GEORGE JOHN VS COMMISSIONER OF INCOME-TAX, 2000 PTD-KERALA-HIGH-COURT-INDIA 193 (1997)

Income-tax--

---Assessment---Loss---Return disclosing loss and claiming carry forward of loss---Rejection of return ---Assessee must be given opportunity to be heard before such rejection---Indian Income Tax Act, 1961, S.143---Constitution of India, Art.226.

Under section 143(1) of the Income Tax Act, 1961, there is an obligation, on the part of the Assessing Authority to make an assessment of the total income or loss of the assessee after making such adjustment to the income or loss declared in the return. Under subsection (2), where a return has been made under section 139 and an assessment having been made under subsection (1), if the assessee makes within one month from the date of service of the notice of demand issued in consequence of such assessment, an application to the Income-tax Officer objecting to the assessment, or whether or not an assessment has been made under subsection (1), if the Income-tax Officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf, the Income-tax Officer shall serve or: the assessee a notice requiring him to attend at the Income-tax Officer's office or to produce, or cause to be produced any evidence on which the assessee may rely.

For the assessment. year 1986-87, which was the first year of assessment, the assessee filed a loss return before the Income-tax Officer ,declaring a total loss of Rs.1,11,248 comprising unabsorbed depreciation of Rs.34,201 and unabsorbed investment allowance of Rs.77,047. It was states that the petitioner also claimed carry. forward of such loss to the following assessment' year. For the assessment year 1987-88, the petitioner filed a loss return on December 22,1987, claiming an aggregate loss of Rs.1,39,631 comprising Rs.1,11,248 being loss carried forward from the assessment year 1986-87, unabsorbed depreciation for the relevant year of Rs.23,118 and share of loss from other partnerships Rs.5,265. It was further stated that the petitioner claimed that the aggregate loss of Rs.1,39,631 be carried forward to the following assessment year to be set off against the income, if any, of such year. The Income-tax Officer did not pass any assessment order on the .returns filed for the years 1986-87 and 1987-88. Subsequently, for the assessment year 1988-89, the petitioner filed his return before the Income-tax Officer on July 29, 1988, returning an aggregate loss of Rs.2,68,703 comprising business loss for the year 1988-89 of Rs.1,20,072 and loss carried forward from the assessment year 1987-88 of Rs.1,39,631.The petitioner claimed that such aggregate loss should be carried forward to the following assessment year to be set off against the income, if any, of that year. The Income-tax Officer completed the assessment for 1988-89 under section 143(1) of the Act and allowed a loss of Rs.1,06,495 to be carried forward. The petitioner then filed a rectification petition. The Income-tax Officer replied that the loss for the years 1986-87 and 1987-88 were allowed to be carried forward\as the returns were filed belatedly. The petitioner then filed a revision petition which. was rejected. On a writ petition against the orders:

Held, that in the instant case, the petitioner had not been afforded an opportunity as contemplated under subsection (2) of section 143 of the Act. It was practically admitted that the order stated to have been passed for the assessment year 1986-87 had not been served on the petitioner. Regarding the communication of the assessment order for the year 1987-88 it was stated that the same was intimated by an inland letter. There was absolutely no proof or evidence regarding the service of notice of the assessment order for the year 1987-88 also on the petitioner. At any rate, when the petitioner had specifically brought to the notice of the Income-tax Officer that he had not received any order of assessment for the years 1986-87 and 1987-88; the Income-tax Officer was bound to intimate the fact of completion of the assessment for the said two years and also communicate the order for 1987-88. Nothing had been stated in .the communication rejecting the application for rectification. The only reason stated was that the returns submitted for the years 1986-87 and 1987-88 were belated and, therefore, the carry forward was not allowed. The petitioner in the revision filed against the assessment order for 1988-89 had pointedly taken all these contentions before the Commissioner of Income-tax but the Commissioner of Income-tax had rejected the same stating that these matters could not be agitated in a revision filed against the assessment order for the year 1988-89.The Commissioner of Income-tax was not justified in rejecting the revision petition. Since the petitioner was not afforded an opportunity before rejecting the loss returns and the claim for carry forward of the said loss, the order of assessment for the year 1988-89, the order rejecting the application for rectification and the order of dismissal of the revision petition, were liable to be quashed. Since the matter related to the assessment years 1986-87 to 1988-89, the Income-tax Officer was directed to complete the proceedings for the aforesaid three years afresh with notice and opportunity to thepetitioner as expeditiously as possible, at any rate; within a period of two months from the date of receipt of a copy of this judgment).

CIT v. Khushal Chand Daga (1961) 42 ITR 177 (SC); Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 (S); Fatechand Agarwal v. CWT (1974) 97 ITR 701 (Orissa) and Sathappa Textiles (Pvt.). Ltd. v. Second I.T.O. (1969) 71 ITR 260 (Mad.) ref.

S. Siri Jagan for Petitioner.

N.R.K. Nair and P.K.R. Menon for Respondents.

JUDGMENT

G. SIVARAJAN, J.---The matter arises under the Income Tax Act, 1961. The assessment years concerned are 1986-87,1987-88 and 1988-89. The petitioner is engaged in the business of manufacture of tread rubber for re-treading tyres and is a sole proprietary concern under the name and style of "Associated Rubber Works" at Kottayam. It is also stated that he is a partner of two other business concerns. He is an assessee on the files of the second respondent it is stated that for the assessment year 1986-87 which was the first year of assessment he filed a loss return on October 31,1986 before the second respondent declaring a total loss of Rs.1,11,248 comprising of unabsorbed depreciation of Rs.34,201 and unabsorbed investment allowance of Rs.77,047. It is stated that the petitioner also claimed carry forward of such loss to the following assessment year, evidenced by Exhs. P-1 and P-1(a). It is also stated that for the assessment year 1987-88, the petitioner filed a loss return on December 22, 1987, claiming an aggregate loss of Rs.1,39,631 comprising of Rs.1,11,248 being loss carried forward from the previous assessment year 1986-87 unabsorbed depreciation for the relevant. year of Rs.23,118 and share of loss from other partnerships of Rs.5,265. It is further stated that the petitioner also claimed that the aggregate loss of Rs.1,39,631 be carried forward to the following assessment year to be set off against the income, if any, of such year, evidenced by Exhs. P-2 and P-2(a), It is stated that though the petitioner was entitled to carry forward the unabsorbed depreciation and investment allowance, the second respondent did not pass any assessment order on the returns filed for the years 1986-8? and 1987-88. It is also stated that subsequently, for the assessment year 1988-89, the petitioner filed his return before the second respondent on July 29. 1988, returning an aggregate loss of Rs.2,68,703 comprising of business loss for the year, 1988-89, Rs.1,28,072 and loss carried forward from the -assessment year, 1987-88, Rs.1,39,631. It is stated that the petitioner also claimed that such aggregate loss should be carried forward to the following assessment year to be set off against the income, if any, of that year, evidenced by Exh. P-3. The second respondent by order, dated November 21, 1988 (Exh. P-4), completed the assessment for 1988-89 under section 143(1) of the Act and allowed a loss of Rs.1,06,495 to be carried forward. The petitioner then filed rectification petition dated April 6. 1989 (Exh.P-5), before the second respondent which was replied to by communication, dated April 19, 1989 (Exh. P-6), stating that the loss for the years 1986-87 and 1987-88 are not allowed to be carried forward as the returns were filed belatedly. It is stated that the petitioner again wrote a letter (Exh. P-7) to the second respondent pointing out the provisions of law whereby unabsorbed depreciation and investment allowance have been allowed to be carried forward even if returns are filed belatedly. It is further stated that since no reply was received to Exh. P-7 communication, the petitioner filed Exh, P-8 revision petition, dated November 15,1989, before the Commissioner of Income-tax under section 264 of the Act. It is stated that an argument note (Exh. P-9) was submitted before the first respondent. Commissioner and that the revision was dismissed as per Exh. P-10. It is crated in the O. P. that the first respondent erred in observing that the petitioner should have pursued action-for the assessment years 1986-87 and 1987-88 instead of filing revision petition for 1988-89 and that he failed to appreciate that since no assessment orders were passed for those two years there was no cause of action for the petitioner to initiate proceedings. It is also stated that since the second respondent failed to notify the loss to be carried forward for the assessment years 1986-87 and 1987-88 the petitioner was entitled to have the loss re determined in the assessment for 1988-89 and the first respondent, according to the petitioner, should have directed the second respondent to re determine the loss accordingly. It. is also stated that even if a loss return is filed belatedly and the assessee is not entitled to carry forward the business loss claimed therein, yet the petitioner is entitled to carry forward any unabsorbed and/or investment allowance.

A counter-affidavit is filed by the second respondent. It is admitted in the said counter-affidavit that the petitioner had filed the return for the year 1986-87 declaring a net loss of Rs.1,11,248 and that the aggregate loss shown in the said return was Rs.1,39,631. The second respondent has dealt with the merits of the matter relating to the claim in respect of the assessment year 1986-87 made in the return in para.7 of the counter-affidavit and submitted the said claim does not appear, to be correct. In para.8 of the counter-affidavit, it is stated that the petitioner's contention that the Income -tax Officer did not pass any assessment order on the returns filed for the assessment, years 1986-87 and 1987-88, is not correct and that the Income-tax Officer had completed the assessment for the year 1986-87 under section 143(1) on January 29, 1988, as "closed as ND" and entered in the D and C register as II(11)(a)/235 of 1987-88. It is stated that there is no specific noting as to whether the loss has been allowed to be carried forward or not. It is further stated that the assessment for the year 1987-88 is also seen completed on January 29,1988, and entered in the D and C register as III(ii)(a)/437 of 1987-88 and that it has been noted that "loss not allowed to be carried forward for default under section 139(3)". It is stated that this was intimated to the assessee by issuing an intimation letter (inland letter) as provided in section 143(1) as the section stood at that time. It is also stated that since both the assessments for the years 1986-87 and 1987-88 were completed simultaneously on January 29,1988, only a consolidated intimation letter was issued on February 9,1988. It is further stated the Income-tax Officer completed the assessment for the year 1988-89 on November 21.1988 as under:

Net loss as declared: Rs.1,29,072

Less disallowance under section 43B: Rs.22,577

Loss Rs.1,06,495 which is carried forward.

In reply to the application under section 154 filed by the petitioner on April 6,1989, the petitioner was intimated by letter dated April 19,1989, that the loss for the earlier years were not carried forward as the returns for these years were filed belatedly. It is also stated that from the records it is not clear whether the intimation regarding the completion of the assessment for the year 1986-87 was issued to the petitioner. But it is stated that the assessment orders for the year 1987-88 was communicated by means of an intimation letter, dated February 9,1988. It is further stated that if the assessee really objects to the adjustment made by the Income-tax Officer under section 143(1) in disallowing the setting off of prior year's loss and refusing carry forward of loss to subsequent years, he could have filed a form No. 6A for the assessment year 1987-88 objecting to the Income-tax Officer's action.

Learned counsel appearing for the petitioner submitted that when the petitioner has filed loss returns for the years 1986-87 and 1987-88, if the assessing authority was not inclined to accept the said returns, the petitioner should have been afforded an opportunity of being heard and that in the instant case, no such opportunity has been granted. He also submitted that the petitioner has not been informed of any such assessment order passed for the years 1986-87 and 1987-88. He submitted that the petitioner is entitled to be heard before rejecting the loss returns. He further submitted that when the petitioner received the assessment order for the year 1988-89 evidenced by Exh. P-4, the petitioner immediately filed a petition pointing out that the loss returns filed for the years 1986-87 and 1987-88 have not been taken into account while issuing Exh. P-4 order, that since the petitioner has not received any assessment orders for the said years he was of the belief that the loss returns, filed for the said two years have been, accepted and carried forward and that the second respondent simply rejected the petition stating that the -loss for the years 1986-87 and 1987-88 was not allowed to carry forward as. the returns were filed belatedly. Learned counsel further submitted that at any rate, the first respondent-Commissioner was not justified in rejecting the application stating, that the petitioner should have pursued action for the assessment years 1986-87 and 1987-88 instead of filing revision against the assessment order for 1988-89. Learned counsel accordingly submitted that Exhs. P-4, P-6 and P-10 orders have to be set aside and the assessing authority must be directed to consider Exhs.P-5 and P-7 petitions afresh with notice and opportunity to the petitioner. Learned counsel relied on the decision of the Supreme Court in CIT v. Khushal Chand Daga (1961) 42 ITR 177. In that case, the Supreme Court with reference to the provisions of section 24(3) of the Indian Income-tax Act, 1922, held that where the Income-tax Officer does not notify to the assessee by order in writing the amount of loss for any year as computed by him under section 24(3) of the Act, the assessee. is entitled to have the loss re determined in a subsequent year. Learned counsel also relied on a decision of the -Madras High Court in Sathappa Textiles (Pvt.) Ltd. v. Second ITO (1969) 71 ITR 260, where it was held that where an assessee claims to carry over business loss as well as unabsorbed depreciation and development rebate, they have all to be included in one return, though the first part of the claim would fall under. section 22(2A). and the other part under section 22(2A), and if the return filed is a composite one under both the sections, though the portion relating to carry forward of loss was belated under section 22(2A), the other part of the return relating to unabsorbed depreciation and development rebate must be considered by the, officer, inasmuch as the carry forward of unabsorbed depreciation and development rebate does not fall within the ambit of section 22(2A). He also relied on the decision of the Orissa High Court in Fatechand Agarwal v. CWT (1974) 97 ITR 701, and contended that it is the duty of the Revenue to establish that the service of an order was made on the assessee. I have heard learned counsel appearing for the Revenue. He reiterated the contentions taken in the counter-affidavit and also relied on the decision of the Supreme Court in Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 and submitted that the term "loss" as understood by the Supreme Court in the above said decision alone should be taken.

I have considered the rival submissions. In the instant case, admittedly, the petitioner has filed loss returns for the years 1986-87 and 1987-88 under section 139 of the Act. Under section 143(1), there is an obligation on the part of the Assessing Authority to make an assessment of the total income or loss of the assessee after making such adjustment to the income or loss declared in the return. Under subsection (2), where a return has been made under section 1,39 and an assessment having been made under subsection (1) if the assessee makes within one month from the date of service of the notice of demand issued in consequence of such assessment, an application to the Income-tax Officer objecting to the assessment, or whether or not an assessment has been made under subsection (1), the Income-tax Officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf, the Income-tax Officer shall serve on the assessee a notice requiring him to attend at the Income-tax Officer's office onto produce, or cause to be produced any evidence on which the assessee may rely. In the instant case, the petitioner has not been afforded an opportunity as contemplated under subsection (2) of section 143 of the Act. It is practically admitted that the order stated to have been passed for the assessment year 1986-87 has not been served on the petitioner. Regarding the communication of the assessment order for the year 1987-88 it is stated that the same was intimated by an inland letter. There is absolutely no proof or evidence regarding the service of notice of the assessment order for the year 1987-88 also on the petitioner. At any rate, when the petitioner has specifically brought to the notice of the second respondent that he has not received any order of assessment for the years 1986-87 and 1987-88, the second respondent was bound to intimate the fact of completion of the assessment for the said two years and the communication of the order for the year 1987-88 to the petitioner, but curiously enough nothing has been stated about these matters in Exh. P-4 communication rejecting the application. The only reason stated is that the return submitted for the years 1986-87 and 1987-88 are belated and, therefore, the carry forward is not allowed. The petitioner in the revision filed against the assessment order for 1988-89 has pointedly taken all these contentions before the first respondent but the first respondent has rejected the same stating that these matters cannot be agitated in a revision filed against the assessment order for the year 1988-89. The first respondent, according to me, was not justified in rejecting the revision petition for the reason mentioned above. If, as a matter of fact, the petitioner's returns for the assessment years 1986-87 and 1987-88 are accepted, certainly the loss claimed in the said returns should have been allowed to be carried forward for the subsequent years and the same should have been reflected in the assessment year for 1988-89. Since the assessment order did not include the loss claimed for the earlier two years, the petitioner has brought this to the notice of the assessing authority and requested for rectification. The said request for rectification has been rejected on the ground that the returns filed for the said two years are belated. As already stated, the assessing authority was bound to communicate the order, if any, passed by him for the years 1986-87 and 1987-88 to enable the petitioner to file .his objection to the same. Since the petitioner was not afforded an opportunity before rejecting the loss returns and the claim for carry forward of the said loss, I am of the view that Exhs. P-4, P-6 and P-10 orders have to be quashed. I accordingly quash the said orders. I direct the second respondent to afford an opportunity to the petitioner to show cause against the rejection of the loss returns filed for the years 1986-87 and 1987-88 and also to complete the assessments for the years 1986-87, 1987-88 and 1988-89 after due consideration of the objections that may be taken by the petitioner. It is for the assessing authority to consider the- merits of the contentions regarding the acceptability of the loss return and, therefore, the same is left open for consideration by the second respondent while completing the said assessments. Since the matter relates to the assessment years 1986-87 to 1988-89, I direct the second respondent to complete the proceedings for the aforesaid three years afresh with notice and opportunity to the petitioner as expeditiously as possible, at any rate, within a period of two months from the date of receipt of a copy of this judgment.

The original petition is allowed to the above extent.

M.B.A./3268/FCPetition allowed.