Issue for consideration: A lapse in a completed
assessment can be cured by the Assessing Officer by resorting to the
rectification or reassessment proceedings depending upon the nature of
the lapse. The remedy available to the Assessing Officer permits him to
proceed u/s.147 or u/s.154 for repairing the damage caused in assessing
the total income.
The existence of the information for the
belief that income chargeable to tax has escaped assessment is the sine
qua non for reopening the assessment u/s.147 and discovery of an error
apparent on the record is the sine qua non for rectification u/s.154 of
the Act. These provisions are to be invoked in different circumstances,
but there can be situations where they overlap, and the AO can have
recourse to one or the other.
It is common to come across cases
where an Assessing Officer, faced with the dilemma of choosing between
the two remedies, decides to prefer one over the other and later on
drops the first and proceeds under the second. For example, an Assessing
Officer, dropping the proceedings u/s.154 initiated for curing the
lapse, later on initiates fresh proceedings u/s.147 for curing the same
lapse.
The question that arises in such circumstances is about
the validity of the second proceedings, having once exercised the option
available under the law and thereafter choosing to proceed under the
second option.
The Madras High Court has held that an option
once exercised attains finality and the Assessing Officer is barred from
availing the second remedy. However, The Kerala High Court recently has
held that there is no prohibition on an Assessing Officer proceeding
under the second remedy after dropping the first.
E.I.D. Parry
Limited’s case: The issue arose before the Madras High Court in the case
of CIT v. E.I.D. Parry Ltd., 216 ITR 489. In that case, the assessee, a
company, submitted its income-tax returns for the years 1968-69 and
1969- 70, which were, after enquiry, accepted by the AO and it was
accordingly assessed and subjected to tax. The AO reopened the
proceedings u/s.147(b) of the IT Act by issuing a notice u/s.148 and
substantially changed the assessments, resulting in a demand for tax, on
the basis of the finding that substantial income had escaped
assessment. Pending the adjudication of the appeal by the assessee, the
AO, not satisfied with the reopening u/s.147 and notwithstanding the
pendency of the appeal, took recourse to proceedings for rectification
of mistake u/s.154 of the Act, allegedly for rectification of mistake
apparent from the record.
The High Court observed that the
provisions for rectification of an error apparent from the record and
that for bringing to tax an escaped income were common features in the
tax laws, and they were to be invoked in different circumstances; that
the AO could have recourse to one or the other, but he must have
recourse to the appropriate provision having regard to the facts and
circumstances of each case; that in cases where the two appear to
overlap, the AO must choose one in preference to the other and proceed;
that the AO should not take one as the appropriate proceeding and give
it up at a later stage to have recourse to the other, since such
proceedings were quasi judicial and were intended for the same purpose.
The
Court held that in a case of overlapping remedies, constructive res
judicata and not the statutory inhibition, should make the AO desist
from using one proceeding after the other, instead of using one of the
two with due care and caution. Accordingly, the proceedings for
rectification u/s.154, initiated subsequent to reassessment proceedings
u/s.147, were held to be invalid and not sustainable in law.
India
Sea Foods’ case: The issue again came up for consideration of the
Kerala High Court recently, in ITA No. 128 of 2010 in the case of the
CIT v. India Sea Foods and was adjudged by the High Court vide its order
dated 17th January, 2011. In that case, the question raised in the
appeal filed by the Revenue was whether the AO could give up
rectification proceedings initiated u/s.154 and then proceed u/s.147 of
the Income-tax Act for the same assessment year on the ground that
income had escaped assessment.
In that case the return filed by
the assessee was processed u/s.143(1) and the deduction claimed on
export profit u/s.80HHC was allowed in terms of the claim. The AO later
noticed that excessive relief was granted while computing deduction
u/s.80HHC and, to repair the damage, he initiated the rectification
proceedings u/s.154 for withdrawal of the excess relief by issue of a
notice to the assessee u/s.154(3) of the Act. The AO did not proceed
with the rectification proceedings on receipt of the objections from the
assessee challenging the maintainability of the proceedings u/s.154,
inter alia, on the ground that there was no mistake apparent from the
record. The AO however, later on issued a notice u/s.148 proposing to
bring to tax the escaped income on account of the excess relief granted
u/s.80HHC of the Act.
In the course of the reassessment
proceedings initiated u/s.147, the assessee raised various objections,
including about the maintainability of the reopening u/s.147, by relying
on the decision of the Madras High Court in CIT v. E.I.D. Parry Ltd.
(supra). The AO overruled the objections and withdrew the excess relief
in the order of reassessment, against which the assessee filed an
appeal. The CIT (Appeals) allowed the appeal against which Revenue filed
appeal before the Tribunal. The Tribunal dismissed the appeal, by
upholding the finding of CIT (Appeals) based on the decision of the
Madras High Court to the effect that, after initiation of rectification
proceedings u/s.154, the AO did not have the jurisdiction to proceed to
reassess the escaped income u/s.147 of the Act. The Revenue preferred an
appeal before the Kerala High Court against the order of the Tribunal.
The
Court noted that there was no dispute that the notice u/s.148 was
issued within time and the reassessment also was completed u/s.147
within the statutory period. The question to be considered was whether
the initiation of proceedings u/s.154 and the dropping of the same
affected the validity of re-assessment u/s.147.
The Kerala High
Court expressed its inability to uphold the principle of constructive
res judicata invoked by the Madras High Court in income tax proceedings
for invalidating the subsequent proceedings initiated by the AO
successively. The Court held that the fact that the AO initiated
rectification proceedings u/s.154 did not mean that he should stick to
the same only, and proceed to issue orders as proposed; that the very
purpose of issuing a notice to the assessee was to give him an
opportunity to raise objection against the proceeding which included the
assessee’s right to question the maintainability of the rectification
proceedings. If the assessee convinced the Officer that rectification
was not permissible, the AO was absolutely free to give up the same and
see whether there was any other recourse open to him to achieve the
purpose i.e., to bring to tax the escaped income.
The Kerala High Court was unable to uphold the findings of the first Appellate Authority or the order of the Tribunal on the issue before it, as, in its view, if an assessment happened to be an under-assessment or a mistaken order, the course open to the AO was either to rectify the assessment if it was a mistake falling u/s.154 or to resort to section 147 for bringing to tax an income that had escaped assessment. The Court held that both these provisions were self-contained provisions, wherein conditions for invoking the powers, the procedure to be followed and the time limit within which orders were to be passed, were specified.
The Court allowed the appeal of the Revenue by vacating the orders of the Tribunal and that of the first Appellate Authority and restoring the order of reassessment passed by the AO.
Observations:
The Income-tax Act contains many instances wherein an aggrieved party is provided with alternative remedies, not all of which are mutually exclusive, for redressing the grievance. Depending upon the circumstances, the party has to select the most appropriate remedy. Each of the remedies, by and large, is self-contained and provides for the circumstances and the mechanism for availing the recourse thereunder. Most of them do not contain any overriding provision or a non-obstante clause, eliminating the possibility of the alternative course of action. All of them, without exception, however contain the circumstances in which the recourse under the particular provision is made available, and a failure to satisfy the terms of the provision disentitles the person from availing the benefit of the said provision.
The existence of the information for the belief that income chargeable to tax has escaped assessment is the sine qua non for reopening an assessment u/s.147 and the discovery of a mistake apparent from the record is the sine qua non for a rectification u/s.154 of the Act. Usually, these provisions are to be invoked in different circumstances, but there can be situations where they overlap and the AO has the option to take recourse to one or the other. In choosing a particular remedy under the circumstances, the AO is expected to make an intelligent choice as an authority vested with the important power of assessing the total income of an assessee. The choice should be based on an application of mind and should be made after giving due weightage to the facts and circumstances of the case. The option should not be exercised in a routine manner.
In cases where recourse is open to the Assessing Officer to bring to tax escaped income, either by rectification or by way of reassessing the income that has escaped assessment, it is for the officer to choose between one of the two and proceed to pass one order. The AO cannot issue two proceedings, one u/s.154 and the other u/s.147.
The objective of the AO should be to avoid burdening an assessee with multiplicity of proceedings and to ensure that no undue harassment is caused to the assessee; first, on account of the failure to frame a proper order of assessment, followed by another failure to choose the right remedy under the law for repairing the damage caused by the first failure. It is this series of failures that has led the Courts to invoke the principle of constructive res judicata in favour of the assessee, to ensure a kind of disciplined approach, found routinely wanting, in the persons administering the provisions of the Income-tax Act.
There is a judicial acceptance of the principle that the proceedings for assessment of total income cannot be allowed to continue endlessly, and all litigation has to be brought to an end at the earliest possible time, and cannot be allowed to be pursued by resorting to the different provisions, otherwise made available, in succession of each other. Such a witch -hunt is found to be undesirable by the Courts. By resorting to the principle of constructive res judicata, the Courts have tried to bring some semblance of discipline in to the administration of the law.
Having said that, the principle of res judicata is not applicable to proceedings under the Income-tax Act. Therefore, warranting an application of constructive res judicata demands presence of such extraneous circumstances as leave the Court with no option but to invoke constructive res judicata to bring to an end the multiplicity of the proceedings caused by the non-application of mind.
