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Commissioner of Income-tax Vs. Sundaram and Company (P.) Ltd. and anr. and Manickavasagam Private Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 152 and 153 of 1961 and 14 to 16 and 21 of 1965 (Reference Nos. 47 and 48 of 1961 and
Judge
Reported in[1970]78ITR162(Mad)
ActsIncome Tax Act, 1922 - Sections 34(1)
AppellantCommissioner of Income-tax
RespondentSundaram and Company (P.) Ltd. and anr. and Manickavasagam Private Ltd.
Appellant AdvocateV. Balasubramanyam and ;J. Jayaraman, Advs. in T.C. Nos. 152 and 153 of 1961 and 14 and 16 of 1965, ;N. Srinivasan, Adv. for ;R. Venkataram, Adv. in T.C. Nos. 15 and 21 of 1965
Respondent AdvocateV. Balasubramanyam and ;J. Jayaraman, Advs. in T.C. Nos. 15 and 21 of 1965, ;S. Swaminathan and ;K. Ramagopal, Advs. in T.C. Nos. 152 and 153 of 1961, ;N. Srinivasa, Adv. for ;R. Venkataram, Adv. in T
Cases ReferredSundaram & Co. (P.) Ltd. v. Commissioner of Income
Excerpt:
.....jurisdiction - section 34 (1) of income tax act, 1922 - income-tax officer completed assessment of assessee company - computed super-tax payable by assessee - granted rebate in accordance with provisions of act - sought reopening of assessment on ground that excessive relief had been granted to company under section 34 (1) (b) - whether reopening o assessment by income-tax officer justified - excessive relief included relief granted to which assessee not legitimately entitled - held, income-tax officer had jurisdiction to initiate proceedings under section 34 (1) (b) for bringing to tax excessive rebate granted to assessee. - - 3,54,716, which was deemed to be distributed under orders passed under section 23a, could be taken into consideration as dividend distributed by the company..........with the assessment of income of the company for the assessment years 1946-47 to 1951-52, the income-tax officer, central circle, madras, passed orders under section 23a of the indian income-tax act, 1922, and directed that the total income of the company as determined in the years of assessment less tax payable be deemed to have been distributed amongst the shareholders of the company as on the relevant dates of the general body meetings. the following table sets out the relevant details:assessment yearamount of dividend deemed to have been declaredrs.date of order passed under s. 23a deeming dividend to have been declared 1946-47 46,563march 18, 19521947-4843,959march 18, 19521948-4947,829march 18, 19521949-5097,875march 18, 19521960-5192,591march 18, 19521951-52 25,899march 30,.....
Judgment:

Ramaprasada Rao, J.

1. In this batch of tax cases it is enough to notice the facts in T. C. No. 152 of 1961. T. C. Nos. 14 and 21 of 1965 are connected with T. C. No. 152 of 1961. In T. C. No. 153 of 1961, excepting for the amounts covered in this case are different from that arising in T.C. No. 152 of 1961, the other facts are identical and even so the questions of law arising therein. T.C. Nos. 15 and 16 of 1965 are connected with T.C. No. 153 of 1961. In all these cases the assessment year is 1956-57. In T.C. No. 152 and 1961 and the connected cases, the assessee is Sundaram and Company (Private) Ltd., Madurai, and in T,C, No 151 of 1961 and the connected case, the assessee is Manickavasagam (Private) Ltd., Madurai. In fact, the present proceedings, at any rate, covering T.C. No. 152 of 1961, are set before us on an order of remand made by the Supreme Court in Sundaram & Co. (P.) Ltd. v. Commissioner of Income-tax, : [1967]66ITR604(SC) . The said case was disposed of by the Supreme Court on April 25, 1967, and this was an appeal from the judgment and order of this court dated August 9, 1963, in T.C. No. 152 of 1961. This decision is reported as Commissioner of Income-tax v. Sundaram & Co. Pvt. Ltd., : [1964]52ITR763(Mad) After this court decided in Commissioner of Income-tax v. Sundaram & Co. P. Ltd. and before the judgment was given by the Supreme Court as above, the Tribunal, pursuant to the directions of this court, in the said case, decided the appeals before it on January 20, 1964, out of which T.C. Nos. 14 to 16 and 21 of 1965 arise. We shall presently refer to the questions referred to us for our decision in the latter batch of cases. In Sundaram & Co. P. Ltd. v. Commissioner of Income-tax, and in Commissioner of Income-tax v. Sundaram & Co. (P.) Ltd., the relevant facts have been noticed in extenso. In so far as they are necessary for us, we are excerpting them herein as it is not necessary to restate them differently:

'In Sundaram & Company (P.) Ltd., hereinafter called 'the company' the public are not substantially interested within the meaning of Section 23A of the Indian Income-tax Act, 1922. In dealing with the assessment of income of the company for the assessment years 1946-47 to 1951-52, the Income-tax Officer, Central Circle, Madras, passed orders under Section 23A of the Indian Income-tax Act, 1922, and directed that the total income of the company as determined in the years of assessment less tax payable be deemed to have been distributed amongst the shareholders of the company as on the relevant dates of the general body meetings. The following table sets out the relevant details:

Assessment yearAmount of dividend deemed to have been declared

Rs.Date of order passed under s. 23A deeming dividend to have been declared

1946-47 46,563March 18, 19521947-4843,959March 18, 19521948-4947,829March 18, 19521949-5097,875March 18, 19521960-5192,591March 18, 19521951-52 25,899

March 30, 19553,54,716

2. On July 7, 1955, the company in a general meeting resolved that the amount of Rs. 3,54,716, which was under the orders of the Income-tax Officer deemed to have been distributed as dividend amongst the shareholders pursuant to orders under Section. 23A of the Income-tax Act, be distributed as dividend to the shareholders, and in pursuance of that resolution, proportionate part of the dividend due to each shareholder was credited to his account.

3. The Income-tax Officer completed the assessment of the company for the year 1956-57 and determined Rs. 5,69,396 as its total income. The Income-tax Officer computed the super-tax payable by the company under the Finance Act, 1956, at the rate of six annas and nine pies in the rupee of the total income, and granted a rebate at the rate of four annas in the rupee in accordance with the provisions of Clause D, provisos (i)(b) and (ii) of the Schedule to that Act. Some time thereafter, the Income-tax Officer, being of the opinion that excessive relief had been granted to the company within the meaning of Section 34(1)(b) of the Income-tax Act, issued a notice on January 31, 1959, for reopening the assessment for the year 1956-57. The company filed its return of income in compliance with the notice and contended that the proceedings commenced by the Income-tax Officer were unauthorised, because the income of the company had not been the subject of 'excessive relief' within the meaning of Section 34(1)(b), and that actual distribution of dividends already deemed to have been distributed in accordance with the orders passed under Section 23A cannot be taken into consideration for the purpose of reducing the rebate of super-tax admissible under proviso 2 to Paragraph D of the Finance Act, 1956. The Income-tax Officer rejected the contentions and ordered that the rebate of supertax to the extent of Rs. 80,978 be withdrawn.

4. In the appeal to the Appellate Assistant Commissioner it was held that, in the circumstances of the case, assessment could be reopened under Section 34(1)(b) on the ground that the income had been made the subject of 'excessive relief', but only Rs. 77,600 and not the whole amount of Rs. 3,54,716, which was deemed to be distributed under orders passed under Section 23A, could be taken into consideration as dividend distributed by the company during the previous year relevant to the assessment year 1956-57.

5. There was a further appeal, not at the instance of the assessee who was apparently satisfied with the order of the Appellate Assistant Commissioner, but at the instance of the department. The contention urged by the department was that the Appellate Assistant Commissioner wrongly interfered with the order of the Income-tax Officer in regard to the reduction of rebate pertaining to Rs. 3,54,716. The assessee raised the objection before the Tribunal that Section 34 proceedings were entirely without jurisdiction and that, therefore, the order of the Appellate Assistant Commissioner in so far, as it was favourable to it was right. On behalf of the department it was contended before the Tribunal that the assessee was not competent to raise the objection of the non-applicability of Section 34 of the Act as it had not filed in independent appeal against the adverse finding of the Appellate Assistant Commissioner holding that this provision was applicable. The Tribunal held that it was open to the assessee to raise the point because of rule 27 of the Appellate Tribunal Rules to which we shall refer a little later. The Tribunal accepted the plea of the assessee that Section 34 was not applicable and consequently dismissed the appeal by the department.

6. But the Tribunal confirmed the order of the Appellate Assistant Commissioner directing that Rs. 77,600 be taken into account in withdrawing rebate of super-tax.

7. The Tribunal then referred three questions to the High Court of Judicature at Madras:

'1. Whether the Tribunal was justified in disposing of the appeal as it did?

2. Whether the Tribunal was right in law in entertaining the assessee's contention relating to the applicability of Section 34(1)(b) under rule 27 of the Appellate Tribunal Rules?

3. Whether the setting aside of the assessment under Section 34(1)(b) was correct in law '

8. The first two questions have been answered by the High Court in Commissioner of Income-tax v. Sundaram & Co. (P.) Ltd., in favour of the assessee and the Commissioner of Income-tax has not challenged the correctness of the answer to those questions before the Supreme Court. But it is to be noted that this court when it decided Commissioner of Income-tax v. Sandaram & Co. (P.) Ltd., said that appeal grounds are only missiles employed by the combatants to achieve their respective ends and it would not be possible to limit the subject of the appeal by taking into account the rival contentions or the reasons or grounds put forward either by the department or by the assessee. In this view, questions Nos. 1 and 2 were answered against the department and in favour of the assessee. Regarding the third question, the Supreme Court felt that the question was defective and reframed it as follows:

'Whether the Income-tax Officer was, in the circumstances of the case, competent to initiate the proceeding under Section 34(1)(b) of the Indian Income-tax Act for bringing to tax excessive rebate granted to the assessee?' 9. Repelling the contention of the counsel for the assessee that the expression 'too low a rate' used in Section 34(1)(b) must, having regard to the context in which the expression is used, be regarded as the fraction which determines tax liability of the assessee, the Supreme Court said:

'The assumption that the expression 'rate' has been used in Section 34(1) as meaning a fraction of total income is, in our judgment, not warranted. By the use of the expression 'rate' in the context in which it occurs, undoubtedly a relation between the taxable income and the tax charged is intended, but the relation need not be of the nature of proportion or fraction. The expression 'rate' is often used in the sense of a standard or measure. Provided the tax is computable by the application of a prescribed standard or measure, though not directly related to taxable income, it may be called tax computed at a certain rate. We agree with the High Court that the rebate of tax and the reduction of such rebate are essentially matters of measure or standards of rate. The chief aim and object of the Finance Act, 1956, is to prescribe the standard or measure of income-tax and super tax and it seems that an assessee escaping some of its provisions, and failing to pay the full measure of tax is assessed at too low a rate.' 10. The Supreme Court also incidentally noticed that it was not argued before the Tribunal on behalf of the company, that on the notice served by the Income-tax Officer, proceedings for reassessment could only be initiated on the ground that income had been the subject-matter, of excessive relief and not on any other ground. The main contention was that the initiation of the reassessment proceedings was invalid. On this aspect, the Supreme Court said :

'Counsel for the company did argue before the High Court that in a proceeding to reassess income initiated on a notice that income has been subject to excessive relief, the Income-tax Officer was incompetent to reassess income on the footing that income was assessed at too low a rate, but the High Court did not record their decision on that plea; they merely suggested that it will be open to the company to raise the question when the matter is again taken up for consideration. If, however, the question arising out of the order of the Tribunal was, as correctly pointed out by the High Court, one about the ' validity of initiation of proceeding under Section 34(1)(b), the High Court was bound to decide all aspects of that question raised before them, before recording an answer: if they did not, the Tribunal would be powerless to enter upon an enquiry of any other aspect of the question after answer to the question is recorded by the High Court. We are unable to agree with the assumption made by the High Court that because a particular aspect of the question of law raised was not specifically argued before the Tribunal, the High Court cannot deal with that aspect.

We are, in the state of the record before us, unable to record an answer to the question, and the case must be remanded to the High Court to determine whether the proceedings were validly initiated on the notice issued against the company. The notice which was served upon the company is not included in the paper book prepared for use in this court. The notice must of necessity be part of the record of the Income-tax Officer, even if it be not on the record of the Tribunal. It will be open to the High Court, in determining the contention raised by the company, to call for a supplementary statement of the case relating to the form and contents of the notice and the validity thereof, from the Tribunal. After receiving the supplementary statement, if any, the High Court will proceed to dispose of the third question in the light of the reasons set out by us in this judgment.'

11. In the light of the above, this court called for a fresh statement of the case but the Tribunal, without adverting to the validity of the notice issued by the Income-tax Officer, sent the notice to enable the court to decide the third question, as reframed by the Supreme Court.

12. It has, therefore, become necessary for us to render an answer to the question involved. We have seen the notice issued by the Income-tax Officer. We have heard arguments. As rebate of tax and reduction of such rebate are primarily having an impact on the 'rate', then it follows that an enquiry by the Income-tax Officer, whether excessive relief has been granted, in the teeth of the provisions of the Finance Act of 1956 has a nexus to the measure or standard of rate. If such a nexus is conceivable, then the Income-tax Officer did have jurisdiction to initiate proceedings as, he did, under Section 34(1)(b), notwithstanding the apparent error in the notice, which has accidentally or inadvertently omitted one of the limbs of Section 34(1)(b), namely, to reassess if the original assessment was assessed at too low a rate. The jurisdiction exercised by the Income-tax Officer under Section 34(1)(b) is a composite jurisdiction and is not divisible and dissectable in the light of the situations contemplated in Section 34(1)(b).

13. The existence or the manner of exercise of such jurisdiction of an authority acting as a statutory functionary is always understood as different concepts. If there is an irregularity in the manner of exercise of jurisdiction, it does not follow, as of necessity, that the resultant act of the authority in such circumstances is a nullity. There is no doubt, when the Income-tax Officer exercises jurisdiction under Section 34(1)(a) or Section 34(1)(b) of the Income-tax Act of 1922, he acts as a statutory functionary and is expected to act within the limits prescribed therein. The only limitation prescribed in Section 34(1)(b) of the Act is that he should issue a notice under Sub-section (2) of Section 22 of the Income-tax Act, 1922, and he should, on information made available, act in accordance with the sub-section. Section 34(1)(b) postulates the various channels through which such jurisdiction can be exercised. It may be a case of escapement of assessment, under-assessment, or assessment at too low a rate or have been made the subject of excessive relief under the Act, etc. But, if, in communicating with the assessee, he erroneously, adopts a wrong channel to process the notice under Section 22 as above and makes a reference to one of the situations postulated in Section 34(1)(b), when it ultimately transpires that that is not the correct situation, does it follow that action under the other limbs of Section 34(1)(b) cannot be taken, though his jurisdiction to initiate and act generally under it is indisputable We think not. The methodology adopted and availed of by the Income-tax Officer is not in pursuance of any law or a statutory mandate. The form of the notice which the Supreme Court has asked us to consider and adjudicate upon its validity, is not one which is prescribed under law, nor is it one of the requirements of Section 34(1)(b), It appears to be the product of administrative guidance. Before issuing the letter, the Income-tax Officer has to be satisfied subjectively about the information on record which would prompt him to act under Section 34(1)(b). He has to be judiciously satisfied about it. Closely following such a subjective satisfaction of the Income-tax Officer is the objective act of the issuance of the notice as envisaged in the section. Whilst the Income-tax Officer acts objectively and follows up an administrative, though age-long, rule by issuing a letter of the kind under review, it may happen that an error may creep in its issuance. If the form of the letter or its text which has no legal basis or the issuance of which depends on no legal authority, contains a mistake, it does not go into the root of the jurisdiction of the officer to act under Section 34(1)(b) in general. If, as in this case, he has limited in his letter, to the exercise of his jurisdiction to a situation that the income, profits or gains chargeable to tax have been made the subject of excessive relief, then if it ultimately transpires, it is a case falling under one or the other of the limbs referred to in the letter, then there is no embargo on him to proceed under the other limbs of the section. To restrict him would be to deny him the statutory right to reassess. This is not a case as it happened in Raghubar Dayal Ram Kishan v. Commissioner of Income-tax, where the Income-tax Officer changed his ground from Section 34(1)(a) to Section 34(1)(b). It is indisputable that Clauses (a) and (b) of Section 34(1) contemplate two separate and mutually exclusive jurisdiction. But, when we come to each of the sub-sections, the jurisdiction is incapable of further dissection, according to the situations noted therein. If, on record, material is available to act under one or the other of the limbs of Section 34(1)(b), the fact that the notice issued by the Income-tax Officer mentioned only one of such situations, does not matter. The substance of the matter should govern and not an administrative form, which has no statutory sanction behind it. After having been apprised of the material in this historic litigation running for more than a decade, we have no hesitation in holding that the Income-tax Officer rightly initiated the proceedings under Section 34(1)(b). No doubt, it was the High Court which ultimately noticed that the real situation is not so, much the grant of excessive relief, but assessment of income, at too low a rate. This was in the sense that a rebate which ought not to have been granted having been granted, has an impact on the rate of tax on income. The Supreme Court has said that if any assessee escapes the clutches of a Finance Act or any of its provisions, he fails to pay the full measure of tax, and in consequence the income has been assessed at too low a rate. This is the case here. The Income-tax Officer was satisfied about the information that the rebate granted earlier was not in accordance with the Finance Act of 1956. So he assumed jurisdiction under Section 34(1)(b). We have already held that once the jurisdiction is assumed and exercised, it is not to be iron-jacketed to one of the situations, erroneously, mistakenly or inadvertently referred to in the notice coined and issued by him. The notice is self-active and its effect cannot be sloped down by a form adopted by the Income-tax Officer on his own. In R.P. Kandaswami v. Commissioner of Income-tax, : [1963]49ITR344(Mad) , this court after referring to the observations of the Supreme Court in Hazari Mal Kuthiala v. Income-tax Officer, : [1961]41ITR12(SC) said:

'It is now well-settled that the jurisdiction of any Tribunal, does, not depend upon the wrong provisions of law upon which the Tribunal might have purported to act, but upon the question whether the Tribunal had jurisdiction on a proper view of the functions and powers with which it is clothed under the law or the, statute creating it. In other words, the Tribunal will not lose its jurisdiction which it undoubtedly has in a particular case because of its having misquoted the provision of law under which it exercised the jurisdiction.' ...... 14. Undoubtedly the Income-tax Officer, had the jurisdiction to act under Section 34(1)(b), because it is not argued that it was a colourable exercise ofpower. So he was competent to initiate the proceedings under Section 34(1)(b) of the Act for bringing to tax the excessive rebate granted to theassessee. 'Excess, relief' is a wide expression. Some instances of suchrelief could be gathered from Sections 15A, 15C, 49A, 49B, 49C, 49D and 60of the Act. But these reliefs are not exhaustive. 'Excessive relief' mayalso, refer, to a relief granted but to which the assessee is not legitimatelyentitled. If the relief runs contra, to the Finance Act of 1956, or for thatmatter any Finance Act of any year, then also it would be a relief illegallygranted. The relief, as contended; need not be under the Income-tax Actalone, as the Finance Act of each year is irretrievably knit with the maintexture of the Act and becomes part of it as soon as it is passed. We,therefore, answer the question is refrained by the Supreme Court in favourof the department and against the assessee. This will apply to T.C. No. 153of 1961 as well.

15. It only remains for us to consider whether, in the peculiar circumstances of the case, we should answer the questions in the other connected tax cases. We are not reproducing the questions as they are not necessary. These cases arise out of the orders of the Tribunal passed by it pursuant to the ratio in Commissioner of Income-tax v. Sundaram & Co. Private Ltd. As the Supreme Court has materially interfered with the order of this court in Commissioner of Income-tax v. Sundaram & Co Private Ltd. we refrain from answering the questions raised, as the Tribunal was 'powerless to enter upon an enquiry of any other aspect of the question, until after an answer to the question about the competency and legality of the initiation of the proceedings under Section 34(1)(b) is decided by this court.' The above question is decided by us only now; therefore, the order of the Tribunal and the questions referred to us, as if arising thereon, need not be taken notice of by us. This is in accord with the ratio of the Supreme Court in Sundaram & Co. (P.) Ltd. v. Commissioner of Income-tax. Hence, with reference to the questions in T.C. Nos. 14, 15, 16 and 21 of 1965, we refrain from answering the same, as they arose in references which are not competent.

16. There will be no order as to costs throughout.


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