K.N. Guruswamy vs Income Tax Officer, Special Circle, Bangalore

Medapa, C.J.—The Special Income Tax Officer, Special Circle, Bangalore started proceedings on 5-1-1954 against the petitioner, u/s 34, Income Tax Act for assessing, what was described as the escaped or under-assessed income chargeable to Income Tax, during the assessment years 1945-46, 46-47, 47-48 and 48-49. The Income Tax Officer made his assessment for the year 1945-46. The assessments for the remaining periods were not completed. The petitioner contends that these proceedings are all without jurisdiction or authority and are liable to be quashed by the issue of appropriate writs under Article 226, Constitution of India.

The financial integration of Mysore with the Union of India had come into effect, in pursuance of the recommendations of the committee known as the Indian States Finance Enquiry Committee, recorded in an agreement entered into between the Rajpramukh of Mysore and the President of India on 28-2-1950, that is to say, 3 years before the Income Tax Officer commenced these proceedings. On and from 1-4-1950, by Section 13, Finance Act of 1950, to which the President accorded his assent on 31-3-1950, the Mysore Income Tax Laws stood repealed and the Indian Income Tax Act was extended to the State of Mysore.

The contention of the petitioner is that after the enactment of the Indian Finance Act it was not competent for the Income Tax Officer to start proceedings u/s 34, Indian Income Tax Act for the purpose of re-opening assessments made before the financial integration. It is undisputed that the petitioner''s income for the relevant years had been made, before the integration came into effect.

The income of the petitioner chargeable to Income Tax is in an area which will be referred to herein as the Retrocede Area. This area formerly was part of the State of Mysore. In the year 1881 when the Rendition of the State of Mysore to the Ruler was made by installation of the Maharaja, the Instrument of Transfer came into existence. It was provided under Article 9 of that Instrument that whenever the Governor-General in Council wished to establish and maintain British Cantonments in such area in the State of Mysore as he considered necessary, the Maharaja would grant such land as may be required for the purpose and would renounce all jurisdiction within such lands. The Retrocede Area which until 1947 was known as the Bangalore Civil and Military Station, was the area so assigned to the exclusive management of the British Government for the formation of cantonment therein. His Majesty the King of England exercised the right of jurisdiction in this area in exercise of his powers under the Indian (Foreign Jurisdiction) Order in Council, 1902 made under the Foreign Jurisdiction Act, 1890. The Governor-General provided for the. administration of civil justice within the Retrocede Area. The laws administered in that Area included various enactments made applicable thereto by the promulgation of notifications under the Indian (Foreign Jurisdiction) Order in Council, 1902. One of the laws so made applicable to the Area was the Indian Income Tax Act.

This Area was Retrocede to the State of Mysore on 26-7-1947 by a notification issued by the Crown Representative, under the Indian (Foreign Jurisdiction) Order in Council, 1937. This was preceded by the enactment, of the Indian Independence Act, 1947 which received Royal assent on 18-7-1947. Section 7(1) of that Act provided among other matters that the suzerainty of His Majesty over the Indian States should as from 15-8-1947 lapse, and with it all .treaties and agreements in force at the date of the passing of that Act between His Majesty and the Rulers of the Indian States, all functions . exercisable by His Majesty at that date with respect to Indian States, all obligations of His Majesty existing at that date towards Indian States and Rulers thereof, and all powers, rights authority or jurisdiction, exercisable by His Majesty by treaty, grant, usage, suffrage or otherwise.

The Mysore laws were not forthwith extended to the Retrocede Area. Mysore Act No. 23 of 1947 (The Retrocession (Application of Laws) Act) promulgated by His Highness the Maharaja on the 4-8-1947 provided that all laws in force in the Retrocede Area immediately prior to the date of retrocession shall continue to have effect in the Retrocede Area and that the Mysore laws shall not apply thereto. By Mysore Act 24 of 1947 (The Retrocession (Transitional Provisions) Act) which came into force on the same date it is provided that notwithstanding the provisions of the - Indian Income Tax Act as in force in the Retrocede Area the Mysore Income Tax Officers shall have power to assess income pertaining to the Retrocede Area which had not been assessed prior to the date of retrocession. It is further provided by that Act that appeals and applications in respect of pre-retrocession assessments- shall lie to the corresponding Mysore Authorities. The Mysore Law (Act 31 of 1948) promulgated by His Highness the Maharaja of Mysore on 30-8-1948 called the Mysore Income Tax and Excess Profits Tax (Application to the Retrocede Area) (Emergency) Act of 1948, extended the Mysore Income Tax Act to tho Retrocede Area with effect from 1-7-1948 and the Indian Income Tax Act as in force in that Area was repealed. Section 5 of that Act further provided that in respect of income chargeable to Income Tax in the Retrocede Area prior to the first day of July 1948 but which had not been assessed until that date, provisions of the Indian Income Tax Act as in force in the Retrocede Area immediately before that date, shall apply until the stage of assessment and determination of the tax and that after that stage the Mysore Income Tax Act should apply to such proceedings.

Finally on 5-8-1948 His Highness the Maharaja promulgated Mysore Act No. 57 of 1948 (The Retrocede Area (Application of Laws) Act, 1948). That Act came into force on and from 15-8-1948. By Section 3 of that Act, except as provided in that Act, all Mysore laws were made applicable to the Retrocede Area and all laws in force in the Retrocede Area were repealed. Section 4 provided that the Mysore Laws so extended and set out in Schedule A to that Act, applied to the Retrocede Area with the modifications and restrictions specified in 2nd column of Schedule A to that Act. The Mysore Income Tax Act of 1923 and the Mysore Excess Profits Tax Act, 1946 were two of the Mysore Acts so applied to the Retrocede Area. Thus, on 80-6-1948 the Mysore Income Tax Act was extended to the Retrocede Area and the Indian Income Tax Act was repealed except for certain transitional provisions to which reference will he made later. The Income Tax law operating in the Retrocede Area from 15-8-1948 was the Mysore Income Tax Act of 1923 with certain modifications and restrictions and as provided in the Indian Finance Act of 1950. This Mysore law ceased to have effect on and from 1-4-1950 except for a limited purpose. Section 13 of the Indian Finance Act, 1950 runs:

"If immediately before the 1st day of April 1950 there is in force in any part B State other than Jammu and Kashmir or in Manipur, Tripura or Vindhya Pradesh or in the merged territory of Cooch Behar any law relating -to Income Tax or super-tax or tax on profits or business, that law shall cease to have effect except for the purposes of the levy, assessment and collection of Income Tax and super-tax in respect of any period not included in the previous year for the purpose of assessment under the Indian Income Tax Act, 1922 (XI of J.922) for the year ending on the 31st day of March 1951, or for any subsequent year or, as the case may be, the levy assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before the 31st day of March 1949....." .

it was nearly 4 years after the enactment of the Indian Finance Act that the Income Tax Officer commenced the impugned proceedings against the petitioner. Notices to the petitioner purport to have been issued u/s 34 of the Indian Income Tax Act. Although it is not so slated in the notices it is clear that the Officer who issued them intended to act u/s 34 of the Indian Income Tax Act as in force in the Retrocede Area prior to its retrocession. The contentions urged on behalf of the petitioner are:

(1) That notices issued under the Indian Income Tax Act, and not under that Act as in force in the Retrocede Area, were defective and rendered the proceedings void;

(2) That the proceedings started by the Income Tax Officer under the repealed law, viz., the Indian Income-lax as in force in the Retro-ceded Area, which was repealed on 30-6-1948 by Mysore Act 31 of 1948, were without jurisdiction or authority;

(3) That on and from 30-6-1948 the Income Tax law applicable to the. Retrocede Area was the Mysore Income Tax Act and not the Indian Income Tax Act;

(4) That after 30-6-1948 and until 1-4-1950 the Income Tax Officer in the Retrocede Area Could re-open the assessment u/s 34 of the Mysore Income Tax Act within a period of 4 years specified in that section and not under the Indian Income Tax Act;

(5) That in these 4 cases the proceedings against the petitioner which were commenced under the Indian Income Tax Act, and after the expiry of the aforesaid period of 4 years were incompetent;

(6) That all Income Tax laws in force in Mysore stood repealed on and from 1-4-1950. and so the Income Tax Officer could not start proceedings " thereunder after that date; and

(7) That even otherwise the agreement made between the President of India and the Raj-pramukh of Mysore on 2-2-1950 under Article 278 of the Constitution of India forbade those proceedings.

it seems to us that the petitioner is right in contending that the proceedings against him were started by the Income Tax Officer under a repealed law. The Indian Income Tax Act, as in force in the Retrocede area, prior to its retrocession to the State of Mysore was repealed on 30-6-1948 by Section 6, Mysore Act 31 of 1948, under which the Mysore Income Tax Act, and the Mysore Excess Profits Tax Act were extended to the Retrocede Area. All the Mysore laws were made applicable to the Retrocede Area by a more comprehensive Mysore law (Mysore Act LVII of 1948) which came into force on 15-8-1948 but by the transitional provisions contained in Section 5 of Act 31 of 1948 and in Schedule A to Act 57 of 1948 it was however provided that notwithstanding the repeal of the Indian Income Tax Act as in force in the Retrocede Area, its provisions were applicable to assessment proceedings and the determination of tax payable in respect of income chargeable to Income Tax in the Retrocede Area prior to 1-7-1948 and which had not been assessed until that date. The relevant portion of Schedule A to Act LVII of 1948 which is a reproduction of Section 8(b) of Act XXXI of 1948 runs:

"in respect of the total income or profits charge able to Income Tax or excess profits tax in the Retrocede Area prior to the first day of July 1948, but which has not been assessed until that date, the provisions of the Indian Income- tax Act of 1922, and the Excess Profits Tax Act, 1940, as in force in the Retrocede Area imme dirtily before that date shall apply to proceed ings relating to the assessment, and the deter Monition of the Income Tax and excess profits tax payable thereon, and the Mysore income tax Act, 1923, or the Mysore Excess Profits Tax Act, 1946, as the case may be, shall apply to such proceedings after that stage;"

These transitional provisions also provided for the disposal of appeals and applications whether pending or arising out of proceedings under the old law, in other words, the provisions of the repealed Indian Act and their machinery were permitted to be employed by the Income Tax Authorities for a limited purpose, viz., for the assessment of income pertaining to the period anterior to 1-7-1948 and which had not been assessed until that date. After such assessment and determination of the tax the proceedings were governed by the Mysore Income Tax Act.

It is argued for the petitioner that the assessment permitted to be made under the old law was an assessment u/s 23 and not a reassessment u/s 34. It is urged that an assessment made under the old law could, if at all, be re-opened after the enactment of Mysore Act XXXI of 1948 only under the Mysore Income Tax Act. It is contended that an assessment becomes complete the moment it is made u/s 23 and a notice of demand is issued u/s 29 of the Act. It is argued that the words "has not been assessed" and "until the stage of assessment" occurring in Schedule A to Act 57 of 1948 extracted above refer only to an assessment u/s 23 which was permitted to be made under the Indian Income Tax Act. Reliance in support of this argument is placed on a decision of the Privy Council reported in -- ''Cominr. of Income Tax, Bombay Presidency and Aden v. Khemchand Ramdas'' AIR 1928 PC 175 (A) and of the Lahore High Court reported in -- ''Nawal Kishore Khaiati lal v. Commr. of Income Tax'' AIR 1936 Lab 397 (B).

This Court in -- ''City Tobacco Mart, Avenue Road, Bangalore City v. Income Tax Officer, Urban Circle, Bangalore'' AIR 1955 Mys 49 (C) has taken the view that an assessment under the Income Tax Act becomes complete when it is made u/s 23 and a notice of demand is issued u/s 29. We adhere to that view and we see no reason why the words "has not been assessed" and "until the stage of assessment" occurring in Schedule A to Act 57 of 1948 should receive a different interpretation. It seems to us therefore that the assessment permitted by Act 57 of 1948 under the Provisions of the Indian Income Tax Act was an assessment u/s 23 and not what may be called its "re-assessment" u/s 34.

it is admitted that in all these cases the assessment on the petitioner''s income has been completed u/s 23. Any proceedings for reopening those assessments should have been commenced only u/s 34 of the Mysore Income Tax Act within the period of 4 years specified in that section and not u/s 34 of the Indian Income Tax Act, The contention of the petitioner that the proceedings against him are liable to be quashed on the ground that they were commenced ''under a repealed law has to be accepted. It is not disputed that if the Income Tax Officer had started proceedings u/s 34, Mysore Income Tax Act they would have been clearly time-barred, since the period of 4 years specified in that section had expired when he commenced them. It is therefore rightly contended on behalf of the petitioner that the proceedings for re-opening ,the assessment of his income were for that reason incompetent.

it is urged that even otherwise, after the enactment of the Indian Finance Act section 13) which repealed the existing Income Tax laws in force in Mysore and with effect from 1-4-1950 any proceeding for re-opening the assessment made prior to that date was not permissible either u/s 34 of the Mysore Income Tax Act or u/s 34 of the Indian Income Tax Act as in force in the Retrocede Area prior to its retrocession. It is rightly argued that when the Income Tax Officer applied the machinery of the Indian Income Tax Act tender the transitional provisions contained in the Mysore Act 57 of 1948 for the purpose of making assessment as provided therein, he was only acting under the Mysore Income Tax law which permitted that procedure and not under the Indian Law. It is therefore urged that when the Indian Finance Act repealed Mysore Income Tax laws, it repealed not only the Mysore Income Tax Act of 1923 but also that part of Mysore Acts 31 and 57 of 1948 which contain the transitional provisions providing for the applicability of the provisions of the Indian Income Tax Act for certain purposes. Hence it is contended that no proceedings u/s 34 could be started against the petitioner after such repeal either under the Mysore Income Tax Act or under the provisions of the Indian Income Tax Act as in force in the Retrocede Area prior to its retrocession.

This contention has been dealt with in the judgment of this Court in AIR 1955 Mys 49 (C). This Court has in those proceedings taken the view that Section 13 of the Indian Finance Act which repealed the Mysore Income Tax Act did not save Section 34 of the Mysore Income Tax Act so as to entitle the Income Tax Officer to re-open under that section assessment made prior to 1-4-1950. The decision of this Court in those cases rested on the view that the word "assessment" occurring in Section 34 of the Indian Finance Act. referred to assessment u/s 23 and not proceedings u/s 34. We adhere to that view and for the same reason we are of the opinion that in any view of the matter it would not be competent for the Income Tax Officer to reopen the assessment made prior to 1-4-1950 even u/s 34 of the Indian Income Tax Act as in force in the Retrocede Area, prior to its retrocession.

This Court has declined to express its opinion in AIR 1955 Mys 49 (C) on the question whether the agreement executed between the Raj-pramukh of Mysore and the President of the Union of India precluded the re-opening of assessment snide prior to the financial integration between the state and the Union. We do not feel called upon to go into that matter on this occasion either.

We are therefore of the opinion that the respondent acted without jurisdiction or authority in starting the impugned proceedings against the petitioner. These writ petitions must therefore succeed and we direct the writs prayed for by the petitioner to issue.

The respondent during the pendency of these cases was permitted by this Court to make an assessment order for the year 1946-47 subject to the condition that the assessment so made by him would be quashed if the writ petitions succeed ed. It is now reported to the Court that the assess ment order has been made for the year 1946-47. The proceedings started and conducted by the res pondent against the petitioner in all these 4 cases and the assessment orders made by him for the assessment years 1945-46 and 46-47 shall be and are hereby quashed. Petitioner will get his costs. Advocate''s fee Rs. 100/-.

Order accordingly.