Bhanji Bagawandass vs Commissioner of Income Tax

Ramaprasada Rao, J.—This tax case is set before us on a remand of the case made by the Supreme Court in its order in Civil Appeal No.

1984 of 1966. We shall extract the relevant portions of the judgment of the Supreme Court in order to appreciate the scope of the order of

remand. We shall be, therefore, quoting in extenso the necessary excerpts from the judgment which touches both questions of fact as well as law.

The assessment year involved in this appeal is 1948-49, the corresponding previous year being the financial year 1947-48, For the accounting

period from November 13, 1947, to November 1, 1948, which was the corresponding previous year for the assessment, year 1949-50, there

was shown a credit of Rs. 25,000 in the capital account of the appellant. On November 13, 1947, this amount was credited in the books of the

appellant. On October 30, 1948, this amount was transferred to the account of one Amrithlal Ranchoodas, the father-in-law of the appellant. The

Income Tax Officer included the said amount as income of the appellant from undisclosed sources in the assessment for the assessment year 1949-

50, On appeal to the Appellate Assistant Commissioner, the appellant contended that the amount could not be included in the assessment year

1949-50 because the credit appeared prior to March 31, 1948.

The Appellate Assistant Commissioner allowed the appeal holding that the credit came into the books of the appellant on November 13, 1947,

i.e., in the financial year 1947-48, which is the previous year for the assessment year 1948-49. On this finding, the Appellate Assistant

Commissioner deleted the addition of Rs. 25,000 from the assessment of the appellant for the year 1949-50. In doing so, the Appellate Assistant

Commissioner followed the decision in Commissioner of Income tax v. P. Darolia & Sons [1956] 27 ITR 515 . Consequently, on November 3,

1953, the Income Tax Officer issued a notice u/s 34(1)(a) of the Income Tax Act, 1922 (hereinafter referred to as ""the Act""), to the appellant for

the assessment year 1948-49. By his order dated April 20, 1959, he rejected the contention of the appellant that the assessment was barred by

limitation and assessed the sum of Rs. 25,000 as income from other sources. The appellant took the matter in appeal to the Appellate Assistant

Commissioner who, by his order dated February 23, 1960, allowed the appeal. He took the view that there was no finding in the order of the

Appellate Assistant Commissioner that the credit represented the income of the appellant or that the same credit should be assessed in the

assessment year 1948-49. He further held that the notice u/s 34 issued on November 3, 1958, was bad in law and was not saved by the second

proviso to Section 34(3) of the Act, The Commissioner of Income Tax preferred an appeal against the order of the Appellate Assistant

Commissioner to the Income Tax Appellate Tribunal which allowed the appeal, holding that ""the order of the Appellate Assistant Commissioner in

the appeal against the assessment for 1949-50 should be taken to contain a finding that the sum of Rs. 25,000 represented income of the assessee

to be considered in the assessment year 1948-49"". At the instance of the appellant the Appellate Tribunal referred the following questions of law

for the opinion of the High Court u/s 66(1) of the Act:

(1) Whether, on the facts and in the circumstances of the case, the proceedings initiated against the assessee for the assessment year 1948-49 u/s

34 and the assessment for the said year are barred by limitation and hence not lawful ?

(2) Whether the proceedings initiated against the assessee for the assessment year 1948-4 u/s 34 and the assessment made u/s 34 for the

assessment year 1948-49 could be justified in law as for the purpose of giving effect to a finding or direction In the order of the Appellate Assistant

Commissioner in I.T.A. No. 134 of 1958-59?

(3) Whether, on the facts and in the circumstances of the case, the assessment made is saved from the bar of limitation under the second proviso to

Section 34(3) ?

By its judgment dated January 2, 1964, the High Court answered the questions in favour of the respondent and against the appellant.

The Supreme Court was of the opinion that the view taken by the High Court is not correct in law and must be overruled. Certain contentions

were raised before the Supreme Court by Mr. Veda Vyasa, counsel for the respondent. Referring to the said contentions, the Supreme Court said:

Mr. Veda Vyasa referred to the decision of the Bombay High Court in Onkarmal Meghraj Vs. Commissioner of Income Tax, Bombay I, in which

it was held that there was nothing in Section 2 or 4 of the Amendment Act of 1959 to restrict the terms of the words ''at any time'' occurring in

Section 4 of that Act as meaning ''at any time after April 1, 1956'', viz., the date on which the amendments made by the Finance Act, 1956, came

into force and there was nothing in the provisions of the Amendment Act of 1959 which limited the retrospective operation of Section 4. It was

also held that since the enactment of the Amendment Act of 1959, a notice issued after April 1, 1956, for reopening an assessment, by virtue of

Section 4, could not be permitted to be called in question on the ground that the notice was not issued within the period prescribed by the

unamended Section 34(1)(a). On behalf of the respondent reference was also made to the decision of this court in S.C. Prashar, Income Tax

Officer, Market Ward, Bombay and Another Vs. Vasantsen Dwarkadas and Others, in which it was held that Section 4 of the Amendment Act,

1959, operated on and validated notices issued u/s 34(1)(a) as amended in 1948, even earlier than April 1, 1956, in other words, in respect of

assessment years prior to March 31, 1956, and, therefore, notices issued u/s 34(1)(a) of the Income Tax Act, before April 1, 1956, could not be

challenged on the ground that they were issued beyond the time limit of eight years from the respective assessment years prescribed by the 1948

amendment. On behalf of the appellant Mr. Swaminathan raised the objection that the point was not taken up by the respondent in the High Court,

nor was there any reference to it in the statement of the case filed by the respondent. It was also contended that the point raised was outside the

scope of the questions of law referred by the Appellate Tribunal to the High Court. We do not think there is any substance in the objection raised

on behalf of the appellant. One of the questions referred to the High Court is ''whether, on the facts and in the circumstances of the case, the

assessment made is saved from the bar of limitation under the second proviso to Section 34(3) ?''. It is true that the impact of the Amending Act,

1959 (1 of 1959), was not raised before the Appellate Tribunal or before the High Court but it is not a separate question by itself and is only an

aspect of the question of limitation which has already been referred by the Appellate Tribunal to the High Court. As pointed out in Commissioner

of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., the question of law referred to the High Court u/s 66 may be a simple one having

its impact on one point, or it might be a complex one, involving more than one aspect and requiring to be tackled from different standpoints. All

that Section 66(1) requires is that the question of law which is referred to the High Court and which the High Court is to decide must be the

question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that

the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the

position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act. In our opinion, the argument

of the respondent with regard to the legal effect of the Amending Act of 1959 (1 of 1959) is within the framework of the question already referred

to the High Court and it is therefore competent to this court, in a case of this description, to allow a new contention to be advanced.

It is, however, necessary that the case should be remanded to the High Court for examining the question of law referred to it after considering

the impact of the Amending Act of 1959 (1 of 1959).

For these reasons we allow this appeal, set aside the judgment of the High Court dated January 2, 1964, and remand the case to it for further

hearing and answering the reference in the light of the Income Tax Amending Act, 1 of 1959.

In the light of this, the questions referred to this court as above, u/s 66(1) of the Act, have to be answered.

In order to answer the question, it is necessary to trace to a certain extent the scope of Section 34 of the Act, as also the amendments made

thereto from time to time and the impact of the Amending Act of 1959 (1 of 1959).

Section 34 enables the Income Tax Officer to assess income which has escaped assessment or has been under-assessed in the relevant

assessment year, even though such assessment has become final. The text of Section 34 suffered verbal, phased, instructive and far-reaching

amendments from time to time ; but we are here concerned only with the period of limitation, within which the Income Tax Officer can act and

issue the notice u/s 34(1)(a). We are not, therefore, touching upon the other conditions for the exercise of such jurisdiction. Prior to 1939, such

action can be initiated within one year of the end of the year during which such income has escaped assessment or has been under assessed. By the

Amending Act of 1939, the period within which he could act was altered to eight years in certain cases and in other cases to four years. In 1948,

the legislature retraced its steps and vested the Income Tax Officer with power to issue the avowed notice at any time, if the action was provoked

by reason of the default on the part of the assessee and within four years of the end of year, if such notice was sought to be served because of

information in the possession of the Income Tax Officer, he has reason to believe that there has been an escapement or under-assessment. In

1953, in the latter situation as above, the assessment can be made before the expiry of one year from the date of service of the notice, even if at

the time of assessment or reassessment the four years rule has already expired. Inter alia, by the Amending Act of 1954, the notice to assess or

reassess the escaped income if it is rupees one lakh or more may be given even after the expiry of the period of eight years or four years, as the

case may be, subject, however, to the interdict that no such notice shall be issued after the 31st day of March, 1956, By the Finance Act of 1956

and with effect from 1st April, 1956, the time-limit of eight years was omitted in cases where the income which escaped assessment was due to

overt or a deliberate act of the assessee ; but this was made subject to the following :

Provided that the Income Tax Officer shall not issue a notice under Clause (a) of Sub-section (1)-

(i) for any year prior to the year ending on the 31st day of March, 1941 ;

(ii) for any year, if eight years have elapsed after the expiry of that year, unless the income, profits or gains chargeable to Income Tax which have

escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act,

or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to, one lakh of rupees or more in the

aggregate, either for that year, or for that year and any other year, or years after which or after each of which eight years have elapsed, not being a

year or years ending before the 31st day of March, 1941 ;

(iii) for any year, unless he has recorded his reasons for doing so, and, in any case falling under Clause (ii), unless the Central Board of Revenue,

and, in any other case, the Commissioner, is satisfied on such reasons recorded that it is a fit case for the issue of such notice :.

Provided further that the Income Tax Officer shall not issue a notice under this sub-section for any year, after the expiry of two years from that

year, if the person on whom the assessment or reassessment is to be made in pursuance of the notice is a person deemed to be the agent of a non-

resident person u/s 43 :

Provided further that the tax shall be chargeable at the rate at which it would have been charged had the income, profits or gains not escaped

assessment, as the case may be.

Explanation.--Production before the Income Tax Officer of account books or other evidence from which material facts could with due diligence

have been discovered by the Income Tax Officer will not necessarily amount to disclosure within the meaning of this section.

While retaining the period of eight years in cases where income was below rupees one lakh, the restriction as to time was removed in so far as

escapement of income over rupees one lakh was concerned,

The above cryptic analysis in so far as the prescribed period of limitation within which the Income Tax Officer can issue a notice u/s 34(1)(a)

or (b) was made by us to appreciate the real question in controversy before us. Mr. Swaminathan would contend that it is only by the Amending

Act of 1956, a special but an enhanced period of limitation was provided for bringing to tax income of rupees one lakh and more and that this sole

purpose was only achieved by the Amending Act of 1956. It is stated that as Section 4 of the Amending Act of 1959 (1 of 1959) refers expressly

to the Finance Act of 1956, the saving of notices, assessments, etc., u/s 4 of Act I of 1959 could only have an impact over such a factual situation,

namely, if the escaped income is a lakh of rupees or more. Hence, it is argued that, as the subject-matter in the instant cess is less than a lakh of

rupees, no saving of action in such cases is envisaged in Section 4 of the Act I of 1959. Incidentally, it was argued that, as the period of eight years

within which income of less than rupees one lakh can be brought to tax remained untouched by the Amending Act of 1956, and as on the date of

the impugned notice the prescribed period of years expired, Section 4 of Act I of 1959 cannot have any impact on such a situation and there can

be, in consequence, no saving of the action as proposed by the Income Tax Officer.

The statute of limitation being ordinarily a statute of repose, is solely intended to restrict controversies to a fixed period. At the expiry of the

fixed period of limitation, a right becomes barred. In the instant case, if the Income Tax Officer failed to bring to book within time any escapement

of tax on an income which was less than rupees one lakh, then the assessee secures a valuable right. The operation of the law of limitation has been

explained by Lord Plunket in a striking metaphor. He stated that time holds, in one hand, a scythe and, in the other, an hour-glass. The scythe

mows down the evidence of our rights, while the hour-glass measures the period which renders that evidence superfluous.

Thus, if a notice u/s 34 is issued after the statutory period of eight years, the question is, can such a lapsed remedy be revived without any

express provision therefor. Ordinarily, the law of limitation is referred to as procedural law and by itself is retrospective in operation. But it is again

fundamental that no law can be retrospective unless made so operative, so as to whittle down, alter or destroy any vested right or so as to bring to

life any remedy already lost by efflux of time. But, in spite of the right becoming stale by operation of the law of limitation, yet the legislature in its

wisdom can interfere and save such rights. Such a saving should be expressly provided or should patently appear by necessary intendment. On this

aspect, there is no difference between procedural law and substantive law. The following excerpt from the judgment of the Privy Council in AIR

1927 242 (Privy Council) is apposite :

....while provision of a statute dealing merely with matters of procedure may properly, unless that construction be textually inadmissible have

retrospective effect attributed to them, provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively

in the absence of express enactment or necessary intendment. Their Lordships can have no doubt that provisions which, if applied retrospectively,

would deprive of their existing finality orders which, when the statute came into force, were final, are provisions which touch existing rights.

Accordingly, if the section now in question is to apply to orders final at the date when it came into force, it must be clearly so provided. Their

Lordships cannot find in the section even an indication to that effect.

In the above perspective it has to be found whether the saving Section 4 of Act I of 1959 gives an indication as to what remedies have been

saved to the revenue, notwithstanding the vestige of certain rights in the assessee due to the lapse of time in so far as it related to assessment of

escaped income. What is saving and what are the principles of interpretation generally and specially applicable for a saving provision?

A saving Act, whether it is substantive or procedural in scope, being the byproduct of legislative wisdom, acts on its own, uninfluenced by

other considerations such as hardship, inconvenience and equity. In its operational field it may work hardship, its results may be at once startling

and inconvenient. So long as such a law gives a clear indication as regards its content and extent of saving, then it is self-active and its effect ought

not to be sloped down by a mere argument, however interesting and attractive it may be and for the reason it affects vested rights.

The Supreme Court observed in The Bengal Immunity Company Limited Vs. The State of Bihar and Others, as follows :

....for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things

are to be discerned and considered : First, what was the common law before the making of the Act; Second, what was the mischief and defect for

which the common law did not provide ; Third, what remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth

; and Fourth, the true reason of the remedy ; and then the office of all judges is always to make such construction as shall suppress the mischief and

advance the remedy and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force

and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico.

But it is well accepted that Acts deal with future and not with past events. This does not, however, mean that an Act is not intended to interfere

with existing rights. If by express declaration or necessary intendment such interference is plausible and provided for in an Act then courts are

bound to give effect to it.

In the conspectus of such understanding of the law relating to interpretation of statutes, what was intended by the legislature in enacting Section

4 of Act I of 1959 ? The law as it stood prior to 1956 was, if an escapement survived a period of eight years in the case of income less than

rupees one lakh, no notice under session 34(1)(a) can be given; but if it related to an income of rupees one lakh and more, then such a notice could

be issued at any time, prior to the 1956 amendment and after the 1956 amendment, within eight years after the expiry of the year of escape. The

observations of Veeraswami J., as he then was, in Hussain Bhai v. Commissioner of Income Tax, [19661 62 ITR 456, are apposite at this place :

But it is contended for the assessees that the latter part of the section confines the saving only to notices which were issued, prior to the Finance

Act, 1956, and it will not cover notices issued, as in this case, subsequent to that date. We are unable to accept this construction of the section. It

seems to us that to adopt that construction will involve inconsistency between the earlier and latter parts of the section. When the section begins by

making reference to notices issued before the commencement of the Act, that is to say, March 12, 1959, and when the latter part of the section

says that such notices shall not be called in question, there is no reason to think that the latter part confines the saving only to notices issued prior to

March 12, 1956. The Finance Act, 1956, in effect made no change to the period of limitation applicable to a notice u/s 34(1)(a) in cases where

the escapement of income fell below one lakh of rupees. Even after the Finance Act, 1956, the period of limitation continued to be eight years,

though this was covered by the proviso to Section 34(1)(a). We are, therefore of the view that the section covers also notices issued between

1956 and 1959.

Thus in the ultimate analysis the time within which such notice should have been issued or the assessment or reassessment should have been

made, under the post-1956 law, was eight years for both the kinds of income, whether it is less than rupees one lakh or rupees one lakh and more.

The pre-1956 law prescribed two different periods according as the escapement was less than rupees one lakh or rupees one lakh and more.

Such law did not provide for the netting of escaped income if eight years have lapsed after the expiry of the year in which income escaped. There

was thus scope for all types of income slipping out of the net of taxation by mere efflux of time. The vigilant legislature, which was from time to time

and since 1939 prescribing ambulatory periods within which escaped income could be brought tax, wanted to remedy and plug the loophole by

saving the lapse of action against such escapement. This was achieved by Section 4 of Act I of 1959, and a clear indication to that effect is there in

the section. It is that mischief which was unprovided for, which the saving provision, introduced in 1959, wanted to cure.

The true reason of the remedy is that, however ingenious a culpable assessee may be and howsoever he was able to hoodwink the revenue by

allowing the march of time to steal a march over the remedy available to the revenue, the legislature thought such unsocial, screening (sic) and

illegal, escapement from the clutches of fiscal law ought not to be encouraged ; hence Parliament resolved to cure the defect. As it is the duty of

courts to advance the remedy and suppress the mischief, it is necessary to see whether the argument of Mr. Swaminathan that the section has not

provided for the revival of the remedy if the quantity of the escaped income is less than rupees one lakh, is well-founded.

Almost to the level of exhaustion, Mr. Swaminathan strenuously argued that the parenthesis ""under that section as in force before its

amendment by Clause (a) of Section 18 of the Finance Act, 1956 (18 of 1956), had expired"", appearing in Section 4 of the Amending Act I of

1959, can have reference to only income of rupees one lakh and above and not to income less, than a lakh of rupees, because the 1956

amendment was intended to touch and deal only with the former situation. By the 1956 Act, Parliament prescribed the time limit for the reopening

of closed assessments, in so far as income of rupees one lakh and more was concerned, but maintained the status quo as regards income of less

than rupees one lakh. This does not mean that the Act of 1956, concerned itself only with escaped income of rupees one lakh and more. It would

be a travesty of fact to interpret the 1956 Act in that limited way. The law referred to the two situations though not expressly, but by necessary

intendment. In our view it is not as if the Amending Act of 1956 left untouched the situation when the income escaped was less than rupees one

lakh. It did not alter the then existing law. But Parliament chose to alter the law in so far as it related to escaped income of rupees one lakh and

more. But in both the types of escapement the law applied its mind and curtailed the period in the case of one and retained the period in the case of

another. Ordinarily, when the time limit prescribed by any law, for action to give effect to it expires, then the remedy is no longer available. But,

again. Parliament has the right to intercede and interdict such a snapping of the chain of causation. This was done by the saving provision by the

Amending Act of 1959. Section 4 of Act I of 1959 reads :

Saving of notices assessments, etc., in certain cases.--No notice issued under Clause (a) of Sub-section (1) of Section 34 of the principal Act at

any time before the commencement of this Act and no assessment, reassessment or settlement made or other proceedings taken in consequence of

such notice shall be called in question in any court, tribunal, or other authority merely on the ground that at the time the notice was issued or at the

time the assessment or reassessment was made, the time within which such notice should have been issued or the assessment or reassessment

should have been made under that section as in force before its amendment by Clause (a) of Section 18 of the Finance Act, 1956, had expired.

Notwithstanding the expiry of the time as prescribed in the 1956 Act, notices issued and consequent action taken to assess or reassess any

type of escaped income are validated and the exercise of such jurisdiction by the Income Tax Officer is saved and protected. This what happened

in this case.

We need not restate the facts because we have already referred to them in the language of the Supreme Court. As regards question No. 2, the

appellant having succeeded before the Supreme Court, it is unnecessary for us to record our answer thereon. Questions Nos. 1 and 3 alone,

therefor, survive.

We have in extenso considered the full scope and content of Section 34 with particular reference to its variegated amendments and finally we

have also touched upon in detail the impact of the Amending Act of 1959 (Act I of 1959) on Section 34.

At this stage the observations of the Supreme Court in S.C. Prashar v. Vasantsen Dwarkadas and the analytical epitomization therefore in

Hussain Bhai v. Commissioner of Income Tax may usefully be referred to. In S.C. Prashar v. Vasantsen Dwarkadas the following excerpts from

the judgment rendered by their Lordships bring out the true effect of Section 4 of the Amending Act of 1959.

At page 21, S. K. Das J. observed :

It seems to me that on the contrary, the provisions of section 34(4) and Section 4 of the Amending Act clearly indicate that the only effect of

Section 34(4) is to authorise action, and the only effect of Section 4 of the Amending Act is to validate action, u/s 34 as amended in 1956, in cases

where action u/s 34 has already become time-barred prior to its amendment in 1956.

At page 27, Kapur J. said :

The notices to which Section 4 applies and which are validated are those that were issued between the periods mentioned in that Act, i. e., before

the Amending Act, 1959, and after the Finance Act, 1956, in spite of the expiry of the eight years period the amendment by the Finance Act of

1956.

Veeraswami J., as he then was, in Hussain Bhai v. Commissioner of income tax analysed, as already mentioned, the aspect and held at page

458 :

It is settled by the majority judgment in Prashar v. Vasantsen Dwarkadas that Section 4 of Act I of 1959 has retrospective effect.

At page 459 the learned judge held :

It follows that Section 4 of Act I of 1959 saves the notice u/s 34(1)(a) issued on July 9, 1958, from the bar of limitation.

Finally, the Supreme Court, in Civil Appeal No. 1984 of 1966, while remanding the subject for a reconsideration, has succinctly summarised

the import of Prashar v. Vasantsen Dwarkadas in these terms :

... Section 4 of the Amending Act, 1959, operated on and validated notices issued u/s 34(1) (a) as amended in 1948 even earlier than April 1,

1956, in other words in respect of assessment years prior to March 31, 1956, and, therefore, notices issued u/s 34(1)(a) of the Income Tax Act

before April 1, 1956, could not be challenged on the ground that they were issued beyond the time limit of eight years from the respective

assessment years prescribed by the 1948 amendment.

In the light of our discussion and in the wake of such a clear exposition of law as laid down and latterly interpreted, we are of the view that the

notice dated November 3, 1958, issued by the Income Tax Officer u/s 34(1)(a) of the Act is valid and the further proceedings are saved by

Section 4 of Act I of 1959.

The surviving questions are, therefore, answered against the assessee with costs. Counsel''s fee Rs. 250.