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S.S. Gadgil, Income-tax Officer, Bombay Vs. Lal and Company - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtSupreme Court of India
Decided On
Reported inAIR1965SC171; [1964]53ITR231(SC); [1964]8SCR72
ActsIndian Income-tax Act, 1922 - Sections 34 and 43; Finance Act, 1956
AppellantS.S. Gadgil, Income-tax Officer, Bombay
RespondentLal and Company
Cases Referred and ShellCompany of Australia Ltd. v. Federal Commissioner of Taxation
.....with non resident parties - assessee claimed having no direct dealing with foreign clients - income-tax officer rejected contention and charged assessee under section 34 - writ filed in high court - claimed that action under section 34 time barred - assessee prayed for issuance of writ of mandamus or prohibition against income-tax officer - high court observed notice invalid - valid notice is a condition precedent for enforcement of section 34 - proceedings not maintainable - appeal to supreme court - right to commence proceedings for assessment against assessee as agent of foreign client extinguished prior to commencement of amending act - held, amending provision cannot be involved although notice was within period under amending act. - code of civil procedure, 1908.[c.a. assess a person as an agent of aforeign party under s. 43 within two years from the end of the year ofassessment. but authority of the income-tax officer under the act before it wasamended by the finance act of 1956 having already come to an end, the amendingprovision will not assist him to commence a proceeding even though at the datewhen he issued the notice it is within the period provided by that amendingact. this will be so, notwithstanding the fact that there has been nodeterminable point of time between the expiry of the time provided under theold act and the commencement of the amending act. the legislature has given tos. 18 of the finance act, 1956, only a limited retrospective operation i.e.,upto april 1, 1956, only. that provision must be read subject to the rule thatin.....

Shah, J.

1. M/s Lal and Company hereinafter called the assessee carry on business inBombay as commission agents. In the course of assessment proceedings for theyear 1954-55 the assessee's books of account were examined by the Income-taxOfficer and it was noticed that the assessee had business connections withcertain non-resident parties. On March, 12, 1957, the Income-tax Officer issueda notice calling upon the assessee to show cause why in respect of theassessment year 1954-55 the assessee should not be treated under s. 43 of theIndian Income-tax Act, 1922, as an agent in respect of twenty-five non-residentparties named in the notice. The assessee denied that he had 'directdealings' with any non-resident party and that in any event the proposedaction was barred because the period prescribed for initiation of proceedinghad expired, and requested the Income-tax Officer to drop the proceeding. TheIncome-tax Officer B-III Ward, Bombay issued on March 27, 1957, a notice unders. 34 of the Indian Income-tax Act for assessment of the assessee as an agentof the twenty-five named non-resident parties. The assessee submitted a returnshowing his income as 'nil'. The Income-tax Officer held that thetransactions disclosed from the books of account of the assessee clearly showedthat the assessee 'had regular business connection with' non-residentparties, that through the assessee those non-resident parties were receivingincome, profits and gains, and s. 43 was clearly applicable to the assesseethere being definite business connection between the assessee and the namednon-residents. He therefore treated the assessee as agent of the non-residentparties, under s. 43 of the Act.

2. The Income-tax Officer also reject the contention of the assessee thataction under s. 34 was barred at the date of the notice issued to the assessee.Relying upon the first proviso to s. 34(1)(b)(iii) inserted by the Finance Act,1956, the Income-tax Officer held that the Legislature had by amendmentextended the 'time-limit in clear and express terms so as to cover'action under s. 34 against a person on whom the assessment or reassessment isto be made as an agent of a non-resident person under s. 43 of the Act for theassessment year 1954-55, and accordingly assessed the income of the assessee atRs. 60,684, estimating the income of the parties residing outside the taxableterritories, in the absence of accounts to be Rs. 50,000.

3. The assessee then filed a petition under Art. 226 of the Constitution inthe High Court of Judicature at Bombay praying that a writ in the nature ofmandamus or prohibition do issue restraining and prohibiting the Income-taxOfficer from giving effect to or taking any steps or proceedings by way ofrecovery or otherwise in pursuance of the orders of assessment. The assesseepleaded, inter alia, that the proceedings for assessment under s. 34 of the Actcommenced by the Income-tax Officer after the expiry of one year from the endof the assessment year 1954-55 were without the authority of law. The HighCourt of Bombay, following its earlier judgment in S. C. Prashar v. VasantsenDwarkadas : [1956]29ITR857(Bom) held that at the date when the notice was issued, byreason of the proviso which was in operation under s. 34(1) in respect of theassessment year 1954-55 the notice was out of time and that the period providedthereby could not be extended by the Finance Act of 1956 so as to authorise theIncome-tax Officer to issue a notice for assessment or reassessment of theassessee as statutory agent of a party, residing outside the taxable territory.In the view of the High Court the notice dated March 27, 1957, was invalid, anda valid notice being a condition precedent to the exercise of jurisdictionunder s. 34, the proceeding under s. 34 was not maintainable. Against the orderof the High Court issuing writs prayed for by the assessee, with certificate offitness this appeal is preferred by the Income-tax Officer, Bombay.

4. In order to appreciate the contention raised by the assessee and whichhas found favour with the High Court, it is necessary to refer to the relevantprovisions of s. 34, as they stood before the section was amended by theFinance Act, 1956. The clauses relevant prescribing the period within whichnotice may be issued read as follows :

'(1) (a) If - X X X

(b) X X X

he may in cases falling underclause (a) at any time within eight years and in cases falling under clause (b)at any time within four years of the end of that year, serve on the assessee, xx x a notice containing all or any of the requirements which may be included ina notice under sub-section (2) of section 22 and may proceed to assess orre-assess such income, profits or gains or recompute the loss or depreciationallowance; X X X

Provided that -

(i) x x x

(ii) x x x

(iii) Where the assessment madeor to be made is an assessment made or to be made on a person deemed to be theagent of non-resident person under section 43, this sub-section shall haveeffect as if for the periods of eight years and four years a period of one yearwas substituted.'

5. By s. 18 of the Finance Act, 1956, s. 34 was extensively amended andclause (iii) of the proviso was substituted by the following proviso :

'Provided further that the Income-tax Officer shallnot issue a notice under this sub-section for any year after the expiry of twoyears from that year if the person on whom an assessment or re-assessment is tobe made in pursuance of the notice is a person deemed to be an agent ofnon-resident person under section 43.'

6. Initially a notice of assessment or re-assessment under s. 34(1) againsta person deemed to be an agent of a non-resident person under s. 43 could notbe issued after the expiry of one year from the end of the year of assessment :under the amended section this period was extended to two years from the end ofthe relevant assessment year. In the course of assessment to income-tax for theyear 1954-55 the relevant law applicable prescribed that a notice of assessmentor re-assessment against a person deemed to be an agent under s. 43 could notbe issued after the expiry of one year from the end of the assessment year.That period expired on March 31, 1956, and after that date no notice could beissued, relying upon the law as it stood before amendment for assessment orre-assessment treating the assessee as an agent of a non-resident under s. 43.But the Income-tax Officer sought recourse to the amended provision which gavehim a period of two years from the end of the assessment year, for initiatingassessment proceedings, and the authority of the Income-tax Officer to so actis challenged by the assessee.

7. Section 18 of the Finance Act, 1956, is, it is common ground, not givenretrospective operation before April 1, 1956. The question then is, whether theIncome-tax Officer may issue a notice of assessment to a person as an agent ofa non-resident party under the amended provision when the period prescribed forsuch a notice had before the amended Act came into force expired Indisputablythe period for serving a notice of re-assessment under the unamended sectionhad expired, and there was in the Act as it then stood, no provision forextending the period beyond the end of one year from the year of assessment.The Income-tax Officer could therefore commence a proceeding under s. 34 onMarch 27, 1957, only if the amended section applied and not otherwise. Theamending Act came into force after the period provided for the issue of anotice under s. 34 before it was amended had expired. It is true that there wasno determinable point of time between the expiry of the prescribed time withinwhich the notice could have been issued against the assessee under s. 34proviso (iii) before it was amended. But there was no overlapping periodeither. Prima facie, on the expiry of the period prescribed by s. 34 as itoriginally stood, there was no scope for issuing a notice unless theLegislature expressly gave power to the Income-tax Officer to issue noticeunder the amended section notwithstanding the expiry of the period under theunamended provision or unless there was overlapping of the period within whichnotice could be issued under the old and the amended provision. But counsel forthe Commissioner submitted that at no time was the Income-tax Officer bereft ofauthority to issue a notice under s. 34 of the Indian Income-tax Act, 1922. Hesubmitted that till the mid-night of March 31, 1956, notice could be issued inexercise of the powers conferred by s. 34 proviso (iii) before it was amendedand notice of assessment or re-assessment could also be issued under theamended provision immediately thereafter in exercise of the powers conferred bys. 18 of the Finance Act, 1956. Counsel relied upon the rule contained in s.5(3) of the General Clauses Act that unless the contrary is expressed, aCentral Act or Regulation shall be construed as coming into operationimmediately on the expiration of the day preceding its commencement. It wassubmitted that this is merely a statutory recognition of the rule which iswell-settled that where a statute names a date on which it shall come intooperation, it shall be deemed to come into force immediately on the expirationof the previous day and the law does not take into consideration fractions of aday.

8. Reliance was placed by counsel upon Tomlinson v. Bullock (1879) 4 Q.B.D.230 and English v. Cliff (1914) 2 Ch.D. 376. In Tomlinson's case (1879) 4Q.B.D. 230 the question was whether an order of affiliation could be made onan application made in respect of a child born at any time of the day on August10, 1872 under the Bastarday Act, 35 & 36 Vict. c. 65. In an applicationmade for an order of affiliation, it was held that the order could competentlybe made in respect of a child born at any time of the day on the 10th of August,1872, because the Act in the contemplation of law for this purpose came intoeffect from the commencement of the day on which it received the royal assent,and that normally an Act which comes into operation becomes law as soon as itcommences. In English v. Cliff (1914) 2 Ch.D. 376 it was held by the Court ofChancery that the trustees under a deed of settlement dated May 13, 1892, whostood possessed of an estate during the term of twenty-one years from the dateof settlement upon trust to apply the rents and profits mentioned therein andwho were authorised at the expiration of the said period to sell the estatecould competently sell it and their action was not liable to be challenged asinfringing the rule of perpetuity. It was held in that case that hedetermination of the term of twenty-one years and the commencement of the trustfor sale arising at one and the same moment, the trust was not void forremoteness on the ground that it was limited to take effect at the expirationof the term. Neither of these cases has, in our judgment, any application tothe principle applicable in the present case. The power to issue a notice underthe unamended Act came to an end on March 31, 1956. Under that Act no noticecould thereafter be issued. It is true that by the amendment made by s. 18 ofthe Finance Act, 1956, notice could be issued within two years from the end ofthe year of assessment. But the application of the amended Act is subject tothe principle that unless otherwise provided if the right to act under theearlier statute has come to an end, it could not be revived by the subsequentamendment which extended the period of limitation. The right to issue a noticeunder the earlier Act came to an end before the new Act came into force. Therewas undoubtedly no determinable point of time between the expiry of the earlierAct and the commencement of the new Act; but that would not, in our judgment,affect the application of this rule.

9. Reliance was also placed by counsel for the Commissioner upon the rulewhich has prevailed in the Supreme Court of the United States of America that'a new statute should be construed as a continuation of the old one withthe modifications contained in the new one, although it formally repeals theold statute, when it re-enacts its substantial provisions and the two statutesare almost identical.' Bear Lake & River Water Works & IrrigationCompany and Jarvis-Conklin Mortgage Trust Company v. William Garland and CoreyBrothers & Co. 164 U.S. 1. It appears to have been recognised in theSupreme Court of the United states of America in Pacific Mail S.S. Co. v.Jolifee that repeal in terms of a for69 U.S. (2 Wall) 459mer statute doesnot necessarily indicate an intention of the legislature thereby to impairright which had arisen under the act which was repealed. As the provisions ofthe new act took effect simultaneously with the repeal of the old one, theSupreme Court held that the new one might more properly be said to besubstituted in the place of the old one, and to continue in force, withmodifications, the provisions of the old act, instead of abrogating orannualling them and re-enacting the same as a new and original act. Apart fromthe question whether the rule so enunciated is applicable to the interpretationof Indian statutes, in this case we are not concerned with re-enactment of astatute. The statute abrogates one rule of limiation, and enacts another rulewith a limited retrospective operation. To such a case the rule enunciated bythe Supreme Court of America, assuming it applies, attributing to theLegislature an intention to continue in force the provisions of the old Act,with a modification, so as to give to the new statute in substance operationretrospectively from the date on which the old statute was enacted, can have noapplication. We do not think that any such intention may be attributed to theLegislature in enacting s. 18 of the Finance Act, 1956 so as to make it thebasis of a liability to taxation after the expiry of the period prescribed inthat behalf by the Legislature.

10. Counsel also submitted that s. 34 lays down a rule of limitation forcommencing an action for assessment or re-assessment, and that in the absenceof an express provision to the contrary, a statute of limitation in operationat a given time governs all proceedings from the moment of its enactment, eventhough the cause of action on which the proceeding was based came intoexistence before the Act was enacted. Equating a proceeding under s. 34 of theIndian Income-tax Act with a suit or a proceeding in a civil court, counselsaid that the law of limitation being a law of procedure, assessmentproceedings including proceedings for re-assessment are governed by the law inforce at the date on which they are instituted, and that the rule that therepeal of a statute without express words or clear implication in the repealingstatute, cannot take away a right vested in a party acquired under the repealedstatute when it was in force, is a rule of prescription and not of procedure,and notwithstanding general observations to the contrary in certain decision,applies only to those actions in which by the determination of the periodprescribed, a right to institute an action for possession of property isextinguished. Counsel relies in support of the plea on Baleswar v. LatafatI.L.R. 24 Pat. 249. It is unnecessary to dilate upon this argument in anydetail, or to enter upon an analysis of the numerous cases which were mentionedat the Bar to determine whether the rule that without an express provision, ora clear implication arising from the amending statute rights acquired under therepealed statute by the determination of the period of limitation prescribedthereby cannot be deemed to be revived, applies to suits for possession only.It may be sufficient to make two comments on the argument. The rule has in factbeen applied to suits other than suits for possession : e.g. Mahomed Mehdi Fayav. Sakinabai I.L.R. 37 Bom. 383 (a suit for restitution of conjugal rights);M. Krishnaswami Nalcker v. A. Thiruvengada Muddaliar A.I.R. (1935) Mad. 245(a suit for recovery of a debt); Shambhoonath Saha v. Guruchurn Lahiri I.L.R.5 Cal. 894 (an application for execution); and Nepal Chandra Roy Chowdhury v.Niroda Sundari Ghose I.L.R. 39 Cal. 506 (an application for setting aside anex parte decree). Again soon after it was delivered the authority of Baleswar'scase I.L.R. 24 Pat. 249 was weakended by the judgment in Jagdish v. SaligramI.L.R. 24 Pat. 391 where the Court doubted the correctness of the earlierview.

11. A proceeding for assessment in not a suit for adjudication of a civildispute. That an income-tax proceeding is in the nature of a judicialproceeding between contesting parties, is a matter which is not capable of evena plausible argument. The Income-tax authorities who have power to assess andrecover tax are not acting as judges deciding a litigation between the citizenand the States : they are administrative authorities whose proceedings areregulated by statute, but whose function is to estimate the income of thetaxpayer and to assess him to tax on the basis of that estimate. Taxlegislation necessitates the setting up of machinery to as certain the taxableincome, and to assess tax on the income, but that does not impress theproceeding with the character of an action between the citizen and the State :The Commissioner of Inland Revenue v. Sneath 17 T.C. 149, 164;. and ShellCompany of Australia Ltd. v. Federal Commissioner of Taxation [1931] A.C. 275.

12. Again the period prescribed by s. 34 for assessment or re-assessment isnot a period of limitation. The section in terms imposes a fetter upon thepower of the Income-tax Officer to bring to tax escaped income. It prescribesdifferent periods in different classes of cases for enforcement of the right ofthe State to recover tax. It was observed by this Court in Ahmedabad . v. S. C. Mehta, Income-tax Officer and another [1963] Supp. 2 S.C.R. 92 :

'It must be remembered that if the Income-tax Actprescribes a period during which tax due in any particular assessment year maybe assessed, then on the expiry of that period the department cannot make anassessment. Where no period is prescribed the assessment can be completed atany time but once completed it is final. Once a final assessment has been made,it can only be reopened to rectify a mistake apparent from the record (s. 35)or to reassess where there has been an escapement of assessment of income forone reason or another (s. 34). Both these sections which enable reopening ofback assessments provide their own periods of time for action but all theseperiods of time, whether for the first assessment or for rectification, or forreassessment, merely create a bar when that time passed against the machineryset up by the Income-tax Act for the assessment and levy of the tax. They donot create an exemption in favour of the assessee or grant an absolution on theexpiry of the period. The liability is not enforceable but the tax may againbecome exigible if the bar is removed and the taxpayer is brought within thejurisdiction of the said machinery by reason of a new power. This is, ofcourse, subject to the condition that the law must say that such is thejurisdiction, either expressly or by clear implication. If the language of thelaw has that clear meaning, it must be given that effect and where the languageexpressly so declares or clearly implies it, the retrospective operation is notcontrolled by the commencement clause.'

13. Counsel for the Commissioner sought to derive some support fromIncome-tax Officer, Companies District I, Calcutta and another v. CalcuttaDiscount Company Ltd. : [1953]23ITR471(Cal) in which Chakravartti C.J., dealing withthe effect of the Income-tax and Business Profits Tax (Amendment) Act, 1948,observed :

'The plain effect of the substitution of the new s.34 with effect from 30th March, 1948 is that from that date the Income-tax Actis to be read as including the new section as a part thereof and if it is to beso read, the further effect of the express language of the section is that sofar as cases coming within clause (a) of sub-s. (1) are concerned allassessment years ending within eight years from 30th March, 1948 and fromsubsequent dates, are within its purview and it will apply to them, providedthe notice contemplated is given within such eight years. What is not withinthe purview of the section is an assessment year which ended before eight yearsfrom 30th March, 1948.

14. But it may be recalled that the amending Act of 1948 with which theCourt was concerned in Calcutta Discount Company's case : [1953]23ITR471(Cal) cameinto force on September 8, 1948, but s. 1(2) prescribed that the amendment ins. 34 of the Income-tax Act, 1922, shall be deemed to have come into force onMarch 30, 1948, and the period under the unamended section within which noticecould be issued under s. 34(3) against the assessee company ended on March 31,1951. Before that date the amending Act came into operation, and at no time hadthe right to re-assess become barred.

15. In considering whether the amended statute applies, the question is oneof interpretation i.e., to ascertain whether it was the intention of theLegislature to deprive a taxpayer of the plea that action for assessment orre-assessment could not be commenced, on the ground that before the amendingAct became effective, it was barred. Therefore the view that even when theright to assess or re-assess has lapsed on account of the expiry of the periodof limitation prescribed under the earlier statute, the Income-tax Officer canexercise his powers to assess or re-assess under the amending statute whichgives an extended period of limitation, was not accepted in Calcutta DiscountCompany's case : [1953]23ITR471(Cal) .

16. As we have already pointed out, the right to commence a proceeding forassessment against the assessee as an agent of a non-resident party under theIncome-tax Act before it was amended, ended on March 31, 1956. It is true thatunder the amending Act by s. 18 of the Finance Act, 1956, authority wasconferred upon the Income-tax Officer to assess a person as an agent of aforeign party under s. 43 within two years from the end of the year ofassessment. But authority of the Income-tax Officer under the Act before it wasamended by the Finance Act of 1956 having already come to an end, the amendingprovision will not assist him to commence a proceeding even though at the datewhen he issued the notice it is within the period provided by that amendingAct. This will be so, notwithstanding the fact that there has been nodeterminable point of time between the expiry of the time provided under theold Act and the commencement of the amending Act. The Legislature has given tos. 18 of the Finance Act, 1956, only a limited retrospective operation i.e.,upto April 1, 1956, only. That provision must be read subject to the rule thatin the absence of an express provision or clear implication, the Legislaturedoes not intend to attribute to the amending provision a greaterretrospectivity than is expressly mentioned, nor to authorise the Income-taxOfficer to commence proceedings which before the new Act came into force had bythe expiry of the period provided, become barred.

17. The appeal fails and is dismissed with costs.

18. Appeal dismissed.

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