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Cit, Bihar And Others v. M/S Banwari Lal Agarwal
Factual and Procedural Background
The Income-tax assessments relate to two accounting years:
- 1947-48: The Income-tax Officer (ITO), Ranchi, treated Rs 17,425 invested in Indian Woollen and Silk Stores, Ranchi, as the assessee’s income from undisclosed sources and included the amount in the assessment of the Hindu Undivided Family (HUF) styled M/s Narmal Ramkumar, of which Banwari Lal Agarwal was a member.
- 1948-49: A similar addition of Rs 35,500 was made.
The HUF appealed. For 1947-48 the Appellate Tribunal held the amount was undisclosed income but not assessable in the HUF’s hands. For 1948-49 the Appellate Assistant Commissioner (AAC) followed that view and directed that Rs 35,500 be deleted from the HUF assessment and taxed in the hands of Banwari Lal Agarwal (“the assessee”).
Acting on the AAC’s direction, the ITO—after obtaining the Commissioner’s sanction—issued a notice dated 24 July 1957 under Section 34(1)(a) of the Indian Income-tax Act, 1922, to reopen the assessee’s 1948-49 assessment. The assessee objected that the notice was time-barred. The ITO and subsequently the AAC rejected this objection. On further appeal, the Appellate Tribunal, relying on the Bombay High Court decision in Hiralal Amritlal Shah, held the notice and resulting assessment invalid for being issued beyond eight years.
The Commissioner of Income-tax (CIT) sought a reference. The Patna High Court answered in favour of the assessee, holding the Section 34(1)(a) proceedings invalid. The CIT appealed to the Supreme Court.
Legal Issues Presented
- Whether, on the stated facts, the reassessment proceedings initiated on 24 July 1957 under Section 34(1)(a) for Assessment Year 1948-49 were barred by limitation and therefore invalid.
Arguments of the Parties
Assessee’s Arguments
- The Section 34(1)(a) notice was served after the expiry of eight years prescribed for such notices and was therefore void.
Commissioner of Income-tax’s Arguments
- The Tribunal relied on the Bombay High Court ruling in Hiralal Amritlal Shah, which had been overruled by the Supreme Court in K.C. Thomas, ITO v. Vasant Hiralal Shah; hence the notice was valid despite the lapse of eight years.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Hiralal Amritlal Shah v. K.C. Thomas, ITO (Bom. HC) | Held that limitation in Section 34(1)(a) is not overridden by the second proviso to Section 34(3). | Relied on by the Tribunal, but the Supreme Court noted it was later overruled. |
| K.C. Thomas, ITO v. Vasant Hiralal Shah, (1964) 6 SCR 437 | Second proviso to Section 34(3) governs the whole of Section 34; limitation in Section 34(1)(a) does not apply when assessment is to give effect to an appellate direction. | Cited by the CIT to argue the notice was within time. |
| S.C. Prashar v. Vasantsen Dwarkadas, (1964) 1 SCR 29 | Declared second proviso unconstitutional insofar as it permits assessment of a “person other than the assessee” beyond the normal period. | Referred to illustrate constitutional limitations when a new assessee is brought in. |
| ITO, A-Ward, Sitapur v. Murlidhar Bhagwandas, (1964) 6 SCR 411 | Defined “finding”, “direction”, and “any person” in the second proviso. | Cited with approval for the scope of persons who can be assessed under appellate directions. |
| Estate of Late Rangalal Jajodia v. CIT, (1970) 3 SCC 371; 79 ITR 505 | Held “any person” in the second proviso means one intimately connected with the assessment under appeal. | Used to underscore the limitation on bringing in strangers to the original assessment. |
Court's Reasoning and Analysis
The Court reiterated that two separate limitation requirements exist under Section 34: (1) service of notice within the periods in sub-section (1), and (2) completion of assessment within the periods in sub-section (3). It reviewed the statutory text and prior Supreme Court case-law, noting:
- K.C. Thomas treats the second proviso to Section 34(3) as an exception that overrides both sub-sections (1) and (3).
- S.C. Prashar limits that proviso’s application where a “person other than the assessee” is sought to be assessed.
The AAC’s direction in the present matter concerned a person—Banwari Lal Agarwal—who was not a party to the original HUF appeal. The crucial issue therefore was whether, despite K.C. Thomas, the assessment could lawfully be made outside the normal period in light of S.C. Prashar and related cases. However, that issue had neither been framed in the reference question nor argued before the Tribunal or the High Court. Counsel for the CIT conceded this procedural deficiency.
Given this concession and the narrow wording of the reference (“whether the proceedings were invalid”), the Court declined to reopen broader constitutional or statutory questions. It therefore left the High Court’s affirmative answer undisturbed.
Holding and Implications
Appeal Dismissed.
The Supreme Court confirmed the High Court’s view that the reassessment proceedings were invalid. As the Court expressly refrained from deciding the wider constitutional question, the dismissal affects only the parties to this case and sets no new precedent on the interaction between Section 34(1)(a) and the second proviso to Section 34(3).
J.C Shah, C.J— In proceedings for assessment of income tax for the years 1947-48 and 1948-49, the Income Tax Officer, Ranchi held that Banwari Lal Agarwal—hereinafter called “the assessee” — had invested Rs 17,425 in the year of account relating to Assessment Year 1947-48, and Rs 35,500 in the year of account relevant to Assessment Year 1948-49, in Indian Woollen and Silk Stores, Ranchi of which the assessee was a partner. The Income Tax Officer included those sums as the income from undisclosed sources in the assessment of the Hindu Undivided Family styled M/s Narmal Ramkumar of which the assessee was a member in the two respective assessment years. The Hindu Undivided Family appealed against that order. The Appellate Tribunal held in respect of the appeal for Assessment Year 1947-48, that the sum of Rs 17, 425 represented the income from undisclosed sources, but it could not be assessed in the hands of the Hindu Undivided Family. But in respect of the appeal for the year 1948-49, following the decision of the Tribunal in the appeal relating to Assessment Year 1947-48, the Appellate Assistant Commissioner directed that the sum of Rs 35,500 be removed from the assessment of the Hindu Undivided Family and that it be assessed in the hands of the assessee.
2. The Income Tax Officer then commenced a proceeding for assessment of the income of the assessee for the year 1948-49, under Section 34(1)(a), after obtaining the sanction of the CIT. The Commissioner's sanction was specifically given on the direction given by the Appellate Assistant Commissioner. In proceeding for assessment before the Income Tax Officer it was contended by the assessee that the proceeding under Section 34(1) (a) was barred by limitation, as it was initiated more than eight years after the expiry of Assessment Year. The Income Tax Officer rejected the contention and assessed the sum of Rs 35,500 as the income of the assesee from undisclosed sources. The appeal filed by the assessee to the Appellate Assistant Commissioner did not succeed. The Appellate Tribunal following the judgment of the Bombay High Court in Hiralal Amritlal Shah v. K.C Thomas, Income Tax Officer, M. I. Ward, Bombay held that the proceeding under Section 34(1)(a) had become barred and was therefore invalid. At the instance of the CIT, the Tribunal referred the following question to the High Court of Patna:
“Whether on the facts and circumstances of the case, the Appellate Tribunal was right in holding that proceedings under Section 34(1)(a) of the Income Tax Act for Assessment Year 1948-49, in the case of the assessee was invalid?”
The High Court answered the question in the affirmative. Against that order the CIT has appealed to this Court.
3. The principal argument advanced in the appeal is that the judgment of the Bombay High Court in Hiralal Amritlal Shah case, on which (i) reliance was placed by the Tribunal was overruled by this Court in K.C Thomas, 1st Income Tax Officer, Market Ward, Bombay v. Vasant Hiralal Shah (1964) 6 SCR 437 and on that account the answer to the question referred be recorded in the negative. This Court held in K.C Thomas case that the second proviso to Section 34(3) in the form in which it stood on the date of the issue of the notice of assessment would govern the whole of Section 34(1) and would, consequently, apply even to an assessment of escaped income with respect to which limitation is provided in clause (ii) of the first proviso to Section 34(1). In that case, bar of limitation was held not to apply when an order to reassess the income of the appellant was made.
4. Before an assessment can be said to be validly made under Section 34 two distinct conditions relating to limitation must be satisfied: under sub-section (1) a notice for initiating proceedings for assessment or re-assessment must be served within the period prescribed by clauses (a) and (b) and assessment and re-assessment must be completed within the period of limitation prescribed in sub-section (3).
5. Notice to the assessee of assessment under Section 34(1)(a) was issued on July 24, 1957 i.e after the expiry of eight years prescribed by Section 34(1)(a). Sub-section (3) of Section 34 as it stood in 1957 when the notice of assessment was served provided (insofar as it is relevant) that:
“No order of assessment or re-assessment other than an order of assessment under Section 23 to which clause (c) of sub-section (1) of Section 28 applies or an order of assessment or re-assessment in cases falling within clause (a) of sub-section (1) ... of this section shall be made after the expiry of four years, from the end of the year in which the income, profits or gains were first assessable ....:
Provided further that nothing contained in this section ... shall apply to an assessment or re-assessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section 33, Section 33-A, Section 33-B, Section 66 or Section 66-A.”
It was held by this Court in K.C Thomas case that proviso two to sub-section (3) was an exception to the entire section. Therefore to an order of assessment or re-assessment of the income of the assessee or any person in consequence of or to give effect to any finding or direction contained, inter alia, in an order of the Appellate Assistant Commissioner or the Tribunal, the periods of limitation contained in sub-section (1) and sub-section (3) shall not apply i.e the requirements as to service of notice within the period of limitation prescribed under sub-section (1) shall not apply nor shall the assessment be required to be completed within the period prescribed in the substantive part of sub-section (3).
6. In the present case the Appellate Assistant Commissioner gave direction for assessment of the income of the assessee, which had escaped assessment. Sanction of the Commissioner was also obtained in that behalf. But the assessee was not a party to the assessment proceeding. He was a person order than the assessee. Whereas in K.C Thomas case an order for re-assessment of income was made against the original assessee, in the case in hand assessment is directed against a person other than the assessee in appeal in which the direction was made. If under sub-section (3) of Section 34 the assessment has to be completed within the period prescribed thereby and the time is not extended, competence to issue the notice under Section 34(1) (a) will not save the order of assessment. Before the Tribunal and the High Court this question was not raised. The Tribunal and the High Court followed the judgment in Hiralal Amritlal Shah case and held that a notice of assessment or re-assessment under Section 34(1)(a) cannot be served against the assessee beyond the period of eight years from the last day of the year of assessment. This Court took a different view holding that the second proviso to Section 34(3) applied to notices under Section 34 (1)(a) as well.
7. The Court in S.C Prashar and Another v. Vasantsen Dwarkadas (1964) 1 SCR 29 held that the second proviso to Section 34(3) of the Income Tax Act, 1922, insofar as it authorises the assessment or re-assessment of any person other than the assessee after the expiry of the period of limitation specified in Section 34 in consequence of or to give effects to a finding or direction given in an appeal, revision or reference arising out of proceedings in relation to the assessee violates Article 14 of the Constitution of India and is invalid to that extent. In Income Tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwandas, (1964) 6 SCR 411 this Court observed that the expressions “findings' and “direction” in the second proviso to Section 34(3) mean respectively, a finding necessary for giving relief in respect of the assessment for the year in question, and a direction which the appellate or revisional authority, as the case may be, is empowered to give under the sections mentioned in that proviso. The Court observed that the expression “any person” in the second proviso to Section 34(3) referred to one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. In Murlidhar Bagwandas case, no reference was made by the majority of the judges to the judgment in S.C Prashar case. In The Estate of Late Rangalal Jajodia v. CIT, Madras, (1970) 3 SCC 371, (1971) 79 ITR 505 this Court held that the expression “any person” in Section 34(3) proviso two is a person intimately connected with the assessment. The Court in that case cited with approval the observations in Murlidhar Bhagwandas case.
8. The real dispute between the assessee and the Department in this case is not whether the notice under Section 34(1) (a) was valid, but whether it is open to the Income Tax Officer to commence a proceeding for assessment pursuant to a direction given by the Appellate Assistant Commissioner after expiry of the period of limitation prescribed by sub-section (3). On that part of the case, no question is raised. Counsel for the Commissioner has fairly conceded that the question referred does not bring out the only plea on a favourable decision on which the Department may bring to tax the income which had escaped assessment. Counsel conceded that the question whether by virtue of the second proviso to sub-section (3) of Section 34, the assessment could in the circumstances of the case be completed outside the bar of that sub-section was not argued and not even raised before the Tribunal or before the High Court. We do not therefore deem it necessary to record our answer to the question raised.
9. The appeal fails and is dismissed. There will be no order as to costs.
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