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Jawahar Lal Mani Ram Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 243 of 1959
Judge
Reported in[1969]72ITR78(All)
ActsIncome Tax Act, 1922 - Sections 34, 34(1) and 34(3)
AppellantJawahar Lal Mani Ram
RespondentCommissioner of Income-tax
Appellant AdvocateG.N. Kunjru and ;K.N. Saxena, Advs.
Respondent AdvocateGopal Behari, Adv.
Excerpt:
.....law, as they were made after the expiry of the period of four years from the end of the assessment years in question instead of from the date of the filing of the returns on november 18, 1950 ? '4. the bench answered the question in the negative and against the assessee, holding that the assessments were valid, even though made after the expiry of four years from the end of the assessment years in question. the supreme court took the view that the assessee attacked the validity of the notices issued under section 34 as well as the validity of the assessments made in pursuance of those notices and the two questions which really arose in the case had not been considered. the assessee may have omitted or failed to file a return of his income; or he may have omitted or failed to disclose..........law, as they were made after the expiry of the period of four years from the end of the assessment years in question instead of from the date of the filing of the returns on november 18, 1950 ' 4. the bench answered the question in the negative and against the assessee, holding that the assessments were valid, even though made after the expiry of four years from the end of the assessment years in question. the assessee proceeded in appeal to the supreme court. on april 19, 1967, the supreme court delivered judgment setting aside the judgment of the high court and remitting the case to it for reframing the question and disposing of the reference afresh. the supreme court took the view that the assessee attacked the validity of the notices issued under section 34 as well as the validity of.....
Judgment:

Pathak, J.

1. There was a Hindu undivided family which carried on business under the name and style, M/s. Nathuram Jawaharlal. During the assessment proceedings for the assessment years 1946-47, 1947-48, 1948-49 and 1949-50 a claim was made under Section 25A of the Indian Income-tax Act, 1922, that the Hindu undivided family had disrupted with effect from May 19, 1945, giving rise to smaller Hindu undivided families. One of such smaller Hindu undivided families is the assessee, M/s. Jawaharlal Maniram. In the assessment proceedings against the parent Hindu undivided family, M/s. Nathuram Jawaharlal, the Income-tax Officer rejectedthe claim under Section 25A and assessed the entire income in the hands of the parent family. The parent family appealed unsuccessfully to the Appellate Assistant Commissioner against the rejection of the claim under Section 25A and thereafter took the case in second appeal to the Income-tax Appellate Tribunal. The Tribunal by its order of August 31, 1954, accepted the claim under Section 25A and directed the Income-tax Officer to recognise the complete partition of the parent Hindu undivided family with effect from May 19, 1945. Parallel appeals were filed against the assessments of the income in the hands of the parent Hindu undivided family and these assessments were set aside in second appeal by the Tribunal by its order dated October 28, 1954, with the direction :

' Fresh assessments should be made, one for the period 1945 up to which the Hindu undivided family was in existence, and the other on the component units, namely, M/s. Jawaharlal Maniram and Bhagwandas Sitaram.'

2. Meanwhile, on November 18, 1950, the assessee Hindu undivided family filed returns of its total income for the assessment years 1946-47 to 1949-50. As the Income-tax Officer had rejected the claim under Section 25A and declined to hold that the parent family had suffered partition, he took no action upon the returns filed by the assessee Hindu undivided family. But after the order of the Tribunal dated October 28, 1954, in the appeals filed by the parent Hindu undivided family, the Income-tax Officer, pursuant to the directions contained in that order, commenced proceedings under Section 34 in respect of the assessee Hindu undivided family for the assessment years 1946-47 to 1949-50. On March 4, 1955, the Income-tax Officer issued a notice under Section 34 in respect of each of the four assessment years. The assessee submitted its returns on July 6, 1955, but contended that the notices issued under Section 34 were invalid inasmuch as it had already filed the returns relating to those years on November 18, 1950, and it could not be said that income had escaped tax on account of the failure or omission on the part of the assessee to submit its return. It was further contended that the assessments for those years had become barred by limitation. The Income-tax Officer rejected the contentions of the assessee and assesseed it for the four assessment years on September 8, 1955. The assessee appealed unsuccessfully before the Appellate Assistant Commissioner against the validity of the proceedings under Section 34. In second appeal the Tribunal held that income had escaped assessment because of the failure of the assessee to file its returns pursuant to the notice under Section 22(1) in respect of the four assessment years and the Income-tax Officer was entitled to proceed under Section 34(1)(a) for which the period of limitation was eight years. Accordingly, it held that the assessments were not barred by time. Alternatively, it held that the Income-tax Officer was precluded from assessing the assessee Hinduundivided family on account of his finding that the parent Hindu undivided family had not suffered partition and that it was only subsequently when the Tribunal held on August 31, 1954, that the parent Hindu undivided family had been partitioned, that the assessee became first assessable. In the view that the assessee became first assessable on August 31, 1954, the Tribunal held that the period of limitation of four years for taking assessment proceedings against the assessee commenced on August 31, 1954. On that reasoning, it found that the assessments had been made within limitation. At the instance of the assessee the Tribunal referred the following question to this court for its opinion :

' Whether the assessments made under Section 34 of the Income-tax Act for the assessment years 1946-47, 1947-48, 1948-49 and 1949-50 were bad in law, as they were made after the expiry of the period of four years from the date of filing of those returns on November 18, 1950 '

3. The reference came on for hearing before a Bench of this court. The Bench considered it necessary to reframe the question as follows :

' Whether the assessments made under Section 34 of the Income-tax Act for the assessment years 1946-47, 1947-48, 1948-49 and 1949-50 were bad in law, as they were made after the expiry of the period of four years from the end of the assessment years in question instead of from the date of the filing of the returns on November 18, 1950 '

4. The Bench answered the question in the negative and against the assessee, holding that the assessments were valid, even though made after the expiry of four years from the end of the assessment years in question. The assessee proceeded in appeal to the Supreme Court. On April 19, 1967, the Supreme Court delivered judgment setting aside the judgment of the High Court and remitting the case to it for reframing the question and disposing of the reference afresh. The Supreme Court took the view that the assessee attacked the validity of the notices issued under Section 34 as well as the validity of the assessments made in pursuance of those notices and the two questions which really arose in the case had not been considered. One question was whether the proceeding for reassessment could be commenced after the returns had been filed on November 18, 1950, or the returns could be ignored. The other question was whether the assessment had to be completed within the period of limitation prescribed by Section 34(3). Being of the view that there should be a proper trial of the question arising out of the order of the Tribunal, it expressed the opinion that the appropriate questions should be refrained by this court keeping in view the questions mentioned by the assessee and the Commissioner. The reference has now been placed before us.

5. We heard learned counsel for the parties on the questions which could be said to properly arise in the case and accordingly we have framed the following two questions :

'(1) Whether it was open to the Income-tax Officer to issue notices under Section 34 of the Income-tax Act, 1922, for the assessment years 1946-47 to 1949-50 and make assessmentin pursuance of the notices in spite of the fact that the assessee had already filed returns for those assessment years on November 18, 1950

(2) Whether, under the circumstances of the case, the notices issued by the Income-tax Officer under Section 34 of the Act and the assessment orders made in pursuance of the notices were within limitation '

6. Learned counsel for the parties agreed that the two questions formulated above are the questions which really arise in the case.

7. At the outset it has been conceded by Mr. Gopal Behari, appearing on behalf of the Commissioner of Income-tax, that the case is one which falls for consideration under Section 34(1)(b) and not under Section 34(1)(a). He states that the position on behalf of the Commissioner of Income-tax is that there was no default on the part of the assessee and that the proceeding properly lay under Section 34(1)(b). Proceeding from there, we may consider what should be our opinion on the two questions set out above.

8. The assessee had filed its returns for the relevant assessment years on November 18, 1950. The Income-tax Officer took no action on those returns. That was apparently because he had already taken the view that the income was assessable in the hands of the parent Hindu undivided family. Now the period of limitation for making an assessment is four years from the end of the relevant assessment year. That period had expired in respect of all the four assessment years before March 4, 1955. The Income-tax Officer was now precluded from assessing the income by the exercise of his powers under Section 23. It was no longer open to him to make an assessment in the exercise of what we may describe as his ordinary jurisdiction for the four assessment years. Now, income may escape assessment for any of several reasons. The assessee may have omitted or failed to file a return of his income; or he may have omitted or failed to disclose fully and truly all material facts necessary for his assessment. Those are cases contemplated by Section 34(1)(a). There may also be cases where, without any default on the part of the assessee, income may escape assessment. Such cases fall within the contemplation of Section 34(1)(b). The reasons for income escaping assessment have not been indicated here. Among them there is the reason that the Income-tax Officer, while making an assessment against the assessee, erroneously excluded an item of income disclosed by the assessee on the ground that it was liable to tax in the hands of another person. It may also happen that the Income-tax Officer mayconsider that the entire income entered in the return submitted by the assessee really belongs to another person and, therefore, while assessing that other person in respect of that income he may decline to take assessment proceedings against the assessee on the basis of that return. In the former case, having completed the assessment against the assessee the Income-tax Officer is now precluded from reopening the assessment for the purpose of including the item of income in the exercise of his ordinary jurisdiction under Section 23. In the latter case, if the period of limitation for completing the assessment has run out, the Income-tax Officer is barred by the expiry of that period from making an assessment order on that return. In each of these cases, income can be said to have escaped assessment. In the instant case, on March 4, 1955, if the Income-tax Officer were to ask himself the question whether he could exercise his ordinary jurisdiction under Section 23 to make an assessment order against the assessee he would have to reply in the negative. The only course open to him in the circumstances would be to invoke his extraordinary jurisdiction under Section 34. We have been referred to the decision of the Supreme Court in Commissioner of Income-tax v. Ranchhoddas Karsondas, [1959] 36 I.T.R. 569; [1960] 1 S.C.R. 114, but in that case the Income-tax Officer initiated proceedings under Section 34 when it was still open to him to take assessment proceedings on the return filed by the assessee, as the period of limitation for completing the assessment had not yet expired. The facts of the instant case are distinguishable. In our opinion, on March 4, 1955, income could be said to have escaped assessment because the Income-tax Officer was precluded by the period of limitation from making an assessment order for the assessment years 1946-47 to 1949-50 on the returns filed by the assessee for those assessment years. We answer the first question in the affirmative.

9. The next question is whether the notices issued by the Income-tax Officer under Section 34 as well as the assessment orders made in pursuance of those notices were made within limitation. Proceeding on the basis affirmed by the learned counsel for the Commissioner that the proceedings fall to be considered under Section 34( 1 )(b), it is plain that the notices which should have been served upon the assessee within four years from the end of the relevant assessment years were in fact served beyond that period. It has been urged on behalf of the Commissioner that, inasmuch as the proceedings under Section 34 were taken pursuant to the direction of the Tribunal in the appeals filed by the parent Hindu undivided family the matter must be examined by reference to the second proviso to Section 34(3). On the basis of that provision it is contended that the bar of limitation stood removed. It is said that second proviso to Section 34(3) removed the bar of limitation for the purpose of taking assessment proceedings against any person in consequence of or to give effect to the direction contained in the appellate order relating to the parent Hindu undivided family. In the instant case such person is the assessee Hindu undivided family. The contention on behalf of the Commissioner in answer to the plea of limitation rests entirely upon this submission. Now the Supreme Court has held in S. C. Prashar v. Vasantsen Dwarkadas, [1963] 49 I.T.R. (S.C.) 1, 11, 12, 13 that the second proviso to Section 34(3) is ultra vires to the extent it permits assessment proceedings against a person other than the assessee. That position is vigorously contested on behalf of the Commissioner. But after a careful examination of the judgments delivered in that case it appears to us that the conclusion is inescapable. In respect of the second proviso to Section 34(3), S. K. Das J. said :

' Now, I proceed to discuss the first question as to whether this proviso applies in the present case. The question has two facets : (1) whether the proviso is constitutionally valid and (2) if it is constitutionally valid, does it apply... With regard to the first facet, Chagla C. J. had pointed out, rightly in my opinion, that the persons with regard to whom a finding or direction is given and persons with regard to whom no finding or direction is given belong really to the same category, namely, the category of persons who are liable to pay tax and have failed to pay it for one reason or another. Admittedly, persons who are liable to pay tax and have not paid it could not be proceeded against after the period of limitation, unless a finding or direction with regard to them was given by some Tribunal under various sections mentioned in the proviso ; therefore, out of the large category of people, who were liable to pay tax but failed to pay it, a certain number is selected for action by the proviso and with regard to that small number the right of limitation given to them is taken away. The real question is, is there any rational basis for distinguishing between persons who are liable to pay tax and have failed to pay it and with regard to whom a finding or direction is given, and persons who are liable to pay tax and have failed to pay it and with regard to whom no finding or direction is given. I am in agreement with the view expressed by the learned Chief Justice that no rational basis has been made out for the distinction between the two classes of people referred to above, who really fall in the same category and with regard to whom there was no difficulty in having a uniform provision of law. I am further in agreement with the view of the learned Chief Justice that the principle laid down by this court in Suraj Mall Mohta & Co. v. A. V. Visvanatha Sastri, [1954] 26 I.T.R. 1 (S.C.) applies. In that case Sub-section (4) of Section 5 of the Taxation on Income (Investigation Commission) Act was challenged and this courtpointed out that there was nothing uncommon either in properties or in characteristics between persons who were discovered as evaders of income-tax during an investigation conducted under Section 5(1) and those who were discovered by the Income-tax Officer to have evaded payment of income-tax. Both these kinds of persons really belonged to the same category and therefore required equal treatment. This court pointed out that Section 34 of the Indian Income-tax Act and Sub-section (4) of Section 5 of the impugned Act dealt with persons who had similar characteristics and properties and therefore a different treatment of some out of the same class offended the equal protection clause embodied in Article 14 of the Constitution. It seems to me that the position is the same here. Whether persons who evade tax are discovered by means of a finding given by a tribunal or they are discovered by any other method, they really belong to the same category and therefore require equal treatment. The second proviso to Sub-section (3) of Section 34 which came into effect from April 1, 1952, patently introduced an unequal treatment in respect of some out of the same class of persons. Those whose liability to pay tax was discovered by one method could be proceeded against at any time and no limitation would apply in their case, and in the case of others the limitation laid down by Sub-section (1) of Section 34 would apply. This in my opinion is unequal treatment which is not based on any rational ground.' (Emphasis is mine).

10. Kapur J. was of the same opinion. He observed :

' The next question raised is the constitutionality of the second proviso to Section 34(3) of the Act...It was contended on behalf of the respondents that the second proviso to Section 34(3) is unconstitutional because it infringes Article 14 of the Constitution in so far as it deprives such third party of the immunity given against assessment or reassessment by the period of eight years mentioned in Section 34(1)(a) and it results in prejudging the merits of the third party's case before he is even heard and that there is no reasonable basis for distinguishing such third party from any other person escaping income-tax. The words used in the section are 'assessment or reassessment made on the assessee in consequence of or to give effect to any finding contained in an order'. Any person there mentioned must mean a person other than the assessee. The consequences of giving effect to the second proviso to Section 34(3) are that the protection of the time-limit given by the proviso to Sub-section (1) of Section 34 will disappear qua those falling within the proviso and would be available to other assessees who fall within Section 34(1)(a) of the Act. It was submitted that assessees who fall under this category cannot form a different class based on any real and substantial distinction; and that there is no nexusbetween the classification and the object sought to be achieved and therefore Article 14 is violated...

It was argued that there was no reasonable basis for classification in this case because there was nothing peculiar in properties or characteristics of persons with regard to whom a finding or a direction is given under the proviso and then action is taken against them under Section 34(3) and those who have evaded tax and in regard to whom no such direction is given and fall under Section 34(1)(a). Both of them have common qualities, common characteristics and common peculiarities and traits...The submission of the respondents that there is no reasonable basis for classification between those who have escaped assessment under Section 34(1)(a) and those third parties who have escaped income-tax but with regard to whom a direction or an order is made under proviso (ii) to Section 34(3) is well founded and therefore the provision is unconstitutional and hit by Article 14.'

11. And Sarkar J. was also in no doubt about it at all. He had held in Commissioner of Income-tax v. Sardar Lakhmir Singh, [1953] 49 I.T.R. (S.C.) 70, 79 :

'I think, therefore, that the second proviso to Sub-section (3) of Section 34, as amended by the Amending Act of 1953, in so far as it affects persons other than assessees is void as violating Article 14 of the Constitution.'

12. And he expressed the same opinion in Prashar's case, The three learned judges constituted the majority of the Bench hearing the appeal. We must, therefore, take it that the Supreme Court has declared that the second proviso to Section 34(3) is ultra vires in so far as it authorises the assessment or reassessment of any person other than the assessee beyond the period of limitation specified in Section 34 in consequence of or to give effect to a finding or direction given in an appeal in relation to the assessee. But Shri Gopal Behari says that it is not open to this court, in a reference under Section 66 of the Indian Income-tax Act, to adjudicate upon the vires of a provision of that Act. He relies upon K. S. Venkataraman & Co. Ltd. v. State of Madras, [1966] 60 I.T.R. 112 (S.C.). It segms to us that there can be no dispute any longer as to the vires of the second proviso to Section 34(3) in respect of the point mentioned above. The question has been settled beyond dispute by the decision of the Supreme Court in Prashar's case. It is now not open to this court to adjudicate on the question whether the provision is intra vires or ultra vires. It cannot entertain any debate on the question and, therefore, no occasion arises for deciding any controversy in the matter. In view of the decision of the Supreme Court, the matter has passed from the realm of contention to that of declared law, and under Article 141 of the Constitution the law declared by the Supreme Court is binding upon this court. All that is left to us is take note of the fact that according to the l!aw so declared the provision is ultra vires in relation to a person other than the assessee in whose appeal the finding or direction was given, and taking note of that fact we must read the second proviso to Section 34(3) as if the words ' or any person ' were never there at all. Article 13(2) of the Constitution declares the provision in respect of such a person to be void. The provision is a nullity. In the eye of law it is ' non est '. In the circumstances, we overrule the objection raised on behalf of the Commissioner. Accordingly, we hold that the notices issued by the Income-tax Officer under Section 34 of the Act for the four assessment years are barred by limitation. If the notices themselves are barred by limitation, the assessment orders made in pursuance of the notices are also beyond limitation. The second question is answered in the negative.

13. Before we part with this case, we may notice a submission, made rather tentatively, on behalf of the assessee. It is pointed out that a petition under Article 226 of the Constitution was filed by the other branch, M/s. Bhagwan Das Sitaram Saraf, of the parent Hindu undivided family, M/s. Naturam Jawaharlal, and that the petition was allowed by this court and it is urged that the decision upon that petition operates as res judicata in the instant case. It is plain that the parties were not the same and that consideration alone is sufficient to defeat the plea.

14. Our answers to the questions framed in the instant reference are :

Question No. 1--In the affirmative.

Question No. 2--In the negative.

15. In the circumstances of the case, we make no orders as to costs.


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