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Commissioner of Income-tax, Bombay City-ii Vs. Homi Mehta and Sons P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 118 of 1971
Judge
Reported in(1982)27CTR(Bom)238; [1982]137ITR213(Bom); [1982]9TAXMAN190a(Bom)
ActsIncome Tax Act, 1961 - Sections 22(4), 23(2), 30, 31, 31(3), 31(3), 31(4), 34(1), 34(3), 35 and 66(1)
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentHomi Mehta and Sons P. Ltd.
Excerpt:
direct taxation - assessment - sections 22 (4), 23 (2), 30, 31, 31 (3), 31 (4), 34 (1), 34 (3), 35 and 66 (1) - whether appellate assistant commissioner (aac) in assessment of one 'g' had no jurisdiction to give any directions in matter of executors of respondent - 'g' in her individual capacity was a person altogether different from executors who were liable to account for income of estate of respondent - executors of estate of respondent could not claim to represent 'g' in her individual capacity - held, aac did not have jurisdiction to give directions to 'g'. - - 35 were clearly attracted. the tribunal found that the ito had clearly mentioned that the action was not being taken under s. 34(1)(a) of the act that it was not satisfied that the assessee could be said to have not fully.....chandurkar, j.1. this reference arises out of proceedings for reassessment under s. 34(1)(b) of the indian i.t. act, 1922 (hereinafter referred to as 'the act'), in respect of the income of the executors of the estate of one sir homi mehta, who died on 15th april, 1948, leaving a will dated 12th january, 1948. the executors of the said estate were justice n. h. coyajee, lady goolbai, wife of sir homi mehta, fali and jali the two sons of sir homi mehta, and minoo n. b. dinshaw the son-in-law of sir homi mehta. paragraph 8 of the will bequeathing the residuary property provided as follows :'the rest and residue of all my property of whatsoever kind and wheresoever situate unto my trustees upon trust to pay the net income thereof to my wife, lady goolbai, absolutely for and during the terms.....
Judgment:

Chandurkar, J.

1. This reference arises out of proceedings for reassessment under s. 34(1)(b) of the Indian I.T. Act, 1922 (hereinafter referred to as 'the Act'), in respect of the income of the executors of the estate of one Sir Homi Mehta, who died on 15th April, 1948, leaving a will dated 12th January, 1948. The executors of the said estate were justice N. H. Coyajee, Lady Goolbai, wife of Sir Homi Mehta, Fali and Jali the two sons of Sir Homi Mehta, and Minoo N. B. Dinshaw the son-in-law of Sir Homi Mehta. Paragraph 8 of the will bequeathing the residuary property provided as follows :

'The rest and residue of all my property of whatsoever kind and wheresoever situate unto my trustees upon trust to pay the net income thereof to my wife, Lady Goolbai, absolutely for and during the terms of her natural life and on and after her death and over my residuary estate to Homi Mehta and Sons Private limited, absolutely.'

2. Lady Goolbai died in April, 1953.

3. The executors of the estate of late Sir Homi Mehta filed returns for the three assessment years 1949-50, 1950-51 and 1951-52, on 4th August, 1953, and the assessments on the basis of those returns for the respective years, were made on 30th January, 1954, 29th November, 1954, and 10th December, 1954, respectively. The executors had in the return disclosed the income of the estate. However, the ITO took the view that 'since the sole beneficiary of the residuary estate is Lady Goolbai Mehta, the income of the estate which is computed here would be assessable in the hands of Lady Goolbai Mehta'. Thus, the ITO declined to include the income of the estate in the assessment of the executors of the executors of the estate as 'the total income determined will be included in the assessment of Lady Goolbai Mehta'.

4. Prior to her death, Lady Goolbai had filed returns for the assessment years 1949-50, 1950-51 and 1951-52, and in the returns, a note was added at the bottom as follows :

'Note :The above income is subject to further addition of income from property and residuary income after paying the liabilities of Sir Homi Mehta who died on 15-4-1948.'

5. The assessment orders in all the three years were passed in the case of Lady Goolbai after her death. The ITO, taking the view that the residuary income was not determined, took it as 'nil', subject to rectification.

6. Subsequently, however, the ITO passed an order under s. 35 of the Act, because, according to the ITO, the income of the estate of Sir Homi Mehta had been determined. The rectification proceedings were objected to by the executors of the estate of Lady Goolbai Mehta but the ITO overruled the objection holding that at the time of assessment the income from the estate of late Sir Homi Mehta was not included in the total income of the assessee and that the mistake was apparent from the records and, therefore, the provisions of s. 35 were clearly attracted. Accordingly, an addition of Rs. 2,73,055 was made in respect of assessment years 1949-50 on account of the income from the estate of late Sir Homi Mehta as determined by the ITO. Similar orders were passed for the other years also.

7. The executors of the estate of Lady Goolbai challenged the rectification orders on the ground that the ITO erred in including the income of the estate of late Sir Homi Mehta. The AAC allowed the appeals. It is necessary to reproduce the operative part of the order of the AAC. The observations of the AAC are as follows :

'3. Going through the facts of the case, I find that the estate of late Sir Homi Mehta has not yet been fully administered. Therefore, the appellant cannot have any share from this estate for all the four years. The appeals, therefore, succeed. However, as the income belongs to the executors of the estate of late Sir Homi Mehta, the ITO is directed to assess the same in their hands.'

8. With a view to carry out the directions contained in the latter part of the observations quoted above, the ITO issued notices under s. 34 to the executors of the estate of Sir Homi Mehta, after obtaining necessary sanction from the Commissioner. The notices for all the three years were issued on 28th June, 1957, and admittedly returns were filed for all the three years as required by s. 34 of the Act.

9. The ITO overruled the objections raised on behalf of the assessee to the proposed reassessment and he completed the reassessment for all the three years. The assessee took the matter in appeal to the AAC before whom the two main contentions raised were that the AAC could not give any direction in respect of a case other than the case before him and, in any event, he was not competent to give a direction in respect of any year or any assessee other than the year and the assessee under appeal before him. The second contention was that the second proviso to s. 34(3) was unconstitutional as held by the Supreme Court in the case of Prashar v. Vasantsen Dwarkadas : [1963]49ITR1(SC) , in so far as it authorised the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in s. 34. The AAC accepted both these contentions, and quashed the notices under s. 34 of the Act and the assessments made by the ITO.

10. The matter was taken in appeal by the revenue to the Tribunal. The Tribunal found that the AAC, when he was seized of the matter of assessment of Lady Goolbai, had no jurisdiction to give any direction in the matter against the executors of Sir Homi Mehta. The Tribunal held that the parties were different and the AAC could not have given a direction against strangers in the manner he had done. This, according to the Tribunal, was clear from the pronouncement of the Supreme Court in the case of ITO v. Murlidhar Bhagwan Das : [1964]52ITR335(SC) . The Tribunal also found that the second proviso to s. 34(3) of the Act was ultra vires as held by the Supreme Court in the case of Vasantsen Dwarkadas : [1963]49ITR1(SC) cited supra, and, therefore, the AAC could not have given the direction against the executors of the estate of Sir Homi Mehta while dealing with the case of the executors of the estate of Lady Goolbai Mehta. A contention was raised before the Tribunal that the action of the ITO could be sustained under s. 34(1)(a) of the Act on the ground that he assessee had not fully and truly disclosed all the material facts necessary for his assessment and the order of the AAC in Lady Goolbai's assessment proceedings was relied upon. The Tribunal found that the ITO had clearly mentioned that the action was not being taken under s. 34(1)(a) of the Act that it was not satisfied that the assessee could be said to have not fully and truly disclosed all the material facts merely because of the finding given by the AAC in the case of Lady Goolbai. The Tribunal referred to the fact that the executors had offered their income for taxation and it was the ITO who took the view that the income was to be taxed in the hands of Lady Goolbai and, therefore, it could not be said that the assessee had not fully and truly disclosed all the material facts.

11. As a last resort, the revenue had relied before the Tribunal on s. 35 of the Act and it was contended before the Tribunal that the action taken by the ITO could be construed as having been taken under s. 35. The Tribunal found that merely because of the decision given by the AAC in the case of Lady Goolbai, it could not be said that there was a mistake on the records in the case of the executors. The Tribunal took the view that whether the income is to be taxed in the hands of the beneficiaries or the executors is a matter for detailed investigation and argument and it cannot be said that there was a mistake apparent from the records. All the contentions of the revenue having been rejected, the appeal filed by the revenue was dismissed by the Tribunal. The following four questions have been referred to this court at the instance of the revenue under s. 66(1) of the Act :

'(i) Whether, on the facts and in the circumstances of the case, it was rightly held that the Appellate Assistant Commissioner in the assessment of Lady Goolbai for the assessment years 1949-50, 1950-51 and 1951-52 had no jurisdiction to give any directions in the matter of the executors of Sir Homi Mehta on the ground that these directions were given against strangers to the proceedings ?

(ii) Whether, on the facts and in the circumstances of the case, the action taken by the Income-tax Officer under section 34(1)(b) read with the proviso to sub-section (3) of section 34 was bad in law ?

(iii) Whether the Tribunal was justified in holding that the action of the Income-tax officer could not be supported under section 34(1)(a) of the Income-tax Act for the assessment years 1949-50, 1950-51 and 1951-52 ?

(vi) Whether, on the facts and in the circumstances of the case, it was rightly held that for the assessment years 1950-51 and 1051-52, the action of the Income-tax Officer could not be supported under section 35 of the Income-tax Act ?'

12. For the purpose of argument, the first two questions can be dealt with together. Mr. Joshi, learned counsel appearing on behalf of the revenue, had urged before us that when the AAC was dealing with the assessment proceedings in respect of the income of Lady Goolbai, it had become necessary to find out as to whose income the amount in question was and, therefore, the learned counsel contended that the finding that the income belonged to the estate of late Sir Homi Mehta was a finding that was required to be recorded before it could be found that the amount in question was not the income of Lady Goolbai. The learned counsel, therefore, contended that the finding was necessary for the decision of the assessment proceedings in the appeal filed in respect of the income of Lady Goolbai as contemplated by the provisions of the second proviso to s. 34(3) of the Act as construed by the Supreme Court in Murlidhar Bhagwan Das' case : [1964]52ITR335(SC) . The learned counsel also contended that it was no doubt true that a limited construction was placed on the concept of 'any person' contemplated by the second proviso to s. 34(3) of the Act, but, according to the learned counsel, in the present case, the executors of the estate of late Sir Homi Mehta were clearly persons who were intimately connected with the assessee, Lady Goolbai, in whose assessment the direction was given by the AAC that the income in question was not the income of Lady Goolbai but was the income of the executors of the estate of Sir Homi Mehta. The learned counsel also relied on the decision in Murlidhar Bhagwan Das' case and on the basis of that authority it was contended that the reassessment proceedings and notice under s. 34(1)(b) on which these proceedings were based were valid in law. Mr. Joshi also relied on a later decision of the Supreme Court in CIT Vadde Pullaiah & Co. : [1973]89ITR240(SC) , at the facts of which we shall refer later, and it was contended on the basis of this decision that the intimate connection referred to in the decision in Murlidhar Bhagwan Das : [1964]52ITR335(SC) , was a connection established by the income which could either belong to Lady Goolbai or to the executors of the estate of Sir Homi Mehta. In other words, the contention was that the income in question was itself the link which intimately connected the two assessees, viz., Lady Goolbai and the executors of the estate of Sir Homi Mehta.

13. Mr. S. P. Mehta, appearing on behalf of the assessee, has contended that the finding that the income in question belonged to the estate of Sir Homi Mehta is wholly unnecessary to be recorded in the appeal filed by the executors of the estate of lady Goolbai. It was, therefore, argued that if the finding was not necessary for the disposal of the appeal filed by the executors of the estate of Lady Goolbai, then such a finding could not be relied upon by the ITO for the purpose of exercising jurisdiction under s. 34(1)(b) for issuing notices for reopening the assessment. It was also contended that there was no connection whatsoever between Lady Goolbai, who was an assessee in her own right, and the executors of the estate of Sir Homi Mehta, because the assessees were wholly independent of one another. Thus, according to the learned counsel, even on the ratio of the decision in Murlidhar Bhagwan Das' case : [1964]52ITR335(SC) , the notices could not be sustained nor could the reassessment proceedings be valid.

14. The decision on the first two questions and the contentions raised by the learned counsel for the revenue and the assessee, would really turn on the decision on the question as to whether the second proviso to s. 34(3) could really be invoked by the ITO in order to reopen the assessment proceedings in respect of the income of the estate of the deceased, Sir Homi Mehta. There is no doubt that primarily, so far as the question of limitation is concerned, the notices were issued beyond a period of four years after the end of the respective assessment years 1949-50, 1950-51 and 1951-52, because the notices were issued on 2nd June, 1957. Prima facie, therefore, the notices would be barred by limitation under s. 34(1)(b) of the Act unless the revenue is able to make out a case that it was enabled to reopen the assessment having regard to the special provisions contained in the second proviso to s. 34(3) of the Act, which lifts the bar of limitation in a limited or a restricted category of cases. We need not go back for the purposes of the present case to the decision of the Supreme Court in S. C. Prashar v. Vasantsen Dwarkadas : [1963]49ITR1(SC) , in which the Supreme Court held that the provisions of the second proviso to s. 34(3) of the Indian I.T. Act, 1922, in so far as they authorised the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in s. 34 in consequence of or to give effect to a finding or direction given in an appeal, revision or reference arising out of proceedings in relation to the assessee, violated the provisions of art. 14 of the Constitution of India and were invalid to that extent. For the purpose of ascertaining the correct position of law, as to in what category of cases the bar of limitation put by s. 34(1) is lifted by the second proviso to s. 34(3) of the Act, it is necessary to refer to the decision of the Supreme Court in the case of Murlidhar Bhagwan Das : [1964]52ITR335(SC) . In that decision the Supreme Court has held that the second proviso to s. 34(3) only lifted the bar of limitation and did not enlarge the jurisdiction of the Tribunals under the relevant section and while dealing with the scope of the proviso, it was pointed out that the expression 'any person' in the second proviso to s. 34(3) referred to one who would be liable to be assessed for the whole or a part of the income that went into the assessment of the year whole or a part of the income that went into the assessment of the year under appeal or revision. In this decision, the Supreme Court has clearly laid down that 'the expression 'any person' in the setting in which it appears must be confined to a person intimately connected with the assessee'. At p. 346 dealing with the contention that the words' 'any person' in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment', the court observed as follows :

'The expression 'any person' in its widest connotation may take in any person, whether connected or not with the assessee, whose income for any year has escaped assessment; but this construction cannot be accepted, for, the said expression is necessarily circumscribed by the scope of the subject-matter of the appeal or revision, as the case may be. That is to say, that person must be one who would be assessed for the whole or a part of the income that went into the assessment of the year under appeal or revision. If so construed we must turn to section 31 to ascertain who is that person other than the appealing assessees might be affected by orders passed by the AAC. Modification or setting aside of assessment made on a firm, joint Hindu family, association of persons, for a particular year may affect the assessment for the said year on a partner or partners of the firm, member or members of the Hindu undivided family or the individual, as the case may be. In such cases though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. The said instances are only illustrative. It is not necessary to pursue the matter further. We would, therefore, hold that the expression 'any person' in the setting in which it appears must be confined to a person intimately connected in the aforesaid sense with the assessments of the year under appeal.'

15. These observations will indicate that for the purpose of ascertaining whether the person whose assessment is sought to be reopened can be said to fall within the expression any person as used in s. 34(3), pro v. (ii), guidance must be sought from the provisions of s. 31 because the Supreme Court has pointed out that a plain reading of s. 30(1) and s. 31(3) of the Act indicates the cases where persons other than the appellant may be affected by the orders passed by the AAC. The Supreme Court has given certain illustrations such as the assessment made on a firm, joint family, association of persons in any particular year which will affect the assessment for the said year of a person or a firm, member or members of an HUF or the individual, as the case may be. The Supreme Court has observed that in such cases though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. It is no doubt true that these instances given by the Supreme Court has observed that in such cases though the latter are not eo nomine parties to the appeal, their assessments depend upon the assessments on the former. It is no doubt true that these instances given by the Supreme Court are said to be only illustrative but what is important is that the test laid down in the paragraph quoted above, indicates that the person whose assessment is sought to be reopened by taking recourse to the second proviso to s. 34(3) must be one whose assessment depended on the assessment of the assessee whose appeal was being dealt with by the AAC under s. 31. Unless, therefore, a person can be said to be intimately connected in the sense in which it is indicated by the Supreme Court in the earlier part of the observations quoted above, the second proviso as now construed by the Supreme Court could not be availed by the ITO.

16. Now, in so far as the nature of the finding which is contemplated by the second proviso to s. 34(3) is concerned, it is necessary to refer in some detail to the observations of the Supreme Court in that behalf. While dealing with this question as to what is the finding and the direction contemplated by the second proviso to s. 34(3) of the Act, the Supreme Court quoted with approval the following observations of the Allahabad High Court in Pt. Hazari Lal v. ITO : [1960]39ITR265(All) :

''The word 'finding', interpreted in the sense indicated by us above, will only cover material questions which arise in a particular case for decision by the authority hearing the case or the appeal which, being necessary for passing the final order or giving the final decision in the appeal, has been the subject of controversy between the interested parties or on which the parties concerned have been given a hearing.''

17. The Supreme Court also pointed out that the finding referred to in the second proviso to s. 34(3) does not take in any incidental finding. The following observations may be reproduced (52 ITR at p. 345) :

'A 'finding', therefore, can be only that which is necessary for the disposal of an appeal in respect of an assessment of a particular year. The Appellate Assistant Commissioner may hold, on the evidence, that the income shown by the assessee is not the income for the relevant year and thereby exclude that income from the assessment of the year under appeal. The finding in that context is that that income does not belong to the relevant year, but that is not a finding necessary for the disposal of an appeal in respect of the year of assessment in question.'

18. The Supreme Court then went on to deal with the kind of 'direction' contemplated by the provisions of s. 34(3), second proviso, and observed as follows (p. 345) :

'The expression 'direction' cannot be construed in vacuum, but must be collated to the directions which the Appellate Assistant Commissioner can given under section 31. Under that section he can give directions, inter alia, under section 31(3)(b), (c) or (e) or section 31(4). The expression 'direction' in proviso could only refer to the directions which the Appellate Assistant Commissioner or other tribunals can issue under the powers conferred on him or them under the respective sections. Therefore, the expression 'finding' as well as the expression 'direction' can be given relief in respect of the assessment of the year in question and the direction is a direction which the appellate or revisional authority, as the case may be, is empowered of or to give effect to' do not create any difficulty, for, they have to be collated with, and cannot enlarge, the scope of the finding or direction under the proviso. If the scope if limited as aforesaid, the said words also must be related to the scope of the findings and directions.'

19. The ratio of the decision in Murlidhar Bhagwan Das' case : [1964]52ITR335(SC) therefore, is that while the finding must be one which is necessary for the disposal of the appeal and that that finding is not an incidental finding, a direction must be one which the authorities who give the direction must be entitled to give within the exercise of their respective powers as either appellate or revisional authorities.

20. Murlidhar Bhagwan Das' case : The decision has been consistently followed by the Supreme Court in later cases to some of which our attention has been invited by both the counsel. In Daffadar Bhagat Singh and Sons v. ITO : [1969]71ITR417(SC) , the assessee-firm consisting of a father and his two sons filed a return for assessment year 1952-53 on 31st March, 1953, and applied for registration under s. 26A of the Indian I.T. Act, 1922. The ITO refused registration and assessed the father and two sons as an HUF. The AAC, on appeal, allowed the registration of the firm holding that the business belonged to the firm and the income ought to be excluded from that of the family and further directed the ITO to assessee the income of the business in the hands of the father. The ITO issued fresh notices under ss. 22(4) and 23(2) whereupon the firm filed a petition under arts. 226 and 227 of the Constitution of India for a writ prohibiting the I.T. authorities from proceeding with the assessment. The writ petition was dismissed by the High Court holding that the second proviso to section 34(3) was applicable because the members of the firm could not be regarded as strangers to the proceedings which resulted in the assessment order made in respect of them on the basis of their constituting an HUF along with others. The Supreme Court held that the finding recorded by the AAC that it was a partnership and not an HUF was necessary for deciding the appeal before him and it could not be said that it was arrived at only incidentally and once a finding was given which was necessary for the disposal the appeal before him and it could not be said that it was arrived at only incidentally and once a finding was given which was necessary for the disposal of the appeal, the second proviso to s. 34(3) was attracted and the bar of limitation lifted. It was also held that it could not be said that the appellant was a total stranger to the assessment which was under appeal before the AAC and had no intimate connection with the person whose assessment was made by the ITO. Thus, in this decision relied upon on behalf of the revenue, the test laid down by the Supreme Court in Murlidhar Bhagwan Das' case : [1964]52ITR335(SC) was applied. The same test was applied in CIT v. Vadde pullaiah & Co. : [1973]89ITR240(SC) . We may point out that that was a case in which one P, who, till the assessment year 1953-54, carried on a business, entered into a partnership with three others in respect of that business and for three successive years the partnership firm filed returns in respect of income from that business and applied for registration under s. 26A of the Act. The application for registration was rejected on the ground that there was no genuine firm and P was assessed as an individual in respect of the income from the business on the ground that the business belonged exclusively to P. The firm and P both preferred appeals. The AAC held that the firm was genuine and, in the firm's appeal, directed the registration of the firm and in P's appeal he found that the business was carried on by the firm and not by P. Thus, the assessment made on P was set aside and a direction was given to add the correct share of P in the firm's income. When the ITO proceeded to assess the firm for those years, the firm claimed that the assessment was barred under s. 34(3) and the second proviso did not apply.

21. The Appellate Tribunal held that the assessment for 1954-55 was barred but the assessments for 1955-56 and 1956-57 were not barred. The High Court held that the assessments for all the three years were barred. The decision of the High Court was reversed by the Supreme Court holding that the AAC had only two alternatives, viz., that he had to decide whether the business was that of the firm or that of P and he came to the conclusion that the business was that of the firm and not that of P. Therefore, the finding given by the AAC was absolutely necessary for deciding both the appeals before him and that the firm was not a stranger to the assessment made on P. It was intimately connected with P and the assessment made on him and, therefore, the assessments made on the firm were saved from the bar of limitation by the second proviso to s. 34(3). This decision was cited by the learned counsel for the revenue as an illustration of the fact that as between a firm and a partner, a partner had been held to be intimately connected with the firm for the purposes of the second proviso and assistance was sought from this decision to contend that the executors of the estate must be said to be intimately connected with the legatee.

22. Two of the later decisions which deal with the law with regard to the meaning of the words 'finding' and 'direction' have been cited before us. In Rajinder Nath v. CIT : [1979]120ITR14(SC) , the Supreme Court was dealing with the provisions of s. 153(3) of the I.T. Act, 1961, and observed that the expressions 'finding' and 'direction' in s. 153(3) are limited in meaning and a finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. It was pointed out that to be a necessary finding, it must be directly involved in the disposal of the case. By way of an illustration it was pointed out as follows (p. 19) :

'It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for, For instance, where the facts show that the income can belong either to A or B and to no one else, a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A's income. A finding respecting B is intimately involved as a step in the process of reaching the ultimate finding respecting A. If, however, the finding as to A's liability can be directly arrived at without necessitating a finding in respect of B, then a finding made in respect of B is an incidental finding only. It is not a finding necessary for the disposal of the case pertaining to A.'

23. With regard to the scope of the direction in s. 153(3)(ii), which is a provision analogous to the second proviso to s. 34(3), the following observations are made (p. 19) :

'As regards the expression 'direction' in s. 153(3)(ii) of the Act, it is now well settled that it must be an express direction necessary for the disposal of the case before the authority or court. It must also be a direction which the authority or court is empowered to give while deciding the case before it.'

24. The other decision on which heavy reliance has been placed by Mr. Mehta for the assessee is in CIT v. S. Raghubir Singh Trust : [1980]123ITR438(SC) . That was a case in which the assessee-trust filed a return of income for the assessment year 1954-55. The trust was held to be invalid by the ITO and he assessed the income of the trust in the hands of the settlor. The settlor carried the matter in appeal and the matter was finally taken to the High Court where it was held that the trust was valid and that the income was an income of the trust and not that for the settlor. In view of the finding given by the High Court, the ITO issued a notice under s. 34(1)(b) of the Act seeking to reopen the assessment. The assessee-trust contended that the notice was barred by limitation. The ITO having rejected the contention that the notice was barred by limitation. The been unsuccessful, the assessee appealed before the Tribunal. The Tribunal accepted the claim and held that the trust was a stranger to the proceedings for the assessment of the settlor and the second proviso to s. 34(3) did not save the reassessment proceedings initiated against the trust from the bar of limitation. The High Court agreed with the view of the Tribunal and in appeal by the revenue, the Supreme Court confirmed the decision of the High Court, holding that the finding of the High Court that the income belonged to the trust and not to the settlor was a finding necessary for disposing of the reference in favour of the settlor and that the trust was a stranger to the assessment proceedings of the settlor and was not 'any person' within the meaning of the second proviso to s. 34(3) and, therefore, the second proviso to s. 34(3) was not attracted and the reassessment proceedings against the trust were barred by time.

25. It is in the light of the legal position as expounded by the authorities referred to above, that we must find out whether, firstly, the finding recorded by the AAC in the assessment proceedings of Lady Goolbai was a finding which was material for the decision of the controversy involved in that appeal; secondly, we must find out whether the direction given by the AAC was a direction which the AAC was empowered to give while deciding the appeal in Lady Goolbai's assessment as observed by the Supreme Court in Rajinder Nath's case : [1979]120ITR14(SC) , and, thirdly, whether the executors of the estate of late Sir Homi Mehta could be said to be intimately connected with Lady Goolbai's assessment proceedings so that they will fall within the concept of 'any person' in s. 34(3), second proviso. We have reproduced earlier the operative part of the order of the AAC in which he directed that the income should be assessed in the hands of the executors. Para. 8 of the will of Sir Homi Mehta contemplated the handing over of the income of the estate only after the estate was fully administered and that was why the AAC observed in his order that the estate of late Sir Homi Mehta has not been fully ascertained and, therefore, the lady could not have any share in all the four years. the appeals were, therefore, allowed. Now, the material consideration which weighed with the AAC while allowing the appeals in the assessment proceedings of Lady Goolbai was that the estate has not been fully administered. That alone was the material question for consideration and indeed the very fact that the AAC has used the word 'however' while recording a direction that the ITO should assess the income in the hands of the executors of the estate clearly showed that that was a finding which was only incidental in character. The earlier finding was sufficient to dispose of the appeal of Lady Goolbai. For the purposes of the ground on which the appeal was allowed, it was not necessary at all to decide whether the income could be taxed in the hands of the executors. As a matter of fact, it is not possible to read into this order a finding that the income belonged to the executors. The words 'however, as the income belongs to the executors of late Sir Homi Mehta', show that it has been assumed that this income belonged to the executors. This can hardly be called a finding and, if it can at all be called a finding, it is clear that that finding was incidental in character.

26. Now, so far as the direction is concerned, as pointed out by the Supreme Court, in Rajinder Nath's case : [1979]120ITR14(SC) , the direction must be one which the authority is empowered to give while deciding the case before it. The AAC was exercising jurisdiction under s. 31 of the Act when he was hearing the appeal filed by Lady Goolbai. If at all any direction could be given by the AAC, that could be only within the scope of the provisions of s. 31(3) which deals with the scope of the jurisdiction of the AAC while disposing of an appeal before him in different categories of cases. We have not been pointed out any part of s. 31 under which the direction could validly be given by the AAc to the ITO directing that the income should be assessed in the hands of the executors while disposing of the appeal of Lady Goolbai. It is clear to us that there is no finding in the order of the AAC within the meaning of that word used in the second proviso to s. 34(3) nor could the direction be held to be valid as being within the scope of the appellate jurisdiction of the AAC under s. 31.

27. Now, so far as the question as to whether the executors could be 'any person' for the purposes of the second proviso, it is difficult for us to see how the test of the intimate connection could really be satisfied in the instant case. In view of the decision in Murlidhar Bhagwan Das' case, : [1964]52ITR335(SC) , as we have already pointed out, the intimate connection must be such that the assessment of one must depend on the assessment of the other as in the case of a partner and partnership firm and an individual and members of the joint Hindu family. In other words, though a person is not eo nomine a party to an appeal, it is words, though a person is not eo nomine a party to an appeal, it is apparent that the finding must be so recorded that there is consideration of the liability of that person to assessment which is so intimately connected with the asessment which is the subject-matter of the appeal that the controversy as to whose income it is got decided by the same order. The very narrow construction of this 'intimate connection', which is placed by the Supreme Court in S. Raghubir Singh Trust's case : [1980]123ITR438(SC) , indicates that merely because in the course of assessment a finding is recorded that income belongs to somebody else, the intimate connection is not automatically established by the fact that the same income is sought to be assessed in the hands of another. Thus, the ratio of the decision of the Supreme Court in Murlidhar Bhagwan Das' case, : [1964]52ITR335(SC) is that it should be possible to say that the interest of the person whose income is now being reassessed on the basis of a finding recorded in the assessment proceeding of another are so closely inter-twined that no separate issues will really arise at a later stage when the assessment is reopened acting on a finding or a direction. If impliedly a person is represented in the earlier proceedings, only then the question of intimate connection as contemplated by Murlidhar Bhagwan Das' case, : [1964]52ITR335(SC) can be said to be established. As already pointed out, in Raghubir Singh Trust case, : [1980]123ITR438(SC) the controversy was whether the income was the settlor's income or the income of the trust and though the income was held to be that of the trust and not of the settlor, yet it was held that that the trust was a stranger to the assessment proceedings of the settlor. The capacities of the two assessees were entirely different. Therefore, merely because the same income becomes the subject-matter of the two assessments, an intimate connection cannot be established as contended by the revenue. Indeed, it is inevitable that the same income will become a subject-matter of the assessments in both the cases because it is the liability of that income to be assessed in the hands of the one or the other which gives rise to either proceedings for assessment or reassessment.

28. So far as the instant case is concerned, Lady Goolbai in her individual capacity was a person altogether different from the executors who were liable to account only for the income of the state of Sir Homi Mehta. The assessees were only independent of one another for the purpose of their respective assessments. Lady Goolbai could not claim to represent the executors of the estate of Sir Homi Mehta nor the executors of the estate of Sir Homi Mehta could claim to represent Lady Goolbai in her individual capacity. We are, therefore, not inclined to accept the contention on behalf of the revenue that the executors satisfy the description of 'any person' as construed by the Supreme Court in Murlidhar Bhagwan Das' case : [1964]52ITR335(SC) .

29. Once we hold that either there was in law no finding given in the assessment proceedings of Goolbai or if there was finding it was only an incidental finding, that the direction was not within the jurisdiction of the AAc and that the executors of the estate were total strangers to the assessment proceedings of Lady Goolbai, the decision on the first two questions referred will have to be against the revenue.

30. So far as the third question is concerned, it is difficult to see what fault could be found with the decision of the Tribunal. The finding is that the executors had not suppressed any particulars of income nor could they be charged with non-disclosure of any material facts necessary for the assessment. As a matter of fact, the finding is that the executors had disclosed the income from the estate in the returns but it was the ITO who took the view that that income was taxable in the hands of Lady Goolbai. If that was so, there was no question of the case falling within the provisions of s. 34(1)(a) of the Act. Question No. 3 must also, therefore, be answered against the revenue.

31. So far as the fourth question is concerned, it is difficult for us to see how the proceedings expressly reopened under s. 34(1)(b) could be sustained on the ground that they should be treated as rectification proceedings. The income which was originally disclosed as belonging to the estate of the deceased was, after a positive application of mind by the ITO, held to be not the income after the estate. Merely because in some other assessment of a legatee a finding is recorded that the income does not belong to her, that cannot create an infirmity in the original order of assessment in the nature of an error apparent on the fact of the record. The Tribunal was therefore, justified, in view, in not sustaining the argument that the proceedings could be supported as being one under s. 35 of the Indian I.T. Act, 1922.

32. Having regard to the discussion earlier made, the questions referred are answered as follows :

Question No. (i) : In the affirmative and against the revenue.

Question No. (ii) : In the affirmative and against the revenue.

Question No.(iii) : In the affirmative and against the revenue.

Question No. (iv) : In the affirmative and against the revenue.

33. Revenue to pay cost of this reference.


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