FALSHAW J. - The following questions have been referred to this court by the Income-tax Appellate Tribunal under section 66(1) of the Income-tax Act :
'(1) Whether on the facts and in the circumstances of this case and in view of the opinion of the majority of the members who heard these appeals that the case did not fall under clause (a) of sub-section (1) of section 34, are the orders of assessments of March, 1952, for the years 1943-44 and 1944-45 legally sustainable as made on the original returns filed by the three assessees ?
(2) If the answer to this question is in the affirmative, then, on a true construction of the terms of sub-section (3) of section 34, was the time limit for making the said orders of assessments eight 34, was the time limit for making the said orders of assessments eight years from the end of those two years ?'
A somewhat long and complicated history lies behind the references, which relate to the assessments for the years 1943-44 and 1944-45, account years 1942-43 and 1943-44 of three assessees (1) a firm called the India Woolen Textile Mills, Chheharta, (2) a Hindu undivided family headed by Lachhman Das Nayar and (3) Daulat Ram, the son of the karta of the Hindu undivided family. In 1936 a Hindu undivided family with two branches headed by brothers, Lachhman Das Nayar and Chuni Lal, disrupted and the branch of Lachhman Das Nayar became a Hindu undivided family. In connection with the assessment for 1938-39 it was represented to the Income-tax Officer that a partnership had come into existence during the relevant account year, the partners consisting of the Hindu undivided family represented by Lachhman Das Nayar with a 0-14-0 share and the son of Lachhman Das Nayar, Daulat Ram, with a 0-2-0 share, although at the same time Daulat Ram was still said to be a member of the joint family. This partnership was said to have started the India Woollen Textile Mills. The Income-tax Officer did not accept the alleged partnership on the ground that no individual member of a Hindu undivided family could enter into a partnership with the family itself and he accordingly treated the income of the India Woollen Textile Mills as belonging to the joint family headed by Lachhman Das Nayar. When this matter came before the Appellate Tribunal in September, 1942, it was held that there was no bar to a partnership between an individual member of a joint family and the family itself, but this view was reversed and the view of the Income-tax Officer restored by the High Court at Lahore on a reference under section 66(1) of the Act by an order of April 18, 1944. However, the matter was carried to the Privy Council which set aside the decision of the High Court and restored the decision of the Appellate Tribunal in July, 1947.
In the meanwhile, the assessments for the years 1942-43 to 1944-45 had been completed and although separate returns had been filed by the India Woollen Textile Mills and Daulat Ram as well as in the name of the joint Hindu family under Lachhman Das Nayar, the income of the firm was treated as the income of the joint family and no separate action was taken regarding the firm or Daulat Ram although the latter in two of the years had shown his receipts on account of his 0-2-0 share of the firm at Rs. 10,848 and Rs. 22,247.
When the orders of the Privy Council were received appeals were pending before the Appellate Assistant Commissioner regarding the assessments for the years 1942-43 to 1944-45 and by his order of June 7, 1948, the Appellate Assistant Commissioner reduced the income of the India Woollen Textile Mills as included in the income of the joint family to annas 14 in a rupee but did not take any steps to assess the India Woollen Textile Mills as a firm or to allocate the income of the individual partners to their respective files. This was apparently because the firm had not yet applied for or had been accorded registration under section 26A of the Act, the result being that while the joint family was charged tax on its 0-14-0 share in the income of the India Woollen Textile Mills the remaining 0-2-0 share of Daulat Ram was not brought to tax in any file.
Thereafter, in February, 1949, the Income-tax Officer, Excess Profits Tax Circle, Ahmedabad, sent a letter to the Income-tax Officer, Excess Profits Tax Circle, Amritsar, the officer concerned with the firms assessment, in which the information was conveyed that by means of certain frauds regarding over-invoicing of goods a sum of Rs. 7,06,963 had, through a firm at Ahmedabad, called Messrs. Tulsi Ram Chuni Lal, been placed in a bank at Ahmedabad in the personal account of Lachhman Das Nayar. On receipt of this information the Income-tax Officer, Amritsar, after obtaining the sanction of the Commissioner issued notices under section 34(1)(a) of the Act in March, 1949, in respect of the three years to each of the assessees, the India Woolen Textile Mills, the Hindu undivided family headed by Lachhman Das Nayar and Daulat Ram. In response to these notices all these three assessees filed returns revealing the concealed income amounting to the above figure over and above the income that had already been shown by them in their original returns. On this the Income-tax Officer revised the assessments which were challenged by the assessees in appeals to the Appellate Assistant Commissioner. In these appeals the assessees challenged the jurisdiction of the Income-tax officer to proceed under section 34(1) of the Act.
By his order dated the 16th of November, 1950, the Appellate Assistant Commissioner accepted the appeals of the firm and set aside the assessments on the ground that the provisions of section 34(1)(a) were not attracted in the case of the firm as the notices had been issued more than four years after the close of the assessment years, the case of the firm being covered by section 34(1)(a) since the failure to assess the firm during the years in question was neither due to the fact that the firm had not furnished returns nor to the fact that there had been failure to disclose material particulars, but to the fact that on the view of the law taken until the Privy Council had given its decision the existence of the firm as a partnership was not recognised. It was also found that whereas the sanction of the Commissioner under section 34(1) had been obtained on the ground that there had been total escapement of the firms income during the years in question, the notices issued by the Income-tax Officer showed his grounds for proceeding as being that the firms income had partially escaped assessment. The Appellate Assistant Commissioner, however, neither decided the appeals of the other two assessees nor passed any direction in terms of section 31(4).
The appeals of the joint family and Daulat Ram were subsequently dismissed by the Appellate Assistant Commissioner on April 9, 1952, on the finding that these assessees had failed to disclose fully and truly all material facts necessary for their assessments, the case being covered by section 34(1)(a).
The three assessees went in appeal to the Tribunal against these orders, the objections of the firm being that the Appellate Assistant Commissioner had failed to give the necessary direction under section 31(4) for modification of the assessments of the partners as a result of the cancellation of the assessment of the firm, while the partners objected that their case did not fall within the purview of section 34(1)(a). On October 29, 1951, the Tribunal disposed of the appeal of the firm by directing the Appellate Assistant Commissioner to give the necessary direction under section 31(4) and observing :
'Whether or not separate proceedings may be taken against the partners individually under section 34, the retention of the inclusion in the hands of a partner of a share of the income assessed in the firms file which assessment had been cancelled, cannot be supported.'
In the light of this order of the Tribunal the partners withdrew their appeals, which were dismissed by an order of March 24, 1953, the Appellate Assistant Commissioner having in the meantime given a direction to the Income-tax Officer under section 31(4).
In the meantime, in March, 1951, the Income-tax Officer again took steps to obtain the sanction of the Commissioner for fresh proceedings against the three assessees under section 34(1)(a) in consequence of the order of the Appellate Assistant Commissioner of November 16, 1950, and also because he was then in possession of information that some proceedings under section 34 were pending against the firm, Messrs. Tulsi Ram Chuni Lal, in which the joint family through Lachhman Das Nayar was a partner. Those proceedings were dropped in May, 1951, but they were pending when the fresh notices were issued under section 34(1)(a) after the Commissioners sanction had been obtained. Fresh assessments on the basis of these notices were made as regards the firm on March 15, and as regards the partners on March 17, 1952, and in these assessments the concealed income was duly brought to tax. Each of the assessees appealed against each of the three assessments but their appeals were dismissed by the Appellate Assistant Commissioner and then the appeals were filed before the Appellate Tribunal which have given rise to this reference, in which we are no longer concerned with the appeals arising from the assessment year 1942-43.
In these appeals there was a disagreement between the Accountant Member of the Tribunal, Mr. A. L. Sehgal, who was of the opinion that all the appeals should be allowed and all the assessments cancelled, and the Judicial Member, Mr. G. J. Bhavnani, who was of the opinion that all the appeals should be dismissed. The learned Accountant Member was of opinion that section 34(1)(a) could not be applied in the circumstances and he rejected the alternative argument of the department that the assessments could still be regarded as within time as being made under section 23 in view of the terms of section 34(3). The learned Judicial Member disagreed with him on both these points and considered that the assessments should be upheld on these alternative grounds.
As a result of disagreement the case was referred to the President of the Income-tax Appellate Tribunal, Mr. A.N. Shah, who agreed with the learned Accountant Member that the appeals should be allowed regarding the first of the assessment years 1942-43 with which, as I have said, we are no longer concerned, on the ground that the notice under section 34(1)(a) was issued more than eight years after the end of the assessment years. As regards the years 1943-44 and 1944-45, the learned President agreed with the view of the learned Accountant Member regarding the invalidity of the proceedings under section 34(1)(a), but he was of the opinion that the assessments should be upheld on the alternative ground advanced by the learned Judicial Member, namely, that the assessments were valid as being made under section 23 on the basis of the original returns within eight years in view of the provisions of section 34(3).
Although it has been necessary to set out this complicated history in order to understand the nature of the dispute, the point involved in the reference is a relatively simple one, since we are no longer concerned with the question whether the proceedings could be properly taken against the assessees under section 34(1)(a) and have only to decide the question whether the assessments for 1943-44 and 1944-45 can be legally sustained on the basis of the provisions of section 34(3) as having been made under section 23 on the basis of the original returns filed by the assessees. The words of section 34(3) as they stood at the relevant time were :
'No order of assessment under section 23 to which clause (c) of sub-section (1) of section 28 of sub-section (1) of this section shall be made after the expiry of eight years, and no order of assessment or reassessment in any other case 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.'
Section 28(1)(c) is undoubtedly applicable in the present case since there was an admitted concealment of income.
The position of the assessees in a nutshell is that although under section 34(3) an assessment can be made in cases where there has been concealment up to eight years from the close of the assessment year on the basis of a return filed at any time during that period, in the present case returns were filed and assessments were made, although actually the assessments in the cases of the firm and Daulat Ram were nil in view of the fact that the existence of the fact that the existence of the partnership was not recognised by the Income-tax Officer. In such circumstances, any fresh assessment could not be said to be made under section 34(3) on the basis of the original returns, and it could only be by way of reassessment under section 34(1), and since more than four years had elapsed it could only be under section 34(1)(a), which the majority of the Tribunal has ruled out.
On the other hand the case of the department is that the orders passed on the original returns of the firm and Daulat Ram were not assessments and that it did not amount to reopening the matter or having a reassessment under section 34(1) when the assessments in disputes were made,. In this connection the learned counsel for the department has relied chiefly on the decision in Sir Rajendranath Mukerjee v. Commissioner of Income-tax and in In re Lachhiram Basantlal. The facts in the latter case were that a notice had been served on the assessee under section 22(2) by the Income-tax Officer of the district in which the assessees business was located but thereafter by an order of the Commissioner the case was made over to a Special Income-tax Officer who made an assessment. While an appeal was pending against this assessment, the High Court held that the orders making over the cases to the Special Income-tax Officer were not within the jurisdiction of the Commissioner and the assessments made by this officer were held to be nugatory. The case in question was, therefore, again made over to the proper Income-tax Officer who proceeded with the case at the stage up to which he had previously proceeded with the case and made the assessment. The date of the resumption was beyond one year from the expiry of the financial years concerned. In these circumstances it was held by Rankin C.J., C. C. Ghose and Buckland JJ. that it was open to the Income-tax Officer to resume the case at the stage at which the proceedings were valid, by a competent officer, and to proceed to assessment although the date of such resumption may be beyond one year from the expiry of the financial year concerned.
This case appears to me to be on an entirely different footing from the present case and the nature of the dispute does not appear to me to bear any resemblance whatever. The other case cited was a decision of the Privy Council. In that case in April, 1927, a notice had been issued to Burn & Co. calling for a return of their income for the year 1926-27 and a return was duly made in 1928. Meanwhile the income-tax authorities though that Martin & Co. had purchased Burn & Co. and made an assessment on Martin & Co. in respect of the joint income of the two companies. Martin & Co. appealed and the High Court held on May 16, 1930, that the two companies should have been separately assessed. The assessment of Martin & Co. was accordingly amended by eliminating the income of Burn & Co. and the Income-tax Officer assessed Burn & Co. on November 8, 1930, on their income as returned in 1928. It was held by their Lordships that the income of Burn & Co. did not 'escape assessment' within the meaning of section 34 of the Income-tax Act, and consequently the serving of a notice under that section before the expiry of the year 1928-29 was not an essential pre-requisite of a valid assessment of that income, and as there was no other time limit prescribed or necessarily implied in the Act, the assessment of November 8, 1930, was not out of time. The decision in the case of Lachhiram Basantlal was approved, but here again, there appears to me to be no parallel. In both these cases an assessment originally made was set aside as void, in one case because the Income-tax Officer had no jurisdiction and in the other case because the income of the assessee had wrongly been included in and assessed in the income of another firm, and in both cases the final assessment was rightly made on the basis of the original returns.
This is very different from the present case in which three assessees filed separate returns and two of them were not assessed to tax on the ground that the existence of an alleged partnership was not recognised by the authorities, and the whole income of the firm was treated as the income of the joint family, and even when the validity of the partnership had been upheld by the Privy Council the only adjustment made was in the income of the joint family, no assessment being made on the firm as such or the junior partner. In fact it was only when the existence of the concealment of income amounting to Rs. 7,00,000 over the period in question was revealed and fresh returns submitted by the assessees, in which the concealment was admitted, in response to notice under section 34(1)(a), that the reassessments were made.
A case much nearer the point has been cited on behalf of the assessees. This is the case of Pran Nath v. Commissioner of Income-tax, decided by Bishan Narain and Dua JJ. of this court. The facts in that case are that there were two brothers, Pran Nath and Vishwa Nath, who constituted a Hindu undivided family which owner property and earned income, and they also carried on a business in partnership. For the assessment year 1946-47 the joint family as such filed a return of its income and a separate return was also filed for the partnerships firm along with an application for the registration of the firm under section 26A of the Act. The two brothers also filed separate returns as individuals. The Income-tax Officer rejected the application under section 26A and included the income of the firm in the total income of the Hindu undivided family and also assessed the brothers as members of that family. The cases of the brothers were filed on the basis of their having no personal income during the assessment year. The assessees appealed and obtained an order from the Appellate Assistant Commissioner directing the registration of the firm and the exclusion of its income from the income of the Hindu undivided family.
The Income-tax Officer then registered the firm and computed its taxable income and proceeded under section 23(5), and by two separate orders dated March 24, 1952, he assessed the income of each partner of the firm and issued demand notices against them individually without taking any action either under section 34 or 35. The appeal by the brothers was dismissed by the Appellate Tribunal but they successfully applied for a reference to the High Court under section 66(1) of the questions, (i) whether the assessments for the year 1946-47 made on the applicants on March 24, 1952, without taking action under section 34 were in order and (ii) whether these assessments made as they were on March 24, 1952, are hit as being out of time. Both these questions were answered in favour of the assessees, it being held that it was obviously a case of chargeable income escaping assessment and that section 34 of the Act applied, it not being open to the Income-tax Officer after a final assessment to go on making fresh computations and issue fresh notices of demand.
It seems to me that the essential facts in that case are exactly similar to these of the present case, since the Income-tax Officer refused to assess the firm or the junior partner, Daulat Ram, on the basis that he did not recognise the existence of the partnership, and he treated the whole of the income of the firm as the income of the undivided family, and on the basis of this decision, with which I am in respectful agreement, it was not open to the Income-tax Officer to make fresh assessments of the firm and the partners except after initiating proceedings under section 34.
On behalf of the assessees reliance was also placed on the decision of the Supreme Court in Esthuri Aswathiah v. Income-tax Officer, Mysore State. In that case the appellant was a Hindu undivided family carrying on business in the erstwhile State of Mysore and had adopted as its accounting year the period July 1 to June 30 of the succeeding years. For the accounting year July 1, 1948, to June 30, 1949, the appellant was assessed to tax under the Mysore Income-tax Act. After the Indian Income-tax Act, 1922, was applied to Mysore, he was required to submit a return for the assessment year 1950-51 and on September 8, 1952, the appellant submitted a return disclosing no assessable income and stated that, as it had been assessed for the accounting year ending June 30, 1949, under the Mysore Act, and the income for the next accounting year ending on June 30, 1950, was assessable only in the assessment year 1951-52, there was no assessable income for the assessment year 1950-51. On that return the Income-tax Officer passed an order 'no proceeding' and closed the assessment. In the course of the assessment proceedings for the assessment year 1951-52 the account books produced by the appellant disclosed an opening cash credit balance of Rs. 1,87,000 on July 1, 1949, and when the Income-tax Officer called for the books of the earlier years the books were not produced. The sum of Rs. 1,37,000 out of the opening balance on July 1, 1949, was treated as income from undisclosed sources for the assessment year 1951-52, but on appeal the Appellate Assistant Commissioner held that the financial year ending March 31, 1950, ought to be taken as the previous year for the income from undisclosed sources. In the meantime the appellant submitted a fresh return for the assessment year 1950-51. On October 15, 1957, the the Income-tax Officer served a notice of reassessment under section 34 of the Indian Income-tax Act, 1922, calling upon the appellant to submit a fresh return. The appellant thereupon presented a petition under article 226 of the Constitution challenging the jurisdiction of the Income-tax Officer to issue the notice of reassessment. The relevant portion of the decision of the Supreme Court is that it was held that on the facts the order 'no proceedings' meant that the Income-tax Officer accepted the return submitted by the appellant on September 8, 1952, and assessed the income as 'nil' for the year 1950-51, and if thereafter he had reason to believe that the appellant had failed to disclose fully and truly all material facts necessary for re-assessment for the year it was open to him to issue a notice of assessment under section 34.
The facts of that case are undoubtedly different in some respects, and it was the assessee who was challenging the jurisdiction of the Income-tax Officer to issue the notice under section 34, but the implication, from the part of the decision which I have quoted, appears to be that in view of the order 'no proceedings' on the return in question the assessees income had been assessed as 'nil' for that year and it could only be after notice under section 34 that any reassessment could be made.
No copy of the exact order of the Income-tax Officer dealing with the returns of the firm and Daulat Ram for the years in question has been made a part of the statement of the case, but it is clear that their returns were filed on the basis that the existence of the partnership was not recognised, and that the whole income of the firm was being included in the assessment of the joint family. In these circumstances it does not seem to me to make much difference what exactly was the form of words used, since the effect was clearly that the firm and Daulat Ram were held not liable to assessment of any tax and this certainly amounts to an assessment, and if we follow the decision in Pran Naths case with which, as I have indicated, I am in agreement, it is clear that any further assessment must be a reassessment which could only be done by initiating proceedings under section 34(1) and could not be regarded as an assessment made within time under section 34(3) on the basis of the original returns. I would accordingly answer the first question referred to us in the negative and in that case the second question does not arise or require and answer. I would award the assessees their costs from the Commissioner. Counsels fee Rs. 250.
DULAT J. - I agree.
Question answered accordingly.