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TMI Blog2006 (3) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... to the matter and if on inquiry the Chief Vigilance Commissioner finds and reports that the said Commissioner of Income-tax was guilty of misconduct, action is taken against him by his such authority, as per law. - - - - - Dated:- 2-3-2006 - Judge(s) : V. K. JHANJI., SURJIT SINGH. JUDGMENT The judgment of the court was delivered by Surjit Singh J.-The writ petition and the income-tax appeal, whose numbers and particulars are given in the title of the judgment, raise common questions of law, arising out of the facts common to both the matters and, therefore, the same are being disposed of by a common judgment. First the facts may be noticed. Green World Corporation, a partnership concern of Shri R.S. Gupta and his wife Smt. Sushila Gupta, apparently set up two units at Parwanoo in Himachal Pradesh for manufacturing exercise books, writing pads, etc., some time in the year 1995, soon after the declaration and enforcement of tax holiday for certain period specified in the Union Budget. Later on they claimed to have set up a third unit for manufacturing of computer software. They started filing income-tax returns in the year 1996-97 (assessment year) showing huge profits. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd after hearing it, passed a detailed order dated July 12, 2004, holding that the firm had not been engaged in any manufacturing process at Parwanoo, within the meaning of sections 80-IA and 80-IB of the Income-tax Act, inasmuch as it appeared to have not engaged between ten and twenty workers, no power had been used in the manufacturing process, the business transacted between the firm and a sister concern of the partners of the firm, situated at Delhi, indicated that it (the business) was so arranged that it yielded to the assessee-firm more profits than ordinarily expected, the value of the plant and machinery transferred from unit I to unit II of the assessee-firm, was much higher than the 20 per cent, of the total value of the machinery and plant used in the business of unit I and hence no deduction could have been claimed, under section 80-IA in view of Explanation 2 to sub-section (2) of the said provision and the activities of the firm did not amount to manufacturing of any goods or articles for the purpose of claiming tax holiday, under sections 80-IA and 80-IB of the Income-tax Act. Consequently the Commissioner of Income-tax ordered that only 5 per cent, of the total de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easoned and had been passed in lawful exercise of the revisional jurisdiction and, therefore, the Tribunal was not justified in interfering with it. It is alleged that the order of the Assessing Officer, which the Commissioner of Income-tax, has set aside, was in fact an illegal order as it had been passed on the dictates of the Commissioner of Income-tax, which dictates amounted to illegal and unwarranted interference in the judicial function of the Assessing Officer. It is also alleged that the order of the Assessing Officer was thus passed without application of mind and was, therefore, no order in the eyes of law. It is also alleged that the judgment of the hon'ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 relied upon by the Tribunal, in holding that the Commissioner of Income-tax could not have interfered with the order of the Assessing Officer, in exercise of powers under section 263 of the Income-tax Act, is not attracted to the facts of the case, because the order of the Assessing Officer was in fact no order as it had been passed just on the dictates of a superior officer, without application of mind. The further contention of the appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Tribunal's order, setting aside the direction contained in the order of the Commissioner of Income-tax for reassessment of the income for the earlier assessment years, is liable to be set aside, being based on erroneous construction of the provision of section 263 of the Act. The appeal filed by the Commissioner of Income-tax was admitted on questions of law formulated by the appellant in the memorandum of appeal itself, which are reproduced below: "1. Whether, on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in denying the opportunity of being heard and then agreeing to allow it partly on facts, to Shri A. K. Manchanda, Commissioner of Income-tax, Shimla who was the respondent also? 2. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in quashing a lawful direction of the Commissioner of Income-tax and basing its finding on a totally wrong understanding of facts and incorrect appreciation of legal provisions especially section 150(1) and section 153(3), of Explanations 2 and 3? 3. Whether, on the facts and circumstances of the case, the Income-tax Appellate Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax could not exercise powers under section 263 since his predecessor had issued certain directions to the Assessing Officer by ignoring the ratio of J.K. Synthetics v. CBDT [1972] 83 ITR 335 of the apex court, and instead relying upon the case of Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P H) which was given in the context of entirely different facts? 11. Whether the Income-tax Appellate Tribunal was correct in holding that the issues concerning non-fulfilment of the condition of manufacturing process being with the aid of power and thus requiring the employment of 20 workers was considered by the Assessing Officer and she had formulated her view, whereas the facts on record show that the above aspects were not considered and she had passed the order acting on the dictates of the then Commissioner of Income-tax? 12. Whether, on the facts and circumstances of the case, was the Income-tax Appellate Tribunal justified in invoking Malabar Industrial case [2000] 243 ITR 83 (SC) on important aspects and matters which had not been enquired into and considered by the Assessing Officer during the assessment proceedings or on which the Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 10, 2005, has held that any defect in signing the memorandum of appeal or in the authority of the person signing the memorandum of appeal, does not invalidate the memorandum of appeal, if such defect is not deliberate. It has further been held that such a defect, being procedural in nature, can subsequently be corrected and that when the defect is noticed or pointed out, the court should, either on an application by the appellant or suo motu, permit the rectification of such a defect. In the present case, as soon as it was brought to the notice of the court by learned counsel for the respondent, during the course of hearing of the appeal, that the appeal by the Commissioner of Income-tax, Shimla, was not competent inasmuch as the area falling within the jurisdiction of the Income-tax Officer, Parwanoo, stood transferred to the supervisory and revisional jurisdiction of the Commissioner of Income-tax, New Delhi, a prayer was made by learned counsel for the Revenue that the Commissioner of Income-tax, Delhi may be impleaded as appellant No. 2 to cure the alleged defect in the appeal. His prayer was granted vide order dated January 9, 2006. This order was in consonance with the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer's order had been passed in a mechanical manner, on the dictates of the Commissioner of Income-tax, without application of her own mind and as such the submission made by learned counsel for the respondent that the view taken by the Income-tax Officer was possible and, therefore, could not have been interfered with in exercise of the revisional jurisdiction, holds no ground, because the Assessing Officer in fact did not take any view as she did not address herself to the facts and the circumstances of the case nor did she examine the material, collected during the course of the survey, but passed the order just on the dictates of the superior administrative officer. He also countered the contention of counsel for the assessee-respondent that the Commissioner of Income-tax had simply monitored the survey being conducted by the Assessing Officer. He drew the attention of the court to the order of the Assessing Officer, particularly the footnote recorded on it, in support of his contention that the order had been passed without application of mind, just on the unwarranted and illegal dictates of the Commissioner of Income-tax. From the submissions made by learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment proceedings. On sale of Rs. 88,55,592 gross profit of Rs. 57,28,980 giving rate of 64.69 per cent, for unit I and on sale of Rs. 63,16,392, gross profit of Rs. 19,12,565 for unit II giving 30.29 per cent, has been declared by the assessee. Sales were made both on credit as well as cash basis. Confirmed copy of account of the creditors has been produced, which is placed on record. Keeping in view the information supplied by the assessee and, facts on file, the income returned by the assessee is hereby accepted. (Sd.)........ Sunita Duggal, Income-tax Officer, Parwanoo. Office Note: After receiving a call from Shimla on December 3, 2002, I visited the office of worthy Commissioner of Income-tax, Shimla, on December 4, 2002, along with all the assessment records and relevant documents of M/s. Green World Corporation. The case was thoroughly discussed with worthy Commissioner of Income-tax, Shimla, in the presence of the learned Additional Commissioner of Income-tax, Solan Range, Solan. All the documents and queries raised and further reply submitted by the assessee were properly glanced through by the worthy Commissioner of Income-tax and after going through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment be finalised as per return. Also, the Income-tax Officer would not have recorded this footnote had there been no pressure upon her. The note is indicative of the fact that the Income-tax Officer was not only under pressure from the Commissioner of Income-tax to accept the return submitted by the assessee, but she was also of the view that the return was not in order and that if she accepted it as such, she could be in trouble at some later point of time when the matter came to the notice of some superior officer (other than the person holding the office of the Commissioner of Income-tax, Shimla at that time). That is why she recorded this footnote on the order to safeguard herself against apprehended trouble in future. Under these circumstances, we have no hesitation in holding that the order was passed by the Assessing Officer, not only without application of mind, but also on account of illegal and unwarranted interference in her statutory functioning by the then Commissioner of Income-tax, Shimla. In other words, the order of the Income-tax Officer was not based on any view formed by her, on the basis of the material before her, but on the dictates of a superior offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its had been consumed from April 1, 1999 to September 30, 1999, when the unit was claimed to have operated and the remaining 775 units had been consumed from October 1, 1999 to December 31, 1999, when the unit was not operational, because it had been closed down on September 30, 1999. The aforesaid figures show that when the unit was allegedly operational, the average monthly consumption of electricity was a meager 234 units, but when it was not operational, the consumption was 258 units per month. This fact knocks the bottom out of the assessee's claim that it had been manufacturing exercise books and note pads, etc., by use of power driven machinery. The sanctioned load for unit I was 9700 KWs., which meant that about 10 units per hour could have been consumed and if the unit operated every day just for eight hours, the approximate consumption of electricity would have been to the extent of more than 2300 units per month. As regards the second unit, which was claimed to have produced goods worth Rs. 63,13,923, 4610 units of electricity had been consumed during the entire period of the financial year 1999-2000, meaning thereby that the average monthly consumption was less than 400 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue, as is clear from a reading of the bare provision of section 263 of the Income-tax Act. There cannot be any dispute so far as the legal proposition, stated by learned counsel is concerned. However, in the present case both the prerequisites, viz., the order being erroneous and also prejudicial to the interests of the Revenue for exercise of revisional power, were there. The circumstances under which the order was passed by the Assessing Officer, as discussed hereinabove leave little doubt that the Assessing Officer was pressurised to accept the return filed by the assessee, by her superior officer, even though she herself wanted to have some more information from the assessee before making up her mind. If that is so, the order of the Assessing Officer is not only erroneous but even worse than that. In any case, when there was overwhelming material, like non-consumption of electricity, unbelievably huge profits and then the closing down of such "highly profitable" manufacturing activity all of a sudden, the order of the Assessing Officer, even if it were passed by application of mind, could not have been a correct order but only an erroneous one within the meaning of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises at Parwanoo, during the relevant assessment year, and making the profits reported in the return. The facts pointed by him are as follows: "(a) genuineness certificate issued by District Industries Centre, Government of Himachal Pradesh after spot inspection. (b) movement of raw material to the assessee's premises by way of Form No. 26A issued by the local sales tax authority, duly verified at the Kalka-Pawanoo barrier; (c) payment of freight on material by way of GR bills of the transport companies; (d) payment of wages with reference to attendance register duly supported by registration of employees with PF and ESI authorities, (e) electricity consumption by way of electricity bills; (f) list of plant and machinery along with bills of purchase thereof; (g) movement of finished goods by way of sale bills along with Form No. 26A along with ledger accounts of the customers, (h) books of account maintained in regular course of business including stock register, etc.; (i) tax audit report under section 44AB of the Income-tax Act, (j) certificate in Form No. 10CCB evidencing deduction claimed under section 80-IA/80IB of the Act;" In the light of the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to the said provision, which said that the provision would not be applicable to an assessment or reassessment, made on the assessee direction, contained in an order, passed under sections 31, 33, 33A, 33B, 66 or 66A. Section 33A of the said Act pertained to the revisional jurisdiction of the Commissioner of Income-tax. That provision of section 33A was in substance similar to the provision of section 263 of the present Act. The question arose before the Constitution Bench of the hon'ble Supreme Court in the case of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 whether a finding or direction given by the appellate authority in respect of an assessment year other than that to which the appeal pertained, was covered by the aforesaid proviso to section 34(3) of the Act and hence the limitation, provided under section 34(3), could not operate as a bar for assessment or reassessment by the Assessing Officer to give effect to such finding or direction. The Constitution Bench, by a majority judgment, held that the finding or direction, referred to in the proviso to section 33(4), meant a finding or direction in relation to the assessment year, which was the subject matter of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of sub-section (1) of section 150 excluding the application of section 149 and sub-section (3)(ii) of section 153 excluding the application of sub-section (2) of section 153 in respect of the cases mentioned therein. The cases mentioned in the proviso to section 34(3) of the old Act and 34 sections 150(1) and 153(3)(ii) are similar, viz., in which the notice is issued or assessment, reassessment or recomputation are made in consequence of or to give effect to any finding or direction contained in any order passed by any appellate or revisional authority. Now, when the proviso to section 34(3) and section 150(1) and section 153(3)(ii) cover similar situations and have similar effect, and moreover the same words and phraseology, viz, "in consequence of or to give effect to any finding or direction contained in an order", figure in them, interpretation of the words and phraseology "in consequence of or to give effect to any finding or direction contained in an order", occurring in sections 150(1) and 153(3)(ii), cannot be different from the construction placed on similar words and phraseology in the proviso to section 34(3) of the Act of 1922, by the hon'ble Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (MP), also it has been observed that the object of Explanation 2 to section 153 is to partially supersede the Supreme Court decisions in ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 and N. Kt. Sivalingam Chettiar v. CIT [1967] 66 ITR 586, by legal fiction so as to cover an assessment year different from the assessment year, to which the appeal or revision pertained, if the income reported was found to pertain not to the assessment year that was the subject matter of the appeal or revision but to some different assessment year. The aforesaid discussion pertaining to the interpretation of sections 150(1) and 153(2), excluding the operation of section 149, prescribing limitation for issue of notice, under section 148 and section 153(2) providing limitation for passing an order, under section 147, however, does not mean that the Commissioner of Income-tax, in exercise of his power, under section 263 of the Income-tax Act, cannot record a finding or give a direction for reopening the assessment pertaining to the assessment years other than the assessment year(s) covered by the revisional proceedings. The only effect of the above discussion and interpretation is that the bar of limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Officer, Shimla, on the direction of the Commissioner of Income-tax contained in his order dated July 12, 2004, for reopening the assessment in respect of earlier years other than the assessment year 2000-01 (which was the subject matter of the revision), shall be subject to the limitation contained in sections 149 and 153(2) of the Income-tax Act. We reiterate for the sake of clarity that the notices under section 148 of the Act issued by the Assessing Officer pursuant to the aforesaid direction, are not saved from the limitation, under the exclusionary provisions of sections 150(1) and 153(3)(ii) of the Act. Before parting with the judgment, we feel that it is desirable and in the public interest that the Chief Vigilance Commissioner is approached by the appointing authority of the Commissioner of Income-tax, who interfered in the statutory functioning of the Assessing Officer and pressurized her to pass the order accepting the return of the assessee, to inquire into the matter and if on inquiry the Chief Vigilance Commissioner finds and reports that the said Commissioner of Income-tax was guilty of misconduct, action is taken against him by his such authority, as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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