Citation Codes

Equivalent Citations

citation codes

Case Number

Special Appeal No. 503 of 1962

Judges

V.G Oak
J.S Trivedi, JJ.

Acts

Income-tax Act, 1922 (hereafter referred to as the Act). M/s Adarsh Construction
Section 28 refers to sub-sections (1) and (2) of section 22,
section 22(4) mentions subsection (1),
sub-section (3) of section 22.10.
sub-section (3) of section 22.15.
sub-section (1), the Income-tax
sub-section (2) of section 22
sub-section (3) of section 22.
sub-section (1) of section 22.
sub-section (4) of section 22
section 37 the Income-tax
provision of section 22(4),
made.3. Sub-section (4)
sub-section (3).14.

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Smart Summary

Case Summary — Special Appeal arising from assessment proceedings under the Income-tax Act, 1922

Factual and Procedural Background

M/s Adarsh Construction Company, a firm of three partners, furnished a statement on October 13, 1961 for the assessment years 1959-60 and 1960-61 under sub‑section (3) of section 22 of the Income‑tax Act, 1922. On the same day the Income‑tax Officer issued a notice to the firm under sub‑section (4) of section 22 requiring certain documents. The firm informed the Income‑tax Officer that it could not produce all the documents mentioned. The Income‑tax Officer treated this as non‑compliance with the notice under section 22(4) and, on November 30, 1961, passed an assessment order under section 23(4) on the footing of such alleged failure and issued a demand notice.

The firm filed a writ petition in this Court challenging the assessment order dated November 30, 1961 and the demand notice. A learned single judge allowed the writ on May 7, 1962, quashing the assessment order and the demand notice for the assessment years 1959‑60 and 1960‑61. The Income‑tax Officer, Kanpur, appealed against that order; this special appeal raises the questions whether the notice under section 22(4) was valid and whether action could properly be taken under section 23(4).

Legal Issues Presented

Whether a return filed under sub‑section (3) of section 22 can be treated as a return under sub‑section (1) of section 22 for the purposes of invoking the power in sub‑section (4) of section 22 (i.e., whether a notice under section 22(4) could validly be served on a person who had filed a return under section 22(3)).
Whether, on the basis of the notice issued under section 22(4), the Income‑tax Officer could validly proceed to make an assessment under section 23(4) for alleged failure to comply with that notice.

Arguments of the Parties

Appellant's Arguments (Income‑tax Officer / Mr. Gulati)

The return filed by the firm on October 13, 1961 under section 22(3) was in substance a return under sub‑section (1) of section 22 and therefore the Income‑tax Officer could issue a notice under section 22(4).
Section 28 (penalty for concealment of income) refers to sub‑sections (1) and (2) of section 22; the appellant argued that the language of section 28 suggested that returns under section 22(3) should be treated as covered (submitted in argument).
The learned single judge's interpretation of section 22(4) would, according to the appellant, make the relevant provision unworkable.

Respondent's Arguments (M/s Adarsh Construction Company / Mr. Pachauri)

The notice under section 22(4) was invalid because sub‑section (3) of section 22 (under which the return was filed) is not mentioned in sub‑section (4); therefore a return under section 22(3) cannot be treated as a return under section 22(1) for the purposes of section 22(4).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
P.S. Rama Iyer v. Commissioner of Income‑tax [1957] 32 I.T.R. 458 (Madras)	Held that a voluntary return submitted (without a notice under s.22(2)) was a "return" within section 22(1) on which assessment proceedings could be validly taken.	The court observed the case but noted that that decision did not concern whether action could be taken under section 22(4); the present Court stated that this case does not establish that a return under s.22(3) can be subjected to a s.22(4) notice.
R.P. Kandaswami v. Commissioner of Income‑tax (Madras)	Where an assessee voluntarily submitted returns, the Income‑tax Officer cannot ignore those returns and initiate proceedings under section 34 (as stated in the opinion).	The court noted the decision but treated it as not laying down any proposition that a s.22(3) return can be called upon under s.22(4).
Radhakrishna Rungta v. Seventh Income‑tax Officer, C‑II Ward, Bombay [1963] 49 I.T.R. 846	Held that a voluntary return of loss submitted by an assessee is a good and valid return under sub‑section (3) of section 22.	The Court used this to support the proposition that s.22(3) returns form a distinct class (voluntary returns) and are acknowledged as valid under s.22(3), not automatically equated with s.22(1) returns for purposes of s.22(4).
Commissioner of Income‑tax v. Ranchhoddas Karsondas [1959] 36 I.T.R. 569 (S.C.)	Supreme Court held that a voluntary return showing income below the taxable limit submitted in answer to the general notice under s.22(1) is a good return.	The opinion records the decision but states that it does not support the proposition that a s.22(3) return may be subjected to s.22(4) procedures.
Gursahai Saigal v. Commissioner of Income‑tax (Supreme Court)	Observed that provisions in a taxing statute dealing with machinery for assessment must be construed by ordinary rules of construction to give effect to legislative intention and that constructions making the machinery workable should be preferred (quoted passage).	The Court cited the passage to acknowledge the general rule of construction about making machinery workable, then observed that the Act contains other provisions (e.g., s.23(3), s.37) that render assessment procedure workable even if s.22(4) is not applied to s.22(3) returns.

Court's Reasoning and Analysis

The Court examined the statutory scheme of section 22 and section 23 of the Act. Section 22 contains three distinct types of return provisions: sub‑section (1) (general notice requiring returns), sub‑section (2) (separate notices to individuals), and sub‑section (3) (permitting a person who has not furnished a return within the time allowed under (1) or (2), or who discovers omission/wrong statement in an earlier return, to furnish a return or revised return any time before assessment).

The Court reasoned that a return under sub‑section (3) is properly characterized as a voluntary or supplementary return and forms a distinct class from returns under sub‑sections (1) and (2). Sub‑section (4) of section 22 authorizes the Income‑tax Officer to serve a notice requiring production of accounts or documents on a person who has made a return under sub‑section (1) or upon whom a notice has been served under sub‑section (2). The Court emphasized that sub‑section (4) expressly mentions only sub‑sections (1) and (2) and makes no reference to sub‑section (3).

The Court observed that the absence of express reference to sub‑section (3) in sub‑section (4) is significant. It rejected the appellant's contention that a return under section 22(3) should be treated as in substance a s.22(1) return for the purposes of invoking s.22(4). The Court also considered the appellant's reliance on section 28 (penalty for concealment) and held that section 28's reference to sub‑sections (1) and (2) (and not (3)) supports distinguishing obligatory returns (ss.22(1) and (2)) from voluntary returns under s.22(3).

To address the appellant's contention that the learned single judge's construction would make the Act unworkable, the Court noted that the Act contains other mechanisms enabling the Income‑tax Officer to examine documents and evidence: subsection (3) of section 23 (inquiry), and section 37 (power to compel production of books of account and other documents). Therefore, even if s.22(4) did not apply to s.22(3) returns, assessment machinery would remain workable.

Applying this construction to the facts, the Court concluded that because the firm had filed its return under section 22(3), the Income‑tax Officer could not validly serve a notice under section 22(4) on the basis that the return was a s.22(1) return. The notice under s.22(4) was therefore invalid, and the assessment made under section 23(4) on the footing of non‑compliance with that invalid notice was itself invalid.

Holding and Implications

APPEAL DISMISSED.

Direct effect on the parties:

The learned single judge's order quashing the assessment order dated November 30, 1961 (for assessment years 1959‑60 and 1960‑61) and the demand notice was upheld.
The appeal by the Income‑tax Officer was dismissed and the respondent's costs were assessed at Rs. 200.

Broader implications:
This opinion rests on a construction of the Income‑tax Act distinguishing returns under s.22(3) (voluntary/supplementary returns) from returns under s.22(1) and s.22(2) (obligatory returns), and concludes that a notice under s.22(4) (expressly directed to s.22(1) and s.22(2) persons) does not extend to persons who have filed only under s.22(3). The opinion does not elaborate broader policy implications beyond its statutory construction and the direct effect on the parties.

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Income-Tax Officer v. Adarsh Construction Company (Dissolved Firm).

V.G Oak, J.:— This special appeal arises out of assessment proceedings under the Income-tax Act, 1922 (hereafter referred to as the Act). M/s Adarsh Construction Company is a firm consisting of three partners. On October 13, 1961, the firm furnished a statement under sub-section (3) of section 22 of the Act with respect to income for the assessment years 1959-60 and 1960-61. The same day the Income-tax Officer issued a notice to the firm under sub-section (4) of section 22 of the Act for filing certain documents. The Income-tax Officer was informed that the firm was not in a position to file all the documents mentioned in the notice under section 22(4). The Income-tax Officer took up the position that the firm had failed to comply with the notice served upon it under section 22(4). On November 30, 1961, an assessment order was passed under section 23(4) of the Act on the footing that the firm had failed to comply with the notice under section 22(4) of the Act. A notice of demand was also issued on that basis. The firm filed in this court a writ petition challenging the assessment order dated November 30, 1961, and the demand notice. The writ petition was allowed by a learned single judge of this court on May 7, 1962. He quashed the assessment order dated November 30, 1961, with respect to the assessment years 1959-60 and 1960-61 and the demand notice. This special appeal by the Income-tax Officer, Kanpur, is directed against the order dated May 7, 1962.

2. The questions raised in this appeal are whether the notice under section 22(4) is valid, and whether action could be taken under section 23(4). In order to decide these questions it is necessary to examine the provisions of sections 22 and 23 of the Act in detail. Section 22 consists of five sub-sections. Under sub-section (1), the Income-tax Officer issues a general notice calling upon a person with an income beyond a certain limit to furnish a return about his total income and total world income within a certain period. Sub-section (2) provides for separate notices to individual assessees. By such a notice, an individual is called upon to furnish a return about income within a certain period. Sub-section (3) states as follows:

“If any person has not furnished a return within the time allowed by or under sub-section (1) or sub-section (2), or having furnished a return under either of those sub-sections, discovers any omission or wrong statement therein, he may furnish a return or a revised return, as the case may be, at any time before the assessment is made.”

3. Sub-section (4) states:

“The Income-tax Officer may serve on any person who has made a return under sub-section (1) or upon whom a notice has been served under sub-section (2) a notice requiring him, on a date to be therein specified, to produce……such accounts or documents as the Income-tax Officer may require……….”

4. Section 23 of the Act provides for assessment. Sub-section (4) of that section states;

“If any person fails to make the return required by any notice given under sub-section (2) of section 22……… or fails to comply with all the terms of a notice issued under sub-section (4) of the same section…. the Income-tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment……….”

5. In the present case action was taken against the respondent under section 23(4) on the footing that it failed to comply with all the terms of the notice issued under section 22(4). The respondent's stand was that notice under section 22(4) was invalid. The main question for consideration in the appeal is whether the notice issued to the respondent under section 22(4) was valid or not.

6. It is to be noted that we are dealing with the assessment years 1959-60 and 1960-61. The return was furnished by the respondent as late as October 13, 1961. It is common ground that the return was furnished under sub-section (3) of section 22. Mr. Pachauri, appearing for the respondent, points out that sub-section (3) is not mentioned in subsection (4) of section 22. On the other hand, Mr. Gulati, appearing for the appellant, has urged that, although the return was furnished under section 22(3), that was in substance a return under sub-section (1) of section 22. We have, therefore, to consider whether the return filed on October 13, 1961, can be treated as a return under sub-section (1) of section 22 of the Act.

7. In P.S Rama Iyer v. Commissioner of Income-tax [1957] 32 I.T.R 458. the assessee voluntarily submitted a return on February 21, 1951, for the assessment year 1947-48 without any notice under section 22(2). The Income-tax Officer rejected the return, and estimated the income at Rs. 30,000, and assessed him accordingly. It was held by the Madras High Court that the return submitted by the assessee, even though it did not disclose the receipt of taxable income, was a “return” within section 22(1) on which assessment proceedings could be validly taken and therefore the assessment was valid. The question referred to the High Court in that case was whether the assessment of Rs. 30,000 for the assessment year 1947-48 was valid. It was in that connection that the court remarked that there was a return within section 22(1) of the Act. The court was not called upon to decide whether action could be taken under section 22(4) of the Act.

8. In R.P Kandaswami v. Commissioner of Income-tax, Madras 2, it was held that, where in respect of any year an assessee has voluntarily submitted his returns, the Income-tax Officer cannot ignore the returns and initiate proceedings under section 34.

9. In Radhakrishna Rungta v. Seventh Income-tax Officer, C-II Ward, Bombay [1963] 49 I.T.R 846. it was held that a voluntary return of loss submitted by an assessee would be a good and valid return under sub-section (3) of section 22.

10. In Commissioner of Income-tax v. Ranchhoddas Karsondas [1959] 36 I.T.R 569 S.C. it was held by the Supreme Court that a return showing income below the taxable limit submitted voluntarily in answer to the general notice under section 22(1) of the Act is a good return.

11. None of these cases lays down the proposition that, if a person submits a return under section 22(3), he can be called upon to furnish a document under section 22(4) of the Act.

12. As pointed out above, the question for consideration is whether a return filed under section 22(3) can be treated as a return under section 22(1) for purposes of section 22(4) of the Act. We have already outlined the plan of section 22. Under sub-section (1), a person has to furnish a return about income within a certain period in pursuance of the general notice. Under sub-section (2), an individual assessee has to furnish a return within the prescribed period in pursuance of a separate notice issued to him. If a person fails to take action under either of these two provisions, he may furnish a return as provided under sub-section (3). One of the situations mentioned in sub-section (3) is where a return has been filed under sub-section (1) and it is found that that return is incomplete. In such a case the person may furnish a suplementary return. It is difficult to accept the contention that a supplementary return is also under sub-section (1). The supplementary return is clearly under sub-section (3) of section 22. The plan of section 22 suggests that returns may be filed under three separate provisions contained under section 22 of the Act. There should be no difficulty in treating returns filed under sub-section (3) as a distinct class.

13. We notice that, although sub-sections (1) and (2) are mentioned in subsection (4) of section 22, there is no mention of sub-section (3) there. It is not clear why sub-section (3) was not expressly mentioned in sub-section (4). The learned single judge has suggested that the legislature might have thought it fit to give encouragement to the filing of volunary return. Be that as it may, the fact remains that sub-section (4) of section 22 makes no reference to the returns filed under sub-section (3).

14. Mr. Gulati invited our attention to section 28 of the Act. Section 28 provides for penalty for concealment of income. Section 28 refers to sub-sections (1) and (2) of section 22, but makes no reference to sub-section (3) of the said section. Mr. Gulati contended that the language of section 28 suggests that a return filed under sub-section (3) of section 22 is covered by section 28. We do not think so. The returns to be furnished under subsections (1) and (2) are obligatory. On the other hand, the return furnished under sub-section (3) is voluntary. The legislature rightly decided that there should be penalty for non-compliance with the requirements of subsections (1) and (2), but there is no need for prescribing a penalty for failure to furnish a voluntary statement under sub-section (3) of section 22.

15. In Gursahai Saigal v. Commissioner of Income-tax , their Lordships of the Supreme Court observed on page 5:

“The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the legislature which is to make a charge levied effective……….In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable………”

16. Mr. Gulati urged that, if the interpretation placed on section 22(4) by the learned single judge is accepted, the provision would be unworkable. We may point out that section 22(4) is not the only provision in the Act enabling the Income-tax Officer to examine the relevant documents. Subsection (3) of section 23 provides for an enquiry. During such an enquiry the Income-tax Officer may insist on examining such evidence as he may require on specific points. Section 37 of the Act confers wide powers upon the income-tax authorities. Under section 37 the Income-tax Officer may compel the production of books of account and other relevant documents. It cannot, therefore, be said that, if action is not taken under the special provision of section 22(4), assessment would become impossible.

17. We have already pointed out that, although section 22(4) mentions subsection (1), there is no reference to sub-section (3). In the instant case, the return was filed on October 13, 1961, under section 22(3) of the Act. As discussed above, that return cannot be deemed to be a return furnished under section 22(1) for purposes of action under section 22(4) of the Act. The learned single judge was, therefore, right that, in the circumstances of the present case, no notice could be served upon the respondent under section 22(4) of the Act. Since the notice itself was invalid, no assessment could be done on the footing that the respondent failed to comply with the notice issued under section 22(4). The learned single judge was justified in quashing the assessment order dated November 30, 1961.

18. The appeal is dismissed with costs. We assess the respondent's costs at Rs. 200.

Income-Tax Officer v. Adarsh Construction Company (Dissolved Firm).

Case Summary — Special Appeal arising from assessment proceedings under the Income-tax Act, 1922

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Income‑tax Officer / Mr. Gulati)

Respondent's Arguments (M/s Adarsh Construction Company / Mr. Pachauri)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Income-Tax Officer v. Adarsh Construction Company (Dissolved Firm).

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