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CASE NO.: Appeal (civil) 1144 1999

PETITIONER: M/S K.  GOVINDAN & SONS.

       Vs.

RESPONDENT: C.I.T.  COCHIN

DATE OF JUDGMENT:       01/12/2000

BENCH: S.P.Bharucha, Y.K.Sabharwakm D.P.Mohapatro

JUDGMENT:

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     J U D G M E N T

     D.P.MOHAPATRA,J.

     The  question  that arises for determination  in  this appeal is whether in an assessment made under Section 147 of the Income Tax Act, 1961 (for short ’the Act’) it is open to the  assessing  authority to charge interest for default  in filing  return  under  Section  139(8)   of  the  Act?   For answering this question it is necessary to determine what is a  ’regular assessment’ for the purpose of Section 139(8) of the Act.

     Shorn  of unnecessary details the facts leading to the present  proceeding may be stated thus:  For the  assessment@@          JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ year  1984-85 the assessee, appellant herein, filed a return of  income in response to a notice issued under Section  148 of  the Act.  While completing the assessment the  assessing authority  charged  interest under Section 139(8)  and  also under  Section  217 of the Act.  In the appeal filed by  the assessee  before the Commissioner of Income Tax (Appeals) it was  contended  that  the assessment in the case was  not  a ’regular  assessment’ within the meaning of Section 2(40) of the  Act and, therefore, no interest could be charged  under Section  139(8)  of  the Act.  The contention did  not  find favour  with the appellate authority so far as the  interest charged  under Section 217 is concerned, but the  contention was accepted in respect of the interest under Section 139(8) of  the  Act.   The assessee carried the matter  further  in appeal  to  the  Income Tax Appellate Tribunal  wherein  the contention  of the appellant as noted above was accepted and the order passed by the assessing authority and confirmed by the  appellate authority were set aside.  The Tribunal  held that  the assessment was not a ’regular assessment’ but only a  ’re-opened  assessment’ under Section 147(a) of the  Act. In  compliance  with  the direction of the High Court  in  a petition  filed  by the Revenue under Section 256(1) of  the

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Act, the following question was referred by the Tribunal:  " Whether  on the facts and circumstances of the case levy  of interest under Section 139(8) in an assessment under Section 143(3)  read with Section 147(a) is valid in law ?" The High Court  by the judgment dated 31.7.1998 in ITR No.63 of  1996 answered  the  question  in the affirmative and  held  thus: "Considering  explanation  2  to  Section  139(8)  which  is clarificatory in nature and the other case law we are of the considered  view that the assessment made for the first time under  Section  147(a) read with Section 148 is  a  ’regular assessment’  and  that being so the assessing officer  could legally charge interest under Section 139(8)."

     The  said  judgment is under challenge in this  appeal filed  by  the assessee.  It will be convenient to refer  to the  relevant  provisions of the Act before considering  the merits  of  the  case.  In Section 2(40) the  term  ’regular assessment’  is  defined to mean the assessment  made  under sub-section(3)  of  Section 143 or Section 144.  In  Section 139(8)  a  provision  is  made regarding  liability  of  the assessee  to pay simple interest at the rate of fifteen  per cent  per annum, reckoned from the day immediately following the  specified  date  to the date of the furnishing  of  the return  or, where no return has been furnished, the date  of completion  of  the  assessment under Section  144,  on  the amount  of the tax payable on the total income as determined on  regular  assessment, as reduced by the advance  tax,  if any,  paid, and any tax deducted at source.  In the  proviso to  sub-section  (8)  the assessing officer is  vested  with power  in such cases and under such circumstances as may  be prescribed,  to  reduce or waive the interest payable by  an assessee   under   the  sub-section.    Explanation   2   to sub-section  (8)  on which strong reliance is placed by  the appellant reads thus:

     "Explanation  2-  Where, in relation to an  assessment year, an assessment is made for the first time under Section 147,  the assessment so made shall be regarded as a  regular assessment for the purposes of this sub- section"

     This  explanation  was  introduced in the Act  by  the Taxation  Laws (Amendment) Act, 1984 w.e.f.  1.4.1985.   The question  to  be considered is whether the  explanation  has application  to the assessment year 1984-85.  The answer  to the  question  depends on whether the explanation is  to  be read  as a clarificatory or an amendatory provision.  It was not disputed before us that if the provision is construed as clarificatory  then it will be applicable to the  assessment year  1984-85.   Section 143 lays down the procedure  to  be followed  in  a  case  where a return has  been  made  under Section  139,  or in response to a notice under  sub-section (1) of section 142.  Section 144 deals with the procedure in a  case of Best judgment assessment which has application if any  person  fails  to  make   the  return  required   under sub-section  (1) of Section 139 or fails to comply with  all the  terms  of  a  notice issued under  sub-section  (1)  of Section  142  or having made a return, fails to comply  with all  the  terms of a notice issued under sub-section (2)  of Section  143.   Section 147 deals with the cases  of  income escaping  assessment.  Closely linked with it is Section 148 which  makes provision for issue of notice where income  has escaped  assessment.   Both the sections are  quoted  below: "147.   If the Assessing Officer has reason to believe  that any  income chargeable to tax has escaped assessment for any

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assessment  year,  he  may,  subject to  the  provisions  of Sections 148 to 153, assess or reassess such income and also any  other  income  chargeable  to  tax  which  has  escaped assessment and which comes to his notice subsequently in the course  of the proceedings under this Section, or  recompute the  loss  or  the  depreciation   allowance  or  any  other allowance,  as  the  case may be, for  the  assessment  year concerned  (hereafter in this Section and in Sections 148 to 153 referred to as the relevant assessment year) :

     Provided  that  where an assessment under  sub-section (3)  of  Section 143 or this section has been made  for  the relevant  assessment  year, no action shall be  taken  under this  section after the expiry of four years from the end of the  relevant assessment year, unless any income  chargeable to  tax  has escaped assessment for such assessment year  by reason  of the failure on the part of the assessee to make a return  under Section 139 or in response to a notice  issued under  sub-  section(1) of Section 142 or Section 148 or  to disclose  fully  and truly all material facts necessary  for his assessment, for that assessment year.

     Explanation  1  -  Production   before  the  Assessing Officer  of  account  books  or other  evidence  from  which material  evidence  could  with   due  diligence  have  been discovered  by  the Assessing Officer will  not  necessarily amount  to  disclosure within the meaning of  the  foregoing proviso.

     Explanation  2 - For the purposes of this section, the following  shall  also  be deemed to be cases  where  income chargeable to tax has escaped assessment, namely :-

     (a)  where  no return of income has been furnished  by the  assessee although his total income or the total  income of  any  other person in respect of which he  is  assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income -tax;

     (b) where a return of income has been furnished by the assessee  but no assessment has been made and it is  noticed by  the Assessing Officer that the assessee has  understated the  income  or  has   claimed  excessive  loss,  deduction, allowance or relief in the return;

     (c) where an assessment has been made, but -

     (i) income chargeable to tax has been under- assessed; or

     (ii)  such income has been assessed at too low a rate; or

     (iii)  such  income  has  been  made  the  subject  of excessive relief under this Act;  or

     (iv)  excessive loss or depreciation allowance or  any other allowance under this Act has been computed.

     148.   (1) Before making the assessment,  reassessment or  re-computation under Section 147, the Assessing  Officer shall  serve  on  the  assessee a notice  requiring  him  to furnish  within  such  period  as may be  specified  in  the notice,  a  return of his income or the income of any  other

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person  in respect of which he is assessable under this  Act during  the  previous  year corresponding  to  the  relevant assessment  year, in the prescribed form and verified in the prescribed  manner and setting forth such other  particulars as may be prescribed;  and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under Section 139

     (2)  The  Assessing Officer shall, before issuing  any notice under this section, record his reasons for doing so."

     That  it is so, is clear on a fair reading of  Section 147  in  which  provision is made for  both  assessment  and re-assessment  in a case where any income chargeable to  tax has escaped assessment for any assessment year.  The proviso treats  at par the assessment under Section 143(3) and under Section  147 and makes no distinction whether the escapement of  income  is by reason of the failure on the part  of  the assessee  to make a return under Section 139 or in  response to  a  notice issued under sub-section 1 of Section  142  or Section  148.  Under clauses (a) and (b) of Explanation 2 to Section  147  - cases where no return has been furnished  by the assessee and where a return of income has been furnished by  the assessee but no assessment has been made, have  both been  included  in  the   expression  ’escaped  assessment’. Section 148 mandates the assessing Officer to serve a notice on  the assessee before making the assessment, re-assessment or   re-computation   under    Section    147.    From   the aforementioned  provisions,  it is manifest that an  initial assessment  made  by  the assessing officer  either  on  the assessee  voluntarily  furnishing a return of the income  or furnishing  such  a  return on being served a  notice  under Section  148, is a ’regular assessment’ under Section  2(40) of  the  Act, but an order passed by the  assessing  officer making a re-assessment or revised assessment in a case where an  assessment  had  been  made, does not  come  within  the meaning  of  the  said expression.  In both  the  cases  the manner  of  making the assessment is similar.  The  position that  follows  is  that while making  the  assessment  under Section  147 in a case where the assessee furnishes a return in  pursuance of the notice served on him under Section  148 of the Act the provision for charging interest under Section 139(8) is applicable and it is open to the assessing officer to charge interest on the assessee in such proceeding.  This construction of the statutory provisions, in our view, is in accord  with  the intent and purpose for which the power  to charge  interest on a defaulting assessee has been vested in the  assessing officer.  To hold otherwise will mean that an assessee  who  files a delayed return will be liable to  pay interest  while an assessee who does not file any return  is free  from  such  a liability.  Such  an  interpretation  of statutory  provisions,  which  will   result  in  an  absurd situation,  cannot  be accepted.  Next we may notice  a  few decisions of the High Courts dealing with the point.  In the case  of K.Gopalaswami Mudaliar vs.  Fifth Additional Income Tax  Officer, Coimbatore, and others [(1963) ITR 49 p.   322 (Madras  High  Court)]  it was held that in cases  where  no return  has  been submitted by the assessee, the  expression "regular   assessment"  in  Section   18A(6)  refers  to  an assessment  made  under  Section  23 after the  issue  of  a special  notice  under  Section  22(2) during  the  year  of assessment  itself, as well as an assessment by the issue of a notice analogous to one under Section 22(2) in proceedings initiated  under  Section 34(I)(a).  In either event, it  is nothing  more than a regular assessment in the sence that it

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is  an initial assessment made upon the assessee and not  an assessment  which  has  once  been  made  but  is  reopened. (emphasis supplied)

     The  High Court of Delhi construing the term  ’regular assessment’   in  the  light  of  provisions   of   Sections 214,215,216  and 244(1)(a) of the Act took a similar view in National  Agricultural Co-operative Marketing Federation  of India Ltd.  vs.  Union of India and others [(1981)130 ITR p. 928], wherein it was held inter alia that the words ’regular assessment’  shall  as  far  as  possible,  be   interpreted consistently  in  all the provisions in Chapter XVII-C.   No difficulty will be caused by its interpretation to mean only the  first or the initial assessment.  It was also held that for  the  purposes of Sections 214,215 and 273 there  is  no reason  why  an  assessment made for the  first  time  under Section  143 should be outside the purview of that  section. There are indications in Sections 215 and 216 itself to show that  the  expression  "regular   assessment"  cannot   mean anything but the first or original assessment.

     The view taken in the aforementioned two decisions was approved  by a full bench of the Kerala High Court in  Lally Jacob  vs.   Income-Tax Officer and others, [(1992) 197  ITR p.439)],  which  took the view that any assessment made  for the  first  time  by resort to Section 147 will  also  be  a regular  assessment for the purpose of invoking Section  217 of the Act.  Elucidating the point, the full Bench observed:

     "A  reading  of  Sections 147 and 148 makes  it  clear that,  at any rate, an assessment for the first time made by resort  to Section 147 is a regular assessment.  Section 148 enjoins  the Income-tax Officer before making an  assessment under  Section  147  to  serve  a  notice  on  the  assessee containing  all  or  any of the requirements  which  may  be included  in a notice under sub-section (2) of Section  139. The  further  provision in that section is very  significant which  provides that the aforesaid notice has to be  treated as  if it is a notice under Section 139(2) and that all  the provisions  of  the  Act  shall   apply  to  the  subsequent procedure  and  the final assessment.  In other  words,  the notice  issued  under Section 148 has to be deemed to  be  a notice  under Section 139(2) and, if the other provisions of the  Act  have to be applied, an assessment in pursuance  of that  can be made only under Section 143 or Section 144.  We were  not shown any other provision by which the  Income-tax Officer  is authorised to make an order of assessment  under the Act.  The provisions contained in Section 140A also give an  indication  that  an assessment made in pursuance  of  a notice  under  Section  148 is a  regular  assessment  under Section  143  or Section 144, for Section  140A(2)  provides that  any admitted tax paid in pursuance of Section  140A(1) shall  be  deemed  to  have been paid  towards  the  regular assessment  under  Section  143  or   Section  144.   It  is pertinent  to note that Section 140A(1) deals with a  return required  to be furnished under Section 139 or Section  148. That makes the provision clear that an assessment made under Section  147 also will be a regular assessment under Section 143  or  Section  144.   Accordingly,   we  hold  that   any assessment  made for the first time by resort to Section 147 will  also  be  a  regular assessment  for  the  purpose  of invoking  Section  217 of the Act.  With great  respect,  we dissent  from  the  view   expressed  in  certain  decisions referred  to earlier in this judgment which take a  contrary view."

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     A  contra  view has been taken by a Division Bench  of Gauhati High Court in Commissioner of Income-Tax vs.  Triple Crown  Agency,  [(1993) 204 ITR p.377)], in which the  Court was of the view that a reading of the provisions of Sections 139,  143,  147, 148 and 217 (1A) of the Act makes it  clear that  the  assessment  or  reassessment  contemplated  under Section  147  is quite different in nature and content  from the  assessment  under  Section   143;   that  a  proceeding initiated under Section 147 and terminating in assessment or reassessment  is not a ’regular assessment’ as  contemplated in  Section  139(8)  and to such a case  the  provisions  of Section  139(8) cannot apply.  Construing the explanation  2 to  sub- Section (8) of Section 139 the High Court took  the view  that  the provision has only widened the scope of  the expression "regular assessment" by bringing within its ambit assessment  made for the first time under Section 147.   The amendment  has been incorporated in view of the decisions of various  High Courts.  The amendment to the provision is not clarificatory in nature but is clearly amendatory in nature.

     The  Punjab and Haryana High Court in Commissioner  of Income-  Tax  vs.  Smt.  Sushma Saxena, [(1997) 223  ITR  p. 395],  took the view that an assessment or reassessment made under  Section 147 was not a ’regular assessment’ within the meaning  of Section 2(40).  As noted in the judgment in that case  the  Patna  High Court in Prakash Lal  Khandelwal  vs. I.T.O.   [(1989) 180 ITR p.604] also was of the view that if the assessee filed his return for the first time pursuant to notice  under  Section 148 of the Act, then it  was  evident that  the  assessee was assessed under Section  143(3)  read with  Section  147 of the Act and, therefore, it was  not  a "regular assessment".

     In  Modi Industries Ltd.  and others vs.  Commissioner of  Income-Tax  and  Another, [(1995) 216 ITR  p.759],  this Court  had  occasion  to deal with the meaning  of  "regular assessment" in Section 214 of the Act.  The Court observed:

     "Coming  to  the core question, viz., the meaning  and purport  of  the expression "regular assessment" in  Section 214(1), we are of the opinion that the said expression means and  refers  to the original assessment made  under  Section 143/144.   This conclusion we arrive at on the basis of more than  one  reasoning.  As we shall  ‘demonstrate  presently, whichever  way  one approaches the issue, one comes  to  the same  conclusion as we have arrived at.  The first approach- which  we may call the long haul approach- involves a  broad survey  of  the nature of advance tax and the scheme of  the enactment in so far as it is relevant to the question herein while  the second approach - which may be called the  "short haul  approach"  emphasises  the   intrinsic  indicators  in Section  214  itself  which lead unmistakably  to  the  same conclusion,  viz., that "regular assessment" in Section  214 means  the first or original assessment, as it may be called and not any other." (emphasis supplied)

     It was further observed (at p.791)

     "The  procedure for making an assessment under Section 143  or Section 144 has been laid down in Chapter XIV of the Income-tax  Act,  1961 (Sections 139 to 158).   Section  139 deals  with the return of income.  Section 140 lays down  by whom  and  how  a  return has to  be  signed  and  verified.

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Section 141 provides for provisional assessment which may be made even before a regular assessment.  Section 142 empowers the  Income  tax Officer to make enquiry before  assessment. Sections  143  and  144  lay down the manner  in  which  the Income-  tax  Officer  will make an  assessment  of  income. Under sub-section (1) of Section 143, the Income-tax Officer will  straightaway  assess the total income or loss  of  the assessee  and determine the sum payable by him or refundable to  him  on the basis of the return of income filed  by  the assessee,  if  he was satisfied that the return was  correct and  complete.   No enquiry was necessary before passing  an order  under  this  sub-section.   But,  if  the  Income-tax Officer  was  not satisfied with a return, he had  to  serve upon  the  assessee  a notice requiring him  to  attend  his office  and  produce  any evidence on which he may  rely  in support  of  the  return.  After  considering  the  evidence produced  by the assessee and after taking into account  all relevant  material  which  he had gathered,  the  Income-tax Officer  had to pass an order assessing the total income  or loss of the assessee and determine the sum payable by him or refundable to him on the basis of such assessment.

     It was further observed (at p.796):

     Interest  will have to be paid by an assessee, if  the advance  tax paid is less than seventy-five per cent of  the tax  determined  on the basis of regular  assessment,  after giving credit to the assessee for the amount of tax deducted at  source.  The interest, however, will be paid only up  to the date of the regular assessment.  It clearly appears from the  provisions of Section 214 and Section 215 that "regular assessment"  cannot  have any other meaning than  the  first order  of assessment, that means the date of the first order of assessment."

     The   decisions   of   the   Madras  High   Court   in K.Gopalaswami Mudaliar case (supra), the Delhi High Court in National  Agricultural Co- operative Marketing Federation of India case (supra) and Kerala High Court in Lally Jacob case (supra)  lay down the correct position in law and they  have our  approval.   The decisions of the Gauhati High Court  in CIT  Vs.   Triple Crown Agency case (supra) and of Punjab  & Haryana High Court in Commissioner of Income-Tax vs.  Sushma Saxena  (supra) were not correct in law.  The view taken  by us  that a first or initial assessment under Section 147  of the  Act  is  a ’regular assessment’ within the  meaning  of Section 139(8) of the Act, has been the position of law even before  the  explanation  in  Section 139(8)  was  added  by amendment.   In  that  view of the  matter  the  explanation merely  clarified  the  position taking it  beyond  pale  of doubt.   The  Parliament  thought it necessary  to  add  the explanation  with  a  view  to remove the  doubt  raised  in certain  decisions  of  different  High Courts  in  which  a contrary  view was taken.  Thus the explanation is merely  a clarificatory provision and has application to the period of assessment in the case i.e.  assessment year 1984-85.

     The  appeal  filed  by the assessee, being  devoid  of merits, is dismissed with costs.