Income-tax---

----Revision---Powers of Commissioner---Commissioner of Income Tax setting aside assessment order and directing ITO to make fresh assessment- Power of ITO to make assessment not confined or restricted to direction given by CIT---ITO bound to examine claim made by assessee which was not a matter which had become final in original assessment---Indian Income Tax Act, 1961. Ss. 143 & 263.

The original assessment of the asses see for the assessment year 1974-75 was completed under section 143(3) of the Income Tax Act, 1961, determining the total income after carrying forward the loss relating to the cashew department which was closed during the accounting year relevant to the assessment year 1972-73. The Commissioner of Income-tax thereafter initiated suo motu revision proceedings under section 263 on the ground that the, losses of the cashew department and the losses of the hessian department could not be set off against the profits of the insecticides department for and from the assessment year 1974-75. The Income-tax Officer thereafter made a fresh assessment under section 143 of the Act in pursuance of the directions of the Commissioner and accepted the claim of the assessed that even ignoring the cashew department loss, there was available loss in the pesticides department to be set off against the net profit. However, the assessee made a claim for deduction of Rs.79,000 being damages paid which was disallowed for the assessment year 1976-77 on the ground that it did not represent the loss of that year but related to the assessment year prior to 1976-77. The Income-tax Officer rejected the claim of the assessee on the ground that the Commissioner of Income-tax in the revisional order set aside the order of assessment only for a specific purpose of excluding the loss from the cashew department and it was not open to the assessee to make a claim for the deduction of Rs.79,000 in the fresh assessment made on the basis of the directions of the Commissioner of Income-tax. On appeal, the Commissioner of Income-tax (Appeals) held that there was nothing in law preventing the Income-tax Officer from going through the question of set off of loss of Rs.79,000 and hence directed the Income-tax Officer to examine the matter on merits for allowance 'of the damages paid. On further appeal, the Tribunal held that when the Income-tax Officer makes a fresh assessment, he has all the powers at the time of making assessment in terms of section 143(3) of the Act and the Commissioner of Income-tax (Appeals) was justified in directing the Income-tax Officer to consider the claim of the assessee for-deduction of the sum of Rs.79,000 in the fresh assessment made on the basis of the directions of the Commissioner of Income-tax. On a reference:

Held, that when the assessee made a claim for consideration of an item for deduction during the course of assessment proceedings, it was the duty of the Income-tax Officer to examine the claim on the merits of the claim. The present case was not a case where the assessee made a claim with reference to a matter which was concluded and had become final in the original assessment proceedings. But, on the other hand, it was found in the subsequent year's assessment proceedings that the liability of the assessee had accrued when the suit for injunction filed by the assessee was dismissed by the city Civil Court, and in view of the subsequent event that the deduction might relate to the present assessment year, the assessee made a claim for deduction of the damage and when such a claim was made, the Income-tax Officer was bound to examine the claim on merits.

CIT v. Mansa Ram & Sons (1991) 190 ITR 453 (All.), CIT v. Shree Manjunathesware Packing Products and Camphor Works (1998) 231 ITR 53 (SC); CIT v. Multimetals Ltd. (1991) 187 ITR 98 (Raj.), CIT v. Seth Manicklal fomra (1975) 99 ITR 470 (Mad.); CIT v. Ulagammai Achi (S.K.) (1987) 166 ITR 210 (Mad.); Chokshi Metal Refinery v. CIT (1977) 107 ITR 63 (Guj.); Faizunnissa Began v. CED (Asstt.) (1995) 214 ITR 749 (Mad.); Katihar Jute Mills (P.) Ltd. v. CIT (1979) 120 ITR 861 (Cal.); Modi Industries Ltd. v. CIT (1995) 216 ITR 759 (SC) and Raja D. V. Seetharamayya Bahadur v. WTO (Sixth) (1995) 213 ITR 562 (Mad.) ref.

C. V. Rajan for the Commissioner.

K. Ramagopal for the Assessee.

JUDGMENT

N. V. BALASUBRAMANIAN, J.---The assessee is a company and the original assessment in the case of, the assessee for the assessment year 1974-75 was completed under section 143(3) of the Income-tax Act, 1961 (thereinafter to be referred to as "the Act"), on September 17, 1975. determining the total income, after carrying forward the loss relating to the cashew department which was closed during the accounting year relevant to the assessment year 1972-73. The Commissioner of Income-tax thereafter initiated suo motu revision proceedings under section 263 of the Act on the ground that the set off of loss from the defunct cashewnut business against the profit of the business in the manufacture and sale of pesticides was erroneous: As the entire case depends upon the proper interpretation of the order of 'the. Commissioner, the relevant passage of the order of the Commissioner is quoted which reads as under:

" the losses of cashew .department, and the losses of the hessian department (if any) cannot be set off against the profits of the insecticides department for and from the assessment year 1974-75. Since this has been done the orders were certainly erroneous and they would be prejudicial to the interests of the Revenue because in the long run, the total income would be reduced. It may be mentioned that the losses in the cashew department for the assessment year 1971-72 was Rs.2,90,273 with unabsorbed depreciation of Rs.9,332. In the circumstances, I shall set aside the assessment for the years 1974-75 and 1975-76 and direct the Income-tax Officer to make fresh assessment in accordance with law so as to exclude the losses of the cashew department and of the hessian department (if any) after giving adequate opportunity to the assessee company."

The Income-tax Officer thereafter made a fresh assessment under section 143 of the Act in pursuance of the directions of the Commissioner of Income-tax given in the revision. In the said assessment proceedings, the Income-tax Officer accepted the claim that even ignoring the cashew -department loss, there was available loss in pesticides department to be set off against the net profit. However, the assessee made a claim for deduction of a sum of Rs.79,000 representing certain damages payment which were disallowed for the assessment year 1976-77 on the ground that it did not represent the loss of that year, but related to the assessment year prior to 1976-77. The Income-tax Officer rejected the claim of the assessee on the ground that the Commissioner of Income-tax in the revisional order set aside the order of assessment only for a specific purpose of excluding the loss from the cashew department and it was not open to the assessee to make a claim for the deduction of Rs.79,000 in the fresh assessment made on the basis of the directions of the Commissioner of Income-tax.

The assessee filed an appeal to the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) held that there is nothing in law preventing the Income-tax Officer going through the question of set off of the loss of Rs.79,000 and he, therefore, directed the Income-tax Officer to examine the matter on merits for allowance on the damages payment.

The Revenue filed an appeal before the Income-tax Appellate Tribunal and the Tribunal following a decision of this Court in the case of CIT v. Seth Manicklal fomra (1975) 99 ITR470 held that when the Income-tax Officer makes a fresh assessment, he has all powers at the time of making assessment in terms of section 143(3) of the Act and the Commissioner of Income-tax (Appeals) was justified in directing the Income-tax Officer to consider the claim of the assessee for deduction of the sum of Rs.79,000 in the fresh assessment made on the basis of the directions of the Commissioner of Income-tax. The Revenue has sought for a reference and the Appellate Tribunal has stated a case and referred the following question of law under section-256(1) of the Income-tax Act, 1961, for our consideration:

"Whether, on the facts and in the circumstances of the case, when an order of assessment is set aside under, section 263 of the Income-tax Act, 1961, the power of the Income-tax Officer to make a fresh assessment is confined to the direction given by the Commissioner?"

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the jurisdiction of the Income-tax Officer is limited by the order of the Commissioner of Income-tax and the order of the Commissioner of Income tax qualified the powers of the Income-tax Officer as he employed the expression, "so as to exclude the loss of the cashew department". He, therefore, submitted that the order of the Commissioner of Income-tax is qualified and it is limited to consider the loss of cashew department and hessian department and, hence, the provisions of section 143(3) of the Act are not applicable. In support of his submission, he placed reliance on the following decisions: Modi Industries Ltd. v. CIT (1995) 216 ITR 759 (SC), (ii) CIT v. Seth Manicklal Fomra (1975) 99 ITR 470 (Mad), (iii) Raja D. V. Seetharamayya Bahadur v. WTO- (Sixth) (1995) 213 ITR 502 (Mad), (iv) CIT v. Ulagammal Achi (S. K.) (1987) 166 ITR 210 (Mad.), (v) Faizunnisa Begum v. CED (Asstt.) (1995) 214 ITR 749 (Mad.); (vi) CIT v. Mansa Ram & Sons (1991) 190 ITR 453 (All), (vii) Katihar Jute Mills (P.) Ltd. v. CIT (1979) 120 ITR 861 (Cal) and (ix) CIT v. Multimetals Ltd. (1991) 187 ITR 98 (Raj.).

Mr. K. Ramagopal learned counsel for the assessee, on " the other hand, submitted that the order of the Commissioner consists of three limbs; firstly, the Commissioner set aside the assessment for the assessment year 1974-75, secondly, the Commissioner directed for fresh assessment in accordance with law and, thirdly, he directed the Income-tax Officer to exclude the loss of cashew 'department and to give an opportunity to the assessee. He submitted that the order of the Commissioner is not a restricted one and when the entire assessment is set aside, the Income-tax Officer was not justified in refusing to consider the claim of the assessee for deduction towards damages payment of the sum of Rs.79,000. He submitted that the order of the Commissioner should be read in the light of the principle that there must be a proper and just assessment and when the direction was to compute the income, no restriction can be placed on the powers of the Income-tax Officer to consider the assessee's claim for deduction towards damages payment.

We have carefully considered the rival submissions of learned counsel. Under section 263 of the Act the revisional powers of the Commissioner are wide. In CIT v. Shree Manjunathesware Packing Products and Comphor Works (1998) 231 ITR 53 (SC), the apex Court held that the revisional powers conferred on the Commissioner under section 263 are of wide amplitude. The Commissioner under section 263 of the Act, after examinating the records and after making an enquiry, is empowered to pass such order as the circumstances of the case would justify and he may pass an order enhancing the assessment; he can modify the assessment or- he may cancel the assessment and direct a fresh assessment. The Commissioner in the instant ease has set aside the assessment for the years 1974-75 and 1975-76 and directed the Income-tax Officer to make a fresh assessment in accordance with the law so as to exclude the losses of the cashew department and hessian department (if any) after giving adequate opportunity to the assessee. The order of the Commissioner setting aside the assessment and his direction to make fresh assessment in accordance with the law cannot be read in isolation, but, it must be read in the context in which the Commissioner has exercised his powers of revision. We have seen on the facts of the case that all three businesses cannot be regarded as one and it was fairly- represented before the Commissioner that the loss incurred by the assessee in the cashew department and the hessian department cannot be set off against the profits from the insecticides department. The irresistible conclusion one reaches is that the set off of, the loss from the two different and distinct business against the profits of other business was not warranted by the provisions of the law and the direction of the Commissioner to exclude the losses of the cashew department and the hessian department has to be 'read alongwith or coupled with his earlier direction to make a fresh assessment in accordance with the law. In other words, he directed the Income-tax Officer to make a fresh assessment after excluding the losses in the cashew department and hessian department and, therefore, -it is not permissible for the assessee to pick out one portion of the order of the Commissioner and contend that the order of assessment in its entirety was set aside. The order of the Commissioner has to be read in the context in which he initiated the revisional proceedings the order passed in the revisions and his final conclusion.

There are two lines of cases falling on either side of the line. In CIT v. Seth Manicklal Fomra (1975) 99 ITR 470. This Court held that the powers of the Income-tax officer to make the assessment are derived under the statutory provisions of section 143(3) of the Act and any observation made by the, appellate authority in the order of appeal would not bind the Income-tax Officer to consider any other item which could be the subject matter of consideration for assessment. The cases falling on the other side of the line are: CIT v. S. K. Ulagammai Achi (1987) 166 ITR 210 (Mad), Raja D. V. Seetharamayya Bahadur v: WTO (Sixth) (1995) 213 ITR 502 (Mad), Faizunnissa. Begam v. CED- (Asstt.) (1995) 214 ITR 749 (Mad), CIT v. Mansa Ram and Sons (1991) 190 ITR 453 (All), Katihar Jute Mills (P.) Ltd. v. CIT (1.979) 120 ITR 861 (Cal) and CIT v. Multimetals Ltd. (1991) 187 ITR 98 (Raj) and they are to the effect that when the assessment is not, set aside, the powers of the Income-tax Officer are limited to those items directed to be considered by the higher authority. But, all the above cases relied on by learned counsel for both the parties are distinguishable as they are all cases where certain additions have been made by the Income-tax Officer on his own when he completed the assessment on the basis of directions of the higher authorities. In the instant case, even if we assume that the Commissioner has not set aside the entire assessment, but set aside the order of the Income-tax Officer in part, even then, the action of the Income-tax Officer to refuse to consider the claim of the assessee is not legally justifiable.

We are of the view that when the assessee made a claim for consideration of an item for deduction during the course of assessment proceedings, it is the duty of the Income-tax Officer to examine the claim on the merits of the claim. The present case is not a case where the assessee made a claim with reference to a matter which was concluded and has become final in the original assessment proceedings. But, on the other hand, it was found in the subsequent years' assessment proceedings that the liability of the assessee had accrued when the suit for injunction filed by the assessee was dismissed by the City Civil Court, Madras, and in view of the subsequent event that the deduction might relate to the present assessment year, the assessee made a claim for deduction of the damages and when such a claim wag made, the Income-tan Officer was bound to examine the claim" on the merits and it is not open to him to reject the claim even at the threshold and refuse to entertain the claim. The zeal of the Income-tax Officer to carry out the directions of the higher authority may be justified, but at the same time it should not prevent him from examining the claim of the assessee on the merits. His duty to make an assessment does not begin and end with carrying out the directions of the Commissioner and his duty is something more that is to determine the correct taxable income. We are of the opinion, nothing precludes the assessee from making a claim before the Income-tax Officer at the time of finalization of the assessment proceedings and equally nothing prevents the Income-tax Officer from examining the claim on the merits of the matter. It is well to remember that the assessment was being redone by the Income-tax Officer within four years from the date of the original assessment order and when he is in the process of the completion of the assessment, he is bound to consider each and every claim preferred by the assessee. let us imagine a case of a concluded assessment and there are no pending assessment proceedings, but when the assessee makes a claim for deduction of losses, the Income-tax Officer cannot refuse to entertain the claim and he may reject the claim on the parameters found in section 154 of the Act. In the instant case, it is a stronger case for the assessee as the Income-tax Officer was directed to determine the correct total income of the assessee according to law and during those proceedings when the assessee makes a claim, the Income-tax Officer is bound to consider the claim of the assessee. We are of the opinion that while considering such a claim the question of fulfillment of the conditions for rectification is not a sine qua non and even if the conditions to rectify the mistakes are not present, the Income-tax Officer, in our opinion, should examine the claim of the assessee 9n the merits of the case. The power of the Income-tax Officer to make the assessment as observed by this Court in CIT v. Seth Manicklal Fomra (1975) 99 ITR 470 is derived .from the statutory provisions of section 143(3) of the Act. Though the Supreme Court in the case of Modi Industries Ltd. v. CIT (1995) 216 ITR 759 has held that the jurisdiction of the Income-tax Officer is derived from the order of the Commissioner of Income-tax, his, jurisdiction td allow or disallow the carry forward losses of the defunct business would be derived from the order of the Commissioner, but in other respects and for completing the assessment, his powers would be traceable to section 143(3) of the Act. This Court in Faizunnissa Begam v. CED (Asstt.) (1995) 214 ITR 749 has indicated such an approach and it was held that in so far as other items not considered by the higher authorities are concerned, the power of the Income-tax Officer to reassess the income would be traceable to the provisions of the statute. Therefore, the refusal of the Income-tax Officer even to consider the claim of the assessee is not justifiable and we are of the opinion that both the Commissioner of Income tax (Appeals) and the Appellate Tribunal were right in directing the Income Tax Officer to consider the claim of the assessee on the merits of the matter. Though we are not agreeing with the view expressed by the Appellate Tribunal that the entire assessment order was set aside by the Commissioner of Income-tax, still the power of the Income-tax Officer to consider the claim of the assessee is neither curtailed nor taken away by the order of the Commissioner. The Income-tax Officer was bound to consider the claim of the assessee under section 143(3) of the Act when he was in the final process of assessment in the determination of total income of the assessee as the assessment pursuant to the directions of the Commissioner has not reached the stage of finality. We find that the Central Board is more liberal in its approach and directed the Income-tax Officer to consider the claim of statutory deduction even when the assessee has not made such a claim (vide; Circular No.14 (XL-35) of 1955, dated April 11, 1955-Chokshi Mel7 Refinery v. CIT (1977) 107 ITR 63 (Guj.)). We are of the opinion, such an attitude of the Income-tax Officer would instil confidence in the minds of the taxpayer that his income would be properly determined and he is not required to pay the tax, neither one paise more nor one paise less than what is correctly and rightly due in accordance with and under the provisions of the statute. In this view of the matter, we are of the opinion that the order of the Appellate Tribunal is sustainable in law, though for different reasons stated above,

Accordingly, we answer the questions of law referred to us in the affirmative, and against the Revenue. The assessee will be entitled to costs a sum of Rs.750.

M.B.A./4018/FC Reference answered.