SHRIVASTAVA J. - By this petition under article 226 of the Constitution, the petitioner challenges the validity of the notice dated March 14, 1962, issued by the income-tax authorities under section 34(1)(a) of the India Income-tax Act, 1922, and prays for a writ of certiorari to quash the notice and for a writ of prohibition to restrain the respondents from taking any proceedings pursuant to that notice.
The assessee was a partnership firm which carried n business in the Sarguja State. The firm was dissolved on July 25, 1947. It was assessed for the assessment year 1946-47 on December 30, 1947 (annexure 'B'). On March 26, 1952, a notice was issued to the assessee under section 34(1)(a) of the Income-tax Act for reassessment of escaped income as it was discovered that the firm had made a declaration of high denomination notes to the extent of Rs. 4,75,000 on January 23, 1946. The income was ultimately assessed to income-tax. The assessee went up in appeal before the Assistant Commissioner of Income-tax who held that the income could not be assessed in the year 1947-48 butt was liable to assessment for the year 1946-47 (annexure 'F'). The matter was taken up to the Tribunal but the order of the Assistant Commissioner was maintained (annexure 'M'). The Tribunal had made a reference under section 66(1) of the Income-tax Act to this High Court passing the question whether the proceedings started on the notice dated March 26, 1952, were valid and the answer given was that they were validly initiated (annexure 'U'). While the petition before the Tribunal was pending, a notice was issued on March 14, 1962, to the petitioner under section 34(1)(a) of the Income-tax Act in accordance with the direction of the Assistant Commissioner for reassessing the escaped income for the year 1946-47. It is this notice and the subsequent proceeding which are sought to be quashed by this petition.
The Ruler of Sarguja State had issued a Darbar order on November 26, 1941 (annexure 'A'), making the Indian Income-tax Act applicable to his State with such amendments as may be made in that Act from time to time. It was under this Act that the original proceedings for assessment of the income for 1945-46 and 1946-47 were started by the Sarguja authorities. On the merger of the State, the Darbar order was continued by the C. P. States (Administration) Order, 1947. Thus, the Indian Income-tax Act as amended from time to time continued in force in the territory which was Sarguja State. Finally, by section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949,the Indian Income-tax Act was made applicable and the corresponding State Act was repealed. However, the earlier Act was saved for the purpose of assessments relating to years prior to the previous year before the Act of 1949. Thus, for the purpose of the assessment for the years 1945-46, the relevant Act would be the Income-tax Act as applied to the Sarguja State by the then Ruler in 1941 under Darbar order, annexure 'A' (hereinafter referred to as the Sarguja Act).
Shri Y. S. Dharmadhikari appearing for the petitioner pressed three points in support of the petition. They are :
(i) that the Sarguja Act, which applies to the instant case, should be applied as it was on the date of the merger of the State (January 1, 1948), and subsequent amendments to the Indian Income-tax Act do not apply to the present assessment;
(ii) that the notice was beyond time and reliance cannot be placed by the income-tax authorities on the second proviso too section 34(3); and
(iii) that the second proviso to section 34(3) is unconstitutional.
We shall consider these contentions seriatim.
Point No. 1. On behalf of the respondents, Shri M. Adhikari urged that all the amendments made to the Income-tax Act apply to Sarguja State by virtue of the Darbar order and, therefore, the limitation for the notice would be governed by subsequent amendments. Sub-section (4) had been added to section 34 by an amendment in 1959 which has the effect of taking away the bar of limitation completely in respect of concealed and undisclosed incomes escaping assessment. Accordingly, it is contended, the notice and the subsequent proceedings are valid.
On the other hand, it is contended by Shri Dharmadhikari that the Income-tax Act as it stood on the date of the merger of the State should be applied to the case without any further amendments, as the authority of the sovereign of Sarguja State ceased after that date. As there was no power to legislate left in the Ruler after that date, the latter amendments could not be read in the Sarguja Act for the application of that Act to previous assessments. We do not see any substance in this argument in view of the fact that the Darbar order, as it was, was continued by the State of Madhya Pradesh. The expression 'from time to time' in the order will thus include amendments made in the Income-tax Act after the merger.
The position, however, changes after the Sarguja Act was repealed by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. Section 7 of that Act introduced the Indian Income-tax Act in the merged State of Sarguja and repealed the Sarguja Act. The relevant part of section 7 is as under :
'7. (1) If, immediately before the 26th day of August, 1949, there was in force in any of the merged States any law relating to income-tax, super-tax or business profits tax, 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, as extended to that State by section 3, or, as the case may be, the levy, assessment and collection of business profits tax for any chargeable accounting period ending on or before the 31st day of March, 1948, and for any purposes connected with such levy, assessment or collection.....'
In A. N. Lakshman Shenoy v. Income-tax Officer, Ernakulam it has been observed that 'reassessment' will, without doubt, come within the expression 'levy, assessment and collection of income-tax'. It was held that the laws in Part B States are saved for the purpose of making reassessments in respect of any period for which they have been kept alive. In Hirjibhai v. Income-tax Officer, Rajnandgaon, the word 'assessment' used in section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, was interpreted to include reassessment by a Division Bench of this court. This view was approved in Income-tax Officer, Bangalore v. K. N. Guruswamy and it was held that :
'...the saving provisions save section 34 of the Indian Income-tax Act, 1922, in its entirety, as it was in force in the retroceded area prior to July 1, 1948, and the contention of the respondent that it stood repealed from that date is not correct.'
After the repeal of the Sarguja Act, it ceased to apply to proceedings for assessments commenced after 1949 but it was preserved in relation to assessments for earlier years. The expression 'amendments made from time to time', if literally interpreted, is comprehensive enough to include amendments made at any time but the difficulty arises in the context of amendments made in the Indian Income-tax Act after the repeal of the Sarguja Act. We are unable to accept that amendments subsequent to the repeal can be read in the Sarguja Act. Amendments can be made only in an Act which is in existence. The fact that the Act has been saved for a limited purpose would not, in our opinion, make any difference. The very purpose of a saving clause is to save vested rights as they existed on the date of repeal and this purpose may be defeated if the expression 'amendments made from time to time,' is interpreted literally to make subsequent amendments applicable. It is quite conceivable that the subsequent amendments may affect vested rights and the saving clause would thus fail in its real purpose.
This view finds support in the following observations of Dixit C.J. in paragraph 16 of the decision in Amalgamated Coalfields Ltd. v. State of M. P.
'...The reason is that the Act of 1920 was repealed by section 192 of the Local Government Act, 1948. The repeal was no doubt subject to the saving stated in the proviso to section 192. Clause (a) of the proviso continued the operation of the Act of 1920 only for a limited purpose, namely, for the continuation of the local authorities constituted under the Act of 1920 till the administration of Local Self-Government was taken over by the Deputy Commissioners in accordance with section 186A of the Act of 1948. The Act of 1920 was not continued for any other purpose. The result was that the Act of 1920 ceased to exist except for a limited purpose when the Act of 1948 came into force and on the date on which the Validation Act was passed it was in no sense and in no manner alive. Now, it is axiomatic that there cannot be any amendment of an enactment which is not in existence. If the Act is not in existence, it cannot be amended unless it is first revived...'
We hold that the saving in section 7 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, has the effect of continuing the Srguja Act for the purpose of earlier assessment but it will have to be read as referring to the Income-tax Act as it stood at the commencement of that Act in 1949. Subsequent amendments will have to be ignored. On this view, the income-tax authorities are not entitled to rely upon sub-section (4) of section 34 which was introduced by an amendment in 1959. In 1949, the limitation for a notice under section 34(1)(a) was eight years only and the period had expired long before the impugned notice. It was thus not competent for the income-tax authorities to issue the impugned notice.
Point No. 2 : Shri Adhikari then contended that he relied upon the second proviso t sub-section (3) of section 34. He argued that the notice in the instant case was to give effect to the finding o direction contained in an order of the Appellate Assistant Commissioner. This contention is not tenable in view of the decision of the Supreme Court in Income-tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwan Das. The following observation is pertinent :
'It is, therefore, manifest that assessment or reassessment made under the said sections or pursuant to the orders or directions made thereunder must necessarily relate to the assessment of the year under review, revision or appeal, as the case may be. It is important to remember that the proviso does not confer any fresh power upon the Income-tax Officer to make assessments in respect of escaped incomes without any time-limit. It only lifts the ban of limitation in respect of certain assessments made under certain provisions of the Act and the lifting of the ban cannot be so construed as to increase the jurisdiction of the Tribunals under the relevant section. The lifting of the ban was only to give effect to the orders that may be made by the appellate, revisional or reviewing Tribunal within the scope of its jurisdiction.'
'The finding in that context is that that income does not belong to the relevant year. He may incidentally find that the income belongs to another year, but that is not a finding necessary for the disposal of an appeal in respect of the year of assessment in question. The expression direction cannot be construed in vacuum, but must be collated to the direction which the Appellate Assistant Commissioner can give under sections 31. Under that section be can give directions, inter alia, under section 31(3)(b), (c) or (e) or section 31(4). The expression direction in the 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 section.'
In the instant case, the direction can only mean that the escaped income could not be assessed for the year 1947-48. The observation that it could be assessed for the earlier year is not a finding or direction within the meaning of the proviso to sub-section (3) and cannot thus help the authorities in supporting the validity of the notice.
Point No. 3 : The learned counsel for the petitioner relies upon S. C. Prashar v. Vasantsen Dwarkadas too support his contention that the proviso to section 34(3) is unconstitutional as it is hit by article 14 of the Constitution. A perusal of that decision seems to us to indicate that the proviso has been held to be unconstitutional only so far as third parties are concerned but has been held valid with respect to parsons who are parties to the proceedings before the income-tax authorities. However, we need not discuss this point in view of our findings on the first two points.
In the result, the petition succeeds. The notice dated March 14, 1962, is hereby quashed. A writ of prohibition shall issue against the income-tax authorities restraining them from starting or continuing any proceedings against the petitioner in pursuance of that notice. The respondents shall pay the costs of the petitioner. Hearing fee is fixed at Rs. 100 only. The outstanding security amount shall be refunded to the petitioner.