Skip to content


Prabhudas Jagjivandas and ors. Vs. Income-tax Officer, Ward-b, Surendranagar and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application No. 506 of 1961
Judge
Reported in[1965]55ITR1a(Guj)
ActsIncome Tax Act, 1922 - Sections 34 and 34(1)
AppellantPrabhudas Jagjivandas and ors.
Respondentincome-tax Officer, Ward-b, Surendranagar and anr.
Appellant Advocate B.S. Trivedi, Adv.
Respondent Advocate J.M. Thakore, Adv. General
Cases ReferredKanailal Gatani v. Commissioner of Income
Excerpt:
direct taxation - reassessment - section 34 of income tax act, 1922 - reassessment order under section 34 (1) (a) and penalty orders under sections 28 and 46 (1) for two assessment years challenged - no valid notice issued by income tax officer (ito) under section 34 (1) (a) - non-fulfilment of condition precedent to exercise of jurisdiction for reopening assessment of firm renders reassessment proceedings illegal - subsequently penalty order for same assessment year based on illegal reassessment proceedings illegal - penalty order for subsequent assessment year passed for non-compliance of notice under section 22 (2) - plea that same ito who issued notice shall pass penalty order - successor of ito who issued notice entitled to apply his mind to material on record and make penalty order.....bhagwati, j.1. this petition filed by some of the partners of the firm of messrs. dhrangadhra salt trading company challenges an order of reassessment made against the firm under section 34(1) (a) of the income-tax act, 1922, for the assessment year 1950-51 and certain orders of penalty imposed on the firm under sections 28 and 46(1) of the act in respect of the assessment years 1950-51 and certain orders of penalty imposed on the firm under sections 28 and 46(1) of the act in respect of the assessment years 1950-51 and 1952-53. the firm was originally constituted under a deed of partnership dated 29th april, 1947. three firms, namely, messrs. ramvallabh gopikishan, messrs. vasantlal manoharlal and messrs jagjivandas hirachand and one individual, namely, kesrimal bhunch, were shown as.....
Judgment:

Bhagwati, J.

1. This petition filed by some of the partners of the firm of Messrs. Dhrangadhra Salt Trading Company challenges an order of reassessment made against the firm under section 34(1) (a) of the Income-tax Act, 1922, for the assessment year 1950-51 and certain orders of penalty imposed on the firm under sections 28 and 46(1) of the Act in respect of the assessment years 1950-51 and certain orders of penalty imposed on the firm under sections 28 and 46(1) of the Act in respect of the assessment years 1950-51 and 1952-53. The firm was originally constituted under a deed of partnership dated 29th April, 1947. Three firms, namely, Messrs. Ramvallabh Gopikishan, Messrs. Vasantlal Manoharlal and Messrs Jagjivandas Hirachand and one individual, namely, Kesrimal Bhunch, were shown as partners of the firm in the deed of partnership dated 29th April, 1947. The petitioners were partners of Messrs. Jagjivandas Hirachand. The firm carried on business in salt at Dhrangadhra situate in the former State of Saurashtra. The Indian Income-tax Act was made applicable to the State of Saurashtra from 1st April, 1950, and assessment of the firm for the assessment year 1950-51 was made under the Act. The accounting year of the firm for the assessment year 1950-51 was taken as the calendar year 1949. The Income-tax Officer by an order of assessment dated 22nd April, 1951, determined the total income of the firm at Rs. 75,964 and assessed the firm on such total income as an unregistered firm. It appears that the firm had shown its entire income as arising in Part B state and the Income-tax Officer, therefore, granted rebate to the firm in respect of the entire income under the part B states (Taxation Concessions) Order, 1960. The Income-tax Officer determined the tax payable by the firm at an aggregate sum of Rs. 9,133-2-0 which was paid by the firm on 24th May, 1951. This assessment was subsequently reopened by the Income-tax Officer and it is the order of reassessment made by the Income-tax Officer as a result of reopening this assessment that has given rise to the main controversy between the parties. We will presently refer to the fact relating to the reopening of this assessment of the firm for the subsequent assessment years, for that would be conductive to a clear understanding of the factual position.

2. The firm was assessed to tax for the assessment year 1951-52, the accounting year this time being the Samvat year, namely, Samvat year 2006, and the total income of the firm was computed at Rs. 4,253. Tax was assessed on the firm on this income on the basis that the entire income had arisen to the firm in part B State. There is no dispute before us in regard to this assessment. Now what happened was that with effect from Kartak Sud 1, Samvat year 2007, i.e., 10th November, 1950, and in this deed of partnership fourteen persons were shown as partners, of whom the petitioners were eight. Though the new deed of partnership recited that there was a change in the partners of the firm as constituted under the deed of partnership dated 29th April, 1947, and it had, therefore, become necessary to execute a new deed of partnership, there was in fact no new firm constituted under the new deed of partnership. The same firm continued with only this difference that whereas formerly three firms were shown as partners along with Kesrimal Bhunch, now under the new deed of partnership the partners of these firms were themselves shown as partners in their individual capacity. The aggregate share of the partners of each of the three firms also remained the same. There was thus no difference in the constitution of the firm. The assessment on the firm for the assessment year 1952-53, for which the corresponding previous year was Samvat year 2007, was made by the Income-tax Officer on 3rd November, 1953. The firm had applied for registration under section 26A but the registration was refused and the firm was assessed as an unregistered firm. The Income-tax Officer disallowed certain interest paid by the firm to Messrs. Ramvallabh Gopikishan, Messrs. Vasantlal Manoharlal and Messrs. Jagjivandas Hirachand and determined the total income of the firm at Rs. 70,864. The Income-tax Officer apportioned the total income of the firm between part A State and part B State and held that 85 per cent. of the total income must be regarded as having arisen in part B state. The Income-tax Officer accordingly gave rebate to the firm only in respect of 15 per cent. of the total income. It may be pointed out that for this assessment year a return was filed by the firm, though long after the period allowed by the notice under section 22(2) which was served on the firm by the Income-tax Officer, but the firm did not appear in response to the notice under section 22(4) and the assessment made by the Income-tax Officer was, therefore, a best judgment assessment under section 23(4).

3. The firm being aggrieved by the order of assessment preferred an appeal before the Appellate Assistant Commissioner. The notive of hearing of the appeal was served on one of the partners of the firm, namely, Gopikrishnan Tolat some time in July, 1958. In the meantime, however, the business of the firm was closed and the firm was dissolved in or about the end of Samvat year 2011 or the beginning of Samvat year 2012 which would be somewhere around November or December, 1955. Gopikrishan Tolat, therefore, sent a telegram to the Appellate Assistant Commissioner on or about 11th July, 1958, asking for an adjournment on the ground that the firm had been dissolved and that the books of the firm were with the other partners. The appellate Assistant Commissioner, however, declined to adjourn the hearing of the appeal and passed an ex parte order on 28th July, 1958. The Appellate Assistant Commissioner took the view that the registration of the firm was wrongly refused by the Income-tax Officer and he accordingly granted registration to the firm. He also set aside the disallowance of interest paid by the firm to Messrs. Ramvallabh Gopikishan, Messrs. Vasantlal Manoharlal and Messrs. Jagjivandas Hirachand and thus reduced the total income of the firm However, so far as the apportionment of the total income of the firm was concerned, he agreed with the Income-tax Officer and held that the total income should be apportioned between part A State and part B state on the basis of 85 per cent. to 15 per cent. As a result of this order of the Appellate Assistant Commissioner, the firm became entitled to a refund of Rs. 11,810.34 nP.

4. Since the firm had not compiled with the notice under section 22(2) issued by the Income-tax Officer in regard to this assessment year, namely, 1952-53, the Income-tax Officer issued a notice to the firm under section 28(3) calling upon the firm to show cause why penalty should not be imposed on the firm for non-compliance with the notice under section 22(2). The notice was served on the firm on 26th October, 1953. The firm submitted a written statement in reply to the notice and pointed out the reasons why penalty should not be imposed on the firm. The explanation offered by the firm was, however, not accepted and the Income-tax Officer made an order dated 15th October, 1956, imposing a penalty of Rs. 3,000 on the firm for noncompliance with the notice under section 22(2). The Income-tax Officer who made this order of penalty was not the same Income-tax Officer who issued the notice under section 28(3) and before whom the written statement of the firm in reply to the notice was submitted but was his successor-in-office.

5. The assessment of the firm for the assessment year 1953-54, the previous accounting year being Samvat year 2008, was made on 8th October, 1954. Since there is no dispute before us in regard to this assessment, we need not say anything more about it. But what happened thereafter marked the commencement of the real controversy leading up to the filing of the present petition. On 10th February, 1959, the Income-tax Officer issued a notice under section 34(1) (a) of the Act in respect of the assessment year 1950-51. Since considerable argument turned on the true nature and effect of the notice, it would be desirable to reproduce the notice in extenso. The notice was in the following terms :

'To,

Shri Kesrimal Bhunch,

Partner of M/s. Dhrangandhra Salt Trading Co.,

Dhrangadhra 48, Yashwant Gunj, Indore-City.

I have reason to believe that your income assessable to income-tax for the year ending 31st of March, 1951, has :

(a).....

(b)......

(c) been assessed at too low a rate,

(d).....

(e).....

I therefore propose to reassess the said income that has -

(a)....

(b)....

(c) been assessed at too low a rate,

(d).....

(e).....

I should request you to deliver to me not later than 25-3-1959 or within 35 days of the receipt of this notice, a return in the attached form of your total income and total world income assessable for the said year ending 31st of March, 19...

This notice is being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Bombay North, Ahmedabad.'

6. The notice was sent by registered post to Kesrimal Bhunch and was received by him. The other partners of the firm were, however, not served and it is the case of the petitioners that they did not come to know about the notice until some time in December, 1960. Though the notice required Kesrimal Bhunch to file a return was in fact filed by him. The result was that a notice under section 22(4) was issued by the Income-tax Officer on 13th August, 1959. The notice was addressed to 'M/s. Dhrangadhra Salt Trading Co., Partner Kesrimal Bhunch Indore,' and after reciting that in connection with the assessment for the assessment year 1950-51 a notice dated 10th February, 1959, had been served on Messrs. Dhrangadhra Salt Trading Company on 16th February, 1959, under section 22(2), the notice required Messrs. Dhrangadhra Salt Trading Company to produce the accounts and/or documents specified on the reverse of the notice. This notice was also sent by registered post and was received by Kesrimal Bhunch. Kesrimal Bhunch, however, did not appear in response to the notice or produce the accounts and documents specified in the notice. The Income-tax Officer, therefore, by an order of reassessment dated 10th September, 1959, made a best judgment assessment on the firm under section 23(4) read with section 34(1) (a). The firm was reassessed as an unregistered firm. The total income of the firm computed under the original order of assessment was not disturbed but the apportionment was changed. The Income-tax Officer, instead of treating the entire income as having arisen in Part B State, regarded income of only Rs. 18,991 as having arisen in Part B state and the balance of the income of Rs. 56,973 as having arisen in Part A State. The result was that rebate which was granted to the firm under the original order of assessment on the entire income was withdrawn to the extent of the income of Rs. 56,973 and income to the extent of Rs. 56,973 was assessed to tax at the ordinary rates. The net effect of this reassessment was that after giving credit to the firm for the taxes already paid, a sum of Rs. 16,025.15 nP. remained to be paid by the firm as and by way of tax in respect of the assessment year 1950-51. The order of reassessment as also the notice of demand calling upon the firm to pay the balance of Rs. 16,025.15 nP. were, like the aforesaid two notices served only on Kesrimal Bhunch. None of the petitioners was served with the order of reassessment or the notice of demand not did any of the petitioners come to know about them until some time in December, 1960.

7. The Income-tax Officer also issued a notice dated 10th September, 1959, under section 28(3) to Shri Kesrimal Bhunch, partners of M/s. Dhrangadhra Salt Trading Company (U. R. F.) Dhrangadhra, 48 Yaswant Gunj, 'Indore City'. By this notice the Income-tax Officer called upon Kesrimal Bhunch to show cause why an order imposing penalty should not be made against him under section 28(1) for non-compliance with the notices issued under section 34 and 22(4). The notice was served on Kesrimal Bhunch on 13th December, 1959, but Kesrimal Bhunch did not appear in pursuance of the notice or offer any explanation. The Income-tax Officer, therefore, passed an ex parte order on 19th December, 1960, imposing a penalty of Rs. 16,000 on the firm under section 28(1) (a) for non-compliance with the notice under section 22(2) read with section 34 and section 22(4). According to the petitioners it was only when the notices of demand in regard to this penalty and another penalty of Rs. 400 levied in respect of the assessment year 1956-57 were servered on the first petitioner towards the end of December, 1960, that the petitioners on taking inspection of the files in the income-tax office came to know of the aforesaid proceedings under section 34 and section 28. The petitioners thereupon moved the Inspecting Assistant Commissioner and the Commissioner of Income-tax for stay of recovery of penalties but only a partial stay was granted on condition that the petitioners paid up certain amounts. The petitioners did not pay any amount in respect of the penalties and two further orders of penalty were, therefore, passed by the Income-tax Officer under section 46(1) for non-payment of the amount directed to be paid out of the penalty of Rs. 16,000. The petitioners thereupon filed the present petition challenging the legality of the order of reassessment passed by the Income-tax Ofifcer under section 34(1) (a) in respect of the assessment year 1950-51, and the various orders of penalty imposed by the Income-tax Officer on the firm from time to time. Amongst the orders of penalty challenged in the petition was also the order of penalty in the sum of Rs. 400 in respect of the assessment year 1956-57, but it appears that subsequent to the filing of the petition that order has been set aside in appeal and no dispute, therefore, survives in the petition in regard to that order.

8. Turning first to the assessment year 1950-51 there are four orders in respect of that assessment year which are challenged in this petition. The first is the order of reassessment made by the Income-tax Officer under section 34(1) (a). The other three are orders of penalty, of which one is an order imposing penalty of Rs. 16,000 under section 28 and the other two are orders imposing penalty of Rs. 16,000 under section 28 and the other two are orders imposing penalty of Rs. 500 each under section 46(1). Now it is obvious that apart altogether from any other defects which may or may not be attaching to the orders of penalty, the orders of penalty being consequent upon the reassessment of the firm, if the reassessment proceedings are without jurisdiction, the orders of penalty must fall along with the order of reassessment. The main argument advanced before us in respect of the assessment year 1950-51 was, therefore, directed against the validity of the orders of reassessment was attacked on behalf of the petitioners but it is not necessary to refer to all of them since there is one ground on which we think the challenge to the legality of the order of reassessment must succeed. That ground is that the proceedings taken by the Income-tax Officer under section 34(1) (a) were invalid because the notice required to be issued under that sub-section was not issued against the firm of Messrs. Dhrangadhra Salt Trading Company. The Income-tax Officer obviously purported to act under section 34(1) (a) in making the order of reassessment. Section 34(1) (a) in making the order of reassessment Section 34(1) (a) provides, inter alia, that 'If the Income-tax Officer has reason to believe that by reason 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, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act... he may... 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.. and the revisions of this act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section.' The argument of Mr. Trivedi, learned advocate, appearing on behalf of the petitioners was that the service of the requisite notice on the assessee is a condition precedent to the validity of the reassessment under section 34(1) (a) and if a notice is not issued as required by sub-section proceedings for reassessment taken by the Income-tax Officer and the order of reassessment made as a result of such proceedings would be void and inoperative. This contention is, in our opinion, well-founded. It is now well-settled as a result of several decisions of the Supreme Court, of which we may mention only one, namely, that in Narayana Chetty v. Income-tax Officer, Nellore, that the notice prescribed by section 34(1). Whether under clause (a) or clause (b) is not a mere procedural requirement : it constitutes the foundation of the jurisdiction of the Income-tax Officer to take proceedings for reassessment of the income of an assessee and, unless it is served on the assessee as required by the sub-section, the Income-tax Officer has no jurisdiction to take proceedings against the assessee. If no notice is issued, the proceeding by the Income-tax Officer would be illegal and void and so would be the consequent order of reassment. Mr. Trivedi contended that in the present case no notice was issued as required by section 34(1) (a) and the proceedings taken by the Income-tax Officer for reassessing the income of the firm were, therefore, invalid and the order of reassessment was illegal and void. The learned Advocate-General appearing on behalf of the revenue combated this contention by pointing out that a notice was issued for adopting proceedings against the firm under section 34(1) (a) and the notice he relied on was the notice dated 10th February, 1959, to which we have already referred. The question which, therefore, arises for consideration is whether this was a valid notice within the meaning of section 34(1) (a).

9. Section 34(1) (a) requires that the notice must be issued to the assessee; but who is the assessee contemplated by that sub-section to whom the notice is required to be issued The language of section 34(1) (a) affords a clear answer to this inquiry. When the Income-tax Officer has reason to believe that income, profits or gains of an assessee chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief by reason of the omission or failure on the part of the assessee to make a return of his income or to disclose fully and truly all material facts necessary for his assessment, he may assess or reassessee such income, profits or gains after giving notice to the assessee. The assessee to whom the notice is required giving notice to the assessee whose income, profits or gains have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief in the year of assessment and the notice is for assessment or reassessment of such income, profits or gains. When a firm is assessed as an unregistered firm in the original assessment proceedings, the notice under section 34(1) (a) must, therefore, be issued against the firm. In such a case when a notice is issued under section 34(1)(a), the Income-tax Officer, proceeds to act on the ground that income, profits or gains of the firm which are chargeable to income-tax have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief. The income, profits and gains of the firm having been initially ascertained and taxed in the original assessment proceedings, it is in respect of those income, profits and gains that the Income-tax Officer finds that a part of them has escaped assessment or has been under-assessed or assessed at too low rate or has been made the subject of excessive relief and he, therefore, proceeds to issue a notice under section 34(1) (a). The firm being the assessee in the original assessment proceedings would be an assessee for the purpose of section 34(1) (a) and the notice under section 34(1) (a) must, therefore, be issued against the firm. The notice must indicate clearly and sufficiently that it is issued because the income, profits and gains of the firm have escaped assessment or have been under-assessed or assessed at too low a rate or have been made the subject of excessive relief and such income, profits and gains of the firm are sought to be assessed or reassessed. Notice against individual partner or partners of the firm cannot form a foundation for initiating proceedings for reassessment of the income, profits and gains of the firm.

10. The view which we take is supported by decision of a single judge of the Calcutta High Court in Manindra Lal Goswami v. Income-tax Officer. We shall have occasion to refer to this case in some detail a little later, but we may point out that the decision of the single judge in this case was affirmed by a Division Bench of the Same High Court in appeal and the report of the decision in appeal is to be found in Bose v. Manindra Lal Goswasmi. The Division Bench held in this case that the notice under section 34(1) which was issued against a partner of the firm could not form the basis of a valid assessment of the firm or the firm's income. The same view was also taken my Lord the Chief Justice sitting as a judge on the original side of the Bombay High Court in Ramnivas Hanumanbux Somani v. Venkataraman. Analysing the provisions of section 34(1) (a) he said that in the case of a firm whose income is sought to be reassessed under section 34(1) (a), the notice must be issued against the firm owing to whose failure or omission income for the year of assessment has escaped assessment. This decision was taken in appeal and was subsequently affirmed by a Division Bench of the Bombay High Court in Ramnivas Hanumanbux Somani v. Venkataraman. Apart from these decisions which support us in the view we have taken regards the requirements of the notice under section 34(1) (a), the decision of the Supreme Court in Narayana Chetty v. Income-tax Officer, Nellore, also contains observations which fortify us in that view. In that case the firm which was sought to be reassessed under section 34(1) (a) was a registered firm and the argument which was, therefore, advanced on behalf of the assessee was that the notice could be therefore, advanced on behalf of the assessee was that the notice could be issued only against the partners of the firm and not against the firm and, since the notice impugned there was issued against the firm, it was not a valid notice. This argument was rejected by the Supreme Court which held that it was the firm which was the assessee and that the notice issued against the firm under section 34(1) (a) was, therefore, a valid notice. Gajendragadkar J., he then was, said :

'Even when the notice is issued under section 34(1) (a) the Income-tax Officer proceeds to act on the ground that the income, profits and gains of the firm which are chargeable to income-tax have been under-assessed; it is the income of the firm which is initially ascertained in the assessment proceedings under section 23 and it is in respect of the said income of the firm that the Income-tax Officer finds that a part of it has escaped assessment. We do not, therefore, think that the appellant's argument that the notice issued against the firm and served on the appellant was invalid under section 34(1) (a) can be accepted.'

11. The case before the Supreme Court was a case of a registered firm and if in the case of a registered firm the supreme Court said that the notice must be against the firm, there would be all the more season why it should be so in the case of an unregistered firm in whose hands the income is not only computed but also taxed. We are, therefore, of the view that if the Income-tax Officer proposes to reopen the assessment of an unregistered firm on the ground that by reason of the omission or failure of the firm to make a return or to disclose fully and truly all material facts necessary for its assessment, the income of firm has escaped assessment or has been assessed at too low a rate, the Income-tax Officer must issue a notice against the firm for reassessment of the income of the firm and unless such a notice is issued by him, he cannot proceed to reassesses the firm.

12. Before we examine the nature and effect of the notice which has been given in the present case, we may point out that at the date when the notice was issued, the firm was dissolved but that would make no difference since by reason of section 44, as it stood at the material time, even if a firm was dissolved, the Income-tax Officer could make an assessment of the total income of the firm as if no such dissolution had taken place. Section 44 by a legal fiction treated the firm as if it were an existing firm and provided for assessment of its total income in the same manner in which an assessment would take place of an existing firm. The dissolution of the firm, prior to the issue of the notice, could not, therefore, stand in the way of the Income-tax Officer proceeding to reassess the income of the firm, if he was otherwise entitled to do so.

13. Turning now to the notice which has been issued in the present case the learned Advocate-General, as we have pointed out above, contended that the notice 10th February, 1959, was a valid notice issued under section 34(1) (a) and that the proceeding for reassessment initiated by that notice were valid proceedings terminating in a valid order of reassessment. This contention can succeed only if the notice relied on by the learned Advocate-General can be said to be a notice issued against the firm. The notice must be a notice for reassessing the income of the firm on the ground that such income was assessed at too low a rate by reason of the omission or failure of the firm specified in section 34(1) (a). Is this test satisfied by the notice dated 10th February, 1959 We think not. The notice is addressed to Shri Kesrimal Bhunch, partner of Messrs. Dhrangadhra Salt Trading Company at 48 Yaswant Gunj, Indore City. Prima facie, therefore, the notice is issued against Kesrimal Bhunch and not against the firm. We would not, however, place undue emphasis on the description of the party to whom the notice is addressed, for in construing a notice of this kind regard must be had to the notice as a whole and no one part of the notice should be allowed to overweigh the other part. It is quite possible that even though a notice may be addressed to a partner, the body of the notice may show that it is an effect and substance a notice against the firm for reassessment of the income of the firm. We must, therefore, turn to examine the body of the notice and see what intent it reveals. The first paragraph of the notice recites the plea of the Income-tax Officer that 'your income', i.e., the income of Kesrimal Bhunch to whom the notice is addressed, has been assessed at too low a rate. The second paragraph then proceeds to state that the Income-tax Officer proposes to reassess 'the said income' meaning thereby the income of Kesrimal Bhunch which has been assessed at low a rate. The third paragraph contains a requisition such as is to be found in a notice under section 22(2). The requisition is in the following terms : 'I should request you to deliver to me... a return in the attached form of your total income and total world income...' Having regard to the fact that the notice is addressed to Kesrimal Bhunch, this requisition can only mean that Kesrimal Bhunch is required to deliver to the Income-tax Officer a return of his total world income and total world income. The notice is, therefore, clearly a notice against Kesrimal Bhunch pointing our that according to the Income-tax Officer the income of Kesrimal Bhunch has been assessed at too low a rate and that the Income-tax Officer, therefore, Proposes to reassess such income and Kesrimal Bhunch should, consequently, file a return of his total income and total world income. It is difficult to see how the notice can be construed as a notice against the firm for reassessment of the income of the firm. It is undoubtedly true that Kesrimal Bhunch is described as partner of Messrs. Dhrangadhra Salt Trading Company, Dhrangadhra, but that is a description of Kesrimal Bhunch and from such description it cannot be said that the notice is a notice for reassessment of the income of the firm. The learned Advocate-General pointed out that was no statutory form prescribed for a notice under section 34(1) (a) and all that was required for a valid notice under that sub-section was that the person on whom the notice was served must know what was sought to be done by the Income-tax Officer. The notice, in the present case, argued the learned Advocate-General, was addressed to Kesrimal Bhunch as partner of Messrs. Dhrangadhra Salt Trading Company, Dhrangadhra, and was issued by the Income-tax Officer, Ward-B, Surendranagar. These two circumstances, according to the learned Advocate-General, clearly showed that what was proposed to be done by the Income-tax Officer was reassessment of the income of the firm and not of the income of Kesrimal Bhunch. The argument was that Kesrimal Bhunch was a resident of Indore and how could there be a notice for his reassessment by the Income-tax Officer, B-Ward, Surendranagar The notice therefore clearly indicated that it was a notice against the firm which was within the jurisdiction of the Income-tax Officer, B-Ward, Surendranagar. These circumstances do not in our opinion assist the argument of the learned Advocate-General. We agree with the learned Advocate-General that we must have regard to the substance of the notice. We must read the notice as a whole. But we certainly cannot speculate as to what was the intention of the Income-tax Officer in issuing the notice. The intention must be found from the language used in the notice and our task can only be to read the language of the notice and to see whether on a true construction it is a notice against the firm. There is no question of technicality here. The notice under section 34(1) (a) is, as pointed out by the Supreme Court, not a mere procedural requirement. It is of the essence and it constitutes the foundation of the jurisdiction of the Income-tax Officer to initiate proceedings for reassessment and unless on a true construction of the notice we come to the conclusion that the notice is a notice against the firm for reassessment of the income of the firm which in the opinion of the Income-tax Officer has been assessed at too low a rate, the proceedings for reassessment cannot be sustained. The notice in the present case does not on a fair reading of the language satisfy this requirement and cannot therefore be regarded as a valid notice for reopening the assessment of the firm.

14. The learned Advocate-General pointed out to us certain difficulties which may arise if we take the view that the notice must be addressed to the firm. In the case of a dissolved firm for example if a notice is required to be addressed to the firm it may not be possible to serve the notice at all. The notice cannot be served on the firm at its last place of business for the firm would no longer be there. If it is addressed to the firm at the address of one of its partners, the partner to whom it is tendered by the postal authorities may refuse to accept it on the ground that the addressee is not there at that place. The same difficulty may arise even if the notice is addressed to the firm care of one of the partners. The learned Advocate-General contended that under the circumstances the only mode which could be followed by the department was the one adopted in this case, namely, addressing the notice to the partner and not to the firm. This contention is in our opinion not well-founded and for two reasons. In the first instance, difficulties of service of the notice cannot affect the question as to what should be the nature of the notice : Whether the notice should be against the firm or against the individual partners Secondly, there is no difficulty of service at all. Even if a notice is issued against the firm it can be served on one of the partners by addressing the envelope containing the notice to such partner. Notice may even be served personally on one of the partners. But whatever be the mode adopted for effecting service on a partner, the notice must be against the firm and it must seek to reassess the income of the firm which has either escaped assessment or has been assessed at too low a rate or has been the subject of excessive relief.

15. The learned Advocate-General also put forward an argument that all that section 34(1) (a) required was that the notice must be served on the assessee and that it did not say that the notice must be against the assessee or that it must be in any particular form. Now it is undoubtedly true that there is no statutory form prescribed for a notice under section 34(1) (a) but the sub-section does say that the notice must contain all or any of the requirements which are included in a notice under section 22(2) and the latter part of the sub-section clearly shows that, once the notice is issued, the provisions of the Act shall apply as if the notice were a notice issued under section 22(2). The notice under section 22(2) is a notice issued to the assessee requiring the assessee to furnish a return setting forth his total income and total world income. The notice under section 34(1) (a) must, therefore, be a notice against the assessee and it must make it clear that the income which is sought to reassessed is the income of the assessee. Of course such a notice must be served on the assessee as required by the sub-section and in the case of a dissolved firm as in the case of an existing firm, service of the notice on one of the partners would be a valid service, but service has nothing to do with the nature and character of the notice and it is in this particular respect that the notice in the Present case is deficient.

16. A notice exactly similar to the notice in the present case was served on a partner of a firm in the Calcutta case of Manindra Lal Goswami v. Income-tax Officer. Sinha J. held the notice to be invalid on the ground that the notice was not a notice against an individual partner of the firm. This view of Sinha J. was upheld in appeal by the Division Bench in Bose v. Manindra Lal Goswami. The Division Bench observed :

'It is was intended that the notice should do duty for a notice on the firm, served on a partner, it should at least have been made clear in the body of the notice that what in the Income-tax Officer's view had escaped assessment was the income of the whole firm and not the income of an individual partner and that the return called for was a return of the total and world income of the firm and not the income of an individual partner. In my view, even assuming that after the dissolution of a firm, an assessment of the firm itself in the firm name for the income earned prior to the date of dissolution is possible in law, no such assessment was possible on the basis of a notice of the kind that was served on the respondent. The assessment must be held to have been invalid on that ground alone.'

17. This decision is on all fours with the facts of the present case and we are in respectful agreement with the conclusion reached in that case. Mr. Trivedi also referred us to a decision of the Calcutta High Court in Shivram Poddar v. Income-tax Officer, and pointed out the form of the notice in that case which in his submission would constitute a proper notice against the firm within the meaning of section 34(1) (a). The form of the notice in that case clearly indicated that what was sought to be done by the Income-tax Officer by issuing the notice was to reassess the income of the firm. But whether a notice in a particular case is a proper notice or not must depend on the facts of each case and a particular form of notice used in one case cannot possibly assist us in arriving at a conclusion as regards the validity of a notice issued in another case. One thing however does appear from the judgment in this case, namely, that prior to the issue of the impugned notice a previous notice was addressed to the petitioner for and on behalf of the firm in which it was stated that the Income-tax Officer had reason to believe that the income had been under-assessed and that he proposed to reassess such income and the petitioner was called upon to file his return and this notice was struck down by the court as not being a proper notice against the firm under section 34(1) (a). The case before us is a similar case.

18. The learned Advocate-General relied on a decision of the Madras High Court in Commissioner of Income-tax v. K. M. N. N. Swaminathan Chettiar in support of his contention that the notice must be read by us as a notice against the firm. This case in our opinion does not help the revenue. What happened in this case was that a notice under section 34(1) (a) was issued to 'K. M. N. N. Swaminathan Chettiar, Sembanur'. K. M. N. N. Swaminathan Chettiar, Sembanur, was assessed not only as an individual but also as karta of Hindu undivided family. The notice was, therefore, equally applicable to the individual as also to the Hindu undivided family. K. M. N. N. Swaminathan Chettiar understood the notice as a notice for reassessment of the income of the Hindu undivided family and he accordingly submitted a return of the income of the Hindu undivided family as the karta. He made no complaint until the matter reached the Income-tax Appellate Tribunal about any irregularity in the issue of the notice. On these facts the Madras High Court held that there was no substance in the objection that the notice was not a valid notice under section 34(1) (a). The Madras High Court also pointed out that the service of the notice on K. M. N. N. Swaminathan Chettiar was perfectly in order as he was 'the person liable to pay' the whole of the tax imposed under the supplementary assessment. Since the notice was intended to be a notice for reassessment of the income of the Hindu undivided family and was rightly addressed to K. M. N. N. Swaminathan Chettiar, he being the karta of the Hindu undivided family and being as such karta liable to pay the whole of the tax imposed under the supplementary assessment, the notice was held to be a valid notice. But in the present case the notice was not a valid against the firm since it was not addressed to the firm and in any event it did not show clearly and sufficiently that what was proposed to be done by the Income-tax Officer was to reassess the income of the firm which in the opinion of the Income-tax Officer had been assessed at too low a rate.

19. The notice not being a valid notice against the firm under section 34(1) (a), it must be concluded that there was no valid notice by the Income-tax Officer under section 34(1) (a) against the firm and the condition precedent to the exercise of jurisdiction for reopening the assessment of the firm was, therefore, not fulfilled. The proceedings for reassessment of the income of the firm were, therefore, invalid and the order of reassessment made by the Income-tax Officer must consequently be held to be illegal and void. If this be so, it must follow that the orders of penalty in respect of the assessment year 1950-51 were also illegal and void since they were founded upon the reassessment proceedings.

20. That takes us to the next question as regards the validity of the order imposing penalty of Rs. 3,000 on the firm in respect of the assessment year 1952-53. There were two grounds on which this order of penalty was challenged by Mr. Trivedi on behalf of the petitioners. There is in our opinion no substance in any of those grounds. The first ground which he urged was that the return was in fact accepted by the Income-tax Officer and the Income-tax Officer was, therefore, not entitled to impose any penalty for non-compliance with the notice under section 22(2). This contention overlooks the fact that the notice under section 22(2) required the firm to file its return within a certain period and the return was admittedly not filed by the firm within such period. There was, therefore, clearly non-compliance with the notice under section 22(2). It is no doubt true that the return was subsequently filed by the firm and was accepted by the Income-tax Officer but that cannot possibly constitute waiver of the default committed by the firm in not filing the return within the period allowed by the notice under section 22(2). The second ground was that the notice for imposing penalty under section 28(3) was issued by one Income-tax Officer while the order imposing penalty was passed by another Income-tax Officer. It was not disputed that even though notice was issued by one Income-tax Officer, order of penalty could be imposed by another Income-tax Officer. But the argument was that before the succeeding Income-tax Officer passed the order or penalty, he should have given a fresh notice to the firm and given a fresh opportunity to the firm to make its submissions. The argument was sought to be supported by a decision of the Calcutta High Court in Calcutta Tanneries (1944) Ltd. v. Commissioner of Income-tax. This decision has however been subsequently explained by a Division Bench of the same High Court in Kanailal Gatani v. Commissioner of Income-tax, where it has been pointed out that the rule enunciated in this decision that a successor-in-office of an Income-tax Officer cannot pass an order where the case has been heard by his predecessor applies only in those cases where the evidence has been taken hand oral arguments have been heard. In cases where no oral evidence has been led and no oral arguments have been heard but the decision is invited only on the basis of a written submission, the successor can apply his mind to the materials before him and pass an order even though the proceedings may have been initiated by his predecessor. In the present case all that was done by the firm in reply to the notice under section 28(3) was to file a written submission and neither any oral evidence was taken nor were any oral arguments heard by the Income-tax Officer who issued the notice. The successor of the Income-tax Officer who issued the notice was, therefore, entitled to apply his mind to the materials before him and to make the order or penalty which has been impugned in the present petition. The validity of the order of penalty must, therefore, be upheld and the contentions urged on behalf of the petitioners must be rejected.

21. In this view of the matter the petition must succeed in so far as the order of reassessment and the orders of penalty in respect of the assessment year 1950-51 are concerned, and in so far as the order of penalty in respect of the assessment year 1952-53 is concerned, the petition must fail. The rule will, therefore, be made absolute in regard to the order of assessment and the orders of penalty in respect of the assessment year 1950-51. The rule will stand discharged in respect of the order of penalty relating to the assessment year 1952-53. The respondents will pay the costs of the petition to the petitioners.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //