(a) Income-tax---

----Assessment---Draft assessment order--.-Reference to I.A.C.---Assessment set aside by Tribunal on ground that I.A.C. .issued directions to I.T.O. without giving opportunity of hearing to assessee---I.A.C. thereafter, hearing assessee and issuing directions to I.T.O.---Fresh assessment made by successor I.T.O.---No fresh draft assessment orders need to be forwarded during course of fresh assessment---Only procedural illegality committed by I. A. C. ---Proceedings can be continued from stage where proceedings were vitiated by illegality of not granting sufficient opportunity to assessee---Fresh assessment not void---Indian Income Tax Act, 1961, S. 144B.

For the assessment year 1978-79, the assessee returned an income of Rs.1,02,790 and an agricultural income of Rs.1,000 but the Income-tax Officer assessed him on an amount of Rs.11,63,660. Since the difference between the returned income and the income assessed was more than Rs.1 lakh, as per section 1448 of the Income Tax Act, 1961, the Income-tax Officer forwarded the draft order, dated March 13, 1981, to the assessee on March 17, 1981. The assessee filed his objections on March 31, 1981. The draft order along with the objections was then forwarded to the Inspecting Assistant Commissioner of Income-tax as contemplated by section 144E of the Act. Even though notice was issued to the assessee by the Inspecting Assistant Commissioner about the posting of the proceedings. for enquiry on September 19, 1981,- the notice was received by the assessee only on September 23, 1981. The Inspecting Assistant Commissioner without hearing the, assessee issued directions to the Income-tax Officer as contemplated under section 1448 on September 25, 1981. The Income-tax Officer thereupon completed the assessment on the basis of such direction and assessment order, dated September 26, 1981, was issued. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) contending that the assessment was barred by limitation and that no opportunity was granted by the Inspecting Assistant Commissioner before directions were issued under section 1448. The assessee prayed that the assessment should be annulled. The Commissioner of Income-tax (Appeals) rejected the contention on the issue of limitation, but took the view that the Inspecting Assistant Commissioner had wrongly denied opportunity to the assessee. The appellate authority also held that-the assessment order could not be held as null and void, since it was vitiated only due to a procedural irregularity at the instance of the Inspecting Assistant -Commissioner. The assessment order was, therefore, set aside and the Income-tax Officer was directed to pass fresh orders in accordance with law. Being aggrieved by the order of the Commissioner (Appeals), the assessee went in second appeal before the Income-tax Appellate Tribunal. By order, dated November 17, 1983, the Tribunal dismissed the appeal. Pursuant thereto the Inspecting Assistant Commissioner took up the matter for hearing, heard the assessee's representative and then issued directions, dated January 11, 1984, to the Income-tax Officer. In pursuance of those directions, the income-tax Officer passed assessment order under section, 143(3) read with section 1448 of the Act on January 20, 1984, after giving a fresh opportunity of hearing to the assessee. The assessee took the matter again in appeal before the Commissioner of Income-tax (Appeals) contenting that since the original assessment was set aside, the Income-tax Officer ought to have sent a fresh draft order and only then the Inspecting Assistant Commissioner could have assumed jurisdiction under section 144B and that the Inspecting Assistant Commissioner had committed a grave error in issuing directions under section 144B(4) on the earlier draft order. The contention was repelled by the Commissioner of Income-tax (Appeals). On second appeal the Tribunal also took the view that the assessment order, dated January 20, 1984, was not liable to be declared as null and void nor was it liable to be set aside as vitiated by any illegality. On a reference:

Held, that the illegality which weighed with the appellate authorities while setting aside the assessment order, dated September 26, 1981, was a procedural irregularity committed by the Inspecting Assistant Commissioner in giving direction to the Income-tax Officer under section 14411(4) without granting an opportunity of hearing to the assessee._ The assessment order, dated September 26, 1981, had to be set aside only for this reason. There was nothing wrong in continuing the proceedings from the stage where the proceedings were vitiated by an illegality of not granting sufficient opportunity to the assessee.

(b) Income- Tax---

----Assessment---Limitation---Reference to I.A.C.---I:T.O. forwarding draft assessment order to assessee on 17-3-1981---Assessee filing objections on 31-3-1981---I.A.C. issuing notice fixing hearing on 19-9-1981, which was received by assessee only on 23-9-1981---I.A.C. without hearing assessee issuing directions to I.T.O. on 25-9-1981---I.T.O. completing assessment on 26-1-1981---Tribunal setting aside assessment ordered directing I.T.O. to pass fresh orders ---I.T.O. completing fresh assessment on 20-1-1984, as per direction of I.A.C., dated 11-1-1984---Assessment not barred by limitation as having been passed after 180 days from 17-3-1981---Indian Income Tax Act, 1961, S. 153, Expln., cl.(iv).

- As per the order passed by the Tribunal on November 17, 1983, the income-tax Officer was directed to proceed as per section 14411. He, therefore, forwarded the draft assessment order, dated March 17,. 1981, alongwith the objections of the assessee to the Inspecting Assistant Commissioner. The Income-tax Officer completed the fresh assessment on January 20, 1984, as per directions of the Inspecting Assistant Commis sioner, dated January 11, 1984. A reading of clause (iv), Explanation 1 to section 153 showed that the provisions contained therein did not provide for a period of limitation. It provided for exclusion of certain period in calculating the period of limitation. Therefore, the fresh assessment could not be held void as having been passed after 180 days from March 17; 1981.

Goa Sea Foods v. CIT (1991) 189 ITR 431 (Ker.); Guduthur Bros. v. ITO (1960) 40 ITR 298 (SC) and Pancliamanal Steel Ltd. v. U. A. Joshi, ITO (1997) 225 ITR 458 (SC) ref.

M.A. Firoz, Dalip Kumar and C. Kochunni Nair for the Assessee.

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

JUDGMENT

MRS. K. K. USHA, J.---This reference application - under section 256(1) of. the Income Tax Act, 1961, is at the instance of the assessee. It arises out of the order passed by the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A. No.74/Coch. of 1985. The relevant assessment year is 1978-79. Following are the questions referred for the opinion of this Court:

"(1) Whether, on the facts and in circumstances of the case, the Tribunal was right in holding that the fresh assessment is neither void nor non est, nor a nullity, arid not to be annulled?

(2) Where-after, a regular: assessment is set aside on the ground that the Inspecting Assistant Commissioner issued directions under section 144B of the Income Tax Act, 1961, without an opportunity to the assessee of being heard, a fresh assessment is made by successor-Income-tax Officer without application of his mind and only as per the directions under the said section issued afresh on the basis of the draft assessment order forwarded to him in regular assessment and to whom no draft assessment order is forwarded during the course of fresh assessment, whether the Tribunal erred in holding that such a fresh assessment is neither void nor non est nor a nullity and not to be annulled?

(3) Whether, the interpretation of the Tribunal that the remand was made only to set right the irregularity committed while following the procedure under section 144B correct?

(4) Whether the Inspecting' Assistant Commissioner of Income-tax in fresh assessment order to .be made as per appellate order had jurisdiction to issue directions on the basis of a draft assessment order forwarded to him in regular assessment?"

The relevant facts are as follows: For the assessment year 1978-79 when the assessee returned an income of Rs.1,02,790 and an agricultural income of Rs.1,000, the Income-tax Officer proposed to assess him on an amount of Rs.11,63,660. Since the difference between the returned income and the income proposed to be assessed was more than Rs.1 lakh, as per section 1448 of the Income Tax Act, 1961, the Income-tax Officer forwarded the draft order, dated March 13, 1981, to the assessee on-March 17, 1981. The assessee filed his objections on March 31, 1981. The draft order along with the objection was then forwarded to the Inspecting Assistant Commissioner of Income-tar as contemplated by section 144E of the Income Tax Act, 1961. Even though notice was issued to the assessee by the Inspecting Assistant Commissioner about the posting of the proceedings for enquiry on September 19, 1981, the notice was received by the assessee only on September 23, 1981. The Inspecting Assistant Commissioner without hearing the assessee issued direction to the Income-tax Officer as contemplated under section 1448 on September 25, 1981. The Income-tax Officer thereupon completed the assessment on the basis of such directions and assessment order, dated September 26, 1981, was issued. The assessee filed an appeal before the Commissioner of Income-tax (Appeals) contending that the assessment was barred by limitation and that no opportunity was granted by the Inspecting Assistant Commissioner before directions were issued under section 1448. The assessee prayed that the assessment should be annulled. The Commissioner of Income-tax (Appeals) rejected the contention on the issue of limitation, but took the view that the Inspecting Assistant Commissioner had wrongly denied opportunity to the assessee. The appellate authority also held that the assessment order cannot be held as null and void, since it is vitiated only due to a procedural irregularity at the instance of the Inspecting Assistant Commissioner. The assessment order was, therefore, set aside and the Income-tax Officer was directed to pass a fresh order in accordance with law. Being aggrieved by the above order, the assessee went in second appeal before the Income-tax Appellate Tribunal. By order, dated November 17, 1983, the Tribunal dismissed the appeal.. Pursuant thereto, the Inspecting Assistant Commissioner took up the matter for hearing, heard the assessee's representative and then issued directions, dated January 11, 1984, to the Income-tax Officer. In pursuance of those directions, the Income-tax Officer passed assessment order under section 143(3) read with section 1448 of the Act on January 20, 1984, after giving a fresh opportunity of being heard to the assessee. The assessee took up the matter again in appeal before the Commissioner of Income-tax (Appeals) contending that since the original assessment was set aside, the Income-tax Officer ought to have sent a fresh draft order and only then the Inspecting Assistant Commissioner could have assumed jurisdiction under section 1448. The Inspecting Assistant Commissioner has committed a, grave error in issuing directions under section 1448(4) on the earlier draft order. The contention was repelled by the Commissioner of Income-tax (Appeals). On a second appeal, the Tribunal also took the view that the assessment order, dated January 20, 1984, is not liable to be declared as null and void nor was it liable to be set aside as vitiated by any illegality. It is from the above order the four questions are referred for opinion of this Court.

It was contended by the assessee before the Tribunal as well as before this Court that once the assessment order, dated September 26, 1981, was set aside, the draft order on the basis of which the Inspecting Assistant Commissioner had given directions to the Income-tax Officer should be treated as no longer in existence and, therefore, the Income-tax Officer should have passed afresh draft order under section 1448. It was also contended that when the proceedings were started afresh there was change of incumbent in the office of the Income-tax Officer and for this reason also a fresh draft order should have been passed, since the new incumbent could have taken a different view in the matter. Learned counsel for the assessee pointed out that Explanation 1(iv) of section 153 of the Income Tax Act, 1961, provides that in a, case where objections were filed on the draft assessment orders the directions of the Inspecting Assistant Commissioner should be received within 180 days from the date of forwarding the draft order or in a case where no objections were filed for the draft order the assessment will be completed within a period of 30 days from the date on which it was forwarded. The draft order under section 1448(1) was issued on March 17, 1981. Objection to the draft order was filed on March 31, 1981. In view of the provisions contained under Explanation 1(iv) of section 153 valid directions could be given only within 180 days from March 17, 1981, and not beyond that. In this case the final assessment order was issued on the basis of the directions issued by the Inspecting Assistant Commissioner on. January 11, 1984, which is much beyond 180 days in March 17, 1981. The assessment order passed on such directions issued beyond the period of limitation is illegal.

Learned standing counsel for the Revenue contended that there is no merit in the objections raised by the assessee to the final assessment order. The only grievance of the assessee was that the Inspecting Assistant Commissioner gave directions on September 25, 1981, without affording the assessee an opportunity of being heard. Accepting the above objection raised by the assessee, the Commissioner of Income-tax (Appeals) set aside the assessment order, dated September 26, 1981, which was passed on the basis of the direction given by the Inspecting Assistant Commissioner on September 25, 1981. No illegality was alleged against the draft order nor was it found by the appellant authorities. The prayer made by the assessee to declare the assessment order as null and void was also not granted in the appeals. Under these circumstances, it is contended on behalf of the Revenue that there is nothing wrong in continuing the proceedings from the stage of the hearing to be afforded by the Inspecting Assistant Commissioner to the assessee on receipt of the draft order. It was also pointed out that the change of incumbent of an office cannot affect the proceedings in view of the provisions contained under section 129 of the Income Tax Act, 1961.

We do not find any merit in the contentions raised by the assessee. The illegality which weighed with the appellate authorities while setting aside the assessment order, dated September 26, 1981, was procedural irregularity committed by the Inspecting Assistant Commissioner in giving direction to the Income-tax Officer under section 144B(4) without granting an opportunity of being heard to the assessee. The assessment order, dated September 26, 1981, had to be set aside only for this reason. There is nothing wrong in continuing the proceedings from the stage where the proceedings were vitiated by an illegality of not granting sufficient opportunity to the assessee. A similar view was taken by the Supreme Court in Guduthur Bros v. ITO (1960) 40 ITR 298. After issuing a notice to the assessee under section 28(1)(a) of the Indian Income-tax Act, 1922, to show cause why penalty should not be imposed for failure to file a return in time, the Income-tax Officer proceeded to impose penalty without affording a hearing. The Appellate Assistant Commissioner set aside the order imposing penalty for the reason that no opportunity was given to the assessee. There was also a direction to refund any penalty that might have been recovered. The apex Court took the view that since the notice was issued in accordance with law it did not cease to be operative and it was, open to the Income-tax Officer to take up the matter from the point at which the illegality supervened and to correct his proceedings. It was held that the Income-tax Officer was well within his jurisdiction to continue the proceedings from the stage after issue of notice under section 28(1)(a). In the present case also no illegality was found by the appellate authorities that would vitiate the draft order. It was the further proceedings which were found illegal and which resulted in setting aside the final assessment order. The assessee has taken a contention that the dictum laid down in the above decision of the Supreme Court is not -applicable in, the present case. According to the assessee, by order, dated November 17, 1983, the Tribunal had restored the matter to the Income-tax Officer with a direction to comply with the procedure under section 144B and, therefore, the Income-tax Officer has to start afresh by issuing a draft order. We cannot agree with the above contention. It is true that the Tribunal had restored the matter to the Income-tax Officer for complying with the procedure under section 144B. The above direction given to the Income-tax Officer has to be understood as one to forward the proceeding to the Inspecting Assistant Commissioner afresh to enable him to rectify the irregularity committed by him. While giving the above direction 'the Tribunal had confirmed the order passed by the Commissioner of Income-tax .(Appeals). A reference to the order of the Commissioner of Income-tax (Appeals), dated February,23, 1982, would show that the remand was only for the purpose .of correcting the procedural irregularity committed by the Inspecting Assistant Commissioner. Therefore, we are of the view that the decision of the Supreme Court in Guduthur Bros. v. ITO (1960) 40 ITR 298, would support the contention taken by the Revenue that the Income -tax Officer was not expected to issue A fresh draft order when the matter was remanded by the Tribunal under its order, dated November 17, 1983.

In Goa Sea Foods v. CIT (1991) 189 ITR 431 (Ker.), it was found that the Income-tax Officer did not forward the objection filed by the assessee alongwith the draft assessment order to the Inspecting Assistant Commissioner. The Court took the view that the word "received" occurring in section 144B(3) should be understood only as "forwarded" as specified in section 144B(2) and since the assessee had forwarded his objections within seven days of receipt of the draft order, the Income-tax Officer should have complied with the provisions of section 144B(4). On the failure of the Income-tax Officer to do so it was held that the final assessment order passed by the Income-tax Officer was vitiated. The matter was remitted to the Income-tax Officer for re-doing the assessment after complying with the provisions of section 144B(4). There is no direction issued in this case to the Income-tax Officer to pass a fresh draft order as contemplated by section 144B(1).

Reliance was placed by learned counsel for the assessee on the observation made by the Supreme Court in Panchamahal Steel Ltd. v. U.A. Joshi, ITO (1997) 225 ITR 458 to the following effect (page 462):

"A reading of section 144B shows that once a draft order is made and the matter is referred to the Inspecting Assistant Commissioner on receiving the objections of the assessee, the function of the Income-tax Officer practically comes to an end."

To contend that once the draft order was issued and reference is made by the Income-tax Officer to the Inspecting Assistant Commissioner, his duty ceases and if any fresh action has to. be taken, he has to pass a fresh draft order. We do not understand the above observation of the Supreme Court in the manner in which it is sought to be interpreted on behalf of the assessee. In that case the assessee wanted to file a revised return after the draft assessment order alongwith the assessee's objections were forwarded to the Inspecting Assistant Commissioner by the Income-tax Officer. The Supreme Court took the view that if the assessee is given such opportunity it may mean re-doing the entire exercise over again. "It may also happen that as a result of such re-doing, the reference already made to the Inspecting Assistant Commissioner may become unnecessary and has to be called back. The Act, however, does not provide for such a situation". Therefore, we are of the view that this. decision is of no help to the assessee.

So also ire do not find any merit in the contention of the assessee on the ground of limitation. As per the order passed by the Tribunal on November 17, 1983, the Income-tax Officer was directed to proceed as per section 144B. He, therefore, forwarded the draft assessment order, dated March 17, 1981, alongwith the objection of the assessee to the Inspecting Assistant Commissioner. A reading of clause (iv) of Explanation 1 to section 153 would show that the provisions contained therein do not provide for a period of limitation. On the other hand, it provides for exclusion of certain period in calculating the period of limitation. Therefore, the assessment cannot' be held void as having been issued after 180 days from March 17, 1981.

In the light of the above discussion, we answer question No. l in the affirmative, in favour of the Revenue and against the assessee. Question No.2 is answered in the negative against the assessee in favour of the Revenue. Question No.3 is answered in the affirmative, in favour of the Revenue and against the assessee. Question No.4 is also answered in the affirmative, in favour of the Revenue and against the assessee.

A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

M.B.A./39/FCReference answered.