High Court Of Allahabad
CIT vs. Kay Kay Family Trust
Section 143(1), 143(1)(a), 143(3), 246(1)(a)
Asst. Year 1986-87, 1987-88, 1988-89
R.K. Agrawal & P. Krishna, JJ.
IT Ref. No. 33 of 1992
11th April, 2005
Counsel Appeared :
A.N. Mahajan, for the Applicant : Rakesh Ranjan Agrawal, for the Respondent
JUDGMENT
P. Krishna, J. :
The Tribunal, New Delhi, at the instance of the IT Department has referred the following question of law under s. 256(1) of the IT Act, 1961 (hereinafter referred to as the Act), for opinion to this Court :
“Whether, on the facts and in the circumstances of the case, Tribunal is right in holding that the AO has no jurisdiction to change the status while making the assessment under s. 143(1) and in that background whether a change in the status is appealable to the first appellate authority ?”
2. The asst. yrs. 1986-87 to 1988-89 are involved in the present reference. The brief facts of the case are as follows : The assessee-respondent had filed the income-tax returns and claimed the status as “specified trust”. The ITO completed the assessment for all these years under s. 143(1) of the Act. However, he while making the assessment under s. 143(1) of the Act adopted the status as that of AOP and charged tax at maximum marginal rate. The said assessment orders were challenged by way of filing appeals before the Dy. CIT(A) and it was contended that the ITO had erred in taking status of AOP and charging maximum rate of tax. It was claimed that as per the returns in the status of specified family trust, there was no tax liability in view of s. 161 of the Act as the trust was not a business trust. But the ITO by treating the assessee in the status of AOP has created tax liability. After overruling the objection that the appeal is not maintainable, the Dy. CIT(A) allowed the appeals and held that under s. 143(1) of the Act the ITO could make certain adjustments for the determination of the income, but could not change the status and charge maximum rate of tax. The order of the Dy. CIT(A) has been confirmed by the Tribunal. The Tribunal agreed with the viewpoint of the first appellate authority that the status of the assessee could not be changed while framing assessment under s. 143(1) of the Act.
3. Heard Shri A.N. Mahajan, the learned standing counsel for the Department, and Shri Rakesh Ranjan Agrawal, the learned counsel for the assessee-respondent.
4. It was submitted that an order passed under s. 143(1) of the Act is not appealable under s. 246 (1) of the Act. Appeal being creature of statute, the order under s. 143(1) having not been made appealable under the provisions of the Act, the view of the Tribunal that the appeal was maintainable is wrong. He further submitted that an order passed under s. 143(1) of the Act has been made appealable for the first time by making necessary amendments w.e.f. 1st of October, 1998, by amending sub-cl. (a) of s. 246(1) of the Act. In contra, the learned counsel for the assessee submitted that the order passed by the ITO though in exercise of power under s. 143(1) of the Act was, in fact, an order under s. 143(3) of the Act and was, therefore, appealable under s. 246(1)(a) of the Act. Elaborating the argument, he submitted that only certain specified adjustments could have been made by the ITO while passing an order under s. 143(1) of the Act. In a case where the ITO exceeds his power and makes the adjustments not permissible under s. 143(1), the assessment order shall be referable to s. 143(3) of the Act. Mere mention of a wrong provision in an order will be of little consequence if the power to pass such an order could be traced out in the Act.
We have carefully considered, the respective submissions of the counsel for the parties and have also perused all the three orders annexed with the reference. The facts which are either not disputed, or are, at this stage, beyond the plea of controversy, may briefly be noticed. The returns were filed by the assessee-respondent in the status of “specified trust”. These returns were processed under s. 143(1) of the Act, by the ITO. He passed the assessment orders and while doing so he did not accept the disclosed status of the assessee-firm and treated the assessee as AOP and levied the tax at maximum rate of tax. According to the assessee-respondent, the trust being not a business trust, there was no tax liability. It is also not in dispute that the assessee challenged the orders purporting to have been passed under s. 246(1) of the Act. In this factual background the question referred to us is to be answered. Sec. 143 of the Act deals with the assessment of income. Two kinds of procedure is provided therein. Sec. 143(1) provides for assessment, without issuing any notice to the assessee, and gives a limited power to ITO to rectify arithmetical mistakes and make prima facie adjustments only. Sec. 143(3) empowers the ITO to frame assessment after notice to the assessee and after making such inquiry as he deems fit. A bare perusal of s. 143(1), as it stood at the relevant time, shows that the ITO without calling upon the assessee for production by him of any evidence in support of the return, may make assessment of total income or loss of the assessee after making such adjustments to the income or loss declared in the return as was required to be made under cl. (b). The said assessment of the income or loss declared in the return is to be made with reference to the return and accounts and documents, if any, accompanying it and also with reference to the past record of the earlier assessment years and determine the sum payable by the assessee or refundable to him on the basis of such assessment. The sub-cl. (iv) of cl. (b) of s. 143(1) of the Act provides for the adjustments, as follows : (i) Rectification of arithmetical errors in the return, accounts and documents, (ii) Giving effect, on the basis of the regular assessments of past years, to the following : (a) Unabsorbed depreciation under s. 32(2). (b) Unabsorbed investment allowance under s. 32A(3)(ii). (c) Unabsorbed development rebate under s. 32(2)(ii). (d) Unabsorbed development allowance under s. 33A(2)(ii). (e) Expenditure on scientific expenditure under s. 35(2)(i). (f) Expenditure on acquisition of patent rights and got rights under s. 35A(1). (g) Preliminary expenses under s. 35D(1). (h) Prospecting expenses under s. 35E(1). (i) Expenses on family planning, etc. under s. 36(1)(ix), first proviso. (j) Any loss carry forward under s. 72(1) or 73(1) or 74(1) or 74(3) or 74A(3), and (k) Any deficiency in “tax holiday” profits under s. 80J(3).
The record of the assessment of the assessee for the past years might be referred to only for the purposes of giving effect to the allowances referred to above. Thus, it is clear that the change of status in summary proceedings under s. 143(1) was not such an adjustment to the income or loss declared in the return, permissible under s. 143(1) of the Act. The ITO, while framing an assessment under s. 143(1), has no jurisdiction not to accept the status as disclosed in the return of income. The ITO if not satisfied by the disclosed status of the assessee in the return, has been empowered to issue a notice under sub-s. (2) of s. 143 requiring the assessee to produce or cause to be produced any evidence on which the assessee may rely in support of the return. Thereafter the assessment shall be finalised under s. 143(3) of the Act. The section as it stood at the relevant time, empowers the ITO to make only certain specified adjustments to the income or losses declared in the return. At the same time certain safeguards were also provided to the assessee who feels aggrieved by the rectification of any arithmetical errors in the return or accounts and documents also about any adjustments in the income or loss by way of filing an application under s. 143(2), within one month from the date of service of the notice of demand issued in consequence of such assessment.
8. The upshot of the above discussion is that the ITO is permitted to rectify arithmetical errors or mistakes and prima facie adjustments in the returns or the accounts and documents accompanying it. He could allow any deduction, allowance or relief which, on the basis of the information available in the return, accounts and documents, was prima facie admissible but was not claimed. Similarly, he could disallow any deduction, allowance or relief claimed in the return, which on the basis of the information available in such return, accounts or documents was prima facie inadmissible. The present case does not fall in either of the above categories. In view of the plain language of s. 143 (1) of the Act, change of status has not been provided as prima facie adjustment under s. 143(1) (a) r/w s. 143(1)(b) of the Act, and the action of the ITO under s. 143(1) was unjustified. Thus, the necessary corollary of the above discussion is that the assessment in question made by the ITO was beyond the scope of s. 143(1). It is correct that the order purported to have been passed under s. 143(1), and it was beyond the four corners of the aforesaid section and such order was not appealable at the relevant point of time. Such an order was not made appealable for the obvious reasons. The reason appears to be because of the limited nature of power to be exercised by the ITO in such matters. Assessment orders passed under s. 143(3) were appealable. The basic difference is that the proceedings under s. 143(1) are summary in nature except making prima facie adjustments as provided therein, the disclosed income or loss is accepted as correct without calling upon the assessee while proceedings under s. 143(3) are also assessment proceedings but they are not summary proceedings. The AO is entitled to assess the income or loss of an assessee inclusive of determination of correct status as per the material available on the record. Opportunity is also afforded to the assessee to establish its claim regarding allowances, deductions, etc. by producing relevant accounts and documents. The proceedings under s. 143(3) are full-fledged assessment proceedings, there is no inhibition or restriction on the power of the ITO to assess the income. The validity of assessment order in question can be saved with reference to s. 143(3) as power to frame assessment is there. The Supreme Court in the case of State of Karnataka vs. Muniyalla AIR 1985 SC 470 has held “but it is now well-settled that merely because an order is purported to be made under a wrong provision of law, it does not become invalid so long as there is some other provision of law under which the order could be validly made. Mere recital of a wrong provision of law does not have the effect of invalidating an order which is otherwise within the power of the authority making it.”
9. At this juncture, it is apt to notice one argument of the learned standing counsel who referred the Explanation to s. 143 and submitted that in view of the Expln. 1(f), the assessment under subs. (1) shall be deemed to be incorrect, inadequate or incomplete in material respect, in the present case and the ITO was justified to (charge) tax on the income of the assessee in correct status. He could refuse to accept the disclosed status while framing the assessment under s. 143(1). He proceeded on the assumption that the Explanation clarifies the words inaccurate, inadequate or incomplete in material respect with reference to sub-s. (1) of s. 143. The argument is misconceived. These expressions do not find place under s. 143(1) but they could be found out under sub-s. (2) of s. 143. The scheme of s. 143 confers power to pass a summary assessment order after rectifying the arithmetical mistake, allowance and deductions permissible under s. 143 (1) of the Act. The said assessment order can be reopened on the application of an assessee filed within the period of one month under sub-s. (2)(a) of s. 143. However, power has also been conferred on the ITO to issue notice to an assessee whether or not an assessment has been made under sub-s. (1) to verify the correctness and completeness of the return by requiring the presence of the assessee under s. 143(2)(b) of the Act. When an income-tax return should be treated as incorrect or inadequate or incomplete has been explained in the Explanation attached to s. 143 of the Act and it is with reference to s. 143(2). Therefore, the argument of the learned standing counsel that the exercise of power of passing the assessment order in question is referable to only s. 143(1) and not to 143(3) of the Act is not correct. The ITO is not required to pass summary assessment order under s. 143(1) if he is of the opinion that the return is incorrect or incomplete and in such circumstances he has to issue a notice under s. 143(2) of the Act.
10. In view of the conclusion that the assessment order was under s. 143(3) of the Act, the same was appealable under s. 246(1) of the Act and the appeal was rightly entertained by the appellate authority. We, therefore, answer the question referred to us in affirmative i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.
[Citation : 278 ITR 620]
