Commissioner of Income Tax, Gujarat vs L.A. Patel

Bhagwati, J.—This reference arises out of an assessment made on the assessee as an individual u/s 34(1)(a) of the Income Tax Act, 1922.

This reference related to the assessment year 1946-47, the relevant account year being the financial year ending 31st March, 1946. During the

relevant account year the assessee was serving as a Deputy Engineer in the Public Works Department of the Government of Bombay and that

salary drawn by him in that year amounted to Rs. 5,326. The assessee was assessed for the first time for the assessment year 1947-48 and so far

as the prior assessment years including the assessment year 1946-47 were concerned, no notice was issued to the assessee u/s 22(2) nor did the

assessee file any return of his income and no assessment was made on the assessee for those assessment years. It appears that some time after the

assessment for the assessment year 1947-48 was completed, the Income Tax Officer received information that the assessee had made large

deposits in his current deposits accounts with the Central Bank of India Limited and the Bank of India Limited in the earlier assessment years

including the assessment year 1946-47 and since the assessee was not able to satisfactorily explain the source of these deposits, the Income Tax

Officer issued a notice u/s 34(1)(a) against the assessee and the notice first issued against the assessee was for the assessment year 1945-46.

Before the Income Tax Officer could issue a similar notice for the assessment year 1946-47, the assessee submitted a voluntary return of his

income for that assessment year u/s 22(3) on 20th December, 1954. In after deducting a loss of Rs. 4,223 in speculation from the salary of Rs.

5,326 and dividend income of Rs. 147. The Income Tax Officer did not act on this return and, ignoring it, issued a notice u/s 34(1)(a) against the

assessee for the assessment year 1946-47 and the notice was served on the assessee on 22nd March, 1955. The assessee disputed the validity of

the notice on the ground, inter alia, that the Income Tax Officer was not entitled to take action u/s 34(1)(a) in view of the voluntary return filed by

the assessee but ultimately the assessee filed a fresh return of 5th November, 1955, in compliance with the notice u/s 34(1)(a). The Income Tax

Officer, thereafter. proceeded to complete the assessment u/s 34(1)(a) and he made on order dated 20th March, 1956, assessing the assessee on

a total income of Rs. 51,098 which included a sum of Rs. 49,800 forming part of the deposits in the bank accounts of the assessee as income

undisclosed sources. The assessee carried the matter in appeal to the Appellate Assistant Commissioner. Two grounds were raised before the

Appellate Assistant Commissioner : one was that the assessment u/s 34(1)(a) was invalid since the assessee had already filed voluntary return

before the issue of the notice u/s 64(1)(a) and the second was that the addition of Rs. 49,800 made by the Income Tax Officer was improper and

unjustified. The first ground was rejected by the Appellate Assistant Commissioner but, so far as the second ground was concerned, the Appellate

Assistant Commissioner gave relief to the assessee to the extent of Rs. 10,800. The assessee thereupon preferred an appeal to the Tribunal. The

Tribunal, relying upon the decision of the High Court of Bombay in Ranchhoddas Karsondas v. Commissioner of Income Tax, took the view that

the submission of voluntary return by the assessee precluded action u/s 34(1)(a) and the Tribunal, accordingly, set aside the assessment without

going into the question whether the addition of income from undisclosed sources made by the revenue authorities was justified. The Commissioner

being aggrieved by this decision applied for a reference and since a question of law admittedly arose our of the decision of the Tribunal, the present

reference was made by the Tribunal. It may be pointed out that whilst the reference application was pending before the Tribunal, the decision of

the Bombay High Court in Ranchhoddas Karsondas''s case was confirmed by the Supreme Court and it is now reported as Commissioner of

Income Tax v. Ranchhoddas Karsondas.

Now, as we have pointed out above, the Tribunal relied wholly and completely on the decision in Ranchhoddas Karsondas''s case in setting

aside the assessment made u/s 34(1)(a) by the Income Tax Officer. It would, therefore, be necessary to examine the true scope and import of that

decision, but before we do so, we would prefer to examine the question on principle. The assessment was made by the Income Tax Officer on the

assessment u/s 34(1)(a) and the ground on which the notice for initiating proceedings under that section was issued was that the Income Tax

Officer had reason to believe that, by reason of the omission or failure on the part of the assessee to make a return of his income u/s 22 for the

assessment year 1946-47, the income of the assessee had escaped assessment. Before the notice was issued by the Income Tax Officer, the

assessee submitted a voluntary return of income showing a net income of Rs. 1,217 which was below the taxable limit. The question is whether the

submission of this voluntary return precluded the Income Tax Officer from issuing notice u/s 34(1)(a). At one time there was a sharp conflict of

opinion between the Bombay High Court on the one hand and the Calcutta High Court on the other whether a voluntary return disclosing income

below the taxable limit could be regarded as a valid return u/s 22, but this conflict was set at rest by the Supreme Court in Ranchhoddas

Karsondas''s case by holding that the view taken by the Bombay High Court was the sounder of the two views and that a return showing income

below the taxable limit could be validly filed in answer to a notice either under sub-section (1) or sub-section (2) of section 22 and that such a

return would be a good return. The voluntary return filed by the assessee could not, therefore, be ignored as an invalid return on the ground that it

disclosed income below the taxable limit. Now it is clear, having regard to the provisions of section 22, that a return may be filed by an assessee in

response to the public notice u/s 22(1) or it may be filed in response to an individual notice served on the assessee u/s 22(2). But even where an

assessee has not submitted a return in response to the public notice u/s 22(1) and no individual notice has been served on the assessee in the

course of the assessment year u/s 22(2), the assessee may yet make a voluntary return u/s 22(3) at any time after the expiration of the assessment

year but this return must evidently be made before the expiration of the time limited for making an assessment u/s 23. This last qualification follows

logically from the language of section 22, sub-section (3). That sub-section provides that if an assessee has not furnished a return within the time

allowed by or under sub-section (1) or sub-section (2), he may furnish a return at any time before the assessment is made. This provision

postulates that the return must be filed at a point of time when the assessment can be lawfully made and therefore it must follow that the return to

be a valid return u/s 22(3) must be filed before the expiration of the time limited for making an assessment u/s 23. Now u/s 34(3), except in certain

limited cases, which are not relevant for the purpose of the present reference, the normal period of limitation for making an assessment is four years

from the end of the assessment year. It would, therefore, appear that a return u/s 22(3) must be filed at the latest before the expiration of the

period of four years from the end of the assessment year. So long as the return is filed within such period, the Income Tax Officer can proceed to

process the return and assess the assessee under the relevant provision of section 23 and in such a case it cannot be said that the income of the

assessee has escaped assessment by reason of the omission or failure on the part of the assessee to file a return of his income so as to attract the

applicability of section 34(1)(a). In the first place, the return having been filed, it would not be possible to say that the assessee has omitted or

failed to filed a return of his income and, secondly, the return being before the Income Tax Officer and the Income Tax Officer being lawfully

entitled to process the return and assess the assessee u/s 23, it would not be possible to say that the income of the assessee has escaped

assessment. This was exactly the position in Ranchhoddas Karsondas''s case. There the voluntary return for the assessment year 1945-46 was

submitted by the assessee on 5th January, 1950, that is, before the expiration of the period of four years from the end of the assessment year and it

was in the context of the voluntary return so submitted that the Supreme Court took the view that the Income Tax Officer was not entitled to ignore

the return and to take proceedings u/s 34(1)(a). Hidayatullah J., speaking of the notice issued by the Income Tax Officer u/s 34(1)(a), observed :

This notice was improper, because with the return already filed, there was neither an omission nor a failure on the part of the assessee nor was

there any question of assessment escaping."" But where the voluntary return is submitted by the assessment after the expiration of the period of four

years from the end of the assessment year, the position would be clearly different. In such a case the period of four years having expired, the

Income Tax Officer would have no jurisdiction to proceed to assess the assessee in the ordinary way u/s 23 (without invoking the aid of section

34(1)(a)) by reason of section 34(3) and the submission of the voluntary return would be futile. The result would be that the income of the assessee

would have escaped assessment by reason of the omission or failure on the part of the assessee to make a return of his income and the terms of

section 34(1)(a) would consequently be satisfied and the Income Tax Officer would be entitled to proceed to take action by issuing notice under

that section. It is, therefore, clear that where a voluntary return of income is filed by an assessee before the time limited u/s 34(3) for making an

assessment u/s 23 has expired, the Income Tax Officer can proceed to make an assessment u/s 23 without having recourse to section 34(1)(a) but

where the voluntary return is filed subsequently, the Income Tax Officer cannot make an assessment u/s 23, but must proceed u/s 34(1)(a) if wants

to bring to tax such income and the subsequent filing of the voluntary return would not avail to preclude initiation of proceedings u/s 34(1)(a). We

find that this view which we are taking has also found favour with the Madras High Court in Santosha Nadar v. First Additional Income Tax

Officer. Applying this principle to the facts of the present case, it is clear that the voluntary return of income was submitted by the assessee long

after the expiration of the period of four years from the end of the assessment year 1946-47, and the submission of the voluntary return could not,

therefore, have the effect of precluding the Income Tax Officer from proceeding to take action u/s 34(1)(a).

Turning to the questions that have been referred to us, we find that the first question is not properly framed and we would reframe it in the

following manner :

(1) Whether the Income Tax Officer was bound to act on the return filed by the assessee on December 20, 1954, for the assessment year 1946-

47 u/s 22(3) of the Act ?

Our answer to this question is in the negative. Our answer to the second question will be in the affirmative. The assessee will pay the costs of the

reference to the Commissioner.