ORDERAssessing officer granted registration to assessee-firm without satisfying condition precedent
Catch Note:
If the assessing officer, in spite of the fact that the conditions not met by the assessee takes the status of the assessee wrongly as a registered firm, the only recourse to the revenue against such erroneous order is to resort to section 263. By taking a wrong status, the assessee is getting an undue advantage. Assessee is paying tax at a low rate, which means the revenue is affected prejudicially; that is because of the wrong status adopted by the assessing officer. Further, the revenue cannot appeal against the order of the assessing officer directly. It is for this reason that the Commissioner is empowered under section 263 to revise the erroneous and prejudicial order passed by the assessing officer.
Ratio:
If the assessing officer, in spite of the fact that the conditions not met by the assessee takes the status of the assessee wrongly as a registered firm, the only recourse to the revenue against such erroneous order is to resort to section 263. By taking a wrong status, the assessee is getting an undue advantage. Assessee is paying tax at a low rate, which means the revenue is affected prejudicially; that is because of the wrong status adopted by the assessing officer. Further, the revenue cannot appeal against the order of the assessing officer directly. It is for this reason that the Commissioner is empowered under section 263 to revise the erroneous and prejudicial order passed by the assessing officer.
Held:
The argument of the assessee’s representative that the Commissioner can interfere invoking his jurisdic-tion vested in him under section 263 to change the status only against an order passed under section 184 does not stand to reason. The registration is automatic provided certain conditions are met. If the assessing officer, in spite of the fact that the conditions not met by the assessee takes the status of the assessee wrongly as a registered firm, the only recourse to the revenue against such erroneous order is to resort to section 263. By taking a wrong status, the assessee is getting an undue advantage. Assessee is paying tax at a low rate, which means the revenue is affected prejudicially; that is because of the wrong status adopted by the assessing officer. Therefore, the argument of the assessee also does not stand to reason. In the circumstances, there is no hesitation in upholding the orders of the Commissioner for both the years under consideration.
The revenue cannot appeal against the order of the assessing officer directly. It is for this reason that the Commissioner is empowered under section 263 to revise the erroneous and prejudicial order passed by the assessing officer.
Case Law Analysis:
Badri Narain Kashi Prasad v. Addl. CIT (1981) 128 ITR 663 (All), Addl. CIT v. J.K. D’Costa (1982) 133 ITR 7 (Del), CIT v. Nihal Chand Rekyan (2000) 242 ITR 45 (Del), CIT v. C.R.K. Swamy (2002) 254 ITR 158 (Mad), P.P. Dinwala v. CIT (1995) (Cal), Special Steel Products v. CIT (2001) 249 ITR 504 (Mad) and Mubarak Trading Co. (IT Appeal No. 230 (Coch) of 2001, dated 24-7-2002) distinguished.
Application:
Principle enunciated in this case is applicable to current assessment year.
Decision:
In favour of revenue.
Income Tax Act 1961 s.263
Revision under s. 263–Merger doctrineScope of section 263
Catch Note:
It is well established that the issue specifically agitated before the Commissioner (Appeals) and adjudicated by him cannot be interfered with by the Commissioner invoking the jurisdiction vested in him under section 263. In such a case, the remedy of the revenue is before a higher forum and not section 263.
Ratio:
It is well established that the issue specifically agitated before the Commissioner (Appeals) and adjudicated by him cannot be interfered with by the Commissioner invoking the jurisdiction vested in him under section 263. In such a case, the remedy of the revenue is before a higher forum and not section 263.
Held:
Application:
Also to current assessment year.
Decision:
Principle explained.
Income Tax Act 1961 s.263
In The ITAT Cochin Bench K.P.T. Thangal, J. M. & Dr. O.K. Narayanan, A. M. Member
ORDER
K..P.T. Thangal, Judicial Member.
These appeals by the assessee pertain to the assessment years 1994-95 and 1995-96. The assessee is aggrieved by the order of the Commissioner passed under section 263 of the Income Tax Act setting aside the assessment orders and directing to pass fresh assessments in accordance with law taking into account the provisions of section 184(5) of the Income Tax Act.
2. On perusal of the records, the Commissioner found that the orders passed by the assessing officer for the assessment years 199495 and 1995-96 were erroneous and prejudicial to the interests of the revenue for the following reasons:
3. Assessee did not file the return either under sub-section (1) or (4) or (5) of section 139 and as such, there was clear failure on the part of the assessee and the provisions of section 184(5) were attracted in this case. The Commissioner held that the assessee’s status could not be taken as a registered firm but only as an assessing officer as contemplated under section 184(5).
4. The Commissioner did not accept the contention that section 148(1) contemplates that once the assessee files the return in response to section 148 notice, the return should be treated as one filed under section 139 and assessment should be completed as such. He held that section 148(1) does not stipulate that return filed in response to section 148(1) should be treated as one furnished under section 139 and it can only be treated as a return required to be furnished under section 139. He negatived the argument of the assessee that the continuity of the registration given to the firm is automatic and as such, the status cannot be changed holding that section 184(1) is subservient to section 184(5) which starts with the wording notwithstanding anything contained in the foregoing provisions of the section”. He also rejected the contention of the assessee that the assessment was completed under section 143(3) and not under section 144, and hence section 184(5) had no application. fie held that if there is failure on the part of the assessee an mentioned in section 144, assessment has to be completed in the same manner as assessing officer and there is no discretion left to the assessing officer. Another contention raised by the assessee was that assessment order for the assessment year 1994-95 was appealed against and that order got merged with that of the Commissioner (Appeals) and as such, the Commissioner of Income-tax could not invoke his jurisdiction under section 263 in this case. He rejected this contention holding that the issue of registration was never before the Commissioner (Appeals). Aggrieved by the above order, the assessee is in appeal before the Tribunal.
5. The learned representative of the assessee submitted that section 263 presupposes existence of an order passed by the assessing officer and such order should also be erroneous insofar as it is prejudicial to the interests of the revenue. He submitted that the Commissioner of Income-tax has failed to note that the assessing officer has not passed any order under section 184 of the Income Tax Act assigning the status of ‘firm’ to the assessee for the assessment years under consideration. Since there is no order passed under section 184, assessee’s representative submitted that continuity of the status of ‘firm’ as taken by the assessing officer could not be held as erroneous and prejudicial to the interests of the revenue. Since there is no order passed under section 184 for both the years, assumption of power under section 263 by the Commissioner for revising such non-existing order is without jurisdiction. In fact, he has only set aside the order passed under section 143(3), read with section 147 as erroneous and prejudicial to the interests of the revenue on the ground that the status of the assessee should be taken as assessing officer instead of ‘firm’. Sections 143(3) and 184 are separate and independent proceedings governing different points. Under section 143(3), the assessing officer only passes an order assessing the total income of the assessee and determines only the tax payable. The assessing officer does not and cannot decide on the status of the assessee in an order section 143(3). It has to be decided only under section 184. For the above proposition, assessee relied on the decision of the Allahabad High Court in the case of Badri Narain Kashi Parsad v. Addl. CIT (1981) 128 ITR 663 (All). For the proposition that the order under section 143(3) cannot be revised under section 263 on the ground that the status of the assessee has not been determined correctly because under section 143, the assessing officer was not required to determine the status of the assessee, following decisions were also relied on :
(a) Addl. CITv. J.K. DCosta (1982) 133 ITR 72 (Del)
(b) CIT v. Nihal Chand Rekyan (2000) 242 ITR 45 (Del)
(c) CIT v. C. R.K. Swamy (2002) 254 ITR 158 (Mad.)
(d) P.P. Dinwala v. CIT (1995) 78 Taxman 421 (Cal.)
6. The next contention advanced by the assessee’s representative is with regard to section 184(5) of Income Tax Act, whether it is applicable in the instant case of the assessee and whether the status of the assessee should have been taken as ‘AOP’. It is true, assessee’s representative submitted that as per section 184(5) where in respect of any assessment year if there is a failure on the part of the assessee as contemplated under section 144(1)(a) the firm shall not and cannot be assessed as a firm but only the status can be treated as AOP. The failure mentioned in section 144(1)(a) is the omission to file a return under sections 139(1), 139(4) or 139(5) or non-compliance with the notice under section 142(1) or 142(2A) or 143(2). Assessee’s representative submitted that although assessee had failed to file the return of income for the years under consideration, under section 139 of the Income Tax Act, in due time assessee filed the returns in response to the notices under section 148 and also complied with the notices issued under sections 142(1) and 143(2) by the assessing officer for both the years under consideration. Hence, as per section 148, assessee’s return should be treated as one filed under section 139 and it should be processed as such. Since the return filed in response to notice under section 148 is deemed as a return filed under section 139 and assessee has complied with the notices under section 142(1) and 142(2), it cannot be said that there is failure on the part of the assessee as mentioned in section 144 and that the provisions of section 184(5) is not applicable to the assessee’s case. The assessment made under section 143(3), read with section 147 in the status of ‘firm’ is, therefore, not erroneous and should not have been set aside by the Commissioner, submitted the assessee’s representative.
7. Assessee was assessed in the status of ‘registered firm’ in earlier years and there is no change in the constitution of the firm during the previous years relevant to the assessment years 1994-95 and 1995-96. Assessing officer has not passed any order under section 184. It is only continuity of the registration. Since the assessment order was passed under section 143(3) and not under section 144, the continuity of the registration of the firm is automatic and as such, there is no error in the orders of the assessing officer, even if the orders passed by the assessing officer is prejudicial to the interests of the revenue. The Commissioner can act under section 263 only if the criteria, i.e., (a) the order is erroneous and (b) also prejudicial to the interests of the revenue are satisfied. Assessee’s representative, in this connection, drawing support from the Board’s Circular No. F. 26/3/ 65-IT (A1) dated 26-6-1995 whereby the Board has clarified that where there is a delay in filing the return of income, the declaration under section 184(7) filed along with the belated return would constitute sufficient compliance with the provisions of the Income Tax Act for continuation of registration of firm, if no ex parte assessment is made by the assessing officer under section 144. Assessee’s representative submitted that the intention behind the Circular is that because of delay in filing the return the benefit of continuation of registration need not be denied to the assessee unless the assessment is made ex parte. Relying on the decision of the Madras High Court in the case of Special Steel Products v. CIT (2001) 249 ITR 504 assessee’s representative contented that even in the case of return filed in pursuance of notice under section 148, if no ex parte assessment is made, the above circular applies and the firm is entitled for registration. He submitted that the above Circular is binding on the officers of the department and it is valid even after the amendments made in the Income Tax Act regarding assessments of firms with effect from the assessment year 1993-94 onwards. Hence, the assessee’s representative submitted that there is no justification for the Commissioner to hold that it is not necessary that for section 185(5) to be invoked, the assessment itself should been completed under section 144. The additional argument advanced for the assessment year is that there was appeal for this year and hence the assessment order completely merged with the order of the Commissioner (Appeals), and therefore, Commissioner’s jurisdiction under section 263 is invariably excluded.
8. In reply to the above,the learned departmental representative supported the order of the Commissioner and also relying upon the decision of the Tribunal in the case of Mubarak Trading Co. (IT Appeal No. 230 (Cochin) of 2001 dated 24-7-2002) for the assessment year 1994-95, it was submitted that it is not necessary to pass an order under section 144 so as to attract the provisions of section 184(5). Since the assessing officer. has not looked at the matter from this angle, the learned Departmental Representative submitted that the order of the Commissioner setting aside the assessments for the years under consideration is liable to be uphelearned He further submitted that the order of the assessing officer is prejudicial to the interests of the revenue because by taking a status to which the assessee is not entitled, assessee has got an undue advantage, namely a low rate of tax. That itself is prejudicial to the interest of the revenue. Getting the status of ‘registered firm’ is a privilege and not a matter of right, this privilege is extended to the assessee provided he complies with the conditions contemplated under the law.
9. We heard the rival submissions. Prior to the changes brought in section 185 with effect from 1-4-1993 and assessee was to meet the following conditions to have the registration:
(a) An application should be made to the assessing officer before the end of the accounting year and the applicant should comply with the requirements of section 184 and Income Tax Rules 22 to 24.
(b) The firm should be evidenced by an instrument of partnership.
(c) The instrument should be specific in relation to the shares of the partners.
(d) The partnership should be valid and genuine and should actually be constituted as specified in the instrument.
If all the above conditions were satisfied, the assessing officer was bound to give registration to the firm. But this privilege the assessee was to lose if he had committed any of such defaults as entail a best judgment assessment under section 144 in which event he may refuse registration under section 185(5) and not otherwise.
10 Under the law i.e., under the 1922 Act, registration was for a year and fresh application for renewal of registration was to be made every year even in cases where there was no change in the constitution of the firm or in the shares of the partners. Under the present 1961 Act, prior to the changes brought in section 185 as mentioned above with effect from 1-4-1993 by virtue of section 185(6), the registration once granted or deemed to have been granted under section 185(6) has effect and under section 184 for every subsequent year, provided that the firm furnishes an application before the expiry of the time for filing the return of income under section 139. After the changes brought in section 184 by virtue of section 184(3), assessee is entitled to the same capacity (as a registered firm) every subsequent year provided there is no change in the constitution of the firm or in the shares of the partners as evidenced in the partnership on the basis of which the firm was first granted registration. It is the argument of the Assessee’s representative that only if there are changes, the firm needs to furnish a certified copy of the revised partnership deed along with the return of income and in such cases all the conditions are to be satisfied. We have no quarrel with this proposition put forward by the assessee’s representative.
11. However if there is a failure on the part of the assessee (a registered firm) as mentioned under section 144, the firm cannot and shall not be assessed as a registered firm for that assessment year, and for all purposes, assessee firm now should be treated as an AOP and assessment should be completed accordingly. The argument of the assessee’s representative is that in spite of the failure of the assessee to file the returns in time, for both the years under consideration, assessee filed the returns in response to section 148 notices. Section 148 reads as under:
“Section 148(l): Before making the assessment, reassessment or recomputation under section 147, the assessing officer shall serve on the assessee a notice requiring him to furnish within such period as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.”
Assessee filed the returns. Assessee responded to the notices issued. Assessments were completed under section 143(3). Since the assessment were completed under section 143(3), read with section 148, by virtue of section 148 which clearly stipulates as mentioned above, the assessment should be completed as if such return were a return required to be furnished under section 139. We are unable to agree with the above proposition. If the above proposition of the assessee is accepted, section 184(5) becomes redundant. First of all, assessee has not filed the return voluntarily. The department was forced to issue notice under section 148. Thereafter, the assessee co-operates and responds to notices. In a case like this, if the assessee co-operates, there is no chance or occasion to pass an order under section 144. Essentially. Order should be passed under section 143(3). An assessee who fails to file the return voluntarily on or before due date for filing of the return under section 139 an assessee who does not discharge the duty cast upon him cannot be treated equally. An honest assessee and a reluctant assessee cannot be treated on the same pedestal. In the case of an assessee who is reluctant but coerced to file the return and co-operate with the department cannot escape the consequences. Against such assessees, section 184(5) is intended. The contention that the assessee that he is excused as the assessment is not completed under section 144 has no much meaning. The assessee knew the consequences of its failure to file the return in time as contemplated under section 144(1)(a).
12. If we accept the assessee’s plea that since the assessment is not completed under section 144 but under section 143(3), then as we noted above, section 184(5) becomes redundant. It is well established principle of interpretation of law that such interpretation should be avoided. A harmonious reading of the sections will lead us to the conclusion that in case of an assessee who fails to file the return under section 139 cannot have the same privilege and same status of an assessee who was prudent and discharged the duty cast upon him by the law promptly. What section 148 contemplates is that, if an assessee files the return, then for all procedural purposes, assessee’s return should be treated as one filed under section 139 but not for any privileges like registration etc.
13. The decision relied on by the assessee in Badri Narain Kashi Prasads case (supra) or any other decision cited above does not help the assessee. In the case of Badri Narain Kashi Prasad (supra) the issue was different. In that case, the court was not dealing with the amended and now existing provisions. The court was dealing with pre-amended section. In the case of J.K DCosta (supra) the court was called upon to decide as to whether the failure of the Income Tax Officer to initiate penalty proceedings would entitle the Commissioner of Income-tax to resort to section 263. The court held ‘No’. The court held that an assessment cannot be held to be erroneous and prejudicial to the interests of the revenue because of the failure of the Income Tax Officer to record his opinion about the leviability of penalty in the case. The same is the position in the case of Nihal Chand Rekyan (supra). Same is the position in the case of C.R.K Swamy (supra) also. In the case of Special Steel Products (supra), the assessee filed the return belatedly in response to section 148 notice. The court was dealing with section 184 before the changes brought into the statute by Finance Act, 1992 with effect from 1-4-1993. The argument of the assessee’s representative that the Commissioner can interfere invoking his jurisdiction vested in him under section 263 to change the status only against an order passed under section 184 does not stand to reason. The registration is automatic provided certain conditions are met. If the assessing officer, in spite of the fact that the conditions not met by the assessee takes the status of the assessee wrongly as a registered firm, the only recourse to the revenue against such erroneous order is to resort to section 263. By taking a wrong status, the assessee is getting an undue advantage. Assessee is paying tax at a low rate, which means the revenue is affected prejudicially; that is because of the wrong status adopted by the assessing officer. Therefore, the above argument of the assessee also does not stand to reason. In the circumstances, we have no hesitation in upholding the orders of the Commissioner for both the years under consideration.
14. Coming to the theory of merger, it is well established that the issue specifically agitated before the Commissioner (Appeals) and adjudicated by him cannot be interfered with by the Commissioner invoking the jurisdiction vested in him under section 263. In such a case, the remedy of the revenue is before a higher forum and not section 263. The revenue cannot appeal against the order of the assessing officer directly. It is for this reason that the Commissioner is empowered under section 263 to revise the erroneous and prejudicial order passed by the assessing officer. In the light of the above, we have no hesitation in upholding the orders passed by the Commissioner under section 263.
15. In the result, the appeals by the assessee are dismissed.