Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to claim deduction of the bonus paid in excess of 20% of the salary ?

Counsel Appeared

P. Balachandran, for the Assessee : P.K. Ravindranatha Menon & N.R.K. Nair, for the Revenue

K.S. PARIPOORNAN, J.:

The Tribunal has referred the following questions of law arising out of its common appellate order dt. 6th March, 1986 and rendered in ITA No. 758/Coch/1983 and ITA No. 778/Coch/1983, for the asst. yr. 1978-79. In ITA No. 758/Coch/1983, the assessee was the applicant. In ITA No. 778/Coch/1983, the Revenue was the applicant. The following questions of law have been referred at the instance of the assessee and at the instance of the Revenue, for the decision of this Court, by the Tribunal: ITR No. 83 of 1987 : “Questions referred on behalf of the assessee:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessment is not time-barred ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the word “forward” used in s. 144B(2) is equivalent to the word “received” used in s. 144B(3) of the IT Act, 1961 ?

ITR No. 84 of 1987 :

Questions referred on behalf of the Revenue:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to claim deduction of the bonus paid in excess of 20% of the salary ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to weighted deduction under s. 35B in respect of ECGC premium ?”

It may not be necessary to answer all the questions referred by the Tribunal, since question No. 2 in ITR No. 83 of 1987, is a fundamental or vital one which has its impact on the validity of the assessment itself. The other questions arise in disposing of the assessment finally. In the light of our answer to question No. 2, referred to this Court, at the instance of the assessee, in ITR No. 83 of 1987, it may not be necessary to deal with the other questions, at this stage. Question No. 2, referred to this Court, at the instance of the assessee in ITR No. 83 of 1987, has not been drafted precisely or with care. It is indeed a matter of regret. In paragraph 2 of the statement of the case, dt. 6th May, 1987, the Tribunal has stated the relevant plea as follows: “It was the contention of the learned counsel for the assessee before the Tribunal that the word “forward” used in s. 144B(2) should be construed as despatched and the same meaning should be given for the word “received” used in sub-s. (3).” So, question No. 2, referred at the instance of the assessee, will be verbally recast as follows: “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the word “received” used in s. 144B(3) of the IT Act should not bear the same meaning as the word “forward” used in s. 144B(2) of the IT Act, 1961 ?”

Counsel, appearing on both sides, argued the above real question that arose for consideration before the Tribunal as reflected in the question recast by us.

We are concerned with the asst. yr. 1978-79. The accounting period ended on 31st March, 1978. The assessee filed the return, for the asst. yr. 1978-79, showing a loss of Rs. 82,15,220. The ITO issued a draft assessment order on 27th March, 1981 and the same was served on the assessee on 31st March, 1981. Under s. 144B of the IT Act, the assessee had seven days time for filing its objections. The objection should have been filed on or before 6th April, 1981. The assessee was staying away at Ernakulam. The authorised representative of the assessee, by his letter dt. 3rd April, 1981, forwarded the objections of the assessee to the draft assessment order, by registered post, on 4th April, 1981. The ITO took the view that the objections were received by him one day beyond time and so declined to comply with the requirements of s. 144B(4) of the Act. He did not forward the draft order together with the objections of the assessee to the IAC. On the other hand, the ITO completed the assessment on 15th April, 1981. It was contended that the failure to forward the draft assessment order together with the objections of the assessee to the IAC, under s. 144B of the Act was grossly irregular and unjustified and the subsequent completion of the assessment on 15th April, 1981, without following the procedure indicated in s. 144B(4) of the Act, is illegal and improper. This plea as such does not appear to have been pressed nor considered by the CIT(A). Though the Tribunal was also inclined to take the view that the assessee did not press the above point before the CIT(A), it proceeded to consider the matter on the merits and held that since the objections of the assessee reached the ITO only on 7th April, 1981, which is beyond the seven days period, the assessment made by the ITO, without referring the matter to the IAC under s. 144B(4) of the Act, is valid and proper. The assessment was also held to be within time. The other matters were also considered on the merits by the Tribunal. The appeal filed by the Revenue was regarding the entitlement of the assessee to deduction for payment of purchase tax, the deduction for payment on account of bonus and weighted deduction under s. 35B in respect of ECGC premium.

As stated, in view of our answer to question No. 2, in ITR No. 83 of 1987, it is unnecessary to answer the other questions referred by the Tribunal for the decision of this Court, at the instance of the assessee and at the instance of the Revenue. Sec. 144B of the IT Act provides as follows: “144B. Reference to IAC in certain cases.—(1) Notwithstanding anything contained in this Act, where in an assessment to be made under sub-s. (3) of s. 143, the ITO proposes to make, before the 1st day of October, 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 assessee. (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, 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 under this subsection 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 purposes 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 fit: Provided that different amounts may be fixed for different areas: 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 of performs the functions of an ITO in pursuance of an order made under s. 125 or s. 125A.”

In cases where the ITO proposes to make any variation in the income returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board, he should, in the first instance, “forward” a draft of the proposed order of assessment to the assessee. On receipt of the same, under s. 144B(2) of the Act, 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 the time extended by the ITO. It is true that under s. 144B(3) of the Act, the objections of the assessee should be “received” within seven days from the receipt of the draft order, and if not so received, the ITO shall complete the assessment on the basis of the draft order. On a plain reading of s. 144B(2) of the Act, it is clear that the assessee is obliged only to “forward” his objections within seven days of the receipt of the draft order. It only means that the objections should be transmitted or despatched. If that is done, there is literal compliance of s. 144B(2) of the Act. The assessee is not obliged to see that the order is served on or received by the ITO within the said period. If the assessee has forwarded his objections or transmitted his objections, it cannot be stated that he has failed to comply with s. 144B(2) of the Act. All that he is expected to do, is to send or despatch or transmit the objections within seven days of the receipt of the draft order. If, due to any reason beyond his control, the objections so despatched by him are not received by the ITO, he cannot be blamed. Once the objections are put in the course of transmission, the receipt thereof or the date of receipt, by the addressee cannot in any manner be subject to the control of the assessee. The assessee is expected to do only what is practicable and reasonable in the circumstances. He should send or despatch or transmit the objections within seven days of the receipt of the draft order by him. Admittedly, it was so done in this case. The draft order of assessment was received by the assessee on 31st March, 1981. His authorised representative forwarded the objections by “registered post” on 4th April, 1981, well within the time allowed by law. Normally, it would have reached the ITO on 6th April, 1981. The presumption available, for the despatch of the article by registered post, cannot be lost sight of. The fact that it was received by the ITO only on 7th April, 1981, one day beyond time, for which the assessee is not responsible, cannot visit the assessee with any penal or adverse consequences. It is true that s. 144B(3) of the Act provides that the objections should be “received” within the period of seven days of the receipt of the draft order by the assessee. But, s.144B should be understood in a practical and meaningful way. The word “received” occurring in s. 144B(3) of the Act should receive a meaning which will not render s. 144B(2) of the Act otiose or meaningless and, so viewed, it is only proper to understand the word “received” in s. 144B(3) of the Act, as one “forwarded” within the period provided in s. 144B(2) of the Act. The dictionary meaning of the word “forward” occurring in s. 144B(1) of the Act, is only “to send”; “despatch”; “transmit”. It was so understood by the Madhya Pradesh High Court and by the Madras High Court in Chandan Wood Products vs. CIT (1988) 71 CTR (MP) 62 : (1988) 173 ITR 585 (MP) : TC11R.432 and CIT vs. Subramanian & Co. (1989) 180 ITR 149 (Mad) : TC11R.434. The word “forward” occurring in s. 144B(1) of the Act was understood as requiring the officer only to send a draft order of assessment as could be seen from the Circular of the CBDT [Circular No. 197 dt. 17th April, 1976 (1977) 110 ITR (St) 18]. In this case, it is admitted that the objections were “forwarded” by the assessee on 4th April, 1981 by registered post, well within the period of seven days from the date of receipt of the draft order—s. 144B(2) of the Act. If it was received one day beyond the period provided by s. 144B(2) of the Act, due to reasons beyond the control of the assessee, the assessee cannot be visited with any adverse consequences. We hold that for the purpose of s. 144B(3) of the Act, it is enough, if the objections are”forwarded” by the assessee within the period, and on receipt of the objections the ITO is bound to take steps under s. 144B(4) of the Act to forward the draft order together with the objections received from the assessee to the IAC for necessary action. Admittedly, it has not been done in this case. Sec. 144B of the Act is machinery provision inserted for the protection of the assessees. In this case, the ITO received the objections on 7th April, 1981, but did not comply with s. 144B(4) of the Act and what is more completed the assessment on 15th April, 1981. We hold that the assessment order passed by the ITO dt. 15th April, 1981 without complying with the provisions contained in s. 144B(4) of the Act, is unjustified and unreasonable, on facts.

On a fair and proper interpretation of the various sub- sections of s. 144B of the Act, we hold that the word “received” occurring in s. 144B(3) of the Act should be understood, only as “forwarded” as specified in s. 144B(2) of the Act. We hold accordingly. In the circumstances, the Tribunal should have set aside the order passed by the ITO and ordered a remit to the ITO directing him to forward the draft order of assessment together with the objections received from the assessee to the IAC and then complete the assessment again.

We answer question No. 2, as recast by us, in the negative—in favour of the assessee and against the Revenue. Since the result of our answer to question No. 2 in ITR No. 83 of 1987 is to result in a remit of the matter to the ITO for redoing the assessment after complying with the formalities enjoined by s. 144B(4) of the Act, it is unnecessary and improper to pronounce on the merits, on the other questions. So we decline to answer question No. 1 in ITR No. 83 of 1987 and also both the questions, referred at the instance of the Revenue, in ITR No. 84 of 1987. The References are disposed of as above.

[Citation : 189 ITR 431]