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Kishanlal Harichand v. Income Tax Officer, Nizamabad .
Factual and Procedural Background
The appellant, assessed in the status of a Hindu joint family for assessment years 1949-50 and 1950-51, was shown as holding an eight-annas share in the Bombay firm “M/s Sriram Harichandradas.” When completing the 1950-51 assessment on 30 October 1953, the Income-tax Officer (ITO) expressly recorded that the order was “subject to rectification under Section 35.”
The firm itself was later assessed on a best-judgment basis under Section 23(4) for an income of Rs 26 lakhs (order dated 30 November 1954). In revision under Section 33-A(2), the Commissioner (31 August 1955) found the basis of that estimate unsatisfactory and remanded the matter, directing the ITO to examine the books and substitute a fresh estimate.
After several opportunities, the assessee failed to produce the books. On 29 January 1963 the ITO passed a fresh order, again estimating the firm’s income at Rs 26 lakhs. Relying on that figure, the ITO on 6 March 1965 issued a rectification order under Section 35(5) adding Rs 13 lakhs (the appellant’s half share) to the appellant’s income.
The appellant challenged the rectification by writ petition. The Andhra Pradesh High Court rejected the challenge, leading to the present Supreme Court appeal filed on certificate.
Legal Issues Presented
- Whether proceedings initiated under Section 35(5) of the 1922 Act after the commencement of the Income-tax Act, 1961, survived by virtue of the repealing provision (Section 297) of the 1961 Act. (Issue later abandoned in light of binding precedent.)
- Whether the rectification order dated 6 March 1965 was barred by limitation because it was made more than four years after what the appellant claimed was the “final order” under Section 35(5).
Arguments of the Parties
Appellant’s Arguments
- The “final order” referenced in Section 35(5) was the Commissioner’s remand order dated 31 August 1955 under Section 33-A(2).
- Consequently, the four-year limitation period expired on 31 August 1959, rendering the rectification order of 6 March 1965 time-barred and void.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S. Sankappa v. Income-tax Officer, (1968) 68 ITR 760 (SC) | Old Act proceedings (including rectifications) are saved by Section 297 of the Income-tax Act, 1961. | After this decision, the appellant abandoned the first issue; the Court noted that the validity of proceedings under the 1922 Act was no longer in dispute. |
Court's Reasoning and Analysis
The Supreme Court confined itself to the limitation issue. Interpreting Section 35(5), it held that:
- The “final order” is the order that definitively determines the assessment after remand, not the earlier remand order itself.
- The Commissioner’s order dated 31 August 1955 merely set aside the prior estimate and instructed the ITO to make a fresh one; it did not itself substitute a quantified assessment. Therefore, it lacked finality for limitation purposes.
- The ITO’s order of 29 January 1963, made in compliance with the remand directions and fixing the income at Rs 26 lakhs, was the first order that finally determined the firm’s taxable income. It thus constituted the “final order” under Section 35(5).
- Calculating four years from 29 January 1963, the rectification order dated 6 March 1965 was well within the statutory period.
Holding and Implications
APPEAL DISMISSED WITH COSTS.
The Supreme Court upheld the validity of the rectification order, confirming that the limitation period under Section 35(5) begins with the assessment order that conclusively settles the assessment after remand, not with the remand order itself. The decision affirms existing interpretive principles but sets no new precedent beyond clarifying the computation of limitation in similar rectification scenarios.
P. Jaganmohan Reddy, J.— This is an appeal by certificate against the judgment of the Andhra Pradesh High Court refusing to interfere with the order of the Income Tax Officer made under Section 35(5) of the Indian Income Tax Act, 1922 (hereinafter called the “Act”).
2. The appellant was assessed in the status of Hindu joint family for the years 1949-50 and 1950-51. In the course of the assessment proceedings for 1950-51 it was represented to the Income Tax Officer that the petitioner had an eight annas share in the firm of M/s Sriram Harichandradas at Bombay. The Income Tax Officer, therefore, while completing the assessment for the said year on October 30, 1953, specifically mentioned therein that the assessment order was subject to rectification under Section 35 of the Act. The assessment of the firm of M/s Sriram Harichandradas, Bombay, was subsequently completed on November 30, 1954. That assessment, it appears, was based on best judgment estimate under Section 23(4) of the Act and the firm charged on an income of Rs 26 lakhs. Against that assessment a revision was filed by the firm before the Commissioner under Section 33-A(2). The Commissioner held that as the petitioner had filed his application for reconsideration under Section 27 out of time which application had been rejected by the Income Tax Officer, he could not interfere with that order. Nonetheless the Commissioner held that the Income Tax Officer had not adopted a proper basis as he had no information regarding the scope of the business done during the year and that it was also possible that the estimate made by him was excessive. In this view, he remanded the matter to the Income Tax Officer with the direction that he should call for the books of the assessee and arrive at an estimate of the income after taking into account the information contained therein and to “substitute such estimate for the income already assessed and modify the assessment accordingly”, thereafter, the Income Tax Officer pursuant to the orders of the Commissioner, called upon the assessee to produce his account books, but it appears that the assesee did not cooperate with the Income Tax Officer, who after giving him several opportunities, ultimately fixed January 16, 1963, as the final date for production of books. On that date the assessee did not appear at all. As a consequence, on January 29, 1963, he passed a final order estimating the total income of the firm of M/s Sriram Harichandradas at Rs 26 lakhs. The Income Tax Officer thereafter passed the rectification order under Section 35(5) of the Act on March 6, 1965, against the appellant by including an income of Rs 13 lakhs as his share of the income derived from the firm. The validity of this older was challenged in the writ petition in which it was contended that the assessment under Section 35(5) of the Act was barred inasmuch as the rectification was made after four years from the date of the final order under Section 33-A(2). Before the High Court two questions were raised, namely:
“(1) that inasmuch as the notice under Section 35(5) of the Income Tax Act, 1922, was issued on August 28, 1964, after the Income Tax Act, 1961, came into force, the proceedings under Section 35 of the 1922 Act were not saved by the repealing Section 297 of the 1961 Act and consequently the proceedings under Section 35 of the old Act are void ab initio; and
(2) that the rectification order made under Section 35 is barred by limitation.”
The first question was, however, given up having regard to the decision of this Court in S. Sankappa v. Income Tax Offiier. (1968) 68 ITR 760 (SC), (1968) 2 SCR 674, AIR 1968 SC 816 The High Court rejected the petitioner's contention on the second question that the rectification order made under Section 35 of the Act was barred by limitation.
3. Before us, the learned advocate for the appellant contends that the final order which is referred to under Section 35(5) is an order of the Commissioner made under Section 33-A(2) on August 31, 1955, and the limitation for rectification of the mistake should be computed as from that date. As we have seen earlier, the order of the Commissioner under Section 33-A(2) of the Act could not be the final order because it required the Income Tax Officer to look into the books of account and make an estimate in the light of the material based on those books. The order of the Commissioner, as already pointed out, specifically directed that the Income Tax Officer should substitute his estimate for income already assessed and modify the assessment accordingly. This order could not be the final order because the Commissioner having set aside the estimate made by the Income Tax Officer already had not himself substituted any estimate for the estimate made by the Income Tax Officer. In pursuance of that order the Income Tax Officer had by his order, dated January 29, 1963, substituted his estimate which though was the same was nonetheless a fresh order. The final order, therefore, is not the one, as contended by the learned advocate, made on August 31, 1955, but the one made by the Income Tax Officer on January 29, 1963. In this view the four years' period which is prescribed under Section 35(5) of the Act is to be computed from the final order made by the Income Tax Officer on January 29, 1963. If so, the rectification under Section 35(5) of the Act on March 16, 1965, is within time. In this view the appeal fails and is dismissed with costs.
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