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Commissioner Of Income-Tax, Kerala v. Thayaballi Mulla Jeevaji Kapasi.

Kerala High Court

Aug 29, 1961

Judgment

Subsequent
References

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Structured Summary of the Opinion (Reference under Section 66(1), Income-tax Act)

Factual and Procedural Background

The Commissioner of Income-tax made a reference under section 66(1) of the Income-tax Act challenging the validity of a reassessment for the assessment year 1945‑46. The assessee was engaged in business in Kozhikode (dealing in Malabar produce, cloth, etc.). For the year 1945‑46 the assessee had submitted a return showing losses of Rs. 7,960, but the assessment was initially concluded on a total income of Rs. 8,009.

Approximately seven years later the Income-tax Officer obtained information of large bank deposits in the assessee's name at the Abdul Rehman Branch of the Central Bank of India Ltd., Bombay. On March 18, 1954 a notice under section 34 of the Act was issued. That notice was served on the assessee's son on March 22, 1954. The Income-tax Officer considered that service on the son was insufficient and issued a second notice which was affixed at the assessee's business premises (affixation dated in the course of late March 1954, with affixation on March 24, 1954 mentioned in the record). The reassessment was thereafter completed under sections 23(3) and 34, imposing tax of Rs. 61,036.

The assessee objected (before the Appellate Assistant Commissioner) that the reassessment proceedings were illegal because the notice under section 34(1)(a) had not been properly served. That objection was not sustained at that stage, but on further appeal the Income-tax Appellate Tribunal allowed the appeal on the ground of improper service of notice and declined to decide other issues. The Commissioner then referred the question whether the reassessment for 1945‑46 made on March 9, 1955 was valid.

A Division Bench (one of the authors of the opinion being a member) had earlier (January 2, 1961) directed that additional facts be found regarding whether the assessee had waived the absence of proper notice; the Tribunal later made a further statement of facts and found that no conscious waiver had occurred.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the reassessment for the year 1945‑46 made on March 9, 1955, was valid.
Whether the notice under section 34(1)(a) of the Income‑tax Act was properly served on the assessee (including whether service on the assessee's son or affixture at the business premises sufficed).
Whether any subsequent acts by the assessee constituted a waiver of the requirement of valid service such that the reassessment would be validated despite defective service.

Arguments of the Parties

Commissioner / Revenue (as argued by the learned Government Pleader)

The earlier service of the notice on the assessee's son (March 22, 1954) was sufficient service; therefore, any deficiency in the later affixation would be immaterial to the validity of the reassessment.
Reliance was placed on the decision in Haji Wali Mohamed Haji Moosa Saya v. Commissioner of Income-tax (a prior Division Bench decision) to support the proposition that an erroneous conclusion by the Income‑tax Officer that the earlier notice was insufficient would not invalidate a subsequent assessment if a later notice was properly served.
The Government Pleader also contended that procedural defects should not necessarily invalidate a notice and that waiver is a question of law—arguing that the acts taken by the assessee could legally amount to a waiver of the defect.

Assessee (as represented before the Tribunal and Court)

The assessee's representative stated that a Bombay address had been given on March 8, 1954, indicating the assessee's whereabouts; in that situation service on the son at Calicut was not effective to give the assessee notice.
The assessee argued that the affixation of the notice at the business premises was invalid: the identities (and addresses) of the witnesses to affixation could not be established, and the assessee's counsel requested (and was not permitted) an opportunity to examine the witnesses.
The assessee maintained (and the Tribunal found) that there was no conscious and intentional waiver of the right to proper notice; acts such as seeking time to send a return were not to be equated with a relinquishment of the right arising from defective service.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Myitkyina Trading Depot v. Deputy Tahsildar, Paramakudi [1957] 32 I.T.R. 393	Substituted service is not to be resorted to as a routine; where the whereabouts of a person are known, substituted service may be futile and ineffective.	The Tribunal and this Court relied on the decision to conclude that, because the assessee's Bombay address was known, service on the son at Calicut was inadequate and could not justify assuming proper service under section 34.
Haji Wali Mohamed Haji Moosa Saya v. Commissioner of Income-tax	Holds (in the cited Division Bench decision) that an erroneous conclusion by the Income-tax Officer about the sufficiency of an earlier notice would not invalidate an assessment if a later notice had been properly served.	The Court considered this authority but held it inapplicable because, on the facts of this case, the earlier service on the son could not be regarded as sufficient; therefore the Haji Wali line of reasoning did not assist the Commissioner.
Narayana Chetty v. Income-tax Officer	States that service of the requisite notice is a condition precedent to reassessment under section 34; if no valid notice is issued or served, proceedings and reassessment would be void.	The Court cited this authority to emphasize that notice under section 34 is not a mere procedural formality but a substantive condition precedent, and that proceedings pursuant to an invalid notice are void.
Basheshar Nath v. Commissioner of Income-tax	Defines the rule on waiver: there must be a conscious and intentional relinquishment of a known right to constitute waiver.	The Court applied this principle to find that the assessee had not consciously and intentionally relinquished the right to proper notice; therefore no waiver cured the defective service.

Court's Reasoning and Analysis

The Court proceeded by examining whether the statutory requirement of service of notice under section 34 of the Income‑tax Act had been satisfied and, subsidiarily, whether any such defect had been waived by the assessee. Key steps in the Court's analysis were:

Condition precedent: The Court reiterated that service of notice under section 34 is a condition precedent to the Income‑tax Officer's jurisdiction to proceed with reassessment. It adopted the view (consistent with Narayana Chetty) that a notice is not a mere procedural formality but a substantive prerequisite.
Earlier service on the son: The Court examined the facts that the assessee's Bombay address had been given (March 8, 1954) and held that, in those circumstances, service on the son at Calicut was insufficient. It applied the reasoning of Myitkyina Trading Depot to show that substituted/service on third persons is not to be treated as routine where the assessee's whereabouts are known.
Affixation at business premises: The Court analysed the legal requirements for affixation under section 63 of the Act read with the Civil Procedure Code. The CPC permits affixture without a court order only after due and reasonable diligence has been shown in attempting personal service. The necessary condition precedent to legitimate affixture was not established here (the identity and addresses of witnesses to the affixation could not be proved and the assessee's counsel was not permitted to examine them), and thus affixation was held to be legally defective.
Nature of an "invalid notice": The Court refused to limit the notion of an "invalid notice" to issuance defects only; it held that a notice may be invalid either because it was incorrectly issued or because it was improperly served. Consequently, procedural defects in service may render the notice invalid.
Waiver: Because the Division Bench had earlier recorded that further facts were needed on waiver, the Tribunal provided the further factual statement and found no conscious waiver. Applying the well‑established rule from Basheshar Nath, the Court held that waiver must be a conscious and intentional relinquishment of a right; the acts of the assessee (such as seeking time to send a return) did not amount to such relinquishment and could have been undertaken to avoid penal consequences.
Resultant invalidity of proceedings: Given that neither the earlier service nor the subsequent affixation satisfied the statutory and Code requirements, and that no waiver was established, the Court concluded that the reassessment proceedings based on those notices were invalid and could not be upheld.
Scope of decision: The Court noted it need not determine whether the defect amounted to a total lack of jurisdiction or merely a failure to observe a condition precedent; on the hypothesis that service was only a condition precedent, the absence of waiver sufficed to invalidate the reassessment.

Holding and Implications

Holding:

REASSESSMENT HELD INVALID

The Court answered the referred question in the negative: the reassessment for 1945‑46 made on March 9, 1955 was invalid because the requisite notice under section 34 was not validly served and no waiver of the defect had been established.

Immediate consequences and relief ordered:

The reassessment made on March 9, 1955 for the assessment year 1945‑46 is declared invalid.
The matter (the reference) was to be returned, and costs were awarded to the assessee; the Court fixed counsel's fee at Rs. 100 in favour of the assessee.

Legal implications (as reflected in the opinion):

The opinion reaffirms that service of notice under section 34 is a substantive condition precedent to reassessment and not a mere procedural formality; proceedings under an invalid notice are void.
The opinion emphasises that substituted or affixture service must meet the strict conditions laid down by the Civil Procedure Code (i.e., affixation without order is permissible only after due and reasonable diligence has been shown) and that knowledge of the assessee's whereabouts may render substituted service ineffective.
The Court recorded the established rule on waiver: only a conscious and intentional relinquishment of a right will amount to waiver; mere engagement in the proceedings or communicative acts to avoid penalties does not necessarily constitute waiver of a statutory right to proper notice.

Note: This summary is strictly confined to the facts, arguments, authorities and reasoning expressly set out in the provided opinion. No additional facts or inferences beyond the opinion's text have been introduced.

Show all summary ...

Ansari, C.J:— This reference has been made on the application of the Commissioner of Income-tax under section 66(1) of the Income-tax Act, herein referred to as the Act. The assessee has been doing business in Malabar produce, cloth, etc., in Kozhikode and had for the assessment year 1945-46 submitted a return, showing Rs. 7,960 as losses. The assessment on him for the aforesaid year was, however, concluded on a total income of Rs. 8,009. Seven years later the Income-tax Officer obtained information regarding large deposits having been made in the assessee's name in the Abdul Rehman Branch of the Central Bank of India Ltd., in Bombay, and thereupon issued on March 18, 1954, the notice under section 34 of the Act. It was served on the assessee's son on March 22, 1954, and the Income-tax Officer, treating the service insufficient, issued another notice, which was affixed in the business premises of the assessee, because he was said to be then in Bombay or Ceylon. Subsequently, the assessee filed a return and the reassessment was concluded under sections. 23(3) and 34 of the Act, Rs. 61,036 being then levied as the tax. One of the objections in the appeal before the Appellate Assistant Commissioner was that the entire reassessment proceedings had been illegal and void, inasmuch as notice under section 34(1)(a) of the Act had not been properly served. That objection was not sustained and on further appeal the Income-tax Appellate Tribunal has upheld it. Therefore, the appeal was allowed, but without decisions on other issues raised in the appeal. The relevant extracts from the Tribunal's order are as follows:

“It was stated before us by the learned counsel for the assessee that he gave the Bombay address of the assessee on March 8, 1954, and we have no reason to doubt this statement and, therefore, it passed our comprehension why the Income-tax Officer did not move in the matter quickly except that he believed in the affixture as a good aid in the last resort. With this knowledge of the whereabouts of the assessee ‘it is futile’ to borrow the words of their Lordships in Myitkyina Trading Depot v. Deputy Tahsildar, Paramakuii [1957] 32 I.T.R 393., to look for the assessee at Calicut or to claim that he could not be found at Calicut. Recourse to substituted service is not to be resorted to as a matter of routine. It should be shown that the party was avoiding such service. There is no evidence to show that this was so. Moreover, the notice by affixture is vitiated in that the identity of the witnesses could not be established in the absence of their addresses. The assessee's counsel requested an opportunity to examine the witnesses, but no such opportunity was given to him.

2. We are, therefore, of the opinion that there was no proper service of the notice on the assessee…”

3. Thereafter, the Commissioner of Income-tax applied and the following question has been referred:

“Whether on the facts and in the circumstances of the case, the reassessment for the year 1945-46 made on March 9, 1955, was valid?”

4. On January 2, 1961, a Division Bench of this court, of which one of us was a party, had found additional facts to be necessary for answering the question. It had been then held that the jurisdiction of the Income-tax Officer under section 34 of the Act did not depend upon the issue of a notice, but that the notice was a condition precedent to the assumption of jurisdiction vested in the Income-tax Officer. Consistently it was found that, should the assessee waive the absence of notice, the Income-tax Officer would not be considered to have made an invalid assessment, and a further statement as to whether there had been such waiver by the assessee to cure the infirmity in the notice was necessary. Therefore, the Tribunal was asked to and has submitted a further statement. Therein the assessee's several requests subsequent to the affixation of the notice at bis business premises on March 24, 1954, are given in some detail and finally the Tribunal finds that, from the facts-so set out, there is no conscious waiver.

5. The learned Government Pleader for the Income-tax Commissioner has urged that the earlier service of notice on the son was sufficient service, with the result of the subsequent improper service on the assessee's premises becoming immaterial for deciding whether the assessment was after proper notice to the assessee. In support of this argument he relied on Haji Wali Mohamed Haji Moosa Saya v. Commissioner of Income-tax, where a Division Bench, of which one of us was a party, had held that an erroneous conclusion by the Income-tax Officer, about the service of the earlier notice not being sufficient, would not invalidate the assessment that followed a second notice, which had not been properly served. In other words, it was held that even though the taxing authority making the assessment had erroneously found the earlier notice to be improperly served, the condition precedent to the notice being properly served would be complied with, should a notice, though not immediate, be properly served. It is, therefore, clear that the case would be of no assistance unless the earlier notice on the assessee's son in this reference be found to be sufficient; but that cannot be said, because of the earlier information of the assessee being absent in Bombay and the service on the son in these circumstances becoming an idle formality. The Tribunal, therefore, has rightly relied on Myitkyina Trading Depot v. Deputy Tahsildar, Paramakudi [1957] 32 I.T.R 393., which has also been relied on in the argument of the assessee's learned advocate before us. The legislature, by directing in section 34 service of notice on the assessee, has intended such notice not to be a bare procedural requirement, and it would not be satisfied where the assessee's earlier departure to a known place would preclude his obtaining immediate information of such notice having been issued. Indeed the Income-tax Officer with the information thought that the service on the son would in the circumstances not be sufficient and that conclusion is not incorrect. It follows that the earlier notice had not been properly served and it would, therefore, not justify the exercise of jurisdiction under section 34 of the Act.

6. So far as the subsequent affixation of notice on the premises is concerned it should be recalled that under section 63 of the Act a notice under the Act may be served as if it were a summons issued under the Civil Procedure Code and the aforesaid Code provides for affixation without court's order only when the person could not be found after all due and reasonable diligence. As the condition precedent has been not proved the affixation on the house would not under the Code be sufficient. It would at this stage be of advantage to refer to what has been said in Narayana Chetty v. Income-tax Officer in order to emphasise the importance of notice for proceeding under section 34 of the Act. Here the legal position has been stated in these words:

“The argument is that the service of the requisite notice on the assessee is a condition precedent to the validity of any reassessment made under section 34; and if a valid notice is not issued as required, proceedings taken by the Income-tax Officer in pursuance of an invalid notice and consequent orders of reassessment passed by him would be void and inoperative. In our opinion, this contention is well founded. The notice prescribed by section 34 cannot be regarded as a mere procedural requirement; it is only if the said notice is served on the assessee as required that the Income-tax Officer would be justified in taking proceedings against him. If no notice is issued or if the notice issued is shown to be invalid then the validity of the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void.”

7. We would not circumscribe the words “invalid notice” by holding what is invalid, because of being not properly served, would still sustain proceedings under section 34; for, a notice, in our opinion, is invalid either because of its being incorrectly issued or through being improperly served. We would, therefore, not accept as correct the argument pressed before us by the learned Government Pleader that procedural defects would not invalidate a notice. In this case, it is clear that the second notice has not been properly served, because the affixation has not been shown in the case to be legally correct. It follows that proceedings started on such invalid notice would not be upheld.

8. For the purposes of our answer we need not decide whether the assessment is vitiated by total lack of jurisdiction or its exercise is bad due to the failure to observe the condition precedent, because, on the assumption of issuing a notice to be only the condition precedent, no waiver of the failure to observe it has taken place here. We have already referred to the conclusion of the Tribunal about such waiver not having been established in the case. The learned Government Pleader has urged that waiver is a question of law and, therefore, it is open to him to argue that several steps taken by the assessee legally amount to such waiver. The rule of what amounts to waiver is well settled and we need refer only to the observation in Basheshar Nath v. Commissioner of Income-tax which has been already quoted in our earlier order, that had called for further statement of facts. It was said in that case that there must be a conscious and intentional relin-quishment of an existing right and, therefore, such relinquishing of the right must be established. The several acts of the assessee narrated in the fresh statement of facts do not lead to the only conclusion of the assessee having relinquished his objections to the invalid notice. He was undoubtedly anxious to send a return and was asking for time; but that may be to avoid penal consequences. Therefore, waiver of the right, arising from the failure of compliance with the direction of serving notice on the assessee, is not established. It follows that the answer to the question in this reference is that reassessment for 1945-46 made on March 9 is invalid and that be sent. The assessee will get costs, counsel's fee being fixed at Rs. 100.