Estate Of The Late A... v. Commissioner Of Inco..., Supreme Court Of India, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

citation codes

Case Number

Appeals by Special Leave from the Judgment and Order dated 16th September, 1964 of the Madras High Court in Tax Case No. 157 of 1960 (Reference No. 74 of 1960).,Civil Appeals Nos. 754 to 756 of 1966, decided on 22nd day of August, 1968.

Disposition

allowed

Attorney(S)

M.C Chagla, Senior Advocate, (B. Datta and A.K Varma, Advocates, and J.B Dadachanji, Advocate of J.B Dadachanji and Co., with him).
D. Narasaraju, Senior Advocate, S.K Aiyar, S.P Nayar and B.D Sharma, Advocates, with him).

Judges

Justice V. Ramaswami
Justice A.N. Grover
Justice J.C. Shah

Acts

The Income Tax Act
Section 25-A of the Income Tax Act
Section 22(3) of the Income Tax Act, 1922
Section 66(1) of the Income Tax Act, 1922
Section 22(2) of the Income Tax Act
Section 22 (1) of the Income Tax Act, Section 22(3), Section 34 of the Income Tax Act
Section 25-A (2) of the Income Tax Act
Section 34 of the Income Tax Act, 1922

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Smart Summary

Factual and Procedural Background

Karuppan Chettiar, his son Muthukaruppan and grandsons constituted a Hindu undivided family (HUF) that was assessed as such up to the assessment year 1948-49. During the assessment proceedings for 1949-50, it was claimed that a complete partition had taken place, leaving Karuppan Chettiar separated on one side and Muthukaruppan with his minor sons as a smaller HUF on the other.

For the assessment years 1950-51, 1951-52 and 1952-53, Karuppan Chettiar filed returns in his individual capacity. The Income-tax Officer (ITO) rejected the partition claim and assessed the larger HUF, treating those returns as HUF returns. On appeal, the Appellate Assistant Commissioner (AAC) on 18 December 1954 accepted the partition under Section 25-A and annulled the HUF assessments, directing that “the income considered in this assessment [is] required to be considered in the hands of the separate coparceners.”

Thereafter, Karuppan Chettiar filed fresh individual returns for the same three years (February 1955 for 1950-51 and 1951-52; June 1956 for 1952-53). On 2 March 1957 the ITO, purporting to act on the AAC’s direction, issued notices under Section 34 to reassess Karuppan Chettiar individually. Despite his protest, reassessments were completed on 31 March 1957. The AAC and the Income-tax Appellate Tribunal (ITAT) upheld the assessments, relying principally on the second proviso to Section 34(3) and Section 25-A(2).

At the assessee’s instance, the ITAT referred the following question to the Madras High Court under Section 66(1): “Whether the aforesaid assessments for 1950-51, 1951-52 and 1952-53 are valid?” The High Court answered in the affirmative, holding that the AAC’s order lifted the bar of limitation. The assessee appealed to the Supreme Court.

Legal Issues Presented

Whether the ITO could lawfully issue notices under Section 34, and make reassessments, when individual returns for the same years had already been filed and not disposed of.
Whether the AAC’s order recording partition and directing separate assessments removed the limitation bar prescribed by Section 34(3).
Whether the question of competency of the Section 34 notices arose out of the ITAT’s order and was therefore open before the Supreme Court.

Arguments of the Parties

Assessee (Karuppan Chettiar)

Section 34(1)(a) was inapplicable because individual returns filed under Section 22(3) had not yet been acted upon; until those returns were disposed of, no valid notice under Section 34 could be issued.
The reassessments were therefore barred by limitation and fundamentally void.

Revenue (Income-tax Department)

The AAC’s direction to assess the divided members separately brought the case within the second proviso to Section 34(3), removing any time-limit for the ITO to act.
Independently of Section 34, the assessments were supportable under Section 25-A(2), and in any event the 1952-53 assessment was within the ordinary four-year period.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Income-tax Officer v. Murlidhar Bhagwan Das	An appellate order directing separate assessment can, in certain circumstances, remove the time-bar under Section 34.	The Court noted the case but found it unnecessary to decide the point, as the impugned assessments suffered from a more fundamental defect.
N.K.T. Sivalingam Chettiar v. CIT	Similar principle regarding the effect of appellate directions on limitation.	Also mentioned but not relied upon; the Court resolved the appeal on a different ground.
CIT v. Ranchhoddas Karsondas	If a voluntary return is filed before assessment, the ITO cannot ignore it; a subsequent Section 34 notice and reassessment are invalid.	Formed the cornerstone of the Supreme Court’s reasoning to invalidate the Section 34 notices issued to Karuppan Chettiar.
CIT v. Scindia Steam Navigation Co. Ltd.	A question can be said to “arise out of” an ITAT order even if the Tribunal did not expressly deal with it, provided it was argued before it.	Used to reject the High Court’s view that the competency of the Section 34 notice did not arise from the Tribunal’s order.

Court's Reasoning and Analysis

The Supreme Court focused on the legal effect of the individual returns already on record. Referring to CIT v. Ranchhoddas Karsondas, it held that a return filed under Section 22(3) before any assessment imposes a duty on the ITO to act on that return. Until such return is processed and an assessment completed, the machinery of Section 34 cannot be invoked.

In the present case, the returns filed by Karuppan Chettiar in February 1955 and June 1956 were pending. Consequently, the Section 34 notices issued on 2 March 1957 were incompetent. The ensuing assessments were therefore void ab initio.

Given this fundamental defect, the Court found it unnecessary to determine whether the AAC’s order had waived the limitation period. It also rejected the High Court’s procedural objection, citing Scindia Steam Navigation, because the validity of the Section 34 notices had been argued before both the AAC and the ITAT and thus clearly arose from the Tribunal’s order.

Holding and Implications

Appeals Allowed—Assessments set aside as invalid.

The Supreme Court discharged the High Court’s affirmative answer and substituted the ruling that the assessments made pursuant to the Section 34 notices were invalid. Costs were awarded to the assessee in both the Supreme Court and High Court.

Implications are confined to the parties: the Revenue cannot rely on Section 34 to reassess an individual whose voluntary returns remain undisposed. The decision applies established precedent and does not create a new rule of law.

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Estate Of The Late A.M.K.M Karuppan Chettiar(In All The Appeals) v. Commissioner Of Income Tax, Madras (In All The Appeals) .

Shah, J.— Karuppan Chettiar, his son Muthukaruppan and his grandsons formed a Hindu undivided family which was assessed to income tax as a Hindu undivided family till Assessment Year 1948-49. In the course of assessment proceedings for 1949-50 it was claimed on behalf of the Hindu undivided family that the properties and the several businesses of the family had been partitioned between Karuppan Chettiar on the one hand and Muthukarppan and his sons forming a separate Hindu undivided family on the other. For Assessment Years 1950-51, 1951-52 and 1952-53 Karuppan Chettiar, pursant to the notices under Section 22(2) issued to the Hindu undivided family, summitted returns in his individual capacity in respect of the income from several sources that fell to his share at the partition. The Income Tax Officer rejected the claim of Karuppan Chettiar that there had been a partition of the Hindu undivided family and proceeded to assess the Hindu undivided family for the three years in question treating returns filed by Karuppan Chettiar as returns filed by the family. In appeal to the Appellate Assistant Commissioner the orders passed by the Income Tax Officer were set aside. Holding that there had been a complete petition of the family estate between Karuppan Chettiar on the one hand and his son Muthukaruppan representing a smaller Hindu undivided family of himself and his minor sons on the other, the Appellate Assistant Commissioner by order dated December 18, 1954 recorded the partition under Section 25-A of the Income Tax Act and cancelled the assessments of the family for the three years in question. The Appellate Assistant Commissioner observed in his order:

“As such the present assessment requires to be annulled and the income considered in this assessment required to be considered in the hands of the separate coparceners.”

2. After the order was passed, Karuppan Chettiar in his individual capacity filed returns for Assessment Years 1950-51, 1951-52 and 1952-53 for the first two years on February 3, 1955 and for the third year on June 30, 1956.

3. Being of the opinion that he was entitled to give effect to the order of the Appellate Assistant Commissioner recording partition of the Hindu undivided family of Karuppan Chettiar and his descendants and cancelling the orders of assessment of the family, the Income Tax Officer issued notices on March 2, 1957, under Section 34 of the Income Tax Act to Karuppan Chettiar for assessment of his income as a separated member for Assessment Years 1950-51, 1951-52 and 1952-53. In compliance with the notices, Karuppan Chettiar submitted returns of his income for the three years in question under protest. The Income Tax Officer ignored the protest and assessed the income of Karuppan Chettiar by his order dated March 31, 1957. The appeals filed by Karuppan Chettiar to the Appellate Assistant Commissioner and to the Income Tax Appellate Tribunal were unsuccessful. The Tribunal held that since the Appellate Assistant Commissioner had a direction under his original order to assess the divided members separately, the Income Tax Officer was invested with jurisdiction under the second proviso to sub-section 2(3) of Section 34 of the Income Tax Act to make the impugned assessments without any limit as to time and that independently of Section 34 the assessments could also be supported under Section 25-A (2) and in any event the assessment for the year 1952-53 having been completed within four years time-limit from the end of the order of assessment was valid.

4. The tribunal at the instance of the assessee submitted the following question to the High Court of Madras under Section 66(1) of the Income Tax Act, 1922:

“Whether the aforesaid assessments for 1950-51, 1951-52 and 1952-53 are valid?”

5. The High Court recorded an answer in the affirmative. In the view of the High Court, the order passed by the Appellate Assistant Commissioner and the direction given by him lifted the bar of limitation prescribed by Section 34(3) for making the assessment.

6. We need not decide whether the observations made by the appellate Assistant Commissioner in his order declining to assess the income of the Hindu undivided family operated to lift the bar of limitation qua the assessment of income of the separated members by the application of the principle of the judgment of this Court in Income Tax Officer v. Murlidhar Bhagwan Das and N. KT. Sivalingam Chettiar v. CIT for in our judgment, the orders passed by the Income Tax Authorities and confirmed by the Tribunal suffer from a fundamental infirmity. As we have already observed, Karuppan Chettiar submitted returns of his income in his individual capacity for the years 1950-51, 1951-52 and 1952-53 in response to the notice issued under Section 22(2). The Income Tax Officer purported to treat those returns made on behalf of the Hindu undivided family and to assess the Hindu undivided in respect of that income. That order was set aside. The returns submitted by Karuppan Chettiar in his individual capacity were therefore never considered and no assessment was made of Karuppan Chettiar as an individual on those returns. Karuppan Chettiar submitted fresh returns in February 1955 and June 1956 before the notice under Section 34 was issued on March 2, 1957. The notice under Section 34 could not be issued against Karuppan Chettiar in his individual capacity unless the returns which had already been filed by him were disposed of.

7. It was held by this Court in CIT v. Ranchhoddas Karsondas that the return in answer to the general notice under Section 22 (1) of the Income Tax Act can, under Section 22(3), be filed at any time before assessment and for this there is no limit of time. When in respect of any year a return has been voluntarily submitted before assessment, the Income Tax Officer cannot ignore the return and the notice of re-assessment and consequent assessment under Section 34 ignoring the return are invalid. Karuppan Chettair in respect of his individual income had never been assessed to tax before he filed the returns and unless the returns filed by him were disposed of, no notice under Section 34 was competent. On that ground the notice under Section 34 issued by the Income Tax Officer was liable to be dismissed as incompetent and no assessments could be made in pursuance thereof.

8. We are unable to agree with the High Court that the question whether a notice under Section 34 issued by the Income Tax Officer on March 2, 1957, was incompetent did not arise out of the order of the Tribunal. It is clear from the statement of the case (vide para 7) that Karuppan Chettiar had submitted before the Appellate Assistant Commissioner that “Section 34(1)(a) was inapplicable since the returns made under Section 22(3) had not been disposed of. Before the Tribunal also that contention was raised (vide para 9 of the statement of case). The question was raised before the Tribunal. Even if it was not expressly dealt with by the Tribunal, it still arose out of the order of the Tribunal: CIT v. Scindia Steam Navigation Co. Ltd.

9. The appeals are allowed. The answer recorded by the High Court is discharged and is substituted by the answer that the assessments made by the Income Tax Officer pursuant to the notice under Section 34 of the Income Tax Act, 1922 were invalid. The appellants will be entitled to their costs in this Court and in the High Court. One hearing fee.

Estate Of The Late A... v. Commissioner Of Inco...