Case: Income Tax Officer, Kolar &amp; Another Vs. Seghu Buchiah Setty

been issued even in respect of the smaller amount which is ultimately found to be the tax properly payable. That being so, the assessee was under an obligation to pay it by the date fixed and if he did not pay it by that date, he became a defaulter" see Ladhuram Taparia v. D. K. Ghosh, 1958-33 ITR 407 at pp. 423, 424: ((S) AIR 1957 Cal 667 at p. 675). With great respect I am unable to accede to this proposition and the conclusion based thereon that the default and its consequences continue even after the appellate order reducing the original assessment. How does the assessee know before the appellate order the smaller amount which he might ultimately be liable to pay? It would be curious if he did not know what he had to pay and could still have defaulted in paying it.17.The order of reduction must, in my opinion, necessarily have the effect of setting aside the original order as a whole. It does not simply strike out a few of the figures appearing in the original order. That would really be a case of rectification for which provision is made in S. 35 of the Act. What an appellate order does in a case of reduction is, as in the present case, to go into all the figures and arrive afresh at the assessable income which replaces the amount of the income arrived at by the Income-tax Officer. Therefore it seems to me that in all cases of an appellate order reducing the assessment the original order goes and if it goes, of course the notice of demand also falls to the ground and the default based thereupon also ceases to be default anymore. Suppose the appellate order itself stated that a smaller amount of tax was payable after it had reduced the figure of the assessable income at which the Income-tax Officer had arrived. Indeed I cannot imagine how else it can be expressed. After such an order the original order must go for the debt being one the two cannot exist together. If that order goes, all default arising out of it must also go.18. Therefore I think that on the Income-tax Officers order being revised in appeal, the default based on it and all consequential proceedings must be taken to have been superseded and fresh proceedings have to be started to realise the dues as found by revised order.19. Coming now to the present case, in view of the order made in it it seems to me impossible to contend that the original default continued. What happened in the present case was that on December 17, 1955 the Appellate Commissioner reduced the assessable income of the assessee as found by the Income-tax Officer by a large sum and directed him to recompute the tax due on the basis of the assessable income stated in the appellate order. The assessee was not informed about the recomputed amount of tax till February 14, 1956. The assessee had not paid the tax mentioned in the Income-tax Officer order. If he had done that then he would under the express terms of the appellate order have become entitled to a refund. What then was the position between these two dates? If the revenue authorities are right, then the assessee continued to be in default even after the appellate order. But what was the amount in respect of which he was so in default? Clearly he could not have continued to be in default in respect of the amount found due by the Income-tax Officer in his original order for that amount was no longer due. He could not have been in default in respect of the amount which was found due on recomputation by the Income-tax Officer according to the direction of the Appellate Commissioner because he did now know that amount. It would be absurd if the Act contemplated a default without the assessee knowing the amount in respect of which the default occurred and without his having a chance to pay it. It would be impossible to construe the Act in a way to produce that result. It has, therefore, to be held that between the date of the appellate order and the communication of the recomputed amount of the tax to the assessee by the Income-tax Officer there could be no default. Since the Act does not provide for a default being in suspension for a period it must be held that the original default ceased to exist after the appellate order was made. Proceedings initiated on the original default before the appellate order could not, therefore, be continued any more. Indeed the appellate order superseded the original order and its consequences.20. If the effect of an appellate order reducing the assessment as in the present case did not wipe out the original order, a most anomalous situation would, in my view, arise. Under S. 46(1) of the Act after a default has been committed in terms of S. 45(1) the Income-tax Officer may impose a penalty not exceeding the amount of the tax due in respect of which the default has occurred. This penalty may be recovered in the same way as the tax due, that is to say, by a notice under S. 29 and thereafter by a certificate issued under S. 46(2). Now suppose the penalty for the full amount of the tax found due by the Income-tax Officer has been imposed and thereafter the appellate order reduces the amount of the tax. What happens to the order of penalty then? Obviously it does not automatically stand reduced to the reduced amount of the tax. It would again be absurd if the penalty could be recovered for the full original amount. The only sensible view to take in such a case would be that the order of penalty falls to the ground and the only logical way to support that conclusion would be to say that the original default has disappeared.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It will be noticed that this section is not confined to the effect of a failure to comply with the terms of a notice of demand issued under S. 29 but makes the same consequence arise on the failure to carry out the terms of a notice under S. 23A(3) and orders under Sections 31 and 33. That consequence is that the assessee is to be deemed to be in default. It is after an assessee is so in default that coercive processes for realisation of the amount due start. Provision for this is made in S. 46 to which I will immediately come. Before doing so, however, I wish to observe that S. 45 gives anOfficer on an appeal being filed a discretion to treat an assessee as not in default. An argument has been founded on this aspect of the section and to it I will later refer.I am unable to agree with this proposition. It may be that the Act contains no express provision stating what would happen to the default already incurred when the order under which it was incurred was later revised in appeal. But I think there is enough in the Act to indicate that in some of these cases at least the default comes to an end. If it does, it seems to me to follow inevitably that the consequences of the default also disappear.9. I would first refer to S. 45 which says that when an order under S. 31 specifies an amount as payable and the amount is not paid within the time, at the place and to the person mentioned in the order or where no time is mentioned in it, within the time specified in the section itself, the assessee so failing to pay shall be deemed to be in default. The order under S. 31 is an order by the Appellate Commissioner. If he specifies an amount as payable in his order and mentions the time when, the place where and the person to whom the payment is to be made thenwith that order would create a default. Now this order is made in an appeal from an order made by theOfficer. Suppose there is already a default as a result ofwith a notice under S. 29 given is respect of theOfficers order. As clearly there could not be two defaults for there was one liability, the Act must in such a case be taken to have provided by necessary implication that the default incurred as a result ofwith the notice to pay the amount mentioned in theOfficers order must be deemed to have been superseded by the appellate order. The contention that the Act does not contemplate a default ceasing to be so except when an assessment order is annulled by the appellate order, is, therefore, unfounded. Take another case. Suppose the appellate order says only that a different amount from that mentioned in theOfficers order shall be payable on income for a certain period without specifying the person to whom or the place where it is to be paid. The effect of it must be to wipe out theOfficers order since the two cannot exist together. In such a case along with the superseded order the default if any incurred in connection with it must also disappear. There will have to be a fresh notice under S. 29 in respect of the amount due under the appellate order on breach of which a fresh default may arise.10. It was, however, said that the Act nowhere requires the appellate order to state the amount payable or to specify the time, when, the place where and the person to whom it is to be paid. That may be so but that does not affect what I have said. Section 45 clearly contemplates the appellate order setting out these things and there is nothing in the Act to prevent the Appellate Commissioner from setting them out. Since S. 45 cannot be read as contemplating an impossibility, it must be held that the Appellate Commissioner may in his order specify the amount payable and state the other particulars about time of payment etc. If he can do so, that would be enough for my present purpose and it is not necessary for it that the Act must in every case require him to do so. In case where the appellate order specifies an amount as payable, theOfficers order must be deemed to have been superseded.11. One other argument to which I have to refer at this stage is that if the assessees contention be correct, then the discretion given to theOfficer by S. 45 not to treat an assessee in default becomes infructuous for then in every case on the making of the appellate order the default earlier incurred must disappear. This does not seem to me to put the position accurately. It is not in dispute that the filing of an appeal does not stay the operation of the original order. So if before the appellate order is made, the amount due is realised by the coercive process following the default, then those steps do not become invalid. There may be a liability to refund but nonetheless what was done was legal when done. Again it would, in my view, depend on the terms of the appellate order whether the earlier default was wiped out or not. If for example, the appellate order confirms the original order, then the default already incurred may not be affected. In both these cases the discretion to treat the assessee as a defaulter was effectively exercised. The argument that the acceptance of the assessees contention would render part of S. 45 nugatory and should, therefore, not be accepted, is in my opinion unsound.12. How then does the matter stand? It seems to me that the crux of it is the effect of the appellate order on the original order. If the original order has been destroyed or replaced by the appellate order, then the notice of demand and all other steps based upon the original order must be deemed to have become ineffective. In such a case the default earlier incurred must be taken to have disappeared and cannot support further action for recovery of any tax. Now the general proposition is that an original order merges in the appellate order: cp. Madan Gopal v. Secretary to the Government of Orissa, (1962) Supp 3 SCR 906: (AIR 1962 SC 1513  ). But in the present case, it is not necessary to rely on that proposition. Section 31 (3) of the Act seems to me to make express provision on the subject. It states that in the case of an appeal from an order of assessment, which is the kind of order with which we are now concerned, the Appellate Commissionerconfirm, reduce, or enhance or annual the assessment, or (b) set aside the assessment and direct theOfficer to make a fresh assessment after making such further enquiry as theOfficer thinks fit or the Appellate Assistant Commissioner may direct, and theOfficer shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assessment."There will, of course, be no occasion to determine the amount of the tax payable on the basis of the fresh assessment if the income on that assessment appears to be below the taxable level. I will consider the various orders contemplated by S. 31(3)(a) and (b) and their effect.13. It may be that when an appellate order confirms the original order, the default earlier incurred and all steps taken pursuant thereto remain unaffected, for such an order may maintain intact the original order. Now it is not in dispute that when the appellate order annuls the earlier order, the default disappears. It is said that that is because the debt ceases to exist. I do not quite follow thin. It has never been questioned that the debt becomes due when demand is made under S. 29 and S. 45 of the Act: see Doorga Prosad v. Secretary of State, 72 Ind App 114: (AIR 1945 PC 62). Therefore if a debt is to cease to exist it must be because the source from which it sprang, namely, the original order, has been annihilated by the appellate order annulling it. In fact Section 31 (3) (a) contemplates an annulment of the original assessment order itself; the demand under Section 29 or S. 45 is not annulled directly by it. Therefore, in the case of an order of annulment under S. 31 the original order of assessment is itself destroyed. If it disappears, I cannot conceive the default based on it continuing in force. Likewise, where under cl. (b) of S. 31(3) the appellate order sets aside the assessment, the same result must clearly follow. There is not much difference between annulling an order and setting it aside; both wipe out the original order.14. I now come to an appellate order enhancing the assessment. With regard to it, it has not been disputed that a fresh notice of demand must issue. If this notice has to be in respect of the entire amount, then clearly the default earlier incurred for the smaller amount found due by the original order must have gone for the liability was one and there could not be two defaults in respect of it. But it was said that the notice has to be issued in respect of the enhanced amount only. Indeed in some of the cases cited at the bar it has been so said. I have very grave doubts about the correctness of this view. The notice of demand can only issue in respect of the amount due in consequence of an order. Unless, therefore, the appellate order specifies only the enhanced amount as due I do not see how a notice in respect of that amount can be issued under S. 29. The appellate order has to specify an amount due. If it specifies the entire amount due including the enhancement, then it cannot be said that under it the amount of the enhancement only is due and not notice demanding such an amount only under S. 29 can be issued. If the appellate order specifies only the amount of the enhancement, it will be making an additional or supplementary assessment. Apart from S. 34 of the Act with which we are not now concerned. I am not aware of any other provision which permits such an assessment. In any case S. 31(3)(a) does not seem to me to contemplate it. Therefore, in my view when an order of enhancement of assessment is made under S. 31 the notice must be in respect of the entire amount and in such a case the earlier notice issued in respect of original order must be deemed to have been superseded.15. But assume I am wrong in this. Assume that an appellate order of enhancement may be confined to the amount of the enhancement only. Even so I am wholly unable to agree that the appellate order cannot specify the entire enhanced amount due. There is nothing in the Act to prevent this being done. When this is done then at least the original order and the notice must be deemed to have been put out of existence along with the default arising from thewith the latter and all its consequences.16. That leaves only the case of an appellate order reducing the amount. It seems to me that it would be somewhat curious if in all other cases excepting the case of a confirmation, the appellate order destroys the original order it does not do so in the case of a reduction. An order confirming may be different, for it confirms and, therefore, does nothas, however, been saidsubsequently the demand is modified on appeal and the amount of the tax payable is reduced, all that happens is that the liability sought to be imposed by the notice of demand, in respect of the amount by which the assessment is reduced is found to have never been a liability at all but the liability in respect of the remainder which stands unaffected by the appellate order remains" and also that "where a notice of the demand has, in fact, been issued in respect of a larger amount as determined by the assessment order, it has been issued even in respect of the smaller amount which is ultimately found to be the tax properly payable. That being so, the assessee was under an obligation to pay it by the date fixed and if he did not pay it by that date, he became a defaulter"e Ladhuram Taparia v. D. K. Ghosh,ITR 407 at pp. 423, 424: ((S) AIR 1957 Cal 667   at p. 675). With great respect I am unable to accede to this proposition and the conclusion based thereon that the default and its consequences continue even after the appellate order reducing the original assessment. How does the assessee know before the appellate order the smaller amount which he might ultimately be liable to pay? It would be curious if he did not know what he had to pay and could still have defaulted in paying it.17.The order of reduction must, in my opinion, necessarily have the effect of setting aside the original order as a whole. It does not simply strike out a few of the figures appearing in the original order. That would really be a case of rectification for which provision is made in S. 35 of the Act. What an appellate order does in a case of reduction is, as in the present case, to go into all the figures and arrive afresh at the assessable income which replaces the amount of the income arrived at by theOfficer. Therefore it seems to me that in all cases of an appellate order reducing the assessment the original order goes and if it goes, of course the notice of demand also falls to the ground and the default based thereupon also ceases to be default anymore. Suppose the appellate order itself stated that a smaller amount of tax was payable after it had reduced the figure of the assessable income at which theOfficer had arrived. Indeed I cannot imagine how else it can be expressed. After such an order the original order must go for the debt being one the two cannot exist together. If that order goes, all default arising out of it must also go.18. Therefore I think that on theOfficers order being revised in appeal, the default based on it and all consequential proceedings must be taken to have been superseded and fresh proceedings have to be started to realise the dues as found by revised order.19. Coming now to the present case, in view of the order made in it it seems to me impossible to contend that the original default continued.It has, therefore, to be held that between the date of the appellate order and the communication of the recomputed amount of the tax to the assessee by theOfficer there could be no default. Since the Act does not provide for a default being in suspension for a period it must be held that the original default ceased to exist after the appellate order was made. Proceedings initiated on the original default before the appellate order could not, therefore, be continued any more. Indeed the appellate order superseded the original order and its consequences.20. If the effect of an appellate order reducing the assessment as in the present case did not wipe out the original order, a most anomalous situation would, in my view, arise. Under S. 46(1) of the Act after a default has been committed in terms of S. 45(1) theOfficer may impose a penalty not exceeding the amount of the tax due in respect of which the default has occurred. This penalty may be recovered in the same way as the tax due, that is to say, by a notice under S. 29 and thereafter by a certificate issued under S. 46(2). Now suppose the penalty for the full amount of the tax found due by theOfficer has been imposed and thereafter the appellate order reduces the amount of the tax. What happens to the order of penalty then? Obviously it does not automatically stand reduced to the reduced amount of the tax. It would again be absurd if the penalty could be recovered for the full original amount. The only sensible view to take in such a case would be that the order of penalty falls to the ground and the only logical way to support that conclusion would be to say that the original default hasam, however, of the opinion, that (except in cases of de minimis) the Act does contemplate that a fresh notice of demand shall issue. There are two reasons for it. The first is the language of S. 29 and the other is the consequences following the issuance of a notice of demand. I shall deal first with the second ground.31. After the demand is made, the tax penalty and interest become a debt due to the Government. This was decided a long time ago by the Privy Council inITR 285 at p. 289: (AIR 1945 PC 62 at p. 64). Further, by issuing a notice of demand, the period of limitation for appeals under S. 30 of the Act starts in many cases. Further still, when the notice of demand is not complied with, the assessee can be treated as a person in default and he is liable to pay a penalty equal to the tax debt under S. 46(1) of theAct. Lastly, on the failure of the assessee to pay after a notice of demand is issued, the recovery proceedings can be started within a time limit and the amount of tax can be treated as an arrear of land revenue.32. It follows, therefore, that the notice of demand is a vital document in many respects. Disobedience to it makes the assessee a defaulter. It is a condition precedent to the treatment of the tax as an arrear of land revenue. It is the starting point of limitation in two ways and the breach of obedience to the notice of demand draws a heavy penalty. The notice of demand which is issued must be in a form prescribed by R. 20 and the form includes the following particulars: it shows the amount which has to be paid and indicates the person to whom, the place where and the time within which it has to be soIt is said that all that is necessary is that theOfficer should write a letter informing the assessee that the tax is reduced from Rs. 10,010/The question is, why not send him a fresh notice of demand? If there is no provision in theAct to send a fresh notice there is none authorising the sending of letters. No doubt, the old proceedings for recovery of the tax might become out of date and inappropriate, but it is one thing to use coercion to recover an amount which the assessee did not but probably could not pay, and another to recover an amount which the assessee could and would pay readily. However, if the law requires that a notice of demand need not go, that would be the end of the matter; but, in my opinion, S. 29 in its terms is extremely clear and indicates that a notice of demand must always issue.It readsany tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, theOfficer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum solearned Chief Justice of the Calcutta High Court, if I may say respectfully, was perfectly right in pointing out its meaning in his first case. I cannot add to what he said and I adopt all the he said. But I would add a few words. The mandatory part of the section is quite clear."TheOfficer shall serve a notice of demand upon the assessee" are emphatic words and the earlier part shows that he has to do it when tax is due in consequence of "any order". Any order means not only an order passed by himself, but also an order passed by reason of the success of an appeal which the assessee may file and in which the old assessment is set aside. In view of the consequences that ensue, it is clear to me that when an assessment is gone through a second time and the amount of tax is reduced, theOfficer must intimate to the assessee the reduced amount of tax and make a demand and give him an opportunity to pay before treating him as a defaulter. This is incumbent because the assessment resulting in the tax is itself set aside or modified and as assessee is entitled to a proper assessment and ascertainment of tax before a demand can be made on him.35. It is said that theOfficer can send a letter but the law says that he shall serve upon the assessee a notice of demand in the prescribed form. When the law requires that a notice of demand should issue, the mode of compliance by a letter is excluded. It may be that the letter is a good substitute for a notice of demand but the section demands that it should be in the prescribed form. If a letter is to be written, why not a notice of demand? In other words, when the assessment is altered, whether it is reduced or it is increased, by reason of any order under the Act, it is the duty of theOfficer to issue a notice of demand in the prescribed form and serve it upon the assessee. The learned Chief Justice of the Calcutta High Court clearly was of the view in the first case that there was only one answer to the question and I respectfully agree with him. He could only depart from his earlier view by finding fault with his drafting of S. 45. I regret I cannot agree with him there. Section 45 intends that the order of the Appellate Assistant Commissioner and the Tribunal may in some cases also serve as notices of demand. Further it is not clear from the later decision whether on the enhancement of the tax, a fresh notice of demand is required for the excess only or for the whole of the sum. That answer is not furnished in any of the other cases to which reference was made at the bar. If default is saved in respect of the reduced amount, a default would also be saved in respect of the original amount when the demand is increased. If a notice of demand were to issue in respect of the excess only, there will be two notices of demand and two starting points of limitation, both for the purpose of coercive action under S. 46(7) as well as for purposes of any appeal that might lie. If, however, a fresh notice of demand is to go in respect of the composite sum, the question to ask would be, what happens to the default which was incurred already? How does it disappear? In my opinion, there is only one possible answer and it was given by the learned Chief Justice in the earlier case.36. I would therefore dismiss these appeals and all the more readily because a fresh notice of demand has issued in this case. If it is disobeyed, theOfficer would be able to recall the old certificate issued to the Revenue Officer, amend it and bring it in line with the tax now demandable and return it to him for continuing the recovery proceedings.