S. L. Banerjee, Advocate Ex-vice President, ITAT)

Before starting any discussion on above topic, an observation of the Supreme Court is cited to show its view about finality of an assessment: in the context of reassessment:

“It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarize themselves with the relevant provision and become well versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that state issues should not be reactivated beyond a particular stage and the lapse of time must induce, repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity. So far as the income-tax assessment orders are concerned, they cannot be reopened on the score of income escaping assessment under section 147 of the Act of 1961 after the expiry of four years from the end of the assessment year unless there be omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. ( Purusottam Pottrey Works Co.Ltd v. ITO 106 ITR 1. (SC).)

This decision was rendered on issue of 147(1)(a) which is attracted if assessee does not disclose material facts necessary of proper assessment. Very recently in the matter of 147(1)(b) Humble Delhi High Court gave its view.

“We are, with respect, unable to subscribe to the aforementioned view. If the contention of the Revenue is accepted the same, in our opinion, would confer an arbitrary power upon the Assessing Officer. The Assessing Officer who had Passed the order of assessment or even his successor officer only on the slightest pretext or otherwise would be entitled to reopen the proceeding. Assessment proceedings may be furthermore reopened more than once. It is now trite that where two interpretations are possible, that which fulfill the purpose and object of the Act should be preferred.”

In penultimate para hon’ble High Court Opined:

“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded, an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section143. When a regular order of assessments passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e)of section 114 of the Indian Evidence Act, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.” (CIT v. Kelvinator Of India Limited 256 ITR 1(Del).)

It may be pointed out that in the above decision Hon’ble Court has taken into consideration of amendment made from 1.4.89 in section 147.

If these two decision are considered as one, it would be seen that courts are of the view that, once and assessment is completed either in 143(1) or 143(3) the department should treat them as final and should be slow to reopen the assessment unless there is concealment by the assessee.

An interesting situation has been created by the Board of Direct Taxes by a circular. It cannot be denied that the assessment under section 147 is invariably a scrutiny assessment. Therefore, if the circular of the Board is followed, after lapse of time of issue of notice under section 143(2), no assessment under section 147 can be made (which is scrutiny assessment to repeat). Circular No. 549, dated October 31, 1989 [1990] 182ITR(St.) 1, has explained the new procedure of assessment in paras. 5.12 and 5.13 as under :

5.13 A proviso to sub-section (2) provides that a notice under the subsection can be served on the assessee only during the financial year in which the return is furnished or within six months from the end of the month in which the return is furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if case is picked up for scrutiny. It follows that if an assessee , after furnishing the return of income does not receive a notice under section 143(2) from the Department within the aforesaid period, he can take it that the return filled by him is final and no scrutiny proceedings are to be started in respect of that return.”

The Hon’ble Punjab and Haryana High Court in the case of Vipan Khanna v. CIT 255 ITR 220 interpreted the above circular in following manner.

Thus, it is evident that the Board itself concedes that if the assessee after furnishing the return of income does not receive a notice under section 143(2) of the Act within the stipulated period he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.

It is true, it may be argued that proceedings under section 147 relate to another return filed under that section, nevertheless, without scrutiny of original return vis-a vis original assessment on that return, no assessment under section 147 can be framed. This circular affirms the correctness of the decision referred above. Arguments that the Board cannot over ride statutory provision had been rejected in UCO Bank v. CIT 237 ITR (SC) and CIT v. Anjum M. H. Ghaswala 252 ITR 1(SC).

After the scheme on intimation under section 143(1)(a) had come into statute, very often the notices under section 147 are issued if the Assessing Officer find that income had escape assessments, do not issue notices under section 143(2) but resorts to proceedings under section 147 because it gives them extended period of limitation. In this respect observations of Delhi High Court in case Kelvinator of India Ltd(supra) can again be repeated :

“If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding with out anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”

It may be noted that the decision of Hon’ble Delhi Court was on the facts of assessment framed under section 143(1). But the intimation under section should be treated as assessesed under section 143(1) if no notice under section 143(2) has been issued within stipulated time as held by learned Tribunal Of Nagpur Bench in case of Dr. Arjun D. Bharad v. ITO 259 ITRI (Nag) (AT) where here it had been held :

At the same time, it is also to be noted that if intimation issued under section is not followed by issue of notice under section 143(2) as a remedy available to the Assessing Officer, within the time prescribed by the statute, the assessment process deemed to have completed on the issuance of intimation under section 143(1)(a) itself.

To sum up, if notice under section 143(2) is not issued within time prescribed under statute (section 153), notice under section 148, to initiate poceeding under section 147, cannot be issued. In case of Babulal Lath v. Asst. CIT 83 ITD 691(MUM) it has been held :

“Thus, the reassessment proceeding under section 147 amounted to extending the limitation which the Assessing Officer was not empowered to. It is trite law that limitation period under section 143 cannot be extended by an income-tax authority directly, cannot be done indirectly by it.”

To reopen an assessment under section 147 beyond 4 years, there should be an element of suppressing the material fact by the assessee required for proper assessment. ( here reopening for not filling of return is not discussed as there is no scope of dispute or dialogue in that respect ) The Apex Court equated the material fact as primary fact in the case of Calcutta discount co v. ITO 41 ITR 191 (SC). It said

“Does the duty,however, extend beyond the truthful dislosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences whether of facts or law he would draw from the primary facts”.

Until to day, perhaps, no decision to the contrary has come. However, what is the primary fact depends upon facts of each case. There are course divergences of opinions in this respect. Of course, if the Assessing Officer finds fresh material in course of subsequent assessment year, he can initiate proceeding under section 147 as laid down in Ess Ess Kay Engineering (P) Ltd. V. CIT 247 ITR 818(SC). But he cannot reopen the assessment giving different interpretation of same fact. A distinct should be made between primary fact and non production of loan account cannot be ground of reopening the assessment, as it was only collateral fact or evidence.

For divergence of opinion two decision of the Apex Court may be referred. In case of ITO v. Lakhmini Mewal Das 103 ITR 437(SC) the Apex Court disallowed the action under section 147 on the basis of general confession of creditor that he is a name lender and had not advance any money to any one. The Apex Court was of the view that as the name of the assessee had not been mentioned in the confession assessment cannot be reopened. It said

“There is nothing to show that the above confession related to a loan to the assessee and not to someone else, much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee respondent.”

But in similar circumstances i.e confession of lenders, the Apex Court upheld the action under section 147 on the basis of general information of name lending without mentioning the name of the assessee in the case of Phoolchand Bajranglal v. ITO 203 ITR 456(SC). In this case, however, the Apex Court distinguished the case of Lakshmini Mewal Das (Supra) saying the period of loan in that case had not been specially mentioned. Nevertheless, difference of opinion cannot be over looked. Tha facts are different without distinction i.e confession of loan without naming the assessee.

In any case, what is material fact or primary fact depends upon situation of any particular case and interpretation or opinion of a judicial body. No hard and fast guid line can be fixed as would be seen from the above two decision of the Apex Court. A small distinction can make adifference.

But material or primary fact cannot alone give authority to reopen the assessment. This fact should have reasonable nexus of escapement of assessment. The nexus can be termed as rational connection. In the case of Lakhsmini Mewal Das (Supra) it was held absence of period mentioned in the confession, there was no rational connection with the credits mentioned in the assessee’s assessment, hence proceedings under section 147 cannot be initiated. Mere name lending is not enough but the period of name lending should be there to have rational connection with the assessee’s assessment in any particular year. The Apex Court in the case of Phoolcahnd Bajrangalal (Supra) finely distinguished the facts of two cases and pointed out how definite information is required to initiate proceedings of reassessment. Another case of the Apex Court may be referred. In case of Sheo nath Singh v. Appelate Asst. Commissioner 82 ITR 147 it has been opined that there should be director circumstantial evidence before proceedings under 147 are initiated. Any and every information not having director circumsattial evidence reassessment proceeding is invalid and without jurisdiction. In other words the assessee should be directly involved and information should relate to the assessment year involved.

Words “ truly and fully” do not cover that statement or information given at the time of original assessment are true nothing but the truth. Information given at the time of original assessment are true nothing but the truth. Information given at the time of original assessment should be considered by the Assessing Officer in proper and legal perspective. In the case of ITO v. nawab Mir Barkat Ali Khan Bahadur 92 ITR 239(SC) the assessee did not state that two of the ladies to whom he transferred some properties are wives, instead, he declared them as only “ladies in position” to give impression that they are not wives to escape application of section 64. but subsequently it was found from the Trust deed that they were wives. The Assessing officer reopened the assessment . the Supreme Court was of the view that proceeding was not valid by initiatied because Trust describing those ladies as wives were created in December 57 where as Statement given to the AO were in September 57 that is in an anterior date. It is interesting that the Supreme Court did not give much credence to the fact that as per Mohamedan Law those ladies should have Been treated as legally married wives and the Assessing Officer should, at first instance, at the time of original assessment, have applied section 64 and not having done he cannot reopen the assessment. If the relevant observations are looked into it would be seen only apparent true fact should be declared and not cent percent truth. The relevant observation are as follows.

“Mr. Manchanda, learned counsel for the appellant, took us through several sections of Mulla’s Priciples of Mohameddan Law including section 268 and submitted that in the circumstances of the case it must be presumed that the three ladies were the legally wedded wives of the respondent. The law has not changed since the original assessments were made and it was open to the Income-tax Officer to make that presumption at the time. If he should have but did not do so then, he cannot avail of section 147 to correct that mistake. In any event, we are not called upon in this proceeding to record a finding on the question whether the condition precedent to the exercise of jurisdiction under section 147 exists in this case; we have found that it does not.

Therefore, even the fact that those ladies were legally married wives, and it was not disclosed, subsequent discovery of the fact does not give jurisdiction to reopen the assessment under section 147. The Supreme Court did not give the credence to the law of marriage according to Mohammedan law. The fact was not correctly stated at the time of original assessment; nevertheless, reopening of assessment was struck down. In a three judges bench the Supreme Court in the case of Chhugamal Rajpal 79 ITR(SC) when the assessee at the time of original assessment had furnished names, addresses of the creditors reopening of assessment on subsequent information that they are bogus the assessment cannot be reopened.

Some times, it is seen even when assessment not completed on the basis of original assessment, proceedings under section 147 are initiated. There is no difficulty in striking down such proceeding in view of the Apex Court’s decision in the case of Estate of the late A.M.K.M. Karuppan Chettiar v. CIT 72 ITR 403 where it has been held when valid returns filed by the assessee had not been disposed of proceedings under section 147 do not lie. Difficulty may arise if the assessment is pending on the basis of set aside order of the appellate authority. If the assessing their had been directed to consider particular issue but escaped income is detected, the same cannot be added in the fresh assessment, as the appellant cannot be put to worse position after filling of appeal. It is for the appellate authority to enhance the assessment if the particular item had been considered in the assessment order. In respect of new item neither the Appellate authority in appellate proceeding nor the Assessing officer giving effect to that order, can include new item of income.

But an argument can be raised whether the above decision are applicable after post amendment effecting from 1.4.89. It would be seen there is no material change in respect of reopening of assessment beyond 4 years. The Central Board of direct Taxes in following circular has clarified the position:

(iv) A Proviso to the new section provides that an assessment, which has been completed under section 143(3) or 147, i.e., a scrutiny assessment, can be reopened after the expiry of four year from the end of the relevant assessment year only if income has escaped assessment due to the failure on the part of the assessee to file a return of income or to disclose fully and truly all materials facts necessary for his assessment.( Circular No. 549, dated October 31, 1989 ( see [ 1990 ] 182 ITR (St. 1).

Therefore, all decisions relating to disclosure, prior to amendment are equally applicable after amendment. In fact the Hon’ble Calcutta High Court in case of Simplex Concrete Piles v. Dy.CIT 262 ITR 605(Cal) at 613 noted

“in substance and principle there seem to be no change in the scheme as it stood prior to April1. 1989>The cosmietic changes introduced on April 1, have not effected any substantial change in the principle as it stood prior to April 1.”

The decision of Hon’ble Delhi High Court in case of Rakesh Agarwal v. Asst.CIT 225 ITR 611(Del) where it has been held that after amendment, failure to truly and fully disclose material has been given go by, most humbly submitted, requires reconsideration. That case however relates to assessment within 4 years of assessment year, therefore, applicable facts in that case and disclosure part may be treated as obiter dicta. It may be pointed out that the explanation 2 of pre-amended period is pari meteria with explanation 1 of amended Act (except last words of each explanation which are of same meaning). These explanation define what should not be treated as disclosure. It will be pertinent to note that Hon’ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. 256 ITR 220 Del) opined that even after the amendment, oversight, inadvertence or mistake on the part of an Assessing Officer would not justify reassessment proceeding. This decision is to the tune of opinion of Supreme Court cited at the top of this article (106 ITR (SC)). In case of Surat City Gymkhana v. Dy. CIT 125 Taxman 225(Guj) it has been held that Explanation 1 is not attracted when particular piece of paper need to be looked into. In case of Jindal Photo Films Ltd. v. Dy.Cit 234 ITR 170 (Del) it has been held facts which could have been discovered by the assessing authority but were not so discovered at the time of original assessment may not constitute a new information even for reassessment within 4 year.

Even case of reassessment within 4 years, it is necessary that information of escaped assessment should come subsequent to the assessment. This condition required even after post amended period. Hon’ble Gujarat High Court in Garde Silk Mill (P)Ltd. v. Dy.CIT 237 ITR 668(Guj) had opined that even after the amendment of section 147, mere change of opinion does not confer the jurisdiction to initiate 147. Therefore, all decisions under amended Act are applicable for post amended Act mutadis mutandis. In case of C. D. Singh v. ITO 77TTJ 282 (All) it was held that law regarding unamended provisions still hold good and consequently, held that initiation of proceedings under section 147 to be valid, the law down as per unamended Act is fully applicable.

Recently, in the sphere of writ petition, a very welcome decision has come where notice under section 148 has been served to start proceedings under section 147. In Mercury travels Ltd. v. Dy. CIT (2002) 258 ITR 533(Cal). Where it has been held :

“The High Court have ample powers under article 226 of the Constitution of India, and are in duty bound there under, to issue such appropriate orders or directions as are necessary in order to prevent persons from being subjected to lengthy proceedings and unnecessary harassment by an executive authority acting without jurisdiction. The alternative remedies that are provided by the Income-tax Act cannot always be a sufficient reason for refusing quick relief in a fit and proper case.

Undoubtedly to obtain such relief, it is necessary to know that what are reasons for reopening. Though an assessee is not entitled to ask for the reasons for starting of enquiry before attaiment of belief, nevertheless, he is entitled to know the reasons for reopening recorded by the Assessing officer before initiation of proceedings after return has been filed in response notice under section 148. In GKN Driveshafts (India) Ltd. v. ITO 259 ITR 19 (SC.)
It was held after the receiving the return, Assessing Officer must inform the assessee about the reason of initiating proceeding u/s. 148. Notice issued after 1.4.89 without recording the reason is invalid CWT v. S.L. Chitale (2002) 121 Taxman 459 (Raj).

Next issue is whether in reassessment, whole of the assessment can be considered? In V.Jaganmohan Rao v. CIT 75 ITR 373 (SC) held that the jurisdiction of the Assessing officer is not restricted to the portion of the income that escape assessment it is his duty to levy entire income that has escaped assessment in that year. But the Hon’ble Calcutta High Court in the case of Metal Imports (P) Ltd. CIT 72 Taxman 373(Cal) opined that the pragmatic reading of the judgment can be that the reassessment proceeding would confine itself to the points of under reassessment. It cannot embrace the entire assessment.

Though in case of Sun Engineering 198 ITR 297 (SC) Supreme Court had held that when assessee fails to file appeal against any disallowed at the time or original assessment, he cannot claim the same at the time of reassessment the Hon’ble Calcutta High Court in the case of Himmatsingka Motor Works Ltd. 200 ITR 749(Cal) held that determination of loss is not impermissible;. If this decision is considered along with the decision of Supreme Court in ITO v. K.L.Srihari(HUF) & Ors 250 ITR 193.(SC) where it has been held that an order of reassessment replace the original assessment, the assesses can claim carry forward of the loss determined if the original return was filed in time and if the reassessment proceeding is not dropped. In addition, the reassessment should not be the first assessment.

So far the limitation is concerned, Supreme Court in the case of K. M. Sharma v. ITO 254 ITR 772 (SC) held that if the period of limitation expires before amendment came in force from 1.4.89 proceeding under new amended section cannot be initiated.

In Sagar Enterprises v. AC 257 ITR 335 (Guj) it was held protective reopening is not possible.

To end, the decision of Desai Brothers v. Dy CIT 240 ITR 121 (Guj) may be quoted:

“Undoubtedly, the word “reason to believe” relates to process of entertaining an opinion which is subjective in nature and is not liable to be scrutinised by the objective test of judicial scrutiny as in appeal. However, even in the case where an action is founded on subjective satisfaction, the process of entertaining such belief is not bereft of any minimum safeguard against arbitrariness.”

The limitation of judicial review where the act is to be founded on subjective opinion on the part of the authority has been succinctly stated by the Apex Court in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp Case 639; AIR 1967 SC 295. The court did not approve the unbridled and unguided operation of the freedom from judicial scrutiny of acts which are founded on formation of subjective satisfaction of the authority empowered to take such action.

Tax Collection at Source – Scope
Narayan Jain, Advocate

1. Introduction :

The scope of tax collection at source has been expanded by the Finance Act, 2003 by bringing within its ambit the Indian made foreign liquor and scrap. Earlier when the Finance Bill, 2003 was originally presented in the Parliament, in case of scrap the provisions were applicable only in respect of sales of scrap and other items in auction , tender etc. and certain buyers ( like buyers in the further sale) were exempted. But when the Bill was finally commended on 30th April, 2003 for approval by Parliament, the scope was further enlarged by curtailing category of exempted buyers in explaination below section 206C. This has caused considerable resentment in various section and on realizing the same the Government has issued 2 press releases notifying notifying the postponement of effective date of operation of amended provisions to the specified extent from 1st June, 2003 to 1st September, 2003. Various aspects of the old and amended provisions are being analysed in this article.

2. Section 206C(1) as amended by the Finance Act, 2003 :

It provides that every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount the said buyer in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, collect the prescribed percentage of income –tax from the buyer of any goods of the nature specified below :

Sl. No Nature of Goods Percentage
(i) Alcoholic liquor for human consumption(including Indian made foreign liquor) and tendu leaves Ten percent
(ii) Timber obtained under a forest lease Fifteen percent
(iii) Timber obtained by any mode other than under a forest lease Five percent
(iv) Any other forest produce not being timber or tendu leaves Fifteen percent
(v) Scrap Ten percent

3. Certain Relaxation :

a) No tax shall be collected at sources where the A. O. on an application made by the buyer, gives a certificate in the prescribed form i.e Form 27C that to the best of his belief any of the goods referred to above are to be utilized for the purposes of manufacturing, processing or producing articles or thing and not for trading purposes for such time as is covered by the certificate.[proviso to sec. 206C(1) ]

b) Collection of tax at lower rate : Section 206C(9) provides that where the A.O. is satisfied that the total income of the buyer justifies the collection of the tax at any lower rate than the relevant rate, the Assessing Officer shall, n an application made by the buyer in this behalf in prescribed Form No.27F, give to him certificate in Form No.27G for collection of tax at such lower rate from the buyer. This certificate would be sent directly to the seller and such a certificate wouldbe valid for maximum period of one year. The buyer may also be provided with a copy of the certificate.

c) Provisions applicable only to buyers and sellers as defined in explanation below the section. Likewise scrap has also been defined. There are discussed hereinafter.

4. Postponement of Effective Date :

In view of the large scale resentment and representations for re-considering the amended provision, the Government has issued 2 press releases notifying the postponement of effective date of operation of amended provision to the specified extent.

a) Press Release dated 16.06.2003 : It has been decided to postpone the date of coming into effect of the amendment made by Finance Act, 2003 in the matter of collection of tax at source from dealers in country liquor and scrap to 1st September, 2003
b) Press Release Dated 04.07.2003 : it has been decided to postpone the date of coming into effect of the amendments made to section 206C by the Finance Act, 2003 in the matter of collection of tax at source from daelers of timber to 1st September, 2003.

5. Legislative History

Section 206c, as also Section 44c, were inserted in the IT Act by the Finance Act, 1988.
When the two section were enacted it was clearly said that the tax would be collectible only
“at the point of sale” and the provisions of the section shall not apply to any buyer in the
second or subsequent sale of goods.

The new provision were intended to combat tax evasion as has also been accepted by the
apex court in the case of Union of India v. A. Sanyasi Rao [1996] 219 ITR 330 (SC) : [1996]
88 Taxman 321(SC).

Section 44AC and 206C were to apply initially to the following items on which the rate of
TCS was also prescribed as indicated against each item :

i) alcoholic liquor for human consumption (other than Indian-made foreign liquor) and tendu leaves 10 per cent;
ii) timber obtained under a forest lease 15 per cent;
iii) Timber obtained from any mode other than under a forest lease 5per cent.
iv) any other forest produce not being timber or tendu leaves 15 per cent.

As per the exlanation to Section 206C, these provisions were not to apply the following
categories of buyers, from whom tax was not to be collected by the sellers:

i) A public sector company;
ii) A buyer in the further sale of such goods obtained in pursuance of such sale, or
iii) A buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State legislation.

These provision resulted into considerable litigation in various High Courts and the matter finally reached the Supreme Court in the Sanyasi Rao case (supra). The main contention before the courts was that the two Section 44AC and 206C lacked legislative competence. However, the courts held that the Sections were within legislative competence of Parliament and they do not transgress the legislative field assigned to Parliament by entry 82 in List I of the Constitution and are, therefore, valid. They are neither discriminatory nor violative of article 14 of the Constitution.

In its judgment, the AP High court in the case of Sanyasi Rao [1989] 178 ITR 31 (AP) held that the legislative policy of fixing the rate of profit, as has been done in Section 44C, had to be regarded as in the nature of unreasonable restriction in cases of some of the assessees. There, Section 44C has to be regarded as violate article 19(1)(a) in the cases of some of the petitioners before the court.

The court then considered whether anything can be done to uphold the validity of section 44C. And the court the solution in “reading down the provision “. The reading down was to the extent that Section 44C shall be read not as an independent provision but as an adjunct to and as explanatory to Section 206C; and that it does not dispense with regular assessment altogether with the result that after the tax is collected in the manner provided by Section 206C, a regular assessment would be made where the profit and gain of business in goods in question would be ascertained in accordance with Section 28 to 43C.

The High Court’s decision was upheld by the Supreme Court, saying that Section 44C is a valid piece of legislation and is an adjunct to and explanatory to Section 206C. It does not dispense with the regular assessment, as provided in accordance with Section 28 to 43C.

While the debate about the constitutionality of section 44AC was on, the government, realizing the deficiencies of Section 44AC, omitted Section 44AC by Finance Act, 1992 w.e.f. 1st April , 1993. Section 206C continued as an aid to collect tax from buyers of the products/items mentioned in the Section.

6 Who is a “ Buyer “ – now and pre–amendment position :

As per explanation amended by the Finance Act, 2003 “ Buyer” means a person who obtains in any sale, by way of auction, tender or any other mode, goods of the nature specified in the Table ( see para 2 above) in sub-section (1) or the right to receive any such goods but does not include,

(i) a public sector company, or
(ii) a buyer in the retail sale of such goods obtained in pursuance of such sale;

Prior to the 2003 amendment, in the above (ii) contained the words “ a buyer in the further sale”, which has now been replaced by the words ‘retail sale’. The effect is quite significant. Earlier the buyers in subsequent sale were exempted from the provisions of TCS but now only such buyers who are in the retail sale will be exempt. Further what is to be considered ratail sale, is in itself a matter of controversy. It is advisable to restore the pre-amendment position as TCS at the exorbitant rates, as prescribed, even in case of subsequent sale is totally unwarranted and unjustified.

Further prior to the 2003 amendment, there was category (iii) of buyers, which was exempted, it was
“ a buyer where the goods were not obtained by him by way of auction and where the sale price of such goods to be sold to be by the buyer is fixed by or under any State Act.”

Due to the above exclusion from the definiion buyers, prior to 2003 amendment, the dealers did not feel much pinch as the scope of dealers on whom the provision were applicable was narrow. But now the amended provision are going to effect large number of dealers and a practical study shows that the new provision will hit hard and the dealers may possibly not be able to sustain as considering their actual profit margins (which is about 2%), the TCS ranging from 5 to 15% of the gross amount of purchase is totally unrealistic.

7 Who is a “Seller” :

After the amendment by the Finance Act, 2003 “Seller” means the Central Government, a State Government or any local authority or corporation or authority established by or under a central, State or Provincial Act, or Any company or firm or co-operative society and also includes an individual or a Hindu undivided family whose total sales , gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which the goods of the nature specified in sub-section (1) are sold.

The definition of seller has also been drastically enlarged to bring within its fold individuals. HUFs whose accounts are required to be audited u/s 44AB(a) or (b). that means those covered by estimated income schemes u/s 44AD, 44AE, 44AF, 44BB, 44BBB and required to get their accounts audited u/s 44AB(c) are not included in the definition of seller for the purpose of section 206C.

8 What constitutes “scrap” :

As stated above, the Finance Act, 2003 has added scrap to the list of items covered by section 206Cfrom 1st June, 2003( deferred to 1st Sept.,2003). “Scrap“ has been defined to mean “waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up , wear and other reasons”.

While the definition is sloppy, its exclusion are significant. The scrap in question must emanate from the manufacturing or mechanical process. Therefore, no tax is required to be collected when for instance a company scraps its cars that are not its stock-in trade.

Similarly, no tax is required to be collected when old newspapers and magazines are disposed off. The needless use of the words which is definitely not usable is however likely to queer the pitch for controversies.

A question may arise, whether a company can get out of the clutches of this requirement when it is remiss in collecting the tax from the scrap dealer by talking advantage of this ambiguous expression? It seems it can, in some cases. It can always say that the items sold were usable though they have been sold as scrap.

Further, the definition leaves hanging the question of ‘not usable’ by whom. Should it be in such a state that it cannot be used by anyone at all? It is well known that what is scrap for one may be the raw material for another. The companies like Tata Steel and SAIL routine dispose of huge quantities of steel as scrap. Now it would be a tall order for them to find out from the buyers whether the scrap they are purchasing can be put to any use.

It is not clear why the government has chosen to bracket scrap dealers with those dealing with forest timber, who are allegedly found non-compliant in payment of normal tax. After all, there is no concrete evidence to show that scrap dealers defy the tax net as ruthlessly as those who slip in and out of dense forest.

The scrap dealers at any rate are invariably small manufacturers.

The cost of inputs to them, therefore, would be pushed up by this 10 per cent impost(if not substantially revised downwards), though admittedly it can be set off against the actual tax liability.

The move, moreover, may prove to be counterproductive if scrap dealer persuade industries to sell scrap to them outside the books, so to speak. In other words, the move could backfire. Thus, the FM is urged to reconsider the amendment and reduce the TCS rates to reasonable level of 1 to 2 per cent at best.

9 What is manufacturing/processing :

In the case of North Koel Tendu Leaves and Mahulam v. Union of India [1997] 228 ITR 630(Pat.) it was held that purchase and sale of tendu leaves after drying, sprinkling of water and bundling of leaves, does not constitute processing and hence exemption to assessee carrying on such activities is not available under the proviso to section206C.

The Madhya Pradesh High Court in the case of Natwarlal v. Union of India [1999] 102 Taxman 49 (MP) has held that process of collection and pruning does not amount to ‘processing within meaning of section 206C as nothing new emerges from the process.

10 Time Limit for deposit of the tax collected :

In view of the provision contained in section 206C(3), the tax so collected from the buyer is required to be deposited within seven days from the date of sale or the date of receipt of payment( whichever is earlier) to the credit of the Central Government otherwise section 206C(7) provides for levy of interest at the rate of 1.25% per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid.

In case, a seller fails to collect appropriate tax from the buyer, he would be liable to pay the requisite tax from his own pocket.

11 Certificate of collection of tax at source :

The seller collecting tax in accordance with the provision of section 206C shall furnish to the buyer to whose account such amount is debited or from whom such payment is received, a certificate in Form No.27D within ten days from the date of debit or receipt of the amount to the effect that tax has been collected together with the sum so collected, and other prescribed particulars. [section 206C(5)]

The buyer from whom the tax has been collected shall furnish such certificate with the Return of Income to avail the credit of tax.

[section 206(4)]

12 Provision regarding Tax Collection Account Number :

It is also relevant to note that section 206CA provides that every person collecting tax as per section 206C shall apply to the Assessing Officer in Form No.49B within the prescribed time for allotment of tax collection account number.
The tax collection account number shall be quoted in the following cases :-

i) In challans for payment of tax collected at source to the credit of Central Government.
ii) In TCS certificate to be issued from whom tax is collected.
iii) In half-yearly returns submitted to the Central Government.
iv) In all other documents pertaining to such transaction as may be prescribed in the interest of revenue.

13. Some useful decisions :

a) Section 206C is not applicable to license issued by government :
It was held by the Hon’ble Supreme Court in the case of Union of India v. Om Prakash S. S & Company [2001] 248 ITR 105 (SC) : 115 Taxman 325 (SC) that section 206C is not attracted to licenses issued by the Government Permitting the licensee to carry on liquor trade as the licensee does not fall within the concept of “buyer” referred to in that section, buyer has to be a buyer of goods and not merely a person who acquires a license to carry on the business.

b) The Punjab & Haryana high court incase of Chandigarh Distillers and Bottlers Ltd. v. Union of India and others and Patiala Distilleries and Manufacturers Ltd. v. Union of India and Others 253 ITR 205 : 173 CTR 269 : 125 Taxman 202 (P & H) held that –
Sub-section (1) of section 206C af the Act requires that every seller of alcoholic liquor for human consumption ( other than Indian made foreign liquor – prior to 2003 amendment) shall collect from the buyer 10 percent. of the amount payable at the time of debiting the amount to the account of the buyer or at the time of receipt of any such amount in cash or by cheque or draft or by any other mode. It is thus clear that what is collectible is 10 per cent of the amount payable. The amount payable is that amount which is payable at the time of debiting the amount to the account of the buyer or at the time of receiving money from him in cash or by cheque or by draft or by any other mode for the goods sold to him. That amount, in our opinion, is the purchase price which the buyer pays to the seller for the goods sold and in the cases before us the amount which the petitioner pay to the wholesaler after they have obtained a permit from the Excise Department by depositing the excise duty. The amount payable would only be the price which the buyer will pay to the seller. It cannot by any stretch of reason include licence fee which the buyer has to pay for the licence that he has obtained. The payment of this fee is wholly unrelated to the amount to be paid at time of purchasing country liquor from the wholesalers.

c) The Full Bench of the Himachal Pradesh High Court in C. P. W.No.224 of 1999 (Saini and Co v. Union of India [2000] 246 ITR 762) has held that –

“…an L-13 licensee could not be said to be “buyer” as he did not purchase liquor in auction and the sale price of such goods to be sold by him was fixed by or under the State Act (which was exempted prior to 2003 amendment). In our considered opinion, the deletion of section 44AC and insertion thereof in section 206C did not change the legal position. The Explanation to section 206C virtually did the same thing which was formerly done by the proviso to section 44AC. A person who was a ‘buyer’ under section 44AC prior to the deletion of the said provision remained a ‘buyer’ even after the amendment in 1993 in section 206C. Likewise, a person who was not a ‘buyer’ and whose case was covered under the proviso to section 44AC prior to the amendment of 1993 remained as such and did not become a buyer under the Explanation to section 206C even after the amendment of 1993. In our considered opinion, therefore, the former Division Bench in Gian Chand Ashok Kumar’s case [1991] 187 ITR 188(HP) was wholly right and fully justified in coming to the distilleries. The same principle and analogy will apply to section 206C as cases of such L-13 and L-13A licensees under the Explanation to section 206C. We are further of the view that the decision of the Supreme Court in A.Sanyasi Rao’s case [1996] 219 ITR 330 has no effect on the above principle whatsoever.”

In the above case, the full bench HP High Court approved the ratio alid down in Gian Chand Ashok Kumar’s case [1991] 187 ITR 188 (HP) and Naresh Kumar and Co. v. Union of India [2000] 243 ITR 760(P & H). However it overruled Rudra and Co.’s case [1998] 233 ITR 66 (HP).

d) In Satya Pal Amrik Shing and Co.’s case [1997] 228 ITR 653 (P & H)as well as Naresh Kumar and Co. [2000] 243 ITR 760 (P & H), the two Division Benches have held that persons holding L-14 and L-14A licenses do not fall within the definition of ‘buyer’ and the holders of L-13 licenses cannot be treated as sellers qua those holding L-14 and L-14A licenses. Similarly view was taken by the Full Bench of the Himachal Pradesh High Court in K.K. Mittal and Co.v. Union of India [1991] 187 ITR 208 and [1993] 203 ITR 201 (P & H), have acquired finality because the special leave petition filed by the Union of India were dismissed by the Supreme Court after hearing counsel for both the Parties.

14 What Purpose is going to be served :

Any legislation, which ignores the hardship to the persons from whom tax is to be collected, is bound to have an adverse impact on tax compliance. There must be a broader purpose, perspective and object in any statute to be effective, but apparently it is lacking in Section 206Cas amended by the Finance Act, 2003. In this context the following observation of the Allahabad High Court, in the Kishan Sahkari Chini Mills Ltd v. State AIR 1987 ALL 298, is relevant –
“If a statute is to make a sense, it must be read in the light of some assumed purpose. A statute merely declaring a rule, with no purpose or objective, is nonsense. Hart and Sacks have inquired whether it is not true that the meaning of a statute is never plain unless it fits with some intelligible purpose.”
The only purpose that the change may achieve is to increase collections. I agree with the view expressed by other analysts that within a welfare state, mere collection, unmindful of its adverse effects, cannot be considered promotion of a good fiscal policy.

15 Element of discrimination :

There is also an element of discrimination in the changes made. The former Chairman CBDT Mr. T.N. Pandey has rightly raised the issue that why should only those engaged in trades of mention Section 206C be discriminated against vis-a vis other traders? There could be case to collect tax at the first stage in the categories mentioned, but the issue is why the exercise should continue down the line for the specified businesses only?

While examining the Section in the Sanyasi Rao case (supra), that Supreme Court raised the issue of why normal relief, given to all assesses, be denied to such traders. It proceeded to observe that, prima facie, all assessees similarly placed under the I-T Act are entitled to equal treatment. In the matter of granting the various reliefs to a particular trade or business, it should have some fair and rational basis.

16 Conclusion :

Due to various exclusions from the definition of buyers, prior to 2003 amendment, the dealers did not feel much pinch as the scope of dealers on whom the provisions were applicable was narrow as stated hereinabove. But now the amended provisions are going to adversely effect large number of dealers and a practical study shows that the new provision will hit hard and the dealers may possible not be able to sustain.

Though the amendment provisions have been deferred to take effect from 1st September, 2003, by way of press releases the Hon’ble FM will do well -

a) by regularizing the same by bringing proper amendment in the Act.

b) when doing so,to restore the pre-amendment explanation to section 206C, if he really
appreciates the hardship of the dealers. Such restoration will also avoid the
unnecessary litigation, which is likely to result due to confusion in interpretation

b) to bring the TCS rates down to reasonable levels conspiring the actual low profit margins (which is about 2%). The present TCS rates ranging from 5 to 15% of the gross amount of purchase is totally unrealistic.

-Mr.Jain is former President of DTPA and co-author of several books on Income Tax. He is also a visiting faculty at National University of Juridical Sciences (NUJS).

STATEMENT DURING SEARCH AND SEIZURE AND SURVEY OPERATION

Paras Kochar, Advocate

STATEMENTS U/S 132(4)

Section 132(4) provides that an authorized officer may, during the course of search or seizure, examine on oath any person found to be in possession or control of any books of accounts, documents, money, bullion or other valuable thing or article and also in respect of all matters, relevant for the purpose of any investigation connected with any proceeding under the Income Tax Act, 1922 or under the 1961 Act.

Shyam jewellers V Chief Commissioner (Adm.) (1992) 196 ITR 243 (ALL)

Only the authorized officer can examine on oath u/s. 132(4). It follows that he has necessarily to be named in search warrant. An officer who is not so authorized can not exercise such power u/s. 132(4). However, the person whose statement is recorded on oath can mot object the presence of other officer.

Statement under section 131

The statement can also be recorded u/s. 131 of the Income Tax Act. The power to record statement u/s. 131 of the Income tax Act are given to the assessing officer, Jt./Addl. Commissioner,Commissioner (Appeal), Commission or Chief Commissioner, Dy.Director, Addl. Director General By virtue of Sec. 132 (1) of the Income Tax Act, 1961. The assessing officer during course of assessment proceedings can record statement of the of the assessee or witness. The CIT (Appeal) can do so in proceedings of appeal, if he feel it necessary.

Statement under section 133A (3)(III)

Sec. 133A (3) (iii) empowers the designated Income Tax Authority to “record the statement of any person which may be useful for or relevant to any proceedings under the Act”. In course of survey, a bare perusal of clause (iii) to section 133A (3) raises a significant question, whether any statement recorded during survey could be made the basis of assessment. The finding of the Kolkata Bench of the appellate Tribunal in a recent case of Asst. CIT Vs. Satya Narayan Agarwalla (2002) 255 ITR (AT) 69 (Kol) seems to have rendered clause (iii) to sub – section (3) of Sec. 133A of the Income Tax Act as quite superfluous.

HOW TO RECORD STATEMENT

The authorize officer should take following steps while recording statement :-

a) Oath should be properly administered.
b) Question should be put in simple language.
c) The language should be properly understandable by the person.
d) If the person does not understand the language, it should properly explained or translated to him.
e) The answer of the person should be recorded properly.
f) The statement should be read over and accepted by the deponent.
g) The statement must be recorded in the presence of independent witness.
h) Care should be taken to ensure that no undue influence or coercion is brought to bear on the deponent during the course of statement.
i) If the deponent is sick the authorized officer should allow him to take help of Doctor and he should mention the finding of Doctor in Panchanama.

REPLIES TO BE GIVEN DURING RECORDING OF STATEMENT

The deponent must keep his mind the following suggestions before giving replies to the questions raised during recording of statement :-

1) He should reply truly and correctly.
2) Reply should not be vague and evasive.
3) He should not feel nervous.
4) If he is not sure about the reply of any question raised to him, he should, “Do no remember”.
5) If he does not know about any reply of question raised to him, he should not hesitate to state, “Do not know”.
6) The reply must be given after fully understanding the question and also after thinking twice.


RECORDING OF STATEMENT OF OTHER PERSONS

During course of search and seizure operation, statement of relative ad staff can be recorded u/s 132(4). But they can question with regard to cash, jewellery and ornaments and other valuable articles recovered from their possession or in relation to such matters which may be relevant for and useful to the investigation in the case of the person who is being searched. The family members or the staff can not be questioned about his or her own affairs which have no connection either with the recovery made during search or with the proper assessment of the person under search.

COPY OF STATEMENT RECORDED

The deponent is entitled to obtain the copy of his statement. The principle of supplying copies of statement or other documents is germane to the principle of audi alteram partem and is directed to meet the principle of natural justice. A statement recorded will partake of the character of evidence only when it is proposed to be used against the assessee in any proceedings including assessment, penalty or prosecution. It is at that stage when the deponent becomes legally entitled to receive copies of all the statements and documents proposed to be used. Therefore, deponent are advised to write down the contents of statement made, immediately after its recording is completed on the basis of their memory.

CONFESSIONAL STATEMENT

CBDT has issued instruction to all the Chief Commissioners and Director General (INV) for not obtained any confession of undisclosed income of the person whose premises is searched while recording the recording the statement during the course of search and seizure operation as well as during surveys. The said instruction has been issued on the basis of an announcement by the Finance Minister during the presentation of the Union Budget.

For the practical purpose, this is a welcome move. But as regards legal consequences, this instruction will not benefit the assessee. Before the withdrawal of Block assessment scheme,
Statement made u/s. 132(4) making disclosure of concealed income at the time of search and seizure did not serve any useful purpose. Under the new scheme for assessment of search cases, penalty u/s. 271 (1)(c) is exigible but explanation 5 thereto provides that confession about the undisclosed income has to be made apart from satisfaction of other criteria for claiming immunity.

STATEMENTS RECORDED UNDER COERCION

If the statement is not recorded in normal manner or if any coercion or undue influence or threat is exercised, the deponent should inform the higher authorities without any loss of time. If the higher authorities do not take any cognizance of the same, he should file an affidavit statement was recorded under threat or coercion or as the case may be. The person whose statement was recorded under undue pressure or coercion or threat has no legal and evidentiary value in the eye of law. But mere allegation that the statement was recorded under coercion is not enough. The Kerala High Court in Kunhunbu v CIT Reported in 86 Taxman 477 held that where the assessee failed to file even the affidavits of the witness to the coercion, the burden was not discharged.

VARIANCE IN THE STATEMENT

If there is variance and incoherence in the statement of a person recorded on different dates, such statements might not fully relied upon by the assessing officer. In ACIT v Sushila Devi Agarwal reported in 50 ITD 524(Ahd) Tribunal has observed that for satisfactory reasons, statement made on search day might not be fully relied upon.

CRIMINAL PROCEEDINGS

If the authorized officer is of opinion that the person whose statement is recorded is not cooperating and is trying to put off the examination, he can administer a warning to the person concerned that he may be liable for prosecution for various offences for refusal to sign the statement under the respective provisions of Indian penal code and penalty under the Income Tax Act.

The authorized officer can also take step for initiation of criminal proceedings against the person whose statement is recorded u/s.132(4) if it is found that the said person has given the false statement. It is important to note that if such statement was not administered on oath, the person cannot be prosecuted. The Bombay High Court has held in

R. R. Gavit V Smt. Sherbanoo Hasan Daya (1986) 161 ITR 793 for making a case for prosecution, it was necessary to prove beyond doubt that the statement was given on oath.

PENALTY

If a person refuses to answer any question put to him by Income Tax Authority refuses to sign the statement made by him in course of any proceedings under this Act, he may be held liable to pay, by way of penalty, a sum of Rs. 10,000/- for each such default of failure.

RETRACTION OF STATEMENT

The person whose statement is recorded u/s. 132 (4) can also make retraction of his statement. He should be very careful while retracting from a statement. A letter of retraction must be sent to the higher authorities include Director General (INV) and Director (INV) of Income Tax. As a practice, statements are again recorded on oath after retraction. Regarding retraction of statement, the Bombay Tribunal in Pushpa Vihar Vs CIT (1994) 48 TT J 389 has held that if retraction is with cogent reasons and evidence it can be accepted.

The Apex court has observed in Pullengode Rubber Produce Co.ltd Vs State of Kerala (1973) 91 ITR 18 that an admission is an extremely important piece of evidence but it cannot be conclusive. It is open to the person who made the admission to show that it was incorrect. Similarly, the Apex court in Pangambam Kalanjay Singh Vs State of Manipur AIR 1956 SC 9 has observed that if retracted, it has to be corroborated on the basis of independent evidence.

EVIDENTIARY VALUE OF STATEMENT

In regard to impact and evidentiary value of statement during assessment proceedings, one should keep in his mind the following decisions:-

a) It has been held in Sri Krishna Vs Kurukshetra University AIR 1976 SC 376 that mere admission in a statement cannot be bed rock or foundation of assessment. It is always open to the assessment who made the admission to show that what he admitted was not correct.
b) It has been further held in Chitra Devi Vs ACIT (2002) 77 TTJ (JD) 640 that statement may though constitute information available with the assessing officer but same, by no stretch of imagination, can be said to be an evidence “found as a result of search”, though the same may be an evidence “Obtained during search”.
c) The Delhi High Court has also held in S. Arjun Singh Vs CWT (1989) 175 ITR 91 that an admission is an important piece of evidence but it is not conclusive.
d) Furthermore, the statement so recorded on oath cannot be used against the assessee without giving an opportunity to him to place materials for rebutting the same. Reliance is placed on CIT Vs Biju Patnaik (1991) 190 ITR 396 (ORI).

CONCLUSION :-

However, statement plays very important role in deciding a particular issue. The assessee should be properly educated to understand the evidence value of statement. The authorized person who record the statement should also know his responsibilities, duties and power relating to recording of statement. Due to ignorance, the deponent commit a number of mistakes in replying questions of the officers and unnecessarily fall into trouble. The officer also commit various mistake while asking question of the officers to the deponents because of which statements taken loose their importance in the eye of law. Therefore, the deponents as well as Income Tax Authorities should be careful and vigilant during recording of statements.

APPEAL BEFORE THE FIRST APPELATE AUTHORITY-SOME IMPORTANT ASPECTS

Subhas Agarwal, Advocate

INTRODUCTION

Whenever scrutiny assessment is taken up under section 143(3), A. O. normally makes addition to the returned income. Needless to say, the aggrieved assessee would like to prefer an appeal against the additions made by the A. O.

A hierarchy of appellate proceedings is provided under the Income – tax Act. First appeal lies before the CiT(A). W.e.f. 1.10.98, the post of DC(A) has been abolished. Second appeal against the order of CIT(A) can be preferred before the Income Tax Appellate Tribunal (ITAT). Against the order of the ITAT, direct appeals may now be preferred before the High Court u/s 260 (A) if substantial question of Law is involved.

FILING APPEAL BEFORE THE CIT(A)

Relevant provision in this regard are contained in section 246 to 251. the important aspects to be considered at the time of filling appeal before the CIT(A are –

a) Time Limit and the Power Of the CIT(A) to condone delay in case appeal is filed beyond.
the limitation period prescribed by the statute.

b) Preparation of statement of facts and grounds of appeal as a part of Form No. 35.

Time limit available here is only 30 days as against 60 days available in case of filling appeal before the ITAT and 120 days in respect of appeal before the High Court. Therefore one has to set the ball rolling immediately on receipt of the assessment order. It may be noted but the onus is always upon the revenue to establish that the order is served upon the assessee or his duly authorized agent. The Orissa High Court in Fatehchand Agarwal vs. CWT (1974) 97 ITR 701 held that where the demand notice was served on the partner of the assessee and he handed over the same a few days later, the limitation will run from the late date.

Though it is no necessary to annex assessment order certified by the department with Form no. 35, but where the certified copy is applied and on its receipt, it is attached with the Memorandum of Appeal (F.No.35), the time taken is obtaining the same will be excluded from the limitation period. [Kindly see 25 STC 225(All.) & 25 STC 505 (Ori.)]

CONDONATION OF DELAY

If there is delay in filing the appeal in time because of some reasonable cause, what is the remedy?

Section 249(3) specifically provides that CIT(A) may admit the appeal even after the limitation period if he is satisfied that the appellant had sufficient cause for the delay. But CIT(A) cannot dismiss the appeal on the ground of limitation in limine without giving the opportunity of hearing. Under the Civil Procedure Court, under Order 41 Rule 3A(1), it is mandatory that the cononation petition should accompany Memorandum of Appeal but the Income Tax Act does not so provide.

As far as drafting of condonation petition is concerned, it may be mentioned that general bland statement are not enough. Each day’s delay should be explained. But sufficient cause is to be shown for the period falling after the limitation period but not in respect of the period falling within the prescribed statutory period. [Kindly see Rewa Coalfields Ltd . AIR 1962 SC 361]

But it may be noted that the case for condonation of delay should be properly made out – proper evidences and/or affidavit should be annexed to the condonation petition. Recently, in case before the ITAT, Kolkata Bench, where the author had the priviledge of arguing, in Oasis Marketing (p) Ltd. vs. ITO, ITA No.2515/C/97, Hon’ble ITAT condoned the delay of more than three years in filling the appeal before it. In this case, the facts were that the assessee had chosen the wrong forum on the advise of a lawyer. It had filed a revision petition before the CIT against the order of the COT(A) and on its rejection, appeal was filed before the ITAT. The assessee had annexed an affidavit of the lawyer concerned, copy of revision petition and copy of the CIT(A)’s order along with the condonation petition. Relying upon Supreme Court’s judgment in Howrah Municipality’s case AIR 1972 SC 749, three years’ delay in filing appeal was condoned.

FRAMING OF GROUND OF APPEAL (GOA) AND STATEMENT OF FACTS (SOFs)

Any appellate authority gets the first impression of the case by persuing the grounds of appeal and the statement of facts annexed to the Memorandum of Appeal (Form no. 35). Unfortunately, proper attention is not given on these matters and even a good case is spoiled because of loose drafting. Many a times, it is seen that each ground runs into half a page to one page. Sometimes, even different paragraphs are contradictory to each other. Needless to say, such descriptive, contradictory and the loosely drafted GOA will only invite dismissal of appeal. GOA should be brief, concise and should not be lengthy and argumentative. A lengthy GOA restricts the area of argument. It may be noted that a well drafted GOA and SOFs make the first best impression.

As far as Statement of Facts (SOFs) are concerned, factual aspects of the issues agitated in each GOA should be stated therein. Mostly, SOFs are either too sketchy or it is merely below SOFs column of Form No. 35- “as per assessment order”. It may be noted that the assessment order may not reflect fully the facts favourable to the assessee. The facts which the A. O. conveniently ignores should be brought to the fore in the SOFs. A Western Judge once stated – “It is the brief that does the final job. Judgments are often written several weeks and sometimes months after the arguments. The arguments, great they may be, are forgotten. In the seclusion of his chamber, the judge has only the brief and the law books. At that time, your brief/ MOA is your only spokesperson”.

ADDITIONAL EVIDENCE

Very often, the A.O makes an addition to income without giving sufficient opportunity to produce evidence or the assessee himself is prevented by sufficient cause to produce the required evidence before the A. O.

In such cases, such evidences, known as additional evidences in legal parlance, are normally produced before the CIT(A) for the purpose of taking relief. Sometimes, it is seen that the CIT(A) also accepts such evidences and grants relief to the assessee without giving any opportunity to the A.O. of examine the same. In such cases, the Department invariably goes in appeal before the ITAT challenging the action of the CIT(A). Such action of the CIT(A) of granting relief without affording opportunity to the A. O. of examining evidences is clearly violative of Rule 46A of the Income Tax Rules. Tribunal has no option but to set aside such cases back to the file of the A. O. for examination. Therefore, it is back to square one for the assessee and a fresh bout of litigation may ensue.

Therefore, it is in the assessee’s interest that whenever a fresh evidence is sought to be produced, CIT(A) is asked to invite comment of the A.O. thereon by asking for a remand report. However, above requirement is not necessary where CIT(A) suo motu asks for production of any document for the purpose of making further inquires. This power is conferred upon the CIT(A) by section 250(4). In fact, in Mohinder Kaur’s case 104 ITR 120 (All) the validity of Rule 46A was challenged on the ground of it being violative of Section 250(4). Its validity was upheld by the Court on the ground that Section 250(4) is not affected or disturbed by Rule 46A.

POWER OF ENHANCEMENT

It is also to be kept in mind that filing of an appeal before the CIT(A) may put the appellant in a worse position. In other words, he has the power to enhance the assessment made by the A.O. this power he derives by virtue of Section 251(1)(a). But this is not the unbridled power. It has been circumscribed by the Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria’s case 66ITR 443. The power is restricted to the sources of income which have been the subject matter of consideration by the A.O. from the point taxability.

CONCLUSION

Many good cases are lost before the appellate authority because of bad drafting and inept handling. If the fundamental issues discussed above are taken care of and a well drafted written submission support by relevant case laws are filed before the CIT(A), success will not be far fetched. Even if after proper representation of a meritorious case, the CIT(A) fails to see reason , their action will be open for correction before the higher appellate authorities/Courts. It must always be remembered that proper representation before the CIT(A) is of vital significance even in respect of future litigation in same matter. Issues not raised before him cannot be raised for the first time before higher forum subject to certain exceptions. Therefore. Proceedings before the CIT(A) should not be taken with laxity.

SOME IMPORTANT ISSUES RELATING TO RECTIFICATION U/S 154
Narayan Jain, Advocate

1. Introduction :

Section 154 of the Income-tax Act, provides for rectification of any order (including intimation) passed by the Income Tax authorities. By the Finance Act, 1999, the power of A.O for making prima facie adjustments, has been omitted w.e.f 1.6.1999. there after in some cases, power u/s 154 is being used more frequently by the A.O to make certain additions, which could be made earlier by way of prima facie adjustment. It has been a matter of contention between the tax payers and the department as to which order can be rectified and which order cannot be rectified u/s 154. there are a number of decision of various Courts which need to be followed for carrying out the end of justice and avoid unnecessary litigation.

2. Mistakes that can be rectified by an income-tax authority u/s 154 :

As per section 154(1), an income – tax authority (as referred to in section 116) may rectify any mistake apparent from the record by –

a) amending any order passed by it under the provision of the Income-tax Act.

b) amending any intimation or deemed intimation made u/s 143(1)

3. Mistakes apparent from the record :

The courts have decided the issue in various cases and some of the relevant decision are :

a) T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50 (SC):

The court laid down the following guidelines :
(i) it was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Act,
(ii) a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process ofreasoning on points on which there may conceivably be two opinions. A decision o a debatable point of law is not a mistake apparent from record, and
(iii) the power of the officers mentioned in section 154 of the Act to correct mistake apparent from the record is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an error apparent on the face of the record.


b) CIT v Hero Cycles (p) Ltd. 228 ITR 463 (SC) : 94 Taxman 271(SC) :
Rectification u/s 154 can only be made when glaring mistake of fact or law has been committed by the officer passing the order and it becomes apparent from the record. The point which is not examined on fact or in law cannot be dealt with as mistake apparent on the record. Rectification is not possible if the question is debatable.

c) M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143(SC) :
If a mistake of fact apparent from the record of the assessment order can be rectified, there is no reason why a mistake of law which is glaring and obvious cannot be similarly rectified.

d) CIT v. Lakshmi Prasad Lahkar (1994) 74 Taxman 112(Gau.) :

A mistake apparent is a mistake that is manifest. In other words, the mistake must be so plain or obvious that it could be realized without a debate or dissertation. The plain meaning of the word ‘apparent‘ is that it must be something which appears to be ex facie that it is incapable of arguments or debate. Thus a mistake can be regarded as apparent only when it is glaring, obvious or self-evident and not something on which there may be two opinions.

In this context Circular No. 68 dated 17.11.1971 is also relevant, which states that a mistake arising as a result of subsequent interpretation of law by the Supreme Court would constitute ‘mistake apparent from the records’ and rectificatory action u/s 154 would be in order. Therefore where an assessee moves an application u/s 154 pointing out that in the light of a later decision of the Supreme Court pronouncing the correct legal position, a mistake has occurred in any of the complete assessment in his case, the application shall be acted upon, provided the same has been filed within time and is otherwise in order

e) Bata India Ltd. V. Inspecting ACIT & Others 249 ITR 491 (Cal.): 122
TAXMANN 44

Hon’ble Justice Kalyan Jyoti Sengupta held that the assessment order cannot be reopened in the name of rectification of mistake. In such a case Notice issued u/s 154 of the Act, is non est and is illegally issued. The Petitioner has been deduction lawfully and on a justified ground. There is neither any subsequent development nor any occasion to depart from the stand taken by the Department on earlier occasions. In this case, I am afraid, if this notice is allowed to be proceeded with and the so called patent mistake is allowed to be rectified pursuant to the notice then there will be an occasion to reopen of this assessment order resulting inevitably in a debatable issue. Therefore, I hold the fact and circumstances of this case that the impugned notice ought not to have been issued.

f) Coates of India Ltd. v. Dy. CIT (No.2) [1995] 214 ITR 504 (Cal.):

Hon’ble Justice Ruma Pal held that when the issue was debatable notice could be issued under section 154 and the Assessing Officer could not decide it under section 143

g) ITO v. India Foils Ltd. [1973] 91 ITR 72 9 (Cal-Division Bench ) :

The mistake defined in the aforesaid section must be apparent on the face of the records. It must be an obvious, clear patent mistake. One which is not apparent and requires long and elaborate reasoning and arguments on points on which there may conceivably be two opinions could not be mistake apparent from records.

4. An A. O. can amend any order or intimation if an appeal is preferred or revision of the order was sought by the assessee :

U/s 154(1A) an A. O while passing any order of rectification can amend order or intimation or deemed intimation in relation to any matter other than the matter which has been considered and decided in any proceeding by way of appeal or revision relating to such order or intimation or deemed intimation.

5. By whom the rectification u/s 154 can be made :

U/s 154(2) of the Income- tax Act, rectification can be made by the following persons :-

i) An Income-tax authority on its own motion or on an application by the assessee in . this behalf.
ii) CIT(Appeals), on his own motion or if mistake is brought to his notice by the
assessing officer or by the assessee.

6. When notice to an assessee is necessary u/s 154 :

U/s 154(3) ,an amendment which has the effect of enhancing an assessment or reducing refund or otherwise increasing the liability of the assessee, shall not be made u/s 154 unless the assessing officer has given notice to the assessee of its intention to do so and has allowed the assessee reasonable opportunity of being heard.

The Supreme Court has opined in the case of Maharana Mills (P) Ltd. v. ITO [1956] 36 ITR 350(SC) that the object of providing notice is that no order detriment t an assessee should be passed without affording him an opportunity. However, if the assessee knows about the proceedings and the matter had been discussed with him then an adverse order would not be invalid merely because no notice was given.

7. A rectification or an amendment order u/s 154 to be passed in writing :

As per section 154(4) an A. O shall make an amendment/rectification order in writing.

8. Necessary of issuing a fresh notice of demand in case the effect of a rectification
order passed by the A. O results in enhancing tax amount:

U/s 154(6), an A.O may make the amendment which has the effect of enhancing assessment or reducing the refund already made, provided the A.O has served the notice of demand to the assessee in the prescribed form. Such notice of demand shall be deemed to have been issued u/s 156.

9. Time limit for rectifying or amending an assessment order u/s 154 :

In case an application for an amendment is made by the assessee on or after 1st June, 2001 to an income tax authority, then the time limit for passing rectification order u/s 154 will be 6 months from the end of the month in which application is made.

The general time u/s 154(7) for rectifying or amending an assessment order is four years from the end of the financial year in which order sought to be amended(not necessary the original order) was passed.

As per Circular No. 73, dated 7.1.1972, in all the cases where a valid application under clause (b) of section 154(2) had been filled by the assessee within the statutory time limit but was not disposed of by the authority concerned within the time specified u/s 154(7), it may be disposed of by that authority even after the expiry of the statutory time limit, on the merits and in accordance with law.

The point of time for computing the period of limitation u/s 154 will be considered under various other circumstances as follows :-

(i) In case of reassessment, period of limitation is counted from the date of passing of reassessment order – CIT v. Mysore Iron and Steel Ltd. [1986] 157 ITR 531 (Kar.)
(ii) In case where mistake in the original assessment was left untouched in the subsequent reassessment and later the ITO rectified the mistake pursuant to High Court decision, the period of limitation is counted from the date of original assessment and not from the date of reassessment – Metur Chemical and Industrial Corporation Ltd. v. Cit [1977] 110 ITR 822 (Mad.)
(iii) In case of revision of order u/s 264 and assessee sought rectification of an item which was not the subject matter of revision, the period of limitation is counted from the date of ITO’s original order and not from the date of revision – Saran Engg. Co.Ltd. v. CIT [1983] 143 ITR 765(All.)
(iv) Incase where the original order of assessment remains unaffected and does not merge with appellate order, period of limitation fro rectification will run from the date of original order and not from the date when ITO had given effect to order of appellate authority – CIT v. Shaw Wallace and Co. Ltd. [1994] 73 Taxman 469 (Cal.)

10. Subsequent decision of the Supreme Court or High Court can form the basis of
rectification u/s 154 :

A subsequent decision of the Supreme court can validly form the basis for rectifying an order of assessment u/s 154 provided the decision is given by the Apex Court within 4 years from the date of order – B. V. K. Seshavataram v. CIT [1994] 210 ITR 633 (AP) : Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT [1988] 174 ITR 579 (Ker.).

If the Supreme Court declared a particular levy as invalid then such levy was at no time good. Consequently, if the ITO levied tax and subsequently the levy was rendered invalid by the Supreme Court then there was a mistake apparent from the record which could be rectified by the ITO – Walchand Nagar Industries Ltd. v. V. S. Gaitonde, ITO [1962] 44 ITR 260 (Bom.)

In this context Circular No. 68 dated 17.11.1971 is also relevant, which stated that a mistake arising as a result of subsequent interpretation of law by the Supreme Court would constitute ‘mistake apparent from the records’ and rectificatory action u/s 154 would be in order. Therefore, where an assessee moves an application u/s 154 pointing out that in the light of a later decision of the Supreme Court pronouncing the correct legal position, a mistake has occurred in any of the complete assessments in his case, the application shall be acted upon, provided the same has been filed within time and is otherwise in order.

The Madhya Pradesh High Court has held that in the circumstances of a given case, if a mistake is discovered in an order on the basis of a subsequent judgment of the High Court, then it may be considered as a mistake apparent on the record and a ground for rectification – Nav Nirman (P) Ltd. v. CIT [1988] 174 ITR 574 (MP).

However in the following cases a view contrary to the Madhya Pradesh High Court has been expressed:

- CIT v. Haryana State Co- Operative Supply & Marketing Federation Ltd. [1995] 80 Taxman 330 (P & H).
- Jiyajeerao Cotton Mills Ltd. v. ITO [1981] 130 ITR 710 (Cal).

It has been recently held by Punjab and Haryana High Court in the case of CIT v. Aruna Luthra [2001] 252 ITR 76 (P & H) that the power of rectification u/s 154 can be invoked even when an issue is decided by the jurisdictional High Court or a superior court after the order has been passed. When a court interpret a provision, it decides as to what is the meaning and effect of the words used by the legislature. It is a declaration regarding the statute. In other words, the judgment declares as to what the legislature had said at the time of the promulgation of the law. The declaration is – This was the law, This is the Law. That is how the provision shall be constructed.

11. High Court cannot rectify any mistake apparent from the record u/s 154 :