2009 (9) TMI 524 - HC - Income Tax

Assessment- M/s. H. P. State Forest Corporation is engaged in the business of purchase, conversion and sale of timber. The assessee filed returns of income for the assessment years 1993-94 and 1994-95 declaring income of Rs. 58 lakhs and Rs. 57 lakhs respectively. These returns were filed on estimate basis since the accounts of the assessee had not been audited by the office of the Comptroller and Accountant General. The Assessing Officer treated these returns to be non est as the audited accounts were not annexed with the returns and he issued notices under section 148 of the Income-tax Act for filing fresh returns. Fresh returns were admittedly not filed and thereafter the Assessing Officer completed the assessments for both the assessment years in exercise of the powers vested in him under section 144 of the Act by using the best judgment method. He assessed the income for the two years at Rs. 1.40 crores and Rs. 1.50 crores respectively. Commissioner (Appeals) confirm the action of the Assessing Officer. Income-tax Appellate Tribunal went on to hold that the income to be assessed by the Assessing Officer should not be less than the income returned by the assessee for both the assessment years in his original returns which had been treated as non est . Held that- when the Tribunal was directing assessment de novo, no fetters as to the upper or lower limit of income to be assessed could have been placed by the Tribunal on the Assessing Officer. He had to go through the audited accounts, apply his mind and frame the assessment afresh in accordance with the duly audited accounts placed on records. The Tribunal s directions, firstly, to assess the income at a figure not less than that declared in the assessee s returns and upon the rectification application, to assess the income at a figure not higher than that assessed under section 144, were unsustainable.

Summary

Issues:
1. Interpretation of directions by the Income-tax Appellate Tribunal regarding assessment of income.
2. Validity of directions issued by the Income-tax Appellate Tribunal for reassessment without specific evidence.
3. Jurisdiction of the Tribunal in rectification applications and distinction between rectification and review powers.

Analysis:

Issue 1:
The case involved a dispute over the directions given by the Income-tax Appellate Tribunal regarding the assessment of income. The Tribunal had directed that the assessed income should not be less than the income returned by the assessee, even though the original returns were treated as "non est" by the Assessing Officer. The High Court held that once the returns were deemed non-existent, they could not be used against the assessee. The Tribunal overstepped its jurisdiction by imposing such a condition, as the assessment was to be done afresh based on audited accounts, not limited by the original returns.

Issue 2:
Another aspect of the case focused on the validity of the Tribunal's direction for reassessment without specific material evidence on the quantum of income. The Tribunal had directed the Assessing Officer to reassess the income without providing any material evidence regarding the income of the assessee. The High Court emphasized that the Assessing Officer should assess the income afresh based on the audited accounts submitted by the assessee, without any restrictions imposed by the Tribunal regarding upper or lower limits.

Issue 3:
The judgment also delved into the jurisdiction of the Tribunal in rectification applications and the distinction between rectification and review powers. The High Court clarified that the power of rectification under section 254(2) of the Income-tax Act is limited to correcting errors apparent on the record. The Tribunal could rectify its order regarding the improper direction but could not issue fresh directions. The distinction between rectification and review powers was crucial in determining the Tribunal's authority in the case.

In conclusion, the High Court ruled in favor of the assessee on the first question, stating that the Tribunal exceeded its jurisdiction. The second and third questions were decided in favor of the Revenue, emphasizing the Assessing Officer's duty to assess income based on audited accounts without external limitations. The judgment highlighted the importance of understanding the scope of Tribunal powers in rectification applications and the need to adhere to legal principles in income assessment procedures.