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  • Gentle, JJ.
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Smart Summary

Structured Summary of the Opinion delivered by McNair, J.

Factual and Procedural Background

The Income-tax Appellate Tribunal referred two questions of law to the Court. The assessees are a Hindu undivided family carrying on business as money-lenders. For the year 1939–1940 the Income-tax Officer served notice under Section 22(2) and received a return that was signed in Hindi by a person described as the ammuktear rather than by the karta. The officer initially accepted the return and issued a notice under S. 23(2) for evidence. During the S. 23(2) proceedings the officer suspected omission of certain interest items and on 1 August 1940 issued a show-cause notice under S. 28(1)(c) proposing a penalty. The assessees asserted that the return was invalid because it was not signed by the karta; the officer then treated the return as invalid and assessed them under S. 23(4) (assessment where no return has been made). The assessees argued the assessment should have been under S. 23(3) (assessment on a returned figure) because the return had at one point been accepted as valid. The Appellate Assistant Commissioner upheld the S. 23(4) assessment. The Appellate Tribunal held the assessees could not raise the validity of the assessment on appeal because they had not invoked the re-opening procedure under S. 27. The assessees did not adopt S. 27 and contended that they could nevertheless challenge the assessment by way of appeal under the amended S. 30.

Legal Issues Presented

  1. Whether, in an appeal under S. 33(1) from a decision in an appeal under S. 30(1), the validity of an assessment under S. 23(4) can be challenged when no proceeding under S. 27 of the Act was taken to cancel the order under S. 23(4).
  2. Whether, on the facts of the case, the lands taken over by the assessee in satisfaction of a debt should be independently valued and such valuation should be considered for the purpose of arriving at the figure of income.

Arguments of the Parties

Assessees' Arguments

  • The assessees contended that they could challenge the validity of the assessment under S. 23(4) by way of appeal, notwithstanding that they had not proceeded under S. 27 to re-open the assessment.
  • They relied on the amendment of S. 30 which removed a prior proviso that no appeal shall lie in respect of an assessment made under S. 23(4); they argued this deletion permits an appeal on the validity of that assessment.
  • By analogy to the Code of Civil Procedure (CPC) they pointed to the CPC's separate procedure for setting aside ex parte decrees (O. 9, R. 13) and to S. 96(2) allowing appeals from original decrees passed ex parte, suggesting that appeal courts sometimes examine matters that would otherwise be dealt with by separate reopening procedures; they suggested a similar flexibility should apply under the Income-tax Act.
  • On the valuation point, they argued that the lands received in satisfaction of the debt were valued arbitrarily in their books and that the Income-tax Officer should have made independent enquiries (or allowed evidence) to ascertain the true value rather than accept the book figures.
  • They cited a Rangoon High Court decision (reported as 2 I.T.R 4171) and judicial remarks indicating that money-lenders may be compelled to accept land at arbitrary or fictitious figures and so should be able to prove that book valuations bear no relation to real value.

Revenue / Appellate Authorities' Position (as reflected in the record)

  • The Appellate Assistant Commissioner held the assessment under S. 23(4) was proper because the return had been shown to be invalid (as the assessees had themselves claimed), and thus the officer was entitled to assess as if no return had been made.
  • The Appellate Tribunal held that the assessees could not raise the question of the validity of the S. 23(4) assessment in appeal because they had not utilized the procedure under S. 27 (the statutory procedure for re-opening and cancelling assessments), and therefore the appeal route was not open to contest validity.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Rangoon High Court decision, cited as "2 I.T.R 4171" Illustrates that money-lenders may be compelled to take over land at arbitrary or fictitious figures; supports proposition that recorded book values may not reflect true market value and can be contested. The Court distinguished the facts: in the Rangoon case the method of recording the transaction differed materially. The Court held that the Rangoon decision did not control the present case because here the assessees had definitively valued each property in their books, making the officer's acceptance of those values appropriate in a summary assessment.
12 Pat. 3182 (Board decision concerning the Maharajadhiraj of Darbhanga and the Kajora Collieries) Holds that where an assessee accepts transfer of property in part satisfaction of liability on the footing that it was valued at a stated sum, the transaction can be treated as the equivalent of receipt of money to that value; the value stated may be treated as the measure for tax purposes. The Court relied on the Board's approach (and Lord Macmillan's reasoning) to support the view that where the assessee has accepted land as equivalent to a specified sum and recorded that valuation, the Income-tax Officer conducting a summary assessment may reasonably adopt the assessee's recorded valuation rather than undertake further enquiries.

Court's Reasoning and Analysis

The Court began by correcting the framing of the first question as originally referred and proceeded to analyze the statutory scheme of the Income-tax Act, focusing on S. 30 (as amended), S. 27 and S. 31(3).

On the procedural question (first question), the Court examined the scope of S. 30 as amended. It observed that the amendment removed an earlier proviso that had expressly prevented appeals in respect of assessments under S. 23(4), but that the current language of S. 30 affords the assessee a right to object to the "amount" of income assessed under S. 23 or S. 27 and to object to the amount of tax determined under those sections, or to a refusal to make a fresh assessment under S. 27. The Court interpreted the insertion of the word "amount" qualifying S. 23 and S. 27 as a clear legislative indication that the right of appeal under S. 30, insofar as those sections are concerned, is confined to challenges to the quantum (the amount) of assessment or tax and not to collateral attacks on the validity of the form of assessment made (i.e., whether the assessment should have been made under S. 23(3) rather than S. 23(4) without first invoking S. 27).

The Court considered analogies drawn to the Code of Civil Procedure (procedures for setting aside ex parte decrees) and to the inherent powers of courts (S. 151), but concluded that provisions in the CPC which permit broader remedial approaches (such as O. 9, R. 13 and S. 105 of the CPC) are not mirrored in the Income-tax Act and therefore offer little assistance in construing the tax statute. The Court emphasized that the Income-tax Act itself contains procedures (notably S. 27 and the powers under S. 31(3)) that indicate how assessments made under S. 23 and S. 27 are to be dealt with on appeal and on reopening.

The Court read S. 31(3) as supporting the view that the Appellate Assistant Commissioner is to deal with orders made under S. 27 in the particular manner specified by the Act (for example, by directing fresh enquiries), and that subsections (a) and (b) of S. 31(3) are inappropriate to cases specifically covered by the S. 27 provisions. On that statutory analysis the Court concluded that the first question must be answered in the negative: the assessees cannot, by way of appeal under S. 30/S. 33(1), attack the validity of an assessment under S. 23(4) without first pursuing the statutory re-opening mechanism under S. 27.

On the second question (valuation of lands taken in satisfaction of debt), the Court examined the facts: the debtor owed about Rs. 41,542 which, with interest, amounted to Rs. 60,382; the parties agreed transfer of three properties and outstanding rents for Rs. 60,000, with Rs. 382 written off. The assessees' books recorded separate valuations for the three properties totaling Rs. 50,000 and arrears of rent at Rs. 10,000. The assessees contended these book values were arbitrary and unreliable and that the Income-tax Officer should have made independent enquiries or allowed evidence to prove true value.

The Court noted the assessees' reliance on the Rangoon case but found that the facts there differed materially: in the Rangoon decision the manner of recording the transaction did not reflect a definitive acceptance of land as equivalent to a stated sum, whereas in the present case the assessees had specifically valued each property in their books. The Court considered the Board decision in 12 Pat. 3182 (Darbhanga) and Lord Macmillan's reasoning that the correct approach is to examine the nature of the transaction; where the assessee agreed to accept transfer on the footing of a stated valuation, that valuation may represent the equivalent sum for tax purposes.

Because this was a summary assessment made to the best of the officer's judgment and because the assessees themselves had entered definite valuations in their accounts, the Court held it was reasonable for the Income-tax Officer to adopt those book values without undertaking further enquiries. The assessees' complaint that they were not allowed to give evidence as to value was held to have no weight. Consequently the Court answered the second question in the negative.

A concurring short observation by Gentle, J. emphasized that the appeal concerning acquisition of the properties and the income derived therefrom was an appeal as to amount and fell within the provisions of Section 80(1) of the Income-tax Act (as stated in the opinion).

Holding and Implications

Holding: Both questions were answered in the negative.

More specifically, the Court held that:

  • The assessees could not challenge the validity of an assessment made under S. 23(4) by way of an appeal under S. 30 (and in the appellate route described) without first having used the statutory procedure under S. 27 to have the assessment re-opened or cancelled; the right of appeal under S. 30 as amended is, in relation to S. 23 and S. 27, confined to objections about the "amount" (quantum) of income or tax.
  • On the facts, where the assessees had accepted properties in satisfaction of debt and had recorded specific valuations in their books, the Income-tax Officer conducting a summary assessment was justified in accepting those book valuations and was not required to undertake independent valuation enquiries; the assessees' contention that they were denied the opportunity to give evidence of value was held to be without weight.

Direct consequences and costs:

  • The assessment under S. 23(4) must stand (subject to the statutory mechanisms for re-opening under S. 27 which the assessees had not invoked).
  • The assessees were ordered to pay the costs assessed by the Court: Rs. 200 plus the costs of the paper book assessed at Rs. 50.

The opinion confines itself to the statutory interpretation and the facts of the case; it does not proclaim any broader rule beyond the statutory interpretative position adopted nor does it purport to set out additional remedial mechanisms beyond those contained in the Income-tax Act as discussed in the opinion.

Show full summary ...

    Naba Kumar Singh Dudhoria Assessee v. Commissioner Of Income-Tax, Bengal

    The Judgment of the Court was delivered by

    McNair, J.:— Two questions of law have been referred to this Court by the Income-tax Appellate Tribunal. Question (1):

    “Whether in an appeal under S. 30(1) the validity of an assessment under S. 23(4) can be challenged when no proceeding under S. 27 of the Act was taken to cancel the order under S. 23(4).”

    2. It appeared that the question had been framed by mistake leaving out the words “under S. 33(1) from a decision in an appeal” after the words with which the question starts, namely, “whether in an appeal,” and the question as re-framed after consultation and agreement with the advocates appearing now reads, “whether in an appeal under S. 33(1) from a decision in an appeal under S. 30(1)” and so on as originally framed. The second question is,

    “Whether on the facts of the case the lands taken over by the assessee in satisfaction of a debt should be independently valued and such valuation should be considered for the purpose of arriving at the figure of income.”

    3. The assessees are a Hindu undivided family carrying on business as money-lenders. On 10th June 1939, the Income-tax Officer served them with a notice under Section 22(2) of the Income-tax Act, calling upon them to make a return of income for the year 1939–1940. A return was submitted but was signed in Hindi by a person who is said to be the ammuktear of the assessees. Apparently the Income-tax Officer did not notice that the signature was not the signature of the assessees and he accepted the return and issued a notice under S. 23(2) calling for evidence in support of the return. During the proceedings initiated by S. 23(2) the Income-tax Officer had reason to believe that certain items of interest had not been disclosed in the return. He thereupon issued a notice on 1st August 1940 calling upon the assessees to show cause why a penalty should not be imposed under S. 28(1)(c) of the Act. On receipt of that notice the assessees through their pleader informed the Income-tax Officer that the tax proceedings were misconceived inasmuch as the return was invalid since it had not been signed by the karta of the Hindu family. The Income-tax Officer on scrutinising the return accepted the view put forward by the assesssees and treated the return as invalid. He then proceeded to assess them under S. 23(4) on the basis that no return had been made. The assessees contended before the Appellate Assistant Commissioner of Income-tax that the assessment should have been made under S. 23(3) on the ground that the Income-tax Officer had in the first instance accepted the return as a valid return. The Appellate Assistant Commissioner, however, upheld the assessment under S. 23(4) on the ground that the return was invalid as the assessees had themselves claimed, and he held further that the Income-tax Officer was therefore entitled to make the assessment under S. 23(4). The appellate Tribunal held that the assessees could not raise this question in appeal inasmuch as they had not adopted the procedure under S. 27 of the Act, which is provided by the Act for having the assessment re-opened. It is admitted that the assessees did not adopt the procedure under S. 27 but it is contended before this Court that the assessees can nevertheless question the validity of the assessment by way of appeal.

    4. It is further contended that although machinery is provided by S. 27 for challenging the assessment there is a further and alternate remedy open to the assessee under Section 30 of the Income-tax Act as now amended. Prior to amendment there was a specific proviso under S. 30 that no appeal shall lie in respect of an assessment made under S. 23(4) or under that sub-section read with S. 27. That proviso has now been deleted and S. 30 provides, so far as is material, in sub-s. (1) that any assessee objecting to the amount of income assessed under S. 23 or S. 27 or the amount of tax determined under S. 23 or S. 27 or denying his liability to be assessed under this Act or objecting to a refusal of an Income-tax Officer to make a fresh assessment under S. 27 or objecting to penalties and to other matters which are specifically set out in the section, may appeal to the appellate Assistant Commissioner against the assessment or against such refusal or order.

    5. The learned advocate on behalf of the assessee has called in aid the procedure which is given under the Code of Civil Procedure when a decree has been passed ex parte, and although he appreciates the difficulty of attempting to construe one Act by reference to another he suggests that the analogy from the Code may be helpful. The Code under S. 96(2) provides that an appeal may lie from an original decree passed ex parte and O. 9, R. 13 of the Code contains provisions for setting aside ex parte decrees under which the defendant must satisfy the Court that the summons was not duly served or that he was prevented by sufficient cause from appearing when the suit was called on for hearing. Under O. 9, R. 13, the procedure is by an application to the Court for setting aside the decree which, as the learned advocate points out, is a form of procedure entirely separate from the procedure which is available by way of appeal. It is true that under the Code there is a procedure under O. 9, R. 13, and, although there has been some conflict amongst the Courts as to whether a Court of appeal may go into the question whether the decree should or should not have been passed ex parte, there are decisions to the effect that the Court of appeal is entitled not only to deal with the merits and the material on the record, but may further consider the questions which, if I may say so, would more properly arise on an application under O. 9, R. 13. But the Code of Civil Procedure contains the further provisions in S. 105 which provide that:

    “Save as otherwise expressly provided, no appeal shall lie from any order made by a Court in the exercise of its original or appellate jurisdiction; but, where a decree is appealed from, any error, defect or irregularity in any order, affecting the decision of the case, may be set forth as a ground of objection in the memorandum of appeal.”

    6. It has also been suggested that the Court has inherent powers of dealing with the question whether the ex parte decree was or was not properly made under S. 151. It is clear, therefore, that the Code of Civil Procedure contains provisions which are not present in the Income-tax Act and which may be said to give the Court very much wider powers when dealing with appeals from an ex parte decree. In my view little assistance can be gained from a reference to these provisions of the Code of Civil Procedure. Coming now to the provisions of the Income-tax Act, S. 30 gives the assessees the right to object to the amount of income assessed under S. 23 or S. 27. They may also object to the amount of tax determined under those sections and they may appeal if they object to the refusal of the Income-tax Officer to make a fresh assessment under S. 27. To that extent only has the proviso in the same section of the Act prior to the amendment been limited. What the assessees are apparently trying to do now as it appears to me is to raise an objection not merely to the amount of the assessment or to the amount of tax determined under any provision of S. 23, but to object to the validity of the assessment. Although S. 30 as amended grants them a right of objecting to the quantum of the assessment, it does not in my view give them the right to leave aside the machinery which has been provided by S. 27 and to come to the Court and ask that the Court should deal with it without having had the matter dealt with, as provided by the Act, by the income-tax authorities. It appears to me that on repealing the proviso in the old section the Legislature has expressly limited the manner in which appeals may be allowed against decisions under S. 23 or S. 27, and by inserting the words applicable to S. 23 or S. 27 with the word ‘amount’ they have definitely intended that the assessee's right of appeal under S. 30 should be limited as regards those sections to the quantum of the assessment or tax.

    7. Reference has also been made to Section 31 of the Income-tax Act. Section 31(3) provides that in disposing of an appeal the Appellate Assistant Commissioner may in the case of an order of assessment—(a) confirm, reduce or enhance or annul the assessment or (b) set aside the assessment and direct the Income-tax Officer to make a fresh assessment after making such further enquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct. Section 31 then provides that in the case of an order refusing to make a fresh assessment under S. 27 the Appellate Assistant Commissioner may confirm such order or cancel it and direct the Income-tax Officer to make a fresh assessment. Section 31 supports the contention that the Appellate Assistant Commissioner should deal with orders which had been made under S. 27 specifically. Sub-sections (a) and (b) of S. 31(3) are not appropriate to a case such as that which is now under consideration, which has been specifically provided for in sub-s. (c). The first question must, therefore, be answered in the negative. The second question, it is contended, does not arise if the first question is answered in the negative, because if there is no appeal the assessment as an assessment to the best of the judgment of the Income-tax Officer under S. 23(4) must stand. The matter has, however, been discussed on the merits, and I propose to deal with it shortly. The assessees are money-lenders. A lady named Sm. Bela Rani Chowdhurani borrowed moneys from the assessees which we may take it amount to the sum of Rs. 41,542. In the year of account with interest the loan amounted to Rs. 60,382. The debtor and the creditor came to an arrangement that the debtor should make over zemindary properties to the creditor along with the outstanding rents due from the tenants for the total sum of Rs. 60,000, and they decided further that the balance of Rs. 382 would be remitted or written off as a bad debt. In entering the transaction in their books the assessees have valued the three different properties separately, Krishnapur at Rs. 30,000, Ahiran at Rs. 16,000 and Durki at Rs. 4000 making a total of Rs. 50,000, and have assessed the arrears of rent at Rs. 10,000. It is contended that this arrangement was an arrangement between a debtor and a creditor for the convenience of the two parties and that it does not truly represent the actual value of the properties. It is contended further that the Income-tax Officer should not have accepted these figures as the true value but that he should have instituted an enquiry to ascertain from other sources what would be the true value of the lands. In support of this argument reference has been made to a decision of Rangoon High Court in 2 I.T.R 4171 and to the remarks by the learned Chief Justice, Sir Arthur Page, to the effect that money-lenders are compelled to take over lands from their debtors at what may be merely an arbitrary and fictitious figure and that the assessees may be in a position to prove that the figure at which the lands have been valued in their books of account bears no relation to the real value of the lands that have been transferred in satisfaction of the debt. That is true, but the facts here are entirely different, and the difference is brought out by Baguley J. in his judgment at p. 426 of the report. He points to the method which had been adopted there and says:

    “It is not as thought he (the assessee) had entered the acquisition of the land as equivalent to the receipt of a certain amount of money in a profit and loss account, or as though he had done anything else of that nature in which he definitely recognised the land as being the equivalent of a certain amount of money for purposes of calculating his profits.”

    8. That appears to me to be exactly what has been done in the present case. The assessees have definitely valued each property and the Income-tax Officer, particularly when he was making an assessment to the best of his judgment, would in my opinion be amply justified in taking the value which had been placed upon these properties by the assessees themselves as the true value. In 12 Pat. 3182 the Board had to consider a somewhat similar transaction which had been entered into by the Maharajadhiraj of Darbhanga who was there the assessee. Among the items which had been entered in the assessee's accounts was the Kajora Collieries, which had been valued at over seven lakhs of rupees. The Board held that the Kajora Collieries had been taken over as the equivalent of cash or moneys worth. At p. 339 of the report Lord Macmillan, who delivered the judgment of the Board, said:

    “In their Lordships' view the solution of the problem is to be found in a consideration of the nature of the particular transaction out of which it has arisen. The assessee agreed to accept the transfer of the colliery in part satisfaction of Kumar Ganesh Singh's liability to him on the footing that it was valued for Rs. 7,37,399.”

    9. In the same way in the present instance the assessee appears to me to have accepted the lands in question as the equivalent in value of Rs. 50,000. In any event this was a summary assessment, and in my opinion the Income-tax Officer was not bound to make any further enquiries into the circumstances under which the properties had been accepted since he had an entry showing the valuation placed upon the property by the assessees themselves. In my view the assessees' contention that they have suffered from not being allowed to give evidence as to the value of the properties has no weight. The second question must also be answered in the negative.

    Gentle, J.:— I agree and I desire to add one short observation with regard to the second question and the facts relating to it. The appeal, so far as it concerned the acquisition of the properties totalling the value as entered in the books of Rs. 60,000 and the amount of the income derived from the transaction and the amount of tax determined upon that income, was in my view a matter which was the subject of an appeal as to amount and comes expressly within the provisions of Section 80(1) of the Income-tax Act.

    10. By the Court.— The assessees must pay the costs which we assess at Rs. 200 plus the costs of the paper book assessed at Rs. 50.

    G.N

    11. Answer accordingly.

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    Naba Kumar Singh Dudhoria Assessee v. Commissioner Of Income-Tax, Bengal
    (Jan 14, 1944)