Commissioner of Income Tax, Madras vs P. Reid

Srinivasan, J.—An order u/s 23A was passed on March 24, 1956, in respect of Simpson and Company Ltd. As a result of this order, the

share of dividend deemed to have been distributed to a shareholder of the company, the assessee in the present case, was computed at Rs.

48,223. The date of the general meeting relevant to this deemed distribution being December, 1950, the proportionate share of the dividend

became assessable by inclusion in the total income of the assessee for the assessment year 1951-52. The initial assessment inclusive of this

dividend had been completed on July 8, 1953. The Income Tax Officer issued a notice u/s 34. The notice purported to have been issued on

March 28, 1956, but it was actually served on the assessee only on April 3, 1956. Objection was, therefore, taken to the assessment on the

ground that the assessee had not been served before the end of four years following the close of the assessment year. But this objection was

overruled by the Income Tax Officer. On appeal, the Appellate Assistant Commissioner accepted this contention as sound and the aside the

assessment. The department appealed to the Tribunal and the Tribunal confirmed the order of the Appellate Assistant Commissioner. On the

application of the department the Tribunal has referred the following question for our determination :

Whether, having regard to the provisions of section 23A and 34, the Income Tax Officer had jurisdiction to revise the assessment of the assessee

which became final ?

In our opinion, the reference has to be answered against the department. It is well settled that section 23A is only a machinery provision and that

any assessment of the shareholder of a company to whom a dividend is deemed to have been distributed has to be assessed or reassessed in

relation to that amount only by resort to section 23 and 34 as the case may be. This has been laid down in Commissioner of Income Tax v.

Navinchandra Mafatlal following an earlier decision in Sirdar Baldev Singh v. Commissioner of Income Tax. It accordingly follows that, after an

order had been made u/s 23A, in cases where the original assessment of the shareholder has already been u/s 23, there has to be a reassessment

only after the service of notice u/s 34. The question that has however been canvassed by the learned counsel for the department is that a valid

assessment is possible upon the assessee notwithstanding that by the date of the assessment the period of four years has elapsed from the end of

the relevant assessment year so long as a notice has been issued to the assessee. u/s 34(1)(b) , which applies to the present case, the Income Tax

Officer has to serve on the assessee at any time within four years of the end of the relevant assessment year a notice containing the necessary

requirements. Section 34(3) contains a proviso, which is to this effect :

Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to

be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if at the time of the

assessment or reassessment the four years aforesaid have already elapsed.

It is accordingly the claim of the learned counsel for the department that no long as the requisite notice u/s 34(1)(b) of the Act has been issued,

though not-served, within the period of four years, no further period of limitation is imposed except that reassessment should be made within four

years from the date of service. Reliance is therefore placed upon the use of the word ""issue"" in this proviso in contradistinction to the requirement

of service contained in section 34(1)(b). The question is whether the Income Tax Officer derives jurisdiction to continue the proceedings started by

the issue of a notice if the notice itself has not been served upon the assessee within the period of limitation prescribed.

That the service of a notice is a necessary condition precedent to the assumption of jurisdiction by the Income Tax Officer u/s 34 has been too

well established to require any further consideration. In Seethai Achi v. Income Tax Officer, Coimbatore, the Madras High Court held that the

department does not have a right independent of section 34 to reopen the assessment of the shareholder in terms of section 23A and that the

period of limitation for assessment u/s 34 has to be computed only with reference to the assessment year of the shareholder. In that case, a notice

was issued to the shareholder more than two year after the four-year period came to an end. The argument that was advanced on behalf of the

department to sustain the validity of the notice was that the period of four years was to be computed from the date of the order u/s 23A. A like

argument is advanced in the present case. This was repelled following the decision in Commissioner of Income Tax v. Robert J. Sas. It was further

emphasised a that the service of a valid notice is a condition precedent to the assumption of jurisdiction u/s 34 of the Act.

These decision do not directly touch upon the question whether the proviso to section 34(3) marks any departure from the condition relating to

serving laid down in section 34(1). This point was however specifically dealt with by a Bench of the Allahabad High Court in Sri Niwas v. Income

Tax Officer, Sitapur. The argument advanced in the present case was also advanced therein, the department seeking to claim that the issue of

notice was sufficient to confer jurisdiction upon the Income Tax Officer to make a reassessment. The learned judges point out that though the use

of the word ""issue"" in the proviso created some difficulty, sub-section (1) and sub-section (3) of section 34 dealt with different matters. They

observed :

Sub-section (1) states the circumstances in which an Income Tax Officer may assessee income which has escaped assessment wholly or in part;

and the giving of notice is a condition precedent to the assumption of jurisdiction. Sub-section (3) deals with another matter altogether, namely, the

period within which an assessment may be made; the sub-section in order words makes provisions for a situation which only arises after there has

been a valid assumption of jurisdiction by the Income Tax Officer under sub-section (1).

In the second place we think that had it been the intention of the legislature that the assumption of the jurisdiction by the Income Tax Officer should

be dependent on the mere issue of a notice to the assessee it would have been a simple matter, when this section was re-drafted in 1948, for the

legislature to have put the matter beyond doubt by using the word ""issue"" in place of the word ""serve.

They refer to the various changes that section 34, had undergone and conclude that the mere issue of a notice would not be sufficient

compliance with the requirements of section 34(1).

The Punjab High Court in Commissioner of Income Tax v. Lachhman Dass Nayar was equally emphatic in its conclusion that the mere issue of

a notice within the period prescribed in section 34 was not enough to confer jurisdiction to reassess.

Nothing has been stated before us to justify our differing from the conclusions reached on this point by the several High Court. It accordingly

follows that, as in the present case a notice u/s 34(1)(b) was served on the assessed beyond the period of four years from the close of the relevant

assessment year, the proceedings u/s 34 were not validly instituted and the assessment was rightly held to be without jurisdiction. The question is

answered in the negative and against the department. The assessee will be entitled to his cost. Counsels fee Rs. 250. Question answered in the

negative.