Commissioner of Income Tax vs Sundaram and Company (P.) Ltd. and Another and Manickavasagam Private Ltd.

Ramaprasada Rao, J.—In this batch of tax cases it is enough to notice the facts in T. C. No. 152 of 1961. T. C. Nos. 14 and 21 of 1965

are connected with T. C. No. 152 of 1961. In T. C. No. 153 of 1961, excepting for the amounts covered in this case are different from that

arising in T.C. No. 152 of 1961, the other facts are identical and even so the questions of law arising therein. T.C. Nos. 15 and 16 of 1965 are

connected with T.C. No. 153 of 1961. In all these cases the assessment year is 1956-57. In T.C. No. 152 and 1961 and the connected cases,

the assessee is Sundaram and Company (Private) Ltd., Madurai, and in T,C, No 151 of 1961 and the connected case, the assessee is

Manickavasagam (Private) Ltd., Madurai. In fact, the present proceedings, at any rate, covering T.C. No. 152 of 1961, are set before us on an

order of remand made by the Supreme Court in Sundaram and Company (P.) Ltd., Madurai Vs. Commissioner of Income Tax, Madras, . The

said case was disposed of by the Supreme Court on April 25, 1967, and this was an appeal from the judgment and order of this court dated

August 9, 1963, in T.C. No. 152 of 1961. This decision is reported as Commissioner of Income Tax, Madras Vs. Sundaram and Company

Private Ltd., After this court decided in Commissioner of Income Tax v. Sundaram & Co. P. Ltd. and before the judgment was given by the

Supreme Court as above, the Tribunal, pursuant to the directions of this court, in the said case, decided the appeals before it on January 20, 1964,

out of which T.C. Nos. 14 to 16 and 21 of 1965 arise. We shall presently refer to the questions referred to us for our decision in the latter batch of

cases. In Sundaram & Co. P. Ltd. v. Commissioner of Income Tax, and in Commissioner of Income Tax v. Sundaram & Co. (P.) Ltd., the

relevant facts have been noticed in extenso. In so far as they are necessary for us, we are excerpting them herein as it is not necessary to restate

them differently:

In Sundaram & Company (P.) Ltd., hereinafter called ""the company"" the public are not substantially interested within the meaning of Section 23A

of the Indian Income Tax Act, 1922. In dealing with the assessment of income of the company for the assessment years 1946-47 to 1951-52, the

Income Tax Officer, Central Circle, Madras, passed orders u/s 23A of the Indian Income Tax Act, 1922, and directed that the total income of the

company as determined in the years of assessment less tax payable be deemed to have been distributed amongst the shareholders of the company

as on the relevant dates of the general body meetings. The following table sets out the relevant details:

Assessment year Amount of dividend deemed to Date of order passed under s. 23A

have been declared deeming dividend to have been

Rs. declared

1946-47 46,563 March 18, 1952

1947-48 43,959 March 18, 1952

1948-49 47,829 March 18, 1952

1949-50 97,875 March 18, 1952

1960-51 92,591 March 18, 1952

1951-52 25,899 March 30, 1955

3,54,716

On July 7, 1955, the company in a general meeting resolved that the amount of Rs. 3,54,716, which was under the orders of the Income Tax

Officer deemed to have been distributed as dividend amongst the shareholders pursuant to orders under Section. 23A of the Income Tax Act, be

distributed as dividend to the shareholders, and in pursuance of that resolution, proportionate part of the dividend due to each shareholder was

credited to his account.

The Income Tax Officer completed the assessment of the company for the year 1956-57 and determined Rs. 5,69,396 as its total income. The

Income Tax Officer computed the super-tax payable by the company under the Finance Act, 1956, at the rate of six annas and nine pies in the

rupee of the total income, and granted a rebate at the rate of four annas in the rupee in accordance with the provisions of Clause D, provisos (i)(b)

and (ii) of the Schedule to that Act. Some time thereafter, the Income Tax Officer, being of the opinion that excessive relief had been granted to the

company within the meaning of Section 34(1)(b) of the Income Tax Act, issued a notice on January 31, 1959, for reopening the assessment for the

year 1956-57. The company filed its return of income in compliance with the notice and contended that the proceedings commenced by the

Income Tax Officer were unauthorised, because the income of the company had not been the subject of ""excessive relief"" within the meaning of

Section 34(1)(b), and that actual distribution of dividends already deemed to have been distributed in accordance with the orders passed u/s 23A

cannot be taken into consideration for the purpose of reducing the rebate of super-tax admissible under proviso 2 to Paragraph D of the Finance

Act, 1956. The Income Tax Officer rejected the contentions and ordered that the rebate of supertax to the extent of Rs. 80,978 be withdrawn.

In the appeal to the Appellate Assistant Commissioner it was held that, in the circumstances of the case, assessment could be reopened u/s

34(1)(b) on the ground that the income had been made the subject of ""excessive relief"", but only Rs. 77,600 and not the whole amount of Rs.

3,54,716, which was deemed to be distributed under orders passed u/s 23A, could be taken into consideration as dividend distributed by the

company during the previous year relevant to the assessment year 1956-57.

There was a further appeal, not at the instance of the assessee who was apparently satisfied with the order of the Appellate Assistant

Commissioner, but at the instance of the department. The contention urged by the department was that the Appellate Assistant Commissioner

wrongly interfered with the order of the Income Tax Officer in regard to the reduction of rebate pertaining to Rs. 3,54,716. The assessee raised

the objection before the Tribunal that Section 34 proceedings were entirely without jurisdiction and that, therefore, the order of the Appellate

Assistant Commissioner in so far, as it was favourable to it was right. On behalf of the department it was contended before the Tribunal that the

assessee was not competent to raise the objection of the non-applicability of Section 34 of the Act as it had not filed in independent appeal against

the adverse finding of the Appellate Assistant Commissioner holding that this provision was applicable. The Tribunal held that it was open to the

assessee to raise the point because of rule 27 of the Appellate Tribunal Rules to which we shall refer a little later. The Tribunal accepted the plea of

the assessee that Section 34 was not applicable and consequently dismissed the appeal by the department.

But the Tribunal confirmed the order of the Appellate Assistant Commissioner directing that Rs. 77,600 be taken into account in withdrawing

rebate of super-tax.

The Tribunal then referred three questions to the High Court of Judicature at Madras:

Whether the Tribunal was justified in disposing of the appeal as it did?

Whether the Tribunal was right in law in entertaining the assessee''s contention relating to the applicability of Section 34(1)(b) under rule 27 of

the Appellate Tribunal Rules?

Whether the setting aside of the assessment u/s 34(1)(b) was correct in law ?

The first two questions have been answered by the High Court in Commissioner of Income Tax v. Sundaram & Co. (P.) Ltd., in favour of the

assessee and the Commissioner of Income Tax has not challenged the correctness of the answer to those questions before the Supreme Court. But

it is to be noted that this court when it decided Commissioner of Income Tax v. Sandaram & Co. (P.) Ltd., said that appeal grounds are only

missiles employed by the combatants to achieve their respective ends and it would not be possible to limit the subject of the appeal by taking into

account the rival contentions or the reasons or grounds put forward either by the department or by the assessee. In this view, questions Nos. 1 and

2 were answered against the department and in favour of the assessee. Regarding the third question, the Supreme Court felt that the question was

defective and reframed it as follows:

Whether the Income Tax Officer was, in the circumstances of the case, competent to initiate the proceeding u/s 34(1)(b) of the Indian Income Tax

Act for bringing to tax excessive rebate granted to the assessee?

Repelling the contention of the counsel for the assessee that the expression ""too low a rate"" used in Section 34(1)(b) must, having regard to the

context in which the expression is used, be regarded as the fraction which determines tax liability of the assessee, the Supreme Court said:

The assumption that the expression ''rate'' has been used in Section 34(1) as meaning a fraction of total income is, in our judgment, not warranted.

By the use of the expression ''rate'' in the context in which it occurs, undoubtedly a relation between the taxable income and the tax charged is

intended, but the relation need not be of the nature of proportion or fraction. The expression ''rate'' is often used in the sense of a standard or

measure. Provided the tax is computable by the application of a prescribed standard or measure, though not directly related to taxable income, it

may be called tax computed at a certain rate. We agree with the High Court that the rebate of tax and the reduction of such rebate are essentially

matters of measure or standards of rate. The chief aim and object of the Finance Act, 1956, is to prescribe the standard or measure of Income

Tax and super tax and it seems that an assessee escaping some of its provisions, and failing to pay the full measure of tax is assessed at too low a

rate.

The Supreme Court also incidentally noticed that it was not argued before the Tribunal on behalf of the company, that on the notice served by

the Income Tax Officer, proceedings for reassessment could only be initiated on the ground that income had been the subject-matter, of excessive

relief and not on any other ground. The main contention was that the initiation of the reassessment proceedings was invalid. On this aspect, the

Supreme Court said :

Counsel for the company did argue before the High Court that in a proceeding to reassess income initiated on a notice that income has been

subject to excessive relief, the Income Tax Officer was incompetent to reassess income on the footing that income was assessed at too low a rate,

but the High Court did not record their decision on that plea; they merely suggested that it will be open to the company to raise the question when

the matter is again taken up for consideration. If, however, the question arising out of the order of the Tribunal was, as correctly pointed out by the

High Court, one about the '' validity of initiation of proceeding u/s 34(1)(b), the High Court was bound to decide all aspects of that question raised

before them, before recording an answer: if they did not, the Tribunal would be powerless to enter upon an enquiry of any other aspect of the

question after answer to the question is recorded by the High Court. We are unable to agree with the assumption made by the High Court that

because a particular aspect of the question of law raised was not specifically argued before the Tribunal, the High Court cannot deal with that

aspect.

We are, in the state of the record before us, unable to record an answer to the question, and the case must be remanded to the High Court to

determine whether the proceedings were validly initiated on the notice issued against the company. The notice which was served upon the

company is not included in the paper book prepared for use in this court. The notice must of necessity be part of the record of the Income Tax

Officer, even if it be not on the record of the Tribunal. It will be open to the High Court, in determining the contention raised by the company, to

call for a supplementary statement of the case relating to the form and contents of the notice and the validity thereof, from the Tribunal. After

receiving the supplementary statement, if any, the High Court will proceed to dispose of the third question in the light of the reasons set out by us in

this judgment.

In the light of the above, this court called for a fresh statement of the case but the Tribunal, without adverting to the validity of the notice issued

by the Income Tax Officer, sent the notice to enable the court to decide the third question, as reframed by the Supreme Court.

It has, therefore, become necessary for us to render an answer to the question involved. We have seen the notice issued by the Income Tax

Officer. We have heard arguments. As rebate of tax and reduction of such rebate are primarily having an impact on the ""rate"", then it follows that

an enquiry by the Income Tax Officer, whether excessive relief has been granted, in the teeth of the provisions of the Finance Act of 1956 has a

nexus to the measure or standard of rate. If such a nexus is conceivable, then the Income Tax Officer did have jurisdiction to initiate proceedings

as, he did, u/s 34(1)(b), notwithstanding the apparent error in the notice, which has accidentally or inadvertently omitted one of the limbs of Section

34(1)(b), namely, to reassess if the original assessment was assessed at too low a rate. The jurisdiction exercised by the Income Tax Officer u/s

34(1)(b) is a composite jurisdiction and is not divisible and dissectable in the light of the situations contemplated in Section 34(1)(b).

The existence or the manner of exercise of such jurisdiction of an authority acting as a statutory functionary is always understood as different

concepts. If there is an irregularity in the manner of exercise of jurisdiction, it does not follow, as of necessity, that the resultant act of the authority

in such circumstances is a nullity. There is no doubt, when the Income Tax Officer exercises jurisdiction u/s 34(1)(a) or Section 34(1)(b) of the

Income Tax Act of 1922, he acts as a statutory functionary and is expected to act within the limits prescribed therein. The only limitation

prescribed in Section 34(1)(b) of the Act is that he should issue a notice under Sub-section (2) of Section 22 of the Income Tax Act, 1922, and he

should, on information made available, act in accordance with the sub-section. Section 34(1)(b) postulates the various channels through which such

jurisdiction can be exercised. It may be a case of escapement of assessment, under-assessment, or assessment at too low a rate or have been

made the subject of excessive relief under the Act, etc. But, if, in communicating with the assessee, he erroneously, adopts a wrong channel to

process the notice u/s 22 as above and makes a reference to one of the situations postulated in Section 34(1)(b), when it ultimately transpires that

that is not the correct situation, does it follow that action under the other limbs of Section 34(1)(b) cannot be taken, though his jurisdiction to

initiate and act generally under it is indisputable ? We think not. The methodology adopted and availed of by the Income Tax Officer is not in

pursuance of any law or a statutory mandate. The form of the notice which the Supreme Court has asked us to consider and adjudicate upon its

validity, is not one which is prescribed under law, nor is it one of the requirements of Section 34(1)(b), It appears to be the product of

administrative guidance. Before issuing the letter, the Income Tax Officer has to be satisfied subjectively about the information on record which

would prompt him to act u/s 34(1)(b). He has to be judiciously satisfied about it. Closely following such a subjective satisfaction of the Income Tax

Officer is the objective act of the issuance of the notice as envisaged in the section. Whilst the Income Tax Officer acts objectively and follows up

an administrative, though age-long, rule by issuing a letter of the kind under review, it may happen that an error may creep in its issuance. If the

form of the letter or its text which has no legal basis or the issuance of which depends on no legal authority, contains a mistake, it does not go into

the root of the jurisdiction of the officer to act u/s 34(1)(b) in general. If, as in this case, he has limited in his letter, to the exercise of his jurisdiction

to a situation that the income, profits or gains chargeable to tax have been made the subject of excessive relief, then if it ultimately transpires, it is a

case falling under one or the other of the limbs referred to in the letter, then there is no embargo on him to proceed under the other limbs of the

section. To restrict him would be to deny him the statutory right to reassess. This is not a case as it happened in Raghubar Dayal Ram Kishan v.

Commissioner of Income Tax, where the Income Tax Officer changed his ground from Section 34(1)(a) to Section 34(1)(b). It is indisputable that

Clauses (a) and (b) of Section 34(1) contemplate two separate and mutually exclusive jurisdiction. But, when we come to each of the sub-

sections, the jurisdiction is incapable of further dissection, according to the situations noted therein. If, on record, material is available to act under

one or the other of the limbs of Section 34(1)(b), the fact that the notice issued by the Income Tax Officer mentioned only one of such situations,

does not matter. The substance of the matter should govern and not an administrative form, which has no statutory sanction behind it. After having

been apprised of the material in this historic litigation running for more than a decade, we have no hesitation in holding that the Income Tax Officer

rightly initiated the proceedings u/s 34(1)(b). No doubt, it was the High Court which ultimately noticed that the real situation is not so, much the

grant of excessive relief, but assessment of income, at too low a rate. This was in the sense that a rebate which ought not to have been granted

having been granted, has an impact on the rate of tax on income. The Supreme Court has said that if any assessee escapes the clutches of a

Finance Act or any of its provisions, he fails to pay the full measure of tax, and in consequence the income has been assessed at too low a rate.

This is the case here. The Income Tax Officer was satisfied about the information that the rebate granted earlier was not in accordance with the

Finance Act of 1956. So he assumed jurisdiction u/s 34(1)(b). We have already held that once the jurisdiction is assumed and exercised, it is not

to be iron-jacketed to one of the situations, erroneously, mistakenly or inadvertently referred to in the notice coined and issued by him. The notice

is self-active and its effect cannot be sloped down by a form adopted by the Income Tax Officer on his own. In R. P. Kandaswami and Others

Vs. Commissioner of Income Tax, Madras, , this court after referring to the observations of the Supreme Court in L. Hazari Mal Kuthiala Vs. The

Income Tax Officer, Special Circle, Ambala Cantt., said:

It is now well-settled that the jurisdiction of any Tribunal, does, not depend upon the wrong provisions of law upon which the Tribunal might have

purported to act, but upon the question whether the Tribunal had jurisdiction on a proper view of the functions and powers with which it is clothed

under the law or the, statute creating it. In other words, the Tribunal will not lose its jurisdiction which it undoubtedly has in a particular case

because of its having misquoted the provision of law under which it exercised the jurisdiction."" ......

Undoubtedly the Income Tax Officer, had the jurisdiction to act u/s 34(1)(b), because it is not argued that it was a colourable exercise of

power. So he was competent to initiate the proceedings u/s 34(1)(b) of the Act for bringing to tax the excessive rebate granted to the assessee.

Excess, relief"" is a wide expression. Some instances of such relief could be gathered from Sections 15A, 15C, 49A, 49B, 49C, 49D and 60 of

the Act. But these reliefs are not exhaustive. ""Excessive relief"" may also, refer, to a relief granted but to which the assessee is not legitimately

entitled. If the relief runs contra, to the Finance Act of 1956, or for that matter any Finance Act of any year, then also it would be a relief illegally

granted. The relief, as contended; need not be under the Income Tax Act alone, as the Finance Act of each year is irretrievably knit with the main

texture of the Act and becomes part of it as soon as it is passed. We, therefore, answer the question is refrained by the Supreme Court in favour of

the department and against the assessee. This will apply to T.C. No. 153 of 1961 as well.

It only remains for us to consider whether, in the peculiar circumstances of the case, we should answer the questions in the other connected tax

cases. We are not reproducing the questions as they are not necessary. These cases arise out of the orders of the Tribunal passed by it pursuant to

the ratio in Commissioner of Income Tax v. Sundaram & Co. Private Ltd. As the Supreme Court has materially interfered with the order of this

court in Commissioner of Income Tax v. Sundaram & Co Private Ltd. we refrain from answering the questions raised, as the Tribunal was

powerless to enter upon an enquiry of any other aspect of the question, until after an answer to the question about the competency and legality of

the initiation of the proceedings u/s 34(1)(b) is decided by this court."" The above question is decided by us only now; therefore, the order of the

Tribunal and the questions referred to us, as if arising thereon, need not be taken notice of by us. This is in accord with the ratio of the Supreme

Court in Sundaram & Co. (P.) Ltd. v. Commissioner of Income Tax. Hence, with reference to the questions in T.C. Nos. 14, 15, 16 and 21 of

1965, we refrain from answering the same, as they arose in references which are not competent.

There will be no order as to costs throughout.