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Judgment
S.K. Kapur, J.—By this writ petition the petitioner-company has prayed for a writ, order or direction quashing notice dated the 23rd March, 1965, issued by the Income Tax Officer, Companies Circle VI, New Delhi, u/s 147 of the Income Tax Act, 1961. The said notice is with respect to assessment year 1948-49. The petitioner company filed a return showing a loss of Rs. 1,48,257/- on the 18th June. 1948, for the said assessment year. On the 31st July. 1953, a press note was issued by the Government of India calling attention of the public to the Income Tax (Amendment) Act. 1953, which had introduced Sub-section (2 A) providing that the assessees, wanting to carry forward their losses, were required to submit returns, declaring such losses, within the time specified in the general notice issued u/s 22(1) of the said Act. In pursuance of this press note, the petitioner-company filed a second loss return for the said assessment year on the 30th December. 1953. It is alleged by the petitioner-company that in spite of the various hearings, no assessment was made on any of the two returns.
The proceedings taken in pursuance of the returns have been set out in paragraph 3 of the petition. According to the said paragraph, notices u/s 23(2) of the said Act were issued to the petitioner-company on the 4th September. 1948, the 27th June, 1950, and the 9th January. 1952, and the case was heard, and/or information supplied on 7th March. 1950, 5th November, 1951, 19th November. 1951, 2nd February, 1952, 9th February, 1952, and 16th May, 1953. The above information was supplied in pursuance of various letters alleged to have been issued by the Income Tax Officer. It is then said in paragraph 5 that in spite of various proceedings, no assessment order was passed by the Income Tax Officer concerned. Similarly, no order for assessment is alleged to have been passed on the second return filed in pursuance of the press note.
The position taken by the respondents in the reply affidavit is as follows--
(i) They do not deny that the the two loss returns were filed. According to them, however, the date of filing of the first return was the 21st July. 1948 and not the 18th June. 1948.
(ii) In reply to the paragraph 3 of the petition setting out the various proceedings taken, the respondents generally deny the correctness, and then proceed to say that two hearings took place on the 10th September 1948, and the 21st December, 1948, but no books of account were examined on either of these dates. The case was generally discussed and a future date was fixed for further examination. On the 3rd November. 1949, the proceedings were dropped and the case was ordered to be "filed", as the return declaring loss, was found to be a voluntary return, which had not been filed in response to a notice u/s 22(2) of the said Act. Thereafter, the case was examined on some occasions and further details were looked into, but this was done with a view to finding out whether any income had escaped assessment and any action u/s 34 was called for
(iii) Even if it be held that various proceedings, as alleged, did take place on a voluntary return filed by the petitioner-company, the same were without jurisdiction and incompetent.
(iv) The loss return, voluntarily filed, was an invalid return in law, and consequently it was a case of no return having been filed
(v) In reply to paragraph 5 it is said that in the circumstances it was not necessary to pass any assessment order on an invalid return.
Before I deal with the merits of the contentions. I consider it appropriate to say a few words about the reply affidavit. According to para graph 3 thereof, the proceedings on the so-called voluntary return were dropped and the case was ordered to be "filed" on the 3rd November. 1949 It is further stated therein that "thereafter the case was examined on some occasions and further details were look ed into but this was all done with a view to finding out whether any income had escaped assessment and any action u/s 34 was called for." The petitioner-company in paragraph 3 had mentioned several notices u/s 23(2) having been issued after the 3rd November, 1949. Those allegations have not been specifically denied, though in the opening part of paragraph 3 of the reply affidavit, there is a general statement "the contentions urged by the petitioner in para 3 are not correct." Even there, it is not stated whether or not the statements of fact (not contentions) are correct or incorrect. Normally, after the proceedings had been dropped on the 3rd November, 1949, there should have been no occasion to issue notices u/s 23(2) of the said Act. I think, it was necessary to set out the facts a little more precisely in the reply affidavit. It is incumbent on the parties to state the facts very clearly and precisely and assist the court in the proper appreciation of the controversy on the basis of the correct factual position.
Mr. Vishwanath Shastri. appearing for the petitioner-company, has urged two contentions: (i) The notice u/s 147 is, on the face of it, without jurisdiction as no income can be said to have escaped assessment unless an assessment had been made on the basis of the loss returns filed by the petitioner-company and (ii) in any, case, even the second return filed in pursuance of the press note was a valid return, and no order having been passed thereon, no action can be taken u/s 147. On behalf of the respondents, the principal question raised by Mr. Hardy is that a voluntary loss return is no return at all, and. therefore, the action proposed to be taken u/s 147, is valid The heart of the problem, therefore, is whether or not the two returns filed by the petitioner-company were valid, and. if so can it be said that any income has escaped assessment, since, admittedly, no assessment order has been passed on any one of the two returns.
In The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, it was held by the Supreme Court that (i) A return filed showing income below the taxable limit voluntarily in answer to the genera] notice u/s 22(1) of the Income Tax Act is a good return, (ii) A return in answer to general notice u/s 22(1) of the Income Tax Act can, u/s 22(3), be filed at any time before assessment, and for this there is no time limit, and (iii) Such a return, voluntarily submitted before assessment, cannot be ignored by the Income Tax Officer, and any notice of re-assessment and consequent assessment u/s 34 ignoring the return is invalid. Hidayatullah, J. after discussing the decisions on the subject observed:
"If the Income Tax Officer had acted on that return and assessed the assessee before March 31, 1950, the assessment would have been valid. He chose to ignore the return, and served on the assessee a notice u/s 34(1).
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''."
In Radhakrishna Rungta and Others Vs. Seventh Income Tax Officer, C-II Ward, Bombay, the petitioner made a petition under Article 226 of the Constitution praying, inter alia, for a writ directing the respondent to compute the loss and to notify the petitioner of the said computation on the basis of a voluntary loss return filed by the assessee. A Bench of Bombay High Court held that (i) A voluntary return of loss submitted by an assessee is a good and valid return under Sub-section (3) of Section 22. even before the amendment of Section 22 of the said Act by insertion of Sub-section (2A), if it was made at any time before assessment, and the Income Tax Officer was bound to take the necessary action in respect of such a claim, (ii) Sub section (2A) of Section 22 does not warrant a conclusion that subsequent to the insertion of the said provision. a voluntary loss return is not capable of being filed by an assessee except as provided in the said Sub-section. On the basis of these conclusions, the High Court directed the Income Tax Officer to take up the returns filed by the petitioner before him for the assessment years 1958-59 and 1959-60 and complete the assessment for the said periods.
To the same effect is the decision of this Court in TULSI DASS JASWANT LAL KUTHIALA AND OTHERS Vs. Income Tax OFFICER, A-WARD, AMBALA, AND ANOTHER., Grover J. upheld the contention that a voluntary loss return filed prior to the making of an assessment was a valid return. Grover. J. said:
"With respect I agree and hold that in the present case the return for the assessment year 1952-53 had been made voluntarily under the provisions of Section 22(3) and since it had been simply ignored and no decision had been given with regard to it, it could not be said that there had been any omission or failure on the part of the assessee or that there was any question of assessment ''escaping'' within the meaning of Section 34(1)..." Mr. Hardy contended that the decision of this court and that of the Bombay High Court were not correct inasmuch as they were based on incorrect reading of the decision of their Lordships of the Supreme Court in The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, . According to him in The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, there was an income though below the taxable limit and, therefore, the return was treated as a valid return.
It is said that that does not lead to the conclusion that even a loss return would be a valid return. Mr. Hardy relies on Section 22(1) and says that it is only a return of income that is required to be filed, and where there is no income, the assessee cannot voluntarily file a loss return. He further seeks to distinguish TULSI DASS JASWANT LAL KUTHIALA AND OTHERS Vs. Income Tax OFFICER, A-WARD, AMBALA, AND ANOTHER., on the ground that the period, in question there, was after Sub-section (2A) of Section 22 had been introduced, which for the first time recognised a loss return under the Income Tax Act. In my opinion, there is no force in Mr. Hardy''s contention. A loss return submitted by an assessee before making of an assessment order would be as valid and proper a return as a return filed for an income below the taxable limit. The language of Section 22(1) is of no assistance to Mr. Hardy, for if the return mentioned therein alone were to be treated as a valid return, then a return of income below the taxable limit would also be invalid. That would be so because Section 22(1) requires a return to be filed by "every person whose total income during the previous year exceeded the maximum amount which is not chargeable to Income Tax...."
There are other serious difficulties in giving effect to Mr. Hardy''s arguments. u/s 10(2)(vi), it appears, that allowance can be claimed by an assessee only if the prescribed particulars are furnished. In respect of these particulars the assessee has to fill in the form prescribed by Rule 19 of the rules made u/s 59 Rule 19 prescribes the form of return and Part V thereof requires a statement of particulars prescribed under proviso (a) of Section 10 (2) (vi) of the Income Tax Act, 1922, relating to the depreciation claimed to be incorporated. Under the scheme of 1922 Act, where a person is carrying on several businesses or both business and profession, he is entitled u/s 10, without recourse to Section 24, to set off losses of one business against profits of another or losses in business against professional earnings, and the tax is leviable only on the balance of profits after deducting such losses u/s 24 of the said Act, where an assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 6, he is entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. This is, however, subject to certain special provisions with respect to speculative losses.
From the above it follows that losses in business may be set off against income from other sources. Take a case where income from other sources is Rs. 50,000/-, and losses under the head ''business'' Rs. 3,00,000/ comprising of Rs. 20,000/- on account, of carrying on of the business and Rs. 2,80,000/ on account of depreciation. In such circumstances the net result would be loss and the assessee would not be liable to pay tax. But, how is an assessee going to claim that loss? Depreciation loss he can claim only if he files the prescribed particulars in the return. To enable himself, therefore, to claim the net overall loss or not to pay tax on income from other sources, it would be necessary for an assessee to file a return showing an overall loss. In case a loss return is not treated a valid return, anomalous results would follow, because depreciation he cannot claim without filing the particular, and particular, to be included in the return, he cannot file since there is an overall loss. Similarly, Section 24 (3) also postulates the computation of a negative figure. The said Sub-section (3) of Section 24 provides--
"(3) When, in the course of the assessment of the total income of any assessee. it is established that a loss of profits or gain has taken place which he is entitled to have set off under the provisions of this Section, the Income Tax Officer shall notify to the assessee by order in writing the amount of the loss as computed by him for the purposes of this Section."
It follows from the above discussion that the Income Tax Act does contemplate filing of a loss return. Proceeding then on the footing that the loss return was a valid return, there could be no question of income escaping assessment since no assessment was made. The petitioner-company filed the voluntary return on 18th June, 1948. It could have, therefore, been assessed u/s 23. It is not open to the revenue to take proceedings u/s 34 by disregarding the return filed.
In The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, the notice u/s 34 was issued on 5-1-1950, while the four years'' period prescribed by Section 34(3) for making the assessment expired on 31-3-1950. In this case the four years'' period had expired before the notice u/s 147 was issued. A question may arise whether in these circumstances it can be said that income escaped assessment because no assessment could be made after the expiry of four years. This reasoning does not, in my opinion, displace the ratio of the decision in The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, This argument proceeds on the assumption that the words ". . . or to disclose fully and truly all material facts necessary for his assessment for that year.. .. " in Section 34(1)(a) are wide enough to include a case where proper income is not disclosed in the return filed by the assessee and as a result of such non-disclosure no assessment is made within the period of limitation resulting in total escapement of income.
So far as Section 34(3) as amended with effect from 1-4-1956 is concerned, there is absolutely no difficulty because order of assessment u/s 23 to which Clause (c) of Sub-section (1) of Section 28 applies, could be made without any bar of limitation and position would be exactly similar as in The Commissioner of Income Tax, Bombay Vs. Ranchhoddas Karsondas, Bombay, Before 1956, however, the period of limitation in such cases was eight years. That would also not alter the position, because to hold that in such cases Section 34 applies would mean that even when a return is filed in response to general notice, the Income Tax Officer may choose not to make an assessment order u/s 23 and take resort to action u/s 34. In such cases also, there can no question of income ''escaping'' because the Income Tax Officer can make the assessment on such voluntary return u/s 23. It is suggested that by ordering the return to be ''filed'' the matter stood disposed of in 1949 and. consequently, the income did escape assessment. There is no force in the argument since admittedly no assessment had been made. Directing the return to be ''filed'' means nothing more than direction to assign it to the record-room. In these circumstances, it must be held that the Income Tax Officer was wrong in issuing the impugned notice on the ground that the income had escaped assessment. The said notice was therefore without jurisdiction and deserved to be quashed. The petition is, therefore, allowed and the notice dated 23rd March, 1965, issued by the Income Tax Officer, Companies Circle VI, New Delhi, u/s 147 of the Income Tax Act, 1961, quashed. Parties will, however, bear their own costs.