Analysis of recent Supreme Court judgements

The Hon’ble Supreme court of India, in its recent judgment in the case of CIT vs Alagendran, has dealt with the issue of time limit available to Commissioner of Income Tax (or ‘CIT’) for passing order under section 263 of the Act, when a reassessment order had already been passed by the Assessing Officer (‘AO’). There was controversy prevailing on the issue and the same has been now settled by the Hon’ble Supreme Court of India.

1. Introduction

In the instant case, assessment of assessee company for assessment years 1994-1995 to 1996-1997 was completed by the AO on 27 February 1997, 12 May 1997 and 30 March 1998 respectively. Thereafter, on limited three issues, assessments were reopened and reassessment order thereupon was passed on 28 March 2002. Further, CIT exercising the jurisdiction under section 263, passed an order on an issue (i.e. lease equalization fund), which was only dealt in original assessment orders, on 29 March 2004, for all the subject assessment years. Income Tax Appellate Tribunal (‘ITAT’) allowed the appeal of the assessee company and held that subject orders passed by CIT are barred by limitation. On appeal by revenue, High Court upheld the order of ITAT. In this way matter landed up in Supreme Court on departmental appeal.

2. Issue posited for consideration of Hon’ble Supreme Court

Whether for the purpose of computing the period of limitation envisaged under section 263 of the Act, the date of original assessment or that of the reassessment, is to be taken into consideration?

3. Underlying Legal Position

Section 263 of the Act gives powers to CIT for revising the orders of subordinate authorities which are erroneous and are prejudicial to the interest of revenue. The power to revise the order under section 263 of the Act is further circumscribed with the limitation period of two years, from the end of the year in which order sought to be revised is passed.

4. Contention of Department before Hon’ble Supreme Court

Department contended that limitation for passing order under section 263 in the facts of instant case, must begin from the date of reassessment order and not the original order. Department also contended that once reassessment order is passed, original assessment stands merged in reassessment order albeit the issues taken under reassessment are different from the issues sought to be plugged under section 263 of the Act

5. Contention of Assessee before Hon’ble Supreme Court

The issue sought to be revised under section 263 of the Act relating to ‘lease equalization fund’ remained foreign to reassessment order, hence the limitation for passing order under section 263 needs to be reckoned from the date of original assessment, where the issue of ‘lease equalization fund’ was only dealt with. There can be no application of doctrine of merger as intended by the department, in the facts of instant case.

6. Ruling of Hon’ble Supreme Court

The Hon’ble Supreme Court held that where the issue sought to be revised under section 263 of the Act was not the subject of the reassessment proceedings, the period of limitation under section 263 will begin from the date of original assessment and not from the date of reassessment order.

In so holding, the Hon’ble Supreme Court placed reliance on the previous ruling of Hon’ble Supreme Court in the case of CIT vs Sun Engineering 198 ITR 297: This was pressed into service, in the instant case to deduce that on initiation of reassessment proceedings although the previous under assessment is set aside and whole proceedings start afresh but the same does not mean that even when the subject matter of original assessment and reassessment is different, entire proceedings would be deemed to have been reopened.

Further, the Hon’ble Supreme Court approved the Madras High Court ruling in the case of CWT vs A.K.Thanga Pillai 252 ITR 260 wherein also the Madras High Court took the view that in case the revenue fails or neglects to revise the original order of assessment within the period of limitation allowed by law, it cannot in the guise of revising the order of reassessment made several years after the original assessment, proceed to revise the items which had been accepted in the original order of assessment. Ruling of Calcutta High Court in the case of CIT vs Kanubhai Engineers (P) Limited 241 ITR 665 wherein it was held that on reassessment, original assessment do not become non est and keeps the legal sanctity, had also got the blessings of Supreme Court in the instant case.

Further, the Hon’ble Supreme Court held that as the issue relating to ‘lease equalization fund’ was not the subject matter of reassessment proceedings, doctrine of merger in such a situation cannot be said to have any application. It was further clarified by the Hon’ble Supreme Court that present case is not the one where subject matter of reassessment and subject matter of original assessment are overlapping.

It may be interesting to note that, few months back, Hon’ble Justice S.B.Sinha who has pronounced the instant ruling in the case of Alagendran, has in the case of CIT vs Ralson Industries 158 Taxman 160 also observed (in context of section 263 of the Act) that there is no application of doctrine of merger between original order and rectification order qua section 263 of the Act.

Further, it may be construed from the instant ruling of Hon’ble Supreme Court that in case the issues on which the revision power is sought to be exercised by CIT under section 263 of the Act were the subject matter of reassessment proceedings, the limitation to revise the order under section 263 shall commence from the date of reassessment order, which view is very recently endorsed by Punjab and Haryana High Court also in the case of CWT vs Rakesh Kumar Jairath 162 Taxman 285.

7. Conclusion

Keeping in mind the principle that limitation period is meant to protect the assessee and ensure that stale issues do not get reactivated beyond a particular stage and that lapse of time induce repose in and set at rest judicial and quasi-judicial controversies (Refer Supreme Court in Parshuram Pottery vs ITO 106 ITR 1), the subject ruling of Supreme Court may be seen as blowing the wind of certainty and bringing the issue to a fair conclusion, by holding that the period of limitation under section 263 of the Act will begin from the date of original assessment order and not from the date of reassessment order, if the issue was only dealt under original assessment proceedings and not under reassessment proceedings. Further, Punjab and Haryana High Court in the case of CWT vs Rakesh Kumar Jairath (supra) independently speaking has also echoed the same line of thought as is aired by Supreme Court in the subject ruling.