# COMMISSIONER OF INCOME-TAX v. SUN ENGINEERING WORKS (P) LTD

- **Citation:** [1992] Supp. 1 S.C.R. 732
- **Court:** Supreme Court of India
- **Decided:** 1992-09-17
- **Case number:** Civil Appeal Nos. 3251-52 of 1979
- **Bench:** Yogeshwar Dayal, Dr. A.S. Anand
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-v-sun-engineering-works-p-ltd-11557
- **Pages:** 32

## Headnote

Income Tax Act, 1961:
Sections 147(a}, 148 and 152(2)-Escapement of income-RcassessC ment-Scope of-Whether assessee could seek review of concluded item
unconnected with escapement of income and matters attaining finality in
original assessment, in computation of escaped income-Assessce filing
returns for two assessment years showing loss--fncome Tax Officer treating
returns as being beyond time and terminating proceedings-Loss not determined-Subsequently assessee filing disclosure petition showing Hundi
D loans-Whether loss shown in original returns to be taken into acc.Junt in
reassessment proceedings for computation of escaped income.
Precedents-Supreme Court Judgment-Application of principles laid
down therein-To be understood in the light of question before court-Words
E and sentences of Judgment not to be divorced from context of the question
under consideration.
The respondent-assessee in the two appeals filed the returns of
income for the assessment years 1960-61 and 1961-62 showing loss. The
Income Tax Officer considered both the returns and recorded that the
F
returns were tiled beyond time, and conveyed to the appellant that the loss
returns submitted beyond time for the assessment years under reference
being invalid, no action on them was necessary, and hence the proceedings
for both these years were filed.
On appeal, the Appellate Assistant Commissioner held that though
G the Income Tax Officer was wrong in filing the returns without proper
scrutiny and without first computing the loss, ioasmnch as it could only
be known aller proper computation whether assessment would result in a
loss or not, no relief could be granted since the Income Tax Officer had
filed the returns, and dismissed both the appeals. Since the assessee <lid
H
not prefer any further appeal the orders of the Income Tax Officer relating
732
C.l.T. v. SUN ENG. WORKS
733
to the assessment years in question in respect of the "loss returns" became A
fiual.
Subsequently, the assessee filed a disclosure petition in respect of
some Hundi loans and a settlement was arrived at between the assessee
and the Revenue, as a result whereof the assessee became assessable for B
the disclosed sums for the assessment years 1960-61 and 1961-62. The
Income Tax Officer considered the said amounts for the two assessment
years as escaped income, and after issuing a notice, as required by section
148 of the Income Tax Act, 1961, within the statutory period, calling npon
the assessee to show cause why the "escaped income" for the two assessment years be not brought to tax under section 147(a) of the Act, and C
hearing the parties and considering the objections, made an order under
section 147(a) of the Act, bringing the escaped income to tax. Aggrieved,
the assessee filed an appeal before the Appellate Assistant Commissioner
contending that the Income Tax Officer should have !l'determined the loss
as declared in the original returns and set it off against the escaped income D
from other sources and even carry forward the loss, if necessary to the
subsequent assessment years. The Appellate Assistant Commissioner allowed the appeal, and directed the Income Tax Officer to not only redetermine the loss, as per the original loss returns and set it off against the
escaped income from other sources, but also to carry forward the unabE
sorbed loss, if any, and set it off against the income in the subsequent
years.
In appeal by Revenue, the Income Tax Appellate Tribunal, accepted
its plea that the action of the Income Tax Officer in filing the assessment F
proceedings for 1960-61 and 1961-62 on the grounds indicated by him
amounted to nil assessment and that the Income Tax Officer had not
allowed the losses as claimed by the assessee in the returns which had been
filed beyond time, and that since the decision of the Income Tax Officer
had been upheld in appeal by the Appellate Assistant Commissioner and G
the assessee had not taken up th~ matter in any further appeal or revision,
t

## Text

_Characters 0–39,788 of 74,820. This is a partial read: ask again with offset=39788 for what follows._

A
COMMISSIONER OF INCOME-TAX
v.
SUN ENGINEERING WORKS (P) LTD.
SEPTEMBER 17, 1992
B
[YOGESHWAR DAYAL AND DR. A.S. ANAND, JJ.J
Income Tax Act, 1961:
Sections 147(a}, 148 and 152(2)-Escapement of income-RcassessC ment-Scope of-Whether assessee could seek review of concluded item
unconnected with escapement of income and matters attaining finality in
original assessment, in computation of escaped income-Assessce filing
returns for two assessment years showing loss--fncome Tax Officer treating
returns as being beyond time and terminating proceedings-Loss not determined-Subsequently assessee filing disclosure petition showing Hundi
D loans-Whether loss shown in original returns to be taken into acc.Junt in
reassessment proceedings for computation of escaped income.
Precedents-Supreme Court Judgment-Application of principles laid
down therein-To be understood in the light of question before court-Words
E and sentences of Judgment not to be divorced from context of the question
under consideration.
The respondent-assessee in the two appeals filed the returns of
income for the assessment years 1960-61 and 1961-62 showing loss. The
Income Tax Officer considered both the returns and recorded that the
F
returns were tiled beyond time, and conveyed to the appellant that the loss
returns submitted beyond time for the assessment years under reference
being invalid, no action on them was necessary, and hence the proceedings
for both these years were filed.
On appeal, the Appellate Assistant Commissioner held that though
G the Income Tax Officer was wrong in filing the returns without proper
scrutiny and without first computing the loss, ioasmnch as it could only
be known aller proper computation whether assessment would result in a
loss or not, no relief could be granted since the Income Tax Officer had
filed the returns, and dismissed both the appeals. Since the assessee <lid
H
not prefer any further appeal the orders of the Income Tax Officer relating
732
C.l.T. v. SUN ENG. WORKS
733
to the assessment years in question in respect of the "loss returns" became A
fiual.
Subsequently, the assessee filed a disclosure petition in respect of
some Hundi loans and a settlement was arrived at between the assessee
and the Revenue, as a result whereof the assessee became assessable for B
the disclosed sums for the assessment years 1960-61 and 1961-62. The
Income Tax Officer considered the said amounts for the two assessment
years as escaped income, and after issuing a notice, as required by section
148 of the Income Tax Act, 1961, within the statutory period, calling npon
the assessee to show cause why the "escaped income" for the two assessment years be not brought to tax under section 147(a) of the Act, and C
hearing the parties and considering the objections, made an order under
section 147(a) of the Act, bringing the escaped income to tax. Aggrieved,
the assessee filed an appeal before the Appellate Assistant Commissioner
contending that the Income Tax Officer should have !l'determined the loss
as declared in the original returns and set it off against the escaped income D
from other sources and even carry forward the loss, if necessary to the
subsequent assessment years. The Appellate Assistant Commissioner allowed the appeal, and directed the Income Tax Officer to not only redetermine the loss, as per the original loss returns and set it off against the
escaped income from other sources, but also to carry forward the unabE
sorbed loss, if any, and set it off against the income in the subsequent
years.
In appeal by Revenue, the Income Tax Appellate Tribunal, accepted
its plea that the action of the Income Tax Officer in filing the assessment F
proceedings for 1960-61 and 1961-62 on the grounds indicated by him
amounted to nil assessment and that the Income Tax Officer had not
allowed the losses as claimed by the assessee in the returns which had been
filed beyond time, and that since the decision of the Income Tax Officer
had been upheld in appeal by the Appellate Assistant Commissioner and G
the assessee had not taken up th~ matter in any further appeal or revision,
the order of the Income Tax Officer had acquired finality. The Tribunal
held that the Appellate Assistant Commissioner was in error in holding
that the determination of the losses claim~d originally were still open for
review in proceedings under Section.147(a) and directing the computation
of losses and setting off against the escaped income.
H
734
SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
A
The High Court, in a reference under section 255(2) of the Act, held
B
c
D
that in the proceedings under section 147 relating to the income which had
escaped assessment the original loss returns in the original assessment
proceedings could not be wholly ignored and in order to determine what
income had escaped taxation, the Income Tax Officer could not ignore
losses which the assessee bad suffered in the relevant years in question as
reflected in the 'loss returns' and the same were required to be computed
for the purpose of determining the 'income which had escaped assessment'.
It, however, held that if any portion of such loss wa• unabsorbed there
could be no carry forward thereof to any subsequent year.
In the appeal before this Court, on behalf of the Revenue, it was
contended that since the loss claimed by the assessee originally was
concluding finally against the assessee, the question was not open for
review in the reassessment proceedings and the Income Tax Officer in
proceedings under section 147 of the Act could not consider items which
had become Dual in the original assessment proceedings unconnected with
any escapement of income.
On behalf of the asses.see, it was contended that once reassessment
proceedings were Initiated, the Initial order of assessment did not survive
for any purpose whatsoevet and while making a fresh order of assessment
E in the reassessment proceedings, the Income Tax Officer has the power to
give benefit to the assessee, which might have been available to it in the
original assessment proceedings.
Allowing the appnls, this Court,
F
HELD: 1.1. In the reassessment pro«edings it is not open to an
assessee to seek a review of the concluded item, -.ected with the
escapement of income, for the purpose of computation of tire escapcl
income. The loss which the assessee wanted to be set off against the
escaped income could not be allowed to be so set off because in the original
assessment proceedings, no 'set off' was claimed or permitted and the
G original assessment had acquired finality when the appeal against the
order of assessment failed before the Appellate Assistant Commissioner
and the assessee took no further steps to agitate the issue. The item which
the assessee wanted to be taken into account in the proceedings under
section 147 of the Act were unconnected with the escapement of income.
H Since the original assessment had been concluded finally against the
C.l.T. 1'. SUN ENG. WORKS
735
assessee, it was not permissible for the assessee in the reassessment A
proceedings to seek a review/revision of the concluded assessment for the
purpose of computation of the escaped income. The High Court clearly fell
in error by permitting the assessee to reagitate, in the reassessment
proceedings un~er section 147(a) of the Act, 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 by
assuming as if the original assessment had not been concluded or was 'still
open'. [763 B-F]
Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax, (1953)
B
23 I.T.R. 82 and Esthuri Aswathiah v. Income-tax Officer, (1961) 41 I.T.R. C
539, relied on.
Deputy Commissioner of Commercial Taxes v. H.R. Sri Ramulu, 39
STC 177 and V. Jaganmohan Rao & Ors. v. Commissioner of Income Tax
and Excess Profits Tax, 75 ITR 373, referred to.
1.2. The orders were made by the Income Tax Officer after hearing
the authorised representative of the assessee and since the returns bad
been filed beyond time, the assessment proceedings terminated in 'no
demand'. As apparently, there was no taxable income the losses were not
directed to be set off or carried forward by the Income Tax Officer. Even
if it is assumed that the procedure adopted by the. Income Tax Officer in
dealing with the 'loss returns' was not proper, the order of the Income Tax
Officer was not set aside in appeal by the Appellate Assistant Commissioner and no further steps were taken by the assessee to question the
order of the Income Tax Officer. Those orders had, in fact and in law,
become final. The High Court clearly fell in error in holding that in the
assessment proceedings there had been no final determination of losses
for the relevant year and to assume as if the 'loss return' had not been
finally disposed of or to be still open. The Income Tax Officer had disposed
of the assessment proceedings, accepting the plea of the assessee that for
D
E
F
the relevant year, it had no income and that is why the proceedings were G
tiled as 'no demand'. The order of assessment had, thus, become final on
the conclusion of the proceedings and dismissal of the appeal. [743 A-Cl
2.1. 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 H
736
SUPREME COURT REPORTS [1992[ SUPP. 1 S.C.R.
A
issuance of' notice under section 148 and where reassessment is made
under section 147 in respect of income which had escaped tax, the Income
Tax Officer's jurisdiction is confined to only such income which has
escaped tax or has been under-assessed and does not extend to revising,
reopening or reconsidering the whole assessment or permitting the asses·
B see to reagitate questions which had been decided in the original assess·
ment proceedings. It is only the under-assessment which is set aside and
not the entire assessment when reassessment proceedings are initiated.
The Income Tax Ofticer cannot make an order or reassessment inconsistent with the original o.-der of assessment in respect of matters which are
c
not the subject-matter of proceedings under section 147. An assessee
cannot resist validly initiated reassessment proceedings under this section
merely by showing that other income which hacl been assessed originally
was at too high a figure except in cases under section 152(2). The words
'such income' in section 147 clearly refer to the income which is chargeable
to tax but has escaped assessment and the Income Tax Officer's jurisdic·
D !ion under the section is confined only to such income which has escaped
assessment. It does not extend to reconsidering generally the concluded
earlier assessment. Claims which have been disallowed in the origmal
assessment proceeding cannot be permitted to be reagitated on the assess·
ment being reopened for bringing to tax certain income which had escaped
E
F
assessment because the controversy on reassessment is confined to mat·
ters which are relevant only in respect of the income which had not been
brought to tax during the course of the original assessment. A matter not
agitated in the concluded"original assessment proceedings also cannot be
permitted to be agitated in the reassessment proceedings unless relatable
to the item sought to be taxed as 'escaped income'. Indeed, in the reassess·
ment 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 or 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 or the Revenue and not an
G assessee, an assessee cannot be permitted to convert the reassessment
proceedings as his appeal or revision, in disguise, and seek relief in r"spect
of items not claimed in the oi;iginal 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
H proceedings relating to the escaped assessment are accepted, still the
~':
.Ji. ii
-I
C.l.T. v. SUN ENG. WORKS
737
allowance of such claims has to be limited to the extent to which they A
reduce the income to that originally assessed. The income for purposes o(.
'reassessment' cannot be reduced beyond the income originally assessed.
(761 E-H, 762 A-El
Madhavjee Damodar Thackersay and Anr. v. C.I. T.(Bom.), (1935) 3
I.T.R. 457; Hirala/ v. C.I. T. (Rajasthan), (1980) 121 I.T.R. 89; Kevaldas B
Ranchhodas v. Commissioner of Income Tax, (1968) 68 I.T.R. 842; Sir Shadi
Lal & Sons, Shamli v. C.I. T., (1973) 92 I.T.R. 453; Sharda Trading Co. v.
C.l. T. (Delhi), (1984) 149 I.T.R. 19; Commissioner of Wealth-tax v. C.
Ravindran and Ors., (1977) 107 I.T.R. 547; Commissioner of Wealth-tax v.
Ba/larpur Industries Ltd., (1979) 118 I.T.R. 711; Chetti Chettinad Corporation
C
Pvt. Ltd. v. C./. T. (Mad.), (1984) 147 I.T.R. 57; Joint Commercial Tax
Officer-II, Tuticorin v. Ekambareeswarar Coffee and Tea Works, (1991) 83
S.T.C. 457 and Commissioner of Sales Tax v. H.M. Esufali H.M. Abdulali,
(1973) 32 S.T.C. 77, referred to.
C.l. T. v. Standard Motor Products of India Ltd., (1983 )142 I.T.R. 877; D
Deputy Commissioner v. Indian Refrigeration Industries !'. Ltd., (1980) 46
S.T.C. 264; C.l.T. (Central) v. Assam Oil Co. Ltd., (1982) 133 I.T.R. 204;
C.I. T. v. Ram Sevak Paul, (1977) 110 I.T.R. 527; State Bank of Hyderabad
v. C.I. T., (1988) 171 I.T.R. 232; C.l. T. v. Rangnath Bangur, (1984) 149 I.T.R.
487 and C.I. T. v. Indian Rare Earth Ltd., 181 I.T.R. 22, overruled.
2.2. Although section 147 is part of a taxing statute, it imposes no
charge on the subject but deals merely "1th the machinery of assessment
and in Interpreting a provision of that kind the rule is that construction
should be preferred which makes the machinery workable. Since the
proceedings under section 147 of the Act are for the benefit of the Revenue
and not an assessee and are aimed at gathering the 'escaped income' or an
assessee, the same cannot be allowed to be converted as 'revisional' or
'review' proceedings at the instance of the assessee, thereby making the
machinery unworkable. (761 C-D)
E
F
3.1. An order made in relation to the escaped turnover does not affect G
the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and
identity. It is only in cases ofunderassessment based on clauses (a) to (d)
of Explanation I to section 147, that the assessment of tax due has to be
recomputed on the entire taxable income. The assessee cannot claim H
738
SUPREME COURT REPORTS [1992] SUPP. I S.C.R.
A
recomputation of the income or redoing of an assessment and be allowed
a claim which he either failed to make or which was otherwise rejected at
the time of original assessment which has since acquired finality. Of
course, in the reassessment proceedings it is open to an assessee to show
that the income alleged to have escaped assessment has in truth and in
B fact no e~caped assessment but that the same had been shown under some
inappropriate head in the original returen. [760 C-E]
V. Jaganmohan Rao and Ors. v. Commissioner of Income Tax and
Excess Profits Tax, 75 I.T.R. 373, explained.
C
3.2. It is neither desirable nor permissihle to pick out a word or a
sentence from the judgment of this Court, divorced from the context of the
question under consideration and treat it to be the complete 'law' declared
by this Court. The judgment must be read as a whole and the observations
from the judgment have to be considered in the light of the questions which
were before this Court. A decision of this Court takes its colour from the
D questions involved in the case in which it is rendered and while applying
the decision to a later case, the courts must carefully try to ascertain the
true principle laid down by the decision of this Court and not to pick out
words or sentences from the judgment, divorced from the context of the
questions under consideration by this Court, to support their reasonings.
E
[760 G-H; 761-A)
F
G
V. Jaganmohan Rao and Ors. v. Commissioner of Income Tax and
Excess Profits Tax, 15 I.T.R. 373 and Madhav Rao Jiwaji Rao Scindia
Bahadur & Ors. v. Union of India, [1971] 3 S.C.R. 9, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 3251-52
of 1979.
From the Judgment and Order dated 17.11.1976 of the Calcutta High
Court in Income Tax Reference No. 153 of 1976."
Ranbir Chander, B.B. Ahuja and Ms. A. Subhashini for the Appellant.
K.R. Nambiar for the Respondent.
The Judgment of the Court was delivered by
DR. A.S. ANAND, J, The following question was formulated by the
H High Court of Calcutta while granting the certificate of fitness to file these
C.J.T. v. SUN ENG. WORKS [ANAND . .I.]
739
appeals against the judgment of the Division Bench of that court dated A
17th November, 1976:
11Where an item unconnected with the escapement of
income has been concluded finally against the assessee
how for in reassessment on an escaped item of income it
is open to the assessee to seek a review of the concluded
item for the purpose of computation of the escaped income?
The circumstances leading to the formulation of the aforesaid question and
B
the grant of certificate of fitness to file the appeals are as follows.
C
Respondent in both the appeals is the assessee. For the assessment
year 1960-61, the assessee filed the return of income on 17th of November,
1960, showing a loss of Rs. 36,418. For the assessment year 1961-62, the
return of income was filed on 4th October 1961, declering a loss of Rs.
24,31'1. The Income Tax Officer after discussion with the authorised repD
resentative of the assessee, Shri AS. Chowdhary, considered both the
returns on 12.12.1962 and in respect of the return for the assessment year
1960-61 recorded on the order sheet that the return filed beyond time. No
action is necessary filed "N.D." For the assessment year 1961-62, the ITO
recorded "the loss re.tum is beyond time. Filed as N.D." The Income Tax E
Officer conveyed to the appellant vide communication dated 12.12.1962.
Sub : Assessment years 1960-61 & 1961-62
With referece to above and your Authorised Representative's discussion with me I an to inform you that the
loss return submitted beyond time for the assessment
years under reference being invalid, no acti0n on them is
necessary. Hence, the proceedings for both these years
are filed.
F
The assessee challenged the order of the Income Tax Officer before the G
Appellate Assistant Commissioner. The Appellate Authority held that the
Income Tax Officer was wrong in filing the returns without proper scrutiny
and without first computing the loss in accordance with law. the Appellate
Assistant Con1missioner also opined that . it could only be known after
proper computation, whether assessment would result in a loss or not.
H
A
B
740
SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
However, the appellate authority finally held that since the Income Tax
Officer had 'filed' the returns no relief could be granted to the assessee in
the appeals and dismissed both the appeals. The assessee did not prefer
any further appeal from the order of the Appellate Assistant Commissioner
and, thus, the orders of the Income Tax Officer relating to the assessment
years 1960-61 and 1961-62 in respect of the "loss returns" became final.
It transpires from the record that subsequent to the proceedings as
noticed above, the assessee filed a disclosure petition in respect of some
Hundi loans and a settlement was arrived at between the assessee and the
Revenue as a result whereof, the assessee became assessable for the
C
disclosed sum of Rs.27,000 for the assessment year 1960-61 and for the sum
of Rs.9,000 for the assessment year 1961-62. The Income Tax Officer
considered the aforesaid amounts for the two assessment years as "escaped
income". A notice as required by section 148 of the Income Tax Act, 1961
(hereinafter the Act) was issued within t\le statutory period calling l!pon
D
the assessee to show cause why the "escaped income" of Rs.27,000 and
Rs. 9, 000 respectively for the two assessment years be not brought to tax
under Section 147(a) of the Act. After hearing the parties and considering
the objections, an order under Section 147(a) of the Act was made and the
"escaped income" was brought to tax. Aggrieved by the order of the Income
Tax Officer made under Section 147(a) of the Act, the assessee went up
E
in appeal and the Appellate Assistant Commissioner accepted the plea of
the assessee that the Income Tax Officer should have redetermined the loss
as declared in the original returns and set it off against the "escaped
income
11 from other sources and even carry forward the loss, if necessary
to the subsequnet assessment years. Accordingly, the Appellant Assistant
F
Commissioner allowed the appeal and directed the Income Tax Officer
that in the reassessment proceedings not only the redetermine the loss as
per the original loss returns and set it off against the escaped income from
other sources but also that the on-absorbed loss, if any, should be carried
forward and set off against the income in the subsequent years.
G
Aggrieved by this order, the Revenue went up in appeal before the
Income Tax Appellate Tribunal. The Tribunal accepted the plea of the
Revenue that the action of the Income Tax Officer in filing the assessment
proceedings for 1960-61 and 1961-62 on the grounds indicated by him in
the letter dated 12.12.1962, referred to (supra) amounted to nil assessment
H
and that the Income Tax Officer had not allowed the losses as claimed by
C.l.T. v. SUN ENG. WORKS [ANAND, J.]
741
the assessee in the returns which had been filed beyond time. The Tribunal A
opined that since the decision of the Income Tax Officer dated 12.12.1962,
had been upheld in appeal by the Appellate Assistant Commissioner and
the assessee had not taken up the matter in any further appeal or revision,
the order of the Income Tax Officer dated 12.12.1962, had been acquired
finality. The Tribunal found that the Appellate Assistant Commissioner
had fallen in error to hold that the determination of the losses claimed B
orginally were still open for review in proceedings under Section 147(a)
and direct the computation of losses and set off against the "escaped
income". The High Court of Calcutta at the instance of the assessee in a
reference under Section 256(2) of the Act called for the statement of the
case and reference of the following question for opinion of the High Court: C
"Whether on the facts and in the circumstances of the case
the Tribunal was justified in disallowing the assessee's
losses of Rs. 36,418 (Rupees thirty six thousand and four
hundred and eighteen) only for assessment year 1960-61
and Rs. 24,314 (Rupees twenty four thousand and three
hundred and fourteen) only for assessment year 1961-62
as per the returns of losses filed before the Income Tax
Officer and initially filed by the Income Tax Officer while
the Income Tax Officer added hundi loans as per settlement in reassessment proceedings ?
The Bench after considering the arguments raised before it and after
noticing the provisions of the Act, various judgments of some High Courts
and this Court came to a conclusion that in the proceedings 'under Section
34 (sic 147) relating to the income which had "escaped assessment", viz.,
D
E
Rs. 27,000 and Rs. 9,000 the original "loss returns" in the original assessF
ment proceedings could not be wholly ignored and in order to determine
what income had "escaped taxation", the Income Tax Officer could not
ignore losses which the assessee had suffered in the relevant years in
question as reflected in the 'loss returns' and the same were required to
be computed for the purpose of determining the 'income which had G
escaped assessment'. The High Court, however, went on to say:
"We however, make it clear that if any portion of such loss
is unabsorbed there will be no carry forward thereof to
any subsequent year. To the extent as stated above we
answer the question referred in the negative and in favour
H
A
B
742
SUPREME COURT REPORTS f1992) SUPP. l S.C.R.
of the assessee."
The Revenue, thereupon, filed an application under Section 261 of the Act
for leave to appeal to the Supreme Court against the judgment of the
Division Bench of the High Court. The case of the Revenue before the
High Court was that since the loss claimed by the assessee originally was
concluded finally against the assessee the question was not open for review
in the reassessment proceedings and the Income-truc Officer in proceedings
under Section 147 of the Act could not consider items which had become
final in the original assessment proceedings unconnected with any escapement of income. On behalf of the assessee, however, it was contended that
C once reasssessment proceedings are initiated, the initial order of assessment does not survive for any purpose whatsoever and while making a fresh
order of assessment in the reassessment proceedings, the Income-truc Officer has the power to give benefit to the assessee, which might have been
available to it in the original assessment proceedings. In support of these
D submissions the assessee had relied upon the judgments in Deputy Commissioner of Commercial Taxes v. H.R. Sri Rumulu, 39 STC 177 and V.
Jaganmohan Rao and Ors. v. Commissioner of Income-Tax and Excess
Profits Tax, 75 !TR 373. The Division Bench after hearing the arguments
in the leave to appeal petition opined :
E
F
"In the instant case, it appears that the question which
is involved, is not the power and the jurisdiction of the
Income Tai< Officer but the right of the assessee to agitate
a matter concluded in the earlier assessment which is
unconnected with any escaped item of income for the
limited purpose of computation in the reassessment. This
question was not involved in any of the decisions of
Supreme Court referred to herein before. This in our view
is a substantial question and fit for appeal to. the Supreme
Court.'
1
G and formulated the question noticed in the earlier part of this judgment
while granting the certificate of fitness.
Before us, Mr. Ranbir Chander has appeared for the Revenue and
despite service, there has been no appearance on behalf of the assessee
H who remained un-represented in these appeals.
C.I.T. 1•. SUN ENG. WORKS [ANAND,J.]
743
With a view to answer the question as formulated by the High Court
and to dispose of both the appeals, it is necessary lo first consider the status
and character of the original assessment orders dated 12.12.1962 made by
the ITO in respect of the 'loss returns' for the years 1960-61 and 1961-62.
As already notice, the orders were made after hearing the authorised
representative of the assessee and since the returns had been filed beyond
time, the assessment proceedings terminated in "no demand". As apparent·
ly there was no taxable income the losses were not directed to be set off
or carried forward by the ITO. Even if, it be assumed for the sake of
argument, that the procedure adopted by the ITO in dealing with the "loss
returns" was not proper, the order of the ITO was not set-aside in appeal
by the Appellate Assistant Commissioner and no further steps were taken
by the assessee to question the order of the Income Tax Officer. Those,
orders had, in fact and in law, become final and the assessee has to thank
himself for that situation.
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In Anglo-French Textile Co. Ltd. v. Commissioner of Income-tax,
(1953) 23 !TR 82, a Brench of four learned Judges of this Court considered D
the scope of the provision of 'set-off and 'carry forward of losses' under
the Income Tax Act, 1922 and the conditions and circumstances under
which the same could be granted. The question before this Court was :
"Whether on the facts and in the circumstances of the
case when an assessment has been made· under Section
23( 1) of the Indian Income-tax Act, determining the assessee company's income as 'nil' and when proceedings
under Section 34 were subsequently started to assess the
income which the Income-tax Officer believed to have
escaped assessment the assessee company is entitled to
claim that the loss of profits and gains (including depreciation allowance) sustained by it in the previous year should
be determined in the course of such proceedings."
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The Bench noticed that the assessee had in response to the notice calling
for a return submitted a 'nil' return, which was accepted by the assessing G
authority. Subsequently, the Income-tax Officer sent the assessee a notice
under Section 34(1)(b) of the 1922 Act in the following terms:
11Whereas in consequence of definite information
which has come into my possession I have discovered that
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your income assessable to income-tax for the year ending
31st March, 1942; has
(a) escaped assessment,
I therefore propose to assess the said income that bas
(a) escaped assessment.
I hereby require you to deliver to me not later
than,........ a return in the attached form of your total
income and total world income assessable for the said
year. ...... .
In reply the assessee again submitted a 'nil' return and also filed a statement showing 'loss'. The Incoem-tax Officer made the following order :
"As the net result for the world business is only a loss,
there can be no question of profits attributable to operations in British India under Sections 42(1) and 42(2)(3) in
respect of cotton purchases. The 'nil' return filed is therefore accepted.
Hence there is no assessment for 1941-42. As this is a
non-resident company, the loss need not be carried forward under Section 24(2) as that section in terms does
not apply to non-residents.
The assessee was particular]~ aggrieved by the last portion of the order and
it claimed that the Income-tax Officer was bound to carry forward the loss
as it had accepted the return. The assessee having failed throughout came
to this Court in appeal. Vivian Bose, J. speaking for the Bench opined :
" ....... There is no provision in the Act which entitles the
assessee to have a loss recorded or computed, unless
something is to be done with the loss. Thus, under Section
24(1) a loss can be set off against an income profit or gain
and under sub-section (2) the Balance of a loss can be
carried forward to a following year on the conditions set
out there. Except for this there is nothing else that can be
called in aid. But under sub-section (2) the loss can be
C.l.T. v. SUN ENG. WORKS [ANAND, J.]
carried forward when "the loss cannot be wholly set off
under sub-section (1)" and in that event only the "portion
not so set off' can be carried forward. We are therefore
thrown back on .sub-section (1).
Sub-section (1) provides that where an assessee sustains a lnss of profits or gains in any year under any of the
heads mentioned in Section 6 he shall be entitled to have
the amount of the loss "set off agains" his income, profits
or gains under anyother head in that year. Therefore, before
any question of set-off can arise there must be (I) a loss
under one or more of the heads mentioned in Section 6,
and (2) an income, profit or gain under some other head.
It follows that when there is no income under any head at
all, there is nothing against which the loss can be set off in
that year and unless that can be done sub-section (2) does
not come into play.
Next, a set-off under Section 24(1) can only be claimed
when the loss arises under the head and the profit against
which it is sought to be .set off arises under a different
head. When the two arise under the same head, of course
the loss can be deducted but that is done under Section
10 and not under Section 24(1). See the decision of the
Privy Council in Rm Ar Ar.Rm. Anmachalam Chettiar v.
Commissioner of income-tax, Madras. In the present case,
the loss is computed by striking a balance in the profit
and loss account of just the one business and consequently
no question of different heads arises. On both these
grounds, therefore, the assessee's contention must fail because, unless the loss can be set-off under sub-section (1)
of Section 24, it cannot be carried forward under sub-section
(2) and if it cannot be carried forward the question of its
dete1. nination and computation becomes i"e/evant."
745
(emphasis Snpplied)
Dealing with the reasoning of the High Court, the learned judge
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observe:
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SUPREME COURT REPORTS [1992] SUPP. l S.C.R.
"The High Court proceeds on the ground that when
proceedings are taken under Section 34 the as~essee is not
entitled to reopen the whole proceedings as the further
proceedings are limited to assessing that portion of the
income which has escaped assessment. We need not express any opinion on this. The question we have to answer
is confined to the facts and circumstances of this case and
those circumstances are ( 1) that no return was filed at any
stage of the case disclosing any income, profits or gains
at al~ (2) that proceedings were later taken under Section
34, and (3) in the course of these proceedings the assesee
claimed that a certain loss should be determined and
recorded. Our answer is that that cannot be done for the
reasons we have given and that consequently the question
referred was rightly answered in the negative by the High
Court.
In Esthuri Aswathiah v. Income-tax Officer, (1961) 41 !TR 539, a
Division Bench of this Court opined that the order of the assessing
authority at the conclusion of assessment proceedings to the effect "no
proceedings" meant that the Income-tax Officer assessed the income as
"nil" "and if thereafter, he had reason to believe that the appellant had
failed to disclose fully and truly all material facts necessary for assessment
for the year, it was open to him to issue notice for reassessment under
Section 34" Shah, J. speaking for the Bench of three learned juges specifically rejected the plea raised on behalf of the assessee to the effect that the
order of the ITO recording "no proceedings" implied that the origianal
assessment proceedings had not been concluded or disposed of. To quote
the learned judge ;
"The submission that the previous return submitted on
September 8, 1962, "had not been disposed of and until
the assessment pursuant to that return was made, no
notice under section 34( 1) for reassessment could be
issued, has in our judgment no substance. The Inco1ne~·
tax Officer had disposed of the assessment proceeding
accepting the submission made by the appellants that they
had no income for the assessment year 1950- 51. ........ "
C.l.T. v. SUN ENG. WORKS [ANAND,J.]
747
In view of the settled position of law, as noticed above, the Tribunal A
was right to opine that, in the present case, by the order, dated 12.12.1962,
the assessment proceedings had concluded and with the dismissal of the
appeals against that order, the order of the ITO, dated 12.12.1962, had
acquired finality. The High Court clearly fell in error in holding that in the
assessment proceedings there had been no final determination of losses for
the relevant year and to assume as if the 'loss return' had not been finally
disposed of or to be still open. The Income Tax Officer had disposed of
the assessment proceedings, accepting the plea of the assessee that for the
relevant year it had no income and that is why the proceedings were filed
as 'No demand'. The order of assessment had, thus, become final on the
conclusion of the proceedings and dismissal of the appeal.
Could the assessee in the above fact situation be permitted to claim
"set off', not granted in the original assessment proceedings, by raising that
plea once again in the reassessment proceedings initiated under section 147
of the Act?
To answer this question, it is necesary to first extract the provisions
of Sections 147 aod 148 of the Act (as they existed at the relevant time)
Section 147 read thus :-
"S.147 Income escaping assessment. If-
(a) the Income Tax Officer has reason to believe that,
by reason of the omission or failure on the part of
an assessee to make a return under section 139 for
any assessment year to the Income-tax Officer or
to disclose fully aod truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year,
or
(b) notwithstanding that there has been no omission
or failure as mentioned in clause (a) on the part of
the assessee, thJ Income-tax Officer has in consequence of information in his possession reason to
believe that income chargeable to tax has escaped
assessment for any assessment year,
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SUPREME COURT REPORTS (1992] SUPP. l S.C.R.
he may, subject to the provisions of sections 148 to 153,
assess or reassess such income or recompute the loss or
the depreciation allowance, as the case may be for the
assessment year concerned (hereafter in sections 148 to
15;J referred to as the relevant assessment year).
Explanation 1. - 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 income chargeable to tax has been underassessed; or
(b) where such income has been assessed at too low a
rate; or
(c) where such income has been made the subject of
excessive relief under this Act or under the Indian
Income-tax Act, 1922 (XI of 1922); or
( d) where excessive loss or depreciation allowance has
been computed.
Explanation 2. - Production before the Income-tax
Officer of accout books or other evidence from which
material evidence could with due diligence have been
discovered by the Income-tax Officer will not necessarily
amount to disclosure within the meaning of this section.
11S.148. Issue of notice where income has escaped assessment. -
( 1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall
serve on the assessee a notice requiring him to furnish
within such period, not being less than thirty days, as may
be specified in the notice, a return of his income or the
income of any other 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
C.l.T. v. SUN ENG. WORKS [A.."IAND, J.]
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."
749
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Section 147, which is subject to Section 148, divides cases of income
escaping assessment into two clauses i.e. viz. (a) those due to the non-submission of return of income or non-disclosure of true and full facts and (b)
other instances. Explanation ( 1) defmes as to what constitutes escape of C
assessment. In order to invoke jurisdiction under Section 147(a) of the Act,
the ITO must have reason to believe that some income chargeable to tax
of an assessee has escaped assessment by reason of the omission or failure
on the part of the assessee either to make a return un\ler Section 139 for
the relevant assessment year or to disclose fully and truly material facts D
necessary for the assessment for that year. Both the conditions must exist
before an ITO can proceed to execise jurisdiction under Section 147(a) of
the Act.