[1992] 64 Taxman 442 (SC)

SUPREME COURT OF INDIA

Commissioner of Income-tax
v.
Sun Engineering Works (P.) Ltd.*
YOGESHWAR DAYAL AND A.S. ANAND, JJ.
CIVIL APPEAL NOS. 3251-52 OF 1979
SEPTEMBER  17, 1992 

Section 147 of the Income-tax Act, 1961 - Reassessment - General - Assessment years
1960-61 and 1961-62 - Whether proceedings under section 147 are for benefit of revenue
and not an assessee and are aimed at gathering 'escaped income' of an assessee, and
same cannot be allowed to be converted as 'revisional' or 'review' proceedings - Held,
yes - Whether claims which have been disallowed in original assessment proceeding
can be permitted to be reagitated on assessment being reopened for bringing to tax
certain income which had escaped assessment - Held, no - Whether, a matter not
agitated in concluded original assessment proceedings also cannot be permitted to be
agitated in reassessment proceedings unless relatable to item sought to be taxed as
'escaped income' - Held, yes - Whether, therefore, in reassessment proceedings under
section 147 assessee cannot seek a review of concluded item, unconnected with
escapement of income for purpose of computation of escaped income - Held, yes
Interpretation of Statues - Interpretation of a Machinery Provision
FACTS
 
For the assessment years 1960-61 and 1961-62 the assessee filed the return of income late declaring
losses. The ITO, by his order dated 12-12-1962, however, conveyed to the assessee that the loss returns
submitted beyond time were invalid and no action on them was necessary and, hence, the proceedings
for both these years were filed. On appeal, the AAC held that the ITO was wrong in filing the returns
without proper scrutiny and without first computing the loss in accordance with law. The AAC also
opined that it could only be known after proper computation whether the assessment would result in a
loss or not. However, the appellate authority finally held that since the ITO had filed the returns, no
relief could be granted to the assessee in the appeals and dismissed the same. No appeal was filed by the
assessee against this order. Subsequently, the assessee filed a disclosure petition as a result whereof the
assessee became assessable for the disclosed sums. The ITO considered the said sums as escaped income
and brought the same to tax under section 147(a).
On appeal, the AAC accepted the assessee's plea that the ITO should have redetermined the loss so
declared in the original returns and set it off against the escaped income from other sources and even
carried forward the loss, if necessary, to the subsequent assessment years. On further appeal by the
revenue, the Tribunal accepted the plea of the revenue that the action of the ITO in filing the assessment
proceedings for 1960-61 and 1961-62 on the grounds indicated by him amounted to nil assessment and
that the ITO had not allowed the losses as claimed by the assessee in the returns which had been filed
beyond time limit. The Tribunal opined that since the decision of the ITO had been upheld in appeal by
the AAC and the assessee had not taken up the matter in any further appeal or revision, the order of the
ITO dated 12-12-1962 had acquired finality and, thus, the AAC had fallen in error to hold that the
determination of the losses claimed originally was still open for review in proceedings under section
147(a).
On appeal to Supreme Court:
HELD
 
The orders for the assessment years 1960-61 and 1961-62 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 apparently there was no taxable income, the losses were not
directed to be set off or carried forward by the ITO. Even if it was 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 AAC and no further steps were taken by the assessee to question the
order of the ITO. Those orders had, in fact and in law, become final. Thus, by the order dated 12-12-
1962, the assessment proceedings had been 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 in assuming as if the 'loss return' had not been finally disposed of or was still open.
The ITO 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.
Further, to judge whether the assessee could claim set off, not granted in the original assessment
proceedings, by raising that plea once again in the reassessment proceedings under section 147, the
assessing officer has been vested with the power to 'assess or reassess' the escaped income of an
assessee. The use of the expression 'assess or reassess such income or recompute the loss or
depreciation allowance' in section 147 after the conditions for reassessment are satisfied, is only
relatable to the preceding expression in clauses (a) and (b) viz., 'escaped assessment'. The term 'escaped
assessment' includes both 'non-assessment' as well as 'under assessment'. Income is said to have
'escaped assessment' within the meaning of this section when it has not been charged in the hands of an
assessee in the relevant year of assessment. The expression 'assess' refers to a situation where the
assessment of the assessee for a particular year is, for the first time, made by resorting to the provisions
of section 147 because the assessment had not been made in the regular manner under the Act. The
expression 'reassess' refers to a situation where an assessment has already been made but the ITO has,
on the basis of information in his possession, reason to believe that there has been under assessment on
account of the existence of any of the grounds contemplated by the provisions of section 147(b), read
with the Explanation (I) thereto. The principle laid down by the Supreme Court in V. Jaganmohan Rao v.
CIT [1970] 75 ITR 373 (SC) therefore, is only to the extent that once an assessment is validly reopened
by issuance of notice under section 34 of the 1922 Act (corresponding to section 147 of the 1961 Act),
the previous under-assessment is set aside and the ITO has the jurisdiction and duty to levy tax on the
entire income that had escaped assessment during the previous year. What is set aside is, thus, only the
previous under-assessment and not the original assessment proceedings. An order made in relation to
the escaped turnover does not affect 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 of
'under-assessment' 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 judgment in Jaganmohan Rao's case
(supra) therefore, cannot be read to imply as laying down that in the reassessment proceedings validly
initiated the assessee can seek reopening of the whole assessment and claim credit in respect of items
finally concluded in the original assessment. The assessee cannot claim 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 fact not escaped assessment and that the same had been shown under
some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Rao's case
(supra) as if laying down that reassessment wipes out the original assessment and that reassessment is
not only confined to 'escaped assessment' or 'under-assessment' but to the entire assessment for the year
and start the assessment proceedings de novo giving right to an assessee to reagitate matters which he
had lost during the original assessment proceeding, which had acquired finality, is not only erroneous
but also against the phraseology of section 147 and the object of reassessment proceedings. Such an
interpretation would be reading that judgment totally out of context in which the questions arose for
decision in that case.
It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court,
divorced from the context of the question under consideration and treat it to be the complete 'law'
declared by the 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 the Court. A decision of the Court
takes its colour from the questions involved in the case in which it is rendered and while applying the
decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the
decision of the Court and not to pick out words or sentences from the judgment, divorced from the
context of the questions under consideration by the Court, to support their proceedings.
Section 147, although part of a taxing statute, imposes no charge on the subject but deals merely with
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 are
for the benefit of the revenue and not an assessee and are aimed at gathering the 'escaped income' of 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.
Further, in proceedings under section 147 the ITO may bring to charge items of income which had
escaped assessment other than or in addition to that item or items, which have led to the issuance of
notice under section 148 and where reassessment is made under section 147 in respect of income which
has escaped tax, the ITO'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 assessee to reagitate questions which have been decided in the original assessment
proceedings. It is only the under-assessment which is set aside and not the entire assessment when
reassessment proceedings are initiated. The ITO cannot make an order of reassessment inconsistent with
the original order of assessment in respect of matters which are 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 had 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 ITO's jurisdiction 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 original assessment proceeding cannot be permitted to be
reagitated on the assessment being reopened for bringing to tax certain income which had escaped
assessment because the controversy on reassessment is confined to matters which are relevant only in
respect of the income which had not been brought to tax during the course of the original assessment. 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 reassessment proceedings for bringing to tax items which had escaped
assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in
respect of that income or the non-taxability of the items at all. Keeping in view the object and purpose of
the proceedings under section 147 which are for the benefit of the revenue and not an assessee, an
assessee cannot be permitted to convert the reassessment proceedings on his appeal or revision, in
disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed
in the original assessment proceedings, unless relatable to 'escaped income', and reagitate the
concluded matters. Even in cases where the claims of the assessee during the course of reassessment
proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be
limited to the extent to which they reduce the income to that originally assessed. The income for
purposes of 'reassessment' cannot be reduced beyond the income originally assessed.
In the instant case, the Tribunal rightly found that 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 original assessment had acquired finality when
the appeal against the order of assessment failed before the AAC and the assessee took no further steps
to agitate the issue. The Tribunal was also right in concluding that the items which the assessee wanted
to be taken into account in the proceedings under section 147 were unconnected with the escapement of
income. The High Court clearly fell in error in holding otherwise. Since the original assessment had
been concluded finally against the assessee, it was not permissible for the assessee in the reassessment
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 under section 147(a ) the finally-concluded assessment proceedings and to
grant to it 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'.
Therefore, in the reassessment proceedings, it was not open to the assessee to seek a review of the
concluded item, unconnected with the escapement of income, for the purpose of computation of the
escaped income.
Decision of the High Court reversed.
JUDICIAL ANALYSIS
 
The principle laid down by this Court in V. Jaganmohan Rao v. CIT/CEPT [1970] 75 ITR 373 (SC), is
only to the extent that once an assessment is validly reopened by issuance of notice under section 34 of
the Indian Income-tax Act, 1922 (corresponding to section 147 of the 1961 Act) the previous under-
assessment is set aside and the ITO has the jurisdiction and duty to levy tax on the entire income that
had escaped assessment during the previous year.
The judgment in V. Jaganmohan Rao's case (supra), therefore, cannot be read to imply as laying down
that in the reassessment proceedings validly initiated the assessee can seek reopening of the whole
assessment, and claim credit in respect of items finally concluded in the original assessment.
It would be seen that whereas in the case of Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 82 (SC)
the question as to the rights of an assessee to claim 'redoing', 'revising' or 'recomputing' entire income
during the reassessment proceedings was left open, that question did not come up for consideration in
the case of Dy. CCT v. H.R. Sri Ramulu [1977] 39 STC 177 (SC) or CST v. H.M. Esufali H.M. Abdulali
[1973] 32 STC 77 (SC) or even in V. Jaganmohan Roa's case (supra). Some of the High Courts,
therefore, fell in error in reading those judgments, divorced from the context in which the precise
questions came up for consideration in those cases, and to hold that the assessee could 'reagitate' the
concluded issues and claim relief in respect of items, finally concluded in the original assessment
proceedings, during the reassessment proceedings, unconnected with the escapement of income. We
cannot, therefore, approve the broad propositions laid in that regard in Dy. Commissioner v. Indian
Refrigeration Industries (P.) Ltd. [1980] 46 STC 264 (Mad.), CIT v. Ramsevak Paul [1977] 110 ITR 527
(Cal.), CIT v. Assam Oil Co. Ltd. [1982] 133 ITR 204 /[1981] 6 Taxman 251 (Cal.), CIT v. Standard
Motor Products of India Ltd. [1983] 142 ITR 877 / 13 Taxman 269 (Mad.), CIT v. Rangnath Bangur
[1984] 149 ITR 487 /[1985] 20 Taxman 72 (Raj.), State Bank of Hyderabad v. CIT [1988] 171 ITR
232/[1987] 34 Taxman 515 (AP) and CIT v. Indian Rare Earth Ltd. [1990] 181 ITR 22/ 48 Taxman 183
(Bom.) (TB)
CASE REVIEW
 
V. Jaganmohan Rao v. CIT [1970] 75 ITR 373 (SC) and Esthuri Aswathiah v. ITO [1961] 41 ITR 539
(SC) [FB] followed and relied upon.
Deputy Commissioner of Commercial Taxes v. Indian Refrigeration Industries P. Ltd. [1980] 46 STC
264 (Mad.), CIT v. Ramsevak Paul [1977] 110 ITR 527 (Cal.), CIT v. Assam Oil Co. Ltd. [1982] 133
ITR 204 (Cal.), CIT v. Standard Motor Products of India Ltd. [1983] 142 ITR 877 (Mad.), CIT v.
Rangnath Bangur [1984] 149 ITR 487 (Raj.), State Bank of Hyderabad v. CIT [1988] 171 ITR 232 (AP),
CIT v. Indian Rare Earth Ltd. [1990] 181 ITR 22 (Bom.) [FB] and Sun Engineering Works (P.) Ltd. v.
CIT [1978] 111 ITR 166 (cal.) reversed.
Madhavjee Damodar Thackersay v. CIT [1935] 3 ITR 457 (Bom.), Kevaldas Ranchhodas v. CIT [1968]
68 ITR 842 (Bom.), Hiralal v. CIT [1980] 121 ITR 89 (Raj.), Sir Shadi Lal and Sons v. CIT [1973] 92
ITR 453 (All.), CWT v. C. Ravindran [1977] 107 ITR 547 (Ker.), CWT v. Ballarpur Industries Ltd.
[1979] 118 ITR 711 (Bom.) and Chettinad Corpn. (P.) Ltd. v. CIT [1984] 147 ITR 57 (Mad.) approved.
CASES REFERRED TO
 
Dy. CCT v. H.R. Sri Ramulu [1977] 39 STC 177 (SC), V. Jaganmohan Rao v. CIT/CEPT [1970] 75 ITR
373 (SC), Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 82 (SC), Esthuri Aswathiah v. ITO [1961]
41 ITR 539 (SC), Madhavjee Damodar Thackersay v. CIT [1935] 3 ITR 457 (Bom.), Hiralal v. CIT
[1980] 121 ITR 89/3 Taxman 575 (Raj.), Kevaldas Ranchhodas v. CIT [1968] 68 ITR 842 (Bom.), Sir
Shadi Lal & Sons v. CIT [1973] 92 ITR 453 (All.), Sharda Trading Co. v. CIT [1984] 149 ITR 19/17
Taxman 49 (Delhi), CWT v. C. Ravindran [1977] 107 ITR 547 (Ker.), CWT v. Ballarpur Industries Ltd.
[1979] 118 ITR 711 (Bom.), CIT v. Standard Motor Products of India Ltd. [1983] 142 ITR 877/13
Taxman 269 (Mad.), Chettinad Corpn. (P.) Ltd. v. CIT [1984] 147 ITR 57/[1983] 14 Taxman 533
(Mad.), Dy. Commissioner v. Indian Refrigeration Industries (P.) Ltd. [1980] 46 STC 264 (Mad.), Joint
CTO v. Ekambareeswarar Coffee & Tea Works [1991] 83 STC 457 (Mad.), CIT v. Assam Oil Co. Ltd.
[1982] 133 ITR 204 /[1981] 6 Taxman 251 (Cal.), CIT v. Ramsevak Paul [1977] 110 ITR 527 (Cal.),
State Bank of Hyderabad v. CIT [1988] 171 ITR 232/[1987] 34 Taxman 515 (AP), CIT v. Rangnath
Bangur [1984] 149 ITR 487/[1985] 20 Taxman 72 (Raj.), CIT v. Indian Rare Earth Ltd. [1990] 181 ITR
22/48 Taxman 183 (Bom.) (FB). New Keiser-I-Hind Spg. & Wvg. Co. Ltd. v. CIT [1977] 107 ITR 760
(Bom.), CST v. H.M. Esufali H.M. Abdulali [1973] 32 STC 77 (SC) and H.H. Maharajadhiraja Madhav
Rao Jiwaji Rao Scindia Bahadur v. UOI [1971] 3 SCR 9 (SC).
JUDGMENT
 
Anand, J.—The following question was formulated by the Calcutta High Court while granting the
certificate of fitness to file these appeals against the judgment of the Division Bench of that Court dated
17-11-1976.
"Where an item unconnected with the escapement of income has been concluded finally against the
assessee how far 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 the grant of certificate of
fitness to file the appeals are as follows:
2. Respondent in both the appeals is the assessee for the assessment year 1960-61. The assessee filed the
return of income on 17-11-1960, showing a loss of Rs. 35,418. For the assessment year 1961-62, the
return of income was filed on 4-10-1961 declaring a loss of Rs. 24,314. The ITO after discussion with
the authorised representative of the assessee Shri A. 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 return is beyond time. Filed as N.D'. The ITO conveyed to the appellant vide
communication dated 12-12-1962.
Sub : Assessment years 1960-61 and 1961-62.
With reference to above and your authorised representative's discussion with me I am to inform you that
the loss returns submitted beyond time for the assessment years under reference, being invalid, no action
on them is necessary. Hence the proceedings for both these years are filed.
The assessee challenged the order of the ITO before the AAC. The appellate authority held that the ITO
was wrong in filing the returns without proper scrutiny and without first computing the loss in
accordance with law. The AAC also opined that it could only be known after proper computation
whether assessment would result in a loss or not. However, the appellate authority finally held that since
the ITO 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 AAC and, thus, the
orders of the ITO relating to the assessment years 1960-61 and 1961-62 in respect of the "loss returns"
became final.
3. 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 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 ITO
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 ('the Act') was issued within the statutory period calling
upon the assessee to show cause why the escaped income of Rs. 27,000 and Rs. 9,000, for the two
assessment years respectively, 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 ITO made under section 147(a) the
assessee went up in appeal and the AAC accepted the plea of the assessee that the ITO should have
redetermined the loss as declared in the original returns and set it off against the escaped income from
other sources and even carried forward the loss, if necessary, to the subsequent assessment years.
Accordingly, the AAC allowed the appeal and directed the ITO not only to redetermine the loss as per
the original loss returns in the reassessment proceedings and set it off against the escaped income from
other sources but also that the unabsorbed loss, if any, should be carried forward and set off against the
income in the subsequent years.
4. Aggrieved by this order, the revenue went up in appeal before the Tribunal. The Tribunal accepted the
plea of the revenue that the action of the ITO 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 and that the ITO had not allowed the losses as claimed by the assessee in the returns which
had been filed beyond time. The Tribunal opined that since the decision of the ITO dated 12-12-1962
had been upheld in appeal by the AAC and the assessee had not taken up the matter in any further appeal
or revision, the order of the ITO dated 12-12-1962 had acquired finality. The Tribunal found that the
AAC had fallen in error to hold that the determination of the losses claimed originally 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 Calcutta High Court 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:
"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?"
5. 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 of the Indian Income-tax Act, 1922 (sic 147) relating to the income which had escaped
assessment viz., Rs. 27,000 and Rs. 9,000, 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 ITO 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 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 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 ITO
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 once reassessment 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-tax 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
submissions the assessee had relied upon the judgments in Dy. CCT v. H.R. Sri Ramulu [1977] 39 STC
177 (SC) and V. Jaganmohan Rao v. CIT/CEPT [1970] 75 ITR 373 (SC). The Division Bench after
hearing the arguments in the leave to appeal petition opined:
"In the instant case, it appears that the question which is involved, is not the power and the
jurisdiction of the Income-tax 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,"
and formulated the question noticed in the earlier part of this judgment while granting the certificate of
fitness.
6. Before us, Mr. K.R. Nambiar has appeared for the revenue and despite service, there has been no
appearance on behalf of the assessee who remained un-represented in these appeals.
7. With a view to answer the question as formulated by the High Court and to dispose of both the
appeals, it is necessary to 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 noticed, 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
apparently 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 AAC and no
further steps were taken by the assessee to question the order of the ITO. Those orders had, in fact and in
law, become final and the assessee has to thank itself for that situation.
8. In Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 82 a Bench of four learned Judges of this
Court considered the scope of the provision of 'set-off' and 'cary forward of losses' under the Indian
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.' " (p. 83)
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 authority. Subsequently, the ITO sent the assessee a notice
under section 34(1)(b) in the following terms:
" 'Whereas in consequence of definite information which has come into my possession I have
discovered that 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 has
(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 . . . .' " (p. 84)
In reply the assessee again submitted a 'nil' return and also filed a statement showing 'loss'. The ITO
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 section 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.' " (p. 84)
The assessee was particularly aggrieved by the last portion of the order and it claimed that the ITO 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 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 loss 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
against his income, profits or gains under any other head in that year'. Therefore, before any
question of set-off can arise, there must be (1) a loss under one or more of the heads mentioned in
section 6, and (2) an income profit or gains 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 one 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. Arunachalam Chettiar v. CIT
[1936] 4 ITR 173 at 178 and 179. In the present case, the loss is computed by striking a balance in
the profit and loss account of just in 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 determination and computation becomes
irrelevant." (Emphasis supplied) (p. 85)
9. Dealing with the reasoning of the High Court, the learned judge observed:
"The High Court proceeds on the ground that when proceedings are taken under section 34 the
assessee 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 all, (2) that proceedings were later taken under section 34, and (3) in the
course of these proceedings the assessee 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." (p. 86)
10. In Esthuri Aswathiah v. ITO [1961] 41 ITR 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 ITO 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 judges 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 original assessment proceedings had not
been concluded or disposed of. To quote the learned judge:
"The submission that the previous return submitted on September 8, 1952, '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 Income-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. . . " (p. 543)
11. In view of the settled position of law, as noticed above, the Tribunal 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 ITO 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.
12. 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?
13. To answer this question it is necessary to first extract the provisions of sections 147 and 148 (as they
existed at the relevant time). Section 147 read thus :
"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 and 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, the 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,
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 153 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 under-assessed; 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 account 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."
"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 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."
14. 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 defines as to what constitutes escape of assessment. In
order to invoke jurisdiction under section 147(a) 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 under section 139 for the relevant assessment year or to disclose
fully and truly material facts necessary for the assessment for that year. Both the conditions must exist
before an ITO can proceed to exercise jurisdiction under section 147(a). Under section 147(b) the ITO
also has the jurisdiction to initiate the proceedings for reassessment where he has reason to believe on
the basis of information in his possession that income chargeable to tax has been either under-assessed
or has been assessed at too low a rate or has been made the subject of excessive relief under the Act or
excessive loss or depreciation allowance has been computed. In either case whether the ITO invokes his
jurisdiction under clause (a) or clause (b) or both, the proceedings for bringing to tax an 'escaped
assessment' can only commence by issuance of a notice under section 148 within the time prescribed
under the Act. Thus, under section 147, the assessing officer has been vested with the power to 'assess or
reassess the escaped income of an assessee. The use of expression 'assess or reassess such income or
recompute the loss or depreciation allowance' in section 147 after the conditions for reassessment are
satisfied, is only relatable to the preceding expression in clauses (a) and (b) viz., 'escaped assessment'.
The term 'escaped assessment' includes both 'non-assessment' as well as 'under assessment'. Income is
said to have 'escaped assessment' within the meaning of this section when it has not been charged in the
hands of an assessee in the relevant year of assessment. The expression 'assess' refers to a situation
whether the assessment of the assessee for a particular year is, for the first time, made by resorting to the
provisions of section 147 because the assessment had not been made in the regular manner under the
Act. The expression 'reassess' refers to a situation where an assessment has already been made but the
ITO has, on the basis of information in his possession, reason to believe that there has been
underassessment on account of the existence of any of the grounds contemplated by the provisions of
section 147(b), read with Explanation (I) thereto.
15. There is some divergence of opinion in the High Courts in the country about the scope of power and
jurisdiction of the ITO under section 147 and the rights of an assessee in those proceedings.
16. In Madhavjee Damodar Thackersay v. CIT [1935] 3 ITR 457 (Bom.), while answering the following
question referred to the Bench:
"Whether in the circumstances of the case, the Income-tax Officer was correct in reassessing only
such sources of income as he found had actually escaped assessment at the time the original
assessment for the financial year 1931-32 (was levied on 31st July, 1931)" (p. 457)
Beaumont, CJ. repelled the plea raised on behalf of the assessee that in the reassessment proceedings an
assessee could obtain redress in respect of an erroneous assessment made at the time of original order of
assessment also and get credit in respect thereof during the reassessment proceedings. The learned Chief
Justice opined :
". . . that under section 34 of the Act it is income which has escaped assessment which can be
 subsequently charged and that it is not open to an assessee, when charged in that way to reopen the
whole assessment and seek to be allowed credit in respect of some item which has been over-
assessed but on the other hand it is open for an assessee to show that income alleged to have
escaped assessment has in truth and in fact not escaped assessment but has been brought in under
some inappropriate head . . . ." (p. 458)
The Rajasthan High Court in Hiralal v. CIT [1980] 121 ITR 89 was requested to answer the following
question in a reference under section 256(1) of the Act:
" 'Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that
the Income-tax Officer's jurisdiction under section 147 of the Income-tax Act, 1961, was confined
to the assessment of such income as had escaped assessment and did not extend to revising or re-
opening the whole original assessment?' " (p. 91)
The question was answered in the affirmative and it was held that the jurisdiction of the ITO under
section 147 was confined to the assessment of such income as had escaped assessment and did not
extend to revising or reopening the whole assessment. The Bench followed the judgment in Kevaldas
Ranchhodas v. CIT [1968] 68 ITR 842 of the Bombay High Court wherein it had been held that in the
reassessment proceedings initiated under section 34(1)(a ) on the ground that loss had been over-
estimated in the original assessment, the ITO had no jurisdiction to reopen the entire assessment
originally made, and determine afresh the assessable profits or the correct errors and omissions made by
the assessee in the matter of computation of total income. The power conferred upon the ITO in respect
of loss, it was held, was confined to recompute the loss and it was observed that when the legislature
speaks of recomputing the loss, it means only the loss and not the income, profits or gains. It was further
held that section 34(1)(a) does not empower a general recomputation of the income, profit or gains and
that the recomputation can take place only with a view to garnering in the income escaping assessment
under the first clause.
17. The Allahabad High Court in Sir Shadi Lal & Sons v. CIT [1973] 92 ITR 453 held that on
reassessment, the entire assessment is not opened and, therefore, a claim for expenditure which had been
disallowed during the original assessment proceedings cannot be reagitated on the assessment being
reopened for bringing to tax income which had 'escaped assessment'. The court held that the controversy
in reassessment is confined to matters which are relevant in respect of the income which had not been
brought to tax during the course of the original assessment.
18. In Sharda Trading Co. v. CIT [1984] 149 ITR 19 though the question before the Delhi High Court
arose in a somewhat different situation, it was observed that section 147 empowered the ITO only to
assess income which had escaped assessment in the relevant year and that reassessment is not confined
to those items in respect of which there is initiation of proceedings and once an assessment is reopened,
the ITO is duty bound to determine the tax liability of an assessee and for the said purpose he would
necessarily have to take into account not only the escaped income in respect of which a notice under
section 148, read with section 147 had been issued but also the entire income that had escaped
assessment during that year.
19. The Kerala High Court in CWT v. C. Ravindran [1977] 107 ITR 547 after following the judgment of
the Division Bench of the Bombay High Court in Kevaldas Ranchhodas' case (supra) and of the
Allahabad High Court in Sir Shadi Lal & Sons' case (supra) held in a case arising under the Wealth-tax
Act, 1957 that during the reassessment proceedings initiated by the WTO to reassess the escaped net
wealth under section 17(1) of the Wealth-tax Act, 1957, an assessee could not during the reassessment
proceedings to tax the escaped net wealth be allowed to seek recomputation of net wealth and redoing of
the assessment and be allowed a claim which the assessee had failed to make at the time of the regular
assessment, especially when that assessment of the assessee had become final. The Bench opined "that
there was no material difference in this respect between the provisions of the Income-tax Act and the
Wealth-tax Act".
20. In CWT v. Ballarpur Industries Ltd. [1979] 118 ITR 711 (Bom.), again in a case arising under the
Wealth-tax Act, Kantawala CJ. speaking for the Bench of the Bombay High Court opined that the nature
of the jurisdiction to assess under section 17 is limited and that there is nothing in the scheme of the
Wealth-tax Act to enlarge the limited scope of the power and jurisdiction of the WTO in assessing to tax
the escaped net wealth
". . . by allowing the assessee to seek a recomputation of net wealth and redoing of the assessment
and allow a claim which the assessee failed to make at the time of the regular assessment, especially
when the assessment of the assessee had become final . . . "(p.711)
21. A Division Bench of the Madras High Court in CIT v. Standard Motor Products of India Ltd. [1983]
142 ITR 877 also considered the scope of 'reassessment' under section 147(a). The Bench opined that
once the assessment is reopened, the ITO will not only have the jurisdiction but it would be his duty to
determine the tax liability of an assessee and for that purpose he will necessarily have to take into
account not only the escaped income in respect of which a notice under section 147 had been issued but
also the entire income that had escaped assessment during the year. The Bench went on to hold that the
ITO had the power and jurisdiction to bring to charge items falling under section 147(b) in a given case
where reassessment proceedings have been validly started by issuance of a notice under section 147(a).
It was held that once an assessment is reopened, the previous assessment is set aside and the whole
assessment proceedings start afresh. The initial order of 'assessment stands automatically' cancelled.
22. The same High Court in Chettinad Corpn. (P.) Ltd. v. CIT [1984] 147 ITR 57, however, observed :
"Having regard to the object and language of section 34 of the IT Act, 1922, section 147 of the IT
Act, 1961, and section 8 of the Surtax Act, 1964, the reopening of an assessment can only be for the
benefit of the revenue subject to one exception, viz., that where a particular item is sought to be
brought to charge for the first time in the reassessment proceedings, any allowance, deduction or
other relief in relation to that item can be put forward by the assessee and will have to be considered
by the assessing authority for grant of relief or otherwise. However, if any disallowance made in the
course of the original assessment which the assessee wants to be reconsidered during the
assessment is relevant or has any nexus with items of income that are brought to charge in the
reassessment, they can also be considered. But other items of disallowance or relief claimed by the
assessee which are not relevant to items which are the subject-matter of the enquiry in the
reassessment proceedings cannot be considered again by the ITO at the stage of reassessment."
(Emphasis supplied) (p. 57)
23. In Dy. Commissioner v. Indian Refrigeration Industries (P.) Ltd. [1980] 46 STC 264, the Madras
High Court in a sales tax case opined that when the Assessing Officer proceeds to make a reassessment
he does so for the purpose of redetermining the annual taxable turnover as a whole and the reassessment
order reflects the assessable turnover in its entirety and the original order of assessment is virtually set
aside. By reassessing the assessee, the taxing officer is bound to determine the taxable turnover for the
assessment year in question as a whole and the assessing authority cannot be said to be merely assessing
the assessee on the escaped turnover but it assesses him on his total turnover. This judgment, however,
was dissented from by a subsequent Division Bench of that High Court in Joint CTO v.
Ekambareeswarar Coffee & Tea Works [1991] 83 STC 457.
24. The Calcutta High Court in CIT v. Assam Oil Co. Ltd. [1982] 133 ITR 204 following its earlier
judgment in CIT v. Ramsevak Paul [1977] 110 ITR 527 dealt with the scope of clause (b) of section 147
and opined that once an assessment is reopened in such a case, the ITO has not only the jurisdiction but
a duty to levy tax on the entire income that had escaped assessment. The Bench then held :
". . . It appears to us that in view of the scheme of the IT Act, onee a reopening is made, the entire
assessment is set aside and the income which has escaped assessment, even though there is nothing
to show the escapement of assessment, it should be examined and even in a case where the assessee
is entitled to any deduction which was not granted in the original assessment, the assessee would
be so granted the deduction. . . ." (Emphasis supplied) (p. 220)
25. The Andhra Pradesh High Court in State Bank of Hyderabad v. CIT [1988] 171 ITR 232 observed :
"Once an assessment is reopened under section 148 of the Income- tax Act, 1961, the entire
assessment proceedings are at large. It is open to the tax authorities to reconsider in such
reassessment all items of escapement of income without limitation; at the same time it is open to
the assessee to put forward a claim for deduction of any expenditure which was inadvertently
omitted in the original assessment proceedings. Likewise, the assessee can also put forward claims
for non-taxability of items of receipt which were not put forward in the original assessment.
In any event, the income for purposes of reassessment cannot be reduced beyond the income
originally assessed, as basically an assessment is reopened on account of escapement of income and
by allowing an assessee to claim deductions, it is not permissible under law to reduce the income
originally assessed. Even if the assessee's fresh claims during the course of reassessment enquiry
are accepted, still the allowance of the claims should be limited to the extent to which they reduce
the income to that originally assessed under section 143(3)." (Emphasis supplied) (p. 232)
The Bench, however, went on to add :
"If a claim for deduction or a claim for non-taxability of a receipt was put forward in the original
assessment proceedings and was considered and rejected by the tax authorities and that finding had
become final, it is not open to an assessee to put forward those claims once again during the course
of reassessment proceedings." (p. 233)
26. The Rajasthan High Court in CIT v. Rangnath Bangur [1984] 149 ITR 487 opined:
". . . that once a reassessment proceeding is initiated, the original order of assessment is set aside or
ceases to be operative. The finality of such an assessment order is wiped out and a fresh order of
assessment would take the place of and completely substitute the initial order of assessment. It is,
therefore, clear that when reassessment proceedings are taken, the former assessment is completely
wiped out, the entire assessment is reopened and the total income of the assessee is determined
afresh. The new order passed on reassessment completely replaces or substitutes the original order
of assessment. . . ." (Emphasis supplied) (p. 498)
27. The High Court noticed an earlier judgment of the same High Court in Hiralal's case ( supra) (one
of the judges Ms. Kanta Bhatnagar J. was common to both the judgments) wherein, it had been held that
in reassessment proceedings the jurisdiction of the ITO was confined to such income alone which had
escaped assessment but struck a divergent note and said :
". . . reassessment proceedings cannot be confined only to such income which has escaped
assessment, but the entire assessment proceedings are set at large and are reopened and the earlier
order of assessment is set aside or wiped out and substituted by the order passed upon reassessment.
. . ." (Emphasis supplied) (p. 503)
The Bench said that once reassessment proceedings are initiated, the assessing authority has to
redetermine afresh the total income of the assessee as also the total sum payable by him as tax under the
Act. The Bench, however, went on to say :
 ". . . We may not be understood as holding that the questions which were expressly raised and
decided during the assessment proceedings or in the appeals from the original assessment order can
be reagitated either in the reassessment proceedings or in the appeals taken from the reassessment
order. So far as the matters raised and decided in the assessment proceedings or in the appeals
against the original assessment order are concerned, they should be considered to have been finally
decided between the parties and cannot be reagitated merely because the assessment has been
reopened. . . ." (p. 503)
28. In CIT v. Indian Rare Earth Ltd. [1990] 181 ITR 22 the Full Bench of the Bombay High Court
disagreeing with its earlier judgments in New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. v. CIT [1977] 107
ITR 760 observed that once valid proceedings under section 147 are started, the Assessing Officer has
the jurisdiction and duty to complete the entire assessment de novo and in reassessment proceedings an
assessee is entitled to make a claim for deduction even though such claim was not made during the
course of the original assessment proceedings.
29. The question which fell for decisions of the Supreme Court in CST v. H.M. Esufali H.M. Abdulali
[1973] 32 STC 77 was somewhat different. In that case, an assessment under the Madhya Pradesh
General Sales Tax Act, 1958, was made on a dealer for a particular year. Later on a surprise inspection
of the dealers' account books, it was discovered that certain items of sales had escaped assessment. The
assessing authority, thereupon, reopened the assessment and while making the reassessment did not
confine its attention to the addition of just those suppressed items of sales which were actually brought
to light during the subsequent inspection, but invoked his powers by assessing the entire turnover to the
best of his judgment by including what he considered to be suppressed turnover. The estimated figure
was larger than the aggregate of the amounts noted down in the surprise inspection report. The argument
of the assessee that the assessing authority, while reopening the assessment for bringing to charge the
escaped turnover, had no power to make a best judgment reassessment based on his own estimate was
repelled.
30. In H.R. Sri Ramulu's case (supra) what was directly in issue before the Supreme Court was, whether
an order of enhancement made by the Deputy Commissioner sitting in revision was barred by limitation.
That question arose under the Mysore Sales Tax Act, 1957. The said Act fixed a time limit for the
exercise of revisional power by the Deputy Commissioner. The Deputy Commissioner's order of
enhancement in revision related to certain items which had already figured in the original assessment
and not added for the first time in the reassessment. If the date of the original assessment were to enter
into the reckoning, the Deputy Commissioner's order was time-barred. It would, however, have been
within time if the date of reckoning was taken as the reassessment date. It was in this context that the
Apex Court, with reference to the provisions of the Mysore Sales Tax Act, rendered the judgment.
31. Since, the assessing authority had made an order of assessment during the reassessment proceeding
by including the order of original assessment in the reassessment order, the assessee was permitted to
question the entire reassessment order within the time prescribed by the Act.
32. The divergent views taken by the High Courts particularly after 1970, apparently are based on the
interpretations placed by the Courts on the observations made by this Court in V. Jaganmohan Rao's
case (supra). The following observations from that judgment have been interpreted and read differently
by various High Courts:
". . . Section 34 in terms states that once the Income-tax Officer decides to reopen the assessment he
could do so within the period prescribed by serving on the person liable to pay tax a notice
containing all or any of the requirements which may be included in a notice under section 22(2) and
may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once
assessment is reopened by issuing a notice under sub-section (2) of section 22 the previous under-
 assessment is set aside and the whole assessment proceedings start afresh. When once valid
proceedings are started under section 34(1)(b) the Income-tax Officer had not only the jurisdiction
but it was his duty to levy tax on the entire income that had escaped assessment during that year."
(p. 380)
33. The High Courts which have taken the view that in the proceedings under section 147 the entire
assessment is reopened, the original assessment 'wiped of and an assessee can put forward all pleas, even
if rejected during the original proceedings, support their conclusions relying on the observation from V.
Jaganmohan Rao's case (supra) to the effect that "the previous under-assessment is set aside and whole
assessment proceedings start afresh", while the High Courts taking the view that the reassessment is
confined only to the escaped assessment and an assessee can put forward pleas only in respect thereof,
rely upon the observations :
". . . When once valid proceedings are started under section 34(1)(b) the Income-tax Officer had not
only the jurisdiction but it was his duty to levy tax on the entire income that had escaped
assessment during that year." (Emphasis supplied) (p. 380)
Let us now examine the judgment in V. Jaganmohan Rao's case (supra) to appreciate as to what was laid
down in that case as regards the scope of the reassessment proceedings.
34. In V. Jaganmohan Rao's case (supra) the facts were as follows:
The assessee was the karta of a HUF. The assessment related to the years 1944-45 to 1946-47.
In 1941 the assessee had purchased a spinning mill known as Sri Satyanarayana Spinning Mills,
Rajahmundry, for a sum of Rs. 54,731. At the time the purchase was made, there were certain litigations
between the sons of the vendor and the vendor in respect of the spinning mill and certain other
properties. Ultimately, the matter went in appeal to the Privy Council. When the appeal was pending, the
assessments were made for the years 1944-45 to 1946-47, and the assessee deposited the amounts for the
various years as per the assessment. Thereafter the Privy Council disposed of the appeal. Pursuant
thereto, the ITO treating the decisions of the Privy Council as information concerning escaped income
issued a notice to the assessee under section 34 in respect of a sum of Rs. 1,09,613 received by the
assessee as lease income of the mill. While questioning the validity of 'reassessment proceedings', one of
the contentions that was raised before the Supreme Court was that at the time the original order of
assessment was passed, the ITO could have legitimately assessed one-third share of the income which
was due to be assessed as per the judgment of the Madras High Court and that there was, therefore, an
escape only to the extent of two-thirds share of the income.
35. This Court, inter alia, held that the decision of the Privy Council constituted definite information
within the meaning of section 34 and the proceedings initiated under section 34 were validly instituted.
36. Repelling the plea of the assessee that the ITO could have legitimately assessed one-third share of
the income which was due to the assessee according to the judgment of the Madras High Court at the
time when the order of original assessment was passed and that the escape was only to the extent of two-
thirds share of the income, this Court observed that once the reassessment proceedings were validly
initiated with regard to two-thirds share of the income, the jurisdiction of the ITO could not be confined
only to that portion of the income but extended to bring to tax the entire escaped income and set aside
the under-assessment previously made. It was in that context that this Court had made the observations
as noticed in the earlier part of the judgment.
37. The principle laid down by this Court in V. Jaganmohan Rao's case (supra) therefore, is only to the
extent that once an assessment is validly reopened by issuance of notice under section 32(2) of the 1922
Act (corresponding to section 148 of the 1961 Act), the previous under-assessment is set aside and the
ITO has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during
the previous year. What is set aside is, thus, only the previous under-assessment and not the original
assessment proceedings. An order made in relation to the escaped turnover does not effect 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 of 'under-assessment' 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 judgment in V. Jaganmohan Roa's case (supra), therefore, cannot be read to imply as laying
down that in the reassessment proceedings validly initiated the assessee can seek reopening of the whole
assessment and claimed credit in respect of items finally concluded in the original assessment. The
assessee cannot claim 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 fact not escaped assessment but
that the same had been shown under some inappropriate head in the original return, but to read the
judgment in V. Jaganmohan Roa's case (supra) as if laying down that reassessment wipes out the
original assessment and that reassessment is not only confined to 'escaped assessment' or 'under-
assessment' but to the entire assessment for the year and start the assessment proceedings de novo giving
right to an assessee to reagitate matters which he had lost during the original assessment proceeding,
which had acquired finality, is not only erroneous but also against the phraseology of section 147 and the
object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of
context in which the questions arose for decision in that case. It is neither desirable nor permissible 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 questions
involved in the case in which it is rendered and while applying the decision to a latter 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. In H.H. Maharajadhiraja Madhav Rao Jiwaji
Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9 this Court cautioned:
"It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme
Court, divorced from its context, as containing a full exposition of the law on a question when the
question did not even fall to be answered in that judgment."
38. Although, section 147 is part of a taxing statute, it imposes no charge on the subject but deals merely
with 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 are for the benefit of the revenue and not an assessee and are aimed at garnering the 'escaped
income' of 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.
39. As a result of the aforesaid discussion we find that in proceedings under section 147 the ITO may
bring to charge items of income which had escaped assessment other than or in addition to that item or
items which have led to the issuance of notice under section 148 and where reassessment is made under
section 147 in respect of income which has escaped tax, the ITO'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 assessee to reagitate questions which had been
decided in the original assessment proceedings. It is only the under-assessment which is set aside and
not the entire assessment when reassessment proceedings are initiated. The ITO cannot make an order of
reassessment inconsistent with the original order of assessment in respect of matters which are 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 had 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 ITO's
jurisdiction 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 original assessment proceeding cannot be permitted to be reagitated on the assessment being
reopened for bringing to tax certain income which had escaped assessment because the controversy on
reassessment is confined to matters which are relevant only in respect of the income which had not been
brought to tax during the course of the original assessment. 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 reassessment
proceedings for bringing to tax items which had escaped assessment, it would be open to an assessee to
put forward claims for deduction of any expenditure in respect of that income or the non-taxability of
the items at all. Keeping in view the object and purpose of the proceedings under section 147 which are
for the benefit of the revenue and not an assessee, an assessee cannot be permitted to convert the
reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier
rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless
relatable to 'escaped income', and reagitate the concluded matters. Even in cases where the claims of the
assessee during the course of reassessment proceedings related to the escaped assessment are accepted,
still the allowance of such claims has to be limited to the extent to which they reduce the income to that
originally assessed. The income for purposes of 'reassessment' cannot be reduced beyond the income
originally assessed.
40. It would be seen that whereas in the case of Anglo French Textile Co. Ltd. (supra) the question as to
the rights of an assessee to claim 'redoing', 'revising' or 'recomputing' entire income during the
reassessment proceedings was left open, that question did not come up for consideration in the case of
H.R. Shri Ramulu ( supra) or H.M. Esufali H.M. Abdulahi (supra) or even in V. Jaganmohan Rao's case
(supra). Some of the High Courts, therefore, fell in error in reading those judgments, divorced from the
context in which the precise questions came up for consideration in those cases, and to hold that the
assessee could 'reagitate' the concluded issues and claim relief in respect of items, finally concluded in
the original assessment proceedings, during the reassessment proceedings, unconnected with the
escapement of income. We cannot, therefore, approve in broad propositions laid in that regard in Indian
Refrigeration Industries (P.) Ltd.'s case (supra), Ramsevak Paul's case (supra ), Assam Oil Co. Ltd.'s
case (supra), Standard Motor Products of India Ltd.'s case (supra), Rangnath Bangur's case (supra),
State Bank of Hyderabad's case (supra) and Indian Rare Earth Ltd.'s case (supra).
41. Keeping in view the above principles, we may now turn our attention to the question formulated by
the High Court as noticed in the earlier part of the judgment.
42. The Tribunal rightly found that 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 original assessment had acquired finality when the appeal against the
order of assessment failed before the AAC and the assessee took no further steps to agitate the issue. The
Tribunal was also right in concluding that the items which the assessee wanted to be taken into account
in the proceedings under section 147 were unconnected with the escapement of income. The High Court
clearly fell in error in holding otherwise. Since the original assessment had been concluded finally
against the assessee, it was not permissible for the assessee in the reassessment 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
under section 147(a), the finally concluded assessment proceedings and to grant to him relief in respect
of items not only earlier rejected, but also unconnected with the escapement of income by assuming as if
the original assessment had not been concluded or was 'still open'.
43. Therefore, our answer to the question formulated by the High Court and noticed in the earlier part of
this judgment is that in the reassessment proceedings it is not open to an assessee to seek a review of the
concluded item, unconnected with the escapement of income, for the purpose of computation of the
escaped income.
44. The appeals, consequently, succeed and are allowed. The orders of the High Court are set aside and
those of the Tribunal restored. Since the assessee had not put in any appearance, there shall be no order
as to costs.
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*In favour of revenue.