Mulla Irshad Ali vs Commissioner Income Tax

P.V. Dixit, C.J.—This is a reference u/s 66 (2) of the Indian income tax Act, 1922. By an order dated the 26th July 1957 of a Division Bench of this Court directed the Appellate Tribunal to state the following questions for the opinion of this Court: -

"1. Were the proceedings taken against the assessee by the income tax Officer, Bhopal, under the Bhopal income tax Act or under the Indian income tax Act ?

Was a second appeal competent before the Tribunal ?"

The facts and circumstances giving rise to this reference are that the applicant Mulla Irshad Ali was assessed u/s 25 (3) of the Bhopal income tax Act, 1936, on a total income of Rs. 2,365 by an order dated 20th July 1946. By Section 3 (2) of the Taxation Laws (Extension to Merged States and Amendment) Act. 1949, the Indian income tax Act, 1922, and the Indian Finance Act, 1949, operated in Bhopal State as if they had been extended to, and brought into force in Bhopal State on 1st April 1949 Sometime in January 1951 the income tax Officer, Bhopal, learnt that the assessee had cashed on 16th January 1946 fifty-seven high denomination notes of Rs. 1,000 each and that the assessee had concealed the particulars of this income for the relevant assessment year 1946-47. On 11th January 1951 the income tax Officer sought permission of the Commissioner, income tax. P and Bhopal, Nagpur, for taking proceedings u/s 34 (1) (a) of the Indian Income tax Act. In reply, the Commissioner pointed out to the income tax Officer that Section 34 of the Indian income tax Act was not applicable to the case and suggested to him to submit fresh proposals in accordance with the relevant law. The Income tax Officer then sent proposals to the Commissioner for re-assessment u/s 40 of the Bhopal Income tax Act dealing with the assessment of escaped income. On 28th March 1951 the income tax Officer recorded the following order-

"As per telegraphic communication received from Commissioner of income tax start proceedings u/s 34 Issue Notices in Forms I. T. 90 and 11"

The notice which was actually issued to the assessee on 28th March 1951 was headed as ''Notice u/s 40 of the Bhopal State income tax Act, 1936,'' In the body of the notice also it was stated that it was issued u/s 40 of the Bhopal Act. The Income tax Officer used the form in vogue u/s 34 of the Indian Income tax Act, 1922, striking off therefrom the words. "Section 34 of the Indian income tax Act. 1922 (XI of 1922)," and making it as one u/s 40 Bhopal Act. The notice was served on the assessee on 29th March 1951. He filed a return which was not accepted. Thereupon notices purporting to be under Sections 23 (2) and 22 (4) of the Indian income tax Act, 1922, were issued to the assessee. These notices were in the forms in current use for notices under the Indian income tax Act. 1922. On re-aseessment the assessee''s total income was found to be Rs. 59,365 and he was assessed on this in come according to the Bhopal income tax rates then prevailing. The income tax Officer stated the details of the assessment in form I. T. 30. A notice of demand was also issued to the assessee for payment of Rs. 7420-10-0 is the tax for the assessment year 1946-47. This notice was headed as ''Notice of demand u/s 29 of the Indian Income tax Act. 1922,''

The assessee then preferred an appeal before the Appellate Assistant Commissioner, Jabalpur, against the order of assessment passed by the Income tax Officer. That appeal failed. Thereafter he took an appeal to the Appellate Tribunal Bombay. The tribunal dismissed the appeal holding that as the reassessment made on the assessee was under the Bhopal income tax Act and not under the Indian Income tax Act, and as the Bhopal Act did not provide for a second appeal to any Appellate Tribunal, the appeal before it was incompetent, The assessee''s application u/s 66 (1) of the Indian Income tax Act was also rejected by the Tribunal on the view that as the assessment proceedings were not under the Indian income tax Act Section 66 (1) of the Act did not apply.

Before proceeding to answer the questions stated for our opinion, it is necessary to state that the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, extended to the Bhopal State, which was administered by virtue of the States Merger (Chief Commissioners'' Provinces) Order; 1949, the Indian income tax Act, 1922, and the Indian Finance Act, 1949, and these Acts operated in that State as if extended to, and brought into force in, Bhopal on 1st April 1949. Section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, provided that if immediately before 26th August 1949 there was in force in any of the merged States any law relating to income tax, that law would cease to have effect except for the purpose of the levy, assessment and collection of income tax and super-tax in respect of any period not included in the previous year for the purposes of assessment under the Indian income tax Act for the year 1949-50 or any subsequent year. It further laid down that any reference in any such law to an officer, authority, tribunal or Court should be construed as a reference to the corresponding officer, authority, tribunal or Court appointed under the Indian income tax Act. When the definition of "taxable territories" was amended by the Finance Act, 1950, the merged territories to which the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, was applicable came to be included in the taxable territories as respects any period after 31st March 1949 for any of the purposes of the Indian income tax Act. Thus the Indian income tax Act became applicable to Bhopal State as from the assessment year 1949-50, or the accounting year 1948-49. The assessment year in question here is 1946-47. The Indian income tax Act not being in force in Bhopal State during the period of this assessment year the re-assessment of income for that year could only be under the Bhopal State law the operation of which was preserved for the purpose of levy, assessment and collection of tax in respect of income of previous years relevant to the assessment years prior to 1949-50, There could be no re-assessment of income for the assessment year 1946-47 under the Indian income tax Act. There is no dispute about this legal position It is also not disputed that u/s 37 of the Bhopal income tax Act an appeal lay to the Assistant Commissioner from orders specified in Section 36 made by an income tax Officer or the Assistant income tax Officer and that an appeal lay u/s 37-A to the Commissioner from certain orders of the Assistant Commissioner. The Bhopal Act did not constitute any Tribunal corresponding to the Tribunal under the Indian income tax Act, and gave no right of reference as u/s 66 of the Indian income tax Act. The order of assessment made against the petitioner by the income tax Officer and upheld in appeal by the Assistant Commissioner was not one against which a second appeal could have been filed to the Commissioner u/s 37-A of the Bhopal Act.

The controversy in this case centres round the question whether the proceedings which were initiated against the assessee in 1951 were under the Bhopal income tax Act or under the Indian income tax Act. In our opinion, on the material on record there can be no doubt that the proceedings were taken under the Bhopal income tax Act. When the income tax Officer first moved the Commissioner for granting permission to reopen the assessment for the year 1946-47 u/s 34 (1) (a) of the Indian income tax Act, the Commissioner informed him in clear terms that the said Act was not applicable. Thereafter the income tax Officer sent a proposal to the Commissioner for reopening assessment u/s 40 of the Bhopal income tax Act and for imposition of penalty u/s 34 of that Act. On receiving the Commissioner''s reply, the income tax Officer actually issued a notice on 28th March 1951 u/s 40 of the Bhopal Act. That notice was expressly stated to be u/s 40 of the Bhopal Act. Before the issue of the notice the income tax Officer no doubt recorded a cryptic order about the starting of proceedings u/s 34 and issue of notices in forms I. T, 90 and 11. This order was no doubt incomplete and inaccurate. The reference to Section 34 in that order is obviously to Section 34 of the Bhopal Act and not to Section 34 of the Indian income tax Act, Even if the frference is taken as one to Section 34 of the Indian income tax Act, the fact remains that the notice which was actually issued was unmistakably and in clear terms u/s 40 of the Bhopal Act. The initiation of proceedings is by the issue of a notice u/s 40 which is a condition precedent to the validity of any assessment on income which has escaped and not by the recording of an order by the income tax Officer embodying his decision to take proceedings for re-assessment of escaped income. The commencement of assessment proceedings was thus u/s 40 of the Bhopal Act and not under the Indian income tax Act. It is no doubt true that during the course of assessment proceedings notices purporting to be under Sections 23 (2) and 22 (4) of the Indian income tax Act were issued to the assessee and the demand notice was also headed as one u/s 29 of the Indian income tax Act. But these features as also the reference to Sections 23 (3) and 34 of the Indian income tax Act in the order of assessment made by the income tax Officer and in the order of the appellate Assistant Commissioner do not alter the fact that the proceedings against the assessee were in fact and in law initiated u/s 40 of the Bhopal Act. After the issue of notice u/s 40 of the Bhopal income tax Act, the taxing authorities no doubt conducted the proceedings as if they were under the Indian income tax Act. But for the purpose of determining whether the re-assessment proceedings were taken against the assessee under the Bhopal Act or under the Indian income tax Act what is material is the notice given to the assessee and not the law which the taxing authorities applied in the proceedings taken pursuant to that notice. If the taxing authorities referred to wrong provisions of law, or if, as the learned counsel for the assessee contended, the notice issued to the assessee was not in conformity with Section 40 of the Bhopal Act, then the validity of the proceedings may be open to attack. But on those grounds it cannot be urged that proceedings against the assessee were not taken-under Section 40 of the Bhopal Act even though a notice under that section was in clear terms issued to the assessee. In our opinion, the proceedings taken agianst the assessee were undoubtedly under the Bhopal Income tax Act.

The proceedings againat the assessee having been initiated under the Bhopal Act, the question whether the second appeal preferred by the assessee before the Tribunal was competent has to be determined with reference to the provisions in the Bhopal Act regarding appeals and of Section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. The first Proviso to Section 7 (1) of the Taxation of Laws Act, 1949, makes it clear that a reference in the Bhopal Act to any officer, authority, tribunal or Court is to be construed as a reference to the corresponding officer, authority, tribunal or Court appointed or constituted by or under the Indian income tax Act. The effect of the substantive provision of Section 7 (1) and of the first proviso to it is that the corresponding authorities appointed under the Indian income tax Act have, for the purposes for which the operation of the State law has been saved u/s 7 (1), the same powers and jurisdiction which the officers and bodies appointed and constituted under the Bhopal Act would have had if they had been allowed to function for the limited purpose stated in Section 7 (1), and discharge the same function which would have been discharged by the officers and authorities appointed or constituted under the Bhopal Act. Therefore, the matter of appeals would be governed by the relevant provisions in the Bhopal Act, and if, as pointed out earlier, under the Bhopal Act there was no second appeal in the present case against the order of the Assistant Commissioner, there could not be any second appeal to the Tribunal. In fact under the Bhopal law no tribunal corresponding to the Appellate Tribunal under the Indian income tax Act existed. In our opinion, the Tribunal rightly held that the second appeal preferred before it was incompetent.

Learned counsel for the assessee said that the appeal was competent inasmuch as the taxing authorities purported to act under the Indian income tax Act even though a notice u/s 40 of the Bhopal Act was issued. As to this, it is sufficient to say that the right of appeal must be expressly conferred by a statute. It has to be found within the statute itself and not in what the Judges or authorities do or purport to do. It is impossible to hold that the order of assessment made under the Bhopal Act which is not open to second appeal under that Act must for the purpose of appeal be taken to have been made under the Indian income tax Act simply because the taxing authorities purported to act under the Indian income tax Act. Our answers to the two questions referred to us, therefore, are that the proceedings taken against the assessee by the income tax Officer, Bhopal, were under the Bhopal income tax Act, 1936, and that the appeal preferred by the assessee before the Appellate Tribunal was incompetent. On these answers it is clear that the Appellate Tribunal was not exercising its usual functions under the Indian income tax Act at all in holding that the appeal was incompetent, and, therefore, no question of a reference u/s 66 of the Indian income tax Act could arise. The Tribunal rightly refused the application for a reference.

The result is that this petition fails as being incompetent and must be and is dismissed with costs. Counsel''s fee is fixed at Rs. 150.