Analysis of recent Supreme Court judgements

In the article, an attempt has been made by the authors to analyse law relating to admissibility of fresh claims during income tax assessment proceedings without recourse to revised return, in light of latest SC ruling in the case of Goetze India 157 Taxman 1.

1. Introduction

In view of complex and technical provisions contained in Indian Income Tax Act (Act), it may not be unreasonable to expect the taxpayers to miss on some of their rightful claims/concessions when they file their tax returns in first instance. In this connection, albeit one may revise the original return within one year from end of relevant assessment year to claim what is left earlier, but it may happen that said omission may come to assessee’s notice during assessment proceedings by which, time limit for filing revised return may have elapsed. The position in this regard, prior to SC ruling in the case of Goetze (supra), seems to have been settled that fresh claims may be made during the course of assessment proceedings without need for resort to revised return. However, SC in Goetze (supra) has held that to admit fresh claims, assessee must come through the gate-pass of revised return. It is this proposition of law, which has been debated under this article.

2. SC ruling in Goetze (Supra) – A Snapshot

Assessee filed its return for AY 1995-1996 on 30 Nov 1995. On 12 Jan 1998, assessee sought to claim a deduction by way of a letter, at assessment stage. Now it is not from the express words used in the SC ruling, whether assessment proceedings were going on under section 143(2) of the Act or under section 144 (Best Judgment Assessment). In this regard, SC came to a sweeping conclusion that no new claim may be made by an assessee without taking recourse to revised return under section 139(5) of the Act, in contradistinction to ITAT powers to admit new grounds which is far wide in scope.

3. Section 143(3) – Express Language – A Historical Perspective

Once an Assessing Officer issues a notice under section 143(2) (scrutiny assessment) to an assessee, the same normally culminates by an assessment order under section 143(3) of the Act. But, the same may end in best judgment assessment (Section 144) also, in case there is specified failure on assessee’s part (like non compliance to notices for hearing etc). As regards section 143(3) is concerned, same as it stands today from 1 October 1998, enables the AO to compute both sum payable and losses in pursuance of its order which position is different in section 144 as it has only outlet for ‘sum payable’.

4. CBDT Views – An Apparent Contradiction

It seems that CBDT in its circular accompanying Direct Tax Laws Amendment Act 1987 which has changed the entire scheme of assessment by introducing summary assessment and scrutiny assessment in place of assessment is all cases, has stated that:

“5.12 Since under the provisions of sub-section (1) of the new section 143, as assessment is not to be made now, the provisions of sub-sections (2) and (3) have also been recast and are entirely different from the old provisions. A notice under sub-section (2), which will be issued only in cases picked up for scrutiny, is now issued only to ensure that the assessee has not understated his income or has not computed excessive loss or has not underpaid the tax in any manner while furnishing his return of income. This means that under the new provisions, in an assessment order passed under section 143(3) in a scrutiny case, neither the income can be assessed at a figure lower than the returned income, nor loss can be assessed at a figure higher than the returned loss, nor a further refund can be given except what was due on the basis of the returned income, and which would have already been allowed under the provisions of section 143(1)(a)(ii).”

A Risk: It seems that aforesaid philosophy contained in aforesaid CBDT Circular may be applied in present situation also and hence assessee may be debarred from making fresh claims during assessment proceedings.

But there is an old CBDT Circular No 14 of 11 April 1955, which comes to rescue of taxpayers and states that:

“3. Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :-

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs;

(c) Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited.”

5. Constitutional Spirit and Indian Contract Law

In relation to aforesaid CBDT Circular (No. 14) which may be at one place be argued to be valid in old assessment scheme existing prior to 1987 Amendment Act, may not hold good in view of following (that is 1955 Circular is good in present scenario also):

• Article 265 of Indian Constitution which states that no tax can be collected except by express authority of the law supports the spirit behind aforesaid CBDT Circular. In this context, one may further refer to SC ruling in the case of Goodyear case AIR 1990 SC 781 wherein it has been stated that Constitution is not a mere law but machinery by which all laws are enacted;

• Further, section 72 of Indian Contract Law, which states that money given under mistake, needs to be refunded to payer of the same also supports the spirit behind aforesaid CBDT Circular.

6. Certain Precedents on the subject– SC, HC and ITAT – Pre Goetze

SC in Anchor Pressing Case 161 ITR 159: In this case, SC (through Hon’ble Justice R.S.Pathak) has observed that: “It is urged that the income-tax authorities and the High Court erred in holding that no mistake was apparent from the record merely because no claim to relief under section 84 had been made by the appellant before the Income-tax Officer during the assessment proceedings. It is contended that an obligation was imposed on the Income-tax Officer by the statute to grant such relief and it could not be refused merely because the appellant had omitted to claim the relief. While we believe the appellant is right in his contention…”

SC in Mahalkshmi Sugar Mills 160 ITR 920: In this case, it (Justice R.S.Pathak) has been held that: “…In the second place, there is a duty cast on the Income-tax Officer to apply the relevant provisions of the Indian Income-tax Act for the purpose of determining the true figure of the assessee’s taxable income and the consequential tax liability. Merely because the assessee fails to claim the benefit of a set-off, it cannot relieve the Income-tax Officer of his duty to apply section 24 (set off of loss etc) in an appropriate case..”

Delhi High Court in Bharat General ReInsurance 81 ITR 303: In this case, DHC has held that “It is true that the assessee itself had included that dividend income in its return for the year in question but there is no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year….”

J&K High Court in Snehlata (2004) 192 CTR 50: In this case, it has been held that:

“When the substantive law confers a benefit on the assessee under a statute, it cannot be taken away by the adjudicatory authority on mere technicalities. It is settled proposition of law that no tax can be levied or recovered without authority of law. Article 265 of the Constitution of India and section 114 of the State (J&K) Constitution imposes an embargo on imposition and collection of tax if the same is without authority of law…”

Bombay High Court in Central Provinces Manganese Ore 112 ITR 734: In this case, it has been held that: “The mere fact that such a deduction was not claimed before the Income-tax Officer is, in our opinion, not of much importance. If the liability arises then a claim can be made bona fide at any stage before the higher authority, who is competent to grant relief….”

Rajasthan High Court in Hiranand 148 Taxman 281: In this case, it has been observed that:

“…. It is difficult to appreciate what to say to accept this approach off the Revenue Officers only to concern with the augmenting of the revenue by all means and seldom to bother the rightful claims made of the deduction from the gross income as a result of the business loss. The ITOs are first also the citizens of the country. They are equally concerned to see and look into that whatever \ legally permissible deductions available are to be given to the assessee. This one-side approach of the Revenue officers of the IT Department only concerns with the Revenue and not to bother for the assessee’s legal rights, rightful deductions and other claims, is not befitting to their position. They are the officers of the welfare State and have duty and obligation to see that assessees are being given their legal rightful and legitimate claims of deductions and other benefits. Whatever may be reason or ground it is not unknown that the assessees have fear and are afraid of entering in the IT Department.”

Further, Delhi ITAT in Vam Organics 6 SOT 775: In this case, after analyzing conspectus of case laws surrounding the issue, it has been held that:

“Further, the Hon’ble Bombay High Court in the case of CIT vs. Smt. Archana R. Dhanwatey (1981) 24 CTR (Bom) 142 : (1982) 136 ITR 355 (Bom) held “that there was a duty on the part of the ITO to consider whether the assessee was entitled to a deduction from income from other sources, though no such specific claim was made by the assessee. The jurisdiction of the ITO is to compute the total income which could be brought to tax in accordance with law. It is obvious that the Tribunal’s observations that the ITO had been too technical are clearly justified because, if in fact and in law, the assessee was entitled to a deduction in which would have ultimately affected his or her total taxable income the assessee could not be assessed on a larger income.” Still further, the Hon’ble Delhi High Court in the case of CIT vs. Bharat General Reinsurance Co. Ltd. (1971) 81 ITR 303 (Del) observed that “it is true that the assessee itself had included that dividend income in its return for the year in question but there is no estopple in the IT Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the IT Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the Department to tax that income in that year even though legally such income did not pertain to that year.” Still further, the Hon’ble Supreme Court in the case of CIT vs. Mahalakshmi Textile MM Ltd. (1967) 66 ITR 710 (SC) held that “all questions, whether of law or facts, which relate to the assessment of the assessee may be raised before the Tribunal. If for reasons recorded by the Departmental authorities in respect of a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the Departmental authorities and the Tribunal, and indeed they would be under a duty to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him. For the reasons given above we are of the opinion that both the lower authorities were wrong in not considering the claim of the loss made by the assessee. Since the claim of loss of the assessee was not examined by the AO, we, by setting aside the orders of the CIT(A) and AO, restore the matter back to the file of AO with the direction to examine the claim of loss considering the order of the BIFR passed under s. 72 A of the Act and if all the other relevant conditions have been fulfilled by the assessee and is eligible for claim of deductions, to allow the same to the assessee. The AO shall allow reasonable opportunity of hearing to the assessee. The assessee is also directed to file all the relevant details and papers on which it wishes to rely in support of his claim before the AO. The ground of appeal of the assessee is allowed.”

7. Certain Precedents on the subject– HC and ITAT – Post Goetze

DHC in the case of Bharat Aluminium (decided on 24 May 2007) 163 Taxman 430, has inter-alia ruled that assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired. DHC while inferring above has placed reliance on All.HC ruling in the case of Dhampur Sugar Mills 90 ITR 236. Interestingly, SC ruling in the case of Goetze do not find mention in DHC ruling.

Mumbai ITAT in the case of Chicago Pneumatic India Limited 15 SOT 252 in context of allowability of new claims during the assessment proceedings without having recourse to revised return, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law) and old CBDT Circular No. 14 dated 11 April 1955 and distinguishing Goetze ruling of SC reported in 284 ITR 323 has categorically held that assessee has the right to make new claims during assessment proceedings without recourse to revised return (Refer Para 45 to Para 49 of the ruling).

Delhi ITAT in Moser Baer Further 295 ITR 148 (AT) has distinguished Goetze (supra) in context of fresh claim (viz. opting out) under section 10B of the Act. In this connection, while distinguishing Goetze (supra) ITAT has held that Goetze (supra) operates in different context and has no applicability to section 10B, which is a code in itself.

Kolkata ruling in the case of Van Oord Altanata B.V 112 TTJ 229 has interalia held that “there is no estoppel against that statute” and AO is duty bound to bring correct legal position to assessee’s notice and give effect to the same while passing assessment order, irrespective of assessee’s mistake.

8. Conclusion

In view of above discussion, it may be inferred that income tax authorities in present legal position are bound to give effect to claims made, first, in course of assessment proceedings as otherwise they may land up crossing constitutional embargo contained in Article 265. Further, same may also be supported by CIT-Appeals co-terminus power to AO, which has been judicially held to include power to admit of fresh claims at appeal stage (SC in famous case Jute Corporation 187 ITR 688).