Holding

The reassessment proceedings were invalid as the ITO lacked any material to believe the land was non‑agricultural or that income had escaped, and the test from Officer‑in‑Charge (Court of Wards) could not be applied.

Summary

Ram BAI's land was acquired under the Land Acquisition Act, 1894 and she received compensation which was later enhanced with solatium and interest by a civil court, a decision affirmed by the High Court. She disclosed the interest as income in a return filed under Section 139(4) of the Income Tax Act, 1961, but the Income Tax Officer (ITO) rejected it as untimely and opened reassessment proceedings under Section 147(a), alleging the land was non‑agricultural and that capital gains were taxable. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal cancelled the reassessment, finding no material to support the ITO's belief that the land was non‑agricultural. The Andhra Pradesh High Court reversed in favour of the Revenue, relying on a later Supreme Court decision on agricultural land. The Supreme Court held that the ITO had no material to justify reopening the assessment, that the test from Officer‑in‑Charge (Court of Wards) could not be applied because it was decided after the reassessment was initiated, and that interest on compensation alone could not warrant reassessment. Consequently, the Court allowed the appeal and set aside the High Court judgment.

Issues considered

Whether the Income Tax Officer had sufficient material to invoke Section 147(a) for reassessment of the 1965‑66 assessment year.
Whether the land in question qualified as agricultural land under the test laid down in Officer‑in‑Charge (Court of Wards) case and whether that test was applicable.
Whether interest accrued on compensation could be brought on a protective basis to justify reopening the assessment.
Whether the High Court erred in ignoring the findings of the Commissioner (Appeals) and the Appellate Tribunal.

Legislation cited

Constitution of Indias. Article 136
Income Tax Act, 1961s. 139(4), s. 147(a), s. 148, s. 256(1)
Land Acquisition Act, 1894

Subjects

income tax reassessmentSection 147(a)agricultural landLand Acquisition Actprotective basisinterest on compensationHigh Court errorSupreme Court appealprocedural validity

Judgment

A RAM BAI
-+
v.
COMMISSIONER OF INCOME TAX

FEBRUARY 18, 1999

B
[D.P. WADHWA AND M. SRINIVASAN, JJ.]

Income tax Act, 1961: Sections 139(4) and 147(a). +

Income T~AY 1965-66-Reassessment proceedings--lnitiation of By
c /To-No material to supp01t reassessment-Assessee's land acquired under
Land Acquisition Act and compensation awarded-Subsequently, civil court
enhanced compensation including solatium and interest which was affi1med
by High Court-Assessee filed retum under S. 139(4) disclosing interest on
belated payment of compensation as her income-lTO rejected it as invalid,
D initiated proceedings under S. 147(a) and issued notice-lTO obtained sane-
tion for reassessment from CIT on the ground that the land acquired was not Ir
agricultural land as it had not been subjected to agricultural operation and ...
the capital gains thereon were chargeable to income tax-Validity of-Held, in
the absence of material to suppo1t reassessment, initiation of reassessment
proceedings, invalid--Land Acquisition Act, 1894.
E
Section 256(1)-lncome Tax-Reference-Scope and power of High
Court-High Court completely ignored and overlooked the findings offact
rendered by CIT (Appeals) and ITAT-Fwther, it discussed the matter as if -'
it was sitting in appeal and also assumed that the ITO had looked into the
F Revenue records in order to reopen assessment-Co1Tectness of-Held, such
a course adopted by High Court, not approved. r
"4.

Practice and Procedure :
~
Precedents-High Court decision-Binding nature of-On subordinate
G courts and tn1mnals-Judgment of High Court reversed by Supreme Court
long after reopening of assessment by ITO-However, ITO applied a test
different from that laid down by High Court in that judgment-C01Tectness
[
<I
of-Held, at the time of reopening of assessment High Court judgment held
the field and, therefore, binaing on ITO-Hence, ITO not justified in deviating
H from the said High Court judgment.
760

......
RAM BAI v.C.l.T 761

New plea-Raising of-For the first time before Supreme Court-Such A
a plea not raised before any authorities or courts below-Permissibility
of-Held, not permissible-Constitution of India, 1950, Art. 136.

The appellant assessee's land was acquired under the Land Acquisi-
tion Act, 1894 and the assessee was awarded compensation during the
previous year relevant to the Assessment Year 1965-66. Subsequently, the B
civil court enhanced the compensation including solatium and interest.
The same was affirmed by the High Court. The assessee filed a return
under Section 139(4) of the Income Tax Act, 1961 disclosing the interest
on the belated payment of compensation as her income.
c
Tlie ITO rejected the return as invalid as it was filed beyond the
period prescribed under Section 139(4) of the Act, initiated proceedings
under Section 147(a) of the Act and issued a notice under Section 148. The
ITO obtained sanction for reassessment from CIT on tht ground that the
land acquired was not agricultural land as it had not been subjected to
agricultural operation and the capital gains thereon were chargeable to D
income tax.

Accordingly, the ITO made an order of reassessment and initiated·
penalty proceedings. But the CIT (Appeals) held that the ITO could not
have any reason to believe that there was escapement of income as there E
was no material whatever at that time to indicate that the lands. were
non-agricultural. The Commissioner of Income Tax allowed the appeal
and cancelled the order of assessment under Section 147(a). The High
Court allowed the appeal filed by the Revenue. Hence this appeal.

On behalf of the respondent-Revenue it was contended that the F
interest accrued from year to year on the compensation paid to the
assessee would have to be brought to assessment on protective basis and
the same was sufficient to reopen the assessment, and that the land in
question did not satisfy the test prescribed by this Court in Officer-i11-
Charge (Court of Wards) case. G

Allowing the appeal, this Court

HELD : 1.1. The Income Tax Officer has made an assertion in the
communication to the Commissioner of Income Tax seeking sanction to
reopen the assessment that the land in question was not subjected to H
762 SUPREME COURT REPORTS [1999] 1 S.C.R.
A agricultural operation and that he had reason to believe the income
chargeable to tax had escaped for the assessment year 1965-66 by reason
of omission or failure on the part of the assessee to make a valid return.
But for such assertion, no reference has been made to any material on the
basis of which he proceeded to invoke the provisions of Section 147(a) of
B the Income Tax Act, 1961. Even the assertion as such was a bare one
without any reference to the materials on the basis of which he made the
said assertion; [765-H; 766-A]

1.2. It is not possible to accept the contention of the Revenue that
the land in question did not satisfy the test prescribed by this Court in
C Officer-in-Charge (Court of Wards) case which reversed the Full Bench
decision of the High Court was since the said decision of this Court was
rendered long after the reopening of the assessment by the ITO in the
present case. Thus when the ITO invoked Section 147(a) of the Act; the
Full Bench judgment of the High Court was holding the field. ~ence, the
ITO could not have applied a test different from that laid down by the said
D Full Bench for· determining whether the land in question in this case was·
an agricultural land. [766-E-F] '

CWT v. Officer-in-Charge (Court of Wards) (1976) 105 ITR 133 SC
and Central Provinces Manganese Ore Co. Ltd; v. ITO, (1991) 191 ITR 662
E SC, held inapplicable.

Officer-in-Charge (Court a/Wards) v; CWT, (1969) 72 ITR 552 AP IJF,
held reversed.

2,1. The Commissioner oflncome tax (Appeals) and the Income Tax
F Appellate Tribunal have discussed the' matter in great detail and pointed out
several facts which were sufficient to show that the land in question was an
agricultural land. In the face of such.materials if the ITO wanted to reopen the
assessment he should have at least some materials to the contrary which could
enable him to say that he had reason to believe that the lands were non·agricul·
G tural lands and there was escapement of income. [767·A·B]

2.2. The High Court has, while answering the reference, completely
ignored and overlooked the findings of fact rendered by the CIT (Appeals)
and the Appellate Tribunal and proceeded to discuss the matter as if it
was sitting in appeal over the order of the Tribunal. The High Court has
H also assumed that the ITO had looked into the Revenue records and other
·c
+
RAM BAI v. C.I.T. [SRINIVASAN, J.] 763
connected records on the basis of which he came to the conclusion that the A
reopening of the assessment was necessary. It is not possible to agree with
the reasoning.of the High Court. [767-C]

3. There was no argument before any of the authorities or the High
Court to the effect that the interest accrued from year to year on the
compensation paid to the assessee would have to be brought to assessment B
on protective basis and the same was sufficient to reopen the assessment.
In the circumstances, the High Court's judgment that the reassessment
proceedings initiated by the ITO were valid requires to be upset. [767-E]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4911 of C
1993.

From the Judgment and Order dated 1.4.91 of the Andhra Pradesh
High Court in C.R. No. 60 of 1983.

T.V. Ratnam for the Appellant. D

T.L.V. Iyer, S. Rajappa and B.K. Prasad for the Respondent.

The Judgment of the Court was delivered by

SRINIVASAN, J. The appellant owned certain lands in Nacharam E
village near Hyderabad. The Government of Andhra Pradesh acquired the
same under the provisions of ~he Land Acquisition Act. A sum of Rs.
25,240 was awarded as compensation by the Land Acquisition Officer on
20.11.65. On a reference at the instance of the appellant the civil court
enhanced the compensation to Rs. 2,72,136 including solatium and interest. p
The ~ame was affirmed on appeal by the High Court on 16.10.70. The
' appellant filed a return under Section 139 (4) of the Income-tax Act
(hereinafte~ referred to as the 'Act') on 17.2.72 disclosing the interest on
belated payment of compensation as her income. The l.T.O. rejected it as
invalid as it was filed beyond the period prescribed under S.139 (4) of the
Act. The I.T.O. initiated proceedings under ~ection 147(a) of the Act for G
the year ending 31.3.65 in March, 1973 and issued a notice under Sec. 148
on 21.4.73. He sought the sanction of the Commissioner on the ground that
the land acquired was not agricultural land as it had not been subjected to
agricultural operation and the capital gains thereon were chargeable to .
income -tax. I-I."
764 SUPREME COURT REPORTS [1999] 1 S.C.R.
A , 2. On 4.9.78, the I.T.O. made an order of assessment holding that a
sum of Rs. 2,43,934 was payable as tax and initiated penalty proceedings.
On appeal by the assessee, the Commissioner of Income-tax (Appeals)
held that the I.T.O. could not have had any reason to believe that there
was escapement of income as there was no material whatever at that time
to indicate that the lands were non-agricultural. The Commissioner allowed
B the appeal and cancelled the order of assessment under S.147(a). The
Department approached the Income-tax Appellate Tribunal with an' appeal
but in vain as the Tribunal agreed with the Commissioner and confirmed 1,
his order.

3. The· Revenue applied for reference to the High Court on the
C following three questions :
1. Whether on the facts and circumstances of the case, the Income-
tax Appellate Tribunal is correct in holding that the reassessment
proceedings were not valid by considering only a part of the
Income-tax Officer's note?
D
2. Whether on the facts and circumstances of the case, the Income-
tax Appellate Tribunal is justified in holding that the Income-tax
Officer had no reason to believe that the land was not agricultural
and in view of the Andhra Pradesh High Court's decision in the
case of CIT v. Officer-in-charge (Court of wards) v. CWT (72 ITR
E
552) which was not accepted by the Department?

3. Whether on the facts and in the circumstances of the case, the
Appellate Tribunal is justified in holding that the lands are agricul-
tural lands?
F 4. By a detailed order, the Tribunal rejected the application with
reference to Questions 2 & 3 but referred only the first question by
recasting it as follows:-

"Whether on the facts and in the circumstances of the case the
Appellate Tribunal was right in holding that the reassessment
G
proceedings initiated by the Income-tax Officer in this case were
not valid in law?

The High Court by its judgment dated 1.4.91 answered the question in the
negative in favour of the Revenue and against the assessee. Aggrieved by
H this the assessee filed this appeal on Special Leave.
+
RAM BAI v. C.I.T. (SRINIVASAN, J.] 765
5. We have earlier referred to the fact that the Tribunal referred only A
one question to the High Court for its decision and refused to refer the
other two questions as desired by the Revenue. The High Court has
mentioned in its judgment that the counsel appearing before it made a
representation that the other two questions were also subject-matter of
another reference. The High Court has -recorded in its judgment that the
particulars about the other alleged referenee were not furnished and rlrns B
the only question to be considered was that referred to it by the Tribunal:

6. We have already mentioned that the I.T.O. sought sanction of the
Commissioner to reopen the matter. That was by a communication dated
17.3.73 in which the relevant part read as follows :- C

"In this case the assessee owned 16 acres 33 cents in Nacharam
village near Hyderabad. This was acquired by the Government with
effect from 27.10.1964. The assessee was awarded a final compen-
sation of Rs. 2,10,361 on 7.7.1967. The land in question is not
agricultural land and has not been subjected to agricultural opera- D
tions. The capital gains are chargeable to income tax. The value
as on 1.1.54 is estimated at Rs. 1,000 per acre and the total value
of the entire land as on 1.1.1954 would be about Rs. 16,500. Thus
the assessee made a net capital gain of Rs. 1,93,860. Besides the
amount of interest that accru~d year to year will have to be
E
included as a protective basis. The assessee has filed a return
disclosing an income of Rs. 3599 being interest on belated com-
pensation on 17 .2.1972. As this has been filed beyond the period
prescribed under Section 139(4) the return has been treated as
invalid and filed. I have therefore, reason to believe the income
chargeable to tax has escaped for the assessment year 1965-66 and F
that such escapement was by reason of omission or failure on the
part of the assessee to make a valid return under Section 139 for
the assessment year 1965-66. I request the Commissioner to accord
sanction for reopening the assessment under Sec. 147(1)."
G'
7. Apart from the said communication, there is nothing on record to
disclose the material on which the I.T.O. decided to reopen the assessment.
He has made an- assertion in the said .communication that the land in
question was not subjected to agricultural operation and that he had reason
to believe, the income chargeable to tax had escaped for the assessment
year 1965-66 by reason of omission or failure on the part of the assessee H
+
766 SUPREME COURT REPORTS [1999] 1 S.C.R.
A rto make a valid return. But for such assertion no reference has b~en made
to any material on the basis of which he proceeded to invoke the provisions
of Sec. 147(1) of the Act. Even the assertion as such was a bare onb without
any reference to the materials on the basis of which he made the said
assertion.

B 8. An attempt was made on behalf of the Revenue to show that the ·
land in question did not satisfy the test prescribed by this Court in Com-
missioner of Wealth-tax Andhra Pradesh v. Officer-in-charge (Court of wards)
Paigah, (1976) 105 I.T.R. 133. In that case this Court laid down that for
the purposes of Wealth Tax Act agricultural land should be shown to have
C connection with an agricultural purpose and user in order to be considered
as an agricultural land and the mere possibility of user of land by some
possible future owner or possessor for. an agricultural purpose was not
sufficient. The Court said that it was not the mere potentiality which will
affect its valuation as part of the assets but its actual condition and
intended user had to be seen for purposes of exemption from wealth tax.
D By that judgment, this Court reversed the judgment of the A.P. High Court
in Officer-in-charge (Cowt of wards) v. Commissioner of Wealth-tax, (1969)
72 l.T.K 552 (F.B.). The Full Bench of the High Court had in its judgment
held that actual user of the land for agricultural purposes was not necessary
for making it an agricultural land and it was sufficient if the land could
have been put to agricultural use. The judgment of this Court was rendered
E only on August 6, 1976 long after the re-opening of the assessment by the
l.T.O. in the present case. Thus when he invoked Section 147(a) of the Act,
the aforesaid judgment of the Full Bench of the AP High Court was
holding the field. Hence the l.T.O. could not have applied a test different
from that laid down by the said Full Bench for determining whether the
F land. in question in this case was an agricultural land. Consequently, the
decision of this Court in C. WT. v. Officer-in-charge (Court of wards) Paigah
(supra) will be of no help to the Revenue.

9. ·Learned counsel for the Revenue has placed reliance on the
G judgment of this Court in Central Provinces Manganese Ore Co. Ltd. v.
Income-tax Officer, Nagpur (1991) 91 I.T.R. 662. It was held on the facts in
that case that the reasons recorded in the notice issued under Section
147(a) and the material on record justified the issue of such notice. That
ruling will not help the Revenue in this case as there is no material
whatever on record to justify the issue of notice by the I.T.O. under Section
H 147 of the Act.
RAM BAI v. C:I.T. [SRINIVASAN, J.] 767
10.. The Commissioner of-Income-tai (Appeals) and the Appellate /y
Tribunal have discussed the matter in great detail and pointed out several
facts .which were sufficient to show that the land in question was an
agricultural land. In the face of such materials if the I.T.O. wanted to
reopen the assessrtl'ent he should have at least some materials to the
contrary which could enable h_im to say that he had reason to. believe that
the lands were non-agrieultural lands and there was escapement of income. B
11. The High Court has while answering t_he reference completely
ignored and overlooked the findings of fact rendered by the Commissioner
of Income-tax (Appeals) and Appellate Tribunai and proceeded to discuss
the matter as if it was sitting in appeal over the order of the Tribunal. The C
High Court has also assumed that the 'ITO has looked into the Revenue
records and other connected record~ on the basis of which he came to the
/
conclusion that the. reopening· of the assessment was' necessary. We are
unable to agree with the reasoning of !~,e- High Court.

12. The learned counsel for the Revenue has attempted to support D
the order of the High Court by stating that the interest accrued from year
> to year on the compensation paid to the assessee would have to be brought
to assessment on protective basis and the same was sufficient to reopen the
assessment. The~e was no such argument before any of the authorities or
the High Court.
E
13. In the circumstances, the order of the High Court requires to be
upset and accordingly we allow this appeal and set aside the judgment of
the High Court. The question referred to the High Court by the Tribunal
is answered in the positive in favour of the assessee. There will be no order
as to costs.
F
v.s.s. Appeal allowed.