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M. Ct. Muthuraman Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 150 of 1960
Reported in[1963]50ITR656(Mad)
AppellantM. Ct. Muthuraman
RespondentCommissioner of Income-tax, Madras.
Cases ReferredRajendranath Mukherjee v. Commissioner of Income
Excerpt:
- rajagopalan j. - the assessee, muthuraman and his uncle, meyyappa, constituted a hindu undivided family. one of the assets of that family was a 15/21 share in a partnership at ipoh with the vilasam m. s. s. on december 29, 1948, muthuramans branch divided itself from meyyappas and, in the partial partition that followed, the share in the m.s.s. firm was divided between muthuraman and meyyappa.though muthuramans status for purposes of assessment was itself that of a hindu undivided family, for purpose of convenience, we shall refer to him in the rest of this judgment as the assessee. we shall refer to the joint family which included the branch of the assessee and his uncle, meyyappa, as the hindu undivided family.in the assessment years that followed the partial partition of december 29,.....
Judgment:

RAJAGOPALAN J. - The assessee, Muthuraman and his uncle, Meyyappa, constituted a Hindu undivided family. One of the assets of that family was a 15/21 share in a partnership at Ipoh with the vilasam M. S. S. On December 29, 1948, Muthuramans branch divided itself from Meyyappas and, in the partial partition that followed, the share in the M.S.S. Firm was divided between Muthuraman and Meyyappa.

Though Muthuramans status for purposes of assessment was itself that of a Hindu undivided family, for purpose of convenience, we shall refer to him in the rest of this judgment as the assessee. We shall refer to the joint family which included the branch of the assessee and his uncle, Meyyappa, as the Hindu undivided family.

In the assessment years that followed the partial partition of December 29, 1948, that is, 1949-50 and 1950-51, the assessee and Meyyappa each filed returns showing his share in income from the M.S.S. Firm. But the Income-tax Officer declined to give effect to that partition and included the income of both the assessee and Meyyappa in the assessment of the Hindu undivided family. The Appellate Assistant Commissioner allowed the appeals preferred by the Hindu undivided family and upheld the claim based on partition. That was confirmed on further appeal by the Tribunal in its order dated September 22, 1956, and the Tribunal recorded :

'...... we wholeheartedly endorse the decision of the Appellate Assistant Commissioner that the shares in the Ipoh vilasam belong only to the two members, at any rate, after December 29, 1948, in the manner claimed. The accrued profits from this business after that date, accordingly, can no longer be assessed in the hands of the assessee family.'

We are not now concerned with the assessment year 1949-50. This reference relates to the assessment year 1950-51 and the four years that followed, that is, up to 1954-55.

In each of the five years, the assessee submitted a return, which included his share of the income of the M.S.S. Firm. All these returns were filed before the disposal of the appeals on September 22, 1956. The Income-tax Officer did not pass any orders on the returns filed by the assessee for 1950-51, 1951-52 and 1952-53. The assessment proceedings for 1953-54 and 1954-55 were closed by the Income-tax Officer respectively on August 30, 1954, and September 15, 1954, with the entry 'N.A.' (not assessed), on the basis that the share income offered by the assessee for assessment in those returns had been included in the assessment of the Hindu undivided family.

In each of the assessment years, the share income of the assessee was included in the assessment of the Hindu undivided family. The Hindu undivided family appealed against the orders of assessment in each of the years. We have pointed out that the appeal in relating to 1950-51 assessment year was disposed of by the Tribunal on September 22, 1956. The Appellate Assistant Commissioner allowed the appeal for 1951-52 on March 11, 1957. The appeals which related to the assessment years 1952-53, 1953-54 and 1954-55 were allowed by the Appellate Assistant Commissioner on November 30, 1957. As a result of these appeals, the share income of the assessee stood excluded from the assessment of the Hindu undivided family. The assessee himself was not taxed on that income, though he had disclosed that income in the returns that he had filed.

After the disposal of the appeals in relation to 1949-50 and 1950-51, the Income-tax Officer took steps to assess the assessee on his share income. He issued notices to the assessee under section 34(1) (a) of the Income-tax Act. The notices for 1950-51 and 1951-52 were dated April 22, 1957/ August 26, 1957. Notices for 1953-54 and 1954-55 were issued on August 21, 1957, and the notice for the assessment year 1952-53 was issued on September 7, 1957. In response to those notices issued under section 34(1) (a) of the Act, the assessee filed his returns on October 21, 1957; but he contended that section 34(1) could not be invoked and that he was not liable to be assessee for any of the assessment years. The Income-tax Officer overruled the objections of the assessee and completed the assessment for each of five years on March 27, 1958. The appeals that the assessee filed successively to the Appellate Assistant Commissioner and to the Tribunal failed. A consolidated reference with reference to all the five years was made by the Tribunal under section 66(1) of the Act, and the question referred to this court ran :

'Whether the reassessments under section 34 for all the assessments 1950-51 to 1954-55 are valid ?'

The challenge to the validity of the assessment in each of the five years was rested principally on the plea that recourse to section 34 was not permissible. That the assessee was not assessed on the income that he returned for assessment in the relevant assessment years was undeniable. The assessee filed those returns voluntarily for the first three assessment years. The returns for 1953-54 and 1954-55 were filed in response to notices issued under section 22(2) of the Act. It was the same income that was subsequently assessed to tax after initiating proceedings under section 34(1). Though the notices were issued under section 34(1)(a), it should be obvious that, if at all the provisions of section 34(1) could be invoked, it was only section 34(1)(b) that could apply. It was no fault of the assessee that he was not assessed earlier. The contention of the learned counsel for the assessee was that the assessment proceedings with reference to the returns filed by the assessee for each of the assessment years must be deemed to be pending, as no assessment was completed on the basis of those returns, and that recourse to section 34(1) was invalid during such pendency of those assessment proceedings.

No orders were passed by the Income-tax Officer on the returns filed for the assessment years 1950-51, 1951-52 and 1952-53. The assessment proceedings for the next two years were closed with the order 'N.A.' (not assessed). Learned counsel for the assessee submitted that 'N.A.' was not an order of assessment at all, and that, despite that entry in the assessment records, the returns filed by the assessee for those years 1953-54 and 1954-55 must be treated on a par with returns for the earlier years. Learned counsel contended that the returns of none of the five years had been disposed of in accordance with law.

We are of opinion that the proceedings for 1953-54 and 1954-55 were lawfully terminated by the Income-tax Officer. It is true that section 23 does not in express terms provide for closing the assessment proceedings with an order that no assessment would be levied. Though the assessee had offered an item of income for assessment as his, the Income-tax Officer came to the conclusion that it was the Hindu undivided family that was liable to he assessed on that income and not the assessee. It was a conclusion, whether it was right or wrong, that he had jurisdiction to reach; and once he reached that conclusion, he could not tax the assessee. In Esthuri Aswathiah v. Income-tax Officer, Mysore State, their Lordships of the Supreme Court pointed out that the order 'No proceeding' terminated the assessment proceedings, and that it should be construed as meaning that the assessee had no assessable income. That in that case it was the assessees contention that was upheld makes no difference in principle. In the case before us, it was open to the Income-tax Officer to reject as unproved the contention of the assessee that it was he and not the Hindu undivided family that was liable to be taxed on his share of the income from the Ipoh firm. That could, and did, lead to the conclusion that the assessee had no assessable income in any of the assessment years. The assessment proceedings that commenced with the returns filed by the assessee were lawfully terminated when they were closed with the entry 'N.A.'. Thereafter, the finality of the termination of those assessment proceedings could be vacated only by recourse to section 34, as this was not a case for the application of section 35.

That the orders terminating the assessment proceedings were not apparently communicated to the assessee did not affect the legality of those orders or their finality. Nor was the legality or finality of that order affected by the absence of a specific notice to the assessee under section 23(2) of the Act before the returns were in effect rejected. We are unable to accepts the contention of learned counsel for the assessee that the Income-tax Officer had no jurisdiction to terminate the assessment with the entry 'N.A.' and without issuing notices prescribed by section 23(2) of the Act. We are therefore unable to accept his contention that the order 'N.A.' must be treated as non est in law. The assessments for 1953-54 and 1954-55, thus lawfully terminated, could be reopened and a reassessment made only after the issue of notices under section 34(1) of the Act. As we have pointed out above, the assessees case fell within the scope of section 34(1)(b).

The contention of learned counsel for the departmental was that, though the Income-tax Officer himself did not pass any orders on the returns filed by the assessee in the assessment proceedings for the assessment years 1950-51, 1951-52 and 1952-53, the assessment proceedings for those years also lawfully terminated on the expiry of the four-year period prescribed by section 34(3) for completing the assessment proceedings. Learned counsel submitted that no assessment proceedings could be deemed to be pending when the law forbade any assessment after the expiry of the prescribed period of four years.

It is true that notices under section 34(1) were issued to the assessee after the expiry of the four years, for which section 34(3) provided. But the issue of the notices was also after the expiry of the four-year period, for which section 34(1)(b) provided. Each rule of limitation is distinct, and each must be given effect to if the circumstances require that. Obviously, it is not enough to show that action was initiated under section 34(1) after the original assessment proceedings had ceased to be pending. The initiation had to be within the period allowed by section 34(1)(b). To get over the bar of limitation prescribed by section 34(1)(b), learned counsel relied on the second proviso in section 34(3) of the Act, which ran :

'34. (3) Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under section 27 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, section 33, section 33A, section 33B, section 66 or 66A.'

This proviso removed not only the bar of limitation imposed by section 34(1)(b), but also that imposed by section 34(3). If the case of the assessee for any of the three assessment years falls within the scope of the proviso, the resultant position would be that there was no ban on assessment of the assessee in the assessment proceedings initiated by the submission of the voluntary returns by the assessee. In other words, the original assessment proceedings did not terminate on the expiry of the four years, for which section 34(3) provided, and they must therefore be treated as pending when the notices were issued under section 34(1) of the Act.

We have therefore to examine the question whether the assessees case came within the scope of the proviso.

For the assessment year 1950-51, the appeal preferred by the Hindu undivided family was disposed of on September 22, 1956, in which it was found that the income in question which belonged to the assessee could not be taxed in the hands of the Hindu undivided family. The issue of the notice under section 34(1) on April 24, 1957, was subsequent to that. The appeal preferred by the Hindu undivided family with reference to the assessment year 1951-52, in which, again, there was a similar findings, was disposed of by the Appellate Assistant Commissioner on March 11, 1957, and the issue of the notice under section 34(1) for that year was on April 24, 1957. With reference to the assessment year 1952-53, the notice under section 34(1) preceded the disposal of the appeal preferred by the Hindu undivided family. The notice was issued to the assessee on September 7, 1957, and reassessment completed on March 27, 1958. But the appeal was disposed of by the Appellate Assistant Commissioner only on November 30, 1957. We have set out the factual position. It was not the case of the department that the Income-tax Officer himself correlated the proceedings under section 34(1) to the disposal of the appeals with reference to the relevant assessment years preferred by the Hindu undivided family. Apparently, the Income-tax Officer took the decision of the Tribunal for the assessment year 1949-50, that the Hindu undivided family was not liable to be assessed on the income from the M.S.S. Firm after the partial partition of December 29, 1948, as the basis for proceedings to assess the income in subsequent years in the hands of the assessee.

In deciding whether the assessees case came within the scope of the second proviso to section 34(3), it should be noted that there was no direction by the appellate authority in any of the assessment years that the income should be assessed in the hands of the assessee. The question is whether the action taken by the Income-tax Officer under section 34(1) was in consequence of any finding in an appellate order or was to give effect to any finding in an appellate order within the scope of the second proviso. The finding in the appellate order in each of the assessment years was in effect that the income was that of the assessee on and after December 29, 1948, and that the Hindu undivided family was not liable to be assessed on that income. There was an appeal by the Hindu undivided family with reference to each of the three assessment years. The action taken by the Income-tax Officer for 1952-53 cannot be viewed as in consequence of or to give effect to the finding in the appellate order for that year, as the appellate order was not in existence on September 7, 1957, when the notice under section 34(1) was issued. But, with reference to the other two years, the department can claim that the attempt to assess the assessee on his share of the income was in consequence of or to give effect to the finding of the appellate authority in the assessment proceedings of the Hindu undivided family in the relevant years 1950-51 and 1951-52. We are unable to accept the contention of learned counsel for the department that recourse to section 34 all the three years could be justified on the ground that it was in consequence of or to give effect to the finding of the Tribunal in the appeal of the Hindu undivided family that related to the assessment year 1949-50. Each assessment year was a unit by itself, and, factually, in this case, there was an appeal by the Hindu undivided family in each of the relevant years. Whether the second proviso in section 34(3) applied to the assessee has to be decided with reference to the appellate order in the assessment proceedings of the Hindu undivided family for each of the years separately.

The position we thus reach is that the second proviso in section 34(3) saved the assessment proceedings of 1950-51 and 1951-52 from the bar of limitation imposed by section 34(1)(b). But then, it also removed the bar imposed by section 34(3). What section 34(3) prohibits is an order of assessment after the expiry of the four years prescribed. If nothing supervenes, that ban, in effect, terminates the assessment. But, if the ban to assessment is removed under the second proviso in section 34(3) the assessment proceedings must be treated as pending all through even after the expiry of the four years. The assessment proceedings that commenced with the voluntary submission of the returns by the assessee must therefore be deemed to have been pending when notices were issued under section 34(1) on April 24, 1957/August 26, 1957. The second proviso did not apply to the notice issued on September 7, 1957, for the assessment year 1952-53; that notice issued after the expiry of the four years, for which section 34(1)(b) provided, was invalid.

It should be taken as well settled now that recourse to section 34(1) is not permissible when the original assessment proceedings are factually treated as pending or must be treated as pending (vide Rajendranath Mukherjee v. Commissioner of Income-tax, the principles laid down in which were approved by the Supreme Court in Commissioner of Income-tax v. Ranchhoddas Karsondas). Those principles were applied by us in an unreported judgment of ours in Raman Chettiar v. Commissioner of Income-tax (R.C. No. 114 of 1956).

We have pointed out that, in the case of the assessee, the assessment proceedings for 1950-51 and 1951-52 must be treated as pending on the date when notices were issued under section 34(1). Though the notices were issued after the expiry of the four-year period prescribed by section 34(3), they were invalid. With reference to 1952-53, the appellate order dated November 30, 1957, removed the bar imposed by section 34(3). But that did not make the notice dated September 7, 1957, one issued in consequence of or to give effect to any finding in the order dated November 30, 1957. It was on that limited ground that we have to negative the validity of the notice dated September 7, 1957.

Learned counsel for the assessee submitted that the second proviso in section 34(3) was unconstitutional and unenforceable, as it offended against the fundamental right of the assessee to equal protection of laws guaranteed by article 14 of the Constitution. A similar contention was upheld by the Bombay High Court in Prashar v. Vasantsen Dwarkadas and by the Kerala High Court in A. G. Nair v. Income-tax Officer. It is not necessary for us to pronounce on the constitutional validity or otherwise of the impugned provisions of the second proviso, as we can grant relief to the assessee without that investigation.

Learned counsel for the assessee submitted that, independent of the pendency of the assessment proceedings invalidating the issue of the notices under section 34(1), the notices should be viewed as ineffective in law as there was no 'escape' from assessment at all. Learned counsel pointed out that, in each of the years, the assessee had offered the income for assessment in the returns submitted by him. Of course, while assessment proceedings are pending and an assessment is permissible in law, there can be no question of any escape from assessment. If, however, the assessment proceedings have lawfully terminated and the income has not been assessed, it would be a case not only of non-assessment as explained in Rajendranath Mukherjee v. Commissioner of Income-tax, but also a case of escape from assessment, though the assessee himself was not to blame for that escape from assessment. We do not consider it necessary to pursue this question further, as we are resting our decision on the ground that the assessment proceedings for 1950-51 and 1951-52 were pending on the date the notices were issued under section 34(1). The assessment proceedings must be treated as pending as the assessees case came within the scope of the second proviso with reference to 1950-51 and 1951-52, and it was that pendency that barred action under section 34(1)(b) of the Act. If, however, the second proviso is for any reason held inapplicable to the case of the assessee for these two years and the original assessment proceedings should be viewed as having lawfully terminated on the expiry of the four-year period prescribed by section 34(3), the position would be that the notices issued under section 34(1) for the assessment years 1950-51 and 1951-52 would be hit by the rule of limitation prescribed by section 34(1)(b). In either view, the initiation of the proceedings under section 34(1) was invalid.

The assessment proceedings under section 34 for 1952-53 were also invalid. If the second proviso applied to that year also and the effect of the subsequent appellate order was to keep the assessment proceedings pending when the notice under section 34(1) was issued on September 7, 1957, that would invalidate the notice. If, however, on September 7, 1957 no proceedings were pending, the four-year rule of limitation prescribed by section 34(1)(b) made the notice dated September 7, 1957, invalid.

Though we have pointed out the alternatives, we are resting the invalidity of the notices under section 34(1) with reference to the first two years on the ground that the original assessment proceedings were pending or must be treated as pending on the date of the issue of those notices. We rest the invalidity of the notice dated September 7, 1957, on the ground that the second proviso did not apply and that the bar of limitation imposed by section 34(1)(b) applied.

Learned counsel for the department urged that the assessments could be viewed as assessments on the original returns themselves filed by the assessee. Such a contention does not arise for consideration in this case on the question as it has been framed and submitted to us. All along, the point in issue between the department and the assessee was whether the proceedings under section 34 had been lawfully initiated and completed. It was the validity of recourse to section 34 that has got to be decided on the question submitted to us under section 66(1). We therefore refrain from going into the question whether the assessments could be justified without recourse to section 34.

Our answer to the question is that the purported reassessments for 1950-51, 1951-52 and 1952-53 under section 34 of the Act were invalid. The reassessments for 1953-54 and 1954-55 were valid. As neither side has wholly succeeded on this reference, there will be no order as to costs.


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