Income-tax---

----Reassessment---Failure to disclose material facts necessary for assessment---Construction work done by assessee in accounting year relevant to assessment year 1979-80---Dispute regarding amount due to assessee-- Final award in 1992--Amount received assessed in assessment year 1993-94- No failure to disclose material facts necessary for assessment---Reassessment notice for assessment year 1979-80 not valid---Indian Income Tax Act, 1961, S 147.

The assessee was a firm engaged in civil construction work. For the assessment year 1979-80, it was assessed on an income of Rs.20,690. At that time the assessee had certain claims pending against BCCL for which it had undertaken construction of some quarters tinder a contract. According to the case of the assessee although the construction work was completed and information in that regard was given to the concerned officials of BCCL, no payment was made. The assessee finally filed a suit. The arbitrator allowed the claim of assessee for a sum of Rs.10,48,500 with interest. The award was made a rule of the Court. However, BCCL challenged the judgment and decree. The Court by an interim order stayed the execution proceedings instituted at the instance of the assessee on the condition that BCCL should deposit the decretal amount in the executing Court. The assessee was given the liberty to withdraw the deposited amount on furnishing sufficient security to the satisfaction of the executing Court. By virtue of that order, the assessee withdrew the decretal amount deposited in the Court and put the entire amount in fixed deposit in a bank. The fixed deposit yielded interest amounting to Rs.1,61,363.29 which was duly shown by the assessee in the return of its income for the assessment year 1987-88. The income-tax authorities made enquiries about the aforesaid interest amount and came to learn about the title suit filed by the assessee in which the Court had given it a decree for the amount as mentioned above. The Income-tax Officer then issued notice to the assesssee on February 20, 1998 asking it to show cause why a proceeding under section 147 of the Income Tax Act, 1961, should not be taken for the assessment year 1979-80 on the presumption that income during that assessment year had escaped assessment. The assessee in its reply pointed out that its claim had been disputed by BCCL and so no income accrued to it at any time till the award was made. Rejecting this explanation notice of reassessment. was issued. On a writ petition:

Held, that at the time of the original assessment the amount of Rs.13,48,945 as the total value of the work done was simply the claim of the assessee which was not being accepted by BCCL and at that stage the assessee had no means to know definitely to what extent its claim would be allowed by the arbitrator/the trial Court and would be finally sustained by the higher Courts. The assessee, therefore, could not reckon that amount or any part of it as income accrued in that year. During the pendency of the writ petition a final award was given by the Supreme Court in May, 1996. It was important to note that the assessee's assessment for the assessment year 1993-94 was made under section 143(3) of the Act in which the entire amount received by it on the basis of the award and the judgment of the Courts was duly shown. The reassessment notice was not valid and was liable to be quashed. .

CIT v. Hindustan Housing and Land Development Trust .Ltd. (1986) 161 ITR 524 (SC) applied.

A. Moitra and S.K. Dutta for Petitioner.

K.K. Jhunjhunwala for Respondents.

JUDGMENT

AFTAB ALAM, J.---The petitioner is a firm engaged in the business of undertaking civil construction contracts. It seeks to challenge a notice, dated March 14, 1990 (Annexure 8), issued by the Assistant Commissioner of Income-tax under section 148 of the Income Tax Act, 1961, asking it to file a return, in the prescribed from, for the assessment year 1979-80 as he proposed to reassess its income for that financial year.

For the assessment year in question the income of the petitioner -firm was assessed at Rs.20,690 by an assessment order as contained in Annexure 5 in a proceeding under section 143(3) read with section 182 of the Act as it was then in existence. At the time the petitioner-firm had certain claims pending against Bharat Coking Coal Limited for which it had undertaken -construction of some quarters under a contract.

According to the case of the petitioner although .the construction work was completed and information .in that regard was given to the concerned officials of BCCL neither any payment was made for the works done nor were any final bills prepared till March 18, 1978. As no final bills were prepared for the works done by the petitioner, including the extra work done due to change of designs while the construction was in progress, the petitioner was finally forced to file title (Arbitration) Suit No.3 of 1983, in the Court of the Subordinate Judge-I, Dhanbad, for the realisation of his claim in that suit an arbitrator was appointed by the Court before whom the petitioner made a claim of Rs.12,60,121.18 which alongwith interest claimed by the petitioner amounted to a total sum of Rs.21,67,408.43. The arbitrator by his award, dated January 23, 1985, allowed the claim of the petitioner for the sum of Rs.10,48,500 and further allowed interest at 15 percent. for certain periods specified in the award.

The arbitrator's award was made a rule of the Court on July 22, 1985. The Court, however, reduced the rate of interest to 12 percent.

BCCL filed M.A. No.65 of 1985 before this Court challenging the judgment and decree of the Court incorporating the arbitrator's award. In the miscellaneous appeal this Court by an interim order, dated February 28, 1986, stayed the execution proceedings instituted at the instance of the petitioner on the condition that BCCL should deposit the decretal amount in the executing Court. The petitioner-firm was given the, liberty to withdraw the deposited amount on furnishing sufficient security to the satisfaction of the executing Court. By virtue of that order the petitioner-firm withdrew the decretal amount deposited in the Court and put the entire amount infixed deposit in a bank. The fixed deposit yielded interest amounting to Rs.1,61,363.29 which was duly shown by the petitioner in the return of its income for the assessment year 1987-88.

It was while dealing with the petitioner's assessment for the assessment year 1978-79 (sic) that the income-tax authorities made enquiries about the aforesaid interest amount and came to learn about the title suit filed by the petitioner in which the Court had given it a decree for the amount as mentioned above. The Income-tax Officer then issued notice to the petitioner on February 20, 1998, asking it to show cause why a proceeding under section 147 should not be taken for the assessment year 1979-80 on the presumption that income during that assessment year had escaped assessment.

The petitioner in his reply to this notice pointed out that since the claim was disputed by BCCL no income could be said to have accrued at any time till the award was given on January 23, 1985, and made the rule of the Court on July 22, 1985, on the basis of which a decree was made for Rs.10,48,500 plus interest. It was further pointed out by the petitioner that the decree was not accepted by BCCL and an appeal challenging the decree was filed in the High Court. The decree passed in the petitioner's favour thus, continued to be in jeopardy and no income could be considered to have accrued thereunder. It was also stated that the execution case instituted by the petitioner was stayed by the High Court. and the petitioner was permitted to withdraw the decretal amount deposited by 13CCL only, on furnishing security to the satisfaction of the Court.

However, the Assistant Commissioner of Income-tax disregarded the petitioner's reply and issued the impugned notice, dated March 14, 1990.

The petitioner then came to this Court in this writ petition which was admitted for hearing on April 25, 1990.

During the pendency of this Writ Petition., M.A. No.65 of 1985(R) filed by BCCL against the arbitrator's award was finally heard and allowed in part by judgment and order, dated July 2, 1991. By that judgment, this Court disallowed interest for certain periods.

Against the judgment of this Court, the petitioner filed a special leave petition before the Supreme Court being S.L.P. No.1215 of 1992 which was allowed by a brief order, dated May 1, 1996. The Supreme Court set aside that part of the order of the High Court by which interest was denied to the petitioner and held that the. petitioner would be entitled to interest for the period which was allowed by the trial Court.

Following the order of the Supreme Court, the petitioner filed a petition before the Subordinate Judge-1, Dhanbad, for releasing the bank, guarantee furnished by it for withdrawal of the decretal amount. Thereupon, the Subordinate Judge by order, dated May 11, 1992, directed the Manager, Bank of India, Hirapur Branch, to release the amount of the bank guarantee furnished by the petitioner.

It is further important to note that the petitioner's assessment for the assessment year 1993-94 was made under section 143(3) of the Act in which the entire amount received by the petitioner on the basis of the award and the judgment of the Courts was duly shown. A copy of the assessment order for the assessment year 1993-94, is brought on the record as Annexure 11 to the supplementary affidavit filed on behalf of the petitioner.

In view of the later developments, particularly, the fact that the entire decretal amount received by the petitioner has now been taken into account in the assessment of its income for the assessment year 1993-94 one should have thought that the controversy in the case has lost its relevance and the Revenue may no longer insist upon pursuing the impugned notice. However, when the case was taken up counsel for the Revenue appeared to be in no mood to give up the notice coming under challenge and hence the case was heard on the merits.

Mr. A. Moitra, learned counsel for the petitioner, submitted that the impugned notice was issued by the Assistant Commissioner of Income-tax on the utterly misconceived notion that in a mercantile system of accounting the decretal money would be deemed to be income accrued to the petitioner- company in the assessment year 1979-80. Learned counsel further submitted that in this case there was neither any failure on the part of the petitioner to make a full and true disclosure of all material facts necessary for assessment for the assessment year 1979-80 nor was there any escapement of income for that year. The ingredients of the proviso to section 147 were, therefore, completely absent and the issuance of the notice under section 148 was quite unwarranted. Mr. Moitra further stated that the impugned notice was issued after eight years on the basis of an approval obtained from the Commissioner of Income-tax in terms of the provisions of section 151 after its amendment with effect from April 1, 1989. Learned counsel pointed out that section 151(1) before its amendment and as it stood at the material time provided that notice would be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board was satisfied on the reason recorded by the Assessing Officer that it was a fit case for the issue of such notice. He contended that as the matter related to the assessment year 1979-80, no notice could be issued without the previous approval of the Board and the approval by the Commissioner of Income-tax would not suffice.

I am of the opinion that this writ petition is fit to be allowed on the basis of the first point urged by Mr. Moitra which is fully supported by the decision of the Supreme Court in CIT v. Hindustan Housing and Land Development Trust Limited (1986) 161 ITR 524. The case of Hindustan Housing was very similar to the facts of the case in hand and in that case the Supreme Court held as follows (page 527):

"In the present case, although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the assessee, the entire amount wits in dispute in the appeal filed by the State Government. Indeed, the dispute was regarded by the Court as real and substantial, because the assessee was not permitted to withdraw the sum of Rs.7,36,691 deposited by the State Government on April 25, 1956, without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether."

The above-quoted passage from the Supreme Court. decision applies with full force to the facts of this case.

In the counter-affidavit filed on behalf of the Revenue, it is stated that since the petitioner was maintaining mercantile system of accounting, it should have disclosed the value of work done at Rs.13,48,945 (which according to the petitioner was the total value of the work done by it) instead of Rs.35,000 and, therefore, the petitioner-firm had furnished inaccurate particulars of income and had failed to disclose income to the tune of Rs.13,13, 945 (after deducting Rs.35,000 which was the only amount shown by the petitioner). According to the Revenue, the petitioner, therefore, failed to disclose fully and truly all material facts necessary for the assessment and concealed its income to the tune of Rs.13,13,945.

The Revenue overlooks the fact that at that time the amount of Rs.13,48,945 as the total value of the work done was simply the claim of the petitioner which was not being accepted by BCCL and at that stage the petitioner had no means to know definitely as to what extent its claim would be allowed by the arbitrator/the trial Court and would be finally sustained by the higher Courts. The petitioner, therefore, could not reckon that amount or any part of it as income accrued in that year.

It may further be noted that Mr. Jhunjhunwala, counsel for the Revenue, laid great stress that the petitioner maintained its account on the mercantile system and, therefore, that amount must be deemed to be the income in that year. The point concerning mercantile system of accounts is to be simply rejected and suffice it to point out in that regard that the assessee in the case of Hindustan Housing (1986) 161 ITR 524 (SC), also maintained its account on the mercantile system and it was in that background that the Supreme Court made the above-quoted observations.

As I have found that this writ petition is fit to succeed on the merits, I need not go into the other point raised by Mr. Moitra pertaining to the authority with whose prior approval notice could be issued.

For the reasons discussed above, I find and hold that the impugned notice is unsustainable in law and is fit to be set aside. I hereby set aside the notice, dated March 14, 1990, as contained in Annexure 8.

In the result, this writ petition is allowed but with no order as to costs.

M.B.A./15/FC

Petition allowed.