1. This special civil application challenges the validity of the notice issued on December 16, 1958, in respect of the assessment year 1949-50 under section 34(1) of the Income-tax Act of 1922.
2. The petitioner was assessed as an individual on the total income of Rs. 6,482 for the assessment year 1950-51, the relative accounting year being Samvat year 2005. His major source of income during that year was his share in a partnership called the Nipani Tobacco Stores. During the relevant accounting period, i.e., Samvat year 2005, the petitioner had brought in capital of Rs. 35,502 into that partnership. On January 23, 1957, the Income-tax Officer served a notice upon the petitioner under section 34(1) asking the petitioner to submit his return of income for the assessment year 1950-51. In pursuance of that notice, the petitioner filed his return of income indicating Rs. 6,482 as his total income in accordance with the original order of assessment. The respondent, however, held that the amount of Rs. 35,502 credited to the account of the petitioner in the books of the said firm as his capital, was income from undisclosed sources, and by his assessment order dated August 22, 1957, he further held that the amount of Rs. 35,502 was concealed income of the petitioner from undisclosed sources and was therefore liable to the taxed in his hands for the assessment year 1950-51. In consequence of this order, the petitioner filed an appeal before the Appellate Assistant Commissioner in which he contended that the said assessment was invalid and, in any event, the amount of Rs. 35,502, alleged to be the concealed income, could not be assessed for the assessment year 1950-51 but could only be assessed, if at all, in the assessment year 1949-50. The Appellate Assistant Commissioner upheld the petitioner's contention and directed the respondent to assess the amount of Rs. 35,502 treating it as income from undisclosed sources for the assessment year 1949-50. In pursuance of this direction, the respondent served on December 16, 1958, another notice under section 34(1) upon the petitioner, calling upon him to file the return of his income for the assessment year 1949-50. The notice was issued with the permission of the Commissioner of Income-tax. In the correspondence that took place between the petitioner and the respondent, the petitioner contended that the proposed assessment was time-barred and, therefore, no action could be taken against him in respect of the assessment year 1949-50. It is the validity of the notice dated December 16, 1958, that has been challenged in this petition.
3. The notice has been assailed on two grounds, (1) that no notice under section 34(1) (a) could be issued after the expiry of eight years after the assessment year where the escaped income was or was likely to be rupees one lakh or more and was not saved by any provision in the Act, and (2) that such a notice required the previous sanction of the Central Board of Revenue and not of the Commissioner of Income-tax. The contention was that since the escaped income admittedly was not nor was it likely to be a lakh of rupees or more, the notice was bad on both the grounds, namely, that it was issued after the lapses of eight years after the assessment year and also because the sanction obtained was that of the Commissioner of Income-tax instead of the Central Board of Revenue.
4. We will first dispose of the second ground as it can be done briefly. For that ground, the petitioner relied upon the decision of the Bombay High Court in Hiralal Amritlal Shah v. K. C. Thomas, where the High Court had held a similar notice to be bad on the ground that the sanction of the Central Board of Revenue had not been obtained as required by the first proviso to section 34(1). But on appeal to the Supreme Court at the instance of the department, that decision has since been reversed and as laid down by the Supreme Court in Thomas v. Vasant Hiralal Shah, the sanction of the Central Board of Revenue is necessary only where the notice in question is issued under clause (ii) of the first proviso to section 34(1). Such a notice can be issued only when the escaped income amounts to one lakh of rupees and over. But if a notice is issued by virtue of some other provision, such as the second proviso to section 34(3), it would amount to a notice 'in any other case' within the meaning of clause (iii) of the first proviso to section 34(1), and in such a case the sanction which is required is only that of the Commissioner of Income-tax. In view of this decision, the second ground urged in the petition cannot survive. Mr. Kaji in fact conceded that there is no longer any force in that contention. Therefore, the only ground that remains for consideration is the first ground, namely, whether the notice was valid though it was issued after the lapse of eight years after the assessment year in view of the fact that the escaped income admittedly was less than rupees one lakh.
5. The assessment year in respect of which the amount of Rs. 35,502, being income from undisclosed sources, was said to have escaped assessment is the year 1949-50 and the notice having been issued on December 15, 1958, was obviously after the expiry of eight years after the assessment year 1949-50. As section 34 stood at the material time, clause (a) of sub-section (1) thereof, which admittedly applied, provided that if the Income-tax Officer had reason to believe that by reson of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, etc., he may in cases falling under clause (a) at any time serve on the assessee 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 reassess such income, profits or gains, etc., and the provisions of this Act shall, as far as may be, apply accordingly as if the notice were a notice issued under that sub-section. There was, therefore, no time limit provided for the initiation of proceedings under sub-section (1) of section 34 or for the issuance of a notice in such a case as the present one. Though the period of eight years, as previously provided for, was done away with as from April 1, 1956, as a result of Finance Act of 1956, the first proviso which was substituted for the original proviso by that very Act laid down three conditions, namely, that no notice under section 34(1) (a) could be issued, (1) for any year prior to the year ending on March 31, 1941, (2) for any year after eight years had elapsed after the expiry of that year unless the income profits or gains which had escaped assessment, etc., amounted to or were likely to amount to one lakh of rupees or more, either for that year or for that year and any other year or years after which or after each of which eight years had elapsed, not being a year or years ending before March 31, 1941, and (3) for any year, unless the Income-tax Officer 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, was satisfied on such reasons recorded that it was a fit case for the issue of such notice. The amount of income alleged to have escaped assessment being less than rupees one lakh, under condition (2) of this proviso no notice could be issued under clause (a) of sub-section (1) of section 34 by reason of eight years having elapsed since the assessment year, in this case, the year 1949-50.
6. Since, however, the impugned notice was issued in consequence of a direction contained as aforesaid in the order passed by the Appellate Assistant Commissioner, the second proviso to sub-section (3) of section 34 would have to be considered. That proviso lays down :
'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 direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A.'
7. The question then is whether the direction given in the aforesaid order by the Appellate Assistant Commissioner is a direction as envisaged by this proviso, and whether it is a direction which saves the impugned notice. Such a question, on facts similar to the facts in the present case, arose before the Supreme Court in Income-tax Officer, Sitapur v. Murlidhar Bhagwan Das. In that case, the respondent-firm was assessed to income-tax under section 23(4) for the assessment year 1949-50 on the ground that the notice issued under sub-sections (2) and (4) of section 22 had not been complied with. On September 27, 1955, that assessment however was cancelled under section 27. Before that cancellation, it was found that an interest income of Rs. 88,737 in the shape of the U. P. Encumbered Estates Act Bonds received by the respondent in discharge of debts due from third parties had escaped assessment as a result of the assessee not having disclosed that amount. The Income-tax Officer issued a notice therefore under section 34(1) for the assessment year 1949-50 on the ground that the amount of Rs. 88,737 had escaped assessment in that assessment year. After the assessment of that year was set aside under section 27, the Income-tax Officer, ignoring the notice issued by him under section 34(1) (a), included that amount in the fresh assessment made by him. In an appeal filed by the assessee, the Appellate Assistant Commissioner held that the bonds were received by the assessee in the previous accounting year and, therefore, directed that the sum representing interest on the bonds should be deleted from the assessment for the year 1949-50 and included in the assessment for the year ending 1948-49. Pursuant to this direction, the Income-tax Officer initiated proceedings under section 34(1) in respect of the assessment year 1948-49. The notice issued under the section was served on the respondent on December 5, 1957. The assessee thereupon filed a petition under article 226 of the Constitution in the High Court of Allahabad for quashing the said notice on the ground that the proceeding under section 34 were initiated beyond the time prescribed by that section. Accepting that contention, the High Court quashed the proceedings initiated by the Income-tax Officer and it was against that order that an appeal was filed by the department in the Supreme Court. The question before the Supreme Court was as regards the true meaning of the second proviso to sub-section (3) of section 34. The department contended that the comprehensive phraseology used in the proviso took in its broad sweep any finding given by the appropriate authority necessary for the disposal of the appeal or revision, as the case may be, and to any direction given by such authority to effectuate its finding and that such a finding or direction may be in respect of any year or any person. On the other hand, it was contended by the respondent that the scope of the proviso was confined to the assessment year which was the subject-matter of the appeal or revision. After examining the legislative history of section 34 culminating in the enactment of this proviso, the Supreme Court negatived the contention urged by the department and held that under the Income-tax Act, a year was the unit of assessment and that the decision of an Income-tax Officer given in a particular year did not operate as re judicata in the matter of assessment of the subsequent years. The Supreme Court further held that the jurisdiction of the tribunals in the hierarchy created by the Act was not higher than that of the Income-tax Officer and that it was also confined to the year of assessment. The Supreme Court also held that the jurisdiction of the Appellate Assistant Commissioner under section 31 was strictly confined to the assessment order of a particular year under appeal, that the assessment or reassessment made in consequence of or to give effect to any finding or direction contained in an order under section 31 must necessarily relate to the assessment of the year under appeal and that the second proviso to section 34(3) only lifted the ban of limitation and did not enlarge the jurisdiction of the tribunals under the relevant section. The Supreme Court also held that the expression 'finding' and 'direction' in the second proviso to section 34(3) meant respectively a finding necessary for giving relief in respect of the assessment for the year in question and a direction which the appellate or revisional authority, as the case may be, was empowered to give under the section mentioned in that proviso. A finding, therefore, could only be that which was necessary for the disposal of an appeal in respect of the assessment of a particular year. The Supreme Court observed that the Appellate Assistant Commissioner might hold on the evidence that the income shown by the assessee was not the income of the relevant year and thereby exclude that income from the assessment of the year under appeal. The finding in that context was that the income did not belong to the relevant year. He might incidentally find that the income belonged to another year but that was not a finding necessary for the disposal of the appeal in respect of the year of assessment in question. It was further held that therefore the second proviso to section 34(3) did not save the time-limit prescribed under section 34(1) in respect of escaped assessment of a year other than that which was the subject-matter of the appeal and, accordingly, the notice issued under section 34(1) (a) in that case was barred by limitation and was not saved by the second proviso to section 34(3). In view of the clear construction placed upon this proviso by this decision, the impugned notice in the present case would be bad and without jurisdiction and would not be saved under the second proviso to sub-section (3).
8. It was, however, urged that the legislature has added since then sub-section (4) in section 34 by section 2 of the Income-tax (Amendment) Act (1 of 1959), and by section 4 of that Act has also enacted a provision saving notice of assessment where the period of eight years has expired. Sub-section (4) of section 34 inserted by Act 1 of 1959 provides that :
'A notice under clause (a) of sub-section (1) may be issued at any time not withstanding that at the time of the issue of the notice the period of eight years specified in that sub-section before its amendment by clause (a) of section 18 of Finance Act, 1956, had expired in respect of the year to which the notice relates.'
9. Section 4 of Act 1 of 1959, inter alia, provides that no notice issued under clause (a) of sub-section (1) of section 34 at any time before the commencement Act 1 of 1959 shall be called in question in any court, tribunal or other authority, merely on the ground that at the time the notice was issued, the time within which such notice should have been issued under that section as in force before its amendment by clause (a) of section 18 of the Finance Act, 1956 (XVIII of 1956), had expired. But it will be notice that in sub-section (4), the crucial words are 'that at the time of the issue of the notice the period of eight years specified in that sub-section (i.e., sub-section (1)) before its amendment by clause (a) of section 18 of the Finance Act, 1956, had expired in respect of the year to which the notice relates.' It is clear that sub-section (4) relates to cases to which sub-section (1) of section 34, as it stood prior to April 1, 1956, applied and to which there was a time-limit of eight years, and not to cases to which that sub-section as amended by the 1956 Act, whereby that time limit was removed, applied. Corresponding words are also to be found in section 4 of Act 1 of 1959. That section also provides that no notice issued under section 34(1) (a) shall be questioned merely on the ground that at the time it was issued, the time within which it should have been issued had expired 'under that section as in force before its amendment by clause (a) of section 18 of the Finance Act, 1956 (XVIII of 1956).' Reading these two provisions together makes it fairly clear that the intention of the legislature in enacting these two provisions was to save notices issued after the lapse of eight years after the assessment year, which period applied under section 34(1) which was in force before April 1, 1956. That being position, neither of these two provisions would apply to the present case where the assessment year being the year 1949-50, the eight-year period lapsed in 1957-58, i.e., after the enactment of Act XVIII of 1956 under which there was no time-limit whatsoever in respect of notices issued under section 34(1) (a). In Prashar v. Vasantsen Dwarkadas the Supreme Court had occasion the construe both these provision and there the notice in question was held to have been validated by reason of section 4 of Act 1 of 1959. The assessment year there was 1942-43 and the notice was issued on April 30, 1954. At page 42 of the report, analysing these two provisions, Sarkar J. observed that sub-section (4) of section 34 could not apply to the notice in that case as that sub-section by its own terms dealt only with notice issued after the 1959 Act came into force and therefore that sub-section could not apply to the notice before them, as it was issued before that date. Dealing with section 4 of the 1959 Act, he observed that section prevented a notice issued under section 34(1) (a) being held to be invalid on the ground that it was issued after the time within which it should have been issued under that section as it stood before it was amended by the Finance Act of 1956. In other words, section 4 validated a notice issued under section 34(1) (a) even though it was invalid for the reason that it was issued after the expiry of eight years prescribed for it under the 1948 Act, that being the section as it stood before the 1956 amendment. He further observed that the first requirement of the applicability of section 4 was that there must be a notice issued under section 34(1) (a) of the principal Act. The provision that the court had to consider for the applicability of section 4 was section 34(1) (a) as it stood as a result of the 1948 amendment, for that was the section in force on the date the notice was issued. It is thus clear that what section 4 of the 1959 Act did was to validate a notice issued under section 34(1) (a) even though it was invalid by reason of its having been issued after the expiry of eight years prescribed for it under the 1948 amendment which was the section as it stood prior to the 1956 amendment. A similar construction has also been given to these two provisions by a Division Bench of the High Court at Bombay in Omkarmal Meghraj v. Commissioner of Income-tax. At pages 388 and 389 of the report, dealing first with section 2 of Act 1 of 1959 which introduced sub-section (4) in section 34, the learned judges observed that the meaning of that section was fairly plain. A notice for assessment or reassessment under section 34(1) (a) after the amendment Act 1 of 1959 might be issued at any time even though the period of eight years prescribed by that sub-section before it was amended by the Finance Act of 1956 had expired. Similarly, by section 4 of Act 1 of 1959, notices issued before Act 1 of 1959 and assessment or reassessment, etc., consequent upon such notice were saved from the bar of limitation prescribed by section 34 before it was amended by the Finance Act of 1956. They observed that the section in terms saved notices under clause (a) of sub-section (1) issued at any time before the commencement of the Act notwithstanding that at the time of the issue of the notice the period prescribed by section 34(1), before it was amended by the Finance Act of 1956, had expired, and there was nothing in section 4 or section 2 of Act 1 of 1959 which would support the contention that the words 'at any time' used in section 4 were used in a restricted sense as meaning 'at any time after the 1st of April, 1956', nor was there any warrant for holding that the reference to clause (a) of sub-section (1) of section 34 in the opening part of section 4 was only to the clause as amended by the Finance Act of 1956. Holding that such a notice could be given at any time, i.e., before or after April 1, 1956, they negatived the contention urged before them that the notice was saved where it was issued after April 1, 1959. On the construction of these two provisions, the learned judges, however, clearly held that the notice which was protected by section 4 of the 1959 Act was the notice which when issued was under section 34 as it was in force before it was amended by the 1956 Act, and that there was the clearest indication in the framework of section 4 itself which supported the conclusion that the notice of assessment or reassessment to which the bar of limitation prescribed by the unamended section 34 could not be set up would be notices issued before the 1st of April, 1956. Sub-section (4) of section 34 cannot also apply because it is prospective, i.e., it applies to notices which were issued after that sub-section came into force. It cannot therefore apply in the present case as the notice was issued on December 16, 1958. Section 4 of the 1959 Act also cannot apply for the reasons given by Sarkar J. in Prashar v. Vasantsen Dwarkadas and also in Omkarmal Meghraj v. Commissioner of Income-tax, because section 34(1) which was in force when the notice was issued was the one amended by the 1959 Act and therefore the notice does not fall within the scope of section 4 of the 1959 Act.
10. For these reasons, the contention urged by Mr. Kaji as regards the invalidity of the notice must be upheld. The petition, therefore, is allowed, the notice is quashed and the rule is made absolute in terms of prayer (b). The respondent will pay to the petitioner the costs of this petition.
11. Petition allowed.