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Commissioner of Income-tax Vs. S. Raghbir Singh Trust - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 3 of 1966
Judge
Reported in[1971]80ITR515(P& H)
ActsIncome Tax Act, 1922 - Sections 34(1) and 34(3)
AppellantCommissioner of Income-tax
RespondentS. Raghbir Singh Trust
Appellant Advocate B.S. Gupta and; D.N. Awasthy, Advs.
Respondent Advocate Deva Singh Randhawa, Adv.
Cases ReferredIn S. C. Prashar v. Vasantsen Dwarkadas
Excerpt:
- sections 100-a [as inserted by act 22 of 2002], 110 & 104 & letters patent, 1865, clause 10: [dr. b.s. chauhan, cj, l. mohapatra & a.s. naidu, jj] letters patent appeal order of single judge of high court passed while deciding matters filed under order 43, rule1 of c.p.c., - held, after introduction of section 110a in the c.p.c., by 2002 amendment act, no letters patent appeal is maintainable against judgment/order/decree passed by a single judge of a high court. a right of appeal, even though a vested one, can be taken away by law. it is pertinent to note that section 100-a introduced by 2002 amendment of the code starts with a non obstante clause. the purpose of such clause is to give the enacting part of an overriding effect in the case of a conflict with laws mentioned with the.....d.k. mahajan, j.1. this reference relates to the assessment year 1954-55--the account year ending on march 31, 1954. the assessee is s. raghbir singh trust, district amritsar, raja sansi (hereinafter referred to as 'the trust').2. the relevant facts, necessary for the determination of the question of law that has been referred for our opinion, may now be stated. s. raghbir singh (hereinafter referred to as 'assessee') was originally a member of the joint hindu family consisting of himself, his sons and his wife. this family disrupted on the 10th of april, 1953. the assets of the family were partitioned. s. raghbir singh received 400 shares of simbhaoli sugar mills p. ltd. among other assets of the joint hindu family, as his share. he was also assigned the obligation to pay off a debt of.....
Judgment:

D.K. Mahajan, J.

1. This reference relates to the assessment year 1954-55--the account year ending on March 31, 1954. The assessee is S. Raghbir Singh Trust, District Amritsar, Raja Sansi (hereinafter referred to as 'the Trust').

2. The relevant facts, necessary for the determination of the question of law that has been referred for our opinion, may now be stated. S. Raghbir Singh (hereinafter referred to as 'assessee') was originally a member of the joint Hindu family consisting of himself, his sons and his wife. This family disrupted on the 10th of April, 1953. The assets of the family were partitioned. S. Raghbir Singh received 400 shares of Simbhaoli Sugar Mills P. Ltd. among other assets of the joint Hindu family, as his share. He was also assigned the obligation to pay off a debt of nearely four lakhs of rupees which had been contracted by the joint Hindu family and was due to Rai Bahadur Seth Jessa Ram Fateh Chand. On the 14th of April, 1953, the assessee executed a deed of trust, whereby he constituted a trust of 300 out of 400 shares of Simbhaoli Sugar Mills. The trustees appointed under the trust deed undertook to accept the obligations and to carry out the same in accordance with the objects of the trust. The relevant objects of the trust were, to pay the debts in the first place and, thereafter, to provide funds for the maintenance and education of the assessee's children and grandchildren. 80 per cent. of the income of the trust was to be spent on the children and grand-children ; and the remaining 20 per cent, was to be spent on various charitable purposes enumerated in the deed of trust: Thus the trust deed came into being during the assessment year 1954-551 For that assessment year, the assessee filed a return of his income excluding the income for 300 shares which had been transferred to the trust. He also filed a return, as a president of the trust, regarding the income of the 300 shares belonging to the trust as assessable in the hands of the trust. Both these returns came up before the same Income-tax Officer, The Income-tax Officer passed orders in both the returns. While dealing with the return of the trust, the Income-tax Officer passed the following orders:

'No assessment is made in this case, and the income according to the so-called trust is to be assessed in the hands of S. B. S. Raghbir Singh for whom a separate file exists (G.I.R. No. 15/R. 18).'

3. With regard to the return filed by S. Raghbir Singh in his individualcapacity, he took into account the income of the trust and added it as theincome of the assessee and accordingly assessed the assessee. S. RaghbirSingh was dissatisfied with this assessment, and he went up in appeal to theAppellate Assistant Commissioner. His contention before the AppellateAssistant Commissioner was that the income of the trust could not be takeninto account and treated as his individual income. This Contention failed,and the order of the Income-tax Officer was affirmed. An appeal to theTribunal by S. Raghbir Singh met with the same fate.

4. S. Raghbir Singh then claimed a reference to this court, and ultimately his contention prevailed in this court, because in that reference, this court, in the answer to the question referred, held that the income of the trust was not the income of S. Raghbir Singh and, therefore, it could not be taken into account while assessing his individual income. This decision is reported as S. Raghbir Singh v. Commissioner of Income-tax, [1961] 42 I.T.R. 410 (Punj.). The department took an appeal to the Supreme Court against this decision by special leave, and the Supreme Court ultimately affirmed our decision and its, judgment is reported as Commissioner of Income-tax v. S. Raghbir Singh, [1965] 57 I.T.R. 408, [1965] 3 S.C.R. 684 (S.C.).

5. On the 19th September, 1961, the Income-tax Officer issued a notice to the trust under Section 34(1)(b) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), in order to assess the income regarding which the trust had filed its return on the I5th of July, 1954. This assessment was completed on the 23rd of February, 1962. The trust's case was that the provisions;of Section 34(1){b) read with, the second proviso to Sub-section (3) of Section 34 were not applicable to his case. This, contention was not accepted by thejncome-tax Officer. Against this decision, the trust preferred an appeal to the, Appellate Assistant Commissioner, and it was urged that the assessment was barred by limitation. The contention of the trust was repelled by the Appellate Assistant Commissioner, and he affirmed the order of the Income-tax Officer. The trust then preferred an appeal to the Tribunal. Before the Tribunal, the contention of the trust was that the assessment was barred by limitation, the revenue, on the other hand, contended that the time-limit had been extended by the second proviso to Section 34(3), because the assessment was merely a consequence of the judgment of the Punjab High Court in S. Raghbir Singh's case. This contention was further fortified by the fact that S. Raghbir Singh was the author of the trust. The contentions of the trust, on the other hand, were that Section 34(1)(b) was ultra vires the Constitution; that the assessment was barred by limitation ; and that the trust did not fall within the expression 'any person' in the second proviso to Section 34 (3) in view of the decision of the Supreme Court in S. C. Prashar v. Vasantsen Dwarkadas, [1963] 49 I.T.R. (S.C.) 1, [1964] 1 S.C.R. 29 (S.C.). Therefore, the proceedings in 5. Raghbir Singh's. case had no effect and did not render the assessment valid. The Tribunal allowed the trust's appeal. It found that Section 34(1)(b) was not ultra vires the Constitution and that Section 34(1)(b) was applicable. The dividend income had escaped assessment and the Income-tax Officer received the information from the judgment in Raghbir Singh's case and, therefore, all the pre-requisites for the initiation of proceedings under Section 34(1)(b) were satisfied. However, the assessment under Section 34(1)(b) was time-barred in View of Section 34(3) and the bar of limitation was not saved by the second proviso in view of the decision of the Supreme Court in S.C. Prashar's case. The relevant part of the observations of the Tribunal are as follows :

'There is ample authority for the view that the trust is a person different from its settlor. It follows that Shri Raghbir Singh, the individual, who was the settlor is a person different in the eye of law, from the trust of which he is the managing trustee. In our opinion, therefore, the rule laid down in Prashar's case applies and the assessment is to be held to be bad, because the notice under Section 34(1)(b) was issued to a person different from the person in whose case the Punjab High Court delivered this judgment.'

6. The department then moved the Tribunal under Section 66(1) of the Act for referring the following question of law for our opinion :

'Whether, on the facts and in the circumstances of the case, the assessment made under Section 34(1)(b) for the assessment year 1954-55 was barred by time and was not saved by the second proviso to Section 34(3) of the Income-tax Act, 1922?'

7. By its order dated the 1st of October, 1965, the aforesaid question oflaw was referred for our opinion. It may be mentioned that before passingthe order of reference, the Tribunal had reminded the case with a specific questionnaire for the, purpose of elucidating the relevant facts. The questionnaire is reproduced below :

' (A) Re. Personal assessment of Shri Raghbir Singh:

Q. (i)--Is Shri Raghbir Singh assessed in the status of an individual, or in the status of a Hindu undivided family? If the latter, then who is the karta of the family?

A.--Assessed in the status of 'individual'.

Q. (ii)--Who filed the return of income?

A. S.B.S. Raghbir Singh.

Q. (iii)--We presume that the interest payment of Rs. 19,856 was disallowed in the case of Shri Raghbir Singh. If this presumption is correct, then :

(a) Was it appealed against ?

(b) Who filed the appeal on behalf of the assessee before the Tribunal ?

(c) Who authorised the advocate on behalf of the assessee?

A.-(a) Yes.

(b) Shri Deva Singh Randhawa, Advocate.

(c) S. B. S. Raghbir Singh.

(B) Re. Case of Raghbir Singh. Trust, Raja Sansi.

Q. (i)--Did the trust file a return of income under Section 22(1), 22(2) or 22(3) ?

A.--The return was filed under Section 22(1) on July 15, 1954.

Q.--(ii) If a return was filed along with an application under Section 48, then who signed the return ?

A.--Signed by S. Raghbir Singh on behalf of the trust.

Q. (iii)--(a) What happened to the application under Section 48?

(b) Was a regular assessment order passed If so, furnish copy thereof.

A.--(a) Assessment was made in this case under Section 23(3) and the income accruing to the trust was held to be the income of S. Raghbir Singh.

(b) Regular assessment was made under Section 23(3). Copy of the assessment order is enclosed herewith.

Q. (iv)(a)--When the present assessment proceedings were commenced? (b) Was the notice under Section 34 issued If so, was it issued with the sanction of the Commissioner under Section 34(1)(b) or with his sanction under Section 34(1)(a) ?

A.--(a) The Income-tax Officer had solicited the approval of the Commissioner of Income-tax, Patiala, under Section 34(1)(b). There was a finding of the High Court in the case of S. Raghbir Singh that the income in this case belonged to S. Raghbir Singh Trust. Therefore, the proceedings under Section 34(1)(b) were initiated on September 19, 1961, as directed bythe Commissioner of Income-tax.

Q. (v)--Under what section was the assessment completed

A.--Assessment was completed under Section 23(3) in the status of'AOP'.

Q. (vi)--From the remarks of the Appellate, Assistant Commissioner, it appears that the assessment was made under Section 23 read with section 34(1)(b) read with the second proviso to Sub-section (3) of Section 34. Is this correct?

A.--Assessment was made under Section 23(3) read with Section34(1)(b).

Q. (vii)--The Appellate Assistant Commissioner status that the disallowance of the claim of interest was made as 'held vide my order dated July 27, 1961, in Appeal Nos. 4-AA and 66-AA of 1959-60 and 26A of 1960-61'. A copy of that order should be made a part of the case?

A.--Copy of the order dated July 27, 1961, passed by the Appellate Assistant Commissioner, Amritsar, in Appeals Nos. 4-AA and 66AA of 1959-60 and 26A of 1960-61 is enclosed herewith.'

8. It is the common case of the parties that no other facts are relevant for the decision of the question of law referred to us.

9. Mr. D. N. Awasthy, learned counsel for the department, has raised two contentions, namely, (1) that the order of assessment in Raghbir Singh's case, contains a finding with regard to the trust and, therefore, one requirement of the second proviso to Section 34(3) of the Act is satisfied ; and (2) that the 'trust' falls within the meaning of the expression 'any person' in the second proviso.

10. It is the validity of these two contentions which has to be examined. The learned counsel did concede that there was no direction in the order passed by this court in Raghbir Singh's case, within the meaning of Section 34(3), second proviso. So far as the learned counsel for the respondent-assessee is concerned, his contention is that both the requirements of the second proviso to Section 34(3) are not satisfied. It is maintained that there is no finding within the meaning of the second proviso as to give jurisdiction to the Income-tax Officer to act under Section 34(1)(b) and that the trust was a total stranger to the proceedings that ended in the, High Court in Raghbir Singh's case. At this stage, it will, therefore, be necessary to reproduce the relevant statutory provisions, namely, Section 34(1)(b) and Sub-section (3) and the second proviso to it, which read as under :

'34. Income escaping assessment.--(1) If-- ....

(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under Clause (a) at any time .... and in cases falling under Clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under Sub-section (2) of Section 22 and may proceed to assess or reasses such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be apply accordingly as if the notice were a notice issued under that Sub-section: Provided that the Income-tax Officer shall not issue a notice under Clause (a) of Sub-section (1)-

(i) for any year prior to the ending on the 31st day of March, 1941.

(ii) for any year if eight years have elapsed after the expiry of that year, unless the income, profits or gains chargeable to income-tax which have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to, one lakh of rupees or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed, not being a year or years ending before the 31st day of March, 1941 ;

(iii) for any year, unless he has recorded his reasons for doing so, and, in any case falling under Clause (ii), unless the Central Board of Revenue, and, in any other case, the Commissioner, is satisfied on such reasons recorded that it is a fit case for the issue of such notice :

Provided further that the Income-tax Officer shall not issue a notice under this Sub-section for any year, after the expiry of two years from that year, if the person on whom the assessment or reassessment is to be made in pursuance of the notice is a person deemed to be the agent of a nonresident person under Section 43 :

Provided further that the tax shall be chargeable at the rate at which it would have been charged had the income, profits or gains not escaped assessment or full assessment, as the case may be.

Explanation.--Production before the Income-tax Officer of account books or other evidence from which material facts could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section .....

(3) No order of assessment or reassessment, other than an order of assessment under Section 23 to which Clause (c) of Sub-section (1) of Section 28 applies or an order of assessment or reassessment in cases falling within Clause (a) of Sub-section (1) or Sub-section (1A) of this section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable.....

Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under Section 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or directioncontained in an order under Section 31, Section 33, Section 33A, Section 33B, Section 66 or Section 66A. . . . .'

11. The second proviso has been specifically dealt with by the SupremeCourt in Income-tax Officer, A-Ward Sitapur v. Murlidhar Bhagwan Das, [1964] 52 I.T.R., 335 [1964] 6 S.C.R. 411 (S.C.). Inorder to see whether the case falls within the rule laid down by theSupreme Court in Murlidhar's case, it will be necessary, at this stage, tostate the finding that was recorded by this Court, in S. Raghbir Singh'scaes, which is as follows :

'.... that .... there has been no retransfer of the income from the trust property to the author of the trust, nor does the trust make any provision whatsoever which entitles him at any time named or in the furture to reassume power over the income or the assets directly or indirectly. That being so, the case does not fall wifhin the mischief of the first proviso, nor is the case covered by Section 16(1)(c) ; the income from the shares must be deemed to be the income of the trust and not of the assessee.'

12. Going back to Murlidhar,s case, K. Subba Rao J. (as he then was), while dealing with the question as to what is the meaning to be assigned to the expression 'finding' in the second proviso to Sub-section (3) of Section 34, after quoting Order 20, Rule 5, Civil Procedure Code, observed as follows :

'Under this Order, a 'finding' is therefore, a decision on an issue framed in a suit, The second part of the rule shows that such a finding shall be one which by its own force or in combination with findings onother issues should lead to the decision of the suit itself. That is to say,the finding shall be one which is necessary for the disposal of the suit.

Thescope of the meaning of the expression 'finding' is considered by a Division Bench of the Allahabad High Court in Pt. Hazari Lal v. Income-tax Officer Kanpur, [1960] 39 I.T.R. 265 (All.). There, the learned judges pointed out :

'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.' We agree with this definition of 'finding'. But a Full Bench of the same High Court in Lakshman Prakash v. Commissioner of Income-tax, [1963] 48 I.T.R. 705 (All.) construed the word 'finding' in a rather comprehensive way. Desai C. J., speaking for the court, observed :

'A finding is nothing but what one finds or decides and a decision on a question, even though not absolutely necessary or not called for is a finding.' If that be the correct meaning, any finding on an irrelevant or extraneous matter would be a finding. That Certainly cannot be the intention of the legislature. The Madras High Court also in A. S. Khader Ismail v. Income-tax Officer, Salem, [163] 47 I.T.R. 16 (Mad.), gave a very wide interpretation to that word, though it did not go so far as the Full Bench of the Allahabad High Court. Ramachandra Iyer J., as he then was, speaking for the court, observed that the word 'finding' in the proviso must be given a wide significance so as to include not only findings necessary for the disposal of the appeal but also findings which were incidental to it. With respect, this interpretation also is inconsistent with the well-known meaning of that expression in the legal terminology. Indeed, learned counsel for the respondent himself will not go so far, for he concedes that the expression 'finding' cannot be an incidental finding, but says that it must be a conclusion on a material question necessary for the disposal of the appeal, though it need not necessarily conclude the appeal. This concession does not materially differ from the definition we have given, but the difference lies in the application of that definition to the finding given in the present case. 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. 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.'

13. There is no doubt that incidentally the finding recorded by this courtdid say that the income, which had been treated as the income of RaghbirSingh as an individual, was, in fact, the income of the trust. This court was.dealing with the assessment of Raghbir Singh as an individual. The incomeof 300 shares that Raghbir Singh claimed as belonging to the trust wastreated as his income on the mistaken belief that the trust, which had beencreated by Raghbir Singh and to which 300 shares had been transferred,was not a valid trust. Therefore, all that had to be decided was whetherthere was a valid trust? To that extent, the finding cannot be incidental.But the question whether the income of 300 shares belonged to the trust,would be, in fact, an incidental finding. Applying the rule laid down in.Murlidhar's case, it cannot be said that the incidental finding--'the incomefrom the shares must be deemed to be the income of the trust'--is a findingas contemplated by Section 34(3), second proviso. In any case, it was notnecessary for the the purposes of Raghbir Singh's case, to determine as towhom the income of the shares belonged. All that was necessary was todetermine if that income, in the circumstances of that case, was RaghbirSingh's income or not. Hence, the finding that the sard income was theincome of the trust was unnecessary. Therefore, the first contention ofMr. Awasthy is rejected.

14. The second contention has to be determined, again with reference to thetest laid down by the Supreme Court in Murlidhar's case, which is in thefollowing terms :

'The words 'any person', it is said, conclude the matter in favour of the department. 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's 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 liable to 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 assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of Section 30(1) and Section (3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the Appellate Commissioner. 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. It will have to be determined, whether the assessment of the trust depended upon the assessment of Raghbir Singh and that the trust was intimately connected with the assessment of Raghbir Singh. In a wider sense, both these requirements would be found to exist because, in the chain of events, Ragbhir Singh, being the author of the trustcannot, from a layman's point of view, be divorced from the trust. But, in legal parlance, the trust and Raghbir Singh were two separate entities, and thus two separate persons. It is only a fortuitous circumstance that Raghbir Singh was also the chairman of the trust. I put it to Mr. Awasthy that if Raghbir Singh was not the chairman of the trust and some third person was the chairman of the trust, would there be any connection between the trust and Raghbir Singh The learned counsel had to admit that, in such circumstances, there would be no connection and the case would not fall within the purview of Section 34(3), second proviso. The learned counsel, however, stressed that the fact that Raghbir Singhwas the common factor vis-a-vis himself and the trust signified that there was an intimate connection between the trust and Raghbir Singh for the purposes of the aforesaid provision. I am unable to agreewith this contention. It is precisely this type of argument which was negatived by their Lordships of the Supreme Court in Murlidhar's case If the illustrations of persons given by their Lordships of the Supreme Court in Murlidhar's case are kept in view, it will be found that theconnection contemplated in those illustrations does not hold good between the trust and Raghbir Singh as an individual. The learnedcounsel has not been able to persuade me, in spite of his vehementarguments, to take a contrary view. In my opinion, the second contention of Mr. Awasthy must also fail.

16. The view I have taken for my conclusion, that the trust was astranger vis-a-vis Raghbir Singh as an individual, finds support from thedecision of the Gujarat High Court in Commissioner Income-tax v. Shantilal Punjabhai, [1965] 57 I.T.R. 58 (Guj.). Murlidhar's case was considered in that case. The facts ofthat case were as follows:

'The assessee was being assessed in the status of an individual. For the assessment year 1944-45, he filed his return in which he included his share of profit in a firm. In the course of the assessment of the Hindu undivided family, of which the assessee was a member, for the same assessment year, viz., 1944-45, the Income-tax Officer found that the assessee was the nominee of the Hindu undivided family in the said firm and, therefore, included the share of profits of the assessee in the said firm, in the total income of the Hindu undivided family. On an appeal by the family to the Tribunal, by an order dated May 5, 1953, the Tribunal held that there was not sufficient evidence to show that the assessee was the nominee of the Hindu undivided family in the firm and directed that the share of profits of the assessee should be deleted from the assessment of the Hindu undivided family. The Income-tax Officer issued a notice to the assessee on 30th March, 1954, under Section 34 of the Income-tax Act for including in the assessee's assessment as an individual his share of profits in the firm and revised the assessment by adding Rs. 11,159 to the total income of the assessee....(It was held) that the assessee, though he was a member of the Hindu undivided family which was a party to the appeal, was not a party to the appeal but a stranger ; the second proviso to Section. 34(3) was ultra vires so far as he was concerned and the right to reopen which had become time-barred before the 1st April, 1952, cannot be revived by the Amendment Act of 1953, which came into force on 1st April, 1952, notwithstanding the provisions of Section 31 of the said Amendment Act of 1953.'

17. The other decisions which lend support to the view I have taken of the matter are Commissioner of Income-tax v. Smt. Rama Jain, [1966] 60 I.T.R. 655 (Pat.) and Commissioner of Income-tax v. K. R. Patel, [1969] 73 I.T.R. 508 (Mys.).

18. Mr. D. N. Awasthy strongly relied on the decision of the Madras: High. Court in N. Naganatha Iyer v. Commissioner of Income-tax, [1965] 57 I.T.R. 326 (Mad.). I reproduce the relevant part of that decision on which he relied for facility of reference :

'The case before us is different; here, admittedly a joint family exists, arid the father, Narayanaswami lyer, can represent his son, Naga-natha, in all matters concerning, the affairs of the family. The latter, in such proceedings against the father, can be deemed as being, constructively a party thereto. Therefore, the conclusion reached by this court in Narayanaswami Iyer v. Commissioner of Income-tax, [1956] 29 I.T.R. 515 (Mad.) must be deemed to have been reached in the presence of Naganatha as well. The inclusion of the income from the Andhra Trading Company in the assessment of the family would certainly affect his interest in the family for the family will have to pay the tax. The non-inclusion of such income in the income of the family would benefit him qua such member. Naganatha being thus constructively a party to the previous decision of this court, the finding given in that decision can be taken advantage of by the department for the purpose of initiating proceedings under Section 34 against him. To this extent, the second proviso to Section 34(3) should be regarded as valid.'

19. In my opinion, this decision is distinguishable, for it proceeds on its own peculiar facts. And if this decision is taken to lay down a law contrary 16 the one enunciated by the Gujarat 'High Court, I would prefer to follow the view of the Gujarat High Court, inasmuch as Murlidhar's case has been fully discussed therein, and the interpretation placed by that court is more in consonance with the decision in Murlidhar's case. There is no dispute now that, in case the trust is neld to be a stranger, vis-a-vis Raghbir Singh as an individual, the decision of the Tribunal would be correct in view of the decisions in S. C. Prashar v. Vasantsen Dwarkadas and Commissioner of Income-tax v. Sardar Lakshmi Singh, [1963] 49 I.T.R. (S.C.) 70, [1964] 1 S.C.R. 148 (S.C.).

20. For the reasons recorded above, I must return the answer to the question referred in the affirmative. The assessment for-the year 1954-55 was barred by time and it was not saved by the second proviso to Section 34(3) of the Income-tax Act, 1922. In the circumstances of the case, there will be no order as to costs.

S. S. Sandhawalia, J.

21. I have had the privilege of perusing the judgment proposed by my learned brother but with respect, I must express my inability to agree.

22. The facts which are not in dispute appear fully in the judgment of Mahajan J. and it is, therefore, unnecessary to recapitulate them. As the case turns primarily upon the scope and language of the second proviso to section 34(3) of the Indian Income-tax Act, 1922 (hereinafter referred toas 'the second proviso'), it may at the very outset be set down in extenso.

'34. (3) No order of assessment or reassessment, other than anorder of assessment under Section 23 to which Clause (c) of Sub-section (1) of Section 28 applies or an order of assessment or reassessment in cases falling within Clause (a) of Sub-section (1) or Sub-section (1A) of this Section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable....:

Provided further that nothing contained in this Section limiting thetime within which any action may be taken or any order, assessment orreassessment may be made, shall apply to a reassessment made underSection 27 or to an assessment or reassessment made on the assessee or anyperson in consequence of or to give effect to any finding or direction contained in an order under Section 31, Section 33, Section 33A, Section 38B, Section 66 or Section 66A.'

23. For facility of reference the question which has been referred in the present case is also quoted below :

'Whether, on the facts and in the circumstances of the case, the assessment made under Section 34(1)(b) for the assessment year 1954-55 was barred by time and was not saved by the second proviso to Section 33(3) of the Income-tax Act, 1922 ?'

24. In the light of the relevant provisions of the statute quoted above and the question referred, only two precise contentions have been raised on behalf of the revenue, which have to be answered in their logical sequence. I would first take up the contention advanced by Mr. Awasthy on behalf of the department that the order of the High Court in Raghbir Singh's case in regard to the assessment of Raghbir Singh as an individual, contains a a clear finding regarding the income of the present assessee, namely, the trust.

25. Ere one goes to details, one salient fact deserves to be highlighted. This is that the assessment year in S. Raghbir Singh's case and the assessment year in the present case of the trust are identical, namely' 1954-55, for which the accounting year was the previous financial year ending the 31st of March, 1954. The issue in S. Raghbir Singh's case as an individual before the High Court earlier was whether the income from 300 shares of Simbhaoli Sugar Mills Private Ltd. was to be assessed in the hands of S. Raghbir Singh as an individual or whether the same was to be assessed in the hands of the trust as its income. It is thus profitable to set down the two questions which had been referred to the High Court in Raghbir Singh's case which were in the following terms :

'1. Whether the dividend income of the 300 shares of the Simbhaoli Sugar Mills Private Ltd. transferred by the assessee to S. Raghbir Singh Trust was the income of the assessee liable to tax ?

2. Whether the assessee was entitled to claim deduction of Rs. 19,856 paid as interest to R. B. Seth Jessa Ram Fateh Chand against the dividend income of the aforesaid shares ?'

26. The Division Bench declined to answer the second question as, according to it, it did not arise and confined itself to only question No. 1 and answered the same in the negative. In doing so it arrived at the following finding:--

'I, therefore, find that in this case there has been no retransfer of the income from the trust property to the author of the trust, nor does the trust make any provision whatsoever which entitles him at any time namedor in the future to reassume power over the income of the assets directly (1) or indirectly. That being so, the case does not fall within the mischief of the first proviso, nor is the case covered by Section 16(1)(c) ; the income from the shares must be deemed to be the income of the trust and not of the assesses.'

27. It has been strenuously contended that the above-quoted finding of the Division Bench was, in fact and law, a necessary finding for the decision of the matter referred to it and is hence within the ambit of the word 'finding' as used in the second proviso. I find merit in this contention of the learned counsel. The true meaning to be assigned to the words 'finding or direction' used in the second proviso now stands settled by the authoritative pronouncement of their Lordships of the Supreme Court in Income-tax Officer v. Murlidhar Bhagwan Das, in which, they resolved the prior conflict on the point in the various High Courts. Their Lordships accepted the construction giving limited and narrower meaning to the word 'finding' and expressly approved the following enunciation of the Division Bench of the Allahabad High Court in Pt. Hazari Lal v. Income-tax Officer, Kanpur,

' '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.''

28. Their Lordships then observed as follows :

'Therefore, the expression 'finding' as well as the expression 'direction' can be given full meaning, namely, that the finding is a finding necessary for giving relief in respect of the assessment of the year in question and direction is a direction which the appellate or revisional authority, as the case may be, is empowered to give under the Sections mentioned therein.'

29. In the light of these observations, therefore, it has to be determined inthe present case whether the finding of the Division Bench quoted earlierin S. Raghbir Singh's case satisfies the indicia and the test laid down bytheir Lordships in Murlidhair's case. The undisputed facts would make itclear that the issue before the learned judges of the Division Bench waswhether the income from 300 shares of the Simbhaoli Sugar Mills P. Ltd.,which constitutes the corpus of the present trust, was assessable in the handsof the trust or whether the same was to be assessed in the hands ofS. Raghbir Singh as an individual. The material question which, therefore,arose and was to be resolved was to find whether the income fell in thehands of one or the other of the only two contenders for the same, namely, S. Raghbir Singh as an individual or the trust as a legal entity. There was no third party to which the income could go and be assessed in its hands. The test, therefore, was whether, in order to give relief to S. Raghbir Singh, whose case was before the Division Bench, it was necessary to arrive at the finding whether the income belonged to him or the income was of the trust. It was in this context that the learned judges of the Division Bench gave the finding in the clearest terms that the income from the said 300 shares was the income of the trust and, consequently, S. Raghbir Singh was not to be assessed therefore as an individual. This finding, therefore, was on the material and the sole question which was raised before the Division Bench and a finding thereon was necessary to accord relief to the party before it. Consequently, the finding given by the Bench was a necessary finding and with respect, if I may say so, appears to be the only finding which the Bench arrived at for answering the question referred to in the negative. In my view this clearly falls within the ambit of the word 'finding' as used in the second proviso and the contention of the revenue that the judgment of the Division Bench in S. Raghbir Singh's case contains a finding qua the income of the present assessee, namely, the trust pertaining to the identical assessment year must be accepted.

30. Before noticing the second contention raised by Mr. Awasthy, I would wish to advert in some detail to the facts and the ratio in Murlidhar's case, in the context of the 'finding' given by the Division Bench in S. Raghbir Singh's case. In Murlidhar's case, certain interest income of Rs. 88,737 was brought to tax for the assessment year 1949-50. The assessee appealed and the Appellate Assistant Commissioner held that the income was received in the previous accounting year and directed that the amount should be deleted for the assessment for the year 1949-50 and included in the assessment year ending 1948-49. Pursuant to this direction the Income-tax Officer initiated the reassessment proceedings in respect of the year 1948-49 and served a notice on the assessee on 5th December, 1957. The issue before the learned judges was whether the second proviso toSection 34(3) applied and saved the notice which was served beyond the time prescribed by Section 34(1).

31. The learned judges of the Supreme Court by a majority held that under the Income-tax Act the year was the unit of assessment and the jurisdiction of the tribunals in the hierarchy created by the Act was, therefore, confined to the year of assessment only. Consequently, it was held that the assessment or reassessment made in consequence of any such finding or direction must necessarily relate to the assessment of the year under appeal, revision or reference, as the case might be. In the finalsumming up, it was observed :

'In the result, we hold that the said proviso would not save the time-limit prescribed under Sub-section (I) of Section 34 of the Act in respect of an escaped assessment of a year other than that which is the subject-matter of the appeal or the revision, as the case may be. It follows that the notice under Section 34(1)(a) of the Act issued in the present case was clearly barred by limitation.'

32. It is thus patent that their Lordships found that a finding as regards an assessment year other than one under appeal, reference or revision was not, therefore, a necessary finding and classed it as an incidental one. As already noticed in the opening part of this judgment, in the present case the finding relates to the identical and the relevant assessment year and as such is a necessary finding for the decision of the case and cannot be classified as a merely incidental finding. The clear point of distinction, therefore, is that in Murlidhar's case, the finding related to the assessment year other than the one under appeal, revision or reference whereas in the present case the finding relates to the identical assessment years.

33. The second contention which now falls for determination is whether the 'trust' falls within the meaning of the expression 'any person' as used in the second proviso. In order to clear the ground forthwith it may be stated at the very outset that it was never the case of the department before us that the trust and S. Raghbir Singh as a private individual are one and the same person. It was forcefully argued by Mr. Awasthy that the trust and S. Raghbir Singh, though necessarily deemed to be separate and distinct entities, are nevertheless closely connected together. The sole contention in this regard was that, though separate and distinct, they are so intimately connected with each other as to fall clearly within the rule laid down by their Lordships in Murlidhar's case and, consequently, within the meaning of 'any person' as used in the second proviso. It deserves notice in this context that the Income-tax Appellate Tribunal primarily based its decision upon the fact that S. Raghbir Singh, the settlor and the present trust were different persons in the eye of law and applying the rule in Prashar's case, they proceeded to decide against the revenue. As is patent by a reference to the order of the Tribunal, they failed to refer to the admittedly relevant law as laid down by their Lordships in this context in Murlidhar's case, which is squarely applicable.

34. The words 'any person' as used in the second proviso fell for construction in Murlidhar's case and their Lordships made the following crucial observations and it is on the true meaning to be assigned to these that the answer to the contention raised on behalf of the revenue must turn :

'The words 'any person', it is said, conclude the matter in favour of the department. 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 liable to be assessed for the whole or a part of the income that went into 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 assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of Section 30(1) and Section 31(3) of the Act iudicates the cases where persons other than the appealing assessees might be affected by orders passed by the Appellate Commissioner. 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.'

35. A close analysis of this passage shows that their Lordships mentioned three cases, namely, a firm, a joint Hindu family, and an association of persons who may well be deemed to be intimately connected qua a partner, or partners of the firms, member or members of the Hindu undivided family or an individual as the case may be. However, it is made clear that these cases are merely illustrative and not exhaustive of the categories of persons who may be so intimately connected as to come within the expression 'any person' as used in the second proviso. To my mind, from the above passage, three tests seem to emerge-

(i) Is the person 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 under appeal or revision?

(ii) Would a modification or setting aside of assessment made on one person for a particular year affect the assessment for the said year of the other ?

(iii) Is the assessment of the two persons dependent upon the assessments of each other?

36. Without attempting to be exhaustive, it appears to me that the crucial test which their Lordships wanted to indicate was the test of the inter-dependence of the assessments. If the whole or the part of the income assessed from the hands of the one assessee in the identical and relevant assessment year becomes liable to tax in the assessment of the other for the said year, the two assessees cannot but be classified as intimately connected for the purposes of tax. The intimacy connection, which their Lordships are visualising, is, therefore, an intimacy and interdependence of the tax assessment of the two persons for the identical and relevant assessment years. Indeed, if it is so, a closer connection qua tax is difficult to visualise where a part or whole of the income of one assessee may be liable in the hands of the other or where the modification of one assessment would affect the assessment of the other. In cases of such interdependence, the test of intimate connection laid down by their Lordships must necessarily stand satisfied.

37. Applying these tests to the present case, we would first see whether the income from the 300 shares of the Simbhaoli Sugar Mills for the assessment year 1954-55 which was the income in issue would be liable to be assessed for the relevant assessment year in the hands of the trust if the same was to be excluded from the hands of S. Raghbir Singh as an individual. The answer to this question is evidently in the affirmative. Again, a modification of the assessment of S. Raghbir Singh as an individual for the relevant assessment year as regards the income from these shares was inevitably bound to affect the assessment for the said year of the trust. Lastly, it appears to be more than patent that the assessment of S. Raghbir Singh as an individual was clearly inter-dependent on the assessment to be made on the trust or vice versa.

38. Though the crucial test above seems amply satisfied in the present case, there are a host of other factors showing the patent intimacy of connection as regards tax assessment. It is undisputed that in the present case S. Raghbir Singh was the settlor and the creator of the said trust. It may well be noticed that the whole corpus of the trust property, namely, 300 shares of the Simbhaoli Sugar Mills, was wholly the property of S. Raghbir Singh which was gifted by him to the trust for constituting the same. Coming to the purposes of the trust the primary object of the same admittedly was to wipe off the considerable and heavy debt due by S. Raghbir Singh as an individual to R. B. Seth Jessa Ram Fateh Chand. Even after this debt had been wiped out 80 per cent. of the income from the corpus of the trust was perpetually directed to the education of the children and the grand-children of the settlor, namely, S. Raghbir Singh. The latter was also the chairman of this trust and this appointment was for life and irrevocable. In fact it is patent that the trust functioned primarily through S. Raghbir Singh and even in the present case qua the tax assessments, the returns thereof and the conduct of the relevant appeals and revisions was being done by it through him. In the light of all these circumstances, the irresistible conclusion that appears to be possible is that the trust and S. Raghbir Singh as an individual were indeed more than intimately connected with each other and fall within the rule laid down in Murlidhar's case.

39. Thus, the rule in Murlidhar's case has been reaffirmed and appears to be enlarged by the observations of their Lordships of the Supreme Court in Daffadar Bhagat Singh and Sons v. Income-tax Officer, [1969] 71 I.T.R. 417 (S.C.). In that case the assessee-firm comprising of a father and his two sons had filed a return for the relevant assessment year and also applied for registration under Section 26A of the Income-tax Act, 1922. The Income-tax Officer refused registration and further passed an order of assessment holding that the assessee constituted a Hindu undivided family. This was reversed on appeal by the Appellate Assistant Commissioner who allowed the registration and further held that the business belonged to the firm, and consequently, its income should be excluded from that of the Hindu undivided family. Thereafter, the Income-tax Officer issued fresh notices to the assessee-firm. The appellant-firm filed a petition before the High Court which was dismissed on the ground that the second proviso was applicable because the members of the appellant-firm could not be regarded as strangers to the proceedings in respect of a Hindu undivided family along with others and the rule of intimate connection applied. Affirming the order of the High Court Grover J. speaking for the Supreme Court observed as follows :

'The second limb of the argument of Mr. Veda Vyasa is based on the premise that the appellant which was a partnership firm was a distinct legal entity and was thus a total stranger to the Hindu undivided family the assessment of which came up for consideration before the Appellate Assistant Commissioner in which the orders already referred to were made by him. It is suggested that the appellant could not fall within the meaning of the expression 'any person' in the second proviso to Section 34(3) of the Act. If the observations made in Murlidhar Bhagwan Das's case are borne in mind it is again not possible to understand how the appellant can be taken out of the category of person or persons intimately connected with the assessment of the year under appeal. The returns, as stated before, were originally filed by the partnership firm comprising Bhagat Singh and his two sons. The question was of the assessment of the income of the business of the firm. The Income-tax Officer treated the father and the sons as a Hindu undivided family. On appeal, however, the Appellate Assistant Commissioner accepted their contention that they formed a partnership firm. It is difficult, in these circumstances, to agree that the appellant was a total stranger to the assessment which was under appeal before the Appellate Assistant Commissioner and had no intimate connection with the person whose assessment was made by the Income-tax Officer andwas set aside in appeal by the Appellate Assistant Commissioner.'

40. In view of the above, both the contentions raised on behalf of the revenue must succeed, and, consequently, I would answer the question referred to us in the negative and in favour of the revenue.

BY THE CORUT

41. In view of the difference of opinion, the case is now submitted to the Hon'ble the Chief Justice under Section 66A of the Income-tax Act read with Clause 26 of the Letters Patent, and Section 98(3) of the Code of Civil Procedure, for nominating a judge to hear the case and to decide it in accordance with law.

[Pursuant to the above order the reference came on for hearing before a third judge HARBANS SINGH C.J.]

Harbans Singh, C.J.

42. This income-tax reference has been placed before me in view of difference of the opinion between Mahajan J. and Sandhawalia J.

43. The relevant facts have been given in considerable detail in the order of Mahajan J. and it is hardly necessary to repeat them in extenso. The family consisting of S. Raghbir Singh, his sons and his wife, disruputed on 10th of April, 1953, and the assets of the family were partitioned. Inter alia, S. Raghbir Singh received 400 shares of Simbhaoli Sugar Mills P. Ltd. (hereinafter referred to as 'the mills'), and out of these he transferred 300 shares to a trust which was to pay off of the debt due to the firm R. B. Seth Jessa Ram Fateh Chand, and thereafter eighty per cent. of the income of the trust was to be spent for the education of S. Raghbir Singh's children and grand-children, and the balance twenty per cent. was to be spent on various charitable purposes mentioned in the deed. This trust deed thus had come into being during the assessment year 1954-55. For that year two returns were filed by S. Raghbir Singh: one was in his individual capacity excluding the income arising from 300 shares in the mills and the other was filed by him on behalf of the trust, in his capacity as its president regarding the income of 300 shares which had been transferred by him to the trust. No assessment was made in the case of the return filed on behalf of the trust, and the Income-tax Officer directed that the income accruing to the so-called trust is to be assessed in the hands of S. B. S. Raghbir Singh. S. Raghbir Singh in his individual capacity was separately assessed and the income of 300 shares was also added to his income. Having failed before the Appellate Assistant Commissioner and the Income-tax Tribunal, he approached this court to which two questions were referred. The second question was not answered by the court, while the first question referred to the court was as follows :

'Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills P. Ltd. transferred by the assessee to S. Raghbir Singh trust was the income of the assessee liable to tax?'

44. This question was answered in the negative, and the case is reported as S. Raghbir Singh v. Commissioner of Income-tax. An appeal filed by the department in the Supreme Court was also dismissed, and the judgment of the Supreme Court is reported as Commissioner of' Income-tax v. S. Raghbir Singh.

45. It appears that after the decision of this court the Income-tax Officer on 19th September, 1961, issued a notice to the trust under Section 34(1)(b) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), with a view to assess the income arising out of 300 shares above-mentioned in respect of which the trust had filed its return on 15th of July, 1954. The assessment was completed by the Income-tax Officer on 23rd of February, 1962. The objection taken on behalf of the trust that the notice issued, as stated above, beyond the time prescribed in Sub-section (1)(b) of Section 34 of the Act was without jurisdiction, was not accepted by the Income-tax Officer or by the Appellate Assistant Commissioner. The Tribunal, however, in appeal preferred by the trust, accepted this contention and on an application made by the department the following question was referred to this court :

'Whether, on the facts and in the circumstances of the case, the assessment made under Section 34(1)(b) for the assessment year 1954-55 was barred by time and was not saved by the second proviso to Section 34(3) of the Income-tax Act, 1922?'

46. Mahajan J. came to the conclusion that the decision of the Tribunal was correct and the assessment was barred by time and was not saved by the second proviso to Sub-section (3) of Section 34 of the Act. Sandhawalia J., however, took a contrary view, and it is in these circumstances that the matter has been placed before me.

47. The only question involved in the present case is whether the second proviso to Sub-section (3) of Section 34 applies to the circumstances of this case. Notice in this case was issued under Section 34(1)(b) of the Act on the ground that some income had escaped assessment for the year concerned. This could be done, as provided in this very Sub-section, 'at any time within four years of the end of that year'. Again Sub-section (3) provides that no order of assessment in a case like the present, after a notice under Section 34(1)(b), can be made 'after the expiry of four years from the end of the year in which the income, profits or gains were first assessable'. It is, therefore, a common case that the notice under Section 34(1)(b) could have been issued within four years of the end of the year in which the income was assessable, in other words, it could have been issued within four years from the end of the assessment year 1954-55. The notice in this case was admittedly given long after that. The case of the department, therefore, is that the second proviso to Sub-section (3) was applicable. The relevant part of this proviso is to the following effect:

'Provided further that nothing contained in this Section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment....made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under Section. ... 66. ...'

48. The contention is that in the order passed by the High Court under Section 66 in the case of S. Raghbir Singh, noted above, finding was given that the income from the 300 shares, which was originally assessed as the income of S. Raghbir Singh in his individual capacity, was not the income of S. Raghbir Singh but that of the trust, and that it was in consequence of or to give effect to this finding contained in this order under Section 66 that action was taken and order of assessment made ; consequently, the limitation of four years was not applicable to the present case.

49. Two conditions have to be satisfied before this proviso can apply to a particular case of reassessment, viz., (a) that the reassessment should be made 'on the assessee or any person', and (b) such a reassessment should be in consequence of or to give effect to any finding contained in an order under Section 66.

50. It is now to be examined whether these two conditions are satisfied in the present case.

51. In the previous order, in consequence of which action is said to have been taken, the assessee was S. Raghbir Singh in his individual capacity. The assessee in the present case is admittedly not S. Raghbir Singh in any capacity whatever. In the present case the assessee is the trust. The mere fact that S. Raghbir Singh is one of the four trustees of this trust or that he filed a return on behalf of the trust in his capacity as such in the year 1954, would not make any difference. This was not disputed on behalf of the department. The trust may, however, fall within the meaning of 'any person'. However, their Lordships of the Supreme Court in S. C. Prashar v. Vasantsen Dwarkadas considered at length the argument put before them that this second proviso, so far as it relates to the reassessment of any person other than the assessee, was ultra vires the Constitution and it was held by majority that this proviso was valid so far as the case of 'an assessee' is concerned, but it was invalid so far as its application to 'any person' is concerned. At page 11 onwards of the report, S. K. Das J. observed as follows:

'.... Chagla C. J. had pointed out, rightly in my opinion, that the persons with regard to whom a finding or direction is given and the 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, personswho 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 .... 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 .... The second proviso to Sub-section (3) of Section 34 .... 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 thecase 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.'

52. Desai J. of the Bombay High Court, from where that appeal had been taken to the Supreme Court, had put the matter on a somewhat narrower ground, and dealing with the same, S. K. Das J. observed as follows :

'He held that so far as assessee were concerned, there might be a rational ground for distinction because the appeal proceedings, etc. might take a long time and the assessee being a party to the appeal could not complain of such delay ; therefore, assessee did not occupy the same position as strangers. But the learned judge held that there was no rational distinction so far as strangers were concerned and there was no reason why they should be deprived of the benefit of the time-limit prescribed by subsection (1). He, therefore, held that the proviso, so far as it affected persons other than assessees not parties to the proceedings enumerated in it, must be held to be ultra vires the legislature.'

53. Even on the basis of this narrower view, the majority of the Supreme Court Judges held that the case was not covered by the proviso.

54. The argument of the department, which has been accepted by Sandha-walia J. was that, although the trust was not a party to the previous proceedings, in which the order or the direction had been given, yet S. Raghbir Singh, who was the assessee, was so intimately connected with the trust that the trust should be treated as covered by the word 'assessee'. For this reliance was placed on certain observations of their Lordships of the Supreme Court in Income-tax Officer, A-Ward, Sitapur v. Murlidhar Bhagwan Das. In that case the respondent-firm was assessed to income-tax under Section 23(4) of the Act for the assessment year 1949-50 on the ground that the notice issued under Sub-sections (2) and (4) of Section 22 of the Act had not been complied with. This assessment was cancelled under Section 27 on 27th of September, 1955, but, before the said cancellation, it was found that some income received had escaped assessment as the assessee failed to disclose the same. The Income-tax Officer had issued notice under Section 34(1)(a) of the Act for the relevant assessment year 1949-50 on the ground that the said income amounting to Rs. 88,737 had escaped assessment in the said assessment year. After the assessment for that year had been set aside* the Income-tax Officer ignored the aforesaid notice and included the amount in the fresh assessment made by him. In appeal, Appellate Assistant Commissioner, however, held that this income was received in the previous accounting year and deleting the same from the assessment year 1949-50, directed that the same be included in the previous assessment year 1948-49. Pursuant to that direction, a notice was issued under Section 34(1) of the Act, and on a petition under article 226 of the Constitution the Allahabad High Court held that the proceedings were intiated beyond the time prescribed by Section 34 of the Act and quashed the proceedings, against which the department filed an appeal to the Supreme Court. In the majority judgment delivered by Subba Rao. J. (as he then was), it was held, first, that under the Income-tax Act, year is the unit of assessment, and the following observations made by the Judicial Committee in Commissioner of Income-tax v. S. M.Chitnavis, [1932] 2 Comp. Cas. 464, L.R. 59 I.A. 290, A.R.I. 1932 P.C. 178, were referred to with approval :

' 'For the purpose of computing the yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant'.'

55. Reference was also made to Kikabhi Premchand v. Commissioner of Income-tax, [1953] 24 I.T.R. 506, [1954] S.C.R. 235 (S.C.), where the Supreme Court observed as follows :

' '.....for income-tax purposes each year is a self-containedaccounting period and we can only take into consideration income, profitsand gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses, which may occur in the future'.'

56. Their Lordships then went on to consider the meaning of the words. 'any person' and 'any finding or direction' as used in the proviso. As, regards the meaning of the word 'finding', it was observed as follows at page 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. 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.'

57. In view of this it was held that the finding given by the Appellate Assistant Commissioner that the income could not be assessed in the relevant year 1949-50 was the only finding within the meaning of the proviso, and the other finding that this income was properly assessable in the previous year was merely incidental and not a finding within the meaning of the proviso in consequence of which action could be taken without any care for the limitation. This was sufficient for the disposal of the case. However, their Lordships also dealt with the meaning of the words 'any person' , and the observations made in this respect are the ones on which great reliance was placed on behalf of the department. I would reproduce the relevant portion of these observations at page 346 of the report:

'The words 'any person' it is said, conclude the matter in favour of the department. 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 liable to 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 assessee who can be liable to be assessed for the income of the said assessment year. A combined reading of Section 30(1) and Section 31(3) of the Act indicates the cases where persons other than the appealing assessees might be affected by orders passed by the Appellate Commissioner. 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.'

58. There is one thing to be noted that in the above case no reference is made by their Lordships to Prashar's case referred to above, in which it had definitely been held that the proviso so far as it relates to persons other than the assessee was unconstitutional. Moreover, on a careful reading of these observations it is clear that, according to their Lordships, only those persons were covered by the proviso, even if they were not strictly parties to the appeal or revision, who in view of Sections 30(1) and 31(3) would be affected by the order passed by the Appellate Assistant Commissioner. The illustrations given are clearly indicative of the type of persons who would be covered. A firm, a Hindu undivided family, and an association of persons, no doubt are treated as separate entities under the Income-tax Act, but in the case of a firm, the burden of the tax imposed on it has ultimately to be borne by its partners and, consequently, any order passed by the appellate authority would, in a way, affect the partners and in a sense they may be treated as assessee. Again in the case of a Hindu undivided family, ultimately the tax is to be paid by the members of the family, and in the case of an association of persons by the individual members, and, therefore, in a sense, they may be treated as parties or intimately affected by the result of the appeal. In a later case reported as Daffadar Bhagat Singh and Sons v. Income-tax Officer, A-Ward, Ferozepur, the Supreme Court had to deal with the case of a partnership firm. The appellant-firm filed a return for the assessment year 1952-53 on March 31, 1953, and also applied for its registration under Section 26A of the Act, the partners of the firm being Bhagat Singh and his two sons. The Income-tax Officer refused to register the firm or to assess it as a firm, and treating as a Hindu undivided family, passed an order of assessment. On appeal, the Appellate Assistant Commissioner made an order on 11th of August, 1959, allowing registration of the partnership firm and further holding that the business belonged to the firm and, consequently, its income should be excluded from that of the family, and then directed the Income-tax Officer to assess the income of the business in the hands of the firm. On a notice having been issued under Section 34 of the Act, an objection was taken that the notice-was barred by time. On behalf of the department the provisions of the proviso were pressed into service, and the High Court of Punjab on a writ petition, following the observations of the Supreme Court in Murlidhar Bhagwan Das's case, held them covered by the proviso. Bofore the Supreme Court two arguments were urged, first, that the finding or direction given by the Appellate Assistant Commissioner that the business belonged to the partnership and not the Hindu undivided family and the further direction that the income of the business should be assessed in the hands of the partnership firm were not necessary for the disposal of the appeal, and, secondly, that the partnership firm which was being sought to-be assessed was distinct from the Hindu undivided family which had gone in appeal. Both these contentions were repelled. With regard to the first, it was observed as follows :.. the assessee filed the return claiming the status of a firm together with an application under Section 26A for its registration which was disallowed by the Income-tax Officer but was allowed by the Appellate Assistant Commissioner. The substantial issue before the Appellate Assistant Commissioner was one of status of the assessee and he held that it was a partnership firm and not a Hindu undivided family. This finding was necessary for deciding the appeal before the Appellate Assistant Commissioner and it is not possible to understand how it can be regarded as having been made only incidentally.'

59. With regard to the second point, after referring to Murlidhar Bhagwan Das's case, it was observed :

'... it is again not possible to understand how the appellant can be taken out of the category of person or persons intimately connected with the assessment of the year under appeal. The returns, as stated before, were originally filed by the partnership firm comprising Bhagat Singh and his two sons. The question was of the assessment of the income of the business of the firm. The Income-tax Officer treated the father and the sons as Hindu undivided family. On appeal, however, the Appellate Assistant Commissioner accepted their contention that they formed a partnership firm. It is difficult, in these circumstances, to agree that the appellant was a total stranger to the assessment which was under appeal before the Appellate Assistant Commissioner and had no intimate connection with the person whose assessment was made by the Income-tax Officer and was set aside in appeal by the Appellate Assistant Commissioner.'

60. It has to be borne in mind that the father and two sons were the persons who had filed the return. They had filed the return in their capacity as partners of the firm of which they sought registration. The Income-tax Officer held that the status of the father and the sons was not that of a partnership firm as claimed by them, but was that of a Hindu undivided family, and in appeal their original contention that they formed a partnership was upheld. So that Bhagat Singh and his two sons were the persons who filed the return and they were hefore the Appellate AssistantCommissioner and their claim was that they occupied the status of a firm and not of a Hindu undivided family before the Income-tax Officer, and they were before the appellate authority in their capacity as members o! the Hindu undivided family, which they claimed they were not. In fact they were parties to the assessment and could be said to be the assessees, as had been observed by Desai J. of the Bombay High Court in Prashar's case, which approach was also accepted by the Supreme Court. In any case, one thing is clear that neither Murlidhar Bhagwan Das's case nor Daffadar Bhagat Singh's case runs counter to the decision in Prashar's case. In fact In Daffadar Bhagat Singh's case the decision in Prashar'scase was approved by Grover J., delivering the judgment of the court, His Lordship observed as follows :

'In S. C. Prashar v. Vasantsen Dwarkadas this court by majority, held that the provisions of the second proviso to Section 34(3) in so far asthey authorised the assessment or reassessments of any person other thanthe assessee beyond the period of limitation specified in Section 34 inconsequence 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 Article 14 of the Constitution and were invalid to that extent.'

61. Prashar's case was also referred to by the Supreme Court in Commissioner of Income-tax v. Saradar Lakhmir Singh.

62. On behalf of the department reliance was also placed on Commissioner of Income-tax v. Ambala Flour Mills, [1970] 78 I.T.R. 256 (S.C.). In that case originally there were three partners of the assessee-firm. The partnership was dissolved on April 29, 1948, at the instance of one of the partners, namely, Jai Ram Das. Thereafter another partner, Balkishan Das, severed his connections with the business and then Debi Prasad, the third partner, alone carried on the business. In the assessment year 1950-51, Debi Prasad filed three returns of income in the status of a firm, in the status of an individual and in the status of a firm consisting of Jai Ram Das and Debi Prasad. For the assessment year 1951-52, he filed a return in the status of an unregistered firm and for the assessment year 1952-53 in the status of a Hindu undivided family. The Income-tax Officer assessed the mills in three years of assessment in the status of 'an association of persons'. In appeals filed by Debi Prasad, the Appellate Assistant Commissioner annulled the orders of assessment and remanded the case to the Income-tax Officer, who assessed the income as the income of the family of Debi Prasad. The Tribunal while upholding the order directed deletion of direction of remand. The High Court held that Debi Prasad was not a stranger in respect of the income-tax proceedings against Ambala Flour Mills; that the Appellate Assistant Commissioner could give a direction, with the rider that the assessment against Debi Prasad could only be in the individual capacity and that the appeals filed by Debi Prasad were maintainable in law. On appeal by the Commissioner, to the Supreme Court, it was held as follows:

'(i) Debi Prasad had submitted the returns, and Debi Prasad appealed against the order of assessment. He could, in the circumstances of the case, not be called a stranger to the assessment. The income earned by the assessee was assessed to tax as income of an association of persons, of which on the finding of the Income-tax Officer, Debi Prasad was a member. In making a direction against Debi Prasad the Tribunal did not exercise his powers qua a stranger to the assessment proceedings.

(ii) The High Court exercising advisory jurisdiction was incompetent to amend the order of the Appellate Assistant Commissioner. But on the question referred to the High Court, no enquiry into the power of the Appellate Assistant Commissioner to make the impugned direction was competent. The second question only related to the assessment of the income in the hands of Debi Prased after annulling the assessment of the Ambala Flour Mills. It was not contended before the Tribunal that the income of the Ambala Flour Mills could not be assessed in the hands of the family of Debi Prasad. The competence of the Appellate Assistant Commissioner to make the direction was not and could not be referred to the High Court.'

63. This is hardly any authority for the proposition that is now being but forward that if a person cannot be treated to be, in any way, before the appellate authorities as an assessee, even then he can be covered by the second proviso. In this case the sole question was the capacity in which Debi Prasad was to be assessed and, therefore, he could not be treated as a stranger.

64. In the present case, the trust was altogether a separate entity and in no way connected with S. Raghbir Singh, as an individual, who was an assessee before the Income-tax Officer and who was the appellant in the High Court. The trust had filed a separate return and as observed by the Tribunal no protective assessment was made in its case. The mere factthat S. Raghbir Singh was a trustee of the trust and in that capacity had filed the return of the trust, would not make any difference. The question for determination is whether the trust can be treated as a stranger to the proceedings before the High Court which were conducted by S. Raghbir Singh in his individual capacity, or is the trust so intimately connected with those proceedings as not to be treated as a stranger but in a way covered by the word 'assessee' The trust itself had not been assessed and the litigation was being fought by S. Raghbir Singh, and his sole contention and interest was that the income of the 300 shares could not be added to his income. In those proceedings the trust was not a party and, therefore, it could not be covered by the second proviso in view of the decision of the Supreme Court in Prashar's case.

65. Moreover, as regards the second point, the only finding that was necessary for the decision of the reference to the High Court made at the instance of S. Raghbir Singh was whether the trust was validly constituted and whether the income of the 300 shares could be treated as the income of S. Raghbir Singh individually. The other finding as to who should be treated to be the recipient of the income of these 300 shares was merely an incidental finding not necessary at all for the decision of the reference. I am, therefore, in agreement with Mahajan J., that this finding was merely incidental and not a finding necessary for the decision of the case and, therefore, this would not be a finding within the meaning of the proviso in pursuance of which any action could be taken.

66. In view of the above, I find that both the tests which are necessary for bringing the case within the second proviso fail in this case, and, agreeing with Mahajan J., I hold that the Tribunal was correct in its decision that the proceedings initiated and the assessment made were barred by time. The question, therefore, referred to this court is answered in the affirmative and against the department. I also agree with Mahajan J. that there should be no order as to costs.


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