1990 (1) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Justification of the Income-tax Officer (ITO) dropping proceedings under section 147.
2. Entitlement of the assessee to claim computation and carry forward of loss based on returns filed pursuant to a notice under section 148.
3. Interpretation of section 147 and its applicability to the computation of loss.

Issue-wise Detailed Analysis:

1. Justification of the Income-tax Officer (ITO) dropping proceedings under section 147:
The Tribunal referred the question of whether the ITO was justified in dropping proceedings initiated under section 147 upon determining no escapement of income. The ITO had initiated proceedings under section 148 for the assessment years 1973-74 and 1974-75 due to the non-filing of returns by the assessee. Upon examining the account books, the ITO found that the business resulted in a loss and subsequently dropped the proceedings, stating that under section 147, loss cannot be determined. The Tribunal upheld this action, stating that if the ITO concluded no income had escaped assessment, he could drop the proceedings initiated under section 147.

2. Entitlement of the assessee to claim computation and carry forward of loss based on returns filed pursuant to a notice under section 148:
The court examined whether the assessee could claim the computation or assessment of loss based on returns filed in response to a notice under section 148. The court referenced the case of Burdwan Wholesale Consumers' Co-operative Society Ltd. v. CIT, which held that an assessee could claim loss computation and carry forward even if the return was filed in response to a section 148 notice. The court noted that the assessee still had time to file the returns voluntarily showing the loss for the relevant assessment years when the ITO issued the notices under section 148. Thus, the assessee's right to file a loss return within the statutory period could not be negated by the issuance of a section 148 notice.

3. Interpretation of section 147 and its applicability to the computation of loss:
The court addressed the contention that section 147 could not be used for computing loss and carrying it forward. The argument was that section 147 only allowed recomputation of loss if there had been an earlier computation. The court rejected this argument, stating that the ITO is empowered to assess or reassess income or compute the loss or depreciation allowance, regardless of whether it had been done previously. The court emphasized that once a notice under section 148 is issued, the entire assessment process must be conducted afresh, as if the return was filed under section 139(2). The court cited several precedents, including the Supreme Court's ruling in V. Jaganmohan Rao v. CIT/CEPT, which affirmed that reopening an assessment sets aside the previous underassessment, and the whole assessment process starts anew.

The court concluded that the ITO must make an assessment through the machinery of section 143(3)(a) if a return discloses a loss. It was held that the issuance of a section 148 notice does not destroy the assessee's right to file a claim for loss to be computed and carried forward. The court also referenced a similar provision under the Wealth-tax Act, affirming that the ITO must make an assessment based on a lawfully filed return.

Conclusion:
The court answered the question in the negative, ruling in favor of the assessee, and determined that the ITO was not justified in dropping the proceedings under section 147 without computing the loss. The assessee was entitled to claim the computation and carry forward of the loss based on the returns filed in response to the section 148 notice. There was no order as to costs.