COMMISSIONER OF INCOME-TAX VS HADE NAVIGATION (P.) LTD.
2001 P T D 2275
[239 I T R 726]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and Smt. Ranjana Desai, JJ
COMMISSIONER OF INCOME‑TAX
Versus
HADE NAVIGATION (P.) LTD
Income‑tax Reference No.497 of 1987, decided on 22/06/1999.
(a) Income‑tax‑‑‑-
‑‑‑‑Assessment‑‑‑Draft assessment order‑‑‑Assessing Officer has no right to issue a second draft order after a draft order has been communicated to assessee under S. 144B.
From the scheme and object of section 144B of the Income Tax Act, 1961, it is clear that so far as the Income‑tax Officer is concerned, the proposed assessment made by him, which is referred to as the "draft assessment order" is final. It is forwarded as a draft order to the assessee only because the variation in the returned income is more than the specified amount, i.e., Rs.1,00,000, with a view to giving him an opportunity to file objections, if he so desires, and to get suitable directions from the Inspecting Assistant Commissioner. If the assessee does not do so within the specified time of seven days or the time extended by the Income‑tax Officer; the Income‑tax Officer is bound to complete the assessment on the basis of the draft order. It is clear from the expression "the Income‑tax Officer shall complete the assessment on the basis of the draft order" contained in subsection (3) of section 144B of the Act that even where objections are received by the Income‑tax Officer, the only function left for him is to forward the objections alongwith the draft order to the Inspecting Assistant Commissioner and to finalise the assessment in terms of the directions of the Inspecting Assistant Commissioner which are binding on him. Once the draft assessment is prepared and the variation in the returned income being more than Rs.1,00,000, the daft order is forwarded to the assessee as required by section 144B, the quasi‑judicial function of the Income‑tax Officer comes to an end. So far as the Income‑tax Officer is concerned, the draft order is the final assessment order. This is clear from the language of subsection (3) of section 144B which clearly provides that if no objections are received within the specified period, he shall complete the assessment on the basis of the draft order. That being so it is not open to the Income‑tax Officer to forward a second draft order to the assessee after the first draft order is communicated.
Panchamahal Steel Ltd. v. U.A. Joshi, ITO (1997) 225 ITR 458 (SC) applied.
(b) Income‑tax‑‑‑
‑‑‑‑Capital gains ‑‑‑Transfer‑‑‑Extinguishment of right in asset‑‑ Extinguishment of asset itself cannot be equated to extinguishment of right in asset‑‑‑Compensation received on destruction of ship‑‑‑Difference between compensation and cost of asset is not assessable as capital gains‑‑‑Indian Income Tax Act, 1961, Ss.2(47) & 45‑‑‑[Banarsidas Bhanot & Sons v. CIT (1981) 129 ITR 488 (MP) and Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT (1994) 208 ITR 882 (Cal.) dissented from].
The extinguishment of right in the asset on account of extinguishment of the asset itself is not a transfer of the right in the asset but its destruction. By no stretch of imagination can the destruction of the right on account of the destruction of the‑asset be equated with the extinguishment of right on account of transfer within the meaning of section 2(47) of the Act. The difference between the amount received by the assessee from the insurance company on the destruction of the asset and the cost thereof, therefore, would not be chargeable to tax as capital gains under section 45.
Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647 (SC) fol.
Banarsidas Bhanot & Sons v. CIT (1981) 129 ITR 488 (MP) and Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT (1994) 208 ITR 882 (Cal.) dissented from.
Sudhir Sareen v. ITO (1981) 128 ITR 445 (Delhi) ref.
R.V. Desai with P.S. Jetley instructed by T.C. Kaushik for the Commissioner.
S.M. Inamdar with P. Vaidya for the Assessee.
JUDGMENT
DR. D.P.SARAF, J.‑‑‑By this reference under section 256(1) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal has referred the following questions of law to this Court for opinion:
At the instance of the Revenue:
"(1)Whether, on the facts and in 'the circumstances of the case, the Tribunal was right in law in holding that the second draft assessment order was invalid in law and, therefore, the disallowance of investment allowance in the second draft assessment order has to be ignored?"
At the instance of assessee:
"(2)Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that there was a transfer of the ship to the insurance company' when the ship became a dead loss and capital gains was leviable on the assessee receiving compensation from the insurance company in respect of destruction of the ship?
This reference pertains two the assessment year 1978‑79. The material facts giving rise to reference of question No. 1 are as follows:
The assessee, a private limited company, submitted its return of income for the assessment year 1978‑79 with the Income‑tax Officer under section 139 of the Income Tax Act, 1961 ("the Act"). In compliance with notice issued under section 143(2) of the Act, the assessee appeared before the Income‑tax Officer and produced evidence in support of its return. After taking into account the relevant material available with him, the Income‑tax Officer made an assessment of the total income of the assessee under section 143(3) of the Act. As the proposed variation in the income returned by the assessee exceeded the amount of Rs.1,00,000, the Income‑tax Officer forwarded a draft assessment order ("draft order"), to the assessee as required by section 144B of the Act. This was done on March 3, 1981. From the statement of case, it appears that no objection was filed by the assessee within seven days of the receipt of the draft order nor any application was made for extension of time for that purpose. Despite that, the‑Income‑tax Officer did not complete the assessment on the basis of the draft order. On the other hand on March 23,' 1981, i.e., ten days after the service of the draft order on the assessee he forwarded another draft order to the assessee. III the second draft, the Income‑tax Officer disallowed the investment allowance of Rs.13,76,350 claimed by the assessee which he had allowed in the first draft order. As a result, the assessed income of the assessee was enhanced to that extent. The variation of the returned income was also enhanced by Rs.13,76,350. The assessee challenged the powers of the Income‑tax Officer to issue a second draft order. This objection of the assessee was overruled and the assessment was finalised by the Income‑tax Officer in terms of the second draft order. The assessee appealed to, the Commissioner of Income‑tax (Appeals). The Commissioner of Income‑tax (Appeals) dismissed the appeal of the assessee and upheld the view taken by the Income‑tax Officer. While doing so, the Commissioner of Income‑tax (Appeals) relied upon the decision of the Madhya Pradesh High Court in Banarsidas Bhanot & Sons v. CIT (1981) 129 ITR 488. The assessee went in further appeal before the Income‑tax Appellate Tribunal ("the Tribunal"). The Tribunal accepted the contentions of the assessee and held that the second draft order of the Income‑tax Officer was bad in law. The Tribunal followed the decision of the Delhi High Court in Sudhir Sateen v. ITO (1981.) 128 ITR 445. Aggrieved by the above decision of the Tribunal, the Revenue is before us by way of reference of question No. 1 for our opinion.
We have heard Mr. R.V. Desai, learned counsel for the Revenue, who submits that the Tribunal erred in law in holding that the Income‑tax Officer had no power to forward a second draft order. In support of this contention, he relied upon the decision of the Madhya Pradesh High Court in Banarsidas Bhanot & Sons v. CIT (1981) 129 ITR 488, and the decision of the Calcutta High Court in Shahdara (Delhi) Saharanpur Light Railway Co, Ltd. v. CIT (1994) 208 1TR 882. According to Mr. Desai the decision of the Delhi High Court to Sudhir Sareen v. ITO (1981) 128 ITR 445, does not lay down the correct law and, therefore, should not be followed. Learned counsel for the assessee, on the other hand, relies on the decision of the Delhi High Court in Sudhir Sareen v. ITO (1981) 128 ITR 445, and submits that the Income‑tax Officer can sub1fiit only one draft order to the assessee under section 144B of he Act and. if the assessee does not forward any objection within seven days from the receipt of the draft order or extended period, the draft assessment order becomes final under section 143(3).
We have considered the rival submissions of learned counsel for the parties. Section 1448 of the Act, as it stood at the material time, reads as follows:
"(144B) Reference to Inspecting Assistant Commissioner in certain cases.‑‑‑(1) Notwithstanding anything contained in this Act, where, in an assessment to be made under subsection (3) of section 143, the Income‑tax Officer proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of 'such variation exceeds the amount fixed by the Board under subsection (6), the Income‑tax Officer shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
(2)On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the Income‑tax Officer within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the Income‑tax Officer may allow on an application made to him in this behalf. .
(3)If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the Income‑tax Officer the acceptance of the variation the Income‑tax Officer shall complete the assessment on the basis of the draft order.
(4)If any objections are received, the Income‑tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks tit for the guidance of the Income‑tax Officer to enable him to complete the assessment:
Provided that no directions which are prejudicial to the assessee shall be‑ issued under this subsection before an opportunity is given to the assessee to be heard.
(5)Every direction issued by the Inspecting Assistant Commissioner under subsection (4) shall be binding on the Income‑tax Officer.
(6)For the purposes of subsection (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems tit:
Provided that different amounts may be fixed for different areas:
Provided further that the amount fixed under this subsection shall, in no case, be less than twenty‑five thousand rupees.
(7)Nothing in this section shall ‑apply to a case where apt Inspecting Assistant Commissioner exercises the powers or performs the functions of an Income‑tax Officer in pursuance of an order made under section 125 or section 125A."
It may also be expedient at this stage to refer to section 143(3) of the Act which deals with the procedure of assessment of income. Subsec tion (1) of section 143 empowers the Income‑tax Officer, without requiring the presence of the assessee or the production of evidence by him, to make an assessment on the basis of the return. If he is not so satisfied, he is empowered to issue a notice to the assessee under subsection (2). of section 143 of the Act requiring him to attend his office or produce any evidence on which he may rely in support of his return. If the assessee appears and produces any evidence in support of his return, the Income‑tax Officer, after taking into account all such material or evidence, by an order in writing, shall make the assessment of the total income or loss of the assessee. By the Taxation Laws (Amendment) Act, 1975, section 14413 was inserted in the Act with effect from January 1, 1976, which provides that where the Income‑tax Officer proposes to, make any variation adverse to the assessee in the income or loss return and the amount of such variation exceeds a sum of Rs.1,00,000, which was the amount fixed by the Board for that purpose, the Income‑tax Officer shall in the first instance forward a draft of the proposed order of assessment to the assessee: on receipt of such a draft order, the assessee is entitled to file his objections, if any, to such variation within seven days of the receipt of the draft order or within such further period not exceeding fifteen days as the Income‑tax Officer may allow an application made in this behalf. If no such objection is filed within the period of seven days or the extended period, the Income‑tax Officer shall complete the assessment on the basis of the draft order. If any objection is filed by the assessee, he shall forward the objection alongwith the draft order to the Inspecting Assistant Commissioner and after receiving directions from him shall complete the assessment in terms of the directions, which are binding on him It may be pertinent to recall that section 14413 was incorporated in the Act in terms of the recommendations of the Wanchoo Committee in its final report submitted in December. 1971 with the object of giving opportunity to the assessee of meeting the objections of the Income‑tax Officer before an assessment is finalised. From the scheme and object of section 144B, it is clear that so far as the Income‑tax Officer is concerned, the proposed assessment made by him, which is referred to as the "draft assessment order" is final. It is forwarded as a draft order to the assessee only because the variation in the returned income is more than the specified amount, i.e., Rs.1,00,000 with a view to giving him an opportunity to file objections, it' he so desires, and to get suitable directions from the Inspecting Assistant Commissioner. If the assessee does not do so within the specified time of seven days or the tune extended by the Income‑tax Officer, the Income‑tax Officer is bound to complete the assessment on the basis of the draft order.
It is clear from the, expression "the Income‑tax Officer shall complete the assessment on the basis of the draft order" contained in subsection (3) of section 14413 of the Act that even where objections are received, by the Income‑tax Officer, the only function' left for him is to forward the objections alongwith the draft order to the Inspecting Assistant Commissioner and to finalise the assessment in terms of the directions of the Inspecting Assistant Commissioner which are binding on him. Once the draft assessment is prepared and the variation in the returned income being more than Rs.1,00,000, the draft order is forwarded to the assessee as required by section 14413, the quasi‑judicial function of the Income‑tax Officer comes to an end. So far as the Income‑tax Officer is concerned, the draft order is the final assessment order. It is clear from the language of subsection (3) of section 14413 which clearly provides that if no objections are received within the specified period, he shall complete the assessment on the basis of the draft order. That being so; we are of the clear opinion that it is not open to the Income‑tax Officer to forward a second draft order to the assessee after the first draft order is communicated.
In the present case, the assessee did not file any objection nor applied for extension of time for the same. It was, therefore, incumbent on the Income‑tax Officer to complete the assessment in terms of the draft order as contemplated by section 14413(3) of the Act. Instead of doing so, he forwarded a second draft order after ten days of communication of the first draft order enhancing the variation by Rs.13,76,350. This obviously, is beyond the powers conferred on him under section 143(3) read with section 144E of the Act.
We are supported in our above conclusion by the ratio of the decision of the Supreme Court in Panchamahal Steel Ltd. v. U.A. Joshi, ITO (1997) 225 ITR 458, wherein the Supreme Court has held that the assessee is not entitled to file revised returns after the Income‑tax Officer has made the draft order. It may be pertinent to mention that subsection (5) of section 139 of the Act provides for submission of revised returns at any time "before the assessment is made". The assessee in that case wanted to submit revised returns after the communication of the draft order. The Supreme Court held that the right to file revised returns under subsection (5) of section 139 of the Act was to be exercised before the making of the draft order in a case where section 144B of the Act was applicable. This is so because so far as Income‑tax Officer is concerned, the draft order is the assessment order. Had the variation been not more than Rs.1,00,000, the Income‑tax Officer would not have forwarded a draft order to the assessee. It is because of the variation being in excess of the specified amount of Rs.1,00,000 that the Income‑tax Officer was required to forward the same to the assessee as a draft order. It was a draft order only so far as the assessee is concerned. So far as the Income‑tax Office is concerned, it was final subject only to the directions of the Inspecting Assistant Commissioner, if any, in the event of objections having been filed by the assessee within the specified time.
We are also supported in our above conclusion by the decision of the Delhi High Court in Sudhir Sateen v. ITO (1981) 128 ITR 445, wherein it was held that if the Income‑tax Officer, acting under section 14413 of the Act, proposes to make any variation to the prejudice of the assessee in the income or loss returned in excess of the limit fixed, he can issue only‑one draft order of assessment. He has no power under that section to issue more than one draft order. The language of section 14413 does not permit any interpretation favouring more than one draft order. It was held that the Income‑tax Officer has no power to issue more than one draft order.
We have carefully perused the decision of the Madhya Pradesh High Court in Banarsidas Bhanot & sons v. CIT (1981) 129 ITR 488 and of the Calcutta High Court in Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT (1994) 208 ITR 882, wherein a contrary view has been taken. We are respectfully in disagreement with the view taken in the above decisions.
In view of the above, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue.
So far as the second question is concerned, the controversy therein pertains to taxability of capital gains. The assessee received compensation amounting to Rs.85,00,000 from the insurance company on the destruction of the ship. The cost of the ship was Rs.55,05,400. The Income‑tax Officer included the difference in the income of the assessee as capital gains as, according to him, there was extinguishment of right in a capital asset. The order of the Income‑tax Officer was upheld by the Commissioner of Income tax (Appeals) and the Income‑tax Appellate Tribunal. Hence, reference of question No.2 at the instance of the assessee. Learned counsel for the parties are agreed that the controversy therein now stands concluded by the decision of the. Supreme Court in Vania Silk Mills (P.) Ltd. v. CIT (1991) 191 ITR 647, wherein it has been held that the extinguishment of right in the asset on account of extinguishment of the asset itself is not a transfer of the right in the asset but its destruction. By no stretch of imagination can the destruction of the right on account of the destruction of the asset be equated with the extinguishment of right on account of transfer within the meaning of section 2(47) of the Act. The difference between the amount received by the assessee on the destruction of the asset and the cost thereof, therefore, would not be chargeable to tax under section 45 of the Act. Learned counsel for the parties are agreed that tit view of the above decision, question No.2 may be answered in favour of the assessee. In view of the above, we answer question No.2 in the negative, i.e., in favour of the assessee and against the Revenue.
This reference stands disposed of accordingly with no order costs.
M.B.A./261/FC Order accordingly.