N. Naganatha Iyer vs Commissioner of Income Tax, Madras

S. Ramachandra Iyer, C.J.

(1) This consolidated reference arises out of proceedings initiated by the Income Tax Officer, Tiruchirapalli, under S. 34 of the Indian Income Tax

Act, 1922, against one Naganatha Aiyar, with a view to bring to tax amounts in his hands, which had escaped assessment in the two assessment

years 1945-46 and 1947-48, Naganatha, the assessee was the junior member of a Hindu undivided family, the Karta thereof being his father,

Narayanaswami Aiyar. In February 1941, Naganatha, in partnership with one Manickam, commenced a business under the name of Andhra

Trading Co., Manickam retired from the partnership on 17-1-1945, and thereafter Naganatha continued to be its sole proprietor. Both he and the

undivided family, of which he was a member, were assessees. So far as the income from the Andhra Trading Co., was concerned, the department

at first accepted the position that Naganatha was exclusively entitled to the profits thereof. Accordingly, during the three assessment years

proceeding the year of assessment, 1945-46, assessments were made on him on that basis. For the year 1945-46 Naganatha filed on 19-7-1946,

his return disclosing the profits earned by him from the firm. But the Income Tax Officer refused to accept such income as his separate property as

he held that it was the family and not Naganatha that was the real partner in the Andhra Trading Co. As a consequence, the income from the firm

was included in the income of the family, which was represented by the assessee''s father. This finding as well as the assessment, were affirmed by

the Appellate Authorities. The matter was then taken up under S. 66, to this court, which gave the opinion that there was no material on record to

sustain the conclusion of the Tribunal that it was the family and not Naganatha that was a partner in the firm. The opinion of this court was delivered

on 12-12-1955 and is reported as K. S. Narayanaswami Iyer Vs. Commissioner of Income Tax, Madras, .

(2) In the meanwhile, the assessee had filed his return in respect of the income from the Andhra Trading Co. for the year 1947-48. The department

took no notice of this return, and proceeded to assess the Hindu undivided family as before on that income as well.

(3) But, even before the decision above referred to was given by this court, the Income Tax Officer issued notices under S. 34 of the Act to

Naganatha, calling upon him to file his returns for the three years commencing form 1945-46. Although the assessee objected to the validity of the

notices, the Officer assessed him with respect to the income received from the business; this was undoubtedly a precautionary measure. It was

expressly stated that the assessment was made without prejudice to the assessments on the family. The assessee appealed, and the Appellate

Assistant Commissioner cancelled the assessments, observing that in case the High Court were to direct the exclusion of the income form the

business in the hands of the income from the business in the hands of the assessee, the Income Tax officer could commence fresh proceedings

under S. 34.

(4) That contingency, as we said, happened: Thereupon, on 13-2-1957, the Income Tax Officer issued notice under S. 34 to bring to tax the

income received from the Andhra Trading Co., in the hands of Naganatha, as by reason of the decision of the High Court, in the assessment

proceedings relating to the Hindu undivided family, it was the assessee, Naganatha, who received the said income and not the joint family.

Objection was from then taken to the proceedings on the ground that they were initiated beyond the period of four years prescribed by S. 34. The

department overruled the objection relying upon the second proviso to S. 34(3). This view was affirmed, on appeal by the appellate Tribunal,

which, however, referred the following question for our opinion u/s 66(1):

Whether the aforesaid assessments on the assessee dated 29-10-1957 and 7-11-1957 for the assessment years 1945-46 and 1947-48

respectively are valid in law ?

It is not disputed that if the second proviso to S. 34(3) is valid the assessments in the present case could not be impugned. But learned counsel for

the assessee, has contended that the second proviso is ultra vires, inasmuch as it is discriminatory in its operation and that, therefore, the notices

issued to the assessee under S. 34(1), having admittedly been done after the expiry of four years form the end of the concerned year of

assessment, must be regarded as invalid. The question of vires of the second proviso to S. 34(3) was considered in detail by the Supreme Court in

S.C. Prashar, Income Tax Officer, Market Ward, Bombay and Another Vs. Vasantsen Dwarkadas and Others, . In the judgment delivered by us

in T. C. Nos. 156 and 157 of 1960 (Mad), we had occasion consider the effect of that pronouncement. We have held that as a result of the

decision of he Supreme Court the second proviso to S. 34(3) will have to be struck down only in so far as it applied to persons other than the

actual assessee and those represented by him in whose appeal the appellate authority had given a finding or direction, which necessitated the

subsequent reopening of the assessment.

(5) The point indeed follows even apart from the constitutional aspect of the question, from the later decision of the Supreme Court in Income Tax

Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, where Subba Rao J., construing the expression ""any person"" in the

second proviso, held that it would bring within its scope only the concerned assessee and those lawfully represented by him.

(6) In Commissioner of Income Tax Vs. Sardar Lakhmir Singh, the Supreme Court had before them a case where a Hindu undivided family was

sought to be assessed. In proceedings relating to the assessment of the family there appellate authority found that the family did not exist, as here

had been a partition even prior to the year during which the profits were earned. As a result of that finding, proceedings under S. 34 were initiated,

beyond the period prescribed by that section, against junior member of the family, who was not eo nomine a party to the appeal. The Supreme

Court held that the second proviso to S. 34(3), on which reliance was placed to sustain the re-assessment, could not validly operate against him,

inasmuch as he was only a third party, so far as the previous proceedings were concerned.

(7) That was a case in which the father, who was sought to be assessed as the Kartha of the family, could not represent the junior member, as a

partition had already taken place.

(8) The case before us is different. Here, admittedly a joint family exists, and the father, Narayanaswami Aiyar, can represent his son Naganatha in

all matters concerning the affairs of the family. The later, in such proceedings against the father, can be deemed as being constructively, a party

thereto. Therefore, the conclusion reached by this court in K. S. Narayanaswami Iyer Vs. Commissioner of Income Tax, Madras, must be

deemed to have been reached in the presence of Naganatha as well. The inclusion of the income from the Andhra Trading Co., in the assessment

of the family, for, the family will have to pay the tax. The non-inclusion of such income of the family would benefit him qua such member.

Naganatha being thus constructively a party to the previous decision of this court, the finding given in that decision can be taken advantage of by

the department for the purpose of initiating proceedings under S. 34 against him. To this extent, the second proviso to S. 34(3) should be regarded

as valid.

(9) In Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, the Supreme Court laid down that a finding or

direction given by the appellate and revisional authorities or the High Court u/s 66(1) would avail the department for invoking the second proviso

to S. 34(3) only for the year of assessment, with which proceedings such authority or the H. C. was concerned. In the present case, what gave rise

to the reference which was answered in K. S. Narayanaswami Iyer Vs. Commissioner of Income Tax, Madras, was the assessment of the Hindu

joint family, represented by Naganatha''s father, for the year 1945-46. Therefore, the proceedings subsequently initiated under S. 34(1) would be

saved form the bar of limitation only with respect to the assessment of Naganatha for the aforesaid year, namely, 1945-46. Such a finding cannot

however be relied on as removing the bar of limitation in regard to the assessment for 1947-48.

(10) We are, therefore, of opinion that the question referred to us should be answered in the following manner. The assessment of the assessee

dated 29-10-1957 for the year 1945-46 will be valid but the assessment on the assessee dated 7-11-1957 for the year 1947-48 will be invalid.

There will be no order as to costs.

(11) Reference answered.