1986 (6) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of sub-section (4) of section 3 of the Income-tax Act.
2. Power of the Income-tax Officer to withhold consent for the change of "previous year."
3. Requirement of providing reasons and opportunity of being heard.
4. Judicial nature of the discretion exercised under section 3(4).
5. Impact on revenue and potential tax avoidance.

Detailed Analysis:

1. Interpretation of sub-section (4) of section 3 of the Income-tax Act:
The case revolves around the correct interpretation of sub-section (4) of section 3 of the Income-tax Act, which pertains to the conditions under which an assessee can change the "previous year" with the consent of the Income-tax Officer. The court noted that the legislative intent behind this provision is to generally allow changes in the "previous year" except in exceptional cases and that the Income-tax Officer's discretion must be exercised in conformity with this intent.

2. Power of the Income-tax Officer to withhold consent for the change of "previous year":
The court examined whether the Income-tax Officer has absolute power to refuse consent. It concluded that while the officer has discretion, this power is not absolute and must be exercised judicially. The officer can impose conditions to safeguard revenue but cannot refuse consent arbitrarily. The legislative policy underlying the provision is to generally give consent unless there are exceptional reasons not to.

3. Requirement of providing reasons and opportunity of being heard:
The court emphasized that any order passed by the Income-tax Officer must be a "speaking order," meaning it must provide reasons for the decision. This requirement is rooted in the principles of natural justice, ensuring that the exercise of discretion is not arbitrary. The absence of reasons deprives the assessee of the ability to challenge the order effectively. The court disagreed with the Delhi High Court's decision in Dalmia Cement (Bharat) Ltd. v. ITO, which held that it was not obligatory to record reasons.

4. Judicial nature of the discretion exercised under section 3(4):
The court highlighted that the discretion vested in the Income-tax Officer under section 3(4) is judicial in nature and must be exercised judicially. Arbitrary refusal to change the "previous year" would violate Article 14 of the Constitution, which guarantees equality before the law. The court cited several precedents to support this view, including Siemens Engineering & Manufacturing Co. of India Ltd. v. Union of India and Mohinder Singh Gill v. Chief Election Commissioner.

5. Impact on revenue and potential tax avoidance:
The court considered whether the potential loss of revenue is a valid ground for refusing the change in the "previous year." It noted that while the change could result in a loss of revenue, the Income-tax Officer could impose conditions to safeguard against this. The court found that the reasons given by the Commissioner for rejecting the application were not germane to the decision and were influenced by the potential loss of revenue due to a reduction in tax rates. The court also referenced the Supreme Court's decision in Esthuri Aswathiah v. CIT, which held that the length of the "previous year" could be more or less than twelve months.

Conclusion:
The court allowed the civil rule, quashing the orders of the Inspecting Assistant Commissioner and the Commissioner of Income-tax. It directed the Inspecting Assistant Commissioner to reconsider the application for a change in the "previous year," taking into account the observations made by the court and the assessee-company's undertaking to accept conditions that would prevent any loss of revenue.

Principles Established:
1. Discretion under section 3(4) must align with legislative intent and policy.
2. Exercise of discretion must not be arbitrary and should be supported by reasons.
3. Defects in the original order cannot be cured by reasons given in a revisional order.
4. There is no inherent right to a personal hearing under section 3(4) unless expressly provided.
5. The length of the "previous year" can vary, and the Income-tax Officer can impose conditions to prevent tax avoidance.