Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessment made by the ITO on 24th April, 1982, was barred by limitation and, therefore, it had got to be annulled ?

Counsel Appeared

C.V. Rajan, for the Revenue : Sriram & Mrs. Arpana Nanda Kumar, for the Assessee

JUDGMENT

R. JAYASIMHA BABU, J. :

For the asst. yr. 1979-80 concerning Muthulakshmi Timber Depot, the assessee, the following three questions have been referred, the first two at the instant of the Revenue and the third at the instance of the assessee.

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessment made by the ITO on 24th April, 1982, was barred by limitation and, therefore, it had got to be annulled ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in annulling the assessment and not setting aside the assessment made by the ITO on 24th April, 1982, and in not directing the ITO to follow the procedure laid down in s. 144B ?

(3) Whether, on the facts and in the circumstances of the case, the assessment order dt. 24th April, 1982, passed by the ITO was not in violation of the principles of natural justice and consequently, required to be annulled instead of merely being set aside with a direction to make a fresh order ?”

2. The undisputed facts are, that the assessee filed a return for the asst. yr. 1979-80 on 23rd July, 1980, that the ITO was of the view that the addition to the income for the purpose of taxation would be more than one lakh rupees; that he sent a draft assessment order to the assessee on 29th March, 1982, before the expiry of the period of two years from the last day of assessment year; that notice was received by the assessee on 1st April, 1982, and the assessee in response to that notice sent a letter stating therein, inter alia, that the assessee was objecting to the proposed addition, as such addition was arbitrary and further the assessee needed two more weeks time to file a detailed statement of objection; that the assessee thereafter did not file the detailed objection within the time and sought further period of two weeks; and that the ITO declined to grant such further additional time and proceeded to make the assessment order on 24th April, 1982. That order was challenged by the assessee on the ground that the procedure prescribed under s. 144B has not been followed and, therefore, the order of assessment was anullity. It was also the case of the assessee that the principles of natural justice had been breached in making the order on 24th April, 1982.

3. Sec. 144B of the Act provides, inter alia, that if the assessee objects to the draft assessment order sent by the ITO, the matter is to be dealt with further by the IAC who is required to hear the assessee and thereafter give directions to the AO. The Revenue contended before the Tribunal that the assessee had not filed the objection and, therefore, it was incumbent on the part of the AO to follow the procedure prescribed under s. 144B(4) of the Act. The contention of the Revenue has been negatived by the Tribunal, which has held that the assessee had in fact filed an objection, inasmuch as it had specifically mentioned in its letter, that it was objecting to the addition proposed, and that the proposed addition was arbitrary. The fact that it wanted time to file a more detailed statement of objection was not regarded as amounting to the objections already raised not being capable of being regarded as objections. The Tribunal, therefore, held that the mandatory procedure prescribed under s. 144B(4) which was required to be followed had not been followed. We may mention here that there was a difference of opinion between the Members of the Tribunal who heard the appeals, and thereafter the matter was referred to a Third Member, who agreed in part with the opinions of the other two. The result of the proceeding was that the order made by the ITO was annulled by the Tribunal. The Third Member also held that the matter was barred by limitation as the period of six months from the end of two years after the end of the assessment year is over.

Learned counsel for the Revenue submitted that the order made, in so far as it disables the Revenue from proceeding further was opposed to law. Counsel for the assessee supported the reference made at the assessee’s instance and submitted that there was breach of principles of natural justice which rendered the order void and no question of taking further proceedings would arise for consideration. We shall first dispose of the question raised by the assessee. There is no violation of the principles of natural justice. After the service of the draft assessment order and receipt of the objection thereto, on account of the officer misunderstanding the purport of the letter sent by the assessee, he had proceeded to finalise the assessment instead of sending the paper to the IAC in terms of s. 148B(4) of the Act. What was breached was the assessee’s statutory IAC in support of its objections. Sec. 144B which was on the statute from 1st Jan., 1976, to 1st April, 1989, was in Chapter XIV of the Act which deals with procedure for assessment. That provision cannot be elevated to a provision conferring substantive right on the assessee to treat the entire assessment proceeding as a nullity. Breach of procedure is curable if the order of the ITO is capable of being set aside and the proceeding being continued from the stage at which the illegality had occurred. While counsel for the Revenue relied on the decisions of the Allahabad. Punjab & Harayana, Karnataka and Madhya Pradesh High Courts, viz. Vishwanath Prasad Bhagwati Prasad vs. CIT (1993) 108 CTR (All) 119 : (1993) 202 ITR 469 (MP), Bal Erectors vs. CIT (1989) 180 ITR 625 (MP) : TC 11R.462, G.R. Steel & Alloys (P) Ltd. vs. CIT (1984) 42 CTR (Kar) 107 : (1985) 152 ITR 220 (Kar) : TC 11R.465 and Kimtee vs. CIT (1984) 40 CTR (MP) 105 : (1985) 151 ITR 73 (MP) : TC 11R.510. Learned coulse for the assessee relied on the decision of the Bombay High Court in the case of CIT vs. Mrs. Ratanbai N. K. Dubhash (1998) 146 CTR (Bom) 450 : (1998) 230 ITR 495 (Bom) : TC S11.1279. In the decisions relied on by counsel for the Revenue, it has been held that s. 144B is a procedural provision breach of which is curable. In the decision relied on by counsel for the assessee, the view taken is that the order made in breach of s. 144B is a nullity and no further proceedings can be taken as the order is declared to be a nullity.

We are unable to persuade ourselves to agree with the view taken by the Bombay High Court. The legislative intention as to the manner in which this provision of s. 144B is to be regarded, has been made explicit. It occurs in Chapter IV, dealing with procedure for assessment (ss. 139 to 158). This is a procedural provision. Theproceeding for assessment commences with the filing of the return by the assessee. The AO is required to scrutinise thereturn, before finalising the assessment. In the event of the AO finding that an addition is required to be made to the income of the assessee is excess of Rs. 1 lakh, he is required to furnish a draft order to the assessee. The step is to be taken before the expiry of the period of two years from the end of the assessment year. It is for the assessee to either object to the proposal or accept the same. If the assessee objects, the objections as also the draft assessment order are to be sent to the IAC who shall hear the assessee, and thereafter give such directions as he thinks fit to the AO, to enable him to complete the assessment. The assessment is thereafter to be made in conformity with the directions so given. In this case, the procedural steps up to the stage of filing the objections had been completed. The assessee had sent a letter which was construed by the ITO as one for adjournment, while the Tribunal found that it was in fact objection to the draft assessment, though not elaborated upon. If further procedure is not barred by limitation, the assessee will suffer no prejudice if the ITO were to be asked to comply with the procedure prescribed under s. 144B(4) after setting aside the order of assessment made in breach of that provision. The assessee would then have had the opportunity to press its objection before the IAC and the assessee will also have the right to challenge the order that may be passed by that officer if it is prejudicial to the assessee.

10. Though we have held that s. 144B is procedural, the Revenue cannot derive any benefit so far as the assessment in question is concerned, as on account of the ITO having proceeded to make an order which has been found to be unsustainable on account to lack of jurisdiction in the officer, the Revenue cannot extend the period of limitation prescribed is s. 153, for completing the assessment. Had the ITO followed the correct procedure, the assessment would have been finalised within the period of six months. Now a period of well over sixteen years have gone by. We, therefore, answer the question referred to us at the instance of the assessee in the negative, and the first question referred to us at the instance of the Revenue also in the negative. Regarding the second question referred to us at the instance of the Revenue, we answer the first part of that question in the negative and the latter part in the affirmative as the proceeding is now barred by limitation.

[Citation : 246 ITR 481]