K.P. Varkey vs Dy. Commissioner Of Income Tax on 1 November, 2007

       

  

  

 
 
  IN THE HIGH COURT OF KERALA AT ERNAKULAM

ITA No. 122 of 2007()


1. K.P. VARKEY,
                      ...  Petitioner

                        Vs



1. DY. COMMISSIONER OF INCOME TAX, ALUVA.
                       ...       Respondent

                For Petitioner  :SRI.A.M.SHAFFIQUE

                For Respondent  : No Appearance

The Hon'ble the Chief Justice MR.H.L.DATTU
The Hon'ble MR. Justice K.T.SANKARAN

 Dated :01/11/2007

 O R D E R
                     H.L.Dattu,C.J. & K.T. Sankaran,J.
   ----------------------------------------------------------------------------------------
        I.T.Appeal Nos.122 of 2007, 124 of 2007, 123 of
                                       2007
   131 of 2007, 132 of 2007, 125 of 2007, 96 of 2007,
  116 of 2007, 113 of 2007, 114 of 2007, 112 of 2007,
  115 of 2007, 121 of 2007, 126 of 2007, 127 of 2007,
          128 of 2007, 129 of 2007 and 130 of 2007.
    ---------------------------------------------------------------------------------------
                  Dated, this the 1st day of November, 2007

                                      JUDGMENT

H.L.Dattu,C.J.

Since the issues involved in all these appeals are common,

they are clubbed, heard and disposed of by this common order.

(2) I.T.A.Nos.122 of 2007, 124 of 2007, 123 of 2007, 131 of

2007, 132 of 2007 and 125 of 2007 are filed by K.P.Varkey, Proprietor,

M/s.Tolin Rubbers. These appeals pertains to the assessment years

1996-97 to 2001-02. They are filed against the orders passed by the

Income Tax Appellate Tribunal, Cochin Bench, Cochin in I.T.A.Nos.406

(Coch)/2005 to 411(Coch)/2005.

(3) K.V.Tolin, Proprietor, M/s.Tolin Pre-Treads has filed

I.T.A.Nos.96 of 2007, 116 of 2007, 113 of 2007, 114 of 2007, 112 of 2007

and 115 of 2007 and they also relate to the assessment years 1996-97 to

2001-02. They arise out of an order passed by the Income Tax Appellate

Tribunal in I.T.A.Nos.412(Coch)/2005 to 417(Coch)/2005.

(4) Smt.Annie Varkey, Proprietor, M/s.Toshima Rubber

Products has filed I.T.A.Nos.121 of 2007 to 130 of 2007 and they arise out

of an order passed by the Income Tax Appellate Tribunal in I.T.A.Nos.418

(Coch)/2005 to 423 (Coch)/2007. They relate to the assessment years

1996-97 to 2001-02.

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(5) Tolin Rubbers Private Limited is a Company incorporated

under the provisions of the Companies Act.

(6) The Central Excise authorities had conducted an inspection in

the business premises of Tolin Rubbers Private Limited. After such inspection,

they had found certain amounts deposited in the benami accounts. They have

initiated further proceedings pursuant to such an inspection. We are not

concerned with the proceedings initiated by the Central Excise authorities in

these appeals.

(7) The assessing authority had completed the assessment

proceedings against Tolin Rubbers Private Limited and had quantified the tax

liability under the provisions of the Income Tax Act (hereinafter for the sake of

brevity referred to as “the Act”). After receipt of the information from the Central

Excise authorities, the assessments in the case of Tolin Rubbers Private Limited

and also in the case of K.P.Varkey, Proprietor, M/s.Tolin Rubbers; K.V.Tolin,

Proprietor, M/s.Tolin Pre-Treads and Smt.Annie Varkey, Proprietor, M/s.Toshima

Rubber Products were taken up for reassessment proceedings under Section 148

of the Act.

(8) The parties had questioned the initiation of proceedings before

the various forums. Thereafter the assessing authority has completed the

substantive assessments in the case of Tolin Rubbers Private Limited and

precautionary assessments/protective assessments in the case of K.P.Varkey,

Proprietor, M/s.Tolin Rubbers; K.V.Tolin, Proprietor, M/s.Tolin Pre-Treads and

Smt.Annie Varkey, Proprietor, M/s.Toshima Rubber Products.

(9) Tolin Rubbers Private Limited had called in question the said

reassessment proceedings before this Court in O.P.No.12888 of 2003. This Court

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had rejected the said writ petition by its order dated 21.05.2003. Thereafter Tolin

Rubbers Private Limited had filed W.A.No.953 of 2003 before this Court. This

Court by order dated 4.8.2003 was pleased to allow the Writ Appeal and was

pleased to pass the following order:-

“8. In view of the order we are proposing to pass, we do
not consider it appropriate to make any observation on the merits
of the controversy. We shall only say that even if it were to be
assumed that the appellant is a bad company, it appears that it
has a just cause. Admittedly, the documents and the evidence
which had been used against the assessee, had not been put to it.
The copies had not been supplied. In this situation, we consider it
appropriate to quash the impugned orders of assessment and the
notices of demand.

9. It is true that normally a party should exhaust the
alternative remedy before it approaches this court. However, in
the present case, it does not appear to be fair to do so. Basically,
the assessee was to be given a due and reasonable opportunity by
the Assessing Officer. This was not done. The opportunity, even
if given by the appellate authority shall not be a fair substitute. In
any event, the requirement of deposit of the amount of tax (unless
waived) would cause further burden. The whole process is likely
to cause delay and defeat justice. Thus, we quash the impugned
orders and notices.

10. In view of the above, we remit the matter to the
assessing authority for a fresh decision in accordance with law. It
is clarified that the quashing of the orders shall not entitle the
appellant to the immediate refund of Rs.25 lakhs that it had
deposited. However, the appellant’s entitlement shall be
determined in the light of the final order. In case it is found that no
tax was due from the appellant, it shall be entitled to the refund
with interest. Otherwise, the amount deposited shall be adjusted
against the demand. At this stage, we do not consider it
appropriate to make any observation on the merits of the
controversy”.

(10) By the aforesaid order, this Court has set aside the

substantive assessments passed against Tolin Rubbers Private Limited and the

matter is remanded to the assessing authority to redo the matter in accordance

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with law and in the light of the observations made by this Court while disposing of

the Writ Appeal.

(11) K.P.Varkey, Proprietor, M/s.Tolin Rubbers; K.V.Tolin,

Proprietor, M/s.Tolin Pre-Treads and Smt.Annie Varkey, Proprietor, M/s.Toshima

Rubber Products, aggrieved by the orders passed by the assessing authority

under Section 148 of the Act, had called in question the same before the first

appellate authority. The first appellate authority, after considering the issues

raised by the appellants and after hearing the departmental representative, has

allowed the appeals filed by the aforesaid persons.

(12) The Department, being aggrieved by the orders so passed by

the first appellate authority/Commissioner of Income Tax (Appeals)-V, Kochi for

the assessment years 1996-97 to 2001-02, had filed 18 appeals before the

Income Tax Appellate Tribunal.

(13) The Tribunal by its order dated 18.05.2007 has allowed the

Department’s appeals and has remanded the matter to the assessing authority to

pass fresh orders in accordance with law. The basis or foundation for passing the

impugned order without going into the merits of the appeal is, the orders passed

by this Court in W.A.No.953 of 2003. According to them, since the substantive

assessments in the case of Tolin Rubbers Private Limited has been set aside by

this Court, it would be in the interest of all the parties that the appeals filed by the

Department against the orders passed by the Commissioner of Income Tax

(Appeals) also require to be set aside and an opportunity should be given to the

assessing authority to redo the matter in accordance with law.

(14) Aggrieved by the conclusions so reached by the Tribunal,

K.P.Varkey, Proprietor, M/s.Tolin Rubbers; K.V.Tolin, Proprietor, M/s.Tolin Pre-

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Treads and Smt.Annie Varkey, Proprietor, M/s.Toshima Rubber Products are

before us in these batch of appeals.

(15) The appellants have raised the following substantial

questions of law for our consideration and decision. They are as under:

“(i) Whether the tribunal was right in law and on facts in setting
aside the order of the CIT (Appeals) which clearly held that in view
of the Central Excise authorities confirming that no case had been
registered against the appellant, there was no basis for the
continuation of protective assessments against the appellant;

(ii) Whether the Tribunal was right in law and on facts in
directing the assessing officer to decide the matter afresh
especially when the substantive assessment of Tolin Rubbers (P)
Limited was set aside by the High Court and further, the very basis
for the protective assessment initiated against the appellant had
been taken away by the letter dated 27.10.2004 (Annexure H) of
the Central Excise authorities;

(iii) Whether the Tribunal was right in law and on facts in
directing the assessing officer to decide the protective
assessments afresh especially when the issue of initiation of a
protective assessment is a matter which has to be decided by the
assessing officer at the time of conducting a regular assessment
against the main assessee (in this case Tolin Rubbers (P) Limited)
and not prior to it.

(iv) Whether the Tribunal was right in law and on facts in
directing the assessing officer to decide the protective
assessments afresh especially when the decision of the Hon’ble
Supreme Court in the case of Lalji Haridas Vs. ITO – 1961 (43)
ITR 387 (SC) – clearly indicates that the finalization of protective
assessments must await the outcome of the substantive
assessment”.

(16) Sri.Jayasankar.A.K., learned counsel appearing for the

appellants would contend that the Tribunal was not justified in allowing the

Department’s appeals, primarily on the ground that the substantive assessments

in the case of Tolin Rubbers Private Limited have been set aside by this Court.

He is of the view, that, since the assessees have succeeded before the first

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appellate authority/Commissioner of Income Tax (Appeals) and the Department is

before the Tribunal in the appeals filed, the Tribunal ought to have decided the

appeals filed by the Department on its merit, instead of remanding the matter to

the assessing authority to redo the matter in accordance with law. In support of

this submission, the learned counsel relies upon the observations made by the

apex Court in the case of Lalji Haridas v. Income Tax Officer and another [(1961)

38 ITR 387] and the observations made by the Allahabad High Court in the case

of Smt.Hemlata Agarwal v. Commissioner of Income-tax, U.P. [1967) 64 ITR

428].

(17) Per contra, Sri.George K.George, learned counsel appearing

for the Department tries to justify the impugned order passed by the Tribunal in

setting aside the orders passed by the first appellate authority/Commissioner of

Income Tax (Appeals). The learned counsel in support of his submission would

rely upon the observations made by the Calcutta High Court in Jagannath

Hanumanbux v. Income-tax Officer [(1957) 31 ITR 603] and the observations

made by the apex Court in the case of Income-tax Officer, “A” Ward, Lucknow v.

Bachu Lal Kapoor [(1966) 60 ITR 74].

(18) The facts are not in dispute. The assessing authority/Income

Tax Officer has passed the substantive assessments in the case of Tolin Rubbers

Private Limited for the assessment years 1996-97 to 2001-02 and protective

assessments in the case of K.P.Varkey, Proprietor, M/s.Tolin Rubbers;

K.V.Tolin, Proprietor, M/s.Tolin Pre-Treads and Smt.Annie Varkey, Proprietor,

M/s.Toshima Rubber Products. Tolin Rubbers Private Limited, who had suffered

an order of substantive assessment, had called in question the orders of

reassessment so passed by the Income Tax Officer in exercise of his powers

I.T.A.Nos.122/2007 &
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under Section 148 of the Act, before this Court. This Court, accepting the

contention of the assessee that the orders so passed by assessing authority are

in violation of the principles of natural justice, has thought it fit to remand the

matter to the assessing authority to redo the matter in accordance with law. That

only means that the substantive assessments made in the case of Tolin Rubbers

Private Limited are now set aside by a Bench of this Court reserving liberty to the

assessing authority to redo the matter.

(19) However, in the case of K.P.Varkey, Proprietor, M/s.Tolin

Rubbers; K.V.Tolin, Proprietor, M/s.Tolin Pre-Treads and Smt.Annie Varkey,

Proprietor, M/s.Toshima Rubber Products, the assessing authority had passed

protective assessments/precautionary assessments and those assessments were

set aside by the first appellate authority. That is how the Department is in appeals

before the Income Tax Appellate Tribunal.

(20) The Appellate Tribunal, without going into the merits of the

appeals filed by the Department, merely on the ground that the substantive

assessments in the case of Tolin Rubbers Private Limited has been set aside by

a Bench of this Court, has allowed the appeals filed by the Department and

remanded the matter to the assessing authority to redo the matter in accordance

with law. The observations made by the Tribunal in this regard is at paragraph 7

of the orders passed by the Tribunal. The same is as under:

“It is not disputed that substantive assessments are made in
the case of Tolin Rubbers Pvt. Ltd and those assessments were
subject matter of Writ Petition being WA No.No.953 of 2003 (A). It
is also not disputed that the Hon’ble High Court was pleased to
remit all the substantive assessments to the file of the assessing
authority for re-doing or fresh decision as the Hon’ble High Court
was of the opinion that the documents and evidence which had
been used by the said authority have not been put to it and,

I.T.A.Nos.122/2007 &
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therefore, the Hon’ble High Court quashed the impugned orders in
the case of Tolin Rubbers Pvt. Ltd and remitted the matter back to
the assessing authority. Hence, in the case of Tolin Rubbers Pvt.
Ltd., the matters have been restored to the file of the AO as there
was gross violation of the principles of natural justice. Moreover,
though the Hon’ble High court was pleased to quash the
assessments, all the assessments were restored to the file of the
AO for fresh decision. In the cases of these three assessees,
though protective assessments are made it is not correct to say that
merely because the substantive assessments have been quashed
and restored to the file of the assessing authority, these
assessments do not survive. As the substantive assessments have
been restored to the file of the AO, we consider it fit to restore the
issue before us taken by the revenue to the file of the AO to decide
them afresh after framing substantive assessments in the case of
Tolin Rubbers Pvt. Ltd. as per the directions of the Hon’ble High
court of Kerala in WA No.953 of 2003 (A) vide judgment dated
4.8.2003. We, therefore, set aside the orders of the CIT (Appeals)
on this issue which are arising out of the grounds taken by the
revenue and restore the matters to the file of the AO to decide them
afresh. We make it clear that the CIT (Appeals) has given a
categorical finding on merits that the Central Excise Department
has given letter dated 27-10-2004 in the case of these three
assessees wherein it is mentioned that no case has been registered
against these assessees and AO should take into consideration the
said aspect of the case also”.

(21) The concept of the protective assessments/precautionary

assessments is well explained by the Calcutta High Court in the case of

Jagannath Haumanbux v. Income-tax Officer [(1957) 31 ITR 603]. A learned

Judge, after referring to the observations made by Rowlatt, J. in the case of

Attorney-General v. Aramayo & Others [(1925) 1 K.B. 86 = 9 Tax Cas.445],

has observed as under:-

“Thus, I must hold that under the Indian law it is permissible
to take a protective assessment. I do not think that the principles
of law put forward by Mr.Roy are in any way wrong. There can be
no doubt that taxing statutes must be strictly construed in favour of
the assessee. It is also true that there cannot be any assessment
excepting of an assessee, and there can be no doubt that the
Income-tax authorities must confine themselves within the four

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corners of the statute and not invent new procedures outside the
limits of the Indian Income-tax Act. But let us see what they have
really done. It is not as if they have made the assessment outside
the Indian Income-tax Act. The trouble is that owing to the various
litigations mentioned above, it is not established finally as to who is
the proper assessee. It is not permissible to assess a fictitious
person, but I do not see that there is anything to prevent
assessment of a person of whom it is not finally known whether he
is fictitious or not. What is the most important thing to consider is
the running of time. If the Income-tax authorities are precluded
from making an alternative assessment, then, by the time the
disputes are over, the real assessment would be barred.

Therefore, I cannot see why an alternative assessment, that it to
say, protective assessment, should be declared to be illegal. But
while a protective assessment is permissible, I do not see that a
protective recovery is to be allowed. It is one thing to say that the
authorities are merely making an assessment and leaving it as a
paper assessment until the matter is decided one way or the other,
and another thing to say that at one and the same time they could
not only make two assessments in respect of one set of dues but
proceed to realise both. Mr.Meyer argues that if in the case of
protective assessment the principle is followed, namely, that the
revenue has to be protected against the bar of limitation, equally,
protective recovery should be allowed because recovery also may
be barred. I cannot agree. If the Income-tax authorities decided
that the present assessment was the valid assessment and kept
another alternative assessment in cold storage, then I could
understand the force of the argument that the present assessment
should proceed to the stage of recovery. But having once stated
that the present assessment was not correct, because according
to the authorities the firm was a mere benamidar of another firm, it
would be entirely against the spirit and tenor of the Income-tax Act
to proceed to recover the tax on the basis of the professedly wrong
assessment. From this point of view, the notices given to the
various parties to pay money appear to be defective. The
question, therefore, is as to whether on the facts and
circumstances of the case as I have stated above, the petitioner is
entitled to any relief in this application. The position is that the
monies in the hands of these various parties are prima facie due to
Messrs.Jagannath Hanumanbux. If that firm consists of the
partners Ganpatrai and Hanumanbux, then the Income-tax
authorities will be entitled to receive these sums direct. But
supposing that they are not the partners and that Ladhuram
Taparia is the real assessee and that Jagannath Hanumanbux is
the benamidar of Ladhuram Taparia, then also the monies in the
hands of these parties will be payable to the Income-tax
authorities, because taxes are payable by Ladhuram Taparia and
notices under section 46 (5A) have also been served, in respect of
taxes due from that firm. If that is the position, then should this

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Court come to the aid of the petitioner, which will only mean that it
will be enabled to take away the monies and defeat the claim of
the income-tax authorities. Mr.Meyer on behalf of the Income-tax
authorities agreed to give an undertaking that they will take this
money and keep it in a suspense account until the Supreme Court
has decided the rights of the parties one way or the other, and
further that the Income-tax authorities will not execute or enforce
the taxes twice over, that is to say, once against Jagannath
Hanumanbux and a second time against Ladhuram Taparia. The
petitioners, however, are not agreeable to this course. It is quite
evident that they are anxious to take away the money. After all,
relief under article 226 is discretionary and it ought not to be
exercised so as to defeat a lawful claim, particularly that of the
State’s revenue. So far as these debtors are concerned, I do not
think that they can with any safety to themselves pay the monies to
Messrs.Jagannath Hanumanbux. Under the circumstances, I do
not see why I am compelled to make an order which will confuse
all these debtors and be instrumental in aiding the immediate
petitioner before me to realise monies and take it beyond the reach
of the Income-tax authorities. While I cannot hold that a protective
recovery is permissible in law, I do hold that on the facts and
circumstances of the case, this Court ought not to come to the aid
of the petitioner under article 226 of the Constitution. If they have
any other relief and remedies, it is open to them”.

(22) Reference to aforesaid judgment is made by the Supreme

Court in Lalji Haridas case (supra) also. The Court while holding that the

protective assessments can be made by the Income Tax authorities, though the

same is not provided under the provisions of the Income Tax Act, has stated as

under:

“In cases where it appears to the income-tax authorities that
certain income has been received during the relevant year but it is
not clear who has received that income and, prima facie, it
appears that the income may have been received either by A or
by B or by both together, it would be open to the income-tax
authorities to determine the question who is responsible to pay tax
by taking assessment proceedings both against A and B”.

(23) Having said so, the apex Court in Lalji Haridas case (supra)

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directed the assessing authority first to complete the substantive assessments

and it is only thereafter to proceed against Chhotalal against whom the protective

assessments were passed by the assessing authority. The observations made by

the apex Court is as under:

“In other words, the respondent’s case clearly is that the notices
issued against the two brothers by their respective Income-tax
Officers are intended to determine who is responsible to pay tax
for the income in question; now though Mr.Nambiar wanted to
argue that protective or precautionary assessment of tax is not
justified by any of the provisions of the Act he did not seriously
contest the position that at the initial stage it would be open to the
income-tax authorities to determine by proper proceedings who is
in fact responsible for the payment of tax, and that is all that is
being done at the present stage. In case where it appears to the
income-tax authorities that certain income has been received
during the relevant assessment year but it is not clear who has
received that income and prima facie it appears that the income
may have been received either by A or B or by both together, it
would be open to the relevant income-tax authorities to determine
the said question by taking appropriate proceedings both against
A and B. That being so, we do not think that Mr.Nambiar would
be justified in resisting the enquiry which is proposed to be held
by respondent No.I in pursuance of the impugned notice issued
by him against the appellant. Under these circumstances we do
not propose to deal with the point of law sought to be raised by
Mr.Nambiar.”

We would, however, like to add one direction in fairness to
the appellants. The proceedings taken against both the
appellants should continue and should be dealt with expeditiously
having regard to the fact that the matter is fairly old. In the
proceedings taken against Lalji the Income-tax Officer should
make an exhaustive enquiry and determine the question as to
whether Lalji is liable to pay the tax on the income in question. All
objections which Lalji may have to raise against his alleged
liability would undoubtedly have to be considered in the said
proceedings. Proceedings against Chhotalal may also be taken
by the Income-tax Officer and continued and concluded, but until
the proceedings against Lalji are finally determined no
assessment order should be passed in the proceedings taken
against Chhotalal. If in the proceedings taken against Lalji it is
finally decided that it is Lalji who is responsible to pay tax for the
income in question it may not become necessary to make any
order against Chhotalal. If, however, in the said proceedings Lalji

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is not held to be liable to pay tax or it is found that Lalji is liable to
pay tax along with Chhotalal it may become necessary to pass
appropriate orders against Chhotalal. When we suggested to the
learned counsel that we propose to make an order on these lines
they all agreed that this would be a fair and reasonable order to
make in the present proceedings.”

(24) The view expressed by the apex Court in the case of Lalji

Haridas is reiterated by the apex Court in the case of Income-tax Officer, “A”

Ward, Lucknow v. Bachu Lal Kapoor [(1966) 60 ITR 74). The same is as

under:

“Some argument was advanced on the question of the validity of
what are called “protective or precautional assessments”.
Reference was made to Jagannath Hanumanbux v. Income-tax
Officer and to the decision of this court in Lalji Haridas v. Income-
tax Officer. In the former, the validity of protective assessment
was approved; and in the latter, this court, though the question of
assessment was raised, did not express its final opinion thereon.
This court held that when there was a doubt as to which person
among two was liable to be assessed, parallel proceedings might
be started against both; and it also laid down an equitable
procedure to be followed in that situation. In this case, the
question of protective assessment does not call for our decision
and we do not express our opinion thereon.

We, therefore, hold that the High Court went wrong in
holding that the Income-tax Officer had no jurisdiction to initiate
proceedings under section 34 of the Act against the respondent as
the karta of a Hindu undivided family”.

(25) The law on the point is now well settled in so far as protective

assessments and substantive assessments that can be passed by the Income

Tax Officers. Reiteration of the principles enunciated by the apex Court in this

judgment may not be necessary.

(26) The question now to be answered by us is, merely because a

substantive assessment passed by the Income Tax Officer/assessing authority is

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set aside by the superior forum, whether the appeals filed against the protective

assessments require to be allowed without going into the merits or demerits of

the appeals.

(27) We once again reiterate that the Tribunal, in the appeals filed

by the Department, has not decided the matter on merits. It has only allowed the

appeals merely on the ground that the substantive assessments made in the

case of Tolin Rubbers Private Limited have been set aside by a Division Bench of

this Court.

(28) In our opinion, in a situation of this nature, an equitable

consideration requires to have been adopted by the Tribunal. It could have kept

the appeals filed by the Department pending till a substantive assessment is

passed by the Income Tax Officer as directed by this Court while disposing of the

Writ Appeal or in the alternative, it could have decided the appeals filed by the

Department on merits, since the assessees have succeeded before the first

appellate authority. Merely because a substantive assessment has been set

aside by a Bench of this Court, it is not permissible for the Tribunal to have

allowed the Department’s appeals by setting aside the orders passed by the first

appellate authority.

(29) In view of the above, we are of the opinion, we cannot sustain

the conclusion reached by the Tribunal while allowing the Department’s appeals.

Therefore, we pass the following:

Order

(i) The appeals are allowed.

(ii) The matter is now remanded back to the Tribunal either to wait till the

Income Tax Officer completes the substantive assessments in the case of Tolin

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Rubbers Private Limited as directed by a Division Bench of this Court or in the

alternative, to dispose of the appeals filed by the Department against the orders

passed by the first appellate authority for the assessment years 1996-97 to

2001-02 on merits.

(iii) In our opinion, the Tribunal, if it chooses the first alternative which we

have suggested, it would be in the interest of both the Department as well as the

assessees, viz., K.P.Varkey, Proprietor, M/s.Tolin Rubbers; K.V.Tolin, Proprietor,

M/s.Tolin Pre-Treads and Smt.Annie Varkey, Proprietor, M/s.Toshima Rubber

Products.

(30) With the above observations and directions, these appeals are

disposed of.

Ordered accordingly.

H.L. Dattu
Chief Justice

K.T. Sankaran
Judge
vku/DK.