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Case Number

PRIVY COUNCIL APPEAL NO. 27 OF 1939

Attorney(S)

J. Millard TuckerK.C.W. Wallach

Judges

LORD JUSTICE GODDARDSIR CREORGE RANKINlord normandLORD THANKERTONLORD RUSSELL OF KILLOWEN

Acts

Kensington Income-tax Commissioners [1913] 3 KB 870 Section 52 of the Taxes Management Act, 1880 (now section 125 of the Income Tax Act, 1918)
British Income Tax Act to the Indian Income-tax Act,
SECTION 34 INDIAN INCOME TAX ACT
section 66 (1) the Indian Income-tax Act, 1922.
section 22 (2) read along with section 34,
section 6 of the Indian Income-tax
(Section 25 A and section 28
sub-section (2) of section 22
sections 22 (4) and 23 (2)
section 22.Section 34

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Smart Summary

Structured Summary of the Opinion (Lord Normand)

Factual and Procedural Background

This is an appeal by the Commissioner of Income-tax, Bengal, against a judgment of the High Court of Judicature at Fort-William in Bengal delivered on a reference under section 66(1) of the Indian Income-tax Act, 1922. The respondents are a registered partnership firm carrying on business in Calcutta.

For the year of assessment 1932-33 the Income-tax Officer served a notice under section 22(2) and the respondents returned a loss of Rs. 8,54,385. The Income-tax Officer accepted that return and on 23 December 1932 assessed the respondents' total income at nil for 1932-33.

In January 1934 the Income-tax Officer received information alleging manipulation of the account books and discrepancies between the cash book and bank pass books, with specific instances supplied. He made informal, ex parte enquiries and concluded there was a prima facie case that income chargeable to tax had escaped assessment. On 5 February 1934 he ordered that notice issue under section 22(2) read with section 34, and a notice dated 8 February 1934 was served, requiring a return of income assessable in the year ending 31 March 1933.

The respondents filed a new return on 22 March 1934 showing the same loss. Further notices under sections 22(4) and 23(2) were issued on 21 May 1934. The respondents applied to the High Court seeking to prevent the Income-tax Officer from proceeding with a new assessment, arguing, inter alia, that section 34 had been put into operation without giving them an opportunity to be heard. Proceedings were stayed and the High Court delivered a reference under section 66(1), framing the central question about the proper construction of section 34.

Legal Issues Presented

Whether, on a true construction of section 34 of the Indian Income-tax Act, 1922, it is open to the Income-tax Officer, when he has reason to believe from available materials that income chargeable to tax has escaped assessment, to initiate proceedings under section 34 on that prima facie satisfaction and at the same time afford the assessee opportunities to produce evidence during the proceedings; or whether section 34 contemplates that the fact of escapement must first be proved and definitely found and determined by an independent (quasi‑judicial) enquiry before the Income-tax Officer can assume jurisdiction to reopen the assessment under section 34.

Arguments of the Parties

Respondents' Arguments

The respondents' learned Counsel argued that section 34 should be construed so as to require a prior quasi‑judicial enquiry before the Income-tax Officer could exercise powers under the section. In support he relied on the argument that when a statute requires a final decision of fact by the Income-tax Officer, the usual statutory expressions are phrases such as "if he is satisfied" or "if it is found," and in such contexts other provisions commonly provide for the interested party to be heard.
It was suggested that section 34 should be read as if introduced by words like "If the Income-tax Officer is satisfied" or "If it is found," and that, by implication, the Income-tax Officer should be required to hold a quasi‑judicial enquiry in which the assessee is convened and given an opportunity to be heard before reopening an assessment.
At one point learned Counsel for the respondents also advanced the argument that the facts alleged did not bring the case within the scope of section 34; however, the reference was framed on the assumption that the case did fall within section 34 and thus raised the general constructional question.

Appellant's Arguments

The opinion does not contain a detailed account of the appellant's (Commissioner’s) specific arguments in the same form as the respondents' contentions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Rex v. Kensington Income-tax Commissioners [1913] 3 KB 870 (Divisional Court); reference also made to the Court of Appeal decision ((1914) 3 K.B. 429) and the observations of Pickford, L.J.	The Divisional Court (Lush, J.) observed that the statute contained no machinery enabling a surveyor to obtain the kind of legal evidence that would be necessary if a condition precedent required formal proof; the surveyor had no power to compel evidence or administer oaths, and therefore it was not tenable to read into the section a requirement that such evidence be obtained before jurisdiction arose.	Their Lordships relied on the general reasoning of Lush, J., to support the conclusion that section 34 of the Indian Act cannot be read to require a prior quasi‑judicial enquiry (because the Income-tax Officer is not given powers necessary to hold such an enquiry). The Court noted caution in applying British statutory decisions to the Indian Act but treated the reasoning as generally applicable.

Court's Reasoning and Analysis

The court undertook a textual and practical analysis of section 34 in the context of related provisions (sections 22 and 23) that prescribe the assessment machinery. The principal points of analysis, drawn from the opinion, are:

Section 34 is imperfectly and impersonally phrased and does not expressly state who must determine that income has escaped assessment or the procedure by which that determination must be reached. It is, however, undisputed that the Income-tax Officer must make the decision.
The court examined the statutory language used elsewhere in the Act. It noted that when only a prima facie satisfaction is required the statute uses phrases like "when it appears" or "if the Income-tax Officer has reason to believe"; by contrast, when the statute requires a conclusive decision by the Income-tax Officer, the language used is typically "if he is satisfied" or similar, and the statute elsewhere provides procedures for the party to be heard in such cases.
The court rejected the respondents' submission that section 34 should be read as if it required the Income-tax Officer to hold a quasi‑judicial enquiry before exercising the section's powers. The first reason was practical: the Income-tax Officer is not vested by section 34 with the powers necessary to conduct a quasi‑judicial enquiry (for example, powers to compel evidence or administer oaths), and it would be anomalous to read into the section a condition precedent that presupposes such powers.
The court relied on the reasoning in Rex v. Kensington Income-tax Commissioners, where Lush, J. pointed out the absence of statutory machinery for a surveyor to obtain compulsory evidence before jurisdiction arises. Although that decision was part of a British statutory context, the court considered Lush, J.'s reasoning generally applicable and apt to the respondents' contention.
A second, independent consideration was that section 34 expressly empowers the Income-tax Officer to proceed de novo under the notice procedure of section 22(2). That route leads to enquiries under section 23(2) and (3), where the assessee has a statutory right to appear and produce evidence. To require a prior quasi‑judicial enquiry before operating section 34 would produce duplication: two enquiries of the same kind, into the same matter, conducted by the same official, without any evident advantage to the parties.
In light of the textual ambiguity and the practical realities of the statutory scheme, the court applied the interpretive maxim favoring a workable construction ("ut res valeat potius quam pereat") and concluded that section 34 should be read as permitting the Income-tax Officer to initiate proceedings when, on the information available and in good faith, he considers he has good ground for believing that income has escaped assessment or been assessed too low.
Concluding from these points, the court held that the High Court's construction — requiring that the Income-tax Officer first hold a quasi‑judicial enquiry convening the assessee before deciding to operate section 34 — was too narrow and incorrect.

Holding and Implications

HOLDING: Their Lordships advised that the appeal should be allowed and that the order of the High Court should be set aside.

The core legal holding, emphasized, is:

It is sufficient under section 34 that the Income-tax Officer, on the information before him and acting in good faith, considers that he has good grounds for believing that the assessee's profits have escaped assessment or have been assessed at too low a rate; the section does not require a prior quasi‑judicial enquiry convening the assessee before proceedings under section 34 are initiated.

Implications (direct effect on the parties):

The notice sent to the respondents on 8 February 1934 was in form a competent preliminary to a new assessment under section 34.
The High Court's requirement that the Income-tax Officer hold a separate quasi‑judicial enquiry before invoking section 34 was disapproved and set aside.

The opinion explains the immediate practical consequence (the appeal allowed and the High Court order set aside). The text does not purport to state broader policy changes beyond the statutory construction and the reasoning provided.

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Commissioner of Income-tax v. Mahaliram Ramjidas

Lord Normand.—This is an appeal by the Commissioner of Income-tax, Bengal, against a judgment of the High Court of Judicature at Fort-William in Bengal delivered on a reference made under section 66 (1) the Indian Income-tax Act, 1922. The respondents are a registered partnership firm carrying on business in Calcutta.

The question in the appeal turns on the true construction of section 34 of the Indian Income-tax Act, 1922. That section enacts :—

"34. 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 re-assess 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 question ' at issue was formulated in the reference as follows :

"Where the Income-tax Officer has, on such materials and information as are available to him, reason to believe that income from any of the heads of income described under section 6 of the Indian Income-tax Act—in the present instance, from 'business, and other sources'—which should have been assessed in the year of assessment has escaped assessment, and as a result of such enquiries and investigations as are possible at that stage, has been satisfied as stated in paragraph 3 of the statement that a prima facie case has been made out against the assessee for assessment under section 34 of the Act, whether, on a true construction of section 34 of the Act, it is not open for the Income-tax Officer to initiate proceedings under section 34, affording at the same time ample opportunities to the assessee to produce such evidence to the contrary as he likes, in the course of the proceedings thus initiated, or, on the other hand, does the section contemplate that the factum of such escapement should have been first proved and definitely found and determined by an independent enquiry, before the Income-tax Officer can assume jurisdiction to reopen the assessment under section 34 ?"

The learned Judges of the High Court criticised this formulation, holding that it was not in proper form and that it was made up of several involved questions connected with each other. They therefore did not render a positive or negative answer to either of the alternative branches of the question, but the judgment of the Court delivered by the learned Chief Justice construes section 34 as requiring the Income-tax Officer to indicate to the assessee the nature of the alleged escapement from assessment and to give the assessee an opportunity of being heard, before the Income-tax Officer decides that income has escaped assessment and before proceeding to exercise his powers under section 34. To put the decision negatively, the Court held that the Income-tax Officer was not entitled to exercise his powers under the section unless he had first held a quasi judicial enquiry to which the assessee had been convened. The question now is whether that decision is well-founded in law.

Though the appeal is concerned with a general question of the construction of section 34, it is necessary for a clear understanding of it that the facts which give rise to it should be briefly explained under reference to other material provisions of the Act which were in force in 1932-33, the year of assessment. These provisions are to be found in sections 22 and 23 of the Act. Under section 22(2) the Income-tax Officer must serve notice on any person, other than a company, whose total income is in the Income-tax Officer's opinion of such an amount as to render such person liable to income-tax, requiring him to furnish a return in the prescribed form of his total income during the previous year. Sub-section (4) authorises the Income-tax Officer to serve on any person upon whom a notice has been served under sub-section (2) a further notice requiring him to produce accounts and documents, subject to the limitation that he shall not require the production of any accounts relating to a period more than three years prior to the year previous to the year of assessment. Section 23 provides for the making of the assessment. Sub-section (1) requires the Income-tax Officer, if he is satisfied that the return made under section 22 is correct and complete, to assess the total income and to determine the sum payable. Under sub-section (2) if the Income-tax Officer has reason to believe that the return is incorrect or incomplete he must serve on the person who made the return a notice requiring him either to attend at the Income-tax Officer's office or to produce any evidence relied on in support of the return. Sub-section (3) provides that the Income-tax Officer, after hearing such evidence as the person who made the return may produce and such other evidence as the Income-tax Officer may require on specified points shall by an order in writing assess the total income and determine the sum payable. Sub-section (4) makes provision for an assessment by the Income-tax Officer to the best of his judgment if the assessee fails to make a return or to comply with the terms of the notices issued to him. This whole procedure, it may be recalled, not only applies on first assessment but is also prescribed by section 34 if for any reason income, profits or gains have escaped assessment or have been assessed at too low a rate.

In the present case the procedure under section 22 was put into operation by the Income-tax Officer and the respondents in reply to the notice issued under sub-section (2) made a return in which they entered under the head "business, trade, commerce, etc.," a loss of Rs. 8,54,385. The Income-tax Officer accepted the return as correct and complete and on the 23rd December, 1932, assessed the total income of the respondents at nil for the year 1932-33. But at the beginning of January, 1934, the Income-tax Officer received information that the account books of the assessees produced before the department had always been manipulated, that a comparison of the cash book with the bank pass books within recent years would show that they did not agreed and that large sums of money which had been shown as received by the assessees-in their bank pass books were not entered in the cash book. Specific instances of some of these discrepancies and inaccuracies were supplied by the informant. This naturally gave the Income-tax Officer food for thought,' and after receipt of the information and before issuing notice under section 34 he made such enquiries as were possible about the truth of the information. These enquiries were informal and ex parte. As a result of them the Income-tax Officer was satisfied (1) that the allegations of discrepancies between the assessees' books of accounts produced at the assessment and some of the entries in their bank pass books were not without foundation; (2) that the . assessees had withheld or suppressed relevant facts and information and thereby deliberately misled the Income-tax Officer; and, (3) that a prima facie case that some income chargeable to income-tax had escaped assessment was made out. Accordingly on 5th February, 1934 the Income-tax Officer made an order directing notice to issue under section 22 (2) read along with section 34, and on 8th February, 1934, a notice was issued to the respondents in these terms:

"Whereas I have reason to believe that your income from business and other sources which should have been assessed in the financial year ending the 31st March 1933, has wholly escaped assessment and I therefore propose to assess the said income that has escaped assessment. I hereby require you to deliver to me, not later than the 9th March, 1934 or within 30 days of the receipt of this notice, a return in the attached form of your income from all sources which was assessable in the said year ending the 31st March, 1933."

On 22nd March, 1934, respondents filed a new return showing the same loss as was shown in the original. The Income-tax Officer on 21st May, 1934, issued further notices under sections 22 (4) and 23 (2) and thereafter further procedure followed, including applications by the respondents to the High Court for the purpose of preventing the Income-tax Officer from proceeding, with a new assessment, on the ground, inter alia, that section 34 had been put into operation without giving the respondents an opportunity of being, heard. It is not, however, necessary to discuss these proceedings, because eventually the convenient' and competent course was taken of staying proceedings under section 34 till the question at issue should be settled on a case stated under section 66 (1) of the Act.

Learned Counsel for the respondents submitted an argument that the facts alleged did not bring the case within the scope of section 34. This is an argument which is not open to the respondents on the terms of the reference, which assume a case that falls within the terms of section 34 and on that assumption raise the general question, what on a sound construction of the section is the duty of the income-tax authorities before issuing a notice under section 22.

Section 34 is unhappily and even ungrammatically phrased. It is expressed impersonally, and it fails to state by whom and by what procedure it is to be established that income, profits or gains have escaped assessment or have been assessed at too low a rate. There is fortunately no dispute that the person who must make that decision is the Income-tax Officer, for, apart from the assessee, no one else is in a position to say whether income have been assessed or at what rate it haft been assessed. The omission to prescribe expressly what the nature of the decision should be and by what procedure it must be reached is all the more surprising because in other sections of the Act the legislature, has been careful to define what is necessary in these respects. This circumstance was founded on by the learned Counsel for the respondents, who pointed out that where some fact had to be established merely prima facie to the satisfaction of the Income-tax Officer in the bona fide exercise of his discretion, this was expressed by such phraseology as " When it appears to the Income-tax Officer," or " if the Income-tax Officer has reason to believe." On the other hand, when the statute requires that the Income-tax Officer shall make a decision, which is ; final so far as he is concerned, upon a matter of fact, the usual expression is "if he is satisfied." When that expression is used, however, express provision is also made whereby the interested parties may be heard either by the Income-tax Officer himself (Section 25 A and section 28 by the Assistant Commissioner (Section 23A) before any definitive action is taken. In one place (Section 26) formula is "where it is found," but in this instance the decision is made by the Income-tax Officer in the course of making an assessment and when an enquiry under section 23 is open. Learned Counsel for the respondents maintained that in a taxing Act the construction more favourable to the assessee should-be preferred and he suggested that section 34 should be read as if it were introduced by the words "If the Income-tax Officer is satisfied" or the words "If it is found ". But this suggestion is not in itself helpful to the respondents, since the words proposed to be implied do not carry with them by a further implication a direction to hold a quasi-judicial enquiry; and the real question is whether, the section should be read subject to an implied proviso that the Income-tax Officer shall not apply the procedure prescribed-i by the section except after a decision taken in a quasi-judicial enquiry.

The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat. In the present instance no powers are imposed by the section on the Income-tax Officer to convene the assessee, or to issue notices calling on him to produce documents, though these powers are essential if the Income-tax Officer is to conduct a quasi-judicial enquiry before "deciding that profits have escaped assessment or have been assessed at too low. In Rex v. Kensington Income-tax Commissioners [1913] 3 KB 870 Section 52 of the Taxes Management Act, 1880 (now section 125 of the Income Tax Act, 1918) came under consideration of the Divisional Court, it was contended on behalf of the subject taxpayer that: the section imposed as a condition precedent to the operation of the section an obligation on the part of the surveyor to obtain legal evidence that the return was defective. The words to be construed-were "if the surveyor discovers that any properties or profits-chargeable to tax have been omitted from the first assessment.'" Rejecting this contention Lush, J., said:

"It is certainly remarkable that the statutecontains no machinery for enabling the surveyor to obtain the evidence which it is said he must obtain before his jurisdiction under the section arises. He is not a judicial officer; he has no power to compel witnesses to give evidence, or to administer an oath if they are willing to give evidence. He has no means of obtaining that evidence without which, according to the contention, the jurisdiction does not arise".

The decision of the Divisional Court in that case ultimately turned on a question not material to the present issue. It was reversed by the Court of Appeal [ (1914) 3 K.B. 429] but the Court of Appeal did not differ from the observations of Lush, J., ' cited above, as is made clear by the judgment of Pickford, L. J., (at p. 445). Caution is necessary in applying decisions on a British Income Tax Act to the Indian Income-tax Act, but the reasoning of Lush, J., is general and is not affected by specialities of the British Act. It is apposite to the respondents' contention in the present case. Their Lordships are of opinion, in accordance with that reasoning, that it cannot be a condition precedent to the operation of section 34 that the Income-tax Officer should hold a quasi - judicial enquiry, because the powers necessary for such an enquiry are not conferred upon him But there is a second consideration which is no less conclusive. The operative part of section 34 empowers the Income-tax Officer to proceed de novo under sub-section (22) of section 22 and that in turn leads, if there should still be a question of the accuracy of the return, to an enquiry under section 23 (2) and (3) and in that enquiry the assessee has a statutory right to appear and to produce evidence. Therefore a construction of section 34 which requites a quasi-judicial enquiry to be held before the powers under the section can be operated would result in mere duplication of procedure and in two enquiries of the same kind, into the same matter, conducted by the same official, and without any advantage to the parties. A construction so unreasonable and unpractical ought not to be preferred when another construction is open. Accordingly their Lordships are of opinion that the Income-tax Officer is not required by the section to convene the assessee, or to intimate to him the nature of the alleged escapement, or to give him an opportunity of being heard, before he decides to operate the powers conferred by the section. In the opinion of their Lordships the view which the learned Judges of the High Court have taken of the section is too narrow, and the notice sent to the respondents on 8th February, 1934, is in form a competent preliminary to a new assessment.

The question in the reference is so framed that an answer to the first branch in the affirmative and to the second branch in the negative might be misleading and fail to give exact effect to the opinion of their Lordships. Their Lordships think that the proper answer to be given is that to enable the Income-tax Officer to initiate proceedings under section 34 it is enough that the Income-tax Officer on the information which he has before him and in good faith considers that he has good ground for believing that the assessee's profits have for some reason escaped assessment or have been assessed at too low a rate. The result is-that their Lordships will humbly advise His Majesty that the appeal should be allowed, and that the order of the High Court should be set aside.

Commissioner of Income-tax v. Mahaliram Ramjidas

Structured Summary of the Opinion (Lord Normand)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Respondents' Arguments

Appellant's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner of Income-tax v. Mahaliram Ramjidas

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