RAJAGOPALAN Offg. C.J. - The petitioner and Murugan were part numbers each with a half share in the firm of Messrs. Murugan Arulanadam and Co., which carried on business at Tuticorin. The petitioner himself was resident of Ceylon. The Income-tax officer refused registration of that firm for the assessment year 1951-52 also, as he had refused it in the previous years from 1949-50. The Income-tax officer completed the assessment for 1951-52 on November 11, 1954. It was the unregistered firm that was assessed. The only source of income of the petitioner in the taxable territories was his share of the profits of the firm. He filed a separate return, wherein he claimed that he was a non-resident. On February 24, 1955, the Income-tax Officer closed the individual assessment of the petitioner. The petitioner was treated as resident and ordinarily resident, as against his claim that he was a non-resident. There was, however, no assessment of tax and it was treated as a case of 'no demand', because his share of the income of the firm had already been assessed along with the rest of the income of the unregistered firm. The petitioner himself did not pursue the matter further.
The firm appealed against the refusal to grant registration, as it had appealed with reference to the previous years also. The Appellate Assistant Commissioner allowed the appeal for 1949-50. The appeal with reference to 1951-52 also was allowed on August 21, 1955, though the appellant was absent at the hearing. The relevant portion of the appellate judgment in relation to the assessment year 1951-52 ran :
'The application for registration was refused for the same reasons as in 1949-50. But the assessment of 1949-50 came for appeal, and I have decided that appeal allowing the appellants claim for registration. This appeal also is allowed and the order of the Income-tax Officer refusing registration is set aside.'
On September 29, 1955, the Income-tax Officer purported to rectify under section 35 of the Act the order of the petitioners assessment dated February 24, 1955. The petitioner was treated as a non-resident. His share income from the fir, treated as a registered firm, was assessed to tax. He was given credit for his share of the tax paid by the firm under the order of assessment dated November 11, 1954, and the balance of the tax payable by the petitioner was assessed at Rs. 2,522-8-0. This order under section 35 was subsequently canceled by the Income-tax Officer himself on November 8, 1958, and action had been taken under section 35 without notice to the petitioner.
On March 29, 1956, the Income-tax Officer granted registration of the firm for the assessment year 1951-52. That was obviously done to give effect to the order of the Appellate Assistant Commissioner dated August 21, 1955, which allowed the firms appeal and set aside the order of the Income-tax Officer refusing registration. At the same time the Income-tax Officer granted registration for the assessment year 1952-53 and 1953-54 also though the firms appeals against the order of the Income-tax Officer refusing registration for those years were pending before the Appellate Assistant Commissioner. We are not concerned now in these proceedings with the orders of the Income-tax Officer in relation to the assessment order of 1952-53 and 1953-54.
The Income-tax Officer, we pointed out, set aside his order dated May 29, 1955, on November 8, 1958. He followed it up by issuing a notice to the petitioner on November 18, 1958, under section 35 to show cause why the order of assessment in his case, dated February 24, 1955, should not be rectified (1) to assess him as a non-resident, and (2) to assess him on his share of the profits of the registered firm. The petitioner was eventually given time till December 15, 1958, to file his objections.
Without preferring his objections within time allowed to him by the Income-tax Officer the petitioner moved this court for the issue of a writ of prohibition under article 226 of the Constitution and obtained a rule on December 8, 1958. In C.M.P. No. 7602 of 1958, the petitioner asked for an interim stay of all further proceedings before the Income-tax Officer and on December 8, 1958 itself this court granted an order export the respondent staying the proceedings for three weeks. Apparently both the department and the petitioner lost sight of the feature that the court limited the interim stay to three weeks. As the period of four years within which rectification could be effected under section 35 would run out on February 24, 1959, the respondent applied to this court for permission to complete the proceeding. On December 16, 1959, this court ordered :
'The interim stay ordered was only for three weeks from December 8, 1958. The department will be at liberty to take further proceedings in the matter. There will be stay only as regards the taking of coercive steps to enforce collection.'
Without any further notice to the petitioner the Income-tax Officer passed an order on February 19, 1959, purporting to be under section 35 of the Act. After pointing out that registration had been granted to the firm, the Income-tax Officer recorded :
'In the assessment order dated February 25, 1955, under section 23(1) the status of the assessee was by mistake shown as resident and ordinarily resident. This is a mistake apparent from the records.'
After referring to the notice issued under section 35 on November 18, 1958, and to the grant of time till December 15, 1958, to file objections the Income-tax Officer recorded :
'No objections have so far been filed by the assessee against the proposed rectification. It has also been observed that in the meanwhile the assessee had file a writ petition before the High Court. But the interim stay ordered by the honble High Court has now been vacated. Since the assessee has not filed any objections till date, I will rectify the mistake in the assessment order dated February 24, 1955, under section 35 of the Act......'
The petitioner was assessed to a tax of Rs. 3,315.77 and a note was added that the amount had already been paid. The status of the assessee was also altered to that of a non-resident, the status he himself claimed in the return that he had originally filed.
Though it was a writ of prohibition that the petitioner asked for in view of the final order dated February 19, 1959, what we have to decide now is whether the petitioner is entitled to writ of certiorari to set aside the proceedings that commenced with the notice dated November 18, 1958, and ended with the order dated February 19, 1959. The petitioner also filed a formal application, C.M.P. No. 309 of 1961, to grant the relief in the lettered circumstances required. In the affidavit that was filed an additional ground was taken that the petitioner had not been given any effective opportunity to present his defence before the Income-tax Officer passed orders on February 19, 1959.
The main contention of the petitioner was that the Income-tax Officer had no jurisdiction to interfere with the finality of the assessment ordered on February 24, 1955, and that the petitioners case did not fall within the scope of either section 35(1) or section 35(5) of the Act. The further contention of the petitioner was that, even if rectification was permissible under section 35, the exercise of the jurisdiction on February 19, 1959, was vitiated as that order was passed without giving the petitioner an effective opportunity to present his objections.
It is easier to dispose of the second contention. It is true that though the petitioner was given time till December 15, 1958, he did on December 8, 1958, an interim stay of further proceedings before the Income-tax Officer. The petitioner was not therefore, bound to lodge his objections within the time originally allowed, December 15, 1958. It is true that the stay was limited to three weeks and even after that ceased on December 29, 1958, the petitioner did not file his objection or seek further time from the Income-tax Officer. But then it should be fairly obvious that both the department and the petitioner fell into the same error that the stay continued and that that misapprehension was cleared up only on February 16, 1959. The assumption in the order dated February 19, 1959, that the High Court vacated the stay on February 16, 1959, is not strictly accurate. The High Court pointed out in effect that the stay ordered on December 8, 1958, had ceased to operate by efflux of time. After February 16, 1956, the Income-tax Officer had only about a week within which he could complete the proceedings under section 35. But what does stand out is that within that week the petitioner was not given any opportunity to show cause against the proposed rectification. The earlier opportunity he had been given to prefer his objections before December 15, 1958, had ceased to be effective when the interim stay was ordered on December 8, 1958. In the peculiar circumstances of this case we have to hold that the petitioner did not have an effective opportunity of being heard or to show cause against the rectification contemplated by the Income-tax Officer.
The learned counsel for the department pointed out that in the affidavit filed in these proceedings in this court the petitioner alleged in effect that the Income-tax Officer had prejudged the issues, and that he was not likely to pay any heed to any objections that the petitioner could prefer. But that does not absolve the Income-tax Officer of his duty to give an opportunity to the petitioner to state his objections and to consider them judicial when they were stated. That the department in effect allowed the question of rectification to drift till the end of the four year period could not clothe the Income-tax Officer with the right to conclude the proceedings without giving an opportunity to the petitioner to state his objection and without considering them. Another contention of the learned counsel for the department was that similar objections with reference to subsequent assessment years 1952-53 and 1953-54 were considered by the Income-tax Officer. Apart from the fact that this is no answer to a charge that proceedings under section 35 in relation to 1951-52 were disposed of without giving an opportunity to the petitioner to state his defence, the position in relation to 1951-52 was not quite the same. There was even less substance in the last of the contentions of the learned counsel for the department, that the court could now consider all the objections the petitioner could put forward. The petitioner was entitled as a normal rule of natural justice to an opportunity, to an effective opportunity, to be heard by the Income-tax Officer, before an order to the determent of the petitioner the Income-tax Officer, before an order to the detriment of the petitioner was passed by the Income-tax Officer. That opportunity the petitioner did not have. The denial of that opportunity vitiated the order dated February 19, 1959, and on that ground along the order is liable to be set aside by the issue of a writ of certiorari.
Though it becomes really unnecessary to decide whether the notice dated November 18, 1958, was without jurisdiction -relief can be granted to the petitioner in these proceedings under article 226 of the Constitution without determining that question - we shall indicate out views. We shall however refrain from examining the question with the same elaborations with which arguments were addressed.
The respondent relied at one stage on section 35(5) of the Act. It should be obvious that the petitioners case did not come within the scope of section 35(50). There was no reassessment of the income of the firm; nor was there an appeal against the assessment of the firm. The only appeal of the firm was against the order of the Income-tax Officer refusing registration under section 26A. In fact the finality of the assessment of the firm dated November 11, 1954, was left untouched all through, an aspect to which we shall have to advert again.
The contention of the learned counsel for the petitioner was that the petitioners case did not come within the scope of section 35(1) either.
The order of assessment on February 24, 1955, ran :
'Business : (share income). The assessees share of income in the unregistered firm of M/s. Murugan Arulanandam and Co., Tuticorin, as determined in the firms file is Rs. 7,218 (taxed).
The assessee had no other income. Declared no demand for 1951-52.'
If in fact it was a registered firm to describe it as an unregistered firm and to proceed with the petitioners assessment on that basis would, in out opinion, constitute a mistake apparent from the record of that assessment. No doubt factually on February 24, 1955, it was an unregistered firm. The Income-tax Officer had refused registration. But on November 18, 1958, when action was taken under section 35 with a notice issued to the petitioner, the status of the firm was that of a registered firm. The firms appeal had been allowed on August 21, 1955, and the Income-tax Officer followed that up with formal order granting registration for 1951-52 on March 29, 1956. The mere fact that that order was passed on March 29, 1956, did not make it any the less operative for the assessment year 1951-52.
The learned counsel for the petitioner contended that the order of the Income-tax Officer dated March 29, 1956 granting registration to the firm was invalid and inoperative. Section 31(3)(c) of the Act empower the Appellate Assistant Commissioner to cancel the order of the Income-tax Officer refusing registration under section 26A and to direct him to register the firm. It is true that in this case while the Appellate Assistant Commissioner canceled the order of the Income-tax Officer there was no express direction to the Income-tax Officer to register the firm. Absence of such an express direction did not really alter the position. To give effect to the appellate order the Income-tax Officer had to grant registration. Only the Income-tax Officer would do it and he had to do it. Even if the effect of the appellate order in the absence of an express direction to grant registration, was only to set aside the order of the Income-tax Officer the position would be that the original application presented to the Income-tax Officer for registration had still to be disposed of and the Income-tax Officer could and had to grant registration. We can see no force in the contention of the learned counsel for the petitioner that on March 29, 1956, the Income-tax Officer had no jurisdiction to grant registration.
It is not really necessary to decide in this case whether the record of the assessment of the firm including the proceedings under section 26A can be viewed as part of the record of the assessment of the petitioner. Ex facie the order dated February 24, 1955, which dealt with the petitioners assessment, showed that his income was a share in the profits of an unregistered firm and that was why that income was not granted subsequent to February 24, 1955, did not make it any the less a registered firm. The description that it was an unregistered firm therefore constituted a mistake apparent on the face of the order of assessment itself. We therefore, refrain from examining the question whether there is an apparent conflict between the views expressed by this court of what constitutes the record for purpose of section 35(1) in Habibullah v. Income-tax Officer, v. Circle Madras, and the views of the Andhra High Court in Lakshminarayana Chetty v. Additional Income-tax Officer, Nellore. See also the decision of the Supreme court in Maharana Mills (private) Ltd. v. Income-tax officer, Porbandar.
The learned counsel contended that the petitioners was at the worst a case of under-assessment or non-assessment, and that the assessment could have been only reopended under section 34 of the Act. The further submission was that section 34(1) and section 35(1) were mutually exclusive and that what came within the scope of section 34(1) would automatically stand excluded from the operation of section 35(1). The alternative contention was that even if section 34(1) and section 35(1) could both apply to a given case of assessment the procedure sanctioned by section 34(1) being one more favourable to the petitioner should have been adopted to the exclusion of section 35(1).
In Pran Nath v. Commissioner of Income-tax, the learned judges of the Punjab High court pointed out that in similar circumstances section 34(1) would apply. The learned judges stated :
'The earlier proceedings failed to result in levy of tax because the Income-tax Officer was of the opinion that the profits of the firm belonged to the Hindu undivided family and not to the brothers as individuals and that its profits could not be added to the brothers individual income. This view was found to be erroneous and in accordance with view of the Appellate Assistant Commissioner the profits of the firm were divided between its partners and the partners as individuals were called upon to pay income-tax on their share of the income. This was, therefore, obviously a case of chargeable income escaping assessment and section 34 of the Income-tax Act applied to the case.'
The learned judges did not consider in that case whether section 35(1) also would have applied. They pointed out that no reliance had been placed by the department on section 35 of the Act. In commissioner of Income-tax v. Khemchand Ramdas their Lordships of the Privy Council pointed out that section 34 and section 35 were exhaustive and prescribed the only circumstances in which and the only time in which fresh assessments could be made. There again their Lordships had no occasion to go into the question whether section 34 and section 35 alternative or whether they were mutually exclusive. No direct decision on the question has been brought to out notice.
We are of opinion that the approach should be whether the statutory requirements of section 34 or section 35 have been satisfied. If in a given case the requirements of both section 34 and section 35 are satisfied the application of neither can be ruled out though obviously both cannot be applied at the same time. In the case of the petitioner it would be a case of escape from assessment coming within the scope of section 34(1)(b). But then it would also be a case of mistake apparent on the face of the record of the petitioners assessment. We have already held that the requirements of section 35(1) were satisfied in this case.
It is no doubt true that the application of section 34 would have been more favourable to the petitioner. Apart from the slightly shorter period within which action would have been permissible under section 34(1)(b), such a reassessment would have given the petitioner a right of appeal. The learned counsel contended that if action under section 34(1)(b) and under section 35(1) were alternatives open to the department the petitioner was entitled as of right to be dealt with under the more favourable procedure, that under section 34(I)(b). The learned counsel relied on the observation of Chagla C.J. in Thakkar v. Commissioner of Income-tax : 'It would still been open to the assessee to contend that by adopting one mode of assessment rather than another a prejudice has been caused to him or that he has been deprived of some right to which he would have been entitled if the unregistered firm had been assessed first or that the burden of taxation has been increased because he has been assessed without the unregistered firm being assessed. It is needless to say that if one or more modes of assessment are open to the taxing authorities, the taxing authorities must adopt that mode which is more beneficial to the assessee. The Indian Income-tax Act is a taxing statute and therefore the courts must be zealous to see that no right which an assessee has under that Act has been taken away by any action on the part of the department. Even though it may not be obligatory upon the department to follow a particular procedure the court will insist upon the department following the procedure if the procedure the court will insist upon the department following the procedure if that procedure leads to a beneficial result as far as the assessee is concerned and the procedure followed by the department is prejudicial to the assesee. But in such a case it would be a question of each individual assesee and the rights of each individual assessee.'
These observations were only obiter. In our opinion these principles, which could well apply to the basis for assessment, should not be extended to a choice between section 34 and section 35 to reopen the assessee in our opinion can claim no statutory right to be dealt with only under section 34 to the exclusion of the liability imposed by section 35(1) to have the assessment reopended.
In our opinion the initiation of proceedings under section 35(1) with the notice dated November 18, 1958, was valid. But as we have already pointed out the exercise of that jurisdiction was vitiated when the order was passed on February 19, 1959, violating the principles of natural justice.
One other feature requires notice. The assessment of the firm was left intact even on February 19, 1959, and it should be remembered that it was as an unregistered firm that that firm was assessed. Apparently the tax assessed on the firm was collected in full. On the same income there cannot be two sets of assessment. The learned consul for the petitioner was well funded in his contention that without setting aside the assessment on the firm and without apportioning the income between the partners under section 23(5)(a), and without carrying out the mandate imposed by section 23(6) of the Act, the Income-tax Officer could not have assessed the petitioner on his share of the income of the firm. What would not have been permissible in the case of the original assessment would not be open in what was virtually a reassessment under section 35(1) of the Act. Further while the order dated September 29, 1955, which was subsequently set aside by the Income-tax officer himself showed ex fact that the petitioner was given credit for his share of the tax paid by the firm the order dated February 19, 1959, did not show it. That order recorded that the assessed tax had already been paid by the assessee but how the adjustments were carried out was not clear. Even apart from that it should be clear as we have already stated that the same income could not be assessed twice once as that of the firm and again as the income of the partners in violation of the statutory requirements of section 23(5)(a) and section 23(6) of the Act.
The petition will be allowed. A writ of certiorari will issue setting aside the order dated February 19, 1959. In the circumstances of this case we direct the parties to bear their respective costs.