S. Raman Chettiar v. Commissioner Of Income-Tax, Madras.

The Judgment of the Court was delivered by

Srinivasan, J.:— The question that has been referred for the determination of this court is “whether the reassessment under section 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 under section 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 under section 34 appears to have been the information, that the assessee had been dealing in immoveable properties and had made a profit of Rs. 88,760, in consequence of such transactions. Apparently, the notice under section 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.

2. 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 assessee's liability for the earlier year 1944-45.”

3. Following up the observation of the Tribunal extracted above, the Income-tax Officer issued a further notice under section 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 under section 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 under section 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 a result of the finding of the Tribunal, the action under section 34(1)(a) was competent. The view was also taken that 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 assessee's liability to tax for the assessment year 1944-45.

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

5. We have already stated that in respect of both the assessment years, notices were issued under section 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 on 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’ Officer's orders that this would be infructuous, further proceedings were not taken.’”

6. 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 under section 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 under section 34 at the time when they were initially instituted in 1948.

7. 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 under section 34(1)(a) has now been enlarged. The period of four years fixed for dealing with cases falling under section 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 under section 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, under section 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 filed 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 under section 34 which in this case was so issued on February 27, 1953.

8. 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 under section 22(1) or the special notice under section 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 under section 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 under section 23(4) to make a “best judgment” assessment.

9. The assessment in this case purports to have been made under section 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 tinder section 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 under section 34, which was issued on April 3, 1948. If the proceedings that were initiated on April 3, 1948, under section 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 [1959] 36 I.T.R 569.. In that case, a return showing an income below the taxable limit was submitted voluntarily in answer to the general notice under section 22(1) of the Income-tax Act. That return was not acted upon and the Income-tax Officer issued a notice purporting to be under section 34 and completed the assessment thereon. The contention of the assessee was that the return he had submitted under section 22(3) of the Act should have been acted upon and that there was no scope for the issue of a notice under section 34. The High Court of Bombay held that:

“the Department ought to have issued a notice under section 22(2) within the assessment year and if no return was made within the time fixed by the notice, the Department should have proceeded under section 23(4) to ‘a best judgment’ assessment. The other alternative for the Department was to issue a notice under section 34 of the Act if the period for sending a notice under section 22(2) had expired. But it could not issue a notice under section 34 after a return was already made before it,….”

10. 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 under the first sub-section of 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…”

11. 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 subsection (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,…”

12. It seems to us that, even on the admitted position that the notice under section 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 under section 22(3) of the Act, and that it is not open to the Department to ignore that notice and issue a further notice under section 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 under section 22.

13. The assessment year was 1944-45. Under section 34, sub-section (3), no order of assessment under section 23 to which Section 28(1)(c) applies or of assessment or reassessment in cases falling under section 34(1)(a) shall be made after the expiry of eight years, 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 under section 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 under section 22, sub-section (3), for the reason that the purported notice under section 34 issued on April 3, 1948, was invalid, the assessment had to be completed by March 31, 1949.

14. Learned counsel for the Department argues that, even if the notice under section 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 [1959] 36 I.T.R 569. 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.

15. We have/already indicated that the notice that was issued under section 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 [1956] 30 I.T.R 484.. 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 under section 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.

16. We hold that the initiation afresh of proceedings under section 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.

17. 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 under section 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 views 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 the question of limitation; no question of limitation can arise for decision when we have decided that the initiation of proceedings was otherwise invalid.

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

19. Question answered in the negative.