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M.O Thomas v. Commissioner Of Income-Tax, Kerala.
Factual and Procedural Background
This matter arises from reassessment proceedings initiated pursuant to a notice dated 27 March 1954 issued under section 34 of the Indian Income-tax Act for the assessment year 1945-46. The Income-tax Appellate Tribunal, as directed by this Court, framed a case and referred nine specific questions for the Court's opinion.
Relevant facts (as stated in the opinion): The assessee carried on wholesale grocery trading and commission business with head office at Trichur and a branch at Kozhikode. Earlier assessments under both the Indian Income-tax Act and the Cochin Income-tax Act for the year 1945-46 had been finally completed on 31 December 1949. After the Indian Income-tax Act was extended to Part B States, the assessee's assessment records were transferred from the Kozhikode officer to the Trichur officer. During voluntary disclosure proceedings the assessee made a disclosure on 22 October 1951. The Trichur Income-tax Officer noticed a Rs. 25,000 credit in the Kozhikode trial balance, believed it might be undisclosed income (the amount was said to have been taken from a lady, N.K. Kunhanam), and asked the Kozhikode officer to take necessary action. The Kozhikode officer issued the section 34 notice dated 27 March 1954; the notice was affixed at the assessee's Kozhikode business premises and at his residence in Trichur on 29 March 1954.
The Court limited its inquiry to question No. 2 (the legality and propriety of service of the section 34 notice and the validity of assessment in the absence of proper service) and therefore confined the factual narrative to those facts relevant to that question.
Legal Issues Presented
- Whether, consequent on the transfer of the assessee's file from Kozhikode to Trichur, the Kozhikode officer had jurisdiction to initiate and complete the proceedings in question?
- Whether notice under section 34 has been served on the assessee as required by law and whether the assessment is proper and legal, in the absence of a proper service of notice on the applicant?
- Whether, on the facts and in the circumstances of the case, the provisions of section 34 were properly applied, especially after the identical amount had been the subject of examination by the Income-tax Officer before accepting the disclosure made by the applicant?
- Whether, on the facts and in the circumstances of the case, there is any material to sustain the finding of the Tribunal that any income has escaped assessment?
- Whether, in the facts and circumstances of the case the finding that the amount is income from other sources is sustainable?
- Assuming the credit as assessable, whether it is assessable for the year 1945-46?
- Whether the reassessment under section 34 is competent when the original assessment itself was on estimate made by the Officer?
- Whether, in the facts and in the circumstances of the case, the amount in question remitted from Cochin could be treated as income from other sources or assessed at all in Kozhikode?
- Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the explanation of the assessee is unbelievable is based on any material and legally sustainable?
Arguments of the Parties
Department's Arguments
- The department relied on the notice dated 27 March 1954 and the report of service by affixture (29 March 1954) to contend that the section 34 notice had been served on the assessee.
- Relying on a letter from the assessee dated 12 April 1954 (annexure "I"), the department contended that because the assessee referred in that letter to the section 34 notice, it must be presumed that the notice had been served before the relevant date (the cut-off being 31 March 1954 for the year of assessment 1945-46).
Assessee's Arguments
- The assessee explained that the Rs. 25,000 credit represented money belonging to his wife (N.K. Kunhanam) as part of her dowry; he admitted the lady was his wife and denied that the amount represented undisclosed income of the assessee.
- Implicit in the factual record is the assessee's reliance on the lack of proper service of the section 34 notice as rendering any reassessment invalid (the Court ultimately decides in favour of the assessee on this point).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax, Kerala v. Thayaballi Mulla Jeevaji Kapasi [1963] 47 I.T.R. 184 | Holds that a notice may be invalid either because incorrectly issued or improperly served; a procedural defect cannot be treated as innocuous so as to validate an otherwise defective notice. | The Court relied on this decision to support its conclusion that the defective/illegal mode of service negates the validity of the section 34 notice and that a procedural defect of this kind invalidates the notice. |
| Y. Narayana Chetty v. Income-tax Officer, Nellore [1959] 35 I.T.R. 388 (Supreme Court) | Affirms that the notice prescribed by section 34 is not a mere procedural formality; only if the notice is served as required can the Income-tax Officer lawfully proceed; where notice is invalid, proceedings under it are illegal and void. | The Court quoted this Supreme Court statement to underpin its conclusion that improper service of the section 34 notice renders any reassessment proceedings illegal and void. |
Court's Reasoning and Analysis
The Court limited the enquiry to question No. 2 and examined whether the notice under section 34 had been properly served so as to confer jurisdiction for reassessment. The Court proceeded in these analytical steps, based strictly on the text of the opinion:
- Statutory framework for service: The Court observed that section 63 of the Indian Income-tax Act allows service either by post or as if the notice were a summons under the Code of Civil Procedure, 1908. Thus, the CPC Order V procedural rules apply. The Court identified Rules 12, 13, 17 and 19 of Order V as relevant.
- Rule 12: Service should be made on the defendant in person wherever practicable.
- Rule 13: Where the defendant does not reside within the local limits of the issuing court's jurisdiction, service on a manager or agent personally carrying on business in those limits is deemed good service.
- Rule 17: Service by affixture is permitted only after the serving officer, after using all due and reasonable diligence, cannot find the defendant and there is no agent empowered to accept service or any other person on whom service can be made.
- Rule 19: The return of service required by rule 17 must be verified by affidavit (a sworn statement) of the serving officer.
- Application to the Kozhikode service: The return stated that the assessee permanently resided at Trichur and that the notice was served by affixture at Kozhikode shop No. 9/351 in the presence of the manager, C.L. Antony. The Court held that the authorities rightly did not rely on the Kozhikode affixture as complying with the mandatory provisions of section 34 because the facts did not justify affixture under the cited CPC rules: affixture was not warranted where the assessee permanently resided elsewhere and where the statutory criteria for substituted service were not satisfied in the manner required by rules.
- Application to the Trichur service: The return stated only that the notice was affixed because "the person was not available." The Court examined rule 17 and found multiple defects:
- There was no evidence the serving officer employed "all due and reasonable diligence" to find the assessee or to ascertain whether there was an agent empowered to accept service.
- There was no affidavit or sworn statement from the serving officer verifying the return as required by rule 19. Although the Income-tax Officer had recorded "Sworn statement of the notice server may be obtained," he nonetheless declared the notice to have been served on the same date without any such sworn verification.
- Consequently, the serving officer violated rule 17 and the Income-tax Officer violated rule 19 by declaring service without the required verification.
- Precedential support: The Court relied on its own earlier decision (Commissioner of Income-Tax, Kerala v. Thayaballi Mulla Jeevaji Kapasi) and the Supreme Court decision in Y. Narayana Chetty to affirm that defective issuance or improper service of a section 34 notice renders subsequent proceedings illegal and void; the Court used these decisions to reinforce that service is not a mere formality but a jurisdictional prerequisite.
- Consideration of the department's alternative argument: The department argued that a letter from the assessee dated 12 April 1954, which referred to the section 34 notice, warranted a presumption that the notice had been served before the relevant date (31 March 1954). The Court rejected this contention, holding that it was for the department to prove proper service before the relevant cutoff date; the department's attempt to prove service on 29 March 1954 had failed for the reasons described, and the mere subsequent reference in a letter dated 12 April 1954 cannot fill that evidentiary gap.
- Conclusion of analysis: Because proper service under section 34 had not been effected in accordance with statutory and CPC requirements, the Income-tax Officer lacked competence to proceed with reassessment under section 34.
Holding and Implications
Holding: The Court held that there has been no proper service of the section 34 notice and, therefore, the Income-tax Officer was incompetent to undertake reassessment proceedings under section 34 in this case. Question No. 2 was answered in the negative in favour of the assessee.
Implications:
- Direct effect: The reassessment proceedings founded on the impugned section 34 notice are invalid; the assessee succeeds on the question of service. The Court awarded costs to the assessee and fixed counsel's fee at Rs. 150.
- Broader implications: The opinion emphasizes that compliance with the procedural requirements for service under section 34 (and the applicable CPC Order V rules) is jurisdictional; a failure in the mode of service or in verifying the service renders proceedings under an invalid notice illegal and void. The Court relied on existing precedents for this principle; the opinion does not purport to lay down a novel precedent beyond applying those authorities to the facts.
Govindan Nair, J.:— The Income-tax Appellate Tribunal, as required by this court, has stated a case and has referred the following nine questions for our opinion:
“1. Whether, consequent on the transfer of the assessee's file from Kozhikode to Trichur, the Kozhikode officer had jurisdiction to initiate and complete the proceedings in question?
2. Whether notice under section 34 has been served on the assessee as required by law and whether the assessment is proper and legal, in the absence of a proper service of notice on the applicant?
3. Whether, on the facts and in the circumstances of the case, the provisions of section 34 were properly applied, especially after the identical amount had been the subject of examination by the Income-tax Officer before accepting the disclosure made by the applicant?
4. Whether, on the facts and in the circumstances of the case, there is any material to sustain the finding of the Tribunal that any income has escaped assessment?
5. Whether, in the facts and circumstances of the case the finding that the amount is income from other sources is sustainable?
6. Assuming the credit as assessable, whether it is assessable for the year 1945-46?
7. Whether the reassessment under section 34 is competent when the original assessment itself was on estimate made by the Officer?
8. Whether, in the facts and circumstances of the case, the amount in question remitted from Cochin could be treated as income from other sources or assessed at all in Kozhikode?
9. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the explanation of the assessee is unbelievable is based on any material and legally sustainable?”
2. The matter arises from reassessment proceedings started against the assessee pursuant to a purported notice dated March 27, 1954, issued to the assessee under section 34 of the Indian Income-tax Act and question No. 2 above relates to the legality of the service of the above notice on the assessee and the propriety and legality of the assessment in the absence of proper service of notice. We feel that this case can be disposed of by answering question No. 2 alone and are therefore referring only to such facts as are relevant for answering the above question.
3. The assessment related to the year 1945-46, the corresponding accounting period ending about the middle of August, 1944 (year 1119 Malabar Era), according to the assessee, and the period ending March 31, 1945, according to the department. This difference between the department and the assessee is not material for answering question No. 2. The assessee was carrying on business in grocery articles as a wholesale trader and as a commission agent with head-office at Trichur and a branch at Kozhikode. Up to and inclusive of the assessment year 1949-50, he was assessed to tax under the Indian Income-tax Act as well as the Cochin Income-tax Act. For the year 1945-46, the assessment under the Indian Income-tax Act was finally completed after appeals and remand on December 31, 1949.
4. The Indian Income-tax Act was extended to the Part B States and on and from the assessment year 1950-51, the assessment has to be made only under that Act. The assessment records of the assessee were therefore transferred by the Income-tax Officer, Kozhikode, to the Income-tax Officer, Trichur, in whose jurisdiction the assessee's main place of business was situated. There were certain voluntary disclosure proceedings and the assessee made a disclosure on October 22, 1951, before the Trichur Income-tax Officer. During the course of those proceedings, the Income-tax Officer, Trichur, wrote to the assessee that he found from the trial balance of the Kozhikode business that a loan of Rs. 25,000 was taken from a lady, N.K Kunhanam, in 1120. He further said that he presumed that the lady in question is the wife of the assessee and that the loan represented the undisclosed income of the assessee. The assessee, admitting that the lady is his wife, explained that the money belonged to his wife being part of proceeds of dowry got by her-from her father. Apparently unsatisfied, the Income-tax Pfficer, Trichur called for further details from the assessee and, by letter dated September 24, 1953, requested the Income-tax Officer, Kozhikode, to take necessary action since the credit was in the books in the Kozhikode branch. The latter officer issued a notice dated March 27, 1954, under sectipn 34 of the Indian Income-tax Act for the assessment year 1945-46. This notice was affixed at the assessee's place of business at Kozhikode as well as at his residence at Trichur on March 29, 1954.
5. The point for consideration is whether there has been proper service of notice as required by the mandatory provisions of section 34 in order to confer jurisdiction on the Income-tax Officer to proceed to reassess the assessee under section 34 of the Act. Annexure “N” to the statement of the case gives copies of the reports of the notice served and extracts from the order-sheet. From the report of the notice server dated March 29, 1954, it is seen that notice has been served by affixture at Trichur “since the person was not available” and the report relating to the service at Kozhikode is to the effect that “since the person noted in the notice, Sri M.O Thomas, is permanently residing at Trichur, the notice has been served by affixture at Shop No. 9/351 (business premises of the assessee) in the presence of C.L Antony, Manager…”
6. Emphasis has not been laid by the authorities on the service of notice at Kozhikode as complying with the mandatory provisions of section 34, we think rightly. Section 63 of the Indian Income-tax Act is clear that a notice under the Indian Income-tax Act may be served on the person either by post or as if it were a summons issued by a court under the Code of Civil Procedure, 1908 (Vof 1908). Rules 12 and 13 of Order V are relevant. The former rule enjoins that, wherever it is practicable, service shall be made on the defendant in person and rule 13 provides that in a suit relating to any business or work against a person who does not reside within the local limits of the jurisdiction of the court from which the summons is issued, service on any manager or agent, who, at the time of service, personally carries on such business or work for such person within such limits, shall be deemed good service. It is seen from the report made by the notice server relating to the service at Kozhikode that the assessee was permanently residing at Trichur and that he served the notice by affixture. We do not think this is warranted.
7. The service at Trichur is no better. The report of the notice server regarding that service merely states that notice has been served by affixture since the person was not available. The relevant rule is rule 17 of Order V of the Code of Civil Procedure and it shows that a service by affixture can be resorted to only where the serving officer, after using all due and reasonable diligence, cannot find the defendant, and there is no agent empowered to accept service of the summons on his behalf nor any other person on whom service can be made. It appears to us to be clear that the Income-tax Officer, Trichur, also felt that the service was not proper. There is no verification of the service-under rule 17 of Order V by an affidavit by the serving officer as enjoined by rule 19 of Order V. The Income-tax Officer, noticing the same, has ordered:
“Sworn statement of the notice server may be obtained.”
8. This is seen from the following extract from the order-sheet of the Income-tax Officer, Trichur, which is contained in annexure “H” to the statement of the case:
“Notice served by affixture on March 29, 1954. Sworn statement of the notice server may be obtained.
I declare the notice to have been served on March 29, 1954.
Sd./- Income-tax Officer,
29-3-1954
1st Addl. Income-tax Officer,
Trichur Circle, Trichur.”
9. Curiously enough, the Income-tax Officer has declared the notice to have been served on March 29, 1954, even without previously obtaining a sworn statement from the notice server. There is no indication whatever that any sworn statement has at any time been obtained.from the serving officer. It is clear that rule 17 has been violated by the serving officer in that the serving officer has not used all due and reasonable diligence for finding out the assessee and for ascertaining whether there is any agent empowered to accept service on his behalf nor has he exercised due and reasonable diligence in finding out whether there is any other person on whom service could be effected. Rule 19 has been violated by the Income-tax Officer concerned in that he has given a declaration that the notice has been duly served without the return being verified by an affidavit and without examining the serving officer on oath. The service at Trichur is also not proper and is even illegal as opposed to the rules indicated above and cannot be treated as service at all. We are supported in this view by the decision of this court in Commissioner Of Income-Tax, Kerala v. Thayaballi Mulla Jeevaji Kapasi. [1963] 47 I.T.R 184, wherein it has been held that a notice is invalid either because of its being incorrectly issued or because it is improperly served negativing the argument that a procedural defect would not invalidate the notice. The Supreme Court in Y. Narayana Chetty v. Income-tax Officer, Neliore [1959] 35 I.T.R 388 observed at page 392 thus:
“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.”
10. In the light of the above discussion, we hold that there has been no proper service of notice under section 34 and, therefore, the Income-tax Officer is incompetent to take reassessment proceedings.
11. Before concluding, we must also refer to the argument advanced by the learned counsel for the department based on a letter dated 12th April, 1954, written by the assessee to the Income-tax Officer, Kozhikode. This letter is contained in annexure “I” to the statement of the case. The assessee, having referred to the notice under section 34 in that letter, it is contended that it must be presumed that there has been proper service of notice. The year of assessment being 1945-46, it is not disputed that a notice should have been served on the assessee before March 31, 1954-The contention is not that the assessee must be taken to have received the notice under section 34 on 12th April, 1954, the date of the above letter, and even so there is valid service as required by law; but the point urged is that, since the assessee refers to the notice under section 34 in his letter, it must be presumed that the notice has been served before the relevant date, viz., March 31, 1954. We are unable to accept this contention. It is for the department to establish that there has been a service of notice on the assessee before the relevant date. Their attempt to prove such service on March 29, 1954, as we have held above, has failed. It is not possible to presume that in view of the letter of the assessee dated 12th April, 1954, he had received notice on or before March 31, 1954.
12. On the basis of the conclusions reached above, we answer both parts of question No. 2 referred to us in the negative and in favour of the assessee. The assessee will have his costs and we fix counsel's fee at Rs. 150.
13. Question No. 2 answered in the negative.
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