COMMISSIONER OF INCOME TAX V. SHRI N.R.SUDHIR

ITA/202/2009

AI Insights

The case revolves around an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal (ITAT), Bangalore, which had ruled in favor of the assessee, Sri N.R. Sudhir. The ITAT had found that the assessee was entitled to a refund of the tax paid on the undisclosed income declared in his return, following the annulment of the assessment order. The Revenue challenged this decision, arguing that the assessee should not be entitled to a refund of the tax paid on the admitted income, even if the assessment order was set aside. The High Court examined the applicability of Section 240 of the Income Tax Act, particularly its proviso (b), in the context of the annulment of the assessment order and the refund of taxes paid.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 701748 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-11-2014
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX v/s SHELLY PRODUCTS AND ANOTHER, COMMISSIONER OF INCOME TAX v/s VATIKA TOWNSHIP P. LTD.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Assessment Order; Block assessment; Jurisdiction; Tax refund; Undisclosed income
• Section: 132; 133A; 158BC; 158BD; 132A; 292B; 240; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17TH DAY OF NOVEMBER 2014 PRESENT THE HON'BLE MR.JUSTICE N.KUMAR AND THE HON'BLE MR.JUSTICE B.MANOHAR ITA NO.202/2009 BETWEEN: 1. The Commissioner of Income Tax, C.R.Building, Queens Road, Bangalore. 2. The Deputy Commissioner of Income Tax, (Inv), Circle – 5 (1), C.R.Building, Queens Road, Bangalore. …Appellants (By Sri.K.V.Aravind, Advocate) AND: Sri.N.R.Sudhir, Flat No.103, Prestige Milton Garden, 15, Milton Street, Cooke Town, Bangalore. …. Respondent (By Sri.S.Parthasarathi, Advocate) 2 This ITA is filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 26.11.2008 passed in IT(SS)A No.52/Bng/2007, for the Block Assessment Period 1/4/1987 to 11/10/1996, praying that this Hon’ble Court may be pleased to formulate the substantial questions of law stated therein and allow the appeal and set aside the order passed by the ITAT, Bangalore in IT(SS)A.No.52/Bng/2007 dated 26-11-2008 and confirm the order of the Appellate Commissioner confirming the order passed by the Deputy Commissioner of Income Tax, (Inv), Circle -5(1), Bangalore, in the interest of justice and equity. This appeal coming on for Hearing this day, N.KUMAR J., delivered the following: J U D G M E N T The Revenue has preferred this appeal against the order dated 26-11-2008 passed by the Income Tax Appellate Tribunal, Bangalore, ‘B’ Bench, Bangalore (hereinafter referred to as ‘the Tribunal’ for short) in IT(SS)A.No.52/(Bang)/2007, whereby the Tribunal held that the assessee is entitled for refund of the tax paid in pursuance of the declaration filed under Section 158BC of 3 the Income Tax Act, 1961 (‘the Act’ for brevity) by virtue of provision of Section 240 of the Act. 2. The brief facts of the case are: A survey under Section 133A of the Act was carried out in the premises of the assessee on 11-10-1996. A notice under Section 158BD was issued to the assessee on 8-2-2000. The assessee filed return of income on 5-2-2001 disclosing the income of Rs.83,00,000/- for the block period 1-4-1986 to 11-10-1996. Thereafter it was ascertained that Rs.23,10,973/- as income of the assessee on account of film Indian. Further, Rs.59,87,218/- was considered as unexplained cash credits. The assessment was concluded vide order dated 23-2-2001. The assessee submitted that he had already paid advance tax of Rs.14,38,570/- for the period and the balance was to be collected from the list of debtors mentioned therein. Considering the challans, credit of Rs.14,50,000/- was given in the assessment order and balance payable was calculated at Rs.47,25,200/-. Aggrieved by the said order, the assessee filed an appeal before the Commissioner of 4 Income Tax (Appeals) (hereinafter referred to as ‘the First Appellate Authority’ for short), which came to be dismissed on the ground of want of jurisdiction. Thereafter, an appeal was preferred to the Tribunal. The Tribunal held that the assessment is invalid as the assessment is pursuant to invalid notice issued. The defect is not curable under the provisions of Section 292B of the Act. Insofar as the assessment of undisclosed income is concerned, the Tribunal was of the view that no material was found during search conducted at the premises of Mr.K.R.Prabhu which relates to the assessee. An order under Section 158BC can be passed in accordance with the provisions of Chapter XIV B where a search is initiated under Section 132 or books of accounts, other documents or assets or requisitioned under Section 132A. Similarly under Section 158BD, where the Assessing Officer is satisfied that undisclosed income belongs to a person other than the person with respect to whom search was made under Section 132, the books of accounts, other documents or assets seized are to be handed over to the Assessing Officer 5 having jurisdiction over such other persons and the Assessing Officer shall proceed against such other person as per provision of Chapter XIV B. In both the cases, no order under Section 158BC can be passed unless a search is conducted under Section 132 in respect of the assessee or the material is found relating to assessee during the course of search in the case of any other person. A survey under Section 133A cannot be equated with search under Section 132. No material was found during the search at the premises of K.R. Prabhu which relates to the assessee, which can form basis for assessment of undisclosed income under Chapter XIV B. Therefore, the order of assessment was set aside. It was also held that the addition derived from the income of film “Indian” cannot be formed as undisclosed income. 3. In pursuance of setting aside the said order of assessment, the refund of tax paid in a sum of Rs.14,50,000/- was put forth by the assessee. The assessee contended that the return filed by him was not voluntary, but under duress to buy peace with the 6 department. The assessment was cancelled and not annulled and hence proviso (b) of Section 240 referred above is not applicable. The Assessing Officer observed that Section 240 is not applicable. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. It is in this background the Tribunal held the assessment was cancelled on preliminary issue as well as on merit. Even on merits, the Tribunal has decided the case in favour of the assessee. Section 240 of the Act provides that – “Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the AO shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf.” Proviso (a) to Section 240 of the Act has no application to the facts of this case because after setting aside the order of assessment, no direction is given for making a fresh assessment. But the Tribunal held that the assessee is entitled for refund by virtue of provision (b) of Section 240 and directed refund of the amount. Aggrieved by the said order, the present appeal is filed. 7 4. The appeal is admitted to consider the following substantial question of law: Whether the Tribunal was correct in holding that the assessee would be entitled to claim the entire refund of taxes paid on the undisclosed income declared in the return of income filed by the assessee of Rs.83 lakhs and the admitted tax paid along with the return of Rs.14,50,000/- and the balance after assessment, since the assessment order was set aside by ignoring the principle that the amount admitted in the return of income cannot be refunded. 5. Learned counsel for the Revenue assailing the impugned order contends that in pursuance of the notice issued under Section 158BC, calling upon the assessee to file a return of income, he had an option to file NIL return instead, he chose to file a return showing the income of Rs.83,00,000/-. Therefore, even if the assessment order is cancelled in appeal by the Tribunal, the admitted liability in the return and the tax paid thereon would not become liable to be refunded in pursuance of such an order. It is only in respect of the disputed tax liability, if 8 it is set aside in appeal, the same requires to be refunded by virtue of proviso (b) to Section 240 of the Act. Learned counsel in support of his contention relied upon a judgment of the Apex Court in the case of COMMISSIONER OF INCOME TAX v/s SHELLY PRODUCTS AND ANOTHER reported in (2003) 261 367(SC) and contends that the impugned order requires to be set aside. 6. Per contra, the learned counsel for the assessee submitted that Section 240(b) applies to a case where the return was filed voluntarily under Section 139 of the Act. In the instant case, though the return was filed in the prescribed form, it is filed under duress in pursuance of the notice issued us. 158BC of the Act. When the Appellate Authority held the very initiation of proceedings under Section 158BC and notice issued in pursuance of the same is void, without jurisdiction, any return filed and the order passed thereon is vitiated. Therefore, as there is no assessment order, there is no liability to pay tax. Accordingly, the assessee is entitled to refund of tax. 9 7. Section 4 of the Act is the charging Section, which reads as under: Where any Central Act enacts that the income-tax shall be charged for any assessment year at any rate or rates, income- tax at the rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income) of, this Act] in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of the Act income tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. The said provision makes it clear that tax shall be charged in accordance with, and subject to the provisions in respect of the total income of the previous year of every person. Sub-Section (2) provides for deduction of tax at source or paid in advance, 10 where it is so deductable or payable under any provision of this Act. 8. Section 139 of the Act makes it obligatory that every person shall furnish a return of his income in the prescribed form within the time stipulated therein. Section 139(5) of the Act provides for filing of a revised return again within the prescribed time. Chapter XIV B deals with the special procedure for assessment of search cases. If in a search conducted under Section 132 or in a proceeding under Section 132A the undisclosed income is unearthed, Section 158BC of the Act empowers the Assessing Officer to call upon the assessee to furnish a return within the prescribed time setting forth his total income including undisclosed income for the block period. The condition precedent for issue of search notice under Section 158BC is that the condition stipulated in Section 132 or 132A should exists. If such condition exists and the proceedings are initiated validly under Chapter XIV B and a return is filed in pursuance of the notice issued under Section 158BC, then, the 11 said Chapter provides for passing of an assessment order on the basis of the said assessment and also taking into consideration the income that is not disclosed even in that return. If, after passing of an assessment under the aforesaid Chapter the assessee challenges the entire proceedings on the ground that the proceeding initiated are without jurisdiction and the assessment order passed is unsustainable and upholding such contention, the assessment order is set aside, then, there is no liability on the part of the assessee to pay any tax in pursuance of such order. The return filed pursuant to the notice issued under Section 158BC cannot be equated with the return filed under Section 139(1) or 139(5) of the Act. The returns filed under Section 139(1) or 139(5) are voluntary in nature whereas the returns filed under Section 158BC of the Act is in pursuance of the search and seizure where he is compelled to file a return in the prescribed form. Merely because instead of filing the NIL returns, the assessee had filed a return showing the income that is undisclosed income, he is not estopped from challenging the very initiation of 12 the proceedings as well as the assessment order passed in those proceedings. If the order passed in those proceedings are set aside or cancelled, then there is no liability to pay any tax. Proviso (b) to Section 240 of the Act has no application to an assessment order passed under Chapter XIV B. it is not a case where the assessee has admitted the liability to pay tax, filed returns, and then the Assessing Officer has made certain additions which are challenged by the assessee and such assessment order is annulled in appeal, it is a case where the very initiation of the proceedings is challenged on the ground of want of jurisdiction and therefore, filing of the returns, passing of the order is without jurisdiction, if the initiation is without jurisdiction. In this context the Apex Court in the case of SHELLY PRODUCTS (Supra) has held as under: 24. We cannot lose sight of the fact that the failure or inability of the revenue to frame a fresh assessment should not place the assessee in a more disadvantageous position than in what he would have been if a fresh assessment was made. In a case where an assessee chooses to deposit by way of abundant caution 13 advance tax or self- assessment tax which is in excess of his liability on the basis of return furnished or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of assessment proceeding. He can certainly make such a claim also before the concerned authority calculating the refund. Similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of income-tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the concerned authority in a case when refund is due and payable, and the authority concerned, on being satisfied, shall grant appropriate relief. In cases governed by section 240 of the Act, an obligation is cast upon the revenue to refund the amount to the assessee without his having to make any claim in that behalf. In appropriate cases therefore, it is open to the assessee to bring facts to the notice of the concerned authority on the basis of the return furnished, which may have a bearing on the quantum of the refund, such as those the assessee could have urged under section 237 of the Act. The concerned authority, for the limited purpose of calculating the amount to be refunded under section 240 of the Act, may take all such facts into consideration and calculate the 14 amount to be refunded. So viewed, an assessee will not be placed in a more disadvantages position than what he would have been, had an assessment been made in accordance with law. 25. It was contended before us that proviso to section 240 was inserted by an amendment which came into effect from 1st April, 1989. Proviso (b) is applicable to the facts of the case under consideration. Section 240 reads as under :- \"240. Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf : Provided that where, by the order of aforesaid, - (a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment ; (b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returnedby the assessee.\" 15 26. It was submitted that after April 1, 1989, in case the assessment is annulled the assessee is entitled to refund only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee. But before the amendment came into effect the position in law was quite different and that is why the legislature thought it proper to amend the section and insert the proviso. On the other hand learned counsel for the revenue submitted that the proviso is merely declaratory and does not change the legal position as it existed before the amendment. It was submitted that this Court in Commissioner of Income-Tax vs. Chittoor Electric Supply Corporation and another : (supra) has held that proviso (a) to section 240 is declaratory and, therefore, proviso (b) should also be held to be declaratory. In our view that is not the correct position in law. Where the proviso consists of two parts, one part may be declaratory but the other part may not be so. Therefore, merely because one part of the proviso has been held to be declaratory it does not follow that the second part of the proviso is also declaratory. However, the view that we have taken supports the stand of the revenue that proviso (b) to section 240 is also declaratory. We have held that even under the unamended section 240 of the Act, the assessee was only entitled to the refund of tax paid in excess of the tax chargeable on the total income returned by the assessee. We have held so without taking the aid of the 16 amended provision. It, therefore, follows that proviso (b) to section 240 is also declaratory. It seeks to clarify the law so as to remove doubts leading to the courts giving conflicting decisions, and in several cases directing the revenue to refund the entire amount of income-tax paid by the assessee where the revenue was not in a position to frame a fresh assessment. Being clarificatory in nature it must be held to be retrospective, in the facts and circumstances of the case. It is well settled that the legislature may pass a declaratory Act to set aside what the legislature deems to have been a judicial error in the interpretation of statute. It only seeks to clear a meaning of a provision of the principal Act and make explicit that which was already implicit. 9. The constitutional bench of the Apex Court in the case of COMMISSIONER OF INCOME TAX v/s VATIKA TOWNSHIP P. LTD. reported in (2014) 367 ITR 466 (SC) at paragraph 28 has held as under: 28. From the above, it becomes manifest that Chapter XIVB comprehensively takes care of all the aspects relating to the block assessment relating to undisclosed income, which includes Section 156BA(2) as the charging section and even the rate at which such income is to be taxed is mentioned in Section 113 of the Act. No doubt, Section 4 of the Act is also a charging 17 section which is made applicable on 'total income of previous year'. As per Section 2 (45), 'total income' means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 5 of the Act enumerates the scope of total income and prescribes, inter alia, that it would include all income which is received or is deemed to receive in India in any previous year by or on behalf of a person who is a Resident. No doubt, undisclosed income referred to in Chapter XIVB is also an income which was received but not disclosed, therefore, in the first blush, argument of the Department that undisclosed income referred to in Chapter XIVB is also a part of total income and consequently Section 4 becomes the charging section in respect thereof as well. However, a little closer scrutiny leads us to conclude that that is not the position as per the scheme of Chapter XIVB. In the first place, income referred to in Section 5 talks of total income of any 'previous year'. As per Section 2 (34) of the Act, 'previous year' means previous year as defined in Section 3. Section 3 lays down that previous year means 'the financial year immediately preceding the assessment year'. Undisclosed income referred to in Chapter XIVB is not relateable to the previous year. On the contrary, it is for the block period which may be 6 years or 10 years, as the case may be. Consequently, as already mentioned, while analyzing the scheme of Chapter XIVB, such Chapter is a 18 complete code in respect of assessments of ' undisclosed income'. Not only it defines what is undisclosed income, it also lays down the block period for which undisclosed income can be taxed. Further, it also lays down the procedure for taxing that income. It is very pertinent to note at this stage that for this purpose, specific provision in the form of Section 158BA(2) is inserted making it a charging section. Thus, a diagnostic of Chapter XIVB of the Act leads to irresistible conclusion that it contains all the provisions starting from charging section till the completion of assessment, by prescribing special procedure in relation thereto, making it a complete Code by itself. Looking it from this angle, the character and nature of 'undisclosed income' referred to in Chapter XIVB becomes quite distinct from ' total income ' referred to in Section 5. It is of some significance to observe that when a separate charging section is introduced specifically, to assess the undisclosed income, notwithstanding a provision in the nature of Section 4 already on the statute book, this move of the legislature has to be assigned some reason, otherwise, there was no necessity to make a provision in the form of Section 158BA(2). It could only be that for assessing undisclosed income, charging provision is Section 158BA(2) alone. 19 What follows from the said judgment is, Chapter XIV B is a complete code in respect of assessments of ‘undisclosed income’. Section 158BA(2) is the charging Section in respect of the undisclosed income. Section 2(45) defines ‘total income’ to mean the amount of income referred to in Section 5 computed in the manner laid down in the Act. Total income does not include the undisclosed income. Section 240(b) provides – where the order of assessment is annulled, refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee. When the undisclosed income is not included in the total income and the assessment order passed setting aside the tax levied on undisclosed income, Section 240(b) is not attracted at all. Therefore, when once the order of assessment passed under Chapter XIV B is annulled, any tax paid pursuant to the said order is liable to be refunded in terms of the main Section 240, as the word ‘undisclosed income’ is conspicuously missing in proviso (b) to Section 240 of the Act. 20 10. The CBDT Circular dated 23-01-1990 at paragraph 13.2 reads as under: \"13.2 Further, where the assessment had been annulled in appeal, say for want of jurisdiction or for any other technical reason, and such annulment became final, the judicial pronouncement did not permit retention of even the tax due on the basis of the returned income. Several High Courts had held that in such a case even the tax paid by way of tax deducted at source or advance tax and the tax which was due on the basis of the returned income had to be refunded to the assessee. Equity demanded that even where an assessment was annulled for any reason, the liability of the assessee, at least to the extent of tax payable on the basis of the income declared in the return, should remain. To overcome this difficulty and to make the position clear, the proviso to section 240, inserted by the Amending Act, 1987, provides that where the assessment is annulled, the refund shall become due only in respect of the amount, if any, paid in excess of the tax chargeable on the total income returned by the assessee.\" (emphasis, italicised in print supplied) 21 The aforesaid circular makes it very clear that where the assessment is annulled, the refund shall become due only in respect of the amount, if any, paid in excess of the tax chargeable on the total income return by the assessee. Therefore, it necessarily follows that there should be return filed by the assessee showing his total income and paying tax. Thereafter, if the Assessing Officer were to make any addition and pass an assessment order and if that assessment is annulled, then, what is annulled is not the entire liability to pay tax. What is annulled is only additional tax foisted on the assessee by virtue of the assessment order in which event the tax refundable is only additional tax paid in pursuance of the assessment order and not the tax paid as per the returns. The returns filed was in pursuance of the notice issued under Section 158BC and it is not voluntary act. Whether the assessee files a NIL return or files a return showing a particular undisclosed income and pays tax, if the entire proceedings initiated is found to be without jurisdiction, the return filed becomes without jurisdiction and the order passed 22 thereon also becomes without jurisdiction, in which event there is no liability to pay tax at all. Merely because the return was filed in pursuance of the said notice, it cannot be said that the assessee has filed a return showing his total income. The effect of setting aside the assessment order passed under Chapter XIV B is that there is no liability to pay tax insofar as the assessee is concerned. If any tax is collected in pursuance of such order, the entire tax becomes liable to be refunded. That is what the Tribunal has exactly held. 11. In that view of the matter, we do not see any merit in this appeal. Accordingly, the same is dismissed. Sd/- JUDGE Sd/- JUDGE mpk/-* "