B.P. BERI J. - These three petitions under article 226 of the Constitution of India have been submitted by three different assessees in regard to notices served on them under section 34 of the Indian Income-tax Act by the Income-tax Officer, Bikaner. The petitioners have prayed for the issuance of a writ of certiorari or prohibition for quashing the notices in question and for prohibiting the Income-tax Officers concerned from taking proceedings thereunder. Since these petitions raise a common question of law about the interpretation of section 34 of the Act, we propose to dispose them of by one judgment.
D.B. Civil Writ Petition No. 153 of 1959
We may state the material facts relating to each of the writ petitions. In the case of Chhagan Lal, the Income-tax Officer, B-Ward, Bikaner, issued a notice to him under section 34 of the Income-tax Act on 14th March, 1959, stating that he had reason to believe that the income of the petitioner for the assessment year 1950-51 had escaped assessment and he proposed to assess the said income and that within thirty-five days of the receipt of the notice the petitioner was required to deliver a return in the form which was attached to the notice. The notice indicates that it was issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, New Delhi. This notice was received by the petitioner on 18th March, 1959. On 18th April, 1959, the assessee wrote to the Income-tax Officer that the notice was not lawful and valid; that it was beyond the jurisdiction of the officer and that it was barred by time and requested the officer to drop the proceedings. Later, the petitioner presented the above application before this court contending that the notice was illegal as it was issued after eight years of the year of account and that in the absence of any reason being mentioned therein as to how and what income had escaped assessment the vague notice could not be the foundation of the officers jurisdiction to take proceedings under section 34 of the Act. A reply has been filed by the Income-tax Officer in which he states that the notice in question was one under section 34(1)(a) and not under section 34(1)(b) of the Act, since the prior satisfaction of the Commissioner had been obtained. He further submits that the petitioners application is premature since he could obtain the relevant relief, if at all from the officers of the department and that the periods of limitation starts from the end of the assessment year and not from the end of the accounting year as alleged by the assessee.
D.B. Civil Writ Petition No. 155 of 1959
Ram Gopal petitioner in Writ Petition No. 155 of 1959, says that he was duly assessed for the accounting year ending on 31st March, 1950, and he paid the income-tax in respect of that period. On 28th March, 1959, however, he received a notice under section 34 of the Income-tax Act dated 27th March, 1959, from the Income-tax Officer, A-Ward, Bikaner, in which it was alleged that the officer had reason to believe that the petitioners income for the assessment year 1950-51 had escaped assessment and he was required to deliver to the said officer a return in the attached form of the petitioners total world income for the assessment year ending on 31st March, 1951. This notice further mentioned the fact as in the earlier case that it was issued after the necessary satisfaction of the Commissioner of Income-tax, New Delhi, had been obtained. The petitioner challenges the notice in question substantially on identical grounds, viz., that the Income-tax Officer had no right to issue the notice eight years after the accounting year ending on 31st March, 1950 and that the notice was otherwise vague and illegal. In the reply submitted on behalf of the Income-tax Officer the facts are not disputed. It is submitted that the notice was within time that the petitioner had adequate legal remedies available before the department and that the notice under section 34(1)(a) of the Act had been validly issued. The petitioner has also submitted a rejoinder wherein, apart from the question of limitation, he has assailed the notice specially on the ground of vagueness. It was stated that the assessment of his income for the assessment year 1950-51 was made on 30th April, 1953. The petitioner preferred an appeal which was accepted on December 31, 1953, and the case was remanded. In the light of the appellate order the Income-tax Officer again concluded the petitioners assessment. An appeal was again preferred by the petitioner which was accepted by the Assistant Commissioner on December 31, 1959 and now the department has taken an appeal before the Income-tax Tribunal which is still pending. At no stage it was ever alleged that any income of the petitioner during the relevant assessment year had escaped assessment and therefore the present notice under section 34 has been issued merely to harass the petitioner. On 13th March, 1960 practically at the close of the arguments an application was further submitted on behalf of the Income-tax Officer alleging that subsequent to the presentation of the above petition before this court the petitioner moved an application for transfer of the case from the Income-tax Officer, A-Ward, Bikaner, and on his application the Commissioner of Income-tax by his order dated November 8, 1960, directed that the petitioners case be transferred to the Income-tax Officer, Wealth tax Circle No. 4, New Delhi. The respondent No. 1 in compliance with that order has therefore, sent all the papers to the Income-tax Officer, New Delhi, who is now seized of the matter. Consequently, no effective relief could be granted to the petitioner as the said officer is outside the jurisdiction of this court.
D.B. Civil Writ Petition No. 224 of 1959
Smt. Kamla Bai Mohtas Writ Petition No. 224 of 1959 arises in these circumstances. The Income-tax Officer, A-Ward Bikaner, issued a notice to her under section 34 of the Income-tax Act on March 19, 1959, calling upon her to deliver to him a return of her total income for the assessment year ending on 31st March, 1951. From the notice also, it appears that it was issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, New Delhi. She filed a reply stating that the notice was neither lawful not valid and that it was barred by time. In her petition under article 226 of the Constitution she had reiterated her challenge on the above grounds of vagueness illegality and limitation. She further says that she had relevant period and there was nothing in the notice to show what income had escaped assessment and now. The reply of the Income tax Officer is mutatis mutandis in identical terms as in the other two cases.
The common question therefore which arises primarily in all these writ petitions is whether the period of eight years envisaged in section 34 first proviso clause (2) is to be computed from the last date of the accounting year or the last date of the assessment year. In other words whether the words that year employed in the aforesaid proviso refer to the accounting year or the assessment year. The petitioners contend that the words refer to the accounting year whereas the department pleads that they refer to the assessment year. It is not disputed that if the expression that year refers to the accounting year all the notices issued to the different petitioner would appear to be barred by time and thus the very foundation of the officers jurisdiction to proceed under section 34 of the Act would be taken away. The material provisions of section 34 read :
'34. Income escaping assessment. - (1) If -
(a) 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, or excessive loss or depreciation allowance has been computed, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee the Income tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,
he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year serve on the assessee or if the assessee is a company on the principal officer thereof 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 re-assess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be apply accordingly as if the notice issued under that sub-section :
Provided that the Income-tax Officer shall not issue a notice under clause (a) of sub-section (1) -
(i) for any year prior to the year ending on the 31st day of March, 1941;
(ii) for any year if eight years have elapsed after the expiry of that year, unless the income profits or gains chargeable to income-tax which have escaped assessment or have been under assessed or assessed at too low a rate or have been made the subject of excessive relief under this Act, or the loss or depreciation allowance which has been computed in excess, amount to, or are likely to amount to, one lakh of rupees or more in the aggregate, either for that year, or for that year and any other year or years after which or after each of which eight years have elapsed, not being a year or years ending before the 31st day of March, 1941;....'
In order to appreciate the true import and meaning of the words 'that year' employed in this proviso a brief resume of the material provisions of the Act may be necessary. The most important of them is the charging section, section 3 of the Act which provides that where any central Act enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions of this Act in respect of the total income of the previous year...' It is obvious from the language of the section that the tax is charged for the assessment year in accordance with the rules prescribed for that year in the Central Act, though it is in respect of the income of the previous year. The words that year in the section which are underlined have reference to the assessment year. The year in which this income is taxed is the year of assessment and the rates at which this tax is levied ar prescribed by the annual Finance Act for that year. Do the words 'that year' relate to the year for which a return of the assessees income has to be forwarded under section 22 of the Indian Income-tax Act, called the 'accounting year', or the year in which the tax is levied for the income of the previous or accounting year and which is compendiously called the 'assessment year' ?
The purpose of section 34 of the Income-tax Act is to provide a machinery for assessing that income of an assessee which has escaped assessment. The reason for such an escape may be concealment of income or application of too low a rate or grant of excessive relief or otherwise. The legislature impose several restrictions before this power can be exercised. The period of eight years is one of these limitations. Escape from assessment and consequent taxing of income of given years is only possible if the return has been called for either by general or special notice. Assessment and computation of tax are dependent on the annual Finance Act which prescribes the rates. The question of 'too low' a rate does not arise unless the rate is laid down by the annual Finance Act. It is the financial year or the year of assessment with reference to which escapment of income or applicability of too low rates, therefore obviously relate. An assessee is not called upon to disclose his income during the currency of the previous year technically so-called. No question of its concealment from the taxing authorities therefore can arise during that year. It is after the commencement of the assessment year that he is expected to make a return of his income or to disclose fully and truly all material facts necessary for his assessment for that year'. The income shown in the return under section 22 of the Act must be with reference to the previous year but the return itself is presented during the assessment year and all the other contingencies referred to in section 34, namely, 'concealment of income', 'escaped assessment', 'under-assessment' or 'excessive relief', etc., must of necessity refer to the year of assessment in respect of which the tax is levied. In our opinion, therefore, 'that year' in the proviso evidently means the assessment year and not the 'previous year' or 'accounting year'. In many sections of the Income-tax Act the word year has been qualified by the word previous where the legislature so intended. Reference may be made for instance to sections 4(1), 16(1)(b) and 22 of the Act, where the words 'previous year' occur. The proviso before us does not qualify the word 'year'. We see no adequate reason to import it by implication. On the contrary the context in which the word 'year' has been used and the purpose which section 34 aims to achieve are clearly indicative of its being the assessment year.
Reliance was placed by the petitioners on H.N.S. Iyengar v. First Additional Income-tax Officer, Mysore City. The argument which appealed to the learned judges in this case largely rested on the notice issued under section 22 of the Income-tax Act and the reference made to it in section 34(1)(a). Because the return is to be filed in respect of the previous year and failure to do so attracted the applicability of section 34(1)(a), the learned judges came to the conclusion that the expression that year in the proviso to section 34 meant the previous year. It probably escaped notice that the return under section 22 is itself presented and called for in the year of assessment and all that happens in the assessment proceedings relate to the assessment year. We have carefully perused this decision and we regret our inability to agree with the view taken by the learned judges. Section 34 aims to make a comprehensive provision for realization of tax which although payable in law escaped levy or collection in due time. It embraces within its scope escape of assessment due to so many reasons. The legislature did not confine the purpose of section 34 merely to the circumstance in which the assessee failed to file his return. To spell out the period of limitation prescribed in this section with reference to the year for which the return of income is presented under section 22, in our opinion, is not giving full effect to the context in which the material expressions occur. Our attention was also invited to Madanlal Mathurdas v. Chunilal, Income-tax Officer and C.W. Spencer v. Income-tax Officer, Madras. Both these cases have taken the view which we have preferred.
It was next contended that section 34 being a provision in a fiscal statute even assuming that it was capable of two meanings, in so far as the question of limitation was concerned the one which was favorable to the citizen must be preferred. In our opinion the argument is not sound. Section 34 merely provides a machinery for collecting that part of the exchequers dues which for some reason has escaped its hands. In Commissioner of Income-tax v. Mahaliram Ramjidas, referring to section 34, it has been held :
The section, although it is a part of a taxing Act imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, resut valeat potius quam pereat.'
The petitioners, Chhagan Lal and Smt. Kamla Bai, have assailed the validity of the notices served on them. The Income-tax Officer has to 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 or recompute the loss or depreciation allowance. The statute further provides that the provisions of this Act shall, so far as may be, apply to this notice as they apply to a notice under section 22(2). A question, therefore, arises as to the nature of the provisions regarding notice under section 34 of the Indian Income-tax Act. The law on this point appears to be well settled. In a recent Supreme court case, Calcutta Discount Co. Ltd. v. Income-tax Officer Calcutta, it has been held that :
'To confer jurisdiction under this section to issue notice in respect of assessment beyond the period of four years, but within a period of eight years, from the end of the relevant year two conditions have therefore to be satisfied. The first is that the Income-tax Officer must have reason to believe that income profits or gains chargeable to income-tax have been under-assessed. The second is that he must have also reason to believe that such under assessment has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer could have jurisdiction to issue a notice for the assessment or reassessment beyond the period of four years but within the period of eight years, from the end of the year in question.'
The plea of the department that the question could be examined in the course of a reassessment proceedings themselves and this court should not investigate into the validity of these notices has also been considered and answered by the aforesaid Supreme Court decision.
'Both the conditions (i) the Income-tax Officer having reason to to believe that there has been under-assessment and (ii) his having reason to believe that such under-assessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of four years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that under assessment has resulted from non-disclosure of material facts, cannot therefore be accepted.'
In Narayana Chetty v. Income-tax Officer, Nellore, it has been laid down that a notice under section 34 is not a mere procedural requirement but affects the validity of the proceedings taken pursuant to this notice. A recent decision of the Assam High Court, Tansukhrai Bodulal v. Income-tax Officer, Nowgong, has expressed the opinion that want of a valid notice raises a question of jurisdiction which does not admit of any waiver on the part of an assessee. Such is the sanctity attached to a notice before the proceedings under section 34 are to be taken. Since on the fulfillment of this condition depends the jurisdiction of the Income-tax Officer to proceed under section 34, a close examination of the notices before us becomes the duty of this court.
The service of the notice under section 34 is not disputed in any of the three cases. Different objections have been raised as to their validity. In order to satisfy ourselves regarding the reasons which actuated the issue of these notice we directed the department to place before us the relevant material. The department has produced place before us the reasons recorded by the Income-tax Officers concerned before they issued notices to the three petitioners. We propose to consider this material at appropriate places.
In Chhagan Lals case (Petition No. 153 of 1959), the grievance made by the petitioner is that the notice does not disclose whether it is due to the failure on the part of the assessee to submit a return or due to an omission to disclose material facts fully or truly or the assessee has been under assessed or assessed at too low a rate etc. Subsequent to the placing of the material by the department before us the petitioner has further submitted that the notice is invalid on the ground that in his report the Income-tax Officer has left column 7 blank which column required him to state the item that had escaped assessment and thus the notice is bad; it is also invalid because the sanction of the Income-tax Commissioner had not been obtained prior to the issue of the notice but subsequent thereto; and also because notwithstanding the fact that the escaped income has been estimated to be at Rs. 1,30,000 the sanction of the Commissioner and not of the Central Board of Revenue has been obtained.
Chhagan Lal admittedly did not submit any return for the year 1950-51. No question therefore relating to his non-disclosure of material facts as envisaged by section 34(1)(a) could arise. The alternatives which have been struck out in the notice issued to the assessee clearly exclude the contingencies of under assessment or assessment at too low a rate or excessive relief or excessive allowance by way of loss or depreciation. By this process of elimination it becomes clear that it is a notice which arises out of failure to submit a return. In the reasons recorded by the Income-tax Officer he has pointed out that the assessee was for the first time taxed for the year 1953-54. He was unable to explain his abnormal cash balance. In the officers opinion this cash balance was fictitious and was designed to accommodate the assessees profits of later years. The income estimated for the purpose of section 34 was Rs. 1,30,000. Sanction of the Income-tax Commissioner was obtained and notice issued. There is no substance in the contention of the learned counsel for the petitioner when he says that column 7 has been left blank. The words appearing against this column are 'see reverse'. What is set out below apparently relates to column 7. Reading the document thus, the next objection to the validity of the notice namely that the sanction did not precede the issuance of the notice also disappears. The Income-tax Officer recorded his reasons on the 28th of February 1959, and the Commissioner accorded his sanction on March 12, 1959. These dates negative the contention of the assessee. The next ground that the notice is invalid because the sanction of the Central Board of Revenue has not been obtained is equally untenable. The sanction of the Central Board of Revenue instead of the Commissioner is required only if the notice is issued after a lapse of eight years and the income which has escaped assessment is likely to amount to rupees one lakh in the aggregate of one or more years prior to eight years. We have already found that the notice does not relates to a period earlier than eight years. In fact, in the present case, any notice earlier than eight years was not possible in 1959 as the Income-tax Act itself came into operation in Rajasthan in the year 1950. The notice, therefore, issued to Chhagan Lal, in our opinion, cannot be characterised as invalid.
In Kamla Bais case (Petition No. 224 of 1959), the notice has been assailed on the ground that it does not specify whether it has been issued under section 34(1)(a) or 34(1)(b); that the petitioner having submitted her return and having been duly assessed for the year 1950-51, the notice is bad as it does not specify the manner is which her income is alleged to have escaped assessment. The department has placed before us the reasons recorded by the Income-tax Officer concerned on which sanction from the Commissioner of Income-tax, Delhi and Rajasthan, was obtained. From this, it appears that the assessee showed her capital at Rs. 2,50,000 at the end of the previous year relevant for the assessment year 1950-51. The origin and development of this capital remain unexplained and in the opinion of the Income tax Officer the assessee seems to have inflated her capital to accommodate future secreted profits.
The notice has clearly indicated that it was issued after the Income-tax Commissioner was satisfied that such a notice should issue. This condition applies only to a case where notice has been issued under section 34(1)(a) and not under section 34(1)(b). The assessee having submitted her return the case cannot possibly belong to the category of a failure to make a return. The notice appears to relate to a case of escaped assessment as is evident from the language of the notice itself. The four other alternatives have been struck out in the notice. It is thus possible to spell out from this notice the purpose for which it has been issued and it cannot be described to be invalid or without jurisdiction merely because the specific provision of low has not been mentioned. As the notice in our opinion is not invalid we are not prepared in the exercise of our extraordinary jurisdiction to interfere.
While in the circumstances of these two cases we have declined to interfere we cannot help observing that the notices issued to the assessees leave mush to be desired. Statute imposes an imperative duty on an Income-tax Officer to issue a notice before he exercise jurisdiction under section 34 of the Indian Income-tax Act. Issuing of a notice is not a mere formality. The Income-tax Officers 'reason to believe' is no information to the assessee against whom action is proposed because the reasons remain with the officer and are not communicated to the assessee who is called upon to answer a case. The assessee is left guessing as to the nature of the case he is called upon to meet. The purpose of a notice is to plainly inform its recipient of the grievance which the giver of the notice has against him. This information has to be communicated with clarity and certainty. It is the bounden duty of the department to acquaint an assessee subject to just reservations the way the alleged dues of the revenue remain uncollected enabling him to answer the demand.
In regard to the case of Ram Gopal the plea of the invalidity of the notice was not raised in the petition under article 226 of the Constitution. It was introduced for the first time by way of a rejoinder to the reply submitted by the respondents. Many other facts regarding the petitioners assessment appeal remand another assessment another appeal which we have already noticed were included in the rejoinder. It is not the purpose of a rejoinder to add new grounds to the parent petition unless leave has been first obtained and the petition amended. However we might have examined these contentions but for the fact that no useful purpose would be served thereby as the case of this assessee has travelled beyond the jurisdiction of this court. The department has brought to our notice that the case of the petitioner Ram Gopal at his won instance has been transferred to the Income-tax Officer, Wealth tax Circle, New Delhi. The order transferring the file of this assessee has been placed before us. The assessee has filed a reply stating that it is not clear from the order whether the case arising out of the notice under section 34 has or has not been transferred. The request by the assessee in his letter dated the 7th of April, 1960, is for the transfer of the file of the assessee as a whole and the Commissioner has acceded to his request. We have no reason to brush aside the departments categorical assertion that the Income-tax Officer New, Delhi, 'is now seized of the case'. In this view of the matter a writ could not be issued to a person outside the territorial jurisdiction of this court. Therefore we do not propose to discuss the question of the validity of his notice.
The result is that all these three petitions must fail and are hereby dismissed with costs.