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Section 34 in The Income- Tax Act, 1995
Section 34(1) in The Income- Tax Act, 1995
Section 34(3) in The Income- Tax Act, 1995
Section 22 in The Income- Tax Act, 1995
The Income- Tax Act, 1995

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Allahabad High Court
Sool Chand Ram Sewak vs Commissioner Of Income-Tax on 14 November, 1968
Equivalent citations: 1969 73 ITR 466 All
Author: T Mukherjee
Bench: V Oak, T Mukherjee

JUDGMENT

T.P. Mukherjee, J.

1. This consolidated reference made by the Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, arises out of three assessments relating to the assessment years 1951-52, 1952-53 and 1953-54. The facts are as follows : The assessee, at the material time, was an unregistered firm constituted of two partners, Sool Chand and Ramsewak, each of whom had equal shares in the partnership. The two partners, before the constitution of the firm, were members of a Hindu undivided family styled M/s. Mannoo Lal Mool Chand. The family claimed total disruption in the assessment year 1948-49 and applied for an order under Section 25A(1), Indian Income-tax Act, 1922 (hereafter referred to as the Act), but the application was rejected by the Income-tax Officer. In the alleged partition, the business carried on by the family was allocated to Sool Chand and Ramsewak. These two members thereafter constituted a partnership and carried on the business under the firm name of Sool Chand Ramsewak. This firm is the assessee in the present reference. The assessee-firm filed returns of its income for the assessment years 1951-52, 1952-53 and 1953-54. These returns were filed on the 2nd November, 1951, 4th August, 1952, and 24th September, 1953, respectively. It may be noted that each of these returns had been filed within the respective assessment years and the incomes returned were Rs. 3,471, Rs. 2,260 and Rs. 2,200 respectively.

2. The Income-tax Officer who did not accept the claim of partition of the family took no action whatever on these returns and he included the income returned by the firm in the assessments of the Hindu undivided family for the said assessment years.

3. Against the assessments made by the Income-tax Officer the Hindu undivided family filed appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not accept the claim of total disruption but he held that there had been a partial partition in respect of the business only and the firm was duly constituted. He, therefore, excluded the income of the firm, M/s. Sool Chand Ram Sewak, from the assessment of the Hindu undivided family. He also directed the Income-tax Officer to start proceedings under Section 34 of the Act and make assessments, inter alia, on M/s. Sool Chand Ram Sewak in the status of a firm.

4. In pursuance of the direction, the Income-tax Officer issued separate notices to the assessee-firm under Section 34(1) of the Act, on the 12th January, 1959, for all the three assessment years. These notices, it may be noted, were issued after the expiry of four years from the last of the three assessment years under reference, namely, 1953-54. In response to these notices the assessee filed returns under protest showing the incomes declared in the past. The assessee, however, contended that

returns had already been filed by the firm for the said years and, therefore, action under Section 34 was invalid. The Income-tax Officer did not, however, accept the contention and completed the assessments of the assessee for the said years in the status of an unregistered firm on 18th March, 1959.

5. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessments were time-barred and invalid and he vacated the assessments by his order dated the 25th August, 1959.

6. Against the decision of the Appellate Assistant Commissioner the department preferred appeals to the Appellate Tribunal. In the Tribunal there was a difference of opinion between the Judicial and the Accountant Members. The Judicial Member held that the notices issued by the Income-tax Officer under Section 34(1) of the Act, on the 12th January 1959, were without jurisdiction inasmuch as the assessee-firm had already filed returns for each of the three years in good time and, therefore, income could not be said to have escaped assessment. He was also of the view that the Appellate Assistant Commissioner was not competent to give a direction in the appeals of the Hindu undivided family of M/s. Mannoo Lal Mool Chand for the assessment of the firm of M/s. Sool Chand Ram Sewak, the assessee in the case. The Judicial Member, therefore, made an order dismissing the departmental appeals. The Accountant Member, on the other hand, passed an order allowing the appeals. His view was that on the 12th January, 1959, when the notices under Section 34(1) were issued no artion could be taken on the returns filed by the assessee as the time limit for normal assessment had already expired. The returns already on record had, to all intents and purposes, become mere scraps of paper and, thus, income had escaped assessment, so that, Section 34 of the Act was applicable. He further held that, in view of the decision of this court in the case of PL Hazari Lal v. Income-tax Officer, Dist. II (ii), Kanpur, [1960] 39 I.T.R. 265. , the Appellate Assistant Commissioner was competent to give the impugned direction for the consequential assessment of the assessee-firm. In view of the difference of opinion between the two members, the case was referred to the President of the Tribunal under Section 5A(7) of the Act. The President agreed with the view taken by the Accountant Member and held that the assessments under Section 34 of the Act for the three years under appeal were valid and competent. In accordance with the view taken by the majority, the three departmental appeals were allowed by the order of the Bench dated 30th June, 1962.

7. At the instance of the assessee the Tribunal has referred the following question of law for the opinion of this court:

" Are the assessments made under Section 34 against the assessee-firm for the assessment years 1951-52, 1952-53 and 1953-54 within time and legal ? "

8. The question under reference involves two points : the first relates to the period of limitation for the impugned assessments and the second relates to the legality of the notices under Section 34(1) issued by the Income-tax Officer. On the question, of limitation the first point to be considered is whether the Appellate Assistant Commissioner in dealing with the appeals of the Hindu undivided family was competent to give a direction to the Income-tax Officer to make an assessment on the assessee-firm. There is no dispute that the second proviso to Section 34(3), as amended by Act No. XXV of 1953, applies to the impugned assessments. The proviso runs as follows : " Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under Section 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section 33, Section 33A, Section 33B, Section 66 or Section 66A. "

9. The effect of this proviso is that, where an assessment or reassessment is made on the assessee or any person in consequence of or to give effect to any rinding or direction given in an appeal, revision or reference, the period of limitation prescribed in Section 34 of the Act for assessment or reassessment shall not apply. The vires of the second proviso to Section 34(3) quoted above was challenged before the Supreme Court in the case of S. C. Prashar v. Vasantsen Dwarkadas, [1963] 49 I.T.R. (S.C.) 1.. That case was decided by a Bench of five hon'ble judges and dissentient views were expressed on the question. Das, Kapur and Sarkar JJ., who constituted the majority, agreed in holding that the second proviso to Section 34(3) of the Income-tax Act, 1922, in so far as it authorises the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in Section 34 in consequence of or to give effect to any finding or direction given in an appeal, revision or reference arising out of proceedings in relation to the assessee, violated the provisions of Article 14 of the Constitution of India and were invalid to that extent. Subsequently, the Supreme Court had again to decide the same question in the case of Income-tax Officer,' A ' Ward, Sitapur v. Murlidhar Bhagwan Das, [1964] 52 I.T.R. 333, 346 (S.C.).. In this case the Supreme Court considered its earlier decision in Prashar v. Vasantsen Dwarkadas and observed as follows :

" The expression 'any person ' in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment; but this construction cannot be accepted, for the said expression is necessarily circumscribed by the scope of the subject-matter of the appeal or revision, as the case may be. That is to say, that person must be one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. If so construed, we must turn to Section 31 to ascertain who is that person other than the appealing assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of Section 30(!) and Section 31(3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the Appellate Assistant Commissioner. Modification or setting aside of the assessment on a firm, joint Hindu family, association of persons, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the Hindu undivided family or the individual, as the case may be. In such cases, though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. The said instances are only illustrative. It is not necessary to pursue the matter further. We would, therefore, hold that the expression ' any person ' in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal. "

10. In view of what has been laid down by the Supreme Court in the

above case, it must follow that where, in consequence of the modification

or setting aside of the assessment of an assessee for a particular year, the

assessment of another person is affected, it would be competent on the

part of the appellate authority to record a finding or give a direction

relating to the assessment of such other person, even though the latter was

not nominally a party to the appeal. By way of illustration their lord

ships have stated that the assessments made on a firm, a Hindu undivided

family, an association of persons in a particular year may affect the assessments for the said year on a partner or partners of the firm, member or

members of the Hindu undivided family or member or members of the

association. In such cases, according to the Supreme Court, the provisions

of the second proviso to Section 34(3), as amended in 195.3, would apply and

it would be possible for the appellate authority to record a finding or give

a direction for the assessment or reassessment of "any person" who,

although not a party to the appeal, is " intimately connected " with the

assessment of the appealing assessee.

11. In another case, very recently decided, the Supreme Court reaffirmed the same view (Daffadar Bhagat Singh v. Income-tax Officer, [1969] 71 I.T.R. 417(S.C.).

, Civil Appeal

No. 962 of 1966 decided on 22-8-68). In that case the question related to the assessment of the income of a partnership carried on by a father and his two sons. The Income-tax Officer assessed them in the status of a Hindu undivided family, -but on appeal the Appellate Assistant Commissioner accepted the contention that they formed a partnership and directed that the income of the business should be excluded from that of the family and assessed in the hands of the firm. When the assessment was made on the firm, the assessee objected and contended that the assessment could not be proceeded with on account of the bar of Section 34(3) of the Act. The Supreme Court rejected the contention of the assessee and held that the assessment was valid in view of the decision of the same court in the earlier case of Murlidhar Bhagwandas.

12. The facts of the present case are in pari materia with those in the latest Supreme Court case referred to above. A firm is not a separate legal entity as laid down by the Supreme Court in the case of Dulichand Laxminarayan v. Commissioner of Income-tax, [1956] 29 I.T.R. 535 (S.C.).; it is an association of individuals. It is manifest that if the income of the business of the assessee-firm is assessed as the income of the Hindu undivided family, such assessment or any modification thereof in appeal would necessarily affect the assessment and the liability of the two members as partners of the firm. The case, therefore, falls within the rule laid down by the Supreme Court in the case of Murlidhar Bhagwan Das.

13. It follows, therefore, that the direction given by the Appellate Assistant Commissioner to assess the unregistered firm while dealing with the appeal of the Hindu undivided family is covered by the terms of the 2nd proviso to Section 34(3) and the ordinary period of limitation prescribed under Section 34 would not apply to the consequential assessments of the firm made by the Income-tax Officer in pursuance of such direction.

14. The next point to be decided is whether the Income-tax Officer was competent to issue the notices under Section 34, Sub-section (1), in respect of the three assessment years under reference. As mentioned above, the notices were issued by the Income-tax Officer on the 12th January, 1959, pursuant to the direction of the Appellate Assistant Commissioner, calling for returns on the ground that the income assessable for those years had escaped assessment. The original returns filed by the assessee in the course of the respective assessment years were already on record, but the Income-tax Officer had taken no action thereon, evidently because the Income-tax Officer had included the same income in the assessments of the Hindu undivided family.

15. Mr. Bhargava, appearing for the assessee, argued that when returns had been filed by the assessee it was not Open to the Income-tax Officer to

ignore them and issue notices under Section 34(1) calling for fresh returns on the ground that income had escaped assessment. He relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Ranchhoddas Karsondas, [1959] 36 I.T.R. 569 (S.C.). , in support of his contention. Mr. Shanti Bhushan, the learned standing counsel for the department, argued that the case of Ranchhoddas Karsondas is distinguishable on facts. He pointed out that in that case notice under Section 34 had been issued before the expiry of four years from the end of the material assessment year when there was still time for the Income-tax Officer to make an assessment on the basis of the voluntary return filed by the assessee under Section 22(3) of the Act. It was submitted that there was no question of income escaping assessment in that case on the date the notice under Section 34 was issued and, therefore, the notice was invalid. Mr. Shanti Bhushan said that the facts of the present case were very different. In this case, the notices under Section 34(1) were issued after the expiry of four years which is the ordinary period of limitation prescribed under Section 34(3) of the Act for making an assessment. The time limit for making the assessments having expired, the learned standing counsel contended, there was an escapement of income which could not be brought to tax except by resort to the provisions of Section 34.

16. The contention of the learned standing counsel, though attractive, does not bear scrutiny. It is true that in the case of Ranchhoddas Karsondas, when the notice under Section 34(1) was issued the normal period of limitation for an assessment had not expired but that case was not decided on the basis that when a return filed by an assessee has not been acted upon and the usual period of limitation for assessment has expired, income escapes assessment and it is open to the Income-tax Officer to issue a notice under Section 34(1). In that case, an assessee bad filed a voluntary return under Section 22(3) of the Act, showing a non-taxable income of Rs. 1,935. The return, which related to the assessment year 1945-46, was filed on January 5, 1950, that is, less than three months before the expiry of the normal period of limitation for an assessment, which is four years. The assessee added a foot-note to the return saying : "My wife has sold her ornaments and deposited the sum of Rs. 59,026 in the firm of Assar Syndicate in which I am a partner. " The Income-tax Officer took no action on the return but, on February 27, 1950, he issued a notice under Section 34 of the Act calling upon the assessee to submit another return. The assessee submitted another return showing the same income and adding the same foot-note. In the assessment that followed the Income-tax Officer included the sum of Rs. 59,026 in the total income of the assessee. The principal question raised before the Supreme Court was whether the notice under

section 34 of the Act issued by the Income-tax Officer after the assessee had filed the voluntary return was valid in law. Speaking for the hon'ble court, Hidayatullah J. (now C.J.) observed as follows (at page 576 of the report) :

" This notice was improper, because with the return already filed, there was neither an omission nor a failure on the part of the assessee, nor was there any question of assessment ' escaping'. The notice under Section 34(1) was. therefore, invalid and the consequent assessment, equally so. "

17. In the case of Commissioner of Income-tax v. S. Raman Chettiar, [1965] 55 I.T.R, 630 (S.C.).

, the Supreme Court had to consider a case in which an assessee had filed a return showing an income below the exempted limit in compliance with a notice under Section 34(1) which was served within four years from the end of the assessment year 1944-45. The notice under Section 34 was, however, found to be defective as the prior sanction of the Commissioner of Income-tax had not been obtained. The assessment was thereupon dropped as infructuous. Subsequently, the Appellate Tribunal, in deciding an appeal for the next assessment year 1945-46, held that a sum of Rs. 46,700 was assessable as the income of the assessee for the earlier assessment year 1944-45. The Income-tax Officer then issued another notice under Section 34 on February 27, 1953 (Within 8 years but after the expiry of 4 years from the end of the assessment year), and made an assessment determining the total income of the assessee at Rs. 51,523., The Supreme Court held that it was not open to the Income-tax Officer to disregard the return filed by the assessee, although it had been filed in response to an invalid notice under Section 34, and issue a notice under Section 34. The Supreme Court observed that, " whatever the impelling cause or motive, if a return otherwise valid is filed by an assessee before the receipt of a valid notice under Section 34, it is to be treated as a return within Section 22(3) " and notice under Section 34 cannot be issued in disregard thereof.

18. The principle which emerges from these decisions of the Supreme Court is that when a valid return has been filed by an assessee, there is no question of income escaping assessment and it is not open to the Income-tax Officer to issue a notice under Section 34(1) whether before or after the expiry of the period of four years from the end of the relevant assessment year.

19. The learned standing counsel conceded that, in the present case, it was not competent on the part of the Income-tax Officer to take action under Section 34(1)(a) as the assessee had committed none of the defaults mentioned therein. Section 34(1)(a) applies when there is an omission or failure on the part of an assessee to make a return of his income for any year or to disclose fully and truly all material facts necessary for his

assessment for that year. In the present case, as already noted, the assessee 6rm did file its returns of income and there is no case that there was any failure on its part to disclose fully and truly all material facts for its assessment for those years. The Income-tax Officer could not, therefore, issue notice for assessment under Section 34(1)(a). The learned standing counsel, however, contended that the Income-tax Officer could take action under Section 34(1)(b) which applies when there is escapement of income even though there has been no omission or failure on the part of the assessee to make a return or to furnish the necessary particulars for assessment.

20. The contention of Sri Shanti Bhushari cannot be accepted in view of the principle laid down by the Supreme Court in categorical terms. A similar argument appears to have been also made before the President of the Appellate Tribunal when he heard the reference under Section 5A(7) of the Act arising on the difference of opinion between the Judicial and Accountant Members. The argument appears to have found favour with the President of the Tribunal and he was of the opinion that it was competent on the part of the Income-tax Officer to take action for assessment under Section 34(1)(b) in this case. He relied on the following observations of the Supreme Court in the case of Maharaj Kumar Kamal Singh v. Commissioner of Income-tax, [1959] 35 I.T.R. 1, 8 (S.C.).

:

" We see no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted.

In our opinion, even in a case where a return has been submitted, if the Income-tax Officer erroneously fails to tax a part of the assessable income, it is a case where the said part of the income has escaped assessment. The appellant's attempt to put a very narrow and artificial limitation on the meaning of the word ' escape ' in Section 34(1)(b) cannot, therefore, succeed."

21. In our opinion, the President of the Appellate Tribunal had failed to appreciate the proper import of the observations of the Supreme Court quoted above. It is clear that their lordships were contemplating a case in which a return had been submitted and assessment made thereon but the Income-tax Officer erroneously failed to tax a part of the income. Section 34(1)(b) provides as follows (omitting parts not material here): 34. (1) If... (b) Notwithstanding that there has been no omission or failure' as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year .... he may .... serve on the assessee .... a notice under Sub-section (2) of Section 22 and may proceed to assess or reassess such income, profits or gains ..."

22. In the case of Maharaj Kumar Kamal Singh, Gajendragadkar J. (as he then was), observed as follows on the conditions for the applicability of Section 34(1)(b) (at pages 5 and 6 of the report):

" It is clear that two conditions must be satisfied before the Income-tax Officer can act under Section 34(1)(b). He must have information in his possession, which, in the context, means that the relevant information must have come into his possession subsequent to the making of the assessment order in question and this information must lead to his belief that income chargeable to income-tax has escaped assessment for any year .... "

23. Evidently, therefore, Section 34(1)(b) contemplates an escapement of income discovered " subsequent to the making of the assessment".

24. There is another way of looking at the matter. Under Section 34(1)(b) as under Section 34(1)(a) no assessment or reassessment can be made thereunder unless the Income-tax Officer has reason to believe that income has escaped assessment for any year. This takes us to the pertinent query as to why, when a return has been filed by the assessee but not proceeded with by the Income-tax Officer, income cannot be said to have escaped assessment even after the assessment becomes time-barred. The short answer to the question is that once a valid return has been filed by the assessee, either in response to a public notice under Section 22(1) or to an individual notice issued by the Income-tax Officer under Section 22(2), or voluntarily under Section 22(3), the proceedings in assessment commence at once and once the assessment proceedings have commenced and remain pending, the Income-tax Officer cannot say, without completing the assessment, that there has been escapement of income chargeable to tax. Previously, there was a cleavage of opinion between the Bombay and Madras High Courts on the one hand and the Calcutta High Court on the other as to when a proceeding in assessment commences but with that aspect of the matter we are not concerned here. In any view, in the instant case, assessment proceedings commenced when the assessee filed its returns of income for the three different assessment years. The assessment proceedings remained pending on the 12th January, 1959, when the Income-tax Officer issued the notices under Section 34(1) of the Act and it was not possible for the Income-tax Officer to hold, without making an assessment, that there was an escapement. The Privy Council had considered this aspect of the matter in the case of Rajendranath Mukerjee v. Commissioner of Income-tax, [1959] 35 I.T.R. 1 (S.C.)

and observed that income cannot be said to have escaped assessment within the meaning of Section 34 if assessment proceedings in respect of that income are still pending and have not yet terminated in a final assessment. Their Lordships remarked that the words " has escaped assessment " in Section 34 cannot be read as equivalent to " has not been assessed ", It may be mentioned that the decision of the Privy Council was referred to and explained by the Supreme Court in the case of Manaraj Kumar Kamal Singh v. Commissioner of Income-tax.

25. We are, therefore, of the opinion that the Income-tax Officer was not competent to issue the notices under Section 34 of the Act on the 12th January, 1959. Our answer to the question referred to us is that, though the assessments made by the Income-tax Officer in pursuance of the notices under Section 34(1) were within time, they cannot be sustained as legal and valid assessments.

26. The assessee will get from the Commissioner of Income-tax the costs of this reference which we assess at Rs. 200.

Oak, C.J.

27. I have read the judgment prepared by my learned brother Mukerjee J. I wish to add a few words, as I was a member of the Division Bench which took a different view in Jawahar Lal Mani Ram v. Commissioner of Income-tax, [1969] 72 I.T.R. 78. (I.T.R, No. 243 of 1959, decided on 24-5-1968).

28. The present reference covers two questions. The first question is whether in the instant case action taken under Section 34 of the Indian Income-tax Act, 1922, was within time. The second question is whether action under Section 34 was permissible in spite of the fact that the assessee had filed returns at the proper time. The two questions may be considered separately.

29. The answer to the first question depends upon whether the department is entitled to the benefit of the second proviso to Sub-section (3) of Section 34 of the Act. In the case of Jawahar Lal Mani Ram the Division Bench relied upon the decision of the Supreme Court in S.C. Prashar v. Vasantsen Dwarkadas, and held that the second proviso to Section 34(3) is ultra vires in so far as it authorized the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in Section 34 in consequence of or to give effect to a finding or direction given in an appeal in relation to the assessee.

30. However, the position was clarified by the Supreme Court in the subsequent case, Income-tax Officer, ' A' Ward, Sitapur v. Murlidhar Bhagwan Das. In the latter case it was explained that the expression "any person " appearing in the proviso should be confined to a person intimately

connected with the assessments and the order under appeal. It means that if the expression " any person " is understood in that limited sense, the second proviso to Section 34(3) of the Act is valid. In the instant case the direction given by the Appellate Assistant Commissioner was with respect to a person intimately connected with the appeals before the Appellate Assistant Commissioner. The direction to start proceedings under Section 34 of the Act is valid. Consequently, the department is entitled to the benefit of the second proviso to Section 34(3) of the Act. Action under Section 34 of the Act was not barred by limitation.

31. On the second question, the assessee relies upon the decision of the Supreme Court in Commissioner of Income-tax v. Ranchhoddas Karsondas. In the case of Jawahar Lal Mani Ram the Division Bench distinguished the case from the case of Ranchhoddas Karsondas on the ground that in the case of Ranchhoddas Karsondas action under Section 34 was taken at a time when the period of limitation for completing the assessment had not yet expired.

32. But in the case of Commissioner of Income-tax v. S. Raman Chettiar action under Section 34 of the Act was taken after the expiry of four years from the end of the assessment year. It was held by the Supreme Court that it was not open to the Income-tax Officer to disregard the return filed by the assessee.

33. It appears from these decisions of the Supreme Court that on the question of the alleged escapement of income from assessment, not much turns on the question whether action was taken within four years or beyond four years. The broad principle laid down by the Supreme Court in these cases is that if the assessee filed returns, and the Income-tax Officer for certain reasons does not Choose to take action on the returns, it is not a case of escaped assessment for purposes of Section 34 of the Act. In cases of this kind notice under Section 34 of the Act cannot be issued.

34. I, therefore, agree with my learned brother that the question referred to this court should be answered in the manner proposed by him.