Gujarat H.C : Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the IAC cannot issue directions under s. 144A during the pendency of a reference before him under s. 144B(4)?

Counsel Appeared

R.P. Bhatt, for the Appellant : R.K. Patel, for the Respondent

JUDGMENT

RAJESH BALIA, J. :

By its order dt. 5th Jan., 1984, the Appellate Tribunal, Ahmedabad Bench ‘B’ has drawn statement of case and referred the following three questions of law for our opinion : “1. Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the IAC cannot issue directions under s. 144A during the pendency of a reference before him under s. 144B(4)? Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing depreciation and initial depreciation under s. 32(1)(vi) of the IT Act, 1961 ? Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing relief under s. 80J of the IT Act, 1961?”

The facts found by the Tribunal as appear from the statement of the case and the order of the Tribunal are that the assessee is a private limited company dealing in purchase of grey cloth, colour, chemicals, etc. and subjecting that cloth to bleaching, dyeing, printing, etc. It would then sell it as a finished product like printed cloth, poplin, etc. The assessee claimed behalf of provisions under s. 80J of the IT Act on its capital outlay. The ITO did not agree with the same on the ground that activity of assessee did not qualify to be treated as an activity of manufacture, and, therefore, it made a draft assessment order under s. 144B of the Act and on an objection being raised to proposed draft order it was referred to IAC under the provisions of s. 144B(4).

The assessee had also claimed depreciation/initial depreciation in respect of three machines, which claim of the assessee was not put at variance by the ITO in his draft order. It may be noted that drat assessment order was drawn on 28th April, 1978. Objections were raised by the assessee on 15th May, 1978. The IAC issued directions under s. 144A to withdraw the depreciation/initial depreciation in respect of the said three machines. On issuance of such direction, assessment was completed by disallowing depreciation/initial depreciation for the claim in respect of said three machines and by rejecting claim of the assessee for deduction under s. 80J of the Act. On an appeal before the CIT(A), the claim of the assessee in respect of 80J was upheld. But, the assessee’s contention that the directions issued under s. 144A during the course of proceedings under s. 144B were wholly without jurisdiction and no assessment could be permitted for giving effect to such direction, was rejected and disallowance of depreciation/initial depreciation, was upheld. Aggrieved with the said orders, both the Department as well as the assessee had preferred appeals before the Tribunal. The Department’s appeal in respect of the allowance claimed under s. 80J of the Act was rejected by the Tribunal by holding the assessee to be entitled for 80J reliefs. Appeals filed by the assessee in respect of the depreciation/initial depreciation claim was allowed. The Tribunal held following its earlier decision that once reference under s. 144B is made operation of s. 144A is excluded. The action under s. 144A is possible only till draft assessment order stage. As a result of this finding, the Tribunal allowed the claim of the assessee for depreciation/initial depreciation in respect of three machines without examining the claim on merits. It is in this background that the aforesaid question of law have been referred to this Court for its opinion.

4. It has been candidly stated by both the learned counsels that so far as question No. 3 is concerned, relating to allowing relief under s. 80J of the IT Act is concerned, the question is squarely covered by a decision of this Court in CIT vs. J.B. Kharwar & Sons (1986) 57 CTR (Guj) 9 : (1987) 163 ITR 394 (Guj) : TC 25R.724, wherein the Court held that when the assessee subjected grey cloth to the process of dyeing and printing, it produced a distinct article having distinct use as distinguished from the grey cloth, though grey cloth still subsisted. As a result of the process to which grey cloth was subjected there was transformation of grey cloth into a new commodity commercially known as a distinct and separate commodity having its own character, use and name. Transformation of grey cloth to the extent that it became a commercially different commodity was sufficient to hold that there was manufacture or production of article within the meaning of cl. (iii) of sub-s. (4) of s. 80J of the Act. On the aforesaid finding, the assessee was held entitled to relief under s. 80J of the Act. The decision is founded on the decision of the Supreme Court in the case of Empire Industries Ltd. vs. Union of India, AIR 1986 SC 662 under the Central Excises and Salt Act. We are in respectful agreement. Accordingly, the question No. 3 referred to above is answered in the affirmative in favour of the assessee and against the Revenue.

5. This brings us to consider the question Nos. 1 and 2. In fact question No. 2 is corollary to question No. 1 It will be appropriate here to reproduce the relevant provisions of ss. 144A and 144B of the IT Act. “144.A. Power of IAC to issue directions in certain cases.—(1) An IAC may, on his own motion or on a reference being made to him by the ITO or on the application of an assessee call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case of the amount involved or for any other reasons, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the ITO to enable him to complete the assessment and such directions shall be binding on the ITO : Provided that no directions which are prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. Explanation: For the purposes of this sub-section, no direction as to the lines on which an investigation connected with the assessment should be made shall be deemed to be a direction prejudicial to the assessee. (2) The provisions of this section shall be in addition to, and not in derogation of, the provisions contained in sub-s. (3) of s. 119. 114B. Reference to IAC in certain cases. (1) Not withstanding anything contained in this Act, where, in an assessment to be made under sub-s. (3) of s. 143, the ITO 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 sub-s. (6), the ITO 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 assess. (2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the ITO within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the ITO 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 ITO the acceptance of the variation, the ITO shall complete the assessment on the basis of the draft order. (4) If any objections are received, the ITO shall forward the draft order together with the objections to the IAC and the IAC 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 fit for the guidance of the ITO to enable him to complete the assessment : Provided that no directions which are prejudicial to the assessee shall be issued be issued under this sub-section before an opportunity is given to the assessee to be heard. (5) Every direction issued by the IAC under sub-s. (4) shall be binding on the ITO. (6) For the purpose of sub-s. (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 fits : Provided that different amounts may be fixed for different arrears : Provided further that the amount fixed under this sub-section shall, in no case, be less than twenty-five thousand rupees. (7) Nothing in this section shall apply to a case where an IAC exercises the powers or performs the functions of an ITO in pursuance of an order made under s. 125 or s. 125A.”

The contention of the Revenue on the aforesaid two provisions is that the jurisdiction of the IAC is co-terminal with that of the completion of assessment before the ITO. So long as the assessment proceedings are not completed before assessing authority and is pending completion of assessment notwithstanding the draft assessment having been made and referred to IAC under s. 144B, the IAC does not lose its jurisdiction qua the area not covered by the variation made in the draft assessment order. On the other hand, it was strenuously contended by Mr. Mehta for the assessee that in the context of the provisions of ss. 144A and 144B that once the ITO acts under s. 144B, by framing draft assessment proposing variation in the income and loss, he becomes functus officio thereafter to make any change therein. Whether the draft assessment is ultimately referred to IAC or not and for all practical purposes proceedings of assessment came to an end before the ITO. If no objections are raised to the proposed variation he has to pass assessment order in terms of draft order under s. 144B(3) and in case of objections are raised, then the ITO has to make assessment in accordance with the directions issued by the IAC under sub-s. (4) of that provision. As ITO has not been left with authority to deal with assessment any further, it cannot be said that from the stage of draft assessment order any assessment is pending before the ITO and, therefore, the provisions of s. 114A cannot be invoked by the IAC for the purpose of issuing directions in respect of particulars not covered by variations made in the draft assessment order. At any rate on framing of draft assessment order, to the extent claims of assessee are accepted by the AO it becomes final.

We have given anxious consideration to contention raised before us. In our opinion, on the plain reading of two provisions conclusion is irresistible that the assessment is not complete, until an order is passed by the ITO, even in case of a draft assessment is framed by the ITO until he completes assessment by passing an effective order under sub-s. (3) of s. 144B. Where no objection to variation is raised, and where any objection to the variation proposed by the ITO are raised, the assessment is not complete, until the IAC issues such direction as he thinks fit for the guidance of the ITO to enable him to complete assessment and thereafter the ITO makes effective order of assessment in accordance with the directives issued from the IAC. It is pertinent to note that sub-s. (3) of s. 144A specifically envisages that the ITO shall ‘complete assessment’ on the basis of the draft order if no objections are received within the period. So also sub-s. (4) makes it abundantly clear that reference being made to the IAC his power exists to issue such instructions as he deemed fit for the guidance of ITO to enable him to ‘complete assessment’ i.e. to say completion of the assessment is a stage posterior to framing of the draft assessment order and assessment proceedings before the ITO do not terminate with formation of the draft assessment.

8. For exercising power under s. 144A to issue directions for the guidance of the ITO which is for the purpose of enabling him to complete assessment, exists throughout the period during which the assessment is pending. A proceeding is in pendency from the date of its institution and remain pending until its conclusion before the concerned authority. The entire period is to be treated as pendency of the proceedings concerned. That is ordinary meaning of the words “pending”. This literal construction of two provisions, in our opinion, is well supported otherwise also by well established canon of interpretation.

9. Stroud’s Judicial Dictionary defines “pending” ‘as soon as commenced and until it is concluded, that is so long as the Court having original cognizance of it can make an order on the matters in issue, or to be dealt with, therein.’ So also the meaning of the word “pending” has been stated in the Black’s Law Dictionary at p. 1134 “Begun, but not yet completed; during; before the conclusion of “prior to the completion of.

10. In Asgarali Nazarali vs. State of Bombay AIR 1957 SC 503, their Lordships of the Supreme Court quoted with approval the meaning of the word “pending” given in Stroud’s Judicial Dictionary referred to above by holding that the legal proceedings is pending as soon as commenced and until it is concluded. The view was reiterated in S.K. Kashyap vs. State of Rajasthan, AIR 1971 SC 1120. Their Lordships said : “The word ‘pending’ came up for consideration before this Court in Asgarali Nazarali Singaporewalla vs. The State of Bombay, 1957 SCR 678 : AIR 1957 SC 503…… The word ‘pending’ will ordinarily mean that the matter is not concluded and the Court which has cognizance of it can make an order on the matter in issue. The test is whether any proceedings can be taken in the cause before the Court or Tribunal where it is said to be pending. The answer is that until the case is concluded it is pending.” Thus, in the light of the aforesaid test, we have no hesitation in coming to the conclusion that the proceedings for the assessment which commences from the date of filing or issuing the notice to file a return remains pending until final effective order is passed by assessing authority on the basis of which tax can be recovered or aggrieved party can exercise his right of appeal or challenge in whichever forum permissible to do so. Until that stage is reached, it cannot be said that the assessment proceeding before the ITO has come to an end. Two decisions relied on by the respective counsel for the parties which apparently gives look of conflicting decision really do not pertain to question raised before us. Both the decisions cited at the Bar relates to the question whether revised return filed after a particular stage can be treated as valid return required to be considered by ITO before completion of the assessment.

11. In Shri Vallabha Glass Works vs. ITO (1995) 212 ITR 433 (Guj) : TC S9.1059 case revised return was filed during the pendency of the proceeding before IAC under s. 144B before the concerned assessing authority. The assessment order was passed the concerned assessing authority. The assessment order was passed by ignoring revised return filed by the petitioner. It was that action of ignoring revised return which was challenged before this Court and the Court held that the return which is filed earlier than assessment is made, then the same is required to be considered. The Revenue did not deny the fact that the revised return was filed before the assessment order was passed by assessing authority and in that view of the matter, the Court held that assessing authority could not have ignored revised return and the assessment was made as it was assessee’s right to submit a revised return.

12. In Panchmahal Steel Ltd. vs. U.A. Joshi, ITO & Anr. (1994) 116 CTR (Guj) 407 : (1994) 210 ITR 723 (Guj) : TC 9S.1058 case the question raised was whether the ITO can refuse to accept the third revised return filed by the petitioner-assessee on the ground that he had already passed draft assessment order on 12th Dec., 1979, under s. 147(3) (sic) r/w s. 144B of the IT Act, 1961. The Court while accepting the contention of Revenue that such revised return at that stage cannot be accepted but was cautious to make it clear that it was only in the context of the filing of revised return that the issue was being determined. The Court said that there is no dispute that when ITO passed draft order it cannot be said that he has passed final and effective order on the basis of which any demand can be made. The Court also observed that ‘what we have to consider is whether in the context of the filing of a revised return, the ITO can be said to have made an assessment or not when he makes a draft order’ and in that context the Court further opined as under : “The words used in sub-s. (5) of s. 139 are “at any time before the assessment is made” and not “at any time before the final order of assessment is made.”

13. Thus, for the purpose of construing the provisions of s. 139(5) which enables an assessee to file a revised return at any time before the assessment is made, the Court drew distinction between terminology of the assessment and the ‘final order of assessment’. For the purpose of determining the scope and ambit of the right of the assessee to file revised return vis-a-vis time within which revised return can be filed. We are here not concerned with the scope and ambit of such right of the assessee or even any right of the concerned ITO to have made any order. What we are concerned in the present case is about the scope and ambit of the jurisdiction of the IAC to issue direction for the purpose of enabling the completion of the assessment. Before completed assessment order comes into existence power under s. 144A continue to be in existence. As we have noticed above the provisions of s. 144B envisages completion of the assessment only at a time posterior to framing of the draft assessment. Until the assessments are completed under s. 144B(3) or 144B(5) bringing in an effective order under which a demand can be raised and recovered, remain in existence the power for issuing direction to enable the assessing authority to complete assessment whether under s. 144A or 144B. May be that while exercising power under s. 144B jurisdiction is confined to variation proposed and to deal with the objections thereto. Under s. 144A jurisdiction relates to area not covered by draft assessment order under s. 144B and extends to issuing direction for holding inquiry. In the present case, inasmuch as I.A.C. was also conferred concurrent power under s. 144A for making assessment. But in any case, the above two provisions leave no room of doubt that completed assessment comes into existence only after proceeding under s. 144B are concluded and effective order giving right to recovery of the tax to the Revenue and the right of aggrieved party to file an appeal comes into existence, until then proceedings are such in which assessment is pending within the meaning of s. 144A. In view of the aforesaid discussion, we are of the opinion that question No. 1 referred to above has to be answered in the negative in favour of the Revenue and against the assessee.

14. As the question about merit of depreciation in respect of three machines was considered only in the light of the jurisdiction of the IAC to issue direction under s. 144A and allowance has been made only on that basis, it is view for the Tribunal to decide the same on merit.

As a result of answer to question No. 1 answer to question No. 2 also will be in the negative in favour of the Revenue and against the assessee.

Accordingly reference is answered. There is no order as to costs.

[Citation : 252 ITR 162]