Farrukhabad Gramin Bank v. ITO ()

INCOME TAX

--Precedent----SUPREME COURT DECISIONEffect of-- Held: The law laid down by the Supreme Court is binding under article 141 of the Constitution of India not only between the litigant, but law is declaratory for the nation.

Income Tax Act, 1961 s.148

INCOME TAX

--Reassessment----NOTICE UNDER SECTION 148Validity--Assessee, a regional rural bank, in the course of banking business made investment with a nationalised bank and financial institutions, etc., to earn income. The said income was disclosed in the return and exemption under section 80P(2)(a)(i) was granted. Thereafter, on the basis of the Supreme Court decision in M.P. Co-operative Bank Ltd. v. CIT (1996) 218 ITR 438 (SC) notice under section 148 was issued. In the writ petition, the assessee pointed out that the Supreme Court in its subsequent decision in CIT v. Karnataka State Co-operative Bank (2001) 251 ITR 194 (SC), had reversed its earlier decision in M.P. Co-operative Bank Ltd s case (supra) and held that any income derived by the assessee-bank from the fund placed with SBI or RBI to enable it to carry on its banking business is exempt under section 80P(2)(a)(i). Thus, the assessee contended that the notices under section 148 were not valid. Held: The subsequent decision of the Supreme Court shall be deemed to be operative by fiction of law on the date of assumption of the jurisdiction by the AO and the day on which he formed the belief that income had escaped assessment, therefore, the later decision of the Supreme Court reversing its own earlier decision, invalidated the notices issued under section 148. The very foundation of notices under section 148 had totally disappeared and, therefore, same were not valid.

Income Tax Act, 1961 s.148

Farrukhabad Gramin Bank v. ITO

In the Allahabad High Court R.K. Agarwal & Prakash Krishna, JJ.

Civil Miscellaneous Writ Petition No. 132 of 2002 23 November 2004

Counsel: Shakeel Ahmad, for the Assessee A. N. Mahajan, for the Revenue

JUDGMENT

Prakash Krishna, J.

Challenging the validity of three notices issued under section 148 of the Income Tax Act, 1961, for the assessment years 1995-96, 1996-97 and 1997-98 the present writ petition has been filed:

2. The petitioner is a regional rural bank and is an incorporated body established on 29-3-1976, under the provisions of section 3(1) of the Regional Rural Banks Act, 1976. The shareholding in the petitioner is as follows:

3. It was established mainly with a view to provide basic banking facility in the remote rural areas and to mobilise savings from the rural masses. In the course of banking business the petitioner made investment with the nationalised bank and financial institutions. etc., to earn income. The petitioner for the assessment years 1995-96 to 1997-98 filed its income-tax returns. The assessments were completed and the disclosed income in the returns was accepted by the Income Tax Department. The assessing authority while passing the assessment order under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), granted exemption from tax on the income accrued from the investment. Presumably, it was treated as income attributable to the banking business under section 80P of the Act.

4. The controversy arose subsequently when the Income Tax Department issued reassessment notices for all these three assessment years to reopen the assessment orders passed under section 143(1)(a) of the Act and to reassess the income of the petitioner. The reasons given by the assessing authority, namely Income Tax Officer, Ward-I, Farrukhabad is, that the Supreme Court in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) has held that only the income earned from banking business is exempt under section 80P and the other income is chargeable to tax under the Act. Fortified with the aforesaid judgment of the Supreme Court the Income Tax Officer formed reasons to believe that the investment income has escaped assessment for all these three years by reason of excess allowance of deduction under section 80P of the Act. Challenging the validity of all these notices in the light of the reasons to believe, as recorded by the assessing authority, the present writ petition has been filed.

5. Heard Sri Shakeel Ahmad, learned counsel for the petitioner and Sri A. N . Mahajan, learned standing counsel for the revenue.

6. The petitioner submitted that the reassessment notices in question are wholly arbitrary and without jurisdiction. The reasons recorded by the assessing authority to reopen the assessment legally do not give jurisdiction to him to issue reassessment notice as the Apex Court in its subsequent judgment has reversed its earlier judgment, on which notices were issued. He placed reliance upon CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC).

7. In contra learned counsel for the department submitted that the day on which reassessment notices were issued the assessing authority had validly exercised his jurisdiction to reopen the assessment, as the judgment of the Supreme Court delivered in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT (supra) was holding the field. Subsequent overruling of the said judgment will not, in any way, affect the validity of the reassessment notices.

8. The Apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank (supra)has held that any income derived by the assessee from the fund and placed with the State Bank of India or the Reserve Bank of India to enable it to carry on its banking business, is exempt by reason of section 80P(2) (a) (i) of the Act. It has been held that placement of such fund being imperative for the purposes of carrying on the banking business; the income derived therefrom shall be the income from the assessees business. There is nothing in the phraseology of that provision which makes it applicable only to income derived from circulating capital. The Apex Court in the aforesaid judgment has subsequently overruled its earlier judgment given in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT with the observation that it does not set down the correct law and the law is as it has been put by it in the case of CIT v. Karnataka State Co-operative Apex Bank. This legal position was not disputed by learned standing counsel for the revenue.

9. If that is so the position which emerges from the above discussion is that the very foundation of the notices under section 148 of the Act has totally disappeared. It is not open to the department to contend that only banking business is exempt under section 80P of the Act and the investment income is not exempt.

10. Faced with this situation learned counsel for the respondent submitted that the day on which notices under section 148 of the Act were issued, the assessing authority validly assumed jurisdiction to initiate reassessment proceedings in view of the then prevailing law, as interpreted by the Supreme Court in the case of M. P. Co-operative Bank Ltd. and the initiation of proceeding was valid. Elaborating the argument it was submitted that no case for interference under article 226 of the Constitution of India by this court, has been made out, notwithstanding the fact that the earlier judgment of the Supreme Court has been overruled by it. He has relied upon the following decisions:

(1) Poonjabhai Vanmalidas and Sons (HUF) v. CIT (1974) 95 ITR 251 (Guj) (FB);

(2) CIT v. Maneklal Harilal Spinning and Manufacturing Co. Ltd. (1977) 106 ITR 24 (Guj);

(3) CIT v. Ahmedabad Manufacturing and Calico Printing Co. Ltd. (1977) 106 ITR 159 (Guj); and

(4) Chandi Ram v. ITO (1997) 225 ITR 611 (Raj).

11. In which it has been held that once notice has been issued under section 147/148, the subsequent development would not invalidate the said notice as there may be other items of income which can be brought to tax under the reassessment proceedings. However, a Division Bench of this court in Ram Singh and Sons v. State of U. P. (1980) UPTC 1128 in a case arising out under section 21 of the U. P. Trade Tax Act, which relates to the assessment of escaped assessment, has held that where the very basis of the notice issued under section 21 consequent upon overruling of the decision of the Apex Court has disappeared the proceeding in pursuance of reassessment notice, cannot go. We are in respectful agreement with the view taken by this court, which is otherwise binding on us.

12. Even otherwise, this argument overlooks the well established principles of law that the interpretation put by a court on an enactment is operative from the date of the commencement of the Act. To put it differently, the interpretation of law operatives retrospectively, the interpretation given by a court, holds the field not from the date of pronouncement of the judgment but with effect from the date of enforcement of the concerned provision. Explaining the law, the Supreme Court in the famous case of L.C. Golak Nath v. State of Punjab, AIR 1967 SC 1643, para. (44A) has observed as follows (page 1666) :

'(44A) There are two doctrines familiar to American jurisprudence, one is described as the Blackstonian theory and the other as prospective overruling, which may have some relevance to the present enquiry. Blackstone in his commentaries, 69 (15th edn. 1809) stated the common law rule that the duty of the court was not to pronounce a new rule but to maintain and expound the old one. It means the judge does not make law but only discovers or finds the true law. The law has always been the same. If a subsequent decision changes the earlier one, the latter decision does not make law but only discovers the correct principle of law. The result of this view is that it is necessarily retrospective in operation.'

13. The Supreme Court in the case of Ganga Sugar Corporation Ltd. v. State of U. P. (1980) 45 STC 36 AIR 1980 SC 286 has held that the law laid down by it is binding under article 141 of the Constitution of India not only between the litigant, but law is declaratory in the nation.

14. Sri A. N. Mahajan, learned standing counsel has placed reliance upon the judgment of the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO (2003) 259 ITR 19 (SC), and appealed to us not to entertain the present writ petition. The said case was decided on its own facts. The High Court refused to examine the validity of the notices issued under section 148 of the Act as it took a view that all objections in its reply to the notice can be raised by the petitioner before the assessing authority in the course of reassessment proceeding. The writ petition was dismissed as premature. The Supreme Court, in appeal, confirmed the order of the High Court with the observation that when notices under section 148 of the Act have been issued, the proper course of action for the noticee is to file the return and if he so desires, to ask reasons for issuing notices. On receipt of reasons the noticee is entitled to file objection to the issuance of notice and the assessing authority is bound to dispose of the same by passing a speaking order. In that view of the matter the Apex Court dismissed the appeal. In the case in hand the assessing authority has furnished reasons and the petitioner has also filed the return. The reasons furnished by the assessing authority do not on their face value hold good for reopening the concluded assessments in view of the subsequent pronouncement by the Supreme Court. The said pronouncement shall be deemed to be operative by fiction of law on the date of assumption of jurisdiction by the assessing authority and the day on which he formed the belief that the income has escaped to assessment. No useful purpose is going to be served by relegating the petitioner to contest the proceedings before the departmental authorities. On undisputed facts the proceedings under section 147 of the Act under law cannot be sustained.

15. No other point was pressed. In view of the above discussion we are of the opinion that the reassessment notices under section 148 of the Act for the assessment years involved in the present writ petition are totally without jurisdiction and they are hereby quashed.

16. In the result, the writ petition succeeds and is allowed. The reassessment notices issued under section 148 of the Act, filed as annexure 2 all dated 30-12-1999, for the assessment years 1995-96, 1996-97 and 1997-98 are hereby quashed.

17. However, there shall be no order as to costs.

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