K. Sambasivam vs The Commissioner of Income Tax

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 24th August, 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 sometime in April, 1950. The Income Tax

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

of account of the assessee the sum of Rs. 29,430-8-10 made up of 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

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

assessee''s 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 29th March, 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 24th August, 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 29th March, 1956, the Officer observed as follows:

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

Chartered Accountant, heard. The assessee has not produced, so far, in spite of several opportunities 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 10th April, 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(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 re-done

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 26th September, 1956, in these terms:

The Income Tax Officer has reported vide his letter 276--S./51-52, dated 15th September, 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 dismissing the appeal as follows:

Here the assessment u/s 23(4) had been set aside and the assessee had not been dandified 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 in fructuous as it is misconceived and dismiss

it.

Against the order of re-assessment, dated 24th August, 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 24th August, 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 re-assessment 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 re-assessment in cases falling within Clause (a) of Sub-section (1) or Sub-section (1-A) 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 assessed.

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

that therefore the order made on 24th August, 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 re-

assessment may be made shall apply to a reassessment made u/s 27 or to an assessment or re-assessment 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 33-A, Section 33-B, Section 66 or

Section 66-A.

A re-assessment 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 re-assessment 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 this section, the Income Tax Officer shall

make the assessment to the best of his judgment and deter mine 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 the assessee must be afforded an opportunity

to show what his true taxable income is before any order of assessment can be made against him. Where an assessee suffers an adverse order of

assessment consequent on his own default 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 notices 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) and (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 Officer 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 Officer 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 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 tinder Section

The fact that no notice under Sub-section (4) of Section 22 was issued by the 6fficer is a circumstance 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 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 approbate 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 re-assessment 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 re-

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

termination of proceedings u/s 27 can quite legitimately be called a re-assessment 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 re-assessment becomes a fait accompli at 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 assessee''s problem in this case is not so simple as he would like to have it. Even if the order, dated 24th

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

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 cost to the Department. Counsel''s fee Rs. 250.