M. CT. Muthuraman vs Commissioner of Income Tax, Madras

Rajagopalan, J.—The assessee, Muthuraman and his uncle, Meyyappa, constituted a Hindu undivided family. One of the assets of that

family was a 15/21 share in a partnership at Ipoh with the vilasam M. S. S. On December 29, 1948, Muthuramans branch divided itself from

Meyyappas and, in the partial partition that followed, the share in the M.S.S. Firm was divided between Muthuraman and Meyyappa. Though

Muthuramans status for purposes of assessment was itself that of a Hindu undivided family, for purpose of convenience, we shall refer to him in the

rest of this judgment as the assessee. We shall refer to the joint family which included the branch of the assessee and his uncle, Meyyappa, as the

Hindu undivided family.

In the assessment years that followed the partial partition of December 29, 1948, that is, 1949-50 and 1950-51, the assessee and Meyyappa

each filed returns showing his share in income from the M.S.S. Firm. But the Income Tax Officer declined to give effect to that partition and

included the income of both the assessee and Meyyappa in the assessment of the Hindu undivided family. The Appellate Assistant Commissioner

allowed the appeals preferred by the Hindu undivided family and upheld the claim based on partition. That was confirmed on further appeal by the

Tribunal in its order dated September 22, 1956, and the Tribunal recorded :

... we wholeheartedly endorse the decision of the Appellate Assistant Commissioner that the shares in the Ipoh vilasam belong only to the two

members, at any rate, after December 29, 1948, in the manner claimed. The accrued profits from this business after that date, accordingly, can no

longer be assessed in the hands of the assessee family.

We are not now concerned with the assessment year 1949-50. This reference relates to the assessment year 1950-51 and the four years that

followed, that is, up to 1954-55.

In each of the five years, the assessee submitted a return, which included his share of the income of the M.S.S. Firm. All these returns were filed

before the disposal of the appeals on September 22, 1956. The Income Tax Officer did not pass any orders on the returns filed by the assessee

for 1950-51, 1951-52 and 1952-53. The assessment proceedings for 1953-54 and 1954-55 were closed by the Income Tax Officer respectively

on August 30, 1954, and September 15, 1954, with the entry ""N.A."" (not assessed), on the basis that the share income offered by the assessee for

assessment in those returns had been included in the assessment of the Hindu undivided family.

In each of the assessment years, the share income of the assessee was included in the assessment of the Hindu undivided family. The Hindu

undivided family appealed against the orders of assessment in each of the years. We have pointed out that the appeal in relating to 1950-51

assessment year was disposed of by the Tribunal on September 22, 1956. The Appellate Assistant Commissioner allowed the appeal for 1951-52

on March 11, 1957. The appeals which related to the assessment years 1952-53, 1953-54 and 1954-55 were allowed by the Appellate Assistant

Commissioner on November 30, 1957. As a result of these appeals, the share income of the assessee stood excluded from the assessment of the

Hindu undivided family. The assessee himself was not taxed on that income, though he had disclosed that income in the returns that he had filed.

After the disposal of the appeals in relation to 1949-50 and 1950-51, the Income Tax Officer took steps to assess the assessee on his share

income. He issued notices to the assessee u/s 34(1)(a) of the Income Tax Act. The notices for 1950-51 and 1951-52 were dated April 22, 1957/

August 26, 1957. Notices for 1953-54 and 1954-55 were issued on August 21, 1957, and the notice for the assessment year 1952-53 was

issued on September 7, 1957. In response to those notices issued u/s 34(1)(a) of the Act, the assessee filed his returns on October 21, 1957; but

he contended that section 34(1) could not be invoked and that he was not liable to be assessee for any of the assessment years. The Income Tax

Officer overruled the objections of the assessee and completed the assessment for each of five years on March 27, 1958. The appeals that the

assessee filed successively to the Appellate Assistant Commissioner and to the Tribunal failed. A consolidated reference with reference to all the

five years was made by the Tribunal u/s 66(1) of the Act, and the question referred to this court ran :

Whether the reassessments u/s 34 for all the assessments 1950-51 to 1954-55 are valid ?

The challenge to the validity of the assessment in each of the five years was rested principally on the plea that recourse to section 34 was not

permissible. That the assessee was not assessed on the income that he returned for assessment in the relevant assessment years was undeniable.

The assessee filed those returns voluntarily for the first three assessment years. The returns for 1953-54 and 1954-55 were filed in response to

notices issued u/s 22(2) of the Act. It was the same income that was subsequently assessed to tax after initiating proceedings u/s 34(1). Though the

notices were issued u/s 34(1)(a), it should be obvious that, if at all the provisions of section 34(1) could be invoked, it was only section 34(1)(b)

that could apply. It was no fault of the assessee that he was not assessed earlier. The contention of the learned counsel for the assessee was that

the assessment proceedings with reference to the returns filed by the assessee for each of the assessment years must be deemed to be pending, as

no assessment was completed on the basis of those returns, and that recourse to section 34(1) was invalid during such pendency of those

assessment proceedings.

No orders were passed by the Income Tax Officer on the returns filed for the assessment years 1950-51, 1951-52 and 1952-53. The

assessment proceedings for the next two years were closed with the order ""N.A."" (not assessed). Learned counsel for the assessee submitted that

N.A."" was not an order of assessment at all, and that, despite that entry in the assessment records, the returns filed by the assessee for those years

1953-54 and 1954-55 must be treated on a par with returns for the earlier years. Learned counsel contended that the returns of none of the five

years had been disposed of in accordance with law.

We are of opinion that the proceedings for 1953-54 and 1954-55 were lawfully terminated by the Income Tax Officer. It is true that section 23

does not in express terms provide for closing the assessment proceedings with an order that no assessment would be levied. Though the assessee

had offered an item of income for assessment as his, the Income Tax Officer came to the conclusion that it was the Hindu undivided family that was

liable to he assessed on that income and not the assessee. It was a conclusion, whether it was right or wrong, that he had jurisdiction to reach; and

once he reached that conclusion, he could not tax the assessee. In Esthuri Aswathiah v. Income Tax Officer, Mysore State, their Lordships of the

Supreme Court pointed out that the order ""No proceeding"" terminated the assessment proceedings, and that it should be construed as meaning that

the assessee had no assessable income. That in that case it was the assessees contention that was upheld makes no difference in principle. In the

case before us, it was open to the Income Tax Officer to reject as unproved the contention of the assessee that it was he and not the Hindu

undivided family that was liable to be taxed on his share of the income from the Ipoh firm. That could, and did, lead to the conclusion that the

assessee had no assessable income in any of the assessment years. The assessment proceedings that commenced with the returns filed by the

assessee were lawfully terminated when they were closed with the entry ""N.A."". Thereafter, the finality of the termination of those assessment

proceedings could be vacated only by recourse to section 34, as this was not a case for the application of section 35.

That the orders terminating the assessment proceedings were not apparently communicated to the assessee did not affect the legality of those

orders or their finality. Nor was the legality or finality of that order affected by the absence of a specific notice to the assessee u/s 23(2) of the Act

before the returns were in effect rejected. We are unable to accepts the contention of learned counsel for the assessee that the Income Tax Officer

had no jurisdiction to terminate the assessment with the entry ""N.A."" and without issuing notices prescribed by section 23(2) of the Act. We are

therefore unable to accept his contention that the order ""N.A."" must be treated as non est in law. The assessments for 1953-54 and 1954-55, thus

lawfully terminated, could be reopened and a reassessment made only after the issue of notices u/s 34(1) of the Act. As we have pointed out

above, the assessees case fell within the scope of section 34(1)(b).

The contention of learned counsel for the departmental was that, though the Income Tax Officer himself did not pass any orders on the returns

filed by the assessee in the assessment proceedings for the assessment years 1950-51, 1951-52 and 1952-53, the assessment proceedings for

those years also lawfully terminated on the expiry of the four-year period prescribed by section 34(3) for completing the assessment proceedings.

Learned counsel submitted that no assessment proceedings could be deemed to be pending when the law forbade any assessment after the expiry

of the prescribed period of four years.

It is true that notices u/s 34(1) were issued to the assessee after the expiry of the four years, for which section 34(3) provided. But the issue of

the notices was also after the expiry of the four-year period, for which section 34(1)(b) provided. Each rule of limitation is distinct, and each must

be given effect to if the circumstances require that. Obviously, it is not enough to show that action was initiated u/s 34(1) after the original

assessment proceedings had ceased to be pending. The initiation had to be within the period allowed by section 34(1)(b). To get over the bar of

limitation prescribed by section 34(1)(b), learned counsel relied on the second proviso in section 34(3) of the Act, which ran :

(3) Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or

reassessment may be made, shall apply to a reassessment made u/s 27 or to an assessment or reassessment made on the assessee or any person in

consequence of or to give effect to any finding or direction contained in an order u/s 31, section 33, section 33A, section 33B, section 66 or 66A.

This proviso removed not only the bar of limitation imposed by section 34(1)(b), but also that imposed by section 34(3). If the case of the

assessee for any of the three assessment years falls within the scope of the proviso, the resultant position would be that there was no ban on

assessment of the assessee in the assessment proceedings initiated by the submission of the voluntary returns by the assessee. In other words, the

original assessment proceedings did not terminate on the expiry of the four years, for which section 34(3) provided, and they must therefore be

treated as pending when the notices were issued u/s 34(1) of the Act.

We have therefore to examine the question whether the assessees case came within the scope of the proviso.

For the assessment year 1950-51, the appeal preferred by the Hindu undivided family was disposed of on September 22, 1956, in which it

was found that the income in question which belonged to the assessee could not be taxed in the hands of the Hindu undivided family. The issue of

the notice u/s 34(1) on April 24, 1957, was subsequent to that. The appeal preferred by the Hindu undivided family with reference to the

assessment year 1951-52, in which, again, there was a similar findings, was disposed of by the Appellate Assistant Commissioner on March 11,

1957, and the issue of the notice u/s 34(1) for that year was on April 24, 1957. With reference to the assessment year 1952-53, the notice u/s

34(1) preceded the disposal of the appeal preferred by the Hindu undivided family. The notice was issued to the assessee on September 7, 1957,

and reassessment completed on March 27, 1958. But the appeal was disposed of by the Appellate Assistant Commissioner only on November

30, 1957. We have set out the factual position. It was not the case of the department that the Income Tax Officer himself correlated the

proceedings u/s 34(1) to the disposal of the appeals with reference to the relevant assessment years preferred by the Hindu undivided family.

Apparently, the Income Tax Officer took the decision of the Tribunal for the assessment year 1949-50, that the Hindu undivided family was not

liable to be assessed on the income from the M.S.S. Firm after the partial partition of December 29, 1948, as the basis for proceedings to assess

the income in subsequent years in the hands of the assessee.

In deciding whether the assessees case came within the scope of the second proviso to section 34(3), it should be noted that there was no

direction by the appellate authority in any of the assessment years that the income should be assessed in the hands of the assessee. The question is

whether the action taken by the Income Tax Officer u/s 34(1) was in consequence of any finding in an appellate order or was to give effect to any

finding in an appellate order within the scope of the second proviso. The finding in the appellate order in each of the assessment years was in effect

that the income was that of the assessee on and after December 29, 1948, and that the Hindu undivided family was not liable to be assessed on

that income. There was an appeal by the Hindu undivided family with reference to each of the three assessment years. The action taken by the

Income Tax Officer for 1952-53 cannot be viewed as in consequence of or to give effect to the finding in the appellate order for that year, as the

appellate order was not in existence on September 7, 1957, when the notice u/s 34(1) was issued. But, with reference to the other two years, the

department can claim that the attempt to assess the assessee on his share of the income was in consequence of or to give effect to the finding of the

appellate authority in the assessment proceedings of the Hindu undivided family in the relevant years 1950-51 and 1951-52. We are unable to

accept the contention of learned counsel for the department that recourse to section 34 all the three years could be justified on the ground that it

was in consequence of or to give effect to the finding of the Tribunal in the appeal of the Hindu undivided family that related to the assessment year

1949-50. Each assessment year was a unit by itself, and, factually, in this case, there was an appeal by the Hindu undivided family in each of the

relevant years. Whether the second proviso in section 34(3) applied to the assessee has to be decided with reference to the appellate order in the

assessment proceedings of the Hindu undivided family for each of the years separately.

The position we thus reach is that the second proviso in section 34(3) saved the assessment proceedings of 1950-51 and 1951-52 from the

bar of limitation imposed by section 34(1)(b). But then, it also removed the bar imposed by section 34(3). What section 34(3) prohibits is an order

of assessment after the expiry of the four years prescribed. If nothing supervenes, that ban, in effect, terminates the assessment. But, if the ban to

assessment is removed under the second proviso in section 34(3) the assessment proceedings must be treated as pending all through even after the

expiry of the four years. The assessment proceedings that commenced with the voluntary submission of the returns by the assessee must therefore

be deemed to have been pending when notices were issued u/s 34(1) on April 24, 1957/August 26, 1957. The second proviso did not apply to

the notice issued on September 7, 1957, for the assessment year 1952-53; that notice issued after the expiry of the four years, for which section

34(1)(b) provided, was invalid.

It should be taken as well settled now that recourse to section 34(1) is not permissible when the original assessment proceedings are factually

treated as pending or must be treated as pending (vide Rajendranath Mukherjee v. Commissioner of Income Tax, the principles laid down in which

were approved by the Supreme Court in Commissioner of Income Tax v. Ranchhoddas Karsondas). Those principles were applied by us in an

unreported judgment of ours in Raman Chettiar v. Commissioner of Income Tax (R.C. No. 114 of 1956).

We have pointed out that, in the case of the assessee, the assessment proceedings for 1950-51 and 1951-52 must be treated as pending on

the date when notices were issued u/s 34(1). Though the notices were issued after the expiry of the four-year period prescribed by section 34(3),

they were invalid. With reference to 1952-53, the appellate order dated November 30, 1957, removed the bar imposed by section 34(3). But that

did not make the notice dated September 7, 1957, one issued in consequence of or to give effect to any finding in the order dated November 30,

1957. It was on that limited ground that we have to negative the validity of the notice dated September 7, 1957.

Learned counsel for the assessee submitted that the second proviso in section 34(3) was unconstitutional and unenforceable, as it offended

against the fundamental right of the assessee to equal protection of laws guaranteed by article 14 of the Constitution. A similar contention was

upheld by the Bombay High Court in Prashar v. Vasantsen Dwarkadas and by the Kerala High Court in A. G. Nair v. Income Tax Officer. It is

not necessary for us to pronounce on the constitutional validity or otherwise of the impugned provisions of the second proviso, as we can grant

relief to the assessee without that investigation.

Learned counsel for the assessee submitted that, independent of the pendency of the assessment proceedings invalidating the issue of the

notices u/s 34(1), the notices should be viewed as ineffective in law as there was no ""escape"" from assessment at all. Learned counsel pointed out

that, in each of the years, the assessee had offered the income for assessment in the returns submitted by him. Of course, while assessment

proceedings are pending and an assessment is permissible in law, there can be no question of any escape from assessment. If, however, the

assessment proceedings have lawfully terminated and the income has not been assessed, it would be a case not only of non-assessment as

explained in Rajendranath Mukherjee v. Commissioner of Income Tax, but also a case of escape from assessment, though the assessee himself

was not to blame for that escape from assessment. We do not consider it necessary to pursue this question further, as we are resting our decision

on the ground that the assessment proceedings for 1950-51 and 1951-52 were pending on the date the notices were issued u/s 34(1). The

assessment proceedings must be treated as pending as the assessees case came within the scope of the second proviso with reference to 1950-51

and 1951-52, and it was that pendency that barred action u/s 34(1)(b) of the Act. If, however, the second proviso is for any reason held

inapplicable to the case of the assessee for these two years and the original assessment proceedings should be viewed as having lawfully terminated

on the expiry of the four-year period prescribed by section 34(3), the position would be that the notices issued u/s 34(1) for the assessment years

1950-51 and 1951-52 would be hit by the rule of limitation prescribed by section 34(1)(b). In either view, the initiation of the proceedings u/s

34(1) was invalid.

The assessment proceedings u/s 34 for 1952-53 were also invalid. If the second proviso applied to that year also and the effect of the

subsequent appellate order was to keep the assessment proceedings pending when the notice u/s 34(1) was issued on September 7, 1957, that

would invalidate the notice. If, however, on September 7, 1957 no proceedings were pending, the four-year rule of limitation prescribed by section

34(1)(b) made the notice dated September 7, 1957, invalid.

Though we have pointed out the alternatives, we are resting the invalidity of the notices u/s 34(1) with reference to the first two years on the

ground that the original assessment proceedings were pending or must be treated as pending on the date of the issue of those notices. We rest the

invalidity of the notice dated September 7, 1957, on the ground that the second proviso did not apply and that the bar of limitation imposed by

section 34(1)(b) applied.

Learned counsel for the department urged that the assessments could be viewed as assessments on the original returns themselves filed by the

assessee. Such a contention does not arise for consideration in this case on the question as it has been framed and submitted to us. All along, the

point in issue between the department and the assessee was whether the proceedings u/s 34 had been lawfully initiated and completed. It was the

validity of recourse to section 34 that has got to be decided on the question submitted to us u/s 66(1). We therefore refrain from going into the

question whether the assessments could be justified without recourse to section 34. Our answer to the question is that the purported reassessments

for 1950-51, 1951-52 and 1952-53 u/s 34 of the Act were invalid. The reassessments for 1953-54 and 1954-55 were valid. As neither side has

wholly succeeded on this reference, there will be no order as to costs.