relating to the assessment year 1990-91. Dissatisfied

with the order of. the Commissioner of Income Tax (Appeals), the Department preferred an appeal before the Income Tax Appellate Tribunal,

Chennai (hereinafter to be referred to as ""the Appellate Tribunal""), and the main ground of challenge was that the provisions of Section 61 of the

Act would apply and the view of the Commissioner of Income Tax (Appeals) that the provisions of Section 61 have no application was not

sustainable in law.

It is stated that the matter came up before the Appellate Tribunal on June 17, 1998, for hearing and it was the first hearing of the appeal and on

that day, the Members constituting the Bench of the Appellate Tribunal were of the opinion that the provisions of Section 61 of the Act have no

application and cannot be invoked on the facts and circumstances of the case. However, the Members of the Tribunal felt that the transactions

entered into by the petitioner firm with the said Karthikeyan appear to be sham transactions. It is seen from the petition filed by the petitioner

before the Appellate Tribunal on June 22, 1998, that the representative appearing for the petitioner made a request before the Tribunal seeking

adjournment of the matter to produce records and documents in support of the petitioner''s case on the new ground raised before the Tribunal

regarding the genuineness of the transactions which was not a dispute raised either before the Assessing Officer or before the Commissioner of

Income Tax (Appeals) and which also was not raised by the Department pleaded that time must be granted to produce the relevant records and

documents in support of the submissions made by the petitioner before the Tribunal. It is not clear what happened on the first day of hearing before

the Tribunal and the Tribunal has not recorded anything in the order as to whether any such request was made and if so made, how it was

disposed of. The petitioner as stated earlier has filed the petition on the next day, viz., June 18, 1998, requesting the Appellate Tribunal to grant an

opportunity to the petitioner to produce the records and documents in support of its submissions. The said petition reached the Appellate Tribunal

on June 22, 1998. On June 23, 1998, the Tribunal allowed the appeal preferred by the Department on a new ground which was not considered by

the Assessing Officer nor by the Commissioner of Income Tax (Appeals), nor raised in the grounds of appeal before the Tribunal. The Tribunal in

the appellate order made the observation which reads as under :

. . .no iota of evidence has been brought to show as to why assets and liabilities of the firm had been transferred to Karthikeyan son of one of the

former partners of the assessee-firm, K, Krishnan.

It is not clear who raised the query as to why the assets and liabilities of the firm had been transferred and in spite of the inquiry, no documents

were produced. According to the Appellate Tribunal, the business of the firm continued till the firm was dissolved or the business of the firm was

transferred to a third party for consideration and the Tribunal came to the conclusion that the transactions entered into by the assessee-firm with

Karthikeyan, in the absence of any evidence filed before it, appeared to be sham transactions. After recording the above finding, the Appellate

Tribunal remitted the matter to the Assessing Officer to assess the income of the firm in the hands of the partnership firm till the firm was dissolved

in the assessment year or in the subsequent assessment years, and accordingly, set aside the order of the Commissioner of Income Tax (Appeals).

The petitioner has challenged the order of the Appellate Tribunal in this writ petition and several grounds have been raised by the petitioner. It is

not necessary to consider the question on the merits of the case. However, the point raised by the writ petitioner that the order of the Appellate

Tribunal is not sustainable due to violation of principles of natural justice is well-founded. I have seen from the orders of the Assessing Officer and

the Commissioner of Income Tax (Appeals) and it is clear that the Assessing Officer has proceeded on the basis that the memo of understanding

was a genuine one and that is the reason for the Assessing Officer invoking the provisions of Section 61 of the Act in his orders of assessment

made for the assessment year 1990-91 and for the prior assessment years as well. In my view, the Assessing Officer could have invoked the

provisions of Section 61 of the Act only when he was of the opinion that the transactions were genuine transactions and the Department also

proceeded on the same basis as is clear from the grounds of appeal raised before the Appellate Tribunal wherein the Department questioned the

order of the Commissioner of Income Tax (Appeals) regarding the applicability of Section 61 of the Act to the facts of the case. However, when

the matter came up for hearing before the Appellate Tribunal, a new ground was raised that the transactions were not genuine. It is not clear

whether such a ground was raised by the Department before the Appellate Tribunal or it was suo motu raised by the Tribunal. Whatever it may be,

even assuming that the entire assessment proceedings were before the Appellate Tribunal, and it had jurisdiction to deal with the entire matter of

assessment, yet when the matter came up for first hearing on June 17, 1998, and when a new case was projected that the transactions recorded in

the memo of understanding were not genuine transactions, the petitioner should have been given an opportunity to meet the case of the bogus

nature of the transactions. It is relevant to notice that the place of the petitioner''s business is at Erode and the case was argued at Chennai and it

cannot be expected from the learned representative representing the petitioner firm to meet the case raised for the first time in the floors of the

Appellate Tribunal then and there by producing supporting documents to substantiate the case of the petitioner that the transactions were genuine.

The petitioner therefore filed the petition on the next day of hearing seeking permission to produce the records and documents in support of its

case and the said petition reached the Appellate Tribunal on June 22, 1998, as June 20. 1998, and June 21, 1998, happened to be holidays being

Saturday and Sunday. The Appellate Tribunal passed the order on June 23, 1998, without taking note of the petition filed by the petitioner seeking

an opportunity to produce the records and documents. In ray view, there is a violation of principles of natural justice by the Appellate Tribunal in

not giving an opportunity to the petitioner to meet the new case raised for the first time before the Appellate Tribunal that the transactions under the

memo of understanding were sham transactions. It is seen that it is on the first day of the hearing of the appeal, for the first time, a new point was

raised before the Tribunal without any written application by the Department and without any prior notice to the petitioner, and the Appellate

Tribunal in such a situation, as the final fact-finding authority, should have given an opportunity to the petitioner to meet the case raised before it.

The Appellate Tribunal has recorded a finding in its appellate order that the transactions entered into by the petitioner firm with Karthikeyan

appeared to be not genuine transactions in the absence of any evidence filed before it. The said finding would be binding on the Assessing Officer

at the time of making assessment of the petitioner firm unless it is set aside in a manner known to law and it would be impermissible for the

Assessing Officer to ignore such a finding as a mere casual observation as such observation has come from the highest fact-finding authority under

the provisions of the Act. Therefore, it is ex facie clear that there is a violation of principles of natural justice committed by the Appellate Tribunal in

passing the appellate order. In my view, the Appellate Tribunal has no discretion whatsoever in the matter of giving a fair opportunity and it is their

plain duty that they must do. The fair opportunity, in my view, consists of granting an opportunity to the petitioner to say anything with documents

to establish its case that the transaction was a real and genuine transaction when a new case was sprung upon it for the first time in the first hearing

before the Appellate Tribunal.

The further question that arises is whether the writ petition is maintainable against an order passed by the Appellate Tribunal. No doubt, there is

a procedure for reference available u/s 256 of the Act. Though it may be open to the petitioner to question the findings rendered by the Appellate

Tribunal on the question of genuineness of transactions in such reference proceedings, in my view, the question whether the procedure adopted by

the Appellate Tribunal in allowing the appeal is correct or not cannot be gone into by this court in reference proceedings in view of the limited

jurisdiction of the court u/s 256 of the Act and on the scope of the question that may be referred by this court by the Appellate Tribunal. In my

view, once this court has come to the conclusion that there is a blatant violation of the principles of natural justice in passing the. impugned order,

this court sitting under article 226 of the Constitution of India has the necessary powers and jurisdiction to interfere with the order of the Tribunal.

The decision of M. Srinivasan J. (as his Lordship then was) in the case of Ceat Tyres of India Ltd. Vs. Union of India, , is an authority for the

proposition that where the principles of natural justice have not been followed, the order of the Appellate Tribunal would stand vitiated as the

petitioner has not been given an appropriate opportunity to contest the case and this court sitting in article 226 of the Constitution of India can

interfere. I am of the view that the principles laid down by M. Srinivasan J. (as his Lordship then was) in Super Rubber Works Vs. Assistant

Collector of Central Excise, would squarely apply to the facts of the case.

The Supreme Court in Reckitt and Colman of India Ltd. Vs. Collector of Central Excise, , made the following observations which are relevant

for the purpose of this case (page 380) :

It will be remembered that the case of the Revenue, which the appellant had been required to meet at every stage from the show-cause notice

onwards, was that the said product was a preparation based on starch. Having come to the conclusion that the said product was not a preparation

based on starch, the Tribunal should have allowed the appeal. It was beyond the competence of the Tribunal to make out in favour of the Revenue

a case which the Revenue had never canvassed and which the appellants had never been required to meet. It is upon this ground alone that the

appeal must succeed.

Applying the principles laid down by the Supreme Court in the above-said case, it is clear that the Revenue in the instant case had never

canvassed either before the Assessing Officer or before the Commissioner of Income Tax (Appeals) that the transactions recorded in the memo of

understanding were sham transactions and the petitioner was also not required to meet such case before the authorities under the Act. When it was

raised for the first time before the Appellate Tribunal, the Appellate Tribunal, in my view, should have given an opportunity to meet the case raised

before the Tribunal. Since no opportunity was given to the petitioner and the case was decided straightaway without affording any opportunity to

the petitioner which causes a serious prejudice to the petitioner, I hold that the order of the Appellate Tribunal suffers from a serious infirmity. The

decision of the Supreme Court in Reckitt and Colman of India Ltd. Vs. Collector of Central Excise, , would squarely apply to the facts of the case.

In Bhagwant Kishore Sud Vs. Income Tax Appellate Tribunal, Chandigarh, , the Supreme Court no doubt has held that where an assessee

can assail the correctness of an order of the Tribunal on the merits in a reference before the High Court, the High Court would be entirely justified

in declining to entertain in the writ petition the questions which the assessee could have brought before the High Court through a reference

application. In the said case, the Supreme Court also noticed that the assessee had sought for an adjournment before the Tribunal on the ground

that its representative had suffered a heart attack and a reply was received declining the adjournment and the Supreme Court held that it was open

to the assessee to assail the order of the Tribunal declining to grant adjournment in a writ petition. Applying the law laid down by the Supreme

Court to the facts of the case, it is open to the petitioner to assail the order of the Tribunal where the grievance of the petitioner is that no fair

opportunity was granted to the petitioner at the time of hearing of the appeal. Therefore, I am of the view that the law laid down by the Supreme

Court in Bhagwant Kishore Sud Vs. Income Tax Appellate Tribunal, Chandigarh, , would apply wherein the Supreme Court has held that it is

permissible for an assessee to challenge the order of the Appellate Tribunal in a writ petition when the Tribunal declined to grant adjournment in the

hearing of the appeal.

The Calcutta High Court in the case of Bata India Ltd. Vs. Deputy Commissioner of Income Tax and Others, , held that in order to prevent

grave and serious miscarriage of justice including one resulting from following a patently erroneous procedure or contravention of basic principles

of justice and fair play, the supervisory and superintending jurisdiction conferred on courts by article 227 of the Constitution remains always

available. On the facts of the case, the petitioner not only invoked the provisions of article 226 of the Constitution, but also the provisions of article

227 of the Constitution of India. Therefore, on the basis of the power available either under article 226 or under article 227 of the Constitution of

India, since there is a miscarriage of justice as the case was decided without affording an opportunity to the petitioner to meet the new case raised

at the first hearing of the case before the Tribunal, the order passed by the Appellate Tribunal is liable to be interfered with.

Learned senior counsel appearing for the Department strongly relied upon a decision of the Supreme Court in the case of The Commissioner

of Income Tax, Lucknow Vs. U.P. Forest Corporation, holding that the High Court ought not to have entertained a writ petition when an adequate

alternative remedy was available to the assessee. There is no doubt that when an adequate alternative statutory remedy is available under the Act,

this court would not normally interfere in a writ petition. However, when this court finds that there is a miscarriage of justice and the procedure

adopted by the Appellate Tribunal which is the final fact-finding authority, is erroneous resulting in gross violation of principles of natural justice in

passing of the order which shocks the conscience of the court, I am of the view, this court cannot remain a mute spectator. In my view, this court in

such a situation can and should interfere to meet the ends of justice. I am therefore inclined to interfere with the impugned order of the Appellate

Tribunal and, accordingly, the impugned order passed by the Appellate Tribunal is quashed and the matter is remitted to the Appellate Tribunal to

consider the case afresh on the merits of the matter, after giving sufficient opportunity to the petitioner. The writ petition is allowed. Rule nisi is

made absolute. However, in the circumstances of the case, there will be no order as to costs. Consequently, W.M.P. No. 21069 of 1998 is

dismissed.