1992 (9) TMI 1 - SC - Income Tax

Supreme Court rules assessee cannot challenge finalized assessment items during section 147(a) reassessment for escaped income

Commissioner of Income-Tax Versus Sun Engineering Works Pvt. Limited

The SC held that HC erred in permitting the assessee to reagitate finally concluded assessment items during reassessment proceedings under section 147(a). ... Where an item unconnected with the escapement of income has been concluded finally, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item - HC clearly fell in error in permitting the assessee to reagitate, in the reassessment proceedings u/s 147(a), the finally concluded assessment proceedings and to grant to him relief in respect of items not only earlier rejected, but also unconnected with the escapement of income The core legal question considered by the Court was whether, in reassessment proceedings under section 147 of the Income-tax Act, 1961, an assessee can seek a review or reopening of an item of income or loss that had been finally concluded against him in the original assessment but was unconnected with the escaped income sought to be assessed in the reassessment.Specifically, the question was formulated as: Where an item unconnected with the escapement of income has been concluded finally against the assessee, to what extent can the assessee seek a review of that concluded item for the purpose of computing the escaped income in reassessment proceedingsRs.The facts involved an assessee who had filed loss returns for assessment years 1960-61 and 1961-62, which were filed beyond time and treated as invalid by the Income-tax Officer (ITO), resulting in 'no demand' orders. These orders became final after dismissal of appeals and no further challenge. Later, reassessment proceedings were initiated under section 147 based on disclosed 'escaped income' from hundi loans for those years. The assessee sought to set off the losses claimed in the original returns against the escaped income in reassessment. The Appellate Assistant Commissioner allowed this claim, but the Income-tax Appellate Tribunal reversed that, holding the original assessment order was final and losses could not be reopened in reassessment. The High Court ruled in favour of the assessee, allowing the losses to be considered in reassessment but disallowing carry forward of unabsorbed losses. The Revenue appealed to the Supreme Court, which framed the above question.Issue-wise detailed analysis:1. Finality of original assessment and reopening in reassessment proceedingsThe Court examined the status of the original assessment orders dated December 12, 1962, which had treated the late-filed loss returns as invalid and closed the assessment with 'no demand.' The appeals against these orders were dismissed, and no further challenge was made, rendering the orders final.The Court referred to precedents including Anglo French Textile Co. Ltd. v. CIT, where it was held that losses can only be recorded or carried forward if there is income against which they can be set off. If the original assessment is final and no income was assessed, losses cannot be reopened or carried forward in reassessment.Similarly, in Esthuri Aswathiah v. ITO, it was held that an order recording 'no proceedings' or 'nil assessment' is a concluded assessment and reassessment can only be initiated if there is reason to believe income has escaped assessment.The Court concluded that the original assessment orders had acquired finality and the assessee was responsible for not challenging them further. Therefore, those orders could not be reopened in reassessment.2. Scope and jurisdiction of reassessment proceedings under sections 147 and 148 of the Income-tax ActThe Court analyzed the provisions of sections 147 and 148, which empower the Income-tax Officer to reassess escaped income if there is reason to believe income chargeable to tax has escaped assessment due to omission or failure to disclose material facts.The Court emphasized that reassessment is confined to income that has escaped assessment or has been underassessed. The reassessment proceedings are initiated by issuance of a notice under section 148 and the scope is limited to the escaped income.The Court reviewed conflicting High Court decisions on whether reassessment opens the entire assessment or only the escaped income. Some High Courts held that reassessment sets aside the entire original assessment and the Income-tax Officer must determine the total income afresh, allowing the assessee to claim deductions or reliefs even if not claimed originally. Others held reassessment is confined to escaped income and issues finally decided in original assessment cannot be reopened.3. Interpretation of Supreme Court precedents, especially V. Jaganmohan Rao v. CITThe Court scrutinized the judgment in V. Jaganmohan Rao v. CIT, which was cited by various High Courts for the proposition that reassessment proceedings start afresh and the original underassessment is set aside. The Court clarified that this judgment means that the Income-tax Officer has jurisdiction and duty to tax the entire escaped income once reassessment is validly initiated, but it does not mean that the entire original assessment is wiped out or that the assessee can reopen concluded issues unrelated to escaped income.The Court held that the phrase 'previous underassessment is set aside' refers only to the underassessment and not the entire original assessment. The original assessment retains its character and finality unless challenged and set aside in proper proceedings.4. Treatment of claims in reassessment proceedingsThe Court held that in reassessment, the Income-tax Officer may consider claims for deductions or non-taxability only insofar as they relate to the escaped income being assessed. Claims rejected or not raised in the original assessment that are unrelated to the escaped income cannot be reopened or allowed in reassessment.The Court emphasized that reassessment proceedings are for the benefit of the Revenue to bring escaped income to tax, not for the assessee to seek review or revision of concluded assessments.5. Application of the above principles to the factsThe Court applied these principles to the facts, holding that the losses claimed by the assessee had been finally concluded against him in the original assessment and could not be reopened in reassessment. The losses were unrelated to the escaped income (hundi loans) being assessed. The High Court erred in permitting the assessee to set off those losses against the escaped income in reassessment and in allowing carry forward of unabsorbed losses. The Tribunal was correct in disallowing the set off.6. Treatment of competing High Court judgmentsThe Court reviewed various High Court decisions, including those from Calcutta, Rajasthan, Madras, Andhra Pradesh, and Bombay, noting divergent views. It rejected the broader interpretation that reassessment wipes out the original assessment and allows reopening of all issues. It favored the narrower interpretation that reassessment is limited to escaped income and related claims.7. Principles governing interpretation of Supreme Court judgmentsThe Court cautioned against taking isolated sentences or phrases from Supreme Court judgments out of context to support broader propositions. It emphasized reading judgments as a whole and understanding the precise questions before the Court in each case.Significant holdings:'In proceedings under section 147 of the Act, the Income-tax Officer may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of the notice under section 148 and where reassessment is made under section 147 in respect of income which has escaped tax, the Income-tax Officer's jurisdiction is confined to only such income which has escaped tax or has been underassessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings.''It is only the underassessment which is set aside and not the entire assessment when reassessment proceedings are initiated.''Claims which have been disallowed in the original assessment proceeding cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income which had escaped assessment because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment.''An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under section 152(2).''In the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non-taxability of the items at all.''Keeping in view the object and purpose of the proceedings under section 147 of the Act which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to escaped income, and reagitate the concluded matters.''Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of 'reassessment' cannot be reduced beyond the income originally assessed.'Final determination on the issue was that the assessee could not seek review or reopening of an item of loss that had been conclusively dealt with in the original assessment and was unconnected with the escaped income for the purpose of computing escaped income in reassessment proceedings. The High Court erred in allowing such review and relief, and the orders of the Tribunal disallowing the set off were restored.