Salil Kumar Datta, J.
1.This is an appeal by the revenue against the judgment and order of Sabyasachi Mukherjee J. dated February 25, 1971, whereby the rule obtained by the respondents was made absolute in part. The relevant facts are as follows :
2. Kanailal Jatia, the original assessee, was assessed on September 28, 1954, on a total income of Rs. 87,269 for the assessment year 1945-46, under the Indian Income-tax Act, 1922, and taxes were duly paid. The assessment was reopened under Section 34(1A) of the said Act and notice dated March 29, 1956, thereunder was served on him by affixation and there is no dispute over this. Kanailal Jatia died on January 19, 1958, and the assessment was completed ex parte on September 29, 1958, pursuant to the said notice. The legal heirs of Kanailal Jatia, the petitioners in the connected rule, who are the respondents before us, preferred an appeal against the said reassessment to the Appellate Assistant Commissioner, who by order dated July 11, 1961, set aside the said assessment and directed the Income-tax Officer to make fresh assessment after bringing on record the legal heirs of the deceased assessee.
3. The Income-tax Officer thereafter issued notice on July 28, 1962, under Section 22(4) of the Indian Income-tax Act, 1922 (hereinafter referred to as the 1922 Act), on the respondents as legal heirs of Kanailal Jatia. On non-compliance thereof the Income-tax Officer, Central Circle XVIII, Calcutta, the appellant No. 1 before us, passed fresh order of reassessment on August 15, 1962, on the legal heirs of Kanailal Jatia, deceased, under Section 23(4) read with sections 34(1 A) and 31(3)(b) and determined a sum of about Rs. 19 lakhs as tax payable on a total income of about Rs. 22 lakhs for the assessment year 1945-46. Notice of demand under Section 29 was issued to the appellants on September 26, 1962.
4. The respondents filed an application before the Income-tax Officer under Section 27 of the 1922 Act, for setting aside the said assessment of August 13, 1962, and the said application was rejected by order dated January 7, 1963.
5. An appeal was also preferred by the respondents against the said ex parte assessment before the Appellate Assistant Commissioner of Income-tax (Central), Calcutta, who, by order dated December 16, 1963, dismissed the appeal as incompetent as it was filed under the Income-tax Act, 1961 (hereinafter referred to as the 1961 Act), and a fresh memorandum of appeal under the 1922 Act was thereafter filed but was rejected as time-barred. On March 16, 1964, a certificate was for warded by the Income-tax Officer to the Tax Recovery Officer, 24-Parganas, the appellant No. 2 in this appeal, for recovery of an amount of Rs. 19,92,358.34. The respondents preferred an appeal before the Income-tax Appellate Tribunal against the said order. The Tribunal by its order dated March 30, 1966, set aside the impugned order and directed the Appellate Assistant Commissioner to hear the appeal on merits after condoning the delay in .filing the appeal in proper form before him. The said appeal is stated to be pending.
6. The respondents preferred another appeal before the Appellate Assistant Commissioner, Range II (Central), against the order of the Income-tax Officer dated January 7, 1963, rejecting the application under Section 27 of the 1922 Act. By order dated May 16, 1964, the Appellate Assistant Commissioner allowed the appeal holding that no assessment could be made on the legal heirs of the deceased assessee without serving notices on them under Section 34 and the assessment was accordingly invalid. The impugned order under Section 27 was cancelled and the Income-tax Officer was directed to make fresh assessment according to law.
7. An appeal was preferred by the Income-tax Officer against the said order of May 16, 1964, before the Income-tax Appellate Tribunal and the said appeal was pending when the connected rule nisi was issued on August 31, 1970, and was disposed of by the order under appeal before us passed on February 25, 1971. It may be mentioned here that by order dated April 17, 1971, the said appeal was allowed by the Income-tax Appellate Tribunal and it was held that notice under Section 34(1A), having been served on Kanailal Jatia, deceased, it was not necessary to serve fresh notice under Section 34(1A) or under Section 34(1)(b) on the legal heirs and proceedings were rightly continued against them on basis of the notice under Section 34(1A) served on Kanailal Jatia during his lifetime. In view of the default of the legal heirs in respect of the notice that was served in such proceedings under Section 22(4) and no sufficient cause having been shown for such default, the Income-tax Officer's order under Section 27 refusing to reopen the assessment was in order. The Appellate Assistant Commissioner's order dated May 16, 1962, was accordingly cancelled. In the course of the hearing before us we have been informed that the above order is the subject-matter of a reference pending in this court.
8. The petitioners-respondents alleged that the appellants herein were threatening to recover tax in execution of the certificate for the said demand. In the context of existing circumstances they moved an application under Article 226(1) of the Constitution contending, inter alia, that the assessment was invalid in law as it was made when the assessee was dead and no notice under Section 34 of the 1922 Act was served on the petitioners-respondents. On this application a rule nisi was issued by this court on July 24, 1970, calling upon the Income-tax Officer concerned as also the Tax Recovery Officer, 24-Parganas, to show cause why writs in the nature of mandamus and of prohibition should not issue forbearing them from taking further steps in execution of the said certificate as also in proceedings connected therewith.
9. The respondents in the rule, the Income-tax Officer, Central Circle XVIII, and the Tax Recovery Officer, 24-Parganas, executing the said certificate opposed the rule by filing an affidavit-in-opposition affirmed on their behalf by Sudhir Kumar Kar on January 13, 1971. It was stated therein that the notice under Section 34(1A) was lawfully and validly served on Kanailal Jatia during his lifetime who raised no objection as to its validity. The petitioners-respondents were validly brought on record and the assessment was lawfully and validly completed and the recovery proceeding was in order. The said petitioners-respondents filed an affidavit-in-reply affirmed on their behalf by Sreemohan Jatia on February 3, 1971, wherein the allegations and contentions made in the petition of motion were reiterated.
10. In the course of hearing of the rule the ground of contention was shifted from the grounds taken in the petition. It was contended that in view of the admitted position that the impugned assessment was set aside and fresh assessment was directed to be made by the Appellate Assistant Commissioner by his order dated May 16, 1964, the certificate proceeding based on the impugned assessment was liable to be quashed. Accepting the above contention, the learned judge was of opinion that under the relevant provisions a certificate could be modified if the demand was reduced. These provisions never contemplate a case where the entire assessment has been set aside. Certificate proceedings arise only when an assessee is in default on his failure to pay the sum due in terms of the notice of demand based on valid assessment. When there is no valid assessment, it was held, the persons like the petitioners could not be said to be in default as there was no valid demand to be complied with and thus they could not be proceeded against by certificate proceedings. The other contention of the petitioners that without service of fresh notice under Section 34(1 A) of the 1922 Act, the revenue was not competent to proceed to assess the heirs of the deceased assessee was not accepted. The learned judge also declined to consider any relief on the assessment as the petitioners had been pursuing their remedy available under the statute in the quantum appeal.
11. In the view that was taken by judgment and order dated February 25, 1971, the certificate proceeding was quashed and the appellants were restrained from proceeding with the impugned certificate, though the revenue was given liberty to initiate a fresh certificate proceeding after a valid order of assessment was made and the petitioners were in default in spite of service of fresh notice of demand. The rule was made absolute to the extent as indicated above.
12. This appeal, as already stated, is by the revenue against the aforesaid judgment and order.
13. Under Section 297(2)(j) of the 1961 Act, any sum payable by way of income-tax, super-tax, interest, penalty or otherwise under the 1922 Act may be recovered under the latter Act. The relevant provisions of the 1961 Act may now be considered. Notice of demand under Section 156 was issued on the respondents being the legal heirs of Kanailal Jatia, deceased, on September 26, 1962, The respondents were further informed on August 25, 1964, that certificate dated March 16, 1964, for recovery of Rs. 19,92,358-34 had been forwarded by the Income-tax Officer and they were required to pay the amount within fifteen days from service of this notice, in default whereof steps for recovery would be taken in accordance with the Second Schedule to the Income-tax Act, 1961. The respondents were also informed that they would be liable for interest according to Section 220(2) and costs.
14. Sub-section (1) of Section 220 provides that any amount specified in the notice of demand under Section 156 shall be paid within thirty-rive days of service of notice. Sub-section (4) provides that, if the amount is not paid within the time limited under Sub-section (1), the assessee shall be deemed to be in default. The respondents' case is that the basis of the demand in this case was the order of assessment of the Income-tax Officer which the Appellate Assistant Commissioner, in appeal against order under Section 27 of the 1922 Act, found to be invalid. In consequence, the notice of demand as also the certificate proceeding initiated on the alleged default for non-compliance of the demand found invalid, died a natural death and came to an end without scope of resuscitation. If, subsequently, by an appellate order, the order of the Appellate Assistant Commissioner holding the assessment invalid is set aside, it would be open to the revenue to enforce such order by issue of fresh demand notice and in default by initiation of certificate proceeding under the 1922 Act or 1961 Act at its discretion.
15. Reliance was placed on the decision in Income-tax Officer, Kolar Circle v. Seghu Buchiah Setty : 52ITR538(SC) in which it was held that when the appellate order revises an assessment, notice of demand on the basis of the original order of assessment falls to the ground and default based thereupon under Section 45 of the 1922 Act ceases to be a default any more. In such a case, therefore, on the Income-tax Officer's order being revised in appeal the default based on it and all consequential proceedings must be taken to have been superseded and fresh proceedings have to be started to realise the dues as found in terms of the revised order, as held by Sarkar J. (as his Lordship then was). In his concurring judgment, Hidayatullah J. (as his Lordship then was) observed that when an assessment is gone through a second time and the amount of tax is reduced the Income-tax Officer must intimate to the assessee the reduced amount of tax and make a demand and give him an opportunity to pay before treating him as a defaulter. This is so because the assessment resulting in the tax itself is set aside or modified and an assessee is entitled to proper assessment and ascertainment of tax before a demand can be made on him. It is to be noticed that in the said judgment fresh demand notice had been directed to be issued and the Income-tax Officer was given liberty, in default of payment, to recall the certificate and to amend the certificate on basis of new assessment and to return the same to the revenue officer for continuing the recovery proceedings.
16. We may now consider the provisions of Section 225(4) of the 1961 Act and it may be noted that the 1922 Act did not contain similar provision.
'Section 225(4): Where a certificate for the recovery of tax has been issued and subsequently the amount of the outstanding demand is reduced as a result of an appeal or other proceeding under this Act, the Income-tax Officer shall, when the order which was the subject-matter of such appeal or other proceeding has become final and conclusive, amend the certificate or withdraw it, as the case may be.'
17. The above provision clearly indicates that if a certificate is issued by the Income-tax Officer, such certificate need not be amended or withdrawn unless the outstanding demand is reduced by an order in appeal or other proceeding and such order has become final and conclusive. If, therefore, a demand is reduced in part or wholly by an intermediate appellate or other appropriate authority but such order is not either final or conclusive obviously by reason of the pendency of other proceeding under the Act in respect thereof, the certificate need not be amended or withdrawn at that stage. At the same time the further proceedings in respect of the entire certificate must necessarily remain suspended, when the demand has been wholly reduced by the order of such intermediate appellate or other appropriate authority. Under Section 225(3) no recovery is permissible for the reduced amount as the demand has been reduced for the time being and the reduction is the subject-matter of appeal or other proceeding. The certificate proceeding for the amount pertaining to the reduction must accordingly remain in suspended animation or held in abeyance and it can be resuscitated and enforced only in accordance with the order in appeal or other proceeding which has to become final and conclusive for execution or withdrawal of certificate in accordance with such order. The position will be the same if the order of any intermediate authority has become final and conclusive in the absence of any challenge to it in appeal or other appropriate proceeding.
18. In the case before us, the Income-tax Officer had already issued a certificate on March 16, 1964, and while this certificate was pending before the Tax Recovery Officer, the Appellate Assistant Commissioner allowed the appeal and the application under Section 27 filed by the respondents was thereby allowed. The same order again became, subject to appeal before the Tribunal and it did not attain the character of a final and conclusive order so that such order did not have any effect on the certificate proceeding which remained in abeyance pending the decision by a final and conclusive order. There was, therefore, no question of extinction or abatement of the certificate proceeding till a final or conclusive order was passed in respect of the demand which is the basis of the certificate. The decision in the case cited above will have no application in, this case inasmuch as the relevant Section 225(4) of the 1961 Act was not in the 1922 Act the provisions whereof were the subject-matter of consideration and even there, as we have seen, the certificate was not quashed, but was directed to be recalled, amended and sent back for execution.
19. The learned judge is, however, of the view that Sub-section (4) of Section 224 contains provisions which are applicable when the 'demand is reduced'. This, it was held, applied to cases when the demand is reduced and not when the assessment is set aside. With respect we are unable to accept this interpretation. The word 'reduce', inter alia, means according to Shorter Oxford English Dictionary, third edition, volume II, page 1662, 'to lead or bring back from error in action, conduct, or belief, to restore to the truth or the right faith, to bring back to a former state,' The word 'reduce' thus contemplates not merely partial reduction in quantum, but it also includes reduction of the quantum or setting aside an assessment in entirety. This interpretation finds express support in Sub-section (2) of Section 221 of the 1961 Act, which provides for cancellation of penalty, when the amount of tax 'has been wholly reduced' by reason of any final order. Again, Section 220(4), as we have seen, provides for amendment or withdrawal of certificate when the demand 'is reduced as a result of appeal or other proceeding'. The withdrawal is thus only possible when the reduction of the demand or setting aside the assessment is in respect of its entirety. Such interpretation is thus warranted by the provisions of the statute. Otherwise, it will lead to an untenable situation to limit the import of 'to reduce' to partial diminution only, when there will be no occasion to withdraw the certificate as provided in law. It would also be inconceivable that the legislature did not provide for a case when the demand or assessment in entirety is reduced or set aside.
20. It has been contended that in view of the order of the Appellate Assistant Commissioner holding the original assessment invalid, the certificate proceedings had come to an end. After the order of the Tribunal setting aside the order of the Appellate Assistant Commissioner, fresh notice of demand has to be issued, for non-compliance whereof only the assessees are to be deemed to be in default. This contention was made relying on the authority of Seghu Buchiah Setty's case noticed above.
21. Parliament, in the context of the above decision, enacted the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. It was stated in the statement of objects and reasons as follows :
'Recently in the case of Income-tax Officer, Kolar v. Seghu Buchiah Setty : 52ITR538(SC) the Supreme Court had occasion to consider the scope of sections 29 and 45 of the Indian Income-tax Act, 1922, and it has been held in that case that when a demand levied by the Income-tax Officer as a result of an assessment is varied by an appellate or revising authority, the original order of the Income-tax Officer merges into the order of such authority and consequently in all cases of an order varying the assessment the original order goes and all steps already taken for the recovery of the demand become null and void and that in such cases it is the duty of the Income-tax Officer to issue a fresh notice of demand in the prescribed form and serve it on the assessee. Though the judgment is with reference to the Indian Income-tax Act, 1922, which has been repealed but kept alive only for the limited purposes, the same interpretation may hold good with respect to the corresponding provisions of the Income-tax Act, 1961, and in other Acts relating to the imposition of direct taxes.
2. The above decision of the Supreme Court will create difficulties in the collection of income-tax and other direct taxes. The number of assessments involved in the arrear demands of direct taxes is nearly 6 lakhs and recovery certificates have been issued to Collectors or Tax Recovery Officers in approximately 2,25,000 cases and the revenue involved comes to Rs. 157 crores. In view of the above 'decision of the Supreme Court, in most of these cases, fresh notices of demand may have to be served upon the assessees and the assessees will have to be allowed a further period for paying the tax. It will be only after the expiry of the said period that fresh proceedings for recovery can be started. The result would be that the recalcitrant assessees would get sufficient time to withdraw their funds or alienate their properties with a view to defeating the claims of the revenue.
3. In order to overcome these difficulties it is proposed to provide that in such cases it shall not be necessary to take proceedings afresh or to serve fresh notices of demand except that in the case of an enhancement of assessment, another notice of demand shall be served upon the assessee with respect to the amount by which the assessment has been enhanced. Opportunity has also been taken to provide for certain matters which are ancillary to the above proposal.'
22. Section 3 of this Act, hereinafter referred to as the 1964 Act, provides as follows:
'3. Continuation and validation of certain proceedings.--(1) Where any notice of demand in respect of any Government dues is served upon an assessee by a taxing authority under any scheduled Act, and any appeal or other proceeding is filed or taken in respect of such Government dues, then,--
(a) Where such Government dues are enhanced in such appeal or proceeding, the taxing authority shall serve upon the assessee another notice of demand only in respect of the amount by which such Government dues are enhanced and any proceedings in relation to such Government dues as are covered by the notice or notices of demand served upon him before the disposal of such appeal or proceeding may, without the service of any fresh notice of demand, be continued from the stage at which such proceedings stood immediately before such disposal;
(b) Where such Government dues are reduced in such appeal or proceeding,--
(i) it shall not be necessary for the taxing authority to serve upon the assessee, a fresh notice of demand ;
(ii) the taxing authority shall give intimation of the fact of such reduction to the assessee, and where a certificate has been issued to the Tax Recovery Officer for the recovery of such amount, also to that officer;
(iii) any proceedings initiated on the basis of the notice or notices of demand served upon the assessee before the disposal of such appeal or proceeding may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal;.........
(2) For the removal of doubts it is hereby declared that no fresh notice of demand shall be necessary in any case where the amount of Government dues is not varied as a result of any order passed in any appeal or other proceeding under any scheduled Act'.
23. The combined effect of the provisions of the 1961 Act and the 1964 Act is that in cases where an order of the appellate or other appropriate authority reducing wholly the demand forming the basis of the certificate, the certificate proceeding shall be kept in abeyance unless and until such order becomes final and conclusive in the absence of appeal or other proceeding against it. As soon as an appeal is filed or other proceedings are taken against such order, it loses its finality and conclusiveness and merges into the appellate order or in the order passed in further proceedings under the Act. The certificate proceeding already started under the original assessment in such case remains in abeyance subject to the provisions of Section 225(4) abiding with the last order as it attains finality and conclusive-ness. If the order of the Tribunal becomes subject to further orders in proceedings under the Act, it will abide with such order as it attains finality and conclusiveness. As we have seen, there is accordingly no question of extinction of the demand or certificate in such cases like the one before us which will abide by the order in the proceedings under the Act which has become final and conclusive.
24. Under Section 3(2) of the 1964 Act, it is provided that no fresh demand shall be necessary in any case where the amount of Government dues is not varied as a result of any order passed in any appeal or other proceeding under any scheduled Act, which includes both the 1922 Act and the 1961 Act. Accordingly, as there is no variation in the quantum of demand under the order of the Tribunal which has only restored the assessment of the Income-tax Officer no fresh notice of demand is necessary in the circumstances. Accordingly, we are of opinion that no fresh notice of demand is necessary in these cases as there is no variation of the amount of Government dues by the order of the Income-tax Appellate Tribunal.
25. In the premises, the rule obtained by the petitioners should be discharged.
26. We, however, add that the respondents should not be liable for any default for the period during which the order of the Appellate Assistant Commissioner dated May 16, 1964, ruled the field till April 17, 1971, when the Appellate Tribunal set aside the said order. The Income-tax Officer shall bear this position in mind in respect of any proceedings under the Acts relating to the impugned assessment.
27. The appeal is accordingly allowed and the judgment and order under appeal in respect of the points of controversy in the appeal as indicated above are set aside and the rule is discharged. All interim orders, if any, are vacated. Parties, however, will bear their own costs in the appeal.
Sankar Prasad Mitra, C.J.
28. I agree.