Commissioner of Income Tax vs Dumraon Cold Storage and Refrigeration Service

This is a reference u/s 66(1) of the Indian Income Tax Act, 1922 (hereinafter called "the Act"), made by the Income Tax Appellate Tribunal, Patna Bench, at the instance of the Commissioner of Income Tax, Patna. The question of law referred to this court runs as follows:

"Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that the assessment made on the assessee u/s 34 was not valid in law ?"

The facts leading to the making of this reference may be stated in a narrow compass. The assessee-company had made new constructions and installed new machineries, it appears, in the years 1956 and 1957. The assessment order for the assessment year 1959-60, the corresponding accounting period of which had ended on the 31st December, 1958, was passed by Shri S. N. Ratho, Income Tax Officer, Special Circle, Patna, on September 8, 1959. It appears that in respect of the new constructions also he allowed a higher rate of depreciation. His successor-income tax Officer issued a notice to the assessee u/s 34(1) of the Act. From the notice it was not clear as to whether it was issued under Clause (a) or Clause (b). Neither the clause was mentioned nor was there any statement of fact to indicate under which clause the notice had been issued. Shri Bagchi, the successor-income tax Officer, Special Circle, Patna, passed a fresh assessment order dated August 16, 1962, allowing depreciation in respect of certain buildings and machineries at a lower rate and thus the allegedly escaped income was roped in by the fresh assessment order of the Income Tax Officer.

The assessee-company went up in appeal, The argument put forward before the Appellate Assistant Commissioner was that on a correct interpretation of the provision of law contained in Section 10(2)(vi)(a) of the Act a higher rate of depreciation ought to have been allowed. The Appellate Assistant Commissioner rejected this argument and upheld the assessment order of the Income Tax Officer passed in the proceeding initiated u/s 34(1) of the Act.

The assessee went up in further appeal before the Tribunal. The Tribunal took the view that the notice and the proceeding u/s 34(1) were invalid. The Tribunal was of the opinion that since the assessment order showed that the proceeding was u/s 34(1)(a) and the notice was silent on the point, it had to be assumed that the proceeding was under the said provision of law. Apart from other defects pointed out in the notice, the Tribunal pointed out that the condition precedent for initiation of such a proceeding was not fulfilled inasmuch as the matter was not dealt with by the Commissioner at all, as required by the proviso to Section 34(1)(a). In that view of the matter, the fresh assessment proceeding and the order were quashed. On being asked to state a case and refer the question of law to this court, the Tribunal has done it.

On the facts of this case, it appears to us that really the proceeding, if at all it could be covered, could be covered under Clause (b) of Sub-section (1) of Section 34 of the Act and not under Clause (a). But in this regard a lot of confusion was created not only in mentioning the wrong assessment year in the notice but also in not specifying whether the Income Tax Officer was charging the assessee for any omission or failure to disclose fully within the meaning of Clause (a) of Section 34(1) or whether he was intending to initiate the proceeding in consequence of information in his possession within the meaning of Clause (a). The confusion seems to have been created because mere change of opinion in regard to the interpretation of the provision of law in this case, the provision contained in Section 10(2)(via) could not have been sufficient to bring the case under Clause (b), for it would have been difficult to say that the proceeding was started in consequence of an information in the possession of the Income Tax Officer. But, we are not concerned with this matter now because the order of the Tribunal rests upon the footing that the proceeding was under Clause (a). Tin''s stand could not be challenged on behalf of the department before us and, therefore, the only question for our determination 13 whether the notice issued and the proceeding initiated upon it were valid in law.

We do not propose to enter into the other defects pointed out by the Tribunal in its order. Suffice it to say that without the approval of the Commissioner the proceeding could not be initiated. The first proviso to Sub-section (1) of Section 34 reads as follows:

"Provided that the Income Tax Officer shall not issue a notice under Clause (a) of Sub-section (1)-

(i) for any year prior to the year ending on the 31st day of March, 1941;

(ii) for any year, if eight years have elapsed after the expiry of that year, unless the income, profits or gains chargeable to Income Tax which have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to, one lakh of rupees or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed, not being a year or years ending before the 31st day of March, 1941 ;

(iii) for any year, unless he has recorded his reasons for doing so, and, in any case falling under Clause (ii), unless the Central Board of Revenue, and, in any other case, the Commissioner, is satisfied on such reasons recorded that it is a fit case for the issue of such notice."

Reading the three clauses of this proviso, it is clear that a notice u/s 34(1)(a) could not be issued in any case for any year prior to the year ending on the 31st of March, 1941 ; in other cases, if eight years had not elapsed, after the expiry of the year for which the notice was being issued, it could be issued by the Income Tax Officer irrespective of the amount of income which had escaped assessment but on fulfilment of two conditions, namely, (i) that the Income Tax Officer has recorded his reasons for issuing the notice, and (ii) that the Commissioner is satisfied on such reasons recorded that it is a fit case for issue of such notice. Beyond the period of eight years, notice could be issued by the Income Tax Officer, provided three conditions were fulfilled--(i) that the amount of escaped income was one lakh of rupees or more, (ii) that he had recorded reasons for issuing the notice, and (iii) that the. Central Board of Revenue is satisfied on such reasons recorded that it is a fit case for issue of notice. In the present case, according to the finding, the amount of escaped income was less than a lakh of rupees. The notice was issued within the period of eight years. But then, the Tribunal has found that the approval or sanction of the Commissioner was not obtained, the reasons recorded by the Income Tax Officer were not forwarded to the Commissioner for his consideration and, therefore, the issuance of the notice and the initiation of the proceeding u/s 34(1)(a) were bad in law.

Learned counsel for the department submitted that on a correct interpretation of the proviso in a case where the amount of escaped income is less than a lakh of rupees and a notice has been issued within the period of eight years, approval of the Commissioner is not necessary. We have no difficulty in rejecting this argument as it is not borne out on a correct construction of the first proviso to Section 34(1). The view which we have expressed above finds support from a Bench decision of this court in Commissioner of Income Tax Vs. Maharaja Pratap Singh Bahadur, which decision was upheld by the Supreme Court in Commissioner of Income Tax, Bihar and Orissa Vs. Maharaja Pratapsingh Bahadur of Gidhapur, . The Supreme Court has repeatedly pointed out in numerous cases including the one just referred to above that if the conditions precedent are not fulfilled before initiation of the reassessment proceeding then it goes to the root of the jurisdiction and the proceeding becomes bad in law. The point which fell for our decision in this case was not canvassed before the Supreme Court but the decision of this court referred to above is a direct authority on it.

For the reasons stated above, we answer the question in the affirmative, in favour of the assessee and against the department. We hold that, on the facts and in the circumstances of this case, the Appellate Tribunal was justified in holding that the assessment made on the assessee u/s 34 was not valid in law. The assessee must have the costs of this reference. Hearing fee is assessed at Rs. 100 only.