The issue, recently, came up for consideration before the Karnataka High Court in the case of
The Karnataka State Co-Operative Apex Bank Limited vs. DCIT 130 taxmann.com 114.
In this case, for A.Y. 2007-08, the assessee had filed its return of income on 31st October,2007, declaring a total income of Rs. 40,77,27,150. No assessment u/s 143(3) was made for that year. The Assessing Officer issued a notice u/s 148 on 31st March, 2012. The assessee filed the return of income in response to the aforesaid notice on 13th September, 2012 and declared a lower income of Rs. 32,56,61,835 claiming a loss on sale of securities to the extent of Rs. 8,28,65,052, not claimed in the first return of income. Thereafter, the Assessing Officer passed an order u/s 143(3) r.w.s 147 determining the assessee’s income at Rs. 51,71,70,670 and made the following additions:
a) disallowance of contributions made to funds – Rs. 10,86,43,782; and
b) denial of set-off of loss claimed on sale of securities – Rs. 8,28,65,052.
The CIT (A) as well as tribunal did not grant relief regarding the additional claim of loss made by the assessee on account of the sale of securities on the ground that the aforesaid additional claim was not made in the original assessment proceeding. The assessee preferred the further appeal before the High Court raising the following substantial questions of law –
1) Whether the Tribunal is right in applying the ratio of the decision of the Hon’ble Supreme Court in CIT vs. Sun Engineering (P.) Ltd. 198 ITR 297 (SC) and holding that concluded issue in the original proceeding cannot be reagitated in reassessment proceedings even though the case of the appellant is distinguishable inasmuch as there was no original assessment proceedings on the facts and circumstances of the case?
2) Whether the Tribunal was justified in law in not appreciating that the notice u/s 148 of the Act was issued to “assess” the income and thus all contentions in law remained open for the appellant to agitate by filling a return in response to the notice u/s 148 of the Act on the facts and circumstances of the case?
3) Whether the Tribunal is justified in law in holding that the appellant is not entitled to make additional claim of loss incurred of Rs. 8,28,65,052/- in the reassessment proceedings under section 147 of the Act on the facts and circumstances of the case?
4) Whether the Tribunal is right in not holding that the appellant is entitled to the additional claim of actual loss incurred of Rs. 8,28,65,052/- on account of sale of government securities on the facts and circumstances of the case?
Before the High Court, the assessee submitted that there was no original assessment for the same assessment year, and only an intimation u/s 143(1) was issued to the assessee. The said intimation u/s 143(1) was not an order of assessment as held by the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd. 291 ITR 500. Therefore, the issue of loss on sale of securities was not considered by the Assessing Officer and has not reached finality. The assessee also urged that the decision of the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra) should not be applied in its case on the ground that in that case the original order of assessment had attained finality and, therefore, it was held that the assessee could not agitate the issues in reassessment proceedings. Further, reliance was placed on the decision of the Supreme Court in the case of V. Jagan Mohan Rao vs. CIT & Excess Profit Tax 75 ITR 373 in which it was held that the original assessment got effaced upon issuance of notice of reassessment and the subsequent assessment proceedings has to be done afresh. The assessee also relied upon the decisions of the Supreme Court in ITO vs. Mewalal Dwarka Prasad 176 ITR 529 (SC) and ITO vs. K.L. Sri Hari (HUF) 250 ITR 193 (SC) as well as on the decisions of the Karnataka High Court in CIT vs. Mysore Iron & Steel Ltd. 157 ITR 531, Nitesh Bera (HUF) vs. Dy. CIT [IT Appeal No. 585 of 2016, dated 17th February, 2021] and CIT vs. Avasarala Automation Ltd. [Writ Appeal Nos. 1411-1413 of 2004, dated 5th April, 2005].
On the other hand, the revenue relied upon the decision of the Supreme Court in the case of Sun Engineering Works (P.) Ltd. (supra) and argued that it still held the field. It was submitted that Section 148 of the Act provided a remedy to the revenue and not to the assessee. If the assessee discovered any omission or any wrong statement in the original return filed after the time limit to revise u/s 139(5) expired, the only remedy which was available to the assessee was to file a return and to seek condonation of delay in filing the return u/s 119 where the time for completion of assessment was not over.
The High Court referred to the decision of a three-judge bench of the Supreme Court in the case of V Jagan Mohan Rao (supra) wherein it was held that when there was a reassessment or assessment u/s 147, the original assessment proceeding, if any, got effaced and the reassessment or assessment has to be done afresh. The High Court also referred to the decision of the Supreme Court in the case of Mewalal Dwarka Prasad (supra) in which it was held that once proceeding u/s 148 of the Act was initiated, the original order of assessment got effaced. The court noted that in Sun Engineering Works (P.) Ltd. (supra), it was held that in a proceeding for reassessment, the issues forming part of the original assessment could not be agitated, whereas, in Mewalal Dwarka Prasad (supra), it was held that once proceeding u/s 148 was initiated, original order of assessment got effaced.
The High Court further referred to the decision of the Supreme Court in the case of K.L. Srihari (HUF) (supra), in which the matter was referred to a three judges bench considering divergence of view so taken in the earlier cases. The relevant portion from the decision of the Supreme Court as reproduced in its order by the Karnataka High Court is as follows –
1. By order dated 19th November, 1996, these special leave petitions have been directed to be placed before the three-judge Bench because it was felt that dissonant views have been expressed by different Benches of this court on the scope and effect of reopening of an assessment under section 147 of the Income-tax Act, 1961. It has been pointed out before us that the matter has earlier been considered by a Bench of three judges in V. Jagan Mohan Rao vs. CIT and EPT and the observations in the said case came up for consideration before two judges’ Benches of this court in ITO vs. Mewalal Dwarka Prasad [1989] 176 ITR 529 and in CIT vs. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297 and that there is a difference in the views expressed in said later judgments.
2. We have heard Shri Ranbir Chandra, learned counsel appearing for the petitioners, and Shri Harish N. Salve, learned senior counsel appearing for the respondents. We have also perused the original assessment order dated 19th March, 1983, as well as the subsequent assessment order that was passed on 16th July, 1987, after the reopening of the assessment under section 147. On a consideration of the order dated 16th, July, 1987, we are satisfied that the said assessment order makes a fresh assessment of the entire income of the respondent-assessee and the High Court was, in our opinion, right in proceeding on the basis that the earlier assessment order had been effaced by the subsequent order. In these circumstances, we do not consider it necessary to go into the question that is raised and the same is left open. The special leave petitions are accordingly dismissed.
In view of the above, the High Court held that, in the case of the assessee, there was no original assessment order and it was only an intimation u/s 143(1), which could not be treated to be an order in view of the decision of the Supreme Court in the case of Rajesh Jhaveri (supra). Therefore, the proceeding u/s 148 was the first assessment and the same could have been done after taking into consideration all the claims of the assessee including the one made in filing the return in response to the notice u/s 148. It was held that the decision rendered by the Supreme Court in Sun Engineering Works (P.) Ltd. had no application to the fact of the case. It was also held that even if an intimation u/s 143(1) was considered to be an order of assessment, in the subsequent reassessment proceedings, the original assessment proceeding got effaced and the Assessing Officer was required to conduct the proceedings de novo and to consider the fresh claim of the assessee.
Accordingly, the High Court decided the issue in favour of the assessee and remitted the matter to the Assessing Officer for adjudication of the fresh claim made by the assessee in its return filed in response to the notice issued u/s 148.
OBSERVATIONS
The scope of assessment in a case where a notice is issued u/s 148 is governed by section 147 which provides as under (as it existed prior to its substitution by the Finance Act, 2021) –
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).
In Sun Engineering Works (P.) Ltd.’s case (supra), the Supreme Court held that the reference to ‘such income’ here would mean the income chargeable to tax which has escaped assessment as referred in the initial part of the section and, therefore, the scope of assessment u/s 147 is limited only to the income which has escaped the assessment for which the proceeding has been initiated by issuing notice u/s 148. The only other income other than such escaped income which also can be included is any other escaped income which comes to the notice of the Assessing Officer subsequently in the course of the proceeding and which is not forming part of the reasons recorded for the issuance of notice u/s 148.
In the case of V. Jaganmohan Rao (supra), the Supreme Court was dealing with the case wherein the assessment was reopened with regard to the escaped income which accrued to the assessee as a result of the decision of the Privy Council in a dispute related to title of the property. While finally assessing the income, the Assessing Officer not only taxed such escaped income accruing as a result of the decision of the Privy Council but also assessed the other portion of the income which accrued to the assessee in accordance with the judgement of the High Court. The assessee contested it on the ground that at the time when the original order of assessment was passed, the ITO could have legitimately assessed the other income which was due to be assessed as per the judgment of the High Court and that there was, therefore, an escapement only to the extent of the income accruing as a result of the decision of the Privy Council. It is in this context, the Supreme Court held as under –
Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year (emphasis supplied).
Subsequent to this decision of the Supreme Court in the case of V. Jaganmohan Rao, several High Courts took the view that the assessee can seek relief even during the course of the reassessment proceeding by relying on the Supreme Court’s observation that the whole assessment proceeding would start afresh in case of reassessment. Later, this issue of whether the assessee can claim reliefs to his benefit during the course of the reassessment proceeding reached the Supreme Court in the case of Sun Engineering Works (P.) Ltd. (supra) in which it was held as under –
37. The principle laid down by this Court in V. Jaganmohan Rao’s case (supra) therefore, is only to the extent that once an assessment is validly reopened by issuance of notice under section 32(2) of the 1922 Act (corresponding to section 148 of the 1961 Act), the previous under-assessment is set aside and the ITO has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. What is set aside is, thus, only the previous under-assessment and not the original assessment proceedings. ………..The judgment in V. Jaganmohan Roa’s case (supra), therefore, cannot be read to imply as laying down that in the reassessment proceedings validly initiated the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim recomputation of the income or redoing of an assessment and be allowed a claim which he either failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. Of course, in the reassessment proceedings it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Roa’s case (supra) as if laying down that reassessment wipes out the original assessment and that reassessment is not only confined to ‘escaped assessment’ or ‘under-assessment’ but to the entire assessment for the year and start the assessment proceedings de novo giving right to an assessee to reagitate matters which he had lost during the original assessment proceeding, which had acquired finality, is not only erroneous but also against the phraseology of section 147 and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court.
38. …..
39. As a result of the aforesaid discussion we find that in proceedings under section 147 the ITO may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of notice under section 148 and where reassessment is made under section 147 in respect of income which has escaped tax, the ITO’s jurisdiction is confined to only such income which has escaped tax or has been under-assessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings. It is only the under-assessment which is set aside and not the entire assessment when reassessment proceedings are initiated (emphasis supplied). The ITO cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject matter of proceedings under section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under section 152(2). The words ‘such income’ in section 147 clearly refer to the income which is chargeable to tax but has ‘escaped assessment’ and the ITO’s jurisdiction under the section is confined only to such income which has escaped assessment.
Keeping in view the object and purpose of the proceedings under section 147 which are for the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to ‘escaped income’, and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings related to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of ‘reassessment’ cannot be reduced beyond the income originally assessed.
The Karnataka High Court, in the case of The Karnataka State Co-operative Apex Bank Ltd. (supra), observed that divergent views had been taken by the Supreme Court in these two cases i.e. Sun Engineering Works (P.) Ltd. (supra) and Mewalal Dwarka Prasad (supra). The High Court also by referring to the decisions of the Supreme Court in the case of V. Jagmohan Rao, Mewalal Dwarka Prasad and K.L. Srihari (HUF) (supra) observed that once proceeding u/s 148 was initiated, the original order of assessment got effaced.
In the case of Mewalal Dwarka Prasad (supra), the notice u/s 148 was issued for income escaping the assessment w.r.t three different cash credit entries in the assessee’s books during the year. When the assessee challenged the validity of the notice before the High Court, the High Court upheld its validity but only with respect to one of the cash credit entries, and for the balance two entries, the notice was held to be invalid. The revenue disputed these findings and argued that the High Court should not have examined the tenability of the assessee’s contention with regard to the other two transactions and that aspect should have been left to be considered by the ITO while making the reassessment as it was open to the ITO to examine not only the three items referred to in the notice but also whatever came within the legitimate ambit of an assessment proceeding. In this context, the Supreme Court held that it was not for the High Court to examine the validity of the notice u/s 148 regarding the two items if the High Court concluded that the notice was valid at least in respect of the remaining item. Whether the ITO, while making his reassessment, would take into account the other two items should have been left to be considered by the ITO in the fresh assessment proceeding.
In our respectful submission, in the case of Mewalal Dwarka Prasad (supra), the Supreme Court had dealt with the limited issue about whether the High Court should have considered the validity of notice on the basis of the other items of income when it was held to be valid at least for one of the items of escaped income. In this context, the Supreme Court referred to the decisions of several High Courts and also to its own decision in the case of V. Jaganmohan Rao wherein it was held that when a notice is issued u/s 148 based on a certain item of income that had escaped assessment, it is permissible for the income-tax authorities to include other items in the assessment, in addition to the item which had initiated and resulted in issuance notice u/s 148. As far as the decision of the Supreme Court in the case of K.L. Srihari (HUF) (supra) is concerned, in its final order dated 25th March, 1998, a reference has been made to its earlier order dated 19th November, 1996 (in the same case) whereby the SLPs have been directed to be placed before the three-judges bench on the ground that dissonant views have been expressed in the cases of Sun Engineering Works (P.) Ltd. and Mewalal Dwarka Prasad.
The Calcutta High Court in the case of Keshoram Industries Ltd. (supra) has considered the impact of the Supreme Court’s decision in the case of K.L. Srihari (HUF) (supra) and held as under:
8. True as contended by Mr. Khaitan in ITO vs. K.L. Srihari (HUF) [2001] 250 ITR 193 (SC), a three-judges Bench considered the following judgments:
(1) CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 (SC);
(2) ITO vs. Mewalal Dwarka Prasad [1989] 176 ITR 529 (SC); and
(3) V. Jaganmohan Rao vs. CIT and CEPT [1970] 75 ITR 373 (SC).
but observed that:
“In these circumstances we do not consider it necessary to go into the question that is raised and the same is left open…”. (p. 194)…………..
12. Having heard learned counsel for the respective parties, we are respectfully of the view that in ITO vs. K.L. Srihari (HUF) 250 ITR 193, the Supreme Court did not consider it necessary to go into the views expressed by different Benches of the Supreme Court on the scope and effect of reopening of an assessment under section 147 of the Income-tax Act. We, respectfully, are, therefore, of the view that the judgment of the Supreme Court in CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 has neither been dissented from nor overruled.
13. No doubt as contended by Mr. Khaitan, the judgment in CIT vs. Sun Engg. Works (P.) Ltd.[1992] 198 ITR 297 1 (SC), is a two-judges Bench judgment. By the said judgment, the three-judges Bench judgment in V. Jaganmohan Rao vs. CIT/CEPT [1970] 75 ITR 373 (SC), has not been and could not have been overruled. As noticed supra, the Supreme Court in CIT vs. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 has explained the principle laid down in V. Jaganmohan Rao vs. CIT/CEPT[1970] 75 ITR 373 (SC).
The decision of the Karnataka High Court has thrown open some very pertinent and interesting issues, some of which are listed hereunder:
• Whether an assessment made u/s 143(3) r.w.s 147 is a fresh assessment or re-assessment where it is made in pursuance of an intimation u/s 143(1) or where no assessment was made.
• Whether there was any conflict of views between the four decisions of the Supreme Court referred to and analyzed by the Karnataka High Court.
• Whether the three decisions of the Supreme Court, other than the decision in the case of Sun Engineering Works (supra), held that the original assessments which were made got effaced and therefore an altogether fresh assessment is to be made as per the provisions of law.
• Whether the decision in Supreme Court, being the latest in line, and delivered by the larger bench of three judges, could be said to have laid down the law permitting an assessee to make a fresh claim, when the court confirmed the decision of the Karnataka High Court, 197 ITR 694, which had held that the interest levied u/s 139(8) and 217 in original assessment was required to be deleted.
• Whether the proceedings for re-assessment are necessary for the benefit of revenue.
• Whether the purpose and objective of the Income Tax Act are to levy tax on real income whenever assessed under the Act.
The decision of the Karnataka High Court, by opening a new possibility for the taxpayers, has thrown a serious challenge for the revenue. It would be better for the Supreme Court to examine the issue afresh and reconcile its views in the four decisions rendered by it, over a period of time, preferably by constituting a larger bench.
