1. The three assessees before us were shareholders in A.C.E.C. Private (India) Ltd. On the 29th of March, 1954, the Income-tax Officer passed an order under Section 23A with regard to the profits of the company for the year 1949-50 and issued a notice under Section 34, and this notice was served on the assessees on the 1st of April, 1954. The contention of the assessees was that the notice was beyond time and, therefore, the assessment could not be made upon the assessees. The Tribunal has upheld the contention of the assessees and the Commissioner has come to this Court on this reference.
2. The first question as submitted to us is whether on the facts and circumstances of the case, it was necessary for the Income-tax Officer to initiate action under Section 34 of the Indian Income-tax Act in order to tax the deemed income distributed by virtue of the order under Section 23A of the Act? Now, this question was considered in the case of Navinchandra Mafatlal v. Commissioner of Income-tax, Bombay City : 27ITR245(Bom) and the view we took there was that Section 23A was not a section which dealt with assessment, and after an order under Section 23A was made, it was necessary to assess the shareholders to tax on this notional income which was to be added to the total income, and in view of that decision, we must answer that question in the affirmative.
3. But the real question that arises on this Reference is the question with regard to limitation. Now, as we have already pointed out, the notice was served on the 1st of April, 1954. If an assessment has to be made upon the assessees by proceedings being taken under Section 34, then those proceedings can only be initiated by a valid notice would vitiate the assessment made under that section, a notice being a condition precedent to jurisdiction being exercised under that section. Now, we held in Navinchandra's case : 27ITR245(Bom) that the case of an Order under Section 23A would fall under Section 34(1)(b), and the period of limitation for serving a notice under that Sub-clause as laid down in that section itself is: 'at any time within four years of the end of that year.' Now, that year is the year of assessment, and in this case, the year of assessment is the year 1949-50 in which the tax has escaped assessment and with regard to which year the notional income is sought to be included in the total income of the assessees. The language used by the Legislature, is, clear as to what is the period limitation. The language is clear and explicit and is capable of only one interpretation. If that be the correct interpretation, then inasmuch as the notice was served on the 1st of April, 1954 and the assessment year was the year 1949-50, the last date for serving the notice was 31-3-1954 and inasmuch as the notice was served on 1-4-1954 the notice was clearly out of time. But what Mr. Joshi contends is that however clear the language used by the Legislature, we must construe this language in a manager which would not make an order under Section 23A an dinfructuous order. It is pointed out that in Kasturchand Ltd. v. Commr. of Income Tax Bombay : AIR1950Bom1 we held that no period of limitation was provided for an order to be made under Section 23A and when it was urged in Navinchandra Mafatlal's case : 27ITR245(Bom) that if we took the view that proceedings under Section 34 were necessary in the case of an order made under Section 23-A we might in effect be providing a period of limitation for an order to be made under Section 23A we repealed that argument by pointing out that as far as an order of assessment was concerned, that order could be made under Section 34(3) within 4 years from the end of the year in which the income, profits or gains were first assessable, and we held that in the case of an order under Section 23A, the income, profits or gains were first assessable in the year in which that order was passed. Our view was that the notional income came into existence when the order under Section 23A was made assessees when the order was forest made Mpw. Om Mavomcjamdra's case, : 27ITR245(Bom) the question with regard to the notice under Section 34 did not aires. Neither counsel at he bar drew our attention to what would be the position with regard to an order made under Section 23A by reason of the provisions with regard to the notice, nor did the court itself consider that aspect of the matter. Now that the question directly arises, what Mr. Joshi contends is that if we were to construe limitation with regard to the notice as we have just said we are bound to construe under Section 34 (1)(b), then in effect we would be providing a period of limitation for an order under Section 23A. If an order of assessment could be made under Section 34(3) within four years of the making of the order under Section 23A, then an order under Section 23A can safely be made by the Department at any time it might so choose, and the Department would not be troubled by the question of limitation. The Department would be able indefinitely to keep its sword hanging not only over the head of a company but also over the head of an assessee who was a shareholder in that company. But Mr. Joshi is against at the suggestion that by reason of our interpretation with regard to limitation for serving a notice, we would now be depriving the Department of its discretion to issue a notice at any time it likes: because if notice is to be served within 4 years of the end of the assessment year, then an order under Section 23A must be made within that time. If it was not made within that time, then a valid notice could not be served; and it is undoubtedly true that in effect the provision with regard to notice would constitute a period of limitation for the making of an order under Section 23A itself. Mr. Joshi says that this view would be tantamount to nullifying our decision in navinchandra's case : 27ITR245(Bom) . Now, what we said in Navinchandra's case : 27ITR245(Bom) and what we had said earlier in Kasturchand's case : AIR1950Bom1 was that the Income-tax Act does not in terms prescribe a period of limitation for an order to be made under Section 23A. That view, we think, is correct. But in neither of those cases did we consider the question of a notice which would have to be issued in order to imitate proceedings under Section 34. All that we held in Navinchandra's case : 27ITR245(Bom) was that proceedings under Section 34 were necessary before an assessment could be made with regard to the notional income under Section 23A. We find that view of ours has also been accepted by the Madras High Court in C.W.Spencer v. I.T.Officer, City Circle II Madras; : AIR1957Mad133 . But it is obvious that if proceedings were to be initiated under Section 34, they can only be initiated by means of a notice, and if the Legislature in clear terms lays down a period of limitation for the issuing of a notice, a notice issued beyond the time indicated by the Legislature would be an invalid notice. Therefore, the effect of our taking the view that the period of limitation for serving this notice is four years from the end of the assessment year in which the income escaped tax would be to compel the Department to make an order under Section 23A within four years of that time. It is not correct to say that an order under Section 23A would become infructuous. It is more correct to say that the Department should be more vigilant and should not postpone making an order under Section 23A would become infructous. It is more correct to say that the Department should be more vigilant and should not postpone making an order under Section 23A would become infructuous. It is more correct to say that the Department should be more vigilant and should not postpone making an order under Section 23A beyond the period of four years laid down by the Legislature for the purpose of serving a notice. In other words, we still adhere to the view we have taken earlier that no period is prescribed by Section 23A, but the view we now take is that a period of limitation is prescribed for the issuing of a notice under Section 34 is order to give effect to the order made under Section 34 in order to give effect to the order made under Section 23A and by reason of that period of limitation, if the Department wants an order to be effective, it must pass that order within that period of limitation.
4. The question as drafted does not really bring out the question of law that arises from the order of the Tribunal. The question as framed is:
'If the answer to question No.1 is in the affirmative whether having regard to the observations of Their Lordships in : 27ITR245(Bom) , the notice served on 1st April 1954 was out of time?'
We have made no observations in that case with regard to the service of the notice. But Mr. Joshi says that the observations referred to are the observations with regard to the order under Section 23 be coming intructuous. We will reframe the question deleting, reference to the observations in Navinchandra's : 27ITR245(Bom) and the reframed question will be:
'If the answer to question No. 1 is in the affirmative whether the notice served on 1st April, 1954 was out of time?'
and we will answer that question in the affirmative.
5. Commissioner to pay the costs.
6. No order on the notice of motion. No order as to costs on the notice of motion.
7. Answers in the affirmative.