The Director of Income Tax, (Exemptions) vs. Royal Education Society

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6TH DAY OF JULY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.392 OF 2016 BETWEEN: M/S THE KARNATAKA STATE CO-OPERATIVE APEX BANK LIMITED REPRESENTED BY ITS SECRETARY SRI C N DEVARAJ, "UTHUNGA" NO.1 PMK ROAD, CHAMARAJPET BANGALORE-560 018. ... APPELLANT (BY SRI. A. SHANKAR, SR. COUNSEL FOR SRI. A. CHANDRASHEKAR, ADV.) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 3(1), BMTC BUILDING 80 FEET ROAD, KORAMANGALA BANGALORE-560 095. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 29.02.2016 PASSED IN ITA NO.1372/BANG/2014 FOR THE ASSESSMENT YEAR 2007- 08, PRAYING TO:

2 (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT. (ii) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE ITAT, 'C' BENCH, BENGALURU IN ITA NO.1372/BANG/2014 RELATING TO ASSESSMENT YEAR 2007-08 VIDE ITS ORDER DATED 29.02.2016. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court on the following substantial questions of law: "(1) Whether the Tribunal is right in applying the ratio of the decision of the Hon'ble Supreme Court in CIT vs. Sun Engineering Pvt. Ltd. 198 ITR 297 (SC) and holding that concluded issue in the original proceeding cannot be re-agitated in re- assessment proceedings even though the

3 case of the appellant is distinguishable in as much as there was no original assessment proceedings on the facts and circumstances of the case? (2) Whether the Tribunal was justified in law in not appreciating that the notice u/s 148 of the Act was issued to "assess" the income and thus all contentions in law remained open for the appellant to agitate by filling a return in response to the notice u/s 148 of the Act on the facts and circumstances of the case? (3) Whether the Tribunal is justified in law in holding that the appellant is not entitled to make additional claim of loss incurred of Rs.8,28,65,052/- in the re- assessment proceedings under section 147 of the Act on the facts and circumstances of the case? (4) Whether the Tribunal is right in not holding that the appellant is entitled to the additional claim of actual loss incurred of Rs.8,28,65,052/- on account of sale of

4 government securities on the facts and circumstances of the case?" 2. Facts leading to filing of this appeal briefly stated are that assessee is a Co-operative Apex Bank and is registered under the Karnataka Co-operative Societies Act, 1959 (hereinafter referred to as 'the 1959 Act' for short). The assessee had been granted licence to carry on the business of banking by Reserve Bank of India under Banking Regulation Act, 1949. The assessee filed the return of income under Section 143(1) of the Act for the Assessment Year 2007-08 on 31.10.2007 and declared total income of Rs.40,77,27,150/-. However, no order of assessment was passed under Section 143(3) of the Act. The Assessing Officer issued a notice under Section 148 of the Act on 31.03.2012. The assessee filed the return of income in response to the aforesaid notice on 13.09.2012 and declared total income of Rs.32,56,61,835/-. In the return of income, the

5 assessee made an additional claim on account of loss on sale of securities to the extent of Rs.8,28,65,052/-. 3. The Assessing Officer by an order dated 30.03.2013 passed under Section 143(3) read with Section 147 of the Act determined the income of the assessee at Rs.51,71,70,670/- and made following additions: (a) disallowance of contributions made to funds -Rs.10,86,43,782/-. (b) additional loss claimed on sale of securities - Rs.8,28,65,052/-. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 31.07.2014 partly allowed the appeal. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 29.02.2016 inter alia allowed the claim of the assessee with regard to disallowance of contribution

6 under various heads and held that such contributions are allowable expenses. However, the tribunal did not grant relief with regard to the additional claim of loss made by the assessee on account of sale of securities on the ground that the aforesaid additional claim was not made in original assessment proceeding. Thus, the appeal was partly allowed. In the aforesaid factual background, the assessee is in appeal before us. 4. Learned Senior counsel for the assessee submitted that in the case of the assessee there is no original assessment for the same Assessment Year and the an intimation under Section 143(1) of the Act was issued to the assessee. The said intimation under Section 143(1) of the Act is not an order of assessment and therefore, the tribunal ought to have appreciated that the issue of loss of sale on government securities was not considered by the Assessing Officer and has not reached finality. It is also submitted that in 'CIT VS. SUN ENGINEERING WORKS (P.) LTD.', (1992) 198

7 ITR 297 (SC), the original order of assessment had attained finality and therefore, it was held that the assessee cannot agitate the issues in re-assessment proceedings. It is also pointed out that decision in Sun Engineering Works (P.) Ltd. supra pertain to Assessment Years 1960-61 and 1961-62 and was rendered before amendment was made under Section 143(1) of the Act with effect from 01.04.1989. It is also argued that aforesaid decision does not apply to Assessment Years after 01.04.1989. It is also pointed out that an order passed under Section 143(1) of the Act was an order of assessment only prior to 01.04.1989 and thereafter, an intimation. Therefore, the earlier order of assessment gets effaced on commencement of proceeding under Section 147 read with Section 148 of the Act. It is also urged that Supreme Court in 'V.JAGAN MOHAN RAO VS. COMMISSIONER OF INCOME TAX AND EXCESS PROFIT TAX', (1970) 75 ITR 373 (SC) has held that the assessment gets effaced and the subsequent

8 assessment proceedings has to be done afresh. It is also submitted that decision in the case of V.Jagan Mohan Rao was followed by this court in 'CIT VS. MYSORE IRON & STEEL LTD.', (1986) 157 ITR 531 (KAR), 'NITESH BERA (HUF) VS. DCIT', ITA NO.585/2016 and 'THE COMMISSIONER OF INCOME TAX AND ANOTHER VS. M/S AVASARALA AUTOMATION LIMITED', W.A.Nos.1411-1413/2004 and connected matters dated 05.04.2005. It is also submitted that loss incurred is an actual loss on sale of securities during the year and the assessee is bound to pay taxes only which it is liable to pay under the law. It is also urged that the loss claimed by the assessee is an allowable expenditure under Section 37 of the Act. In support of aforesaid submissions, reference has been made to 'ITO VS. MEWALAL DWARKA PRASAD', (1989) 176 ITR 529 (SC), 'ITO VS. K.L.SRIHARI (HUF) (2001) 250 ITR 193 (SC), and 'ACIT VS.

9 RAJESH JHAVERI STOCK BROKERS P. LTD.', (2007) 291 ITR 500 (SC). 5. On the other hand, learned counsel for the revenue submitted that if an assessee discovers any omission or any wrong statement, he may furnish a revised return under Section 139(5) of the Act within the time limit prescribed therein. However, once the time limit prescribed in Section 139(5) of the Act expires, the only remedy which is available to the assessee is to file a return and to seek condonation of delay in filing the return under Section 119 of the Act. It is further submitted that Section 148 of the Act provides a remedy to the revenue and is not a remedy to the assessee. It is also submitted that proceeding under Section 148 can be initiated only in respect of such income which escapes assessment and the same has been interpreted by the Supreme Court in Sun Engineering Works (P.) Ltd supra which has rightly been applied to the case in hand by the tribunal. It is further submitted that no fresh claims can

10 be made by the assessee in a proceeding under Section 148 of the Act. It is also urged that decision of the Supreme Court in Sun Engineering Works (P.) Ltd still holds the field. In support of aforesaid submissions, reference has been made to a decision in 'GOETZE (INDIA) LTD. VS. COMMISSIONER OF INCOME TAX', (2006) 157 TAXMAN 1 (SC). 6. We have considered the rival submissions made at the bar and have perused the record. The Explanation to Section 143 of the Act prior to 01.06.1999 reads as under: "Explanation - An intimation sent to the assessee under sub-Section (1) or sub- Section (1B) shall be deemed to be an order for the purposes of Sections 246 and 264. The aforesaid Explanation was deleted by Finance Act, 1999 with effect from 01.06.1999. The effect of the deletion is that intimation under Section 143(1) of the

11 Act ceases to be an order for the purposes of Section 264 of the Act. The Supreme Court in RAJESH JHAVERI supra has held that an intimation under Section 143(1) of the Act cannot be treated as an order of assessment. In the instant case, admittedly, no original assessment was made in case of the assessee. The assessee has made a claim in the return filed in response to a notice under Section 148 of the Act. 7. In V.JAGAN MOHAN RAO supra, a three judge bench of the Supreme Court held as follows: This argument is not of much avail to the appellant because once proceedings under Section 34 are taken to be validly initiated with regard to two-thirds share of the income, the jurisdiction of the Income- tax Officer cannot be confined only to that portion of the income. Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a

12 notice containing all or any of the requirements which may be included in a notice under Section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under Sub-section (2) of Section 22 the previous under- assessment is set aside and the whole assessment proceedings start afresh. When once valid proceedings are started under Section 34(1)(b) the Income-tax Officer had not only the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. Thus, a three judge bench of the Supreme Court held that when there is a re-assessment or assessment under Section 147 of the Act, the original assessment proceeding, if any, gets effaced and the re-assessment or assessment has to be done afresh.

13 8. In MEWALAL DWARKA PRASAD supra, Supreme Court in the light of decision of three judge bench of the Supreme Court in V.JAGAN MOHAN RAO supra has upheld the division bench decisions of Punjab High Court in 'CIT VS. JAGANNATH MAHESHWARY', (1957) 32 ITR 418 and decision of the Andhra Pradesh High court in PULAVARTHI VISWANADHAN VS. CIT (1963) 60 ITR 463 and held that the view taken by aforesaid two high courts is in consonance with the law laid down by the Supreme Court in V.JAGAN MOHAN RAO supra. The aforesaid decision has been followed by benches of this court in 'NITESH BERA (HUF) VS. DCIT', ITA NO.585/2016 and 'THE COMMISSIONER OF INCOME TAX AND ANOTHER VS. M/S AVASARALA AUTOMATION LIMITED', W.A.Nos.1411-1413/2004 and connected matters dated 05.04.2005. 9. Thereafter, a two judge bench of the Supreme Court in Sun Engineering Works (P.) Ltd supra

14 while dealing with the Assessment Years 1960-61 and 1961-62 held as follows: 38. Although, Section 147 is part of a taxing statute, it imposes no charge on the subject but deals merely with the machinery of assessment and in interpreting a provision of that kind, the rule is that construction should be preferred which makes the machinery workable. Since, the proceedings under Section 147 of the Act are for the benefit of the Revenue and not an assessee and are aimed at garnering the 'escaped income' of an assessee, the same cannot be allowed to be converted as 'revisional' or 'review' proceedings at the instance of the assessee, thereby making the machinery unworkable. 39. As a result of the aforesaid discussion, we find that in proceedings under Section 147 of the Act, the Income Tax Officer may bring to charge items of income which had escaped assessment other than or in addition to that item or

15 items which have led to the issuance of notice under Section 148 and where ressessment is made under Section 147 in respect of income which has escaped tax, the Income Tax Officer's jurisdiction is confined to only such income which has escaped tax or has been under-assessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings. It is only the under-assessment which is set aside and not the entire assessment when reassessment proceedings are initiated. The Income Tax Officer cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject-matter of proceedings under Section 147. An assessee cannot resist validly initiated reassessment proceedings under this Section merely by showing that other income which had been assessee originally was at too high a figure except in cases

16 under Section 152(2). The words "such income" in Section 147 clearly referred to the income which is chargeable to tax but has "escaped assessment" and the Income Tax Officers' jurisdiction under the Section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment. Claims which have been disallowed in the original assessment proceeding cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which had escaped assessment because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the item sought to be taxed as 'escaped income'. Indeed, in the reassessment proceedings for bringing to

17 tax items which had escaped assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non-taxability of the items at all. Keeping in view the object and purpose of the proceedings under Section 147 of the Act which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to 'escaped income', and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of 'reassessment'

18 cannot be reduced beyond the income originally assessed. 10. In Sun Engineering Works (P.) Ltd supra, it was held that in a proceeding fro re-assessment, the Assessing Officer cannot adjudicate the issues, which are the issues forming part of the original assessment, whether the issues are adjudicated or not, whereas, MEWALAL DWARKA PRASAD supra, it was held that once proceeding under Section 148 of the act is initiated, original order of assessment gets effaced. In Mewalal Dwarka Prasad supra reliance has been placed on decision rendered by three judge bench of the Supreme Court in Jagan Mohan supra. In view of divergence of view taken by the Supreme Court in MEWALAL DWARKA PRASAD supra and Sun Engineering Works (P.) Ltd supra, the matter was referred to a three judge bench, which dealt with the reference in INCOME TAX OFFICER VS. K.L.SRIHARI (HUF)', (2001) 250 ITR 193 (SC), which held as follows:

19 1. By order dated November 19, 1996, these special leave petitions have been directed to be placed before the three- judge Bench because it was felt that dissonant views have been expressed by different Benches of this court on the scope and effect of reopening of an assessment under Section 147 of the Income-tax Act, 1961. It has been pointed out before us that the matter has earlier been considered by a Bench of three judges in V. Jagan mohan Rao v. CIT and EPT and the observations in the said case came up for consideration before two judges' Benches of this court in ITO v. Mewalal DwcirKa Prasad [1989] 176 ITR 529 and in CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 and that there is a difference in the views expressed in said later judgments. 2. We have heard Shri Ranbir Chandra, learned counsel appearing for the petitioners, and Shri Harish N. Salve, learned senior counsel appearing for the respondents. We have also perused the original assessment order dated March 19,

20 1983, as well as the subsequent assessment order that was passed on July 16, 1987, after the reopening of the assessment under Section 147. On a consideration of the order dated July 16, 1987, we are satisfied that the said assessment order makes a fresh assessment of the entire income of the respondent-assessee and the High Court was, in our opinion, right in proceeding on the basis that the earlier assessment order had been effaced by the subsequent order. In these circumstances, we do not consider it necessary to go into the question that is raised and the same is left open. The special leave petitions are accordingly dismissed. 11. In the instant case, admittedly, there is no original assessment order in the case of the assessee and it was only an intimation under Section 143(1)of the Act, which cannot be treated to be an order in view of decision of the Supreme Court in Rajesh Jhaveri supra. Therefore, the question of re-assessment of the income

21 of the assessee by the Assessing Officer does not arise. In the proceeding under Section 148 of the Act, it was the first assessment and the same could have been done considering all the claims of the assessee. Therefore, the decision rendered by the Supreme Court in Sun Engineering Works (P.) Ltd had no application to the fact situation of the case. Even assuming for the sake of argument that if an intimation under Section 143(1) of the Act is considered to be an order of assessment, in the subsequent re-assessment proceeding, the original assessment proceeding get effaced and the Assessing Officer was required to consider the proceeding de novo and to consider the claim of the assessee. In view of preceding analysis, the first and second substantial question of law is answered in the negative and in favour of the assessee. In the instant case, the authorities under the Act have not considered the claim of the assessee. Therefore, it is not necessary for us to express any opinion with regard to substantial question

22 of law Nos.3 and 4 as the aforesaid claims have to be adjudicated afresh by the Assessing Officer. Accordingly, the order dated 29.02.2016, 31.07.2014 & 30.03.2013 are quashed and the matter is remitted to the Assessing Officer to adjudicate the claims of the assessee. In the result, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss