K Sambasivam vs Commissioner of Income Tax, Madras

Jagadisan, J.—This is a reference application under the Indian Income Tax Act and the question referred to this court is whether, on the

facts and in the circumstances of the case, the assessment made on August 24, 1956, in respect of assessment year 1951-52 is legal. The assessee

had a business in Ceylon and he started a new business at Tiruchirapalli in bullion some time in April, 1950. The Income Tax Officer, Tiruchirapalli,

assessed him to tax for the assessment year 1951-52 relevant to the accounting year ended March 31, 1951. In the books of account of the

assessee the sum of Rs. 29,430-8-10 made up of the three sums of Rs. 10,000, Rs. 8,000 and Rs. 11,430-8-10 was shown as capital. The

assessee stated that the sum of Rs. 10,000 was advanced to him by his father-in-law. This was his first version. He later on submitted that he got

the amount from his uncle, Thambi Pillai Saravanamuthu. The sum of Rs. 8,000 was stated to be given to him by his father, who collected

outstanding due to him from third parties in the Federated Malary States. A sum of Rs. 11,430-8-10 was alleged to have been advanced by the

assessees father during his lifetime but collected by the assessee and brought to India. The Income Tax Officer however chose to treat these sums

of money as income earned by the assessee from undisclosed sources. The order of assessment is dated March 29,1956. The officer acted u/s

23(4) of the Act in making the assessment. That is a provision which enables the officer to make a ""best judgment assessment"" consequent on

default by the assessee in complying with the statutory notices issued to him u/s 22(4) or 23(2). The assessee filed an appeal against this order and

also filed an application u/s 27 of the Act to have the assessment cancelled. The ground on which the assessee invoked the aid of section 27 was

that he had not received any notice from the officer u/s 22(4). On August 24, 1956, the officer passed an order cancelling his previous assessment

and on the same day reassessed the assessee again holding that this sum of Rs. 29,430-8-10 was income from hidden sources and not capital as

represented by the assessee.

In the first assessment order dated March 29, 1956, the officer observed as follows :

Notice u/s 23(2) has duly been served. The accounts produced were examined and the assessees representative, Mr. M. R. Venkataraman,

Chartered Accountant, heard. The assessee has not produced so far, in spite of several opportunities being given to him, information and evidence

to decide the following issues which are necessary to fix his income and tax liability.

In the order of cancellation u/s 27, the officer, however, made the following observation :

The assessee put in a petition u/s 27 on April 10, 1956, pointing out that a notice u/s 22(4) was not issued to the assessee and therefore he could

not be said to have committed any default in not producing the specific evidence called for by the Income Tax Officer. It is also pointed out that the

assessee has by his appearance through his representative and by the production of the accounts relating to the business before the Income Tax

Officer complied with all the terms of the notice u/s 23(2). In the result the assessee requests that the assessment u/s 23(2). In the result the

assessee requests that the assessment u/s 23(4) may be reopened u/s 27 and a fresh assessment made.... On going through the records I find that

the contention of the assessee is correct. The assessment u/s 23(4) is therefore against the provisions of the Act and has therefore to be cancelled.

I therefore admit the petition u/s 27. The assessment will be redone after giving the assessee a further opportunity of presenting all the evidence

called for in connection with the original assessment.

We have already referred to the fact that the assessee preferred an appeal to the Appellate Assistant Commissioner against the assessment

order u/s 23(4). That appeal was dismissed on September 26, 1956, in these terms :

The Income Tax Officer has reported, vide his letter, 276-S/51-52, dated September 15, 1956, that the assessment has been cancelled. Therefore

this appeal becomes superfluous and is therefore dismissed.

The assessee preferred a further appeal against this order to the Income Tax Appellate Tribunal, Madras, but was unsuccessful. The Tribunal

stated in its order submitting the appeal as follows :

Here the assessment u/s 23(4) had been set aside and the assessee had not been damnified at all. We see no reason why there should be an

appeal in the circumstances. We agree with the Appellate Assistant Commissioner that the appeal becomes infructuous as it is misconceived and

dismiss it.

Against the order of reassessment dated August 24, 1956, passed by the Income Tax Officer the assessee preferred appeals to the Appellate

Assistant Commissioner and to the Income Tax Appellate Tribunal raising various contentions which need not be set out. He failed to establish that

the alleged capital of Rs. 29,430-8-10 was not income from an undisclosed source taxable u/s 12 of the Act. Hence on an application by the

assessee the above question has been referred to us.

It is the validity of the assessment order dated August 24, 1956, passed by the Income Tax Officer which is the target of attack in this reference.

Learned counsel for the assessee submits that the assessment is without jurisdiction as it has been made beyond the four year period of limitation

prescribed u/s 34, sub-section (3), of the Act. That provision is :

No order of assessment or reassessment, other than an order of assessment u/s 23 to which clause (c) of sub-section (1) of section 28 applies, or

an order of assessment or reassessment in cases falling within clause (a) of sub-section (1) or sub-section (1A) of this section shall be made after

the expiry of four years from the end of the year in which the income, profits or gains were first assessable.

It is clear that in view of this provision the order of assessment cannot be made after March 31, 1956, the assessment year being 1951-52, and

that therefore the order made on August 24, 1956, is illegal. But the department relies on the second proviso to section 34, sub-section (3), and

that reads :

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 u/s 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 u/s 31, section 33, section 33A, section 33B, section 66 or

section 66A.

A reassessment order u/s 27 or as a result of proceedings u/s 27 is therefore not hit by the four year period prescribed u/s 34(3). If in this case

the proviso applied the alleged bar of limitation disappears. But Mr. Swaminathan, learned counsel for the assessee, contends that the proviso

cannot be invoked by the department as the facts and circumstances of the case did not warrant a reassessment u/s 27. We have therefore now to

consider the scope of that section. It is necessary first to refer to the provisions of the Act governing the proceedings of the Income Tax Officer.

The officer can issue notice to any person u/s 22(2) calling upon him to furnish within such period not being less than 30 days as may be specified

in the notice, a return in the prescribed form setting forth his total income and total world income during the previous year. After a return is made

by that person the Income Tax Officer may issue a further notice u/s 22, sub-section (4), requiring him to produce or cause to be produced such

accounts or documents as the Income Tax Officer may require on a date specified in the notice. The only limitation imposed by this second sub-

section to section 22(4) upon the Income Tax Officer is that he shall not require the production of any accounts relating to a period more than three

years prior to the previous year. Section 23 is the assessment section. The Income Tax Officer may be satisfied with the return made by the

assessee and he can complete the assessment accepting the return. If he is not so satisfied he shall u/s 23, sub-section (2), serve on the assessee a

notice requiring him on a date to be therein specified either to attend his office or to produce or to cause to be produced any evidence on which he

may rely in support of the return. On the date specified in the notice after hearing the assessee and scrutinising the evidence that may be produced

by him the Income Tax Officer can assess the total income of the assessee and determine the sum payable by him as tax. Now section 23(4) is

material and is in these terms :

If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a revised

return under sub-section (3) of the same section or fails to comply with all the terms of a notice issued under sub-section (4) of the same section

or, having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of the section the Income Tax Officer shall

make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case

of a firm, may refuse to register it or may cancel its registration if it is already registered.

The scheme of the Act is that the assessee is to make a return and if he makes a return he may be called upon to adduce evidence in support

of the income disclosed in his return. In case the assessee fails to make a return or fails to produce the evidence required to be produced, account

books and documents, the officer can make the assessment as best as he can. It is however obvious that the assessee must be afforded an

opportunity to show what his true taxable income is before any order or assessment consequent on his own fault or on his not being served with

the notice u/s 22(4) or section 23(2), it is open to him to have the assessment order cancelled invoking the aid of section 27 and that is :

Where an assessee within one month from the service of a notice of demand issued as hereinafter provided, satisfies the Income Tax Officer that

he was prevented by sufficient cause from making the return required by section 22, or that he did not receive the notice issued under sub-section

(4) of section 22, or sub-section (2) of section 23, or that he had not a reasonable opportunity to comply, or was prevented by sufficient cause

from complying, with the terms of the last mentioned notices, the Income Tax Officer shall cancel the assessment and proceed to make a fresh

assessment in accordance with the provisions of section 23.

The necessary ingredients of the section which must be present before it can be called into play are as follows :

(1) The assessee should prefer an application for cancellation of the assessment within one month from the service of notice of demand;

(2) The assessee must satisfy the Income Tax Officer that though he received the notice u/s 22(2) calling upon him to make a return he was

prevented by sufficient cause from making the return; or

(3) The assessee must establish that he did not receive the notice issued u/s 22, sub-section (4), or section 23, sub-section (2) or (4). The assessee

must show that though he received the notices (section 22(4) or section 23(2) he was prevented by sufficient cause from complying with the said

notices. This provision is fairly plain and clear in its terms. The assessee if he had been duly intimated of the proceedings before the officer or had

received the statutory notices u/s 22(2), (4) or section 23(2) can plead and satisfy the Income Tax Officer that there was sufficient cause for his

having committed default in not complying with those notices.

Now, Mr. Swaminathan contends that section 27 is hardly applicable to a case like the present where the officer admittedly failed to issue the

statutory notice u/s 22(4). Reliance is placed upon the order of the Income Tax Officer u/s 27 extracted above. We must say that nothing is clear

from the said order except the fact that the original assessment was cancelled. The Income Tax Office states in that order that the assessee was

represented during the prior proceedings and that he also produced his books of account. It is true that the officer failed to issue the requisite

notice u/s 22(4). The basis of the first assessment was not that the assessee failed to comply with a notice u/s 22(4), but that the assessee did not

comply with the terms of the notice u/s 23(2). This is clear from the following observation of the Income Tax Office in his order reopening the first

assessment :

In the course of the assessment, the assessee was called upon to produce certain specific evidence in respect of the degree of his responsibility and

the source of capital invested by him in the Trichy business as well as in a business carried on by the assessee in Ceylon. Evidence to the

satisfaction of the Income Tax Officer was not produced by the assessee. Consequently, the assessee was held to have not complied with the

terms of the notice u/s 23(2) and the assessment was completed u/s 23(4).

The Income Tax Officer had jurisdiction to resort to section 23(4), if, in his view, the assessee failed to comply with the terms of the notice

issued to him under sub-section (2) of the section 23. If the assessee satisfied the Income Tax Officer that he had not a reasonable opportunity to

comply with the terms of the notice under sub-section (2) of section 23, the officer had undoubtedly jurisdiction to cancel the assessment u/s 27.

The fact that no notice under sub-section (4) or section 22 was issued by the officer is a circumstances which was discovered in the course of the

proceedings u/s 27. The true basis, however, on which the first assessment was cancelled by the officer was that the assessee had no reasonable

opportunity to comply with the terms of the section 23(2) notice. We are unable to say that the Income Tax Officer acted without jurisdiction in

invoking the machinery of section 27 of the Act on the facts and circumstances of this case.

It was the assessee who moved the Income Tax officer for cancellation of the original assessment u/s 27. He succeeded in his attempt before

the officer and it is now too late for him to turn round and say that the officer had no jurisdiction to act under that provision. The assessee cannot

be permitted to appropriate and reprobate or to blow hot and cold. He cannot take advantage of the cancellation of the original order of

assessment u/s 27 and at the same time say that the order of reassessment which is certainly a consequence of the order u/s 27 is bad, because of

the bar of limitation.

Quite apart from the above considerations, it seems to us that the assessee cannot avoid the applicability of the second proviso to section

34(3) as the terms of that proviso, plain as they are, are fully applicable to the present case. The time bar of four years does not apply to ""a

reassessment made u/s 27"". This does not mean that the reassessment was one properly made u/s 27. Any order of reassessment which marks the

termination of proceedings u/s 27 can quite legitimately be called a reassessment u/s 27. If the assessee invokes the aid of section 27 and invites

the officer to pass an order under that provision and the officer purports to act under that provision, the requirements of the second proviso are

fully satisfied. After a reassessment becomes a fail accompli, it would be dangerous to embark upon an investigation of the validity of an order u/s

27 at the instance of an assessee seeking to rely upon a bar of limitation u/s 34(3).

We may also point out that the assessees problem in this case is not so simple as he would like to have it. Even if the order dated August 24,

1956, can be destroyed by using a dialectical skill, that would only result in reviving the previous order of assessment dated March 29, 1956.

There are absolutely no grounds vitiating the impugned order of the Income Tax Officer, which is perfectly in conformity with law. Learned

counsel for the assessee did not advance any argument on the question whether the addition of income made by the assessing authorities and

confirmed by the Appellate Tribunal is, in any way, not supported by the materials on record. The question is answered in the affirmative and

against the assessee who will pay the costs to the department. Counsels fee Rs. 250. Question answered in the affirmative.