TAXAP/1536/2005 1/33 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 1514 TO 1797 OF 2006 WITH TAX APPEAL No. 573 TO 618 AND 1216 TO 1233 OF 2007 WITH TAX APPEAL No. 182 & 204 OF 2002 WITH TAX APPEAL No. 27 TO 30 OF 2004 AND TAX APPEAL No.1536 TO 1635 OF 2005 AND SPECIAL CIVIL APPLICATION No. 1073 OF 2008 WITH SPECIAL CIVIL APPLICATION No. 1236 TO 1824 OF 2008 For Approval and Signature: HONOURABLE THE CHIEF JUSTICE Y.R.MEENA HONOURABLE MR.JUSTICE J.C.UPADHYAYA ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ====================================== COMMISSIONER OF INCOME TAX-II - Appellant(s) Versus PUNITABEN KARSANBHAI PATEL - Opponent(s) TAXAP/1536/2005 2/33 JUDGMENT ====================================== Appearance : MRS MAUNA M BHATT for Appellant(s) : 1,MR MANISH R BHATT for Appellant(s) : 1, MR S.N. SOPARKAR, SR. ADVOCATE WITH MRS SWATI SOPARKAR for Opponent(s) : 1, ====================================== CORAM : HONOURABLE THE CHIEF JUSTICE Y.R.MEENA and HONOURABLE MR.JUSTICE J.C.UPADHYAYA Date : /06/2008 CAV JUDGMENT PUNITABEN K. PATEL OSDFT AND OTHERS 284 CASES TAX APPEAL NOS. 1514 TO 1797 OF 2006 MANJULABEN PRAMODBHAI PATEL AND OTHERS 64 CASES TAX APPEAL NOS. 573 TO 618 AND 1216 TO 1233 OF 2007 JANAK PRAMODBHAI PATEL AND OTHERS 6 CASES TAX APPEAL NOS. 182 & 204 OF 2002 WITH TAX APPEAL NOS.27 OF 30 OF 2004 Present Tax Appeals are of 354 cases of 100 Assessees. Special Bench of ITAT passed combined order dt. 07.07.2006. In these appeals, CIT revised assessment u/S.263 of I.T. Act of the order passed by A.O. Tribunal allowed Assessee’s appeal and reversed the order passed by CIT. Revenue preferred Tax Appeal by raising following questions of law. A. “Whether, when the order under the Kar Vivad Samadhan Scheme TAXAP/1536/2005 3/33 JUDGMENT (KVSS) did not decide any judicial issue, the Tribunal was right in law and on facts in holding that when the tax arrears of the main trust were settled under KVSS, the assessee beneficiary Trust could not be assessed in respect of the share income from the main trust?” B. “Whether the Appellate Tribunal is right in law and on facts in holding that when the main Trust settled its arrears under the KVSS, the share income cannot again be assessed in the hands of the assessee beneficiary?” C. “Whether the Appellate Tribunal is right in law and on facts in holding that the Department had exercised the option to `assess’ the main trust under the KVSS and, therefore, the same income would not be again taxable in the hands of the assessee beneficiary on distribution?” D. “Whether, when the main Trust avails the benefit under the KVSS, it tantamounts to `assessment’ under the Act?” E. “Whether the Appellate Tribunal is right in law and on facts in canceling the order passed by the CIT u/S.263 of the Act, when declaration was filed by the main Trust and the assessee Trust was given benefit thereof by the Assessing Officer?” F. “Whether the Appellate Tribunal is right in law and on facts in impliedly extending the benefit of KVSS to the assessee Trust, who was a non-declarant under the KVSS?” TAXAP/1536/2005 4/33 JUDGMENT G. “Whether the Appellate Tribunal is right in law and on facts in holding that the assessee was entitled to refund of all the amount of tax paid on self assessment as well as advance tax or tax deducted at source or pre-paid tax with reference to the returned income, despite the judgment of this Court in the case of Saurashtra Cement reported in 194 ITR 659?” Tribunal noted that facts and circumstances of these 284 cases were exactly identical and the revision orders have been the same in all these appeals were clubbed together for joint hearing and analogous disposal. Identical questions were raised by revenue in all these 284 appeals. Common order is passed for all these 284 Tax Appeals. The controversy arising in these appeals is whether income of Main Trust assessed on a substantive basis and liabilities finally settled under Kar Vivad Samadhan Scheme, 1998 (hereinafter referred to as KVSS) could again be assessed in the hands of corresponding beneficiaries which are respondents in these Tax Appeals here assessed on a protective basis. The facts of one case, i.e. Punitaben K. Patel Oral Spec. Def. Family Trust for Asst. Year: 1983-84 was discussed by ITAT on which decision was taken by ITAT. The said trust was beneficiary in S.K. Patel Family Trust (Main Trust). Beneficiary trust filed its Return of Income showing income from Main Trust. Main Trust allocated income among TAXAP/1536/2005 5/33 JUDGMENT beneficiaries and beneficiaries paid taxes on its returned income. Originally Income-tax Officer in the order dt. 10-03-83 accepted that Main Trust is a specific trust and income should be assessed in the hands of beneficiary trust. CIT revised assessment u/S.263 of IT Act in the case of main trust on 18-3-85 holding that income pertaining to beneficiary trusts should be taxed at maximum marginal tax. In the assessment order u/S.143(3) of I.T. Act dt. 17-3-86, beneficiary trusts were assessed on a protective basis. CIT(A) passed order against which, appeals were preferred before Tribunal. Assessee as well as revenue filed cross appeals before Tribunal. Main Trust has succeeded its appeal before Tribunal and Tribunal vide order dt. 24-11-94 held that Main Trust is a specific trust and reversed the revision order passed by CIT u/s.263 of I.T. Act. Revenue filed reference which was allowed by tribunal vide order dt. 30- 4-95. This reference was settled under KVSS. The necessary payment was made under KVSS. The certificate for full and final settlement of tax arrears u/S.90(2) rws 91 of the Finance (No.2) Act, 1998 in respect of KVSS was issued in Form No.4 by CIT on 2-7-99. Hence, the stand of the department was accepted by Main Trust. Income was finally assessed in the case of Main Trust. ITAT while disposing of cross appeals of the beneficiary trusts passed order dt. 03.04.00 and found that beneficiaries were taxed on a protective basis. Tribunal directed not to tax again. Income-tax Officer passed order u/s.154(1)/155(2) of I.T. Act TAXAP/1536/2005 6/33 JUDGMENT dt.22.8.00 and excluded income which was assessed in the case of Main Trust and settled under KVSS. The resultant refund was issued with interest. This order dt. 22.8.00 was revised u/s.263 of I.T. Act by CIT vide order dt.12.03.03. Special Bench of ITAT passed order on 7-7-2006 and reversed the order u/s.263. Revenue preferred Tax Appeals before this court. Mr. Manish Bhatt argued that the income should be assessed in the hands of beneficiaries though Main Trust had settled the dispute under KVSS and paid due taxes. He submitted that the taxes paid by the beneficiaries on its returned income cannot be refunded. He relied on the decision of this court in the case of CIT V/s. Saurashtra Cement and Chemical Ind. Ltd. v/s. I.T.O. (194 ITR 659). He further submitted that beneficiaries should be assessed though Main Trust paid taxes under KVSS for which he relied on the decision of this court in the case of Shankerlal Nebhumal Uttamchandani v/s. CIT (251 ITR 876). He submitted that the income consisting of share of profit from Main Trust to beneficiaries and interest from Main Trust to the beneficiaries. He conceded that as far as share income is concerned, it cannot be assessed twice i.e. in the case of Main Trust as well as in the case of beneficiaries. He submitted that the beneficiaries being the right persons, they should be assessed. For this he relied on the decision of Apex Court in the case of ITO V/s. C.H. Atchaiah (218 ITR 239). He submitted that Tribunal has TAXAP/1536/2005 7/33 JUDGMENT wrongly dealt with interest on refund, which was not subject matter of discussion of CIT in the revision order. He has also pointed out that in this group case, this court has passed order (Coram: Mr. Justice A.R. Dave and Mr. Justice D.A. Mehta) dt. 30.07.01. He also submitted that revenue has not challenged this order before Supreme Court. In the proceedings for different Asst. years, another Division Bench referred the matter before Larger Bench. Revenue wants to rely on the material not earlier produced before Tribunal. Larger Bench observed that it would be appropriate for the petitioner to raise the contention before Tribunal and Tribunal shall consider the same after hearing the concerned parties, take a decision thereon in accordance with law. Mr. Bhatt relied on the decision of Apex Court in the case of Shelly Products (261 ITR 367). The refund of the taxes paid on the returned income should not be refunded. Mr. Soparkar on behalf of the respondents supported the order of ITAT. He has pointed out that controversy was covered by the decision of this court dt.30.07.01 which has attained finality. Revenue cannot contest the issue again and again when the issue was decided by this court. He has submitted that various decisions cited by the revenue were already raised in the earlier proceedings of the decision of this court dt.30.07.01. He submitted that once the assessment of the Main Trust has become final where substantive assessment is made, protective assessment in the hands of beneficiaries would go, the same income TAXAP/1536/2005 8/33 JUDGMENT cannot be taxed twice. He submitted that it was department case that income belongs to Main Trust which was accepted by Main Trust and due taxes were paid under KVSS. On the same income when beneficiaries were assessed on a protective basis, the same income cannot be assessed again. He referred to the circulars issued by the board under KVSS and also on protective assessment. He submitted that the decisions relied upon by the revenue were not applicable to the facts of the case. He has also submitted that CIT passed order which was in contravention to the directions of ITAT vide order dt.03.04.00. The order of Tribunal dt.03.04.00 was not challenged before this court and hence became final. If CIT is again directing to assess income in the case of beneficiaries, it is contrary to the decision of Tribunal. He has also challenged the jurisdiction of the CIT to revise the assessment on the ground that though this was only view, it is, at least, one of the two views possible and hence order passed by A.O. dt.22.08.00 cannot be revised by CIT u/s.263 of the IT Act. He also relied on the decisions of Apex Court in the case of Malabar Industries Co. Ltd. V/s. CIT 243 ITR 83, G.M. Mittal 263 ITR 255 and this court in the case of CIT V/s. Mehsana Dist. Co-op. Milk Producers Union Ltd. 263 ITR 645. On the issue of protective and substantive assessment, he relied on the decision of this court in the case of Banyan and Berry v/s. CIT 222 ITR 831. We have heard the contentions and perused the facts carefully. We TAXAP/1536/2005 9/33 JUDGMENT find that Main Trust had settled the dispute under KVSS. This is the dispute which department has originated and is agitating before higher appellate authorities. It was department’s case that income belongs to Main Trust and not to the beneficiaries that is the reason why incomes were assessed substantively in the case of Main Trust and protectively assessed in the case of beneficiaries. When Main Trust settled the disputes under KVSS and paid due taxes, that is the end of the dispute between department and Main Trust as well as Assessees on the taxability of incomes. When in the case of Main Trust where substantive assessments were made, the protective assessments made in other cases viz. beneficiaries of Main Trust should be deleted. This controversy was already decided by this court vide order dt. 30.07.01 (Coram: Mr. Justice A.R. Dave and Mr. Justice D.A. Mehta), it was held as under: “In our opinion, no question of law, much less a substantial question of law, arises in these appeals. It is a settled principle that one particular income cannot be taxed in the hands of different assessees. In the instant case, as the income has been substantively assessed in the hands of the main trust, the same income cannot be again assessed in the hands of the beneficiary trusts. For the sake of abundant caution, it has been directed by the Tribunal that the revenue should look into the facts and see whether the income TAXAP/1536/2005 10/33 JUDGMENT which has been assessed on protective basis in the hands of the respondent trusts was, in fact, assessed in the hands of the main trust.” This order was not challenged before Supreme Court and has become final. Following the same, we agree with the decision of Tribunal that income should not be taxed again in the case of beneficiaries where protective assessments were made on the same income. On this reasoning, Tax Appeals filed by the revenue were dismissed at the admission stage. This court has held in case of CIT Vs Nirma Industries Ltd – TA No.632 of 2005 regarding implication of dismissal of Tax Appeals which is binding on the lower authorities. Hon’ble Supreme Court dismissed S.L.P. No.557 of 2007 vide order dt.5-4.2007. The issue was also amply clear by the question and answer which was issued by CBDT while explaining the provisions of KVSS. Question and Answer No.32 given in circular reads as under: Question No.32 Where certain income has been charged to tax in the hands of two different persons or where it has been charged to tax in the case of same person in two different assessment years, one on substantive basis and the other on the protective basis, will the declarant or the TAXAP/1536/2005 11/33 JUDGMENT other person get advantage in respect of additions made both substantively and protectively. Answer The assessees are advised to make declaration in cases or for assessment years where the additions are made on substantive basis. The protective demand is not subject to recovery unless it is finally upheld. Once the declaration in a substantive case or year is accepted, the tax arrear in protective case/year would no longer be valid and will be rectified by suitable orders in the normal course. This position is not peculiar to Samadhan Scheme. In view of this, we find, without any iota of doubt, that in the case of beneficiaries where protective assessment is made for the same Asst. Year, the assessment in the case of beneficiaries should be modified and the income should be excluded from the beneficiaries. We also find that circular No.71 dt.20.12.1971 also clarified the position regarding protective and substantive assessments. Operative part of the circular reads as under: “Order u/s.119(2)(b) of the I.T. Act, 1961. - The Board’s authorization for taking action u/s.154 be action u/s.154 beyond the time limit fixed u/s.154(7) in cases of protective assessments requiring to be cancelled. Where the same income was assessed, as a protective measure, in the hands of more than one assessee or as TAXAP/1536/2005 12/33 JUDGMENT the income of more than one assessment year, and one or more of these protective assessments needs to be cancelled as a result of some of the relevant assessments having become final and conclusive, it has been the practice of the Income-tax Department to cancel the redundant assessment u/s.154 of the Income-tax Act, 1961, treating these as involving mistakes apparent from the records.” Hence, we find that controversy is covered by these two circulars. Circulars issued by CBDT are binding on department. This issue was also decided by this court in the case of Banyan and Berry v/s. CIT 222 ITR 831 wherein it has been held that once substantive assessment is final, protective assessment is nullity. Mr. Bhatt has conceded that as regards the share income, the same income cannot be again assessed in the case of beneficiaries. As regards refund of taxes paid on returned income, we find that facts of the present case are different than the two decisions in case of this court in the case of CIT V/s Saurashtra Cement and Chemical Ind. Ltd. V/s I.T.O. 194 ITR 659 and Hon’ble Supreme Court in the case of Shelly Products 261 ITR 367. This is not the case of annulment of the TAXAP/1536/2005 13/33 JUDGMENT assessment. Hon’ble Supreme Court in the case of Shelly Products held that refund of taxes paid on returned income cannot be given, if assessment order is held void, ab initio. In the present case, there is no assessment order which is held void, ab initio. Hon’ble Supreme Court at page 382 also specified some instances, wherein refund can be granted on tax paid on returned income. This is neither a case of annulment nor on account of failure on the part of revenue to pass assessment. In this case, refund arose on account of the assessments and further appellate proceedings. Hence, the refund should be granted, may be on account of taxes on the returned income, if the refund arose on exclusion of income from the beneficiaries case, where incomes were substantively assessed in the case of Main Trust. Mr. Bhatt referred to the decisions of Supreme Court in the case of ITO V/s. C.H. Atchaiah 218 ITR 239 S.P. Jaiswal V/s. CIT 224 ITR 619. We find that facts of these two decisions are not applicable to the present case. In the present case, issue is of protective assessments and substantive assessments. Protective assessments cannot be continued in the appellate proceedings once substantive assessments become final. In the present case, revenue assessed income in the case of Main Trust on a substantive basis, which was accepted. TAXAP/1536/2005 14/33 JUDGMENT The finding of CIT is contrary to the decision of Tribunal dated 03- 04-2000 which is not permitted. CIT being subordinate authority to the Tribunal cannot take contrary to the decision of Tribunal. When CIT revised order, controversy was already decided by this court vide order dt. 30.07.01 (Coram: Mr. Justice A.R. Dave and Mr. Justice D.A. Mehta). The decision of CIT in the revision order is contrary to the above decision of court which cannot be permitted. Reference to the larger bench cannot be ground to revise assessment u/s.263 of I.T. Act. On this ground also we uphold the order of Special Bench of ITAT. We find that this is the only conclusion that once assessment in the substantive case is final, protective assessment cannot be continued in the case of beneficiaries. When CIT revised order, there exist order of this court dt.30.07.01. Hence, atleast this is one of the views, though we find that this is the only view, revision order u/s.263 is not permissible on jurisdictional ground. This is the decision of Hon’ble Supreme Court in the cases of Malabar Industries Co. Ltd. V/s CIT 243 ITR 83 and G.M. Mittal 263 ITR 255. When the decision of High Court was reversed by Supreme Court on merits, Hon’ble Supreme Court held that revision order cannot be sustained as on the date of revision order, order of High Court TAXAP/1536/2005 15/33 JUDGMENT did exist. Following the same, we hold that CIT had no jurisdiction to pass revision order u/s.263 on 12.03.03. On that day, the order of this court dt.30.07.01 did exist. On the contrary, this order has become final. As regards grant of interest on refund, we find that Tribunal was justified in holding that refund should be granted with interest. We are in full agreement with the order of Special Bench of Tribunal. We repeat that revenue should not drag the respondents to unnecessary avoidable litigation. Accordingly, we dismiss the appeals filed by revenue except Tax Appeals Nos. 182 and 204 of 2002 with Tax Appeals Nos.27 to 30 of 2004, i.e., the appeals of the assessees in the cases of Janak Pramodbhai Patel, Pramodbhai Kanjibhai Patel HUF, Bharat & Piyush ODFT and C.J. Zala ODFT. Therefore, Tax Appeals Nos. 182 and 204 of 2002 and Tax Appeals Nos.27 to 30 of 2004 stand allowed for the same reasons. TAXAP/1536/2005 16/33 JUDGMENT ABHIMANYU DISCRETIONARY FAMILY TRUST AND OTHER 99 CASES TAX APPEALS NOS. 1536 TO 1635 OF 2005 This is a bunch of 100 appeals filed by the revenue against order of Tribunal. Tribunal reversed the order passed by CIT u/s.263 of the I.T. Act for Asst. Year:91-92. The facts of the case, in brief, are that these are the beneficiaries of Ambica Trust. Ambica Trust filed its return of income showing income of Rs.6,57,620. The income was allocated amongst beneficiaries, assessable u/s.161 of I.T. Act. Ambica Trust revised return of income declaring the same income but offered for tax at maximum marginal rate u/s.164 of I.T. Act with the disclosure in the return of income. Assessing Officer passed assessment order u/s.143(3) of I.T. Act and assessed the income at Rs.22,82,700. The income was assessed at maximum marginal rate treating the trust as discretionary trust assessable u/s.164 of I.T. Act. CIT(A) held that trust is a discretionary trust and tax should be charged at maximum marginal rate. Ambica Trust settled the arrear demand of Rs.1,18,267 under Kar Vivad Samadhan Scheme, 1998 (KVSS) introduced by Finance (No.2) Act, 1998. Appeal to the Tribunal was dismissed as withdrawn vide order dt.08.07.99 in ITA No.1217/Ahd/94. In the case of beneficiary trusts being respondents, income from TAXAP/1536/2005 17/33 JUDGMENT Ambica Trust was originally not offered for tax with the disclosure in the return of income. Income from Ambica Trust was assessed to tax on a protective basis. CIT(A) held to assess the same on a substantive basis. Revenue preferred appeal before Tribunal and Tribunal set aside the issue back to the file of A.O. to pass fresh order in the light of the opinion of the High Court in similar other matters. While giving effect to the order of Tribunal, A.O. passed fresh assessment order on 11.09.00 determining the issue of rate of taxation. In this order, A.O. excluded share income of the respondent beneficiaries which was settled under KVSS by Ambica Trust. This order was revised by CIT u/s.263 of I.T. Act vide order dt.27.03.03. CIT found that order dt.11.09.00 was erroneous and prejudicial to the interest of revenue. CIT was of the opinion that the matter was settled under KVSS by Ambica Trust. According to him, benefit cannot be given to the respondent beneficiaries. It does not grant any benefit or concession or immunity to the respondent beneficiaries, who were different assessees. He referred to the decision of this court in the case of Shankerlal Nebhumal Uttamchandani v/s.CIT (251 ITR 876). He was of the view that income should be assessed in the right person and the respondent beneficiaries were the right persons. He also held that interest granted by A.O. u/s.244A should not be granted in view of TAXAP/1536/2005 18/33 JUDGMENT the decision of this court in the case of Saurashtra Cement and Chemical Ind. Ltd. 194 ITR 669. Tribunal has held that it is the option of the revenue either to assess the respondent beneficiaries or the trustees in the representative capacity. Once the option is exercised by the revenue and the income was assessed in the case of Ambica Trust, the same income cannot be again assessed in the case of respondent beneficiaries. Shri M.R. Bhatt, standing counsel for the department and Shri S.N. Soparkar, Senior Advocate for the respondents appeared and made their respective submissions. We have heard both the parties. On perusal of facts and submissions, we find that decision under consideration is that whether the same income can be assessed in the case of Ambica Trust as well as in the case of respondent beneficiaries. Section 4 of I.T. Act provides charging of income tax in respect of total