S. Raman Chettiar vs Commissioner of Income Tax, Madras

Srinivasan, J.—The question that has been referred for the determination of this court is ""whether the reassessment u/s 34 completed on

June 30, 1953, for the year 1944-45 is valid ?"" The facts of the case are, in brief, as below :

Acting on the information that the assessee had income assessable for the assessment years 1944-45 and 1945-46, notices u/s 34 were issued in

respect of both these assessment years on April 13, 1948. An assessment was in due course made by the Income Tax Officer on October 27,

1950, for the year of assessment 1945-46, the accounting year for which had ended on March 31, 1945. The ground upon which proceedings

were initiated u/s 34 appears to have been the information, that the assessee had been dealing in Immovable properties and had made a profit of

Rs. 88,760, in consequence of such transactions. Apparently, the notice u/s 34 issued in relation to the assessment year 1944-45 was not pursued

further as the whole amount was brought to tax in 1945-46. An appeal was carried in due course to the Income Tax Appellate Tribunal, which

came to the conclusion that the transactions in landed properties constituted ventures in the nature of trade, profits from which were undoubtedly

assessable. It may be mentioned that as against the sum of Rs. 88,760 determined as profits from the sale of lands, the Appellate Assistant

Commissioner in the appeal before him excluded a sum of Rs. 6,000 for certain reasons which are not now relevant, and the Tribunal itself

deducted a further sum, thereby reducing the amount of profit to Rs. 79,760.

The Tribunal further held that the transactions leading to the profit in question covered both the assessment years, and that only a sum of Rs.

33,000 was profit assessable in the assessment year 1945-46. In coming to this conclusion, the Tribunal computed the quantum of profits

attributable to the earlier assessment year 1944-45, which it fixed at Rs. 46,760. In so far as the appeal, which the Appellate Tribunal was seized

of at the time, which related to the assessment year 1945-46 was concerned, the Tribunal directed that this sum of Rs. 46,760, which related to

the earlier assessment year, could not be taxed in the assessment for the year 1945-46. It, however, observed :

The Income Tax Officer is at liberty to take such action as he may be advised about the assessees liability for the earlier year 1944-45.

Following up the observation of the Tribunal extracted above, the Income Tax Officer issued a further notice u/s 34 on February 27, 1953, to

the assessee. He obtained the prior sanction of the Commissioner for these proceedings and brought to tax this amount of profits of Rs. 46,760, as

determined by the Tribunal to relate to the assessment year 1944-45. This assessment order was made on June 30, 1953. An appeal was taken to

the Appellate Assistant Commissioner attacking the assessment proceedings u/s 34 of the Act as illegal. The ground that was taken before the

Appellate Assistant Commissioner was that there has been no omission or failure on the part of the assessee to disclose fully and truly all material

facts at the time of the completion of the assessment for 1945-46, that section 34(1)(a) was not attracted and that action u/s 34(1)(b) was barred

by limitation. This objection did not find favour with the Appellate Assistant Commissioner who held that in so far as the proceedings for 1944-45

were concerned, the Income Tax Officer did not have information of the escape of income from tax, and that since any escape of income in

relation to the assessment year 1944-45 came to light only in the proceedings relating to 1945-46, as result of the finding of the Tribunal, the action

u/s 34(1)(a) was competent. The view was also taken the provision relating to the period of limitation stood excluded as the Income Tax Officer

only proceeded to give effect to this specific finding of the Income Tax Appellate Tribunal with regard to the assessees liability to tax for the

assessment year 1944-45.

The appeal to the Tribunal failed, and on the application of the assessee, the question set out earlier has been referred to this court.

We have already stated that in respect of both the assessment years, notices were issued u/s 34 on April 3, 1948. We are now concerned only

with the assessment year 1944-45 in this reference. The assessment that was made by the Income Tax Officer in October 27, 1950, related to the

assessment year 1945-46, and in the view that he took that the entire quantum of profits arising from the sale of lands was assessable for this later

year, he took no further proceedings in respect of the assessment year 1944-45. Reference was made to this in the order of the Appellate

Assistant Commissioner, wherein he observed :

... finding that further proceedings would be infructuous, the Income Tax Officer appears to have dropped the proceedings. The remarks dated

February 9, 1953, on the order sheet for the assessment year 1944-45 are as under :

Please see 1945-46 file. As per Income Tax Officers orders that this would be infructuous, further proceedings were not taken.

It, however, appears that it was in consequence of the finding of the Tribunal in the appeal relating to the assessment year 1945-46 that a further

notice u/s 34 was issued on February 27, 1953, for the assessment year 1944-45. The first question that we have to determine is, what was the

scope of the proceedings u/s 34 at the time when they were initially instituted in 1948.

At the relevant time, section 34 had been amended by Act XLVIII of 1948, though this Act received the assent of the Governor-General on

September 8, 1948, the amendments were made retrospective in their operation to take effect from March 30, 1948. The main part of section 34

was to all intents and purposes the same as it is now, except that the period of 8 years prescribed for dealing with cases falling u/s 34(1)(a) had

now been enlarged. The period of four years fixed for dealing with cases falling u/s 34(1)(b) however remains the same. But important changes

were effected in the latter parts of the section. The first proviso to section 34 as amended by Act XLVIII of 1948 required that the Income Tax

Officer shall not issue a notice u/s 34(1) ""unless he has recorded his reasons for doing so and the Commissioner is satisfied with such reasons

recorded that it is a fit case for the issue of such notice."" It is conceded by the learned counsel for the Department that in respect of the notice that

was issued on April 3, 1948, the requirements of this proviso were not complied with. In pursuance of this notice, the assessee filed a return on

September 4, 1948. As has been stated already, he filed returns in respect of both years, but no action was taken on the return relating to the

assessment year 1944-45. If, therefore, the notice that was issued on April 3, 1948, u/s 34 of the Act was invalid for non-compliance with the

requirements of the proviso referred to, it would necessarily follow that the subsequent proceedings could not be validly related to section 34 of the

Act at all. Nevertheless, the assessee in fact field a return for the assessment year 1944-45, and the question arises, whether so long as this return

was with the Department and remained undisposed of, the Department could at a later point of time issue a further notice u/s 34 which in this case

was so issued on February 27, 1953.

Section 22 of the Income Tax Act deals with the return of income. Section 22(1) relates to a general notice and prescribes a period of 60 days

within which a return should be filed. Sub-section (2) deals with individual notices whereby the Income Tax Officer is enabled to call upon the

assessee to submit a return within such time as he may fix. Sub-section (3) enables an assessee who has filed a return either under sub-section (1)

or sub-section (2) to file a revised return in case he discovers any omission or wrong statement in the return already filed. This sub-section also

enables an assessee to file his return notwithstanding that the return is not filed within the time fixed either under the general notice u/s 22(1) or the

special notice u/s 22(2) at any time before the assessment is made; that is to say, even if an assessee is late in filing his return, so long as he files it

before the assessment is actually made upon him, that return has to be dealt with by the Income Tax Officer. Coming to the assessment, section

23(4) of the Act enables the Income Tax Officer to make the assessment to the best of his judgment if the assessee fails to make the return

required by any notice given under sub-section (2) of section 22 or has not made a return under sub-section (3) of that section. Action u/s 23(4) is

competent only when by the time the Income Tax Officer takes up the case for assessment, no return has been filed. But if a return, however

belated it may be having regard to section 22(1) and section 22(2), is made, the Income Tax Officer cannot proceed u/s 23(4) to make a ""best

judgment"" assessment.

The assessment in this case purports to have been made u/s 23(3) and section 34. The view taken by the Income Tax Officer was that the

assessee had not filed a return except in response to the notice that was issued on February 27, 1953, and that the case fell within section 34(1)(a)

of the Act; that is to say, there had been an omission or failure on the part of the assessee to make a return of his income u/s 22. In holding so, he

ignored the circumstance that a return had been filed by the assessee on September 4, 1948, in response to the earlier notice purporting to be u/s

34, which was issued on April 3, 1948. If the proceedings that were initiated on April 3, 1948, u/s 34 were invalid under the law as it obtained on

that date for want of the prior sanction of the Commissioner, the submission of the return cannot be related to that notice. Notwithstanding that the

return was the result of an invalid notice, the return itself cannot be ignored or disregarded by the Department. A similar case came up for

consideration of the Supreme Court in Commissioner of Income Tax v. Ranchhoddas Karsondas. In that case, a return showing an income below

the taxable limit was submitted voluntarily in answer to the general notice u/s 22(1) of the Income Tax Act. That return was not acted upon and the

Income Tax Officer issued a notice purporting to be u/s 34 and completed the assessment thereon. The contention of the assessee was that the

return he had submitted u/s 22(3) of the Act should have been acted upon and that there was no scope for the issue of a notice u/s 34. The High

Court of Bombay held that :

The Department ought to have issued a notice u/s 22(2) within the assessment year and if no return was made within the time fixed by the notice,

the Department should have proceeded u/s 23(4) to a best judgment assessment. The other alternative for the Department was to issue a notice u/s

34 of the Act if the period for sending a notice u/s 22(2) had expired. But it could not issue a notice u/s 34 after a return was already made before

it,....

Their Lordships of the Supreme Court construing section 34(1) observed at page 573 :

It would appear from this that if the return filed on January 5, 1950, was a return of income, there was no failure or omission on the part of the

assessee, so as to bring the matter within section 34(1)(a) of the Act and sub-section (3) of section 34 would then apply to the case limiting the

period to four years. In that event, the assessment should have been completed on or before March 31, 1950. But if the return made by the

assessee was no return at all, then the conditions u/s the first sub-section 34 obtained, and the assessment could be completed within one year of

the date of service of the notice (March 3, 1950), i.e., on or before March 2, 1951..

Dealing with section 22 of the Act, they proceeded to notice :

It will be seen from this, that, as the Bombay High Court correctly pointed out, there is a time limit provided in sub-sections (1) and (2) and the

failure or omission occurs when that period passes, but sub-section (3) allows a locus poenitentiae before the assessment is actually made. There is

no dispute that a return could be filed in this case, late though it was. The controversy centres round the fact that the return, when it was filed,

disclosed an income which was below the maximum not chargeable to tax,...

It seems to us that, even on the admitted position that the notice u/s 34 issued on April 3, 1948, was invalid, it would follow that a return

though furnished in consequence of that notice was a valid return filed by the assessee u/s 22(3) of the Act, and that it is not open to the

Department to ignore that notice and issue a further notice u/s 34(1)(a) of the Act on the assumption that there had been an omission or failure on

the part of the assessee to make a return of his income u/s 22.

The assessment year was 1944-45. u/s 34, sub-section (3), no order of assessment u/s 23 to which section 28(1)(c) applies or of assessment

or reassessment in case falling u/s 34(1)(a) shall be made after the expiry of eight year, and no order of assessment or reassessment in any other

case shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable. In cases,

however, where a notice u/s 34(1) had been issued within the time prescribed, the assessment or reassessment made in pursuance of such notice

could be made before the expiry of one year from the date of the service of the notice, even if that period exceeds the period of eight or four years,

as the case may be. Section 28(1)(c) was inapplicable to the facts of this case. It, therefore, follows that the assessment for the year 1944-45 had

to be completed within a period of four years from the end of that assessment year; that is to say, since the assessee had submitted a return of the

income on September 4, 1948, and it has to be regarded as a return made u/s 22, sub-section (3), for the reason that the purported notice u/s 34

issued on April 3, 1948, was invalid, the assessment had to be completed by March 31, 1949.

Learned counsel for the Department argues that, even if the notice u/s 34 issued on April 3, 1948, is invalid, the return submitted by the

assessee on September 4, 1948, is still not a voluntary return and that it has to be ignored. Commissioner of Agricultural Income Tax v. Sultan Ali

Gharami has been relied upon in this connection. This decision of the Calcutta High Court was later explained in R. K. Das and Co. v.

Commissioner of Income Tax. It is not necessary to examine the facts and the reasoning upon which those decisions proceeded. It would be

sufficient to indicate that in Commissioner of Income Tax v. Ranchhoddas Karsondas those decisions were examined by their Lordships of the

Supreme Court. Though the question that was therein considered related to the submission of a return which showed an income below the taxable

limit, still the point was whether such a return would be a return in law. The Supreme Court observed : ""It is a little difficult to understand how the

existence of a return can be ignored once it has been filed."" They proceeded to deal with the matter where the return showed an income below the

taxable limit, and held that a person may legitimately consider himself entitled to certain deductions and allowances yielding a non-taxable income

and yet may file a return to be on the safe side. But, nevertheless, it is a return such as the assessee considers represents his true income. The ratio

of this decision appears to us to be that a return filed under circumstances as in the present case cannot be rejected or ignored by the Department.

We have already indicated that the notice that was issued u/s 34 on April 3, 1948, was invalid, and that though the return that was filed was in

response to that notice, the return itself cannot for the reason be regarded as having been compelled by the issue of that notice. This view finds

ample support in Commissioner of Income Tax v. Maharaja Pratap Singh Bahadur. That case also related to the issue of a notice when section 34

of the Income Tax Act as re-enacted by Act XLVIII of 1948 was in operation. Though the Act itself was passed in September, 1948, it was given

retrospective effect from March 30, 1948. Notice u/s 34 was in that case issued on August 8, 1948, and it failed to comply with the conditions laid

down in the proviso to section 34(1) which made it mandatory that the prior sanction of the Commissioner should be obtained. The learned judge

held that the entire proceedings initiated by such a notice were illegal and that the compliance of the conditions imposed by the proviso formed the

essential basis of the jurisdiction of the Income Tax Officer. The argument that the submission of a return in pursuance of such a notice by the

assessee amounted to a waiver on the part of the assessee was repelled, the learned judges holding that even if that could be regarded as a waiver,

that could not confer jurisdiction on the Income Tax Officer, if the statutory conditions had not-been complied with.

We hold that the initiation afresh of proceedings u/s 34 with the issue of the notice on February 27, 1953, was without jurisdiction and was

invalid. That is sufficient to answer this reference in favour of the assessee.

The further question that was argued at length before us raised the issue of limitation. Mr. Ranganathan, learned counsel for the Department,

who argued this point with considerable ability and clarity, submitted that the second proviso to section 34(3) applied, and that the bar of limitation

imposed by section 34(3) was removed in this case, as the proceedings u/s 34 were taken afresh ""in pursuance"" of the order of the Tribunal. The

main contention of the learned counsel for the assessee was that, considering the scope of the appeal disposed of by the Tribunal which related to

the assessment year 1945-46, it was beyond the jurisdiction of the Tribunal to decide in that appeal whether any portion of the income fell to be

taxed in any other assessment year, e.g., 1944-45. Interesting though the arguments on both sides were, we do not consider it necessary to record

any view of ours at this stage on the scope of the second proviso to section 34(3) either as it stands now or as it stood before it was amended. As

we stated earlier, the reference can be disposed of in favour of the assessee without any need to go into question of limitation; no question of

limitation can arise for decision when we have decided that the initiation of proceedings was otherwise invalid.

We answer the question in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 250.

Question answered in the negative.