IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 5453 of 1994 with SPECIAL CIVIL APPLICATION No 2381 of 1996 AND SPECIAL CIVIL APPLICATION NO. 10744 OF 1996 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- SPL C.A. NO. 5453 OF 1994 DAMODAR H SHAH Versus ASSISTANT COMMISSIONER OF INCOME-TAX AND SPL C.A. NOS. 2381 OF 1996 & 10744 OF 1996 SMT. RAMABEN C. PATEL Versus ASSISTANT COMMISSIONER OF INCOME-TAX -------------------------------------------------------------- Appearance: 1. Special Civil Application No. 5453 of 1994 MR JP SHAH with MR MANISH J. SHAH for Petitioner MR MIHIR JOSHI with MR. M.R. BHATT for Resp No.1 2. Special Civil ApplicationNo 2381 of 1996 MR JP SHAH with MR MANISH J. SHAH for Petitioner MR MIHIR JOSHI with MR. M.R. BHATT for Resp No.1 3. Special Civil Application No. 10744 of 1996 MR JP SHAH with MR MANISH J. SHAH for Petitioner MR MIHIR JOSHI with MR. M.R. BHATT for Resp No.1 -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE A.R.DAVE Date of decision: 22/06/2000 ORAL JUDGEMENT (Per R.K.Abichandani,J.) These matters raise common points and have been heard together at the instance of both the sides. The question involved is whether the impugned notices issued by the Assessing Officer against the petitioners under Section 148, read with Section 147 of the Income Tax Act, are without jurisdiction and not warranted by that provision. 2. In Special Civil Application No. 5453 of 1994, the relevant assessment years are 1987-88, 1988-89, 1989-90 and 1990-91. In respect of the assessment years 1987-88 and 1989-90, the assessment was being reopened on the ground that the assessee was allowed excessive deduction of expenses on adhoc basis though as per the CBDT circular dated 14th September, 1965 as modified by the circular dated 6.1.1984, such LIC agents who did not maintain detailed account regarding expenses incurred could be allowed a maximum deduction of only Rs. 10,000. In the reasons recorded by the Assessing Officer which are placed on record, it is stated that for the assessment year 1987-88, an amount of Rs. 44,703 had escaped assessment while in respect of the assessment year 1989-90, a sum of Rs. 49,844 had escaped assessment. In short, for these two assessment years 1987-88 and 1989-90, according to the Assessing Officer, he had reason to believe that the income chargeable to tax had escaped the assessment because in the assessments for these two years, the income in question was made the subject of excessive relief under the Act, making them deemed to be cases where income chargeable to tax had escaped assessment within the meaning of Explanation 2(c) (iii) of the Act. 2.1 As regards the assessment years 1988-89 and 1990-91, the reasons in support of the notices issued for these years under Section 148, which are placed on record, show that according to the Assessing Officer the returns of this assessee for these two assessment years were not on the record of the office. It was stated therein that the assessee was sent a letter dated 14.2.1997, in which he was asked to state whether the returns for income for these years were filed by the assessee. The assessee was also asked to state the Ward/Circle where the returns of income were filed. It was stated that the returns for the assessment years 1987-88, 1989-90, 1991-92, 1992-93 and 1993-94 were in the office record. The assessee was requested by that letter to file a copy of acknowledgement of return of income and a copy of statement of income. However, as stated therein, the assessee did not reply within the stipulated time, a fact which has not been disputed. It is for this reason that the assessing officer had reason to believe that the asessee had not filed returns of income for these two years and therefore, the income of the assessee had escaped assessment under Section 147 Explanation (2)(a), which, inter-alia, provides that where no return of income has been furnished by the assessee although his total income was chargeable to income tax, it would be deemed to be a case where income chargeable to tax has escaped assessment within the meaning of Section 147 of the Act. In the reasons it was also recorded that the assessee's return of income for the assessment year 1987-88 disclosed an income of Rs. 60,200 and for the assessment year 1989-90, Rs. 1,06,920 and therefore, his income for the year 1988-89 was likely to be between these two figures and therefore, he had reason to believe that the income had escaped the assessment for the said year. Likewise, for the assessment year 1990-91, it was stated that his income was likely to be between Rs. 1,06,920, which was the return income for assessment year 1989-90 and Rs. 1,64,750 which was the return income for the assessment year 1991-92. 3. In Special Civil Application No. 2381 of 1996, the assessment years involved are 1986-87, 1988-89, 1990-91 and 1991-92 while in Special Civil Application No. 10744 of 1996, the assessment year involved of the same petitioner assessee is of 1989-90. This petitioner was also an LIC agent and as per the separate reasons which are placed on record, in respect of these five assessment years which are the subject matter of these two petitions, according to the assessment officer there was escapement of income chargeable to tax under Explanation 2(c)(iii) of Section 147 of the Act, because, excess relief was granted by allowing deduction of the commission on adhoc basis beyond the maximum allowable deduction of Rs. 10,000 under the said circular dated 22.9.1965, as modified by the circular dated 6.1.1985 of the Board. According to the Assessing Officer, for the assessment year 1986-87 an income of Rs. 62,870, for the assessment year 88-89 an income of Rs. 81,473, for the assessment year 1989-90 an income of Rs. 79,121, for the assessment year 1990-91 an income of Rs. 1,14,827 and for the assessment year 1990-91 an income of Rs. 1,98,187 had escaped assessment on the ground that excessive deduction beyond the maximum limit of Rs. 10,000 per annum was allowed in respect of these years. 4. The learned Counsel appearing for the petitioners in all these matters contended that the assessing officer had no basis for issuing notices under Section 148, in respect of the assessment years in question. He contended that on a bare reading of the circulars which were issued by the Board, it was clear that the LIC agents were entitled to get deduction on adhoc basis at the rates mentioned in the circular and there was no question of applying any ceiling of Rs. 10,000 to the agents who were having commission income of more than Rs. 20,000. It was submitted that the ceiling of Rs. 6,000 which was provided in the circular dated 14/22.9.1965 was applicable only to cases where the gross insurance commission did not exceed Rs. 20,000 for the year. It was argued that in cases where gross insurance commission exceeded Rs. 20,000, the adhoc deduction allowable for expenses incurred by such agent was at the rate of 40% of the first year's commission and 15% of the renewal commission where separate figures were available and if separate figures were not available, then the adhoc deduction of 25% of the total commission was to be allowed. It was argued that the limit of Rs. 10,000 which was mentioned in paragraph 2 of the circular was not intended to be a ceiling beyond which no deduction could be allowed, but it was only an additional benefit which could be given beyond the deductions which were allowable on per centage basis and that such additional benefit not exceeding Rs. 10,000 could be given if special circumstances to justify such additional deduction were established. It was contended that the words "aforesaid ceiling" in paragraph 2 of the circular referred to the maximum allowable adhoc deduction of 40%, 15% or 25%, as the case may be, and not the amount of Rs. 6,000 which was the maximum permissible by way of deduction only in a case where the gross insurance commission did not exceed Rs. 20,000 for the year. The learned Counsel contended that if any other view was taken, it would result in absurdity. It was argued that one cannot imagine that an agent getting gross insurance commission of Rs. 20,000 would be allowed deduction of Rs. 6,000 and an agent who may be getting gross insurance commission of several lakhs of rupees would be allowed deduction of Rs. 10,000 only. It was argued that such startling result was not intended by the Board, nor was the circular ever understood to impose such a ceiling on the gross insurance commission amount which exceeded Rs. 20,000. It was contended that the view taken by those who had occasion to construe the circulars, including the Commissioner, was that adhoc deduction was allowable at the rate of 40%, 15% or 25%, as the case may be, of the gross insurance commission upto any amount exceeding Rs. 20,000 and therefore, the exercise undertaken by initiating the proceedings under Section 147 by the Assessing Officer was an afront to the decision taken by his superiors and was nothing beyond a mere change of opinion, which was not permissible for initiating proceedings under Section 147 for assessment/re-assessment or recomputation of income. 4.1 The learned Counsel further submitted that the from circular dated 6.1.1984 in which instructions for amending the earlier circular of 14.9.1965 were issued by the Board, it could be demonstrated how absurd the result would be, if the ceiling of Rs. 10,000 was applied. He submitted that this circular dated 6.1.1984 showed that the Board, after considering the representations that the rate of deduction should be raised from 40% having regard to the increase in cost, had decided that the expenditure may be allowed at the rate of 50% of the years' commission where the gross commission was less than Rs. 60,000 and had modified the instructions issued on 14/22.9.1965 to this extent. It was submitted that even the Tribunal had, in case of another assessee [Pankaj Dhirajlal Dhru Vs. ITO, reported in (1996) 55 TTJ 667], taken a view, while construing the said circulars, that deduction was allowable at the rate of percentages mentioned in the circular and that the ceiling of Rs. 10,000 was not intended or meant to apply where the gross insurance commission exceed Rs. 20,000 in a year. It is stated by both the sides that this decision of the Tribunal is subject matter of a reference, which is pending before this Court. 4.2 The learned Counsel further argued that in Special Civil Application Nos. 2381 of 1996 and 10744 of 1996, the Assessing Officer had already, in respect of these very assessment years, attempted rectification on the said ground that there was a ceiling in the circulars and adhoc deduction could not be allowed beyond that ceiling of Rs. 10,000. But all those rectification orders were set-aside by the CIT (Appeals) by the appellate order dated 27.3.1995. The rectification orders were made for the assessment year 1986-87 on 31.3.1993, and for the assessment years 1988-89, 1989-90, 1990-91 and 1992-93 on 18.3.1994. It was contended that when CIT (Appeals) held that there was no rectifiable mistake committed in the assessments made for these years, it was ex-facie a matter only of change of opinion and the Assessing Officer could not have initiated the proceedings on the same ground for reopening the assessment under Section 147 of the Act. 4.3 Lastly, it was contended that the assessee was not obliged to respond to the query which was raised by the Assessing Officer in his letter dated 14.2.1994 about the filing of returns. It was contended that, that letter was received by the representative of the assessee on 23.3.1994 and the assessee did not get a clear seven days time which was mentioned in the notice, to respond to it. 4.4 The learned Counsel for the petitioners cited the following decisions of the Supreme Court in support of his submissions:- (a) R.B. Jodha Mal Kuthiala Vs. CIT, Panjab Jammu & Kashmir and Himachal Pradesh, reported in 82 ITR 571 was cited for its proposition that though it was true that equitable considerations are irrelevant in interpreting tax laws, those laws, like all other laws, are to be interpreted reasonably and in consonance with justice. In that case, an assessee whose property vested in the custodian as evacuee property, was held not to be the owner of the property for the purpose of Section 9 of the Indian Income-tax Act, 1922, because, he could not exercise any rights in that property except with the consent of the Custodian and had only some residual beneficial interest in that property which he had left in Pakistan. It was held that such residual beneficial right cannot be considered to be ownership for the purpose of Section 9 of the said Income-tax Act. The question before the Court was as to who was the "owner" of the property for the purpose of computation of income under Section 9 of the Act. (b) K.P.Varghese Vs. Income-tax Officer, Ernakulam, reported in 131 ITR 597 (S.C) was cited for its proposition that literal construction which leads to absurdity, unjust result or mischief should be avoided. While construing the provisions of sub-section (2) of Section 52 of the Income Tax Act, 1961, the Supreme Court held that the word "declared" occurring therein was very eloquent and revealing and it clearly indicates that the focus of sub-section (2) is on the consideration declared or disclosed by the assessee as distinguished from the consideration actually received by him and it contemplates a case where the consideration received by the assessee in respect of the transaction was not truly declared or disclosed by him but was shown at a different figure. It was held that what in fact never accrued or was never received, cannot be computed as capital gains under Section 48 and that Section 52(1) did not deem income to accrue or to be received, which in fact never accrued or was never received. The Supreme Court held that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided and where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction. (c) CIT, Bangalore Vs. J.H. Gotla, reported in 156 ITR 323 (S.C) was cited again for the proposition that if a strict and literal construction of the statute leads to an absurd result i.e. a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, and, if another construction is possible apart from the strict literal construction, then, that construction should be preferred to the strict literal construction. Where the plain literal interpretation of a statutory provision produced a manifestly unjust result, which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational result. It was also pointed out from the judgement that though Supreme Court observed that equity and taxation are often strangers, attempts should be made that these do not remain always so and "if a construction results in equity rather than in injustice", then such construction should be preferred to the literal construction. d) The learned Counsel relied upon the decision of the Madras High Court in CIT Vs. E.I.D Parry Ltd., reported in 216 ITR 489, in which it was held that existence of the information for the belief that income chargeable to tax has escaped assessment is the sine qua non for reopening the assessment under Section 147(b) and discovery of an error apparent on the record is the sine qua non for rectification under Section 154 of the Act. It was held that Income Tax Officer can have recourse to one or the other, but he must have recourse to the appropriate provision having regard to the facts and circumstances in each case. In cases where the two appear to overlap, the Income-tax officer must choose one in preference to the other and proceed, and he should not take one as the appropriate proceeding and give it up at a later stage to have recourse to the other, since such proceedings are quasi-judicial and adjudication after notice is intended for the same purpose. In such a case of overlapping, constructive res judicata and not the statutory inhibition, should make the Income-tax Officer desist from using one proceeding after the other instead of using one of the two with due care and caution. e) Jamnadas Madhavji & Co. Vs. J.B. Panchal, ITO reported in 162 ITR 331 (Bombay) was cited for the proposition that ITO had no power to issue summons when no proceedings were pending before the Income Tax Officer. This decision was pressed in service for contending that the letter dated 14.2.94 seeking information from the assessee could not have written by the Assessing Officer and that since no proceedings were pending at that time, the assessee was not obliged to respond to that. 5. The learned Counsel appearing for the Revenue contended that as per the reasons recorded in writing in all these cases, the Assessing Officer was justified in proceeding to reopen the assessment of these assessees for the said years. He submitted that on a plain reading of the circulars issued by the Board, it was clear that there was a ceiling limit beyond which the adhoc deductions could not be allowed. It was submitted that the ceiling of Rs. 10,000 was not at all affected by the instructions dated 6.1.1984 which modified the circular dated 14/22.9.1965 only on the aspect of eligibility bracket upto Rs. 60,000 and the rate which was raised to 50% from 40% for the cases falling in that bracket. It was further contended that even in the two cases where the assessment was being reopened on the ground that the returns for those two years were not found in the record, the Assessing Officer had, at the relevant time, reason to believe that those returns were not filed because the assessee did not furnish many particulars though his representative was asked to furnish them, if the returns were so filed and a written communication dated 14.2.1994 was also sent to the assessee seeking this information. It was submitted that since the assessee or his representative did not furnish the particulars to show that the returns were filed, the Assessing Officer was justified in harbouring a belief that it was deemed to be a case where income chargeable to tax had escaped assessment within the meaning of Explanation (2)(a) to Section 147 of the said Act. It was submitted that even if later on the assessee comes out with a case that the returns were filed, that would not relate back and take away the justification which the Assessing Officer had at the relevant time for issuance of notice on the basis of his reason to believe that the returns were not filed. It was submitted that even after the receipt of the notice in respect of those two years, the assessee did not come forth with any such information about such returns having filed in respect of those two assessment years and it is for the first time that he has said so in the petition. It was submitted that if the assessee had, in response to the impugned notices in respect of those two years, sent his reply pointing out the fact that returns were indeed filed, that aspect would have been duly taken into account by the Assessing Officer. Even now the assessee can come forward and give particulars in response to those notices, since nothing is concluded even at this stage. 5.1 The learned Counsel further argued that in cases where there was no rectifiable mistake found after initiating the proceedings under Section 154 of the Act, but notwithstanding that fact the Assessing Officer still has a reason to believe that the income has escaped assessment, the Assessing Officer is not precluded from reopening the assessment under Section 147 in respect of the same income which had escaped assessment and for which he earlier thought that there was a rectifiable mistake. It was submitted that the ambit of Section 147 was much wider and all cases of escapement of income whether due to mistake or not, could be taken up for consideration under Section 147 for the purpose of assessment, re-assessment or re-computation. 6. In support of his submissions, the learned Counsel for the respondent referred to the following decisions:- (a) Mayor, & c., of Westminister Vs London & North Western Railway Company, reported in (1905) HL (E) 426, a decision of the House of Lords, was cited for the proposition that the Court will not hinder the authority, which is left by the legislature with a discretion as to how it should exercise its powers. (b) CIT, Bombay Vs. D.R. Naik, reported in VII ITR 362, was cited for the proposition that the fact that the mistake could have been rectified under Section 35 of the Act of 1922 was no reason why it should not be altered under Section 34 thereof if the case falls within that Section. It was held that there was no reason for supposing that Sections 34 and 35 were mutuallly exclusive. (c) Salem Provident Fund Society Ltd. Vs. CIT, reported in 42 ITR 547, which followed the decision in CIT, Mumbai Vs. D.R. Naik (supra) was cited for the proposition that the real question was not whether Section 34 and Section 35 in the Act of 1922 were mutually exclusive in their operation, but whether, if in a given case the statutory requirements of both Sections 34 and 35 were satisfied, the Income Tax Officer could have recourse to either. It was observed that in such a case the fact that there was over-lapping will not bar recourse to either section at the choice of the assessing authority. It was also held that the mistake apparent on the face of an order of assessment may itself constitutes information, and, the availability of powers vested in the ITO by Section 35 did not create a bar on the recourse to the jurisdiction vested in him by Section 34. (d) Radheshyam Khare and anr. Vs. The State of Madhya Pradesh, reported in AIR 1959 S.C 107, was referred to, to point out that the proposition laid down in the Mayor & C., of Westminister Vs. London & North Western Railway Co. (supra) was approved by the Supreme Court. If the statute gives to the State Government powers under its various provisions and the State Government chooses in its discretion to use one rather than the other, it was beyond the power of any court to contest that discretion unless a case of abuse was made out. (e) Cenlon Finance Co.Ltd. Vs. Ellwood (Inspector of Taxes), reported in [1962] 1 All England Law Reports 854 was referred to for the proposition that there was no reason for saying that a discovery of undercharge can only arise where a new fact has been discovered. If for