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K.P. Chagganlal Oil Mills Vs. Commissioner of Income Tax and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberI.T.W.P. No. 7/5 of 1955
Judge
Reported in[1959]36ITR337(AP)
ActsIncome Tax Act, 1922 - Sections 26A, 31(4), 38, 39, 66(1) and 66(2); Hyderabad Income Tax Act - Sections 31(4), 46(1), 57, 58, 82(1) and 82(5); Finance Act, 1950 - Sections 13 and 13(1); Constitution of India - Article 226; Specific Relief Act, 1963 - Sections 45
AppellantK.P. Chagganlal Oil Mills
RespondentCommissioner of Income Tax and anr.
Advocates:C. Rangachar, Adv.
DispositionPetition allowed
Excerpt:
direct taxation - cancellation of registration - sections 26a, 31 (4), 38, 39, 66 (1) and 66 (2) of income tax act, 1922, sections 31 (4), 46 (1), 57, 58, 82 (1) and 82 (5) of hyderabad income tax act, article 226 of constitution of india and section 45 of specific relief act, 1963 - registration of petitioner's firm cancelled - income tax officer (ito) cancelled registration alleging non-compliance with notice under sections 46 and 30 (4) - ito has no power after period of limitation has expired to take any action for cancellation of registration - notice under section 46 (1) was validly issued but not validly served - held, ito is barred from taking any further proceedings after lapse of three years under section 46 (2). - - sub-section (1) of section 13 of the indian finance act,.....j.p. jaganmohan reddy, j.1. this is a petition under article 226 of the constitution of india for the issue of a writ of certiorari to quash the notice dated may 11, 1955, issued by the income-tax officer purporting to the under section 31(4) of the hyderabad income-tax act calling upon the petitioner to show cause why the registration of the partnership should not be canceled and the order dated september 21, 1955, cancelling the registration to the petitioner's firm. the petitioner further prays for the issue of a writ of mandamus or any other appropriate writ or direction or order and for the refund of the sum of rs. 75, 666-12-0 to the petitioner.2. the petition arises out of our judgments on a reference under section 82(1) of the hyderabad income-tax act in the case of chaganlal oil.....
Judgment:

J.P. Jaganmohan Reddy, J.

1. This is a petition under article 226 of the Constitution of India for the issue of a writ of certiorari to quash the notice dated May 11, 1955, issued by the Income-tax Officer purporting to the under section 31(4) of the Hyderabad Income-tax Act calling upon the petitioner to show cause why the registration of the partnership should not be canceled and the order dated September 21, 1955, cancelling the registration to the petitioner's firm. The petitioner further prays for the issue of a writ of mandamus or any other appropriate writ or direction or order and for the refund of the sum of Rs. 75, 666-12-0 to the petitioner.

2. The petition arises out of our judgments on a reference under section 82(1) of the Hyderabad Income-tax Act in the case of Chaganlal Oil Mills v. Commissioner of Income-tax. In that case the following four questions had been referred to us by the Income-tax Tribunal :

'(1) Whether the notice under section 46(1) of the Hyderabad Income-tax Act was validly issued ?

(2) Whether the notice under section 46(1) of the Hyderabad Income-tax Act was validly served upon the assessee ?

(3) If the answer to the question Nos. 1 and 2 is in the negative, whether the assessee is competent to raise in appeal the question regarding the validity of the issue and service of notices withour first rasing the question by making an application under section 39 of the Act ?

(4) Water the registration of the firm was validly canceled ?'

3. It is necessary to state a few facts. The assessee was a firm consisting of three partners registered under section 38 of the Act. Its business in the assessment year 1357 F. was the manufacture and sale of groundnut oil and cake. It was assessed on December 21, 1948, on an income of Rs. 1, 65, 909. Subsequently, the Income-tax authorities purporting to reopen the case served a notice on the assessee under section 46(1) of the Act on the ground of income escaping assessment. The Income-tax Officer is alleged to have written a letter on May 15, 195I, requesting the assessee to produce or cause to be produced, his account books on May 21, 1951, for the year ending November 12, 1947. According to the Tribunal at Bombay it was not clear whether this letter was dispatched to the assessee as there was no mention of this letter in the revised assessment order and the assessee has denied having received that letter. In these circumstances, the contention of the assessee that he did not receive the letter was held to be valid. On June 12, 1951, a notice under section 46(1) of the Act was issued to the assessee but this was served on an employee of the firm. No return was filed as required by the notice under section 46(1). Thereafter, a notice under section 30(4) directing the production of the account books on September 10, 1951, was issued on August 29, 1951, but the Income-tax Officer did not examine the process-server as to the service of this notice. The account books have not been produced and the Income-tax Officer made a revised assessment on September 30, 1951, after obtaining the previous approval of the Deputy Commissioner and added Rs. 50, 000 to the income as computed originally on December 21, 1948. The registration granted to the firm was also canceled by virtue of powers conferred under section 31(4) of the Act. A notice was issued on September 13, 1951, by the Income-tax Officer to the auditors of the firm but the auditor said that he was no longer the representative of the assessee. But in spite of this the Income-tax Officer, holding that the auditor was authorized to appear for the assessee in all stages of the proceedings, i.e., original and appellate, deemed the notice to be sufficient and canceled the registration of the firm. On these facts the above questions had been referred to us. With respect to questions Nos. 1, 2 and 4 which are relevant for purposes of this petition we held that the notice under section 46(1) was validly issued but was not validly served and that the registration of the firm was not validly canceled having regard to the fact that the notice served on the auditor who had ceased to act for the assessee could not be deemed to have been served on an authorised representative of the assessee. When the judgment containing the answers to the reference was received by the Appellate Tribunal at Bombay it passed the following order :

'In conformity with the judgment of the High Court under section 82(5) of the Hyderabad Income-tax Act, we hold that the registration of the firm was not validly cancelled, inasmuch as the notice issued under the proviso to section 31(4) of the Hyderabad Income-tax Act was not validly served. It is not for us to say whether the income-tax Officer should issue a fresh notice and serve upon the assessee as required by the proviso to section 31(4) of the Act.'

4. Thereafter it appears that the assessee moved the Income-tax Officer to give effect to the order of the Tribunal and to obtain a refund of the tax, but the Income-tax Officer in his letter dated February 7, 1955, stated that the question of granting refund did not arise as the Tribunal's order dated December 10, 1954, did not authorize the same. He had also moved the Commissioner on January 7, 1955, and January I7, 1955, who through letter dated January 29, 1955, advised the assessee that the Income-tax Officer concerned had been directed to take such action as may be necessary in the matter. On receipt of this letter the assessee filed this writ petition in March, 1955.

5. The assessee by his letter dated May 13, 1955, and August 30, 1955, contested the jurisdiction of the Income-tax Officer to issue that notice both on the ground of repeal of the Hyderabad Income-tax Act and on the ground that the previous notices having been held to have been not properly served, the Income-tax Officer could not make that as a basis for the cancellation of the registration of the firm. The Income-tax Officer, however, cancelled the registration of the firm by his order dated September 21, 1955, to which we shall later refer in detail. In view of the subsequent supervening facts the assessee filed an application for the amendment of his petition on December 2, 1955. After giving notice to the respondents and on considering the petition and the affidavit and on hearing the arguments we had by our order dated March 9, 1956, allowed the petitioner to amend has petition and add the prayer for the issue of writs of certiorari quashing the notice dated May 11, 1955, and the order dated September 21, 1955, of the Income-tax Officer. The amended writ petition was accordingly filed on March 13, 1956.

6. The respondents are absent and in the circumstances we have not had the advantage of hearing arguments representing their point of view.

7. It appears to us that on a reference to the High Court under section 82(1) and (2) of the Hyderabad Income-tax Act corresponding to section 66(1) and (2) of the Indian Income-tax Act the High Court is bound to decide the question of law referred to it under sub-section (5) after which the Appellate Tribunal is enjoined to pass such orders as are necessary to dispose of the case conformably to the judgment of the High Court. In conformity with the judgment if any amounts have to the refunded it is for the Tribunal to pass such order or to give directions to the Income-tax Officer relating thereto. The Tribunal cannot refuse to take up the case or pass orders conformably to the judgment of the High Court. It is a duty imposed by the statute upon the Tribunal to take up the case immediately after the reference has been answered by the High Court and to dispose of the same in accordance with the opinion of the High Court. If the Tribunal refuses to discharge its functions or refuses to revise or alter the figures or give necessary directions in conformity with the judgment of the High Court it can be compelled to perform its duty by the issue of a writ of mandamus. The High Court however cannot direct the Income-tax authorities to refund any amounts of tax paid. This is clear and if authority is required we may refer to the case of Commissioner of Income-tax v. Bombay Trust Corporation Ltd. where their Lordships of the Privy Council held :

'The High Court has no Jurisdiction under section 45(g) of the Specific Relief Act to direct the Commissioner under the Income-tax Act to refund a tax paid.

The court cannot claim even in appearance to command the Crown, and where and obligation is cast upon the principal the court cannot enforce it against the servant as such. Before mandamus can issue to a public servant it must be should that a duty towards the applicant has been imposed upon the public servant by statute so that he can be charged thereon independently of any duty which as servant he may owe to the Crown a principal.'

8. By this petition, however, the applicant has not asked for a mandamus against the Tribunal of the ground that it has not discharged its statutory functions and consequently no writ or direction can be given to the Tribunal. The Income-tax Officer has taken the attitude that the Tribunal has not directed him to make any refund or any directions to re-assess in conformity with the judgment of the High Court. Though no exception can be taken to this attitude the Income-tax Officer is not however precluded from taking independent steps under any of the provisions of the Act to make a supplemental assessment or to rectify a mistake. But that would not justify the assessee asking for a writ of mandamus against the Income-tax Officer or the Income-tax Commissioner.

9. In so far as the proceedings relating to the cancellation of the registration of partnership firm is concerned the learned advocate for the petitioner contends, inter alia, (a) that the Income-tax Officer had no jurisdiction to issue either the impugned notice or the order cancelling the registration; (b) even if he had he could not contrary to the judgment of the High Court assume that the previous notices under section 46(1) and section 30(4) were validly served and make that as the basis for cancelling the registration of the firm. In so far as the first point is concerned he refers us to a judgment of the erst-while Hyderabad High Court in the case of Babu Khan and Sons v. Commissioner of Income-tax, for the proposition that section 13 of the Indian Finance Act, 1950, which repealed the Hyderabad Income-tax Act was not saved for purposed of reassessment or reopening escaped assessment. Sub-section (1) of section 13 of the Indian Finance Act, 1950, is in the following terms :

'If immediately before the 1st day of April, 1950, there is in force in any Part B State other than Jammu and Kashmir or in Manipur, Tripura or Vindhya Pradesh or in the merged territory of Cooch-Behar any law relating to income-tax or super-tax or tax on profits of business, that law shall cease to have effect except for the purposes 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, 1922 (XI of 1922), for the year ending on the 31st day on March 1951, or for any subsequent year, or, as the case may be, the levy, assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before the 31st day of March, 1949.'

10. In construing the words 'levy, assessment and collection' quo the action to be taken under section 46(1) of the Hyderabad Income-tax Act where the income has escaped or is under-assessed or is assessed at too low a rate, we held that section 13 of the Indian Finance Act was specifically enacted to save the provisions of Income-tax Acts in Part B States for purposes of completing assessments in the process of being completed as well as assessing incomes escaping assessments, and that, therefore, section 13 of the Indian Finance Act did save section 46(1) of the Hyderabad Income-tax Act notwithstanding its repeal. But in Bhikaji Dadabhai & Co. v. Commissioner of Income-tax, we held that sub-section (1) of section 13 of the Indian Finance Act did not have the effect of saving the provisions of section 40 of the Hyderabad Income-tax Act for purposes of imposing they levy of penalty relating to any particular year or years of assessment. After referring to the Privy Council case in the case of Commissioner of Income-tax v. Khemchand Ramdas, we observed as follows :

'When the Privy Council refers to the whole procedure for imposing liability upon the taxpayer it must be considered as referring to the liability to pay tax and not to pay penalty. There is a clear distinction, both in the Hyderabad Income-tax Act and the Indian Income-tax Act, between tax and penalty and special provisions have been inserted in these Acts relating to the recovery by this procedure. While sections 57 and 58 of the Hyderabad Income-tax Act, corresponding to sections 45 and 46 of the Indian Income-tax Act, deal with the recovery of tax payable of a notice of demand, section 59, corresponding to section 47, deals specifically with the recovery of the penalty imposed under the provisions of sub-section (3) of section 35 or section 40 or sub-section (1) of section 58 of the Hyderabad Income-tax Act...........'

11. Again at page 904 we observed :

'Imposition of penalty is not a necessary concomitant of the process of assessment, levy and collection of tax, all of which can be completed without any resort to penal provisions. Penalty, in our view, is not incidental to assessment proceedings. It is independent of it. It, being a penal provision, is only imposed on an assessee for offending any particular provisions of the law which exposes him to punishment.'

12. It has to be seen whether proceedings relating to cancellation of the registration of a firm would be saved as coming within the term levy, assessment and collection under sub-section (1) of sections 13 of the Indian Finance Act. The provisions relating to the registration of cancellation of a firm are to be found in section 31 which deals with assessment. The registration or non-registration of the firm would materially affect the procedure for assessment. If a firm is registered under section 38 (section 26A of the Indian Income-tax Act) the firm does not itself pay the income-tax but each share on the income of the partner in the firm is added to the other income and in individually assessed. In the process of assessment there are three distinct steps. It has been observed by their Lordships of the Privy Council in Commissioner of Income-tax v. Khemchand Ramdas as follows :

'It is essential to bear in mind the method prescribed by the Act for making an assessment to tax, using the word assessment in its comprehensive sense as including the whole procedure for imposing liability upon the taxpayer. The method consists of the following steps. In the first place the taxable income of the taxpayer has to be computed. In the next place the sum payable by him on the basis of such computation has to be determined. Finally, a notice of demand in the prescribed form, specifying the sum so payable has to be served upon the taxpayer. The second of these steps involves the determination of two sums, namely, the sum payable for income-tax and the sum payable for super-tax.'

13. In so far as the first stage is concerned the registration or non-registration of the firm dose not make any difference but it is only with respect to the second and the third stages there is a difference, i.e., with respect to the determination of the tax payable and the demand. From this point of view the registration of the cancellation of the firm can be said to be a step in the levy, assessment and caliph the tax within the meaning of section 13(1) of the Indian Finance Act and appears to be saved. Though this is so by virtue of sub-section (2) of section 46 no order of assessment under section 31 or re-assessment under subsection (1) of section 46 can be made after the expire of three years from the end of the year in which the gains were first assessable but this provision does not apply to re-assessment made in pursuance of an order passed in appeal under section 43 or in revision under section 45 or on a reference to the High Court's order or to the State Judicial Committee under section 82. That the Income-tax Officer does not purport to make the impugned order under any of the sections specified in the proviso to sub-section (2) of section 46 cannot be doubted. He purports to act independently without any specific orders passed in appeal or in revision or on reference and, there for, must under section 46(2) of the Act take steps within three years from the end of the year in which the gains were first assessable. The year of assessment being 1357 F., i.e., for the year of 1st October, 1946, to 30th September, 1947, the end of the year in which the income, profits or gains were first assessable would be 30th September, 1948. The income for 1357 F. was in fact assessed on December 21, 1948. Any re-assessment on the ground of escaped income or assessment under section 31 including the power to cancel registration under section 31 must be exercised within three years from that date i.e., 30th September, 1951. What the Income-tax Officer in effect is proposing to do, as will be seen from his order to be referred later, is to take action under section 46(1) and that is the only section under which she can reopen an assessment already made. In his notice of may 11, 1955, the reason which the Income-tax Officer assigns for proposing to cancel registration is the non-compliance with the notice under sections 46 and 30(4). In our view the Income-tax Officer has no power after the period of limitation has expired to take any action for cancellation of the registration of the firm in order to affect the assessment already made for 1357 F. With respect to cancellation of the firm otherwise than for purposes of assessment for the year 1357 F., the Income-tax Officer cannot act under the Hyderabad Income-tax Act which has been repealed. In any view of the matter the cancellation of the registration of the firm by the Income-tax Officer is without jurisdiction. Next, with respect to the contention that because the assessee has not complied with the notices under sections 46(1) and 30(4) the registration of the firm was liable to be canceled and in fact canceled the Income-tax Officer in his order made certain statements which must be noticed. The Income-tax Officer after referring to the observations of the Tribunal that it is not for them to say that the Income-tax Officer shout issue a fresh notice and serve upon the representative of the firm under section 31(4) of the Income-tax Act says :

'In this view the only flaw was a 'technical objection' which was taken by the High Court that the notice was not properly served inasmuch as it was served on the representatives who were holding the power of attorney at the time when the notice was served. This is only a technical objection and not touching any legal issues.'

14. We fail to understand the significance of the statement. Firstly, the High Court has not taken any technical objection and secondly, the determination of the question whether the notice which was saved upon the auditor was deemed to have been served upon the assessee was a matter touching a legal issue, which was the subject-matter of a question on a reference under section 82. The High Court is called upon to pronounce upon the legal issues arising on questions referred to it or which it directs the Tribunal to refer to it under section 82. The Income-tax Officer after stating that the assessee had failed to comply with notices issued under sections 46(1) and 30(4) and due to his non-co-operation the assessment had to be completed ex parte and in doing so the registration originally granted was cancelled, further says :

'The assessment under section 31(4) and the question of cancelling the registration are entirely separate proceedings and they are not at all dependent on each other......'

'The assessee has, by not complying with the statutory notices issused by the Department from time, to time, automatically denied himself of the above privileges and thus rendered himself liable to a further consequence of losing the registration already granted. The matter has been referred to me now only with regard to the concellation of registration and validity of service thereon. It is only a technical mistake which is cured now by giving 14 days' time as contemplated under proviso to section 31(4)......'

'In my opinion granting of registration as well as assessment under section 31(4) are entirely separate proceedings and the issue of notice giving the assessee 13 days time was already given to the assessee before the date of completion of the assessments but that notice which was in all good faith served on the assessee's representatives was held to be not valid only under a technical objection by the High Court......'

'As regards the contention which goes to say that the issue of a notice now for cancellation of registration has automatically canceled the assessment made under section 31(4), has no strength in view of the observation made by me in the preceding paras of this order. The status was already determined and now that it has been brought to my order passed in this respect.'

15. The passages to which we have referred above are indicative of the attitude designed to set a bought the judgment of the High Court on a reference under section 82 which could by way of an appeal to the Supreme Court. The continual harping on the point that the High Court had taken a technical objection relating to the service of notice or that the technical irregularity could be cured by now merely giving a notice is not warranted. If as the Income-tax Officer held that the cancellation of the registration has nothing to do with the assessment proceedings both of which are separate and independent then he has no power under the Hyderabad Income-tax Act. He cannot take any action at all as the proviso under section 31(4) is not saved. Even otherwise we have shown that the Income-tax Officer has no power or jurisdiction to cancel the registration under the Hyderabad Income-tax Act. We had clearly on a reference held in this case that the notice were not validly saved. The duty to serve validly the notices upon the assessee in accordance with the provisions of law and the responsibility for the omission to serve in upon the Income-tax authorities. The notice asking the assessee to show cause why the registration granted to him should not be canceled gives as its reasons the failure to comply with the notice under section 31(4) in respect of 1357 f. assessment. The question of failure to complex can only arise if the notice are served in accordance with the provisions of law. The notice presumes the valid serving of those notices, an assumption which is in direct conflict with the judgment of this court and is not warranted in any view of the matter, nor is there any validity in the statement that the status of the firm as a registered firm was already determined and it only required the rectification of the mistake relating to the giving of notice. The cancellation of registration of the firm must always follow the issue of the required notice. In the result, we quash the notice of May 11, 1955, and the order of the Additional Income-tax Officer dated September 21, 1955, and allow the application partly with costs of the applicant. Advocate's fee Rs. 100.

16. [On a petition by the Income-tax Department, this ex parte order was set aside and the court heard fresh arguments and on January 17, 1958, delivered the following judgment.]

17. C. Rangachari for the petitioner.

18. V. Vedantachari for the Commissioner.

J.P. Jaganmohan Reddy, J.

19. This writ petitions had been disposed of by us ex parte on the 29th August, 1357. Subsequently, however, on a petition by the Income-tax Department that there was an omission in the case list and that neither the name of the advocate appearing for the Department nor the Commissioner of Income-tax was put in the list, as a result of which the Department was not in a position to ascension the date of hearing or the date of the judgment, we allowed the petition, set aside our orders and recalled the writ which was issued. Learned advocate for the Department, Shri Vedantachari, has not dealt with those points which were found in favour of the Department nor has Mr. Rangachari sought to assail the reasoning given by us in the former order or adduce any fresh arguments against them.

20. The only point on which the learned advocate for the Department concentrated his argument was that having regard to our finding on the third question in Chaganlal Oil Mills v. Commissioner of Income-tax, the assessment made by the Income-tax Officer cannot now be challenged. In order to understand the argument, it is necessary to set out a few facts.

21. The assessee was first assessed on 21st December, 1948, on an income of Rs. 1, 65, 909. Subsequently, the Additional Income-tax Officer having come to know that the assessee had received some blackmarket profit on the sale of groundnut oil from certain named persons wrote a letter to the assessee on 15th May, 1951, asking him to produce or cause to be produced its account books on 21st May, 1951, for the year ending 12th November, 1947. This letter does not appear to have been received by the assessee or at any rate, as the Tribunal observes, it was not clear whether it was dispatched to the assessee as there was no mention of it in the revised assessment order. On 12th June, 1951, a notice under section 46(1) of the Act was issued to the assessee and on the return of the process server it was held to be validly served. As no return was filed as required by the said notice, a notice under section 30(4) directing the production of account books was issued and the Income-tax Officer made a revised assessment on 30th September, 1951, after obtaining the previous approval of the Deputy Commissioner. This assessment was ex parte and by it a sum of Rs. 50, 000 was added to the income originally computed on 21st December, 1948. It may also be observed that a notice for the cancellation of the registration of the firm was also issued as required by the proviso to section 31(4) on 13th September, 1951, to the auditors of the firm who returned the same with the contention that they had ceased to act as auditors of the assessee and that the same should be served on the assessee. This was on 25th September, 1951, and the notice was received back by the Income-tax Officer on 26th September, 1951. The Income-tax Officer thereafter without issuing any further notice cancelled the registration on 26th September, 1951. After the cancellation of the registration the assessee did not make any application as provided under section 39 of the Act; but appealed to the Appellate Assistant Commissioner without success. Against this order two appeals where filed, one against the quantum of the income assessed and the other against the cancellation of the registration. The following questions were referred by the Tribunal to the High Court :

'(1) Whether the notice under section 46(1) of the Hyderabad Income-tax Act was validly issued ?

(2) Whether the notice under section 46(1) of the Hyderabad Income-tax Act was validly served upon the assessee ?

(3) If the answer to the question (1) and (2) is in the negative, whether the assessee is competent to raise in appeal in question regarding the validity of the issue and service of notice without first raising the question by making an application under section 39 of the Act ?

(4) Whether the registration of the firm was validly canceled ?'

22. The first question was answered in the affirmative and on the second we said that the notice was validly issued but not validly served. On the third question we said that inasmuch as the assessee has not filed an application to set aside the assessment under section 39 of the Act on the ground of his not being served with a notice, he is not competent to raise this matter in appeal. On the question of the validity of cancellation of registration of the firm, we held that it was not validly canceled. We have set out in our previous order the subsequent history of the proceedings which led to the cancellation of the registration of the firm by the Income-tax Officer. It is unnecessary to reiterate that history as we direct that our previous order dated 29th August, 1957, should be read as part of this order and in so far as the several contentions raised by the learned advocates are concerned, we adopt the reasoning given therein.

23. We had in our previous order dealt with the contention of the Income-tax Officer that the cancellation of registration has nothing to do with the assessment proceedings, both of which were separate and independent as under :

'............ If, as the Income-tax Officer held the cancellation of the registration has nothing to do with the assessment proceedings, both of which are separate and independent, then he has no power under the Hyderabad Income-tax Act. He cannot take any action at all as the proviso under section 31(4) is not saved. Even otherwise we have shown that the Income-tax Officer has no power or jurisdiction to cancel the registration under the Hyderabad Income-tax Act. We had clearly on a reference held in this case that the notice were not validly served. The duty to serve validly the notices upon the assessee in accordance with the provisions of law and the responsibility for the omission to serve is upon the Income-tax authorities. The notice asking the assessee to show cause why the registration granted to him should not be canceled gives as its reasons the failure to comply with the notice under section 31(4) in respect of 1957-F assessment. The question of failure to complete can only arise if the notice are served in accordance with the provisions of law. The notice presumes the valid serving of those notices, an assumption which is in direct conflict with the judgment of this court and is not warranted in any view of the matter, nor is there any validity in the statement that the status of the firm as a registered firm was already determined and it only required the rectification of the mistake relating to the giving of notice. The cancellation of registration of the firm must always follow the issue of the required notice.'

24. In the result we quashed the notice of 11th May, 1955, and the order of the Additional Income-tax Officer dated 21st September, 1955.

25. Shri Vedantachari contends that two consequences follow as a result of the ex parte assessment : (1) that under section 31(4) if the assessee fails to make a return either under sub-section (1) or sub-section (2) of section 30 or fails to comply with the terms of a notice issued under sub-section (4) of the said section, he may after obtaining the previous approval of the Deputy Commissioner make the assessment to the best of his judgment and in the case of a firm may refuse to register it or may cancel its registration if it is already registered; and (2) once an order under this is passed the assessee can only have the ex parte assessment canceled under section 39 by showing that he has not received any of the notice issued under the provisions stated in the above section, or that he had not a reasonable opportunity to comply or was prevented by sufficient cause from complying with the terms of the notice. Shri Vedantachari contends that since we held on question 3 of the reference that the assessee not having filed an application under section 39 cannot assail the order on the ground of the invalidity of the notice the order of assessment cannot be challenged. This argument, in our view, appears to be based on some misconception of the finding. While question 3 was designed to determine the effect of the omission of the assessee to take proceedings under section 39 on his right to question the validity of the notice issued, it did not attempt to determine the reasonableness of the amount computed or the question whether under the provisions of the Act the assessee was liable to pay that amount or any similar amount. In fact the assessee had filed an appeal against the order canceling the registration which was dismissed. Against that order of dismissal a further appeal was filed in the Tribunal. The assessee was entitled to file these appeals under the provisions of section 42 against an order under section 31 both with respect to the quantum as well as with respect to the registration. He did not choose to file an application under section 39 to set aside the ex parte order, nor did he file an appeal under section 42 with respect to the quantum. He however, as we had stated, filed an appeal with respect to the registration of the firm. In the reference relating to the registration, we held that the registration was not properly canceled. In the circumstances the consequence of that non-cancellation of the registration would affect the determination of the tax payable and the demand. If the firm was unregistered, then the firm would have been assessed as such and if the firm is registered then the income of the firm as competed, which computation in this case cannot be challenged, will have to be taxed in the hands of the individual partners. The result of the answer to question 4 of the reference would require the Income-tax Officer to include such share of the income from the firm in the individual assessments of the partners. The force of this conclusion appears to have been well realised by the Income-tax authorities when they purported to issue a fresh notice in conformity with law to cancel the registration of the firm. Otherwise there is no meaning in the steps taken by the Department. The effect of the order of the Income-tax Officer is certainly against the interests of the assessee and has consequently been challenged. The next question which has been raised by Shri Vedantachari is that as the order canceling the registration is not an order of assessment within the meaning of sub-section (2) of section 46, it cannot be said that the Income-tax Officer has no power after the expire of three years from the end of the year in which the income, profits or gains were first assessable to take proceedings to cancel the registration. If we understand his argument aright, it is that the cancellation of registration is merely a cancellation of a privilege and the order cannot, by any stretch of the language, be said to be an order of assessment under section 31. Sub-section (2) of section 46 is in the following terms :

'No order of assessment under section 31 or of assessment or re-assessment under sub-section (1) of this section shall be made after the expire of three years from the end of the year in which the income profits or gains were first assessable :Provided that nothing contained in this sub-section shall apply to a reassessment made in pursuance of an order under section 43 section 45, section 82 or section 83.'

26. As already pointed out in our previous order which is to be read as part of this order the proviso is not attracted by the facts of this case, but sub-section (2) alone is to be considered. In this case the re-assessment was made under the provisions of section 46(1) and the procedure under section 31(4) for assessment was followed. In re-assessing the income of Rs. 50, 000 was added and the registration of the firm canceled and the firm was assessed to an income, when in fact individual partners should have been assessed with respect to that income had the registration been not canceled. The contention of the learned advocate for the assessee is that the effect of the order declaring the cancellation of the registration invalid is to modify the order or re-assessment and it is to negative this effect of our order that further steps were taken to cancel the registration. In our view sub-section (2) of section 46 clearly contemplates the order of assessment made under section 31, which includes not only the best judgment assessment, but also the final order computing the income and making the demand. In other words, the manner in which the income as computed is to be assessed would depend upon the question whether the firm is registered or unregistered. The order of assessment and the issue of demand notices based thereon would certainly be dependent upon this fact and consequently, it would come within the purview of sub-section (2) of section 46. The Income-tax Officer is, therefore, barred from taking any further proceedings thereunder after the lapse of three years. The third contention is based upon section 13 of the Indian Finance Act which we have already dealt with in our previous order. We held that the Hyderabad Income-tax Act was saved for the purposes of levy, and collection of income-tax which would include levy and collection of tax on re-assessment under section 46. Holding thus does in any way benefit the Department because on the assumption that the Hyderabad Income-tax Act is applicable we held that section 46(2) did bar the Income-tax Officer from taking any action to cancel the registration under that Act after the lapse of three years.

27. In the result even on hearing the counsel for the Department as well as the counsel for the assessee, we see no reason to take a different view to the one which we have already taken. Consequently, we quash the notice of 11th May, 1955, and the order of the Additional Income-tax Officer dated September 21, 1955, and allow the application with costs of the applicant. Advocate's fee Rs. 100.


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