SRINIVASAN J. - The validity of a reassessment upon a shareholder following an assessment upon the company under section 23A of the Act is raised in the question referred to us under section 66(1) of the Act. The facts relevant are these :
The assessee was a shareholder in the Gobald Motor Service Ltd. The Income-tax Officer applied the provisions of section 23A of the Act to the company in respect of the assessment years 1947-48 to 1949-50. Undoubtedly the shareholders became assessable on the basis of the deemed distribution of dividend in respect of their assessment years 1948-49 and 1950-51. The orders under section 23A in respect of the assessment years 1947-48 and 1949-1950 of the company were made on the 15th February, 1954, and 25th June, 1956, respectively. The Income-tax Officer commenced proceedings under section 34 of the Act in respect of the deemed distribution against the assessee, and these notices were issued even before the dates on which orders under section 23A were made, that is to say, in respect of the assessment year 1949-50 of the assessee, the notice was issued to him on 17th March, 1953, and in respect of the assessment year 1950-51, the notice was issued on 28th March, 1955. Both of these dates were anterior to the actual dates on which the orders under section 23A were passed. The section 34 assessments of the assessee were completed on 20th February, 1954, and 25th July, 1956 respectively, for the two years. Both the company and the assessee appealed. The Appellate Assistant Commissioner set aside the orders under section 23A on the ground of a defect in the proceedings. The assessees appeals were also allowed by the Appellate Assistant Commissioner, apparently for the reason that on the date on which the notice was issued under section 34, there was no information upon which any escape of income could be founded.
Following the setting aside of the order under section 23A on the company the Income-tax Officer made orders afresh after observing the proper procedure, and these orders were made on 25th June, 1956, in respect of both the assessment years. Thereafter, the Income-tax Officer made further orders of assessment on the assessee under section 34, but without the issue of any notice. These orders were made on 30th June, 1956, for the assessments year 1948-49 and on 25th July, 1956, for the assessment year 1950-51. These were again carried in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner cancelled the reassessment by his order dated 12th September, 1956, and as part of the order, he stated :
'As a valid order has never been passed under section 23A the Income-tax Officer will now proceed under section 34 of the Act to include the dividends in the hands of the shareholder. The time-limit for such a proceeding will be four years from the last day of the financial year in which the income first became assessable in the hands of the shareholder on 25th June, 1956. The time-limit will thereby be up to the 31st March, 1961.'
Following upon this the Income-tax notices under section 34 of the Act on 27 the October, 1956, for the two assessment years and completed the reassessment on 11th February, 1957.
The assessee appealed against the assessments contending that the proceedings under section 34, which were initiated by the notice of 27th October, 1956, were beyond the period of limitation prescribed by section 34 of the Act. It was further contended that it was not open to the Appellate Assistant Commissioner to issue any direction such as the one contained in the extract above. But the Appellate Assistant Commissioner who heard these appeals did not feel competent to decide whether a direction issued by his predecessor was or was not in excess of his jurisdiction. He accordingly held that the proceedings of the Income-tax Officer carrying out the directions given by the appellate authority had been validly made, and that since the assessments were made in order to give effect to a direction by the appellate authority, the bar or limitation stood excluded by the second proviso to section 34(3) of the Act.
There were further appeals to the Tribunal. The Tribunal came to the conclusion that the Appellate Assistant Commissioner could not issue a direction which in effect destroyed the very basis of the appeal that he had before him, and further that there was no necessity for the issue of any direction by the Appellate Assistant Commissioner, his direction being based only upon his interpretation of when the deemed income in the hands of the shareholder became assessable which, the light of decided authority, was erroneous. For these reasons, the Tribunal decided that the proceedings under section 34 were taken beyond the time-limit pre-prescribed and set aside the assessments.
On the application of the department, the following question stands referred to us :
'Whether, on the facts and circumstances of the case, the reassessment made on 11th February, 1957, is valid in la ?'
We may set out a further fact. In T. C. No. 35 of 1958, which was a reference arising out of the orders under the section 23A of the Act, this court held that the order was not valid for the assessment years 1947-48, the validity of the order for 1949-50 was upheld. Learned counsel for the department concedes that in view of the findings of this court that the order of the company was not valid for the assessment year 1947-48, it should follow that there could be no corresponding assessment upon the shareholder for the succeeding assessment year 1948-49. On this short ground, the assessment on the assessee for the assessment year 1948-49 must be held unsustainable. The question that we shall now proceed to consider relates to the assessment year 1950-51 of the assessee and the assessment upon him under section 34 of the Act, following an order made upon the company under section 23A of the Act.
To restate the facts relevant to the proceedings for the assessment under section 34 of the Act, for the assessment year 1950-51 of the assessee, the order under section 23A was made upon the company on 25th June, 1956. The notice under section 34 was issued to the assessee on 27th October, 1956, and the reassessment was completed on 11th February, 1957. The contention of the assessee has been that since this is a case which falls within the scope of section 34(1)(b) of the Act, the reassessment proceedings should have been initiated by issue of a notice within the period of four years from the close of the assessment year of the assessee. Since the assessment year in question of the assessee was 1950-51, the four year period would expire by the 31st March, 1955. If the notice had been issued on or before that day, then the assessment could be made within the period of one year following. In the present case the notice under section 34 was issued and served on the assessee on 27th October, 1954, obviously beyond the period of four years provided in the section. On these facts alone, it would be manifest that the proceedings were initiated beyond the period fixed, and the assessment must be held to be devoid of jurisdiction. What is however contended by the department is that on the appeal filed by the assessee against the earlier order of assessment which had been made without the issue of a notice under section 34, the Appellate Assistant Commissioner had set aside the assessment by his appellate order dated 12th September, 1956, and while so setting aside the reassessment, he stated that it would be competent to the Income-tax Officer to proceed under section 34 of the Act observing that 'the lime-limit for such a proceeding will be four years from the last day of the financial year in which the income first became assessable in the hands of the shareholder'; that is to say, he took the view that the assessability of the deemed dividend in the hands of the shareholder arose on the date on which a valid order under section 23A had been made upon the company, that is, on the 25th June, 1956. It was form this date that he computed the time-limit provided under section 34(1)(b) and observed further that this time-limit of four years together with one year from the completion of the proceedings making a total of five years would be available up to 31st March, 1961. The department takes its stand upon this order of the Appellate Assistant Commissioner and contends that the second proviso to section 34(3) of the Act operates to overcome the bar of limitation and that if the Income-tax Officer commences proceedings under section 34 of the Act, in order to give effect to any direction contained in an order under section 34, the bar of limitation is wholly removed. That is the question which we have to consider.
Before doing so, we may remove the misapprehension that appears to exist in the order made by the Appellate Assistant Commissioner that the period of limitation commences from the date on which the order under section 23A was made upon the company. It is conceded by the learned counsel for the department, Mr. Ranganathan, that this is an incorrect view. It would be sufficient to refer to Seethai Achi v. Income-tax Officer, where it was held that the department does not have any right independent of section 34 of the Act to make a reassessment upon the shareholder on the basis of an order under section 23A in respect of the undistributed profits of the company. It was specifically decided therein by a Bench of this court that the period of limitation for reassessment under section 34(1) of the Act is to be computed only with reference to the assessment year of the shareholder and the date on which the order under section 23A is passed against the company is not relevant in computing the period of limitation either for the assessment or for the reassessment of the shareholder. Reference was made by the learned judge to a decision of the Bombay High Court in Commissioner of Income-tax v. Robert J. Sas, wherein the same view was taken. Further authority is found in a decision of the Supreme Court in Sardar Baldev Singh v. Commissioner of Income-tax, where their Lordships say that section 23A creates a fictional income arising as on a specified date in the past and it does so for the purpose of the income being included in the income of the shareholders for the assessment of their income-tax and that though the order under section 23A created a fictional income, it must be deemed to have escaped assessment in that assessment year for the assessment relevant to the date on which the fictional income was created, in the past. It follows, therefore, that the view of the Appellate Assistant Commissioner that the income came into existence on the date of the passing of the order under section 23A is erroneous. The deemed distribution of the dividend must in the light of the decided cases relate to the year in which the income of the company accrued and remained undistributed. It is common ground that is that is the correct view to take, the income was assessable in the hands of the shareholder assessee in respect of his assessment year 1950-51.
Section 34(3) of the Act, in so far as it is relevant, reads thus :
'Now order of assessment of reassessment...... shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable :
Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice even if at the time of the assessment or reassessment the four years aforesaid have already elapsed :
Provided further that nothing contained in this section limiting the time within which any action may be taken or any order of assessment or reassessment may be made shall apply... or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31 .....'
It is this later proviso that is relied on by the learned counsel for the department in support of his contention that in a case where the Income-tax Officer purports to give effect to a direction of the appellate authority made under section 31, there is no bar of limitation whatsoever. It is the correctness of this contentions that calls for examination.
It seems to us that this contentions can hardly be accepted. Firstly, the direction of the appellate authority relied upon is based on a wholly erroneous conception of the law that there was no bar of limitation at all in the circumstances of the case. It was made in the course of an appeal wherein the order of assessment itself was challenged as having been made without compliance with the requirements of section 34. If, for instance, the ground that the assessment was made in violation of the bar of limitation had been raised in the appeal but the appellate authority, while accepting that contention yet purported to give a direction, it requires no explanation that such a direction would not be a valid one. It would in effect destroy the right of appeal created in the assessee and the observation of the Tribunal that such a direction would defeat the very cause of action of the appeal before the appellate authority is a very pertinent one. Referring to the facts of the case in which this direction was given by the Appellate Assistant Commissioner, it is noticed that section 34 notice was served on the assessee on 28th March, 1955, on a date anterior to the passing of the order under section 23A and the creation of the fictional dividend income in the hands of the assessee. That such a notice was improper and had no validity whatsoever is not denied by the department. There was in effect therefore no notice at all issued by the department under section 34 and the entire proceedings stood vitiated as it is the issue and service of the notice that confers jurisdiction on the Income-tax Officer. The subsequent order of reassessment which was completed on 11th February, 1957, followed upon a notice on 27th October, 1956. This was issued pursuant to the decision of the Appellate Assistant Commissioner was to. The question that was before the Appellate Assistant Commissioner was whether a reassessment made without notice was valid and it was undoubtedly within the knowledge of the Appellate Assistant Commissioner that by the date on which he disposed of the appeal, accepting the appellant-assessees contention, the time stipulated in section 34 of the Act for the commencement of the proceedings under that section, i.e., four years from the end of the assessment year 1950-51, for reassessment had expired. In these circumstances, we are wholly unable to see how a direction of this kind based upon an erroneous conception of the date on which the income became assessable and in the full knowledge that any further proceedings would be barred under section 34 could validly be construed as a proper direction made under section 34 of the Act. Cases have no doubt arisen in which the giving of a direction in the in the appellate order has validly served to overcome the bar of limitation. For instance, in W. P. Nos. 225 and 1007 of 1958, it was found by the appellate authority that an amount of income which was assessed in the assessment year 1945-46 really accrued in the accounting year and the appellate authority directed the Income-tax Officer to consider the assessment of the assessee for that earlier assessment year. Pursuant to this direction, the Income-tax Officer initiated proceedings under section 34 seeking to assess the income for the earlier assessment year. By that date, however, the period of four years from the end of that assessment year had elapsed. The question arose whether the second proviso to section 34(3) operated to save the bar of limitation. It was held in that case that it would. It is clear from the facts therein that the appellate authority had before it for decision the question as to which of the two years the income in question related and pursuant to its findings it gave a direction. It was fully within the scope of the appellate authoritys powers to decide the question that was before it and, if so much is granted a direction in that regard could legally follow. But the facts of the present case seem to us to be fundamentally different. The direction to assess the income in this case was not one that could naturally flow from the subject-matter of the appeal that was before the appellate authority. Section 31(3) of the Act confers powers upon the appellate authority to set aside the assessments and direct the Income-tax Officer to make fresh assessment fresh assessment after making such further enquiry as the Income-tax Officer thinks fit or the Appellate Assistant Commissioner may direct. But that contemplates that the assessment proceedings themselves had been validly initiated and it was set aside only for the reason that a proper enquiry had not been made by the Income-tax Officer, that is to say, the Income-tax Officer had been seized of jurisdiction in the matter and only the final order made by him was defective for some reason or other. But in a proceeding for reopening an assessment and making a reassessment under section 34, the Income-tax Officer acquires jurisdiction in a particular manner and it is open to the appellate authority to make a direction which would have the effect of conferring jurisdiction in a case where such jurisdiction was not been properly acquired by the Income-tax Officer. From the words of the section itself, it is seen that no authority other than the Income-tax Officer has jurisdiction under section 34 of the Act. If the present case had been one where the initiation of the proceedings had been validly launched, it would be open to the Appellate Assistant Commissioner in appeal before him, while setting aside the assessment, to issue directions. But it is unthinkable that a direction can be made in the exercise of the powers under section 31 of the Act which goes to the extent of conferring jurisdiction upon the Income-tax Officer if he is not lawfully seized of jurisdiction. To our minds, the direction issued by the Appellate Assistant Commissioner travels far beyond the scope of section 31 of the Act in the circumstances of the case. If direction is neither lawful no valid, it cannot come within the scope of the saving proviso and serve to remove the bar of limitation.
We accordingly answer the question in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsels fee Rs. 250.
Question answered in the negative.