The Commissioner of Income Tax vs P. Reid

Srinivasan, J.—An order u/s 23A was passed on 24th March, 1956, in respect of Simpson and Company, Limited. 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 not inclusive of this

dividend had been completed on 8th July, 1953. The Income Tax Officer issued a notice u/s 34. The notice purports to have been issued on 28th

March, 1956, but it was actually served on the assessee only on 3rd April, 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 set 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 Sections 23-A 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 re-assessed in

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

Navinchandra Mafatlal (1964) 42 ITR 53, following an earlier decision in Sardar Baldev Singh Vs. Commissioner of Income Tax, Delhi and

Ajmer, . 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 made u/s 23, there has to be a re-assessment 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 re-assessment

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

assessment or re-assessment the four years aforesaid have already elapsed.

It is accordingly the claim of the learned Counsel for the Department that so 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 re-assessment 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 is 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 S. Seethai Achai Vs. Income Tax Officer, Coimbatore, , the Madras High Court held that

the Department does not have a right independent of Section 34 to re-open the assessment of the shareholder in terms of Section 23A and that the

period of limitation for re-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 years 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, Bombay City Vs. Robert J.

Sas, Belgium, . It was further emphasised that the service of a valid notice is a condition precedent to the assumption of jurisdiction u/s 34 of the

Act.

These decisions do not directly touch upon the question whether the Proviso to Section 34 (3) marks any departure from the condition relating

to service laid down in Section 34 (1). This point was however specifically dealt with by a Bench of the Allahabad High Court in Srinivas v.

Income Tax Officer (1950) 30 ITR 381. 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 re-assessment. 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 under which the Income Tax Officer may assess 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, viz., the

period within which an assessment may be made. The sub-section in other words makes provision 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 section was re-drafted in 1948 for the

Legislature to have put the matter beyond doubt by using the word '' issue '' in the 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, SIMLA Vs. L. 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 re-assess.

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

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

assessment year, the proceeding 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 costs. Counsel''s fee Rs. 250.