COMMISSIONER OF INCOME-TAX VS K. C. RANGAIAH & CO.
1999 P T D 3651
[230 I T R 385]
[Andhra Pradesh High Court (India)]
Before Syed Shah Mohammed Quadri and J. Chelameswar, JJ
COMMISSIONER OF INCOME-TAX
Versus
K. C. RANGAIAH & CO.
R. C. No. 206 of 1991, decided on 23/09/1997.
Income-tax.
----Revision---Powers of Commissioner---Material coming to light subsequent to passing of order by I.T.O. but before exercise of revisional power by Commissioner---Commissioner entitled to take into consideration such material for exercise of revisional power---Clause (b) of Explanation to S.263(1) is clarificatory in nature and retrospective in operation---Indian Income Tax Act, 1961, S.263(1), Expln., clause (b) [as substituted by Indian Finance Act, 1988, w.e.f. 1-6-1988].
For the assessment year 1980-81, the asses see-firm was granted registration under section 185 of the Income Tax Act, 1961. The Commissioner of Income-tax, in exercise of his powers of revision under section 263 of the Act, set aside the order granting registration to the firm. The Tribunal held that the Commissioner of Income-tax was in error in cancelling the registration granted to the firm. On a reference, the Revenue contended that in view of the amendment to section 263 by the insertion of the Explanation by the Taxation Laws (Amendment) Act, 1984, with effect from October 1, 1984, and amendment by the Finance Act, 1988, with effect from June 1, 1988, the exercise of power by the Commissioner was justified and the Tribunal was in error in coming to the conclusion that the material relied on by the Commissioner was not on record when the registration was granted to the assessee-firm and so it could not form the basis for cancellation of the registration. The assessee contended that, in exercise of power under section 263, the Commissioner could only rely upon the material available on record at the time of granting registration and that the amendment of the said provision was subsequent to the passing of the order of the Commissioner and, therefore, the amended provision would be of no avail to the Revenue:
Held, (i) that the ambit of the word "record" in clause (b) of the Explanation to section 263(1) has been clarified to mean that it shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner.
(ii) That it has now to be taken as settled law after the decision of the Supreme Court in South India Steel Rolling Mills v. CIT (1997) 224 ITR 654, that the material which came to light, after the order of the Income -tax Officer but before the revisional power was exercised, could be taken into consideration for exercise of revisional power under section 263(1).
(iii) That having regard to the nature of clause (b) of the Explanation to section 263(1), it has to be held that it is clarificatory in nature and retrospective in operation. The fact that it was inserted with effect from June 1, 1988, would not mean that Courts should confine its application and apply the meaning only from June 1, 1988.
(iv) That the Tribunal was not correct in law in cancelling the order passed by the Commissioner under section 263 of the Act, since the facts subsequently revealed showed that the Income-tax Officer did not make proper inquiries when granting registration to the firm.
South India Steel Rolling Mills v. CIT (1997) 224 ITR 654 (SC) fol.
CIT v. M. A. Unneerikutty (1992) 194 ITR 546 (Ker.) and Ganga Properties v. I.T.O: (1979) 118 ITR 447 (Cal.) held no longer good law.
CST v: Bijli Cotton Mills (1964) 15 STC 656 (SC); Ramaswamy Chettiar (K. A.) v. CIT (1996) 220 ITR 657 (Mad.); South India Steel Rolling Mills v. CIT (1982) 135 ITR 322 (Mad.); Sundaram Pillai (S.) v. V. R. Pattabiraman AIR 1985 SC 582 ref.
J. V. Prasad for the Commissioner.
C. Kodanda Ram for the Assessee.
JUDGMENT
SYED SHAH MOHAMMED QUADRI, J.----This is a reference under section 256(2) of the Income Tax Act, 1961 (for short "the Act"). Pursuant to a direction of this Court in I.T.C. No. 62 of 1986, made on November 26, 1987, the Income-tax Appellate Tribunal referred the following questions of law to this Court for its opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in cancelling the order passed by the Commissioner of Income-tax under section 263 -of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal ought to have held that the Commissioner of Income-tax had jurisdiction to pass orders under section 263 since the facts subsequently revealed showed that the Income-tax Officer did not make proper enquiries when granting registration to the firm ?
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in directing that the material available at the time of passing the order under section 263 but which was not available at the time the Income-tax Officer passed the impugned order dated August 29, 1981, under section 185 should be ignored though the material disclosed that the Income-tax Officer had passed an order without making proper enquiries?"
The respondent/assessee is a firm (hereinafter referred to as "the firm"). For the assessment year 1980-81, the firm was granted registration under section 185 of the Act. In exercise of his revisional power under section 263 .of the Act, the Commissioner set aside the order of registration on August 12, 1983. The firm carried the matter in appeal before the Income-tax Appellate Tribunal. The Tribunal took the view that the Commissioner was in error in cancelling the registration and thus allowed the appeal on October 31, 1985. That order has given rise to the aforementioned questions of law.
Sri Prasad, learned standing counsel for the Revenue, contends that in view of the amendment of section 263 of the Act, the exercise of power by the Commissioner was justified and the Tribunal was in error in coming to the conclusion that the material relied on by the Commissioner, was not on record when the registration was granted; so, that cannot form the basis for cancellation of the registration.
Sri Kodanda Ram, learned counsel appearing for the firm, submits that in exercise of power under section 263, the Commissioner can only rely upon the material available on record at the time of granting of the registration and that the amendment of the said provision was subsequent to the passing of the order of the Commissioner therefore, the amended provision would be of no avail to the Revenue.
To appreciate the contentions of learned counsel for the parties we shall refer to section 263 as it stood in the year of assessment and as it stands after the amendment. Section 263 of the Act, as it stood in the year of assessment, read as follows:
"263. Revision of orders prejudicial to Revenue.---(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
(2) No order shall be made under subsection (1)--
(a)to revise an order of reassessment made under section 147, or
(b) after the expiry of two years from the date of the order sought to be revised.
(3) Notwithstanding anything contained in subsection (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.---In computing the period of limitation for the purposes of subsection (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded. "
Section 263 of the Act as it stands after the amendment reads as follows:
"263. Revision of orders prejudicial to Revenue.---(1) The Commissioner may call for and examine - the record ofany proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation.---For the removal of doubts, it is hereby declared that, for the purposes of this subsection,
(a) an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer shall include-
(i) an order of assessment made by the Assistant Commissioner or the Income-tax Officer on the basis of the directions issued by the Deputy Commissioner under section 144A;
(ii) an order made by the Deputy Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under, the orders or directions issued by the Board or by the Chief Commissioner or Director-General or Commissioner authorised by the Board in this behalf under section 120;
(b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;
(c) where any order referred to in this, subsection and passed by the Assessing Officer had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this subsection shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
(2) No order shall be made under subsection (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in subsection (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.
Explanation.--In computing the period of limitation for the purposes of subsection (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded. "
It may be noted here that the Explanation to section 263 was inserted by the Taxation Laws (Amendment) tact, 1984, with effect from October 1, 1984. But then, this Explanation was substituted by the Finance Act, 1988, with effect from June 1, 1988. Of the amendments, which are introduced, the one relevant for purposes of the present discussion is clause (b) of the Explanation. The ambit of the word "record" has been clarified to mean that it shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner. The provision as it stood prior to amendment authorised the Commissioner to call for and examine the "record of any proceeding under the Act". The power under that section could be exercised if the Commissioner considers that, any order passed by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue then, after giving the assessee an opportunity of being heard and on making such enquiry as he may deem necessary, he may pass such orders as the circumstances of the case may justify. The word "record" was interpreted by the Courts to mean record available with Income-tax Officer on the date of the passing of the order by the Income-tax Officer, which was sought to be revised. The Courts also took the view that material, which came to light after the passing of the order of the Income-tax Officer does not form part of the record to justify exercise of revisional power under section 263. That was the view taken by the Calcutta High Court in Ganga Properties v. ITO (1979). 118 ITR 447. In that case a learned Single Judge of the Calcutta High Court took the view that under section 263 the Commissioner may call for the record of the proceeding which was before the Income7tax Officer and examine it in order to consider whether, on the basis of the materials which were before the Income-tax Officer and formed part of that record, the order passed by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. The learned judge also observed that the materials, which were not in existence at the time of assessment but came into existence afterwards cannot form part of the record of the proceedings of the Income-tax Officer and cannot be taken into consideration by the Commissioner for the purpose of invoking his jurisdiction under section 263(1) of the Act. It may be pointed out here that the amended provision was not before the Calcutta High Court. The same view is shared by the Kerala High Court in CIT v. M.A. Unneerikutty (1992) 194 ITR 546. There, the order of the Income-tax Officer passed for the assessment year 1975-76 was revised by the Commissioner (Income-tax) under section 263. That power was exercised on taking into consideration the material, which was not available to the Income-tax Officer at the time of the assessment. The assessee questioned the order of the Commissioner before the Tribunal. Holding that the Commissioner was not justified in relying on material, which was not before the assessing authority at the time of assessment, it allowed the appeal. The judgment of the Calcutta High Court referred to above was relied upon by the Tribunal. On a reference, the Division Bench of the Kerala High Court held that the Explanation to section 263(1) was inserted only with effect from June 1, 1988, and there was no occasion for the Tribunal to consider the scope of that section because the Tribunal passed the order before the amendment of section 263(1) therefore, it held that Explanation could not be relied upon. In that view of the matter, it answered the question in the affirmative, i.e., in favour of the assessee, taking the view that the Commissioner was not justified in invoking his power under section 263 of the Act with reference to the material which came on record very much later, after the making of the assessment for the year 1975-76.
In K. A. Ramaswamy Chettiar v. CIT (1996) 220 ITR 657 (Mad.) the assessee had purchased some properties. Without making any enquiries about the value of the properties, the order of assessment was made for the assessment years 1974-75 and 1975-76. It appears that search in the premises of the sellers was conducted and certain documents were recovered from their possession. On the basis of that record 'the Commissioner of Income-tax exercised jurisdiction under section 263 of the Act and set aside the assessment. On appeal, the order of the Commissioner was upheld by the Income-tax Appellate Tribunal. On a reference to the High Court of Madras, one of the questions that was referred related to exercise of power by the Commissioner under section 263(1), based on material which came to light after the order of assessment. The Division Bench of the Madras High Court has held that clause (b) of the Explanation was inserted in section 263(1), which provides that the word "record" shall include and shall be deemed always to have included all records in relation to any proceeding under the Act available at the time of examination of an order by the Commissioner to revise the same even if the order under revision was passed during the period prior to June 1, 1988, and, therefore, the Commissioner could make use of the materials gathered by him on the date when he assumed jurisdiction under section 263 of the Act. It held that there was no infirmity in the order of the Tribunal upholding the order of the Commissioner. Here we refer to an earlier judgment of the Madras High Court in South India Steel Rolling Mills v. CIT (1982) 135 ITR 322 which arose out of an order passed by the Commissioner in exercise of revisional power under section 263(1) cancelling the development rebate granted by the Income-tax Officer. There, both learned counsel conceded that the Commissioner had jurisdiction to take proceedings in exercise of the revisional power on the basis of the material, which was not before the assessing authority. That judgment of the Madras High Court was affirmed by the Supreme Court in South India Steel Rolling Mills v. CIT (1997) 224 ITR 654. Before the Supreme Court one of the contentions urged was that the Commissioner should not have invoked his jurisdiction under section 263 of the Act as the matter could have been dealt with by the Income-tax Officer in exercise of his power of rectification under section 155 of the Act. That contention was negatived holding that the revisional power conferred on the Commissioner under section 263 is of wide amplitude and that power cannot be limited with reference to section 155. It was observed as follows (page 662):
"As regards his taking into consideration an event which had occurred subsequent to the passing of the order by the Income-tax Officer, it may be stated that in Explanation (b) in section 263 there is an express provision where it is prescribed that ' record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner'. The death of one of the two partners resulting in the dissolution of the assessee-firm on account of such death took place prior to the passing of the order by Commissioner and it could therefore, be taken into consideration him for the purpose of exercising his powers under section 263 the Act."
From the above observation of the Supreme Court it has to be now taken as settled law that the material, which came to light, after the order of the Income-tax Officer' but before the revisional power was exercised, could be taken into consideration for exercise of revisional power under section 263(1). In view, of the above judgment of the Supreme Court, the law declared by the Calcutta High Court in Ganga Properties' case (1979) 118 ITR 447 and the Kerala High Court in CITs case (1992) 194 ITR 546 cannot be said to be good law.
We may note here that in Sundaram Pillai (S.) v. V. R. Pattabiraman, AIR 1985 SC 582 the Supreme Court pointed out the object of adding an Explanation to a statutory provision and observed (headnote):
"It is now well-settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision."
Having regard to the nature of clause (b) of the Explanation it has to be held that it is clarificatory in nature and retrospective in operation. The fact that it is inserted with effect from June 1, 1988, would not mean that the Courts should confine its application and apply the meaning only from June 1, 1988.
However, Sri Kodanda Ram has relied upon the observation of the Supreme Court in CST v. Bijli Cotton Mills (1964) 15 STC 656 to hold that the amended law cannot be made applicable. We are afraid we cannot accept the contention of learned counsel. In that case, the Supreme Court observed (page 664):
"If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in dispute, it would be bound to decide the question in the tight of the law so amended. Similarly when the question has been referred to the High Court and in the meanwhile the law has been amended with retroactive operation, it would be the duty of the High Court to apply the law so amended if it applies. By taking notice of the law, which has been substituted for the original provision, the High Court is giving effect to the legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred by the Tribunal, provided the question is couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law, and the enquiry dose not necessitate investigation of fresh facts."
These observations are of no assistance to the respondent
It is then contended that the judgment of the Supreme Court in South India Steel Rolling Mills' case (1997) 224 ITR 654 is obiter. We are not persuaded to accept the contention of learned counsel.
For the above reasons, we answer question No. 1 in, the negative, i.e., in favour of the Revenue and against the assessee, and question No. 2 in the affirmative, i.e., in favour of the Revenue and against the assessee. So far as question No. 3 is concerned, the words "though the material disclosed that the Income-tax Officer had passed an order without making proper enquiries" are contrary to the findings in the present case. Therefore, the question has to be refrained deleting those words:
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in directing that the material available at the time of passing the order under section 263 but which was not available at the time the Income-tax Officer passed the impugned order dated August 29, 1981, under section 185 should be ignored ?"
This question, we answer in the negative, .e., in favour of the Revenue and against the assessee.
The reference is accordingly answered,
M.B.A./3153/FC/ Reference answered.