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Income-Tax Officer v. Eastern Coal Co. Ltd.
Factual and Procedural Background
Eastern Coal Company sold its colliery to Bhowrah Kankanee Collieries Ltd. by an indenture dated 28 September 1957, the sale being made effective from 1 January 1955. The consideration was Rs. 62 lakhs with an abatement of Rs. 5 lakhs on account of retrenchment compensation. Eastern Coal Company went into voluntary liquidation on 26 June 1958.
For the assessment year 1956-57 (accounting year 1 October 1954 to 30 September 1955) the assessee offered Rs. 62 lakhs and was taxed under section 10(2)(vii) of the 1922 Act, producing a tax figure of Rs. 2,21,057. The assessment for the assessment year 1958-59 (completed 28 February 1961) was made on the basis of the return in which the assessee claimed the business and collieries had been sold with effect from 1 January 1955 and was taxed only on interest on security and dividend income; loss-on-working expenses were disallowed since the assessee was not carrying on business in that year.
The assessee was permitted to take a supplementary ground before the Income-tax Appellate Tribunal in its appeal for 1956-57, contending that the profit taxed under section 10(2)(vii) for 1956-57 was not liable in that year. The Tribunal, following the Supreme Court decision in Commissioner of Income Tax v. Bhurangya Coal Co., held the sale concluded on 28 September 1957 (deed registration) and that the profits should be included in assessment year 1958-59. The Tribunal later rectified its order under section 35 of the 1922 Act by deleting a direction that the income was “liable to be included in the total income of the appellant in the assessment year 1958-59” in light of the Supreme Court decision in Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das.
On 7 December 1965 the Income-tax Officer issued a notice under section 148 of the Income-tax Act, 1961, for assessment year 1958-59. The assessee challenged the validity of that notice by a writ under Article 226; the High Court (K.L. Roy J.) on 6 October 1969 made the rule nisi absolute and quashed the notice. The present appeal was preferred against that judgment.
Legal Issues Presented
- Whether the notice dated 7 December 1965 issued under section 148 of the Income-tax Act, 1961 for assessment year 1958-59 was valid.
- Whether the reopening was permissible under clause (a) of section 147 (i.e., whether the assessee failed to disclose fully and truly all material/primary facts resulting in escapement of income).
- If clause (a) was not properly available, whether a notice issued apparently under clause (a) could be treated as one under clause (b) of section 147 when the necessary conditions for clause (b) are met.
- Whether section 297(2)(d)(ii) read with section 150(2) and section 153, Explanation 2 (1961 Act) applied to permit reassessment in the circumstances of this case when events arose under the 1922 Act.
- Whether section 297(2)(d) (and related transitional provisions) was ultra vires or discriminatory as contended by the assessee.
- Whether any limitation bar prevented the issuance of the notice (i.e., whether section 150(1) and related limitation provisions precluded action).
Arguments of the Parties
Revenue's Arguments
- The departmental reasons recorded stated that the Tribunal deleted profits assessed under section 10(2)(vii) for 1956-57 on the ground that such profits are includible in the previous year in which the sale took place; the Tribunal's view was that the sale was concluded on registration (28-9-1957), making the profits liable in 1958-59.
- The Income-tax Officer proceeded on the basis that the assessee had failed to disclose fully and truly all material facts for assessment year 1958-59 and therefore income of Rs. 2,21,057 had escaped assessment, justifying action under clause (a) of section 147.
- Alternatively, relying on section 297(2)(d)(ii) read with section 150(2) and section 153 Explanation 2, the department contended that action could be justified under clause (b) of section 147 because information (from the Tribunal's order) had come into the department's possession after the original assessment.
- The department maintained that section 150(1) of the 1961 Act applies to give effect to a finding or direction in an appellate order (even when the appellate order arose under the 1922 Act) and that the limitation under section 149 would not bar reassessment in these circumstances.
- The department argued that section 297(2)(d)(ii) is a valid transitional provision and does not amount to impermissible discrimination between classes of cases; instead, the different treatments have a rational connection to the contingencies contemplated.
Assessee's Arguments
- All primary facts (sale, consideration, date of conveyance, date of registration) were disclosed to the department at the time of the original assessment for 1958-59; therefore clause (a) of section 147 could not be invoked because there was no failure to disclose primary facts.
- Because the Income-tax Officer purported to proceed under clause (a) of section 147, he could not later have his action sustained on the basis of clause (b); reliance was placed on the principle that one cannot transform a notice validly issued under one provision into another if statutory conditions differ materially.
- Section 297(2)(d)(ii) did not apply because, it was argued, reassessment is a continuation of assessment (and the return was filed before the 1961 Act), and therefore clause (a) of s297(2) should apply rather than clause (d)(ii).
- Section 297(2)(d) was said to be ultra vires and discriminatory (drawing distinction between those who had received notices before the 1961 Act and those who had not) and the 1961 Act was argued to be more onerous than the 1922 Act.
- It was argued that, even if section 150(1) applied, the notice was barred by limitation as of the date of the appellate order; additionally, Explanation 2 to section 153(3) could not be invoked and the deeming provisions would result in forbidden double-deeming.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income Tax v. Bhurangya Coal Co. [1958] 34 ITR 802 SC | That the sale was concluded on registration of the conveyance (28-9-1957) for the legal question of the year in which profits were to be assessed. | The Tribunal followed this decision to conclude the sale was concluded on registration and initially held profits liable in assessment year 1958-59; the court described this as part of the factual and procedural background. |
| Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das [1964] 52 ITR 335 SC | Principles about the Tribunal not giving specific directions for another year and the mischief the legislature sought to cure by transitional provisions. | The Tribunal had deleted a direction in view of this decision; the court relied on the case in discussing the effect of appellate findings and in construing transitional provisions (Explanation 2 to s.153) and section 150(1). |
| Calcutta Discount Co. Ltd. v. Income-tax Officer | Principle that clause (a) of reassessment provisions requires failure to disclose primary facts; reopening cannot be based where primary facts were disclosed. | The court relied on this Supreme Court decision (and another companion case) to support the conclusion that clause (a) of section 147 could not be invoked because primary facts were disclosed. |
| Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer | Same principle as above regarding requirement of non-disclosure of primary facts for clause (a). | Used with Calcutta Discount Co. to support the view that reopening under clause (a) was not permissible here. |
| Commissioner of Income-tax v. Kallu Babu Lalchand | Decision of this court bearing on the principle that clause (a) requires non-disclosure of primary facts. | Relied on in conjunction with Supreme Court authorities to conclude clause (a) could not be invoked here. |
| Johri Lal v. Commissioner of Income-tax | Held that an action taken under one subsection (e.g. 34(1)(b)) could not be transformed into another (34(1)(a)) by the court. | The court discussed this authority when considering whether a notice under clause (a) could be treated as one under clause (b), distinguishing situations where transformation is or is not permissible. |
| Mriganka Mohan Sur v. Commissioner Of Income-Tax, West Bengal III (Income-tax Reference No. 89 of 1968) | Held that a notice proposed under clause (a) can be treated as under clause (b) if material conditions for clause (b) are fulfilled. | The court relied on this decision to hold that the notice, though proposed on the basis of clause (a), could be treated as one under clause (b) because information had come into the department after the original assessment. |
| M.M Ispahani Ltd. v. Commissioner of Income-tax | Authority that differing procedural treatment of different contingencies does not necessarily amount to impermissible discrimination. | Relied upon to reject the assessee's contention that section 297(2)(d) was ultra vires or discriminatory. |
| Third Income-tax Officer, Mangalore v. M. Damodar Bhat; Jain Brothers v. Union of India; Commissioner of Income-tax v. Singh Engineering Works (P.) Ltd.; Kalawati Devi Harlalka v. Commissioner of Income-tax [1967] 66 ITR 680 SC | Authorities on applying provisions of a new Act mutatis mutandis and construing transitional statutory provisions. | The court cited these cases to justify reading the transitional provisions of the 1961 Act (section 297(2)(d)(ii)) and applying them mutatis mutandis to the present facts. |
| R.B. Seth (Gujarmal Modi) v. Commissioner of Income-tax [1972] 84 ITR 261 SC | Distinguished facts where proceedings under the 1922 Act were pending on 1 April 1962 and it was held one could not issue a new notice under the 1961 Act in those circumstances. | The court discussed this case to explain limits of applying section 150(1) where old Act proceedings were continuing; it concluded section 150(1) would apply to notices issued under the 1961 Act even though the appellate finding arose under the 1922 Act in the present case. |
| Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd.; Amarchand N. Shroff | Cases cited in argument on the propriety of double-deeming and limits of statutory fiction. | The court referred to these authorities when addressing the assessee's contention about double-deeming and explained why the transitional scheme and deeming provisions could be applied without impermissible double-deeming. |
| Commissioner of Income-tax v. Girdhardas and Co. Pvt. Ltd. | Principle that when a statute creates a fiction, the situation in which the fiction can work should be postulated. | Relied on to support the court's view that the statutory fiction in Explanation 2 and transitional provisions can be applied in the present factual context. |
| Niranjan & Co. (P.) Ltd. v. Commissioner of Income-tax; Gopichand Sarjuprasad v. Union of India; S.B. Jain, Income-tax Officer v. Mahendra; Commissioner of Income-tax v. Rajinder Nath | These decisions were cited by the parties; the judgment notes their citation. | The court observed these decisions were drawn to its attention but stated it was not necessary to discuss them in detail for the resolution reached. |
Court's Reasoning and Analysis
The court proceeded through a sequence of legal determinations grounded in the facts and the recorded reasons for reopening:
-
Primary-facts disclosure and clause (a) of section 147:
The court agreed with the learned trial judge that all primary facts (the sale, the consideration, date of conveyance and date of registration) were disclosed to the department or already in its possession at the time of the original assessment for 1958-59.
Given this, the court held that clause (a) of section 147 (reassessment for failure to disclose fully and truly all material facts) could not be invoked. The court emphasised that there is no obligation on the assessee to disclose the correct legal inference to be drawn from facts; reopening under clause (a) requires non-disclosure of primary facts. The court relied on established principles and authorities (including Calcutta Discount Co. and related cases) to support this conclusion.
-
Whether notice under clause (a) could be treated as under clause (b):
The court analysed whether a notice initially proceeded upon under clause (a) could nevertheless be treated as one under clause (b) when the material conditions for clause (b) existed.
The court noted the Supreme Court's decision in Johri Lal that a notice under one specific subsection could not always be transformed into another; however, it accepted the position taken in the court's earlier decision (Mriganka Mohan Sur) that a proposed notice under clause (a) can be treated as one under clause (b) if the material conditions for clause (b) are fulfilled. In the present case, information (that income had escaped assessment) came into the department's possession after the original assessment as a result of the Tribunal's order; therefore, the conditions for clause (b) (information coming into possession later) were present and transformation was permissible.
-
Applicability of section 297(2)(d)(ii) and transitional provisions:
The court considered whether sub-clause (ii) of clause (d) of section 297(2) (1961 Act) applied, given that no notice under section 34 of the 1922 Act had been served prior to the commencement of the 1961 Act.
The court construed the transitional scheme: clause (a) of s.297(2) addresses returns filed but assessment not made before commencement of 1961 Act; clause (d) deals with two specific situations, and sub-clause (ii) expressly contemplates cases where income chargeable had escaped assessment but no notice under section 34 of the 1922 Act had been served when the 1961 Act came into operation. The court held that the present facts fall within clause (d)(ii) and that the special provision for the special case is the appropriate reading rather than applying the general clause (a).
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Objections of ultra vires/discrimination:
The assessee argued that section 297(2)(d) was ultra vires because it discriminated between taxpayers who had been issued notices under section 34 of the old Act and those who had not.
The court rejected this contention, holding that the two groups are distinct classes subject to different procedural treatment and that the differentiation has a rational connection with the circumstances contemplated; reference was made to the court's prior decision in M.M. Ispahani Ltd.
-
Application of section 150(1) and limitation issues:
The revenue contended that section 150(1) (1961 Act) removes the limitation bar, allowing action to give effect to an appellate finding or direction.
The court examined whether the Tribunal's finding/direction (though made under the 1922 Act) could be treated as a finding/direction for purposes of section 150(1) under the transitional scheme. The court held that sub-clause (ii) of s.297(2)(d) must be read so that all provisions of the 1961 Act apply mutatis mutandis, and hence section 150(1) can be invoked in the present case. Distinguishing R.B. Seth (where proceedings under the old Act were pending), the court concluded section 150(1) applies to a notice issued under the 1961 Act even if the appellate finding arose under the 1922 Act, so long as the transitional conditions are satisfied.
On limitation, the court held that the correct date for assessing whether the reassessment could have been taken is the date of the order which was the subject-matter of appeal (29 December 1960). On that date, action for reassessment could have been taken for assessment year 1958-59; therefore, limitation does not bar the present action when section 150(1) is properly applied.
-
Deeming provisions and double-deeming objection:
The assessee argued that Explanation 2 to section 153(3) would create an impermissible double-deeming.
The court addressed the objection: it held that properly read, section 297(2)(d)(ii) together with relevant provisions of the 1961 Act operate mutatis mutandis and that invoking Explanation 2 does not produce unlawful double-deeming. The court referred to authorities on statutory fictions (e.g., Girdhardas) to justify that the legislature may create a fiction provided the situation in which that fiction works is postulated and the fiction is applied within those bounds.
Holding and Implications
Holding:
APPEAL ALLOWED; the judgment and order of the learned trial judge are set aside and the rule nisi is discharged.
Implications:
- The High Court's earlier order quashing the notice under section 148 (dated 7 December 1965) was reversed; accordingly the notice stands and the department's action to proceed is not susceptible to the challenge made in the writ petition.
- The court concluded that clause (a) of section 147 could not be invoked because all primary facts had been disclosed; however, the notice could validly be sustained as one under clause (b) of section 147 given that information came into the department's possession after the original assessment (the Tribunal's order), and transitional provisions (section 297(2)(d)(ii) read with section 150 and section 153 Explanation 2) applied.
- The court rejected the assessee's contentions that the transitional provision was ultra vires or discriminatory, and rejected the limitation and double-deeming objections on the facts and statutory construction advanced.
- The court directed that there would be no order as to costs.
The summary above reflects the court's decision and the direct consequences for the parties. The opinion does not state that the court intended to lay down any novel principle of law beyond the application and construction of the cited transitional and reassessment provisions to the facts of this case.
Sabyasachi Mukharji, J.:— In this appeal the question involved is the validity of the notice dated the 7th December, 1965, issued under section 148 of the Income-tax Act, 1961, for the assessment year 1958-59. It appears that Eastern Coal Company sold its colliery to Bhowrah Kankanee Collieries Ltd., by an indenture dated the 28th of September, 1957. This sale was made effective on and from the 1st of January, 1955. The consideration for the sale was Rs. 62 lakhs with an abatement of Rs. 5 lakhson the ground of retrenchment compensation. On the 26th of June, 1958, Eastern Coal Company went into voluntary liquidation. On the 29th of December, 1960, the assessment of the Eastern Coal Company for the assessment year 1956-57, accounting year being 1st of October, 1954, to 30th of September, 1955, was completed. The assessee offered for taxation the said sum of Rs. 62 lakhs for the said assessment year and was accordingly taxed under section 10(2)(vii) of the Indian Income-tax Act, 1922, for a sum of Rs. 2,21,057. The difference between the written down value and the actual sale consideration was the figure which was subjected to tax on this account. It is stated that the assessment was made on the basis of the documents and evidence furnished by the assessee. Thereafter, on the 28th of February, 1961, the assessment for the assessment year 1958-59 was completed on the basis of the return filed by the assessee. The assessee claimed that its business and its collieries had been sold with effect from the 1st January, 1955. The assessee also produced certain evidence in support of the said claim and was taxed only on interest on security and dividend income. The assessee's claim for expenses under the head “Loss on working” was disallowed on the ground that in the relevant year the assessee was not carrying on any business. On the 21st of July, 1965, the assessee was allowed to take a supplementary ground before the Income-tax Appellate Tribunal in its appeal for the assessment year 1956-57, contending that the profit which was the subject-matter of taxation under section 10(2)(vii) of the Indian Income-tax Act, 1922, for the assessment year 1956-57 was not liable to be taxed in the said assessment year. The Tribunal came to the conclusion following the decision of the Supreme Court in the case of Commissioner Of Income Tax v. Bhurangya Coal Co. [1958] 34 ITR 802 SC., that the sale was concluded on the 28th of September, 1957, when the deed of conveyance was registered. The Tribunal accordingly held that the profits under section 10(2)(vii) were, therefore, liable to be included in the assessment of the assessee for the assessment year 1958-59 and not in the assessment year 1956-57 under appeal. It appears that thereafter on being moved under section 35 of the Indian Income-tax Act, 1922, the Tribunal rectified the order by deleting the words “liable to be included in the total income of the appellant in the assessment year 1958-59” in view of the decision of the Supreme Court in the case of Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das [1964] 52 ITR 335 SC.. On the 7th of December, 1965, the Income-tax Officer issued a notice under section 148 of the Income-tax Act, 1961, in respect of the assessment year 1958-59 and on the 4th February, 1966, this rule was obtained under article 226 of the Constitution challenging the validity of the notice. The rule ultimately came up for hearing before K.L Roy J. and by a judgment delivered and an order passed on the 6th of October, 19693 the rule nisi was made absolute and the notice under section 148 was quashed. This appeal has been preferred from the said judgment.
2. The first ground of challenge to the said notice is that all primary facts had been disclosed. We directed the income-tax department to produce before us the recorded reasons for the reopening of the said assessment. The said reasons were produced; the reasons were shown to counsel for the assessee. The reasons are as follows:
“In this case the Tribunal have deleted the profits u/s 10(2)(vii) amounting to Rs. 2,21,057 in respect of immovable properties from the assessment year 1956-57, on the ground that under the second proviso to section 10(2)(vii) such profits are includible in the total income of the previous year in which the sale took place. In the instant case the sale of immovable properties was concluded on 28-9-1957 when the conveyance was executed and registered. Therefore, the profits u/s 10(2)(vii) in respect of the immovable properties are liable to be included in the total income of the assessee in the assessment year 1958-59 and not in the assessment year 1956-57.
3. At the time of the assessment year 1958-59, the assessee had failed to disclose fully and truly all material facts necessary for his assessment for that year. As each assessment is a separate and distinct entity, disclosure of the fact of sale in connection with the assessment year 1956-57 is not disclosure for the assessment year 1958-59. The assessee did not, in fact, offer the income arising from sale of property in respect of the assessment year 1958-59 nor did he even specifically disclose the fact of sale. In such circumstances, therefore, this income of Rs. 2,21,057 which has escaped assessment requires to be assessed. Hence, the action u/s 148(a) is proposed.” As a matter of fact the substance of these reasons has been stated in the affidavit-in-opposition filed in answer to the rule nisi. It appears that the Income-tax Officer has proceeded on the basis of failure and omission on the part of the assessee to disclose fully and truly all primary facts and as a result of which, according to the Income-tax Officer, the income of the assessee for the assessment year 1958-59 has escaped assessment. Therefore, it appears that the Income-tax Officer was proposing action under clause (a) of section 147 of the Income-tax Act, 1961. The learned trial judge has come to the conclusion that clause (a) of section 147 of the Income-tax Act, 1961, cannot be applied in this case, because, according to the learned judge, all primary facts had been disclosed and were in possession of the department at the time of the original assessment for the assessment year 1958-59. We are in agreement with the learned judge on this aspect of the matter. It appears to us that the primary facts in connection with this transaction are the sale, the consideration, the date of conveyance and the date of registration. All these facts were disclosed to the department and/or were otherwise in the possession or knowledge of the department because of the disclosure or otherwise at the time of the original assessment for the assessment year 1958-59. It has to be borne in mind that assessment for the year 1956-57 had been completed already at the time of the original assessment for the year 1958-59. There is no obligation on the assessee to disclose the correct legal inference in respect of a particular transaction. The principles upon which clause (a) of section 147 of the Income-tax Act, 1961, or section 34(1)(a) of the Income-tax Act, 1922, can be invoked are well-settled by the provisions of these sections as well as by the decisions of the courts. In view of the principles which are well-established we are of the opinion that in this case there was no failure on the part of the assessee to disclose fully or truly all primary facts, and in any event the income which has escaped assessment was not due to failure or omission on the part of the assessee to disclose fully and truly all the material facts because all relevant and material facts were in the possession of the department at the time of the original assessment of 1958-59. So, escapement, if any, has happened not as a result of the failure of the assessee but because both the assessee as well as the department drew wrong inference from the facts disclosed. In such a case clause (a) of section 147 of the Income-tax Act, 1961, cannot be invoked. Reliance may be placed on the decisions of the Supreme Court in the case of Calcutta Discount Co. Ltd. v. Income-tax Officer and Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer and the decision of this court in the case of Commissioner of Income-tax v. Kallu Babu Lalchand.
4. Counsel for the revenue, then, contended that in view of the provisions of section 297(2)(d)(ii) read with section 150(2) and section 153, Explanation 2 of the Income-tax Act, 1961, the action taken in this case could be justified on the ground of clause (b) of section 147 of the Income-tax Act, 1961. To this the first submission of the assessee is that clause (b) of section 147 cannot be invoked in this case because the Income-tax Officer had purported to take action under clause (a) of section 147 of the Income-tax Act, 1961. As it is not necessary, the notice does not mention under which clause the action was taken but counsel for the assessee can justifiably claim that the grounds indicated in the reasons recorded as well as in the affidavit-in-opposition establish that the Income-tax Officer was proceeding on the basis of clause (a) of section 147 of the Income-tax Act, 1961. The first question in this case is whether where the Income-tax Officer has proceeded under clause (a) of section 147 if it transpires later that such a course was not justified but action could have been taken under clause (b) of section 147 of the Act, can such action be upheld by court? It has been held by the Supreme Court in the case of Johri Lal v. Commissioner of Income-tax that where action has been taken under section 34(1)(b) of the Income-tax Act, 1922, it was not possible for the court to transform such an action and treat the notice issued as one under section 34(1)(a) of the Income-tax Act, 1922. It is true that a notice issued on the ground of clause (b) of section 147 of the Income-tax Act, 1961, cannot be later on treated as one issued under clause (a) of section 147 of the said Act. But that is because certain specific and special conditions are required to be complied with in cases under clause (a) of section 147 which normally and in ordinary course are not required to be complied with in respect of cases under clause (b) of section 147 of the Act. But a notice under section 147 which has been proposed under clause (a) can be treated as one, if the material conditions are fulfilled, under clause (b) of section 147 of the Income-tax Act, 1961. It was so held by this court in the Income-tax Reference No. 89 of 1968, Mriganka Mohan Sur v. Commissioner Of Income-Tax, West Bengal Iii. In this case it is apparent that the information that the income-tax for the assessment year 1958-59 has escaped assessment came as a result of the appellate order of the Tribunal which was passed subsequent to the original assessment for the assessment year 1958-59. Therefore, there was information coming into the possession of the department that income of the assessee has escaped assessment which came as a result of the decision of the Tribunal. The Income-tax Officer, however, thought that the assessee had failed to disclose fully and truly all material facts but that position was not correct. The assessee had not failed to disclose fully and truly all material facts and in any event the income did not escape as a result of such alleged failure on the part of the assessee, but there was escapement and that information came subsequent to the original assessment and there was information to that effect. If these are the conditions fulfilled and if reasons have been recorded, then in such a case, there is no impediment in treating a notice issued under clause (a) of section 147 of the Income-tax Act, 1961, as one under clause (b) of the Income-tax Act, 1961.
5. The next question is whether this action can be held to be valid in view of the provisions of section 297(2)(d)(ii) of the Income-tax Act, 1961, read with section 150(2) and section 153, Explanation 2, of the said Act; Counsel for the assessee contended that section 297(2)(d)(ii) of the Income-tax Act, 1961, did not apply because, firstly, it was submitted that it was in conflict with the provisions of section 297(2)(a) of the Income-tax Act, 1961, and it was submitted that assessment under that Act included reassessment. Therefore, it was urged that inasmuch as a return for the original assessment had been filed before the coming into operation of the Income-tax Act, 1961, clause (a) of sub-section (2) of section 297 applied to this case because reassessment was a part and continuation of the process of assessment and not clause (d), sub-clause (ii) of section 297(2) of the Act. It is true that by definition “assessment” could include reassessment, but clause (a) of sub-section (2) of section 297 deals with the general situation, namely, where a return has been filed but no assessment has been made as yet before the commencement of the 1961 Act. And clause (d) of section 297 deals with two specific situations, namely, under clause (i) where on the belief of escapement of income a notice under section 34 of the 1922 Act though given, yet action pursuant thereto remains incomplete, and under clause (ii) where income chargeable to tax has escaped assessment but no notice under section 34 of the 1922 Act had yet been served when the 1961 Act came into operation. The last situation contemplated by sub-clause (ii) of clause (d) of sub-section (2) of section 297 of the Act is the present position in the instant case. In such a situation the harmonious way of construction is to consider that a special provision should be applicable to a special case and the special case mentioned in the later part of the same Act is an exception to the earlier general provision of the same Act. Therefore, in view of the fact that in this case no notice had been issued under section 34 of the Indian Income-tax Act, 1922, prior to the coming into operation of the 1961 Act, sub-clause (ii) of clause (d) of sub-section (2) of section 297 would apply in our opinion.
6. It was then contended that section 297(2)(d) was ultra vires because it discriminated between the persons who had been served with notices under section 34 of the Income-tax Act, 1961, and those who had not been served with such notices. It was further urged that provisions of the 1961 Act were more onerous than the provisions of the 1922 Act. It has been held by this court that those whose income had escaped assessment and in respect of whom notices had been issued prior to the coming into operation of this Act and those whose income had escaped assessment and no notices had been issued in respect thereof are two different and distinct classes to be dealt with by two different methods of the procedure, and the difference in the procedure has a rational connection with the differentiation made, and as such does not amount to discrimination. Reference may be placed on the decision of this court in the case of M.M Ispahani Ltd. v. Commissioner of Income-tax. It has been held in the aforesaid decision that it could not be said that the provisions of the one Act were more onerous than the other because these two Acts made different provisions for two contingencies. In the premises, this contention of the assessee cannot be accepted.
7. The next question that requires consideration is whether under section 150 of the Income-tax Act, 1961, this notice can be treated as valid. Counsel for the revenue contended that in view of sub-section (1) of section 150 the period of limitation prescribed under section 149 would not be a bar for taking action in this case. It was submitted that it was to give effect to the finding or direction contained in the order of the Appellate Tribunal that the present action was taken; the first question that requires consideration is whether it was to give effect to any finding or direction. As mentioned hereinbefore the Tribunal following the decision of the Supreme Court given under the provisions of the 1922 Act in the case of Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das subsequently deleted the direction contained in the appellate order as indeed specific direction could not be given by the Tribunal in respect of another year when hearing an appeal in respect of one year, but there was a finding in the year 1956-57 that the income in question though liable to be taxable was not taxable in the year 1956-57. The question is what is the effect of that finding. As a result of that finding it became apparent that this income escaped assessment. Explanation 2 to subsection (3) of section 153 provides that where by an order referred to in clause (ii) of sub-section (3) any income is excluded from the total income of the assessee for an assessment year, then assessment of such income for another assessment year shall, for the purposes of section 150 and this section, namely, section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order. It appears that in order to avoid the mischief spoken of by the Supreme Court in the aforesaid decision of Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das, this Act specifically made a direction in one year or a finding made in one year to be valid for taking action in respect of a subsequent year or another year. The first contention of counsel for the assessee, however, is that sub-section (1) of section 152 speaks of a finding or a direction contained in an order passed by an authority in a proceeding under “this Act” by way of appeal, reference or revision, namely, the Income-tax Act, 1961. It was contended that the decision of the Income-tax Appellate Tribunal for the assessment year 1956-57 was not given under “this Act”, namely, 1961 Act, but was given under the provisions of the Indian Income-tax Act, 1922. We have referred to the provisions of section 297(2)(d)(ii) and we have held that under the said provisions the present Act would apply to the present proceedings. But the question is to what extent this 1961 Act is to be applied. It appears to us that when the section speaks “that all the provisions of this Act shall apply accordingly” in sub-clause (ii) of clause (d) of sub-section (2) of section 297 of the Income-tax Act, 1961, the provisions must be read mutatis mutandis in applying the provisions, otherwise these will lead to incongruous results. It has been so held by the Supreme Court in the case of Third Income-tax Officer, Mangalore v. M. Damodar Bhat, Jain Brothers v. Union of India, Commissioner of Income-tax v. Singh Engineering Works (P.) Ltd. and Kalawati Devi Harlalka v. Commissioner of Income-tax [1967] 66 ITR 680 SC.. Our attention, however, was drawn to the decision of the Supreme Court in the case of R.B Seth Gujarmal Modi v. Commissioner of Income-tax [1972] 84 ITR 261 SC.. There a notice under section 34(1)(b) of the Indian Income-tax Act, 1922, was issued on November 7, 1958, to reopen the assessment of the deceased assessee for assessment year 1957-58. It was served only on the appellant No. 2. On June 15, 1963, the Appellate Assistant Commissioner set aside the assessment made pursuant to that notice on the ground that it was necessary to issue notice to all the legal representatives of the deceased assessee. In the meantime, the Income-tax Act, 1961, came into force on April 1, 1962. Thereafter, on January 7, 1964, the Income-tax Officer issued a notice under section 148 of the Act of 1961 to the appellants. It was held by the Supreme Court that since the proceedings under section 34(1)(b) of the 1922 Act were pending since April 1, 1962, it was not open to the Income-tax Officer to issue notice under section 148 of the Income-tax Act, 1961, and since the Appellate Assistant Commissioner's order was not passed under the 1961 Act, the department could not take the support from section 150(1) of the 1961 Act. It appears as is evident from the facts stated before that notice was issued under section 148 of the Income-tax Act, 1961, on January 7, 1964, when a notice under section 34(1)(b) of the Indian Income-tax Act, 1922, was pending. Therefore, the action taken by the notice under section 148 was really a continuation of the action taken under section 34(1)(b) of the Indian Income-tax Act, 1922. In construing the validity of such action the provision of section 297(2)(d)(ii) cannot be applied and, therefore, as it was really a continuation of the proceedings under the old Income-tax Act no question can arise of invoking the provision of section 150(1) of the Income-tax Act, 1961. In those circumstances, the Supreme Court observed that since the Appellate Assistant Commissioner's order was not passed under the 1961 Act, the department could not take any support from section 150(1) of the 1961 Act. Therefore, we are of the opinion that the provision of section 150(1) of the Income-tax Act, 1961, would apply in respect of a notice issued under the 1961 Act even though the direction or the finding out of which this notice was issued was passed under the provisions of the Act of 1922.
8. The next question that was urged in this case was that even if section 150(1) of the 1961 Act applied the notice had become barred. It was contended that a notice would become barred even under section 150(1) if on the date of the appellate order the time for taking action for assessment for that year had become barred by the other provisions of the Act. The correct date in this connection would be the date when the order, which is the subject-matter of the appeal, was passed. If on that date the reassessment proceedings could have been validly taken then because of subsequent lapse of time the said reassessment proceedings do not become barred by time. In this case on the 29th of December, 1960, the original order for assessment was passed and, therefore, on that date action could have been taken for reassessment for the assessment year 1958-59. That was the date when the order which was the subject-matter of appeal was passed. In that view of the matter, in our opinion, the provisions of section 150(1) of the Income-tax Act, 1961, would apply on the facts of this case. It was lastly contended that Explanation 2 to sub-section (3) of section 153 could not be invoked in this case, firstly, because it dealt with a different section and, secondly, according to counsel for the assessee, Explanation 2 of that section did not come into play. Explanation 2 created a fiction by deeming an assessment to be made in consequence of an order or to give effect to a finding or direction which was not there. But there was no provision that the proceedings under the 1922 Act should be deemed to be proceedings under the new Act. But for this no fiction or deeming provision, in our opinion, is necessary because section 297(2)(d)(ii) read properly with the provisions of the new Act would apply mutatis mutandis to the present case. Therefore, even though in respect of an order passed under the 1922 Act, action could be taken under the 1961 Act, the said provision would be applicable. Counsel for the assessee contended that this would result in double deeming which was not permitted. Reliance was placed on a decision of the Supreme Court in the case of Commissioner of Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. and Amarchand N. Shroff's case. On the other hand it has been clearly laid down by the Supreme Court that when a statute creates a fiction the situation in which the fiction can work should be postulated. Reliance may be placed on the decisions of the Supreme Court in the case of Commissioner of Income-tax v. Girdhardas and Co. Private Ltd. In the aforesaid view of the matter we are of opinion that the action in this case was valid and the notice cannot be challenged in this case.
9. Our attention was drawn to several decisions, viz., Niranjan & Co. (P.) Ltd. v. Commissioner of Income-tax, Gopichand Sarjuprasad v. Union of India, S.B Jain, Income-tax Officer v. Mahendra and Commissioner of Income-tax v. Rajinder Nath. But in the view we have taken it is not necessary for us to discuss the aforesaid decisions in detail. In the aforesaid view of the matter this appeal is allowed and the judgment and order of the learned trial judge are set aside and the rule nisi is discharged.
10. There will be no order as to costs.
Sankar Prasad Mitra, C.J:— I agree.
provisions of section 297(2)(d)(ii)Alert