N. Naganatha Iyer vs Commissioner of Income Tax, Madras

Venkatadri, J.—The Tribunal has submitted a statement of the case, directed u/s 66(2) of the Indian Income Tax Act, and the statement of

the case discloses the following facts :

The assessee, Naganatha Iyer, is a member of a Hindu undivided family consisting of himself, his father, Narayanaswsami Iyer, and his brother,

Ganapathy Iyer. The family was carrying on business in rice-mill fire-wood, oil-cake and soap-nut power at Tiruchirapalli. In February, 1941, the

assessee entered into a partnership with one Manickam and carried on business under the name and style of ""Andhra Trading Company"". The firm

traded in fire-wood and oil-cake and also plied lorries for hire. The business of the firm was also carried on at Tiruchirapalli. For the assessment

year 1942-43, which was the very first year of assessment for the firm, the share income from the said firm was returned by the assessee as his

separate income. The Hindu undivided family, of which the assessee is a member, also filed return. The assessee claimed that he was carrying on

the partnership business in the Andhra Trading Company in his individual capacity, and the firm had nothing to do with the Hindu undivided family.

His father, Nrayanaswami Iyer, also wrote a letter to the Income Tax Officer stating that he had no claim to the income form the Andhra Trading

Company, as it belonged exclusively to his son, the assessee. The Income Tax Officer, after making enquires, satisfied himself that the share

income from the firm represented the individual income of the assessee, and accordingly separately assessed it in the hands of the assessee for the

assessment years 1942-43, 1943-44 and 1944-45. But, in the assessment for the year 1945-46, the Income Tax Officer came to the conclusion,

on the basis of conduct of the parties and the entries in the account books of the family business and those of the Andhra Trading Company, that

the assessee was a partner in the firm on behalf of himself and the other members of the family, and, therefore, his share income from the firm was

included in the return of the undivided family. Narayanaswami Iyer, the father of the assessee and the karta of the Hindu undivided family, filed an

appeal against such inclusion of his sons individual income in the return of Hindu undivided family. The Appellate Assistant Commissioner did not

accept the contention of the father, and, on dismissal of his appeal, he filed a further appeal to the Tribunal where also he was unsuccessful. Finally,

the family moved this court u/s 66(2) of the Act and the High Court directed the Tribunal to state the case on the question of inclusion of the share

income of the assessee in the come of the family, consisting if the assessee, his father and his brother. The High Court finally answered the

reference in favour of the Hindu undivided family : Narayanaswami Iyer v. Commissioner of Income Tax. This decision was rendered on 12the

December, 1955.

During the pendency of that reference in this court, the assessee, as usual, submitted his respect of his share income in the said firm for the

assessment year 1948-49 and 1949-50. The Income Tax Officer ignored these returns and did not take any steps to assess the assessee on the

basis of these returns.

The Income Tax Officer issued a notice on 17th March, 1953, u/s 34(1)(a) of the Act, requiring the assessee to file his return for the assessment

year 1948-49. The assessee submitted that the return for 1948-49 was already filed before the Income Tax Officer on 8th March, 1949, and that

it was not lawful to ignore the return and resort to the provisions of section 34(1)(a) of the Act. However, the assessee filed a copy of the return

under protest. The assessment was completed on 13th March, 1954. Again for the assessment year 1949-50, the Income Tax Officer issued a

notice u/s 34 of the Act on 16th March, 1954, and the assessee filed a return under protest though he had filed one in the ordinary course on 25th

April, 1950. The officer completed the assessment on 7the May, 1954. In both the cases, the officer made the assessment on the assessee by

adopting the income from the firm as his individual income. It may be noted that the same items of income had been assessed on the Hindu

undivided family, rejecting the assessees claim that the income was not that of the Hindu undivided family.

The assessee preferred appeals to the Appellate Assistant Commissioner and contended that he had already filed the returns, that the Income

Tax Officer was not justified in ignoring them and invoking the provisions of section 34(1)(a) of the Act and that the assessments made on 13th

March, 1954, and 7th May, 1954, were barred by limitation, as four years had expired from the end of the relevant year of assessment. The

Appellate Assistant Commissioner upheld the action of the Income Tax Officer u/s 34. He was of the view, however that the case came under the

provisions of section 34(1)(b). Finally, he set aside the orders of the Income Tax Officer, to enable him to re-work the income of the assessee

according to law.

There were further appeals to the Tribunal, objecting to the validity of the assessments u/s 34(1)(a) of the Act. The Tribunal held that the appeal

had become otiose, as the Appellate Assistant Commissioner had vacated the assessments appealed against.

Thereafter, the Income Tax Officer, in accordance with the order of the Appellate Assistant Commissioner, made fresh assessments for the two

years, viz., 1948-49 and 1949-50, on 22nd January, 1957. Aggrieved with the assessment made, the assessee preferred appeals to the Appellate

Assistant Commissioner, once again contending that the whole proceedings initiated u/s 34(1)(a) were illegal and void, inasmuch as the returns of

his individual income had been submitted already and that no action was taken thereon. He further contended that when once the Appellate

Assistant Commissioner came to the conclusion that section 34(1)(a) was not applicable, he should not have given directions to re-work the

assessment u/s 34(1)(b), and that, in any event, there being no assessment u/s 34(1)(b) within four years from the end of the end of the year of

assessment, the Appellate Assistant Commissioner could not in law enlarge the period of limitation prescribed by the statute by purporting to act

under the proviso to section 34(3). The Appellate Assistant Commissioner, with regard to the assessment for the year 1948-49, referred to the

earlier decision of his predecessor and held that the point could not be considered in that appeal. However, in regard to the quantum, the Appellate

Assistant Commissioner gave some relief. The appeal for 1949-50 was dismissed as withdrawn.

The assessee preferred further appeals to the Income Tax Appellate Tribunal and contended that the assessments made u/s 34 were time-

barred and illegal, that the assessee having himself field the returns, there was no question of notice either u/s 22(2) or section 34 and that section

34(1) could be invoked only when there had been escapement of income and consequent failure on the part of the assessee. The Tribunal rejected

all these contentions of the assessee and confirmed the order of the Appellate Assistant Commissioner.

Now, on the request of the assessee, who failed before the Tribunal to refer the case to this court, this court directed the Tribunal to state a

case on the question whether the assessment u/s 34 of the Act was lawful. The reference, therefore, involves the true construction of section 34 of

the Income Tax Act. Lord Normand, while considering the scope of section 34, delivered his opinion thus in Commissioner of Income Tax v.

Mahaliram Ramjidas :

The section, although it is part of a taxing Act, imposes no charge, on the subject, and deals merely with the machinery of assessment. In

interpreting provisions of this kind rule is that that construction should be preferred with makes the machinery workable, ut res valeat potius quam

pereat.

Therefore, this section gives power to the Income Tax Officer to take proceedings, when the assessee did not disclose fully the total income in

his return or did not reveal the sources of income or did not submit a voluntary return of income u/s 22(1) or when income, profits or gains

chargeable to tax is omitted or has been under-charged, and he has reason to believe in consequence of information that the income has escaped

assessment or full assessment. Section 34 is intended to vest in the Income Tax Officer a power to amend the assessment, when he has reason to

believe that any income, profits or gains chargeable to Income Tax have escaped assessment for any year, and, in a such a case, he may proceed

to assess or reassess such income, profits or gains or recompute the loss or depreciation allowances. Before he exercises his power, he should

have some material to form his opinion that the assessee suppressed the relevant facts to escape assessment, or that he himself inadvertently

omitted to consider a fact or point of law. The burden of proof is on the department to show that the income has escaped assessment, and it is not

for the assessee to prove the contrary. In a proceeding u/s 34, the Income Tax Officer is only dealing with the extra income, which has not been

assessed to Income Tax. He has no jurisdiction to make a new assessment.

Section 34 deals with two cases of escaped assessment; clause (a) of section 34(1) deals with a case where there is an omission or failure on

the part of the assessee to make a return, and clause (b) deals with a case where, even without there being an omission or failure on the part of the

assessee, the Income Tax Officer receives certain information with regard to income. having escaped assessment. Thus, two conditions are

necessary before proceeding can be taken under this provision. In this case, the assessee had submitted a return, but the department ignored his

return and did not take steps to assess his income. It cannot be said that the officer had reason to believe that the income escaped assessment in

the relevant assessment Year.

What is meant by ""escaped assessment"" was explained in Rajendranath Mukherjee v. Commissioner of Income Tax. In that case, when one

Burn & Co. filed to the Income Tax authorities, they made an assessment including it in the income of Martin & Co. Subsequently, Martin & Co.

disputed the action of the Income Tax authorities in legal proceedings. The High Court directed the tax authorities to eliminate the income of Burn

& Co. in the assessment of Martin & Co. When the taxing authorities began to take action on the individual income of Burn & Co., they objected

that the authorities should have then proceedings u/s 34. Lord Macmillan, who delivered the opinion, observed at page 77 :

To say that the income of Burn & Company which... was returned for assessment and which was accepted as correctly returned, though it was

erroneously included in the assessment of Martin & Company, has escaped assessment... seems to their Lordships an inadmissible reading. The

fact that section 34 requires a notice to be served calling for a return of income which has escaped assessment strongly suggests that the income

which has already been duly returned for assessment cannot be said to have escaped assessment within the statutory meaning.

In the instant case, it is common case that the assessee made a return for the assessment years in question. But the department was hesitant to

assessee him individually, as it was of opinion that this income should have been included in the return made by the joint family, of which he was a

member. In Mannalal Modi v. Commissioner of Income Tax, when the assessee filed a return of his income, as an individual, it was transferred to

the office who was dealing with the return of the family income of the assess. Subsequently, it was found that there was partition in the family. The

Income Tax Officer issued a fresh notice u/s 34 calling upon him to file the return. He objected that he had already submitted his return. The

question for consideration was whether the assessment u/s 34 was valid. The learned judges observed at page 41 :

... the assessment proceedings had not come to an end. The return was still pending. Whether it was pending before the territorial Income Tax

Officer or the Income Tax officer, Special Circle, is immaterial so far as the assessee is concerned. He had filed a return and an assessment could

have been made by the department u/s 23 in pursuance of that return. Under those circumstances, it cannot be said that the income chargeable to

Income Tax had escaped assessment, and, therefore, the Income Tax Officer had no jurisdiction to issue a notice u/s 34 of the Act.

The same principle has been followed in Muthiah Thevar v. Commissioner of Income Tax. There the a assessee submitted a return for the

assessment year 1944-45, in response to a notice u/s 34 of the Act. He also submitted a return for the assessment year 1945-46. The Income Tax

Officer took no action on the return of 1945-46. Later, the officer issued a notice of reassessment u/s 34. The assessee objected and stated that

he had already submitted his return for the year 1945-46. Admittedly, the officer had not made any assessment for that year. It was held that the

Income Tax Officer was not entitled proceedings u/s 34 of the Act. Reliance was placed on Commissioner of Income Tax v. Ranchhoddas

Karsondas. The facts of that case are these. The assessee made a return in 1950 that his assessable income for the assessment year 1945-46 was

only Rs. 1,935 with a foot-note that his wife had sold old ornaments and deposited the sum of Rs. 59,026 in the firm in which he was a partner.

The department ignored this return and did not act on that. The department issued a notice purporting to be u/s 34 of the Act calling upon the

assessee to submit his return. The assessee submitted a similar return showing the same income and adding the same foot-note. The Income Tax

Officer included the sum of Rs. 59,026 in the total income of the assessee and assessed him on it for the assessment year 1945-46. The assessee

disputed the assessment, and finally, when the matter went to the Superman Court, their Lordships agreed with the High Court of Bombay that

notice u/s 34 was necessary only if, at the end of the assessment year, no return had been made by the assessee and the authorities wished to

proceed u/s 22(2), but, where the assessee himself chose voluntarily to made a return, no question could arise u/s 34 of assessment escaping and,

therefore, there was no necessity to server any notice u/s 34. Their Lordships further observed at page 576.

There is nothing to prevent the Income Tax Officer from taking up the return and proceeding to assess the income of the assessee. It was open to

him, if there was sufficient justification for it, to hold that the amount noted in the foot-note was really the assessees income, in which case an

assessable income would have been found and the tax could be charged thereon. If the Income Tax Officer had acted on that return and assessed

the assessee before 31st March, 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. The notice u/s 34(1) was, therefore, invalid and the consequent assessment equally so.

Therefore, when a return has been filed but no assessment has been made, it cannot be said that the income escaped assessment, so as to

confer a jurisdiction on the Income Tax Officer to invoked the aid of section 34. Once we come to the conclusion that the whole proceeding

initiated by the Income Tax officer u/s 34 is void of jurisdiction, the assessment certainly cannot be maintained in law. The assessment cannot also

be said to be in accordance with law or binding on the assessee.

It was further contended by learned counsel for the a assessee that, when the Appellate Assistant Commissioner directed the Income Tax

Officer to take proceedings u/s 34(I)(b) while setting aside the orders passed by the Income Tax Officer in pursuance of the notice issued u/s 34,

the direction itself was illegal and irregular. To support his proposition, he drew our attention to the decision in Commissioner of Income Tax. v. N.

Veeraswami Chettiar, to which one of us was a party. In that case, the Income Tax Officer passed orders on the assessee who was a shareholder

in a company that he became assessable to tax on the basis of the deemed distribution of dividends, before any order was made on the company

u/s 23A. On appeal by the assessee, the order was set aside on the ground that there was no information upon which any escape of income could

be founded. Subsequently, when final orders were passed on the company, the officer made a further order of assessment on the assessee u/s 34

but without notice. Again, when the assessee filed an apple, the Appellant Assistant Commissioner cancelled the reassessment and, while passing

the order, stated that the officer could proceed u/s 34 to include, the dividends in the hands of the shareholder. The assessee again objected, and

finally, when the matter came to this court, it was held at page 22 :

But in a proceeding for reopening an assessment and making a reassessment u/s 34, the Income Tax Officer acquires Jurisdiction in a particular

manner and it is open to the appellate authority to make a direction which would have the effect of conferring jurisdiction in a case when such

jurisdiction has not been properly acquired by the Income Tax Officer. From the words of the section itself, it is seen that no authority other than

the Income Tax Officer has jurisdiction u/s 34 of the Act. If the present case had been one where the initiation of the proceedings had been validly

launched, it would be open to the Appellate Assistant Commissioner in appeal before him, while setting aside the assessment, to issue directions.

But it is unthinkable that a direction can be made in the exercise of the powers u/s 31 of the Act which goes to the extent of conferring jurisdiction

upon the Income Tax Officer if he is not lawfully seized of jurisdiction. To our minds, the direction issued by the Appellate Assistant Commissioner

travels far beyond the scope of section 31 of the Act in the circumstances of the case. If the direction is neither lawful nor valid, it cannot come

within the scope of the saving proviso and serve to remove the bar of limitation.

Relying on this principle, we are of opinion that the direction given by the Appellate Assistant Commissioner while setting side the order of

assessment, that the Income Tax Officers should invoke the provisions of section 34(1)(b), and the action of the Income Tax in reassessing the

income is neither lawful nor valid. The proceeding u/s 34 initiated by the Income Tax Officer even in the first instance is wholly void, irregular and

illegal.

It was next contended by learned counsel for the department that, once the assessee himself withdrew the appeal for the year 1949-50 before

the Appellate Assistant Commissioner, he could not raise the objection either before the Tribunal or before us that the proceedings initiated by the

department for reassessment u/s 34 was invalid. But on a close scrutiny of the record, we find that the assessee by his letter dated July 8, 1957, to

the Appellate Assistant Commissioner has only withdrawn the objection in regard to the estimated income for the year 1949-50. We are also of

opinion that the Tribunal committed an error, in coming to the conclusion that the assessee did not raise the contention in the grounds of appeal that

he never gave up the legality of the assessment for the year 1949-50. Here again, we have seen the copy of the enclosure to the grounds of appeal

before the Tribunal, wherein he has stated specifically that the was withdrawing only the objection regarding the estimated income. There was no

request to withdrawn the appeal in relation to the legality of the assessment. It is hardly likely that it would have been withdrawn, for the assessee

had succeeded in establishing that this income was not includible in the income of the Hindu undivided family, in the reference to this court relating

to 1945-46. Therefore, we feel that the assessee is entitled to claim before us that the action of the Income Tax Officer in reassessing his income

for 1949-50 u/s 34 of the Act is invalid.

For the reasons stated above, we answer the question in the negative and hold that, on the facts and circumstances of the case, the assessment

u/s 34 of the Act is not lawful. The assessee is entitled to his costs. Counsels fee Rs. 250

Question answered in the negative.