Commissioner Of Income-Tax vs M.R. Dhawan
1994 Latest Caselaw 193 Del

JUDGMENT

R. C. Lahoti, J.

1. This common order shall govern the disposal of Income-tax Cases Nos. 65 of 1992 and 66 of 1992. In both the cases, the parties and the facts and the question of law arising for decision are common except for a change of the assessment year and the amount of taxable income. Income-tax Case No. 65 of 1992 relates to the assessment year 1967-68 and Income-tax Case No. 66 of 1992 relates to the assessment year 1966-67.

2. The facts in brief, in so far as relevant for the present purpose, may be noticed. The assessed is an individual. He had a business of share broker. One of his clients was the late Rana Babar Shamsher Jang Bahadur. On behalf of Rana, the assessed was entering into transactions of purchase and sale of shares. Later on, Rana gave a power of attorney to the assessed who then started transacting business in his own name though, according to him, that was on behalf of his principal, the late Rana. Thus the assessed was having under his name several shares of limited companies. The value of shares standing in the name of the assessed, but apparently on behalf of Rana, was worth about Rs. 38 lakhs in the year 1961-62. There were income-tax recoveries against Rana and the Department in their efforts to recover the income-tax dues issued garnishee order on the assessed, because his books showed Rana as creditor. The assessed did not make any payment. So the Department attached his property at New Delhi.

3. Against the attachment and recovery proceedings, the assessed took two lines of action. He denied his owing any money to Rana and disputed the validity of the garnishee proceedings. The reason given for his denial was that although he did owe money to the late Rana to begin with, with the passing away of Rana on May 12, 1960, and the legal heirs having not filed their claim with the assessed, the same had got barred by limitation and hence nothing had remained due by him to Rana. The other step was in respect of his own assessments. Since the books of account showed large credits, they were subject to scrutiny by the Department. In fact, the Department had made an assessment for the assessment year 1961-62 making an addition of Rs. 11,84,062 and Rs. 1,67,145. The assessed filed a petition before the Commissioner of Income-tax, New Delhi, on August 24, 1966, for settling his income-tax affairs. In this petition, he agreed that originally he was having dealings with Rana on principal to principal basis, purchasing shares in his own name. The amount due by him to the late Rana had become barred by limitation. However, he had stated that because the credit amounts had been claimed and allowed as trading liability to him in the earlier orders and the liability in respect thereof had ceased, if proper entries were made in the account books indicating cessation of liability with a corresponding credit to the profit and loss account, these amounts could be offered under section 41 of the Income-tax Act, 1961. To quote from his application (paragraph 9) -

"That if the first settlement subject to the scheme of payment suggested by the applicant is accepted, he would make proper entries as on March 31, 1965, of the sum of Rs. 26,14,672 for inclusion in 1965-66 assessment and Rs. 4,27,168 in the assessment year 1966-67. The other items of Rs. 25,750 will fall for consideration in 1967-68. The total income-tax liability would be in the neighborhood of Rs. 15 lakhs."

4. The Commissioner of Income-tax by his order dated February 13, 1967, accepted the assessed's contention. In paragraph 1, he wrote as follows :

"Your proposal to offer for taxation the following amounts under section 41 of the Income-tax Act, 1961, is accepted :

Rs.

Assessment year 1965-66              28,51,593
Assessment year 1966-67               4,27,168
Assessment year 1967-68               2,57,500
  
 

 5. You may proceed to make the necessary entries in your account books and file the returns for the years 1965-66 and 1966-67 accordingly. 
The return for 1967-68 may be filed in due course in the next financial year." 
In compliance with this settlement, the assessed filed revised returns for the three assessment years, consistently with the order of the Commissioner of Income-tax. The Income-tax Officer made assessments accordingly. 

However, it appears that there were certain additions made other than the amount agreed to. For the assessment year 1965-66, the assessed appealed to the Appellate Assistant Commissioner against the other additions. The assessed did not object to the inclusion of Rs. 28,51,593 for that year. He was satisfied that it was correctly includible as per this settlement. In respect of the assessment years 1966-67 and 1967-68, the assessed had second thoughts about the acceptance of these additions as per the settlement. He appealed to the Appellate Assistant Commissioner who accepted the contention that the settlement with the Commissioner of Income-tax or the furnishing of the revised return was no bar to seeking exclusion of the amount. The Appellate Assistant Commissioner set aside the order of the Income-tax Officer and directed him to make a fresh assessment after examining the assessed's contention. The Department went in appeal against the order of the Appellate Assistant Commissioner but the Tribunal upheld the Appellate Assistant Commissioner's action.

6. The Income-tax Officer started the assessment proceedings again. This time the assessed did not co-operate. The Income-tax Officer completed the assessment ex parte in which he included the disputed amounts. Again the assessed went up in appeal. The Commissioner of Income-tax (Appeals) opined that when the Department was proceeding against the assessed on the merits of the case, the assessed closed the avenue by making a settlement. Now when the avenue was closed, the assessed wanted the Department to examine the case on the merits. With the passage of time it would be difficult to process the case especially when important clues had been lost. The assessed kept on changing his stand to suit his convenience and avoiding the tax liability. In the year 1966, he came with a proposal for taxing the same. The Commissioner of Income-tax further held that once an addition was made on settlement, the assessed could not be treated as an aggrieved party. Therefore, the assessed did not have the option of appeal at all. On these findings, the Commissioner of Income-tax held that the additions made by way of settlement were correct and there could be no appeal.

7. The assessed went in further appeal to the Income-tax Appellate Tribunal. The Tribunal accepted both the contentions of the appellant that the settlement arrived at was not binding on the assessed as an assessed could not be stopped from relying upon a proper construction of the relevant statute and preventing the Department from providing a basis of assessment different from what was laid down in the Act and consequently that the onus was on the Department, that it was not discharged and so the disputed amount could not be brought to tax. The Tribunal also noticed that the assessed had filed an application under section 131 for inspection of the records to satisfy himself if the deductions were allowed in the earlier year of assessment which alone would attract the applicability of section 41 but the records were not examined. The Tribunal accordingly allowed the assessed's appeal for the assessment years 1966-67 and 1967-68.

8. Section 41(1) of the Income-tax Act, 1961, the provision relevant for the present purpose, reads as under :

"Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessed (hereinafter referred to as 'the first-mentioned person') and subsequently during any previous year, -

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year."

9. The Department moved an application under section 256(1) of the Act for drawing up a statement of the facts of the case and stating the following questions for the opinion of the High Court :

(For the assessment year 1966-67) :

"1. Whether, on the facts and in the circumstances of the case and having accepted in principle that the move of the assessed for the settlement had foreclosed the Department's option of considering the issue on the merits, the Income-tax Appellate Tribunal is right in law in deleting the addition of Rs. 4,27,168 voluntarily surrendered by the assessed under section 41(1) of the Income-tax Act ?

2. Whether, on the facts and in the circumstances of the case and in the absence of any evidence having subsequently been brought by the assessed on record, the Income-tax Appellate Tribunal is legally correct in holding that the provisions of section 41(1) were not applicable to the amount of Rs. 4,27,168 initially admitted by the assessed to represent cessation of liability and treated by him as such ?

3. Whether, on the facts and in the circumstances of the case and without giving the Department any opportunity to examine the matter on merits, thus violating the principles of natural justice, the Tribunal is legally correct in accepting the assessed's plea that the provisions of section 41(1) were not applicable to the amount of Rs. 4,27,168 ?"

(For the assessment year 1967-68) :

"1. Whether, on the facts and in the circumstances of the case and having accepted in principle that the move of the assessed for the settlement had foreclosed the Department's option of considering the issue on the merits, the Income-tax Appellate Tribunal is right in law in deleting the addition of Rs. 2,57,500 voluntarily surrendered by the assessed under section 41(1) of the Income-tax Act ?

2. Whether, on the facts and in the circumstances of the case and in the absence of any evidence having subsequently been brought by the assessed on record, the Income-tax Appellate Tribunal is legally correct in holding that the provisions of section 41(1) were not applicable to the amount of Rs. 2,57,500 initially admitted by the assessed to represent cessation of liability and treated by him as such ?

3. Whether, on the facts and in the circumstances of the case and without giving the Department any opportunity to examine the matter on the merits, thus violating the principles of natural justice, the Tribunal is legally correct in accepting the assessed's plea that the provisions of section 41(1) were not applicable to the amount of Rs. 2,57,500 ?"

10. The applications have been rejected by the Tribunal forming an opinion that the questions sought to be stated for the opinion of the High Court were questions of fact and no question of law arose out of appellate order of the Tribunal. During the course of its order, the Tribunal has also expressed an opinion that the Department ought to have either challenged the earlier order of the Tribunal or sought for a reference there from, failing which the matter was concluded by the earlier order of the Tribunal.

11. At this juncture, a very significant fact deserves to be taken note of in the matter of assessment for the assessment year 1965-66. The assessed having lost before the Tribunal had filed a writ petition under articles 226 and 227 of the Constitution which was disposed of by this court by order dated August 29, 1983. The decision is reported as M. R. Dhawan v. CIT [1984] 149 ITR 160. This court held (headnote) :

"It was clear from an examination of the application for settlement that the assessed admitted that the impugned amount represented a trading liability and claimed deduction of the same. The deduction had not been allowed earlier but it was allowed under the settlement. There had thus been an allowance for trading liability satisfying the first requirement under section 41. In the application for settlement, the petitioner admitted in terms that this liability had ceased to exist. In paragraph 3, it had been clearly stated that the heirs of the late Rana had not come forward to claim this amount for various reasons. The bar of limitation was, therefore, not the only reason. It was significant that in the application for settlement the assessed had stated that, earlier also, he had made an offer to surrender this income but subject to the condition that in case the Rana's heirs succeeded in getting a decree for this amount, the necessary adjustment would be allowed by the Department but now he was not attaching this condition. The assessed thus admitted in clear terms that this liability had finally ceased to exist. He could not now be allowed to resile from this admission. It could not be said that the admission was erroneous. No good ground had been made to withdraw these admissions of fact. The second requirement under section 41, therefore, also stood satisfied. Moreover, in writ proceedings, the court would not investigate questions of fact. The assessed had not also pursued the alternate remedy of reference. The assessed had failed to prove that the impugned settlement or impugned assessment order for the assessment year 1965-66 suffered from a patent lack of jurisdiction." (underlining by us).

12. Reverting back to the case at hand, at the hearing learned counsel for the Department submitted that questions of law do arise out of the order of the Tribunal and being questions of law they ought to have been referred by the Tribunal to the High Court. Learned counsel for the assessed has vehemently opposed the contention of learned counsel for the Department and submitted that the issues were eclipsed by the earlier order of the Tribunal and hence the present proceedings were incompetent. Learned counsel for the assessed has also cited a number of decisions (as per list) submitting that there was no estoppel, that the foundational facts attracting applicability of section 41 of the Act were not satisfied and that the onus lay on the Department which was not discharged and, etc. Suffice it to say that whatever has been urged by learned counsel for the assessed is premature indeed and certainly beyond the scope of hearing under section 256(2) of the Act. In CIT v. Jai Parkash Om Parkash Co. Ltd. [1964] 52 ITR 23, their Lordships of the Supreme Court dealing with pari materia provisions contained in section 66(2) of the Indian Income-tax Act, 1922, held (headnote) :

"When an application was made under section 66(2) to the High Court for an order directing the Tribunal to state a case and refer a question of law arising out of its order, the High Court could not deal with it by answering that question."

13. In CIT v. Managing Trustee, Jalakhabai Trust , their Lordships have held (at page 622) :

"The High Court in dealing with the application under section 66(2) of the Act is not called upon to decide whether the question may ultimately be decided in favor of the assessed; the High Court had only to consider whether a question of law which may be supported by reasonable argument, arose out of the order of the Tribunal."

14. In our opinion, the earlier order of the Tribunal had not decided anything. It had only confirmed an order of remand made by the Appellate Assistant Commissioner. The Income-tax Officer was to make an assessment afresh. The merits of the contentions raised by either party were left at large before the assessing authority. Till the assessment was made and the liability of the assessed to pay the tax was fixed, the questions raised by either party would have been merely academic. It is only when the liability to pay the tax was fixed by the assessing authority and that order was either maintained or set aside finally by the final Appellate Tribunal, the questions arising as those of law would become ripe for being referred to the High Court for its opinion.

15. The questions framed by the Department are questions of law and do arise from the order of the Tribunal.

16. For the foregoing reasons both the applications are allowed. The Tribunal is directed to draw up a statement of the facts of the case in each of the two cases and refer the questions for the opinion of the High Court.

17. The costs shall be determined while disposing of the matter finally on reference being made by the Tribunal.

18. One copy each of this order shall be placed on the records of Income-tax Cases Nos. 65 of 1992 and 66 of 1992.