Calcutta H.C : Reassessment of escaped income, without any express ‘finding’ or ‘direction’ could be made under Explanation 2 to section 153 (3)

High Court Of Calcutta

CIT, Central-II, Kolkata Vs. Glass Equipment (India) Ltd.

Section 153, 148, 149 & 150

Girish Chandra Gupta And Sudip Ahluwalia, JJ.

ITAT No. 189 Of 2013

Ga No. 3382 Of 2013

May  16, 2014

ORDER

Girish Chandra Gupta, J. – The subject matter of challenge in this appeal is a judgment and order dated 30th April, 2013 passed by the learned Income Tax Appellate Tribunal dismissing an appeal preferred by the Revenue and Cross Objection filed by the assessee. Aggrieved by the order, the Revenue has come up in appeal. The assessee has filed a Cross Objection. The facts and circumstances of the case are as follows:—

The Assessing Officer in his order dated 8th March, 2000 following the judgment of various High Courts and the Supreme Court held that the closing stock could not be valued without taking into account the work in progress, the cost of labour and office expenses. Accordingly, he assessed the aforesaid cost at a sum of Rs.63,23,501/- and added back the same to the income of the assessee. Before the Assessing Officer, the assessee had raised a contention that in case the closing stock was to be revalued, the opening stock was also required to be revalued which was rejected by the Assessing Officer holding as follows:

“3.5 During the course of assessment proceedings, another contention has been raised in this respect, namely, if the closing stock of this year is sought to be changed, the opening stock also should accordingly be changed and net effect should be taken into consideration to determine the profit of the year. In this respect, it may be mentioned that the assessee’s contention is not acceptable because the assessee has been following wrong method of accounting in respect of closing stock and if it is allowed to adjust the difference in opening stock, the profit & loss account would not reflect the true picture of the profit during the year because all along these years the assessee has been unilaterally suppressing its value of work-in-progress and thereby the profit of the year.

3.6 As per various decision of the Superior Courts including in the case of CIT v. Corn. Bank Ltd. [1988] 174 ITR 616 (Kar.) it has been held as under:—

It is thus clear that irrespective of the basis adopted for valuation in the earlier year, the assessee has an option to change the method of valuation of closing stock at cost or market price whichever is lower at any time provided the change is bonafide and followed regularly thereafter.

3.7 If the assessee is free to change its method of valuation in a particular year irrespective of the method adopted in the earlier year, it is unfair to argue that while making the adjustment in the value of closing stock, the department should also make change in the opening stock accordingly. If this argument is accepted it will be a never ending process because the opening stock of one year is the closing stock of the earlier year and so on.

3.8 Since the methods of valuation adopted by the assessee has been clearly shown to be erroneous in the earlier paragraph of this order, the department has every justification to change the valuation of closing stock in accordance with the law. The assessee cannot be allowed to take advantage of its own omission/ commission by arguing that opening stock of this year should also be adjusted. Moreover, under the provisions of section 145 there is no mandate to change the method of valuation of opening stock which is obviously the closing stock of the earlier year.”

2. The assessee preferred an appeal against the order dated 8th March, 2000 and also applied under section 154 of the Income Tax Act for rectification of the order dated 8th March, 2000. The prayer for rectification was allowed by an order dated 29th November, 2000 by which the addition made by the Assessing Officer by his order dated 8th March, 2000 was reduced to a sum of Rs.41,03,008/- from the originally added sum of Rs.63,23,501/-.

3. The appeal preferred by the assessee against the order dated 8th March, 2000 was allowed by CIT (Appeal) by his order dated 12th August, 2002. The CIT (Appeal) accepted the contention of the assessee that the opening stock of the assessment year 1997-98 could be revised, but he was of the opinion that a corresponding revision of the closing stock of the assessment year 1996-97 was necessary in that case. To be precise, the views expressed by the CIT (Appeal) are as follows:

“12. As illustrated above, the present case is not one where the appellant has chosen to change the method of valuation and therefore, there was no question of the department having permitted the same. Accordingly, the decisions in the case of Mel Mould Corp. v. CIT & Trivani Engg. Works v. CIT [1987] 167 ITR 742 (All) will not apply. On the other hand, the present case is more akin to the case before the Privy Council and K.G. Khosla & Co. Vs. CIT (Supra). Thus, the Assessing Officer applying the same yardstick to the opening stock of work-in-progress, will do well to revise such an opening stock also and come to the correct amount of under valuation. In doing so, he would be free to reopen the immediately preceding year since the closing stock of the preceding year would be the same as the value of opening stock of the year under consideration i.e. assessment year 1997-98. Thus, closing stock value of work in progress, will necessarily be enhanced in the preceding year i.e. assessment year 1996-97. This course of action would be in consonance with the decision rendered in the case of CIT v. Bengal Jute Mills Co. Ltd. 107 CTR 34 (Cal.). The Calcutta High Court have, in this judgment held that in case of consequential adjustment made in the opening stock, if there is any escapement of income in any earlier previous year, the Assessing Officer may reopen the assessment for the purpose of bringing to the tax the income that has escaped assessment. With these observations, ground No.1.2 also stands disposed off.”

4. Pursuant to the order dated 12th August, 2002 an exercise was undertaken by the Assessing Officer once again, but he omitted to revalue the opening stock for the assessment year 1997-98 for the following reasons:

“iv. In the subsequent assessment year 1998-99 onwards, the assessee has himself followed the same yardstick as per directions of CIT (A) and the Assessing Officer while completing the assessment for assessment year 1998-99 u/s 143(3) on 12.01.2000, made the assessment at Rs.73,20,620/- as against the returned income of Rs.85,18,620/-. Thus, the Assessing Officer allowed a reduction of income to the extent of Rs.12,42,510/- due to over valuation of opening stock of work-in-progress as on 01.04.1997 (on the basis of addition of Rs.41,03,008/- made in assessment year 1997-98). The relevant portion of assessment order at page 7 & 8 for the assessment year 1998-99 is reproduced as under:—

Therefore, the value of the work-in-progress as on 31.03.1998 is valued at Rs.75,04,008/- (value as per Balance-Sheet Schedule G i.e. Rs.46,63,510/- + Rs.28,60,498/- i.e. machine hour rate). The net effect of valuation of work-in-progress is worked out as under:—

Addition to value of Opening Stock of Work- Rs.41,03,008/-

in-Progress (as on 1.4.97)

Addition to value of Closing Stock of Work- Rs.28,60,498/-

in-Progress (as on 31.12.98)

Net effect of addition to Work-in-Progress Rs.12,42,510/-

Thus, the Returned Income of the assessment year 1998-99 was reduced by the Assessing Officer himself by Rs.12,42,510/- & thus, the assessee automatically got relief/ reduction in assessment year 1998-99 due to the addition of Rs.41,03,008/- made in the assessment year 1997-98. Then why the assessee is demanding further relief in assessment year 1997-98 is not understood ? It will amount to double relief to the assessee, which cannot and should not be allowed.

In view of the above, no further relief or refund is due to the assessee in assessment year 1997-98 or for any other earlier assessment year, as a result of CIT (A)’s order. Therefore, the assessee’s application dated 17.01.2003 for refund of Rs.39,79,400/- for the assessment year 1997-98 as a result of CIT (A)’s order is misconceived and is devoid of any merit and is rejected/dismissed.”

5. The assessee unsuccessfully challenged the order dated 30th May, 2003 before the CIT (Appeal), who by his order dated 20th November, 2003 held as follows:

“On a careful consideration, I am of the opinion that neither there was the competent directions by the CIT (A) to substitute the opening stock the accounting year relevant to the assessment year in appeal at Rs.63,23,501/- nor there has been a revision of the return by the appellant of the preceding assessment year 1996-97 to the extent of Rs.63,23,501/-. The Assessing Officer’s action in not having allowed allowance of Rs.62,23,501/- in the order under section 154 (in appeal) is quite justified. Incidentally, the order of the CIT (A) if given effect as intended by the appellant would result in an income lower than the income returned by the appellant, which never is the intention of the legislature while providing for appellate remedy under the Income Tax Act. Under the Income Tax Law no Appellate Authority under the Income Tax Act in my opinion has any power to lower the income of the appellant than returned one, except when whole or part of the income is assessable in some one else’s hand. This incidentally proves that the reverse movement of the above said accounting principle of valuation has no sanction under the Income Tax Law. Accordingly, the Assessing Officer’s order under section 154 dated 30.05.2003 is hereby confirmed” (sic).

6. Aggrieved by the order dated 20th November, 2003, the assessee preferred an appeal before the learned Tribunal which was disposed of by a judgment and order dated 20th October, 2006 by allowing the appeal of the assessee holding as follows:

“6. After considering the rival submissions, we are inclined to agree with the submissions by Shri Rastogi. In the original direction the learned CIT (A) has held that not only the closing stock has to be reworked but the opening stock has also to be reworked on the same basis and even for the said purpose can revalue the closing stock of the immediately preceding year. In our opinion, this was a specific direction though worded in a peculiar manner. This direction has been confirmed by the Tribunal and hence in view of the order of the Tribunal the AO is directed to consider the observation of learned CIT (A) in his order dated 12.8.2002 as direction and not merely an advice”.

7. In order to give effect to the order dated 20th October, 2006 the Assessing Officer once again applied his mind, but did not give effect to the order dated 20th October, 2006 for the following amongst other reasons:

“5. From the wording of the Hon’ble ITAT’s order, it is clear that no specific deletion of income has been ordered and both the appellate authorities have observed that the same yardstick should be applied to the OS which will obviously reduce the net addition in the year under consideration but will correspondingly & equally enhance the income of the preceding year i.e. AY 1996-97. Normally, the valuation of closing stock affects the succeeding year only and does not work in reverse gear, as per the accounting principles and accounting practices & standards as laid down by the Institute of Chartered Accountants. It may be added that the assessee has already got benefit of addition of Rs.41,03,008/- in the succeeding assessment year 1998-99 and the assessed income in the assessment year 1998-99 is lower than the returned income even in scrutiny assessment under section 143(3). This is due to the reason that due to this addition in the value of closing stock of W.I.P. as on 31.3.1997, the opening stock value of W.I.P. as on 1.4.1998 i.e. for the assessment year 1998-99 was enhanced equally and correspondingly. Thus, the assessee is trying to take double & undue benefit in the assessment year 1998-99 as well as in the assessment year 1997-98 of this addition of Rs.41,03,008/- made in the assessment year 1997-98.

6. By following the appellate authorities directions reproduced above in para 4 above, the AO is equally duty bound & directed to revalue the closing stock of assessment year 1996-97. Thus, the addition in the opening stock value as on 1.4.1996 will be set off/ neutralized by the corresponding & consequential addition in the closing stock value as on 31.3.1996 i.e. for the assessment year 1996-97. Thus, both the additions in the values of W.I.P. as on 1.4.1996 & 31.3.1996 will be nullified by each other. As per directions of the Hon’ble ITAT, both the values have been reworked out and value beyond or prior to 31.3.1996 cannot be reworked out because that is not the directions of the CIT (A) or the ITAT in their orders”.

8. The assessee once again preferred an appeal against the order dated 4th June, 2008 which was disposed of by an order dated 4th May, 2009 by which the CIT (Appeal) held as follows :

“5. The issue involved and the submissions made by the appellant have been considered. The directions of the Hon’ble ITAT are categorical, clear and unambiguous. In view of the binding nature of the orders of the Higher Authorities on the lower authorities, as laid down by the Apex Court in the citations referred to by the appellant; the AO is bound to give effect to the directions of the Hon’ble ITAT so long as the orders of the Tribunal are not reversed by the Higher Judiciary, irrespective of the fact that the assessed income comes down below the returned income. In view of the aforesaid discussion the AO is directed to give effect to the directions of the Hon’ble ITAT; if he is not satisfied with the order of the Hon’ble ITAT, the proper course is to file an appeal before the High Court, but it is highly improper to defy the directions of the ITAT. The appeal of the appellant is allowed”.

9. Aggrieved by the order of the CIT (Appeal) passed on 4th May, 2009, the Revenue preferred an appeal before the learned Tribunal which was dismissed by a judgment and order dated 6th November, 2009. The learned Tribunal issued directions as follows :

“5. We have heard the parties. It is settled law that income for each asstt. year has to be computed and income of two different years cannot be set off against each other except as provided in sections 70 to 74 of the Act. Therefore, when the Tribunal has directed to recompute the stock and give consequential relief to the assessee, the effect has to be given. Therefore, if by giving effect to the order of the Tribunal if income for asstt. year 1997-98 is to be reduced that has to reduced and if it also results into enhancement of income for asstt. year 1996-97, the same has also to be enhanced but separately. Therefore, since the income of each asstt. year is to be separately computed, the AO is not justified in setting off the income of asstt. year 1996-97 against the relief to be granted for asstt. year 1997-98. Accordingly, the AO is directed to give effect to the appellate order in letter and spirit”.

10. When the Assessing Officer was thus directed to follow the direction of the Appellate Authority in letter and spirit, the opening stock for the assessment year 1997-98 was revalued and the required benefit was given to the assessee. But at the same time, a notice under Section 148 was issued on 10th June, 2010. The reasons for issuance of the aforesaid notice obviously was to give effect to the order dated 6th November, 2009 passed by the learned Tribunal at the instance of the assessee himself. The assessment order for the assessment year 1996-97 and the assessment year 1997-98 were as a matter of fact passed on 31st December, 2010. Pursuant to the order passed by the Appellate Tribunal dated 6th November, 2009, the closing stock of the assessment year 1996-97 was enhanced by a sum of Rs.63,64,820/-.

11. Aggrieved by the aforesaid order, the assessee preferred an appeal which was allowed by an order dated 12th March, 2012 for the following reasons:

“Even if for argument sake, it is considered that in the case of appellant company the Hon’ble ITAT in I.T.A. No.3216/Del/09 dated 06.11.2009 had given direction in terms of section 150(1) for reopening of assessment for A.Y. 1996-97, such direction is not valid in view of provisions of section 150(2) of the I.T. Act. The section 150(1) provides that the power to issue notice u/s. 148 in consequence of or giving effect to any finding or direction of the Appellate/Revisional Authority or the Court is subject to the provision contained in section 150(2). Section 150(2) provides that directions u/s. 150(1) cannot be given by the Appellate/Revisional Authority or the Court if on the date on which the order impugned in the appeal was passed, the re-assessment proceedings had become time barred. In other words, as per section 150(2), the Appellate Authority could give directions for the re-assessment only in respect of that assessment year in respect of which re-assessment proceedings could be initiated on the date of passing of order under appeal. In the case of appellant company, it is apparent that the order under appeal before the Hon’ble ITAT was order of the CIT(A) dated 04.05.2009 which was passed against the order of the A.O. dated 04.06.2008 giving effect to the order of Tribunal. Thus, in this case, the order under appeal was A.O.’s order dated 04.06.2008 and as on that date the time limit for reopening of assessment for A.Y. 1996-97 was already lapsed. Hence, as per the provisions of section 150(2), the ITAT could have not given the direction u/s. 150(1) of the Act. In view of above facts, it is to be held that the provisions of section 150(1) is not applicable and consequently notice issued u/s. 148 for A.Y. 1996-97 was time barred u/s. 149 and without jurisdiction. Therefore, subsequently, the order passed u/s. 147 by the A.O. for A.Y. 1996-97 is beyond the period of limitation and deserves to be cancelled. The Ground Nos. 1 to 5 are allowed.”

12. Aggrieved by the order of the CIT (A), the revenue preferred an appeal before the learned Tribunal which was dismissed by a judgment and order dated 30th April, 2013, virtually endorsing the views of the CIT (A). The learned Tribunal opined as follows:

“We find that as per the provisions contained in section 150(2) of the Act no notice u/s 148 of the Act can be issued in any circumstances after a lapse of six years from the end of the relevant assessment year. In the instant case, the assessment year involved being 1996-97 no notice u/s 148 of the Act can be issued after 31.03.2003. The case of the Revenue is that the notice was issued to give effect to the directions contained in the order of the Tribunal dated 6.11.2009. It is not the case of the Revenue that the notice u/s 148 was issued to give effect to any other earlier order passed by the ld. CIT(A) or Tribunal. The order which was the subject matter of appeal before the Tribunal in ITA No.3216/Del/2009 was the order dated 04.06.2008 passed by the A.O. In the above circumstances, in our considered view, in view of the specific provisions contained in sub-section (2) of section 150 the issuance of notice of section 148 on 10.06.2010 in pursuance of the order of the Tribunal dated 06.11.2009 for A.Yr. 1996-97 is bad in law and untenable. We, therefore, do not find any error in the order of the ld. CIT(A). Thus the grounds of appeal of the Revenue are dismissed.”

13. Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal.

14. Mr. Bandopadhyay, learned advocate appearing for the revenue, submitted that the CIT(A) and the learned Tribunal fell into a patent error of law in proceeding on the basis that the notice under Section 148 of the Income Tax Act was barred by limitation. He submitted that the prayer of the assessee to have the opening stock for the assessment year 1997-98 revalued was allowed on the condition that the closing stock of the assessment year 1996-97 would correspondingly be enhanced. He contended that it cannot be said that the order allowing revaluation of the opening stock of the assessment year 1997-98 is good but the other part of the order directing revaluation of the closing stock of the assessment year 1996-97 was bad. He contended that the assessee from the day one accepted the position that the order directing revaluation both of the opening stock of the 1997-98 and the closing stock of 1996-97 was a valid and legal order. It was no longer open to the assessee to turn round and challenge the legality of the order directing the revaluation of the closing stock of the assessment year 1996-97. He contended that the assessee is blowing hot and cold in the same breathe and the learned Tribunal erred in not appreciating the issue involved in the matter.

15. Mr. Murarka, learned Advocate appearing for the assessee/respondent, submitted that the observation as regards revaluation of the closing stock or work in progress of the assessment year 1996-97 was made by the CIT(A) in his order dated 12th August, 2002 while hearing an appeal arising out of the assessment year 1997-98. He submitted that while hearing an appeal against the assessment order for the assessment year 1997-98 it was not open to the CIT(A) to make any observation or to pass any order with respect to a concluded transaction relating to the assessment year 1996-97. He in support of his submission drew our attention to the judgment of the apex Court in the case of ITO v. Murlidhar Bhagwandas [1964] 52 ITR 335. What had happened in that case was that an interest income of Rs.88,737/- was brought to tax for the assessment year 1949-50. In an appeal preferred by the assessee, the Appellate Commissioner held that the income had in fact been received in the previous accounting year. He, therefore, directed that the amount should be deleted from the assessment year 1949-50 and included in the assessment for the year ending 1948-49. Pursuant to the aforesaid direction, notice under Section 34 of the Income Tax Act, 1922 was issued which was challenged by a writ petition under Article 226. The matter ultimately travelled to the Supreme Court. Their Lordships held by majority that the finding of the Appellate Commissioner that the interest income related to the assessment year 1948-49 was not required for the purpose of disposal of the appeal and therefore, the same did not amount to a direction under Section 31.

16. Mr. Murarka also cited the judgment in the case of N. K. T. Sivalingam Chettiar v. CIT [1967] 66 ITR 586 (SC) wherein the judgment in the case of Murlidhar Bhagwandas (supra) was followed. He also relied upon a judgment of this Court in the case of Peico Electronics & Electricals Ltd. v. Dy. CIT [1994] 210 ITR 991 (Cal.) for the same proposition.

17. Mr. Murarka also relied upon a judgment of the Apex Court in the case of Rajinder Nath v. CIT [1979] 120 ITR 14/2 Taxman 204 wherein it was held that “As regards the expression direction in Section 153 (3) (ii) of the Act, it is now well-settled that it must be an express direction necessary for the disposal of the case before the authority or Court. It must also be a direction which the authority or Court is empowered to give while deciding the case before it. The expressions “finding” and “direction” in Section 153 (3) (ii) must be accordingly confined.

18. The last judgment cited by Mr. Murarka is by a Division Bench of this Court in the case of R. H. Dave v. CIT [1983] 140 ITR 1035/[1982] 9 Taxman 86 wherein the Division bench taking into consideration the views expressed by the Apex Court in the case of Rajinder Nath (supra) opined “our attention was drawn by the learned advocate for the Revenue to Explanation 2 to Sub-Section (3) of Section 153. We may incidentally point out that explanation was introduced with effect from 6th October, 1964 by the Direct Tax (Amendment) Act, 1964 and the judgment of the Supreme Court in the above-mentioned case on 13th August, 1979. Indeed, though the Supreme Court was not concerned with the Explanation, the Supreme Court noted that though it was concerned with the Assessment years 1955-56 and 1956-57, there was no change in the expression used in Sub-section (3) of Section 153 namely “finding” or “direction” and in spite of the same, the Supreme Court made the aforesaid observations.”

19. Mr. Murarka contended that the law declared in Murlidhar Bhagwan Das therefore continues to hold the field.

20. The second submission advanced by Mr. Murarka was that in case the closing stock of the assessment year 1996-97 was to be revalued, a corresponding revaluation of the opening stock of the assessment year 1996-97 was required. In support of his submission he relied upon the judgment in the case of the CIT v. Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245 (PC). He drew our attention to the head note which reads as follows:—

“that the real profits of the assessees could not be ascertained by merely raising the valuation of the closing stock, not taking into consideration the similar undervaluation of the opening stock.”

21. He also relied on a Division Bench judgment of this Court in the case of CIT v. Bengal Jute Mills Co. Ltd. [1992] 107 CTR (Cal) 34 wherein the following view was taken:—

“The general rule of accountancy is that the value of the closing stock of a year becomes the value of the opening stock of the next year. But in a case like this where the ITO has made an allegation of undervaluation and has valued the closing stock at the market rate rejecting the assessee’s valuation then to arrive at the correct figure of profit, the ITO must also value the opening stock in a similar fashion. If the assessee’s method of valuation of the opening stock is accepted and at the same time that method is rejected for valuation of the closing stock, then a highly distorted figure of profit will emerge. This will be beyond the scope of the charging section. This position was explained at length by Marten C. J. in the case of Ahmedabad New Cotton Mills Company Limited vs. CIT 3 ITC 91. This judgment was ultimately affirmed by the Privy Council.”

Both the CIT (A) and the learned Tribunal opined that the reassessment made under Section 147 by the Assessing Officer on 31st December, 2010 was barred under Section 150(2) of the Act.

Therefore primarily the following questions arise for determination:—

(a) Whether reopening of the assessment for the assessment year 1996-97 by the notice dated 10th June, 2010 was barred by Sub-section (2) of Section 150 of the Income Tax Act as held both by the CIT appeal and the Income Tax Appellate Tribunal.

(b) Whether the reopening of the assessment for the assessment year 1996-97 was unlawful?

22. Sub-section (2) of Section 150 of the Act provides as follows:—

“The provisions of sub-section (1) shall not apply in any case where any such assessment, reassessment or recomputation as is referred to in that sub-section relates to an assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject-matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken.”

23. Mr. Murarka drew our attention to the case of K. M. Sharma v. ITO [2002] 254 ITR 772/122 Taxman 426 (SC) wherein their Lordships opined as follows:—

“Sub-section (2) aims at putting an embargo on reopening assessments, which have attained finality on the expiry of the prescribed period of limitation. Sub-section (2) in putting such embargo refers to the whole of sub-section (1) meaning thereby to insulate all assessments, which have become final and may have been found liable to reassessments or recomputation either on the basis of orders in proceedings under the Act or orders of courts passed under any other law. The High Court, therefore, was in error in not reading the whole of the amended sub-section (1) into sub-section (2) and coming to the conclusion that the reassessment proposed on the basis of the order of the court in proceedings under the Land Acquisition Act could be commenced even though the original assessments for the relevant years in question have attained finality on the expiry of the period of limitation under section 149 of the Act. On a combined reading of sub-section (1) as amended with effect from April 1, 1989, and sub-section (2) of Section 150 as it stands, in our view, a fair and just interpretation would be that the authority under the Act has been empowered only to re-open assessments, which have not already been closed and attained finality due to the operation of the bar of limitation under Section 149.”

24. Mr. Murarka also drew our attention to the judgment in the case of Lotus Investments Ltd. v. G. Y. Wagh, Asstt. CIT [2007] 288 ITR 459/162 Taxman 241 (Bom) for the same proposition as in the case of K. M. Sharma.

25. The question whether the notice dated 10th June, 2010 seeking to reopen the assessment of the assessment year 1996-97 was barred under Sub-section (2) of Section 150, has to be considered in the light of the fact that the finding or direction to revalue the closing stock of the assessment year 1996-97 was made or issued on 12th August, 2002 by the CIT (Appeal) when he directed that “thus closing stock value of work in progress will necessarily be enhanced in the preceding year i.e., assessment year 1996-97”.

26. Mr. Murarka did not dispute that on 12th August, 2002 when the aforesaid finding or direction was issued the exercise of reopening the assessment for the assessment year 1996-97 was well within time. On top of that the appellate order dated 12th August, 2002 was passed against the original order dated 8th March, 2000. The notice under Section 148 seeking to reopen the assessment of the year 1996-97 was not promptly issued thereafter because the direction to revalue the opening stock of the assessment year 1997-98 and the corresponding revaluation of the closing stock of the assessment year 1996-97 as directed by the order dated 12th August, 2002 was not implemented until the learned Tribunal by its judgment and order dated 6th November, 2009 directed as follows:—

“Therefore, if by giving effect to the order of the Tribunal if income for asstt. year 1997-98 is to be reduced that has to reduce and if it also results into enhancement of income for asstt. year 1996-97, the same has also to be enhanced but separately.”

27. Pursuant to the aforesaid order dated 6th November, 2009 the opening stock for the assessment year 1997-98 and closing stock the assessment year 1996-97 were revalued giving the requisite benefit to the assessee and raising claim for the escaped income for the assessment year 1996-97. As a matter of fact, the reassessment of both the assessment years 1996-97 and 1997-98 was made on 31st December, 2010. A notice under Section 148 seeking to reopen the assessment for the assessment year 1996-97 had already been issued on 10th June, 2010.

28. The scope of Section 150 (2) was considered by the Punjab & Haryana High Court in the case of Parveen Kumari v. CIT [1999] 237 ITR 339 wherein the following views were expressed:—

“Sub-section (2) of section 150 lays down an exception and, where such an exception exists, the provisions of sub-section (1) would not be applicable. Sub-section (1) of section 150 shall not apply where the notice for reassessment for an assessment year had become barred by limitation at the time when the order, which was the subject-matter of appeal, revision or reference, was passed. Generally, the time limits prescribed in Section 149 shall not apply where reassessment proceedings are initiated by a notice to give effect to any finding or direction, under sub-section (1) of section 150 of the Act. But, under sub-section (2) of Section 150, the period of limitation as laid down in section 149 shall come into play. If the action for assessment or reassessment cannot be initiated for an assessment year on the date of the order, which was a subject-matter of appeal, reference or revision, that would prevent the Assessing Officer from proceeding under Section 148 of the Act.

According to sub-section (2) of section 150, the provisions of sub-section (1) of that section shall not apply where, by virtue of any other provision limiting the time within which action for assessment or reassessment may be initiated, issuance of notice for such assessment or reassessment is barred on the date of the order, which is the subject-matter of appeal, reference or revision, in which the finding or direction is contained. It would, thus, mean that an appellate or revisional authority cannot give a direction for assessment or reassessment which goes to the extent of conferring jurisdiction upon the Assessing Officer if his jurisdiction had ceased due to the bar of limitation. If the issuing of a notice for assessment or reassessment for a particular assessment year had become time-barred at the time of the order, which was the subject-matter of the appeal, the provisions of section 150(1) cannot be invoked to the aid of the Revenue for making an assessment or reassessment.”

29. The submission that the finding and or direction issued in the appellate order dated 12th August, 2002 concerning revaluation of the closing stock of the assessment year 1996-97 is bad in law in the light of the judgment of the Apex Court in the case of Murlidhar Bhagwandas (supra) does not appear to be sound because whenever an income is deleted or excluded from one year a corresponding inclusion in the appropriate year by resorting to reopening the assessment for that year is specifically permitted by the Explanation 2 to Section 153 (3) of the Act. Therefore the limitation provided under Section 148 and 149 of the Act has to be considered in the light of Section 150 and Sub-section (3) of Section 153 read with Explanation 2 thereof which provides as follows:—

“Where, by an order [referred to in clause (ii) of sub-section (3)], any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order.”

30. The question was considered by this Court in the case of ITO v. Eastern Coal Co. Ltd. [1975] 101 ITR 477 wherein the following views were expressed:—

“The next question that requires consideration is whether under Section 150 of the Income Tax Act, 1961, this notice can be treated as valid. Counsel for the revenue contended that in view of sub-section (1) of section 150 the period of limitation prescribed under section 149 would not be a bar for taking action in this case. It was submitted that it was to give effect to the finding or direction contained in the order of the Appellate Tribunal that the present action was taken; the first question that requires consideration is whether it was to give effect to any finding or direction. As mentioned hereinbefore the Tribunal following the decision of the Supreme Court given under the provisions of the 1922 Act in the case of Income tax Officer, “A” Ward, Sitapur v. Murlidhar Bhagwan Das subsequently deleted the direction contained in the appellate order as indeed specific direction could not be given by the Tribunal in respect of another year when hearing an appeal in respect of one year, but there was a finding in the year 1956-57 that the income in question though liable to be taxable was not taxable in the year 1956-57. The question is what is the effect of that finding. As a result of that finding it became apparent that this income escaped assessment. Explanation 2 to sub-section (3) of Section 153 provides that where by an order referred to in clause (ii) of sub-section (3) any income is excluded from the total income of the assessee for an assessment year, then assessment of such income for another assessment year shall, for the purposes of section 150 and this section, namely, section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. It appears that in order to avoid the mischief spoken of by the Supreme court in the aforesaid decision of Income tax Officer, “A” Ward, Sitapur v. Murlidhar Bhagwan Das, this Act specifically made a direction in one year or a finding made in one year to be valid for taking action in respect of a subsequent year or another year…………………

The next question that was urged in this case was that even if section 150(1) of the 1961 Act applied the notice had become barred. It was contended that a notice would become barred even under Section 150(1) if on the date of the appellate order the time for taking action for assessment for that year had become barred by the other provisions of the Act. The correct date in this connection would be the date when the order, which is the subject-matter of the appeal, was passed. If on that date the reassessment proceedings could have been validly taken then because of subsequent lapse of time the said reassessment proceedings do not become barred by time. In this case on the 29th of December, 1960, the original order for assessment was passed and, therefore, on that date action could have been taken for reassessment for the assessment year 1958-59. That was the date when the order which was the subject-matter of appeal was passed. In that view of the mater, in our opinion, the provisions of section 150(1) of the Income tax Act, 1961, would apply on the facts of this case.”

31. Reference may also be made to the judgment in the case of Addl. CIT v. Kamlapat Moti Lal [1977] 110 ITR 769 (All.). In the aforesaid judgment the Allahabad High Court held that the views expressed by the Supreme Court in the case of Murlidhar Bhagwandas (supra) were partly nullified by Explanation 2 added to Section 153 (3) of the Income Tax Act.

‘We shall next deal with the contention of Shri Gupta that the reassessment for the year 1961-62 could not be said to be in consequence of or to give effect to any direction or finding of the Appellate Assistant Commissioner. No doubt, in Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), the Supreme Court held that in deciding an appeal relating to one assessment year the appellate authority cannot give a direction or a finding that a particular income which was not chargeable to tax in that assessment year, was chargeable to tax in another assessment year. But the effect of this decision of the Supreme Court has been partly nullified by the amendment of section 153 of the Act by adding Explanation 2 to sub-section (3) of that section. The relevant portion of sub-section (3) of Section 153, after such amendment, reads:

“(3) The provisions of sub-sections (1) and (2) shall not apply to the following classes of assessments, reassessments and recomputations which may be completed at any time –

(i) where a fresh assessment is made under section 146;

(ii) where the assessment, reassessment or recomputation is made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 250, 254, 260, 262, 263 or 264 or in an order of any court in a proceeding otherwise than by way of appeal or reference under this Act;

(iii) where in the case of a firm, an assessment is made on a partner of the firm in consequence of an assessment made on the firm under section 147……

Explanation 2. – Where, by an order referred to in clause (ii) of sub-section (3), any income is excluded from the total income of the assessee for assessment year, an assessment of such income for another assessment year shall, for the purposes of section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order……”

Explanation 2 specifically provides that where by an order in an appeal, any income is excluded from the total income of an assessee for an assessment year, then an assessment of such income for another assessment year shall be deemed to be one made in consequence of, or to give effect to, any finding or direction contained in that order (in appeal).’

32. The aforesaid judgment of the Allahabad High Court was affirmed by the Apex Court in Kamlapat Moti Lal v. Addl. CIT [1992] 193 ITR 338.

33. Reference may also be made to the judgment of the Andhra Pradesh High Court in the case of Abdul Rahman Saheb (B.A.R.) v. ITO [1975] 100 ITR 541 wherein the following views were expressed:—

‘Thus, on a careful reading of Explanation 2 to sub-section (3) of Section 153, it is evident that the mere exclusion of an income from an assessment year by a higher authority in a proceeding before it, gives jurisdiction to the Income-tax Officer to assess or reassess that excluded income in a different assessment year, and, in such a case, under Explanation 2 to Section 153 (3), it will be deemed to have been made in consequence of or to give effect to a finding or direction contained in the said order. If there is no finding or direction in the order of a higher authority, then Explanation 2 to Section 153(3) of the Act will apply. On the other hand, if there is a finding or direction, the case would fall under Section 153 (3)(ii).

In a case dealing with the corresponding provisions of the Indian Income-tax Act if 1922, the Supreme Court in Income-tax Officer v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) held that:—

“The jurisdiction of the Appellate Assistant Commissioner under section 31 was strictly confined to the assessment order of the particular year under appeal and that assessment or reassessment made in consequence of or to give effect to any finding or direction contained in an order under Sections 31, 33, 33A, 33B, 66 or Section 66 A, must necessarily relate to the assessment of the year under appeal, revision or reference, as the case may be.”

“The Explanation in the 1961 Act partly gets over the above decision of the Supreme Court.

Two arguments have been advanced by the learned counsel, Sri S. Dasaratharama Reddy, for contending that Explanation 2 is invalid. His argument was that in Income-tax Officer v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC), the Supreme Court pointed out the infirmity in giving a finding or direction relating to an assessment year which was different from the one under his consideration. Instead of removing that infirmity by amending section 251 of the Act and by enlarging the powers of the Appellate Assistant Commissioner for disposing of an appeal before him, the Act has merely added the impugned Explanation to section 153 (3). By doing so, the legislature has usurped the judicial power which is not vested in it. The next argument was that the legislature has attempted to overrule the decision of the Supreme Court and to validate a finding which the Supreme Court has invalidated; that the legislature cannot do, and if the legislature attempts to do that, the provision should be struck down. In support of these arguments, the learned counsel for the assessee invited our attention to Janapada Sabha, Chhindwara v. Central Provinces Syndicate Ltd. AIR 1971 SC 57, State of Tamil Nadu v. M. Rayappa Gounder AIR 1971 SC 231, Municipal Corporation of Ahmedabad v. New Shorrock Spinning and Weaving Company Ltd. AIR 1970 SC 1292 and Prithvi Cotton Mills Ltd. v. Boroach Borough Municipality [1971] 79 ITR 136 (SC).

The first argument advanced by the learned counsel in this behalf has no substance. Mere exclusion of an income from one assessment by an appellate authority would empower the Income-tax Officer to reopen the assessment for a different year and Explanation 2 to section 153 (3) of the Act. Explanation 2 does not validate any finding or direction given by the Appellate Assistant Commissioner in appeal which is invalid. Consequently, the issue would not touch the powers of the Appellate Assistant Commissioner, as envisaged in section 251 of the Act in disposing of an appeal before him. The Appellate Assistant Commissioner would be within his powers to exclude an income from an assessment if it did not pertain to that year. The Income-tax Officer then gets jurisdiction in such a case in view of the impugned Explanation to assess that income or reassess that income in another year, that is to say, it gives jurisdiction to the Income-tax Officer. The powers to hear an appeal given to the Appellate Assistant Commissioner under section 251 of the Act do not, therefore, require to be enlarged, because the exclusion of the income from an assessment would be within his jurisdiction.

The next argument is equally devoid of force. In Janapada Sabha, Chhindwara v. Central Provinces Syndicate Ltd. AIR 1971 SC 57, the Supreme Court laid down that, on the language used in the Act, it was plain that the legislature attempted to overrule or set aside the decision of the Supreme Court, which it cannot do. As we have already stated above, the legislature in this case has not attempted to overrule or set aside the decision of the Supreme Court. This decision is not, therefore, attracted to the facts of the case before us.’

34. Reference may also be made to the judgment of the Bombay High Court in the case of Ambaji Traders (P.) Ltd. v. ITO [1976] 105 ITR 273 wherein agreeing with the views expressed in Abdul Rahman Saheb (B.A.R.) case (supra) the following views were expressed:—

“Now, what was contended by Mr. Ghate on behalf of the petitioner is that even assuming that by virtue of Explanation 2 to section 153 (3) the assessment of the income which was excluded in the assessment year 1958-59 and had, therefore, to be included in the assessment year 1959-60 could be fictionally included under section 150 and was deemed to be an assessment by giving effect to a finding or direction contained in an order, even that could not be done beyond the period of four years in view of the provisions of section 150(2). The learned counsel for the petitioner does not dispute that the limitation of time referred to in sub-section (2) to section 150 for the purposes of the present case would be the one found in clause (b) of section 153(2), and according to the learned counsel it is that limitation which will govern the proceedings for assessment, and since the notice was issued beyond four years from the end of the assessment year 1959-60 and the notice was also not issued within the similar period as prescribed by section 149 (1)(b), the notice was liable to be quashed. Now, it is no doubt true that sub-section (2) of section 153 prescribes the limitation for making an order of assessment, reassessment or recomputation, and where such an order is to be made under clause (b) of section 147, it cannot be made after the expiry of four years from the end of the assessment year in which the income was first assessable, which is the assessment year 1959-60 in the instant case. The legislature has, however, made positive provisions excluding certain proceedings from the bar of limitation contained in section 153(1) and (2). One such provision is contained in clause (ii) of sub-section (3) of section 153, which says that the provisions of sub-sections (1) and (2) shall not apply where the assessment, reassessment or recomputation is made in consequence of or to give effect to any finding or direction contained in an order under section 250, i.e., in an appeal under section 254 i.e., in an order of the Appellate Tribunal under section 260, i.e., in a decision of the High Court or Supreme Court on the case stated under section 262, i.e. in an appeal to the Supreme Court against a decision of the High Court on a reference under section 256, under section 263 which deals with the revisional jurisdiction of the Commissioner of Income-tax in respect of orders prejudicial to revenue, or under section 264 which deals with the revisional power of the Commissioner in respect of an order other than an order to which section 263 applies. A further category of orders consequent upon which an assessment, reassessment or recomputation is to be made without any bar of limitation is referred to in clause (ii) of sub-section (3) as an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Thus, the substantive provisions of sub-section (3) of Section 153 have removed the bar of limitation prescribed in sub-section (2) in the cases contemplated by that section. Now, under Explanation 2 it is provided that where, by an order referred to in clause (ii) of sub-section (3), any income is excluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of section 150 and section 153 be deemed to be one made in consequence of or give effect to any finding or direction contained in the said order. This is a new provision and is a departure from the 1922 Act under which, for the purposes of the second proviso to sub-section (3) of section 34, the finding to which effect could be given without a bar of limitation had to be in respect of the same assessment year as held by the Supreme Court in Income-tax Officer v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC) and N. KT. Sivalingam Chettiar v. Commissioner of Income-tax [1967] 66 ITR 586 (SC). The effect of the second Explanation is that where the income of an assessee has been excluded from one assessment year and it has to be included in another assessment year, this has been fictionally treated for the purposes of section 150 as a proceeding in consequence of or to give effect to any finding or direction contained in an order. Where such income excluded from one year has to be included in another year and such proceeding is fictionally treated as one under section 150, then the bar of limitation will not apply in view of the express provisions in section 153(3). In a case like the instant one the provisions of section 153(2) will not be attracted. Sub-section (2) no doubt provides that sub-section (1) of section 150 shall not apply in a case where the assessment, reassessment or recomputation relates to an assessment year in respect of which an assessment, reassessment or recomputation could not have been made at the time the order which was the subject-matter of the appeal, reference or revision, as the case may be, was made by reason of any other provision limiting the time within which any action for assessment, reassessment or recomputation may be taken. Now, if as argued by the learned counsel, the limitation referred to in sub-section (2) of section 150 is the one referred to in sub-section (2) of section 153, then by the express provisions of sub-section (3) of section 153 the bar of limitation has been removed. The provisions of sub-section (2) of Section 150 cannot, therefore, be availed of by the petitioner.

The view which we taken is supported by a Division Bench decision of the Andhra Pradesh High Court in Abdul Rahman Saheb v. Income-tax Officer [1964] 52 ITR 335 (SC).”

35. Reference may also be made to the judgment of Karnataka High Court in the case of Mysore Tobacco Co. Ltd. v. CIT [1986] 157 ITR 606/[1987] 30 Taxman 675 wherein it was held that to obviate the difficulty arising out of the decision in the case of Murlidhar Bhagwandas that the Explanation 2 to Section 153 (3) of the Act was enacted. The Division Bench opined that “it was, perhaps, to obviate this difficulty in giving effect to the finding or direction of any authority relating to an excluded income from any assessment, Explanation 2 to section 153 (3) was enacted. This provision would certainly come to the aid of the Department in the instant case, since the Tribunal has found that Rs.2,00,000/- added in the assessment year 1966-67 was a revenue receipt. The deletion of that income by the Tribunal for that assessment year shall be deemed to be a direction, and to give effect to the direction, reassessment could be made under section 147(b) read with sections 150 and 153(3). The Tribunal, in our opinion, has correctly construed these provisions.”

Therefore the Division Bench judgment of this Court in the case of Mrs. R. H. Dave (supra) relied upon by Mr. Murarka is no longer binding. The reassessment of the escaped income of the assessment year 1996-97, without any express ‘finding’ or ‘direction’ can be made under Explanation (2) to Section 153 (3) and in a case where no express finding or direction is there, like the one in the order dated 12th August, 2002, the reassessment could be made under Section 153 (3) (ii). The judgment in the case of Murlidhar Bhagwan Das shall not stand in the way. Therefore both the questions formulated above are answered in the negative and in favour of the Revenue.

36. The next question which falls for determination is “whether closing stock of the assessment year 1996-97 can be revalued without correspondingly revaluing the opening stock for the year in question?”

37. The assessee in its appeal against the assessment order dated 31st December, 2010 relating to assessment year 1996-97 raised the following grounds as the sixth and seventh ground of challenge which the CIT (A) did not decide because the appeal was allowed on the ground of limitation.

“For that on the facts and circumstances of the case, the AO erred in law in making addition of Rs.63,23,501/- to the value of closing work in progress without making corresponding adjustment to the value of opening work in progress amounting to Rs.72,98,978/-.

For that on the facts and circumstances of the case, if the addition to the value of closing work in progress is to be upheld then the AO be directed to make adjustment to the value of opening work in progress as well amounting to Rs.72,98,978/-.”

38. Before the learned Tribunal the assessee had raised the following grounds by way of cross objection which the Tribunal did not decide because the appeal preferred by the Revenue was dismissed.

1. “For that on the facts and circumstances of the case, the CIT (A) should have also directed the AO to recompute the value of opening inventory of WIP; following the same valuation principle on which closing inventory of WIP was valued.

2. For that on the facts and circumstances of the case, the AO be directed to value the inventory of WIP as on 01.04.1995 at Rs.149,72,307/- as opposed to Rs.76,73,329/- and thereby be directed to re-compute the business income of the A. Y. 1996-97.”

39. The aforesaid contention should have been raised by the assessee by challenging the appellate order dated 12th August, 2002 which the assessee did not do. Therefore the assessee is deemed to have accepted the finding or direction that “thus closing stock value of work in progress, will necessarily be enhanced in the preceding year i.e., assessment year 1996-97.” Far from challenging the order dated 12th August, 2002 he went on litigating to have the said order implemented. The order was ultimately implemented on 31st December, 2010 consequent to a notice dated 10th June, 2010 under Section 148. The assessee’s contention that the notice dated 10th June, 2010 was barred by limitation has been rejected by us. It is no longer open to the assessee to assail the order dated 12th August, 2002 on merits after having taken the benefit thereof in relation to the assessment year 1997-98.

40. We are supported in our view by the following judgments:—

41. In the case of Hope (India) Ltd. v. CIT [1993] 203 ITR 118/71 Taxman 387 (Cal.) a Division Bench of this Court held as follows:—

“It is on the basis of the submissions of the assessee that the Tribunal decided the issue in favour of the assessee and issued a direction that the Income-tax Officer should make proportionate addition for the period during which construction continued. The assessee cannot approbate and reprobate at the same time. It was on the basis of the contention of the assessee which was accepted by the Tribunal that the Tribunal gave the aforesaid direction. In our view, the direction which was given by the Tribunal in connection with the assessment for the assessment year 1966-67 was necessary for the disposal of the appeal on the basis of the submission made by the assessee. The assessee having taken the benefit cannot now ask for overturning the said decision. That apart, the Explanation to section 153 clearly provides that, in any case where income is excluded in appeal, reference or revision, or in any other legal proceeding, from the assessment for any year, an assessment of such income for another assessment year shall be deemed to be one made in consequence of, or to give effect to, any finding or direction by the authority hearing the case. This fiction of law removes the bar of limitation, irrespective of the question whether the authority has in fact given or can in law give a finding or direction that the income should be taxed in a specified assessment year other than the year for which the authority hears the case. Thus, if any income from an assessment by a higher forum on the ground that it is not the income of that year, the Income-tax Officer has jurisdiction to initiate proceedings under section 147 to assess it as the income of another year without any limitation applying to the issue of the notice under section 148 or to the completion of the assessment or reassessment.”

42. The Guwahati High Court in the case of Lalsingh Estate (P.) Ltd. v. CIT [1995] 216 ITR 644/[1994] 74 Taxman 525 held as follows:—

“It is settled that the law does not permit a person to approbate and reprobate. No party can accept and reject the same instrument, that is to say, a person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid, and then turn round and say it is void for the purpose of securing some other advantage (see R. N. Gosain v. Yashpal Dhir, AIR 1993 SC 352). This being the situation, any of the members of the Hindu undivided family could not invalidate the sale of the properties by M. L. Singh.”

43. The point now sought to be urged by way of cross objection should have contemporaneously been raised challenging the appellate order dated 12th August, 2002. By omitting to do so and expressly acting thereupon and by taking advantage thereof the assessee is estopped from challenging the same. Consequently the third question formulated above need not be answered on merits.

44. For the aforesaid reasons the cross-objection filed by the assessee is dismissed and the appeal preferred by the Revenue is allowed. The order under challenge and the order passed by CIT (A) are both set aside.

[Citation : 366 ITR 59]