ORDER UNDER S. 144A–Rectification of original draft order
Ratio :
Rectification of original draft order effected by successor assessing officer to include some more items and Inspecting Assistant Commissioner’s instruction on basis thereof was valid.
Held :
As long as the assessment is pending and not concluded and it is not barred by limitation, if the Income Tax Officer is of the opinion that the predecessor’s draft requires some more items to be included in the income of the assessee, the provisions of the Income Tax Act do not prohibit him from doing so. In the circumstances the second draft submitted by the Income Tax Officer is only in the nature of rectification of the original draft which he is permitted to do, as long as the earlier draft has not taken a final shape. In view of the above, the procedure followed by the Income Tax Officer in submitting a second draft order and the Inspecting Assistant Commissioner’s action in issuing instructions on the basis of the second draft order under section 144A and under section 144B are correct and the Commissioner of Income Tax (Appeals) was in error in setting aside the order of the Income Tax Officer.
Application :
Not to current assessment years.
Income Tax Act 1961 s.143
Income Tax Act 1961 s.144B
ORDER
R. Rangayya, Accountant Member
1. IT Appeal No. 422 (Coch.)/1984 is an appeal filed by the assessee against the order of the CIT (Appeals) for the assessment year 1980-81. The cross-objection No. 80 (Coch.)/84 is filed by the revenue in relation to this appeal. There is a delay of 29 days in filing the cross-objection. It is explained that the delay is due to the fact that when the appeal memo was received the same was tagged with some other appeal papers and it was not brought to the notice of the ITO. Immediately after noticing this appeal, it is stated, that the ITO took action to file the cross-objection. In the circumstances, it is requested that the delay should be condoned. Taking into account the reasons mentioned in the petition, the delay in filing the cross-objection is condoned.
2. For the assessment year 1980-81 the Income-tax Officer originally prepared a draft assessment order Under Section 144B on 7-7-1981 and forwarded the same to the Inspecting Assistant Commissioner for further action. Subsequently there was a change in the incumbent of the ITO and the new incumbent seems to have asked the assessee whether he requires any further hearing in the matter in view of the provisions of Section 129 of the IT Act. Though the assessee did not give any reply in writing he seems to have orally indicated that he does not want any further hearing. However, the successor-ITO found that certain modifications are necessary in the draft order submitted by his predecessor and accordingly after hearing the assessee he proceeded to prepare another draft assessment order and submitted the same to the Inspecting Asstt. Commissioner along with the assessee’s objections. Before the IAC an objection was taken to the procedure followed by the ITO in submitting a second draft assessment order. Reliance was sought to be placed on the decision of the Delhi High Court in the case of Sudhir Sareen v. ITO [1981] 128 ITR 445. It was contended that the provision of Section 144B envisages only one draft order and there cannot be more than one such order. In the circumstances, it was contended that the second draft order submitted by the ITO is invalid and could not be taken cognizance of. The IAC held that as per Section 129 of the IT Act, the succeeding Income-tax authority can continue the proceedings from the stage at which the proceedings were left by his predecessor. The fact that the successor-ITO posted the case for hearing and proposed further additions and issued a fresh draft assessment order shows that he did not wish to continue the proceedings from the stage left by his predecessor but wanted to proceed independently as far as the proceedings Under Section 144B is concerned. Thus he held that the earlier draft order became a non-entity in the eyes of law in view of the fresh draft order submitted by the ITO. He thereupon proceeded to give instructions to the second draft assessment order. On the same day he had also given instructions Under Section 144A in respect of certain other items of income to be considered by the ITO. There is no dispute that instructions were issued by the IAC after giving the assessee an opportunity of being heard in the matter. The assessment was ultimately completed on the basis of the instructions from the IAC both Under Section 144A and Under Section 144B. The assessee challenged the assessment made by the ITO on various grounds before the Commissioner of Income-tax (Appeals). The main objection taken by the assessee was that the assessment is invalid as it is based on the second draft assessment order and instructions given by the IAC on such order, as the Delhi High Court in the above case held that when Section 144B does not envisage a second draft assessment order and any proceedings based on such illegal order would be a nullity. It was also contended before the CIT (A) that while proceedings were pending Under Section 144B the IAC was not competent to proceed Under Section 144A. The latter contention was negatived by the CIT (A). He, however, accepted the assessee’s case that the provisions of Section 144B do not envisage a second draft order in view of the decision of the Delhi High Court in Sudhir Sareen’s case (supra). He set aside the assessment made by the ITO and directed him to pass fresh orders in accordance with law on the basis of the first draft assessment order and in accordance with the IAC’s directions in so far as it relates to the matters contained in the first draft order and objections raised by the assessee against the same. The submission of the assessee that the assessment should be annulled has not been accepted by him in view of the decision of the Supreme Court in the case of Guduthur Bros. v. ITO [1960] 40 ITR 298. Aggrieved by the action of the CIT (A) in setting aside the assessment and not annulling the same, the assessee is in appeal before us. In the cross-objection, the revenue contends that the CIT (A) is not correct in holding that the second draft assessment order is not valid and in directing the ITO to make a fresh assessment only on the basis of the first draft assessment order and the instructions of the IAC in so far as it related to that order. While the assessee relies on the decision of the Delhi High Court in Sudhir Sareen’s case (supra), the departmental representative relies on the provisions of Section 129 of the IT Act and the decisions in Guduthur Bros.’ case (supra) and H. H. Maharaja Raja Pawer Dewas v. CIT [1982] 138 ITR 518 (MP).
3. We have considered the rival submissions. As stated earlier, originally the Income-tax Officer prepared a draft assessment order on 7-7-1981 and forwarded the same to the IAC for his action. After forwarding the draft assessment order, there was a change of the incumbent of the ITO and the successor-ITO seems to have asked the assessee whether he requires any fresh opportunity of being heard in view of the change in the incumbency of the ITO. The assessee seems to have stated, no. However, the ITO thought that the earlier draft order requires certain modifications. After giving an opportunity of being heard to the assessee, he prepared a fresh draft assessment order on 6-2-1982 and forwarded the same to the IAC. In between 7-7-1981, i.e., the date of passing the first draft assessment order and 6-2-1982, i.e., the date of passing the second draft assessment order, the IAC has not issued any instructions Under Section 144A or Under Section 144B. Section 129 of the IT Act provides that whenever in respect of any proceeding under this Act an Income-tax authority ceases to exercise jurisdiction, and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor, provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be re-heard. Though, this section permits the ITO to continue the proceeding from the stage at which the proceeding was left by Ms predecessor it does not mean that the succeeding ITO is rendered functus officio once he submits a draft order to the IAO. As long as the assessment is pending and not concluded and it is not barred by limitation, if the ITO is of opinion that the predecessor’s draft requires reconsideration in that “some more items of income require to be included in the total income of the assessee, we do not think the provisions of the IT Act prohibit him from doing so. Indeed it is his duty to bring all items of income which he considers liable to tax, into the computation of the total income and after following the procedure required to be followed Under Section 144B to complete the assessment within the limitation set by the Act. There is no dispute that the revised draft assessment order was prepared after hearing the assessee. There is also no dispute that the preparation of the revised draft assessment order, the instructions given by the IAC Under Section 144A and Under Section 144B and the later assessment in accordance with those instructions are all completed within the period of limitation Under Section 153. In the circumstances, we are of the opinion that the second draft submitted by the ITO is only in the nature of rectification of the original draft which he is permitted to do, as long as the earlier draft has not taken a final shape. The decision of the Delhi High Court in the case of Sudhir Sareen (supra), is clearly distinguishable on facts. In that case, a draft order was prepared and submitted to the IAC. Thereafter there were a few hearings, before the IAC. The IAC is supposed to have issued some instructions to the ITO to include certain items in the assessee’s total income. Such directions were stated to have been given by the IAC without giving the assessee an opportunity of being heard. The ITO proceeded to prepare a second draft assessment order on the basis of the instructions given by the IAC. It was against this second draft that an objection was taken. The Court held that the procedure followed by the revenue in that case was illegal and in violation of the express provisions. The second draft assessment order is the result of the illegal directions given by the IAC without hearing the assessee which he was not to do. In the circumstances, it was held that the entire proceedings from the stage of the directions given by the IAC onwards were required to be quashed. While disposing of the matter in the above fashion their Lordships have also observed that Section 144B does not contemplate a second draft order to be prepared and submitted. These observations, in our opinion, have to be understood in the context of the facts obtaining in that case, namely, that the second draft order was the result of certain illegal directions given by the IAC without giving the assessee an opportunity of being heard. The Tribunal, Bombay Bench ‘E’, in Heritage Estates (P.) Ltd. v. ITO [1985] 11 ITD 519, in similar circumstances and after considering the above decision of the Delhi High Court held that the ITO can revise or rectify a draft order already submitted to the IAC and proceed to submit a fresh draft order according to his understanding of the facts of the case. Thus, in our opinion, the decision of the Delhi High Court in the case of Sudhir Sareen (supra) does not help the assessee in any way. The IAC in this case has issued instructions Under Section 144A and Under Section 144B on consideration of the second draft order. The validity of instructions issued Under Section 144A when proceedings Under Section 144B are pending was also approved by the Kerala High Court in the case of CIT v. N. Krishnan [1988] 172 ITR 604. In view of the above, we are of the opinion that the procedure followed by the ITO in submitting a second draft order and the IAC’s action in issuing instructions on the basis of the second draft order Under Section 144A and Under Section 144B are correct and the CIT (Appeals) was in error in setting aside the order of the ITO holding that the second, draft assessment order is not a valid one and directing the ITO to complete the assessment on the basis of the instruction of the IAC in so far as it related to items referred to in the first draft order. We accordingly set aside the order of the first appellate authority and restore the appeal back to his file for disposal of other grounds raised before him on their merits.
4. In the result, the assessee’s appeal is rejected and cross-objection by the revenue is allowed.