PETITIONER: TRUSTEES OF H.E.H. THE NIZAM'S SUPPLEMENTAL FAMILY TRUST Vs. RESPONDENT: COMMISSIONER OF INCOME TAX DATE OF JUDGMENT: 16/02/2000 BENCH: D.P.Wadhwa, S.S.M.Quadri JUDGMENT:
D.P. WADHWA, J.
The question that calls for consideration is:
Whether, on the facts and in the circumstances of the case,
the assessment made by the Income-tax Officer for the
Assessment Year 1962-63 under Section 143(3) read with
Section 147 of the Income Tax Act, 1961 is valid in law?
The case concerns the H.E.H. the Nizam’s second
Supplemental Family Trust. The trustees of the trust filed
income tax return for the Assessment Year 1962-63 on behalf
of the beneficiaries on April 2, 1964. Along with the
return they filed an application under Section 237 of the
Income Tax Act, 1961 (for short the ‘Act’) for refund of tax
of Rs.20,050.52 deducted at source on interest on Government
securities and dividends. Section 237 of the Act provides
for refund and it is as under: –
“237. If any person satisfies the Assessing Officer
that the amount of tax paid by him or on his behalf or
treated as paid by him or on his behalf for any assessment
year exceeds the amount with which he is properly chargeable
under this Act for that year, he shall be entitled to a
refund of the excess.”
Under Rule 41 of the Income Tax Rules, 1962 (for short
the ‘Rules’) a claim for refund is to be made in Form No.
30. This Rule is as under: –
“41.(1) A claim for refund under Chapter XIX shall be
made in Form No.30.
(2) The claim under sub-rule (1) shall be accompanied
by a return in the form prescribed under section 139 unless
the claimant has already made such a return to the Assessing
Officer.
(3) Where any part of the total income of a person
making a claim for refund of tax consists of dividends or
any other income from which tax has been deducted under the
provisions of sections 192 to 194, section 194A and section
195, the claim shall be accompanied by the certificates
prescribed under section 203.
(4) The claim under sub-rule (1) may be presented by
the claimant in person or through a duly authorised agent or
may be sent by post.”
The claim for refund is to be accompanied by return of
income in the form prescribed under Section 139 of the Act
unless the claimant has already made such a return to the
Income-tax Officer.
Since there was no response from the Income-tax
Officer the trustees reminded him on June 17, 1964 for
disposal of the refund application. The Income-tax Officer
gave a reply on July 22, 1964 stating that the refund could
not be granted to the trustees unless the references on the
same question for the preceding assessment years filed by
the trustees were disposed of by the High Court. A reminder
was again sent by the trustees on September 23, 1966 to the
Income-tax Officer for grant of refund but again no reply
was given by the Income-tax Officer. Thereafter a notice
under Section 148 of the Act was received by the trustees
from the Income-tax Officer requiring them to file return
for the Assessment Year 1962-63. Return was filed on July
3, 1970 declaring an income of Rs.6, 26,200/- as long term
capital gain. It would appear that on the same day the
return was accepted on the income returned by the trustees.
The trustees thereafter raised an objection by writing to
the Income-tax Officer on July 3, 1970, after they had
received the assessment order, that the return filed by them
on April 2, 1964 along with refund application was still
pending and, therefore, the proceedings initiated under
Section 147 of the Act were invalid. They also claimed that
the assessment made pursuant to the notice under Section 148
was equally invalid. To this the Income-tax Officer sent
his reply on July 16, 1970 stating that the return filed on
April 2, 1964 was disposed of on November 10, 1965 by a note
recorded by the Income-tax Officer in his file. This note
was recorded on November 10, 1965 in the file pertaining to
Assessment Year 1963-64 and was to the following effect: –
“In view of the Supreme Court judgment in the case of
H.E.H. Nizam, the question of giving credit for tax
deducted at source can be considered in the hands of the
beneficiaries. Hence, no credit for the tax deducted at
source is to be allowed here. The question of refunding the
additional surcharge will have to be considered.”
Against the order of reassessment dated July 3, 1970
trustees filed an appeal before the Appellate Assistant
Commissioner questioning the same. The Appellate Assistant
Commissioner took the view that the Income-tax Officer had
not passed the final orders on the return filed on April 2,
1964 along with application seeking refund. He, therefore,
held that the reassessment made by the Income-tax Officer
pursuant to the notice under Section 148 of the Act was
invalid and cancelled the same. The Revenue then took the
matter in appeal to the Income Tax Appellate Tribunal.
Following two questions were raised before the Tribunal: –
“(1) Whether the return filed by the assessee on April
2, 1964, along with the refund application was one filed
under section 139(1) of the Income-tax Act?
(2) Even if it is assumed that the return filed by the
assessee along with the refund application commences
assessment proceedings, whether the proceedings should be
treated to have been finalised by the Income-tax Officer at
least by his note dated November 10, 1965, if not earlier by
his letter dated September 26, 1964, addressed to the
assessee, and as the proceedings for the refund were
terminated by the Income-tax Officer by his note dated
November 10, 1965, there is no bar for the reassessment
proceedings for the same year and, hence, the reassessment
proceedings in respect of the income of such year would be
valid?”
There was difference of opinion between the Accountant
Member and the Judicial Member comprising the Tribunal and
the matter was referred to the third member in the following
manner: –
“Whether, on the facts and in the circumstances of the
case, the order of assessment made by the Income- tax
Officer for the Assessment Year 1962-63 under Section 147 of
the Income-tax Act, 1961, is valid in law.”
The Accountant Member was of the view that the return
filed by the assessee along with its refund claim did not
set in motion any assessment proceedings and consequentially
there were no assessment proceedings which remained
undisposed of by the Income-tax Officer at the time when he
initiated proceedings under Section 147 of the Act.
Judicial Member was of the view that on consideration of the
entirety of the facts and circumstances of the case the
return filed by the assessee on April 2, 1964 was a valid
return. On second question whether proceedings had been
terminated by the noting of the Income-tax Officer in the
order sheet the Accountant Member held that proceedings, if
any, that commenced with the return, were terminated by the
Income-tax Officer by his note dated November 10, 1965. On
the second question the Judicial Member held that on a plain
reading of the endorsement made by the Income-tax Officer it
was very clear that no disposal was given to the return
filed and the said endorsement related to the opinion
expressed by the Income-tax Officer about giving credit for
tax deduction at source. Third member (Mr. D. Rangaswamy,
Vice President) after examining the whole matter said as
under: –
“Since I have already expressed my agreement with the
views expressed by the Judicial Member that the return
accompanying an application for refund is a return under
section 139 and all the procedures, formalities and
machineries applicable to proceedings of a return under
section 139 would apply and I have further agreed with his
view that there has been no termination of the proceedings,
I hold that both the Judicial Member and the Appellate
Assistant Commissioner were right in holding that the
assessment made by the Income-tax Officer, pursuant to
notice under section 147 was invalid and has to be
accordingly cancelled.”
Thereafter, in conformity with the views of the
majority of the members the Tribunal dismissed the appeal of
the revenue.
At the instance of the revenue under Section 256(1) of
the Act the Tribunal referred the question of law arising
from its order to the Andhra Pradesh High Court as set out
in the beginning of this judgment for the opinion of the
High Court. High Court was of the view that the order dated
November 10, 1965 of the Income-tax Officer on the
note-sheet (reproduced above) was an order of disposal of
the tax return filed by the trustees. It held that the
return filed by the trustees on April 2, 1964 along with
refund application was one filed under Section 139 of the
Act and was valid return and as the refund application was
disposed of by order dated November 10, 1965 of the
Income-tax Officer, there was no bar to the reassessment
proceeding for the same year and the reassessment
proceedings were, therefore, valid.
Now it is the assessee, which felt aggrieved and has
come to this Court. It is not disputed that the return
filed with the refund application under Section 237 of the
Act is a valid return and the Income-tax Officer can
initiate proceedings for assessment on the basis of the
return so filed. The only question that falls for
consideration for us is: if in the circumstances of the
case it could be said that the note recorded by the
Income-tax Officer in his file on November 10, 1965 is an
order which concluded the assessment proceedings for the
Assessment Year 1962-63 before he initiated proceedings
under Section 147 of the Act. It is also not disputed that
this note/order of November 10, 1965 terminating the
assessment proceedings for the Assessment Year 1962-63 was
never communicated to the trustees till July 16, 1970 and
that too in a reply to the letter sent by the trustees.
According to the High Court the note, which is an order, did
terminate the assessment proceedings. High Court was of the
view that the first part of the order gave reasons and the
second part of the order clearly spoke of the conclusion
when read: “Hence no credit for tax deducted at source is
to be allowed here”.
` It is settled law that unless the return of income
already filed is disposed of notice for reassessments under
Section 148 cannot be issued, i.e., no reassessment
proceedings can be initiated so long as assessment
proceedings pending on the basis of the return already filed
are not terminated. According to the Revenue it is
immaterial whether the order is communicated or not and that
the only bar to the reassessment proceedings is that
proceedings on the return already filed should have been
terminated. In support of this contention reference was
made to certain decisions of the High Courts and some
observations made by this Court in a case, which we note as
under:-
In M.Ct. Muthuraman vs. Commissioner of Income-Tax,
Madras [(1963) 50 ITR 656] the assessment proceedings which
had commenced with the returns filed by the assessee were
lawfully terminated when they were closed with the entry
“N.A.” (not assessed). The orders terminating the
assessment proceedings were not communicated to the
assessee. The Income Tax Officer issued notices under
Section 34 of the Income Tax Act, 1922 (corresponding to
Section 147 of the Income Tax Act, 1961). The Court held
that the assessment proceedings were lawfully terminated and
that “the orders terminating the assessment proceedings were
not apparently communicated to the assessee did not affect
the legality of those orders or their finality”.
In V.S. Sivalingam Chettiar vs. Commissioner of
Income Tax, Madras [(1966) 62 ITR 678] again a similar
question arose before the Madras High Court. It was
contended that the conclusion of the Madras High Court in
M.Ct. Muthuraman’s case that “the orders terminating the
assessment proceedings were not apparently communicated to
the assessee did not affect the legality of those orders or
their finality” was without reasons. But the Court rejected
this contention and held : “But we are satisfied, if we may
say so with respect, that that is the correct view to take.
Wherever orders are made under the Act, which affect the
assessee in some form or other, it has provided for service
of notice and the remedy there against. Section 29 requires
notice of demand to be served on an assessee; but the
section makes it a condition that a notice of demand will be
required to be served only when any tax, penalty or interest
is due in consequence of any order passed under or in
pursuance of the Act. Learned counsel for the revenue
argues that it is visualised by the section that there
should be an order made under the Act under which tax,
penalty or interest is due before a notice of demand is
served, and that this means that service of notice does not
bear on the validity of an order. In other words, what he
points out is that there should be first a valid order, and
then only a notice of demand is required to be served, so
that service of notice is not a condition to the validity of
the order itself. Though prima facie the argument may
appear to be tenable, the question may arise as to whether
proceedings under section 34 could be initiated between the
date of an order under the Act and service of notice of that
order. But an examination of some of the other provisions
of the Act like sections 24(3), 23(5) and (6), 27, proviso
(2) to section 30(1) and the related provisions in section
30 lead us to the conclusion that where orders are passed
under or in pursuance of the Act, which are prejudicial to
an assessee, notice of the order is required to be served
and, for the purposes of resorting to the remedy, limitation
is to count from the date of service of notice of such
order. In this case, from a purely fiscal point of view, it
can hardly be said that the orders made by the Income-tax
Officer on the returns by the assessee as an individual were
in any way prejudicial to him. The orders did not fasten on
the assessee any liability to tax. Nor did they contain any
finding which could by any means be said to be against the
assessee as an individual. All that was held by the
Income-tax Officer was that the income, which the assessee
claimed to be his as an individual, did not belong to him.
That means that he was not held liable to pay any tax. In
that sense, as it seems to us, not prejudiced as he was by
the order passed by the Income-tax Officer, failure to serve
notice thereof did not deprive these orders of their
validity. In our view, on a strict reading of the Act, it
does not appear to contemplate service of notice in such
cases. Nevertheless, we feel that it is desirable from many
points of view that the revenue serves notice on assessees
of such orders. It will not only tend to fairness to the
assessee but also avoid deserving complaints that an order
of which the assessee was not aware of forms the basis of
proceedings under section 34.”
Relying on these two decisions of the Madras High
Court in M.Ct. Muthuraman and V.S. Sivalingam Chettiar’s
cases Kerala High Court in Commissioner of Agricultural
Income-Tax, Kerala vs. K.H. Parameswara Bhat [(1974) 97
ITR 190] took somewhat a similar view. Kerala Agricultural
Income Tax Appellate Tribunal under the Agricultural Income
Tax Act, 1950, however, had taken the view that since the
order of “nil” assessment had not been communicated to the
assessee, the notice under Section 35 was ab initio void.
The ground for the decision was that as far as the assessee
was concerned, the assessement proceedings originally
commenced were still pending because the order of “nil”
assessment had not been communicated to the assessee. High
Court said that the view taken by the Tribunal was
erroneous. It said : “The scheme of the Act indicates that
the making of an assessment naturally by an order is
different from the communication of the assessment order to
the assessee. There is no specific provision in the Act
enjoining that an assessment order must be communicated to
the assessee. Nor is there any provision in the relevant
Rules that assessment orders must be communicated. All that
section 30 of the Act requires is that a notice of demand in
the prescribed form specifying the sum payable shall be
served on the assessee when a tax or penalty is due in
consequence of an order passed under the Act. But it is of
course not only desirable but necessary that an order of
assessment should be communicated to the assessee. The Act
itself envisages service of the assessment order.
Sub-section (3) of section 31 for instance provides that an
appeal from the order of assessment shall be presented
within a period of thirty days from the date of service of
the order. Apart from this, the assessee is entitled to
know the reasoning for imposing tax or penalty on him and he
would be able to exercise his right of appeal, if any, only
if the order is communicated to him. But the questgion is
not whether it is either desirable or necessary that an
order of assessment should be communicated, but whether the
lack of communication of the order would make the order void
or would have the result of keeping the assessment
proceedings pending. We conceive that once an order had
been passed by the officer, it is not open to him to modify
or alter that order even if the order had not been
communicated to the assessee, without adopting the procedure
prescribed by section 35 or section 36.”
In Kalyankumar Ray vs. Commissioner of Income Tax
[(1991) 191 ITR 634] this Court said that the “assessment”
is one integrated process involving not only the assessment
of the total income but also the determination of the tax.
It said that when the Income Tax Officer first draws up an
order assessing the total income and indicating the
adjustments to be made, directs the office to compute the
tax payable on that basis and then approves of it, either
immediately or some time later, no fault can be found with
the process, though it is only when both the computation
sheets are signed or initialled by the Income-tax Officer
that the process described in section 143(3) will be
complete. Section 143(3) mandates that the Income-tax
Officer “shall, by an order in writing, make an assessment
of the total income or loss of the assessee, and determine
the sum payable by him on the basis of such assessment”.
In Commissioner of Income-Tax, Madras vs. M.K.K.R.
Muthukaruppan Chettiar [(1970) 78 ITR 69] it was observed
that it was manifest that notice under Section 34 of the
Income-Tax Act, 1922 for reassessment could not be issued
unless the returns which had already been filed were
disposed of. In that case the Income- tax Officer by his
order closed the assessment as “no assessment” and added
that since there was no separate income, the pending
proceedings would be closed as N.A. and for income-tax year
1953- 54 the file would be removed and clubbed with the
family file F. 1005-A. This Court said that the order of
the Income-tax Officer should be interpreted in the light of
the circumstances in which that order was passed and so
interpreted “it appears to us that the Income-tax Officer
did not intend to conclude the proceedings before him”.
An order under Section 237 of the Act is appealable as
provided in clause (k) of sub-section (1) of Section 246 of
the Act. Section 249 prescribes limitation for filing
appeal. Sub-section (1) of Section 249 is relevant and it
is as under : “249. (1) Every appeal under this Chapter
shall be in the prescribed form and shall be verified in the
prescribed manner (2) The appeal shall be presented within
thirty days of the following date, that is to say (a) where
the appeal relates to any tax deducted under sub-section (1)
of section 195, the date of payment of the tax, or (b) where
the appeal relates to any assessment or penalty, the date of
service of the notice of demand relating to the assessment
or penalty : Provided that, where an application has been
made under section 146 for reopening an assessment, the
period from the date on which the application is made to the
date on which the order passed on the application is served
on the assessee shall be excluded, or (c) in any other case,
the date on which intimation of the order sought to be
appealed against is served.”
There is difference in clauses (b) and (c) of
sub-section (2) of Section 249 of the Act. Return of income
filed in the form prescribed along with an application for
refund under Section 237 of the Act is a valid return.
There is no stopping the Income Tax Officer to complete the
assessment on the basis of return so filed. It may be that
the Income Tax Officer may limit the scope of examination of
the return to satisfy himself regarding the correctness of
the amount claimed as refund. For that purpose, he will
examine if the tax paid by the assessee exceeds the amount
of tax for which he is chargeable. If it is found that the
Income was “nil”, he will direct refund be granted to the
assessee for any amount of tax paid. That will certainly be
assessment. Filing of return in the form prescribed under
Section 39 of the Act along with the application for refund
is not an empty formality. It assumes importance if such
return had not been filed earlier. We have reproduced the
note/order dated November 10, 1965 on the file pertaining to
assessment year 1963-64. In the file for assessment year
1963-63 there is another note which is as under: “Please
see my note in 1963-64 file. Refund to be considered in the
hands of the beneficiaries.”
The mere glance at this note would show that it could
not be said that the Income Tax Officer gave finality to the
refund since no refund is granted either in the hands of the
trust or in the hands of the beneficiaries. It is an
inconclusive note where the Income Tax Officer left the
matter at the stage of consideration even with regard to
refund in the hands of the beneficiaries. This note was
also not communicated to the trustees. When we examine the
note dated November 10, 1965 on the file of 1963-64 nothing
flows from that as well. In any case if it is an order, it
would be appealable under Section 249 of the Act. Since
period of limitation starts from the date of intimation of
such an order, it is imperative that such an order be
communicated to the assessee. Had the Income-tax Officer
passed any final order, it would have been communicated to
the assessee within a reasonable period. In any case, what
we find is that the note dated November 10, 1965 is merely
an internal endorsement on the file without there being an
indication if the refund application has been finally
rejected. By merely recording that in his opinion, no
credit for tax deducted at source is to be allowed the
Income Tax Officer cannot be said to have closed the
proceedings finally. Decisions referred to by the revenue
are of no help in the present case. We are, thus, of the
opinion that during the pendency of the return filed under
Section 139 of the Act along with refund application under
Section 237 of the Act action could not have been taken
under Section 147/148 of the Act. Our answer to the
question, therefore, is in the negative, i.e., against the
Revenue. The appeal is accordingly allowed with costs.