B.M.S.R.M. Ramaswami Chettiar vs Commissioner of Income Tax

Reilly, J.—In this case an Income Tax assessee made a return of his income when required to do so u/s 22 (2) of the Indian Income Tax

Act, 1922. Not being satisfied with the return the Income Tax Officer required the assessee u/s 23 (2) of the Act to produce evidence in support

of his return. The assessee produced some evidence; but the Income Tax Officer found it insufficient to show the amount of the assessee''s income

and then issued a notice to him u/s 22 (4) of the Act to produce complete accounts of a branch business at a place in the Federated Malay States

for the account year in question. Those accounts the assessee did not produce, and the Income Tax Officer, therefore, proceeded to make his

assessment u/s 23 (4) of the Act--that is an assessment not made upon evidence but ""to the best of his judgment,"" an assessment from which under

the Act the assessee had no right of appeal. The question referred to us is ""the applicant having made a return of his income and having complied

with the terms of the notice issued by him u/s 23 (2), was there any jurisdiction in the Income Tax Officer to revert to Section 22 (4) and make an

assessment u/s 23 (4) for non-compliance with the notice u/s 22 (4)""? The assessee contends that in those circumstances the Income Tax Officer

had no power to make an arbitrary assessment u/s 23 (4), from which there was no right of appeal.

This question has been before four of the Indian High Courts. It has been answered against the assessee by a unanimous Full Bench of three

Judges of the Calcutta High Court in In the matter of Messrs. Harmukhrai Putichand (1928) 32 C.W.N. 710,by a unanimous Full Bench of five

judges of the Patna High Court in Ram Khelawan Ugam Lal Vs. Commissioner of Income Tax, ,overruling Brij Raj Rang Lal Vs. Commissioner of

Income Tax, ,a decision of two Judges, and by a Division Bench of the Allahabad High Court in In the matter of Chandra Sen Jaini ILR (1928) A.

Now that the earlier decision of the Division Bench of the Patna High Court has been overruled, there remains in the assessee''s favour of the

cases quoted before us only a decision of a Division Bench of the Lahore High Court in Khushi Ram Karam Chand v. Commissioner of Income

Tax, Punjab AIR 1928 Lah. 219. At one stage of the arguments before us it was suggested that the decision of a Full Bench of this Court in

Ramaswamiah v. Commissioner of Income Tax, Madras ILR (1925) M. 831 was by implication in favour of the assessee in this matter; but on

examination it will be seen that it was found in that case that the assessment was in fact made, not u/s 23 (4) but u/s 23 (3). The weight of authority

on the question before us is therefore overwhelmingly against the assessee.

It was first contended by Mr. Krishnaswami Aiyangar for the assessee that the Income Tax Officer''s power to call for accounts u/s 22 (4) can

be exercised only before the assessee has submitted a return of his income. There is nothing whatever in the wording of the sub-section to suggest

that. On the contrary the only limitations on the power of the Income Tax Officer to call for accounts in that sub-section are that, if the assessee is

not a company, a notice requiring him to make a return of his income must have been served on him and that accounts for a period more than three

years prior to the previous year cannot be called for. The fact that those restrictions are mentioned explicitly makes it the more improbable that any

other restriction is implied. It is urged that the fact that the subsection occurs in Section 22, which deals with the procedure for getting in a return,

makes it probable that all its provisions apply to the stage before the return comes in. That would be a very unsafe reason for limiting the plain

effect of the words of the sub-section; and it may be remarked that Sub-section (3) of Section 22 enables the assessee to do something after he

has submitted his return. If Section 22 (4) is to be construed as in this part of his argument Mr. Krishnaswami Aiyangar would have us construe it,

we must read into it a very important restriction which only a very careless Legislature could have omitted to express if it were intended. And, as

has been pointed out by Mr. Patanjali Sastri for the Commissioner of Income Tax, in the great majority of cases it must be after the return has

come in, not before, that the Income Tax Officer has any need to see the assessee''s accounts. If the provision for calling for accounts were

restricted to the period before the return is submitted, it would be of comparatively little use. Until he knows whether a company is going to submit

its return by the 15th June or any other assessee is going to submit its return by the date specified in the notice to him u/s 22 (2), the Income Tax

Officer need not trouble about accounts at all, as, if no return is submitted in time, he can, as is unquestioned, make this arbitrary assessment u/s 23

(4) without referring to any accounts or evidence. It is very highly improbable that the only specific provision made by the Legislature for calling for

accounts would apply only to the period when accounts are least required. But it has been argued--and the argument was adopted in Khushi Ram

Karam Chand v. Commissioner of Income Tax, Punjab AIR 1928 Lah. 219 and in the overruled case in the Patna High Court--that this surprising

restriction of the effect of Section 22 (4) has been introduced by the Legislature in a cryptic and backhanded way by the wording used in Section

23 (4). What the exact meaning of that wording is I will discuss later; but pushed to its farthest grammatical extreme, as contended by the assessee,

it comes to no more than this--that the penalty provided by Section 23 (4) for failure to produce accounts when required to do so by a notice u/s

22 (4) applies only if the notice is issued before the return is submitted. Even if that interpretation were correct, it would in my opinion be a clearly

insufficient reason for refusing to read Section 22 (4) according to its plain meaning and for reading into it a remarkable and very important

restriction which those who framed it could hardly have forgotten to express. The prevailing judgments of the Calcutta High Court, Allahabad and

Patna High Courts, which I have mentioned, agree that there is no such restriction.

But Mr. Krishnaswami Aiyangar has tried to get at the same result by another road. In a later stage of his arguments he has admitted that the

Income Tax Officer must have the right to call for the assessee''s accounts even after he has submitted his return, but has suggested that calling for

accounts at that stage is provided for in Section 23 (3). The admission that the Income Tax Officer can call for accounts u/s 23 (3) in the course of

an inquiry under that sub-section Mr. Krishnaswami Aiyangar can make without reluctance because failure to comply with a demand of the Income

Tax Officer made under that sub-section does not expose the assessee to the penalty of arbitrary assessment provided by Section 23 (4). If the

Act provided explicitly for calling for accounts during the inquiry u/s 23 (3), which is to be made after a return has been submitted, there might be

some reason for supposing that the provision for calling for accounts u/s 22 (4) applied only to an earlier stage. But the power given to the Income

Tax Officer by Section 23 (3) is to require the production of evidence ""on specified points."" If it were intended by those words to give power to

call for accounts for several years, the language would in my opinion be ill-chosen and misleading. If it were intended to give power to call for

accounts, what object could there be in failing to say so explicitly, what object could there be in using language in such contrast with the language

of Section 22 (4)? The accounts of a series of years may provide evidence on a specified point; but to describe them as ""evidence on a specified

point is obviously inappropriate."" To my mind the language of Section 23 (3) adds force to the Commissioner''s contention. If accounts can be

called for at any stage, before or after the return is submitted, then in the inquiry u/s 23 (3) power to call for further evidence on specified points is

enough and the language of that sub-section need not be strained in any way.

And, though Mr. Krishnaswami Aiyangar has called Section 23 (3) to his aid as showing an implied restriction of Section 22 (4), on examination

it throws light on the question of immediate importance in this case--whether failure to produce accounts when called for after a return has been

submitted entails the penalty of arbitrary assessment u/s 23 (4). Failure to comply with a direction u/s 23 (3) does not entail that penalty. If the

power of the Income Tax Officer u/s 23 (3) is confined to the plain meaning of that sub-section, viz., to call for evidence on specified points, it is

reasonable that failure to comply with such a direction should not entail the very severe penalty of arbitrary assessment without right of appeal. If it

did entail that penalty, it could obviously be used in a very oppressive way. For instance, the Income Tax Officer might call for some evidence of

doubtful relevance and difficult or impossible to produce, and, if it were not produced, enforce the penalty of arbitrary assessment. That would be

clearly unjust, and the Legislature has rightly made the penalty of arbitrary assessment inapplicable to such a case. But, if an assessee fails to

produce at any stage when required his accounts--the most important of all evidence in such a matter, the very evidence on which, if he is honest,

he will himself wish to reply--why should he be treated more leniently when his improper and obstructive refusal comes after instead of before he

submits his return?

No reason has been suggested for such a distinction. On the contrary, the man who refuses to produce his accounts when the Income Tax

Officer has expressed u/s 23 (2) dissatisfaction with his return is clearly more blameworthy and obstructive than the'' man who fails to produce

them before he has made his return, when no one has yet expressed an opinion whether his return will be an honest one or not. When once it is

admitted that the Income Tax Officer must have power to call for accounts in the course of the inquiry u/s 23 (3)--and without it the inquiry might

easily be reduced by the assessee to a farce--the omission to penalise failure to comply with the Officer''s requisition under that sub-section by

arbitrary assessment is strong evidence that the right for accounts even at that stage must be found elsewhere, that is in Section 22 (4).

There remains the actual wording of Section 23 (4) which sets out the failure on the part of the assessee which entail the penalty of arbitrary

assessment without appeal. It is contended that, even if Section 22 (4) gives power to call for accounts after the assessee has submitted his return,

the penalty of arbitrary assessment is restricted to a failure to produce accounts when called for before the return is submitted. As I have indicated,

there is nothing in the object or nature of the proceedings and nothing in Section 22 or the rest of Section 23 to make it probable that the legislature

would intend to treat more leniently a failure to produce accounts when required after the submission of a return than before it. But it is contended

that the wording of Section 23 (4) has that surprising result. It is quite clear, that, if a company or other assessee fails to submit a return by the

proper date, the penalty of arbitrary assessment is to be enforced. That is what the sub-section first provides. Then it goes on to provide the same

penalty for failure to comply with all the terms of a notice issued under Sub-section (4) of Section 22. If the notice u/s 22 (4) can be issued at any

time--and that I do not think can now be doubted--there is nothing so far to suggest that the penalty is attached only to failure to comply with a

notice issued u/s 22 (4) before a return is submitted. But Section 23 (4) goes on to provide that, if a company or other assessee ""having made a

return"" fails to comply with all the terms of a notice issued u/s 23 (2) the penalty shall apply. The contention of the assessee in this case rests upon

the insertion of the words ""having made a return."" It is urged with truth that failure to comply with a notice u/s 23 (2) can occur only after making a

return as that notice cannot be issued before a return is made. Therefore it is contended these otherwise useless words must have been introduced

to show by contrast that the other two failures penalised must occur before a return is made. No such contrast could be of any use in regard to the

first failure mentioned in the subsection, which is failure to make a return at all. Then this supposed contrast, if it indicates anything, must be

understood to indicate that the failure to comply with a notice to produce accounts u/s 22 (4) is to be penalised only if the notice is issued before

the return is submitted. But, if that was the intention, if the object was to express something of such importance, why try to indicate it in a clumsy

and obscure way? We must all accept the principle adopted in Khusi Ram Karam Chand v. Commissioner of Income Tax, Punjab AIR 1928 Lah.

219 that if two constructions of a fiscal enactment are equally possible and reasonable, the construction more favourable to the subject must be

enforced. But the contention of the assessee in this case rests on too frail a foundation. The words ""having made a return"" in Section 23 (4) may be

superfluous and add nothing necessary for the description of the third failure penalised, but they are applicable to that failure. Their use may be

tantalogical and inartistic. But because they are unnecessary, we are not justified in jumping to the conclusion that they have been used to express

something which it cannot be pretended they could express clearly, which a child could express clearly in other words, which no man of education

and sense of responsibility would think of expressing in that way and of which there is no indication in Section 22 or other parts of Section 23. That

to my mind would not be choosing between two equally possible and reasonable constructions, but adopting a strained construction, unreasonable

in effect and out of tune with the policy of the Act that an assessee should make full disclosure of his income. In my opinion the power to call for

accounts u/s 22 (4) may be exercised by the Income Tax Officer after the assessee has submitted a return, and failure of the assessee to produce

his accounts when called for after he has submitted a return may be penalised by arbitrary assessment u/s 23 (4). The question referred to us must

be answered in the affirmative, and the assessee should pay the costs of the reference Rs. 250.