Supreme Court of India
COMMISSIONER OF INCOME-TAXversusSUN ENGINEERING WORKS (P) LTD.
- Citation
- 1992 INSC 256
- Decided
- 17 September 1992
- Disposal
- Dismissed
- Bench
- YOGESHWAR DAYAL
Holding
In reassessment proceedings under section 147, the Income Tax Officer may only tax income that has escaped assessment and cannot reopen or set off a loss that was finally disallowed in the original assessment, as such loss is unconnected with the escaped income.
Summary
Sun Engineering Works filed loss returns for assessment years 1960-61 and 1961-62 after the statutory time limit; the Income Tax Officer treated the returns as "no demand" and did not allow the losses. The assessee later disclosed Hundi loans, which the Officer treated as escaped income and, under sections 147 and 148, reassessed the years, bringing Rs 27,000 and Rs 9,000 to tax. The assessee appealed, seeking that the original loss amounts be recomputed, set off against the escaped income and carried forward. The Appellate Assistant Commissioner allowed this, but the Income Tax Appellate Tribunal held that the original assessment had acquired finality and the loss could not be reopened in the reassessment. The Calcutta High Court, in a reference, held that the loss could be computed for the purpose of escaped income but not carried forward. The Supreme Court held that in reassessment proceedings the Officer's jurisdiction is limited to income that has escaped assessment and a concluded item unrelated to that escaped income, such as the loss, cannot be revisited, thereby restoring the Tribunal's order and setting aside the High Court's decision.
Issues considered
- The scope of the Income Tax Officer's jurisdiction under section 147(a) of the Income Tax Act, 1961 in reassessment proceedings.
- Whether an assessee can seek review or recomputation of a loss that was finally disallowed in the original assessment, for the purpose of computing escaped income.
- Whether the original assessment, having acquired finality, can be reopened to allow set‑off of loss against escaped income and to permit carry‑forward of unabsorbed loss.
Legislation cited
- Income Tax Act, 1961s. 147, s. 148, s. 152(2)
Subjects
Income TaxSection 147ReassessmentEscaped incomeLoss set‑offFinality of assessmentTax lawReview of assessment
Judgment
A COMMISSIONER OF INCOME-TAX
v.
SUN ENGINEERING WORKS (P) LTD.
SEPTEMBER 17, 1992
B [YOGESHWAR DAYAL AND DR. A.S. ANAND, JJ.J
Income Tax Act, 1961:
Sections 147(a}, 148 and 152(2)-Escapement of income-Rcassess-
C ment-Scope of-Whether assessee could seek review of concluded item
unconnected with escapement of income and matters attaining finality in
original assessment, in computation of escaped income-Assessce filing
returns for two assessment years showing loss--fncome Tax Officer treating
returns as being beyond time and terminating proceedings-Loss not deter-
mined-Subsequently assessee filing disclosure petition showing Hundi
D loans-Whether loss shown in original returns to be taken into acc.Junt in
reassessment proceedings for computation of escaped income.
Precedents-Supreme Court Judgment-Application of principles laid
down therein-To be understood in the light of question before court-Words
E and sentences of Judgment not to be divorced from context of the question
under consideration.
The respondent-assessee in the two appeals filed the returns of
income for the assessment years 1960-61 and 1961-62 showing loss. The
Income Tax Officer considered both the returns and recorded that the
F returns were tiled beyond time, and conveyed to the appellant that the loss
returns submitted beyond time for the assessment years under reference
being invalid, no action on them was necessary, and hence the proceedings
for both these years were filed.
On appeal, the Appellate Assistant Commissioner held that though
G the Income Tax Officer was wrong in filing the returns without proper
scrutiny and without first computing the loss, ioasmnch as it could only
be known aller proper computation whether assessment would result in a
loss or not, no relief could be granted since the Income Tax Officer had
filed the returns, and dismissed both the appeals. Since the assessee <lid
H not prefer any further appeal the orders of the Income Tax Officer relating
732
C.l.T. v. SUN ENG. WORKS 733
to the assessment years in question in respect of the "loss returns" became A
fiual.
Subsequently, the assessee filed a disclosure petition in respect of
some Hundi loans and a settlement was arrived at between the assessee
and the Revenue, as a result whereof the assessee became assessable for B
the disclosed sums for the assessment years 1960-61 and 1961-62. The
Income Tax Officer considered the said amounts for the two assessment
years as escaped income, and after issuing a notice, as required by section
148 of the Income Tax Act, 1961, within the statutory period, calling npon
the assessee to show cause why the "escaped income" for the two assess-
ment years be not brought to tax under section 147(a) of the Act, and C
hearing the parties and considering the objections, made an order under
section 147(a) of the Act, bringing the escaped income to tax. Aggrieved,
the assessee filed an appeal before the Appellate Assistant Commissioner
contending that the Income Tax Officer should have !l'determined the loss
as declared in the original returns and set it off against the escaped income D
from other sources and even carry forward the loss, if necessary to the
subsequent assessment years. The Appellate Assistant Commissioner al-
lowed the appeal, and directed the Income Tax Officer to not only redeter-
mine the loss, as per the original loss returns and set it off against the
escaped income from other sources, but also to carry forward the unab-
sorbed loss, if any, and set it off against the income in the subsequent E
years.
In appeal by Revenue, the Income Tax Appellate Tribunal, accepted
its plea that the action of the Income Tax Officer in filing the assessment F
proceedings for 1960-61 and 1961-62 on the grounds indicated by him
amounted to nil assessment and that the Income Tax Officer had not
allowed the losses as claimed by the assessee in the returns which had been
filed beyond time, and that since the decision of the Income Tax Officer
had been upheld in appeal by the Appellate Assistant Commissioner and G
the assessee had not taken up th~ matter in any further appeal or revision,
the order of the Income Tax Officer had acquired finality. The Tribunal
held that the Appellate Assistant Commissioner was in error in holding
that the determination of the losses claim~d originally were still open for
review in proceedings under Section.147(a) and directing the computation
of losses and setting off against the escaped income. H
734 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A The High Court, in a reference under section 255(2) of the Act, held
that in the proceedings under section 147 relating to the income which had
escaped assessment the original loss returns in the original assessment
proceedings could not be wholly ignored and in order to determine what
income had escaped taxation, the Income Tax Officer could not ignore
losses which the assessee bad suffered in the relevant years in question as
B reflected in the 'loss returns' and the same were required to be computed
for the purpose of determining the 'income which had escaped assessment'.
It, however, held that if any portion of such loss wa• unabsorbed there
could be no carry forward thereof to any subsequent year.
c In the appeal before this Court, on behalf of the Revenue, it was
contended that since the loss claimed by the assessee originally was
concluding finally against the assessee, the question was not open for
review in the reassessment proceedings and the Income Tax Officer in
proceedings under section 147 of the Act could not consider items which
had become Dual in the original assessment proceedings unconnected with
D any escapement of income.
On behalf of the asses.see, it was contended that once reassessment
proceedings were Initiated, the Initial order of assessment did not survive
for any purpose whatsoevet and while making a fresh order of assessment
E in the reassessment proceedings, the Income Tax Officer has the power to
give benefit to the assessee, which might have been available to it in the
original assessment proceedings.
Allowing the appnls, this Court,
F HELD: 1.1. In the reassessment pro«edings it is not open to an
assessee to seek a review of the concluded item, -.ected with the
escapement of income, for the purpose of computation of tire escapcl
income. The loss which the assessee wanted to be set off against the
escaped income could not be allowed to be so set off because in the original
assessment proceedings, no 'set off' was claimed or permitted and the
G original assessment had acquired finality when the appeal against the
order of assessment failed before the Appellate Assistant Commissioner
and the assessee took no further steps to agitate the issue. The item which
the assessee wanted to be taken into account in the proceedings under
section 147 of the Act were unconnected with the escapement of income.
H Since the original assessment had been concluded finally against the
C.l.T. 1'. SUN ENG. WORKS 735
assessee, it was not permissible for the assessee in the reassessment A
proceedings to seek a review/revision of the concluded assessment for the
purpose of computation of the escaped income. The High Court clearly fell
in error by permitting the assessee to reagitate, in the reassessment
proceedings un~er section 147(a) of the Act, the finally concluded assess-
ment proceedings and to grant to him relief in respect of items not only
B
earlier rejected, but also unconnected with the escapement of income by
assuming as if the original assessment had not been concluded or was 'still
open'. [763 B-F]
Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax, (1953)
23 I.T.R. 82 and Esthuri Aswathiah v. Income-tax Officer, (1961) 41 I.T.R. C
539, relied on.
Deputy Commissioner of Commercial Taxes v. H.R. Sri Ramulu, 39
STC 177 and V. Jaganmohan Rao & Ors. v. Commissioner of Income Tax
and Excess Profits Tax, 75 ITR 373, referred to.
D
1.2. The orders were made by the Income Tax Officer after hearing
the authorised representative of the assessee and since the returns bad
been filed beyond time, the assessment proceedings terminated in 'no
demand'. As apparently, there was no taxable income the losses were not
directed to be set off or carried forward by the Income Tax Officer. Even
if it is assumed that the procedure adopted by the. Income Tax Officer in
E
dealing with the 'loss returns' was not proper, the order of the Income Tax
Officer was not set aside in appeal by the Appellate Assistant Commis-
sioner and no further steps were taken by the assessee to question the
order of the Income Tax Officer. Those orders had, in fact and in law,
become final. The High Court clearly fell in error in holding that in the F
assessment proceedings there had been no final determination of losses
for the relevant year and to assume as if the 'loss return' had not been
finally disposed of or to be still open. The Income Tax Officer had disposed
of the assessment proceedings, accepting the plea of the assessee that for
the relevant year, it had no income and that is why the proceedings were G
tiled as 'no demand'. The order of assessment had, thus, become final on
the conclusion of the proceedings and dismissal of the appeal. [743 A-Cl
2.1. In proceedings under section 147 of the Act, the Income Tax
Officer may bring to charge items of income which had escaped assessment
other than or in addition to that item or items which have led to the H
736 SUPREME COURT REPORTS [1992[ SUPP. 1 S.C.R.
A issuance of' notice under section 148 and where reassessment is made
under section 147 in respect of income which had escaped tax, the Income
Tax Officer's jurisdiction is confined to only such income which has
escaped tax or has been under-assessed and does not extend to revising,
reopening or reconsidering the whole assessment or permitting the asses·
B see to reagitate questions which had been decided in the original assess·
ment proceedings. It is only the under-assessment which is set aside and
not the entire assessment when reassessment proceedings are initiated.
The Income Tax Ofticer cannot make an order or reassessment inconsis-
tent with the original o.-der of assessment in respect of matters which are
not the subject-matter of proceedings under section 147. An assessee
c cannot resist validly initiated reassessment proceedings under this section ~':
merely by showing that other income which hacl been assessed originally
was at too high a figure except in cases under section 152(2). The words
'such income' in section 147 clearly refer to the income which is chargeable
to tax but has escaped assessment and the Income Tax Officer's jurisdic·
D !ion under the section is confined only to such income which has escaped
assessment. It does not extend to reconsidering generally the concluded .Ji.
ii
earlier assessment. Claims which have been disallowed in the origmal
assessment proceeding cannot be permitted to be reagitated on the assess·
ment being reopened for bringing to tax certain income which had escaped
assessment because the controversy on reassessment is confined to mat·
E
ters which are relevant only in respect of the income which had not been
brought to tax during the course of the original assessment. A matter not
agitated in the concluded"original assessment proceedings also cannot be
permitted to be agitated in the reassessment proceedings unless relatable
to the item sought to be taxed as 'escaped income'. Indeed, in the reassess·
F ment proceedings for bringing to tax items which had escaped assessment,
it would be open to an assessee to put forward claims for deduction of any
expenditure in respect of that income or the non·taxability or the items at
all. Keeping in view the object and purpose of the proceedings under
section 147 of the Act which are for the benefit or the Revenue and not an
G assessee, an assessee cannot be permitted to convert the reassessment
proceedings as his appeal or revision, in disguise, and seek relief in r"spect
of items not claimed in the oi;iginal assessment proceedings, unless
relatable to 'escaped income', and reagitate the concluded matters. Even
in cases where the claims of the assessee during the course of reassessment
H proceedings relating to the escaped assessment are accepted, still the
C.l.T. v. SUN ENG. WORKS 737
allowance of such claims has to be limited to the extent to which they A
reduce the income to that originally assessed. The income for purposes o(.
'reassessment' cannot be reduced beyond the income originally assessed.
(761 E-H, 762 A-El
Madhavjee Damodar Thackersay and Anr. v. C.I. T.(Bom.), (1935) 3
I.T.R. 457; Hirala/ v. C.I. T. (Rajasthan), (1980) 121 I.T.R. 89; Kevaldas B
Ranchhodas v. Commissioner of Income Tax, (1968) 68 I.T.R. 842; Sir Shadi
Lal & Sons, Shamli v. C.I. T., (1973) 92 I.T.R. 453; Sharda Trading Co. v.
C.l. T. (Delhi), (1984) 149 I.T.R. 19; Commissioner of Wealth-tax v. C.
-I
Ravindran and Ors., (1977) 107 I.T.R. 547; Commissioner of Wealth-tax v.
Ba/larpur Industries Ltd., (1979) 118 I.T.R. 711; Chetti Chettinad Corporation C
Pvt. Ltd. v. C./. T. (Mad.), (1984) 147 I.T.R. 57; Joint Commercial Tax
Officer-II, Tuticorin v. Ekambareeswarar Coffee and Tea Works, (1991) 83
S.T.C. 457 and Commissioner of Sales Tax v. H.M. Esufali H.M. Abdulali,
(1973) 32 S.T.C. 77, referred to.
C.l. T. v. Standard Motor Products of India Ltd., (1983 )142 I.T.R. 877; D
Deputy Commissioner v. Indian Refrigeration Industries !'. Ltd., (1980) 46
S.T.C. 264; C.l.T. (Central) v. Assam Oil Co. Ltd., (1982) 133 I.T.R. 204;
C.I. T. v. Ram Sevak Paul, (1977) 110 I.T.R. 527; State Bank of Hyderabad
v. C.I. T., (1988) 171 I.T.R. 232; C.l. T. v. Rangnath Bangur, (1984) 149 I.T.R.
487 and C.I. T. v. Indian Rare Earth Ltd., 181 I.T.R. 22, overruled.
E
2.2. Although section 147 is part of a taxing statute, it imposes no
charge on the subject but deals merely "1th the machinery of assessment
and in Interpreting a provision of that kind the rule is that construction
should be preferred which makes the machinery workable. Since the
proceedings under section 147 of the Act are for the benefit of the Revenue F
and not an assessee and are aimed at gathering the 'escaped income' or an
assessee, the same cannot be allowed to be converted as 'revisional' or
'review' proceedings at the instance of the assessee, thereby making the
machinery unworkable. (761 C-D)
3.1. An order made in relation to the escaped turnover does not affect G
the operative force of the original assessment, particularly if it has ac-
quired finality, and the original order retains both its character and
identity. It is only in cases ofunderassessment based on clauses (a) to (d)
of Explanation I to section 147, that the assessment of tax due has to be
recomputed on the entire taxable income. The assessee cannot claim H
738 SUPREME COURT REPORTS [1992] SUPP. I S.C.R.
A recomputation of the income or redoing of an assessment and be allowed
a claim which he either failed to make or which was otherwise rejected at
the time of original assessment which has since acquired finality. Of
course, in the reassessment proceedings it is open to an assessee to show
that the income alleged to have escaped assessment has in truth and in
B fact no e~caped assessment but that the same had been shown under some
inappropriate head in the original returen. [760 C-E]
V. Jaganmohan Rao and Ors. v. Commissioner of Income Tax and
Excess Profits Tax, 75 I.T.R. 373, explained.
C 3.2. It is neither desirable nor permissihle to pick out a word or a
sentence from the judgment of this Court, divorced from the context of the
question under consideration and treat it to be the complete 'law' declared
by this Court. The judgment must be read as a whole and the observations
from the judgment have to be considered in the light of the questions which
were before this Court. A decision of this Court takes its colour from the
D questions involved in the case in which it is rendered and while applying
the decision to a later case, the courts must carefully try to ascertain the
true principle laid down by the decision of this Court and not to pick out
words or sentences from the judgment, divorced from the context of the
questions under consideration by this Court, to support their reasonings.
E [760 G-H; 761-A)
V. Jaganmohan Rao and Ors. v. Commissioner of Income Tax and
Excess Profits Tax, 15 I.T.R. 373 and Madhav Rao Jiwaji Rao Scindia
Bahadur & Ors. v. Union of India, [1971] 3 S.C.R. 9, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3251-52
F of 1979.
From the Judgment and Order dated 17.11.1976 of the Calcutta High
Court in Income Tax Reference No. 153 of 1976."
Ranbir Chander, B.B. Ahuja and Ms. A. Subhashini for the Appellant.
G
K.R. Nambiar for the Respondent.
The Judgment of the Court was delivered by
DR. A.S. ANAND, J, The following question was formulated by the
H High Court of Calcutta while granting the certificate of fitness to file these
C.J.T. v. SUN ENG. WORKS [ANAND . .I.] 739
appeals against the judgment of the Division Bench of that court dated A
17th November, 1976:
Where an item unconnected with the escapement of
11
income has been concluded finally against the assessee
how for in reassessment on an escaped item of income it
is open to the assessee to seek a review of the concluded B
item for the purpose of computation of the escaped in-
come?
The circumstances leading to the formulation of the aforesaid question and
the grant of certificate of fitness to file the appeals are as follows. C
Respondent in both the appeals is the assessee. For the assessment
year 1960-61, the assessee filed the return of income on 17th of November,
1960, showing a loss of Rs. 36,418. For the assessment year 1961-62, the
return of income was filed on 4th October 1961, declering a loss of Rs.
24,31'1. The Income Tax Officer after discussion with the authorised rep- D
resentative of the assessee, Shri AS. Chowdhary, considered both the
returns on 12.12.1962 and in respect of the return for the assessment year
1960-61 recorded on the order sheet that the return filed beyond time. No
action is necessary filed "N.D." For the assessment year 1961-62, the ITO
recorded "the loss re.tum is beyond time. Filed as N.D." The Income Tax E
Officer conveyed to the appellant vide communication dated 12.12.1962.
Sub : Assessment years 1960-61 & 1961-62
With referece to above and your Authorised Repre-
sentative's discussion with me I an to inform you that the F
loss return submitted beyond time for the assessment
years under reference being invalid, no acti0n on them is
necessary. Hence, the proceedings for both these years
are filed.
The assessee challenged the order of the Income Tax Officer before the G
Appellate Assistant Commissioner. The Appellate Authority held that the
Income Tax Officer was wrong in filing the returns without proper scrutiny
and without first computing the loss in accordance with law. the Appellate
Assistant Con1missioner also opined that .it could only be known after
proper computation, whether assessment would result in a loss or not. H
740 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A However, the appellate authority finally held that since the Income Tax
Officer had 'filed' the returns no relief could be granted to the assessee in
the appeals and dismissed both the appeals. The assessee did not prefer
any further appeal from the order of the Appellate Assistant Commissioner
and, thus, the orders of the Income Tax Officer relating to the assessment
years 1960-61 and 1961-62 in respect of the "loss returns" became final.
B
It transpires from the record that subsequent to the proceedings as
noticed above, the assessee filed a disclosure petition in respect of some
Hundi loans and a settlement was arrived at between the assessee and the
Revenue as a result whereof, the assessee became assessable for the
C disclosed sum of Rs.27,000 for the assessment year 1960-61 and for the sum
of Rs.9,000 for the assessment year 1961-62. The Income Tax Officer
considered the aforesaid amounts for the two assessment years as "escaped
income". A notice as required by section 148 of the Income Tax Act, 1961
(hereinafter the Act) was issued within t\le statutory period calling l!pon
D the assessee to show cause why the "escaped income" of Rs.27,000 and
Rs. 9, 000 respectively for the two assessment years be not brought to tax
under Section 147(a) of the Act. After hearing the parties and considering
the objections, an order under Section 147(a) of the Act was made and the
"escaped income" was brought to tax. Aggrieved by the order of the Income
Tax Officer made under Section 147(a) of the Act, the assessee went up
E in appeal and the Appellate Assistant Commissioner accepted the plea of
the assessee that the Income Tax Officer should have redetermined the loss
as declared in the original returns and set it off against the "escaped
income11 from other sources and even carry forward the loss, if necessary
to the subsequnet assessment years. Accordingly, the Appellant Assistant
F Commissioner allowed the appeal and directed the Income Tax Officer
that in the reassessment proceedings not only the redetermine the loss as
per the original loss returns and set it off against the escaped income from
other sources but also that the on-absorbed loss, if any, should be carried
forward and set off against the income in the subsequent years.
G
Aggrieved by this order, the Revenue went up in appeal before the
Income Tax Appellate Tribunal. The Tribunal accepted the plea of the
Revenue that the action of the Income Tax Officer in filing the assessment
proceedings for 1960-61 and 1961-62 on the grounds indicated by him in
the letter dated 12.12.1962, referred to (supra) amounted to nil assessment
H and that the Income Tax Officer had not allowed the losses as claimed by
C.l.T. v. SUN ENG. WORKS [ANAND, J.] 741
the assessee in the returns which had been filed beyond time. The Tribunal A
opined that since the decision of the Income Tax Officer dated 12.12.1962,
had been upheld in appeal by the Appellate Assistant Commissioner and
the assessee had not taken up the matter in any further appeal or revision,
the order of the Income Tax Officer dated 12.12.1962, had been acquired
finality. The Tribunal found that the Appellate Assistant Commissioner
had fallen in error to hold that the determination of the losses claimed B
orginally were still open for review in proceedings under Section 147(a)
and direct the computation of losses and set off against the "escaped
income". The High Court of Calcutta at the instance of the assessee in a
reference under Section 256(2) of the Act called for the statement of the
case and reference of the following question for opinion of the High Court: C
"Whether on the facts and in the circumstances of the case
the Tribunal was justified in disallowing the assessee's
losses of Rs. 36,418 (Rupees thirty six thousand and four
hundred and eighteen) only for assessment year 1960-61
and Rs. 24,314 (Rupees twenty four thousand and three D
hundred and fourteen) only for assessment year 1961-62
as per the returns of losses filed before the Income Tax
Officer and initially filed by the Income Tax Officer while
the Income Tax Officer added hundi loans as per settle-
ment in reassessment proceedings ?
E
The Bench after considering the arguments raised before it and after
noticing the provisions of the Act, various judgments of some High Courts
and this Court came to a conclusion that in the proceedings 'under Section
34 (sic 147) relating to the income which had "escaped assessment", viz.,
Rs. 27,000 and Rs. 9,000 the original "loss returns" in the original assess- F
ment proceedings could not be wholly ignored and in order to determine
what income had "escaped taxation", the Income Tax Officer could not
ignore losses which the assessee had suffered in the relevant years in
question as reflected in the 'loss returns' and the same were required to
be computed for the purpose of determining the 'income which had G
escaped assessment'. The High Court, however, went on to say:
"We however, make it clear that if any portion of such loss
is unabsorbed there will be no carry forward thereof to
any subsequent year. To the extent as stated above we
answer the question referred in the negative and in favour H
742 SUPREME COURT REPORTS f1992) SUPP. l S.C.R.
A of the assessee."
The Revenue, thereupon, filed an application under Section 261 of the Act
for leave to appeal to the Supreme Court against the judgment of the
Division Bench of the High Court. The case of the Revenue before the
High Court was that since the loss claimed by the assessee originally was
B concluded finally against the assessee the question was not open for review
in the reassessment proceedings and the Income-truc Officer in proceedings
under Section 147 of the Act could not consider items which had become
final in the original assessment proceedings unconnected with any escape-
ment of income. On behalf of the assessee, however, it was contended that
C once reasssessment proceedings are initiated, the initial order of assess-
ment does not survive for any purpose whatsoever and while making a fresh
order of assessment in the reassessment proceedings, the Income-truc Of-
ficer has the power to give benefit to the assessee, which might have been
available to it in the original assessment proceedings. In support of these
D submissions the assessee had relied upon the judgments in Deputy Com-
missioner of Commercial Taxes v. H.R. Sri Rumulu, 39 STC 177 and V.
Jaganmohan Rao and Ors. v. Commissioner of Income-Tax and Excess
Profits Tax, 75 !TR 373. The Division Bench after hearing the arguments
in the leave to appeal petition opined :
E "In the instant case, it appears that the question which
is involved, is not the power and the jurisdiction of the
Income Tai< Officer but the right of the assessee to agitate
a matter concluded in the earlier assessment which is
unconnected with any escaped item of income for the
limited purpose of computation in the reassessment. This
F
question was not involved in any of the decisions of
Supreme Court referred to herein before. This in our view
is a substantial question and fit for appeal to. the Supreme
1
Court.'
G and formulated the question noticed in the earlier part of this judgment
while granting the certificate of fitness.
Before us, Mr. Ranbir Chander has appeared for the Revenue and
despite service, there has been no appearance on behalf of the assessee
H who remained un-represented in these appeals.
C.I.T. 1•. SUN ENG. WORKS [ANAND,J.] 743
With a view to answer the question as formulated by the High Court A
and to dispose of both the appeals, it is necessary lo first consider the status
and character of the original assessment orders dated 12.12.1962 made by
the ITO in respect of the 'loss returns' for the years 1960-61 and 1961-62.
As already notice, the orders were made after hearing the authorised
representative of the assessee and since the returns had been filed beyond
time, the assessment proceedings terminated in "no demand". As apparent· B
ly there was no taxable income the losses were not directed to be set off
or carried forward by the ITO. Even if, it be assumed for the sake of
argument, that the procedure adopted by the ITO in dealing with the "loss
returns" was not proper, the order of the ITO was not set-aside in appeal
by the Appellate Assistant Commissioner and no further steps were taken
by the assessee to question the order of the Income Tax Officer. Those,
c
orders had, in fact and in law, become final and the assessee has to thank
himself for that situation.
In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax,
(1953) 23 !TR 82, a Brench of four learned Judges of this Court considered D
the scope of the provision of 'set-off and 'carry forward of losses' under
the Income Tax Act, 1922 and the conditions and circumstances under
which the same could be granted. The question before this Court was :
"Whether on the facts and in the circumstances of the
case when an assessment has been made· under Section E
23(1) of the Indian Income-tax Act, determining the as-
sessee company's income as 'nil' and when proceedings
under Section 34 were subsequently started to assess the
income which the Income-tax Officer believed to have
escaped assessment the assessee company is entitled to F
claim that the loss of profits and gains (including deprecia-
tion allowance) sustained by it in the previous year should
be determined in the course of such proceedings."
The Bench noticed that the assessee had in response to the notice calling
for a return submitted a 'nil' return, which was accepted by the assessing G
authority. Subsequently, the Income-tax Officer sent the assessee a notice
under Section 34(1)(b) of the 1922 Act in the following terms:
11
Whereas in consequence of definite information
which has come into my possession I have discovered that H
744 SUPREME COURT REPORTS (1992( SUPP. l S.C.R.
A your income assessable to income-tax for the year ending
31st March, 1942; has
(a) escaped assessment,
I therefore propose to assess the said income that bas
B
(a) escaped assessment.
I hereby require you to deliver to me not later
than,........ a return in the attached form of your total
income and total world income assessable for the said
c year. ...... .
In reply the assessee again submitted a 'nil' return and also filed a state-
ment showing 'loss'. The Incoem-tax Officer made the following order :
"As the net result for the world business is only a loss,
D there can be no question of profits attributable to opera-
tions in British India under Sections 42(1) and 42(2)(3) in
respect of cotton purchases. The 'nil' return filed is there-
fore accepted.
E Hence there is no assessment for 1941-42. As this is a
non-resident company, the loss need not be carried for-
ward under Section 24(2) as that section in terms does
not apply to non-residents.
The assessee was particular]~ aggrieved by the last portion of the order and
F it claimed that the Income-tax Officer was bound to carry forward the loss
as it had accepted the return. The assessee having failed throughout came
to this Court in appeal. Vivian Bose, J. speaking for the Bench opined :
"....... There is no provision in the Act which entitles the
assessee to have a loss recorded or computed, unless
G something is to be done with the loss. Thus, under Section
24(1) a loss can be set off against an income profit or gain
and under sub-section (2) the Balance of a loss can be
carried forward to a following year on the conditions set
out there. Except for this there is nothing else that can be
H called in aid. But under sub-section (2) the loss can be
C.l.T. v. SUN ENG. WORKS [ANAND, J.] 745
carried forward when "the loss cannot be wholly set off A
under sub-section (1)" and in that event only the "portion
not so set off' can be carried forward. We are therefore
thrown back on .sub-section (1).
Sub-section (1) provides that where an assessee sus-
tains a lnss of profits or gains in any year under any of the
heads mentioned in Section 6 he shall be entitled to have
the amount of the loss "set off agains" his income, profits
or gains under anyother head in that year. Therefore, before
any question of set-off can arise there must be (I) a loss
under one or more of the heads mentioned in Section 6, c
and (2) an income, profit or gain under some other head.
It follows that when there is no income under any head at
all, there is nothing against which the loss can be set off in
that year and unless that can be done sub-section (2) does
not come into play.
D
Next, a set-off under Section 24(1) can only be claimed
when the loss arises under the head and the profit against
which it is sought to be .set off arises under a different
head. When the two arise under the same head, of course
the loss can be deducted but that is done under Section E
10 and not under Section 24(1). See the decision of the
Privy Council in Rm ArAr.Rm. Anmachalam Chettiar v.
Commissioner of income-tax, Madras. In the present case,
the loss is computed by striking a balance in the profit
and loss account of just the one business and consequently
F
no question of different heads arises. On both these
grounds, therefore, the assessee's contention must fail be-
cause, unless the loss can be set-off under sub-section (1)
of Section 24, it cannot be carried forward under sub-section
(2) and if it cannot be carried forward the question of its
dete1. nination and computation becomes i"e/evant." G
(emphasis Snpplied)
Dealing with the reasoning of the High Court, the learned judge
observe: H
746 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A "The High Court proceeds on the ground that when
proceedings are taken under Section 34 the as~essee is not
entitled to reopen the whole proceedings as the further
proceedings are limited to assessing that portion of the
income which has escaped assessment. We need not ex-
press any opinion on this. The question we have to answer
B
is confined to the facts and circumstances of this case and
those circumstances are (1) that no return was filed at any
stage of the case disclosing any income, profits or gains
at al~ (2) that proceedings were later taken under Section
34, and (3) in the course of these proceedings the assesee
c claimed that a certain loss should be determined and
recorded. Our answer is that that cannot be done for the
reasons we have given and that consequently the question
referred was rightly answered in the negative by the High
Court.
D
In Esthuri Aswathiah v. Income-tax Officer, (1961) 41 !TR 539, a
Division Bench of this Court opined that the order of the assessing
authority at the conclusion of assessment proceedings to the effect "no
proceedings" meant that the Income-tax Officer assessed the income as
E "nil" "and if thereafter, he had reason to believe that the appellant had
failed to disclose fully and truly all material facts necessary for assessment
for the year, it was open to him to issue notice for reassessment under
Section 34" Shah, J. speaking for the Bench of three learned juges specifi-
cally rejected the plea raised on behalf of the assessee to the effect that the
order of the ITO recording "no proceedings" implied that the origianal
F assessment proceedings had not been concluded or disposed of. To quote
the learned judge ;
"The submission that the previous return submitted on
September 8, 1962, "had not been disposed of and until
G the assessment pursuant to that return was made, no
notice under section 34( 1) for reassessment could be
issued, has in our judgment no substance. The Inco1ne~·
tax Officer had disposed of the assessment proceeding
accepting the submission made by the appellants that they
H had no income for the assessment year 1950- 51. ........ "
C.l.T. v. SUN ENG. WORKS [ANAND,J.] 747
In view of the settled position of law, as noticed above, the Tribunal A
was right to opine that, in the present case, by the order, dated 12.12.1962,
the assessment proceedings had concluded and with the dismissal of the
appeals against that order, the order of the ITO, dated 12.12.1962, had
acquired finality. The High Court clearly fell in error in holding that in the
assessment proceedings there had been no final determination of losses for
the relevant year and to assume as if the 'loss return' had not been finally
B
disposed of or to be still open. The Income Tax Officer had disposed of
the assessment proceedings, accepting the plea of the assessee that for the
relevant year it had no income and that is why the proceedings were filed
as 'No demand'. The order of assessment had, thus, become final on the
conclusion of the proceedings and dismissal of the appeal. c
Could the assessee in the above fact situation be permitted to claim
"set off', not granted in the original assessment proceedings, by raising that
plea once again in the reassessment proceedings initiated under section 147
of the Act?
D
To answer this question, it is necesary to first extract the provisions
of Sections 147 aod 148 of the Act (as they existed at the relevant time)
Section 147 read thus :-
"S.147 Income escaping assessment. If- E
(a) the Income Tax Officer has reason to believe that,
by reason of the omission or failure on the part of
an assessee to make a return under section 139 for
any assessment year to the Income-tax Officer or F
to disclose fully aod truly all material facts neces-
sary for his assessment for that year, income char-
geable to tax has escaped assessment for that year,
or
(b) notwithstanding that there has been no omission G
or failure as mentioned in clause (a) on the part of
the assessee, thJ Income-tax Officer has in conse-
quence of information in his possession reason to
believe that income chargeable to tax has escaped
assessment for any assessment year, H
748 SUPREME COURT REPORTS (1992] SUPP. l S.C.R.
A he may, subject to the provisions of sections 148 to 153,
assess or reassess such income or recompute the loss or
the depreciation allowance, as the case may be for the
assessment year concerned (hereafter in sections 148 to
15;J referred to as the relevant assessment year).
B Explanation 1. - For the purposes of this section, the
following shall also be deemed to be cases where income
chargeable to tax has escaped assessment, namely :-
(a) Where income chargeable to tax has been under-
assessed; or
c
(b) where such income has been assessed at too low a
rate; or
(c) where such income has been made the subject of
D excessive relief under this Act or under the Indian
Income-tax Act, 1922 (XI of 1922); or
(d) where excessive loss or depreciation allowance has
been computed.
E Explanation 2. - Production before the Income-tax
Officer of accout books or other evidence from which
material evidence could with due diligence have been
discovered by the Income-tax Officer will not necessarily
amount to disclosure within the meaning of this section.
F 11
S.148. Issue of notice where income has escaped assess-
ment. -
( 1) Before making the assessment, reassessment or recom-
putation under section 147, the Assessing Officer shall
serve on the assessee a notice requiring him to furnish
G within such period, not being less than thirty days, as may
be specified in the notice, a return of his income or the
income of any other person in respect of which he is
assessable under this Act during the previous year cor-
responding to the relevant assessment year, in the
H prescribed form and verified in the prescribed manner
C.l.T. v. SUN ENG. WORKS [A.."IAND, J.] 749
and setting forth such other particulars as may be A
prescribed; and the provisions of this Act shall, so far as
may be, apply accordingly as if such return were a return
required to be furnished under section 139.
(2) The Assessing Officer shall, before issuing any
notice under this section, record his reasons for doing so." B
Section 147, which is subject to Section 148, divides cases of income
escaping assessment into two clauses i.e. viz. (a) those due to the non-sub-
mission of return of income or non-disclosure of true and full facts and (b)
other instances. Explanation ( 1) defmes as to what constitutes escape of C
assessment. In order to invoke jurisdiction under Section 147(a) of the Act,
the ITO must have reason to believe that some income chargeable to tax
of an assessee has escaped assessment by reason of the omission or failure
on the part of the assessee either to make a return un\ler Section 139 for
the relevant assessment year or to disclose fully and truly material facts D
necessary for the assessment for that year. Both the conditions must exist
before an ITO can proceed to execise jurisdiction under Section 147(a) of
the Act. Under Section 147(b) the Income-tax Officer also has the juris-
diction to initiate the proceedings for reassessment where he has reason to
believe, on the basis of information in his possession, that income charge-
able to tax has been either under-assessed or has been assessed at too low E
a rate or has been made the subject of excessive relief under the Act or
excessive loss or depreciation allowance has been_ computed. In either case
whether the Income-tax Officer invokes his jurisdiction under clause (a) or
clause (b) or both, the proceedings for bringing to tax an 'escaped
assessment' can only commence by issuance of a notice under Section 148 F
ofthe Act within the time prescribed under the Act. Thus, under Section
147, the assessing officer has been vested with the power to "assess or
reassess'' the escaped income of an assessee. The use of the expression
n assess or reassess such income or recompute the loss or depreciation
allowance 11 in section 147 after the conditions for reassessment are satisfied,
is only relatable to the preceding expression in clauses (a) and (b) viz., G
"escaped assessment The ternl. escaped assessment" includes both non-
11
•
11 11
assessment" as well as 11 under assessment". Income is said to have 11 escaped
11
assessment within the meaning of this section when it has not been charged
in the hands of an assessee in the relevant year of assessment. The expres-
sion 11assess" refers to a situation where the assessment of the assessee for H
750 SUPREME COURT REPORTS [1992] SUPP. 1 S.C.R.
A a particular year is, for the first time, made by resorting to the provisions
of Section 147 because the assessment had not been made in the regular
manner under the Act. The expression "reassess refers to a situation where
11
an assessment has already been made but the Income-tax Officer has, on
the basis of information in his possession, reason to believe that there has
beer. under assessment on account of the existence of any of the grounds
B contemplated by the provisions of Section 147(b) read with the Explanation
{I) thereto.
There is some divergence of opinion in the High Courts in the
country about the scope of power and jurisdiction of the Income-tax
c Officer under Section 147 of the Act and the rights of an assessce in those
proceedings.
In Madhavjee Damodar Thackersay and Anr. v. CIT (Born.), {1935) 3
ITR 457 while answering the following question referred to the Bench :
D
"(1) Whether in the circumstances of the case, the Income
Tax Officer was correct in reassessing only such sources
of income as he found had actually escaped assessment at
the time of the original assessment fo1 the financial year
1931-32 (was levied on 31st July, 1931) (sic)".
E
Beaumont, CJ. repelled the plea raised on behalf of the assessee that in
the reassessment proceedings an assessee could obtain redress in respect
of an erroneous assessment made at the time of original order of assess-
ment also and get credit in respect thereof during the reassessment
p proceedings. The learned Chief Justice opined :
....... that under Section 34 of the Act it is income which
11
has escaped assessment which can be subsequent]y
charged and that it is not open to an assessee, when
charged in that way to re-open the whole assessment and
G seek to be allowed credit in respect of some item which
has been over-assessed, but on the other hand it is open
for an assessee to show that income alleged to have
escaped assessment has in truth and in fact not escaped
assessment but has been brought in under some inap-
H propriate head........ "
C.l.T. v. SUN ENG. WORKS [ANAND,.!.] 751
The Rajasthan High Court in Hiralal v. CIT (Rajasthan), [1980] 121 A
!TR 89, was requested to answer the following question in a reference
under Section 256(1) of the Income Tax Act 1961 :
11
Whether, on the facts and circumstances of this case, the
Tribunal was right in holding that the Income-tax Officer's
jurisdiction under Secliun 147 of the Income-tax Act, B
1961, was confined to the assessment of such income as
had escaped assessment and did not extend to revising or
re-opening the whole original assessment ?
The question was answered in the affirmative and it was held that the C
jurisdiction of the ITO under Section 147 of the Act was confined to the
assessment of such income as had escaped assessment and did not extend
to revising or re-opening the whole assessment. The Bench followed the
judgment in Kevaldas Ranchhodas v. Commissioner of Income Tax, (1968)
68 !TR 842 of the Bombay High Court wherein it had been held that in
the re-assessment proceedings initiated under Section 34(1)(a) of the 1922 D
Act, on the ground that loss had been over-estimated in the original
assessment, the ITO had no jurisdiction to re-open the entire assessment
originally made, and determine afresh the assessable profits or to correct
errors and omissions made by the assessee in the matter of computation
of total income. The power conferred upon the ITO in respect of loss, it E
was held, was confined to "re-compute the loss" and it was observed that
when the legislature speaks of re-computing the loss, it means only the loss
and not the income, profits or gains. It was further held that Section
34(1)(a) does not empower a general recomputation of the income, profits
or gains and that the recomputation can take place only with a view to
granering in the income escaping assessment under the first clause. F
The Allahabad High Court in Sir Shadi Lal & Sons, Shamli v. CIT,
(1973) 92 !TR 453, held that on reassessment, the entire assessment is not
opened and therefore a claim for expenditure which had been disallowed
during the original assessment proceedings cannot be reagitated on the G
assessment being reopened for bringing to tax income which had 'escaped
assessment'. The court held that the controversy in reassessment is con-
fined to matters which are relevant in respect of the income which had nor
been brought to tax during the course of the original assessment.
In Sharda Trading Co. v. CIT (Delhi), (1984) 149 !TR 19, though the H
752 SUPREME COURT REPORTS [1992] SUPP. I S.C.R.
A question before the Delhi High Court arose in a somewhat different situation,
it was observed that Section 147 empowered the ITO only to assess income
which had ·escaped assessment in the relevant year and that reassessment is
not confined to those items in respect of which there is initiation of proceed-
ings and once an assessment is reopened, the ITO is duty bound to determine
the tax liability of an assessee and for the said purpose he would necessarily
B have to take into account not only the escaped income in respect of which a
notice under Section 148 read with Section 147 had been issued but also the
entire income that had escaped assessment during that year.
The Kera la High Court in Commissioner of Wealth-tax v. C. Ruvindran
C and Ors., (1977) 107 !TR 547 after following the judgment of the Division
Bench of the Bombay High Court in (1968) 68 ITR 842 (supra] and of the
Allahabad High Court in (1973) 92 !TA 453 [supra] held in a case arising
under the Wealth Tax Act that during the reassessment proceedings initiated
by the Wealth Tax Officer to reassess the escaped net wealth under Section
17(1] of the Wealth Tax Act 1957, an assessee could not during the reassess-
D ment proceedings to tax the escaped net wealth be allowed to seek recom-
putation of net wealth and redoing of the assessm~nt and be allowed a claim
which the assessee had failed to make at the time to the regular assessment,
especially when that assessment of the assessee had become final. The Bench
opined "that there was no material difference in this respect between the
E provisions of the Income Tax Act and the Wealth Tax Act".
In Commissioner of Wealth-tax v. Ballarpur Industries Ltd. (1979) 118
ITA 711 again in a case arising under the Welath Tax Act Kantawala CJ.
speaking for the Bench of the Bombay High Court opined that the nature
of the jurisdction to assess under section 17 of the Wealth Tax Act 1957 is
F limited and that there is nothing in the scheme of the Wealth Tax Act to
enlarge the limited scope of the power and jurisdiction of the Wealth Tax
Officer in assessing to tax the escaped net wealth.
".......by allowing the assessee to seek a recomputation of
net wealth and redoing of the assessment and allow a
G
claim which the assessee failed to make at the time of the
regular assessment, especially when the assessment of the
assessee had become final ...."
A Divisi'?n Bench of the Madras High Court in CIT v. Standard
H Motor Products of India Ltd., (1983) 142 JTR 877 also considered the scope
C.I.T. v. SUN ENG. WORKS [ANAND, J.] 753
of "reassessment" under Section 147(a) of the Act. The Bench opined that A
once the assessment is reopened the ITO will not only have the jurisdiction
but it would be his duty to determine the tax liability of an assessee and
for that purpose he will necessarily have to take into account not only the
escaped income in respect of which a notice under Section 147 had been
issued but also the entire income that had escaped assessment during the B
year. The Bench went on to hold that the ITO had the power and
jurisdiction to bring to charge items falling under Section 147(b) in a given
case where reassessment proceedings have been validly started by issuance
of a notice under Section 147(a) of the Act. It was held that once an
assessment is reopened, the previous assessment is set aside and the whole
assessment proceedings start afresh. The initial order of 'assessment stands C
automatically" cancelled.
The same High Court in Chettinad Corporation Pvt. Ltd. v. CIT
(Mad), (1984) 147 !TR 57 however, observed:
"Having regard to the object and language of s.34 of D
the l.T. Act, 1922, s.147 of the l.T. Act, 1961, and s.8 of
the Surtax Act, 1964, the reopening of an assessment can
only be for the benefit of the Revenue subject to one
exception, viz., that where a particular item is ought to be
brought to charge for the first time in the reassessment E
proceedings, any allowance, deduction or other relief in
relation to that item can be put forward by the assessee
and will have to be considered by the assessing authority
for grant of relief or otherwise. However, if any disa/-
lowance made in the course of the original assessment which
the assessee wants to be reconsidered during the assessment F
is relevant or has any nexus with items of income that are
brought to charge in the reassessmen~ they can also be
considered. But other items of disa/lowance or relief claimed
by the assessee which are not relevant to items which are
the subject-matter of the enquiry in the reasessment proceed- G
ings cannot be considered again by the ITO at the stage of
reassessment.11
(Emphasis supplied)
In Deputy Commissioner v. Indian Refrigeration Industries P.Ltd., H
754 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A (1980] 46 STC 246 the Madras High Court in a sales tax case opined that
when the assessing officer proceeds to make a reassessment, be does so for
the purpose of redetennining the annual taxable turnover as a whole and
the reassessment order reflects the assessable turnover in its entirety and
the original order of assessment is virtually set aside. By reassessing the
B assessee, the taxing officer is bound to determine the taxable turnover for
the assessment year to question as a whole and the assessing authority
cannot be said to be merely assessing the assessee on the escaped turnover
but it assesses him on his total turnover. This judgment, however, was
dissented from by a subsequent Division Bench of that High Court in Joint
Commercial Tax Officer-II, Tuticorin v. Ekambareeswarar Coffee and Tea
C Wolks, (1991) 83 STC 457.
The Calcutta High Court in CIT (Central) v. Assam Oil Co. Ltd.,
(1982) 133 !TR 204 following its earlier judgment in CIT v. Ram Sevak
Paul, (1977) 110 !TR 527 dealt with the scope of clause (b) of Section 147
and opined that once an assessment is reopened in such a case, the ITO
D has not only the jurisdiction but a duty to levy tax on the entire income that
had escaped assessment. The Bench then held:
"..... .It appears to us that in view of the scheme of the I.T.
Act, once a reopening is made, the entire assessment is
E set aside and the income which has escaped assessment,
even though there is nothing to show the escapement of
assessment, it should be examined and even in a case where
the assessee is entitled to any deduction which was not
granted in the original assessment, the assessee would be so
granted the deduction ....
F
[emphasis supplied]
The Andhra Pradesh High Court in State Bank of Hyderabad v. CIT,
(1988) 171 !TR 232, observed:
G Once an assessment is reopened under Section 148 of
the Income~tax Act, the entire assessment proceedings are
at large. It is open to the tax authorities to reconsider in
such reassessment all items of escapement of income with
out limitation; at the same time it is open to the assessee to
H put forward a claim for deduction of any expenditure which
C.l.T. v. SUN ENG. WORKS [ANAND, J.] 755
was inadvertently omitted in the original assessment A
proceedings. Likewise, the assessee can also put forward
claims for non-taxability of items of receipt which were not
put forward in the original assessment.
(emphasis ours)
B
In any event, the income for purposes of reassessment
cannot be reduced beyond the income originally assessed,
as basically an assessment is reopened on account of
escapement of income and by allowing an assessee to
claim deductions, it is not permissible under law to reduce
the income originally assessed. Even if the assessee's fresh
c
claims during the course of reassessment enquiry are
accepted, still the allowance of the claims should be
limited to the extent to which they reduce the income to
that originally assessed under Section 143(3).
D
The Bench, however, went on to add:
If a claim for deduction or a claim for non-taxability of a
receipt was put forward in the original assessment
proceedings and was considered and rejected by the tax
E
authorities and that fmding had become final, it is not
open to an assessee to put forward those claims Qnce again
during the course of reassessment proceedings."
The Rajasthan High Court in C/Tv. Rangnath Bangur, (1984) 149 !TR 487,
opined: F
"......that once a reassessment proceeding is initiated, the
original order of assessment is set aside or ceases to be
operative. The finality of such an assessment order is wiped
out and a fresh order of assessment would take the place
of and completely substitute the initial order of assess- G
ment. It is, therefore, clear that when reassessment
proceedings are taken, the fonner assessment is completely
wiped out, the entire assessment is reopened and the total
income of the assessee is detennined afresh. The new order
passed on reassessment completely replaces or substitlltes H
756 SUPREME COURT REPORTS (1992] SUPP. 1 S.C.R.
A the original order of assessment. ..... "
(Emphasis supplied)
The Hjgh Court noticed an earlier judgment of the same High Court
in Hirata/ v. CIT (Raj.), (1980) 121 ITR 89 (supra) (one of the Judges Ms.
B Kanta Bhatnagar J. was common to both the Judgments] wherein, it bad
been held that in reassessment proceedings the jurisdic~ion of ITO was
confined to such income alone which had escaped assessment but struck a
divergent note and said:
"reassessment proceedings cannot be confined only to
c such income which has escaped assessment, but the entire
essessment proceedings are set at large and reopened and
the earlier order of assessment is set aside or wiped out
and substituted by the order passed upon reassessment."
(Emphasis supplied]
D
The Bench said that once reassessment proceedings are initiated, the
assessing authority bas to redetermine afresh the total income of the
assessee as also the total sum payable by him as tax under the Act. The
Bench, however, went on to say:
E
"........We may not be understood as holding that the ques-
tions which were expressly raised and decided during the
assessment proceedings or in the appeals from the original
assessment order cannot be reagitated either in the reas-
sessment proceedings or in the appeals taken from the
F reassessment order. So far as the matters raised and
decided in the assessment proceedings or in the appeals
against the original assessment order are concerned, they
should be considered to have been finally decided be-
tween the parties and cannot be reagitated merely because
the assessment has been reopened...... 11
G
In CIT v. Indian Rare Earth Ltd., 181 ITR 22. Full Bench of the
Bombay High Court disagreeing with its earlier judgments in 107 ITR 760
[supra] observed that once v.lid proceedings under Section 147 are started,
the assessing officer has the jurisdiction and dnty to complete the entire
H assessment de-nova and in reassessment proceedings an assessee is entitled
C.l.T. v. SUN ENG. WORKS [ANAND, J.] 757
to make a claim for deduction even though such claim was not made during A
the course of the original assessment proceedings.
The question which fell for decision cf the Supreme Court in Com-
missioner of Sales Tax v. H.M. Esufali H.M. Abdulali, (1973) 32 STC 77,
was some what different. In that case, an assessment under the Madhya
Pradesh General Sales Tax Act, 1958, was made on a dealer for a particular
B
year. Later, on a surprise inspection of the dealers' account books, it was
discovered that certain items of sales had escaped assessment. The assess-
ing authority, thereupon, reopened the assessment and while making the
reassessment did not confine its attention to the addition of just those
suppressed items of sales which were actually brought to light during the c
subsequent inspection, but invoked his powers by assessing the entire
turnover to the best of his judgment by including what he considered to be
suppressed turnover. The estimated figure was larger than the aggregate
of the amounts noted down in the surprise inspection report. The .rrgument
of the assessee that the assessing authority, while reopening the assessment D
for bringing to charge the escaped turnover, had no power to make a best
judgment reassessment, based on his own estimate was repelled.
In Deputy Commissioner of Commercial Taxes v. R.R. Sri Ramulu,
(1977) 39 STC 177 what was directly in issue before the Supreme Court E
was, whether an order of enhancement made by the Deputy Commissioner
sitting in revision was barred by limitation. That question arose under .the
Mysore Sales Tax Act, 1957. The said Act fixed a time limit for the exercise
of revisional power by the Deputy Commissioner. The Deputy
Commissioner's order of enhancement in revision related to certain items
which had already figured in the original assessment and not added for the
F
first time in the reassessment. If the date of"the original assessment were
to enter into the reckoning, the Deputy Commissioner's order was time-
barred. It would, however, have been within time if the date of reckoning
was taken as the reassessment date. It was in this context that the Apex
Court, with reference to the provisions of the Mysore Sales Tax Act, 1957, G
rendered the judgment.
Since, the assessing authority had made an order of assessment
during the reassessment proceedings by including the order of original
assessment in the reassessment order, the assessee was permitted to ques- H
758 SUPREME COURT REPORTS [1992] SUPP. I S.C.R.
A tion the entire reassessment order within the time prescribed by the Act.
The divergent views taken by the High Courts particularly after 1970,
app~rently are based on the interpretations placed by the courts on the
observations made by this Court in V. Jaganmohan Rao and ors. v. CIT,
(1970) 75 !TR 373. The following observations from that judgment have
B been interpreted and read differently by various High Courts:
"Section 34 in terms states that once the Income-tax Of-
ficer decides to reopen the assessment he could do so
within the period prescribed by serving on the person
liable to pay tax a notice containing all or any of the
c requirements which may be included in a notice under
section 22(2) and may proceed to assess or reassess such
income, profits or gains. It is, therefore, manifest that once
assessment is reopened by issuing a notice under sub-sec-
tion (2) of section 22 the previous under-assessment is set
D aside and the whole assessment proceedings start afresh.
When once valid proceedings are started under section
34(1)(b) the Income-tax Officer had not only the jurisdic-
tion but it was his duty to levy tax on the entire income
that had escaped assessment during that year."
E
The High Courts which have taken the view that in the proceedings
under Section 147 of the Act, the entire assessment is reopened, the original
assessment "wiped of' and assessee can put forward all pleas, even if
rejected during the original proceedings, support their conclusions relying
on the observation from Jaganmohan Rao's case to the effect that "the
F previous under assessment is set aside and whole assessment proceedings start
afresh·~while the High Courts taking the view that the reassessment is
confmed only to the escaped assessment and an assessee can put forward
pleas only in respect thereof, rely upon the observations :
"when once valid proceedings are started under Section
G 34(1)(b), the Income-tax Officer had not only the jurisdic-
tion but it was his duty to levy tax on the entire income
that had escaped assessment during that year."
Let us now examine the judgment in Jaganmohan Rao's case [supra]
H to appreciate as to what was laid down in that case as regards the scope
C.l.T. v. SUN ENG. WORKS [ANAND, J.] 759
of the reassessment proceedings. A
In Jaganmohan Rao's case the facts were as follows :
The assessee was the karta of an HUF. The assessment related to
the years 1944-45 to 1946-47. In 1941 the assessee had purchased a spinning
mill known as Sri Satyanarayana Spinning Mills, Rajahmundry, for a sum B
of Rs.54,731. At the time the purchase was made, there were certain
litigations between the sons of the vendor and the vendor in respect of the
spinning mill and certain other properties. Ultimately, the matter went on
appeal to the Privy Council. When the appeal was pending the assessments
were made for the years 1944-45 to 1946-47, and the assessee deposited
the amounts for the various years as per the assessment. Thereafter, the
c
Privy Council disposed of the appeal. Pursuant thereto, the ITO treating
the decision of the Privy Council as information concerning escaped in-
come issued a notice to the assessee under s.34 of the Indian I.T. Act, 1922,
in respect of a sum of Rs.1,09,613 received by the assessee as lease income
of the mill. While questioning the validity of "reassessment proceedings", D
one of the contentions that was raised before the Supreme Court was that
at the time the original order of assessment was passed, the ITO could have
legitimately assessed one-third share of the income which was due to be
assessed as per the judgment of the Madras High Court and that there was
therefore an escape only to the extent of two-thirds share of the income.
E
This court inter-alia held that the decision of the Privy Council
constituted definite information within the meaning of Section 34 and the
proceedings initiated under section 34 were validly instituted.
Repelling the plea of the assessee that the Income-tax Officer could
have legitimately assessed one-third share of the income which was due to F
the assessee according to the judgment of the Madras High Court at the
time when the order of original assessment was passed and that the escape
was only to the extent of two-thirds share of the income, this Court
observed that once the reassessment proceedings were validly initiated with
regard to two-thirds share of the income, the jurisdiction of the Income-tax G
Officer could not be confined only to that portion of the income but
extended to bring to tax the entire escaped income and set aside the
under-assessment previously made. It was in that context that this Court
had made the observations as noticed in the earlier part of the judgment :
The principle laid down by this Court in Jaganmohan Rao's case, H
760 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A therefore, is only to the extent that once an assessment is validly reopened
by issuance of notice under Section 22(2) of the 1922 Act (corresponding
lo Secti9n 148 of the Act) the previous under assessment is set aside and
the ITO !las the jurisdiction and duty to levy tax on the entire income that
had escaped assessment during the previous year. What is set aside is, thus,
only the previous under assessment and not the original assessment
B proceedings. An order made in relation to the escaped turnover does not
effect the operative force of the original assessment, particularly if it has
acquired finality, and the original order retains both its character and
identity. It is only in cases of "under assessment" based on clauses (a) to ( d)
of Explanation (I) to Section 147, that the assessment of tax due has to be
recomputed on the entire taxable income. The judgment in Jaganmohan
c Rao's case, therefore, cannot be read to imply as laying down that in the
reassessment proceedings validly initiated, the assessee can seek reopening
of the whole assessment and claim credit in respect of items finally con-
cluded in the original assessment. The assessee cannot claim recomputa-
tion of the income or redoing of an assessment and be allowed a claim
D which he either failed to make or which was otherwise rejected at the time
of origianal assessment which has since acquired finality. Of course, in the
reassessment proceedings it is open to an assessee to show that the income
alleged to have escaped assessment has in truth and in fact not escaped
assessment but that the same had been shown under some inappropriate
head in the original return, b.ut to read the judgment in Jaganmohan Rao's
E case, as if laying down that reassessment ~pes out the original assessment
and that reassessment is nae only confined to "escaped assessment" or
"under assessment" but to the entire assessment for the year and start the
assessment proceeding de-nova giving right to an assessee to reagitate
matters which he had lost during the original assessment proceeding, which
had acquired finality, is no( only erroneous but also against the phraseology
F
of Section 147 of the Act and the object of reassessment proceedings. Such
an interpretation would be reading that judgment totally out of context in
which the questions arose for decision in that case. It is neither desirable
nor permissible to pick out a word or a sentence from the judgment of this
court, divorced from the context of the question under consideration and
G treat it to be the complete 'law' declared by this court. The judgment must
be read as a whole and the observations from the judgment have to be
considered in the light of the questions which were before this Court. A
decision of this Court takes its colour from the questions involved in the
case in which it is rendered and while applying the decision to a later case,
H the courts must carefully try to ascertain the true principle laid down by
C.J.T. v. SUN ENG. WORKS [ANAND, J.] 761
the decision of this court and not to pick out words or sentences from the A
judgment, divorced from the context of the questions under considereation
by this Court, to support their reasonings. In Madhav Rao Jiwaji Rao
Scindia Bahadur & Ors. v. Union of India, [1971] 3 SCR 9 this Court
cautioned:
"It is not proper to regard a word, a c13.use or a sentence B
occurring in a judgment of the Supreme Court, divorced
from its context, as containing a full exposition of the law
on a question when the question did not even fall to be
answered in that judgment."
Although, Section 147 is part of a taxing statute, it imposes no charge c
on the subject but deals merely with the machinery of assessment and in
interpreting a provision of that kind, the rule is that construction should
be preferred which makes the machinery workable. Since, the proceedings
under Section 147 of the Act are for the benefit of the Revenue and not
an assessee and are aimed at garnering the 'escaped income' of an assessee, D
the same cannot be allowed to be converted as 'revisional' or 'review'
proceedings at the instance of the assessee, thereby making the machinery
unworkable.
As a result of the aforesaid discussion, we find that in proceedings
under Section 147 of the Act, the Income Tax Officer. may bring to charge E
items of income which had escaped assessment other than or in addition
to that item or items which have led to the issuance of notice under' Section
148 and where ressessment is made under Section 147 in respect of income
which has escaped tax; the Income Tax Officer's jurisdiction is confined to
only such income which has escaped tax or has been under-assessed and
does not extend to revising; reopening or reconsidering the whole assess- F
ment or permitting the assessee to reagitate questions which had been
decided in the original assessment proceedings. It is only the under-assess-
ment which is set aside and not the entire assessment when reassessment
proceedings are initiated. The Income Tax Officer cannot make an order
of reassessment inconsistent with the original order of assessment in G
respect of metters which are not the subject-matter of proceedings under
Section 147. An assessee cannot resist validly initiated reassessment
proceedings under this Section merely by showing that other income which
had been assessee o~iginally was at too high a figure except in cases under
Section 152(2). The words "such income" in Section 147 clearly refered to
the income which is chargeable to tax but has "escaped assessment" and H
762 SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A the Income Tax Officers' jurisdiction under the Sectio.n is confined only to
such income which has escaped assessment. It does not extend to recon-
sidereing generally the concluded earlier assessment. Claims which have
been disallowed in the original assessment proceeding cannot be permitted
to be reagitated on the assessment being reopened for bringing to tax
certain income which had escaped assessment because the controversy on
B reassessment is confined to matters which are relevant only in respect of
the income which had not been brought to tax during the course of the
original assessment. A matter not agitated in the concluded original assess-
ment proceedings also cannot be permitted to be agitated in the reassess-
ment proceedings unless relatable to the item sought to be taxed as
c 'escaped income'. Indeed, in the reassessment proceedings for bringing to
tax items which had escaped assessment, it would be open to an assessee
to put forward claims for deduction of any expenditure in respect of that
income or the non-taxablity of the items at all. Keeping in view the object
and purpose of the proceedings under Section 147 of the Act which are
for the benefit of the Revenue and not an assessee, an assessee cannot be
D permitted to convert the reassessment proceedings as his appeal or
revision, in disguise, and seek relief in respect of items earlier rejected or
claim relief in respect of items not claimed in the original assessment
proceedings, unless relatable to 'escaped income', and reagitate the con-
cluded matters. Even in cases where the claims of the assessee during the
course of reassessment proceedings relating to the escaped assessment are
E accepted, still the allowance of such claims has to be limited to the extent
to which they reduce the income to that originally assessed. The income
for purposes of 'reassessment' cannot be reduced beyond the income
originally assessed.
It would be seen that whereas in the case of Anglo French Textile
F Company Limited's case (supra) the question as to the rights of an assessee
to claim 'redoing', 'revising' or 'recomputing' . entire income during the
reassessment proceedings was left open, that question did not come up for
consideration in the case of N.H. shri Ramu/u (supra) or H.M. Esufali
(supra) or even in Jaganmohan Rao's case (supra). Some of the High
G Courts, therefore, fell in error in reading those judgiments, divorced from
the context in which the precise questions came up for consideration in
those cases, and to hold that the assessee could 'reagitate' the concluded
issues and claim relief in respect of items, finally con.duded in the original .
assessment proceedings, during the reassessment proceedings, uncon-
H nected with the escapement of income. We cannot, t>lierefore, approve the
C.I.T. v. SUN ENG. WORKS [ANAND, J.] 763
broad propositions laid in that regard in 46 STC 264; 110 ITR 527; 133 A
ITR 204; 142 ITR 877; 149 ITR 487; 171 ITR 232 and 181 ITR 22 (supra).
Keeping in view the above principles, we may now turn our attention
to the question formulated by the. High Court as noticed in the earlier part
of the judgment.
B
The Tribunal rightly found that the loss which the assessee wanted
to be set off against the 'escaped income' could not be allowed to be so
set off because in the original assessment proceedings, no 11 set off! was
claimed or permitted and the original assessment had acquired finality
when the appeal against the order of assessment failed before the Appel- c
late Assistant Commissioner and the assessee took no further steps to
agitate the issue. The Tribunal was also right in concluding that the item
which the assessee wanted to be taken into account in the proceedings
under Section 147 of the Act were unconnected with the escapement of
income. The High Court clearily fell in error in holding otherwise. Since D
the original assessment had been concluded finally against the assessee, it
was not permissible for the assessee in the reassessment proceedings to
seek a review/revision of the concluded assessment for the purpose of
computation of the escaped income. The High Court clearly fell in error
by permitting the assessee to reagitate, in the reassessment proceedings
under Section 147 (a) of the Act, the finally concluded assessment proceed- E
ings and to grant to him relief in respect of items not only earlier rejected,
but also unconnected with the escapement of income by assuming as if the
original assessment had not been concluded or was 'still open'
Therefore our answer to the question formulated by the High Court F
and noticed in the earlier part of this judgment is that in the reassessment
proceedings it is not open to an assessee to seek a review of the concluded
item, unconnected with the escapement of income, for the purpose of
computation of the escaped income.
G
The appeals consequently succeed and are allowed. The orders of
the High Court are set aside and those of the Tribunal restored. Since the
assessee had not put in any appearance, there shall be no order as to custs.
N.P.V. Appeals allowed.
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