This is a petition under articles 226 and 227 of the Constitution challenging the legality and validity of notices issued under section 34 of the Income-tax Act of 1922 (to be referred to as the Act) in respect of the assessment years 1951-52 and 1952-53.
It is alleged in the petition that petitioners Nos. 2, 3 and 4 were partners of a firm called Tulsi Dass Jaswant Lal Kuthiala which is petitioner No. 1 for the accounting years ending 31st March, 1951, and 31st March 1952 relevant to the assessment years 1951-52 and 1952-53. The petitioner firm filed its returns on 3rd October, 1955. These returns were sent back by the Income-tax Officer, B-Ward, Ambala Cantt., in the beginning of December, 1955, on the ground that the last date of filing of what was called 'the loss returns' was the 31st December, 1953. By means of a letter dated 20th December, 1955 (annexure 'C') the petitioner-firm represented to the Income-tax Officer that sub-section (2A) of section 22 of the Act, which had been inserted by the amending Act of 1953, relates to the case of a person who wants to claim benefit of the loss sustained under the head 'business' being carried forward under section 24(2), and no such consideration arose in the present case because the returns submitted were of a registered firm and its partners had already been served under section 22(2) and had duly declared in their individual returns their respective shares in the partnership. The returns were sent once again for consideration and decision. The Income-tax Officer wrote a letter dated 9th February, 1956 (annexure 'C-1'), saying that it was not possible for him to accept the position taken up by the petitioner-firm. It was further stated that there was no information on the records of the department to show as to when the firm had been registered and even the constitution of the partnership was not known. The petitioner firm addressed another letter dated 11th February, 1956 (annexure 'C-2'), reiterating the position previously taken up with regard to the applicability of section 22(2A). It was mentioned in that letter that an application had been made in the prescribed form within the prescribed period relating to the registration of the firm by means of a letter dated the 16th February, 1963. The Income-tax Officer sent a notice dated 19th March, 1956 (annexure 'C-3'), calling upon the petitioner-firm to attend his office on 24th March, 1956, for discussion of the issues raised in the letter of the petitioner-firm. A notice was sent under section 23(2) of the Act, dated 19th March, 1956 (annexure 'RB'), by the Income-tax Office,r but this again related to the assessment year 1951-52, saying that there were certain points in connection with the returns submitted in regard to which further information was required, and the assessee should attend the office on 24th March, 1956. A notice was issued on the same day under section 22(4) of the Act in connection with the assessment for the year 1951-52 requiring the production of the accounts ion 24th March, 1956 (annexure 'RB-1'). An extract from the order sheet for the year 1951-52 (annexure 'RC') deserves to be reproduced in its entiret :
Serial number of order and date
Brief order, mentioning reference, if necessary
How complied with and date of compliance
No one attends. The above notices and letter were sent per Regd. Pos : vide No. 556 dated 19/3 and per express delivery respectively. Since there is no response, the case is filed. Inform case is filed. Inform assessee as per letter (to be sent D. C. 439 per Regd. Post).
A notice was issued under section 34 of the Act dated 29th February, 1960 (annexure 'D'), in which it was state :
'Whereas I have reason to believe that your income assessable to income-tax for the assessment year 1951-52 has escaped assessment,
I therefore propose to assess the said income...'
The assessee was required to submit within 35 days of the receipt of the notice a return for the year ending 31st March, 1952. On 3rd May, 1960, the petitioner-firm addressed a letter to the Income-tax Officer (annexure 'E') saying that the above notice was illegal and invalid, inter alia, because it had not been served within the statutory period and also because there was no case of 'escaped assessment'. A return was submitted voluntarily to the Income-tax Officer on 3rd October, 1955, declaring a net loss of Rs. 4,430 and in spite of repeated requests no orders had been made with regard to the same. It was not open to the department to issue any notice under section 34 of the Act in view of the various decisions of High Courts and the Supreme Court set out on page 2 of annexure 'E'. It the heading of this letter it was clearly mentioned, 'Assessment for the year 1951- 52. Notice under section 34'.
When this petition came up for arguments before me, the learned counsel for the petitioners pointed out that what he was really challenging was the validity of the notice under section 34 in so far as it related to the years ending 31st March, 1952, which, according to him, would be the assessment year 1952-53. It was stated in categorical terms that the firm was not raising the question of any notice or proceedings which may be pending under section 34 with regard to the year ending 31st March, 1951, (assessment year being 1951-52). The notice which had been served under section 34 (annexure 'D') purported to relate to the assessment year 1951-52, but it required the return to be filed for the year ending 31st March, 1952. Now the learned counsel for the petitioners is quite right in saying that if this notice is confined to the year ending 31st March, 1951, (assessment year 1951-52), then he does not challenge its validity, but if it relates to the year ending 31st March, 1952 (assessment year 1952-53), although the assessment year 1951-52 has been wrongly stated in it, then he would assail its legality and validity. Indeed, the entire correspondence, to which reference has been made, related to the year ending 31st March, 1951, and not 31st March, 1952. The learned counsel for the respondents at first sought to argue that the relevant assessment year for the year ending 31st March, 1952, would be 1951-52, but he could not satisfy me with regard to the correctness of this submission. Later on, therefore, the question resolved itself into the notice being for what is specifically stated with regard to the filing of the return, namely, the year ending 31st March, 1952, which clearly would mean the assessment year 1952-53. As regards this there was no order whatsoever which had been produced and I directed the files to be produced before me as also an additional affidavit to be made explaining the whole position. In the additional written statement which has been filed, it is stated that two separate returns had been made by the petitioner-firm in respect of the assessment years 1951-52 and 1952-53. Both these returns showed loss and as they were filed belatedly, they were not entertained by the Income-tax officer and were returned to the assessee. These returns were, however, refiled. Reference has then been made to the correspondence which followed, which has already been set out. In paragraph 4 of this written statement, it is sai :
'Accordingly, the Income-tax Officer fixed 24th March, 1956, for appearance of the assessee and petitioner No. 4 was informed accordingly. (A true copy of the notice of the Income-tax Officer is annexure C-3 to the petition). It is clear from the wording of the notice that the date was fixed to enable the assessee to show how the loss returns for the years 1951-52 and 1952-53 could be entertained. As neither petitioner No. 4 nor any other person or representative of petitioner nO. 1 attended on 24th March, 1956, the case was filed and the petitioners were informed accordingly on March 24/29, 1956. A true copy of the letter addressed by the Income-tax Officer to the assessee-firm is attached as annexure RD. It is clear from this letter that the returns made by the assessee, which were never entertained by the Income-tax Office,r were finally refused by him under advice tot he assessee.'
Paragraph 5 may also be set ou :
'The the order sheets relating to the cases contained common entries in both the years up to December 24, 1955. Thereafter the only entries are in the order sheet relating to the year 1951-52. It appears that the case for both the years was disposed of together in the file relating to assessment year 1951-52 on March 24, 1956, by a single order.'
In the letter dated March 24/29, 1956 (annexure 'RD'), which related to the years 1951-52 and 1952-53, it was state :
'... I am of the view that you are not entitled under the provisions of income-tax law to have your returns entertained by this office. I have therefore to inform you that your returns will be ignored by this office.'
There can be no doubt and I have verified it from the original records that no order was passed with regard to the year ending 31st March, 1952, (assessment year 1952-53), although a proper order was made with regard to the year ending 31st March, 1951. The learned counsel for the respondents now says that although no separate order was made, yet it was intended that the cases for both the years be disposed of by a single order dated 24th March, 1956, which appears on the file of the return relating to the assessment year 1951-52. This position is seriously contested on behalf of the petitioners and rightly so because the entire correspondence, the orders, the entries on the case-file, etc., go to show that no order was made whatsoever with regard to the return which had been filed relating to the assessment year 1952- 53. Learned counsel for the respondents finally contended that the letter dated 24th/29th March, 1956, (annexure 'RD'), clearly shows that both the returns, which included the return for the year 1952-53, were ignored and the question that would at once arise will be whether this would take the case out of the rule laid down by their Lordships of the Supreme Court in the case to be presently referred on the ambit and scope of section 34 of the Act.
It is common ground and is not disputed that it was open to the petitioner-firm to file the returns relating to income in the year 1955 when they were made in view of the provisions contained in section 22(3). On behalf of the respondents, however, it is maintained that the return, which is now in dispute, was made under sub-section (2A) of section 22 which is to the effect that if any person, who has not been served with a notice under sub- section (2), has sustained a loss of profits or gains in any year under the head 'profits and gains of business, profession or vocation', and such loss or any part thereof would ordinarily have been carried forward under sub-section (2) of section 24, he shall, if he is to be entitled to the benefit of the carry forward of loss in any subsequent assessment, furnish within the time specified in the general notice given under sub-section (1) or within such further time as the Income-tax Officer may allow, all the particulars required under the prescribed form of return, etc. The department as also the counsel for the respondent considered and still consider that an assessee cannot file a return which does not show income and if such a return is filed showing loss beyond the prescribed period, it can be ignored. If that were so, there can be no doubt that it was open to the department to decline to entertain or completely ignore the return which had been filed by the petitioner-firm with regard to both the years 1951-52 and 1952-53 but, as in the present case we are confined to the latter year, it will henceforth be not necessary to refer to the earlier year. Reliance has been placed on behalf of the respondents on Commissioner of Income-tax v. Govindalal Dutta, in which it was held that voluntary returns, which showed a loss, were no returns in the eye of law and the Income-tax Officer was not required to make any assessment on them. This view was overruled by the Supreme Court in Commissioner of Income-tax v. Ranhhoddas Karsonds, in which the Bombay decisions were accepted as laying down the law correctly. After referring to the above decision of the Calcutta High Court, their Lordships observed at page 57 :
'It is a little difficult to understand how the existence of a return can be ignored, once it has been filed. A return showing income below the taxable limit can be made even in answer to a notice under section 22(2). The notice under section 22(1) requires in a general way what a notice under section 22(2) requires of an individual.'
It was further held, accepting the Bombay view, that a 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. In the case decided by their Lordships, since the Income-tax Officer had ignored the return, the notice under section 34 was found to be invalid and illegal. A learned judge of the Allahabad High Court in Ram Bilas Kedar Nath v. Income-tax Officer, District III(i), Kanpur held, following the above decision of their Lordships, that whether a return is an income return or a loss return, so long as it is filed prior to the making of an assessment, even though by reason of the delay in filing the same, it may not be considered a return under section 22(1) or section 22(2), it would still be a return under section 22(3). The effect of the provision in section 22(2A), on which so much emphasis has been laid by the learned counsel for the respondents, was considered, and it has been held that if an assessee is minded to take advantage of the carry forward of loss in a subsequent year under section 24(2), then he cannot get that advantage unless he has filed a return under section 22(2A). That is, however, very different from saying that a return voluntarily filed by an assessee prior to the making of an assessment, even though it may be merely a loss return, is excluded from the purview of section 22(3). With respect I agree and hold that in the present case the return for the assessment year 1952-53 had been made voluntarily under the provisions of section 22(3) and since it had been simply ignored and no decision had been given with regard to it, it could not be said that there had been any omission or failure on the part of the assessee or that there was any question of assessment 'escaping' within the meaning of section 34(1) on which alone reliance has been placed on behalf of the respondents for justifying the issue of the impugned notice.
Counsel for the respondents has also urged that the question, whether any order was made with regard to the assessment year 1952-53 in the same terms as it was made with regard to the assessment year 1951-52, was a matter which had to be decided on evidence and, therefore, there should be no interference in a writ petition when the facts were not clear and were in dispute. There can be no doubt that if the facts had not been cogently established, this court would have declined to interfere in exercise of the extraordinary jurisdiction conferred by article 226 of the Constitution, but the entire records have been placed before me as also the correspondence of which copies have been produced, apart from the material orders, and I am satisfied that no order was made whatsoever with regard to the return relating to the assessment year 1952-53, and that the return was simply ignored. In these circumstances, the notice in so far as it relates to and is maintained to relate to the year ending 31st March, 1952 (assessment year 1952-53), issued under section 34 by the respondents, must be quashed and is hereby quashed.
It may be mentioned that the counsel for the petitioners also argued that since the partnership firm had been dissolved with effect from the 1st April, 1952, the notice was vitiated, but, in view of my decision on the first point, I have considered it wholly unnecessary to go into this matter.
There will be no order as to costs.