M/s Green World Corporation, a partnership concern of Shri R.
S. Gupta and his wife Smt. Sushila Gupta, had set up two units for manufacturing
exercise books, writing pads, etc., at Parwanoo, in the state of Himachal
Pradesh, in the year 1995. The said units were established after declaration and
enforcement of a policy for tax holiday for a certain period specified in the
Union Budget. They had also set up a third unit for manufacturing computer
software. They started filing income-tax returns from the assessment year
1996-97 showing huge profits. In the return for the assessment year 2000-01,
they disclosed their total sales to the tune of Rs 1, 51, 69,515, of which a sum
of Rs 74, 69,314 was shown as net profit. Thus, the profits bore a proportion of
49 per cent to the gross sales. For the earlier assessment year, i.e.,
1999-2000, the proportion of the net profit to the total sales was as high as 66
per cent; of the total sales of Rs 2,97,12,106, net profits were declared to be
to the tune of Rs 1,96,77,631. For the subsequent three assessment years, i.e.,
2001-02, 2002-03 and 2003-04, the proportion of net profit to the gross sales
were 81 per cent, 95 per cent and 95 per cent respectively. The total investment
on plant and machinery for Unit No. I was shown to be just Rs 1, 25,000, and a
very small amount of money was shown to have been spent on plant and machinery
for the second unit.
On or about February 7, 2000, the Assessing Officer (“AO” )
conducted a survey at the premises of the assessee in terms of section 133A of
the Income-tax Act, 1961 (hereinafter referred to for the sake of brevity as,
“the said Act”) and verified for herself the following: (a) factum of the
existence and actual working of the unit; (b) installation of plant and
machinery working with the aid of power; (c) presence of requisite number of
workers, some of whose statements were recorded; (d) availability of stock of
raw, semi-finished and finished material prior to the assessment year 2000-01.
On or about December 19, 2002, the AO, after completing the proceeding for
assessment, passed an order for the assessment year 2000-01, accepting the
income returned by the assessee.
In the said order of assessment, the AO recorded a note which
read as follows:
“The case was thoroughly discussed with (sic) records and
relevant worthy Commissioner of Income Tax, Shimla, in the presence of the
learned Additional Commissioner of income Tax, Solan Range, Solan. Commissioner
of Income Tax has directed that since the reply submitted by the assessee is
satisfactory and up to the mark, no more information is required to be called
for and to assess the case as such. He, therefore, directed in presence of the
learned Additional Commissioner of Income-tax, Solan Range, Solan, to
incorporate that discussion in the body of the order sheet. A copy of the draft
assessment order was sent to the Additional Commissioner of Income Tax, Solan
Range, Solan, under the office letter No. ITO/PWN. 2002/03/2127, dated December
13, 2002, for according necessary approval. Approval to complete the assessment
was received telephonic from the office of the Additional Commissioner of
Income-tax, Solan Range, Solan, and assessment has been completed and the
assessment order has been served upon the assessee on December 19, 2002”.
The Commissioner of Income Tax (‘CIT”, for short), on whose
dictates the order of assessment, dated December 19, 2002, purported to have
been passed, was transferred and his successor, on or about December 5, 2003,
issued notice to the assessee under section 263 of the Act for the assessment
year 2000-01 only, inter alia, on the premise that the said order of assessment
dated December 19, 2002, was prejudicial to the interests of the revenue.
The CIT (Shimla) passed an order dated July 12, 2004, under
section 263 of the Act, inter alia, on the premise that the AO, while finalizing
the assessment had not examined the case properly. In the said order, the
following directions were issued:
a. To estimate the assessee’s income from the units at
Parwanoo at 5 per cent of the declared turnover. The income shown in excess of
5 per cent was to be treated as undisclosed income from undisclosed sources.
b. As the assessee did not fulfil many of the conditions
for being entitled to deduction under section 80-IA/IB, no part of total
income — not even the income estimated at 5 per cent of the turnover at
Parwanoo — would be entitled for deduction u/s. 80-IA/IB.
c. To charge interest under section 234B/C for non-payment
of advance tax.
d. To initiate penalty proceedings under section 271(1)
(c).
e. To examine the case records for all the preceding
assessment years including those for the assessment year 1996-97, and initiate
necessary proceedings under section 148, within a week.
f. To examine the succeeding assessment years also, i.e.,
the assessment year 2001-02, 2002-03 and 2003-04 and initiate appropriate
action under section 148/143(2), as may be applicable, in a week’s time.
The assessee preferred an appeal against the order dated July
12, 2004, before the Income Tax Appellate Tribunal (for short “ITAT”). In its
memo of appeal, the assessee raised contentions relating to: (1) Jurisdiction,
(2) Bias on the part of the CIT (Shimla), and (3) On the merits of the matter.
By reason of an order dated April 15, 2005, the ITAT allowed
an appeal filed by the assessee, setting aside the order of the CIT (Shimla) on
the jurisdictional issue alone. It did not enter into the merits of the matter.
Pursuant to the said order dated July 12, 2004 or in
furtherance thereof, notices under section 148 of the Act were issued to the
assessee for the assessment year 1996-97 to 1999-2000, 2001-02 and 2002-03.
On or about July 5, 2005, a notice under section 148 of the
Act was also issued for the assessment year 2000-01.
The assessee questioned the legality of the notice under
section 148 of the Act by filing a writ petition before the Himachal Pradesh
High Court.
Also, the CIT (Shimla) preferred an appeal before the High
Court under section 260A of the Act.
The High Court by its order dated March 2, 2006, while
allowing the appeal filed by the CIT (Shimla), dismissed the writ petitions
filed by the assessee.
On an appeal, the Supreme Court held that section 263 provides for a power of revision. It has its own limitations. An order can be interfered with suo motu by the said authority not only when an order passed by the AO is erroneous but also when it is prejudicial to interests of the revenue. Both the conditions for exercising the jurisdiction under section 263 of the Act are conjunctive and not disjunctive. An order of assessment should not be interfered with only because another view is possible.
The Supreme Court held that only in terms of the directions issued by the Commissioner under section 263 of the Act, notices under section 148 were issued. The CIT (Shimla) had no jurisdiction to issue directions. Notices issued pursuant thereto would be bad in law.
The Supreme Court considered the effect of the “noting” made by the Assessing Officer. The Supreme Court observed that the noting was specific. It was stated so in the proceedings sheet at the instance of higher authorities. No doubt in terms of the circular letter issued by the CBDT, the Commissioner or for that matter any other higher authority may have supervisory jurisdiction, but it is difficult to conceive that even the merit of the decision shall be discussed and the same shall be rendered at the instance of the higher authority who, as noticed hereinabove, is a supervisory authority. It is one thing to say that while making the orders of assessment the AO shall be bound by statutory circulars issued by the Central Board of Direct Taxes, but it is another thing to say that the assessing authority, exercising a quasi judicial function and keeping in view the scheme contained in the Act, would lose its independence to pass an order of assessment. The Supreme Court held that when a statute provided for different hierarchies and forums in relation to passing of an order as also appellate or original order, by no stretch of imagination can a higher authority interfere with the independence, which is the basic feature of any statutory scheme involving adjudicatory process.
The Supreme Court, in its conclusion observed that the case before it posed some peculiar questions. Whereas the order under section 263 and consequently the notices under section 148 have been held to be not maintainable, the Supreme Court was constrained to think that the AO had passed an order at the instance of the higher authority, which was illegal. The Supreme Court was of the view that for the aforementioned purpose, it may not go into the question of the authorities acting bona fide or otherwise under the Income Tax Act. They might have proceeded bona fide, but the assessment order passed by the AO on the dictates of the higher authorities being wholly without jurisdiction, was a nullity.
The Supreme Court, therefore, was of the opinion that with a view to do complete justice between the parties, the assessment proceedings should be gone through again by the appropriate assessing authorities. The Supreme Court, therefore, in the exercise of jurisdiction under article 142 of the Constitution of India, directed the assessment to be reopened by the CIT, Delhi.
