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Petitioner: COMMISSIONER OF INCOME-TAX (CENTRAL), BOMBAY VS Respondent: DEVIDAYAL METAL INDUSTRIES PVT. LTD.Honorable Justice KOTVALR. J. Kolah,G. N. Joshi
1969 P T D 761
1969 P T D 761
[Bombay (India)]
Before Kotval, C. J. arid V. S. Desai, J
COMMISSIONER OF INCOME‑TAX (CENTRAL), BOMBAY
versus
DEVIDAYAL METAL INDUSTRIES PVT. LTD.
Income‑tax Reference No. 86 of 1962, decided on 26th September 1967.
Appeal‑Appellate Court's powers‑Claim for setting off of loss in hedging transactions against trade profits‑Profits assessed and set‑off disallowed‑Appellate Assistant Commissioner allowing set‑off but remanding case for reassessment of trade profits Tribunal restricting scope of inquiry in reassessment to speculation losses‑Power of Tribunal to restrict scope of inquiry‑Indian Income‑tax Act, 1912, S. 31(3)(b).
The assessee, who was a dealer, in, and manufacturer of vessels out of, stainless steel, copper and copper alloys and stainless steel scrap, claimed business losses of Rs. 4,05,905 and Rs. 1,70,213 for the years 1955‑56 and 1956‑57, respectively. The Income‑tax Officer computed loss for 1955‑56 at Rs. 1,30,889 and income for 1956‑57 and Rs. 5,60,078. In the same years, the assessee had claimed that he had incurred loss in respect of transactions entered into by way of speculation ‑in order to set‑off possible trading losses due to fluctuations in the market price of the metals which he had purchased. The Income‑tax Officer disallowed these speculation losses. The Appellate Assistant Commissioner set aside the assessment and directed the Income‑tax Officer not only to verify the forward transactions in metals but also to check up the correctness of the results disclosed in the manufacturing and trading accounts of the assessee. The Tribunal directed that, although the assessment could be set aside, the scope of the enquiry to be undertaken by the Income‑tax Officer in the course of the reassessment proceedings must be limited to the specific points that arose in the appeal and should not include reassess ment of the business profits:
Held, that the issue as to what was the trading loss or profit of the assessee could not be reopened in the circumstances of the case though the accounts as a whole may be looked into in order to determine the quantum of the hedging losses; on the facts and circumstances of the case, the Tribunal was justified in restricting the powers conferred on the Income‑tax Officer in making the reassessment under section 31(3)(b) of the Income‑tax Act.
Narrondas Manordass v. Commissioner of Income‑tax (1957) 31 I T R 909 distinguished.
Hukumchand Mills Ltd. v. Commissioner of Income‑tax (1967) 63 I T R 232 S C rel.
STATEMENT OF CASE
By these applications, which are consolidated for the sake of convenience, the Commissioner of Income‑tax (Central), Bombay, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's consolidated order in 1. T. As. Nos. 8303 and 8320 of 1960‑61. Inasmuch as, in our opinion questions of law do arise out of the aforesaid order of the Tribunal, we hereby draw up an agreed statement of the case and refer it to the High Court of Judicature at Bombay, under section 66(1) of the Indian Income‑tax Act, 1922.
2. The assessee is a private limited company and carries on the business of dealing in, and in the manufacture of, vessels out of stainless steel, copper and copper alloys and stainless steel scraps. The assessment years are 1955‑56 and 1956‑57; the corresponding accounting periods being the calendar years 1954 and 1955, respectively. In the assessments for these two years, the assessee claimed losses of Rs. 4,05,905and Rs.1,70,213 as losses in business. Rejecting these claims, assessments were made for these two years on July 31, 1958, and August 30, 1958, deter mining a loss of Rs. 1,30,889 in the first year and income of Rs. 5,60,078 in the second year.
3. Paragraph 2 of the assessment order for the assessment year 1955‑56 is as follows:
"As in the preceding year, the assesses‑company was carrying on business in non‑ferrous metals such as copper, stainless steel, aluminium, etc. It is also noticed that the assesses‑company had carried out manufacturing process in the above metals. The total turnover during the year of account amounts to Rs. 1,21,75,758 with a G. P. of 4 % as compared to the turnover of Rs. 53,56,664 and a G. P. of 115 % in the preceding year. It was explained that the rate of G. P. has come down mainly due to the fluctuating market in copper. It is noticed that the total purchase of copper during the year of account amounts to Rs. 1,08,94,377 at the rate of Rs. 35 per qr. and it is noticed that the assesses had to sell the goods that has been purchased during this year on almost the same rate of Rs. 35 per qr. In view of this,, the profit that has been obtained by the assessee in the copper account was only on account of the opening stock brought forward from the last year which was valued at the average rate of Rs. 29 per qr."
From the computation of income for that year in the same order it is also found:
"Less: inadmissibles: Speculation loss considered separately as per proviso to section 24(1) of the Income‑tax Act 4,05,905
The loss of Rs. 1,30,889 will be carried forward along with the unabsorbed depreciation of Rs. 1,30,380 of the previous year and set‑off against the business income in the next year. The speculation loss of Rs. 4,05,905 will be carried forward and set‑off against the future speculation profits. Exempted from this year."
Similarly, for the other year it is found:
"The assessee also had manufactured vessels out of the above metals. The total turnover during the year of account amounts to Rs. 2,06,79,990 with a G. P. of about 12 % as compared to the turnover of Rs. 1,21,75,759 with a G. P. of 4 % in the preceding year. Separate trading accounts have been filed for each metal and they have been duly scrutinised."
Copies of the Income‑tax Officer's orders for the assessment years 1955‑56 and 1956‑57 are Annexures "A‑1" and A‑2", respectively, and form part of the case.
4. The above assessment order deals also with the speculation loss in paragraph 3. Against the disallowance of a loss of Rs. 4,05,905 for the first year and Rs. 1,70,213 for the second year, the assessee preferred appeals to the Appellate Assistant Commissioner, L Range, Bombay. There were other grounds also taken for the year 1956‑57 with which we were not concerned in the two appeals. When the appeals were taken up by the Appellate Assistant Commissioner, he after hearing the parties passed on July 31, 1959, the following order:
"While dealing with the appeal for the assessment year 1955‑56, the counsel of the appellant alleged that the entire loss of Rs. 4,05,905, which has been treated as speculation loss under proviso 2 to section 24(1) of the Indian Income‑tax Act, is actually the ready loss, because it is the loss in respect of hedging transactions to guard against the loss from future price fluctuations in respect of their stock. The appellant has filed a big chart to prove his case. You are requested to go through the chart and the list prepared by the appellant to state if the contention of the appellant is correct. Remand report in duplicate should be submitted within one month from the receipt hereof."
5. The Income‑tax Officer, Companies Circle, on receipt of the said order did not immediately proceed to make the necessary inquiries and submit his report. Meanwhile, the jurisdiction over this particular assessment was transferred to the Income‑tax Officer, Section IV (Central), Bombay, and communicated to the assessee on February 18, 1960, by him. A copy of the Income- tax Officer's letter dated February 18, 1960, is Annexure "B" and forms part of the case. The jurisdiction over the appeals was also transferred to the Appellate Assistant Commissioner Central Range, Bombay, by the Board's Notification F. No. 50/128/60‑IT dated October 17, 1960. A copy of this notification is Annexure "C" and forms part of the case. There was, however, no notice to the assessee of this transfer.
6. The Income‑tax Officer, Section IV (Central), Bombay. who then became seized of this matter submitted his report dated 31st October 1960, in compliance with the Appellate Assistant Commissioner's remand order dated 31st July 1959. In this report, he set out the nature of the hedging transactions and the law relevant to them and then went on to deal with the trading accounts of the assessee in paragraph 8 of his report. On an analysis of the trading accounts, he came to the conclusion that there would be only a gross loss and there would not be a profit against which this loss stated to be of hedging could be set off. He, therefore, in the concluding portion of paragraphs 8 and 11 requested the Appellate Assistant Commissioner to set aside the assessment order to enable him to make a further investigation in the case. He further observed in paragraph 11 of his remand report as follows:
"This cannot be done in a limited enquiry of the type suggest ed in the letter dated 31st July 1959. Moreover, I find that it has been claimed for the first time before the Appellate Assistant Commissioner that the speculation loss, which has been dis allowed, was a hedging loss of the assessee. I, therefore, request you to set aside the assessment in order to enable to make further investigation in the case."
A copy of the remand report of the Income‑tax Officer is Annexure "D" and forms part of the case.
7. On the receipt of the remand report, the Appellate Assis tant Commissioner, Central Range, Bombay, to whom the jurisdiction had since been transferred, heard the appeal. In this appeal, the assessee's objections were all considered especially the objections raised in the assessee's letter dated November 29, 1960. A copy of the assessee's letter dated November‑ 29, 1960, is Annexure "E" and forms part of the case. It may be stated here that the assessee even at this stage did not raise any objection as to the propriety or validity of the transfer of the proceedings by the Central Board of Revenue to the files of the Income‑tax Officer, Section IV (Central), and the Appellate Assistant Commissioner, Central Range. The Appellate Assistant Commissioner by his order dated November 29, 1960, set aside the ‑ assessments and directed the Income‑tax Officer to re‑do the same in accordance with law. In paragraph 3 of his order he stated as follows;
"3. I am afraid neither at the time of the original assess ment nor during the course of the scrutiny of the statements at the time of remand proceedings the Income‑tax Officer has applied his mind to verify the genuineness of the various losses incurred on the forward transactions in metals. According to the letter dated July 19, 1958, of the company all hedging losses have been paid to and hedging profits have been received from Messrs Devidayal (Sales) Private Ltd. The books of this allied concern have not been examined. It is also seen that the bulk of the loss during the year 1954 has occurred in the months of October and November, i.e. towards the close of the year of account when the results in ready trading could be more or less estimated with reasonable precision. In the circumstances, it is necessary that the Income‑tax Officer should go into the question of the forward transactions in the assessment years 1955‑56 and 1956‑57, fully examining the relevant contracts and also the souda books maintained by all the connected parties to find out how far the various transactions are genuine. Only after the genuineness of the losses claimed is established the question of treating them as speculation loss or otherwise will have to be considered. As this has not been done, I set aside the assessment and direct the Income‑tax Officer to verify the forward transactions in metals and also check up the correctness of the results disclosed in the manufacturing and trading accounts of the appellant. The appellant's Representative stated that, in case the assessments for the years 1955‑56 and 1956‑57 are set aside, the scope of the inquiry to be undertaken by the Income-tax Officer in the course of the reassessment proceedings must be limited to the specific points that arise in the appeal. I cannot accept this suggestion because, once the assessment is set aside, it will be open to the Income‑tax Officer to re‑do the same according to the law and the Income‑tax Officer's power while acting under section 23 of the Act cannot in any way be fettered."
Copies of the Appellate Assistant Commissioner's orders for the years 1955‑56 and 1956‑57 are Annexures "F‑1" and "F‑2" respectively and form part of the case.
8. Against the order of the Appellate Assistant Commissioner setting aside the assessments for the years 1955‑56 and 1956‑57, the assessee preferred appeals to the Tribunal. It was contended by Mr. Aggarwal, the learned counsel for the assessee, that the transfer of the proceedings from the file of the Income- tax Officer, Companies Circle and the Appellate Assistant Com missioner, L‑Range, to the Income‑tax Officer, Section IV (Central) and the Appellate Assistant Commissioner, Central Range, was invalid and mala fide and no notice was given to the assessee of the proposed transfer of the files and consequently the entire proceedings were void. It was also contended that the Appellate Assistant Commissioner ought not to have directed the entire assessments to be reopened but that he should have confined his direction to the verification of losses from hedging, which alone was the subject‑matter of the appeals before him. The departmental representative on the other hand contended that it was not open to the assessee to question the validity or propriety of the transfer proceedings or non‑service of notice prior to the transfer, at that stage, especially so, when the assessee had not raised the same before. It was also contended by the departmental representative that the Appellate Assistant Commis sioner had the widest powers. He could direct the Income‑tax Officer in the manner he had done to go into the trading accounts as well; and it was further stated that the Appellate Assistant Commissioner having himself powers of enhancement could direct the Income‑tax Officer to do what he himself could have done in the circumstances; that trading account was one of the items already examined by the Income‑tax Officer in his order with reference to which the Appellate Assistant Commissioner could legitimately exercise his own powers so to enhance.
9. The questions which the Tribunal had to consider were whether the transfer of the proceedings from the files of the income‑tax Officer, Companies Circle, and the Appellate Assistant Commissioner, Range, to the Income‑tax Officer, Section IV (Central), and the Appellate Assistant Commissioner, Central Range, was valid and proper, whether the proceedings were invalid because of want of notice to the assessee before the transfer was effected and whether, in the facts and circumstances of the case, the Appellate Assistant Commissioner ought to have given directions to the Income‑tax Officer restricting the investi gation to the hedging losses and not to permit him to re‑investigate the trading accounts especially in view of the fact that the income‑tax Officer at the original stage had applied his mind, scrutinised the accounts and had accepted the same and the directions given would open the doors for a further roving inquiry into the trading accounts thereby multiplying the pro ceedings needlessly.
10. Relying upon the decision of the Supreme Court in the case of Pannalal Binjraj v. Union of India ((1957) 31 I T R 565), the Tribunal rejected the first contention. It held that, as the assessee had acquiesced in the jurisdiction of the Income‑tax Officer to whom the case had been transferred under section 5(7‑A), it could not subsequently object to the jurisdiction of the officer. As regards the second contention, the Tribunal held:
"9. As regards the second contention, from the extracts from the original assessment orders it is clear that the Income tax Officer making the assessments had applied his mind and scrutinised the trading accounts filed for each of these two years. The Income‑tax Officer even observes:
"Separate trading accounts have been filed for each metal and they have been duly scrutinised."
The assessment order also clearly indicates the examination and acceptance of the reason for the fall in gross profit. This is what it says:
"It is noticed that the total purchase of copper during the year of account amounts to Rs. 1,08,94,377 at the rate of Rs. 35 per qr. and it is noticed that the assessee had to sell the goods that has been purchased during this year on almost the same rate of Rs. 35 per qr. In view of this, the profit that has been obtained by the assessee in the copper account was only on account of the opening stock brought forward from the last year which was valued at the average rate of Rs. 29 per qr."
The assessments were made only after examination of the separate accounts and the details of the losses. This is clear from the letter of the Income‑tax Officer dated 11th July 1958 and the assessee's reply thereto dated 19th July 1958. The Income‑tax Officer specifically called upon the assessee by his letter dated 11th July 1958, to furnish separate trading accounts for all the metals during the year 1955‑56, giving full particulars about the quantity purchased and quantity sold and in case of metals where manufacturing processes were carried on the assessee was required to give full details about the consumption of metals. The assessee was called upon to furnish particulars regarding speculation loss and full details of payments and receipts of Rs. 2,000. The assessee was also specifically called upon to furnish reasons for the low rate of gross profit during the year. That the assessee furnished these particulars is also clear from the reply dated 19th July 1958, where he specifically states regarding submission of separate trading accounts of the metals and the furnishing of particulars regarding all hedging losses.
10. The main argument of the departmental representative in this case is that the Appellate Assistant Commissioner had unfettered jurisdiction to set aside the assessment and direct the Income‑tax Officer to re‑examine the matter in any manner. In support of this he relied upon certain decisions. It is not necessary to consider the decisions in view of the fact that Mr. Aggarwal, the learned counsel for the assessee, did not challenge that proposition, but all that he confined himself to was that in the circumstances the Appellate Assistant Commissioner ought to have given directions to the Income‑tax Officer restricting the investigation to the hedging losses and not to permit him to re‑investigate the trading accounts especially in view of the fact that the Income‑tax Officer at the original stage having applied his mind, scrutinised the accounts and had accepted the same and that the present direction which opened the doors for a further roving enquiry into the trading would multiply proceedings needlessly. We see considerable force in this submission of Mr. Aggarwal. Even in the remand report all that the Income- tax Officer says is that if the trading accounts are scrutinised they will only show a gross loss and there would not be any profit for the hedging losses to be set off against. Therefore, we consider that, in the facts and circumstances of this case, while undoubted ly the Appellate Assistant Commissioner had the power to set aside the assessment and direct the Income‑tax Officer to make such investigation as he may ‑direct, that power should be judiciously exercised in the facts and circumstances of each case. At no time the genuineness of the trading accounts having been disputed, the Income‑tax Officer at the original stage having scrutinised, considered and accepted the same, it is unnecessary to rip open the trading accounts. Even in the remand he has not discovered any serious laches. The Appellate Assistant Commis sioner's order setting aside the assessment will have no doubt to stand, as it has not been passed without jurisdiction, but, in our opinion, purely from grounds of expediency, it is just and reason able to restrict the scope of the enquiry of the Income‑tax Officer in the reassessment proceedings to only the speculation losses and to no other point. We modify the Appellate Assistant Commissioner's orders accordingly."
A copy of the Tribunal's order is Annexure "G" and forms part of the case.
11. The Commissioner of Income‑tax seeks to raise the following question which, according to him, arises out of the order of the Tribunal:
"Whether, on the facts and in the circumstances of the case, it was open to the Tribunal to restrict the powers conferred on the Income‑tax Officer in making assessment directed under section 31(3)(b) of the Income‑tax Act.
It is common ground and it was nobody's case that the Tribunal could not pass such an order in any circumstances, but the real matter in issue was only whether, in the facts and circum stances of the case, the Tribunal was justified in restricting the powers conferred on the Income‑tax Officer, in making the assess ment under section 31(3)(b). Mr. Aggarwal objects to this question being raised, as according to him it is finding of fact, but we consider that this question of law does arise out of the order of the Tribunal.
12. Mr. Aggarwal wants the following questions to be referred to the High Court:
"1. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee had acquiesced in the jurisdiction of the Income‑tax Officer, Section IV (Central) and the Appellate Assistant Commissioner, Central Range?
2. If so, whether the transfers of the proceedings from the file of the Income‑tax Officer, Company Circle, and the Appellate Assistant Commissioner, `L' Range, to the Income‑tax Officer, Section IV (Central), and the Appellate Assistant Commissioner, Central Range, are invalid and mala fide and the entire proceed ings taken by them are null and void?"
But the departmental representative objects to these questions being raised. In view of the decisions reported in (1957) 31 I T R 844 at page 855 and (1958) 33 I T R 82 at pages 92‑93, we are referring the same.
13. In our opinion, the questions of law that arise out of the order of the Tribunal are:
"1. Whether, in the facts wind circumstances‑of the case the Tribunal was justified in restricting the powers conferred on the Income‑tax Officer in making assessment under section 31(3)(b) of the Income‑tax Act? .
2. Whether the transfer of the proceedings from the file of the Income‑tax Officer, Companies Circle, and the Appellate Assistant Commissioner, `L' Range, to file of the Income‑tax Officer, Section I V (Central), and Appellate Assistant Commis sioner, Central Range, is valid and proper?
3. Whether, in the facts and circumstances of this case it is open to the assessee having acquiesced in the jurisdiction of the Income‑tax Officer to whom the case was transferred under section 5(7‑A), to object to the jurisdiction of that officer?"
We accordingly refer to the High Court the above three questions.
14. At the request of the assessee, the following documents are made annexures and form part of the case:
A copy of letter dated 11th July 1958, from the Income‑tax Officer to the assessee (Annexure "H‑1");
A copy of the assessee's reply dated 19th July .1958 (Annexure "H‑2").
G. N. Joshi with R. J. Joshi for the Commissioner.
R. J. Kolah with S. E. Dastur for the Assessee.
JUDGMENT
KOTVAL, C. J.‑Since counsel for the assessee, at whose instance questions Nos. 2 and 3 have been referred for decision to this Court, has not pressed those questions, it is unnecessary to consider them. That leaves for out decision only question No. 1, which is as follows:
"Whether, in the facts and circumstances of the case, the Tribunal was justified in restricting the powers conferred on the Income‑tax Officer in making assessment under section 31(3)tb) of the Income‑tax Act?"
This question arises upon the following facts. We need not in stating the facts refer to any of the several facts to be found in the statement of the case which do not impinge upon this question. The two years with which we are concerned are the assessment years 1955‑56 and 1956‑57, corresponding to the accounting years January 1; 1954, to December 31, 1954, and January 1, 1955, to December 31, 1955. In those years the assessee, who is a dealer in and manufacturer of vessels out of stainless steel, copper and copper alloys and stainless steel scrap, had claimed business losses its under:
1955‑56 1956‑57 Rs. Rs. 4,05,905 1,70,213
The Income‑tax Officer, however, computed the loss for .1955‑56 at Rs. 1,30,889 and the income for 1956‑57, at Rs. 5,60,078. In the same years, the assessee had…
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