1. The material facts giving rise to this petition under Articles 226 and 227 of the Constitution are as follows :
The petitioner is the karta of the HUF, Satish Chandra Arya. According to the petitioner he along with other persons formed a co-ownership for the purpose of constructing godowns at Dewas and earning income by hiring out the same. The petitioner filed two returns of his income for the assessment year 1978-79, the relevant accounting year having ended on March 31, 1973. One return was filed by the petitionerin his status as an individual and other in the status of HUF. In both the returns the petitioner included the share of income of the assessee from the property said to be owned by the co-ownership concern, M/s. Sadhna Enterprises. The income disclosed by the assessee in the returns was Rs. 452 and Rs. 160, i.e., below the taxable limit. It is alleged that the respondent made enquiry into the returns filed by the petitioner. However, on March 23, 1981, the respondent sent a letter (annex, 'C') to the petitioner stating that as the returns are claimed to have been filed voluntarily by him declaring total income below the non-taxable maximum limit for the respective assessment year, the same are not covered by any of the sub-sections of Section 139. The same, therefore, could not be proceeded with for making of regular assessment. On the same day the respondent issued notice to the petitioner under Section 148 of the I.T. Act, 1961 (for short 'the Act'), stating therein that he has reason to believe that the petitioner's income in respect of which he is assessable for the assessment year 1978-79, has escaped assessment within the meaning of Section 147 of the Act. The respondent proposes to assess the income for the said assessment year. The petitioner was, therefore, required to deliver to the respondent within 30 days from the date of the service of the said notice (annex. 'D') a return in the prescribed form of his income in respect of which he was assessable for the said assessment year. The petitioner has prayed that as the respondent had no jurisdiction to issue notice under Section 148 of the Act to him the said notice (annex. 'D') deserves to be quashed.
2. The petitioner also averred that similar notice under Section 148 of the Act was issued in the name of the petitioner as a member of the association of persons requiring the petitioner to file the return of his income in respect of which the petitioner was assessable for the said assessment year. Although the petitioner averred that this notice (annex. 'E') was also illegal yet he has stated that this notice is being challenged separately. The petitioner has not prayed for any relief in this petition in respect of the said notice (annex. 'E') and, therefore, the question of the legality of the said notice does not fall for consideration in this petition.
3. Along with the return the respondent filed a copy, R-3, of the proceedings dated March 23, 1981, which contains reasons for issuance of notice under Section 148 of the Act. In annex., R-3, it is stated as follows :
'Record of proceedings in the assessee's case clearly indicates that proceedings for assessment were wrongly continued on invalid return. Fresh proceedings are considered necessary for obtaining a valid and legal return with the issue of notice under Section 148 for the reasons discussed in the following para. If an assessment is made on the return already filed, such an assessment shall remain liable to be challenged even by theassessee on the ground that it were made on a return which was invalid being not covered by any of the sub-sections of Section 139. The said return had accordingly to be so ignored and this action initiated in the light of Supreme Court's judgment in the case reported in : 65ITR607(SC) .'
4. The learned counsel for the petitioner contended that the respondent committed a patent error of law in holding that the returns submitted by the petitioner were invalid and that he had no jurisdiction to issue notice under Section 148 of the Act ignoring the returns voluntarily filed by the petitioner. He placed reliance upon the decision of the Supreme Court in CIT v. Ranchhoddas Karsondas : 36ITR569(SC) . The contention is well founded. In the aforesaid decision the assessee voluntarily submitted return of his income beyond time disclosing income below taxable limit. The ITO did not act on the return submitted by the assessee but issued a notice purporting to be under Section 34 of, the Indian I.T. Act, 1922, calling upon the assessee to submit his return. The ITO assessed the assessee on the basis of the second return and by adding a sum of Rs. 59,026 in the income of the assessee from undisclosed sources, disallowing the cash credits standing in the name of the assessee's wife in the firm of which the assessee was a partner. This amount of cash credits was disclosed by the assessee in the, foot note to the return voluntarily filed by him. On these facts, after considering the difference of opinion between the High Courts of Bombay and Calcutta, the Supreme Court held as follows (p. 576):
'We are unable (and we say this with due respect) to accept the view adumbrated in the Calcutta cases. The contrary view is expressed by the Bombay High Court in the earlier case of Harakchand Makanji and Co. v. Commissioner of Income-tax : 16ITR119(Bom) , and in the judgment under appeal. That view was accepted by the Madras High Court in P.S. Rama Iyer v. Commissioner o/Income-tax : 32ITR458(Mad) , and also, in our opinion, is the sounder view of the two. In the earlier of the two Bombay cases, Chagla C.J. and Tendolkar J. held (as-stated in the head-note):
'Notice under Section 34 is only necessary if at the end of the assessment year no return has been made by the assessee and the authorities wished to proceed under Section 22(2), but, where the assessee himself chooses voluntarily to make a return, no question can arise under Section 34 of assessment escaping and therefore there is no necessity to serve any notice under Section 34.'
This represents the law applicable to the facts as they are to be found in this case. In the assessment year no return of income was filed, nor was any notice served under Section 22(2). There was, however, the general notice under Section 22(1). A return in answer to that notice could befiled under Section 22(3) before assessment, and for this there is no limit of time. It was filed on January 5, 1950. There was nothing to prevent the Income-tax Officer from taking up the return and proceeding to assess the income of the assessee. It was open to him, if there was sufficient justification for it, to hold that the amount noted in the footnote was really the assessee's income, in which case an assessable income would have been found and the tax could be charged thereon. If the Income-tax Officer had acted on that return and assessed the assessee before March 31, 1950, the assessment would have been valid. He chose to ignore the return, and served on the assessee a notice under Section 34(1). This notice was improper, because with the return already filed, there was neither an omission nor a failure on the part of the assessee, nor was there any question of assessment 'escaping'. The notice under Section 34(1) was, therefore, invalid and the consequent assessment, equally so.'
The ratio of the aforesaid Supreme Court decision applies to the present case with full force.
5. In the present case, the returns filed by the assessee disclosing income below taxable limit were good returns and if assessments were framed on the basis of those returns, the assessments could not have been assailed on the ground that they were based on invalid returns. The respondent seems to have lost sight of the aforesaid decision of the Supreme Court in holding that the returns filed by the assessee-petitioner were invalid and that assessments could not be framed on the basis of those returns. The respondent had, therefore, no jurisdiction to issue a notice under Section 148 of the Act to the petitioner because in the returns already filed there was neither an omission nor a failure on the part of the petitioner nor was there any question of income escaping assessment.
6. The decision of the Supreme Court in CIT v. Adinarayana Murthy : 65ITR607(SC) , relied upon by the ITO for holding that if the assessments were framed on the basis of the returns filed by the assessee they could be invalid, is not applicable to the present case and it was not relied upon by the learned counsel for the Department in support of the notice issued by the respondent under Section 148 of the Act. The notice GIR No. S-205, dated March 23, 1981 (annex. 'D') issued by the respondent under Section 148 of the Act to the petitioner, therefore, deserves to be quashed.
7. The respondent issued notice under Section 148 of the Act to the petitioner on the ground that the returns filed by the assessee were invalid returns and on their basis no assessments could be framed. As stated above, theview taken by the ITO is patently erroneous and contrary to the law laid down by the Supreme Court. In the circumstances, the letter dated March 23, 1981 (annex. 'C'), sent by the respondent to the petitioner stating that the returns filed by the assessee are not covered by any sub-section of Section 139 of the Act and, therefore, cannot be proceeded with for making of regular assessments also deserves to be quashed.
8. According to the Department, the Sadhna Enterprises of which the petitioner is a member is an association of persons and has to be assessed as such. The petitioner contends that the property purchased by the petitioner and others under the name and style of Sadhna Enterprises is a co-ownership property and, therefore, income therefrom deserves to be assessed under Section 26 of the Act. The respondent has also issued notices to the petitioner and other members of the Sadhna Enterprises to show cause why they should not be assessed as an association of persons. The respondent shall be free to proceed with the assessment of Sadhna Enterprises in accordance with law.
9. As a result of the discussion aforesaid this petition is allowed. Both the notice dated March 23, 1981 (annex. 'D'), and the letter dated March 23, 1981 (annex 'C'), issued by the respondent to the petitioner are quashed. The respondent shall be at liberty to proceed with the assessment of the petitioner in respect of his income for the assessment year 1978-79 on the basis of the returns voluntarily filed by the petitioner in accordance with law. In the circumstances, the parties shall bear their own costs of this petition. The outstanding amount of security deposit, if any, should be returned to the petitioner after verification.