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Satyendramohan Ray Chaudhuri, In Re
Structured Summary of the Legal Opinion (Rankin, C.J.)
Factual and Procedural Background
The assessees are a Hindu undivided family. For the year 1926–1927 they were assessed to income-tax under section 23(4) on the footing that they had defaulted in rendering a return and submitting accounts. The Income-tax Officer (ITO) made an assessment to the best of his judgment, fixing total income at Rs. 17,950, broken down as: money-lending business Rs. 11,155; property Rs. 1,795; other sources Rs. 5,000.
In connection with the assessment for 1927–1928 the assessees produced accounts which led the ITO to believe income under the heads business and property for the prior year had partially escaped assessment. Under section 34 he issued a notice proposing to assess the escaped income and required a return. The assessees filed a return showing total chargeable income Rs. 29,933-11 (money-lending Rs. 28,287-11; house property Rs. 1,365; other sources Rs. 281).
After examining the accounts the ITO reassessed the assessees at a total of Rs. 36,858 (business Rs. 28,787; property Rs. 3,071; other sources Rs. 5,000 as originally assessed). The assessees did not challenge the reassessment increases for business and property but contended that the ITO was not entitled, in these proceedings under section 34, to repeat the original assessment figure of Rs. 5,000 under "other sources." The assessees' contention was that a large portion of their zemindâri collections was agricultural (and thus exempt) and that the original "other sources" figure was too high.
The Income-tax authorities maintained that the assessees could not raise this contention in proceedings under section 34 because those proceedings were limited to assessing income which had escaped assessment in the specific heads alleged to be under-assessed. A reference was made to the court on the precise question whether, when an assessment under section 23(4) is reopened under section 34 for specified heads, an assessee may reopen other heads alleged to have been over-assessed.
Legal Issues Presented
- When an assessment made under section 23(4) is reopened under section 34 because income from certain specified heads has been assessed at too low a figure, is it open to the assessee, in those section 34 proceedings, to show that income under other heads was assessed at too high a figure and therefore to reopen the whole assessment?
- Relatedly, what is the proper scope of the Income-tax Officer's powers under section 34 — does it permit reassessment beyond the specific income, profits or gains which the officer has reason to believe have escaped assessment?
Arguments of the Parties
Assessees' Arguments (represented by Mr. Gupta)
- Section 34 contains no mention of "heads" or "sources" of income; the proper inquiry is into the total assessment, so the whole assessment must be open to reconsideration.
- Accordingly, while proceedings under section 34 may not create a right to a refund and can be abandoned by the authorities, the assessee should be entitled, in those proceedings, to show that some heads were over-assessed so that the true total income is established.
- The assessees sought to show that the ITO had wrongly assumed a portion of zemindâri collections to be taxable income (under "other sources") when much of it was agricultural and exempt.
Income-tax Authorities' / Commissioner's Position
- The Commissioner (and the Income-tax authorities) submitted that section 34 permits the ITO to assess income which has escaped assessment or has been assessed at too low a rate, but does not give a general power of revision to reopen unrelated heads of income.
- They maintained that general revisionary powers lie with the Commissioner under section 33, and the powers of the ITO under sections 34 and 35 are strictly limited by the language of those sections.
- The Income-tax authorities held that the question whether zemindâri collections are agricultural and therefore exempt is not relevant to the limited purpose of reassessing the business and property items alleged to have escaped assessment under section 34.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court began by examining the language of section 34. The section contemplates cases in which "income, profits or gains" chargeable to tax have escaped assessment in a year, and it empowers the Income-tax Officer, within one year of the end of that year, to serve a notice and to proceed to assess or reassess such income. The court observed that while the section also refers to income assessed at too low a rate, that phrase can be treated as a separate category for present purposes; broadly, the section is directed to income which has escaped assessment.
Applying that framework to the facts, the court noted the figures found by the ITO: income from the money-lending business of Rs. 28,787 (of which Rs. 17,632 exceeded the original assessed Rs. 11,155) and property income of Rs. 3,071 (exceeding the original Rs. 1,795 by Rs. 1,276). The court held that these differences represent income which had escaped assessment and that such escaped amounts could not be nullified by the assessees' claim that other receipts (zemindâri collections) had been over-assessed as "other sources."
The court acknowledged a qualification: if the zemindâri collections were inter-mixed with the matters properly regarded as profits of the money-lending business or with the property income within the meaning of section 9, then classification as different heads would not necessarily exclude consideration of those receipts. The court observed, however, that on the facts before it the zemindâri collections' exemption as agricultural income did not affect the computation of profits in the money-lending business or the annual value of the property held by the assessees. The referred question assumed that factual separation.
Turning to statutory construction, the court concluded that the language of section 34 points to an intention to empower the ITO to assess the income which has escaped, not to permit the assessee to reopen the entire assessment on unrelated matters before being rendered liable to further tax. The court said that it would require express words to confer upon the assessee a right to reopen other unconnected matters in section 34 proceedings. Although the section does not explicitly mention "heads" or "sources," those concepts typically appear in assessments and, where an assessment is made lump-sum under a head in default of a return, the assessee will later be able to contest that head if it is alleged to be insufficient.
The court qualified its conclusion by stating that it is always open under section 34 for an assessee to show that the income, profits or gains alleged to have escaped assessment have in truth not escaped assessment — for example, because they were in fact assessed under a different head. But once it is shown that income has escaped assessment, the assessee cannot resist assessment of the escaped amounts under section 34 merely by demonstrating that other income has been assessed at too high a figure.
Holding and Implications
Holding: The court answered the reference in the negative — i.e., it held that, as a general rule under section 34, where an assessment made under section 23(4) is reopened because income from specified heads has escaped assessment, an assessee may not, in those section 34 proceedings, reopen other and unconnected heads of income merely by showing they were over-assessed. It is, however, open to an assessee to show that the income alleged to have escaped assessment has in fact not escaped assessment (for example, because it was assessed under a different head).
Implications:
- Direct effect on the parties: The assessees' contention that they could use section 34 proceedings to reduce the original "other sources" assessment by offsetting against increases in other heads was rejected; the reassessment of the amounts found to have escaped was upheld and the assessees were ordered to pay the costs of the reference.
- Broader legal consequence: The court interpreted section 34 as narrowly focused on assessing income that has escaped assessment, not as granting a general right to reopen unrelated parts of an assessment. The opinion does not announce a novel precedent beyond that statutory interpretation and confines its ruling to the construction and application of section 34 on the facts presented.
Other Information from the Opinion
Costs: The assessees were ordered to pay the costs of the reference.
Concurring Judges: Ghose, J. and Buckland, J. agreed with Rankin, C.J.
Advocates: Advocate for assessee — Bimalchandra Das Gupta; Advocate for Income-tax Department — Radhabinode Pal.
Rankin, C.J:— The assessees are a Hindu undivided family and for the year 1926-1927 an assessment to income-tax was made upon them under section 23, clause (4) upon the footing that they had made default in rendering a return of income and submitting accounts. The Income-tax Officer, making the assessment to the best of his judgment, assessed upon a total income of Rs. 17,950 under the following heads: Money-lending business, Rs. 11,155, property, Rs. 1,795, other sources, Rs. 5,000, making in all Rs. 17,950. In connection with the assessment for the next year, namely, 1927-1928, the assessees produced certain accounts, from which the Income-tax Officer was of opinion that, in the previous year, income under the heads business and property had partially escaped assessment. Accordingly, under section 34 of the Act, he issued a notice stating, that he had reason to believe that their income from money-lending and house property chargeable to income-tax in the year ending 31st March, 1927, had partially escaped assessment and that he proposed to assess the income that had escaped assessment and requiring the assessees to deliver a return of their income from all sources chargeable to income-tax during the said year. In compliance with this demand the assessees filed a return, showing that their income chargeable in the said year was: (a) from money-lending business, Rs. 28,287-11; (b) from house property, Rs. 1,365; (c) from other sources, Rs. 281; making a total of Rs. 29,933-11. Upon the basis of this return, and, after an examination of the accounts, the Income-tax Officer reassessed the petitioners as follows:—
Business, Rs. 28,787; property, Rs. 3,071; other sources, Rs. 5,000 as originally assessed, making a total of Rs. 36,858. It will be seen, therefore, that, as regards money-lending business, the Income-tax Officer has raised the assessment from Rs. 11,155 to Rs. 28,787; and, as regards property, from Rs. 1,795 to Rs. 3,071.
Upon the present reference, the decision of the Income-tax Officer is not challenged as regards these items. What is contended by the assessees is that the Income-tax Officer was wrong in thinking himself entitled to repeat the original assessment under the heading “other sources” at the figure 5,000. The contention which they seek to raise is that the Income-tax Officer, acting originally to the best of his judgment under section 23, clause (4), assessed them under the head “other sources” at a figure which was much too high; that he had wrongly assumed that a certain portion of their collections from their zemmdâries was chargeable to income-tax, whereas in fact a much smaller portion was so chargeable, a great bulk of this revenue being agricultural.
The Income-tax authorities have held that this contention cannot be raised in the present proceedings under section 34; that these proceedings were for the purpose of assessing income from money-lending-business and house property, which had partially escaped assessment; that the question whether the assessees' collections from their zemindâries are or are not, to the extent claimed, agricultural income, has nothing to do with the question whether the original assessment was too low in respect of their money-lending business or their property, i.e, buildings or lands appurtenant thereto (cf. section 9).
The question which has been referred to us is stated as follows:—
When an assessment, made under section 23(4) of the Act, is reopened under section 34, by reason of the income from certain specified heads having been assessed at too low a figure, and proceedings are taken for the purpose of increasing the assessment, is it open to the assessee to show that his income under other heads had been assessed at the original assessment at too high a figure and that such assessment was unwarranted by law?
The Commissioner of Income-tax is of opinion that section 34 provides for the assessment to income-tax of profits or gains which have escaped assessment in any year or which have been assessed at too low a rate; that it gives no general powers of revision to the Income-tax Officer and that the Income-tax Officer cannot reopen the assessment of the income, profits or gains on an assessee from any source in respect of which he has no reason to believe that the assessee has been under-assessed. In his view, it appears to be the intention of the Act that general powers of revision should only be exercised by the Commissioner acting under section 33 and that the powers of the Income-tax Officer under sections 34 and 35 are strictly limited by the terms of the sections themselves.
Mr. Gupta, for the assessees, has contended that section 34 says nothing about heads of income or sources of income. Accordingly, he contends that one has to look at the total assessment before one can decide whether any income has escaped assessment. While not disputing that steps taken under section 34 cannot give rise to a right in the assessee to make a claim for a refund and that the Income-tax authorities may at any time abandon the proceedings under this section, he contends that such proceedings entitle the assessee to show that, while income under one head may have escaped assessment, income under another head had been over-assessed—in other words, that the whole assessment may be reopened at the option of the assessee, who may show what the real truth as to his total income is.
This controversy must be determined, if possible, upon the words of the section which are as follows:—
If for any reason income, profits or gains chargeable to income-tax has escaped assessment in any year, or has been assessed at too low a rate, the Income-tax Officer may, at any time within one year of the end of that year, serve on the person liable to pay tax on such income, profits or gains, or, in the case of a company, on the principal officer thereof, a notice containing; all or any of the requirements which may be included in a notice under sub-section (2) of section 22, and may proceed to assess or reassess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section:
Provided that the tax shall be charged at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be.
The section begins by contemplating a case in which income, profits or gains has escaped assessment and it says that the Income-tax Officer may serve a notice upon the person liable to pay tax on such income. The notice may contain all or any of the requirements which may be included in a notice under section 22(2). The ultimate step is that the Income-tax Officer may proceed to assess such income. The words which have reference to a case in which income has been assessed at too low a rate may, for the present purposes, be disregarded, as they refer to a separate type of case. Broadly speaking, as the section is expressed, it deals with income which has escaped assessment and it provides how the Income-tax Officer may proceed to assess it.
In the present case, the assessees' income from their business is found to have been Rs. 28,787, of which all but Rs. 11,155 has escaped assessment; and their income from property is found to have been Rs. 3,071, of which the excess over Rs. 1,795 has escaped assessment. I do not think that it can be said in such a case as this that the sums which represent the difference, i.e, Rs. 17,632 and Rs. 1,276 are not income which has escaped assessment because the assessees have been charged too much in resect of the zemindâri collections. If the question of the zemindâri collections was in any way inter-mixed with the question of the profits in the money-lending business, or the question of the assessees' property within the meaning of section 9 of the Act, the mere circumstance that it falls under a different head or is to be regarded different source would not, in my opinion, exclude it from consideration. It is not always clear whether a particular income should be entered under one head or another. I know of no limits which can be laid down so as to prejudice the question whether any particular receipts have or have not escaped assessment and I am not prepared to say that it is never open to an assessee to show, for this purpose, that his income under one head must be reduced if his income under another head is to be enhanced. In the, case before us, however, it appears to be clear enough that the extent to which the zemindâri collections are exempt from income-tax as being agricultural income is not affected by, and has no bearing upon, the question of the profits of the business of money-lending or the question of the annual value of the assessees' buildings and land appurtenant thereto of which they are the owners. In any event, the question which has been referred to us and argued before us assumes this.
On this footing I am unable to say that the language of section 34 points to an intention to give to the assessee a right to reopen the whole assessment before being rendered liable to further tax. It is not for the court to determine whether the administrative inconvenience entailed by such a right would be much or little, or whether it would afford any sufficient reason for refusing to the assessee a right to reopen the whole matter. Nor is it for the court to consider whether there is any real injustice or inconvenience in refusing this right to an assessee who has failed to make a return. Such considerations are questions of policy and debatable as such. As a matter of the true construction of this section, it appears to me that if the legislature had meant to say that if in any case it appears to the Income-tax Officer that an assessee has been assessed upon too low a figure or at too low a rate, the Income-tax Officer may issue a fresh notice under section 22(2) and may proceed to reassess such assessee afresh, the language employed would have been noticeably different from that which we find in the present section.
It is clear that the initial duty of the Income-tax Officer is merely to assess the income which has escaped. If this be right, then I think that it would require express words to confer on the assessee a right to reopen other and unconnected matters. It is true that there is no express reference in the section to sources or heads of income. But these will usually come into the question in favour of the assessee since the assessment order will usually assess him at a lump sum under each head and in any case in which such an assessment has been made in default of a return of income or of production of accounts the assessee will thus be able to contest the whole assessment made under that head if it is afterwards said to be insufficient.
It appears to me, therefore, that the question which has been referred to us must be answered against the assessees, but I am not altogether satisfied with the form in which it is expressed. In my opinion, it is always open, under section 34, to an assessee to show in any way he can that the income, profits or gains alleged to have escaped assessment have not in truth and in fact escaped assessment, and for this purpose it is not true that income, profits or gains have necessarily escaped assessment, because they have not been assessed under the right head. But if it is once shown that income has escaped assessment, the assessee cannot, under section 34, resist proceedings to assess it merely by showing that other income, profits or gains have been assessed at too high a figure.
The assessees must pay the cost of this reference.
Ghose, J.:— I agree.
Buckland, J.:— I agree.
Advocate for assessee: Bimalchandra Das Gupta.
Advocate for Income-tax Department: Radhabinode Pal.
S.M
Reference answered in the negative.
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