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Case Name

M/s Karnataka Financial Services Limited (in liquidation) vs. Assistant Commissioner of Income Tax (High Court of Karnataka)

ITA No. 88 of 2015

Date: 8th February 2021

Key Takeaways

• Limitation Issue Must Be Decided: The ITAT was wrong to refuse to consider whether the assessment order was time-barred after the High Court remanded the case.
• Effect of Quashing an Order: When an appellate order is quashed and remanded, all issues—including those not previously decided—can be raised again.
• Tribunal’s Duty: The ITAT must now decide if the assessment order was passed within the statutory time limit.
• Legal Precedents Applied: The court relied on Supreme Court decisions to clarify the effect of remanding a case and the scope of issues that can be reconsidered.

Issue

Was the block assessment order passed by the Assessing Officer for the years 1986-87 to 1996-97 barred by limitation, and should the ITAT have adjudicated this issue after the High Court’s remand?

Facts

• Parties: The appellant is M/s Karnataka Financial Services Limited (in liquidation), and the respondent is the Assistant Commissioner of Income Tax.
• Background: The company was in the business of equipment leasing. A search under Section 132 of the Income Tax Act was conducted on 29.03.1996.
• Assessment: The Assessing Officer issued a notice under Section 158BC and passed a block assessment order on 30.05.1997, adopting a lower value for assets and disallowing excess depreciation claimed by the company.
• Appeals: The company appealed to the ITAT, which initially ruled in its favor. The Revenue then appealed to the High Court, which remanded the case to the ITAT for fresh consideration under amended Section 158BB.
• Tribunal’s Refusal: On remand, the ITAT refused to consider the limitation issue, saying it was outside the scope of the remand order.
• Current Appeal: The company challenged the ITAT’s refusal to consider the limitation issue.

Arguments

For the Assessee (Company)

• The assessment order was passed after the limitation period expired (search on 29.03.1996; order passed on 30.05.1997; limitation expired on 31.03.1997).
• The ITAT should have considered the limitation issue after remand, as the entire order was set aside.
• Cited: Commissioner of Income Tax T.N. vs. V. Damodaran, 121 ITR 472 (SC).

For the Revenue (Tax Department)

• The ITAT had already held the assessment was within limitation in its earlier order.
• The High Court’s remand was only to consider the amended Section 158BB, not to revisit the limitation issue.
• Cited: VLS Finance Ltd. vs. Commissioner of Income-Tax, (2016) 68 Taxmann.com 368 (SC).

Key Legal Precedents

• Shree Chamundi Mopeds Ltd. vs. Church of South India Trust Association, (1992) 3 SCC 1: Quashing an appellate order restores the appeal to the position it was in before the quashed order, allowing all issues to be raised again.
• Commissioner of Income Tax T.N. vs. V. Damodaran, 121 ITR 472 (SC): Supports the right to raise all contentions after remand.
• VLS Finance Ltd. vs. Commissioner of Income-Tax, (2016) 68 Taxmann.com 368 (SC): Cited by the Revenue to argue the scope of remand.

Judgement

• Decision: The High Court held that the ITAT was wrong to refuse to consider the limitation issue. When the earlier order was set aside and the case remanded, all issues—including limitation—could be raised.
• Order: The High Court quashed the ITAT’s order on the limitation issue and directed the ITAT to decide whether the assessment order was time-barred.
• Outcome: The appeal was disposed of with directions to the ITAT to reconsider the limitation issue. The court did not address the other questions of law since the limitation issue could be decisive.

FAQs

Q1: What is a block assessment?

A block assessment is a special procedure under the Income Tax Act to assess undisclosed income found during a search, covering several years in one go.

Q2: What does “barred by limitation” mean?

It means the assessment order was passed after the legally allowed time period, making it invalid.

Q3: Why did the ITAT refuse to consider the limitation issue?

The ITAT believed the High Court’s remand was limited to considering the amended Section 158BB and did not include the limitation issue.

Q4: What did the High Court decide about the scope of remand?

The High Court clarified that when an order is set aside and remanded, all issues can be raised again, including limitation.

Q5: What happens next?

The ITAT must now decide if the assessment order was passed within the limitation period. The outcome could affect the validity of the entire assessment.

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Block Assessment years 1986-87 to 1996-97. The appeal was admitted by a bench of this Court vide order dated 31.08.2015 on the following substantial questions of law:

1. Where the Tribunal is justified in law in not holding that the block assessment order passed by the assessing office for the block assessment years 1986-87 to 1996-97 is barred by limitation on the facts and circumstances of the case?

2. Whether the Tribunal is correct in law in holding there was material evidence found and seized in the course of search under section 132 of the Act on the basis of which the alleged excess depreciation is to be brought to tax in the block assessment made under chapter XIV-B of the Act on the facts and circumstances of the case?

3. Whether the Tribunal is justified in upholding the action of the assessing officer in invoking the provisions of explanation 3 to section 43(1) of the Act even when the same is not warranted, on the facts and circumstances of the case?

4. Whether the Tribunal is justified in law in holding that the value of the assets is to be adopted at Rs.2,00,00,000/- for the purpose of depreciation in place of Rs.1,00,00,000/- adopted by the assessing officer as against the actual incurred by the appellant of Rs.3,62,52,209/- on the facts and circumstances of the case?

5. Without prejudice, whether the Tribunal erred in law in not appreciating that if the value of the assets is adopted at an amount lower than the value agreed upon by the parties of Rs.32,62,52,209/-, then a proportionate reduction in lease rentals will have to be made as otherwise it would result in double taxation on the facts and circumstances of the case?

2. Facts leading to filing of this appeal briefly stated are that the assessee is a company in liquidation and for the relevant Block Assessment Year viz., 1986-87 to 1996-97 was carrying on the business of financial activity in equipment leasing. A search under Section 132 of the Act was conducted at the premises of the appellant and its Directors on 29.03.1996. Thereafter, a notice was issued to the appellant under Section 158BC requiring the assessee to file return of income from block period pending on 29.03.1996. The return of income in Form-2B was filed on 02.12.1996. The Assessing Officer by an order dated 30.05.1997 inter alia held that the assessee purchased the assets from M/s PL Finance and Investments Ltd. at a higher value of Rs.3,62,52,309/-, with a view to claim depreciation on the enhanced value as against actual written down value of Rs.87,75,621/- in the books of accounts of M/s PL Finance and Investments Ltd. The Assessing Officer concluded the assessment for the block Assessment Years and adopted the value of assets at Rs.1,00,00,000/- and allowed depreciation on this value alone and disallowed the depreciation claimed by the assessee in excess of depreciation.

3. The assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 21.11.2003 deleted disallowance of depreciation and decided the issue in favour of the assessee. The revenue filed an appeal before this court against the order of the tribunal during the pendency of the appeal before this court, the Reserve Bank of India filed a company petition before this court to wind up the assessee. This court by an order dated 20.07.2005 directed the company to be wound up and appointed the Official Liquidator to take charge of the assets of the company. This court by an order passed in I.T.A.No.146/2004 dated 25.11.2009 set aside the order of the tribunal dated 21.11.2013 and remitted the matter to the tribunal for fresh adjudication considering the amended provision of Section 158BB of the Act. The tribunal after hearing the parties, passed an order on 17.10.2014 and did not adjudicate the ground raised by the assessee with regard to the limitation and held that the aforesaid ground is not subject matter of the order of remand in the light of directions contained in the order dated 25.11.2009 passed by this court. The tribunal further held that during the course of the search under Section 132 of the Act, the excess depreciation is to be brought to tax in block assessment made under Chapter XIVB of the Act. The tribunal also upheld the action of the Assessing Officer in invoking Explanation 3 to Section 43(1) of the Act and held that for the purpose of depreciation, the value of assets has to be adopted at Rs.2,00,00,000/- instead of Rs.1,00,00,000/-. In the aforesaid factual background, this appeal has been filed.

4. Learned Senior counsel for the assessee with regard to first substantial question of law pertaining to non adjudication of the question of limitation submitted that search was conducted under Section 132 of the Act on 29.03.1996 and on 31.03.1997 i.e., from one year from the month in which last of the authorizations for search has been executed, the limitation for passing the block assessment period expired on 31.03.1997 and in the instant case the block assessment order has been passed on 31.05.1997 i.e., beyond the period of one year from the end of month in which last of authorization of the search was executed. However, the tribunal has failed to appreciate the aforesaid aspect of the matter and has erroneously refused to adjudicate the issue with regard to the limitation. It is further submitted that this court had remanded the matter to tribunal for fresh consideration and therefore, the issue with regard to the limitation could have been raised by the assessee in the appeal. In support of aforesaid submissions, reliance has been placed on decision of the Supreme Court in COMMISSIONER OF INCOME TAX T.N. VS. V.DAMODARAN', 121 ITR 472 (SC).

5. On the other hand, learned counsel for the revenue submitted that the tribunal by an order dated 21.11.2003 held that the block assessment order was within the period of limitation. The revenue had challenged the aforesaid order in an appeal before this court viz., I.T.A.No.146/2004 to the extent it was decided against the revenue. It is further submitted that this court remanded the matter to the tribunal to adjudicate the issue only to decide the same in accordance with law by applying the amended provisions of Section 158BB of the Act. Therefore, the tribunal has rightly refused to adjudicate the issue urged by the assessee with regard to limitation. In support of aforesaid submission, reliance has been placed on the decision of the Supreme Court in VLS FINANCE LTD. VS. COMMISSIONER OF INCOME-TAX, (2016) 68 TAXMANN.COM 368 (SC).

6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite tot ake note of legal effect of quashing of an order. The Supreme Court in SHREE CHAMUNDI MOPEDS LTD. VS. CHURCH OF SOUTH INDIA TRUST ASSOCIATION, (1992) 3 SCC 1 has held that quashing of an order results in restoration of a position as it stood on the date of passing of the order which had been quashed. It has further been held that if an order passed by an Appellate Authority is quashed and the matter is remanded the result would be the appeal which had been disposed of by the said order of the Appellate Authority would be restored and can be said to be pending before the Appellate Authority after quashing order passed by the Appellate Authority. Thus, the effect of quashing of an order of Appellate Authority is that the appeal is restored before the Appellate Authority.

7. In the backdrop of aforesaid legal position, it is pertinent to have a look at the memo of appeal filed on behalf of the revenue. From perusal of the prayer clause, it is evident that the revenue had sought quashment of the order dated 21.11.2013. This court has passed an order on 25.11.2009. The relevant extract of paragraphs 2 and 3 are reproduced below for the facility of reference:

2. Therefore, in the aforesaid case, by setting aside the order of the Income Tax Appellate Tribunal, we are remanding the matter to the tribunal for fresh consideration.

3. In the circumstances, following the decision in I.T.A.No.146/2002, we allow this appeal without considering the questions of law and remand the matter to the tribunal for fresh consideration considering the amended provision of Section 158 BB of the Income Tax Act, 1961.

8. Thus, from perusal of the aforesaid relevant extract, it is evident that the matter was remitted to tribunal for fresh consideration. The finding of the tribunal that the issue with regard to limitation cannot be adjudicated as the same would be beyond the purview of the order of remand cannot but be said to be perverse. The order passed by the tribunal was set aside in its entirety by this court. Therefore, it was open for the assessee to raise the plea of limitation. Therefore, the first substantial question of law is answered accordingly. Since, the tribunal has not adjudicated the issue with regard to limitation, the impugned order dated 17.10.2014 passed by the tribunal insofar as it pertains to finding with regard to the issue of limitation is hereby quashed and the tribunal is directed to decide the issue of limitation with regard to the order of assessment passed by the Assessing Officer for the block assessment years 1986-86 to 1996-97. Needless to state that it will be open for the parties to raise all contentions before the tribunal on the aforesaid issue. Therefore, it is not necessary for us to answer the remaining substantial questions of law.

In the result, the appeal is disposed of.

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JUDGE

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JUDGE