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Sadaram Puranchand, In Re

Calcutta High Court
Jul 21, 1931
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Judgment Summary — Rankin, C.J. (with Pearson, J. and S.K. Ghose, J. concurring)

Factual and Procedural Background

The opinion concerns assessment for the year of assessment 1929–1930; the year of account was the Ramnavami year 1985. The taxpayers ("the assessees") were an unregistered firm with principal place of business at Calcutta and branches at Cawnpore and three branches at Bhagalpur.

On 26 July 1929 the Income-tax Officer (Calcutta) issued a notice under Section 22(2) of the Income-tax Act requiring the assessees to furnish a return by 6 September. The assessees sought extensions in September (granted to 20 October) and again in October (petition rejected on 25 October), after which they were in default of the original return deadline. Section 22(3) entitled them to furnish a return at any time before assessment and for any such return to be deemed made in due time.

On 15 November a notice under Section 22(4) required production of books of account for Ramnavami 1985 on 16 December. The assessees filed a return on 16 December declaring an income of Rs. 18,000 and stating that "The accounts are under adjustment and will be completed in a month's time." On the same day the Income-tax Officer ordered issuance of notices under Ss. 23(2) and 22(4) fixing 19 December at 11:30 a.m. as the time for production of evidence and books.

A combined notice issued on 17 December (received by the assessees at 3 p.m. on 18 December) called for attendance and production of evidence and books on 19 December. The assessees, appearing by pleader on 19 December, petitioned for another month's time, explaining that branch accounts were at the branches and head office accounts were at their native place for settlement of disputed accounts. The Income-tax Officer refused further time, stating "no time can be allowed after submission of return for which the party already got enough time," proceeded to assess the assessees at Rs. 3,55,000 and the case was brought before this Court by rule calling on the Commissioner to state a case.

Legal Issues Presented

  1. Whether the Income-tax Officer was entitled to make an assessment under Section 23, sub‑section (4) by reason of the petitioners' failure on 19 December to comply with the notice of 17 December calling upon them to produce their books of account and to adduce evidence in support of the return dated 16 December.

Arguments of the Parties

Assessees' Positions

  • Their return of 16 December showed income of Rs. 18,000 and included an explanatory note that "The accounts are under adjustment and will be completed in a month's time."
  • They petitioned for extensions on the ground that accounts from their mufassil (branch) offices had not yet been received and that there were discrepancies in branch trial balances preventing finalization.
  • At the hearing on 19 December they asked for another month's time "to enable the petitioners to produce conclusive evidence of their previous year's income" and stated that branch accounts were at the branches and head office accounts were at their native place for settlement of disputed accounts.

Income-tax Officer / Commissioner Positions

  • The Income-tax Officer relied on prior notices (including the notice of 15 November under S. 22(4) calling for books on 16 December) and took the view that "no time can be allowed after submission of return for which the party already got enough time."
  • The Income-tax Officer issued combined notices under Ss. 23(2) and 22(4) and, upon the assessees' failure to produce books and evidence on 19 December, proceeded to assess in default under S. 23(4) at Rs. 3,55,000.
  • The Commissioner, in stating a case, relied on reports from the branch Income-tax Officers and the assessees' own petitions to conclude that the books of both head office and branches were in Calcutta from October to December and disbelieved the allegation that the Calcutta books had been sent to Rajputana for collection.
  • From those facts the Commissioner found the assessees could have produced the books on 16 and 19 December and inferred they preferred to see what assessment would be in the absence of accounts before producing them.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

Rankin, C.J. accepted the Commissioner's factual finding that the books of both the head office and branches were in Calcutta from October until December and accepted adverse inferences about the assessees' conduct. Despite that, the Judge turned to the legal question whether the Income-tax Officer took proper and reasonable steps such as to justify an assessment in default under S. 23(4).

The Court's reasoning proceeded in these principal steps:

  1. Identification of the nature of the defaults relied upon: the Income-tax Officer's order cited "default under Ss. 23(2) and 22(4)." The Court noted that the assessees had filed a return on 16 December which was a return and was accepted as such; therefore the default relied on was not failure to submit a return.
  2. Application of Section 22(3): because the return was made before assessment, it had to be treated as a return made in due time under S. 22(3). That statutory deeming meant the return could not be disregarded without giving the assessees a reasonable opportunity to produce evidence in support of it.
  3. Assessment of what "reasonable opportunity" required: the Court emphasized that assessees were entitled not merely to time to collect books but also to time to produce supporting or supplementary evidence. The Court questioned whether a notice received at 3 p.m. on 18 December requiring production of evidence the next morning (19 December) afforded reasonable opportunity to support a return covering a head office and four mufassil branches.
  4. Legal conclusion on reasonableness as matter of law: while the reasonableness of time is generally a question of fact, the Court held that on the facts here the time allowed was so short that as a matter of law it could not be considered reasonable. Absent very special facts, such short notice was unreasonable for the scale of production required.
  5. Consideration of the counter-argument: the Court acknowledged that if an assessee actually has books and refuses to produce them, an assessment in default under S. 23(4) can be justified. However, the Court rejected the notion that a prior failure to comply with a notice under S. 22(4) (issued before the return) should automatically deprive an assessee of the statutory right to have a subsequently filed return properly inquired into and supported by evidence.
  6. Rejection of the Income-tax Officer's broad principle: the Court found the Income-tax Officer's maxim ("no time can be allowed after submission of return for which the party already got enough time") too broad. The combined notices issued on 17 December required books and evidence to be produced together; because the time afforded was unreasonably short, the assessees could not be held to have been in default for the purposes of making an assessment in default on 19 December.

On the footing that the 16 December return was a valid return, the Court concluded that the 17 December notice did not entitle the Income-tax Officer to make an assessment in default on 19 December.

Holding and Implications

The assessment made under Section 23, sub-section (4) on 19th December 1929 was held to be invalid.

Direct consequences

  • The Court answered the posed question in favour of the assessees and declared the assessment invalid.
  • The assessees were awarded their costs.

Broader implications

The opinion emphasizes that notices under Ss. 23(2) and 22(4) must be given so as to afford a reasonable opportunity to an assessee to comply, and that an assessment in default is a serious step that must not be founded on an unreasonably short period for compliance. The opinion itself does not elaborate or claim to establish any broader precedent beyond the application of those principles to the facts of this case.

V.B/R.K
Show all summary ...

Rankin, C.J:— The rule issued in this case has reference to the year of assessment, 1929-1930 and the year of account in the case of these assessees was the Ramnavami year 1985. The assessees are an unregistered firm whose principal place of business is Calcutta but who have a branch in Cawnpore and three branches at Bhagalpur.

2. On 26th July 1929, the Income-tax Officer, Calcutta, issued a notice under Section 22(2) of the Income-tax Act, requiring the assessees to furnish by 6th September a return of their total income for the previous year. In September the assessees put in a petition to the effect that the accounts from their mufassil branches had not as yet been received and were given time up till 20th October to submit their return. In October they filed another petition asking for further time on the ground that their accounts had not yet been adjusted by reason of some discrepancies in the trial balance of their branch accounts. This petition was on 25th October rejected so that thereafter the assessees were in default in respect of their return. They had however the right given to them by S. 22(3), namely, that they could furnish their return at any time before the assessment was made

“and any return so made shall be deemed to be a return made in due time under this section.”

3. On 15th November notice was given to the assessees under S. 22(4) requiring them to produce their books of account for Ramnavami 1985 on 16th December. The assessees, on 16th December, filed a return showing an income in the year of account of Rs. 18,000, with an explanatory note stating:

“The accounts are under adjustment and will be completed in a month's time.”

4. The question before us is as to the correctness of the action taken by the Income-tax Officer upon receipt of this return. On 16th December he recorded an order:

“Issue notice under Ss. 23(2) and 22(4) for evidence and accounts of the Head Office as well as all the branches and fix 19th December 1929 at 11-30 a.m”

5. On the following day, the 17th, a combined notice under Ss. 23(2) and 22(4) was issued accordingly that is to say, the assessees were called upon (1) to attend at the Income-tax Officer's office at 11-30 a.m on the 19th or to produce or cause to be produced then and there any evidence on which they might rely in support of their return; and (2) at that time and place to produce or cause to be produced their books of account for the Head Office and the branches. This notice, though issued on the 17th, was not received by the assessees until 3 o'clock in the afternoon of the 18th. On the following day the assessees attended on the Income-tax Officer by their pleader and presented a petition asking for another month's time:

“to enable the petitioners to produce conclusive evidence of their previous year's income.”

6. This petition contained statements to the effect that the branch accounts were lying at the branches and that the return had been submitted

“on obtaining instructions from branches and mufassil about the position of affairs.”

7. It stated also that the Head Office accounts were at the petitioners' native place for settlement of certain disputed accounts. The Income-tax Officer refused to give any further time saying that

“no time can be allowed after submission of return for which the party already got enough time.”

8. He proceeded to make an assessment and assessed the assessees on the sum of Rs. 3,55,000. The rule issued by this Court calls upon the Commissioner of Income-tax to state a case on the following question:

“Whether the Income-tax Officer was entitled to make an assesament under S. 23, sub-S. (i) by reason of the petitioners failing on 19th December last to comply with the notice of the 17th December last calling upon them to produce their books of account and adduce evidence in support of the return dated 16th December last.”

9. From certain reports received from the Income-tax Officers at Cawnpore Bhagalpurand Bhagalpur to the effect that the assessees' representatives were in August and September stating that the branch accounts were in Calcutta, and from the petitions presented to the Income-tax Officer in Calcutta, on 6th September and 19th October, the Commissioner of Income-tax draws the conclusion that from 19th October to 19th December all books of account were in Calcutta. He disbelieves the allegation that the Calcutta books had been sent to Rajputana for collection of out standings.

10. His finding is that the assessees could have produced their books of account on 16th December 1929, and 19th December 1929 if they had wished; and he further infers and finds that they preferred to sea what sort of an assessment would be made on them in the absence of accounts before producing them.

11. It is for the Commissioner, in stating a case, to find the facts, and I accept the finding that the books both of the Head Office and branches were in Calcutta from October till December. This means that the assessees are shifty people, full of excuses and not minded to be either expeditious or straightforward. Even so however it is very necessary to see whether the Income-tax Officer had taken proper and reasonable steps to entitle him to make an assessment in default under S. 23(4). The defaults relied upon by the Income-tax Officer in his order of 19th December was “default under Ss. 23(2) and 22(4).” Whatever criticism may be passed upon the return filed on 16th December, it was a return; it was accepted as such; a notice under S. 23(2) was issued upon it and the default relied upon by the Income-tax Officer was not default in submitting a return. The assessee's return therefore having been made before assessment had to be treated as a return made in due time: of S. 22(3). Before such a return could be disregarded, the assessees were entitled to a reasonable opportunity to produce any evidence upon which they might rely in support of the return. It is quite probable that their accounts were not in apple-pie order and in the return itself the assessees had stated that the accounts were still under adjustment. They were entitled to a reasonable opportunity not merely to collect and produce the books but to support or supplement their books by any other evidence on which they might rely. Now whether a notice received at 3 p.m on the 18th requiring them to produce any evidence on which they might rely in support of their return on the 19th is a reasonable notice affording the assessees proper, opportunity to comply with its terms is not, I think, a mere question of fact. Whether a given time is a reasonable time is no doubt a question of fact; but on the border line the question arises whether the time is not so short that it cannot be reasonable. Save upon very special facts, the time allowed in the present case is unreasonably short, if it be considered as an opportunity to the assessees to support their return in respect of a Head Office and four mufassil branches. The Income-tax Officer proceeded expressly upon default under S. 23(2) as well as S. 22(4). I am prepared to hold as a matter of law that he did not give to the assessees such reasonable opportunity as the Act requires to produce their evidence in support of their return. It is said however that the Income-tax Officer was entitled to make an assessment in default by reason of the assessee's failure to comply with the requirement made under S. 22(4) that they should produce their books. The principle upon which he acted was that no-time can be allowed after submission of return for which the party had already got enough time. The contention is that although the return filed on 16th of December must be deemed to have been made in due time under S. 22, never the less, as a notice had been issued on 15th November calling for the books to be produced on 16th December the second notice, received on 18th, made the assessees liable to be assessed independently of any evidence in support of their return after their failure to produce the books on the morning of the 19th. Now, I quite agree that if an assessee has books and does not produce them, he can be assessed in default under S. 23(4), whatever other evidence he might choose to put forward in support of his return. Other evidence, in the absence of the books, can hardly satisfy a reasonable man. But I do not think that it was ever intended by the Act that failure to produce books, prior to the filing of a return, should deprive the assessee of his right to have the return duly and properly inquired into. A return which by S. 22 is to be deemed to be a return made in due time cannot be treated as still born because of a previous failure to comply with a notice under S. 22(4). The principle enunciated by the income-tax officer that

“no time can be allowed after submission of return for which the party already got enough time”

is I think too broad. In fact on 17th December the Income-tax Officer very properly issued a second notice for the books requiring them to be produced at the same time as any other evidence on which the assessees might rely. The two things in any ordinary case would go together and be done at the same time; and if, as I think, the time given was much too short to enable the assessees to deal with the matter properly, I do not think that they can be held liable to an assessment on the basis of default by reason merely of a finding that the books were in Calcutta. The assessees may perhaps deserve little sympathy, but an assessment in default is a very serious thing; and unless it is open to the Court to insist that notices under Ss. 23(2) and 22(4) are given so as to afford reasonable opportunity to an assessee to comply with their requirements the honest and diligent tax-payer will have no security for fair treatment and no remedy in the absence of fair treatment. Assessees who are not diligent or straightforward may no doubt be treated very strictly, but in such cases it is a plain and unnecessary mistake to order them to comply with the statutory requirements in an unreasonable time and to base an assessment in default upon their noncompliance. On the footing that the return filed on 16th December was a good return, I cannot hold that the notice dated 17th December entitled the Income tax Officer to make an assessment in default upon the 19th. I would answer the question put to us in favour of the assessees and hold that the assessment made under S. 23, sub-S. (4) on 19th December is invalid.

12. The assessees must have their costs.

Pearson, J.:— I agree.

S.K Ghose, J.:— I agree.

V.B/R.K

13. Question answered.