INCOME TAX APPELLATE TRIBUNAL vs. DY.COMMNR. OF INCOME TAX & ANR.ETC.ETC

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 13 PETITIONER: THE INCOME TAX APPELLATE TRIBUNAL,TRIBUNAL, HYDERABAD SPECIA Vs. RESPONDENT: THE DEPUTY COMMISSIONER OFINCOME-TAX (ASSTS) III, HYDERABAD, DATE OF JUDGMENT: 17/01/1996 BENCH: MAJMUDAR S.B. (J) BENCH: MAJMUDAR S.B. (J) JEEVAN REDDY, B.P. (J) CITATION: 1996 AIR 1066 1996 SCC (7) 454 JT 1996 (1) 416 1996 SCALE (1)432 ACT: HEADNOTE: JUDGMENT: J U D G M E N T S.B. Majmudar, J. Leave granted in all these petitions. By consent of learned advocates of parties the appeals are heard finally and are being disposed of by this common judgment. These appeals are taken out by Income Tax Appellate Tribunal (referred to as ‘the Appellate Tribunal’) which is up in arms against the Income Tax Department. In a way these are unusual cases wherein the Tribunal has to voice a grievance against the Income Tax Department in connection with its functioning as such. A few relevant background facts are required to be noted at the outset to highlight the grievance of the appellant-Appellate Tribunal. Background Facts M/s. Surana Steels Pvt. Ltd., M/s. Bnjusaria Metal Box Co. Pvt. Ltd. and M/s. Agroha Extraction Ltd., who are respondents nos.2 in each of these appeals are the concerned assessees. They were appellants in three income tax appeals before the Income Tax Appellate Tribunal, Hyderabad. The Special Bench thereof disposed of all the three appeals by common order dated 4th February 1993 as they involved consideration of common question of law relating to the construction of Section 115-J of the Income Tax Act, 1961 (hereinafter referred to as ‘Income Tax Act’). This decision of the Special Bench resulted in three writ petitions moved by the Deputy Commissioner of Income Tax, Hyderabad before the High Court of Andhra Pradesh. The assessee-respondents nos.2 in each of these appeals had succeeded before the Special Bench of the Appellate Tribunal on the construction of Section 115-J of the Income Tax Act. However, Income Tax Reference No.126 of 1992 which was pending in the High Court also pertained to the very same question centering round the construction of Section 115-J and was, therefore, clubbed with the aforesaid three writ petitions moved by the Deputy Commissioner of Income Tax

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 13 against the common order of the Special Bench dated 4th February 1993. All these matters were heard by a Division Bench of the High Court consisting of V. Sivaraman Nair and S.V. Maruthi, JJ. The Division Bench of the High Court by its common order dated 31st December 1993 allowed the three writ petitions moved by the Deputy Commissioner of Income Tax and answered the Reference in favour of the Revenue and against the assessees. The Appellate Tribunal being aggrieved by the findings reached by the High Court in the writ petitions has filed the aforesaid appeals before this Court on obtaining leave under Article 136 of the Constitution of India. The dissatisfied assessees have filed separate Special Leave Petitions Nos.12446 and 12835 of 1994. By an order dated 8th August 1994 in the special leave petitions moved by the Appellate Tribunal a bench of this Court consisting of one of us, Jeevan Reddy, J. and Sen, J., issued notice and directed that pending further orders, the judgment, in so far as it holds that constitution of a Special Bench consisting of three or more members by the President of Income Tax Appellate Tribunal can be done only and by virtue of a judicial order, is suspended, while notice was also issued and interim relief was granted on condition in the assessee’s Special Leave Petition No.12446 of 1994 arising from the very same common judgment of the High Court. By a later order dated 3rd April 1995, however, Special Leave Petitions Nos.12054-56 of 1994 moved by the Income Tax Appellate Tribunal were declined from other matters. That is how the assessees’ Special Leave Petitions are now no longer a part of the present group and we are concerned, in the present proceedings, with the three appeals arising out of Special Leave Petition Nos.12054-56 of 1994 moved by the Income Tax Appellate Tribunal against the common order of the Division Bench of the High Court in the aforesaid three writ petitions. Consequently, we will not be concerned, in these proceedings, with the question of construction of Section 115-J of the Income Tax Act and the merits of the decision of the High Court on this point. We will, therefore, only consider, in these proceedings, the grievances voiced on behalf of the Appellate Tribunal by its learned counsel Shri Subba Rao. Rival Contentions Shri Subba Rao, learned counsel appearing for the appellant-Tribunal contended that the High Court had patently erred in law in taking the view that the President of the Income Tax Appellate Tribunal had no juri iction to constitute a Special Bench for hearing the appeals of the respondent-assessees. He submitted that the Division Bench of the High Court had misconstrued and misinterpreted the relevant statutory provisions of the Income Tax Act as well as the regulations in this connection. According to Shri Subba Rao the High Court had wrongly assumed that Special Bench can be constituted by the President only on the basis of a judicial order and not in exercise of his powers under sub-section (3) of Section 255 of the Income Tax Act. According to the learned counsel the High Court had equally erred in taking the view that on the facts of the present case the Special Bench was constituted on the whims and fancies of the President and there was no reason for constituting such a bench. He also further contended that the High Court was equally in error when it held that the Tribunal had committed a breach of the principles of natural justice in not granting adjournment as asked FOR by learned counsel for the Revenue. That on the facts of the present case enough latitude was shown by the Tribunal in adjourning

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 13 the matters at the instance of the learned counsel for the Revenue on 11 past occasions and, therefore, there was no violation of principles of natural justice when further adjournment was refused and the matter was heard by the Special Bench. Shri Ahuja, learned senior counsel appearing for the respondent-Deputy Commissioner of Income Tax on the other hand submitted that on the facts of the present case the High Court rightly took the view that Special Bench was constituted by the President of Tribunal without any rhyme or reason and in any case the Tribunal had committed breach of basic principles of natural justice in refusing adjournment in the appeals posted for hearing before the Special Bench when the departmental representative who was incharge of the matter had taken ill and had to be hospitalized and that the previous adjournments which were granted before the constitution of the Special Bench were only 8 in number and that had nothing to do with the situation in which the department found itself under circumstances beyond its control when the learned counsel for the Revenue was busy in the High Court in tax matters before the Tax Bench and the departmental representative had suddenly taken ill and had to be hospitalized. That these were circumstances which called for a judicious and a liberal approach on the part of the Tribunal. That even the written submissions which were tendered on behalf of the Revenue were not permitted to be taken on record and, therefore, the High Court was right in taking the view that the Tribunal in deciding the Special Bench matter had committed breach of basic principles of natural justice. In view of the aforesaid rival contentions, the following points arise for our determination. Point No.1 Whether the Special Bench of the Income Tax Appellate Tribunal had committed breach of principles of natural justice and had denied reasonable opportunity to the Income Tax Department to put forward its case in the appeals taken up for decision by the Special Bench. Point No.2 Whether the President of the Tribunal was legally competent to constitute a Special Bench for hearing the three appeals moved by respondent no.2-assessees in these three cases and whether the Special Bench was validly constituted. We shall deal with the aforesaid points one by one. Point No.1 So far as this point is concerned the High Court in the impugned judgment at page 31 has noted that it was true that the matter was adjourned at the instance of the departmental representative from time to time on 11 occasions from 28.10.1992 upto 4.1.1993. However, on 4.1.1993 when the matter was posted for hearing before the Special Bench Shri M. Srinivasulu who was appointed as designated officer to argue the matter before the Special Bench fell sick. It was also not disputed that he was shifted to Hyderabad Nursing Home and the doctors had advised him rest for four weeks. It was also true that Shri Mani, another Deputy Commissioner, who was appointed to assist Shri Srinivasulu was ready to argue the matter and in fact he argued the matter to the best of his ability. However, in view of the complicated nature of the case and the heavy revenue involved in the matters and also keeping in view the fact that any decision rendered by the Special Bench of the Tribunal will have an all India effect, to supplement the arguments of Shri Mani, the department sought permission of the Tribunal to file

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 13 written submissions and it is not disputed that the Tribunal did not permit the departmental representative to file those written submissions. On these facts the High Court took the view that the Tribunal was not justified in not adjourning the matter and in insisting to hear the matter. Now we may state at this stage that even though on merits the Revenue lost before the Special Bench of the Income Tax Appellate Tribunal the High Court in writ petitions heard the department fully on the merits of the question, namely, the construction of Section 115-J of the Income Tax Act and held in favour of the Revenue and against the assessees. Thus the Revenue had not only full opportunity to put forward its case before the High Court in the writ petitions but had succeeded therein. Under the circumstances the question of violation of principles of natural justice by the Tribunal pales into insignificance and, therefore, we do not deem it fit to pronounce upon that question finally. We have already noted that the decision of the Division Bench of the High Court on the merits of the controversy centering round the construction of Section 115-J of the Income Tax Act is already pending scrutiny of this Court in the declined special leave petitions moved by the assessees and this Court is going to decide that question on merits. Under these circumstances we do not think it fit to delve deep into the question of failure of principles of natural justice at the stage of hearing before the Special Bench of the Tribunal. However, in passing we may observe that prima facie, the view of the High Court that the Tribunal on the peculiar facts of the case was not justified in insisting on hearing the matter and even not taking the written submissions on record as tried to be furnished on behalf of the Revenue and thus had adopted an unjustified stand, appears to be well sustained. It is no doubt true that the matter was adjourned on 11 occasions earlier. It is also true that when a senior counsel is not available to argue an adjourned matter for which a Special Bench is constituted at Hyderabad where the President had to come from Delhi and the another member had to come from Bombay, the Revenue should have taken all care to see that some alternative arrangement was made so that the matter may not get unduly prolonged and indefinitely adjourned and that in such situations the Special Bench of the Tribunal could have legitimately required the Revenue to make alternative arrangement for getting the matter argued. But for that purpose a short adjournment of a day or two could have been granted when the departmental representative who was incharge of the matter was admitted to a nursing home. In any case written submissions could have been taken on record and considered by the Tribunal instead of totally brushing them aside. However as noted earlier as ultimately the Revenue has not suffered till date and its viewpoint has been accepted by the High Court on the construction of Section 115-J of the Income Tax Act we do not dilate on this question any further. That disposes of the first point. Point No.2 So far as this point is concerned it is necessary to have a look at the relevant facts as emerging on the record of the case which resulted in the constitution of the Special Bench by the President of the Appellate Tribunal. In the counter filed by Shri Kalu Ram Meena, Deputy Commissioner of Income Tax, Hyderabad in the present proceedings the background facts leading to the formation of the Special Bench by the President have been stated. It is averred that the Tax Bar Association of Andhra Pradesh addressed a letter to the President on 25th July 1992

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 13 requesting him to refer the matter of correct interpretation of Section 115-J to a Special Bench to have uniformity of the decisions on the point. The request in the letter was as follows : "In the wake of the divergent opinions expressed by different Benches of the tribunal and also in view of language in which Sec.115-J is couched, the members of A.P. Tax Bar Association have felt the need to request your goodself to refer the matter to a Special Bench to have uniformity in the decisions on this point. The Governing Body has received various representations to this effect from our members. May we, therefore, request your goodself to consider the request of constituting a Special Bench to decide the issue relating to the interpretation of the word u/s 115- J and oblige. After the receipt of the above letter, the President forwarded the same to the Senior Member of the Income-tax Appellate Tribunal, Hyderabad Bench, Hyderabad directing him to contact the members of the Bar and suggest to him how far he feels the need of constituting a Special Bench. On that the Senior Member alongwith the Accountant Member after due consultation with the Bar suggested constitution of the Special Bench and the reason for the constitution of the Special Bench is stated in reference dated 25.9.1992 forwarded to the President, which reads thus: ‘After noting conflicting decisions on the interpretation of Section 115-J and also after going through the several articles published in 50 Taxman 659 (Magazine Section) 47 Taxman 133 (Magazine Section) 48 Taxman 347 (Magazine Section) and 49 Taxman 49 and 133 (Magazine Section) and having noticed diametrically opposite views expressed in two decisions of the Tribunal - one reported in 39 I.T.D. 432 Commissioner of Income-tax and the opposite decision rendered by the Hyderabad Bench in V.V. Trans Investment (P) Ltd. Vs. Income-tax Officer (42 ITD 242) we are of the opinion in order to secure uniformity in judicial decisions and prevent judicial chaos and in order to avoid uncertainties on such a vital point of public importance, constitution of a Full Bench is very essential to resolve the following questions : (1) Whether depreciation and loss should necessarily be present for purpose of adjustment while computing book profit u/s 115-J of the I.T. Act

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 13 read with 205(1) proviso (b) of the Companies Act? (2) For purpose of computing book profits under sec. 115J of the I.T. Act read with Section 205(1) proviso (b) of the Companies Act whether depreciation include loss? (3) If an assessee had not incurred losses in previous years but only had unabsorbed depreciation claim, the claim for deduction under section 115J(I) (iv) would not be available to such an assessee? (4) In a case where there is profit in a year but after adjustment of depreciation it results in a loss, can no adjustment in book profit under sec.115J of the I.T. Act be allowed?’ This reference was made on 25.9.1992 in the prescribed form and it was sent alongwith covering letter dated 25.9.92 to the President of the I.T.A.T. at Delhi. Thereupon the President, ITAT had accepted the reference and constituted a Special Bench vide letter No.F.16- LG(ATNZ-Sectt)92 dated 1.10.1992." The aforesaid stand taken in the counter shows that the President appeared to have acted in the light of the reference dated 25th September 1992 made by two senior members of the Tribunal. It is also true that the President was requested by the Tax bar Association of Andhra Pradesh to constitute a Special Bench for resolving the question in controversy. However, when we turn to the reference letter dated 25.9.1992 which has been brought on record of these proceedings as an annexure to the Special Leave Petition as Annexure ‘A’, we find that the reference purports to be under Section 255(3) of the Income Tax Act by two members Shri T.V. Rajagopala Rao and Shri Chander Singh and they have suggested that the Special Bench of the Tribunal may be constituted for deciding the following four matters :

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 13 September 1992 to which the President agreed and by his order in the light of the said D.O. the President constituted a Special Bench. That is clearly indicated by communication dated 1st October 1992 addressed by